Audited Results For Year Ended 31 December 2014

RNS Number : 4589G
Melrose Industries PLC
04 March 2015
 



4 March 2015                                                                                                 

MELROSE INDUSTRIES PLC

 

AUDITED RESULTS

FOR THE YEAR ENDED 31 DECEMBER 2014

 

 

Melrose Industries PLC today announces its audited results, which are reported under IFRS, for the year ended 31 December 2014.

 

Highlights1

 

§ Headline2 profit before tax of £213 million, up 21% (11% at actual currency) and headline2 proforma earnings per share3 of 15.3p

§ Elster profits up by two thirds (circa £80 million) in the two full years of ownership

§ Elster now delivering revenue and order intake growth, up +9% and +6% respectively in the second half of 2014

§ All three Elster divisions achieved profit growth in 2014 (Gas +13%, Electricity +23% and Water +11%)

§ Brush (revenue -3% and profit -7%) suffering from a tough OEM generator end market

§ In November 2014 Bridon sold for £365 million, doubling shareholders' original investment

§ Return of Capital of £200 million (18.7p per share) to be paid on 16 March 2015 alongside a 13 for 14 share consolidation

§ IFRS profit after tax4 of £87 million (2013: £102 million)

§ Net debt at 31 December 2014 of £501 million, equal to 1.8x EBITDA5. Adjusting for the Return of Capital in March 2015, proforma leverage equal to 2.5x EBITDA5

§ Final proposed dividend of 5.3p per share (2013: 5.0p). Full year dividend increased by 5% to 8.1p per share (2013: 7.75p)

 

In common with many companies that trade internationally the movement in exchange rates in 2014 has caused a headwind to profits of around 8%. For ease of comparison, unless stated otherwise, the year on year variances in this announcement are stated using constant rates.

 

1

Continuing businesses only and at constant currency unless otherwise stated

2

Before exceptional costs, exceptional income and intangible asset amortisation

3

Calculated using the diluted number of shares in issue following the Return of Capital and the related share consolidation

4

After exceptional costs, exceptional income and intangible asset amortisation

5

Headline2 operating profit before depreciation and amortisation

 

 

 

 

Christopher Miller, Chairman of Melrose Industries PLC, today said:

 

"We are delighted with Melrose's performance in 2014 with profits up 21% in constant currencies.

"Elster has had another very successful year with profits up by two thirds since acquisition.

"Our strategy is working: for a net shareholder investment of £170 million, and with a current market capitalisation of £3.0 billion, we have created £2.8 billion of shareholder value.

"We look forward to a further acquisition in due course to continue our success."

 

 

 

 

 

An Analysts' meeting will be held today at 11.00 am at Investec, 2 Gresham Street, London EC2V 7QP

 

 

Enquiries:     

 

Montfort Communications:

Charlotte McMullen/Sophie Blythe      +44 (0) 203 514 0897

CHAIRMAN'S STATEMENT

 

 

I am pleased to report our twelfth set of annual results since flotation in 2003.

 

2014 has been another successful year.  Elster, our gas, electricity and water metering company acquired in 2012, continues to demonstrate the benefits of our management model.

 

In November 2014 we sold Bridon, our wire rope maker principally for the mining and oil & gas sectors, for an enterprise value of £365 million.  In line with our strategy we have announced a capital repayment of £200 million which will be paid on 16 March 2015.  With only Brush remaining from our FKI acquisition in 2008, this nearly completes that acquisition cycle. 

 

Since making our first investment in 2005, Melrose has achieved an annual return on equity investment of 23 per cent and an increase in operating margins of 5 to 7 percentage points across each of the businesses we have owned.  Total shareholder return over the same period has been 421 per cent, compared to 104 per cent for the FTSE 350.

 

By implementing our strategy, following the Return of Capital, we will have created approximately £2,782 million of shareholder value with a net shareholder investment of £170 million.

 

As ever, I would like to thank all our employees for their efforts in helping to produce this outstanding performance.

 

 

RESULTS FOR THE GROUP

 

Revenue from continuing businesses for the year was £1,377.5 million (2013: £1,466.4 million) and headline profit before tax (before exceptional costs, exceptional income and intangible asset amortisation) was £212.5 million (2013: £191.5 million). 

 

Further details of these results are contained in the Finance Director's review.

 

 

TRADING

 

Elster continues to perform strongly in all three divisions with orders and sales in Gas, the largest division, in particular, showing pleasing increases in constant currency terms.  Whilst the bulk of restructuring and product rationalisation is behind us there is nevertheless an ongoing programme of efficiency gains which we expect will add to the substantial improvements already achieved in operating margins.  Investment in all divisions continues and the purchase of Eclipse on 31 October 2014 for US $158 million is an exciting addition to Elster Gas which will make a good contribution in its first full year.

 

In our Energy division, Brush continues to experience difficult end markets with its OEM business.  While it is pleasing to note that independent market research shows Brush has more than maintained its market share, nevertheless the forces at play holding down OEM demand do not appear to be dissipating in the near term.  In the medium and long term, however, we have full confidence that this market will recover.  In the meantime the Aftermarket and Switchgear divisions are performing well. 

 

We encountered foreign exchange headwinds in 2014 and while these have abated somewhat in recent months as regards the US Dollar, the further weakness in the Euro and the Rouble suggest a further 5% headwind in 2015 based on current exchange rates.

 

Further discussion of trading appears in the Chief Executive's Review.

 

 

DIVIDEND

 

The Board proposes to pay a final dividend of 5.3p per share (2013: 5.0p).  This will be paid on 18 May 2015 to those shareholders on the register at 17 April 2015, subject to the approval at the AGM on 14 May 2015.  This gives a total for the year of 8.1p per share (2013: 7.75p).

 

We continue to pursue a progressive dividend policy.

 

 

STRATEGY

 

Since Melrose's flotation in 2003, and the introduction of our "buy, improve, sell" strategy, we have seen many changes in economic and stock market conditions.  Nevertheless, through all this, returns to shareholders have been extremely good and we see no reason to diverge from our proven strategy.  We continue to see situations which are candidates for our management and investment methods and we are confident we will identify a suitable opportunity in due course.  In the meantime we will continue to improve our existing businesses, and will make disposals at the appropriate time.

 

 

OUTLOOK

 

The world economy continues to be geographically patchy.  Strength in the USA is mirrored by weakness in most of Continental and Central Europe - a situation which seems unlikely to change in the near future.  Adjusting for currency effects, our Group is trading in line with management expectations for 2015 despite the expected downturn in the performance at Brush.  In our Elster businesses, we see the potential for good demand and growth prospects, as indeed we have seen in the second half of 2014.  This, together with the opportunity for further margin enhancement, and the possibility of a value creating acquisition, gives us confidence for the balance of 2015 and beyond.

 

 

 

 

 

 

Christopher Miller

4 March 2015

 

CHIEF EXECUTIVE'S REVIEW

 

 

Acquiring good quality manufacturing businesses, making operational improvements, realising shareholder value at the appropriate time and then returning this value to shareholders continue to be the components of the "buy, improve, sell" business strategy that Melrose has followed since being founded in 2003.  The Group now consists of Brush, the last remaining business from the FKI acquisition, and the businesses which comprise Elster.  Continued improvement of all these businesses is, as ever, a key objective for 2015.

 

 

ACQUISITIONS AND DISPOSALS DURING THE YEAR

 

2014 has been another highly successful year for Melrose.  In October 2014, Elster Gas completed the acquisition of Eclipse, a US-based manufacturer of gas combustion components and systems for industrial heating and drying applications. Combining this with our existing Elster Gas business gives us a great opportunity to create significant shareholder value.  In the following month, Melrose completed the disposal of Bridon for a total enterprise value of £365 million, representing the latest step in realising value from the FKI businesses acquired by Melrose in 2008.

 

 

OUTLOOK

 

Overall market conditions remain challenging but we have in Elster a business that is well positioned for growth in 2015.  At current exchange rates we face further currency headwinds this year and the order intake pattern suggests a more pronounced weighting of results to the second half of the year.  As said previously we believe we will see further progress in our Elster businesses but end market conditions mean that Brush will have a more difficult 2015.  Overall, adjusting for the adverse currency movements which are outside our control, we believe that the Group will be in line with management expectations for 2015. 

 

ELSTER GAS

 

 

 

 

 

 

2014

 

 

2013

Constant currency growth

 

Total Revenue

£687.0m

                        £688.9m

+6%

Headline Operating Profit

£161.4m

                        £152.4m

+13%

 

 

Elster Gas is a world leader in gas measurement and gas safety control equipment supplying a global customer base in more than 130 countries. With one of the most extensive installed utility measurement bases in the world and more than 75 million gas metering devices deployed globally, Elster Gas products enable customers to efficiently measure, manage and control natural gas resources across the complete gas value chain.

 

From its four lead plants in Europe and the USA, coupled with sizeable subsidiary operations in China, Malaysia, Russia and Mexico, Elster Gas designs and manufactures gas meters and related products for residential, commercial and industrial customers. In 2014, 5 million gas meters were manufactured in Elster's major factories.

 

Global revenues increased by 6% in 2014. Operating profit increased by 13% compared to 2013, driven by sales growth and management's strategy of strong operational control coupled with rationalisation of the business footprint. During the year, there were significant performance improvements in both North America and Germany.  Overall, there was a continued improvement in gross margin and when coupled with a further reduction in fixed costs, there was an encouraging 1.5% improvement this year in the return on sales.

 

In October 2014, Elster Gas completed the acquisition of Eclipse, a US-based manufacturer of gas combustion components and systems for industrial heating and drying applications. Eclipse will be merged with the Elster Gas control equipment business (sold under the Kromschröder brand) to create a market leading global Thermal Solutions division, which will offer industrial customers a comprehensive range of gas combustion and safety control systems.  This business is now approximately a third of the sales of Elster Gas and a good contribution is expected from Eclipse during 2015.

 

Elster are also involved in both residential Smart gas meter programmes and commercial and industrial Smart meter rollouts in Europe. While overall progress on the former is slow, due to delays by the relevant authorities in their mass roll out of Smart meters, volumes are slowly increasing in the foundation phase.  In 2014, Elster Gas sold 29,000 Smart residential gas meters.  By contrast, good progress has been made in the Smart commercial and industrial sector.  In addition to the 24,000 Smart commercial and industrial gas meters sold in 2014, Elster Gas announced that British Gas Business, the UK's largest non-residential gas supplier, has selected Elster to supply up to 100,000 Smart commercial and industrial gas meters in total over the next three years to a significant proportion of its UK customer base.

 

In May 2014, Elster Gas announced major changes in the global footprint of its Integrated Metering Solutions (IMS) business which builds gas metering stations for the upstream production and shipment of gas.  Production will move from Western Europe to Saudi Arabia and Malaysia, with the latter becoming the centre of excellence for these products.  This shift moves production closer to the major gas metering station markets with completion planned for the end of 2015.

