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
adjusted1 operating profit more than doubles to £420 million (pre-PLC
costs) and ahead of guidance
· 2024
adjusted1 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
|
Adjusted1
results
|
Statutory results
|
|
2023
|
20222
|
2023
|
20222
|
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 debt1
|
572
|
n/a
|
n/a
|
n/a
|
Leverage1
|
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 highlights3
· Revenue of
£3.35 billion, 17% growth over last year (13% including businesses
being exited)
· Adjusted1
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%
· Adjusted1
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)
· Adjusted1
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
flow1 better than expectations
· Net
debt1 of £572 million,
representing leverage1 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 highlights3
Engines
· Engines
revenue growth of 16% to £1.19 billion with adjusted1
operating profit up 92% to £310 million and adjusted1
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). Adjusted1 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
adjusted1 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
adjusted1 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
Montfort Communications: +44 (0)
20 3514 0897
Nick Miles:
+44 (0) 7739 701 634, miles@montfort.london
Charlotte McMullen:
+44 (0) 7921 881 800,
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
Engines adjusted results
|
2023
£m
|
2022
£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
£m
|
2022
£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 flat3 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 1000th Honeywell HTF Nacelle
and its 600th 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
£m
|
Structures
£m
|
Aerospace
£m
|
Corporate
£m
|
Total
£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
£m
|
2022
£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 and liabilities
|
(114)
|
79
|
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
£m
|
Structures
£m
|
Corporate
£m
|
Total
£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
£m
|
2022
£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
£m
|
2022
£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
£m
|
2022
£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:
|
Assets
£m
|
Liabilities
£m
|
Accounting
deficit
£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
|
|
Average
rate
|
Closing
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.
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
2023
|
30 June
2024
|
31 December
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
Continuing operations
|
Engines
£m
|
Structures
£m
|
Total
£m
|
Timing of revenue recognition
At a point in time
Over time
|
931
262
|
1,457
700
|
2,388
962
|
Revenue
|
1,193
|
2,157
|
3,350
|
Year ended 31 December 2022 -
restated(1)
Continuing operations
|
Engines
£m
|
Structures
£m
|
Total
£m
|
Timing of revenue recognition
At a point in time
Over time
|
806
229
|
1,224
695
|
2,030
924
|
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
Continuing operations
|
Engines
£m
|
Structures
£m
|
Corporate(1)
£m
|
Total
£m
|
Adjusted operating profit/(loss)
|
310
|
110
|
(30)
|
390
|
Items not included in adjusted operating
profit(2):
Amortisation of intangible assets acquired in
business combinations
Restructuring costs
Melrose equity-settled compensation scheme
charges
Acquisition and disposal related gains and
losses
Movement in derivatives and associated
financial assets and liabilities
Net release and changes in
discount rates of fair value items
|
(135)
(26)
-
-
(3)
1
|
(125)
(111)
-
-
(6)
2
|
-
(12)
(38)
(3)
123
-
|
(260)
(149)
(38)
(3)
114
3
|
Operating profit/(loss)
|
147
|
(130)
|
40
|
57
|
Finance costs
Finance income
|
|
|
|
(79)
14
|
Loss before tax
Tax
|
|
|
|
(8)
9
|
Profit after tax for the year from continuing
operations
|
|
|
|
1
|
Year ended 31 December 2022 -
restated(3)
Continuing operations
|
Engines
£m
|
Structures
£m
|
Corporate(1)
£m
|
Total
£m
|
Adjusted operating profit/(loss)
|
162
|
24
|
(39)
|
147
|
