Final Results

Melrose Industries PLC

07 March 2024

MELROSE INDUSTRIES PLC

AUDITED RESULTS

FOR THE YEAR ENDED 31 DECEMBER 2023

Melrose Industries PLC ("Melrose" or the "Group"), the aerospace focused Group, today announces its audited results for the year ended 31 December 2023.

Key messages

· 2023 adjusted¹ operating profit more than doubles to £420 million (pre-PLC costs) and ahead of guidance

· 2024 adjusted¹ operating profit guidance upgraded by 6% (pre-PLC costs)

· Engines margin to reach target 28% in 2024, one year early and on track for >30% post 2025

· Positive earnings momentum across industry leading businesses, 2025 targets de-risked

· Engines' future RRSP net cash inflow grows to c.£22 billion as a result of GE contract

	Adjusted¹ results		Statutory results
	2023	2022²	2023	2022²
Continuing operations	£m	£m	£m	£m
Revenue	3,350	2,954	3,350	2,954
Aerospace operating profit/(loss)	420	186	17	(134)
Operating profit/(loss) (post-PLC costs)	390	147	57	(270)
Profit/(loss) before tax	331	62	(8)	(328)
Diluted earnings per share (p)	18.7	4.1	0.1	(16.3)
Net debt¹	572	n/a	n/a	n/a
Leverage¹	1.1x	n/a	n/a	n/a

n/a - comparative information for net debt and leverage has not been restated for discontinued operations and any comparison is less meaningful

Financial highlights³

· Revenue of £3.35 billion, 17% growth over last year (13% including businesses being exited)

· Adjusted¹ operating profit (pre-PLC costs) of £420 million versus initial guidance of £350 million and most recent £405 million. Margins grew by more than 600bps to 12.5%

· Adjusted¹ operating profit of £390 million, up 164% on the prior year, a margin of 11.6%. Statutory operating profit of £57 million (2022: loss of £270 million)

· Adjusted¹ diluted EPS of 18.7p, compared to 4.1p in 2022, an increase of over 4 times. Statutory diluted EPS of 0.1p (2022: loss of 16.3p)

· Free cash flow¹ better than expectations

· Net debt¹ of £572 million, representing leverage¹ of 1.1x, better than our guidance, including a share buyback cost of £93 million

· Full year dividend of 5.0 pence including final dividend of 3.5 pence per share recommended

Strategic highlights

· Successful transition to pureplay aerospace business with clear growth trajectory

· Significant delivery of restructuring and repricing actions, ahead of our plan and de-risking 2025 targets. Engines to reach 28% adjusted operating margin, one year early, and on track to >30% post 2025

· Wide-ranging new agreement with GE covering a series of engines including GEnx with higher aftermarket RRSP entitlement; RRSP expected net cash inflow up by 10% to c.£22 billion (assuming US$ = 1.25)

· Good operational progress with 23% improvement in cost of poor quality and £40 million reduction in arrears, despite industry supply chain issues

· Substantial investment of c.£120 million in Research and Development including government and customer funding. In 2023 we committed to invest £50 million targeted to expand our unique additive fabrication capacity during the next couple of years

· Substantial progress in achieving Group sustainability targets, with new more stretching targets set

Divisional highlights³

Engines

· Engines revenue growth of 16% to £1.19 billion with adjusted¹ operating profit up 92% to £310 million and adjusted¹ operating margin up to 26%

· Engines aftermarket growth of 34% driven by recovering flying hours and the Group entering the lucrative aftermarket 'sweet spot' supporting an above market performance

· Strong progress on growth initiatives, including increasing capacity and 23% increase in revenue in aftermarket repair

Structures

· Structures revenue growth of 18% to £2.16 billion (12% including businesses being exited). Adjusted¹ operating profit of £110 million with margins increasing to 5.1% from 1.3% in 2022

· The ramp-up in Civil OEM shipments resulted in 28% growth. Defence repricing and portfolio work progressed well with 42% of core work now sustainably priced

· Significant progress on restructuring and portfolio rationalisation with two non-core plants closed in 2023 and further exits underway

Demerger of GKN Automotive, GKN Powder Metallurgy and GKN Hydrogen

· The demerger of the GKN Automotive, GKN Powder Metallurgy and GKN Hydrogen divisions from Melrose into Dowlais Group plc successfully completed on 20 April 2023

Upgraded guidance for 2024 full year (assuming US$ = 1.25 average exchange rate for the year)

· Revenue between £3.6 billion and £3.75 billion, growth tempered by ongoing sector-wide supply chain issues

· Aerospace adjusted¹ operating profit (pre-PLC costs) between £550 million and £570 million, 6% above our prior guidance at the midpoint, driven by ongoing operating margin improvement with Engines on track to deliver 2025 margin targets of 28% in 2024

· Aerospace adjusted¹ EBITDA of between £710 million and £730 million

· Central costs at £30 million, up £5 million to reflect a non-cash LTIP charge

· As expected, cash generation limited by ongoing restructuring in 2024 and previously announced GTF issues; increasing free cash flow is expected in 2025 and beyond, driven by RRSPs

Peter Dilnot, Chief Executive Officer of Melrose Industries PLC, today said:

"Melrose Aerospace has delivered record results in 2023, ahead of upgraded guidance driven by strong operating margin progression in both divisions. The Group is well positioned to deliver continued growth and margin improvement supported by positive end markets and excellent operational momentum. We have upgraded guidance for 2024 and are confident about unlocking significant further potential of the business going forward."

Enquiries:

Investor Relations:

Chris Dyett: +44 (0) 7974 974 690, ir@melroseplc.net

Montfort Communications: +44 (0) 20 3514 0897

Nick Miles: +44 (0) 7739 701 634, miles@montfort.london

Charlotte McMullen: +44 (0) 7921 881 800, mcmullen@montfort.london

^Notes

^{1. Described in the glossary to the Preliminary Announcement and considered by the Board to be a key measure of performance}

^{2. Results for the year ended 31 December 2022 have been restated for discontinued operations and the one for three share consolidation where applicable}

^{3. Like-for-like growth is calculated at constant currency against 2022 results and excludes businesses being exited}

CHAIRMAN'S STATEMENT

CALENDAR YEAR 2023

The Group had a transformational year in 2023 and delivered financial results ahead of expectations. We achieved statutory revenue for the Melrose Group of £3,350 million (2022: £2,954 million), with an adjusted operating profit (post-PLC costs) of £390 million (2022: £147 million) based on a statutory operating profit of £57 million (2022: loss of £270 million).

Following completion of the Dowlais Group plc demerger (the 'Demerger') in the first half of the year, Melrose's strategy shifted from its previous 'Buy, Improve, Sell' model to becoming a premium-listed aerospace business for the long-term. Your Board is confident that Melrose is now well positioned for strong future performance. This will be driven by our two industry leading aerospace divisions which have been restructured and repositioned, coupled with strong market growth and a disciplined approach to capital allocation. The positive trajectory is clearly demonstrated within these results.

Further details of these results are contained in the CEO's review and Finance Director's review, and I would like to thank all employees for their efforts this year.

PURPOSE, STRATEGY & SUSTAINABILITY

Melrose was founded to empower its businesses to unlock their full potential for the collective benefit of stakeholders, whilst providing shareholders with a superior return on their investment. Our strategy remains focused on value creation, driven by operational and financial improvement over the longer term, now as a pureplay, UK-listed aerospace business. Our positive trajectory is underpinned by leading positions across the world's major aircraft platforms, strong organic growth prospects within the aerospace sector, and attractive opportunities to differentiate our business further through cutting-edge proprietary technology that is already shaping the future of flight.

Melrose sees the decarbonisation of the aerospace sector as a priority, and this presents great opportunities to deploy our innovation and technology leadership to create and commercialise world-leading solutions for cleaner air travel, and to generate superior financial returns for our shareholders. We are pleased that our sustainability performance continues to be recognised by several key benchmarking agencies, including Sustainalytics which ranks Melrose in the top decile of our industrial peers, MSCI which continues to rank us in the "A" category, and our recent elevation to a "B" rating by CDP Climate Change.

This current set of results illustrates our strategy in action, and our continued shareholder value creation is reflected in Melrose being one of the strongest performers in the FTSE100 in 2023.

DIVIDEND

In line with our progressive dividend policy, the Board proposes to pay a final dividend of 3.5 pence per share for 2023, making a total dividend for the year of 5.0 pence per share. The final dividend will be paid on 8 May 2024 to those shareholders on the register at 2 April 2024.

BOARD MATTERS

Given the evolution of Melrose from the 'Buy, Improve, Sell' model into a focused aerospace business, Victoria Jarman has decided not to stand for re-election at the 2024 AGM. We thank her very much for her contributions over the last three years.

As announced last year, Christopher Miller, Simon Peckham and Geoffrey Martin will not stand for re-election at the Company's Annual General Meeting on 2 May 2024. Their periods of service as Directors in a variety of leadership roles have been filled with great success for Melrose and its shareholders.

With Melrose's transformation into a pureplay aerospace business complete, your Board is confident that the time is right for the new management team to take the Company forward, led by Peter Dilnot and Matthew Gregory. To that end, on 6 March 2024 Mr Peckham stepped down as Chief Executive, and today Mr Martin has stepped down as Group Finance Director and Mr Peckham, Mr Martin and Mr Miller have resigned from their positions as Directors. During their tenure, the business has grown from a start-up in 2003, to a well-positioned FTSE100 enterprise, having delivered total returns of capital of over £8 billion to shareholders, and an average return of 2.5x shareholders' equity for the businesses sold under the previous business model. We wish them well for the future.

We are pleased to confirm Mr Dilnot's appointment as CEO of Melrose effective 6 March 2024. Peter has been at Melrose for nearly 5 years, serving as COO and as an executive Director, and CEO of GKN Aerospace during this time. He has many years of public company experience, including as CEO of Renewi PLC and as a senior executive at Danaher Corporation. He has an engineering and aviation background, and started his career as a helicopter pilot in the British Armed Forces.

We also welcome Mr Gregory to the Board as an executive Director, and are pleased to confirm his appointment as CFO of Melrose effective today. Matthew was previously CFO of GKN Aerospace, and is a seasoned public company CFO with executive leadership experience across several complex, UK-listed manufacturing and transportation businesses, including as CFO of Essentra plc, and as CFO then CEO of FirstGroup plc.

Justin Dowley
Non-executive Chairman
7 March 2024

CEO'S REVIEW

MELROSE IS A PUREPLAY AEROSPACE BUSINESS WITH EXCELLENT LONG-TERM GROWTH POTENTIAL

It has been a transformational year for Melrose. During 2023 we successfully evolved into a focused aerospace technology business while delivering results well ahead of expectations. Our end markets continued to recover strongly and we generated significant margin expansion from our extensive improvement actions including restructuring, operational gains and repositioning our portfolio to improve the quality of our earnings. We have built positive momentum and have a very clear path to deliver further profitable growth and shareholder value in the years ahead.

Melrose has an extensive range of proprietary 'Tier One' technology that is in strong demand from Aerospace OEMs. This technology is already embedded into the world's leading commercial and defence aircraft platforms - both in aerospace engines and in structures. We are reinforcing these established positions with ongoing business improvements, targeted investments in organic growth and a disciplined approach to capital allocation. This includes making an important contribution to the future of sustainable flight with breakthrough technologies such as additive fabrication now, and in the longer-term, developing new forms of propulsion. We have significant opportunities to create value for all stakeholders going forward and we are confident about our exciting trajectory from here.

2023 RESULTS

In 2023, overall Group revenues grew by 17%³ with Engines growth of 16%³, driven by RRSP strength despite ongoing industry supply chain challenges, and Structures growth of 18%³ largely from OEM deliveries ramping-up. There was a 124%³ increase in adjusted operating profit to £420 million, with margins doubling from 6.3% to a record 12.5% (pre-PLC costs). The Group statutory operating profit was £57 million compared to a loss of £270 million in the prior year. Our leverage reduced to 1.1x, including £93 million of share buyback cost in the period, and net debt was better than expectations. Going forward, we are guiding to continued profit expansion to £560 million (pre-PLC costs) in 2024, at the midpoint of the range, and £700 million in 2025 as the benefits of market growth and the full impact of our improvement plans read through. Our confidence in these targets is underpinned by robust commercial and operational progress.

On the commercial front, we secured a flagship new Engines agreement with GE which is estimated to deliver US$5 billion in incremental revenue over the contract lifetime, including an expansion of RRSP participation on the GEnx programme. In Civil Structures we agreed a five-year extension with Airbus for the sole-source production of A220 wiring, and a new multi-year contract covering design and build of flight control surfaces for the new urban air mobility player, Joby. In Defence Structures, an agreement has been signed with The Netherlands MoD and Airbus for new helicopter developments, and we have secured favourable positioning for design and build content on the Global Combat Air Programme, Future Vertical Lift Programme and European Next Generation Rotorcraft Programme. In addition, Defence repricing is proceeding ahead of plan, with 42% of core defence work now being sustainably priced. Our leadership in next generation technologies was cemented through a new partnership with Embraer to explore the implementation of hydrogen technologies in aviation.

We made further progress with operational gains in 2023 with safety and quality always being our top priorities. During the year we reduced total reportable safety incidents by 19%, and the number of quality escapes (issues reaching our customers) was 44% lower than prior year. Our performance on customer deliveries improved with a reduction in arrears of £40 million, despite the significant ongoing industry supply chain issues. Productivity was impacted by these supply chain shortages, however underlying gains are being made through focused Lean implementation, automation and digitalisation. The plan to rationalise our footprint from 12 sites to nine in Engines, and 40 sites to 22 in Structures has continued to progress well. All business improvement initiatives remain firmly on, or ahead of, plan and we expect further gains to read through as we deliver revenue growth from a more focused and productive operational base.

STRATEGY

Following completion of the Demerger, Melrose has now changed strategy to being purely an aerospace business, and is reporting publicly as two divisions, Engines and Structures. The previous Melrose business model of 'Buy, Improve, Sell', has been replaced by 'Design, Deliver, Improve'. This new business model reflects how value will be created by Melrose going forward based on differentiated technology leadership, consistent delivery of commitments to our stakeholders, and ongoing improvement in all areas - including progressive financial results.

While our strategy has changed, the Group will retain the most important elements of what made Melrose successful: rapid decision making; empowering management teams; and accountability for results. Our determination and focus on improving businesses at pace will also always remain at the heart of what we do. This coupled with GKN Aerospace's technology leadership and engineering excellence will be a powerful and competitive combination.

Our plan is to deliver strong profitable growth driven in particular by our exceptional Engines division. By 2025, Engines is forecast to contribute over 70% of Melrose profit with over 85% of this being from the accretive and structurally growing aftermarket. Within this aftermarket business, our unique RRSP portfolio - which includes leading engines from all major OEMs - is expected to generate £22 billion of future cash flows (using a rate of USD 1.25). The positive momentum in Engines is demonstrated by our guidance that its 2025 margin target of 28% will be achieved a year early in 2024.

Our Structures division also has a positive profitable growth trajectory and is well on track to deliver its 9% margin target in 2025. This represents significant gains from the modestly above breakeven result in 2022 (immediately post COVID) and the 5% margin that was delivered ahead of expectations in 2023. The ongoing Structures margin expansion will continue to come from civil volumes ramping-up, our Defence portfolio repositioning and repricing, and ongoing wider business improvements.

Our immediate focus will remain on delivering organic growth with an increasing number of exciting technology-led opportunities emerging for the future, particularly in Engines where returns are highly attractive and accretive. The Board has confirmed that no material acquisitions will be made in the near-term.

MELROSE AND GKN

Within the markets in which it operates, the GKN Aerospace brand conveys quality, reliability and deep technical expertise. This is both a function of its position as a long-term trusted partner to all major airframe and engine OEMs, and its pioneering approach to the delivery of next generation solutions.

Within financial markets, since its formation in 2003, Melrose has established itself as an excellent steward of capital, empowering businesses to unlock their full potential for the collective benefit of stakeholders. As a focused aerospace group, the Melrose strategy may have changed but the unstinting focus on value creation remains.

