REG - Melrose Industries - Final Results
07/03/2024 07:00
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RNS Number : 9079F Melrose Industries PLC 07 March 2024
MELROSE INDUSTRIES PLC
AUDITED RESULTS
FOR THE YEAR ENDED 31 DECEMBER 2023
Melrose Industries PLC ("Melrose" or the "Group"), the aerospace focused
Group, today announces its audited results for the year ended 31 December
2023.
Key messages
· 2023 adjusted(1) operating profit more than doubles to £420
million (pre-PLC costs) and ahead of guidance
· 2024 adjusted(1) operating profit guidance upgraded by 6% (pre-PLC
costs)
· Engines margin to reach target 28% in 2024, one year early and on
track for >30% post 2025
· Positive earnings momentum across industry leading businesses, 2025
targets de-risked
· Engines' future RRSP net cash inflow grows to c.£22 billion as a
result of GE contract
Adjusted(1) results Statutory results
2023 2022(2) 2023 2022(2)
Continuing operations £m £m £m £m
Revenue 3,350 2,954 3,350 2,954
Aerospace operating profit/(loss) 420 186 17 (134)
Operating profit/(loss) (post-PLC costs) 390 147 57 (270)
Profit/(loss) before tax 331 62 (8) (328)
Diluted earnings per share (p) 18.7 4.1 0.1 (16.3)
Net debt(1) 572 n/a n/a n/a
Leverage(1) 1.1x n/a n/a n/a
n/a - comparative information for net debt and leverage has not been restated
for discontinued operations and any comparison is less meaningful
Financial highlights(3)
· Revenue of £3.35 billion, 17% growth over last year (13% including
businesses being exited)
· Adjusted(1) operating profit (pre-PLC costs) of £420 million
versus initial guidance of £350 million and most recent £405 million.
Margins grew by more than 600bps to 12.5%
· Adjusted(1) operating profit of £390 million, up 164% on the prior
year, a margin of 11.6%. Statutory operating profit of £57 million (2022:
loss of £270 million)
· Adjusted(1) diluted EPS of 18.7p, compared to 4.1p in 2022, an
increase of over 4 times. Statutory diluted EPS of 0.1p (2022: loss of 16.3p)
· Free cash flow(1) better than expectations
· Net debt(1) of £572 million, representing leverage(1) of 1.1x,
better than our guidance, including a share buyback cost of £93 million
· Full year dividend of 5.0 pence including final dividend of 3.5
pence per share recommended
Strategic highlights
· Successful transition to pureplay aerospace business with clear
growth trajectory
· Significant delivery of restructuring and repricing actions, ahead
of our plan and de-risking 2025 targets. Engines to reach 28% adjusted
operating margin, one year early, and on track to >30% post 2025
· Wide-ranging new agreement with GE covering a series of engines
including GEnx with higher aftermarket RRSP entitlement; RRSP expected net
cash inflow up by 10% to c.£22 billion (assuming US$ = 1.25)
· Good operational progress with 23% improvement in cost of poor
quality and £40 million reduction in arrears, despite industry supply chain
issues
· Substantial investment of c.£120 million in Research and
Development including government and customer funding. In 2023 we committed to
invest £50 million targeted to expand our unique additive fabrication
capacity during the next couple of years
· Substantial progress in achieving Group sustainability targets,
with new more stretching targets set
Divisional highlights(3)
Engines
· Engines revenue growth of 16% to £1.19 billion with adjusted(1)
operating profit up 92% to £310 million and adjusted(1) operating margin up
to 26%
· Engines aftermarket growth of 34% driven by recovering flying hours
and the Group entering the lucrative aftermarket 'sweet spot' supporting an
above market performance
· Strong progress on growth initiatives, including increasing
capacity and 23% increase in revenue in aftermarket repair
Structures
· Structures revenue growth of 18% to £2.16 billion (12% including
businesses being exited). Adjusted(1) operating profit of £110 million with
margins increasing to 5.1% from 1.3% in 2022
· The ramp-up in Civil OEM shipments resulted in 28% growth. Defence
repricing and portfolio work progressed well with 42% of core work now
sustainably priced
· Significant progress on restructuring and portfolio rationalisation
with two non-core plants closed in 2023 and further exits underway
Demerger of GKN Automotive, GKN Powder Metallurgy and GKN Hydrogen
· The demerger of the GKN Automotive, GKN Powder Metallurgy and GKN
Hydrogen divisions from Melrose into Dowlais Group plc successfully completed
on 20 April 2023
Upgraded guidance for 2024 full year (assuming US$ = 1.25 average exchange
rate for the year)
· Revenue between £3.6 billion and £3.75 billion, growth tempered
by ongoing sector-wide supply chain issues
· Aerospace adjusted(1) operating profit (pre-PLC costs) between
£550 million and £570 million, 6% above our prior guidance at the midpoint,
driven by ongoing operating margin improvement with Engines on track to
deliver 2025 margin targets of 28% in 2024
· Aerospace adjusted(1) EBITDA of between £710 million and £730
million
· Central costs at £30 million, up £5 million to reflect a non-cash
LTIP charge
· As expected, cash generation limited by ongoing restructuring in
2024 and previously announced GTF issues; increasing free cash flow is
expected in 2025 and beyond, driven by RRSPs
Peter Dilnot, Chief Executive Officer of Melrose Industries PLC, today said:
"Melrose Aerospace has delivered record results in 2023, ahead of upgraded
guidance driven by strong operating margin progression in both divisions. The
Group is well positioned to deliver continued growth and margin improvement
supported by positive end markets and excellent operational momentum. We have
upgraded guidance for 2024 and are confident about unlocking significant
further potential of the business going forward."
Enquiries:
Investor Relations:
Chris Dyett: +44 (0) 7974 974 690,
ir@melroseplc.net (mailto:ir@melroseplc.net)
Montfort Communications: +44 (0) 20 3514 0897
Nick Miles: +44 (0) 7739 701 634,
miles@montfort.london (mailto:miles@montfort.london)
Charlotte McMullen: +44 (0) 7921 881 800,
mcmullen@montfort.london (mailto:mcmullen@montfort.london)
(Notes)
(1. Described in the glossary to the Preliminary Announcement and
considered by the Board to be a key measure of performance)
(2. Results for the year ended 31 December 2022 have been restated for
discontinued operations and the one for three share consolidation where
applicable)
(3. Like-for-like growth is calculated at constant currency against 2022
results and excludes businesses being exited)
CHAIRMAN'S STATEMENT
CALENDAR YEAR 2023
The Group had a transformational year in 2023 and delivered financial results
ahead of expectations. We achieved statutory revenue for the Melrose Group of
£3,350 million (2022: £2,954 million), with an adjusted operating profit
(post-PLC costs) of £390 million (2022: £147 million) based on a statutory
operating profit of £57 million (2022: loss of £270 million).
Following completion of the Dowlais Group plc demerger (the 'Demerger') in the
first half of the year, Melrose's strategy shifted from its previous 'Buy,
Improve, Sell' model to becoming a premium-listed aerospace business for the
long-term. Your Board is confident that Melrose is now well positioned for
strong future performance. This will be driven by our two industry leading
aerospace divisions which have been restructured and repositioned, coupled
with strong market growth and a disciplined approach to capital allocation.
The positive trajectory is clearly demonstrated within these results.
Further details of these results are contained in the CEO's review and Finance
Director's review, and I would like to thank all employees for their efforts
this year.
PURPOSE, STRATEGY & SUSTAINABILITY
Melrose was founded to empower its businesses to unlock their full potential
for the collective benefit of stakeholders, whilst providing shareholders with
a superior return on their investment. Our strategy remains focused on value
creation, driven by operational and financial improvement over the longer
term, now as a pureplay, UK-listed aerospace business. Our positive trajectory
is underpinned by leading positions across the world's major aircraft
platforms, strong organic growth prospects within the aerospace sector, and
attractive opportunities to differentiate our business further through
cutting-edge proprietary technology that is already shaping the future of
flight.
Melrose sees the decarbonisation of the aerospace sector as a priority, and
this presents great opportunities to deploy our innovation and technology
leadership to create and commercialise world-leading solutions for cleaner air
travel, and to generate superior financial returns for our shareholders. We
are pleased that our sustainability performance continues to be recognised by
several key benchmarking agencies, including Sustainalytics which ranks
Melrose in the top decile of our industrial peers, MSCI which continues to
rank us in the "A" category, and our recent elevation to a "B" rating by CDP
Climate Change.
This current set of results illustrates our strategy in action, and our
continued shareholder value creation is reflected in Melrose being one of the
strongest performers in the FTSE100 in 2023.
DIVIDEND
In line with our progressive dividend policy, the Board proposes to pay a
final dividend of 3.5 pence per share for 2023, making a total dividend for
the year of 5.0 pence per share. The final dividend will be paid on 8 May
2024 to those shareholders on the register at 2 April 2024.
BOARD MATTERS
Given the evolution of Melrose from the 'Buy, Improve, Sell' model into a
focused aerospace business, Victoria Jarman has decided not to stand for
re-election at the 2024 AGM. We thank her very much for her contributions over
the last three years.
As announced last year, Christopher Miller, Simon Peckham and Geoffrey Martin
will not stand for re-election at the Company's Annual General Meeting on 2
May 2024. Their periods of service as Directors in a variety of leadership
roles have been filled with great success for Melrose and its shareholders.
With Melrose's transformation into a pureplay aerospace business complete,
your Board is confident that the time is right for the new management team to
take the Company forward, led by Peter Dilnot and Matthew Gregory. To that
end, on 6 March 2024 Mr Peckham stepped down as Chief Executive, and today Mr
Martin has stepped down as Group Finance Director and Mr Peckham, Mr Martin
and Mr Miller have resigned from their positions as Directors. During their
tenure, the business has grown from a start-up in 2003, to a well-positioned
FTSE100 enterprise, having delivered total returns of capital of over £8
billion to shareholders, and an average return of 2.5x shareholders' equity
for the businesses sold under the previous business model. We wish them well
for the future.
We are pleased to confirm Mr Dilnot's appointment as CEO of Melrose effective
6 March 2024. Peter has been at Melrose for nearly 5 years, serving as COO and
as an executive Director, and CEO of GKN Aerospace during this time. He has
many years of public company experience, including as CEO of Renewi PLC and as
a senior executive at Danaher Corporation. He has an engineering and aviation
background, and started his career as a helicopter pilot in the British Armed
Forces.
We also welcome Mr Gregory to the Board as an executive Director, and are
pleased to confirm his appointment as CFO of Melrose effective today. Matthew
was previously CFO of GKN Aerospace, and is a seasoned public company CFO with
executive leadership experience across several complex, UK-listed
manufacturing and transportation businesses, including as CFO of Essentra plc,
and as CFO then CEO of FirstGroup plc.
Justin Dowley
Non-executive Chairman
7 March 2024
CEO'S REVIEW
MELROSE IS A PUREPLAY AEROSPACE BUSINESS WITH EXCELLENT LONG-TERM GROWTH
POTENTIAL
It has been a transformational year for Melrose. During 2023 we successfully
evolved into a focused aerospace technology business while delivering results
well ahead of expectations. Our end markets continued to recover strongly
and we generated significant margin expansion from our extensive improvement
actions including restructuring, operational gains and repositioning our
portfolio to improve the quality of our earnings. We have built positive
momentum and have a very clear path to deliver further profitable growth and
shareholder value in the years ahead.
Melrose has an extensive range of proprietary 'Tier One' technology that is in
strong demand from Aerospace OEMs. This technology is already embedded into
the world's leading commercial and defence aircraft platforms - both in
aerospace engines and in structures. We are reinforcing these established
positions with ongoing business improvements, targeted investments in organic
growth and a disciplined approach to capital allocation. This includes
making an important contribution to the future of sustainable flight with
breakthrough technologies such as additive fabrication now, and in the
longer-term, developing new forms of propulsion. We have significant
opportunities to create value for all stakeholders going forward and we are
confident about our exciting trajectory from here.
2023 RESULTS
In 2023, overall Group revenues grew by 17%(3) with Engines growth of 16%(3),
driven by RRSP strength despite ongoing industry supply chain challenges, and
Structures growth of 18%(3) largely from OEM deliveries ramping-up. There
was a 124%(3) increase in adjusted operating profit to £420 million, with
margins doubling from 6.3% to a record 12.5% (pre-PLC costs). The Group
statutory operating profit was £57 million compared to a loss of £270
million in the prior year. Our leverage reduced to 1.1x, including £93
million of share buyback cost in the period, and net debt was better than
expectations. Going forward, we are guiding to continued profit expansion to
£560 million (pre-PLC costs) in 2024, at the midpoint of the range, and £700
million in 2025 as the benefits of market growth and the full impact of our
improvement plans read through. Our confidence in these targets is
underpinned by robust commercial and operational progress.
On the commercial front, we secured a flagship new Engines agreement with GE
which is estimated to deliver US$5 billion in incremental revenue over the
contract lifetime, including an expansion of RRSP participation on the GEnx
programme. In Civil Structures we agreed a five-year extension with Airbus
for the sole-source production of A220 wiring, and a new multi-year contract
covering design and build of flight control surfaces for the new urban air
mobility player, Joby. In Defence Structures, an agreement has been signed
with The Netherlands MoD and Airbus for new helicopter developments, and we
have secured favourable positioning for design and build content on the Global
Combat Air Programme, Future Vertical Lift Programme and European Next
Generation Rotorcraft Programme. In addition, Defence repricing is proceeding
ahead of plan, with 42% of core defence work now being sustainably priced.
Our leadership in next generation technologies was cemented through a new
partnership with Embraer to explore the implementation of hydrogen
technologies in aviation.
We made further progress with operational gains in 2023 with safety and
quality always being our top priorities. During the year we reduced total
reportable safety incidents by 19%, and the number of quality escapes (issues
reaching our customers) was 44% lower than prior year. Our performance on
customer deliveries improved with a reduction in arrears of £40 million,
despite the significant ongoing industry supply chain issues. Productivity
was impacted by these supply chain shortages, however underlying gains are
being made through focused Lean implementation, automation and
digitalisation. The plan to rationalise our footprint from 12 sites to nine
in Engines, and 40 sites to 22 in Structures has continued to progress well.
All business improvement initiatives remain firmly on, or ahead of, plan and
we expect further gains to read through as we deliver revenue growth from a
more focused and productive operational base.
STRATEGY
Following completion of the Demerger, Melrose has now changed strategy to
being purely an aerospace business, and is reporting publicly as two
divisions, Engines and Structures. The previous Melrose business model of
'Buy, Improve, Sell', has been replaced by 'Design, Deliver, Improve'. This
new business model reflects how value will be created by Melrose going forward
based on differentiated technology leadership, consistent delivery of
commitments to our stakeholders, and ongoing improvement in all areas -
including progressive financial results.
While our strategy has changed, the Group will retain the most important
elements of what made Melrose successful: rapid decision making; empowering
management teams; and accountability for results. Our determination and
focus on improving businesses at pace will also always remain at the heart of
what we do. This coupled with GKN Aerospace's technology leadership and
engineering excellence will be a powerful and competitive combination.
Our plan is to deliver strong profitable growth driven in particular by our
exceptional Engines division. By 2025, Engines is forecast to contribute
over 70% of Melrose profit with over 85% of this being from the accretive and
structurally growing aftermarket. Within this aftermarket business, our
unique RRSP portfolio - which includes leading engines from all major OEMs -
is expected to generate £22 billion of future cash flows (using a rate of USD
1.25). The positive momentum in Engines is demonstrated by our guidance
that its 2025 margin target of 28% will be achieved a year early in 2024.
Our Structures division also has a positive profitable growth trajectory and
is well on track to deliver its 9% margin target in 2025. This represents
significant gains from the modestly above breakeven result in 2022
(immediately post COVID) and the 5% margin that was delivered ahead of
expectations in 2023. The ongoing Structures margin expansion will continue
to come from civil volumes ramping-up, our Defence portfolio repositioning and
repricing, and ongoing wider business improvements.
Our immediate focus will remain on delivering organic growth with an
increasing number of exciting technology-led opportunities emerging for the
future, particularly in Engines where returns are highly attractive and
accretive. The Board has confirmed that no material acquisitions will be
made in the near-term.
MELROSE AND GKN
Within the markets in which it operates, the GKN Aerospace brand conveys
quality, reliability and deep technical expertise. This is both a function of
its position as a long-term trusted partner to all major airframe and engine
OEMs, and its pioneering approach to the delivery of next generation
solutions.
