REG - Melrose Industries - Final Results <Origin Href="QuoteRef">MRON.L</Origin> - Part 2
20/02/2018 07:05
- Part 2: For the preceding part double click ID:nRST3300Fa
3.3 n/a
It is noted that a 0.1 percentage point decrease in the discount rate would
increase the pension liabilities of the Melrose Group by £8.0 million, or 1%,
and a 0.1 percentage point increase to inflation would increase the
liabilities by £3.0 million, or 1%. Furthermore, an increase by one year in
the expected life of a 65 year old member would increase the pension
liabilities on these plans by £18.3 million, or 3%.
Annual contributions to the Melrose Group defined benefit pension plans are
expected to be approximately £3.2 million in 2018.
FINANCIAL RISK MANAGEMENT
The financial risks the Melrose Group faces have been considered and policies
have been implemented to appropriately deal with each risk. The most
significant financial risks are considered to be liquidity risk, finance cost
risk, exchange rate risk, contract and warranty risk and commodity cost risk.
These are discussed in turn below.
Liquidity risk management
The Melrose Group's net debt position at 31 December 2017 was £571.8 million
(31 December 2016: £541.5 million)
Melrose has a five year multi-currency US $1.25 billion committed bank
facility which commenced on 6 July 2016 to assist with the acquisition of
Nortek and consists of a US $350 million term loan facility and a US $900
million revolving credit facility. Loans drawn under this facility are
guaranteed by Melrose Industries PLC and certain of its subsidiaries, and
there is no security over any of the Melrose assets in respect of this
facility.
The facility has two financial covenants. There is a net debt to underlying
EBITDA (underlying operating profit before depreciation and amortisation)
covenant and an interest cover covenant, both of which are tested half yearly,
each June and December.
The first of these covenants is set at 3.5x leverage for each of the half
yearly measurement dates for the remainder of the term of the facility. For
the year ended 31 December 2017 it was approximately 1.9x (31 December 2016:
1.9x), showing significant headroom compared to the covenant test.
The interest cover covenant is set at 4.0x throughout the life of the facility
and was 19.6x at 31 December 2017 (31 December 2016: 20.7x), affording
comfortable headroom compared to the covenant test.
At 31 December 2017 the term loan was fully drawn down and the revolving
credit facility was drawn down by US $455 million, split US $274 million and
£134 million. The core currency of Nortek is the US dollar, and debt is drawn
down to protect the Melrose Group as efficiently as possible from currency
fluctuations on net assets and profit.
In addition, there are a number of uncommitted overdraft, guarantee and
borrowing facilities made available to the Melrose Group. These uncommitted
facilities have been lightly used.
Cash, deposits and marketable securities amounted to £16.3 million at 31
December 2017 (31 December 2016: £42.1 million) and are offset against gross
debt of £588.1 million (31 December 2016: £583.6 million) to arrive at the
net debt position of £571.8 million (31 December 2016: £541.5 million). The
combination of this cash and the size of the new facility allows the Directors
to consider that the Melrose Group has sufficient access to liquidity for its
current needs.
The Board takes careful consideration of counterparty risk with banks when
deciding where to place Melrose's cash on deposit.
Finance cost risk management
The bank margin on the Melrose bank facility depends on the Melrose Group
leverage, and ranges from 0.85% to 2.00%; as at 31 December 2017 the margin
was 1.35% (31 December 2016: 1.35%).
The Melrose Group holds interest rate swap arrangements to fix the cost of
LIBOR. The profile of the interest rate swaps has been designed to hedge, on
average, 70% of the interest exposure on the projected gross debt as it
reduces over the five year term. Under the terms of these swap arrangements,
the Melrose Group will pay a weighted average fixed cost of 1.0% up to 31
December 2019, and 0.9% until the remaining swaps terminate on 6 July 2021.
The interest on the swaps is payable annually in arrears on 1 July. The bank
margin is payable monthly.
Exchange rate risk management
The Melrose Group trades in various countries around the world and is exposed
to many different foreign currencies. The Melrose Group therefore carries an
exchange rate risk that can be categorised into three types, transaction,
translation and disposal related risk as described in the paragraphs below.
The Board policy is designed to protect against the majority of the cash risks
but not the non-cash risks.
The most common exchange rate risk is the transaction risk the Group takes
when it invoices a sale in a different currency to the one in which its cost
of sale is incurred. This is addressed by taking out forward cover against
approximately 60% to 80% of the anticipated cash flows over the following
twelve months, placed on a rolling quarterly basis and for 100% of each
material contract. This does not eliminate the cash risk but does bring some
certainty to it.
The Melrose Group's annual revenue is heavily denominated in US Dollars, with
82% of revenue being denominated in this currency, and therefore the largest
foreign exchange rate exposure is the translation risk from changes in the US
Dollar exchange rate relative to Sterling. In addition, the Melrose Group
has foreign currency exposure, the largest being a transactional exchange rate
exposure due to certain Nortek US businesses transacting in the Chinese
Renminbi. The following exchange rates were used in respect of these two
currencies during the year:
US Dollar Twelve month average rate Closing
Four month average rate
(Nortek businesses)
2017 1.29 N/A 1.35
2016 1.36 1.26 1.23
CNY
2017 8.71 N/A 8.80
2016 8.99 8.56 8.57
The translation rate risk, being the effect on the results in the year due to
the translation movement of exchange rates from one year to the next is shown
below. The table below illustrates what the movement in proforma revenue and
underlying operating profit has been in 2017 as a result of changes in foreign
exchange rates.
The translation difference in 2017 £m
Revenue has increased by 100.0
Underlying operating profit has increased by 15.1
For reference, in respect of the continuing Melrose Group, an indication of
the short-term exchange rate risk, which shows both translation exchange risk
and unhedged transaction exchange rate risk, is as follows:
Sensitivity of profit to translation and unhedged transaction exchange risk Increase/
(decrease) in underlying
operating profit
£m
For every 10 per cent strengthening of the US Dollar against Sterling 27.3
For every 10 per cent strengthening of the Chinese Renminbi against Sterling (4.7)
The long-term exchange rate risk, which ignores any hedging instruments, is as
follows:
Sensitivity of profit to translation and full transaction exchange rate risk Increase/
(decrease) in underlying
operating profit
£m
For every 10 per cent strengthening of the US Dollar against Sterling 31.9
For every 10 per cent strengthening of the Chinese Renminbi against Sterling (23.8)
No specific exchange instruments are used to protect against the translation
risk because it is a non-cash risk to the Melrose Group. However, when the
Melrose Group has net debt, the hedge of having a matching debt facility
funding these foreign currency trading units protects against some of the
balance sheet and banking covenant translation risk.