We have therefore chosen to preserve both brands given their inherent value and reputation to different stakeholders. Going forward, the Group will operate with one brand for its customers, GKN Aerospace, and one brand for financial markets, Melrose Industries PLC. Internally we have created one unified and efficient organisation but with an emphasis on decentralisation that empowers customer-facing leaders and local operating teams.

MARKET UPDATE AND PORTFOLIO POSITION

Our end markets continue to recover strongly and look set for sustained structural growth in the years ahead. The demand is compounded by the fact that over the last four years there was a significant reduction in aerospace deliveries due to COVID and the well-publicised issues with the Boeing 737 MAX. In addition, the industry supply chain is currently pacing deliveries due to capacity and raw material shortages. This dynamic continues to create a mismatch between supply and demand, and backlogs have increased in 2023 in our key markets. Given our embedded position on all major civil and defence aircraft these large backlogs underpin our expected future business growth.

In 2023, global revenue passenger kilometres closed to within 1% of pre-COVID levels and many domestic markets were ahead of previous peak levels. With strong order intake and constrained supply, the total civil aircraft order backlog has reached a record of over 14,000 aircraft (source: Boeing and Airbus websites). Defence demand has also increased significantly due to geo-political tensions. The book-to-bill ratio for leading global defence businesses is expected to remain above 1x in the near-term.

Our positions on all leading commercial narrowbody and widebody aircraft are well established with a stronger weighting towards Airbus over Boeing. Our positions are largely design to build and sole source, including metallic and composite aerostructures, wiring, transparencies and anti-ice systems. Within Defence we have a similar technology portfolio with extensive content on the leading global F-35 fighter jet, plus positions on leading military helicopters and cargo aircraft. Our Engine portfolio is unique in terms of its breadth and coverage of global flying hours. Our deep design expertise has been embedded in leading engines from all major engine OEMs with RRSP positions on 19 engines, including 100% coverage of legacy narrowbody engines (CFM56 and V2500). In total our technology supports more than 100,000 flights per day and our business is therefore directly linked to global market growth.

SUSTAINABILITY

We are well positioned to play an important role in the development of sustainable flight and see this as key to our future success. We are investing selectively in developing new technologies, independently or in conjunction with customers and governments, that we believe will further enhance our market position. This includes developing new manufacturing methods to make established components more sustainably today - such as additive fabrication and thermoplastics. Our partners continue to embed technological improvements to make current aircraft more fuel efficient, with Pratt & Whitney's Geared Turbo Fan now certified on 50% Sustainable Aviation Fuel ('SAF') and successfully tested on 100% SAF. In parallel, we are working on longer-term developments such as our pioneering work on Hydrogen aircraft propulsion and storage, plus associated electrical distribution systems. For example, GKN Aerospace is part of the Hydrogen in Aviation Alliance, established in September 2023 to accelerate the delivery of zero carbon aviation.

We are also taking action to reduce the direct impact of our business on the environment. This year has seen continued momentum, with a number of our environmental targets being achieved early. New 2025 targets have therefore been set including a reduction in Scope 1 & 2 emission intensity by 50%, and a 40% reduction in water intensity by 2025. To enable aviation's route to Net Zero by 2050, we have set 2025 targets for the percentage of sustainable R&D at 80%.

Our sustainability actions and plans will be set out in greater detail in our Annual Report.

CAPITAL ALLOCATION

The Group commenced a £500 million share buyback programme in October 2023 with £93 million paid within the year. The programme is anticipated to complete by the end of September 2024. We will maintain a disciplined approach to capital allocation going forward with a singular focus on generating the most attractive returns for shareholders. This includes investing in an increasingly promising range of organic growth opportunities, particularly in Engines given its very accretive economics. We will pursue these opportunities while keeping leverage comfortably within the previous guidance.

We also remain committed to paying a progressive annual dividend. For 2023 the Board has recommended a final dividend of 3.5 pence per share, which will be paid on 8 May 2024 to shareholders on the register at the close of business on 2 April 2024. This makes the total dividend for 2023 5.0 pence per share.

GROUP OUTLOOK

The Group is well positioned to deliver further significant progress in 2024 and beyond. Our positive momentum gives us confidence to raise our adjusted operating profit guidance (pre-PLC costs) by £30 million for 2024 (6%), driven primarily by Engines revenue growth and adjusted operating margins. Notwithstanding the upgraded operating profit guidance, there remain revenue headwinds from industry-wide supply chain issues, short-term destocking due to the phasing of commercial aircraft build rates, and the impact of planned exits and disposals in our Structures division.

The progress we expect in 2024 will further narrow the gap to our 2025 targets. These are increasingly underpinned by the Engines outlook and mix, Civil ramp up, Defence portfolio improvements and ongoing business improvements throughout the Group.

GUIDANCE FOR 2024 AND 2025

Income Statement	2024 (Targets)	2025 (Targets)
Revenue:
Engines	£1.45bn - £1.50bn	£1.8bn
Structures	£2.15bn - £2.25bn	£2.2bn
Aerospace	£3.60bn - £3.75bn	£4.0bn

Adjusted operating profit (pre-PLC costs):
Engines	£410m - £420m	£500m
Structures	£140m - £150m	£200m
Aerospace	£550m - £570m	£700m

Adjusted operating profit margin (pre-PLC costs)	>15%	17%-18%

Adjusted EBITDA (pre-PLC costs):
Engines	£480m - £490m	£580m
Structures	£230m - £240m	£290m
Aerospace	£710m - £730m	£870m

PLC costs	c.£30m	c.£30m

Peter Dilnot
Chief Executive Officer
7 March 2024

DIVISIONAL REVIEW

ENGINES

Industry-leading Engines division positioned to achieve exceptional growth

Engines adjusted results	2023 £m	2022 £m
Revenue	1,193	1,035
Operating profit	310	162
Operating profit margin	26.0%	15.7%
EBITDA	360	215
EBITDA margin	30.2%	20.8%

The Engines division made strong financial, operational and strategic progress during 2023. Divisional growth was supported by strong end markets with increasing flying hours leading to an acceleration in shop visits and spare parts demand. Our unique RRSP portfolio further matured during the year, providing good momentum and visibility to divisional margins exceeding 30% beyond 2025.

During the year, revenue was up 16%³ versus 2022. OE revenue grew 3%, constrained by ongoing industry supply chain issues. Underlying demand is therefore higher than the reported level of growth indicates. Aftermarket revenue was up 34%, led by 40% growth in the civil engines aftermarket from a combination of volume increases, wider shop visit scope and positive pricing. Adjusted operating margins improved 10.3 percentage points to 26.0%. Encouragingly, the second half margin was ahead of our initial and most recent guidance at 27.5%.

Over the course of 2023, commercial highlights include the signing of a major new agreement with GE Aerospace. This agreement expands RRSP participation on the GEnx programme, the fastest-selling high-thrust engine, and also covers new technology insertion. The agreement also enables GKN Aerospace to join GE Aerospace's global aftermarket repair network as well as securing life-of-programme contracts to deliver 100% of GEnx, CF6 and GE90 fan cases, and 50% of GE9X fan case assembly. Other commercial highlights include a new contract with Safran to supply shafts for the LEAP engine family, plus a 10-year extension of an OEM supply agreement with Pratt & Whitney for their military engine programme family of cases such as F135, F100 and F119. Our Engines division also continues to support the Swedish Air Force with complete engine production and maintenance for their fighter fleet and this extends to wider international military customers who also fly the Gripen jet. The demand for this support continues to be elevated due to higher defence flying hours, most notably due to the ongoing war in Ukraine.

We continue to work closely with Pratt & Whitney and other partners to manage the well-publicised issues from powder metal manufacturing on some variants of the GTF. The associated inspection programme is now well underway with global airlines and is progressing according to plan with increasing clarity on the execution schedule and regulatory framework. Our previous financial guidance is unchanged with no profit impact expected from this issue and with a total cash cost of around £200 million over the next few years if it is assumed that this is all a programme cost. More broadly, we remain confident that the GTF will be a robust and attractive narrowbody engine in the decades ahead. Beyond the GTF, we have 17 other RRSP life-of-programme contracts and these generated a positive contribution in 2023. Most notably, we have 100% coverage of legacy narrowbody engines through our CFM56 and V2500 positions and these performed strongly with flying hours returning towards pre-COVID levels. The returns from our widebody engines, GEnx and XWB, are also continuing to grow with recovering long-haul travel.

Our strategically important repair business grew by 23% in 2023 as demand continued to increase strongly and our new capacity came online. Further growth will be driven by our Malaysian fan blade repair centre which gained its Civil Aviation Administration of China (CAAC) certification in 2023, opening up the rapidly expanding China and Asia markets. The development of our new state-of-the-art dedicated engine component repair centre in El Cajon, California (US), is progressing well and remains on target to open in 2024.

It was also a positive year operationally for Engines. A breakthrough quality target of 'zero escapes' in the core Engines business (issues reaching our customers from our sites) was successfully achieved throughout 2023. The division also stayed ahead of OEM production with reliable customer deliveries, despite supply chain issues that impacted our own production flows and productivity. Further progress continued during the year with our digital initiatives, including our internally developed machine and factory connectivity programme called CO-PILOT. These initiatives, coupled with ongoing Lean implementation across the global site footprint, will deliver further quality, delivery and productivity gains going forward. In addition, the US East Coast sites consolidation and Nordics restructuring programmes have progressed well, providing greater financial benefits than originally envisaged.

The development of our unique additive fabrication business, using laser wire deposition in conjunction with other technologies, has accelerated significantly. This innovative and proprietary new manufacturing approach enables complex engine parts to be made with less reliance on complex and large forgings and castings - many of which are currently capacity constrained. Our additive fabrication approach is gaining significant traction with Engine OEMs as they look to alternative manufacturing methods which can provide additional sources of supply with shorter lead times, lower costs and more sustainable processes. Current subtractive manufacturing typically results in around 80% of material being machined away to achieve the final product. By contrast, additive fabrication effectively builds and welds parts in near final form thereby minimising raw material waste, energy use and shipping emissions. Our commitment to this breakthrough proprietary technology is illustrated by a £50 million investment in a low rate production additive fabrication plant in Trollhättan, Sweden, which included £12 million funding support by the Swedish Energy Agency's Industriklivet initiative. Following a successful certification process we are now shipping the initial additive fabrication engine components to customers. The future opportunities are extremely promising and they over time include manufacturing more parts on existing engines, as well as development parts for next generation engines such as CFMI RISE.

OUTLOOK

The Engines division is extremely well placed to drive profitability throughout this decade and beyond. The division has OEM-level capability, strategic partnerships with all major engine OEMs, a lucrative and diverse RRSP portfolio, and GKN proprietary breakthrough technologies that are becoming increasingly valuable to the industry at large.

To unlock the potential of the division we have a clear and well-established path for delivering profitable growth based on: increasing RRSP portfolio contribution; focused Engines growth initiatives including repairs and additive fabrication; and ongoing business improvements. In the context of robust demand, partially tempered by ongoing supply chain issues, we expect to deliver strong revenue progress in 2024, led by aftermarket growth, and our target 2025 adjusted operating margin of 28% to be achieved one year early. We are also increasingly confident that Engines will deliver >30% margins beyond 2025.

STRUCTURES

Strong growth trajectory, exceeding pre-pandemic profitability

Structures adjusted results	2023 £m	2022 £m
Revenue	2,157	1,919
Operating profit	110	24
Operating profit margin	5.1%	1.3%
EBITDA	201	115
EBITDA margin	9.3%	6.0%

Structures had a strong year delivering adjusted operating margins of 5.1%, well ahead of our original plan of 3%. This performance was driven by expected volume growth as civil production ramped up, as well as the positive impact of our extensive business improvement actions reading through strongly, especially in the second half. These business improvements include good progress on rationalising our global site footprint, commercial renegotiations and operational gains. The division is increasingly design led with excellent customer positions, and benefits from technological expertise well suited for next generation aircraft, expected to drive long-term growth. The division remains firmly on track to achieve its 9% adjusted operating margin target by 2025.

The positive trajectory for Structures is underpinned by strong demand. In civil, order backlogs are at record levels with A320 order slots now being booked in 2030 and beyond. The rate of production ramp-up is currently being constrained by ongoing industry wide supply chain issues, and volumes are set to increase structurally as capacity expands in the years ahead. The narrowbody ramp-up is evident and is extending to widebody production rates as long-haul travel recovers. In defence, global spending continued its rapid expansion in 2023 due to geo-political tensions and as budgetary plans announced in the wake of Russia's 2022 Ukraine invasion started to positively impact. Total global defence spending has risen to US$2.2 trillion in 2023, an increase of 9% on the prior year (source: IISS). Sustained growth is set to continue with positive book-to-bill ratios expected for all the leading Defence primes. We have an established technology position on all major civil and defence platforms, so are well placed to capture market growth in the years ahead.

In 2023 Structures revenue grew 18%³ versus prior year. Civil growth of 28%³ reflected higher OEM production rates and Defence was flat³ due to increased demand and shipments offset by strategic exit of business. Divisional adjusted operating margins improved by 3.8 percentage points to 5.1% driven by volume increases, improved pricing and operational improvements, plus portfolio moves in Defence. Our focused work on improving the quality of our Defence portfolio through renegotiation or exit continues at pace and we are now ahead of plan. In total 42% of core contracts are now sustainably priced, more than double the proportion at the end of 2022. We are increasingly confident of achieving the target 85% of the portfolio being sustainably priced by 2025.

Over the course of 2023 we achieved a number of significant commercial milestones within our Structures division. This included successes with Airbus on establishing electrical wiring interconnectivity systems ('EWIS') capability in Mexico for the A220, as well as delivering the final trailing edge in the Wing of Tomorrow development programme ('WOT'). The division also delivered its 1000^th Honeywell HTF Nacelle and its 600^th Gulfstream G650 Empennage with production rates reaching an all-time high. Our position at the forefront of the next generation Air Mobility Market was reinforced through partnerships with the leading players Joby, Archer and Supernal. This is a market in its early stage but one where we are making good progress and see multiple opportunities while limiting our financial risk.

Operationally, Structures made good progress and has momentum to deliver further gains. Our top priority is always safety and quality, and during 2023 the Civil business achieved a landmark of zero lost time accidents and the wider Structures division delivered a 43% reduction in quality 'escapes' (issues reaching the customer) versus prior year. Our deliveries also ramped-up strongly despite the ongoing industry supply chain challenges with arrears in the division 34% lower than 2022. The extensive restructuring programme within Structures is nearing completion with the successful consolidation and restructuring of The Netherlands' footprint down from six sites to two multiple technology campuses in Hoogeveen and Papendrecht. In the US and Mexico the site footprint has been rationalised to create three centres of excellence at Chihuahua, Orangeburg and Wellington. Going forward, we expect to deliver further quality, productivity and cost improvements as volumes increase within our restructured and leaner operating base.

More broadly, our new COMAC and AVIC joint venture ('JV') site in Jingjiang, China remains under construction with production expected from Q2 2024 and with the first work packages already agreed. China is set to become the largest aviation market by 2040, opening 150 new airports by 2035, and this JV unlocks the path to this promising and important indigenous market. Our work on focusing the Defence portfolio has continued and we divested the non-core Fuel Systems business on 1 March 2024.

We are also positioning Structures to play a valuable and profitable role in future aircraft developments. This is built upon GKN Aerospace's expertise in thermoplastics, EWIS and lightweight aerostructures, as well as breakthrough additive manufacturing methods that can accelerate product development. During 2023 our technological leadership was evidenced through our collaboration with Embraer for a hydrogen flight demonstrator, with Pratt & Whitney Canada for a hybrid electric flight demonstrator, and by completing the first high voltage electrical harness for the Lilium jet. Our Defence business is well positioned for design and build content on the Global Combat Air Programme with the UK, Italy and Japan, and with two leading OEMs for uncrewed systems. We also remain well placed on future rotorcraft programmes in the US (Future Vertical Lift) and EU (European Next Generation Rotorcraft).

To further support the Structures positioning in next generation technology, and the pursuit of Net Zero, a new Global Technology Centre ('GTC') opened in Hoogeveen, Netherlands, with a particular focus on lightweight thermoplastics and high voltage wiring systems. This new centre complements our established GTCs across the wider Group in Bristol (UK), Trollhättan (Sweden) and Fort Worth, Texas (US).