Within financial markets, since its formation in 2003, Melrose has established
itself as an excellent steward of capital, empowering businesses to unlock
their full potential for the collective benefit of stakeholders. As a focused
aerospace group, the Melrose strategy may have changed but the unstinting
focus on value creation remains.
We have therefore chosen to preserve both brands given their inherent value
and reputation to different stakeholders. Going forward, the Group will
operate with one brand for its customers, GKN Aerospace, and one brand for
financial markets, Melrose Industries PLC. Internally we have created one
unified and efficient organisation but with an emphasis on decentralisation
that empowers customer-facing leaders and local operating teams.
MARKET UPDATE AND PORTFOLIO POSITION
Our end markets continue to recover strongly and look set for sustained
structural growth in the years ahead. The demand is compounded by the fact
that over the last four years there was a significant reduction in aerospace
deliveries due to COVID and the well-publicised issues with the Boeing 737
MAX. In addition, the industry supply chain is currently pacing deliveries
due to capacity and raw material shortages. This dynamic continues to create
a mismatch between supply and demand, and backlogs have increased in 2023 in
our key markets. Given our embedded position on all major civil and
defence aircraft these large backlogs underpin our expected future business
growth.
In 2023, global revenue passenger kilometres closed to within 1% of pre-COVID
levels and many domestic markets were ahead of previous peak levels. With
strong order intake and constrained supply, the total civil aircraft order
backlog has reached a record of over 14,000 aircraft (source: Boeing and
Airbus websites). Defence demand has also increased significantly due to
geo-political tensions. The book-to-bill ratio for leading global defence
businesses is expected to remain above 1x in the near-term.
Our positions on all leading commercial narrowbody and widebody aircraft are
well established with a stronger weighting towards Airbus over Boeing. Our
positions are largely design to build and sole source, including metallic and
composite aerostructures, wiring, transparencies and anti-ice systems. Within
Defence we have a similar technology portfolio with extensive content on the
leading global F-35 fighter jet, plus positions on leading military
helicopters and cargo aircraft. Our Engine portfolio is unique in terms of
its breadth and coverage of global flying hours. Our deep design expertise
has been embedded in leading engines from all major engine OEMs with RRSP
positions on 19 engines, including 100% coverage of legacy narrowbody engines
(CFM56 and V2500). In total our technology supports more than 100,000
flights per day and our business is therefore directly linked to global market
growth.
SUSTAINABILITY
We are well positioned to play an important role in the development of
sustainable flight and see this as key to our future success. We are
investing selectively in developing new technologies, independently or in
conjunction with customers and governments, that we believe will further
enhance our market position. This includes developing new manufacturing
methods to make established components more sustainably today - such as
additive fabrication and thermoplastics. Our partners continue to embed
technological improvements to make current aircraft more fuel efficient, with
Pratt & Whitney's Geared Turbo Fan now certified on 50% Sustainable
Aviation Fuel ('SAF') and successfully tested on 100% SAF. In parallel, we
are working on longer-term developments such as our pioneering work on
Hydrogen aircraft propulsion and storage, plus associated electrical
distribution systems. For example, GKN Aerospace is part of the Hydrogen in
Aviation Alliance, established in September 2023 to accelerate the delivery of
zero carbon aviation.
We are also taking action to reduce the direct impact of our business on the
environment. This year has seen continued momentum, with a number of our
environmental targets being achieved early. New 2025 targets have therefore
been set including a reduction in Scope 1 & 2 emission intensity by 50%,
and a 40% reduction in water intensity by 2025. To enable aviation's route
to Net Zero by 2050, we have set 2025 targets for the percentage of
sustainable R&D at 80%.
Our sustainability actions and plans will be set out in greater detail in our
Annual Report.
CAPITAL ALLOCATION
The Group commenced a £500 million share buyback programme in October 2023
with £93 million paid within the year. The programme is anticipated to
complete by the end of September 2024. We will maintain a disciplined
approach to capital allocation going forward with a singular focus on
generating the most attractive returns for shareholders. This includes
investing in an increasingly promising range of organic growth opportunities,
particularly in Engines given its very accretive economics. We will pursue
these opportunities while keeping leverage comfortably within the previous
guidance.
We also remain committed to paying a progressive annual dividend. For 2023
the Board has recommended a final dividend of 3.5 pence per share, which will
be paid on 8 May 2024 to shareholders on the register at the close of business
on 2 April 2024. This makes the total dividend for 2023 5.0 pence per
share.
GROUP OUTLOOK
The Group is well positioned to deliver further significant progress in 2024
and beyond. Our positive momentum gives us confidence to raise our adjusted
operating profit guidance (pre-PLC costs) by £30 million for 2024 (6%),
driven primarily by Engines revenue growth and adjusted operating margins.
Notwithstanding the upgraded operating profit guidance, there remain revenue
headwinds from industry-wide supply chain issues, short-term destocking due to
the phasing of commercial aircraft build rates, and the impact of planned
exits and disposals in our Structures division.
The progress we expect in 2024 will further narrow the gap to our 2025
targets. These are increasingly underpinned by the Engines outlook and mix,
Civil ramp up, Defence portfolio improvements and ongoing business
improvements throughout the Group.
GUIDANCE FOR 2024 AND 2025
Income Statement 2024 (Targets) 2025 (Targets)
Revenue:
Engines £1.45bn - £1.50bn £1.8bn
Structures £2.15bn - £2.25bn £2.2bn
Aerospace £3.60bn - £3.75bn £4.0bn
Adjusted operating profit (pre-PLC costs):
Engines £410m - £420m £500m
Structures £140m - £150m £200m
Aerospace £550m - £570m £700m
Adjusted operating profit margin (pre-PLC costs) >15% 17%-18%
Adjusted EBITDA (pre-PLC costs):
Engines £480m - £490m £580m
Structures £230m - £240m £290m
Aerospace £710m - £730m £870m
PLC costs c.£30m c.£30m
Peter Dilnot
Chief Executive Officer
7 March 2024
DIVISIONAL REVIEW
ENGINES
Industry-leading Engines division positioned to achieve exceptional growth
2023 2022
Engines adjusted results £m £m
Revenue 1,193 1,035
Operating profit 310 162
Operating profit margin 26.0% 15.7%
EBITDA 360 215
EBITDA margin 30.2% 20.8%
The Engines division made strong financial, operational and strategic progress
during 2023. Divisional growth was supported by strong end markets with
increasing flying hours leading to an acceleration in shop visits and spare
parts demand. Our unique RRSP portfolio further matured during the year,
providing good momentum and visibility to divisional margins exceeding 30%
beyond 2025.
During the year, revenue was up 16%(3) versus 2022. OE revenue grew 3%,
constrained by ongoing industry supply chain issues. Underlying demand is
therefore higher than the reported level of growth indicates. Aftermarket
revenue was up 34%, led by 40% growth in the civil engines aftermarket from a
combination of volume increases, wider shop visit scope and positive
pricing. Adjusted operating margins improved 10.3 percentage points to
26.0%. Encouragingly, the second half margin was ahead of our initial and
most recent guidance at 27.5%.
Over the course of 2023, commercial highlights include the signing of a major
new agreement with GE Aerospace. This agreement expands RRSP participation on
the GEnx programme, the fastest-selling high-thrust engine, and also covers
new technology insertion. The agreement also enables GKN Aerospace to join GE
Aerospace's global aftermarket repair network as well as securing
life-of-programme contracts to deliver 100% of GEnx, CF6 and GE90 fan cases,
and 50% of GE9X fan case assembly. Other commercial highlights include a new
contract with Safran to supply shafts for the LEAP engine family, plus a
10-year extension of an OEM supply agreement with Pratt & Whitney for
their military engine programme family of cases such as F135, F100 and
F119. Our Engines division also continues to support the Swedish Air Force
with complete engine production and maintenance for their fighter fleet and
this extends to wider international military customers who also fly the Gripen
jet. The demand for this support continues to be elevated due to higher
defence flying hours, most notably due to the ongoing war in Ukraine.
We continue to work closely with Pratt & Whitney and other partners to
manage the well-publicised issues from powder metal manufacturing on some
variants of the GTF. The associated inspection programme is now well underway
with global airlines and is progressing according to plan with increasing
clarity on the execution schedule and regulatory framework. Our previous
financial guidance is unchanged with no profit impact expected from this issue
and with a total cash cost of around £200 million over the next few years if
it is assumed that this is all a programme cost. More broadly, we remain
confident that the GTF will be a robust and attractive narrowbody engine in
the decades ahead. Beyond the GTF, we have 17 other RRSP life-of-programme
contracts and these generated a positive contribution in 2023. Most notably,
we have 100% coverage of legacy narrowbody engines through our CFM56 and V2500
positions and these performed strongly with flying hours returning towards
pre-COVID levels. The returns from our widebody engines, GEnx and XWB, are
also continuing to grow with recovering long-haul travel.
Our strategically important repair business grew by 23% in 2023 as demand
continued to increase strongly and our new capacity came online. Further
growth will be driven by our Malaysian fan blade repair centre which gained
its Civil Aviation Administration of China (CAAC) certification in 2023,
opening up the rapidly expanding China and Asia markets. The development of
our new state-of-the-art dedicated engine component repair centre in El Cajon,
California (US), is progressing well and remains on target to open in 2024.
It was also a positive year operationally for Engines. A breakthrough
quality target of 'zero escapes' in the core Engines business (issues reaching
our customers from our sites) was successfully achieved throughout 2023. The
division also stayed ahead of OEM production with reliable customer
deliveries, despite supply chain issues that impacted our own production flows
and productivity. Further progress continued during the year with our
digital initiatives, including our internally developed machine and factory
connectivity programme called CO-PILOT. These initiatives, coupled with
ongoing Lean implementation across the global site footprint, will deliver
further quality, delivery and productivity gains going forward. In
addition, the US East Coast sites consolidation and Nordics restructuring
programmes have progressed well, providing greater financial benefits than
originally envisaged.
The development of our unique additive fabrication business, using laser wire
deposition in conjunction with other technologies, has accelerated
significantly. This innovative and proprietary new manufacturing approach
enables complex engine parts to be made with less reliance on complex and
large forgings and castings - many of which are currently capacity
constrained. Our additive fabrication approach is gaining significant
traction with Engine OEMs as they look to alternative manufacturing methods
which can provide additional sources of supply with shorter lead times, lower
costs and more sustainable processes. Current subtractive manufacturing
typically results in around 80% of material being machined away to achieve the
final product. By contrast, additive fabrication effectively builds and
welds parts in near final form thereby minimising raw material waste, energy
use and shipping emissions. Our commitment to this breakthrough proprietary
technology is illustrated by a £50 million investment in a low rate
production additive fabrication plant in Trollhättan, Sweden, which included
£12 million funding support by the Swedish Energy Agency's Industriklivet
initiative. Following a successful certification process we are now shipping
the initial additive fabrication engine components to customers. The future
opportunities are extremely promising and they over time include manufacturing
more parts on existing engines, as well as development parts for next
generation engines such as CFMI RISE.
OUTLOOK
The Engines division is extremely well placed to drive profitability
throughout this decade and beyond. The division has OEM-level capability,
strategic partnerships with all major engine OEMs, a lucrative and diverse
RRSP portfolio, and GKN proprietary breakthrough technologies that are
becoming increasingly valuable to the industry at large.
To unlock the potential of the division we have a clear and well-established
path for delivering profitable growth based on: increasing RRSP portfolio
contribution; focused Engines growth initiatives including repairs and
additive fabrication; and ongoing business improvements. In the context of
robust demand, partially tempered by ongoing supply chain issues, we expect to
deliver strong revenue progress in 2024, led by aftermarket growth, and our
target 2025 adjusted operating margin of 28% to be achieved one year early.
We are also increasingly confident that Engines will deliver >30% margins
beyond 2025.
STRUCTURES
Strong growth trajectory, exceeding pre-pandemic profitability
Structures adjusted results 2023 2022
£m £m
Revenue 2,157 1,919
Operating profit 110 24
Operating profit margin 5.1% 1.3%
EBITDA 201 115
EBITDA margin 9.3% 6.0%
Structures had a strong year delivering adjusted operating margins of 5.1%,
well ahead of our original plan of 3%. This performance was driven by
expected volume growth as civil production ramped up, as well as the positive
impact of our extensive business improvement actions reading through strongly,
especially in the second half. These business improvements include good
progress on rationalising our global site footprint, commercial renegotiations
and operational gains. The division is increasingly design led with
excellent customer positions, and benefits from technological expertise well
suited for next generation aircraft, expected to drive long-term growth. The
division remains firmly on track to achieve its 9% adjusted operating margin
target by 2025.
The positive trajectory for Structures is underpinned by strong demand. In
civil, order backlogs are at record levels with A320 order slots now being
booked in 2030 and beyond. The rate of production ramp-up is currently being
constrained by ongoing industry wide supply chain issues, and volumes are set
to increase structurally as capacity expands in the years ahead. The
narrowbody ramp-up is evident and is extending to widebody production rates as
long-haul travel recovers. In defence, global spending continued its rapid
expansion in 2023 due to geo-political tensions and as budgetary plans
announced in the wake of Russia's 2022 Ukraine invasion started to positively
impact. Total global defence spending has risen to US$2.2 trillion in 2023,
an increase of 9% on the prior year (source: IISS). Sustained growth is set
to continue with positive book-to-bill ratios expected for all the leading
Defence primes. We have an established technology position on all major
civil and defence platforms, so are well placed to capture market growth in
the years ahead.
In 2023 Structures revenue grew 18%(3) versus prior year. Civil growth of
28%(3) reflected higher OEM production rates and Defence was flat(3) due to
increased demand and shipments offset by strategic exit of business.
Divisional adjusted operating margins improved by 3.8 percentage points to
5.1% driven by volume increases, improved pricing and operational
improvements, plus portfolio moves in Defence. Our focused work on improving
the quality of our Defence portfolio through renegotiation or exit continues
at pace and we are now ahead of plan. In total 42% of core contracts are now
sustainably priced, more than double the proportion at the end of 2022. We
are increasingly confident of achieving the target 85% of the portfolio being
sustainably priced by 2025.
Over the course of 2023 we achieved a number of significant commercial
milestones within our Structures division. This included successes with Airbus
on establishing electrical wiring interconnectivity systems ('EWIS')
capability in Mexico for the A220, as well as delivering the final trailing
edge in the Wing of Tomorrow development programme ('WOT'). The division also
delivered its 1000(th) Honeywell HTF Nacelle and its 600(th) Gulfstream G650
Empennage with production rates reaching an all-time high. Our position at
the forefront of the next generation Air Mobility Market was reinforced
through partnerships with the leading players Joby, Archer and Supernal.
This is a market in its early stage but one where we are making good progress
and see multiple opportunities while limiting our financial risk.
Operationally, Structures made good progress and has momentum to deliver
further gains. Our top priority is always safety and quality, and during 2023
the Civil business achieved a landmark of zero lost time accidents and the
wider Structures division delivered a 43% reduction in quality 'escapes'
(issues reaching the customer) versus prior year. Our deliveries also
ramped-up strongly despite the ongoing industry supply chain challenges with
arrears in the division 34% lower than 2022. The extensive restructuring
programme within Structures is nearing completion with the successful
consolidation and restructuring of The Netherlands' footprint down from six
sites to two multiple technology campuses in Hoogeveen and Papendrecht. In the
US and Mexico the site footprint has been rationalised to create three centres
of excellence at Chihuahua, Orangeburg and Wellington. Going forward, we
expect to deliver further quality, productivity and cost improvements as
volumes increase within our restructured and leaner operating base.
More broadly, our new COMAC and AVIC joint venture ('JV') site in Jingjiang,
China remains under construction with production expected from Q2 2024 and
with the first work packages already agreed. China is set to become the
largest aviation market by 2040, opening 150 new airports by 2035, and this JV
unlocks the path to this promising and important indigenous market. Our work
on focusing the Defence portfolio has continued and we divested the non-core
Fuel Systems business on 1 March 2024.
We are also positioning Structures to play a valuable and profitable role in
future aircraft developments. This is built upon GKN Aerospace's expertise in
thermoplastics, EWIS and lightweight aerostructures, as well as breakthrough
additive manufacturing methods that can accelerate product development. During
2023 our technological leadership was evidenced through our collaboration with
Embraer for a hydrogen flight demonstrator, with Pratt & Whitney Canada
for a hybrid electric flight demonstrator, and by completing the first high
voltage electrical harness for the Lilium jet. Our Defence business is well
positioned for design and build content on the Global Combat Air Programme
with the UK, Italy and Japan, and with two leading OEMs for uncrewed
systems. We also remain well placed on future rotorcraft programmes in the
US (Future Vertical Lift) and EU (European Next Generation Rotorcraft).
