Share Name Share Symbol Market Type Share ISIN Share Description
Melrose Industries Plc LSE:MRO London Ordinary Share GB00BZ1G4322 ORDS 48/7P
  Price Change % Change Share Price Bid Price Offer Price High Price Low Price Open Price Shares Traded Last Trade
  1.60 0.72% 224.00 223.80 224.10 227.70 222.80 223.40 14,638,192 16:29:59
Industry Sector Turnover (m) Profit (m) EPS - Basic PE Ratio Market Cap (m)
Industrial Engineering 8,605.0 -550.0 -12.0 - 10,882

Melrose Industries PLC Half-year Report

05/09/2019 7:01am

UK Regulatory (RNS & others)


Melrose Industries (LSE:MRO)
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3 Months : From Aug 2019 to Nov 2019

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RNS Number : 2718L

Melrose Industries PLC

05 September 2019

5 September 2019

MELROSE INDUSTRIES PLC

UNAUDITED RESULTS

FOR THE SIX MONTHSED 30 JUNE 2019

Melrose Industries PLC today announces its interim results for the six months ended 30 June 2019.

Highlights

 
                               Adjusted(1) results    Statutory results 
                                   2019        2018      2019       2018 
 Continuing operations             GBPm        GBPm      GBPm       GBPm 
                              ---------  ----------  --------  --------- 
 Revenue                          6,002       2,971     5,700      2,847 
                              ---------  ----------  --------  --------- 
 Operating profit/(loss)            539         284      (11)      (325) 
                              ---------  ----------  --------  --------- 
 Profit/(loss) before tax           429         244     (128)      (372) 
                              ---------  ----------  --------  --------- 
 Profit/(loss) after tax            330         188     (150)      (330) 
                              ---------  ----------  --------  --------- 
 
 Diluted earnings per share        6.7p        6.0p    (3.1)p    (10.6)p 
                              ---------  ----------  --------  --------- 
 

Group

-- Melrose is trading in line with expectations for 2019, with the three main divisions of GKN on track to achieve previously announced targets

-- Adjusted(1) operating profit was GBP539 million, which excluding the uplift from loss-making contracts was GBP494 million. The statutory operating loss was GBP11 million; of the GBP550 million adjusting items, only GBP79 million are cash

-- Net debt leverage at 2.3x EBITDA is better than expectations due to stronger cash generation

-- Adjusted free cash inflow(2) from continuing operations of GBP256 million

-- A new target to improve GKN's working capital efficiency, releasing additional future free cash of GBP400 million within our ownership period

-- An interim dividend of 1.7 pence per share (2018: 1.55 pence) is declared, up 10%

Divisions

-- Aerospace performance is significantly better than prior year period; adjusted(1) operating profit growth(3) of 37% and adjusted(1) operating margin improvement of 2.0 percentage points

-- Aerospace increasing to 34% of Group adjusted(1) profits, becoming the largest division and profit driver in Melrose

-- Record year of investment in Aerospace technology and a major announcement to create the 'One GKN Aerospace' organisation, to improve performance further

-- Automotive and Powder Metallurgy are maintaining profit well in an automotive industry downturn, due to decisive cost reductions

-- Significant investment made into class leading eDrive technology

-- Nortek businesses' adjusted(1) operating profit has grown by approximately 40% during our ownership

-- Nortek Air & Security has strong fundamentals, HVAC has signed a significant new contract for its industry leading new proprietary StatePoint Technology(R)

-- Security & Smart Technology is challenged by US tariffs and market headwinds

-- Many operational improvement programmes and capital investment projects are underway to help improve performance further, while good progress is being made on resolving the GKN loss-making contracts

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

"These results show the initial fruits of the 'improve' stage of Melrose's ownership of GKN and, with the overall GKN margin increasing positively, we are excited about what is possible. The performance is in line with expectations and leverage is better than expected. At the same time, this has been a year of record investment in Aerospace technology and substantial eDrive development. The Melrose Board is confident that our businesses will deliver significant upside for shareholders."

(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 inflow excludes the one-off pension contributions, restructuring spend and cash used in discontinued operations)

(3. Growth is calculated at constant currency against 2018 results, excluding the impact of loss-making contracts in both periods for consistency)

S

Enquiries:

Montfort Communications: +44 (0) 20 3514 0897

Nick Miles +44 (0) 7973 130 669 / Charlotte McMullen +44 (0) 7921 881 800

miles@montfort.london / mcmullen@montfort.london

Investor Relations: ir@melroseplc.net

CHAIRMAN'S STATEMENT

I am pleased to report our interim results for the six months ended 30 June 2019, which are in line with expectations for the full year.

RESULTS FOR THE CONTINUING GROUP

These interim results include statutory revenue for the Melrose Group of GBP5,700 million (2018: GBP2,847 million), an adjusted profit before tax of GBP429 million (2018: GBP244 million) and a statutory loss before tax of GBP128 million (2018: statutory loss of GBP372 million).

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

TRADING

Having owned the GKN businesses for just over a year, we are pleased with how they have responded to our initial investments and initiatives. GKN Aerospace revenue grew strongly in the period with decisive operational improvements also made, delivering a significant increase in profit. While the global automotive sector downturn is affecting the GKN Automotive and GKN Powder Metallurgy businesses, we are pleased with their performance against the challenging market backdrop.

We remain focused on technology and efficiency across our businesses and there are substantial operational improvements available. We are working with our management teams to secure these improvements, whilst ensuring strong cash management. Even with investments in technology at record levels, we have kept leverage at 2.3x EBITDA and well within expectations.

The Nortek acquisition continues to be a success as our investments start to deliver good returns, with profit for the Nortek businesses up by approximately 40% in our ownership and the Air businesses performing well. Unfortunately, the Security & Smart Technology business continues to face material and persistent market headwinds and tariff pressure, resulting in us taking the actions outlined in these results.

Further details of these results are contained in the Chief Executive's Review and the Finance Director's Review and I would like to thank all employees for their efforts in helping to produce this strong performance.

DIVID

Your Board declared an interim dividend of 1.7 pence per share (2018: 1.55 pence), which is a 10% increase on last year and will be paid on 11 October 2019 to shareholders on the register at the close of business on 13 September 2019. Your Board continues to align its dividend policy with the earnings of the Group and will use this basis to set future dividends, including for the final dividend for this year.

BOARD MATTERS

The Board has commenced a search for an additional non-executive director with a view to further increasing the strength and diversity of the Board.

STRATEGY

Melrose targets generating superior returns for our shareholders whilst protecting the interests of all stakeholders through the acquisition of high quality but under-performing manufacturing businesses, investing heavily to improve their operational performance before identifying an appropriate purchaser who will look to guide them through their next phase of development.

The acquisition of GKN last year is the latest example of this strategy in action and we are pleased to see the GKN businesses already responding positively to the Melrose approach.

OUTLOOK

With these good results and actions underway, we remain confident the Group will trade in line with our expectations for this year, despite some macro challenges presented by tariffs and the automotive sector downturn. We are on track to improve the performance of our businesses, driven by continued and significant investment in operational improvement projects, and backed by stronger cash management and cost control, customer delivery and management accountability. We are positive about the prospects for the rest of 2019 and beyond.

Justin Dowley

Chairman

5 September 2019

CHIEF EXECUTIVE'S REVIEW

The first half of 2019 has been a busy period. We have focused with our operational management teams on implementing targeted investments, faster decision-making and improving customer delivery, which will achieve the improvements that underline our divisional profit margin targets. We have made a strong start in addressing the GBP600 million of loss-making contracts of the GKN businesses identified on acquisition, and we are seeing positive change take hold. This has been an important area of focus for us and we will update shareholders further in the full year accounts. Following the success of a major procurement savings initiative, we have commenced a thorough working capital review across the GKN businesses, to unlock GBP400 million of additional future cash within our ownership period. For the GKN group this has not been an area previously focused upon.

At GKN Aerospace, sales were up by 7% compared to the first half of last year. This is a strongly performing sector and is now the biggest contributor to Melrose's Group profits. There is an opportunity to improve this division so that it achieves its potential. Having worked hard to address the inherited customer relationship issues through improved performance and delivery, the business is now in a position to implement the global operating model announced this week. This will overcome the previously fragmented structure and move it to a truly global integrated business "One GKN Aerospace". We see this as a key stepping stone in the ongoing improvement and performance of this division.

During the period, GKN Automotive has been dealing with the global market downturn, which we expect to continue into the second half. Prompt steps have been taken to control costs, which has included the recently announced closure of one of its German production facilities. GKN Powder Metallurgy has also been affected by the automotive sector downturn and, like GKN Automotive, its management team has been quick to take the necessary steps to reengineer its business and protect profits.

In the Nortek Air & Security division, the Air businesses have performed well, but we have struggled with a number of factors affecting the Security & Smart Technology business. A combination of significant tariff pressure, difficult market conditions and the scheduled expiry of a major customer contract has impacted trading performance in this particular business. This has led us to review its underlying value in accordance with the appropriate accounting standards. It is important to put this into context with the overall improved performance of the Nortek businesses, including an approximate 40% increase in profit for the original Nortek Group since its acquisition. Overall, there has been a substantial increase in shareholder value at Nortek.

At the same time, our commitment to invest in the technological development of our businesses has accelerated during the first half of 2019, including breaking ground at the new GBP32 million GKN Aerospace Global Technology Centre in Filton, UK; commencing work on the initial projects in the five year, GBP300 million investment programme in GKN Automotive's eDrive technology; building out the additive manufacturing capabilities for GKN Powder Metallurgy; and supporting Nortek HVAC in their production ramp up for the world-leading data centre climate control system StatePoint Technology(R).

The sale of Walterscheid Powertrain Group was also completed in the period, further streamlining the Group. Details of the first half trading performance for each continuing business are set out below.

AEROSPACE

GKN Aerospace made strong progress in the first half of 2019, with sales and operating margins significantly improved. A number of its North American facilities have returned to profitability after receiving continued investment to sustainably improve their processes, workforce and performance. This has set a strong foundation from which to drive necessary margin improvements.

Efforts to improve its European Aerostructures and Engine Systems operational performance are going well. As part of a wholesale strategic review, the Special Technologies business announced its intention to close its Kings Norton site, while investing approximately GBP50 million in its other sites, including Luton and Portsmouth. These investments will bolster the business's position in developing world-leading niche technologies, including fuel and flotation tanks, advanced canopies and cabin windows, and electro-thermal ice-protection systems.

Additive manufacturing remains a key focus, with a new world-leading pilot production cell at Oak Ridge National Laboratory in the USA and two new additive manufacturing programmes in Bristol, UK. These initiatives will further enhance GKN Aerospace's strong market position within additive manufacturing and composite manufacturing, as demonstrated by the production of the first demonstrator wing components for Airbus's Wing of Tomorrow research programme.

AUTOMOTIVE

GKN Automotive completed its leadership team change during the first half of 2019 and continued to strive to offset difficult market conditions and industry-wide pressure on sales, through a disciplined focus on commercial excellence and cost improvement. We are very pleased with the financial performance of this business in the first half. Revenue declines were in line with market trends and have been met with an improvement in operating margins against 2018.

Whilst adverse market conditions have masked the financial performance improvement, we are confident that the much stronger business we anticipated at acquisition will emerge as market conditions improve. In the circumstances, this is the most creditable performance of all the GKN businesses. Our management team has continued to grow a strong pipeline of new business, including four new eDrive programmes that are expected to progressively ramp up over the next 12 months.

As with all of the GKN businesses, the pursuit and gradual realisation of operating margin increases have promoted an increased focus on working capital, which has led to an improved cash flow position for the business.

We currently expect second half trading to be similar to the first half of 2019. As with GKN Aerospace, this business has significant upside potential and its new management team is well positioned to realise this.

POWDER METALLURGY

The division performed well in challenging automotive market conditions, with the business taking prompt action to ensure it achieved its margin and cash generation targets. Continuous improvement plans delivered the expected positive results, while over GBP100 million new business wins were booked in the period. In addition, the business acquired and integrated a small bearings business in Italy, which increased its already strong presence in the industrial sector in Europe and we continue to support its focused acquisition strategy.

Progress has been made in reorganising GKN Powder Metallurgy's footprint, as well as enhancing customer development initiatives and collaboration in order to identify and introduce new powder metallurgy and additive manufacturing applications to new energy vehicles.

We expect end markets to remain challenging but for operational improvements to partly offset this. We are now executing on our strategy to develop cutting edge additive technology in this business, refocus on operating margin improvement and improve the operations of the business.

NORTEK AIR & SECURITY

The performance of Nortek Global HVAC ("HVAC") in this period has been good, with end markets largely positive and we are very pleased with its development. The high point has been the development of world leading technology in StatePoint Technology(R), as a result of considerable investment in people and technology over the last two years.

The HVAC leadership team has continued to drive margin expansion and new product development. They have focused on capturing profitable growth within expanding vertical segments for retrofit and new construction, particularly in the residential and commercial markets, and innovative plug-and-play solutions for the manufactured multi-family housing and light commercial markets.

Sustained investment in research and development during the first half of 2019 has continued to enhance core product platforms. Alongside the newly launched StatePoint Technology(R), a new High Performance Computing Portfolio has ramped up during the first half of the year which, along with HVAC's core Air Handling and Computer Room Air Handler systems, continue to address growing demand within the data centre cooling market. Two transformational projects have been announced with a major technology firm that position this business at the forefront of this market globally.

Simultaneously, HVAC has continued to implement its operational footprint strategy by consolidating resources and upgrading its existing manufacturing plants, underpinning our confidence in its prospects for the rest of the year.

The Air Quality & Home Solution business ("AQH") saw modest sales growth during the first half of 2019, but was held back by lower single family housing starts in Canada and a slow start to the year for US housebuilders. The business has successfully implemented its 2019 product launch strategy, which remains on track and is expected to positively impact financial performance in the second half of 2019. Since our acquisition, we have redeveloped the products of AQH substantially so as to further consolidate the position of this business in its very strong North American market.

Security & Smart Technology ("SST") is our most challenging Nortek business. It continues to see an increasingly competitive market in its traditional security markets, and flat demand for its products in the home control and access markets. In response to these challenges, SST has renewed its focus on technology and made further structural changes to the business to improve its competitive positions.

