REG - Melrose Industries - Listing Rule 6.1.3D: Required Information <Origin Href="QuoteRef">MRON.L</Origin> - Part 2
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- Part 2: For the preceding part double click ID:nRSX5021Aa
10 and IAS 28: Sale or contribution of assets between an
investor and its associate or
joint venture
Annual improvements to IFRSs: 2014-16 Cycle
Clarifications to IFRS 15: Revenue from contracts with customers
The Directors do not expect that the adoption of the Standards listed above
will have a material impact on the financial statements of the Nortek Group in
future periods, except that IFRS 9 will impact both the measurement and
disclosures of financial instruments, IFRS 15 may have an impact on revenue
recognition and related disclosures and IFRS 16 will impact the recognition of
leases. Beyond the information above, it is not practicable to provide a
reasonable estimate of the effect of IFRS 9 and IFRS 15 until a detailed
review has been completed, which is planned to be undertaken in the next 12
months.
5. Business combinations
Nuiku
On May 19, 2016, one of the Nortek Group's wholly-owned subsidiaries completed
the acquisition of certain assets of Nuiku, Inc. ("Nuiku"), which was a
privately-owned company that had developed a data driven platform and cloud
based application program interface that enables natural language processing
for multiple products ("NLP Software"). The acquired NLP Software is expected
to be integrated with certain of the Nortek Group's Security & Smart
Technology and Air Management products. The Nortek Group completed the
acquisition of Nuiku to expand its technology and product offerings and
functionality. The Nortek Group acquired Nuiku for an aggregate initial all
cash purchase price of approximately $1.3 million, of which approximately $1.0
million was paid at closing and approximately $0.3 million was deferred to be
paid no later than August 14, 2017 subject to any reduction for
indemnification or other claims. There were no tangible assets acquired or
liabilities assumed and the Nortek Group concluded that the estimated fair
value of acquired developed technology was approximately $1.3 million. In
addition to the initial cash purchase price consideration, the asset purchase
agreement also contained a contingent purchase consideration provision whereby
the Nortek Group is required to pay additional consideration (all in cash), up
to a maximum of $2.3 million.
MiOS
On May 2, 2016, the Nortek Group purchased certain preferred stock of MiOS
Limited ("MiOS") for approximately $4.5 million (of which $4.0 million was
paid in cash), which represents an ownership of approximately 25% on a
fully-diluted basis. MiOS is a global technology company focused on
developing and distributing advanced control and monitoring solutions for the
home and small enterprise markets. Following the acquisition of Nortek by
Melrose on 31 August 2016, a decision was made to fully impair this
investment.
6. Reconciliation between profit and underlying profit
As described in note 2, underlying profit/(loss) is the alternative
performance measure used by the Board to monitor the underlying trading
performance of the Nortek Group. A reconciliation between the statutory loss
and underlying profit for 2016 is shown below:
Note Year ended
31 December 2016
$m
Operating loss (168.7)
Acquisition fees and expenses a 37.8
Restructuring and transformation charges b 93.2
Stock based compensation c 19.6
Amortisation of intangible assets d 69.6
Adjustments made on acquisition e 177.0
Other f 12.5
Total adjustments 409.7
Underlying operating profit 241.0
241.0
a. Acquisition fees and expenses of $37.8 million, which were incurred
primarily as a result of the Melrose transaction. These items are excluded
from underlying results due to their size and non-trading nature.
b. Restructuring and transformation charges of $93.2 million were
incurred during the year. These related principally to the closure of the
Nortek Head office and the restructuring of the Air Management segment where
the two Heating, Ventilation and Air Conditioning ("HVAC") businesses were
combined, closing various loss making businesses, making further cost
reductions and moving the centralised functions for warehousing, human
resources and IT back to the businesses. These items are excluded from
underlying results due to their size and non-trading nature.
c. There was a charge of $19.6 million recorded in the Income Statement
related to the IFRS 2 charge for the first eight months of 2016 and the
accelerated vesting of share options as a consequence of the Melrose
transaction, whereby the acquirer settled outstanding share options. These
items are excluded from underlying results due to their size and non-trading
nature.
d. The amortisation of intangible assets acquired in business
combinations are excluded from underlying results due to their non-trading
nature.
e. As a result of the acquisition, adjustments of $177.0 million were
made to the carrying value of assets and liabilities. This included changes in
management estimates for the recoverability of assets and the expected future
costs of provisions and liabilities. This non-recurring charge is not
representative of the underlying trading performance of the business and it
has been excluded from the underlying results by virtue of its size and
nature.
f. Other non-underlying charges incurred totalled $12.5 million. These
items are excluded from underlying results due to their non-trading nature.
