Amec Foster Wheeler Announces Half-Year Results 2017

Announced Date :  Aug 10, 2017


Amec Foster Wheeler plc (Amec Foster Wheeler) has announced Half-Year results for 2017.
Summary

- Challenging conditions continue in some key markets (primarily upstream oil and gas and solar)

- underlying revenue down 24%

- E&I underlying revenue up 7%

- Offset by better operational performance and contract close outs

- trading margin up 80bp, and up 180bp for retained operations

- Retained operations order book up 2% to £5.5bn

- Efficiency and cost saving programme delivering greater benefits ahead of schedule

- £159m proceeds from non core disposal programme in H1, £229m in total since Q4

- Offer from John Wood Group remains on track to complete in Q4

Jon Lewis, CEO said:

“I am encouraged that the first wave of benefits of the transformation programme we began last year is now evident. Operational discipline has improved, we have more than delivered on our cost saving targets and we have also seen the first tangible signs of sustainable growth: in the retained operations, trading margin is up 180 basis points compared to H1 last year with a 2% increase in the order book since the year end.

Although, as expected, some of our end markets remain challenging, I am pleased that we are making progress across the business – reinforcing the value of a multi-discipline and multi-market customer offering.

Looking forward, I am confident Amec Foster Wheeler is now moving in the right direction, and I believe that our people and shareholders will have an exciting future as part of the Wood Group, once the deal closes in the fourth quarter.”

First half review

We have made a strong start to our transformation programme. We began 2017 with the full roll out of our new, leaner, operating model. This was designed to bring our people closer to projects and customers, enabling us to deliver cost efficiencies across the business and to improve the consistency with which each part of the business operates.

In addition, we identified more than 20 strategic initiatives that would drive growth in the medium term. The first signs of progress is now showing up in the order book, up 2% for retained operations year to date.

We have also made good progress on disposing of non-core assets, raising £229m of proceeds since the first sales in Q4 2016. As previously announced, from 1 January 2017, we replaced our geographical reporting structure with four market-based business lines: Oil, Gas & Chemicals, Mining, Power & Process and Environment & Infrastructure (E&I). The principal change from previous revenue disclosures by market is that E&I projects are now fully allocated to the E&I segment. Previously E&I work for Oil & Gas, Clean Energy or Mining customers was recorded in those sectors.

Oil, Gas and Chemicals

Underlying revenue fell 18%, as long-standing challenging conditions persisted across key upstream markets. However, underlying trading profit rose by 17% to £83m compared to H1 2016 as the benefits of the leaner operating structure and an improved operating performance came through. In North America we completed the restructuring of the US business returning the business to a small profit in H1 2017.

The breadth of our customer offering once again protected us from the full impact of market challenges. Downstream contributed more than 50% of OGC revenues, a position we expect to continue, supported by good growth from our Middle East downstream projects. Upstream capital projects remain weak, except for the ongoing work for major hook up projects in the UK North Sea. Our asset support businesses have performed well: in the North Sea we have continued to grow volumes, as we strengthen our offering in preparation for the hook up project cycle ending. We have also started to mobilise key staff for the 5 year offshore rejuvenation contract for Brunei Shell Petroleum.

The OGC order book fell 3% during the first half to £2.9bn. Key additions included the 5 year offshore rejuvenation contract for Brunei Shell Petroleum and a limited notice to proceed for the EPC of a methanol plant in Louisiana for Yuhuang Chemical. We also announced, this morning, a major long term contract for maintenance services at the Yara Pilbara ammonia facilities in Western Australia. All three projects are significant wins in 2017 and represent great progress on our strategic priorities to expand our asset support capability globally and grow our chemicals and full scope project portfolios.

During H1, we signed global master service agreements with BP for pre FEED and FEED upstream engineering services and a downstream enterprise framework with Shell.

We are also making real progress on other, earlier stage initiatives. We have made our first hires in the US unconventional market, and have started work on 8 small projects. A typical scope is in-field design and layout and engineering support. If these projects develop as anticipated then this investment will be self-funding and will make a c$10m revenue contribution in 2018. We have also increased our engineering hours in India over 60% in the past 12 months, improving our cost efficiency and price competitiveness further.

Mining

Underlying revenue fell 12%, with trading profit boosted by successful contract close outs and settlements. Studies and pre-FID work continues at relatively healthy levels, whereas project activity remains subdued. We have also seen a number of projects in our pipeline deferred. The reorganisation of the Mining business line at the beginning of the year helped reduce costs and improved the operational focus. It also better positions us to engage with customers globally.