To further support the Structures positioning in next generation technology,
and the pursuit of Net Zero, a new Global Technology Centre ('GTC') opened in
Hoogeveen, Netherlands, with a particular focus on lightweight thermoplastics
and high voltage wiring systems. This new centre complements our established
GTCs across the wider Group in Bristol (UK), Trollhättan (Sweden) and Fort
Worth, Texas (US).
OUTLOOK
Structures has an embedded position as a Super Tier One partner to the world's
leading aircraft OEMs, coupled with unrivalled technical expertise. The
division is therefore well placed to benefit from civil ramp-up, defence
spending and new platforms, and the shift to sustainable aviation over time.
Our design to build business model and increasingly focused portfolio is set
to deliver high quality earnings.
For 2024 we expect to make revenue progress reflecting market growth.
However, reported revenue is likely to be flat versus prior year due to
short-term destocking at some Civil customers (caused by their supply chain
challenges), the planned exit of non-core work previously outlined, and
the disposal of the Fuel Systems business. For the full year the division
is expected to make further progress in expanding adjusted operating margins
and we expect the year to have second half seasonal weighting as usual.
Looking forward, we are increasingly confident of achieving our 2025
adjusted operating margin target of 9%.
FINANCE DIRECTOR'S REVIEW
The year ended 31 December 2023 has seen a significant transformation for the
Melrose Group.
On 20 April 2023 the demerger of the GKN Automotive, GKN Powder Metallurgy and
GKN Hydrogen group of businesses ("Dowlais") completed. Dowlais contributed
approximately two thirds of the adjusted revenue and adjusted operating profit
of the Group in 2022 and therefore the demerger, and necessary treatment of
Dowlais as discontinued, has a material impact on the presentation of these
Consolidated Financial Statements.
Following the demerger of Dowlais, it was deemed appropriate to announce a
change to the Group's strategy from 'Buy, Improve, Sell', which has served
shareholders well since the first Melrose acquisition in 2005, to being purely
an aerospace business that reports as two separate operating segments, namely
Engines and Structures, alongside the corporate cost centre.
MELROSE GROUP RESULTS - CONTINUING OPERATIONS
Statutory results:
The statutory IFRS results for continuing operations are shown on the face of
the Income Statement and show revenue of £3,350 million (2022: £2,954
million), an operating profit of £57 million (2022: loss of £270 million)
and a loss before tax of £8 million (2022: £328 million). The diluted
earnings per share ("EPS"), calculated using the weighted average number of
shares in issue during the year of 1,405 million (2022: 1,406 million), were
0.1 pence (2022: loss of 16.3 pence).
Adjusted results:
The adjusted results are also shown on the face of the Income Statement.
They are adjusted to exclude certain items which are significant in size or
volatility or by nature are non-trading or non-recurring, or are items
released to the Income Statement that were previously a fair value item booked
on an acquisition. It is the Group's accounting policy to exclude these
items from the adjusted results, which are used as an Alternative Performance
Measure ("APM") as described by the European Securities and Markets Authority
("ESMA"). APMs used by the Group are defined in the glossary to the
Consolidated Financial Statements.
The Melrose Board considers the adjusted results to be an important measure
used to monitor how the businesses are performing as they achieve consistency
and comparability between reporting periods when all businesses are held for
the complete reporting period.
The adjusted results for the year ended 31 December 2023 show an operating
profit of £390 million (2022: £147 million) and a profit before tax of £331
million (2022: £62 million). Adjusted diluted EPS, calculated using the
weighted average number of shares in issue in the year of 1,405 million (2022:
1,406 million), were 18.7 pence (2022: 4.1 pence).
The following table shows the adjusted results for the year ended 31 December
2023 split by reporting segment:
Engines Structures Aerospace Corporate Total
£m £m £m £m £m
Revenue 1,193 2,157 3,350 - 3,350
Operating profit/(loss) 310 110 420 (30) 390
Operating margin 26.0% 5.1% 12.5% n/a 11.6%
Revenue for Engines of £1,193 million (2022: £1,035 million) shows constant
currency growth of 16% over 2022, with adjusted operating profit of £310
million (2022: £162 million) giving an operating margin of 26.0% (2022:
15.7%), an increase of 10.3 percentage points.
Revenue for Structures of £2,157 million (2022: £1,919 million) shows
like-for-like (excluding revenue exited in closing businesses) constant
currency growth of 18% over 2022, (12% including revenue exited in closing
businesses), with adjusted operating profit of £110 million (2022: £24
million) giving an operating margin of 5.1% (2022: 1.3%), an increase of 3.8
percentage points.
Corporate costs of £30 million (2022: £39 million) included £29 million
(2022: £36 million) of operating costs and £1 million (2022: £3 million) of
costs relating to a divisional cash-based long-term incentive plan.
The performances of each of the Aerospace reporting segments are discussed in
the CEO's Review.
RECONCILIATION OF STATUTORY RESULTS TO ADJUSTED RESULTS
The following table reconciles the Group statutory operating profit/(loss) to
adjusted operating profit:
Continuing operations: 2023 2022
£m £m
Statutory operating profit/(loss) 57 (270)
Adjusting items:
Amortisation of intangible assets acquired in business combinations 260 260
Restructuring costs 149 90
Equity-settled compensation scheme charges 38 15
Currency movements in derivatives and movements in associated financial assets (114) 79
and liabilities
Other - (27)
Adjustments to statutory operating profit/(loss) 333 417
Adjusted operating profit 390 147
Adjusting items to the statutory operating profit/(loss) are consistent with
prior years and include:
· The amortisation charge on intangible assets acquired in business
combinations of £260 million (2022: £260 million), which is excluded from
adjusted results due to its non-trading nature and to enable comparison with
companies that grow organically. However, where intangible assets are
trading in nature, such as computer software and development costs, the
amortisation is not excluded from adjusted results.
· Costs associated with restructuring projects in the year totalling
£149 million (2022: £90 million), including £59 million (2022: £11
million) of losses incurred in closing businesses within the Group. These
are shown as adjusting items due to their size and non-trading nature.
There are three significant ongoing multi-year restructuring programmes,
impacting multiple sites across the Engines and Structures divisions, two of
which include European footprint consolidations, and one significant
multi-site restructuring programme in North America. These programmes
incurred a combined charge, excluding losses, of £62 million in the year.
Since commencement, the cumulative charges, excluding losses, on these three
restructuring programmes to 31 December 2023 has been £217 million (31
December 2022: £155 million), with approximately 35% relating to the two
significant European programmes and approximately 65% in North America.
As at 31 December 2023, actions to complete the European programmes, on
average, are approximately 95% complete. During the year, the North America
multi-site restructuring programme has been expanded and is now approximately
70% complete. In addition to the remaining charges to be incurred on these
projects, £37 million is included in restructuring provisions at 31 December
2023 to be settled in cash over the next two years.
Restructuring costs during the year also included charges of £12 million
(2022: £nil) relating to changes made within the Melrose corporate cost
centre following the announced change to the Group's ongoing strategy. These
include the costs of merging the Melrose corporate cost function with the
previously separate Aerospace division head office team. These restructuring
actions reshape the corporate cost centre to serve as an ongoing pureplay
aerospace business.
· The charge for the equity-settled compensation schemes of £38
million (2022: £15 million), which includes a charge to the accrual for
employer's tax payable of £28 million (2022: credit of £1 million). This
is excluded from adjusted results due to its size and volatility. The shares
that would be issued, based on the scheme's current valuation at the end of
the year, are included in the calculation of the adjusted diluted earnings per
share, which the Board considers to be a key measure of performance.
· Movements in the fair value of derivative financial instruments
(primarily forward foreign currency exchange contracts), where hedge
accounting is not applied, along with foreign exchange movements on the
associated financial assets and liabilities, entered into within the
businesses to mitigate the potential volatility of future cash flows on
long-term foreign currency customer and supplier contracts. This totalled a
credit of £114 million (2022: charge of £79 million) in the year and is
shown as an adjusting item because of its volatility and size.
· Other adjusting items, net to £nil (2022: net credit of £27
million), which included a charge of £3 million in respect of acquisition and
disposal costs, net of a credit of £3 million relating to the release of fair
value items in the year, where items have been resolved for more favourable
amounts than first anticipated at acquisition. The net release of fair value
items is shown as an adjusting item, avoiding positively distorting adjusted
results from items booked on acquisition. The prior year also includes the
profit on disposal of two corporate properties.
The following table shows the allocation of adjusting items, described above,
by reporting segment:
Engines Structures Corporate Total
£m £m £m £m
Statutory operating profit/(loss) 147 (130) 40 57
Adjusting items 163 240 (70) 333
Adjusted operating profit/(loss) 310 110 (30) 390
FINANCE COSTS AND INCOME - CONTINUING OPERATIONS
Statutory results:
Total net finance costs in the statutory IFRS results for the year ended 31
December 2023 were £65 million (2022: £58 million).
Adjusted results:
Total net finance costs in the adjusted results in the year ended 31 December
2023 were £59 million (2022: £85 million), which included net interest on
external bank loans, bonds, overdrafts and cash balances of £48 million
(2022: £72 million).
Net finance costs in adjusted results also included: a £4 million (2022: £10
million) amortisation charge relating to the arrangement costs of raising the
Group's current bank facility; an interest charge on net pension liabilities
of £1 million (2022: credit of £1 million); a charge on lease liabilities of
£5 million (2022: £3 million); and a charge for the unwind of discounting on
long-term provisions of £1 million (2022: £1 million).
Adjusting items:
Adjusting items, within finance costs and income, total a net charge of £6
million (2022: net credit of £27 million).
Adjusting items include a £13 million gain (2022: £24 million) following the
settlement of a portion of the 2032 bond, acquired with GKN, a £17 million
charge (2022: £nil) in respect of the proportion of the Group's net debt
strategically allocated to Dowlais at the start of the year and a £2 million
charge (2022: £nil) in respect of the write off of unamortised bank fees when
the existing bank facilities at the time of the demerger were repaid.
In the prior year, adjusting items within finance costs and income also
included a credit of £3 million relating to the fair value changes on
cross-currency swaps.
DISCONTINUED OPERATIONS
In accordance with IFRS 5, the results of Dowlais are shown as discontinued
for the period up to demerger in 2023 and are restated to be shown as
discontinued operations for the prior year.
These businesses contributed £1,582 million to revenue and achieved statutory
operating profit of £32 million for the period of the year under ownership in
2023.
SHARE CONSOLIDATION, SHARE BUYBACK AND NUMBER OF SHARES IN ISSUE
A one for three share consolidation was performed by the Group on the eve of
the demerger of Dowlais, which resulted in the number of shares in issue
reducing from 4,054 million to 1,351 million. Shareholders then received one
Dowlais share for every post-consolidation Melrose share they held. In
accordance with IAS 33, the one for three consolidation is applied to all
periods in these Consolidated Financial Statements.
The Group commenced a share buyback programme on 2 October 2023, and made
market purchases of existing ordinary shares in issue in the capital of the
Company. At 31 December 2023, 18 million ordinary shares had been purchased
at an average price per share of 494 pence. These ordinary shares are being
held in treasury and the number of ordinary shares in issue has reduced by
1.3%, from 1,351 million to 1,333 million at 31 December 2023.
The weighted average number of shares used for basic earnings per share
calculations in the year ended 31 December 2023 was 1,349 million (2022: 1,406
million), and when including the number of shares expected to be issued from
the Melrose equity-settled share plan, the weighted average number of shares
used for diluted earnings per share, was 1,405 million (2022: 1,406 million).
TAX - CONTINUING OPERATIONS
The statutory results for continuing operations show a tax credit of £9
million (2022: £99 million) which arises on a statutory loss before tax on
continuing operations of £8 million (2022: £328 million), a statutory tax
rate of 113% (2022: 30%). The effective rate on the adjusted profit before tax
for the year ended 31 December 2023 was 20.5% (2022: 6.5%).
The statutory tax rate is higher than the adjusted tax rate because the
intangible asset amortisation and certain other adjusting items generate
adjusting tax credits at rates higher than 21%, and these are applied to a
small statutory loss before tax in the year.
The Group has £747 million (31 December 2022: £856 million) of deferred tax
assets on tax losses, retirement benefit obligations and other temporary
differences. These are offset by deferred tax liabilities on intangible
assets of £479 million (31 December 2022: £923 million) and £223 million
(31 December 2022: £179 million) of other deferred tax liabilities. Where
they arise in the same territory, deferred tax assets and liabilities must be
offset, resulting in deferred tax assets of £527 million (31 December 2022:
£373 million) and deferred tax liabilities of £482 million (31 December
2022: £619 million) being shown on the Balance Sheet at 31 December 2023.
Most of the tax losses and other deferred tax assets will generate future cash
tax savings, whereas the deferred tax liabilities on intangible assets are not
expected to give rise to cash tax payments.
Net cash tax paid in the year ended 31 December 2023 by continuing operations
was £17 million (2022: £8 million), 5.1% (2022: 12.9%) of adjusted profit
before tax.
CASH GENERATION AND MANAGEMENT
Adjusted free cash flow for the continuing Group in the year ended 31 December
2023 was an inflow of £113 million (2022: outflow of £35 million), after net
interest and tax spend of £82 million (2022: £89 million), but before
restructuring spend of £125 million (2022: £53 million).
Free cash flow pre-interest and tax was an inflow of £70 million (2022: £1
million), which calculated as a percentage of revenue, gives a free cash flow
margin of 2.1% (2022: 0.0%).
An analysis of free cash flow is shown in the table below:
2023 2022
£m £m
Continuing operations:
Adjusted operating profit 390 147
Depreciation and amortisation 142 145
Lease obligation payments (32) (29)
Positive non-cash impact from loss-making contracts (23) (23)
Working capital movements:
Inventory (10) (88)
Receivables and payables (136) (60)
Adjusted operating cash flow (pre-capex) 331 92
Net capital expenditure (102) (72)
Defined benefit pension contributions - ongoing (22) (23)
Restructuring (125) (53)
Net other (12) 57
Free cash flow pre-interest and tax 70 1
Free cash flow pre-interest and tax margin 2.1% -
Net interest and net tax paid (82) (89)
Free cash flow (12) (88)
Adjusted free cash flow 113 (35)
Working capital movements in the continuing Group totalled an outflow of £146
million for the year ended 31 December 2023, being an outflow of £10 million
in inventory and £136 million from receivables and payables combined. The
working capital performance in the first half was consistent with revenue
growing by 15% in that period, but in the second half the performance was
stronger, as expected, with an inventory inflow of £43 million and with
combined receivables and payables only growing by £20 million, 4%, despite
Group revenue growing by c.12% in the second half of the year.
Capital expenditure in the year ended 31 December 2023 was £102 million
(2022: £72 million). Capital expenditure represented 0.9x (2022: 0.6x)
depreciation of owned assets.
Restructuring spend in the year was £125 million (2022: £53 million).
In the continuing Group, net interest paid in the year was £65 million (2022:
£81 million), net tax payments were £17 million (2022: £8 million) and
ongoing contributions to defined benefit pension schemes were £22 million
(2022: £23 million).
The movement in net debt (as defined in the glossary to the Consolidated
Financial Statements) is summarised as follows:
£m
Opening net debt (1,139)
Net cash outflow from Dowlais businesses to date of demerger (54)
Reduction in net debt following the demerger of Dowlais 885
2022 second interim dividend paid to shareholders (61)
Demerger related costs and pension buy-in (118)
Proforma opening net debt (487)
Free cash flow of the continuing Group (12)
2023 interim dividend paid to shareholders (20)
Buyback of own shares (93)
FX and other non-cash movements 40
Net debt at 31 December 2023 at closing exchange rates (572)
Proforma opening net debt of £487 million for the continuing Melrose Group is
calculated after adjusting the closing net debt at 31 December 2022, of
£1,139 million, for: the payment of demerger related costs of £62 million;
bank facility arrangement fees of £11 million; the cost of fully securing the
benefits of all members of the GKN UK Pension Scheme Number 4 in advance of an
expected buy-out process, of £45 million; the second interim dividend for the
year ended 31 December 2022 of £61 million; and the net debt that Dowlais
inherited on inception.
