Buy
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Sell
Melrose
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Melrose Industries PLC
Acquiring good quality manufacturing businesses,
making operational improvements, realising shareholder
value at the appropriate time and then returning this
value to shareholders continues to be the fundamentals
of the “buy, improve, sell” business strategy that
Melrose has followed since being founded in 2003.
Strategic Report P02
Chairman’s statement
02
Governance
Governance overview
P58
60
Board of Directors
Directors’ report
Corporate governance report
Audit Committee report
Nomination Committee report
Directors’ remuneration report
Statement of Directors’
responsibilities
62
64
68
72
78
80
91
Chief Executive’s review
Market overview
Our strategy and business model
Strategy in action
Key performance indicators
Performance Review
Divisional review
Air Management
Security & Smart Technology
Ergonomics
Energy
Finance Director’s review
Longer-term viability statement
Risk management
Risks and uncertainties
Corporate Social Responsibility
04
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41
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P92
Financials
Independent auditor’s report to the 94
members of Melrose Industries PLC
Consolidated Income Statement 101
Consolidated Statement of
Comprehensive Income
Consolidated Statement
of Cash Flows
Consolidated Balance Sheet
Consolidated Statement
of Changes in Equity
102
103
104
105
Notes to the financial statements 106
Company Balance Sheet
for Melrose Industries PLC
Company Statement
of Changes in Equity
Notes to the Company
Balance Sheet
Glossary
145
145
146
152
Shareholder
P156
information
Notice of Annual General Meeting 156
Company and shareholder
information
162
Cautionary statement
The Strategic Report and certain other sections of this Annual Report contain 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. Accordingly, readers are cautioned not to place undue reliance on any such forward-looking statements.
Subject to compliance with applicable laws and regulations, Melrose does not undertake any obligation to update any forward-looking
statement to reflect events or circumstances after the date of this Annual Report.
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.
Some financial and other numerical data in this Annual Report and financial statements has been rounded and, as a result,
the numerical figures shown as totals may vary slightly from the exact arithmetic aggregation of the figures that precede them.
Melrose is very pleased with the track record achieved
over its 14-year history since floating on AIM in 2003. It has
achieved an average annual return on equity investment
of 25% since making the first acquisition in 2005, with
an increase in operating margins between five and nine
percentage points across the businesses sold to date.
Shareholder investment and gain (figures up to 31 December 2017)
£4.8bn
Shareholder value
created to date
25%
Average annual return
for a shareholder since
the first acquisition
2.7x
Average return on equity
across all businesses sold
Value creation on previous deals
Sales growth Margin growth Cash generation Multiple expansion
McKechnie/Dynacast
Bought for
£0.4bn
FKI
Bought for
Elster
Bought for
£1.0bn
Sold for
£0.8bn
Sold for
£1.6bn
Sold for
Investment in business
Equity rate of return
Shareholder return
on original equity
51%
30%
Investment in business
Equity rate of return
66%
30%
3.0x
Shareholder return
on original equity
2.9x
Investment in business
Equity rate of return
Shareholder return
on original equity
£1.8bn
£3.3bn
25%
33%
2.3x
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Original investment
£1.00
+ £11.85
Additional investment in
subsequent capital raisings
Total investment
=£12.85
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Responsible stewardship
Melrose has substantially improved the funding
levels for all the pensions schemes under
its ownership.
109%
103%
99%
95%
87%
58%
McKechnie
FKI UK
FKI
Bridon
Brush
Total pension scheme contributions
£307m
Total shareholder
returns (TSR)(1)
Underlying operating
margin improvement
3,019%
c.13x
higher TSR
18%
13%
11%
10%
9%
Company
Entry
Current
McKechnie
Elster
Dynacast
FKI
Nortek
18%
13%
11%
10%
9%
•
•
•
•
15%
Gross return
£17.30
on original £1 investment
£13.24
Capital returns
+ £2.05
Ordinary dividends
+ £13.86
Market value of shares held
Total returns
=£29.15
How Elster and
Nortek operating
margin improved
+9ppts
+1ppts
+2ppts
+6ppts
+1ppts
+6ppts
+1ppts
+4ppts
24%
22%
16%
15%
Improvement
>30%
>70%
>40%
>50%
>60%
+6pp
+9pp
+5pp
+5pp
+6pp
15%(2)
Exit
24%
22%
16%
15%
•
231%
Melrose FTSE 350
(1)
(2)
Since Melrose IPO
(October 2003).
Nortek operating margin
up to 31 December 2017.
Investment in R&D equal to 4% of sales
over £230m
R&D investment in Elster and Nortek businesses in last five years.
Elster
Nortek
Returns on capex and restructuring
and other commercial actions.
Central cost savings.
Exit of low margin sales channels.
Christopher Miller
Chairman
01
This year has been another
demonstration of the effectiveness
of the tried and tested Melrose
methods. We are delighted
with the performance Nortek
management are achieving freed
from the culture of ‘head office
knows best’.
Substantial value is being
created for all stakeholders with
significant investment in new
technology, new products and
operations. Brush is adjusting
to its changed market place and
will emerge a stronger business
as a result.
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Chairman’s statement
A history of
value creation
Calendar year 2017
2017 has been another successful year, with
Nortek undergoing the fastest transformation
of any acquisition we have made to date
and improving its sales performance in the
second half of the year. As a result, the
Melrose Group revenue for the year was
£2,092.2 million (2016: £889.3 million) and,
despite declaring a statutory loss before
tax of £27.6 million (2016: statutory loss of
£69.3 million), the underlying(1) profit before
tax was £257.7 million (2016: £96.4 million).
These results reflect the record performance
of the Nortek businesses, which have
increased their underlying(1) operating profits
by 52%(2) from last year and 67%(2) from
the last full year prior to our acquisition.
This performance was achieved through
increasing underlying(1) operating margins
to 15.2%, which is a 5.5 percentage point
improvement since the start of the year.
This was our original three to five-year aim
at the time of acquisition and has been
achieved in less than 18 months. There
is more to come as investments continue
at approximately double the rate of
depreciation and the benefit of many of
the 2017 improvements is still to be fully
reflected. Melrose continues to invest in R&D
and in the past five years has now expensed
R&D costs equivalent to 4% of revenue
within the Elster and Nortek businesses.
Unfortunately, although its Switchgear
and Transformers businesses have
continued to perform satisfactorily, Brush’s
Turbogenerator business has not been
immune to the significant structural change
in its key global gas turbine market, leading
to the consultation process announced
earlier this month to materially re-shape
this business. The Board is committed to
positioning the business well for the future.
Further details of these results are contained
in the Chief Executive’s and Finance
Director’s reviews and I would like to thank
all employees for their efforts in helping to
produce this strong performance.
In addition, we launched a formal offer for
GKN plc on 1 February 2018, seeking to
create a UK industrial powerhouse with
a value in excess of £10 billion. The Board
believes that GKN plc is a company in
need of fundamental change to reverse
its long-term underperformance. We
believe GKN plc will respond to Melrose’s
methods and deliver lasting results for
all stakeholders.
Dividend
The Board proposes to pay a final dividend
of 2.8 pence per share (2016: 1.9 pence),
making a total of 4.2 pence for the year
(2016: 2.2 pence(3)), an increase of 91% in
line with its progressive annual dividend
policy. This will be paid on 21 May 2018 to
those shareholders on the register at 6 April
2018 subject to approval at the Annual
General Meeting (AGM) on 10 May 2018.
Board matters
As planned, John Grant retired at the
conclusion of the 2017 AGM, having
made a significant contribution to Melrose’s
success over the course of his ten years
of service as a non-executive Director.
On John’s retirement, the Chairman of the
Remuneration Committee, Justin Dowley,
took up the role of Senior Independent
Director, with Liz Hewitt assuming the
responsibilities of chairing the Audit
Committee, while handing over her
chairmanship of the Nomination Committee
to David Lis. On 5 July 2017, Archie G.
Kane was appointed to the Board as an
independent non-executive Director and
will be putting himself forward for election
at this year’s AGM in May.
I commend them all on their appointments,
further details of which are included in the
Governance Report.
The search for a suitable candidate to fill
the fifth independent non-executive Director
position was put on hold by the Board
pending the outcome of the Company’s bid
for GKN plc. Your Board believes that it is
Christopher Miller
Chairman
I am pleased to report
on our 15th set of annual
results since flotation
in 2003.
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Melrose Industries PLC Annual Report 2017 03
Buy
Improve
Sell
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Melrose’s focus since its inception
has always been to generate superior
returns for our shareholders through the
acquisition of high-quality but under-
performing manufacturing businesses,
investing heavily to improve their
operational performance before selling
them at the appropriate time to a buyer
who is looking to guide them through
the next stage of their development.
Strategy in action
p.10
“ We rely on shareholder support for our ability to secure
acquisitions where we can materially improve businesses
and create value for our investors. The progress made at
Nortek should give further confidence that our approach
can continue to identify new opportunities even in
challenging times.”
Christopher Miller, Chairman
appropriate for independent directors to
be a majority of the Board and will resume
this search as soon as possible.
Our history
2003
October
Floated on AIM
2005
May
Acquired McKechnie, along
with the Dynacast business,
for £429 million
2005
December
Entered the FTSE 250 on
London’s main exchange
2007
May
2008
July
2011
July
2012
August
2013
Sold McKechnie’s aerospace
and aftermarket business
for £428 million and returned
£220 million to shareholders
Acquired FKI plc for just under
£1 billion, in part shares, part
cash offer
Sold Dynacast for £377 million
and returned £373 million
to shareholders
Acquired Elster for £1.8 billion,
including a fully underwritten
£1.2 billion rights issue
Sold Marelli, Truth, Harris,
Crosby and Acco for
£950 million and returned
£595 million to shareholders
2014
November
Sold Bridon for £365 million
and returned £200 million
to shareholders
2015
December
Sold Elster for £3.3 billion
and returned £2.4 billion
to shareholders
2016
August
Acquired Nortek for £2.2 billion,
including a fully underwritten
£1.6 billion rights issue
Premium List
As promised on completion of the
acquisition of Nortek, we sought
readmission to the Premium Segment
of the Official List of the London Stock
Exchange at the earliest opportunity
and this was approved by the UK Listing
Authority on 26 April 2017.
Strategy
The scale and rate of success achieved
by the Nortek businesses in such a short
space of time demonstrates the continuing
effectiveness of the Melrose model,
which simplifies corporate structures and
injects pace and accountability into
businesses, while investing heavily for their
long-term success. Whilst FKI has been
a very successful acquisition, Brush is
experiencing extremely difficult market
conditions and your Board will continue to
support the business through these times.
The Board believes that GKN plc is similarly
well placed to benefit from Melrose’s
management and we have invited GKN plc
shareholders to accept our offer to join
us in creating a UK industrial powerhouse.
Outlook
At present the majority of our businesses
are based in the US, where markets are
currently sound. We note some adverse
headwinds from exchange rate movements,
however, further improvement in our
businesses building on their second half
sales performance, as well as exciting
acquisition opportunities, gives us
confidence for 2018 and future years.
Christopher Miller
Chairman
20 February 2018
(1)
(2)
(3)
Considered by the Board to be a key measure of
performance. Underlying measures are defined in the
glossary to this Annual Report on pages 152 to 155.
Proforma underlying(1) growth as described in the
glossary to this Annual Report on pages 152 to 155.
2016 interim dividend adjusted to include the effects
of the 12 for 1, fully underwritten, rights issue by
the Company on 24 August 2016 to part fund the
acquisition of Nortek (the 2016 Rights Issue).
Strategic ReportMelrose Industries PLC Annual Report 2017 04
Chief Executive’s review
Our strong
track record
The Nortek businesses have built on a
promising start under Melrose ownership
to have an outstanding 2017, with improved
momentum in sales coming through in the
second half when sales were up 4%(2) on
the second half of 2016. Freed from the
restrictions of the formerly centralised group
structure, operational management have
improved underlying(1) operating profit by
52%(2) in their first full year and increased
underlying(1) operating margins to 15.2%,
being the original three to five-year aim
at the time of the acquisition and an
improvement of more than five percentage
points. This improvement has been
funded by Melrose investments equal
to approximately 2x depreciation, the
full benefits of which are still unfolding.
The businesses have also been extremely
successful in converting this strong
performance into cash, with a cash
conversion rate under Melrose ownership
of over 100%.
At HVAC, the strengthened and refocused
management team is currently upgrading
the key US production facilities and has
made significant investment in the R&D
centre in Saskatoon, Canada. A detailed
52%
Improved underlying(1) operating
profit of Nortek Group by 52%(2)
in their first full year under
Melrose ownership
(1)
(2)
Considered by the Board to be a key measure of
performance. Underlying performance measures are defined
in the glossary to this Annual Report on pages 152 to 155.
Proforma underlying growth as described in the
glossary to this Annual Report on pages 152 to 155.
Simon Peckham
Chief Executive
The Melrose Group currently consists of four divisions,
three of which were acquired with Nortek in 2016: the
Air Management division, which includes the Heating,
Ventilation & Air Conditioning (HVAC) and Air Quality
& Home Solutions (AQH) businesses; the Security
& Smart Technology (SST) division, comprising the
Nortek Security & Control (NSC), Core Brands and
GTO businesses; and the Ergonomics division, which
comprises the Ergotron business. Energy is the fourth
division and includes the Brush businesses from our
FKI acquisition in 2008.
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Melrose Industries PLC Annual Report 2017 05
“ 2017 has been another highly successful year
for Melrose, as Nortek has continued its strong
performance, with improvements made
across all three divisions during the year.”
Simon Peckham, Chief Executive
product profitability review has led not only
to the exiting of approximately 12% of low
margin divisional sales, but has also better
informed their approach to tendering.
Free from the distraction of the loss-
making European business of Best S.p.A.,
which was sold in July 2017, AQH is part
way through optimising a previously
fragmented production footprint, including
a site consolidation in Canada and
increased production at the Hartford,
US headquarters, made possible by an
ongoing £16 million upgrade investment.
An in-depth product portfolio review and
accelerated R&D investment has supported
the continued refreshing of the product
range, with a number of new product
launches due in 2018.
The consolidation of NSC, Core Brands
and GTO businesses under one Security
& Smart Technology management team
has refocused the business on profitable
channels, improving the product mix to
take advantage of customer changes
in the market. This has been supported
by significant investment in tooling for
new products.
Already a high margin business on
acquisition, Melrose has supported
Ergotron’s expansion projects such as
the growth in e-commerce and in the
European and Asia Pacific markets,
while restructuring its US production
facility along with further development
of Ergotron’s market leading ‘WorkFit’
and medical cart products.
As previously announced, due to significant
structural changes to the global gas turbine
market caused by worldwide environmental
policy, Brush commenced consultations
with employees in relation to implementing
a restructuring plan for its Turbogenerator
business as described in greater detail on
page 31.
5.5
percentage point improvement
in underlying(1) operating
margins at Nortek in the first
full year of ownership
The Board continues to be fully committed
to supporting Brush and its management
team in emerging from these adverse
market conditions so as to be positioned
to have the best possible long-term future.
Outlook
The benefit from ongoing investment yet
to fully materialise and the encouraging
second half sales momentum in Nortek,
balanced by the effect of exchange rates,
position the Group well for 2018 and
beyond, without taking future acquisition
opportunities into account.
Simon Peckham
Chief Executive
20 February 2018
Strategic ReportMelrose Industries PLC Annual Report 2017 06
Market overview
This section details the market trends and external factors
affecting the growth of each of Melrose’s divisions and
explores how they are responding to those trends and factors.
Air Management
Nortek Global HVAC
Market trends
• The prevalence of mega trends as shown
in the diagram below, which is impacting
HVAC’s customers and therefore informing
its growth platforms and technological
investments.
• Convergence of smart devices, artificial
intelligence, virtual reality and ubiquitous data
means that there will be 50 billion connected
devices by 2020, high performance
computing and new entrants into the space.
• Energy efficiency targets are increasing
globally with a commitment on 43%
reductions worldwide resulting in an increase
in demand for energy efficient products.
• Two thirds of the world’s population by 2050
in cities, 90 trillion in urban investment,
backlog of deferred maintenance and
increase in renovations and retrofits.
• Increased demand for healthcare and
understanding the importance of air quality.
Market mega trends
Digitisation
Convergence of smart devices,
artificial intelligence, virtual
reality and ubiquitous data.
Energy
42% energy use in buildings,
53% increase in demand by
2035, optimisation.
Business response
• Focus on providing new innovative products
and solutions that help address many of
the trends related to sustainability, energy
efficiency, life cycle technology costs and
quality environments where people work
and live.
• Diversification of portfolio of businesses
in the coming years.
• HVAC’s product suite can help alleviate
concerns related to energy, water,
sustainability and reliability in a data centre.
• Best in class products in ensuring clean
room certification and healthcare solutions.
Implications:
• 50 billion connected devices by 2020.
• Data centre infrastructure.
• High performance computing.
• New entrants into space.
Implications:
• Power and water usage effectiveness
performance data centre.
• Energy efficient products.
• Control and optimisation.
• Innovation and speed.
Legislative &
regulatory
Targets are increasing
globally, commitment on
43% reductions worldwide,
increased carbon emissions
and infections in healthcare.
Implications:
• Standards driving product performance
and design, energy related products and
seasonal energy efficiency.
• Requirements by governments.
• Healthcare design and infection control technologies.
Demographics
Surging middle class and
an ageing world, transition
from baby boomers to
millennials, changing racial
demographics.
Implications:
• Increased demand for productivity, comfort,
and efficiency (work, home, play).
• Shifting demands in customers and channel,
especially in cities.
• Talent and workforce shortage.
• Impact on Healthcare and Cleansuite.
Urbanisation
2/3 of population by 2050
in cities, 90 trillion in urban
investment, backlog of
deferred maintenance
and increase in renovations
& retrofits.
Implications:
• Opportunity to drive retrofit business
and services.
• New innovative products.
• New competitors and business models.
• Channel expansion.
AQH
Market trends
• The housing and remodelling market
forecasted another year of growth. Home
improvement, e-commerce and digital growth
is expected at 15% overall, with Amazon
expecting approximately 30% growth.
• Outlook for the home improvement
industry remains positive, supported by
job gains and income growth, strong
consumer balance sheets and favourable
revolving credit usage.
• Rising home prices should continue to
encourage homeowners to engage in
more discretionary projects in addition to
ongoing maintenance and repair spending.
• Ventilation and air quality in home
construction trends continue to be an
important topic to builders looking to add
differentiation to their customers.
• Indoor air quality products growing rapidly
in Asia.
• Increasing US codes and regulations for
proper airflow and ventilation in newly
built homes.
• Home building market growth and speed
determined by developable land and
labour market. Labour is tight in specific
regions and various trades.
• Omni channel research, shopping, and
purchasing forces disciplined channel
strategy and market awareness.
Business response
• Refocus on the North American markets.
• AQH is expanding its professional
channel sales model to sell and influence
decision makers and builders earlier in
the purchase process.
• The appliance channel is launching a
new line of hoods that will show AQH’s
interchangeable features and product depth.
• There is additional focus and opportunity
in private label sales.
• AQH is revitalising their brands’ websites;
strategic growth investments in e-commerce
channel with plans to grow double digit again
in 2018 after a strong 2017.
• Omni channel shifts and strength in current
professional customers requires channel and
product differentiation as product launches
will accelerate in second half of the 2018.
• Product development plan for 2018 will
result in multiple new product launches
in chimney hoods, supply fans, indoor air
quality wall mounts, expanded air quality
sensing, LED feature expansion and
decorative designs.
Melrose Industries PLC Annual Report 2017 07
Security &
Smart Technology
Market trends
• Dynamic market, with rapidly advancing
technologies, new services entrants,
growth in new business models and
growing global demand.
• Growth in internet of things (IoT) products
and technologies have required traditional
security services to broaden their appeal
from strictly professional options to new
DIY options.
• Technology continues to shift towards
video and audio technology solutions
(including voice control) as well as
strong preferences for analytics to be
more proactive.
• Cloud-based software platforms are
growing in importance as mobile-based
user applications dominate user
requirements for control, security
and monitoring.
• Growing demand for cyber security
reflected in encrypted devices.
• Growth of telecommunication, cable
companies and consumer technology
companies entering the business and
offering lower cost options for traditional
video and audio content management.
• Software becoming a primary
technological requirement.
Business response
• The business is transforming its
engineering base from predominantly
hardware to integrated solutions with
both hardware and software.
• Focused attention on developing more
intellectual property to strengthen its
position in the market.
• Restructuring of product management
and engineering organisations to add
more software capabilities and leverage
IoT technologies across the business
providing its customers with more
services. Increased capabilities in security,
safety, control, automation and audio &
video management.
• The business has begun partnering with
companies that have analytics that can be
used to improve its software platform as
well as launched encrypted sensors that
address the concern for better security.
• Restructure of international product
management and sales efforts through
the combination of the businesses to
provide greater focus and speed for
international sales opportunities.
Ergonomics
Energy
Market trends
• Relevant market segments are
underpinned by strong technology
and wellness trends.
• Electronic medical records are well
established in the US and many
other countries.
• Digital learning in education and corporate
wellness initiatives drive the need for
sit-stand workstations, student desks,
and laptop charging carts.
• Preparatory design is a rapidly growing
market as large healthcare and
electronic device manufacturers seek
to consolidate into global design and
manufacturing partners.
Business response
• Migration from strength in the healthcare
cart market to product development in
adjacent spaces such as mobile device
solutions and medication delivery.
• Development of superior ergonomic
solutions for the sit-stand workstation
market and also driving e-commerce sales
and expanding into the furniture channel.
• Facilities in both China and the US provide
the flexibility to build charging carts
cost-efficiently.
• Build on key strength in medical cart
sector with an aggressive sales initiative
delivering a strong order pipeline.
• Development of a digital marketing
campaign and launch of e-commerce
website to drive brand awareness.
• Leverage strengths and features from
previous offering to enhance broader
spectrum of product.
Market trends
• Renewables are forecast to account for
almost two thirds of the overall growth in
the installed generation capacity to 2040.
• Demand for gas fired electricity generation
impacted by strong growth in the
renewable energy sector, which has
significantly impacted the gas turbine
market with orders running more than
60% below the peak level of 2011.
• Correlation between economic growth
and energy consumption weakening
due to greater environmental awareness,
energy conservation and efficiency
improvements.
• Low prices/high supply of oil in recent
years have led to the cancellation and/or
deferral of many investment projects and
activity in the available oil and gas sector.
• Excess production capacity leading to
integrated customers in-sourcing
generator manufacturing.
• For Switchgear and Transformers,
electrification in developing markets,
increased investment in rail and tram
infrastructure and regulatory strategies
favouring asset upgrade over replacement,
present growth opportunities.
Business response
• Intention to concentrate European
turbogenerator manufacturing activity
in Plzenˇ (Czech Republic) and the closure
of generator manufacturing activity in
both Loughborough (UK) and Ridderkerk
(Netherlands).
• Organisational changes implemented to
support geographic expansion in both the
Switchgear and Transformers businesses
and the Aftermarket organisation were
realigned to take advantage of potential
asset extension or upgrade opportunities
in all businesses.
• Brush continues to invest in product
development across all of its businesses
enabling it to launch several innovative
new products in Generators, Switchgear
& HGI during 2018.
• Product enhancements are ongoing
to broaden Brush’s product offering to
support rail switchgear asset upgrade.
Strategic ReportMelrose Industries PLC Annual Report 2017
08
Our strategy and business model
Our aim
Melrose aims to acquire high-quality
manufacturing businesses with strong
fundamentals and the potential for
significant development and improvement
under Melrose management.
Our objective
Through investing in businesses, changing
management focus and operational
improvements, Melrose seeks to increase
and realise the value in such businesses
at the appropriate time and to return the
proceeds to shareholders.
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Buy
Improve
• Good manufacturing businesses
• Free management from
• Drive operational improvements.
whose performance can be improved.
bureaucratic central structures.
• Use low (public market) leverage.
• Change management focus,
• Melrose management are substantial
incentivise well.
equity investors.
• Set strategy and targets and
sign off investments.
• Invest in the business.
• Focus on profitability and
operating cash generation – not
growth for the sake of growth.
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Inputs
Industry
expertise
Highly experienced
management team
Strong track record
Operational
efficiency
Effective
governance
Businesses under improvement
Investment into the businesses
Value creation model
Further investment in the businesses
to improve operations(1)
39%
100%
Equity raised
to acquire
businesses
Reinvestment
Margin growth
Good manufacturing
businesses whose
previous potential
was constrained
by leverage.
Sales growth
Good demand drivers
potentially suggest
more than average
top line growth.
Melrose Industries PLC Annual Report 2017
09
Air Management
HVAC p.10
AQH p.12
Security & Smart Technology
p.14
Ergonomics
p.16
Energy
p.17
Sell
• Commercially choose the right
time to sell, often between
3-5 years but flexible.
• Return value to shareholders
from significant disposals.
The Melrose philosophy
The improvements made by Melrose vary depending on the needs of the
business but the common theme for all businesses is the implementation
of the Melrose philosophy:
1
Giving
ownership to
the divisions.
2
Appropriately
incentivising
the management
teams.
3
Freeing
businesses
from central
bureaucracy.
4
Quick
decision
making.
5
Ready access
to funds for capital
expenditure, R&D
and expansion
projects.
Value creation
Outputs
Value creation model
How has Melrose created value?(1)
Multiple expansion
Multiple expansion is
never assumed, but
has been achieved
on all previous deals
(on average +30%)
as the businesses
have been improved.
Shareholder investment and gain
(figures up to 31 December 2017):
Average annual return since first acquisition
25%
Average return on equity across all businesses sold
2.7x
Shareholder value created to date
£4.8bn
Selling for a higher multiple than paid
Cash generation
Sales growth
Margin growth
(1)
In respect of the McKechnie, Dynacast,
FKI and Elster acquisitions.
Cash generation
Cash flows have been
significantly improved.
32%
16%
4%
48%
Reinvestment
Investment in research and development
in last five years
£230m
equal to 4% of sales
Capital expenditure in last five years
£250m
Strategic ReportMelrose Industries PLC Annual Report 2017
10
Strategy in action
Improve
Air Management
Each of the HVAC and AQH businesses had been
impacted by the capital constraints of Nortek, Inc.
prior to acquisition by Melrose. This had restricted
investment and resulted in a loss of focus without
coherent business strategies.
£21m
capital investment
into the production
facilities
HVAC
In addition to the underinvestment,
Melrose inherited a business split
between two management teams,
overseeing operations that were
further fragmented, as a result of a
lack of integration following previous
acquisitions. Despite some strong
brands, the business lacked
direction and vision for the future.
Melrose immediately consolidated the Nortek Air
Solutions (NAS), Residential and Light Commercial
businesses under one management team in St Louis,
Missouri, closing duplicate sites and administrative
functions. Further work was required to overcome
the localised fragmentation. A targeted £21m capital
investment into the production facilities, warehousing
systems and quality management processes
reinforced a fundamental culture change which
was made possible by clarity of strategy and
improved financial visibility.
A significant R&D investment was made in the
technology centre in Saskatoon, Canada, which
unlocked a breakthrough in the data centre climate
management sector and put the business at the
heart of major customer development plans.
Melrose Industries PLC Annual Report 2017 11
Strategic ReportMelrose Industries PLC Annual Report 2017 12
Strategy in action
Improve
Melrose Industries PLC Annual Report 2017 13
£16m
capital investment in
the manufacturing and
warehousing facilities
at their Hartford
headquarters
AQH
AQH had market leading brands but was steadily
losing market share as the underinvestment had
made it slow and unresponsive, resulting in poor
customer service and a tired product range.
The Melrose strategy review with management
highlighted that the business needed to refocus
on its core strengths, rationalise its production
footprint and invest heavily in three main areas:
production to drive efficiency; productivity and
quality; and new product development to regain
initiative with customers and improve customer service.
The first step was to change the culture through
fresh leadership and a new CEO with relevant large
retail customer experience. Having freed the business
from the distraction of the Nortek head office, Melrose
also sold AQH’s loss-making European business
Best S.p.A. to ensure focus remained on its core
North American markets.
AQH then set about optimising its production
footprint. This included a £5.6m site consolidation
in Canada and a £16m capital investment at their
Hartford headquarters focusing on improvements
in productivity, efficiency and quality measures
and increasing automation, which included the
consolidation of US warehousing and distribution
into the Hartford headquarters.
This is addressing the issue of inconsistent customer
service and having a positive effect on AQH’s ‘On Time
and Complete’ delivery rates. Investment in new
product development has increased the rate of
refreshment of the product offering and the launch
of the Alliance range is the largest in ten years, and
the start of the new pipeline.
Strategic ReportMelrose Industries PLC Annual Report 2017 14
Strategy in action
Improve
Security & Smart Technology
Previous indecision at Nortek
corporate level had meant the NSC,
Core Brands and GTO businesses
were separated prior to our
acquisition and lacked scale.
Although the business had good technology, it was
saddled with duplicative costs and in the case of GTO,
distracted by material legal action, meaning the division
was disjointed and underperforming.
With a high degree of cross over in markets, platforms
and customers, each of the businesses had significant
contributions to make to the others, together with
significant associated back office consolidation savings.
Melrose consolidated all three businesses under
one management team, which is currently moving
to a new headquarters in Carlsbad, California.
This move involves a capital investment to upgrade
the divisional R&D capabilities, as well as investing
significantly in new product development. Non core
and underperforming parts of the business were
closed and the warehousing was consolidated as
control was handed back to the divisions, resulting
in $4m of cost savings, which improved flow and
customer service. Significant operational improvements
were implemented in the Asian production facility
including LEAN and Kaizan projects, enabling the
reversal of previous production outsourcing decisions.
Finally, the product development pipeline received heavy
investment to differentiate itself alongside significant
customer change as well as leverage premium features
across the different product platforms.
Melrose Industries PLC Annual Report 2017 15
£4.5m
invested in software
and hardware product
development for new
panel and accessory
launches
Strategic ReportMelrose Industries PLC Annual Report 2017 16
Strategy in action
Improve
£4m
Tooling investment
commitment to
enhance their
product portfolio
Ergonomics
Although already a high margin
business on acquisition, and
well regarded in the previous
Nortek structure, Ergotron had
nonetheless suffered from the
same capital constraints as
the other Nortek businesses.
Therefore, the Ergotron improvement plan, which
was different from the other Nortek businesses,
focused on supporting the expansion and leverage
of their premier product range, including a £4 million
tooling investment commitment to enhance their
portfolio. Despite some initial teething problems
relating to the decentralisation, the business is already
seeing the benefits of our investment in e-commerce
and their digital platform, as well as the growth of the
European and Asia Pacific markets.
Melrose Industries PLC Annual Report 2017 Strategy in action
Reshape
17
Energy
Brush is a high-quality
turbogenerator, switchgear,
transformer and
aftermarket business.
It has been a part of the Melrose Group for almost
ten years and has received significant investment in
R&D, site expansion, new product development and
operational improvements during that time to ensure
it was well placed to serve its markets.
Unfortunately, the most important of those markets –
the global gas turbine market – has suffered a
severe structural change due to the rise in renewables.
Demand for gas turbines has fallen over 60% from
the peak levels in 2011 and this has been reflected
in a similar fall in turbogenerator volumes.
As a result, and as announced on 1 February 2018,
Brush has commenced employee consultations in
relation to the restructuring at the turbogenerator
production sites in the UK and Netherlands. Once this
restructuring is complete Brush will have a well invested
2-pole and 4-pole turbogenerator production facility
in Plzenˇ , Czech Republic, well equipped to cope
with any increased OEM demand and complemented
by aftermarket facilities in the US, UK and Europe.
Brush is also investing in the next generation of its
product ranges across the business, with the uprated
turbogenerator trailer set being qualified this year
and the Quantum switchgear range providing a
major upgrade on its Eclipse project.
Strategic ReportMelrose Industries PLC Annual Report 2017 18
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 here. Additional
business level KPIs are also used, which are relevant
to their particular circumstances.
I
s Underlying(1) diluted
P
K
earnings per share
9.8p
Underlying(1)
operating profit
Net debt to underlying(1)
EBITDA(4)
£278.4m
1.9x
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2015
3.2p (2)
2015
£24.8m
2015
n/a(5)
2016
2017
4.4p (proforma(3) 6.4p)
9.8p
2016
2017
£104.1m (proforma(3) £188.0m)
2016
£278.4m
2017
1.9x
1.9x
Method of calculation
Group underlying(1) profit after
tax, attributable to owners of
the parent of businesses in
existence during the year ended
31 December 2017, divided
by the related diluted number
of shares in issue.
Strategic objective
To create consistent
and long-term value
for shareholders.
Method of calculation
Underlying(1) operating profit
for the businesses in existence
during the year ended
31 December 2017.
Method of calculation
Net debt at average exchange
rates divided by underlying(1)
EBITDA(4) for existing
businesses at each year end.
Strategic objective
To improve profitability
of Group operations.
Strategic objective
To ensure the Group has
suitable amounts of debt
and remains within its
banking covenants.
Health and safety
Method of calculation
A variety of different health
and safety KPIs are used by
the businesses owned by
the Group from time to time,
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
The Group’s current businesses
measure three key health and
safety KPIs:
Major accident
frequency rate:
Records the number of lost
time accidents that have
resulted in more than three
days off work (defined as
‘major’ accidents), per
200,000 hours worked:
2015
2016
2017
0.7
0.8
1.5
Accident frequency rate:
Records the number of all
lost time accidents, both
major and minor, per
200,000 hours worked:
2015
2016
2017
1.9
2.2
1.3
Accident severity rate:
Records the average number
of days an employee takes
off work following an accident
at work:
2015
2016
2017
18.5
22.5
16.1
The Nortek businesses currently
account for almost 90% of
the Melrose Group and were
acquired in August 2016.
Therefore, the KPIs for 2015 and
most of 2016 relate to a period
when the businesses were
not owned by Melrose, but
the figures have been included
for comparison purposes.
Melrose Industries PLC Annual Report 2017
19
Risk management
p.42
Risks and uncertainties
p.44
Underlying(1) profit conversion
to cash percentage
Underlying(1) operating
profit margin
95%
13.3%
Interest cover
19.6x
Final dividend
per share
2.8p
2015
2016
2017
65%
123%
95%
2015
2016
2017
9.5%
11.7% (proforma(3) 9.1%)
13.3%
2015
2016
2017
15.3x
2015
0.5p(2)
20.7x
19.6x
2016
2017
1.9p
2.8p
Method of calculation
Percentage of underlying(1)
EBITDA(4) conversion to cash for
businesses in existence during
the year ended 31 December
2017, pre capital expenditure.
Method of calculation
Underlying(1) operating profit
as a percentage of revenue,
for the businesses in existence
during the year ended
31 December 2017.
Strategic objective
To improve profitability
of Group operations.
Method of calculation
Underlying(1) EBITDA(4) as a
multiple of interest payable on
bank loans and overdrafts for
the Group during each year.
Strategic objective
To ensure the Group has
sufficient profitability to
meet the interest cost
of debt and remain within
its banking covenants.
Strategic objective
To ensure businesses are
suitably cash generative in
order to have adequate cash
reserves for the effective
running of the Group and for
significant capital investment
where required.
The figures demonstrate a
decrease in 2017, principally
due to investment in health and
safety initiatives at the Nortek
businesses. On joining the
Melrose Group in 2016 a full
review was conducted and
improvements implemented,
and health and safety remains
a key focus for the businesses.
Further information in relation
to the various health and safety
initiatives undertaken by the
Group’s businesses during
2017 can be found within the
Corporate Social Responsibility
Report on pages 50 to 57.
Environment and
energy usage
Method of calculation
Due to the decentralised nature
of the Group and differing
operations of businesses which
the Company may acquire,
there are no standardised
environmental KPIs used
throughout the Group. A range
of environmental measures
are utilised, including energy
consumption, CO2 emissions,
water consumption, water
contamination, waste
disposal, solid and liquid
waste generation, recycling
and volatile organic
compound emissions.
Strategic objective
Melrose fully understands
the importance of the Group’s
environmental responsibilities
and is committed to ensuring
that operations have a minimum
possible adverse effect on
the environment.
Performance
Information in relation to the
various environmental initiatives
undertaken by the Group’s
business divisions during
2017 can be found within the
Corporate Social Responsibility
Report on pages 54 to 55. The
Group is required to disclose
greenhouse gas emissions data
for the year ended 31 December
2017. Such data can be found
within the Corporate Social
Responsibility Report on
page 55.
Method of calculation
Amount declared as payable
by way of dividends in terms
of pence per share.
Strategic objective
To operate a progressive
dividend policy whenever
the financial position of the
Company, in the opinion of the
Board, justifies the payment.
For discussions on the
dividend policy going forward,
please refer to the Chairman’s
statement on page 2.
Other non-financial KPIs
Due to the diverse nature
of the Group, each business
acquired by the Group 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.
(1) Considered by the Board to be a key measure of performance. A reconciliation of statutory profit/(loss) to underlying profit is given in the Finance Director’s review on page 32.
(2) 2015 has been adjusted by a bonus factor of 18.8% related to the Rights Issue completed in August 2016.
(3) Assuming a full year’s ownership of Nortek in 2016, as explained in the Finance Director’s review.
(4) Underlying(1) operating profit before depreciation, and amortisation of computer software and development costs.
(5) All external debt had been repaid at 31 December 2015.
Strategic ReportMelrose Industries PLC Annual Report 2017 20
Performance Review
Divisional review
Air Management
Security & Smart Technology
Ergonomics
Energy
Finance Director’s review
Longer-term viability statement
Risk management
Risks and uncertainties
Corporate Social Responsibility
22
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26
28
30
32
41
42
44
50
Melrose is not a passive investor
in the businesses it acquires.
The leadership team has a hands-
on relationship with each acquired
business and work closely with
them to develop long-term strategic
plans, as well as having regular
input on restructuring decisions,
capital expenditure and working
capital management.
Melrose Industries PLC Annual Report 2017 21
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Strategic ReportMelrose Industries PLC Annual Report 2017
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Divisional review
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Melrose Industries PLC Annual Report 2017
HVAC
www.nortekair.com
The Air Management division is
the largest in the Melrose Group.