During the first half the Legacy potash project for K+S in Sakatchewan was successfully commissioned and first gold produced at the Brucejack project in Canada. The Husab uranium project in Namibia also delivered first production.

Order book is up 37% year to date, including our share of the A$300m EPC contract for the Gruyere Gold Project in Australia.

Our gold portfolio remains strong, and also includes the EPCm on the Alacer Gold Project in Turkey and the design and supply of conveyors for the Ulyeva Project in Russia for Nordgold. We have announced one lithium project, for Albemarle in Chile, and continue to see more opportunities in this fast growing space.

We have made a good start at implementing the strategic priorities identified during the 2016 review. The formation of our global consulting group has already improved its financial performance, and will enhance our visibility of major project work in the next capex cycle. We are making key hires in business development and are currently taking on more staff in locations such as Chile and Australia, to support growth there.

Power and Process

Underlying revenue fell 52% and trading profit fell 56%, to £21m; in line with our expectations due to the significant drop-off in solar activity in the US after the record levels of activity in 2016. Volumes were elevated due to project accelerations, ahead of the scheduled end of federal investment incentives. The deadline for these incentives has now been extended through to 2019 before tapering down.

After a slow start to the year, we have seen a strong second quarter order book performance, with over £300m of new orders in June, including new projects with long-standing customers such as LG&E and Southern Company. Work in the order book includes solar, wind, thermal upgrade and conventional power clean-up projects in North America, as well as the long-term contracts in European nuclear. At 30th June the P&P order book stood at £1.4bn, up 33% since December.

Operationally the focus remains on executing existing projects and developing a broader portfolio of power and process projects in North America. The order book shows good progress on this already, and together with planned business development investment, we are confident there is more to come.

Environment and Infrastructure

Underlying revenue increased 7%, ahead of the market growth rate, as we continue to execute well across a wide-ranging portfolio of projects in our chosen sectors. There have been no further losses from the over-running fixed price US government contract in the Pacific, however, revenue on this project recognised at nil margin in the first half has impacted returns. Strategic initiatives put in place at the beginning of the year are already adding to the portfolio. Better business development coordination with OGC has seen environmental specialist headcount grow significantly in Houston, and we have won our first $1m environmental consulting contract in Saudi Arabia for Aramco. We expect to see other awards in the Middle East, as we roll out our capabilities across the region.

Expansion in the UK and continental Europe also remains a focus. In May we secured a position on the UK Government’s Crown Commercial Services project and programme management framework which supports the delivery of the UK Government’s construction and infrastructure strategy. This was a key priority in H1 2017 given the outlook for UK infrastructure spending remains strong. Two wins in Europe for pharmaceutical projects represents a good start to our new focus on this sector, and we believe there is a lot more we can do. Across our chosen sectors we are currently tracking a pipeline of more than £5bn of opportunities.

Non-core disposals

As previously announced, the Company has sold Aquenta Consulting, its circulating fluidised bed boilers business and its share in FW Power during the first half. In addition, the disposals of its share in Petropower and the Incheon Bridge were announced in Q4 2016. In aggregate, these disposals have yielded £229m in proceeds, with £159m coming in the first half. The assets within the non-core disposal programme contributed £43m of trading profit in full year 2016 and £12m in the first half (including £1m from the residual industrial boilers part of GPG which is expected to be sold later this year).

The company is continuing to progress the disposal of its North American nuclear operations and the balance of its steam generator businesses. In June, the Company (in consultation with the board of John Wood Group) announced it had decided to retain its European nuclear business.

Had the Company accepted its preferred offer for the European nuclear business, it would have met its target of £500m of disposal proceeds from the non-core disposal programme.

Balance sheet

As previously disclosed, in April 2017, the Company agreed a waiver to increase the leverage covenant in its banking facilities to 4.5x net debt to EBITDA until June 2018. Net debt has reduced to £989m (December 2016 £1,084m), and the leverage ratio at June was 3.7x.

John Wood Group offer The all-share offer from John Wood Group remains on schedule to close in the fourth quarter.

In June, both sets of shareholders voted in favour of the transaction, which remains subject to a small number of anti-trust clearances, including approval from the UK Competition and Markets Authority (CMA).

On 2 August, the CMA announced that the combination of Amec Foster Wheeler and John Wood Group’s operations in the UK North Sea would lead to a substantial lessening of competition across the engineering and construction and operations and maintenance service sectors. In advance of this announcement, the Company has been preparing its UK North Sea operations for sale, with a competitive process already well underway.