 

OUTLOOK

 

The main Elster Gas end markets remain healthy and order input in 2014 was higher than in 2013.  We expect the recent decline in the oil price to have an effect on the timing of some gas metering station projects throughout 2015; however, the high demand projected in the Elster conventional gas meter markets will more than compensate for any weakness in this area.

 

When coupled with further planned operational improvements and the integration of Eclipse into the existing business, Elster Gas should enjoy another strong performance in 2015.  Whilst still very early in the year, order books going into 2015 give us encouragement for the next 12 months.

 

ELSTER ELECTRICITY

 

 

 

 

 

 

2014

 

 

2013

Constant currency growth

 

Total Revenue

£215.7m

£247.5m

-4%

Headline Operating Profit

£22.8m

£21.5m

+23%

 

 

Elster Electricity is one of the largest international metering solutions providers, supplying both traditional and Smart meter equipment, including applications for residential, commercial, industrial, transmission and distribution markets.

 

The product range includes distribution and control monitoring equipment, advanced Smart metering, demand response, networking and software solutions including MDC (Meter Data Collection) with open API (Application Programme Interface) connecting third party applications, together with several other communication products and services. Elster Electricity has key production facilities located in Europe, North America and South America and operates in most global markets through its own offices or agents.

 

North America is served through factories and sales offices, and offers Smart metering solutions to commercial, industrial and residential markets. Elster has one of the largest installed AMI (Advanced Meter Infrastructure) meter bases. Most utilities in the USA have started deploying Smart meter solutions, with around 50% of all households equipped with Smart meters.  Following the end of the Smart Grid Investment Grant awards as part of the American Reinvestment and Recovery Act, the North American market saw a revenue decrease compared to previous years.  Growth, however, is expected in Mexico, where a regulatory framework is in place to accelerate further deployment.

 

Europe, the Middle East and Africa, with the biggest market being the European Union, have seen significant growth over the last year, and with the third Energy Package calling for a European-wide roll out of Smart meter solutions through to 2022, further growth is expected over the coming years.  Elster Electricity is well positioned with a broad range of products and solutions, and with recent wins and pilot projects, Elster Electricity expects to capture its fair share of the market.

 

Operating profit improved as a result of consolidation activities and process improvement actions taken in previous years.  The move of production in North America to San Luis Potosi in Mexico has now been completed and supply chain and assembly for a part of the European operation has now been consolidated in Timisoara in Romania.  Focus on solutions selling and subsequent service revenue also contributed to the overall profit improvement.  The supply chain, both in North America and Europe, has been consolidated around tier 1 OEM suppliers resulting in improved quality. 2014 saw another focus on VAVE (Value Added Value Engineering) across all product lines resulting in improved margins.

 

In 2015, a key focus will be on introducing the new enhanced open software offering, Connexo, starting in North America followed by Europe.  New product features will be launched reflecting the market demand for new communication protocols and data encryption features.  A move to a new facility in Timisoara in Romania is planned for the fourth quarter.

 

 

OUTLOOK

 

Following last year's tender activities for Smart metering in Europe and the Middle East, a number of projects have been secured that will see pilot projects in 2015 and subsequent mass roll out in the years to follow. In South America, including Mexico, utilities are expected to continue the focus on reducing wastage of electricity through accelerated roll out of integrated metering solutions.  These developments mean that Elster Electricity is well positioned for an exciting future albeit the precise timing of Smart meter roll out remains unpredictable.

 

ELSTER WATER

 

 

 

 

 

 

2014

 

 

2013

Constant currency growth

 

Total Revenue

£147.5m

£179.9m

-12%

Headline Operating Profit

£23.4m

£23.0m

+11%

 

 

Elster Water designs, manufactures and provides a comprehensive range of water metering solutions including high accuracy mechanical meters, fully electronic meters and Smart metering solutions for residential, commercial and industrial sectors.

 

Headline operating profits continued to improve in 2014, following the restructuring activity in 2012 and 2013.  Restructuring operations during this period led to the cessation of manufacture of mechanical meters for the North American market and rationalisation of product lines which resulted in the closure of sites in Europe to consolidate production.  Operating margins have improved compared with 2013 due to the impact of improved operating efficiency, well-controlled raw material costs and a continued focus on overhead control.  Working capital controls also improved with a year-on-year reduction ensuring strong cash conversion.

 

Revenues in 2014 were approximately 12% lower compared with 2013, largely due to the remaining effect of the exit from low margin business in North America and in Germany.  This action has led to an overall improvement in the quality of earnings, delivering a return on sales of nearly 16% in the year (2013: 12.8%).  Revenue in the Middle East was lower than expected due to the level of customer activity; however, this was offset by strong growth in Africa.  Sales in the rest of Europe were lower than in 2013 as a result of the deliberate strategy of exiting lower margin products.

 

New product launches in 2014 included extending the range of polymer-bodied volumetric meters by adding high metrological performance variants and new registers to increase the options for system connectivity. For the sub-meter portfolio, a connection kit was launched to allow independent radio providers to adapt their products to work with Elster sub-meters, whilst gaining regulatory approval for more installation options. For Latin America, a new residential multi-jet M170 meter was launched with improved metrological performance offering an extended accurate operating range. For the commercial and industrial sector, the range of the new H5000 meter has been extended, offering new data communication options and alternative meter body configurations. A strong pipeline of new products continues to provide global business growth opportunities.

 

Elster Water's continual focus on their customers was recognised by the Institute of Mechanical Engineers' Manufacturing Excellence Awards 2014, with UK-based Elster Water Metering winning the coveted Manufacturing Excellence Award for Customer Focus.

 

 

OUTLOOK

 

The focus in 2015 will be to maintain industry-leading operating margins and achieve revenue growth above industry growth rates. Elster Water is well positioned to penetrate new and existing markets offering a leading portfolio of water measurement products. 

 

ENERGY

 

 

 

 

 

2014

 

 

2013

Constant currency growth

 

Total Revenue

£327.3m

£350.1m

-3%

Headline Operating Profit

£65.4m

£73.1m

-7%

 

 

Brush Turbogenerators ("Turbogenerators") is the world's largest independent manufacturer of electricity generating equipment for the power generation, industrial, oil & gas and offshore sectors. 

 

From its four plants in the UK, Czech Republic, Netherlands and US (and with a newly-built China generator plant coming into production in 2015) it designs, manufactures and services turbogenerators, principally in the 10 MW to 250 MW range, for both gas and steam turbine applications and supplies a globally diverse customer base.

 

In addition, Brush designs and manufactures systems and power transformers under the brand name Brush Transformers ("Transformers") and also produces a wide range of indoor and outdoor medium voltage AC/DC switchgear under the Hawker Siddeley Switchgear ("HSS") brand name.  Brush also has a strong presence in power control systems.  Harrington Generators International ("HGI") is a specialist UK-based small generator manufacturer supplying the construction, military, telecoms and rail sectors.

 

During 2014, Brush experienced a challenging market again, particularly in new build generators. This was mitigated by another strong year from aftermarket sales and HSS.  Significant investment was made in the year to fund new product development, new routes to market, and the China project, and thus future growth.  The performance was supported by operational efficiency gains, and the benefits from capital investments. 

 

2014 saw the commencement of the construction of the Brush greenfield generator manufacturing plant near Shanghai, China.  This £30 million capital investment will produce generators primarily for the China market and is in support of several of Brush's international turbine customers.  Factory construction is nearly complete and manufacturing equipment is now being installed and commissioned, with the factory expected to deliver its first generator in January 2016.  The first orders have now been received for this factory as it moves towards being operational.  Brush has already been supplying generators in 2014 from Europe against the six year long-term purchase agreement with Huadian GE Aero Gas Turbine Equipment Co. Ltd ("HDGE"), which will continue until the new factory is operational. 

 

The separation of the aftermarket business into one unit in 2013 has helped it to grow strongly in 2014.  Late 2014 saw the launch of the "VF" range, an initiative to provide premium replacement rotors in seven weeks, and selected complete generators in ten weeks - industry leading timescales. This gives end users a critically important replacement service as an alternative to repair, and significantly widens the available market to Brush, for both Brush and non-Brush legacy machine replacement.  During 2015 this offer will be extended to third party, non-Brush manufactured generators as well as 4 pole generators.

 

The aftermarket business in the USA had another strong growth year.  Investment has commenced on a new large rotor balancing facility in Pittsburgh, which will significantly enhance its capabilities and lead to further growth.  The new global structure of service engineers resulted in Brush aftermarket being able to manage the power outage spike in demand in the USA utilising its own engineers, rather than subcontractors.  Overall aftermarket sales were well ahead of a strong 2013.

 

The Transformer business had a slow sales year in 2014 as a result of it being the last year of the current five year OFGEM (the UK Government's Office of Gas and Electricity Markets) cycle.  Orders have now improved into 2015 as the period has ended. The capital expenditure programme to reorganise the Transformers production process and value engineer the product was completed, and resulted in significant margin improvement.

 

The HSS business had a satisfactory year.  Whilst sales were 8% behind the previous year (mainly due to project delays) as a result of efficiency savings profit was 3% ahead.  During the year investment in R&D significantly increased, which positions the business well for the future with a pipeline of unique products.

 

 

OUTLOOK

 

The medium and long-term growth in power and in particular the aero-derivative gas turbine market, where Brush has such a strong position, remain positive, and with the additional growth from China, a strong new product development pipeline across all business units coupled with continued operational improvements, means the business is well positioned for its future. 

 

However, the overall market dynamics remain difficult in the short term.    Your Board expects profits to decline significantly in 2015 despite all the efforts of Brush's management and continued improvements in its Aftermarket, Transformers and Switchgear businesses.

 

 

 

 

 

 

Simon Peckham

Chief Executive

4 March 2015

 

FINANCE DIRECTOR'S REVIEW

 

 

The year to 31 December 2014 included the disposal of Bridon, the remaining business in the Lifting division, which in the prior year contributed 15% towards continuing Group revenue and 12% to continuing Group headline operating profit.  Consequently, in accordance with IFRS 5, the trading results of Bridon up to the date of disposal have been shown as discontinued in both years.

 

The remaining continuing operations consist of the three Elster businesses, Gas, Electricity and Water and the only remaining FKI business, Brush, which is shown within the Energy division.

 

The discontinued operations in 2013 also include the results, up until the date of their disposal, of the Marelli business, previously shown within the Energy division, the Crosby and Acco businesses, previously shown within the Lifting division and the Truth and Harris businesses, previously shown within the Other Industrial division. 

 

 

Group trading results - continuing operations

 

To help understand the results of the continuing operations the term 'headline' has been used.  This refers to results calculated before exceptional costs, exceptional income and intangible asset amortisation as this is considered by the Melrose Board to be the best measure of performance.

 

For the year ended 31 December 2014 the Group achieved revenue from continuing operations of £1,377.5 million (2013: £1,466.4 million), flat at constant currency, and headline operating profit of £246.0 million (2013: £240.0 million), an increase of 11% at constant currency.  The Group results have been adversely impacted by movements in foreign exchange rates due to the strengthening of Sterling compared to many foreign currencies.  At actual exchange rates Group revenue was down 6% whilst Group headline operating profit was up 3%.  The Group headline operating profit margin (defined as the percentage of headline operating profit to revenue) increased from 16.4% in 2013 to 17.9% in 2014. 