OUTLOOK

Structures has an embedded position as a Super Tier One partner to the world's leading aircraft OEMs, coupled with unrivalled technical expertise. The division is therefore well placed to benefit from civil ramp-up, defence spending and new platforms, and the shift to sustainable aviation over time. Our design to build business model and increasingly focused portfolio is set to deliver high quality earnings.

For 2024 we expect to make revenue progress reflecting market growth. However, reported revenue is likely to be flat versus prior year due to short-term destocking at some Civil customers (caused by their supply chain challenges), the planned exit of non-core work previously outlined, and the disposal of the Fuel Systems business. For the full year the division is expected to make further progress in expanding adjusted operating margins and we expect the year to have second half seasonal weighting as usual. Looking forward, we are increasingly confident of achieving our 2025 adjusted operating margin target of 9%.

FINANCE DIRECTOR'S REVIEW

The year ended 31 December 2023 has seen a significant transformation for the Melrose Group.

On 20 April 2023 the demerger of the GKN Automotive, GKN Powder Metallurgy and GKN Hydrogen group of businesses ("Dowlais") completed. Dowlais contributed approximately two thirds of the adjusted revenue and adjusted operating profit of the Group in 2022 and therefore the demerger, and necessary treatment of Dowlais as discontinued, has a material impact on the presentation of these Consolidated Financial Statements.

Following the demerger of Dowlais, it was deemed appropriate to announce a change to the Group's strategy from 'Buy, Improve, Sell', which has served shareholders well since the first Melrose acquisition in 2005, to being purely an aerospace business that reports as two separate operating segments, namely Engines and Structures, alongside the corporate cost centre.

MELROSE GROUP RESULTS - CONTINUING OPERATIONS

Statutory results:

The statutory IFRS results for continuing operations are shown on the face of the Income Statement and show revenue of £3,350 million (2022: £2,954 million), an operating profit of £57 million (2022: loss of £270 million) and a loss before tax of £8 million (2022: £328 million). The diluted earnings per share ("EPS"), calculated using the weighted average number of shares in issue during the year of 1,405 million (2022: 1,406 million), were 0.1 pence (2022: loss of 16.3 pence).

Adjusted results:

The adjusted results are also shown on the face of the Income Statement. They are adjusted to exclude certain items which are significant in size or volatility or by nature are non-trading or non-recurring, or are items released to the Income Statement that were previously a fair value item booked on an acquisition. It is the Group's accounting policy to exclude these items from the adjusted results, which are used as an Alternative Performance Measure ("APM") as described by the European Securities and Markets Authority ("ESMA"). APMs used by the Group are defined in the glossary to the Consolidated Financial Statements.

The Melrose Board considers the adjusted results to be an important measure used to monitor how the businesses are performing as they achieve consistency and comparability between reporting periods when all businesses are held for the complete reporting period.

The adjusted results for the year ended 31 December 2023 show an operating profit of £390 million (2022: £147 million) and a profit before tax of £331 million (2022: £62 million). Adjusted diluted EPS, calculated using the weighted average number of shares in issue in the year of 1,405 million (2022: 1,406 million), were 18.7 pence (2022: 4.1 pence).

The following table shows the adjusted results for the year ended 31 December 2023 split by reporting segment:

	Engines £m	Structures £m	Aerospace £m	Corporate £m	Total £m
Revenue	1,193	2,157	3,350	-	3,350
Operating profit/(loss)	310	110	420	(30)	390
Operating margin	26.0%	5.1%	12.5%	n/a	11.6%

Revenue for Engines of £1,193 million (2022: £1,035 million) shows constant currency growth of 16% over 2022, with adjusted operating profit of £310 million (2022: £162 million) giving an operating margin of 26.0% (2022: 15.7%), an increase of 10.3 percentage points.

Revenue for Structures of £2,157 million (2022: £1,919 million) shows like-for-like (excluding revenue exited in closing businesses) constant currency growth of 18% over 2022, (12% including revenue exited in closing businesses), with adjusted operating profit of £110 million (2022: £24 million) giving an operating margin of 5.1% (2022: 1.3%), an increase of 3.8 percentage points.

Corporate costs of £30 million (2022: £39 million) included £29 million (2022: £36 million) of operating costs and £1 million (2022: £3 million) of costs relating to a divisional cash-based long-term incentive plan.

The performances of each of the Aerospace reporting segments are discussed in the CEO's Review.

RECONCILIATION OF STATUTORY RESULTS TO ADJUSTED RESULTS

The following table reconciles the Group statutory operating profit/(loss) to adjusted operating profit:

Continuing operations:	2023 £m	2022 £m
Statutory operating profit/(loss)	57	(270)
Adjusting items:
Amortisation of intangible assets acquired in business combinations	260	260
Restructuring costs	149	90
Equity-settled compensation scheme charges	38	15
Currency movements in derivatives and movements in associated financial assets and liabilities	(114)	79
Other	-	(27)
Adjustments to statutory operating profit/(loss)	333	417


Adjusted operating profit	390	147

Adjusting items to the statutory operating profit/(loss) are consistent with prior years and include:

· The amortisation charge on intangible assets acquired in business combinations of £260 million (2022: £260 million), which is excluded from adjusted results due to its non-trading nature and to enable comparison with companies that grow organically. However, where intangible assets are trading in nature, such as computer software and development costs, the amortisation is not excluded from adjusted results.

· Costs associated with restructuring projects in the year totalling £149 million (2022: £90 million), including £59 million (2022: £11 million) of losses incurred in closing businesses within the Group. These are shown as adjusting items due to their size and non-trading nature.

There are three significant ongoing multi-year restructuring programmes, impacting multiple sites across the Engines and Structures divisions, two of which include European footprint consolidations, and one significant multi-site restructuring programme in North America. These programmes incurred a combined charge, excluding losses, of £62 million in the year. Since commencement, the cumulative charges, excluding losses, on these three restructuring programmes to 31 December 2023 has been £217 million (31 December 2022: £155 million), with approximately 35% relating to the two significant European programmes and approximately 65% in North America.

As at 31 December 2023, actions to complete the European programmes, on average, are approximately 95% complete. During the year, the North America multi-site restructuring programme has been expanded and is now approximately 70% complete. In addition to the remaining charges to be incurred on these projects, £37 million is included in restructuring provisions at 31 December 2023 to be settled in cash over the next two years.

Restructuring costs during the year also included charges of £12 million (2022: £nil) relating to changes made within the Melrose corporate cost centre following the announced change to the Group's ongoing strategy. These include the costs of merging the Melrose corporate cost function with the previously separate Aerospace division head office team. These restructuring actions reshape the corporate cost centre to serve as an ongoing pureplay aerospace business.

· The charge for the equity-settled compensation schemes of £38 million (2022: £15 million), which includes a charge to the accrual for employer's tax payable of £28 million (2022: credit of £1 million). This is excluded from adjusted results due to its size and volatility. The shares that would be issued, based on the scheme's current valuation at the end of the year, are included in the calculation of the adjusted diluted earnings per share, which the Board considers to be a key measure of performance.

· Movements in the fair value of derivative financial instruments (primarily forward foreign currency exchange contracts), where hedge accounting is not applied, along with foreign exchange movements on the associated financial assets and liabilities, entered into within the businesses to mitigate the potential volatility of future cash flows on long-term foreign currency customer and supplier contracts. This totalled a credit of £114 million (2022: charge of £79 million) in the year and is shown as an adjusting item because of its volatility and size.

· Other adjusting items, net to £nil (2022: net credit of £27 million), which included a charge of £3 million in respect of acquisition and disposal costs, net of a credit of £3 million relating to the release of fair value items in the year, where items have been resolved for more favourable amounts than first anticipated at acquisition. The net release of fair value items is shown as an adjusting item, avoiding positively distorting adjusted results from items booked on acquisition. The prior year also includes the profit on disposal of two corporate properties.

The following table shows the allocation of adjusting items, described above, by reporting segment:

	Engines £m	Structures £m	Corporate £m	Total £m
Statutory operating profit/(loss)	147	(130)	40	57
Adjusting items	163	240	(70)	333
Adjusted operating profit/(loss)	310	110	(30)	390

FINANCE COSTS AND INCOME - CONTINUING OPERATIONS

Statutory results:

Total net finance costs in the statutory IFRS results for the year ended 31 December 2023 were £65 million (2022: £58 million).

Adjusted results:

Total net finance costs in the adjusted results in the year ended 31 December 2023 were £59 million (2022: £85 million), which included net interest on external bank loans, bonds, overdrafts and cash balances of £48 million (2022: £72 million).

Net finance costs in adjusted results also included: a £4 million (2022: £10 million) amortisation charge relating to the arrangement costs of raising the Group's current bank facility; an interest charge on net pension liabilities of £1 million (2022: credit of £1 million); a charge on lease liabilities of £5 million (2022: £3 million); and a charge for the unwind of discounting on long-term provisions of £1 million (2022: £1 million).

Adjusting items:

Adjusting items, within finance costs and income, total a net charge of £6 million (2022: net credit of £27 million).

Adjusting items include a £13 million gain (2022: £24 million) following the settlement of a portion of the 2032 bond, acquired with GKN, a £17 million charge (2022: £nil) in respect of the proportion of the Group's net debt strategically allocated to Dowlais at the start of the year and a £2 million charge (2022: £nil) in respect of the write off of unamortised bank fees when the existing bank facilities at the time of the demerger were repaid.

In the prior year, adjusting items within finance costs and income also included a credit of £3 million relating to the fair value changes on cross-currency swaps.

DISCONTINUED OPERATIONS

In accordance with IFRS 5, the results of Dowlais are shown as discontinued for the period up to demerger in 2023 and are restated to be shown as discontinued operations for the prior year.

These businesses contributed £1,582 million to revenue and achieved statutory operating profit of £32 million for the period of the year under ownership in 2023.

SHARE CONSOLIDATION, SHARE BUYBACK AND NUMBER OF SHARES IN ISSUE

A one for three share consolidation was performed by the Group on the eve of the demerger of Dowlais, which resulted in the number of shares in issue reducing from 4,054 million to 1,351 million. Shareholders then received one Dowlais share for every post-consolidation Melrose share they held. In accordance with IAS 33, the one for three consolidation is applied to all periods in these Consolidated Financial Statements.

The Group commenced a share buyback programme on 2 October 2023, and made market purchases of existing ordinary shares in issue in the capital of the Company. At 31 December 2023, 18 million ordinary shares had been purchased at an average price per share of 494 pence. These ordinary shares are being held in treasury and the number of ordinary shares in issue has reduced by 1.3%, from 1,351 million to 1,333 million at 31 December 2023.

The weighted average number of shares used for basic earnings per share calculations in the year ended 31 December 2023 was 1,349 million (2022: 1,406 million), and when including the number of shares expected to be issued from the Melrose equity-settled share plan, the weighted average number of shares used for diluted earnings per share, was 1,405 million (2022: 1,406 million).

TAX - CONTINUING OPERATIONS

The statutory results for continuing operations show a tax credit of £9 million (2022: £99 million) which arises on a statutory loss before tax on continuing operations of £8 million (2022: £328 million), a statutory tax rate of 113% (2022: 30%). The effective rate on the adjusted profit before tax for the year ended 31 December 2023 was 20.5% (2022: 6.5%).

The statutory tax rate is higher than the adjusted tax rate because the intangible asset amortisation and certain other adjusting items generate adjusting tax credits at rates higher than 21%, and these are applied to a small statutory loss before tax in the year.

The Group has £747 million (31 December 2022: £856 million) of deferred tax assets on tax losses, retirement benefit obligations and other temporary differences. These are offset by deferred tax liabilities on intangible assets of £479 million (31 December 2022: £923 million) and £223 million (31 December 2022: £179 million) of other deferred tax liabilities. Where they arise in the same territory, deferred tax assets and liabilities must be offset, resulting in deferred tax assets of £527 million (31 December 2022: £373 million) and deferred tax liabilities of £482 million (31 December 2022: £619 million) being shown on the Balance Sheet at 31 December 2023. Most of the tax losses and other deferred tax assets will generate future cash tax savings, whereas the deferred tax liabilities on intangible assets are not expected to give rise to cash tax payments.

Net cash tax paid in the year ended 31 December 2023 by continuing operations was £17 million (2022: £8 million), 5.1% (2022: 12.9%) of adjusted profit before tax.

CASH GENERATION AND MANAGEMENT

Adjusted free cash flow for the continuing Group in the year ended 31 December 2023 was an inflow of £113 million (2022: outflow of £35 million), after net interest and tax spend of £82 million (2022: £89 million), but before restructuring spend of £125 million (2022: £53 million).

Free cash flow pre-interest and tax was an inflow of £70 million (2022: £1 million), which calculated as a percentage of revenue, gives a free cash flow margin of 2.1% (2022: 0.0%).

An analysis of free cash flow is shown in the table below:

	2023 £m	2022 £m
Continuing operations:
Adjusted operating profit	390	147
Depreciation and amortisation	142	145
Lease obligation payments	(32)	(29)
Positive non-cash impact from loss-making contracts	(23)	(23)
Working capital movements:
Inventory	(10)	(88)
Receivables and payables	(136)	(60)
Adjusted operating cash flow (pre-capex)	331	92
Net capital expenditure	(102)	(72)
Defined benefit pension contributions - ongoing	(22)	(23)
Restructuring	(125)	(53)
Net other	(12)	57
Free cash flow pre-interest and tax	70	1
Free cash flow pre-interest and tax margin	2.1%	-
Net interest and net tax paid	(82)	(89)
Free cash flow	(12)	(88)
Adjusted free cash flow	113	(35)

Working capital movements in the continuing Group totalled an outflow of £146 million for the year ended 31 December 2023, being an outflow of £10 million in inventory and £136 million from receivables and payables combined. The working capital performance in the first half was consistent with revenue growing by 15% in that period, but in the second half the performance was stronger, as expected, with an inventory inflow of £43 million and with combined receivables and payables only growing by £20 million, 4%, despite Group revenue growing by c.12% in the second half of the year.

Capital expenditure in the year ended 31 December 2023 was £102 million (2022: £72 million). Capital expenditure represented 0.9x (2022: 0.6x) depreciation of owned assets.

Restructuring spend in the year was £125 million (2022: £53 million).

In the continuing Group, net interest paid in the year was £65 million (2022: £81 million), net tax payments were £17 million (2022: £8 million) and ongoing contributions to defined benefit pension schemes were £22 million (2022: £23 million).

The movement in net debt (as defined in the glossary to the Consolidated Financial Statements) is summarised as follows:

	£m
Opening net debt	(1,139)
Net cash outflow from Dowlais businesses to date of demerger	(54)
Reduction in net debt following the demerger of Dowlais	885
2022 second interim dividend paid to shareholders	(61)
Demerger related costs and pension buy-in	(118)
Proforma opening net debt	(487)
Free cash flow of the continuing Group	(12)
2023 interim dividend paid to shareholders	(20)
Buyback of own shares	(93)
FX and other non-cash movements	40
Net debt at 31 December 2023 at closing exchange rates	(572)

Proforma opening net debt of £487 million for the continuing Melrose Group is calculated after adjusting the closing net debt at 31 December 2022, of £1,139 million, for: the payment of demerger related costs of £62 million; bank facility arrangement fees of £11 million; the cost of fully securing the benefits of all members of the GKN UK Pension Scheme Number 4 in advance of an expected buy-out process, of £45 million; the second interim dividend for the year ended 31 December 2022 of £61 million; and the net debt that Dowlais inherited on inception.

Group net debt at 31 December 2023, translated at closing exchange rates (being US$1.28 and €1.15), was £572 million (31 December 2022: £1,139 million), after a free cash outflow from the continuing Group of £12 million, described above. Movements in Group net debt also included the payment of the 2023 interim dividend to shareholders of £20 million, £93 million spent buying back shares in the market, net favourable foreign exchange movements of £24 million and other non-cash movements of £16 million.

For bank covenant purposes the Group's net debt is calculated at average exchange rates for the previous twelve months, to better align the calculation with the currency rates used to calculate profits, and was £584 million.