In 2016, this proposed disposal business contributed revenues of £740m and trading profit of £43m to Amec Foster Wheeler. In H1 2017, it contributed revenues of £323m and trading profit of £34m, including a significant contribution from major projects which are expected to complete over the next two years.

Anti-trust clearance has been obtained in Australia, Bulgaria, Canada, Colombia, Kazakhstan, Philippines, Poland, Russia, South Africa, Turkey and USA. The clearances in respect of CIFIUS, CEMAC and Mexico are progressing to schedule. SFO investigation In its circular to shareholders published on 23 May 2017, the Company disclosed that the UK Serious Fraud Office (SFO) may well commence an investigation into Amec Foster Wheeler. The company confirmed on 11 July 2017 that it had been informed by the SFO that it had opened an investigation into Amec Foster Wheeler, predecessor companies and associated persons in respect of the Foster Wheeler business. The investigation focuses on the past use of third parties and possible bribery and corruption and related offences.

Amec Foster Wheeler takes its obligation to conduct business ethically very seriously and has in place a robust global antibribery programme, including a detailed code of conduct and anti-bribery and corruption policies. Amec Foster Wheeler continues fully to co-operate with and assist the SFO.

Given the stage of this matter, it is not possible to estimate reliably what effect the outcome of it may have on Amec Foster Wheeler. However, the SFO’s investigation is not expected to have an impact on the completion of the merger of Amec Foster Wheeler and John Wood Group. 

Board changes

Kent Masters left the board after the AGM on 2 June, and we welcomed Bob Card to the board as a non executive director on 1 March 2017. Bob is a member of the Audit Committee and of the Health, Safety, Security, Environmental and Ethics Committee.

Roy Franklin, Linda Adamany and Ian McHoul will join the John Wood Group board upon the completion of the scheme of arrangement as non executive directors, with Roy taking up the positions of senior independent director and deputy Chairman.

Outlook

For the full year 2017, our trading results expectations have improved since the beginning of the year.

Some key markets remain challenging, however, our performance in H1 2017 demonstrates the first sustainable benefits of the transformation programme.

We expect the balance sheet to strengthen further, as our typical H2 operational cash inflow will more than offset anticipated exceptional costs, including outstanding deal related fees.

Operating and financial review

Operating segments

With effect from 1 January 2017, the Group organised its Engineering & Construction business into four market-based business lines: Oil, Gas & Chemicals; Mining; Power & Process and Environment & Infrastructure.

As a consequence of the programme of non-core disposals launched in 2016, the internal reporting has been restructured to present the results of the core business separately from those planned for disposal. As a result, the Group has determined the Group’s reportable segments to be Oil, Gas & Chemicals, Mining, Power & Process, Environment & Infrastructure, Investment Services and Disposals.

Continuing operations

Revenue

Revenue for the period at £2,333m was 18% lower than last year (six months ended 30 June 2016: £2,842m). Revenue reduced by £157m in Oil, Gas & Chemicals with continued market weakness and by £375m in Power & Process following record levels of solar activity in 2016. This was partly offset by growth in Environment & Infrastructure, with Mining being in line with 2016.

Excluding the effect of currency movements and disposals, revenue declined by 24%.

Administrative expenses

Administrative expenses were £304m (six months ended 30 June 2016: £741m), including exceptional items, intangibles amortisation and impairment and asbestos-related items of £141m (six months ended 30 June 2016: £580m).

Administrative expenses before intangibles amortisation and impairment, exceptional items and asbestos-related items increased by £2m to £163m. Excluding the effect of currency movements and disposals, underlying administrative expenses were £11m lower than last year.

Corporate costs, which comprise the costs of operating central corporate functions and certain regional overheads, at £22m were in line with last year (six months ended 30 June 2016: £22m).

Profit/(loss) before net financing expense

There was a profit before net financing expense of £116m in the six months ended 30 June 2017 compared to a loss of £(414)m in the six months ended 30 June 2016, with impairment charges of £440m having been recognised in that period compared to £30m in the six months ended 30 June 2017.

Amortisation and impairments

Intangible assets principally comprise goodwill and identifiable intangible assets that were recognised in relation to acquired businesses. Goodwill is not amortised but is subject to an annual impairment test. Amortisation of intangible assets was £51m (six months ended 30 June 2016: £66m).

In 2017, there was a £10m write down on an asset transferred to held for sale and a £20m impairment of the customer relationship attached to one of the residual GPG businesses. This business provides after sales services to boilers previously installed by GPG and the expected future prospects for that business have deteriorated following the disposal of the CFB business of GPG.