Group net debt at 31 December 2023, translated at closing exchange rates
(being US$1.28 and €1.15), was £572 million (31 December 2022: £1,139
million), after a free cash outflow from the continuing Group of £12 million,
described above. Movements in Group net debt also included the payment of the
2023 interim dividend to shareholders of £20 million, £93 million spent
buying back shares in the market, net favourable foreign exchange movements of
£24 million and other non-cash movements of £16 million.
For bank covenant purposes the Group's net debt is calculated at average
exchange rates for the previous twelve months, to better align the calculation
with the currency rates used to calculate profits, and was £584 million.
The Group net debt leverage on this basis at 31 December 2023 was 1.1x EBITDA
compared to a proforma opening leverage of 1.8x EBITDA when using proforma net
debt at demerger of £487 million, described above (31 December 2022: reported
1.4x EBITDA).
ASSETS AND LIABILITIES AND IMPAIRMENT REVIEW
The summarised Melrose Group assets and liabilities are shown below:
2023 2022
£m £m
Goodwill and intangible assets acquired with business combinations 3,106 6,508
Tangible fixed assets, computer software and development costs 1,022 2,937
Equity accounted investments 7 435
Net working capital 475 343
Net retirement benefit obligations (99) (488)
Provisions (286) (611)
Deferred tax and current tax 31 (358)
Lease obligations (192) (366)
Net other 75 (93)
Total 4,139 8,307
The significant reduction in the Group's net assets in the year relates
primarily to the assets and liabilities demerged with Dowlais.
The Group's goodwill has been tested for impairment, and in accordance with
IAS 36 "Impairment of assets" the recoverable amount has been assessed as
being the higher of the fair value less costs to sell and the value in use.
The Board is comfortable that no impairment is required in respect of the
valuation of goodwill in its businesses as at 31 December 2023.
The assets and liabilities shown above are funded by:
2023 2022
£m £m
Net debt (572) (1,139)
Equity (3,567) (7,168)
Total (4,139) (8,307)
( )
Net debt shown in the table above is defined in the glossary to the
Consolidated Financial Statements.
PROVISIONS
Total provisions at 31 December 2023 were £286 million (31 December 2022:
£611 million).
The following table details the movement in provisions in the year:
Total
£m
Provisions at 1 January 2023 611
Continuing businesses:
Net charge in the year 137
Spend against provisions (107)
Utilisation of loss-making contract provision (23)
Other (12)
Discontinued businesses:
Movement in provisions in Dowlais in the period to demerger 24
Demerger of Dowlais (344)
Provisions at 31 December 2023 286
The net charge to the Income Statement in the year for continuing operations
was £137 million, and included £78 million relating to restructuring
activities and a £20 million loss making contract provision charge at a
closing site as operations wind down. In addition, the net charge includes a
£28 million charge relating to employer's tax payable on equity-settled
compensation schemes. These sizeable items are shown as adjusting items and
are included in the adjusting items section discussed earlier in this review.
During the year, £23 million was utilised against loss-making contract
provisions in Aerospace and £107 million of cash was spent against provisions
with £79 million relating to restructuring activities.
Net provision movements relating to property, environmental & litigation
and warranty in Aerospace were not material in the year.
Other movements in provisions, in continuing operations, included £4 million
of provisions classified as held for sale as at 31 December 2023, relating to
the contractually agreed sale of a non-core business in the Structures segment
that completed on 1 March 2024 and £8 million relating to foreign exchange
movements.
The net movement on provisions within Dowlais in the period up to demerger was
£24 million, with £344 million of provisions leaving the Group at the date
of demerger.
PENSIONS AND POST-EMPLOYMENT OBLIGATIONS
Melrose operates a number of defined benefit pension schemes and retiree
medical plans across the Group, accounted for using IAS 19 Revised: "Employee
Benefits".
The values of the Group plans were updated at 31 December 2023 by independent
actuaries to reflect the latest key assumptions and are summarised as follows:
Liabilities Accounting deficit
Assets £m £m
£m
GKN UK Group pension scheme - Number 1 632 (692) (60)
GKN UK Group pension scheme - Number 4 438 (438) -
Other Group pension schemes 48 (87) (39)
Total Group pension schemes 1,118 (1,217) (99)
At 31 December 2023, following the demerger of Dowlais, the total plan assets
of Melrose Group's defined benefit pension plans has reduced to £1,118
million (31 December 2022: £1,941 million) and total plan liabilities to
£1,217 million (31 December 2022: £2,429 million), a net deficit of £99
million (31 December 2022: £488 million).
The GKN UK Group Pension Schemes (Numbers 1 and 4) are the most significant
pension plans remaining in the Group, and are closed to new members and to the
accrual of future benefits for current members.
At 31 December 2023, the GKN UK Group Pension Scheme Number 1 had gross assets
of £632 million (31 December 2022: £628 million), gross liabilities of £692
million (31 December 2022: £667 million) and a net deficit of £60 million
(31 December 2022: £39 million).
During the year ended 31 December 2023, the Group commenced a process to
buy-out the GKN UK Group Pension Scheme Number 4. The first stage of the
process, purchasing a buy-in policy which fully secures all members' benefits,
was completed in the year, resulting in assets and liabilities of £438
million being recorded equally at 31 December 2023. The buy-out process is
expected to complete in the first half of 2024, when assets and liabilities
will leave the Group and cease being shown in the Balance Sheet.
Other pension schemes in the Group include US pension plans which are
generally funded schemes and closed to new members. At 31 December 2023,
these US pension plans had a net deficit of £25 million.
In total, ongoing contributions to the Group defined benefit pension plans and
post-employment medical plans in the year ended 31 December 2023 were £22
million and are expected to be a similar amount in 2024.
A summary of the assumptions used are shown in note 10 to this Prelimanary
Announcement.
FINANCIAL RISK MANAGEMENT
The financial risks the Group faces continue to be considered and policies are
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 Group's net debt position at 31 December 2023 was £572 million (31
December 2022: £1,139 million).
The Group's committed bank facilities were refinanced during the year. The new
facilities consist of a multi-currency term loan denominated US$300 million
and €100 million, and a US$250 million revolving credit facility, both of
which mature in April 2026. In addition, the Group also entered into
multi-currency revolving credit facilities totalling US$690 million, £300
million and €300 million that initially mature in April 2026, but with the
potential to be extended for two additional one-year periods at the Company's
option. Details of the new facilities and amounts borrowed as at 31 December
2023 are shown below:
Local currency £m
Size Drawn Headroom Headroom
Term loan:
USD 300 300 - -
EUR 100 100 - -
Revolving credit facility:
USD 940 298 642 503
GBP 300 1 299 299
EUR 300 22 278 241
Total headroom 1,043
At 31 December 2023, the term loan was fully drawn and there were drawings of
US$298 million, £1 million and €22 million on the revolving credit
facilities. Applying the exchange rates at 31 December 2023, the headroom
equated to £1,043 million. There are also a number of uncommitted overdraft,
guarantee and borrowing facilities made available to the Group.
In addition to the headroom on the multi-currency committed revolving credit
facility, cash, deposits and marketable securities, net of overdrafts, in the
Group amounted to £57 million at 31 December 2023 (31 December 2022: £292
million).
At the start of the year the Group held capital market borrowings with an
outstanding notional value of £130 million from an original £300 million
bond, issued in May 2017 and due to mature in May 2032. In December 2023, an
agreement was reached with certain remaining bondholders that resulted in
£120 million of the outstanding nominal value being bought back and cancelled
for a total cost of £109 million (excluding accrued interest). This
represented a gain of £13 million after associated costs and the release of a
fair value adjustment of £2 million on the bond, recognised on acquisition of
GKN. This gain has been recognised as an adjusting item within finance income
in the Consolidated Income Statement.
As at 31 December 2023, the capital market borrowings held by the Group
consisted of £10 million of the original £300 million bond due to mature in
May 2032, with a current coupon of 4.625%.
The committed bank funding has two financial covenants, being a net debt to
adjusted EBITDA covenant and an interest cover covenant, both of which are
tested half-yearly in June and December, with the exception that the first
testing date for the interest cover covenant will be 30 June 2024.
The net debt to adjusted EBITDA covenant test level is set at 3.5x and, as at
31 December 2023, the Group net debt leverage was 1.1x, affording comfortable
headroom.
The interest cover test is set at 4.0x for the remaining term of the bank
facility.
A limited number of Group trade receivables are subject to non-recourse
factoring and customer supply chain finance arrangements. As at 31 December
2023, these amounted to £268 million (31 December 2022: £325 million).
In addition, some suppliers have access to utilise the Group's supplier
finance programmes, which are provided by a number of the Group's banks. As at
31 December 2023 there were drawings on these facilities of £86 million (31
December 2022: £200 million). There is no cost to the Group for providing
these programmes as the cost is borne by the suppliers. These programmes allow
suppliers to choose whether they want to accelerate the payment of their
invoices by the financing banks, at a low interest cost, based on the credit
rating of the Group as determined by the financing banks. If the Group exited
these arrangements or the banks ceased to fund the programmes there could be a
potential impact of up to £42 million (31 December 2022: £94 million) on the
Group's cash flows. The risk of this happening is considered remote as the
Group has extended the number of banks that provide this type of financing to
ensure there is not a significant exposure to any one bank.
Finance cost risk management
In addition to the fixed coupon payable under the remaining £10 million bond
discussed above, the Group uses financial derivatives to fix a portion of the
interest cost on its committed bank facilities.
The policy of the Board is to fix approximately 70% of the interest rate
exposure on the Group's committed bank borrowings to align with the maturity
of its debt facilities. Following the demerger, the Group fixed an appropriate
amount of debt by currency up to the initial maturity date of the Group's new
bank facilities. The maximum weighted average rates, excluding the bank
margin, the Group will pay on the fixed portions of its US Dollar and Euro
bank debt are 3.6% and 3.0% respectively.
The bank margin on the bank facilities depends on Group leverage and were as
follows:
31 Dec 2023 31 Dec 2022
Facility: Margin Range Margin Range
Term Loan 1.30% 0.9% - 2.2% 0.75% 0.75% - 2.0%
Revolving Credit Facilities 1.30% - 1.55% 0.9% - 2.4% 0.75% 0.75% - 2.0%
The Group's cost of drawn debt for the next 12 months is currently expected to
be approximately 5.4%.
Exchange rate risk management
The Group trades in various countries around the world and is exposed to
movements in a number of foreign currencies. Following the demerger and
subsequent update to the Group's strategy to be a pureplay aerospace business
going forward, the exposure to foreign exchange movements related to a
disposal now no longer represents a material risk for the Group.
The Group therefore carries exchange rate risk that can be categorised into
two types: transaction and translation risk, as described in the paragraphs
below. The Group's 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 customer or purchases from suppliers in a different
currency to the underlying functional currency of the relevant business. The
Group's policy is to review transactional foreign exchange exposures, and
place necessary hedging contracts, quarterly on a rolling basis. To the
extent the cash flows associated with a transactional foreign exchange risk
are committed, the Group will hedge 100% at the time the cash flow becomes
committed. For forecast and variable cash flows, the Group hedges a proportion
of the expected cash flows, with the percentage being hedged lowering as the
time horizon lengthens. The Group hedges on a sliding scale, typically hedging
around 90% of foreign exchange exposures expected over the next twelve months,
with the percentage decreasing by approximately 10 percentage points for each
subsequent year. This policy does not eliminate the cash risk but does bring
some certainty to it.
The translation rate risk is the effect on the Group results in the period due
to the movement of exchange rates used to translate foreign results into
Sterling from one period to the next. No specific exchange instruments are
used to protect against the translation risk because it is a non-cash risk to
the Group, until foreign currency is subsequently converted to Sterling.
However, the Group utilises its multi-currency banking facilities and
cross-currency swaps, where relevant, to maintain an appropriate mix of debt
in each currency. The hedge of having debt drawn in these currencies funding
the trading units with US Dollars or Euro functional currencies protects
against some of the Balance Sheet and banking covenant translation risk.
Exchange rates for currencies most relevant to the Group in the year were:
US Dollar Closing rate
Average rate
2023 1.24 1.28
2022 1.24 1.21
Euro
2023 1.15 1.15
2022 1.17 1.13
A 10 percent strengthening of the major currencies within the Group, if this
were to happen in isolation against all other currencies, would have the
following impact on the re-translation of adjusted operating profit into
Sterling:
USD EUR
Increase in adjusted operating profit - £ million 38 9
% impact on adjusted operating profit 7% 2%
The impact from transactional foreign exchange exposures is not material in
the short term due to hedge coverage being approximately 90%.
A 10 percent strengthening in either the US Dollar or Euro would have the
following impact on debt as at 31 December 2023:
USD EUR
Increase in debt - £ million 50 12
% impact on debt 8% 2%
Contract and warranty risk management
Under Melrose management a suitable bid and contract management process exists
in the businesses, which includes thorough reviews of contract terms and
conditions, contract-specific risk assessments and clear delegation of
authority for approvals. These processes aim to ensure effective management
of risks associated with complex contracts. The financial risks connected
with contracts and warranties include the consideration of commercial, legal
and warranty terms and their duration, which are all considered carefully by
the businesses and Melrose centrally before being entered into.
Commodity cost risk management
The cumulative expenditure on commodities is important to the Group and the
risk of base commodity costs increasing is mitigated, wherever possible, by
passing on the cost increases to customers or by having suitable purchase
agreements with suppliers which fix the price over a certain period. These
risks are also managed through sourcing policies, including the use of
multiple suppliers, where possible, and procurement contracts where prices are
agreed in advance to limit exposure to price volatility.
GOING CONCERN
As part of their consideration of going concern, the Directors have reviewed
the Group's future cash forecasts and projections, which are based on both
market and internal data and recent past experience.
The Directors recognise the challenges in the current economic environment,
including challenges in supply chains and geopolitical risks. The Group is
actively managing the associated impacts on trading through a sharp focus on
pricing, productivity and costs. In addition, the Group's cash flow forecasts
consider any impacts from further economic factors such as high interest
rates.
The Group has modelled a reasonably possible downside scenario against these
future cash forecasts and throughout this scenario the Group would not breach
any of the revised financial covenants and would not require any additional
sources of financing.
The macroeconomic environment remains uncertain and volatile and the impacts
of the economic factors such as inflation, high interest rates, geopolitical
conflict and challenges in supply chains could be more prolonged or severe
than that which the Directors have considered in the Group's reasonably
possible downside scenario.
Considering the Group's current committed bank facility headroom, its access
to liquidity, and the sensible level of bank covenants in place with lending
banks, the Directors consider it appropriate that the Group can manage its
business risks successfully and adopt a going concern basis in preparing these
Consolidated Financial Statements.
Geoffrey Martin
Group Finance Director
7 March 2024
CAUTIONARY STATEMENT
This announcement contains statements that are, or may be deemed to be
"forward-looking statements". These forward-looking statements may be
identified by the use of forward-looking terminology, including the terms
"believes", "estimates", "plans", "projects", "anticipates", "potential",
"predicts", "expects", "intends", "may", "will", "can", "likely" or "should"
or, in each case, their negative or other variations or comparable
terminology, or by discussions of strategy, plans, objectives, goals, future
events or intentions. Forward-looking statements may and often do differ
materially from actual results. Any forward-looking statements reflect the
Company's current view with respect to future events and are subject to risks
relating to future events and other risks, uncertainties and assumptions
relating to the business, results of operations, financial position,
liquidity, prospects, growth and strategies of the Group. Forward-looking
statements speak only as of the date they are made.
In light of these risks, uncertainties and assumptions, the events in the
forward-looking statements may not occur or the Company's or the Group's
actual results, performance or achievements of the Company might be materially
different from the expected results, performance or achievements expressed or
implied by such forward-looking statements. Forward-looking statements
contained in this announcement speak only as at the date of this
announcement. The Company expressly disclaims any obligation or undertaking
to update these forward-looking statements contained in this announcement to
reflect any change in their expectations or any change in events, conditions,
or circumstances on which such statements are based unless required to do so
by applicable law, the Listing Rules and the Disclosure Guidance and
Transparency Rules of the FCA or Regulation (EU) 596/2014 as it forms part of
the domestic law of the United Kingdom by virtue of the European Union
(Withdrawal) Act 2018.