Underlying profit before tax is as follows:
Note Year ended
31 December 2016
$m
Loss before tax (306.3)
Adjustments to operating profit per above 409.7
Loss from debt retirement g 31.3
Write-off of deferred finance costs g 14.2
Adjustments to loss before tax 455.2
Underlying profit before tax 148.9
Underlying profit before tax
148.9
g. As a result of the Melrose transaction as at 31 August 2016,
outstanding borrowings and accrued interest under the Nortek Group's 8.5%
Senior Notes and Senior Secured Term Loan Facility were repaid. The Nortek
Group recorded a loss on debt retirement of $31.3 million related to early
redemption premiums on the 8.5% Senior Notes and wrote-off $14.2 million of
deferred finance costs. These items are excluded from underlying results due
to their size and non-trading nature.
Underlying profit after tax is as follows:
Year ended
31 December 2016
$m
Loss for the year (195.1)
Adjustments to loss before tax per above 455.2
Tax effect of adjustments to underlying profit before tax (158.7)
Adjustments to loss for the year 296.5
Underlying profit after tax 101.4
101.4
7. Revenue and expenses
An analysis of the Nortek Group's revenue is as follows:
Year ended
31 December
2016
$m
Revenue from the sale of goods 2,437.3
Revenue from the provision of services 43.4
Total revenue 2,480.7
2,480.7
Net operating expenses comprise:
Year ended
31 December
2016
$m
Selling and distribution costs 241.5
Administration expenses 603.3
Shares of results of joint ventures 0.8
Total net operating expenses 845.6
845.6
Operating loss is stated after charging:
Year ended
31 December
2016
$m
Research and development costs 23.0
Depreciation 34.7
Amortisation of acquired intangibles 69.6
Amortisation of computer software 8.6
Foreign exchange losses 0.2
Operating lease expense 35.2
Write-down of inventory to net realisable value 41.9
Impairment of property, plant and equipment 13.7
Impairment of computer software 5.8
Impairment of trade receivables 12.1
Loss on sale of property, plant and equipment 0.1
Cost of inventories recognised as an expense 1,803.8
1,803.8
Staff costs during the year (including executive Directors) comprise:
Year ended
31 December
2016
$m
Salaries and wages 522.0
Pension costs (note 17)
-.... Defined benefit plans 0.5
-.... Defined contribution plans 2.1
Payroll taxes and other fringe benefits 26.7
Share-based compensation 19.6
Total staff costs 570.9
570.9
Average number of persons employed (including executive Directors):
Year ended
31 December
2016
Total average number of persons employed 11,092
11,092
Finance costs and income comprise:
Year ended
31 December
2016
$m
Interest on bank loans and overdrafts 70.6
Interest paid to parent undertaking 15.2
Amortisation of costs of raising finance 2.1
Loss from debt retirement 31.3
Write-off of deferred finance costs 14.2
Pension interest cost 1.6
Unwind of discount on provisions 0.1
Other 2.5
Finance costs, net 137.6
137.6
8. Tax
The analysis of the tax credit in the consolidated Income Statement is:
Year ended
31 December
2016
$m
Current tax (5.2)
Deferred tax (106.0)
Total tax credit in income statement (111.2)
(111.2)
The total tax credit of $111.2 million includes a tax credit classified as
non-underlying of $158.7 million. This credit is comprised of a credit of
$141.0 million on the non-underlying adjustments to operating profit of $409.7
million, a credit of $12.2 million on loss from debt retirement and a credit
of $5.5 million on write-off of deferred finance costs.
The tax credit for the year can be reconciled to the loss per the Income
Statement as follows:
Year ended
31 December
2016
$m
Loss before tax (306.3)
Tax on loss at US Federal Rate of 35% (107.2)
Disallowable expenses within underlying items 2.1
Disallowable items in respect of acquisition related costs 6.8
Temporary differences not recognised in deferred tax 5.1
Impact of foreign tax rates (17.6)
Tax credits and other rate differences 0.2
Credit in respect of prior years (0.6)
(111.2)
(111.2)
In addition to the tax credit within the Income Statement, a tax charge of
$0.8 million has been recognised directly in the Consolidated Statement of
Comprehensive Income in respect of actuarial movements on retirement benefit
obligations. Also, a tax credit of $3.8 million has been recognised in Other
Reserves in respect of the excess tax benefit on share based payments.
Deferred Taxes
The following table shows the major deferred tax assets and liabilities
recognised at 31 December 2016 and movements thereon during the current
period:
1 January 2016 P&L OCI Equity 31 December
2016
$m $m $m $m $m
Tax losses and other assets 102.2 114.2 (0.8) 3.8 219.4
Deferred tax on intangible assets (169.3) (8.2) --- --- (177.5)
Net deferred income tax (liabilities) / assets (67.1) 106.0 (0.8) 3.8 41.9
106.0
(0.8)
3.8
41.9
As at 31 December 2016, the Nortek Group had gross unused federal and
corporate losses of $133.5 million available for offset against future
profits. A deferred tax asset in respect of $27.2 million of these losses has
been recognised in the Balance Sheet. No asset was recognised in respect of
the remaining losses due to the geographic split of anticipated future profit
streams. The majority of these losses may be carried forward indefinitely
subject to certain continuity of business requirements. In addition, deferred
tax on tax credits and state tax losses with a combined value of $39.3 million
have been recognised and are available to set against future tax liabilities.
