RNS Number : 6373G

Morgan Advanced Materials PLC

25 July 2019

Morgan Advanced Materials

Half-year results for the six months ended 30 June 2019

£ million unless otherwise stated	1H 20191	1H 20181	As reported change %	Organic constant- currency2 change %
Headline results Revenue	525.8	514.4	2.2%	1.0%
Group headline operating profit2	67.4	62.4	8.0%	3.1%
Group headline operating profit margin2	12.8%	12.1%
Headline EPS2	13.8p	13.4p	3.0%
Interim dividend per share	4.0p	4.0p
Cash generated from continuing operations	61.1	55.2	10.7%
Free cash flow before acquisitions, disposals and dividends2	11.4	20.5
Statutory results
Operating profit	63.3	58.6
Profit before tax	54.7	52.4
Cash generated from operations3	60.7	53.5
Continuing EPS4	12.4p	12.1p
Continuing and discontinued EPS4	12.4p	9.1p

1. The Group disposed of the Composites and Defence Systems business in 2018, the disposal group formed the Composites and Defence Systems operating segment and has been classified as a discontinued operation under IFRS 5. In line with the requirements of IFRS 5 all periods presented in these condensed consolidated financial statements are for continuing operations, with separate disclosure of discontinued operations where appropriate. Further details are provided in notes 2 and 7 to the condensed consolidated financial statements.

2. Definitions of these non-GAAP measures can be found in the glossary of terms on page 39, reconciliations of the statutory results to the adjusted measures can be found on pages 10 to 14.

3. Cash generated from continuing and discontinued operations.

4. EPS is presented on a 'continuing' and a combined 'continuing and discontinued' basis for statutory reporting. Further details are provided in note 8 to the condensed consolidated financial statements.

Highlights

·    Strategy implementation continuing to progress well and remains on track.

·    Revenue growth of 1.0% on an organic constant-currency* basis.

·    Group headline operating profit margin* of 12.8% an improvement of 70bps from organic revenue* growth and benefit of efficiency actions.

·    Headline EPS* growth of 3.0% reflecting improvement in operating profit.

·    The expectations of profitability for the full year remain unchanged.

Pete Raby - Chief Executive Officer:

'The Group has made good progress during the first half of the year. We are on track with the implementation of our strategy, improving our sales capability, driving new product development and improving operational performance. We have delivered organic constant-currency* revenue growth of 1.0% under more challenging end market conditions and we have expanded our headline operating margin* to 12.8%.

Looking forward into the second half of 2019 there are a number of global headwinds and uncertainties leading to a slowing of industrial markets. Based on our current assessment of business trends and orders, we expect Group revenues to be broadly flat in the second half compared to the prior year. Our expectations of profitability for the full year remain unchanged.'

Strategic progress

The Group has four execution priorities which will continue the implementation of our strategy.

We have made good progress against those priorities in the first half of 2019:

1. Drive sales effectiveness and market focus. The Group is focused on improving a number of aspects of its sales capabilities: sales processes and their efficiency, the management of key customer accounts and distribution channels, and deeper understanding of end-markets and faster-growing segments.

Throughout 2019 we have been deploying the approaches we developed in 2018 including: embedding our pricing tools across the sales teams; rolling out our sales skills training to our commercial organisation; launching our new sales incentive plans across; deploying and enhancing our customer relationship management (CRM) system and implementing a clearly defined and mapped sales process with associated leading KPIs across the business.

2. Extend technical leadership. Investment has been increased to build our technical lead and accelerate new product development, supporting the Group's emphasis on both manufacturing process and materials technology, producing materials which transform our customers' processes.

We have maintained investment levels in line with the prior year and we continue to focus our new product development efforts in our four research and development Centres of Excellence. Our development teams are focused on 5-10 priority development projects in each global business unit that deliver improved materials properties and performance to meet the needs of our customers, and expand our fundamental understanding of the characteristics of our materials as well as their performance in varied environments.

There has been good progress across our business including the development of new insulation products for our Thermal customers; further development of materials and material combinations to enhance corrosion resistance and resistivity for semiconductor manufacturing applications; continued development of our additive manufacturing capability for ceramic materials expanding the size and tolerance range of parts that we can produce. We are making good progress with a number of developments of our carbon materials for both electrical and seals and bearings applications. We are developing materials with better wear characteristics, better temperature performance and higher current carrying capabilities for a range of end markets.

       3. Increase investment in people management and development. Our objective is to strengthen our leadership capability and deepen functional capabilities across the business, including in sales and engineering.

      We have been filling the last remaining gaps in our leadership teams and working with them to strengthen their performance as teams. In 2019 we also launched new Group-wide development programmes for our future leaders at multiple levels of the organisation. These programmes are designed to develop a global network and pipeline of leaders who inspire and develop our people, drive alignment to our purpose and strategic execution priorities, and to support the leaders to drive and manage change. As part of the sales effectiveness programme, we have training programmes underway with our sales and customer service functions.

      We also continue to enhance our approach to driving higher performance by integrating our leadership behaviours into a globally consistent performance management process, creating a stronger link between performance and reward, and building the performance culture across the Group.

      4. Improve operational execution. Our objective is to strengthen our operational capabilities, reduce operational costs to fund reinvestment in the business, and improve delivery and quality performance.

      We continue to make good progress with our operational efficiency programmes, with year-to-date net savings underpinning the margin expansion seen in the first half. These savings come from a wide variety of projects in automation, global sourcing and multiple local projects designed to improve efficiency and eliminate waste across all of our global business units.

Enquiries

Pete Raby	Morgan Advanced Materials	01753 837 000
Peter Turner	Morgan Advanced Materials
Alison Lea	Brunswick	0207 404 5959

Results presentation today

There will be an analyst and investor presentation at 11.30 (UK time) today at The Lincoln Centre, 18 Lincoln's Inn Fields, London, WC2A 3ED.

A live video webcast and slide presentation of this event will be available on morganadvancedmaterials.com. We recommend you register by 11.15 (UK time).

Basis of preparation

Non-GAAP measures

Throughout this report adjusted measures are used to describe the Group's financial performance. These are not recognised under IFRS or other generally accepted accounting principles (GAAP). These measures are shown because the Directors consider they provide useful information to shareholders, including additional insight into ongoing trading and year-on-year comparisons. These non-GAAP measures should be viewed as complementary to, not replacements for, the comparable GAAP measures.

The Executive Committee and the Board manage and assess the performance of the business on these measures as they are more representative of performance, facilitate meaningful year-on-year comparisons and hence provide additional useful information to shareholders.

Throughout this report these non-GAAP measures are clearly identified by an asterisk (*) where they appear in text, and by a footnote when they appear in tables and charts. Definitions of these non-GAAP measures can be found in the glossary of terms on page 39, reconciliations of the statutory results to the adjusted measures can be found on pages 10 to 14.

The Group disposed of the Composites and Defence Systems business in 2018. The disposal group formed the Composites and Defence Systems operating segment and has been classified as a discontinued operation under IFRS 5 Non-current Assets Held For Sale and Discontinued Operations. In line with the requirements of IFRS 5 all periods presented in these condensed consolidated financial statements are for continuing operations, with separate disclosure of discontinued operations where appropriate.

Further details on the disposal of Composites and Defence Systems are provided in notes 2 and 7 on pages 23 and 30 of the condensed consolidated financial statements.

Operating review

	Revenue		Segment EBITA1		Margin
	1H 2019	1H 2018	1H 2019	1H 2018	1H 2019	1H 2018
	£m	£m	£m	£m	%	%
Thermal Ceramics	207.8	217.3	25.7	26.1	12.4%	12.0%
Molten Metal Systems	24.7	24.5	2.7	3.6	10.9%	14.7%
Thermal Products Division	232.5	241.8	28.4	29.7	12.2%	12.3%
Electrical Carbon	85.4	82.9	11.1	10.3	13.0%	12.4%
Seals and Bearings	71.1	65.6	13.4	12.1	18.8%	18.4%
Technical Ceramics	136.8	124.1	17.5	13.2	12.8%	10.6%
Carbon and Technical Ceramics Division	293.3	272.6	42.0	35.6	14.3%	13.1%
Divisional total	525.8	514.4	70.4	65.3	13.4%	12.7%
Corporate costs			(3.0)	(2.9)
Group headline operating profit1			67.4	62.4	12.8%	12.1%
Amortisation of intangible assets			(4.1)	(3.8)
Operating profit			63.3	58.6	12.0%	11.4%
Net financing costs			(8.6)	(6.6)
Share of profit of associate (net of income tax)			-	0.4
Profit before taxation			54.7	52.4

1. Definitions of these non-GAAP measures can be found in the glossary of terms on page 39, reconciliations of the statutory results to the adjusted measures can be found on pages 10 to 14.

Thermal Products Division

Revenue for Thermal Products for the six months ended 30 June 2019 was £232.5 million, representing a decrease of 3.8% compared with £241.8 million in 1H 2018. On an organic constant-currency* basis, year-on-year revenue decreased by 3.3%.

Divisional EBITA* for Thermal Products was £28.4 million (1H 2018: £29.7 million) with a Divisional EBITA* margin of 12.2% (1H 2018: 12.3%).

Revenue for Thermal Ceramics for the six months ended 30 June 2019 was £207.8 million, representing a decrease of 4.4% compared with £217.3 million in 1H 2018. On an organic constant-currency* basis, year-on-year revenue decreased by 3.8%. The year-on-year decrease in revenue was primarily driven by the automotive market segment, which declined £7.7 million (30%) from prior year, and the decline in the overall European industrial market segment. Growth was seen in the North American and Asian chemical and petrochemical (CPI) market segments as well as iron and steel.

EBITA* for Thermal Ceramics for the six months ended 30 June 2019 was £25.7 million (1H 2018: £26.1 million) with EBITA margin* of 12.4% (1H 2018: 12.0%). The year-on-year margin improvement was driven by prior year plant closures and operational efficiencies.

Revenue for Molten Metals Systems for the six months ended 30 June 2019 was £24.7 million, representing an increase of 0.8% compared with £24.5 million in 1H 2018. On an organic constant-currency* basis, year-on-year revenue increased by 0.4%. The core crucibles business growth was primarily driven by good performance in India and South America, offsetting automotive industry driven demand decline in China, North America and Europe. Industrial equipment sales increased globally into the precious metals fire assay markets.

EBITA* for Molten Metals Systems for the six months ended 30 June 2019 was £2.7 million (1H 2018: £3.6 million) with EBITA margin* of 10.9% (1H 2018: 14.7%). During 2019 margin was impacted by one-off restructuring costs, as well as the annualised impact of prior year planned investments in technology, product development and sales capability, designed to improve the future prospects of the business.

Carbon and Technical Ceramics Division

Revenue for the Carbon and Technical Ceramics Division for the six months ended 30 June 2019 was £293.3 million, representing an increase of 7.6% compared with £272.6 million in 1H 2018. On an organic constant-currency* basis, year-on-year revenue increased 4.6%.

Divisional EBITA* for the Carbon and Technical Ceramics Division was £42.0 million (1H 2018: £35.6 million) with Divisional EBITA margin* of 14.3% (1H 2018: 13.1%).

Revenue for Electrical Carbon for the six months ended 30 June 2019 was £85.4 million, representing an increase of 3.0% compared with £82.9 million in 1H 2018. On an organic constant-currency* basis, year-on-year revenue increased by 2.0%.

The year-on-year growth was driven primarily by the wind and semiconductor market segments. On a regional basis, Europe achieved strong sales into the semiconductor market segment and also from sales of carbon collector strip products for electrified rail applications, supported by recent investments. Within North America products for diesel-electric locomotives in the rail market were negatively impacted by the general industrial slowdown in the region, this was partially mitigated by growth in products supporting power generation applications in the growing wind market. Sales in Asia were impacted by slowing general industrial output.