The Group net debt leverage on this basis at 31 December 2023 was 1.1x EBITDA compared to a proforma opening leverage of 1.8x EBITDA when using proforma net debt at demerger of £487 million, described above (31 December 2022: reported 1.4x EBITDA).

ASSETS AND LIABILITIES AND IMPAIRMENT REVIEW

The summarised Melrose Group assets and liabilities are shown below:

	2023 £m	2022 £m
Goodwill and intangible assets acquired with business combinations	3,106	6,508
Tangible fixed assets, computer software and development costs	1,022	2,937
Equity accounted investments	7	435
Net working capital	475	343
Net retirement benefit obligations	(99)	(488)
Provisions	(286)	(611)
Deferred tax and current tax	31	(358)
Lease obligations	(192)	(366)
Net other	75	(93)
Total	4,139	8,307

The significant reduction in the Group's net assets in the year relates primarily to the assets and liabilities demerged with Dowlais.

The Group's goodwill has been tested for impairment, and in accordance with IAS 36 "Impairment of assets" the recoverable amount has been assessed as being the higher of the fair value less costs to sell and the value in use.

The Board is comfortable that no impairment is required in respect of the valuation of goodwill in its businesses as at 31 December 2023.

The assets and liabilities shown above are funded by:

	2023 £m	2022 £m
Net debt	(572)	(1,139)
Equity	(3,567)	(7,168)
Total	(4,139)	(8,307)

Net debt shown in the table above is defined in the glossary to the Consolidated Financial Statements.

PROVISIONS

Total provisions at 31 December 2023 were £286 million (31 December 2022: £611 million).

The following table details the movement in provisions in the year:

	Total £m
Provisions at 1 January 2023	611
Continuing businesses:
Net charge in the year	137
Spend against provisions	(107)
Utilisation of loss-making contract provision	(23)
Other	(12)
Discontinued businesses:
Movement in provisions in Dowlais in the period to demerger	24
Demerger of Dowlais	(344)
Provisions at 31 December 2023	286

The net charge to the Income Statement in the year for continuing operations was £137 million, and included £78 million relating to restructuring activities and a £20 million loss making contract provision charge at a closing site as operations wind down. In addition, the net charge includes a £28 million charge relating to employer's tax payable on equity-settled compensation schemes. These sizeable items are shown as adjusting items and are included in the adjusting items section discussed earlier in this review.

During the year, £23 million was utilised against loss-making contract provisions in Aerospace and £107 million of cash was spent against provisions with £79 million relating to restructuring activities.

Net provision movements relating to property, environmental & litigation and warranty in Aerospace were not material in the year.

Other movements in provisions, in continuing operations, included £4 million of provisions classified as held for sale as at 31 December 2023, relating to the contractually agreed sale of a non-core business in the Structures segment that completed on 1 March 2024 and £8 million relating to foreign exchange movements.

The net movement on provisions within Dowlais in the period up to demerger was £24 million, with £344 million of provisions leaving the Group at the date of demerger.

PENSIONS AND POST-EMPLOYMENT OBLIGATIONS

Melrose operates a number of defined benefit pension schemes and retiree medical plans across the Group, accounted for using IAS 19 Revised: "Employee Benefits".

The values of the Group plans were updated at 31 December 2023 by independent actuaries to reflect the latest key assumptions and are summarised as follows:

	Assets £m	Liabilities £m	Accounting deficit £m
GKN UK Group pension scheme - Number 1	632	(692)	(60)
GKN UK Group pension scheme - Number 4	438	(438)	-
Other Group pension schemes	48	(87)	(39)
Total Group pension schemes	1,118	(1,217)	(99)

At 31 December 2023, following the demerger of Dowlais, the total plan assets of Melrose Group's defined benefit pension plans has reduced to £1,118 million (31 December 2022: £1,941 million) and total plan liabilities to £1,217 million (31 December 2022: £2,429 million), a net deficit of £99 million (31 December 2022: £488 million).

The GKN UK Group Pension Schemes (Numbers 1 and 4) are the most significant pension plans remaining in the Group, and are closed to new members and to the accrual of future benefits for current members.

At 31 December 2023, the GKN UK Group Pension Scheme Number 1 had gross assets of £632 million (31 December 2022: £628 million), gross liabilities of £692 million (31 December 2022: £667 million) and a net deficit of £60 million (31 December 2022: £39 million).

During the year ended 31 December 2023, the Group commenced a process to buy-out the GKN UK Group Pension Scheme Number 4. The first stage of the process, purchasing a buy-in policy which fully secures all members' benefits, was completed in the year, resulting in assets and liabilities of £438 million being recorded equally at 31 December 2023. The buy-out process is expected to complete in the first half of 2024, when assets and liabilities will leave the Group and cease being shown in the Balance Sheet.

Other pension schemes in the Group include US pension plans which are generally funded schemes and closed to new members. At 31 December 2023, these US pension plans had a net deficit of £25 million.

In total, ongoing contributions to the Group defined benefit pension plans and post-employment medical plans in the year ended 31 December 2023 were £22 million and are expected to be a similar amount in 2024.

A summary of the assumptions used are shown in note 10 to this Prelimanary Announcement.

FINANCIAL RISK MANAGEMENT

The financial risks the Group faces continue to be considered and policies are implemented to appropriately deal with each risk. The most significant financial risks are considered to be liquidity risk, finance cost risk, exchange rate risk, contract and warranty risk and commodity cost risk.

These are discussed in turn below.

Liquidity risk management

The Group's net debt position at 31 December 2023 was £572 million (31 December 2022: £1,139 million).

The Group's committed bank facilities were refinanced during the year. The new facilities consist of a multi-currency term loan denominated US$300 million and €100 million, and a US$250 million revolving credit facility, both of which mature in April 2026. In addition, the Group also entered into multi-currency revolving credit facilities totalling US$690 million, £300 million and €300 million that initially mature in April 2026, but with the potential to be extended for two additional one-year periods at the Company's option. Details of the new facilities and amounts borrowed as at 31 December 2023 are shown below:

	Local currency			£m
	Size	Drawn	Headroom	Headroom
Term loan:
USD	300	300	-	-
EUR	100	100	-	-
Revolving credit facility:
USD	940	298	642	503
GBP	300	1	299	299
EUR	300	22	278	241
Total headroom				1,043

At 31 December 2023, the term loan was fully drawn and there were drawings of US$298 million, £1 million and €22 million on the revolving credit facilities. Applying the exchange rates at 31 December 2023, the headroom equated to £1,043 million. There are also a number of uncommitted overdraft, guarantee and borrowing facilities made available to the Group.

In addition to the headroom on the multi-currency committed revolving credit facility, cash, deposits and marketable securities, net of overdrafts, in the Group amounted to £57 million at 31 December 2023 (31 December 2022: £292 million).

At the start of the year the Group held capital market borrowings with an outstanding notional value of £130 million from an original £300 million bond, issued in May 2017 and due to mature in May 2032. In December 2023, an agreement was reached with certain remaining bondholders that resulted in £120 million of the outstanding nominal value being bought back and cancelled for a total cost of £109 million (excluding accrued interest). This represented a gain of £13 million after associated costs and the release of a fair value adjustment of £2 million on the bond, recognised on acquisition of GKN. This gain has been recognised as an adjusting item within finance income in the Consolidated Income Statement.

As at 31 December 2023, the capital market borrowings held by the Group consisted of £10 million of the original £300 million bond due to mature in May 2032, with a current coupon of 4.625%.

The committed bank funding has two financial covenants, being a net debt to adjusted EBITDA covenant and an interest cover covenant, both of which are tested half-yearly in June and December, with the exception that the first testing date for the interest cover covenant will be 30 June 2024.

The net debt to adjusted EBITDA covenant test level is set at 3.5x and, as at 31 December 2023, the Group net debt leverage was 1.1x, affording comfortable headroom.

The interest cover test is set at 4.0x for the remaining term of the bank facility.

A limited number of Group trade receivables are subject to non-recourse factoring and customer supply chain finance arrangements. As at 31 December 2023, these amounted to £268 million (31 December 2022: £325 million).

In addition, some suppliers have access to utilise the Group's supplier finance programmes, which are provided by a number of the Group's banks. As at 31 December 2023 there were drawings on these facilities of £86 million (31 December 2022: £200 million). There is no cost to the Group for providing these programmes as the cost is borne by the suppliers. These programmes allow suppliers to choose whether they want to accelerate the payment of their invoices by the financing banks, at a low interest cost, based on the credit rating of the Group as determined by the financing banks. If the Group exited these arrangements or the banks ceased to fund the programmes there could be a potential impact of up to £42 million (31 December 2022: £94 million) on the Group's cash flows. The risk of this happening is considered remote as the Group has extended the number of banks that provide this type of financing to ensure there is not a significant exposure to any one bank.

Finance cost risk management

In addition to the fixed coupon payable under the remaining £10 million bond discussed above, the Group uses financial derivatives to fix a portion of the interest cost on its committed bank facilities.

The policy of the Board is to fix approximately 70% of the interest rate exposure on the Group's committed bank borrowings to align with the maturity of its debt facilities. Following the demerger, the Group fixed an appropriate amount of debt by currency up to the initial maturity date of the Group's new bank facilities. The maximum weighted average rates, excluding the bank margin, the Group will pay on the fixed portions of its US Dollar and Euro bank debt are 3.6% and 3.0% respectively.

The bank margin on the bank facilities depends on Group leverage and were as follows:

	31 Dec 2023		31 Dec 2022
Facility:	Margin	Range	Margin	Range
Term Loan	1.30%	0.9% - 2.2%	0.75%	0.75% - 2.0%
Revolving Credit Facilities	1.30% - 1.55%	0.9% - 2.4%	0.75%	0.75% - 2.0%

The Group's cost of drawn debt for the next 12 months is currently expected to be approximately 5.4%.

Exchange rate risk management

The Group trades in various countries around the world and is exposed to movements in a number of foreign currencies. Following the demerger and subsequent update to the Group's strategy to be a pureplay aerospace business going forward, the exposure to foreign exchange movements related to a disposal now no longer represents a material risk for the Group.

The Group therefore carries exchange rate risk that can be categorised into two types: transaction and translation risk, as described in the paragraphs below. The Group's policy is designed to protect against the majority of the cash risks but not the non-cash risks.

The most common exchange rate risk is the transaction risk the Group takes when it invoices a customer or purchases from suppliers in a different currency to the underlying functional currency of the relevant business. The Group's policy is to review transactional foreign exchange exposures, and place necessary hedging contracts, quarterly on a rolling basis. To the extent the cash flows associated with a transactional foreign exchange risk are committed, the Group will hedge 100% at the time the cash flow becomes committed. For forecast and variable cash flows, the Group hedges a proportion of the expected cash flows, with the percentage being hedged lowering as the time horizon lengthens. The Group hedges on a sliding scale, typically hedging around 90% of foreign exchange exposures expected over the next twelve months, with the percentage decreasing by approximately 10 percentage points for each subsequent year. This policy does not eliminate the cash risk but does bring some certainty to it.

The translation rate risk is the effect on the Group results in the period due to the movement of exchange rates used to translate foreign results into Sterling from one period to the next. No specific exchange instruments are used to protect against the translation risk because it is a non-cash risk to the Group, until foreign currency is subsequently converted to Sterling. However, the Group utilises its multi-currency banking facilities and cross-currency swaps, where relevant, to maintain an appropriate mix of debt in each currency. The hedge of having debt drawn in these currencies funding the trading units with US Dollars or Euro functional currencies protects against some of the Balance Sheet and banking covenant translation risk.

Exchange rates for currencies most relevant to the Group in the year were:

US Dollar	Average rate	Closing rate
2023	1.24	1.28
2022	1.24	1.21
Euro
2023	1.15	1.15
2022	1.17	1.13

A 10 percent strengthening of the major currencies within the Group, if this were to happen in isolation against all other currencies, would have the following impact on the re-translation of adjusted operating profit into Sterling:

	USD	EUR
Increase in adjusted operating profit - £ million	38	9
% impact on adjusted operating profit	7%	2%

The impact from transactional foreign exchange exposures is not material in the short term due to hedge coverage being approximately 90%.

A 10 percent strengthening in either the US Dollar or Euro would have the following impact on debt as at 31 December 2023:

	USD	EUR
Increase in debt - £ million	50	12
% impact on debt	8%	2%

Contract and warranty risk management

Under Melrose management a suitable bid and contract management process exists in the businesses, which includes thorough reviews of contract terms and conditions, contract-specific risk assessments and clear delegation of authority for approvals. These processes aim to ensure effective management of risks associated with complex contracts. The financial risks connected with contracts and warranties include the consideration of commercial, legal and warranty terms and their duration, which are all considered carefully by the businesses and Melrose centrally before being entered into.

Commodity cost risk management

The cumulative expenditure on commodities is important to the Group and the risk of base commodity costs increasing is mitigated, wherever possible, by passing on the cost increases to customers or by having suitable purchase agreements with suppliers which fix the price over a certain period. These risks are also managed through sourcing policies, including the use of multiple suppliers, where possible, and procurement contracts where prices are agreed in advance to limit exposure to price volatility.

GOING CONCERN

As part of their consideration of going concern, the Directors have reviewed the Group's future cash forecasts and projections, which are based on both market and internal data and recent past experience.

The Directors recognise the challenges in the current economic environment, including challenges in supply chains and geopolitical risks. The Group is actively managing the associated impacts on trading through a sharp focus on pricing, productivity and costs. In addition, the Group's cash flow forecasts consider any impacts from further economic factors such as high interest rates.

The Group has modelled a reasonably possible downside scenario against these future cash forecasts and throughout this scenario the Group would not breach any of the revised financial covenants and would not require any additional sources of financing.

The macroeconomic environment remains uncertain and volatile and the impacts of the economic factors such as inflation, high interest rates, geopolitical conflict and challenges in supply chains could be more prolonged or severe than that which the Directors have considered in the Group's reasonably possible downside scenario.

Considering the Group's current committed bank facility headroom, its access to liquidity, and the sensible level of bank covenants in place with lending banks, the Directors consider it appropriate that the Group can manage its business risks successfully and adopt a going concern basis in preparing these Consolidated Financial Statements.

Geoffrey Martin

Group Finance Director

7 March 2024

CAUTIONARY STATEMENT

This announcement contains statements that are, or may be deemed to be "forward-looking statements". These forward-looking statements may be identified by the use of forward-looking terminology, including the terms "believes", "estimates", "plans", "projects", "anticipates", "potential", "predicts", "expects", "intends", "may", "will", "can", "likely" or "should" or, in each case, their negative or other variations or comparable terminology, or by discussions of strategy, plans, objectives, goals, future events or intentions. Forward-looking statements may and often do differ materially from actual results. Any forward-looking statements reflect the Company's current view with respect to future events and are subject to risks relating to future events and other risks, uncertainties and assumptions relating to the business, results of operations, financial position, liquidity, prospects, growth and strategies of the Group. Forward-looking statements speak only as of the date they are made.

In light of these risks, uncertainties and assumptions, the events in the forward-looking statements may not occur or the Company's or the Group's actual results, performance or achievements of the Company might be materially different from the expected results, performance or achievements expressed or implied by such forward-looking statements. Forward-looking statements contained in this announcement speak only as at the date of this announcement. The Company expressly disclaims any obligation or undertaking to update these forward-looking statements contained in this announcement to reflect any change in their expectations or any change in events, conditions, or circumstances on which such statements are based unless required to do so by applicable law, the Listing Rules and the Disclosure Guidance and Transparency Rules of the FCA or Regulation (EU) 596/2014 as it forms part of the domestic law of the United Kingdom by virtue of the European Union (Withdrawal) Act 2018.