A deferred tax asset of $10.4 million was recognised in respect of retirement
benefit obligations.
As at 31 December 2016, the aggregate amount of temporary differences
associated with undistributed earnings of subsidiaries was $123.3 million on
which deferred tax liabilities not recognised were $41.7 million. No
liability is recognised in respect of $102.1 million of the differences
because the Nortek Group is in a position to control the timing of the
reversal of the temporary differences and it is probable that such differences
will not reverse in the foreseeable future.
9. Goodwill and other intangible assets
Goodwill Customer relationships Trademarks and tradenames Developed technology costs Computer Software Other Total
$m $m $m $m $m $m $m
Cost
At 1 January 2016 509.9 634.4 209.7 120.2 - 25.5 1,499.7
Additions - - - 1.0 3.4 - 4.4
Acquisition of businesses (note 5) - - - 1.3 - - 1.3
Disposals - - - - (4.8) - (4.8)
Reclassifications - - - - 60.7 - 60.7
At 31 December 2016 509.9 634.4 209.7 122.5 59.3 25.5 1,561.3
Amortisation
At 1 January 2016 (4.4) (233.5) (69.6) (53.4) - (24.1) (385.0)
Charge for the year - (41.2) (11.6) (16.4) (8.6) (0.4) (78.2)
Impairments - - - - (5.8) - (5.8)
Disposals - - - - 2.5 - 2.5
Reclassification - - - - (35.5) - (35.5)
At 31 December 2016 (4.4) (274.7) (81.2) (69.8) (47.4) (24.5) (502.0)
Net book value
At 31 December 2016 505.5 359.7 128.5 52.7 11.9 1.0 1,059.3
52.7
11.9
1.0
1,059.3
The goodwill generated as a result of major acquisitions represents the
premium paid in excess of the fair value of all net assets, including
intangible assets, identified at the point of acquisition. The goodwill
arising on acquisitions is attributable to the anticipated profitability and
cash flows arising from the businesses acquired, synergies as a result of the
complementary nature of the business with existing businesses, the assembled
workforce, technical expertise, knowhow, market share and geographical
advantages afforded to the Nortek Group.
The future improvements applied to the acquired businesses, achieved through a
combination of revised strategic direction, operational improvements and
investment, are expected to result in improved profitability of the acquired
businesses during the period of ownership. The combined value achieved from
these improvements is expected to be in excess of the value of goodwill
acquired.
Goodwill is allocated to groups of cash-generating units.
During the year, $25.2 million of computer related assets were reclassified
from machinery and equipment to software, there was no impact on net assets.
The Nortek Group tests goodwill annually for impairment or more frequently if
there are indications that goodwill might be impaired. Value in use
calculations are used to determine the recoverable amount of goodwill
allocated to each group of CGU which use the latest approved forecasts
extrapolated to perpetuity using growth rates shown below, and which do not
exceed the long-term growth rate for the relevant market.
The basis of these impairment tests and the key assumptions are set out in the
table below:
31 December 2016
Group of CGUs Basis of valuation Carrying value of goodwill Pre-tax discount rate Period of forecast Key assumptions applied in the forecast cash flow projections Long-term growth rate
$m
Air Management Value in use 263.2 12.8% 4 years Revenue growth, operating margins 3.0%
Security & Smart Technology Value in use 85.3 12.7% 4 years Revenue growth, operating margins 3.0%
Ergonomics Value in use 157.0 12.6% 4 years Revenue growth, operating margins 3.0%
12.6%
4 years
Revenue growth, operating margins
3.0%
Pre-tax risk adjusted discount rates
Cash flows are discounted using a pre-tax discount rate specific to each CGU.
Discount rates reflect the current market assessments of the time value of
money and are based on the estimated cost of capital of each CGU. In
determining the cost of equity, the Capital Asset Pricing Model ("CAPM") has
been used. Under CAPM, the cost of equity is determined by adding a risk
premium to the risk free rate to reflect the additional risk associated with
investing outside of lending to a country. The risk free rate is based on the
cost of US government bonds. The premium is based on an industry adjustment
("Beta") to the expected return of the equity market above the risk free
return. The relative risk adjustment reflects the risk inherent in each CGU
relative to all other sectors and geographies on average.