During the first half of 2019, SST continued to integrate the IntelliVision technologies it acquired last year into its Home Control and Access product lines. The business expects to launch its next generation security platform over the next 12 months, which will incorporate these new capabilities and complete the full integration of analytics-based technologies across all of its product platforms. The IntelliVision business has continued to broaden SST's patent portfolio for these and related emerging technologies, which have made it a leading player in the security sector for data analytic technology.

Against the backdrop of difficult market conditions and continuing pressure from tariffs, the business has taken the decision to close its Chinese factory and switch to contract manufacturing with a third party supplier. While this move is on track to deliver the intended benefits, overall, we expect market conditions to remain challenging.

OTHER INDUSTRIAL

The newly-installed fully flexible, automated off-highway rim line at the GKN Wheels & Structures facility in the UK, committed prior to our ownership, came on-stream during the first half of 2019. This has been further bolstered by a new management team and the sale of the Italian manufacturing line producing commoditised products. The positive impact of these changes will be realised over the next 12 months.

Global economic prospects for Brush's main markets remain uncertain and the underlying trading environment in the first half of 2019 continued to present significant challenges. Brush's key gas turbine market continues to run far below its previous peak, with anticipated stabilisation in generator demand for Brush this year of approximately 50 generators, leading it to explore alternative applications for its generator products and grow its aftermarket services.

Ergotron is a market leading business, which is being impacted by factors mainly outside its control, primarily tariffs and the resultant market disruptions. The first half performance was down compared to the first half of last year but at a similar level to the second half of 2018. Following the implementation of US tariffs, a review of its manufacturing footprint is now underway and a strong pipeline of new products will launch this year and in 2020.

GROUP OUTLOOK

Our businesses have continued to perform in line with expectations over this busy period. We are pleased that overall Nortek is performing in a manner that shows it will deliver the shareholder value we anticipated, albeit we have work to do, in particular at SST. This has also been a period of huge positive change at the GKN businesses. Despite automotive trading headwinds, these businesses have enormous potential and it is both exciting and a privilege to be on the journey to deliver that.

Simon Peckham

Chief Executive

5 September 2019

FINANCE DIRECTOR'S REVIEW

The results for the Group for the six months ended 30 June 2019 have been significantly impacted by the acquisition of GKN in April last year. As a result, any comparisons with prior year are difficult to interpret.

The comparative results in this Interim Report, which include GKN for 73 days only, have been restated to show the results of the Walterscheid Powertrain Group as a discontinued operation following its disposal on 25 June 2019 and have also been restated to reflect the finalisation of the opening Balance Sheet review process for GKN.

MELROSE GROUP RESULTS - CONTINUING OPERATIONS

Statutory results:

The statutory IFRS results are shown on the face of the Income Statement and show revenue of GBP5,700 million (2018: GBP2,847 million), an operating loss of GBP11 million (2018: loss of GBP325 million) and a loss before tax of GBP128 million (2018: loss of GBP372 million). The diluted earnings per share ("EPS"), calculated using the weighted average number of shares in issue during the period of 4,858 million (2018: 3,045 million), were a loss of 3.1 pence (2018: loss of 10.6 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 set out 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 2019 show revenue of GBP6,002 million (2018: GBP2,971 million), an operating profit of GBP539 million (2018: GBP284 million) and a profit before tax of GBP429 million (2018: GBP244 million). Adjusted diluted EPS were 6.7 pence (2018: 6.0 pence).

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

The results for the period included a positive impact from utilising loss-making contract provisions which were required under IAS 37: "Provisions, contingent liabilities and contingent assets", and were identified during the opening Balance Sheet review process for GKN.

Excluding the positive impact of the utilisation of the loss-making contracts provision, the adjusted results for continuing operations would show an operating profit of GBP494 million, and an adjusted diluted EPS of 6.0 pence.

RECONCILIATION OF STATUTORY RESULTS TO ADJUSTED RESULTS

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

 
 
                                               2019   2018 
 Continuing operations:                        GBPm   GBPm 
-------------------------------------------  ------  ----- 
 Statutory revenue                            5,700  2,847 
-------------------------------------------  ------  ----- 
 
 Adjusting item: 
-------------------------------------------  ------  ----- 
 Revenue from equity accounted investments      302    124 
-------------------------------------------  ------  ----- 
 
 Adjusted revenue                             6,002  2,971 
-------------------------------------------  ------  ----- 
 

Adjusting revenue item:

The Group has a number of 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. During the period ended 30 June 2019, EAIs in the Group generated GBP302 million of revenue (2018: GBP124 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.

 
                                                     2019   2018 
 Continuing operations:                              GBPm   GBPm 
-------------------------------------------------  ------  ----- 
 Statutory operating loss                            (11)  (325) 
-------------------------------------------------  ------  ----- 
 
 Adjusting items: 
-------------------------------------------------  ------  ----- 
 Amortisation of intangible assets acquired in 
  business combinations                               269    125 
-------------------------------------------------  ------  ----- 
 Impairment of assets                                 179      - 
-------------------------------------------------  ------  ----- 
 Restructuring costs                                   75    128 
-------------------------------------------------  ------  ----- 
 Currency movements in derivatives and movements 
  in associated financial assets and liabilities       13    123 
-------------------------------------------------  ------  ----- 
 Acquisition and disposal related costs                11    124 
-------------------------------------------------  ------  ----- 
 Other                                                  3     10 
-------------------------------------------------  ------  ----- 
 Reversal of uplift in value of inventory               -     99 
-------------------------------------------------  ------  ----- 
 
 Adjustments to statutory operating loss              550    609 
-------------------------------------------------  ------  ----- 
 
 Adjusted operating profit                            539    284 
-------------------------------------------------  ------  ----- 
 

Adjusting items to operating profit are consistent with prior periods and include:

The amortisation charge on intangible assets acquired in business combinations of GBP269 million (2018: GBP125 million) is excluded from adjusted results due to its non-trading nature and to enable comparison with companies that grow organically. Where intangible assets are trading in nature, such as computer software and development costs, the amortisation is not adjusted.

The 2018 Annual Report disclosed that the determination of the recoverable amount in respect of the Security & Smart Technology group of cash generating units ("CGUs") involved management estimation of the impact of highly uncertain matters at that time. Enhanced disclosures, including sensitivity analysis in respect of the key assumptions used in the forecast models, were shown at the 2018 year end. Subsequently, there has been further deterioration in both the performance during the period and forecast future prospects, particularly following increases in US tariffs for goods being imported from China. This along with the increased level of competition and technological change in the market has resulted in the necessity to impair goodwill allocated to the Security & Smart Technology group of CGUs by GBP179 million. The impairment charge is shown as an adjusting item due to its non-trading nature and size.

Restructuring and other associated costs in the period totalled GBP75 million (2018: GBP128 million). Restructuring costs are adjusting items due to their size and non-trading nature and during the period ended 30 June 2019 they included:

-- A charge of GBP45 million in respect of the GKN businesses. Within this, GBP26 million related to the Aerospace division and included costs incurred in improving quality and delivery for customers in North America and costs relating to footprint rationalisation projects within the Special Technologies business. Within the Automotive division, GBP14 million of costs have been incurred addressing the cost base of the business, whilst ensuring a more flexible cost structure going forward. In addition, GBP5 million of restructuring costs were incurred in the Powder Metallurgy division.

-- A charge of GBP21 million within Nortek Air & Security, primarily relating to structural footprint changes in the Security & Smart Technology business in an attempt to mitigate the negative impact of the increase in US tariffs on goods manufactured in China. In addition, there were charges related to continued footprint rationalisation within the HVAC business.

-- A charge of GBP5 million within Other Industrial businesses, predominantly relating to the finalisation of the restructuring activities announced in Brush last year.

Hedge accounting is not applied within the GKN businesses for transactional foreign exchange exposure. For consistency, the movement 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, totalling a charge of GBP13 million (2018: GBP123 million), is shown as an adjusting item because of its volatility and size.

Acquisition and disposal related costs of GBP11 million (2018: GBP124 million) were incurred in the period and included the profit or loss on the sale of two smaller businesses and their related transaction costs. These items are excluded from adjusted results due to their non-trading nature.

Other adjusting items include the charge for the Melrose equity-settled Incentive Scheme, including its associated employer's tax charge, of GBP7 million (2018: GBP10 million) which is excluded from adjusted results due to its volatility; an adjustment of GBP14 million (2018: GBP3 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 GBP18 million (2018: GBP3 million) resolved for more favourable amounts than first expected.

GOODWILL AND IMPAIRMENT REVIEW

Following the GKN acquisition in April 2018, an extensive review of the GKN assets, liabilities and accounting policies in accordance with IFRS 3 "Business Combinations" has now been completed.

Since the year end this review has resulted in increases to goodwill of GBP6 million, intangible assets of GBP21 million, provisions and trade and other payables of GBP10 million and a decrease to deferred tax assets of GBP17 million. The June 2018 and December 2018 Balance Sheets have been restated in accordance with IFRS 3.

The Security & Smart Technology business has experienced tough trading conditions and as a result enhanced disclosures, including sensitivity analysis in respect of the key assumptions used in the forecast models, were shown in the 2018 Annual Report.

During the period the impact of US tariffs on goods imported from China became clearer. The impact of US tariffs and the increased level of competition and technological change in the market caused further deterioration in performance and in forecast future prospects, resulting in a structural review of the business. This review resulted in the decision to close the manufacturing facility in China and the outsourcing of production to a third party.

A full impairment review has been performed on the Security & Smart Technology group of CGUs, which has assumed that US tariffs at the current higher rate will remain permanently, resulting in an impairment charge of GBP179 million in the period.

DISPOSAL OF WALTERSCHEID POWERTRAIN GROUP

On 25 June 2019 the Group completed the disposal of Walterscheid Powertrain Group to One Equity Partners, a US-based private equity firm for cash consideration of GBP185 million, less costs charged in the period of GBP7 million. Retirement benefit obligations of GBP155 million were disposed with the business and the loss on disposal was GBP21 million after the recycling of cumulative translation differences of GBP13 million.

Walterscheid Powertrain Group was acquired with GKN on 19 April 2018, contributed GBP206 million of revenue and GBP10 million of statutory operating profit in the period from 1 January 2019 up to the date it was disposed, and is shown within discontinued operations.

TAX - CONTINUING OPERATIONS

The statutory results for the period show a tax charge of GBP22 million (2018: credit of GBP42 million), arising on a statutory loss before tax of GBP128 million (2018: loss of GBP372 million). A tax charge was incurred on the statutory loss because certain adjusting items, discussed earlier in this review, did not give rise to tax deductions.

The Group Income Statement adjusted tax rate in the period was 23% (2018: 23%) and the Group paid GBP79 million (2018: GBP22 million) representing 18% of adjusted profit before tax.

ADOPTION OF IFRS 16 "LEASES"

IFRS 16 was adopted on 1 January 2019 and required operating leases to be recognised on the Balance Sheet. Previously only finance leases were recognised on the Balance Sheet, with costs associated with leases categorised as operating expensed through the Income Statement as incurred.

The impact of IFRS 16, on transition, has been to recognise a lease liability of GBP589 million with a corresponding right-of-use fixed asset in the Balance Sheet, which offset each other. The impact of IFRS 16 on the Income Statement in the period was to increase finance costs by GBP11 million, but this was broadly offset by an associated increase in operating profit. In addition, approximately GBP35 million of costs have been reclassified from a lease expense to depreciation.

Both the lease liability and the depreciation on leased assets are excluded from the definition of net debt and the resulting leverage calculations in the Group banking agreements.

CASH GENERATION AND MANAGEMENT

Group net debt at 30 June 2019, translated at closing exchange rates (being US $1.27 and EUR1.12), was GBP3,454 million (31 December 2018: GBP3,482 million). 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. The Group net debt leverage at 30 June 2019 was 2.3x EBITDA.

The movement in net debt during the period is summarised as follows:

 
                                                     2019     2018 
   Movement in Group net debt                        GBPm     GBPm 
-----------------------------------------------  --------  ------- 
 
 At 1 January                                     (3,482)    (572) 
-----------------------------------------------  --------  ------- 
 GKN acquisition related net debt movements             -  (2,789) 
-----------------------------------------------  --------  ------- 
 Adjusted net debt brought forward                (3,482)  (3,361) 
-----------------------------------------------  --------  ------- 
 Non-trading items: 
-----------------------------------------------  --------  ------- 
 Net cash flow from disposal of Walterscheid 
  Powertrain Group                                    172        - 
-----------------------------------------------  --------  ------- 
 Acquisition related costs                           (15)     (26) 
-----------------------------------------------  --------  ------- 
 Dividend paid to Melrose shareholders              (148)     (54) 
-----------------------------------------------  --------  ------- 
 Foreign exchange and other non-cash movements       (41)     (24) 
-----------------------------------------------  --------  ------- 
 Cash flow from non-trading items                    (32)    (104) 
-----------------------------------------------  --------  ------- 
 
 Free cash flow                                        60       92 
-----------------------------------------------  --------  ------- 
 At 30 June at closing exchange rates             (3,454)  (3,373) 
-----------------------------------------------  --------  ------- 
 
 At 30 June at twelve month average exchange 
  rates                                           (3,404)  (3,330) 
-----------------------------------------------  --------  ------- 
 

An analysis of the free cash flow is shown in the table below. The comparative period includes GKN for 73 days following the acquisition:

 
                                                       2019   2018 
                                                       GBPm   GBPm 
---------------------------------------------------  ------  ----- 
 Adjusted operating cash flow (pre capex)               599    240 
---------------------------------------------------  ------  ----- 
 Net capital expenditure                              (235)   (85) 
---------------------------------------------------  ------  ----- 
 Net interest and net tax paid                        (148)   (50) 
---------------------------------------------------  ------  ----- 
 Defined benefit pension contributions                (111)   (20) 
---------------------------------------------------  ------  ----- 
 Restructuring                                         (91)   (50) 
---------------------------------------------------  ------  ----- 
 Dividend income from equity accounted investments       67     64 
---------------------------------------------------  ------  ----- 
 Net other (including discontinued operations)         (21)    (7) 
---------------------------------------------------  ------  ----- 
 Free cash flow                                          60     92 
---------------------------------------------------  ------  ----- 
 
 Adjusted free cash flow                                256    135 
---------------------------------------------------  ------  ----- 
 

Net capital expenditure in the period was GBP235 million (2018: GBP85 million), representing 1.1x depreciation on non-leased assets. Net interest paid in the period was GBP69 million (2018: GBP28 million) and tax was GBP79 million (2018: GBP22 million).

