Morgan Advanced Materials

Full-year results for the period ended 31 December 2018

£ million unless otherwise stated	2018^(1/2)	2017^(1/2)	As Reported change %	Organic Constant Currency⁽²⁾ change %
Headline results Revenue	1,033.9	1,001.4	3.2%	7.4%
Group headline operating profit⁽⁴⁾	124.8	120.7	3.4%	9.4%
Group headline operating profit margin⁽⁴⁾	12.1%	12.1%
Headline EPS ⁽²⁾	26.7p	22.8p	17.1%
Total dividend per share	11.0p	11.0p
Cash flow from operations⁽⁴⁾	131.3	127.6	2.9%
Free cash flow before acquisitions, disposals, dividends, and additional US pension payments⁽⁴⁾	48.9	52.8

Statutory results
Operating profit	107.3	159.1
Profit before tax	94.9	136.8
Continuing EPS⁽³⁾	20.0p	38.1p
Continuing and discontinued EPS⁽³⁾	16.2p	37.8p

1. The Group disposed of the Composites and Defence Systems business in 2018, the disposal group formed the Composites and Defence Systems operating segment and has been classified as a discontinued operation under IFRS 5. Further details are provided in note 7 to the financial statements. The results for the years ended 31 December 2018 and 2017 have been presented as Continuing operations in the above table and throughout this Report, unless otherwise noted.

2. The year ended 31 December 2018 has been prepared reflecting the adoption of IFRS 15. The year ended 31 December 2017 has been restated to reflect the adoption of IFRS 15. Further details are provided in note 15 to the financial statements.

3. EPS is presented on a 'Continuing' and a combined 'Continuing and discontinued' basis for Statutory reporting. Further details are provided in note 8 to the financial statements.

4. Definitions of these non-GAAP measures can be found in the glossary of terms on page 42, reconciliations of the statutory results to the adjusted measures can be found on pages 10 to 14.

Group highlights

· Strategy implementation progressing well, accelerating growth

· Revenue growth of 7.4% and headline operating profit growth of 9.4% on an organic constant-currency* basis

· Group headline profit margin of 12.1%

· Headline EPS growth of 17.1% reflecting improvement in operating profit, lower financing charges and a lower effective tax rate

· The completion of the divestment of Composite and Defence Systems further simplifies the portfolio

Commenting on the results for Morgan Advanced Materials, Chief Executive Officer, Pete Raby said:

'The Group has made good progress during the year with the implementation of our strategy going well and accelerating growth. We have delivered organic revenue* growth of 7.4% and organic headline operating profit* growth of 9.4% while investing in R&D, sales and wider business infrastructure. We are now investing £10 million per year more in R&D than we were three years ago, a vital investment in the technical differentiation of the Group.

Looking forward to 2019, we are likely to see slower growth in the key industrial economies in which we participate, and there are several macro-economic and geopolitical uncertainties which could have a significant impact. However, based on our current assessment of business trends and orders, we expect to deliver modest revenue growth in 2019, with efficiency savings delivering benefits to Group headline operating profit.'

Strategy implementation progressing well.

In 2016 we defined six execution priorities that would be our focus to address the immediate issues that were holding the Group back, with the objective to get the business growing in line with our markets in 2019.

We have made good progress against those objectives:

1. Move to a global structure. We changed to a global organisation structure in March 2016 and have progressively changed the structures within the global business units to build larger units and create more customer and market focus. The change in structure has improved global co-ordination across the Group and has sharpened the accountability within each of our global business units. This is an important change to enable the wider changes we need to make and we completed this without any loss of business momentum

2. Extend our technology leadership. Our objective is to strengthen our technical teams and increase our annual investment in research and development by around 1% of sales (around £10m), from our 2015 starting point.

At the end of 2018 our R&D spend is £10 million higher than the 2015 level. We have established two new Centres of Excellence to drive materials development activity in carbon science and the metallising and joining of ceramics. Both of these new centres are up and running with the teams working on new product developments to enhance our differentiation and accelerate the growth of the Group. We have also worked with our technical teams during the year to reduce the overall number of developments they are working on to get more resource and faster progress on a smaller number of projects.

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

We have continued to make good progress with our operational improvements during the year. We generated net savings that funded reinvestment in the year. The savings came from a wide variety of projects in automation, procurement and small-scale waste elimination across all of our global business units. We have also launched a number of larger lean manufacturing projects to reduce waste and cost and improve delivery performance in select sites. Those projects have delivered cost savings and delivery improvements during the year and will continue into 2019.

4. Drive sales effectiveness and market focus. Our objective is to strengthen our sales capability, and

increase the intensity of effort with new customers and in new markets.

We have a sizeable programme of work underway to improve sales effectiveness: redesigning our sales processes and approach, building capabilities, deploying new segmentation and pricing tools, streamlining sales processes, increasing business development resources and changing sales incentives. These approaches have been developed through pilot activity in 2017 and in 2018 we have deployed these more widely across the business, typically starting with segmentation and sales structures and then moving to sales processes and incentives. We have developed training programmes for our sales and customer service teams and piloted those during the year ahead of wider deployment in 2019.

5. Increase investment in people management and development. We are aiming to strengthen our leadership capability and deepen functional capabilities across the business, including in sales and engineering.

We have made further progress in strengthening the senior leadership population across the Group and in developing our IT, EHS, finance and HR functions. We have also broadened our focus beyond the senior population with the design of new Group-wide development programmes for our future leaders, and we will launch those during 2019.

We have improved our approach to driving higher performance by integrating the leadership behaviours - launched in 2017 - into an enhanced, globally consistent performance management process. A stronger link between performance and reward has also been introduced to build the performance culture.

6. Simplify the business. We have completed the planned divestment of the Composites and Defence Systems business in the year, the last of the priority divestments that we identified in 2016. Through these actions we have exited businesses where we were sub-scale or where there was limited synergy with the remainder of the Group. We have sharpened the focus on the core business and reduced overhead costs. We received consideration of £82.2 million from these sales and have used that to reduce our net debt* position, creating funds for reinvestment in the business in due course. Additionally in 2018, we have also simplified our Thermal business in South America with the closure of our Thermal plant in Brazil, and the exit of our Venezuelan business, and we have taken the decision to close our ceramic cores business in China.

The health of the business has improved significantly over the last three years, as has the financial position of the Group. We have completed significant investment in business capabilities, reduced debt, reduced the pension deficit and lowered the cost of long-term funding for the Group. Operating margins have improved while we have reinvested in the business, ROIC* has expanded from 16.0% to 18.1%. We have returned the business to growth delivering a second year of organic revenue* growth.

We will continue to focus on the following four priorities: driving sales effectiveness and market focus; extending our technology leadership; increasing investment in people management and development, and improving operational execution.

Enquiries


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

Results presentation today

There will be an analyst and investor presentation at 08.30 (UK time) today at The London Stock Exchange, 10 Paternoster Square, London, EC4M 7LS.

A live video webcast and slide presentation of this event will be available on www.morganadvancedmaterials.com. We recommend you register by 08.15 (UK time).

Basis of preparation

Non-GAAP measures

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

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

The year ended 31 December 2018 has been prepared reflecting the adoption of IFRS 15, the year ended December 2017 has been restated to reflect the adoption of IFRS 15. The disposal of the Composites and Defence Systems business is presented as discontinued operations in accordance with IFRS 5, the year ended 31 December 2017 has been restated to present the Group excluding the Composites and Defence Systems business.

Further details on the disposal of Composites and Defence Systems and the adoption of IFRS 15 are provided in notes 7 and 15 to the financial statements.

Throughout this report these non-GAAP measures are clearly identified by an asterisk (*) where they appear in text, and by a footnote when they appear in tables and charts. Definitions of these non-GAAP measures can be found in the glossary of terms on page 42, reconciliations of the statutory results to the adjusted measures can be found on pages 10 to 14.

Operating review

	Revenue⁽¹⁾		EBITA⁽¹⁾		Margin %⁽¹⁾
	2018⁽²⁾	2017⁽²⁾	2018⁽²⁾	2017⁽²⁾	2018⁽²⁾	2017⁽²⁾
	£m	£m	£m	£m	%	%
Thermal Ceramics	433.6	427.3	52.9	56.9	12.2%	13.3%
Molten Metal Systems	48.6	47.1	6.6	7.0	13.6%	14.9%
Thermal Products Total	482.2	474.4	59.5	63.9	12.3%	13.5%
Electrical Carbon	166.8	156.9	19.4	16.7	11.6%	10.6%
Seals and Bearings	132.7	113.3	23.7	17.5	17.9%	15.4%
Technical Ceramics	252.2	256.8	28.1	28.3	11.1%	11.0%
Carbon and Technical Ceramics Total	551.7	527.0	71.2	62.5	12.9%	11.9%
Divisional Total	1,033.9	1,001.4	130.7	126.4	13.0%	12.6%

Corporate costs			(5.9)	(5.7)
Group headline operating profit^(1)/(2)			124.8	120.7	12.1%	12.1%
Amortisation of intangible assets			(8.0)	(7.3)
Operating profit before specific adjusting items			116.8	113.4	11.6%	11.3%
Specific adjusting items included in operating profit⁽³⁾			(9.5)	45.7
Operating profit			107.3	159.1	11.2%	15.9%
Net financing costs			(13.2)	(22.5)
Share of profit of associate (net of income tax)			0.8	0.2
Profit before taxation			94.9	136.8

1. The year ended 31 December 2018 has been prepared reflecting the adoption of IFRS 15. The year ended 31 December 2017 has been restated to reflect the adoption of IFRS 15. Further details are provided in note 15 to the financial statements.

2. Definitions of these non-GAAP measures can be found in the glossary of terms on page 42, reconciliations of the statutory results to the adjusted measures can be found on pages 10 to 14.

3. Details of specific adjusting items can be found in note 4 to the financial statements

Thermal Products

Revenue for Thermal Products for the year was £482.2 million, representing an increase of 1.6% compared with £474.4 million in 2017. On an organic constant-currency* basis, year-on-year revenue increased by 5.5%. Divisional EBITA* for Thermal Products was £59.5 million (2017: £63.9 million) with a Divisional EBITA* margin of 12.3% (2017: 13.5%).

The statutory operating profit for the Thermal Products Division was £43.2 million in 2018, (2017: £61.9 million), and included £13.8 million of charges related to the exit of the Brazilian and Venezuelan businesses, see note 4 for additional information.

Revenue for Thermal Ceramics for the year was £433.6 million, representing an increase of 1.5% compared with £427.3 million in 2017. On an organic constant-currency* basis, year-on-year revenue increased by 5.3%. Strong growth in Asia was led by China and India. North America experienced lower demand whilst Europe was slightly ahead of the prior year. Growth was primarily in insulation projects for the petrochemical industry, and in the metals and industrial market segments.

Thermal Ceramics 2018 EBITA* was £52.9 million (2017: £56.9 million) with EBITA margin* of 12.2% (2017: 13.3%). The margin decline was driven by two factors. First a mix impact, with increased lower margin petrochemical project business in Asia offset by lower volume in North America. Secondly, the profitability of the Brazilian business declined in 2018 reflecting the challenges in that market. The Thermal Ceramics manufacturing site in Brazil was closed in the second half of 2018.

Revenue for Molten Metals Systems for the year was £48.6 million, representing an increase of 3.2% compared with £47.1 million in 2017. On an organic constant-currency* basis, year-on-year revenue increased by 7.3%. Growth was driven primarily by the Asia and North America regions. The core crucibles business grew year-on-year, primarily driven by strong performance in India. Industrial equipment sales increased as well as consumable sales into the strengthening precious metal fire assay markets.