Items not included in adjusted operating
profit(2):
Amortisation of intangible assets acquired in
business combinations
Restructuring costs
Movement in derivatives and associated
financial assets and liabilities
Melrose equity-settled compensation scheme
charges
Net release and changes in discount rates of
fair value items
Acquisition and disposal related gains and
losses
|
(135)
(25)
20
-
3
(5)
|
(125)
(63)
1
-
9
-
|
-
(2)
(100)
(15)
-
20
|
(260)
(90)
(79)
(15)
12
15
|
Operating profit/(loss)
|
20
|
(154)
|
(136)
|
(270)
|
Finance costs
Finance income
|
|
|
|
(83)
25
|
Loss before tax
Tax
|
|
|
|
(328)
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
2023
£m
|
Restated(1)
31 December
2022
£m
|
|
31 December
2023
£m
|
Restated(1)
31 December
2022
£m
|
Engines
Structures
Corporate
|
3,957
2,388
584
|
3,798
2,894
761
|
|
1,396
1,099
867
|
1,202
1,315
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
owned assets(1)
|
|
Depreciation of
leased assets
|
|
Year ended
31 December
2023
£m
|
Restated(2)
Year ended
31 December
2022
£m
|
|
Year ended
31 December
2023
£m
|
Restated(2)
Year ended
31 December
2022
£m
|
|
Year ended
31 December
2023
£m
|
Restated(2)
Year ended
31 December
2022
£m
|
Engines
Structures
Corporate
|
55
63
-
|
38
39
-
|
|
43
74
-
|
46
77
-
|
|
7
17
1
|
7
14
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
external customers
|
|
Segment assets
|
|
Year ended
31 December
2023
£m
|
Restated(2)
Year ended
31 December
2022
£m
|
|
31 December
2023
£m
|
Restated(2)
31 December
2022
£m
|
UK
Rest of Europe
North America
Other
|
579
540
2,138
93
|
509
408
1,971
66
|
|
882
2,166
1,179
22
|
1,042
2,501
1,038
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
31 December
2023
£m
|
Restated(1)
Year ended
31 December
2022
£m
|
Operating profit/(loss)
|
|
57
|
(270)
|
Amortisation of intangible assets acquired in
business combinations
Restructuring costs
Melrose equity-settled compensation scheme
charges
Acquisition and disposal related gains and
losses
Movement in derivatives and associated
financial assets and liabilities
Net release and changes in discount rates of
fair value items
|
a
b
c
d
e
f
|
260
149
38
3
(114)
(3)
|
260
90
15
(15)
79
(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
31 December
2023
£m
|
Restated(1)
Year ended
31 December
2022
£m
|
Loss before tax
|
|
(8)
|
(328)
|
Adjustments to operating profit/(loss) as
above
Finance costs on demerger settled net
debt
Accelerated unamortised debt issue
costs
Bond redemption gains
Fair value changes on cross-currency
swaps
|
g
h
i
j
|
333
17
2
(13)
-
|
417
-
-
(24)
(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
31 December
2023
£m
|
Restated(1)
Year ended
31 December
2022
£m
|
Profit/(loss) after tax
|
|
1
|
(229)
|
Adjustments to loss before tax as
above
Tax effect of adjustments to loss before
tax
Tax effect of significant
restructuring
|
5
5
|
339
(77)
-
|
390
(105)
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
31 December
2023
£m
|
Restated(1)
Year ended
31 December
2022
£m
|
Analysis of tax charge/(credit) in the
year:
|
|
|
Current tax
|
|
|
Current year tax charge
Adjustments in respect of prior
years
|
19
4
|
16
(4)
|
Total current tax charge
|
23
|
12
|
Deferred tax
Origination and reversal of temporary
differences
Adjustments in respect of prior
years
Tax on the change in value of derivative
financial instruments
Adjustments to deferred tax attributable to
changes in tax rates
Non-recognition of deferred tax
|
(61)
(3)
29
(1)
4
|
(85)
(8)
(25)
(1)
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)
|
Analysis of tax credit on continuing operations
in the year:
|
£m
|
£m
|
Tax charge in respect of adjusted profit before
tax
Tax credit recognised as an adjusting
item
|
68
(77)
|
4
(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
31 December
2023
£m
|
Restated(1)
Year ended
31 December
2022
£m
|
Profit/(loss) before tax:
Continuing operations
Discontinued operations (note 8)
|
(8)
25
|
(328)
(38)
|
|
17
|
(366)
|
Tax charge/(credit) on profit/(loss) before tax
at 23.5% (2022: 25.0%)
Tax effect of:
Disallowable expenses and other permanent
differences within adjusted profit
