Press Release
24 February 2016
The Weir Group PLC today reports its results for the 52 week period ended 1 January 2016.
Strategic progress in challenging markets
Continuing Operations | 2015 | 2014 | Reported Growth | Constant Currency1 |
Order input1 | £1,877m | £2,478m | n/a | -24% |
Revenue | £1,918m | £2,438m | -21% | -22% |
Operating profit2 | £259m | £450m | -42% | -43% |
Operating margin2 | 13.5% | 18.4% | -490bps | -510bps |
Profit before tax2 | £220m | £409m | -46% | -47% |
Cash from operations | £396m | £421m | -6% | n/a |
Earnings per share2 | 78.4p | 141.3p | -45% | n/a |
Dividend per share | 44.0p | 44.0p | 0% | n/a |
Return on Capital Employed3 | 10.0% | 18.2% | n/a | -820bps |
Net debt | £825m | £861m | £36m | n/a |
Keith Cochrane, Chief Executive, commented:
"Despite market challenges which are unprecedented in recent years, Weir has delivered a resilient performance in Minerals, maintained leadership and market share in Oil & Gas, and created an additional platform for growth with the new Flow Control division. As Weir has always done, we adapted quickly to market conditions. Costs were aggressively reduced while the cash generative nature of the business supported continued investment in our strategic priorities.
Given ongoing market conditions, 2016 will be another challenging year. As a result, we are planning for a further reduction in constant currency Group operating profits, driven primarily by lower activity levels in upstream oil and gas markets. We will continue to invest for the medium term supported by our aftermarket-focused business model, further cost reduction initiatives, non-core asset disposals and a clear focus on cash generation, to ensure we benefit fully and quickly when markets improve."
A live webcast of the management presentation to the investment community will begin at 0900 (GMT) on 24 February 2016 at www.investors.weir
Enquiries: | |
Investors: Stephen Christie | +44 (0) 7795 110456 |
Media: Raymond Buchanan | +44 (0) 7713 261447 |
Brunswick: Patrick Handley / Nina Coad | +44 (0) 20 7404 5959 |
Notes:
Strategic overview
The Group's strategy is to strengthen and extend its position as a leading provider of highly engineered solutions for use in global mining, oil and gas, power and other aftermarket-orientated processing industries. Weir aims to achieve sustainable growth ahead of its markets, while responding to short term market conditions. The Group executes its strategy by focusing on four strategic pillars: innovation; collaboration; value chain excellence; and global capability.
Improving competitiveness
The Group reacted quickly to market conditions, delivering £110m in annualised savings. Actions included the closure of smaller manufacturing operations in the USA, Australia and Europe and consolidating twelve Oil & Gas service centre facilities. The workforce was reduced by approximately 1,600 in 2015 with the largest impact on the North American oil and gas workforce, which fell by more than 40%. In this process, the Group has been careful to ensure it retains the capability to respond quickly when markets recover. 2015 cost reductions enabled it to maintain broadly stable gross margins (before manufacturing overhead under-recoveries) and reduce underlying Selling, General and Administration (SG&A) costs by £27m (9%).
In 2016, the Group will continue to reduce costs with the additional consolidation of manufacturing and service facilities. These measures will deliver an anticipated £40m in further annualised savings. In addition, it plans to realise up to £100m from the disposal of non-core assets.
Innovation:
R&D investment increased 17% and drove the successful introduction of new products which are closely aligned to customer demands for increased efficiency and performance. These include Oil & Gas' new SPM® QEM 3000 frack pump which will substantially reduce customers' total cost of ownership. Similarly, the Minerals division's new Cavex® 700 CVX Hydrocyclone range can increase throughput by up to 50% and reduce processing costs. Power & Industrial launched a new safety valve for Liquefied Natural Gas (LNG) customers and a light-weight industrial pump for hydrocarbon applications. In addition, the Group established the Weir Technology Advisory Board, with representatives from different engineering disciplines to advise on future R&D priorities.
With Microsoft Corporation the Group is developing 'Internet of Things' (IoT) solutions for mining, oil and gas and power customers. The Group's work with Microsoft recognises the importance of accessing the best skills to complement Weir's engineering expertise, by working with one of the world's leading technology companies.
Collaboration:
The success of the Group's Downstream Forum, which brought together businesses from different divisions to share best practice and market opportunities, has been recognised with the strategic restructuring of the Power & Industrial division. Power & Industrial will be renamed Weir Flow Control and will incorporate the downstream-orientated pump businesses Floway and Gabbioneta, which were previously in the Minerals and Oil & Gas divisions respectively. This will create a division clearly focused on flow control opportunities in power, oil and gas and other process industries. The Oil & Gas division has agreed the terms of a joint venture with Rolls-Royce PLC subsidiary MTU America to develop an integrated frack power system, which will combine the new Weir SPM® QEM 3000 frack pump, a transmission and MTU engine. The new power system will be offered with comprehensive aftermarket support which will be provided by Weir's Oil & Gas service network.
Value Chain Excellence (VCE):
The Group's commitment to operational excellence has helped support performance through a series of value chain excellence initiatives which have delivered significant productivity and procurement gains. These have included a reduction in lead times and working capital, where there was substantial progress, particularly in the Oil & Gas and Power & Industrial divisions. The Minerals division is continuing to implement a common Enterprise Resource Planning (ERP) tool across its global operations which will consolidate fifteen ERP systems into one. Rollout is complete in Malaysia and Europe, and is underway in Latin America. These initiatives helped sustain gross margins and deliver an £87m working capital inflow, in addition to the Group's ongoing procurement efforts, which in 2015 delivered £37m in savings.
Global Capability:
The integration of Trio Engineered Products was successfully completed with early success in new comminution (crushing, grinding and screening) and sand and aggregates markets. A worldwide sales team was established to bring Trio's products to a wider range of customers. The Group also acquired US-based Delta Industrial Valves, which is a leading supplier of knife-gate valves principally for mining and oil sands applications. In addition, work is continuing to develop the Group's global facilities with Oil & Gas' manufacturing centre in Dubai moving to full operation, serving upstream and downstream customers, and a new factory and distribution centre in Milan to serve downstream customers.
Financial performance overview
Summary
Overall, in a challenging year, order input and revenue (on a constant currency basis) decreased by 24% and 22% respectively, with Oil & Gas input declining sequentially each quarter in line with market conditions. Aftermarket input declined 22% and original equipment orders fell by 29%. On a like-for-like basis, input was down 27% and revenue was down 24%. On a reported basis, revenues were 21% lower, supported by a £6m foreign exchange tailwind. In constant currency terms, gross margins (before manufacturing overhead under-recoveries) fell 20bps on a like-for-like basis, while operating margins declined 520bps, reflecting negative operating leverage and manufacturing overhead under-recoveries partially offset by restructuring cost savings of £65m. Reported profit before tax, amortisation and exceptional items of £220m was down 46%, primarily as a result of declines in North American oil and gas. Operating exceptional charges of £365m were incurred, reflecting impairments and restructuring actions taken across the Group.
In the Minerals division, as expected, orders fell as a result of reduced customer capital expenditure. Falling commodity prices led to some mine closures, reduced safety stock levels and postponement of scheduled maintenance, although the division took advantage of ore production growth and available brownfield opportunities. The division's order book was unchanged with a book-to-bill ratio of 1.00. As expected, operating margins declined slightly, primarily as a result of lower volumes, acquisition integration costs and investment in product development.
In Oil & Gas, further falls in oil prices resulted in significant reductions in activity levels, particularly within upstream North American unconventional markets, with investment falling substantially. Operating margins fell and were impacted by significant pricing pressure and negative operating leverage resulting from lower North American upstream volumes, despite the proactive and aggressive cost reduction and facility consolidation.
Power & Industrial's overall orders were down 11% in constant currency. Original equipment orders were down 20% against a prior-year period which included large hydro and steam turbine orders. Valve and hydro orders were affected by project order and delivery delays across oil and gas and power markets. Aftermarket was more resilient, falling 2%. Operating margin increased 130bps, reflecting an improved operational performance, as the benefits from restructuring more than offset the impact of the negative operating leverage from the revenue decline.
Segmental analysis | |||||||
Continuing operations £m | Minerals | Oil & Gas | Power & Industrial | Unallocated expenses | Total | Total OE | Total AM |
Input (constant currency) | |||||||
2015 | 1,033 | 567 | 277 | n/a | 1,877 | 579 | 1,298 |
2014 | 1,076 | 1,088 | 314 | n/a | 2,478 | 816 | 1,662 |
Variance: | |||||||
- Constant currency | -4% | -48% | -11% | -24% | -29% | -22% | |
- Like for Like1 | -9% | -48% | -11% | -27% | -34% | -23% | |
Revenue | |||||||
2015 | 1,034 | 582 | 302 | n/a | 1,918 | 598 | 1,320 |
2014 (as reported) | 1,128 | 992 | 318 | n/a | 2,438 | 822 | 1,616 |
Variance: | |||||||
- As reported | -8% | -41% | -5% | -21% | -27% | -18% | |
- Constant currency | -4% | -45% | -5% | -22% | -27% | -19% | |
- Like for Like1 | -9% | -45% | -5% | -24% | -32% | -20% | |
Operating profit2 | |||||||
2015 | 198 | 58 | 22 | (19) | 259 | ||
2014 (as reported) | 226 | 225 | 19 | (20) | 450 | ||
Variance: | |||||||
- As reported | -13% | -74% | 16% | -7% | -42% | ||
- Constant currency | -9% | -76% | 15% | -7% | -43% | ||
- Like for Like1 | -13% | -76% | 15% | -7% | -45% | ||
Operating margin | |||||||
2015 | 19.2% | 10.0% | 7.2% | n/a | 13.5% | ||
2014 (as reported) | 20.1% | 22.7% | 5.8% | n/a | 18.4% | ||
Variance: | |||||||
- As reported | -90bps | -1270bps | 140bps | -490bps | |||
- Constant currency | -100bps | -1280bps | 130bps | -510bps | |||
- Like for Like1 | -80bps | -1280bps | 130bps | -520bps | |||
1 Like-for-like excludes the impact of acquisitions and related transaction integration costs. 2 Adjusted to exclude exceptional items and intangibles amortisation. |
Minerals
Weir Minerals is a global leader in the provision of mill circuit technology and services as well as the market leader in slurry handling equipment and associated aftermarket support for abrasive high wear applications. Its differentiated technology is used in mining, oil and gas and general industrial markets around the world.
Constant currency £m | H11 | H2 | 2015 | 20141 | Growth | LFL3 Growth |
Input OE | 154 | 156 | 310 | 332 | -6% | -19% |
Input aftermarket | 384 | 339 | 723 | 744 | -3% | -5% |
Input Total | 538 | 495 | 1,033 | 1,076 | -4% | -9% |
Revenue OE | 135 | 169 | 304 | 354 | -14% | -25% |
Revenue aftermarket | 370 | 360 | 730 | 723 | +1% | -1% |
Revenue Total | 505 | 529 | 1,034 | 1,077 | -4% | -9% |
Operating profit2 | 91 | 107 | 198 | 218 | -9% | -13% |
Operating margin2 | 17.9% | 20.3% | 19.2% | 20.2% | -100bps | -80bps |
Operating cash flow | 117 | 118 | 235 | 225 | +4% | n/a |
Book-to-bill | 1.06 | 0.94 | 1.00 | 1.00 |
12014 and H1 restated at 2015 average exchange rates.
2Adjusted to exclude exceptional items and intangibles amortisation.
