REG - Melrose Industries - Final Results <Origin Href="QuoteRef">MRON.L</Origin> - Part 3
20/02/2018 07:05
- Part 3: For the preceding part double click ID:nRST3300Fb
1.8 3.6 9.2 9.0
Air Management 44.4 10.3 18.9 6.4
Security & Smart Technology 3.1 1.8 3.1 1.0
Ergonomics 2.4 1.1 2.8 1.0
Nortek Central - 0.1 0.7 0.5
Nortek total 49.9 13.3 25.5 8.9
Central - corporate - - - 0.2
Total 51.7 16.9 34.7 18.1
( )
((1)) Including computer software and development costs.
Geographical information
The Group operates in various geographical areas around the world. The Group'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 its segment
assets (non-current assets excluding interests in joint ventures, deferred tax
assets, derivative financial assets and non-current trade and other
receivables) by geographical location are detailed below:
Revenue((1)) from external customers Non-current assets
Year ended 31 December 2017 Year ended 31 December 2016 31 December 2017 Restated((2))
£m £m £m 31 December 2016
£m
Continuing operations
UK 104.7 88.9 130.3 183.3
Europe 124.2 82.3 108.8 181.4
North America 1,767.8 638.8 2,207.3 2,480.1
Other 95.5 79.3 10.1 36.4
Total 2,092.2 889.3 2,456.5 2,881.2
((1) ) Revenue is presented by destination.
((2) ) Restated to reflect the completion of the acquisition accounting for
Nortek (note 8).
4. Reconciliation between profit and underlying profit
As described in note 1, underlying profit/(loss) is an alternative performance
measure used by the Board to monitor the underlying trading performance of the
Group. The Board considers 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.
A reconciliation between the statutory loss and underlying profit is shown
below:
Year ended Year ended
31 December 31 December 2016
2017 £m
Continuing operations Notes £m
Operating loss (6.9) (61.6)
Impairment of Brush assets a 144.7 -
Amortisation of intangible assets b 81.4 36.3
Restructuring costs c 35.0 51.4
Acquisition and disposal costs d 5.8 38.7
Removal of one-off uplift in value of inventory e - 18.2
Melrose equity-settled compensation scheme f 24.2 22.8
Release of fair value items g (5.8) (1.7)
Total adjustments to operating loss((1)) 285.3 165.7
Underlying operating profit 278.4 104.1
((1) ) Of the adjustments to operating loss, £285.3 million (2016: £147.5
million) is included within net operating expenses and £nil (2016: £18.2
million) within cost of sales.
a. The results for the year ended 31 December 2017 included an
impairment charge totalling £144.7 million in respect of the carrying value
of the assets held within the Brush business. This charge included £31.1
million in respect of the net assets of Brush China, which was closed in
November 2017, and, following a review of the non-current assets, included
£18.2 million in respect of fixed assets and £95.4 million in respect of
goodwill. The impairment charge has been excluded from underlying results due
to its one-off nature and size.
b. The amortisation of intangible assets acquired in business
combinations are excluded from underlying results due to their non-trading
nature and to enable comparison with companies that grow organically and do
not have such a charge. Where intangible assets are trading in nature, such as
computer software and development costs, the amortisation of these intangible
assets are shown within underlying results.
c. Restructuring costs and other associated costs arising from
significant strategy changes totalled £35.0 million (2016: £51.4 million)
and included £1.1 million (2016: £nil) of losses incurred following the
announcement of the closure of certain businesses. Within the Nortek
businesses the cost of restructuring actions taken in the year was £29.1
million (2016: £45.3 million, of which £31.8 million related to the closure
of the Nortek head office). These actions included the closure of loss making
operations within the HVAC business, the removal of excess manufacturing
capacity in the Air Quality & Home Solutions business and the
consolidation of Nortek Security & Control, GTO and Core Brands into a
single Security & Smart Technology division based in Carlsbad.
Restructuring costs also included £5.9 million (2016: £6.1 million) within
the Brush businesses relating to the closure of the China factory and
realigning the cost base of Brush with the reduced revenue. Restructuring
costs are excluded from underlying results due to their size and non-trading
nature.
d. Acquisition and disposal costs incurred in the year ended 31
December 2017 totalled £5.8 million (2016: £38.7 million) and included the
costs involved in returning the ordinary shares of the Company to the Premium
List of the London Stock Exchange following on from the acquisition of Nortek,
along with £1.8 million of committed costs associated with the potential
acquisition of GKN plc. In the year ended 31 December 2016 acquisition and
disposal costs related primarily to the acquisition of Nortek. These items are
excluded from underlying results due to their non-trading nature.
e. The one-off loss of profit effect of being required to uplift the
value of inventory acquired in an acquisition to that close to its selling
price was excluded from the year ended 31 December 2016 underlying results due
to its size and non-recurring nature.
f. The charge for the equity-settled Melrose Incentive Plan,
including its associated employer's tax charge, is excluded from underlying
results due to its size and volatility. The shares that would be issued in
respect of the equity-settled Melrose Plan are included in the calculation of
the underlying diluted earnings per share, which the Board consider to be a
key measure of performance.
g. During the year ended 31 December 2017 certain items, primarily
booked as fair value items on the acquisition of Nortek, have been settled for
a more favourable amount than first anticipated. The release of any excess
fair value item is shown within non-underlying profit to avoid positively
distorting underlying results.
Year ended 31 December 2017 £m Year ended
31 December
2016
Continuing operations £m
Loss before tax (27.6) (69.3)
Adjustments to loss before tax per above 285.3 165.7
Underlying profit before tax 257.7 96.4
Year ended 31 December 2017 £m Year ended
31 December
2016
Continuing operations Notes £m
Loss for the year (23.9) (39.0)
Adjustments to loss before tax per above 285.3 165.7
Net effect of new tax legislation in the US h (26.4) -
Incremental deferred tax asset recognition on UK losses i - (10.4)
Tax effect of adjustments to underlying profit before tax 5 (44.1) (45.9)
Adjustments to loss for the year 214.8 109.4
Underlying profit for the year 190.9 70.4
h. The net tax credit arising from the new US tax legislation enacted
in December 2017, including an estimated repatriation charge and changes to
closing deferred tax items due to a reduction in the Federal tax rate from 35%
to 21%, has been included as non-underlying because of its size and one-off
nature.
i. During the year ended 31 December 2016 deferred tax assets on UK
tax losses, which are now considered accessible following acquisition and
disposal activities, were recognised. This is excluded from underlying results
due to its size, volatility and non-trading nature.
5. Tax
Continuing operations Year ended Year ended 31 December 2016 £m
31 December 2017 £m
Analysis of charge/(credit) in year:
Current tax
In respect of current year 13.1 6.0
In respect of prior year 0.2 (3.0)
Deferred tax
In respect of current year 6.4 (22.5)
Adjustments to deferred tax attributable to changes in tax rates (39.4) (0.4)
Loss utilisation against US repatriation charge 16.0 -
Recognition of previously unrecognised UK tax losses - (10.4)
Total income tax credit (3.7) (30.3)
( )
The total income tax credit of £3.7 million (2016: £30.3 million) is
comprised of a current tax charge of £13.3 million (2016: £3.0 million) and
a deferred tax credit of £17.0 million (2016: £33.3 million).
The deferred tax credit for the year has been materially affected by the
reduction of corporate tax rates in the UK and the US. In the UK, the
Finance Act 2016 enacted future reductions in the rate of UK Corporation Tax
and excess losses arising in the current year have been recognised in the
closing Balance Sheet at the rates at which the benefit is likely to reverse.