It comprises the HVAC business
based in St. Louis, Missouri and AQH,
headquartered in Hartford, Wisconsin.
Proportion of total revenue
56%
23
2017 also heralded a refocus by the
businesses on customers to materially
improve service levels, including in one
instance a 44% improvement in on-time
delivery rates and the launch of a new
account management programme. This
will enable the business and customers
alike to benefit from access to combined
manufacturing capabilities, new product
pipelines, expanded engineering support
and distinctive innovation roadmaps,
thereby addressing the market need for
smart, energy efficient and sustainable
solutions for buildings, homes and cities,
and creating opportunities for customers
to cross-sell multiple products.
This refocus on customers also involved
a comprehensive technology roadmap
and product profitability review, resulting
in the exit of 12% of low margin divisional
sales and enabling HVAC to make material
and targeted investments in product
development and innovation. This included
funding the expansion of the CLEANSUITE®
product family, expansion and new
breakthrough technologies in data centre
cooling and high-performance computing,
expanding and updating the Residential
product portfolio and leveraging sales
synergies between its Light Commercial
and NAS product lines.
The key to this transformation has been a
change in culture throughout the business
to reinforce employee engagement,
involvement and ownership, and provide
the foundation for the next stage of
improvements in 2018 and beyond.
Outlook
Having invested heavily to improve
performance and overcome operational
issues and complexity while unifying
the culture, HVAC has progressed from
transforming the businesses to driving
profitable growth. In 2018, the business
will seek to capitalise on its distinctive
capabilities and strong market positions
to continue to grow and improve.
Consolidation of the NAS, Residential
and Light Commercial businesses
under one HVAC management team
has removed unnecessary complexity
in its business structure, product
portfolios and cost base.
This has freed the business up to make
investments of more than £12 million across
its NAS manufacturing base which enabled
HVAC to increase the capacity of its clean
room, premium air handler and healthcare
operating room production capabilities,
as well as upgrade to next generation
plant and equipment and expand its two
Canadian plants. HVAC also invested
£9 million in new machinery and updated
technologies for its Residential and Light
Commercial facilities to drive utilisation and
quality improvements.
These investments have been bolstered
by the implementation of Value Analysis/
Value Engineering (VAVE), LEAN, ISO
and other quality processes in the facilities
to drive process and manufacturing,
quality, productivity and accountability.
A warehouse management system (Design
for Manufacturing Assembly and Quality)
and operational finance and costing tools
have provided better visibility on its sales
pipeline, logistics and costings.
In addition, inventory efficiency drives and
supply chain initiatives to improve working
capital have been very successful. There
have also been significant improvements
in safety and quality, with recordable injury
rate and warranty costs falling by 47% and
20% respectively in 2017, with continued
improvement expected.
Strategic ReportMelrose Industries PLC Annual Report 2017
24
Divisional review
Continued
AQH has developed a robust product
development pipeline to strengthen its
leadership position in North America. It also
completed the launch of the Alliance range
hood platform in 2017, which was the largest
new product initiative in over ten years and
demonstrates their interchangeable features
and product depth.
With the loss-making European business
of Best S.p.A. being sold in July, the
business refocused its attention on its
North American markets. The business is
also expanding its professional channel
sales model to sell and influence decision
makers and builders earlier in the purchase
process. The retail business continues to
be competitive and will receive investment
in further innovation, programming and
promotions during 2018.
Outlook
AQH is in the midst of a fundamental
improvement to its operational capabilities,
restructuring its product offering, materially
improving its service levels and revitalising
its brand presence. These ongoing
improvements, the strength of professional
customer relationships and the acceleration
of new product launches in the second half
of 2018, means the business is well
positioned for further improvement this year.
£16m
capital investment in
the manufacturing and
warehousing facilities
at their Hartford headquarters
Air Quality & Home Solutions
www.broan-nutone.com
AQH is a leading manufacturer of
ventilation products for the professional
remodelling and replacement market,
residential new construction market
and DIY market.
It supplies to distributors and dealers of
electrical and lighting products, kitchen
and bathroom dealers, retail home centres
and private label customers from its four
manufacturing locations around the world.
AQH enjoys a leading market share and
installed base in US residential ventilation
fans and range hoods.
AQH had a very productive 2017 as it
reversed a recent history of underinvestment
to address a number of operational
challenges. Supported by significant
Melrose investment, the business undertook
a number of operational improvement
projects, including a £16 million upgrade to
the production facility at its headquarters in
Hartford, Wisconsin, a consolidation of its
Canadian footprint and US warehousing,
and substantial automation, efficiency and
quality improvement programmes.
New technology, product launches and
promotions by competitors had previously
taken advantage and chipped away at AQH’s
strong market presence. The appointment
of a new CEO with substantial large retail
customer experience is reversing this trend
through production upgrades, improved
channel strategy, a refresh of the new
product development schedule and a
refocus of the management team on core
product categories.
Melrose Industries PLC Annual Report 2017 25
Strategic ReportMelrose Industries PLC Annual Report 2017 26
Divisional review
Continued
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Melrose Industries PLC Annual Report 2017
Security & Smart
Technology
www.nortekcontrol.com
www.corebrands.com
www.gtoaccess.com
Proportion of total revenue
21%
27
The division has launched a number
of new, good margin, high technology
additions to its product range, including
the 2GIG® Vario Hybrid Security System
which adds wireless connectivity to a
hardwired security and home control
solution, as well as the 2GIG® Rely DIY
panel which allows service providers to
enter the renters market. It has invested
in the next generation smart garage door
and gate operators equipped with full
inter-connectivity, as well as additions to
its premium ELAN home control system,
which streamlines management of lighting,
security, audio, video and other aspects
of the connected home to a single device.
In addition to improved product
development, SST continued a controlled
expansion of its international sales structure
through entry into strategic arrangements
with key partners in Europe, the Middle
East and Latin America.
In addition to the integration of the three
businesses, which allowed the division to
leverage its management, systems and
engineering capabilities, SST continues a
strong focus on efficiency programmes, such
as factory investment and improvements,
the restructure of distribution and logistics
arrangements, and efforts to reduce product
costs through improvements in its supply
chain management.
Outlook
The controlled broadening of its product
offering into the smart ecosystem and
sensor markets has allowed SST to explore
the possibilities in the growing IoT market,
which is linked to its traditional security
business. We expect this trend to continue
in 2018 and, following the consolidation,
the division has a clear strategy that means
it is well positioned to take advantage of
these changing market developments.
®
The SST division comprises the
Nortek Security and Control, Core
Brands and GTO Access Systems
(GTO) businesses. The decision was
taken to consolidate these businesses
under one management team, which
is due to move into its brand new
integrated office in Carlsbad, California
in April 2018.
SST is one of the world’s leading
developers and manufacturers of security,
home automation and access control
technologies for the residential and
commercial markets, together with audio
visual equipment for the residential audio
video and professional video markets. It has
expertise in the design and manufacture
of wireless connectivity devices and strong
brand presence in professional security,
integrator and custom installer channels
as well as relationships with top resellers.
The division operates in a rapidly evolving
market in which consumers are increasingly
demanding greater focus on software
and connectivity from manufacturers
and their service provider partners, as
they embrace the possibilities of the IoT.
In response, under Melrose ownership,
the division has improved and accelerated
its product development processes to
increase speed to market and service
options for partners, as well as improving
its operating efficiency to eliminate
complexity and lower overall costs.
SST is utilising its increased R&D
investment and consolidating its
engineering and product development
capabilities to enable increased leverage
of software and hardware product
platforms, thereby increasing speed
to market and overall flexibility. This is
ensuring it gains the maximum benefit
for its increased R&D investment.
Strategic ReportMelrose Industries PLC Annual Report 2017
28
Divisional review
Continued
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Melrose Industries PLC Annual Report 2017 Ergonomics
www.ergotron.com
Proportion of total revenue
13%
29
The 2017 results were impacted by a
disrupted transition to a new warehousing
partner in the US. This issue has been
resolved and the 2018 outlook is strong.
Competitive pressures in the sit-stand desk
market impacted growth in Ergotron’s
premier WorkFit brand, while healthcare
and OmniMount remained robust, and its
ODM new business revenue continued to
grow. Continual refreshment of the product
portfolio remains the key to maintaining
the business’s market-leading position.
Melrose has supported its expansion
projects with approximately $1 million of
additional revenue expenditure as it looks
to build momentum in e-commerce with
a new online portal, as well as to pursue
markets in Europe and Asia Pacific.
The drop in profits in 2017 is mostly as a
result of a one-off credit relating to a legal
settlement received prior to our ownership
in 2016.
Outlook
With the 2017 operational issues resolved,
Ergotron expects its core businesses to
perform well in 2018. Several key business
growth initiatives are in place that will
contribute revenue in 2018, including a
recently launched e-commerce site, an
expanded European sales team, and
expansion into the office furniture dealer
channel. New product development is
accelerating focus on an expanded product
portfolio in healthcare, sit-stand desks,
and OfficePro, a brand focused on the
office dealer channel, and the business
is positive in its outlook for 2018.
The Ergonomics division comprises
Ergotron, a leading manufacturer and
distributor of innovative ergonomic
technology workstations including
wall mounts, carts, arms and stands,
headquartered in Minneapolis, US.
The business is organised into three
segments: Commercial, Original
Design and Manufacture (ODM),
and Consumer.
Ergotron’s Commercial business is a top
global manufacturer of products such
as electronic medical records carts and
workstations for hospitals, sit-stand
desks and technology charging carts
for education, and ergonomic arms and
sit-stand desks for corporate offices. The
ODM business manufactures ergonomic
and charging products for top technology
industry brands and is an emerging
leader in healthcare equipment carts for
ultrasound and other specialty healthcare
applications. The Consumer business
sells ergonomic equipment through retail
channels under the brands OmniMount
and Ergotronhome.
Ergotron retains a strong market position
in most of its key markets due to expertise
in the design and manufacture of
ergonomic technology workstations and
computer mounts, utilising its Constant
Force counterbalance technology. A strong
supply chain enables Ergotron to leverage
component suppliers from the global
computer industry, producing high-quality,
affordable products.
Strategic ReportMelrose Industries PLC Annual Report 2017
30
Divisional review
Continued
y
g
r
e
n
E
Melrose Industries PLC Annual Report 2017 Energy
www.brush.eu
Proportion of total revenue
10%
31
The Energy division comprises: Brush
Turbogenerators (Generators), which
manufactures electricity generating
equipment for gas turbines; Brush
Transformers (Transformers), which
designs and manufactures systems
and power transformers; Hawker
Siddeley Switchgear (Switchgear), a
medium voltage AC switchgear and low
voltage DC switchgear manufacturer;
Harrington Generators International
Limited (HGI), a specialist UK-based
small generator manufacturer; and
Brush Aftermarket (Aftermarket),
which provides comprehensive
support for customers throughout
the manufactured product’s life.
Brush’s Generator business supplies
the global gas turbine market, which
had enjoyed a long period of growth.
This was predicted to continue and, as
a result, the business received significant
investment under Melrose ownership,
including the acquisition of the US
aftermarket business Generator & Motor
Services for £8 million in 2010 and its
subsequent expansion to install a £6 million
balancing pit, construction of the new
£30 million turbogenerator factory in
Changshu, China, the over £11 million
upgrade of plant and equipment at the
Loughborough facility and a further
£7 million in its Plzenˇ , Czech Republic site.
Unfortunately, the fossil power generation
market experienced large scale disruption
in a very short timescale. The growth
of renewables has caused a substantial
structural change that significantly
impacted the gas turbine market, with
orders falling more than 60% from the
peak levels in 2011. This caused a 43%
reduction in Generator’s unit sales in
2017 alone.
Alongside certain mitigating actions taken
during 2017, Brush conducted a full review
of the Generator business. This culminated
in the announcement on 1 February 2018
of Brush’s intention to restructure its
Generator production footprint, impacting
the sites in Ridderkerk, Netherlands and
Loughborough, UK. Brush has already
closed its Changshu, China site just prior
to year end. This restructure is aimed at
reshaping Generators in light of the reduced
generator volumes and ensuring it is well
positioned for the future. The cash cost of
these restructuring items is estimated to be
£40 million and is expected to be materially
complete by the end of 2018. These
actions are expected to mitigate the
current £12 million annual losses of the
Turbogenerators business and align it
to the new market conditions.
The Transformers and Switchgear
businesses have performed satisfactorily.
Brush has continued to invest in product
development across all of its businesses
putting it in a position to launch several
innovative products in Generators and
Switchgear during 2018, such as the
new generation turbogenerator trailer
set and the Quantum switchgear.
Outlook
Global economic prospects remain
uncertain in Brush’s main markets and we
expect the underlying trading environment
in 2018 to remain very challenging for
Generators. There is some optimism for
Aftermarket performance in 2018 and
Switchgear and Transformers should benefit
from the launch of new products and
geographic market expansion. However,
this is not expected to result in material
upside for the business in the short-term.
Despite the challenges, Brush is taking
the difficult but necessary action to
structurally reduce its cost base and
position the business to the new market
realities. Brush remains a strong business
and these actions will simplify the structure
and increase flexibility and responsiveness
to the market, positioning the business
for 2019 and beyond.
Strategic ReportMelrose Industries PLC Annual Report 2017
32
Finance Director’s review
The statutory IFRS results, which are shown unadjusted on the
face of the Income Statement, are presented below. The underlying
results, which are used as an Alternative Performance Measure
(APM) as described by the European Securities and Markets
Authority (ESMA), are shown below the unadjusted statutory results
and are described in more detail in the glossary to this Annual
Report on pages 152 to 155. Lastly, to improve year-on-year
comparability, a proforma measure is calculated, which presents
the prior year, on a constant currency basis, as if Nortek had been
owned for the full year. All three of these measures are discussed
in this review and their definitions are explained in the glossary to
this Annual Report.
Melrose Group segmental split
The Melrose Group at 31 December 2017 consisted of four
divisions, the Energy division, along with three divisions within
Nortek, namely: the Air Management division, which contains both
the Air Quality & Home Solutions (AQH) business and the Heating,
Ventilation & Air Conditioning (HVAC) business; the Security &
Smart Technology (SST) division; and the Ergonomics division.
Statutory results
The Income Statement shows the unadjusted statutory results
of the Group.
The statutory results for the year ended 31 December 2017 include
revenue of £2,092.2 million (2016: £889.3 million), an operating loss
of £6.9 million (2016: £61.6 million), a statutory loss before tax of
£27.6 million (2016: £69.3 million) and diluted earnings per share
(EPS), being a loss of 1.2p (2016: loss of 2.6p).
A table summarising the statutory results by division is shown in the
segmental note of the financial statements.
The year ended 31 December 2017 was a year of significant
transformation for Melrose, being the first full year of Nortek
ownership and with Brush Turbogenerators experiencing structural
changes in its end markets. Consequently these statutory results
include significant amounts of items which are non-trading in
nature, significant in size, volatile or are non-recurring. These are
defined as non-underlying items. It is Melrose accounting policy
to exclude these items from underlying results and the specific
amounts that fall within these categories in the year are
detailed as follows.
Geoffrey Martin
Group Finance Director
The results for the year ended 31 December
2017 include the first full year of ownership
of Nortek. As a consequence, the results for
the year are not directly comparable to 2016
as the prior year performance includes only
four months of Nortek trading following its
acquisition on 31 August 2016.
Melrose Industries PLC Annual Report 2017 33
Acquisition and disposal costs incurred in the year ended
31 December 2017 totalled £5.8 million (2016: £38.7 million) and
included the costs involved in returning the ordinary shares of the
Company to the Premium List of the London Stock Exchange
following on from the acquisition of Nortek, along with £1.8 million
of committed costs associated with the potential acquisition of
GKN plc. In the year ended 31 December 2016 acquisition and
disposal costs related primarily to the acquisition of Nortek.
These items are excluded from underlying results due to their
non-trading nature.
The charge for the Company’s equity-settled long-term incentive
plan renewed in 2012 (the Incentive Plan (2012)), including its
associated employer’s tax charge, is excluded from underlying
results due to its size and volatility. The shares that would be
issued in respect of the equity-settled Melrose Plan are included
in the calculation of the underlying diluted EPS, which the Board
considers to be a key measure of performance.
Certain items, primarily booked as fair value items on the
acquisition of Nortek, have been settled for a more favourable
amount than first anticipated. The release of any excess fair
value item is shown within non-underlying profit to avoid positively
distorting underlying results.
The net tax credit arising from the new US tax legislation enacted
in December 2017, including an estimated repatriation charge
and changes to closing deferred tax items due to a reduction
in the Federal tax rate from 35% to 21%, has been included as
non-underlying because of its size and one-off nature.
Underlying results
Underlying results are the statutory results excluding non-
underlying items. The underlying measures are used to partly
determine the variable element of remuneration of senior
management throughout the Group and are also in alignment
with performance measures used by certain external stakeholders.
The underlying measures are also one measure used to value
individual businesses as part of the “Buy, Improve, Sell” Melrose
strategy model.
Non-underlying items
In reporting financial information, the Group presents underlying
results, which are not defined or specified under the requirements
of IFRS. The Board considers the underlying results to be a key
APM to monitor how the businesses are performing because this
provides a more meaningful comparison of how the businesses
are managed and measured on a day-to-day basis and achieves
consistency and comparability between reporting periods.
Non-underlying items are defined as those which are significant in
size or volatility or by nature are non-trading or non-recurring, and
any item released to the Income Statement that was previously a
fair value item booked on acquisition.
The following items have been classified as non-underlying in these
financial statements:
An impairment charge totalling £144.7 million in respect of the
carrying value of the assets held within the Brush business.
This charge included £31.1 million in respect of the net assets of
Brush China, which was closed in November 2017, and, following
a review of the non-current assets, included £18.2 million in
respect of fixed assets and £95.4 million in respect of goodwill.
The impairment charge has been excluded from underlying results
due to its one-off nature and size.
The amortisation of intangible assets acquired in business
combinations are excluded from underlying results due to their
non-trading nature and to enable comparison with companies that
grow organically and do not have such a charge. Where intangible
assets are trading in nature, such as computer software and
development costs, the amortisation of these intangible assets
are shown within underlying results.
Restructuring costs and other associated costs arising from
significant strategy changes totalled £35.0 million (2016:
£51.4 million), and included £1.1 million (2016: £nil) of losses
incurred following the announcement of the closure of certain
businesses. Within the Nortek businesses the cost of restructuring
actions taken in the year was £29.1 million (2016: £45.3 million,
of which £31.8 million related to the closure of the Nortek head
office). These actions included the closure of loss-making
operations within the HVAC business, the removal of excess
manufacturing capacity in the AQH business and the consolidation
of NSC, GTO and Core Brands into a single SST division based
in Carlsbad. Restructuring costs also included £5.9 million (2016:
£6.1 million) within the Brush businesses relating to the closure
of the China factory in November 2017 and realigning the cost
base of Brush with the reduced revenue. Restructuring costs
are excluded from underlying results due to their size and non-
trading nature.
Strategic ReportMelrose Industries PLC Annual Report 2017 34
Finance Director’s review
Continued
The underlying results in the year ended 31 December 2017
included an underlying operating profit of £278.4 million (2016:
£104.1 million) and an underlying profit before tax of £257.7 million
(2016: £96.4 million). The following table reconciles the statutory
operating result to underlying operating profit:
The table also presents a constant currency proforma growth after
adjusting revenue for exited sales channels. This measurement of
year-on-year growth is described in more detail in the glossary to
this Annual Report on pages 152 to 155.
Operating loss
Impairment of Brush assets
Amortisation of intangible assets
Restructuring costs
Acquisition and disposal related costs
Removal of one-off uplift in the value of inventory
Equity-settled compensation scheme charges
Release of fair value items
2017
£m
(6.9)
144.7
81.4
35.0
5.8
–
24.2
(5.8)
2016
£m
(61.6)
–
36.3
51.4
38.7
18.2
22.8
(1.7)
Revenue
Nortek(2),(3)
Brush
Continuing Group
2017
Actual
£m
2016
Full year
£m
Proforma(1)
growth
%
1,873.2
1,830.2
219.0
246.4
2,092.2
2,076.6
+2%
-14%
Flat
Underlying operating profit
Nortek(3)
Brush
Continuing Group(4)
284.3
17.5
177.8
32.0
+52%
-47%
278.4
188.0
+40%
Adjustments to statutory operating loss
285.3
165.7
Underlying operating margin
Underlying operating profit
278.4
104.1
The underlying performance of each of the trading divisions is
shown in the segmental note of the financial statements and the
reasons for the performance are discussed in the Chief Executive’s
review. The underlying operating profit in Brush of £17.5 million
included £2.1 million of losses incurred within the Brush China
factory prior to its closure.
Central costs were £23.4 million (2016: £14.2 million), which
included £15.8 million (2016: £14.2 million) of Melrose corporate
costs and £7.6 million (2016: £nil) of costs relating to the Nortek
divisional cash-based long-term incentive plan, which was
introduced during the year.
Proforma Group trading results
The results for 2017 are not directly comparable to 2016 because
the prior year performance includes only four months of Nortek
trading following its acquisition on 31 August 2016.
The table opposite presents a comparative which includes a
proforma measure as if Nortek had been owned for the full year,
converted to IFRS and presented under Melrose accounting
policies. The Nortek full year results for 2016 were audited for the
process of returning Melrose to the Premium List of the London
Stock Exchange. The proforma measure also makes an allowance
for the divisional cash-based long-term incentive plan, finance
costs of the acquisition and uses a consistent tax rate and number
of shares in both years.
Nortek
Brush
15.2%
9.7% +5.5ppts
8.0%
13.0% -5.0ppts
Continuing Group
13.3%
9.1% +4.2ppts
Underlying diluted EPS(5)
9.8p
6.4p
+45%(6)
(1) At constant currency, using 2016 average exchange rates in both 2016 and 2017.
(2) Adjusting revenue growth for exited sales channels.
(3)
Nortek 2016 full year revenue of $2,480.7 million and underlying operating profit of
$241.0 million as reported in the audited financial statements used for the Step Up
to the Premium List of the London Stock Exchange.
Includes the Melrose central costs and an additional divisional LTIP charge of £7.6 million
in 2016 as if Nortek was owned for the full year.
Underlying diluted EPS for 2016 calculated after using the same net finance costs, effective
tax rate and number of shares as for 2017.
(4)
(5)
(6) Growth of 54% using actual average exchange rates for both years.
Profit estimate
On 1 February 2018 a trading update was published which, under
Rule 28 of the City Code on Takeovers and Mergers, was deemed
to include the following profit estimate:
“Nortek trading has been transformed more comprehensively
and faster than envisaged at the time of the acquisition; underlying
operating profits at constant currency are up approximately 50%
compared to last year of $241.0 million and approximately 65%
up on the full year prior to acquisition of $220.1 million.”
A reconciliation of the proforma Nortek underlying operating profit,
at constant currency, is presented in the glossary to this Annual
Report on pages 152 to 155. This shows that Nortek proforma
underlying operating profit was up 52% on 2016 and up 67%
on 2015.
Melrose Industries PLC Annual Report 2017 35
Finance costs and income
The net finance cost in 2017 was £20.7 million (2016: £7.7 million)
and the net interest on external bank loans, overdrafts and cash
balances was £16.0 million (2016: £5.9 million). The year-on-year
increase reflecting that the Group was in a net cash position for
eight months prior to acquiring Nortek on 31 August 2016, after
which it was in a net debt position.
Melrose uses interest rate swaps to fix the majority of the interest
rate exposure on its drawn debt. More detail on these swaps is
given in the finance cost risk management section of this review.
In addition, a £2.3 million (2016: £0.7 million) amortisation charge
relating to the arrangement costs of raising the bank facility was
incurred in 2017.
Also included in net finance costs is a net interest cost on net
pension liabilities of £1.1 million (2016: £0.9 million) and a charge for
the unwinding of discounts on long-term provisions of £1.3 million
(2016: £0.2 million).
Tax
The statutory tax rate for the year ended 31 December 2017 was
13.4% (2016: 43.7%). This is lower than the underlying effective tax
rate due to the deferred tax credit noted below, which is partially
offset by certain non-underlying charges not being deductible for
tax purposes.
The underlying effective tax rate for the full 12 months was 25.9%
(2016: 27.0%). As expected, this rate represents a mixture of profits
arising in the UK at lower tax rates and in the rest of the world at
higher rates, particularly the US with a federal rate of 35%, plus
state taxes.
As announced in January 2018, the tax event with most significance
for the Group this year was the passing of the Tax Cuts and Jobs Act
in the US on 22 December 2017. This changed the US Federal tax
rate at which deferred tax assets and liabilities will reverse in the
future from 35% to 21%, leading to a reassessment of deferred tax
balances and a net non-underlying credit of £26.4 million.
The corporate tax paid during the year was £15.9 million
(2016: £5.9 million). The Melrose Group continues to benefit
from the utilisation of tax losses and other deferred tax assets.
The net deferred tax liability has reduced by £60.5 million to
£19.8 million. This is because the deferred tax liability in respect
of intangible assets was reduced as a result of the US law change
and also because the Group has recognised additional deferred
tax assets in respect of deductions arising from the Incentive Plan
(2012) and the Company’s long-term incentive plan renewed in
2017 (the Incentive Plan (2017)).
Long-term incentive plans
The Melrose Incentive Plan (2012) matured, as expected, on
31 May 2017 and was replaced by the new Incentive Plan (2017),
approved by shareholders, which mirrors the previous plan, except
that the five-year duration of the replacement plan is split between
a three-year performance period and a further two-year holding
period. Directors will be subject to malus and clawback provisions
during the performance period and to clawback provisions for the
duration of the subsequent holding period.
During the year the Remuneration Committee determined that
23,494 options held in respect of the Incentive Plan (2012) should
be withheld by the Company in exchange for an equivalently valued
£115.5 million cash payment being sufficient to allow holders to
meet their income tax and employee national insurance liabilities
in respect of the Incentive Plan (2012).
The remaining 26,506 options were exercised on 30 May 2017
in exchange for 26,506 Incentive Shares (2012), which were issued
on 31 May 2017 and converted into 54,453,914 Melrose ordinary
shares, increasing the total number of shares in issue by 2.9% at
that date to 1,941,200,503.
At the start of the Incentive Plan (2017) the first tranche of options
were granted. For accounting purposes the IFRS 2 charge has
been calculated as if all options over the Incentive Plan (2017) have
been granted on day one because of a common expectation,
established at that date, between employees and the Company
that the remaining options will be allocated annually in two more
equal tranches over the three-year performance period.
The charge to non-underlying profit in respect of the Incentive
Plan (2017) will be £13.3 million per annum (previous Incentive
Plan (2012) £4.0 million), excluding the associated employer’s
tax charge. The increased charge reflects the relative size of the
business at the time of inception of the Incentive Plan (2017)
compared to that at inception of the Incentive Plan (2012).
Earnings per share
In accordance with IAS 33, the statutory basic and diluted EPS
numbers are disclosed on the face of the Income Statement.
In the year ended 31 December 2017 the diluted EPS was a
loss of 1.2p (2016: a loss of 2.6p). There were no discontinued
operations in 2017 or 2016.
The underlying diluted EPS for the year ended 31 December 2017
was 9.8p (2016: proforma of 6.4p), representing a 45% increase
over the proforma calculation, described in the glossary to this
Annual Report on pages 152 to 155, which is largely as a result of
the 52% increase in Nortek underlying operating profits in the year.
Strategic ReportMelrose Industries PLC Annual Report 2017 36
Finance Director’s review
Continued
Cash generation and management
For the year ended 31 December 2017 the profit conversion to
cash pre capital expenditure was 95% (2016: 123%). An analysis
of the cash generation performance for the year is shown in the
table below:
Cash flow from operating and investing activities
(after all costs including tax)
Underlying operating profit
Depreciation(1)
Working capital movement
2017
£m
2016
£m
278.4
104.1
34.7
(16.1)
18.1
28.2
Underlying operating cash flow (pre capex)
297.0
150.4
95% 123%
(48.8)
(30.7)
(17.1)
(8.6)
(4.2)
(10.5)
(147.9)
(48.6)
(31.8)
–
(24.2)
(12.6)
Underlying EBITDA conversion to cash
(pre capex) %
Net capital expenditure
Net interest and net tax paid
Defined benefit pension contributions
Incentive scheme tax related payments
(including employer’s tax)
Restructuring
Net other
Cash flow from operating and investing
activities (after all costs including tax)
Movement in net debt(2)
Opening (net debt)/cash
Acquired net debt with Nortek
Net repayment, on acquisition, of the Nortek debt
Fair value exercise
In accordance with IFRS 3 “Business Combinations”, an extensive
review of the opening Nortek assets, liabilities and accounting
policies commenced following the acquisition in August 2016.
This review was completed in the first half of 2017. In accordance
with IFRS 3, the 31 December 2016 Balance Sheet has been
restated in these financial statements to reflect goodwill decreasing
by £57.7 million, deferred tax liabilities by £63.8 million and
inventory by £1.2 million. Provisions increased by £3.4 million, other
payables by £1.8 million and deferred tax assets by £0.3 million.
Disposal
On 10 August 2017 the disposal of the loss-making Best S.p.A.
operations to Electrolux A.G. was completed. The Best operations
were previously shown within the AQH business, within the Air
Management division. Cash consideration, net of costs, was
£9.2 million which was equal to the net assets that were disposed.
Assets and liabilities
The summary Melrose Group assets and liabilities are shown below:
Fixed assets (tangible, intangible and goodwill)
2,456.5
2,881.2
2017
£m
2016(1)
£m
(15.0)
77.4
Net working capital
£m
£m
(541.5) 2,451.4
Retirement benefit obligations
Provisions
Deferred tax and current tax
– (1,056.5)
–
429.8
Net other
Total
241.0
(17.6)
225.2
(33.4)
(209.8)
(283.0)
(26.2)
13.1
(90.5)
4.8
2,457.0
2,704.3
Cash flow from trading (after all costs including tax)
(15.0)
77.4
(1) Restated to reflect the completion of the acquisition accounting for Nortek.
Amount paid to shareholders
(63.0) (2,394.3)
These assets and liabilities are funded by:
Foreign exchange and other non-cash movements
47.7
(49.3)
Closing net debt
(571.8)
(541.5)
(1)
(2)
Including amortisation of computer software and development costs.
Defined as the net of cash and cash equivalents, external bank borrowings and
finance leases.
The total cash outflow from operating and investing activities
included payments relating to restructuring provisions of
£48.6 million (2016: £24.2 million), net capital expenditure in
the Nortek businesses of £46.3 million, representing 1.8x
depreciation, and £147.9 million of incentive scheme payments
which included associated employer’s tax.
Payments to defined benefit pension schemes in the year ended
31 December 2017 were £4.2 million compared to £10.5 million in
2016. The previous year included £8.8 million early contributions
to the Brush UK Pension Plan following the disposal of the Elster
businesses to Honeywell International Inc. in December 2015.
Net debt
Equity
Total
2017
£m
2016
£m
(571.8)
(541.5)
(1,885.2)
(2,162.8)
(2,457.0)
(2,704.3)
The reduction in net assets included the statutory loss for the
year and primarily related to the adverse foreign exchange
movements on the retranslation of foreign operations of
£133.3 million in the year, along with the dividend payment
to shareholders of £63.0 million.
Melrose Industries PLC Annual Report 2017
37
Goodwill, intangible assets and impairment review
The total value of goodwill as at 31 December 2017 was
£1,432.2 million (31 December 2016: £1,648.3 million) and
intangible assets acquired with business combinations
was £796.7 million (31 December 2016: £950.1 million).
These items are split by division as follows:
31 December 2017
Goodwill
Intangible assets acquired with
business combinations
Nortek
£m
Brush
£m
Total
£m
1,310.2
122.0 1,432.2
734.2
62.5
796.7
Total goodwill and intangible assets
2,044.4
184.5 2,228.9
The goodwill and intangible assets have been tested for
impairment as at 31 December 2017. In accordance with IAS 36
“Impairment of assets” the recoverable amount is assessed as
being the higher of the fair value less costs to sell and the value
in use.
The Board is comfortable that no impairment is required in respect
of the goodwill and intangible assets of Nortek and that there are
no reasonable possible changes in assumptions that would result
in any impairment.
The Group reported on 21 November 2017 that a full review of
the cash generating units of the Energy divisions was underway
following the continued worsening of the market, recent negative
trading statements made by participants in the market sector
and the deferral of Generator orders within Brush. As has been
well-publicised, structural changes caused by worldwide
environmental policy have triggered a fall in volumes in the gas
turbine market of over 60% from its peak in 2011. This in turn
has resulted in Brush’s turbogenerator sales falling. These
circumstances resulted in a reduction in the forecasts of the
Brush business and the communication, in the November trading
statement, that the current order intake by Brush would result
in a low single-digit margin during 2018.
At 31 December 2017 an agreed restructuring plan for the Brush
business had not been publicly announced or communicated to
those affected by the restructure and therefore, in accordance with
IAS 37 “Provisions”, these were not considered to be committed
at that date. The restructuring plans were subsequently announced
on 1 February 2018.
Under IAS 36, the value in use basis for calculating the recoverable
amount prohibits the inclusion of future uncommitted restructuring
plans, whilst the fair value less costs to sell basis of valuation allows
the inclusion of these plans if it is deemed that a market participant
would also restructure. The recent trading announcements by
key players in the market in which Brush operates is considered
to be a good indication that a market participant would restructure
the business. With the restructuring being a material part of
the Brush valuation, this affects the result of the impairment
review considerably.
The recoverable amount of the Brush assets using the fair value
less costs to sell basis was £300 million, which gave a higher
valuation than the value in use basis which was £177.5 million,
which excluded the benefits of the restructuring. Consequently
Brush is valued at £300 million at 31 December 2017 and an
impairment charge of £144.7 million has been recognised in the
year, which included the write down of the Brush China assets
of £31.1 million, following the announcement of its closure in
November 2017, an impairment of certain fixed assets of
£18.2 million and a £95.4 million impairment to goodwill.
Provisions
Total provisions at 31 December 2017 were £209.8 million
(31 December 2016: £283.0 million). Despite the £106.7 million
(2016: £85.6 million) net charge to operating profit in the year,
provisions decreased primarily because of the net utilisation of
the restructuring provision at Nortek, along with the £31.7 million
payment made in the year in respect of the employer related tax
on the Incentive Plan (2012), which matured in the year.
The following table summarises the movement in provisions in
the year:
At 31 December 2016(1)
Net charge to underlying operating profit
Charge to non-underlying operating profit
Release of fair value items to non-underlying operating profit
Spend against provisions
Other (including foreign exchange)
At 31 December 2017
Total
£m
283.0
62.4
48.7
(4.4)
(163.9)
(16.0)
209.8
(1) Restated to reflect the completion of the acquisition accounting for Nortek.
In 2017 there was a net charge to underlying operating profit of
£62.4 million which included the £7.6 million charge for Nortek
divisional cash based long-term incentive plans but mainly related
to warranty, product liability and workers’ compensation type
charges, which are matched by similar cash payments in the year.
The charge to non-underlying operating profit of £48.7 million
included £13.4 million of Melrose equity-settled incentive plan
related costs in respect of employer related tax. The remaining
charge to non-underlying operating profit primarily related to
restructuring items.
Included within other movements in provisions are foreign
exchange movements, the unwind of discounting on sizeable
provisions and the provisions included in the Best S.p.A.
businesses which were disposed of on 10 August 2017(1).
(1) The sale of Best S.p.A. was signed on 6 July 2017 and completed on 10 August 2017.
Strategic ReportMelrose Industries PLC Annual Report 2017 38
Finance Director’s review
Continued
Pensions
At 31 December 2017 the accounting net deficit of the Melrose
Group’s defined benefit pension plans was £17.6 million
(2016: £33.4 million). Total plan assets at 31 December 2017 were
£524.7 million (2016: £522.6 million) and total plan liabilities were
£542.3 million (2016: £556.0 million). The plan assets and liabilities
at 31 December 2017 were split as follows:
Plan liabilities
Plan assets
Net deficit
UK
Plans
£m
US
Plans
£m
(288.5)
(252.6)
283.0
(5.5)
241.1
(11.5)
Other
Plans
£m
(1.2)
0.6
(0.6)
Total
£m
(542.3)
524.7
(17.6)
The net deficit on the UK Plans included a surplus of £8.3 million
(31 December 2016: £17.1 million) for the Brush UK Plan.
The values of the Melrose Group plans were updated at
31 December 2017 by independent actuaries to reflect the
latest key assumptions. A summary of the assumptions used
are shown below:
Discount rate
Inflation (RPI)
2017
UK
%
2.5
3.2
2017
US
%
3.4
n/a
2016
UK
%
2.7
3.3
2016
US
%
3.9
n/a
It is noted that a 0.1 percentage point decrease in the discount
rate would increase the pension liabilities of the Melrose Group by
£8.0 million, or 1%, and a 0.1 percentage point increase to inflation
would increase the liabilities by £3.0 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 £18.3 million, or 3%.
Annual contributions to the Melrose Group defined benefit pension
plans are expected to be approximately £3.2 million in 2018.
Financial risk management
The financial risks the Melrose Group faces have been considered
and policies have been implemented to appropriately deal with
each risk. The most significant financial risks are considered to
be liquidity risk, finance cost risk, exchange rate risk, contract and
warranty risk and commodity cost risk. These are discussed in
turn below.
Liquidity risk management
The Melrose Group’s net debt position at 31 December 2017
was £571.8 million (31 December 2016: £541.5 million).
Melrose has a five-year multi-currency US $1.25 billion committed
bank facility which commenced on 6 July 2016 to assist with the
acquisition of Nortek and consists of a US $350 million term loan
facility and a US $900 million revolving credit facility. Loans drawn
under this facility are guaranteed by Melrose Industries PLC and
certain of its subsidiaries, and there is no security over any of the
Melrose assets in respect of this facility.
The facility has two financial covenants. There is a net debt to
underlying EBITDA (underlying operating profit before depreciation
and amortisation) covenant and an interest cover covenant, both
of which are tested half yearly, each June and December.
The first of these covenants is set at 3.5x leverage for each of the
half yearly measurement dates for the remainder of the term of the
facility. For the year ended 31 December 2017 it was approximately
1.9x (31 December 2016: 1.9x), showing significant headroom
compared to the covenant test.