3Like-for-like (LFL) excludes the impact of acquisitions and related transaction integration costs. Trio Engineered Products was acquired on 22 October 2014 and Delta Industrial Valves was acquired on 8 July 2015.
Continued resilience:
2015 Market review
Price declines continued across a number of key commodities as markets adjusted to slowing demand in China and new lower-cost capacity coming on line. Iron ore spot prices fell by 40%, copper prices fell by 26% and gold prices fell 12%. Supply outstripped demand in iron ore and coal, while some operators reduced production in higher-cost areas with iron ore mine closures in North America and China. In Africa and the United States, higher cost copper mines were closed.
Overall, in 2015, aftermarket demand was supported by the growth of global ore production which benefited from the start-up of several new low-cost mines in South America and the positive full year effect of mines commissioned in 2014, offset by maintenance delays and closures of higher-cost mines. Oil prices were down by around a third, significantly impacting oil sands capital expenditure although production volumes increased.
Mining sector capital expenditure fell by an estimated 25% in 2015 with both greenfield and brownfield spend experiencing further significant reductions from 2014 as customers deferred decisions on major projects. As ore production increased and ore grade declined, miners focused on optimising existing sites, resulting in brownfield opportunities for engineering solutions which clearly demonstrate efficiency improvements and short pay back timescales.
The recovery in African markets following industrial action in 2014 was affected by some reduction in production and concerns over further industrial action. In Asia Pacific, markets were relatively stable although weak iron ore and coal prices led to some production cuts in Australia, South East Asia and China. Similarly, lower commodity prices led to production reductions in North America. Political and economic instability in Europe contributed to subdued conditions.
In the second half of the year, some of the world's largest mining companies reacted to falling commodity prices by announcing substantial restructuring plans which included the mothballing or closure of mines that fail to offer sufficient returns.
Order input decreased by 4% to £1,033m (2014: £1,076m), with a 9% like-for-like decline partially offset by a full year contribution from Trio and a first contribution from Delta Industrial Valves. The division's book-to-bill at 1.00 was stable year-on-year. Original equipment orders were down 6% year-on-year (19% lower like-for-like), reflecting declines in capital expenditure by miners and oil and gas customers. Contrary to overall trends, the division had a strong performance from the Geho product line, which captured a large share of available mining projects.
Aftermarket orders decreased by 3% and represented 70% of total input (2014: 69%). On a like-for-like basis aftermarket input was down 5% against a strong prior-year figure, primarily due to declines in power, oil and gas and industrial markets. Mining aftermarket orders were broadly stable as the impacts of mine closures and customers reducing safety stock levels and postponing scheduled maintenance was offset by the move to full production in a number of greenfield sites in South America, together with underlying ore production trends.
In total, mining end markets accounted for 74% of input (2014: 74%) with orders down 6% on a like-for-like basis due to original equipment declines. Sand and aggregates markets were stable while oil and gas sector orders fell 34%.
Revenue was 4% lower at £1,034m on a constant currency basis (2014: £1,077m) and 9% lower like-for-like. Original equipment sales were 14% lower (25% lower on a like-for-like basis) and accounted for 29% (2014: 33%) of divisional revenue. Production-driven aftermarket revenues were relatively flat, up 1% over the prior year, but down 1% on a like-for-like basis.
Strong aftermarket growth in South America and higher activity levels in the Middle East only partially offset reduced revenues in Australia, North America, Europe and Asia Pacific. At a product category level there was a reduction in revenues from larger, more discretionary products such as HPGRs, hoses and other wear resistant liners, as well as a significant reduction in demand for swellable packers used in North American oil and gas completions. There was a 4% increase in slurry pump spares' revenues reflecting their critical importance to support increasing processing and their lower susceptibility to maintenance delays.
Reported revenues declined by 8%, reflecting a 5% foreign exchange headwind (2014: £1,128m).
Operating profit decreased by 9% on a constant currency basis to £198m (2014: £218m), reflecting lower volumes, £5m (2014: £1m) of one-off acquisition integration costs and increased investment in product development. Reported operating profit fell by 13% after a 4% foreign exchange headwind (2014: £226m).
Operating margin declined, as anticipated, by 100bps to 19.2% (2014: 20.2%), and was 19.5% (2014: 20.3%) on a like-for-like basis. Gross margins (before manufacturing overhead under-recoveries) increased by 120bps on a like-for-like basis, as a result of a more favourable aftermarket mix and the benefits of procurement and restructuring initiatives, which more than outweighed pricing pressure. This was offset at an operating level by the effect of negative operating leverage and increased investment.
Capital expenditure of £41m (2014: £45m) included investment in completing the restructuring and consolidation of the division's regional manufacturing footprint announced in November 2014. The division also continued the roll-out of its standardised ERP system in Europe.
Research and development spend increased to £13m (2014: £11m) and was focused on continuing to develop the division's product portfolio, materials technology and IoT and additive manufacturing capabilities which are being developed on behalf of the whole Group.
2016 Divisional outlook
We expect further reductions in mining capital expenditure in 2016, marking the fourth successive year of reduced spend. Greenfield and brownfield capex is expected to fall, partly offset by a modest rise in sustaining capex. We anticipate slight growth in global ore production as increased capacity from low cost mines is largely offset by the full year impact of previously announced mine closures. Sand and aggregates end market prospects remain attractive, particularly in North America and South East Asia, helping to mitigate the impact of reduced mining original equipment revenues.
Oil and gas markets will remain challenging, impacting capital expenditure in oil sands and upstream North American markets, although production levels in the oil sands are expected to remain resilient.
Overall, the division is expected to deliver slightly lower constant currency revenues with operating margins broadly stable as additional cost saving measures offset pricing pressure.
Oil & Gas
Weir Oil & Gas provides superior products and service solutions to upstream, production, transportation, refining and related industries. Upstream products include pressure pumping equipment and services and pressure control products and rental services. Equipment repairs, upgrades, certification and asset management and field services are delivered globally by Weir Oil & Gas Services. Downstream products include API 610 pumps and spare parts.
Constant currency £m | H11 | H2 | 2015 | 20141 | Growth |
Input OE | 77 | 61 | 138 | 320 | -57% |
Input aftermarket | 249 | 180 | 429 | 768 | -44% |
Input Total | 326 | 241 | 567 | 1,088 | -48% |
Revenue OE | 66 | 69 | 135 | 292 | -54% |
Revenue aftermarket | 260 | 187 | 447 | 757 | -41% |
Revenue Total | 326 | 256 | 582 | 1,049 | -45% |
Operating profit2 | 37 | 21 | 58 | 239 | -76% |
Operating margin2 | 11.3% | 8.3% | 10.0% | 22.8% | -1280bps |
Operating cash flow | 95 | 51 | 146 | 209 | -30% |
Book-to-bill | 1.00 | 0.94 | 0.97 | 1.04 | |
12014 and H1 restated at 2015 average exchange rates. | |||||
2Adjusted to exclude exceptional items and intangibles amortisation. |
Sequential decline in line with end markets:
2015 Market review
International oil benchmarks Brent crude and West Texas Intermediate crude (WTI) fell by around two thirds between their 2014 peak and the end of 2015 while natural gas prices fell by more than 60%, with a subsequent reduction in capital spending and activity by oil companies. Operators sought significant pricing discounts from suppliers as part of their focus on reducing expenditure.
In North America, the division's biggest market, rig count fell by 61%. Oil-directed rigs fell 64% and gas-directed rigs reduced by 52%, both greater than market expectations at the start of the year. The number of wells drilled in North America fell 53% with the number of horizontal wells drilled down by around 40%, substantially reducing demand for pressure control equipment and services.
In pressure pumping markets, North American frack fleet utilisation fell from 87% in 2014 to below 50% in 2015. Pressure control markets also experienced sharp reductions in activity in line with rig count declines. With substantial additional equipment lying idle, there was an increase in destocking and component cannibalisation which reduced demand for both original equipment and aftermarket spares and maintenance services. In China, which has the largest frack fleet outside of North America, demand was subdued after strong growth in previous years.
In order to cut costs, many operators in North America negotiated pricing concessions which impacted the whole industry. USA oil production peaked in April and had fallen 6% by January 2016. As a result of ongoing efficiency gains in the industry and higher production levels, the breakeven cost per well fell by around a quarter in 2015.
In the Middle East, production increased, particularly in Saudi Arabia and Iraq, with the average rig count increasing 2%, although projects were subject to delay and customers targeted cost reductions from suppliers in line with the global industry. In higher cost production regions such as the North Sea and the Caspian, market conditions were more challenging.
Order input at £567m (2014: £1,088m) was 48% lower reflecting the reduction in activity as oil prices fell substantially over the year. Aftermarket input was down 44% year-on-year, primarily as a result of significant declines in the upstream North American markets, with Services also down, and a slight decline in Downstream. On a sequential basis, aftermarket orders were relatively stable from the third to the fourth quarter, despite further declines in activity as a result of continued falling oil prices Aftermarket orders increased to 76% (2014: 71%) of divisional orders. Original equipment input was 57% lower, driven primarily by reduced demand for pressure pumping equipment and wellheads as frack fleet utilisation and the number of wells drilled fell substantially.
Pressure Pumping input was down 59%, with order rates declining sequentially quarter-on-quarter and original equipment orders falling below lows experienced in the downturn of 2009. As expected, cannibalisation of idle frack fleet continued throughout the year in response to rig count reductions, which together with destocking, significantly reduced aftermarket demand for flow control and fluid end products. Service and maintenance input was more resilient. Customers remain focused on achieving efficiency improvements and are actively trialling the business' broader technologically-differentiated product portfolio.
Pressure Control input also fell significantly, although both Seaboard and Mathena maintained market share in a very challenging environment. Seaboard continued to see good interest in its zipper manifold product line as customers targeted further efficiency improvements. Mathena input was impacted by customers downgrading the range and specification of the equipment used during drilling.
Input from Services operations decreased year-on-year, primarily due to reduced activity levels in the North Sea and Caspian although the core Middle East business was relatively resilient. Downstream order input was also down on a strong prior year, as customers continued to delay project activity in subdued markets.
Revenue decreased by 45% to £582m on a constant currency basis (2014: £1,049m), reflecting order input trends, particularly in North America. Original equipment and aftermarket revenues decreased by 54% and 41% respectively, with aftermarket accounting for 77% of total revenues (2014: 72%). Reported revenues fell by 41%, after a 6% foreign exchange benefit (2014: £992m).
Pressure Pumping benefited from a positive opening order book in the first quarter before the reduction in North American upstream activity impacted revenue. Pressure Control revenues decreased in line with order trends. Services revenues were more resilient with growth in Iraq, partially offsetting declines in the North Sea and the Caspian. Downstream revenues fell slightly, with performance impacted by project delivery delays.
Operating profit, including joint ventures, was 76% lower on a constant currency basis at £58m (2014: £239m). The decline was entirely attributable to North American upstream operations, despite c. £40m of cost savings and strong profit growth from Services and Downstream. Reported operating profit decreased by 74% after a 6% foreign exchange tailwind (2014: £225m).
Operating margin was down 1280bps reflecting the impact of pricing pressure, lower volumes and negative operating leverage. Divisional gross margins (before manufacturing overhead under-recoveries) were down 370bps year-on-year, with double-digit North American upstream pricing pressure partially offset by cost and operational efficiency measures. Pressure Pumping manufacturing overhead under-recoveries totalled £20m in the year.
Capital expenditure of £36m (2014: £50m) included a new manufacturing facility for Downstream in Milan and further expansion of Services facilities in the Middle East, including the acquisition of a service facility in southern Iraq.
