REG - Weir Group PLC - Half-year Report <Origin Href="QuoteRef">WEIR.L</Origin> - Part 4
27/07/2017 07:10
- Part 4: For the preceding part double click ID:nRSa1966Mc
40.3 6.2 0.6 51.9
At 30 June 2016 23.9 53.0 35.6 3.4 115.9
Current 18.2 19.8 42.5 2.7 83.2
Non-current 5.3 49.6 4.6 0.7 60.2
At 31 December 2016 23.5 69.4 47.1 3.4 143.4
Warranties & onerous sales contracts
Provision has been made in respect of actual warranty and contract penalty claims on goods sold and services provided and
allowance has been made for potential warranty claims based on past experience for goods and services sold with a warranty
guarantee. It is expected that all costs related to such claims will have been incurred within five years of the balance
sheet date.
Provision has been made in respect of sales contracts entered into for the sale of goods in the normal course of business
where the unavoidable costs of meeting the obligations under the contracts exceed the economic benefits expected to be
received from the contracts. Provision is made immediately when it becomes apparent that expected costs will exceed the
expected benefits of the contract. It is expected that the majority of these costs will be incurred within one year of the
balance sheet date.
Employee related
Employee related provisions arise from legal obligations, some of which relate to compensation associated with periods of
service, while the majority are for asbestos-related claims.
Asbestos-related claims
Certain of the Group's US-based subsidiaries are co-defendants in lawsuits pending in the United States in which plaintiffs
are claiming damages arising from alleged exposure to products previously manufactured which contained asbestos. The Group
has comprehensive insurance cover for cases of this nature with all claims directly managed by the Group's insurers who
also meet associated defence costs. The insurers and their legal advisers agree and execute the defence strategy between
them and there are currently no related cash flows to or from the Group. We expect this to continue for the foreseeable
future.
During 2016, the estimates underlying the provision continued to be reassessed and refined as the Group's claims experience
developed. Since the initial review in 2014 the period of claims has been analysed to improve understanding of key
drivers, including the originating State of claims, average settlement and defence costs per State and the occurrence of
one-off claims and/or settlements. While the overall level of claims experience remained relatively immature, the
additional claims history provided the Group with growing confidence around our ability to estimate the level of future
claims.
Claims data for the current period indicates claims and indemnity costs for 2017 are broadly in line with model. The
provision has decreased by £2.8m to £44.7m (£0.6m offset for unwind of discount and related utilisation and £2.8m
favourable FX) in the period and the provision represents the Directors' best estimate of the future liability, although
these estimates and the period over which they are assessed will continue to be refined as the claims history develops. A
corresponding asset continues to be recognised for insurance proceeds.
In the UK, there are outstanding asbestos-related claims which are not the subject of insurance cover. The extent of the UK
asbestos exposure involves a series of legacy employers liability claims which all relate to former UK operations and
employment periods in the 1960's and 1970's. In 1989 the Group's employer's liability insurer (Chester Street Employers
Association Ltd) was placed into run-off which effectively generated an uninsured liability exposure for all future long
tail disease claims with an exposure period pre-dating 1 January 1972. All claims with a disease exposure post 1 January
1972 are fully compensated via the Government established Financial Services Compensation Scheme (FSCS). Any settlement to
a former employee whose service period straddles 1972 is calculated on a pro rata basis. The Group provides for these
claims based on management's best estimate of the likely costs given past experience of the volume and cost of similar
claims brought against the Group. An exercise was completed in 2016 which found based on additional claims experience the
actual claims cost is lower than the provision previously held. The provision was adjusted accordingly and the provision
has remained unchanged as at 30 June 2017 based on the level of claims activity in the period.
Exceptional rationalisation
Restructuring and rationalisation charges led to additions of £4.2m during the period of which £2.6m relates to the
Gabbioneta manufacturing facility closure in 2016 and £1.6m for other costs from 2016 restructuring projects. An extension
of a prior period legal claim resulted in £1.1m of additional costs.
During 2017 a transfer has been made from exceptional rationalisation to the warranty provision. Included in the
utilisation of the exceptional rationalisation provision in the period is non-cash utilisation items of £1.6m.
Other
Other provisions relate to penalties, legal claims and other exposures across the Group.
11. Interest-bearing loans and borrowings
The Group utilises a number of sources of funding including private placement debt, Euro commercial paper issuance,
revolving credit facilities and uncommitted facilities. At 30 June 2017, the Group had £865.6m (2016: £849.5m) of private
placement debt in issue, a total of £269.8m (2016: £185.0m) was issued under the commercial paper programme whilst £nil
(2016: £nil) was drawn under the revolving credit facility. Total unamortised issue costs at 30 June 2017 were £2.0m
(2016: £3.1m).