During 2016, there were impairments of £440m recognised against goodwill and other assets, of which £405m was recorded directly against goodwill and intangible assets and £35m against assets classified as held for sale.

Exceptional items

There were net pre-tax exceptional gains of £47m in the period (six months ended 30 June 2016: costs £53m) of which a credit of £49m (six months ended 30 June 2016: £51m) is recorded in profit before net financing income and a cost of £2m (six months ended 30 June 2016: £2m) is recorded in net financing expense. The net gain of £47m is analysed as follows:

- A gain of £102m on the disposal of the CFB business of GPG, and a loss of £1m on the disposal of Aquenta;

- costs of £29m in relation to restructuring costs (including severance, office rationalisation, consultancy as well as IT and other costs);

- £25m of transaction costs related to the proposed acquisition by Wood Group, the business disposals and costs incurred in connection with the previously proposed rights issue.

Asbestos-related items (net of insurance recoveries)

During the six months ended 30 June 2017, the Group recognised net asbestos-related costs of £11m (six months ended 30 June 2016: £24m) of which £7m (six months ended 30 June 2016: £21m) related to the movement in the discount rate applied to the net asbestos-related liabilities assumed on the acquisition of Foster Wheeler and £1m related to costs associated with managing that liability (six months ended 30 June 2016: £nil), both of which are reported in profit before net financing income.

In addition, there was an asbestos-related interest expense of £3m (six months ended 30 June 2016: £3m) related to the unwinding of the discount applied to the liability

Trading profit fell by 8% to £162m (six months ended 30 June 2016: £177m). The impact of cost control measures taken to date along with stronger operational execution and successful contract close outs resulted in increases in trading profit in Oil, Gas & Chemicals of £16m and Mining of £10m. Investment Services generated a trading profit of £15m (six months ended 30 June 2016: £3m). These gains were offset by a reduction in Power & Process, from the record levels of solar activities in 2016, and in Environment & Infrastructure.

There was a trading profit contribution of £12m from businesses classified as disposals compared to £40m in the six months ended 30 June 2016.

Net financing expense

The net financing expense was £44m (six months ended 30 June 2016: £40m) including bank interest payable of £32m (six months ended 30 June 2016: £29m) and net pensions financing costs of £4m (six months ended 30 June 2016: £nil).

In the six months ended 30 June 2017, the net financing expense also included expenses of £2m associated with the cost of refinancing activities and £3m due to the unwinding of the discount on the net asbestos-related liabilities which have been reported within exceptional items.

A net currency exchange gain of £3m (six months ended 30 June 2016: loss of £92m) was recognised in the translation reserve in respect of foreign currency borrowings and derivatives held in designated net investment hedging relationships. The exchange loss in 2016 was principally caused by a weakening of Sterling during that period.

Share of results of joint ventures

The Group’s share of joint ventures’ post-tax profit for the period was £5m (six months ended 30 June 2016: £8m).

Profit/(loss) before tax There was a profit before tax of £77m (six months ended 30 June 2016: loss of £446m) after impairment charges of £30m (2016: £440m) intangibles amortisation of £51m (six months ended 30 June 2016: £66m), a net asbestos-related charge of £11m (six months ended 30 June 2016: £24m), exceptional credits of £47m (six months ended 30 June 2016: charges of £53m) and the Group’s share of joint ventures’ tax expense of £1m (six months ended 30 June 2016: £3m). Adjusted profit before tax was 12% lower at £123m (six months ended 30 June 2016: £140m).

Taxation

Our tax policy is to manage our obligations in compliance with all relevant tax laws, disclosure requirements and regulations. We seek to ensure that our approach to tax and the tax payments that we make in all territories in which we have operations is fully consistent with local requirements, taking into account available tax incentives and allowances and is aligned with the Group’s wider business strategy. We seek to develop good, open working relationships with tax authorities and to engage with them proactively, recognising that tax legislation can be complex and may be subject to differing interpretations.

The Group’s effective tax rate for the first six months of 2017 on continuing operations (including its share of joint ventures’ income tax expense but before exceptional items, intangibles amortisation and impairment and asbestos-related items) was 22.4% (six months ended 30 June 2016: 21.1%). The full year tax rate is expected to be in the range 22-23%.

During the first six months of 2017, there was a tax charge on exceptional items of continuing operations of £4m (six months ended 30 June 2016: credit of £4m), and a tax credit of £13m on intangibles amortisation and impairment (six months ended 30 June 2016: £27m).