Total R&D expenditure of £10m (2014: £8m) was focused on expanding the division's product offering and included the launch of the new SPM® QEM 3000 continuous duty frack pump.
2016 Divisional outlook
Having fallen materially at the start of the year, the market expects oil prices to remain low throughout much of 2016. Many E&P and service companies have announced plans to further reduce their capital spending plans. As a result, market conditions are expected to remain challenging.
So far in 2016, North American rig count and activity levels have continued to fall with a consequent impact on upstream revenues. Continued declines in activity will extend the period of destocking and cannibalisation in pressure pumping markets through the first half of the year with market rationalisation expected to continue. Conditions are also expected to be more challenging in international and downstream markets.
The division continues to reduce costs and increase efficiency and will take proactive action to support operational performance as appropriate. However, these measures will not fully offset market impacts, and consequently a further significant reduction in constant currency divisional revenues is expected. Operating margins will be impacted by additional negative operating leverage, with North American upstream businesses currently operating around breakeven, albeit still cash generative.
Power & Industrial
Weir Power & Industrial designs and manufactures valves, pumps and turbines as well as providing specialist support services to the global power generation, industrial and oil and gas sectors.
Constant currency £m | H11 | H2 | 2015 | 20141 | Growth |
Input OE | 66 | 65 | 131 | 164 | -20% |
Input aftermarket | 88 | 58 | 146 | 150 | -2% |
Input Total | 154 | 123 | 277 | 314 | -11% |
Revenue OE | 76 | 83 | 159 | 175 | -9% |
Revenue aftermarket | 73 | 70 | 143 | 143 | -1% |
Revenue Total | 149 | 153 | 302 | 318 | -5% |
Operating profit2 | 10 | 12 | 22 | 19 | +15% |
Operating margin2 | 6.4% | 7.9% | 7.2% | 5.9% | +130bps |
Operating cash flow | 15 | 22 | 37 | 14 | +159% |
Book-to-bill | 1.04 | 0.80 | 0.92 | 0.98 | |
12014 and H1 restated at 2015 average exchange rates. | |||||
2Adjusted to exclude exceptional items and intangibles amortisation. |
Improved profitability despite challenging markets:
2015 Market review
Uncertainty over the pace of global economic growth led to project delays in power and industrial markets, while activity in oil and gas was affected by the substantial reduction in prices that led to reduced capital and operational spending.
In conventional power markets, demand was subdued in Europe and the United States and there was a significant reduction in South Korean project activity. New build nuclear opportunities were concentrated in China with delays to planned investment in the United Kingdom. In the United States, hydro markets were stable. Reduced spending on new projects supported aftermarket demand as customers used their existing equipment more intensely.
Order input decreased by 11% to £277m (2014: £314m) primarily due to large hydro and steam turbine orders in 2014 which were not repeated in 2015. In addition, customer decisions to delay projects across the division's power and industrial markets and oil price reductions impacted mid and downstream oil and gas activity levels. Excluding the impact of large one-off orders, input was down 8%. Original equipment orders were down 20%, driven by the timing of hydro orders, reduced Korean power orders and oil and gas project delays in Valves. Aftermarket input declined by 2%, with good Valves growth offset by lower Services input. Total Valves input was down 12% year-on-year.
Power markets represented 58% of orders (2014: 58%) and the proportion of orders from oil and gas markets decreased to 13% (2014: 14%). Emerging markets accounted for 26% of input (2014: 35%), with a fall in orders from Asia Pacific and the Middle East as a result of lower project activity and a subdued Korean domestic market.
Revenue decreased by 5% on a constant currency basis to £302m (2014: £318m), with aftermarket revenues broadly flat on the prior year and original equipment revenues down 9% supported by the opening order book. Valves revenues were 5% lower year-on-year, with strong double-digit aftermarket growth offset by project delays for original equipment. Reported revenues fell by 5% and were not impacted by foreign exchange movements (2014: £318m).
Operating profit was up 15% at £22m on a constant currency basis (2014: £19m), as the benefits of the cost reduction and operational improvement measures more than offset the impact of lower volumes. Reported operating profits increased 16% after a 1% foreign exchange tailwind (2014: £19m) and the benefits of an £8m year-on-year reduction in SG&A.
Operating margin was up 130bps to 7.2% (2014: 5.9%) against the prior year, which was impacted by strike action. Gross margins (before manufacturing overhead under-recoveries) increased by 140bps, reflecting the benefits of restructuring and low-cost sourcing. Cost reduction and efficiency measures broadly offset the impact of the negative operational leverage from the revenue decline.
Capital expenditure of £5m (2014: £9m) was primarily focused on expanding the capacity of the division's Valves facility in South Korea. Investment in research and development was stable at £2m (2014: £2m), with a new range of municipal pumps progressing to field trials.
2016 Divisional outlook
Power, oil and gas, and industrial markets are expected to remain subdued in 2016, with uncertainty across most process industries leading to customers delaying new investment decisions. Mid and downstream oil and gas markets will be affected the most, with existing projects subject to delays.
The division, which enters 2016 with a lower order book but supported by the benefits of restructuring and strategic growth initiatives, expects broadly flat constant currency revenues. Operating margins are also expected to be broadly flat as the full year benefit of previous restructuring actions is offset by modest pricing impacts.
Group financial highlights
Order input at £1,877m decreased 24% on a constant currency basis. Original equipment orders were down across all markets driven by weak commodity prices and the resultant impact on customer activity levels. Aftermarket orders were down 22%, reflecting a significant decrease in Oil & Gas and representing 69% of total input (2014: 67%).
Revenue of £1,918m was 22% down on a constant currency basis. The aftermarket accounted for 69% of revenues, a 3 percentage point increase over the prior year. The 2015 full year impact of the Trio and Delta acquisitions was £63m in revenue.
Operating profit from continuing operations (before exceptional items and intangibles amortisation) decreased by 42% to £259m on a reported basis. Restructuring related cost savings of £65m and procurement savings of £37m were realised during the year, an element of the latter passed on to customers to secure available volumes. One-off costs incurred in the period, excluding exceptional items, were £5m (2014: £2m) and related solely to acquisition and integration costs. The contribution from current and prior year acquisitions in 2015 was £8m, after charging integration costs. Unallocated costs were £19m (2014: £20m), reflecting continued investment in innovation and strategic initiatives, offset by cost reduction measures implemented centrally.
Operating margin from continuing operations (before exceptional items and intangibles amortisation) was 13.5%, a decrease of 490bps on a reported basis on the prior year (2014: 18.4%; 18.6% on a constant currency basis). Minerals reported an operating margin, on a constant currency basis, of 19.2% (2014: 20.2%) for the full year demonstrating the division's resilience to the downturn in commodity prices and the benefits of a significant installed base. The like-for-like Minerals operating margin was 19.5% (2014: 20.3%). The Oil & Gas full year operating margin at 10.0% (2014: 22.8% constant currency) reflects the substantial volume decline, negative operating leverage and pricing pressure seen across the division's North American upstream businesses. The operating margin in Power & Industrial was 7.2% (2014: 5.9% constant currency) and reflects the benefits from cost reduction and operational improvement measures taken at the end of 2014, which more than offset the impact of lower volumes.
An exceptional charge of £365m (2014: £212m) was recorded in the year, primarily in relation to the oil and gas downturn actions of £92m implemented to mitigate current market conditions and the impairment charge against intangible assets of £251m. In addition, the final charges in respect of the Group-wide efficiency review announced in November 2014 were recorded in the first half of the year (charge of £8m (2014: £49m)) and other restructuring actions taken by the Minerals and Power & Industrial divisions, by way of continued response to market conditions, resulted in further charges of £16m (2014: £nil).
The total charge in relation to the Oil & Gas downturn actions comprised an anticipated cash cost of £31m, of which £7m was reflected in the current year cash flow statement, and an impairment of assets of £61m.
The prolonged downturn facing oil and gas markets, and the resultant impact on the North American rig count and related activity levels, resulted in an impairment charge of £225m being recognised at the end of the year in relation to the intangible assets held in the Pressure Control cash generating unit (CGU). This has been allocated £193m against goodwill and £32m against other intangible assets and is further to the goodwill impairment of £160m that was recognised in 2014. The cash flow forecasts underpinning the impairment testing reflect current oil price projections with depressed activity levels expected to endure for the next two years, followed by a gradual pick up in year three and measured return to more normal levels thereafter.
An impairment of £26m has also been recognised in relation to the goodwill of two other CGUs in Power & Industrial reflecting the planned disposal of non-core assets following the creation of the Weir Flow Control division. No impairment has been identified in relation to any of the other CGUs.
Other exceptional items in the period include the £2m unwind of inventory fair value adjustments in respect of Trio, offset by a gain of £2m (2014: charge of £1m) in relation to the fair value adjustment of contingent consideration liabilities and the release of a warranty indemnity provision of £4m which lapsed during the period.
Total net finance costs, including exceptional items, were £41m (2014: £43m). There were four components of this net charge, the most significant being the interest cost of £41m (2014: £44m) on the Group's borrowings (including amounts in relation to derivative financial instruments). The other elements were finance income of £5m (2014: £6m), a charge of £3m (2014: £3m) in relation to the Group's defined benefit pension plans and an exceptional cost of £2m (2014: £2m) being the unwind of the discount on contingent consideration liabilities.
Profit before tax from continuing operations (before exceptional items and intangibles amortisation) decreased by 46% to £220m (2014: £409m). The reported loss before tax from continuing operations of £200m compares to a profit before tax of £149m in 2014.
The tax charge for the year of £53m (2014: £106m) on profit before tax from continuing operations (before exceptional items and intangibles amortisation) of £220m (2014: £409m) represents an underlying effective tax rate (ETR) of 23.9% (2014: 25.8%).
Earnings per share from continuing operations (before exceptional items and intangibles amortisation) decreased by 45% to 78.4p (2014: 141.3p). Reported loss per share including exceptional items, intangibles amortisation and profit from discontinued operations was 83.6p (2014: earnings per share of 34.3p).
Cash generated from operations before working capital movements was £309m (2014: £503m). Cash generated from operations decreased by 6% from £421m to £396m but represents an improved EBITDA to cash conversion ratio of 123% (2014: 82%). Working capital cash inflows of £87m (2014: outflow of £82m) were driven by excellent cash collections of receivables, particularly in Oil & Gas. Exceptional items in the period resulted in total cash outflows of £33m across all restructuring activities (2014: £11m). Net capital expenditure decreased from £101m in 2014 to £88m in the current year, reflecting the Group's focus on cash management while maintaining investment in key strategic arenas including operational efficiency, R&D and Group-wide Information Systems. The settlement of financing derivatives resulted in a net cash outflow of £2m (2014: £3m) and additional pension contributions of £3m (2014: £11m) were paid in the year in respect of agreed deficit recovery contributions. Free cash flow from continuing operations, before cash exceptional items and after dividends of £94m (2014: £103m), was £132m (2014: £79m). Dividend cash outflows reduced as a result of the rephasing of dividend payments in 2014. Outflows in respect of the acquisition of subsidiaries of £15m resulted in a closing net debt of £825m (2014: £861m), which includes an adverse foreign exchange movement of £48m. On a lender covenant basis, the ratio of net debt to EBITDA was 2.5 times.
The Group's Return on Capital Employed (ROCE) of 10.0% for 2015 (on a like for like basis, excluding Trio and Delta) was lower than the prior year (2014: 18.2%), reflecting current market conditions.
