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 2019.

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 2019 and in accordance with AIM Rule 18.

The consolidated financial statements of the Group as at and for the year ended 30 June 2019 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 2019 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 2019 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 2019. 

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

4 February 2020.

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 2019 are consistent with the policies applied by the Group in its consolidated financial statements as at and for the year ended 30 June 2019. 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 2020.

IFRIC 23 Uncertainty over Income Tax Treatments

The Group has applied IFRIC 23, which is effective for periods beginning on or after 1 January 2019, from 1 July 2019 with no impact on the disclosures made by the Group.

IFRS 16 Leases

The Group has applied IFRS 16 using the modified retrospective approach and therefore the comparative information has not been restated and continues to be reported under IAS 17 and IFRIC 4. The impact of adopting the standard on 1 July 2019 was, in broad terms, to bring the Group's property leases on to the consolidated statement of financial position. Previously these were treated as operating leases and were 'off balance sheet'. More specifically the impact of adoption was:

-       The recognition of a right of use asset and lease liability of £5.0 million on the date of adoption with no impact on reserves at that stage;

-       The charge to the income statement increased by £0.03 million, reducing profit for the period by this figure in the current financial half-year to 31 December 2019; and

-       EBITDA increased by £0.3 million as the former lease expense was re-classified as a depreciation charge and interest cost in the six months to 31 December 2019.

The details of accounting policies under IAS 17 and IFRIC 4 are disclosed separately below if they are different from those under IFRS 16 and the impact of changes is disclosed in note 14.

1. Basis of preparation (continued)

Significant accounting policy

i)    Identification of a lease

Policy applicable for contracts entered into from 1 July 2019

At inception of a contract the Group assesses whether a contract is, or contains, a lease. A contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. To assess whether a contract conveys the right to control the use of an identified asset the Group assesses whether:

-       the contract involves the sole use of a specific identified asset - this may be specified explicitly or implicitly, and should be physically distinct or represent substantially all of the capacity of a physically distinct asset. If the supplier has the right to substitute the identified asset for a similar asset then the asset is not identified;

-       the Group has the right to obtain substantially all of the economic benefits from use of the asset throughout the period of use; and

-       the Group has the right to direct the use of the asset.

Policy applicable for contracts entered into prior to 1 July 2019

For contracts entered into before 1 July 2019, the Group determined whether the arrangement was or contained a lease based on the assessment of whether:

-       fulfilment of the arrangement was dependent on the use of a specific asset or assets; and

-       the arrangement had conveyed a right to use the asset. An arrangement conveyed the right to use the asset if one of the following was met:

o  the Group had the ability or right to operate the asset while obtaining or controlling more than an insignificant amount of the output;

o  the Group had the ability or right to control the physical access to the asset while obtaining or controlling more than an insignificant amount of the output; or

o  facts and circumstances indicated that it was remote that other parties would take more than an insignificant amount of the output, and the price per unit was neither fixed per unit of output nor equal to the current market price per unit of output.

ii)     As a lessee

Policy applicable from 1 July 2019

The Group recognises a right-of-use asset and a lease liability at the lease commencement date. The right-of-use asset is initially measured at cost, which comprises the initial amount of the lease liability.

The right-of-use asset is subsequently depreciated using the straight-line method from the commencement date to the earlier of the end of the useful life of the right-of-use asset or the end of the lease term. The estimated useful lives of right-of-use assets are determined on the same basis as those of property and equipment. In addition, the right-of-use asset is periodically reduced by impairment losses, if any, and adjusted for certain remeasurements of the lease liability.

The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Group's incremental borrowing rate. The Group uses its incremental borrowing rate as the discount rate.

Lease payments included in the measurement of the lease liability comprise fixed payments. The Group does not make other types of payment referred to in IFRS 16 for its leases.

Generally the lease liability represents the present value of contractual future lease payments including optional renewal periods where the Group is reasonably certain to exercise the extension option. The Group does not typically enter into purchase options or variable lease payments.