Assumptions applied in financial forecasts
The Nortek Group prepares cash flow forecasts derived from financial budgets
and medium term forecasts. The key assumptions used in forecasting pre-tax
cash flows relate to future budgeted revenue and operating margins likely to
be achieved and the likely rates of long-term growth by market sector.
Underlying factors in determining the values assigned to each key assumption
are shown below:
Revenue growth and operating margins
Revenue growth assumptions in the forecast period are based on financial
budgets and medium term forecasts by management, taking into account industry
growth rates and management's historical experience in the context of wider
industry and economic conditions. Projected sales are built up with reference
to markets and product categories. They incorporate past performance,
historical growth rates, projections of developments in key markets, secured
orders and orders likely to be achieved in the short to medium-term given
trends in the relevant market sector.
Operating margins have been forecast based on historical levels achieved
considering the likely impact of changing economic environments and
competitive landscapes on volumes and revenues and the impact of management
actions on costs. Projected margins reflect the impact of all initiated
projects to improve operational efficiency and leverage scale. The projections
do not include the impact of future restructuring projects to which the Nortek
Group is not yet committed. Forecasts for other operating costs are based on
inflation forecasts and supply and demand factors.
Long-term growth rates
Long-term growth rates are based on long-term forecasts for growth in the
sectors and geography in which the CGU operates. Long-term growth rates are
determined using a blend of publicly available historical data and a long-term
growth rate forecast and further take into account the international presence
and the markets in which each business operates.
10. Property, plant and equipment
Land, Machinery Total
buildings and and
improvements equipment
$m $m $m
Cost
At 1 January 2016 129.4 346.0 475.4
Additions 3.1 41.1 44.2
Reclassifications - (60.7) (60.7)
Derecognition of leased assets (31.5) - (31.5)
Disposals (6.9) (25.3) (32.2)
Exchange adjustments (1.6) (1.0) (2.6)
At 31 December 2016 92.5 300.1 392.6
Accumulated depreciation
At 1 January 2016 (35.1) (211.3) (246.4)
Depreciation (6.9) (27.8) (34.7)
Impairments - (13.7) (13.7)
Reclassifications - 35.5 35.5
Derecognition of leased assets 4.5 - 4.5
Disposals 3.6 24.1 27.7
Exchange adjustments 0.6 0.6 1.2
At 31 December 2016 (33.3) (192.6) (225.9)
Net book value
At 31 December 2016 59.2 107.5 166.7
107.5
166.7
During the year, $25.2 million of computer related assets were reclassified
from machinery and equipment to software, there was no impact on net assets.
As a result of the acquisition by Melrose, management performed a review of
finance leases held by Nortek. As a result of this review, management
identified previously classified finance leases that meet the definition of
operating leases, and hence have derecognised both the finance lease and the
corresponding fixed asset in the current financial year
As a result of the acquisition by Melrose, management carried out an
impairment review and recorded an impairment charge relating to machinery and
equipment of $13.7 million, which has been recognised in the Income
Statement.
11. Inventories
31 December
2016
$m
Raw materials 74.7
Work in progress 30.8
Finished goods 200.0
305.5
305.5
The Directors consider that there is no material difference between the
Balance Sheet value of inventories and their net realisable value.
12. Trade and other receivables
31 December
2016
$m
Current
Trade receivables 341.9
Allowance for doubtful receivables (21.3)
Interest-bearing loans to parent undertaking 29.1
Other receivables 16.8
Prepayments 15.2
381.7
381.7
Trade receivables are non-interest-bearing. Credit terms offered to customers
vary upon the country of operation but are generally between 30 and 90 days.
31 December
2016
$m
Non-current
Other receivables 3.5
3.5
An allowance has been made for estimated irrecoverable amounts with reference
to past default experience and management's assessment of credit worthiness,
an analysis of which is as follows:
Total
$m
At 1 January 2016 13.4
Income Statement charge 12.1
Utilised (5.1)
Other, including exchange differences 0.9
At 31 December 2016 21.3
At 31 December 2016
21.3
Concentrations of credit risk with respect to trade receivables are limited
due to the large number of customers comprising the Nortek Group's customer
base and their dispersion across many different geographical regions. No
single customer accounts for 10% or more of consolidated net sales or trade
and other receivables.
Included in the Nortek Group's trade receivables balance are overdue trade
receivables with a carrying amount of $64.5 million against which a provision
of $21.3 million is held.
Impaired trade receivables comprise:
31 December
2016
$m
1 - 30 days 10.6
31 - 60 days 7.6
60+ days 3.1
21.3
21.3
The balance deemed recoverable of $43.2 million is past due as follows:
31 December
2016
$m
1 - 30 days 43.2
31 - 60 days -
60+ days -
43.2
43.2
The Directors consider that the carrying amount of trade and other
receivables, including amounts not past due and not impaired, approximates
their fair value.