Dividend The Board is recommending a final dividend of 29.0p resulting in a total dividend of 44.0p for the year, aligned with 2014. Dividend cover (being the ratio of earnings per share from continuing operations before exceptional items and intangibles amortisation, to dividend per share) is 1.8 times. If approved at the Annual General Meeting, the final dividend will be paid on 6 June 2016 to shareholders on the register on 29 April 2016. The Board is also recommending a scrip dividend scheme to replace the current Dividend Reinvestment Plan. The proposed scrip dividend scheme will give shareholders the option to receive new fully paid Ordinary Shares in the Company in place of their cash dividend payments. The Board intends that the necessary resolution to introduce the scrip dividend scheme will be put to shareholders at the Annual General Meeting on the 28 April 2016. Further details will be provided with the Annual General Meeting documentation when it is sent to shareholders. If the scheme is approved by shareholders, the last date for receipt of scrip elections will be 25 May 2016.
Board and management changes
As previously announced, Dean Jenkins joined the Board as Chief Operating Officer on 1 January 2016. He was succeeded as Minerals Divisional Managing Director by Ricardo Garib, previously the division's Regional Managing Director for Latin America.
Appendix 1 - 2015 quarterly input trends
Reported growth | Like for like1 growth | ||||||||||||
Division | Q1 | Q2 | Q3 | Q4 | FY | Q1 | Q2 | Q3 | Q4 | FY | |||
Original Equipment | 4% | -14% | 18% | -31% | -6% | -13% | -26% | 7% | -41% | -19% | |||
Aftermarket | 6% | -2% | -9% | -7% | -3% | 3% | -4% | -10% | -8% | -5% | |||
Minerals | 5% | -5% | -1% | -15% | -4% | -2% | -11% | -5% | -19% | -9% | |||
Original Equipment | -41% | -63% | -60% | -62% | -57% | -41% | -63% | -60% | -62% | -57% | |||
Aftermarket | -15% | -47% | -57% | -53% | -44% | -15% | -47% | -57% | -53% | -44% | |||
Oil & Gas | -23% | -52% | -58% | -55% | -48% | -23% | -52% | -58% | -55% | -48% | |||
Original Equipment | -34% | -16% | -18% | -9% | -20% | -34% | -16% | -18% | -9% | -20% | |||
Aftermarket | 12% | -2% | -11% | -8% | -2% | 12% | -2% | -11% | -8% | -2% | |||
Power & Industrial | -14% | -8% | -15% | -9% | -11% | -14% | -8% | -15% | -9% | -11% | |||
Original Equipment | -22% | -35% | -20% | -38% | -29% | -28% | -40% | -25% | -42% | -34% | |||
Aftermarket | -2% | -22% | -33% | -29% | -22% | -4% | -23% | -33% | -29% | -23% | |||
Continuing Ops | -9% | -26% | -29% | -32% | -24% | -12% | -28% | -31% | -34% | -27% | |||
Book to Bill | 1.05 | 1.03 | 0.95 | 0.88 | 0.98 | 1.03 | 1.02 | 0.95 | 0.89 | 0.98 |
1 Like-for-like excludes the impact of acquisitions and related transaction integration costs. Trio Engineered Products was acquired on 22 October 2014 and Delta Valves was acquired on 8 July 2015.
Appendix 2 - 2015 Foreign Exchange (FX) rates and profit exposure
2014 FY average FX rates | 2015 FY average FX rates | Percentage of 2015 operating profits | |
US $ | 1.65 | 1.53 | 44% |
Australian $ | 1.83 | 2.04 | 12% |
Canadian $ | 1.82 | 1.96 | 12% |
Euro | 1.24 | 1.38 | 8% |
Chilean Peso | 940 | 1,001 | 12% |
United Arab Emirates Dirham | 6.01 | 5.61 | 8% |
Russian Rouble | 63.32 | 93.65 | 1% |
Brazilian Real | 3.87 | 5.10 | 2% |
South African Rand | 17.87 | 19.53 | 1% |
A one-cent move in the average US$:£ exchange rate has an impact of circa £1m on operating profit over the year.
This information includes 'forward-looking statements'. All statements other than statements of historical fact included in this presentation, including, without limitation, those regarding The Weir Group's ("the Company") financial position, business strategy, plans (including development plans and objectives relating to the Company's products and services) and objectives of management for future operations, are forward-looking statements. These statements contain the words "anticipate", "believe", "intend", "estimate", "expect" and words of similar meaning. Such forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause the actual results, performance or achievements of the Company to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. Such forward-looking statements are based on numerous assumptions regarding the Company's present and future business strategies and the environment in which the Company will operate in the future. These forward-looking statements speak only as at the date of this document. The Company expressly disclaims any obligation or undertaking to disseminate any updates or revisions to any forward-looking statements contained herein to reflect any change in the Company's expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based. Past business and financial performance cannot be relied on as an indication of future performance.
AUDITED RESULTS Consolidated Income Statement | |||||||
for the 52 weeks ended 1 January 2016 | |||||||
52 weeks ended 1 January 2016 | 52 weeks ended 2 January 2015 | ||||||
Before exceptional items & intangible amortisation | Exceptional items & intangible amortisation (note 3) | Total | Before exceptional items & intangible amortisation | Exceptional items & intangible amortisation (note 3) | Total | ||
Notes | £m | £m | £m | £m | £m | £m | |
Continuing operations | |||||||
Revenue | 2 | 1,917.7 | - | 1,917.7 | 2,438.2 | - | 2,438.2 |
Continuing operations | |||||||
Operating profit (loss) before share of results of joint ventures | 250.6 | (417.2) | (166.6) | 439.8 | (257.3) | 182.5 | |
Share of results of joint ventures | 8.3 | - | 8.3 | 10.0 | - | 10.0 | |
Operating profit (loss) | 258.9 | (417.2) | (158.3) | 449.8 | (257.3) | 192.5 | |
Finance costs | (40.5) | (2.4) | (42.9) | (44.5) | (2.1) | (46.6) | |
Finance income | 4.7 | - | 4.7 | 6.0 | - | 6.0 | |
Other finance costs - retirement benefits | (3.3) | - | (3.3) | (2.8) | - | (2.8) | |
Profit (loss) before tax from continuing operations | 219.8 | (419.6) | (199.8) | 408.5 | (259.4) | 149.1 | |
Tax (expense) credit | 4 | (52.5) | 73.3 | 20.8 | (105.5) | 30.1 | (75.4) |
Profit (loss) for the period from continuing operations | 167.3 | (346.3) | (179.0) | 303.0 | (229.3) | 73.7 | |
Profit for the period from discontinued operations | 5 | - | - | - | - | 1.0 | 1.0 |
Profit (loss) for the period | 167.3 | (346.3) | (179.0) | 303.0 | (228.3) | 74.7 | |
Attributable to: | |||||||
Equity holders of the Company | 167.6 | (346.3) | (178.7) | 301.4 | (228.3) | 73.1 | |
Non-controlling interests | (0.3) | - | (0.3) | 1.6 | - | 1.6 | |
167.3 | (346.3) | (179.0) | 303.0 | (228.3) | 74.7 | ||
Earnings (loss) per share | 6 | ||||||
Basic - total operations | (83.6p) | 34.3p | |||||
Basic - continuing operations | 78.4p | (83.6p) | 141.3p | 33.8p | |||
Diluted - total operations | (83.6p) | 34.2p | |||||
Diluted - continuing operations | 78.4p | (83.6p) | 140.9p | 33.7p |
Consolidated Statement of Comprehensive Income | |||
for the 52 weeks ended 1 January 2016 | |||
52 weeks ended | 52 weeks ended | ||
1 January 2016 | 2 January 2015 | ||
Note | £m | £m | |
(Loss) profit for the period | (179.0) | 74.7 | |
Other comprehensive income | |||
Losses taken to equity on cash flow hedges | (2.8) | (4.0) | |
Exchange (losses) gains on translation of foreign operations | (13.0) | 61.3 | |
Exchange losses on net investment hedges | (16.5) | (16.1) | |
Reclassification adjustments on cash flow hedges | 1.6 | 0.9 | |
Tax relating to other comprehensive (expense) income to be reclassified in subsequent periods | 1.2 | 0.3 | |
Items that are or may be reclassified to profit or loss in subsequent periods | (29.5) | 42.4 | |
Remeasurements on defined benefit plans | 13.5 | (31.1) | |
Tax relating to other comprehensive income (expense) that will not be reclassified in subsequent periods | (2.1) | 6.8 | |
Items that will not be reclassified to profit or loss in subsequent periods | 11.4 | (24.3) | |
Net other comprehensive (expense) income | (18.1) | 18.1 | |
Total net comprehensive (expense) income for the period | (197.1) | 92.8 | |
Attributable to: | |||
Equity holders of the Company | (196.5) | 90.7 | |
Non-controlling interests | (0.6) | 2.1 | |
(197.1) | 92.8 |
Consolidated Balance Sheet | ||||
at 1 January 2016 | ||||
Restated (note 1) | ||||
1 January 2016 | 2 January 2015 | |||
Notes | £m | £m | ||
ASSETS | ||||
Non-current assets | ||||
Property, plant & equipment | 8 | 388.3 | 435.0 | |
Intangible assets | 8 | 1,411.6 | 1,640.8 | |
Investments in joint ventures | 33.4 | 33.7 | ||
Deferred tax assets | 20.2 | 24.5 | ||
Other receivables | 22.3 | 22.3 | ||
Retirement benefit plan assets | 11 | 8.2 | 4.1 | |
Derivative financial instruments | 12 | 8.5 | 3.5 | |
Total non-current assets | 1,892.5 | 2,163.9 | ||
Current assets | ||||
Inventories | 478.7 | 550.0 | ||
Trade & other receivables | 444.7 | 623.0 | ||
Construction contracts | 28.5 | 31.3 | ||
Derivative financial instruments | 12 | 14.2 | 10.5 | |
Income tax receivable | 29.1 | 5.8 | ||
Cash & short-term deposits | 184.0 | 178.7 | ||
Total current assets | 1,179.2 | 1,399.3 | ||
Total assets | 3,071.7 | 3,563.2 | ||
LIABILITIES | ||||
Current liabilities | ||||
Interest-bearing loans & borrowings | 195.6 | 166.1 | ||
Trade & other payables | 459.6 | 582.0 | ||
Construction contracts | 8.9 | 13.8 | ||
Derivative financial instruments | 12 | 14.1 | 11.3 | |
Income tax payable | 31.6 | 32.1 | ||
Provisions | 10 | 70.3 | 65.4 | |
Total current liabilities | 780.1 | 870.7 | ||
Non-current liabilities | ||||
Interest-bearing loans & borrowings | 813.4 | 873.3 | ||
Other payables | 22.6 | 25.6 | ||
Derivative financial instruments | 12 | 5.8 | 3.1 | |
Provisions | 10 | 46.7 | 47.4 | |
Deferred tax liabilities | 115.3 | 162.5 | ||
Retirement benefit plan deficits | 11 | 90.0 | 98.4 | |
Total non-current liabilities | 1,093.8 | 1,210.3 | ||
Total liabilities | 1,873.9 | 2,081.0 | ||
NET ASSETS | 1,197.8 | 1,482.2 | ||
CAPITAL & RESERVES | ||||
Share capital | 26.8 | 26.8 | ||
Share premium | 38.0 | 38.0 | ||
Merger reserve | 9.4 | - | ||
Treasury shares | (5.8) | (5.8) | ||
Capital redemption reserve | 0.5 | 0.5 | ||
Foreign currency translation reserve | (41.8) | (12.6) | ||
Hedge accounting reserve | (2.0) | (2.0) | ||
Retained earnings | 1,166.5 | 1,430.5 | ||
Shareholders' equity | 1,191.6 | 1,475.4 | ||
Non-controlling interests | 6.2 | 6.8 | ||
TOTAL EQUITY | 1,197.8 | 1,482.2 | ||
Approved by the Board of Directors on 24 February 2016 | ||||
Keith Cochrane, | Jon Stanton, | |||
Director | Director |
Consolidated Cash Flow Statement | |||
for the 52 weeks ended 1 January 2016 | |||
52 weeks ended | 52 weeks ended | ||
1 January 2016 | 2 January 2015 | ||
Notes | £m | £m | |
Continuing operations | |||
Cash flows from operating activities | 13 | ||
Cash generated from operations | 396.5 | 421.3 | |
Additional pension contributions paid | (2.6) | (10.6) | |
Exceptional cash items | (33.4) | (10.6) | |
Income tax paid | (50.4) | (94.1) | |
Net cash generated from operating activities | 310.1 | 306.0 | |
Continuing operations | |||
Cash flows from investing activities | |||