1. Basis of preparation (continued)

ii)      As a lessee (continued)

The lease liability is measured at amortised cost using the effective interest method. It is remeasured when there is a change in future lease payments arising from a change in an index or rate, if there is a change in the Group's estimate of the amount expected to be payable under a residual value guarantee, or if the Group changes its assessment of whether it will exercise a purchase, extension or termination option.

When the lease liability is remeasured in this way, a corresponding adjustment is made to the carrying amount of the right-of-use asset, or is recorded in profit or loss if the carrying amount of the right-of-use asset has been reduced to zero.

The Group presents right-of-use assets that do not meet the definition of investment property in 'Property, plant and equipment - right of use assets' and discloses the corresponding "Lease liability" in the statement of financial position.

Short-term leases and leases of low-value assets

The Group has elected not to recognise right-of-use assets and lease liabilities for short-term leases that have a lease term of 12 months or less and leases of low-value assets.

Further to this, the Group has taken advantage of the practical expedient within IFRS 16 and excluded leases with a remaining term of less than 12 months at the date of adoption.

The Group recognises the lease payments associated with these leases as an expense on a straight-line basis over the lease term.

Policy applicable under IAS 17 prior to 1 July 2019

In the comparative period, as a lessee the Group classified none of its leases as finance leases as none were deemed to transfer substantially all of the risks and rewards of ownership.

Payments made under operating leases were recognised in profit or loss on a straight-line basis over the term of the lease.

iii)       As a lessor

IFRS 16 lessor accounting requirements remain similar to requirements under IAS 17 with the change in accounting standard having no impact on the Group's financial statements.

When the Group acts as a lessor, it determines at lease inception whether each lease is a finance lease or an operating lease.

To classify each lease, the Group makes an overall assessment of whether the lease transfers substantially all of the risks and rewards incidental to ownership of the underlying asset. If this is the case, then the lease is a

finance lease; if not, then it is an operating lease. As part of this assessment, the Group considers certain indicators such as whether the lease is for the major part of the economic life of the asset.

When the Group is an intermediate lessor, it accounts for its interests in the head lease and the sub-lease separately. It assesses the lease classification of a sub-lease with reference to the right-of-use asset arising from the head lease, not with reference to the underlying asset. If a head lease is a short-term lease to which the Group applies an exemption under IFRS 16 then it classifies the sub-lease as an operating lease.

If an arrangement contains lease and non-lease components, the Group applies IFRS 15 to allocate the consideration in the contract.

The Group recognises lease payments received under operating leases as income on a straight-line basis over the lease term within Net operating expenses.

The accounting policies applicable to the Group as a lessor in the comparative period were not different from IFRS 16. However, when the Group is an intermediate lessor the sub-leases are classified with reference to the underlying asset.

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 2019, namely the valuation of defined benefit pension obligations, the valuation of the Group's acquired goodwill and the recognition of revenue and profit on contracts with customers where revenue is recognised over time.

During the six months ended 31 December 2019, management reassessed and updated its estimates in respect of retirement benefit obligations based on market data available at 31 December 2019. The resulting impact was a £1.5 million pre-tax actuarial loss, calculated using IAS 19 conventions, recognised in the six month period to 31 December 2019.

3. Risks and uncertainties

A summary of the Group's principal risks and uncertainties was provided on pages 22 and 23 of Alumasc's Report and Accounts 2019. 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:

1.     Impact of economic and political risks

The Group expects strong second half trading for the reasons set out in the Review of Interim Results.

Changes to the economic and political backdrop, for example progress with the UK/EU free trade agreement, international trade barriers and events in the Middle East could impact customer demand, the timing of construction projects and/or inflation and input costs, and therefore the Group's second half revenue performance and/or profit realisation.

A prolonged period of bad UK weather (such as that experienced in 2018) could also impact second half revenue and profit realisation.

2.     Impairment of assets risk

As set out in note 14 to the Group's 2019 annual report, there is limited headroom between the value in use of the Levolux business (cash generating unit) and its carrying value in the balance sheet, which includes acquired goodwill of £10.2 million. Should the ongoing restructuring and recovery plans at Levolux result in a future business that is smaller and/or less profitable than currently anticipated, the goodwill carried on the balance sheet could become partially impaired. This position will be re-assessed at the financial year end.