13. Trade and other payables
Current 31 December
2016
$m
Trade payables 248.4
Other payables 7.7
Other taxes and social security 7.2
Accruals 168.4
431.7
431.7
Trade payables are non-interest-bearing. The Directors consider that the
carrying amount of trade and other payables approximates their fair value.
Normal settlement terms vary by country and the average credit period taken
for trade purchases is 67 days.
Non-current 31 December
2016
$m
Other payables 11.8
Accruals 5.1
16.9
16.9
14. Interest-bearing loans and borrowings
The Nortek Group has the following interest-bearing loans and borrowings:
Current 31 December Non-current 31 December 2016 Total 31 December 2016
2016
$m $m $m
Amounts owed to parent undertaking --- 743.8 743.8
Obligations under finance leases 0.9 1.0 1.9
Other loans --- 1.7 1.7
Bank advances of the Nortek Group's foreign subsidiaries 0.5 --- 0.5
Total interest-bearing loans and borrowings 1.4 746.5 747.9
---
0.5
Total interest-bearing loans and borrowings
1.4
746.5
747.9
As at 31 December 2016, the Nortek Group was owed $29.1 million from its
parent undertaking. Amounts owed by parent undertaking receive interest at
interbank rates adjusted by a margin. The margin as at 31 December 2016 was
0.25%.
Amounts owed to parent undertaking of $743.8 million bear interest at 7.00%.
As a result of the Melrose transaction as at 31 August 2016, outstanding
borrowings and accrued interest under the Nortek Group's 8.5% Senior Notes of
$735.0 million and $28.6 million, respectively, and the Senior Secured Term
Loan Facility of $605.4 million and $1.9 million were repaid. Additionally,
early redemption premiums of $31.3 million related to the 8.5% Senior Notes
were paid. Of these amounts, the Nortek Group paid $30.0 million, with the
remainder being paid by Melrose. The Nortek Group recorded a loss on debt
retirement of $31.3 million related to such early redemption premiums on the
8.5% Senior Notes and wrote-off $14.2 million of deferred finance costs.
Maturity of financial liabilities
The table below shows the maturity profile of anticipated future cash flows,
including interest, on an undiscounted basis in relation to the Nortek Group's
financial liabilities. The amounts shown therefore differ from the carrying
value and fair value of the Nortek Group's financial liabilities.
Interest- Derivative Other Total
bearing financial financial financial
loans and liabilities liabilities liabilities
borrowings
$m $m $m $m
Within one year 59.2 1.8 424.5 485.5
Two to five years 961.1 - 16.9 978.0
More than five years 1.0 - - 1.0
Effect of financing rates (273.4) - - (273.4)
31 December 2016 747.9 1.8 441.4 1,191.1
441.4
1,191.1
15. Financial instruments risk management objectives and policies
Fair values
The Nortek Group determines the fair market values of its financial
instruments, based on the fair value hierarchy, which requires an entity to
maximise the use of observable inputs and minimise the use of unobservable
inputs when measuring fair value. Observable inputs are inputs that reflect
the assumptions market participants would use in pricing the asset or
liability developed based on the best information available in the
circumstances. The Nortek Group's assessment of the significance of a
particular input to the fair value measurement requires judgment, and may
affect the classification of fair value assets and liabilities within the fair
value hierarchy levels.
31 December 2016
Fair value measuring using
Level 2
$m
Financial assets measured at fair value
Derivative financial assets - foreign currency forward contracts 1.3
Financial liabilities measured at fair value
Derivative financial liabilities - foreign currency forward contracts (1.8)
Derivative financial liabilities - foreign currency forward contracts
(1.8)
There have been no transfers between levels in the year.
Foreign Currency Contracts
The Nortek Group had foreign currency hedge contracts outstanding with a
notional amount of approximately $47.2 million as of 31 December 2016. There
were no material unrealised gains or losses related to contracts outstanding
as of 31 December 2016.
The Nortek Group has determined the fair value of its derivative instruments
considering the estimated amount it would receive or pay to sell or transfer
these instruments at the reporting date and by taking into account currency
exchange rates, the creditworthiness of the counterparty for assets, and the
Nortek Group's creditworthiness for liabilities. Generally, the Nortek Group
uses inputs that include quoted prices for similar assets or liabilities in
active markets.
The Nortek Group has classified its derivative assets and liabilities within
Level 2 of the fair value hierarchy, because these observable inputs are
available for substantially the full term of its derivative instruments.
Neither the total derivative assets nor the total derivative liabilities were
material as of 31 December 2016.
Financial risk management
The Nortek Group is exposed to credit risk, capital risk, liquidity risk,
interest rate risk and foreign currency risk. All derivative activities for
risk management purposes are carried out by specialist teams that have the
appropriate skills, experience and supervision. It is the Nortek Group's
policy that no trading in derivatives for speculative purposes may be
undertaken.