EBITA* for Electrical Carbon for the six months ended 30 June 2019 was £11.1 million (1H 2018: £10.3 million) with an EBITA margin* of 13.0% (1H 2018: 12.4%), reflecting the benefit of revenue growth supported by operational efficiency actions.

Revenue for Seals and Bearings for the six months ended 30 June 2019 was £71.1 million, representing an increase of 8.4% compared with £65.6 million in 1H 2018. On an organic constant-currency* basis year-on-year revenue increased by 5.2%. Revenue growth was driven by the petrochemical, healthcare and ceramic armour market segments, partially offset by some contraction in the Asian domestic heating circulating pumps end market caused by demand outpacing local infrastructure capabilities, and decline in the automotive market segment. In a continuation of the contracts awarded in 2017, sales of ceramic armour increased to £15 million in 1H 2019 (1H 2018: £11 million).

EBITA* for Seals and Bearings for the six months ended 30 June 2019 was £13.4 million (1H 2018: £12.1 million) with an EBITA margin* of 18.8% (1H 2018: 18.4%). The increase in volume and a continued strong continuous improvement projects pipeline yielded incremental savings, which offset cost inflation and investments in its sales and operations teams, research and development and targeted functional capabilities in support of its growth strategy.

Revenue for Technical Ceramics for the six months ended 30 June 2019 was £136.8 million, an increase of 10.2% compared with £124.1 million in 1H 2018. On an organic constant-currency* basis, year-on-year revenue increased by 6.0% primarily driven by demand increases for ceramic cores in the aerospace market, the supply of ceramic parts into the semiconductor and medical markets, and growth in the renewable energy market segment.

EBITA* for Technical Ceramics for the six months ended 30 June 2019 was £17.5 million (1H 2018: £13.2 million) with an EBITA margin* of 12.8% (1H 2018: 10.6%). Margins expanded due to the benefit of higher volume, operational efficiencies, and the implementation of the new lease accounting standard, IFRS 16.

Group financial review

Group revenue for the six months ended 30 June 2019 was £525.8 million (1H 2018: £514.4 million), an increase of 2.2% on a reported basis compared with 1H 2018, driven by improvements in the underlying business and foreign exchange. On an organic constant-currency* basis revenue increased by 1.0%.

Group headline operating profit* for the six months ended 30 June 2019 was £67.4 million (1H 2018: £62.4 million). Headline operating profit* margin was 12.8%, compared to 12.1% for 1H 2018.

Operating profit was £63.3 million (1H 2018: £58.6 million) and profit before tax was £54.7 million (1H 2018: £52.4 million). There were no specific adjusting items in either six month period.

The net finance charge was £8.6 million (1H 2018: £6.6 million), primarily comprising net bank interest and similar charges of £4.8 million (1H 2018: £4.2 million), the IAS 19 (revised) finance charge, being the interest charge on pension scheme net liabilities, of £2.3 million (1H 2018: £2.4 million), and the interest charge on the Group's lease liabilities of £1.5 million (1H 2018: £nil), following the implementation of IFRS 16 Leases.

The Group amortisation charge was £4.1 million (1H 2018: £3.8 million), with the higher year-on-year charge driven by the amortisation of computer software.

The Group tax charge was £15.3 million (1H 2018: £14.4 million). The effective tax rate was 28.0% (1H 2018: 27.5%). Further information is provided in note 6 on page 29 to the condensed consolidated financial statements.

We anticipate that the effective tax rate will remain at around 28% for the full year, with cash tax paid slightly higher than the charge to the income statement.

Headline earnings per share* was 13.8 pence (1H 2018: 13.4 pence) and basic earnings per share from continuing operations was 12.4 pence (1H 2018: 12.1 pence). Details of these calculations can be found in note 8 to the condensed consolidated financial statements on page 31.

Specific adjusting items

For the six month periods ended 30 June 2019 and 2018 there were no specific adjusting items.

Cash flow

	1H 2019 £m	1H 2018 £m
Cash generated from continuing operations	61.1	55.2
Capital expenditure	(29.2)	(23.1)
Net interest	(6.1)	(4.1)
Tax paid	(14.4)	(7.5)
Free cash flow before acquisitions, disposals and dividends1	11.4	20.5
Dividends paid to external plc shareholders	(19.9)	(20.0)
Net cash flows from other investing and financing activities	(1.7)	(1.3)
Net cash flows from divestments and discontinued operations	0.3	(1.7)
Exchange movement and other non-cash movements	(5.6)	(4.4)
Movement in net debt1 in period	(15.5)	(6.9)
Opening net debt1	(180.0)	(181.3)
Impact of change in accounting policy (IFRS 16 Leases)	(67.4)	-
Closing net debt1	(262.9)	(188.2)

1. Definitions of these non-GAAP measures can be found in the glossary of terms on page 39, reconciliations of the statutory results to the adjusted measures can be found on pages 10 to 14.

Cash generated from continuing operations was £61.1 million (1H 2018: £55.2 million), an improvement on 2018 driven by cash generated from operations, partially offset by movements in working capital.

Free cash flow before acquisitions, disposals and dividends* was £11.4 million (1H 2018: £20.5 million), with the increase in cash generated from operations offset by increased capital expenditure and higher cash tax paid compared to 2018, which benefitted by the one-off US pension contribution in December 2017.

Net debt* was £262.9 million (1H 2018: £188.2 million). Net debt* excluding lease liabilities was £193.9 million (1H 2018: £187.8 million), representing a net debt*(excluding lease liabilities) to EBITDA* ratio of 1.2x (1H 2018: 1.2x). Further information on the Group's net debt* is provided on page 13 and within note 11 to the condensed consolidated financial statements on page 33.

Defined benefit pension plans

The Group pension deficit has increased by £5.2 million since last year end to £195.6 million (FY 2018: £190.4 million) on an IAS 19 (revised) basis as a result of the lower European discount rates.  

·      The UK schemes deficit increased by £0.1 million to £140.2 million, (discount rate 2019 2.22%; FY 2018 2.74%).

·      The US schemes deficit increased by £0.5 million to £9.3 million, (discount rate 2019 3.53%; FY 2018 4.34%).

·      The European schemes deficit increased by £4.2 million to £41.1 million, (discount rate 2019 1.00%; FY 2018 1.70%).

·      The Rest of World schemes deficit increased by £0.4 million to £5.0 million, (discount rate 2019 2.10%; FY 2018 2.60%).

Note 13 to the condensed consolidated financial statements, on pages 35 to 36, provides additional information on the Group's pension schemes.

Foreign exchange

The principal exchange rates used in the translation of the results of overseas subsidiaries were as follows:

	1H 2019		1H 2018
GBP to:	Closing rate	Average rate	Closing rate	Average rate
US dollar	1.27	1.29	1.32	1.38
Euro	1.12	1.15	1.13	1.14

For illustrative purposes, the table below provides details of the impact on first half 2019 revenue and Group headline operating profit* if the actual reported results, calculated using 2019 average exchange rates for the six months ended 30 June 2019 were restated for GBP weakening by 10 cents against USD in isolation and 10 cents against the Euro in isolation:

Increase in first half 2019 revenue/Group headline operating profit1 if:	Revenue £m	Group headline operating profit1 £m
GBP weakens by 10c against the US dollar in isolation	+19.6	+3.2
GBP weakens by 10c against the Euro in isolation	+9.9	+1.5

1. Definitions of these non-GAAP measures can be found in the glossary of terms on page 39, reconciliations of the statutory results to the adjusted measures can be found on pages 10 to 14.

Interim dividend

The Board has resolved to pay an interim dividend of 4.0 pence per Ordinary share. The interim dividend will be paid on 22 November 2019 to Ordinary shareholders on the register of members at the close of business on 1 November 2019.

Principal risks and uncertainties

The Group has an established risk management methodology, which seeks to identify, prioritise and mitigate risks, underpinned by a 'three lines of defence' model comprising of an internal control framework, monitoring and independent assurance processes. The Board considers that risk management and internal control are fundamental to achieving the Group aim of creating long-term sustainable shareholder value.

The current risks, representing those risks that the Board feels could have the most significant impact on achieving the Group's strategy of building a sustainable business for the long-term and delivering strong returns to the Group's shareholders, are set out in the 2018 Annual Report, which is available on the Group's website at morganadvancedmaterials.com.

The Group has reviewed these risks and concluded that they adequately represent the current principal risks and uncertainties of the Group and will continue to remain relevant for the second half of the financial year.

The following are the Group's principal risks and uncertainties: technical leadership; operational execution, organisational change and sales effectiveness; portfolio management; macro-economic and political environment; environment, health and safety; product quality, safety and liability; IT and cyber security; supply chain and business continuity; treasury and tax; pension funding; contract management; and compliance.

The current economic climate continues to have an impact on the Group, its customers and its suppliers. The UK's exit from the European Union (EU) may have an impact on the Group if subsequent tariff changes, or border effects, negatively impact the profitability of the Group's products or the ability to manufacture or distribute products on a timely basis. However, given the current value of the Group's UK exports to the EU (ca. £25 million in 2018) and imports into the UK from the EU (ca. £15 million in 2018), it is not considered that this will have a significant impact overall on the Group's liquidity or operations.

The Board reviews the status of all principal risks with a notable potential impact at Group level throughout the year. Additionally, the Audit Committee carries out focused risk reviews of each Division. These reviews include an analysis of principal risks, together with the controls, monitoring and assurance processes established to mitigate those risks to acceptable levels.

Going concern

As reported on pages 20, 29-30, and 116-124 of the 2018 Annual Report and Accounts, the Group meets its day-to-day working capital requirements through local banking arrangements and the committed £200 million unsecured five-year multi-currency revolving credit facility.

The Group's forecasts and projections, taking account of reasonably possible changes in trading performance, show that the Group is able to operate within the level of its committed facilities. The Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for a period of 12-months from the date of this Statement. Accordingly, they continue to adopt the going concern basis in preparing the condensed consolidated financial statements for the six months ended 30 June 2019.

Directors' Responsibility Statement

The Directors confirm that to the best of their knowledge:

·      The condensed consolidated financial statements have been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the European Union;

·      The interim management report includes a fair review of the information required by:

(a) DTR 4.2.7R of the Disclosure Guidance and Transparency Rules of the Financial Conduct Authority, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed consolidated financial statements; and a description of the principal risks and uncertainties for the remaining six months of the year; and

(b) DTR 4.2.8R of the Disclosure Guidance and Transparency Rules, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the entity during that period; and any changes in the related party transactions described in the last annual report that could do so.

Information on the current directors of Morgan Advanced Materials plc responsible for providing this Statement is maintained on the Company's website at morganadvancedmaterials.com.

By order of the Board

Pete Raby

Chief Executive Officer

Peter Turner

Chief Financial Officer  

25 July 2019

Definitions and reconciliations of non-GAAP to GAAP measures

Reference is made to the following non-GAAP measures throughout this document. These measures are shown because the Directors consider they provide useful information to shareholders, including additional insight into ongoing trading and year-on-year comparisons. These non-GAAP measures should be viewed as complementary to, not replacements for, the comparable GAAP measures. As defined in the basis of preparation on page 4, these measures are calculated on a continuing basis.

Headline profit and earnings measures

Group headline operating profit is stated before specific adjusting items and amortisation of intangible assets. Specific adjusting items are excluded on the basis that they distort trading performance. For the six month periods ended 30 June 2019 and 2018 there were no specific adjusting items. Amortisation is excluded as the charge arises primarily on externally acquired intangible assets since the adoption of IFRS and does not therefore reflect all intangible assets consistently.

