NOTES TO THE CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

for the half year to 31 December 2018

1. Basis of preparation

The condensed consolidated interim financial statements of The Alumasc Group plc and its subsidiaries have been prepared on the basis of International Financial Reporting Standards (IFRS), as adopted by the European Union, that are effective at 31 December 2018.

The condensed consolidated interim financial statements have been prepared using the accounting policies set out in the statutory accounts for the financial year to 30 June 2018 and in accordance with IAS 34 "Interim Financial Reporting".

The consolidated financial statements of the group as at and for the year ended 30 June 2018 are available on request from the company's registered office at Burton Latimer, Kettering, Northants, NN15 5JP or on the website www.alumasc.co.uk.

The comparative figures for the financial year ended 30 June 2018 are not the company's statutory accounts for that financial year but have been extracted from those accounts. Those accounts have been reported on by the company's auditors and delivered to the registrar of companies. The report of the auditors was (i) unqualified, (ii) did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying their report, and (iii) did not contain a statement under section 498 (2) or (3) of the Companies Act 2006.

The condensed consolidated interim financial statements for the half year ended 31 December 2018 are not statutory accounts and have been neither audited nor reviewed by the group's auditors. They do not contain all of the information required for full financial statements, and should be read in conjunction with the consolidated financial statements of the group as at and for the year ended 30 June 2018. 

These condensed consolidated interim financial statements were approved by the Board of Directors on

31 January 2019.

On the basis of the group's financing facilities and current financial plans and sensitivity analyses, the Board is satisfied that the group has adequate resources to continue in operational existence for twelve months from the date of signing this report and accordingly continues to adopt the going concern basis in preparing these condensed consolidated interim financial statements.

Changes in accounting policy

Except as described below, the accounting policies adopted in the preparation of the unaudited condensed group interim financial statements to 31 December 2018 are consistent with the policies applied by the group in its consolidated financial statements as at and for the year ended 30 June 2018. The changes in accounting policies are also expected to be reflected in the group's consolidated financial statements as at and for the year ending 30 June 2019.

IFRS 15 Revenue from Contracts with Customers

The directors have completed their assessment of the impact of IFRS 15 "Revenue from Contracts with Customers" and the group has adopted the new standard for the financial year ending 30 June 2019 using the cumulative effect method, as the net impact of adopting the new standard is not significant. As a result of adopting the input method of revenue recognition under the new standard as opposed to the output method in the old standard, the group has re-stated its opening equity position as at 1 July 2018 by reducing its profit and loss reserve by £76,000 to reflect the impact of transitioning to IFRS 15, see note 14. The comparative information for the six month period to 31 December 2017 and the twelve month period to 30 June 2018 has not been re-stated and continues to be reported under IAS 18 Revenue and IAS 11 Construction contracts, the accounting policies stated in the annual report for the year ended 30 June 2018.

IFRS 15 has impacted the group in the following ways:

Architectural screening, solar shading & balconies:

All revenue within the Architectural screening, solar shading & balconies division, for which revenue was previously recognised over time measured by reference to the stage of completion of the contract on an output cost method based on Quantity Surveyor assessments, will now be recognised on an input cost method over time. Revenue and associated margin are therefore recognised progressively as costs are incurred, having regard to latest estimates of cost to complete and expected project margins. The group has determined that this method more fairly reflects progress in satisfying customer performance obligations.

Within trade and other receivables in the consolidated statement of financial position:

-       Previously, under IAS 11, amounts recoverable on construction contracts reflected amounts invoiced for payment of work performed based on quantity surveyor assessments

-       Under IFRS 15, invoices for payment are presented as trade receivables with revenue recognised at the balance sheet date not yet invoiced presented as a contract asset.

Within trade and other payables in the consolidated statement of financial position:

-       Previously, under IAS 11, payments in advance of revenue recognised were presented as construction deposits received on account

-       Under IFRS 15, payments in advance of revenue recognised are presented as contract liabilities.

Other revenue streams:

The group has concluded that the impact of adopting IFRS 15 in our Roofing & Water Management and Housebuilding & Ancillary Products divisions at 30 June 2018 is immaterial because the point at which performance obligations to customers were satisfied under IFRS 15 at that date was similar to the point at which risks and rewards were transferred under IAS 18. It is possible that, should the value of bespoke contract work in the Roofing & Water Management division become material in the future, IFRS 15 could result in earlier recognition of revenue and profit over time.