Lastly, and potentially most significantly for Melrose, exchange risk arises
when a business that is predominantly based in a foreign currency is sold. The
proceeds for those businesses may be received in a foreign currency and
therefore an exchange risk might arise if foreign currency proceeds are
converted back to Sterling, for instance to pay a dividend or Capital Return
to shareholders. Protection against this risk is considered on a case-by-case
basis.
Contract and warranty risk
The financial risks connected with contracts and warranties, which include the
consideration of commercial, legal and warranty terms and their duration, are
considered carefully by Melrose before being entered into.
Commodity cost risk management
The cumulative expenditure on commodities is important to the Melrose Group
and the risk of base commodity costs increasing is mitigated by, wherever
possible, passing on the cost increases to customers or by having suitable
purchase agreements with its suppliers which sometimes fix the price over some
months into the future. These risks are minimised through sourcing policies,
including the use of multiple sources, where possible, and procurement
contracts where prices are agreed for up to one year to limit exposure to
price volatility. On occasions, Melrose does enter into financial instruments
on commodities when this is considered to be the most efficient way of
protecting against movements.
GOING CONCERN
The Melrose Group's business activities, together with the factors likely to
affect its future development, performance and position are set out in the
Chief Executive's Review. In addition, the consolidated financial statements
include details of the Melrose Group's borrowing facilities and hedging
activities along with the processes for managing its exposures to credit risk,
capital risk, liquidity risk, interest risk, foreign currency risk and
commodity cost risk.
The Melrose Group has adequate financial resources and has a consistent cash
generation record, and, as a consequence, the Directors believe that the
Melrose Group is well placed to manage its business risks successfully despite
the current uncertain economic outlook.
After making enquiries, the Directors have a reasonable expectation that the
Melrose Group has adequate resources to continue in operational existence for
the foreseeable future. For this reason, they continue to adopt the going
concern basis in preparing the financial statements.
POST BALANCE SHEET EVENTS
On 17 January 2018 the Melrose Group announced the terms of a firm offer to
acquire the entire issued share capital of GKN plc and on 1 February 2018
issued a public offer document containing the full terms and conditions of the
offer.
In conjunction with this offer, the Company entered into a senior term and
revolving credit facilities agreement with Lloyds Bank plc and Royal Bank of
Canada as original lenders which is subject to the acquisition taking place.
The new facilities agreement provides for term facilities and revolving credit
facilities in an aggregate principal amount up to £2.6 billion, US $2.0
billion and €0.5 billion. The maturity of the facilities ranges from 3 years
and 6 months to 5 years, after the date of the agreement of the new facility.
On 1 February 2018 Melrose announced that Brush had commenced consultations
with employees in relation to restructuring its Turbogenerator business to
reflect the reduced levels of activity. These reduced levels have been caused
by worldwide environmental policy which has triggered a fall in volumes in the
gas turbine market of over 60% from its peak in 2011. This in turn has
resulted in Brush's turbogenerator sales falling.
This restructuring involves the intended closure of the turbogenerator
production facility at Ridderkerk, Netherlands and the transfer of its 4-pole
turbogenerator production to the facility in Plzen, Czech Republic, while the
factory in Changshu, China has already been closed. In the UK, Brush has
entered into consultation with its workforce about the future of 2-pole
turbogenerator production at the Loughborough, UK facility, which accounts for
approximately half the workforce at the site. The 520-strong workforce
employed at Brush's other UK sites in the transformers, switchgear and mobile
generator businesses remain unaffected.
The cash cost of these restructuring items is estimated to be £40 million and
is expected to be materially complete by the end of 2018.
Geoffrey Martin
Group Finance Director
20 February 2018
Consolidated Income
Statement
Notes Year ended 31 December 2017 Year ended
£m 31 December 2016
£m
Continuing operations
Revenue 3 2,092.2 889.3
Cost of sales (1,439.4) (626.0)
Gross profit 652.8 263.3
Net operating expenses (659.7) (324.9)
Operating loss (6.9) (61.6)
Finance costs (21.5) (9.5)
Finance income 0.8 1.8
Loss before tax (27.6) (69.3)
Tax 5 3.7 30.3
Loss after tax for the year attributable to owners of the parent (23.9) (39.0)
Earnings per share
- Basic 7 (1.2)p (2.6)p
- Diluted 7 (1.2)p (2.6)p
Underlying Results
Underlying operating profit 4 278.4 104.1
Underlying profit before tax 4 257.7 96.4
Underlying profit after tax 4 190.9 70.4
Underlying basic earnings per share 7 9.9p 4.7p
Underlying diluted earnings per share 7 9.8p 4.4p
( )
Consolidated Statement of Comprehensive Income
Year ended 31 December 2017 Year ended
£m 31 December 2016
£m
Loss for the year (23.9) (39.0)
Items that will not be reclassified subsequently to the Income Statement:
Net remeasurement gain on retirement benefit obligations 12.1 22.7
Income tax charge relating to items that will not be reclassified (1.1) (3.3)
11.0 19.4
Items that may be reclassified subsequently to the Income Statement:
Currency translation on net investments (133.3) 104.3
Transfer to Income Statement from equity of cumulative translation differences
on disposal of foreign operations (0.5) -
Gains on cash flow hedges 8.9 5.3
Transfer to Income Statement on cash flow hedges (4.1) 0.3
Income tax (charge)/credit relating to items that may be reclassified (0.7) 5.4
(129.7) 115.3
Other comprehensive (expense)/income after tax (118.7) 134.7
Total comprehensive (expense)/income for the year attributable to
owners of the parent (142.6) 95.7
Consolidated Statement of Cash Flows
Continuing operations Year ended Year ended
31 December 2017 31 December 2016
Notes £m £m
Net cash from operating activities 11 32.4 50.6
Investing activities
Disposal of businesses 10.8 -
Disposal costs (0.2) (0.1)
Net cash disposed (1.4) -
Purchase of property, plant and equipment (47.7) (16.8)
Proceeds from disposal of property, plant and equipment 2.1 0.3
Purchase of computer software and capitalised development costs (3.2) (0.6)
Dividends received from joint ventures 0.6 0.9
Acquisition of subsidiaries (9.2) (1,130.0)
Cash acquired on acquisition of subsidiaries - 9.4
Interest received 0.8 1.8
Net cash used in investing activities (47.4) (1,135.1)
Financing activities
Return of Capital - (2,388.5)
Net proceeds from Rights Issue - 1,612.0
Repayment of borrowings - (1,092.4)
New bank loans raised 56.0 557.4
Costs of raising debt finance - (10.9)
Repayment of finance leases (1.0) -
Dividends paid 6 (63.0) (5.8)
Net cash used in financing activities (8.0) (1,328.2)
Net decrease in cash and cash equivalents (23.0) (2,412.7)
Cash and cash equivalents at the beginning of the year 11 42.1 2,451.4
Effect of foreign exchange rate changes 11 (2.8) 3.4
Cash and cash equivalents at the end of the year 11 16.3 42.1
( )
As at 31 December 2017, the Group had net debt of £571.8 million (31 December
2016: £541.5 million). A reconciliation of the movement in net debt is shown
in note 11.