The interest cover covenant is set at 4.0x throughout the life of the
facility and was 19.6x at 31 December 2017 (31 December 2016:
20.7x), affording comfortable headroom compared to the
covenant test.
At 31 December 2017 the term loan was fully drawn down and the
revolving credit facility was drawn down by US $455 million, split
US $274 million and £134 million. The core currency of Nortek is
the US dollar, and debt is drawn down to protect the Melrose
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 Melrose
Group. These uncommitted facilities have been lightly used.
Cash, deposits and marketable securities amounted to £16.3
million at 31 December 2017 (31 December 2016: £42.1 million) and
are offset against gross debt of £588.1 million (31 December 2016:
£583.6 million) to arrive at the net debt position of £571.8 million
(31 December 2016: £541.5 million). The combination of this cash
and the size of the new facility allows the Directors to consider
that the Melrose Group has sufficient access to liquidity for its
current needs.
The Board takes careful consideration of counterparty risk with
banks when deciding where to place Melrose’s cash on deposit.
Finance cost risk management
The bank margin on the Melrose bank facility depends on the
Melrose Group leverage, and ranges from 0.85% to 2.00%;
as at 31 December 2017 the margin was 1.35% (31 December
2016: 1.35%).
The Melrose Group holds interest rate swap arrangements to fix
the cost of LIBOR. The profile of the interest rate swaps has been
designed to hedge, on average, 70% of the interest exposure on the
projected gross debt as it reduces over the five-year term. Under
the terms of these swap arrangements, the Melrose Group will pay
a weighted average fixed cost of 1.0% up to 31 December 2019,
and 0.9% until the remaining swaps terminate on 6 July 2021.
The interest on the swaps is payable annually in arrears on 1 July.
The bank margin is payable monthly.
Melrose Industries PLC Annual Report 2017 39
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% strengthening
of the US Dollar against Sterling
For every 10% strengthening
of the Chinese Renminbi against Sterling
Increase/(decrease) in
underlying operating profit
£m
31.9
(23.8)
No specific exchange instruments are used to protect against the
translation risk because it is a non-cash risk to the Melrose Group.
However, when the Melrose Group has net debt, the hedge of
having a matching debt facility funding these foreign currency
trading units protects against some of the balance sheet and
banking covenant translation risk.
Lastly, and potentially most significantly for Melrose, exchange
risk 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 or make a capital return
to shareholders. Protection against this risk is considered on a
case-by-case basis.
Contract and warranty risk
The financial risks connected with contracts and warranties, which
include the consideration of commercial, legal and warranty terms
and their duration, are considered carefully by Melrose before
being entered into.
Commodity cost risk management
The cumulative expenditure on commodities is important to the
Melrose Group and the risk of base commodity costs increasing
is mitigated 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. On occasions, Melrose
does enter into financial instruments on commodities when
this is considered to be the most efficient way of protecting
against movements.
Exchange rate risk management
The Melrose Group trades in various countries around the world
and is exposed to many different foreign currencies. The Melrose
Group therefore carries an exchange rate risk that can be
categorised into three types, transaction, translation and disposal
related risk, as described in the paragraphs below. The Board
policy is designed to protect against the majority of the cash risks
but not the non-cash risks.
The most common exchange rate risk is the transaction risk the
Group takes when it invoices a 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.
The Melrose Group’s annual revenue is heavily denominated in US
Dollars, with 82% of revenue being denominated in this currency,
and therefore the largest foreign exchange rate exposure is the
translation risk from changes in the US Dollar exchange rate relative
to Sterling. In addition, the Melrose Group has foreign currency
exposure, the largest being a transactional exchange rate exposure
due to certain Nortek US businesses transacting in the Chinese
Renminbi. The following exchange rates were used in respect of
these two currencies during the year:
US Dollar
2017
2016
CNY
2017
2016
Twelve month
average rate
Four month
average (Nortek
businesses)
1.29
1.36
8.71
8.99
N/A
1.26
N/A
8.56
Closing
rate
1.35
1.23
8.80
8.57
The translation rate risk, being the effect on the results in the year
due to the translation movement of exchange rates from one year
to the next is shown below. The table below illustrates what the
movement in proforma revenue and underlying operating profit
has been in 2017 as a result of changes in foreign exchange rates.
The translation difference in 2017
Revenue has increased by
Underlying operating profit has increased by
£m
100.0
15.1
For reference, in respect of the continuing Melrose 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% strengthening
of the US Dollar against Sterling
For every 10% strengthening
of the Chinese Renminbi against Sterling
Increase/(decrease) in
underlying operating profit
£m
27.3
(4.7)
Strategic ReportMelrose Industries PLC Annual Report 2017
40
Finance Director’s review
Continued
Going concern
The Melrose Group’s business activities, together with the factors
likely to affect its future development, performance and position
are set out in the Chief Executive’s review. In addition, the
consolidated financial statements include details of the Melrose
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 Melrose Group has adequate financial resources and has a
consistent cash generation record, and, as a consequence, the
Directors believe that the Melrose 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 Melrose 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.
Post balance sheet events
On 17 January 2018 the Melrose Group announced the terms of a
firm offer to acquire the entire issued share capital of GKN plc and
on 1 February 2018 issued a public offer document containing the
full terms and conditions of the offer.
In conjunction with this offer, the Company entered into a senior
term and revolving credit facilities agreement with Lloyds Bank plc
and Royal Bank of Canada as original lenders which is subject to
the acquisition taking place. The new facilities agreement provides
for term facilities and revolving credit facilities in an aggregate
principal amount up to £2.6 billion, US $2.0 billion and €0.5 billion.
The maturity of the facilities ranges from three years and six
months to five years, after the date of the agreement of the
new facility.
On 1 February 2018 Melrose announced that Brush had
commenced consultations with employees in relation to
restructuring its Turbogenerator business to reflect the reduced
levels of activity. These reduced levels have been caused by
worldwide environmental policy which has triggered a fall in
volumes in the gas turbine market of over 60% from its peak
in 2011. This in turn has resulted in Brush’s turbogenerator
sales falling.
This restructuring involves the intended closure of the
turbogenerator production facility at Ridderkerk, Netherlands and
the transfer of its 4-pole turbogenerator production to the facility in
Plzenˇ , Czech Republic, while the factory in Changshu, China has
already been closed. In the UK, Brush has entered into consultation
with its workforce about the future of 2-pole turbogenerator
production at the Loughborough, UK facility, which accounts for
approximately half the workforce at the site. The 520-strong
workforce employed at Brush’s other UK sites in the transformers,
switchgear and mobile generator businesses remain unaffected.
The cash cost of these restructuring items is estimated to be
£40 million and is expected to be materially complete by the end
of 2018.
Geoffrey Martin
Group Finance Director
20 February 2018
Melrose Industries PLC Annual Report 2017 Longer-term viability
statement
41
In preparing this statement, the following qualifications and
assumptions are made:
(i)
the viability model is based on the Group as at the date
of this Annual Report, the model includes no consideration
of a combined working capital forecast for the proposed
GKN plc acquisition, for the reasons set out above. It also
does not consider any further acquisitions or future disposals
of continuing businesses. We note future acquisitions would
be based on the same proven business model applied
previously, with related bank debt and equity raised to
support the acquisition with sufficient headroom to cover
business risks; and
(ii)
financing arrangements and bank covenant testing are
in line with the current facility which is committed for the
period under review.
In accordance with provision C.2.2 of the UK Corporate
Governance Code, the Directors have assessed the prospects of
the Company over a longer period than the 12 months required by
the “Going Concern” provision. A period of three years is believed
to be appropriate for this assessment since this is consistent with
the Group’s financing cycle, whereby on average the Group has
refinanced debt in line with this timescale, usually as a result of
acquisition or disposal activity.
The Directors confirm that they have a reasonable expectation that
the Group will continue in operation and meet its liabilities, as they
fall due, up to December 2020.
The Directors’ assessment has been made by reference to the
Group’s financial position as at 31 December 2017, its prospects,
the Group’s strategy, the Board’s risk appetite and the Group’s
principal risks and their management, all of which are described
in the Strategic Report.
The Directors’ assessment of the Group’s viability is supported by
comprehensive and detailed analysis and modelling. The model
underpinning this statement is stress-tested, proven and is
frequently used by management when determining working capital
requirements for transactions and corporate restructuring. The
main assumptions included in the model relate to forecast revenue,
operating margin and cash generation. The model includes three
years of forecast data from the Group’s business assets and
incorporates agreed sensitivities for economic risk (impacting
revenue and margins to replicate a sales downturn in line with
those experienced in previous downturns), foreign exchange risk
(impacting net debt and assuming adverse movements in foreign
exchange rates) and liquidity risk (impacting net debt and assuming
a deterioration in working capital)(1), each of which have been
considered both individually and in combination by the Board,
together with expected achievable mitigating actions from the
working capital model to create severe, but plausible, scenarios.
These scenarios sensitise the main assumptions noted above.
On 1 February 2018 the Company issued an official offer
document to acquire the entire share capital of GKN plc. In
anticipation of the potential acquisition, the Company has entered
into a senior term and revolving credit facilities agreement with
Lloyds Bank plc and Royal Bank of Canada as original lenders
which is subject to the acquisition taking place. The new facilities
agreement provides for term facilities and revolving credit facilities
in an aggregate principal amount up to £2.6 billion, US $2.0 billion
and €0.5 billion. The maturity of the new facilities would range
from three years and six months to five years, after the date of the
agreement of the new facility.
At this point in time the Company does not have access to
non-public information on GKN plc that would allow procedures to
be undertaken for Melrose to be able to conclude on a combined
working capital model.
(1)
For further details on the economic risk, foreign exchange risk and liquidity risk, and the
mitigating actions being taken by management, please refer to the Risks and Uncertainties
section of the Strategic Report on pages 44 to 49.
Strategic ReportMelrose Industries PLC Annual Report 2017 42
Risk management
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.
Risk management responsibilities
The Board, having overall responsibility for risk management, has approved a formalised,
but pragmatic, Group risk management framework.
Board
Overall responsibility
for risk management
• Agrees the Group’s risk strategy and defines its risk appetite
• Reviews reports and recommendations from the Audit
Committee on risk governance
• Maintains oversight of key risks and mitigation plans
Audit Committee
Monitors the effectiveness
of the Group’s internal
control processes
Melrose senior
management and
business unit
senior managers
• Oversees the risk management processes and controls
• Supports the Board in monitoring risk exposure against
risk appetite
• Set the risk management processes and controls
• Consider emerging risks
• Oversee and challenge risk mitigation plans
Operational
managers
and financial
controllers
• Risk identification, assessment and monitoring at the business
unit level
• Implementing risk mitigation plans and controls
• Embedding risk awareness and culture throughout the business
T
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The Board’s view of our principal risks and uncertainties
is detailed in the table on pages 44 to 49.
Risk management strategy and framework
The objectives of the Directors and senior management are
to safeguard and increase the value of the businesses 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 to achieve its strategic objectives. It also recognises the
need to define a risk appetite for the Group, to maintain sound risk
management and internal control systems and to monitor its risk
exposures and mitigations to ensure that the nature and extent
of risks taken by the Group are consistent and aligned with its
strategic objectives.
The Board confirms that there is an ongoing process for identifying,
evaluating and managing the principal risks faced by the Company
and that these systems, which are subject to regular monitoring
and review, have been in place for the year under review and up to
the date of approval of the Annual Report and financial statements.
The Board further confirms that the systems, processes and
controls in place accord with the guidance contained in the
Financial Reporting Council’s “Guidance on Risk Management,
Internal Control and Related Financial Business Reporting”.
The Audit Committee monitors the effectiveness of the risk
management and internal control processes implemented across
the Group, through regular updates and discussions with
management and a review of the key findings presented by the
external and internal auditors. The Board is responsible for
considering the Audit Committee’s recommendations and ensuring
implementation by management of those recommendations it
deems appropriate for the business. A description of the Audit
Committee’s activities during the year on risk management can
be found on page 75.
During 2017, in accordance with provision C.2.3 of the UK
Corporate Governance Code, the Audit Committee undertook a
robust review of the effectiveness of the Group’s risk management
and internal control systems, covering all material controls including
financial, operational and compliance controls. The Audit
Committee reported its findings to the Board. From this review of
the risk management and internal control systems, the Board did
not identify, nor was it advised of, any failings or weaknesses which
it would determine to be significant. The Board concluded that
the Group’s risk management and internal control systems and
processes were operating effectively and therefore a confirmation
in respect of necessary actions to be undertaken has not been
considered appropriate.
Melrose Industries PLC Annual Report 2017
43
Risks and uncertainties
p.44
Governance overview
p.60
Risk management framework
Identification
Financial and
non-financial risks
recorded in controlled
risk registers
Evaluation
Risk exposure
reviewed and
risks prioritised
Mitigation
Risk owners
identified and
action plans
implemented
Analysis
Risks analysed
for impact and
probability to
determine gross
exposure
Review and
monitoring
Robust mitigation
strategy subject
to regular and
rigorous review
The Group operates on a decentralised basis and the Board
has established an organisational structure with clear reporting
procedures, lines of responsibility and delegated authority, as
depicted in the diagram on the previous page. Consistent with
this, the Group operates a top-down/bottom-up approach to
risk management, comprising Board and senior management
oversight coupled with bottom-up risk management embedded
in the day-to-day activities of its individual businesses.
Risk appetite
The Board has undertaken a comprehensive exercise to consider
its risk appetite across a number of key business risk areas.
The results of this review indicate the relative appetite of the Board
across the risk factors at a specific point in time. Any material
changes in risk factors will impact the Board’s assessment of
its risk appetite.
The Board has a higher risk appetite towards its strategic and
operational risks and a balanced appetite towards macro-
economic and political risk. The Board seeks to minimise all health
and safety risks and has a low risk appetite in relation to legal,
compliance and regulatory risk. Similarly, a conservative appetite
is indicated by the Board with respect to pension and finance-
related risks.
The results of the risk appetite review will support the Board’s
decision making processes during 2018. It is the intention to
undertake a review of the Board’s risk appetite at least annually.
Risk management actions
During 2017, the Board continued to deliver on the key
management priorities identified in the 2016 review across the
Group, utilising and updating where necessary the enhanced risk
management framework implemented in 2015. Specific actions
undertaken during the year include:
• reviewing and reaffirming the Board’s risk appetite;
• monitoring the implementation and risk management
governance framework across all business divisions. This
framework defines the Melrose principles for risk management
and sets the standards for the identification, evaluation,
prioritisation, recording, review and reporting of risks and
their management or mitigation throughout the organisation;
• fully embedding the Melrose risk register methods and risk
profile mapping application throughout the Nortek business
divisions. These provide the Board with greater levels of detail
and visibility on the risk management systems and processes
in place, and illustrate each principal risk facing the Group from
both a gross risk (pre-mitigation) and net risk (post-mitigation)
position. The risk mapping application provides Directors
with a clear risk profile for the Group and enables the Board
to determine the degree to which its profile is aligned with its
risk appetite; and
• reviewing and improving the Group’s processes around the
assessment of principal risks and the monitoring and reporting
of the Group’s risk management performance.
Assessment of principal risks
During the year the Board undertook a robust, in-depth and
comprehensive assessment of the principal risks facing the Group
and specifically those that might threaten the delivery of its strategic
business model, its future performance, solvency or liquidity.
A summary of the principal risks and uncertainties that could
impact on the Group’s performance is shown on pages 44
to 49. Further information detailing the internal control and risk
management policies and procedures operated within the
Group is shown on pages 70 to 71 of the Corporate
Governance Report.
Risk management priorities for 2018
Continual improvements have been made during 2017 in
respect of the Group’s risk management processes. However,
the Board recognises that Melrose cannot be complacent.
In 2018, management will continue to focus on refining the risk
management framework and embedding a culture of effective
risk management across the Group to ensure that risks and
opportunities are identified and managed, to support the delivery
of long-term value creation. Further resources will be devoted
to strengthening the mechanisms for providing independent
assurance on the effectiveness of the Group’s risk management
governance, processes and controls.
Strategic ReportMelrose Industries PLC Annual Report 2017 44
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. The content of the table, however,
is not intended to be an exhaustive list of all the risks and
uncertainties that may arise and nor is the order of the list
intended to be any indication of priority.
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 by both the management of the business and the
Melrose Board.
Key risk
Description and impact
Mitigation
Responsibility
Risk
Trend
trend
commentary
Strategic
priorities
Strategic risk
Acquisition
of new
businesses
and
improvement
strategies
The success of the Group’s acquisition strategy depends on identifying available and suitable targets, obtaining any consents or
authorisations required to carry out an acquisition and procuring the necessary financing, be this from equity, debt or a combination
of the two. In making acquisitions, there is a risk of unforeseen liabilities being later discovered which were not uncovered or known
at the time of the due diligence process. Further, as per the Group’s strategy to buy and improve good but under-performing
manufacturing businesses, once an acquisition is completed, there are risks that the Group will not succeed in driving strategic
operational improvements to achieve the expected post-acquisition trading results or value which were originally anticipated, that
the acquired products and technologies may not be successful or that the business 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 shareholder investment 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.
• Structured and appropriate due diligence undertaken.
• Focus on acquisition targets that have strong headline
Executive
management (1)
fundamentals, high-quality products, leading market share but
which 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.
Timing of
disposals
In line with our strategy and depending where the Group is within the “buy, improve, sell” cycle, the expected timing of any disposal
of businesses 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 businesses’ operations there may be long-term liabilities which could be retained by the Group
following a disposal. Insufficient allowance for such retained liabilities may affect the Group’s financial position.
• Directors are experienced in judging and regularly reviewing
Executive
the appropriate time in a business cycle for a disposal to realise
management (1)
maximum value for shareholders.
• Each disposal is assessed on its merits, with a key focus on
a clean disposal.
Operational risk
Economic
and political
The Group operates, through manufacturing and/or sales facilities, in numerous countries and is affected by global economic
conditions. Businesses are also affected by government spending priorities and the willingness of governments to commit substantial
resources. Current global economic and financial market conditions, including any fluctuation in commodity prices (in particular, the
prices of oil and gas), the potential for a significant and prolonged global recession and any uncertainty in the political environment
may materially and adversely affect the Group’s operational performance, financial condition and could have significant impact on
timing of acquisitions and disposals.
Following the EU referendum on 23 June 2016, there continues to be some uncertainty in the UK regarding the nature of Brexit and
what this will mean for business and the economy. However, the majority of the Group’s revenue is generated in North America, where
any effects are expected to be minimal, and the Group remains agile and well positioned to deal with any short-term uncertainty in
the UK.
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 the Group’s businesses.
(1) Comprises executive Directors and Melrose senior management.
• Regular monitoring of order books and other leading indicators, to
Executive
ensure the Group and each of its businesses can respond quickly
management (1)
to any adverse trading conditions. This includes the identification
of cost reduction and efficiency measures.
• Finance for acquisitions is readily available to the Group from
banking syndicates. This has proven to be available to the Group
even during periods of economic downturn, for example during
the global financial crisis in 2008.
As the bid for GKN plc
indicates, the Group is currently
actively looking to secure
its next acquisition and is
confident that opportunities
will be available.
Buy
Sell
Improve
Improve
Buy
Sell
The responsiveness of the
Nortek business to the Melrose
methods have meant that
disposal may be considered
earlier than expected. However,
management will remain
disciplined and there is
no obligation to sell before
it is appropriate to do so.
There continues to be a degree
of geopolitical uncertainty in
2018. However, the Board notes
that economic uncertainty can
depress business valuations
and this may increase the
number of potential acquisition
opportunities for Melrose.
Buy
Sell
Improve
Melrose Industries PLC Annual Report 2017 Strategic risk profile
Our updated view of the current strategic risk profile is shown below. The residual risk scores have been calculated on a post-mitigation basis.
45
No
Risk rating
Risk title
Moderate
Acquisition of new businesses
and improvement strategies
Moderate
Timing of disposals
Moderate
Economic and political
Moderate
Loss of key management
Risk trend since
last Annual Report
Decrease
No change
No change
No change
Moderate
Legal, regulatory and environmental
No change
Moderate
Information security and cyber threat
Increase
Low
Low
Low
Foreign exchange rate
Pensions
Liquidity
No change
No change
No change
1
2
3
4
5
6
7
8
9
n
o
i
t
i
d
n
o
c
l
i
a
c
n
a
n
fi
n
o
t
c
a
p
m
I
h
g
h
i
y
r
e
V
h
g
H
i
e
t
a
r
e
d
o
M
w
o
L
w
o
l
y
r
e
V
2
1
3
7
4
9
8
5
6
Remote
Unlikely
Possible
Likely
Very likely
Probability
Key risk
Description and impact
Strategic risk
Mitigation
Responsibility
Risk
trend
Trend
commentary
Strategic
priorities
Acquisition
The success of the Group’s acquisition strategy depends on identifying available and suitable targets, obtaining any consents or
of new
authorisations required to carry out an acquisition and procuring the necessary financing, be this from equity, debt or a combination
businesses
of the two. In making acquisitions, there is a risk of unforeseen liabilities being later discovered which were not uncovered or known
and
at the time of the due diligence process. Further, as per the Group’s strategy to buy and improve good but under-performing
improvement
manufacturing businesses, once an acquisition is completed, there are risks that the Group will not succeed in driving strategic
strategies
operational improvements to achieve the expected post-acquisition trading results or value which were originally anticipated, that
the acquired products and technologies may not be successful or that the business 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 shareholder investment 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.
• Structured and appropriate due diligence undertaken.
• Focus on acquisition targets that have strong headline
Executive
management (1)
fundamentals, high-quality products, leading market share but
which 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.
Timing of
disposals
In line with our strategy and depending where the Group is within the “buy, improve, sell” cycle, the expected timing of any disposal
of businesses 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 businesses’ operations there may be long-term liabilities which could be retained by the Group
• Directors are experienced in judging and regularly reviewing
the appropriate time in a business cycle for a disposal to realise
maximum value for shareholders.
• Each disposal is assessed on its merits, with a key focus on
Executive
management (1)
following a disposal. Insufficient allowance for such retained liabilities may affect the Group’s financial position.
a clean disposal.
Operational risk
Economic
The Group operates, through manufacturing and/or sales facilities, in numerous countries and is affected by global economic
and political
conditions. Businesses are also affected by government spending priorities and the willingness of governments to commit substantial
resources. Current global economic and financial market conditions, including any fluctuation in commodity prices (in particular, the
prices of oil and gas), the potential for a significant and prolonged global recession and any uncertainty in the political environment
may materially and adversely affect the Group’s operational performance, financial condition and could have significant impact on
timing of acquisitions and disposals.
Following the EU referendum on 23 June 2016, there continues to be some uncertainty in the UK regarding the nature of Brexit and
what this will mean for business and the economy. However, the majority of the Group’s revenue is generated in North America, where
any effects are expected to be minimal, and the Group remains agile and well positioned to deal with any short-term uncertainty in
the UK.
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 the Group’s businesses.
(1) Comprises executive Directors and Melrose senior management.
• 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.
• Finance for acquisitions is readily available to the Group from
banking syndicates. This has proven to be available to the Group
even during periods of economic downturn, for example during
the global financial crisis in 2008.
Executive
management (1)
As the bid for GKN plc
indicates, the Group is currently
actively looking to secure
its next acquisition and is
confident that opportunities
will be available.
Buy
Improve
Sell
Buy
Improve
Sell
The responsiveness of the
Nortek business to the Melrose
methods have meant that
disposal may be considered
earlier than expected. However,
management will remain
disciplined and there is
no obligation to sell before
it is appropriate to do so.
There continues to be a degree
of geopolitical uncertainty in
2018. However, the Board notes
that economic uncertainty can
depress business valuations
and this may increase the
number of potential acquisition
opportunities for Melrose.
Buy
Improve
Sell
Strategic ReportMelrose Industries PLC Annual Report 2017
46
Risks and uncertainties
Continued
Key risk
Description and impact
Operational risk continued
Loss of key
management
The success of the Group is built upon strong management teams. As a result, the loss of key personnel could 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.
Compliance and ethical risk
Legal,
regulatory
and
environmental
There is a risk that the Group may not always be in complete compliance with laws, regulations or permits, for example concerning
environmental 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 Group or Directors.
For example, the Group’s operations are subject to anti-bribery and anti-corruption, anti-money laundering, competition, anti-trust
and trade compliance laws and regulations. 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.
Information
security
and cyber
threat
Information security and cyber threats are an increasing priority across all industries and remain a key UK government agenda item.
Like many businesses, Melrose recognises that the Group may have a potential exposure in this area. Potential exposure to
such risks remains a constant threat to the Group due to the size and complexity of the Group’s operations and the nature of the
product portfolio.
(1) Comprises executive Directors and Melrose senior management.
Mitigation
Responsibility
Risk
Trend
trend
commentary
Strategic
priorities
• Regular monitoring of legal and regulatory matters at both
Executive
a Group and business level. Consultation with external advisers
management (1)
The Group undertakes annual
reviews to ensure it has a
• Succession planning within the Group and its businesses is
Executive
coordinated via the Nomination Committee in conjunction with
management (1)
the Board and includes all Directors and senior employees.
• 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 attract and retain such individuals.
where necessary.
• A robust control framework is in place underpinned by
comprehensive corporate governance and compliance
procedures at both a Group and business level.
• Due diligence processes during the acquisition stage seek to
identify legal, regulatory and environmental risks. At the business
level, controls are in place to prevent such risks from crystallising.
• Any environmental risks that crystallise are subject to mitigation
by specialist consultants engaged for this purpose. External
consultants assist the Group in complying with new and emerging
environmental regulations.
• Insurance cover mitigates certain levels of risk.
• Management continues to work with information security
Executive
consultants to better understand the extent to which the Group is
management (1)
exposed to cyber security risk and to ensure appropriate mitigations
are in place.
• Management has developed an information security strategy to
mitigate the Group’s exposure to cyber risk which follows the UK
government’s recommended steps on cyber security, covering all
the relevant security areas, including: network security; malware
protection; active monitoring of information systems and networks;
home and mobile working; and incident management.
• This strategy has been successfully implemented across the whole
Group with significant progress made during the year and is also
subject to regular monitoring, together with the Group’s Business
Continuity and Disaster Recovery policies and procedures,
supplementing those already in place.
Buy
Sell
Improve
Succession planning remains a
core focus for the Nomination
Committee and the Board.
Succession planning of
executive Directors and senior
management, together with
visibility of potential successors
within the Group, has been
selected as an area for targeted
management focus during 2018.
robust legal and compliance
Improve
framework and considers
the risk to be consistent with
prior years.
Buy
Sell
Buy
Sell
Improve
Information security and cyber
threats are an increasing
priority across all industries.
Cyber security breaches of the
Group’s IT systems could result
in the misappropriation of
confidential information
belonging to it or its customers,
suppliers or employees. In
response to the increased
sophistication of information
security and cyber threats,
the Group has worked, and
continues to work, with external
consultants to monitor and
refine it’s Group-wide strategy
to aid the prevention,
identification and mitigation
of any threats.
Melrose Industries PLC Annual Report 2017 47
Key risk
Description and impact
Operational risk continued
Loss of key
The success of the Group is built upon strong management teams. As a result, the loss of key personnel could have a significant
management
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.
Compliance and ethical risk
Legal,
There is a risk that the Group may not always be in complete compliance with laws, regulations or permits, for example concerning
regulatory
environmental requirements. The Group could be held responsible for liabilities and consequences arising from past or future
and
environmental damage, including potentially significant remedial costs. There can also be no assurance that any provisions for
environmental
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 Group or Directors.
For example, the Group’s operations are subject to anti-bribery and anti-corruption, anti-money laundering, competition, anti-trust
and trade compliance laws and regulations. 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.
Information
Information security and cyber threats are an increasing priority across all industries and remain a key UK government agenda item.
Like many businesses, Melrose recognises that the Group may have a potential exposure in this area. Potential exposure to
such risks remains a constant threat to the Group due to the size and complexity of the Group’s operations and the nature of the
security
and cyber
threat
product portfolio.
(1) Comprises executive Directors and Melrose senior management.
Mitigation
Responsibility
Risk
trend
Trend
commentary
Strategic
priorities
• Succession planning within the Group and its businesses is
coordinated via the Nomination Committee in conjunction with
the Board and includes all Directors and senior employees.
• 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 attract and retain such individuals.
Executive
management (1)
• Regular monitoring of legal and regulatory matters at both
a Group and business level. Consultation with external advisers
where necessary.
Executive
management (1)
• A robust control framework is in place underpinned by
comprehensive corporate governance and compliance
procedures at both a Group and business level.
• Due diligence processes during the acquisition stage seek to
identify legal, regulatory and environmental risks. At the business
level, controls are in place to prevent such risks from crystallising.
• Any environmental risks that crystallise are subject to mitigation
by specialist consultants engaged for this purpose. External
consultants assist the Group in complying with new and emerging
environmental regulations.
• Insurance cover mitigates certain levels of risk.
• Management continues to work with information security
consultants to better understand the extent to which the Group is
exposed to cyber security risk and to ensure appropriate mitigations
are in place.
• Management has developed an information security strategy to
mitigate the Group’s exposure to cyber risk which follows the UK
government’s recommended steps on cyber security, covering all
the relevant security areas, including: network security; malware
protection; active monitoring of information systems and networks;
home and mobile working; and incident management.
• This strategy has been successfully implemented across the whole
Group with significant progress made during the year and is also
subject to regular monitoring, together with the Group’s Business
Continuity and Disaster Recovery policies and procedures,
supplementing those already in place.
Executive
management (1)
Buy
Improve
Sell
Succession planning remains a
core focus for the Nomination
Committee and the Board.
Succession planning of
executive Directors and senior
management, together with
visibility of potential successors
within the Group, has been
selected as an area for targeted
management focus during 2018.
The Group undertakes annual
reviews to ensure it has a
robust legal and compliance
framework and considers
the risk to be consistent with
prior years.
Buy
Improve
Sell
Buy
Improve
Sell
Information security and cyber
threats are an increasing
priority across all industries.
Cyber security breaches of the
Group’s IT systems could result
in the misappropriation of
confidential information
belonging to it or its customers,
suppliers or employees. In
response to the increased
sophistication of information
security and cyber threats,
the Group has worked, and
continues to work, with external
consultants to monitor and
refine it’s Group-wide strategy
to aid the prevention,
identification and mitigation
of any threats.
Strategic ReportMelrose Industries PLC Annual Report 2017 48
Risks and uncertainties
Continued
Key risk
Description and impact
Mitigation
Responsibility
Risk
Trend
trend
commentary
Strategic
priorities
Financial
risk
Foreign
exchange
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 of the Group.
• The Group policy is to protect against the majority of foreign
exchange risk which affects cash, by hedging such risks with
Executive
management (1)
Group results are reported in
Sterling but a large proportion
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.
• Protection against specific transaction risks is taken by the Board
financial instruments.
on a case-by-case basis.
of its revenues are denominated
Improve
Pensions
Any shortfall in the Group’s defined benefit pension schemes may require additional funding. As at 31 December 2017, the Group’s
pension schemes had an aggregate deficit, on an accounting basis, of £17.6 million. 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.
Liquidity
Alternatively, if the plans are managed on an ongoing basis, there is a risk that the plans’ assets, such as investments in equity and
debt securities, will not be sufficient to cover the value of the retirement benefits to be provided under the plans. The implications
of a higher pension deficit include a direct impact on valuation, implied 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 ability to raise debt or to refinance existing borrowings in the bank or capital markets is dependent on market conditions and the
proper functioning of financial markets. As set out in more detail in the Finance Director’s review on page 38, the Group has a US
$1.25 billion term bank loan and revolving credit facility, which is partially utilised. In January 2018, in connection with the Company’s
proposed acquisition of GKN plc, the Group entered into a term loan and a revolving credit facility which comprised a £2.6 billion
facility, a $2 billion facility and a €0.5 billion facility. The new facilities will only become available if the proposed acquisition of GKN plc
completes and if this occurs the debt drawn under the existing US $1.25 billion facility will be repaid and the facility cancelled.
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. In addition, the Group may be
unable to refinance its debt when it falls due.
(1) Comprises executive Directors and Melrose senior management.
• The Group’s key funded pension plans, including the Nortek plans,
Executive
are closed to new entrants and future service accrual. Long-term
management (1)
funding arrangements are agreed with the Trustees and reviewed
following completion of actuarial valuations.
• Active engagement with Trustees on pension plan asset
allocations and strategies.
• To ensure it has comprehensive and timely visibility of the liquidity
Executive
position, the Group conducts monthly reviews of its cash forecast,
management (1)
which are in turn revised quarterly.
• The Group operates cash management mechanisms, including
cash pooling across the Group and maintenance of revolving
credit facilities to mitigate the risk of any liquidity issues.
• The Group operates a conservative level of headroom across its
financing covenants which is designed to avoid the need for any
unplanned refinancing.
in currencies other than
Sterling. Following the Nortek
acquisition, movements
between the US Dollar and
Sterling and Renminbi and the
US Dollar could have a material
adverse effect on Group results,
whilst exposure remains in
Brush against the Czech
Koruna and the Euro.
No structured changes
occurred during 2017.
The Group is satisfied that
pension liability risks are well
mitigated. The net deficit is
relatively small for a group
of this size.
The Group is satisfied that it has
adequate resources available to
meet its liabilities.
Buy
Sell
Buy
Sell
Improve
Buy
Sell
Improve
Melrose Industries PLC Annual Report 2017 49
Key risk
Description and impact
Mitigation
Responsibility
Risk
trend
Trend
commentary
Strategic
priorities
Financial
risk
Foreign
exchange
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 of the Group.
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.
• The Group policy is to protect against the majority of foreign
exchange risk which affects cash, by hedging such risks with
financial instruments.
• Protection against specific transaction risks is taken by the Board
Executive
management (1)
on a case-by-case basis.
• The Group’s key funded pension plans, including the Nortek plans,
are closed to new entrants and future service accrual. Long-term
funding arrangements are agreed with the Trustees and reviewed
following completion of actuarial valuations.
• Active engagement with Trustees on pension plan asset
allocations and strategies.
Executive
management (1)
Group results are reported in
Sterling but a large proportion
of its revenues are denominated
in currencies other than
Sterling. Following the Nortek
acquisition, movements
between the US Dollar and
Sterling and Renminbi and the
US Dollar could have a material
adverse effect on Group results,
whilst exposure remains in
Brush against the Czech
Koruna and the Euro.
No structured changes
occurred during 2017.
The Group is satisfied that
pension liability risks are well
mitigated. The net deficit is
relatively small for a group
of this size.
• To ensure it has comprehensive and timely visibility of the liquidity
position, the Group conducts monthly reviews of its cash forecast,
which are in turn revised quarterly.
Executive
management (1)
The Group is satisfied that it has
adequate resources available to
meet its liabilities.
• The Group operates cash management mechanisms, including
cash pooling across the Group and maintenance of revolving
credit facilities to mitigate the risk of any liquidity issues.
• The Group operates a conservative level of headroom across its
financing covenants which is designed to avoid the need for any
unplanned refinancing.
Pensions
Any shortfall in the Group’s defined benefit pension schemes may require additional funding. As at 31 December 2017, the Group’s
pension schemes had an aggregate deficit, on an accounting basis, of £17.6 million. 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.
Alternatively, if the plans are managed on an ongoing basis, there is a risk that the plans’ assets, such as investments in equity and
debt securities, will not be sufficient to cover the value of the retirement benefits to be provided under the plans. The implications
of a higher pension deficit include a direct impact on valuation, implied 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.
Liquidity
The ability to raise debt or to refinance existing borrowings in the bank or capital markets is dependent on market conditions and the
proper functioning of financial markets. As set out in more detail in the Finance Director’s review on page 38, the Group has a US
$1.25 billion term bank loan and revolving credit facility, which is partially utilised. In January 2018, in connection with the Company’s
proposed acquisition of GKN plc, the Group entered into a term loan and a revolving credit facility which comprised a £2.6 billion
facility, a $2 billion facility and a €0.5 billion facility. The new facilities will only become available if the proposed acquisition of GKN plc
completes and if this occurs the debt drawn under the existing US $1.25 billion facility will be repaid and the facility cancelled.
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. In addition, the Group may be
unable to refinance its debt when it falls due.
(1) Comprises executive Directors and Melrose senior management.
Buy
Improve
Sell
Buy
Improve
Sell
Buy
Improve
Sell
Strategic ReportMelrose Industries PLC Annual Report 2017 50
l
i
a
c
o
S
e
t
a
r
o
p
r
o
C
y
t
i
l
i
i
b
s
n
o
p
s
e
R
Melrose Industries PLC Annual Report 2017
51
Melrose supports and monitors
the corporate social responsibility
policies, practices and initiatives
across its businesses.
Reflecting the decentralised nature of the Group, responsibility for the
adoption of policies, practices and initiatives sits at a divisional unit level.
This ensures that rigorous and targeted policies and procedures are
implemented that meet local regulatory requirements and guidance,
whilst also taking into account the size and nature of the business.
The information set out in this Corporate Social Responsibility Report
focuses on the initiatives taken during 2017 by each of the four
divisions that now make up the Melrose Group. The policies, practices
and initiatives set out in this report are indicative of the approach taken
with any new business Melrose acquires.
01
02
Employment matters
p.52
Charitable achievements
p.53
03
04
Gender diversity
p.54
The environment
p.54
05
06
Health and safety
p.56
Supply chain assurance
p.57
07
Human rights and
ethical standards
p.57
Strategic ReportMelrose Industries PLC Annual Report 2017 52
Corporate Social Responsibility
Continued
01
Employment matters
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.
Employment policies
As part of the Group’s decentralised
approach, each of Melrose’s businesses
is responsible for setting and measuring
its own employment and employee
related KPIs and, as such, these can 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.
Equal opportunities for appropriate training,
career development and promotion are
available to all employees within the Group
regardless of any 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. Furthermore, as a Group-wide
policy and so far as particular disabilities
permit, Melrose and each of its businesses
will, where practicable, make every effort
to provide continued employment in the
same role for employees who are disabled
during their period of employment or, where
necessary, provide such employees with
a suitable alternative role, together with
appropriate training.