Credit risk
The Nortek Group's principal financial assets were cash and cash equivalents,
loans receivable from parent undertaking and trade and other receivables for
which the carrying values represent the Nortek Group's maximum exposure to
credit risk in relation to financial assets and derive directly from its
operations.
The Nortek Group's credit risk on cash and cash equivalents was limited
because the counterparties were banks with strong credit ratings assigned by
international credit rating agencies. The Nortek Group's credit risk was
primarily attributable to its trade receivables and other receivables. The
amounts presented in the Balance Sheet were net of allowances for doubtful
receivables, estimated by the Nortek Group's management based on prior
experience and their assessment of the current economic environment.
Concentrations of credit risk with respect to trade receivables are limited
due to the large number of customers comprising the Nortek Group's customer
base and their dispersion across many different geographical regions.
Capital risk
The Nortek Group manages its capital to ensure that entities in the Nortek
Group will be able to continue as a going concern.
The capital structure of the Nortek Group as at 31 December 2016 consisted of
cash and equity attributable to equity holders of the parent, comprising
issued share capital and reserves.
Liquidity risk
The Nortek Group's primary liquidity needs are to fund general business
requirements, including working capital requirements, capital expenditures,
interest payments, and debt repayments. Nortek's principal sources of
liquidity are cash flows from operations, existing cash and cash equivalents,
loans receivable from its parent undertaking and the use of borrowings from
its parent undertaking.
Interest rate risk
Interest rate risk is the risk that the fair value or future cash flows of a
financial instrument will fluctuate because of changes in market interest
rates. The Nortek Group is exposed to market risk from changes in interest
rates primarily through its borrowing activities.
The long-term borrowings from the parent undertaking bear interest at fixed
interest rates.
Based upon interest rates in effect at 31 December 2016, an overall increase
in interest rates of 100 basis points would result in additional interest
income of $0.8 million.
Foreign currency risk
Foreign currency risk is the risk that the fair value or future cash flows of
an exposure will fluctuate because of changes in foreign exchange rates.
The Nortek Group manufactures, markets and sells its products globally and, as
a result, a portion of its sales are generated outside the United States in
local currencies. The Nortek Group also incurs certain manufacturing,
marketing and selling costs in international markets in local currency.
Accordingly, the Nortek Group's earnings and cash flows are exposed to market
risk from changes in foreign currency exchange rates relative to the US
dollar, the Nortek Group's reporting currency.
The Nortek Group manages its exposure to foreign currency exchange risk
principally by trying to minimise its net investment in foreign assets.
An overall unfavourable change in foreign exchange rates in effect at 31
December 2016 of 10% would result in an increase in equity as a result of the
impact on the cumulative translation adjustment of approximately $11.8
million. Additionally, an overall unfavourable change in foreign exchange
rates in effect at the reporting date of 10% would result in a net loss of
$1.0 million to operating profit as a result of the impact on the foreign
exchange gains and losses.
16. Provisions
Other Environmental Surplus Employee related Product liability Warranty related Total
and leasehold property
legal costs costs
$m $m $m $m $m $m $m
At 1 January 2016 5.3 3.4 - 11.4 43.9 51.0 115.0
Utilised (33.4) (4.4) (0.7) (55.4) (6.4) (25.7) (126.0)
Net charge to operating profit 69.6 45.1 20.1 54.8 15.2 64.2 269.0
Unwind of discount --- --- 0.1 --- --- --- 0.1
Exchange differences 0.1 (0.2) --- --- --- (0.2) (0.3)
At 31 December 2016 41.6 43.9 19.5 10.8 52.7 89.3 257.8
Current 35.7 32.2 4.1 6.4 14.4 35.7 128.5
Non-current 5.9 11.7 15.4 4.4 38.3 53.6 129.3
Total 41.6 43.9 19.5 10.8 52.7 89.3 257.8
10.8
52.7
89.3
257.8
The provision for surplus leasehold property costs represents the estimated
net payments payable over the term of these leases together with any
dilapidation costs. This is expected to result in cash expenditure over the
next one to eight years.
Environmental and legal costs provisions relate to the estimated remediation
costs of pollution, soil and groundwater contamination at certain sites and
estimated future costs and settlements in relation to legal claims. Due to
their nature, it is not possible to predict precisely when these provisions
will be utilised.
The provision for warranty related costs represents the best estimate of the
expenditure required to settle the Nortek Group's obligations, based on past
experiences. Warranty terms are, on average, between one and five years.
The employee related provision relates to the estimated cost of the Nortek
Group's health insurance and workers compensation plans. The product liability
provision relates to the estimated cost of future product and general
liabilities claims. Due to their nature it is not possible to predict
precisely when these provisions will be utilised.