Disallowable items included within adjusting
items
Temporary differences not recognised in
deferred tax
Tax credits and withholding taxes
Adjustments in respect of prior
years
Tax charge classified within adjusting items -
continuing operations
Tax charge classified within adjusting items -
discontinued operations
Effect of changes in tax rates
Effect of rate differences between UK and
overseas rates
|
4
(9)
8
5
3
13
-
-
(2)
(3)
|
(91)
4
(2)
13
15
(29)
2
8
1
-
|
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
31 December
2023
£m
|
Year ended
31 December
2022
£m
|
Deferred tax movements on retirement benefit
obligations
Deferred tax movements on hedge relationship
gains and losses
|
(29)
8
|
1
(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
31 December
2023
£m
|
Year ended
31 December
2022
£m
|
Interim dividend for the year ended 31 December
2023 of 1.5p
Second interim dividend for the year ended 31
December 2022 of 1.5p (4.5p)(1)
Interim dividend for the year ended 31 December
2022 of 0.825p (2.475p)(1)
Final dividend for the year ended 31 December
2021 of 1.0p (3.0p)(1)
|
20
61
-
-
|
-
-
33
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
31 December
2023
£m
|
Restated(1)
Year ended
31 December
2022
£m
|
Earnings for basis of earnings per
share
Less: loss from discontinued operations (note
8)
|
(1,019)
1,020
|
(308)
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
31 December
2023
Number
|
Restated(1)
Year ended
31 December
2022
Number
|
Weighted average number of ordinary shares for
the purposes of basic earnings per share (million)
Further shares for the purposes of diluted
earnings per share (million)
|
1,349
56
|
1,406
-
|
Weighted average number of ordinary shares for
the purposes of diluted earnings per share (million)
|
1,405
|
1,406
|
(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
31 December
2023
pence
|
Restated(1)
Year ended
31 December
2022
pence
|
Basic earnings per share
|
|
|
From continuing and discontinued
operations
From continuing operations
From discontinued operations
|
(75.5)
0.1
(75.6)
|
(21.9)
(16.3)
(5.6)
|
Diluted earnings per share
|
|
|
From continuing and discontinued
operations
From continuing operations
From discontinued operations
|
(75.5)
0.1
(75.6)
|
(21.9)
(16.3)
(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
31 December
2023
£m
|
Restated(1)
Year ended
31 December
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
31 December
2023
pence
|
Restated(1)
Year ended
31 December
2022
pence
|
Adjusted basic earnings per share
Adjusted diluted earnings per share
|
19.5
18.7
|
4.1
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
31 December
2023
£m
|
Restated(1)
Year ended
31 December
2022
£m
|
Revenue
Operating costs
|
1,582
(1,550)
|
4,715
(4,740)
|
Operating profit/(loss)
Net finance costs
|
32
(7)
|
(25)
(13)
|
Profit/(loss) before tax
Tax
|
25
(28)
|
(38)
(20)
|
Loss after tax
Loss on disposal of net assets of discontinued
operations, net of recycled cumulative translation differences
but before transaction costs
Demerger transaction costs(2)
|
(3)
(978)
(39)
|
(58)
(16)
-
|
Loss for the year from discontinued
operations
|
(1,020)
|
(74)
|
Attributable to:
Owners of the parent
Non-controlling interests
|
(1,020)
-
|
(79)
5
|
|
(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
held for sale(1)
£m
|
Businesses
disposed
£m
|
Goodwill and other intangible assets
Property, plant and equipment
Current and deferred tax
Equity accounted investments
Inventories
Trade and other receivables
Derivative financial instruments
Cash and cash equivalents
|
-
4
1
-
4
9
-
-
|
2,989
1,789
127
417
515
753
45
320
|
Total assets
|
18
|
6,955
|
Trade and other payables
Interest-bearing loans and
borrowings(2)
Lease obligations
Current and deferred tax
Retirement benefit obligations
Provisions
|
5
-
1
-
-
4
|
1,232
1,205
158
435
439
344
|
Total liabilities
|
10
|
3,813
|
Net assets
Demerger distribution fair value
Derecognition of non-controlling interests on
demerger
Demerger costs incurred
Cumulative translation difference recycled on
demerger
|
8
|
3,142
1,973
39
(39)