This has resulted in an effective deferred tax charge of £3.0 million (2016:
credit of £0.4 million) which is included in underlying tax.
In addition, the new US tax measures enacted in December 2017 include a
reduction of the Federal tax rate from 35% to 21% with effect from 1 January
2018, requiring a revaluation of the US deferred tax assets and liabilities at
31 December 2017. The reduction in the deferred tax liability held in respect
of intangible assets results in a tax credit of £99.5 million (2016: £nil),
whilst the reduction in the deferred tax assets held within the Group's
subsidiaries results in a tax charge of £57.1 million (2016: £nil). Together
with a charge of £16.0 million (2016: £nil) in respect of the US
repatriation charge, these amounts total £26.4 million (2016: £nil) which is
classified as non-underlying tax.
In addition, the tax effect of non-underlying items incurred in the year was a
credit of £44.1 million (2016: £45.9 million) which comprises £2.5 million
(2016: £nil) in respect of impairment of Brush assets, £10.0 million (2016:
£18.2 million) in respect of restructuring costs, £0.3 million (2016: £3.9
million) in respect of acquisition and disposal costs, £30.0 million (2016:
£12.8 million) in respect of the amortisation of intangible assets, £nil
(2016: £6.8 million) in respect of the required uplift in the value of
inventory acquired with Nortek, £2.9 million (2016: £4.5 million) in respect
of Melrose equity-settled compensation scheme, and a charge of £1.6 million
(2016: £0.3 million) in respect of the release of fair value provisions and
other items.
The tax credit for the year for continuing operations can be reconciled to the
loss per the Income Statement as follows:
Year ended 31 December 2017 Year ended 31 December 2016
£m £m
Loss on ordinary activities before tax: (27.6) (69.3)
Tax on loss on ordinary activities at weighted average rate 14.22% (2016: (3.9) (28.3)
40.82%)
Tax effect of:
Disallowable expenses within underlying items 5.4 1.6
Disallowable items in respect of non-underlying items 21.7 7.3
Temporary differences not recognised in deferred tax 11.0 2.7
Tax credits, withholding taxes and other rate differences (0.9) (0.2)
Prior year tax adjustments (10.6) (3.0)
Tax credit classified as non-underlying (note 4) (26.4) (10.4)
Total tax credit for the year (3.7) (30.3)
The reconciliation has been performed at a blended Group tax rate of 14.22%
(2016: 40.82%) which represents the weighted average of the tax rates applying
to profits and losses in the jurisdictions in which those results arose.
In addition to the amount charged to the Income Statement, a tax credit of
£31.6 million (2016: £2.1 million) has been recognised in equity. This
represents a tax charge of £1.1 million (2016: £3.3 million) in respect of
retirement benefit obligations, a tax charge of £0.7 million (2016: £1.1
million) in respect of movements on cash flow hedges, a tax credit of £nil
(2016: £1.3 million) in respect of tax charged on foreign exchange gains and
a tax credit of £33.4 million (2016: £5.2 million) in respect of share based
payments.
6. Dividends
Year ended 31 December 2017 £m Year ended 31 December 2016 £m
Final dividend for the year ended 31 December 2015 paid of 2.6p (0.5)p((1)) - 3.8
Interim dividend for the year ended 31 December 2016 paid of 1.4p (0.3)p((1)) - 2.0
Final dividend for the year ended 31 December 2016 paid of 1.9p 35.8 -
Interim dividend for the year ended 31 December 2017 paid of 1.4p 27.2 -
63.0 5.8
( )
((1) ) Adjusted to include the effects of the Rights Issue (note 7).
Proposed final dividend for the year ended 31 December 2017 of 2.8p per share
(2016: 1.9p( )per share) totalling £54.4 million (2016: £35.8 million).
The final dividend of 2.8p was proposed by the Board on 20 February 2018 and,
in accordance with IAS 10: "Events after the reporting period", has not been
included as a liability in these financial statements.
7. Earnings per share
Earnings attributable to owners of the parent Year ended Year ended 31 December
31 December 2017 2016
£m £m
Earnings for basis of earnings per share from continuing operations (23.9) (39.0)
( )
Year ended Year ended((1)) 31 December
31 December 2017 2016
Number Number
Weighted average number of Ordinary Shares for the purposes of basic
earnings
1,918.7 1,499.3
per share (million)
Further shares for the purposes of diluted earnings per share (million) 22.5 89.8
Weighted average number of Ordinary Shares for the purposes of diluted
earnings
1,941.2 1,589.1
per share (million)
( )
((1) ) On 24 August 2016, a 12 for 1, fully underwritten, Rights Issue was
completed by Melrose Industries PLC and subsequently 1,741.6 million new
ordinary shares were issued raising £1,654.5 million to part fund the
acquisition of the Nortek Group. In accordance with IAS 33, a bonus factor
associated with the issue of the new share capital of 18.8491% has been
applied to the number of ordinary shares in issue prior to 24 August
2016 for the purposes of earnings per share calculations.
On 28 January 2016 the number of Ordinary Shares in issue was consolidated in
a ratio of 7 for 48, which reduced the number of Ordinary Shares in issue from
995.2 million to 145.1 million.
On 1 June 2017 the number of Ordinary Shares in issue increased by 54.5
million following the crystallisation of the 2012 Melrose Incentive Plan which
increased the number of shares in issue from 1,886.7 million to 1,941.2
million.
Earnings per share Year ended Year ended 31 December
31 December 2017 2016
pence pence
Basic earnings per share (1.2) (2.6)
Diluted earnings per share (1.2) (2.6)
Year ended Year ended
31 December 31 December 2016
2017 £m
Underlying earnings Note £m
Underlying earnings for the basis of underlying earnings per share from
continuing operations 4 190.9 70.4
Underlying earnings per share
Year ended Year ended 31 December 2016
31 December pence
2017
Continuing operations pence
Underlying basic earnings per share 9.9p 4.7p
Underlying diluted earnings per share 9.8p 4.4p
( )
8. Goodwill and other intangible
assets
Goodwill acquired in business combinations, net of impairment, has been
allocated to the businesses, each of which comprises several cash-generating
units, as follows:
31 December 2017 £m Restated((1))
31 December 2016 £m
Energy 122.0 212.9
Air Management 580.5 636.1
Security & Smart Technology 320.2 350.6
Ergonomics 409.5 448.7
Nortek total 1,310.2 1,435.4
Total operations 1,432.2 1,648.3
( )
((1)) Restated to reflect the completion of the acquisition accounting for
Nortek.
The Group tests goodwill annually or more frequently if there are indications
that goodwill might be impaired. In accordance with IAS 36: "Impairment of
assets" the Group values goodwill at the recoverable amount, being the higher
of the value in use basis and the fair value less costs to sell basis.
Value in use calculations have been used to determine the recoverable amount
of goodwill allocated to each group of cash-generating units ("CGUs") within
Nortek. The calculation uses the latest approved forecast extrapolated to
perpetuity using growth rates shown below, which do not exceed the long-term
growth rate for the relevant market. Based on impairment testing completed
at the year end, no impairment was identified in respect of the Nortek
businesses. No reasonable possible change in key assumptions would result in
an impairment in any of the Nortek group of CGUs.
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.
At 31 December 2017 an agreed restructuring plan had not been publically
announced or communicated to those affected by the restructure and therefore,
in accordance with IAS 37: "Provisions, contingent liabilities and contingent
assets", these costs were not considered to be committed. The restructuring
plan was subsequently announced on 1 February 2018.