Earnings before interest, tax and amortisation (EBITA) is stated before specific adjusting items and amortisation of intangible assets. Segment EBITA is stated before unallocated corporate costs.

	Thermal Ceramics £m	Molten Metal Systems £m	Thermal Products Division £m	Electrical Carbon £m	Seals and Bearings £m	Technical Ceramics £m	Carbon and Technical Ceramics Division  £m	Segment  total £m	Corporate costs1 £m	Group £m
Operating profit/(loss)	24.6	2.5	27.1	10.7	13.2	15.3	39.2	66.3	(3.0)	63.3
Add back: amortisation of intangible assets	1.1	0.2	1.3	0.4	0.2	2.2	2.8	4.1	-	4.1
Group headline operating profit										67.4
Corporate costs1									3.0	3.0
1H 2019 EBITA	25.7	2.7	28.4	11.1	13.4	17.5	42.0	70.4

1.Corporate costs consist of the cost of the central head office.

	Thermal Ceramics £m	Molten Metal Systems £m	Thermal Products Division £m	Electrical Carbon £m	Seals and Bearings £m	Technical Ceramics £m	Carbon and Technical Ceramics Division  £m	Segment total £m	Corporate costs1 £m	Group £m
Operating profit/(loss)	25.1	3.5	28.6	9.9	11.9	11.1	32.9	61.5	(2.9)	58.6
Add back: amortisation of intangible assets	1.0	0.1	1.1	0.4	0.2	2.1	2.7	3.8	-	3.8
Group headline operating profit										62.4
Corporate costs1									2.9	2.9
1H 2018 EBITA	26.1	3.6	29.7	10.3	12.1	13.2	35.6	65.3

1.Corporate costs consist of the cost of the central head office.

Group organic growth

Group organic growth is the growth of the business excluding the impact of acquisitions, divestments, business exits and foreign currency. This measure is used as it allows revenue and EBITA to be compared on a like-for-like basis.

Commentary on the underlying business performance is included as part of the operational review on pages 4 to 6.

Year-on-year movements in segment revenue

	Thermal Ceramics	Molten Metal Systems	Thermal Products Division	Electrical Carbon	Seals and Bearings	Technical Ceramics	Carbon and Technical Ceramics Division	Segment total
	£m	£m	£m	£m	£m	£m	£m	£m
1H 2018 revenue	217.3	24.5	241.8	82.9	65.6	124.1	272.6	514.4
Impact of foreign currency movements	0.3	0.1	0.4	0.8	2.0	4.9	7.7	8.1
Impact of disposals and business exits	(1.7)	-	(1.7)	-	-	-	-	(1.7)
Organic constant-currency change	(8.1)	0.1	(8.0)	1.7	3.5	7.8	13.0	5.0
Organic constant-currency change %	(3.8)%	0.4%	(3.3)%	2.0%	5.2%	6.0%	4.6%	1.0%
1H 2019 revenue	207.8	24.7	232.5	85.4	71.1	136.8	293.3	525.8

Year-on-year movements in segment and Group EBITA

	Thermal Ceramics	Molten Metal Systems	Thermal Products Division	Electrical Carbon	Seals and Bearings	Technical Ceramics	Carbon and Technical Ceramics Division	Segment total	Corporate costs1	Group
	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m
2018 EBITA	26.1	3.6	29.7	10.3	12.1	13.2	35.6	65.3	(2.9)	62.4
Impact of foreign currency movements	(0.3)	-	(0.3)	0.1	0.6	0.6	1.3	1.0	-	1.0
Impact of disposals and business exits	1.9	-	1.9	-	-	0.1	0.1	2.0	-	2.0
Organic constant-currency change	(2.0)	(0.9)	(2.9)	0.7	0.7	3.6	5.0	2.1	(0.1)	2.0
Organic constant-currency change %	(7.2)%	(25.0)%	(9.3)%	6.7%	5.5%	25.9%	13.5%	3.1%	(3.4)%	3.1%
2019 EBITA	25.7	2.7	28.4	11.1	13.4	17.5	42.0	70.4	(3.0)	67.4

1.Corporate costs consist of the cost of the central head office.

Group EBITDA

Group EBITDA is defined as operating profit before specific adjusting items, depreciation and amortisation of intangible assets. The Group uses this measure as it is a key metric in covenants over debt facilities. A reconciliation of operating profit to Group EBITDA is as follows:

	1H 2019 £m	1H 2018 £m
Operating profit	63.3	58.6
Add back: depreciation - property, plant and equipment	15.9	15.4
Add back: depreciation - right-of-use assets	4.7	-
Add back: amortisation of intangible assets	4.1	3.8
Group EBITDA	88.0	77.8

Free cash flow before acquisitions, disposals and dividends

Free cash flow before acquisitions, disposals and dividends is defined as cash generated from continuing operations less capital expenditure, net interest (interest paid on borrowings, overdrafts and lease liabilities, net of interest received) and tax paid.

The Group discloses this measure of free cash flow as this provides readers of the condensed consolidated financial statements with a measure of the cash flows from the business before corporate level cash flows (acquisitions, disposals and dividends).

A reconciliation of cash generated from continuing operations to free cash flow before acquisitions, disposals and dividends is as follows:

	1H 2019 £m	1H 2018 £m
Cash generated from continuing operations	61.1	55.2
Capital expenditure	(29.2)	(23.1)
Net interest	(6.1)	(4.1)
Tax paid	(14.4)	(7.5)
Free cash flow before acquisitions, disposals and dividends	11.4	20.5

Net debt

Net debt is defined as borrowings, bank overdrafts and lease liabilities, less cash and cash equivalents. The Group also discloses this metric excluding lease liabilities as this is the measure used in the covenants over the Group's debt facilities.

	1H 2019 £m	1H 2018 £m
Cash and cash equivalents	59.7	58.9
Non-current borrowings	(184.9)	(195.6)
Current borrowings and bank overdrafts	(68.7)	(51.1)
Lease liabilities	(69.0)	(0.4)
Net debt	(262.9)	(188.2)
Net debt excluding lease liabilities	(193.9)	(187.8)

Return on invested capital

Return on invested capital (ROIC) is defined as the 12-month Group headline operating profit (operating profit excluding specific adjusting items and amortisation of intangible assets) divided by the 12-month average adjusted net assets (third-party working capital, plant and equipment, land and buildings, right-of-use assets, intangible assets and other balance sheet items). This measure excludes long-term employee benefits, deferred tax assets and liabilities, current tax payable, provisions, cash and cash equivalents, borrowings and lease liabilities.

	1H 2019 £m	1H 2018 £m
Operating profit	121.4	114.0
Add back: amortisation of intangible assets	8.3	7.6
Group headline operating profit (12-month rolling)	129.7	121.6
12-month average adjusted net assets:
Third-party working capital	177.3	166.6
Plant and equipment	187.6	176.2
Land and buildings	120.8	115.1
Right-of-use assets	24.7	-
Intangible assets	213.7	213.8
Other assets (net)	10.8	9.5
12-month average adjusted net assets	734.9	681.2
ROIC	17.6%	17.9%

Headline earnings per share

Headline earnings per share is defined as operating profit adjusted to exclude specific adjusting items and amortisation of intangible assets, plus share of profit of associate less net financing costs, income tax expense and non-controlling interests, divided by the weighted average number of Ordinary shares during the period. This measure of earnings is shown because the Directors consider it provides a better indication of headline performance.

Whilst amortisation of intangible assets is a recurring charge it is excluded from these measures on the basis that it primarily arises on externally acquired intangible assets and therefore does not reflect consistently the benefit that all of Morgan's businesses realise from their intangible assets, which may not be recognised separately.

Constant-currency revenue and Group headline operating profit

Constant-currency revenue and Group headline operating profit are derived by translating the prior year results at current year average exchange rates. These measures are used as they allow revenue to be compared excluding the impact of foreign exchange rates. Page 8 provides further information on the principal foreign currency exchange rates used in the translation of the Group's results to constant-currency at average exchange rates.

Condensed Consolidated Financial Statements

  for the six months ended 30 June 2019

       Condensed consolidated income statement

		Six months ended 30 June 2019				Restated six months ended 30 June 20181				Year ended 31 December 2018
		Results before specific adjusting items	Specific adjusting items2	Total		Results before specific adjusting items	Specific adjusting items2	Total		Results before specific adjusting items	Specific adjusting items2	Total
	Note	£m	£m	£m		£m	£m	£m		£m	£m	£m
Revenue	3	525.8	-	525.8		514.4	-	514.4		1,033.9	-	1,033.9
Operating costs before amortisation of intangible assets		(458.4)	-	(458.4)		(452.0)	-	(452.0)		(909.1)	(9.5)	(918.6)
Profit from operations before amortisation of intangible assets	3	67.4	-	67.4		62.4	-	62.4		124.8	(9.5)	115.3
Amortisation of intangible assets		(4.1)	-	(4.1)		(3.8)	-	(3.8)		(8.0)	-	(8.0)
Operating profit	3	63.3	-	63.3		58.6	-	58.6		116.8	(9.5)	107.3
Finance income		0.6	-	0.6		0.5	-	0.5		1.3	-	1.3
Finance expense		(9.2)	-	(9.2)		(7.1)	-	(7.1)		(14.5)	-	(14.5)
Net financing costs	5	(8.6)	-	(8.6)		(6.6)	-	(6.6)		(13.2)	-	(13.2)
Share of profit of associate (net of income tax)		-	-	-		0.4	-	0.4		0.8	-	0.8
Profit before taxation		54.7	-	54.7		52.4	-	52.4		104.4	(9.5)	94.9
Income tax expense	6	(15.3)	-	(15.3)		(14.4)	-	(14.4)		(29.0)	(1.7)	(30.7)
Profit from continuing operations		39.4	-	39.4		38.0	-	38.0		75.4	(11.2)	64.2
Loss from discontinued operations1	7	-	-	-		(0.9)	(7.6)	(8.5)		(1.4)	(9.3)	(10.7)
Profit for the period		39.4	-	39.4		37.1	(7.6)	29.5		74.0	(20.5)	53.5
Profit for the period attributable to:
Shareholders of the Company		35.3	-	35.3		33.5	(7.6)	25.9		66.8	(20.5)	46.3
Non-controlling interests		4.1	-	4.1		3.6	-	3.6		7.2	-	7.2
		39.4	-	39.4		37.1	(7.6)	29.5		74.0	(20.5)	53.5
Earnings per share	8
Continuing operations and discontinued operations
Basic earnings per share				12.4p				9.1p				16.2p
Diluted earnings per share				12.3p				9.0p				16.1p
Continuing operations
Basic earnings per share				12.4p				12.1p				20.0p
Diluted earnings per share				12.3p				12.0p				19.9p
Dividends3
Proposed interim dividend - pence				4.0p				4.0p				4.0p
- £m				11.4				11.4				11.4
Final dividend                     - pence												7.0p
- £m												20.0

1.  The Group disposed of the Composites and Defence Systems business in 2018, the disposal group formed the Composites and Defence Systems operating segment and has been classified as a discontinued operation under IFRS 5. In line with the requirements of IFRS 5 all periods presented in these condensed consolidated financial statements are for continuing operations, with separate disclosure of discontinued operations where appropriate. Further details are provided in notes 2 and 7 to the condensed consolidated financial statements.

2.   Details of specific adjusting items are given in note 4 to the condensed consolidated financial statements.

3.  The proposed interim and approved final dividends are based upon the number of shares outstanding at the balance sheet date.