Consolidated Balance Sheet
31 December 2017
£m Restated((1))
Notes 31 December 2016
£m
Non-current assets
Goodwill and other intangible assets 2,237.6 2,609.3
Property, plant and equipment 218.9 271.9
Interests in joint ventures 0.4 -
Deferred tax assets 49.3 49.6
Derivative financial assets 4.1 5.2
Trade and other receivables 1.9 5.2
2,512.2 2,941.2
Current assets
Inventories 275.4 296.1
Trade and other receivables 332.0 365.8
Derivative financial assets 9.9 3.8
Cash and cash equivalents 16.3 42.1
633.6 707.8
Total assets 3 3,145.8 3,649.0
Current liabilities
Trade and other payables 366.5 428.2
Interest-bearing loans and borrowings 0.4 0.5
Derivative financial liabilities 1.3 4.2
Current tax liabilities 6.4 10.2
Provisions 9 92.2 140.5
466.8 583.6
Net current assets 166.8 124.2
Non-current liabilities
Trade and other payables 1.8 13.7
Interest-bearing loans and borrowings 587.7 583.1
Deferred tax liabilities 69.1 129.9
Retirement benefit obligations 17.6 33.4
Provisions 9 117.6 142.5
793.8 902.6
Total liabilities 3 1,260.6 1,486.2
Net assets 1,885.2 2,162.8
Equity
Issued share capital 10 133.1 129.4
Share premium account 1,492.6 1,492.6
Merger reserve 108.7 112.4
Other reserves (2,329.9) (2,329.9)
Hedging reserve 8.6 4.5
Translation reserve (66.0) 67.8
Retained earnings 2,538.1 2,686.0
Total equity attributable to owners of the parent 1,885.2 2,162.8
( )
((1)) Restated to reflect the completion of the acquisition accounting for
Nortek (note 8).
The financial statements were approved and authorised for issue by the Board
of Directors on 20 February 2018 and were signed on its behalf by:
………………………………………………
……………………………………………
Geoffrey Martin
Simon Peckham
Group Finance
Director
Chief Executive
Consolidated Statement of Changes in Equity
Merger reserve Hedging Retained earnings
£m reserve £m
£m
Total equity attributable to owners of the parent
Issued Share £m
share premium account Other reserves Translation reserve
capital £m £m £m
£m
At 1 January 2016 10.0 - 2,500.9 (2,329.9) - (37.8) 2,702.2 2,845.4
Loss for the year - - - - - - (39.0) (39.0)
Other comprehensive income - - - - 4.5 105.6 24.6 134.7
Total comprehensive
income/(expense) - - - - 4.5 105.6 (14.4) 95.7
Return of Capital - - (2,388.5) - - - - (2,388.5)
Issue of new shares 119.4 1,492.6 - - - - - 1,612.0
Dividends paid - - - - - - (5.8) (5.8)
Credit to equity for equity-
settled share-based
payments - - - - - - 4.0 4.0
At 31 December 2016 129.4 1,492.6 112.4 (2,329.9) 4.5 67.8 2,686.0 2,162.8
Loss for the year - - - - - - (23.9) (23.9)
Other comprehensive (133.8)
income/(expense) - - - - 4.1 11.0 (118.7)
Total comprehensive (133.8)
income/(expense) - - - - 4.1 (12.9) (142.6)
Dividends paid - - - - - - (63.0) (63.0)
Credit to equity for equity-
settled share-based
payments - - - - - - 10.1 10.1
Deferred tax on share-based
payment transactions - - - - - - 33.4 33.4
Incentive scheme related((1)) 3.7 - (3.7) - - - (115.5) (115.5)
At 31 December 2017 133.1 1,492.6 108.7 (2,329.9) 8.6 (66.0) 2,538.1 1,885.2
((1)) On 31 May 2017, the Melrose 2012 Incentive Plan crystallised. Of the
50,000 options in issue, 23,494 were withheld by the Company in
exchange for a cash payment sufficient to allow holders to meet their
income tax and employee national insurance liabilities in respect of the
Incentive Plan. This resulted in 23,494 options being exercised for
£115.5 million in cash and being paid to the tax authorities on behalf of
the
option holders. The remaining 26,506 options were converted into
54,453,914 ordinary shares of 48/7 pence each and resulted in a £3.7 million
increase to Issued share capital and an equivalent reduction to the
Merger reserve.
Notes to the financial statements
1. Corporate information
The financial information included within this preliminary announcement does
not constitute the Company's statutory financial statements for the years
ended 31 December 2017 or 31 December 2016 within the meaning of s435 of the
Companies Act 2006, but is derived from those financial statements. Statutory
financial statements for the year ended 31 December 2016 have been delivered
to the Registrar of Companies and those for the year ended 31 December 2017
will be delivered to the Registrar of Companies during April 2018. The auditor
has reported on those financial statements; their reports were unqualified,
did not draw attention to any matters by way of emphasis and did not contain
statements under s498(2) or (3) of the Companies Act 2006.
While the financial information included in this preliminary announcement has
been prepared in accordance with the recognition and measurement criteria of
International Financial Reporting Standards ("IFRSs"), this announcement does
not itself contain sufficient information to comply with IFRSs. The Company
expects to publish full financial statements that comply with IFRSs during
April 2018.
The Group has adopted a number of standards and amendments which became
mandatory during the current financial year. These changes have had no
significant impact on the Group's financial statements. The accounting
policies followed are the same as those detailed within the 2016 Annual Report
which are available on the Group's website www.melroseplc.net.
The Board of Directors approved the preliminary announcement on 20 February
2018.
Alternative Performance Measures
The Group presents Alternative Performance Measures ("APMs") in addition to
the unadjusted statutory results of the Group. These are presented in
accordance with the Guidelines on APMs issued by the European Securities and
Markets Authority ("ESMA").
To provide more clarity and in response to increased guidance, the APMs used
by the Group are set out in the glossary to these Financial Statements and the
reconciling items between statutory and underlying results are listed below
and described in more detail in note 4 to the Financial Statements.
Underlying profit/(loss) excludes items which are significant in size or
volatility or by nature are non-trading or
non-recurring, and excludes any item released to the Income Statement that was
previously a fair value item booked on acquisition.
On this basis, the following items were included within adjusted items for the
year ended 31 December 2017:
· Impairment charges that are considered to be significant in
nature and/or value to the trading performance of the business.
· Amortisation of intangible assets that are acquired in a business
combination.
· Significant restructuring costs and other associated costs
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 costs.
· The charge for the equity-settled Melrose Incentive Plan,
including its associated employer's tax charge.
· The release of fair value items booked on acquisitions.