Adjusted free cash flow of GBP256 million (2018: GBP135 million) is considered to be a reflection of ongoing Group cash flow and is shown before the one-off special pension contribution of GBP94 million (2018: GBPnil), being the balance of the Melrose commitment to contribute GBP150 million to the GKN UK 2012 and 2016 plans within the first twelve months of GKN ownership. It is also shown before cash spent on restructuring projects of GBP91 million (2018: GBP50 million) and cash flows used in discontinued operations of GBP11 million (2018: GBP7 million cash generated).

Free cash flow in the period, after all costs, was GBP60 million (2018: GBP92 million).

PROVISIONS

Total provisions at 30 June 2019 were GBP1,335 million (31 December 2018: GBP1,471 million, restated following the finalisation of the GKN opening Balance Sheet review process).

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

 
                                                                 Total 
                                                                  GBPm 
---------------------------------------------------------------  ----- 
 At 1 January 2019 (restated)                                    1,471 
---------------------------------------------------------------  ----- 
 Spend against provisions                                        (156) 
---------------------------------------------------------------  ----- 
 Net charge to adjusted operating profit                            49 
---------------------------------------------------------------  ----- 
 Net charge shown as an adjusting item in the Income Statement      37 
---------------------------------------------------------------  ----- 
 Utilisation of loss-making contract provision                    (45) 
---------------------------------------------------------------  ----- 
 Other (including foreign exchange)                               (21) 
---------------------------------------------------------------  ----- 
 At 30 June 2019                                                 1,335 
---------------------------------------------------------------  ----- 
 

The net charge to adjusted operating profit in the period of GBP49 million, includes GBP12 million in respect of certain non-cash divisional long-term incentive plan charges, and 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 GBP37 million, consists of charges of GBP68 million, primarily related to restructuring activities discussed in the adjusting items section of this review, offset by a GBP31 million provision release, primarily relating to loss-making contracts which have been favourably resolved.

During the period GBP91 million of cash was spent on restructuring.

Included within other movements are foreign exchange changes, the unwind of discounting on certain provisions, the reclassification of surplus property lease provisions following the adoption of IFRS 16 and the provisions disposed with Walterscheid Powertrain Group.

PENSIONS AND POST-EMPLOYMENT OBLIGATIONS

At 30 June 2019 total plan assets of the Melrose Group's defined benefit pension plans were GBP3,366 million (31 December 2018: GBP3,273 million) and total plan liabilities were GBP4,692 million (31 December 2018: GBP4,686 million), a net deficit of GBP1,326 million (31 December 2018: GBP1,413 million).

The values of the Group plans were updated at 30 June 2019 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.

The most significant pension plan in the Group is the GKN UK 2012 plan, with a net accounting deficit of GBP583 million at 30 June 2019 (31 December 2018: GBP606 million). The plan had gross assets of GBP2,191 million (31 December 2018: GBP2,007 million) and liabilities of GBP2,774 million (31 December 2018: GBP2,613 million).

The Group has paid its committed one-off GBP150 million contribution and is making ongoing annual contributions of GBP60 million to the GKN UK 2012 and 2016 plans. In addition, the Group has committed to contribute to these plans GBP270 million upon the disposal of Powder Metallurgy, 10% of the proceeds from disposal of other GKN businesses and 5% of the proceeds from disposal of non-GKN businesses. These commitments cease when the funding target, which has been agreed with the Trustees, is achieved, being gilts plus 25 basis points for the GKN UK 2016 plan and gilts plus 75 basis points for the GKN UK 2012 plan.

On 1 July 2019 the GKN UK 2012 plan was separated into four pension plans, two of which have been allocated to the Aerospace division and two to the Automotive division as follows:

 
 
 
                                    Assets  Liabilities   Deficit 
 GKN UK 2012 pension plan split       GBPm         GBPm      GBPm 
--------------------------------  --------  -----------  -------- 
 Aerospace pension plans             1,402      (1,775)     (373) 
--------------------------------  --------  -----------  -------- 
 Automotive pension plans              789        (999)     (210) 
--------------------------------  --------  -----------  -------- 
 Total                               2,191      (2,774)     (583) 
--------------------------------  --------  -----------  -------- 
 
 
 

Ongoing progress was made in the period to manage the pension liabilities within the Group. The disposal of Walterscheid Powertrain Group, the buyout of the Broan Aftermarket North America, Inc. Group Pension Plan and some members voluntarily choosing to leave certain pension plans, resulted in Group gross pension liabilities reducing by over GBP400 million.

Contributions to the Melrose Group defined benefit pension plans and post-employment medical plans from continuing operations in the period were GBP111 million and included GBP94 million of one-off special contributions, being the balance of the GBP150 million upfront commitment following the acquisition of GKN.

EXCHANGE RATES USED IN THE PERIOD

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

 
                                           Average rate 
                                      for GKN ownership    Average   Closing 
 US Dollar                                      in 2018       rate      rate 
-----------------------------------  ------------------  ---------  -------- 
 Six months to 30 June 2019                         N/A       1.29      1.27 
-----------------------------------  ------------------  ---------  -------- 
 Twelve months to 31 December 2018                 1.31       1.33      1.27 
-----------------------------------  ------------------  ---------  -------- 
 Six months to 30 June 2018                        1.35       1.38      1.32 
-----------------------------------  ------------------  ---------  -------- 
 
 Euro 
-----------------------------------  ------------------  ---------  -------- 
 Six months to 30 June 2019                         N/A       1.15      1.12 
-----------------------------------  ------------------  ---------  -------- 
 Twelve months to 31 December 2018                 1.13       1.13      1.11 
-----------------------------------  ------------------  ---------  -------- 
 Six months to 30 June 2018                        1.14       1.14      1.13 
-----------------------------------  ------------------  ---------  -------- 
 
 
 

The Group policy on foreign currency risk is explained on pages 47 and 48 of the 2018 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 the 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                            71    22     9      16 
--------------------------------  ----  ----  ----  ------ 
 % impact on adjusted operating 
  profit                            6%    2%    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 net debt as at 30 June 2019:

 
 GBPm                  USD   EUR 
------------------    ----  ---- 
 Increase in debt      233    82 
--------------------  ----  ---- 
 

FINANCIAL RISKS AND UNCERTAINTIES

The principal financial risks and uncertainties faced by the Group have not changed significantly from 2018. In summary, these financial risks include liquidity risk, finance cost risk, exchange rate risk, contract and warranty risk and commodity risk. Detailed explanations of these risks are discussed on pages 46 to 48 of the 2018 Annual Report and further explanations and details of the strategic risk profile of the Group are set out on pages 52 to 58 of the 2018 Annual Report.

BREXIT

Whilst the effect of Brexit on the European economy remains unclear, due to the Group's geographically balanced manufacturing footprint, on a micro level resulting tariffs and customs clearance are not expected to have a material negative effect on the Group as a whole.

Sales of product between the UK and Europe are a small proportion of the Group's overall revenues. Aerospace components are typically exempt from import duties under global agreements, whilst Automotive parts tariffs typically range between tariff free and 7%. However, the outcome of any Brexit agreement is unknown, as is the case for any legal or regulatory changes.

On a wider macro level the Group's financial results may be impacted by general lack of confidence and economic instability arising from a disruptive exit from the EU, or from any wider supply-chain disruption causing scheduling issues for customers or suppliers. Depending on the outcome of Brexit, the Group could be exposed to translational and transactional foreign exchange fluctuations. The impact from movements in foreign exchange rates on translating profits into Sterling is provided in the table above, whilst transactional exposures are generally well protected in the short-term due to approximately 90% of exposures being hedged for the next twelve months.

The Board will continue to monitor Brexit developments and adjust the plans for its businesses accordingly.

Geoffrey Martin

Group Finance Director

5 September 2019

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

   5 September 2019                                                                   5 September 2019 

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 2019 which comprises the condensed consolidated income statement, the condensed consolidated statement of comprehensive income, the condensed consolidated statement of cash flows, the condensed consolidated balance sheet, the condensed consolidated statement of changes in equity and related notes 1 to 13. We have read the other information contained in the half-yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.

This report is made solely to the company in accordance with International Standard on Review Engagements (UK and Ireland) 2410 "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the 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.

Directors' responsibilities

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

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

Our responsibility

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

Scope of review

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410 "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the 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 2019 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.

Deloitte LLP

Statutory Auditor

London, United Kingdom

5 September 2019

Melrose Industries PLC

Condensed Consolidated Income Statement

 
                                                              Restated(1) 
                                                    6 months     6 months 
                                                       ended        ended   Restated(2) 
                                                     30 June      30 June    Year ended 
                                                        2019         2018   31 December 
                                                   Unaudited    Unaudited          2018 
Continuing operations                      Notes        GBPm         GBPm          GBPm 
---------------------------------------  -------  ----------  -----------  ------------ 
 
Revenue                                     3          5,700        2,847         8,325 
Cost of sales                                        (4,568)      (2,342)       (6,717) 
---------------------------------------  -------  ----------  -----------  ------------ 
 
Gross profit                                           1,132          505         1,608 
 
Share of results of equity accounted 
 investments                                8             16           12            34 
Net operating expenses                               (1,159)        (842)       (2,027) 
---------------------------------------  -------  ----------  -----------  ------------ 
 
Operating loss                              3           (11)        (325)         (385) 
 
 
Finance costs                                          (126)         (51)         (161) 
Finance income                                             9            4             5 
 
Loss before tax                                        (128)        (372)         (541) 
Tax                                         5           (22)           42            73 
---------------------------------------  -------  ----------  -----------  ------------ 
 
Loss after tax for the period from 
 continuing operations                                 (150)        (330)         (468) 
 
 
Discontinued operations 
Loss for the period from discontinued 
 operations                                 9           (15)          (4)           (7) 
---------------------------------------  -------  ----------  -----------  ------------ 
 
Loss after tax for the period                          (165)        (334)         (475) 
---------------------------------------  -------  ----------  -----------  ------------ 
 
Attributable to: 
 
Owners of the parent                                   (168)        (328)         (475) 
Non-controlling interests                                  3          (6)             - 
---------------------------------------  -------  ----------  -----------  ------------ 
 
                                                       (165)        (334)         (475) 
 
 
Earnings per share 
 Continuing operations 
  - Basic                                   6         (3.1)p      (10.6)p       (11.8)p 
  - Diluted                                 6         (3.1)p      (10.6)p       (11.8)p 
 
Continuing and discontinued operations 
  - Basic                                   6         (3.4)p      (10.8)p       (12.0)p 
  - Diluted                                 6         (3.4)p      (10.8)p       (12.0)p 
 
Adjusted results from continuing 
 operations 
 
Adjusted revenue                            3          6,002        2,971         8,818 
Adjusted operating profit                  3,4           539          284           819 
Adjusted profit before tax                  4            429          244           677 
Adjusted profit after tax                   4            330          188           520 
Adjusted basic earnings per share           6           6.7p         6.0p         12.8p 
Adjusted diluted earnings per share         6           6.7p         6.0p         12.8p 
---------------------------------------  -------  ----------  -----------  ------------ 
 

(1) Results for the period ended 30 June 2018 have been restated for the finalisation of acquisition accounting for GKN (see note 2) and discontinued operations (see note 9).

(2) Results for the year ended 31 December 2018 have been restated for discontinued operations (see note 9).

Melrose Industries PLC

Condensed Consolidated Statement of Comprehensive Income

 
                                                               Restated(1) 
                                                     6 months     6 months 
                                                        ended        ended 
                                                      30 June      30 June     Year ended 
                                                         2019         2018    31 December 
                                                    Unaudited    Unaudited           2018 
                                            Notes        GBPm         GBPm           GBPm 
----------------------------------------  -------  ----------  -----------  ------------- 
 
Loss after tax for the period                           (165)        (334)          (475) 
---------------------------------------- 
 
 Items that will not be reclassified 
  subsequently to the 
  Income Statement: 
Net remeasurement (loss)/gain on 
 retirement benefit obligations                         (151)          166           (36) 
Income tax credit/(charge) relating 
 to items that will not be reclassified         5          39         (25)              9 
---------------------------------------- 
 
                                                        (112)          141           (27) 
 
 Items that may be reclassified 
  subsequently to the 
  Income Statement: 
Currency translation on net investments                     6          389            625 
Share of other comprehensive income 
 from equity accounted investments                          2            -              9 
Transfer to Income Statement from 
 equity of cumulative translation 
 differences on disposal of foreign 
 operations                                   9          (13)            -              - 
Losses on hedge relationships                            (44)         (50)           (97) 
Transfer to Income Statement on 
 hedge relationships                                        -          (3)            (2) 
Income tax (charge)/credit relating 
 to items that may be reclassified              5         (8)            9             29 
 
                                                         (57)          345            564 
 
 
Other comprehensive (expense)/income 
 for the period                                         (169)          486            537 
 
 
Total comprehensive (expense)/income 
 for the period                                         (334)          152             62 
 
Attributable to: 
 
Owners of the parent                                    (337)          140             44 
Non-controlling interests                                   3           12             18 
----------------------------------------  -------  ----------  -----------  ------------- 
 
                                                        (334)          152             62 
 
 

(1) Results for the period ended 30 June 2018 have been restated for the finalisation of acquisition accounting for GKN (see note 2).