CONSOLIDATED INCOME STATEMENT
Notes Year ended Restated(1)
31 December
2023 Year ended
£m
31 December
2022
£m
Revenue 3 3,350 2,954
Cost of sales (2,696) (2,533)
Gross profit 654 421
Operating expenses (597) (691)
Operating profit/(loss) 3, 4 57 (270)
Finance costs (79) (83)
Finance income 14 25
Loss before tax 5 (8) (328)
Tax 9 99
Profit/(loss) after tax for the year from continuing operations 1 (229)
Discontinued operations 8
Loss for the year from discontinued operations (1,020) (74)
Loss after tax for the year (1,019) (303)
8 (1,019) (308)
Attributable to: - 5
Owners of the parent
Non-controlling interests
(1,019) (303)
Earnings per share 7 0.1p (16.3)p
Continuing operations 7 0.1p (16.3)p
- Basic
- Diluted
7 (75.5)p (21.9)p
Continuing and discontinued operations 7 (75.5)p (21.9)p
- Basic
- Diluted
Adjusted(2) results from continuing operations
Adjusted operating profit 3, 4 390 147
Adjusted profit before tax 4 331 62
Adjusted profit after tax 4 263 58
Adjusted basic earnings per share 7 19.5p 4.1p
Adjusted diluted earnings per share 7 18.7p 4.1p
(1) Results for the year ended 31 December 2022 have been restated for
discontinued operations (see note 1).
(2) Defined in note 2.
Consolidated Statement OF COMPREHENSIVE INCOME
Notes Year ended Year ended
31 December
31 December
2023
2022
£m
£m
Loss after tax for the year (1,019) (303)
(119) (32)
Items that will not be reclassified subsequently to the Income Statement: 35 (34)
Net remeasurement loss on retirement benefit obligations 5 29 (1)
Fair value gain/(loss) on investments in equity instruments
Income tax credit/(charge) relating to items that will not be reclassified
Items that may be reclassified subsequently to the Income Statement: (55) (67)
Currency translation on net investments
Share of other comprehensive (expense)/income from equity accounted 8 (195) 593
investments
(12) 13
Transfer to Income Statement from equity of cumulative translation differences
on disposal of foreign operations
Derivative gains/(losses) on hedge relationships 5 (152) (11)
Transfer to Income Statement on hedge relationships 2 (39)
Income tax (charge)/credit relating to items that may be reclassified - 2
(8) 5
(365) 563
Other comprehensive (expense)/income for the year (420) 496
Total comprehensive (expense)/income for the year (1,439) 193
(1,439) 187
Attributable to: - 6
Owners of the parent
Non-controlling interests
(1,439) 193
Consolidated Statement of Cash Flows
Notes Year ended Restated(1)
31 December
2023 Year ended
£m
31 December
2022
£m
Operating activities 11 (7) (39)
Net cash used in operating activities from continuing operations 11 36 243
Net cash from operating activities from discontinued operations
Net cash from operating activities 29 204
8 (320) 478
Investing activities 8 1,205 -
Disposal of businesses, net of cash disposed (95) (69)
Settlement receipt from loans held with demerged entities 4 45
Purchase of property, plant and equipment (11) (7)
Proceeds from disposal of property, plant and equipment 3 -
Purchase of computer software and capitalised development costs - (4)
Disposal of equity accounted investments - (109)
Acquisition of subsidiaries, net of cash acquired - (3)
Settlement of derivatives used in net investment hedging 2 1
Equity accounted investment additions
Interest received
Net cash from investing activities from continuing operations 11 788 332
Net cash used in investing activities from discontinued operations (67) (140)
Net cash from investing activities 721 192
Financing activities (1,371) (598)
Repayment of borrowings 628 632
Drawings on borrowing facilities (11) -
Costs of raising debt finance (32) (29)
Repayment of principal under lease obligations 6 (93) (504)
Purchase of own shares, including associated costs 6 (81) (77)
Dividends paid to owners of the parent
Net cash used in financing activities from continuing operations 11 (960) (576)
Net cash used in financing activities from discontinued operations (6) (23)
Net cash used in financing activities (966) (599)
11 (216) (203)
Net decrease in cash and cash equivalents, net of bank overdrafts 11 292 468
Cash and cash equivalents, net of bank overdrafts at the beginning of the year (19) 27
Effect of foreign exchange rate changes
Cash and cash equivalents, net of bank overdrafts at the end of the year 11 57 292
(1) Results for the year ended 31 December 2022 have been restated for
discontinued operations (see note 1).
As at 31 December 2023, the Group had net debt of £572 million (31 December
2022: £1,139 million). A definition and reconciliation of the movement in net
debt is shown in note 11.
Consolidated Balance Sheet
Notes 31 December 31 December
2023
2022
£m
£m
Non-current assets 3,351 6,846
Goodwill and other intangible assets 777 2,599
Property, plant and equipment 114 62
Investments 7 435
Interests in equity accounted investments 527 373
Deferred tax assets 46 36
Derivative financial assets 789 670
Other receivables 10 - 93
Retirement benefit surplus
5,611 11,114
Current assets 510 1,025
Inventories 713 1,426
Trade and other receivables 13 38
Derivative financial assets 6 29
Current tax assets 58 355
Cash and cash equivalents 8 18 -
Assets classified as held for sale
1,318 2,873
Total assets 3 6,929 13,987
Current liabilities
Trade and other payables 1,179 2,347
Interest-bearing loans and borrowings 54 63
Lease obligations 40 60
Derivative financial liabilities 42 86
Current tax liabilities 9 20 141
Provisions 8 188 281
Liabilities associated with assets held for sale 10 -
1,533 2,978
Net current liabilities (215) (105)
Non-current liabilities 358 431
Other payables 576 1,433
Interest-bearing loans and borrowings 152 306
Lease obligations 64 141
Derivative financial liabilities 482 619
Deferred tax liabilities 10 99 581
Retirement benefit obligations 9 98 330
Provisions
1,829 3,841
Total liabilities 3 3,362 6,819
Net assets 3,567 7,168
Equity 309 309
Issued share capital 3,271 3,271
Share premium account 109 109
Merger reserve 753 753
Capital redemption reserve (2,330) (2,330)
Other reserves 273 638
Translation and hedging reserve 1,182 4,379
Retained earnings
Equity attributable to owners of the parent 3,567 7,129
Non-controlling interests - 39
Total equity 3,567 7,168
The Financial Statements were approved and authorised for issue by the Board
of Directors on 7 March 2024 and were signed on its behalf by:
Geoffrey Martin
Peter Dilnot
Group Finance Director
Chief Executive Officer
7 March
2024
7 March 2024
Consolidated statement of changes in equity
Issued share capital Share premium account Merger reserve Other reserves Translation and hedging reserve Retained earnings Equity attributable to owners Non-controlling interests Total
of the parent
equity
£m £m £m Capital redemption reserve £m £m £m
£m
£m £m
£m
At 1 January 2022 333 3,271 109 729 (2,330) 76 5,319 7,507 33 7,540
(Loss)/profit for the year - - - - - - (308) (308) 5 (303)
Other comprehensive income/(expense) - - - - - 562 (67) 495 1 496
Total comprehensive income/(expense) - - - - - 562 (375) 187 6 193
Purchase of own shares(1) (24) - - 24 - - (504) (504) - (504)
Dividends paid - - - - - - (77) (77) - (77)
Equity-settled share-based payments - - - - - - 16 16 - 16
At 31 December 2022 309 3,271 109 753 (2,330) 638 4,379 7,129 39 7,168
Loss for the year - - - - - - (1,019) (1,019) - (1,019)
Other comprehensive expense - - - - - (365) (55) (420) - (420)
Total comprehensive expense - - - - - (365) (1,074) (1,439) - (1,439)
Purchase of own shares(1) - - - - - - (93) (93) - (93)
Dividends paid - - - - - - (81) (81) - (81)
Demerger distribution (note 8) - - - - - - (1,973) (1,973) - (1,973)
Derecognition of non-controlling interests on demerger (note 8)
Equity-settled share-based payments - - - - - - - - (39) (39)
Deferred tax on equity-settled share-based payments (note 5) - - - - - - 2 2 - 2
- - - - - - 22 22 - 22
At 31 December 2023 309 3,271 109 753 (2,330) 273 1,182 3,567 - 3,567
(1) Further information is set out in note 1.
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 2023 or 31 December 2022 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 2022 have been delivered
to the Registrar of Companies and those for the year ended 31 December 2023
will be delivered to the Registrar of Companies during April 2024. 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") adopted pursuant to IFRSs as issued by
the IASB, 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 2024.
Corporate structure
Capital structure
On 19 April 2023, a share consolidation took place whereby shareholders
received one new share in the Company for every three existing shares held. In
accordance with IAS 33: Earnings per Share, a one for three adjustment is
required to the weighted average number of shares in existence prior to the
share consolidation and the prior year has been restated accordingly.
On 2 October 2023, the Group commenced a £500 million share buyback programme
which is expected to complete by the end of September 2024. At 31 December
2023, 18,761,840 shares had been purchased at an average price of 494 pence
per share with cash spent of £93 million, inclusive of costs of £1 million.
These are held as treasury shares and the costs of the purchase have been
recognised in retained earnings. No liability has been recognised in respect
of the remaining share buyback programme as there is no contractual
obligation. In 2022, the Group completed a share buyback programme with
318,003,512 shares repurchased and subsequently cancelled, with cash spent of
£504 million, inclusive of costs of £4 million.
Discontinued operations, disposals and assets held for sale
On 20 April 2023, the Group completed the demerger of the GKN Automotive, GKN
Powder Metallurgy and GKN Hydrogen businesses through the flotation of Dowlais
Group plc ("Dowlais") on the London Stock Exchange. The results of the Dowlais
businesses have been classified within discontinued operations for both years
presented; with the Income Statement, the Statement of Cash Flows and their
associated notes being restated accordingly. See note 8 for further detail.
Dowlais became a related party to the Group on demerger.
On 12 December 2023, the Group agreed a disposal of its Fuel Systems business,
a non-core part of the Structures segment. At 31 December 2023, the disposal
was expected to complete within the next twelve months and accordingly the
assets and liabilities of the business have been classified as held for sale
as at 31 December 2023. The disposal completed on 1 March 2024.
In addition, discontinued operations for 2022 include the results of the
Ergotron business which was classified as held for sale as at 30 June 2022,
and was subsequently disposed on 6 July 2022.
Going concern
The Consolidated Financial Statements have been prepared on a going concern
basis as the Directors consider that adequate resources exist for the Company
to continue in operational existence for the foreseeable future.
The Group's liquidity and funding arrangements are described in the Finance
Director's Review. There is significant liquidity headroom of £1.0 billion
at 31 December 2023 and sufficient headroom throughout the going concern
forecast period. Forecast covenant compliance is considered further below.
Covenants
The Group's banking facility has two financial covenants being a net debt to
adjusted EBITDA covenant and an interest cover covenant, both of which are
tested half yearly in June and December. As a result of the demerger on 20
April 2023, the Group renegotiated its banking arrangements. No testing of the
interest cover covenant was required at 31 December 2023. The interest cover
covenant will be tested from 30 June 2024. Covenant calculations are detailed
in the glossary to these Consolidated Financial Statements.
The financial covenants during the period of assessment for going concern are
as follows:
31 December 30 June 31 December
2023 2024 2024
Net debt to adjusted EBITDA 3.5x 3.5x 3.5x
Interest cover n/a 4.0x 4.0x
Testing
The Group has modelled two scenarios in its assessment of going concern. A
base case and a reasonably possible sensitised case.
The base case takes into account end markets and operational factors,
including supply chain challenges, throughout the going concern period and has
been monitored against the actual results and cash generation in the year.
Climate scenario analysis was used to model the impact of climate change on
the Group's cash flow position. Climate is deemed to not have a material
impact over the period of 12 months for the assessment of going concern or 36
months for assessment of viability of the Group.
The reasonably possible sensitised case models more conservative sales
assumptions for 2024 and the first half of 2025. The sensitised assumptions
are specific to each business taking into account their markets, but on
average represents a c.10% reduction to the Group's forecast revenue in each
of 2024 and the first half of 2025 respectively. The sensitised revenues have
had a consequential impact on profit and cash flow, along with a further
downside sensitivity applied to increase working capital by approximately 2%
of revenue. Given that there is liquidity headroom of £1.0 billion and the
Group's leverage was 1.1x, comfortably below the covenant test at 31 December
2023, no further sensitivity detail is provided.
Under the reasonably possible sensitised case, even with significant
reductions, no covenant is breached at the forecast testing dates being
30 June 2024 and 31 December 2024, and the Group will not require any
additional sources of finance. Testing at 30 June 2025 is also favourable,
assuming arrangements similar in nature with existing agreements.
2. Alternative Performance Measures
The Group presents Alternative Performance Measures ("APMs") in addition to
the statutory results of the Group. These are presented in accordance with the
Guidelines on APMs issued by the European Securities and Markets Authority
("ESMA").
APMs used by the Group are set out in the glossary to this Preliminary
Announcement and the reconciling items between statutory and adjusted results
are listed below and described in more detail in note 4.
Adjusted profit measures exclude items which are significant in size or
volatility or by nature are non-trading or non-recurring or any item released
to the Income Statement that was previously a fair value item booked on an
acquisition.
On this basis, the following are the principal items included within adjusting
items impacting operating profit:
· Amortisation of intangible assets that are acquired in a business
combination, excluding computer software and development costs;
· Significant restructuring project costs and other associated costs,
including losses incurred following the announcement of closure for identified
businesses, arising from significant strategy changes that are not considered
by the Group to be part of the normal operating costs of the business;
· Acquisition and disposal related gains and losses;
· Impairment charges that are considered to be significant in nature and/or
value to the trading performance of the business;
· Movement in derivative financial instruments not designated in hedging
relationships, including revaluation of associated financial assets
and liabilities;
· The charge for the Melrose equity-settled compensation scheme, including
its associated employer's tax charge; and
· The net release of fair value items booked on acquisitions.
Further to the adjusting items above, adjusting items impacting profit before
tax include:
· Acceleration of unamortised debt issue costs written off as a consequence
of Group refinancing;
· Significant settlement gains and losses associated with debt instruments
including interest rate swaps following acquisition or disposal related
activity or non-trading transactions, which are not considered by the Group to
be part of normal financing costs;
· Finance costs in respect of the Group's net debt strategically allocated
to a demerger group of businesses at the start of the year and subsequently
settled on demerger; and
· The fair value changes on cross-currency swaps, entered into by GKN prior
to acquisition, relating to cost of hedging which are not deferred in equity.
In addition to the items above, adjusting items impacting profit after tax
include:
· The net effect on tax of significant restructuring from strategy changes
that are not considered by the Group to be part of the normal operating costs
of the business;
· The net effect of significant new tax legislation; and
· The tax effects of adjustments to profit before tax.
The Board considers the adjusted results to be an important measure used to
monitor how the businesses are performing as this provides a meaningful
reflection of how the businesses are managed and measured on a day-to-day
basis and achieves consistency and comparability between reporting periods,
when all businesses are held for a complete reporting period.
The adjusted measures are used to partly determine the variable element of
remuneration of senior management throughout the Group and are also in
alignment with performance measures used by certain external stakeholders. The
adjusted measures are also taken into account when valuing individual
businesses.
Adjusted profit is not a defined term under IFRS and may not be comparable
with similarly titled profit measures reported by other companies. It is not
intended to be a substitute for, or superior to, GAAP measures. All APMs
relate to the current year results and comparative periods where provided.
3. Segment information
Segment information is presented in accordance with IFRS 8: Operating
Segments, which requires operating segments to be identified on the basis of
internal reports about components of the Group that are regularly reported to
the Group's Chief Operating Decision Maker ("CODM"), which has been deemed to
be the Group's Board, in order to allocate resources to the segments and
assess their performance.
Following the demerger of the Automotive, Powder Metallurgy and Other
Industrial segments during the year their results are classified within
discontinued operations and the comparative results for 2022 have been
restated accordingly. In addition, the results of the Aerospace business are
now viewed by the CODM as separated into Engines and Structures. The
incremental information is provided below with comparative results for 2022
also re-presented accordingly.
The operating segments are as follows:
Engines - An industry leading global tier one supplier to the aerospace
engines market, including structural engineered components; parts repair;
commercial and aftermarket contracts.
Structures - A multi-technology global tier one supplier of both civil and
defence air frames, including lightweight composite and metallic structures;
electrical distribution systems and components.
In addition, there is a corporate cost centre which is also reported to the
Board. The corporate cost centre contains the Melrose Group head office costs
and charges related to the divisional management long-term incentive plans.
Reportable segment results include items directly attributable to a segment as
well as those which can be allocated on a reasonable basis.
Inter-segment pricing is determined on an arm's length basis in a manner
similar to transactions with third parties.
The Group's geographical segments are determined by the location of the
Group's non-current assets and, for revenue, the location of external
customers. Inter-segment sales are not material and have not been disclosed.