Changes in accounting policy:

The details of the new significant accounting policies and the nature of the changes to previous accounting policies in relation to the group's adoption of IFRS 15 are set out below:

Revenue represents the total amounts receivable by the group for goods supplied and services provided, excluding VAT and rebates

Architectural screening, solar shading & balconies:

The performance obligations and transaction price are defined within signed contracts between the customer and Levolux. These contracts contain one performance obligation as the scope of work and pricing of the contract is to deliver an interrelated service. Effect of change in accounting policy: The contracts with customers as defined under IFRS 15 correspond in almost all circumstances to construction contracts as previously defined under IAS 11. The revenue for the performance obligation is recognised on an input cost method over time, measured by reference to the stage of completion of the contract. Revenue and associated profit are therefore recognised progressively as costs are incurred and having regard to latest estimates of cost to complete and expected project margins. Effect of change in accounting policy: Revenue was previously recognised on an output cost method based on Quantity Surveyor assessments. The group has determined that an input method more fairly reflects progress in satisfying customer performance obligations and, depending on stage of completion of each contract at the reporting date, will generally result in earlier recognition of revenue and profit.

Due to the nature of the services provided, instructed variations to contracts are usually accounted for as if it was part of the existing contract, as the variations do not result in a distinct good or service being delivered. Where the variation to the original contract is for extra goods or services which are distinct from the original performance obligations under the contract, this is accounted for as a separate contract. Claims for extra revenue for variations or extra work over and above the original contract are only recognised when management determines the revenue to be highly probable. Effect of change in accounting policy: The move from "probable" under IAS 37 to "highly probable" under IFRS 15 did not create a material change in the timing of revenue recognition for the group at the transition date.

Within trade and other receivables in the consolidated statement of financial position:

-       Trade receivables represent invoiced rights to payment. Contract assets represent revenue recognised at the balance sheet date not yet invoiced.

Within trade and other payables in the consolidated statement of financial position:

-       Contract liabilities represent payments received in advance of revenue recognised.

Other revenue streams:

The revenue for each performance obligation is generally recognised at a point in time upon despatch of goods, or receipt of goods by the customer, depending on the terms of trade of each operating entity. Effect of change in accounting policy:  The satisfaction of performance obligations to customers under IFRS 15 matches the point at which risks and rewards were transferred under IAS 18.

However, should the value of bespoke contract work in the Roofing & Water Management division become material, IFRS 15 could result in earlier recognition of revenue and profit over time.

The impact of the adoption of IFRS 15, both at the transition date and on the six month accounting period ended 31 December 2018, is set out in note 14.

IFRS 9 Financial Instruments
The group has adopted IFRS 9 "Financial Instruments" from 1 July 2018. IFRS 9 replaces IAS 39 "Financial Instruments: Recognition and Measurement" and specifies how an entity should classify and measure financial assets and liabilities. 

The most significant area of change which could potentially impact the group's reported results is the introduction of an "expected loss" model for impairment provisioning of receivables, which now also includes contract assets recognised under the adoption of IFRS 15 "Revenue from Contracts with Customers".

Based on an assessment of historic credit losses and the likelihood of the occurrence of future credit losses on existing financial assets, and the existence of credit insurance for the majority of group receivables, the directors consider that there are no further material impairment losses to be recognised against the group's financial assets as a result of the transition to IFRS 9.

Changes in accounting policy:

The details of the new significant accounting policies and the nature of the changes to previous accounting policies in relation to the group's adoption of IFRS 9 are set out below:
 

The group's principal financial instruments comprise cash and cash equivalents, trade receivables, contract assets, trade payables, contract liabilities and interest-bearing borrowings. Based on the way these financial instruments are managed and their contractual cash flow characteristics, all the group's financial assets and liabilities are measured at amortised cost, which in most cases in the group is materially the same as their original invoiced or recognition value, due to the relatively short credit periods involved.