It is the Group’s policy 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 works with
the business community to understand
the changes required in the workplace in
order that disabled persons are treated
fairly, so that they can contribute to
business success, to society and to
economic growth.
Employee involvement,
consultation and development
The Group places great importance
on good labour relations, employee
engagement and employee development.
The responsibility for the implementation
and management of employment practices
rests with local management, in a manner
appropriate to each business.
A culture of clear communication and
employee consultation and engagement
is inherent across the Group. 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 to
receive feedback from them on these
issues. Regular appraisals, employee
surveys, notice boards, team meetings,
suggestion boxes and newsletters are also
used to communicate and engage with
employees, and to solicit their feedback
on issues of concern to them.
Extensive training is available to all staff
and is actively encouraged to ensure that
high standards of skills are maintained
across the Group. Inter-departmental
training programmes are also put in place
across the Group to ensure that skills
are shared between operations. The
importance of training extends beyond
on-the-job training and also focuses on
enhancing personal development. In
addition, apprenticeship programmes help
to assist with training a new generation of
employees and to ensure knowledge is
retained within the businesses. Employees
across the Group are encouraged to think
innovatively and to have regard for both
financial and economic factors affecting
the Group.
The Group regards employee training
and advancement as an essential element
of industrial relations.
Employee initiatives
During 2017, a range of employee
related initiatives were implemented
across the Group:
• The SST division continued its
emphasis on improving its products and
services through the employee invention
process. Three of 2016’s employee
submissions have resulted in the grant
of patents, and 2017 saw another 36
submissions, with five resulting in patent
applications (including one design
patent issued from efforts by SST’s
engineering team in Shenzhen). Several
submissions have also resulted in new
products and product improvements.
The Patent Committee meets monthly
to review employee submissions,
the committee consisting of inside
counsel, outside patent counsel,
senior engineering leadership from all
offices, and the inventors themselves.
Incentives are in place for employees
to submit, including financial incentives
if submission results in applications
filed and patents granted.
• Within our Ergonomics division,
Ergotron has conducted over 20 training
programmes globally with over 1,700
employees participating. Topics
included leadership and management
skills training, technical and quality
training, product and marketing training,
system and process training in addition
to wellness and benefits training.
Ergotron also has global programmes
that provide employees opportunities
to enhance their education through
educational reimbursement.
• Brush continues to take the health
and well-being of its employees
seriously and its Occupational Health
Service is available to employees four
days a week. The service can make
referrals to doctors, physiotherapists
or counselling services, as required,
ensuring that the business supports
its employees throughout any periods
of absence or illness. Health promotion
is a key feature of the service, which
is continually developing through
awareness campaigns and has
had a positive impact on both the
employees and the business as a
whole. During 2017, Brush GMS, based
in Pittsburgh, promoted employee
engagement by supporting employee
leisure and community/charitable
activities such as summer games,
family parties and community outreach
activities. It has also increased
management training resources.
• 165 employees attended the first Air
Management Leadership Bootcamp
in Itasca, Illinois in April 2017. The
Leadership Bootcamp reinforced the
Air Management mission and values
and key business objectives for 2017.
Over the three days, leaders actively
engaged in seminars to equip them
with specific skills and business tools
to support a performance driven
culture. Outside business experts
led employees through topics such
as financial management, team
dynamics, and plan execution tools.
Melrose Industries PLC Annual Report 2017 53
02
Charitable achievements
Hurricane relief
NSC held a drive to help the victims
of Hurricane Maria in Puerto Rico and
shipped 13 large boxes filled with items
such as canned goods, toiletries and
clothes to San Juan, Puerto Rico. NSC
also used cash donations to buy supplies
of food and collected containers of
pet supplies for local animal shelters
who were taking in dogs rescued from
Puerto Rico.
Heart walks
Since 2012, Ergotron has made a
commitment to sponsor and participate
in the American Heart Association’s (AHA)
Heart Walks throughout the US. AHA is
an organisation whose mission is to
improve the lives of all Americans and
help people understand the importance
of healthy lifestyle choices, which aligns
with the Ergotron mission of promoting
a healthy environment for life and work.
Teams from the business’s Twin Cities,
Phoenix and Tualatin offices have raised
over $130,000 and look forward to the
fundraising activities and the Heart Walk
every year.
March of Dimes
HVAC was once again named one
of the top 40 giving companies in West
Tennessee for its commitment to investing
in its community. One of the excellent
causes HVAC supported was March of
Dimes, a US non-profit organisation that
works to improve the health of mothers
and babies by preventing birth defects,
premature birth and infant mortality.
Approximately 20 employees participated
in the walk, which was held in Dyer
County, Tennessee in October 2017 and
raised $5,000.
Employees of the Group
have supported a number
of worthwhile charities
during 2017.
Here are a few examples
of the great contributions
that have been made.
Christmas for children
On 19 December 2017, HVAC supported
a group of local, under-privileged children
by donating presents that the children
had wished for in their letters to Santa.
HVAC employees, along with Santa,
attended the surprise Christmas party
at their school.
United Way
Broan supported United Way of
Washington County 2017 Campaign, a
non-profit organisation who are dedicated
to improving community conditions
through support in education, health
and financial stability. Broan raised a
total of $105,000 through events such
as “Dunk Tank”, “Chilli Cook Off” and
“School Supplies for Boys and Girls Club.”
Strategic ReportMelrose Industries PLC Annual Report 2017 54
Corporate Social Responsibility
Continued
03
Gender diversity
The charts opposite show
the total number of males
and females working
within the Group as at
31 December 2017.
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 and the Board is committed to
equality of opportunity for all employees.
The Group currently takes into account
a variety of factors before determining
suitability for vacancies, including relevant
skills to perform the role, experience and
knowledge. The most important priority,
however, has been and will continue to
be ensuring that the best candidate
is selected.
Melrose notes the recommendations of
Lord Davies’ review, “Women on Boards”
and continues to encourage gender
diversity throughout the Group. Although
not appropriate to set specific gender
diversity targets at Board level and
throughout the Group’s workforce due to
Melrose’s strategic business model and
frequent turnover of businesses, Melrose
is actively engaged in finding ways to
increase the Group’s diversity.
Total Group employees
Men
Women
7,645
3,706
11,351
SST
HVAC
AQH
2,438
3,687
2,171
Ergotron
1,347
1,674
Brush
Men
Women
1,115
1,323
04
The environment
The Melrose Board fully
understands the importance
of the Group’s environmental
responsibilities and is
committed to ensuring that
operations have the
minimum possible adverse
effect on the environment.
Although there are no standardised
environmental KPIs currently used within
the Group, the Group ensures businesses
understand the importance of monitoring
the impact of their 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. These KPIs are then used to
plan for ongoing improvements.
During the year, the Company continued to
comply with the ongoing annual reporting
requirements of the UK’s Carbon Reduction
Commitment Energy Efficiency Scheme.
Men
Women
3,023
664
Men
Women
1,278
893
Men
Women
727
620
Men
Women
1,479
195
Melrose Industries PLC Annual Report 2017
55
The GHG reporting period is aligned to
the Company’s financial reporting year.
The data has been prepared in
accordance with the principles and
requirements of the Greenhouse Gas
Protocol, Corporate Accounting and
Reporting Standard (Revised Edition) 2004
for Scope 1 and Scope 2 emissions and
the Department for Environment, Food &
Rural Affairs (DEFRA) guidance on how to
measure and report on greenhouse gas
emissions, as first published in 2013 and
subsequently updated.
We have reported on all emission sources
required under the Companies Act 2006
(Strategic Report and Directors’ Reports)
Regulations 2013.
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.
Given that the Melrose business model is
to acquire and divest businesses over a
three to five-year time frame, 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.
Environmental initiatives
During 2017, a range of environmental
initiatives were implemented within the
Group’s divisions. Some of these are
listed below:
• SST continues to make its
environmental awareness and
compliance one of its highest priorities.
The various sites continue to evaluate
their operations and strive to make
improvements to reduce their
environmental global footprint. The
manufacturing site located in China
completed seven energy and emissions
reduction projects, as well as adding
exhaust filtration and tin slag recovery
systems. Continued improvements in
cardboard, pallets, paper and universal
waste systems have been implemented
throughout the continental US. SST’s
Chinese site’s efforts resulted in a 4%
reduction in electrical consumption
and a 2% drop in paper consumption.
Continued improvements are planned
for 2018 including the review and
reduction of the hazardous material
quantities/hazard level as directed by
ISO 14001 standard, improving and
increasing waste recycling systems,
and reducing their carbon footprint.
• Ergotron maintained the environmental
certification ISO 14001:2004 in its
locations in Eagan, Minnesota, EMEA,
and Asia Pacific and added ISO
14001:2015 in Asia Pacific. The division
focused throughout the year on
reducing its impact on the environment,
resulting in 95% of waste materials at its
EMEA, Eagan and Minnesota locations
being recycled. The Asia Pacific sites
have decreased the loss of main raw
material (scrap rate 0.2% maximum)
and decreased the electricity wasted
by 3% compared with 2016.
• The Air Management division rolled
out an environmental inspection
process at facility level which will be
audited in early 2018. In 2017, the Air
Management division worked closely
with insurers to successfully address
employee related inspection items
with 22 items being addressed.
• Brush continued its focus on making
further energy savings, including in gas
and electricity consumption. Through
more effective energy management
and greater employee engagement,
electricity consumption for lighting at
its Czech operations was reduced by
5%, whilst heating consumption was
the lowest in the location’s history
again. Lighting initiatives across the
Loughborough site continue with
ad hoc upgrades which continue to
generate savings for the business.
The Loughborough site is also working
towards environmental management
standard ISO 14001:2015 transition.
The site is also in the process of
replacing existing lighting with LED
luminaires which will deliver an annual
reduction of 83.5 tonnes of CO2
and 35.04kw reduction of light load.
Greenhouse gas emissions
The Group is required to measure and
report its direct and indirect greenhouse
gas (GHG) emissions pursuant to the
Companies Act 2006 (Strategic Report
and Directors’ Reports) Regulations
2013. The emissions associated with the
purchase of the Nortek Group in 2016
have been included in the report for the
first time and account for the significant
year-on-year increase in emissions.
However, the intensity measure decreased
by over 60% year on year. The year-on-year
like-for-like emissions, removing the
Nortek group emissions, decreased by
approximately 20% due to a significant
reduction in gas and electricity usage.
Global GHG emissions data for period 1 January 2017 – 31 December 2017
(tonnes CO2e(1) unless stated)
Emissions sources:
2017
2016(2)
Change
Combustion of fuel & operation of facilities
UK electricity
Overseas electricity
Total purchased electricity
Other purchased energy
Company’s chosen intensity measurement:
Emissions reported above normalised to tonnes per
£1,000 turnover
23,680
3,236
33,273
36,509
2,027
0.030
7,122
3,717
9,008
10,689
2,035
0.081
+232%
-13%
+269%
+242%
-0.4%
-63%
(1) CO2e – carbon dioxide equivalent, this figure includes greenhouse gases in addition to carbon dioxide.
(2) The 2016 emissions data does not include the Nortek businesses as they were acquired part way through that year.
Strategic ReportMelrose Industries PLC Annual Report 2017
with DEKRA to further develop a safety
driven culture. All locations will be
evaluated to determine the level of
understanding and status of leadership
involvement. These evaluations will
lead to future tasks and plans to grow
awareness and develop a safety
driven culture.
• Brush’s behavioural safety programme
is designed to improve the strong health
and safety culture within the business.
The programme focuses on developing
a proactive approach among Brush
employees so that they increase
responsibility and accountability for
their own and their working group’s
actions while ensuring they intervene
at the earliest opportunity to stop
hazardous acts or correct any unsafe
conditions. It is intended to refresh the
behavioural safety programme during
2018. At Brush Electrical Machines
in Loughborough there has been
increased focus on accident prevention
by issuing Safety Alerts, implementing
management “walk-abouts” to hazard
“hot-spots” and improved, more
efficient reporting and closing of
incidents. The result was a significant
decrease in the number of lost days
in 2017.
Following these initiatives, among others,
the Group has recognised the benefits of a
workforce engaged in matters of health and
safety, management teams committed to
the continuous improvement of health and
safety standards throughout the Group’s
businesses and a recognition that a strong
health and safety focus can have a positive
impact on growth and brand value.
56
Corporate Social Responsibility
Continued
For more information on the Group’s health
and safety KPIs, see the key performance
indicators section on pages 18 to 19 of the
Strategic Report.
A number of sites within the Group hold
the ISO 18001 certification, the internationally
recognised assessment standard for
occupational health and safety management
systems, including Brush’s manufacturing
locations in the UK and the Czech Republic
and Ergotron’s Asia Pacific sites. GBIS
Huizhou China is also ISO 14001 registered.
The Air Management division’s Tualatin
facility earned its fifth year SHARP Award
(Safety & Health Achievement Recognition
Programme). SHARP is an intensive,
five-year safety programme and the site
was presented with its certificate in January
2018. The site will be pursuing the Voluntary
Protection Programme – the next step up
in safety excellence after SHARP – which
is a federally recognised OSHA safety
programme that continues to build
effective, world class safety culture
and performance.
Brush GMS is ISO 9001:2008 (quality
management system) accredited and
will be transitioning to ISO 9001:2015
during 2018. SST’s Carlsbad and
Shenzhen sites are both ISO 9001
(Quality Management) and 13485 (Quality
Management for medical devices) certified.
During 2017, a range of health and safety
initiatives were implemented across the
Group including Safety Councils, 190
certifications and wellness programmes,
designed to promote a strong health and
safety catalogue at local levels, some of
which are listed below:
• HVAC rolled out their Safety Council
early in 2017. The team worked on
facility communication across all
locations, harmonising policies, and
developing or sharing best practices.
As a result of these actions, they
had great success in reducing the
recordable injury rate by 16% over the
year. During 2018 HVAC, along with
all of Air Management, will engage
05
Health and safety
The Board is committed to
minimising the health and
safety risks that each Group
employee is 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 division 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, they 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.
Reports detailing each division’s
performance in relation to three health
and safety KPIs (major accident frequency
rate, accident frequency rate and accident
severity rate) are presented to the Melrose
Board and reviewed at each quarterly
Board meeting.
There were no material issues or concerns
identified by the Board during 2017.
While no corrective measures were
deemed necessary, the Board continues
to encourage management to remain
vigilant where employee and third party
safety is concerned.
Melrose Industries PLC Annual Report 2017 06
Supply chain assurance
Each of the businesses
is responsible for the
management of its
supplier base, including
the application of the
appropriate policy, which
best suits the geographical
and operational diversity
of the Group.
The security, assurance and ethical
compliance of business supply chains
are very important to Melrose and its
businesses. Responsibility for the
implementation and management of all
supplier-related policies rests with local
management. Such policies are used in
a manner appropriate to the size and
complexity of the business and also take
into account the nature and geographical
representation of key suppliers. A supplier
approval process exists within all business
divisions, which is linked to specific and
tailored supplier assessments and due
diligence requirements utilising third party
resources and the implementation of
appropriate terms and conditions for
the protection of the Group.
57
07
Human rights and
ethical standards
Sound business ethics and
integrity are core to the
Group’s values and a high
importance is placed on
dealings with all employees,
customers, suppliers and
other stakeholders.
The decentralised nature of the Group
means there is no over-arching policy
currently in place with regard to human
rights, however Melrose is committed to
good practice in respect of human rights.
Employees across the Group are required,
at all times, to exhibit the highest levels of
integrity and to maintain the highest ethical
standards in business affairs. The full text
of the Melrose Code of Ethics, which all
employees of the Group are required to
familiarise themselves with, can be found
on the Company’s website at: www.
melroseplc.net/about-us/code-of-ethics
In addition to the Melrose Code of Ethics,
each Group business is expected to have
its own code of ethics dealing with matters
such as human rights. All business-specific
employee policies are 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
managers within the Group’s businesses.
Finally, the Company produced its first
Modern Slavery Statement in June 2017
in accordance with the Modern Slavery
Act 2015 which is available at: www.
melroseplc.net/media/1412/msa-policy.
pdf . The Group has taken steps to
implement effective and proportionate
procedures to ensure that there are no forms
of modern slavery in the Group’s business
or supply chains. This has included the roll
out of a new policy regarding the prevention
of modern slavery and human trafficking
to all businesses and online training
for employees.
The Strategic Report, as set out on
pages 2 to 57, has been approved
by the Board
On behalf of the Board
Simon Peckham
Chief Executive
20 February 2018
Strategic ReportMelrose Industries PLC Annual Report 2017
58
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
78
80
91
The Board remains committed to
maintaining the high standards of
corporate governance required to
ensure that Melrose can continue
to deliver its strategy to the benefit
of shareholders.
Melrose Industries PLC Annual Report 2017 59
e
c
n
a
n
r
e
v
o
G
GovernanceMelrose Industries PLC Annual Report 2017 60
Governance overview
extensive financial and accounting experience, including her role as
Chairman of the Audit Committee for Novo Nordisk A/S, Savills plc.
and the House of Lords Commission.
Mr David Lis took up the role of Chairman of the Nomination
Committee on conclusion of the 2017 AGM, having served on the
Committee since joining the Melrose Board in 2016. Mr Lis brings
a wealth of experience to the role, including as non-executive
Director of Electra Private Equity PLC and BCA Marketplace plc.
On the recommendation of the Nomination Committee, the Board
decided to increase the number of independent Directors following
Mr Grant’s retirement so that they comprised the majority of the
members of the Board. Therefore, external recruitment consultants
Stonehaven International were retained to identify suitable
candidates for the Board’s consideration. Stonehaven International
provided an initial list of potential candidates which the Nomination
Committee reviewed and produced a shortlist of candidates, from
which several candidates were invited to interview with members
of the Committee. Mr Archie G. Kane was identified as the Board’s
preferred candidate and accepted the offer of appointment subject
to certain necessary approvals. Those approvals were granted and
Mr Kane was appointed to the Board on 5 July 2017.
Following Mr Kane’s appointment, the Committee continued its
search for a fifth independent non-executive Director. However, at
the time the Company’s approach to GKN plc was made public,
the appropriate candidate had not been identified and the search
for the fifth independent non-executive Director was put on hold
until the acquisition process has concluded.
Remuneration
The Directors’ Remuneration Report, comprising the Annual
Report on Remuneration, is available on pages 80 to 90.
The Company’s former long-term incentive plan, the Incentive
Plan (2012), crystallised on 31 May 2017 and, following shareholder
approval at a general meeting on 11 May 2017 (the General
Meeting), was replaced by a new scheme, the Incentive Plan
(2017), on equivalent economic terms. The Incentive Plan (2012)
had been central to the Company’s exceptional performance since
its establishment in creating £3.6 billion of shareholder value over
its performance period. Approval was also sought and granted at
the General Meeting for a new Directors’ Remuneration Policy to
be adopted in order to incorporate, and allow for awards to be
made under, the Incentive Plan (2017). The Incentive Plan (2017) is
on equivalent economic principles as the Incentive Plan (2012) with
additional, shareholder focused features, as set out in the circular
to shareholders (available at www.melroseplc.net/investors/
shareholder-information/shareholder-meetings). The only
change to the new Directors’ Remuneration Policy as compared
to the policy approved by shareholders at the 2016 AGM is to
reflect the inclusion of the Incentive Plan (2017) in place of the
Incentive Plan (2012). All other elements remained the same as
approved at the 2016 AGM.
Melrose’s remuneration philosophy remains unchanged; executive
remuneration should be simple, transparent, support the delivery of
the Melrose value creation strategy and only pay for performance.
Christopher Miller
Executive 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.”
Introduction from the Chairman
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 Code) issued by the
Financial Reporting Council (the FRC) and available to view on
the FRC’s website at: www.frc.org.uk
In support of this commitment, the Board carried out a number
of key governance activities during 2017 designed to ensure that
Melrose remains compliant with the provisions of the Code
and to enable continuous improvement in line with best practice
corporate governance guidelines.
Succession planning
Succession planning was an area of focus for Melrose in 2017.
The Nomination Committee and the Board have considered the
leadership needs of the Group, present and future, together with
the skills and experiences needed from its Directors going forward.
We recognise that succession planning is an ongoing process and
is critical to maintaining an effective and high-quality board.
Mr John Grant retired from the Board at the conclusion of the 2017
AGM in May. At the time of his retirement, Mr Grant was the Senior
Independent Director and Chairman of the Audit Committee.
His departure therefore led to a change in the composition of a
number of the independent non-executive positions of the Board
and Committees.
Mr Justin Dowley, who has served as a non-executive Director
since 2011, took up the role of Senior Independent Director of
the Board at the conclusion of the 2017 AGM, while continuing to
perform his role as the Chairman of the Remuneration Committee.
Ms Liz Hewitt stood down as Chairman of the Nomination
Committee on conclusion of the 2017 AGM to take up the role of
Chairman of the Audit Committee vacated by Mr Grant. Ms Hewitt
had served as a member of the Audit Committee since joining the
Board as a non-executive Director in 2013 and brings to the role
Melrose Industries PLC Annual Report 2017 61
Audit Committee report
p.72
Nomination Committee report
p.78
Directors’ remuneration report
p.80
Board structure
Board composition
Board independence
Board diversity
Executive Chairman 1
Executive Directors 3
Non-executive
Directors
4
Independent
Non-independent
4
4
Male
Female
7
1
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 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
• Determine the nature and extent of the risks the
Group is willing to take
• Agree the Group’s governance framework
and approve Group governance policies
Risk management and compliance
Melrose has implemented a uniform Enterprise Risk Management
programme across all its business units. Brush continues to
manage and monitor its programme and the Nortek businesses
have fully embedded our processes and procedures.
The Group’s compliance policies have been fully implemented
across all Nortek business units and continue to be monitored to
ensure their effectiveness for the enlarged Group. Taken together,
these initiatives have ensured the Nortek businesses’ effectiveness
at identifying and managing risks and have promoted and
embedded a more risk-aware culture. Further details on the
Group’s management of risk can be found on pages 42 to 43
of this Annual Report.
Melrose’s reputation for acting responsibly plays a critical role in
its success as a business and its ability to generate shareholder
value. We maintain high standards of ethical conduct and take a
zero tolerance approach to bribery, corruption, modern slavery
and human trafficking and any other unethical or illegal practices.
Supporting our updated compliance policies are a comprehensive
online training platform and an industry-leading whistleblowing
reporting facility. The integrity of the compliance framework is
further reinforced by the use of independent assurance and
compliance audits.
Engagement with shareholders
During 2017, the Company continued its programme of
engagement with major investors and the governance bodies in
respect of our Remuneration Policy and incentive arrangements.
In particular, the Chairman of the Remuneration Committee and
other members of the Board met with major shareholders prior to
the implementation of the Incentive Plan (2017), which was well
supported by shareholders. 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.
Further engagement with key shareholders and governance bodies
has been a central part of our bid for GKN plc and has continued
in our lead up to the 2018 AGM.
Christopher Miller
Executive Chairman
20 February 2018
GovernanceMelrose Industries PLC Annual Report 2017
62
Board of Directors
Executives
Christopher Miller
Executive Chairman
David Roper
Executive Vice-Chairman
Simon Peckham
Chief Executive
Geoffrey Martin
Group Finance Director
Year appointed
Appointed as Executive Chairman
on 29 May 2003.
Skills and experience
Christopher’s long-standing
involvement in manufacturing
industries and private investment
brings a wealth of experience
to the Board.
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
Business reviews attended
4
3
Other significant appointments
• Trustee of the Prostate Cancer
Research Centre
Year appointed
Appointed as Executive
Vice-Chairman on 9 May 2012,
having previously served as
Chief Executive from May 2003.
Skills and experience
From a wide range of roles in
corporate finance, private
investment and management in
manufacturing industries, David
brings significant investment,
financial and operational expertise.
A Chartered Accountant, David
qualified with Peat Marwick Mitchell,
following which he worked in the
corporate finance divisions of S.G.
Warburg, BZW and Dillon Read.
In September 1988, David was
appointed to the board of Wassall
PLC, before becoming its deputy
Chief Executive in 1993. Between
2000 and 2003, David was involved
in private investment activities and
served as a non-executive Director
on the boards of two companies
in France.
Year appointed
Appointed as Chief Executive
on 9 May 2012, having previously
served as Chief Operating Officer
from May 2003.
Skills and experience
Simon provides widespread
expertise in corporate finance,
mergers and acquisitions, strategy
and operations. Simon qualified as
a solicitor in 1986, before moving
to Wassall PLC in 1990, where he
became an executive Director in
1999. Between October 2000
and May 2003, Simon worked
for the equity finance division of
The Royal Bank of Scotland where
he was involved in several high
profile transactions.
Board meetings attended
Business reviews attended
4
3
Year appointed
Appointed as Group Finance
Director on 7 July 2005.
Skills and experience
Geoffrey provides considerable
public company experience and
expertise in corporate finance,
raising equity finance and financial
strategy. 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, serving
as Group Finance Director from
October 2000 until June 2005.
During this time, Geoffrey was
involved in a number of projects,
including raising public equity, debt
refinancing and the restructuring
and outsourcing of the
manufacturing and supply chain.
Other significant appointments
Board meetings attended
• Non-executive Director of
Greensphere Capital PLC
4
3
Business reviews attended
Independent
Not applicable
Committee membership
Board meetings attended
• Nomination
Independent
Not applicable
Business reviews attended
Independent
Not applicable
Independent
Not applicable
4
3
Melrose Industries PLC Annual Report 2017 Non-executive
63
Justin Dowley
Senior Independent
Non-executive Director
Liz Hewitt
Independent
Non-executive Director
David Lis
Independent
Non-executive Director
Archie G. Kane
Independent
Non-executive Director
Year appointed
Appointed as a non-executive
Director on 8 October 2013.
Year appointed
Appointed as a non-executive
Director on 12 May 2016.
Year appointed
Appointed as a non-executive
Director on 5 July 2017.
Skills and experience
Liz has extensive business,
financial and investment experience
gained from a number of senior
roles in international companies.
A Chartered Accountant, Liz
qualified with Arthur Andersen &
Co., following which she held a
variety of positions within Gartmore
Investment Management, CVC and
3i Group plc. Between 2004 and
2011, Liz was the Group Director
of Corporate Affairs for Smith
& Nephew plc, following a
secondment to the Department
for Business, Innovation and Skills
and the HM Treasury, where Liz
worked to establish The Enterprise
Capital Fund.
Board meetings attended
Business reviews attended
4
3
Other significant appointments
• Non-executive Director of
Novo Nordisk A/S, Savills plc,
Silverwood Property Ltd,
St George’s Fields Ltd and
St George’s Fields (No2) Ltd
• Independent Member of the
House of Lords Commission
Committee membership
• Audit (Chairman)(1)
• Nomination
• Remuneration
Independent
Yes
Skills and experience
David has held several senior
roles in investment and fund
management and brings extensive
financial experience to the Board.
David commenced his career at
NatWest, and held positions at
J Rothschild Investment
Management and Morgan Grenfell
after which David founded Windsor
Investment Management. David
joined Norwich Union Investment
Management in 1997 (later merging
to form Aviva Investors), before
becoming Head of Equities in
2012 and latterly Chief Investment
Officer, Equities and Multi Assets,
until his retirement in March 2016.
Board meetings attended
Business reviews attended
4
3
Other significant appointments
• Non-executive Director of Electra
Private Equity PLC and BCA
Marketplace plc
Committee membership
• Audit
• Nomination (Chairman)(1)
• Remuneration
Independent
Yes
Skills and experience
Archie qualified as a Chartered
Accountant with Mann Judd
Gordon and Company. After a
move into the financial services
sector as Group Financial Controller
of the TSB subsidiary United
Dominions Trust, Archie became
Group Strategy Director. Archie
later served in senior roles for
Lloyds Bank and was CEO of the
former mutual Scottish Widows
in 2003. In 2009 he moved to
become Group Executive Director
for all the group’s insurance
businesses and for Scotland,
until his retirement in May 2011.
Archie continues to serve as a
non-executive Governor of the
Board of Bank of Ireland.
Board meetings attended
Business reviews attended
2
1
Other significant appointments
• Non-executive Governor of the
Board of Bank of Ireland
Committee membership
• Audit
• Nomination
• Remuneration
Independent
Yes
Year appointed
Appointed as a non-executive
Director on 1 September 2011
and took up the role of Senior
Independent Director on the
retirement of John Grant at the
conclusion of the 2017 AGM.
Skills and experience
Appointed as Senior Independent
Director on 11 May 2017. Justin
has extensive experience with over
35 years spent within the banking,
investment and asset management
sector. 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.
Board meetings attended
Business reviews attended
4
3
Other significant appointments
• Non-executive Director of
Scottish Mortgage Investment
Trust PLC
• Director of a number of
private companies
• Steward of the Jockey Club
• Deputy Chairman of The Panel
on Takeovers and Mergers
(with effect from 1 May 2018)
Committee membership
• Audit
• Nomination
• Remuneration (Chairman)
Independent
Yes
(1) From conclusion of the 2017 AGM.
GovernanceMelrose Industries PLC Annual Report 2017 64
Directors’ report
The Directors of Melrose Industries PLC present their
Annual Report and audited financial statements of the
Group for the year ended 31 December 2017.
Incorporated information
The Corporate Governance Report set out on pages 68 to 71, the
Finance Director’s review on pages 32 to 40 and the Corporate
Social Responsibility section of the Strategic Report 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.
AGM
The Annual General Meeting of the Company will be held at Saddlers’
Hall, 40 Gutter Lane, London EC2V 6BR at 11 a.m. on 10 May 2018.
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 (the AGM Notice).
Directors
The Directors of the Company as at the date of this Annual Report,
together with their biographical details, can be found on pages 62
to 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
pages 80 to 90.
The statement of Directors’ responsibilities in relation to the
consolidated financial statements is set out on page 91, which
is incorporated into this Directors’ Report by reference.
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.
Pursuant to the Articles and in line with the Code, all of the
Directors of the Company are required to stand for re-election on
an annual basis. With the exception of Mr Archie G. Kane who will
be standing for election for the first time following his appointment
on 5 July 2017, all current Directors of the Company will be standing
for re-election by the shareholders at the forthcoming AGM.
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.
Insurance and indemnities
In accordance with the Articles and the indemnity provisions of the
Act, the Directors have the benefit of an indemnity from the Company
in respect of any liabilities incurred as a result of their office. This
indemnity is provided both within the Articles and through a separate
deed of indemnity between the Company and each of the Directors.
The Company has taken out an insurance policy in respect of those
liabilities for which the Directors may not be indemnified. Neither the
indemnities nor the insurance provides cover in the event that a
Director is proved to have acted dishonestly or fraudulently.
Post Balance Sheet events
In January 2018, in connection with the Company’s proposed
acquisition of GKN plc, the Group entered into a facilities
agreement for acquisition financing facilities. Further details
of the financing facilities are set out on page 67.
On 1 February 2018, the Company announced its formal offer to
acquire GKN plc on terms of 1.49 Melrose shares and 81 pence
per GKN share.
On 1 February 2018, the Company announced that it had entered
into consultations with employees regarding the intended closure
of the turbogenerator production facility at Ridderkerk, Netherlands
and the transfer of its 4-pole turbogenerator production to the
facility in Plzenˇ , Czech Republic. In the UK, Brush has entered
into consultation with its workforce about the future of 2-pole
turbogenerator production at the Loughborough, UK facility,
which accounts for approximately half the workforce at the site.
The cash cost of these restructuring items is estimated to be £40
million and is expected to be materially complete by the end of 2018.
Capital structure
As set out in detail on pages 43 to 46 of the prospectus published
by the Company on 6 July 2016 in connection with the Rights Issue
(the Prospectus), upon completion of the acquisition of Nortek on
31 August 2016 the listing of the Company’s ordinary shares on the
premium segment of the Official List was cancelled, and on that date
the Company announced that its ordinary shares had been re-
admitted to the standard segment of the Official List (Readmission).
The Company stated in the Prospectus that, following Readmission,
the Directors intended to seek a Premium Listing for Melrose as
soon as reasonably practicable, subject to meeting the eligibility
criteria contained in Chapter 6 of the Listing Rules. On 26 April 2017,
the Company’s ordinary shares were admitted to the premium
segment of the Official List.
On 31 May 2017 the Incentive Plan (2012) crystallised as planned.
As further detailed in the Directors’ Remuneration Report, 23,494
options over the incentive shares under the Incentive Plan (2012) (the
Incentive Shares (2012)) were cash cancelled immediately prior to
crystallisation, following which the remaining 26,506 options in issue
over the Incentive Shares (2012) were exercised on 30 May 2017 in
exchange for 26,506 Incentive Shares (2012), which were issued on
31 May 2017 and converted into 54,453,914 new ordinary shares
in the Company (2012 Incentive Plan Crystallisation). As a result, the
issued share capital of the Company increased to 1,941,200,503
ordinary shares of 48/7 pence each. Further details regarding the
crystallisation of the Incentive Plan (2012) are available in the circular
posted to shareholders on 7 April 2017 available at https://www.
melroseplc.net/media/1728/21347274-_-1-_circular.pdf and in
the Directors’ Remuneration Report.
On 29 June 2017 certain participants in the Incentive Plan (2017),
including the executive Directors, exercised options to subscribe for
the incentive shares under the Incentive Plan (2017) (the Incentive
Shares (2017)) and on the same date the Company issued 12,831
Incentive Shares (2017) for a subscription price of £1.00 per option
exercised (2017 Option Exercise). The Incentive Shares (2017) do
not carry voting rights. Following the issuance, the Company’s
issued share capital now consists of 1,941,200,503 ordinary shares
of 48/7 pence each, with each ordinary share carrying the right to
one vote, and 12,831 Incentive Shares (2017) which do not carry
the right to vote. Further details regarding the Incentive Plan (2017)
are available in the circular posted to shareholders on 7 April 2017
at https://www.melroseplc.net/media/1728/21347274-_-1-_
circular.pdf
Melrose Industries PLC Annual Report 2017 65
The table below shows details of the Company’s issued share capital as at 31 December 2016; immediately following the 2012 Incentive
Plan Crystallisation on 31 May 2017; immediately following the 2017 Option Exercise; and as at 31 December 2017.
Share class
Ordinary shares of 48/7 pence each
Incentive Shares (2017)
31 December 2016
31 May 2017
(2012 Incentive Plan
Crystallisation)
29 June 2017
(2017 Option
Exercise)
31 December 2017
1,886,746,589(1)
1,941,200,503(2)
1,941,200,503
1,941,200,503
Nil
Nil
12,831(3)
12,831
(1)
(2)
(3)
These ordinary shares were issued pursuant to the general authorities granted by the Company’s shareholders in accordance with section 551 and section 570 of the Act at a general meeting
of the Company held on 25 July 2016. The terms of this issue were fixed on 8 August 2016 following a meeting of a transaction committee of the Board.
Includes 54,453,914 ordinary shares issued on 31 May 2017 in connection with the 2012 Incentive Plan Crystallisation pursuant to the authority contained in Article 6(L) of the Company’s articles
of association, with a sum of £3,733,982.68 standing to the credit of the Company’s merger reserve being capitalised in order to pay up such shares in full.
The Incentive Plan (2017) was approved by the Company’s shareholders at a general meeting of the Company held on 11 May 2017, and these Incentive Shares were issued pursuant to the authority
granted at such meeting to issue Incentive Shares up to an aggregate nominal amount of £50,000.
• on a poll, one vote for every ordinary share held by them.
Shareholder
Details of the Incentive Plan (2012) and the Incentive Plan (2017)
are set out on page 85 of the Directors’ Remuneration Report
and note 21 to the financial statements, which are incorporated
by reference into this report.
The Directors note that, in connection with the Company’s
proposed acquisition of GKN plc, the Directors are seeking
authority to allot shares in the Company up to an aggregate
nominal amount of £178,210,189 (to apply in addition to existing
authorities). Further details are set out in the circular relating to
the proposed acquisition sent to the Company’s shareholders
on 2 February 2018, which provides notice of a general meeting
to be held on 8 March 2018.
Shareholders’ voting rights
Subject to any special rights or restrictions as to voting attached
to any class of shares by or in accordance with the Articles, at
a general meeting of the Company, each member who holds
ordinary shares in the Company and who is present (in person
or by proxy) at such meeting is entitled to:
• on a show of hands, one vote; and
With the exception of the Incentive Shares (2017), which do
not carry voting rights, there are currently no special rights
or restrictions as to voting attached to any class of shares.
The Company is not aware of any agreements between
shareholders that restrict voting rights attached to the ordinary
shares in the Company.
Where any call or other amount due and payable in respect of an
ordinary share remains unpaid, the holder of such shares shall not
be entitled to vote or attend any general meeting of the Company
in respect of those shares. As at 20 February 2018, all ordinary
shares issued by the Company are fully paid.
The Company’s incentive shares may only be transferred with
the prior written consent of the Board (such consent expressly
provided in respect of transfers to personal trusts, companies
wholly-owned by the relevant holder and certain of their
close relatives).
The Company is not aware of any agreements between
shareholders that restrict the transfer of ordinary shares
in the Company.
Articles of association
The Articles may only be amended by a special resolution at a
general meeting of the shareholders of the Company. There are
no amendments proposed to be made to the Articles at the
forthcoming AGM.
Substantial shareholdings
As at 31 December 2017, the following voting interests in the
ordinary share capital of the Company, disclosable under DTR 5,
had been notified to the Directors:
Fidelity Mgt & Research
BlackRock Inc
Old Mutual
Ameriprise Financial
Aviva plc
Affiliated Managers Group
Between 1 January 2018 and 20 February 2018, the following
voting interests in the ordinary share capital of the Company,
disclosable under DTR 5, were notified to the Directors.
Shareholding
170,830,412
152,914,793
141,394,166
120,163,145
108,680,727
99,800,027
% of ordinary
share capital as at
31 December 2017
8.80
7.88
7.28
6.19
5.60
5.14
% of ordinary share
capital as at date
Shareholding(1)
of disclosure(1)
64,669,685
3.33%
Details of the deadlines for exercising voting rights in respect of
the resolutions to be considered at the 2018 AGM are set out in
the AGM Notice on pages 156 to 161.