Melrose Industries PLC

Condensed Consolidated Statement of Cash Flows

 
 
                                                                   Restated(1) 
                                                       6 months       6 months 
                                                          ended          ended   Restated(1) 
                                                        30 June        30 June    Year ended 
                                                           2019           2018   31 December 
                                                      Unaudited      Unaudited          2018 
                                              Notes        GBPm           GBPm          GBPm 
------------------------------------------  -------  ----------  -------------  ------------ 
 
Operating activities 
Net cash from/(used in) operating 
 activities from continuing operations        13            262            (3)           344 
Net cash (used in)/from operating 
 activities from discontinued operations      13            (5)              9            29 
------------------------------------------  -------  ----------  -------------  ------------ 
 
Net cash from operating activities                          257              6           373 
 
 
Investing activities 
Disposal of businesses, net of cash 
 disposed                                      9            172            (1)           (4) 
Purchase of property, plant and equipment                 (223)           (78)         (333) 
Proceeds from disposal of property, 
 plant and equipment                                          7              3            18 
Purchase of computer software and 
 capitalised development costs                             (19)           (10)          (35) 
Dividends received from equity accounted 
 investments                                                 67             64            66 
Equity accounted investment additions                         -              -           (3) 
Acquisition of subsidiaries, net of 
 cash acquired                                                -        (1,009)       (1,009) 
Interest received                                            10              4             5 
 
Net cash from/(used in) investing 
 activities from continuing operations                       14        (1,027)       (1,295) 
  Net cash used in investing activities 
       from discontinued operations           13            (4)            (2)           (9) 
------------------------------------------  -------  ----------  -------------  ------------ 
 
Net cash from/(used in) investing activities                 10        (1,029)       (1,304) 
 
 
Financing activities 
Purchase of non-controlling interests                         -          (179)         (224) 
Costs of issuing shares                                       -            (1)           (1) 
Repayment of borrowings                                   (144)          (803)         (820) 
New bank loans raised                                         -          2,515         2,558 
Costs of raising debt finance                                 -           (54)          (51) 
Repayment of principal under lease 
 obligations                                               (43)              -             - 
Dividends paid to non-controlling 
 interests                                                  (5)              -           (1) 
Dividends paid to owners of the parent         7          (148)           (54)         (129) 
 
Net cash (used in)/from financing 
 activities from continuing operations                    (340)          1,424         1,332 
Net cash used in financing activities 
 from discontinued operations                 13            (2)              -             - 
------------------------------------------  -------  ----------  -------------  ------------ 
 
Net cash (used in)/from financing activities              (342)          1,424         1,332 
 
 
Net (decrease)/increase in cash and 
 cash equivalents                                          (75)            401           401 
Cash and cash equivalents at the beginning 
 of the period                                              415             16            16 
Effect of foreign exchange rate changes                       -              9           (2) 
------------------------------------------  ------- 
 
   Cash and cash equivalents at the end 
               of the period                  13            340            426           415 
 
 
 

(1) Amounts for the periods ended 30 June 2018 and 31 December 2018 have been restated for discontinued operations (see notes 9 and 13).

As at 30 June 2019, the Group had net debt of GBP3,454 million (31 December 2018: GBP3,482 million). A reconciliation of the movement in net debt is shown in note 13.

Melrose Industries PLC

Condensed Consolidated Balance Sheet

 
                                                                          Restated(1) 
                                                               30 June        30 June   Restated(1) 
                                                                  2019           2018   31 December 
                                                             Unaudited      Unaudited          2018 
                                         Notes                    GBPm           GBPm          GBPm 
--------------------------------------  ------  ----------------------  -------------  ------------ 
Non-current assets 
Goodwill and other intangible 
 assets                                                         10,444         11,179        11,098 
Property, plant and equipment                                    3,631          2,966         3,171 
Interests in equity accounted 
 investments                                                       439            473           492 
Deferred tax assets                                                143            159           132 
Derivative financial assets                                         20             25            26 
Trade and other receivables                                        422            256           504 
--------------------------------------  ------ 
 
                                                                15,099         15,058        15,423 
Current assets 
Inventories                                                      1,504          1,403         1,489 
Trade and other receivables                                      2,190          2,743         2,328 
Derivative financial assets                                         38             20            15 
Current tax assets                                                  38             59            74 
Cash and cash equivalents                                          340            426           415 
 
                                                                 4,110          4,651         4,321 
--------------------------------------  ------  ----------------------  -------------  ------------ 
 
Total assets                              3                     19,209         19,709        19,744 
 
 
Current liabilities 
Trade and other payables                                         2,705          2,853         2,583 
Interest-bearing loans and borrowings                              394              1           377 
Lease obligations                                                   50              -             5 
Derivative financial liabilities                                   218            100           204 
Current tax liabilities                                             82            160           137 
Provisions                                10                       376            393           391 
 
                                                                 3,825          3,507         3,697 
--------------------------------------  ------  ----------------------  -------------  ------------ 
 
Net current assets                                                 285          1,144           624 
 
 
Non-current liabilities 
Trade and other payables                                           403            549           762 
Interest-bearing loans and borrowings                            3,235          3,700         3,378 
Lease obligations                                                  566              -            52 
Derivative financial liabilities                                   303            261           227 
Deferred tax liabilities                                           811            966           874 
Retirement benefit obligations            12                     1,326          1,231         1,413 
Provisions                                10                       959          1,065         1,080 
--------------------------------------  ------  ----------------------  ------------- 
 
                                                                 7,603          7,772         7,786 
--------------------------------------  ------  ----------------------  -------------  ------------ 
 
Total liabilities                         3                     11,428         11,279        11,483 
 
 
Net assets                                                       7,781          8,430         8,261 
 
 
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) 
Hedging reserve                                                  (125)           (36)          (67) 
Translation reserve                                                563            313           562 
Retained earnings                                                1,071          1,875         1,492 
 
Equity attributable to owners of 
 the parent                                                      7,759          8,402         8,237 
 
 
Non-controlling interests                                           22             28            24 
--------------------------------------  ------  ----------------------  -------------  ------------ 
 
Total equity                                                     7,781          8,430         8,261 
 
 
 

(1) Amounts at 30 June 2018 and 31 December 2018 have been restated for the finalisation of acquisition accounting for GKN (see note 2).

Melrose Industries PLC

Condensed Consolidated Statement of Changes in Equity

 
                                                                                                                            Equity 
                                                                                                                      attributable 
                                   Issued            Share                                                               to owners           Non- 
                                    share          premium      Merger     Other  Hedging   Translation     Retained        of the    controlling    Total 
                                  capital          account     reserve  reserves  reserve    reserve(1)  earnings(1)        parent   interests(1)   equity 
                                     GBPm             GBPm        GBPm      GBPm     GBPm          GBPm         GBPm          GBPm           GBPm     GBPm 
                   ----------------------  ---------------  ----------  --------  -------  ------------  ----------- 
 
At 1 January 2018                     133            1,493         109   (2,330)        8          (66)        2,538         1,885              -    1,885 
 
Loss for the 
 period                                 -                -           -         -        -             -        (328)         (328)            (6)    (334) 
Other 
 comprehensive 
 (expense)/income                       -                -           -         -     (44)           379          133           468             18      486 
-----------------  ----------------------  ---------------  ----------  --------  -------  ------------  -----------  ------------  -------------  ------- 
 
Total 
 comprehensive 
 (expense)/income                       -                -           -         -     (44)           379        (195)           140             12      152 
Acquisition of 
 GKN(2)                               169            5,631           -         -        -             -            -         5,800            857    6,657 
Purchase of 
 non-controlling 
 interests                             31            1,014           -         -        -             -        (419)           626          (841)    (215) 
Implementation 
 of IFRS 9(3)                           -                -           -         -        -             -          (2)           (2)              -      (2) 
Dividends paid                          -                -           -         -        -             -         (54)          (54)              -     (54) 
Equity-settled 
 share-based 
 payments                               -                -           -         -        -             -            7             7              -        7 
-----------------  ----------------------  ---------------  ----------  --------  -------  ------------  -----------  ------------  -------------  ------- 
At 30 June 2018 
 (unaudited)                          333            8,138         109   (2,330)     (36)           313        1,875         8,402             28    8,430 
 
Loss for the 
 period                                 -                -           -         -        -             -        (147)         (147)              6    (141) 
Other 
 comprehensive 
 (expense)/income                       -                -           -         -     (31)           249        (167)            51              -       51 
-----------------  ----------------------  ---------------  ----------  --------  -------  ------------  -----------  ------------  -------------  ------- 
 
Total 
 comprehensive 
 (expense)/income                       -                -           -         -     (31)           249        (314)          (96)              6     (90) 
Purchase of 
 non-controlling 
 interests                              -                -           -         -        -             -            -             -            (9)      (9) 
Dividends paid                          -                -           -         -        -             -         (75)          (75)            (1)     (76) 
Equity-settled 
 share-based 
 payments                               -                -           -         -        -             -            6             6              -        6 
 
At 31 December 
 2018                                 333            8,138         109   (2,330)     (67)           562        1,492         8,237             24    8,261 
 
Loss for the 
 period                                 -                -           -         -        -             -        (168)         (168)              3    (165) 
Other 
 comprehensive 
 (expense)/income                       -                -           -         -     (58)             1        (112)         (169)              -    (169) 
-----------------  ----------------------  ---------------  ----------  --------  -------  ------------  -----------  ------------  -------------  ------- 
 
Total 
 comprehensive 
 (expense)/income                       -                -           -         -     (58)             1        (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)    (125)           563        1,071         7,759             22    7,781 
 
 

(1) Amounts at 30 June 2018 have been restated for the finalisation of acquisition accounting for GKN (see note 2).

(2) Relates to purchase of approximately 85% of the issued share capital of GKN plc. The amount recognised within the share premium account for the acquisition of GKN of GBP5,631 million is net of GBP1 million for costs associated with issuing shares.

(3) The Group adopted IFRS 9 on 1 January 2018.

Notes to the Condensed Interim Financial Statements

   1.   Corporate information 

The interim financial information for the six months ended 30 June 2019 has been reviewed by the auditor, but not audited. The information for the year ended 31 December 2018 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.

On 25 June 2019, the Group completed the disposal of the Walterscheid Powertrain Group to One Equity Partners. The Walterscheid Powertrain Group was previously reported within the Other Industrial operating segment and is shown as a discontinued operation in these Condensed Interim Financial Statements.

   2.   Summary of significant accounting policies 

The interim financial information for the six months ended 30 June 2019, 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 2018 Annual Report and financial statements on pages 132 to 141 other than as noted below.

The Group's 2018 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 2018 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.

On 19 April 2018, the Group acquired approximately 85% of the issued share capital and obtained control of GKN plc ("GKN") for consideration of GBP7,091 million. The remaining 15% of the issued share capital of GKN was acquired in the period from 19 April 2018 to 30 June 2018, at a cost of GBP1,260 million which was treated as a purchase of a non-controlling interest.

The amounts recognised in respect of the identifiable assets and liabilities assumed on the acquisition of GKN were set out in the 2018 Annual Report and reported as provisional. During the period to 19 April 2019, the Group completed its review of the assets and liabilities acquired. As a result, the Group has recorded its final adjustments to the opening balance sheet of GKN and in accordance with IFRS 3: "Business combinations" the acquisition Balance Sheet at 19 April 2018 has been restated to reflect this. These adjustments impact the Balance Sheets at 31 December 2018 and 30 June 2018.

As at 30 June 2018 the Group was still performing a programme of GKN site visits at all significant locations to assess the fair value of assets and liabilities acquired and appropriately align accounting policies. As a consequence, the only fair value items included at 30 June 2018 were in relation to: interest-bearing loans and borrowings, derivative financial instruments, retirement benefit obligations, certain interests in equity accounted investments, tax balances, the uplift of inventory and an initial value for property, plant and equipment. Given the magnitude of GKN's acquired intangible assets and the associated deferred tax liability, these values were removed from the acquisition balance sheet at 30 June 2018 pending finalisation of the Group's valuation and accordingly no amortisation was recognised in the period ended 30 June 2018.

There were many fair value changes identified in the second half of 2018 as well as a small number of final adjustments identified in the first half of the year up to 19 April 2019 that have impacted the restated Balance Sheet at 30 June 2018. Amortisation of acquired intangible assets amounting to a charge of GBP90 million, utilisation of loss-making contract provisions resulting in income of GBP15 million and tax income of GBP17 million thereon has impacted the Income Statement for the period ended 30 June 2018. Additionally, there was a GBP179 million gain recognised in the Statement of Comprehensive Income for favourable foreign exchange differences resulting primarily from the finalisation of goodwill and acquired intangible asset valuations.

The small number of final adjustments identified in the first half of the year up to 19 April 2019 that have impacted the restated Balance Sheet at 31 December 2018 are as follows:

   --      Provisions and trade and other payables have increased by GBP10 million; 

o Provisions increased by GBP26 million, including a GBP16 million reclassification from trade and other payables;

o Trade and other payables decreased by GBP16 million due to a reclassification to provisions

   --      Deferred tax assets have reduced by GBP17 million; 
   --      Acquisition intangibles assets have increased by GBP21 million; and 
   --      Goodwill has correspondingly increased by GBP6 million. 

There has been no restatement of the Income Statement or Statement of Comprehensive Income for the year ended 31 December 2018 as a result of the finalisation of fair values on acquisition accounting.

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").

   2.   Summary of significant accounting policies (continued) 

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 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;

-- One-off costs associated with gender equalisation of guaranteed minimum pensions ("GMP") for occupational schemes; and

   --      The 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.

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

   --      Net effect of significant new tax legislation changes; and 
   --      The tax effects of adjustments to profit/(loss) before tax. 

The Board considers the adjusted results to be an important measure used to monitor how the businesses are performing as this provides a meaningful reflection of how the businesses are managed and measured on a day-to-day basis and achieves consistency and comparability between reporting periods, 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 year results and comparative periods where provided.

Adoption of new accounting standards

The Group adopted IFRS 16 "Leases" on 1 January 2019 using the modified retrospective approach, resulting in no adjustments to the prior year comparatives. IFRS 16 superseded the previous lease guidance including IAS 17: "Leases" and related interpretations. IFRS 16 requires all leases, except where exemptions are applied, to be recognised on the Balance Sheet as a lease liability with a corresponding right-of-use asset presented within property, plant and equipment. As a result of the transition to IFRS 16, the Group recognised right-of-use assets of GBP589 million and lease liabilities of GBP589 million.

As part of the initial application of IFRS 16, the Group has applied the following exemptions available; IFRS 16 guidance has not been applied to leases with a lease term which ends within 12 months of the date of initial application or to leases of low value assets. Payments relating to these leases are recognised as an expense in the Income Statement over the lease term and no right-of-use asset or lease liability is recognised.

The Group opted to apply the relief option available under IFRS 16, which permits any right-of-use asset to be adjusted by the value of any associated onerous lease provision recognised in the Balance Sheet as at 31 December 2018, as an alternative to performing an impairment review. As a result onerous lease liabilities, previously held within surplus property provisions of GBP20 million have been transferred to the IFRS 16 right-of-use asset following adoption of IFRS 16 on 1 January 2019.

The lease liabilities were measured at the present value of the remaining lease payments discounted at the incremental borrowing rate as at 1 January 2019. On transition, the right-of-use assets were measured at an amount equal to the lease liability, adjusted by the amount of any prepaid or accrued lease payments.