Molten Metal Systems 2018 EBITA* was £6.6 million (2017: £7.0 million) with EBITA margin* of 13.6% (2017: 14.9%). During 2018 we continued our investment in technology, product development and sales capability, which depressed the margins compared to the prior year.

Carbon and Technical Ceramics

Revenue for the Carbon and Technical Ceramics Division for the year was £551.7 million, representing an increase of 4.7% compared with £527.0 million in 2017. On an organic constant-currency* basis, year-on-year revenue increased 7.1%.

Divisional EBITA* for the Carbon and Technical Ceramics Division was £71.2 million (2017: £62.5 million) with Divisional EBITA margin* of 12.9% (2017: 11.9%).

Revenue for Electrical Carbon for the year was £166.8 million, representing an increase of 6.3% compared with £156.9 million in 2017. On an organic constant-currency* basis, year-on-year revenue increased by 12.6%.

The strong year-on-year growth was driven primarily by the rail, industrial and semiconductor market segments. The rail segment benefitted from good market conditions, primarily from sales of our carbon collector strip products for electrified rail applications.

On a regional basis, growth in Asia was driven by sales of specialty graphite products accompanied by good growth in the industrial and rail sectors. Double digit growth was also seen in North America across all sectors, supported by the strong economy. Europe saw good growth in the wind power and rail segments offsetting a slight decline in the industrial market.

Electrical Carbon EBITA* was £19.4 million (2017: £16.7 million) with an EBITA margin* of 11.6% (2017: 10.6%). Strong revenue growth, supported by operational efficiency actions, more than offset the dilutive impacts of the 2017 divestment of the Rotary Transfer Systems business. These actions enabled Electrical Carbon to re-invest in sales effectiveness, research and development and wider business infrastructure.

Revenue for Seals and Bearings for the year was £132.7 million, representing an increase of 17.1% compared with £113.3 million in 2017. On an organic constant-currency* basis year-on-year revenue increased by 18.9%. The business saw strong growth in most key markets, offsetting continued weakness in the Korean automotive market. In a continuation of the contracts awarded in 2017, sales of ceramic armour increased significantly from £6.6 million in 2017 to £24.0 million in 2018. Excluding armour, organic revenue* growth on the core business was 3.3%. The business saw organic revenue* growth in the water, petrochemical, medical and aerospace markets.

Seals and Bearings EBITA* was £23.7 million (2017: £17.5 million) with an EBITA margin* of 17.9% (2017: 15.4%).

The increase in volume and a strong continuous improvement projects pipeline yielded incremental savings which offset cost inflation and investments in the production base. Additionally the business continued to invest in sales effectiveness training, research and development and the functional capabilities in support of its growth strategy.

Revenue for Technical Ceramics was £252.2 million, a decrease of (1.8)% compared with £256.8 million in 2017. On an organic constant-currency* basis, year-on-year revenue increased by 2.8% primarily driven by demand increases for ceramic cores in the aerospace market and supply of ceramic parts into the semiconductor and medical markets. This demand growth was partially offset by the sharp slow-down in the industrial gas turbine (IGT) market.

Technical Ceramics EBITA* was £28.1 million (2017: £28.3 million) with an EBITA margin* of 11.1% (2017: 11.0%). Margins expanded slightly with the benefit of higher volume offsetting the significant reduction in IGT volume, and the dilutive impact of the 2017 divestment of the Electro-ceramics business.

Group Financial review

Group revenue was £1,033.9 million (2017: £1,001.4 million), an increase of 3.2% on a reported basis compared with 2017, driven by improvements in the underlying business, more than offsetting the impacts of prior year disposals and foreign exchange headwinds. On an organic constant-currency* basis revenue increased by 7.4%.

Group headline operating profit was £124.8 million (2017: £120.7 million). Headline operating profit margin was
12.1%, compared to 12.1% for 2017.

Operating profit was £107.3 million (2017: £159.1 million) and profit before tax was £94.9 million (2017: £136.8 million). Both of these included specific adjusting items charge of £(9.5) million (2017: credit £45.7 million), explained in note 4 to the financial statements on page 28.

The net finance charge was £13.2 million (2017: £22.5 million), primarily comprising net bank interest and similar charges of £8.5 million (2017: £15.8 million), and the finance charge under IAS 19 (revised), being the interest charge on pension scheme net liabilities, which was £4.7 million (2017: £6.9 million).

The Group amortisation charge was £8.0 million (2017: £7.3 million), with the higher year-on-year charge driven by increased software licenses.

The Group tax charge, excluding specific adjusting items, was £29.0 million (2017: £26.9 million). The effective tax rate, excluding specific adjusting items, was 27.8% (2017: 29.5%). Note 6 to the financial statements, on page 30, provides additional information on the Group's tax charge.

Looking forward to 2019, we anticipate that the effective tax rate will remain at around 28%, with cash tax paid slightly higher than the charge to the income statement.

Headline earnings per share* was 26.7 pence (2017: 22.8 pence), and basic earnings per share from continuing operations was 20.0 pence (2017: 38.1 pence). Details of these calculations can be found in note 8 to the financial statements on page 32. Headline earnings per share* is a non-GAAP measure.

A reconciliation from IFRS profit to the profit used to calculate headline earnings per share is included in note 8 to the financial statements on page 32.

Specific adjusting items

	2018 £m	2017 £m
Specific adjusting items
Net pension past service credit	5.7	-
Business closure and exit costs	(15.2)	-
Net profit on disposal of businesses	-	45.7
Total specific adjusting items	(9.5)	45.7
Income tax (charge) / credit from specific adjusting items	(1.7)	0.9
Income tax (charge) / credit from US Tax Cuts and Jobs Act	-	4.1
Total specific adjusting items after income tax	(11.2)	50.7

Specific adjusting items after income tax were £(11.2) million (2017: £50.7 million), and consisted of the following:

Net pension past service credit - UK

Early and late retirement adjustment

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

Adjustment for Guaranteed Minimum Pensions (GMPs)

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

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

Business closure and exit costs

Brazil, Thermal Ceramics

In 2018 the Group announced its decision to close the Thermal Ceramics site in Rio de Janeiro. A £6.2 million charge has been recognised. This comprises cash exit costs of £2.6 million relating to site clean-up costs, professional and legal fees and staff redundancies and impairment costs of £3.6 million relating to the impairment of property, plant and equipment and other assets.

In the year ended December 2018 the business generated an operating loss of £2.6 million on revenues of £3.0 million, (2017: operating loss of £2.0 million on revenues of £6.5 million).

China, Technical Ceramics

The Group has decided to close its ceramic cores operations in China, a part of the Technical Ceramics global business unit. A £1.4 million impairment charge has been recognised relating to the impairment of plant and equipment and other assets.

In the year ended December 2018 the business generated a headline operating loss of £0.9 million on revenues of £0.5 million, (2017: headline operating loss of £0.9 million on revenues of £0.6 million).

Venezuela, Thermal Ceramics

The Group has decided to exit its Thermal Ceramics operations in Venezuela. A £7.6 million charge has been recognised, of which £7.3 million relates to the recycling of deferred foreign exchange translation losses in accordance with IAS 21 The Effects of Changes in Foreign Exchange Rates, and £0.3 million relates to the impairment of assets.

In the years ended December 2017 and 2018 the business had negligible revenue and headline operating profit (£0.0m).

Cash Flow

	2018⁽¹⁾	2017⁽¹⁾
	£m	£m
Cash flow from operations⁽²⁾	131.3	99.6
Capital expenditure	(53.1)	(33.7)
Net interest	(8.4)	(16.6)
Tax paid	(20.9)	(24.5)
Free cash flow before acquisitions, disposals and dividends⁽²⁾	48.9	24.8
Dividends paid to external plc shareholders	(31.4)	(31.4)
Net cash flows from other investing and financing activities	(5.2)	(18.2)
Net cash flows from divestments and discontinued operations	(1.2)	77.7
Exchange movement	(9.8)	8.3
Movement in net debt⁽²⁾ in period	1.3	61.2
Opening net debt⁽²⁾	(181.3)	(242.5)
Closing net debt⁽²⁾	(180.0)	(181.3)

1. The year ended 31 December 2018 has been prepared reflecting the adoption of IFRS 15. The year ended 31 December 2017 has been restated to

reflect the adoption of IFRS 15. Further details are provided in note 15 to the financial statements.

2. Definitions of these non-GAAP measures can be found in the glossary of terms on page 42, reconciliations of the statutory results to the adjusted measures can be found on pages 10 to 14.

Cash flow from operations was £131.3 million (2017: £127.6 million excluding the one-off US pension payment of £28 million), an improvement on 2017.

Free cash flow before acquisitions and dividends was £48.9 million (2017: £52.8 million excluding the one-off US pension payment of £28 million).

Net debt* at the year-end was £180.0 million (2017: £181.3 million), representing a net debt* to EBITDA* ratio of 1.2x (2017: 1.2x).

Defined benefit pension plans

The Group pension deficit has decreased by £27.6 million since last year end to £190.4 million on an IAS 19 (revised basis) as employer contributions and changes in assumptions more than offset investment losses.

· The UK schemes deficit decreased by £25.9 million to £140.1 million (2017: decrease of £14.5 million), as employer contributions and changes in assumptions more than offset investment losses (discount rate 2018 2.74%; 2017 2.38%).

· The USA schemes deficit decreased by £2.3 million to £8.8 million (2017: decrease of £37.9 million), (discount rate 2018 4.34%; 2017 3.65%).

· The European schemes deficit increased by £0.2 million to £36.9 million (2017: decrease of £0.8 million), (discount rate 2018 1.70%; 2017 1.60%).

· The Rest of World schemes deficit increased by £0.4 million to £4.6 million (2017: decrease of £0.1 million), (discount rate 2018 2.60%; 2017 3.20%).

Note 13 to the financial statements, on page 38, provides additional information on the Group's pension schemes.

Foreign exchange

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

	2018		2017
GBP to:	Closing rate	Average rate	Closing rate	Average rate
US dollar	1.28	1.33	1.35	1.29
Euro	1.11	1.13	1.13	1.14

For illustrative purposes, the table below provides details of the impact on 2018 revenue and Group EBITA* if the actual reported results, calculated using 2018 average exchange rates were restated for GBP weakening by 10 cents against USD in isolation and 10 cents against the Euro in isolation:

Increase in 2018 revenue/Group EBITA⁽¹⁾ if:

Revenue

£m

Group EBITA⁽¹⁾

£m

GBP weakens by 10c against the US dollar in isolation

+34.9

+5.1

GBP weakens by 10c against the Euro in isolation

+21.2

+3.8

1. Definitions of these non-GAAP measures can be found in the glossary of terms on page 42, reconciliations of the statutory results to the adjusted measures can be found on pages 10 to 14.

Retranslating the 2018 full year results at the January 2019 closing exchange rates would lead to revenue of £1,026.2 million and headline operating profit of £123.1 million

Final dividend

The Board is recommending a final dividend, subject to shareholder approval, of 7.0 pence per share on the Ordinary share capital of the Group, payable on 24 May 2019 to Ordinary shareholders on the register at the close of business on 3 May 2019. Together with the interim dividend of 4.0 pence per share paid on 23 November 2018, this final dividend, if approved by shareholders, brings the total distribution for the year to 11.0 pence per share (2017: 11.0 pence). A total dividend of 11.0 pence per share represents a dividend cover of headline EPS* 2.4x in 2018 (2017: 2.0x).

