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Melrose
Melrose Industries PLC
Annual Report
for the year ended 31 December 2014
Melrose Industries PLC
A year of improvement
Throughout 2014 we have focused on
improving performance across the Group.
Elster businesses continue to perform
strongly, with profits increased by two-thirds
in the two full years of ownership.
Chairman’s statement
More information p12
Transformational growth
The management team has a successful track record in creating
substantial value for shareholders, as shown below. This has been
delivered over a number of deals since 2003.
Improving shareholder value
More information p02
£3.0bn
Market capitalisation
as at 4 March 2015
£170m
Net shareholder
investment as
at 4 March 2015
£13m
Listed on
AIM 2003
2003
2015
2015
Download the latest Annual Report at
www.melroseplc.net/investors/reports
Cautionary statement
The Strategic Report has been prepared
solely to provide additional information
to shareholders to assess the Company’s
strategies and the potential for those
strategies to succeed.
The Strategic Report contains certain
forward-looking statements. These statements
are made by the Directors in good faith based
on the information available to them up to the
time of their approval of this report and such
statements should be treated with caution due
to the inherent uncertainties, including both
economic and business risk factors, underlying
any such forward-looking information.
Contents
Strategic Report
02
Performance
Review
26
Governance
58
Financials
97
Shareholder
information
156
02
04
06
08
12
14
16
24
28
30
32
34
36
38
42
50
60
62
64
68
72
76
78
96
97
98
102
103
104
105
106
107
151
152
156
162
Improving shareholder value
Performance summary
Business at a glance
Market overview
Chairman’s statement
Chief Executive’s review
Our strategy
Key performance indicators
Business review
Elster Gas
Elster Electricity
Elster Water
Energy
Risk management
Risks and uncertainties
Finance Director’s review
Corporate Social Responsibility
Governance overview
Board of Directors
Directors’ report
Corporate Governance report
Audit Committee report
Nomination Committee report
Directors’ remuneration report
Statement of Directors’ responsibilities
Financial contents
Independent auditor’s report to the members
of Melrose Industries PLC
Consolidated Income Statement
Consolidated Statement of
Comprehensive Income
Consolidated Statement of Cash Flows
Consolidated Balance Sheet
Consolidated Statement of Changes in Equity
Notes to the financial statements
Company Balance Sheet for
Melrose Industries PLC
Notes to the Company Balance Sheet
Notice of Annual General Meeting
Company and shareholder information
Notice of AGM
More information p156
01
156
Melrose Industries PLC
Annual Report 2014
Shareholder information
Notice of Annual General Meeting
This document is important and requires
your immediate attention. If you are in any
doubt as to the action you should take,
you should consult your stockbroker, bank
manager, solicitor, accountant, fund manager
or other independent financial adviser
authorised under the Financial Services and
Markets Act 2000 if you are resident in the
United Kingdom or, if not, another
appropriately authorised independent
financial adviser.
13. To authorise the Audit Committee to determine the
remuneration of the auditor of the Company.
14. That, in accordance with section 551 of the Companies Act
2006 (the “Act”), the directors of the Company (the “Directors”)
be and are generally and unconditionally authorised to allot
shares in the Company, or to grant rights to subscribe for or to
convert any security into shares in the Company (“Rights”):
(A) up to an aggregate nominal amount of £422,209; and
(B) comprising equity securities (as defined in section 560 of
the Act) up to an aggregate nominal amount of £844,418
(such amount to be reduced by the aggregate nominal
amount of any allotments or grants made under paragraph
(A) of this resolution) in connection with an offer by way of
rights issue:
(i)
to ordinary shareholders in proportion (as nearly as
may be practicable) to their existing holdings; and
(ii) to holders of other equity securities as required by
the rights of those securities or, subject to such rights,
as the Directors otherwise consider necessary,
and so that the Directors may impose any limits or
restrictions and make any arrangements which they
consider necessary or appropriate to deal with treasury
shares, fractional entitlements, record dates, legal,
regulatory or practical problems in, or under the laws
of any territory or any other matter,
such authorities to expire at the conclusion of the Company’s
next Annual General Meeting after this resolution is passed or, if
earlier, at the close of business on 30 June 2016, but, in each
case, so that the Company may make offers or agreements
before the authority expires which would or might require
shares to be allotted or Rights to be granted after the authority
expires, and so that the Directors may allot shares or grant
Rights in pursuance of any such offer or agreement
notwithstanding that the authority conferred by this resolution
has expired.
If you have sold or otherwise transferred all of your shares in
Melrose Industries PLC (the “Company”), you should send this
document as soon as possible to the purchaser or transferee or
to the stockbroker, bank or other agent through whom the sale or
transfer was effected, for delivery to the purchaser or transferee.
Notice is given that the Annual General Meeting of the Company will
be held at Barber-Surgeons’ Hall, Monkwell Square, Wood Street,
London, EC2Y 5BL at 11.00 am on 14 May 2015 for the following
purposes. Resolutions 1 to 14 (inclusive) will be proposed as ordinary
resolutions and resolutions 15 to 17 (inclusive) as special resolutions.
Ordinary resolutions
1. To receive the Company’s audited financial statements for
the financial year ended 31 December 2014, together with
the Directors’ report, strategic report and the auditor’s report
on those financial statements.
2. To approve the Directors’ Remuneration Report (other than the
part containing the Directors’ remuneration policy) for the year
ended 31 December 2014, as set out on pages 78 to 95 (save
for pages 88 to 95) of the Company’s 2014 Annual Report.
3. To declare a final dividend of 5.3p per Ordinary Share for the
year ended 31 December 2014.
4. To re-elect Christopher Miller as a Director of the Company.
5. To re-elect David Roper as a Director of the Company.
6. To re-elect Simon Peckham as a Director of the Company.
7. To re-elect Geoffrey Martin as a Director of the Company.
8. To re-elect Perry Crosthwaite as a Director of the Company.
9. To re-elect John Grant as a Director of the Company.
10. To re-elect Justin Dowley as a Director of the Company.
11. To re-elect Liz Hewitt as a Director of the Company.
12. To re-appoint Deloitte LLP as auditor of the Company to hold
office from the conclusion of this meeting until the conclusion of
the next Annual General Meeting of the Company at which
accounts are laid.
Melrose Industries PLCAnnual Report 2014Strategic ReportPerformance ReviewGovernanceFinancialsShareholder information 02
Melrose Industries PLC
Annual Report 2014
Strategic Report
Improving shareholder value
Delivering
transformational growth...
Melrose has achieved an average annual return
on equity investment of 23% since making our
first investment in 2005 and an increase in
operating margins of 5 to 7 percentage points
across the businesses we owned.
See the Melrose timeline of key events
at www.melroseplc.net/about-us/history
£2.8bn
of shareholder
value created
x 4
shareholder
value
Melrose Industries PLC
Annual Report 2014
Strategic Report
03
Total shareholder return
versus public benchmarks
Source: Datastream
Since acquisition of McKechnie and Dynacast
Outperformed
FTSE 350 benchmark by
x 4.0
Since acquisition of FKI
x 4.5
Outperformed
FTSE 350 benchmark by
£3.81
We are very pleased with the track
record which we have achieved over
the first 11 years of our history and
remain confident that Melrose is
well-positioned to create superior
shareholder value going forward.
23%
Average annual return
on investment
£0.2bn
Net shareholder investment
at 4 March 2015
£3.0bn
Market capitalisation
at 4 March 2015
Track record for a shareholder
For £1 invested in Melrose...
Since the first deal in 2005
<10 years
IRR 23%
£1
Strategic Report 04
Performance summary
Financial(1)
Revenue
Headline(2) operating profit
£1,377.5m
2013
2014
£1,466.4m
£1,377.5m
£246.0m
2013
2014
£240.0m
£246.0m
2013
2014
16.4%
17.9%
Headline(2) operating
profit margin
17.9%
In common with many
companies that trade
internationally, the movement
in exchange rates in 2014 has
caused a headwind to profits
of around 8%. For ease of
comparison, unless stated
otherwise, the year-on-year
variances in these financial
highlights are stated using
constant currency.
Headline(2) profit before tax of £213 million, up 21% (11% at actual
currency) and headline(2) proforma(3) earnings per share of 15.3p
Elster profits up by two thirds (circa £80 million) in the two full
years of ownership
Elster now delivering revenue and order intake growth,
up +9% and +6% respectively in the second half of 2014
All three Elster divisions achieved profit growth in 2014
(Gas +13%, Electricity +23% and Water +11%)
Brush (revenue -3% and profit -7%) suffering from a tough OEM
(Original Equipment Manufacturer) generator end market
In November 2014 Bridon sold for £365 million, doubling
shareholders’ original investment
Return of Capital of £200 million (18.7p per share) to be paid
on 16 March 2015 alongside a 13 for 14 share consolidation
IFRS profit after tax(4) of £87 million (2013: £102 million)
Net debt at 31 December 2014 of £501 million, equal to 1.8x
EBITDA(5). Adjusting for the Return of Capital in March 2015,
proforma leverage equal to 2.5x EBITDA(5)
Final proposed dividend of 5.3p per share (2013: 5.0p). Full year
dividend increased by 5% to 8.1p per share (2013: 7.75p)
(1) Continuing businesses only and at constant currency unless otherwise stated.
(2) Before exceptional costs, exceptional income and intangible asset amortisation.
(3) Calculated using the diluted number of shares in issue following the related Return of Capital and the associated share consolidation.
(4) After exceptional costs, exceptional income and intangible asset amortisation.
(5) Headline2 operating profit before depreciation and amortisation.
Melrose Industries PLCAnnual Report 2014Strategic Report £200m
Returned to
shareholders
Operational
Sale of Bridon
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• The enterprise value was £365 million
on a debt and cash free basis.
• As part of the transaction, Melrose
contributed £6.7 million into the Bridon
Group (2013) Pension Scheme, which
remained with Bridon on disposal.
• Melrose used the net proceeds of the
disposal to return £200 million in cash
to shareholders. The balance was used
to pay down borrowings.
Acquisition of Eclipse, Inc.
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Elster Gas acquired Eclipse, Inc. (‘Eclipse’),
a manufacturer of gas combustion
components and systems for industrial
heating and drying applications
headquartered in Rockford, Illinois (USA)
for a consideration of US $158 million.
Our strategy
More information p16
05
Corporate Social
Responsibility
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Melrose believes good corporate
social responsibility is not only
desirable in its own right but also
makes good business sense.
Group companies work closely
with their local communities,
engaging with them and building
relationships with charities and
environmental organisations.
Employee investment,
consultation and development
The Group attaches great importance
to good labour relations, employee
engagement and employee
development. The diverse nature
of the Group’s activities places the
responsibility for the implementation
and management of employment
practices with local management, in a
manner appropriate to each business.
Health and safety
The Directors of the Company are
committed to minimising the health
and safety risks that each of the
Group’s employees is exposed to
by promoting the effective use and
management of business-specific
policies and procedures.
Detailed health and safety plans
are set by businesses each year
to determine annual targets and
improvement initiatives.
Corporate Social Responsibility
More information p50
Melrose Industries PLCAnnual Report 2014Strategic ReportStrategic Report 06
Business at a glance
Melrose aims to create significant gains by increasing
the value of the businesses currently owned through
substantial investment, and by seeking to make suitable
acquisitions which have attractive potential rewards.
Melrose
Industries
PLC
Strategic
acquisitions
Executive Board
Melrose is led by a management
team which has a strong track record
in the successful implementation of
a disciplined strategy.
Melrose buys good
manufacturing businesses
with strong fundamentals,
whose performance can be
improved. Melrose finances
its acquisitions using a low
level of leverage, improves
the businesses by a mixture
of investment and changed
management focus, sells
them and returns the
proceeds to shareholders.
Board of Directors
More information p62
Our strategy
More information p16
Elster Gas
Elster Gas meters, systems and
process heat control technology
are deployed all over the world.
Elster Gas is the world number
one in gas metering and the joint
world number one in gas safety
control equipment.
Elster Electricity
Elster Electricity meters,
communications and energy
management platforms are
engineered for residential,
commercial and industrial
markets, and interchange
metering applications.
Elster Water
Elster Water engineers
award-winning metering and
communication systems for
water utilities and industries
to meet the demands of an
expanding and increasingly
connected global community.
Energy
World number one independent
supplier of turbogenerators and leading
supplier of other electricity generating
machinery, switchgear, transformers,
power infrastructure equipment,
aftermarket and product support
services for the power generation,
industrial, oil & gas and offshore sectors.
Governance
More information p58
Corporate Social Responsibility
More information p50
The Board of Directors remains committed to maintaining the
high standards of corporate governance required to ensure the
Company can continue to deliver its long-term strategic goals
for shareholders.
Melrose believes good corporate social responsibility makes
good business sense through supporting the development
of employees, developing and maintaining close ties with
stakeholders and minimising waste.
Profit made by improved
acquisition performance
Melrose
Group
Profit generated
Melrose management
team own a substantial
shareholding in
the Company
Returns to
shareholders
Melrose Industries PLCAnnual Report 2014Strategic Report
07
Melrose
Group
Profit generated
Melrose management
team own a substantial
shareholding in
the Company
Returns to
shareholders
1. Elster Gas
£687.0m
2. Elster Electricity
£215.7m
3. Elster Water
£147.5m
4. Energy
£327.3m
Profit made by improved
acquisition performance
1. Europe
53%
2. North America 31%
3. Asia
14%
4. RoW
2%
1. Europe
27%
2. North America 44%
3. Asia
10%
4. RoW
19%
1. Europe
2. North America
3. Asia
4. RoW
50%
7%
8%
35%
1. Europe
52%
2. North America 28%
3. Asia
10%
4. RoW
10%
4
3
2
4
3
2
3
4
1
2
3
2
4
4
3
2
1
1
1
1
2014 Group revenue
Revenue by geographical
destination
(Year ended 31 December 2014)
£687.0m
Gas
Revenue by geographical
destination
(Year ended 31 December 2014)
£215.7m
Electricity
Revenue by geographical
destination
(Year ended 31 December 2014)
£147.5m
Water
Revenue by geographical
destination
(Year ended 31 December 2014)
£327.3m
Energy
Performance Review
More information p26
Melrose is not a passive investor in the businesses it acquires.
Our Directors and senior management team have a hands-on
relationship with each acquired company and work closely with
them to develop the long-term strategic plans of the business.
Melrose Industries PLCAnnual Report 2014Strategic ReportStrategic Report
08
Market overview
Businesses within the Melrose Group operate in diverse
markets around the world. In this section, current market
trends and external factors affecting the growth of each
Melrose business are considered, together with individual
business responses to these trends and factors.
Melrose Group
Global market
Manufacturing locations around the world
Elster Water, a leader in water
metering products and solutions.
Melrose Industries PLCAnnual Report 2014Strategic Report 09
75 million
Elster Gas metering devices
have been deployed globally
130 countries
use Elster Gas measurement
and safety control equipment
Elster Gas
Elster Gas is a world leader in the
design and manufacture of gas
measurement, process heat control
and gas safety control equipment,
supplying a global customer base
in more than 130 countries. It has
one of the most extensively installed
utility measurement bases in the
world with more than 75 million gas
metering devices deployed globally.
Its complete range of end-to-end
solutions enables customers to
efficiently manage and control
natural gas resources.
Current market trends
Global energy consumption continues
to increase, with a growing share for
natural gas (away from coal and oil)
that is forecast to continue in the long
term. This share growth reflects the
environmental advantages of gas
when compared with other fossil
fuels. However, in addition, supply
side growth (particularly from new
sources of gas such as shale gas
in the US), and some demand side
weakness from the global economy,
are helping to reduce the price of
natural gas, further enhancing its
attractiveness within the energy mix.
Business review
More information p28
External factors:
competition and regulation
In Europe, the EU 20/20/20 mandatory
environmental targets remain in force,
targeting an improvement in the following
areas: 20% improvement in energy efficiency
against 1990 levels; 20% reduction in carbon
emissions; 20% of energy to be from
renewable sources. In addition to the
environmental drivers, the global economic
situation is increasing competition and
pricing pressure and changing buying
behaviour within key markets.
Recent international tensions are also
increasing concerns over energy security,
prompting changes to infrastructure
investment strategies.
China accounts for almost 50% of global steel
production, and there is international pressure
for China to adopt ISO global standards in
terms of safety and environmental efficiency.
Business response
The effect of these factors is being seen
in the six strategic market sectors in which
Elster Gas operates, as set out below.
The European gas meter market, driven
by EU environmental legislation, is in the
process of replacing existing standard gas
meters with Smart meters. Elster is actively
involved in major residential pilot projects
in several countries, each with its own
technical requirements.
The Integrated Gas Metering Station market
is driven by increasing gas consumption,
creating a demand to expand the gas
pipelines and infrastructure to connect the
gas reserves with the ultimate consumers.
This fuels investment in infrastructure
associated with extraction, production, grid
injection and transmission of shale gas and
biogas, including Liquefied Natural Gas
(“LNG”) terminals and grid injection plants.
Elster supplies the full scope of energy
measurement solutions, including ultrasonic
meters, flow computers, and gas quality
measurement devices.
These solutions are deployed worldwide,
with a strong focus on Asia, the Middle
East and the US, together with a growing
biogas sector in Northern Europe.
The US Residential and Commercial
Metering Market is driven by new housing,
meter replacement programmes, and
Smart Grid deployments. The downstream
distribution market surged with
government-funded projects focused on
infrastructure improvement and integrity
management. Elster’s ability to provide
a “main to meter” solution has generated
strong demand which is anticipated to
last for the next three to five years.
The Midstream, Pipeline, and Power
Markets are driven by the transition from
coal-burning power plants to natural gas,
and by the rapid growth of shale gas with
its associated infrastructure for export as
LNG. Increased investment in the US high
pressure transmission network is also
expected to drive growth. Accordingly,
Elster has invested resources in high
pressure metering and energy measurement
(gas chromatograph) systems to capitalise
on the expected growth.
The Residential Heating Market is
dominated by targets set by the EU
for the use of energy in home heating.
It will be mandatory from 2015 to install
condensing boilers with high efficiency
for a 10%–15% energy saving. Elster
supplies solutions for heat generation
(Safety Combustion Technology) and
heat management (Comfort Controls)
to the European heating market.
The Process Heat Market depends
heavily on global capacity levels in the
steel, aluminium and non-ferrous metal
industries. Elster Kromschröder has
developed specific solutions for Process
Heat and Heating applications. Sales and
application skills of the engineering team
are key factors for high level products and
solutions, and their “added value thinking”
is an important market differentiator.
Melrose Industries PLCAnnual Report 2014Strategic ReportStrategic Report 10
Market overview
continued
“ The global market will continue
to see a shift from ‘traditional’
electricity metering to Smart
meter solutions.”
Elster Electricity
Elster Electricity is one of the
largest international Smart metering
solutions providers for residential,
commercial, industrial, transmission
and distribution markets.
Current market trends
Elster Electricity’s primary markets
are the EU, US, South America, the
Middle East and Africa. In the EU,
Elster Electricity saw several gains of
major customers and continued growth
is expected. Following calls for the
European-wide roll out of Smart meter
solutions by 2022, further significant
growth is anticipated. Good growth
has also been seen in the Middle East,
which is expected to continue over the
coming years. In South America, there
is a controlled change from standard
metering towards Smart metering.
External factors:
competition and regulation
The global market will continue to see
a shift from “traditional” metering to
Smart meter solutions. While the North
American markets are expected to
remain relatively constant at existing
sales volumes, other markets are
expected to see growth. In Latin America,
Europe and the Middle East, further
projects are starting and a significant
level of tender activity is anticipated.
Business response
New metering and software solutions
products and technologies have been
developed and successfully launched.
The new evolution of Meter Data
Collection has been released recently
and during 2015 further investment
will be made to secure further world
class partnerships with Smart Grid
application providers.
Business review
More information p30
Precision engineering and
quality control are a vital
element of our world class
manufacturing processes.
“ Smart metering is driving
growth in electronic water
meters equipped with
standard communication
interfaces for connection
to Smart networks.”
Elsewhere, legislation on water quality
and CO2 reduction continues to drive the
adoption of polymer-bodied water meters
in both developed and developing markets.
Utilities are also seeking water meters with
extended accuracy ranges in order to
maximise water measurement and help
detect leaks.
Elster Water
Elster Water is recognised globally as
a leading supplier of water meters with
sales revenue derived from more than
100 countries.
Current market trends
The global water industry continues to seek
innovative metering solutions to support
the objectives of water providers, including
water conservation, customer service and
resource efficiency. In developed markets,
revenue growth is driven by a continued
increase in the adoption of communicating
meters for Smart metering projects,
particularly in Europe, the Middle East
and North America.
This Smart metering trend is also driving
growth in electronic water meters equipped
with standard communication interfaces for
connection to Smart networks. These solid
state, electronic meters, often called “static”
meters, allow extended meter life in harsh
water quality conditions.
Melrose Industries PLCAnnual Report 2014Strategic Report 11
“ Brush’s product development of very
large air-cooled generators will position
the business well in future years.”
Energy
Brush Turbogenerators is the world’s
largest independent manufacturer of
electricity generating equipment for
the power generation, industrial, oil
& gas and offshore sectors.
Current market trends
Slow growth in the global economy is
driving a modest market growth in power
generation. Advances in technology are
resulting in the development of larger
more efficient turbines, in excess of sizes
traditionally supplied by Brush.
Exceptionally low oil & gas prices have
had a negative impact on oil & gas
investment projects, predominantly
in the upstream sector of the industry,
to which Brush has exposure.
Business review
More information p34
External factors:
competition and regulation
Some Brush businesses have strong UK
revenue streams, principally Transformers
and Switchgear, customers of which are
regulated by OFGEM (Office of Gas and
Electricity Markets).
In China, the “Energy Action Plan” was
released in November 2014 by the new
Chinese Government which endorsed
the distributed energy installation targets
set out in the 12th ‘5 Year Plan’. This
will underpin the switch from coal fired
generation to gas fired generation which
will require generators such as those
to be manufactured by Brush China.
Business response
In 2014, Brush started to supply
generators to its Chinese customers
from its European factories. The newly-
constructed factory in China is expected
to deliver its first generator in the first
quarter of 2016.
Brush’s product development of very
large air-cooled generators will position
the business well in future years.
Product development
continues to be an
integral part of Brush’s
business strategy.
External factors:
competition and regulation
Regulations governing water meter
specifications are both regional and
national with most markets adopting
international standards into their regulatory
environment, usually with some adaptation
to suit local needs. The competitive
environment in Elster Water’s main
markets comprises a few large suppliers
based in Europe and North America,
together with many regional companies.
The trends in Smart water metering are
attracting new software providers to
support advanced metering infrastructure
projects including those from the IT sector.
It is expected that there will be increasing
numbers of projects requiring partners
working together to deliver these Smart
water services to utilities.
Business response
In response to the above trends, Elster
Water remains focused on the delivery
of innovative, value added products in
market segments that are responsive
to higher performing metering products
and solutions. Recent innovations by
Elster include extending the range of
award winning polymer-bodied residential
meters, the launch of the H5000
commercial and industrial meter and the
integration and connectivity of leading
Smart communication technologies.
Elster Water continues to work with key
water industry partners in several regions
to address local requirements. Strong
customer relationships remain important,
helping to ensure that Elster Water
continues to develop water metering
products and solutions tailored to
customer needs.
Business review
More information p32
Melrose Industries PLCAnnual Report 2014Strategic ReportStrategic Report 12
Chairman’s statement
Christopher Miller
Chairman
£3.0 billion
market capitalisation from
£13 million in 11 years
£2.8 billion
of shareholder value created
23%
average annual return
on investment
I am pleased to report our 12th
set of annual results since
flotation in 2003.
2014 has been another successful
year. Elster, our gas, electricity
and water metering company
acquired in 2012, continues to
demonstrate the benefits of our
management model.
In November 2014 we sold Bridon, our
wire rope maker principally for the mining
and oil & gas sectors, for an enterprise
value of £365 million. In line with our
strategy we have announced a capital
repayment of £200 million which will be
paid on 16 March 2015. With only Brush
remaining from our FKI acquisition in
2008, this nearly completes that
acquisition cycle.
Since making our first investment in 2005,
Melrose has achieved an annual return on
equity investment of 23% and an increase
in operating margins of 5 to 7 percentage
points across each of the businesses we
have owned. Total shareholder return
over the same period has been 421%,
compared to 104% for the FTSE 350.
By implementing our strategy, following
the Return of Capital, we will have created
approximately £2,782 million of shareholder
value with a net shareholder investment
of £170 million.
As ever, I would like to thank all our
employees for their efforts in helping
to produce this outstanding performance.
Results for the Group
Revenue from continuing businesses
for the year was £1,377.5 million
(2013: £1,466.4 million) and headline
profit before tax (before exceptional
costs, exceptional income and intangible
asset amortisation) was £212.5 million
(2013: £191.5 million).
Further details of these results are
contained in the Finance Director’s review
on pages 42 to 49.
Trading
Elster continues to perform strongly
in all three divisions with orders and
sales in Gas, the largest division, in
particular, showing pleasing increases
in constant currency terms. Whilst the
bulk of restructuring and product
rationalisation is behind us there is
nevertheless an ongoing programme
of efficiency gains which we expect
will add to the substantial improvements
already achieved in operating margins.
Investment in all divisions continues and
the purchase of Eclipse on 31 October
2014 for US $158 million is an exciting
addition to Elster Gas which will make
a good contribution in its first full year.
In our Energy division, Brush continues
to experience difficult end markets with its
OEM business. While it is pleasing to note
that independent market research shows
Brush has more than maintained its market
share, nevertheless the forces at play
holding down OEM demand do not appear
to be dissipating in the near term. In the
medium and long term, however, we have
full confidence that this market will recover.
In the meantime, the Aftermarket and
Switchgear divisions are performing well.
Melrose Industries PLCAnnual Report 2014Strategic Report 13
“ Our strategy is working: for a net shareholder
investment of £170 million, and with a current
market capitalisation of £3.0 billion, we have
created £2.8 billion of shareholder value.”
Headline(1) proforma(2) diluted
earnings per share
15.3p
Dividend per share
8.1p
5%
(1) Before exceptional costs, exceptional income and
intangible asset amortisation.
(2) Calculated using the businesses in existence at the year
end, using the diluted number of shares in issue following
the Return of Capital and related share consolidation.
Outlook
The world economy continues to be
geographically patchy. Strength in the
USA is mirrored by weakness in most
of Continental and Central Europe – a
situation which seems unlikely to change
in the near future. Adjusting for currency
effects, our Group is trading in line with
management expectations for 2015
despite the expected downturn in the
performance at Brush. In our Elster
businesses, we see the potential for
good demand and growth prospects,
as indeed we have seen in the second half
of 2014. This, together with the opportunity
for further margin enhancement, and the
possibility of a value creating acquisition,
gives us confidence for the balance of
2015 and beyond.
Christopher Miller
Chairman
4 March 2015
We encountered foreign exchange
headwinds in 2014 and while these have
abated somewhat in recent months as
regards the US Dollar, the further
weakness in the Euro and the Rouble
suggest a further 5% headwind in 2015
based on current exchange rates.
Further discussion of trading appears
in the Chief Executive’s review on page 14.
Dividend
The Board proposes to pay a final dividend
of 5.3p per share (2013: 5.0p). This will be
paid on 18 May 2015 to those shareholders
on the register at 17 April 2015, subject to
approval at the AGM on 14 May 2015. This
gives a total for the year of 8.1p per share
(2013: 7.75p).
We continue to pursue a progressive
dividend policy.
Strategy
Since Melrose’s flotation in 2003, and the
introduction of our “buy, improve, sell”
strategy, we have seen many changes in
economic and stock market conditions.
Nevertheless, through all this, returns to
shareholders have been extremely good
and we see no reason to diverge from
our proven strategy. We continue to see
situations which are candidates for our
management and investment methods
and we are confident we will identify
a suitable opportunity in due course.
In the meantime, we will continue to
improve our existing businesses, and will
make disposals at the appropriate time.
Governance
The Board remains committed to maintaining high standards
of corporate governance.
Governance overview
Corporate Governance report
p60
p68
Board of Directors
More information p62
Melrose Industries PLCAnnual Report 2014Strategic ReportStrategic Report 14
Chief Executive’s review
Simon Peckham
Chief Executive
Outlook
Overall market conditions remain
challenging but we have in Elster a
business that is well positioned for growth
in 2015. At current exchange rates we face
further currency headwinds this year and
the order intake pattern suggests a more
pronounced weighting of results to the
second half of the year. As said previously,
we believe we will see further progress in
our Elster businesses but end market
conditions mean that Brush will have a
more difficult 2015. Overall, adjusting for
the adverse currency movements which
are outside our control, we believe that the
Group will be in line with management
expectations for 2015.
Simon Peckham
Chief Executive
4 March 2015
Acquiring good quality
manufacturing businesses,
making operational
improvements, realising
shareholder value at the
appropriate time and then
returning this value to
shareholders continue to
be the components of the
“buy, improve, sell” business
strategy that Melrose has
followed since being founded
in 2003.
The Group now consists of Brush, the
last remaining business from the FKI
acquisition, and the businesses which
comprise Elster. Continued improvement
of all these businesses is, as ever, a key
objective for 2015.
Acquisitions and disposals during
the year
2014 has been another highly successful
year for Melrose. In October 2014, Elster
Gas completed the acquisition of Eclipse,
a US-based manufacturer of gas
combustion components and systems for
industrial heating and drying applications.
Combining this with our existing Elster Gas
business gives us a great opportunity to
create significant shareholder value. In the
following month, Melrose completed the
disposal of Bridon for a total enterprise
value of £365 million, representing the
latest step in realising value from the FKI
businesses acquired by Melrose in 2008.
To find out more about
our performance please
see the following pages:
Elster Gas
More information p28
Elster
Electricity
More information p30
Elster Water
More information p32
Energy
More information p34
Melrose Industries PLCAnnual Report 2014Strategic Report 15
“ 2014 has been another
highly successful year
for Melrose.”
An Elster Smart residential
gas meter destined for the
UK market is subjected to
automated leak testing in
Lotte, Germany.
Melrose Industries PLCAnnual Report 2014Strategic ReportStrategic Report 16
Our strategy
Melrose buys good manufacturing businesses with
strong fundamentals, whose performance can be
improved. Melrose finances its acquisitions using a low
level of leverage, improves the businesses by a mixture
of investment and changed management focus, sells
them and returns the proceeds to shareholders.
Buy
• Good manufacturing
businesses whose
performance can be improved
• Use low (public market)
leverage
Progress
The acquisition of Eclipse, a US-based
specialist in the complementary field of
low-temperature combustion technology,
has created an opportunity to strengthen
the Elster Gas business and enhance
shareholder value.
The business is already performing
ahead of expectations.
Priorities
To identify and acquire strong
manufacturing businesses whose
performance can be improved,
using low (public market) leverage.
Key risks
Global economic and financial conditions
may impact the timing of acquisitions.
Assets may underperform or require
more investment and resources than
originally anticipated.
Buy
Improve
Sell
Improve
• Set strategy and targets
and sign off investments
• Drive operational improvements
• Invest in the business
• Change management
focus, incentivise well
• Focus on operating
cash generation
Progress
The year on year operating margins
of the continuing Group businesses have
increased from 16.4% to 17.9%, with the
Elster Group increasing operating
margins from 17.4% to 19.6%. Operational
improvement projects are returning
efficiency gains in each Elster business.
Priorities
To drive operational improvements,
invest in businesses and focus on
cash generation.
Key risks
The Group may not succeed in driving
strategic operational improvements to
generate value post acquisition in the
acquired business.
Buy
Improve
Sell
Key performance
indicators
Headline(1) proforma(2)
diluted earnings per share
Dividend per share
Headline(1)
operating profit
15.3p
8.1p
£246.0m
Key performance
indicators
More information p24
(1) Before exceptional costs, exceptional income and intangible asset amortisation.
(2) Calculated using the number of shares in issue following the Return of Capital and the related share consolidation.
(3) Calculated using average exchange rates for the year.
(4) Headline(1) operating profit before depreciation and amortisation of computer software and development costs.
Melrose Industries PLCAnnual Report 2014Strategic Report 17
Sell
• Identify the optimal time
to sell, often between three
to five years but flexible
• Return value to shareholders
from significant disposals
Progress
In November 2014, the Group completed
the sale of Bridon for an enterprise value
of £365 million, meaning that the original
equity investment by Melrose more
than doubled.
Priorities
To identify the optimal time to
divest the Group’s businesses
and to return value to shareholders
from significant disposals.
Key risks
Due to the Group’s global operations,
disposals may be significantly impacted
by political and macroeconomic factors.
There may be long-term liabilities which
may be retained by the Group and
insufficient allowance for indemnities
and warranties given at disposal may
affect the Group’s financial position.
Buy
Improve
Sell
Cash conversion
Net debt(3) to headline(1)
EBITDA(4)
Interest cover
Headline(1) operating
profit margin
90%
1.7x
15.3x
17.9%
Melrose Industries PLCAnnual Report 2014Strategic ReportStrategic Report 1818
Acquisition
of Eclipse, Inc.
A more comprehensive offering
for our customers
Eclipse and Elster
In October 2014, the Elster
Gas business acquired
Eclipse, Inc., a manufacturer
of gas combustion
components and systems for
industrial heating and drying
applications headquartered
in Rockford, Illinois (USA).
The total consideration
was US $158 million. The
transaction was on a debt
and cash free basis and
was funded within the
existing debt facilities
of the Melrose Group.
Eclipse’s long established
expertise in low-temperature
industrial gas combustion
complements Elster’s
expertise in high-temperature
industrial gas combustion
applications in Europe.
Eclipse high temperature
SER burners providing
even temperature
distribution in a metals
industry furnace.
Melrose Industries PLCAnnual Report 2014Strategic Report 1919
US $158m
Total consideration
paid for Eclipse
Melrose Industries PLCAnnual Report 2014Strategic ReportStrategic Report 20
Continual improvement
across Elster
Margins improve in Elster businesses
Whilst the bulk of
restructuring and product
rationalisation is behind us,
ongoing programmes of
efficiency gains are expected
to add to the substantial
improvements already
achieved in these businesses.
Since their acquisition in 2012,
the improvement programmes
implemented within the Elster
businesses have increased
Elster profits by two-thirds.
Operating margins continue
to improve in each of the
three businesses of Gas,
Electricity and Water with the
combined Elster operating
margin having grown from
12.8% to 19.6% during the
period of Melrose ownership.
Automated housing
production with doubled
capacity for residential
smart gas meters
in Lotte, Germany.
Melrose Industries PLCAnnual Report 2014Strategic Report 21
Elster profits
increased by
two-thirds since
acquisition in 2012
Elster operating
margin grown
from 12.8% to
19.6% during the
period of Melrose
ownership
Melrose Industries PLCAnnual Report 2014Strategic ReportStrategic Report 2222
Creating value
in the sale of Bridon
Our “buy, improve, sell” model in action
Highlights
In November 2014, Melrose
completed the disposal of
the Bridon business for an
enterprise value of £365
million. The Board used
part of the net proceeds
to return £200 million in
cash to shareholders,
using the balance to
pay down borrowings.
“Bridon is an excellent
example of the Melrose
‘buy, improve, sell’ model
at work. It demonstrates our
ability to create substantial
value for shareholders by
investing heavily in our
businesses and improving
operational performance.
Since the acquisition of FKI
in 2008, we have successfully
grown and developed the
Bridon business into a
premier supplier of critical
high-performance ropes
for energy, mining and
industrial applications.”
Simon Peckham,
Chief Executive
Melrose Industries PLCAnnual Report 2014Strategic Report Melrose Industries PLC
Annual Report 2014
Strategic Report
23
£365m
Enterprise value
x2
Original equity
investment by
Melrose more
than doubled
Strategic Report 24
Key performance indicators
In order to support the Group’s strategy and to monitor performance,
the Board uses a number of financial and non-financial key performance
indicators (‘KPIs’). Details of a selection of the KPIs are shown below.
Additional business level KPIs are also used, which are relevant
to their particular circumstances.
Financial
KPIs
Headline(1) proforma(2) diluted
earnings per share
Dividend per share
Headline(1) operating profit
15.3p
8.1p
2012(6)
2013
2014
14.4p
15.0p
15.3p
2012
2013
2014
7.6p
7.75p
8.1p
£246.0m
2012(4)
£113.5m (proforma(6) £189.5m)
2013(4)
2014
£240.0m
£246.0m
Method of calculation
Group headline(1) profit after tax, attributable
to owners of the parent, of businesses in
existence at each year end, divided by the
diluted number of shares in issue following
related share consolidations.
Strategic objective
To create consistent and long-term value
for shareholders.
Method of calculation
Amount declared as payable by way of
dividends in terms of pence per share.
Method of calculation
Headline(1) operating profit for the
continuing Group.
Strategic objective
To operate a progressive dividend policy
whenever the financial position of the
Company, in the opinion of the Board,
justifies the payment.
Strategic objective
To improve profitability of Group operations.
Cash conversion
90%
2012(4)
2013(4)
2014
92%
96%
90%
Method of calculation
Percentage of headline(1) EBITDA(3)
conversion to cash for continuing
businesses, pre capital expenditure.
Strategic objective
To ensure businesses are suitably cash
generative in order to have adequate
cash reserves for the effective running
of the Company and for significant
capital investment where required.
Net debt to headline(1)
EBITDA(3)
1.7x
2012(5)
2013
0.5×
2014
1.7x
Interest cover
15.3x
2.6×
2012
2013
2014
9.1x
11.8x
15.3x
Method of calculation
Net debt at average exchange rates divided by
headline(1) EBITDA(3) for existing businesses at
each year end.
Method of calculation
Calculated as headline(1) EBITDA(3) as a
multiple of interest payable on bank loans and
overdrafts for the full Group during each year.
Strategic objective
To ensure the Group has suitable amounts of
debt and remains within its banking covenants.
Strategic objective
To ensure the Group has suitable amounts of
debt and remains within its banking covenants.
(1) Before exceptional costs, exceptional income and intangible asset amortisation.
(2) Calculated using the businesses in existence at each year end, using the diluted number of shares in issue following the related Return of Capital and associated share consolidation.
(3) Headline(1) operating profit before depreciation and amortisation of computer software and development costs.
(4) Restated to include the results of Bridon within discontinued operations.
(5) Based on 1 January 2012 to 31 December 2012 EBITDA(3) for all continuing businesses. Elster pre acquisition EBITDA(3) has been adjusted to estimate the impact of the transition
to Melrose accounting policies under IFRS.
(6) Assuming a full year’s ownership of Elster in 2012.
Melrose Industries PLCAnnual Report 2014Strategic Report
25
Other non-financial
KPIs
Due to the diverse nature of the Group,
each business uses a range of its own
specific non-financial KPIs, which are used
to drive business performance and assist
in managing risk. This helps to ensure that
the KPIs used are relevant to each business
and take into account specific operational
and reporting requirements. Such KPIs
cover operational, quality, commercial and
human resource measures. Further information
regarding some of the Group’s recent initiatives
can be found within the Corporate Social
Responsibility report on pages 50 to 57
and the Directors’ report on pages 64 to 67.
Headline(1) operating profit
margin
17.9%
2012(4)
2013(4)
2014
14.5% (proforma(6) 12.8%)
16.4%
17.9%
Method of calculation
Headline(1) operating profit as a percentage
of revenue, for the continuing Group.
Strategic objective
To improve profitability of Group operations.
Non-financial
KPIs
Health and safety
Method of calculation
A variety of different health and safety KPIs
are used by each of the businesses within the
Group, which are specific to the exact nature
of the business and its associated risks.
Strategic objective
The Company has an objective to stop all
preventable accidents.
Performance
As each business uses its own Health
and Safety KPIs, performance in 2014
when compared to 2013 will vary. Further
information in relation to the various health
and safety initiatives undertaken by the
Group’s businesses during 2014 can
be found within the Corporate Social
Responsibility report on pages 50 to 57.
Environment
and energy usage
Method of calculation
Environmental KPIs used within the Group and
their method of calculation vary by business
unit and depend on the specific nature of the
operation. A range of environmental measures
are used, including energy consumption,
CO2 emissions, water consumption, water
contamination and waste disposal.
Strategic objective
Each of the Group’s businesses is committed to
ensuring that their operations have a minimum
possible adverse effect on the environment.
Particular relevance has been placed on the
control of energy consumption.
Performance
Investment was provided by the Group for
several environmental improvement initiatives
during 2014. The Group is required to disclose
greenhouse gas emissions data in relation to
the 2014 financial year. Further information
can be found within the Corporate Social
Responsibility report on pages 50 to 57.
Melrose Industries PLCAnnual Report 2014Strategic ReportStrategic Report
26
Melrose Industries PLCAnnual Report 2014Performance Review 27
Performance
Review
Business review
Elster Gas
Elster Electricity
Elster Water
Energy
Risk management
Risks and uncertainties
Finance Director’s review
Corporate Social Responsibility
28
30
32
34
36
38
42
50
Melrose Industries PLCAnnual Report 2014Performance ReviewPerformance ReviewFinancialsShareholder informationGovernanceStrategic Report 28
Business review
Elster Gas
In 2014 the new semi-
automatic production line
in Lotte, Germany produced
1.5 million commercial and
residential meters.
www.elster-gas.com
/en/index
Total revenue
(year ended 31 December 2014)
£687.0m
(2013: £688.9m)
+6%(2)
Key strengths
With proven excellence in
engineering, sales and operational
capability and a “Best in Class”
approach to everything it does,
Elster Gas is well positioned to
exploit growth opportunities and
to succeed as technology shifts
towards Smart meter solutions. In
parallel, Elster Gas is expanding
its global service network, winning
customer loyalty across the world.
Headline(1) operating profit
(year ended 31 December 2014)
£161.4m
(2013: £152.4m)
+13%(2)
Revenue by geographical
destination
(year ended 31 December 2014)
4
3
2
1
1. Europe
53%
2. North America 31%
3. Asia
14%
4. RoW
2%
(1) Before exceptional costs, exceptional income and
intangible asset amortisation.
(2) Calculated at constant currency.
Elster Gas is a world leader
in gas measurement and gas
safety control equipment,
supplying a global customer
base in more than 130
countries. With one of the
most extensive installed utility
measurement bases in the
world and more than 75 million
gas metering devices deployed
globally, Elster Gas products
enable customers to efficiently
measure, manage and control
natural gas resources across
the complete gas value chain.
From its four lead plants in Europe
and the USA, coupled with sizeable
subsidiary operations in China, Malaysia,
Russia and Mexico, Elster Gas designs
and manufactures gas meters and related
products for residential, commercial and
industrial customers. In 2014, five million
gas meters were manufactured in Elster’s
major factories.
Global revenues increased by 6% in
2014. Operating profit increased by
13% compared to 2013, driven by sales
growth and management’s strategy of
strong operational control coupled with
rationalisation of the business footprint.
During the year, there were significant
performance improvements in both North
America and Germany. Overall, there was
a continued improvement in gross margin
and when coupled with a further reduction
in fixed costs, there was an encouraging
1.5% improvement this year in the return
on sales.
In October 2014, Elster Gas completed
the acquisition of Eclipse, a US-based
manufacturer of gas combustion
components and systems for industrial
heating and drying applications. Eclipse
will be merged with the Elster Gas control
equipment business (sold under the
Kromschröder brand) to create a market
leading global Thermal Solutions division,
which will offer industrial customers a
comprehensive range of gas combustion
and safety control systems. This business
is now approximately a third of the sales
of Elster Gas and a good contribution is
expected from Eclipse during 2015.
Elster are also involved in both residential
Smart gas meter programmes and
commercial and industrial Smart meter
rollouts in Europe. While overall progress
Melrose Industries PLCAnnual Report 2014Performance Review
Products
Universal device for volume
conversion, billing and system
monitoring, with optional GSM
(Global System for Mobile
communication)/GPRS (General
Packet Radio Services) modem
– used in diaphragm-turbine or
rotary meters
Rotary gas meter (RABO) for
high measuring rates, compact
dimensions and high accuracy
Encal 3000 gas Chromotograph
for Biogas analysis applications
Chekker mechanical index for
diaphragm gas meters with
checksum generation to cross-
check data for accurate billing
75 million
gas metering devices have been
deployed globally.
on the former is slow, due to delays by
the relevant authorities in their mass rollout
of Smart meters, volumes are slowly
increasing in the foundation phase.
In 2014, Elster Gas sold 29,000 Smart
residential gas meters. By contrast, good
progress has been made in the Smart
commercial and industrial sector.
In addition to the 24,000 Smart commercial
and industrial gas meters sold in 2014,
Elster Gas announced that British Gas
Business, the UK’s largest non-residential
gas supplier, has selected Elster to supply
up to 100,000 Smart commercial and
industrial gas meters over the next three
years to a significant proportion of its
UK customer base.
In May 2014, Elster Gas announced
major changes in the global footprint
of its Integrated Metering Solutions (IMS)
business which builds gas metering
stations for the upstream production and
shipment of gas. Production will move
from Western Europe to Saudi Arabia and
Malaysia, with the latter becoming the
centre of excellence for these products.
This shift moves production closer to the
major gas metering station markets, with
completion planned for the end of 2015.
Outlook
The main Elster Gas end markets remain
healthy and order input in 2014 was
higher than in 2013. We expect the
recent decline in the oil price to have
an effect on the timing of some gas
metering station projects throughout
2015; however, the high demand
projected in the Elster conventional
gas meter markets will more than
compensate for any weakness in
this area.
When coupled with further planned
operational improvements and the
integration of Eclipse into the existing
business, Elster Gas should enjoy another
strong performance in 2015. Whilst still
very early in the year, order books going
into 2015 give us encouragement for
the next 12 months.
29
Market overview
Global energy consumption continues
to increase, with a growing share for
natural gas that is forecast to continue
in the long term. In addition, supply
side growth and some demand side
weakness are helping to reduce the
price of natural gas, enhancing its
attractiveness within the energy mix.
External factors
In the EU, mandatory environmental
targets remain in force, targeting
improvements in energy efficiency,
reductions in carbon emissions and
increased use of energy from renewable
sources. The global economic situation
is increasing competition and pricing
pressure and changing buying
behaviour within key markets.
Business response
Elster Gas is actively involved in projects
driven by EU environmental legislation
and the demands of the US Residential
and Commercial Metering Market.
Elster supplies the full scope of energy
measurement solutions required for gas
pipelines and infrastructure connecting
gas reserves with the end-user.
Market overview
More information p09
Efficient and reliable helium leak
detection in Lotte, Germany.
Two million residential and
industrial gas meters have been
tested this way.
Melrose Industries PLCAnnual Report 2014Performance ReviewPerformance Review
30
Business review continued
Elster Electricity
For the future Smart Grid,
Elster Electricity is investing
to secure world class
partnerships and has recently
introduced the new enhanced
open and secure software
offering, Connexo®.
www.elster.com
/en/electricity
Total revenue
(year ended 31 December 2014)
£215.7m
(2013: £247.5m)
-4%(2)
Key strengths
End-to-end solution provider for
the Smart Grid, covering the entire
energy distribution value chain
Delivering complete Smart Grid and
Energy Management Solutions that
drive energy efficiency, operational
improvements and cost savings
Driving interoperability and Open
Standards through strategic
collaboration with customers
and partners
Leading on Privacy Enhancement
Technology and Security
Reputation for quality, reliability,
accuracy and innovation
Headline(1) operating profit
(year ended 31 December 2014)
£22.8m
(2013: £21.5m)
+23%(2)
Revenue by geographical
destination
(year ended 31 December 2014)
4
3
1
1. Europe
27%
2. North America 44%
3. Asia
10%
4. RoW
19%
2
(1) Before exceptional costs, exceptional income and
intangible asset amortisation.
(2) Calculated at constant currency.
Elster Electricity is one of the
largest international metering
solutions providers, supplying
both traditional and Smart meter
equipment, including applications
for residential, commercial,
industrial, transmission and
distribution markets.
The product range includes distribution
and control monitoring equipment,
advanced Smart metering, demand
response, networking and software
solutions including MDC (Meter Data
Collection) with open API (Application
Programme Interface) connecting third
party applications, together with several
other communication products and
services. Elster Electricity has key
production facilities located in Europe,
North America and South America and
operates in most global markets through
its own offices or agents.
North America is served through factories
and sales offices, and offers Smart metering
solutions to commercial, industrial and
residential markets. Elster has one of the
largest installed AMI (Advanced Meter
Infrastructure) meter bases. Most utilities
in the USA have started deploying Smart
meter solutions, with around 50% of all
households equipped with Smart meters.
Following the end of the Smart Grid
Investment Grant awards as part of the
American Reinvestment and Recovery
Act, the North American market saw a
revenue decrease compared to previous
years. Growth, however, is expected in
Mexico, where a regulatory framework is
in place to accelerate further deployment.
Europe, the Middle East and Africa, with
the biggest market being the European
Union, have seen significant growth over
the last year, and with the third Energy
Package calling for a European-wide roll
out of Smart meter solutions through to
2022, further growth is expected over the
coming years. Elster Electricity is well
positioned with a broad range of products
and solutions, and with recent wins and
pilot projects, Elster Electricity expects
to capture its fair share of the market.
Melrose Industries PLCAnnual Report 2014Performance Review
31
Products
Complete end-to-end product
range, covering every aspect
of the value chain
Innovative, advanced and
modular electricity meters for
both residential, commercial
and industrial markets
Providing new concepts and
technologies in data collection
and communication
Full range of services,
delivering business solutions
5 million
Elster Electricity has deployed more
than 5 million Smart residential
meters over the last six years.
Market overview
Elster Electricity’s primary markets are the
EU, US, South America, the Middle East
and Africa. In the EU, Elster Electricity
saw several gains of major customers.
Continued growth is expected. Good
growth has also been seen in the Middle
East, which is expected to continue over
the coming years.
External factors
The global market will continue to see
a shift from “traditional” metering to
Smart meter solutions. While the North
American markets are expected to
remain relatively constant at existing
sales volumes, other markets are
expected to see growth.
Business response
New metering and software solutions
products and technologies have been
developed and successfully launched.
The new evolution of Meter Data
Collection has been released recently
and during 2015 further investment
will be made to secure further world
class partnerships with Smart Grid
application providers.
Market overview
More information p10
Operating profit improved as a result
of consolidation activities and process
improvement actions taken in previous
years. The move of production in North
America to San Luis Potosi in Mexico has
now been completed and supply chain
and assembly for a part of the European
operation has now been consolidated in
Timisoara in Romania. Focus on solutions
selling and subsequent service revenue
also contributed to the overall profit
improvement. The supply chain, both in
North America and Europe, has been
consolidated around tier 1 OEM suppliers
resulting in improved quality. 2014 saw
another focus on VAVE (Value Added
Value Engineering) across all product
lines resulting in improved margins.
In 2015, a key focus will be on introducing
the new enhanced open software offering,
Connexo, starting in North America
followed by Europe. New product features
will be launched reflecting the market
demand for new communication protocols
and data encryption features. A move to
a new facility in Timisoara in Romania is
planned for the fourth quarter.
Outlook
Following last year’s tender activities for
Smart metering in Europe and the Middle
East, a number of projects have been
secured that will see pilot projects in 2015
and subsequent mass roll out in the years
to follow. In South America, including
Mexico, utilities are expected to continue
the focus on reducing wastage of electricity
through accelerated roll out of integrated
metering solutions. These developments
mean that Elster Electricity is well positioned
for an exciting future, although the precise
timing of Smart meter roll out remains
unpredictable.
From traditional to Smart.
A visible shift from “traditional”
metering to Smart meter solutions
is occurring globally, and is
expected to gain momentum over
the coming years.
Melrose Industries PLCAnnual Report 2014Performance ReviewPerformance Review
32
Business review continued
Elster Water
Elster Water R&D is delivering
innovative new products
that address key customer
needs. State of the art product
validation testing is employed
throughout the new product
introduction process.
www.elster.com
/en/water
Total revenue
(year ended 31 December 2014)
Key strengths
130 year reputation for quality,
reliability, accuracy and innovation
within the water industry
Global market presence in
more than 100 countries,
offering all major water
measurement technologies
Leading position in many of
the world’s best markets for
water metering
An industry leader with innovative
product development and
technology choice for customers
Strong long-term customer
relationships and strategic
partnerships
£147.5m
(2013: £179.9m)
-12%(2)
Headline(1) operating profit
(year ended 31 December 2014)
£23.4m
(2013: £23.0m)
+11%(2)
Revenue by geographical
destination
(year ended 31 December 2014)
1. Europe
50%
2. North America 7%
3. Asia
8%
4. RoW
35%
1
4
3
2
(1) Before exceptional costs, exceptional income and
intangible asset amortisation.
(2) Calculated at constant currency.
Elster Water designs,
manufactures and provides a
comprehensive range of water
metering solutions including
high accuracy mechanical
meters, fully electronic meters
and Smart metering solutions
for residential, commercial
and industrial sectors.
Headline operating profits continued to
improve in 2014, following the restructuring
activity in 2012 and 2013. Restructuring
operations during this period led to the
cessation of manufacture of mechanical
meters for the North American market
and rationalisation of product lines, which
resulted in the closure of sites in Europe
to consolidate production. Operating
margins have improved compared with
2013 due to the impact of improved
operating efficiency, well-controlled raw
material costs and a continued focus
on overhead control. Working capital
controls also improved with a year-on-year
reduction ensuring strong cash conversion.
Revenues in 2014 were approximately 12%
lower compared with 2013, largely due to
the remaining effect of the exit from low
margin business in North America and in
Germany. This action has led to an overall
improvement in the quality of earnings,
delivering a return on sales of nearly 16%
in the year (2013: 12.8%). Revenue in the
Middle East was lower than expected due
to the level of customer activity; however,
this was offset by strong growth in Africa.
Sales in the rest of Europe were lower than
in 2013, reflecting our strategy of exiting
lower margin products.
Melrose Industries PLCAnnual Report 2014Performance Review
Products
Broad range of class leading
mechanical water meters
pre-equipped for Smart metering
Advanced electronic water
meters for both residential
and commercial customers
Innovative Smart metering
solutions and services
Large portfolio of advanced
commercial and industrial meters
Connectivity and integration
of leading water measurement
communication technologies
H5000
Commercial and industrial water
meter with class leading
measuring range.
New product launches in 2014 included
extending the range of polymer-bodied
volumetric meters by adding high
metrological performance variants and new
registers to increase the options for system
connectivity. For the sub-meter portfolio,
a connection kit was launched to allow
independent radio providers to adapt their
products to work with Elster sub-meters,
whilst gaining regulatory approval for more
installation options. For Latin America, a
new residential multi-jet M170 meter was
launched with improved metrological
performance offering an extended accurate
operating range. For the commercial and
industrial sector, the range of the new
H5000 meter has been extended, offering
new data communication options and
alternative meter body configurations.
A strong pipeline of new products
continues to provide global business
growth opportunities.
Elster Water’s continual focus on their
customers was recognised by the Institute
of Mechanical Engineers’ Manufacturing
Excellence Awards 2014, with UK-based
Elster Water Metering winning the coveted
Manufacturing Excellence Award for
Customer Focus.
Outlook
The focus in 2015 will be to maintain
industry-leading operating margins and
achieve revenue growth above industry
growth rates. Elster Water is well
positioned to penetrate new and existing
markets offering a leading portfolio of
water measurement products.
33
Market overview
The global water industry continues
to seek innovative metering solutions
to support the objectives of water
providers, including water conservation,
customer service and resource efficiency.
In developed markets, revenue growth
is driven by a continued increase in the
adoption of communicating meters for
Smart metering projects.
External factors
Regulations governing water meter
specifications are both regional and
national with most markets adopting
international standards into their
regulatory environment. The competitive
environment in our main markets
comprises a few large suppliers based
in Europe and North America. The
trends in Smart water metering are
attracting new software providers,
including those from the IT sector.
Business response
Elster Water remains focused on the
delivery of innovative, value-added
products in market segments that
are responsive to higher performing
metering products and solutions.
Market overview
More information p10
World class manufacturing
techniques including statistical
process control are key to
maintaining the highest quality.
Melrose Industries PLCAnnual Report 2014Performance ReviewPerformance Review
34
Business review continued
Energy
Brush provides energy
solutions for the global
power industry, focusing
on outstanding product
performance and
manufacturing excellence.
www.brush.eu
Total revenue
(year ended 31 December 2014)
£327.3m
(2013: £350.1m)
-3%(2)
Headline(1) operating profit
(year ended 31 December 2014)
£65.4m
(2013: £73.1m)
-7%(2)
Revenue by geographical
destination
(year ended 31 December 2014)
4
3
2
1. Europe
52%
2. North America 28%
3. Asia
10%
4. RoW
10%
1
(1) Before exceptional costs, exceptional income and
intangible asset amortisation.
(2) Calculated at constant currency.
Key strengths
Expertise in the design and
manufacture of an extensive range of
high quality, 2 and 4 pole high voltage
generators and electric motors
Innovative design and
developments
Comprehensive and integrated
aftermarket support tailored
to meet customers’ needs
throughout operating life
Switchgear and transformer
products in service with all UK
and certain overseas energy
supply authorities
Hydropower generators to produce
environmentally green energy
Generators and electric motors
for marine power
Strategically located around
the world
Brush Turbogenerators
(“Turbogenerators”) is the
world’s largest independent
manufacturer of electricity
generating equipment for the
power generation, industrial,
oil & gas and offshore sectors.