12. Pensions & other post-employment benefit plans
31 December 2016 30 June 2017 30 June 2016
£m £m £m
9.8 Plans in surplus 11.1 7.1
(147.0) Plans in deficit (130.4) (132.6)
(137.2) Net liability (119.3) (125.5)
The decrease in net liability of £17.9m in the period ended 30 June 2017 was primarily due to increases in value of the plan assets driven by changes in market conditions. A credit of £16.0m (2016: charge of £40.8m) has been recognised in the Consolidated Statement of Comprehensive Income.
13. Financial instruments
31 December 2016 30 June 2017 30 June 2016
£m £m £m
Included in non-current assets
- Other forward foreign currency contracts 0.1 0.3
- 0.1 0.3
Included in current assets
- Forward foreign currency contracts designated as cash flow hedges 0.1 0.4
- Forward foreign currency contracts designated as net investment hedges 7.1 -
24.0 Other forward foreign currency contracts 7.8 48.6
24.0 15.0 49.0
Included in current liabilities
(1.2) Forward foreign currency contracts designated as cash flow hedges (1.8) (1.0)
(15.2) Forward foreign currency contracts designated as net investment hedges (0.1) (26.7)
(6.3) Cross currency swaps designated as net investment hedges (17.5) -
(7.5) Other forward foreign currency contracts (13.1) (25.8)
(30.2) (32.5) (53.5)
Included in non-current liabilities
- Forward foreign currency contracts designated as cash flow hedges - (0.4)
(14.7) Cross currency swaps designated as net investment hedges - (12.4)
(0.2) Other forward foreign currency contracts (0.1) (1.0)
(14.9) (0.1) (13.8)
(21.1) Net derivative financial (liabilities) (17.5) (18.0)
Carrying amounts & fair values
Set out below is a comparison of carrying amounts and fair values of all of the Group's financial instruments that are reported in the financial statements.
Carrying amount Fair value Carrying amount Fair value Carrying amount Fair value
31 December 2016 31 December 2016 30 June 2017 30 June 2017 30 June 2016 30 June 2016
£m £m £m £m £m £m
Financial assets
24.0 24.0 Derivative financial instruments recognised at fair value through profit or loss 7.9 7.9 48.9 48.9
- - Derivative financial instruments in designated hedge accounting relationships 7.2 7.2 0.4 0.4
3.9 3.9 Contingent consideration receivable 2.9 2.9 - -
481.8 481.8 Trade & other receivables excluding statutory assets & prepayments* 544.6 544.6 443.2 443.2
258.6 258.6 Cash & short term deposits* 266.0 266.0 211.0 211.0
768.3 768.3 828.6 828.6 703.5 703.5
Financial liabilities
7.7 7.7 Derivative financial instruments recognised at fair value through profit or loss 13.2 13.2 26.8 26.8
37.4 37.4 Derivative financial instruments in designated hedge accounting relationships 19.4 19.4 40.5 40.5
31.0 31.0 Contingent consideration payable 30.4 30.4 34.5 34.5
Amortised cost:
917.5 1,012.7 Fixed rate borrowings 864.8 950.4 846.5 988.3
173.2 173.2 Floating rate borrowings 269.5 269.5 215.0 215.0
0.8 0.8 Obligations under finance leases 0.6 0.6 0.9 0.9
1.6 1.6 Bank overdrafts & short-term borrowings* 0.1 0.1 2.0 2.0
443.8 443.8 Trade & other payables excluding statutory liabilities & deferred income* 466.8 466.8 384.2 384.2
1,613.0 1,708.2 1,664.8 1,750.4 1,550.4 1,692.2
*The fair value of cash and short-term deposits, trade and other receivables and trade and other payables approximates their carrying amount due to the short-term maturities of these instruments. As such disclosure of the fair value hierarchy for these items is not required.
The Group enters into derivative financial instruments with various counterparties, principally financial institutions with
investment grade credit ratings. The derivative financial instruments are valued using valuation techniques with market
observable inputs including spot and forward foreign exchange rates, interest rate curves, counterparty and own credit
risk. The fair value of cross currency swaps is calculated as the present value of the estimated future cash flows based on
spot foreign exchange rates. The fair value of forward foreign currency contracts is calculated as the present value of
the estimated future cash flows based on spot and forward foreign exchange rates.
The Group uses the following hierarchy for determining and disclosing the fair value of financial instruments by valuation
technique:
Level 1: quoted (unadjusted) prices in active markets for identical assets or liabilities;
Level 2: other techniques for which all inputs that have a significant effect on the recorded fair value are observable,
either directly or indirectly;
Level 3: techniques which use inputs which have a significant effect on the recorded fair value that are not based on
observable market data.
For financial instruments that are recognised at fair value on a recurring basis, the Group determines whether transfers
have occurred between levels in the hierarchy by re-assessing categorisation (based on the lowest level input that is
significant to the fair value measurement as a whole) at the end of each reporting period.