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.
The fair value less costs to sell calculation does not include any synergistic
savings as these synergies would not be available to most market participants.
The inclusion of the impacts of the restructuring plan, risk adjusted
downwards to reflect the inherent execution risk, results in the fair value
less cost to sell basis giving 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.
Based on the impairment testing completed at year end, an impairment loss of
£95.4 million was identified in relation to these assets, and hence goodwill
has been written down accordingly. Combined with the £31.1 million write down
of assets in Brush China following its closure in November 2017 and the £18.2
million impairment of fixed assets, tested separately on a value in use basis
as required by IAS 36 a total impairment charge of £144.7 million is shown in
non-underlying items (note 4).
The basis of these impairment tests and the key assumptions are set out in the
table below:
31 December 2017
Key assumptions applied in the forecast cash flow projections((b))
Carrying value of goodwill
£m Pre-tax discount rates((a)) Post-tax Period of forecast Long-term growth rates((c))
Basis of valuation discount rates
Group of CGUs
Revenue growth, restructuring impact, operating margins
Fair value less costs of disposal
Energy((d)) 122.0((1)) 11.9% 10.0% 5 years 2.2%
Value in use Revenue growth, operating margins
Air Management 580.5 12.6% 9.8% 4 years 3.0%
Security & Smart Technology Value in use Revenue growth, operating margins
320.2 12.6% 9.8% 4 years 3.0%
Value in use Revenue growth, operating margins
Ergonomics 409.5 12.6% 9.8% 4 years 3.0%
( )
((1)) Following a goodwill impairment charge in the year of £95.4 million.
31 December 2016
Restated((1)) Key assumptions applied in the forecast cash flow projections((b))
carrying value of goodwill
£m Pre-tax discount rates((a)) Post-tax Period of forecast Long-term growth rates((c))
Basis of valuation discount rates
Group of CGUs
Value in use Revenue growth, operating margins
Energy 212.9 11.0% 9.2% 5 years 2.2%
Value in use Revenue growth, operating margins
Air Management 636.1 12.8% 9.7% 4 years 3.0%
Security & Smart Technology Value in use Revenue growth, operating margins
350.6 12.7% 9.7% 4 years 3.0%
Value in use Revenue growth, operating margins
Ergonomics 448.7 12.6% 9.7% 4 years 3.0%
((1)) Restated to reflect the completion of the acquisition accounting for
Nortek.
((a)) Pre-tax risk adjusted discount rates
Cash flows are discounted using a pre-tax discount rate specific to each group
of CGUs. Discount rates reflect the current market assessments of the time
value of money and are based on the estimated cost of capital of each CGU. In
determining the cost of equity, the Capital Asset Pricing Model (CAPM) has
been used. Under CAPM, the cost of equity is determined by adding a risk
premium to the risk free rate to reflect the additional risk associated with
investing outside of lending to a country. The risk free rate for the Energy
group of CGUs is based on the cost of UK Government bonds, whilst the risk
free rate for the Air Management, Security & Smart Technology and
Ergonomics groups of CGUs are based on the cost of US Government bonds. The
premium is based on an industry adjustment ("Beta") to the expected return of
the equity market above the risk free return. The relative risk adjustment
reflects the risk inherent in each group of CGUs relative to all other sectors
and geographies on average.
The discount rate used for the Energy group of CGUs has been risk adjusted to
reflect the execution risk inherent in future restructuring plans in the fair
value less costs of disposal approach.
( )
((b)) Assumptions applied in financial forecasts
The Group prepares cash flow forecasts derived from financial budgets and
medium-term forecasts. The key assumptions used in forecasting pre-tax cash
flows relate to future budgeted revenue and operating margins likely to be
achieved and the likely rates of long-term growth by market sector. Underlying
factors in determining the values assigned to each key assumption are shown
below:
Revenue growth and operating margins:
Revenue growth assumptions in the forecast period are based on financial
budgets and medium-term forecasts by management, taking into account industry
growth rates and management's historical experience in the context of wider
industry and economic conditions. Projected sales are built up with reference
to markets and product categories. They incorporate past performance,
historical growth rates, projections of developments in key markets, secured
orders and orders likely to be achieved in the short to medium-term given
trends in the relevant market sector.
Operating margins have been forecast based on historical levels achieved
considering the likely impact of changing economic environments and
competitive landscapes on volumes and revenues and the impact of management
actions on costs. Projected margins reflect the impact of all initiated
projects to improve operational efficiency and leverage scale. The projections
do not include the impact of future restructuring projects to which the Group
is not yet committed. Forecasts for other operating costs are based on
inflation forecasts and supply and demand factors.
(
)
Brush is a supplier of turbogenerators for the power generation, industrial,
Oil & Gas and offshore sectors and a leading supplier of switchgear,
transformers and other power infrastructure equipment. The key drivers for
revenues and operating margins are: i) original equipment investments in the
global power market, both new capacity (mainly emerging markets) and
replacement capacity (mainly in mature markets) ii) growth in service
requirements of the installed base; and iii) new product introduction.
Independent forecasts of growth in these power generation markets have been
used to derive revenue growth assumptions. Forecasts for other operating costs
are based on inflation forecasts and supply and demand factors. As described
above, the impacts of the planned restructuring have been included in deriving
future operating margins within the Energy group of CGUs using a fair value
less costs to sell basis. The timing of these assumed restructuring impacts
have been risk adjusted to reflect the execution risk inherent in future
restructuring plans of a market participant and are also a key driver for
operating margins in the forecast period.
Nortek is a diversified global manufacturer of innovative air management,
security, home automation and ergonomic and productivity solutions.
Air Management is a leading provider of residential indoor air quality
improvement solutions, home comfort and convenience products and heating,
ventilation and air conditioning equipment for both residential and commercial
markets. The key drivers for revenue and operating margins are the levels of
residential remodelling and replacement activity and the levels of residential
and non-residential new construction in the markets in which Air Management
operates. New residential and non-residential construction activity and, to a
lesser extent, residential remodelling and replacement activity are affected
by seasonality and cyclical factors such as interest rates, credit
availability, inflation, consumer spending, employment levels and other
macroeconomic factors.
Security & Smart Technology is a leading developer and manufacturer of
security, home automation and access control technologies for residential and
commercial markets' service providers. The key driver for revenue and
operating margins is global demand for security and home automation products.
Consumer spending, employment levels, regulation, technological advancements
and the evolution of the traditional security market towards home automation
and other macroeconomic factors influence demand for these products.
The Ergonomics segment includes Ergotron, one of the world's largest
manufacturers of ergonomics equipment. Ergotron provides a wide variety of
solutions to healthcare, education, corporate office and home applications.
The key driver for revenue and operating margins is demand for technology and
wellness products in the markets in which Ergotron operates. Seasonal factors,
public authority spending, corporate and consumer spending, employment levels,
the public awareness of wellness, regulation, technological advancements and
other macroeconomic factors influence demand for these products.
((c)) Long-term growth rates
Long-term growth rates are based on long-term forecasts for growth in the
sectors and geography in which the CGU operates. Long-term growth rates are
determined using a blend of publicly available data and a long-term growth
rate forecast that takes into account the international presence and the
markets in which each business operates.
((d)) Energy group of CGUs
The previous full impairment test performed at 30 June 2017 indicated that
although headroom had decreased from 31 December 2016, the recoverable amount
was still in excess of the carrying amount. It is evident that market
conditions have deteriorated further since this date and Brush is facing some
of the most challenging market conditions it has ever experienced.