From its four plants in the UK, Czech
Republic, Netherlands and US (and
with a newly-built China generator plant
coming into production in 2015) Brush
designs, manufactures and services
turbogenerators, principally in the 10
MVA to 300 MVA range, for both gas
and steam turbine applications, and
supplies a globally diverse customer base.
In addition, Brush designs and manufactures
systems and power transformers under
the brand name Brush Transformers
(“Transformers”) and also produces a
wide range of indoor and outdoor medium
voltage AC/DC switchgear under the
Hawker Siddeley Switchgear (“HSS”)
brand name. Brush also has a strong
presence in power control systems.
Harrington Generators International (“HGI”)
is a specialist UK-based small generator
manufacturer supplying the construction,
military, telecoms and rail sectors.
During 2014, Brush experienced a
challenging market again, particularly in
new build generators. This was mitigated
by another strong year from aftermarket
sales and HSS. Significant investment
was made in the year to fund new product
development, new routes to market, and
the China project, and thus future growth.
The performance was supported by
operational efficiency gains, and the
benefits from capital investments.
2014 saw the commencement of the
construction of the Brush greenfield generator
manufacturing plant near Shanghai, China.
This £30 million capital investment will produce
generators primarily for the China market and
is in support of several of Brush’s international
turbine customers. Factory construction
is nearly complete and manufacturing
equipment is now being installed and
commissioned, with the factory expected to
deliver its first generator in January 2016. The
first orders have now been received for this
factory as it moves towards being operational.
Brush has already been supplying generators
in 2014 from Europe against the six year
long-term purchase agreement with Huadian
GE Aero Gas Turbine Equipment Co. Ltd
(“HDGE”), which will continue until the new
factory is operational.
Melrose Industries PLCAnnual Report 2014Performance Review
35
Products
Quality products and service
Power generation equipment
from 10 MVA to 300 MVA
Synchronous motors, induction
motors, submersible and
traction motors
Power management and
excitation systems
Medium voltage AC and DC
switchgear
Power and system transformers
Aftermarket servicing/support/
spares/lifetime extension
£30m
Market overview
Slow growth in the global economy is
driving a modest market growth in power
generation. Advances in technology are
resulting in the development of larger
more efficient turbines, often in excess
of sizes traditionally supplied by Brush.
External factors
Some of Brush businesses have
strong UK revenue streams, principally
Transformers and Switchgear, which
are regulated by OFGEM.
In China, the “Energy Action Plan”
will underpin the switch from coal
fired generation to gas fired generation.
Business response
The newly-constructed factory in China
is expected to deliver its first generator
in the first quarter of 2016.
Brush’s product development of very
large air-cooled generators will position
the business well in future years.
Capital investment to construct
a new generator plant in China.
Market overview
More information p11
Outlook
The medium and long-term growth in
power and in particular the aero-derivative
gas turbine market, where Brush has such
a strong position, remain positive, and with
the additional growth from China, a strong
new product development pipeline across
all business units coupled with continued
operational improvements, means the
business is well positioned for the future.
However, the overall market dynamics
remain difficult in the short term. Profits
are expected to decline significantly
in 2015 despite the efforts of Brush’s
management and continued improvements
in its Aftermarket, Transformers and
Switchgear businesses.
The separation of the aftermarket business
into one unit in 2013 has helped it to grow
strongly in 2014. Late 2014 saw the launch
of the “VF” range, an initiative to provide
premium replacement rotors in seven
weeks, and selected complete generators
in 10 weeks, industry leading timescales.
This gives end users a critically important
replacement service as an alternative to
repair, and significantly widens the available
market to Brush, for both Brush and
non-Brush legacy machine replacement.
During 2015 this offer will be extended
to third party, non-Brush manufactured
generators as well as 4 pole generators.
The aftermarket business in the USA had
another strong growth year. Investment has
commenced on a new large rotor balancing
facility in Pittsburgh, which will significantly
enhance its capabilities and lead to further
growth. The new global structure of service
engineers resulted in Brush Aftermarket
being able to manage the power outage
spike in demand in the USA utilising its
own engineers, rather than subcontractors.
Overall Aftermarket sales were well ahead
of a strong 2013.
The Transformer business had a slow
sales year in 2014 as a result of it being
the last year of the current five year OFGEM
(the UK Government’s Office of Gas and
Electricity Markets) cycle. Orders have
now improved into 2015 as the period has
ended. The capital expenditure programme
to reorganise the Transformers production
process and value engineer the product
was completed, and resulted in significant
margin improvement.
The HSS business had a satisfactory year.
Whilst sales were 8% behind the previous
year (mainly due to project delays), as a
result of efficiency savings profit was 3%
ahead. During the year investment in R&D
significantly increased, which positions the
business well for the future with a pipeline
of unique products.
Melrose Industries PLCAnnual Report 2014Performance ReviewPerformance Review
36
Risk management
Melrose operates in a variety of sectors and countries and
is exposed to a wide range of risks and uncertainties from a
strategic, operational, compliance and financial perspective.
Risk management framework
The objectives of the Directors and senior
management are to safeguard and increase
the value of the business and assets of the
Group. Achievement of these objectives
requires the development of policies and
appropriate internal control frameworks to
ensure the Group’s resources are managed
properly and any key risks are identified
and mitigated, where possible.
The Board recognises that it is ultimately
responsible for determining the nature and
extent of the principal risks it is willing to take
in achieving its strategic objectives. It also
recognises the need to maintain sound risk
management and internal control systems.
The Audit Committee monitors the
effectiveness of the internal control processes
implemented across the Group, through
a review of the key findings presented by
the external and internal auditors and
discussions with senior management.
The Board is responsible for considering
Audit Committee recommendations and
ensuring implementation by management
of those recommendations it deems
appropriate for the business.
The Group operates on a de-centralised
basis and the Board has established an
organisational structure with clear reporting
procedures, lines of responsibility and
delegated authority, as depicted in the
diagram opposite.
Risk management framework
Identification
Financial and
non-financial risks
recorded in controlled
risk registers
Id e ntifi catio n
Mitigation
Risk owners
identified and action
plans implemented
M
iti
g
a
ti
o
Robust mitigation strategy
subject to regular and
rigorous review
n
A summary of the principal risks and
uncertainties that could impact on the
Group’s performance is shown on pages
38 to 41. Further information detailing
the internal control and risk management
policies and procedures operated within
the Group is shown on page 71 of the
Corporate Governance report.
2014 Risk management review
In 2014, the Board initiated a root and
branch audit and review of the risk
management framework and underlying
processes in operation in every business
across the Melrose Group. The exercise
was led by the Company Secretary and
supported by risk consultants, BDO LLP.
Audit meetings were conducted by
the Company Secretary with senior
management from each business unit.
The review focused on the degree to
which risk management arrangements
are guided by strategic direction and the
extent to which appropriate processes
are in place for the identification,
evaluation, prioritisation, recording,
monitoring and reporting of risk within
the businesses. The results of this audit
exercise were presented to the Board
and an action plan detailing the key risk
management priorities was agreed.
Evaluation
Risk exposure
reviewed and
risks prioritised
E
v
a
l
u
a
ti
o
n
A n alysis
Analysis
Risks analysed
for impact
and probability
to determine
gross exposure
Risk management priorities
for 2015
The Board recognises that operating in a
dynamic and rapidly evolving commercial
environment requires a pragmatic, flexible
and responsive risk management framework
that changes with the business and provides
management with a comprehensive view
of the Group’s risk profile at any given time.
Following the 2014 risk management audit,
BDO LLP have been engaged to support
the Board in developing an enhanced
risk management framework and in
implementing a programme to promote
and embed a more risk-aware culture
across the organisation. Specific
priorities for the Group in 2015 include:
• Reviewing the Board’s risk appetite and,
where appropriate, updating the Melrose
Risk Policy and Strategy;
• Developing and implementing an
enhanced and more consistent risk
management governance framework
across the Group. This will define the
Melrose principles for risk management
and set the standards for the
identification, evaluation, prioritisation,
recording, review and reporting of risks
and their management or mitigation
throughout the organisation;
• Rolling out a Group-wide education
and training programme designed to
instill and embed a culture of effective
risk management against a consistently
applied framework;
• Embedding the risk management
programme through a series of risk
workshops. These will be attended by
risk champions from each business
unit and will provide a forum for sharing
learning and refining risk tools and
processes; and
• Reviewing and improving our processes
around the assessment of principal risks
and the monitoring and reporting of the
Group’s risk management performance.
Invariably, this may require slight revisions
to the priorities attached to the principal
risks already identified in this report.
Melrose Industries PLCAnnual Report 2014Performance Review 37
Risks and uncertainties
More information p38
Governance overview
More information p60
The Board
The Board has approved a formalised but pragmatic Group risk management framework.
Identifying risks
The identification and management of risks across the Group are integral to the Group’s strategic objectives.
They are vital in helping protect the Group’s businesses, its people and its reputation.
Board
Overall responsibility for risk management
Audit Committee
Monitors the effectiveness of the Group’s internal control processes
Elster
Gas
Elster
Electricity
Elster
Water
Energy
Divisional Senior Managers
Operational Managers and Financial Controllers
Melrose Industries PLCAnnual Report 2014Performance ReviewPerformance Review 38
Risks and uncertainties
The table below lists the principal risks and uncertainties that may affect the Group and highlights the mitigating actions that are being
taken and the opportunities that the Group aims to exploit. The content of the table, however, is not intended to be an exhaustive list of
all the risks and uncertainties that may arise.
A risk management and internal controls framework is in place within the Group to ensure that such risks and uncertainties can be
identified and where possible managed suitably. Each Group business maintains a risk register which is reviewed regularly.
Key risk
Description and impact
Mitigation
Responsibility
Risk trend
Strategic priorities
Strategic risk
Acquisition of new
businesses and
improvement strategies
Timing of disposals
Operational risk
Economic and
political risk
Loss of key management
As per the Group’s strategy to buy and improve good underperforming manufacturing businesses,
there is a risk that the Group will not succeed in driving strategic operational improvements to
generate value post acquisition. In making acquisitions, there is a risk of unforeseen liabilities being
discovered which are not known at the time of the due diligence process but which arose in
the business before it was acquired. The success of the Group’s acquisition strategy depends
on identifying targets, obtaining authorisations and having the necessary financing. Even if an
acquisition is completed, the acquired products and technologies may not be successful or may
require significantly greater resources and investment than anticipated. If anticipated benefits
are not realised or trading by acquired businesses falls below expectations, it may be necessary
to impair the carrying value of these assets. The Group’s return on capital employed may fall if
acquisition hurdle rates are not met. The Group’s financial performance may suffer from goodwill
or other acquisition-related impairment charges, or from the identification of additional liabilities
not known at the time of the acquisition.
In line with our strategy and depending where the Group is within the buy, improve and sell
strategic cycle, the expected timing of disposal of companies is considered as a principal risk which
could have a material impact on the Group strategy. Further, due to the Group’s global operations,
there may be a significant impact on timing of disposal due to political and macroeconomic factors.
Depending on the timings of disposals and nature of companies’ operations there may be long-term
liabilities which could be retained by the Group. Insufficient allowance for retained liabilities may also
affect the Group’s financial position.
The Group operates, through manufacturing and/or sales facilities, in over 50 countries and
is affected by global economic conditions particularly in the US and Europe. Businesses are
also affected by government spending priorities and the willingness of governments to commit
substantial resources. Current global economic and financial market conditions and the potential
for a significant and prolonged global recession may materially and adversely affect the Group’s
operational performance, financial condition and could have significant impact on timing of
acquisitions and disposals.
A recession may also materially affect customers, suppliers and other parties with which the
Group does business. Adverse economic and financial market conditions may cause customers
to terminate existing orders, to reduce their purchases from the Group, or to be unable to meet
their obligations to pay outstanding debts to the Group. These market conditions may also cause
our suppliers to be unable to meet their commitments to the Group or to change the credit terms
they extend to Group businesses.
The success of the Group is built upon strong management teams. As a result, the loss of key
personnel can have a significant impact on performance, at least for a time. The loss of key
personnel or the failure to plan adequately for succession or develop new talent may impact
the reputation of the Group, or lead to a disruption in the leadership of the business. Competition
for personnel is intense and the Group may not be successful in attracting or retaining qualified
personnel, particularly engineering professionals. The loss of key employees, the Group’s
inability to attract new and adequately trained employees, or a delay in hiring key personnel,
could seriously harm the Group’s business. Over time, the Group’s competitive advantage is
defined by the quality of its people; should the Group fail to attract, develop and retain key talent,
in time the competitive advantage will erode, leading to weaker growth potential or returns in
particular with significant restructuring activities undertaken to improve the acquired businesses.
• Structured and focused due diligence undertaken.
• Focus on acquisition targets that have strong headline
fundamentals – high quality products, leading market
share but are underperforming their potential and ability
to generate sustainable cash flows and profit growth.
• Hands-on role taken by Directors and other senior
employees of the Group. Development of strategic
plans, restructuring opportunities, capital expenditure
and working capital management.
Executive
management(1)
Buy
Improve
Sell
• Directors are experienced in judging and regularly reviewing
Executive
the appropriate time in a business cycle for disposal to realise
management(1)
maximum value for shareholders.
• Each disposal is assessed on its merits, with a key focus on
a clean disposal.
Buy
Improve
Sell
• Diverse range of companies operating within the Group, within
Executive
a variety of different industries and countries, which reduces
management(1)
macro-economic and political risks.
Buy
Improve
Sell
• Regular monitoring of order books and other leading indicators,
to ensure the Group and each of its businesses can respond
quickly to any adverse trading conditions. This includes the
identification of cost reduction and efficiency measures.
• Succession planning within the Group and its various businesses
Executive
is co-ordinated via the Nomination Committee in conjunction
management(1)
with the Board and includes all Directors and senior employees.
Buy
Improve
Sell
• The Company recognises that, as with most businesses,
particularly those operating within a technical field, it is
dependent on Directors and employees with particular
managerial, engineering or technical skills. Appropriate
remuneration packages and long-term incentive arrangements
are offered in an effort to retain such individuals.
Melrose Industries PLCAnnual Report 2014Performance Review Key risk
Description and impact
Mitigation
Responsibility
Risk trend
Strategic priorities
39
• Structured and focused due diligence undertaken.
• Focus on acquisition targets that have strong headline
fundamentals – high quality products, leading market
share but are underperforming their potential and ability
to generate sustainable cash flows and profit growth.
• Hands-on role taken by Directors and other senior
employees of the Group. Development of strategic
plans, restructuring opportunities, capital expenditure
and working capital management.
Executive
management(1)
Buy
Improve
Sell
• Directors are experienced in judging and regularly reviewing
the appropriate time in a business cycle for disposal to realise
maximum value for shareholders.
Executive
management(1)
• Each disposal is assessed on its merits, with a key focus on
a clean disposal.
Buy
Improve
Sell
• Diverse range of companies operating within the Group, within
a variety of different industries and countries, which reduces
macro-economic and political risks.
Executive
management(1)
Buy
Improve
Sell
• Regular monitoring of order books and other leading indicators,
to ensure the Group and each of its businesses can respond
quickly to any adverse trading conditions. This includes the
identification of cost reduction and efficiency measures.
Loss of key management
The success of the Group is built upon strong management teams. As a result, the loss of key
• Succession planning within the Group and its various businesses
is co-ordinated via the Nomination Committee in conjunction
with the Board and includes all Directors and senior employees.
Executive
management(1)
Buy
Improve
Sell
• The Company recognises that, as with most businesses,
particularly those operating within a technical field, it is
dependent on Directors and employees with particular
managerial, engineering or technical skills. Appropriate
remuneration packages and long-term incentive arrangements
are offered in an effort to retain such individuals.
(1) Comprises executive Directors and Melrose senior management.
Risk trend
Increasing
Constant
Decreasing
Strategic risk
Acquisition of new
businesses and
improvement strategies
generate value post acquisition. In making acquisitions, there is a risk of unforeseen liabilities being
As per the Group’s strategy to buy and improve good underperforming manufacturing businesses,
there is a risk that the Group will not succeed in driving strategic operational improvements to
Timing of disposals
In line with our strategy and depending where the Group is within the buy, improve and sell
Operational risk
Economic and
political risk
discovered which are not known at the time of the due diligence process but which arose in
the business before it was acquired. The success of the Group’s acquisition strategy depends
on identifying targets, obtaining authorisations and having the necessary financing. Even if an
acquisition is completed, the acquired products and technologies may not be successful or may
require significantly greater resources and investment than anticipated. If anticipated benefits
are not realised or trading by acquired businesses falls below expectations, it may be necessary
to impair the carrying value of these assets. The Group’s return on capital employed may fall if
acquisition hurdle rates are not met. The Group’s financial performance may suffer from goodwill
or other acquisition-related impairment charges, or from the identification of additional liabilities
not known at the time of the acquisition.
strategic cycle, the expected timing of disposal of companies is considered as a principal risk which
could have a material impact on the Group strategy. Further, due to the Group’s global operations,
there may be a significant impact on timing of disposal due to political and macroeconomic factors.
Depending on the timings of disposals and nature of companies’ operations there may be long-term
liabilities which could be retained by the Group. Insufficient allowance for retained liabilities may also
affect the Group’s financial position.
The Group operates, through manufacturing and/or sales facilities, in over 50 countries and
is affected by global economic conditions particularly in the US and Europe. Businesses are
also affected by government spending priorities and the willingness of governments to commit
substantial resources. Current global economic and financial market conditions and the potential
for a significant and prolonged global recession may materially and adversely affect the Group’s
operational performance, financial condition and could have significant impact on timing of
acquisitions and disposals.
A recession may also materially affect customers, suppliers and other parties with which the
Group does business. Adverse economic and financial market conditions may cause customers
to terminate existing orders, to reduce their purchases from the Group, or to be unable to meet
their obligations to pay outstanding debts to the Group. These market conditions may also cause
our suppliers to be unable to meet their commitments to the Group or to change the credit terms
they extend to Group businesses.
personnel can have a significant impact on performance, at least for a time. The loss of key
personnel or the failure to plan adequately for succession or develop new talent may impact
the reputation of the Group, or lead to a disruption in the leadership of the business. Competition
for personnel is intense and the Group may not be successful in attracting or retaining qualified
personnel, particularly engineering professionals. The loss of key employees, the Group’s
inability to attract new and adequately trained employees, or a delay in hiring key personnel,
could seriously harm the Group’s business. Over time, the Group’s competitive advantage is
defined by the quality of its people; should the Group fail to attract, develop and retain key talent,
in time the competitive advantage will erode, leading to weaker growth potential or returns in
particular with significant restructuring activities undertaken to improve the acquired businesses.
Melrose Industries PLCAnnual Report 2014Performance ReviewPerformance Review 40
Risks and uncertainties continued
Key risk
Description and impact
Mitigation
Responsibility
Risk trend
Strategic priorities
Compliance and ethical risk
Legal, regulatory and
intellectual property (“IP”)
Financial risk
Foreign exchange rate
Pensions
Liquidity
There is a risk that the Group may not always be in complete compliance with laws, regulations
or permits, for example concerning environmental or safety requirements. The Group could
be held responsible for liabilities and consequences arising from past or future environmental
damage, including potentially significant remedial costs. There can also be no assurance that
any provisions for expected environmental liabilities and remediation costs will adequately
cover these liabilities or costs.
The Group operates in highly regulated sectors. In addition, new legislation, regulations or
certification requirements may require additional expense, restrict commercial flexibility and
business strategies or introduce additional liabilities for the Company or Directors. Should a
regulator’s approval process take a particularly long time, our products may be delayed in getting
to market, which could lead to a loss of revenue or benefit a competitor with a similar product.
Failure to comply with certain regulations may result in significant financial penalties, debarment
from government contracts and/or reputational damage and impact our business strategy.
Due to the global nature of operations and volatility in the foreign exchange market, exchange
rate fluctuations have and could continue to have a material impact on the reported results.
The Group is exposed to three types of currency risk: transaction risk, translation risk and risk
that when a business that is predominantly based in a foreign currency is sold, it is sold in that
foreign currency. The Group’s reported results will fluctuate as average exchange rates change.
The Group’s reported net assets will fluctuate as the year-end exchange rate changes.
As at 31 December 2014, the Group has legacy defined benefit pension plans, with aggregate
net liabilities of £218.5 million on an accounting basis. Changes in discount rates, inflation,
asset values or mortality assumptions could lead to a materially higher deficit. For example,
the cost of a buyout on a discontinued basis uses more conservative assumptions and is likely
to be significantly higher than the accounting deficit. In addition, there is a risk that the plan’s
assets, such as investments in equity and debt securities, will not be sufficient to cover the
value of those benefits. The implications of a higher pension deficit include a direct impact on
valuation, credit rating and potential additional funding requirements at subsequent triennial
reviews. In the event of a major disposal, that generates significant cash proceeds which are
returned to the shareholders, the Group may be required to make additional cash payments
to the plans or provide additional security.
The Group has £571.8 million of gross debt as at 31 December 2014. The ability to refinance
its borrowings in the bank or capital markets is dependent on market conditions and the proper
functioning of financial markets. Furthermore, in line with the Group’s strategy, investment is
made in the businesses (capital expenditure in excess of depreciation) and there is a requirement
to assess liquidity and headroom when new businesses are acquired and the Group may be
unable to refinance its debt when it falls due.
• Regular monitoring of legal and regulatory matters at both a
Group and business unit level. Consultation with external
Executive
management(1)
advisers where necessary.
Buy
Improve
Sell
• Development of suitable corporate governance and compliance
procedures both at a Group and business unit level.
• Protection of rights over trademarks, copyright, patents,
designs and trade secrets, where necessary.
• The Group policy is to protect against the majority of foreign
Executive
exchange risk which affects cash, by hedging such risks with
management(1)
financial instruments.
• Protection against specific transaction risks is taken by the
Board on a case-by-case basis.
Buy
Improve
Sell
• Each of the Group’s key funded pension plans are now closed
Executive
to new entrants and future service accrual. Long-term funding
management(1)
Buy
Improve
Sell
arrangements are agreed with each of these plans and reviewed
following completion of actuarial valuations. Other pension plans
exist within the Group but these are largely unfunded plans
whereby funding plans are not required and benefit obligations
are paid when due.
• Active management of pension plan assets.
• Ensure the Company has adequate resources to meet its
liabilities by reviewing its quarterly forecasts, ensuring there
is sufficient headroom within committed bank facilities to
Executive
management(1)
cope with market volatility.
Buy
Improve
Sell
Melrose Industries PLCAnnual Report 2014Performance Review 41
Key risk
Description and impact
Mitigation
Responsibility
Risk trend
Strategic priorities
Compliance and ethical risk
Legal, regulatory and
There is a risk that the Group may not always be in complete compliance with laws, regulations
intellectual property (“IP”)
or permits, for example concerning environmental or safety requirements. The Group could
Financial risk
Foreign exchange rate
Due to the global nature of operations and volatility in the foreign exchange market, exchange
Pensions
As at 31 December 2014, the Group has legacy defined benefit pension plans, with aggregate
be held responsible for liabilities and consequences arising from past or future environmental
damage, including potentially significant remedial costs. There can also be no assurance that
any provisions for expected environmental liabilities and remediation costs will adequately
cover these liabilities or costs.
The Group operates in highly regulated sectors. In addition, new legislation, regulations or
certification requirements may require additional expense, restrict commercial flexibility and
business strategies or introduce additional liabilities for the Company or Directors. Should a
regulator’s approval process take a particularly long time, our products may be delayed in getting
to market, which could lead to a loss of revenue or benefit a competitor with a similar product.
Failure to comply with certain regulations may result in significant financial penalties, debarment
from government contracts and/or reputational damage and impact our business strategy.
rate fluctuations have and could continue to have a material impact on the reported results.
The Group is exposed to three types of currency risk: transaction risk, translation risk and risk
that when a business that is predominantly based in a foreign currency is sold, it is sold in that
foreign currency. The Group’s reported results will fluctuate as average exchange rates change.
The Group’s reported net assets will fluctuate as the year-end exchange rate changes.
net liabilities of £218.5 million on an accounting basis. Changes in discount rates, inflation,
asset values or mortality assumptions could lead to a materially higher deficit. For example,
the cost of a buyout on a discontinued basis uses more conservative assumptions and is likely
to be significantly higher than the accounting deficit. In addition, there is a risk that the plan’s
assets, such as investments in equity and debt securities, will not be sufficient to cover the
value of those benefits. The implications of a higher pension deficit include a direct impact on
valuation, credit rating and potential additional funding requirements at subsequent triennial
reviews. In the event of a major disposal, that generates significant cash proceeds which are
returned to the shareholders, the Group may be required to make additional cash payments
to the plans or provide additional security.
The Group has £571.8 million of gross debt as at 31 December 2014. The ability to refinance
its borrowings in the bank or capital markets is dependent on market conditions and the proper
functioning of financial markets. Furthermore, in line with the Group’s strategy, investment is
made in the businesses (capital expenditure in excess of depreciation) and there is a requirement
to assess liquidity and headroom when new businesses are acquired and the Group may be
unable to refinance its debt when it falls due.
Liquidity
• Regular monitoring of legal and regulatory matters at both a
Group and business unit level. Consultation with external
advisers where necessary.
Executive
management(1)
Buy
Improve
Sell
• Development of suitable corporate governance and compliance
procedures both at a Group and business unit level.
• Protection of rights over trademarks, copyright, patents,
designs and trade secrets, where necessary.
• The Group policy is to protect against the majority of foreign
exchange risk which affects cash, by hedging such risks with
financial instruments.
Executive
management(1)
• Protection against specific transaction risks is taken by the
Board on a case-by-case basis.
Buy
Improve
Sell
• Each of the Group’s key funded pension plans are now closed
to new entrants and future service accrual. Long-term funding
arrangements are agreed with each of these plans and reviewed
following completion of actuarial valuations. Other pension plans
exist within the Group but these are largely unfunded plans
whereby funding plans are not required and benefit obligations
are paid when due.
• Active management of pension plan assets.
Executive
management(1)
Buy
Improve
Sell
• Ensure the Company has adequate resources to meet its
liabilities by reviewing its quarterly forecasts, ensuring there
is sufficient headroom within committed bank facilities to
cope with market volatility.
Executive
management(1)
Buy
Improve
Sell
(1) Comprises executive Directors and Melrose senior management.
Risk trend
Increasing
Constant
Decreasing
Melrose Industries PLCAnnual Report 2014Performance ReviewPerformance Review 42
Finance Director’s review
Geoffrey Martin
Group Finance Director
The year to 31 December 2014 included the
disposal of Bridon, the remaining business
in the Lifting division, which in the prior year
contributed 15% towards continuing Group
revenue and 12% to continuing Group headline
operating profit. Consequently, in accordance
with IFRS 5, the trading results of Bridon up
to the date of disposal have been shown as
discontinued in both years.
The remaining continuing operations consist of the three Elster
businesses, Gas, Electricity and Water, and the only remaining
FKI business, Brush, which is shown within the Energy division.
The discontinued operations in 2013 also include the results,
up until the date of their disposal, of the Marelli business,
previously shown within the Energy division, the Crosby and
Acco businesses, previously shown within the Lifting division,
and the Truth and Harris businesses, previously shown within
the Other Industrial division.
Group trading results - continuing operations
To help understand the results of the continuing operations the
term ‘headline’ has been used. This refers to results calculated
before exceptional costs, exceptional income and intangible
asset amortisation as this is considered by the Melrose Board
to be the best measure of performance.
For the year ended 31 December 2014 the Group achieved
revenue from continuing operations of £1,377.5 million (2013:
£1,466.4 million), flat at constant currency, and headline operating
profit of £246.0 million (2013: £240.0 million), an increase of 11%
at constant currency. The Group results have been adversely
impacted by movements in foreign exchange rates due to the
strengthening of Sterling compared to many foreign currencies.
At actual exchange rates Group revenue was down 6% whilst
Group headline operating profit was up 3%. The Group headline
operating profit margin (defined as the percentage of headline
operating profit to revenue) increased from 16.4% in 2013
to 17.9% in 2014.
After exceptional costs, exceptional income and intangible
asset amortisation, Group operating profit was £162.4 million
(2013: £192.5 million) and profit before tax was £128.9 million
(2013: £144.0 million).
Trading results by division–continuing operations
A split of revenue, headline operating profit and headline operating
profit margin for 2014 and 2013 is as follows:
2014
Headline
operating
profit/
(loss)
£m
205.5
65.4
2014
Headline
operating
profit
margin
%
2013
Revenue
£m
19.6% 1,116.3
350.1
20.0%
2013
Headline
operating
profit/
(loss)
£m
194.2
73.1
2013
Headline
operating
profit
margin
%
17.4%
20.9%
2014
Revenue
£m
1,050.2
327.3
–
–
(13.9)
(11.0)
n/a
n/a
–
–
(14.3)
(13.0)
n/a
n/a
Elster
Energy
Central
corporate
Central
LTIPs(1)
Continuing
Group
1,377.5
246.0
17.9% 1,466.4
240.0
16.4%
(1) Long Term Incentive Plans.
The performance of each of the trading divisions is discussed
in detail in the Chief Executive’s review.
Central costs comprise £13.9 million (2013: £14.3 million) of
Melrose corporate costs and a Long Term Incentive Plan (“LTIP”)
accrual of £11.0 million (2013: £13.0 million). The LTIP accrual
includes an amount of £4.0 million in respect of the Melrose
share-based Incentive Plan (2013: £4.0 million), and a charge
of £7.0 million (2013: £9.0 million) for the cash-based divisional
management incentive plans. The disposals of Crosby, late in
2013, and Bridon in 2014, contributed to the reduced divisional
LTIP charge in the year.
Return of Capital
Consistent with the Group strategy of returning to shareholders
a large part of any proceeds from the disposal of businesses,
£595.3 million was returned to shareholders on 28 February 2014
following the sale of Crosby a few months earlier. This return
was made via a redeemable share scheme alongside a share
consolidation which reduced the number of Ordinary Shares by
a factor of 11 for 13, or 15%, from 1,266.6 million to 1,071.8 million.
In addition, Melrose announced on 3 February 2015 a further
Return of Capital of £200.4 million following the disposal of
Bridon. This was subsequently approved by shareholders on
20 February 2015. This return will be made on 16 March 2015
via a redeemable share scheme alongside a share consolidation
which will reduce the number of shares by a factor of 13 for 14,
or 7%, from 1,071.8 million to 995.2 million.
Melrose Industries PLCAnnual Report 2014Performance Review 43
“ Since acquiring FKI for just under £1 billion in
2008 the FKI businesses have generated £2 billion
of cash from trading and disposal proceeds.
Brush, the largest of the FKI businesses, is still
owned by the Melrose Group.”
Elster – headline(1) operating profit margin
19.6%
2013
2014
17.4%
19.6%
Group – headline(1) operating profit margin
17.9%
2013
2014
16.4%(2)
17.9%
(1) Before exceptional costs, exceptional income and
intangible asset amortisation.
(2) Restated to include the results of Bridon within
discontinued operations.
Finance costs and income
The net finance cost in 2014 was £33.5 million (2013: £48.5 million).
Prior to the Return of Capital made on 28 February 2014 and
following the disposal of Bridon on 12 November 2014, the
Group’s net debt and bank leverage were lower than usual levels.
This, along with the renegotiation of the Group’s financing facilities
on 11 July 2014 (discussed later in this review), contributed to net
interest on external bank loans, overdrafts and cash balances
being lower in the year at £20.3 million (2013: £34.3 million). In
2014 the Group had a blended interest rate of 2.4% (2013: 3.1%).
Melrose uses interest rate swaps to fix the majority of the interest
rate exposure on its debt. More detail on these swaps is given
in the finance cost risk management section of this review.
Also included in net finance cost is a £4.0 million (2013: £4.7
million) amortisation charge relating to the arrangement costs
of raising the bank facility, a net interest cost on net pension
liabilities of £7.8 million (2013: £8.9 million) and a charge for the
unwinding of discounts on long-term provisions of £1.4 million
(2013: £0.6 million).
Tax
The headline Income Statement tax rate was 27.0% (2013: 26.4%).
The headline tax rate for the Group is lower than the weighted
blend of the statutory tax rates around the world because of the
recognition of deferred tax assets that were not previously thought
to be recoverable. There is also a small benefit from the release
of provisions previously held against potential overseas tax audits
which have been successfully resolved.
The tax rate after exceptional items and intangible asset
amortisation is 32.4% (2013: 28.9%). The main reason for this
being higher than the headline rate is the £3.9 million (2013:
£8.1 million) exceptional tax charge on Group reorganisations.
The cash tax rate on headline continuing operations of 16.5%
(2013: 22.5%) is below the headline Income Statement rate
due to the utilisation of pre-existing Melrose Group tax losses
and other deferred tax assets.
The deferred tax liability in respect of intangible assets,
of £259.8 million (2013: £287.4 million), is not expected to
represent a future cash tax payment and will unwind as the
customer relationship, brand name and intellectual property
intangible assets are amortised.
Melrose Industries PLCAnnual Report 2014Performance ReviewPerformance Review 44
Finance Director’s review continued
The total amount of tax losses in the Group has decreased during
the year due to their utilisation against taxable profits and also as a
result of some utilisation against tax audits in respect of prior years.
The total gross tax losses within the Group are shown below:
Tax
losses
UK
Germany
Rest of World
Total 2014
Total 2013
Recognised
£m
Unrecognised
£m
14.0
20.0
6.9
40.9
42.0
115.1
–
27.6
142.7
175.1
Total
£m
129.1
20.0
34.5
183.6
217.1
Exceptional items and amortisation of intangible assets
In the year ended 31 December 2014 the continuing Group
incurred exceptional costs of £34.3 million (2013: £19.3 million).
These included £30.6 million (2013: £18.8 million) of restructuring
costs which mainly relate to the Elster businesses, notably in Gas
where the most significant proportion of restructuring cost relates
to the closure of the Essen plant in Belgium and relocation of its
Integrated Metering Solutions business, which builds gas metering
stations, to Saudi Arabia and Malaysia. This decision was taken
so as to move production closer to the major gas metering station
markets and it is also expected to deliver cost savings in the future
as a result. Additionally, restructuring projects were undertaken in
the Gas business in Mainz, to move research and development and
the production of ultrasonic meters to the German plant in the year.
Also within the Gas business, following the acquisition of Eclipse,
Inc. (“Eclipse”) late in 2014, immediate severance programmes
were announced in the US business as part of
the planned synergies.
The restructuring costs incurred in 2013 were proportionally
weighted to the Elster Electricity and Water businesses. Some
restructuring costs have been incurred within these businesses
in 2014 within the European operations following the large
restructure programmes performed in the North America
businesses in 2012 and 2013.
In addition, £3.7 million (2013: £0.5 million) of acquisition and
disposal costs were incurred, mostly relating to the acquisition
of Eclipse.
The Group benefited from exceptional income of £5.4 million
(2013: £28.9 million) as a result of the release of a surplus
provision following the successful resolution of a property
lease dispute. The exceptional income in 2013 related to the
successful resolution of a number of warranty issues, inherited
with the acquisition of Elster, for less expense than expected.
In addition, intangible asset amortisation of £54.7 million
(2013: £57.1 million) was charged. A net tax credit on these
exceptional costs, exceptional income and intangible asset
amortisation, of £19.5 million (2013: £17.0 million), and an
exceptional tax charge of £3.9 million (2013: £8.1 million)
has been taken in the year.
Overall, the net exceptional items and intangible asset
amortisation, after tax, shows a net expense of £68.0 million
(2013: £38.6 million).
Earnings per share (“EPS”)
The Melrose Board considers that headline diluted EPS,
calculated using the headline continuing profit attributable
to shareholders and the number of shares in issue following
the Return of Capital in March 2015, best demonstrates
the performance in 2014 because it matches the size of
the continuing Group with the ongoing number of shares.
On this basis the EPS in 2014 was 15.3p.
In accordance with IAS 33, two sets of basic and diluted EPS
numbers are disclosed on the face of the Income Statement,
one for continuing operations and one that also includes
discontinued operations. In the year ended 31 December 2014
the diluted EPS for continuing operations was 7.8p (2013: 7.8p).
For continuing and discontinued operations the diluted EPS for
2014 was 17.5p (2013: 43.7p).
Acquisition during the year
On 31 October 2014 Elster Gas acquired Eclipse, a manufacturer
of gas combustion components and systems for industrial heating
and drying applications, headquartered in Rockford, Illinois (USA),
for cash consideration of £97.6 million. The acquisition was funded
through the existing Group debt facilities and in the two months
of ownership Eclipse has contributed £12.2 million to revenue and
£1.4 million to headline operating profit.
Disposal during the year
On 12 November 2014 the disposal of Bridon was completed for
a gross cash consideration of £374.8 million less £9.9 million of
costs. The profit on disposal of this business was £96.9 million.
Bridon was acquired with FKI in July 2008 and contributed
£208.0 million of revenue and £22.6 million of headline operating
profit up to the date it was disposed in 2014, and is shown within
discontinued operations.
Since acquiring FKI for just under £1 billion in 2008 the FKI
businesses have generated £2 billion of cash from trading and
disposal proceeds. Brush, the largest of the FKI businesses,
is still owned by the Melrose Group.
Melrose Industries PLCAnnual Report 2014Performance Review 45
Cash generation and management
The cash generation performance in 2014 and the movement
in net debt are summarised as follows:
Capital expenditure
By business, the net capital expenditure and depreciation
in the year was as follows:
Headline operating profit
Depreciation and amortisation of computer software
and development costs
Working capital movement
Headline operating cash flow (pre capex)
Headline EBITDA conversion to cash (pre capex) %
Net capital expenditure
Net interest and net tax paid
Defined benefit pension contributions
Other (including discontinued operations)
Cash inflow from trading (after all costs including tax)
2014
£m
246.0
31.8
(28.5)
249.3
90%
(58.3)
(59.3)
(31.1)
(30.2)
70.4
Net capital expenditure £m
Depreciation £m
Net capital expenditure to
depreciation ratio (full year)
Melrose 10 year (2005–2014)
average annual multiple
Elster
Energy
Central
28.1
24.6
30.0
6.3
0.2
0.9
Total
58.3
31.8
1.1x
4.8x
0.2x
1.8x
1.3x
The net capital spend to depreciation ratio was 1.8x in 2014 (2013:
1.1x). Within this, the ratio in the Brush business was 4.8x (2013:
2.8x) which included the continuation of the significant investment
in a new factory in the Shanghai area of China. The net capital
spend to depreciation ratio in Elster was 1.1x (2013: 0.7x). Elster
is inherently a less capital intensive business than Energy.
The conversion of headline operating profit (before depreciation
and amortisation) into cash was 90% in 2014 (2013: 96%). Within
this strong level of cash generation Elster achieved 94% and
Brush 83%.
The movement in net debt in the year is reconciled as follows:
Assets and liabilities
The summary of Melrose Group assets and liabilities are
shown below:
Opening net debt
Cash inflow from trading (after all costs including tax)
Net cash flow from acquisitions and disposals(1)
Amounts paid to shareholders (Return of Capital
and dividends)
Foreign exchange and other
Closing net debt
2014
£m
(140.8)
70.4
253.3
(678.9)
(5.3)
(501.3)
(1) Gross disposal proceeds of £374.8 million, less costs paid of £8.5 million and cash
disposed of £14.6 million, net of acquisition of subsidiaries of £97.6 million, cash
acquired of £1.5 million and costs of acquisition of £2.3 million.
The Balance Sheet leverage (calculated as net debt divided
by continuing headline operating profit before depreciation and
amortisation) was 1.8x at 31 December 2014 (31 December 2013:
0.4x). Net debt will increase in March 2015 following the recently
approved Return of Capital of £200.4 million. Allowing for this, the
proforma leverage at 31 December 2014 would have been 2.5x,
which is considered to be a better reflection of the ongoing
leverage level for the Group.
Fixed assets (including computer
software and development costs)
Intangible assets
Goodwill
Net working capital
Retirement benefit obligations
Provisions
Deferred tax and current tax
Other(1)
Total
2014
£m
2013
£m
224.2
859.8
1,520.9
106.4
(218.5)
(177.0)
(247.4)
6.6
2,075.0
265.3
985.9
1,602.0
126.9
(219.3)
(177.8)
(272.9)
18.6
2,328.7
(1) Includes interests in joint ventures and derivative financial instruments
These assets and liabilities are funded by:
Net debt
Equity
Total
2014
£m
(501.3)
(1,573.7)
(2,075.0)
2013
£m
(140.8)
(2,187.9)
(2,328.7)
The movements in net debt and equity primarily relate to the
return of £595.3 million to shareholders and the disposal of
Bridon in the year.
Melrose Industries PLCAnnual Report 2014Performance ReviewPerformance Review 46
Finance Director’s review continued
Goodwill, intangible assets and impairment review
The total value of goodwill as at 31 December 2014 was £1,520.9
million (31 December 2013: £1,602.0 million) and intangible
assets was £859.8 million (31 December 2013: £985.9 million).
These balances reduced as a result of the disposal of Bridon in
the year and the split is as follows:
Goodwill
Intangible assets
Total goodwill
and intangible assets
Elster
£m
1,319.2
776.2
Energy
£m
201.7
83.6
Total
£m
1,520.9
859.8
2,095.4
285.3
2,380.7
The goodwill and intangible assets have been tested for
impairment as at 31 December 2014. The Board is comfortable
that no impairment is required.
Provisions
Total provisions at 31 December 2014 were £177.0 million
(31 December 2013: £177.8 million). In total, £49.6 million
of cash was spent on the utilisation of provisions, of which
£38.7 million related to restructuring and warranty. The
following table details the movement in provisions in the year:
At 31 December 2013
Cash spent on the utilisation of provisions
Acquisition of Eclipse
Net charge to headline operating profit
Net charge to exceptional items
Disposal of Bridon
Other (including foreign exchange)
At 31 December 2014
Total
£m
177.8
(49.6)
9.2
15.0
26.2
(1.4)
(0.2)
177.0
The net charge to headline operating profit in the year was £15.0
million which included the £7.0 million divisional LTIP charge along
with £7.8 million of normal net warranty expenses in the year.
The net charge to exceptional items of £26.2 million included
£31.6 million relating to restructuring projects, most of which is
expected to be spent in 2015. This amount has been partly offset
by the exceptional income release of £5.4 million relating to the
successful resolution of a historical property lease dispute.
The other movements on provisions in the period relate to the net
effect of the unwind of discounting on long-term provisions and
the relevant foreign exchange impact.
Pensions
The Group has a number of defined benefit and defined
contribution pension plans.
At 31 December 2014 the FKI UK Pension Plans, which comprise
two separate independent plans, the FKI UK Pension Plan and the
Brush Group (2013) Pension Plan, are significant in size and had
a combined net deficit at 31 December 2014 of £82.7 million
(31 December 2013: £100.2 million). Plan assets were £695.6
million (31 December 2013: £619.5 million) and plan liabilities
were £778.3 million (31 December 2013: £719.7 million).
The other UK defined benefit pension plan of significant size in
the Group is the McKechnie UK Pension Plan with an accounting
surplus at 31 December 2014 of £1.6 million (31 December 2013:
deficit of £0.5 million). The plan assets at 31 December 2014 were
£209.9 million (31 December 2013: £182.5 million) and liabilities
were £208.3 million (31 December 2013: £183.0 million).
These three UK plans are closed both to new members and
current members’ future service.
A US defined benefit plan for FKI also exists. At 31 December
2014 the FKI US plan had assets of £176.5 million (31 December
2013: £177.6 million), liabilities of £195.2 million (31 December
2013: £183.0 million) and consequently a net deficit of £18.7
million (31 December 2013: £5.4 million). This plan is closed to
new members and to current members’ future service.
During the year a decision was made to offer lump sums to
terminated vested participants of the FKI US Plan whose benefit
had a current lump sum of US $65,000 or less. Approximately
60% of those offered accepted, resulting in a reduction in gross
liabilities of £23 million, and a benefit of £3.5 million to the overall
pension charge for the year, shown within central costs.
The Elster businesses also operate a number of defined benefit
plans, most of which are unfunded, with a net accounting deficit
at 31 December 2014 of £118.7 million (31 December 2013:
£101.5 million). Within this, 79%, or £94.3 million (31 December
2013: 82%), related to unfunded German defined benefit plans
and early retirement programmes.
During the year the Group terminated certain Elster US unfunded
retiree medical and welfare plans, reducing gross liabilities by
£4.3 million, which benefited the overall pension charge in the
year within the Gas division.
Melrose Industries PLCAnnual Report 2014Performance Review A summary of key assumptions used for all of the UK plans is
shown below:
Discount rate
Inflation
2014 Assumptions
2013 Assumptions
%
3.50
2.10
%
4.40
3.40
For the most significant plans (the FKI UK Pension Plans),
a male aged 65 in 2014 is expected to live for a further 21.9 years
(31 December 2013: 21.9 years) whilst a woman aged 65 would
live for a further 24.2 years (31 December 2013: 24.1 years).
This is assumed to increase by 1.3 years (6%) for a male and
1.5 years (6%) for a female aged 65 in 2034.
It is noted that a 0.1 percentage point decrease in the discount
rate would increase the pension liabilities on the UK pension
plans by £15.6 million, or 2%, and a 0.1 percentage point increase
to inflation would increase the liabilities on these plans by
£11.1 million, or 1%. Furthermore, an increase by one year in
the expected life of a 65 year old member would increase the
pension liabilities on these plans by £36.2 million, or 4%.
The long-term strategy for the UK plans is to concentrate on the
cash flows required to fund the liabilities as they fall due, whether
that is within the timescales of Melrose ownership or beyond.
The pension plan cash flows extend many years into the future
and the ultimate objective is that the total pool of assets derived
from future Company contributions and the investment strategy
allow each cash payment to members to be made when due.
In 2014 the Melrose Group made annual contributions of £18.5
million in total (2013: £18.5 million) to the two remaining UK plans
within the FKI businesses and £5.2 million (2013: £5.2 million) to
the McKechnie UK Pension Plan. In addition, £8.1 million was
paid into the disposed Bridon Group (2013) Pension Plan.
In 2015 the Group expects to contribute £20.0 million to the FKI
UK Plans and £5.2 million to the McKechnie UK Pension Plan.
The Melrose Board recognises that pension plan liabilities need
to exit the Group as businesses are sold. However, this can be
done at a time which is commercially sensible.
Risk management
The financial risks the Group faces have been considered and
policies have been implemented to best deal with each risk.
The most significant financial risks are considered to be liquidity
risk, finance cost risk, exchange rate risk, contract and warranty
risk and commodity cost risk. These are discussed in turn below.
47
Liquidity risk management
The Group’s net debt position at 31 December 2014 was £501.3
million compared to £140.8 million a year earlier. The level of net
debt and leverage at both year ends was lower than the normal
level because disposals had been completed during the year but
the associated returns to shareholders did not occur until after
the year end.
On 11 July 2014 the Group’s financing facilities were renegotiated
to improve the existing terms and to extend the maturity date from
29 June 2017 to 11 July 2019.
The Group previously had a committed term loan held in two
tranches of £180 million and US $290 million. As part of the
renegotiation the US $290 million term loan tranche was
converted into a revolving credit facility and now exists along
with the £741.5 million and €300 million revolving credit facilities
that were already in place. The remaining Sterling term loan is
subject to mandatory 5% repayments on 11 July 2017, 11 July
2018 and 11 January 2019.
The banking facility continues to have two financial covenants,
a net debt to headline EBITDA covenant (debt cover covenant)
and an interest cover covenant, both of which are tested half
yearly at June and December and both of which afforded
comfortable headroom at 31 December 2014.
The first of these covenants, which calculates net debt at average
rates during the year, is set at 3.5x leverage or lower for each of
the half yearly measurement dates for the remainder of the term.
At 31 December 2014 it was 1.7x (31 December 2013: 0.5x), but
it would have been 2.5x on a proforma basis when allowing for
the Return of Capital that will occur in March 2015.
The interest cover covenant is unchanged, at 4.0x or higher
throughout the life of the facility. At 31 December 2014 it was
15.3x (31 December 2013: 11.8x).
The drawdown of the facilities are made in the core currencies
of the Group, being US Dollar, Euro and Sterling and in
proportions to protect the Group as efficiently as possible
from currency fluctuations on net assets and profit.
In addition, there are a number of uncommitted overdraft,
guarantee and borrowing facilities made available to the Group.
These uncommitted facilities are lightly used.
Cash, deposits and marketable securities amounted to £70.5
million at 31 December 2014 (31 December 2013: £200.4 million)
and are offset against gross debt of £571.8 million (31 December
2013: £341.2 million) to arrive at the net debt position of £501.3
million (31 December 2013: £140.8 million). The combination of
this cash and the size of the debt facilities allows the Directors
to consider that the Group has sufficient access to liquidity for
its current needs.
The Board considers carefully its counterparty risk with banks
when deciding where to place the cash on deposit held within
the Melrose Group.
Melrose Industries PLCAnnual Report 2014Performance ReviewPerformance Review 48
Finance Director’s review continued
Finance cost risk management
The Group remained in a net debt position at 31 December 2014.
Drawdowns under the amended facilities bear interest at
interbank rates of interest plus a margin. The margin ranges
between 0.75% and 1.90% (previously 1.40% to 2.65%),
determined by reference to the Group’s debt cover ratio.
At the beginning of 2014 the Group protected just under 80%
of gross borrowings from exposure to changes in interest rates
by holding a number of interest rate swaps to fix the cost on
US $246.8 million, £336.8 million and €200.0 million of debt.
During the year, following the disposal of Bridon, a €50.0 million
interest rate swap arrangement was closed out. This left swap
arrangements in place fixing the interest rate cost on US $246.8
million, £336.8 million and €150.0 million of gross borrowings at
31 December 2014.
Subsequent to the Balance Sheet date, to ensure that the Group
protected between 70% and 80% of gross borrowings from
exposure to changes in interest rates following the Return of
Capital in March 2015, further swap arrangements have been
closed out and new arrangements placed. The new swap
arrangements provide protection through to July 2019 and require
the Group to pay, annually in arrears, a weighted blended fixed
finance cost of 0.92% (31 December 2013: 0.70%) for US Dollar
swaps, 0.06% (31 December 2013: 0.72%) on Euro swaps and
1.05% (31 December 2013: 0.91%) on Sterling swaps, plus the
relevant bank margin which is currently 1.30% (31 December
2013: 2.25%).
Exchange rate risk management
The Group trades in various countries around the world and is
exposed to many different foreign currencies. The Group therefore
carries an exchange rate risk that can be categorised into three
types as described below. The Board policy is designed to protect
against the majority of the cash risks but not the non-cash risks.
The most common cash risk is the transaction risk the Group
takes when it invoices a sale in a different currency to the one
in which its cost of sale is incurred. This is addressed by taking
out forward cover against approximately 60% to 80% of the
anticipated cash flows over the following 12 months, placed on
a rolling quarterly basis and for 100% of each material contract.
This does not eliminate the cash risk but does bring some
certainty to it.
Exchange rates used in the year
US Dollar
2014
2013
Euro
2014
2013
12 month
average rate
1.65
1.56
1.24
1.18
Closing
rate
1.56
1.66
1.29
1.20
The effect on the key headline numbers in 2014 for the continuing
Group due to the translation movement of exchange rates from
2013 to 2014 is shown below. The table illustrates the translation
movement in revenue and headline operating profit if the 2013
average exchange rates had been used to calculate the 2014
results rather than the 2014 average exchange rates. In particular,
the table illustrates an 8% headwind to headline operating profit
in the year from the movement in foreign exchange rates.
The translation difference in 2014
Revenue decrease
Headline operating profit decrease
£m
90.4
19.5
Given the Group’s largest exchange rate exposure is to the Euro,
which makes up 40% of Group profits in 2014, current exchange
rates, including the recent weakness of the Euro, mean there is
a 5% headwind from currency into 2015.
For reference in respect of the enlarged Group, an indication
of the short-term exchange rate risk, which shows both translation
exchange risk and unhedged transaction exchange rate risk,
is as follows:
Sensitivity of profit to translation
and unhedged transaction exchange risk
For every 10 cent strengthening of the US Dollar
against Sterling
For every 10 cent strengthening of the Euro
against Sterling
Increase in headline
operating profit
£m
6.2
8.1
The long-term exchange rate risk, which ignores any hedging
instruments, is as follows:
Sensitivity of profit to translation
and full transaction exchange rate risk
For every 10 cent strengthening of the US Dollar
against Sterling
For every 10 cent strengthening of the Euro
against Sterling
Increase in headline
operating profit
£m
8.4
4.3
Melrose Industries PLCAnnual Report 2014Performance Review 49
No specific exchange instruments are used to protect against
the translation risk because it is a non-cash risk to the Group.
However, when the Group has net debt, the hedge of having
a multi-currency debt facility funding these foreign currency
trading units protects against some of the Balance Sheet and
banking covenant translation risk.
Lastly, potentially the most significant exchange risk that the
Group has arises when a business that is predominantly based
in a foreign currency is sold. The proceeds for those businesses
may be received in a foreign currency and therefore an exchange
risk might arise if foreign currency proceeds are converted
back to Sterling, for instance to pay a dividend to shareholders.
Protection against this risk is considered on a case-by-case basis.
Contract and warranty risk management
The financial risks connected with contracts and warranties,
which include the consideration of warranty terms, duration and
any other commercial or legal terms, are considered carefully by
Melrose before being entered into.
Commodity cost risk management
As Melrose owns engineering businesses across various
sectors the cumulative expenditure on commodities is important.
The Group addresses the risk of base commodity costs
increasing by, wherever possible, passing on the cost increases
to customers or by having suitable purchase agreements with
its suppliers which sometimes fix the price over some months
into the future. These risks are minimised through sourcing
policies (including the use of multiple sources, where possible)
and procurement contracts where prices are agreed for up to
one year to limit exposure to price volatility.
Going concern
The Group’s business activities, together with the factors likely
to affect its future development, performance and position, are
set out in the Strategic Report and Performance Review sections
of the Annual Report. In addition, the consolidated financial
statements, and in particular notes 19 and 24, include details of
the Group’s borrowing facilities and hedging activities along with
the processes for managing its exposures to credit risk, capital
risk, liquidity risk, interest risk, foreign currency risk and
commodity cost risk.
The Group has considerable financial resources and a breadth
of end markets, both by sector and geographically, giving
some balance to the various market and economic cycle risks.
Furthermore, the Group has a consistent cash generation record,
and as a consequence, the Directors believe that the Group is
well placed to manage its business risks successfully despite
the current uncertain economic outlook.
After making enquiries, the Directors have a reasonable
expectation that the Group has adequate resources to continue
in operational existence for the foreseeable future. For this reason,
they continue to adopt the going concern basis in preparing the
financial statements.
Geoffrey Martin
Group Finance Director
4 March 2015
Melrose Industries PLCAnnual Report 2014Performance ReviewPerformance Review 5050
Corporate Social Responsibility
Contents
1. Employment policies
2. Employee involvement, consultation and development
3. Employee initiatives
4. Gender diversity
5. Health and safety
6. Health and safety initiatives
7. The environment
8. Environmental initiatives
9. Greenhouse gas emissions
10. Energy Savings Opportunity Scheme
11. Supply chain assurance
12. Human rights and ethical standards
Internal communication
initiatives foster a culture
of openness.
Melrose Industries PLCAnnual Report 2014Performance Review 51
1. Employment policies
The Group recognises its responsibilities
for the fair treatment of all its current and
potential employees in accordance with
legislation applicable to the territories
within which it operates, together with
relevant guidance on good practice where
appropriate. Due to the diverse nature of the
Group’s activities, businesses are required
to manage their employment matters on a
decentralised basis; therefore, responsibility
for the adoption of employment policies and
practices sits at a local business unit level.
This position ensures that rigorous and
targeted policies and procedures are
implemented that meet both site and local
regulatory requirements, taking into account
the size and nature of the businesses.
As part of this decentralised approach,
each business is responsible for setting
and measuring its own employment and
employee-related KPIs and, as such, these
vary throughout the Group. However,
such measurements will generally include
absenteeism, punctuality, headcount and
employee relations issues.
Any concerns or adverse trends are
responded to in a timely manner.
Furthermore, as a Group-wide policy
and so far as particular disabilities permit,
the Company and each of its businesses
will, where practicable, give employees
disabled during their period of employment
continued employment in the same job,
or a suitable alternative job, together with
appropriate training and/or re-training.
Equal opportunities for appropriate
training, career development and
promotion are also available to all
employees within the Group regardless
of any physical disability, gender, religion,
race, nationality, sexual orientation or age.