The following tables present the results and certain asset and liability
information regarding the Group's operating segments and corporate cost centre
for the year ended 31 December 2023.
a) Segment revenues
The Group derives its revenue from the transfer of goods and services over
time and at a point in time. The Group has assessed that the disaggregation of
revenue recognised from contracts with customers by operating segment is
appropriate as this is the information regularly reviewed by the CODM in
evaluating financial performance. The Group also believes that presenting this
disaggregation of revenue based on the timing of transfer of goods or
services provides useful information as to the nature and timing of revenue
from contracts with customers.
Year ended 31 December 2023 Engines Structures Total
Continuing operations £m £m £m
Timing of revenue recognition 931 1,457 2,388
At a point in time 262 700 962
Over time
Revenue 1,193 2,157 3,350
Year ended 31 December 2022 - restated(1) Engines Structures Total
Continuing operations £m £m £m
Timing of revenue recognition 806 1,224 2,030
At a point in time 229 695 924
Over time
Revenue 1,035 1,919 2,954
(1) Revenue has been restated for discontinued operations (see note 1) and the
re-presentation of the Engines and Structures segments.
b) Segment operating profit
Year ended 31 December 2023 Engines Structures Corporate(1) Total
Continuing operations £m £m £m £m
Adjusted operating profit/(loss) 310 110 (30) 390
Items not included in adjusted operating profit(2): (125) - (260)
Amortisation of intangible assets acquired in business combinations (135) (111) (12) (149)
Restructuring costs (26) - (38) (38)
Melrose equity-settled compensation scheme charges - - (3) (3)
Acquisition and disposal related gains and losses - (6) 123 114
Movement in derivatives and associated financial assets and liabilities (3) 2 - 3
Net release and changes in discount rates of fair value items 1
Operating profit/(loss) 147 (130) 40 57
Finance costs (79)
Finance income 14
Loss before tax (8)
Tax 9
Profit after tax for the year from continuing operations 1
Year ended 31 December 2022 - restated(3) Engines Structures Corporate(1) Total
Continuing operations £m £m £m £m
Adjusted operating profit/(loss) 162 24 (39) 147
Items not included in adjusted operating profit(2): (135) (260)
Amortisation of intangible assets acquired in business combinations (25) (125) - (90)
Restructuring costs 20 (63) (2) (79)
Movement in derivatives and associated financial assets and liabilities - 1 (100) (15)
Melrose equity-settled compensation scheme charges 3 - (15) 12
Net release and changes in discount rates of fair value items (5) 9 - 15
Acquisition and disposal related gains and losses - 20
Operating profit/(loss) 20 (154) (136) (270)
Finance costs (83)
Finance income 25
Loss before tax (328)
Tax 99
Loss after tax for the year from continuing operations (229)
(1) Corporate adjusted operating loss of £30 million (2022: £39 million),
includes £1 million (2022: £3 million) of costs in respect of divisional
management
long-term incentive plans.
(2) Further details on adjusting items are discussed in note 4.
(3) Operating profit has been restated for discontinued operations (see note
1) and the re-presentation of the Engines and Structures segments.
c) Segment total assets and liabilities
Total assets Total liabilities
31 December Restated(1) 31 December Restated(1)
2023 31 December 2023 31 December
£m
2022 £m 2022
£m
£m
Engines 3,957 3,798 1,396 1,202
Structures 2,388 2,894 1,099 1,315
Corporate 584 761 867 1,838
Continuing operations 6,929 7,453 3,362 4,355
Discontinued operations - 6,534 - 2,464
Total 6,929 13,987 3,362 6,819
(1) Total assets and liabilities have been restated for
discontinued operations (see note 1) and the re-presentation of the Engines
and Structures segments.
d) Segment capital expenditure and depreciation
Capital expenditure(1) Depreciation of Depreciation of
owned assets(1)
leased assets
Year ended Restated(2) Year ended Restated(2) Year ended Restated(2)
31 December Year ended 31 December Year ended 31 December Year ended
2023 31 December 2023 31 December 2023 31 December
£m 2022 £m 2022 £m 2022
£m £m £m
Engines 55 38 43 46 7 7
Structures 63 39 74 77 17 14
Corporate - - - - 1 1
Continuing operations 118 77 117 123 25 22
Discontinued operations 51 231 43 238 6 25
Total 169 308 160 361 31 47
(1) Including computer software and development costs.
Capital expenditure excludes lease additions.
(2) Capital expenditure and depreciation have been
restated for discontinued operations (see note 1) and the re-presentation of
the Engines and Structures segments.
e) Geographical information
The Group operates in various geographical areas around the world. The parent
company's country of domicile is the UK and the Group's revenues and
non-current assets in the rest of Europe and North America are also considered
to be material.
The Group's revenue from external customers and information about its segment
assets (non-current assets excluding deferred tax assets,
non-current derivative financial assets, non-current other receivables and
retirement benefit surplus) by geographical location are detailed below:
Revenue(1) from Segment assets
external customers
Year ended Restated(2) 31 December Restated(2)
31 December Year ended 2023 31 December
2023 31 December £m 2022
£m 2022 £m
£m
UK 579 509 882 1,042
Rest of Europe 540 408 2,166 2,501
North America 2,138 1,971 1,179 1,038
Other 93 66 22 28
Continuing operations 3,350 2,954 4,249 4,609
Discontinued operations 1,582 4,715 - 5,333
Total 4,932 7,669 4,249 9,942
(1) Revenue is presented by destination.
(2) Revenue and segment assets have been restated for
discontinued operations (see note 1).
4. Reconciliation of adjusted profit measures
As described in note 2, adjusted profit measures are an alternative
performance measure used by the Board to monitor the operating performance of
the Group. For the year ended 31 December 2022 the Group presented adjusted
revenue as an alternative performance measure. Following the demerger of the
Dowlais businesses, as described in note 8, the Board no longer uses adjusted
revenue to monitor the ongoing performance of the Group as there are no
continuing material equity accounted investments.
a) Operating profit
Continuing operations Notes Year ended Restated(1)
31 December Year ended
2023 31 December
£m 2022
£m
Operating profit/(loss) 57 (270)
Amortisation of intangible assets acquired in business combinations a
Restructuring costs b 260 260
Melrose equity-settled compensation scheme charges c 149 90
Acquisition and disposal related gains and losses d 38 15
Movement in derivatives and associated financial assets and liabilities e 3 (15)
Net release and changes in discount rates of fair value items f (114) 79
(3) (12)
Total adjustments to operating profit/(loss) 333 417
Adjusted operating profit 390 147
(1) Results have been restated for discontinued
operations (see note 1).
a. The amortisation charge on intangible assets acquired in business
combinations of £260 million (2022: £260 million) is excluded from adjusted
results due to its non-trading nature and to enable comparison with companies
that grow organically. However, where intangible assets are trading in nature,
such as computer software and development costs, the amortisation is not
excluded from adjusted results.
b. Restructuring and other associated costs in the year totalled £149
million (2022: £90 million), including £59 million (2022: £11 million) of
losses incurred in closing businesses within the Group. These are shown as
adjusting items due to their size and non-trading nature and during the year
ended 31 December 2023 these included:
· A charge of £137 million (2022: £88 million) primarily relating to the
continuation of significant restructuring projects, necessary for the business
to achieve its full potential target operating margins.
There are three significant ongoing multi-year restructuring programmes,
impacting multiple sites across the Engines and Structures divisions, two of
which include European footprint consolidations, and one significant
multi-site restructuring programme in North America. These programmes incurred
a combined charge, excluding losses, of £62 million in the year. Since
commencement, the cumulative charges, excluding losses, on these three
restructuring programmes to 31 December 2023 has been £217 million (31
December 2022: £155 million), approximately 35% relating to the two
significant European programmes and approximately 65% in North America.
As at 31 December 2023, actions to complete the European programmes, on
average, are approximately 95% complete and will complete in 2024. During the
year, the North America multi-site restructuring programme has been expanded
and is approximately 70% complete and now expected to conclude in 2025. In
addition to the remaining charges to be incurred on these projects, £37
million is included in restructuring provisions at 31 December 2023 to be
settled in cash over the next two years.
· A net charge of £12 million (2022: £2 million) within the Melrose
corporate cost centre that relates to changes made following the announced
change to the Group's ongoing strategy. These include the costs of merging the
Melrose corporate cost function with the previously separate Aerospace
division head office team. These restructuring actions reshape the corporate
cost centre to serve as an ongoing pureplay aerospace business.
c. The charge for the Melrose equity-settled Employee Share Scheme of £38
million (2022: £15 million), which includes a charge to the accrual for
employer's tax payable of £28 million (2022: credit of £1 million), is
excluded from adjusted results due to its size and volatility. The shares that
would be issued, based on the Scheme's current value at the end of the
reporting period, are included in the calculation of the adjusted diluted
earnings per share, which the Board considers to be a key measure of
performance.
d. An acquisition and disposal related net charge of £3 million (2022:
credit of £15 million) arose in the year which primarily relates to ongoing
acquisition commitments. The prior year also includes the profit on disposal
of two corporate properties, a loss on disposal of a non-core Aerospace
business and the initial costs incurred in respect of the demerger. These
items are excluded from adjusted results due to their non-trading nature.
e. Movements in the fair value of derivative financial instruments
(primarily forward foreign currency exchange contracts where hedge accounting
is not applied) entered into to mitigate the potential volatility of future
cash flows, on long-term foreign currency customer and supplier contracts,
including foreign exchange movements on the associated financial assets and
liabilities are shown as an adjusting item because of volatility and size.
This totalled a credit of £114 million (2022: charge of £79 million) in the
year.
f. The net release of fair value items in the year of £3 million (2022:
£12 million) where items have been resolved for more favourable amounts than
first anticipated are shown as an adjusting item, avoiding positively
distorting adjusted operating profit.
b) Profit before tax
Continuing operations Notes Year ended Restated(1)
31 December Year ended
2023 31 December
£m 2022
£m
Loss before tax (8) (328)
Adjustments to operating profit/(loss) as above g 333 417
Finance costs on demerger settled net debt h 17 -
Accelerated unamortised debt issue costs i 2 -
Bond redemption gains j (13) (24)
Fair value changes on cross-currency swaps - (3)
Total adjustments to loss before tax 339 390
Adjusted profit before tax 331 62
(1) Results have been restated for discontinued
operations (see note 1).
g. Finance costs in respect of the proportion of the Group's net debt
strategically allocated to the demerger group of businesses at the start of
the year and subsequently settled on demerger are excluded from adjusted
results to ensure the finance costs of the continuing Group are appropriately
shown alongside the trading performance of the continuing business.
h. Following the demerger of the GKN Automotive, GKN Powder Metallurgy and
GKN Hydrogen businesses, the existing bank facilities at that time were repaid
and all unamortised bank fees were written off. This is shown as an adjusting
item due to its non-trading nature.
i. During the year, the Group repurchased £120 million of the remaining
2032 £300 million bond, on which a gain of £13 million was realised. During
2022, the Group also undertook a tender to buyback the same 2032 £300 million
bond. There were £170 million of bonds repurchased, on which a gain of £24
million was realised. Both items are shown as an adjusting item due to their
non-trading nature.
j. The fair value changes on cross-currency swaps relating to cost of
hedging which are not deferred in equity were shown as an adjusting item
because of the volatility and non-trading nature.
c) Profit after tax
Continuing operations Note Year ended Restated(1)
31 December Year ended
2023 31 December
£m 2022
£m
Profit/(loss) after tax 1 (229)
Adjustments to loss before tax as above 339 390
Tax effect of adjustments to loss before tax 5 (77) (105)
Tax effect of significant restructuring 5 - 2
Total adjustments to profit/(loss) after tax 262 287
Adjusted profit after tax 263 58
(1) Results have been restated for discontinued operations (see note 1).
5. Tax
Continuing operations Year ended Restated(1)
31 December Year ended
2023 31 December
£m 2022
£m
Analysis of tax charge/(credit) in the year:
Current tax
Current year tax charge 19 16
Adjustments in respect of prior years 4 (4)
Total current tax charge 23 12
Deferred tax
Origination and reversal of temporary differences (61) (85)
Adjustments in respect of prior years (3) (8)
Tax on the change in value of derivative financial instruments 29 (25)
Adjustments to deferred tax attributable to changes in tax rates (1) (1)
Non-recognition of deferred tax 4 8
Total deferred tax credit (32) (111)
Tax credit on continuing operations (9) (99)
Tax charge on discontinued operations 28 20
Total tax charge/(credit) for the year 19 (79)
£m £m
Analysis of tax credit on continuing operations in the year:
Tax charge in respect of adjusted profit before tax 68 4
Tax credit recognised as an adjusting item (77) (103)
Tax credit on continuing operations (9) (99)
(1) Tax has been restated for discontinued operations (see note 1).
The tax charge of £68 million (2022: £4 million) arising on adjusted profit
before tax of £331 million (2022: £62 million), results in an effective tax
rate of 20.5% (2022: 6.5%).
The £77 million (2022: £103 million) tax credit recognised as an adjusting
item includes a credit of £77 million (2022: £105 million) in respect of tax
credits on adjustments to loss before tax of £339 million (2022: £390
million) and a charge of £nil (2022: £2 million) in respect of internal
Group restructuring.
The tax charge/(credit) for the year for continuing and discontinued
operations can be reconciled to the profit/(loss) before tax per the Income
Statement as follows:
Year ended Restated(1)
31 December Year ended
2023 31 December
£m 2022
£m
Profit/(loss) before tax: (8) (328)
Continuing operations 25 (38)
Discontinued operations (note 8)
17 (366)
Tax charge/(credit) on profit/(loss) before tax at 23.5% (2022: 25.0%) 4 (91)
Tax effect of:
Disallowable expenses and other permanent differences within adjusted profit (9) 4
Disallowable items included within adjusting items 8 (2)
Temporary differences not recognised in deferred tax 5 13
Tax credits and withholding taxes 3 15
Adjustments in respect of prior years 13 (29)
Tax charge classified within adjusting items - continuing operations - 2
Tax charge classified within adjusting items - discontinued operations - 8
Effect of changes in tax rates (2) 1
Effect of rate differences between UK and overseas rates (3) -
Total tax charge/(credit) for the year 19 (79)
(1) Tax has been restated for discontinued operations (see note 1).
The reconciliation has been performed at a tax rate of 23.5% (2022: 25.0%).
The reconciliation rate usually represents the weighted average of the tax
rates applying to profits and losses in the jurisdictions in which those
results arose in the year. However, for 2023 this rate was close to zero due
to offsetting profits and losses in the relevant jurisdictions and as such the
UK rate has been used.
Tax (credits)/charges included in Other Comprehensive Income are as follows:
Year ended Year ended
31 December 31 December
2023 2022
£m £m
Deferred tax movements on retirement benefit obligations (29) 1
Deferred tax movements on hedge relationship gains and losses 8 (5)
Total credit for the year (21) (4)
There is also a tax credit of £22 million (2022: £nil) recognised directly
in the Statement of Changes in Equity in respect of deferred tax on
equity-settled share-based payments.
6. Dividends
Year ended Year ended
31 December 31 December
2023 2022
£m
£m
Interim dividend for the year ended 31 December 2023 of 1.5p 20 -
Second interim dividend for the year ended 31 December 2022 of 1.5p (4.5p)(1) 61 -
Interim dividend for the year ended 31 December 2022 of 0.825p (2.475p)(1) - 33
Final dividend for the year ended 31 December 2021 of 1.0p (3.0p)(1) - 44
81 77
(1) Adjusted to include the effects of the one for three share consolidation
(see note 1).
A final dividend for the year ended 31 December 2023 of 3.5p per share
totalling an expected £46 million is declared by the Board. The final
dividend of 3.5p per share was declared by the Board on 7 March 2024 and in
accordance with IAS 10: Events after the reporting period, has not been
included as a liability in the Consolidated Financial Statements.
During the year, the Group commenced a £500 million share buyback programme
with £93 million of cash spent, inclusive of costs of £1 million (see note
1). In the prior year, the Group also undertook a share buyback programme,
with £504 million of cash spent, inclusive of costs of £4 million.
7. Earnings per share
Earnings attributable to owners of the parent Year ended Restated(1)
31 December Year ended
2023 31 December
£m 2022
£m
Earnings for basis of earnings per share (1,019) (308)
Less: loss from discontinued operations (note 8) 1,020 79
Earnings for basis of earnings per share from continuing operations 1 (229)
(1) Earnings has been restated for discontinued operations (see note 1).