The recoverable amount of the Energy group of CGUs has been determined based
on fair value less costs of disposal, which was higher than value in use. The
valuation technique used is an income approach, based on discounted future
cash flow projections relevant to a market participant. This methodology
includes a risk adjusted assessment of the results of the restructuring plan
that was announced on 1 February 2018. It has been assumed that a market
participant would also restructure the business based on the economic data in
the market and the announcements made by key players in the market.
Key assumptions used in the calculation of recoverable amounts are discount
rates, revenue growth, operating margins and long-term growth rates.
Discount rates
The estimate of fair value less disposal costs was determined using a post-tax
discount rate of 10.0%. This discount rate has been risk adjusted to reflect
the execution risk inherent in future restructuring plans and hence is higher
than would be the case under a non-restructured basis.
Revenue growth
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. The
continuing impacts arising from this downturn in the market are a key
assumption. In addition the revenue assumptions applied to Switchgear,
Transformers and Aftermarket are a key assumption.
Revenue is forecast to increase by a compound annual growth rate of 0.2% over
the five year projection period.
Restructuring impact and operating margins
Over the five year period, operating margins and EBITDA are anticipated to
increase as the impact of the restructuring savings materialise. The timing
and quantitative impact of these restructuring benefits is a key assumption.
Long-term growth rates
The Energy group of CGUs has five years of cash flows included in their
discounted cash flow model. A long-term growth rate into perpetuity has been
determined based upon the nominal GDP rates for the countries in which the
business operates and the long-term compound annual growth rate estimated by
management.
The fair value measurement of the Energy group of CGUs is categorised within
Level 3 of the fair value hierarchy set out in IFRS13: "Fair value
measurement".
Based on the impairment testing completed at year end, an impairment loss of
£95.4 million was identified in relation to these assets, and hence goodwill
has been written down accordingly. Combined with the £31.1 million write down
of assets in Brush China following its closure in November 2017 and the £18.2
million impairment of fixed assets, tested separately on a value in use basis
as required by IAS 36 a total impairment charge of £144.7 million is shown in
non-underlying items (note 4).
Sensitivity analysis
The Energy group of CGUs has been measured at fair value less costs of
disposal, a methodology required by IAS 36: "Impairment of assets". Following
the above impairment, the recoverable amount is equal to the carrying amount
and therefore any adverse movement in a key assumption may lead to further
impairment.
The discount rate has been risk adjusted to reflect the uncertainty of
achieving the cash flows within the forecast. However, for illustration
purposes a further 0.1 percentage point increase in the discount rate could
result in an impairment of £4.5 million. A further £0.5 million reduction in
annual and terminal value operating profit could result in an impairment of
£4.9 million. A further 0.1 percentage point decrease in the long-term growth
rate could result in an impairment of £3.5 million.
( )
Acquisition of businesses
On 31 August 2016 the Group acquired 100 per cent of the issued share capital
and obtained control of Nortek Inc. ("Nortek") for cash consideration of
£1,093.1 million.
Nortek is a leading diversified global manufacturer of innovative air
management, security, home automation and ergonomic and productivity solutions
(note 3).
The amounts recognised in respect of the identifiable assets and liabilities
assumed on the acquisition of Nortek were set out in the 2016 Annual Report.
During the year, the Group has completed its review of the assets and
liabilities acquired. As a result the Group recorded its final adjustments to
the opening balance sheet of Nortek at the half year. In accordance with IFRS
3: "Business combinations" the acquisition Balance Sheet at 31 August 2016 has
been restated to reflect this. These adjustments also impacted the Balance
Sheet at 31 December 2016 and increased provisions by £3.4 million, deferred
tax assets by £0.3 million and other payables by £1.8 million whilst
reducing inventory by £1.2 million and deferred tax liabilities by £63.8
million. The corresponding adjustment is to decrease goodwill by £57.7
million. The measurement period was closed at 30 June 2017.
9. Provisions
Surplus Environmental Other Total
leasehold and Warranty £m £m
property costs legal costs related Product Employee related
£m £m costs liability £m
£m £m
At 1 January 2017((1)) 20.8 66.8 86.9 42.5 8.9 57.1 283.0
Utilised (4.2) (18.7) (22.8) (5.7) (34.6) (77.9) (163.9)
Net charge to operating profit((2)) (2.1) (2.0) 14.2 3.4 35.7 57.5 106.7
Transfer from accruals - 1.3 1.6 - - 0.7 3.6
Unwind of discount 0.1 0.1 - - - 1.1 1.3
Transfer to held for sale((3)) - (1.0) (1.0) - - (2.9) (4.9)
Exchange differences (1.1) (3.6) (6.0) (3.2) (0.7) (1.4) (16.0)
At 31 December 2017 13.5 42.9 72.9 37.0 9.3 34.2 209.8
Current 4.6 15.9 33.2 10.5 5.6 22.4 92.2
Non-current 8.9 27.0 39.7 26.5 3.7 11.8 117.6
13.5 42.9 72.9 37.0 9.3 34.2 209.8
( )
((1)) Restated to reflect the completion of the acquisition accounting for
Nortek (note 8).
((2)) Includes restructuring charges and other non-underlying items of £44.3
million and £62.4 million relating to items charged through underlying
operating profit.
((3)) Transferred to liabilities held for sale at 30 June 2017 in accordance
with IFRS 5, subsequently disposed on 10 August 2017.
( )
The provision for surplus leasehold property costs represents the estimated
net payments payable over the term of these leases together with any
dilapidation costs. This is expected to result in cash expenditure over the
next one to seven years.
Environmental and legal costs provisions relate to the estimated remediation
costs of pollution, soil and groundwater contamination at certain sites and
estimated future costs and settlements in relation to legal claims. Due to
their nature, it is not possible to predict precisely when these provisions
will be utilised.
The provision for warranty related costs represents the best estimate of the
expenditure required to settle the Group's obligations, based on past
experiences. Warranty terms are, on average, between one and five years.
The employee related provision relates to the estimated cost of the Group's
health insurance and workers' compensation plans. The product liability
provision relates to the estimated cost of future product and general
liabilities claims. Due to their nature it is not possible to predict
precisely when these provisions will be utilised.
Other provisions relate to costs that will be incurred in respect of
restructuring programmes, usually resulting in cash spend within one year. In
addition other provisions include long-term incentive plans for divisional
senior management and the employer tax on equity-settled incentive schemes
which are expected to result in cash expenditure over the next five years.
Where appropriate, provisions have been discounted using a discount rate of 3%
(31 December 2016: 3%).
( )
10. Issued capital and reserves
31 December 31 December
2017 £m 2016
Share Capital £m
Allotted, called-up and fully paid
1,941,200,503 (31 December 2016: 1,886,746,589) Ordinary Shares of
48/7p each (31 December 2016: 48/7p each) 133.1 129.4
12,831 (31 December 2016: nil) 2017 Melrose Incentive Plan Shares of £1 each - -
133.1 129.4
On 1 June 2017 the number of Ordinary Shares in issue increased by 54,453,914
following the crystallisation of the 2012 Melrose Incentive Plan which
increased the number of Ordinary Shares in issue from 1,886,746,589 to
1,941,200,503.
During the course of the year, 12,831 of the 2017 Melrose Incentive Plan
options issued to the Directors and senior management were exercised and
resulted in the creation of 12,831 of 2017 Melrose incentive shares with a
nominal value of £1 each.