Applications for employment by disabled
persons are always fully and fairly
considered by the Group and are
considered on merit, with regard only
to the job-specific requirements and the
relevant applicant’s aptitude and ability
to carry out the role. Where reasonable
to do so, arrangements wll be made to
enable disabled persons to carry out a
specific role. It is the policy of the Group
that in recruitment, training, career
development and promotion, the treatment
of disabled persons should, as far as
possible, be identical to that of other
employees. Melrose is proud to be a
member of the Business Disability Forum,
a not-for-profit member organisation that
World class manufacturing
facilities and engineering.
also used to communicate and engage
with employees, and to solicit their
feedback on issues of concern to them
as employees.
Extensive training is available to all staff
and is actively encouraged to ensure
that a high standard of skill is maintained
across the Group. Cross-training
programmes are also in place at a number
of the Group’s businesses. The importance
of training extends beyond on-the-job
training and also focuses on enhancing
personal development. Apprenticeship
programmes are in place, which help
to assist with succession planning in
locations where there is an ageing
workforce. Employees are encouraged
to think in an innovative manner across
the Group and have regard for both
financial and economic factors affecting
the Group.
24%
of Melrose Group employees
are women
works with the business community to
understand the changes required in the
workplace in order that disabled people
are treated fairly so that they can
contribute to business success, to
society and to economic growth.
The Group regards employee training and
advancement as an essential element of
industrial relations.
2. Employee involvement,
consultation and development
The Group attaches great importance
to good labour relations, employee
engagement and employee development.
The diverse nature of the Group’s
activities places the responsibility for
the implementation and management
of employment practices with local
management, in a manner appropriate
to each business.
A culture of clear communication and
employee consultation and engagement
is inherent in the Group’s businesses.
Employee briefing sessions with employee
representatives are held on a regular basis
to communicate strategy, key changes,
financial results, achievements and other
important issues to employees, and
receive feedback from them on these
issues. Regular appraisals, employee
surveys, notice boards, team meetings,
suggestion boxes and newsletters are
Melrose Industries PLCAnnual Report 2014Performance ReviewPerformance Review 52
Corporate Social Responsibility
continued
Operators in Lotte, Germany,
assembling precision electronic
measurement devices for Elster
Smart gas meters.
3. Employee initiatives
During 2014, the Group’s businesses
implemented a range of employee-related
initiatives. Some of these are listed below:
• Recognising that leadership is critical to
the success of its business, Brush UK
has developed and implemented a
Leadership Development Programme
which has external accreditation to the
Institute of Leadership & Management.
It is structured to allow talent to develop
and grow within the business. The
programme has been designed to
reflect the development needs of the
organisation and through the Problem
Solving Module participants identify a
business improvement opportunity which
creates a return on investment in the
company. Participants present their
opportunities to the Brush Executive
to underline how they have applied their
learning in the operational environment.
• The Brush Group launched a Customer
Connection Programme in 2014
supporting its global vision statement
‘The Vital Few’. The objective of the
programme is to develop the employees’
ability to exceed the expectations of both
the internal and external customers and
maximise these relationships. During
the programme, employees identify a
Customer Innovation Project which
delivers a return on investment in the
company and is presented to the Brush
Executive at the end of the programme.
• In 2014, Brush UK launched a new
Graduate Scheme, illustrating its
commitment to recruiting bright minds
and fresh talent for the future. The two-year
graduate programme includes an
overseas placement so that the graduates
gain international experience within the
organisation preparing them for a
successful future with Brush. To ensure
the success of this programme, Brush
representatives attended a number of
job fairs to promote the programme
and discuss it with potential graduates.
This included the Graduate Engineer
and Science Show in London. Brush has
also been active in the local community,
attending careers fairs at local schools
encouraging young people to consider
engineering and manufacturing as a
career choice. Such events also promote
the employer branding of Brush in a wider
sphere as an employer of choice.
• Brush continues to value the contribution
that apprentices bring to the organisation
and another 10 apprentices joined Brush
UK in 2014 bringing the total current
number of apprentices to 56 at various
stages of their four year apprenticeship.
The apprentice scheme is continually
developing and evolving to bring together
a blend of technical training, academic
learning and personal development to
create a future talent pipeline for Brush.
• Brush takes the health and well-being
of its employees very seriously and has
continued to develop and enhance its
Occupational Health Service, which is
available to employees five days a week.
The service can make referrals to
doctors, physiotherapists or counselling
services as required to ensure that the
business supports its employees through
any periods of absence or illness. Health
promotion is a key feature of the service
that is continually developing through
awareness campaigns, which in turn has
a positive impact on both the employee
and the business.
• Elster Electricity introduced new internal
communication initiatives in 2014; a further
step in fostering a culture of clear and
open communication. In September 2014,
the first global webcast (Electricity*LIVE*)
took place, hosted by the global
management team. The first global
newsletter, Electricity*CurrentAffairs*,
containing contributions from employees
worldwide, was distributed in December
2014. Specialised newsletters are also
issued bi-monthly, providing employees
with important business facts and news
regarding the software business.
• Elster Electricity’s 2014 Global Leadership
Development Programme involved
two strategy workshops, two training
sessions on change management and
a four-day training session on leadership
for 42 employees.
• Two Elster Gas leadership conferences
were held in 2014. These were attended
by senior management, managing
directors and other executives from
across the Elster Gas businesses.
The conferences involved knowledge
sharing and discussions on business
priorities and strategic targets.
• Elster Gas conducted their first international
employee engagement survey in 2014
covering the major parts of the business.
Teams were set up to work on the analysis
and evaluation of the survey results and
the development of action plans, in order
to improve employee engagement.
• Elster Water launched an improved
performance management system in
2014 to ensure that all employees are
aware of the business objectives and
how they individually contribute to the
success of the business.
Melrose Industries PLCAnnual Report 2014Performance Review 53
5. Health and safety
The Directors of the Company are
committed to minimising the health and
safety risks that each of the Group’s
employees are exposed to by promoting
the effective use and management of
business specific policies and procedures.
The Group has a policy to ensure that the
Directors are made aware of any serious
health and safety incidents, wherever they
occur in the world, without delay, to ensure
that suitable investigations and corrective
action can be organised. Current events and
issues relating to health and safety matters
are also discussed within the Group at
quarterly Board meetings of the Company.
Each business is responsible for setting
its own detailed arrangements concerning
health and safety policies and procedures,
in accordance with local health and safety
legislation. As a general rule, businesses
strive to achieve best practice, in terms of
what is suitable and practical for the size
and nature of their operations. Defined and
business specific health and safety key
performance indicators are also used
within the Group’s businesses.
Reports detailing business unit
performances in relation to three
health and safety KPIs (Major Accident
Frequency Rate; Accident Frequency
Rate; and Accident Severity Rate) are
presented to the Board and reviewed
at each quarterly Board meeting.
There were no issues or concerns
identified by the Melrose Board during
2014. While no corrective measures were
deemed necessary, the Board as always
encourages business unit management
to remain vigilant where employee and
third party safety is concerned.
Many manufacturing locations within the
Group hold ISO 18001 certification, the
internationally recognised assessment
standard for occupational health and
safety management systems.
Divisional managers within each business
unit have responsibility to ensure that
health and safety remains a key focus
and to ensure that active procedures
and monitoring systems are in place.
Detailed health and safety plans are set
by businesses each year to determine
annual targets and improvement initiatives.
All businesses have Health and Safety
Committees (“H&S Committees”), which
meet on a regular basis and are made up
of representatives from both management
and shop floor level personnel. Each of
the H&S Committees has wide-ranging
responsibilities which vary from business to
business and include the review of reported
incidents and the monitoring of incident
trends. These H&S Committees are also
responsible for ensuring that corrective
measures are implemented when accidents
occur and that all incidents, whether or not
they are deemed reportable under local
legislation, are given due attention.
4. Gender diversity
The charts below show the total number
of males and females working within the
Group as at 31 December 2014.
Total Group employees
1. Male
2. Female
6,672
2,090
Senior managers(1)
1. Male
2. Female
Melrose Industries PLC Board
1. Male
2. Female
8
0
7
1
Other employees
1. Male
2. Female
6,657
2,089
(1) Defined as senior head office employees of
Melrose Industries PLC, located in the London,
Birmingham and Atlanta offices.
Health, safety and
sustainability are integral
to our business.
Melrose Industries PLCAnnual Report 2014Performance ReviewPerformance Review
54
Corporate Social Responsibility
continued
One of the key responsibilities for these
H&S Committees is to carry out regular
tours of the premises in which they work,
in order to ensure compliance with local
policies and procedures. These tours
also identify potential hazards, for which
counter-measures can be identified to
prevent accidents from happening.
Each H&S Committee recommendation
is followed up at the next divisional Board
meeting to ensure that issues are resolved.
Additionally, operations are audited by
the H&S Committee at least annually and
reports of performance and recommended
improvements are prepared and circulated
to the divisional senior management
teams. Divisional managers are provided
with detailed health and safety reports on
a frequent basis to ensure that such
matters are given high visibility and that
improvements are authorised and
implemented quickly.
6. Health and safety initiatives
During 2014, many of the Group’s
businesses implemented a range of
health and safety initiatives. Some of
these are listed below:
• During 2014, Brush UK implemented
a behavioural safety programme to
continue to evolve the very strong
health and safety culture within the
business. The programme focuses
on developing a proactive approach
among Brush employees so that they
increase their responsibility and
accountability for their own and their
working group’s actions while ensuring
they intervene at the earliest opportunity
to stop an unsafe act or correct an
unsafe condition.
• The business has recognised the
following benefits:
“ Divisional managers are
provided with detailed
health and safety reports
on a frequent basis.”
– A 100% reduction in reportable
accidents to the Health and Safety
Executive;
– An engaged workforce in matters
relating to health and safety;
– A clear demonstration of the Brush
management’s intentions to
continually improve the standard
of health and safety within the
business; and
– A recognition that a strong health
and safety culture can have a positive
impact on the growth and brand
value of the business.
• Elster Electricity carried out numerous
health and safety initiatives in various
countries in 2014. This included an
initiative at Elster Electricity UK which
provided training and awareness in key
areas including fire marshalling, first aid,
manual handling, safety management
and risk control.
• In Brazil, personal safety procedures for
risk areas were implemented and weekly
five minute health and safety talks were
held with all production employees at
Elster Electricity’s Mexican site. In the
US, safety audits were conducted by
an external third party to provide a safer
working environment for all employees.
• Following the highly successful
implementation and external audit
of the OHSAS 18001 system in
Romania in October 2014, and to
support Elster Electricity’s increased
commitment to Occupational Health
and Safety (OHS), OHSAS 18001 will
be further implemented within EMEA
and externally audited throughout 2015.
This initiative demonstrates Elster
Electricity’s continued commitment
to employee well-being.
• It is a policy of Elster Gas that all major
manufacturing plants are certified to
OHSAS 18001 to promote world class
health and safety practices. Several
major plants are now accident free.
• During the year, the Accident Frequency
Rate for the global Elster Gas business
was reduced by 30% when compared
with 2013. At the same time, the
Accident Severity Rate saw a 50%
reduction. The improvement in both
metrics demonstrates the leadership’s
commitment to improving the welfare
of all Elster Gas employees worldwide.
• Elster Water’s 2013 comprehensive OHS
review and improvement initiative was
completed in H1 2014. Elster Water sites
with assembly and/or test processes
were re-audited after completion of
minor improvements and confirmed
compliant to national and international
OHS standards.
• All operational processes are subject
to continuous review by senior site
management to confirm compliance to
OHS standards. Elster Water applies a
“no-risk” tolerance in order to provide a
safe and clean work environment for all
its employees.
Melrose Industries PLCAnnual Report 2014Performance Review 55
7. The environment
The Melrose Board fully understands the
importance of the Group’s environmental
responsibilities. Each of the Company’s
businesses is committed to ensuring that
their operations have a minimum possible
adverse effect on the environment.
Although there are no standardised
environmental KPIs currently used within
the Group, each business understands
the importance of monitoring the impact
of its operations on the environment.
A range of KPIs are used as environmental
measures, including energy consumption,
CO2 emissions, water consumption,
water contamination, waste disposal,
solid and liquid waste generation,
recycling and volatile organic compound
emissions. Environmental performance
is measured using KPIs in order that
each of the businesses can plan for
ongoing reductions.
During the year, the Company continued to
comply with the ongoing annual reporting
requirements of the UK’s Carbon Reduction
Commitment Energy Efficiency Scheme.
8. Environmental initiatives
During 2014, many of the Group’s
businesses implemented a range of
environmental improvement initiatives.
Some of these are listed below:
• Brush UK focused on making further
energy savings. Savings were
made in gas consumption (19% saving
from 2013) and electricity consumption
(0.5% saving from 2013). Lighting initiatives
across the Loughborough site have
generated savings in certain working
facilities of between 47% and 72%.
• To increase awareness of environmental
management and to complement the
existing ISO 14001 certifications at the
operations in Romania, the UK, and
Russia, standardised processes are
being implemented across Elster
Electricity. To ensure best practice and
transparency, these new processes will
continue to be aligned with ISO 14001
and will be externally audited.
• Elster Electricity constantly increases
product features while optimising its power
consumption, having a positive impact
on energy saving, energy distribution
costs and energy management features.
Elster EnergyICT, a unit within Elster
Electricity, offers utility-grade energy
management software solutions.
These help to reduce their clients’
energy consumption by up to 30%.
• At Elster Electricity in Mexico, a “tree day”
was held in 2014 which involved the
donation of trees for reforestation.
• It is a policy of Elster Gas that all major
manufacturing plants are certified to
OHSAS 14001 to promote world class
environmental behaviour. In several
countries the 2013 certifications were
renewed following audit approvals. In
the first quarter of 2014, both facilities
in Germany were certified.
• A comprehensive environmental
measurement and reporting system was
introduced for all Elster Gas manufacturing
operations which tracks six key KPIs as
part of the monthly operations review. The
KPIs measure electricity consumption, gas
consumption (and hence together CO2),
water consumption, solid waste generation
(and % recycled), liquid waste generation
and Volatile Organic Compounds (VOCs)
emissions. Performance against these
KPIs improved in 2014.
• Elster Water meters and radio equipment
contain lithium batteries. These batteries
are defined as dangerous goods under
the ‘UN Recommendations on the
Transport of Dangerous Goods’. Elster
Water, together with its logistics partners,
have implemented appropriate processes
to ensure compliance with these
UN Recommendations.
Melrose Industries PLCAnnual Report 2014Performance ReviewPerformance Review 56
Corporate Social Responsibility
continued
Global GHG emissions data for period 1 January – 31 December 2014
(tonnes CO2e(1) unless stated)
Emissions sources:
Combustion of fuel and operation of facilities
Electricity, heat and steam purchased for own use
Overseas electricity(3)
Company’s chosen intensity measurement:
Emissions reported above normalised to tonnes per £1,000 turnover
2014
18,985
9,380
26,741
2013(2)
23,237
12,036
29,642
Change
-18%
-22%
-10%
0.040
0.044
-9%
(1) CO2e – carbon dioxide equivalent, this figure includes greenhouse gases in addition to carbon dioxide.
(2) Excluding Bridon emissions.
(3) The emissions associated with overseas electricity are presented in tonnes carbon dioxide only as per the DEFRA guidance.
10. Energy Savings
Opportunity Scheme
The Energy Savings Opportunity Scheme
(“ESOS”) Regulations 2014, which
transpose Article 8 of EU Directive
2012/27/EU on energy efficiency and
came into force on 17 July 2014, are
intended to help deliver part of the EU’s
20% improvement in energy efficiency.
The ESOS Regulations require qualifying
organisations to measure energy
consumption, evaluate energy efficiency,
identify management opportunities, store
data and notify the Environment Agency
by 5 December 2015 that an ESOS
compliance audit has been completed.
Melrose is working with environmental
and energy efficiency specialists, CMR
Consultants, to ensure that the Group
meets its ESOS compliance obligations.
All material emissions from within the
organisational and operational scope and
boundaries of the Group are reported.
The emissions from owned vehicle
transport (i.e. Group owned cars and
vans, lorries and fork lift trucks) and the
emissions associated with refrigeration
have been excluded from the report on
a de minimis basis. The GHG emissions
from these sources have been estimated
to account for less than 1% of the total
Melrose emissions reported on an
individual basis and as a combined total
to account for less than 2% of the total
Melrose GHG emissions reported.
The financial reporting year of 2013
was the first year in which the Company
had been required to disclose its GHG
emissions data within the Annual Report
and represents the baseline against which
the subsequent emission data sets will
be based. The main change in the data
compared to the baseline data, as
presented in the table above, is due to
the divestment of the Bridon business
unit in 2014; the Bridon group represented
approximately 45% of the total GHG
emissions reported in 2013. Other, smaller
changes have resulted from the closure
and relocation of activities from some
sites and general efficiency savings and
improvements at a number of other sites.
Given that the Melrose business model
is to acquire and divest businesses over
a 3-5 year timeframe, there may be
significant year on year changes in the
reported emissions data which may not
reflect the underlying GHG performance
of the Group’s businesses.
9. Greenhouse gas emissions
This greenhouse gas (GHG) report has
been prepared for the reporting period
of 1 January 2014 to 31 December 2014.
The data has been prepared in
accordance with the principles and
requirements of the Greenhouse Gas
Protocol, Revised Edition, ISO 14064
Part 1 and DEFRA (Department for
Environment, Food & Rural Affairs)
guidance on how to measure and report
on greenhouse gas emissions 2013.
We have reported on all of the emission
sources required under the Companies
Act 2006 (Strategic Report and Directors’
Reports) Regulations 43 (see Companies
Act 2006 (Strategic Report and Directors’
Reports) Regulations 2013 paragraph 18).
These sources fall within our consolidated
statement. We do not have responsibility
for any emission sources that are not
included in our consolidated statement.
We have used the GHG Protocol
Corporate Accounting and Reporting
Standard (revised edition), data gathered
in accordance with our GHG reporting
procedure and emission factors from
UK Government’s GHG Conversion
Factors for Company Reporting 2014.
The reported emissions cover all entities
over which the organisation had financial
control for a period of at least one year as of
31 December 2014. Emissions from entities
acquired or disposed of during the reporting
period (i.e. disposed of before 31 December
2014 or acquired after 1 January 2014) are
not accounted for in the report. Therefore,
the data from the Bridon business unit has
not been included within the reported GHG
data, as this business was divested during
2014. One business was acquired during
the reporting period, Eclipse, and the
emissions from this business unit will
be included in the 2015 report.
Melrose Industries PLCAnnual Report 2014Performance Review
57
The Strategic Report and
Performance Review, as set
out on pages 02 to 57, have
been approved by the Board.
On behalf of the Board
Simon Peckham
Chief Executive
4 March 2015
11. Supply chain assurance
Owing to the geographical and operational
diversity of the Group’s businesses, and
therefore its supplier base, there is no single
over-arching Group policy currently in use
in relation to suppliers. However, the security,
assurance and ethical compliance of
business supply chains is very important
to Melrose. Responsibility for the
implementation and management of all
supplier-related policies rests with local
management in each business. Such
policies are used in a manner appropriate
to the size and complexity of each business
and also take into account the nature and
geographical representation of key suppliers.
A supplier approval process exists within the
businesses, which is linked to specific and
tailored supplier assessments and due
diligence requirements.
12. Human rights and ethical
standards
As is stated within the employee policies
and supply chain assurance sections
above, the decentralised nature of the
Group means there is no single over-
arching policy currently in place with
regard to human rights. However, sound
business ethics and integrity are core to
the Group’s values and each business
places a high importance on its dealings
with all employees, customers, suppliers
and other stakeholders and is committed
to good practice in respect of human
rights. Employees within each Group
business are required, at all times, to
exhibit the highest Ievels of integrity and
to maintain the highest ethical standards
in business affairs.
Each of the Group’s businesses will
have their own code of ethics dealing
with matters such as human rights.
All employee policies are also prepared
locally within each business in order to
ensure compliance with local laws and
standards as a minimum. Responsibility
for the communication and implementation
of such policies rests with the relevant
senior divisional managers.
The Brush Group has been involved
in high class engineering and
manufacturing for more than 125 years.
Melrose Industries PLCAnnual Report 2014Performance ReviewPerformance Review 58
Melrose Industries PLCAnnual Report 2014Governance 59
Governance
Governance overview
Board of Directors
Directors’ report
Corporate Governance report
Audit Committee report
Nomination Committee report
Directors’ remuneration report
Statement of Directors’ responsibilities
60
62
64
68
72
76
78
96
Melrose Industries PLCAnnual Report 2014GovernanceGovernanceStrategic ReportFinancialsShareholder informationPerformance Review 60
Governance overview
Christopher Miller
Chairman
Introduction
from the Chairman
The Board remains committed to
maintaining the high standards
of corporate governance
required to ensure that the
Company can continue to deliver
on its strategic goals and to
achieve long-term success for
the benefit of its shareholders.
As part of this approach, the Board
supports, applies and complies with the
Main Principles, the Supporting Principles
and the respective related provisions of
corporate governance contained in the
UK Corporate Governance Code (the “UK
Code”) issued by the Financial Reporting
Council (the “FRC”) and available to view
on the FRC’s website at: https://www.frc.org.
uk/Our-Work/Codes-Standards/Corporate-
governance.aspx. The UK Code was
previously dated September 2012 and was
updated by the FRC in September 2014.
Although the updated version of the UK
Code only applies to financial periods
beginning on or after 1 October 2014,
Melrose welcomes the changes to the UK
Code and therefore will be seeking to comply
with them earlier than formally expected.
programme to promote and embed
a more risk-aware culture across the
organisation. As part of this programme,
the Group’s risk strategy and the
Board’s risk appetite will be reviewed
and, if deemed appropriate, refreshed.
Further details on this can be found on
pages 36 to 41 of the Annual Report.
In support of this commitment, the Board
carried out a number of actions during 2014
designed to ensure that Melrose remains
compliant with the provisions of the UK
Code and also to enable continuous
improvement in line with best practice
corporate governance guidelines.
Risk management
In 2014, the Board initiated a root and
branch audit of the risk management
framework and underlying processes
in operation in every business in the
Melrose Group. Following on from this
audit, external risk consultants BDO LLP
have been engaged to support the
Group in developing an enhanced risk
framework and in implementing a
Remuneration
The revised UK Code provides that greater
emphasis should be placed on ensuring
that remuneration policies are designed
with the long-term success of the
Company in mind. This is a belief that
the Melrose Board has always held.
Our remuneration philosophy is that
executive remuneration should be simple
and transparent, support the delivery
of the business strategy and pay for
performance. This belief is reflected in
our remuneration structure. Base salaries
are set at the lower end of a competitive
range, the annual bonus is deliberately
positioned below the median maximum
opportunity for comparable companies
and payments under the single long-term
Board
structure
Christopher Miller
Executive Chairman
David Roper
Executive
Vice-Chairman
Simon Peckham
Chief Executive
Geoffrey Martin
Group Finance
Director
Perry Crosthwaite(1)
Senior non-executive
Director
Audit Committee
John Grant,
Chairman
Perry Crosthwaite
Justin Dowley
Liz Hewitt
Nomination Committee
Liz Hewitt(2),
Chairman
Perry Crosthwaite
Justin Dowley
John Grant
Christopher Miller
Melrose Industries PLCAnnual Report 2014Governance 61
Board composition
Industry background
Board diversity
1
Executive Chairman
Executive Directors
Non-executive
Directors
1
3
4
2
4
3
6
Finance
Industry
6
2
1
Male
Female
7
1
7
Main responsibilities of
the Board:
effectively manage and control the Company
via a formal schedule of matters reserved for
its decision;
determine and review Company strategy
and policy;
consider acquisitions, disposals and asset
requests for major capital expenditure;
review trading performance;
ensure that adequate funding and personnel
are in place;
maintain sound internal control systems;
report to shareholders and give consideration
to all other significant financial matters;
agree Board succession plans and consider
the evaluation of the Board’s performance
over the preceding year;
review the Group’s risk management and
internal control systems; and
agree the Group’s governance framework
and approve the Standards of Business
Conduct and other Group policies.
Audit Committee report
More information p72
Nomination Committee report
More information p76
Directors’ remuneration report
More information p78
incentive arrangement are entirely
dependent upon shareholder value
generated over a five year period. Rather
than successive one year LTIP schemes,
we believe that a five year scheme is
preferable in that it is closer to a typical
ownership cycle for an acquired business.
We believe that this remuneration strategy
has directly driven Melrose’s historical
out-performance of the market, supported
the Company’s success and clearly led
to increased shareholder value.
A further change to the UK Code provides
that companies should put in place
arrangements that will enable the recovery
or withholding of variable pay. Malus(1) has
always applied to the Melrose long-term
incentive plan and the annual bonus
scheme. The Company will introduce a
clawback provision for the annual bonus
scheme with effect from the 2014 annual
bonus. In addition, clawback will apply to
any new long-term incentive arrangements
awarded to executive Directors of Melrose,
in line with best practice.
Engagement with shareholders
During the second half of 2014 and
continuing into 2015, the Company has
launched a programme of engagement
with major investors and the governance
bodies in respect of our remuneration policy
and incentive arrangements. The Board is
pleased with the support and constructive
feedback throughout these discussions
and it is our intention to continue this
programme for the foreseeable future.
Christopher Miller
Executive Chairman
4 March 2015
(1) Malus is defined in the CEBS (Committee of European
Banking Supervisors) Guidelines on Remuneration
Policies and Practices as “an arrangement that permits
the institution to prevent vesting of all or part of the
amount of a deferred remuneration award in relation
to risk outcomes or performance”.
Justin Dowley
Non-executive
Director
John Grant
Non-executive
Director
Liz Hewitt
Non-executive
Director
Remuneration Committee
Justin Dowley(3),
Chairman
Perry Crosthwaite
John Grant
Liz Hewitt
(1) Perry Crosthwaite assumed the position of Senior non-executive
Director at the conclusion of the 2014 AGM following the
retirement of Miles Templeman.
(2) Liz Hewitt became Chairman of the Nomination Committee at
the conclusion of the 2014 AGM following the retirement of
Miles Templeman.
(3) Justin Dowley replaced Perry Crosthwaite as Chairman of the
Remuneration Committee at the conclusion of the 2014 AGM.
Melrose Industries PLCAnnual Report 2014GovernanceGovernance
62
Board of Directors
Christopher Miller
Executive Chairman
Year appointed
Appointed as Executive Chairman on
29 May 2003.
Skills and experience
Christopher brings to the Board a wealth of experience gained from
his involvement in manufacturing industries and private investment.
A chartered accountant, Christopher qualified with Coopers & Lybrand,
following which he was an Associate Director of Hanson plc. In
September 1988, Christopher joined the board of Wassall PLC as its
Chief Executive. Between October 2000 and May 2003, Christopher
was involved in private investment activities.
Board meetings attended
4/4
Other appointments
–
Committee membership
Nomination
Independent
Not applicable
David Roper
Executive Vice-Chairman
Year appointed
Appointed as Executive Vice-Chairman on
9 May 2012, having previously been Chief
Executive from May 2003.
Skills and experience
David provides experience gained from his roles in corporate finance,
management of manufacturing industries and private investment.
A chartered accountant, David qualified with Peat Marwick Mitchell,
following which he worked in the corporate finance divisions of S.G.
Warburg & Co. Limited, BZW and Dillon Read. In September 1988,
David was appointed to the board of Wassall PLC and became its
deputy Chief Executive in 1993. Between October 2000 and May
2003, David was involved in private investment activities and served
as a non-executive Director on the boards of two companies.
Board meetings attended
4/4
Other appointments
–
Committee membership
–
Independent
Not applicable
Simon Peckham
Chief Executive
Year appointed
Appointed as Chief Executive on 9 May 2012,
having previously served as Chief Operating
Officer from May 2003.
Geoffrey Martin
Group Finance Director
Year appointed
Appointed as Group Finance Director on
7 July 2005.
Skills and experience
Simon provides expertise in equity finance, corporate transactions and
management of manufacturing industries.
Simon qualified as a solicitor in 1986, following which, in 1990, he
joined Wassall PLC, where he became an executive Director in 1999.
From October 2000 until May 2003, Simon worked for the equity
finance division of The Royal Bank of Scotland and was also involved
in several high profile transactions.
Skills and experience
Geoffrey provides expertise in corporate finance, management and
corporate restructuring.
A chartered accountant, Geoffrey qualified with Coopers & Lybrand,
where he worked within the corporate finance and audit departments.
In 1996, Geoffrey joined Royal Doulton PLC and was Group Finance
Director from October 2000 until June 2005, which was a period of
significant restructuring for the company.
Board meetings attended
4/4
Other appointments
–
Committee membership
–
Independent
Not applicable
Board meetings attended
4/4
Other appointments
–
Committee membership
–
Independent
Not applicable
Melrose Industries PLCAnnual Report 2014Governance 63
Perry Crosthwaite
Senior non-executive Director(1)
Year appointed
Appointed as a non-executive Director on
26 July 2005.
John Grant
Non-executive Director
Year appointed
Appointed as a non-executive Director on
1 August 2006.
Skills and experience
Perry has financial expertise gained through a distinguished career in
investment banking with over 30 years’ experience as a Director in the
City of London.
Skills and experience
John brings financial expertise and global executive experience gained
from a variety of senior roles within the automotive industry and other
engineering businesses.
Perry was a founding Director of Henderson Crosthwaite Institutional
Brokers Limited, serving on the board until its acquisition by Investec
Bank in 1998. He became a Director of Investec Bank (UK) Limited and
Chairman of the Investment Banking division until his retirement in 2004.
John was Chief Executive of Ascot Plc between 1997 and 2000.
Prior to that, he was Group Finance Director of Lucas Industries Plc
(subsequently LucasVarity Plc) between 1992 and 1996. He also
previously held several senior strategy and finance positions with
Ford Motor Company in Europe and the US.
Board meetings attended
4/4
Other appointments
Chairman of Jupiter Green Investment Trust PLC
Non-executive Director of Investec Limited and Investec plc
Committee membership
Audit
Nomination
Remuneration(1)
Independent
Yes
Board meetings attended
4/4
Other appointments
Non-executive Director of MHP S.A. and Pace plc
Chairman of The British Racing Drivers’ Club Limited
Committee membership
Audit (Chairman)
Nomination
Remuneration
Independent
Yes
Justin Dowley
Non-executive Director
Year appointed
Appointed as a non-executive Director on
1 September 2011.
Liz Hewitt
Non-executive Director
Year appointed
Appointed as a non-executive Director on
8 October 2013.
Skills and experience
Justin has extensive experience within the banking, investment and
asset management sector.
Skills and experience
Liz has extensive business and financial experience gained from senior
roles in international companies.
A chartered accountant, Justin qualified with Price Waterhouse and
was latterly Vice Chairman of EMEA Investment Banking, a division
of Nomura International plc. He was also a founder partner of Tricorn
Partners, Head of Investment Banking at Merrill Lynch Europe and a
Director of Morgan Grenfell.
A chartered accountant, Liz qualified with Arthur Andersen & Co,
following which she held a variety of senior positions within Gartmore
Investment Management, CVC and 3i Group plc. Between 2004
and 2011, she was Group Director of Corporate Affairs for Smith
& Nephew plc.
Board meetings attended
4/4
Board meetings attended
4/4
Other appointments
Chairman of Intermediate Capital Group plc (a specialist investment
and asset management company)
Non-executive Director of a number of private companies including
Ascot Authority (Holdings) Limited
Non-executive Director of the National Crime Agency
Committee membership
Audit
Nomination
Remuneration (Chairman)(2)
Independent
Yes
Other appointments
Non-executive Director of Novo Nordisk A/S and Savills plc
Committee membership
Audit
Nomination (Chairman)(3)
Remuneration
Independent
Yes
(1) Perry Crosthwaite assumed the position of Senior non-executive Director at the conclusion of the 2014 AGM and resigned as Chairman of the Remuneration Committee.
(2) Justin Dowley became Chairman of the Remuneration Committee at the conclusion of the 2014 AGM.
(3) Liz Hewitt became Chairman of the Nomination Committee at the conclusion of the 2014 AGM.
Melrose Industries PLCAnnual Report 2014GovernanceGovernance 64
Directors’ report
The Directors of Melrose Industries PLC
(the “Company”) present their Annual
Report and audited financial statements
of the Group for the year ended
31 December 2014.
The Corporate Governance report set out on pages 68 to 71,
the Finance Director’s review on pages 42 to 49 and the Corporate
and Social Responsibility section of the Performance Review
on pages 50 to 57, are each incorporated by reference into this
Directors’ report. Disclosures elsewhere in the Annual Report
are cross-referenced where appropriate; taken together, they
fulfil the combined requirements of the Companies Act 2006
(the “Act”) and of the Disclosure and Transparency Rules (the
“DTRs”) and the Listing Rules of the Financial Conduct Authority.
Details of significant events since the Balance Sheet date are
contained in note 29 to the financial statements. An indication
of likely future developments in Group businesses is included
within the Performance Review.
Directors
The Directors of the Company as at the date of this report, together
with their biographical details, are given on pages 62 and 63.
Changes to the Board during the year are set out in the Corporate
Governance report on pages 68 to 71. Details of Directors’ service
contracts are set out in the Directors’ remuneration report on
page 93.
The Statement of Directors’ responsibilities in relation to the
consolidated financial statements is set out on page 96.
Appointment and removal of Directors and their powers
The Company’s articles of association (“Articles”) give the
Directors the power to appoint and replace other Directors.
Under the terms of reference of the Nomination Committee,
any appointment must be recommended by the Nomination
Committee for approval by the Board.
With effect from the 2012 Annual General Meeting (“AGM”),
the Board determined that all Directors of the Company should
stand for re-election on an annual basis, in compliance with the
provisions of the UK Corporate Governance Code, and this
requirement is contained in the Articles. Therefore, all Directors
will offer themselves for re-election at the AGM to be held on
14 May 2015.
The Directors are responsible for managing the business of the
Company and exercise their powers in accordance with the
Articles, directions given by special resolution and any relevant
statutes and regulations. Specific powers relating to the allotment
and issuance of shares and the ability of the Company to
purchase its own shares are also included within the Articles
and such authorities are submitted for approval by the
shareholders at the AGM each year.
Pursuant to sections 693 and 701 of the Act and a special
resolution passed at the AGM in 2014, the Company was
authorised to purchase its own shares, limited to an aggregate
maximum number equal to 10% of the issued share capital of
the Company. The Company did not purchase any Ordinary
Shares pursuant to this authority. The resolutions being proposed
at this year’s AGM include a resolution to renew this authority.
Insurance and indemnities
The Directors have the benefit of an indemnity from the Company
in respect of their liabilities incurred as a result of their office. This
indemnity is provided under the Company’s Articles and satisfies
the indemnity provisions of the Act.
The Company has taken out an insurance policy in respect of
those liabilities for which the Directors may not be indemnified.
Neither the indemnity nor the insurance provides cover in the
event that a Director is proved to have acted dishonestly or
fraudulently.
AGM
The AGM of the Company will be held at Barber-Surgeons’
Hall, Monkwell Square, Wood Street, London, EC2Y 5BL at
11.00 am on 14 May 2015. The notice convening the meeting
is shown on pages 156 to 161 and includes full details of the
resolutions to be proposed, together with explanatory notes
in relation to such resolutions.
Post Balance Sheet events
In November 2014, the Company completed the disposal of
its Bridon business for an enterprise value of £365 million (see
note 9 to the financial statements for further details), representing
the latest step in realising value for the FKI businesses acquired
by Melrose in 2008. In accordance with its strategy, the Board
decided to use part of the net proceeds of the disposal to return
£200 million in cash to shareholders (the “Return of Capital”).
At the time of such decision, this return was equivalent to 18.7
pence per existing Ordinary Share of 13/110 pence nominal
value each in the capital of the Company in issue at that time
(the “Existing Ordinary Shares”).
The Return of Capital was approved by shareholders at a general
meeting of the Company held on 20 February 2015, using a
redeemable share scheme (in this case involving B Shares and/or
C Shares) and was structured with the objective of enabling
shareholders, subject to restrictions in respect of certain
overseas shareholders, to elect to receive their cash proceeds
of 18.7 pence per Existing Ordinary Share as:
• an income payment (the ‘‘Income Option’’); or
• a capital payment (the ‘‘Capital Option’’), (collectively the
“Share Alternatives”).
Shareholders were also offered a mix and match facility, such
that they could choose to receive the cash proceeds through
a combination of the Share Alternatives.
Only shareholders who were on the register of members at
5.00 pm on 20 February 2015 (the “B/C Share Record Date”)
were entitled to participate in the Return of Capital, and the
deadline for shareholders making their elections in respect
of the Share Alternatives was 4.30 pm on 27 February 2015.
Melrose Industries PLCAnnual Report 2014Governance 65
Further details of the Share Alternatives are listed in the table below, together with details of the number of Existing Ordinary Shares in
respect of which each Share Alternative was chosen by shareholders.
Share Alternative
Income Option
Capital Option
Details of Share Alternative
Relevant shareholders received one C Share, with a nominal value of 0.00001 pence, for every
Existing Ordinary Share held at the B/C Share Record Date, and a single C Share dividend
of 18.7 pence per C Share held. The single C Share dividend became due and payable on
2 March 2015 and, thereafter, the C Shares were automatically converted into C Deferred
Shares with a nominal value of 0.00001 pence each. Proceeds in respect of the Income
Option will be paid to relevant shareholders and the C Deferred Shares will be automatically
redeemed by the Company on 16 March 2015.
Relevant shareholders received one B Share, with a nominal value of 18.7 pence, for every
Existing Ordinary Share held at the B/C Share Record Date, and had such B Share(s) redeemed
by the Company on 2 March 2015. Proceeds in respect of the Capital Option will be paid to
relevant shareholders on 16 March 2015.
Number of Existing
Ordinary Shares
in respect of which
Share Alternative
chosen(1)
687,786,937
383,974,411
(1) The Capital Option was not made available to any shareholders with a registered address in, or who were resident or located in, Australia, Canada, Japan, New Zealand, the Republic of South
Africa, United States, and any other territory where the invitation to participate in the Return of Capital proposals and any election for the Capital Option in respect of all or some of such
shareholder’s entitlement to the Return of Capital would violate the laws of that jurisdiction or would require the registration of the B Shares, C Shares and/or C Deferred Shares, and all such
shareholders were automatically deemed to have elected for the Income Option.
Associated with the Return of Capital, an Ordinary Share capital
consolidation was approved by shareholders at the general
meeting of the Company held on 20 February 2015, in the ratio
of 13 for 14 (the “Share Capital Consolidation”), and the record
date for the Share Capital Consolidation was 6.00 pm on the
same day (the “Share Capital Consolidation Record Date”).
The aim of the Share Capital Consolidation was to ensure, so
far as possible, that the market price of an Ordinary Share
remained approximately the same before and after the Return
of Capital and, so far as possible, to maintain comparability of
historical and future per share data.
The Share Capital Consolidation was effected by the sub-division
of every Existing Ordinary Share into 13 shares of 1/110 pence
each in the capital of the Company and, forthwith upon such
sub-division, the consolidation of every 14 shares of 1/110
pence each in the capital of the Company resulting from such
sub-division into one new ordinary share of 7/55 pence in the
capital of the Company (the “New Ordinary Shares”).
Details of the structure of the Company’s share capital both
before and after the Share Capital Consolidation, together with
the rights attached to each of the share classes in issue as at
31 December 2013, 31 December 2014 and immediately following
the Share Capital Consolidation on 20 February 2015, are set
out within the sections below. Shareholders continued to own
approximately the same proportion of the Company after the
Share Capital Consolidation as they did before, subject to
fractional entitlements.
Capital structure
The table below shows details of the Company’s issued share
capital as at 31 December 2013, 31 December 2014 and
immediately following the Share Capital Consolidation becoming
effective on 23 February 2015.
31 December
2013
31 December
2014
1,266,627,036
Nil
Nil 1,071,761,339(1)
23 February
2015 (post the
Share Capital
Consolidation)
Nil
Nil
Nil
Nil 995,206,966(2)
Share class
Former Ordinary
Shares of 0.1
pence each
Existing Ordinary
Shares of 13/110
pence each
New Ordinary
Shares of 7/55
pence each
(1) Fractional entitlements resulting from the Share Capital Consolidation effective on
10 February 2014 were aggregated and sold in the market on shareholders’ behalf. In order
to ensure that the aggregate of all fractional entitlements to be sold in the market added up
to a whole number of New Ordinary Shares, between the B/C Share Record Date and the
Share Capital Consolidation Record Date, one Ordinary Share was allotted fully paid up for
cash to Investec Bank plc at a price which was equal to the closing middle-market price of
an Existing Ordinary Share on 7 February 2014, less 47 pence. This Ordinary Share was
not entitled to participate in the Return of Capital, but was subject to the Share Capital
Consolidation in the ratio of 11 for 13 approved by shareholders at the general meeting
of the Company held on 7 February 2014.
(2) Fractional entitlements resulting from the Share Capital Consolidation effective on
23 February 2015 were aggregated and sold in the market. The aggregated proceeds of
sale, net of commission, were donated to a charity nominated by the Board, the Rainbow
Trust. In order to ensure that the aggregate of all fractional entitlements to be sold in the
market added up to a whole number of New Ordinary Shares, Nine Existing Ordinary Shares
were allotted and issued to Investec Bank plc on 3 February 2015 at 266.8 pence per share,
being the closing middle-market price of an Existing Ordinary Share on 2 February 2015.
These Ordinary Shares were subject to the Share Capital Consolidation and were entitled
to participate in the Return of Capital.
Only the New Ordinary Shares are traded on the London
Stock Exchange.
The Company is not aware of any agreements between
shareholders that restrict the transfer of New Ordinary Shares
or that restrict voting rights attached to the New Ordinary Shares.
Details of the 2012 Incentive Share Plan are set out on pages
81 to 82 of the Directors’ remuneration report and note 22 to
the financial statements.
Melrose Industries PLCAnnual Report 2014GovernanceGovernance 66
Directors’ report
continued
Shareholders’ voting rights
Only the New Ordinary Shares have voting rights attached. In
a general meeting of the Company, subject to the provisions of
the current Articles and to any special rights or restrictions as to
voting attached to any other class of shares in the Company from
time to time:
• on a show of hands, every member who is present (in person
or by proxy) shall have one vote; and
• on a poll, every member who is present (in person or by proxy)
shall have one vote for every share they hold.
If any call or other sum payable by a holder of New Ordinary
Shares remains unpaid, they shall not be entitled to vote at a
general meeting or class meeting in respect of any shares held
by them. Currently, all New Ordinary Shares are fully paid.
Articles of association
The Company’s Articles were amended pursuant to a special
resolution approved at the general meeting of the Company
held on 20 February 2015, in order to reflect the rights and
restrictions attaching to the B Shares, the C Shares and the
C Deferred Shares, and certain other changes required in relation
to the Share Capital Consolidation. The rights and restrictions
attaching to the New Ordinary Shares following the Share Capital
Consolidation remained exactly the same as those attaching to
the Existing Ordinary Shares immediately prior to the Share
Capital Consolidation.
Substantial shareholdings
As at 31 December 2014, the following voting interests in the
Ordinary Share capital of the Company, disclosable under DTR 5,
had been notified to the Directors:
Shareholder
BlackRock, Inc.
Schroders plc
Legal & General Group Plc
Aberdeen Asset Managers Limited
Shareholding
104,103,286
59,672,074
53,881,949
53,456,498
% of Ordinary
Share capital
9.71
5.57
5.02
4.99
Between 1 January 2015 and 3 March 2015, the following voting
interests in the Ordinary Share capital, disclosable under DTR 5,
were notified to the Directors:
Shareholder
Schroders plc
Shareholding
46,308,210
% of Ordinary
Share capital
4.32
Shareholder dividend
The Directors are pleased to recommend the payment of a final
dividend of 5.3p per share (2013: 5.0p) on 18 May 2015 to
Ordinary shareholders on the register of members of the
Company at the close of business on 17 April 2015. This dividend
recommendation will be put to shareholders at the forthcoming
AGM of the Company, to be held on 14 May 2015. Subject to
shareholder approval being obtained at the AGM for the final
dividend, this will mean a full year 2014 dividend of 8.1p per share
(2013: 7.75p).
In November 2014, the Company completed the disposal of
its Bridon business for an enterprise value of £365 million (see
note 9 to the financial statements for further details), representing
the latest step in realising value for the FKI businesses acquired
by Melrose in 2008. In accordance with its strategy, the Board
decided to use part of the net proceeds of the disposal to return
£200 million in cash to shareholders, by way of the Return of
Capital proposals described earlier in this Directors’ report. The
Return of Capital was approved by shareholders at the general
meeting of the Company held on 20 February 2015. This return
to shareholders is not included in the full year dividend figure
stated above.
It is the intention of the Board to continue to pursue a progressive
dividend policy, where appropriate.
The Company offers a Dividend Reinvestment Plan (“DRIP”) which
gives shareholders the opportunity to use their dividend payments
to purchase further Ordinary Shares in Melrose Industries PLC.
Further details about the DRIP and its terms and conditions can
be found within the Investors section on the Company’s website
at www.melroseplc.net. To the extent that shareholders chose
the Income Option in respect of all or some of their entitlement to
the Return of Capital, the DRIP could not be used in relation to the
single C Share dividend paid to such shareholders in respect of
their holdings of such C Shares.
Financial instruments
The disclosures required in relation to the use of financial
instruments by the Company, including the financial risk
management objectives and policies of the Company and
the exposure of the Company to credit risk, liquidity risk, cash
flow risk, exchange rate risk, contract and warranty risk and
commodity cost risk, can be found in the Finance Director’s
review on pages 42 to 49, which is incorporated by reference into
this Directors’ report, and in note 24 to the financial statements.
Research and development activities
Melrose Group businesses are encouraged to focus on research
and development and to ensure that new and innovative product
lines continue to be developed. During 2014, investment
continued and several new product launches were either realised
during 2014, or planned for 2015. This Group strategy helps
to ensure that each business can remain at the forefront of
technological advances within defined market sectors and be
able to meet specific customer demands. Some examples of
the types of new products being launched within the various
markets are discussed within the business reviews on pages
28 to 35 of the Performance Review.
Melrose Industries PLCAnnual Report 2014Governance 67
Auditor
So far as each Director is aware, there is no relevant audit
information of which the Company’s auditor is unaware and the
Directors have taken all the steps which they ought to have taken
as Directors to make themselves aware of any relevant audit
information and to establish that the Company’s auditor is aware
of that information. This confirmation is given and should be
interpreted in accordance with the provisions of section 418
of the Companies Act 2006.
On behalf of the Board, the Audit Committee has reviewed the
effectiveness, performance, independence and objectivity of
the existing external auditor, Deloitte LLP, for the year ended
31 December 2014 and concluded that the external auditor was
in all respects effective. Deloitte LLP has expressed its willingness
to continue in office as auditor. Accordingly, resolutions will be
proposed at the AGM of the Company to re-appoint Deloitte LLP
as auditor of the Company and to authorise the Audit Committee
to determine their remuneration.
Approved by the Board of Directors and signed on its behalf by:
Adam Westley
Company Secretary
4 March 2015
Employees
Further details in relation to employment policies, employee
involvement, consultation and development, together with details of
some of the human resource improvement initiatives implemented
during 2014 are shown on pages 51 and 52 of the Corporate Social
Responsibility section of the Performance Review, which is
incorporated by reference into this Directors’ report.
Environmental
The Directors of the Company fully understand the importance of
the Group’s environmental responsibilities. Each of the Company’s
businesses is committed to ensuring that their operations have
a minimum adverse effect on the environment and that ongoing
reductions in both energy usage and CO2 emissions are achieved,
wherever practicable.
Further details in relation to the various environmental initiatives
that are ongoing within some of the Group’s businesses and
statistics showing greenhouse gas emissions data are shown
on pages 55 and 56 of the Corporate Social Responsibility
section of the Performance Review, which is incorporated by
reference into this Directors’ report.
Political donations
The Company’s policy is not to make any political donations and
there were no political donations made during the year ended
31 December 2014 (2013: nil).
Disclosures required under Listing Rule 9.8.4R
No information is required to be disclosed by the Company in
respect of Listing Rules 9.8.4R (1) to (14).
Significant agreements and change of control
With the exception of the Group’s banking facilities, the 2012
Incentive Plan (including the options over 2012 Incentive Shares)
and the divisional management long-term incentive plans, there are
no other agreements that would have a significant effect upon a
change of control of Melrose Industries PLC as at 4 March 2015.
In June 2012, as part of the process to acquire Elster, the Group
agreed a £1.5 billion five year multi-currency, committed bank
facility, which was subsequently amended in July 2014 and
extended for five years from that date. This states that in the event
of a change of control of the Company following a takeover bid,
the Company and lenders under this facility are obliged to enter
into negotiations to determine whether and, if so, how to continue
with the facility. There is no obligation for the lenders to continue
to make the facility available for more than 30 days beyond any
change of control. Failure to reach agreement with parties on
revised terms could require an acquirer to put in place
replacement facilities.
In the event of a takeover of the Company, options over the 2012
Incentive Shares would be exercised and any 2012 Incentive
Shares resulting from such exercise, or that have previously been
issued, would convert into Ordinary Shares of 7/55 pence or an
entitlement to a dividend paid in cash, the rate of conversion being
based upon the offer price of the Company’s Ordinary Shares as
calculated on the date of the change of control of the Company.
If part or the entire offer price is not in cash, the Remuneration
Committee will determine the value of the non-cash element,
having been advised by an investment bank of repute that such
valuation is fair and reasonable.
Melrose Industries PLCAnnual Report 2014GovernanceGovernance 68
Corporate Governance report
Statement of compliance
The Company is required to make certain statements relating
to the way it is governed as laid down in the UK Code. The
remainder of this Corporate Governance report describes the
way in which the Company has applied and complied with the
Main Principles, the Supporting Principles and the respective
related provisions of governance set out in the UK Code.
The Board is accountable to the Company’s shareholders for
good governance. Throughout the year ended 31 December
2014, the Company applied and complied with the Main
Principles, the Supporting Principles and the respective related
provisions of the UK Code, with the exception of a specific
element of Schedule A, which recommends that grants under
executive share options and long-term incentive plans should
normally be phased, rather than awarded in one block. Under
the 2012 Incentive Plan, details of which are provided on pages
81 and 82 of the Directors’ remuneration report, entitlements
to executive Directors were awarded in one block, rather than
phased. The 2012 Incentive Plan was recommended as being
in the best interests of shareholders as a whole by the Board
of Directors and was approved by shareholders at a general
meeting held on 11 April 2012. With regard to all other aspects
of executive Directors’ remuneration, the Company’s policies
fully comply with the provisions of Schedule A of the UK Code.
The Audit Committee report, Nomination Committee report and
Directors’ remuneration report also form part of this Corporate
Governance report.
Main Principle A: Leadership
The Board
Details of the structure of the Board and its key responsibilities
are shown on pages 60 and 61.
Board responsibilities are discharged in conjunction with senior
management, who in turn are responsible for the day-to-day
conduct of the Group’s operations and for reporting to the Board
on items of significance and progress against objectives. The
Board meets regularly during the year as well as on an ad-hoc
basis as required by time-critical business needs.
There were four, formally scheduled Board meetings held during
the year and the attendance of each Director at these meetings
is shown on page 70. In addition, a number of unscheduled Board
meetings were held during the year in connection with corporate
transactions, for example, business acquisitions and divestments
and, since the year end, the Return of Capital to shareholders and
associated share capital consolidation.
A pack of briefing papers and an agenda are provided to each
Director in advance of each Board, Committee or Business Review
meeting. The Directors are able to seek further clarification and
information on any matter from any other Director, the Company
Secretary or any other employee of the Group whenever
necessary. Decisions are taken by the Board in conjunction with
the recommendations of its Committees and advice from external
consultants, advisers and senior management.
The Board has a fully encrypted electronic board portal system,
enabling Board and Committee papers to be delivered securely
to Directors. This facilitates a faster and more secure distribution
of information, accessed using electronic tablets, and reduced
resource usage.
The Company Secretary is responsible for advising and
supporting the Chairman and the Board on corporate governance
matters as well as ensuring a smooth flow of information to enable
effective decision making. All Directors have access to the advice
and services of the Company Secretary and, through him, have
access to independent professional advice in respect of their
duties, at the Company’s expense. The Company Secretary acts
as secretary to the Board, the Audit Committee, the Nomination
Committee and the Remuneration Committee.
In addition, Business Review meetings are held between
scheduled Board meetings. These meetings are critical to
providing the Directors with a comprehensive understanding
of the current performance and the key issues affecting Group
businesses, without the formality or rigidity of a Board meeting.
Chief executives and other senior management from the Melrose
businesses are periodically invited to attend and present to these
meetings, providing the Directors with an opportunity to meet
and engage with existing and emerging talent from across
the organisation.
In accordance with its Articles and in compliance with the
Companies Act 2006, the Company has granted a qualifying
third party indemnity to each Director. The Company also
maintains Directors’ and Officers’ liability insurance.
Chairman, Vice-Chairman and Chief Executive
The roles of Chairman and Vice-Chairman are, and will remain,
separate to that of the Chief Executive of the Company,
in accordance with best practice and Board policy.
The Chairman, with the assistance of the Vice-Chairman, is
responsible for leadership of the Board. The Chairman sets
the Board agenda and ensures that adequate time is given to
the discussion of issues, particularly those of a strategic nature.
Responsibility for ensuring effective communications with
shareholders rests with the Chairman, Vice-Chairman and the
two other executive Directors.
During 2014, the non-executive Directors, led by the current
Senior non-executive Director, Perry Crosthwaite, held meetings
to discuss and appraise the performance of the Chairman.
The Chief Executive is responsible for strategic direction and
decisions involving the day-to-day management of the Company.
Main Principle B: Effectiveness
Board composition
As at 4 March 2015, the Board comprised an executive Chairman,
three other executive Directors and four non-executive Directors,
all of whom the Board considers to be independent. The Board
believes that the Directors possess diverse business experience
in areas complementary to the activities of the Company.
Biographies of the Directors are shown on pages 62 and 63 and
on the Company’s corporate website at www.melroseplc.net.
These biographies identify any other appointments held by the
non-executive Directors. None of the executive Directors hold
non-executive positions outside the Company.
Non-executive Director independence
In accordance with the provisions of the UK Code, consideration
has been given to the independence of all non-executive
Directors. The Board considers all of the non-executive Directors
to be independent.
Melrose Industries PLCAnnual Report 2014Governance The Board notes that Perry Crosthwaite, who was appointed
as a non-executive Director on the Melrose Board in July 2005
and first elected at the 2006 AGM, will have served three terms
totalling nine years at the time of the 2015 AGM. However,
the Board is of the opinion that, due to his invaluable experience
in financial and other corporate matters, Perry Crosthwaite
continues to maintain both his effectiveness and his
independence. The Board will continue to monitor this
position but feels at the present time that Perry Crosthwaite
continues to make an important contribution to the Company.
The non-executive Directors are not entitled to any cash bonus
or shares under the 2012 Incentive Plan.
Board induction, training and support
A full and formal induction programme tailored to the needs
of individual Directors is provided for new Directors joining
the Board. The primary aim of the induction programme is
to introduce new Directors to, and educate new Directors
about, the Group’s businesses, its operations and its governance
arrangements. Individual induction requirements are monitored
by the Chairman and the Company Secretary to ensure that new
Directors gain sufficient knowledge to enable them to contribute
to the Board’s deliberations as quickly as possible.
One of the outputs from the 2013 Board evaluation exercise,
see below, was a desire for the Board as a whole to gain greater
visibility of and connection with the Group’s business operations.
Following this feedback, a visit was organised to the Elster Gas
operations in Germany (see below).
Board visit
In October 2014, the Board visited Elster Gas in Lotte, near
Osnabrück, Germany, which in 2012 had received the German
Global Excellence in Operations award. Meetings were held
with senior management from across the Elster Gas business
and a tour of the production facility was complemented by
presentations covering:
• the history of Elster Gas, the scope of its operations and the
global product range;
• the business transformation post-acquisition by Melrose;
• the future strategy of Elster Gas; and
• human resource management across the business unit.
69
Board evaluation
Evaluation approach and process
During 2014, the Chairman held meetings with each of the
Directors, including the Senior non-executive Director, Perry
Crosthwaite, to discuss the performance of individual executive
Directors and the Board as a whole. Following positive feedback
from Directors over the process adopted for the 2013 evaluation
exercise, the Board decided once again to engage Lintstock
Limited to undertake an independent evaluation of Board and
Board Committee performance and to identify areas where
performance and procedures might be further improved.
Lintstock is a specialist corporate governance consultancy
and, other than supporting the Audit Committee in its assessment
of the effectiveness of the external auditor, has no commercial
dealings or other connection with the Melrose Group.
The first stage of the evaluation involved a review by the Board of
what had been delivered in 2014 against the outputs and actions
agreed from the 2013 evaluation exercise.
Actions agreed from
the 2013 evaluation
What we delivered
in 2014
To incorporate into the Board
schedule visits to major
operating businesses and
periodic sessions with senior
management from those
business units.
To increase the frequency of
management presentations
to the Board.
To devote further Board
time to discussions on talent
management and executive
and non-executive Director
succession planning.
To further enhance the
Board’s understanding
of risk identification and
management.
In October 2014, the Board visited
the award winning/class leading Elster
Gas factory in Osnabrück, Germany
(see above).