The Group holds all financial instruments at level 2 fair value measurement, with the exception of contingent consideration
assessed as level 3. Contingent consideration payable at 31 December 2016 and 30 June 2017 primarily relates to the
acquisition of Weir International in 2011. The movements in the period to 30 June 2016 include the unwind of the discount
reflected in the Income Statement and the settlement of a contingent liability in relation to Trio. The contingent
consideration paid in the current period related to the acquisition of Delta and the purchase of a non-controlling
interest. There have been no other significant changes to the key performance indicators or the inputs to the fair value
calculation.
13. Financial instruments (continued)
A reconciliation of the fair value measurement of the contingent consideration payable is provided below.
Total
£m
Balance as at 1 January 2016 35.9
Fair value changes in profit or loss (0.1)
Exchange movements in the period 3.9
Contingent consideration paid (7.1)
Unwind of discount 1.9
Balance as at 30 June 2016 34.5
Balance as at 31 December 2016 31.0
Fair value changes in profit or loss 0.5
Exchange movements in the period (0.5)
Contingent consideration paid (1.4)
Unwind of discount 0.8
Balance as at 30 June 2017 30.4
Balance as at 1 January 2016 35.9
Liability arising on business combinations 0.6
Fair value changes in profit or loss (3.7)
Exchange movements in the period 5.0
Contingent consideration paid (10.6)
Unwind of discount 3.8
Balance as at 31 December 2016 31.0
During the period ended 30 June 2017 and the period ended 31 December 2016, there were no transfers between level 1 and
level 2 fair value measurements and no transfers into or out of level 3 fair value measurements.
The fair value of borrowings and obligations under finance leases is estimated by discounting future cash flows using rates
currently available for debt on similar terms, credit risk and remaining maturities. The fair value of cash and short-term
deposits, trade and other receivables and trade and other payables approximates their carrying amount due to the short-term
maturities of these instruments.
The estimated fair value of the contingent consideration at the date of acquisition is based on an assessment of the
probability of possible outcomes discounted to net present value. Subsequent changes to the fair value of the contingent
consideration are adjusted against the cost of acquisition where they qualify as measurement period adjustments. All other
subsequent changes in the fair value of contingent consideration classified as an asset or liability are accounted for in
accordance with relevant IFRSs. A substantial change in the expected future results of the entities to which contingent
liabilities relate or a significant change in the discount rate applied in the fair value calculation may result in a
change to the fair value recognised.
14. Additional cash flow information
Period ended Period ended Period ended
31 December 2016 30 June 2017 30 June 2016
£m £m £m
Total operations
Net cash generated from operations
90.3 Operating profit - continuing operations 81.0 48.7
(3.8) Operating loss - discontinued operations (0.1) (3.8)
86.5 Operating profit - total operations 80.9 44.9
77.5 Exceptional items 4.9 34.7
50.3 Amortisation of intangible assets 26.8 23.8
(7.2) Share of results of joint ventures (6.9) (3.5)
56.2 Depreciation of property, plant & equipment 27.9 26.9
(1.1) Gains on disposal of property, plant & equipment - (0.2)
(0.6) Funding of pension & post-retirement costs (0.8) (0.2)
4.1 Employee share schemes 4.9 4.7
6.6 Transactional foreign exchange 1.7 1.2
(11.3) Decrease in provisions 4.5 (5.4)
261.0 Cash generated from operations before working capital cashflows 143.9 126.9
7.1 (Increase) decrease in inventories (42.3) 10.3
57.5 (Increase) decrease in trade & other receivables and construction contracts (58.6) 25.7
(33.0) Increase (decrease) in trade & other payables and construction contracts 35.4 (29.9)
292.6 Cash generated from operations 78.4 133.0
(2.8) Additional pension contributions paid (2.0) -
(58.1) Exceptional cash items (16.9) (30.5)
(15.7) Income tax paid (15.3) 2.1
216.0 Net cash generated from operating activities 44.2 104.6
The employee related provision and associated insurance asset in relation to US asbestos-related claims disclosed in note 10 did not result in any cash flows either to or from the Group and therefore they have been excluded from the table above.
Cash flows from discontinued operations are disclosed in note 6.
Period ended Period ended Period ended
31 December 2016 30 June 2017 30 June 2016
£m £m £m
The following tables summarise the cash flows arising on acquisitions and disposals.
Acquisitions of subsidiaries
(10.6) Prior periods acquisitions contingent consideration paid (0.8) (7.1)
- Prior periods acquisitions completion adjustment 0.6 -
(10.6) Total cash outflow relating to acquisitions (0.2) (7.1)
Net cash inflow arising on disposal:
35.4 Consideration received in cash & cash equivalents - 34.8
(4.0) Less: cash and cash equivalents disposed of - (4.0)
31.4 - 30.8
Cash & cash equivalents comprise the following.
Cash & cash equivalents
258.6 Cash & short-term deposits 266.0 211.0
(1.6)
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