CONSOLIDATED INCOME STATEMENT

Notes

Year ended
31 December
2023
£m

Restated(1)

Year ended
31 December
2022
£m

Revenue

Cost of sales

3,350

(2,696)

2,954

(2,533)

Gross profit

Operating expenses

654

(597)

421

(691)

Operating profit/(loss)

3, 4

(270)

Finance costs

Finance income

(79)

(83)

Loss before tax

Tax

(8)

(328)

Profit/(loss) after tax for the year from continuing operations

(229)

Discontinued operations

Loss for the year from discontinued operations

(1,020)

(74)

Loss after tax for the year

(1,019)

(303)

Attributable to:

Owners of the parent

Non-controlling interests

(1,019)

(308)

(1,019)

(303)

Earnings per share

Continuing operations

- Basic

- Diluted

0.1p

(16.3)p

Continuing and discontinued operations

- Basic

- Diluted

(75.5)p

(21.9)p

Adjusted(2) results from continuing operations

Adjusted operating profit

Adjusted profit before tax

Adjusted profit after tax

Adjusted basic earnings per share

Adjusted diluted earnings per share

3, 4

390

331

263

19.5p

18.7p

147

4.1p

(1) Results for the year ended 31 December 2022 have been restated for discontinued operations (see note 1).

(2) Defined in note 2.

Consolidated Statement OF COMPREHENSIVE INCOME

	Notes	Year ended 31 December 2023 £m	Year ended 31 December 2022 £m
Loss after tax for the year		(1,019)	(303)
Items that will not be reclassified subsequently to the Income Statement: Net remeasurement loss on retirement benefit obligations Fair value gain/(loss) on investments in equity instruments Income tax credit/(charge) relating to items that will not be reclassified	5	(119) 35 29	(32) (34) (1)
Items that may be reclassified subsequently to the Income Statement: Currency translation on net investments Share of other comprehensive (expense)/income from equity accounted investments Transfer to Income Statement from equity of cumulative translation differences on disposal of foreign operations Derivative gains/(losses) on hedge relationships Transfer to Income Statement on hedge relationships Income tax (charge)/credit relating to items that may be reclassified	8 5	(55) (195) (12) (152) 2 - (8)	(67) 593 13 (11) (39) 2 5
		(365)	563
Other comprehensive (expense)/income for the year		(420)	496
Total comprehensive (expense)/income for the year		(1,439)	193
Attributable to: Owners of the parent Non-controlling interests		(1,439) -	187 6
		(1,439)	193

Consolidated Statement of Cash Flows

Notes

Year ended
31 December
2023
£m

Restated(1)

Year ended
31 December
2022
£m

Operating activities

Net cash used in operating activities from continuing operations

Net cash from operating activities from discontinued operations

(7)

(39)

243

Net cash from operating activities

204

Investing activities

Disposal of businesses, net of cash disposed

Settlement receipt from loans held with demerged entities

Purchase of property, plant and equipment

Proceeds from disposal of property, plant and equipment

Purchase of computer software and capitalised development costs

Disposal of equity accounted investments

Acquisition of subsidiaries, net of cash acquired

Settlement of derivatives used in net investment hedging

Equity accounted investment additions

Interest received

(320)

1,205

(95)

(11)

478

(69)

(7)

(4)

(109)

(3)

Net cash from investing activities from continuing operations

Net cash used in investing activities from discontinued operations

788

(67)

332

(140)

Net cash from investing activities

721

192

Financing activities

Repayment of borrowings

Drawings on borrowing facilities

Costs of raising debt finance

Repayment of principal under lease obligations

Purchase of own shares, including associated costs

Dividends paid to owners of the parent

(1,371)

628

(11)

(32)

(93)

(81)

(598)

632

(29)

(504)

(77)

Net cash used in financing activities from continuing operations

Net cash used in financing activities from discontinued operations

(960)

(6)

(576)

(23)

Net cash used in financing activities

(966)

(599)

Net decrease in cash and cash equivalents, net of bank overdrafts

Cash and cash equivalents, net of bank overdrafts at the beginning of the year

Effect of foreign exchange rate changes

(216)

292

(19)

(203)

468

Cash and cash equivalents, net of bank overdrafts at the end of the year

292

(1) Results for the year ended 31 December 2022 have been restated for discontinued operations (see note 1).

As at 31 December 2023, the Group had net debt of £572 million (31 December 2022: £1,139 million). A definition and reconciliation of the movement in net debt is shown in note 11.

Consolidated Balance Sheet

	Notes	31 December 2023 £m	31 December 2022 £m
Non-current assets Goodwill and other intangible assets Property, plant and equipment Investments Interests in equity accounted investments Deferred tax assets Derivative financial assets Other receivables Retirement benefit surplus	10	3,351 777 114 7 527 46 789 -	6,846 2,599 62 435 373 36 670 93
		5,611	11,114
Current assets Inventories Trade and other receivables Derivative financial assets Current tax assets Cash and cash equivalents Assets classified as held for sale	8	510 713 13 6 58 18	1,025 1,426 38 29 355 -
		1,318	2,873
Total assets	3	6,929	13,987
Current liabilities Trade and other payables Interest-bearing loans and borrowings Lease obligations Derivative financial liabilities Current tax liabilities Provisions Liabilities associated with assets held for sale	9 8	1,179 54 40 42 20 188 10	2,347 63 60 86 141 281 -
		1,533	2,978
Net current liabilities		(215)	(105)
Non-current liabilities Other payables Interest-bearing loans and borrowings Lease obligations Derivative financial liabilities Deferred tax liabilities Retirement benefit obligations Provisions	10 9	358 576 152 64 482 99 98	431 1,433 306 141 619 581 330
		1,829	3,841
Total liabilities	3	3,362	6,819
Net assets		3,567	7,168
Equity Issued share capital Share premium account Merger reserve Capital redemption reserve Other reserves Translation and hedging reserve Retained earnings		309 3,271 109 753 (2,330) 273 1,182	309 3,271 109 753 (2,330) 638 4,379
Equity attributable to owners of the parent		3,567	7,129
Non-controlling interests		-	39
Total equity		3,567	7,168

The Financial Statements were approved and authorised for issue by the Board of Directors on 7 March 2024 and were signed on its behalf by:

Geoffrey Martin Peter Dilnot

Group Finance Director Chief Executive Officer
7 March 2024 7 March 2024

Consolidated statement of changes in equity

Issued share capital

£m

Share premium account

£m

Merger reserve

£m

Capital redemption reserve

£m

Other reserves

£m

Translation and hedging reserve

£m

Retained earnings

£m

Equity attributable to owners
of the parent

£m

Non-controlling interests

£m

Total
equity

£m

At 1 January 2022

333

3,271

109

729

(2,330)

5,319

7,507

7,540

(Loss)/profit for the year

Other comprehensive income/(expense)

562

(308)

(67)

(308)

495

(303)

496

Total comprehensive income/(expense)

Purchase of own shares(1)

Dividends paid

Equity-settled share-based payments

(24)

562

(375)

(504)

(77)

187

(504)

(77)

193

(504)

(77)

At 31 December 2022

309

3,271

109

753

(2,330)

638

4,379

7,129

7,168

Loss for the year

Other comprehensive expense

(365)

(1,019)

(55)

(1,019)

(420)

(1,019)

(420)

Total comprehensive expense

Purchase of own shares(1)

Dividends paid

Demerger distribution (note 8)

Derecognition of non-controlling interests on demerger (note 8)

Equity-settled share-based payments

Deferred tax on equity-settled share-based payments (note 5)

(365)

(1,074)

(93)

(81)

(1,973)

(1,439)

(93)

(81)

(1,973)

(39)

(1,439)

(93)

(81)

(1,973)

(39)

At 31 December 2023

309

3,271

109

753

(2,330)

273

1,182

3,567

(1) Further information is set out in note 1.

notes to the FINANCIAL STATEMENTS

1. Corporate information

The financial information included within this Preliminary Announcement does not constitute the Company's statutory Financial Statements for the years ended 31 December 2023 or 31 December 2022 within the meaning of s435 of the Companies Act 2006, but is derived from those Financial Statements. Statutory Financial Statements for the year ended 31 December 2022 have been delivered to the Registrar of Companies and those for the year ended 31 December 2023 will be delivered to the Registrar of Companies during April 2024. The auditor has reported on those Financial Statements; their reports were unqualified, did not draw attention to any matters by way of emphasis and did not contain statements under s498(2) or (3) of the Companies Act 2006. While the financial information included in this Preliminary Announcement has been prepared in accordance with the recognition and measurement criteria of International Financial Reporting Standards ("IFRSs") adopted pursuant to IFRSs as issued by the IASB, this announcement does not itself contain sufficient information to comply with IFRSs. The Company expects to publish full Financial Statements that comply with IFRSs during April 2024.

Corporate structure

Capital structure

On 19 April 2023, a share consolidation took place whereby shareholders received one new share in the Company for every three existing shares held. In accordance with IAS 33: Earnings per Share, a one for three adjustment is required to the weighted average number of shares in existence prior to the share consolidation and the prior year has been restated accordingly.

On 2 October 2023, the Group commenced a £500 million share buyback programme which is expected to complete by the end of September 2024. At 31 December 2023, 18,761,840 shares had been purchased at an average price of 494 pence per share with cash spent of £93 million, inclusive of costs of £1 million. These are held as treasury shares and the costs of the purchase have been recognised in retained earnings. No liability has been recognised in respect of the remaining share buyback programme as there is no contractual obligation. In 2022, the Group completed a share buyback programme with 318,003,512 shares repurchased and subsequently cancelled, with cash spent of £504 million, inclusive of costs of £4 million.

Discontinued operations, disposals and assets held for sale

On 20 April 2023, the Group completed the demerger of the GKN Automotive, GKN Powder Metallurgy and GKN Hydrogen businesses through the flotation of Dowlais Group plc ("Dowlais") on the London Stock Exchange. The results of the Dowlais businesses have been classified within discontinued operations for both years presented; with the Income Statement, the Statement of Cash Flows and their associated notes being restated accordingly. See note 8 for further detail.

Dowlais became a related party to the Group on demerger.

On 12 December 2023, the Group agreed a disposal of its Fuel Systems business, a non-core part of the Structures segment. At 31 December 2023, the disposal was expected to complete within the next twelve months and accordingly the assets and liabilities of the business have been classified as held for sale as at 31 December 2023. The disposal completed on 1 March 2024.

In addition, discontinued operations for 2022 include the results of the Ergotron business which was classified as held for sale as at 30 June 2022, and was subsequently disposed on 6 July 2022.

Going concern

The Consolidated Financial Statements have been prepared on a going concern basis as the Directors consider that adequate resources exist for the Company to continue in operational existence for the foreseeable future.

The Group's liquidity and funding arrangements are described in the Finance Director's Review. There is significant liquidity headroom of £1.0 billion at 31 December 2023 and sufficient headroom throughout the going concern forecast period. Forecast covenant compliance is considered further below.

Covenants

The Group's banking facility has two financial covenants being a net debt to adjusted EBITDA covenant and an interest cover covenant, both of which are tested half yearly in June and December. As a result of the demerger on 20 April 2023, the Group renegotiated its banking arrangements. No testing of the interest cover covenant was required at 31 December 2023. The interest cover covenant will be tested from 30 June 2024. Covenant calculations are detailed in the glossary to these Consolidated Financial Statements.

The financial covenants during the period of assessment for going concern are as follows:

31 December

2023

30 June

2024

31 December

2024

Net debt to adjusted EBITDA

3.5x

Interest cover

n/a

4.0x

Testing

The Group has modelled two scenarios in its assessment of going concern. A base case and a reasonably possible sensitised case.

The base case takes into account end markets and operational factors, including supply chain challenges, throughout the going concern period and has been monitored against the actual results and cash generation in the year. Climate scenario analysis was used to model the impact of climate change on the Group's cash flow position. Climate is deemed to not have a material impact over the period of 12 months for the assessment of going concern or 36 months for assessment of viability of the Group.

The reasonably possible sensitised case models more conservative sales assumptions for 2024 and the first half of 2025. The sensitised assumptions are specific to each business taking into account their markets, but on average represents a c.10% reduction to the Group's forecast revenue in each of 2024 and the first half of 2025 respectively. The sensitised revenues have had a consequential impact on profit and cash flow, along with a further downside sensitivity applied to increase working capital by approximately 2% of revenue. Given that there is liquidity headroom of £1.0 billion and the Group's leverage was 1.1x, comfortably below the covenant test at 31 December 2023, no further sensitivity detail is provided.

Under the reasonably possible sensitised case, even with significant reductions, no covenant is breached at the forecast testing dates being 30 June 2024 and 31 December 2024, and the Group will not require any additional sources of finance. Testing at 30 June 2025 is also favourable, assuming arrangements similar in nature with existing agreements.

2. Alternative Performance Measures

The Group presents Alternative Performance Measures ("APMs") in addition to the statutory results of the Group. These are presented in accordance with the Guidelines on APMs issued by the European Securities and Markets Authority ("ESMA").

APMs used by the Group are set out in the glossary to this Preliminary Announcement and the reconciling items between statutory and adjusted results are listed below and described in more detail in note 4.

Adjusted profit measures exclude items which are significant in size or volatility or by nature are non-trading or non-recurring or any item released to the Income Statement that was previously a fair value item booked on an acquisition.

On this basis, the following are the principal items included within adjusting items impacting operating profit:

· Amortisation of intangible assets that are acquired in a business combination, excluding computer software and development costs;

· Significant restructuring project costs and other associated costs, including losses incurred following the announcement of closure for identified businesses, arising from significant strategy changes that are not considered by the Group to be part of the normal operating costs of the business;

· Acquisition and disposal related gains and losses;

· Impairment charges that are considered to be significant in nature and/or value to the trading performance of the business;

· Movement in derivative financial instruments not designated in hedging relationships, including revaluation of associated financial assets
and liabilities;

· The charge for the Melrose equity-settled compensation scheme, including its associated employer's tax charge; and

· The net release of fair value items booked on acquisitions.

Further to the adjusting items above, adjusting items impacting profit before tax include:

· Acceleration of unamortised debt issue costs written off as a consequence of Group refinancing;

· Significant settlement gains and losses associated with debt instruments including interest rate swaps following acquisition or disposal related activity or non-trading transactions, which are not considered by the Group to be part of normal financing costs;

· Finance costs in respect of the Group's net debt strategically allocated to a demerger group of businesses at the start of the year and subsequently settled on demerger; and

· The fair value changes on cross-currency swaps, entered into by GKN prior to acquisition, relating to cost of hedging which are not deferred in equity.

In addition to the items above, adjusting items impacting profit after tax include:

· The net effect on tax of significant restructuring from strategy changes that are not considered by the Group to be part of the normal operating costs of the business;

· The net effect of significant new tax legislation; and

· The tax effects of adjustments to profit before tax.

The Board considers the adjusted results to be an important measure used to monitor how the businesses are performing as this provides a meaningful reflection of how the businesses are managed and measured on a day-to-day basis and achieves consistency and comparability between reporting periods, when all businesses are held for a complete reporting period.

The adjusted measures are used to partly determine the variable element of remuneration of senior management throughout the Group and are also in alignment with performance measures used by certain external stakeholders. The adjusted measures are also taken into account when valuing individual businesses.

Adjusted profit is not a defined term under IFRS and may not be comparable with similarly titled profit measures reported by other companies. It is not intended to be a substitute for, or superior to, GAAP measures. All APMs relate to the current year results and comparative periods where provided.

3. Segment information

Segment information is presented in accordance with IFRS 8: Operating Segments, which requires operating segments to be identified on the basis of internal reports about components of the Group that are regularly reported to the Group's Chief Operating Decision Maker ("CODM"), which has been deemed to be the Group's Board, in order to allocate resources to the segments and assess their performance.

Following the demerger of the Automotive, Powder Metallurgy and Other Industrial segments during the year their results are classified within discontinued operations and the comparative results for 2022 have been restated accordingly. In addition, the results of the Aerospace business are now viewed by the CODM as separated into Engines and Structures. The incremental information is provided below with comparative results for 2022 also re-presented accordingly.

The operating segments are as follows:

Engines - An industry leading global tier one supplier to the aerospace engines market, including structural engineered components; parts repair; commercial and aftermarket contracts.

Structures - A multi-technology global tier one supplier of both civil and defence air frames, including lightweight composite and metallic structures; electrical distribution systems and components.

In addition, there is a corporate cost centre which is also reported to the Board. The corporate cost centre contains the Melrose Group head office costs and charges related to the divisional management long-term incentive plans.