Shareholder
Deutsche Bank AG
(1) Since the disclosure date, the shareholders’ interests in the Company may have changed.
Restrictions on transfer of securities
The Articles do not contain any restrictions on the transfer of
ordinary shares in the Company, aside from the usual restrictions
applicable where shares are not fully paid up, if entitled to do so
under the Uncertificated Securities Regulations 2001, where the
transfer instrument does not comply with the requirements of the
Articles or, in exceptional circumstances, where approved by the
UK Listing Authority provided such refusal would not disturb the
market in such shares. Restrictions may also be imposed by
laws and regulations (such as insider trading and market abuse
provisions). Directors and certain senior employees of the Group
may also be subject to internal approvals before dealing in ordinary
shares of the Company and minimum shareholding requirements.
GovernanceMelrose Industries PLC Annual Report 2017 66
Directors’ report
Continued
Shareholder dividend
The Directors are pleased to recommend the payment of a final
dividend of 2.8 pence per share (2016: 1.9 pence) to be paid on
21 May 2018 to ordinary shareholders on the register of members
of the Company at the close of trading on 6 April 2018. This
dividend recommendation will be put to shareholders at the
forthcoming AGM of the Company, to be held on 10 May 2018.
Subject to shareholder approval being obtained at the AGM for the
final dividend, this will mean a full year 2017 dividend of 4.2 pence
per share (2016: 2.2 pence).
For discussions on the Board’s intentions with regard to the
dividend policy, please see the Chairman’s statement on page 2,
which is incorporated into this report by reference.
The Company offers a Dividend Reinvestment Plan (DRIP), which
gives shareholders the opportunity to use their dividend payments
to purchase further ordinary shares in the Company. Further
details about the DRIP and its terms and conditions can be found
within the Investors section of the Company’s website at
www.melroseplc.net
Historic dividends
The Company administers the unclaimed dividends of the former
FKI plc (now Brush Holdings Limited). Pursuant to law and the
Articles, the Company is obliged to pay such unclaimed dividends
12 years from the date of the last dividend claim of the particular
shareholder (Unclaimed Dividends). Six months after this time
period has expired, the Company’s policy is to donate the amount
of the Unclaimed Dividend to a charity of the Company’s choice.
As at 31 December 2017, the amount of such Unclaimed Dividends
was £139,481.83. If the Unclaimed Dividends are not claimed by
30 September 2018, the Company will donate the funds to charity.
Ability to purchase own shares
Pursuant to sections 693 and 701 of the Act and a special
resolution passed at a general meeting of the Company on
11 May 2017, the Company is authorised to make market
purchases of up to 188,674,658 of its ordinary shares, representing
approximately 10% of the issued ordinary share capital of the
Company. The Company has not made any purchases of its
own shares pursuant to this authority. This authority will expire
at the end of this year’s AGM, at which the Company is seeking
approval to make market purchases of its ordinary shares up to
194,120,050, being approximately 10% of the current issued
ordinary share capital (as enlarged as a result of the 2012 Incentive
Plan Crystallisation), together with an additional 259,889,859
ordinary shares in the event that the Company’s proposed
acquisition of GKN plc completes (being an amount which,
when aggregated with 194,120,050 ordinary shares, equates
to approximately 10% of the Company’s issued ordinary
share capital as it is expected to be enlarged as a result of
the proposed acquisition), thereby renewing the authority.
The full text of the resolution, together with minimum and
maximum price requirements, is set out in the AGM Notice
on pages 156 to 161.
Financial instruments
The disclosures required in relation to the use of financial
instruments by the Company, including the financial risk
management objectives and policies (including in relation to
hedging) of the Company and the exposure of the Company to
price risk, 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 32 to 40,
the risks and uncertainties section of the Strategic Report on
pages 44 to 49 and in note 23 to the financial statements,
which are incorporated by reference into this Directors’ Report.
Research and development activities
The industries in which the Melrose Group invests are highly
competitive and the businesses within the Group are encouraged
to research and develop new and innovative product lines and
processes in order to meet customer demands in a continuously
evolving environment.
An example of the types of new products being launched within
the Nortek businesses include Ergotron’s next generation of height
adjustable sit-stand desks, NSC’s fast response security panel and
the extension of HVAC’s clean suite products for operating room
use, as noted in the Divisional reviews on pages 22 to 31, which is
incorporated by reference into this Directors’ Report.
Business review and risks
A review of the Group’s performance, the key risks and uncertainties
facing the Group and details on the likely development of the Group
can be found in the Chairman’s statement on page 2 and the
Strategic Report on pages 2 to 57 of this Annual Report (including
the longer-term viability statement on page 41 and the risks and
uncertainties section on pages 44 to 49) which are incorporated
into this Directors’ Report by reference.
Employees
Details in relation to employment policies, employee involvement,
consultation and development, together with details of some of the
human resource improvement initiatives implemented during 2017
are shown on page 52 of the Corporate Social Responsibility
section of the Strategic Report, which is incorporated by reference
into this Directors’ Report.
Environmental
Details of the Group’s environmental initiatives, greenhouse gas
emissions and the methodology used to calculate such emissions
are set out on pages 54 to 55 of the Corporate Social Responsibility
section of the Strategic Report, which is incorporated by reference
into this Directors’ Report.
Political donations
The Group’s policy is not to make any political donations and
there were no political donations made during the year ended
31 December 2017 (2016: nil).
Branches
The Melrose Group and its businesses operate across various
jurisdictions. The Group has no registered branches.
Melrose Industries PLC Annual Report 2017 67
Auditor
So far as each Director is aware, there is no relevant audit
information (being information that is needed by the Company’s
auditor to prepare its report) of which the Company’s auditor is
unaware. Each Director has taken all the steps that he/she ought
to have taken as a Director to make him/herself 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 Act.
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 2017 and concluded that the external auditor was in
all respects effective. Deloitte LLP has expressed its willingness to
continue in office as auditor of the Group. Accordingly, resolutions
will be proposed at this year’s AGM for the reappointment of
Deloitte LLP as auditor of the Group and to authorise the Audit
Committee to determine its remuneration.
Approval
Approved by the Board and signed on its behalf by:
Jonathon Crawford
Company Secretary
20 February 2018
Disclosures required under Listing Rule 9.8.4R
Other than the following, no further information is required to be
disclosed by the Company in respect of Listing Rule 9.8.4R:
• details of the allotment of ordinary shares issued as a result
of the Incentive Plan (2012) Crystallisation, which are set
out on page 64 of this Directors’ Report and note 24 to
the financial statements (incorporated by reference into
this report); and
• details of the allotment of Incentive Shares (2017) as a result
of the 2017 Option Exercise, which are set out on page 64 of
this Directors’ Report and note 24 to the financial statements
(incorporated by reference into this report).
Significant agreements and change of control
With the exception of the Group’s banking facilities, the Incentive
Plan (2017) (including the options granted under this plan), 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 20 February 2018.
In July 2016, as part of the process to acquire Nortek, the Group
entered into a $1,250,000,000 senior term and revolving facilities
agreement (the Existing Facilities Agreement).
In the event of a change of control of the Company following
a takeover bid, the Company and lenders under the facility
agreement 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 January 2018, in connection with the Company’s proposed
acquisition of GKN plc, the Group entered into a term loan and a
revolving credit facility which comprised a £2.6 billion facility,
a $2.0 billion facility and a €0.5 billion facility (the New Facilities
Agreement). The facilities will only become available if the proposed
acquisition of GKN plc completes and if this occurs the debt drawn
under the Existing Facilities Agreement will be repaid and then the
facility cancelled.
Equivalent provisions apply under the New Facilities Agreement
in respect of a change of control as described above in relation to
the Existing Facilities Agreement.
In the event of a takeover of the Company, options granted under
the Incentive Plan (2017) would be exercised and any Incentive
Shares (2017) resulting from such exercise, or that had previously
been issued, would convert into ordinary shares in the Company
or an entitlement to a dividend paid in cash. The rate of conversion
is 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
the offer price, or any element of the offer price, is not in cash, the
Remuneration Committee will determine the value of the non-cash
element, having been advised by a reputable investment bank that
such valuation is fair and reasonable.
During 2017, long-term management incentive plans have been
put in place for the Nortek divisions which would be triggered upon
a takeover of the Company. The plans provide for the payment of
bonuses to certain key managers of the Nortek divisions based
upon the increase in value of the business.
GovernanceMelrose Industries PLC Annual Report 2017 68
Corporate governance report
In line with the UK Corporate Governance Code and the Listing
Rules issued by the Financial Conduct Authority, this section of the
Annual Report details the ways in which the Company has applied
and complied with the principles and provisions of the Code during
the year ended 31 December 2017.
In April 2016, the Financial Reporting Council (FRC) amended the
Code, a copy of which is available at www.frc.org.uk/Our-Work/
Publications/Corporate-Governance/UK-Corporate-
Governance-Code-April-2016.pdf
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 Audit Committee Report, Nomination Committee Report,
Directors’ Remuneration Report, Statement of Directors’
Responsibilities and the risk management and risks and
uncertainties sections of the Strategic Report also form part
of this Corporate Governance Report.
The Board has a fully encrypted electronic board portal system,
enabling Board, Committee and review papers to be delivered
securely and efficiently to Directors. This facilitates a faster and
more secure distribution of information, accessed using electronic
tablets and reduced resource usage.
Statement of compliance
Throughout the year ended 31 December 2017, the Company has
applied and complied with the main principles, the supporting
principles and the respective related provisions of the Code, with
the exception of the following:
D.1.1
Schedule A of the Code recommends that grants under
executive share options and other long-term investment
plans should normally be phased, rather than awarded in
one block. Grants under the Incentive Plan (2012), details
of which are set out on pages 85 to 86 of the Directors’
Remuneration Report in the Annual Report for the year
ended 31 December 2015, were awarded in one block,
rather than phased. The Incentive Plan (2012) was
recommended as being in the best interests of
shareholders as a whole by the Board and was approved
by shareholders at a general meeting held on 11 April
2012. The Incentive Plan (2012) crystallised in May 2017
and was finalised.
All other aspects of the executive Directors’ remuneration fully
comply with Schedule A of the Code. It is noted that grants under
the Incentive Plan (2017) will be phased rather than awarded in
one block.
Main Principle A: Leadership
The Board
Details of the structure of the Board and its key responsibilities
are shown on pages 62 to 63.
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 in relation to the crystallisation of the
Incentive Plan (2012) and the creation and approval of the Incentive
Plan (2017).
In addition, business review meetings are held between scheduled
Board meetings. There were three business review meetings held
during the year. The attendance of each Director at these review
meetings is set out on page 70. These meetings are critical to
providing the Directors with a comprehensive understanding of the
current performance of, and the key issues affecting, the Group’s
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 discuss
each business directly and to develop relationships with their
leadership teams.
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 accordance with its Articles and in compliance with the Act, the
Company has granted a qualifying third party indemnity to each
Director. This indemnity is provided both within the Company’s
Articles and through a separate deed of indemnity between the
Company and each of the Directors. 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 are made
to shareholders rests with the Chairman, Vice-Chairman and the
two other executive Directors.
The Board notes, and confirms its satisfaction with, the choice
of an Executive Chairman. Christopher Miller, the current Executive
Chairman of the Group, is one of the founding members of
Melrose, having been a Director since its incorporation in 2003.
Christopher’s long-standing involvement brings a wealth of
experience to the Board and his oversight of corporate governance
and compliance matters complements the work of the Group’s
non-executive Directors. Christopher continues to play an active
role in identifying and evaluating new opportunities for the Group.
The Chief Executive is responsible for strategic direction and
decisions involving the day-to-day management of the Company.
Non-executive Directors
The Company’s non-executive Directors are encouraged to,
and do, scrutinise the performance of the executive Directors in
all areas, including on strategy, risks and financial information,
through their roles on the Company’s Committees, at the Board’s
scheduled meetings and review sessions and on an ad hoc basis.
Melrose Industries PLC Annual Report 2017 69
Main Principle B: Effectiveness
Board composition
As at 20 February 2018, the Board comprised an Executive
Chairman, three other executive Directors and four non-executive
Directors. 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 significant appointments held
by the Directors.
The Board and the Nomination Committee undertake an annual
review of the time commitment required from both the executive
and non-executive Directors. The consensus view between the
Directors is that the current time commitment is appropriate.
The Board notes that Mr John Grant retired as a non-executive
Director at the conclusion of the 2017 AGM and was replaced as
Senior Independent Director by Mr Justin Dowley. On the
recommendation of the Nomination Committee, the Board had
decided to increase the number of independent Directors following
Mr Grant’s retirement so that they comprised the majority of the
members of the Board. Therefore, external recruitment consultants
Stonehaven International were retained to identify suitable
candidates for the Board’s consideration. Stonehaven International
provided an initial list of potential candidates which the Nomination
Committee reviewed and produced a shortlist of candidates, from
which several candidates were invited to interview with members
of the Committee. Mr Archie G. Kane was identified as the Board’s
preferred candidate and accepted the offer of appointment subject
to certain necessary approvals. Those approvals were granted and
Mr Kane was appointed to the Board on 5 July 2017.
Following Mr Kane’s appointment, the Committee continued its
search for a fifth non-executive Director. However, at the time
the Company’s approach to GKN plc was made public, the
appropriate candidate had not been identified and it was decided
to suspend the search for the fifth non-executive Director until the
acquisition process has concluded. Aside from their assistance
with the recruitment process, Stonehaven International have no
other connection with the Company.
Despite this appointment remaining outstanding, the Board is
satisfied that there will be sufficient challenge by non-executive
Directors of executive management in meetings of the Board
and that no individual or small group of individuals dominates
its decision making.
Non-executive Director independence
In accordance with the provisions of the 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.
Under the Code, the Board is required to state its reasons if it
determines that a Director is independent notwithstanding the
existence of any circumstances which may appear relevant to
its determination.
Mr Grant retired from the Board and his role as the Board’s Senior
Independent Director at the conclusion of the 2017 AGM, having
served three three-year terms as a non-executive Director.
Mr Grant’s role as a non-executive Director, and in particular the
length of his time in office, was closely monitored by the Board.
Even though Mr Grant served as a non-executive Director for
more than nine years since the date of his first election, the Board
determined that he continued to maintain his independence.
In addition, the Board continued to benefit from Mr Grant’s
invaluable experience in financial and other corporate matters.
On Mr Grant’s retirement the position of Senior Independent
Director was taken up by Mr Dowley.
The non-executive Directors are not entitled to any cash bonus or
shares under the Incentive Plan (2012) or the Incentive Plan (2017).
Board induction, training and support
An 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.
Board evaluation
Evaluation approach and process
In accordance with its obligations under the Code to conduct
an external Board evaluation at least once every three years, the
Board engaged Lintstock Limited to undertake an independent
evaluation of the Board, the Audit Committee, the Nomination
Committee, the Remuneration Committee and the Chairman’s
performance to identify areas where performance and procedures
might be further improved. Lintstock is a specialist corporate
governance consultancy and, other than the Board, Committee
and Chairman evaluations, has no commercial dealings or other
connection with the Melrose Group.
A range of topics were discussed including: Board mix, profile and
diversity, succession planning, risk and internal controls, strategy,
Board processes, future investor strategy and the Group’s
preparedness at managing the cyber risks facing the business.
The discussion also included a review of the actions agreed
following the 2016 Board evaluation, and the steps taken in 2017
to address these needs:
Actions agreed
from 2016 evaluation
What we have delivered
in 2017
To continue to focus on
succession planning for
the executive Directors
and senior management
and the Board’s visibility
of potential successors
within the Group, and
to further scrutinise
the composition,
expertise and diversity
of the Board.
To continue to focus
on risk management
and internal control and,
in particular, further
embedding a culture
of effective risk
management across
the Group.
Executive succession planning, talent
management and senior executive career
planning were considered by the Board
throughout the year, and the composition,
expertise and diversity of the Board is
subject to continuous review.
It is intended that these issues remain
a core focus for the Board and that they
be reviewed on at least an annual basis.
The Board and the Audit Committee
monitored throughout the year the key
elements of the Melrose risk management
framework and its application to the Group,
including the updated risk strategy, best
practice risk register with risk mapping
and profiling application, education and
training programmes and audit and
assurance processes. The review of the
implementation of these elements across
the Nortek business divisions was an area
of particular focus.
GovernanceMelrose Industries PLC Annual Report 2017 70
Corporate governance report
Continued
Outputs of the evaluation
Overall, the Board was satisfied with its performance, and agreed
that the Chairman and the Senior Independent Director continued
to be very effective.
In order to continue and further enhance the Board’s effectiveness,
the following areas were designated as the subject of management
focus during 2018:
• Executive and non-executive Director succession and senior
management succession (both in Melrose and its Group);
• risk management and internal control and to delineate
accountabilities between the Board and the Audit Committee;
and
• although considerable steps were taken to improve cyber
security across all business units in 2017 it was recognised
that cyber security is an ongoing risk and will, therefore, be
focused on again in 2018.
In accordance with the provisions of the Code, it is anticipated
that externally facilitated Board evaluations will be carried out at
least once every three years. The scope for each evaluation is
designed to build upon the previous evaluation to ensure that the
recommendations agreed are implemented and that year-on-year
progress is measured and reported upon.
Annual re-election of Directors
Pursuant to the Company’s Articles and in accordance with the
provisions of the Code, all of the Directors (with the exception of
Mr Kane who was appointed with effect from 5 July 2017) stood
for re-election at the 2017 AGM. With the exception of Mr Kane
who is standing for election for the first time, all current Directors
of the Company will be standing for re-election by shareholders
at this year’s AGM.
Following performance evaluations of each of the Directors and
having carefully considered the commitments required and the
contributions made by each Director, the Chairman is of the
opinion that each Director’s performance continues to be effective
and demonstrates commitment to the role. Similarly, following
performance evaluations of the Chairman, and having carefully
considered the commitments required and the contributions made
by the Chairman, the non-executive Directors, led by the Senior
Independent Director, are of the opinion that the Chairman’s
performance continues to be effective and that he 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
John Grant(3)
Justin Dowley
Liz Hewitt
David Lis
Archie G. Kane(4)
4
4
4
4
4
1
4
4
4
2
3
–
–
–
3(2)
1
3
3
3
2
2
2
–
–
–
–
2
2
2
1
2
–
–
–
–
1
2
2
2
1
3
3
3
3
3
2
3
3
3
1
(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)
(4)
John Grant retired with effect from the conclusion of the 2017 AGM on 11 May 2017, having
attended all meetings held to that date.
Archie G. Kane was appointed as a non-executive Director with effect from 5 July 2017 and
has attended all meetings since that date, plus the June Board and Nomination Committee
meetings as an observer prior to his appointment being finalised.
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 senior 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
failing to achieve business objectives and cannot provide absolute
assurance against material financial misstatement or loss.
The Board is committed to satisfying the internal control guidance
for Directors set out in the FRC’s Guidance on Risk Management,
Internal Control and Related Financial and Business Reporting.
In accordance with this guidance, the Board assumes ultimate
responsibility for risk management and internal controls, including
determining the nature and extent of the principal risks it is willing
to take to achieve its strategic objectives (its “risk appetite”) and
ensuring an appropriate culture has been embedded throughout
the organisation. The establishment of a revised risk management
and internal control system has been complemented by ongoing
monitoring and review, to ensure the Company is able to adapt
to an evolving risk environment.
A separate Audit Committee Report is set out on pages 72 to 77
and provides details of the role and activities of the Audit Committee
and its relationship with the internal and external auditors.
Managing and controlling risk
Since 2016, the Group’s approach to risk management has been
reviewed and enhanced. The systems, processes and controls
in place accord with the Code and the FRC’s updated guidance.
Details on the Group’s risk management strategy are set out on
pages 42 to 43.
Melrose Industries PLC Annual Report 2017 71
Further information regarding the Group’s financial risk objectives
and policies can be found in the Finance Director’s review on pages
32 to 40. A summary of the principal risks and uncertainties that
could impact upon the Group’s performance is set out on pages 44
to 49.
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 with the involvement of 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 76 to 77, the Group
engages BM Howarth as internal auditor. A total of 25 internal audit
visits, 21 of which were Nortek sites, were completed during 2017.
The Directors are pleased to report that there were no material
deficiencies at Brush and that the majority of the recommendations
presented in the internal audit reports have now been, or are in the
process of being, implemented. There were some deficiencies found
in HVAC’s internal financial controls at two sites. This prompted
immediate action by the Finance Director and the Melrose
accounting function, including strengthening of the local accounting
functions, implementation of more comprehensive and robust
controls and a specific action plan to address the shortcomings
identified. The internal auditor has scheduled follow up visits at each
site to review progress in the first half of 2018. The Committee has
already seen significant progress and is confident that the Nortek
Global HVAC sites have already, and will continue to, improve their
internal financial controls under Melrose ownership.
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.
Compliance and ethics
The Company takes very seriously its responsibilities under the
laws and regulations in the countries and jurisdictions in which the
Group operates and has in place appropriate measures to ensure
compliance. A compliance framework is in place comprising a suite
of policies governing anti-bribery and anti-corruption, anti-money
laundering, competition, trade compliance, data privacy,
whistleblowing, document retention and joint ventures. These
policies are in place within each business and 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/or associated
companies in which the Company or any of its subsidiaries has
a majority interest.
In addition, in conjunction with their internal audit function,
BM Howarth conduct compliance audits across the Group
and its businesses to identify any areas for improvement.
During 2017, the Company completed its roll-out of its online
compliance training platform to Nortek, covering topics such
as antitrust, trade compliance and export controls, data privacy,
anti-bribery and anti-corruption and anti-money laundering.
The Company produced its first Modern Slavery Statement in
June 2017 which is available at http://www.melroseplc.net/
media/1412/msa-policy.pdf . To support the Company’s belief in
the importance of this matter it also produced a Group-wide policy
on the prevention of modern slavery and human trafficking which
was rolled out to Nortek and Brush employees along with an online
compliance training module. The Company also rolled out an
online whistleblowing training module for all employees to promote
awareness of the importance of whistleblowing and the Company’s
externally hosted whistleblowing portal. The whistleblowing portal
received reports which were identified as employee related
matters. Each report was fully investigated by the Company and
all reports were presented to the Audit Committee for their review.
Main Principle D: Remuneration
Details regarding Directors’ remuneration, both generally and in
relation to the requirements of the Code, are set out in the
Directors’ Remuneration Report, which is presented in the following
three sections:
• the annual statement from the Chairman of the Remuneration
Committee, which can be found on pages 80 to 82;
• the Annual Report on Remuneration, which can be found on
pages 83 to 90; and
• the Directors’ Remuneration Policy, which can be found in the
circular dated 7 April 2017 on pages 19 to 27 available at
https://www.melroseplc.net/media/1728/21347274-_-1-_
circular.pdf and remains unchanged.
Main Principle E: Relations with shareholders
Through regular meetings and presentations between the
executive Directors, analysts and institutional shareholders,
including those following the announcements of the Company’s
annual and interim results, the Company seeks to build on a mutual
understanding of objectives with its shareholders. During 2017,
the Company continued its programme of engagement with
major investors and the governance bodies in respect of its
Remuneration Policy and incentive arrangements. In particular,
the Chairman of the Remuneration Committee and other
members of the Board met with major shareholders prior to the
implementation of the Incentive Plan (2017), which was well
supported by shareholders. The Board is pleased with the support
and constructive feedback throughout these discussions and it
is the Company’s intention to continue this programme for the
foreseeable future. Further engagement with key shareholders and
governance bodies has been a central part of the Company’s bid
for GKN plc and has continued in the lead up to the 2018 AGM.
The non-executive Directors are also available to meet institutional
shareholders should there be unresolved matters shareholders
wish to bring to their attention. The views of key analysts and
shareholders are generally reported 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 and any concerns of shareholders.
The Board welcomes the attendance of shareholders at the AGM,
the notice for which can be found on pages 156 to 161. The AGM
provides all shareholders with the opportunity to attend and vote
on the matters put to shareholders, either in person or by proxy.
The results of the voting on each of the resolutions proposed will
be announced shortly after the AGM has concluded, via the
Melrose corporate website at www.melroseplc.net
Details of the deadlines for exercising voting rights in respect of
the resolutions to be considered at the 2018 AGM are set out in
the AGM Notice on pages 156 to 161.
GovernanceMelrose Industries PLC Annual Report 2017 72
Audit Committee report
• reviewing the Company’s procedures for detecting fraud;
• assessing annually the external auditor’s independence and
objectivity, taking into account relevant UK law, regulation, the
Ethical Standards and other professional requirements and the
relationship with the auditor as a whole, including the provision
of any non-audit services;
• developing, implementing and monitoring the Group’s policy
on external audit and for overseeing the objectivity and
effectiveness of the external auditor;
• reviewing and challenging the provision of non-audit services
by the external auditor; and
• reviewing and considering the Annual Report and financial
statements to ensure that it is fair, balanced and
understandable and advising the Board on whether it can
state that this is the case.
Composition
On the retirement of Mr John Grant as Chairman of the Audit
Committee at the conclusion of the 2017 AGM, existing Audit
Committee member Ms Liz Hewitt took up the role of Chairman.
Ms Hewitt brings a wealth of expertise to the role as Audit
Chairman of Novo Nordisk A/S, Savills plc and the House of Lords
Commission. The Audit Committee briefly had three members on
Mr Grant’s retirement, until Mr Archie G. Kane’s appointment on
5 July 2017. 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 page 63.
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 2017, 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 to maintain a view of the internal controls and processes
throughout the year.
The attendance of its members at these meetings is shown in the
table at the start of this section.
Liz Hewitt
Audit Committee Chairman
The responsibilities of the Audit Committee (the
Committee) include overseeing financial reporting,
risk management and internal controls, in addition
to making recommendations to the Board regarding
the appointment of the Company’s internal and
external auditors.
Member
Liz Hewitt (Chairman)
John Grant(1)
David Lis
Justin Dowley
Archie G. Kane(2)
No. of meetings
3/3
1/1
3/3
3/3
2/2
(1) Retired from the Audit Committee with effect from the conclusion of the AGM on 11 May 2017.
(2) Appointed to the Audit Committee with effect from 5 July 2017.
Role and responsibilities
The Committee’s role and responsibilities are set out in its terms
of reference. These were updated in August 2017 in line with best
practice and are available on the Company’s website and from
the Company Secretary at the Company’s 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. The responsibilities of the
Committee include:
• reviewing and monitoring the integrity of the financial
statements of the Group, including the Annual Report and
interim report, and reviewing and reporting to the Board on
significant financial reporting issues and judgements which
they contain;
• keeping under review the effectiveness of the Group’s financial
reporting, risk management and internal control systems and
compliance controls;
• monitoring and evaluating the effectiveness of the internal
Significant activities 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:
audit function;
• reviewing and challenging the going concern assumption
and the assessment forming the basis of the longer-term
viability statement;
• focusing and challenging the consistency of accounting
policies, methods used to account for significant or unusual
transactions and compliance with accounting standards;
• reviewed the Annual Report and financial statements
and interim financial report, including the going concern
assumption and the assessment forming the basis of the
longer-term viability statement. As part of this review, the
Committee received reports from the external auditor on
their audit of the Annual Report and financial statements
and their review of the interim financial report;
• reviewing the Group’s arrangements for its employees to raise
concerns in confidence in accordance with the Company’s
whistleblowing policy;
• 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
Melrose Industries PLC Annual Report 2017 73
in relation to the 2017 Annual Report and financial statements.
The Committee advised the Board that, in its view, the 2017
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;
• 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 risk management
and internal controls and disclosures made in the Annual
Report and financial statements on this matter;
• reviewed the effectiveness of the Group’s internal and external
auditors; and
• reviewed and agreed the scope of work to be undertaken
in respect of the 2017 annual accounts by the external auditor
and the scope of work to be undertaken in 2018 by the
internal auditor.
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 2017
Significant issue considered by the Audit Committee
How the issue was addressed by the Audit Committee
The Committee challenged the outcome of the impairment review in respect
of Brush performed by management and in doing so considered the following:
• the Committee reviewed a paper, which included the key outputs of the
impairment model, prepared by management;
• the appropriateness of the inclusion of restructuring in the fair value less costs to
sell approach, on the basis that a market participant would restructure the Brush
business. In particular, with regard to the structural changes in the markets in
which Brush operates and following the recent announcements from key
participants in these markets;
• the trading assumptions that have been applied in the model, in particular
the assumptions that were key to the model, being revenue growth and
operating margin;
• the timing and the impact of the restructuring for the fair value in use less costs
to sell approach;
• the market assumptions for the long-term growth rates applied and the discount
rate used, taking into account third party valuations of the company;
• risk adjustments that have been applied to the model, in particular the fair value
less costs to sell model which includes the impact of future restructuring; and
• the appropriateness of the full disclosures in the financial statements in respect
of the impairment review performed and the impact, along with sensitivities that
could cause a future impairment.
Impairment of goodwill, intangible assets and other
fixed assets of the Energy CGU
The judgements in relation to goodwill impairment testing
include the assumptions applied in calculating the
recoverable amount of the cash-generating units being
tested for impairment.
In the 2016 Annual Report the headroom in respect of the
carrying amount of the Energy CGUs was £95.4 million
(23%), which was a tightening of headroom from that shown
in the previous year. As a result of this reduced headroom,
enhanced sensitivity disclosures were provided in the 2016
Annual Report in respect of this group of CGUs.
At the date of the 2017 interim results announcement, it was
evident that trading conditions had worsened and were in
fact the toughest conditions experienced since Melrose
acquired Brush in 2008.
Subsequently, it was announced, in a trading statement in
November 2017, that since the interim announcement the
market conditions had worsened such that a full review of
Brush was underway to improve its performance.
The closure of Brush China was announced in November
2017, resulting in an impairment loss on assets of
£31.1 million, and at 31 December a review of property,
plant and equipment was performed that identified a write
down of £18.2 million. The key estimates used to derive the
discounted cash flow valuations of the property, plant and
equipment were revenue changes, operating margins and
market conditions that impact long-term growth rates and
discount rates.
Furthermore, an assessment of the future cash flows of the
Brush businesses under a value in use basis, which does
not allow for the benefits of any restructuring programme that
has not been committed to, and under a fair value less costs
to sell basis, which does allow future restructuring to be
considered if it is viewed that a market participant would
restructure, was made.
In accordance with IAS 36, the higher valuation, being the
fair value less cost to sell basis, was used to value the Brush
business at £300 million, resulting in an impairment to
goodwill of £95.4 million.
In considering the valuation that has been used for Brush
using a fair value less cost to sell basis, the key estimates
that were used were the timing and impact of restructuring,
the possibility of a further reduction of future sales, operating
margins and market conditions that impact long-term growth
rates and discount rates.
(Refer to notes 3 and 11)
GovernanceMelrose Industries PLC Annual Report 2017 74
Audit Committee report
Continued
The Audit Committee’s activities during 2017
Significant issue considered by the Audit Committee
How the issue was addressed by the Audit Committee
Classification of non-underlying items and use
of Alternative Performance Measures (APMs)
The reporting, classification and consistency of non-
underlying items continue to be an area of focus for the
Committee. In particular, given the guidance on Alternative
Performance Measures (APMs) given by the European
Securities and Markets Authority (ESMA).
The Committee considers this to be a key consideration
when considering whether the financial statements give
a fair, balanced and understandable view of events.
(Refer to note 6 and the glossary to this Annual Report)
Non-audit fees
Under EU and Competition Commission rules, effective
from 17 June 2016, new restrictions on non-audit services
now apply.
Risk management and internal control
Monitored the risk management and the internal control
systems and conducted a review of their effectiveness.
Provisions for legal and environmental claims,
other provisions and contingent liabilities
The level of provisioning for legal and environmental claims
and other provisions requires 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 note 19)
Going concern and viability
Assessment of the going concern assumptions and
the basis of the viability statement.
The Committee has considered the nature, classification and consistency of
non-underlying items, whilst addressing the guidance given by ESMA. These
items were detailed in the external auditor’s paper to the Committee and are
clearly defined and discussed in the Finance Director’s review, along with the
glossary to this Annual Report.
The Committee has considered the Company’s accounting policy and reporting
practice as to non-underlying items and determines it to be clear, transparent
and appropriate, thereby assisting shareholders in measuring the underlying
performance of the Company. The Committee therefore concluded that these
non-underlying items were appropriately captured and disclosed.
The Committee also considered the disclosure of the Company’s APMs with
respect to applicable guidelines and noted that these are set out in detail in the
glossary to this Annual Report and found them to be clear and transparent.
The Committee has considered the application of the new rules to the Group,
noting in particular the cap on permitted non-audit services of 70% of average
audit fees over a three-year period, to be first applied in December 2020. Audit
fees in 2017, 2018 and 2019 will be relevant and the average of these three years
will be compared to the non-audit fees in 2020.
The Company’s non-audit fee represents 62% of the audit fees for 2017.
The Committee completed its annual review of the Group’s Non-Audit Services
Policy, whereby the Committee reviewed the services provided by the audit firm,
considered the impact of the services and threats and safeguards to ensure that
the auditor remained independent and the services provided were in line with the
Group’s non-audit services policy. The non-audit fees were also reviewed and
services provided approved.
The Committee received updates during the year from senior management
on the Company’s risk management framework and internal control systems.
The Committee received a presentation from senior management on the risk
management framework and on the financial, operational and compliance controls
in place.
In addition, the Committee were presented with the findings of the internal audit
visits on a bi-annual basis to assist them with determining the effectiveness of
internal controls within the Group.
The Committee considered the risk management and internal control systems
and concluded that they were effective and reported this to the Board.
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 and consistent
with previous years.
The Committee reviewed and supported management’s recommendation to
prepare the financial statements on a going concern basis.
The Committee also considered papers prepared by management detailing
the qualifications, assumptions, scenario modelling, sensitivity analysis and
judgements which underpinned the longer-term viability statement to be included
in the 2017 Annual Report. The Committee concurred with the assumptions and
judgements made by management and concluded that the longer-term viability
statement was appropriate.
Melrose Industries PLC Annual Report 2017 75
The Audit Committee’s activities during 2017
Significant issue considered by the Audit Committee
How the issue was addressed by the Audit Committee
Internal audit
Monitoring and evaluating the effectiveness of the internal
audit function.
The Committee reviewed and approved the new Internal Audit Charter
and committed to annually reviewing the Internal Audit Charter.
The Committee reviewed and assessed the effectiveness of the internal audit
process, by use of a questionnaire completed by each member and key
representatives of the Company and deemed it to be thorough and effective.
The Committee reviewed the reappointment of BM Howarth as internal auditor
and, following an assessment of the services delivered to the Company by BM
Howarth in 2017, approved their reappointment.
External audit
Monitoring and evaluating the effectiveness of the external
audit function.
The Committee reviewed the independence of the external auditor, whilst
considering fees in respect of the audit and non-audit services, and deemed
the external auditor to be independent.
The Committee reviewed the remuneration paid to the external auditor in 2017
in light of the services provided to the Company during 2017 and deemed it fair
and reasonable.
The Committee reviewed and assessed the effectiveness of the external audit
process. In doing so the Committee consulted the views of its members, the
Finance Director, the Chief Executive, the divisional finance directors and the
internal auditor.
Following the assessment, the Committee reviewed and approved the
reappointment of Deloitte LLP as external auditor.
Committee evaluation
Monitoring and evaluating the effectiveness
of the Committee.
The Committee participated in an externally facilitated independent evaluation
of itself carried out by Lintstock Limited to identify areas where performance
and procedures might be further improved.
Risk management and internal control
During 2017, the Committee monitored the effectiveness of the
Group’s risk management and internal control systems through
regular updates from management and a review of the key findings
presented by the external and internal auditors.
In accordance with provision C.2.3 of the Code, the Board
instructed the Committee to undertake a review of the
effectiveness of the Group’s risk management and internal control
systems, covering all material controls including financial,
operational and compliance controls.
This review took the form of management presentations followed
by a Committee discussion. The Company Secretary briefed the
Committee on the key elements of the Melrose risk management
framework including an updated risk strategy, a best practice risk
register with risk mapping and profiling application, an education
and training programme and an audit and assurance process,
as well as a confirmation to the Committee that this has been
implemented across the Nortek business units.
Management then reported on the Group’s internal control systems
supported by the internal audit review. Samples of both Group
and business unit controls, including financial, operational and
compliance controls, were presented and examined. The Group’s
risk management and internal control systems were reviewed
and the Committee concluded that these systems were effective.
The Committee reported its conclusions to the Board at the next
scheduled Board meeting.
External audit
Assessment of effectiveness and reappointment
The Committee reviews and makes recommendations with regard
to the reappointment of the external auditor. In making these
recommendations, the Committee considers auditor effectiveness
and independence, partner rotation and any other factors which
may impact the external auditor’s reappointment.
The Committee has reviewed the external auditor’s performance
and effectiveness. For 2017, a series of questions covering the key
areas of the audit process that the Committee is expected to have
an opinion over were put to the Committee, including:
• the calibre, continuity, experience, resources and technical
and industry knowledge of the engagement partner and of
the wider external audit team;
• the planning and execution of the audit process;
• the quality and timeliness of communications from the
external auditor;
• the quality of support provided to the Committee by the
external audit partner;
• the degree to which the external auditor and the audit process
have contributed to improvements in financial reporting to
Melrose’s shareholders; and
• the external auditor’s independence and objectivity.
The Committee, along with the Finance Director and the divisional
finance directors, were requested to complete a questionnaire
containing these questions. The Chairman also sought feedback
from the Chief Executive and the internal auditor. The Company
Secretary 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.
GovernanceMelrose Industries PLC Annual Report 2017 76
Audit Committee report
Continued
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 auditor will be put to the shareholders at the 2018 AGM.
Audit tendering
The Committee has considered the audit tendering provisions
outlined in the Code. The Committee has also reviewed the
guidance provided by the European Commission and the
Competition and Markets Authority (CMA). It is the Committee’s
understanding that, under the CMA and the EU rules, rotation of
the external audit firm is required by 2024. It is the Committee’s
intention to put the external audit out to tender in accordance
with the CMA and the EU timeframes.
The current audit engagement partner was appointed in 2015 and
is not due to rotate until after the year ending 31 December 2019.