· The net impact arising from the new US tax legislation with the
US Federal tax rate moving from 35% to 21%.
The Board consider the underlying results to be a key measure to monitor how
the businesses are performing because this provides a more meaningful
comparison of how the business is managed and measured on a day-to-day basis
and achieves consistency and comparability between reporting periods.
The underlying measures are used to partly determine the variable element of
remuneration of senior management throughout the Group and are also in
alignment with performance measures used by certain external stakeholders. The
underlying measures are also one measure used to value individual businesses
as part of the "Buy, Improve and Sell" Melrose strategy model.
Underlying profit is not a defined term under IFRS and may not be comparable
with similarly titled profit measures reported by other companies. It is not
intended to be a substitute for, or superior to, GAAP measures. All APMs
relate to the current year results and comparative periods where provided.
2. Critical accounting judgements and key sources of
estimation uncertainty
In the application of the Group's accounting policies the Directors are
required to make judgements, estimates and assumptions about the carrying
amounts of assets and liabilities that are not readily apparent from other
sources. The estimates and associated assumptions are based on historical
experiences and other factors that are considered to be relevant. Actual
results may differ from these estimates.
The estimates and underlying assumptions are reviewed on an ongoing basis.
Revisions to accounting estimates are recognised in the period in which the
estimate is revised if the revision affects only that period, or in the period
of revision and future periods if the revision affects both current and future
periods.
There are no critical judgements, apart from those involving estimations, to
disclose within the scope of paragraph 122 of IAS 1: "Presentation of
financial statements".
Key sources of estimation uncertainty
The key assumptions concerning the future, and other key sources of estimation
uncertainty at the reporting period end that may have a significant risk of
causing a material adjustment to the carrying amounts of assets and
liabilities within the next financial year, are discussed below.
Assumptions used to determine the carrying amount of the Energy
segment
IAS 36: "Impairment of assets" requires that the carrying amount of assets
does not exceed their recoverable amount. Recoverable amount is defined as the
higher of an asset's or cash-generating unit's ("CGU") fair value less costs
of disposal and its value in use.
The Group reported on 21 November 2017 that a full review of the Energy group
of CGUs was underway following the continued worsening of the market, recent
negative trading statements made by participants in the market sector and the
deferral of Generator orders within Brush. As has been well-publicised,
structural changes caused by worldwide environmental policy have triggered a
fall in volumes in the gas turbine market of over 60% from its peak in 2011.
This in turn has resulted in Brush's turbogenerator sales falling. These
circumstances resulted in a reduction in the forecasts of the Brush business
and the communication, in the November trading statement, that the current
order intake by Brush would result in a low single-digit margin during 2018.
Given the challenging current market conditions affecting the Energy segment,
management conducted a review of the carrying value of property, plant and
equipment and computer software as at 31 December 2017 using a value in use
calculation. This required the entity to estimate the future cash flows
expected to arise from the property, plant and equipment and use a suitable
discount rate in order to calculate present value. Management draws upon
experience as well as external resources in making these estimates. Based on
this testing, an impairment loss of £18.2 million was identified in relation
to specific items of property, plant and equipment and computer software. At
31 December 2017, the carrying amount of property, plant and equipment and
computer software was £70.1 million (31 December 2016: £118.2 million). The
key estimates used to derive these non-current asset discounted cash flow
valuations were revenue changes, operating margins (impacting EBITDA) and
market conditions that impact long-term growth rates and discount rates.
As a result of its closure in November 2017, a reassessment of the value of
the assets in Brush China resulted in a write down of £31.1 million and
therefore the valuation of these assets is no longer considered a key source
of estimation uncertainty.
Goodwill and intangible assets are tested for impairment whenever events or
circumstances indicate that their carrying amounts might be impaired and at
least annually.
Under IAS 36, the value in use basis for calculating the recoverable amount
prohibits the inclusion of future uncommitted restructuring plans, however,
the fair value less costs to sell basis valuation should reflect all future
events (including restructuring) that would affect the expected cash flows for
a market participant. The recent trading announcements by key players in the
market in which Brush operates is considered to be a good indication that a
market participant would restructure the business and therefore the
restructuring impact should be included in the calculation.
For the purposes of this impairment test, the Energy group of CGUs has been
measured using the higher of a fair value less disposal costs basis and a
value in use basis. The fair value less cost to sell basis gives a value of
£300 million (net of expected costs of disposal), which is more than the
recoverable amount calculated using the value in use basis of £177.5 million.
The fair value less costs to sell basis has therefore been used in the
impairment assessment of the Energy group of CGUs, in accordance with IAS
36.
Fair value is the price that would be expected to be received to sell an asset
or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. In estimating the fair value, the Group
uses market-observable data to the extent it is available. The Group engaged
third party valuation specialists as necessary and worked closely with these
specialists to establish appropriate valuation techniques and market based
inputs to the model. Fair value less disposal costs has been estimated using
discounted cash flow projections, approved by management. The key estimates
used to derive this valuation are the timing and impact of restructuring,
potential reduction of future sales, operating margins (impacting EBITDA) and
market conditions that impact long-term growth rates and discount rates. These
are considered to be the main risk areas and are discussed in more detail in
note 8.
Based on the impairment testing completed at year end, an impairment loss of
£95.4 million was identified in relation to the assets of the Brush CGU, and
hence goodwill has been written down accordingly. At 31 December 2017, the
carrying amount of goodwill and other intangible assets in this division (not
including computer software and development costs) was £184.5 million (31
December 2016: £283.0 million). Further information on the carrying amount of
these assets, including a sensitivity analysis on the key assumptions, is
provided in note 8.
Assumptions used to determine the carrying amount of the
Group's defined benefit obligation
The Group's defined benefit obligation is discounted at a rate set by
reference to market yields at the end of the reporting period on high quality
corporate bonds. Significant judgement is required when setting the criteria
for bonds to be included in the population from which the yield curve is
derived. The most significant criteria considered for the selection of bonds
include the issue size of the corporate bonds, quality of the bonds and the
identification of outliers which are excluded. In addition judgement is made
in determining mortality rate assumptions to be used when valuing the Group's
defined benefit obligations. At 31 December 2017, the Group's retirement
benefit obligation deficit was £17.6 million (31 December 2016: £33.4
million).
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 Board in order to allocate resources to the segments and assess
their performance. The Group's reportable operating segments under IFRS 8 are
as follows:
Energy - includes the Brush business, a specialist supplier of energy
industrial products to the global market.
Air Management - includes the Air Quality & Home Solutions business
("AQH"), a leading manufacturer of ventilation products for the professional
remodelling and replacement markets, residential new construction market, and
do-it-yourself market. The Air Management division also includes the Heating,
Ventilation & Air Conditioning business ("HVAC") which 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 HVAC products and systems
for non-residential applications.