 

After exceptional costs, exceptional income and intangible asset amortisation, Group operating profit was £162.4 million (2013: £192.5 million) and profit before tax was £128.9 million (2013: £144.0 million).

 

 

TRADING RESULTS BY DIVISION - CONTINUING OPERATIONS

 

A split of revenue, headline operating profit and headline operating profit margin for 2014 and 2013 is as follows:

 

 

 

2014 Revenue

2014

Headline

operating

profit/

(loss)

2014

Headline operating profit margin

 

 

2013

Revenue

2013

Headline operating profit/

(loss)

2013

Headline operating profit

margin


£m

£m

%

£m

£m

%

Elster

1,050.2

205.5 

19.6%

1,116.3

194.2 

17.4%

Energy

327.3

65.4 

20.0%

350.1

73.1 

20.9%

Central - corporate

-

(13.9)

n/a

-

(14.3)

n/a

Central - LTIPs(¹)

-

(11.0)

n/a

-

(13.0)

n/a

Continuing Group

1,377.5

246.0 

17.9%

1,466.4

240.0 

16.4%

 

(¹) Long Term Incentive Plans

 

The performance of each of the trading divisions is discussed in detail in the Chief Executive's review.

 

Central costs comprise £13.9 million (2013: £14.3 million) of Melrose corporate costs and a Long Term Incentive Plan ("LTIP") accrual of £11.0 million (2013: £13.0 million).  The LTIP accrual includes an amount of £4.0 million in respect of the Melrose share-based Incentive Plan (2013: £4.0 million), and a charge of £7.0 million (2013: £9.0 million) for the cash-based divisional management incentive plans.  The disposals of Crosby, late in 2013, and Bridon in 2014, contributed to the reduced divisional LTIP charge in the year.

 

 

RETURN OF CAPITAL

 

Consistent with the Group strategy of returning to shareholders a large part of any proceeds from the disposal of businesses, £595.3 million was returned to shareholders on 28 February 2014 following the sale of Crosby a few months earlier.  This return was made via a redeemable share scheme alongside a share consolidation which reduced the number of Ordinary Shares by a factor of 11 for 13, or 15%, from 1,266.6 million to 1,071.8 million.

 

In addition, Melrose announced on 3 February 2015 a further Return of Capital of £200.4 million following the disposal of Bridon.  This was subsequently approved by shareholders on 20 February 2015.  This return will be made on 16 March 2015 via a redeemable share scheme alongside a share consolidation which reduced the number of shares by a factor of 13 for 14, or 7%, from 1,071.8 million to 995.2 million.

 

 

FINANCE COSTS AND INCOME

 

The net finance cost in 2014 was £33.5 million (2013: £48.5 million).

 

Prior to the Return of Capital made on 28 February 2014 and following the disposal of Bridon on 12 November 2014, the Group's net debt and bank leverage were lower than usual levels.  This, along with the renegotiation of the Group's financing facilities on 11 July 2014 (discussed later in this review), contributed to net interest on external bank loans, overdrafts and cash balances being lower in the year at £20.3 million (2013: £34.3 million).  In 2014 the Group had a blended interest rate of 2.4% (2013: 3.1%).

 

Melrose uses interest rate swaps to fix the majority of the interest rate exposure on its debt. More detail on these swaps is given in the finance cost risk management section of this review.

 

Also included in net finance cost is a £4.0 million (2013: £4.7 million) amortisation charge relating to the arrangement costs of raising the bank facility, a net interest cost on net pension liabilities of £7.8 million (2013: £8.9 million) and a charge for the unwinding of discounts on long term provisions of £1.4 million (2013: £0.6 million). 

 

 

TAX

 

The headline Income Statement tax rate was 27.0% (2013: 26.4%). 

 

The headline tax rate for the Group is lower than the weighted blend of the statutory tax rates around the world because of the recognition of deferred tax assets that were not previously thought to be recoverable. There is also a small benefit from the release of provisions previously held against potential overseas tax audits which have been successfully resolved.

 

The tax rate after exceptional items and intangible asset amortisation is 32.4% (2013: 28.9%).  The main reason for this being higher than the headline rate is the £3.9 million (2013: £8.1 million) exceptional tax charge on group reorganisations.

 

The cash tax rate on headline continuing operations of 16.5% (2013: 22.5%) is below the headline Income Statement rate due to the utilisation of pre-existing Melrose Group tax losses and other deferred tax assets. 

 

The deferred tax liability in respect of intangible assets, of £259.8 million (2013: £287.4 million), is not expected to represent a future cash tax payment and will unwind as the customer relationship, brand name and intellectual property intangible assets are amortised.

 

The total amount of tax losses in the Group has decreased during the year due to their utilisation against taxable profits and also as a result of some utilisation against tax audits in respect of prior years.  The total gross tax losses within the Group are shown below:

 

Tax losses

Recognised

£m

Unrecognised

£m

Total

£m

UK

14.0

115.1

129.1

Germany

20.0

-

20.0

Rest of World

6.9

27.6

34.5

Total 2014

40.9

142.7

183.6

Total 2013

42.0

175.1

217.1

 

 

EXCEPTIONAL ITEMS AND AMORTISATION OF INTANGIBLE ASSETS

 

In the year ended 31 December 2014 the continuing Group incurred exceptional costs of £34.3 million (2013: £19.3 million).  These included £30.6 million (2013: £18.8 million) of restructuring costs which mainly relate to the Elster businesses, notably in Gas where the most significant proportion of restructuring cost relates to the closure of the Essen plant in Belgium and relocation of its Integrated Metering Solutions business, which builds gas metering stations, to Saudi Arabia and Malaysia.  This decision was taken so as to move production closer to the major gas metering station markets and it is also expected to deliver cost savings in the future as a result.  Additionally, restructuring projects were undertaken in the Gas business in Mainz, to move research and development and the production of ultrasonic meters to the German plant in the year. 

 

Also within the Gas business, following the acquisition of Eclipse late in 2014, immediate severance programmes were announced in the US business as part of the planned synergies.   

 

The restructuring costs incurred in 2013 were proportionally weighted to the Elster Electricity and Water businesses.   Some restructuring costs have been incurred within these businesses in 2014 within the European operations following the large restructure programmes performed in the North America businesses in 2012 and 2013.

 

In addition £3.7 million (2013: £0.5 million) of acquisition and disposal costs were incurred, mostly relating to the acquisition of Eclipse, Inc. ("Eclipse").  

  

The Group benefited from exceptional income of £5.4 million (2013: £28.9 million) as a result of the release of a surplus provision following the successful resolution of a property lease dispute.  The exceptional income in 2013 related to the successful resolution of a number of warranty issues, inherited with the acquisition of Elster, for less expense than expected.  

 

 

In addition intangible asset amortisation of £54.7 million (2013: £57.1 million) was charged.  A net tax credit on these exceptional costs, exceptional income and intangible asset amortisation, of £19.5 million (2013: £17.0 million), and an exceptional tax charge of £3.9 million (2013: £8.1 million) has been taken in the year.

 

Overall the net exceptional items and intangible asset amortisation, after tax, shows a net expense of £68.0 million (2013: £38.6 million).

 

 

EARNINGS PER SHARE ("EPS")

 

The Melrose Board consider that headline diluted EPS, calculated using the headline continuing profit attributable to shareholders and the number of shares in issue following the Return of Capital in March 2015, best demonstrates the performance in 2014 because it matches the size of the continuing Group with the ongoing number of shares. On this basis the EPS in 2014 was 15.3p.

 

In accordance with IAS 33, two sets of basic and diluted EPS numbers are disclosed on the face of the Income Statement, one for continuing operations and one that also includes discontinued operations.  In the year ended 31 December 2014 the diluted EPS for continuing operations was 7.8p (2013: 7.8p).  For continuing and discontinued operations the diluted EPS for 2014 was 17.5p (2013: 43.7p).

 

 

ACQUISITION DURING THE YEAR

 

On 31 October 2014 Elster Gas acquired Eclipse, a manufacturer of gas combustion components and systems for industrial heating and drying applications, headquartered in Rockford, Illinois (USA), for cash consideration of £97.6 million.  The acquisition was funded through the existing Group debt facilities and in the two months of ownership Eclipse has contributed £12.2 million to revenue and £1.4 million to headline operating profit.

 

 

DISPOSAL DURING THE YEAR

 

On 12 November 2014 the disposal of Bridon was completed for a gross cash consideration of £374.8 million less £9.9 million of costs.  The profit on disposal of this business was £96.9 million.

 

Bridon was acquired with FKI in July 2008 and contributed £208.0 million of revenue and £22.6 million of headline operating profit up to the date it was disposed in 2014, and is shown within discontinued operations.   

 

Since acquiring FKI for just under £1 billion in 2008 the FKI businesses have generated £2 billion of cash from trading and disposal proceeds.  Brush, the largest of the FKI businesses, is still owned by the Melrose Group.

 

CASH GENERATION AND MANAGEMENT

 

The cash generation performance in 2014 and the movement in net debt are summarised as follows:

 

 

 

 

2014

£m

Headline operating profit

246.0 

Depreciation and amortisation of computer software and development costs

31.8 

Working capital movement

(28.5)

Headline operating cash flow (pre capex)

249.3 

Headline EBITDA conversion to cash (pre capex) %

90%

Net capital expenditure

(58.3)

Net interest and net tax paid

(59.3)

Defined benefit pension contributions

(31.1)

Other (including discontinued operations)

(30.2)

Cash inflow from trading (after all costs including tax)

70.4 

 

The conversion of headline operating profit (before depreciation and amortisation) into cash was 90% in 2014 (2013: 96%).  Within this strong level of cash generation Elster achieved 94% and Brush 83%.

 

The movement in net debt in the year is reconciled as follows:

 

 

 

2014

£m

Opening net debt

(140.8)

Cash inflow from trading (after all costs including tax)

70.4 

Net cash flow from acquisitions and disposals(¹)

253.3 

Amounts paid to shareholders (Return of Capital and dividends)

(678.9)

Foreign exchange and other

(5.3)

Closing net debt

(501.3)

 

(¹) Gross disposal proceeds of £374.8 million, less costs paid of £8.5 million and cash disposed of £14.6 million, net of acquisition of subsidiaries of £97.6 million, cash acquired of £1.5 million and costs of acquisition of £2.3 million.

 

The Balance Sheet leverage (calculated as net debt divided by continuing headline operating profit before depreciation and amortisation) was 1.8x at 31 December 2014 (31 December 2013: 0.4x).  Net debt will increase in March 2015 following the recently approved Return of Capital of £200.4 million.  Allowing for this, the proforma leverage at 31 December 2014 would have been 2.5x, which is considered to be a better reflection of the ongoing leverage level for the Group.