Acquisitions of subsidiaries | 13 | (14.1) | (137.7) |
Purchases of property, plant & equipment and intangible assets | (92.1) | (108.0) | |
Other proceeds from sale of property, plant & equipment and intangible assets | 4.4 | 6.7 | |
Interest received | 3.9 | 6.2 | |
Dividends received from joint ventures | 10.0 | 6.0 | |
Net cash used in investing activities | (87.9) | (226.8) | |
Continuing operations | |||
Cash flows from financing activities | |||
Purchase of shares for equity settled share-based incentives | - | (0.2) | |
Proceeds from borrowings | 541.9 | 404.0 | |
Repayments of borrowings | (591.2) | (237.5) | |
Settlement of external debt of subsidiary on acquisition | 13 | (1.2) | - |
Settlement of derivative financial instruments | (1.7) | (3.1) | |
Interest paid | (41.8) | (42.7) | |
Proceeds from increase in non-controlling interests | - | 0.2 | |
Dividends paid to equity holders of the Company | 7 | (94.0) | (102.7) |
Net cash (used in) generated from financing activities | (188.0) | 18.0 | |
Net increase in cash & cash equivalents from continuing operations | 34.2 | 97.2 | |
Cash & cash equivalents at the beginning of the period | 166.6 | 68.6 | |
Foreign currency translation differences | (21.5) | 0.8 | |
Cash & cash equivalents at the end of the period | 179.3 | 166.6 |
Consolidated Statement of Changes in Equity | |||||||||||
for the 52 weeks ended 1 January 2016 | |||||||||||
Share capital | Share premium | Merger reserve | Treasury shares | Capital redemp- tion reserve | Foreign currency transla- tion reserve | Hedge accoun- ting reserve | Retained earnings | Attribu- table to equity holders of the Company | Non- controlling interests | Total equity | |
£m | £m | £m | £m | £m | £m | £m | £m | £m | £m | £m | |
At 3 January 2014 | 26.7 | 38.0 | - | (5.8) | 0.5 | (57.3) | 0.8 | 1,479.3 | 1,482.2 | 4.5 | 1,486.7 |
Profit for the period | - | - | - | - | - | - | - | 73.1 | 73.1 | 1.6 | 74.7 |
Losses taken to equity on cash flow hedges | - | - | - | - | - | - | (4.0) | - | (4.0) | - | (4.0) |
Exchange gains on translation of foreign operations | - | - | - | - | - | 60.8 | - | - | 60.8 | 0.5 | 61.3 |
Exchange losses on net investment hedges | - | - | - | - | - | (16.1) | - | - | (16.1) | - | (16.1) |
Remeasure- ments on defined benefit plans | - | - | - | - | - | - | - | (31.1) | (31.1) | - | (31.1) |
Reclassifi- cation adjust- ments on cash flow hedges | - | - | - | - | - | - | 0.9 | - | 0.9 | - | 0.9 |
Tax relating to other comprehend- sive income | - | - | - | - | - | - | 0.3 | 6.8 | 7.1 | - | 7.1 |
Total net comprehend- sive income for the period | - | - | - | - | - | 44.7 | (2.8) | 48.8 | 90.7 | 2.1 | 92.8 |
Proceeds from increase in non- controlling interests | - | - | - | - | - | - | - | - | - | 0.2 | 0.2 |
Cost of share- based payments inclusive of tax charge | - | - | - | - | - | - | - | 5.2 | 5.2 | - | 5.2 |
Dividends | - | - | - | - | - | - | - | (102.7) | (102.7) | - | (102.7) |
Exercise of LTIP awards | 0.1 | - | - | - | - | - | - | (0.1) | - | - | - |
At 2 January 2015 | 26.8 | 38.0 | - | (5.8) | 0.5 | (12.6) | (2.0) | 1,430.5 | 1,475.4 | 6.8 | 1,482.2 |
Loss for the period | - | - | - | - | - | - | - | (178.7) | (178.7) | (0.3) | (179.0) |
Losses taken to equity on cash flow hedges | - | - | - | - | - | - | (2.8) | - | (2.8) | - | (2.8) |
Exchange losses on translation of foreign operations | - | - | - | - | - | (12.7) | - | - | (12.7) | (0.3) | (13.0) |
Exchange losses on net investment hedges | - | - | - | - | - | (16.5) | - | - | (16.5) | - | (16.5) |
Remeasure- ments on defined benefit plans | - | - | - | - | - | - | - | 13.5 | 13.5 | - | 13.5 |
Reclassifi- cation adjust- ments on cash flow hedges | - | - | - | - | - | - | 1.6 | - | 1.6 | - | 1.6 |
Tax relating to other comprehen- sive income | - | - | - | - | - | - | 1.2 | (2.1) | (0.9) | - | (0.9) |
Total net compre- hensive expense for the period | - | - | - | - | - | (29.2) | - | (167.3) | (196.5) | (0.6) | (197.1) |
Issue of shares (note 9) | - | - | 9.4 | - | - | - | - | - | 9.4 | - | 9.4 |
Share- based pay- ments credit inclusive of tax charge | - | - | - | - | - | - | - | (2.7) | (2.7) | - | (2.7) |
Dividends | - | - | - | - | - | - | - | (94.0) | (94.0) | - | (94.0) |
At 1 January 2016 | 26.8 | 38.0 | 9.4 | (5.8) | 0.5 | (41.8) | (2.0) | 1,166.5 | 1,191.6 | 6.2 | 1,197.8 |
Notes to the Audited Results
1. Accounting policies
Basis of preparation
The audited results for the 52 weeks ended 1 January 2016 ("2015") have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union and applied in accordance with the provisions of the Companies Act 2006.
The financial information set out in the audited results does not constitute the Group's statutory financial statements for the 52 weeks ended 1 January 2016 within the meaning of section 434 of the Companies Act 2006 and has been extracted from the full financial statements for the 52 weeks ended 1 January 2016.
Statutory financial statements for the 52 weeks ended 2 January 2015 ("2014"), which received an unqualified audit report, have been delivered to the Registrar of Companies. The reports of the auditors on the financial statements for the 52 weeks ended 2 January 2015 and for the 52 weeks ended 1 January 2016 were unqualified and did not contain a statement under either section 498(2) or section 498(3) of the Companies Act 2006. The financial statements for the 52 weeks ended 1 January 2016 will be delivered to the Registrar of Companies and made available to all shareholders in due course.
These financial statements are presented in Sterling. All values are rounded to the nearest 0.1 million pounds (£m) except where otherwise indicated.
The accounting policies which follow are consistent with those of the previous period except for the adoption of the Annual Improvements to IFRSs 2011-2013 Cycle, which was implemented effective from 1 January 2015. This covered minor clarifications and amendments to various IFRSs and did not have a material impact on the Group's financial statements.
There are no other standards and amendments which apply for the first time in 2015 and impact the Group financial statements.
Business combinations - update to provisional fair values
During the year, the provisional fair values attributed to the 2014 acquisitions (being Trio and Metra) were finalised. In accordance with IFRS 3 "Business Combinations", the net impact of the adjustments to the provisional fair values has been recognised by means of an increase to goodwill and the adjustments to the provisional amounts have been recognised as if the accounting for the business combinations had been completed at the relevant acquisition dates. As such, all affected balances and amounts have been restated in the financial statements.
The table below reflects the adjustments made to finalise the Trio Engineered Products (Weir Trio) fair values.
Provisional | Final | ||||
fair | fair | Adjustments | |||
values | values | to fair | |||
2 January 2015 | 2 January 2015 | values | |||
£m | £m | £m | |||
Inventories | 20.9 | 19.9 | (1.0) | ||
Trade & other receivables | 15.6 | 13.6 | (2.0) | ||
Trade & other payables | (20.0) | (20.6) | (0.6) | ||
Provisions | (10.9) | (11.2) | (0.3) | ||
Deferred tax | (1.0) | 0.7 | 1.7 | ||
Goodwill arising on acquisition | 75.7 | 77.9 | 2.2 | ||
Impact on net assets | - |
The Metra Equipment Inc. (Weir Metra) provisional fair values were also finalised during the period, the impact being a decrease to the inventory fair value of £0.3m, with a corresponding increase in goodwill. The Consolidated Balance Sheet and affected notes present restated comparative information as at 2 January 2015. There was no material impact on the Consolidated Income Statement or Consolidated Statement of Comprehensive Income as a result of the finalisation of the provisional fair values.
Exceptional items
In order to provide the users of the financial statements with a more relevant presentation of the Group's underlying performance, profit for each financial year has been analysed between:
i) profit before exceptional items and intangibles amortisation; and
ii) the effect of exceptional items and intangibles amortisation.
Exceptional items are items of income and expense which, because of the nature, size and/or infrequency of the events giving rise to them, merit separate presentation to allow a better understanding of the elements of the Group's financial performance for the period and are presented on the face of the income statement to facilitate comparisons with prior periods and assessment of trends in financial performance. Exceptional items may include but are not restricted to: profits or losses arising on disposal or closure of business; the cost of significant business restructuring; significant impairments of intangible or tangible assets; adjustments to the fair value of acquisition related items such as contingent consideration and inventory; other items deemed exceptional due to their significance, size or nature; and the related exceptional taxation. Intangibles amortisation has been shown separately to provide visibility over the impact of increased acquisition activity on intangible assets. Further analysis of the items included in the column "Exceptional items & intangibles amortisation" is provided in note 3 to the financial statements.
2. Segment information
For management purposes, the Group is organised into three operating divisions: Minerals, Oil & Gas and Power & Industrial. These three divisions are organised and managed separately based on the key markets served and each is treated as an operating and a reportable segment under IFRS 8. The operating and reportable segments were determined based on the reports reviewed by the Chief Executive which are used to make operational decisions.
The Minerals segment is the global leader in the provision of slurry handling equipment and associated aftermarket support for abrasive high wear applications used in the mining and oil sands markets. The Oil & Gas segment provides products and service solutions to upstream, production, transportation, refining and related industries. The Power & Industrial segment designs and manufactures valves, pumps and turbines as well as providing specialist support services to the global power generation, industrial and oil and gas sectors.
The Chief Executive assesses the performance of the operating segments based on operating profit from continuing operations before exceptional items (including impairments) and intangibles amortisation ('segment result'). Finance income and expenditure and associated interest-bearing liabilities and derivative financial instruments are not allocated to segments as all treasury activity is managed centrally by the Group treasury function. The amounts provided to the Chief Executive with respect to assets and liabilities are measured in a manner consistent with that of the financial statements. The assets are allocated based on the operations of the segment and the physical location of the asset. The liabilities are allocated based on the operations of the segment.