Reportable segment results include items directly attributable to a segment as well as those which can be allocated on a reasonable basis.
Inter-segment pricing is determined on an arm's length basis in a manner similar to transactions with third parties.

The Group's geographical segments are determined by the location of the Group's non-current assets and, for revenue, the location of external customers. Inter-segment sales are not material and have not been disclosed.

The following tables present the results and certain asset and liability information regarding the Group's operating segments and corporate cost centre for the year ended 31 December 2023.

a) Segment revenues

The Group derives its revenue from the transfer of goods and services over time and at a point in time. The Group has assessed that the disaggregation of revenue recognised from contracts with customers by operating segment is appropriate as this is the information regularly reviewed by the CODM in evaluating financial performance. The Group also believes that presenting this disaggregation of revenue based on the timing of transfer of goods or services provides useful information as to the nature and timing of revenue from contracts with customers.

Year ended 31 December 2023

Continuing operations

Engines

£m

Structures

£m

Total

£m

Timing of revenue recognition

At a point in time

Over time

931

262

1,457

700

2,388

962

Revenue

1,193

2,157

3,350

Year ended 31 December 2022 - restated(1)

Continuing operations

Engines

£m

Structures

£m

Total

£m

Timing of revenue recognition

At a point in time

Over time

806

229

1,224

695

2,030

924

Revenue

1,035

1,919

2,954

(1) Revenue has been restated for discontinued operations (see note 1) and the re-presentation of the Engines and Structures segments.

b) Segment operating profit

Year ended 31 December 2023 Continuing operations	Engines £m	Structures £m	Corporate(1) £m	Total £m
Adjusted operating profit/(loss)	310	110	(30)	390
Items not included in adjusted operating profit(2): Amortisation of intangible assets acquired in business combinations Restructuring costs Melrose equity-settled compensation scheme charges Acquisition and disposal related gains and losses Movement in derivatives and associated financial assets and liabilities Net release and changes in discount rates of fair value items	(135) (26) - - (3) 1	(125) (111) - - (6) 2	- (12) (38) (3) 123 -	(260) (149) (38) (3) 114 3
Operating profit/(loss)	147	(130)	40	57
Finance costs Finance income				(79) 14
Loss before tax Tax				(8) 9
Profit after tax for the year from continuing operations				1

Year ended 31 December 2022 - restated(3) Continuing operations	Engines £m	Structures £m	Corporate(1) £m	Total £m
Adjusted operating profit/(loss)	162	24	(39)	147
Items not included in adjusted operating profit(2): Amortisation of intangible assets acquired in business combinations Restructuring costs Movement in derivatives and associated financial assets and liabilities Melrose equity-settled compensation scheme charges Net release and changes in discount rates of fair value items Acquisition and disposal related gains and losses	(135) (25) 20 - 3 (5)	(125) (63) 1 - 9 -	- (2) (100) (15) - 20	(260) (90) (79) (15) 12 15
Operating profit/(loss)	20	(154)	(136)	(270)
Finance costs Finance income				(83) 25
Loss before tax Tax				(328) 99
Loss after tax for the year from continuing operations				(229)

(1) Corporate adjusted operating loss of £30 million (2022: £39 million), includes £1 million (2022: £3 million) of costs in respect of divisional management
long-term incentive plans.

(2) Further details on adjusting items are discussed in note 4.

(3) Operating profit has been restated for discontinued operations (see note 1) and the re-presentation of the Engines and Structures segments.

c) Segment total assets and liabilities

	Total assets		Total liabilities
	31 December 2023 £m	Restated(1) 31 December 2022 £m	31 December 2023 £m	Restated(1) 31 December 2022 £m
Engines Structures Corporate	3,957 2,388 584	3,798 2,894 761	1,396 1,099 867	1,202 1,315 1,838
Continuing operations	6,929	7,453	3,362	4,355
Discontinued operations	-	6,534	-	2,464
Total	6,929	13,987	3,362	6,819

(1) Total assets and liabilities have been restated for discontinued operations (see note 1) and the re-presentation of the Engines and Structures segments.

d) Segment capital expenditure and depreciation

	Capital expenditure(1)		Depreciation of owned assets(1)		Depreciation of leased assets
	Year ended 31 December 2023 £m	Restated(2) Year ended 31 December 2022 £m	Year ended 31 December 2023 £m	Restated(2) Year ended 31 December 2022 £m	Year ended 31 December 2023 £m	Restated(2) Year ended 31 December 2022 £m
Engines Structures Corporate	55 63 -	38 39 -	43 74 -	46 77 -	7 17 1	7 14 1
Continuing operations	118	77	117	123	25	22
Discontinued operations	51	231	43	238	6	25
Total	169	308	160	361	31	47

(1) Including computer software and development costs. Capital expenditure excludes lease additions.

(2) Capital expenditure and depreciation have been restated for discontinued operations (see note 1) and the re-presentation of the Engines and Structures segments.

e) Geographical information

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

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

	Revenue(1) from external customers		Segment assets
	Year ended 31 December 2023 £m	Restated(2) Year ended 31 December 2022 £m	31 December 2023 £m	Restated(2) 31 December 2022 £m
UK Rest of Europe North America Other	579 540 2,138 93	509 408 1,971 66	882 2,166 1,179 22	1,042 2,501 1,038 28
Continuing operations	3,350	2,954	4,249	4,609
Discontinued operations	1,582	4,715	-	5,333
Total	4,932	7,669	4,249	9,942

(1) Revenue is presented by destination.

(2) Revenue and segment assets have been restated for discontinued operations (see note 1).

4. Reconciliation of adjusted profit measures

As described in note 2, adjusted profit measures are an alternative performance measure used by the Board to monitor the operating performance of the Group. For the year ended 31 December 2022 the Group presented adjusted revenue as an alternative performance measure. Following the demerger of the Dowlais businesses, as described in note 8, the Board no longer uses adjusted revenue to monitor the ongoing performance of the Group as there are no continuing material equity accounted investments.

a) Operating profit

Continuing operations	Notes	Year ended 31 December 2023 £m	Restated(1) Year ended 31 December 2022 £m
Operating profit/(loss)		57	(270)
Amortisation of intangible assets acquired in business combinations Restructuring costs Melrose equity-settled compensation scheme charges Acquisition and disposal related gains and losses Movement in derivatives and associated financial assets and liabilities Net release and changes in discount rates of fair value items	a b c d e f	260 149 38 3 (114) (3)	260 90 15 (15) 79 (12)
Total adjustments to operating profit/(loss)		333	417
Adjusted operating profit		390	147

(1) Results have been restated for discontinued operations (see note 1).

a. The amortisation charge on intangible assets acquired in business combinations of £260 million (2022: £260 million) is excluded from adjusted results due to its non-trading nature and to enable comparison with companies that grow organically. However, where intangible assets are trading in nature, such as computer software and development costs, the amortisation is not excluded from adjusted results.

b. Restructuring and other associated costs in the year totalled £149 million (2022: £90 million), including £59 million (2022: £11 million) of losses incurred in closing businesses within the Group. These are shown as adjusting items due to their size and non-trading nature and during the year ended 31 December 2023 these included:

· A charge of £137 million (2022: £88 million) primarily relating to the continuation of significant restructuring projects, necessary for the business to achieve its full potential target operating margins.

There are three significant ongoing multi-year restructuring programmes, impacting multiple sites across the Engines and Structures divisions, two of which include European footprint consolidations, and one significant multi-site restructuring programme in North America. These programmes incurred a combined charge, excluding losses, of £62 million in the year. Since commencement, the cumulative charges, excluding losses, on these three restructuring programmes to 31 December 2023 has been £217 million (31 December 2022: £155 million), approximately 35% relating to the two significant European programmes and approximately 65% in North America.

As at 31 December 2023, actions to complete the European programmes, on average, are approximately 95% complete and will complete in 2024. During the year, the North America multi-site restructuring programme has been expanded and is approximately 70% complete and now expected to conclude in 2025. In addition to the remaining charges to be incurred on these projects, £37 million is included in restructuring provisions at 31 December 2023 to be settled in cash over the next two years.

· A net charge of £12 million (2022: £2 million) within the Melrose corporate cost centre that relates to changes made following the announced change to the Group's ongoing strategy. These include the costs of merging the Melrose corporate cost function with the previously separate Aerospace division head office team. These restructuring actions reshape the corporate cost centre to serve as an ongoing pureplay aerospace business.

c. The charge for the Melrose equity-settled Employee Share Scheme of £38 million (2022: £15 million), which includes a charge to the accrual for employer's tax payable of £28 million (2022: credit of £1 million), is excluded from adjusted results due to its size and volatility. The shares that would be issued, based on the Scheme's current value at the end of the reporting period, are included in the calculation of the adjusted diluted earnings per share, which the Board considers to be a key measure of performance.

d. An acquisition and disposal related net charge of £3 million (2022: credit of £15 million) arose in the year which primarily relates to ongoing acquisition commitments. The prior year also includes the profit on disposal of two corporate properties, a loss on disposal of a non-core Aerospace business and the initial costs incurred in respect of the demerger. These items are excluded from adjusted results due to their non-trading nature.

e. Movements in the fair value of derivative financial instruments (primarily forward foreign currency exchange contracts where hedge accounting is not applied) entered into to mitigate the potential volatility of future cash flows, on long-term foreign currency customer and supplier contracts, including foreign exchange movements on the associated financial assets and liabilities are shown as an adjusting item because of volatility and size. This totalled a credit of £114 million (2022: charge of £79 million) in the year.

f. The net release of fair value items in the year of £3 million (2022: £12 million) where items have been resolved for more favourable amounts than first anticipated are shown as an adjusting item, avoiding positively distorting adjusted operating profit.

b) Profit before tax

Continuing operations	Notes	Year ended 31 December 2023 £m	Restated(1) Year ended 31 December 2022 £m
Loss before tax		(8)	(328)
Adjustments to operating profit/(loss) as above Finance costs on demerger settled net debt Accelerated unamortised debt issue costs Bond redemption gains Fair value changes on cross-currency swaps	g h i j	333 17 2 (13) -	417 - - (24) (3)
Total adjustments to loss before tax		339	390
Adjusted profit before tax		331	62

(1) Results have been restated for discontinued operations (see note 1).

g. Finance costs in respect of the proportion of the Group's net debt strategically allocated to the demerger group of businesses at the start of the year and subsequently settled on demerger are excluded from adjusted results to ensure the finance costs of the continuing Group are appropriately shown alongside the trading performance of the continuing business.

h. Following the demerger of the GKN Automotive, GKN Powder Metallurgy and GKN Hydrogen businesses, the existing bank facilities at that time were repaid and all unamortised bank fees were written off. This is shown as an adjusting item due to its non-trading nature.

i. During the year, the Group repurchased £120 million of the remaining 2032 £300 million bond, on which a gain of £13 million was realised. During 2022, the Group also undertook a tender to buyback the same 2032 £300 million bond. There were £170 million of bonds repurchased, on which a gain of £24 million was realised. Both items are shown as an adjusting item due to their non-trading nature.

j. The fair value changes on cross-currency swaps relating to cost of hedging which are not deferred in equity were shown as an adjusting item because of the volatility and non-trading nature.

c) Profit after tax

Continuing operations	Note	Year ended 31 December 2023 £m	Restated(1) Year ended 31 December 2022 £m
Profit/(loss) after tax		1	(229)
Adjustments to loss before tax as above Tax effect of adjustments to loss before tax Tax effect of significant restructuring	5 5	339 (77) -	390 (105) 2
Total adjustments to profit/(loss) after tax		262	287
Adjusted profit after tax		263	58

(1) Results have been restated for discontinued operations (see note 1).

5. Tax

Continuing operations	Year ended 31 December 2023 £m	Restated(1) Year ended 31 December 2022 £m
Analysis of tax charge/(credit) in the year:
Current tax
Current year tax charge Adjustments in respect of prior years	19 4	16 (4)
Total current tax charge	23	12
Deferred tax Origination and reversal of temporary differences Adjustments in respect of prior years Tax on the change in value of derivative financial instruments Adjustments to deferred tax attributable to changes in tax rates Non-recognition of deferred tax	(61) (3) 29 (1) 4	(85) (8) (25) (1) 8
Total deferred tax credit	(32)	(111)
Tax credit on continuing operations	(9)	(99)
Tax charge on discontinued operations	28	20
Total tax charge/(credit) for the year	19	(79)
Analysis of tax credit on continuing operations in the year:	£m	£m
Tax charge in respect of adjusted profit before tax Tax credit recognised as an adjusting item	68 (77)	4 (103)
Tax credit on continuing operations	(9)	(99)

(1) Tax has been restated for discontinued operations (see note 1).

The tax charge of £68 million (2022: £4 million) arising on adjusted profit before tax of £331 million (2022: £62 million), results in an effective tax rate of 20.5% (2022: 6.5%).

The £77 million (2022: £103 million) tax credit recognised as an adjusting item includes a credit of £77 million (2022: £105 million) in respect of tax credits on adjustments to loss before tax of £339 million (2022: £390 million) and a charge of £nil (2022: £2 million) in respect of internal Group restructuring.

The tax charge/(credit) for the year for continuing and discontinued operations can be reconciled to the profit/(loss) before tax per the Income Statement as follows:

Year ended

31 December

2023

£m

Restated(1)

Year ended

31 December

2022

£m

Profit/(loss) before tax:

Continuing operations

Discontinued operations (note 8)

(8)

(328)

(38)

(366)

Tax charge/(credit) on profit/(loss) before tax at 23.5% (2022: 25.0%)

Tax effect of:

Disallowable expenses and other permanent differences within adjusted profit

Disallowable items included within adjusting items

Temporary differences not recognised in deferred tax

Tax credits and withholding taxes

Adjustments in respect of prior years

Tax charge classified within adjusting items - continuing operations

Tax charge classified within adjusting items - discontinued operations

Effect of changes in tax rates

Effect of rate differences between UK and overseas rates

(9)

(2)

(3)

(91)

(2)

(29)

Total tax charge/(credit) for the year

(79)

(1) Tax has been restated for discontinued operations (see note 1).

The reconciliation has been performed at a tax rate of 23.5% (2022: 25.0%). The reconciliation rate usually represents the weighted average of the tax rates applying to profits and losses in the jurisdictions in which those results arose in the year. However, for 2023 this rate was close to zero due to offsetting profits and losses in the relevant jurisdictions and as such the UK rate has been used.

Tax (credits)/charges included in Other Comprehensive Income are as follows:

Year ended

31 December

2023

£m

Year ended

31 December

2022

£m

Deferred tax movements on retirement benefit obligations

Deferred tax movements on hedge relationship gains and losses

(29)

(5)

Total credit for the year

(21)

(4)

There is also a tax credit of £22 million (2022: £nil) recognised directly in the Statement of Changes in Equity in respect of deferred tax on
equity-settled share-based payments.

6. Dividends

Year ended

31 December

2023
£m

Year ended

31 December

2022
£m

Interim dividend for the year ended 31 December 2023 of 1.5p

Second interim dividend for the year ended 31 December 2022 of 1.5p (4.5p)(1)

Interim dividend for the year ended 31 December 2022 of 0.825p (2.475p)(1)

Final dividend for the year ended 31 December 2021 of 1.0p (3.0p)(1)

(1) Adjusted to include the effects of the one for three share consolidation (see note 1).

A final dividend for the year ended 31 December 2023 of 3.5p per share totalling an expected £46 million is declared by the Board. The final dividend of 3.5p per share was declared by the Board on 7 March 2024 and in accordance with IAS 10: Events after the reporting period, has not been included as a liability in the Consolidated Financial Statements.

During the year, the Group commenced a £500 million share buyback programme with £93 million of cash spent, inclusive of costs of £1 million (see note 1). In the prior year, the Group also undertook a share buyback programme, with £504 million of cash spent, inclusive of costs of £4 million.

7. Earnings per share

Earnings attributable to owners of the parent

Year ended

31 December

2023

£m

Restated(1)

Year ended

31 December

2022

£m

Earnings for basis of earnings per share

Less: loss from discontinued operations (note 8)

(1,019)

1,020

(308)

Earnings for basis of earnings per share from continuing operations

(229)

(1) Earnings has been restated for discontinued operations (see note 1).