In addition to a series of presentations
delivered by the Elster Gas management
team during the Board’s site visit to
Osnabrück, the Board also received a
comprehensive business briefing from
the leadership team of Elster Electricity.
Executive and non-executive Director
succession planning, talent management
and senior executive career planning were
considered by the Board at a dedicated
session held in December 2014. It is
intended that these issues remain a core
focus for the Board and that they be
reviewed on an annual basis.
At the Board’s instruction, an audit was
undertaken of the risk management
processes in operation across the
Group. Following this audit, a new
risk management framework is being
developed and will be implemented
throughout the Group during 2015
(see pages 36 to 37).
The second stage of the 2014 evaluation involved Lintstock
engaging with the Chairman and the Company Secretary to
discuss and agree the scope of the proposed evaluation and
to develop a series of questionnaires tailored to the specific
circumstances of Melrose.
The Board was requested to complete online questionnaires
addressing the composition and performance of the Board and
its Committees, and the performance of the Chairman and the
Senior non-executive Director. The anonymity of all respondents
was ensured throughout the process in order to promote the
open and frank exchange of views.
Melrose Industries PLCAnnual Report 2014GovernanceGovernance 70
Corporate Governance report
continued
Lintstock subsequently produced a report which addressed the
following areas:
• The composition of the Board, its expertise and dynamics;
• The performance of the Board since the last evaluation exercise;
• The Board’s time management, the annual cycle of work and the
support afforded to the Board;
• The performance of the Board Committees and of the Chairman
and Senior non-executive Director;
• The Board’s oversight of strategy, its understanding of the
Company’s performance relative to its competitors and the key
strategic issues facing the Group over the next three to five years;
• The Board’s oversight and management of risk and internal
control; and
• The succession planning for the executive Directors and for
senior management at the level below the Board and the Board’s
visibility of potential successors from within the business.
At a dedicated Board session, a report of the findings of the
evaluation and its recommendations was discussed and specific
actions agreed.
Outputs of the evaluation
The Board recognises the benefits of a thorough Board
and Committee evaluation process. Overall, the evaluation
demonstrated that the composition and performance of
the Board and its Committees and the performance of the
Chairman and the Senior non-executive Director continued
to be very effective.
As a result of the review, amongst other things, the Board agreed:
• On the importance of planning for executive Director succession
and managing the succession of non-executive Directors;
• To continue its focus on risk management and internal control
and to clearly delineate accountabilities for risk management
between the Board and the Audit Committee;
• That it should continue with its visits to major operating units
to ensure that it develops and maintains a sound knowledge of
the businesses, is visible to the operations and has access to
a broad group of executives and employees;
• To increase the frequency of management presentations so
that the Chief Executive of each business reports to the Board
annually; and
• That the format and content of the management information
provided to the Board should be reviewed. Increased market
information and intelligence was also requested.
In accordance with the provisions of the UK Code, it is anticipated
that externally facilitated Board evaluations will be carried out
every three years. In years when an external evaluation is not
carried out, the Board will continue to complete internal
performance-based questionnaires, with the process managed
by the Company Secretary. The scope for each subsequent
evaluation will be designed to build upon learning gained in the
previous year to ensure that the recommendations agreed in the
evaluations are implemented and that year-on-year progress is
measured and reported upon.
Annual re-election of Directors
In accordance with the provisions of the UK Code, all of the Directors
stood for re-election at the 2014 Annual General Meeting. The
Articles of the Company require the Directors to stand for annual
re-election, thus ensuring continued compliance with the UK Code.
As such, all Directors will offer themselves for re-election at the 2015
Annual General Meeting, to be held on 14 May 2015.
Following the formal performance evaluations of each of the
Directors and having carefully considered the commitments
required and the contribution made by each Director, the Chairman
is of the opinion that each Director’s performance continues to be
effective and continues to demonstrate commitment to the role.
Attendance of Directors at meetings
The following table shows the attendance of each of the Directors at
the scheduled meetings of the Board and its Committees held during
the year. The quorum necessary for the transaction of business by
the Board and each of its Committees is two. Briefing papers and
meeting agendas are provided to each Director in advance of each
meeting. Decisions are taken by the Board in conjunction with the
recommendations of its Committees and advice from external advisers
and senior management as appropriate. The representations of any
Director, who is unable to attend a meeting of the Board or a standing
Committee, are duly considered by those Directors in attendance.
The table also shows attendance at Business Review meetings
held between scheduled Board meetings.
Attendance of Directors
Board
Audit Nomination Remuneration
Business
Review
Number of meetings(1)
Christopher Miller
David Roper
Simon Peckham
Geoffrey Martin
Perry Crosthwaite
John Grant
Justin Dowley
Liz Hewitt
Miles Templeman(3)
4
4
4
4
4
4
4
4
4
1
3
–
–
–
3(2)
3
3
3
3
1
2
2
–
–
–
1
2
2
2
–
3
–
–
–
–
3
3
3
3
2
3
3
3
3
3
3
3
2
2
2
(1) In addition, ad-hoc meetings are held from time to time which are attended by a quorum of
Directors and are convened to deal with specific items of business.
(2) Geoffrey Martin attends by invitation.
(3) Retired from the Board at the conclusion of the AGM on 13 May 2014.
Main Principle C: Accountability
Objectives and policy
The objectives of the Directors and senior management are to
safeguard and increase the value of the business and assets of
the Group for the benefit of its shareholders. Achievement of their
objectives requires the development of policies and appropriate internal
control frameworks to ensure the Group’s resources are managed
properly and any key risks are identified and mitigated where possible.
The Board is ultimately responsible for the development of the
Group’s overall risk management policies and system of internal
control frameworks and for reviewing their respective effectiveness,
while the role of management is to implement these policies and
frameworks across the Group’s business operations. The Directors
recognise that the systems and processes established by the
Board are designed to manage, rather than eliminate, the risk of
failure to achieve business objectives and cannot provide absolute
assurance against material financial misstatement or loss.
Melrose Industries PLCAnnual Report 2014Governance 71
The Board is committed to satisfying the internal control guidance
for Directors set out in the revised version of the Turnbull
Guidance on Internal Control. In accordance with this guidance,
there is an ongoing process, regularly reviewed by the Directors,
for identifying, evaluating, managing and mitigating (where
possible) the significant risks faced by the Group. This process
for reviewing the Group’s internal controls is consistent with prior
years and has been in place throughout the 2014 financial year
and up to the date of approval of this Annual Report.
A separate Audit Committee report is set out on pages 72 to 75
and provides details of the role and activities of the Committee
and its relationship with the internal and external auditors.
Managing and controlling risk
The Group has policies and internal control frameworks which
address a number of key business risks, including strategic,
operational, compliance, ethical and financial risks. A summary
of the principal risks and uncertainties that could impact upon
the Group’s performance is set out on pages 38 to 41.
The Group’s financial risk management objectives and policies are
also described in the Finance Director’s review on pages 42 to 49.
The Group operates on a de-centralised basis and the Board
has established an organisational structure with clear reporting
procedures, lines of responsibility and delegated authority.
Divisional senior management, operational managers and financial
controllers have been delegated responsibility by the Board for
the establishment and implementation of detailed control systems
as appropriate for their business.
An established programme of regular review is in place at
the businesses and a culture of continuous improvement is
encouraged by the Board through regular meetings with senior
management, review of operating performance and progress
against business plans. The ongoing process of review provides
assurance that the control environment is operating as intended.
The Audit Committee also monitors the effectiveness of the
internal control process implemented across the Group through
a review of the key findings presented by the external and internal
auditors. Management is responsible for ensuring that the Audit
Committee’s recommendations in respect of internal controls
and risk management are implemented.
Internal financial controls and reporting
The Group has a comprehensive system for assessing the
effectiveness of the Group’s internal controls, including strategic
business planning and regular monitoring and reporting of financial
performance. A detailed annual budget is prepared by senior
management and thereafter is reviewed and formally adopted by
the Board. The budget and other targets are regularly updated via
a rolling forecast process and regular business review meetings are
held involving senior management to assess performance. The results
of these reviews are in turn reported to and discussed by the Board
at each meeting. As discussed in the Audit Committee report on
pages 72 to 75, BM Howarth is the Group’s internal auditor; they also
assumed internal audit responsibility for the Elster businesses from
acquisition in August 2012 onwards. A total of 37 internal audit visits,
covering 43% of Group turnover, were completed during 2014.
These visits include 30 Elster reporting units which, combined with
the visits completed in 2013 and the planned visits for the first quarter
of 2015, will ensure that 93% of the continuing Elster units will have
been visited by internal audit since the acquisition. The Directors are
pleased to report that there were no material deficiencies; the majority
of the recommendations presented in the internal audit reports have
now been, or are in the process of being, implemented. Of the 37
sites visited in 2014, four sites have been chosen for “re-visits” in 2015
to ensure that the agreed improvements to systems and processes
have been implemented. During 2014, initial fair value audit visits were
also completed on all Eclipse sites acquired during the year.
The Board confirms that, from the review of internal controls, it
has not determined any significant failings or weaknesses that it
considers require remedial action. The Board also confirms that it
has not been advised of any material weaknesses in the internal
control systems that relate to financial reporting.
Whistleblowing, anti-bribery and corruption policies
The Company takes very seriously its responsibilities under the
Bribery Act 2010 and has in place appropriate measures to
ensure compliance. Policies in place within each business apply
to all Directors, employees (whether permanent, fixed-term, or
temporary), pension trustees, consultants and other business
advisers, contractors, trainees, volunteers, business agents,
distributors, joint venture partners, or any other person working for
or performing a service on behalf of the Company, its subsidiaries
and associated companies in which it has a majority interest.
During 2014, the Company updated its compliance policies and
these are now in the process of being implemented across the
Group. As part of these ongoing improvements, NAVEX Global
was engaged to provide an externally facilitated whistleblowing
hotline which is being made available during 2015.
Main Principle D: Remuneration
Following changes to the Companies Act 2006 and in line with
new regulations which came into effect on 1 October 2013, details
around Directors’ remuneration, both generally and as it relates to
the UK Code, are set out in the Directors’ remuneration report and
are now presented in the following three sections:
• the annual statement from the Chairman of the Remuneration
Committee, which can be found on pages 78 to 80;
• the Annual Report on Remuneration, which can be found on
pages 81 to 88; and
• a summary of the Directors’ remuneration policy, which can be
found on pages 88 to 95.
Main Principle E: Relations with shareholders
The Company seeks to build on a mutual understanding of
objectives with its institutional shareholders, via the executive
Directors, through regular meetings and presentations following
announcements of its annual and interim results. The non-executive
Directors are available to meet institutional shareholders should
there be unresolved matters they wish to bring to their attention.
The views of key analysts and shareholders generally are fed back
to the Board directly by individual Directors, or via the Company’s
brokers. This helps to ensure that all members of the Board
develop an understanding of the views of major shareholders.
The Board welcomes the attendance of shareholders at the
Annual General Meeting. The results of the voting on each of the
resolutions proposed will be announced shortly after the Annual
General Meeting has concluded, via the Melrose corporate
website at www.melroseplc.net.
Melrose Industries PLCAnnual Report 2014GovernanceGovernance 72
Audit Committee report
John Grant
Audit Committee Chairman
The Board has delegated to the Audit
Committee responsibility for overseeing
the financial reporting and internal control
review and reporting and for making
recommendations to the Board in relation
to the appointment of the Company’s
internal and external auditors.
Member
John Grant (Chairman)
Perry Crosthwaite
Justin Dowley
Liz Hewitt
Miles Templeman(1)
No. of meetings
3/3
3/3
3/3
3/3
1/1
(1) Retired from the Board at the conclusion of the AGM on 13 May 2014.
Role and responsibilities
The Audit Committee’s (the “Committee”) role and responsibilities are
set out in its terms of reference. These were updated in August 2014 in
line with best practice and are available on the Company’s website and
from the Company Secretary at the Registered Office. In discharging
its duties, the Committee embraces its role of protecting the interests
of shareholders with respect to the integrity of financial information
published by the Company and the effectiveness of the audit.
Specifically, the Committee is responsible for:
Composition
Each member of the Committee is deemed to be independent by
the Company and brings recent and relevant financial experience
from senior executive and non-executive positions as described in
their biographies on pages 62 and 63.
Miles Templeman stepped down from the Committee following
his retirement from the Board at the conclusion of the AGM on
13 May 2014.
The Company Secretary acts as secretary to the Committee.
The Committee invites the Group Finance Director, the Head of
Financial Reporting and senior representatives of the external and
internal auditors to attend meetings where appropriate to the
business being considered. The Committee has the right to invite
any other Directors and/or employees to attend meetings where
this is considered appropriate. In addition, the Committee meets
at least once per year with both the external and internal auditors
without management present.
Summary of meetings in the year
The Committee is expected to meet not less than three times
a year. In 2014, the Committee met in March, August and
November. The scheduling of these meetings is designed to be
aligned with the financial reporting timetable thereby enabling the
Committee to review the Annual Report and financial statements,
the interim financial report and the audit plan ahead of the year
end audit and maintaining a view of the internal controls and
processes throughout the year.
The attendance of its members at these meetings is shown above.
Significant issues related to the financial statements
In discharging its duties under its terms of reference, the
Committee undertook the following recurring activities that receive
annual scrutiny:
• reviewed the Annual Report and financial statements and interim
financial report. As part of this review the Committee received a
report from the external auditor on their audit of the Annual Report
and the financial statements and review of the interim report;
• considered the processes in place to generate forecasts of
cash flows and accounting valuation information, including
the reasonableness and consistent use of assumptions;
• reviewed the effectiveness of the Group’s internal controls and
• reviewing and monitoring the integrity of the financial statements
of the Group, including the Annual Report and interim report;
disclosures made in the Annual Report and financial statements
on this matter;
• keeping under review the effectiveness of the Group’s financial
reporting, internal audit and controls, risk management systems
and compliance controls;
• focusing and challenging the consistency of accounting policies,
methods used to account for significant or unusual transactions
and compliance with accounting standards;
• reviewing the Group’s arrangements for its employees to raise
concerns in confidence about possible wrongdoing in financial
reporting, in accordance with the Company’s whistleblowing policy;
• developing, implementing and monitoring the Group’s policy on
external audit and for overseeing the objectivity and effectiveness
of the auditor; and
• reviewing and considering the Annual Report and financial
statements to ensure that it is fair, balanced and understandable
and advising the Board that it can state that this is the case.
• considered the Annual Report and financial statements in the
context of being fair, balanced and understandable and reviewed
the content of a paper prepared by management with regard to
this principle in relation to the 2014 Annual Report and financial
statements. Advised the Board that in its view, the 2014 Annual
Report and financial statements when taken as a whole is fair,
balanced and understandable and provides the information
necessary for shareholders to assess the Group’s performance,
business model and strategy; and
• reviewed and agreed the scope of the audit work to be
undertaken by the auditor.
Melrose Industries PLCAnnual Report 2014Governance 73
In addition to these matters, the Committee considered the following significant issues in relation to the financial statements during the year:
The Audit Committee’s activities during 2014
Significant issue considered by the Audit Committee
How the issue was addressed by the Audit Committee
Provisions for legal and environmental claims and other
provisions
The level of provisioning for legal and environmental claims and
other provisions require significant judgement.
Although provisions are reviewed on a regular basis and adjusted
for management’s best current estimates, the judgemental nature of
these items means that future amounts settled may be different from
those provided.
(Refer to notes 3 and 20)
Classification of exceptional items
The reporting, classification and consistency of exceptional items,
specifically restructuring, were an area of focus for the Committee.
(Refer to note 6)
Taxation risks and recognition of deferred tax assets
Judgement is required in determining the Group’s provision for income
taxes including estimating tax provisions where additional current
tax may become payable in the future following the audit by the tax
authorities of previously filed tax returns. Judgement is also required
as to whether a deferred tax asset should be recognised based on
the availability of future taxable profits.
(Refer to notes 3, 8 and 21)
The Committee considered management’s proposed provisioning in
respect of these legal and environmental claims and other provisions
including the key judgements made and relevant legal advice.
The external auditor also reported on all material provisions to
the Committee.
Having considered the matter and sought guidance from the external
auditor, the Committee concluded that management’s proposed
provisioning and the associated disclosures in the Annual Report
were appropriate.
The Committee considered the nature, classification and consistency
of exceptional items. These items were detailed in the external
auditor’s paper to the Committee. The Committee considered this
issue and concluded that these exceptional items were appropriately
captured and disclosed.
Management’s taxation judgements, accounting treatment and the
appropriateness of tax disclosures have been reviewed by the Committee.
The Committee considered whether, from an accounting perspective,
an update was required to the tax provisions previously recorded in
respect of specific exposures identified. In addition, the Committee
reviewed the tax implications of corporate transactions undertaken
during the year. The Committee debated whether additional deferred
tax assets should be brought onto the Balance Sheet as a consequence
of, for example, the expected timing of future corporate transactions.
Having taken input from the external auditor, the Committee agreed with
management’s proposed treatment of tax risks and deferred tax assets.
Impairment of goodwill, intangible assets and other fixed assets
The judgements in relation to goodwill impairment testing relate
to the assumptions applied in calculating the value in use of the
cash-generating units being tested for impairment. The key
assumptions applied in the calculation relate to the future
performance expectations of the cash-generating units.
Business plans prepared by management supporting future
performance expectations used in the calculation were approved
by the Board. The Committee received a detailed report on the
outcome of the impairment review performed by management.
The impairment review was also an area of focus for the external
auditor, who reported their findings to the Committee.
The Committee has also considered the related disclosures
within the financial statements.
(Refer to notes 3 and 12)
The Committee considered management’s approach, the
assumptions applied in relation to the impairment of goodwill,
intangible assets and other fixed assets and related disclosures
and, having taken input from the external auditor, agreed with
management’s assessment that there were no indicators of
impairment for any of the Group’s business units during the year.
External auditor rotation
The Group is required to comply with developing regulatory
requirements in respect of external auditor rotation.
The Committee considered papers which highlighted the developing
regulatory and governance framework and which highlighted the
expected timeline and relevant impact on the Group.
As noted below, the external auditor is required to rotate the
audit signing partner every five years. The Group’s current audit
signing partner is due to be replaced in the financial year ending
31 December 2015.
Non-audit fees
With effect from the 2017 financial year, the Group will be required to
comply with new rules governing the level of non-audit services that
may be awarded to the external auditor.
During 2014, the Committee considered a number of potential
candidates for the role of new audit signing partner. A suitable candidate
was selected and was formally introduced to the Committee. The new
audit signing partner will take office following the conclusion of the audit
process in respect of the financial year ended 31 December 2014.
The Committee considered papers detailing the new rules and
highlighting the impact on the Group. A policy on the engagement
of the external auditor for the supply of non-audit services is in place
and, in line with best practice, is subject to regular review. The
Company is committed to complying with the rules and regulations
governing the payment of non-audit fees.
Melrose Industries PLCAnnual Report 2014GovernanceGovernance 74
Audit Committee report
continued
External audit
Appointment, re-appointment and assessment
of effectiveness
The Committee reviews and makes recommendations with regard
to the re-appointment of the external auditors. In making these
recommendations, the Committee considers auditor effectiveness
and independence, partner rotation and any other factors which
may impact the external auditor’s re-appointment.
The external auditor is required to rotate the audit signing partner
every five years. The Group’s audit signing partner changed as
part of that rotation process in 2010 and therefore partner rotation
is due in the financial year ending 31 December 2015.
The Committee has reviewed the external auditor’s performance
and effectiveness. For 2014, the Company engaged the services
of Lintstock Limited, an independent corporate governance
specialist, to support the assessment of Deloitte LLP’s
effectiveness and performance. Lintstock worked with the
Chairman of the Committee and the Company Secretary to
develop a series of questions covering the key areas of the
audit process that the Committee is expected to have an
opinion over, including:
• the calibre, continuity, experience, resources and technical
and industry knowledge of the external audit team;
• the planning and execution of the audit process;
• the quality and timeliness of communications from the
external auditor;
• the support provided to the Committee by the external audit
partner; and
• the external auditor’s independence and objectivity.
The Committee, along with relevant members of the management
team, were requested to complete an online questionnaire
containing these questions. Lintstock subsequently produced
a report summarising the responses. Based on this report,
the Committee concluded that the quality of the external audit
team remains very high, the external audit process is operating
effectively and Deloitte LLP continues to prove effective in its
role as external auditor. As detailed below, the Committee
regularly monitors the objectivity and independence of the
external auditor.
Deloitte LLP was appointed in 2003 when the Company
commenced trading and the external audit has not been
formally tendered since then. The Committee is satisfied that the
effectiveness and independence of the external auditor is not
impaired in any way. There are no legal or contractual obligations
that restrict the Group’s capacity to recommend a particular firm
for appointment as auditor and therefore a resolution proposing
the reappointment of Deloitte LLP as external auditors will be
put to the shareholders at the 2015 Annual General Meeting.
Audit tendering
The Committee is mindful of the recommendations of the UK
Corporate Governance Code that the external audit should be
put out to tender every 10 years. The Company intends to comply
with the order issued by the Competition & Markets Authority
relating to the statutory audit market for FTSE 350 companies,
which came into effect on 1 January 2015, and will apply to
financial years commencing on or after 1 January 2015. The
current audit engagement partner’s rotation is due in the year
ending 31 December 2015. It is the Committee’s understanding
that under the EU rules, a formal tender process will be required
to be held no later than two years from the end of the current
rotation and that a rotation of external audit firm will be required
by 2023. This matter will be kept under review.
Non-audit services
Under new EU and Competition Commission rules, effective from
the 2017 financial year, the level of non-audit services awarded to
the external auditor will need to be capped at 70% of the average
audit fee for the previous three years.
The Company is committed to complying with the rules and
regulations governing non-audit services. A policy on
the engagement of the external auditor for the supply of non-audit
services is in place to ensure that the provision of non-audit
services does not impair the external auditor’s independence
or objectivity. In accordance with best practice FRC guidelines,
the Company policy in relation to non-audit services is kept under
regular review (it was re-examined during 2014); the policy outlines
which non-audit services are pre-approved (being those which
are routine in nature, with a fee that is not significant in the context
of the audit or audit-related services), which services require the
prior approval of the Committee and which services the auditor
is excluded from providing. The general principle is that the audit
firm should not be requested to carry out non-audit services on
any activity of the Company where they may, in the future, be
required to give an audit opinion.
During 2014, the main non-audit services provided by Deloitte
LLP were in relation to taxation advisory, compliance and
planning services.
An analysis of the fees earned by the external auditors for audit
and non-audit services can be found in note 7 to the consolidated
financial statements.
Melrose Industries PLCAnnual Report 2014Governance 75
Auditor objectivity and independence
The Committee carries out regular reviews to ensure that
auditor objectivity and independence is maintained at all times.
A different senior partner oversees the taxation audit of the
Company compared to those working on the non-audit
taxation services.
No fees were paid to Deloitte LLP on a contingent basis. Based
on these strict procedures the Committee remains confident that
auditor objectivity and independence have been maintained but
accepts that non-audit work should be controlled to ensure that
it does not compromise the auditor’s position.
At each year end, Deloitte LLP submits a letter setting out how it
believes its independence and objectivity have been maintained.
As noted above, they are also required to rotate the audit partner
responsible for the Group audit every five years and significant
subsidiary audits every seven years.
Internal audit
Due to the size and complexity of the Group, it is appropriate for
an internal audit programme to be used within the business. BM
Howarth, an external firm, provides internal audit services to the
Group. A rotation programme is in place, such that every business
unit will have an internal audit at least once every three years, with
the largest sites being reviewed at least once every two years.
The rotation programme allows divisional management’s actions
and responses to be followed up on a timely basis. The internal
audit programme of planned visits is discussed and agreed with
the Committee during the year.
The internal auditor’s remit includes assessment of the
effectiveness of internal control systems, compliance with
the Group’s Policies and Procedures Manual and a review
of the businesses’ Balance Sheets. A report of key findings
and recommendations is presented to the Group Finance
Director, the Head of Financial Reporting and, where considered
necessary, the Group Operations Controller, followed by
a meeting to discuss these key findings and to agree on
resulting actions.
BM Howarth present their key findings to the Committee twice
during the year. These presentations include details of the site
coverage for the previous year and an outline of the planned visits
for the current year. A review of the internal audit process and
scope of work covered by the internal auditor is the responsibility
of the Committee, to ensure their objectives, level of authority
and resources are appropriate for the nature of the businesses
under review. The Committee also reviews BM Howarth’s
performance against the agreed internal audit programme.
A report of significant findings is presented by the internal
auditor to the Committee at each meeting and implementation
of recommendations by the Board is followed up at the
subsequent Committee meeting.
John Grant
Chairman, Audit Committee
4 March 2015
Melrose Industries PLCAnnual Report 2014GovernanceGovernance 76
Nomination Committee report
Liz Hewitt
Nomination Committee Chairman
“ Melrose is a meritocracy and individual
performance is the key determinant
in any appointment, irrespective of
ethnicity, gender or other characteristic,
trait or orientation.”
The Nomination Committee has
overall responsibility for making
recommendations to the Board on
all new appointments to the Board
and for ensuring that the Board and
its Committees have the appropriate
balance of skills, experience,
independence, diversity and knowledge
of the Company to enable them to
discharge their respective duties and
responsibilities effectively.
Member
Liz Hewitt (Chairman)(1)
Perry Crosthwaite
Justin Dowley
John Grant
Christopher Miller
Miles Templeman(2)
No. of meetings
2/2
1/2
2/2
2/2
2/2
–
(1) Appointed Chairman with effect from the conclusion of the AGM on 13 May 2014.
(2) Retired as Chairman with effect from the conclusion of the AGM on 13 May 2014.
Committee responsibilities
The Nomination Committee (the “Committee”) discharges these
responsibilities through:
• regular review of the size, structure and composition of the Board
and by providing recommendations to the Board of any
adjustments that may be necessary from time to time;
• giving full consideration to succession planning in order to ensure
an optimum balance of executive and non-executive Directors in
terms of skills, experience and diversity;
• keeping under review the leadership needs of the business; and
• keeping up to date and fully informed about strategic issues and
commercial changes affecting the Company and the markets in
which it operates.
The Committee is expected to meet not less than twice a year
and during 2014 the Committee met twice. The attendance of its
members at these Committee meetings is shown above.
The Committee’s terms of reference were reviewed and revised
in August 2014. Full terms of reference are available to view on
the Company’s website at: www.melroseplc.net/about-us/
governance/nomination-committee
Further details regarding the composition, diversity policy and the
2014 activities of the Committee are shown below.
Composition
In compliance with the UK Corporate Governance Code, the
majority of the members of the Committee were independent
non-executive Directors throughout 2014. The Committee was
chaired by Miles Templeman until his retirement from the Board
following the conclusion of the 2014 AGM on 13 May 2014. Miles
Templeman was succeeded as chairman by Liz Hewitt. Perry
Crosthwaite, John Grant and Justin Dowley also served on the
Committee throughout the year. Christopher Miller, Executive
Chairman of the Board, was also a member of the Committee
throughout the year.
The Company Secretary acts as secretary to the Committee.
On occasion, the Committee invites the Chief Executive, the
Vice-Chairman and the Group Finance Director to attend
discussions where their input is required.
Directors’ remuneration report
More information p78
Melrose Industries PLCAnnual Report 2014Governance Diversity
Melrose is a meritocracy and individual performance is the
key determinant in any appointment, irrespective of ethnicity,
gender or other characteristic, trait or orientation. The Board
recognises the importance of diversity throughout the workforce,
be it geographical, cultural or market aligned and encompassing
gender, race, sexual orientation and disability, and it is committed
to equality of opportunity for all employees. For example, Melrose is
proud to support the Business Disability Forum, a body committed
to understanding the changes required in the workplace so that
disabled people are treated fairly and they can contribute to
business success, to society and to economic growth.
The Committee currently takes into account a variety of factors
before recommending any new appointments to the Board,
including relevant skills to perform the role, experience,
knowledge, ethnicity and gender. The most important priority
of the Committee, however, has been and will continue to be
ensuring that the best candidate is selected to join the Board
and this approach will remain in place going forward.
The Committee will endeavour to pursue diversity, including
gender diversity, throughout the Melrose Group and notes
the recommendations of Lord Davies’ review, “Women
on Boards”. However, given the Company’s strategic business
model and the frequent turnover of businesses, the Committee
does not think that setting and committing to specific diversity
targets in relation to the composition of the Board, and the
workforce in the wider businesses within the Group, is correct
for Melrose.
77
What the Committee did in 2014
The principal focus of the Committee during 2014 has been to
consider the items set out below:
• The Committee considered the composition and balance of
the Board and the timing of future Board changes and reviewed
the succession plans in place in respect of key executives
in conjunction with the provisions of the UK Corporate
Governance Code;
• The existing time commitment of Melrose non-executive
Directors was reviewed and confirmed as appropriate;
• The Committee membership was reviewed and a
recommendation made to the Board that no changes should be
made in 2015;
• The independence of each non-executive Director was reviewed
and a recommendation made to the Board supporting the
Board’s determination of non-executive Director independence;
• Consideration was given to the re-appointment of the Directors
before making a recommendation to the Board regarding each
Director’s re-election at the 2015 AGM;
• A review of the leadership requirements of Melrose, both
executive and non-executive, was undertaken and this
confirmed that the existing management team is appropriate
for the Group. This review also demonstrated that appropriate
and effective leadership is in place within the business units
and that processes are in place to ensure that performance
is reviewed regularly against operational and financial criteria;
• The Committee examined the career planning and talent
management programmes in operation across the Group
and concluded that these were appropriate for the needs
of the business;
• The Committee reviewed and re-affirmed the principles
underlying the Company’s diversity policy; and
• The Committee’s terms of reference were revised during the
year to ensure that these remain in line with best practice.
Liz Hewitt
Chairman, Nomination Committee
4 March 2015
Melrose Industries PLCAnnual Report 2014GovernanceGovernance 78
Directors’ remuneration report
Justin Dowley
Remuneration Committee Chairman
“ Melrose’s remuneration philosophy
is that executive remuneration should
be simple and transparent, support
the delivery of the business strategy
and pay for performance.”
The Board has delegated to the
Remuneration Committee responsibility
for overseeing the remuneration of
the Company’s Directors, Company
Secretary and other senior employees.
Member
Justin Dowley (Chairman)(1)
Perry Crosthwaite(1)
Miles Templeman(2)
John Grant
Liz Hewitt
No. of meetings
3/3
3/3
2/2
3/3
3/3
(1) Justin Dowley was appointed Chairman of the Remuneration Committee with effect
from the close of the 2014 AGM on 13 May 2014. Perry Crosthwaite was Chairman of
the Remuneration Committee from 1 January 2014 until the close of the 2014 AGM.
(2) Miles Templeman retired as a non-executive Director of the Company with effect
from the close of the 2014 AGM on 13 May 2014.
Board of Directors
More information p62
Dear Shareholder,
On behalf of the Board, I am pleased to present our report on
Directors’ remuneration, being my first report as Chairman of the
Remuneration Committee. The Directors’ remuneration report sets
out the amounts earned in respect of the year ended 31 December
2014 and the remuneration policy for the Directors of Melrose.
As with the Directors’ remuneration report for the year ended
31 December 2013, this report is presented in two sections: the
Annual Report on Remuneration and the Directors’ remuneration
policy. The Annual Report on Remuneration provides details on the
amounts earned in respect of the year ended 31 December 2014
and how the Directors’ remuneration policy will be applied in 2015;
the Annual Report on Remuneration will be subject to an advisory
vote at the AGM. The Directors’ remuneration policy sets out the
policy that was approved by shareholders at the 2014 AGM and
took binding effect from the conclusion of that meeting (in line with
the regulations on the presentation and disclosure of Directors’
remuneration which came into effect from October 2013), except
that, as noted on page 88, we have not included the “illustrations
of the application of Remuneration Policy”. The approval of the
Directors’ remuneration policy is valid for three years (provided the
Company does not intend to make changes to the policy within
this period) and therefore shareholder approval of the policy is not
required at the AGM scheduled for 14 May 2015. A key element of
the Melrose remuneration framework is the Long-Term Incentive
Plan, which had already been approved by special resolution of
shareholders at a general meeting held in April 2012.
Our remuneration structure for executive Directors
Melrose’s remuneration philosophy is that executive remuneration
should be simple and transparent, support the delivery of the
business strategy and pay for performance. This philosophy is
reflected in our remuneration structure.
The Remuneration Committee feels strongly that rewards should be
linked to generation and delivery of real returns to shareholders.
• Base salary: Base salaries are paid at the lower end of a market
competitive range compared to companies of similar size and
complexity. Since flotation in 2003 all current executive Directors
have received the same annual increases to base salary; in the
last five years these increases have averaged 3%.
• Pension: Pension contributions/salary supplements for executive
Directors are payable at the level of 15% of base salary, which is
considered modest for a business of the size and complexity of
Melrose. No executive Director participates in, or has ever
participated in, any Melrose defined benefit pension scheme.
Melrose Industries PLCAnnual Report 2014Governance 79
• Annual bonus: The maximum bonus payable is set at 100%
of base salary. All Directors who participate in the annual bonus
scheme receive the same percentage bonus. In the last five
years, the average percentage of base salary payable has been
81%. The maximum opportunity is deliberately positioned below
the median maximum opportunity for FTSE 250 companies and
is a percentage of salaries that are paid at the lower end of a
market competitive range compared to companies of similar
size and complexity.
The Remuneration Committee strongly believes that this simple
and transparent incentive framework is aligned with the
Company’s strategy for growth. We believe that this remuneration
strategy has also directly driven historical out-performance
when compared with our competitors, supported the Company’s
success and has clearly led to increased shareholder value.
In this regard, our remuneration arrangements are tailored to
the culture and strategy of the Company and provide a strong
platform for the ongoing long-term success of the Company.
Together with their own purchase of shares, the remuneration
policy has also enabled the executive Directors to build up
and retain significant shareholdings in the Company. As at
31 December 2014, the Chairman and Chief Executive held
92 and 51 times their base salary respectively in Melrose shares.
Further detail is given on pages 84 to 85; however, the table
below shows the number of Ordinary Shares held by the
executive Directors as at 31 December 2014 and the value of
each executive Director’s shareholding at that date as a multiple
of his 2014 base salary.
Executive Director
Christopher Miller
David Roper
Simon Peckham
Geoffrey Martin
Number of
shares held as at
31 December 2014
14,934,282(2)
8,110,074
8,373,288
4,026,674
Value of
shares held at
31 December 2014(1)
£39,844,644
£21,637,677
£22,339,932
£10,743,166
Value of shares
held at
31 December 2014
as a multiple of
2014 base salary
92
50
51
31
(1) For these purposes, the value of a share is 266.8 pence, being the closing mid-market price
on 31 December 2014.
(2) As at 31 December 2014, the interest of Christopher Miller included 5,719,999 Ordinary
Shares held by Harris & Sheldon Investments Limited, a company which is connected
with Christopher Miller within the meaning of section 252 of the Companies Act 2006.
As noted on page 85, internal Company rules on shareholdings
are extended to senior Melrose management in addition to the
executive Directors in order that appropriate remuneration
principles are applied to senior management on a similar basis
to executive Directors.
• Long-term incentives: The only long-term incentive
arrangement in which the executive Directors participate is the
2012 Incentive Plan which was approved by shareholders by
special resolution in a general meeting held on 11 April 2012
(the “LTIP”). Entitlements under the 2012 Incentive Plan, details
of which are provided on page 85, were awarded in April 2012.
Any payment made will be dependent upon shareholder value
generated over a five year time period.
Rather than successive one year LTIP arrangements, we believe
that a five year arrangement is preferable, given that it is closer to
a typical ownership cycle for an acquired business. By its nature
this means that any payment under the LTIP is only made once
every five years and so the payment in that fifth year should not
be regarded as an annual payment.
The LTIP arrangements are intended to directly align our executive
Directors’ incentive arrangements with those of shareholders by
linking remuneration specifically to shareholder value. The LTIP
structure is designed to ensure that only once shareholders have
received a compound, annual, cash return in excess of RPI plus
2% does the LTIP have any value whatsoever. This means that
the Melrose LTIP has a minimum growth requirement (effectively
a charge) which requires the initial invested capital to be inflated
by RPI + 2% per annum. The value payable to management
under the LTIP comprises 7.5% of value created in excess of
this minimum. The LTIP is then paid out to participants in pre-
determined proportions, either in Ordinary Shares or (and only
in certain circumstances which are within the complete control
of the Remuneration Committee) as a cash dividend, with the total
being equal in value to 7.5% (reduced from 10% in the equivalent
2009 plan) of the increase in shareholder value in excess of the
minimum growth requirement from the date of grant to 31 May
2017. The formula by which growth is calculated, as set out in
the Company’s articles of association, takes account of every
change to the capital structure and dividend payment. In this
way, the participants will only receive a share of returns over
and above that adjusted level. Under the 2012 Incentive Plan,
the initial invested shareholder capital needs to grow by RPI +2%
per annum before LTIP participants receive anything at all. After
that return, shareholders will also receive 92.5% of any total value
gain. We have included on pages 81 to 82 further information in
relation to the 2012 Incentive Plan, including an illustration of how
any increase in value would be shared between shareholders and
participants in the plan.
Melrose Industries PLCAnnual Report 2014GovernanceGovernance 80
Directors’ remuneration report
continued
The Remuneration Committee has considered the application
of malus and clawback to the executive Directors’ variable
remuneration opportunities, taking into account the views of our
investors and the corporate governance advisory agencies and
the recent changes to the UK Corporate Governance Code. The
annual bonus arrangement is a discretionary arrangement and,
therefore, any annual bonus opportunity is, effectively, subject to
a “malus” provision over the course of the relevant year. Annual
bonus awards for 2014 and future years will also be subject to a
clawback arrangement giving the Remuneration Committee the
ability to require repayment of some or all of any bonus earned
in the event of: (1) material misstatement of financial results; (2)
miscalculation of any performance measure on which the bonus
earned was calculated; and (3) serious misconduct by the relevant
participant. The Remuneration Committee will have discretion to
apply clawback at any time up until the Annual General Meeting
held in the second year following the payment of the bonus –
for example, clawback may be applied in respect of any bonus
earned in respect of performance in 2014 at any time up until the
Annual General Meeting in 2017. The malus provisions applied to
the 2012 Incentive Plan are referred to on page 82; clawback of
some form will apply to the new long-term incentive arrangements
which will replace, in 2017, the existing LTIP approved by special
resolution of the shareholders in 2012.
No other changes have been made to the structure of our
executive Director remuneration for the coming year.
Shareholder engagement
We remain committed to maintaining an open and transparent
engagement with our investors. We believe that a key objective
of the Directors’ remuneration report is to communicate clearly
how much our executive Directors are earning and how this is
clearly linked to performance. Members of the Remuneration
Committee are engaged in an ongoing dialogue with investors
in order to understand more fully their views on Melrose’s
approach to executive remuneration.
Justin Dowley
Chairman, Remuneration Committee
4 March 2015
Our remuneration structure for non-executive Directors
A simple remuneration structure is applied for our non-executive
Directors. Non-executive Directors are paid fees to reflect market
conditions and attract individuals with appropriate knowledge and
expertise. Fees for non-executive Directors are determined by
the executive Directors; and our non-executive Directors do not
participate in our pension arrangements, the annual bonus or
our long-term incentive arrangement.
2014 key decisions and incentive pay-outs
The Remuneration Committee remains committed to a responsible
approach to executive pay. As described in the Strategic Report
and Performance Review sections of this Annual Report, the
Company delivered strong financial and operational results in 2014.
The executive Directors’ remuneration rewards that performance.
Annual bonuses for executive Directors are calculated using
two elements, 80% being based on diluted earnings per share
growth and 20% on a strategic element. Having listened to
our investors and a number of corporate governance advisers,
and in the interests of transparency, greater levels of detail are
included on the objectives and deliverables and on how the
Remuneration Committee determined the level of award under
the 2014 annual bonus.
In line with increases in previous years, an inflationary increase
of 3% was made to the executive Directors’ salaries with effect
from 1 January 2014. This is consistent with the salary rises
awarded to the wider head office population. Non-executive
Directors’ basic fees increased by 3% with effect from January
2014 and with effect from the 2014 AGM the additional fees
payable to the committee chairmen and Senior non-executive
Director (which had been unchanged since 2006) were increased
as disclosed in last year’s Directors’ remuneration report.
Awards under the 2012 Incentive Plan were made in April 2012 and
are due to crystallise in May 2017; accordingly no executive Director
received any pay-out under a long-term incentive plan in 2014.
Business unit Long-Term Incentive Plans
Long-term incentive plans are in place for the leadership of the
Business units with pay-outs based on the performance of their
respective businesses.
Approach to Directors’ remuneration for 2015
The Directors’ remuneration policy as approved by shareholders
at the 2014 AGM is set out in the policy report on pages 88 to 95.
Details of how the policy will be applied in practice for 2015 are set
out in the Annual Report on Remuneration on page 87. Executive
Directors’ base salaries have been increased by 3% with effect
from January 2015, the same as for other head office employees
(other than where other such employees’ salaries have been
increased on a different basis to reflect individual circumstances
such as promotions). Non-executive Directors’ basic fees for 2015
have also been increased by 3%.
The overall framework for the executive Directors’ annual bonus
arrangements for 2015 will remain the same as in 2014, with a
maximum bonus opportunity of 100% of salary, 80% of which
is based on financial performance metrics and 20% of which is
based on strategic performance metrics.
Melrose Industries PLCAnnual Report 2014Governance 81
Annual Report on Remuneration
Introduction
Melrose’s remuneration philosophy is that executive
remuneration should be simple and transparent, support
the delivery of the business strategy and pay for performance,
which is reflected in our remuneration structure:
• fixed elements of remuneration (salary and pension) are
positioned at the lower end of a market competitive range;
• annual incentive remuneration (annual bonus) is positioned
below the median maximum opportunity for FTSE 250
companies; and
• long-term incentive remuneration (the 2012 Incentive Plan)
is intended to directly align executive Directors’ remuneration
with that of shareholders by connecting remuneration
specifically to shareholder value.
The Remuneration Committee strongly believes that this
simple and transparent incentive framework is aligned with
the Company’s strategy for growth and that our remuneration
arrangements are tailored to the culture and strategy of
the Company.
The Annual Report on Remuneration sets out the amounts
earned by Directors in 2014 as a result of the application of our
remuneration philosophy and in accordance with the Directors’
remuneration policy approved by shareholders at the 2014
AGM, and how that philosophy will be applied in 2015.
The 2012 Incentive Plan
In the interests of transparency and to illustrate how the 2012
Incentive Plan may operate, we have set out above an illustration
of how the growth in value of the Company over the period from
the start of that plan in March 2012 might translate into value earned
by participants in that plan. It is important to note that the following
illustration is theoretical only and the value derived under the 2012
Incentive Plan will be entirely determined by reference to the value
that will be delivered to shareholders over the period to crystallisation.
Theoretical value under the LTIP if crystallised on
31 December 2014 rather than on the 2017 scheduled
payment date.
2012
Invested capital from (and including)
March 2012 up to (and including) December 2014
(see line 1 in box below)
Index adjustment/Minimum return
Indexed capital
2014
Number of issued Ordinary Shares on
31 December 2014
Average price of an Ordinary Share for
40 Business Days prior to 31 December 2014
Deemed market capitalisation of Melrose based
on average price of an Ordinary Share for
40 Business Days prior to 31 December 2014
£1,874,717,568
£303,586,944
£2,178,304,512
1,071,761,339
£2.58905
£2,774,843,695
Overall increase in value for shareholders
since 22 March 2012
£596,539,183
Theoretical value to management and shareholder dilution
calculated at 31 December 2014 (illustrative only)
7.5% of increase in value
Theoretical total number of new shares issued
under LTIP(1)
£44,740,439
17,280,639
Theoretical dilution to shareholders due to LTIP
1.6%
(1) The number of shares to be issued in accordance with this calculation differs to the diluted
number of shares of 13.7 million disclosed in note 11. The difference arises due to the
requirements of IAS 33 which stipulate that un-recognised future service costs for LTIPs
(calculated in accordance with IFRS 2) should be deducted from the calculation of diluted
shares for the purposes of Earnings per Share calculations.
Importantly, and as referred to in the Remuneration Policy on
page 90, the calculation of the growth in value of the Company
for the purposes of the 2012 Incentive Plan shall be determined
in accordance with the formula set out in the Company’s articles
of association. Those articles provide that participants in the plan
are entitled to 7.5% of the value created in excess of a minimum
growth threshold, being the initial invested capital increased by
RPI + 2% per annum. The formula by which growth is calculated,
as set out in the Company’s articles of association, takes account
of every change to the capital structure and dividend payment. In
this way, the participants will only receive a share of returns over
and above that adjusted level. In the table above, we have shown
an illustrative calculation of the increase in the value relevant for
the purposes of the 2012 Incentive Plan, calculated in accordance
with the principles in the Company’s articles of association, but
assuming a trigger date of 1 January 2015.
Initial
invested
capital
March
2012(1)
Dividend
May
2012
New share
issue
August
2012
Dividend
October
2012
Dividend
May
2013
Dividend
October
2013
Capital
return
February
2014
Dividend
May
2014
Dividend
October
2014
Total
1,518,492,691 (32,840,728) 1,199,073,594 (32,932,303)
(63,331,352)
(34,832,243)
(595,314,707)
(53,588,067)
(30,009,317) 1,874,717,568
1,721,596,172 (36,720,329) 1,336,267,485 (36,270,842)
(67,513,836)
(36,483,382)
(617,749,004)
(54,674,978)
(30,146,774) 2,178,304,512
Invested
capital post return
Net shareholder investment
(non adjusted) (£)
Net shareholder investment
inflated at RPI +2% per
annum to December 2014 (£)
Implied index adjustment
1.134x
1.118x
1.114x
1.101x
1.066x
1.047x
1.038x
1.020x
1.005x
(1) Represents the £1,518,492,691 deemed net shareholder investment on an adjusted basis as at 22 March 2012.
Melrose Industries PLCAnnual Report 2014GovernanceGovernance 82
Directors’ remuneration report
continued
The chart below represents how the illustrative calculation of
the increase in the value relevant for the purposes of the 2012
Incentive Plan as referred to above is shared between
participants in the 2012 Incentive Plan and shareholders.
2012 Incentive plan
£2,774,843,695
£44,740,439
£551,798,744
£596,539,183
Overall increase
in value for
shareholders since
22 March 2012
£1,874,717,568
£303,586,944
Index adjustment/
Minimum return
Value delivered to shareholders
Value delivered to participants
Single total figure of remuneration (audited information)
Year ended 31 December 2014
Based on this illustration, if the entitlements under the 2012
Incentive Plan were to have been settled in Ordinary Shares of
13/110 pence each (being the nominal value of Ordinary Shares
on 1 January 2015), this would have resulted in the issue to the
participants of 17,280,639 Ordinary Shares (i.e. £44,740,439/
£2.58905). While it is the Remuneration Committee’s intention
that entitlements under the 2012 Incentive Plan shall be settled in
Ordinary Shares, the entitlements can be settled in alternative ways
as set out in the Company’s articles of association and as referred
to in the Remuneration Policy on page 90. In any event, the number
of Ordinary Shares issued to satisfy entitlements under the 2012
Incentive Plan shall not exceed 5% of the aggregate number of
shares in issue on 22 March 2012 plus 5% of any additional shares
issued by the Company after that date, as described in more detail
in the Remuneration Policy on page 90.
Malus has applied to awards granted under the 2012 Incentive Plan
since its inception. The rules of the plan provide for compulsory
return at nominal value of incentive shares held by bad leavers
(defined as any person who ceases to be a Director or employee
other than by reason of death, permanent ill health or disability or
as a result of a change of control) at the Remuneration Committee’s
discretion. In addition, the Company’s articles of association
provide the Remuneration Committee with the discretion to adjust
the calculation of the amount to which holders of incentive shares
and options shall be entitled, in certain circumstances.
Christopher Miller
David Roper
Simon Peckham
Geoffrey Martin
Miles Templeman(3)
Perry Crosthwaite(4)
John Grant(5)
Justin Dowley(6)
Liz Hewitt(7)
Total
Total salary
and fees
£’000
435
435
435
348
23
67
70
68
64
1,945
Taxable
benefits
£’000
9
19
21
46
–
–
–
–
–
95
Annual
bonus
£’000
–
–
252
202
–
–
–
–
–
454
Long-term
incentives(1)
Pension related
benefits(2)
£’000
–
–
–
–
–
–
–
–
–
–
£’000
65
65
65
52
–
–
–
–
–
247
Total
£’000
509
519
773
648
23
67
70
68
64
2,741
(1) The Company’s long-term incentive arrangement for Directors is the 2012 Incentive Plan. This five year plan is scheduled to crystallise in 2017 and, accordingly, no value vested to participants
in respect of the year to 31 December 2014.
(2) Of the £247,836 attributable to pension contributions, £195,660 was paid as a supplement to base salary in lieu of pension arrangements. The balance of £52,176 was paid into the individual
Directors’ nominated private pension plans.
(3) Miles Templeman stood down as a non-executive Director of the Company with effect from the AGM on 13 May 2014 and the fees referred to above reflect his fees for the period from
1 January 2014 to 13 May 2014.
(4) Perry Crosthwaite was Chairman of the Remuneration Committee up to the close of the 2014 AGM on 13 May 2014 but was then replaced by Justin Dowley. Perry Crosthwaite received
an amount of £1,822 in recognition of his Chairmanship of the Remuneration Committee from 1 January 2014 to 13 May 2014. Perry Crosthwaite was Senior non-executive Director from
13 May 2014 and received an amount of £3,178 in recognition of his holding that position.
(5) Includes £8,181 in recognition of Chairmanship of the Audit Committee.
(6) Justin Dowley became Chairman of the Remuneration Committee following the close of the 2014 AGM on 13 May 2014, in place of Perry Crosthwaite. In recognition of Justin Dowley’s
Chairmanship of this Committee from 13 May 2014 to 31 December 2014 an amount of £6,365 was paid.
(7) Includes £1,586 in recognition of Chairmanship of the Nomination Committee from the close of the 2014 AGM on 13 May 2014 to 31 December 2014.
Melrose Industries PLCAnnual Report 2014Governance 83
Year ended 31 December 2013
Christopher Miller
David Roper
Simon Peckham
Geoffrey Martin
Miles Templeman
Perry Crosthwaite(3)
John Grant(5)
Justin Dowley(6)
Liz Hewitt(7)
Total
Total salary
and fees
£’000
422
422
422
338
60
65
65
60
14
1,868
Taxable
benefits
£’000
19
19
20
56
–
–
–
–
–
114
Annual
bonus
£’000
–
–
422
338
–
–
–
–
–
760
Long-term
incentives(1)
Pension related
benefits(2)
£’000
–
–
–
–
–
–
–
–
–
–
£’000
63
63
63
51
–
–
–
–
–
240
Total
£’000
504
504
927
783
60
65
65
60
14
2,982
(1) The Company’s long-term incentive arrangement for Directors is the 2012 Incentive Plan. This five year plan is scheduled to crystallise in 2017 and, accordingly, no value vested to participants
in respect of the year to 31 December 2013.
(2) Of the £240,598 attributable to pension contributions, £159,298 was paid as a supplement to base salary in lieu of pension arrangements. The balance of £81,300 was paid into the individual
Directors’ nominated private pension plans.
(3) Includes £5,000 per annum in recognition of Chairmanship of the Remuneration Committee.
(4) Includes £5,000 per annum in recognition of Chairmanship of the Audit Committee.
(5) Liz Hewitt was appointed as a non-executive Director of the Company on 8 October 2013.
Base salary
Salaries are fixed at a level which is at or below the lower end of a market competitive range compared to companies of similar size and
complexity, to reflect participation in the 2012 Incentive Plan. Each executive Director received an inflationary increase in base salary
of approximately 3% effective from January 2014.
Benefits
The range of benefits provided to Directors has not changed since the inception of Melrose and there is no intention to widen the range
of benefits Directors may receive. All of the executive Directors received taxable benefits during 2014, being a company car allowance,
private fuel allowance and private medical insurance. Geoffrey Martin also received paid train travel to and from London and
accommodation whilst working in London.
Bonus
The maximum bonus opportunity is set below the maximum median annual bonus opportunity for FTSE 250 companies to reflect
the participation of the executive Directors in the 2012 Incentive Plan. For the year ended 31 December 2014, Simon Peckham’s and
Geoffrey Martin’s (being the only executive Directors participating in the annual bonus plan) maximum bonus opportunity was equal
to 100% of base salary and bonuses earned were equal to 58% of base salary.
Melrose Industries PLCAnnual Report 2014GovernanceGovernance 84
Directors’ remuneration report
continued
Executive Director
Simon Peckham
Geoffrey Martin
(each of these
executive
Directors
participated
in the annual
bonus plan on
the same basis)
Performance
measure
Weighting Target
Performance
Level of award
80%
Growth in
diluted earnings
per share.
For these
purposes
earnings per
share is
adjusted for
the impact
of transactions.
Strategic
element
(subject to
metrics
determined
at the start
of the year).
20%
The percentage
of this element
of the bonus
which is earned
is calculated by
reference to EPS
growth and subject
to a five x multiple
(capped at 80%
of salary).
Determined to the
extent assessed
by the
Remuneration
Committee
between 0% and
20% of salary
based on a range
of financial and
non-financial
metrics.
For 2014, growth in earnings per share (as adjusted, for the
purposes of the annual bonus, for the impact of the disposal of
Bridon) was 12%. Applying the multiple of five results in a figure
of 60%. Accordingly, 48% of salary was earned for this
element.
48% of salary
(60% of the
maximum for
this element
of the bonus)
10% of salary
(50% of the
maximum for
this element
of the bonus)
The factors taken into account for the purposes of the 2014
bonus and the performance in respect of them and resulting
bonus outcome are set out below.
Metric
Weighting
1/3
“Buy” – identify and
secure the acquisition
of a business to
enhance the existing
Elster Gas utilisation
operation
1/3
“Improve” – improve
the margins of the
continuing Group
businesses, year
on year
Extent to which the metric was
determined to be satisfied by
the Remuneration Committee
Met in part reflecting
the acquisition of Eclipse
in October 2014 for
£98 million creating an
opportunity to strengthen
the Elster Gas business and
enhance shareholder value.
Met in part reflecting
the fact that the margins of
the three Elster businesses
have been enhanced with
only a marginal decrease
at the Brush operation.
“Sell” – successfully
divest Bridon for
appropriate value
1/3
Met in part reflecting the
disposal of Bridon in
November 2014.
Scheme interests awarded during the year
No awards were granted to Directors in the year under any
long-term incentive plan.
Payments to past Directors
No payments were made in the year to any former Director of
the Company.
Payments for loss of office
No payments for loss of office were made in the year to any Director.
Statement of Directors’ shareholding and share interests
(audited information)
As disclosed at the time of the crystallisation of the 2009 Incentive
Share Plan, the executive Directors considered it appropriate
that they, together with their immediate families, would hold at
least half of the shares acquired pursuant to that crystallisation
(after making adequate provision for any tax liability arising in
connection with that crystallisation) for the foreseeable future.
Accordingly, the Remuneration Committee has adopted the
following guidelines in relation to the holding of Ordinary Shares
by executive Directors who participated in the 2009 Incentive
Share Plan and who participate in the 2012 Incentive Plan,
reinforcing the executive Directors’ long-term stewardship of the
Company and long-term investment in the Company’s shares.
No executive Director may dispose of any such Ordinary Shares
without the consent of the Remuneration Committee, which will
not normally be withheld provided the executive Director holds at
least the “minimum number of Ordinary Shares” referred to below.
Minimum number
of Ordinary Shares
to be held by the
Executive
Directors
1,749,756
1,649,756
1,874,878
1,054,619
Number of Ordinary
Shares held as at
31 December 2014
14,934,282(1)
8,110,074
8,373,288
4,026,674
Executive Director
Christopher Miller
David Roper
Simon Peckham
Geoffrey Martin
Value of Ordinary
Shares held as at
31 December 2014
as a multiple of
salary for the
year ended 31
December 2014(2)
92
50
51
31
(1) As at 31 December 2014, the interest of Christopher Miller included 5,719,999 Ordinary
Shares held by Harris & Sheldon Investments Limited, a company which is connected with
Christopher Miller within the meaning of section 252 of the Companies Act 2006.
(2) For these purposes, the value of a share is 266.8 pence, being the closing mid-market price
on 31 December 2014.
As at 31 December 2014, each executive Director held
significantly more than the minimum number of Ordinary Shares
and so satisfied the guideline.
Melrose Industries PLCAnnual Report 2014Governance 85
Internal Company rules on shareholdings are extended to senior management in addition to the executive Directors in order that
appropriate remuneration principles are applied to senior management on a similar basis to executive Directors.