The Board has held the dividend flat as it looks to rebuild dividend cover in the medium-term.

Definitions and reconciliations of non-GAAP to GAAP measures

Reference is made to the following non-GAAP measures throughout this document. These measures are shown because the Directors consider they provide useful information to shareholders, including additional insight into ongoing trading and year-on-year comparisons. These non-GAAP measures should be viewed as complementary to, not replacements for, the comparable GAAP measures.

Headline profit and earnings measures

Group headline operating profit is stated before specific adjusting items and amortisation of intangible assets. Specific adjusting items are excluded on the basis that they distort trading performance. Amortisation is excluded as the charge arises primarily on externally acquired intangible assets since the adoption of IFRS and does not therefore reflect all intangible assets consistently.

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

2018	Thermal Ceramics £m	Molten Metal Systems £m	Thermal Products Division £m	Electrical Carbon £m	Seals and Bearings £m	Technical Ceramics £m	Carbon and Technical Ceramics Division £m	Segment total £m	Corporate costs⁽¹⁾ £m	Group £m
Operating profit/(loss)	36.9	6.3	43.2	18.7	23.3	22.3	64.3	107.5	(0.2)	107.3
Add back specific adjusting items included in operating profit	13.8	-	13.8	-	-	1.4	1.4	15.2	(5.7)	9.5
Add back amortisation of intangible assets	2.2	0.3	2.5	0.7	0.4	4.4	5.5	8.0	-	8.0
Group headline operating profit										124.8
Corporate costs⁽¹⁾									5.9	5.9
Divisional EBITA/global business unit EBITA	52.9	6.6	59.5	19.4	23.7	28.1	71.2	130.7

1.Corporate costs consist of the specific adjusting items and the cost of the central head office.

2017	Thermal Ceramics £m	Molten Metal Systems £m	Thermal Products Division £m	Electrical Carbon £m	Seals and Bearings £m	Technical Ceramics £m	Carbon and Technical Ceramics Division £m	Segment total £m	Corporate costs⁽¹⁾ £m	Group £m
Operating profit/(loss)	55.1	6.8	61.9	16.2	17.2	23.8	57.2	119.1	40.0	159.1
Add back specific adjusting items included in operating profit	-	-	-	-	-	-	-	-	(45.7)	(45.7)
Add back amortisation of intangible assets	1.8	0.2	2.0	0.5	0.3	4.5	5.3	7.3	-	7.3
Group headline operating profit										120.7
Corporate costs⁽¹⁾									5.7	5.7
Divisional EBITA/global business unit EBITA	56.9	7.0	63.9	16.7	17.5	28.3	62.5	126.4

1.Corporate costs consist of the specific adjusting items and the cost of the central head office.

Group Organic Growth

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

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

Year-on-year movements in Segment Revenue

	Thermal Ceramics	Molten Metal Systems	Thermal Products Division	Electrical Carbon	Seals and Bearings	Technical Ceramics	Carbon and Technical Ceramics Division	Segment Total
	2017 versus 2018	2017 versus 2018	2017 versus 2018	2017 versus 2018	2017 versus 2018	2017 versus 2018	2017 versus 2018	2017 versus 2018
	£m	£m	£m	£m	£m	£m	£m	£m

2017 Revenue	427.3	47.1	474.4	156.9	113.3	256.8	527.0	1,001.4

Impact of foreign currency movements	(15.4)	(1.8)	(17.2)	(4.1)	(1.7)	(6.0)	(11.8)	(29.0)
Impacts of disposals	-	-	-	(4.6)	-	(5.5)	(10.1)	(10.1)
Impact of underlying business	21.7	3.3	25.0	18.6	21.1	6.9	46.6	71.6
Underlying %	5.3%	7.3%	5.5%	12.6%	18.9%	2.8%	9.2%	7.4%

2018 Revenue	433.6	48.6	482.2	166.8	132.7	252.2	551.7	1,033.9

Year-on-year movements in Segment and Group EBITA

	Thermal Ceramics	Molten Metal Systems	Thermal Products Division	Electrical Carbon	Seals and Bearings	Technical Ceramics	Carbon and Technical Ceramics Division	Segment Total	Corporate Costs	Group
	2017 versus 2018	2017 versus 2018	2017 versus 2018	2017 versus 2018	2017 versus 2018	2017 versus 2018	2017 versus 2018	2017 versus 2018	2017 versus 2018	2017 versus 2018
	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m

2017 Segment & Group EBITA	56.9	7.0	63.9	16.7	17.5	28.3	62.5	126.4	(5.7)	120.7

Impact of foreign currency movements	(2.2)	(0.3)	(2.5)	(0.6)	(0.4)	(0.7)	(1.7)	(4.2)	-	(4.2)
Impacts of disposals	-	-	-	(1.3)	-	(1.1)	(2.4)	(2.4)	-	(2.4)
Impact of underlying business	(1.8)	(0.1)	(1.9)	4.6	6.6	1.6	12.8	10.9	(0.2)	10.7
Underlying %	(3.3)%	(1.5)%	(3.1)%	31.1%	38.6%	6.0%	21.9%	9.5%	-	9.4%

2018 Segment & Group EBITA	52.9	6.6	59.5	19.4	23.7	28.1	71.2	130.7	(5.9)	124.8

Group EBITDA

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

	2018 £m	2017 £m
Operating Profit	107.3	159.1
Add back: specific adjusting items included in operating profit	9.5	(45.7)
Add back: depreciation	31.3	30.0
Add back: amortisation of intangible assets	8.0	7.3
Group EBITDA	156.1	150.7

Cash flow from operations and free cash flow before acquisitions, disposals and dividends

Free cash flow before acquisitions and disposals is defined as cash generated from operations less capital expenditure, net interest and tax paid.

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

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

	2018 £m	2017 £m
Cash generated from operations	131.3	99.6
Capital expenditure	(53.1)	(33.7)
Net interest	(8.4)	(16.6)
Tax paid	(20.9)	(24.5)
Free cash flow before acquisitions, disposals and dividends	48.9	24.8
Free cash flow before acquisitions, dividends and one-off US pension payment	48.9	52.8

1. In 2017 cash generated from operations includes a one-off payment to the US pension scheme of £28.0 million. Free cash flow is presented both before and

after this payment.

Net debt

Net debt is defined as interest-bearing loans and borrowings and bank overdrafts less cash and cash equivalents. The Group discloses this metric as it is a key metric in covenants over debt facilities.

	2018 £m	2017 £m
Cash and cash equivalents	67.6	50.4
Non-current interest-bearing loans and borrowings	(164.8)	(192.7)
Current interest-bearing loans and borrowings and bank overdrafts	(82.8)	(39.0)
Net debt	(180.0)	(181.3)

Return on invested capital

Return on invested capital (ROIC) is defined as the 12-month Group headline operating profit (operating profit excluding specific adjusting items and amortisation of intangible assets) divided by the 12-month average adjusted net assets (third-party working capital, plant and equipment, land and buildings, intangible assets and other balance sheet items).

	2018 £m	2017 £m
Operating profit	116.8	113.4
Add back: amortisation of intangible assets	8.0	7.3
Group headline operating profit (12-month rolling)	124.8	120.7

12-month average adjusted net assets:
Third-party working capital	169.3	170.4
Plant and equipment	180.9	174.6
Land and buildings	116.3	114.5
Intangible assets	214.0	219.3
Other assets (net)	9.6	16.4
12-month average adjusted net assets	690.1	695.2

ROIC	18.1%	17.4%

Headline earnings per share

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

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

Constant-currency revenue and Group headline operating profit

Constant-currency revenue and Group headline operating profit are derived by translating the prior year results at current year average exchange rates. These measures are used as they allow revenue to be compared excluding the impact of foreign exchange rates. Page 9 provides further information on the principal foreign currency exchange rates used in the translation of the Group's results to constant-currency at average exchange rates.

Consolidated Financial Statements

for the 12 months ended 31 December 2018

Consolidated Income Statement

		Year ended 31 December 2018			Year ended 31 December 2017
		Results before specific adjusting items	Specific adjusting items⁽¹⁾	Total	Restated results before specific adjusting items^(2,3)	Specific adjusting items⁽¹⁾	Restated total ^(2,3)
	Note	£m	£m	£m	£m	£m	£m
Revenue	3	1,033.9	-	1,033.9	1,001.4	-	1,001.4
Operating costs before restructuring costs and other items and amortisation of intangible assets		(909.1)	-	(909.1)	(880.7)	-	(880.7)

Profit from operations before restructuring costs and other items and amortisation of intangible assets		124.8	-	124.8	120.7	-	120.7

Restructuring costs and other items:	4
Net pension past service credit		-	5.7	5.7	-	-	-
Business closure and exit costs		-	(15.2)	(15.2)	-	-	-
Net profit on disposal of businesses		-	-	-	-	45.7	45.7
Profit from operations before amortisation of intangible assets	3	124.8	(9.5)	115.3	120.7	45.7	166.4

Amortisation of intangible assets		(8.0)	-	(8.0)	(7.3)	-	(7.3)

Operating profit	3	116.8	(9.5)	107.3	113.4	45.7	159.1

Finance income		1.3	-	1.3	1.8	-	1.8
Finance expense		(14.5)	-	(14.5)	(24.3)	-	(24.3)
Net financing costs	5	(13.2)	-	(13.2)	(22.5)	-	(22.5)

Share of profit of associate (net of income tax)		0.8	-	0.8	0.2	-	0.2

Profit before taxation		104.4	(9.5)	94.9	91.1	45.7	136.8

Income tax expense	6	(29.0)	(1.7)	(30.7)	(26.9)	5.0	(21.9)

Profit from continuing operations		75.4	(11.2)	64.2	64.2	50.7	114.9
Loss from discontinued operation		(1.4)	(9.3)	(10.7)	(1.0)	-	(1.0)
Profit for the period		74.0	(20.5)	53.5	63.2	50.7	113.9

Profit for the period attributable to:
Owners of the parent		66.8	(20.5)	46.3	56.9	50.7	107.6
Non-controlling interests		7.2	-	7.2	6.3	-	6.3

Profit for the period		74.0	(20.5)	53.5	63.2	50.7	113.9

Earnings per share	8
Continuing operations and discontinued operations
Basic earnings per share				16.2p			37.8p
Diluted earnings per share				16.1p			37.5p

Continuing operations only
Basic earnings per share				20.0p			38.1p
Diluted earnings per share				19.9p			37.9p

Dividends
Interim dividend - pence				4.00p			4.00p
- £m				11.4			11.4

Proposed final dividend - pence				7.00p			7.00p
- £m				20.0			20.0

The proposed final dividend is based upon the number of shares outstanding at the balance sheet date.

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

2. The Group disposed of the Composites and Defence Systems business in 2018, the disposal group formed the Composites and Defence Systems operating segment and has been classified as a discontinued operation under IFRS 5. The years ended 31 December 2018 and 2017 have been presented as Continuing operations throughout the Consolidated financial statements. Further details are provided in note 7 to the consolidated financial statements.

3.The year ended 31 December 2018 has been prepared reflecting the adoption of IFRS 15. The year ended 31 December 2017 has been restated to reflect the adoption of IFRS 15. Further details are provided in note 15 to the consolidated financial statements.