Effect of change in accounting policy: Cash and cash equivalents and trade receivables were previously treated as financial assets under IAS 39 and were measured at amortised cost. Trade payables and interest-bearing borrowings were previously treated as financial liabilities under IAS 39 and were measured at amortised cost. Contract assets and contract liabilities under IFRS 15, previously classified as amounts recoverable on construction contracts and construction deposits received on account under IAS 11, continue to be measured at amortised cost. The adoption of IFRS 9 has therefore not had any impact on the measurement of the group's financial assets and liabilities.

Impairment losses against financial assets carried at amortised cost are recognised by reference to any expected credit losses against those assets. Effect of change in accounting policy: IFRS 9 replaces the incurred loss model in IAS 39 with the expected credit loss model, which requires that future events are considered when calculating impairments to financial assets. Based on an assessment of historic credit losses on the group's financial assets and the likelihood of the occurrence of future credit losses on existing financial assets, the Directors consider that any increase in impairment provision to be recognised against the group's financial assets on transition to IFRS 9 is immaterial.

Update on new standards not yet applied

The group is currently assessing the impact that IFRS 16 "Leases" will have on the group's assets and liabilities. This standard will be applicable to the group from 1 July 2019. The ongoing assessment is consistent with that published in Report and Accounts 2018.

2. Estimates

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

Except as described below, in preparing these condensed consolidated interim financial statements, the significant judgements made by management in applying the group's accounting policies and the key sources of estimation uncertainty were the same as those that applied to the consolidated financial statements as at and for the year ended 30 June 2018.

During the six months ended 31 December 2018, management reassessed and updated its estimates in respect of retirement benefit obligations based on market data available at 31 December 2018. The resulting impact was a £0.1 million pre-tax actuarial loss (excluding the £1.1 million past service cost included in the operating profit for the period), calculated using IAS 19 conventions, recognised in the six month period to 31 December 2018.

3. Risks and uncertainties

A summary of the group's principal risks and uncertainties was provided on pages 28 and 29 of Alumasc's Report and Accounts 2018. The Board considers these risks and uncertainties remain relevant to the current financial year.

Specific risks and uncertainties relating to the group's performance in the second half year are:

·      The progress and outcome of current Brexit negotiations

Ongoing uncertainty over Brexit is impacting customer decision making, leading to project delays and also conversion of some work in our sales pipeline into orders being deferred. Whilst we have some allowance for this built into in our forecasts, revenue and profit performance in the second half year could be impacted.

Alumasc is a UK based group and does not have operations located in the Eurozone. Circa 5% of sales are made to, and over 10% of material supplies are sourced from, the Eurozone. We are working closely with both customers and suppliers to ensure known risks to all parties are managed as far as possible. We have no "just in time" supply chain exposures. We are increasing inventories in the second half year to mitigate the shorter-term risks of any "hard" or "no deal" Brexit and to maintain continuity of supply. We have operational flexibility to have supplies shipped to UK ports in numerous locations should any bottlenecks arise. We have significantly increased our forward foreign currency hedging to manage the impact of potential foreign exchange rate volatility on revenues and profits. We are also in the final phase of implementing hedging strategies to mitigate inflation and interest rate risk in our pension schemes and we have a well diversified pension investment portfolio.

·      Changing environmental regulations in China

Government policy and action in China could result in unexpected supplier factory closures and this might disrupt our operations, particularly in the Roofing & Water Management division. We are working with our long standing suppliers in China and investing in tooling compatible with their planned newer and cleaner manufacturing facilities to mitigate risks in this area.

4. Underlying to statutory profit reconciliation

Analysed by continuing and discontinued operations:

*Alumasc Facades meets the definition of a discontinued operation under international accounting standards. See note 5.

Analysed by continuing and discontinued operations:

*Alumasc Facades meets the definition of a discontinued operation under international accounting standards. See note 5.

In the presentation of underlying profits, management treats the amortisation of acquired brands and IAS 19 pension costs as non-underlying items because they are material non-cash and non-trading items that typically would be excluded in assessing the value of the business.