Security & Smart Technology ("SST") - includes the Security & Control
business ("SCS") along with the Core Brands and GTO Access Systems businesses.
These businesses are manufacturers and distributors of products designed to
provide convenience and security primarily for residential applications and
audio visual equipment for the residential audio video and professional video
market.
Ergonomics - comprises the Ergotron business, a manufacturer and distributor
of innovative products designed with ergonomic features including wall mounts,
carts, arms, desk mounts, workstations and stands that attach to or support a
variety of display devices such as notebook computers, computer monitors and
flat panel displays.
In addition, there are central cost centres which are also separately reported
to the Board. The central corporate cost centre which contains the Melrose
Group head office costs along with charges related to the divisional
management long-term incentive plans and the remaining Nortek central cost
centre.
All operating segments are classified as continuing operations.
Transfer prices between business units are set on an arm's length basis in a
manner similar to transactions with third parties.
No single customer contributed 10% or more to the Group's revenue in either
2017 or 2016.
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.
Segment revenues and results
The following tables present the revenue, results and certain asset and
liability information regarding the Group's operating segments and central
cost centres for the year ended 31 December 2017 and the comparative year.
Security & Smart
Air Management Technology Nortek central Nortek Central((1))-corporate
Year ended Energy £m £m Ergonomics £m total £m Total
31 December 2017 £m £m £m £m
Revenue 219.0 1,159.6 440.7 272.9 - 1,873.2 - 2,092.2
Underlying operating profit/(loss)
17.5 146.1 70.7 69.6 (2.1) 284.3 (23.4) 278.4
Impairment of Brush assets (144.7)
(144.7) - - - - - -
Amortisation of intangible assets
(8.8) (35.3) (20.2) (17.1) - (72.6) - (81.4)
Restructuring costs (5.9) (19.0) (6.7) (2.1) (1.3) (29.1) - (35.0)
Acquisition and disposal costs
- - - - - - (5.8) (5.8)
Melrose equity-settled compensation scheme
- - - - - - (24.2) (24.2)
Release of fair value items
0.3 3.2 1.8 0.5 - 5.5 - 5.8
Operating (loss)/profit (141.6) 95.0 45.6 50.9 (3.4) 188.1 (53.4) (6.9)
Finance costs (21.5)
Finance income 0.8
Loss before tax (27.6)
Tax 3.7
Loss for the year (23.9)
( )
((1)) Includes £7.6 million (2016: £nil) of costs relating to divisional
Long-term Incentive Plans.
Security & Smart
Air Management Technology Nortek central Nortek((1)) Central- corporate
Year ended Energy £m £m Ergonomics £m total £m Total
31 December 2016 £m £m £m £m
Revenue 246.4 416.5 130.4 96.0 - 642.9 - 889.3
Underlying operating profit/(loss)
32.0 46.8 17.1 24.4 (2.0) 86.3 (14.2) 104.1
Amortisation of intangible assets
(8.5) (15.1) (6.9) (5.8) - (27.8) - (36.3)
Restructuring costs (6.1) (12.4) (1.1) - (31.8) (45.3) - (51.4)
Acquisition and disposal costs
- - - - - - (38.7) (38.7)
Melrose equity-settled compensation scheme
- - - - - - (22.8) (22.8)
Release of fair value items
1.7 - - - - - - 1.7
Removal of one-off uplift in value of inventory
- (13.0) (3.4) (1.8) - (18.2) - (18.2)
Operating profit/(loss) 19.1 6.3 5.7 16.8 (33.8) (5.0) (75.7) (61.6)
Finance costs (9.5)
Finance income 1.8
Loss before tax (69.3)
Tax 30.3
Loss for the year (39.0)
((1)) Includes four months trading of Nortek following its acquisition on 31
August 2016.
Total assets Total liabilities
31 December 2017 Restated((1)) 31 December 2017 Restated((1))
£m 31 December 2016 £m 31 December 2016
£m £m
Energy 376.4 549.2 69.5 97.8
Air Management 1,399.2 1,569.2 367.2 497.4
Security & Smart Technology 630.5 692.2 127.3 160.7
Ergonomics 670.3 756.5 103.4 144.6
Nortek central 0.5 5.3 (10.3)((2)) (31.0)((2))
Nortek total 2,700.5 3,023.2 587.6 771.7
Central - corporate 68.9 76.6 603.5 616.7
Total 3,145.8 3,649.0 1,260.6 1,486.2
( )
((1)) Restated to reflect the completion of the acquisition accounting for
Nortek (note 8).
((2)) IAS 12 requires the set off of deferred tax assets and liabilities in
the same tax jurisdiction. The £10.3 million (31 December 2016: £31.0
million) negative balance within Nortek central liabilities represents £36.7
million (31 December 2016: £85.5 million) of Nortek central deferred tax
assets which have been treated as negative liabilities to represent the
required offset, and £26.4 million (31 December 2016: £54.5 million) of
other Nortek central liabilities.
Capital expenditure((1)) Depreciation((1))
Year ended 31 December 2017 Year ended 31 December 2016 Year ended 31 December 2017 Year ended 31 December 2016
£m £m £m £m
Continuing operations
Energy
- More to follow, for following part double click ID:nRST3300Fc currency and therefore an
exchange risk might arise if foreign currency proceeds are converted back to Sterling, for instance to pay a dividend or
Capital Return to shareholders. Protection against this risk is considered on a case-by-case basis.
Contract and warranty risk
The financial risks connected with contracts and warranties, which include the consideration of commercial, legal and
warranty terms and their duration, are considered carefully by Melrose before being entered into.
Commodity cost risk management
The cumulative expenditure on commodities is important to the Melrose Group and the risk of base commodity costs increasing
is mitigated by, wherever possible, passing on the cost increases to customers or by having suitable purchase agreements
with its suppliers which sometimes fix the price over some months into the future. These risks are minimised through
sourcing policies, including the use of multiple sources, where possible, and procurement contracts where prices are agreed
for up to one year to limit exposure to price volatility. On occasions, Melrose does enter into financial instruments on
commodities when this is considered to be the most efficient way of protecting against movements.
GOING CONCERN
The Melrose Group's business activities, together with the factors likely to affect its future development, performance and
position are set out in the Chief Executive's Review. In addition, the consolidated financial statements include details of
the Melrose Group's borrowing facilities and hedging activities along with the processes for managing its exposures to
credit risk, capital risk, liquidity risk, interest risk, foreign currency risk and commodity cost risk.
The Melrose Group has adequate financial resources and has a consistent cash generation record, and, as a consequence, the
Directors believe that the Melrose Group is well placed to manage its business risks successfully despite the current
uncertain economic outlook.
After making enquiries, the Directors have a reasonable expectation that the Melrose Group has adequate resources to
continue in operational existence for the foreseeable future. For this reason, they continue to adopt the going concern
basis in preparing the financial statements.