Transfer prices between business segments are set on an arm's length basis, in a manner similar to transactions with third parties.
2. Segment information (continued)
The segment information for the reportable segments for 2015 and 2014 is disclosed below.
Minerals | Oil & Gas | Power & Industrial | Total continuing operations | |||||||||||||
2015 | 2014 | 2015 | 2014 | 2015 | 2014 | 2015 | 2014 | |||||||||
£m | £m | £m | £m | £m | £m | £m | £m | |||||||||
Revenue | ||||||||||||||||
Sales to external customers | 1,034.3 | 1,127.9 | 581.9 | 992.1 | 301.5 | 318.2 | 1,917.7 | 2,438.2 | ||||||||
Inter-segment sales | 4.4 | 3.9 | 14.7 | 14.6 | 7.9 | 8.5 | 27.0 | 27.0 | ||||||||
Segment revenue | 1,038.7 | 1,131.8 | 596.6 | 1,006.7 | 309.4 | 326.7 | 1,944.7 | 2,465.2 | ||||||||
Eliminations | (27.0) | (27.0) | ||||||||||||||
1,917.7 | 2,438.2 | |||||||||||||||
Sales to external customers - 2014 at 2015 average exchange rates | ||||||||||||||||
Sales to external customers | 1,034.3 | 1,076.8 | 581.9 | 1,048.8 | 301.5 | 318.5 | 1,917.7 | 2,444.1 | ||||||||
1,917.7 | 2,444.1 | |||||||||||||||
Segment result | ||||||||||||||||
Segment result before share of results of joint ventures | 198.1 | 226.4 | 49.7 | 214.9 | 21.6 | 18.6 | 269.4 | 459.9 | ||||||||
Share of results of joint ventures | - | - | 8.3 | 10.0 | - | - | 8.3 | 10.0 | ||||||||
Segment result | 198.1 | 226.4 | 58.0 | 224.9 | 21.6 | 18.6 | 277.7 | 469.9 | ||||||||
Unallocated expenses | (18.8) | (20.1) | ||||||||||||||
Operating profit before exceptional items & intangibles amortisation | 258.9 | 449.8 | ||||||||||||||
Total exceptional items & intangibles amortisation | (419.6) | (259.4) | ||||||||||||||
Net finance costs before exceptional items | (35.8) | (38.5) | ||||||||||||||
Other finance costs - retirement benefits | (3.3) | (2.8) | ||||||||||||||
(Loss) profit before tax from continuing operations | (199.8) | 149.1 | ||||||||||||||
Segment result - 2014 at 2015 average exchange rates | ||||||||||||||||
Segment result before share of results of joint ventures | 198.1 | 217.5 | 49.7 | 228.7 | 21.6 | 18.8 | 269.4 | 465.0 | ||||||||
Share of results of joint ventures | - | - | 8.3 | 10.7 | - | - | 8.3 | 10.7 | ||||||||
Segment result | 198.1 | 217.5 | 58.0 | 239.4 | 21.6 | 18.8 | 277.7 | 475.7 | ||||||||
Unallocated expenses | (18.8) | (20.2) | ||||||||||||||
Operating profit before exceptional items & intangibles amortisation | 258.9 | 455.5 | ||||||||||||||
There are no material revenues derived from a single external customer. |
2. Segment information (continued)
Minerals | Oil & Gas | Power & Industrial | Total continuing operations | |||||
2015 | 2014 | 2015 | 2014 | 2015 | 2014 | 2015 | 2014 | |
£m | £m | £m | £m | £m | £m | £m | £m | |
Assets & liabilities (restated note 1) | ||||||||
Intangible assets | 555.8 | 539.1 | 843.2 | 991.6 | 72.6 | 102.0 | 1,471.6 | 1,632.7 |
Property, plant & equipment | 195.3 | 214.6 | 137.5 | 167.0 | 50.9 | 52.3 | 383.7 | 433.9 |
Working capital assets | 434.2 | 501.6 | 350.9 | 532.1 | 168.3 | 178.4 | 953.4 | 1,212.1 |
1,185.3 | 1,255.3 | 1,331.6 | 1,690.7 | 291.8 | 332.7 | 2,808.7 | 3,278.7 | |
Investments in joint ventures | - | - | 33.4 | 33.7 | - | - | 33.4 | 33.7 |
Segment assets | 1,185.3 | 1,255.3 | 1,365.0 | 1,724.4 | 291.8 | 332.7 | 2,842.1 | 3,312.4 |
Unallocated assets | 229.6 | 250.8 | ||||||
Total assets | 3,071.7 | 3,563.2 | ||||||
Working capital liabilities | 259.8 | 286.6 | 172.0 | 242.8 | 131.6 | 113.8 | 563.4 | 643.2 |
Unallocated liabilities | 1,310.5 | 1,437.8 | ||||||
Total liabilities | 1,873.9 | 2,081.0 | ||||||
Other segment information | ||||||||
Segment additions to non-current assets | 36.7 | 56.9 | 36.2 | 50.6 | 6.8 | 8.9 | 79.7 | 116.4 |
Unallocated additions to non-current assets | 10.2 | 3.7 | ||||||
Total additions to non-current assets | 89.9 | 120.1 | ||||||
Segment depreciation & amortisation | 43.4 | 37.7 | 58.7 | 54.7 | 10.8 | 10.6 | 112.9 | 103.0 |
Impairment of property, plant & equipment | 2.8 | 4.0 | 33.4 | 5.2 | - | - | 36.2 | 9.2 |
Impairment of intangible assets | - | - | 225.5 | 160.0 | 25.9 | - | 251.4 | 160.0 |
Unallocated depreciation & amortisation | 3.0 | 3.0 | ||||||
Total depreciation, amortisation & impairment | 403.5 | 275.2 |
Unallocated assets primarily comprise cash and short-term deposits, derivative financial instruments, income tax receivable, deferred tax assets and retirement benefit surpluses as well as those assets which are used for general head office purposes. Unallocated liabilities primarily comprise interest-bearing loans and borrowings, derivative financial instruments, income tax payable, provisions, deferred tax liabilities and retirement benefit deficits as well as liabilities relating to general head office activities. Segment additions to non-current assets do not include those additions which have arisen from business combinations (note 9).
2. Segment information (continued)
Geographical information
Geographical information in respect of revenue and non-current assets for 2015 and 2014 is disclosed below. Revenues are allocated based on the location to which the product is shipped. Assets are allocated based on the location of the assets and operations. Non-current assets consist of property, plant and equipment, intangible assets and investments in joint ventures.
UK | USA | Canada | Europe & FSU | Asia Pacific | Australia | South America | Middle East & Africa | Total | |
52 weeks ended 1 January 2016 | £m | £m | £m | £m | £m | £m | £m | £m | £m |
Revenue from continuing operations | |||||||||
Sales to external customers | 93.5 | 557.3 | 194.8 | 142.6 | 247.2 | 146.6 | 247.7 | 288.0 | 1,917.7 |
Non-current assets | 178.8 | 895.6 | 48.5 | 135.0 | 269.9 | 155.2 | 44.6 | 105.7 | 1,833.3 |
UK | USA | Canada | Europe & FSU | Asia Pacific | Australia | South America | Middle East & Africa | Total | |
52 weeks ended 2 January 2015 | £m | £m | £m | £m | £m | £m | £m | £m | £m |
Revenue from continuing operations | |||||||||
Sales to external customers | 113.0 | 875.9 | 246.0 | 180.9 | 252.4 | 220.3 | 261.6 | 288.1 | 2,438.2 |
Non-current assets (restated note 1) | 144.7 | 1,133.0 | 59.0 | 144.6 | 304.6 | 163.0 | 49.5 | 111.1 | 2,109.5 |
The following disclosures are given in relation to continuing operations. | ||
2015 | 2014 | |
£m | £m | |
An analysis of the Group's revenue is as follows | ||
Original equipment | 526.6 | 748.7 |
Aftermarket parts | 939.4 | 1,145.3 |
Sales of goods | 1,466.0 | 1,894.0 |
Aftermarket services | 380.1 | 470.5 |
Revenue from construction contracts | 71.6 | 73.7 |
Revenue | 1,917.7 | 2,438.2 |
Finance income | 4.7 | 6.0 |
Total revenue | 1,922.4 | 2,444.2 |
3. Exceptional items & intangibles amortisation | ||
2015 | 2014 | |
£m | £m | |
Recognised in arriving at operating (loss) profit from continuing operations | ||
Intangibles amortisation | (52.5) | (44.9) |
Exceptional item - Intangibles impairment | (251.4) | (160.0) |
Exceptional item - Group-wide efficiency review | (7.6) | (49.4) |
Exceptional item - Oil & Gas downturn actions | (92.5) | - |
Exceptional item - Other Group restructuring | (16.3) | - |
Exceptional item - charging of fair value inventory uplift | (2.4) | - |
Exceptional item - release of expired indemnity provisions for LGE Process disposal | 3.8 | - |
Exceptional item - Metso aborted acquisition costs | - | (2.4) |
Exceptional item - fair value adjustment to contingent consideration liability | 1.7 | (0.6) |
(417.2) | (257.3) | |
Recognised in finance costs | ||
Exceptional item - unwind in respect of contingent consideration liability | (2.4) | (2.1) |
Recognised in arriving at profit for the period from discontinued operations | ||
Exceptional item (note 5) | - | 1.0 |
The Group-wide efficiency review, which commenced during the fourth quarter of 2014 with the closure of a number of small manufacturing facilities and workforce reductions, continued into the first half of 2015 with the final headcount reductions and restructuring actions implemented. Exceptional costs totalling £7.6m have been recognised in the income statement, represented by £5.9m in cash restructuring costs and impairment charges of £1.7m. The charge is in line with that disclosed in the Interim accounts. The charge recorded in the 52 weeks ended 2 January 2015 was £49.4m, which comprised £30.1m in restructuring costs and impairment charges of £19.3m. The total cash outflow in the period in relation to the Group-wide efficiency review was £20.3m, of which £14.4m related to the cost provided for in 2014 and the balance in respect of the 2015 charge.
The Group has taken a number of actions to mitigate the impact of the prolonged downturn in oil and gas markets, including headcount reductions and the closure of certain service centres. The Group has also taken the decision to rationalise product lines and discontinue support for certain older product lines which have been superseded in the market by new technologies, as well as reassess actual and expected utilisation of rental assets based on the "lower for longer" outlook for the market. Exceptional costs totalling £92.5m have been recognised in the income statement in relation to these actions, comprising £31.2m in cash restructuring costs (of which £0.5m relates to the close out of commodity hedges) and impairment charges of £61.3m. The impairment charge includes £33.2m in relation to property, plant & equipment (predominantly rental assets) and £28.1m on inventory. Of the cash restructuring charge, a cash outflow of £7.1m has been recorded in the period.
Additional restructuring actions have been implemented by the other Divisions in the second half of the year by way of continued response to end market conditions across minerals and power. Exceptional costs totalling £16.3m have been recognised in the income statement, represented by £11.0m cash restructuring costs and impairment charges of £5.3m. The impairment charge includes £1.0m in relation to property, plant & equipment and £3.2m and £1.1m against inventory and receivables respectively. Of the cash restructuring charge, a cash outflow of £6.0m has been recorded in the period.
The termination costs in the period total £16.7m in relation to the above actions (2014: £15.6m).