Translation reserve
The Translation reserve contains exchange differences on the translation of
subsidiaries with a functional currency other than Sterling and exchange gains
or losses on the translation of liabilities that hedge the Company's net
investment in foreign subsidiaries.
Hedging reserve
The Hedging reserve represents the cumulative fair value gains and losses on
derivative financial instruments for which cash flow hedge accounting has been
applied.
Merger reserve and Other reserves
The Merger reserve represents the excess of fair value over nominal value of
shares issued in consideration for the acquisition of subsidiaries. Other
reserves comprise accumulated adjustments in respect of Group reconstructions.
11. Cash flow statement
Year ended Year ended
31 December 31 December
2017 2016
Note £m £m
Reconciliation of underlying operating profit to cash generated by continuing
operations
Underlying operating profit 4 278.4 104.1
Adjustments for:
Depreciation of property, plant and equipment 30.9 15.9
Amortisation of computer software and development costs 3.8 2.2
Restructuring costs paid and movements in provisions (73.4) (37.6)
Defined benefit pension contributions paid (4.2) (10.5)
(Increase)/decrease in inventories (8.1) 15.0
Decrease in receivables 8.1 22.5
Decrease in payables (16.1) (9.3)
Acquisition costs (7.6) (41.3)
Tax paid (15.9) (5.9)
Interest paid (15.6) (4.5)
Incentive scheme tax related payments (147.9) -
Net cash from operating activities 32.4 50.6
Net debt reconciliation
Other Foreign exchange difference
31 December non-cash movements 31 December 2017
2016 Cash flow
£m £m £m £m £m
Bank borrowings (582.0) (56.0) (0.9) 51.4 (587.5)
Finance leases (1.6) 1.0 - - (0.6)
Gross debt (583.6) (55.0) (0.9) 51.4 (588.1)
Cash 42.1 (23.0) - (2.8) 16.3
Net debt (541.5) (78.0) (0.9) 48.6 (571.8)
Net debt is presented in the closing Balance Sheet at year end exchange rates.
For bank covenant testing purposes net debt is converted using average
exchange rates for the year, which increases net debt at 31 December 2017 by
£22.8 million (31 December 2016: decreases net debt by £51.1 million) to
£594.6 million (31 December 2016: £490.4 million).
12. 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.
Glossary
Alternative Performance Measures ("APMs")
In response to the Guidelines on Alternative Performance Measures 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 Alternative Performance Measures) provide additional information on the
performance of the business and trends to shareholders. These measures are
consistent with those used internally, and are considered critical to
understanding the financial performance and financial health of the Group.
APMs are considered 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.
These alternative performance measures may not be directly comparable with
similarly titled profit measures reported by other companies and they are not
intended to be a substitute for, or superior to, IFRS measures.
APM Reconciling Definition and purpose
Closest equivalent items to statutory
statutory measure measure
Income Statement Measures
Proforma revenue and proforma revenue growth Revenue and movement in Full year impact of acquisitions, revenue from exited sales channels and The year-on-year change in revenue from sales that are continuing,
translational currency impacts retranslating the current year revenue at the average actual periodic exchange
revenue per the rates used in the prior year.
Income Statement
This measure includes the full year impact of businesses acquired and excludes
the impact of exited sales channels from both years to provide a more direct
- More to follow, for following part double click ID:nRST3300Fd 31 December 31 December 31 December 31 December
2017£m 2016£m 2017£m 2016£m
Energy 1.8 3.6 9.2 9.0
Air Management 44.4 10.3 18.9 6.4
Security & Smart Technology 3.1 1.8 3.1 1.0
Ergonomics 2.4 1.1 2.8 1.0
Nortek Central - 0.1 0.7 0.5
Nortek total 49.9 13.3 25.5 8.9
Central - corporate - - - 0.2
Total 51.7 16.9 34.7 18.1
(1) Including computer software and development costs.
Geographical information
The Group operates in various geographical areas around the world. The Group'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 its segment assets (non-current assets excluding
interests in joint ventures, deferred tax assets, derivative financial assets and non-current trade and other receivables)
by geographical location are detailed below:
Revenue(1) from external customers Non-current assets
Continuing operations Year ended Year ended 31 December Restated(2)31 December
31 December 31 December 2017£m 2016£m
2017£m 2016£m
UK 104.7 88.9 130.3 183.3
Europe 124.2 82.3 108.8 181.4
North America 1,767.8 638.8 2,207.3 2,480.1
Other 95.5 79.3 10.1 36.4
Total 2,092.2 889.3 2,456.5 2,881.2
(1) Revenue is presented by destination.
(2) Restated to reflect the completion of the acquisition accounting for Nortek (note 8).
4. Reconciliation between profit and underlying profit
As described in note 1, underlying profit/(loss) is an alternative performance measure used by the Board to monitor the
underlying trading performance of the Group. The Board considers 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.
A reconciliation between the statutory loss and underlying profit is shown below:
Continuing operations Notes Year ended31 December 2017£m Year ended31 December 2016£m
Operating loss (6.9) (61.6)
Impairment of Brush assets a 144.7 -
Amortisation of intangible assets b 81.4 36.3
Restructuring costs c 35.0 51.4
Acquisition and disposal costs d 5.8 38.7
Removal of one-off uplift in value of inventory e - 18.2
Melrose equity-settled compensation scheme f 24.2 22.8
Release of fair value items g (5.8) (1.7)
Total adjustments to operating loss(1) 285.3 165.7
Underlying operating profit 278.4 104.1
(1) Of the adjustments to operating loss, £285.3 million (2016: £147.5 million) is included within net operating expenses
and £nil (2016: £18.2
million) within cost of sales.
a. The results for the year ended 31 December 2017 included an impairment charge totalling £144.7 million in respect of
the carrying value of the assets held within the Brush business. This charge included £31.1 million in respect of the net
assets of Brush China, which was closed in November 2017, and, following a review of the non-current assets, included £18.2
million in respect of fixed assets and £95.4 million in respect of goodwill. The impairment charge has been excluded from
underlying results due to its one-off nature and size.
b. The amortisation of intangible assets acquired in business combinations are excluded from underlying results due to
their non-trading nature and to enable comparison with companies that grow organically and do not have such a charge. Where
intangible assets are trading in nature, such as computer software and development costs, the amortisation of these
intangible assets are shown within underlying results.
c. Restructuring costs and other associated costs arising from significant strategy changes totalled £35.0 million
(2016: £51.4 million) and included £1.1 million (2016: £nil) of losses incurred following the announcement of the closure
of certain businesses. Within the Nortek businesses the cost of restructuring actions taken in the year was £29.1 million
(2016: £45.3 million, of which £31.8 million related to the closure of the Nortek head office). These actions included the
closure of loss making operations within the HVAC business, the removal of excess manufacturing capacity in the Air Quality
& Home Solutions business and the consolidation of Nortek Security & Control, GTO and Core Brands into a single Security &
Smart Technology division based in Carlsbad. Restructuring costs also included £5.9 million (2016: £6.1 million) within the
Brush businesses relating to the closure of the China factory and realigning the cost base of Brush with the reduced
revenue. Restructuring costs are excluded from underlying results due to their size and non-trading nature.
d. Acquisition and disposal costs incurred in the year ended 31 December 2017 totalled £5.8 million (2016: £38.7
million) and included the costs involved in returning the ordinary shares of the Company to the Premium List of the London
Stock Exchange following on from the acquisition of Nortek, along with £1.8 million of committed costs associated with the
potential acquisition of GKN plc. In the year ended 31 December 2016 acquisition and disposal costs related primarily to
the acquisition of Nortek. These items are excluded from underlying results due to their non-trading nature.
e. The one-off loss of profit effect of being required to uplift the value of inventory acquired in an acquisition to
that close to its selling price was excluded from the year ended 31 December 2016 underlying results due to its size and
non-recurring nature.
f. The charge for the equity-settled Melrose Incentive Plan, including its associated employer's tax charge, is
excluded from underlying results due to its size and volatility. The shares that would be issued in respect of the
equity-settled Melrose Plan are included in the calculation of the underlying diluted earnings per share, which the Board
consider to be a key measure of performance.
g. During the year ended 31 December 2017 certain items, primarily booked as fair value items on the acquisition of
Nortek, have been settled for a more favourable amount than first anticipated. The release of any excess fair value item is
shown within non-underlying profit to avoid positively distorting underlying results.