POST BALANCE SHEET EVENTS
On 17 January 2018 the Melrose Group announced the terms of a firm offer to acquire the entire issued share capital of GKN
plc and on 1 February 2018 issued a public offer document containing the full terms and conditions of the offer.
In conjunction with this offer, the Company entered into a senior term and revolving credit facilities agreement with
Lloyds Bank plc and Royal Bank of Canada as original lenders which is subject to the acquisition taking place. The new
facilities agreement provides for term facilities and revolving credit facilities in an aggregate principal amount up to
£2.6 billion, US $2.0 billion and E0.5 billion. The maturity of the facilities ranges from 3 years and 6 months to 5 years,
after the date of the agreement of the new facility.
On 1 February 2018 Melrose announced that Brush had commenced consultations with employees in relation to restructuring its
Turbogenerator business to reflect the reduced levels of activity. These reduced levels have been caused by worldwide
environmental policy which has triggered a fall in volumes in the gas turbine market of over 60% from its peak in 2011.
This in turn has resulted in Brush's turbogenerator sales falling.
This restructuring involves the intended closure of the turbogenerator production facility at Ridderkerk, Netherlands and
the transfer of its 4-pole turbogenerator production to the facility in Plzen, Czech Republic, while the factory in
Changshu, China has already been closed. In the UK, Brush has entered into consultation with its workforce about the future
of 2-pole turbogenerator production at the Loughborough, UK facility, which accounts for approximately half the workforce
at the site. The 520-strong workforce employed at Brush's other UK sites in the transformers, switchgear and mobile
generator businesses remain unaffected.
The cash cost of these restructuring items is estimated to be £40 million and is expected to be materially complete by the
end of 2018.
Geoffrey Martin
Group Finance Director
20 February 2018
Consolidated Income Statement
Continuing operations Notes Year ended Year ended31 December 2016£m
31 December
2017£m
Revenue 3 2,092.2 889.3
Cost of sales (1,439.4) (626.0)
Gross profit 652.8 263.3
Net operating expenses (659.7) (324.9)
Operating loss (6.9) (61.6)
Finance costs (21.5) (9.5)
Finance income 0.8 1.8
Loss before tax (27.6) (69.3)
Tax 5 3.7 30.3
Loss after tax for the year attributable to owners of the parent (23.9) (39.0)
Earnings per share
- Basic 7 (1.2)p (2.6)p
- Diluted 7 (1.2)p (2.6)p
Underlying Results
Underlying operating profit 4 278.4 104.1
Underlying profit before tax 4 257.7 96.4
Underlying profit after tax 4 190.9 70.4
Underlying basic earnings per share 7 9.9p 4.7p
Underlying diluted earnings per share 7 9.8p 4.4p
Consolidated Statement of Comprehensive Income
Year ended Year ended31 December 2016£m
31 December
2017£m
Loss for the year (23.9) (39.0)
Items that will not be reclassified subsequently to the Income Statement:
Net remeasurement gain on retirement benefit obligations 12.1 22.7
Income tax charge relating to items that will not be reclassified (1.1) (3.3)
11.0 19.4
Items that may be reclassified subsequently to the Income Statement:
Currency translation on net investments (133.3) 104.3
Transfer to Income Statement from equity of cumulative translation differences on disposal of foreign operations (0.5) -
Gains on cash flow hedges 8.9 5.3
Transfer to Income Statement on cash flow hedges (4.1) 0.3
Income tax (charge)/credit relating to items that may be reclassified (0.7) 5.4
(129.7) 115.3
Other comprehensive (expense)/income after tax (118.7) 134.7
Total comprehensive (expense)/income for the year attributable to owners of the parent (142.6) 95.7
Consolidated Statement of Cash Flows
Continuing operations Notes Year ended31 December Year ended31 December 2016£m
2017£m
Net cash from operating activities 11 32.4 50.6
Investing activities
Disposal of businesses 10.8 -
Disposal costs (0.2) (0.1)
Net cash disposed (1.4) -
Purchase of property, plant and equipment (47.7) (16.8)
Proceeds from disposal of property, plant and equipment 2.1 0.3
Purchase of computer software and capitalised development costs (3.2) (0.6)
Dividends received from joint ventures 0.6 0.9
Acquisition of subsidiaries (9.2) (1,130.0)
Cash acquired on acquisition of subsidiaries - 9.4
Interest received 0.8 1.8
Net cash used in investing activities (47.4) (1,135.1)
Financing activities
Return of Capital - (2,388.5)
Net proceeds from Rights Issue - 1,612.0
Repayment of borrowings - (1,092.4)
New bank loans raised 56.0 557.4
Costs of raising debt finance - (10.9)
Repayment of finance leases (1.0) -
Dividends paid 6 (63.0) (5.8)
Net cash used in financing activities (8.0) (1,328.2)
Net decrease in cash and cash equivalents (23.0) (2,412.7)
Cash and cash equivalents at the beginning of the year 11 42.1 2,451.4
Effect of foreign exchange rate changes 11 (2.8) 3.4
Cash and cash equivalents at the end of the year 11 16.3 42.1
As at 31 December 2017, the Group had net debt of £571.8 million (31 December 2016: £541.5 million). A reconciliation of
the movement in net debt is shown in note 11.
Consolidated Balance Sheet
Notes 31 December Restated(1) 31 December
2017£m 2016£m
Non-current assets
Goodwill and other intangible assets 2,237.6 2,609.3
Property, plant and equipment 218.9 271.9
Interests in joint ventures 0.4 -
Deferred tax assets 49.3 49.6
Derivative financial assets 4.1 5.2
Trade and other receivables 1.9 5.2
2,512.2 2,941.2
Current assets
Inventories 275.4 296.1
Trade and other receivables 332.0 365.8
Derivative financial assets 9.9 3.8
Cash and cash equivalents 16.3 42.1
633.6 707.8
Total assets 3 3,145.8 3,649.0
Current liabilities
Trade and other payables 366.5 428.2
Interest-bearing loans and borrowings 0.4 0.5
Derivative financial liabilities 1.3 4.2
Current tax liabilities 6.4 10.2
Provisions 9 92.2 140.5
466.8 583.6
Net current assets 166.8 124.2
Non-current liabilities
Trade and other payables 1.8 13.7
Interest-bearing loans and borrowings 587.7 583.1
Deferred tax liabilities 69.1 129.9
Retirement benefit obligations 17.6 33.4
Provisions 9 117.6 142.5
793.8 902.6
Total liabilities 3 1,260.6 1,486.2
Net assets 1,885.2 2,162.8
Equity
Issued share capital 10 133.1 129.4
Share premium account 1,492.6 1,492.6
Merger reserve 108.7 112.4
Other reserves (2,329.9) (2,329.9)
Hedging reserve 8.6 4.5
Translation reserve (66.0) 67.8
Retained earnings 2,538.1 2,686.0
Total equity attributable to owners of the parent 1,885.2 2,162.8
(1) Restated to reflect the completion of the acquisition accounting for Nortek (note 8).