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
contracts
£m
|
Property
related costs
£m
|
Environmental and
litigation
£m
|
Warranty
related costs
£m
|
Restructuring
£m
|
Other
£m
|
Total
£m
|
At 1 January 2023
Utilised
Charge to operating profit(1)
Release to operating profit(2)
Disposal of businesses(3)
Transfer to held for sale(4)
Unwind of discount(5)
Exchange adjustments
|
108
(26)
23
(2)
(41)
(1)
-
(3)
|
28
-
1
-
(5)
-
-
(1)
|
119
(7)
18
(9)
(63)
(1)
-
(3)
|
200
(11)
16
(18)
(154)
(2)
-
(4)
|
83
(97)
96
(2)
(18)
-
-
(3)
|
73
(8)
63
-
(63)
-
1
(1)
|
611
(149)
217
(31)
(344)
(4)
1
(15)
|
At 31 December 2023
|
58
|
23
|
54
|
27
|
59
|
65
|
286
|
Current
Non-current
|
38
20
|
5
18
|
34
20
|
15
12
|
49
10
|
47
18
|
188
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
of pensions in payment
% per annum
|
Discount rate
%
|
Price inflation
(RPI/CPI)
%
|
31 December 2023
|
|
|
|
GKN Group Pension Schemes (Numbers 1 and
4)
GKN US plans
|
2.6
n/a
|
4.5
4.8
|
2.9/2.5
n/a
|
31 December 2022
|
|
|
|
GKN Group Pension Schemes (Numbers 1 -
4)
GKN US plans
GKN Europe plans
|
2.7
n/a
2.6
|
4.8
5.0
3.7
|
3.2/2.7
n/a
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
2023
£m
|
31 December
2022
£m
|
Present value of funded defined benefit
obligations
Fair value of plan assets
|
|
(1,193)
1,118
|
(1,931)
1,941
|
Funded status
Present value of unfunded defined benefit
obligations
|
|
(75)
(24)
|
10
(498)
|
Net liabilities
|
|
(99)
|
(488)
|
Analysed as:
Retirement benefit surplus
Retirement benefit obligations
|
|
-
(99)
|
93
(581)
|
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
Plans(1)
£m
|
US
Plans
£m
|
Other
Plans
£m
|
Total
£m
|
Plan assets
Plan liabilities
|
1,070
(1,136)
|
47
(72)
|
1
(9)
|
1,118
(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
31 December
2023
£m
|
Restated(1)
Year ended
31 December
2022
£m
|
Reconciliation of operating profit/(loss) to
net cash used in operating activities generated by continuing
operations
|
|
|
|
Operating profit/(loss)
Adjusting items
|
4
|
57
333
|
(270)
417
|
Adjusted operating profit
Adjustments for:
Depreciation of property, plant and
equipment
Amortisation of computer software and
development costs
Restructuring costs paid and movements in
provisions
Defined benefit pension contributions
paid(2)
Change in inventories
Change in receivables
Change in payables
Tax paid
Interest paid on loans and
borrowings(3)
Interest paid on lease obligations
Acquisition and disposal costs
|
4
|
390
100
42
(160)
(67)
(10)
(140)
4
(17)
(79)
(5)
(65)
|
147
104
41
(60)
(23)
(88)
(172)
112
(8)
(76)
(6)
(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
2023
£m
|
31 December
2022
£m
|
Cash and cash equivalents per Balance
Sheet
Bank overdrafts included within current
interest-bearing loans and borrowings
|
58
(1)
|
355
(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
31 December
2023
£m
|
Restated(1)
Year ended
31 December
2022
£m
|
Net cash from discontinued
operations
Defined benefit pension contributions
paid
Tax paid
Interest paid on lease obligations
Interest paid on loans and
borrowings
|
54
(5)
(8)
(3)
(2)
|
377
(36)
(81)
(6)
(11)
|
Net cash from operating activities from
discontinued operations
|
36
|
243
|
Interest received
Dividends received from equity accounted
investments
Purchase of property, plant and
equipment
Proceeds from disposal of property, plant and
equipment
Purchase of computer software and capitalised
development costs
|
-
-
(62)
-
(5)
|
3
59
(203)
21
(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
2023
£m
|
31 December
2022
£m
|
Interest-bearing loans and borrowings - due
within one year
Interest-bearing loans and borrowings - due
after one year
|
(54)
(576)
|
(63)
(1,433)
|
External debt
Less:
Cash and cash equivalents
|
(630)
58
|
(1,496)
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
31 December
2022
£m
|
Cash flow
£m
|
Acquisitions
and disposals
£m
|
Other non-cash movements
£m
|
Effect of foreign exchange
£m
|
At
31 December
2023
£m
|
External debt (excluding bank
overdrafts)
Non-cash acquisition fair value
adjustments
|
(1,433)
2
|
(462)
-
|
1,205
-
|
18
(2)
|
43
-
|
(629)
-
|
|