In addition, management has presented the following items as non-underlying as they are non-recurring items that are judged to be significant enough to affect the understanding of the year-on-year evolution of the underlying trading performance of the business:

-       The one off IAS 19 past service pension cost relating to Guaranteed Minimum Pension ("GMP") equalisation between men and women, following a High Court decision on 26 October 2018;

-       The loss on disposal of the Scaffold and Construction Products ("SCP") business, which was sold on 31 July 2017;

-       The profit on disposal of the group's share of Amorim Isolamentos S.A, a previously available-for-sale asset on 21 November 2017;

-       Cost of restructuring and relocation of businesses within the group in 2018/19 and 2017/18; and

-       Acquisition costs relating to the purchase of Wade International Limited on 31 January 2018.

5.     Discontinued operations

Discontinued operations relate to the Alumasc Facades business which was divested by the group on 31 October 2018.

6. Segmental analysis - continuing operations

In accordance with IFRS 8 Operating Segments, the segmental analysis below follows the group's internal management reporting structure.

The group sold the Alumasc Facades business on 31 October 2018. This has been treated as a discontinued operation (see note 5). Revenues and operating results from this business have been excluded from the segmental analysis below. This business was formerly part of the group's Roofing & Walling operating segment in prior years. Due to changes to internal management reporting and responsibilities to the Chief Operating Decision Maker in respect of the Roofing business following the sale of Alumasc Facades, this business is now included within the Roofing & Water Management segment.  

* Total excludes the SCP business sold on 31 July 2017.

7. Finance expenses

8. Tax expense

9. Dividends

The Directors have approved an interim dividend per share of 2.95p (2017/18: 2.95p) which will be paid on 8 April 2019 to shareholders on the register at the close of business on 1 March 2019. The cash cost of the dividend is expected to be £1,062,000. In accordance with accounting requirements, as the dividend was approved after the statement of financial position date, it has not been accrued in the interim consolidated financial statements. A final dividend per share of 4.4p in respect of the 2017/18 financial year was paid at a cash cost of £1,583,000 during the six months to 31 December 2018.

10. Share Based Payments

During the period the group awarded 90,000 options (2017/18: 210,000) under the Executive Share Option Scheme ("ESOS"). These options have an exercise price of 126.5p and require certain criteria to be fulfilled before vesting. No existing options (2017/18: 20,000) were exercised during the period and 200,000 existing options lapsed (2017/18: 40,000).

Total awards granted under the group's Long Term Incentive Plans ("LTIP") amounted to 373,267 (2017/18: 282,629). LTIP awards have no exercise price but are dependent on certain vesting criteria being met. 42,166 existing LTIP awards were exercised during the period (2017/18: none) and 222,464 existing LTIP awards lapsed (2017/18: none).

11. Earnings per share

Basic earnings per share is calculated by dividing the net profit for the period attributable to ordinary equity shareholders of the parent by the weighted average number of ordinary shares in issue during the period.

Diluted earnings per share is calculated by dividing the net profit attributable to ordinary equity shareholders of the parent by the weighted average number of ordinary shares in issue during the period, after allowing for the exercise of outstanding share options. The following sets out the income and share data used in the basic and diluted earnings per share calculations:

12. Movement in net cash/(debt)

13. Related party disclosure

The group has a related party relationship with its Directors and with its UK pension schemes. There has been no material change in the nature of the related party transactions described in the Report and Accounts 2018. Related party information is disclosed in note 28 of that document.   

14. IFRS 15 impact of transition and first half year

Transition

The group has taken advantage of the relief in IFRS 15 to reflect the aggregate effect of all modifications that occur before 1 July 2018 as a reduction to the group's profit and loss account reserve at 1 July 2018 by £76,000, because the net impact of adopting the new standard is not significant on the previously reported profit.

Impact on six months to 31 December 2018

Had the group continued to report in accordance with IAS 18 "Revenue" for the six months ended 31 December 2018, it would have reported the following amounts in these financial statements;

The main reasons for the differences are;

-       Recognition of revenue and profit on an input cost method over time, measured by reference to the stage of completion of the contract, rather than on an output cost method over time based on Quantity Surveyor assessments;

-       Resultant changes in the tax expense arising from the above adjustment.

Responsibility Statement

The Directors confirm that, to the best of their knowledge:

a) the condensed consolidated interim financial statements have been prepared in accordance with IAS 34 "Interim Financial Reporting" as adopted by the EU; and

b) the interim management report includes a fair review of the information required by:

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

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

On behalf of the Board

G P Hooper                                                           A Magson             

Chief Executive                                                     Group Finance Director