The financial statements were approved and authorised for issue by the Board of Directors on 20 February 2018 and were
signed on its behalf by:
……………………………………………… ……………………………………………
Geoffrey Martin Simon
Peckham
Group Finance Director Chief
Executive
Consolidated Statement of Changes in Equity
Issued share capital£m Share premium account£m Merger reserve£m Other reserves£m Hedging reserve£m Translation reserve£m Retained earnings£m Total equity attributable to owners of the parent£m
At 1 January 2016 10.0 - 2,500.9 (2,329.9) - (37.8) 2,702.2 2,845.4
Loss for the year - - - - - - (39.0) (39.0)
Other comprehensive income - - - - 4.5 105.6 24.6 134.7
Total comprehensive income/(expense) - - - - 4.5 105.6 (14.4) 95.7
Return of Capital - - (2,388.5) - - - - (2,388.5)
Issue of new shares 119.4 1,492.6 - - - - - 1,612.0
Dividends paid - - - - - - (5.8) (5.8)
Credit to equity for equity- settled share-based payments - - - - - - 4.0 4.0
At 31 December 2016 129.4 1,492.6 112.4 (2,329.9) 4.5 67.8 2,686.0 2,162.8
Loss for the year - - - - - - (23.9) (23.9)
Other comprehensive income/(expense) - - - - 4.1 (133.8) 11.0 (118.7)
Total comprehensive income/(expense) - - - - 4.1 (133.8) (12.9) (142.6)
Dividends paid - - - - - - (63.0) (63.0)
Credit to equity for equity- settled share-based payments - - - - - - 10.1 10.1
Deferred tax on share-based payment transactions - - - - - - 33.4 33.4
Incentive scheme related(1) 3.7 - (3.7) - - - (115.5) (115.5)
At 31 December 2017 133.1 1,492.6 108.7 (2,329.9) 8.6 (66.0) 2,538.1 1,885.2
(1) On 31 May 2017, the Melrose 2012 Incentive Plan crystallised. Of the 50,000 options in issue, 23,494 were withheld by
the Company in
exchange for a cash payment sufficient to allow holders to meet their income tax and employee national insurance
liabilities in respect of the
Incentive Plan. This resulted in 23,494 options being exercised for £115.5 million in cash and being paid to the tax
authorities on behalf of the
option holders. The remaining 26,506 options were converted into 54,453,914 ordinary shares of 48/7 pence each and resulted
in a £3.7 million
increase to Issued share capital and an equivalent reduction to the Merger reserve.
Notes to the financial statements
1. Corporate information
The financial information included within this preliminary announcement does not constitute the Company's statutory
financial statements for the years ended 31 December 2017 or 31 December 2016 within the meaning of s435 of the Companies
Act 2006, but is derived from those financial statements. Statutory financial statements for the year ended 31 December
2016 have been delivered to the Registrar of Companies and those for the year ended 31 December 2017 will be delivered to
the Registrar of Companies during April 2018. The auditor has reported on those financial statements; their reports were
unqualified, did not draw attention to any matters by way of emphasis and did not contain statements under s498(2) or (3)
of the Companies Act 2006.
While the financial information included in this preliminary announcement has been prepared in accordance with the
recognition and measurement criteria of International Financial Reporting Standards ("IFRSs"), this announcement does not
itself contain sufficient information to comply with IFRSs. The Company expects to publish full financial statements that
comply with IFRSs during April 2018.
The Group has adopted a number of standards and amendments which became mandatory during the current financial year. These
changes have had no significant impact on the Group's financial statements. The accounting policies followed are the same
as those detailed within the 2016 Annual Report which are available on the Group's website www.melroseplc.net.
The Board of Directors approved the preliminary announcement on 20 February 2018.
Alternative Performance Measures
The Group presents Alternative Performance Measures ("APMs") in addition to the unadjusted statutory results of the Group.
These are presented in accordance with the Guidelines on APMs issued by the European Securities and Markets Authority
("ESMA").
To provide more clarity and in response to increased guidance, the APMs used by the Group are set out in the glossary to
these Financial Statements and the reconciling items between statutory and underlying results are listed below and
described in more detail in note 4 to the Financial Statements.
Underlying profit/(loss) excludes items which are significant in size or volatility or by nature are non-trading or
non-recurring, and excludes any item released to the Income Statement that was previously a fair value item booked on
acquisition.
On this basis, the following items were included within adjusted items for the year ended 31 December 2017:
· Impairment charges that are considered to be significant in nature and/or value to the trading performance of the
business.
· Amortisation of intangible assets that are acquired in a business combination.
· Significant restructuring costs and other associated costs 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 costs.
· The charge for the equity-settled Melrose Incentive Plan, including its associated employer's tax charge.
· The release of fair value items booked on acquisitions.
· The net impact arising from the new US tax legislation with the US Federal tax rate moving from 35% to 21%.
The Board consider the underlying results to be a key measure to monitor how the businesses are performing because this
provides a more meaningful comparison of how the business is managed and measured on a day-to-day basis and achieves
consistency and comparability between reporting periods.
The underlying measures are used to partly determine the variable element of remuneration of senior management throughout
the Group and are also in alignment with performance measures used by certain external stakeholders. The underlying
measures are also one measure used to value individual businesses as part of the "Buy, Improve and Sell" Melrose strategy
model.
Underlying profit is not a defined term under IFRS and may not be comparable with similarly titled profit measures reported
by other companies. It is not intended to be a substitute for, or superior to, GAAP measures. All APMs relate to the
current year results and comparative periods where provided.
2. Critical accounting judgements and key sources of estimation uncertainty
In the application of the Group's accounting policies the Directors are required to make judgements, estimates and
assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The
estimates and associated assumptions are based on historical experiences and other factors that are considered to be
relevant. Actual results may differ from these estimates.
The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised
in the period in which the estimate is revised if the revision affects only that period, or in the period of revision and
future periods if the revision affects both current and future periods.
There are no critical judgements, apart from those involving estimations, to disclose within the scope of paragraph 122 of
IAS 1: "Presentation of financial statements".
Key sources of estimation uncertainty
The key assumptions concerning the future, and other key sources of estimation uncertainty at the reporting period end that
may have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the
next financial year, are discussed below.
Assumptions used to determine the carrying amount of the Energy segment
IAS 36: "Impairment of assets" requires that the carrying amount of assets does not exceed their recoverable amount.
Recoverable amount is defined as the higher of an asset's or cash-generating unit's ("CGU") fair value less costs of
disposal and its value in use.