Director(4)
Christopher Miller
David Roper
Simon Peckham
Geoffrey Martin
Perry Crosthwaite
John Grant
Justin Dowley
Liz Hewitt
Type
Ordinary Shares
Option(3)
Ordinary Shares
Option(3)
Ordinary Shares
Option(3)
Ordinary Shares
Option(3)
Ordinary Shares
Ordinary Shares
Ordinary Shares
Ordinary Shares
Ordinary Shares held as
at 31 December 2014(1)
14,934,282(2)
N/A
8,110,074
N/A
8,373,288
N/A
4,026,674
N/A
188,165
296,431
471,769
6,550
Vested interests
Subject to
Not subject to
Unvested interests under share schemes
under share schemes
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
performance conditions
N/A
8,500
N/A
8,500
N/A
8,500
N/A
8,500
N/A
N/A
N/A
N/A
performance conditions
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
(1) The Directors’ holdings in Ordinary Shares were adjusted in the share consolidation in February 2015 in the same manner as other shareholders. Accordingly, following the consolidation: Christopher
Miller held 13,867,545 ordinary shares (including 5,311,426 ordinary shares held by Harris & Sheldon Investments Limited, a company which is connected with Christopher Miller within the meaning
of section 252 of the Companies Act 2006), David Roper held 7,530,783 Ordinary Shares, Simon Peckham held 7,775,196 Ordinary Shares, Geoffrey Martin held 3,739,054 Ordinary Shares, Perry
Crosthwaite held 174,724 Ordinary Shares, John Grant held 275,257 Ordinary Shares, Justin Dowley held 438,071 Ordinary Shares and Liz Hewitt held 6,082 Ordinary Shares.
(2) As at 31 December 2014, the interest of Christopher Miller included 5,719,999 Ordinary Shares held by Harris & Sheldon Investments Limited, a company which is connected with Christopher
Miller within the meaning of section 252 of the Companies Act 2006.
(3) Each of these options is over 2012 Incentive Shares. Although the option can be exercised at any time, the value which may be derived from the shares acquired on exercise will be determined
at the relevant “trigger date” as discussed on page 90. 2012 Incentive Shares acquired on or before the trigger date may be forfeited in accordance with the Company’s articles of association.
The option exercise price is £1 per share, which is equal to the nominal value of those shares.
(4) Miles Templeman retired from the Board at the close of the Company’s AGM on 13 May 2014. At that date he held 585,828 Ordinary Shares and had no interests in shares under any share schemes.
Performance graph
The total shareholder return graph below shows the value as at 31 December 2014 of £100 invested in the Company on 31 December
2008, compared with £100 invested in the FTSE 100 Index, the FTSE 250 Index or the FTSE All Share Index. The Remuneration
Committee considers the FTSE 100 Index, the FTSE 250 Index and the FTSE All Share Index to be appropriate indices for the purposes of
this comparison because of the comparable size of the companies which comprise the FTSE 100 Index and the FTSE 250 index and the
broad nature of companies which comprise the FTSE All Share Index. The source data for the graph below assumes that all cash returns
to shareholders made by the Company during this period are reinvested in Ordinary Shares.
Performance graph
900
800
700
600
500
400
300
200
100
0
Dec 08
Jun 09
Dec 09
Jun 10
Dec 10
Jun 11
Dec 11
Jun 12
Dec 12
Jun 13
Dec 13
Jun 14
Dec 14
Melrose
FTSE All Share
FTSE 100
FTSE 250
Melrose Industries PLCAnnual Report 2014GovernanceGovernance 86
Directors’ remuneration report
continued
Chief Executive Officer Remuneration for previous six years
In accordance with the regulations governing the reporting of Directors’ remuneration which came into effect in October 2013, the
total figure of remuneration set out in the table below includes the value of long-term incentive vesting in respect of the financial year.
This means that the full value of the crystallisation of the 2009 Incentive Share Plan on 11 April 2012 is shown for the year ending
31 December 2012 and no value will be reflected in the total figure of remuneration for the 2012 Incentive Plan until the trigger date
(which will be May 2017 or an earlier trigger date determined in accordance with the arrangements).
The value of the 2009 Incentive Share Plan was earned over a period of approximately five years. Therefore, in the view of the
Remuneration Committee, inclusion of this value in respect of the year ended 31 December 2012 does not give a fair representation
of the Chief Executive Officer’s yearly remuneration over each of the previous five years. Therefore, an additional column has been
added to the table below to show total remuneration excluding the value received on the maturity in April 2012 of the 2009 Incentive
Share Plan. No other long-term incentive plan vested in favour of any executive Director in any of the other years.
The amount of that value shown in respect of David Roper and Simon Peckham for 2012 reflects the proportion of 2012 for which
each was the Chief Executive Officer.
Chief Executive Officer
Simon Peckham
Total remuneration
£
773,167
Simon Peckham
927,276
Simon Peckham
David Roper
David Roper
David Roper
David Roper
20,280,584(3)
10,915,846(3)
811,152
849,341
712,372
Total remuneration
excluding the long-term
incentive value
£
773,167
927,276
489,372
259,040
811,152
849,341
712,372
Annual bonus as a
percentage of maximum
opportunity
58%
Long-term incentives as a
percentage of maximum
opportunity
–
100%
64%
64%
84%
100%
70%
–
N/A(2)
N/A(2)
–
–
–
Financial year
Year ended
31 December 2014
Year ended
31 December 2013
Year ended
31 December 2012(1)
Year ended
31 December 2011
Year ended
31 December 2010
Year ended
31 December 2009
(1) In the year ending 31 December 2012, David Roper was Chief Executive Officer for the period from 1 January 2012 until 9 May 2012 and Simon Peckham was Chief Executive Officer for the
period from 9 May 2012, onwards. In the table above:
(i) the “Total remuneration” figure shows, in respect of David Roper, his total remuneration in respect of his service in the period 1 January 2012 to 9 May 2012 and in respect of Simon Peckham
his total remuneration in respect of his service in the period from 9 May 2012 to 31 December 2012. Included in this figure for each of David Roper and Simon Peckham is the value of the
long-term incentives vesting in the year pro-rated to reflect the portion of the year for which he was Chief Executive Officer; and
(ii) the “Total remuneration excluding the long-term incentive value” shows in respect of each of David Roper and Simon Peckham total remuneration in respect of the period for which he was
Chief Executive Officer excluding any value received on the maturity in April 2012 of the 2009 Incentive Share Plan.
(2) On the crystallisation in April 2012 of the 2009 Incentive Shares awarded in 2009, participants in the 2009 Incentive Share Plan as a whole were entitled to 10% of the increase in shareholder
value from 18 July 2007 to 23 March 2012. Because the value derived on the crystallisation of the 2009 Incentive Shares depended upon the shareholder value created over the relevant period,
it is not possible to express the value derived as a percentage of the maximum opportunity. The crystallisation of the 2009 Incentive Shares was satisfied by the conversion of those shares into
Ordinary Shares.
(3) The value derived in 2012 from the 2009 Incentive Shares represents the Chief Executive’s share, determined in accordance with the terms of those shares, of the shareholder value created over
a period of circa five years.
Chief Executive
Officer
percentage
change
3%
6%
-40%
Company’s senior head office
employees, Managing Directors and
Finance Directors of Group businesses
and direct senior reports of those
Managing Directors and Finance
Directors average percentage change
5%
-4%
28%
Element of
remuneration
Basic salary
Benefits(1)
Annual bonus
(1) Company car allowance, private fuel allowance and private medical insurance.
Percentage change in Chief Executive Officer’s remuneration
The table below sets out, in relation to salary, taxable benefits and
annual bonus, the percentage increase in pay for the Company’s
Chief Executive Officer compared to the average increase for a
group consisting of the Company’s senior head office employees,
Managing Directors and Finance Directors of Group businesses
and direct senior reports of those Managing Directors and
Finance Directors. The percentages shown below relate to the
financial year ended 2014 as a percentage comparison to the
financial year ended 2013. This group of senior management was
considered an appropriate comparator group because of their
level of seniority and the structure of their remuneration package;
the spread of the Company’s operations across various countries
and industries means that remuneration policies vary to take
account of geography and industry such that the Remuneration
Committee considers that selecting a wider group of employees
would not provide a meaningful comparison.
Melrose Industries PLCAnnual Report 2014Governance 87
Relative importance of spend on pay
The following table sets out the percentage change in
dividends and the overall expenditure on pay (as a whole
across the organisation).
Non-executive Directors’ basic fees have been increased by 3%
with effect from January 2015. The non-executive Director fee
levels for 2014 and 2015 are set out in the table below.
Fee element
Basic non-executive
Director fee
Additional fee for holding
the Chairmanship of the
Remuneration Committee
Additional fee for holding
the Chairmanship of the
Audit Committee
Additional fee for holding
the Chairmanship of the
Nomination Committee
Additional fee for holding
the position of Senior
non-executive Director
Fee with effect
from January
2015
£63,800
£10,000
Previous fee
£61,900 (with effect
from January 2014)
£10,000 (with effect
from the 2014 AGM)
£10,000 (with effect
from the 2014 AGM)
£10,000
£2,500 (with effect
from the 2014 AGM)
£5,000 (with effect
from the 2014 AGM)
£2,500
£5,000
Consideration by the Directors of matters relating to
Directors’ remuneration
The responsibilities of the Remuneration Committee
The Remuneration Committee is responsible for:
• considering and making recommendations to the Board on the
framework for the remuneration of the Company’s executive
Directors, the Company Secretary and other senior employees;
• ensuring that the executive Directors and senior employees are
provided with appropriate annual incentives to encourage
enhanced performance and that they are rewarded for their
individual contributions to the success of the Company, noting
any major changes in employee benefit structures throughout
the Group and ensuring that executive Director remuneration
practice is consistent with any such changes;
• approving the structure of, and determining targets for, any
long-term incentive plans operated by the Company; and
• reviewing, on an annual basis, remuneration trends across
the Group and obtaining reliable and up-to-date information
about the remuneration of Directors and senior employees
in other companies.
Full details can be found in the terms of reference available in
the Investor section of our website at www.melroseplc.net
Fees for non-executive Directors are determined by the
executive Directors.
Year ended
Year ended
31 December 2013
£471.4 million(1)
31 December 2014
£403.0 million(1)
Percentage
change
-15.5%
£98.1 million(2)
£678.9 million(3)
692.0%
Expenditure
Remuneration paid
to all employees
Distributions to
shareholders by
way of dividend
and share buy back
(1) The figure for the year ended 31 December 2013 is the year end 31 December 2013 total
staff costs as stated in note 7 on page 123 of the 2014 Annual Report and financial
statements and the figure for the year ended 31 December 2014 is the year end 31 December
2014 total staff costs as stated in note 7 on page 123. This comparison has been affected by
the sale of Bridon in November 2014. In the light of the Company’s business model of buy,
sell, improve and Return of Capital to shareholders your Board does not consider that the
table is meaningful in the context of the Group’s remuneration structure, which provides
a strong alignment with shareholder interests.
(2) The figure for year ended 2013 does not include the Return of Capital to shareholders
in February 2014.
(3) The figure for year ended 2014 includes the Return of Capital to shareholders in
February 2014.
Implementation of Directors’ Remuneration Policy for the
financial year commencing on 1 January 2015
The Remuneration Committee strongly believes that its
remuneration framework is aligned with the Company’s strategy for
growth and no structural changes to the Directors’ remuneration
arrangements are proposed for 2015.
Executive Directors’ salaries have increased by 3% with effect
from January 2015, the same as for other head office employees
(other than where other such employees’ salaries have been
increased on a different basis to reflect individual circumstances
such as promotions), as shown in the following table.
2014 salary
2015 salary
Executive Director
Christopher Miller
David Roper
Simon Peckham
Geoffrey Martin
£’000
435
435
435
348
£’000
448
448
448
358
Percentage
increase
3%
3%
3%
3%
The overall framework for the executive Directors’ annual bonus
arrangements for 2015 will remain the same as in 2014, with a
maximum bonus opportunity of 100% of salary based on financial
performance metrics as regards 80% of the opportunity and
strategic performance metrics as regards the balance. The
Remuneration Committee considers that the strategic performance
measures are commercially sensitive but will disclose the nature of
those measures on a retrospective basis on a similar basis to the
disclosure on page 84 in respect of the annual bonus for the year
ending 31 December 2014. As noted on page 80, annual bonus
awards for 2015 (as well as payments in respect of the 2014 annual
bonus) will be subject to a clawback arrangement giving the
Remuneration Committee the ability to require repayment of some or
all of any bonus earned in the event of: (1) material misstatement of
financial results; (2) miscalculation of any performance measure on
which the bonus earned was calculated; and (3) serious misconduct
by the relevant participant. The Remuneration Committee will have
discretion to apply clawback to any bonus earned for 2015 at any
time up until the 2018 Annual General Meeting.
Melrose Industries PLCAnnual Report 2014GovernanceGovernance 88
Directors’ remuneration report
continued
The members of the Remuneration Committee
The members of the Remuneration Committee during the year
were Perry Crosthwaite (Committee Chairman from 1 January 2014
until the close of the 2014 AGM on 13 May 2014), Justin Dowley
(Committee Chairman with effect from 13 May 2014), John Grant
and Liz Hewitt. Miles Templeman was a member of the
Remuneration Committee from 1 January 2014 until his retirement
from the Board following the conclusion of the 2014 AGM on 13
May 2014. The Company regards all members of the Remuneration
Committee as independent non-executive Directors; the
composition of the Remuneration Committee is therefore in
accordance with the UK Corporate Governance Code. During
the year, the Remuneration Committee met three times.
Advisers to the Remuneration Committee
During the year, the Remuneration Committee received advice
on the remuneration reporting regulations and preparation of the
Directors’ remuneration report from Deloitte LLP. Deloitte LLP
was appointed by the Company Secretary on behalf of the
Remuneration Committee. Deloitte LLP’s fees for this advice
were £12,500, which were charged on a time/cost basis. Deloitte
LLP is external auditor to the Company and provides certain
other services (as described on page 74 of the Annual Report
and financial statements).
The Remuneration Committee is satisfied that the advice provided by
Deloitte LLP in relation to the remuneration reporting regulations and
the Directors’ remuneration report is objective and independent.
Statement of voting at general meeting
The Company remains committed to ongoing shareholder
dialogue and takes an active interest in voting outcomes. The
following table sets out actual voting in respect of the resolution
to approve the Directors’ remuneration report at the Company’s
Annual General Meeting on 13 May 2014:
Resolution to approve the Directors’
remuneration report for the year
ended 31 December 2013
Resolution to approve the Directors’
remuneration policy
Votes for the
resolution
678,912,088
Percentage of
votes cast for the
resolution
95.78%
Votes against the
resolution
29,894,346
Percentage of votes
cast against the
resolution
4.22%
Total votes cast
708,806,434
Votes withheld
25,276,317
528,635,478
77.39%
154,418,839
22.61%
683,054,317
51,028,433
The Remuneration Committee noted the strong support given by shareholders to the Directors’ remuneration report. Taking into
account the level of votes cast against the Directors’ remuneration policy, the Remuneration Committee will consider the comments
given by shareholders in relation to the Company’s long-term incentive structure prior to the introduction of a new scheme in 2017.
Members of the Remuneration Committee are engaged in an ongoing dialogue with investors in order to understand more fully their
views on Melrose’s approach to executive remuneration.
Directors’ remuneration policy
This part of the report sets out the Company’s Directors’ remuneration policy, which was approved by shareholders at the 2014 Annual
General Meeting and took binding effect from the conclusion of that meeting, save that: (1) the illustrations of the application of the
remuneration policy included in the Directors’ remuneration report for the year ended 31 December 2013 have not been repeated in this
year’s report because, in accordance with the reporting regulations, they illustrated the application of the remuneration policy in the first
year to which the remuneration policy applied (2014) and we have included an alternative illustration of the potential LTIP value on pages
81 to 82; and (2) to provide consistency with the remainder of this report cross references have been updated where necessary.
Executive Directors
Component of
remuneration
Base Salary
Purpose and link
to strategy
Core element
of fixed
remuneration,
reflecting the
size and scope
of the role.
Purpose is to
attract and retain
Directors of the
calibre required
for the business.
Operation
Normally reviewed annually and
usually fixed for 12 months from
1 January, although salaries may
be reviewed more frequently or
at different times of the year if
the Remuneration Committee
determines this is appropriate.
Salary is paid in cash and levels are
determined by the Remuneration
Committee taking into account a
range of factors including:
• role, experience and performance;
• prevailing market conditions;
• external benchmarks for similar roles
at comparable companies; and
• salary increases awarded for other
employees in the Group.
Opportunity
To avoid setting expectations of
executive Directors and other
employees, no maximum has been
set under the remuneration policy.
Increases may be made to salary
levels in certain circumstances as
required, for example to reflect:
• increase in scope of role or
responsibility; and
• performance in role.
Salary increases will take into
account the average increase
awarded to other employees
in the worldwide Group.
Performance metrics
Not applicable, although the
individual’s contribution and overall
performance is one of the
considerations in determining
the level of any salary increase.
Melrose Industries PLCAnnual Report 2014Governance 89
Performance metrics
The Remuneration Committee
will have regard to various
performance metrics (which will be
determined by the Remuneration
Committee) measured over the
relevant financial year, when
determining bonuses.
At least 50% of the award will be
based on financial measures, and
the balance of the award will be
determined at the discretion of
the Remuneration Committee.
Financial metrics
The element of the bonus subject
to a financial metric will be
determined between 0% and
100% for performance between
“threshold” performance (the
minimum level of performance that
results in any level of pay-out) and
“maximum” performance.
Discretionary element
The discretionary element of
an award will be determined to
the extent assessed by the
Remuneration Committee between
0% and 100% based on the
Remuneration Committee’s
assessment of a range of financial
and non-financial metrics.
Not applicable.
Executive Directors
Component of
remuneration
Annual Bonus
Purpose and link
to strategy
Rewards
performance
against annual
targets which
support the
strategic
direction of
the Company.
Opportunity
For executive Directors
participating in the Company’s
2012 Incentive Plan, the maximum
annual bonus opportunity is 100%
of base salary.
Operation
Financial targets are set annually
and pay-out is determined by the
Remuneration Committee after the
year-end based on performance
against those targets. The
Remuneration Committee has
discretion to vary the bonus
pay-out (upwards or downwards)
should any formulaic output not
produce a fair result for either the
individual executive Director or the
Company, taking account of
overall business performance.
The treatment of a “leaver’s”
bonus participation is described
on page 94.
Benefits
Ensures the
overall package
is competitive.
Purpose is to
recruit and retain
Directors of the
calibre required
for the business.
Whilst the Remuneration Committee
has not set an absolute maximum
on the level of benefits executive
Directors may receive, the value of
benefits is set at a level which the
Remuneration Committee considers
appropriate against the market and
to support the ongoing strategy of
the Company.
Executive Directors receive
benefits in line with market
practice, and these include a
company car allowance, fuel
allowance, private medical
insurance, life insurance and
Group income protection.
Other benefits may be provided
based on individual circumstances;
such benefits may include (but are
not limited to) travel costs to and
from London and accommodation
in London for executive Directors
who are not based in London but
who are required to work there,
and relocation allowances.
Melrose Industries PLCAnnual Report 2014GovernanceGovernance 90
Directors’ remuneration report
continued
Executive Directors
Performance metrics
The value that may be delivered
under the 2012 Incentive Plan will
be determined by reference to the
growth in value of the Company,
from and including 22 March 2012
to and including the trigger date
calculated in accordance with the
Company’s articles of association.
Opportunity
The value that may be delivered
under the 2012 Incentive Plan is
linked to the shareholder value
created over the period from
and including 22 March 2012 to
crystallisation; accordingly, it is
not possible to express the
maximum opportunity as a
multiple of salary. Options may
be granted over, in aggregate,
50,000 2012 Incentive Shares.
The options held by the executive
Directors over 2012 Incentive
Shares as at 31 December 2014
are set out on page 85.
The maximum aggregate value
that may be realised under the
2012 Incentive Shares shall be
7.5% of the increase in shareholder
value from and including 22 March
2012 to and including the trigger
date (as determined in accordance
with the Company’s articles
of association).
The maximum number of new
Ordinary Shares in the Company
that may be issued is 5% of the
aggregate number of Ordinary
Shares in Melrose PLC in issue
on 22 March 2012 plus 5% of any
additional Ordinary Shares issued
or created by Melrose PLC after
that date and prior to 27 November
2012 or by the Company after 27
November 2012.
For participants in the 2012
Incentive Plan, 15% of base salary.
Not applicable.
Operation
Options are granted over a
separate class of shares known as
the “2012 Incentive Shares”. The
options have an exercise price per
share equal to the nominal value
of a 2012 Incentive Share. The
rights attaching to the 2012
Incentive Shares are set out in the
Company’s articles of association.
Options may be exercised at any
time up to 31 May 2017 (the
“trigger date”) and will be
automatically exercised prior to
the trigger date if not already
exercised. In the event of a change
of control or winding up of the
Company, the trigger date may
be a date before 31 May 2017.
On the trigger date, the holders of
the 2012 Incentive Shares shall be
entitled to 7.5% of the increase in
value of the Company from and
including 22 March 2012 to the
trigger date. This value may be
delivered in the form of a dividend
and/or the conversion of the
2012 Incentive Shares into an
appropriate number of Ordinary
Shares or in certain other ways
permitted under the Company’s
articles of association.
The calculation of the growth in
value of the Company shall be
determined in accordance with
the formula set out in the
Company’s articles of association.
The treatment of an executive
Director’s participation in the 2012
Incentive Plan if he becomes a
“leaver” is described on page 94.
Directors may elect to receive
a Company contribution to an
individual defined contribution
pension arrangement or a
supplement to base salary in
lieu of a pension arrangement.
Component of
remuneration
2012 Incentive
Plan
Purpose and link
to strategy
Incentivises
executive
Directors over
the longer term
and aligns their
interests with
those of
shareholders by
linking the level
of reward to the
value delivered
to shareholders.
This plan was
approved by a
special resolution
of shareholders
on 11 April 2012
and has been
unchanged
since.
Retirement
Benefits
Purpose is to
recruit and retain
Directors of the
calibre required
for the business.
Provides market
competitive
post-employment
benefits (or cash
equivalent).
Although neither clawback nor malus applies to any element of the remuneration package, the Company’s articles of association give
the Remuneration Committee discretion to adjust the calculation of the amount to which holders of 2012 Incentive Shares and of
options over such shares shall be entitled in certain circumstances, as referred to on page 94.(1)
(1) Further information on the Remuneration Committee’s approach to malus and clawback is set out on page 80.
Melrose Industries PLCAnnual Report 2014Governance 91
Non-executive Directors
Component of
remuneration
Non-executive
Director fees
Purpose and link
to strategy
Set at a level that
reflects market
conditions and
is sufficient to
attract individuals
with appropriate
knowledge and
expertise.
Operation
Fees are reviewed periodically
and amended to reflect market
positioning and any change in
responsibilities. Fees for
non-executive Directors are
determined by the executive
Directors.
Performance metrics
Not applicable.
Opportunity
Fees are based on the level of fees
paid to non-executive Directors
serving on boards of similar-sized
UK-listed companies and the
time commitment and contribution
expected for the role.
Non-executive Directors receive
a basic fee and a further fee for
the Chairmanship of a Board
committee or for holding the office
of Senior non-executive Director.
Non-executive Directors may be
eligible to benefits such as use of
secretarial support, reimbursement
of travel costs and other benefits
that may be appropriate.
Explanation of performance metrics chosen
Performance measures are chosen which are aligned to the Company’s strategy.
Annual Bonus
Stretching performance targets are set each year for the annual bonus, to reflect the key financial and strategic objectives of the
Company, and reward for delivery against these targets. When setting the targets, the Remuneration Committee will take into account
a number of different reference points including its plans and strategy and the market environment.
2012 Incentive Plan
Value delivered under the 2012 Incentive Plan is determined by reference to the growth in the value of the Company, such that the
performance metric is the level of such growth that is delivered to shareholders. This arrangement was considered appropriate by
the Remuneration Committee which considers that the previous, and similar, Incentive Shares arrangements introduced in 2009,
and which crystallised in 2012, have been very effective in incentivising management to deliver real value to shareholders over the
applicable performance period.
The Company’s articles of association provide that the Remuneration Committee may make adjustments to the calculation of the
amount to which the holders of the 2012 Incentive Shares shall be entitled in certain circumstances. These circumstances include,
but are not limited to, the Company’s articles of association or a change in the capital structure of the Company otherwise producing
an anomalous result. Any such adjustment shall be such as the Remuneration Committee considers fair and reasonable and as an
investment bank shall have confirmed is fair and reasonable so far as the ordinary shareholders are concerned.
Differences between the Company’s policy on Directors’ remuneration and its policy on remuneration for other employees
Remuneration arrangements throughout the Group are determined based on the same principle that reward should be sufficient as
is necessary to attract and retain high calibre talent, without paying more than is necessary and should be achieved for delivery of the
Company’s strategy.
The Company has operations in various countries and across various industries, with Group employees of differing levels of seniority.
Accordingly, though based on the overarching principle above, reward policies vary to take account of these factors.
On the introduction of the 2012 Incentive Plan, the Remuneration Committee considered it appropriate to recognise the required growth
of the senior management team beyond the executive Directors necessary to further develop the business, and participation includes
certain non-director employees.
The Company has also implemented divisional long-term incentive plans for senior managers of certain businesses within the Group
to incentivise them to create value for the Company and its shareholders.
Melrose Industries PLCAnnual Report 2014GovernanceGovernance 92
Directors’ remuneration report
continued
Recruitment remuneration policy
When agreeing a remuneration package for the appointment of a new executive Director, the Remuneration Committee will apply the
following principles:
• the package will be sufficient to attract the calibre of Director required to deliver the Company’s strategy;
• the Remuneration Committee will seek to ensure that no more is paid than is necessary; and
• in the next Annual Report on Remuneration after an appointment, the Remuneration Committee will explain to shareholders the rationale
for the arrangements implemented.
In addition to the policy elements set out in the table on pages 88 to 91, the Remuneration Committee retains discretion to make
appropriate remuneration decisions outside the standard policy to meet the individual circumstances of the recruitment, including
discretion to include any other remuneration component or award. The Remuneration Committee does not intend to use this discretion
to make a non-performance related incentive payment (for example a “golden hello”). In this regard, elements that the Remuneration
Committee may consider for the purposes of a remuneration package for the recruitment of a new executive Director include, but are
not limited to, the following.
Element
Incentive remuneration
opportunity
Approach
The Remuneration Committee’s intention is that a new executive Director’s incentive remuneration opportunity will
consist of:
• an annual bonus up to a maximum of 100% of salary (i.e. as applies for existing executive Directors); and
• an award of options over 2012 Incentive Shares, with the number of such shares awarded being equal to
the number of such shares over which an existing executive Director was granted an option in April 2012,
as reduced to take into account the proportion of the 2012 Incentive Plan’s life that has elapsed at the time
of the new executive Director’s appointment.
The Remuneration Committee’s intention is that a new executive Director would only participate in the 2012 Incentive
Plan on this basis if he/she had a similar level of experience and responsibility as the existing executive Directors.
If a new executive Director did not participate in the 2012 Incentive Plan, the Remuneration Committee may award
a maximum annual bonus opportunity of up to 300% of salary until such time as a new long-term incentive
arrangement is put in place for the executive Directors in which that new executive Director could participate.
Whilst considered unlikely the Remuneration Committee may make awards on hiring an external candidate to buy out
remuneration arrangements forfeited on leaving a previous employer. In doing so, the Remuneration Committee will
have regard to relevant factors, including any performance conditions attached to such arrangements, the form of
those awards (e.g. cash or shares) and the timeframe of such awards. While such awards are excluded from the
maximum level of variable remuneration referred to below, the Remuneration Committee’s intention is that the value
awarded (as determined by the Remuneration Committee on a fair and reasonable basis) would be no higher than
the expected value of the forfeited arrangements. Where considered appropriate, buy-out awards will be subject to
forfeiture or clawback on early departure.
The notice period will be the same as the Company’s ordinary policy of 12 months.
Where necessary, the Company will pay appropriate relocation costs. The Remuneration Committee will seek
to ensure that no more is paid than is necessary.
The maximum contribution of 15% of salary referred to in the policy table on page 90 will apply to any new executive
Director. However, the Remuneration Committee reserves the right to pay the contribution into any pension
arrangement or to pay the amount as a supplement to base salary in lieu of a pension arrangement.
Compensation for forfeited
remuneration arrangements
Notice period
Relocation costs
Retirement benefits
Melrose Industries PLCAnnual Report 2014Governance 93
Under the new reporting regulations, the Company is required to set out the maximum level of variable remuneration that may be
granted when agreeing the components of a remuneration package for the appointment of Directors, excluding any remuneration
constituting compensation for the forfeiture of any variable remuneration award with a previous employer. In order to provide sufficient
flexibility in recruitment scenarios, and to reflect the fact that the value of participation in the 2012 Incentive Plan depends on
shareholder value created and so cannot be expressed as a multiple of salary, the Remuneration Committee has set this level as
maximum variable remuneration of:
• If the Director participates in the 2012 Incentive Plan:
• one times salary; plus
• an award of options over a number of 2012 Incentive Shares equal to the number of such shares over which an existing executive
Director was granted an option in April 2012, as reduced to take into account the proportion of the 2012 Incentive Plan’s life that
has elapsed at the time of the new executive Director’s appointment; and
• If the Director does not participate in the 2012 Incentive Plan, three times salary.
While long-term incentive awards and “buy out” awards may be granted under the 2012 Incentive Plan, if necessary and subject,
where relevant, to the limits referred to above, awards may be granted outside this plan as permitted under the Listing Rules which
allow for the grant of awards to facilitate, in unusual circumstances, the recruitment of a Director.
Where a position is filled internally, any ongoing remuneration obligations or outstanding variable pay elements shall be allowed to
continue according to their subsisting terms.
The remuneration package for a newly appointed non-executive Director would normally be in line with the structure set out in the policy
table for non-executive Directors.
Service contracts and policy on payment for loss of office
The Company’s policy is for executive Directors to be employed on the terms of service agreements which may be terminated by either
the Director or the Company on the giving of not less than 12 months’ written notice (subject to certain exceptions).
Each of the executive Directors had entered into a service agreement with Melrose PLC which was novated on exactly the same terms
to the Company with effect from 27 November 2012 when the Company became the new parent company of the Group. Details of the
executive Directors’ original appointment dates and notice periods are set out below.
Executive Directors
Christopher Miller
David Roper
Simon Peckham
Geoffrey Martin
Date of original appointment as an
executive Director of Melrose PLC
29 May 2003(1)
29 May 2003(1)
29 May 2003
7 July 2005
Date of appointment as an
executive Director of the Company
8 October 2012
8 October 2012
8 October 2012
8 October 2012
Notice period
12 months
12 months
12 months
12 months
(1) Both Christopher Miller and David Roper resigned as directors of Melrose PLC on 27 November 2012.
Each of the non-executive Directors (other than Liz Hewitt) entered into new letters of appointment with the Company with effect from
8 October 2012. Liz Hewitt entered into a letter of appointment with the Company with effect from 8 October 2013. Details of the
non-executive Directors’ appointment dates and duration are shown below.
Non-executive Directors
Miles Templeman
Date of original appointment as a
non-executive Director of Melrose PLC
8 October 2003
Date of appointment as a
non-executive Director of the Company
8 October 2012
Perry Crosthwaite
26 July 2005
8 October 2012
John Grant
1 August 2006
8 October 2012
Justin Dowley
1 September 2011
8 October 2012
Liz Hewitt
N/A
8 October 2013
(1) Miles Templeman retired at the conclusion of the 2014 AGM
(2) Assuming re-election at the 2015 AGM
End of appointment period
Conclusion of the 2015 AGM
unless extended or renewed(1)
Conclusion of the 2015 AGM
unless extended or renewed
Conclusion of the 2015 AGM
unless extended or renewed
Conclusion of the 2015 AGM
unless extended or renewed
Conclusion of the 2016 AGM
unless extended or renewed(2)
Melrose Industries PLCAnnual Report 2014GovernanceGovernance 94
Directors’ remuneration report
continued
The principles on which the determination of payments for loss of office will be approached are summarised below:
Provision
Payment in lieu of notice
Annual Bonus
2012 Incentive Plan
Other payments
Treatment upon loss of office
If the Company terminates an executive Director’s employment with immediate effect, a payment in lieu of notice may
be made. This may include base salary, pension contributions and benefits.
This will be at the discretion of the Remuneration Committee on an individual basis and the decision whether or not
to award a bonus in full or in part will be dependent upon a number of factors including the circumstances of the
executive Director’s departure and their contribution to the business during the bonus period in question. Typically,
bonus amounts will be pro-rated for time in service to termination.
If an executive Director holding 2012 Incentive Shares ceases employment in circumstances in which he is a “good
leaver”, the Remuneration Committee may (other than if he is a good leaver as a result of his resignation in connection
with a change of control of the Company) require that he transfer some or all of the “unvested proportion” of his
2012 Incentive Shares for their nominal value. An executive Director who is a good leaver will be entitled to retain
any 2012 Incentive Shares which he is not required to transfer. For these purposes the “unvested proportion” shall
be the proportion of his 2012 Incentive Shares equal to the unexpired proportion of the period from 11 April 2012
to 31 May 2017 calculated on a full month basis.
If an executive Director holding an option over 2012 Incentive Shares ceases employment in circumstances in which
he is a “good leaver”, at the discretion of the Remuneration Committee some or all of his unexercised options shall
lapse. The number of options which shall lapse shall not exceed the number equal to the “unvested portion” of the
executive Director’s 2012 Incentive Shares had the executive Director’s options been exercised immediately before
the executive Director became a good leaver. The executive Director will be entitled to retain any options which do
not lapse.
For these purposes, an executive Director shall be a “good leaver” if he leaves because of death, permanent ill health,
permanent disability, resignation in connection with a change of control or termination by the Company without cause.
The Remuneration Committee reserves the right to make additional exit payments where such payments are made in
good faith in discharge of an existing legal obligation (or by way of damages for breach of such an obligation) or by way
of settlement or compromise of any claim arising in connection with the termination of a Director’s office or employment.
In appropriate circumstances, payments may also be made in respect of legal fees.
The overall amount of any payment made in respect of a loss of office will not exceed the aggregate of any payment
in lieu of notice and any payment made in respect of annual bonus, as referred to above. Entitlements under the 2012
Incentive Plan will be dealt with in accordance with the terms of that plan and were the Company to make an award
on recruitment of an executive Director to buy out remuneration arrangements forfeited on leaving a previous
employer then the leaver provisions for that award would be determined at the time of grant.
On a change of control or winding-up of the Company the 2012 Incentive Shares will crystallise early. In the event of a change of
control, the date of the change of control shall be the “trigger date” for the purposes of determining the number of Ordinary Shares
into which the 2012 Incentive Shares shall convert or the dividend amount to be paid. In the event of a winding up, the 2012 Incentive
Shares shall be treated as if they had converted into Ordinary Shares immediately prior to the winding-up and the holders of the 2012
Incentive Shares shall be entitled to a sum equal to the amount to which they would have been entitled on a return of capital on a
winding-up if they had held those Ordinary Shares.
Statement of consideration of employment conditions elsewhere in the Company
Salary, benefits and performance related reward provided to employees is taken into account when setting policy for executive
Directors’ remuneration. There is no consultation with employees on Director remuneration.
Statement of consideration of shareholder views
The Company is committed to ongoing engagement and seeks the views of major shareholders in advance of amending its
remuneration policies. The policies are set to reflect the Company’s commercial strategy and the 2012 Incentive Plan was approved
by a special resolution of shareholders in 2012.
Melrose Industries PLCAnnual Report 2014Governance 95
Payments outside the policy in this report
The Remuneration Committee retains discretion to make any
remuneration payments and payments for loss of office outside
the policy in this report:
• where the terms of the payment were agreed before the policy
came into effect;
• where the terms of the payment were agreed at a time when the
relevant individual was not a Director of the Company and, in the
opinion of the Remuneration Committee, the payment was not
in consideration of the individual becoming a Director of the
Company; or
• to satisfy contractual commitments under legacy remuneration
arrangements.
For these purposes, “payments” includes the satisfaction of
awards of variable remuneration and, in relation to an award over
shares, the terms of the payment are “agreed” at the time the
award is granted.
This report was approved by the Board on 4 March 2015 and
signed on its behalf by:
Justin Dowley
Chairman, Remuneration Committee
4 March 2015
Melrose Industries PLCAnnual Report 2014GovernanceGovernance 96
Statement of Directors’
responsibilities
The Directors are responsible for preparing the Annual Report
and financial statements in accordance with applicable law
and regulations.
Company law requires the Directors to prepare financial
statements for each financial year. Under that law the Directors
are required to prepare the Group financial statements in
accordance with International Financial Reporting Standards
(IFRSs) as adopted by the European Union and Article 4 of the
IAS Regulation and have elected to prepare the parent company
financial statements in accordance with United Kingdom
Generally Accepted Accounting Practice (United Kingdom
Accounting Standards and applicable law). Under company
law, the Directors must not approve the financial statements
unless they are satisfied that they give a true and fair view of
the state of affairs of the Company and of the profit or loss
of the Company for that period.
In preparing the parent company financial statements, the
Directors are required to:
• select suitable accounting policies and then apply them
consistently;
• make judgements and accounting estimates that are reasonable
and prudent;
• state whether applicable UK Accounting Standards have been
followed, subject to any material departures disclosed and
explained in the financial statements; and
• prepare the financial statements on the going concern basis
unless it is inappropriate to presume that the Company will
continue in business.
The Directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the Company’s
transactions and disclose with reasonable accuracy at any time
the financial position of the Company and enable them to ensure
that the financial statements comply with the Companies Act
2006. They are also responsible for safeguarding the assets
of the Company and hence for taking reasonable steps for
the prevention and detection of fraud and other irregularities.
The Directors are responsible for the maintenance and integrity
of the corporate and financial information included on the
Company’s website. Legislation in the United Kingdom governing
the preparation and dissemination of financial statements may
differ from legislation in other jurisdictions.
Directors’ responsibility statement
We confirm that to the best of our knowledge:
• the financial statements, prepared in accordance with the
relevant financial reporting framework, give a true and fair
view of the assets, liabilities, financial position and profit or
loss of the Company and the undertakings included in the
consolidation taken as a whole;
• the Strategic Report includes a fair review of the development
and performance of the business and the position of the
Company and the undertakings included in the consolidation
taken as a whole, together with a description of the principal
risks and uncertainties that they face; and
• the Annual Report and financial statements, taken as a
whole, are fair, balanced and understandable and provide
the information necessary for shareholders to assess the
Company’s performance, business model and strategy.
In preparing the Group financial statements, International
Accounting Standard 1 requires that Directors:
By order of the Board
• properly select and apply accounting policies;
• present information, including accounting policies, in a
manner that provides relevant, reliable, comparable and
understandable information;
• provide additional disclosures when compliance with the
specific requirements in IFRSs are insufficient to enable users
to understand the impact of particular transactions, other events
and conditions on the entity’s financial position and financial
performance; and
• make an assessment of the Company’s ability to continue
as a going concern.
Geoffrey Martin Simon Peckham
Group Finance Director Chief Executive
4 March 2015 4 March 2015
Melrose Industries PLCAnnual Report 2014Governance Melrose Industries PLC
Annual Report 2014
Financials
97
Company statements
Company Balance Sheet for Melrose Industries PLC
Notes to the Company Balance Sheet
Note
1. Significant accounting policies
2. Profit for the period
3. Investment in subsidiaries
4. Creditors
5. Issued share capital
6. Reserves
7. Reconciliation of movements in shareholders’ funds
8. Related party transactions
9. Post Balance Sheet events
151
152
152
153
154
154
154
155
155
155
Financial
contents
Consolidated statements
Independent auditor’s report
Consolidated Income Statement
Consolidated Statement of Comprehensive Income
Consolidated Statement of Cash Flows
Consolidated Balance Sheet
Consolidated Statement of Changes in Equity
Notes to the financial statements
Note
1. Corporate information
2. Summary of significant accounting policies
3. Critical accounting judgements and key sources
of estimation uncertainty
4. Revenue
5. Segment information
6. Exceptional costs and income
7. Revenues and expenses
8. Tax
9. Discontinued operations
10. Dividends
11. Earnings per share
12. Goodwill and other intangible assets
13. Property, plant and equipment
14. Interests in joint ventures
15. Inventories
16. Trade and other receivables
17. Cash and cash equivalents
18. Trade and other payables
19. Interest-bearing loans and borrowings
20. Provisions
21. Deferred tax
22. Share-based payments
23. Retirement benefit obligations
24. Financial instruments and risk management
25. Issued capital and reserves
26. Cash flow statement
27. Commitments and contingencies
28. Related parties
29. Post Balance Sheet events
30. Contingent liabilities
98
102
103
104
105
106
107
108
116
118
118
121
122
124
125
126
127
128
132
133
133
134
135
135
136
137
138
138
139
143
147
148
149
150
150
150
Financials 98
Independent auditor’s report to the
members of Melrose Industries PLC
Opinion on financial statements of Melrose Industries PLC
In our opinion:
• the financial statements give a true and fair view of the state of the Group’s and of the Parent Company’s affairs as at 31 December 2014
and of the Group’s profit for the year then ended;
• the Group financial statements have been properly prepared in accordance with International Financial Reporting Standards (IFRSs)
as adopted by the European Union;
• the parent company financial statements have been properly prepared in accordance with United Kingdom Generally Accepted
Accounting Practice; and
• the financial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the
Group financial statements, Article 4 of the IAS Regulation.
The financial statements comprise the Consolidated Income Statement, the Consolidated Statement of Comprehensive Income, the
Consolidated and the Company Balance Sheets, the Consolidated Statement of Cash Flows, the Consolidated Statement of Changes in
Equity, the related notes 1 to 30 to the consolidated financial statements and the related notes 1 to 9 to the Company financial statements.
The financial reporting framework that has been applied in the preparation of the Group financial statements is applicable law and IFRSs as
adopted by the European Union. The financial reporting framework that has been applied in the preparation of the Parent company financial
statements is applicable law and United Kingdom Accounting Standards (United Kingdom Generally Accepted Accounting Practice).
Going concern
As required by the Listing Rules we have reviewed the Directors’ statement on page 49 that the Group is a going concern. We confirm that:
• we have concluded that the Directors’ use of the going concern basis of accounting in the preparation of the financial statements is
appropriate; and
• we have not identified any material uncertainties that may cast significant doubt on the Group’s ability to continue as a going concern.
However, because not all future events or conditions can be predicted, this statement is not a guarantee as to the Group’s ability to
continue as a going concern.
Our assessment of risks of material misstatement
The assessed risks of material misstatement described below, which are the same risks identified in the prior year, are those that had the
greatest effect on our audit strategy, the allocation of resources in the audit and directing the efforts of the engagement team:
Risk
Provisions
Legal, environmental, restructuring, property and warranty
provisions as at 31 December 2014 totalled £177.0 million. The
recognition and valuation of the expected outcome of these
provisions requires the exercise of management judgement
and the use of estimates giving rise to inherent subjectivity
in the amounts recorded in the financial statements.
Note 3 includes this as one of the significant accounting
judgements and key sources of estimation uncertainty
and note 20 includes further details on the provisions.
Exceptional items
The presentation and consistency of costs and income within
exceptional items is a key determinant in the assessment of the
quality of the Group’s underlying earnings. The exceptional
operating costs and exceptional operating income for the year
ended 31 December 2014 are £34.3 million and £5.4 million
respectively and are therefore significant to the statutory net
profit for the year.
Note 2 includes the Group’s accounting policy for exceptional
items and note 6 include further details on the exceptional items.
How the scope of our audit responded to the risk
We challenged the assumptions underlying the recognition and valuation of
provisions through checking and verifying the inputs used to calculate the
provisions, including review of the nature and timings of formal restructuring
plans, review of third party correspondence, discussion with the Group’s
lawyers, applicability of relevant laws and regulations and review of agreements.
Further we assessed the level of historical warranty claims and obtained the
specific warranty terms and conditions provided in order to ascertain whether
the warranty provisions held were sufficient to cover all obligations in existence at
the year-end in light of known claims and standard warranty periods provided.
A sample of exceptional items (including all material items) has been agreed
to source documentation and evaluated by the component and Group audit
teams as to their nature in order to assess whether they are in line with the
Group’s accounting policy and also to assess consistency of management’s
application of the policy with previous accounting periods. In particular we
evaluated the reversal of any items originally booked as exceptional and
confirmed that the reversal of any fair value items recorded on acquisition
is appropriately classified as exceptional items.
We also assessed whether the disclosures within the financial statements
provide sufficient detail for the reader to understand the nature of these items.
Melrose Industries PLCAnnual Report 2014Financials 99
Risk
Goodwill and intangibles
The carrying value of goodwill and intangible assets as at
31 December 2014 is £2,405.3 million. The assumptions include
future projected cash flows, the perpetual growth rate and the
appropriate discount rate.
This is included in note 3 as one of the significant accounting
judgements and key sources of estimation uncertainty and
note 12 includes more details on goodwill and intangibles.
Recognition of deferred tax assets and
accounting for uncertain tax positions
Recognition of deferred tax assets is based on management’s
judgements of the availability of future taxable profits.
In addition, the value of the tax provisions recorded in respect
of a number of uncertain tax positions requires judgements in
respect of the likely outcome of negotiations with and enquiries
from various tax authorities.
Accordingly tax provisioning is included in note 3 as one of
the significant accounting judgements and key sources of
estimation uncertainty and note 21 includes details of the
deferred tax assets recognised.
How the scope of our audit responded to the risk
We assessed the assumptions used in the impairment model for goodwill
and intangible assets, specifically including the cash flow projections,
discount rates, perpetuity growth rates and the sensitivities applied.
Our procedures included reviewing forecast cash flows with reference to
historical trading performance, consulting with our valuation specialists and
benchmarking assumptions such as the perpetual growth rate and discount
rate to external macro-economic and market data. Having ascertained the
extent of change in those assumptions that either individually or collectively
would be required for the assets to be impaired by performing sensitivity
analysis on the key assumptions, we considered the likelihood of such a
movement in those assumptions arising.
We tested the appropriateness of the assumptions and estimates in relation to
the likelihood of generating future taxable profits to support the recognition of
deferred tax assets. We considered those assumptions, including the expected
timing of business disposals, and supporting forecasts and estimates as well
as the appropriateness of the tax disclosures.
We worked with our tax audit specialists in relation to the recognition of
deferred tax assets and to appraise the likely outcome of technical tax
treatments, including the review of correspondence with the revenue
authorities to assess the reasonableness of the provisions made.
The description of risks above should be read in conjunction with the significant issues considered by the Audit Committee discussed on
page 73.
Our audit procedures relating to these matters were designed in the context of our audit of the financial statements as a whole, and not
to express an opinion on individual accounts or disclosures. Our opinion on the financial statements is not modified with respect to any
of the risks described above, and we do not express an opinion on these individual matters.
Our application of materiality
We define materiality as the magnitude of misstatement in the financial statements that makes it probable that the economic decisions
of a reasonably knowledgeable person would be changed or influenced. We use materiality both in planning the scope of our audit work
and in evaluating the results of our work.
We determined materiality for the Group to be £11 million (2013: £13 million), which is 5.2% (2013: 5.7%) of headline profit before tax and
below 1% of equity. We use headline profit before tax to provide a stable basis for materiality that reflects the focus of the users of the
financial statements. This excludes the effect of separately disclosed exceptional items, as these can be volatile, and the amortisation
of acquired intangibles, as excluding the relatively high amortisation charge, given the acquisitive nature of the Group, provides a more
comparable measure with similar organisations and is consistent with the profit measure most relevant to analysts and investors.
We agreed with the Audit Committee that we would report to the Committee all audit differences in excess of £250,000 (2013: £250,000),
as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds. We also report to the Audit
Committee on disclosure matters that we identified when assessing the overall presentation of the financial statements.
Melrose Industries PLCAnnual Report 2014FinancialsFinancials 100
Independent auditor’s report to the
members of Melrose Industries PLC continued
An overview of the scope of our audit
Our Group audit was scoped by obtaining an understanding of the Group and its environment, including Group-wide controls, and
assessing the risks of material misstatement at the Group level.
The Group’s 66 (2013: 72) locations are organised into the 4 (2013: 5) continuing divisions described in the Business Review on pages
28 to 35 of this Annual Report. Our Group audit scope focused primarily on audit work at 29 (2013: 25) locations. The difference to last
year is due to changes in composition of the Group.
23 of these were subject to a full audit (2013: 18), whilst the remaining 6 (2013: 7) were subject to full scope audit procedures where the
extent of our testing was based on our assessment of the risks of material misstatement and on the materiality of the Group’s business
operations at those locations. The 23 locations subject to full audit represent business units within each of the Group’s continuing
reportable segments and accounted for 64% (2013: 63%) of the continuing Group’s revenue, 69% (2013: 70%) of the total operating
segments’ continuing headline operating profit (i.e. before central costs). The 6 locations subject to full audit procedures account for 23%
(2013: 24%) of the continuing Group’s revenue and 23% (2013: 21%) of the continuing Group’s headline operating profit (i.e. before central
costs). Full audit or full audit procedures undertaken at the 29 locations or performed centrally by the Group audit team accounted for 94%
(2013: 94%) of the Group’s net assets. The locations subject to full audit or specified audit procedures were selected to provide an
appropriate basis for undertaking audit work to address the risks of material misstatement identified above.
Our audit work and audit procedures at the 29 locations were performed at lower levels of materiality determined by reference to the
relative scale of the business division concerned and no higher than £5.2 million.
The senior statutory auditor or other senior members of the Group audit team visited 12 of the largest locations for the audit (2013: 12). The
Group audit team met with the management teams including Managing Directors and Finance Directors of all the continuing businesses
during the year end audit. The senior statutory auditor also held audit close meetings with all of the 4 continuing businesses, which cover
all locations. In years when we do not visit a component within our Group audit scope; we will include the component audit team in our
team briefing, discuss their risk assessment, and review documentation of the findings from their work.
At the parent entity level we also tested the consolidation process and carried out analytical procedures to confirm our conclusion that
there were no significant risks of material misstatement of the aggregated financial information of the remaining components not subject
to audit or audit of specified account balances.
Opinion on other matters prescribed by the Companies Act 2006
In our opinion:
• the part of the Directors’ remuneration report to be audited has been properly prepared in accordance with the Companies Act 2006; and
• the information given in the Strategic Report and the Directors’ report for the financial year for which the financial statements are
prepared is consistent with the financial statements.
Matters on which we are required to report by exception
Adequacy of explanations received and accounting records
Under the Companies Act 2006 we are required to report to you if, in our opinion:
• we have not received all the information and explanations we require for our audit; or
• adequate accounting records have not been kept by the Parent Company, or returns adequate for our audit have not been received
from branches not visited by us; or
• the Parent Company financial statements are not in agreement with the accounting records and returns.
We have nothing to report in respect of these matters.
Directors’ remuneration
Under the Companies Act 2006 we are also required to report if in our opinion certain disclosures of directors’ remuneration have not been
made or the part of the Directors’ remuneration report to be audited is not in agreement with the accounting records and returns. We have
nothing to report arising from these matters.
Corporate Governance Statement
Under the Listing Rules we are also required to review the part of the Corporate Governance Statement relating to the Company’s
compliance with ten provisions of the UK Corporate Governance Code. We have nothing to report arising from our review.
Melrose Industries PLCAnnual Report 2014Financials 101
Our duty to read other information in the Annual Report
Under International Standards on Auditing (UK and Ireland), we are required to report to you if, in our opinion, information in the Annual
Report is:
• materially inconsistent with the information in the audited financial statements; or
• apparently materially incorrect based on, or materially inconsistent with, our knowledge of the Group acquired in the course of
performing our audit; or
• otherwise misleading.
In particular, we are required to consider whether we have identified any inconsistencies between our knowledge acquired during the audit
and the Directors’ statement that they consider the Annual Report is fair, balanced and understandable and whether the Annual Report
appropriately discloses those matters that we communicated to the Audit Committee which we consider should have been disclosed.
We confirm that we have not identified any such inconsistencies or misleading statements.
Respective responsibilities of Directors and auditor
As explained more fully in the Statement of Directors’ Responsibilities, the Directors are responsible for the preparation of the financial
statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial
statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to
comply with the Auditing Practices Board’s Ethical Standards for Auditors. We also comply with International Standard on Quality Control 1
(UK and Ireland). Our audit methodology and tools aim to ensure that our quality control procedures are effective, understood and applied.
Our quality controls and systems include our dedicated professional standards review team and independent partner reviews.
This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006.
Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in
an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone
other than the Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed.
Scope of the audit of the financial statements
An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance
that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of:
whether the accounting policies are appropriate to the Group’s and the parent company’s circumstances and have been consistently
applied and adequately disclosed; the reasonableness of significant accounting estimates made by the Directors; and the overall
presentation of the financial statements. In addition, we read all the financial and non-financial information in the Annual Report to identify
material inconsistencies with the audited financial statements and to identify any information that is apparently materially incorrect based
on, or materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any
apparent material misstatements or inconsistencies we consider the implications for our report.
Nigel Mercer, ACA (Senior statutory auditor)
for and on behalf of Deloitte LLP
Chartered Accountants and Statutory Auditor
London, UK
4 March 2015
Melrose Industries PLCAnnual Report 2014FinancialsFinancials 102
Consolidated
Income Statement
Continuing operations
Revenue
Cost of sales
Gross profit
Headline(2) operating expenses
Share of headline(2) results of joint ventures
Intangible asset amortisation
Exceptional operating costs
Exceptional operating income
Total net operating expenses
Operating profit
Headline(2) operating profit
Finance costs
Finance income
Profit before tax
Headline(2) profit before tax
Headline(2) tax
Exceptional tax(3)
Total tax
Profit for the year from continuing operations
Headline(2) profit for the year from continuing operations
Discontinued operations
Profit for the year from discontinued operations
Profit for the year
Attributable to:
Owners of the parent
Non-controlling interests
Earnings per share
From continuing operations
– Basic
– Diluted
From continuing and discontinued operations
– Basic
– Diluted
(1) Restated to include the results of Bridon within discontinued operations (note 9).
(2) Before exceptional costs, exceptional income and intangible asset amortisation.
(3) Includes exceptional tax and tax on exceptional items and intangible asset amortisation.
Year ended
31 December
2014
£m
Restated(1)
year ended
31 December
2013
£m
1,377.5
(875.0)
502.5
(259.7)
3.2
(54.7)
(34.3)
5.4
(340.1)
162.4
246.0
(48.2)
14.7
128.9
212.5
(57.4)
15.6
(41.8)
87.1
155.1
107.6
194.7
193.9
0.8
194.7
7.9
7.8
17.8
17.5
1,466.4
(952.0)
514.4
(277.2)
2.8
(57.1)
(19.3)
28.9
(321.9)
192.5
240.0
(70.2)
21.7
144.0
191.5
(50.5)
8.9
(41.6)
102.4
141.0
462.2
564.6
562.7
1.9
564.6
7.9
7.8
44.4
43.7
Notes
4,5
14
6
6
7
5
7
7
8
9
11
11
11
11
Melrose Industries PLCAnnual Report 2014Financials Consolidated Statement
of Comprehensive Income
Profit for the year
Items that will not be reclassified subsequently to the Income Statement:
Net remeasurement (loss)/gain on retirement benefit obligations
Income tax credit/(charge) relating to items that will not be reclassified
Items that may be reclassified subsequently to the Income Statement:
Currency translation on net investments
Currency translation on non-controlling interests
Transfer to Income Statement from equity of cumulative translation differences
on disposal of foreign operations
(Losses)/gains on cash flow hedges
Transfer to Income Statement on cash flow hedges
Income tax credit relating to items that may be reclassified
Other comprehensive expense after tax
Total comprehensive income for the year
Attributable to:
Owners of the parent
Non-controlling interests
103
Year ended
31 December
2014
£m
194.7
Year ended
31 December
2013
£m
564.6
Notes
23
8
9
8
(35.5)
8.7
(26.8)
(93.2)
–
(7.6)
(11.9)
5.6
–
(107.1)
(133.9)
60.8
60.0
0.8
60.8
20.1
(0.6)
19.5
(25.9)
(0.3)
(12.1)
10.0
3.0
0.6
(24.7)
(5.2)
559.4
557.8
1.6
559.4
Melrose Industries PLCAnnual Report 2014FinancialsFinancials 104
Consolidated Statement
of Cash Flows
Net cash from operating activities from continuing operations
Net cash from operating activities from discontinued operations
Net cash from operating activities
Investing activities
Disposal of businesses
Disposal costs
Net cash disposed
Purchase of property, plant and equipment
Proceeds from disposal of property, plant and equipment
Purchase of computer software and development costs
Dividends received from joint ventures
Interest received
Acquisition of businesses and non-controlling interests
Cash acquired on acquisition of businesses
Dividends paid to non-controlling interests
Net cash from investing activities from continuing operations
Net cash used in investing activities from discontinued operations
Net cash from investing activities
Financing activities
Return of Capital
Movement in borrowings
Costs of amending borrowing facilities
Dividends paid
Net cash used in financing activities from continuing operations
Net cash used in financing activities from discontinued operations
Net cash used in financing activities
Net (decrease)/increase in cash and cash equivalents
Cash and cash equivalents at the beginning of the year
Effect of foreign exchange rate changes
Cash and cash equivalents at the end of the year
(1) Restated to include the cash flows of Bridon within discontinued operations (note 9).