Condensed consolidated statement of comprehensive income

	Translation reserve	Hedging reserve	Retained earnings	Total parent comprehensive income	Non- controlling interests	Total comprehensive income
	£m	£m	£m	£m	£m	£m
Six months ended 30 June 2019
Profit for the period	-	-	35.3	35.3	4.1	39.4
Items that will not be reclassified subsequently to profit or loss:
Remeasurement loss on defined benefit plans		-	(9.8)	(9.8)	-	(9.8)
Tax effect of components of other comprehensive income not reclassified	-	-	1.6	1.6	-	1.6
	-	-	(8.2)	(8.2)	-	(8.2)
Items that may be reclassified subsequently to profit or loss:
Foreign exchange translation differences	1.3	-	-	1.3	0.3	1.6
Cash flow hedges:
Change in fair value	-	0.1	-	0.1	-	0.1
Transferred to profit or loss	-	0.1	-	0.1	-	0.1
	1.3	0.2	-	1.5	0.3	1.8
Total comprehensive income, net of tax	1.3	0.2	27.1	28.6	4.4	33.0
Total comprehensive income attributable to:
Continuing operations	1.3	0.2	27.1	28.6	4.4	33.0
Discontinued operations	-	-	-	-	-	-
Total comprehensive income, net of tax attributable to shareholders of the Company	1.3	0.2	27.1	28.6	4.4	33.0
Year ended 31 December 2018
Profit for the period	-	-	46.3	46.3	7.2	53.5
Items that will not be reclassified subsequently to profit or loss:
Remeasurement gain on defined benefit plans	-	-	14.2	14.2	-	14.2
Tax effect of components of other comprehensive income not reclassified	-	-	(0.7)	(0.7)	-	(0.7)
	-	-	13.5	13.5	-	13.5
Items that may be reclassified subsequently to profit or loss:
Foreign exchange translation differences	9.9	-	-	9.9	0.2	10.1
Cash flow hedges:
Change in fair value	-	(0.2)	-	(0.2)	-	(0.2)
Transferred to profit or loss	-	(0.5)	-	(0.5)	-	(0.5)
	9.9	(0.7)	-	9.2	0.2	9.4
Total comprehensive income, net of tax	9.9	(0.7)	59.8	69.0	7.4	76.4
Total comprehensive income/(expense) attributable to:
Continuing operations	9.9	(0.7)	70.5	79.7	7.4	87.1
Discontinued operations	-	-	(10.7)	(10.7)	-	(10.7)
Total comprehensive income, net of tax attributable to shareholders of the Company	9.9	(0.7)	59.8	69.0	7.4	76.4

Condensed consolidated statement of comprehensive income (continued)

	Translation reserve	Hedging reserve	Retained earnings	Total parent comprehensive income	Non- controlling interests	Total comprehensive income
	£m	£m	£m	£m	£m	£m
Six months ended 30 June 2018
Profit for the period	-	-	25.9	25.9	3.6	29.5
Items that will not be reclassified subsequently to profit or loss:
Remeasurement gain on defined benefit plans	-	-	22.8	22.8	-	22.8
Tax effect of components of other comprehensive income not reclassified	-	-	(0.5)	(0.5)	-	(0.5)
	-	-	22.3	22.3	-	22.3
Items that may be reclassified subsequently to profit or loss:
Foreign exchange translation differences	(1.5)	-	-	(1.5)	(0.2)	(1.7)
Cash flow hedges:
Change in fair value	-	(0.2)	-	(0.2)	-	(0.2)
Transferred to profit or loss	-	(0.4)	-	(0.4)	-	(0.4)
	(1.5)	(0.6)	-	(2.1)	(0.2)	(2.3)
Total comprehensive income, net of tax	(1.5)	(0.6)	48.2	46.1	3.4	49.5
Total comprehensive income/(expense) attributable to:
Continuing operations	(1.5)	(0.6)	56.7	54.6	3.4	58.0
Discontinued operations	-	-	(8.5)	(8.5)	-	(8.5)
Total comprehensive income, net of tax attributable to shareholders of the Company	(1.5)	(0.6)	48.2	46.1	3.4	49.5

      Condensed consolidated balance sheet

	Note	30 June 2019	30 June 20181	31 December 20181
		£m	£m	£m
Assets
Property, plant and equipment	9	321.1	296.4	314.5
Right-of-use assets		52.0	-	-
Intangible assets	10	213.8	214.8	215.6
Investments		5.9	6.8	5.9
Other receivables		5.1	6.0	6.3
Deferred tax assets		12.5	9.3	6.9
Total non-current assets		610.4	533.3	549.2
Inventories		152.7	152.1	145.3
Derivative financial assets		0.3	0.9	0.6
Trade and other receivables		208.9	204.9	200.5
Current tax receivable		0.9	2.8	1.3
Cash and cash equivalents	11	59.7	58.9	67.6
Total current assets		422.5	419.6	415.3
Total assets		1,032.9	952.9	964.5
Liabilities
Borrowings		184.9	195.6	164.8
Lease liabilities		57.2	-	-
Employee benefits: pensions	13	195.6	191.2	190.4
Provisions	14	8.5	11.1	10.1
Non-trade payables		2.5	3.1	2.5
Deferred tax liabilities		10.8	10.9	11.0
Total non-current liabilities		459.5	411.9	378.8
Borrowings and bank overdrafts		68.7	51.1	82.6
Lease liabilities		11.8	0.4	0.2
Trade and other payables		178.7	190.3	190.5
Current tax payable		27.0	26.6	26.0
Provisions	14	9.5	7.6	8.6
Derivative financial liabilities		0.5	1.1	0.6
Total current liabilities		296.2	277.1	308.5
Total liabilities		755.7	689.0	687.3
Total net assets		277.2	263.9	277.2
Equity
Share capital		71.8	71.8	71.8
Share premium		111.7	111.7	111.7
Reserves		38.7	37.2	37.2
Retained earnings		9.0	1.4	12.1
Total equity attributable to shareholders of the Company		231.2	222.1	232.8
Non-controlling interests		46.0	41.8	44.4
Total equity		277.2	263.9	277.2

1.  Borrowings on the comparative balance sheets have been re-presented to disaggregate lease liabilities and align with the current period. See note 1 to the condensed consolidated financial statements for more information on IFRS 16 Leases.

Condensed consolidated statement of changes in equity

	Share capital	Share premium	Translation reserve	Hedging reserve	Fair value reserve	Capital redemption reserve	Other reserves	Retained earnings	Total parent equity	Non- controlling interests	Total equity
	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m
Balance at 1 January 2018	71.8	111.7	(7.8)	0.5	(1.0)	35.7	11.8	(27.5)	195.2	39.1	234.3
Profit for the period	-	-	-	-	-	-	-	25.9	25.9	3.6	29.5
Other comprehensive income	-	-	(1.5)	(0.6)	-	-	-	22.3	20.2	(0.2)	20.0
Transactions with owners:
Transfer between reserves	-	-	-	-	-	-	0.1	(0.1)	-	-	-
Dividends	-	-	-	-	-	-	-	(20.0)	(20.0)	(0.7)	(20.7)
Equity-settled share-based payment transactions	-	-	-	-	-	-	-	1.1	1.1	-	1.1
Own shares acquired for share incentive schemes	-	-	-	-	-	-	-	(0.3)	(0.3)	-	(0.3)
Balance at 30 June 2018	71.8	111.7	(9.3)	(0.1)	(1.0)	35.7	11.9	1.4	222.1	41.8	263.9
Balance at 1 January 2018	71.8	111.7	(7.8)	0.5	(1.0)	35.7	11.8	(27.5)	195.2	39.1	234.3
Profit for the period	-	-	-	-	-	-	-	46.3	46.3	7.2	53.5
Other comprehensive income	-	-	9.9	(0.7)	-	-	-	13.5	22.7	0.2	22.9
Transactions with owners:
Capital contributions by non-controlling interests	-	-	-	-	-	-	-	-	-	0.5	0.5
Transfer between reserves	-	-	-	-	-	-	(11.2)	11.2	-	-	-
Dividends	-	-	-	-	-	-	-	(31.4)	(31.4)	(2.6)	(34.0)
Equity-settled share-based payment transactions	-	-	-	-	-	-	-	2.8	2.8	-	2.8
Own shares acquired for share incentive schemes	-	-	-	-	-	-	-	(2.8)	(2.8)	-	(2.8)
Balance at 31 December 2018	71.8	111.7	2.1	(0.2)	(1.0)	35.7	0.6	12.1	232.8	44.4	277.2
Balance at 1 January 2019 as previously reported	71.8	111.7	2.1	(0.2)	(1.0)	35.7	0.6	12.1	232.8	44.4	277.2
Impact of change in accounting policy, net of tax	-	-	-	-	-	-	-	(12.2)	(12.2)	-	(12.2)
Adjusted balance at 1 January 2019	71.8	111.7	2.1	(0.2)	(1.0)	35.7	0.6	(0.1)	220.6	44.4	265.0
Profit for the period	-	-	-	-	-	-	-	35.3	35.3	4.1	39.4
Other comprehensive income	-	-	1.3	0.2	-	-	-	(8.2)	(6.7)	0.3	(6.4)
Transactions with owners:
Dividends	-	-	-	-	-	-	-	(19.9)	(19.9)	(2.8)	(22.7)
Equity-settled share-based payment transactions	-	-	-	-	-	-	-	1.6	1.6	-	1.6
Own shares acquired for share incentive schemes	-	-	-	-	-	-	-	0.3	0.3	-	0.3
Balance at 30 June 2019	71.8	111.7	3.4	-	(1.0)	35.7	0.6	9.0	231.2	46.0	277.2

 