In order to calculate the incremental borrowing rate, reference interest rates were derived for corporate bonds, for a period of up to 15 years. Interest rates were obtained for all key currencies and were subsequently adjusted to reflect the country risk premium and a leasing risk premium. The leasing risk premium derived was adjusted to reflect whether the lease was deemed to be secured or unsecured. The Group applied a single discount rate to a portfolio of leases with similar characteristics, in line with the practical expedient available under IFRS 16.

   2.   Summary of significant accounting policies (continued) 

For leases that were classified as finance leases under IAS 17, the carrying amount of the right-of-use asset and the corresponding lease liability at 1 January 2019 was determined to be the carrying amount of the lease asset and lease liability under IAS 17 immediately before that date.

The following explains the difference between operating lease commitments disclosed, applying IAS 17, at 31 December 2018 and the lease liability recognised on adoption of IFRS 16 at 1 January 2019.

 
                                                          GBPm 
------------------------------------------------------  ------ 
 
 Total minimum lease payments reported at 31 December 
  2018 under IAS 17                                        710 
 Change in assessment of lease term under IFRS 16           32 
 Leases outside the scope of IFRS 16                      (11) 
 Impact of discounting lease liability under IFRS 16     (142) 
------------------------------------------------------  ------ 
 
 Lease liability recognised on transition to IFRS 16 
  at 1 January 2019                                        589 
 
 

Going concern

The Group's business activities in the period, together with the factors likely to affect its future development, performance and position are set out in the Chief Executive's Review.

After making appropriate enquiries, the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future, a period of not less than twelve months from the date of this report. Accordingly, they continue to adopt the going concern basis in preparing these Condensed Interim Financial Statements.

   3.   Segment information 

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

Aerospace - a multi-technology tier one supplier of air frame and engine structures, including Aerostructures, Engine Systems and Special Technologies.

Automotive - comprises Driveline, All Wheel Drive and e-Drive (together e-Powertrain) 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 & Security - comprises the Group's Air Management and Security & Smart Technology businesses. Air Management includes the Air Quality & 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 non-residential applications. Security & Smart Technology manufactures and distributes products designed to provide convenience and security primarily for residential applications and audio visual equipment for the residential audio video and professional video market.

Other Industrial - comprises the Group's Ergotron, Brush and Wheels & Structures businesses. The Walterscheid Powertrain business has been included in discontinued operations and prior periods have been restated following its disposal in June 2019.

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, the remaining GKN central cost centres 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 2019 and comparative periods.

   3.   Segment information (continued) 
   a)   Segment revenues 
 
 6 months ended 30 June 2019 
 
                                                              Powder       Nortek          Other 
                                           Automotive     Metallurgy        Air &     Industrial     Total 
                            Aerospace            GBPm           GBPm     Security           GBPm      GBPm 
   Continuing operations         GBPm                                        GBPm 
-------------------------  ----------  --------------  -------------  -----------  -------------  -------- 
 
 Adjusted revenue               1,904           2,450            581          732            335     6,002 
 Equity accounted 
  investments                    (13)           (282)            (7)            -              -     (302) 
-------------------------  ----------  --------------  -------------  -----------  -------------  -------- 
 
 Revenue                        1,891           2,168            574          732            335     5,700 
 
 
 
 
 
   6 months ended 30 June 2018 
   - restated 
 
                                                              Powder       Nortek          Other 
                                           Automotive     Metallurgy        Air &     Industrial     Total 
   Continuing operations    Aerospace            GBPm           GBPm     Security           GBPm      GBPm 
                                 GBPm                                        GBPm 
-------------------------  ----------  --------------  -------------  -----------  -------------  -------- 
 
 Adjusted revenue                 714           1,019            254          720            264     2,971 
 Equity accounted 
  investments                     (1)           (123)              -            -              -     (124) 
-------------------------  ----------  --------------  -------------  -----------  -------------  -------- 
 
 Revenue                          713             896            254          720            264     2,847 
 
 
 
 
 Year ended 31 December 2018 
  - restated 
 
                                                              Powder       Nortek          Other 
                                           Automotive     Metallurgy        Air &     Industrial     Total 
   Continuing operations    Aerospace            GBPm           GBPm     Security           GBPm      GBPm 
                                 GBPm                                        GBPm 
-------------------------  ----------  --------------  -------------  -----------  -------------  -------- 
 
 Adjusted revenue               2,521           3,382            851        1,458            606     8,818 
 Equity accounted 
  investments                    (42)           (446)            (5)            -              -     (493) 
-------------------------  ----------  --------------  -------------  -----------  -------------  -------- 
 
 Revenue                        2,479           2,936            846        1,458            606     8,325 
 
 
 

b) Segment operating profit

 
 6 months ended 30 
 June 
 2019 
 
                                                                        Nortek 
                                                           Powder        Air &          Other 
  Continuing             Aerospace      Automotive     Metallurgy     Security     Industrial   Corporate(2)     Total 
  operations                  GBPm            GBPm           GBPm         GBPm           GBPm           GBPm      GBPm 
----------------------  ----------  --------------  -------------  -----------  -------------  -------------  -------- 
 
 Adjusted operating 
  profit/(loss)                192             186             66           92             31           (28)       539 
 
 Items not included in 
 adjusted operating 
 profit(1) 
 : 
 Amortisation of 
  intangible 
  assets acquired in 
  business 
  combinations               (132)            (73)           (24)         (28)           (12)              -     (269) 
 Impairment of assets            -               -              -        (179)              -              -     (179) 
 Restructuring costs          (26)            (14)            (5)         (21)            (5)            (4)      (75) 
 Equity accounted 
  investments 
  adjustments                    -            (14)              -            -              -              -      (14) 
 Movement in 
  derivatives 
  and associated 
  financial 
  assets and 
  liabilities                    2             (2)              -            -              -           (13)      (13) 
 Acquisition and 
  disposal 
  related costs                  -               -              -            -              -           (11)      (11) 
 Melrose 
  equity-settled 
  compensation scheme 
  charges                        -               -              -            -              -            (7)       (7) 
 Release and changes 
  in discount rate of 
  fair value items             (6)               -             22            2              -              -        18 
 
 
 Operating 
  profit/(loss)                 30              83             59        (134)             14           (63)      (11) 
 
 
 Finance costs                                                                                                   (126) 
 Finance income                                                                                                      9 
 
 
 Loss before tax                                                                                                 (128) 
 Tax                                                                                                              (22) 
 
 
 Loss for the period from 
  continuing 
  operations                                                                                                     (150) 
 
 

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

(2) Corporate adjusted operating loss of GBP28 million, includes GBP4 million of costs in respect of remaining GKN central cost centres and GBP12 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 2018 
   - restated 
 
                                                                    Nortek 
                                                       Powder        Air &          Other 
  Continuing         Aerospace      Automotive     Metallurgy     Security     Industrial   Corporate(2)     Total 
  operations              GBPm            GBPm           GBPm         GBPm           GBPm           GBPm      GBPm 
------------------  ----------  --------------  -------------  -----------  -------------  -------------  -------- 
 
 Adjusted 
  operating 
  profit/(loss)             57              74             30          104             32           (13)       284 
 
 Items not 
 included in 
 adjusted 
 operating 
 profit(1) 
 : 
 Restructuring 
  costs                   (12)            (11)            (1)         (16)           (69)           (19)     (128) 
 Amortisation of 
  intangible 
  assets acquired 
  in business 
  combinations            (49)            (29)            (9)         (26)           (12)              -     (125) 
 Acquisition and 
  disposal 
  related costs              -               -              -            -              -          (124)     (124) 
 Movement in 
  derivatives 
  and associated 
  financial 
  assets and 
  liabilities                -               -              -            -              -          (123)     (123) 
 Reversal of 
  uplift in 
  value of 
  inventory               (45)            (42)           (11)            -            (1)              -      (99) 
 Melrose 
  equity-settled 
  compensation 
  scheme 
  charges                    -               -              -            -              -           (10)      (10) 
 Equity accounted 
  investments 
  adjustments                -             (3)              -            -              -              -       (3) 
 Release and 
  changes 
  in discount rate 
  of 
  fair value items           -               -              -            3              -              -         3 
 
 
 Operating 
  (loss)/profit           (49)            (11)              9           65           (50)          (289)     (325) 
 
 
 Finance costs                                                                                                (51) 
 Finance income                                                                                                  4 
 
 
 Loss before tax                                                                                             (372) 
 Tax                                                                                                            42 
 
 
 Loss for the period from 
  continuing 
  operations                                                                                                 (330) 
 
 
 

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

(2) Corporate adjusted operating loss of GBP13 million, includes GBP3 million of costs in respect of remaining GKN central cost centres and GBP2 million of costs in respect of divisional long-term incentive plans.

 
 Year ended 31 
 December 
 2018 - restated 
                                                                        Nortek 
                                                           Powder        Air &          Other 
 Continuing              Aerospace      Automotive     Metallurgy     Security     Industrial   Corporate(2)     Total 
 operations                   GBPm            GBPm           GBPm         GBPm           GBPm           GBPm      GBPm 
--------------------  ------------  --------------  -------------  -----------  -------------  -------------  -------- 
 
 Adjusted operating 
  profit/(loss)                250             231             98          198             70           (28)       819 
 
 Items not included 
 in 
 adjusted operating 
 profit(1) 
 : 
 Amortisation of 
  intangible 
  assets acquired in 
  business 
  combinations               (176)           (103)           (34)         (54)           (24)              -     (391) 
 Restructuring costs          (56)            (46)           (11)         (22)           (64)           (32)     (231) 
 Acquisition and 
  disposal 
  related costs                (7)               -            (1)            -              -          (145)     (153) 
 Impairment of 
  assets                      (17)               -            (3)            -          (132)              -     (152) 
 Movement in 
  derivatives 
  and associated 
  financial 
  assets and 
  liabilities                    -               -              -            -              -          (143)     (143) 
 Reversal of uplift 
  in 
  value of inventory          (50)            (42)           (11)            -            (2)              -     (105) 
 Equity accounted 
  investments 
  adjustments                  (1)            (24)              -            -              -              -      (25) 
 Melrose 
  equity-settled 
  compensation 
  scheme 
  charges                        -               -              -            -              -           (13)      (13) 
 Impact of GMP 
  equalisation 
  on UK pension 
  schemes                      (2)             (1)              -            -            (1)            (7)      (11) 
 Release and changes 
  in discount rate 
  of 
  fair value items              15               -              -            4              1              -        20 
 
 
 Operating 
  (loss)/profit               (44)              15             38          126          (152)          (368)     (385) 
 
 
 Finance costs                                                                                                   (161) 
 Finance income                                                                                                      5 
 
 
 Loss before tax                                                                                                 (541) 
 Tax                                                                                                                73 
 
 
 Loss for the year 
  from 
  continuing 
  operations                                                                                                     (468) 
 
 

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

(2) Corporate adjusted operating loss of GBP28 million, includes GBP6 million of costs in respect of remaining GKN central cost centres and GBP2 million of costs in respect of divisional long-term incentive plans.

   3.   Segment information (continued) 
   c)   Segment total assets and liabilities 
 
 30 June 2019 
 
                                                        Powder       Nortek          Other 
                                     Automotive     Metallurgy        Air &     Industrial                  Total 
                      Aerospace            GBPm           GBPm     Security           GBPm   Corporate       GBPm 
                           GBPm                                        GBPm                       GBPm 
-------------------  ----------  --------------  -------------  -----------  -------------  ----------  --------- 
 
 Total assets             7,702           5,696          2,117        2,112          1,038         544     19,209 
 Total liabilities      (3,112)         (2,419)          (551)        (594)          (258)     (4,494)   (11,428) 
-------------------  ----------  --------------  -------------  -----------  -------------  ----------  --------- 
 
 
 30 June 2018 - restated 
 
                                                                     Nortek 
                                                        Powder        Air &             Other 
                      Aerospace      Automotive     Metallurgy     Security     Industrial(1)   Corporate      Total 
                           GBPm            GBPm           GBPm         GBPm              GBPm        GBPm       GBPm 
-------------------  ----------  --------------  -------------  -----------  ----------------  ----------  --------- 
 
 Total assets             7,264           5,672          2,155        2,111             1,608         899     19,709 
 Total liabilities      (2,968)         (2,454)          (342)        (468)             (531)     (4,516)   (11,279) 
-------------------  ----------  --------------  -------------  -----------  ----------------  ----------  --------- 
 

(1) Includes assets of GBP421 million and liabilities of GBP186 million relating to discontinued operations.

 
 31 December 2018 - restated 
 
                                                        Powder       Nortek             Other 
                                     Automotive     Metallurgy        Air &     Industrial(1)                  Total 
                      Aerospace            GBPm           GBPm     Security              GBPm   Corporate       GBPm 
                           GBPm                                        GBPm                          GBPm 
-------------------  ----------  --------------  -------------  -----------  ----------------  ----------  --------- 
 
 Total assets             7,725           5,685          2,070        2,142             1,494         628     19,744 
 Total liabilities      (3,040)         (2,330)          (521)        (492)             (499)     (4,601)   (11,483) 
-------------------  ----------  --------------  -------------  -----------  ----------------  ----------  --------- 
 

(1) Includes assets of GBP426 million and liabilities of GBP226 million relating to discontinued operations.

   d)   Segment capital expenditure and depreciation 
 
  6 months ended 30 June 
   2019 
 
 
                                                            Powder       Nortek 
                                         Automotive     Metallurgy        Air &            Other                 Total 
                          Aerospace            GBPm           GBPm     Security    Industrial(2)   Corporate      GBPm 
                               GBPm                                        GBPm             GBPm        GBPm 
-----------------------  ----------  --------------  -------------  -----------  ---------------  ----------  -------- 
 
 Capital expenditure(1)          67              95             31           20               10           -       223 
 Depreciation of 
  owned assets(1)                68              93             30           13               12           -       216 
 Depreciation of 
  leased assets                  15               8              3            7                1           1        35 
-----------------------  ----------  --------------  -------------  -----------  ---------------  ----------  -------- 
 

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

(2) Includes capital expenditure of GBP4 million and depreciation of GBP5 million relating to discontinued operations.