 

 

CAPITAL EXPENDITURE

 

By business, the net capital expenditure and depreciation in the year was as follows:

 

 

Elster

 

Energy

 

Central

 

Total

Net capital expenditure £m

28.1

30.0

0.2

58.3

Depreciation £m

24.6

6.3

0.9

31.8

Net capital expenditure to depreciation ratio (full year)

1.1x

4.8x

0.2x

1.8x

Melrose ten year (2005-2014) average annual multiple




1.3x

 

 

The net capital spend to depreciation ratio was 1.8x in 2014 (2013: 1.1x).  Within this the ratio in the Brush business was 4.8x (2013: 2.8x) which included the continuation of the significant investment in a new factory in the Shanghai area of China.  The net capital spend to depreciation ratio in Elster was 1.1x (2013: 0.7x). Elster is inherently a less capital intensive business than Energy.

 

 

ASSETS AND LIABILITIES

 

The summary Melrose Group assets and liabilities are shown below:

 

2014

£m

2013

£m

Fixed assets (including computer software and development costs)

224.2 

265.3 

Intangible assets

859.8 

985.9 

Goodwill

1,520.9 

1,602.0 

Net working capital

106.4 

126.9 

Retirement benefit obligations

(218.5)

(219.3)

Provisions

(177.0)

(177.8)

Deferred tax and current tax

(247.4)

(272.9)

Other(¹)

6.6 

18.6 

Total

2,075.0 

2,328.7 

(¹)   Includes interests in joint ventures and derivative financial instruments

 

 

These assets and liabilities are funded by:

2014

£m

2013

£m

Net debt

(501.3)

(140.8)

Equity

(1,573.7)

(2,187.9)

Total

(2,075.0)

(2,328.7)

 

The movements in net debt and equity primarily relate to the return of £595.3 million to shareholders and the disposal of Bridon in the year.

 

 

GOODWILL, INTANGIBLE ASSETS AND IMPAIRMENT REVIEW

 

The total value of goodwill as at 31 December 2014 was £1,520.9 million (31 December 2013: £1,602.0 million) and intangible assets was £859.8 million (31 December 2013: £985.9 million).  These balances reduced as a result of the disposal of Bridon in the year and the split is as follows:

 

 

Elster

£m

 

Energy 

£m 

 

Total 

£m 

Goodwill

1,319.2 

201.7 

1,520.9 

Intangible assets

776.2 

83.6 

859.8 

Total goodwill and intangible assets

2,095.4 

285.3 

2,380.7 

 

The goodwill and intangible assets have been tested for impairment as at 31 December 2014.  The Board is comfortable that no impairment is required.

 

PROVISIONS

 

Total provisions at 31 December 2014 were £177.0 million (31 December 2013: £177.8 million).  In total £49.6 million of cash was spent on the utilisation of provisions, of which £38.7 million related to restructuring and warranty. The following table details the movement in provisions in the year:

 


Total

£m

At 31 December 2013


177.8 

Cash spent on the utilisation of provisions


(49.6)

Acquisition of Eclipse


9.2 

Net charge to headline operating profit


15.0 

Net charge to exceptional items


26.2 

Disposal of Bridon


(1.4)

Other (including foreign exchange)


(0.2)

At 31 December 2014


177.0 

 

The net charge to headline operating profit in the period was £15.0 million which included the £7.0 million divisional LTIP charge along with £7.8 million of normal net warranty expenses in the period. 

 

The net charge to exceptional items of £26.2 million included £31.6 million relating to restructuring projects, most of which is expected to be spent in 2015.  This amount has been partly offset by the exceptional income release of £5.4 million relating to the successful resolution of a historical property lease dispute.

 

The other movements on provisions in the period relate to the net effect of the unwind of discounting on long term provisions and the relevant foreign exchange impact.

 

 

PENSIONS

 

The Group has a number of defined benefit and defined contribution pension plans.

 

At 31 December 2014 the FKI UK Pension Plans, which comprise two separate independent plans; the FKI UK Pension Plan and the Brush Group (2013) Pension Plan, are significant in size and had a combined net deficit at 31 December 2014 of £82.7 million (31 December 2013: £100.2 million).  Plan assets were £695.6 million (31 December 2013: £619.5 million) and plan liabilities were £778.3 million (31 December 2013: £719.7 million).

 

The other UK defined benefit pension plan of significant size in the Group is the McKechnie UK Pension Plan with an accounting surplus at 31 December 2014 of £1.6 million (31 December 2013: deficit of £0.5 million).  The plan assets at 31 December 2014 were £209.9 million (31 December 2013: £182.5 million) and liabilities were £208.3 million (31 December 2013: £183.0 million). 

 

These three UK plans are closed both to new members and current members' future service.

 

A US defined benefit plan for FKI also exists.  At 31 December 2014 the FKI US plan had assets of £176.5 million (31 December 2013: £177.6 million), liabilities of £195.2 million (31 December 2013: £183.0 million) and consequently a net deficit of £18.7 million (31 December 2013: £5.4 million).  This plan is closed to new members and to current members' future service.

 

During the year a decision was made to offer lump sums to terminated vested participants of the FKI US plan whose benefit had a current lump sum of $65,000 or less.  Approximately 60% of those offered accepted, resulting in a reduction in gross liabilities of £23 million, and a benefit of £3.5 million to the overall pension charge for the year, shown within central costs.

 

The Elster businesses also operate a number of defined benefit plans, most of which are unfunded, with a net accounting deficit at 31 December 2014 of £118.7 million (31 December 2013: £101.5 million).  Within this, 79%, or £94.3 million (31 December 2012: 82%), related to unfunded German defined benefit plans and early retirement programmes.

 

During the year the Group terminated certain Elster US unfunded retiree medical and welfare plans, reducing gross liabilities by £4.3 million, which benefited the overall pension charge in the year within the Gas division.

 

A summary of key assumptions used for all of the UK plans are shown below:

 

2014 Assumptions

%

2013 Assumptions

%

Discount rate

3.50

4.40

Inflation

2.10

3.40

 

For the most significant plans (the FKI UK Pension Plans), a male aged 65 in 2013 is expected to live for a further 21.9 years (31 December 2013: 21.9 years) whilst a woman aged 65 would live for a further 24.2 years (31 December 2013: 24.1 years).  This is assumed to increase by 1.3 years (6%) for a male and 1.5 years (6%) for a female aged 65 in 2034.

 

It is noted that a 0.1 percentage point decrease in the discount rate would increase the pension liabilities on the UK pension plans by £15.6 million, or 2%, and a 0.1 percentage point increase to inflation would increase the liabilities on these plans by £11.1 million, or 1%. Furthermore, an increase by one year in the expected life of a 65 year old member would increase the pension liabilities on these plans by £36.2 million, or 4%.

 

The long term strategy for the UK plans is to concentrate on the cash flows required to fund the liabilities as they fall due whether that is within the timescales of Melrose ownership or beyond.  The pension plan cash flows extend many years into the future and the ultimate objective is that the total pool of assets derived from future company contributions and the investment strategy allows each cash payment to members to be made when due.  In 2014 the Melrose Group made annual contributions of £18.5 million in total (2013: £18.5 million) to the two remaining UK plans within the FKI businesses and £5.2 million (2013: £5.2 million) to the McKechnie UK Pension Plan.  In addition £8.1 million was paid into the disposed Bridon Group (2013) Pension Plan.

 

In 2015 the Group expects to contribute £20.0 million to the FKI UK Plans and £5.2 million to the McKechnie UK Pension Plan.

 

The Melrose Board recognise that pension plan liabilities need to exit the Group as businesses are sold.  However this can be done at a time which is commercially sensible.

 

 

RISK MANAGEMENT

 

The financial risks the Group faces have been considered and policies have been implemented to best 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 2014 was £501.3 million compared to £140.8 million a year earlier.  The level of net debt and leverage at both year ends was lower than the normal level because disposals had been completed during the year but the associated returns to shareholders did not occur until after the year end.

 

On 11 July 2014 the Group's financing facilities were renegotiated to improve the existing terms and to extend the maturity date from 29 June 2017 to 11 July 2019.

 

The Group previously had a committed term loan held in two tranches of £180 million and US$ 290 million.  As part of the renegotiation the US$ 290 million term loan tranche was converted into a revolving credit facility and now exists along with the £741.5 million and €300 million revolving credit facilities that were already in place.  The remaining Sterling term loan is subject to mandatory 5% repayments on 11 July 2017, 11 July 2018 and 11 January 2019.

 

The banking facility continues to have two financial covenants, a net debt to headline EBITDA covenant (debt cover covenant) and an interest cover covenant, both of which are tested half yearly at June and December and both of which afforded comfortable headroom at 31 December 2014. 

 

The first of these covenants is set at 3.5x leverage or lower for each of the half yearly measurement dates for the remainder of the term.  At 31 December 2014 leverage was 1.7x (31 December 2013: 0.5x), but it would have been 2.5x on a proforma basis when allowing for the Return of Capital that will occur in March 2015.

 

The interest cover covenant is unchanged, at 4.0x or higher throughout the life of the facility.  At 31 December 2014 it was 15.3x (31 December 2013: 11.8x).

 

The drawdown of the facilities are made in the core currencies of the Group, being US Dollar, Euro and Sterling and in proportions to protect the Group as efficiently as possible from currency fluctuations on net assets and profit.

 

In addition, there are a number of uncommitted overdraft, guarantee and borrowing facilities made available to the Group.  These uncommitted facilities are lightly used.

 

Cash, deposits and marketable securities amounted to £70.5 million at 31 December 2014 (31 December 2013: £200.4 million) and are offset against gross debt of £571.8 million (31 December 2013: £341.2 million) to arrive at the net debt position of £501.3 million (31 December 2013: £140.8 million).  The combination of this cash and the size of the debt facilities allows the Directors to consider that the Group has sufficient access to liquidity for its current needs.

 

The Board considers carefully its counterparty risk with banks when deciding where to place the cash on deposit held within the Melrose Group.

 

Finance cost risk management

 

The Group remained in a net debt position at 31 December 2014.  Drawdowns under the amended facilities bear interest at interbank rates of interest plus a margin.  The margin ranges between 0.75% and 1.90% (previously 1.40% to 2.65%), determined by reference to the Group's debt cover ratio. 

 

At the beginning of 2014 the Group protected just under 80% of gross borrowings from exposure to changes in interest rates by holding a number of interest rate swaps to fix the cost on US $246.8 million, £336.8 million and €200.0 million of debt. 

 

During the year, following the disposal of Bridon, a €50.0 million interest rate swap arrangement was closed out. This left swap arrangements in place fixing the interest rate cost on US $246.8 million, £336.8 million and €150.0 million of gross borrowings at 31 December 2014.

 

Subsequent to the Balance Sheet date, to ensure that the Group protected between 70% and 80% of gross borrowings from exposure to changes in interest rates following the Return of Capital in March 2015, further swap arrangements have been closed out and new arrangements placed.  The new swap arrangements provide protection through to July 2019 and require the Group to pay, annually in arrears, a weighted blended fixed finance cost of 0.92% (31 December 2013: 0.70%) for US Dollar swaps, 0.06% (31 December 2013: 0.72%) on Euro swaps and 1.05% (31 December 2013: 0.91%) on Sterling swaps, plus the relevant bank margin which is currently 1.30% (31 December 2013: 2.25%). 