Continuing operations Year ended Year ended31 December 2016£m
31 December
2017
£m
Loss before tax (27.6) (69.3)
Adjustments to loss before tax per above 285.3 165.7
Underlying profit before tax 257.7 96.4
Continuing operations Notes Year ended Year ended31 December 2016£m
31 December
2017
£m
Loss for the year (23.9) (39.0)
Adjustments to loss before tax per above 285.3 165.7
Net effect of new tax legislation in the US h (26.4) -
Incremental deferred tax asset recognition on UK losses i - (10.4)
Tax effect of adjustments to underlying profit before tax 5 (44.1) (45.9)
Adjustments to loss for the year 214.8 109.4
Underlying profit for the year 190.9 70.4
h. The net tax credit arising from the new US tax legislation enacted in December 2017, including an estimated
repatriation charge and changes to closing deferred tax items due to a reduction in the Federal tax rate from 35% to 21%,
has been included as non-underlying because of its size and one-off nature.
i. During the year ended 31 December 2016 deferred tax assets on UK tax losses, which are now considered accessible
following acquisition and disposal activities, were recognised. This is excluded from underlying results due to its size,
volatility and non-trading nature.
5. Tax
Continuing operations Year ended 31 December Year ended
2017 31 December
£m 2016
£m
Analysis of charge/(credit) in year:
Current tax
In respect of current year 13.1 6.0
In respect of prior year 0.2 (3.0)
Deferred tax
In respect of current year 6.4 (22.5)
Adjustments to deferred tax attributable to changes in tax rates (39.4) (0.4)
Loss utilisation against US repatriation charge 16.0 -
Recognition of previously unrecognised UK tax losses - (10.4)
Total income tax credit (3.7) (30.3)
The total income tax credit of £3.7 million (2016: £30.3 million) is comprised of a current tax charge of £13.3 million
(2016: £3.0 million) and a deferred tax credit of £17.0 million (2016: £33.3 million).
The deferred tax credit for the year has been materially affected by the reduction of corporate tax rates in the UK and the
US. In the UK, the Finance Act 2016 enacted future reductions in the rate of UK Corporation Tax and excess losses arising
in the current year have been recognised in the closing Balance Sheet at the rates at which the benefit is likely to
reverse. This has resulted in an effective deferred tax charge of £3.0 million (2016: credit of £0.4 million) which is
included in underlying tax.
In addition, the new US tax measures enacted in December 2017 include a reduction of the Federal tax rate from 35% to 21%
with effect from 1 January 2018, requiring a revaluation of the US deferred tax assets and liabilities at 31 December 2017.
The reduction in the deferred tax liability held in respect of intangible assets results in a tax credit of £99.5 million
(2016: £nil), whilst the reduction in the deferred tax assets held within the Group's subsidiaries results in a tax charge
of £57.1 million (2016: £nil). Together with a charge of £16.0 million (2016: £nil) in respect of the US repatriation
charge, these amounts total £26.4 million (2016: £nil) which is classified as non-underlying tax.
In addition, the tax effect of non-underlying items incurred in the year was a credit of £44.1 million (2016: £45.9
million) which comprises £2.5 million (2016: £nil) in respect of impairment of Brush assets, £10.0 million (2016: £18.2
million) in respect of restructuring costs, £0.3 million (2016: £3.9 million) in respect of acquisition and disposal costs,
£30.0 million (2016: £12.8 million) in respect of the amortisation of intangible assets, £nil (2016: £6.8 million) in
respect of the required uplift in the value of inventory acquired with Nortek, £2.9 million (2016: £4.5 million) in respect
of Melrose equity-settled compensation scheme, and a charge of £1.6 million (2016: £0.3 million) in respect of the release
of fair value provisions and other items.
The tax credit for the year for continuing operations can be reconciled to the loss per the Income Statement as follows:
Year ended Year ended
31 December 31 December
2017£m 2016£m
Loss on ordinary activities before tax: (27.6) (69.3)
Tax on loss on ordinary activities at weighted average rate 14.22% (2016: 40.82%) (3.9) (28.3)
Tax effect of:
Disallowable expenses within underlying items 5.4 1.6
Disallowable items in respect of non-underlying items 21.7 7.3
Temporary differences not recognised in deferred tax 11.0 2.7
Tax credits, withholding taxes and other rate differences (0.9) (0.2)
Prior year tax adjustments (10.6) (3.0)
Tax credit classified as non-underlying (note 4) (26.4) (10.4)
Total tax credit for the year (3.7) (30.3)
The reconciliation has been performed at a blended Group tax rate of 14.22% (2016: 40.82%) which represents the weighted
average of the tax rates applying to profits and losses in the jurisdictions in which those results arose.
In addition to the amount charged to the Income Statement, a tax credit of £31.6 million (2016: £2.1 million) has been
recognised in equity. This represents a tax charge of £1.1 million (2016: £3.3 million) in respect of retirement benefit
obligations, a tax charge of £0.7 million (2016: £1.1 million) in respect of movements on cash flow hedges, a tax credit of
£nil (2016: £1.3 million) in respect of tax charged on foreign exchange gains and a tax credit of £33.4 million (2016: £5.2
million) in respect of share based payments.
6. Dividends
Year ended Year ended
31 December 31 December
2017 2016
£m £m
Final dividend for the year ended 31 December 2015 paid of 2.6p (0.5)p(1) - 3.8
Interim dividend for the year ended 31 December 2016 paid of 1.4p (0.3)p(1) - 2.0
Final dividend for the year ended 31 December 2016 paid of 1.9p 35.8 -
Interim dividend for the year ended 31 December 2017 paid of 1.4p 27.2 -
63.0 5.8
(1) Adjusted to include the effects of the Rights Issue (note 7).
Proposed final dividend for the year ended 31 December 2017 of 2.8p per share (2016: 1.9p per share) totalling £54.4
million (2016: £35.8 million).
The final dividend of 2.8p was proposed by the Board on 20 February 2018 and, in accordance with IAS 10: "Events after the
reporting period", has not been included as a liability in these financial statements.
7. Earnings per share
Earnings attributable to owners of the parent Year ended31 December 2017£m Year ended
31 December 2016£m
Earnings for basis of earnings per share from continuing operations (23.9) (39.0)
Year ended31 December 2017 Year ended(1)
31 December 2016
Number Number
Weighted average number of Ordinary Shares for the purposes of basic earnings per share (million) 1,918.7 1,499.3
Further shares for the purposes of diluted earnings per share (million) 22.5 89.8
Weighted average number of Ordinary Shares for the purposes of diluted earnings per share (million) 1,941.2 1,589.1
(1) On 24 August 2016, a 12 for 1, fully underwritten, Rights Issue was completed by Melrose Industries PLC and
subsequently 1,741.6 million new
ordinary shares were issued raising £1,654.5 million to part fund the acquisition of the Nortek Group. In accordance with
IAS 33, a bonus factor
associated with the issue of the new share capital of 18.8491% has been applied to the number of ordinary shares in issue
prior to 24 August
2016 for the purposes of earnings per share calculations.