The Group’s share of joint ventures’ income tax expense was £1m (six months ended 30 June 2016: £3m).

Profit/(loss) for the period from continuing operations

There was a profit for the period from continuing operations of £59m (six months ended 30 June 2016: loss of £441m) after adjusting for intangibles impairment and amortisation of £81m (six months ended 30 June 2016: £506m), the net asbestosrelated charge of £11m (six months ended 30 June 2016: £24m), exceptional credits of £47m (six months ended 30 June 2016: charges of £53m), and income tax credits on those items of £9m (six months ended 30 June 2016: £31m), adjusted profit for the period was £95m (six months ended 30 June 2016: £111m).

Earnings/(loss) per share

Diluted earnings per share was 14.6p (six months ended 30 June 2016: loss of (112.7)p), comprising an EPS of 15.2p (six months ended 30 June 2016: loss of (115.8)p) from continuing operations and a loss per share of (0.6)p (six months ended 30 June 2016: EPS of 3.1p) from discontinued operations.

Adjusted diluted EPS from continuing operations was 24.8p (six months ended 30 June 2016: 28.2p), due to the reduction in trading profit in the period.

Dividend

As previously announced, the board has decided to suspend dividend payments until free cash flow is being generated and as a result, the directors are not declaring an interim dividend in respect of the six months ended 30 June 2017 and did not propose a final dividend in respect of the year ended 31 December 2016.

Commentary on the results of the operating segments is included in the first half review.

Discontinued operations

Discontinued operations represent the residual assets and retained obligations of businesses sold in prior years, including the UK conventional power business which was discontinued in 2013.

There was no trading profit generated by discontinued operations during the six months ended 30 June 2017, the pre-tax profit of £6m in 2016 was generated from a provision release on a completed contract, with an associated tax charge of £1m resulting in a post-tax profit for the period of £5m.

Discontinued operations included a pre-tax loss on disposals of £3m (six months ended 30 June 2016: profit of £8m) arising from costs associated with businesses sold in prior years, there was an associated tax credit of £1m (six months ended 30 June 2016: tax charge of £1m) giving a total post-tax loss for the period of £2m (six months ended 30 June 2016: profit of £12m).

Cash flow

Trading cash flow

Trading cash flow of £81m was £44m lower than 2016 (2016: £125m), as a result of adverse working capital movements. Cash conversion from trading profit was 50% (2016: 71%).

Capital expenditure

Capital expenditure was £6m (2016: £3m) and there were proceeds from disposals of £11m (2016: £1m).

Acquisitions and disposals

There was a net cash inflow of £159m in respect of disposals in the six months ended 30 June 2017, with the disposals of Aquenta Consulting Pty Ltd, Foster Wheeler Power SRL and the CFB business of GPG completing during the period. There was total cash consideration of £198m and cash included in the disposals of £70m giving a cash flow of £128m, in addition there was debt of £31m disposed of to give a net impact of £159m.

Exceptional items

The cash outflow on exceptional items principally related to settlement of asbestos claims, integration and restructuring costs.

Balance sheet

Goodwill and other intangibles

As at 30 June 2017, the carrying amount of goodwill was £2,015m (31 December 2016: £2,164m), with the reduction during the year being the allocation of £114m of goodwill to the disposal group and exchange movements of £35m. See note 11 for further details.

As at 30 June 2017, the carrying amount of other intangibles was £390m (31 December 2016: £511m), which comprised acquired identifiable intangible assets of £360m (31 December 2016: £473m) and computer software of £30m (31 December 2016: £38m). During the period there was an amortisation charge of £51m, a transfer of £40m to the disposal group, an impairment of £20m and exchange and other movements of £10m.

Property, plant and equipment

As at 30 June 2017, property, plant and equipment amounted to £58m (31 December 2016: £71m), with the reduction in the period due to disposals and the transfer of PPE to held for sale of £11m along with depreciation of £9m offset by capex additions of £6m and exchange movements of £1m.

The Group holds the majority of the properties through which the Group operates under operating leases which are for varying periods and on differing terms.

Post-retirement benefits

The Group has a number of defined benefit pension plans in a number of countries. There are two principal plans: the Amec Foster Wheeler Pension Plan in the UK and The Foster Wheeler Inc. Salaried Employees Pension Plan in the US. Each of these plans is closed to new entrants and to future service accruals.