 

Exchange rate risk management

 

The Group trades in various countries around the world and is exposed to many different foreign currencies.  The Group therefore carries an exchange rate risk that can be categorised into three types as described below.  The Board policy is designed to protect against the majority of the cash risks but not the non-cash risks.  The most common cash risk is the transaction risk the Group takes when it invoices a sale in a different currency to the one in which its cost of sale is incurred.  This is addressed by taking out forward cover against approximately 60% to 80% of the anticipated cash flows over the following twelve months, placed on a rolling quarterly basis and for 100% of each material contract. This does not eliminate the cash risk but does bring some certainty to it.

 

Exchange rates used in the year

 

US Dollar

Twelve month

average rate

Closing

rate

2014

1.65

1.56

2013

1.56

1.66

Euro



2014

1.24

1.29

2013

1.18

1.20

 

The effect on the key headline numbers in 2014 for the continuing Group due to the translation movement of exchange rates from 2013 to 2014 is shown below.  The table illustrates the translation movement in revenue and headline operating profit if the 2013 average exchange rates had been used to calculate the 2014 results rather than the 2014 average exchange rates.  In particular the table illustrates an 8% headwind to headline operating profit in the year from the movement in foreign exchange rates.

 

The translation difference in 2014 

£m

Revenue decrease

90.4

Headline operating profit decrease

19.5

 

Given the Group's largest exchange rate exposure is to the Euro, which makes up 40% of Group profits in 2014, current exchange rates, including the recent weakness of the Euro, mean there is a 5% headwind from currency into 2015.

 

For reference in respect of the enlarged Group, an indication of the short term exchange rate risk, which shows both translation exchange risk and unhedged transaction exchange rate risk, is as follows:

 

Sensitivity of profit to translation and unhedged transaction exchange risk

 

Increase in headline

operating profit

£m

For every 10 cent strengthening of the US Dollar against Sterling

6.2

For every 10 cent strengthening of the Euro against Sterling

8.1

 

The long term exchange rate risk, which ignores any hedging instruments, is as follows:

 

Sensitivity of profit to translation and full transaction exchange rate risk

 

Increase in headline

operating profit

£m

For every 10 cent strengthening of the US Dollar against Sterling

8.4

For every 10 cent strengthening of the Euro against Sterling

4.3

 

No specific exchange instruments are used to protect against the translation risk because it is a non-cash risk to the Group.  However, when the Group has net debt, the hedge of having a multi-currency debt facility funding these foreign currency trading units protects against some of the Balance Sheet and banking covenant translation risk.

 

Lastly, and potentially the most significant exchange risk that the Group has, arises when a business that is predominantly based in a foreign currency is sold.  The proceeds for those businesses may be received in a foreign currency and therefore an exchange risk might arise if foreign currency proceeds are converted back to Sterling, for instance to pay a dividend to shareholders.  Protection against this risk is considered on a case-by-case basis.

 

Contract and warranty risk management

 

The financial risks connected with contracts and warranties, which include the consideration of warranty terms, duration and any other commercial or legal terms are considered carefully by Melrose before being entered into.

 

Commodity cost risk management

 

As Melrose owns engineering businesses across various sectors the cumulative expenditure on commodities is important.  The Group addresses the risk of base commodity costs increasing by, wherever possible, passing on the cost increases to customers or by having suitable purchase agreements with its suppliers which sometimes fix the price over some months into the future.  These risks are minimised through sourcing policies (including the use of multiple sources, where possible) and procurement contracts where prices are agreed for up to one year to limit exposure to price volatility.

 

 

GOING CONCERN

 

The Group's business activities, together with the factors likely to affect its future development, performance and position are set out in the Strategic Report section of the Annual Report.  In addition, the consolidated financial statements, and in particular notes 19 and 24, include details of the Group's borrowing facilities and hedging activities along with the processes for managing its exposures to credit risk, capital risk, liquidity risk, interest risk, foreign currency risk and commodity cost risk.

 

The Group has considerable financial resources and a breadth of end markets, both by sector and geographically, giving some balance to the various market and economic cycle risks. Furthermore, the Group has a consistent cash generation record, and as a consequence, the Directors believe that the Group is well placed to manage its business risks successfully despite the current uncertain economic outlook.

 

After making enquiries, the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future.  For this reason, they continue to adopt the going concern basis in preparing the financial statements.

 

 

 

 

 

 

Geoffrey Martin

Group Finance Director

4 March 2015

 

 

Consolidated Income Statement                                                                                       

 

Notes

Year ended
31 December
 2014

£m

Restated(1)

year ended

31 December 2013

£m

Continuing operations




Revenue

2

1,377.5 

1,466.4 

Cost of sales


(875.0)

(952.0)





Gross profit


502.5 

514.4 





Headline(2) operating expenses


       (259.7)

(277.2)

Share of headline(2) results of joint ventures


3.2 

2.8 

Intangible asset amortisation


(54.7)

(57.1)

Exceptional operating costs

3

(34.3)

(19.3)

Exceptional operating income

3

5.4 

28.9 





Total net operating expenses


(340.1)

(321.9)









Operating profit


162.4 

192.5 





Headline(2) operating profit

2

246.0 

240.0 









Finance costs


(48.2)

(70.2)

Finance income


14.7 

21.7 





Profit before tax


128.9 

144.0 





Headline(2) profit before tax


212.5 

191.5 





Headline(2) tax


(57.4)

(50.5)

Exceptional tax(3)  


15.6 

8.9 





Total tax

4

(41.8)

(41.6)









Profit for the year from continuing operations


87.1 

102.4





Headline(2) profit for the year from continuing operations


155.1 

141.0 









Discontinued operations




Profit for the year from discontinued operations

5

107.6 

462.2 





Profit for the year


194.7

564.6









Attributable to:




Owners of the parent


193.9

562.7

Non-controlling interests


 0.8

1.9







194.7

564.6









Earnings per share




From continuing operations




- Basic

7

7.9

7.9

- Diluted

7

7.8

7.8





From continuing and discontinued operations




- Basic

7

17.8

44.4

- Diluted

7

17.5

43.7





 

(1) Restated to include the results of Bridon within discontinued operations (note 5).

(2) Before exceptional costs, exceptional income and intangible asset amortisation.

(3) Includes exceptional tax and tax on exceptional items and intangible asset amortisation.

 


Consolidated Statement of Comprehensive Income

 

 

 

 

Notes

Year ended
31 December
 2014

£m

Year ended

31 December 2013

£m





Profit for the year


194.7

   564.6





Items that will not be reclassified subsequently to the Income Statement:




Net remeasurement (loss)/gain on retirement benefit obligations

               (35.5)

             20.1

Income tax credit/(charge) relating to items that will not be reclassified

4

8.7

              (0.6)







               (26.8)

19.5

Items that may be reclassified subsequently to the Income Statement:




Currency translation on net investments


               (93.2)

(25.9)

Currency translation on non-controlling interests


-

(0.3)

Transfer to Income Statement from equity of cumulative translation differences

      on disposal of foreign operations

 

5

 

                 (7.6)

 

(12.1)

(Losses)/gains on cash flow hedges


               (11.9)

10.0

Transfer to Income Statement on cash flow hedges


5.6

3.0

Income tax credit relating to items that may be reclassified

4

-

0.6







              (107.1)

(24.7)









Other comprehensive expense after tax


              (133.9)

(5.2)









Total comprehensive income for the year


60.8

559.4









Attributable to:




Owners of the parent


60.0

557.8

Non-controlling interests


0.8

1.6







60.8

559.4







Consolidated Statement of Cash Flows

 

 

 

Notes

Year ended

31 December
 2014

£m

Restated(1)

year ended

31 December 2013

£m

Net cash from operating activities from continuing operations

11

111.4 

             53.6

Net cash from operating activities from discontinued operations

11

5.1 

             82.4





Net cash from operating activities


              116.5

          136.0





Investing activities




Disposal of businesses

5

               374.8

           950.4

Disposal costs


(8.5)

(25.0)

Net cash disposed

5

(14.6)

(37.2)

Purchase of property, plant and equipment


(54.3)

(38.5)

Proceeds from disposal of property, plant and equipment


                  3.9

               6.2

Purchase of computer software and development costs


(7.9)

(3.7)

Dividends received from joint ventures


                  3.3

                2.7

Interest received


                14.7

             21.7

Acquisition of businesses and non-controlling interests

8

(97.6)

(12.8)

Cash acquired on acquisition of businesses

8

                  1.5

- 

Dividends paid to non-controlling interests


(0.4)

(6.3)

Net cash from investing activities from continuing operations


               214.9

           857.5

Net cash used in investing activities from discontinued operations

11

(4.1)

(20.2)





Net cash from investing activities


               210.8

          837.3





Financing activities




Return of Capital


 (595.3)

- 

Movement in borrowings


              226.1

(834.0)

Costs of amending borrowing facilities


                 (3.6) 

- 

Dividends paid

6

(83.6)

(98.1)

Net cash used in financing activities from continuing operations


(456.4)

(932.1)

Net cash used in financing activities from discontinued operations

11

- 

- 





Net cash used in financing activities


(456.4)

(932.1)









Net (decrease)/increase in cash and cash equivalents


(129.1)

             41.2

Cash and cash equivalents at the beginning of the year

11

               200.4

           156.5

Effect of foreign exchange rate changes

11

(0.8)

              2.7





Cash and cash equivalents at the end of the year

11

                 70.5

           200.4





 

(1) Restated to include the cash flows of Bridon within discontinued operations (note 5).

 

 

As at 31 December 2014, the Group's net debt was £501.3 million (31 December 2013: £140.8 million). A reconciliation of the movement in net debt is shown in note 11.