Consolidated Financial Statements (continued)

for the 12 months ended 31 December 2018

Consolidated Statement of Comprehensive Income

	Translation reserve	Hedging reserve	Retained earnings	Total parent comprehensive income	Non- controlling interests	Total comprehensive income
	£m	£m	£m	£m	£m	£m

2017
Profit for the period	-	-	107.6	107.6	6.3	113.9
Items that will not be reclassified subsequently to profit or loss:
Remeasurement gain on defined benefit plans	-	-	10.0	10.0	-	10.0
Tax effect of components of other comprehensive income not reclassified	-	-	(1.8)	(1.8)	-	(1.8)
	-	-	8.2	8.2	-	8.2
Items that may be reclassified subsequently to profit or loss:
Foreign exchange translation differences	(11.0)	-	-	(11.0)	(1.3)	(12.3)
Cash flow hedges:
Change in fair value	-	2.6	-	2.6	-	2.6
Transferred to profit or loss	-	0.4	-	0.4	-	0.4
	(11.0)	3.0	-	(8.0)	(1.3)	(9.3)
Total comprehensive income, net of tax	(11.0)	3.0	115.8	107.8	5.0	112.8

Total comprehensive income/(expense) attributable to:
Continuing operations	(11.0)	3.0	116.8	108.8	5.0	113.8
Discontinued operations	-	-	(1.0)	(1.0)	-	(1.0)
Total comprehensive income, net of tax attributable to shareholders of the Company	(11.0)	3.0	115.8	107.8	5.0	112.8

2018
Profit for the period	-	-	46.3	46.3	7.2	53.5
Items that will not be reclassified subsequently to profit or loss:
Remeasurement gain on defined benefit plans	-	-	14.2	14.2	-	14.2
Tax effect of components of other comprehensive income not reclassified	-	-	(0.7)	(0.7)	-	(0.7)
	-	-	13.5	13.5	-	13.5
Items that may be reclassified subsequently to profit or loss:
Foreign exchange translation differences	9.9	-	-	9.9	0.2	10.1
Cash flow hedges:
Change in fair value	-	(0.2)	-	(0.2)	-	(0.2)
Transferred to profit or loss	-	(0.5)	-	(0.5)	-	(0.5)
	9.9	(0.7)	-	9.2	0.2	9.4
Total comprehensive income, net of tax	9.9	(0.7)	59.8	69.0	7.4	76.4

Total comprehensive income/(expense) attributable to:
Continuing operations	9.9	(0.7)	70.5	79.7	7.4	87.1
Discontinued operations	-	-	(10.7)	(10.7)	-	(10.7)
Total comprehensive income, net of tax attributable to shareholders of the Company	9.9	(0.7)	59.8	69.0	7.4	76.4

Consolidated Balance Sheet

		Year ended 31 December 2018⁽¹⁾	Restated year ended 31 December 2017⁽¹⁾
	Note	£m	£m
Assets
Property, plant and equipment		314.5	297.8
Intangible assets		215.6	217.0
Investments		5.9	6.3
Other receivables		6.3	5.4
Deferred tax assets		6.9	9.1
Derivative financial assets		-	0.3
Total non-current assets		549.2	535.9
Inventories		145.3	141.6
Derivative financial assets	12	0.6	0.7
Trade and other receivables		200.5	194.4
Current tax receivable		1.3	6.7
Cash and cash equivalents	11	67.6	50.4
Total current assets		415.3	393.8
Total assets		964.5	929.7
Liabilities
Interest-bearing loans and borrowings		164.8	192.7
Employee benefits: pensions	13	190.4	218.0
Provisions	14	10.1	6.1
Non-trade payables		2.5	3.4
Deferred tax liabilities		11.0	10.5
Total non-current liabilities		378.8	430.7
Interest-bearing loans and borrowings and bank overdrafts		82.8	39.0
Trade and other payables		190.5	193.7
Current tax payable		26.0	23.0
Provisions	14	8.6	8.4
Derivative financial liabilities	12	0.6	0.6
Total current liabilities		308.5	264.7
Total liabilities		687.3	695.4
Total net assets		277.2	234.3
Equity
Share capital		71.8	71.8
Share premium		111.7	111.7
Reserves		37.2	39.2
Retained earnings		12.1	(27.5)
Total equity attributable to equity holders of Parent Company		232.8	195.2
Non-controlling interests		44.4	39.1
Total equity		277.2	234.3

1.The year ended 31 December 2018 has been prepared reflecting the adoption of IFRS 15. The year ended 31 December 2017 has been restated to reflect the adoption of IFRS 15. Further details are provided in note 15 to the consolidated financial statements.

Consolidated Statement of Changes in Equity

	Share capital	Share premium	Trans- lation reserve	Hedging reserve	Fair value reserve	Capital redemption reserve	Other reserves	Retained earnings	Total parent equity	Non-controlling interests	Total equity
	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m

Balance at 1 January 2017	71.8	111.7	3.2	(2.5)	(1.0)	35.7	11.4	(109.5)	120.8	43.9	164.7
Profit for the year	-	-	-	-	-	-	-	107.6	107.6	6.3	113.9
Other comprehensive income	-	-	(11.0)	3.0	-	-	-	8.2	0.2	(1.3)	(1.1)
Transactions with owners:
Change in ownership of controlled interest without a change in control	-	-	-	-	-	-	-	(3.3)	(3.3)	-	(3.3)
Transfer between reserves	-	-	-	-	-	-	0.4	(0.4)	-	-	-
Dividends	-	-	-	-	-	-	-	(31.4)	(31.4)	(9.8)	(41.2)
Equity-settled share-based payment transactions	-	-	-	-	-	-	-	1.7	1.7	-	1.7
Own shares acquired for share incentives schemes	-	-	-	-	-	-	-	(0.4)	(0.4)	-	(0.4)
Balance at 31 December 2017	71.8	111.7	(7.8)	(0.5)	(1.0)	35.7	11.8	(27.5)	195.2	39.1	234.3

Balance at 1 January 2018	71.8	111.7	(7.8)	(0.5)	(1.0)	35.7	11.8	(27.5)	195.2	39.1	234.3
Profit for the year	-	-	-	-	-	-	-	46.3	46.3	7.2	53.5
Other comprehensive income	-	-	9.9	(0.7)	-	-	-	13.5	22.7	0.2	22.9
Transactions with owners:
Capital contributions by non-controlling interests	-	-	-	-	-	-	-	-	-	0.5	0.5
Transfer between reserves	-	-	-	-	-	-	(11.2)	11.2	-	-	-
Dividends	-	-	-	-	-	-	-	(31.4)	(31.4)	(2.6)	(34.0)
Equity-settled share-based payment transactions	-	-	-	-	-	-	-	2.8	2.8	-	2.8
Own shares acquired for share incentive schemes	-	-	-	-	-	-	-	(2.8)	(2.8)	-	(2.8)
Balance at 31 December 2018	71.8	111.7	2.1	(0.2)	(1.0)	35.7	0.6	12.1	232.8	44.4	277.2

Consolidated Statement of Cash Flows

		Continuing 2018	Discontinued 2018	Total 2018	Continuing 2017	Discontinued 2017	Total 2017
	Note	£m	£m	£m	£m	£m	£m
Operating activities
Profit for the period		64.2	(10.7)	53.5	114.9	(1.0)	113.9
Adjustments for:
Depreciation	3	31.3	0.4	31.7	30.0	0.6	30.6
Amortisation	3	8.0	-	8.0	7.3	-	7.3
Net financing costs	5	13.2	-	13.2	22.5	-	22.5
Loss/(profit) on disposal of businesses	2,4	-	1.7	1.7	(45.7)	-	(45.7)
Non-cash specific adjusting items included in operating profit	4	6.5	1.5	8.0	-	-	-
Share of profit from associate (net of income tax)		(0.8)	-	(0.8)	(0.2)	-	(0.2)
Loss on sale of property, plant and equipment		0.4	-	0.4	0.1	-	0.1
Income tax expense	6	30.7	-	30.7	21.9	-	21.9
Equity-settled share-based payment expenses		2.8	-	2.8	1.7	-	1.7
Cash generated from operations before changes in working capital and provisions		156.3	(7.1)	149.2	152.5	(0.4)	152.1
(Increase)/decrease in trade and other receivables		(7.2)	(0.1)	(7.3)	(6.1)	5.6	(0.5)
(Increase)/decrease in inventories		(4.2)	(0.7)	(4.9)	(3.9)	(0.6)	(4.5)
Increase/(decrease) in trade and other payables		1.7	(1.4)	0.3	9.0	(2.7)	6.3
Increase/(decrease) in provisions		(2.4)	6.3	(3.9)	(3.0)	-	(3.0)
Payments to defined benefit pension plans	13	(12.9)	-	(12.9)	(48.9)	-	(48.9)
Cash generated from operations		131.3	(3.0)	128.3	99.6	1.9	101.5
Interest paid		(9.7)	-	(9.7)	(17.6)	-	(17.6)
Income tax paid		(20.9)	-	(20.9)	(24.5)	-	(24.5)
Net cash from operating activities		100.7	(3.0)	97.7	57.5	1.9	59.4
Investing activities
Purchase of property, plant and equipment		(53.1)	-	(53.1)	(33.7)	(0.7)	(34.4)
Forward contracts used in net investment hedging		-	-	-	(7.7)	-	(7.7)
Purchase of investments		(1.0)	-	(1.0)	(1.6)	-	(1.6)
Disposal of investments		0.6	-	0.6	-	-	-
Proceeds from sale of property, plant and equipment		-	-	-	1.3	-	1.3
Loan made to associate		(1.0)	-	(1.0)	-	-	-
Loan repaid by associate		1.0	-	1.0	-	-	-
Interest received		1.3	-	1.3	1.0	-	1.0
Disposal of subsidiaries, net of cash disposed		-	1.9	1.9	78.1	-	78.1
Purchase of stake held by non-controlling interest		-	-	-	(1.5)	-	(1.5)
Net cash from investing activities		(52.2)	1.9	(50.3)	35.9	(0.7)	35.2
Financing activities
Purchase of own shares for share incentive schemes		(3.2)	-	(3.2)	(0.4)	-	(0.4)
Proceeds from exercise of share options		0.4	-	0.4	-	-	-
Increase/(decrease) in borrowings	11	7.5	-	7.5	(114.1)	-	(114.1)
Payment of finance lease liabilities	11	(0.4)	-	(0.4)	(0.3)	-	(0.3)
Dividends paid to external plc shareholders		(31.4)	-	(31.4)	(31.4)	-	(31.4)
Dividends paid to non-controlling interests		(2.6)	-	(2.6)	(9.8)	-	(9.8)
Capital contributions made by non-controlling interest partners		0.5	-	0.5	-	-	-
Net cash from financing activities		(29.2)	-	(29.2)	(156.0)	-	(156.0)
Net increase/(decrease) in cash and cash equivalents		19.3	(1.1)	18.2	(62.6)	1.2	(61.4)
Cash and cash equivalents at start of period				50.4			122.4
Effect of exchange rate fluctuations on cash held				(1.0)			(10.6)
Cash and cash equivalents at period end⁽¹⁾	11			67.6			50.4

1. A reconciliation of cash and cash equivalents to net borrowings is shown in note 11.

Notes on Consolidated Financial Statements

Note 1. Basis of preparation

The preliminary announcement for the year ended 31 December 2018 has been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union and as issued by the International Accounting Standards Board. There has been no significant impact arising from new accounting policies adopted in the year.