Condensed consolidated statement of cash flows

		Six months ended 30 June 2019				Six months ended 30 June 2018				Year ended 31 December 2018
		Continuing	Discontinued	Total		Continuing	Discontinued	Total		Continuing	Discontinued	Total
	Note	£m	£m	£m		£m	£m	£m		£m	£m	£m
Operating activities
Profit for the period		39.4	-	39.4		38.0	(8.5)	29.5		64.2	(10.7)	53.5
Adjustments for:
Depreciation - property, plant and equipment	3	15.9	-	15.9		15.4	0.3	15.7		31.3	0.4	31.7
Depreciation - right-of-use assets	3	4.7	-	4.7		-	-	-		-	-	-
Amortisation	3	4.1	-	4.1		3.8	-	3.8		8.0	-	8.0
Net financing costs	5	8.6	-	8.6		6.6	-	6.6		13.2	-	13.2
Loss on disposal of businesses	2,7	-	-	-		-	-	-		-	1.7	1.7
Non-cash specific adjusting items included in operating           profit	4,7	-	-	-		-	2.0	2.0		6.5	1.5	8.0
Share of profit from associate (net of income tax)		-	-	-		(0.4)	-	(0.4)		(0.8)	-	(0.8)
(Profit)/loss on sale of property, plant and equipment		-	-	-		(0.1)	-	(0.1)		0.4	-	0.4
Income tax expense	6	15.3	-	15.3		14.4	-	14.4		30.7	-	30.7
Equity-settled share-based payment expenses		1.2	-	1.2		0.9	-	0.9		2.8	-	2.8
Cash generated from operations before changes in working capital and provisions		89.2	-	89.2		78.6	(6.2)	72.4		156.3	(7.1)	149.2
(Increase)/decrease in trade and other receivables		(6.3)	-	(6.3)		(9.5)	(0.1)	(9.6)		(7.2)	(0.1)	(7.3)
(Increase)/decrease in inventories		(7.2)	-	(7.2)		(11.5)	-	(11.5)		(4.2)	(0.7)	(4.9)
Increase/(decrease) in trade and other payables		(6.7)	-	(6.7)		5.5	(0.7)	4.8		1.7	(1.4)	0.3
Increase/(decrease) in provisions		(1.7)	(0.4)	(2.1)		(1.4)	5.3	3.9		(2.4)	6.3	3.9
Payments to defined benefit pension plans	13	(6.2)	-	(6.2)		(6.5)	-	(6.5)		(12.9)	-	(12.9)
Cash generated from operations		61.1	(0.4)	60.7		55.2	(1.7)	53.5		131.3	(3.0)	128.3
Interest paid - borrowings and overdrafts	11	(5.3)	-	(5.3)		(4.6)	-	(4.6)		(9.7)	-	(9.7)
Interest paid - lease liabilities	11	(1.5)	-	(1.5)		-	-	-		-	-	-
Income tax paid		(14.4)	-	(14.4)		(7.5)	-	(7.5)		(20.9)	-	(20.9)
Net cash from operating activities		39.9	(0.4)	39.5		43.1	(1.7)	41.4		100.7	(3.0)	97.7
Investing activities
Purchase of property, plant and equipment and software		(29.2)	-	(29.2)		(23.1)	-	(23.1)		(53.1)	-	(53.1)
Purchase of investments		(0.5)	-	(0.5)		(0.5)	-	(0.5)		(1.0)	-	(1.0)
Disposal of investments		-	-	-		-	-	-		0.6	-	0.6
Proceeds from sale of property, plant and equipment		1.3	-	1.3		0.1	-	0.1		-	-	-
Loan made to associate	15	-	-	-		(1.0)	-	(1.0)		(1.0)	-	(1.0)
Loan repaid by associate	15	-	-	-		1.0	-	1.0		1.0	-	1.0
Interest received		0.7	-	0.7		0.5	-	0.5		1.3	-	1.3
Disposal of subsidiaries, net of cash disposed		-	0.7	0.7		-	-	-		-	1.9	1.9
Net cash from investing activities		(27.7)	0.7	(27.0)		(23.0)	-	(23.0)		(52.2)	1.9	(50.3)
Financing activities
Purchase of own shares for share incentive schemes		-	-	-		(0.3)	-	(0.3)		(3.2)	-	(3.2)
Proceeds from exercise of share options		0.3	-	0.3		0.2	-	0.2		0.4	-	0.4
Net increase/(decrease) in borrowings	11	6.1	-	6.1		13.0	-	13.0		7.5	-	7.5
Payment of lease liabilities (2018: payment of finance lease liabilities)	11	(4.3)	-	(4.3)		(0.2)	-	(0.2)		(0.4)	-	(0.4)
Dividends paid to external plc shareholders		(19.9)	-	(19.9)		(20.0)	-	(20.0)		(31.4)	-	(31.4)
Dividends paid to non-controlling interests		(2.8)	-	(2.8)		(0.7)	-	(0.7)		(2.6)	-	(2.6)
Capital contributions made by non-controlling interest   partners		-	-	-		-	-	-		0.5	-	0.5
Net cash from financing activities		(20.6)	-	(20.6)		(8.0)	-	(8.0)		(29.2)	-	(29.2)
Net (decrease)/increase in cash and cash equivalents		(8.4)	0.3	(8.1)		12.1	(1.7)	10.4		19.3	(1.1)	18.2
Cash and cash equivalents at start of period				67.6				50.4				50.4
Effect of exchange rate fluctuations on cash held				0.2				(1.9)				(1.0)
Cash and cash equivalents at period end	11			59.7				58.9				67.6

Notes to the condensed consolidated financial statements

1. Basis of preparation, accounting policies, judgements and estimates

Morgan Advanced Materials plc (the 'Company') is a company incorporated in the UK under the Companies Act 2006.

The unaudited condensed consolidated financial statements of the Company for the six months ended 30 June 2019 comprise the Company, its subsidiaries and the Group's interest in associates (together the 'Group'). The half-year condensed consolidated financial statements have been prepared for the six months ended 30 June 2019.

The condensed consolidated financial statements for the six months ended 30 June 2019 have been prepared in accordance with International Accounting Standard 34 Interim Financial Reporting as adopted by the European Union. Selected explanatory notes are included to explain events and transactions that are significant to an understanding of the changes in financial position and performance of the Group since the last annual consolidated financial statements for the year ended 31 December 2018.

The condensed consolidated financial statements and the comparative information for the six months ended 30 June 2019 have neither been audited nor reviewed, do not comprise statutory accounts for the purpose of section 434 of Companies Act 2006 and should be read in conjunction with the Annual Report and Accounts for the year ended 31 December 2018. Those accounts have been reported on by the Group's auditor and delivered to the Registrar of Companies. The report of the auditor was unqualified, did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying his report, and did not contain a statement under section 498(2) or (3) of the Companies Act 2006. The financial statements have been prepared on a going concern basis, refer to page 9 for further details.

The consolidated financial statements of the Group for the year ended 31 December 2018 are available on request from the Company's registered office at Quadrant, 55-57 High Street, Windsor, Berkshire SL4 1LP or at morganadvancedmaterials.com.

The condensed consolidated financial statements for the six months ended 30 June 2019 were approved by the Board on 25 July 2019.

Judgements and estimates

Preparing the condensed consolidated financial statements requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expense. Actual results may differ from these estimates.

In preparing the condensed consolidated financial statements, significant judgements made by management in applying the Group's accounting policies and the key sources of estimation uncertainty were the same as those that applied to the consolidated financial statements for the year ended 31 December 2018.

Accounting policies

Except for the changes set out in the newly adopted standards section below, as required by the Disclosure and Transparency Rules of the Financial Conduct Authority, these condensed consolidated financial statements have been prepared by applying the accounting policies that were applied in the preparation of the Company's published consolidated financial statements for the year ended 31 December 2018.

Newly adopted standards - IFRS 16 Leases

The Group adopted IFRS 16 Leases with effect from 1 January 2019. IFRS 16 introduced a single, on-balance sheet accounting model that is similar to previous finance lease accounting. Under the standard, from 1 January 2019 the Group:

·      recognises right-of-use assets and lease liabilities (including those previously assessed as operating leases) on the consolidated balance sheet at the present value of future lease payments;

·      recognises depreciation relating to the right-of-use asset and interest charge on the lease liability in the consolidated income statement; and

·      separates cash payments made on the outstanding lease liability into repayment of principal (within financing activities) and interest paid (within operating activities) in the consolidated statement of cash flows.

Under IFRS 16, right-of-use assets are tested annually for impairment in accordance with IAS 36 Impairment of Assets, replacing the previous requirement to recognise a provision for onerous lease contracts.

Applied transition options

For leases in existence at 31 December 2018, the Group applied a modified retrospective approach. Comparative periods are not restated. The modified retrospective approach has two available options, under both options the calculation of the lease liability considered future lease payments only and current discount rates.

In the calculation of the right-of-use assets for material land and buildings leases, the Group adopted a modified retrospective approach using historical payment data as if IFRS 16 had always existed but with the benefit of hindsight for actual events. This calculation led to an equity adjustment of £16 million before tax.

1. Basis of preparation, accounting policies, judgements and estimates (continued)

In the calculation of right-of-use assets for its remaining lease portfolio (non-material land, buildings, plant and equipment), the Group used the alternative modified retrospective approach, whereby the asset is equal to the liability (with the exception of any transition balance sheet adjustments such as rent-free periods). There is no equity adjustment arising from this calculation.

On 1 January 2019 the Group recognised right-of-use assets of £51 million, lease liabilities of £67 million and an equity adjustment of £16 million before tax.

The Group utilised the practical expedient available on transition to IFRS 16 to grandfather assessments on whether an existing contract contains a lease. From 1 January 2019, the Group applies the definition of a lease as outlined in IFRS 16, which examines whether the Group has the right to control the use of an asset in exchange for consideration. The difference in definition would not have had a material impact on the Group's financial statements on transition.

The Group also utilised practical expedients available under a modified retrospective approach, namely excluding leases with short remaining terms, excluding leases of low value and relying on the assessment on whether a lease is considered onerous by applying IAS 37 Provisions, Contingent Liabilities and Contingent Assets immediately before the date of initial application as an alternative to performing an impairment review.

The following table provides a reconciliation of the Group's reported lease liability obligations as at 31 December 2018 and the lease liabilities recognised under IFRS 16 as at 1 January 2019:

	£m
Future operating lease commitments as at 31 December 2018	64.8
Recognition exemptions:
For leases of low value assets	(0.4)
Reasonably certain lease extension/termination options	24.5
Operating lease commitments for which IFRS 16 has been applied	88.9
Effect of discounting at the incremental borrowing rate	(23.6)
Liabilities additionally recognised on initial application of IFRS 16 on 1 January 2019	65.3
Liabilities from finance leases as at 31 December 2018	0.2
Effect of foreign exchange rates1	1.9
Liabilities from leases as at 1 January 2019	67.4

1.  Representing the difference in foreign exchange rates between future operating lease commitments, prepared using 2018 average rates, and the opening balance sheet rates used for the initial application of IFRS 16.

The weighted-average incremental borrowing rate for lease liabilities recognised on 1 January 2019 was 5.14%.

Newly adopted standards - other

The Group has also adopted the following standards and with effect from 1 January 2019. There has been no material impact on the Group on adoption of these standards:

·      IFRIC 23 Uncertainty over Income Tax Treatments

There were no other new accounting standards or amendments to standards that were required to be adopted in the period and the Group did not adopt any of the new accounting standards that could have been adopted early.

Accounting developments and changes

There are no upcoming accounting standards or amendments that are applicable to the Group.

2.  Business exits and disposals

2019

There were no business exits or disposals in the six months ended 30 June 2019.

2018

Composites and Defence Systems

On 20 November 2018, the Group completed the sale of its Composites and Defence Systems business with its principle site in Coventry, UK. The transaction was structured as a share sale on a debt-free and cash-free basis, for a total consideration of £2.5 million, of which £2.0 million was received on completion and £0.5 million was received on 21 January 2019, with a closing cash adjustment also received of £0.2 million.

The transaction was structured to leave Morgan with the economic benefit of certain assets, most notably the principal freehold property associated with the business, as well as certain liabilities relating to the exit of parts of the business. These liabilities were provided for in the interim results for the six months ended 30 June 2018.

In the year ended 31 December 2017, the Composite and Defence Systems business generated a £1.0 million headline operating loss* on £21.0 million of revenue.

The disposal and closure of the Composites and Defence Systems business reduced the Group's assets and liabilities as follows:

	31 December 2018
	£m
Trading net assets of disposal group	(4.2)
Transaction costs associated with the business exit and disposal	(7.6)
Recycling of deferred foreign exchange losses	(0.2)
Total consideration	2.7
Loss on disposal	(9.3)

The disposal group formed the Composites and Defence Systems operating segment, it was therefore classified as a discontinued operation under IFRS 5. Further detail is disclosed in note 7 to the condensed consolidated financial statements.

3.  Segment reporting

The Group reports as two Divisions and five global business units, which have been identified as the Group's reportable operating segments. These have been identified on the basis of internal management reporting information that is regularly reviewed by the Group's Board of Directors (the Chief Operating Decision Maker) in order to allocate resources and assess performance.

Segment results, assets and liabilities include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. Unallocated items comprise mainly investments and related income, borrowings and related expenses, corporate assets and head office expenses and income tax assets and liabilities. The results for the six months to 30 June 2018 have been restated for discontinued operations, for further details see note 7 to the condensed consolidated financial statements.

The information presented below represents the operating segments of the Group.