An impairment of £225.5m has been recognised in the period in relation to goodwill and brand names held in Pressure Control and a charge of £25.9m to goodwill held in certain of the Other CGUs.
Other exceptional items in the period include the unwind of both contingent consideration liabilities and inventory fair value adjustments relating to Weir Trio. Offsetting these amounts is an adjustment to the fair value of the contingent consideration liability and a release of expired warranty indemnity provisions.
4. Income tax expense | |||
2015 | 2014 | ||
£m | £m | ||
Group - UK | (6.5) | (0.1) | |
Group - Overseas | 27.3 | (75.3) | |
Total income tax credit (expense) in the Consolidated Income Statement | 20.8 | (75.4) | |
The total income tax credit (expense) is disclosed in the Consolidated Income Statement as follows. | |||
Tax expense - continuing operations before exceptional items & intangibles amortisation | (52.5) | (105.5) | |
- exceptional items | 32.2 | 16.0 | |
- intangibles amortisation and impairment | 41.1 | 14.1 | |
Total income tax credit (expense) in the Consolidated Income Statement | 20.8 | (75.4) | |
The total income tax expense included in the Group's share of results of joint ventures is as follows. | |||
Joint ventures | (1.6) | (3.1) |
5. Discontinued operations | ||
There were no disposals of core businesses during the current or prior period. As disclosed in note 3 an exceptional gain of £1.0m was recognised in 2014 in relation to the release of unutilised tax warranty provisions relating to previous disposals. There have been no gains and losses in relation to discontinued operations in the current period. | ||
Earnings per share from discontinued operations were as follows. | ||
2015 | 2014 | |
pence | pence | |
Basic | - | 0.5 |
Diluted | - | 0.5 |
These earnings per share figures were derived by dividing the net profit attributable to equity holders of the Company from discontinued operations by the weighted average number of ordinary shares, for both basic and diluted amounts, shown in note 6. |
6. Earnings (loss) per share | ||
Basic earnings per share amounts are calculated by dividing net profit for the period attributable to equity holders of the Company by the weighted average number of ordinary shares outstanding during the period. Diluted earnings per share is calculated by dividing the net profit attributable to equity holders of the Company by the weighted average number of ordinary shares outstanding during the period (adjusted for the effect of dilutive share awards). | ||
The following reflects the earnings and share data used in the calculation of earnings per share. | ||
2015 | 2014 | |
(Loss) profit attributable to equity holders of the Company | ||
Total operations* (£m) | (178.7) | 73.1 |
Continuing operations* (£m) | (178.7) | 72.1 |
Continuing operations before exceptional items & intangibles amortisation* (£m) | 167.6 | 301.4 |
Weighted average share capital | ||
Basic earnings per share (number of shares, million) | 213.7 | 213.3 |
Diluted earnings per share (number of shares, million) | 213.7 | 213.9 |
6. Earnings (loss) per share (continued) The difference between the weighted average share capital for the purposes of the basic and the diluted earnings per share calculations is analysed as follows. | ||
2015 | 2014 | |
Shares Million | Shares Million | |
Weighted average number of ordinary shares for basic earnings per share | 213.7 | 213.3 |
Effect of dilution: LTIP and deferred bonus awards | - | 0.6 |
Adjusted weighted average number of ordinary shares for diluted earnings per share | 213.7 | 213.9 |
The LTIP and deferred bonus are anti-dilutive in the current period and are therefore disregarded in arriving at the adjusted weighted average number of ordinary shares. |
The profit attributable to equity holders of the Company used in the calculation of both basic and diluted earnings per share from continuing operations before exceptional items and intangibles amortisation is calculated as follows. | ||
2015 | 2014 | |
£m | £m | |
Net (loss) profit attributable to equity holders from continuing operations* | (178.7) | 72.1 |
Exceptional items & intangibles amortisation net of tax | 346.3 | 229.3 |
Net profit attributable to equity holders from continuing operations before exceptional items & intangibles amortisation* | 167.6 | 301.4 |
2015 | 2014 | |
pence | pence | |
Basic earnings (loss) per share: | ||
Total operations* | (83.6) | 34.3 |
Continuing operations* | (83.6) | 33.8 |
Continuing operations before exceptional items & intangibles amortisation* | 78.4 | 141.3 |
Diluted earnings (loss) per share: | ||
Total operations* | (83.6) | 34.2 |
Continuing operations* | (83.6) | 33.7 |
Continuing operations before exceptional items & intangibles amortisation* | 78.4 | 140.9 |
*Adjusted for a loss of £0.3m (2014: profit of £1.6m) in respect of non-controlling interests. | ||
There have been no share options (2014: nil) exercised between the reporting date and the date of signing of these financial statements. |
7. Dividends paid & proposed | ||
2015 | 2014 | |
£m | £m | |
Declared & paid during the period | ||
Equity dividends on ordinary shares | ||
Final dividend for 2014: 29.0p (2013: 33.2p) | 61.9 | 70.7 |
Interim dividend for 2015: 15.0p (2014: 15.0p) | 32.1 | 32.0 |
94.0 | 102.7 | |
Proposed for approval by shareholders at the annual general meeting | ||
Final dividend for 2015: 29.0p (2014: 29.0p) | 62.1 | 61.9 |
The dividend was re-phased in 2014 such that the final payment now represents approximately two thirds, as opposed to three quarters, of the total dividend. The proposed dividend is based on the number of shares in issue, excluding treasury shares held, at the date the financial statements were approved and authorised for issue. The final dividend may differ due to increases or decreases in the number of shares in issue between the date of approval of this annual report and financial statements and the record date for the final dividend. |
8. Property, plant & equipment & intangible assets | ||
2015 | 2014 | |
£m | £m | |
Additions of property, plant & equipment & intangible assets | ||
- land & buildings | 13.1 | 23.9 |
- plant & equipment | 58.6 | 72.1 |
- intangible assets | 18.2 | 24.1 |
89.9 | 120.1 | |
The above additions relate to the normal course of business and do not include any additions made by way of business combinations. |
9. Business combinations
On 8 July 2015, the Group completed the acquisition of 100% of the voting shares of Delta Industrial Valves Inc. (Delta Valves) for a consideration of up to US$46m. Delta Valves is a US-based manufacturer of knife gate valves for the mining, oil sands and other industrial markets. The acquisition extends Weir Minerals' leading presence in mining and oil sands markets by expanding the division's portfolio of valve products, particularly knife gate valves, for use in the transportation of slurry. Initial consideration of US$36m was paid on completion; US$21m in cash, funded from existing bank facilities, and US$15m in new equity. The new equity represents 593,934 ordinary shares with a fair value representing the closing share price on the date of acquisition. Up to a further US$10m in cash is payable over the 18 months from acquisition, contingent upon meeting certain profit growth targets. The provisional fair value of the net assets has been assessed as £11.8m, giving rise to goodwill on acquisition of £14.8m. The goodwill recognised includes certain intangible assets that cannot be individually separated and reliably measured due to their nature, including anticipated business growth, synergies and an assembled workforce. The provisional fair values are subject to change following completion of the fair value exercise during the first half of 2016.
In March 2015, the Group completed the acquisition of the remaining 49% of Trio Chile, a minor joint venture acquired as part of the Weir Trio acquisition in 2014. The cash consideration paid of £0.4m was offset by cash and cash equivalents acquired. The fair value of the assets and liabilities of the entity was £nil, resulting in £0.4m goodwill being recognised.
Provisional fair values | Delta Valves | ||
2015 | |||
£m | |||
Property, plant & equipment | 0.5 | ||
Inventories | 3.5 | ||
Intangible assets | |||
- customer and distributor relationships | 4.7 | ||
- brand name | 2.7 | ||
- order backlog | 1.0 | ||
Trade & other receivables | 2.6 | ||
Cash & cash equivalents | 1.1 | ||
Interest-bearing loans & borrowings | (1.2) | ||
Trade & other payables | (3.1) | ||
Fair value of net assets | 11.8 | ||
Goodwill arising on acquisition | 14.8 | ||
Total consideration | 26.6 | ||
Cash consideration | 15.2 | ||
Equity consideration | 9.4 | ||
Contingent consideration | 3.2 | ||
Settlement of external debt of subsidiary on acquisition | (1.2) | ||
Total consideration | 26.6 | ||
The total net cash outflow on current year acquisitions was as follows | |||
Delta Valves | |||
- cash paid | (15.2) | ||
- cash & cash equivalents acquired | 1.1 | ||
Weir Trio Chile | |||
- cash paid | (0.4) | ||
- cash & cash equivalents acquired | 0.4 | ||
Total cash outflow (note 13) | (14.1) | ||
The gross amount and fair value of the Delta Valves trade receivables amounts to £2.6m. It is expected that virtually all the contractual amounts will be collected.
Delta Valves contributed £10.3m to revenue and £1.1m to operating profit (including exceptional items and intangibles amortisation) in the period from acquisition to 1 January 2016.
If the acquisitions had occurred at the start of 2015 the revenue and profit for the period from acquired operations after exceptional items and intangibles amortisation, would not have been materially different from the results disclosed in the Consolidated Income Statement.
The fair values for Weir Trio were finalised during the year. The cash flows in relation to this acquisition are disclosed in note 13.
10. Provisions | |||||
Warranties & onerous sales contracts | Employee related | Exceptional rationalisation | Other | Total | |
£m | £m | £m | £m | £m | |
At 2 January 2015 (restated note 1) | 35.6 | 51.6 | 21.6 | 4.0 | 112.8 |
Additions | 13.5 | 4.2 | 47.6 | 1.5 | 66.8 |
Utilised | (13.8) | (4.4) | (33.4) | (2.5) | (54.1) |
Unutilised | (7.7) | (0.1) | - | (0.4) | (8.2) |
Exchange adjustment | - | (0.7) | 0.5 | (0.1) | (0.3) |
At 1 January 2016 | 27.6 | 50.6 | 36.3 | 2.5 | 117.0 |
Current 2015 | 21.9 | 10.9 | 35.8 | 1.7 | 70.3 |
Non-current 2015 | 5.7 | 39.7 | 0.5 | 0.8 | 46.7 |
At 1 January 2016 | 27.6 | 50.6 | 36.3 | 2.5 | 117.0 |
Current 2014 (restated note 1) | 30.8 | 10.9 | 20.3 | 3.4 | 65.4 |
Non-current 2014 | 4.8 | 40.7 | 1.3 | 0.6 | 47.4 |
At 2 January 2015 (restated note 1) | 35.6 | 51.6 | 21.6 | 4.0 | 112.8 |
Warranties and onerous sales contracts
Provision has been made in respect of actual warranty and contract penalty claims on goods sold and services provided and allowance has been made for potential warranty claims based on past experience for goods and services sold with a warranty guarantee. It is expected that all costs related to such claims will have been incurred within five years of the balance sheet date.
Provision has been made in respect of sales contracts entered into for the sale of goods in the normal course of business where the unavoidable costs of meeting the obligations under the contracts exceed the economic benefits expected to be received from the contracts. Provision is made immediately when it becomes apparent that expected costs will exceed the expected benefits of the contract. It is expected that the majority of these costs will be incurred within one year of the balance sheet date.
Employee related
Employee related provisions arise from legal obligations, some of which are for asbestos-related claims.
Asbestos-related claims
Certain of the Group's US-based subsidiaries are co-defendants in lawsuits pending in the United States in which plaintiffs are claiming damages arising from alleged exposure to products previously manufactured which contained asbestos. The Group has comprehensive insurance cover for these cases with all claims directly managed by the Group's insurers who also meet all associated defence costs. The insurers and their legal advisers agree and execute the defence strategy between them and there are no related cash flows to or from the Group. We expect this to continue for the foreseeable future as long as the litigation arises.