Other provisions relate to costs that will be incurred in respect of
restructuring programmes, usually resulting in cash spend within one year. In
addition other provisions include long term incentive plans for divisional
senior management and the employer tax on equity-settled incentive schemes
which are expected to result in cash expenditure over the next five years.
Where appropriate, provisions have been discounted using a discount rate of
3%.
Other Commitments and Contingencies
The Nortek Group is subject to other contingencies, including legal
proceedings and claims, arising out of its businesses that cover a wide range
of matters including, among others, environmental matters, contract and
employment claims, workers' compensation claims, product liability, warranty,
and modification and adjustment or replacement of component parts of units
sold, which include product recalls. Product liability, environmental and
other legal proceedings also include matters with respect to businesses
previously owned. Whilst it is difficult to reasonably estimate the timing and
ultimate outcome of these contingent liabilities, management estimates that
the financial effect of these contingent liabilities could be approximately
$30 million. These liabilities are not probable and therefore have not been
provided for.
17. Pensions and other post-employment benefits plans
Retirement benefit obligations
Defined contribution plans
The Nortek Group operates defined contribution plans for qualifying employees
across several jurisdictions. The assets of the plans are held separately from
those of the Nortek Group in funds under the control of trustees.
The total costs charged during the year of $2.1 million represents
contributions payable to these plans by the Nortek Group at rates specified in
the rules of the plans.
Defined benefit plans
The Nortek Group's pension plans offer subsidised early retirement and lump
sum payments. The Nortek Group's policy is to generally fund currently at
least the minimum required annual contribution of its various qualified
defined benefit plans. The Nortek Group contributed $5.8 million to the
continuing defined benefit pension plans in the year ended 31 December 2016.
At 31 December 2016, the Nortek Group expects to contribute approximately $5.9
million to its defined benefit pension plans in 2017.
The cost of the Nortek Group's defined benefit plans are determined using the
advice of independent professionally qualified actuaries on the basis of
formal actuarial valuations and using the projected unit credit method. In
line with normal practice, these valuations are undertaken triennially in the
UK and annually in the US.
The valuation of the US Pension Plan was based on a full actuarial valuation
as of 1 January 2016, updated at 31 December 2016 by independent actuaries.
The valuation of the UK Pension Plan was based on a full actuarial valuation
as of 5 April 2015, updated at 31 December 2016 by independent actuaries.
Actuarial assumptions
The discount rate assumptions used by the actuaries in calculating the Nortek
Group's pension liabilities are as set out below:
31 December 2016
UK Plan % p.a. US Pension Plan % p.a.
Discount rate 2.7% 3.9%
2.7%
3.9%
The Nortek Group utilises long-term investment-grade bond yields as the basis
for selecting a discount rate by which plan obligations are measured. An
analysis of projected cash flows for each plan is performed in order to
determine plan-specific duration. Discount rates are selected based on high
quality corporate bond yields of similar durations.
Mortality
UK Pension Plan
Mortality assumptions for the UK Pension Plan, as at 31 December 2016 were
based on the Self-Administered Pension Scheme ('SAPS') 'S1' base tables with a
scaling factor of 120%, which reflected the results of a mortality analysis
carried out on the plan's membership. Future improvements are in line with the
Continuous Mortality Investigation ('CMI') improvement model with a long-term
rate of improvement of 1.25% p.a. for both males and females.
The assumptions were that a member currently aged 65 will live on average for
a further 21.0 years if they are male and for a further 23.1 years if they are
female. For a member who retires in 2036 at age 65, the assumptions were that
they will live for a further 22.7 years after retirement if they are male and
for a further 24.9 years after retirement if they are female.
US Pension Plan
The mortality assumptions adopted as at 31 December 2016 were set to reflect
the Nortek Group's best estimate view of life expectancies of members of the
pension arrangement. Each assumption reflected the characteristics of the
membership of the US Pension Plan.
The assumptions were that a member currently aged 65 will live on average for
a further 20.2 years if they are male and for a further 22.3 years if they are
female. For a member who retires in 2036 at age 65, the assumptions were that
they will live for a further 21.8 years after retirement if they are male and
for a further 23.9 years after retirement if they are female.
Balance Sheet disclosures
The amounts recognised in the Balance Sheet arising from net liabilities in
respect of defined benefit plans were as follows:
31 December 2016
$m
Present value of funded defined benefit obligations (154.9)
Fair value of plan assets 116.3
Funded status (38.6)
Present value of unfunded defined benefit obligations (7.6)
Net liabilities (46.2)
Net liabilities
(46.2)
The plan liabilities and assets at 31 December 2016 were split by plan as
follows:
UK and European US Total
Pension Plans Pension Plan
$m $m $m
Plan liabilities (44.5) (118.0) (162.5)
Plan assets 25.4 90.9 116.3
Net liabilities (19.1) (27.1) (46.2)
(27.1)
(46.2)
At 31 December 2016, $90.9 million of assets in relation to the Nortek US Plan
were held in cash as they were in the process of being transferred to the new
plan custodian. The investment strategy is now approximately 60% equities and
40% bonds.