Consolidated Balance Sheet

 

 

 

Notes


31 December
 2014

£m

31 December
 2013

£m

Non-current assets





Goodwill and other intangible assets



2,405.3

2,612.0

Property, plant and equipment



199.6

241.2

Interests in joint ventures



11.8

12.6

Deferred tax assets



68.7

70.3

Derivative financial assets



1.2

8.1

Trade and other receivables



3.3

0.3









2,689.9

2,944.5

Current assets





Inventories



166.5

234.5

Trade and other receivables



257.5

292.8

Derivative financial assets



3.9

5.1

Cash and cash equivalents



70.5

200.4









498.4

732.8











Total assets

2


3,188.3

3,677.3











Current liabilities





Trade and other payables



320.5

399.2

Interest-bearing loans and borrowings



0.9

-

Derivative financial liabilities



10.1

7.2

Current tax liabilities



48.8

43.6

Provisions

9


71.7

74.4









452.0

524.4











Net current assets



46.4

208.4











Non-current liabilities





Trade and other payables



0.4

1.5

Interest-bearing loans and borrowings



570.9

341.2

Derivative financial liabilities



0.2

-

Deferred tax liabilities



267.3

299.6

Retirement benefit obligations



218.5

219.3

Provisions

9


105.3

103.4









1,162.6

965.0











Total liabilities

2


1,614.6

1,489.4











Net assets



1,573.7

2,187.9











Equity





Issued share capital

10


1.3

1.3

Merger reserve



595.3

1,190.6

Capital redemption reserve



595.3

-

Other reserves



             (757.1)

(757.1)

Hedging reserve



                 (0.5)

                  5.8

Translation reserve



             (130.7)

(29.9)

Retained earnings



1,267.5

            1,775.3






Equity attributable to owners of the parent



1,571.1

2,186.0

Non-controlling interests



2.6

1.9






Total equity



1,573.7

2,187.9






 

 

The financial statements were approved and authorised for issue by the Board of Directors on 4 March 2015 and were signed on its behalf by:

 

 

 

 

………………………………………………                                                               ……………………………………………

Geoffrey Martin                                                                                                   Simon Peckham

Group Finance Director                                                                                      Chief Executive



Consolidated Statement of Changes in Equity

 

 

  

 

 

 

 

 

Issued share capital

£m

Merger reserve

£m

 

 

Capital redemption

reserve

£m

 

 

 

Other reserves

£m

Hedging

reserve

£m

 

 

 

Translation reserve

£m

Retained earnings

£m

 

Equity attributable to owners of the parent

£m

Non-controlling interests

£m

 

 

 

Total
equity

£m












At 1 January 2013

1.3 

1,190.6

-

(757.1)

(7.7)

 8.0

1,299.5 

1,734.6 

7.1 

1,741.7 

Profit for the year

 - 

-

-

- 

- 

- 

562.7 

562.7 

1.9 

564.6 

Other comprehensive

     income/(expense)

 

 -

 

-

 

-

 

-

 

13.5

 

(37.9)

 

19.5

 

(4.9)

 

(0.3)

 

(5.2)


    










Total comprehensive

      income/(expense)

 

-

 

-

 

-

 

-

 

13.5

 

(37.9)

 

582.2

 

557.8

 

1.6

 

559.4












Dividends paid

 -

-

-

 - 

 - 

 -  

(98.1)

(98.1)

(6.3)

(104.4)

Credit to equity for equity-

      settled share-based

      payments

 

 

 -

 

 

-

 

 

-

 

 

-

 

 

-

 

 

 - 

 

 

4.0

 

 

4.0

 

 

-

 

 

4.0

Purchase of non-controlling

      interests

 

 -

 

-

 

-

 

-

 

-

           

-  

 

(12.3)

 

(12.3)

 

(0.5)

 

(12.8)












At 31 December 2013

1.3 

1,190.6

-

(757.1)

5.8 

(29.9)

1,775.3 

2,186.0 

1.9 

2,187.9 












Profit for the year

 -

-

-

-

 -

- 

193.9

193.9

0.8

194.7

Other comprehensive     

       expense

 

 -

 

-

 

-

 

-

 

(6.3)

 

(100.8)

 

(26.8)

 

(133.9)

 

-

 

(133.9)












Total comprehensive

      (expense)/income

           

 -

 

-

 

-

 

-

 

(6.3)

 

(100.8)

 

167.1

 

60.0

 

0.8

 

60.8












Return of Capital(1)

 -

(595.3)

595.3

 -

-

- 

(595.3)

(595.3)

-

(595.3)

Dividends paid

 -

-

-

-

-

- 

(83.6)

(83.6)

(0.4)

(84.0)

Credit to equity for equity-

      settled share-based

      payments

 

 

 -

 

 

-

 

 

-

 

 

-

 

 

-

 

 

- 

 

 

4.0

 

 

4.0

 

 

-

 

 

4.0

Acquisition of non-controlling

      interests

 

 -

 

-

 

-

 

-

 

-

 

- 

             

- 

 

-

 

0.3

 

0.3












At 31 December 2014

1.3

   595.3

595.3

(757.1)

  (0.5)

(130.7)

1,267.5

1,571.1

2.6

1,573.7












                                                                               

(1) On 7 February 2014, following the approval by shareholders of a Return of Capital of 47p per share, 'B' and 'C' shares with a total value of 

   £595.3 million were created resulting in a corresponding reduction in the Merger reserve. Following the capital return payments, these 'B' and 

   'C' shares were redeemed and £595.3 million was transferred to the Capital redemption reserve (note 10).

 

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 2014 or 31 December 2013 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 2013 have been delivered to the Registrar of Companies and those for the year ended 31 December 2014 will be delivered to the Registrar of Companies during April 2015. 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"), 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 2015.

The Group has adopted a number of standards and amendments which became mandatory during the current financial year. These changes have had no significant impact on the Group's financial statements. The accounting policies followed are the same as those detailed within the 2013 Annual Report which are available on the Group's website www.melroseplc.net.

The comparative information for the year ended 31 December 2013 in these financial statements has been restated to include the results and cash flows of Bridon within discontinued operations and exclude them from continuing operations. Bridon was previously disclosed within the Lifting segment.

The Board of Directors approved the preliminary announcement on 4 March 2015.

 

2.             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 Board in order to allocate resources to the segments and assess their performance. The Group's reportable operating segments under IFRS 8 are categorised as follows:

 

-       Energy segment

 

-       Elster segments

§  Gas

§  Electricity

§  Water

§  Elster central

 

The Energy segment consists of the Brush business, a specialist supplier of energy industrial products to the global market. Elster comprises the Gas, Electricity and Water segments along with their associated central costs. These businesses serve residential and industrial metering and utilisation markets whilst providing related communications, networking and software solutions.

 

There are two central cost centres which are also separately reported to the Board:

 

-       Central - corporate

-       Central - LTIPs(1) 

 

(1) Long Term Incentive Plans.

 

The Central corporate cost centre contains the Melrose Group head office costs. The Central LTIPs cost centre contains the costs associated with the five year Melrose Incentive Plan (granted on 11 April 2012) and the divisional management LTIPs that are in operation across the Group.

 

Following the disposal of Bridon, the Lifting segment has ceased to exist and the results of this business have been included within discontinued operations.

 

The discontinued segment comprises the Bridon, Truth, Marelli, Crosby, Acco and Harris businesses in 2013 and Bridon in 2014.

 

Transfer prices between business units are set 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 included in the analysis below.

 

The following tables present revenue, profit, and certain asset and liability information regarding the Group's operating segments for the year ended 31 December 2014 and the comparative year. Note 3 gives details of exceptional costs and income.

 

 

Segment revenues and results

 

Segment revenue from external customers


Note

Year ended

31 December 2014

£m

Restated(1)

year ended

31 December

2013

£m

Continuing operations




Energy


327.3

350.1





Gas


687.0

688.9

Electricity


215.7

247.5

Water


147.5

179.9





Elster total


1,050.2

1,116.3





Total continuing operations


1,377.5

1,466.4





Discontinued operations

5

208.0

659.2





Total revenue


1,585.5

2,125.6





 

(1) Restated to include the revenues of Bridon within discontinued operations (note 5).

 

Segment result


Notes

Year ended

31 December 2014

£m

Restated(1)

year ended

31 December

2013

£m

Continuing operations




Energy headline(2) operating profit


65.4 

73.1 





Gas


161.4 

152.4 

Electricity


22.8 

21.5 

Water


23.4 

23.0 

Elster central


(2.1)

(2.7)





Elster headline(2) operating profit


205.5 

194.2 





Central - corporate


(13.9)

(14.3)

Central - LTIPs(3)


(11.0)

(13.0)





Headline(2) operating profit


246.0 

240.0 





Intangible asset amortisation


(54.7)

(57.1)

Exceptional operating costs

3

(34.3)

(19.3)

Exceptional operating income

3

5.4 

28.9 





Operating profit


162.4 

192.5 





Finance costs


(48.2)

(70.2)

Finance income


14.7 

21.7 





Profit before tax


128.9 

144.0 

Tax

4

(41.8)

(41.6)

Profit for the year from discontinued operations

5

107.6 

462.2 





Profit for the year


194.7 

564.6 





 

(1) Restated to include the results of Bridon within discontinued operations (note 5).

(2) As defined on the Income Statement.

(3) Long Term Incentive Plans.

 

Total assets

Total liabilities




31 December
 2014

£m

Restated(1)

31 December
 2013

£m

31 December
 2014

£m

Restated(1)

31 December
 2013

£m

Continuing operations







Energy



502.5

497.7

136.3

146.5







Gas



2,054.8

2,038.7

506.1

470.3

Electricity



337.1

343.0

107.8

117.7

Water



183.7

201.6

84.1

92.6

Elster central



5.3

6.3

52.8

60.5








Elster total



2,580.9

2,589.6

750.8

741.1








Central - corporate



104.9

249.4

700.9

488.7

Central - LTIPs(2)



-

-

26.6

21.6








Total continuing operations



3,188.3

3,336.7

1,614.6

1,397.9








Discontinued operations



-

340.6

-

91.5








Total



3,188.3

3,677.3

1,614.6

1,489.4








 

(1) Restated to include the total assets and total liabilities of Bridon within discontinued operations (note 5).

(2) Long Term Incentive Plans.

 

 

Capital expenditure(1)

Depreciation(1)


Year ended
31 December
 2014

£m

Restated(2)

year ended
31 December
 2013

£m

Year ended
31 December
 2014

£m

Restated(2)

year ended
31 December
 2013

£m

Continuing operations





Energy

30.1

16.8

6.3

5.9






Gas

16.9

14.1

15.4

15.4

Electricity

11.1

6.9

5.8

6.7

Water

3.9

3.7

3.3

4.5

Elster central

-

0.3

0.1

-






Elster total

31.9

25.0

24.6

26.6






Central - corporate

0.2

0.6

0.9

0.7






Total continuing operations

62.2

42.4

31.8

33.2






Discontinued operations

4.1

18.9

6.8

15.2






Total

66.3

61.3

38.6

48.4






 

(1)  Including computer software and development costs.

(2)  Restated to include the capital expenditure(1) and depreciation(1) of Bridon within discontinued operations (note 5).

 

Geographical information

 

The Group operates in various geographical areas around the world. The Group's country of domicile is the UK and the Group's revenues and non-current assets in Europe and North America are also considered to be material.

 

 

The Group's revenue from external customers and information about its segment assets (non-current assets excluding interests in joint ventures, deferred tax assets, derivative financial assets and non-current trade and other receivables) by geographical location are detailed below:

 

Revenue(1) from external customers

Non-current assets


Year ended
31 December
 2014

£m

Restated(2)

year ended
31 December
 2013

£m


31 December
 2014

£m

Restated(2)
31 December
 2013

£m

Continuing operations





UK

159.2

189.9

239.7

276.9

Europe

507.9

509.8

1,399.8

1,522.4

North America

408.4

461.7

859.1

706.7

Other

302.0

305.0

106.3

109.8






Total continuing operations

1,377.5

1,466.4

2,604.9

2,615.8






Discontinued operations

208.0

659.2

                     -

237.4






Total

1,585.5

2,125.6

2,604.9

2,853.2






 

(1)  Revenue is presented by destination.