The Committee remains satisfied with the quality, integrity and the
effectiveness of the work undertaken by Deloitte LLP on behalf of
the Melrose shareholders. Accordingly, it is not proposed to put the
audit out to tender at the present time but the matter will be kept
under review.
Non-audit services
Under EU and Competition Commission rules, effective from
17 June 2016, restrictions on non-audit services now apply, which
cap the level of permissible non-audit services awarded to the
external auditor at 70% of the average audit fee for the previous
three years. The cap applies prospectively and so will first apply
in respect of the Company’s 2020 financial year, audit fees in 2017,
2018 and 2019 being relevant.
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 revised in 2016).
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 the
audit firm may, in the future, be required to give an audit opinion.
During 2017, the main non-audit services provided by Deloitte LLP
were in relation to the reporting accountant’s role for the step
up to the premium segment of the Official List following the
acquisition of Nortek Inc., an aborted acquisition, tax compliance
in non-EU subsidiaries and the audit of non-statutory accounts.
The Company did not use Deloitte for any taxation advice in 2017
and does not intend to during 2018. The Company’s non-audit
fee represents 62% of the audit fees for 2017.
The Committee closely monitors the amount of non-audit work
undertaken by the external auditor and considers using other firms
for transaction-related work. However, there are occasions when
it is appropriate, because of background knowledge, to use our
auditor for non-audit work, for example on certain advisory and
compliance projects.
Despite being well within the CMA guidance, the Committee has
taken into account feedback from institutional shareholder services
and has been actively migrating non-audit work to other firms and
has recently worked with Ernst & Young and KPMG in respect of
corporate finance affairs and obtained tax advice from
PricewaterhouseCoopers.
An analysis of the fees earned by the external auditor for audit
and non-audit services can be found in note 7 to the consolidated
financial statements.
As in previous years, the Audit Committee specifically considered
the potential threats that each of these limited non-audit
engagements may present to the objectivity and independence
of the external auditor. In each case, the Committee was satisfied
with the safeguards in place to ensure that the external auditor
remained independent from the Company and its objectivity was
not, and is not, compromised.
Auditor objectivity and independence
The Committee carries out regular reviews to ensure that auditor
objectivity and independence are maintained at all times.
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, Deloitte LLP is also required to rotate the audit
partner responsible for the Group audit every five years and
significant subsidiary audits every five 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 Ltd, an external firm, provides internal audit services to
the Group in accordance with an annually agreed Internal Audit
Charter and internal audit plan. A rotation programme is in place,
such that every business unit site will have an internal audit at least
once every three years, with the largest sites being reviewed at
least once every two years. Upon acquisition, each site of any new
business is promptly visited as part of the acquisition accounting
exercise, which better informs the external audit rotation process.
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.
Melrose Industries PLC Annual Report 2017 77
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 and
the Head of Financial Reporting, followed by a meeting to discuss
these key findings and to agree on resulting actions. Site visits were
conducted by BM Howarth across a total of 25 sites, 21 of which
were Nortek sites.
The Directors are pleased to report that there were no material
deficiencies at Brush and that the majority of the recommendations
presented in the internal audit reports have now been, or are in
the process of being, implemented. There were some deficiencies
found in Nortek Global HVAC’s internal financial controls at two
sites. This prompted immediate action by the Finance Director and
the Melrose accounting function, and resulted in the strengthening
of the local accounting functions, implementation of more
comprehensive and robust controls and a specific action plan
to address the shortcomings identified. The internal auditor has
scheduled follow-up visits at each site to review progress in the first
half of 2018. The Committee has already seen significant progress
and is confident that the Nortek Global HVAC sites have already,
and will continue to, improve their internal financial controls under
Melrose ownership.
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.
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. The Committee also reviews BM Howarth’s
performance against the agreed internal audit programme.
Liz Hewitt
Chairman, Audit Committee
20 February 2018
GovernanceMelrose Industries PLC Annual Report 2017 78
Nomination Committee report
Davis Lis
Nomination Committee Chairman
The Nomination Committee (the 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
David Lis (Chairman)
Christopher Miller
John Grant(1)
Justin Dowley
Liz Hewitt
Archie G. Kane(2)
No. of meetings
2/2
2/2
0/0
2/2
2/2
1/1
(1)
(2)
Mr John Grant retired as a non-executive Director with effect from the conclusion of the 2017
AGM on 11 May 2017. Mr Grant attended all Board and Committee meetings held during the
period 1 January 2017 to 11 May 2017.
Mr Archie G. Kane was appointed as a non-executive Director with effect from 5 July 2017.
Mr Kane attended all Board and Committee meetings held during the period 5 July 2017 to
31 December 2017 and attended the meetings of the Board and Nomination Committee in
June 2017 as an observer.
Directors’ remuneration report
p.80
“ Melrose is a meritocracy and individual
performance is the key determinant
in any appointment, irrespective of
ethnicity, gender or other characteristic,
trait or orientation.”
Discharge of responsibilities
The Committee discharges its responsibilities through:
• regularly reviewing 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;
• giving full consideration to succession planning of senior
executives of the Company and any of its subsidiaries;
• evaluating the skills, knowledge and experience of potential
Board candidates and making suitable nominations to the
Board; and
• keeping up-to-date and fully informed on 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 2017 the Committee met twice. The attendance of its members
at these Committee meetings is shown in the table opposite.
The Committee’s terms of reference, which were last revised in
June 2017, 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
2017 activities of the Committee are set out below and overleaf.
Composition
In compliance with the Code, the majority of the members of the
Committee were independent non-executive Directors throughout
2017, with Mr Christopher Miller, the Executive Chairman of the
Board, being the only non-independent member. Mr Grant served
on the Committee until stepping down at the conclusion of the
2017 AGM in May. At the time of his retirement, Mr Grant was
the Senior Independent Director and Chairman of the Audit
Committee. His departure therefore led to a change in the
composition of a number of the independent non-executive
positions of the Board and Committees.
Mr Justin Dowley, who has served as a non-executive Director
since 2011, was elected to the role of Senior Independent
Director of the Board at the conclusion of the 2017 AGM, while
continuing to perform his role as the Chairman of the Remuneration
Committee. Ms Liz Hewitt stood down as Chairman of the
Nomination Committee on conclusion of the 2017 AGM to take up
the role of Chairman of the Audit Committee vacated by Mr Grant.
Ms Hewitt had served as a member of the Audit Committee since
joining the Board as a non-executive Director in 2013 and brings
extensive financial and accounting experience to the role, including
as Chairman of the Audit Committee for Novo Nordisk A/S, Savills
plc. and the House of Lords Commission.
Mr David Lis took up the role of Chairman of the Nomination
Committee on conclusion of the 2017 AGM, having served on the
Committee since joining the Melrose Board in 2016. Mr Lis brings
a wealth of experience to the role, including as non-executive
Director of Electra Private Equity PLC and BCA Marketplace plc.
Melrose Industries PLC Annual Report 2017 79
On the recommendation of the Nomination Committee, the Board
decided to increase the number of independent Directors following
Mr Grant’s retirement so that they comprised the majority of the
members of the Board. Therefore, external recruitment consultants
Stonehaven International were retained to identify suitable
candidates for the Board’s consideration. Stonehaven International
provided an initial list of potential candidates which the Nomination
Committee reviewed and produced a shortlist of candidates, from
which several candidates were invited to interview with members
of the Committee. Mr Archie G. Kane was identified as the Board’s
preferred candidate and accepted the offer of appointment subject
to certain necessary approvals. Those approvals were granted and
Mr Kane was appointed to the Board on 5 July 2017.
Mr Kane brings significant financial and accounting experience to
the Board having begun his career as a Chartered Accountant at
Mann Judd Gordon and Company. Mr Kane then moved into the
financial services sector as Group Financial Controller of the
TSB subsidiary United Dominions Trust. Mr Kane became Group
Strategy Director responsible for strategic planning for all group
businesses, mergers and acquisitions, disposals and long-term
business research. Mr Kane continued to serve in senior roles for
Lloyds Bank, including Retail Financial Services Director and
Group Director for IT & Operations before being appointed Group
Executive Director Insurance Investments and Chief Executive
Officer for the former mutual Scottish Widows in 2003. In 2009
he moved to become Group Executive Director for all the group’s
insurance businesses and for Scotland, until his retirement in May
2011. Mr Kane continues to work as a non-executive Governor of
the Bank of Ireland. In accordance with the Articles, Mr Kane will
stand for election at the 2018 AGM.
Following Mr Kane’s appointment, the Committee continued
its search for a fifth non-executive Director. However, at the time
the Company’s approach to GKN plc was made public, the
appropriate candidate had not been identified and it was decided
to suspend the search for the fifth non-executive Director until the
acquisition process has concluded.
The Company Secretary acts as secretary to the Committee.
On occasion, the Committee invites the Chief Executive, the
Executive Vice-Chairman and the Group Finance Director to
attend discussions where their input is required.
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 the Board 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 and knowledge. The
most important priority of the Committee, however, has been, and will
continue to be, to ensure 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
and ethnic diversity, throughout the Melrose Group and notes the
recommendations of Lord Davies’ review, “Women on Boards”
and Sir John Parker’s review “Report into Ethnic Diversity of UK
Boards” and continues to encourage diversity throughout the
Group. Although not appropriate to set specific diversity targets
at Board level and throughout the Group’s workforce due to
Melrose’s strategic business model and frequent turnover of
businesses, Melrose is actively engaged in finding ways to
increase the Group’s diversity.
What the Committee did in 2017
The principal focus of the Committee during 2017 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 executive Directors
and non-executive Directors in conjunction with the provisions
of the Code. In particular, action was taken to replace Mr Grant
who, having served more than three, three-year terms as a
non-executive Director, stood down from the Board following
the conclusion of the 2017 AGM. The Committee determined
that in securing a replacement for John Grant it would increase
the number of non-executive Directors to five, so there will
be a majority of independents serving on the Board. The
Committee recommended the appointment of Mr Kane whose
appointment was approved by the Board and Mr Kane was
appointed as a non-executive Director with effect from 5 July
2017. The recruitment process for the fifth non-executive
Director has been postponed until the conclusion of the GKN
plc acquisition process;
• the existing time commitment of the Company’s non-executive
Directors was reviewed and confirmed as appropriate;
• the Committee membership was reviewed and a
recommendation made to the Board that, subject to the
appointment of a new non-executive Director, no changes
would be required to be made in 2018;
• consideration was given to the reappointment of each of the
Directors (with the exception of Mr Kane who is standing for
election for the first time since his appointment took effect on
5 July 2017) before making a recommendation to the Board
regarding each Director’s re-election at the 2018 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 businesses 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;
• the Committee’s terms of reference were reviewed and
updated in line with best practice; and
• the Committee participated in an externally facilitated
independent evaluation of itself carried out by Lintstock Limited
to identify areas where performance and procedures might be
further improved.
David Lis
Chairman, Nomination Committee
20 February 2018
GovernanceMelrose Industries PLC Annual Report 2017 80
Directors’ remuneration report
Justin Dowley
Remuneration Committee Chairman
The Board has delegated to the Remuneration
Committee (the Committee) responsibility for
overseeing the remuneration of the Company’s
Directors, Company Secretary and other
senior employees.
Member
Justin Dowley (Chairman)
John Grant(2)
Liz Hewitt
David Lis
Archie G. Kane(3)
No. of meetings(1)
2/2
1/1
2/2
2/2
1/1
(1)
Reflects regular scheduled meetings. The Committee also met twice in connection
with the establishment of the Incentive Plan (2017).
(2) Retired from the Committee with effect from the conclusion of the AGM on 11 May 2017.
(3) Appointed to the Committee with effect from 5 July 2017.
“ Melrose’s philosophy is that executive
remuneration should be simple and
transparent, support the delivery of
the value creation strategy and pay
only for performance.”
Dear Shareholder,
On behalf of the Board, I am pleased to present our report on
Directors’ remuneration at the end of yet another successful year.
As set out elsewhere in this Annual Report, the disappointing
downgrade of Brush and the restructure of its turbogenerator
business, albeit a small part of the Group, is offset by the scale and
pace of the transformation achieved with Nortek. Nortek recorded
a 52% improvement in its underlying profit through the 5.5
percentage point improvement in its underlying profit margins to
over 15%. This margin improvement had been the original three to
five-year aim when the business was acquired, but this has been
achieved in under 18 months.
Our Directors’ Remuneration Policy was approved by shareholders
at the General Meeting on 11 May 2017, with over 80% of votes
cast in favour of the resolution, a level of support which was also
reflected in the approval of the Incentive Plan (2017). The Policy is
set out on pages 19 to 27 of the Circular relating to the General
Meeting held on 11 May 2017, which is available on the Company’s
website at https://www.melroseplc.net/media/1728/21347274-
_-1-_circular.pdf
This report includes the Annual Report on Remuneration, which
provides details on the amounts earned in respect of the year
ended 31 December 2017 and which will be subject to an advisory
vote at the AGM to be held on 10 May 2018.
Performance in 2017
2017 was another very strong year for Melrose and marked
another milestone in our “buy, improve, sell” strategy. It is with
this performance in mind, and in line with Melrose’s remuneration
philosophy of paying only for performance, that the Committee has
taken its decisions in respect of executive Directors’ remuneration
arrangements for 2017 and 2018.
Our remuneration structure for executive Directors
Melrose’s philosophy is that executive remuneration should be
simple and transparent, support the delivery of the value creation
strategy and pay only for performance. This philosophy is reflected
in our remuneration structure.
Board of Directors
p.62 to 63
Melrose Industries PLC Annual Report 2017 81
The Committee feels strongly that rewards should be linked to
generation and delivery of real returns to shareholders.
• Base salary: Base salaries are considered reasonably
conservative in comparison to a market-competitive range for
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 eight 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 Group defined benefit
pension scheme.
• 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
three years, the average percentage of base salary payable
has been 91%. The maximum opportunity is deliberately
positioned below the median maximum opportunity for FTSE
250 companies.
• Long-term incentives: The Incentive Plan (2012) crystallised
on 31 May 2017 and was renewed on equivalent economic
terms with further shareholder protections. This renewal was
approved by shareholders by special resolution at the General
Meeting held on 11 May 2017.
The values delivered to the executive Directors under the Incentive
Plan (2012) are included in the single total figure of remuneration
table on page 84, and are further described below that table. It
should be noted that these values were earned over the five-year
performance period and that no other long-term incentive vested
to the executive Directors over that period.
The Committee strongly believes that this simple and transparent
incentive framework is aligned with the Company’s strategy for
creation of shareholder value. The Company’s long-term incentive
arrangements have applied since Melrose was floated in 2003
and have been regularly renewed with shareholder approval since
then. Consistent with Melrose’s remuneration principles, they are
intended to align management’s incentive arrangements directly
with the interests of shareholders by linking remuneration
specifically to shareholder value.
Since its first acquisition in 2005, Melrose has demonstrated an
excellent track record, including:
• generating a total net shareholder value increase of £4.8 billion
as set out in the table on page 83;
• maintaining an average annual return on investment of 25%
since the first acquisition in 2005; and
• producing a gross return of approximately £17.30 for
shareholders who invested £1 at the time of its first acquisition
in 2005.
The awards paid under the Incentive Plan (2012) were based on
value created between March 2012 and 31 May 2017, during
which time Melrose’s management created £3.6 billion in value for
shareholders, equating to an average annual return of 22%. In the
view of the Remuneration Committee, this validates the incentive
arrangements as a highly effective and essential mechanism in
establishing the necessary environment for management to
produce the significant returns enjoyed by shareholders to date.
We believe that this remuneration strategy has also directly driven
historical outperformance when compared with our competitors
and supported the Company’s success. 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.
We have included on page 86 details of the awards granted to
the executive Directors in 2017 under the Incentive Plan (2017).
That plan entitles its participants to 7.5% of the increase in the
index-adjusted value over the course of the performance period
from and including 31 May 2017, to (but excluding) 31 May 2020.
Through a combination of grants under the Remuneration Policy
and their own self-funded purchases of shares, the executive
Directors have built significant shareholdings in the Company.
As at 31 December 2017, the Chairman and Chief Executive held
135 and 77 times their base salary, respectively, in Melrose shares.
The table below shows the number of ordinary shares held by the
executive Directors as at 31 December 2017 and the value of each
executive Director’s shareholding at that date as a multiple of their
2017 base salary. Further details on Directors’ shareholdings are
given on page 87.
Number
of shares
held as at
31 December
2017
Value of
shares held at
31 December
2017 (1)
(£)
Value of
shares held at
31 December
2017 as a multiple
of 2017 base
salary
Executive Director
Christopher Miller
30,108,510(2)
63,890,258
David Roper
15,730,130
33,379,336
Simon Peckham
17,265,565
36,637,529
Geoffrey Martin
7,395,256
15,692,733
135x
70x
77x
41x
(1)
(2)
For these purposes, the value of a share is 212.20 pence, being the closing mid-market price
on 29 December 2017, being the last business day prior to 31 December 2017.
As at 31 December 2017, the interest of Christopher Miller included 8,750,000 ordinary shares
held by Harris & Sheldon Investments Limited, a company which is connected with
Christopher Miller within the meaning of section 252 of the Act.
Our remuneration structure for non-executive Directors
A simple remuneration structure is applied for the non-executive
Directors. Non-executive Directors are paid fees to reflect market
conditions and to attract individuals with appropriate knowledge
and expertise. Fees for non-executive Directors are determined
by the executive Directors, and non-executive Directors do not
participate in the Company’s pension arrangements, the annual
bonus or long-term incentive arrangements.
GovernanceMelrose Industries PLC Annual Report 2017 82
Directors’ remuneration report
Continued
2017 key decisions and incentive pay-outs
The Remuneration Committee remains committed to a responsible
approach to executive pay.
In line with increases in previous years, an increase of 3%
was made to the executive Directors’ salaries with effect from
1 January 2017. This is consistent with the salary rises awarded
to the wider head office population 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 increased by 3% with effect from
1 January 2017. However, the additional fees payable to the
committee chairmen and the Senior Independent Director were
left unchanged.
Annual bonuses for executive Directors are calculated using two
elements, 80% being based on diluted earnings per share growth
and 20% based on a strategic element. The maximum bonus
opportunity is set at 100% of base salary, which is below the
maximum median annual bonus opportunity for FTSE 250
companies, and reflects the participation of the Chief Executive
and Group Finance Director in the Incentive Plan (2012) and
Incentive Plan (2017). The Chairman and the Vice-Chairman do
not participate in the annual bonus scheme. Information on the
bonuses earned during the year and the relevant performance
measures is set out on page 85.
The Incentive Plan (2012) crystallised on 31 May 2017 as referred
to above, and further information is set out below the single total
figure of remuneration table on page 84. Allocations of options
to acquire incentive shares under the Incentive Plan (2017) were
made on establishment on 31 May 2017, as set out below. On
29 June 2017, the executive Directors exercised all options held by
them at that time, paying the exercise price to the Company and
being issued with incentive shares under the Incentive Plan (2017).
No value can be realised in respect of these shares until
crystallisation of the Incentive Plan (2017), which is intended to
occur on 31 May 2020.
Approach to Directors’ remuneration for 2018
In 2018, we will apply the Remuneration Policy approved by
shareholders at the General Meeting on 11 May 2017.
Executive Directors’ base salaries have been increased by 3%,
with effect from 1 January 2018. This is consistent with the salary
rises awarded to the wider head office population, other than
where such employees’ salaries have been increased on a different
basis to reflect individual circumstances, such as promotions.
Non-executive Directors’ basic fees for 2018 have also been
increased by 3%, with effect from 1 January 2018. However, the
additional fees payable to the committee chairmen and the Senior
Independent Director are viewed as appropriate and have been
left unchanged.
The overall framework for the executive Directors’ annual bonus
arrangements for 2018 will remain the same as in 2017, 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.
In accordance with terms of the Incentive Plan (2017), allocations
are phased over the course of the performance period.
Accordingly, the Remuneration Committee intends to make a
further allocation of options over incentive shares in the Incentive
Plan (2017) to executive Directors and senior management during
2018. For accounting purposes, the IFRS 2 charge has been
calculated as if all three tranches have been granted on day one
because of a common expectation, established at that date but
subject to changes to take account of exceptional circumstances,
between employees and the Company that the remaining options
will be allocated annually in two more equal tranches over the
three-year performance period.
Business unit long-term incentive plans
Long-term incentive plans were put in place for the leadership
of the Group’s businesses during 2017, with payouts based on
the creation of shareholder value in their respective businesses.
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 Committee are
engaged in an ongoing dialogue with corporate governance
advisory agencies and investors in order to better understand
their views on Melrose’s approach to executive remuneration.
Specifically during 2017, the Company conducted a formal
engagement with over 30 key shareholders and corporate
governance advisory agencies in respect of the AGM and
the establishment of the Incentive Plan (2017).
Justin Dowley
Chairman, Remuneration Committee
20 February 2018
Melrose Industries PLC Annual Report 2017 83
Annual Report on Remuneration
Melrose’s remuneration philosophy is that executive
remuneration should be simple and transparent, support
the delivery of the value creation strategy and pay only for
performance. This philosophy is reflected in our remuneration
structure, whereby:
• both the salary and annual incentive remuneration
(annual bonus) is positioned below the median maximum
opportunity for FTSE 250 companies; and
• long-term incentive remuneration is intended to directly align
executive Directors’ remuneration with that of shareholders
by connecting remuneration specifically to the creation of
shareholder value.
The Committee strongly believes that this simple and
transparent incentive framework is aligned with the Company’s
strategy for creation of shareholder value. The Company’s
long-term incentive arrangements have applied since Melrose
was floated in 2003 and have been regularly renewed
with shareholder approval since then. Consistent with
Melrose’s remuneration principles, they are intended to align
management’s incentive arrangements directly with the
interests of shareholders by linking remuneration specifically
to shareholder value.
Since its first acquisition in 2005, Melrose has demonstrated
an excellent track record, including:
• generating a total net shareholder value increase of £4.8 billion
as set out in the table opposite;
• maintaining an average annual return on investment of 25%;
and
• producing a gross return of approximately £17.30 for
shareholders who invested £1 at the time of its first acquisition
in 2005.
The awards paid under the Incentive Plan (2012) are based on
value created between March 2012 and 31 May 2017, during
which time Melrose’s management created £3.6 billion in value
for shareholders, equating to an average annual return of 22%.
In the view of the Remuneration Committee, this validates the
incentive arrangements as a highly effective and essential
mechanism in establishing the necessary environment for
management to produce the significant returns enjoyed by
shareholders to date. We believe that this remuneration strategy
has also directly driven historical outperformance when compared
with our competitors and supported the Company’s success.
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.
Total shareholder investment
Total money invested
Total money returned to investors
Net shareholder investment returned
Market capitalisation
Net shareholder gain
£ billion
(3.6)
4.3
0.7
4.1
4.8
The Annual Report on Remuneration sets out the amounts
earned by Directors in 2017 as a result of the application of our
remuneration philosophy, and how that philosophy will be applied
in 2018.
GovernanceMelrose Industries PLC Annual Report 2017
84
Directors’ remuneration report
Continued
Single total figure of remuneration
The following information provided in this part of the Annual Report on Remuneration is subject to audit.
Year ended 31 December 2017
Christopher Miller
David Roper
Simon Peckham
Geoffrey Martin
John Grant(3)(4)
Justin Dowley(4)
Liz Hewitt
David Lis
Archie G. Kane(5)
Total
Total salary
and fees
£’000
Taxable
benefits
£’000
Annual
bonus
£’000
Long-term
incentives(1)
£’000
Pension related
benefits(2)
£’000
475
475
475
380
30
81
75
69
33
19
18
20
27
–
–
428
342
–
–
–
–
–
41,770
41,770
41,770
41,770
–
–
–
–
–
71
71
71
57
–
–
–
–
–
Total
£’000
42,335
42,334
42,764
42,576
30
81
75
69
33
2,093
84
770
167,080
270
170,297
(1) The Incentive Plan (2012) crystallised in 2017. The values included in the above table are calculated in accordance with the applicable regulations, as further disclosed below.
(2) All of the £270,923 attributable to pension contributions was paid as a supplement to base salary in lieu of pension arrangements.
(3) John Grant retired as a non-executive Director of the Company with effect from 11 May 2017 and the fees referred to above reflect his fees for the period from 1 January 2017 to 11 May 2017.
(4)
(5) Archie G. Kane was appointed as a non-executive Director of the Company with effect from 5 July 2017 and the fees referred to above reflect his fees for the period 5 July 2017 to 31 December 2017.
Includes £5,000 per annum in recognition of the role of Senior Independent Director, pro-rated for time served.
Year ended 31 December 2016
Total salary
and fees
£’000
Taxable
benefits
£’000
Annual
bonus
£’000
Long-term
incentives(1)
£’000
Pension related
benefits(2)
£’000
Christopher Miller
David Roper
Simon Peckham
Geoffrey Martin
John Grant(4)
Justin Dowley
Liz Hewitt
David Lis(3)
Perry Crosthwaite(4)(5)
Total
461
461
461
369
79
76
68
42
26
19
18
19
27
–
–
–
–
–
–
–
438
351
–
–
–
–
–
2,043
83
789
–
–
–
–
–
–
–
–
–
–
Total
£’000
549
548
987
803
79
76
68
42
26
69
69
69
56
–
–
–
–
–
263
3,178
(1)
(2)
The Company’s long-term incentive arrangement for Directors was the Incentive Plan (2012). This five-year plan crystallised in 2017 and, accordingly, no value was vested to participants in respect of
the year to 31 December 2016.
Of the £263,025 attributable to pension contributions, £253,650 was paid as a supplement to base salary in lieu of pension arrangements. The balance of £9,375 was paid into the Directors’
individual nominated private pension plans.
(3) David Lis was appointed as a non-executive Director of the Company with effect from 12 May 2016 and the fees referred to above reflect his fees for the period 12 May 2016 to 31 December 2016.
(4)
(5) Perry Crosthwaite retired as a non-executive Director of the Company with effect from 11 May 2016 and the fees referred to above reflect his fees for the period 1 January 2016 to 11 May 2016.
Includes £5,000 per annum in recognition of the role of Senior Independent Director, pro-rated for time served.
Base salary
Salaries are fixed at a level which is considered reasonably conservative in comparison to a market competitive range for companies
of similar size and complexity. Each executive Director received an increase in base salary of approximately 3% effective from
1 January 2017.
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 certain benefits during 2017, being a company car allowance,
fuel allowance, private medical insurance, life insurance and group income protection. Geoffrey Martin also received paid train travel to
and from London.
Melrose Industries PLC Annual Report 2017 85
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 Company’s long-term incentive arrangements. For the year ended 31 December 2017, the
maximum bonus opportunity was equal to 100% of base salary. Following the application of the formulaic basis used in previous years
and as explained below, it was determined by the Committee that Simon Peckham and Geoffrey Martin (being the only executive
Directors participating in the annual bonus plan) should be awarded a bonus of 90% of base salary.
Measure
Performance measure
Threshold
Target
Maximum Actual audited results
Weighting
Bonus
outturn
(% of base
salary)
Growth in
earnings
per share
EPS growth subject to a 5x
multiple (capped at 80% of
base salary)
Strategic
element
Strategic objectives set by
the Committee:
0%
n/a
100% Proforma growth in EPS of 54% as
80%
80%
set out in the Finance Director’s
review and the glossary to the
financial statements.
Accordingly, the Committee
awarded 10% of the possible 20%
maximum available for the strategic
element of the 2017 annual bonus.
20%
10%
The strategic objectives focused
on the “Improve” segment of the
“Buy, Improve, Sell” strategy.
The scale and pace of the
improvement achievement at
Nortek to deliver underlying
operating margins over 15%
and improvement in underlying
operating profit of 52% was
balanced by the downgrade
and restructure at Brush, albeit
a small part of the Group and
largely market driven.
Total
100%
90%
The Committee is satisfied that given their significant shareholdings the interests of executive Directors are aligned with those of
shareholders, and therefore considers bonus deferral provisions would be unnecessary and inappropriate.
Long-term incentives
The long-term incentives values in the 2017 single total figure of remuneration table reflect the value of the Incentive Plan (2012) which
vested in May 2017. The performance period of that plan ran from May 2012 to May 2017 and delivered to participants (including the
executive Directors) 7.5% of the index adjusted growth in shareholder value of the Company over that period, calculated in accordance
with the Incentive Plan (2012) rules. It should be noted that these values were earned over that five-year period and that no other long-
term incentive vested to the executive Directors over that period. As noted in the statement from the Chairman of the Committee, the
creation of shareholder value over the same period was £3.6 billion.
As described in the circular relating to the General Meeting on 11 May 2017, the crystallisation of the Incentive Plan (2012) resulted in an
income tax liability for the participants. The tax liability could have been satisfied by the sale of shares acquired on the crystallisation of the
Incentive Plan (2012). However, as described in that circular, the Committee recognised that this would increase the dilutive effect of the
Incentive Plan (2012) on existing shareholders, and instead determined that a proportion of the Incentive Plan (2012) options would be
cancelled in return for a cash payment equal to the value of the shares that would otherwise have been issued for those options, so as to
enable participants to meet their tax and National Insurance contributions liability, with the cash payment withheld to satisfy those liabilities.
In the 2017 single total figure of remuneration table, the long-term incentives value for each executive Director is calculated as follows:
Executive Director
Christopher Miller
David Roper
Simon Peckham
Geoffrey Martin
Number of ordinary
shares acquired
pursuant to the
crystallisation of the
Incentive Plan (2012)
Value of ordinary
shares acquired
pursuant to the
crystallisation of the
Incentive Plan (2012)(1)
Amount of
cash cancellation
payment to meet tax
and NIC liabilities Option exercise price
Aggregate value(2)
9,604,317
9,604,317
9,255,069
9,255,069
£22,978,328
£18,796,627
£22,978,328
£18,796,627
£22,142,753
£19,632,032
£22,142,753
£19,632,032
£4,675
£4,675
£4,505
£4,505
£41,770,280
£41,770,280
£41,770,280
£41,770,280
(1) Based on a share price of £2.3925, being the closing value of those shares on 31 May 2017.
(2) Net of £1 per option exercise price paid by the executive Directors in respect of the exercise of the options over incentive shares in the Incentive Plan (2017).
GovernanceMelrose Industries PLC Annual Report 2017 86
Directors’ remuneration report
Continued
Scheme interests awarded during the year
Awards were granted to the executive Directors and other participants under the Incentive Plan (2017), on establishment on 31 May 2017.
On 29 June 2017, each of the executive Directors exercised all options they held at that time and, on payment of the exercise price to
the Company, the executive Directors were issued with Incentive Shares (2017). Details of the award, exercise and issue to the executive
Directors are as follows: Christopher Miller 2,583 Incentive Shares (2017), David Roper 2,583 Incentive Shares (2017), Simon Peckham
2,833 Incentive Shares (2017) and Geoffrey Martin 2,833 Incentive Shares (2017).
The Incentive Shares (2017) entitle the holders to 7.5% of the increase in the index-adjusted value from and including 31 May 2017 to (but
excluding) 31 May 2020, subject to earlier crystallisation in accordance with the Incentive Plan (2017). For accounting purposes, the IFRS
2 charge has been calculated as if all three tranches have been granted on establishment because of a common expectation, established
at that date but subject to changes to take account of exceptional circumstances, between employees and the Company that the
remaining options will be allocated annually in two more equal tranches over the three-year performance period.
The regulations require that the Directors’ Remuneration Report sets out the face value of the awards at the date of grant. However, this
is not practical in the case of the Incentive Plan (2017), where the value of any award is based on the growth in value of the Company over
the applicable measurement period.
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
As disclosed at the time of the crystallisation of the 2009 Incentive 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 satisfying tax
obligations following the crystallisation of that plan and subject to capital adjustments) for the foreseeable future. Accordingly, the
Remuneration Committee has adopted the minimum share retention guidelines outlined below in relation to the holding of ordinary shares
by executive Directors who participated in the 2009 Incentive Plan and the Incentive Plan (2012) and who participate in the Incentive Plan
(2017), 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 ordinary shares without the consent of the Remuneration Committee, which will not normally
be withheld provided the executive Director will continue to hold at least the “minimum number” of ordinary shares referred to in the table
below following any such disposal.
These guidelines were updated at the time of the renewal of the Incentive Plan (2017) for the ordinary shares issued to executive Directors
on crystallisation of the Incentive Plan (2012) as set out in the table on page 85.
Executive Director
Christopher Miller
David Roper
Simon Peckham
Geoffrey Martin
Minimum number
of ordinary
shares to be held
by the executive
Directors as at
31 December
2017(1)
Number of
ordinary shares
held as at
31 December
2017
4,802,159
30,108,510(2)
4,802,159
15,730,130
4,627,535
17,265,565
4,627,535
7,395,256
Value of ordinary
shares held as at
31 December
2017 as a multiple
of salary for the
year ended
31 December
2017 (3)
135x
70x
77x
41x
(1) This threshold is subject to adjustments related to the reductions in capital as the Company returns proceeds to shareholders following the sale of businesses.
(2)
As at 31 December 2017, the interest of Christopher Miller included 8,750,000 ordinary shares held by Harris & Sheldon Investments Limited, a company which is connected with Christopher Miller
within the meaning of section 252 of the Act.
(3) For these purposes, the value of a share is 212.20 pence, being the closing mid-market price on 29 December 2017, the last business day prior to 31 December 2017.
As at 31 December 2017, each executive Director held much more than the minimum number of ordinary shares and so satisfied the
guidelines. 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.
Melrose Industries PLC Annual Report 2017 87
Directors’ shareholding and share interests as at 31 December 2017 (or, if earlier, the date of retirement from the Board)
Director
Ordinary shares held
at 31 December 2017
(or, if earlier, the date of
retirement from the Board)
Type
Unvested interests under share schemes
Vested interests under
share schemes
Subject to performance
conditions
Not subject to
performance conditions
Christopher Miller(4)
Ordinary shares(1)
30,108,510
David Roper(4)
Ordinary shares
15,730,130
Incentive Shares (2017)(2)
n/a
Simon Peckham(4)
Ordinary shares
17,265,565
Incentive Shares (2017)(2)
n/a
Geoffrey Martin(4)
Ordinary shares
Incentive Shares (2017)(2)
Incentive Shares (2017)(2)
Justin Dowley
Liz Hewitt
David Lis
Archie G. Kane
John Grant(3)
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
n/a
7,395,256
n/a
1,065,661
120,877
433,947
–
632,637
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
2,583
n/a
2,583
n/a
2,833
n/a
2,833
n/a
n/a
n/a
n/a
n/a
n/a
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)
(2)
As at 31 December 2017, the interest of Christopher Miller included 8,750,000 ordinary shares held by Harris & Sheldon Investments Limited, a company which is connected with Christopher Miller
within the meaning of section 252 of the Act.
Each executive Director was granted options over Incentive Shares (2017) on 31 May 2017: Christopher Miller was granted 2,583 options, David Roper was granted 2,583 options, Simon Peckham
was granted 2,833 options and Geoffrey Martin was granted 2,833 options. Each executive Director exercised his option on 29 June 2017 and 2,583 Incentive Shares (2017) each were issued to
Christopher Miller and David Roper and 2,833 Incentive Shares (2017) each were issued to Simon Peckham and Geoffrey Martin. The value which may be derived from the Incentive Shares (2017)
acquired on exercise will be determined following 31 May 2020, or any other earlier crystallisation date in accordance with the Incentive Plan (2017). For accounting purposes, the IFRS 2 charge has
been calculated as if all three tranches have been granted on day one because of a common expectation, established at that date but subject to changes to take account of exceptional
circumstances, between employees and the Company that the remaining options will be allocated annually in two more equal tranches over the three-year performance period.
(3) John Grant retired as a non-executive Director of the Company with effect from 11 May 2017.
(4)
During 2017, each executive Director exercised his option under the Incentive Plan (2012). Each executive Director held an option over 8,500 Incentive Shares (2012). Those options were cancelled in
respect of 3,825 Incentive Shares (2012) (in the case of Christopher Miller), 3,825 Incentive Shares (2012) (in the case of David Roper), 3,995 Incentive Shares (2012) (in the case of Simon Peckham)
and 3,995 Incentive Shares (2012) (in the case of Geoffrey Martin), as referred to on page 64. The Incentive Shares (2012) acquired on exercise of the Incentive Plan (2012) options were converted into
9,604,317 ordinary shares (in the case of Christopher Miller), 9,604,317 ordinary shares (in the case of David Roper), 9,255,069 ordinary shares (in the case of Simon Peckham) and 9,255,069
ordinary shares (in the case of Geoffrey Martin), as referred to on page 64.
There have been no changes in the holdings of the Directors between 31 December 2017 and 20 February 2018.
Performance graph
The information provided in this part of the Annual Report on Remuneration is not subject to audit.
The total shareholder return graph below shows the value as at 31 December 2017 of £100 invested in the Company on 31 December
2009, compared with £100 invested in the FTSE 100 Index, the FTSE 250 Index or the FTSE All-Share Index. The Committee considers
the FTSE 100 Index, the FTSE 250 Index and the FTSE All-Share Index to be appropriate indices for the year ended 31 December 2017
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 data shown below assumes that
all cash returns to shareholders made by the Company during this period are reinvested in ordinary shares.
4,000
3,000
2,000
1,000
)
£
(
t
n
e
m
t
s
e
v
n
i
f
o
l
e
u
a
V
0
Dec 09
Dec 10
Dec 11
Dec 12
Dec 13
Dec 14
Dec 15
Dec 16
Dec 17
Melrose
FTSE All-Share
FTSE 100
FTSE 250
Source: Datastream
GovernanceMelrose Industries PLC Annual Report 2017
88
Directors’ remuneration report
Continued
Chief Executive remuneration for previous nine 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 Plan on 11 April 2012 is shown for the year ended
31 December 2012 and that the full value of the Incentive Plan (2012) which crystallised in May 2017 is shown for 2017.
The value of each Incentive Plan was earned over a period of approximately five years. Therefore, in the view of the Committee,
inclusion of these values in respect of the years ended 31 December 2012 and 31 December 2017 does not give a fair
representation of the Chief Executive’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 of those plans.
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 the year ended 31 December 2012 reflects
the proportion of that year for which each was the Chief Executive.