The financial information set out in this report does not constitute the Company's statutory accounts for the years ended 31 December 2018 or 31 December 2017. Statutory accounts for the year ended 31 December 2017 have been delivered to the registrar of companies, and those for the year ended 31 December 2018 will be delivered in due course.

The auditors have reported on those accounts; their report 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 in respect of the accounts for 2018 and 2017.

Use of judgements and estimates

In preparing these consolidated financial statements, management has made judgements, estimates and assumptions that affect the application of the Group's accounting policies and the reported amounts of assets, liabilities, income and expenses. Final outcomes results may differ from these estimates.

Estimates and underlying assumptions are reviewed on an ongoing basis.

Judgements

Information about judgements made in applying accounting policies that have the most significant effects on the amounts recognised in the consolidated financial statements is included in the following notes:

Note 4: Specific adjusting items

The Group separately presents specific adjusting items in the consolidated income statement which, in the Directors' judgement, need to be disclosed separately by virtue of their size and incidence in order for users of the consolidated financial statements to obtain a proper understanding of the financial information and the underlying performance of the business. These items which occur infrequently and include (but are not limited to):

· Individual restructuring projects which are material or relate to the closure of a part of the business and are not expected to recur.

Gains or losses on disposal of businesses.

· Significant costs incurred as part of the integration of an acquired business.

· Gains or losses arising on significant changes to or closures of defined benefit pension plans.

Determining whether an item is part of specific adjusting items requires judgement to determine the nature and the intention of the transaction.

Note 6: Recognition of deferred tax assets

Deferred tax assets are recognised when management judges it probable that future taxable profits will be available against which the temporary differences can be utilised.

Note 14: Provisions and contingent liabilities

Due to the nature of its operations, the Group holds provisions for its environmental obligations. Judgement is needed in determining whether a contingent liability has crystallised into a provision. Management assesses whether there is sufficient information to determine that an environmental issue exists and to estimate with sufficient reliability what the cost of remediation is likely to be. For environmental remediation matters, this tends to be at the point in time when a remediation feasibility study has been completed.

The Group will recognise a legal provision at the point when the outcome of a legal matter can be reliably estimated. Estimates are based on past experience of similar issues, professional advice received and the Group's assessment of the most likely outcome. The timing of utilisation of these provisions is frequently uncertain, reflecting the complexity of issues and the outcome of various court proceedings and associated negotiations.

Assumptions and estimates

Assumptions and estimation uncertainties that have a significant risk of resulting in a material adjustment to the carrying amounts of assets and liabilities within the year ending 31 December 2019 is included in the following notes:

Note 13: Employee benefits: key actuarial assumptions

The principal actuarial assumptions applied to pensions are shown in note 13, including a sensitivity analysis. The actuarial evaluation of pension assets and liabilities is based on assumptions in respect of inflation, future salary increases, discount rates, returns on investments and mortality rates. Relatively small changes in the assumptions underlying the actuarial valuations of pension schemes can have a significant impact on the net pension liability included in the balance sheet.

In addition, in the current year based on the results of a High Court hearing, the Group has recognised a liability in relation to Guaranteed Minimum Pensions (GMPs), which is an initiative to remove inequalities in scheme benefits that arise from Guaranteed Minimum Pensions being unequal between men and women. Legal uncertainly remains in this area. Further details are included in note 4.

Note 14: Provisions and contingent liabilities

Provisions for environmental costs and settlement of litigation are estimated based on current legal and constructive requirements. Final outcomes, costs and cash outflows, can differ from current estimates because of changes in laws and regulations, public expectations, prices, more detailed analysis of site conditions and innovations in clean-up technology.

Closure and restructuring costs can be estimated with greater certainty and the carrying value of existing provisions at the balance sheet date is less likely to change materially within the next financial year.

Amounts provided are the Group's best estimate of exposure based on currently available information.

Adoption of new and revised accounting standards

The Group adopted the following standards and with effect from 1 January 2018:

· IFRS 15 Revenue from Contracts with Customers. The standard introduced a new revenue recognition model which requires the transaction price receivable from customers to be allocated between the Group's performance obligations under contracts on a relative stand-alone selling price basis. The Group has opted to apply the full retrospective method under which comparative information is restated. The impact of the restatement is set out in in note 15 to the consolidated financial statements.

· IFRS 9 Financial Instruments, and

· IFRIC 22 Foreign Currency Transactions and Advance Considerations.

There has been no material impact on the Group on adoption of these standards.

New standards and interpretations

A number of new Standards, amendments to Standards and interpretations have been issued but are not yet effective, and have not been applied in preparing the Group's financial statements. Those which may be relevant to the Group are set out below. The Group has not adopted these Standards early.

IFRIC 23 Uncertainty over Income Tax Treatments - the standard is effective for annual reporting periods on or after January 1 2019, and will clarify the accounting for uncertainties in income taxes. The interpretation is to be applied to the determination of taxable profit (tax loss), tax bases, unused tax losses, unused tax credits and tax rates, when there is uncertainty over income tax treatments under IAS 12. We anticipate limited impact to the Group.

IFRS 16 Leases is effective for periods beginning on or after 1 January 2019 and introduces a single, on-balance sheet accounting model that is similar to current finance lease accounting. Under the new standard, a lessee is required to recognise all lease assets and liabilities (including those currently classified as operating leases) on the balance sheet at the present value of the lease payments and an depreciation charge on the leased assets and an interest charge on the lease liabilities in the income statement.

For its material land and buildings leases, Morgan has adopted a modified retrospective approach which calculates the asset value using historical payment data as if IFRS 16 had always existed, but uses future lease payments only when calculating the lease liability, current discount rates and the benefit of hindsight for actual events. This calculation leads to an equity adjustment.

For its remaining lease portfolio (non-material land and buildings and plant and equipment), Morgan has used the alternative modified retrospective approach, calculating the lease liability based on future lease payments only and using current discount rates. The asset is equal to the liability (with the exception of any transition balance sheet adjustments such as rent free periods etc). This calculation does not give rise to an equity adjustment.

Morgan has opted to grandfather assessments on whether a contract contains a lease and has applied the practical expedients which are available under these modified retrospective approaches, namely excluding leases with a short remaining terms and excluding low value leases.

The Group has completed its evaluations of the impact of IFRS 16 on the financial statements and performance measures. Upon adoption of IFRS 16, at 1 January 2019, the most significant impact will be the present value of the operating lease commitments

currently being shown as a liability of £67 million on the balance sheet together with an asset of £51 million representing the right of use. At 1 January 2019, an equity adjustment before taxation of £16 million will be recognised as a result of the accounting method applied for material land and building leases. It is anticipated that the depreciation and interest charge of the leases transitioned on 1 January 2019 will be around £9 million and £3 million respectively.

Non-GAAP measures

Where non-GAAP measures have been referenced these have been identified by an asterisk (*) where they appear in the text and by a footnote where they appear in a table.

Definitions of these non-GAAP measures, and their reconciliation to the relevant GAAP measure, are provided on pages 10 to 14.

Going Concern

The Group meets its day-to-day working capital requirements through local banking arrangements underpinned by the Group's £200 million unsecured multi-currency revolving credit facility maturing September 2023. The Group's forecasts and projections, taking account of reasonably possible changes in trading performance and exchange rates, show the Group operating within its debt financial covenants for the next 12 months.

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

The Board fully recognises the challenges that lie ahead but, after making enquiries, the Directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for a period of 18 months from the date of the Annual Report and Accounts. Accordingly, they continue to adopt the going concern basis in preparing the consolidated statements for the year ended 31 December 2018.

Note 2. Disposals

2018

Composites and Defence Systems:

On 23 April 2018 the Group announced that the Board had decided to exit the Composite and Defence Systems business. The exit was intended to take the form of the divestment of certain product lines, should a suitable acquirer be found, together with the closure of the remainder of the business lines.

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

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

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

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

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

Loss on disposal	9.3

The disposal group formed the Composites and Defence Systems operating segment. It has therefore been classified as a discontinued operation under IFRS 5. Further detail is disclosed in note 7.

2017

Electro-ceramics:

On 31 March 2017, the Group completed the sale of its UK Electro-ceramics business, comprising the two sites at Ruabon and Southampton. The transaction was structured as a sale of the business, assets and goodwill for a consideration of £47 million on a cash-free, debt-free basis, paid in cash on completion and subject to customary working capital adjustments.

In the year ended 31 December 2016, UK Electro-ceramics generated an operating profit of £6.2 million on revenues of £22.7 million. Gross assets at 31 December 2016 were £6.7 million.

The Group also announced the closure of its US Electro-ceramics business, which formed the remainder of the Group's Electro-ceramics business. This latter site will be closed when delivery of the last time orders from customers have been completed, currently anticipated to be around the end of 2019.

The disposal and closure of the electro-ceramics business reduced the Group's assets and liabilities as follows:

	31 March 2017
	£m
Trading net assets of disposal group	7.4
Goodwill of disposal group	5.8
Transaction costs associated with the disposal	6.9

Total consideration	46.9

Gain on disposal	26.8

The disposal group was included in the Technical Ceramics operating segment.

Global Rotary Transfer Systems Business:

On 31 March 2017, the Group completed the sale of its global Rotary Transfer Systems. The business is principally located at two manufacturing sites; Antweiler, Germany and Chalon, France. The sale valued the business at €40.0 million on a cash-free, debt-free basis, with consideration paid in cash on completion, subject to customary closing working capital adjustments.

In the year to 31 December 2016, the Rotary business generated £3.2 million of operating profit on £15.5 million of revenue. Gross assets at 31 December 2016 were £5.9 million.

The disposal and closure of the rotary transfer systems business reduced the Group's assets and liabilities as follows:

	31 March 2017
	£m
Trading net assets of disposal group	3.5
Goodwill of disposal group	7.1
Transaction costs associated with the disposal	3.1

Total consideration	32.6

Gain on disposal	18.9

The disposal group was included in the Electrical Carbon operating segment.

Note 3. Segment information

The Group reports as two Divisions and five (2017: five) global business units, which have been identified as the Group's reportable operating segments. These have been identified on the basis of internal management reporting information that is regularly reviewed by the Group's Board of Directors (the Chief Operating Decision Maker) in order to allocate resources and assess performance.

Segment results, assets and liabilities include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. Unallocated items comprise mainly investments and related income, loans and borrowings and related expenses, corporate assets and head office expenses, and income tax assets and liabilities. The results for 2017 have been restated for discontinued operations (note 7) and IFRS 15 (note 15).

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

	Year ended 31 December 2018
Continuing operations	Thermal Ceramics	Molten Metal Systems	Thermal Products Division	Electrical Carbon	Seals and Bearings	Technical Ceramics	Carbon and Technical Ceramics Division	Segment totals	Corporate costs	Group
	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m

Revenue from external customers	433.6	48.6	482.2	166.8	132.7	252.2	551.7	1,033.9	-	1,033.9

Divisional EBITA⁽²⁾	52.9	6.6	59.5	19.4	23.7	28.1	71.2	130.7	-	130.7
Corporate costs									(5.9)	(5.9)
Group headline operating profit⁽²⁾										124.8
Amortisation of intangible assets	(2.2)	(0.3)	(2.5)	(0.7)	(0.4)	(4.4)	(5.5)	(8.0)	-	(8.0)
Operating profit before specific adjusting items										116.8
Specific adjusting items included in operating profit⁽¹⁾	(13.8)	-	(13.8)	-	-	(1.4)	(1.4)	(15.2)	5.7	(9.5)
Operating profit/(loss)	36.9	6.3	43.2	18.7	23.3	22.3	64.3	107.5	(0.2)	107.3
Finance income										1.3
Finance expense										(14.5)
Share of profit of associate (net of income tax)										0.8
Profit before taxation										94.9


Segment assets	393.1	41.2	434.3	157.6	97.6	187.2	442.4	876.7	87.8	964.5

Segment liabilities	83.3	8.0	91.3	32.2	21.4	42.4	96.0	187.3	500.0	687.3

Segment capital expenditure	15.7	2.4	18.1	11.1	8.8	15.1	35.0	53.1	-	53.1

Segment depreciation	13.6	1.9	15.5	4.7	4.5	6.6	15.8	31.3	-	31.3

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

2. Definitions of these non-GAAP measures can be found in the glossary of terms on page 42, reconciliations of the statutory results to the adjusted measures can be found on pages 10 to 14.