Six months ended 30 June 2019
	Thermal Ceramics	Molten Metal Systems	Thermal Products Division	Electrical Carbon	Seals and Bearings	Technical Ceramics	Carbon and Technical Ceramics Division	Segment total	Corporate costs	Group
Continuing operations	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m
Revenue from external customers	207.8	24.7	232.5	85.4	71.1	136.8	293.3	525.8	-	525.8
Segment EBITA1	25.7	2.7	28.4	11.1	13.4	17.5	42.0	70.4		70.4
Corporate costs									(3.0)	(3.0)
Group headline operating profit1										67.4
Amortisation of intangible assets	(1.1)	(0.2)	(1.3)	(0.4)	(0.2)	(2.2)	(2.8)	(4.1)	-	(4.1)
Operating profit before specific adjusting items										63.3
Specific adjusting items included in operating profit2	-	-	-	-	-	-	-	-	-	-
Operating profit/(loss)	24.6	2.5	27.1	10.7	13.2	15.3	39.2	66.3	(3.0)	63.3
Finance income										0.6
Finance expense										(9.2)
Share of profit of associate (net of income tax)										-
Profit before taxation										54.7
Segment assets	415.4	43.4	458.8	163.3	105.6	221.6	490.5	949.3	83.6	1,032.9
Segment liabilities	102.8	8.6	111.4	33.7	21.6	79.7	135.0	246.4	509.3	755.7
Segment capital expenditure	6.0	1.4	7.4	4.2	5.0	12.6	21.8	29.2	-	29.2
Segment depreciation - property, plant and equipment	6.8	0.9	7.7	2.5	2.4	3.3	8.2	15.9	-	15.9
Segment depreciation - right-of-use assets	1.9	0.2	2.1	0.6	0.3	1.7	2.6	4.7	-	4.7

1.  Definitions of these non-GAAP measures can be found in the glossary of terms on page 39, reconciliations of the statutory results to the adjusted measures can be found on pages 10 to 14.

2.  Details of specific adjusting items are given in note 4 to the condensed consolidated financial statements.

3. Segment reporting (continued)

Six months ended 30 June 2018
	Thermal Ceramics	Molten Metal Systems	Thermal Products Division	Electrical Carbon	Seals and Bearings	Technical Ceramics	Carbon and Technical Ceramics Division	Segment total	Restated1 corporate costs	Group
Continuing operations	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m
Revenue from external customers	217.3	24.5	241.8	82.9	65.6	124.1	272.6	514.4	-	514.4
Segment EBITA2	26.1	3.6	29.7	10.3	12.1	13.2	35.6	65.3		65.3
Corporate costs									(2.9)	(2.9)
Group headline operating profit2										62.4
Amortisation of intangible assets	(1.0)	(0.1)	(1.1)	(0.4)	(0.2)	(2.1)	(2.7)	(3.8)	-	(3.8)
Operating profit before specific adjusting items										58.6
Specific adjusting items included in operating profit3	-	-	-	-	-	-	-	-	-	-
Operating profit/(loss)	25.1	3.5	28.6	9.9	11.9	11.1	32.9	61.5	(2.9)	58.6
Finance income										0.5
Finance expense										(7.1)
Share of profit of associate (net of income tax)										0.4
Profit before taxation										52.4
Segment assets4	397.0	40.4	437.4	152.1	93.3	183.2	428.6	866.0	79.6	945.6
Segment liabilities4	86.6	7.3	93.9	30.3	20.6	41.6	92.5	186.4	493.0	679.4
Segment capital expenditure4	7.5	0.7	8.2	4.5	4.0	6.4	14.9	23.1	-	23.1
Segment depreciation - property, plant and equipment4	6.6	0.9	7.5	2.4	2.3	3.2	7.9	15.4	-	15.4

1.  Specific adjusting items of £7.6 million were previously reported within corporate costs, these costs relate solely to business closure and exit costs within the Composites and Defence Systems business, therefore they have been restated under IFRS 5 discontinued operations, see also note 7 to the condensed consolidated financial statements.

2.  Definitions of these non-GAAP measures can be found in the glossary of terms on page 39, reconciliations of the statutory results to the adjusted measures can be found on pages 10 to 14.

3.  Details of specific adjusting items are given in note 4 to the condensed consolidated financial statements.

4.  Segment assets, liabilities, capital expenditure and depreciation attributed to discontinued operations at 30 June 2018 were £7.3 million, £9.6 million, £nil and £0.3 million respectively and are excluded from the table above.

3. Segment reporting (continued)

Year ended 31 December 2018
	Thermal Ceramics	Molten Metal Systems	Thermal Products Division	Electrical Carbon	Seals and Bearings	Technical Ceramics	Carbon and Technical Ceramics Division	Segment total	Corporate costs	Group
Continuing operations	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m
Revenue from external customers	433.6	48.6	482.2	166.8	132.7	252.2	551.7	1,033.9	-	1,033.9
Segment EBITA1	52.9	6.6	59.5	19.4	23.7	28.1	71.2	130.7		130.7
Corporate costs									(5.9)	(5.9)
Group headline operating profit1										124.8
Amortisation of intangible assets	(2.2)	(0.3)	(2.5)	(0.7)	(0.4)	(4.4)	(5.5)	(8.0)	-	(8.0)
Operating profit before specific adjusting items										116.8
Specific adjusting items included in operating profit2	(13.8)	-	(13.8)	-	-	(1.4)	(1.4)	(15.2)	5.7	(9.5)
Operating profit/(loss)	36.9	6.3	43.2	18.7	23.3	22.3	64.3	107.5	(0.2)	107.3
Finance income										1.3
Finance expense										(14.5)
Share of profit of associate (net of income tax)										0.8
Profit before taxation										94.9
Segment assets	393.1	41.2	434.3	157.6	97.6	187.2	442.4	876.7	87.8	964.5
Segment liabilities	83.3	8.0	91.3	32.2	21.4	42.4	96.0	187.3	500.0	687.3
Segment capital expenditure	15.7	2.4	18.1	11.1	8.8	15.1	35.0	53.1	-	53.1
Segment depreciation - property, plant and equipment	13.6	1.9	15.5	4.7	4.5	6.6	15.8	31.3	-	31.3

1.  Definitions of these non-GAAP measures can be found in the glossary of terms on page 39, reconciliations of the statutory results to the adjusted measures can be found on pages 10 to 14.

2.  Details of specific adjusting items are given in note 4 to the condensed consolidated financial statements.

3. Segment reporting (continued)

Segment revenue from external customers by geography

	Six months ended 30 June 2019	Six months ended 30 June 2018	Year ended 31 December 2018
Continuing operations	£m	£m	£m
US	209.3	186.6	381.3
China	51.0	52.3	104.0
Germany	35.2	37.2	69.9
UK (the Group's country of domicile)	23.0	21.0	42.8
France	13.0	14.6	29.0
Other Asia, Australasia, Middle East and Africa	96.1	96.3	202.9
Other Europe	66.8	74.7	140.5
Other North America	16.0	16.0	32.4
South America	15.4	15.7	31.1
	525.8	514.4	1,033.9

Revenue from external customers is based on geographic location of the end customer. No customer represents greater than 10% of revenue.

Segment revenue by end market

	Six months ended 30 June 2019	Six months ended 30 June 2018	Year ended 31 December 2018
Continuing operations	£m	£m	£m
Industrial	243.6	250.2	492.5
Transportation	107.7	110.4	221.9
Chemical and petrochemical	48.6	46.5	96.7
Semiconductor and electronics	34.5	29.5	61.9
Security and defence	33.9	25.3	52.3
Energy	30.8	29.5	58.8
Healthcare	26.7	23.0	49.8
	525.8	514.4	1,033.9

4.  Specific adjusting items

In the condensed consolidated income statement the Group presents specific adjusting items separately. In the judgement of the Directors, due to the nature and value of these items they should be disclosed separately from the underlying results of the Group to allow the reader to obtain a proper understanding of the financial information and the best indication of underlying performance of the Group.

	Six months ended 30 June 2019	Six months ended 30 June 2018	Year ended 31 December 2018
Continuing operations	£m	£m	£m
Specific adjusting items:
Net pension past service credit	-	-	5.7
Business closure and exit costs	-	-	(15.2)
Total specific adjusting items before income tax charge	-	-	(9.5)
Income tax charge from specific adjusting items	-	-	(1.7)
Total specific adjusting items after income tax charge	-	-	(11.2)

Specific adjusting items relating to discontinued operations are disclosed in note 7 to the condensed consolidated financial statements.

2019

There were no specific adjusting items from continuing operations in the six months ended 30 June 2019.

2018

Net pension past service credit, UK

Early and late retirement adjustment

In 2018, the Group reviewed with the Trustees of Morgan Pension Scheme the factors applied on early and late retirement, and clarified the practice regarding the calculation of pension payments with members who elected to retire other than at the normal date of retirement. This was effected via a Deed of Amendment. This change resulted in a net gain of £7.6 million in the income statement.

Adjustment for Guaranteed Minimum Pensions (GMPs)

On 26 October 2018, the High Court ruled that the Trustee of the Lloyds Banking Group pension schemes needed to remove the inequalities in pension scheme benefits that arise from unequal GMPs. This resulted in a charge of £1.9 million to reflect the potential cost of removing the GMP inequalities for the Group's UK defined benefit pension schemes.

The net impact of these pension adjustments was a credit to the income statement of £5.7 million.

Business closure and exit costs

Brazil, Thermal Ceramics

In 2018 the Group announced its decision to close the Thermal Ceramics site in Rio de Janeiro. A £6.2 million charge was recognised. This comprised cash exit costs of £2.6 million relating to site clean-up costs, professional and legal fees and staff redundancies and impairment costs of £3.6 million relating to the impairment of property, plant and equipment and other assets. In the year ended December 2018 the business generated a headline operating loss* of £2.6 million on revenues of £3.0 million, (year ended 31 December 2017: headline operating loss* of £2.0 million on revenues of £6.5 million).

China, Technical Ceramics

In 2018 the Group decided to close its ceramic cores operations in China, a part of the Technical Ceramics operating segment. A £1.4 million impairment charge was recognised relating to the impairment of plant and equipment and other assets. In the year ended December 2018 the business generated a headline operating loss* of £0.9 million on revenues of £0.5 million, (year ended 31 December 2017: headline operating loss* of £0.9 million on revenues of £0.6 million).

Venezuela, Thermal Ceramics

In 2018 the Group decided to exit its Thermal Ceramics operations in Venezuela. A £7.6 million charge was recognised, of which £7.3 million related to the recycling of deferred foreign exchange translation losses in accordance with IAS 21 The Effects of Changes in Foreign Exchange Rates and £0.3 million related to the impairment of assets. In the years ended December 2018 and December 2017 the business had negligible revenue and headline operating profit* (£0.0 million).

5.  Finance income and expense

	Six months ended 30 June 2019	Six months ended 30 June 2018	Year ended 31 December 2018
Continuing operations	£m	£m	£m
Interest on bank balances and cash deposits	0.6	0.5	1.3
Finance income	0.6	0.5	1.3
Interest on borrowings and overdrafts	(5.4)	(4.7)	(9.8)
Interest on lease liabilities	(1.5)	-	-
Net interest on IAS 19 obligations	(2.3)	(2.4)	(4.7)
Finance expense	(9.2)	(7.1)	(14.5)
Net financing costs recognised in profit or loss	(8.6)	(6.6)	(13.2)

6.  Taxation - income tax expense

	Six months ended 30 June 2019	Six months ended 30 June 2018	Year ended 31 December 2018
Continuing operations	£m	£m	£m
Total income tax expense in profit of loss	(15.3)	(14.4)	(30.7)

The Group's consolidated effective tax rate for the six months ended 30 June 2019 is based on the Directors' best estimate of the effective tax rate for the year.

EU State Aid

On 2 April 2019 the European Commission ruled that a Group Financing Exemption under the UK controlled foreign company rules was partly contrary to EU State Aid rules. The UK government has filed an annulment application with the EU General Court against this decision. Like many other multinational groups that have acted in accordance with the UK legislation in force at the time, the Group may be affected. The estimated maximum potential liability for the Group is approximately £2.5 million. Based on the Group's current assessment of the circumstances under which tax would be payable, no provision has been made.