Year ended

31 December

2023

Number

Restated(1)

Year ended

31 December

2022

Number

Weighted average number of ordinary shares for the purposes of basic earnings per share (million)

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

1,349

1,406

Weighted average number of ordinary shares for the purposes of diluted earnings per share (million)

1,405

1,406

(1) Adjusted to include the effects of the one for three share consolidation (see note 1).

On 2 October 2023, the Group commenced a £500 million share buyback programme, with 18,761,840 shares repurchased by 31 December 2023. These are held as treasury shares and are excluded from the number of shares for the purposes of calculating earnings per share. In the prior year, the Group completed a £500 million share buyback programme with 318,003,512 shares repurchased and subsequently cancelled.

Earnings per share

Year ended

31 December

2023
pence

Restated(1)
Year ended

31 December

2022
pence

Basic earnings per share

From continuing and discontinued operations

From continuing operations

From discontinued operations

(75.5)

0.1

(75.6)

(21.9)

(16.3)

(5.6)

Diluted earnings per share

From continuing and discontinued operations

From continuing operations

From discontinued operations

(75.5)

0.1

(75.6)

(21.9)

(16.3)

(5.6)

(1) Earnings per share has been restated for discontinued operations and to include the effects of the one for three share consolidation (see note 1).

Adjusted earnings from continued operations

Year ended

31 December

2023
£m

Restated(1)

Year ended

31 December

2022
£m

Adjusted earnings for the basis of adjusted earnings per share

263

(1) Earnings has been restated for discontinued operations (see note 1).

Adjusted earnings per share from continuing operations:

Year ended

31 December

2023

pence

Restated(1)

Year ended

31 December

2022

pence

Adjusted basic earnings per share

Adjusted diluted earnings per share

19.5

18.7

4.1

(1) Earnings per share has been restated for discontinued operations and to include the effects of the one for three share consolidation (see note 1).

8. Discontinued operations

On 30 March 2023, shareholders approved the demerger of the GKN Automotive, GKN Powder Metallurgy and GKN Hydrogen businesses through the flotation of Dowlais Group plc ("Dowlais") on the London Stock Exchange. As a consequence, the assets and liabilities of Dowlais were reclassified as held for sale in accordance with IFRS 5: Non-current Assets Held for Sale and Discontinued Operations.

On 20 April 2023, the Group completed the demerger of Dowlais. The results of the Dowlais businesses have been classified within discontinued operations for both years presented. In addition, discontinued operations for 2022 include the results of the Ergotron business which was disposed of on 6 July 2022.

The demerger distribution of £1,973 million has been measured at fair value in accordance with IFRIC 17: Distributions of Non-cash Assets to Owners. Total demerger costs of £64 million, of which £6 million was recognised in the year ended 31 December 2022, were incurred before a contribution of £19 million in the form of one percent of Dowlais Group plc issued equity which has been retained by the Group. The Melrose Automotive Share Plan has also been taken into account within the loss on disposal calculation, but its net impact was immaterial.

Financial performance of discontinued operations:

Year ended

31 December

2023

£m

Restated(1)

Year ended

31 December

2022

£m

Revenue

Operating costs

1,582

(1,550)

4,715

(4,740)

Operating profit/(loss)

Net finance costs

(7)

(25)

(13)

Profit/(loss) before tax

Tax

(28)

(38)

(20)

Loss after tax

Loss on disposal of net assets of discontinued operations, net of recycled cumulative translation differences but before transaction costs

Demerger transaction costs(2)

(3)

(978)

(39)

(58)

(16)

Loss for the year from discontinued operations

(1,020)

(74)

Attributable to:

Owners of the parent

Non-controlling interests

(1,020)

(79)

(1,020)

(74)

(1) Restated for operations discontinued in the year (see note 1).

(2) Demerger transaction costs of £39 million comprise total cash costs incurred in the year of £58 million, offset by a non-cash contribution from Dowlais of
£19 million.

Cash flow information relating to discontinued operations is shown in note 11.

Classes of assets and liabilities disposed of and amounts classified as held for sale during the year were as follows:

Classified as

held for sale(1)

£m

Businesses
disposed

£m

Goodwill and other intangible assets

Property, plant and equipment

Current and deferred tax

Equity accounted investments

Inventories

Trade and other receivables

Derivative financial instruments

Cash and cash equivalents

2,989

1,789

127

417

515

753

320

Total assets

6,955

Trade and other payables

Interest-bearing loans and borrowings(2)

Lease obligations

Current and deferred tax

Retirement benefit obligations

Provisions

1,232

1,205

158

435

439

344

Total liabilities

3,813

Net assets

Demerger distribution fair value

Derecognition of non-controlling interests on demerger

Demerger costs incurred

Cumulative translation difference recycled on demerger

3,142

1,973

(39)

152

Loss on disposal of businesses

(1,017)

(1) Relates to the Fuel Systems business (see note 1).

(2) Prior to the demerger the interest-bearing loans and borrowings were inter-company. On demerger, these were subsequently settled.

9. Provisions

Loss-making

contracts

£m

Property

related costs

£m

Environmental and litigation

£m

Warranty

related costs

£m

Restructuring

£m

Other

£m

Total

£m

At 1 January 2023

Utilised

Charge to operating profit(1)

Release to operating profit(2)

Disposal of businesses(3)

Transfer to held for sale(4)

Unwind of discount(5)

Exchange adjustments

108

(26)

(2)

(41)

(1)

(3)

(5)

(1)

119

(7)

(9)

(63)

(1)

(3)

200

(11)

(18)

(154)

(2)

(4)

(97)

(2)

(18)

(3)

(8)

(63)

(1)

611

(149)

217

(31)

(344)

(4)

(15)

At 31 December 2023

286

Current

Non-current

188

286

(1) Includes £182 million of adjusting items and £35 million recognised in adjusted operating profit.

(2) Includes £8 million of adjusting items and £23 million recognised in adjusted operating profit.

(3) Disposal of businesses relates to the demerger of the GKN Automotive, GKN Powder Metallurgy and GKN Hydrogen businesses (see note 1).

(4) Transfer to held for sale relates to the contractually agreed sale of a non-core business in the Structures segment (see note 1).

(5) Includes £1 million within finance costs relating to the time value of money.

Loss-making contracts

Provisions for loss-making contracts are considered to exist where the Group has a contract under which the unavoidable costs of meeting the obligations exceed the economic benefits expected to be received under it. This obligation has been discounted and will be utilised over the period of the respective contracts, which is up to 15 years. At 31 December 2023, the loss-making contracts provision within Engines totalled £14 million (31 December 2022: £17 million) and £44 million within Structures (31 December 2022: £45 million).

Calculation of loss-making contract provisions is based on contract documentation and delivery expectations, along with an estimate of directly attributable costs and represents management's best estimate of the unavoidable costs of fulfilling the contract.

Utilisation in continuing operations during the year of £23 million has benefited adjusted operating profit with £3 million recognised in Engines and £20 million recognised in Structures. In addition, £21 million has been charged on a net basis (2022: £8 million released) and is shown as an adjusting item.

Property related costs

The provision for property related costs represents dilapidation costs for ongoing leases and is expected to result in cash expenditure over the next eight years. Calculation of dilapidation obligations are based on lease agreements with landlords and external quotes, or in the absence of specific documentation, management's best estimate of the costs required to fulfil obligations.

Environmental and litigation

There are environmental provisions amounting to £7 million (31 December 2022: £26 million) relating to the estimated remediation costs of pollution, soil and groundwater contamination at certain sites and estimated future costs and settlements in relation to legal claims and associated insurance obligations amounting to £47 million (31 December 2022: £93 million). Liabilities for environmental costs are recognised when environmental assessments are probable and the associated costs can be reasonably estimated.

The Group has on occasion been required to take legal or other actions to defend itself against proceedings brought by other parties. Provisions are made for the expected costs associated with such matters, based on past experience of similar items and other known factors, considering professional advice received. This represents management's best estimate of the likely outcome. The timing of utilisation of these provisions is frequently uncertain, reflecting the complexity of issues and the outcome of various court proceedings and negotiations. Contractual and other provisions represent management's best estimate of the cost of settling future obligations and reflect management's assessment of the likely settlement method, which may change over time. However, no provision is made for proceedings which have been, or might be, brought by other parties against Group companies unless management, considering professional advice received, assess that it is more likely than not that such proceedings may be successful.

Warranty related costs

Provisions for the expected cost of warranty obligations under local sale of goods legislation are recognised at the date of sale of the relevant products and subsequently updated for changes in estimates as necessary. The provision for warranty related costs represents the best estimate of the expenditure required to settle the Group's obligations, based on past experience, recent claims and current estimates of costs relating to specific claims. Warranty terms are, on average, between one and five years.

Restructuring

Restructuring provisions relate to committed costs in respect of restructuring programmes, as described in note 4, usually resulting in cash spend within one to two years. A restructuring provision is recognised when the Group has developed a detailed formal plan for the restructuring and has raised a valid expectation in those affected that it will carry out the restructuring by either starting to implement the plan or by announcing its main features to those affected by it. The measurement of a restructuring provision includes only the direct expenditures arising from the restructuring, which are those amounts that are necessarily entailed by the restructuring programmes.

Other

Other provisions include long-term incentive plans for divisional senior management and the employer tax on equity-settled incentive schemes which are expected to result in cash expenditure during the next three years.

Where appropriate, provisions have been discounted using discount rates between 0% and 7% (31 December 2022: 0% and 14%) depending on the territory in which the provision resides and the length of its expected utilisation.

10. Retirement benefit obligations

Defined benefit plans

The Group sponsors defined benefit plans for qualifying employees of certain subsidiaries. The funded defined benefit plans are administered by separate funds that are legally separated from the Group. The Trustees of the funds are required by law to act in the interest of the fund and of all relevant stakeholders in the plans. The Trustees of the pension funds are responsible for the investment policy with regard to the assets of the fund.

During the year, £439 million of net retirement benefit obligations were disposed with the demerger of the GKN Automotive, GKN Powder Metallurgy and GKN Hydrogen businesses (note 1).

Also during the year, a buy-in policy was purchased for £45 million which fully insured pensioner members who were in the GKN Group Pension Scheme Number 4. The present value of funded defined benefit obligations for GKN Group Pension Scheme Number 4 was actuarially calculated and the plan asset was set equal.

Contributions

The Group contributed £72 million (2022: £59 million) to defined benefit pension plans and post-employment plans, inclusive of the £45 million purchase of a buy-in policy discussed above, in the year ended 31 December 2023. The Group expects to contribute £25 million in 2024.

Actuarial assumptions

The major assumptions used by the actuaries in calculating the Group's pension liabilities are as set out below:

Rate of increase
of pensions in payment

% per annum

Discount rate

Price inflation

(RPI/CPI)

31 December 2023

GKN Group Pension Schemes (Numbers 1 and 4)

GKN US plans

2.6

n/a

4.5

4.8

2.9/2.5

n/a

31 December 2022

GKN Group Pension Schemes (Numbers 1 - 4)

GKN US plans

GKN Europe plans

2.7

n/a

2.6

4.8

5.0

3.7

3.2/2.7

n/a

2.6/2.6

Balance Sheet disclosures

The amounts recognised in the Consolidated Balance Sheet in respect of defined benefit plans were as follows:

31 December

2023

£m

31 December

2022

£m

Present value of funded defined benefit obligations

Fair value of plan assets

(1,193)

1,118

(1,931)

1,941

Funded status

Present value of unfunded defined benefit obligations

(75)

(24)

(498)

Net liabilities

(99)

(488)

Analysed as:

Retirement benefit surplus

Retirement benefit obligations

(99)

(581)

Net liabilities

(99)

(488)

The net retirement benefit obligations in continuing businesses is attributable to Engines: liability of £2 million (31 December 2022: £1 million) and Structures: liability of £97 million (31 December 2022: £26 million).

The plan assets and liabilities at 31 December 2023 were as follows:

Plans(1)

£m

US
Plans

£m

Other
Plans

£m

Total

£m

Plan assets

Plan liabilities

1,070

(1,136)

(72)

(9)

1,118

(1,217)

Net liabilities

(66)

(25)

(8)

(99)

(1) Includes a liability in respect of the GKN post-employment medical plans of £6 million and a net deficit in respect of the GKN Group Pension Scheme (Numbers 1 and 4) of £60 million.

11. Cash flow statement

	Notes	Year ended 31 December 2023 £m	Restated(1) Year ended 31 December 2022 £m
Reconciliation of operating profit/(loss) to net cash used in operating activities generated by continuing operations
Operating profit/(loss) Adjusting items	4	57 333	(270) 417
Adjusted operating profit Adjustments for: Depreciation of property, plant and equipment Amortisation of computer software and development costs Restructuring costs paid and movements in provisions Defined benefit pension contributions paid(2) Change in inventories Change in receivables Change in payables Tax paid Interest paid on loans and borrowings(3) Interest paid on lease obligations Acquisition and disposal costs	4	390 100 42 (160) (67) (10) (140) 4 (17) (79) (5) (65)	147 104 41 (60) (23) (88) (172) 112 (8) (76) (6) (10)
Net cash used in operating activities		(7)	(39)

(1) Restated for discontinued operations (see note 1).

(2) The year ended 31 December 2023 includes £45 million for the purchase of a buy-in policy for GKN Group Pension Scheme Number 4 (see note 10).

(3) The year ended 31 December 2023 includes £17 million of finance costs on the proportion of the Group's net debt strategically allocated to demerged businesses at the start of the year and settled on demerger (see note 4).

Reconciliation of cash and cash equivalents, net of bank overdrafts

31 December
2023
£m

31 December
2022
£m

Cash and cash equivalents per Balance Sheet

Bank overdrafts included within current interest-bearing loans and borrowings

(1)

355

(63)

Cash and cash equivalents, net of bank overdrafts per Statement of Cash Flows

292

Cash flow information relating to discontinued operations is as follows:

Cash flow from discontinued operations	Year ended 31 December 2023 £m	Restated(1) Year ended 31 December 2022 £m
Net cash from discontinued operations Defined benefit pension contributions paid Tax paid Interest paid on lease obligations Interest paid on loans and borrowings	54 (5) (8) (3) (2)	377 (36) (81) (6) (11)
Net cash from operating activities from discontinued operations	36	243
Interest received Dividends received from equity accounted investments Purchase of property, plant and equipment Proceeds from disposal of property, plant and equipment Purchase of computer software and capitalised development costs	- - (62) - (5)	3 59 (203) 21 (20)
Net cash used in investing activities from discontinued operations	(67)	(140)
Repayment of principal under lease obligations	(6)	(23)
Net cash used in financing activities from discontinued operations	(6)	(23)

(1) Restated for discontinued operations (see note 1).

Net debt reconciliation

Net debt consists of interest-bearing loans and borrowings (excluding any acquisition related fair value adjustments) and cash and cash equivalents.

Net debt is considered to be an alternative performance measure as it is not defined in IFRS. The most directly comparable IFRS measure is the aggregate of interest-bearing loans and borrowings (current and non-current) and cash and cash equivalents. A reconciliation from the most directly comparable IFRS measure to net debt, used as a basis for banking covenant calculations, is given below:

	31 December 2023 £m	31 December 2022 £m
Interest-bearing loans and borrowings - due within one year Interest-bearing loans and borrowings - due after one year	(54) (576)	(63) (1,433)
External debt Less: Cash and cash equivalents	(630) 58	(1,496) 355
	(572)	(1,141)
Adjustments: Non-cash acquisition fair value adjustments	-	2
Net debt	(572)	(1,139)

The table below shows the key components of the movement in net debt:

	At 31 December 2022 £m	Cash flow £m	Acquisitions and disposals £m	Other non-cash movements £m	Effect of foreign exchange £m	At 31 December 2023 £m
External debt (excluding bank overdrafts) Non-cash acquisition fair value adjustments	(1,433) 2	(462) -	1,205 -	18 (2)	43 -	(629) -
	(1,431)	(462)	1,205	16	43	(629)
Cash and cash equivalents, net of bank overdrafts	292	169	(385)	-	(19)	57
Net debt	(1,139)	(293)	820	16	24	(572)

GLOssary

Alternative Performance Measures ("APMs")

In accordance with the Guidelines on APMs issued by the European Securities and Markets Authority ("ESMA"), additional information is provided on the APMs used by the Group below.