 
  6 months ended 30 June 
   2018 
 
 
                                                                       Nortek 
                                                          Powder        Air &            Other 
                        Aerospace      Automotive     Metallurgy     Security    Industrial(2)   Corporate     Total 
                             GBPm            GBPm           GBPm         GBPm             GBPm        GBPm      GBPm 
---------------------  ----------  --------------  -------------  -----------  ---------------  ----------  -------- 
 
 Capital 
  expenditure(1)               14              43             10           23                6           -        96 
 Depreciation of 
  owned assets(1)              22              26              9           12                6           -        75 
---------------------  ----------  --------------  -------------  -----------  ---------------  ----------  -------- 
 
 

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

(2) Includes capital expenditure of GBP2 million and depreciation of GBP1 million relating to discontinued operations.

 
 Year ended 31 December 2018 
 
 
                                                         Powder       Nortek             Other 
                                      Automotive     Metallurgy        Air &     Industrial(2)                 Total 
                       Aerospace            GBPm           GBPm     Security              GBPm   Corporate      GBPm 
                            GBPm                                        GBPm                          GBPm 
--------------------  ----------  --------------  -------------  -----------  ----------------  ----------  -------- 
 
 Capital 
  expenditure(1)             105             198             53           44                22           -       422 
 Depreciation of 
  owned assets(1)             88             116             37           24                17           -       282 
--------------------  ----------  --------------  -------------  -----------  ----------------  ----------  -------- 
 
 

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

(2) Includes capital expenditure of GBP11 million and depreciation of GBP5 million relating to discontinued operations.

   3.   Segment information (continued) 
   e)   Geographical information 

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

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

 
                         Revenue(1) from external 
                                 customers                                Non-current assets 
           ----------------------------------------------------  ----------------------------------- 
                                       Restated 
                           6 months    6 months        Restated 
                              ended       ended      Year ended              Restated       Restated 
                            30 June     30 June     31 December    30 June    30 June    31 December 
                               2019        2018            2018       2019       2018           2018 
                               GBPm        GBPm            GBPm       GBPm       GBPm           GBPm 
 --------  ------------------------  ----------  --------------  ---------  ---------  ------------- 
 
 UK                             578         266             834      2,435      2,630          2,459 
 Europe                       1,316         594           1,869      5,431      5,422          5,704 
 North America                3,100       1,599           4,536      5,219      5,148          5,146 
 Other                          706         388           1,086      1,429      1,418          1,452 
 
 Total                        5,700       2,847           8,325     14,514     14,618         14,761 
 
 
 

(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       Restated 
                                                        ended      ended     Year ended 
                                                      30 June    30 June    31 December 
                                                         2019       2018           2018 
  Continuing operations                    Notes         GBPm       GBPm           GBPm 
                                                                          ------------- 
 
Operating loss                                           (11)      (325)          (385) 
-------------------------------------------------  ----------  ---------  ------------- 
 
Amortisation of intangible assets 
 acquired in business combinations           a            269        125            391 
Impairment of assets                        b             179          -            152 
Restructuring costs                         c              75        128            231 
Equity accounted investments 
 adjustments                                d              14          3             25 
Movement in derivatives and associated 
 financial assets and liabilities            e             13        123            143 
Acquisition and disposal related 
 costs                                      f              11        124            153 
Melrose equity-settled compensation 
 scheme charges                             g               7         10             13 
Release and changes in discount 
 rate of fair value items                   h            (18)        (3)           (20) 
Reversal of uplift in value of 
 inventory                                  i               -         99            105 
Impact of GMP equalisation on 
 UK pension schemes                         j               -          -             11 
 
Total adjustments to operating 
 loss                                                     550        609          1,204 
 
Adjusted operating profit                                 539        284            819 
 
 

a. The amortisation charge on intangible assets acquired in business combinations of GBP269 million (2018: GBP125 million) is excluded from adjusted results due to its non-trading nature and to enable comparison with companies that grow organically. Where intangible assets are trading in nature, such as computer software and development costs, the amortisation is not adjusted.

b. The 2018 Annual Report disclosed that the determination of the recoverable amount in respect of the Security & Smart Technology group of cash generating units ("CGUs") involved management estimation of the impact of highly uncertain matters at that time. Enhanced disclosures, including sensitivity analysis in respect of the key assumptions used in the forecast models, were shown at the 2018 year end. Subsequently, there has been further deterioration in both the performance during the period and forecast future prospects, particularly following increases in US tariffs for goods being imported from China. This along with the increased level of competition and technological change in the market has resulted in the necessity to impair goodwill allocated to the Security & Smart Technology group of CGUs by GBP179 million. The impairment charge is shown as an adjusting item due to its non-trading nature and size.

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

c. Restructuring and other associated costs in the period totalled GBP75 million (2018: GBP128 million). Restructuring costs are adjusting items due to their size and non-trading nature and during the period ended 30 June 2019 they included:

-- A charge of GBP45 million in respect of the GKN businesses. Within this, GBP26 million related to the Aerospace division and included costs incurred in improving quality and delivery for customers in North America and costs relating to footprint rationalisation projects within the Special Technologies business. Within the Automotive division, GBP14 million of costs have been incurred addressing the cost base of the business, whilst ensuring a more flexible cost structure going forward. In addition, GBP5 million of restructuring costs were incurred in the Powder Metallurgy division.

-- A charge of GBP21 million within Nortek Air & Security, primarily relating to structural footprint changes in the Security & Smart Technology business in an attempt to mitigate the negative impact of the increase in US tariffs on goods manufactured in China. In addition, there were charges related to continued footprint rationalisation within the HVAC business.

-- A charge of GBP5 million within Other Industrial businesses, predominantly relating to the finalisation of the restructuring activities announced in Brush last year.

d. The Group has a number of equity accounted investments ("EAIs") in which it does not hold full control, the largest of which is a 50% interest in Shanghai GKN HUAYU Driveline Systems ("SDS"), within the Automotive business. The EAIs generated GBP302 million (2018: GBP124 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.

e. Hedge accounting is not applied within the GKN businesses for transactional foreign exchange exposure. For consistency, the movement 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, totalling a charge of GBP13 million (2018: GBP123 million), is shown as an adjusting item because of its volatility and size.

f. Acquisition and disposal related costs of GBP11 million (2018: GBP124 million) were incurred in the period and included the profit or loss on the sale of two smaller businesses and their related transaction costs. These items are excluded from adjusted results due to their non-trading nature.

g. The charge for the Melrose equity-settled Incentive Scheme, including its associated employer's tax charge, of GBP7 million (2018: GBP10 million) is excluded from adjusted results due to its size and 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 settled for more favourable amounts than first anticipated. The release of fair value items recognised on acquisitions in the period of GBP29 million included a credit of GBP26 million relating to certain loss-making contracts recognised on the acquisition of GKN and is partly offset by an GBP11 million charge relating to the movement in discount rates on the loss-making contracts recognised as fair value items. The release of any excess fair value item is shown as an adjusting item to avoid positively distorting adjusted results.

i. Finished goods and work in progress inventory which are present in a business when acquired, in accordance with IFRS 3, are required to be uplifted in value to closer to their selling price. As a result, in the early months of an acquisition, reduced profits are generated as this inventory is sold. The one-off effect in the prior period, relating to GKN's acquired inventory was a charge of GBP99 million and is excluded from adjusted results due to its size and non-recurring nature.

j. On 26 October 2018, a High Court judgement was made in respect of the gender equalisation of guaranteed minimum pensions for occupational pension schemes. The judgement concluded the schemes should be amended to equalise pension benefits for men and women in relation to guaranteed minimum pension benefits, an issue which affects many UK defined benefit pension schemes. The impact of this amendment on the pension schemes within the Group resulted in a specific GBP11 million increase in the pension deficit in the year ended 31 December 2018, with a corresponding past service cost in the Income Statement. This cost is excluded from adjusted results due to its non-trading and non-recurring nature.

   4.   Reconciliation of adjusted profit measures (continued) 
   b)    Profit before tax 
 
 
                                                                Restated 
                                                    6 months    6 months             Restated 
                                                       ended       ended           Year ended 
                                                     30 June     30 June          31 December 
                                                        2019        2018                 2018 
  Continuing operations                    Notes        GBPm        GBPm                 GBPm 
-------------------------------------   --------  ----------  ----------  ------------------- 
 
Loss before tax                                        (128)       (372)                (541) 
------------------------------------------------  ----------  ----------  ------------------- 
 
Adjustments to operating loss 
 per above                                               550         609                1,204 
Fair value changes on cross-currency 
 swaps                                      k              7           -                    8 
Write-off previous debt facility 
 unamortised fees                           l              -           7                    7 
Equity accounted investments 
 - interest                                 m              -           -                  (1) 
 
Total adjustments to loss before 
 tax                                                     557         616                1,218 
------------------------------------------------  ----------  ----------  ------------------- 
 
Adjusted profit before tax                               429         244                  677 
 
 

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

l. To enable the acquisition of GKN, a new bank facility was negotiated which replaced the old Group bank facility. As a result, the amortisation of the remaining GBP7 million of debt fees relating to the old facility was accelerated and written off. This prior year charge is shown as an adjusting item because of its one-off non-trading nature.

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

   c)     Profit after tax 
 
                                                                            Restated 
                                                       6 months             6 months              Restated 
                                                          ended                ended            Year ended 
                                                        30 June              30 June           31 December 
                                                           2019                 2018                  2018 
  Continuing operations             Notes                  GBPm                 GBPm                  GBPm 
--------------------------------  -------  --------------------  -------------------  -------------------- 
 
Loss after tax                                            (150)                (330)                 (468) 
--------------------------------  -------  --------------------  -------------------  -------------------- 
 
Adjustments to loss before tax 
 per above                                                  557                  616                 1,218 
Equity accounted investments 
 - tax                               m                      (4)                  (3)                   (9) 
Tax effect of adjustments to 
 loss before tax                     5                     (73)                 (95)                 (221) 
--------------------------------  -------  --------------------  -------------------  -------------------- 
 
Total adjustments to loss after 
 tax                                                        480                  518                   988 
 
Adjusted profit after tax                                   330                  188                   520 
 
 
   5.   Tax 
 
                                               Restated 
                                    6 months   6 months      Restated 
                                       ended      ended    Year ended 
                                     30 June    30 June   31 December 
Analysis of the charge/(credit)         2019       2018          2018 
 in the period:                         GBPm       GBPm          GBPm 
---------------------------------   --------  ---------  ------------ 
 
Continuing operations 
Current tax                               59         27            30 
Deferred tax                            (37)       (69)         (103) 
----------------------------------  --------  ---------  ------------ 
 
Total income tax charge/(credit) 
 from continuing operations               22       (42)          (73) 
----------------------------------  --------  ---------  ------------ 
 
Discontinued operations 
Current tax                                2          3             4 
Deferred tax                               -        (5)           (6) 
----------------------------------  --------  ---------  ------------ 
 
Total income tax charge/(credit) 
 from discontinued operations              2        (2)           (2) 
----------------------------------  --------  ---------  ------------ 
 
Total income tax charge/(credit)          24       (44)          (75) 
 
 
 

Continuing operations:

The effective tax rate in respect of adjusted profit before tax for the half year is 23% (2018: 23%). The adjusted tax charge has been calculated by applying the expected tax rate for the full year to the adjusted profit before tax of GBP429 million (2018: GBP244 million), giving an adjusted tax charge of GBP99 million (2018: GBP56 million).

   5.   Tax (continued) 

The adjusted tax charge of GBP99 million (2018: GBP56 million) excludes a tax credit on adjusting items of GBP73 million (2018: GBP95 million). This represents a deferred tax credit on intangible asset amortisation of GBP59 million (2018: GBP27 million) and a tax credit on other adjusting items of GBP14 million (2018: GBP68 million). The adjusted tax charge includes a charge in respect of EAIs of GBP4 million (2018: GBP3 million).

In addition to the amount charged to the Income Statement, a credit of GBP31 million (2018: charge of GBP16 million) has been recognised directly in the Statement of Comprehensive Income. This represents a tax charge of GBP8 million (2018: credit of GBP9 million) in respect of movements on hedge relationships and translation differences and a tax credit of GBP39 million (2018: charge of GBP25 million) in respect of the remeasurement of retirement benefit obligations.

   6.    Earnings per share 
 
                                                         Restated 
                                              6 months   6 months      Restated 
                                                 ended      ended    Year ended 
                                               30 June    30 June   31 December 
Earnings attributable to owners of the            2019       2018          2018 
 parent                                           GBPm       GBPm          GBPm 
--------------------------------------------  --------  ---------  ------------ 
 
Earnings for basis of earnings per share         (168)      (328)         (475) 
Less: loss for the period from discontinued 
 operations                                         15          4             7 
--------------------------------------------  --------  ---------  ------------ 
 
Earnings for basis of earnings per share 
 from continuing operations                      (153)      (324)         (468) 
 
 
 
                                             6 months  6 months 
                                                ended     ended    Year ended 
                                              30 June   30 June   31 December 
                                                 2019      2018          2018 
                                               Number    Number        Number 
-------------------------------------------  --------  --------  ------------ 
Weighted average number of ordinary shares 
 for the purposes of basic earnings per 
 share (million)                                4,858     3,045         3,959 
Further shares for the purposes of diluted          -         -             - 
 earnings per share (million)(1) 
 
Weighted average number of ordinary shares 
 for the purposes of diluted earnings 
 per share (million)                            4,858     3,045         3,959 
 
 

(1) The results for all periods presented are a loss and therefore in accordance with IAS 33: "Earnings per share" there is no dilution. However, the dilutive number of shares for both periods are used for the purpose of calculating adjusted diluted earnings per share.

 
                                                         Restated 
                                              6 months   6 months      Restated 
                                                 ended      ended    Year ended 
                                               30 June    30 June   31 December 
                                                  2019       2018          2018 
Earnings per share                               pence      pence         pence 
--------------------------------------------  --------  ---------  ------------ 
Basic earnings per share 
From continuing and discontinued operations      (3.4)     (10.8)        (12.0) 
From continuing operations                       (3.1)     (10.6)        (11.8) 
From discontinued operations                     (0.3)      (0.2)         (0.2) 
--------------------------------------------  --------  ---------  ------------ 
 
Diluted earnings per share 
From continuing and discontinued operations      (3.4)     (10.8)        (12.0) 
From continuing operations                       (3.1)     (10.6)        (11.8) 
From discontinued operations                     (0.3)      (0.2)         (0.2) 
--------------------------------------------  --------  ---------  ------------ 
 
 
 
                                                    Restated 
                                         6 months   6 months       Restated 
                                            ended      ended     Year ended 
                                          30 June    30 June    31 December 
  Adjusted earnings from continuing          2019       2018           2018 
  operations                                 GBPm       GBPm           GBPm 
------------------------------------   ----------  ---------  ------------- 
 
Adjusted earnings(1) for the basis 
 of adjusted earnings per share               327        182            507 
-------------------------------------  ----------  ---------  ------------- 
 
(1) Adjusted earnings for the 6 months ended 30 June 2019 comprises 
 adjusted profit after tax of GBP330 million (6 months ended 30 
 June 2018: GBP188 million - see note 4c), net of an allocation 
 to non-controlling interests of GBP3 million (6 months ended 30 
 June 2018: GBP6 million). Adjusted earnings for the year ended 
 31 December 2018 comprises adjusted profit after tax of GBP520 
 million, net of an allocation to non-controlling interests of 
 GBP13 million. 
 