(2)  Restated to include the revenue and non-current assets of Bridon within discontinued operations (note 5).

 

 

 

3.             Exceptional costs and income

 

 

 

 

 

Exceptional costs

 

Year ended

31 December 2014

£m

 

Year ended

31 December 2013

£m

Continuing operations



Restructuring costs

(30.6)

(18.8)

Acquisition and disposal costs

(3.7)

(0.5)




Total exceptional costs

(34.3)

(19.3)




 

 

During 2014, the continuing Group incurred £30.6 million (2013: £18.8 million) of costs relating to restructuring programmes which are expected to deliver cost savings in the future.

 

The costs in both years were weighted towards the recently acquired Elster businesses, notably towards Gas in 2014. The most significant proportion of restructuring within the Gas business relates to the major closure of the Essen plant in Belgium and relocation of its Integrated Metering Solutions business, which builds metering stations, to Saudi Arabia and Malaysia. In addition, as a consequence of the closure of Essen, research and development and the production of ultrasonic meters was moved to Mainz, Germany in the year. Initial restructuring costs following the acquisition of Eclipse were also incurred in 2014.

 

The restructuring costs incurred in 2013 were proportionally weighted to the Elster Electricity and Water businesses and whilst restructuring costs have been incurred within these businesses in 2014 they are focused on European operations rather than the large restructures in the North America businesses incurred in previous years.

 

The Group also incurred £3.7 million (2013: £0.5 million) of expenses on acquisition and disposal related activities during the year.

 

 

 

 

 

Exceptional income

Year ended
31 December
2014
£m

Year ended

31 December 2013

£m

Continuing operations



Release of surplus leasehold property cost provision

                    5.4

                 -

Release of items previously booked as fair value adjustments

-

             28.9




Total exceptional income

5.4

             28.9




 

During the year a historical onerous lease dispute was successfully resolved for less than expected resulting in the release of £5.4 million from provisions as exceptional income.

 

During 2013 certain warranty and legal issues, inherited with the acquisition of Elster, were successfully resolved for less than expected resulting in the release of £28.9 million of provisions as exceptional income.

 

 

4.             Tax

 

Continuing operations

Discontinued operations

Total

Analysis of charge/(credit)

   in year:

 

Year ended
31 December
2014
£m

Restated(1)

year ended
31 December
2013
£m

Year ended
31 December
2014
£m

Restated(1)

year ended
31 December
2013
£m

 

Year ended
31 December
2014
£m

 

Year ended
31 December
2013
£m

Current tax

                46.2

                33.9

               4.6

43.1 

             50.8

77.0 

Deferred tax

(4.4)

                 7.7

(1.2)

(5.1)

(5.6)

2.6 








Total income tax charge

            41.8

               41.6

              3.4

38.0 

             45.2

79.6 








Tax charge on headline(2)  profit before tax

 

                57.4

 

                50.5

 

              5.5

 

42.0 

 

             62.9

 

92.5 

Exceptional tax charge

              3.9

                  8.1

                 -

                   - 

               3.9

8.1 

Tax (credit)/charge on net exceptional items

 

(3.6)

 

          3.7

 

(0.5)

 

                  - 

 

(4.1)

 

3.7 

Tax credit in respect of intangible asset amortisation 

 

(15.9)

 

(20.7)

 

(1.6)

 

(4.0)

 

(17.5)

 

(24.7)








Total income tax charge

                41.8

                41.6

              3.4

38.0 

            45.2

79.6 








 

(1) Restated to include the results of Bridon within discontinued operations (note 5).

(2) As defined on the Income Statement.

 

The tax charge for the year ended 31 December 2014 includes an exceptional tax charge of £3.9 million (2013: £8.1 million) predominantly relating to the tax costs arising on an internal reorganisation of the Electricity business  (2013: internal reorganisation of the Water business). 

 

The charge for the year can be reconciled to the profit per the Income Statement as follows:

 

Year ended
31 December
2014

£m

Restated(1)

year ended
31 December
2013

£m

Profit on ordinary activities before tax:



Continuing operations

128.9 

144.0 

Discontinued operations (note 5)

14.1 

99.5 





143.0 

243.5 




Tax on profit on ordinary activities at weighted average rate 28.49% (2013: 29.89%)

40.7 

72.8 




Tax effect of:



Net permanent differences/non-deductible items

1.3 

5.8 

Effect of rate change on deferred tax liabilities on intangible assets

                   - 

(3.9)

Temporary differences not recognised in deferred tax

3.7 

(2.2)

Tax credits, withholding taxes and other rate differences

(1.5)

1.4 

Prior year tax adjustments

(2.9)

(2.4)

Exceptional tax charge

3.9 

8.1 




Total tax charge for the year

45.2 

79.6 




 

(1) Restated to include the results of Bridon within discontinued operations (note 5).

 

The reconciliation has been performed at a blended Group tax rate of 28.49% (2013: 29.89%) which represents the weighted average of the tax rates applying to taxable profits in the jurisdictions in which those profits arose.

 

In addition to the amount charged to the Income Statement, a tax credit of £8.7 million (2013: £nil) has been recognised directly in the Consolidated Statement of Comprehensive Income. This represents a tax credit of £8.7 million (2013: £0.6 million charge) in respect of retirement benefit obligations and a tax charge of £nil (2013: £0.6 million credit) in respect of movements on cash flow hedges.



5.             Discontinued operations

 

Disposal of businesses

 

On 12 November 2014, the Group completed the disposal of Bridon, which was acquired as part of the FKI acquisition in 2008, for gross cash consideration of £374.8 million. The costs charged during the year associated with the disposal were £9.9 million. The profit on disposal was £96.9 million after the recycling of cumulative translation differences of £7.6 million. The Bridon business was previously classified within the Lifting segment and is now shown within discontinued operations in both years.

 

Discontinued operations in 2013 also contain the results and cash flows of the Crosby and Acco businesses, which were disposed of on 22 November 2013, the Marelli business, disposed of on 1 August 2013, the Truth business, disposed of on 3 July 2013, and the Harris business, disposed of on 31 December 2013.

 

Financial performance of discontinued operations:

 

 

 

 

 

Year ended
31 December
2014
£m

Restated(1)

year ended
31 December
2013
£m

Revenue


              208.0

659.2 

Operating costs


(185.4)

(544.8)





Headline(2) operating profit


                22.6

114.4 

Intangible asset amortisation


(6.3)

(13.8)

Exceptional items


(1.8)

(0.7)

Net finance costs


(0.4)

(0.4)





Profit before tax


                14.1

99.5 

Headline(2) tax


(5.5)

(42.0)

Exceptional tax(3)


                  2.1

4.0 





Profit after tax


                10.7

61.5 

Cumulative translation differences recycled on disposals


                  7.6

12.1 

Gain on disposal of net assets of discontinued operations


                89.3

388.6 





Profit for the year from discontinued operations


              107.6

462.2 









Attributable to:




Owners of the parent


              107.6

462.2 

Non-controlling interests


                     -

- 







              107.6

462.2 





 

(1) Restated to include the results of Bridon within discontinued operations.

(2) As defined on the Income Statement.

(3) Includes exceptional tax and tax on exceptional items and intangible asset amortisation.

 

 

The major classes of assets and liabilities disposed of within this business were as follows:

 

 

Lifting

£m

Goodwill and other intangible assets

167.1

Property, plant and equipment

62.3

Inventories

54.7

Trade and other receivables

51.8

Cash and cash equivalents

14.6



Total assets

350.5

Trade and other payables

44.1

Retirement benefit obligations

3.6

Provisions

1.4

Tax and deferred tax

25.8



Total liabilities

74.9

Net assets

275.6

Cash consideration net of costs(1)

364.9

Cumulative translation difference recycled on disposals

7.6



Profit on disposal of businesses

96.9



 

(1) Net of £9.9 million of disposal costs.

 

 

6.             Dividends

 

Year ended
31 December
2014
£m

Year ended
31 December
2013
£m

Final dividend for the year ended 31 December 2012 paid of 5.0p

                      -

63.3

Interim dividend for the year ended 31 December 2013 paid of 2.75p

                      -

34.8

Final dividend for the year ended 31 December 2013 paid of 5.0p

53.6

                      -

Interim dividend for the year ended 31 December 2014 paid of 2.8p

30.0

                      -





83.6

98.1




 

 

Proposed final dividend for the year ended 31 December 2014 of 5.3p per share (2013: 5.0p per share) totalling £52.7 million (2013: £53.6 million).

 

The final dividend of 5.3p was proposed by the Board on 4 March 2015 and, in accordance with IAS 10: "Events after the reporting period", has not been included as a liability in these financial statements.

 

 

7.             Earnings per share

 

 

Earnings attributable to owners of the parent

Year ended

31 December 2014

£m

Restated(1)

year ended
31 December

2013

£m

 

Profit for the purposes of earnings per share

                 

193.9

 

562.7 

Less: profit for the year from discontinued operations (note 5)

                (107.6)

(462.2)




Earnings for basis of earnings per share from continuing operations

                    86.3

              100.5




 

(1) Restated to include the results of Bridon within discontinued operations (note 5).

 

Year ended

31 December 2014

Year ended
31 December

2013


Number

Number

Weighted average number of Ordinary Shares for the purposes of basic earnings

      per share (million)

 

1,092.0

 

1,266.6

Further shares for the purposes of diluted earnings per share (million)

13.7

20.1




Weighted average number of Ordinary Shares for the purposes of diluted earnings

      per share (million)

 

1,105.7

 

1,286.7

 

 

On 7 February 2014 the number of Ordinary Shares was consolidated in a ratio of 11 to 13, which reduced the number of Ordinary Shares in issue from 1,266.6 million to 1,071.8 million.

 

Earnings per share

Year ended

31 December 2014

pence

Restated(1)

year ended
31 December

2013

pence

Basic earnings per share



From continuing and discontinued operations

17.8

44.4

From continuing operations

7.9

7.9

From discontinued operations

9.9

36.5




Diluted earnings per share



From continuing and discontinued operations

17.5

43.7

From continuing operations

7.8

7.8

From discontinued operations

9.7

35.9

 

(1) Restated to include the results of Bridon within discontinued operations (note 5).

Headline(1) proforma(2) diluted earnings per share

 

Following the disposals in 2013 and 2014 and the related Returns of Capital and associated share consolidations, headline(1) proforma(2) diluted earnings per share is calculated using the headline(1) profit after tax, of businesses in existence at each year end, attributable to the owners of the parent and the number of shares in issue following the related share consolidation.  

 

Year ended

31 December 2014

Year ended
31 December

2013


£m

£m




Headline(1) profit after tax, of businesses in existence at each year end, attributable to 

       owners of the parent(2)

 

154.3

 

164.2




 

(1) Before exceptional costs, exceptional income and intangible asset amortisation.

(2) Includes £25.1 million of headline(1) profit after tax in respect of Bridon in the year ended 31 December 2013.