Year ended
31 December
2014
£m
111.4
5.1
116.5
Notes
26
26
Restated(1)
year ended
31 December
2013
£m
53.6
82.4
136.0
9
9
14
12
12
26
10
26
26
26
17,26
374.8
(8.5)
(14.6)
(54.3)
3.9
(7.9)
3.3
14.7
(97.6)
1.5
(0.4)
214.9
(4.1)
210.8
(595.3)
226.1
(3.6)
(83.6)
(456.4)
–
(456.4)
(129.1)
200.4
(0.8)
70.5
950.4
(25.0)
(37.2)
(38.5)
6.2
(3.7)
2.7
21.7
(12.8)
–
(6.3)
857.5
(20.2)
837.3
–
(834.0)
–
(98.1)
(932.1)
–
(932.1)
41.2
156.5
2.7
200.4
As at 31 December 2014, the Group’s net debt was £501.3 million (31 December 2013: £140.8 million). A reconciliation of the movement in
net debt is shown in note 26.
Melrose Industries PLCAnnual Report 2014Financials Consolidated
Balance Sheet
Non-current assets
Goodwill and other intangible assets
Property, plant and equipment
Interests in joint ventures
Deferred tax assets
Derivative financial assets
Trade and other receivables
Current assets
Inventories
Trade and other receivables
Derivative financial assets
Cash and cash equivalents
Total assets
Current liabilities
Trade and other payables
Interest-bearing loans and borrowings
Derivative financial liabilities
Current tax liabilities
Provisions
Net current assets
Non-current liabilities
Trade and other payables
Interest-bearing loans and borrowings
Derivative financial liabilities
Deferred tax liabilities
Retirement benefit obligations
Provisions
Total liabilities
Net assets
Equity
Issued share capital
Merger reserve
Capital redemption reserve
Other reserves
Hedging reserve
Translation reserve
Retained earnings
Equity attributable to owners of the parent
Non-controlling interests
Total equity
105
31 December
2014
£m
31 December
2013
£m
Notes
12
13
14
21
24
16
15
16
24
17
5
18
19
24
20
18
19
24
21
23
20
5
25
2,405.3
199.6
11.8
68.7
1.2
3.3
2,689.9
166.5
257.5
3.9
70.5
498.4
3,188.3
320.5
0.9
10.1
48.8
71.7
452.0
46.4
0.4
570.9
0.2
267.3
218.5
105.3
1,162.6
1,614.6
1,573.7
1.3
595.3
595.3
(757.1)
(0.5)
(130.7)
1,267.5
1,571.1
2.6
1,573.7
2,612.0
241.2
12.6
70.3
8.1
0.3
2,944.5
234.5
292.8
5.1
200.4
732.8
3,677.3
399.2
–
7.2
43.6
74.4
524.4
208.4
1.5
341.2
–
299.6
219.3
103.4
965.0
1,489.4
2,187.9
1.3
1,190.6
–
(757.1)
5.8
(29.9)
1,775.3
2,186.0
1.9
2,187.9
The financial statements were approved and authorised for issue by the Board of Directors on 4 March 2015 and were signed on its behalf by:
Geoffrey Martin
Group Finance Director
Simon Peckham
Chief Executive
Melrose Industries PLCAnnual Report 2014FinancialsFinancials
106
Consolidated Statement
of Changes in Equity
At 1 January 2013
Issued
share
capital
£m
1.3
Merger
reserve
£m
1,190.6
Capital
redemption
reserve
£m
–
Other
reserves
£m
(757.1)
Hedging
reserve
£m
(7.7)
Translation
reserve
£m
8.0
Retained
earnings
£m
1,299.5
Equity
attributable
to owners
of the
parent
£m
1,734.6
Non-
controlling
interests
£m
7.1
Profit for the year
Other comprehensive income/(expense)
Total comprehensive income/(expense)
Dividends paid
Credit to equity for equity-settled
share-based payments
Purchase of non-controlling interests
At 31 December 2013
–
–
–
–
–
–
–
–
–
–
1.3
–
–
1,190.6
–
–
–
–
–
–
–
Profit for the year
Other comprehensive expense
Total comprehensive (expense)/income
Return of Capital(1)
Dividends paid
Credit to equity for equity-settled
share-based payments
Acquisition of non-controlling interests
At 31 December 2014
–
–
–
–
–
–
–
1.3
–
–
–
(595.3)
–
–
–
595.3
–
–
–
595.3
–
–
–
595.3
–
–
–
–
–
–
(757.1)
–
–
–
–
–
–
13.5
13.5
–
–
–
5.8
–
(6.3)
(6.3)
–
–
–
(37.9)
(37.9)
–
562.7
19.5
582.2
(98.1)
562.7
(4.9)
557.8
(98.1)
–
–
(29.9)
4.0
(12.3)
1,775.3
4.0
(12.3)
2,186.0
–
(100.8)
(100.8)
–
–
193.9
(26.8)
167.1
(595.3)
(83.6)
193.9
(133.9)
60.0
(595.3)
(83.6)
1.9
(0.3)
1.6
(6.3)
–
(0.5)
1.9
0.8
–
0.8
–
(0.4)
–
–
(757.1)
–
–
(0.5)
–
–
4.0
–
(130.7) 1,267.5
4.0
–
1,571.1
4.0
–
0.3
0.3
2.6 1,573.7
(1) On 7 February 2014, following the approval by shareholders of a Return of Capital of 47 pence per share, ‘B’ and ‘C’ shares with a total value of £595.3 million were created resulting
in a corresponding reduction in the Merger reserve. Following the capital return payments, these ‘B’ and ‘C’ shares were redeemed and £595.3 million was transferred to the
Capital redemption reserve (note 25).
Total
equity
£m
1,741.7
564.6
(5.2)
559.4
(104.4)
4.0
(12.8)
2,187.9
194.7
(133.9)
60.8
(595.3)
(84.0)
Melrose Industries PLCAnnual Report 2014Financials
107
Notes to the
financial statements
1. Corporate information
Melrose Industries PLC (“the Company”) is a company incorporated in the United Kingdom under the Companies Act 2006. The address
of the registered office is given on the back cover. The nature of the Group’s operations and its principal activities are set out in note 5 and
in the Business review sections on pages 28 to 35.
The consolidated financial statements of the Group for the year ended 31 December 2014 were authorised in accordance with a resolution
of the Directors of Melrose Industries PLC on 4 March 2015.
These financial statements are presented in pounds Sterling which is the currency of the primary economic environment in which the
Company is based. Foreign operations are included in accordance with the policies set out in note 2.
The comparative information for the year ended 31 December 2013 in these financial statements has been restated to include the results
and cash flows of Bridon within discontinued operations and exclude them from continuing operations. Bridon was previously disclosed
within the Lifting segment.
1.1 New Standards and Interpretations affecting amounts, presentation or disclosure reported in the current year
In the current financial year, the Group has adopted a number of new or revised Standards and Interpretations, none of which significantly
affected the amounts reported in these financial statements. Details of the Standards and Interpretations that were adopted are set out in
section 1.2.
1.2 New Standards and Interpretations adopted with no significant effect on financial statements
The following new and revised Standards and Interpretations have been adopted in the current year. Their adoption has not had
any significant impact on the amounts reported in these financial statements, but may impact the accounting for future transactions
and arrangements.
IFRS 10: Consolidated financial statements
IFRS 11: Joint arrangements
IFRS 12: Disclosure of interests in other entities
IAS 27 (revised): Separate financial statements
IAS 28 (revised): Investments in associates and joint ventures (2011)
Amendments to IAS 32: Offsetting financial assets and financial liabilities
Amendments to IAS 39: Novation of derivatives and continuation of hedge accounting
Amendments to IFRS 10, IFRS 12 and IAS 27: Investment entities
1.3 New Standards and Interpretations in issue but not yet effective
At the date of authorisation of these financial statements, the following Standards and Interpretations are in issue but not yet effective
(and in some cases have not been adopted by the EU):
IFRS 9: Financial instruments
Amendments to IFRS 11: Accounting for acquisitions of interests in joint operations
IFRS 14: Regulatory deferral accounts
IFRS 15: Revenue from contracts with customers
Amendments to IAS 16 and IAS 38: Clarification of acceptable methods of depreciation and amortisation
Amendments to IAS 19: Defined benefit plans: Employee contributions
Amendments to IAS 27: Equity method in separate financial statements
Amendments to IFRS 10 and IAS 28: Sale or contribution of assets between an investor and its associate or joint venture
Annual improvements to IFRSs: 2012–14 Cycle
The Directors do not expect that the adoption of the Standards listed above will have a material impact on the financial statements of the
Group in future periods, except that IFRS 9 will impact both the measurement and disclosures of financial instruments and IFRS 15 may
have an impact on revenue recognition and related disclosures. Beyond the information above, it is not practicable to provide a reasonable
estimate of the effect of IFRS 9 and IFRS 15 until a detailed review has been completed.
Melrose Industries PLCAnnual Report 2014FinancialsFinancials 108
Notes to the
financial statements continued
2. Summary of significant accounting policies
Basis of accounting
The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRSs”).
The consolidated financial statements have also been prepared in accordance with IFRSs adopted for use in the European Union and
therefore comply with Article 4 of the EU IAS Regulation.
The consolidated financial statements have been prepared on an historical cost basis, except for the revaluation of certain financial
instruments which are recognised at fair value at the end of each reporting period. Historical cost is generally based on the fair value of the
consideration given in exchange for assets. The principal accounting policies adopted are consistent with the prior year and are set out below.
Basis of consolidation
The Group financial statements include the results of the parent undertaking and all of its subsidiary undertakings. The results of
businesses acquired during the period are included from the effective date of acquisition and for those sold during the period to the
effective date of disposal. Where necessary, adjustments are made to the financial statements of subsidiaries to bring the accounting
policies used into line with those used by the Group. All intra-Group balances and transactions, including unrealised profits arising from
intra-Group transactions, have been eliminated in full.
Non-controlling interests in subsidiaries are identified separately from the Group’s equity therein. The interest of non-controlling
shareholders is initially measured at the non-controlling interests’ proportion of the share of the fair value of the acquiree’s identifiable net
assets. Subsequent to acquisition, the carrying amount of non-controlling interests is the amount of those interests at initial recognition
plus the non-controlling interests’ share of subsequent changes in equity. Total comprehensive income is attributed to non-controlling
interests even if this results in the non-controlling interests having a deficit balance.
Going concern
The Directors have, at the time of approving the financial statements, a reasonable expectation that the Company and the Group have
adequate resources to continue in operational existence for the foreseeable future. Thus they continue to adopt the going concern basis
of accounting in preparing the financial statements. Further detail is contained on page 49 of the Finance Director’s review.
Business combinations and goodwill
The acquisition of subsidiaries is accounted for using the acquisition method. The cost of acquisition is measured at the fair value of assets
transferred, the liabilities incurred or assumed at the date of exchange of control and equity instruments issued by the Group in exchange
for control of the acquiree. Control is achieved where the Company has the power to govern the financial and operating policies of an
investee entity so as to obtain benefits from its activities. Costs directly attributable to business combinations are recognised as an
expense in the Income Statement as incurred.
The acquired identifiable assets and liabilities are measured at their fair value at the date of acquisition except those where specific
guidance is provided by IFRSs. Non-current assets and directly attributable liabilities that are classified as held for sale in accordance with
IFRS 5: “Non-current assets held for sale and discontinued operations”, are recognised and measured at fair value less costs to sell. Also,
deferred tax assets and liabilities are recognised and measured in accordance with IAS 12: “Income taxes”, liabilities and assets related to
employee benefit arrangements are recognised and measured in accordance with IAS 19 (revised): “Employee benefits” and liabilities or
equity instruments related to the replacement by the Group of an acquiree’s share-based payments awards are measured in accordance
with IFRS 2: “Share-based payment”. Any excess of the cost of the acquisition over the fair values of the identifiable net assets acquired is
recognised as goodwill.
If the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, the
Group reports provisional amounts where appropriate. Those provisional amounts are adjusted during the measurement period, or
additional assets or liabilities recognised, to reflect new information obtained about facts and circumstances that existed as of the
acquisition date that, if known, would have affected the amounts recognised at that date.
The measurement period is the period from the date of acquisition to the date the Group obtains complete information about facts and
circumstances that existed as of the acquisition date and is subject to a maximum period of one year.
Goodwill on acquisition is initially measured at cost, being the excess of the sum of the consideration transferred, the amount of any
non-controlling interest in the acquiree and the fair value of the acquirer’s previously held equity interest in the acquiree over the acquirer’s
interest in the net fair value of the identifiable assets, liabilities and contingent liabilities. Following initial recognition, goodwill is measured
at cost less any accumulated impairment losses. Goodwill is reviewed for impairment annually or more frequently if events or changes in
circumstances indicate that the carrying value may be impaired.
If, after reassessment, the Group’s interest in the fair value of the acquiree’s identifiable net assets exceeds the sum of the consideration
transferred, the amount of any non-controlling interest in the acquiree and the fair value of the acquirer’s previously held equity interest in
the acquiree, the excess is recognised immediately in profit or loss as a bargain purchase gain.
Melrose Industries PLCAnnual Report 2014Financials 109
As at the acquisition date, any goodwill acquired is allocated to each of the cash-generating units acquired. Impairment is determined
by assessing the recoverable amount of the cash-generating unit to which goodwill relates. Where the recoverable amount of the cash-
generating unit is less than the carrying amount, an impairment loss is recognised in the Income Statement and is not subsequently
reversed. When there is a disposal of a cash-generating unit, goodwill relating to the operation disposed of is taken into account in
determining the gain or loss on disposal of that operation. The amount of goodwill allocated to a partial disposal is measured on the
basis of the relative values of the operation disposed of and the operation retained.
Joint ventures
A joint venture is an entity which is not a subsidiary undertaking but the interest of the Group is that of a partner in a business over which the
Group exercises joint control. The results, assets and liabilities of joint ventures are accounted for using the equity method of accounting.
Revenue
Revenue is measured at the fair value of the consideration received or receivable and represents amounts receivable for goods and
services provided in the normal course of business, net of discounts, customs duties and sales related taxes. Revenue is reduced for
estimated customer returns, rebates and other similar allowances. The nature of agreements into which the Group enters means that:
• the contracts usually contain discrete elements, each of which transfers risks and rewards to the customer. Where such discrete
elements are present, revenue is recognised on each element in accordance with the policy on the sale of goods.
• the service element of the contract is usually insignificant in relation to the total contract value and is often provided on a short-term or
one-off basis. Where this is the case, revenue is recognised when the service is complete.
• aftermarket activities generally relate to the provision of spare parts, repairs and the rebuild of equipment. Revenue on the provision of
parts is recognised in accordance with the policy on the sale of goods and revenue for repairs and rebuild is recognised upon
completion of the activity.
The significant majority of the Group’s revenue is recognised on a sale of goods basis.
The specific methods used to recognise the different forms of revenue earned by the Group are as follows:
Sale of goods
Revenue is recognised when all of the following conditions are satisfied:
• the Group has transferred to the buyer the significant risks and rewards of ownership of the goods;
• the Group retains neither continuing managerial involvement to the degree usually associated with ownership nor effective control over
the goods;
• the amount of revenue can be measured reliably;
• it is probable that the economic benefits associated with the transaction will flow to the Group; and
• the costs incurred or to be incurred in respect of the transaction can be measured reliably.
Transfers of risks and rewards vary depending on the nature of the products sold and the individual terms of the contract of sale. Sales
made under internationally accepted trade terms are recognised as revenue when the Group has completed the primary duties required
to transfer risks as stipulated in those terms. Sales made outside such terms are generally recognised on delivery to the customer.
No revenue is recognised where recovery of the consideration is not probable or there are significant uncertainties regarding associated
costs or the possible return of goods.
Provision of services
As noted above, because revenue from the rendering of services is usually not significant in relation to the total contract value and is
generally provided on a short-term or one-off basis, revenue is usually recognised when the service is complete.
Construction contracts
As noted above, customer contracts usually contain discrete elements separately transferring risks and rewards to the customer.
Where such discrete elements are present, revenue is recognised on each element in accordance with the policy on the sale of goods.
Where such discrete elements are not in place, revenue from significant contracts is recognised in proportion to the stage of completion
of the contract by reference to the specific contract terms and the costs incurred on the contract at the Balance Sheet date in comparison
to the total forecast costs of the contract. This is normally measured by the proportion that contract costs incurred for work performed
to date bear to the estimated total contract costs, except where this would not be representative of the stage of completion.
Melrose Industries PLCAnnual Report 2014FinancialsFinancials 110
Notes to the
financial statements continued
2. Summary of significant accounting policies continued
Variations in contract work, claims and incentive payments are included in revenue from construction contracts when the amount can
be measured reliably and its receipt is considered probable. Variations are included when the customer has agreed to the variation or
acknowledged liability for the variation in principle. Claims are included when negotiations with the customer have reached an advanced
stage such that it is probable that the customer will accept the claim. Incentive payments are included when a contract is sufficiently
advanced that it is probable that the performance standards triggering the incentive will be achieved.
Profit attributable to contract activity is recognised if the final outcome of such contracts can be reliably assessed. Where this is not the
case contract revenue is recognised to the extent of contract costs incurred where it is probable they will be recovered. When it is probable
that total contract costs will exceed total contract revenue, the expected loss is recognised as an expense immediately.
Interest income
Interest income is recognised when it is probable that the economic benefits will flow to the Group and the amount of revenue can be measured
reliably. Interest income is accrued on a time basis, by reference to the principal outstanding and the effective interest rate applicable.
Exceptional costs/income
Exceptional costs/income are those costs/income of a significant and non-recurring nature or those associated with significant
restructuring programmes, acquisitions or disposals, which warrant separate additional disclosure in the financial statements in order
to fully understand the underlying performance of the Group.
Headline operating profit
Headline operating profit is stated before exceptional operating costs, exceptional operating income and intangible asset amortisation.
Headline operating profit is considered by the Directors to be the best measure of performance.
Borrowing costs
Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily
take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets, until such time as the
assets are substantially ready for their intended use or sale.
Investment income earned on the temporary investment of specific borrowings pending their expenditure on qualifying assets is deducted
from the borrowing costs eligible for capitalisation.
All other borrowing costs are recognised in the Income Statement in the period in which they are incurred.
Issue costs of loans
The finance cost recognised in the Income Statement in respect of the issue costs of borrowings is allocated to periods over the terms
of the instrument using the effective interest rate method.
Property, plant and equipment
Property, plant and equipment are stated at cost less accumulated depreciation and any impairment in value.
The initial cost of an asset comprises its purchase price or construction cost, and any costs directly attributable to bring the asset into
operation. The purchase price or construction cost is the aggregate amount paid and the fair value of any other consideration given to
acquire the asset.
Depreciation is calculated on a straight-line basis over the estimated useful life of the asset as follows:
Freehold land
Freehold buildings and long leasehold property
Short leasehold property
Plant and equipment
nil
over expected economic life not exceeding 50 years
over the term of the lease
3-12 years
The estimated useful lives of property, plant and equipment are reviewed on an annual basis and, if necessary, changes in useful lives are
accounted for prospectively.
Melrose Industries PLCAnnual Report 2014Financials 111
The carrying values of property, plant and equipment are reviewed for impairment when events or changes in circumstances indicate that
the carrying value may not be recoverable. If any such indication exists an impairment review is performed and, where the carrying values
exceed the estimated recoverable amount, the assets are written down to their recoverable amount. The recoverable amount of property,
plant and equipment is the greater of net selling price and value in use. In assessing value in use, the estimated future cash flows are
discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and
the risks specific to the asset. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined
for the cash-generating unit to which the asset belongs.
An item of property, plant and equipment is derecognised upon disposal or when no future economic benefits are expected to arise from
the continued use of the asset. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal
proceeds or costs and the carrying amount of the item) is included in the Income Statement in the year that the item is derecognised.
Intangible assets
Intangible assets are stated at cost less accumulated amortisation and accumulated impairment losses.
On acquisition of businesses, separately identifiable intangible assets are initially recorded at their fair value at the acquisition date.
Access to the use of brands and intellectual property are valued using a “relief from royalty” method which determines the net present
value of future additional cash flows arising from the use of the intangible asset.
Customer relationships are valued on the basis of the net present value of the future additional cash flows arising from customer
relationships with appropriate allowance for attrition of customers.
Amortisation is calculated on a straight-line basis over the estimated useful lives of the asset as follows:
Customer relationships
Brands and intellectual property
Computer software
Development costs
20 years or less
20 years or less
5 years or less
5 years or less
Computer software is initially recorded at cost. Where these assets have been acquired through a business combination, this will be the
fair value allocated in the acquisition accounting. Where these have been acquired other than through a business combination, the initial
cost is the aggregate amount paid and the fair value of any other consideration given to acquire the asset.
Intangible assets are tested for impairment annually or more frequently whenever events or changes in circumstances indicate that the
carrying value may not be recoverable. Impairment losses are measured on a similar basis to property, plant and equipment. Useful lives
are also examined on an annual basis and adjustments, where applicable, are made on a prospective basis.
Research and development costs
Research costs are expensed as incurred.
Costs relating to clearly defined and identifiable development projects are capitalised when there is a technical degree of exploitation,
adequacy of resources and a potential market or development possibility in the undertaking that are recognisable; and where it is the
intention to produce, market or execute the project. A correlation must also exist between the costs incurred and future benefits and
those costs can be measured reliably. Capitalised costs are expensed on a straight-line basis over their useful lives of five years or less.
Costs not meeting such criteria are expensed as incurred.
Inventories
Inventories are valued at the lower of cost and net realisable value and measured using a first in, first out basis. Cost includes all direct
expenditure and appropriate production overhead expenditure incurred in bringing goods to their current state under normal operating
conditions. Net realisable value is based on estimated selling price less costs expected to be incurred to completion and disposal.
Provisions are made for obsolescence or other expected losses where necessary.
Trade and other receivables
Trade receivables and other receivables are measured and carried at amortised cost using the effective interest method, less any
impairment. The carrying amount of other receivables is reduced by the impairment loss directly and a charge is recorded in the Income
Statement. For trade receivables, the carrying amount is reduced through the use of an allowance account. Subsequent recoveries
of amounts previously written off are credited against the allowance account and changes in the carrying amount of the allowance
account are recognised in the Income Statement.
Melrose Industries PLCAnnual Report 2014FinancialsFinancials 112
Notes to the
financial statements continued
2. Summary of significant accounting policies continued
Trade receivables that are assessed not to be impaired individually are also assessed for impairment on a collective basis. Objective
evidence of impairment for a portfolio of receivables could include the Group’s past experience of collecting receipts, an increase in the
number of delayed receipts in the portfolio past the average credit period, as well as observable changes in national or local economic
conditions that correlate with default on receivables.
Cash and cash equivalents
Cash and cash equivalents in the Balance Sheet comprise cash in hand, current balances with banks and similar institutions and short-
term deposits which are readily convertible to cash which are subject to insignificant risks of changes in value.
For the purpose of the Consolidated Cash Flow Statement, cash and cash equivalents consist of cash and cash equivalents as defined
above, net of outstanding bank overdrafts.
Interest-bearing loans and borrowings
All loans and borrowings are initially recognised at fair value of the consideration received net of issue costs associated with the borrowings.
After initial recognition, interest-bearing loans and borrowings are subsequently measured at amortised cost using the effective interest
method. Amortised cost is calculated by taking into account any issue costs, and any discount or premium on settlement.
Gains and losses are recognised in the Income Statement when the liabilities are derecognised or impaired, as well as through the
amortisation process.
Leases
Finance leases, which transfer to the Group substantially all the risks and benefits incidental to ownership of the leased item, are capitalised
at the inception of the lease at the fair value of the lease or, if lower, at the present value of the minimum lease payments. The corresponding
liability to the lessor is included in the Balance Sheet as a finance lease obligation. Lease payments are apportioned between the finance
charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability.
Finance charges are charged directly against income. Capitalised leased assets are depreciated over the shorter of the estimated useful
life of the asset or the lease term.
Operating lease payments are recognised as an expense in the Income Statement on a straight-line basis over the lease term. Rental
income from operating leases is recognised on a straight-line basis over the term of the relevant lease.
Other financial liabilities
Other financial liabilities are initially measured at fair value, net of transaction costs. Other financial liabilities are subsequently measured
at amortised cost using the effective interest method, with interest expense recognised on an effective yield basis. The effective interest
method is a method of calculating the amortised cost of a financial liability and of allocating interest expense over the relevant periods.
The effective interest rate is the rate that discounts estimated future cash payments throughout the expected life of the financial liability,
or, where appropriate, a shorter period to the net carrying amount on initial recognition. The Group derecognises financial liabilities when
the Group’s obligations are discharged, cancelled or they expire.
Derivative financial instruments and hedging
The Group uses derivative financial instruments to manage its exposure to interest rate, foreign exchange rate and commodity risks, arising
from operating and financing activities. The Group does not hold or issue derivative financial instruments for trading purposes. Details of
derivative financial instruments are disclosed in note 24 of the financial statements.
Derivative financial instruments are recognised and stated at fair value. Their fair value is recalculated at each reporting date. The
accounting treatment for the resulting gain or loss will depend on whether the derivative meets the criteria to qualify for hedge accounting.
Where derivatives do not meet the criteria to qualify for hedge accounting, any gains or losses on the revaluation to fair value at the period
end are recognised immediately in the Income Statement. Where derivatives do meet the criteria to qualify for hedge accounting,
recognition of any resulting gain or loss on revaluation depends on the nature of the hedge relationship and the item being hedged.
Derivative financial instruments with maturity dates of less than one year from the period end date are classified as current in the Balance Sheet.
Hedge accounting
In order to qualify for hedge accounting, the Group is required to document from inception the relationship between the item being hedged
and the hedging instrument and to show that the hedge will be highly effective on an ongoing basis. This effectiveness testing is performed
at each period end to ensure that the hedge remains highly effective.
Melrose Industries PLCAnnual Report 2014Financials 113
Hedge accounting is discontinued when the Group revokes the hedging relationship, the hedge instrument expires or is sold, terminated,
exercised, or no longer qualifies for hedge accounting.
The Group designates certain hedging instruments as either fair value hedges, cash flow hedges or hedges of net investments in
foreign operations.
Fair value hedge
Derivative financial instruments are classified as fair value hedges when they hedge the Group’s exposure to changes in the fair value of
a recognised asset or liability. Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recorded in
the Income Statement immediately, together with any changes in the fair value of the hedged item that is attributable to the hedged risk.
Cash flow hedge
Derivative financial instruments are classified as cash flow hedges when they hedge the Group’s exposure to the variability in cash flows
that are either attributable to a particular risk associated with a recognised asset or liability, or a highly probable forecasted cash flow.
The effective portion of any gain or loss from revaluing the derivative financial instrument is recognised in the Statement of Comprehensive
Income and accumulated in equity. The gain or loss relating to the ineffective portion is recognised immediately in the Income Statement.
Amounts previously recognised in the Statement of Comprehensive Income and accumulated in equity are recycled to the Income
Statement in the periods when the hedged item is recognised in the Income Statement or when the forecast transaction is no longer
expected to occur. However, when the forecast transaction that is hedged results in the recognition of a non-financial asset or a non-
financial liability, the gains and losses previously deferred in equity are transferred from equity and included in the initial measurement
of the cost of the non-financial asset or non-financial liability.
Hedges of net investments in foreign operations
Derivative financial instruments are classified as net investment hedges when they hedge the Group’s net investment in foreign operations.
The effective element of any foreign exchange gain or loss from revaluing the derivative at a reporting period end is recognised in the
Statement of Comprehensive Income. Any ineffective element is recognised immediately in the Income Statement.
Gains and losses accumulated in equity are recognised immediately in the Income Statement when the foreign operation is disposed of
or when the hedge is no longer expected to occur.
Provisions
Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that
an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the
amount of the obligation. If the effect of the time value of money is material, provisions are determined by discounting the expected future
cash flows at a rate that reflects the current market assessment of the time value of money and, where appropriate, the risks specific to
the liability. Where discounting is used, the increase in the provision due to the passage of time is recognised as a finance cost.
Restructurings
A restructuring provision is recognised when the Group has developed a detailed formal plan for the restructuring and has raised a valid
expectation in those affected that it will carry out the restructuring by either starting to implement the plan or by announcing its main
features to those affected by it. The measurement of a restructuring provision includes only the direct expenditures arising from the
restructuring, which are those amounts that are both necessarily entailed by the restructuring and not associated with the ongoing
activities of the entity.
Warranties
Provisions for the expected cost of warranty obligations under local sale of goods legislation are recognised at the date of sale of the
relevant products, at the Directors’ best estimate of the expenditure required to settle the Group’s obligation.
Onerous contracts
Present obligations arising under onerous contracts are recognised and measured as provisions. An onerous contract is considered
to exist where the Group has a contract under which the unavoidable costs of meeting the obligations under the contract exceed the
economic benefits expected to be received under it.
Environmental liabilities
Liabilities for environmental costs are recognised when environmental assessments or clean-ups are probable and the associated
costs can be reasonably estimated. Generally, the timing of these provisions coincides with the commitment to a formal plan of action.
The amount recognised is the best estimate of the expenditure required. Where the liability will not be settled for a number of years, the
amount recognised is the present value of the estimated future expenditure.
Melrose Industries PLCAnnual Report 2014FinancialsFinancials
114
Notes to the
financial statements continued
2. Summary of significant accounting policies continued
Employee benefits
Wages, salaries, bonuses, social security contributions, paid annual leave and sick leave are accrued in the year in which the associated
services are rendered by employees of the Group. The accounting policy for pensions and other retirement benefits is described below.
The Group also operates long-term incentive plans (LTIPs) for Directors and certain employees. The expected settlement costs of these
plans are expensed on a straight-line basis over the life of the plans.
Pensions and other retirement benefits
The Group operates defined benefit pension plans and defined contribution plans, some of which require contributions to be made
to administered funds separate from the Group.
For the defined benefit pension and retirement benefit plans, plan assets are measured at fair value and plan liabilities are measured on
an actuarial basis and discounted at an interest rate equivalent to the current rate of return on a high quality corporate bond of equivalent
currency and term to the plan liabilities. Any assets resulting from this calculation are limited to past service cost plus the present value
of available refunds and reductions in future contributions to the plan. The present value of the defined benefit obligation, and the related
current service cost and past service cost, are measured using the projected unit credit method.
The service cost of providing pension and other retirement benefits to employees for the period is charged to the Income Statement.
Net interest expense on net defined benefit obligations is determined by applying discount rates used to measure defined benefit
obligations at the beginning of the year to net defined benefit obligations at the beginning of the year. Net interest expense is recognised
within finance costs.
Remeasurement gains and losses comprise actuarial gains and losses, the effect of the asset ceiling (if applicable) and the return on
plan assets (excluding interest). Remeasurement gains and losses, and taxation thereon, are recognised in full in the Statement of
Comprehensive Income in the period in which they occur and are not subsequently recycled.
Actuarial gains and losses may result from differences between the actuarial assumptions underlying the plan obligations and actual
experience during the period, or changes in the actuarial assumptions used in the valuation of the plan obligations.
For defined contribution plans, contributions payable are charged to the Income Statement as an operating expense when employees
have rendered services entitling them to the contributions.
Foreign currencies
The individual financial statements of each Group company are presented in the currency of the primary economic environment in which
it operates (its functional currency). For the purpose of the consolidated financial statements, the results and financial position of each
Group company are expressed in pounds Sterling, which is the functional currency of the Company, and the presentation currency for
the consolidated financial statements.
In preparing the financial statements of the individual companies, transactions in currencies other than the entity’s functional currency
(foreign currencies) are recorded at the rates of exchange prevailing on the dates of the transactions. At each Balance Sheet date,
monetary assets and liabilities that are denominated in foreign currencies are retranslated at the rates prevailing on the Balance Sheet date.
Non-monetary items carried at fair value that are denominated in foreign currencies are translated at the rates prevailing at the date when
the fair value was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated.
Exchange differences arising on the settlement of monetary items, and on the retranslation of monetary items, are included in the Income
Statement for the period. Exchange differences arising on the retranslation of non-monetary items carried at fair value are included in the
Income Statement for the period except for differences arising on the retranslation of non-monetary items in respect of which gains and
losses are recognised directly in equity. For such non-monetary items, any exchange component of that gain or loss is also recognised
directly in equity.
For the purpose of presenting consolidated financial statements, the assets and liabilities of the Group’s foreign operations are translated
at exchange rates prevailing on the Balance Sheet date. Income and expense items are translated at the average exchange rates for the
period, unless exchange rates fluctuate significantly during that period, in which case the exchange rates at the date of transactions are
used. Exchange differences arising, if any, are recognised in the Statement of Comprehensive Income and accumulated in equity
(attributed to non-controlling interests as appropriate). Such translation differences are recognised as income or as expenses in the period
in which the related operation is disposed of. Any exchange differences that have previously been attributed to non-controlling interests
are derecognised but they are not reclassified to the Income Statement.
Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and
translated at the rate prevailing at the Balance Sheet date.
Melrose Industries PLCAnnual Report 2014Financials 115
Taxation
The tax expense is based on the taxable profits for the period and represents the sum of the tax paid or currently payable and deferred tax.
Taxable profit differs from net profit as reported in the Income Statement because it excludes items of income or expense that are taxable
or deductible in other years and it further excludes items that are never taxable or deductible. The Group’s liability for current tax is
calculated using tax rates that have been enacted or substantively enacted by the Balance Sheet date.
Deferred tax is provided, using the liability method, on all temporary differences at the Balance Sheet date between the tax bases of assets
and liabilities and their carrying amounts for financial reporting purposes.
Deferred tax liabilities are recognised for all taxable temporary differences except:
• where the deferred tax liability arises on the initial recognition of goodwill or an asset or liability in a transaction that is not a business
combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and
• where the timing of the reversal of the temporary differences associated with investments in subsidiaries and interests in joint ventures
can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future.
Deferred tax assets are recognised for all deductible temporary differences, carry-forward of unused tax assets and unused tax losses,
to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and carry-forward
of unused tax assets and unused tax losses can be utilised except:
• where the deferred tax asset arises from the initial recognition of an asset or liability in a transaction that is not a business combination
and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and
• in respect of deductible temporary differences associated with investments in subsidiaries and interests in joint ventures, deferred tax
assets are only recognised to the extent that it is probable that the temporary differences will reverse in the foreseeable future and
taxable profit will be available against which the temporary differences can be utilised.
The carrying amount of deferred tax assets is reviewed at each Balance Sheet date and reduced to the extent that it is no longer probable
that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilised.
Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the year when the asset is realised or the
liability is settled, based on tax rates and tax laws that have been enacted or substantively enacted at the relevant Balance Sheet date.
Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities
and when they relate to income taxes levied by the same taxation authority and the Group intends to settle its current tax assets and
liabilities on a net basis.
Tax relating to items recognised directly in other comprehensive income is recognised in the Statement of Comprehensive Income and
not in the Income Statement.
Revenues, expenses and assets are recognised net of the amount of sales tax except:
• where the sales tax incurred on a purchase of goods and services is not recoverable from the taxation authority, in which case the sales
tax is recognised as part of the cost of acquisition of the asset or as part of the expense item as applicable; and
• where receivables and payables are stated with the amount of sales tax included.
The net amount of sales tax recoverable from, or payable to, the taxation authority is included as part of receivables or payables in the
Balance Sheet.
Share-based payments
The Group has applied the requirements of IFRS 2: “Share-based payment”. The Group issues equity-settled share-based payments
to certain employees. Equity-settled share-based payments are measured at fair value of the equity instrument excluding the effect of
non-market based vesting conditions at the date of grant. The fair value determined at the grant date of the equity-settled share-based
payments is expensed on a straight-line basis over the vesting period, based on the Group’s estimate of shares that will eventually vest
and adjusted for the effect of non-market based vesting conditions.
Fair value is measured by use of the Black Scholes pricing model. The expected life used in the model has been adjusted, based on the
Directors’ best estimate, for the effects of non-transferability, exercise restrictions, and behavioural considerations.
Melrose Industries PLCAnnual Report 2014FinancialsFinancials 116
Notes to the
financial statements continued
2. Summary of significant accounting policies continued
Government grants
Government grants are not recognised until there is reasonable assurance that the Group will comply with the conditions attaching to them
and that the grants will be received.
Government grants relating to property, plant and equipment are treated as deferred income and released to profit or loss over the
expected useful lives of the assets concerned.
Non-current assets and businesses held for sale
Non-current assets and businesses classified as held for sale are measured at the lower of carrying amount and fair value less costs to sell.
Non-current assets and businesses are classified as held for sale if their carrying amount will be recovered principally through a sale
transaction rather than through continuing use. This condition is regarded as having been met only when the sale is highly probable and
the asset or business is available for immediate sale in its present condition. Management must be committed to the sale which should
be expected to qualify for recognition as a completed sale within one year from the date of classification.
3. Critical accounting judgements and key sources of estimation uncertainty
In the application of the Group’s accounting policies, which are described in note 2, the Directors are required to make judgements,
estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources.
The estimates and associated assumptions are based on historical experiences and other factors that are considered to be relevant.
Actual results may differ from these estimates.
The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the
period in which the estimate is revised if the revision affects only that period, or in the period of revision and future periods if the revision
affects both current and future periods.
In applying the Group’s accounting policies as set out in note 2, management has made critical accounting judgements regarding the
fair value of assets acquired and liabilities assumed at acquisition, the valuation of intangibles, the impairment of non-current assets,
the quantification of provisions, the valuation of retirement benefit obligations and in respect of taxation. Due to the inherent uncertainty
involved in making assumptions and estimates, actual outcomes may differ from those assumptions and estimates. An analysis of the
key sources of estimation uncertainty at the Balance Sheet date that have a significant risk of causing a material adjustment to the carrying
amount of assets and liabilities within the next financial year is provided below.
Fair values at acquisition
Following the acquisition of Eclipse, Inc. (“Eclipse”), management has made judgements regarding the fair value of assets acquired and
liabilities assumed particularly in relation to provisions and intangible assets. The fair value of these assets and liabilities are shown in note 12.
Valuation of intangibles
In accordance with IFRS 3: “Business combinations” intangible assets acquired in a business combination are recognised at fair value.
These fair values have been estimated using income based valuation methods. These valuation methods estimate the price that an asset
could be sold for in an arm’s length transaction on the basis of the asset’s expected future income stream. These estimates are based
upon market data in order to reconstruct the measurement process a typical market participant would implement.
The valuation of intangible assets requires management to estimate the net present value of future cash flows arising from customer
relationships after estimating the attrition factor relevant to the customer relationship and other factors such as access to the workforce,
which are appropriate to the determination of the additional cash flows. The valuation of intangible assets in respect of brands and
intellectual property requires management to estimate future cash flows using a “relief from royalty” model.
Melrose Industries PLCAnnual Report 2014Financials 117
Impairment of non-current assets
Goodwill and intangible assets are tested for impairment whenever events or circumstances indicate that their carrying amounts might be
impaired and at least annually. Such events and circumstances include the effects of restructuring initiated by management.
To determine whether goodwill and intangible assets are impaired requires an estimation of the value in use of the cash-generating units
to which goodwill and other intangible assets have been allocated. The value in use calculation requires management to estimate the future
cash flows expected to arise from the cash-generating unit and a suitable discount rate in order to calculate the net present value. Such
calculations require judgement relating to the appropriate discount factors and long-term growth prevalent in a particular market as well as
short and medium-term business plans. Management draw upon experience as well as external resources in making these judgements.
The carrying amount of goodwill and other intangible assets (not including computer software and development costs) at the Balance
Sheet date was £2,380.7 million (31 December 2013: £2,587.9 million). At 31 December 2014 and 2013, the Group recognised no
impairment loss in respect of these assets.
Provisions
The quantification of certain liabilities within provisions (environmental remediation obligations and future costs and settlements in relation
to certain legal claims) have been estimated using the best information available. However, such liabilities depend on the actions of third
parties and on the specific circumstances pertaining to each obligation, neither of which is controlled by the Group. Although provisions
are reviewed on a regular basis and adjusted for management’s best current estimates, the judgemental nature of these items means that
future amounts settled may be different from those provided. Further details are set out in note 20.
Retirement benefit obligations
Retirement benefits are accounted for under IAS 19 (revised): “Employee benefits”. For defined benefit plans, obligations are measured
at the discounted present value whilst plan assets are recorded at fair value. Because of changing market and economic conditions, the
expenses and liabilities actually arising under the plans in the future may differ materially from the estimates made on the basis of these
actuarial assumptions. Therefore, declining returns on equity markets and markets for fixed-income instruments could necessitate
additional contributions to the plans in order to cover future pension obligations. Also, higher or lower withdrawal rates or longer or shorter
life of participants may have an impact on the amount of pension income or expense recorded in the future.
The discount rate used to discount retirement benefit obligations to present value is derived from the yields of senior, high-quality corporate
bonds at the Balance Sheet date. These generally include AA-rated securities. The discount rate is based on the market yield of a portfolio
of bonds whose weighted residual maturities approximately correspond to the duration necessary to cover the entire benefit obligation.
Pension and other retirement benefits are inherently long-term and future experience may differ from the actuarial assumptions used
to determine the net charge for retirement benefit obligations. Note 23 to these consolidated financial statements describes the principal
discount rate, earnings increase and pension retirement benefit obligation assumptions that have been used to determine the net charge
for retirement benefit obligations in accordance with IAS 19 (revised): “Employee benefits”. The calculation of any charge relating to
retirement benefit obligations is clearly dependent on the assumptions used, which reflects the exercise of judgement. The assumptions
adopted are based on prior experience, market conditions and the advice of plan actuaries.
At 31 December 2014, the Group’s retirement benefit obligation deficit was £218.5 million (31 December 2013: £219.3 million).
Taxation
The Group is subject to income tax in most of the jurisdictions in which it operates. Management is required to exercise judgement in
determining the Group’s provision for income taxes. Management’s judgement is required in estimating tax provisions where additional
current tax may become payable in the future following the audit by the tax authorities of previously filed tax returns. Management’s
judgement is also required as to whether a deferred tax asset should be recognised based on the availability of future taxable profits.
While the Group aims to ensure that the estimates recorded are accurate, the actual amounts could be different from those expected.
Melrose Industries PLCAnnual Report 2014FinancialsFinancials 118
Notes to the
financial statements continued
4. Revenue
An analysis of the Group’s revenue, as defined by IAS 18: “Revenue”, is as follows:
Continuing operations
Revenue from the sale of goods
Revenue recognised on long-term contracts
Revenue from the provision of services
Revenue
Finance income
Total revenue from continuing operations as defined by IAS 18
Discontinued operations
Revenue from the sale of goods
Revenue recognised on long-term contracts
Revenue from the provision of services
Revenue
Finance income
Total revenue from discontinued operations as defined by IAS 18
Total revenue as defined by IAS 18
(1) Restated to include the results of Bridon within discontinued operations (note 9).
Year ended
31 December
2014
£m
Notes
Restated(1)
year ended
31 December
2013
£m
5
7
5, 9
1,296.8
5.5
75.2
1,377.5
14.7
1,392.2
203.4
0.3
4.3
208.0
–
208.0
1,600.2
1,379.2
0.6
86.6
1,466.4
21.7
1,488.1
647.5
5.9
5.8
659.2
0.1
659.3
2,147.4
5. Segment information
Segment information is presented in accordance with IFRS 8: “Operating segments” which requires operating segments to be identified on
the basis of internal reports about components of the Group that are regularly reported to the Group’s Board in order to allocate resources
to the segments and assess their performance. The Group’s reportable operating segments under IFRS 8 are categorised as follows:
• Energy segment
• Elster segments
– Gas
– Electricity
– Water
– Elster central
The Energy segment consists of the Brush business, a specialist supplier of energy industrial products to the global market.
Elster comprises the Gas, Electricity and Water segments along with their associated central costs. These businesses serve
residential and industrial metering and utilisation markets whilst providing related communications, networking and software solutions.
There are two central cost centres which are also separately reported to the Board:
• Central – corporate
• Central – LTIPs(1)
(1) Long Term Incentive Plans.
The Central corporate cost centre contains the Melrose Group head office costs. The Central LTIPs cost centre contains the costs
associated with the five year Melrose Incentive Plan (granted on 11 April 2012) and the divisional management LTIPs that are in operation
across the Group.
Following the disposal of Bridon, the Lifting segment has ceased to exist and the results of this business have been included within
discontinued operations.
The discontinued segment comprises the Bridon, Truth, Marelli, Crosby, Acco and Harris businesses in 2013 and Bridon in 2014.
Transfer prices between business units are set on an arm’s length basis in a manner similar to transactions with third parties.
Melrose Industries PLCAnnual Report 2014Financials 119
The Group’s geographical segments are determined by the location of the Group’s non-current assets and, for revenue, the location of
external customers. Inter-segment sales are not material and have not been included in the analysis below.
The following tables present revenue, profit, and certain asset and liability information regarding the Group’s operating segments for the
year ended 31 December 2014 and the comparative year. Note 6 gives details of exceptional costs and income.
Segment revenues and results
Continuing operations
Energy
Gas
Electricity
Water
Elster total
Total continuing operations
Discontinued operations
Total revenue
(1) Restated to include the revenues of Bridon within discontinued operations (note 9).
Continuing operations
Energy headline(2) operating profit
Gas
Electricity
Water
Elster central
Elster headline(2) operating profit
Central – corporate
Central – LTIPs(3)
Headline(2) operating profit
Intangible asset amortisation
Exceptional operating costs
Exceptional operating income
Operating profit
Finance costs
Finance income
Profit before tax
Tax
Profit for the year from discontinued operations
Profit for the year
(1) Restated to include the results of Bridon within discontinued operations (note 9).
(2) As defined on the Income Statement.
(3) Long Term Incentive Plans.
Segment revenue from external customers
Year ended
31 December
2014
£m
Notes
Restated(1)
year ended
31 December
2013
£m
327.3
687.0
215.7
147.5
1,050.2
1,377.5
208.0
1,585.5
350.1
688.9
247.5
179.9
1,116.3
1,466.4
659.2
2,125.6
4
4, 9
Segment result
Year ended
31 December
2014
£m
Notes
Restated(1)
year ended
31 December
2013
£m
65.4
161.4
22.8
23.4
(2.1)
205.5
(13.9)
(11.0)
246.0
(54.7)
(34.3)
5.4
162.4
(48.2)
14.7
128.9
(41.8)
107.6
194.7
73.1
152.4
21.5
23.0
(2.7)
194.2
(14.3)
(13.0)
240.0
(57.1)
(19.3)
28.9
192.5
(70.2)
21.7
144.0
(41.6)
462.2
564.6
6
6
7
7
8
9
Melrose Industries PLCAnnual Report 2014FinancialsFinancials 120
Notes to the
financial statements continued
5. Segment information continued
Continuing operations
Energy
Gas
Electricity
Water
Elster central
Elster total
Central – corporate
Central – LTIPs(2)
Total continuing operations
Discontinued operations
Total
(1) Restated to include the total assets and total liabilities of Bridon within discontinued operations (note 9).
(2) Long Term Incentive Plans.
Continuing operations
Energy
Gas
Electricity
Water
Elster central
Elster total
Central – corporate
Total continuing operations
Discontinued operations
Total
Total assets
Total liabilities
31 December
2014
£m
Restated(1)
31 December
2013
£m
31 December
2014
£m
Restated(1)
31 December
2013
£m
502.5
2,054.8
337.1
183.7
5.3
2,580.9
104.9
–
3,188.3
–
3,188.3
497.7
2,038.7
343.0
201.6
6.3
2,589.6
249.4
–
3,336.7
340.6
3,677.3
136.3
506.1
107.8
84.1
52.8
750.8
700.9
26.6
1,614.6
–
1,614.6
146.5
470.3
117.7
92.6
60.5
741.1
488.7
21.6
1,397.9
91.5
1,489.4
Capital expenditure(1)
Depreciation(1)
Year ended
31 December
2014
£m
Restated(2)
year ended
31 December
2013
£m
Year ended
31 December
2014
£m
Restated(2)
year ended
31 December
2013
£m
30.1
16.9
11.1
3.9
–
31.9
0.2
62.2
4.1
66.3
16.8
14.1
6.9
3.7
0.3
25.0
0.6
42.4
18.9
61.3
6.3
15.4
5.8
3.3
0.1
24.6
0.9
31.8
6.8
38.6
5.9
15.4
6.7
4.5
–
26.6
0.7
33.2
15.2
48.4
(1) Including computer software and development costs.
(2) Restated to include the capital expenditure(1) and depreciation(1) of Bridon within discontinued operations (note 9).
Geographical information
The Group operates in various geographical areas around the world. The Group’s country of domicile is the UK and the Group’s revenues
and non-current assets in Europe and North America are also considered to be material.
The Group’s revenue from external customers and information about its segment assets (non-current assets excluding interests in joint ventures,
deferred tax assets, derivative financial assets and non-current trade and other receivables) by geographical location are detailed below:
Melrose Industries PLCAnnual Report 2014Financials 121
Revenue(1) from external customers
Non-current assets
Year ended
31 December
2014
£m
Restated(2)
year ended
31 December
2013
£m
31 December
2014
£m
Restated(2)
31 December
2013
£m
159.2
507.9
408.4
302.0
1,377.5
208.0
1,585.5
189.9
509.8
461.7
305.0
1,466.4
659.2
2,125.6
239.7
1,399.8
859.1
106.3
2,604.9
–
2,604.9
276.9
1,522.4
706.7
109.8
2,615.8
237.4
2,853.2
Year ended
31 December
2014
£m
Year ended
31 December
2013
£m
(30.6)
(3.7)
(34.3)
(18.8)
(0.5)
(19.3)
Continuing operations
UK
Europe
North America
Other
Total continuing operations
Discontinued operations
Total
(1) Revenue is presented by destination.
(2) Restated to include the revenue and non-current assets of Bridon within discontinued operations (note 9).
6. Exceptional costs and income
Exceptional costs
Continuing operations
Restructuring costs
Acquisition and disposal costs
Total exceptional costs
During 2014, the continuing Group incurred £30.6 million (2013: £18.8 million) of costs relating to restructuring programmes which are
expected to deliver cost savings in the future.
The costs in both years were weighted towards the recently acquired Elster businesses, notably towards Gas in 2014. The most significant
proportion of restructuring within the Gas business relates to the major closure of the Essen plant in Belgium and relocation of its Integrated
Metering Solutions business, which builds metering stations, to Saudi Arabia and Malaysia. In addition, as a consequence of the closure of
Essen, research and development and the production of ultrasonic meters was moved to Mainz, Germany in the year. Initial restructuring
costs following the acquisition of Eclipse were also incurred in 2014.
The restructuring costs incurred in 2013 were proportionally weighted to the Elster Electricity and Water businesses and whilst
restructuring costs have been incurred within these businesses in 2014 they are focused on European operations rather than the large
restructures in the North America businesses incurred in previous years.
The Group also incurred £3.7 million (2013: £0.5 million) of expenses on acquisition and disposal related activities during the year.
Exceptional income
Continuing operations
Release of surplus leasehold property cost provision
Release of items previously booked as fair value adjustments
Total exceptional income
Year ended
31 December
2014
£m
Year ended
31 December
2013
£m
5.4
–
5.4
–
28.9
28.9
During the year a historical onerous lease dispute was successfully resolved for less than expected resulting in the release of £5.4 million
from provisions as exceptional income.
During 2013 certain warranty and legal issues, inherited with the acquisition of Elster, were successfully resolved for less than expected
resulting in the release of £28.9 million of provisions as exceptional income.
Melrose Industries PLCAnnual Report 2014FinancialsFinancials 122
Notes to the
financial statements continued
7. Revenues and expenses
Net operating expenses comprise:
Selling and distribution costs
Administration expenses
Share of headline(2) results of joint ventures (note 14)
Other operating costs – exceptional (note 6)
Other operating income – exceptional (note 6)
Total net operating expenses
Continuing operations
Discontinued operations
Total
Year ended
31 December
2014
£m
(105.1)
(209.3)
3.2
(34.3)
5.4
(340.1)
Restated(1)
year ended
31 December
2013
£m
(114.1)
(220.2)
2.8
(19.3)
28.9
(321.9)
Year ended
31 December
2014
£m
(28.3)
(23.4)
–
(1.8)
–
(53.5)
Restated(1)
year ended
31 December
2013
£m
(57.0)
(61.8)
–
(0.7)
–
(119.5)
Year ended
31 December
2014
£m
(133.4)
(232.7)
3.2
(36.1)
5.4
(393.6)
Year ended
31 December
2013
£m
(171.1)
(282.0)
2.8
(20.0)
28.9
(441.4)
(1) Restated to include the results of Bridon within discontinued operations (note 9).
(2) As defined on the Income Statement.
Continuing operations
Discontinued operations
Total
Operating profit is stated
after charging/(crediting):
Depreciation and impairment
Cost of inventories
Amortisation of customer relationships, brands and
Year ended
31 December
2014
£m
27.2
875.0
Restated(1)
year ended
31 December
2013
£m
30.4
952.0
Year ended
31 December
2014
£m
6.7
140.0
Restated(1)
year ended
31 December
2013
£m
15.3
439.8
intellectual property (note 12)
54.7
57.1
Amortisation and impairment of computer software
and development costs (note 12)
Operating lease expense
Staff costs(2)
Research and development costs(2)
Profit on disposal of property, plant and equipment
Impairment recognised on trade receivables
7.3
6.5
350.1
19.5
(0.2)
1.6
5.2
7.0
382.5
18.7
(1.1)
2.7
6.3
0.1
4.1
52.9
0.1
–
–
(1) Restated to include the results of Bridon within discontinued operations (note 9).
(2) Staff costs include £33.6 million (2013: £36.3 million) of research and development related costs in continuing operations.
13.8
0.3
6.8
88.9
0.5
–
0.6
The analysis of auditor’s remuneration is as follows:
Fees payable to the Company’s auditor for the audit of the Company’s annual accounts
Fees payable to the auditor for the audit of the Eclipse acquisition Balance Sheet
Total fees payable for the audit of the Company’s annual accounts
Fees payable to the Company’s auditor and their associates for other audit services to the Group:
– the audit of the Company’s subsidiaries pursuant to legislation
Total audit fees
Audit-related assurance services:
Review of the half year interim statement
Non-statutory audit of certain of the Company’s businesses
Total audit-related assurance services
Total audit and audit-related assurance services
Taxation compliance services
Other taxation advisory services
Corporate finance services
Other services
Total audit and non-audit fees
Year ended
31 December
2014
£m
33.9
1,015.0
Year ended
31 December
2013
£m
45.7
1,391.8
61.0
70.9
7.4
10.6
403.0
19.6
(0.2)
1.6
5.5
13.8
471.4
19.2
(1.1)
3.3
Year ended
31 December
2014
£m
1.4
0.1
1.5
Year ended
31 December
2013
£m
1.4
–
1.4
1.3
2.8
0.1
0.6
0.7
3.5
0.2
0.5
0.3
0.1
4.6
1.4
2.8
0.2
1.0
1.2
4.0
0.1
0.9
–
0.3
5.3
Details of the Company’s policy on the use of auditors for non-audit services and how auditor’s independence and objectivity were
safeguarded are set out in the Audit Committee report on pages 74 and 75. No services were provided pursuant to contingent
fee arrangements.
Melrose Industries PLCAnnual Report 2014Financials
123
Year ended
31 December
2014
£m
Restated(1)
year ended
31 December
2013
£m
279.6
50.4
2.2
6.9
11.0
350.1
52.9
403.0
297.2
62.1
3.4
6.8
13.0
382.5
88.9
471.4
Year ended
31 December
2014
Number
Restated(1)
year ended
31 December
2013
Number
2,594
3,699
1,395
985
34
8,707
1,529
10,236
2,691
3,827
1,391
1,104
35
9,048
4,695
13,743
Year ended
31 December
2014
£m
Notes
Restated(1)
year ended
31 December
2013
£m
(35.0)
(4.0)
(7.8)
(1.4)
(48.2)
14.7
(33.5)
(0.4)
(33.9)
(56.0)
(4.7)
(8.9)
(0.6)
(70.2)
21.7
(48.5)
(0.4)
(48.9)
20
9
Staff costs during the year (including executive Directors)
Wages and salaries
Social security costs
Pension costs (note 23)
– defined benefit plans
– defined contribution plans
LTIPs(2)
Total continuing staff costs
Discontinued staff costs(3)
Total staff costs
(1) Restated to include the results of Bridon within discontinued operations (note 9).
(2) Long Term Incentive Plans.
(3) Includes £1.9 million (2013: £7.9 million) of defined contribution pension costs.
Average monthly number of persons employed (including executive Directors)
Energy
Gas
Electricity
Water
Central – corporate
Total continuing operations
Discontinued operations
Total average number of persons employed
(1) Restated to include the employees of Bridon within discontinued operations (note 9).