 
 
 
 
 
  6. Earnings per share (continued) 
Adjusted earnings per share from 
 continuing operations 
 
 
                                                    Restated 
                                         6 months   6 months       Restated 
                                            ended      ended     Year ended 
                                          30 June    30 June    31 December 
                                             2019       2018           2018 
                                            pence      pence          pence 
------------------------------------   ----------  ---------  ------------- 
 
Adjusted basic earnings per share            6.7p       6.0p          12.8p 
Adjusted diluted earnings per share          6.7p       6.0p          12.8p 
 
 
   7.    Dividends 
 
                                      6 months  6 months 
                                         ended     ended    Year ended 
                                       30 June   30 June   31 December 
                                          2019      2018          2018 
                                          GBPm      GBPm          GBPm 
------------------------------------  --------  --------  ------------ 
 
Final dividend for the year ended 
 31 December 2017 of 2.8p                    -        54            54 
Interim dividend for the year ended 
 31 December 2018 of 1.55p                   -         -            75 
Final dividend for the year ended 
 31 December 2018 of 3.05p                 148         -             - 
------------------------------------  --------  --------  ------------ 
 
Total dividends paid                       148        54           129 
 
 

An interim dividend of 1.7p per ordinary share (2018: 1.55p) totalling GBP83 million (2018: GBP75 million) was declared by the Board and in accordance with IAS 10: "Events after the reporting period" has not been included as a liability as at 30 June 2019.

   8.    Share of results of equity accounted investments 

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

 
                                                  Restated 
                                       6 months   6 months      Restated 
                                          ended      ended    Year ended 
                                        30 June    30 June   31 December 
                                           2019       2018          2018 
Continuing operations                      GBPm       GBPm          GBPm 
-------------------------------------  --------  ---------  ------------ 
 
Revenue                                     302        124           493 
-------------------------------------  --------  ---------  ------------ 
 
Adjusted operating profit                    30         15            59 
-------------------------------------  --------  ---------  ------------ 
 
Adjusting items                            (10)          -          (15) 
Net finance costs                             -          -           (1) 
-------------------------------------  --------  ---------  ------------ 
 
Profit before tax                            20         15            43 
Tax                                         (4)        (3)           (9) 
-------------------------------------  --------  ---------  ------------ 
 
Share of results of equity accounted 
 investments                                 16         12            34 
 
 
   9.     Discontinued operations 

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 during the period associated with the disposal were GBP7 million. The loss on disposal was GBP21 million after the recycling of cumulative translation differences of GBP13 million.

The results of the Walterscheid Powertrain Group were previously included within the Other Industrial operating segment and are classified as a discontinued operation, in accordance with IFRS 5: Non-current Assets Held for Sale and Discontinued Operations.

   9.     Discontinued operations (continued) 

Financial performance of discontinued operations:

 
                                                                  6 months   6 months 
                                                                     ended      ended     Year ended 
                                                                   30 June    30 June    31 December 
                                                                      2019       2018           2018 
                                                                      GBPm       GBPm           GBPm 
 Revenue                                                               206         90            280 
 Operating costs                                                     (196)       (96)          (287) 
---------------------------------------------  ---------------------------  ---------  ------------- 
 
 Operating profit/(loss)                                                10        (6)            (7) 
 Finance costs                                                         (2)          -            (2) 
----------------------------------------  ---  ---------------------------  ---------  ------------- 
 
 Profit/(loss) before tax                                                8        (6)            (9) 
 Tax                                                                   (2)          2              2 
----------------------------------------  ---  ---------------------------  ---------  ------------- 
 
 Profit/(loss) after tax                                                 6        (4)            (7) 
 Cumulative translation differences                                     13          -              - 
  recycled on disposal 
 Loss on disposal of net assets of                                    (34)          -              - 
  discontinued operations 
 
 Loss for the period from discontinued 
  operations                                                          (15)        (4)            (7) 
 
 
 
 

The major classes of assets and liabilities disposed of during the period were as follows:

 
                                                             GBPm 
---------------------------------------------------------  ------ 
 
 Goodwill and other intangible assets                         210 
 Property, plant and equipment                                110 
 Interests in equity accounted investments                      4 
 Inventories                                                   74 
 Trade and other receivables                                   67 
 Cash and cash equivalents                                      9 
---------------------------------------------------------  ------ 
 
 Total assets                                                 474 
 
 
 Trade and other payables                                    (54) 
 Lease obligations                                           (34) 
 Retirement benefit obligations                             (155) 
 Provisions                                                  (10) 
 Current and deferred tax                                     (9) 
---------------------------------------------------------  ------ 
 
 Total liabilities                                          (262) 
 
 
 Net assets                                                   212 
  Cash consideration, net of costs(1)                         178 
 Cumulative translation difference recycled on disposals       13 
---------------------------------------------------------  ------ 
 
 Loss on disposal of businesses                              (21) 
 
 
 Net cash inflow arising on disposal: 
 Consideration received in cash and cash equivalents, 
  net of costs(2)                                             181 
 Less: cash and cash equivalents disposed                     (9) 
---------------------------------------------------------  ------ 
 
                                                              172 
 
 

(1) Cash consideration of GBP185 million net of GBP7 million of disposal costs charged to the Income Statement, GBP3 million of these costs were accrued at 30 June 2019.

(2) Cash consideration of GBP185 million net of GBP4 million of cash disposal costs.

   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 
 2019 - restated                 616        74              218       397            116        50       1,471 
Utilised                        (45)       (2)             (34)      (26)           (91)       (3)       (201) 
Net (credit)/charge 
 to operating 
 profit(1)                      (25)         -               21         7             68        15          86 
Unwind of discount(2)             15         -                -         -              -         -          15 
Disposal of businesses           (1)       (1)              (1)       (1)            (2)       (4)        (10) 
Transfers(3)                       -      (20)                -         -              -         -        (20) 
Exchange differences             (5)         -                2       (2)              -       (1)         (6) 
-----------------------  -----------  --------  ---------------  --------  -------------  --------  ---------- 
 
At 30 June 2019                  555        51              206       375             91        57       1,335 
 
 
Current                           77        13               70       111             85        20         376 
Non-current                      478        38              136       264              6        37         959 
-----------------------  -----------  --------  ---------------  --------  -------------  --------  ---------- 
 
                                 555        51              206       375             91        57       1,335 
 
 
 

(1) Includes GBP37 million of adjusting items and GBP49 million recognised in adjusted operating profit.

(2) Includes GBP4 million within finance costs relating to the time value of money and GBP11 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.

(3) Onerous lease liabilities have been transferred to the IFRS 16 'right of use asset' following the adoption of IFRS 16 on 1 January 2019.

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 of between 0% and 8% (31 December 2018: 0% and 9%) 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 2019, 30 June 2018 and 31 December 2018:

 
                                                     Current          Non-current     Total 
                                                        GBPm                 GBPm      GBPm 
---------------------------------------  -------------------  -------------------  -------- 
 
 30 June 2019 
 Financial assets 
 Classified as amortised cost: 
 Cash and cash equivalents                               340                    -       340 
 Net trade receivables                                 1,762                    -     1,762 
 Contract assets                                         186                  404       590 
 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) 
 
 30 June 2018 - Restated 
 Financial assets 
 Classified as amortised cost: 
 Cash and cash equivalents                               426                    -       426 
 Net trade receivables                                 1,847                    -     1,847 
 Contract assets                                         342                  255       597 
 Classified as fair value: 
 Derivative financial assets: 
    Foreign currency forward contracts                    13                    9        22 
    Interest rate swaps                                    4                    7        11 
  Embedded derivatives                                     3                    9        12 
 Financial liabilities 
 Classified as amortised cost: 
 Interest-bearing loans and borrowings                   (1)              (3,700)   (3,701) 
 Government refundable advances                          (8)                 (72)      (80) 
 Other financial liabilities                         (2,732)                (240)   (2,972) 
 Classified as fair value: 
 Derivative financial liabilities: 
    Foreign currency forward contracts                  (90)                 (97)     (187) 
    Cross-currency swaps                                 (8)                (159)     (167) 
  Embedded derivatives                                   (2)                  (5)       (7) 
 
 31 December 2018 
 Financial assets 
 Classified as amortised cost: 
 Cash and cash equivalents                               415                    -       415 
 Net trade receivables                                 1,835                    -     1,835 
 Contract assets                                         200                  396       596 
 Classified as fair value: 
 Derivative financial assets: 
    Foreign currency forward contracts                     9                    6        15 
  Interest rate swaps                                      3                    5         8 
  Embedded derivatives                                     3                   15        18 
 Financial liabilities 
 Classified as amortised cost: 
 Interest-bearing loans and borrowings                 (377)              (3,378)   (3,755) 
 Government refundable advances                          (8)                 (73)      (81) 
 Lease obligations                                       (5)                 (52)      (57) 
 Other financial liabilities                         (2,309)                (106)   (2,415) 
 Classified as fair value: 
 Derivative financial liabilities: 
    Foreign currency forward contracts                 (100)                (109)     (209) 
    Interest rate swaps                                  (1)                 (13)      (14) 
  Cross-currency swaps                                 (102)                 (97)     (199) 
  Embedded derivatives                                   (1)                  (8)       (9) 
---------------------------------------  -------------------  -------------------  -------- 
 
   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". 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 2019 were:

GKN UK 2012 Pension Plan

The GKN UK 2012 Pension Plan is a funded plan, closed to new members and was closed to future accrual in 2017. The valuation of the plan was based on a full actuarial valuation as of 5 April 2016, updated to 30 June 2019 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 2019 by independent actuaries.

GKN US Consolidated Pension Plan

The GKN US Consolidated Pension Plan is a funded plan, closed to new members and closed to future accrual. The US Pension Plan valuation was based on a full actuarial valuation as of 1 January 2018, updated to 30 June 2019 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 2016, updated to 30 June 2019 by independent actuaries.

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

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

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

30 June 2019

 
 
                                                 European 
                     UK plans(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 deficit                 (555)       (165)       (592)           (14)  (1,326) 
 
 

(1) Includes a net deficit in respect of the GKN UK 2012 plan, GKN post-employment medical plans and the Nortek

UK plan and a surplus in     respect of the Brush UK plan and the GKN UK 2016 plan. 

30 June 2018 - restated

 
 
                                                  European 
                      UK plans(1()    US plans       plans    Other plans    Total 
                              GBPm        GBPm        GBPm           GBPm     GBPm 
-----------------  ---------------  ----------  ----------  -------------  ------- 
Plan assets                  2,914         438          29             37    3,418 
Plan liabilities           (3,374)       (554)       (668)           (53)  (4,649) 
 
Net deficit                  (460)       (116)       (639)           (16)  (1,231) 
 
 

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

   12.   Retirement benefit obligations (continued) 

31 December 2018

 
 
                                                 European 
                     UK plans(1()    US plans       plans    Other plans    Total 
                             GBPm        GBPm        GBPm           GBPm     GBPm 
-----------------  --------------  ----------  ----------  -------------  ------- 
Plan assets                 2,791         412          29             41    3,273 
Plan liabilities          (3,378)       (565)       (690)           (53)  (4,686) 
 
Net deficit                 (587)       (153)       (661)           (12)  (1,413) 
 
 

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

Valuations of material plans have been updated at 30 June 2019 by independent actuaries to reflect updated assumptions regarding discount rates, inflation rates and asset values. The major assumptions were as follows:

 
 
                   Rate of increase 
                     in pensions in 
                            payment  Discount rate  Price inflation 
                             % p.a.         % p.a.           % p.a. 
-----------------  ----------------  -------------  --------------- 
30 June 2019 
GKN UK - 2012 
 plan                           3.1            2.3              2.1 
GKN UK - 2016 
 plan                           3.1            2.2              2.1 
GKN US plans                    n/a            3.5              2.5 
GKN Europe plans                1.7            1.1              1.7 
Brush UK plan                   3.2            2.3              2.1 
 
30 June 2018 
GKN UK - 2012 
 plan                           3.0            2.9              2.0 
GKN UK - 2016 
 plan                           3.0            2.7              2.0 
GKN US plans                    n/a            4.2              n/a 
GKN Europe plans                1.8            1.9              n/a 
Brush UK plans                  3.1            2.9              2.0 
 
31 December 2018 
GKN UK - 2012 
 plan                           3.1            2.9              2.1 
GKN UK - 2016 
 plan                           3.1            2.9              2.1 
GKN US plans                    n/a            4.1              2.5 
GKN Europe plans                2.5            1.9              1.8 
Brush UK plan                   3.2            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 2019.

During the period, an enhanced transfer value (ETV) exercise has been carried out in the GKN UK 2012 pension plan. This has resulted in a settlement credit of GBP6 million. Furthermore, the liabilities of the Broan Aftermarket North America, Inc. Group Pension Plan have been settled resulting in a settlement charge of GBP7 million.

On 1 July 2019, the GKN UK 2012 pension plan was spilt into four separate pension schemes which have been allocated to the Aerospace and Automotive segments. There has been no change to the amounts recognised by the Group as a result of this change.