7.  Discontinued operations

The Group disposed of its Composites and Defence Systems business on 20 November 2018. The business represented a separate reportable operating segment and therefore, in accordance with IFRS 5 Non-current Assets Held For Sale and Discontinued Operations, the disposal group was classified as discontinued and the six month period ended 30 June 2018 has been restated to reflect this.

The results from discontinued operations, which have been disclosed in the Group's income statement, are set out below:

	Six months ended 30 June 2019				Six months ended 30 June 2018				Year ended 31 December 2018
				Results				Specific				Total		Results	Specific	Total		Results	Specific	Total
	before	adjusting			before	adjusting			before	adjusting
	specific	items1			specific	items1			specific	items1
	adjusting				adjusting				adjusting
	items				items				items
	£m	£m	£m		£m	£m	£m		£m	£m	£m
Revenue	-	-	-		7.4	-	7.4		11.2	-	11.2
Operating costs	-	-	-		(8.3)	(7.6)	(15.9)		(12.6)	(9.3)	(21.9)
Loss before taxation	-	-	-		(0.9)	(7.6)	(8.5)		(1.4)	(9.3)	(10.7)
Income tax expense	-	-	-		-	-	-		-	-	-
Loss from discontinued operations	-	-	-		(0.9)	(7.6)	(8.5)		(1.4)	(9.3)	(10.7)
Basic loss per share			-				(3.0)p				(3.8)p
Diluted loss per share			-				(3.0)p				(3.7)p

1. The discontinued specific adjusting items relate to the loss on disposal of assets and provisions for business exit costs. Refer also to note 2 to the condensed consolidated financial statements.

There is no income tax expense in relation to discontinued operations in either the current or preceding periods.

8. Earnings per share

	Six months ended 30 June 2019				Restated six months ended 30 June 2018				Year ended 31 December 2018
	Earnings	Basic earnings per share	Diluted earnings per share		Earnings	Basic earnings per share	Diluted earnings per share		Earnings	Basic earnings per share	Diluted earnings per share
	£m	pence	pence		£m	pence	pence		£m	pence	pence
Profit for the period attributable to shareholders of the Company	35.3	12.4p	12.3p		25.9	9.1p	9.0p		46.3	16.2p	16.1p
Loss from discontinued operations	-	-	-		8.5	3.0p	3.0p		10.7	3.8p	3.7p
Profit from continuing operations	35.3	12.4p	12.3p		34.4	12.1p	12.0p		57.0	20.0p	19.9p
Specific adjusting items	-	-			-	-			9.5	3.3p
Amortisation of intangible assets	4.1	1.4p			3.8	1.3p			8.0	2.8p
Tax effect of the above	-	-			-	-			1.7	0.6p
Non-controlling interests' share of the above adjustments	-	-			-	-			-	-
Adjusted profit for the period from continuing operations for use in headline earnings per share1	39.4	13.8p			38.2	13.4p			76.2	26.7p

1. Definitions of these non-GAAP measures can be found in the glossary of terms on page 39, reconciliations of the statutory results to the adjusted measures can be found on pages 10 to 14.

	30 June	30 June	31 December
Number of shares	2019	2018	2018
Weighted average number of Ordinary shares for the purposes of basic earnings per share1	284.6	285.3	285.2
Effect of dilutive potential Ordinary shares:
Share options	1.8	1.8	1.6
Weighted average number of Ordinary shares for the purposes of diluted earnings per share	286.4	287.1	286.8

1. The calculation of the weighted average number of shares excludes the shares held by The Morgan General Employee Benefit Trust, on which the dividends are waived.

9. Property, plant and equipment

	Land and buildings		Plant, equipment and fixtures		Total
	£m		£m		£m
Cost
At 1 January 2019	218.3		697.6		915.9
Additions	6.3		16.8		23.1
Disposals	(2.4)		(13.7)		(16.1)
Transfers between categories	0.3		(0.3)		-
Effect of movement in foreign exchange	0.6		1.7		2.3
At 30 June 2019	223.1		702.1		925.2
Depreciation and impairment losses
At 1 January 2019	95.9		505.5		601.4
Depreciation charge for the period	2.7		13.2		15.9
Reversal of impairment charge	-		(0.5)		(0.5)
Disposals	(1.2)		(13.6)		(14.8)
Transfers between categories	-		-		-
Effect of movement in foreign exchange	0.6		1.5		2.1
Balance at 30 June 2019	98.0		506.1		604.1
Carrying amounts
At 1 January 2019	122.4		192.1		314.5
At 30 June 2019	125.1		196.0		321.1

10.  Intangible assets

	Goodwill	Customer relationships	Technology and trademarks	Capitalised development costs	Computer software	Total
	£m	£m	£m	£m	£m	£m
Cost
At 1 January 2019	179.4	60.4	3.7	0.8	29.8	274.1
Additions	-	-	-	-	1.6	1.6
Disposals	-	-	-	-	-	-
Effect of movement in foreign exchange	0.5	0.3	-	-	0.1	0.9
At 30 June 2019	179.9	60.7	3.7	0.8	31.5	276.6
Amortisation and impairment losses
At 1 January 2019	-	38.1	0.5	0.8	19.1	58.5
Amortisation charge for the year	-	2.0	0.1	-	2.0	4.1
Impairment losses for the period	-	-	-	-	-	-
Disposals	-	-	-	-	-	-
Effect of movement in foreign exchange	-	0.2	-	-	-	0.2
Balance at 30 June 2019	-	40.3	0.6	0.8	21.1	62.8
Carrying amounts
At 1 January 2019	179.4	22.3	3.2	-	10.7	215.6
At 30 June 2019	179.9	20.4	3.1	-	10.4	213.8

11.  Cash and cash equivalents reconciled to net debt*

	At 30 June 2019	At 30 June 2018	At 31 December 2018
	£m	£m	£m
Bank balances	49.6	49.5	57.9
Cash deposits	10.1	9.4	9.7
Cash and cash equivalents	59.7	58.9	67.6
Reconciliation of cash and cash equivalents to net debt*
	Six months ended 30 June 2019	Six months ended       30 June 2018	Year ended 31 December 2018
	£m	£m	£m
Opening borrowings and lease liabilities as reported	(247.6)	(231.7)	(231.7)
Impact of change in accounting policy	(67.4)	-	-
Adjusted opening borrowings and lease liabilities	(315.0)	(231.7)	(231.7)
Net increase in borrowings	(6.1)	(13.0)	(7.5)
Payment of lease liabilities	4.3	0.2	0.4
Total changes from cash flows	(1.8)	(12.8)	(7.1)
New leases and lease remeasurement	(5.6)	-	-
Effect of movements in foreign exchange	(0.2)	(2.6)	(8.8)
Closing borrowings and lease liabilities	(322.6)	(247.1)	(247.6)
Cash and cash equivalents	59.7	58.9	67.6
Closing net debt1	(262.9)	(188.2)	(180.0)

1. Definitions of these non-GAAP measures can be found in the glossary of terms on page 39, reconciliations of the statutory results to the adjusted measures can be found on pages 10 to 14.

The table below details changes in the Group's liabilities arising from financing activities, including both cash and non-cash changes:

	Borrowings	Lease liabilities	Total financing liabilities	Cash and cash equivalents	Movement in net debt1
	£m	£m	£m	£m	£m
At 1 January 2019 as reported	(247.4)	(0.2)	(247.6)	67.6	(180.0)
Impact of change in accounting policy	-	(67.4)	(67.4)	-	(67.4)
Adjusted 1 January 2019	(247.4)	(67.6)	(315.0)	67.6	(247.4)
Cash outflow	-	-	-	(2.0)	(2.0)
Borrowings and lease liability cash flow	(6.1)	4.3	(1.8)	-	(1.8)
Net interest paid	-	-	-	(6.1)	(6.1)
Net cash (outflow)/inflow	(6.1)	4.3	(1.8)	(8.1)	(9.9)
Share purchases	-	-	-	-	-
New leases and lease remeasurement	-	(5.6)	(5.6)	-	(5.6)
Exchange and other movements	(0.1)	(0.1)	(0.2)	0.2	-
At 30 June 2019	(253.6)	(69.0)	(322.6)	59.7	(262.9)

1. Definitions of these non-GAAP measures can be found in the glossary of terms on page 39, reconciliations of the statutory results to the adjusted measures can be found on pages 10 to 14.

12.  Financial risk management

Fair values

The fair values of financial assets and liabilities, together with the carrying amounts shown in the balance sheet, are as follows:

	At 30 June 2019			At 30 June 2018			At 31 December 2018
	Carrying amount	Fair value		Carrying amount	Fair value		Carrying amount	Fair value
	£m	£m		£m	£m		£m	£m
Financial assets and liabilities at amortised cost
6.26% US Dollar Senior Notes 2019	(59.2)	(59.7)		(56.8)	(58.1)		(59.0)	(59.6)
1.18% Euro Senior Notes 2023	(22.4)	(22.7)		(22.1)	(22.0)		(22.5)	(22.3)
3.17% US Dollar Senior Notes 2023	(11.9)	(11.8)		(11.4)	(10.7)		(11.8)	(11.3)
1.55% Euro Senior Notes 2026	(22.4)	(23.1)		(22.2)	(21.9)		(22.5)	(22.3)
3.37% US Dollar Senior Notes 2026	(76.7)	(74.9)		(73.8)	(67.0)		(76.4)	(70.6)
1.74% Euro Senior Notes 2028	(9.0)	(9.3)		(8.9)	(8.6)		(9.0)	(8.8)
2.89% Euro Senior Notes 2030	(22.4)	(23.7)		-	-		(22.5)	(22.5)
4.87% US Dollar Senior Notes 2026	(20.1)	(21.1)		-	-		-	-
Bank and other borrowings	(9.5)	(9.5)		(51.5)	(51.5)		(23.7)	(23.7)
Obligations under finance leases1	-	-		(0.4)	(0.4)		(0.2)	(0.2)
Trade and other payables	(90.1)	(90.1)		(104.2)	(104.2)		(95.0)	(95.0)
Trade and other receivables	183.4	183.4		182.7	182.7		177.8	177.8
Cash and cash equivalents	59.7	59.7		58.9	58.9		67.6	67.6
	(100.6)	(102.8)		(109.7)	(102.8)		(97.2)	(90.9)
Financial instruments - held at FVOCI2
Financial assets - held at FVOCI2	0.5	0.5		1.0	1.0		0.5	0.5
Derivatives and other items at fair value
Forward exchange contracts used for hedging	(0.2)	(0.2)		(0.2)	(0.2)		-	-
	(100.3)	(102.5)		(108.9)	(102.0)		(96.7)	(90.4)

1. Comparative information represents finance leases accounted for under IAS 17.

2. Fair value through other comprehensive income.

On 28 January 2019, the Group completed funding on a US private placement, raising $25 million for a seven year tenor, to refinance existing financial indebtedness.

The following summarises the major methods and assumptions used in estimating the fair values of financial instruments reflected in the preceding table.

Equity securities

Fair value is based on quoted market prices at the balance sheet date.

Derivatives

Forward exchange contracts are marked to market either using listed market prices or by discounting the contractual forward price and deducting the current spot rate.

Borrowings

Fair value is calculated based on discounted expected future principal and interest cash flows. The interest rates used to determine the fair value of borrowings are 0.9 - 4.2% (30 June 2018: 1.4 - 4.7%; 31 December 2018: 1.4 - 4.7%).