	Year ended 31 December 2017
Continuing operations	Thermal Ceramics	Molten Metal Systems	Thermal Products Division	Electrical Carbon	Seals and Bearings	Technical Ceramics	Carbon and Technical Ceramics Division	Segment totals	Corporate costs	Group
	£m	£m	£m	£m	£m	£m	£m	£m	£m	£m

Revenue from external customers	427.3	47.1	474.4	156.9	113.3	256.8	527.0	1,001.4	-	1,001.4

Divisional EBITA⁽²⁾	56.9	7.0	63.9	16.7	17.5	28.3	62.5	126.4	-	126.4
Corporate costs									(5.7)	(5.7)
Group headline operating profit²										120.7
Amortisation of intangible assets	(1.8)	(0.2)	(2.0)	(0.5)	(0.3)	(4.5)	(5.3)	(7.3)	-	(7.3)
Operating profit before specific adjusting items										113.4
Specific adjusting items included in operating profit⁽¹⁾	-	-	-	-	-	-	-	-	45.7	45.7
Operating profit/(loss)	55.1	6.8	61.9	16.2	17.2	23.8	57.2	119.1	40.0	159.1
Finance income										1.8
Finance expense										(24.3)
Share of profit of associate (net of income tax)										0.2
Profit before taxation										136.8


Segment assets⁽³⁾	392.5	40.0	432.5	147.1	86.6	177.6	411.3	843.8	76.1	919.9

Segment liabilities⁽³⁾	86.7	7.0	93.7	31.3	19.7	43.2	94.2	187.9	502.4	690.4

Segment capital expenditure⁽³⁾	10.5	1.8	12.3	6.9	3.5	11.0	21.4	33.7	-	33.7

Segment depreciation⁽³⁾	12.3	1.9	14.2	4.7	4.5	6.6	15.8	30.0	-	30.0

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

2. Definitions of these non-GAAP measures can be found in the glossary of terms on page 42, reconciliations of the statutory results to the adjusted measures can be found on pages 10 to 14.

3. Segment assets, liabilities, capital expenditure and depreciation attributed to discontinued operations in 2017 were £9.8 million, £5.1 million and £0.7 million and £0.6 million respectively.

Segment revenue by end market

Continuing operations	2018 £m	2017 £m
Industrial	492.5	491.3
Transportation	221.9	223.0
Petrochemical	96.7	85.3
Electronics	61.9	57.2
Energy	58.8	63.3
Security and defence	52.3	33.8
Healthcare	49.8	47.5
	1,033.9	1,001.4

Segment revenue by geography

	Revenue from external customers		Non-current assets (excluding tax and financial instruments)
Continuing operations	2018 £m	2017 £m	2018 £m	2017 £m
US	381.3	368.8	210.8	198.0
China	104.0	92.8	62.6	64.5
Germany	69.9	69.1	42.6	42.0
UK (the Group's country of domicile)	42.8	43.3	117.4	117.1
France	29.0	29.3	17.9	17.0
Other Asia, Australasia, Middle East and Africa	202.9	191.9	55.5	49.3
Other Europe	140.5	140.2	24.3	23.5
Other North America	32.4	31.9	6.3	5.6
South America	31.1	34.1	4.9	9.5
	1,033.9	1,001.4	542.3	526.5

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

Intercompany sales to other segments

Thermal

Ceramics

Molten

Metal

Systems

Thermal Products

Division

Electrical

Carbon

Seals and

Bearings

Technical

Ceramics

Carbon and

Technical

Ceramics

Division

Continuing operations

2018

£m

2017

£m

2018

£m

2017

£m

2018

£m

2017

£m

2018

£m

2017

£m

2018

£m

2017

£m

2018

£m

2017

£m

2018

£m

2017

£m

Intercompany sales to other segments

0.1

0.5

0.1

0.2

0.6

1.3

1.4

0.2

2.2

2.9

Note 4. Specific adjusting items

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

	Year ended 31 December 2018	Year ended 31 December 2017
Continuing operations	£m	£m
Specific adjusting items:
Net pension past service credit	5.7	-
Business closure and exit costs	(15.2)	-
Net profit on disposal of businesses	-	45.7
Total specific adjusting items before income tax	(9.5)	45.7
Income tax (charge)/credit from specific adjusting items	(1.7)	0.9
Income tax credit resulting from US tax reform rate change and mandatory repatriation charge	-	4.1
Total specific adjusting items after income tax	(11.2)	50.7

Specific adjusting items in relation to discontinued operations are disclosed in note 7.

2018

Net pension past service, UK

Early and late retirement adjustment

Adjustment for Guaranteed Minimum Pensions (GMPs)

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

Business closure and exit costs

Brazil, Thermal Ceramics

In the year ended December 2018 the business generated an operating loss of £2.6 million on revenues of £3.0 million, (2017: operating loss of £2.0 million on revenues of £6.5 million).

China, Technical Ceramics

Venezuela, Thermal Ceramics

In the years ended December 2018 and December 2017 the business had negligible revenue and headline operating profit.

Note 5. Net finance and income expense

	Year ended 31 December 2018	Year ended 31 December 2017
	£m	£m
Recognised in profit or loss
Amounts derived from financial instruments	-	0.2
Interest income on bank deposits measured at amortised cost	1.3	1.6
Finance income	1.3	1.8

Interest expense on financial liabilities measured at amortised cost	(9.8)	(17.4)
Net interest on IAS 19 obligations	(4.7)	(6.9)
Finance expense	(14.5)	(24.3)
Net financing costs recognised in profit or loss	(13.2)	(22.5)

Recognised directly in equity
Cash flow hedges:
Effective portion of changes in fair value of cash flow hedges	(0.2)	2.6
Transferred to profit or loss	(0.5)	0.4

Foreign currency translation differences for foreign operations	9.9	(11.0)
	9.2	(8.0)

No finance income or expense related to discontinued operations in either the current or preceding year.

Note 6. Taxation - income tax expense

Taxation - income tax expense recognised in the income statement	Year ended 31 December 2018 £m	Restated⁽¹⁾ year ended 31 December 2017 £m
Current tax
Current year	29.9	23.5
Adjustments for prior years	(0.6)	0.1
	29.3	23.6
Deferred tax
Current year	1.9	(1.7)
Adjustments for prior years	(0.5)	-
	1.4	(1.7)

Total income tax expense in income statement	30.7	21.9

Reconciliation of effective tax rate	2018 £m	2018 %	2017 £m	2017 %
Profit before tax	94.9		136.8

Income tax using the domestic corporation tax rate	18.0	19.0	26.3	19.2
Effect of different tax rates in other jurisdictions	3.9	4.1	8.2	6.0
Local taxes including withholding tax suffered	3.7	3.9	4.5	3.3
Impact of US Tax Cuts and Jobs Act	-	-	(4.1)	(3.0)
Permanent differences	3.7	3.9	0.8	0.6
Non-taxable disposals	-	-	(2.9)	(2.1)
Utilisation of UK unrecognised capital losses on disposal of UK Electro-ceramics business	-	-	(6.2)	(4.5)
Movements related to unrecognised temporary differences	2.5	2.6	(4.1)	(3.0)
Adjustments in respect of prior years	(1.1)	(1.2)	0.1	0.1
Other	-	-	(0.7)	(0.5)
	30.7	32.4	21.9	16.0

Income tax recognised directly in equity
Tax effect on components of other comprehensive income:
Deferred tax associated with defined benefit schemes and share schemes	0.7		1.8
Total tax recognised directly in equity	0.7		1.8

1. The year ended 2017 has been restated to present the Composites and Defence Systems business as a discontinued operation under IFRS 5. Further details are provided in note 7 to the consolidated financial statements.

The effective rate of tax before specific adjusting items is 27.8% (2017: 29.5%).

The Group operates in many jurisdictions around the world and is subject to factors that may impact future tax charges including the recently enacted US tax reform, implementation of the OECD's BEPS actions, tax rate and legislation changes, expiry of the statute of limitations and resolution of tax audits and disputes.

Of the increase in permanent differences in the year, £1.7 million relates to the recycling of deferred foreign exchange translation losses in Venezuela and the impairment of fixed assets in China, see note 4 for further information.

Note 7. Discontinued operations

The Group disposed of its Composites and Defence Systems business on 20 November 2018. The business represented a separate reporting segment and therefore, in accordance with IFRS 5 Non-current Assets Held For sale and Discontinued Operations, the disposal group has been classified as discontinued and the prior period has been restated to reflect this.

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

		Year ended 31 December 2018			Year ended 31 December 2017

		Results before specific adjusting items	Specific adjusting items	Total	Results before specific adjusting items	Specific adjusting items		Total
	Note	£m	£m	£m	£m	£m		£m

Revenue		11.2	-	11.2	21.0	-	21.0
Operating costs before restructuring costs and other items		(12.6)	-	(12.6)	(22.0)	-	(22.0)

Loss from operations before restructuring costs and other items		(1.4)	-	(1.4)	(1.0)	-	(1.0)

Net loss on disposal of business	2	-	(1.7)	(1.7)	-	-	-
Business closure and exit costs	2	-	(7.6)	(7.6)	-	-	-
Loss before taxation		(1.4)	(9.3)	(10.7)	(1.0)	-	(1.0)

Income tax expense		-	-	-	-	-	-

Loss from discontinued operations		(1.4)	(9.3)	(10.7)	(1.0)	-	(1.0)

Basic loss per share from discontinued operations				(3.8)p			(0.4)p
Diluted loss per share from discontinued operations				(3.7)p			(0.3)p

The discontinued specific adjusting items relates to the loss on disposal of assets and provisions for business exit costs.

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

Note 8. Earnings per share

The calculation of basic/diluted earnings per share from continuing and discontinued operations at 31 December 2018 was based on the net profit attributable to equity shareholders of £46.3 million (2017: £107.6 million, 2016: £52.3 million), and a weighted average number of shares outstanding during the year of 285.2 million (2017: 285.0 million, 2016: 284.9 million). The calculation of the weighted average number of shares excludes the shares held by The Morgan General Employee Benefit Trust, on which the dividends are waived. The denominators used are the same as those detailed above for both basic and diluted earnings per share from continuing and discontinued operations.

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

The diluted earnings per share calculation takes into account the dilutive effect of share incentives. The diluted, weighted average number of shares is 286.8 million (2017: 286.7 million, 2016: 285.1 million). Diluted earnings per share is 16.1 pence (2017: 37.5 pence, 2016: 18.3 pence).