Year ended Restated(1)
31 December Year ended
2023 31 December
Number 2022
Number
Weighted average number of ordinary shares for the purposes of basic earnings 1,349 1,406
per share (million)
56 -
Further shares for the purposes of diluted earnings per share (million)
Weighted average number of ordinary shares for the purposes of diluted 1,405 1,406
earnings per share (million)
(1) Adjusted to include the effects of the one for three share consolidation
(see note 1).
On 2 October 2023, the Group commenced a £500 million share buyback
programme, with 18,761,840 shares repurchased by 31 December 2023. These are
held as treasury shares and are excluded from the number of shares for the
purposes of calculating earnings per share. In the prior year, the Group
completed a £500 million share buyback programme with 318,003,512 shares
repurchased and subsequently cancelled.
Earnings per share Year ended Restated(1)
Year ended
31 December
31 December
2023
pence 2022
pence
Basic earnings per share
From continuing and discontinued operations (75.5) (21.9)
From continuing operations 0.1 (16.3)
From discontinued operations (75.6) (5.6)
Diluted earnings per share
From continuing and discontinued operations (75.5) (21.9)
From continuing operations 0.1 (16.3)
From discontinued operations (75.6) (5.6)
(1) Earnings per share has been restated for discontinued operations and to
include the effects of the one for three share consolidation (see note 1).
Adjusted earnings from continued operations Year ended Restated(1)
31 December Year ended
2023 31 December
£m
2022
£m
Adjusted earnings for the basis of adjusted earnings per share 263 58
(1) Earnings has been restated for discontinued operations (see note 1).
Adjusted earnings per share from continuing operations:
Year ended Restated(1)
31 December Year ended
2023 31 December
pence 2022
pence
Adjusted basic earnings per share 19.5 4.1
Adjusted diluted earnings per share 18.7 4.1
(1) Earnings per share has been restated for discontinued operations and to
include the effects of the one for three share consolidation (see note 1).
8. Discontinued operations
On 30 March 2023, shareholders approved the demerger of the GKN Automotive,
GKN Powder Metallurgy and GKN Hydrogen businesses through the flotation of
Dowlais Group plc ("Dowlais") on the London Stock Exchange. As a consequence,
the assets and liabilities of Dowlais were reclassified as held for sale in
accordance with IFRS 5: Non-current Assets Held for Sale and Discontinued
Operations.
On 20 April 2023, the Group completed the demerger of Dowlais. The results of
the Dowlais businesses have been classified within discontinued operations for
both years presented. In addition, discontinued operations for 2022 include
the results of the Ergotron business which was disposed of on 6 July 2022.
The demerger distribution of £1,973 million has been measured at fair value
in accordance with IFRIC 17: Distributions of Non-cash Assets to Owners. Total
demerger costs of £64 million, of which £6 million was recognised in the
year ended 31 December 2022, were incurred before a contribution of £19
million in the form of one percent of Dowlais Group plc issued equity which
has been retained by the Group. The Melrose Automotive Share Plan has also
been taken into account within the loss on disposal calculation, but its net
impact was immaterial.
Financial performance of discontinued operations:
Year ended Restated(1)
31 December Year ended
2023 31 December
£m 2022
£m
Revenue 1,582 4,715
Operating costs (1,550) (4,740)
Operating profit/(loss) 32 (25)
Net finance costs (7) (13)
Profit/(loss) before tax 25 (38)
Tax (28) (20)
Loss after tax (3) (58)
Loss on disposal of net assets of discontinued operations, net of recycled
cumulative translation differences but before transaction costs
(978) (16)
Demerger transaction costs(2)
(39) -
Loss for the year from discontinued operations (1,020) (74)
Attributable to: (1,020) (79)
Owners of the parent - 5
Non-controlling interests
(1,020) (74)
(1) Restated for operations discontinued in the year (see
note 1).
(2) Demerger transaction costs of £39 million comprise
total cash costs incurred in the year of £58 million, offset by a non-cash
contribution from Dowlais of
£19 million.
Cash flow information relating to discontinued operations is shown in note 11.
Classes of assets and liabilities disposed of and amounts classified as held
for sale during the year were as follows:
Classified as Businesses
disposed
held for sale(1)
£m
£m
Goodwill and other intangible assets - 2,989
Property, plant and equipment 4 1,789
Current and deferred tax 1 127
Equity accounted investments - 417
Inventories 4 515
Trade and other receivables 9 753
Derivative financial instruments - 45
Cash and cash equivalents - 320
Total assets 18 6,955
Trade and other payables 5 1,232
Interest-bearing loans and borrowings(2) - 1,205
Lease obligations 1 158
Current and deferred tax - 435
Retirement benefit obligations - 439
Provisions 4 344
Total liabilities 10 3,813
Net assets 8 3,142
Demerger distribution fair value 1,973
Derecognition of non-controlling interests on demerger 39
Demerger costs incurred (39)
Cumulative translation difference recycled on demerger 152
Loss on disposal of businesses (1,017)
(1) Relates to the Fuel Systems business (see note 1).
(2) Prior to the demerger the interest-bearing loans and borrowings were
inter-company. On demerger, these were subsequently settled.
9. Provisions
Loss-making Property Environmental and litigation Warranty Restructuring Other Total
contracts related costs £m related costs £m £m £m
£m £m £m
At 1 January 2023 108 28 119 200 83 73 611
Utilised (26) - (7) (11) (97) (8) (149)
Charge to operating profit(1) 23 1 18 16 96 63 217
Release to operating profit(2) (2) - (9) (18) (2) - (31)
Disposal of businesses(3) (41) (5) (63) (154) (18) (63) (344)
Transfer to held for sale(4) (1) - (1) (2) - - (4)
Unwind of discount(5) - - - - - 1 1
Exchange adjustments (3) (1) (3) (4) (3) (1) (15)
At 31 December 2023 58 23 54 27 59 65 286
Current 38 5 34 15 49 47 188
Non-current 20 18 20 12 10 18 98
58 23 54 27 59 65 286
(1) Includes £182 million of adjusting items and £35 million recognised in
adjusted operating profit.
(2) Includes £8 million of adjusting items and £23 million recognised in
adjusted operating profit.
(3) Disposal of businesses relates to the demerger of the GKN Automotive, GKN
Powder Metallurgy and GKN Hydrogen businesses (see note 1).
(4) Transfer to held for sale relates to the contractually agreed sale of a
non-core business in the Structures segment (see note 1).
(5) Includes £1 million within finance costs relating to the time value of
money.
Loss-making contracts
Provisions for loss-making contracts are considered to exist where the Group
has a contract under which the unavoidable costs of meeting the obligations
exceed the economic benefits expected to be received under it. This obligation
has been discounted and will be utilised over the period of the respective
contracts, which is up to 15 years. At 31 December 2023, the loss-making
contracts provision within Engines totalled £14 million (31 December 2022:
£17 million) and £44 million within Structures (31 December 2022: £45
million).
Calculation of loss-making contract provisions is based on contract
documentation and delivery expectations, along with an estimate of directly
attributable costs and represents management's best estimate of the
unavoidable costs of fulfilling the contract.
Utilisation in continuing operations during the year of £23 million has
benefited adjusted operating profit with £3 million recognised in Engines
and £20 million recognised in Structures. In addition, £21 million has been
charged on a net basis (2022: £8 million released) and is shown as
an adjusting item.
Property related costs
The provision for property related costs represents dilapidation costs for
ongoing leases and is expected to result in cash expenditure over the next
eight years. Calculation of dilapidation obligations are based on lease
agreements with landlords and external quotes, or in the absence of specific
documentation, management's best estimate of the costs required to fulfil
obligations.
Environmental and litigation
There are environmental provisions amounting to £7 million (31 December 2022:
£26 million) relating to the estimated remediation costs of pollution, soil
and groundwater contamination at certain sites and estimated future costs and
settlements in relation to legal claims and associated insurance obligations
amounting to £47 million (31 December 2022: £93 million). Liabilities for
environmental costs are recognised when environmental assessments are probable
and the associated costs can be reasonably estimated.
The Group has on occasion been required to take legal or other actions to
defend itself against proceedings brought by other parties. Provisions are
made for the expected costs associated with such matters, based on past
experience of similar items and other known factors, considering professional
advice received. This represents management's best estimate of the likely
outcome. The timing of utilisation of these provisions is frequently
uncertain, reflecting the complexity of issues and the outcome of various
court proceedings and negotiations. Contractual and other provisions represent
management's best estimate of the cost of settling future obligations and
reflect management's assessment of the likely settlement method, which may
change over time. However, no provision is made for proceedings which have
been, or might be, brought by other parties against Group companies unless
management, considering professional advice received, assess that it is more
likely than not that such proceedings may be successful.
Warranty related costs
Provisions for the expected cost of warranty obligations under local sale of
goods legislation are recognised at the date of sale of the relevant products
and subsequently updated for changes in estimates as necessary. The provision
for warranty related costs represents the best estimate of the expenditure
required to settle the Group's obligations, based on past experience, recent
claims and current estimates of costs relating to specific claims. Warranty
terms are, on average, between one and five years.
Restructuring
Restructuring provisions relate to committed costs in respect of restructuring
programmes, as described in note 4, usually resulting in cash spend within one
to two years. A restructuring provision is recognised when the Group has
developed a detailed formal plan for the restructuring and has raised a valid
expectation in those affected that it will carry out the restructuring by
either starting to implement the plan or by announcing its main features to
those affected by it. The measurement of a restructuring provision includes
only the direct expenditures arising from the restructuring, which are those
amounts that are necessarily entailed by the restructuring programmes.
Other
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 during the next three years.
Where appropriate, provisions have been discounted using discount rates
between 0% and 7% (31 December 2022: 0% and 14%) depending on the territory in
which the provision resides and the length of its expected utilisation.
10. Retirement benefit obligations
Defined benefit plans
The Group sponsors defined benefit plans for qualifying employees of certain
subsidiaries. The funded defined benefit plans are administered by separate
funds that are legally separated from the Group. The Trustees of the funds are
required by law to act in the interest of the fund and of all relevant
stakeholders in the plans. The Trustees of the pension funds are responsible
for the investment policy with regard to the assets of the fund.
During the year, £439 million of net retirement benefit obligations were
disposed with the demerger of the GKN Automotive, GKN Powder Metallurgy and
GKN Hydrogen businesses (note 1).
Also during the year, a buy-in policy was purchased for £45 million which
fully insured pensioner members who were in the GKN Group Pension Scheme
Number 4. The present value of funded defined benefit obligations for GKN
Group Pension Scheme Number 4 was actuarially calculated and the plan asset
was set equal.
Contributions
The Group contributed £72 million (2022: £59 million) to defined benefit
pension plans and post-employment plans, inclusive of the £45 million
purchase of a buy-in policy discussed above, in the year ended 31 December
2023. The Group expects to contribute £25 million in 2024.
Actuarial assumptions
The major assumptions used by the actuaries in calculating the Group's pension
liabilities are as set out below:
Rate of increase Discount rate Price inflation
of pensions in payment
% (RPI/CPI)
% per annum
%
31 December 2023
GKN Group Pension Schemes (Numbers 1 and 4) 2.6 4.5 2.9/2.5
GKN US plans n/a 4.8 n/a
31 December 2022
GKN Group Pension Schemes (Numbers 1 - 4) 2.7 4.8 3.2/2.7
GKN US plans n/a 5.0 n/a
GKN Europe plans 2.6 3.7 2.6/2.6
Balance Sheet disclosures
The amounts recognised in the Consolidated Balance Sheet in respect of defined
benefit plans were as follows:
31 December 31 December
2023 2022
£m £m
Present value of funded defined benefit obligations (1,193) (1,931)
Fair value of plan assets 1,118 1,941
Funded status (75) 10
Present value of unfunded defined benefit obligations (24) (498)
Net liabilities (99) (488)
Analysed as: - 93
Retirement benefit surplus (99) (581)
Retirement benefit obligations
Net liabilities (99) (488)
The net retirement benefit obligations in continuing businesses is
attributable to Engines: liability of £2 million (31 December 2022: £1
million) and Structures: liability of £97 million (31 December 2022: £26
million).
The plan assets and liabilities at 31 December 2023 were as follows:
UK US Other Total
Plans
Plans
Plans(1)
£m
£m £m
£m
Plan assets 1,070 47 1 1,118
Plan liabilities (1,136) (72) (9) (1,217)
Net liabilities (66) (25) (8) (99)
(1) Includes a liability in respect of the GKN post-employment medical plans
of £6 million and a net deficit in respect of the GKN Group Pension Scheme
(Numbers 1 and 4) of £60 million.
11. Cash flow statement
Notes Year ended Restated(1)
31 December
2023 Year ended
£m
31 December
2022
£m
Reconciliation of operating profit/(loss) to net cash used in operating
activities generated by continuing operations
Operating profit/(loss) 57 (270)
Adjusting items 4 333 417
Adjusted operating profit 4 390 147
Adjustments for:
Depreciation of property, plant and equipment 100 104
Amortisation of computer software and development costs 42 41
Restructuring costs paid and movements in provisions (160) (60)
Defined benefit pension contributions paid(2) (67) (23)
Change in inventories (10) (88)
Change in receivables (140) (172)
Change in payables 4 112
Tax paid (17) (8)
Interest paid on loans and borrowings(3) (79) (76)
Interest paid on lease obligations (5) (6)
Acquisition and disposal costs (65) (10)
Net cash used in operating activities (7) (39)
(1) Restated for discontinued operations (see note 1).
(2) The year ended 31 December 2023 includes £45 million
for the purchase of a buy-in policy for GKN Group Pension Scheme Number 4 (see
note 10).
(3) The year ended 31 December 2023 includes £17 million
of finance costs on the proportion of the Group's net debt strategically
allocated to demerged businesses at the start of the year and settled on
demerger (see note 4).
Reconciliation of cash and cash equivalents, net of bank overdrafts 31 December 31 December
2023
2022
£m
£m
Cash and cash equivalents per Balance Sheet 58 355
Bank overdrafts included within current interest-bearing loans and borrowings (1) (63)
Cash and cash equivalents, net of bank overdrafts per Statement of Cash Flows 57 292
Cash flow information relating to discontinued operations is as follows:
Cash flow from discontinued operations Year ended Restated(1)
31 December
Year ended
2023
31 December
£m
2022
£m
Net cash from discontinued operations 54 377
Defined benefit pension contributions paid (5) (36)
Tax paid (8) (81)
Interest paid on lease obligations (3) (6)
Interest paid on loans and borrowings (2) (11)
Net cash from operating activities from discontinued operations 36 243
Interest received - 3
Dividends received from equity accounted investments - 59
Purchase of property, plant and equipment (62) (203)
Proceeds from disposal of property, plant and equipment - 21
Purchase of computer software and capitalised development costs (5) (20)
Net cash used in investing activities from discontinued operations (67) (140)
Repayment of principal under lease obligations (6) (23)
Net cash used in financing activities from discontinued operations (6) (23)
(1) Restated for discontinued operations (see note 1).
Net debt reconciliation
Net debt consists of interest-bearing loans and borrowings (excluding any
acquisition related fair value adjustments) and cash and cash equivalents.
Net debt is considered to be an alternative performance measure as it is not
defined in IFRS. The most directly comparable IFRS measure is the aggregate of
interest-bearing loans and borrowings (current and non-current) and cash and
cash equivalents. A reconciliation from the most directly comparable IFRS
measure to net debt, used as a basis for banking covenant calculations, is
given below:
31 December 31 December
2023
2022
£m
£m
Interest-bearing loans and borrowings - due within one year (54) (63)
Interest-bearing loans and borrowings - due after one year (576) (1,433)
External debt (630) (1,496)
Less:
Cash and cash equivalents 58 355
(572) (1,141)
Adjustments: -
Non-cash acquisition fair value adjustments 2
Net debt (572) (1,139)
The table below shows the key components of the movement in net debt:
At Cash flow Acquisitions Other non-cash movements Effect of foreign exchange At
31 December
£m
and disposals
£m
£m
31 December
2022
£m
2023
£m
£m
External debt (excluding bank overdrafts) (1,433) (462) 1,205 18 43 (629)
Non-cash acquisition fair value adjustments 2 - - (2) - -
(1,431) (462) 1,205 16 43 (629)
Cash and cash equivalents, net of bank overdrafts 292 169 (385) - (19) 57
Net debt (1,139) (293) 820 16 24 (572)
GLOssary
Alternative Performance Measures ("APMs")
In accordance with the Guidelines on APMs issued by the European Securities
and Markets Authority ("ESMA"), additional information is provided on the APMs
used by the Group below.