   13.   Notes to the Cash Flow Statement 
 
                                                       Restated 
                                            6 months   6 months              Restated 
                                               ended      ended            Year ended 
                                             30 June    30 June           31 December 
                                                2019       2018                  2018 
Continuing operations                           GBPm       GBPm                  GBPm 
------------------------------------------  --------  ---------  -------------------- 
 
Reconciliation of adjusted operating 
 profit to cash generated from operating 
 activities 
Adjusted operating profit(1)                     539        284                   819 
Adjustments for: 
Depreciation of property, plant and 
 equipment                                       214         61                   233 
Amortisation of computer software 
 and development costs                            32         13                    44 
Share of adjusted operating profit 
 of equity accounted investments                (30)       (15)                  (59) 
Restructuring costs paid and movements 
 in provisions                                 (141)       (78)                 (202) 
Defined benefit pension contributions 
 paid(2()                                      (111)       (20)                  (99) 
Change in inventories                           (92)       (25)                 (110) 
Change in receivables                            164       (39)                   179 
Change in payables                             (140)       (24)                 (160) 
Acquisition costs and associated 
 transaction taxes                              (15)      (106)                 (125) 
Tax paid                                        (79)       (22)                  (65) 
Interest paid                                   (79)       (32)                 (111) 
 
Net cash from/(used in) operating 
 activities                                      262        (3)                   344 
 
 
 

(1) See note 4 for reconciliation of operating loss to adjusted operating profit.

(2() The Group committed to contribute GBP150 million in total to the GKN UK 2012 and GKN UK 2016 plans in the first 12 months of ownership, GBP56 million was contributed in the year ended 31 December 2018 and GBP94 million was contributed in the period ended 30 June 2019.

 
 
                                            6 months                 6 months 
                                               ended                    ended     Year ended 
                                             30 June                  30 June    31 December 
                                                2019                     2018           2018 
  Cash flow from discontinued operations        GBPm                     GBPm           GBPm 
------------------------------------------  --------  -----------------------  ------------- 
 
Net cash (used in)/from discontinued 
 operations                                      (3)                       10             33 
Defined benefit pension contributions 
 paid                                            (2)                      (1)            (3) 
Tax paid                                           -                        -            (1) 
 
Net cash (used in)/from operating 
 activities from discontinued operations         (5)                        9             29 
 
 
Purchase of property, plant and equipment        (4)                      (2)           (11) 
Proceeds from disposal of property, 
 plant and equipment                               -                        -              2 
 
Net cash used in investing activities 
 from discontinued operations                    (4)                      (2)            (9) 
 
 
Repayment of principal under lease 
 obligations                                     (2)                        -              - 
 
 
Net cash used in financing activities 
 from discontinued operations                    (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. See the glossary for a reconciliation of these measures.

   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 
                                                  2019      2018         2018 
                                                  GBPm      GBPm         GBPm 
 
Interest-bearing loans and borrowings 
 - due within one year                           (394)       (1)        (377) 
Interest-bearing loans and borrowings 
 - due after one year                          (3,235)   (3,700)      (3,378) 
External debt                                  (3,629)   (3,701)      (3,755) 
Less: 
Cash and cash equivalents                          340       426          415 
                                               (3,289)   (3,275)      (3,340) 
Adjustments: 
Impact of cross-currency swaps                   (209)     (167)        (199) 
Non-cash acquisition fair value adjustments         44        69           57 
 
Net debt                                       (3,454)   (3,373)      (3,482) 
 
 
 

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 
                                   2018   flow                              movements         exchange      2019 
                                   GBPm   GBPm             GBPm                  GBPm             GBPm      GBPm 
 
External debt                   (3,755)    144                -                     7             (25)   (3,629) 
Cross-currency 
 swaps                            (199)      -                -                   (6)              (4)     (209) 
Non-cash acquisition 
 fair value adjustments              57      -                -                  (13)                -        44 
                                (3,897)    144                -                  (12)             (29)   (3,794) 
Cash and cash 
 equivalents                        415  (232)              157                     -                -       340 
 
Net debt                        (3,482)   (88)              157                  (12)             (29)   (3,454) 
 
 
 
Glossary 
 

Alternative Performance Measures ("APMs")

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

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

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

 
          Closest      Reconciling 
           equivalent   items to 
           statutory    statutory 
APM        measure      measure      Definition and purpose 
Income Statement Measures 
Adjusted  Revenue      Share of      Adjusted revenue includes the Group's 
 revenue                revenue       share of revenue of equity accounted 
                        of equity     investments ("EAIs"). This enables comparability 
                        accounted     between reporting periods. 
                        investments                                    Restated(1) 
                        (note 8)                             6 months     6 months   Restated(2) 
                                                                ended        ended 
                                                              30 June      30 June    Year ended 
                                                                 2019         2018   31 December 
                                                                 GBPm         GBPm          2018 
                                      Revenue                                               GBPm 
 
                                      Revenue                   5,700        2,847         8,325 
                                      Share of revenue 
                                       of equity accounted 
                                       investments                302          124           493 
 
                                      Adjusted revenue          6,002        2,971         8,818 
 
 
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)(3)   items (note   to provide a useful and more comparable 
 profit                         4)            measure of the ongoing performance 
                                              of the Group. Adjusted measures are 
                                              reconciled to statutory measures by 
                                              removing adjusting items, the nature 
                                              of which are disclosed above and further 
                                              detailed in note 4. 
 
 
                                Restated(1) 
                      6 months     6 months    Restated(2) 
                         ended        ended 
                       30 June      30 June     Year ended 
                          2019         2018    31 December 
                          GBPm         GBPm           2018 
 Operating profit                                     GBPm 
                     ---------  -----------  ------------- 
 
Operating loss            (11)        (325)          (385) 
Adjusting items 
 (note 4)                  550          609          1,204 
                     ---------  -----------  ------------- 
 
Adjusted operating 
 profit                    539          284            819 
 
 
 
 
            Closest      Reconciling 
             equivalent   items to 
             statutory    statutory 
APM          measure      measure      Definition and purpose 
Adjusted    Operating    Share of      Adjusted operating margin represents 
 operating   margin(4)    revenue       Adjusted operating profit as a percentage 
 margin                   of equity     of Adjusted revenue. 
                          accounted 
                          investments 
                          (note 8), 
                          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    Restated(2) 
                         ended        ended 
                       30 June      30 June     Year ended 
                          2019         2018    31 December 
                          GBPm         GBPm           2018 
 Profit before tax                                    GBPm 
                                             ------------- 
 
Loss before tax          (128)        (372)          (541) 
Adjusting items 
 (note 4)                  557          616          1,218 
                                             ------------- 
 
Adjusted profit 
 before tax                429          244            677 
 
 
 
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    Restated(2) 
                        ended        ended 
                      30 June      30 June     Year ended 
                         2019         2018    31 December 
                         GBPm         GBPm           2018 
 Profit after tax                                    GBPm 
 
Loss after tax          (150)        (330)          (468) 
Adjusting items 
 (note 4)                 480          518            988 
 
Adjusted profit 
 after tax                330          188            520 
 
 
 
Adjusted       Operating    Adjusting          Adjusted operating profit for 12 months 
 EBITDA         profit/      items (note        subsequent to the reporting date, before 
 for covenant   (loss)(3)    4), depreciation   depreciation and impairment of property, 
 purposes                    of property,       plant and equipment and before the amortisation 
                             plant and          and impairment of computer software 
                             equipment          and development costs. 
                             and amortisation 
                             of computer        Adjusted EBITDA for covenant purposes 
                             software           is a measure used by external stakeholders 
                             and development    to measure performance. 
                             costs,                                         12 months 
                             share of                                           ended  Year ended(5) 
                             depreciation                                     30 June    31 December 
                             of property,                                        2019           2018 
                             plant and          Adjusted EBITDA for 
                             equipment           covenant purposes               GBPm           GBPm 
                             and amortisation 
                             of computer        Adjusted operating 
                             software            profit                         1,074            847 
                             and development    Depreciation of property, 
                             costs of            plant and equipment 
                             equity              and amortisation of 
                             accounted           computer software 
                             investments         and development costs            449            282 
                                                Full year impact of 
                                                 acquisitions                       -            378 
                                                Other adjustments 
                                                 required for covenant 
                                                 purposes(6)                     (65)           (15) 
                                                                            --------- 
                                                Adjusted EBITDA for 
                                                 covenant purposes              1,458          1,492 
               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   Restated(2) 
                                                                             ended        ended 
                                                                           30 June      30 June    Year ended 
                                                                              2019         2018   31 December 
                                                                              GBPm         GBPm          2018 
                                                  Adjusted tax rate                                      GBPm 
 
                                                  Tax (charge)/credit 
                                                   per Income Statement       (22)           42            73 
                                                  Tax impact of 
                                                   adjusting items            (77)         (98)         (230) 
 
                                                  Adjusted tax charge         (99)         (56)         (157) 
 
                                                  Adjusted profit 
                                                   before tax                  429          244           677 
 
                                                  Adjusted tax rate            23%          23%           23% 
 
 
 
Adjusted       Basic                   Adjusting         Profit after tax attributable to owners 
 basic          earnings                items (notes      of the parent and before the impact of 
 earnings       per share               4 and 6)          adjusting items, divided by the weighted 
 per share                                                average number of ordinary shares in 
                                                          issue during the financial period. 
Adjusted       Diluted                 Adjusting         Profit after tax attributable to owners 
 diluted        earnings                items (notes      of the parent and before the impact of 
 earnings       per share               4 and 6)          adjusting items, divided by the weighted 
 per share                                                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 for covenant purposes 
 cover                                                    as a multiple of net interest payable 
                                                          on bank loans and overdrafts, being 10.5x 
                                                          in 12-month period ended 30 June 2019 
                                                          (Year ended 31 December 2018: 11.6x). 
 
                                                          This measure is used for bank covenant 
                                                          testing. 
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            interest-bearing loans and borrowings 
                less interest-bearing   debt (note        and cross-currency swaps but excludes 
                loans                   13)               non-cash acquisition fair value adjustments. 
                and borrowings 
                and finance                               Net debt is one measure that could be 
                related                                   used to indicate the strength of the 
                derivative                                Group's Balance Sheet position and is 
                instruments                               a useful measure of the indebtedness 
                                                          of the Group. 
Leverage       None                    Not applicable    Bank covenant definition of net debt 
 of net                                                   divided by adjusted EBITDA for bank covenant 
 debt to                                                  purposes. 
 adjusted 
 EBITDA                                                   This measure is used for bank covenant 
 for covenant                                             testing. 
 purposes 
 
 
 
               Closest                 Reconciling 
                equivalent              items to 
                statutory               statutory 
APM             measure                 measure          Definition and purpose 
Bank covenant  Cash and                Impact            Net debt (as above) is presented in the 
 definition     cash equivalents        of foreign        Balance Sheet translated at period end 
 of net         less interest-bearing   exchange          exchange rates. 
 debt at        loans                   and adjustments 
 average        and borrowings          for bank          For bank covenant testing purposes net 
 rates          and finance             covenant          debt is converted using average exchange 
                related                 purposes          rates for the previous 12 months. 
                derivative                                Covenants were not applicable for the 
                instruments                               period ended 30 June 2018. 
                                                                                        30 June   31 December 
                                                                                           2019          2018 
                                                           Net debt                        GBPm          GBPm 
                                                                                                 ------------ 
 
                                                          Net debt at closing rates 
                                                           (note 13)                      3,454         3,482 
                                                          Impact of foreign exchange       (50)          (86) 
                                                                                                 ------------ 
                                                          Net debt at average rates       3,404         3,396 
                                                          Other adjustments required 
                                                           for covenant purposes             14            11 
                                                                                                 ------------ 
 
                                                          Bank covenant definition 
                                                           of net debt at average 
                                                           rates                          3,418         3,407 
                                                                                                 ------------ 
 
                                                          Leverage                        2.34x         2.28x 
 
 
Cash Flow Measures 
Adjusted       Net cash         Non-working   Adjusted operating cash flow (pre-capex) 
 operating      from operating   capital       is calculated as adjusted profit before 
 cash flow      activities       items (note   depreciation and amortisation attributable 
 (pre-capex)                     13)           to subsidiaries less movements in working 
 and Adjusted                                  capital. 
 operating 
 cash flow                                     Adjusted operating cash flow (pre-capex) 
 conversion                                    conversion is adjusted operating cash 
                                               flow (pre-capex) divided by adjusted 
                                               profit before depreciation and amortisation 
                                               of assets 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    Restated(2) 
                                    ended        ended 
                                  30 June      30 June     Year ended 
                                     2019         2018    31 December 
                                     GBPm         GBPm           2018 
 Adjusted operating                                              GBPm 
  cash flow 
 
Adjusted operating 
 profit                               539          284            819 
Share of adjusted 
 operating profit of 
 equity accounted investments        (30)         (15)           (59) 
Depreciation of owned 
 property, plant and 
 equipment and amortisation 
 of computer software 
 and development costs                211           74            277 
Depreciation of leased 
 property, plant and 
 equipment and amortisation 
 of computer software                  35            -              - 
 and development costs 
Lease obligation payments            (43)            -              - 
Positive non-cash 
 impact from loss-making 
 contracts                           (45)         (15)           (63) 
                                      667          328            974 
Change in inventories                (92)         (25)          (110) 
Change in receivables                 164         (39)            179 
Change in payables                  (140)         (24)          (160) 
 
Adjusted operating 
 cash flow (pre-capex)                599          240            883 
 
 
Adjusted operating 
 cash flow conversion                 90%          73%            91% 
 
 
 
                  Closest        Reconciling 
                   equivalent     items to 
                   statutory      statutory 
APM                measure        measure             Definition and purpose 
Free cash         Net increase/  Acquisition        Free cash flow represents cash generated 
 flow              decrease       related            from trading after all costs including 
                   in cash        cash flows,        restructuring, pension contributions, 
                   and cash       dividends          tax and interest payments. 
                   equivalents    paid to 
                                  owners 
                                  of the 
                                  parent, 
                                  foreign 
                                  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, restructuring 
                   and cash       above,             cash flows and discontinued operating 
                   equivalents    adjusted           cash flows. 
                                  for special 
                                  pension 
                                  contributions, 
                                  restructuring 
                                  cash flows 
                                  and discontinued 
                                  operation 
                                  cash flows 
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     Capital expenditure divided by depreciation 
 expenditure                                         of owned property, plant and equipment 
 to depreciation                                     and amortisation of computer software 
 ratio                                               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 2018 have been restated for the finalisation of acquisition accounting for GKN (see note 2) and discontinued operations (see note 9).

(2) Results for the year ended 31 December 2018 have been restated for discontinued operations (see note 9).

(3) 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.

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

(5) Year ended 31 December 2018 remains aligned to the original calculations supporting the Group's bank debt compliance certificate, and has not been restated for discontinued operations.

(6) Included within other adjustments required for covenant purposes are adjustments to include dividends received from equity accounted investments, to remove adjusted operating profit of equity accounted investments and adjustments in respect of leases.

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

END

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