	2018 £m	Restated⁽¹⁾ 2017 £m
Profit for the period from continuing and discontinued operations attributable to equity shareholders	46.3	107.6
Loss from discontinued operations	10.7	1.0
Profit from continuing operations	57.0	108.6
Specific adjusting items	9.5	(45.7)
Amortisation of intangible assets	8.0	7.3
Tax effect of the above	1.7	(5.0)
Non-controlling interests' share of the above adjustments	-	-
Adjusted profit for the period from continuing operations	76.2	65.2

	2018 Pence	2017 Pence
Earnings per Ordinary share	20.0p	38.1p
Specific adjusting items	3.3p	(16.0)p
Amortisation of intangible assets	2.8p	2.5p
Tax effect of the above	0.6p	(1.8)p
Non-controlling interests' share of the above adjustments	-	-
Headline earnings per share⁽²⁾	26.7p	22.8p

	2018	2017
Number of shares
Weighted average number of Ordinary shares for the purposes of basic earnings per share	285.2	285.0
Effect of dilutive potential Ordinary shares:
Share options	1.6	1.7
Weighted average number of Ordinary shares for the purposes of basic earnings per share	286.8	286.7

2. Definitions of these non-GAAP measures can be found in the glossary of terms on page 42, reconciliations of the statutory results to the adjusted measures can be

found on pages 10 to 14.

Note 9. Property, plant and equipment

	Land and buildings £m	Plant and equipment and fixtures £m	Total £m
Cost
Balance at 1 January 2017	202.6	685.1	887.7
Additions	4.2	36.4	40.6
Disposals	(3.3)	(35.5)	(38.8)
Transfers between categories	6.3	(6.3)	-
Effect of movement in foreign exchange	(6.9)	(29.2)	(36.1)
Balance at 31 December 2017	202.9	650.5	853.4

Balance at 1 January 2018	202.9	650.5	853.4
Additions	10.2	39.0	49.2
Disposals	(0.3)	(10.1)	(10.4)
Effect of movement in foreign exchange	5.5	18.2	23.7
Balance at 31 December 2018	218.3	697.6	915.9
Depreciation and impairment losses
Balance at 1 January 2017	87.9	496.1	584.0
Depreciation charge for the year	4.4	26.2	30.6
Disposals	(1.4)	(32.5)	(33.9)
Effect of movement in foreign exchange	(3.9)	(21.2)	(25.1)
Balance at 31 December 2017	87.0	468.6	555.6

Balance at 1 January 2018	87.0	468.6	555.6
Depreciation charge for the year	4.8	26.9	31.7
Impairment charge for the year	1.4	5.5	6.9
Disposals	(0.2)	(9.8)	(10.0)
Effect of movement in foreign exchange	2.9	14.3	17.2
Balance at 31 December 2018	95.9	505.5	601.4
Carrying amounts
At 1 January 2017	114.7	189.0	303.7
At 31 December 2017	115.9	181.9	297.8
At 31 December 2018	122.4	192.1	314.5

Note 10. Intangible assets

	Goodwill £m	Customer relationships £m	Technology and trademarks £m	Capitalised development costs £m	Computer software £m	Total £m
Cost
Balance at 1 January 2017	210.6	89.3	21.8	0.8	25.6	348.1
Additions (externally purchased)	-	-	-	-	5.3	5.3
Disposals	(12.9)	-	-	-	(1.8)	(14.7)
Effect of movement in foreign exchange	(5.7)	(4.2)	0.2	-	(1.0)	(10.7)
Balance at 31 December 2017	192.0	85.1	22.0	0.8	28.1	328.0

Balance at 1 January 2018	192.0	85.1	22.0	0.8	28.1	328.0
Additions (externally purchased)	-	-	-	-	1.3	1.3
Disposals	(16.4)	(27.8)	(18.3)	-	(0.1)	(62.6)
Effect of movement in foreign exchange	3.8	3.1	-	-	0.5	7.4
Balance at 31 December 2018	179.4	60.4	3.7	0.8	29.8	274.1

Amortisation and impairment losses
Balance at 1 January 2017	16.4	57.6	18.4	0.8	14.5	107.7
Amortisation charge for the year	-	4.3	0.2	-	2.8	7.3
Disposals	-	-	-	-	(1.6)	(1.6)
Effects of movement in foreign exchange	-	(2.0)	-	-	(0.4)	(2.4)
Balance at 31 December 2017	16.4	59.9	18.6	0.8	15.3	111.0

Balance at 1 January 2018	16.4	59.9	18.6	0.8	15.3	111.0
Amortisation charge for the year	-	4.1	0.2	-	3.7	8.0
Disposals	(16.4)	(27.8)	(18.3)	-	(0.1)	(62.6)
Effects of movement in foreign exchange	-	1.9	-	-	0.2	2.1
Balance at 31 December 2018	-	38.1	0.5	0.8	19.1	58.5

Carrying amounts
At 1 January 2017	194.2	31.7	3.4	-	11.1	240.4
At 31 December 2017	175.6	25.2	3.4	-	12.8	217.0
At 31 December 2018	179.4	22.3	3.2	-	10.7	215.6

Included in customer relationships is an asset with a net book value of £16.3 million at 31 December 2018 recognised in relation to the acquisition of the Technical Ceramics businesses of Carpenter Technology Corporation in 2008. The remaining amortisation period on this asset is five years.

Note 11. Cash and cash equivalents reconciled to net debt

	Year ended 31 December 2018	Year ended 31 December 2017
	£m	£m

Bank balances	57.9	44.7
Cash deposits	9.7	5.7
Cash and cash equivalents	67.6	50.4

Reconciliation of cash and cash equivalents to net debt⁽¹⁾
	Year ended 31 December 2018	Year ended 31 December 2017
	£m	£m

Opening borrowings	(231.7)	(364.9)
(Increase)/decrease in borrowings	(7.5)	114.1
Payment of finance lease liabilities	0.4	0.3
Total changes from cash flows	(7.1)	114.4
Effect of movements in foreign exchange on borrowings	(8.8)	18.8
Closing borrowings	(247.6)	(231.7)
Cash and cash equivalents	67.6	50.4
Closing net debt⁽¹⁾	(180.0)	(181.3)

1. Definitions of these non-GAAP measures can be found in the glossary of terms on page 42, reconciliations of the statutory results to the adjusted measures can be found on pages 10 to 14.

	Current borrowings £m	Non-current borrowings £m	Total financing liabilities £m	Cash and cash equivalents £m	Movement in net debt⁽¹⁾ £m
At 31 December 2017	(39.0)	(192.7)	(231.7)	50.4	(181.3)
Cash inflow	-	-	-	29.8	29.8
Borrowings cash flow	15.0	(22.1)	(7.1)	-	(7.1)
Reclassification of borrowings	(59.1)	59.1	-	-	-
Net interest paid	-	-	-	(8.4)	(8.4)
Net cash inflow/(outflow)	(44.1)	37.0	(7.1)	21.4	14.3
Share purchases	-	-	-	(3.2)	(3.2)
Exchange and other movements	0.3	(9.1)	(8.8)	(1.0)	(9.8)
At 31 December 2018	(82.8)	(164.8)	(247.6)	67.6	(180.0)

1. Definitions of these non-GAAP measures can be found in the glossary of terms on page 42, reconciliations of the statutory results to the adjusted measures can be found on pages 10 to 14.

Note 12. Financial risk management

Fair Values

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

	Carrying amount 2018 £m	Fair value 2018 £m	Carrying amount 2017 £m	Fair value 2017 £m
Financial assets and liabilities at amortised cost
6.26% US Dollar Senior Notes 2019	(59.0)	(59.6)	(55.6)	(57.9)
1.18% Euro Senior Notes 2023	(22.5)	(22.3)	(22.2)	(21.8)
3.17% US Dollar Senior Notes 2023	(11.8)	(11.3)	(11.2)	(10.7)
1.55% Euro Senior Notes 2026	(22.5)	(22.3)	(22.3)	(21.5)
3.37% US Dollar Senior Notes 2026	(76.4)	(70.6)	(72.1)	(67.4)
1.74% Euro Senior Notes 2028	(9.0)	(8.8)	(8.9)	(8.5)
2.89% Euro Senior Notes 2030	(22.5)	(22.5)	-	-
Bank and other loans	(23.7)	(23.7)	(38.8)	(38.8)
Obligations under finance leases	(0.2)	(0.2)	(0.6)	(0.6)
Trade and other payables	(95.0)	(95.0)	(97.9)	(97.9)
Trade and other receivables	177.8	177.8	174.9	174.9
Cash and cash equivalents	67.6	67.6	50.4	50.4
	(97.2)	(90.9)	(104.3)	(99.8)
Financial instruments - held at Fair Value Other Comprehensive Income (FVOCI)
Financial assets - held at FVOCI	0.5	0.5	0.9	0.9

Derivatives and other items at fair value
Forward exchange contracts used for hedging	-	-	0.4	0.4
	(96.7)	(90.4)	(103.0)	(98.5)

Equity securities

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

Derivatives

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

Interest-bearing loans and borrowings

Fair value is calculated based on discounted expected future principal and interest cash flows. The interest rates used to determine the fair value of loans and borrowings are 1.4-4.7% (2017: 1.6-4.2%) and finance leases 4.3% (2017: 4.2%).

Finance lease liabilities

The fair value is estimated as the present value of future cash flows, discounted at market interest rates for homogeneous lease agreements. The estimated fair values reflect changes in interest rates.

Trade and other receivables/payables

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

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

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

Fair value hierarchy

The table below analyses financial instruments carried at fair value, by valuation method. The different levels have been defined as follows:

Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities

Level 2: inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (ie as prices) or indirectly (ie derived from prices)

Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs).

	31 December 2018			31 December 2017
	Level 1 £m	Level 2 £m	Total £m	Level 1 £m	Level 2 £m	Total £m
Financial assets held at FVOCI	0.5	-	0.5	0.9	-	0.9
Derivative financial assets	-	0.6	0.6	-	1.0	1.0
	0.5	0.6	1.1	0.9	1.0	1.9

Derivative financial liabilities	-	0.6	0.6	-	0.6	0.6

The table below analyses financial instruments disclosed at fair value, by valuation method.

	31 December 2018			31 December 2017
	Level 1 £m	Level 2 £m	Total £m	Level 1 £m	Level 2 £m	Total £m
6.26% US Dollar Senior Notes 2019	-	(59.6)	(59.6)	-	(57.9)	(57.9)
1.18% Euro Senior Notes 2023	-	(22.3)	(22.3)	-	(21.8)	(21.8)
3.17% US Dollar Senior Notes 2023	-	(11.3)	(11.3)	-	(10.7)	(10.7)
1.55% Euro Senior Notes 2026	-	(22.3)	(22.3)	-	(21.5)	(21.5)
3.37% US Dollar Senior Notes 2026	-	(70.6)	(70.6)	-	(67.4)	(67.4)
1.74% Euro Senior Notes 2028	-	(8.8)	(8.8)	-	(8.5)	(8.5)
2.89% Euro Senior Notes 2030	-	(22.5)	(22.5)	-	-	-
Obligations under finance leases	-	(0.2)	(0.2)	-	(0.6)	(0.6)
	-	(217.6)	(217.6)	-	(188.4)	(188.4)

There have been no transfers between Level 1 and Level 2 during 2018 and 2017 and there were no Level 3 financial instruments in either 2018 or 2017.