Finance costs and income
Interest on bank loans and overdrafts
Amortisation of costs of raising finance
Net interest cost on pensions
Unwind of discount on provisions
Total finance costs
Finance income
Total continuing operations
Discontinued operations(2)
Total net finance costs
(1) Restated to include the results of Bridon within discontinued operations (note 9).
(2) Includes £0.4 million (2013: £0.3 million) net interest cost in relation to pensions.
Melrose Industries PLCAnnual Report 2014FinancialsFinancials 124
Notes to the
financial statements continued
8. Tax
Analysis of charge/(credit) in year:
Current tax
Deferred tax (note 21)
Total income tax charge
Tax charge on headline(2) profit before tax
Exceptional tax charge
Tax (credit)/charge on net exceptional items
Tax credit in respect of intangible asset amortisation
Total income tax charge
Continuing operations
Discontinued operations
Total
Year ended
31 December
2014
£m
46.2
(4.4)
41.8
57.4
3.9
(3.6)
(15.9)
41.8
Restated(1)
year ended
31 December
2013
£m
33.9
7.7
41.6
50.5
8.1
3.7
(20.7)
41.6
Year ended
31 December
2014
£m
4.6
(1.2)
3.4
5.5
–
(0.5)
(1.6)
3.4
Restated(1)
year ended
31 December
2013
£m
43.1
(5.1)
38.0
42.0
–
–
(4.0)
38.0
Year ended
31 December
2014
£m
50.8
(5.6)
45.2
62.9
3.9
(4.1)
(17.5)
45.2
Year ended
31 December
2013
£m
77.0
2.6
79.6
92.5
8.1
3.7
(24.7)
79.6
(1) Restated to include the results of Bridon within discontinued operations (note 9).
(2) As defined on the Income Statement.
The tax charge for the year ended 31 December 2014 includes an exceptional tax charge of £3.9 million (2013: £8.1 million) predominantly
relating to the tax costs arising on an internal reorganisation of the Electricity business (2013: internal reorganisation of the Water business).
The charge for the year can be reconciled to the profit per the Income Statement as follows:
Profit on ordinary activities before tax:
Continuing operations
Discontinued operations (note 9)
Tax on profit on ordinary activities at weighted average rate 28.49% (2013: 29.89%)
Tax effect of:
Net permanent differences/non-deductible items
Effect of rate change on deferred tax liabilities on intangible assets
Temporary differences not recognised in deferred tax
Tax credits, withholding taxes and other rate differences
Prior year tax adjustments
Exceptional tax charge
Total tax charge for the year
(1) Restated to include the results of Bridon within discontinued operations (note 9).
Year ended
31 December
2014
£m
Restated(1)
year ended
31 December
2013
£m
128.9
14.1
143.0
40.7
1.3
–
3.7
(1.5)
(2.9)
3.9
45.2
144.0
99.5
243.5
72.8
5.8
(3.9)
(2.2)
1.4
(2.4)
8.1
79.6
The reconciliation has been performed at a blended Group tax rate of 28.49% (2013: 29.89%) which represents the weighted average
of the tax rates applying to taxable profits in the jurisdictions in which those profits arose.
In addition to the amount charged to the Income Statement, a tax credit of £8.7 million (2013: £nil) has been recognised directly in the
Consolidated Statement of Comprehensive Income. This represents a tax credit of £8.7 million (2013: £0.6 million charge) in respect
of retirement benefit obligations and a tax charge of £nil (2013: £0.6 million credit) in respect of movements on cash flow hedges.
Melrose Industries PLCAnnual Report 2014Financials 125
9. Discontinued operations
Disposal of businesses
On 12 November 2014, the Group completed the disposal of Bridon, which was acquired as part of the FKI acquisition in 2008, for gross
cash consideration of £374.8 million. The costs charged during the year associated with the disposal were £9.9 million. The profit on
disposal was £96.9 million after the recycling of cumulative translation differences of £7.6 million. The Bridon business was previously
classified within the Lifting segment and is now shown within discontinued operations in both years.
Discontinued operations in 2013 also contain the results and cash flows of the Crosby and Acco businesses, which were disposed of on
22 November 2013, the Marelli business, disposed of on 1 August 2013, the Truth business, disposed of on 3 July 2013, and the Harris
business, disposed of on 31 December 2013.
Financial performance of discontinued operations:
Revenue
Operating costs
Headline(2) operating profit
Intangible asset amortisation
Exceptional items
Net finance costs
Profit before tax
Headline(2) tax
Exceptional tax(3)
Profit after tax
Cumulative translation differences recycled on disposals
Gain on disposal of net assets of discontinued operations
Profit for the year from discontinued operations
Attributable to:
Owners of the parent
Non-controlling interests
(1) Restated to include the results of Bridon within discontinued operations.
(2) As defined on the Income Statement.
(3) Includes exceptional tax and tax on exceptional items and intangible asset amortisation.
Year ended
31 December
2014
£m
208.0
(185.4)
22.6
(6.3)
(1.8)
(0.4)
14.1
(5.5)
2.1
10.7
7.6
89.3
107.6
Restated(1)
year ended
31 December
2013
£m
659.2
(544.8)
114.4
(13.8)
(0.7)
(0.4)
99.5
(42.0)
4.0
61.5
12.1
388.6
462.2
107.6
–
107.6
462.2
–
462.2
Melrose Industries PLCAnnual Report 2014FinancialsFinancials 126
Notes to the
financial statements continued
9. Discontinued operations continued
The major classes of assets and liabilities disposed of within this business were as follows:
Goodwill and other intangible assets
Property, plant and equipment
Inventories
Trade and other receivables
Cash and cash equivalents
Total assets
Trade and other payables
Retirement benefit obligations
Provisions
Tax and deferred tax
Total liabilities
Net assets
Cash consideration net of costs(1)
Cumulative translation difference recycled on disposals
Profit on disposal of businesses
(1) Net of £9.9 million of disposal costs.
10. Dividends
Final dividend for the year ended 31 December 2012 paid of 5.0p
Interim dividend for the year ended 31 December 2013 paid of 2.75p
Final dividend for the year ended 31 December 2013 paid of 5.0p
Interim dividend for the year ended 31 December 2014 paid of 2.8p
Lifting
£m
167.1
62.3
54.7
51.8
14.6
350.5
44.1
3.6
1.4
25.8
74.9
275.6
364.9
7.6
96.9
Year ended
31 December
2014
£m
–
–
53.6
30.0
83.6
Year ended
31 December
2013
£m
63.3
34.8
–
–
98.1
Proposed final dividend for the year ended 31 December 2014 of 5.3 pence per share (2013: 5.0 pence per share) totalling £52.7 million (2013:
£53.6 million).
The final dividend of 5.3 pence was proposed by the Board on 4 March 2015 and, in accordance with IAS 10: “Events after the reporting
period”, has not been included as a liability in these financial statements.
Melrose Industries PLCAnnual Report 2014Financials 11. Earnings per share
Earnings attributable to owners of the parent
Profit for the purposes of earnings per share
Less: profit for the year from discontinued operations (note 9)
Earnings for basis of earnings per share from continuing operations
(1) Restated to include the results of Bridon within discontinued operations (note 9).
Weighted average number of Ordinary Shares for the purposes of basic earnings per share (million)
Further shares for the purposes of diluted earnings per share (million)
Weighted average number of Ordinary Shares for the purposes of diluted earnings per share (million)
127
Year ended
31 December
2014
£m
193.9
(107.6)
86.3
Year ended
31 December
2014
Number
1,092.0
13.7
1,105.7
Restated(1)
year ended
31 December
2013
£m
562.7
(462.2)
100.5
Year ended
31 December
2013
Number
1,266.6
20.1
1,286.7
On 7 February 2014 the number of Ordinary Shares was consolidated in a ratio of 11 to 13, which reduced the number of Ordinary Shares
in issue from 1,266.6 million to 1,071.8 million.
Earnings per share
Basic earnings per share
From continuing and discontinued operations
From continuing operations
From discontinued operations
Diluted earnings per share
From continuing and discontinued operations
From continuing operations
From discontinued operations
(1) Restated to include the results of Bridon within discontinued operations (note 9).
Year ended
31 December
2014
pence
Restated(1)
year ended
31 December
2013
pence
17.8
7.9
9.9
17.5
7.8
9.7
44.4
7.9
36.5
43.7
7.8
35.9
Headline(1) proforma(2) diluted earnings per share
Following the disposals in 2013 and 2014 and the related Returns of Capital and associated share consolidations, headline(1) proforma(2)
diluted earnings per share is calculated using the headline(1) profit after tax, of businesses in existence at each year end, attributable to the
owners of the parent and the number of shares in issue following the related share consolidation.
Headline(1) profit after tax, of businesses in existence at each year end, attributable to owners of the parent(3)
Year ended
31 December
2014
£m
154.3
Year ended
31 December
2013
£m
164.2
(1) Before exceptional costs, exceptional income and intangible asset amortisation.
(2) Calculated using the businesses in existence at each year end, using the diluted number of shares in issue following the related Return of Capital and associated share consolidation.
(3) Includes £25.1 million of headline(1) profit after tax in respect of Bridon in the year ended 31 December 2013.
Number of shares in issue following the Return of Capital (million)
Further shares for the purpose of diluted earnings per share (million)
Number of shares for the purpose of diluted headline(1) proforma(2) earnings per share (million)
Headline(1) proforma(2) diluted earnings per share (pence)
Year ended
31 December
2014
995.2
13.7
1,008.9
15.3
Year ended
31 December
2013
1,071.8
20.1
1,091.9
15.0
(1) Before exceptional costs, exceptional income and intangible asset amortisation.
(2) Calculated using the businesses in existence at each year end, using the diluted number of shares in issue following the related Return of Capital and associated share consolidation.
Melrose Industries PLCAnnual Report 2014FinancialsFinancials 128
Notes to the
financial statements continued
12. Goodwill and other intangible assets
Cost
At 1 January 2013
Additions
Disposal of businesses
Exchange adjustments
At 31 December 2013
Additions
Acquisition of businesses
Disposals
Disposal of businesses
Exchange adjustments
At 31 December 2014
Amortisation
At 1 January 2013
Charge for the year
Disposal of businesses
Exchange adjustments
At 31 December 2013
Charge for the year
Impairments(1)
Disposals
Disposal of businesses
Exchange adjustments
At 31 December 2014
Net book value
At 31 December 2014
At 31 December 2013
At 1 January 2013
Customer
relationships
£m
Brands and
intellectual
property
£m
Computer
software and
development
costs
£m
877.5
–
(9.0)
(1.0)
867.5
–
27.1
–
(20.7)
(37.0)
836.9
(41.0)
(51.4)
4.4
1.7
(86.3)
(48.2)
–
–
13.1
3.8
(117.6)
719.3
781.2
836.5
399.3
–
(134.4)
3.2
268.1
–
24.0
–
(106.7)
(3.7)
181.7
(79.5)
(19.5)
36.0
(0.4)
(63.4)
(12.8)
–
–
34.0
1.0
(41.2)
140.5
204.7
319.8
29.0
3.9
(3.8)
(0.1)
29.0
7.9
0.3
(1.4)
(2.3)
0.2
33.7
(2.7)
(5.5)
3.3
–
(4.9)
(5.3)
(2.1)
1.4
2.1
(0.3)
(9.1)
24.6
24.1
26.3
Goodwill
£m
1,866.2
–
(259.1)
(5.1)
1,602.0
–
64.6
–
(86.6)
(59.1)
1,520.9
–
–
–
–
–
–
–
–
–
–
–
1,520.9
1,602.0
1,866.2
Total
£m
3,172.0
3.9
(406.3)
(3.0)
2,766.6
7.9
116.0
(1.4)
(216.3)
(99.6)
2,573.2
(123.2)
(76.4)
43.7
1.3
(154.6)
(66.3)
(2.1)
1.4
49.2
4.5
(167.9)
2,405.3
2,612.0
3,048.8
(1) The impairment of computer software and development costs comprises £2.1 million (2013: £nil) in relation to the Gas segment.
The most significant identified intangible asset is included within the Gas segment, is in relation to customer relationships, has a carrying
amount as at 31 December 2014 of £582.8 million (31 December 2013: £647.5 million) and has a remaining amortisation period of 17 years
and 8 months.
The goodwill generated as a result of major acquisitions represents the premium paid in excess of the fair value of all net assets, including
intangible assets, identified at the point of acquisition. The carrying value of goodwill represents the initial value that the Directors believed
could be added to the acquired businesses through the application of their specialist turnaround experience.
The goodwill arising on bolt on acquisitions is attributable to the anticipated profitability and cash flows arising from the businesses
acquired, synergies as a result of the complementary nature of the business with existing Melrose businesses, the assembled workforce,
technical expertise, knowhow, market share and geographical advantages afforded to the Group.
Melrose Industries PLCAnnual Report 2014Financials 129
The future improvements applied to the acquired businesses, achieved through a combination of revised strategic direction, operational
improvements and investment, are expected to result in improved profitability of the acquired businesses during the period of ownership
and are also expected to result in enhanced disposal proceeds when the acquired businesses are ultimately disposed. The combined
value achieved from these improvements is expected to be in excess of the value of goodwill acquired.
Goodwill has been allocated to the businesses, each of which comprises several cash-generating units, as follows:
Continuing operations
Energy
Gas
Electricity
Water
Elster total
Total continuing operations
Discontinued operations
31 December
2014
£m
Restated(1)
31 December
2013
£m
201.7
1,088.2
156.0
75.0
1,319.2
1,520.9
–
1,520.9
207.4
1,072.0
157.9
78.5
1,308.4
1,515.8
86.2
1,602.0
(1) Restated to include the goodwill of Bridon within discontinued operations (note 9).
The Group tests goodwill annually for impairment or more frequently if there are indications that goodwill might be impaired. Value in use
calculations are used to determine the recoverable amount of goodwill allocated to each group of cash-generating units (CGUs) and use the
latest approved forecasts extrapolated to perpetuity using growth rates shown below, which do not exceed the long-term growth rate for the
relevant market. No impairment was identified. The basis of these impairment tests and the key assumptions are set out in the table below:
31 December 2014
Group of CGUs
Energy
Gas
Electricity
Water
31 December 2013
Group of CGUs
Energy
Gas
Electricity
Water
Basis of
valuation
Value in use
Value in use
Value in use
Value in use
Basis of
valuation
Value in use
Value in use
Value in use
Value in use
Carrying
value of
goodwill
£m
201.7
1,088.2
156.0
75.0
Carrying
value of
goodwill
£m
207.4
1,072.0
157.9
78.5
Pre-tax
discount
rates(1)
10.3%
9.8%
9.9%
9.8%
Pre-tax
discount
rates(1)
10.4%
9.8%
9.8%
10.0%
Period of
forecast
4 years
5 years
3 years
3 years
Period of
forecast
4 years
4 years
4 years
3 years
Key assumptions applied in the
forecast cash flow projections(2)
Revenue growth, operating margins
Revenue growth, operating margins
Revenue growth, operating margins
Revenue growth, operating margins
Key assumptions applied in the
forecast cash flow projections(2)
Revenue growth, operating margins
Revenue growth, operating margins
Revenue growth, operating margins
Revenue growth, operating margins
Long-term
growth
rates(3)
2.4%
2.2%
2.4%
2.5%
Long-term
growth
rates(3)
2.5%
2.5%
2.9%
2.5%
(1) Pre-tax risk adjusted discount rates
Cash flows are discounted using a pre-tax discount rate specific to each CGU. Discount rates reflect the current market assessments of
the time value of money and are based on the estimated cost of capital of each CGU. In determining the cost of equity, the Capital Asset
Pricing Model (CAPM) has been used. Under CAPM, the cost of equity is determined by adding a risk premium to the risk free rate to
reflect the additional risk associated with investing outside of lending to a country (e.g. the purchase of UK Gilts). The premium is based
on an industry adjustment (‘Beta’) to the expected return of the equity market above the risk free return. The relative risk adjustment
reflects the risk inherent in each CGU relative to all other sectors and geographies on average.
Melrose Industries PLCAnnual Report 2014FinancialsFinancials 130
Notes to the
financial statements continued
12. Goodwill and other intangible assets continued
(2) Assumptions applied in financial forecasts
The Group prepares cash flow forecasts derived from financial budgets and mid-term plans approved by management. The key
assumptions used in forecasting pre-tax cash flows relate to future budgeted revenue and operating margins likely to be achieved and
the likely rates of long-term growth by market sector. Underlying factors in determining the values assigned to each key assumption by
CGU are shown below:
Revenue growth and operating margins:
Revenue growth assumptions in the forecast period are based on financial budgets and mid-term plans approved by management, taking
into account industry growth rates and management of each division’s historical experience in the context of wider industry and economic
conditions. Projected sales are built up with reference to markets and product categories. They incorporate past performance, historical
growth rates, projections of developments in key markets, secured orders and orders likely to be achieved in the short to medium-term,
given trends in the relevant market sector.
Operating margins have been forecast based on historical levels considering the likely impact of changing economic environments and
competitive landscapes on volumes and revenues and the impact of management actions on costs. Projected margins reflect the impact
of all initiated projects to improve operational efficiency and leverage scale. The projections do not include the impact of future restructuring
projects to which the Group is not yet committed. Forecasts for other operating costs are based on inflation forecasts and supply and
demand factors.
Energy
Brush is a supplier of turbogenerators for the power generation, industrial, oil & gas and offshore sectors and a leading supplier
of switchgear, transformers and other power infrastructure equipment. The key drivers for revenues and operating margins are
i) original equipment investments in the global power market, both new capacity (mainly emerging markets) and replacement capacity
(mainly in mature markets), ii) growth in service requirements of a growing installed base, and iii) new product introduction. Independent
forecasts of growth in these power generation markets have been used to derive revenue growth assumptions. Forecasts for other
operating costs are based on inflation forecasts and supply and demand factors.
Elster
Elster Gas designs and manufactures gas measurement, process heat control and gas safety control equipment. The key drivers for
revenues and operating margins are i) global energy consumption and the growing share for natural gas ii) international legislation aimed
at driving down emission levels and increasing efficiency which in turn stimulates demand for Smart meters and process heat applications.
Independent forecasts of the growth in these end markets have been used to derive revenue growth assumptions. Forecasts for other
operating costs are based on inflation forecasts and supply and demand factors.
Elster Electricity is an international metering solution provider supplying both traditional and Smart meter equipment, including applications
for residential, commercial, industrial, transmission and distribution markets. The key drivers for revenues and operating margins are
i) global demand for electricity metering requirements, both traditional and Smart, and ii) market developments in meter data software
solutions. Independent forecasts of the growth in the meter hardware and related meter software end markets have been used to derive
revenue growth assumptions as well as management’s best estimates of the impact of residential Smart meter rollouts in the EU.
Forecasts for other operating costs are based on inflation forecasts and supply and demand factors.
Elster Water designs and manufactures a comprehensive range of water metering solutions. The key driver for revenues and operating
margins is the global demand for water meters, both traditional and Smart. Revenue growth assumptions have been built up with reference
to past performance, historical growth rates and projections of developments in key markets. Forecasts for other operating costs are
based on inflation forecasts and supply and demand factors.
(3) Long-term growth rates
Long-term growth rates are based on long-term economic forecasts for growth in the manufacturing sector in the geography in which the
CGU operates. Long-term growth rates are determined using a blend of publicly available historical data and a long-term growth rate forecast
published by external analysts and further take into account the international presence and the markets in which each business operates.
Melrose Industries PLCAnnual Report 2014Financials 131
Sensitivity analysis
A reasonable possible change in the assumptions applied would not result in any impairment. Base case forecasts show significant
headroom above the carrying value for each Group of CGUs. Sensitivity analysis has been undertaken for each Group of CGUs to assess
the impact of any reasonable possible change in key assumptions. There is no reasonable possible change that would cause the carrying
values to exceed recoverable amounts.
Acquisition of businesses
On 31 October 2014, the Group acquired 100% of the issued share capital and obtained control of Eclipse, Inc. (“Eclipse”) for cash
consideration of £97.6 million.
Eclipse is a long established manufacturer of low-temperature industrial gas combustion equipment, which complements Elster Gas’
expertise in high-temperature industrial gas combustion applications.
The amounts recognised in respect of the identifiable assets acquired and liabilities assumed are set out in the table below. Fair values are
provisional as of 31 December 2014 and are based on the information held to date.
Eclipse
Property, plant and equipment
Intangible assets, computer software and development costs
Inventories
Trade and other receivables
Cash and cash equivalents
Trade and other payables
Provisions
Deferred tax
Retirement benefit obligations
Current tax
Non-controlling interests
Net assets
Goodwill
Total consideration
Satisfied by:
Cash consideration
Fair value
£m
5.5
51.4
5.4
13.5
1.5
(17.2)
(9.2)
(12.2)
(4.6)
(0.8)
(0.3)
33.0
64.6
97.6
97.6
Acquisition related costs (included in exceptional operating costs) amount to £2.3 million.
The fair value of financial assets include gross trade and other receivables of £14.3 million. The best estimate at acquisition date of the
contractual cash flows not to be collected is £0.8 million.
Eclipse contributed £12.2 million to revenue and £1.4 million to headline operating profit for the two month period between the date of
acquisition and the Balance Sheet date.
If the acquisition of Eclipse had been completed on the first day of the financial year, Group revenues would have been approximately
£1,441 million and Group headline operating profit would have been approximately £249 million.
The goodwill arising on acquisition of Eclipse is attributable to the anticipated profitability and cash flows arising from the businesses
acquired, synergies as a result of the complementary nature of the business with Elster Gas, the assembled workforce, technical expertise,
knowhow, market share and geographical advantages afforded to the Group. None of the goodwill is expected to be deductible for
income tax purposes.
Contingent liabilities of £4.5 million have been acquired in respect of warranty and legal claims and recognised within provisions.
The majority of expenditure is expected to be incurred over the next five years.
The non-controlling interests acquired are measured on the proportion of the fair value of their net assets.
Melrose Industries PLCAnnual Report 2014FinancialsFinancials 132
Notes to the
financial statements continued
13. Property, plant and equipment
Cost
At 1 January 2013
Additions
Disposals
Disposal of businesses
Exchange adjustments
At 31 December 2013
Additions
Acquisition of businesses
Disposals
Disposal of businesses
Exchange adjustments
At 31 December 2014
Accumulated depreciation and impairment
At 1 January 2013
Charge for the year
Impairments(1)
Disposals
Disposal of businesses
Exchange adjustments
At 31 December 2013
Charge for the year
Impairments(1)
Disposals
Disposal of businesses
Exchange adjustments
At 31 December 2014
Net book value
At 31 December 2014
At 31 December 2013
At 1 January 2013
Land and
buildings
£m
Plant and
equipment
£m
129.6
4.5
(1.1)
(36.6)
(1.3)
95.1
15.2
3.1
(2.9)
(21.7)
(2.3)
86.5
(12.2)
(4.6)
–
–
5.2
0.1
(11.5)
(4.1)
–
2.6
3.0
0.4
(9.6)
76.9
83.6
117.4
284.3
52.9
(5.7)
(91.9)
(1.9)
237.7
43.2
2.4
(9.6)
(76.2)
(5.6)
191.9
(82.9)
(38.3)
(2.8)
1.7
40.5
1.7
(80.1)
(29.2)
(0.6)
6.2
32.6
1.9
(69.2)
122.7
157.6
201.4
Total
£m
413.9
57.4
(6.8)
(128.5)
(3.2)
332.8
58.4
5.5
(12.5)
(97.9)
(7.9)
278.4
(95.1)
(42.9)
(2.8)
1.7
45.7
1.8
(91.6)
(33.3)
(0.6)
8.8
35.6
2.3
(78.8)
199.6
241.2
318.8
(1) The impairment of plant and equipment comprises £0.6 million (2013: £nil) in relation to the Electricity segment, £nil (2013: £1.8 million) in relation to the Water segment,
£nil (2013: £0.6 million) in relation to the Energy segment and £nil (2013: £0.4 million) in relation to discontinued operations.
Melrose Industries PLCAnnual Report 2014Financials 14. Interests in joint ventures
Aggregated amounts relating to joint ventures:
Share of assets
Share of liabilities
Interests in joint ventures
Share of joint venture revenues
Share of headline(1) results of joint ventures
Dividends received from joint ventures
(1) As defined on the Income Statement.
133
31 December
2014
£m
31 December
2013
£m
23.6
(11.8)
11.8
33.6
3.2
(3.3)
24.0
(11.4)
12.6
36.6
2.8
(2.7)
A list of all the significant investments in subsidiaries including the name, country of incorporation and proportion of ownership interest is
given in note 3 to the Company’s separate financial statements.
15. Inventories
Raw materials
Work in progress
Finished goods
31 December
2014
£m
63.4
57.0
46.1
166.5
31 December
2013
£m
75.1
89.2
70.2
234.5
The Directors consider that there is no material difference between the Balance Sheet value of inventories and their replacement cost.
The expense of writing down inventory to net realisable value during the year totalled £5.5 million (2013: £8.7 million) whilst reversals of
previous write downs of inventory amounted to £4.1 million (2013: £5.3 million).
Construction contracts
Contracts in progress at the Balance Sheet date:
Amounts due from contract customers included in other receivables
Contract costs incurred plus recognised profit less recognised losses to date
Less: progress billings
The average life of contracts is 1-2 years (31 December 2013: 1-2 years).
31 December
2014
£m
31 December
2013
£m
4.3
4.3
4.3
–
4.3
4.7
4.7
14.8
(10.1)
4.7
Melrose Industries PLCAnnual Report 2014FinancialsFinancials 134
Notes to the
financial statements continued
16. Trade and other receivables
Current
Trade receivables
Allowance for doubtful receivables
Amounts due from joint ventures
Other receivables
Prepayments
31 December
2014
£m
230.9
(7.4)
–
24.6
9.4
257.5
31 December
2013
£m
257.2
(8.2)
1.0
27.5
15.3
292.8
Trade receivables are non interest-bearing. Credit terms offered to customers vary upon the country of operation but are generally
between 30 and 90 days.
Non-current
Other receivables
31 December
2014
£m
3.3
31 December
2013
£m
0.3
An allowance has been made for estimated irrecoverable amounts with reference to past default experience and management’s
assessment of credit worthiness, an analysis of which is as follows:
At 1 January 2013
Disposal of businesses
Income Statement charge
Utilised
Exchange differences
At 31 December 2013
Disposal of businesses
Acquisition of businesses
Income Statement (credit)/charge
Utilised
Exchange differences
At 31 December 2014
Energy
£m
0.3
–
0.6
(0.1)
–
0.8
–
–
(0.4)
(0.2)
–
0.2
Elster
£m
9.5
–
2.1
(4.8)
0.1
6.9
–
0.8
2.0
(2.3)
(0.2)
7.2
Central
£m
0.1
–
–
(0.1)
–
–
–
–
–
–
–
–
Restated(1)
discontinued
£m
2.7
(2.6)
0.6
(0.2)
–
0.5
(0.5)
–
–
–
–
–
Total
£m
12.6
(2.6)
3.3
(5.2)
0.1
8.2
(0.5)
0.8
1.6
(2.5)
(0.2)
7.4
(1) Restated to include the results of Bridon within discontinued operations (note 9).
The concentration of credit risk is limited due to the large number of customers and because they are unrelated to each other.
Credit control procedures are implemented to ensure that sales are only made to organisations that are willing and able to pay for them.
Such procedures include the establishment and review of customer credit limits and terms. The Group does not hold any collateral or
any other credit enhancements over any of its trade receivables nor does it have a legal right of offset against any amounts owed by the
Group to the counterparty.
The ageing of impaired trade receivables past due is as follows:
Ageing of impaired trade receivables past due
0 – 30 days
31 – 60 days
60+ days
31 December
2014
£m
1.2
–
6.2
7.4
31 December
2013
£m
0.4
0.2
7.6
8.2
Included in the Group’s trade receivables balance are overdue trade receivables with a carrying amount of £35.4 million
(31 December 2013: £42.7 million) against which an appropriate provision of £7.4 million (31 December 2013: £8.2 million) is held.
Melrose Industries PLCAnnual Report 2014Financials The balance deemed recoverable of £28.0 million (31 December 2013: £34.5 million) is past due as follows:
0 – 30 days
31 – 60 days
60+ days
135
31 December
2014
£m
21.6
4.7
1.7
28.0
31 December
2013
£m
23.9
7.2
3.4
34.5
The Directors consider that the carrying amount of trade and other receivables, including amounts not past due and not impaired,
approximates to their fair value.
17. Cash and cash equivalents
Cash and cash equivalents
31 December
2014
£m
70.5
31 December
2013
£m
200.4
Cash and cash equivalents comprises cash at bank and in hand which earns interest at floating rates based on daily bank deposit rates
and short-term deposits which are made for varying periods of between one day and one month and earn interest at the respective
short-term deposit rates. The carrying amount of these assets is considered to be equal to their fair value.
18. Trade and other payables
Current
Trade payables
Other payables
Other taxes and social security
Deferred government grants
Accruals
31 December
2014
£m
153.0
91.9
11.5
0.1
64.0
320.5
31 December
2013
£m
195.3
111.8
13.0
2.2
76.9
399.2
Trade payables are non interest-bearing. Normal settlement terms vary by country and the average credit period taken for trade purchases
is 88 days (2013: 100 days). Other payables are non interest-bearing and have an average term of approximately 60 days.
Non-current
Other payables
Accruals
The Directors consider that the carrying amount of trade and other payables approximates to their fair value.
31 December
2014
£m
0.1
0.3
0.4
31 December
2013
£m
1.1
0.4
1.5
Melrose Industries PLCAnnual Report 2014FinancialsFinancials 136
Notes to the
financial statements continued
19. Interest-bearing loans and borrowings
This note provides information about the contractual terms of the Group’s interest-bearing loans and borrowings. Details of the Group’s
exposure to credit, liquidity, interest rate and foreign currency risk are included in note 24.
Floating rate obligations
Bank borrowings – US Dollar loan(1)
Bank borrowings – Euro loan(2)
Bank borrowings – Sterling loan(3)
Bank borrowings – Brazilian Real
Unamortised finance costs
Total interest-bearing loans and borrowings
Current
Non-current
Total
31 December
2014
£m
31 December
2013
£m
31 December
2014
£m
31 December
2013
£m
31 December
2014
£m
31 December
2013
£m
–
–
–
0.9
0.9
–
0.9
–
–
–
–
–
–
–
244.5
150.7
191.0
0.6
586.8
(15.9)
570.9
175.1
–
180.0
2.4
357.5
(16.3)
341.2
244.5
150.7
191.0
1.5
587.7
(15.9)
571.8
175.1
–
180.0
2.4
357.5
(16.3)
341.2
(1) Interest rate LIBOR +1.30%, final maturity July 2019 (31 December 2013: interest rate LIBOR +2.25%, final maturity June 2017).
(2) Interest rate EURIBOR +1.30%, final maturity July 2019 (31 December 2013: interest rate EURIBOR +2.25%, final maturity June 2017).
(3) Interest rate LIBOR +1.30%, final maturity July 2019 (31 December 2013: interest rate LIBOR +2.25%, final maturity June 2017).
As at 1 January 2014, the Group held a five year multi-currency facility split between a £355 million term loan and a £989 million revolving
credit facility. These facilities were due to mature on 29 June 2017. On 11 July 2014, the existing facility was “Amended and Extended”,
resulting in lower margins, greater flexibility and the facility being extended by two years, maturing on 11 July 2019.
As at 1 January 2014, the term loan was split into two tranches of £180 million and US $290 million. As part of the Amend and Extend
exercise the US $290 million term loan was converted into a US Dollar denominated revolving credit facility. The Sterling denominated term
loan is subject to mandatory repayments of 5% on July 2017, July 2018 and January 2019, adjusted for any term loan repayments made
prior to these dates.
As at 1 January 2014, the revolving credit facility was split between a £741.5 million Sterling denominated multi-currency facility and a
€300 million Euro denominated facility. At 31 December 2014 the Sterling and Euro denominated facilities remain unchanged and exist
along with the US $290 million facility which was converted from a term loan to a revolving credit facility during the year.
The £180 million term loan facility was fully drawn at 31 December 2014. The drawdowns under the revolving credit facility as of this date
were £11 million, US $381 million and €194 million.
Throughout the year, the Group remained compliant with all covenants under the facilities disclosed above. A number of companies
continue to be guarantors under the bank facilities.
Drawdowns under the existing facility bear interest at interbank rates of interest plus a margin determined by reference to the Group’s
performance under its debt cover covenant ratio and ranges between 0.75% and 1.90% (31 December 2013: range between 1.40%
to 2.65%). The margin as at 31 December 2014 was 1.30% (31 December 2013: 2.25%).
Melrose Industries PLCAnnual Report 2014Financials 137
Maturity of financial liabilities
The maturity profile of anticipated future cash flows including interest in relation to the Group’s financial liabilities, on an undiscounted basis
and which, therefore, differs from both the carrying value and fair value is shown in the table below. Interest on floating rate debt is based
on the relevant LIBOR curve for US Dollar and Sterling balances and the EURIBOR curve for Euro balances. Interest on hedging interest
rate swaps is based on the relevant forward LIBOR curves for US Dollar and Sterling amounts and EURIBOR curve for Euro amounts and
is illustrated as a net cash flow.
Within one year
In one to two years
In two to five years
Effect of financing rates
31 December 2014
Within one year
In one to two years
In two to five years
Effect of financing rates
31 December 2013
20. Provisions
At 31 December 2013
Acquisition of businesses
Utilised
Net charge to headline(1) operating profit
Net charge to exceptional items(2)
Disposal of businesses
Unwind of discount (note 7)
Exchange differences
At 31 December 2014
Current
Non-current
Interest-bearing
loans and
borrowings
£m
10.6
13.0
625.7
(77.5)
571.8
9.6
22.0
368.8
(59.2)
341.2
Incentive plan
related
£m
21.6
–
(3.0)
7.0
–
–
1.0
–
26.6
11.0
15.6
26.6
Derivative
financial
liabilities
£m
10.1
0.2
–
–
10.3
7.2
–
–
–
7.2
Warranty
related costs
£m
56.1
5.5
(17.6)
7.8
–
–
–
(0.5)
51.3
20.2
31.1
51.3
Other
financial
liabilities
£m
308.9
0.4
–
–
309.3
384.0
1.5
–
–
385.5
Other
£m
24.8
–
(21.1)
0.1
31.6
(1.2)
–
(0.8)
33.4
31.8
1.6
33.4
Total
financial
liabilities
£m
329.6
13.6
625.7
(77.5)
891.4
400.8
23.5
368.8
(59.2)
733.9
Total
£m
177.8
9.2
(49.6)
15.0
26.2
(1.4)
1.4
(1.6)
177.0
71.7
105.3
177.0
Surplus
leasehold
property costs
£m
21.2
0.4
(5.0)
–
(5.4)
(0.2)
0.3
0.2
11.5
2.7
8.8
11.5
Environmental
and legal costs
£m
54.1
3.3
(2.9)
0.1
–
–
0.1
(0.5)
54.2
6.0
48.2
54.2
(1) As defined on the Income Statement.
(2) Net of £31.6 million of exceptional costs relating to restructuring and a £5.4 million surplus leasehold property costs provision released to exceptional income.
The provision for surplus leasehold property costs represents the estimated net payments payable over the term of these leases together
with any dilapidation costs. This is expected to result in cash expenditure over the next one to four years.
Environmental and legal costs provisions relate to the estimated remediation costs of pollution, soil and groundwater contamination at
certain sites and estimated future costs and settlements in relation to legal claims. Due to their nature, it is not possible to predict precisely
when these provisions will be utilised.
Incentive plan related provisions are in respect of long-term incentive plans for divisional senior management, expected to result in cash
expenditure in the next three years.
The provision for warranty related costs represents the best estimate of the expenditure required to settle the Group’s obligations. Warranty
terms are, on average, between one and five years.
Other provisions relate primarily to costs that will be incurred in respect of restructuring programmes, usually resulting in cash spend within
one year.
Where appropriate, provisions have been discounted using a discount rate of 3% (31 December 2013: 3%).
Melrose Industries PLCAnnual Report 2014FinancialsFinancials 138
Notes to the
financial statements continued
21. Deferred tax
The following are the major deferred tax assets and liabilities recognised by the Group and movements thereon during the current and
prior reporting period.
At 1 January 2013
(Charge)/credit to income
(Charge)/credit to other comprehensive income
Disposal of businesses
Exchange differences
At 31 December 2013
(Charge)/credit to income
Credit to other comprehensive income
Disposal of businesses
Acquisition of businesses
Exchange differences
At 31 December 2014
Deferred tax
assets
Tax losses and
other assets
£m
150.3
(64.1)
(0.6)
(15.8)
0.5
70.3
(15.5)
8.7
–
5.7
(0.5)
68.7
Notes
8
8
12
Deferred tax liabilities
Accelerated
capital
allowances and
other liabilities
£m
(64.0)
36.8
0.6
14.4
–
(12.2)
3.6
–
1.1
–
–
(7.5)
Deferred
tax on
intangible
assets
£m
(347.2)
24.7
–
36.2
(1.1)
(287.4)
17.5
–
20.0
(17.9)
8.0
(259.8)
Total deferred
tax liabilities
£m
(411.2)
61.5
0.6
50.6
(1.1)
(299.6)
21.1
–
21.1
(17.9)
8.0
(267.3)
Total net
deferred tax
£m
(260.9)
(2.6)
–
34.8
(0.6)
(229.3)
5.6
8.7
21.1
(12.2)
7.5
(198.6)
As at 31 December 2014, the Group had gross unused losses of £183.6 million (31 December 2013: £217.1 million) available for offset
against future profits. At 31 December 2014, a £10.4 million deferred tax asset (31 December 2013: £9.7 million) in respect of £40.9 million
(31 December 2013: £42.0 million) of these gross losses was recognised in the Balance Sheet. No asset was recognised in respect of the
remaining losses due to the divisional and geographic split of anticipated future profit streams and the effect of possible disposals in future
years. The majority of these losses may be carried forward indefinitely subject to certain continuity of business requirements.
A deferred tax asset of £24.7 million (31 December 2013: £25.6 million) was recognised on Group retirement benefit obligations, being the
extent to which they are expected to generate tax deductions against foreseeable taxable profits.
The remaining asset of £33.6 million (31 December 2013: £35.0 million) relates to other temporary differences.
As at 31 December 2014, the aggregate amount of temporary differences associated with undistributed earnings of subsidiaries was £474
million (31 December 2013: £364 million) on which deferred tax liabilities not recognised were £4.3 million (31 December 2013: £3.3 million).
No liability was recognised in respect of these differences because the Group is in a position to control the timing of the reversal of the
temporary differences and it is probable that such differences will not reverse in the foreseeable future.
22. Share-based payments
Melrose Incentive Plan
The Company has 50,000 options (31 December 2013: 50,000 options) in issue which enable the holder of these options to subscribe for
2012 Incentive Shares. These options are held by Directors and senior employees. Further details of the 2012 Melrose Incentive Plan are
provided in the Remuneration report on pages 78 to 95.
The estimated value of the 2012 Incentive Shares at 31 December 2014 was £44.7 million (31 December 2013: £73.0 million). Using a Black
Scholes option pricing model, the estimated fair value attributable to this plan, at 31 May 2017, is £63.4 million (31 December 2013: £101.7 million).
The inputs into the Black Scholes model that were used to fair value the plan when it was originally established in 2012 were as follows:
Weighted average share price
Weighted average exercise price
Expected volatility
Expected life as at inception
Risk free interest
Valuation
assumptions
£2.27
£2.85
30%
5.0 years
1.0%
Expected volatility was determined by calculating the historical volatility of the Company’s share price.
The Group recognised an IFRS 2 charge of £4.0 million (2013: £4.0 million) in the year ended 31 December 2014 in relation to the equity-
settled 2012 Melrose Incentive Plan.
Melrose Industries PLCAnnual Report 2014Financials 139
23. Retirement benefit obligations
Defined contribution plans
The Group operates defined contribution plans for qualifying employees across several jurisdictions. The assets of the plans are held
separately from those of the Group in funds under the control of trustees.
The total costs charged in relation to the continuing businesses during the year of £6.9 million (2013: £6.8 million) represent contributions
payable to these plans by the Group at rates specified in the rules of the plans.
Defined benefit plans
The Group sponsors defined benefit plans for qualifying employees of certain subsidiaries. The funded defined benefit plans are
administered by a separate fund that is legally separated from the Group. The trustees of the funds are required by law to act in the interest
of the fund and of all relevant stakeholders in the plans. The trustees of the pension funds are responsible for the investment policy with
regard to the assets of the fund.
The most significant defined benefit pension plans are:
• The FKI UK Pension Plans, which comprise two separate independent plans; the FKI UK Pension Plan and the Brush Group (2013)
Pension Plan, are defined benefit in type and are funded plans. The plans are closed to new members and the accrual of future benefits
for existing members. At 31 December 2013 the FKI UK Pension Plans also contained the Bridon Group (2013) Pension Plan, which was
disposed with Bridon on 12 November 2014.
• The McKechnie UK Pension Plan, which is defined benefit in type and is a funded plan (other than £5.0 million of unfunded liabilities).
The plan is closed to new members and the accrual of future benefits for existing members.
• The FKI US Pension Plan, which is defined benefit in type and is a funded plan. The plan is closed to new members and the accrual of
future benefits for existing members. During the year certain vested participants accepted lump sum offers resulting in an adjustment to
past service cost of £3.5 million.
Other plans include a number of funded and unfunded defined benefit arrangements across Europe, North America and the rest of the
world. The Group also operates unfunded retiree medical and welfare benefit plans, principally in the US. During the year the Group
terminated certain Elster US unfunded retiree medical and welfare plans, reducing gross liabilities by £4.3 million.
The costs of the Group’s defined benefit plans are determined in accordance with IAS 19 (revised): “Employee benefits” with the advice of
independent professionally qualified actuaries on the basis of formal actuarial valuations using the projected unit credit method. In line with
normal practice, these valuations are undertaken triennially in the UK and annually in the US.
Valuations of the FKI UK Pension Plans are based on full actuarial valuations as of 31 December 2013 and updated at 31 December 2014
by independent actuaries. The McKechnie UK Pension Plan valuation is based on a full valuation at 31 December 2011, updated at
31 December 2014 by independent actuaries. The FKI US Pension Plan valuation is based on the US full actuarial valuation as of
31 December 2013, updated at 31 December 2014 by independent actuaries.
The Group contributed £26.6 million (2013: £20.0 million) to the FKI UK Pension Plans, which included £8.1 million (2013: £0.6 million) to the
disposed Bridon Group (2013) Pension Plan, and contributed £5.2 million (2013: £5.2 million) to the McKechnie UK Pension Plan in the year
ended 31 December 2014. In 2015 the Group expects to contribute £20.0 million to the FKI UK Pension Plans and £5.2 million to the
McKechnie UK Pension Plan.
In total, the Group expects to contribute approximately £31.4 million to its defined benefit plans in the year ended 31 December 2015.
Actuarial assumptions
The major weighted average assumptions used by the actuaries in calculating the Group’s pension liabilities are as set out below:
Rate of increase in salaries
Rate of increase in pensions in payment
Discount rate
RPI inflation assumption
FKI UK
Plans
% p.a.
n/a
3.00
3.50
2.10
McKechnie
UK Plan
% p.a.
n/a
3.00
3.50
2.10
31 December 2014
FKI US
Plan
% p.a.
n/a
n/a
3.90
n/a
US Plans
% p.a.
n/a
n/a
3.90
n/a
European
Plans
% p.a.
2.30
1.50
1.90
1.50
Other plans
% p.a.
3.00
n/a
3.90
2.25
Melrose Industries PLCAnnual Report 2014FinancialsFinancials 140
Notes to the
financial statements continued
23. Retirement benefit obligations continued
Rate of increase in salaries
Rate of increase in pensions in payment
Discount rate
RPI inflation assumption
FKI UK
Plans
% p.a.
n/a
3.20
4.40
3.40
McKechnie
UK Plan
% p.a.
3.90(1)
3.20
4.40
3.40
31 December 2013
FKI US
Plan
% p.a.
n/a
n/a
4.70
n/a
US Plans
% p.a.
4.00
n/a
4.70
n/a
European
Plans
% p.a.
2.75
1.90
3.50
1.90
Other plans
% p.a.
3.00
n/a
4.70
2.25
(1) Closed to the accrual of future benefits but active members’ benefits linked to current salaries.
Mortality
FKI UK Pension Plans
Mortality assumptions for the most significant plans in the Group, the FKI UK Plans, as at 31 December 2014 are based on the Self
Administered Pension Scheme (“SAPS”) “S1” base tables with scaling factors of 110% and 105% for deferred members and pensioners
respectively, which reflect the results of a mortality analysis carried out on the plan’s membership. Future improvements are in line with the
Continuous Mortality Investigation (“CMI”) improvement model with a long-term rate of improvement of 1.25% p.a. for both males and females.
The assumptions are that a member currently aged 65 will live on average for a further 21.9 years (31 December 2013: 21.9 years) if they
are male and for a further 24.2 years (31 December 2013: 24.1 years) if they are female. For a member who retires in 2034 at age 65, the
assumptions are that they will live for a further 23.2 years (31 December 2013: 23.3 years) after retirement if they are male and for a further
25.7 years (31 December 2013: 25.6 years) after retirement if they are female.
The mortality assumptions are consistent with those adopted for the full valuation as at 31 December 2013.
Other plans
The mortality assumptions adopted as at 31 December 2014 have been set to reflect the Group’s best estimate view of life expectancies
of members of each individual pension arrangement. These mortality assumptions vary by arrangement, each assumption reflecting the
characteristics of the membership of that arrangement.
Balance Sheet disclosures
The amount recognised in the Balance Sheet arising from net liabilities in respect of defined benefit plans is as follows:
Present value of funded defined benefit obligations
Fair value of plan assets
Funded status
Present value of unfunded defined benefit obligations
Net liabilities
31 December
2014
£m
(1,231.0)
1,125.2
(105.8)
(112.7)
(218.5)
31 December
2013
£m
(1,187.6)
1,070.8
(116.8)
(102.5)
(219.3)
The plan liabilities and assets at 31 December 2014 were split by plan as follows:
Plan liabilities
Plan assets
Net (liabilities)/assets
FKI UK
Plans(1)
£m
(778.3)
695.6
(82.7)
McKechnie
UK Plan
£m
(208.3)
209.9
1.6
FKI US
Plan
£m
(195.2)
176.5
(18.7)
US Plans
£m
(48.4)
30.8
(17.6)
European
Plans
£m
(110.7)
10.0
(100.7)
Other plans
£m
(2.8)
2.4
(0.4)
Total
£m
(1,343.7)
1,125.2
(218.5)
(1) The FKI UK Plans comprise two separate plans; the FKI UK Pension Plan and the Brush Group (2013) Pension Plan. The net liabilities of these plans are £54.3 million (31 December 2013: £70.8
million) and £28.4 million (31 December 2013: £29.4 million) respectively. At 31 December 2013 the FKI UK Plans also contained the Bridon Group (2013) Pension Plan, the net liabilities of this plan
at that date were £9.0 million.
Melrose Industries PLCAnnual Report 2014Financials 141
The major categories and fair values of plan assets at the end of the reporting period for each category are as follows:
Equities
Government bonds
Corporate bonds
Property
Insurance contracts
Other
Total
31 December
2014
£m
380.7
315.2
337.9
21.8
11.9
57.7
1,125.2
31 December
2013
£m
381.6
215.8
318.6
18.5
13.5
122.8
1,070.8
The assets are well diversified and the majority of plan assets have quoted prices in active markets. All government bonds are issued by
reputable governments and are generally AA rated or higher. Interest rate and inflation rate swaps are also employed to complement the
role of fixed and index-linked bond holdings for liability risk management.
The trustees continually review whether the chosen investment strategy is appropriate with a view to providing the pension benefits and to
ensure appropriate matching of risk and return profiles. The main strategic policies include maintaining an appropriate asset mix, managing
interest rate sensitivity and maintaining an appropriate equity buffer. Investment results are regularly reviewed.
There is no self investment (other than in relevant tracker funds) either in the Group’s own financial instruments or property or other assets
used by the Group.
Movements in the present value of defined benefit obligations during the year:
At beginning of year
Acquisition of businesses
Disposal of businesses
Current service cost
Past service cost
Losses on curtailments
Interest cost on obligations
Terminations
Remeasurement losses/(gains) – demographic
Remeasurement losses – financial
Remeasurement (gains)/losses – experience
Benefits paid out of plan assets
Benefits paid out of Group assets for unfunded plans
Currency translation differences
At end of year
Year ended
31 December
2014
£m
1,290.1
4.6
(68.4)
2.2
(3.5)
–
55.0
(4.3)
14.4
151.6
(29.7)
(71.8)
(4.4)
7.9
1,343.7
Year ended
31 December
2013
£m
1,304.6
–
(35.6)
3.4
–
0.7
54.2
–
(18.5)
2.9
35.2
(54.1)
(4.7)
2.0
1,290.1
The defined benefit plan liabilities are 5% (31 December 2013: 5%) in respect of active plan participants, 41% (31 December 2013: 44%)
in respect of deferred plan participants and 54% (31 December 2013: 51%) in respect of pensioners.
The weighted average duration of the defined benefit plan liabilities at 31 December 2014 is 15.5 years (31 December 2013: 15.3 years).
Melrose Industries PLCAnnual Report 2014FinancialsFinancials 142
Notes to the
financial statements continued
23. Retirement benefit obligations continued
Movements in the fair value of plan assets during the year:
At beginning of year
Disposal of businesses
Interest income on plan assets
Return on plan assets, excluding interest income
Contributions
Benefits paid out of plan assets
Plan administrative costs
Currency translation differences
At end of year
The actual return on plan assets was a gain of £147.6 million (2013: £84.7 million).
Income Statement disclosures
Amounts recognised in the Income Statement in respect of these defined benefit plans are as follows:
Continuing operations
Included within headline(2) operating profit:
– current service cost
– past service cost
– plan administrative costs
– terminations
Included within net finance costs:
– interest cost on obligations
– interest income on plan assets
Discontinued operations
Included within headline(2) operating profit:
– plan administrative costs
Included within net finance costs:
– interest cost on obligations
– interest income on plan assets
Included within exceptional items
– curtailment loss
Year ended
31 December
2014
£m
1,070.8
(64.8)
46.8
100.8
34.8
(71.8)
(3.6)
12.2
1,125.2
Year ended
31 December
2013
£m
1,043.3
(25.4)
45.0
39.7
28.9
(54.1)
(2.8)
(3.8)
1,070.8
Year ended
31 December
2014
£m
Restated(1)
year ended
31 December
2013
£m
2.2
(3.5)
3.3
(4.3)
52.6
(44.8)
0.3
2.4
(2.0)
–
3.4
–
2.8
–
52.2
(43.3)
–
2.0
(1.7)
0.7
(1) Restated to include the results of Bridon within discontinued operations (note 9).
(2) As defined on the Income Statement.
Statement of Comprehensive Income disclosures
Amounts recognised in the Statement of Comprehensive Income in respect of these defined benefit plans are as follows:
Return on plan assets, excluding amounts included in net interest expense
Actuarial (losses)/gains arising from changes in demographic assumptions
Actuarial losses arising from changes in financial assumptions
Actuarial gains/(losses) arising from experience adjustments
Net remeasurement (loss)/gain on retirement benefit obligations
Year ended
31 December
2014
£m
100.8
(14.4)
(151.6)
29.7
(35.5)
Year ended
31 December
2013
£m
39.7
18.5
(2.9)
(35.2)
20.1
Melrose Industries PLCAnnual Report 2014Financials
143
Risks and sensitivities
The defined benefit plans expose the Group to actuarial risks, such as longevity risk, currency risk, salary risk, interest rate risk and market
(investment) risk. The Group is not exposed to any unusual, entity specific or plan specific risks.
A sensitivity analysis on the principal assumptions used to measure the plan liabilities at the year end is as follows:
Discount rate
RPI inflation assumption(1)
Assumed life expectancy at age 65 (rate of mortality)
(1) The RPI inflation sensitivity encompasses the impact on pension increases, where applicable.
Change in
assumption
Increase by 0.10%
Decrease by 0.10%
Increase by 0.10%
Decrease by 0.10%
Increase by 1 year
Decrease by 1 year
Decrease/
(increase) to
plan liabilities
£m
19.3
(19.9)
(12.2)
11.8
(44.6)
44.6
Increase/
(decrease) to
profit before tax
£m
0.5
(0.5)
n/a
n/a
n/a
n/a
The sensitivity analysis above has been determined based on reasonable possible changes to the respective assumptions, while holding
all other assumptions constant. There has been no change in the methods and assumptions used in preparing the sensitivity analysis from
prior years.
The sensitivities are based on the relevant assumptions and membership profile as at 31 December 2014 and are applied to the obligations
at the end of the reporting period. Whilst the analysis does not take account of the full distribution of cash flows expected, it does provide
an approximation to the sensitivity of the assumptions shown. Extrapolation of these results beyond the sensitivity figures shown may not
be appropriate and the sensitivity analysis presented may not be representative of the actual change in the defined benefit obligation as it
is unlikely that the change in assumptions would occur in isolation of one another as some of the assumptions may be correlated.
24. Financial instruments and risk management
The table below sets out the Group’s accounting classification of each category of financial assets and liabilities and their fair values at
31 December 2014 and 31 December 2013:
31 December 2014
Financial assets
Cash and cash equivalents
Net trade receivables
Derivative financial assets
Financial liabilities
Interest-bearing loans and borrowings
Derivative financial liabilities
Other financial liabilities
31 December 2013
Financial assets
Cash and cash equivalents
Net trade receivables
Derivative financial assets
Financial liabilities
Interest-bearing loans and borrowings
Derivative financial liabilities
Other financial liabilities
Energy
£m
Elster
£m
Restated(1)
Central
£m
Restated(1)
discontinued
£m
–
67.3
0.3
–
(3.9)
(72.4)
–
64.6
1.1
–
(3.4)
(82.4)
–
156.1
2.4
(1.5)
(1.9)
(216.6)
–
141.3
0.9
(2.4)
(1.1)
(228.4)
70.5
0.1
2.4
(570.3)
(4.5)
(20.3)
200.4
0.1
9.7
(338.8)
(2.5)
(31.3)
–
–
–
–
–
–
–
43.0
1.5
–
(0.2)
(43.4)
Total
£m
70.5
223.5
5.1
(571.8)
(10.3)
(309.3)
200.4
249.0
13.2
(341.2)
(7.2)
(385.5)
(1) Restated to include the financial assets and financial liabilities of Bridon within discontinued operations (note 9).
Melrose Industries PLCAnnual Report 2014FinancialsFinancials 144
Notes to the
financial statements continued
24. Financial instruments and risk management continued
Credit risk
The Group considers its maximum exposure to credit risk to be as follows:
31 December 2014
Financial assets
Cash and cash equivalents
Net trade receivables
Derivative financial assets
31 December 2013
Financial assets
Cash and cash equivalents
Net trade receivables
Derivative financial assets
Energy
£m
Elster
£m
Central
£m
Restated(1)
discontinued
£m
–
67.3
0.3
–
64.6
1.1
–
156.1
2.4
–
141.3
0.9
70.5
0.1
2.4
200.4
0.1
9.7
–
–
–
–
43.0
1.5
Total
£m
70.5
223.5
5.1
200.4
249.0
13.2
(1) Restated to include the financial assets of Bridon within discontinued operations (note 9).
The Group’s principal financial assets are cash and cash equivalents, trade receivables and derivative financial assets which represent the
Group’s maximum exposure to credit risk in relation to financial assets.
The Group’s credit risk on cash and cash equivalents and derivative financial assets is limited because the counterparties are banks with
strong credit-ratings assigned by international credit-rating agencies. The Group’s credit risk is primarily attributable to its trade receivables.
The amounts presented in the Consolidated Balance Sheet are net of allowances for doubtful receivables, estimated by the Group’s
management based on prior experience and their assessment of the current economic environment. Note 16 provides further details
regarding the recovery of trade receivables.
Capital risk
The Group manages its capital to ensure that entities in the Group will be able to continue as a going concern while maximising the return
to stakeholders through the optimisation of the Group’s net debt and equity balance.
The capital structure of the Group consists of net debt, which includes the borrowings disclosed in note 19, after deducting cash and cash
equivalents, and equity attributable to equity holders of the parent, comprising Issued share capital, Reserves and Retained earnings as
disclosed in the Consolidated Statement of Changes in Equity.
Liquidity risk
The Group’s policy for managing liquidity rate risk is set out in the Finance Director’s review.
Fair values
The Directors consider that the financial assets and liabilities have fair values not materially different to the carrying values.