The Group reported on 21 November 2017 that a full review of the Energy group of CGUs was underway following the continued
worsening of the market, recent negative trading statements made by participants in the market sector and the deferral of
Generator orders within Brush. As has been well-publicised, structural changes caused by worldwide environmental policy
have triggered a fall in volumes in the gas turbine market of over 60% from its peak in 2011. This in turn has resulted in
Brush's turbogenerator sales falling. These circumstances resulted in a reduction in the forecasts of the Brush business
and the communication, in the November trading statement, that the current order intake by Brush would result in a low
single-digit margin during 2018.
Given the challenging current market conditions affecting the Energy segment, management conducted a review of the carrying
value of property, plant and equipment and computer software as at 31 December 2017 using a value in use calculation. This
required the entity to estimate the future cash flows expected to arise from the property, plant and equipment and use a
suitable discount rate in order to calculate present value. Management draws upon experience as well as external resources
in making these estimates. Based on this testing, an impairment loss of £18.2 million was identified in relation to
specific items of property, plant and equipment and computer software. At 31 December 2017, the carrying amount of
property, plant and equipment and computer software was £70.1 million (31 December 2016: £118.2 million). The key estimates
used to derive these non-current asset discounted cash flow valuations were revenue changes, operating margins (impacting
EBITDA) and market conditions that impact long-term growth rates and discount rates.
As a result of its closure in November 2017, a reassessment of the value of the assets in Brush China resulted in a write
down of £31.1 million and therefore the valuation of these assets is no longer considered a key source of estimation
uncertainty.
Goodwill and intangible assets are tested for impairment whenever events or circumstances indicate that their carrying
amounts might be impaired and at least annually.
Under IAS 36, the value in use basis for calculating the recoverable amount prohibits the inclusion of future uncommitted
restructuring plans, however, the fair value less costs to sell basis valuation should reflect all future events (including
restructuring) that would affect the expected cash flows for a market participant. The recent trading announcements by key
players in the market in which Brush operates is considered to be a good indication that a market participant would
restructure the business and therefore the restructuring impact should be included in the calculation.
For the purposes of this impairment test, the Energy group of CGUs has been measured using the higher of a fair value less
disposal costs basis and a value in use basis. The fair value less cost to sell basis gives a value of £300 million (net of
expected costs of disposal), which is more than the recoverable amount calculated using the value in use basis of £177.5
million. The fair value less costs to sell basis has therefore been used in the impairment assessment of the Energy group
of CGUs, in accordance with IAS 36.
Fair value is the price that would be expected to be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date. In estimating the fair value, the Group uses
market-observable data to the extent it is available. The Group engaged third party valuation specialists as necessary and
worked closely with these specialists to establish appropriate valuation techniques and market based inputs to the model.
Fair value less disposal costs has been estimated using discounted cash flow projections, approved by management. The key
estimates used to derive this valuation are the timing and impact of restructuring, potential reduction of future sales,
operating margins (impacting EBITDA) and market conditions that impact long-term growth rates and discount rates. These are
considered to be the main risk areas and are discussed in more detail in note 8.
Based on the impairment testing completed at year end, an impairment loss of £95.4 million was identified in relation to
the assets of the Brush CGU, and hence goodwill has been written down accordingly. At 31 December 2017, the carrying amount
of goodwill and other intangible assets in this division (not including computer software and development costs) was £184.5
million (31 December 2016: £283.0 million). Further information on the carrying amount of these assets, including a
sensitivity analysis on the key assumptions, is provided in note 8.
Assumptions used to determine the carrying amount of the Group's defined benefit obligation
The Group's defined benefit obligation is discounted at a rate set by reference to market yields at the end of the
reporting period on high quality corporate bonds. Significant judgement is required when setting the criteria for bonds to
be included in the population from which the yield curve is derived. The most significant criteria considered for the
selection of bonds include the issue size of the corporate bonds, quality of the bonds and the identification of outliers
which are excluded. In addition judgement is made in determining mortality rate assumptions to be used when valuing the
Group's defined benefit obligations. At 31 December 2017, the Group's retirement benefit obligation deficit was £17.6
million (31 December 2016: £33.4 million).
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 Board
in order to allocate resources to the segments and assess their performance. The Group's reportable operating segments
under IFRS 8 are as follows:
Energy - includes the Brush business, a specialist supplier of energy industrial products to the global market.
Air Management - includes the Air Quality & Home Solutions business ("AQH"), a leading manufacturer of ventilation products
for the professional remodelling and replacement markets, residential new construction market, and do-it-yourself market.
The Air Management division also includes the Heating, Ventilation & Air Conditioning business ("HVAC") which 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 HVAC products and systems for
non-residential applications.
Security & Smart Technology ("SST") - includes the Security & Control business ("SCS") along with the Core Brands and GTO
Access Systems businesses. These businesses are manufacturers and distributors of products designed to provide convenience
and security primarily for residential applications and audio visual equipment for the residential audio video and
professional video market.
Ergonomics - comprises the Ergotron business, a manufacturer and distributor of innovative products designed with ergonomic
features including wall mounts, carts, arms, desk mounts, workstations and stands that attach to or support a variety of
display devices such as notebook computers, computer monitors and flat panel displays.
In addition, there are central cost centres which are also separately reported to the Board. The central corporate cost
centre which contains the Melrose Group head office costs along with charges related to the divisional management long-term
incentive plans and the remaining Nortek central cost centre.
All operating segments are classified as continuing operations.
Transfer prices between business units are set on an arm's length basis in a manner similar to transactions with third
parties.
No single customer contributed 10% or more to the Group's revenue in either 2017 or 2016.
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.
Segment revenues and results
The following tables present the revenue, results and certain asset and liability information regarding the Group's
operating segments and central cost centres for the year ended 31 December 2017 and the comparative year.
Year ended 31 December 2017 Energy£m Air Management£m Security & SmartTechnology£m Ergonomics£m Nortek central£m Nortektotal£m Central(1)-corporate£m Total£m
Revenue 219.0 1,159.6 440.7 272.9 - 1,873.2 - 2,092.2
Underlying operating profit/(loss) 17.5 146.1 70.7 69.6 (2.1) 284.3 (23.4) 278.4
Impairment of Brush assets (144.7) - - - - - - (144.7)
Amortisation of intangible assets (8.8) (35.3) (20.2) (17.1) - (72.6) - (81.4)
Restructuring costs (5.9) (19.0) (6.7) (2.1) (1.3) (29.1) - (35.0)
Acquisition and disposal costs - - - - - - (5.8) (5.8)
Melrose equity-settled compensation scheme - - - - - - (24.2) (24.2)
Release of fair value items 0.3 3.2 1.8 0.5 - 5.5 - 5.8
Operating (loss)/profit (141.6) 95.0 45.6 50.9 (3.4) 188.1 (53.4) (6.9)
Finance costs (21.5)
Finance income
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