The assets were well diversified and the majority of plan assets had quoted
prices in active markets. All government bonds were issued by reputable
governments and were generally AA rated or higher. Interest rate and inflation
rate swaps were also employed to complement the role of fixed and index-linked
bond holdings for liability risk management.
The trustees continually review whether the chosen investment strategy is
appropriate with a view to providing the pension benefits and to ensure
appropriate matching of risk and return profiles. The main strategic policies
included maintaining an appropriate asset mix, managing interest rate
sensitivity and maintaining an appropriate equity buffer. Investment results
were regularly reviewed.
Movements in the present value of defined benefit obligations during the
year:
Year ended
31 December 2016
$m
At beginning of year 166.8
Current service cost 0.5
Interest cost on obligations 6.0
Remeasurement losses - demographic 0.9
Remeasurement losses - financial 8.9
Remeasurement gains - experience (3.6)
Benefits paid out of assets (11.4)
Benefits paid out of Company assets for unfunded plans (1.2)
Currency translation differences (4.4)
At end of year 162.5
162.5
The defined benefit plan liabilities were 10% in respect of active plan
participants, 24% in respect of deferred plan participants and 66% in respect
of pensioners.
The weighted average duration of the defined benefit plan liabilities at 31
December 2016 was 12.2 years.
Movements in the fair value of plan assets during the year:
Year ended
31 December
2016
$m
At beginning of year 120.1
Interest income on plan assets 4.4
Return on plan assets (excluding amounts included in net interest expense) 3.5
Contributions 4.6
Benefits paid (11.4)
Expenses paid out of plan assets (1.0)
Currency translation differences (3.9)
At end of year 116.3
116.3
Income Statement disclosures
Amounts recognised in the Income Statement in respect of these defined benefit
plans were as follows:
Year ended
31 December
2016
$m
Included within operating profit:
-current service costs 0.5
-administrative expenses 1.0
-total included in operating profit 1.5
Included within net finance costs:
-net interest 1.6
1.6
Statement of Comprehensive Income disclosures
Amounts recognised in the Statement of Comprehensive Income in respect of
these defined benefit plans were as follows:
Year ended
31 December
2016
$m
Return on plan assets, excluding amounts included in net interest expense 3.5
Actuarial losses arising from changes in demographic assumptions (0.9)
Actuarial losses arising from changes in financial assumptions (8.9)
Actuarial gains arising from experience adjustments 3.6
Net remeasurement loss on retirement benefit obligations (2.7)
(2.7)
Risks and sensitivities
The defined benefit plans expose the Nortek Group to actuarial risks, such as
longevity risk, currency risk, salary risk, interest rate risk and market
(investment) risk. The Nortek Group is not exposed to any unusual, entity
specific or plan specific risks.
A sensitivity analysis on the principal assumptions used to measure the plan
liabilities at 31 December 2016 was as follows:
Change in Decrease/
assumption (increase) to plan
liabilities
$m
Rate of salary increase Increase by 0.1% (0.5)
Decrease by 0.1% 0.5
Discount rate Decrease by 0.1% (2.0)
Increase by 0.1% 1.9
Assumed life expectancy (rate of mortality) Increase by 1 year (5.1)
Decrease by 1 year 5.1
5.1
The sensitivity analysis above was determined based on reasonable possible
changes to the respective assumptions, while holding all other assumptions
constant. There has been no change in the methods and assumptions used in
preparing the sensitivity analysis from prior years.
The sensitivities were based on the relevant assumptions and membership
profile as at 31 December 2016 and were applied to the obligations at the end
of the reporting period. Whilst the analysis does not take account of the full
distribution of cash flows expected, it does provide an approximation to the
sensitivity of the assumptions shown. Extrapolation of these results beyond
the sensitivity figures shown may not be appropriate and the sensitivity
analysis presented may not be representative of the actual change in the
defined benefit obligation as it is unlikely that the change in assumptions
would occur in isolation of one another as some of the assumptions may be
correlated.
18. Share-based payments
As a result of the Melrose transaction, all share based awards, including
restricted stock, previously granted immediately vested and became
exercisable. There was a charge of $19.6 million recorded in the Income
Statement related to the IFRS 2 charge for the first eight months of 2016 and
the accelerated vesting of share options as a consequence of the Melrose
transaction, whereby the acquirer settled outstanding share options. In
conjunction with the Melrose transaction, the total value of these share based
awards were settled and the net cash value of $59.7 million was paid. There
are no
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