In the reporting of financial information, the Group uses certain measures
that are not required under IFRS. These additional measures (commonly referred
to as APMs) provide additional information on the performance of the business
and trends to stakeholders. These measures are consistent with those used
internally, and are considered important to understanding the financial
performance and financial health of the Group. APMs are considered to be an
important measure to monitor how the businesses are performing because this
provides a meaningful comparison of how the business is managed and measured
on a day-to-day basis and achieves consistency and comparability between
reporting periods.
These APMs may not be directly comparable with similarly titled measures
reported by other companies and they are not intended to be a substitute for,
or superior to, IFRS measures. All Income Statement and cash flow measures are
provided for continuing operations unless otherwise stated and comparable
information has been restated((1)).
Income Statement Measures
APM
Adjusting items
Closest equivalent statutory measure
None
Reconciling items to statutory measure
Adjusting items (note 4)
Definition and purpose
Those items which the Group excludes from its adjusted profit metrics in order
to present a further measure of the Group's performance.
These include items which are significant in size or volatility or by nature
are non-trading or non-recurring or any item released to the Income Statement
that was previously a fair value item booked on an acquisition.
This provides a meaningful comparison of how the business is managed and
measured on a day-to-day basis and provides consistency and comparability
between reporting periods.
APM
Adjusted operating profit
Closest equivalent statutory measure
Operating profit/(loss)(2)
Reconciling items to statutory measure
Adjusting items (note 4)
Definition and purpose
The Group uses adjusted profit measures to provide a useful and more
comparable measure of the ongoing performance of the Group. Adjusted measures
are reconciled to statutory measures by removing adjusting items, the nature
of which are disclosed above and further detailed in note 4.
Adjusted operating profit Year ended Restated(1)
31 December
Year ended
2023
31 December
£m
2022
£m
Operating profit/(loss) 57 (270)
Adjusting items to operating profit/(loss) (note 4) 333 417
Adjusted operating profit 390 147
APM
Adjusted operating margin
Closest equivalent statutory measure
Operating margin(3)
Reconciling items to statutory measure
Adjusting items (note 4)
Definition and purpose
Adjusted operating margin represents Adjusted operating profit as a percentage
of revenue. The Group uses adjusted profit measures to provide a useful and
more comparable measure of the ongoing performance of the Group.
APM
Adjusted profit before tax
Closest equivalent statutory measure
Loss before tax
Reconciling items to statutory measure
Adjusting items (note 4)
Definition and purpose
Profit before the impact of adjusting items and tax. As discussed above,
adjusted profit measures are used to provide a useful and more comparable
measure of the ongoing performance of the Group. Adjusted measures are
reconciled to statutory measures by removing adjusting items, the nature of
which are disclosed above and further detailed in note 4.
Adjusted profit before tax Year ended Restated(1)
31 December
Year ended
2023
31 December
£m
2022
£m
Loss before tax (8) (328)
Adjusting items to loss before tax (note 4) 339 390
Adjusted profit before tax 331 62
APM
Adjusted profit after tax
Closest equivalent statutory measure
Profit/(loss) after tax
Reconciling items to statutory measure
Adjusting items (note 4)
Definition and purpose
Profit after tax but before the impact of the adjusting items. As discussed
above, adjusted profit measures are used to provide a useful and more
comparable measure of the ongoing performance of the Group. Adjusted measures
are reconciled to statutory measures by removing adjusting items, the nature
of which are disclosed above and further detailed in note 4.
Adjusted profit after tax Year ended Restated(1)
31 December
Year ended
2023
31 December
£m
2022
£m
Profit/(loss) after tax 1 (229)
Adjusting items to profit/(loss) after tax (note 4) 262 287
Adjusted profit after tax 263 58
APM
Constant currency
Closest equivalent statutory measure
Income Statement, which is reported using actual average foreign exchange
rates
Reconciling items to statutory measure
Constant currency foreign exchange rates
Definition and purpose
The Group uses GBP based constant currency models to measure performance.
These are calculated by applying 2023 average exchange rates to local currency
reported results for the current and prior year. This gives a GBP denominated
Income Statement which excludes any variances attributable to foreign exchange
rate movements.
APM
Adjusted EBITDA for leverage covenant purposes
Closest equivalent statutory measure
Operating profit/(loss)(2)
Reconciling items to statutory measure
Adjusting items (note 4), depreciation of property, plant and equipment and
amortisation of computer software and development costs, imputed lease
charge, share of non-controlling interests and other adjustments required for
leverage covenant purposes(4)
Definition and purpose
Adjusted operating profit for 12 months prior to the reporting date, before
depreciation of property, plant and equipment and before the amortisation of
computer software and development costs.
Adjusted EBITDA for leverage covenant purposes is a measure used by external
stakeholders to measure performance.
Adjusted EBITDA for leverage covenant purposes Year ended Year ended(5)
31 December
31 December
2023 2022
£m
£m
Adjusted operating profit 390 480
Depreciation of property, plant and equipment and amortisation of computer 142 406
software and development costs
(37) (63)
Imputed lease charge
- (5)
Non-controlling interests
20 (19)
Other adjustments required for leverage covenant purposes(4)
Adjusted EBITDA for leverage covenant purposes 515 799
APM
Adjusted tax rate
Closest equivalent statutory measure
Effective tax rate
Reconciling items to statutory measure
Adjusting items, adjusting tax items and the tax impact of adjusting items
(note 4 and note 5)
Definition and purpose
The income tax charge for the Group excluding adjusting tax items, and the tax
impact of adjusting items, divided by adjusted profit before tax.
This measure is a useful indicator of the ongoing tax rate for the Group.
Adjusted tax rate Year ended Restated(1)
31 December
Year ended
2023
31 December
£m
2022
£m
Tax credit per Income Statement 9 99
Adjusted for:
Tax impact of adjusting items (77) (105)
Tax impact of significant restructuring - 2
Adjusted tax charge (68) (4)
Adjusted profit before tax 331 62
Adjusted tax rate 20.5% 6.5%
APM
Adjusted basic earnings per share
Closest equivalent statutory measure
Basic earnings per share
Reconciling items to statutory measure
Adjusting items (note 4 and note 7)
Definition and purpose
Profit after tax attributable to owners of the parent and before the impact of
adjusting items, divided by the weighted average number of ordinary shares in
issue during the financial year.
APM
Adjusted diluted earnings per share
Closest equivalent statutory measure
Diluted earnings per share
Reconciling items to statutory measure
Adjusting items (note 4 and note 7)
Definition and purpose
Profit after tax attributable to owners of the parent and before the impact of
adjusting items, divided by the weighted average number of ordinary shares in
issue during the financial year adjusted for the effects of any potentially
dilutive options.
The Board considers this to be a key measure of performance when all
businesses are held for the complete reporting period.
APM
Interest cover
Closest equivalent statutory measure
None
Reconciling items to statutory measure
Not applicable
Definition and purpose
Adjusted EBITDA calculated for covenant purposes (including adjusted EBITDA of
businesses disposed) as a multiple of net interest payable on bank loans and
overdrafts.
This measure is used for bank covenant testing.
Balance Sheet Measures
APM
Working capital
Closest equivalent statutory measure
Inventories, trade and other receivables less trade and other payables
Reconciling items to statutory measure
Not applicable
Definition and purpose
Working capital comprises inventories, current trade and other receivables,
non-current other receivables, current trade and other payables and
non-current other payables. This measure provides additional information in
respect of working capital management.
APM
Net debt
Closest equivalent statutory measure
Cash and cash equivalents less interest-bearing loans and borrowings
Reconciling items to statutory measure
Reconciliation of net debt (note 11)
Definition and purpose
Net debt comprises cash and cash equivalents and interest-bearing loans and
borrowings but excludes non-cash acquisition fair value adjustments.
Net debt is one measure that could be used to indicate the strength of the
Group's Balance Sheet position and is a useful measure of the indebtedness of
the Group.
APM
Bank covenant definition of net debt at average rates and leverage
Closest equivalent statutory measure
Cash and cash equivalents less interest-bearing loans and borrowings
Reconciling items to statutory measure
Impact of foreign exchange and adjustments for bank covenant purposes
Definition and purpose
Net debt (as above) is presented in the Balance Sheet translated at year end
exchange rates.
For bank covenant testing purposes net debt is converted using average
exchange rates for the previous 12 months.
Leverage is calculated as the bank covenant definition of net debt divided by
adjusted EBITDA for leverage covenant purposes. This measure is used for bank
covenant testing.
Bank covenant definition of net debt at average rates and leverage 31 December 31 December(5)
2023 2022
£m
£m
Net debt at closing rates (note 11) 572 1,139
Impact of foreign exchange 12 (27)
Bank covenant definition of net debt at average rates 584 1,112
Leverage 1.1x 1.4x
APM
Proforma opening net debt and proforma opening leverage
Closest equivalent statutory measure
Cash and cash equivalents less interest-bearing loans and borrowings
Reconciling items to statutory measure
Disposal of businesses net of cash and cash equivalents disposed and
borrowings repaid, associated transaction costs, pension buy-in cost paid and
second interim dividend paid to shareholders
Definition and purpose
Proforma opening net debt represents net debt for the Group when excluding
transactions related to the demerger of the GKN Automotive, GKN Powder
Metallurgy and the GKN Hydrogen businesses.
Proforma opening net debt is one measure that could be used to indicate the
strength of the Group's opening Balance Sheet position and is a useful
measure to compare against the ongoing indebtedness of the Group.
Proforma opening net debt and proforma opening leverage £m
Opening net debt (note 11) (1,139)
Disposal of businesses, net of cash disposed (note 8) (320)
Settlement receipt from loans held with demerged entities (note 8) 1,205
Reduction in net debt following the demerger of Dowlais 885
Cash flows from discontinued operations (note 11) (37)
Finance costs on demerger settled net debt (note 4) (17)
Net cash outflow from Dowlais businesses to date of demerger (54)
Demerger related costs (62)
Pension buy-in (note 10) (45)
Debt refinancing costs (11)
Demerger related costs and pension buy-in (118)
Second interim dividend for the year ended 31 December 2022 (note 6) (61)
Proforma opening net debt (487)
Proforma opening adjusted EBITDA for leverage covenant purposes((6)) 266
Proforma opening leverage 1.8x
Cash Flow Measures
APM
Adjusted operating cash flow (pre-capex)
Closest equivalent statutory measure
Net cash from operating activities
Reconciling items to statutory measure
Non-working capital items (note 11)
Definition and purpose
Adjusted operating cash flow (pre-capex) is calculated as net cash from
operating activities before net cash from operating activities from
discontinued operations, restructuring costs paid and movements in provisions,
defined benefit pension contributions paid, tax paid, interest paid on loans
and borrowings, interest paid on lease obligations, acquisition and disposal
costs and the repayment of principal under lease obligations.
This measure provides additional useful information in respect of cash
generation and is consistent with how business performance is
measured internally.
Adjusted operating cash flow (pre-capex) Year ended Restated(1)
31 December
Year ended
2023
31 December
£m
2022
£m
Net cash from operating activities 29 204
Operating activities:
Net cash from operating activities from discontinued operations (36) (243)
Restructuring costs paid and movements in provisions((7)) 137 37
Defined benefit pension contributions paid 67 23
Tax paid 17 8
Interest paid on loans and borrowings 79 76
Interest paid on lease obligations 5 6
Acquisition and disposal costs 65 10
Debt related:
Repayment of principal under lease obligations (32) (29)
Adjusted operating cash flow (pre-capex) 331 92
APM
Free cash flow
Closest equivalent statutory measure
Net increase/decrease in cash and cash equivalents (net of bank overdrafts)
Reconciling items to statutory measure
Acquisition and disposal related cash flows, dividends paid to owners of the
parent, transactions in own shares and movements on borrowing facilities
Definition and purpose
Free cash flow represents cash generated after all trading costs including
restructuring, pension contributions, tax and interest payments.
Free cash flow Year ended Restated(1)
31 December
Year ended
2023
31 December
£m
2022
£m
Net decrease in cash and cash equivalents (net of bank overdrafts) (216) (203)
Debt related:
Repayment of borrowings 1,371 598
Drawings on borrowing facilities (628) (632)
Costs of raising debt finance 11 -
Equity related:
Dividends paid to owners of the parent 81 77
Purchase of own shares, including associated costs 93 504
Acquisition and disposal related:
Disposal of businesses, net of cash disposed 320 (478)
Settlement receipt from loans held with demerged entities (1,205) -
Equity accounted investments additions - 3
Disposal of equity accounted investments (3) -
Acquisition of subsidiaries, net of cash acquired - 4
Cash flows from/(used in) discontinued operations 37 (80)
Acquisition and disposal costs 65 10
Settlement of derivatives used in net investment hedging - 109
Finance costs on demerger settled net debt 17 -
GKN UK pension plan buy-in 45 -
Free cash flow (12) (88)
APM
Adjusted free cash flow
Closest equivalent statutory measure
Net increase/decrease in cash and cash equivalents (net of bank overdrafts)
Reconciling items to statutory measure
Free cash flow, as defined above, adjusted for restructuring cash flows
Definition and purpose
Adjusted free cash flow represents free cash flow adjusted for restructuring
cash flows.
APM Year ended Restated(1)
31 December
Adjusted free cash flow
Year ended
2023
31 December
£m
2022
£m
Free cash flow (12) (88)
Restructuring costs paid 125 53
Adjusted free cash flow 113 (35)
APM
Free cash flow pre-interest and tax and free cash flow pre-interest and tax
margin
Closest equivalent statutory measure
Net increase/decrease in cash and cash equivalents (net of bank overdrafts)
Reconciling items to statutory measure
Free cash flow, as defined above, adjusted for interest and tax cash flows
excluding finance costs on demerger settled net debt
Definition and purpose
Free cash flow pre-interest and tax represents free cash flow adjusted for
interest and tax and excluding finance costs on demerger settled net debt.
Free cash flow pre-interest and tax margin represents free cash flow adjusted
for interest and tax and excluding finance costs on demerger settled net debt
divided by revenue.
Free cash flow pre-interest and tax Year ended Restated(1)
31 December
Year ended
2023
31 December
£m
2022
£m
Free cash flow (12) (88)
Tax paid 17 8
Interest paid on loans and borrowings 79 76
Interest paid on lease obligations 5 6
Interest received (2) (1)
Finance costs on demerger settled net debt (17) -
Free cash flow pre-interest and tax 70 1
Free cash flow pre-interest and tax margin 2.1% 0.0%
APM
Capital expenditure (capex)
Closest equivalent statutory measure
None
Reconciling items to statutory measure
Not applicable
Definition and purpose
Calculated as the purchase of owned property, plant and equipment and computer
software and expenditure on capitalised development costs during the year,
excluding any assets acquired as part of a business combination.
Net capital expenditure is capital expenditure net of proceeds from disposal
of property, plant and equipment.
APM
Capital expenditure to depreciation ratio
Closest equivalent statutory measure
None
Reconciling items to statutory measure
Not applicable
Definition and purpose
Net capital expenditure divided by depreciation of owned property, plant and
equipment and amortisation of computer software and development costs.
APM
Dividend per share
Closest equivalent statutory measure
Dividend per share
Reconciling items to statutory measure
Not applicable
Definition and purpose
Amounts payable by way of dividends in terms of pence per share.
(1) Restated for discontinued operations (see note 1).
(2) Operating profit/(loss) is not defined within IFRS but is a widely
accepted profit measure being profit/(loss) before finance costs, finance
income and tax.
(3) Operating margin is not defined within IFRS but is a widely accepted
profit measure being derived from operating profit/(loss)(2) divided by
revenue.
(4) Included within other adjustments required for leverage covenant purposes
in the year ended 31 December 2023 are unrealised annual savings from spend
incurred in the year on restructuring projects. In the year ended 31 December
2022 are dividends received from equity accounted investments and the removal
of adjusted operating profit of equity accounted investments.
(5) Year ended 31 December 2022 remains aligned to the original calculations
supporting the Group's bank debt compliance certificate and has not been
restated for discontinued operations.
(6) Proforma opening adjusted EBITDA for leverage covenant purposes comprises
Aerospace adjusted operating profit, depreciation of property, plant and
equipment and amortisation of computer software and development costs, imputed
lease charge and proforma corporate costs of £30 million.
(7) Excludes non-cash utilisation of loss-making contract
provisions of £23 million (2022: £23 million).
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