4. Underlying to statutory profit reconciliation

In the presentation of underlying profits, management treats the amortisation of acquired brands and IAS 19 pension costs consistently 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 underlying trading performance of the business:

-       The one-off profits and gains relating to the Alumasc Facades business that was divested by the Group on 31 October 2018 and treated as a discontinued operation (note 5);

-       Restructuring and relocation costs in 2018/19 and 2019/20.

-       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 one-off settlement gain arising from the merger of the Group's pension schemes on 5 March 2019;

-       The one-off professional fees incurred in connection with the re-listing of Alumasc's shares from the main market to the Alternative Investment Market ("AIM") on 25 June 2019;

5.     Discontinued operations

The Alumasc Facades business, divested by the Group on 31 October 2018 has been classified as a discontinued operation. The income in the current period relates to deferred consideration:

6. Segmental analysis - continuing operations

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

As described in the Operational Review, the Group changed its operating segments effective from 1 July 2019 to reflect the previously announced formation of the Building Envelope division at that date. This division comprises Alumasc Roofing and Levolux. Internal management reporting to the Chief Operating Decision Maker has been realigned accordingly. Previously Alumasc Roofing was part of the Roofing & Water Management division and Levolux was a separate segment. Comparative information has been re-stated to reflect the new segments.

The Group sold the Alumasc Facades business on 31 October 2018. This was treated as a discontinued operation (note 5). Revenues and operating results from this business have been excluded from the segmental analysis below.

6. Segmental analysis - continuing operations (continued)

7. Finance expenses

8. Tax expense

9. Dividends

The Directors have approved an interim dividend per share of 2.95 pence (2018/19: 2.95 pence) which will be paid on 7 April 2020 to shareholders on the register at the close of business on 6 March 2020. The cash cost of the dividend is expected to be £1,055,000. 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 4.4 pence in respect of the 2018/19 financial year was paid at a cash cost of £1,574,000 during the six months to 31 December 2019.

10. Share Based Payments

During the period the Group awarded 160,000 options (2018/19: 90,000) under the Executive Share Option Scheme ("ESOS"). These options have an exercise price of 82.5 pence and require certain criteria to be fulfilled before vesting. No existing options (2018/19: none) were exercised during the period and 130,000 existing options lapsed (2018/19: 200,000).

Total awards granted under the Group's Long Term Incentive Plans ("LTIP") amounted to 219,078 (2018/19: 373,267). LTIP awards have no exercise price but are dependent on certain vesting criteria being met. No existing LTIP awards were exercised during the period (2018/19: 42,166) and 253,208 existing LTIP awards lapsed (2018/19: 222,464).

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 bank 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 2019. Related party information is disclosed in note 28 of that document.   

14. IFRS 16 impact of transition and first half year

Transition

The Group applied IFRS 16 using the modified retrospective approach, under which the cumulative effect of initial application would be recognised in retained earnings at 1 July 2019.

Impact on 6 months to 31 December 2019

On transition to IFRS 16, the Group recognised an additional £5.0 million of right-of-use assets and lease liabilities with no net amount required to be recognised in retained earnings. In summary, the impact on the statement of financial position at 31 December 2019 is set out below. The impact on the interim statement of comprehensive income is to reduce the reported profit for the period by £34,000, being an improvement in operating profit of £42,000 offset by an increase in interest expense of £76,000. The net impact on the Group's cash flows is £nil, however cash flows from operating activities have improved by £249,000 with cash flows from financing activities reducing by the same amount. Further details of the impact are shown within note 1.

When measuring lease liabilities, the Group discounted lease payments using its incremental borrowing rate at 1 July 2019. The weighted-average rate applied is 3.1%.

The following reconciles the operating lease commitment disclosed at 30 June 2019 with the amount recognised on the balance sheet at 1 July 2019:

Responsibility Statement

The Directors confirm that, to the best of their knowledge the condensed consolidated interim financial statements have been prepared in accordance with Alternative Investment Market ("AIM") Rule 18.

On behalf of the Board

G P Hooper                                                           A Magson             

Chief Executive                                                     Group Finance Director