(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
31 December
2023
£m
|
Restated(1)
Year ended
31 December
2022
£m
|
Operating profit/(loss)
Adjusting items to operating profit/(loss)
(note 4)
|
57
333
|
(270)
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
31 December
2023
£m
|
Restated(1)
Year ended
31 December
2022
£m
|
Loss before tax
Adjusting items to loss before tax (note
4)
|
(8)
339
|
(328)
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
31 December
2023
£m
|
Restated(1)
Year ended
31 December
2022
£m
|
Profit/(loss) after tax
Adjusting items to profit/(loss) after tax
(note 4)
|
1
262
|
(229)
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
31 December
2023
£m
|
Year ended(5)
31 December
2022
£m
|
Adjusted operating profit
Depreciation of property, plant and equipment
and amortisation of computer software and development
costs
Imputed lease charge
Non-controlling interests
Other adjustments required for leverage
covenant purposes(4)
|
390
142
(37)
-
20
|
480
406
(63)
(5)
(19)
|
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
31 December
2023
£m
|
Restated(1)
Year ended
31 December
2022
£m
|
Tax credit per Income Statement
Adjusted for:
Tax impact of adjusting items
Tax impact of significant
restructuring
|
9
(77)
-
|
99
(105)
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
2023
£m
|
31 December(5)
2022
£m
|
Net debt at closing rates (note 11)
Impact of foreign exchange
|
572
12
|
1,139
(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)
Disposal of businesses, net of cash disposed
(note 8)
Settlement receipt from loans held with
demerged entities (note 8)
|
(1,139)
(320)
1,205
|
Reduction in net debt following the
demerger of Dowlais
|
885
|
Cash flows from discontinued operations (note
11)
Finance costs on demerger settled net debt
(note 4)
|
(37)
(17)
|
Net cash outflow from Dowlais businesses to
date of demerger
|
(54)
|
Demerger related costs
Pension buy-in (note 10)
Debt refinancing costs
|
(62)
(45)
(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
31 December
2023
£m
|
Restated(1)
Year ended
31 December
2022
£m
|
Net cash from operating activities
Operating activities:
Net cash from operating activities from
discontinued operations
Restructuring costs paid and movements in
provisions(7)
Defined benefit pension contributions
paid
Tax paid
Interest paid on loans and
borrowings
Interest paid on lease obligations
Acquisition and disposal costs
Debt related:
Repayment of principal under lease
obligations
|
29
(36)
137
67
17
79
5
65
(32)
|
204
(243)
37
23
8
76
6
10
(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
31 December
2023
£m
|
Restated(1)
Year ended
31 December
2022
£m
|
Net decrease in cash and cash equivalents (net
of bank overdrafts)
Debt related:
Repayment of borrowings
Drawings on borrowing facilities
Costs of raising debt finance
Equity related:
Dividends paid to owners of the
parent
Purchase of own shares, including associated
costs
Acquisition and disposal related:
Disposal of businesses, net of cash
disposed
Settlement receipt from loans held with
demerged entities
Equity accounted investments
additions
Disposal of equity accounted
investments
Acquisition of subsidiaries, net of cash
acquired
Cash flows from/(used in) discontinued
operations
Acquisition and disposal costs
Settlement of derivatives used in net
investment hedging
Finance costs on demerger settled net
debt
GKN UK pension plan buy-in
|
(216)
1,371
(628)
11
81
93
320
(1,205)
-
(3)
-
37
65
-
17
45
|
(203)
598
(632)
-
77
504
(478)
-
3
-
4
(80)
10
109
-
-
|
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
Adjusted free cash flow
|
Year ended
31 December
2023
£m
|
Restated(1)
Year ended
31 December
2022
£m
|
Free cash flow
Restructuring costs paid
|
(12)
125
|
(88)
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
31 December
2023
£m
|
Restated(1)
Year ended
31 December
2022
£m
|
Free cash flow
Tax paid
Interest paid on loans and
borrowings
Interest paid on lease obligations
Interest received
Finance costs on demerger settled net
debt
|
(12)
17
79
5
(2)
(17)
|
(88)
8
76
6
(1)
-
|
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).