Financial year
Chief Executive
Total
remuneration
excluding the
long-term
incentive value
£
Annual bonus
as a percentage
of maximum
opportunity
Total
remuneration
£
Year ended 31 December 2017
Simon Peckham
42,764,000(2)
Year ended 31 December 2016
Year ended 31 December 2015
Year ended 31 December 2014
Year ended 31 December 2013
Simon Peckham
Simon Peckham
Simon Peckham
Simon Peckham
987,725
928,541
773,167
927,276
Year ended 31 December 2012(1)
Simon Peckham
20,280,584(4)
Year ended 31 December 2011
Year ended 31 December 2010
Year ended 31 December 2009
David Roper
David Roper
David Roper
David Roper
10,915,846(4)
811,152
849,341
712,372
994,000
987,725
928,541
773,167
927,276
489,372
259,040
811,152
849,341
712,372
90%
95%
88%
58%
100%
64%
64%
84%
100%
70%
Long-term
incentives as a
percentage of
maximum
opportunity
n/a(3)
–
–
–
–
n/a(5)
n/a(5)
–
–
–
(1)
(2)
(3)
(4)
(5)
In the year ending 31 December 2012, David Roper was Chief Executive for the period from 1 January 2012 until 9 May 2012 and Simon Peckham was Chief Executive 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; 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 excluding any value received on the maturity in April 2012 of the 2009 Incentive Plan.
The value derived in 2017 from the Incentive Shares (2012) represents the Chief Executive’s share, determined in accordance with the terms of those shares, of the shareholder value created over
a period of approximately five years.
On the crystallisation in May 2017 of the Incentive Plan (2012), participants as a whole were entitled to 7.5% of the increase in shareholder value from 22 March 2012 to 31 May 2017. Because the
value derived on the crystallisation of the Incentive Shares (2012) 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 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 approximately five years.
On the crystallisation in April 2012 of the 2009 Incentive Plan awarded in 2009, participants 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.
Element of remuneration
Basic salary
Benefits
Annual bonus
Chief Executive
percentage
change
Senior head
office employees
percentage
change
3%
5%
-2%
6%
-13%
-12%
Percentage change in Chief Executive’s remuneration
The table opposite sets out, in relation to salary, taxable benefits
and annual bonus, the percentage increase in pay for the
Company’s Chief Executive compared to the average increase
for a group consisting of the Company’s senior head office
employees, managing directors and finance directors of the
Group’s businesses and direct senior reports of those managing
directors. The percentages shown opposite relate to the financial
year ended 2017 as a percentage comparison to the financial year
ended 2016. 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 Committee considers
that selecting a wider group of employees would not provide
a meaningful comparison.
Melrose Industries PLC Annual Report 2017
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).
Year ended
31 December
2016
Year ended
31 December
2017
Percentage
change
£246.6million(1) £502.9million(1)
104%
£2,394.3million(2)
£63.0million
-97%
Expenditure
Remuneration paid
to all employees
Distributions to
shareholders by
way of dividend
and share buy back
(1)
(2)
The figure for the year ended 31 December 2016 total staff costs as stated in note 7 on page
121 of the 2017 Annual Report and financial statements and the figure for the year ended
31 December 2017 is the year end 31 December 2017 total staff costs as stated in note 7
on page 121 of the 2017 Annual Report and financial statements. The 2016 total staff costs
include four months of Nortek staff costs as compared to the 2017 total staff costs which
reflect a full year of Nortek’s staff costs. In light of the Company’s business model of buy,
improve, sell 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.
The figure for year ended 2016 includes the £2,388.5 million return of capital to shareholders
in February 2016.
Implementation of Directors’ Remuneration Policy
for the financial year commencing on 1 January 2018
The Committee strongly believes that its remuneration framework
is aligned with the Company’s strategy for creation of shareholder
value, and no structural changes to the Directors’ remuneration
arrangements are proposed for 2018. A summary of our approach
to executive Directors’ remuneration and non-executive Directors’
fees for 2018 is set out below.
Executive Directors’ salaries
Executive Directors’ salaries have increased by 3% with effect
from January 2018. This is consistent with the salary rises awarded
to the wider head office population, 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.
Executive Director
Christopher Miller
David Roper
Simon Peckham
Geoffrey Martin
2017 salary
£’000
2018 salary
£’000
Percentage
increase
475
475
475
380
490
490
490
392
3%
3%
3%
3%
Bonus arrangements for 2018
The overall framework for Simon Peckham’s and Geoffrey Martin’s
(the executive Directors who participate in the annual bonus
arrangement) annual bonus arrangements for 2018 will remain the
same as in 2017, 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 Committee considers that the strategic performance
measures are commercially sensitive but will disclose the nature of
those measures on a retrospective basis, where appropriate, on a
similar basis to the disclosure on page 85 in respect of the annual
bonus for the year ending 31 December 2017.
89
Incentive Plan (2017) awards in 2018
In accordance with terms of the Incentive Plan (2017), allocations
are phased over the course of the performance period.
Accordingly, the Committee intends to make a further allocation
of options over Incentive Shares (2017) in the Incentive Plan (2017)
to executive Directors and senior management during 2018. For
accounting purposes, the IFRS 2 charge has been calculated as
if all three tranches have been granted on day one because of
a common expectation, established at that date but subject to
changes to take account of exceptional circumstances, between
employees and the Company that the remaining options will be
allocated annually in two more equal tranches over the three-year
performance period.
Non-executive Directors’ fees
Non-executive Directors’ basic fees have been increased by 3%
with effect from January 2018. The non-executive Director fee
levels for 2017 and 2018 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 Independent Director
Previous fee with
effect from
January 2017
Fee with
effect from
January 2018
£67,685
£10,000
£69,715
£10,000
£10,000
£10,000
£2,500
£2,500
£5,000
£5,000
Consideration by the Directors of matters relating
to Directors’ remuneration
The responsibilities of the Remuneration Committee
The Committee is responsible for, among other things:
• 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
performance-related pay schemes (including bonus schemes)
and any material long-term incentive plans operated by
the Company;
• reviewing the structure of all share incentive plans operated
by the Company for approval by the Board; 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 of comparable scale and complexity.
Full details can be found in the terms of reference available in the
Investor section of the Melrose website at www.melroseplc.net
Fees for non-executive Directors are determined by the
executive Directors.
GovernanceMelrose Industries PLC Annual Report 2017 90
Directors’ remuneration report
Continued
The members of the Remuneration Committee
The members of the Committee during the year were Justin Dowley (Committee Chairman), Liz Hewitt, David Lis and Archie G. Kane
(appointed to the Committee with effect from 5 July 2017). John Grant was a member of the Committee from 1 January 2017 until
his retirement from the Board following the conclusion of the 2017 AGM on 11 May 2017. The Company regards all members of the
Committee as independent non-executive Directors; the composition of the Committee is therefore in accordance with the UK Corporate
Governance Code. During the year, the Committee met four times, including two regularly scheduled meetings and two special meetings
in relation to the establishment of the Incentive Plan (2017).
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 £4,000, which were charged on a time/cost basis. As the external auditor to the
Company, Deloitte LLP also provides certain other services (as described on page 76 of this Annual Report and financial statements).
Deloitte LLP is a member of the Remuneration Consultants’ Group, and as such chooses to operate pursuant to a code of conduct
that requires remuneration advice to be given objectively and independently. The Remuneration Committee is satisfied that the advice
provided by Deloitte LLP in relation to remuneration matters 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 resolutions at the Company’s Annual General Meeting on 11 May 2017 to approve (i) the Directors’
Remuneration Report and (ii) the Directors’ Remuneration Policy:
Resolution to approve the Directors’
Remuneration Report for the year
ended 31 December 2016
Resolution to approve the Directors’
Remuneration Policy
Votes cast for the
resolution
1,453,684,782
Percentage of
votes cast for the
resolution
Votes cast against
the resolution
Percentage of
votes cast against
the resolution
Total votes cast
Votes withheld
99.28
10,525,099
0.72
1,464,209,881
120,663
1,135,681,725
82.04
248,582,841
17.96
1,384,264,566
35,787,047
This report was approved by the Board and signed on its behalf by:
Justin Dowley
Chairman, Remuneration Committee
20 February 2018
Melrose Industries PLC Annual Report 2017 Statement of Directors’ responsibilities
91
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.
This responsibility statement was approved by the Board of
Directors on 20 February 2018 and is signed on its behalf by:
Geoffrey Martin
Simon Peckham
Group Finance Director Chief Executive
20 February 2018
20 February 2018
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), including FRS 102 “The Financial Reporting Standard
applicable in the UK and Republic of Ireland”. 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.
In preparing the Group financial statements, International
Accounting Standard 1 requires that Directors:
• 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.
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 Act. 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.
GovernanceMelrose Industries PLC Annual Report 2017
92
Financials
Consolidated statements
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
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. Reconciliation between profit and underlying profit
7. Revenues and expenses
8. Tax
9. Dividends
10. Earnings per share
11. Goodwill and other intangible assets
12. Property, plant and equipment
13. Interests in joint ventures
14. Inventories
15. Trade and other receivables
16. Cash and cash equivalents
17. Trade and other payables
18. Interest-bearing loans and borrowings
19. Provisions
20. Deferred tax
21. Share-based payments
22. Retirement benefit obligations
23. Financial instruments and risk management
24. Issued capital and reserves
25. Cash flow statement
26. Commitments and contingencies
27. Related parties
28. Post Balance Sheet events
29. Contingent liabilities
Company statements
Company Balance Sheet for Melrose Industries PLC
Company Statement of Changes in Equity
Notes to the Company Balance Sheet
Note
1. Significant accounting policies
2. Loss for the year
3. Investment in subsidiaries
4. Debtors
5. Creditors
6. Provisions
7. Issued share capital
8. Related party transactions
Glossary
Shareholder Information
Notice of Annual General Meeting
Company and shareholder information
94
101
102
103
104
105
106
107
115
116
116
118
120
121
122
123
124
129
129
129
130
131
131
132
133
133
134
135
139
142
143
143
143
144
144
145
145
146
147
147
150
150
150
151
151
152
156
162
Melrose Industries PLC Annual Report 2017 93
i
l
s
a
c
n
a
n
F
i
FinancialsMelrose Industries PLC Annual Report 2017 94
Independent auditor’s report to the members
of Melrose Industries PLC
Report on the audit of the financial statements
Opinion
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
2017 and of the group’s loss 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 including Financial Reporting Standard 102 “The Financial Reporting Standard applicable in the UK and
Republic of Ireland”; 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.
We have audited the financial statements of Melrose Industries plc (the ‘parent company’) and its subsidiaries (the ‘group’) which comprise:
• the Consolidated Income Statement;
• the Consolidated Statement of Comprehensive Income;
• the Consolidated Statement of Cash Flows;
• the Consolidated and Company Balance Sheets;
• the Consolidated and Company Statements of Changes in Equity; and
• the related notes 1 to 29 to the consolidated financial statements and the related notes 1 to 8 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, including FRS 102 “The Financial Reporting Standard
applicable in the UK and Republic of Ireland” (United Kingdom Generally Accepted Accounting Practice).
Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities
under those standards are further described in the auditor’s responsibilities for the audit of the financial statements section of our report.
We are independent of the group and the parent company in accordance with the ethical requirements that are relevant to our audit
of the financial statements in the UK, including the FRC’s Ethical Standard as applied to listed public interest entities, and we have fulfilled
our other ethical responsibilities in accordance with these requirements. We confirm that the non-audit services prohibited by the FRC’s
Ethical Standard were not provided to the group or the parent company.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Summary of our audit approach
Key audit matters
Materiality
Scoping
Significant changes in our approach
The key audit matters that we identified in the current year were:
• Carrying value of goodwill and other non-current assets in the Energy Segment; and
• Classification of non-underlying items
The materiality that we used for the group financial statements was £12.5 million which was determined on
the basis of the Group’s underlying profit before tax.
Full scope audit work was completed on 11 components and the head office function, and specified audit
procedures over certain balances were performed on 4 components. In total our scope represented 77%
of Group revenue, 83% of Group operating profit and 95% of Group net assets.
Following the acquisition of the Nortek group in August 2016, this is the first full year of ownership. As such
we have revised our audit scoping, materiality basis and consideration of the risks most specific to the
current group.
In particular, our basis of materiality in the prior year considered revenue, underlying profit before tax and
net assets of the enlarged Group, whereas in the current year our basis of materiality is focused on
underlying profit before tax.
Our prior year audit report also discussed the risks relating to the acquisition of the Nortek business,
focused on the valuation of intangible assets and the fair value of provisions. The acquisition completed
in 2016 and is therefore not considered to be a key audit matter in 2017.
Melrose Industries PLC Annual Report 2017 95
We confirm that we
have nothing material
to report, add or draw
attention to in respect
of these matters.
We confirm that we
have nothing material
to report, add or draw
attention to in respect
of these matters.
Conclusions relating to going concern, principal risks and viability statement
Going concern
We have reviewed the directors’ statement in note 2 to the financial statements about whether they considered it
appropriate to adopt the going concern basis of accounting in preparing them and their identification of any material
uncertainties to the group’s and company’s ability to continue to do so over a period of at least twelve months from
the date of approval of the financial statements.
We are required to state whether we have anything material to add or draw attention to in relation to that statement
required by Listing Rule 9.8.6R(3) and report if the statement is materially inconsistent with our knowledge obtained
in the audit.
Principal risks and viability statement
Based solely on reading the directors’ statements and considering whether they were consistent with the knowledge
we obtained in the course of the audit, including the knowledge obtained in the evaluation of the directors’ assessment
of the group’s and the company’s ability to continue as a going concern, we are required to state whether we have
anything material to add or draw attention to in relation to:
• the disclosures on pages 44 to 49 that describe the principal risks and explain how they are being managed
or mitigated;
• the directors’ confirmation on page 42 to 43 that they have carried out a robust assessment of the principal risks
facing the group, including those that would threaten its business model, future performance, solvency or liquidity; or
• the directors’ explanation on page 41 as to how they have assessed the prospects of the group, over what period
they have done so and why they consider that period to be appropriate, and their statement as to whether they have
a reasonable expectation that the group will be able to continue in operation and meet its liabilities as they fall due
over the period of their assessment, including any related disclosures drawing attention to any necessary
qualifications or assumptions.
We are also required to report whether the directors’ statement relating to the prospects of the group required by Listing
Rule 9.8.6R(3) is materially inconsistent with our knowledge obtained in the audit.
Key audit matters
Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial statements
of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) that we
identified. These matters included those which had the greatest effect on: the overall audit strategy, the allocation of resources in the
audit; and directing the efforts of the engagement team.
These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon,
and we do not provide a separate opinion on these matters.
Our prior year audit report discussed the risks relating to the acquisition of the Nortek business, focused on the valuation of intangible
assets and the fair value of provisions. The acquisition completed in 2016 and is therefore not considered to be a key audit matter in 2017.
FinancialsMelrose Industries PLC Annual Report 2017 96
Independent auditor’s report to the members
of Melrose Industries PLC
Continued
Key audit matter description
How the scope of our audit responded to the key audit matter
Key observations
Based on our detailed audit
procedures performed,
we determined that the
assumptions applied in the
impairment model were within
an acceptable range, that the
overall position adopted was
reasonable and the disclosures
are appropriate.
Carrying value of goodwill and other non-current assets
The carrying value of goodwill and other non-current
assets in the Energy group of cash-generating units
(the Energy group) as at 31 December 2017 is
comprised of goodwill of £122 million, other intangible
assets of £62.5 million and property, plant and
equipment of £69.8 million.
Management perform an impairment review for
all goodwill balances on an annual basis and for
other assets whenever an indication of impairment
is identified.
As a result of the continued market downturn and
deferral of generator orders in the second half of the
year, an impairment trigger was identified for the Energy
group. Management determined the recoverable
amount for the Energy Group was £300 million, which
resulted in pre-tax impairment charges of £95.4 million
related to Goodwill and £18.2 million relating to
property, plant and equipment, in addition to a
£31.1 million charge for the write down of assets
in Brush China.
IAS 36 “Impairment of assets” requires that the
recoverable amount of an asset is measured as the
higher of its Value in Use (“VIU”) or its fair value less
costs to sell (“FV”). Management has prepared a model
to calculate the recoverable amount, in this instance
FV being the higher valuation. The determination of
the fair value of the Energy business is a judgemental
process which requires estimates concerning the
forecast future cash flows, associated growth and
discount rates. Further, the valuation includes the
impact of restructuring costs on the basis that a market
participant would perform a similar restructure. The
inclusion of restructuring costs, forecasting of future
cash flows and associated growth and discount rates
is a judgemental process.
The key judgements and estimates and impairment
accounting policy are described in more detail in the
audit committee report and in notes 2, 3 and 11 to
the consolidated financial statements.
We assessed the design and implementation of
relevant controls around management’s preparation
of the impairment models.
We assessed management’s impairment paper,
underlying analysis, supporting financial model and
challenged the reasonableness of the assumptions
which underpin management’s forecasts. Specifically,
our work included, but was not limited to:
• Evaluating the model applied by management in
calculating the fair value less cost to sell recoverable
amount, specifically evaluated the appropriateness
of the inclusion of the restructuring costs and
benefits in the estimation of fair value;
• Evaluating forecast revenue and operating margins
with reference to the recent and historical trading
performance of the Energy group, as well as the
current contractual arrangements and external
market data;
• Assessing the forecast restructuring costs and
impact on future cash flows;
• Benchmarking long-term growth rates to applicable
macro-economic and market data;
• Engaging our internal valuation specialists to
challenge the discount rate applied, by obtaining
the underlying data used in the calculation and
benchmarking it against market data and
comparable organisations, and by evaluating the
underlying process used to determine the risk
adjusted cash flow projections;
• Validating the integrity of the impairment models
through testing of the mathematical accuracy and
verifying the application of the input assumptions.
We performed sensitivity analysis and have challenged
management on the key assumptions such as
forecasted revenues, operating margins, discount
rate and long-term growth rate which would either
individually or collectively impact the impairment
charge whilst also considering the likelihood of
such movements.
We reviewed the disclosures in note 11 in relation
to the sensitivities reflecting the risks inherent in the
valuation of goodwill and other non-current assets
and also in note 3 in relation to the key sources of
estimation uncertainty for the Energy business.
Melrose Industries PLC Annual Report 2017 97
Key audit matter description
How the scope of our audit responded to the key audit matter
Key observations
Classification of non-underlying items
The presentation and consistency of costs and
income within non-underlying items is a key determinant
in the assessment of the quality of the Group’s
underlying earnings.
There is no definition of non-underlying items within
IFRS and therefore the Group continues to classify one
off costs or income in accordance with its accounting
policy on non-underlying items as set out in note 2.
In the Group’s reported results significant adjustments
have been made to the statutory operating loss of
£6.9m to derive underlying operating profit of £278.4m.
Explanations of each adjustment are set out in note 6
to the financial statements.
As such, a risk of material misstatement exists in
respect of the classification of items recorded as
non-underlying. We note that underlying profit
before tax is the main measure used by management
in monitoring the Group’s performance and in
communication to shareholders.
There is a risk that items may be classified as non-
underlying which are underlying or recurring items
and that therefore the reported underlying earnings
are distorted, whether due to manipulation or error.
Consistency in the identification and presentation
of these items is important for the comparability
of year on year reporting.
We evaluated the appropriateness of the inclusion
of items, both individually and in aggregate, within
non-underlying results. We assessed the consistency
of items included year on year and the application of
management’s accounting policy, challenging the
nature of these items and ensuring adherence
to IFRS requirements, ESMA guidance and latest
FRC guidance.
We consider the disclosure
of non-underlying items to
be in line with the Group’s
accounting policies and
that the presentation of
non-underlying items is
consistent between the
periods presented.
A sample of non-underlying items, including all material
items, were 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 non-underlying items between periods
in the financial statements.
We also assessed whether the disclosures within
the financial statements provide sufficient detail for
the reader to understand the nature of these items
and how non-underlying results are reconciled to
statutory results.
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.
Based on our professional judgement, we determined materiality for the financial statements as a whole as follows:
Group financial statements
Parent company financial statements
Materiality
Basis for determining materiality
Rationale for the benchmark applied
£6.25 million (2016: £5.5 million)
50% of Group materiality.
Materiality for the parent company financial
statements has been capped at 50% of Group
materiality. This is with reference to the net asset
position of the parent company when compared
to the net asset position of the Group.
£12.5 million (2016: £11 million)
5% of underlying profit before tax which is
reconciled to the loss before tax in Note 6
to the financial statements.
Underlying profit before tax is a key measure
used by management in monitoring the
Group’s performance and in communication
to shareholders. This approach differs from
the prior year where we considered a range of
benchmarks, including revenue, underlying profit
and net assets, due to the impact of the timing
of the acquisition of Nortek Inc. and the resulting
focus on the balance sheet. Our determined
materiality for the current year is equivalent to
0.7% of net assets (2016: 0.5%).
FinancialsMelrose Industries PLC Annual Report 2017 98
Independent auditor’s report to the members
of Melrose Industries PLC
Continued
Group materiality £12.5m
Underlying profit before tax £257.7m
Group materiality
£12.5m
Upper range of component materiality £6.25m
Audit Committee reporting threshold £0.5m
We agreed with the Audit Committee that we would report to the Committee all audit differences in excess of £500,000 (2016: £250,000)
for the group and £250,000 (2016: £125,000) for the parent company, 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.
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 is organised into an Energy division and three Nortek divisions.
Our Group audit scope focused primarily on audit work at 15 components (2016: 17), of which 4 relate to components which form part
of the Energy division, 7 relate to Air Management, 2 relate to Security & Smart Technology and 2 relate to the Ergonomics division.
The change in the number of components reflects the reorganisation of the Nortek business since acquisition by Melrose and our risk
assessment in the current year.
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 these locations. In total our scope represented 77% of Group revenue, 83% of Group operating profit and 95%
of Group net assets.
Revenue
Operating profit
Net assets
Full audit scope 73%
Specified audit
procedures
Review at
group level
4%
23%
Full audit scope 76%
Specified audit
procedures
Review at
group level
7%
17%
Full audit scope 95%
Specified audit
procedures
Review at
group level
0%
5%
In 2016 our combined full audit scope and specified audit procedures represented 82% of Group revenue, 86% of Group operating profit
and 92% of Group net assets.
Energy division
In respect of the Energy division, all 4 components were subject to a full audit (2016: 4). These 4 components accounted for 80% of the
Energy division’s revenue and 76% of the Energy division’s underlying operating profit and divisional costs (before central costs). The work
performed at these 4 components together with the work performed centrally by the Group audit team accounted for 77% of the Energy
division net assets.
Our work at the 4 components forming part of the Energy division was principally performed to levels of materiality applicable to each
individual entity which were lower than group materiality and ranged between £0.4 million and £1.1 million.
In 2016, these 4 components accounted for 81% of the revenue and 79% of the underlying operating profit and divisional costs (before
central costs) of the Energy division.
Nortek group
For the Nortek group, 7 components were subject to a full audit (2016: 8 components) and 4 were subject to specified audit procedures
(2016: 5 components) on certain balances that represent a risk of material misstatement to the Group financial statements.
These 11 components subject to full audit and specified audit procedures accounted for 76% of revenue and 78% of underlying operating
profit and divisional costs (before central costs). The work performed at these components together with the work performed centrally
by the Group audit team accounted for 78% of the net assets of the Nortek group at 31 December 2017.
Our work and audit procedures at the Nortek components were performed at levels of materiality which were lower than group
materiality, determined by reference to the relative scale of the business concerned, and ranged between £6.25 million and £5 million
(2016: between £2.8 million and £3.9 million).
Melrose Industries PLC Annual Report 2017
99
Involvement in the work of component auditors and work performed at group level
The senior statutory auditor or other senior members of the Group audit team visited 7 of the largest components for the audit (2016: 8).
The senior statutory auditor also held close meetings which covered all businesses. Where we do not visit a component within our Group
audit scope, we 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. The parent company was audited directly by the group audit team.
Other information
The directors are responsible for the other information. The other information comprises the information included in the annual report,
other than the financial statements and our auditor’s report thereon.
Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in our
report, we do not express any form of assurance conclusion thereon.
In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider
whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit or otherwise
appears to be materially misstated.
If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether there is a material
misstatement in the financial statements or a material misstatement of the other information. If, based on the work we have performed,
we conclude that there is a material misstatement of this other information, we are required to report that fact.
In this context, matters that we are specifically required to report to you as uncorrected material misstatements of the other information
include where we conclude that:
• Fair, balanced and understandable – the statement given by the directors that they consider the annual report and financial
statements taken as a whole is fair, balanced and understandable and provides the information necessary for shareholders to
assess the group’s position and performance, business model and strategy, is materially inconsistent with our knowledge obtained
in the audit; or
• Audit committee reporting – the section describing the work of the audit committee does not appropriately address matters
communicated by us to the audit committee; or
• Directors’ statement of compliance with the UK Corporate Governance Code – the parts of the directors’ statement required under
the Listing Rules relating to the company’s compliance with the UK Corporate Governance Code containing provisions specified
for review by the auditor in accordance with Listing Rule 9.8.10R(2) do not properly disclose a departure from a relevant provision
of the UK Corporate Governance Code.
We have nothing to report in respect of these matters.
Responsibilities of directors
As explained more fully in the directors’ responsibilities statement, the directors are responsible for the preparation of the financial
statements and for being satisfied that they give a true and fair view, and for such internal control as the directors determine is necessary
to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, the directors are responsible for assessing the group’s and the parent company’s ability to continue
as a going concern, disclosing as applicable, matters related to going concern and using the going concern basis of accounting unless
the directors either intend to liquidate the group or the parent company or to cease operations, or have no realistic alternative but to do so.
Auditor’s responsibilities for the audit of the financial statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement,
whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of
assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when
it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably
be expected to influence the economic decisions of users taken on the basis of these financial statements.
A further description of our responsibilities for the audit of the financial statements is located on the Financial Reporting Council’s website
at: www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor’s report.
Use of our report
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.
FinancialsMelrose Industries PLC Annual Report 2017 100
Independent auditor’s report to the members
of Melrose Industries PLC
Continued
Report on other legal and regulatory requirements
Opinions 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.
In our opinion, based on the work undertaken in the course of the audit:
• 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; and
• the strategic report and the directors’ report have been prepared in accordance with applicable legal requirements.
In the light of the knowledge and understanding of the group and of the parent company and their environment obtained in the course
of the audit, we have not identified any material misstatements in the strategic report or the directors’ report.
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 in respect of these matters.
Other matters
Auditor tenure
Following the recommendation of the audit committee, we were appointed by the Board of Directors in 2003 to audit the financial
statements for the year ending 31 December 2003 and subsequent financial periods. Our appointment was subsequently ratified at the
annual general meeting of the Company. The period of total uninterrupted engagement including previous renewals and reappointments
of the firm is 15 years, covering the years ending 31 December 2003 to 31 December 2017.
Consistency of the audit report with the additional report to the audit committee
Our audit opinion is consistent with the additional report to the audit committee we are required to provide in accordance with ISAs (UK).
Stephen Griggs FCA (Senior statutory auditor)
For and on behalf of Deloitte LLP
Statutory Auditor
London, United Kingdom
20 February 2018
Melrose Industries PLC Annual Report 2017 Consolidated Income Statement
101
Continuing operations
Revenue
Cost of sales
Gross profit
Net operating expenses
Operating loss
Finance costs
Finance income
Loss before tax
Tax
Loss after tax for the year attributable to owners of the parent
Earnings per share
– Basic
– Diluted
Underlying Results
Underlying operating profit
Underlying profit before tax
Underlying profit after tax
Underlying basic earnings per share
Underlying diluted earnings per share
Year ended
31 December
2017
£m
Year ended
31 December
2016
£m
2,092.2
(1,439.4)
652.8
(659.7)
(6.9)
(21.5)
0.8
(27.6)
3.7
(23.9)
889.3
(626.0)
263.3
(324.9)
(61.6)
(9.5)
1.8
(69.3)
30.3
(39.0)
(1.2)p
(1.2)p
(2.6)p
(2.6)p
278.4
257.7
190.9
9.9p
9.8p
104.1
96.4
70.4
4.7p
4.4p
Notes
4, 5
7
7
7
8
10
10
5, 6
6
6
10
10
FinancialsMelrose Industries PLC Annual Report 2017 102
Consolidated Statement of Comprehensive Income
Loss for the year
Items that will not be reclassified subsequently to the Income Statement:
Net remeasurement gain on retirement benefit obligations
Income tax charge relating to items that will not be reclassified
Items that may be reclassified subsequently to the Income Statement:
Currency translation on net investments
Transfer to Income Statement from equity of cumulative translation
differences on disposal of foreign operations
Gains on cash flow hedges
Transfer to Income Statement on cash flow hedges
Income tax (charge)/credit relating to items that may be reclassified
Other comprehensive (expense)/income after tax
Total comprehensive (expense)/income for the year attributable to owners of the parent
Note
22
Year ended
31 December
2017
£m
Year ended
31 December
2016
£m
(23.9)
(39.0)
12.1
(1.1)
11.0
22.7
(3.3)
19.4
(133.3)
104.3
(0.5)
8.9
(4.1)
(0.7)
(129.7)
(118.7)
(142.6)
–
5.3
0.3
5.4
115.3
134.7
95.7
Melrose Industries PLC Annual Report 2017 Consolidated Statement of Cash Flows
103
Continuing 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 capitalised development costs
Dividends received from joint ventures
Acquisition of subsidiaries
Cash acquired on acquisition of subsidiaries
Interest received
Net cash used in investing activities
Financing activities
Return of Capital
Net proceeds from Rights Issue
Repayment of borrowings
New bank loans raised
Costs of raising debt finance
Repayment of finance leases
Dividends paid
Net cash used in financing activities
Net decrease 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
Year ended
31 December
2017
£m
Year ended
31 December
2016
£m
32.4
50.6
Notes
25
10.8
(0.2)
(1.4)
(47.7)
2.1
(3.2)
0.6
(9.2)
–
0.8
(47.4)
–
–
–
56.0
–
(1.0)
(63.0)
(8.0)
(23.0)
42.1
(2.8)
16.3
–
(0.1)
–
(16.8)
0.3
(0.6)
0.9
(1,130.0)
9.4
1.8
(1,135.1)
(2,388.5)
1,612.0
(1,092.4)
557.4
(10.9)
–
(5.8)
(1,328.2)
(2,412.7)
2,451.4
3.4
42.1
13
11
9
25
25
16, 25
As at 31 December 2017, the Group had net debt of £571.8 million (31 December 2016: £541.5 million). A reconciliation of the movement
in net debt is shown in note 25.
FinancialsMelrose Industries PLC Annual Report 2017 104
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
Deferred tax liabilities
Retirement benefit obligations
Provisions
Total liabilities
Net assets
Equity
Issued share capital
Share premium account
Merger reserve
Other reserves
Hedging reserve
Translation reserve
Retained earnings
Total equity attributable to owners of the parent
31 December
2017
£m
Notes
Restated (1)
31 December
2016
£m
11
12
13
20
23
15
14
15
23
16
5
17
18
23
19
17
18
20
22
19
5
24
2,237.6
218.9
0.4
49.3
4.1
1.9
2,512.2
275.4
332.0
9.9
16.3
633.6
3,145.8
366.5
0.4
1.3
6.4
92.2
466.8
166.8
1.8
587.7
69.1
17.6
117.6
793.8
1,260.6
1,885.2
133.1
1,492.6
108.7
(2,329.9)
8.6
(66.0)
2,538.1
1,885.2
2,609.3
271.9
–
49.6
5.2
5.2
2,941.2
296.1
365.8
3.8
42.1
707.8
3,649.0
428.2
0.5
4.2
10.2
140.5
583.6
124.2
13.7
583.1
129.9
33.4
142.5
902.6
1,486.2
2,162.8
129.4
1,492.6
112.4
(2,329.9)
4.5
67.8
2,686.0
2,162.8
(1) Restated to reflect the completion of the acquisition accounting for Nortek (note 11).
The financial statements were approved and authorised for issue by the Board of Directors on 20 February 2018 and were signed on its
behalf by:
Geoffrey Martin
Group Finance Director
20 February 2018
Simon Peckham
Chief Executive
20 February 2018
Melrose Industries PLC Annual Report 2017 Consolidated Statement of Changes in Equity
105
Merger
reserve
£m
Other
reserves
£m
Hedging
reserve
£m
Translation
reserve
£m
Retained
earnings
£m
Issued
share
capital
£m
10.0
–
–
–
–
119.4
–
–
129.4
–
–
–
–
–
Share
premium
account
£m
–
–
–
–
–
1,492.6
–
–
1,492.6
–
–
–
–
–
2,500.9
–
–
–
(2,388.5)
–
–
(2,329.9)
–
–
–
–
–
–
–
112.4
–
–
(2,329.9)
–
–
–
–
–
–
–
–
–
–
3.7
133.1
–
–
1,492.6
–
(3.7)
108.7
–
–
(2,329.9)
At 1 January 2016
Loss for the year
Other comprehensive income
Total comprehensive
income/(expense)
Return of Capital
Issue of new shares
Dividends paid
Credit to equity for equity-settled
share-based payments
At 31 December 2016
Loss for the year
Other comprehensive
income/(expense)
Total comprehensive
income/(expense)
Dividends paid
Credit to equity for equity-settled
share-based payments
Deferred tax on share-based
payment transactions
Incentive scheme related (1)
At 31 December 2017
Total equity
attributable to
owners of the
parent
£m
2,845.4
(39.0)
134.7
95.7
(2,388.5)
1,612.0
(5.8)
4.0
2,162.8
(23.9)
(37.8)
–
105.6
2,702.2
(39.0)
24.6
105.6
–
–
–
–
67.8
–
(14.4)
–
–
(5.8)
4.0
2,686.0
(23.9)
(133.8)
11.0
(118.7)
(133.8)
–
(12.9)
(63.0)
(142.6)
(63.0)
–
10.1
10.1
–
–
(66.0)
33.4
(115.5)
2,538.1
33.4
(115.5)
1,885.2
–
–
4.5
4.5
–
–
–
–
4.5
–
4.1
4.1
–
–
–
–
8.6
(1)
On 31 May 2017, the Melrose 2012 Incentive Plan crystallised. Of the 50,000 options in issue, 23,494 were withheld by the Company in exchange for a cash payment sufficient to allow holders to
meet their income tax and employee national insurance liabilities in respect of the Incentive Plan. This resulted in 23,494 options being exercised for £115.5 million in cash and being paid to the tax
authorities on behalf of the option holders. The remaining 26,506 options were converted into 54,453,914 ordinary shares of 48/7 pence each and resulted in a £3.7 million increase to Issued share
capital and an equivalent reduction to the Merger reserve.
FinancialsMelrose Industries PLC Annual Report 2017 106
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 Divisional review section on pages 22 to 31.
The consolidated financial statements of the Group for the year ended 31 December 2017 were authorised in accordance with a
resolution of the Directors of Melrose Industries PLC on 20 February 2018.
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.
On 31 August 2016 the Group acquired 100 per cent of the issued share capital and obtained control of Nortek Inc. (Nortek) for cash
consideration of £1,093.1 million (note 11).
In the year to 31 December 2016, the results of Nortek are included in the consolidated financial statements of the Group for the four
month period from the date of acquisition.
The Balance Sheet at 31 December 2016, shown in these consolidated financial statements, has been restated to reflect the completion
of the acquisition accounting for Nortek (note 11).
On 10 August 2017 the disposal of the Best EMEA operations, previously reported within the Air Management segment, to Electrolux A.G.
was completed. The assets and liabilities related to these operations were classified as held for sale as at 30 June 2017.
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:
• Annual improvements to IFRSs: 2014-16 cycle
• Amendments to IAS 7: Disclosure initiative
• Amendments to IAS 12: Recognition of deferred tax assets for unrealised losses
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
• IFRS 15: Revenue from contracts with customers (and related clarifications)
• IFRS 16: Leases
• Amendments to IFRS 2: Classification and measurement of share-based payment transactions
• Amendments to IFRS 9: Prepayment features with negative compensation
• Amendments to IFRS 10 and IAS 28: Sale or contribution of assets between an investor and its associate or joint venture
• Amendments to IAS 28: Long-term interests in associates and joint ventures
• IFRIC 22: Foreign currency transactions and advance consideration
• IFRIC 23: Uncertainty over income tax treatments
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 16 will impact the recognition of leases. A detailed review of the impact of IFRS 9 and IFRS 15
has been completed and it is not anticipated that the application of either standard will have a material impact on the financial statements
of the Group in future periods.
IFRS 9 is effective from 1 January 2018. It includes amendments to classification and measurement of financial instruments, which
include providing a new model for expected future credit losses and impairment. The Group does not expect that the adoption of IFRS 9
will have a material impact on the financial statements but it will impact both the measurement and disclosure of financial instruments.
IFRS 9 does not require restatement of prior periods and therefore any difference between the new carrying amount under IFRS 9 and
the previous carrying amount on the date of initial application will be recognised as a change to equity.
IFRS 15 is effective from 1 January 2018. It provides a single, principles-based, five-step model to be applied to all sales contracts, based
on the transfer of control of goods and services to customers. It replaces the separate model for goods and services of IAS 18 “Revenue”.
The Directors do not consider the impact of IFRS 15 to be significant on the sale of goods where revenue is currently recognised on either
dispatch or delivery dependent on the specific circumstances. The supply of goods and services under more complicated contractual
arrangements will involve the application of judgement when recognising revenue, however, the year-on-year impact on profit is not
considered to be significant and therefore the adoption of this standard is not expected to have a material impact on the financial
statements of the Group in future periods. IFRS 15 will be adopted via the cumulative effect method, therefore comparative information
will not be restated.