On 28 January 2016 the number of Ordinary Shares in issue was consolidated in a ratio of 7 for 48, which reduced the number
of Ordinary Shares in issue from 995.2 million to 145.1 million.
On 1 June 2017 the number of Ordinary Shares in issue increased by 54.5 million following the crystallisation of the 2012
Melrose Incentive Plan which increased the number of shares in issue from 1,886.7 million to 1,941.2 million.
Earnings per share Year ended31 December 2017pence Year ended
31 December 2016pence
Basic earnings per share (1.2) (2.6)
Diluted earnings per share (1.2) (2.6)
Underlying earnings Note Year ended 31 December 2017£m Year ended 31 December 2016£m
Underlying earnings for the basis of underlying earnings per share from continuing operations 4 190.9 70.4
Underlying earnings per share
Continuing operations Year ended 31 December 2017pence Year ended 31 December 2016pence
Underlying basic earnings per share 9.9p 4.7p
Underlying diluted earnings per share 9.8p 4.4p
8. Goodwill and other intangible assets
Goodwill acquired in business combinations, net of impairment, has been allocated to the businesses, each of which
comprises several cash-generating units, as follows:
31 December Restated(1)31 December
2017 2016
£m £m
Energy 122.0 212.9
Air Management 580.5 636.1
Security & Smart Technology 320.2 350.6
Ergonomics 409.5 448.7
Nortek total 1,310.2 1,435.4
Total operations 1,432.2 1,648.3
(1) Restated to reflect the completion of the acquisition accounting for Nortek.
The Group tests goodwill annually or more frequently if there are indications that goodwill might be impaired. In
accordance with IAS 36: "Impairment of assets" the Group values goodwill at the recoverable amount, being the higher of the
value in use basis and the fair value less costs to sell basis.
Value in use calculations have been used to determine the recoverable amount of goodwill allocated to each group of
cash-generating units ("CGUs") within Nortek. The calculation uses the latest approved forecast extrapolated to perpetuity
using growth rates shown below, which do not exceed the long-term growth rate for the relevant market. Based on impairment
testing completed at the year end, no impairment was identified in respect of the Nortek businesses. No reasonable
possible change in key assumptions would result in an impairment in any of the Nortek group of CGUs.
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.
At 31 December 2017 an agreed restructuring plan had not been publically announced or communicated to those affected by the
restructure and therefore, in accordance with IAS 37: "Provisions, contingent liabilities and contingent assets", these
costs were not considered to be committed. The restructuring plan was subsequently announced on 1 February 2018.
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.
The fair value less costs to sell calculation does not include any synergistic savings as these synergies would not be
available to most market participants.
The inclusion of the impacts of the restructuring plan, risk adjusted downwards to reflect the inherent execution risk,
results in the fair value less cost to sell basis giving 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.
Based on the impairment testing completed at year end, an impairment loss of £95.4 million was identified in relation to
these assets, and hence goodwill has been written down accordingly. Combined with the £31.1 million write down of assets in
Brush China following its closure in November 2017 and the £18.2 million impairment of fixed assets, tested separately on a
value in use basis as required by IAS 36 a total impairment charge of £144.7 million is shown in non-underlying items (note
4).
The basis of these impairment tests and the key assumptions are set out in the table below:
31 December 2017
Group of CGUs Basis of valuation Carrying value of goodwill£m Pre-tax discount rates(a) Post-taxdiscount rates Period of forecast Key assumptions applied in the forecast cash flow projections(b) Long-term growth rates(c)
Energy(d) Fair value less costs of disposal 122.0(1) 11.9% 10.0% 5 years Revenue growth, restructuring impact, operating margins 2.2%
Air Management Value in use 580.5 12.6% 9.8% 4 years Revenue growth, operating margins 3.0%
Security & Smart Technology Value in use 320.2 12.6% 9.8% 4 years Revenue growth, operating margins 3.0%
Ergonomics Value in use 409.5 12.6% 9.8% 4 years Revenue growth, operating margins 3.0%
(1) Following a goodwill impairment charge in the year of £95.4 million.
31 December 2016
Group of CGUs Basis of valuation Restated(1)carrying value of goodwill£m Pre-tax discount rates(a) Post-taxdiscount rates Period of forecast Key assumptions applied in the forecast cash flow projections(b) Long-term growth rates(c)
Energy Value in use 212.9 11.0% 9.2% 5 years Revenue growth, operating margins 2.2%
Air Management Value in use 636.1 12.8% 9.7% 4 years Revenue growth, operating margins 3.0%
Security & Smart Technology Value in use 350.6 12.7% 9.7% 4 years Revenue growth, operating margins 3.0%
Ergonomics Value in use 448.7 12.6% 9.7% 4 years Revenue growth, operating margins 3.0%
(1) Restated to reflect the completion of the acquisition accounting for Nortek.
(a) Pre-tax risk adjusted discount rates
Cash flows are discounted using a pre-tax discount rate specific to each group of CGUs. Discount rates reflect the current
market assessments of the time value of money and are based on the estimated cost of capital of each CGU. In determining
the cost of equity, the Capital Asset Pricing Model (CAPM) has been used. Under CAPM, the cost of equity is determined by
adding a risk premium to the risk free rate to reflect the additional risk associated with investing outside of lending to
a country. The risk free rate for the Energy group of CGUs is based on the cost of UK Government bonds, whilst the risk
free rate for the Air Management, Security & Smart Technology and Ergonomics groups of CGUs are based on the cost of US
Government bonds. The premium is based on an industry adjustment ("Beta") to the expected return of the equity market above
the risk free return. The relative risk adjustment reflects the risk inherent in each group of CGUs relative to all other
sectors and geographies on average.
The discount rate used for the Energy group of CGUs has been risk adjusted to reflect the execution risk inherent in future
restructuring plans in the fair value less costs of disposal approach.
(b) Assumptions applied in financial forecasts
The Group prepares cash flow forecasts derived from financial budgets and medium-term forecasts. The key assumptions used
in forecasting pre-tax cash flows relate to future budgeted revenue and operating margins likely to be achieved and the
likely rates of long-term growth by market sector. Underlying factors in determining the values assigned to each key
assumption are shown below:
Revenue growth and operating margins:
Revenue growth assumptions in the forecast period are based on financial budgets and medium-term forecasts by management,
taking into account industry growth rates and management's historical experience in the context of wider industry and
economic conditions. Projected sales are built up with reference to markets and product categories. They incorporate past
performance, historical growth rates, projections of developments in key markets, secured orders and orders likely to be
achieved in the short to medium-term given trends in the relevant market sector.
Operating margins have been forecast based on historical levels achieved considering the likely impact of changing economic
environments and competitive landscapes on volumes and revenues and the impact of management actions on costs. Projected
margins reflect the impact of all initiated projects to improve operational efficiency and leverage scale. The projections
do not include the impact of future restructuring projects to which the Group is not yet committed. Forecasts for other
operating costs are based on inflation forecasts and supply and demand factors.