At 30 June 2019, the carrying value of fixed-interest rate bearing borrowings totalled £244.1 million (30 June 2018: £195.2 million and 31 December 2018: £223.7 million) and the fair value approximated £246.3 million (30 June 2018: £188.3 million and 31 December 2018: £217.4 million).

Trade and other receivables/payables

For receivables/payables with a remaining life of less than one year, the notional amount is deemed to reflect the fair value. All other receivables/payables are discounted to determine the fair value.

Cash and cash equivalents, trade and other payables and trade and other receivables

The Group has disclosed the fair value of cash and cash equivalents, current trade and other receivables and current payables at their carrying amount, given their notional amount is deemed to be their fair value.

There have been no transfers between level 1 and level 2 during 2019 and 2018 and there were no level 3 financial instruments in either 2019 or 2018.

13.  Employee benefits

	30 June 2019 UK	30 June 2019 US	30 June 2019 Europe	30 June 2019 Rest of World	30 June 2019 Total
	£m	£m	£m	£m	£m
Pension plans and employee benefits
Present value of unfunded defined benefit obligations	-	(8.0)	(39.2)	(2.0)	(49.2)
Present value of funded defined benefit obligations	(582.4)	(141.3)	(2.4)	(11.5)	(737.6)
Fair value of plan assets	442.2	140.0	0.5	8.5	591.2
Net obligations	(140.2)	(9.3)	(41.1)	(5.0)	(195.6)
Movements in present value of defined benefit obligation
At 1 January 2019	(544.4)	(138.8)	(37.3)	(13.6)	(734.1)
Current service cost	-	-	(0.4)	(0.9)	(1.3)
Interest cost	(7.2)	(2.9)	(0.3)	(0.1)	(10.5)
Actuarial gain/(loss):
Experience gain/(loss) on plan obligations	0.8	-	-	0.5	1.3
Changes in financial assumptions - gain/(loss)	(49.4)	(11.5)	(4.3)	(0.3)	(65.5)
Changes in demographic assumptions - gain/(loss)	5.3	-	-	-	5.3
Benefits paid	12.5	4.6	0.7	0.5	18.3
Contributions by members	-	-	-	-	-
Curtailments and settlements	-	-	-	0.1	0.1
Exchange adjustments	-	(0.7)	-	0.3	(0.4)
At 30 June 2019	(582.4)	(149.3)	(41.6)	(13.5)	(786.8)
Movements in fair value of plan assets
At 1 January 2019	404.3	130.0	0.4	9.0	543.7
Interest on plan assets	5.4	2.7	-	0.1	8.2
Remeasurement gain/(loss)	38.9	10.6	-	(0.4)	49.1
Contributions by employer	6.1	0.5	0.8	0.6	8.0
Contributions by members	-	-	-	-	-
Benefits paid	(12.5)	(4.6)	(0.7)	(0.5)	(18.3)
Curtailments and settlements	-	-	-	(0.1)	(0.1)
Exchange adjustments	-	0.8	-	(0.2)	0.6
At 30 June 2019	442.2	140.0	0.5	8.5	591.2
The fair values of the plan assets at 30 June 2019 were as follows:
Equities and growth assets	125.6	6.9	-	-	132.5
Bonds and liability-driven investments	142.6	129.0	-	-	271.6
Matching insurance policies	173.3	-	0.5	6.4	180.2
Other	0.7	4.1	-	2.1	6.9
Total	442.2	140.0	0.5	8.5	591.2
Principal actuarial assumptions at 30 June 2019 were:	%	%	%	%
Discount rate	2.22	3.53	1.00	2.10
Inflation (UK: RPI/CPI)	3.18/2.08	n/a	1.70	n/a

13.  Employee benefits (continued)

	30 June 2018 UK	30 June 2018 US	30 June 2018 Europe	30 June 2018 Rest of World	30 June 2018 Total
	£m	£m	£m	£m	£m
Pension plans and employee benefits
Present value of unfunded defined benefit obligations	-	(7.9)	(34.9)	(2.7)	(45.5)
Present value of funded defined benefit obligations	(560.0)	(131.2)	(2.0)	(9.6)	(702.8)
Fair value of plan assets	419.0	129.7	0.6	7.8	557.1
Net obligations	(141.0)	(9.4)	(36.3)	(4.5)	(191.2)
Principal actuarial assumptions at 30 June 2018 were:	%	%	%	%
Discount rate	2.63	4.26	1.60	3.20
Inflation (UK: RPI/CPI)	3.05/1.95	n/a	1.70	n/a

	31 December 2018 UK	31 December 2018 US	31 December 2018 Europe	31 December 2018 Rest of World	31 December 2018 Total
	£m	£m	£m	£m	£m
Pension plans and employee benefits
Present value of unfunded defined benefit obligations	-	(7.9)	(35.9)	(2.8)	(46.6)
Present value of funded defined benefit obligations	(544.4)	(130.9)	(1.4)	(10.8)	(687.5)
Fair value of plan assets	404.3	130.0	0.4	9.0	543.7
Net obligations	(140.1)	(8.8)	(36.9)	(4.6)	(190.4)
Principal actuarial assumptions at 31 December 2018 were:	%	%	%	%
Discount rate	2.74	4.34	1.70	2.60
Inflation (UK: RPI/CPI)	3.17/2.07	n/a	1.70	n/a

14.  Provisions and contingent liabilities

	Closure and restructuring provisions	Legal and other provisions	Environmental provisions	Total
	£m	£m	£m	£m
At 1 January 2019	3.5	10.3	4.9	18.7
Provisions made during the year	0.1	1.1	-	1.2
Provisions used during the year	(0.7)	(0.4)	(0.6)	(1.7)
Provisions reversed during the year	-	(0.2)	-	(0.2)
Transfers between categories	(0.1)	(0.5)	0.6	-
Effect of movements in foreign exchange	-	-	-	-
At 30 June 2019	2.8	10.3	4.9	18.0
Current	2.2	6.0	1.3	9.5
Non-current	0.6	4.3	3.6	8.5
At 30 June 2019	2.8	10.3	4.9	18.0

14.  Provisions and contingent liabilities (continued)

Closure and restructuring provisions

Closure and restructuring provisions are based on the Group's restructuring programmes and represent committed expenditure at the balance sheet date. The amounts provided are based on the costs of terminating relevant contracts, under the contract terms, and management's best estimate of other associated restructuring costs including professional fees. Due to the nature of the provision for closure and restructuring provisions, the timing of any potential future outflows in respect of these liabilities is uncertain until the restructuring programme is completed.

Legal and other provisions

Legal and other provisions mainly comprise amounts provided against open legal and contractual disputes arising in the normal course of business and long-service costs.

The Company has on occasion been required to take legal or other actions to protect its intellectual property rights, to enforce commercial contracts or otherwise and similarly to defend itself against proceedings brought by other parties. Provisions are made for the expected costs associated with such matters, based on past experience of similar items and other known factors, taking into account professional advice received, and represent management's best estimate of the most likely outcome. The timing of utilisation of these provisions is frequently uncertain, reflecting the complexity of issues and the outcome of various court proceedings and associated negotiations.

Other provisions represent the best estimate of the cost of settling current obligations although there is a higher degree of judgement involved.

Where obligations are not capable of being reliably estimated, or if a material outflow of economic resources is considered remote, it is classified as a contingent liability. The Group is of the opinion that any associated claims that might be brought can be defeated successfully and, therefore, the possibility of any material outflow in settlement is assessed as remote.

Environmental provisions

Environmental provisions are made for quantifiable environmental liabilities arising from known environmental issues. The amounts provided are based on the best estimate of the costs required to remedy these issues. At one site, a remediation feasibility study is currently being conducted in relation to a known environmental issue, in conjunction with the local Environmental Regulator. The costs of completing this study have been provided. At this stage it is not possible to reliably quantify the liabilities arising from this environmental issue until the outcome of this feasibility study is known.

Environmental contingent liabilities

The Group is subject to local health, safety and environmental laws and regulations concerning its manufacturing operations around the world. These laws and regulations may require the Group to take future action to remediate the impact of historical manufacturing processes on the environment or lead to other economic outflows. Such contingencies may exist for various sites which the Group currently operates or has operated in the past. There is a contingent liability arising from the known environmental issue referred to above under the heading 'environmental provisions' where the financial impact cannot be reliably estimated until the completion of the remediation feasibility study.

The Group is of the opinion that, whilst the amounts of future costs not provided for could be significant, it is not possible to estimate the amounts involved reliably. However, the Group does not expect that costs associated with these environmental contingent liabilities will significantly impact the Group's operations or its liquidity.

Tax contingent liabilities

The Group is subject to periodic tax audits by various fiscal authorities covering corporate, employee and sales taxes in the various jurisdictions in which it operates. We have provided for estimates of the Group's likely exposures where these can be reliably estimated.

15.  Related parties

Identification of related parties

The Company has related party relationships with its subsidiaries and its associates and with its Directors and executive officers.

Transactions with key management personnel

Details of transactions with key management personnel are described in note 26 of the Group's 2018 Annual Report and Accounts.

	Six months ended 30 June 2019	Six months ended 30 June 2018	Year ended 31 December 2018
Transactions with associate:	£m	£m	£m
Sales to associate	-	-	0.3
Purchases from associate	1.1	0.8	1.3
Loan made to associate	-	1.0	1.0
Loan repaid by associate	-	1.0	1.0
Trade receivables due from associate	-	-	-
Trade payables due to associate	0.3	0.3	1.2

At 30 June 2019 the Group does not have any trade receivables owed by associates which have been fully provided for (30 June 2018 and 31 December 2018: £nil).

Except as disclosed in the table above:

·      There were no related party transactions during the period that have materially affected the financial position or the perfor mance of the Group during the period; and

·      There have been no changes in the nature of related party transactions as described in note 26 to the Group's 2018 Annual Report and Accounts (page 135) which could have a material effect on the financial position or performance of the Group during the period.

Glossary of terms

Constant-currency1	Constant-currency revenue and Group headline operating profit are derived by translating the prior year results at current year average exchange rates.
Corporate costs	Corporate costs consist of the costs of the central head office.
Free cash flow before acquisitions, diposals and dividends1	Cash generated from operations less capital expenditure, net interest paid and tax paid.
Earnings before interest, tax and amortisation (EBITA)1	EBITA is defined as Group operating profit before specific adjusting items and amortisation of intangible assets. Segment - Divisional and global business unit - EBITA is stated before unallocated corporate costs.
Group earnings before interest, tax, depreciation and amortisation (EBITDA)1	EBITDA is defined as operating profit before specific adjusting items, amortisation of intangible assets and depreciation.
Group headline operating profit1	Operating profit adjusted to exclude specific adjusting items and amortisation of intangible assets.
Headline earnings per share (EPS)1	Headline earnings per share is defined as operating profit adjusted to exclude specific adjusting items and amortisation of intangible assets, plus share of profit of associate less net financing costs, income tax expense and non-controlling interests, divided by the weighted average number of Ordinary shares during the period.
Net debt1	Borrowings, bank overdrafts and lease liabilities less cash and cash equivalents.
Group organic1	The Group results at constant-currency excluding the impacts of acquisitions, disposals and business exits.
Return on invested capital (ROIC)1	Group headline operating profit (operating profit excluding specific adjusting items and amortisation of intangible assets) divided by the 12-month average adjusted net assets (third-party working capital, plant and equipment, land and buildings, right-of-use assets, intangible assets and other balance sheet items). This measure excludes long-term employee benefits, deferred tax assets and liabilities, current tax payable, provisions, cash and cash equivalents, borrowings and lease liabilities.
Specific adjusting items1	See note 4 to the condensed consolidated financial statements for further details.

1.   Reconciliations of these non-GAAP measures and reconciliations to GAAP measures can be found on pages 10 to 14.

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END

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