Melrose Industries PLCAnnual Report 2014Financials 145
Foreign exchange contracts
As at 31 December 2014, the Group held foreign exchange forward contracts to mitigate expected exchange rate fluctuations on cash
flows on sales to customers and purchases from suppliers. These instruments operate as cash flow hedges unless the amounts involved
are small. The terms of the material currency pairs with total principals in excess of Sterling £1.0 million equivalent are as follows:
Sell Australian Dollar/Buy Sterling
Sell Brazilian Real/Buy US Dollar
Sell Canadian Dollar/Buy US Dollar
Sell Czech Koruna/Buy Euro
Sell Czech Koruna/Buy Sterling
Sell Euro/Buy Czech Koruna
Sell Euro/Buy Romanian Leu
Sell Euro/Buy Russian Rouble
Sell Euro/Buy Sterling
Sell Euro/Buy US Dollar
Sell Norwegian Krone/Buy Sterling
Sell Russian Rouble/Buy Euro
Sell South African Rand/Buy Euro
Sell South African Rand/Buy Sterling
Sell Sterling/Buy Czech Koruna
Sell Sterling/Buy Euro
Sell Sterling/Buy Singapore Dollar
Sell Sterling/Buy US Dollar
Sell US Dollar/Buy Czech Koruna
Sell US Dollar/Buy Euro
Sell US Dollar/Buy Mexican Peso
Sell US Dollar/Buy Sterling
31 December
2014
Selling currency
millions
–
BRL 4.2
CAD 62.0
CZK 78.1
–
EUR 10.6
EUR 2.2
EUR 3.9
EUR 8.4
EUR 2.7
–
RUB 237.9
–
ZAR 20.4
GBP 34.5
GBP 41.9
–
GBP 5.4
–
USD 4.3
USD 8.8
USD 32.8
31 December
2014
Average hedged
rate
–
USD/BRL 2.60
USD/CAD 1.13
EUR/CZK 27.64
–
EUR/CZK 27.48
EUR/RON 4.49
EUR/RUB 62.07
GBP/EUR 1.22
EUR/USD 1.28
–
EUR/RUB 61.47
–
GBP/ZAR 18.51
GBP/CZK 33.27
GBP/EUR 1.25
–
GBP/USD 1.64
–
EUR/USD 1.30
USD/MXN 13.73
GBP/USD 1.64
31 December
2013
Selling currency
millions
AUD 1.9
BRL 4.3
CAD 1.8
CZK 77.0
CZK 188.3
EUR 9.1
–
EUR 5.5
EUR 33.0
EUR 1.5
NOK 54.9
RUB 70.0
ZAR 22.8
ZAR 23.3
GBP 43.1
GBP 53.5
GBP 1.9
GBP 11.5
USD 4.2
USD 6.1
–
USD 61.5
31 December
2013
Average hedged
rate
GBP/AUD 1.76
USD/BRL 2.33
USD/CAD 1.05
EUR/CZK 25.84
GBP/CZK 32.69
EUR/CZK 26.10
–
EUR/RUB 45.21
GBP/EUR 1.18
EUR/USD 1.34
GBP/NOK 9.59
EUR/RUB 44.76
EUR/ZAR 13.80
GBP/ZAR 16.67
GBP/CZK 30.93
GBP/EUR 1.18
GBP/SGD 1.97
GBP/USD 1.57
USD/CZK 19.38
EUR/USD 1.34
–
GBP/USD 1.58
The foreign exchange contracts all mature between January 2015 and May 2016.
The fair value of the contracts at 31 December 2014 was a net liability of £4.3 million (31 December 2013: net asset of £0.4 million).
Hedge of net investments in foreign entities
Included in interest-bearing loans at 31 December 2014 were the following amounts which were designated as hedges of net investments
in the Group’s subsidiaries in Europe and the USA and were being used to reduce the exposure to foreign exchange risks.
Borrowings in local currency:
US Dollar
Euro(1)
31 December
2014
£m
157.2
150.7
31 December
2013
£m
144.9
–
(1) At 31 December 2013 there were no borrowings in Euros due to disposal proceeds received being used to temporarily pay down debt prior to the Return of Capital in February 2014.
Melrose Industries PLCAnnual Report 2014FinancialsFinancials 146
Notes to the
financial statements continued
24. Financial instruments and risk management continued
Interest rate sensitivity analysis
A one percentage point rise in market interest rates for all currencies would increase/(decrease) profit before tax by the following amounts
assuming the net debt as at the Balance Sheet date was outstanding for the whole year. At 31 December 2014 the Group had a temporary
excess position on Sterling interest rate swaps as a result of paying down debt under the Revolving Credit Facilities from the proceeds of
the disposal that occurred in the year. This position was reversed following the capital return in March 2015. Adjusting for the capital return,
the sensitivity would decrease profit after tax by £0.2 million for Sterling, £1.4 million for US Dollar and £0.1 million for Euros.
Sterling
US Dollar
Euro
Year ended
31 December
2014
£m
1.3
(0.8)
(0.2)
0.3
Year ended
31 December
2013
£m
2.7
(0.1)
1.8
4.4
Interest rate risk management
The Group’s policy for managing interest rate risk is set out in the Finance Director’s review.
Following the Return of Capital in February 2014, the Group protected 78% of its gross debt against interest rate fluctuations through fixing
the interest expense on US $246.8 million, £336.8 million and €200.0 million of debt with the use of interest rate swaps.
As a result of the “Amend and Extend” exercise the Group completed in July 2014 and the impact of the disposal of Bridon, the Group
closed out all Euro and Sterling interest rate swaps. In order to hedge up to 75% of interest rate exposure on the gross debt post the
Return of Capital in March 2015, the Group took out new Euro, Sterling and additional US Dollar swaps. The fixed finance cost is 0.06%
(31 December 2013: 0.72%) on Euro swaps, 1.05% (31 December 2013: 0.91%) on Sterling swaps and the weighted blended fixed rate
for US Dollar swaps is 0.92% (31 December 2013: 0.70%), plus the bank margin of 1.30%.
The interest rate swaps are designated as cash flow hedges and were highly effective throughout 2014. The fair value of the contracts
at 31 December 2014 was a net liability of £0.9 million (31 December 2013: net asset of £5.6 million).
Foreign currency risk
The Group’s policy for managing foreign currency risk is set out in the Finance Director’s review on page 48.
Foreign currency sensitivity analysis
Currency risks are defined by IFRS 7: “Financial instruments: Disclosures” as the risk that the fair value or future cash flows of a financial
asset or liability will fluctuate because of changes in foreign exchange rates.
The following table details the transactional impact of hypothetical changes in foreign exchange rates on financial assets and liabilities
at the Balance Sheet date, illustrating the (decrease)/increase in Group operating profit caused by a 10 cent strengthening of the
US Dollar and Euro against Sterling and a 10% strengthening of the Canadian Dollar against Sterling compared to the year end spot rate.
The analysis assumes that all other variables, in particular other foreign currency exchange rates, remain constant. The Group operates
in a range of different currencies, and those with a notable impact are noted here:
US Dollar
Euro
Canadian Dollar
Year ended
31 December
2014
£m
(1.5)
2.4
(1.0)
Year ended
31 December
2013
£m
(0.8)
0.5
–
Melrose Industries PLCAnnual Report 2014Financials 147
The following table details the impact of hypothetical changes in foreign exchange rates on financial assets and liabilities at the Balance
Sheet date, illustrating the increase/(decrease) in Group equity caused by a 10 cent strengthening of the US Dollar and Euro against
Sterling and a 10% strengthening of the Canadian Dollar against Sterling. The analysis assumes that all other variables, in particular other
foreign currency exchange rates, remain constant.
The 2013 high sensitivity on Euro was due to a currency swap for €235 million that was put in place ahead of the 2013 year end to
temporarily repay Euro debt with a proportion of the disposal proceeds in that year until the debt was redrawn ahead of the capital return
on 28 February 2014. Adjusting for the currency swap, the sensitivity on Euro at 31 December 2013 was £3.0 million. The Group operates
in a range of different currencies, and those with a notable impact are noted here:
US Dollar
Euro
Canadian Dollar
31 December
2014
£m
2.2
3.7
(0.4)
31 December
2013
£m
1.5
20.8
0.4
In addition, the change in equity due to a 10 cent strengthening of the US Dollar and Euro against Sterling for the translation of net
investment hedging instruments would be a decrease of £10.8 million (31 December 2013: £9.3 million) and £12.7 million (31 December
2013: £nil) respectively. However, there would be no overall effect on equity because there would be an offset in the currency translation
of the foreign operation.
Fair value measurements recognised in the Balance Sheet
Foreign currency forward contracts are measured using quoted forward exchange rates and yield curves derived from quoted interest
rates matching the maturities of the contracts.
Interest rate swap contracts are measured using yield curves derived from quoted interest rates.
The following table sets out the Group’s assets and liabilities that are measured and recognised at fair value:
Recurring fair value measurements
Derivative financial assets
Foreign currency forward contracts
Interest rate swaps
Total recurring financial assets
Derivative financial liabilities
Foreign currency forward contracts
Interest rate swaps
Total recurring financial liabilities
31 December
2014
Current
£m
31 December
2014
Non-current
£m
31 December
2014
Total
£m
31 December
2013
Current
£m
31 December
2013
Non-current
£m
31 December
2013
Total
£m
3.9
–
3.9
(8.0)
(2.1)
(10.1)
–
1.2
1.2
(0.2)
–
(0.2)
3.9
1.2
5.1
(8.2)
(2.1)
(10.3)
5.1
–
5.1
(4.7)
(2.5)
(7.2)
–
8.1
8.1
–
–
–
5.1
8.1
13.2
(4.7)
(2.5)
(7.2)
The fair value of these financial instruments are derived from inputs other than quoted prices that are observable for the asset or liability, either
directly (i.e. as prices) or indirectly (i.e. derived from prices) and they are therefore categorised within Level 2 of the fair value hierarchy set out
in IFRS 13: “Fair value measurement”. The Group’s policy is to recognise transfers into and out of the different fair value hierarchy levels at the
date the event or change in circumstances that caused the transfer to occur. There have been no transfers between levels in the year.
25. Issued capital and reserves
Share capital
Allotted, called-up and fully paid
1,071,761,339 (31 December 2013: 1,266,627,036) Ordinary Shares of 13/110p each (31 December 2013: 0.1p each)
31 December
2014
£m
31 December
2013
£m
1.3
1.3
1.3
1.3
The rights of each class of share are described in the Directors’ report.
On 7 February 2014 at a General Meeting of the Company, shareholders approved a resolution to return £595.3 million to shareholders.
Melrose Industries PLCAnnual Report 2014FinancialsFinancials 148
Notes to the
financial statements continued
25. Issued capital and reserves continued
The Return of Capital took place by increasing the authorised share capital by £595.3 million through the issue of 509,123,150 ‘B’ shares
and 757,503,886 ‘C’ shares of 47.0 pence each and capitalising £595.3 million of the Merger reserve to pay up in full the ‘B’ and ‘C’ shares.
Shareholders had the option to receive the cash value inherent in the ‘B’ and ‘C’ shares by way of income or the choice of two capital
options. As a result of the elections made by shareholders in respect of the Return of Capital:
• 493,363,270 ‘B’ shares were redeemed and subsequently cancelled with immediate effect from 17 February 2014.
• 15,759,880 ‘B’ shares were redeemed on 30 April 2014 and subsequently cancelled.
• 757,503,886 ‘C’ shares were paid a dividend on 28 February 2014 and these ‘C’ shares were subsequently cancelled.
In conjunction with the Return of Capital, on 7 February 2014 the number of Ordinary Shares in issue was consolidated in a ratio of 11 for
13 in order to maintain comparability of the Company’s share price before and after the Return of Capital. On 7 February 2014 the number
of Ordinary Shares in issue became 1,071,761,339 each with a nominal value of 13/110 pence.
Translation reserve
The Translation reserve contains exchange differences on the translation of subsidiaries with a functional currency other than Sterling and
exchange gains or losses on the translation of liabilities that hedge the Company’s net investment in foreign subsidiaries.
Hedging reserve
The Hedging reserve represents the cumulative fair value gains and losses on derivative financial instruments for which cash flow hedge
accounting has been applied.
Merger reserve, Capital redemption reserve and Other reserves
The Merger reserve represents the excess of fair value over nominal value of shares issued in consideration for the acquisition of
subsidiaries. The Capital redemption reserve arises upon the redemption of the Company’s own shares. Other reserves comprise
accumulated adjustments in respect of Group reconstructions.
26. Cash flow statement
Reconciliation of headline(2) operating profit to cash generated by continuing operations
Headline(2) operating profit from continuing operations
Adjustments for:
Depreciation of property, plant and equipment
Amortisation of computer software and development costs
Restructuring costs paid and movements in other provisions
Operating cash flows before movements in working capital
Decrease in inventories
(Increase)/decrease in receivables
Decrease in payables
Cash generated by operations
Tax paid
Interest paid
Acquisition costs
Defined benefit pension contributions paid
Incentive scheme payments
Net cash from operating activities from continuing operations
(1) Restated to include the results of Bridon within discontinued operations (note 9).
(2) As defined on the Income Statement.
Year ended
31 December
2014
£m
Restated(1)
year ended
31 December
2013
£m
246.0
240.0
26.6
5.2
(30.5)
247.3
20.9
(13.8)
(35.6)
218.8
(35.1)
(38.9)
(2.3)
(31.1)
–
111.4
28.0
5.2
(66.2)
207.0
26.3
0.7
(37.5)
196.5
(43.1)
(53.1)
(11.4)
(31.9)
(3.4)
53.6
Melrose Industries PLCAnnual Report 2014Financials 149
Year ended
31 December
2014
£m
17.4
(4.2)
–
(8.1)
5.1
(3.9)
(0.2)
–
(4.1)
–
Restated(1)
year ended
31 December
2013
£m
101.9
(17.7)
(0.1)
(1.7)
82.4
(20.1)
(0.2)
0.1
(20.2)
–
Cash flow from discontinued operations
Cash generated from discontinued operations
Tax paid
Interest paid
Defined benefit pension contributions paid
Net cash from operating activities from discontinued operations
Purchase of property, plant and equipment
Purchase of computer software and development costs
Interest received
Net cash used in investing activities from discontinued operations
Net cash used in financing activities from discontinued operations
(1) Restated to include the results of Bridon within discontinued operations (note 9).
Net debt reconciliation
Cash
Debt due within one year
Debt due after one year
Net debt
31 December
2013
£m
200.4
–
(341.2)
(140.8)
Cash flow
£m
(382.4)
–
(226.1)
(608.5)
Acquisitions
£m
(98.4)
–
–
(98.4)
Disposals
£m
351.7
–
–
351.7
Other
non-cash
movements
£m
–
(0.9)
0.5
(0.4)
Foreign
exchange
difference
£m
(0.8)
–
(4.1)
(4.9)
31 December
2014
£m
70.5
(0.9)
(570.9)
(501.3)
27. Commitments and contingencies
Future total minimum rentals payable under non-cancellable operating leases were as follows:
Amounts payable:
Within one year
After one year but within five years
Over five years
31 December
2014
£m
31 December
2013
£m
6.9
9.3
2.6
18.8
9.3
20.1
28.4
57.8
The Group leases properties, plant, machinery and vehicles for operational purposes. Property leases vary in length up to a period of
25 years. Plant, machinery and vehicle leases typically run for periods of up to five years. The reduction in minimum rentals payable under
non-cancellable operating leases during the year was primarily as a result of the disposal of Bridon.
Capital commitments
At 31 December 2014, there were commitments of £19.2 million (31 December 2013: £13.8 million) relating to the acquisition of new plant
and machinery.
Melrose Industries PLCAnnual Report 2014FinancialsFinancials
150
Notes to the
financial statements continued
28. Related parties
Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not
disclosed in this note.
The Group did not enter into any significant transactions in the ordinary course of business with joint ventures during the current or prior year.
Sales to and purchases from Group companies are priced on an arm’s length basis and generally are settled on 30 day terms.
Remuneration of key management personnel
The remuneration of the Directors, who are the key management personnel of the Group, is set out below in aggregate for each of the
categories specified in IAS 24: “Related party disclosures”. Further information about the remuneration of individual Directors is provided
in the audited part of the Directors’ remuneration report on pages 82 and 83.
Short-term employee benefits
Share-based payments
Year ended
31 December
2014
£m
2.7
2.7
5.4
Year ended
31 December
2013
£m
3.0
2.7
5.7
29. Post Balance Sheet events
At a General Meeting of the Company held on 20 February 2015, shareholders approved a Return of Capital of 18.7 pence per Ordinary
Share totalling £200.4 million.
‘B’ and ‘C’ shares with a total value of £200.4 million have been created resulting in a corresponding reduction in the Merger reserve.
When the capital return payments are made on 16 March 2015, the ‘B’ and ‘C’ shares will be redeemed and £200.4 million will be
transferred to the Capital redemption reserve.
As a result of the approval of the capital return, on 20 February 2015 the number of Ordinary Shares in issue was consolidated in a ratio
of 13 for 14 in order to maintain comparability of the Company’s share price before and after the capital return. On 20 February 2015 the
number of Ordinary Shares in issue became 995,206,966 each with a nominal value of 7/55 pence.
Further details of the capital return are provided on pages 64 and 65 in the Directors’ report.
30. Contingent liabilities
As a result of acquisitions made by the Group, certain contingent legal, environmental, warranty and tax liabilities were identified either
at the time of acquisition or as part of the completion of the acquisition accounting. Whilst it is difficult to reasonably estimate the ultimate
outcome of these claims, the Directors’ best estimate has been included in the Balance Sheet where they existed at the time of acquisition
and hence were recognised in accordance with IFRS 3: “Business combinations”. Where a provision has been recognised, information
regarding the different categories of such liabilities and the amount and timing of outflows is included within note 20.
The Group has contingent liabilities representing guarantees and contract bonds given in the ordinary course of business on behalf of
trading subsidiaries. No losses are anticipated to arise on these contingent liabilities. The Group does not have any other significant
contingent liabilities.
Melrose Industries PLCAnnual Report 2014Financials Company Balance Sheet for
Melrose Industries PLC
Fixed assets
Investment in subsidiaries
Creditors: amounts falling due within one year
Creditors
Net current liabilities
Net assets
Capital and reserves
Issued share capital
Merger reserve
Capital redemption reserve
Retained earnings
Shareholders’ funds
151
31 December
2014
£m
31 December
2013
£m
Notes
3
4
5
6
6
6
7
2,713.1
2,713.1
(787.7)
(787.7)
1,925.4
1.3
595.3
595.3
733.5
1,925.4
2,711.9
2,711.9
(100.8)
(100.8)
2,611.1
1.3
1,190.6
–
1,419.2
2,611.1
The financial statements were approved by the Board of Directors on 4 March 2015 and were signed on its behalf by:
Geoffrey Martin
Group Finance Director
Simon Peckham
Chief Executive
Registered number: 8243706
Melrose Industries PLCAnnual Report 2014FinancialsFinancials
152
Notes to the Company
Balance Sheet
1. Significant accounting policies
Basis of accounting
The separate financial statements of Melrose Industries PLC (“the Company”) are presented as required by the Companies Act 2006.
They have been prepared under the historical cost convention and in accordance with applicable United Kingdom Generally Accepted
Accounting Practice (“UK GAAP”) and law.
The principal accounting policies are summarised below. They have all been applied consistently throughout the current and prior year.
Going concern
The Directors have, at the time of approving the financial statements, a reasonable expectation that the Company has adequate resources
to continue in operational existence for the foreseeable future. Thus they continue to adopt the going concern basis of accounting in
preparing the financial statements. Further detail is contained in the Directors’ statement of going concern on page 49 of the Finance
Director’s review.
Investments
Fixed asset investments in subsidiaries are shown at cost less provision for impairment.
For investments in subsidiaries acquired for consideration, including the issue of shares qualifying for merger relief, cost is measured
at the fair value of the consideration paid. Any premium is ignored.
Share-based payments
The Company has applied the requirements of FRS 20: “Share-based payment”. The Company issues equity-settled share-based
payments to certain employees. Equity-settled share-based payments are measured at fair value (excluding the effect of non-market
based vesting conditions) at the date of grant. The fair value determined at the grant date of the equity-settled share-based payments
is expensed on a straight-line basis over the vesting period, based on the Company’s estimate of the shares that will eventually vest
and adjusted for the effect of non-market based vesting conditions.
Fair value is measured by use of the Black Scholes pricing model. The expected life used in the model has been adjusted, based on
the Directors’ best estimate, for the effects of non-transferability, exercise restrictions, and behavioural considerations.
Where equity-settled share-based payments are made available to employees of the Company’s subsidiaries, these are treated as
increases in equity over the vesting period of the award with a corresponding increase in the Company’s investment in subsidiaries.
Cash Flow Statement
The Company has taken advantage of the exemption from preparing a Cash Flow Statement under the terms of FRS 1 (revised): “Cash
flow statements” because it prepares a consolidated Cash Flow Statement which is shown on page 104 of the Group financial statements.
Taxation
Current tax, including UK corporation tax and foreign tax, is provided at amounts expected to be paid (or recovered) using the tax rates
and laws that have been enacted or substantively enacted by the Balance Sheet date.
Deferred tax is recognised in respect of all timing differences that have originated but not reversed at the Balance Sheet date where
transactions or events that result in an obligation to pay more tax in the future or a right to pay less tax in the future have occurred at the
Balance Sheet date. Timing differences are differences between the Company’s taxable profits and its results as stated in the financial
statements that arise from the inclusion of gains and losses in tax assessments in periods different from those in which they are
recognised in the financial statements.
2. Profit for the period
As permitted by section 408 of the Companies Act 2006 the Company has elected not to present its own Profit and Loss Account for
the year. Melrose Industries PLC reported a loss for the financial year ended 31 December 2014 of £10.8 million (2013: £5.1 million).
The auditor’s remuneration for audit services to the Company is disclosed in note 7 to the Group consolidated financial statements.
Melrose Industries PLCAnnual Report 2014Financials 3.
Investment in subsidiaries
At 1 January 2014
Additions – share-based payments
At 31 December 2014
153
£m
2,711.9
1.2
2,713.1
The Company has investments in the following subsidiaries which principally affected the profits and net assets of the Group.
The following subsidiary is directly owned by Melrose Industries PLC:
Subsidiary
Melrose PLC
Country of incorporation
Great Britain
Principal activity
Holding company
Holding %
100
Significant indirectly owned subsidiaries of the Group are:
Subsidiaries
Energy
Brush Electrical Machines Limited
Brush HMA B.V.
Brush SEM s.r.o.
Brush Transformers Limited
Harrington Generators International Limited
Hawker Siddeley Switchgear Limited
Generator and Motor Services of Pennsylvania LLC
Elster
Elster American Meter Company LLC
Elster Perfection Corporation
Elster N.V.
Elster GmbH
Elster S.A.S.
OOO Elster Gaselectronica
Elster Metering Limited
Hauck Manufacturing Company Inc.
Eclipse, Inc.
Elster Solutions LLC
Elster Solutions GmbH
Elster Medicao de Energia Ltda
Elster AMCO Water LLC
Elster Metering Pty Ltd
Elster Messtechnik GmbH
Elster s.r.o.
Elster Group S.E.
Elster Holdings Netherlands B.V.
Elster Holdings US Inc.
Elster Solutions Limited
Elster Water Metering Holdings Limited
Group
FKI Limited
FKI Engineering Limited
Precision House Management Services Limited
Country of incorporation
Principal activity
Equity interest %
Great Britain
Netherlands
Czech Republic
Great Britain
Great Britain
Great Britain
USA
USA
USA
Belgium
Germany
France
Russia
Great Britain
USA
USA
USA
Germany
Brazil
USA
Australia
Germany
Slovakia
Germany
Netherlands
USA
Great Britain
Great Britain
Great Britain
Great Britain
Great Britain
Engineering company
Engineering company
Engineering company
Engineering company
Engineering company
Engineering company
Engineering company
Engineering company
Engineering company
Engineering company
Engineering company
Engineering company
Engineering company
Engineering company
Engineering company
Engineering company
Engineering company
Engineering company
Engineering company
Engineering company
Engineering company
Engineering company
Engineering company
Holding company
Holding company
Holding company
Holding company
Holding company
Holding company
Holding company
Management services company
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
Melrose Industries PLCAnnual Report 2014FinancialsFinancials
154
Notes to the Company
Balance Sheet continued
4. Creditors
Amounts falling due within one year:
Amounts owed to Group undertakings
Accruals and other payables
The Directors consider that amounts owed to Group undertakings approximate to their fair value.
5.
Issued share capital
Share capital
Allotted, called up and fully paid
1,071,761,339 (31 December 2013: 1,266,627,036) Ordinary Shares of 13/110p each (31 December 2013: 0.1p each)
31 December
2014
£m
31 December
2013
£m
787.0
0.7
787.7
100.0
0.8
100.8
31 December
2014
£m
31 December
2013
£m
1.3
1.3
1.3
1.3
On 7 February 2014 at a General Meeting of the Company, shareholders approved a resolution to return £595.3 million to shareholders.
The Return of Capital took place by increasing the authorised share capital by £595.3 million through the issue of 509,123,150 ‘B’ shares
and 757,503,886 ‘C’ shares of 47.0 pence each and capitalising £595.3 million of the Merger reserve to pay up in full the ‘B’ and ‘C’ shares.
Shareholders had the option to receive the cash value inherent in the ‘B’ and ‘C’ shares by way of income or the choice of two capital
options. As a result of the elections made by shareholders in respect of the Return of Capital:
• 493,363,270 ‘B’ shares were redeemed and subsequently cancelled with immediate effect from 17 February 2014.
• 15,759,880 ‘B’ shares were redeemed on 30 April 2014 and subsequently cancelled.
• 757,503,886 ‘C’ shares were paid a dividend on 28 February 2014 and these ‘C’ shares were subsequently cancelled.
In conjunction with the Return of Capital, on 7 February 2014 the number of Ordinary Shares in issue was consolidated in a ratio of 11 for
13 in order to maintain comparability of the Company’s share price before and after the Return of Capital. On 7 February 2014 the number
of Ordinary Shares in issue became 1,071,761,339 each with a nominal value of 13/110 pence.
6. Reserves
Reserves
At 1 January 2013
Dividends paid
Loss for the year
Credit to equity for equity-settled share-based payments
At 31 December 2013
Return of Capital
Dividends paid
Loss for the year
Credit to equity for equity-settled share-based payments
At 31 December 2014
Issued share
capital
£m
1.3
–
–
–
1.3
–
–
–
–
1.3
Merger
reserve
£m
1,190.6
–
–
–
1,190.6
(595.3)
–
–
–
595.3
Capital
redemption
reserve
£m
–
–
–
–
–
595.3
–
–
–
595.3
Retained
earnings
£m
1,518.4
(98.1)
(5.1)
4.0
1,419.2
(595.3)
(83.6)
(10.8)
4.0
733.5
Details of share-based payments are given in note 22 to the Group consolidated financial statements.
Melrose Industries PLCAnnual Report 2014Financials 7. Reconciliation of movements in shareholders’ funds
At 1 January 2013
Dividends paid
Loss for the year
Credit to equity for equity-settled share-based payments
At 31 December 2013
Return of Capital
Dividends paid
Loss for the year
Credit to equity for equity-settled share-based payments
At 31 December 2014
155
£m
2,710.3
(98.1)
(5.1)
4.0
2,611.1
(595.3)
(83.6)
(10.8)
4.0
1,925.4
8. Related party transactions
The Company has taken the exemption in FRS 8: “Related party disclosures” not to disclose intercompany balances and transactions
in the period with fully owned subsidiary undertakings.
9. Post Balance Sheet events
At a General Meeting of the Company held on 20 February 2015, shareholders approved a Return of Capital of 18.7 pence per Ordinary
Share totalling £200.4 million.
‘B’ and ‘C’ shares with a total value of £200.4 million have been created resulting in a corresponding reduction in the Merger reserve.
When the capital return payments are made on 16 March 2015, the ‘B’ and ‘C’ shares will be redeemed and £200.4 million will be
transferred to the Capital redemption reserve.
As a result of the approval of the capital return, on 20 February 2015 the number of Ordinary Shares in issue was consolidated in a ratio
of 13 for 14 in order to maintain comparability of the Company’s share price before and after the capital return. On 20 February 2015 the
number of Ordinary Shares in issue became 995,206,966 each with a nominal value of 7/55 pence.
Further details of the capital return are provided on pages 64 and 65 in the Directors’ report.
Melrose Industries PLCAnnual Report 2014FinancialsFinancials 156
Notice of Annual General Meeting
This document is important and requires
your immediate attention. If you are in any
doubt as to the action you should take,
you should consult your stockbroker, bank
manager, solicitor, accountant, fund manager
or other independent financial adviser
authorised under the Financial Services
and Markets Act 2000 if you are resident
in the United Kingdom or, if not, another
appropriately authorised independent
financial adviser.
13. To authorise the Audit Committee to determine the
remuneration of the auditor of the Company.
14. That, in accordance with section 551 of the Companies Act
2006 (the “Act”), the directors of the Company (the “Directors”)
be and are generally and unconditionally authorised to allot
shares in the Company, or to grant rights to subscribe for or
to convert any security into shares in the Company (“Rights”):
(A) up to an aggregate nominal amount of £422,209; and
(B) comprising equity securities (as defined in section 560 of
the Act) up to an aggregate nominal amount of £844,418
(such amount to be reduced by the aggregate nominal
amount of any allotments or grants made under paragraph
(A) of this resolution) in connection with an offer by way
of rights issue:
(i)
to ordinary shareholders in proportion (as nearly as
may be practicable) to their existing holdings; and
(ii) to holders of other equity securities as required by
the rights of those securities or, subject to such
rights, as the Directors otherwise consider necessary,
and so that the Directors may impose any limits or
restrictions and make any arrangements which they
consider necessary or appropriate to deal with treasury
shares, fractional entitlements, record dates, legal,
regulatory or practical problems in, or under the laws
of any territory or any other matter,
such authorities to expire at the conclusion of the Company’s
next Annual General Meeting after this resolution is passed or,
if earlier, at the close of business on 30 June 2016, but, in each
case, so that the Company may make offers or agreements
before the authority expires which would or might require
shares to be allotted or Rights to be granted after the authority
expires, and so that the Directors may allot shares or grant
Rights in pursuance of any such offer or agreement
notwithstanding that the authority conferred by this
resolution has expired.
If you have sold or otherwise transferred all of your shares in
Melrose Industries PLC (the “Company”), you should send this
document as soon as possible to the purchaser or transferee or
to the stockbroker, bank or other agent through whom the sale or
transfer was effected, for delivery to the purchaser or transferee.
Notice is given that the Annual General Meeting of the Company will
be held at Barber-Surgeons’ Hall, Monkwell Square, Wood Street,
London, EC2Y 5BL at 11.00 am on 14 May 2015 for the following
purposes. Resolutions 1 to 14 (inclusive) will be proposed as ordinary
resolutions and resolutions 15 to 17 (inclusive) as special resolutions.
Ordinary resolutions
1. To receive the Company’s audited financial statements for
the financial year ended 31 December 2014, together with
the Directors’ report, strategic report and the auditor’s report
on those financial statements.
2. To approve the Directors’ Remuneration Report (other than the
part containing the Directors’ remuneration policy) for the year
ended 31 December 2014, as set out on pages 78 to 95 (save
for pages 88 to 95) of the Company’s 2014 Annual Report.
3. To declare a final dividend of 5.3p per Ordinary Share for the
year ended 31 December 2014.
4. To re-elect Christopher Miller as a Director of the Company.
5. To re-elect David Roper as a Director of the Company.
6. To re-elect Simon Peckham as a Director of the Company.
7. To re-elect Geoffrey Martin as a Director of the Company.
8. To re-elect Perry Crosthwaite as a Director of the Company.
9. To re-elect John Grant as a Director of the Company.
10. To re-elect Justin Dowley as a Director of the Company.
11. To re-elect Liz Hewitt as a Director of the Company.
12. To re-appoint Deloitte LLP as auditor of the Company to hold
office from the conclusion of this meeting until the conclusion
of the next Annual General Meeting of the Company at which
accounts are laid.
Melrose Industries PLCAnnual Report 2014Shareholder information 157
Special resolutions
15. That, subject to the passing of resolution 14, in accordance with
(C) the maximum price which may be paid for an Ordinary
Share is not more than the higher of:
sections 570 and 573 of the Act, the Directors be and are generally
empowered to allot equity securities (as defined in section 560 of
the Act) for cash pursuant to the authorities granted by resolution
14 as if section 561 of the Act did not apply to any such allotment
provided that this power shall be limited:
(A) to the allotment of equity securities in connection with an
offer of equity securities (but in the case of an allotment
pursuant to the authority granted under paragraph (B) of
resolution 14, such power shall be limited to the allotment
of equity securities in connection with an offer by way of
rights issue only):
(i)
to ordinary shareholders in proportion (as nearly as
may be practicable) to their existing holdings; and
(ii) to holders of other equity securities, as required by
the rights of those securities or, subject to such rights,
as the Directors otherwise consider necessary,
and so that the Directors may impose any limits or
restrictions and make any arrangements which they
consider necessary or appropriate to deal with treasury
shares, fractional entitlements, record dates, legal,
regulatory or practical problems in, or under the laws
of any territory or any other matter; and
(B) to the allotment (otherwise than in the circumstances set
out in paragraph (A) of this resolution) of equity securities
pursuant to the authority granted by paragraph (A) of resolution
14 up to an aggregate nominal amount of £126,662,
such power to expire at the conclusion of the Company’s next
Annual General Meeting after this resolution is passed or, if
earlier, at the close of business on 30 June 2016, but so that
the Company may make offers or agreements before the
power expires which would or might require equity securities
to be allotted after the power expires and so that the Directors
may allot equity securities in pursuance of any such offer or
agreement notwithstanding that the power conferred by this
authority has expired.
(i) 105% of the average of the middle market quotation
for an Ordinary Share as derived from the Daily Official
List of the London Stock Exchange for the five
business days immediately preceding the day on
which the Ordinary Share is purchased; and
(ii) the higher of the price of the last independent trade
and the highest current independent bid on the
trading venue where the purchase is carried out,
in each case, exclusive of expenses;
(D) this authority shall expire at the conclusion of the
Company’s next Annual General Meeting after this
resolution is passed or, if earlier, at the close of business
on 30 June 2016;
(E) the Company may make a contract of purchase of Ordinary
Shares under this authority which would or might be
executed wholly or partly after the expiry of this authority,
and may make a purchase of Ordinary Shares in pursuance
of any such contract; and
(F) any Ordinary Shares purchased pursuant to this authority
may either be held as treasury shares or cancelled by
the Company, depending on which course of action is
considered by the Directors to be in the best interests
of shareholders at the time.
17. That a general meeting other than an Annual General Meeting
may be called on not less than 14 clear days’ notice.
Recommendation
The Board believes that each of the resolutions to be proposed
at the Annual General Meeting is in the best interests of the
Company and its shareholders as a whole. Accordingly, the
Directors unanimously recommend that ordinary shareholders
vote in favour of all of the resolutions proposed, as the Directors
intend to do in respect of their own beneficial holdings.
By order of the Board
16. That the Company be and is generally and unconditionally
authorised to make one or more market purchases (within the
meaning of section 693 of the Act) of Ordinary Shares in the
capital of the Company provided that:
Adam Westley
Company Secretary
2 April 2015
(A) the maximum aggregate number of Ordinary Shares
authorised to be purchased is 99,520,696;
(B) the minimum price which may be paid for an Ordinary
Share is the nominal value of an Ordinary Share at the
time of such purchase;
Registered Office:
11th Floor Colmore Plaza
20 Colmore Circus Queensway
Birmingham
West Midlands
B4 6AT
Shareholder information Melrose Industries PLCAnnual Report 2014Shareholder informationShareholder information 158
Notice of Annual General Meeting
continued
Explanatory notes to the proposed resolutions
Resolutions 1 to 14 (inclusive) are proposed as ordinary
resolutions, which means that for each of those resolutions
to be passed, more than half the votes cast must be cast in
favour of the resolution. Resolutions 15 to 17 (inclusive) are
proposed as special resolutions, which means that for each
of those resolutions to be passed, at least three-quarters of
the votes cast must be cast in favour of the resolution.
Resolution 1 – Receipt of 2014 Annual Report and
financial statements
The Directors are required to lay the Company’s financial
statements, the strategic report and the Directors’ and auditor’s
reports on those financial statements (collectively, the “Annual
Report”) before shareholders each year at the Annual General
Meeting (“AGM”).
Resolution 2 – Approval of Directors’ remuneration report
Following changes to the Act and in line with new regulations which
came into effect on 1 October 2013, the Directors’ remuneration
report (the “Directors’ Remuneration Report”) is now presented in
three sections:
The Directors’ Remuneration Report (other than the part containing
the Directors’ remuneration policy) is subject to an annual advisory
shareholder vote by way of an ordinary resolution; Resolution 2 is to
approve the Directors’ Remuneration Report (other than the part
containing the Directors’ remuneration policy).
Resolution 3 – Declaration of final dividend
The Board is recommending, and the shareholders are being asked
to approve, the declaration of a final dividend of 5.3 pence per
Ordinary Share for the year ended 31 December 2014. The final
dividend will, subject to shareholder approval, be paid on 18 May
2015 to the holders of Ordinary Shares whose names are recorded
on the register of members of the Company at the close of
business on 17 April 2015.
Resolutions 4 to 11 (inclusive) – Re-election of Directors
In accordance with the UK Corporate Governance Code (the
“Code”) and the Company’s articles of association (the “Articles”),
every Director will stand for re-election at the AGM. Biographical
details of each Director can be found on pages 62 and 63 of the
2014 Annual Report. All of the non-executive Directors standing
for re-election are considered independent under the Code.
• the annual statement from the Chairman of the
Remuneration Committee;
• the annual report on remuneration; and
• the Directors’ remuneration policy
Resolution 12 – Re-appointment of auditor
The Company is required to appoint auditors at each general
meeting at which accounts are laid before shareholders, to hold
office until the next such meeting.
The annual statement from the Chairman of the Remuneration
Committee, set out on pages 78 to 80 of the 2014 Annual Report,
summarises, for the year ended 31 December 2014, the major
decisions taken on Directors’ remuneration, any substantial
changes relating to Directors’ remuneration made during the year
and the context in which those changes occurred and decisions
that have been taken.
The annual report on remuneration, set out on pages 81 to 88
of the 2014 Annual Report, provides details of the remuneration
paid to Directors in respect of the year ended 31 December 2014,
including base salary, taxable benefits, short-term incentives
(including percentage deferred), long-term incentives vested in
the year, pension-related benefits, any other items in the nature
of remuneration and any sum(s) recovered or withheld during the
year in respect of amounts paid in earlier years.
The Directors’ remuneration policy, set out on pages 88 to 95 of the
2014 Annual Report, provides details of the Company’s policy on
Directors’ remuneration (including the policy on payments for loss
of office). This policy was approved by shareholders at the AGM
on13 May 2014, the approval being valid for three years from that
date. As the policy is unchanged, shareholder approval of the
policy is not required at this AGM. All remuneration payments and
payments for loss of office made by the Company to the current
and any former Directors must be consistent with the Directors’
remuneration policy or, if inconsistent with the Directors’
remuneration policy, must have been separately approved by
way of an ordinary resolution of the shareholders in accordance
with the relevant provisions of the Act. Approval would also be
sought from shareholders if, at any time in the next two years,
the Company wished to make any changes to the policy.
The Audit Committee has reviewed the effectiveness, performance,
independence and objectivity of the existing external auditor,
Deloitte LLP, on behalf of the Board, and concluded that the
external auditor was in all respects effective.
This resolution proposes the re-appointment of Deloitte LLP until
the conclusion of the next AGM.
Resolution 13 – Authority to agree auditor’s remuneration
This resolution seeks authority for the Audit Committee to
determine the level of the auditor’s remuneration.
Resolution 14 – Authority to allot shares
This resolution seeks shareholder approval to grant the Directors
the authority to allot shares in the Company, or to grant rights to
subscribe for or convert any securities into shares in the Company
(“Rights”) pursuant to section 551 of the Act (the “Section 551
authority”). The authority contained in paragraph (A) of the
resolution will be limited to an aggregate nominal amount of
£422,209, being approximately one-third of the Company’s issued
Ordinary Share capital as at 2 April 2015.
In line with guidance issued by the Association of British Insurers,
paragraph (B) of this resolution would give the Directors authority
to allot shares in the Company or grant Rights in connection with
a rights issue up to aggregate nominal amount of £844,418,
representing approximately two-thirds of the Company’s issued
Ordinary Share capital as at 2 April 2015, as reduced by the
aggregate nominal amount of any allotments or grants under
paragraph (A) of this resolution.
The Company does not hold any shares in treasury.
Melrose Industries PLCAnnual Report 2014Shareholder information 159
If approved, the Section 551 authority shall, unless renewed,
revoked or varied by the Company, expire at the end of the
Company’s next AGM after the resolution is passed or, if earlier,
at the close of business on 30 June 2016. The exception to this
is that the Directors may allot shares or grant Rights after the
authority has expired in connection with an offer or agreement
made or entered into before the authority expired. The Directors
have no present intention to exercise the Section 551 authority.
Resolution 16 – Authority to purchase own shares
This resolution seeks shareholder approval to grant the Company
the authority to purchase its own shares pursuant to sections 693
and 701 of the Act.
This authority is limited to an aggregate maximum number of
99,520,696 Ordinary Shares, representing 10% of the Company’s
issued Ordinary Share capital as at 2 April 2015.
Resolution 15 – Partial disapplication of pre-emption rights
This resolution seeks shareholder approval to grant the Directors
the power to allot equity securities of the Company pursuant to
sections 570 and 573 of the Act (the “Section 570 and 573 power”)
without first offering them to existing shareholders in proportion to
their existing shareholdings.
The power is limited to allotments for cash in connection with
pre-emptive offers, subject to any arrangements that the Directors
consider appropriate to deal with fractions and overseas
requirements and otherwise for cash up to a maximum nominal
value of £126,662, representing approximately 10% of the
Company’s issued Ordinary Share capital as at 2 April 2015.
The Directors intend to adhere to the guidelines set out in the
Pre-Emption Group’s Statement of Principles (as updated in March
2015) and not to allot shares for cash on a non-pre-emptive basis
pursuant to the authority in Resolution 15 (B):
• in excess of an amount equal to 5% of the Company’s issued
Ordinary Share capital; or
• in excess of an amount equal to 7.5% of the Company’s issued
Ordinary Share capital in a rolling three-year period,
in each case other than in connection with an acquisition
or specified capital investment which is announced
contemporaneously with the allotment or which has taken
place in the preceding six-month period and is disclosed in
the announcement of the allotment.
If approved, the Section 570 and 573 power shall apply until the
end of the Company’s next AGM after the resolution is passed or,
if earlier, until the close of business on 30 June 2016. The exception
to this is that the Directors may allot equity securities after the
power has expired in connection with an offer or agreement made
or entered into before the power expired. The Directors have no
present intention to exercise the Section 570 and 573 power.
The maximum price which may be paid for an Ordinary Share will
be an amount which is not more than the higher of (i) 5% above the
average of the middle market quotation for an Ordinary Share as
derived from the Daily Official List of the London Stock Exchange
for the five business days immediately preceding the day on which
the Ordinary Share is purchased; and (ii) the higher of the price of
the last independent trade and the highest current independent bid
on the trading venue where the purchase is carried out (in each
case, exclusive of expenses).
If approved, the authority shall, unless varied, revoked or renewed,
expire at the end of the Company’s next AGM after the resolution is
passed or, if earlier, at the close of business on 30 June 2016. The
Directors have no present intention of exercising all or any of the
powers conferred by this resolution and will only exercise their
authority if it is in the interests of shareholders generally.
Resolution 17 – Notice period for general meetings other
than AGMs
This resolution seeks shareholder approval to allow the Company
to continue to call general meetings (other than AGMs) on 14 clear
days’ notice. In accordance with the Companies (Shareholders’
Rights) Regulations 2009, the notice period required for general
meetings of the Company is 21 days unless shareholders approve a
shorter notice period (subject to a minimum period of 14 clear days).
AGMs will continue to be held on at least 21 clear days’ notice.
The approval will be effective until the Company’s next AGM,
when it is intended that a similar resolution will be proposed.
In accordance with the Act, the Company must make a means
of electronic voting available to all shareholders for that meeting
in order to be able to call a general meeting on less than 21 clear
days’ notice.
Shareholder information Melrose Industries PLCAnnual Report 2014Shareholder informationShareholder information 160
Notice of Annual General Meeting
continued
7.
In order for a proxy appointment or instruction made using the
CREST service to be valid, the appropriate CREST message
(a “CREST Proxy Instruction”) must be properly authenticated
in accordance with Euroclear UK & Ireland Limited’s
specifications, and must contain the information required
for such instruction, as described in the CREST Manual
(available via www.euroclear.com). The message, regardless
of whether it constitutes the appointment of a proxy or is an
amendment to the instruction given to a previously appointed
proxy, must in order to be valid be transmitted so as to be
received by the issuer’s agent (ID RA19) by 11.00 am on
12 May 2015. For this purpose, the time of receipt will be
taken to be the time (as determined by the time stamp applied
to the message by the CREST Application Host) from which
the issuer’s agent is able to retrieve the message by enquiry
to CREST in the manner prescribed by CREST. After this
time any change of instructions to proxies appointed through
CREST should be communicated to the appointee through
other means.
8. CREST members and, where applicable, their CREST
sponsors, or voting service providers should note that
Euroclear UK & Ireland Limited does not make available
special procedures in CREST for any particular message.
Normal system timings and limitations will, therefore, apply
in relation to the input of CREST Proxy Instructions. It is the
responsibility of the CREST member concerned to take
(or, if the CREST member is a CREST Personal Member,
or sponsored member, or has appointed a voting service
provider, to procure that his CREST sponsor or voting service
provider(s) take(s)) such action as shall be necessary to ensure
that a message is transmitted by means of the CREST system
by any particular time. In this connection, CREST members
and, where applicable, their CREST sponsors or voting system
providers are referred, in particular, to those sections of the
CREST Manual concerning practical limitations of the CREST
system and timings.
9. The Company may treat as invalid a CREST Proxy Instruction
in the circumstances set out in Regulation 35(5) (a) of the
Uncertified Securities Regulations 2001.
10. Any corporation which is a member can appoint one or more
corporate representatives who may exercise on its behalf all
of its powers as a member provided that they do not do so
in relation to the same shares.
Explanatory notes as to the proxy, voting and attendance
procedures at the Annual General Meeting (AGM)
1. The holders of Ordinary Shares in the Company are entitled to
attend the AGM and are entitled to vote. A member entitled to
attend and vote may appoint a proxy to exercise all or any of
their rights to attend, speak and vote at a general meeting of
the Company. Such a member may appoint more than one
proxy, provided that each proxy is appointed to exercise the
rights attached to different shares. A proxy need not be a
member of the Company.
2. A form of proxy is enclosed with this notice. To be effective, a
form of proxy must be completed and returned, together with
any power of attorney or authority under which it is completed
or a certified copy of such power or authority, so that it is
received by the Company’s registrars at the address specified
on the form of proxy not less than 48 hours (excluding any part
of a day that is not a working day) before the stated time for
holding the meeting. Returning a completed form of proxy will
not preclude a member from attending the meeting and voting
in person.
3. Any person to whom this notice is sent who is a person
nominated under section 146 of the Act to enjoy information
rights (a “Nominated Person”) may, under an agreement
between him and the shareholder by whom he was nominated,
have a right to be appointed (or to have someone else
appointed) as a proxy for the AGM. If a Nominated Person
has no such proxy appointment right or does not wish to
exercise it, he may, under any such agreement, have a right
to give instructions to the shareholder as to the exercise of
voting rights. The statement of the rights of shareholders in
relation to the appointment of proxies in paragraphs 1 and 2
above does not apply to Nominated Persons. The rights
described in paragraphs 1 and 2 can only be exercised by
ordinary shareholders of the Company.
4. To be entitled to attend and vote at the AGM (and for the
purposes of the determination by the Company of the number
of votes they may cast), members must be entered on the
Company’s register of members by 6.00 pm on 12 May 2015
(or, in the event of an adjournment, on the date which is two
days before the time of the adjourned meeting). Changes to
entries on the register of members after this time shall be
disregarded in determining the rights of any person to attend
or vote at the meeting.
5. As at 2 April 2015, the Company’s issued share capital consists
of 995,206,966 Ordinary Shares of 7/55 pence each, carrying
one vote each.
6. CREST members who wish to appoint a proxy or proxies
through the CREST electronic proxy appointment service
may do so by using the procedures described in the CREST
Manual. CREST Personal Members or other CREST sponsored
members, and those CREST members who have appointed
a service provider(s), should refer to their CREST sponsor or
voting service provider(s), who will be able to take the
appropriate action on their behalf.
Melrose Industries PLCAnnual Report 2014Shareholder information 161
11. Under section 527 of the Act, members meeting the threshold
requirements set out in that section have the right to require
the Company to publish on a website a statement setting out
any matter relating to: (i) the audit of the Company’s accounts
(including the auditor’s report and the conduct of the audit)
that are to be laid before the AGM; or (ii) any circumstance
connected with an auditor of the Company ceasing to hold
office since the previous meeting at which annual accounts
and reports were laid in accordance with section 437 of the Act.
The Company may not require the shareholders requesting any
such website publication to pay its expenses in complying with
sections 527 or 528 of the Act. Where the Company is required
to place a statement on a website under section 527 of the Act,
it must forward the statement to the Company’s auditor not
later than the time when it makes the statement available on
the website. The business which may be dealt with at the
Annual General Meeting includes any statement that the
Company has been required under section 527 of the Act
to publish on a website.
12. Any member holding Ordinary Shares attending the meeting
has the right to ask questions. The Company must answer any
such questions relating to the business being dealt with at the
meeting but no such answer need be given if (a) to do so would
interfere unduly with the preparation for the meeting or involve
the disclosure of confidential information; (b) the answer has
already been given on a website in the form of an answer to
a question; or (c) it is undesirable in the interests of the
Company or the good order of the meeting that the question
be answered.
13. Voting at the AGM will be by poll. The Chairman will invite each
shareholder, corporate representative and proxy present at
the meeting to complete a poll card indicating how they wish
to cast their votes in respect of each resolution. In addition,
the Chairman will cast the votes for which he has been
appointed as proxy. Poll cards will be collected at the end
of the meeting. Once the results have been verified by the
Company’s registrar, Equiniti, they will be notified to the UK
Listing Authority, announced through a Regulatory Information
Service and will be available to view on the Company’s website.
14. A copy of this notice, and other information required by section
311A of the Act, can be found at www.melroseplc.net.
15. You may not use an electronic address provided in either this
Notice of Annual General Meeting or any related documents
(including the Proxy Form) to communicate with the Company
for any purposes other than those expressly stated.
16. The following documents will be available for inspection at
the Company’s registered office during normal business hours
(Saturdays, Sundays and public holidays excepted) from the
date of this notice until the date of the Annual General Meeting
and at the place of the Annual General Meeting for 15 minutes
prior to and during the meeting:
(A) copies of all service agreements under which Directors
of the Company are employed by the Company or any
subsidiaries; and
(B) a copy of the terms of appointment of the non-executive
Directors of the Company.
17. You may register your vote online by visiting Equiniti’s website
at www.sharevote.co.uk. In order to register your vote online,
you will need to enter the Task ID, together with your Voting ID
and Shareholder Reference Number which are set out on the
enclosed Proxy Form. The return of the Proxy Form by post or
registering your vote online will not prevent you from attending
the Annual General Meeting and voting in person, should you
wish. Alternatively, shareholders who have already registered
with Equiniti’s online portfolio service, Shareview, can appoint
their proxy electronically by logging on to their portfolio
at www.shareview.co.uk and click on the link to vote.
The on-screen instructions give details on how to complete
the appointment process. A proxy appointment made
electronically will not be valid if sent to any address other
than those provided or if received after 11.00 am on
12 May 2015.
Adoption of Financial Reporting Standard (FRS) 101
– Reduced Disclosure Framework
Following the publication of FRS 100 Application of
Financial Reporting Requirements by the Financial
Reporting Council, Melrose Industries PLC is required
to change its accounting framework for its entity financial
statements, which is currently UK GAAP, for its financial
year which commenced on 1 January 2015. The Board
considers that it is in the best interests of the Group for
Melrose Industries PLC to adopt FRS 101 Reduced
Disclosure Framework. No disclosures in the current UK
GAAP financial statements would be omitted on adoption
of FRS 101. A shareholder or shareholders holding in
aggregate 5% or more of the total allotted shares in
Melrose Industries PLC may serve objections to the use
of the disclosure exemptions on Melrose Industries PLC,
in writing, to its registered office (11th Floor, Colmore Plaza,
20 Colmore Circus Queensway, Birmingham, West Midlands
B4 6AT) not later than 30 June 2015.
Shareholder information Melrose Industries PLCAnnual Report 2014Shareholder informationShareholder information 162
Company and
shareholder information
As at 31 December 2014, there were 9,828 holders of Ordinary Shares of 13/110 pence each in the capital of the Company.
Their shareholdings are analysed below and show shareholding numbers as at 31 December 2014.
Shareholder analysis
Range of holdings
1-5,000
5,001-50,000
50,001-500,000
Over 500,000
Total
Held by
Individuals
Institutions
Total
Number of
holdings
8,058
1,228
310
232
9,828
5,852
3,976
9,828
Percentage of
total shareholders
82.0
12.5
3.1
2.4
100.0
59.5
40.5
100.0
Number of
Ordinary Shares
9,765,985
15,741,004
52,274,483
993,979,867
1,071,761,339(1)
35,231,306
1,036,530,033
1,071,761,339(1)
Percentage of
Ordinary Shares in issue
0.9
1.5
4.9
92.7
100.0
3.3
96.7
100.0
(1) Following the Return of Capital to shareholders and the subsequent Share Capital Consolidation, details of which can be found on pages 64 and 65 of the Directors’ report, the total number of
issued Ordinary Shares in the capital of the Company was 995,206,966, with a nominal value of 7/55 pence each. Shareholders continued to own approximately the same proportion of the
Company after the Share Capital Consolidation as they did before, subject to fractional entitlements.
Financial calendar 2015
Ex-dividend date for final dividend
Record date for final dividend
Annual General Meeting
Payment date of final dividend
Announcement of interim results
Intended payment of interim dividend
Preliminary announcement of 2015 results
Registrar
Equiniti
Aspect House
Spencer Road
Lancing
West Sussex
BN99 6DA
Tel: 0871 384 2030*
or +44 (0) 121 415 7047
(from outside UK)
* Calls to this number are charged at
8 pence per minute (excluding VAT)
plus network extras. Lines are open
from 8.30am to 5.30pm Monday to
Friday, excluding UK public holidays.
16 April 2015
17 April 2015
14 May 2015
18 May 2015
August 2015
October 2015
March 2016
Brokers
Investec
2 Gresham Street
London
EC2V 7QP
J.P. Morgan Cazenove
25 Bank Street
London
E14 5JP
Legal advisers
Simpson Thacher & Bartlett LLP
CityPoint
One Ropemaker Street
London
EC2Y 9HU
Bankers
Barclays Bank PLC
Commerzbank AG
HSBC Bank plc
J.P. Morgan Limited
Lloyds TSB Bank plc
Royal Bank of Canada
The Royal Bank of Scotland plc
BayernLB
Fifth Third Bank
ICBC
Mizuho
Santander UK PLC
Unicredit
Wells Fargo Bank International
A range of shareholder information is available at Equiniti’s website www.shareview.co.uk, where you can also register for a Shareview Portfolio
to access information about your holding and undertake a number of activities, including changing a dividend mandate and updating your address.
To register, you will need your 11 digit Shareholder Reference Number (SRN), which can be found on your proxy form or dividend voucher.
Gifting your shares
If you have a small number of shares and the dealing costs or minimum fee make it uneconomical to sell them, you may like to donate them
to benefit charities through ShareGift, a registered charity. Further information is available on the ShareGift website at www.sharegift.org
or call +44 (0) 207 930 3737.
Share Fraud Warning
Many companies have become aware that their shareholders have received unsolicited phone calls or correspondence concerning
investment matters. Fraudsters use persuasive and high-pressure tactics to lure investors into scams. They may offer to sell shares that
turn out to be worthless or non-existent, or to buy shares at an inflated price in return for an upfront payment. For more detailed information
on this kind of activity or to report a scam, please call the Financial Conduct Authority’s Consumer Helpline on 0800 111 6768 or visit
www.fca.org.uk/consumers/scams
Melrose Industries PLCAnnual Report 2014Shareholder information Notes
163
Melrose Industries PLCAnnual Report 2014Shareholder informationShareholder information 164
Notes
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Melrose
Melrose Industries PLC
Registered Office
11th Floor Colmore Plaza
20 Colmore Circus Queensway
Birmingham
West Midlands
B4 6AT
Tel: +44 (0) 121 296 2800
Fax: +44 (0) 121 296 2839
Registered Number: 08243706
Head Office
Leconfield House
Curzon Street
London
W1J 5JA
Tel: +44 (0) 20 7647 4500
Fax: +44 (0) 20 7647 4501
North America Office
Gateway Center Building One
2077 Convention Center Concourse
Suite 175
College Park
Atlanta
GA 30337
USA
Tel: +1 404 941 2100
Fax: +1 404 941 2772
www.melroseplc.net
London Stock Exchange
Code: MRO
SEDOL: BV9FYX3