A review was completed in 2014, in conjunction with external advisors, to assess the adequacy of the Group's insurance policies to meet future settlement and defence costs. As a result of this review a provision of £28m was recorded in 2014 with an equivalent receivable for insurance proceeds based on an estimate of settlement and defence costs for existing and projected claims received in the subsequent five year period. The cash flows associated with this claim profile have been assessed as extending to a period of 10 years from the balance sheet date and the modelling coincides with this period. In the current period costs have been charged against the provision however further charges have been made to reflect new claims.
During the current period, the estimates underlying the provision have continued to be reassessed and refined. The period of claims history has been further analysed to improve understanding of key drivers, including the originating State of claims, average settlement and defence costs per State and the occurrence of one-off claims and/or settlements. This analysis, coupled with the further year of claims experience supports the estimates made in the prior year and therefore the same principles have been used consistently to form the basis of the financial modelling in 2015. A provision of £28m continues to represent the Directors best estimate of the future liability, although these estimates and the period over which they are assessed will continue to be refined as the claims history builds. An equivalent asset continues to be recognised for insurance proceeds.
Due to the inherent uncertainty associated with estimating future costs in respect of asbestos-related diseases, there can be no guarantee that the assumptions used to estimate the provision will result in an accurate prediction of the actual costs that may be incurred. However, we do not expect there to be a net financial exposure to the Group given the comprehensive insurance cover in place.
In the UK, there are outstanding asbestos-related claims which are not the subject of insurance cover. The Group provides for both based on management's best estimate of the likely costs given past experience of the volume and cost of similar claims brought against the Group. It is expected that these costs will be incurred in the period up to 2025.
10. Provisions (continued)
Exceptional rationalisation
As part of the Group-wide efficiency review announced in November 2014, the 2015 Oil & Gas downturn actions and other restructuring actions, the Group has provided an additional £47.6m during the period. The provision incorporates committed costs for the closure of small manufacturing facilities, consolidation of service centres and workforce reductions. The majority of the provision will be utilised in 2016.
Other
Other provisions relate to an environmental clean up programme in the United States for a company acquired in 1992, the discontinued operations and indemnity provision, and various other legal claims and exposures across the Group. The environmental provision is based on management's current best estimate of the expected costs under the programme. It is expected that these costs will be incurred in the period up to 2019.
11. Pensions & other post-employment benefit plans | ||
2015 | 2014 | |
£m | £m | |
Plans in surplus | 8.2 | 4.1 |
Plans in deficit | (90.0) | (98.4) |
Net liability | (81.8) | (94.3) |
The net Group deficit for retirement benefit obligations at the period end was £81.8m (2014: £94.3m) as a result of actuarial gains on the liability side from changes in financial and demographic assumptions, coupled with a loss due to other experience, being partially offset by actuarial losses on the asset side.
12. Derivative financial instruments
Set out in the table below is a summary of the types of derivative financial instruments included within each balance sheet category.
2015 | 2014 | |
£m | £m | |
Included in non-current assets | ||
Forward foreign currency contracts designated as cash flow hedges | 0.1 | 0.2 |
Cross currency swaps designated as net investment hedges | 8.3 | 3.3 |
Other forward foreign currency contracts | 0.1 | - |
8.5 | 3.5 | |
Included in current assets | ||
Forward foreign currency contracts designated as cash flow hedges | 0.2 | 0.5 |
Forward foreign currency contracts designated as net investment hedges | 0.9 | - |
Other forward foreign currency contracts | 13.1 | 10.0 |
14.2 | 10.5 | |
Included in current liabilities | ||
Forward foreign currency contracts designated as cash flow hedges | (1.5) | (2.3) |
Forward foreign currency contracts designated as net investment hedges | (4.4) | (2.4) |
Cross currency swaps designated as net investment hedges | - | (0.7) |
Other forward foreign currency contracts | (8.2) | (5.9) |
(14.1) | (11.3) | |
Included in non-current liabilities | ||
Forward foreign currency contracts designated as cash flow hedges | (0.9) | (0.2) |
Cross currency swaps designated as net investment hedges | (4.8) | (2.7) |
Other forward foreign currency contracts | (0.1) | (0.2) |
(5.8) | (3.1) | |
Net derivative financial assets (liabilities) | 2.8 | (0.4) |
13. Additional cash flow information | |||||||
2015 | 2014 | ||||||
£m | £m | ||||||
Continuing operations | |||||||
Net cash generated from operations | |||||||
Operating (loss) profit | (158.3) | 192.5 | |||||
Exceptional items - other | 113.3 | 52.4 | |||||
Exceptional impairment of intangible assets | 251.4 | 160.0 | |||||
Amortisation of intangible assets | 52.5 | 44.9 | |||||
Share of results of joint ventures | (8.3) | (10.0) | |||||
Depreciation of property, plant & equipment | 63.4 | 61.1 | |||||
Impairment of property, plant & equipment | 0.3 | - | |||||
Gains on disposal of property, plant & equipment | (1.6) | (1.4) | |||||
Funding of pension & post-retirement costs | - | (0.4) | |||||
Employee share schemes | (2.3) | 4.4 | |||||
Net foreign exchange including derivative financial instruments | 4.5 | 1.4 | |||||
Decrease in provisions | (5.7) | (1.9) | |||||
Cash generated from operations before working capital cash flows | 309.2 | 503.0 | |||||
Decrease (increase) in inventories | 25.2 | (45.5) | |||||
Decrease (increase) in trade & other receivables and construction contracts | 189.3 | (86.4) | |||||
(Decrease) increase in trade & other payables and construction contracts | (127.2) | 50.2 | |||||
Cash generated from operations | 396.5 | 421.3 | |||||
Additional pension contributions paid | (2.6) | (10.6) | |||||
Exceptional cash items | (33.4) | (10.6) | |||||
Income tax paid | (50.4) | (94.1) | |||||
Net cash generated from operating activities | 310.1 | 306.0 | |||||
Exceptional items are detailed in note 3. The employee-related provision and associated insurance asset in relation to US asbestos-related claims disclosed in note 10 will not result in any cash flows either to or from the Group and therefore they have been excluded from the table above. | |||||||
13. Additional cash flow information (continued) The following tables summarise the cash flows arising on acquisitions. | |||||||
2015 | 2014 | ||||||
£m | £m | ||||||
Acquisitions of subsidiaries | |||||||
Current period acquisitions (see below) | (12.9) | (132.7) | |||||
Prior period acquisitions contingent consideration paid | (2.8) | (5.0) | |||||
Prior period acquisitions completion adjustment | 1.6 | - | |||||
(14.1) | (137.7) | ||||||
Acquisition of subsidiaries - cash paid | (14.4) | (140.7) | |||||
Cash & cash equivalents acquired | 1.5 | 8.0 | |||||
Acquisition of subsidiaries - current period acquisitions | (12.9) | (132.7) | |||||
Settlement of external debt of subsidiary on acquisition | (1.2) | - | |||||
Total cash outflow on current period acquisitions (note 9) | (14.1) | (132.7) | |||||
Prior period acquisitions contingent consideration paid | (2.8) | (5.0) | |||||
Prior period acquisitions completion adjustment | 1.6 | - | |||||
Total cash outflow relating to acquisitions | (15.3) | (137.7) | |||||
The settlement of the external debt of Delta Valves on acquisition has been classified as a financing cash flow in accordance with IAS 7. | |||||||
13. Additional cash flow information (continued) | 2015 | 2014 | |||||
£m | £m | ||||||
Reconciliation of net increase in cash & cash equivalents to movement in net debt | |||||||
Net increase in cash & cash equivalents from continuing operations | 34.2 | 97.2 | |||||
Net decrease (increase) in debt | 49.4 | (166.5) | |||||
Change in net debt resulting from cash flows | 83.6 | (69.3) | |||||
Lease inceptions | (0.1) | (0.4) | |||||
Foreign currency translation differences | (47.8) | (44.0) | |||||
Change in net debt during the period | 35.7 | (113.7) | |||||
Net debt at the beginning of the period | (860.7) | (747.0) | |||||
Net debt at the end of the period | (825.0) | (860.7) | |||||
Net debt comprises the following | |||||||
Cash & short-term deposits | 184.0 | 178.7 | |||||
Current interest-bearing loans & borrowings | (195.6) | (166.1) | |||||
Non-current interest-bearing loans & borrowings | (813.4) | (873.3) | |||||
(825.0) | (860.7) |
14. Related party disclosure
The following table provides the total amount of significant transactions which have been entered into with related parties for the relevant financial year and outstanding balances at the period end.
Sales to related parties - goods | Sales to related parties - services | Purchases from related parties - goods | Purchases from related parties - services | Amounts owed to related parties | ||
Related party | £m | £m | £m | £m | £m | |
Joint ventures | 2015 | 18.4 | 0.4 | 1.4 | 0.8 | - |
2014 | 26.7 | 0.5 | 8.2 | 0.5 | - | |
Group pension plans | 2015 | - | - | - | - | 2.1 |
2014 | - | - | - | - | 1.8 |
15. Legal claims
The Company and certain subsidiaries are, from time to time, parties to legal proceedings and claims which arise in the normal course of business.
A claim made by Philippines Gold Processing & Refining Corporation against Weir Services Australia Pty Limited (WSA), a subsidiary of the Company, was defended at arbitration, with the successful judgement issued in favour of WSA in January 2016. During the arbitration process, the Group entered into a cap and collar agreement with the claimant, which limited the potential exposure for the Group to a de minimus amount.
16. Exchange rates | ||||
The principal exchange rates applied in the preparation of these financial statements were as follows. | ||||
2015 | 2014 | |||
Average rate (per £) | ||||
US dollar | 1.53 | 1.65 | ||
Australian dollar | 2.04 | 1.83 | ||
Euro | 1.38 | 1.24 | ||
Canadian dollar | 1.96 | 1.82 | ||
United Arab Emirates dirham | 5.61 | 6.01 | ||
Chilean peso | 1,000.85 | 940.16 | ||
South African rand | 19.53 | 17.87 | ||
Brazilian real | 5.10 | 3.87 | ||
Russian rouble | 93.65 | 63.32 | ||
Closing rate (per £) | ||||
US dollar | 1.47 | 1.54 | ||
Australian dollar | 2.02 | 1.89 | ||
Euro | 1.36 | 1.28 | ||
Canadian dollar | 2.04 | 1.80 | ||
United Arab Emirates dirham | 5.41 | 5.64 | ||
Chilean peso | 1,044.14 | 942.64 | ||
South African rand | 22.81 | 17.97 | ||
Brazilian real | 5.84 | 4.14 | ||
Russian rouble | 107.45 | 90.99 |
The Group's operating profit from continuing operations before exceptional items and intangibles amortisation was denominated in the following currencies. | ||
2015 | 2014 | |
£m | £m | |
US dollar | 114.4 | 262.3 |
Australian dollar | 31.6 | 41.1 |
Euro | 21.6 | 26.5 |
Canadian dollar | 31.1 | 42.3 |
United Arab Emirates dirham | 21.6 | 16.6 |
Chilean peso | 30.6 | 27.8 |
South African rand | 1.3 | 2.0 |
Brazilian real | 4.3 | 6.8 |
Russian rouble | 3.8 | 10.6 |
UK Sterling | (13.0) | (5.4) |
Other | 11.6 | 19.2 |
Operating profit from continuing operations before exceptional items & intangibles amortisation | 258.9 | 449.8 |