Brush is a supplier of turbogenerators for the power generation, industrial, Oil & Gas and offshore sectors and a leading
supplier of switchgear, transformers and other power infrastructure equipment. The key drivers for revenues and operating
margins are: i) original equipment investments in the global power market, both new capacity (mainly emerging markets) and
replacement capacity (mainly in mature markets) ii) growth in service requirements of the installed base; and iii) new
product introduction. Independent forecasts of growth in these power generation markets have been used to derive revenue
growth assumptions. Forecasts for other operating costs are based on inflation forecasts and supply and demand factors. As
described above, the impacts of the planned restructuring have been included in deriving future operating margins within
the Energy group of CGUs using a fair value less costs to sell basis. The timing of these assumed restructuring impacts
have been risk adjusted to reflect the execution risk inherent in future restructuring plans of a market participant and
are also a key driver for operating margins in the forecast period.
Nortek is a diversified global manufacturer of innovative air management, security, home automation and ergonomic and
productivity solutions.
Air Management is a leading provider of residential indoor air quality improvement solutions, home comfort and convenience
products and heating, ventilation and air conditioning equipment for both residential and commercial markets. The key
drivers for revenue and operating margins are the levels of residential remodelling and replacement activity and the levels
of residential and non-residential new construction in the markets in which Air Management operates. New residential and
non-residential construction activity and, to a lesser extent, residential remodelling and replacement activity are
affected by seasonality and cyclical factors such as interest rates, credit availability, inflation, consumer spending,
employment levels and other macroeconomic factors.
Security & Smart Technology is a leading developer and manufacturer of security, home automation and access control
technologies for residential and commercial markets' service providers. The key driver for revenue and operating margins is
global demand for security and home automation products. Consumer spending, employment levels, regulation, technological
advancements and the evolution of the traditional security market towards home automation and other macroeconomic factors
influence demand for these products.
The Ergonomics segment includes Ergotron, one of the world's largest manufacturers of ergonomics equipment. Ergotron
provides a wide variety of solutions to healthcare, education, corporate office and home applications. The key driver for
revenue and operating margins is demand for technology and wellness products in the markets in which Ergotron operates.
Seasonal factors, public authority spending, corporate and consumer spending, employment levels, the public awareness of
wellness, regulation, technological advancements and other macroeconomic factors influence demand for these products.
(c) Long-term growth rates
Long-term growth rates are based on long-term forecasts for growth in the sectors and geography in which the CGU operates.
Long-term growth rates are determined using a blend of publicly available data and a long-term growth rate forecast that
takes into account the international presence and the markets in which each business operates.
(d) Energy group of CGUs
The previous full impairment test performed at 30 June 2017 indicated that although headroom had decreased from 31 December
2016, the recoverable amount was still in excess of the carrying amount. It is evident that market conditions have
deteriorated further since this date and Brush is facing some of the most challenging market conditions it has ever
experienced.
The recoverable amount of the Energy group of CGUs has been determined based on fair value less costs of disposal, which
was higher than value in use. The valuation technique used is an income approach, based on discounted future cash flow
projections relevant to a market participant. This methodology includes a risk adjusted assessment of the results of the
restructuring plan that was announced on 1 February 2018. It has been assumed that a market participant would also
restructure the business based on the economic data in the market and the announcements made by key players in the market.
Key assumptions used in the calculation of recoverable amounts are discount rates, revenue growth, operating margins and
long-term growth rates.
Discount rates
The estimate of fair value less disposal costs was determined using a post-tax discount rate of 10.0%. This discount rate
has been risk adjusted to reflect the execution risk inherent in future restructuring plans and hence is higher than would
be the case under a non-restructured basis.
Revenue growth
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. The continuing impacts
arising from this downturn in the market are a key assumption. In addition the revenue assumptions applied to Switchgear,
Transformers and Aftermarket are a key assumption.
Revenue is forecast to increase by a compound annual growth rate of 0.2% over the five year projection period.
Restructuring impact and operating margins
Over the five year period, operating margins and EBITDA are anticipated to increase as the impact of the restructuring
savings materialise. The timing and quantitative impact of these restructuring benefits is a key assumption.
Long-term growth rates
The Energy group of CGUs has five years of cash flows included in their discounted cash flow model. A long-term growth rate
into perpetuity has been determined based upon the nominal GDP rates for the countries in which the business operates and
the long-term compound annual growth rate estimated by management.
The fair value measurement of the Energy group of CGUs is categorised within Level 3 of the fair value hierarchy set out in
IFRS13: "Fair value measurement".
Based on the impairment testing completed at year end, an impairment loss of £95.4 million was identified in relation to
these assets, and hence goodwill has been written down accordingly. Combined with the £31.1 million write down of assets in
Brush China following its closure in November 2017 and the £18.2 million impairment of fixed assets, tested separately on a
value in use basis as required by IAS 36 a total impairment charge of £144.7 million is shown in non-underlying items (note
4).
Sensitivity analysis
The Energy group of CGUs has been measured at fair value less costs of disposal, a methodology required by IAS 36:
"Impairment of assets". Following the above impairment, the recoverable amount is equal to the carrying amount and
therefore any adverse movement in a key assumption may lead to further impairment.
The discount rate has been risk adjusted to reflect the uncertainty of achieving the cash flows within the forecast.
However, for illustration purposes a further 0.1 percentage point increase in the discount rate could result in an
impairment of £4.5 million. A further £0.5 million reduction in annual and terminal value operating profit could result in
an impairment of £4.9 million. A further 0.1 percentage point decrease in the long-term growth rate could result in an
impairment of £3.5 million.
Acquisition of businesses
On 31 August 2016 the Group acquired 100 per cent of the issued share capital and obtained control of Nortek Inc.
("Nortek") for cash consideration of £1,093.1 million.
Nortek is a leading diversified global manufacturer of innovative air management, security, home automation and ergonomic
and productivity solutions (note 3).
The amounts recognised in respect of the identifiable assets and liabilities assumed on the acquisition of Nortek were set
out in the 2016 Annual Report. During the year, the Group has completed its review of the assets and liabilities acquired.
As a result the Group recorded its final adjustments to the opening balance sheet of Nortek at the half year. In accordance
with IFRS 3: "Business combinations" the acquisition Balance Sheet at 31 August 2016 has been restated to reflect this.
These adjustments also impacted the Balance Sheet at 31 December 2016 and increased provisions by £3.4 million, deferred
tax assets by £0.3 million and other payables by £1.8 million whilst reducing inventory by £1.2 million and deferred tax
liabilities by £63.8 million. The corresponding adjustment is to decrease goodwill by £57.7 million. The measurement period
was closed at 30 June 2017.
9. Provisions
Surplus leaseholdproperty costs£m Environmental and legal costs£m Warranty relatedcosts £m Product liability£m Employee related£m Other£m Total£m
At 1 January 2017(1) 20.8 66.8 86.9 42.5 8.9 57.1 283.0
Utilised (4.2) (18.7) (22.8) (5.7) (34.6) (77.9) (163.9)
Net charge to operating profit(2) (2.1) (2.0) 14.2 3.4 35.7 57.5 106.7
Transfer from accruals - 1.3 1.6 - - 0.7 3.6
Unwind of discount 0.1 0.1 - - - 1.1 1.3
Transfer to held for sale(3) - (1.0) (1.0) - - (2.9) (4.9)
Exchange differences (1.1) (3.6) (6.0) (3.2) (0.7) (1.4) (16.0)
At 31 December 2017 13.5 42.9 72.9 37.0 9.3 34.2 209.8
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