During 2016, all legacy defined benefit plans in the UK were merged into the AMEC Staff Pension Scheme, which was renamed the Amec Foster Wheeler Pension Plan. The merged scheme holds all the pension assets in a separately administered fund and is governed by the employment laws of the UK. The benefits are determined by the member’s length of service and salary each year. Once the benefits are in payment, the pension is adjusted each year in accordance with the scheme’s rules relative to UK price inflation. The scheme is established under trust law and is governed by a corporate Trustee Board (the “Trustees”), which consists of employers’ and employees’ representatives and two independent trustees. The Trustees are responsible for the management and administration of the scheme and for the definition of the investment strategy.

As at 30 June 2017, there was a net deficit of £114m on the Group’s defined benefit pension plans (31 December 2016: £137m) with the movement in the period principally due to movements in the discount rates applied to the liabilities. Of the total net deficit of £114m, a deficit of £76m on an overseas defined benefit pension plan is reported within liabilities held for sale on the balance sheet.

Provisions

Provisions held at 30 June 2017 were £582m (31 December 2016: £619m).

During the six months ended 30 June 2017 provisions of £29m were utilised, £9m of provisions no longer required were released to the income statement and there were exchange and other movements of £20m. Additional provisions of £9m were created and the asbestos provision increased by £11m as a result of changes in the discount rate applied to the provision and the unwinding of that discount.

Asbestos-related obligations

Certain of the company’s subsidiaries in the UK and US are subject to claims by individuals who allege that they have suffered personal injury alleged to have arisen from exposure to asbestos primarily in connection with equipment allegedly manufactured by certain of our subsidiaries during the 1970s or earlier.

As at 30 June 2017, the Group recognised a total net liability in respect of asbestos as follows:

- asbestos-related liabilities of £420m, which included estimates of indemnity amounts and defence costs for open and yet to be asserted claims expected to be incurred in each year in the period to 2050; and

- insurance recoveries of £110m

The net liability of £(310)m in respect of asbestos-related obligations is presented on the balance sheet within other non-current receivables (£97m); trade and other receivables (£13m); trade and other payables (£(34)m) and provisions (£(386)m).

There was a net cash outflow of £18m during H1 2017 due to the excess of indemnity payments and defence costs over insurance proceeds.

Going concern

As at 30 June 2017, the Company had net debt of £989m. Committed facilities under the principal Debt Facility Arrangement and other smaller facilities were £1,569m of which £185m was undrawn.

As previously disclosed, the Company has taken various actions to reduce its debt including the disposal of non-core assets, cost savings measures and suspending dividend payments until the Company is generating sustainable free cash flow. As at 31 December, despite the actions taken during 2016, there remained a risk that the leverage ratio would exceed the maximum leverage ratio under the Debt Facility Arrangement of 3.75:1 in the measurement period ended 30 June 2017 and in subsequent periods.

Should there have been a breach of the leverage covenant, the lenders could have demanded accelerated repayment and the Company may not have the funds to make these repayments. To ensure continued compliance with its financial covenants, in early 2017 the Company had approached its banking group and successfully agreed a waiver to increase the leverage covenant in its banking facilities to 4.5:1 to provide additional headroom through to the reporting period ending 30 June 2018, dropping back to 3.5:1 at December 2018. Should the acquisition by Wood Group not complete, the Directors would take further steps to reduce debt including consideration of further asset disposals and the reactivation of the previously proposed rights issue. The Directors have a reasonable expectation that the Company and the Group will comply with this revised covenant and will be able to operate within the level of available facilities and cash for the foreseeable future and accordingly believe that it is appropriate to prepare the financial statements on a going concern basis.

Performance measures

Profitability measures

We use three measures of profitability that are not recognised measures under IFRS: trading profit, trading margin and adjusted profit before tax. As appropriate, we exclude the following specific items in arriving at these measures: exceptional items, the amortisation and impairment of intangible assets, and asbestos-related costs (net of insurance recoveries). Exceptional items are items of income and expense that are material by their size, incidence or nature and may include, but are not restricted to: acquisition-related costs, restructuring costs, gains and losses on the disposal of fixed assets, and gains and losses on the disposal or closure of businesses. Acquisition-related costs may include transaction costs (including external advisory, legal, valuation and other professional fees and attributable internal costs), the amortisation of acquisitionrelated facility fees, payments to selling shareholders that are accounted for as remuneration and changes in the fair value of contingent consideration.

Trading profit

Trading profit represents profit before net financing expense excluding exceptional items, the amortisation and impairment of intangible assets and asbestos-related costs (net of insurance recoveries). Trading profit includes the Group’s share of the trading profit of joint ventures.

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