Note 13. Employee benefits

	31 December 2018
	UK	US	Europe	Rest of World	Total
Note	£m	£m	£m	£m	£m
Pension plans and employee benefits

Present value of unfunded defined benefit obligations	-	(7.9)	(35.9)	(2.8)	(46.6)
Present value of funded defined benefit obligations	(544.4)	(130.9)	(1.4)	(10.8)	(687.5)
Fair value of plan assets	404.3	130.0	0.4	9.0	543.7
Net obligations	(140.1)	(8.8)	(36.9)	(4.6)	(190.4)

Movements in present value of defined benefit obligation
At 1 January 2018	(593.7)	(146.7)	(37.2)	(12.7)	(790.3)
Current service cost	(0.5)	-	(1.0)	(1.8)	(3.3)
Interest cost	(13.9)	(5.2)	(0.6)	(0.2)	(19.9)
Actuarial gains/(losses)
Experience gains/(losses) on plan obligations	(1.3)	1.5	-	0.1	0.3
Changes in financial assumptions - gain/(loss)	31.3	9.7	0.6	(0.3)	41.3
Changes in demographic assumptions - gain/(loss)	4.3	0.4	(0.5)	0.1	4.3
Benefits paid	23.9	9.5	1.8	1.4	36.6
Contributions by members	(0.2)	-	-	-	(0.2)
Net past service credit 4	5.7	-	-	-	5.7
Exchange adjustments	-	(8.0)	(0.4)	(0.2)	(8.6)
At 31 December 2018	(544.4)	(138.8)	(37.3)	(13.6)	(734.1)

Movements in fair value of plan assets
At 1 January 2018	427.7	135.6	0.5	8.5	572.3
Interest on plan assets	10.1	4.9	-	0.2	15.2
Remeasurement losses	(22.3)	(9.2)	-	(0.2)	(31.7)
Contributions by employer	12.5	0.9	1.7	1.9	17.0
Contributions by members	0.2	-	-	-	0.2
Administrative expenses	-	-	-	-	-
Benefits paid	(23.9)	(9.5)	(1.8)	(1.4)	(36.6)
Exchange adjustments	-	7.3	-	-	7.3
At 31 December 2018	404.3	130.0	0.4	9.0	543.7

Actual return on assets	(12.2)	(4.3)	-	-	(16.5)

Principal actuarial assumptions at 31 December 2018 were:
Discount rate	2.74	4.34	1.70	2.60
Inflation (UK: RPI/CPI)	3.17/2.07%	n/a	1.70	n/a

The Group expects to contribute £16.9 million to its pension schemes in 2019.

The fair values of the assets were as follows:

	31 December 2018
	UK	US	Europe	Rest of World	Total
	£m	£m	£m	£m	£m

Equities and growth assets	102.0	3.9	-	-	105.9
Bonds and liability-driven investments (LDI)	131.8	124.3	-	-	256.1
Matching insurance policies	167.9	-	0.4	6.5	174.8
Other	2.6	1.8	-	2.5	6.9
Total	404.3	130.0	0.4	9.0	543.7

	31 December 2017
	UK	US	Europe	Rest of World	Total
	£m	£m	£m	£m	£m
Pension plans and employee benefits

Present value of unfunded defined benefit obligations	-	(8.3)	(35.2)	(2.7)	(46.2)
Present value of funded defined benefit obligations	(593.7)	(138.4)	(2.0)	(10.0)	(744.1)
Fair value of plan assets	427.7	135.6	0.5	8.5	572.3
Net obligations	(166.0)	(11.1)	(36.7)	(4.2)	(218.0)

Principal actuarial assumptions at 31 December 2017 were:	%	%	%	%
Discount rate	2.38	3.65	1.6	3.2
Inflation (UK: RPI/CPI)	3.12/2.02	n/a	1.7	n/a

Note 14. Provisions and contingent liabilities

A provision is recognised in the consolidated balance sheet when the Group has a present legal or constructive obligation as a result of a past event and there is probable outflow of resources which can be reliably measured and will be required to settle the obligation. Provisions are recognised at an amount equal to the best estimate of the expenditure required to settle the Group's liability. If the effect is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate reflective of the current market assessments of the time value of money and, where appropriate, the risks specific to the liability.

A contingent liability is disclosed, where significant, if the existence of the obligation will only be confirmed by future events or where the amount of the obligation cannot be measured with reasonable reliability. A contingent liability is not disclosed if the likelihood of a material outflow in excess of any amounts provided is considered remote. Obligations arising from restructuring plans are recognised when detailed formal plans have been established and when there is a valid expectation that such a plan will be carried out. The Group's contingent liabilities are reviewed on a regular basis.

A contingent asset is not recognised but is disclosed, where significant, if an inflow of economic benefit is probable.

	Closure and restructuring provisions £m	Legal and other provisions £m	Environmental provisions £m	Total £m
Balance at 31 December 2017	9.5	3.8	1.2	14.5
Provisions made during the year	1.7	5.9	2.1	9.7
Provisions used during the year	(3.7)	(0.7)	(0.7)	(5.1)
Provisions reversed during the year	(0.2)	(0.4)	-	(0.6)
Transfers between categories	(4.0)	1.7	2.3	-
Effect of movements in foreign exchange	0.2	-	-	0.2
Balance at 31 December 2018	3.5	10.3	4.9	18.7

Current	1.6	5.8	1.2	8.6
Non-current	1.9	4.5	3.7	10.1
	3.5	10.3	4.9	18.7

Closure and Restructuring Provisions

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

Legal and other provisions

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

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

Other provisions represent the best estimate of the cost of settling current obligations although there is a higher degree of judgement involved. Unless specific evidence exists to the contrary, these provisions are shown as current.

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

Subsidiary undertakings within the Group have given unsecured guarantees of £9.2 million (2017: £11.2 million) in the ordinary course of business.

Environmental provisions

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

Environmental contingent liabilities

The Group is subject to local health, safety and environmental laws and regulations concerning its manufacturing operations around the world. These laws and regulations may require the Group to take future action to remediate the impact of historic manufacturing processes on the environment or lead to other economic outflows. Such contingencies may exist for various sites which the Group

currently operates or has operated in the past. There is a contingent liability arising from the known environmental issue referred to above under the heading 'environmental provisions' where the financial impact cannot be reliably estimated until the completion of the remediation feasibility study.

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

Tax contingent liabilities

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

Note 15. Change in accounting policy

The following tables summarise the impact of adopting IFRS 15 Revenue from Contracts with Customers on the consolidated income statement and balance sheet. The change in accounting policy had no impact on specific adjusting items, the information presented shows the impact on total Group results. The IFRS 15 restatement has had no material impact on tax.

Adjustments to the consolidated income statement for the year ended 31 December 2017


	Revenue	Total operating costs	Operating profit	Profit for the period
	£m	£m	£m	£m
As reported at 31 December 2017	1,021.5	(901.8)	158.1	113.9
Restatement for discontinued operations⁽¹⁾	(21.0)	22.0	1.0	1.0
2017 continuing operations	1,000.5	(879.8)	159.1	114.9
Adjustments for IFRS 15:
Timing differences⁽²⁾	(1.6)	1.6	-	-
Rebates and discounts⁽³⁾	(3.1)	3.1
Freight and packing⁽⁴⁾	5.6	(5.6)	-	-
Restated	1,001.4	(880.7)	159.1	114.9

Adjustments to the consolidated balance sheet for the year ended 31 December 2017


	Inventory	Trade and other receivables	Total Assets	Liabilities	Total net assets	Equity
	£m	£m	£m	£m	£m	£m
As reported at 31 December 2017	141.8	194.2	929.7	(695.4)	234.3	234.3
Adjustments for IFRS 15:
Timing differences⁽²⁾	(0.2)	0.2	-	-	-	-
Restated	141.6	194.4	929.7	(695.4)	234.3	234.3

Adjustments arising from the adoption of IFRS 15 are summarised below:

1. The Group disposed of the Composites and Defence Systems business in 2018, the disposal group formed the Composites and Defence Systems operating segment and has been classified as a discontinued operation under IFRS 5. Results for the year ended 31 December 2017 have been restated to reflect this. Further details are provided in note 7 to the consolidated financial statements.

2. Revenue for certain contracts was previously recognised in the earlier stages of a contract in line with the profile of costs incurred. Due to the application of IFRS 15, these contracts have now recognised revenue in line with their output, measured on a contract specific basis.

3. Under IFRS 15, revenue represents the amount of consideration the Group was entitled to receive for transferring its goods and services to its customers, net of rebates, discounts, penalties and similar items. These costs have therefore been reclassified from the cost of sales to reflect this.

4. For certain contracts, the Group is reimbursed for the costs of shipping and packing. Under IFRS 15, this forms part of revenue as it constitutes a separate performance obligation. These reimbursements have been reclassified to reflect this.

There was no net change in cash generated as a result of the adoption of IFRS 15. Accordingly no reconciliation of the consolidated statement of cash flows has been presented.

Practical expedients

The Group has elected to apply the practical expedients available under IFRS 15.219. Contracts with customer have no significant financing components at inception and the incremental costs of obtaining a contracts are not material.

Note 16. Subsequent events

In December 2018, the Group agreed the issuance of a new US private debt placement, raising $25 million with a duration of seven years, at a coupon of 4.87%. This was used to refinance existing financial indebtedness. Funding was completed on 28 January 2019.

Glossary

Cash flow from operations⁽¹⁾	Cash generated from operations before cash flows from restructuring costs and other items.
Constant-currency⁽¹⁾	Constant-currency revenue and Group headline operating profit are derived by translating the prior year results at current year average exchange rates.
Corporate costs	Corporate costs consist of the costs of the central head office.
Free cash flow before acquisitions and dividends⁽¹⁾	Cash generated from operations less capital expenditure, net interest paid and tax paid.
Group earnings before interest, tax and amortisation (EBITA)⁽¹⁾	EBITA is defined as Group operating profit before specific adjusting items and amortisation of intangible assets. Segment - Divisional and global business unit - EBITA is stated before unallocated corporate costs.
Group earnings before interest, tax, depreciation and amortisation (EBITDA)⁽¹⁾	EBITDA is defined as operating profit before specific adjusting items, amortisation of intangible assets, restructuring costs and other items, and depreciation.
Group headline operating profit¹	Operating profit adjusted to exclude specific adjusting items and amortisation of intangible assets.
Headline earnings per share (EPS)⁽¹⁾	Headline earnings per share is defined as operating profit adjusted to exclude specific adjusting items and amortisation of intangible assets, plus share of profit of associate less net financing costs, income tax expense and non-controlling interests, divided by the weighted average number of Ordinary shares during the period.
Net debt⁽¹⁾	Interest-bearings loans and borrowings and bank overdrafts less cash and cash equivalents.
Group Organic⁽¹⁾	The Group results excluding acquisition and disposal impacts at constant-currency.
Restructuring costs and other items	Include the costs of restructuring activity and gain on disposal of property.
Return on invested capital (ROIC)⁽¹⁾	Group headline operating profit (operating profit excluding specific adjusting items and amortisation of intangible assets) divided by the 12-month average adjusted net assets (excludes long term employee benefits, deferred tax assets and liabilities, current tax payable, provisions, cash and cash equivalents and interest-bearing loans and borrowings.
Revenue growth	Revenue growth is defined as current year revenue translated using current year average exchange rates divided by prior year revenue translated using prior year average exchange rates.
Specific adjusting items	See note 4 to the consolidated financial statements for further details

1. See definitions and reconciliations of non-GAAP measures to GAAP measures on pages 10 to 14.