In the reporting of financial information, the Group uses certain measures that are not required under IFRS. These additional measures (commonly referred to as APMs) provide additional information on the performance of the business and trends to stakeholders. These measures are consistent with those used internally, and are considered important to understanding the financial performance and financial health of the Group. APMs are considered to be an important measure to monitor how the businesses are performing because this provides a meaningful comparison of how the business is managed and measured on a day-to-day basis and achieves consistency and comparability between reporting periods.

These APMs may not be directly comparable with similarly titled measures reported by other companies and they are not intended to be a substitute for, or superior to, IFRS measures. All Income Statement and cash flow measures are provided for continuing operations unless otherwise stated and comparable information has been restated⁽¹⁾.

Income Statement Measures

APM

Adjusting items

Closest equivalent statutory measure

None

Reconciling items to statutory measure

Adjusting items (note 4)

Definition and purpose

Those items which the Group excludes from its adjusted profit metrics in order to present a further measure of the Group's performance.

These include items which are significant in size or volatility or by nature are non-trading or non-recurring or any item released to the Income Statement that was previously a fair value item booked on an acquisition.

This provides a meaningful comparison of how the business is managed and measured on a day-to-day basis and provides consistency and comparability between reporting periods.

APM

Adjusted operating profit

Closest equivalent statutory measure

Operating profit/(loss)(2)

Reconciling items to statutory measure

Adjusting items (note 4)

Definition and purpose

The Group uses adjusted profit measures to provide a useful and more comparable measure of the ongoing performance of the Group. Adjusted measures are reconciled to statutory measures by removing adjusting items, the nature of which are disclosed above and further detailed in note 4.

Adjusted operating profit

Year ended
31 December

2023
£m

Restated(1)

Year ended
31 December

2022
£m

Operating profit/(loss)

Adjusting items to operating profit/(loss) (note 4)

333

(270)

417

Adjusted operating profit

390

147

APM

Adjusted operating margin

Closest equivalent statutory measure

Operating margin(3)

Reconciling items to statutory measure

Adjusting items (note 4)

Definition and purpose

Adjusted operating margin represents Adjusted operating profit as a percentage of revenue. The Group uses adjusted profit measures to provide a useful and more comparable measure of the ongoing performance of the Group.

APM

Adjusted profit before tax

Closest equivalent statutory measure

Loss before tax

Reconciling items to statutory measure

Adjusting items (note 4)

Definition and purpose

Profit before the impact of adjusting items and tax. As discussed above, adjusted profit measures are used to provide a useful and more comparable measure of the ongoing performance of the Group. Adjusted measures are reconciled to statutory measures by removing adjusting items, the nature of which are disclosed above and further detailed in note 4.

Adjusted profit before tax

Year ended
31 December

2023
£m

Restated(1)

Year ended
31 December

2022
£m

Loss before tax

Adjusting items to loss before tax (note 4)

(8)

339

(328)

390

Adjusted profit before tax

331

APM

Adjusted profit after tax

Closest equivalent statutory measure

Profit/(loss) after tax

Reconciling items to statutory measure

Adjusting items (note 4)

Definition and purpose

Profit after tax but before the impact of the adjusting items. As discussed above, adjusted profit measures are used to provide a useful and more comparable measure of the ongoing performance of the Group. Adjusted measures are reconciled to statutory measures by removing adjusting items, the nature of which are disclosed above and further detailed in note 4.

Adjusted profit after tax

Year ended
31 December

2023
£m

Restated(1)

Year ended
31 December

2022
£m

Profit/(loss) after tax

Adjusting items to profit/(loss) after tax (note 4)

262

(229)

287

Adjusted profit after tax

263

APM

Constant currency

Closest equivalent statutory measure

Income Statement, which is reported using actual average foreign exchange rates

Reconciling items to statutory measure

Constant currency foreign exchange rates

Definition and purpose

The Group uses GBP based constant currency models to measure performance. These are calculated by applying 2023 average exchange rates to local currency reported results for the current and prior year. This gives a GBP denominated Income Statement which excludes any variances attributable to foreign exchange rate movements.

APM

Adjusted EBITDA for leverage covenant purposes

Closest equivalent statutory measure

Operating profit/(loss)(2)

Reconciling items to statutory measure

Adjusting items (note 4), depreciation of property, plant and equipment and amortisation of computer software and development costs, imputed lease charge, share of non-controlling interests and other adjustments required for leverage covenant purposes(4)

Definition and purpose

Adjusted operating profit for 12 months prior to the reporting date, before depreciation of property, plant and equipment and before the amortisation of computer software and development costs.

Adjusted EBITDA for leverage covenant purposes is a measure used by external stakeholders to measure performance.

Adjusted EBITDA for leverage covenant purposes

Year ended
31 December

2023
£m

Year ended(5)
31 December

2022
£m

Adjusted operating profit

Depreciation of property, plant and equipment and amortisation of computer software and development costs

Imputed lease charge

Non-controlling interests

Other adjustments required for leverage covenant purposes(4)

390

142

(37)

480

406

(63)

(5)

(19)

Adjusted EBITDA for leverage covenant purposes

515

799

APM Adjusted tax rate
Closest equivalent statutory measure Effective tax rate
Reconciling items to statutory measure Adjusting items, adjusting tax items and the tax impact of adjusting items (note 4 and note 5)
Definition and purpose The income tax charge for the Group excluding adjusting tax items, and the tax impact of adjusting items, divided by adjusted profit before tax. This measure is a useful indicator of the ongoing tax rate for the Group.

Adjusted tax rate	Year ended 31 December 2023 £m	Restated(1) Year ended 31 December 2022 £m
Tax credit per Income Statement Adjusted for: Tax impact of adjusting items Tax impact of significant restructuring	9 (77) -	99 (105) 2
Adjusted tax charge	(68)	(4)
Adjusted profit before tax	331	62
Adjusted tax rate	20.5%	6.5%

APM

Adjusted basic earnings per share

Closest equivalent statutory measure

Basic earnings per share

Reconciling items to statutory measure

Adjusting items (note 4 and note 7)

Definition and purpose

Profit after tax attributable to owners of the parent and before the impact of adjusting items, divided by the weighted average number of ordinary shares in issue during the financial year.

APM

Adjusted diluted earnings per share

Closest equivalent statutory measure

Diluted earnings per share

Reconciling items to statutory measure

Adjusting items (note 4 and note 7)

Definition and purpose

Profit after tax attributable to owners of the parent and before the impact of adjusting items, divided by the weighted average number of ordinary shares in issue during the financial year adjusted for the effects of any potentially dilutive options.

The Board considers this to be a key measure of performance when all businesses are held for the complete reporting period.

APM

Interest cover

Closest equivalent statutory measure

None

Reconciling items to statutory measure

Not applicable

Definition and purpose

Adjusted EBITDA calculated for covenant purposes (including adjusted EBITDA of businesses disposed) as a multiple of net interest payable on bank loans and overdrafts.

This measure is used for bank covenant testing.

Balance Sheet Measures

APM

Working capital

Closest equivalent statutory measure

Inventories, trade and other receivables less trade and other payables

Reconciling items to statutory measure

Not applicable

Definition and purpose

Working capital comprises inventories, current trade and other receivables, non-current other receivables, current trade and other payables and non-current other payables. This measure provides additional information in respect of working capital management.

APM

Net debt

Closest equivalent statutory measure

Cash and cash equivalents less interest-bearing loans and borrowings

Reconciling items to statutory measure

Reconciliation of net debt (note 11)

Definition and purpose

Net debt comprises cash and cash equivalents and interest-bearing loans and borrowings but excludes non-cash acquisition fair value adjustments.

Net debt is one measure that could be used to indicate the strength of the Group's Balance Sheet position and is a useful measure of the indebtedness of the Group.

APM

Bank covenant definition of net debt at average rates and leverage

Closest equivalent statutory measure

Cash and cash equivalents less interest-bearing loans and borrowings

Reconciling items to statutory measure

Impact of foreign exchange and adjustments for bank covenant purposes

Definition and purpose

Net debt (as above) is presented in the Balance Sheet translated at year end exchange rates.

For bank covenant testing purposes net debt is converted using average exchange rates for the previous 12 months.

Leverage is calculated as the bank covenant definition of net debt divided by adjusted EBITDA for leverage covenant purposes. This measure is used for bank covenant testing.

Bank covenant definition of net debt at average rates and leverage

31 December

2023
£m

31 December(5)

2022
£m

Net debt at closing rates (note 11)

Impact of foreign exchange

572

1,139

(27)

Bank covenant definition of net debt at average rates

584

1,112

Leverage

1.1x

1.4x

APM Proforma opening net debt and proforma opening leverage
Closest equivalent statutory measure Cash and cash equivalents less interest-bearing loans and borrowings
Reconciling items to statutory measure Disposal of businesses net of cash and cash equivalents disposed and borrowings repaid, associated transaction costs, pension buy-in cost paid and second interim dividend paid to shareholders
Definition and purpose Proforma opening net debt represents net debt for the Group when excluding transactions related to the demerger of the GKN Automotive, GKN Powder Metallurgy and the GKN Hydrogen businesses. Proforma opening net debt is one measure that could be used to indicate the strength of the Group's opening Balance Sheet position and is a useful measure to compare against the ongoing indebtedness of the Group.

Proforma opening net debt and proforma opening leverage	£m
Opening net debt (note 11) Disposal of businesses, net of cash disposed (note 8) Settlement receipt from loans held with demerged entities (note 8)	(1,139) (320) 1,205
Reduction in net debt following the demerger of Dowlais	885
Cash flows from discontinued operations (note 11) Finance costs on demerger settled net debt (note 4)	(37) (17)
Net cash outflow from Dowlais businesses to date of demerger	(54)
Demerger related costs Pension buy-in (note 10) Debt refinancing costs	(62) (45) (11)
Demerger related costs and pension buy-in	(118)
Second interim dividend for the year ended 31 December 2022 (note 6)	(61)
Proforma opening net debt	(487)
Proforma opening adjusted EBITDA for leverage covenant purposes⁽⁶⁾	266
Proforma opening leverage	1.8x

Cash Flow Measures

APM

Adjusted operating cash flow (pre-capex)

Closest equivalent statutory measure

Net cash from operating activities

Reconciling items to statutory measure

Non-working capital items (note 11)

Definition and purpose

Adjusted operating cash flow (pre-capex) is calculated as net cash from operating activities before net cash from operating activities from discontinued operations, restructuring costs paid and movements in provisions, defined benefit pension contributions paid, tax paid, interest paid on loans and borrowings, interest paid on lease obligations, acquisition and disposal costs and the repayment of principal under lease obligations.

This measure provides additional useful information in respect of cash generation and is consistent with how business performance is measured internally.

Adjusted operating cash flow (pre-capex)

Year ended
31 December

2023
£m

Restated(1)

Year ended
31 December

2022
£m

Net cash from operating activities

Operating activities:

Net cash from operating activities from discontinued operations

Restructuring costs paid and movements in provisions⁽⁷⁾

Defined benefit pension contributions paid

Tax paid

Interest paid on loans and borrowings

Interest paid on lease obligations

Acquisition and disposal costs

Debt related:

Repayment of principal under lease obligations

(36)

137

(32)

204

(243)

(29)

Adjusted operating cash flow (pre-capex)

331

APM

Free cash flow

Closest equivalent statutory measure

Net increase/decrease in cash and cash equivalents (net of bank overdrafts)

Reconciling items to statutory measure

Acquisition and disposal related cash flows, dividends paid to owners of the parent, transactions in own shares and movements on borrowing facilities

Definition and purpose

Free cash flow represents cash generated after all trading costs including restructuring, pension contributions, tax and interest payments.

Free cash flow

Year ended
31 December

2023
£m

Restated(1)

Year ended
31 December

2022
£m

Net decrease in cash and cash equivalents (net of bank overdrafts)

Debt related:

Repayment of borrowings

Drawings on borrowing facilities

Costs of raising debt finance

Equity related:

Dividends paid to owners of the parent

Purchase of own shares, including associated costs

Acquisition and disposal related:

Disposal of businesses, net of cash disposed

Settlement receipt from loans held with demerged entities

Equity accounted investments additions

Disposal of equity accounted investments

Acquisition of subsidiaries, net of cash acquired

Cash flows from/(used in) discontinued operations

Acquisition and disposal costs

Settlement of derivatives used in net investment hedging

Finance costs on demerger settled net debt

GKN UK pension plan buy-in

(216)

1,371

(628)

320

(1,205)

(3)

(203)

598

(632)

504

(478)

(80)

109

Free cash flow

(12)

(88)

APM

Adjusted free cash flow

Closest equivalent statutory measure

Net increase/decrease in cash and cash equivalents (net of bank overdrafts)

Reconciling items to statutory measure

Free cash flow, as defined above, adjusted for restructuring cash flows

Definition and purpose

Adjusted free cash flow represents free cash flow adjusted for restructuring cash flows.

APM

Adjusted free cash flow

Year ended
31 December

2023
£m

Restated(1)

Year ended
31 December

2022
£m

Free cash flow

Restructuring costs paid

(12)

125

(88)

Adjusted free cash flow

113

(35)

APM

Free cash flow pre-interest and tax and free cash flow pre-interest and tax margin

Closest equivalent statutory measure

Net increase/decrease in cash and cash equivalents (net of bank overdrafts)

Reconciling items to statutory measure

Free cash flow, as defined above, adjusted for interest and tax cash flows excluding finance costs on demerger settled net debt

Definition and purpose

Free cash flow pre-interest and tax represents free cash flow adjusted for interest and tax and excluding finance costs on demerger settled net debt.

Free cash flow pre-interest and tax margin represents free cash flow adjusted for interest and tax and excluding finance costs on demerger settled net debt divided by revenue.

Free cash flow pre-interest and tax

Year ended
31 December

2023
£m

Restated(1)

Year ended
31 December

2022
£m

Free cash flow

Tax paid

Interest paid on loans and borrowings

Interest paid on lease obligations

Interest received

Finance costs on demerger settled net debt

(12)

(2)

(17)

(88)

(1)

Free cash flow pre-interest and tax

Free cash flow pre-interest and tax margin

2.1%

0.0%

APM

Capital expenditure (capex)

Closest equivalent statutory measure

None

Reconciling items to statutory measure

Not applicable

Definition and purpose

Calculated as the purchase of owned property, plant and equipment and computer software and expenditure on capitalised development costs during the year, excluding any assets acquired as part of a business combination.

Net capital expenditure is capital expenditure net of proceeds from disposal of property, plant and equipment.

APM

Capital expenditure to depreciation ratio

Closest equivalent statutory measure

None

Reconciling items to statutory measure

Not applicable

Definition and purpose

Net capital expenditure divided by depreciation of owned property, plant and equipment and amortisation of computer software and development costs.

APM

Dividend per share

Closest equivalent statutory measure

Dividend per share

Reconciling items to statutory measure

Not applicable

Definition and purpose

Amounts payable by way of dividends in terms of pence per share.

(1) Restated for discontinued operations (see note 1).

(2) Operating profit/(loss) is not defined within IFRS but is a widely accepted profit measure being profit/(loss) before finance costs, finance income and tax.

(3) Operating margin is not defined within IFRS but is a widely accepted profit measure being derived from operating profit/(loss)(2) divided by revenue.

(4) Included within other adjustments required for leverage covenant purposes in the year ended 31 December 2023 are unrealised annual savings from spend incurred in the year on restructuring projects. In the year ended 31 December 2022 are dividends received from equity accounted investments and the removal of adjusted operating profit of equity accounted investments.

(5) Year ended 31 December 2022 remains aligned to the original calculations supporting the Group's bank debt compliance certificate and has not been restated for discontinued operations.

(6) Proforma opening adjusted EBITDA for leverage covenant purposes comprises Aerospace adjusted operating profit, depreciation of property, plant and equipment and amortisation of computer software and development costs, imputed lease charge and proforma corporate costs of £30 million.

(7) Excludes non-cash utilisation of loss-making contract provisions of £23 million (2022: £23 million).

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