 

Year ended

31 December 2014

Year ended
31 December

2013


Number

Number

Number of shares in issue following the Return of Capital (million)

995.2

1,071.8

Further shares for the purpose of diluted earnings per share (million)

13.7

20.1



Number of shares for the purpose of diluted headline(1) proforma(2) earnings

       per share (million)

 

1,008.9

 

1,091.9







Headline(1) proforma(2) diluted earnings per share (pence)

15.3

15.0




 

(1) Before exceptional costs, exceptional income and intangible asset amortisation.

(2) Calculated using the businesses in existence at each year end, using the diluted number of shares in issue following the related Return of

         Capital and associated share consolidation.

 

 

8.             Acquisition of businesses              

 

On 31 October 2014, the Group acquired 100 per cent of the issued share capital and obtained control of Eclipse, Inc. ("Eclipse") for cash consideration of £97.6 million.

 

Eclipse is a long established manufacturer of low-temperature industrial gas combustion equipment, which complements Elster Gas' expertise in high-temperature industrial gas combustion applications.

 

The amounts recognised in respect of the identifiable assets acquired and liabilities assumed are set out in the table below. Fair values are provisional as of 31 December 2014 and are based on the information held to date.

 

 



 

 

 

 

Fair value

£m






Eclipse





Property, plant and equipment




                 5.5

Intangible assets, computer software and development costs




               51.4

Inventories




                 5.4

Trade and other receivables




               13.5

Cash and cash equivalents




                 1.5

Trade and other payables




(17.2)

Provisions




(9.2)

Deferred tax




(12.2)

Retirement benefit obligations




(4.6)

Current tax




(0.8)

Non-controlling interests




(0.3)






Net assets




33.0











Goodwill




64.6











Total consideration

97.6











Satisfied by:





Cash consideration

97.6

 

 

Acquisition related costs (included in exceptional operating costs) amount to £2.3 million.

 

The fair value of financial assets include gross trade and other receivables of £14.3 million. The best estimate at acquisition date of the contractual cash flows not to be collected is £0.8 million.

 

Eclipse contributed £12.2 million to revenue and £1.4 million to headline operating profit for the two month period between the date of acquisition and the Balance Sheet date.

 

If the acquisition of Eclipse had been completed on the first day of the financial year, Group revenues would have been approximately £1,441 million and Group headline operating profit would have been approximately £249 million.

 

The goodwill arising on acquisition of Eclipse is attributable to the anticipated profitability and cash flows arising from the businesses acquired, synergies as a result of the complementary nature of the business with Elster Gas, the assembled workforce, technical expertise, knowhow, market share and geographical advantages afforded to the Group. None of the goodwill is expected to be deductible for income tax purposes.

 

Contingent liabilities of £4.5 million have been acquired in respect of warranty and legal claims and recognised within provisions. The majority of expenditure is expected to be incurred over the next five years.

 

The non-controlling interests acquired are measured on the proportion of the fair value of their net assets.

 

 

9.             Provisions

 

Surplus

leasehold

property costs

£m

Environmental

and

legal costs

£m

Incentive plan

related

£m

 

Warranty related costs

£m

Other

£m

Total

£m

At 31 December 2013

  21.2 

54.1 

21.6 

56.1 

24.8 

177.8 

Acquisition of businesses

           0.4

                     3.3

-

               5.5

                  -

            9.2

Utilised

            (5.0)

(2.9)

(3.0)

(17.6)

(21.1)

        (49.6)

Net charge to headline(1)

      operating profit

                

                 -

 

                      0.1

 

 7.0

             

               7.8

               

               0.1

          

         15.0

Net charge to exceptional 

     items(2)

 

(5.4)

 

                        -

 

-

               

                 -

 

              31.6

        

          26.2

Disposal of businesses

(0.2)

                        -

-

                 -

(1.2)

(1.4)

Unwind of discount

              0.3

                     0.1

1.0

                 -

                  -

            1.4

Exchange differences

              0.2

(0.5)

-

(0.5)

(0.8)

(1.6)








At 31 December 2014

            11.5

                   54.2

26.6

              51.3

             33.4

        177.0















Current

              2.7

                     6.0

11.0

        20.2

        31.8

          71.7

Non-current

              8.8

                   48.2

15.6

        31.1

          1.6

        105.3









            11.5

                   54.2

26.6

        51.3

        33.4

       177.0








 

(1) As defined on the Income Statement.

(2) Net of £31.6 million of exceptional costs relating to restructuring and a £5.4 million surplus leasehold property costs provision released to exceptional income.

 

 

The provision for surplus leasehold property costs represents the estimated net payments payable over the term of these leases together with any dilapidation costs. This is expected to result in cash expenditure over the next one to four years.

 

Environmental and legal costs provisions relate to the estimated remediation costs of pollution, soil and groundwater contamination at certain sites and estimated future costs and settlements in relation to legal claims. Due to their nature, it is not possible to predict precisely when these provisions will be utilised.

 

Incentive plan related provisions are in respect of long term incentive plans for divisional senior management, expected to result in cash expenditure in the next three years.

 

The provision for warranty related costs represents the best estimate of the expenditure required to settle the Group's obligations. Warranty terms are, on average, between one and five years.

 

Other provisions relate primarily to costs that will be incurred in respect of restructuring programmes, usually resulting in cash spend within one year.

 

Where appropriate, provisions have been discounted using a discount rate of 3% (31 December 2013: 3%).

10.          Issued capital and reserves

 

 

 

Share Capital


31 December

 2014
£m

31 December

2013

£m

Allotted, called-up and fully paid




1,071,761,339 (31 December 2013: 1,266,627,036) Ordinary Shares of

      13/110p each (31 December 2013: 0.1p each)


 

1.3

 

1.3







1.3

1.3





 

 

On 7 February 2014 at a General Meeting of the Company, shareholders approved a resolution to return £595.3 million to shareholders.

 

The Return of Capital took place by increasing the authorised share capital by £595.3 million through the issue of 509,123,150 'B' shares and 757,503,886 'C' shares of 47.0p each and capitalising £595.3 million of the Merger reserve to pay up in full the 'B' and 'C' shares.

 

Shareholders had the option to receive the cash value inherent in the 'B' and 'C' shares by way of income or the choice of two capital options.  As a result of the elections made by shareholders in respect of the Return of Capital:

 

§  493,363,270 'B' shares were redeemed and subsequently cancelled with immediate effect from 17 February 2014.

§  15,759,880 'B' shares were redeemed on 30 April 2014 and subsequently cancelled.

§  757,503,886 'C' shares were paid a dividend on 28 February 2014 and these 'C' shares were subsequently cancelled.

In conjunction with the Return of Capital, on 7 February 2014 the number of Ordinary Shares in issue was consolidated in a ratio of 11 for 13 in order to maintain comparability of the Company's share price before and after the Return of Capital.  On 7 February 2014 the number of Ordinary Shares in issue became 1,071,761,339 each with a nominal value of 13/110 pence.

 

Translation reserve

 

The Translation reserve contains exchange differences on the translation of subsidiaries with a functional currency other than Sterling and exchange gains or losses on the translation of liabilities that hedge the Company's net investment in foreign subsidiaries.

 

Hedging reserve

 

The Hedging reserve represents the cumulative fair value gains and losses on derivative financial instruments for which cash flow hedge accounting has been applied.

 

Merger reserve, Capital redemption reserve and Other reserves

 

The Merger reserve represents the excess of fair value over nominal value of shares issued in consideration for the acquisition of subsidiaries. The Capital redemption reserve arises upon the redemption of the Company's own shares. Other reserves comprise accumulated adjustments in respect of Group reconstructions.

 

 

11.          Cash flow statement

 

 

Year ended

31 December

 2014

£m

Restated(1)

year ended

31 December

2013

£m

Reconciliation of headline(2) operating profit to cash generated by continuing operations


Headline(2) operating profit from continuing operations

   246.0

240.0 

Adjustments for:



Depreciation of property, plant and equipment

     26.6

     28.0

Amortisation of computer software and development costs

       5.2

5.2 

Restructuring costs paid and movements in other provisions

(30.5)

(66.2)




Operating cash flows before movements in working capital

   247.3

207.0 

Decrease in inventories

     20.9

26.3 

(Increase)/decrease in receivables

(13.8)

                0.7

Decrease in payables

(35.6)

(37.5)




Cash generated by operations

    218.8

   196.5

Tax paid

(35.1)

(43.1)

Interest paid

(38.9)

(53.1)

Acquisition costs

(2.3)

(11.4)

Defined benefit pension contributions paid

(31.1)

(31.9)

Incentive scheme payments

           -

(3.4)




Net cash from operating activities from continuing operations

   111.4

53.6 




 

(1) Restated to include the results of Bridon within discontinued operations (note 5).

(2) As defined on the Income Statement.

 

 

 

 

 

Cash flow from discontinued operations

 

Year ended

31 December

 2014

£m

Restated(1)

year ended

31 December

2013

£m

Cash generated from discontinued operations

        17.4

101.9 

Tax paid

(4.2)

(17.7)

Interest paid

            -

(0.1)

Defined benefit pension contributions paid

(8.1)

(1.7)




Net cash from operating activities from discontinued operations

         5.1

82.4 







Purchase of property, plant and equipment

(3.9)

(20.1)

Purchase of computer software and development costs

(0.2)

(0.2)

Proceeds from disposal of property, plant and equipment

             -

- 

Interest received

             -

0.1 




Net cash used in investing activities from discontinued operations

(4.1)

(20.2)







Net cash used in financing activities from discontinued operations

-

- 




 

(1) Restated to include the results of Bridon within discontinued operations (note 5).

 

 

Net debt reconciliation

 

31 December

2013

 

 

 

Cash flow

 

 

 

Acquisitions

 

 

 

Disposals

 

Other

non-cash movements

 

Foreign exchange difference

 

31 December 2014


£m

£m

£m

£m

£m

£m

£m

Cash

200.4 

(382.4)

(98.4)

351.7

                -

(0.8)

        70.5

Debt due within one year

                -

          -

              -

            -

 (0.9)

              -

(0.9)

Debt due after one year

(341.2)

(226.1)

              -

            -

           0.5

(4.1)

(570.9)









Net debt

(140.8)

(608.5)

(98.4)

351.7

(0.4)

(4.9)

(501.3)









 

 

12.          Post Balance Sheet events

 

At a General Meeting of the Company held on 20 February 2015, shareholders approved a Return of Capital of 18.7 pence per Ordinary Share totalling £200.4 million.

'B' and 'C' shares with a total value of £200.4 million have been created resulting in a corresponding reduction in the Merger reserve. When the capital return payments are made on 16 March 2015, the 'B' and 'C' shares will be redeemed and £200.4 million will be transferred to the Capital redemption reserve.

As a result of the approval of the capital return, on 20 February 2015 the number of Ordinary Shares in issue was consolidated in a ratio of 13 for 14 in order to maintain comparability of the Company's share price before and after the capital return. On 20 February 2015 the number of Ordinary Shares in issue became 995,206,966 each with a nominal value of 7/55 pence.

 


This information is provided by RNS
The company news service from the London Stock Exchange
 
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