Melrose Industries PLC Annual Report 2017 107
1. Corporate information continued
IFRS 16 is effective from 1 January 2019. It will require all leases to be recognised on the Balance Sheet. Currently, IAS 17: “Leases”
only requires those categorised as finance leases to be recognised on the Balance Sheet, with leases categorised as operating leases
not recognised and expensed through the Income Statement instead. The impact of IFRS 16 will be to recognise a lease liability and a
corresponding asset in the Balance Sheet for leases currently classified as operating leases. The Directors are continuing to evaluate
the full impact of the adoption of this standard and it is not practicable to provide a reasonable estimate of the effect of IFRS 16 until a
detailed review has been completed, which is planned to be undertaken in the next 12 months. IFRS 16 will be adopted via a modified
retrospective approach and it is anticipated that right of use assets recognised on transition will be measured at an amount equal to the
lease liability.
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.
Alternative Performance Measures
The Group presents Alternative Performance Measures (APMs) in addition to the unadjusted statutory results of the Group. These are
presented in accordance with the Guidelines on APMs issued by the European Securities and Markets Authority (ESMA).
To provide more clarity and in response to increased guidance, the APMs used by the Group are set out in the glossary to these Financial
Statements on pages 152 to 155 and the reconciling items between statutory and underlying results are listed below and described in
more detail in note 6 to the financial statements.
Underlying profit/(loss) excludes items which are significant in size or volatility or by nature are non-trading or non-recurring, and excludes
any item released to the Income Statement that was previously a fair value item booked on acquisition.
On this basis, the following items were included within adjusted items for the year ended 31 December 2017:
• Impairment charges that are considered to be significant in nature and/or value to the trading performance of the business.
• Amortisation of intangible assets that are acquired in a business combination.
• Significant restructuring costs and other associated costs arising from significant strategy changes that are not considered by the
Group to be part of the normal operating costs of the business.
• Acquisition and disposal costs.
• The charge for the equity-settled Melrose Incentive Plan, including its associated employer’s tax charge.
• The release of fair value items booked on acquisitions.
• The net impact arising from the new US tax legislation with the US Federal tax rate moving from 35% to 21%.
The Board consider the underlying results to be a key measure to monitor how the businesses are performing because this provides
a more meaningful comparison of how the business is managed and measured on a day-to-day basis and achieves consistency and
comparability between reporting periods.
The underlying measures are used to partly determine the variable element of remuneration of senior management throughout the
Group and are also in alignment with performance measures used by certain external stakeholders. The underlying measures are
also one measure used to value individual businesses as part of the “Buy, Improve and Sell” Melrose strategy model.
Underlying profit is not a defined term under IFRS and may not be comparable with similarly titled profit measures reported by other
companies. It is not intended to be a substitute for, or superior to, GAAP measures. All APMs relate to the current year results and
comparative periods where provided.
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.
FinancialsMelrose Industries PLC Annual Report 2017 108
Notes to the financial statements
Continued
2. Summary of significant accounting policies continued
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 40 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.
As at the acquisition date, any goodwill acquired is allocated to 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:
• Certain of the Group’s arrangements with its customers are multiple element arrangements that can include any combination of
products and services such as extended warranties, installation and start up testing as deliverables. With the exception of certain
extended warranty arrangements, substantially all of the deliverables within the Group’s multiple-element arrangements are
delivered within a one year period. Revenue for any undelivered elements are deferred until delivery occurs. The Group allocates
revenue to multiple-element arrangements based on the relative fair value of each element’s estimated selling price.
• 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.
Melrose Industries PLC Annual Report 2017 109
2. Summary of significant accounting policies continued
Cash discounts, volume rebates and other customer incentive programmes are based upon certain percentages agreed upon with the
Group’s various customers, which are typically earned by the customer over an annual period. The Group records periodic estimates
for these amounts based upon the historical results to date, estimated future results through the end of the contract period, and the
contractual provisions of the customer agreements. These are recorded at the later of the date at which the revenues are recognised or
the incentive is offered and are generally recorded as a reduction in sales at the time of sale based upon the estimated future outcome.
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 of 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
Revenue from significant contracts, without discrete elements, 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.
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.
Operating profit
Operating profit is stated after the share of profit after tax of joint ventures and associates, and before finance costs.
EBITDA
EBITDA is operating profit from continuing operations, before depreciation and impairment of property, plant and equipment and before
amortisation and impairment of intangible assets acquired in business combinations, computer software and development costs.
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.
FinancialsMelrose Industries PLC Annual Report 2017 110
Notes to the financial statements
Continued
2. Summary of significant accounting policies continued
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.
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.
Technology assets are valued using a replacement cost approach.
Amortisation of intangible assets is recorded in administration expenses in the Income Statement and is calculated on a straight-line
basis over the estimated useful lives of the asset as follows:
Customer relationships
Brands and intellectual property
Technology
Order backlog
Computer software
Development costs
20 years or less
20 years or less
5 years or less
1 year 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 (other than computer software and development costs) 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.
Melrose Industries PLC Annual Report 2017 111
2. Summary of significant accounting policies continued
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.
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.
Net Debt
Net debt includes interest-bearing loans, finance leases and cash and cash equivalents.
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 23 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.
FinancialsMelrose Industries PLC Annual Report 2017 112
Notes to the financial statements
Continued
2. Summary of significant accounting policies continued
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.
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.
Restructuring
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 and subsequently updated for changes in estimates as necessary. The Directors’ best estimate of the expenditure
required to settle the Group’s obligation is used to determine the amount of the provision.
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.
Employee related
Liabilities for health and workers compensation expenses are provided for based on the total liabilities that are able to be estimated and
are probable as of the balance sheet date. These liabilities include an estimate of claims incurred but not yet reported and are based on
actuarial valuations using claim data.
Melrose Industries PLC Annual Report 2017 113
2. Summary of significant accounting policies continued
Product liability
Provisions are recorded for product and general liability claims which are probable and for which the cost can be reliably estimated.
These liabilities include an estimate of claims incurred but not yet reported and are based on actuarial valuations using claim data.
Contingent liabilities acquired in a business combination
Contingent liabilities acquired in a business combination are initially measured at fair value at the acquisition date. At the end of
subsequent reporting periods, such contingent liabilities are measured at the higher of the amount that would be recognised in
accordance with IAS 37: “Provisions, contingent liabilities and contingent assets” and the amount initially recognised less cumulative
amortisation recognised in accordance with IAS 18: “Revenue”.
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.
FinancialsMelrose Industries PLC Annual Report 2017 114
Notes to the financial statements
Continued
2. Summary of significant accounting policies continued
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 and tax laws 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.
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.
Melrose Industries PLC Annual Report 2017 115
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.
There are no critical judgements, apart from those involving estimations, to disclose within the scope of paragraph 122 of IAS 1:
“Presentation of financial statements”.
Key sources of estimation uncertainty
The key assumptions concerning the future, and other key sources of estimation uncertainty at the reporting period end that may
have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year,
are discussed below.
Assumptions used to determine the carrying amount of the Energy segment
IAS 36: “Impairment of assets” requires that the carrying amount of assets does not exceed their recoverable amount. Recoverable
amount is defined as the higher of an asset’s or cash-generating unit’s (CGU) fair value less costs of disposal and its value in use.
The Group reported on 21 November 2017 that a full review of the Energy group of CGUs was underway following the continued
worsening of the market, recent negative trading statements made by participants in the market sector and the deferral of Generator
orders within Brush. As has been well-publicised, structural changes caused by worldwide environmental policy have triggered a fall
in volumes in the gas turbine market of over 60% from its peak in 2011. This in turn has resulted in Brush’s turbogenerator sales falling.
These circumstances resulted in a reduction in the forecasts of the Brush business and the communication, in the November trading
statement, that the current order intake by Brush would result in a low single-digit margin during 2018.
Given the challenging current market conditions affecting the Energy segment, management conducted a review of the carrying value
of property, plant and equipment and computer software as at 31 December 2017 using a value in use calculation. This required the
entity to estimate the future cash flows expected to arise from the property, plant and equipment and use a suitable discount rate
in order to calculate present value. Management draws upon experience as well as external resources in making these estimates.
Based on this testing, an impairment loss of £18.2 million was identified in relation to specific items of property, plant and equipment
and computer software. At 31 December 2017, the carrying amount of property, plant and equipment and computer software was
£70.1 million (31 December 2016: £118.2 million). The key estimates used to derive these non-current asset discounted cash flow
valuations were revenue changes, operating margins (impacting EBITDA) and market conditions that impact long-term growth rates
and discount rates.
As a result of its closure in November 2017, a reassessment of the value of the assets in Brush China resulted in a write down of
£31.1 million and therefore the valuation of these assets is no longer considered a key source of estimation uncertainty.
Goodwill and intangible assets are tested for impairment whenever events or circumstances indicate that their carrying amounts might
be impaired and at least annually.
Under IAS 36, the value in use basis for calculating the recoverable amount prohibits the inclusion of future uncommitted restructuring
plans, however, the fair value less costs to sell basis valuation should reflect all future events (including restructuring) that would affect the
expected cash flows for a market participant. The recent trading announcements by key players in the market in which Brush operates is
considered to be a good indication that a market participant would restructure the business and therefore the restructuring impact should
be included in the calculation.
For the purposes of this impairment test, the Energy group of CGUs has been measured using the higher of a fair value less disposal
costs basis and a value in use basis. The fair value less cost to sell basis gives a value of £300 million (net of expected costs of disposal),
which is more than the recoverable amount calculated using the value in use basis of £177.5 million. The fair value less costs to sell basis
has therefore been used in the impairment assessment of the Energy group of CGUs, in accordance with IAS 36.
Fair value is the price that would be expected to be received to sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. In estimating the fair value, the Group uses market-observable data to the extent it is
available. The Group engaged third party valuation specialists as necessary and worked closely with these specialists to establish
appropriate valuation techniques and market based inputs to the model. Fair value less disposal costs has been estimated using
discounted cash flow projections, approved by management. The key estimates used to derive this valuation are the timing and impact
of restructuring, potential reduction of future sales, operating margins (impacting EBITDA) and market conditions that impact long-term
growth rates and discount rates. These are considered to be the main risk areas and are discussed in more detail in note 11.
Based on the impairment testing completed at year end, an impairment loss of £95.4 million was identified in relation to the assets of
the Brush CGU, and hence goodwill has been written down accordingly. At 31 December 2017, the carrying amount of goodwill and
other intangible assets in this division (not including computer software and development costs) was £184.5 million (31 December 2016:
£283.0 million). Further information on the carrying amount of these assets, including a sensitivity analysis on the key assumptions, is
provided in note 11.
FinancialsMelrose Industries PLC Annual Report 2017 116
Notes to the financial statements
Continued
3. Critical accounting judgements and key sources of estimation uncertainty continued
Assumptions used to determine the carrying amount of the Group’s defined benefit obligation
The Group’s defined benefit obligation is discounted at a rate set by reference to market yields at the end of the reporting period on high
quality corporate bonds. Significant judgement is required when setting the criteria for bonds to be included in the population from which
the yield curve is derived. The most significant criteria considered for the selection of bonds include the issue size of the corporate bonds,
quality of the bonds and the identification of outliers which are excluded. In addition judgement is made in determining mortality rate
assumptions to be used when valuing the Group’s defined benefit obligations. At 31 December 2017, the Group’s retirement benefit
obligation deficit was £17.6 million (31 December 2016: £33.4 million). Further details of the assumptions applied and a sensitivity analysis
on the principal assumptions used to determine the Group’s defined benefit obligations is shown in note 22.
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
Year ended
31 December
2017
£m
Year ended
31 December
2016
£m
Notes
1,995.7
5.0
91.5
2,092.2
0.8
2,093.0
5
7
807.8
3.0
78.5
889.3
1.8
891.1
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 as follows:
Energy – includes the Brush business, a specialist supplier of energy industrial products to the global market.
Air Management – includes the Air Quality & Home Solutions business (AQH), a leading manufacturer of ventilation products for the
professional remodelling and replacement markets, residential new construction market, and do-it-yourself market. The Air Management
division also includes the Heating, Ventilation & Air Conditioning business (HVAC) which manufactures and sells split-system and
packaged air conditioners, heat pumps, furnaces, air handlers and parts for the residential replacement and new construction markets,
along with custom-designed and engineered HVAC products and systems for non-residential applications.
Security & Smart Technology (SST) – includes the Security & Control business (SCS) along with the Core Brands and GTO Access
Systems businesses. These businesses are manufacturers and distributors of products designed to provide convenience and security
primarily for residential applications and audio visual equipment for the residential audio video and professional video market.
Ergonomics – comprises the Ergotron business, a manufacturer and distributor of innovative products designed with ergonomic
features including wall mounts, carts, arms, desk mounts, workstations and stands that attach to or support a variety of display devices
such as notebook computers, computer monitors and flat panel displays.
In addition, there are central cost centres which are also separately reported to the Board. The central corporate cost centre which
contains the Melrose Group head office costs along with charges related to the divisional management long-term incentive plans and
the remaining Nortek central cost centre.
All operating segments are classified as continuing operations.
Transfer prices between business units are set on an arm’s length basis in a manner similar to transactions with third parties.
No single customer contributed 10% or more to the Group’s revenue in either 2017 or 2016.
The Group’s geographical segments are determined by the location of the Group’s non-current assets and, for revenue, the location
of external customers. Inter-segment sales are not material and have not been disclosed.
Melrose Industries PLC Annual Report 2017 117
5. Segment information continued
Segment revenues and results
The following tables present the revenue, results and certain asset and liability information regarding the Group’s operating segments
and central cost centres for the year ended 31 December 2017 and the comparative year.
Air
Management
£m
Security &
Smart
Technology
£m
Ergonomics
£m
1,159.6
146.1
–
(35.3)
(19.0)
–
–
3.2
95.0
440.7
70.7
–
(20.2)
(6.7)
–
–
1.8
45.6
272.9
69.6
–
(17.1)
(2.1)
–
–
0.5
50.9
Energy
£m
219.0
17.5
(144.7)
(8.8)
(5.9)
–
–
0.3
(141.6)
Nortek
central
£m
–
(2.1)
–
–
(1.3)
–
–
–
(3.4)
Nortek
total
£m
1,873.2
284.3
–
(72.6)
(29.1)
–
–
5.5
188.1
Central(1)-
corporate
£m
–
(23.4)
–
–
–
(5.8)
(24.2)
–
(53.4)
Year ended 31 December 2017
Revenue
Underlying operating profit/(loss)
Impairment of Brush assets
Amortisation of intangible assets
Restructuring costs
Acquisition and disposal costs
Melrose equity-settled
compensation scheme
Release of fair value items
Operating (loss)/profit
Finance costs
Finance income
Loss before tax
Tax
Loss for the year
(1)
Includes £7.6 million (2016: £nil) of costs relating to divisional Long-term Incentive Plans.
Air
Management
£m
Security &
Smart
Technology
£m
Ergonomics
£m
Nortek central
£m
416.5
46.8
(15.1)
(12.4)
–
–
–
(13.0)
6.3
130.4
17.1
(6.9)
(1.1)
–
–
–
(3.4)
5.7
96.0
24.4
(5.8)
–
–
–
–
(1.8)
16.8
–
(2.0)
–
(31.8)
–
–
–
–
(33.8)
Energy
£m
246.4
32.0
(8.5)
(6.1)
–
–
1.7
–
19.1
Nortek (1)
total
£m
642.9
86.3
(27.8)
(45.3)
–
–
–
(18.2)
(5.0)
Central-
corporate
£m
–
(14.2)
–
–
(38.7)
(22.8)
–
–
(75.7)
Year ended 31 December 2016
Revenue
Underlying operating profit/(loss)
Amortisation of intangible assets
Restructuring costs
Acquisition and disposal costs
Melrose equity-settled
compensation scheme
Release of fair value items
Removal of one-off uplift
in value of inventory
Operating profit/(loss)
Finance costs
Finance income
Loss before tax
Tax
Loss for the year
Total
£m
2,092.2
278.4
(144.7)
(81.4)
(35.0)
(5.8)
(24.2)
5.8
(6.9)
(21.5)
0.8
(27.6)
3.7
(23.9)
Total
£m
889.3
104.1
(36.3)
(51.4)
(38.7)
(22.8)
1.7
(18.2)
(61.6)
(9.5)
1.8
(69.3)
30.3
(39.0)
(1)
Includes four months trading of Nortek following its acquisition on 31 August 2016.
Energy
Air Management
Security & Smart Technology
Ergonomics
Nortek central
Nortek total
Central – corporate
Total
Total assets
Total liabilities
31 December
2017
£m
Restated (1)
31 December
2016
£m
31 December
2017
£m
Restated (1)
31 December
2016
£m
376.4
1,399.2
630.5
670.3
0.5
2,700.5
68.9
3,145.8
549.2
1,569.2
692.2
756.5
5.3
3,023.2
76.6
3,649.0
69.5
367.2
127.3
103.4
(10.3) (2)
587.6
603.5
1,260.6
97.8
497.4
160.7
144.6
(31.0) (2)
771.7
616.7
1,486.2
(1) Restated to reflect the completion of the acquisition accounting for Nortek (note 11).
(2)
IAS 12 requires the set off of deferred tax assets and liabilities in the same tax jurisdiction. The £10.3 million (31 December 2016: £31.0 million) negative balance within Nortek central liabilities
represents £36.7 million (31 December 2016: £85.5 million) of Nortek central deferred tax assets which have been treated as negative liabilities to represent the required offset, and £26.4 million
(31 December 2016: £54.5 million) of other Nortek central liabilities.
FinancialsMelrose Industries PLC Annual Report 2017 118
Notes to the financial statements
Continued
5. Segment information continued
Continuing operations
Energy
Air Management
Security & Smart Technology
Ergonomics
Nortek central
Nortek total
Central – corporate
Total
(1)
Including computer software and development costs.
Capital expenditure (1)
Depreciation (1)
Year ended
31 December
2017
£m
Year ended
31 December
2016
£m
Year ended
31 December
2017
£m
Year ended
31 December
2016
£m
1.8
44.4
3.1
2.4
–
49.9
–
51.7
3.6
10.3
1.8
1.1
0.1
13.3
–
16.9
9.2
18.9
3.1
2.8
0.7
25.5
–
34.7
9.0
6.4
1.0
1.0
0.5
8.9
0.2
18.1
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:
Continuing operations
UK
Europe
North America
Other
Total
Revenue (1) from external customers
Non-current assets
Year ended
31 December
2017
£m
Year ended
31 December
2016
£m
31 December
2017
£m
Restated (2)
31 December
2016
£m
104.7
124.2
1,767.8
95.5
2,092.2
88.9
82.3
638.8
79.3
889.3
130.3
108.8
2,207.3
10.1
2,456.5
183.3
181.4
2,480.1
36.4
2,881.2
(1) Revenue is presented by destination.
(2) Restated to reflect the completion of the acquisition accounting for Nortek (note 11).
6. Reconciliation between profit and underlying profit
As described in note 2, underlying profit/(loss) is an alternative performance measure used by the Board to monitor the underlying
trading performance of the Group. The Board considers the underlying results to be a key measure to monitor how the businesses
are performing because this provides a more meaningful comparison of how the business is managed and measured on a day-to-day
basis and achieves consistency and comparability between reporting periods.
A reconciliation between the statutory loss and underlying profit is shown below:
Continuing operations
Operating loss
Impairment of Brush assets
Amortisation of intangible assets
Restructuring costs
Acquisition and disposal costs
Removal of one-off uplift in value of inventory
Melrose equity-settled compensation scheme
Release of fair value items
Total adjustments to operating loss (1)
Underlying operating profit
Year ended
31 December
2017
£m
Year ended
31 December
2016
£m
Notes
a
b
c
d
e
f
g
(6.9)
144.7
81.4
35.0
5.8
–
24.2
(5.8)
285.3
278.4
(61.6)
–
36.3
51.4
38.7
18.2
22.8
(1.7)
165.7
104.1
(1) Of the adjustments to operating loss, £285.3 million (2016: £147.5 million) is included within net operating expenses and £nil (2016: £18.2 million) within cost of sales.
Melrose Industries PLC Annual Report 2017
119
6. Reconciliation between profit and underlying profit continued
a.
The results for the year ended 31 December 2017 included an impairment charge totalling £144.7 million in respect of the carrying
value of the assets held within the Brush business. This charge included £31.1 million in respect of the net assets of Brush China,
which was closed in November 2017, and, following a review of the non-current assets, included £18.2 million in respect of fixed
assets and £95.4 million in respect of goodwill. The impairment charge has been excluded from underlying results due to its one-off
nature and size.
b.
c.
d.
e.
f.
g.
The amortisation of intangible assets acquired in business combinations are excluded from underlying results due to their non-trading
nature and to enable comparison with companies that grow organically and do not have such a charge. Where intangible assets are
trading in nature, such as computer software and development costs, the amortisation of these intangible assets are shown within
underlying results.
Restructuring costs and other associated costs arising from significant strategy changes totalled £35.0 million (2016: £51.4 million)
and included £1.1 million (2016: £nil) of losses incurred following the announcement of the closure of certain businesses. Within the
Nortek businesses the cost of restructuring actions taken in the year was £29.1 million (2016: £45.3 million, of which £31.8 million
related to the closure of the Nortek head office). These actions included the closure of loss making operations within the HVAC
business, the removal of excess manufacturing capacity in the Air Quality & Home Solutions business and the consolidation of Nortek
Security & Control, GTO and Core Brands into a single Security & Smart Technology division based in Carlsbad. Restructuring costs
also included £5.9 million (2016: £6.1 million) within the Brush businesses relating to the closure of the China factory and realigning the
cost base of Brush with the reduced revenue. Restructuring costs are excluded from underlying results due to their size and non-
trading nature.
Acquisition and disposal costs incurred in the year ended 31 December 2017 totalled £5.8 million (2016: £38.7 million) and included
the costs involved in returning the ordinary shares of the Company to the Premium List of the London Stock Exchange following on
from the acquisition of Nortek, along with £1.8 million of committed costs associated with the potential acquisition of GKN plc. In the
year ended 31 December 2016 acquisition and disposal costs related primarily to the acquisition of Nortek. These items are excluded
from underlying results due to their non-trading nature.
The one-off loss of profit effect of being required to uplift the value of inventory acquired in an acquisition to that close to its selling
price was excluded from the year ended 31 December 2016 underlying results due to its size and non-recurring nature.
The charge for the equity-settled Melrose Incentive Plan, including its associated employer’s tax charge, is excluded from underlying
results due to its size and volatility. The shares that would be issued in respect of the equity-settled Melrose Plan are included in the
calculation of the underlying diluted earnings per share, which the Board consider to be a key measure of performance.
During the year ended 31 December 2017 certain items, primarily booked as fair value items on the acquisition of Nortek, have been
settled for a more favourable amount than first anticipated. The release of any excess fair value item is shown within non-underlying
profit to avoid positively distorting underlying results.
Continuing operations
Loss before tax
Adjustments to loss before tax per above
Underlying profit before tax
Continuing operations
Loss for the year
Adjustments to loss before tax per above
Net effect of new tax legislation in the US
Incremental deferred tax asset recognition on UK losses
Tax effect of adjustments to underlying profit before tax
Adjustments to loss for the year
Underlying profit for the year
Year ended
31 December
2017
£m
Year ended
31 December
2016
£m
(27.6)
285.3
257.7
(69.3)
165.7
96.4
Year ended
31 December
2017
£m
Year ended
31 December
2016
£m
Notes
h
i
8
(23.9)
285.3
(26.4)
–
(44.1)
214.8
190.9
(39.0)
165.7
–
(10.4)
(45.9)
109.4
70.4
h.
i.
The net tax credit arising from the new US tax legislation enacted in December 2017, including an estimated repatriation charge
and changes to closing deferred tax items due to a reduction in the Federal tax rate from 35% to 21%, has been included as
non-underlying because of its size and one-off nature.
During the year ended 31 December 2016 deferred tax assets on UK tax losses, which are now considered accessible
following acquisition and disposal activities, were recognised. This is excluded from underlying results due to its size, volatility
and non-trading nature.
FinancialsMelrose Industries PLC Annual Report 2017 120
Notes to the financial statements
Continued
7. Revenues and expenses
Continuing operations
Net operating expenses comprise:
Selling and distribution costs
Administration expenses(1)
Share of results of joint ventures (note 13)
Total net operating expenses
(1) Includes £285.3 million (2016: £147.5 million) of non-underlying costs.
Continuing operations
Operating profit is stated after charging/(crediting):
Cost of inventories
Amortisation of intangible assets acquired in business combinations (note 11)
Depreciation and impairment of property, plant and equipment (note 12)(1)
Impairment of goodwill (note 11)(1)
Amortisation and impairment of computer software and development costs (note 11)(1)
Operating lease expense
Staff costs
Research and development costs(2)
Loss on disposal of property, plant and equipment
Loss on disposal of computer software and development costs
Expense of writing down inventory to net realisable value(1)
Reversals of previous write-downs of inventory
Impairment recognised on trade receivables
Impairment reversed on trade receivables
Year ended
31 December
2017
£m
Year ended
31 December
2016
£m
(167.7)
(492.6)
0.6
(659.7)
(76.7)
(249.1)
0.9
(324.9)
Year ended
31 December
2017
£m
Year ended
31 December
2016
£m
1,439.4
81.4
74.7
95.4
4.3
20.0
502.9
18.7
1.6
0.3
11.8
(2.7)
4.6
(4.4)
626.0
36.3
18.4
–
7.5
10.7
246.6
3.9
–
0.2
9.3
(6.6)
3.7
(1.1)
(1)
Of the £144.7 million of Brush impairment charges, £95.4 million relates to goodwill, £0.5 million relates to computer software and development costs, £42.3 million relates to property, plant and
equipment, £3.9 million relates to inventory and £2.6 million relates to other assets.
(2) In addition staff costs include £44.2 million (2016: £19.2 million) of research and development related costs.
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 Nortek 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
Other assurance services
Total audit-related assurance services
Total audit and audit-related assurance services
Taxation compliance services
Other taxation advisory services
Corporate finance services
Total audit and non-audit fees
Year ended
31 December
2017
£m
Year ended
31 December
2016
£m
2.3
–
2.3
0.4
2.7
0.2
0.9
0.1
1.2
3.9
–
–
0.5
4.4
1.8
0.5
2.3
0.5
2.8
0.1
0.1
0.4
0.6
3.4
0.1
0.9
1.8
6.2
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 page 76. No services were provided pursuant to contingent fee arrangements.
Melrose Industries PLC Annual Report 2017 7. Revenues and expenses continued
Continuing operations
Staff costs during the year (including executive Directors)
Wages and salaries
Social security costs(1)
Pension costs (note 22)
– defined benefit plans
– defined contribution plans
Share based compensation expense(2)(note 21)
Total staff costs
(1) Includes the employer’s tax charge on the change in value of the Melrose equity-settled incentive scheme (note 6).
(2) Charged to non-underlying expense (note 6).
Continuing operations
Average monthly number of persons employed (including executive Directors)
Energy
Air Management
Security & Smart Technology
Ergonomics
Nortek central(2)
Central – corporate
Total average number of persons employed
121
Year ended
31 December
2017
£m
Year ended
31 December
2016
£m
433.4
52.0
0.2
7.2
10.1
502.9
204.9
31.7
0.1
5.9
4.0
246.6
Year ended
31 December
2017
Number
Year ended(1)
31 December
2016
Number
1,798
6,205
2,507
1,418
2
30
11,960
2,107
6,743
2,602
1,546
86
30
13,114
(1) For Nortek businesses the average monthly number of persons employed in the year ended 31 December 2016 reflects the average for the four month period from the date of acquisition.
(2) At 31 December 2017, no Nortek central employees remained within the Group (31 December 2016: 10).
Continuing operations
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 net finance costs
8. Tax
Continuing operations
Analysis of charge/(credit) in year:
Current tax
In respect of current year
In respect of prior year
Deferred tax
In respect of current year
Adjustments to deferred tax attributable to changes in tax rates
Loss utilisation against US repatriation charge
Recognition of previously unrecognised UK tax losses
Total income tax credit
Year ended
31 December
2017
£m
Year ended
31 December
2016
£m
(16.8)
(2.3)
(1.1)
(1.3)
(21.5)
0.8
(20.7)
(7.7)
(0.7)
(0.9)
(0.2)
(9.5)
1.8
(7.7)
Year ended
31 December
2017
£m
Year ended
31 December
2016
£m
13.1
0.2
6.4
(39.4)
16.0
–
(3.7)
6.0
(3.0)
(22.5)
(0.4)
–
(10.4)
(30.3)
The total income tax credit of £3.7 million (2016: £30.3 million) is comprised of a current tax charge of £13.3 million (2016: £3.0 million)
and a deferred tax credit of £17.0 million (2016: £33.3 million).
The deferred tax credit for the year has been materially affected by the reduction of corporate tax rates in the UK and the US. In the UK,
the Finance Act 2016 enacted future reductions in the rate of UK Corporation Tax and excess losses arising in the current year have been
recognised in the closing Balance Sheet at the rates at which the benefit is likely to reverse. This has resulted in an effective deferred tax
charge of £3.0 million (2016: credit of £0.4 million) which is included in underlying tax.
FinancialsMelrose Industries PLC Annual Report 2017 122
Notes to the financial statements
Continued
8. Tax continued
In addition, the new US tax measures enacted in December 2017 include a reduction of the Federal tax rate from 35% to 21% with
effect from 1 January 2018, requiring a revaluation of the US deferred tax assets and liabilities at 31 December 2017. The reduction in
the deferred tax liability held in respect of intangible assets results in a tax credit of £99.5 million (2016: £nil), whilst the reduction in the
deferred tax assets held within the Group’s subsidiaries results in a tax charge of £57.1 million (2016: £nil). Together with a charge of
£16.0 million (2016: £nil) in respect of the US repatriation charge, these amounts total £26.4 million (2016: £nil) which is classified as
non-underlying tax.
In addition, the tax effect of non-underlying items incurred in the year was a credit of £44.1 million (2016: £45.9 million) which comprises
£2.5 million (2016: £nil) in respect of impairment of Brush assets, £10.0 million (2016: £18.2 million) in respect of restructuring costs,
£0.3 million (2016: £3.9 million) in respect of acquisition and disposal costs, £30.0 million (2016: £12.8 million) in respect of the amortisation
of intangible assets, £nil (2016: £6.8 million) in respect of the required uplift in the value of inventory acquired with Nortek, £2.9 million
(2016: £4.5 million) in respect of Melrose equity-settled compensation scheme, and a charge of £1.6 million (2016: £0.3 million) in respect
of the release of fair value provisions and other items.
The tax credit for the year for continuing operations can be reconciled to the loss per the Income Statement as follows:
Loss on ordinary activities before tax:
Tax on loss on ordinary activities at weighted average rate 14.22% (2016: 40.82%)
Tax effect of:
Disallowable expenses within underlying items
Disallowable items in respect of non-underlying items
Temporary differences not recognised in deferred tax
Tax credits, withholding taxes and other rate differences
Prior year tax adjustments
Tax credit classified as non-underlying (note 6)
Total tax credit for the year
Year ended
31 December
2017
£m
Year ended
31 December
2016
£m
(27.6)
(69.3)
(3.9)
(28.3)
5.4
21.7
11.0
(0.9)
(10.6)
(26.4)
(3.7)
1.6
7.3
2.7
(0.2)
(3.0)
(10.4)
(30.3)
The reconciliation has been performed at a blended Group tax rate of 14.22% (2016: 40.82%) which represents the weighted average
of the tax rates applying to profits and losses in the jurisdictions in which those results arose.
In addition to the amount charged to the Income Statement, a tax credit of £31.6 million (2016: £2.1 million) has been recognised in equity.
This represents a tax charge of £1.1 million (2016: £3.3 million) in respect of retirement benefit obligations, a tax charge of £0.7 million
(2016: £1.1 million) in respect of movements on cash flow hedges, a tax credit of £nil (2016: £1.3 million) in respect of tax charged on
foreign exchange gains and a tax credit of £33.4 million (2016: £5.2 million) in respect of share based payments.
9. Dividends
Final dividend for the year ended 31 December 2015 paid of 2.6p (0.5)p (1)
Interim dividend for the year ended 31 December 2016 paid of 1.4p (0.3)p (1)
Final dividend for the year ended 31 December 2016 paid of 1.9p
Interim dividend for the year ended 31 December 2017 paid of 1.4p
(1) Adjusted to include the effects of the Rights Issue (note 10).
Year ended
31 December
2017
£m
Year ended
31 December
2016
£m
–
–
35.8
27.2
63.0
3.8
2.0
–
–
5.8
Proposed final dividend for the year ended 31 December 2017 of 2.8p per share (2016: 1.9p per share) totalling £54.4 million
(2016: £35.8 million).
The final dividend of 2.8p was proposed by the Board on 20 February 2018 and, in accordance with IAS 10: “Events after the reporting
period”, has not been included as a liability in these financial statements.
Melrose Industries PLC Annual Report 2017 10. Earnings per share
Earnings attributable to owners of the parent
Earnings for basis of earnings per share from continuing operations
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)
123
Year ended
31 December
2017
£m
Year ended
31 December
2016
£m
(23.9)
(39.0)
Year ended
31 December
2017
Number
Year ended (1)
31 December
2016
Number
1,918.7
22.5
1,941.2
1,499.3
89.8
1,589.1
(1) On 24 August 2016, a 12 for 1, fully underwritten, Rights Issue was completed by Melrose Industries PLC and subsequently 1,741.6 million new ordinary shares were issued raising £1,654.5 million to
part fund the acquisition of the Nortek Group. In accordance with IAS 33, a bonus factor associated with the issue of the new share capital of 18.8491% has been applied to the number of ordinary
shares in issue prior to 24 August 2016 for the purposes of earnings per share calculations.
On 28 January 2016 the number of ordinary shares in issue was consolidated in a ratio of 7 for 48, which reduced the number
of ordinary shares in issue from 995.2 million to 145.1 million.
On 1 June 2017 the number of ordinary shares in issue increased by 54.5 million following the crystallisation of the 2012 Melrose Incentive
Plan which increased the number of shares in issue from 1,886.7 million to 1,941.2 million.
Earnings per share
Basic earnings per share
Diluted earnings per share
Underlying earnings
Underlying earnings for the basis of underlying earnings per share from continuing operations
Underlying earnings per share
Continuing operations
Underlying basic earnings per share
Underlying diluted earnings per share
Year ended
31 December
2017
pence
Year ended
31 December
2016
pence
(1.2)
(1.2)
(2.6)
(2.6)
Year ended
31 December
2017
£m
Year ended
31 December
2016
£m
190.9
70.4
Note
6
Year ended
31 December
2017
pence
Year ended
31 December
2016
pence
9.9p
9.8p
4.7p
4.4p
FinancialsMelrose Industries PLC Annual Report 2017 124
Notes to the financial statements
Continued
11. Goodwill and other intangible assets
Cost
At 1 January 2016
Acquisition of businesses(2)
Additions
Disposals
Exchange adjustments
At 31 December 2016 restated(2)
Transfer to held for sale(3)
Additions
Disposals
Exchange adjustments
At 31 December 2017
Amortisation and impairment
At 1 January 2016
Charge for the year
Impairments(4)
Exchange adjustments
At 31 December 2016
Charge for the year
Impairments(4)
Disposals
Exchange adjustments
At 31 December 2017
Net book value
At 31 December 2017
At 31 December 2016 restated(2)
At 1 January 2016
Goodwill
£m
198.1
1,348.5
–
–
101.7
1,648.3
–
–
–
(120.7)
1,527.6
–
–
–
–
–
–
(95.4)
–
–
(95.4)
1,432.2
1,648.3
198.1
Customer
relationships
£m
28.4
556.4
–
–
37.8
622.6
–
–
–
(51.3)
571.3
(21.3)
(18.7)
–
(1.3)
(41.3)
(49.1)
–
–
3.2
(87.2)
484.1
581.3
7.1
Brands and
intellectual
property
£m
106.4
266.5
–
–
25.1
398.0
–
–
–
(22.7)
375.3
(39.8)
(11.5)
–
(3.2)
(54.5)
(23.2)
–
–
0.5
(77.2)
298.1
343.5
66.6
Computer
software and
development
costs
£m
4.5
15.8
0.6
(0.2)
1.5
22.2
(0.1)
3.2
(1.2)
(0.9)
23.2
(3.3)
(2.2)
(5.3)
(0.5)
(11.3)
(3.8)
(0.5)
0.9
0.2
(14.5)
8.7
10.9
1.2
Other (1)
£m
–
29.7
–
–
1.9
31.6
–
–
–
(2.8)
28.8
–
(6.1)
–
(0.2)
(6.3)
(9.1)
–
–
1.1
(14.3)
14.5
25.3
–
Total
£m
337.4
2,216.9
0.6
(0.2)
168.0
2,722.7
(0.1)
3.2
(1.2)
(198.4)
2,526.2
(64.4)
(38.5)
(5.3)
(5.2)
(113.4)
(85.2)
(95.9)
0.9
5.0
(288.6)
2,237.6
2,609.3
273.0
(1) Other includes technology and order backlog intangible assets acquired with the Nortek businesses.
(2) Restated to reflect the completion of the acquisition accounting for Nortek.
(3) Transferred to assets held for sale at 30 June 2017 in accordance with IFRS 5, subsequently disposed on 10 August 2017.
(4) The impairment in 2017 relates to impairments recognised in the Energy segment. The impairment charges in 2016 relate to the closure of the Nortek head office.
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 includes a premium, paid in order to secure
shareholder agreement to the business combination, that is less than the 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.
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 acquired in business combinations, net of impairment, has been allocated to the businesses, each of which comprises several
cash-generating units, as follows:
Energy
Air Management
Security & Smart Technology
Ergonomics
Nortek total
Total operations
31 December
2017
£m
Restated (1)
31 December
2016
£m
122.0
580.5
320.2
409.5
1,310.2
1,432.2
212.9
636.1
350.6
448.7
1,435.4
1,648.3
(1) Restated to reflect the completion of the acquisition accounting for Nortek.
The Group tests goodwill annually or more frequently if there are indications that goodwill might be impaired. In accordance with IAS 36:
“Impairment of assets” the Group values goodwill at the recoverable amount, being the higher of the value in use basis and the fair value
less costs to sell basis.
Melrose Industries PLC Annual Report 2017 125
11. Goodwill and other intangible assets continued
Value in use calculations have been used to determine the recoverable amount of goodwill allocated to each group of cash-generating
units (CGUs) within Nortek. The calculation uses the latest approved forecast extrapolated to perpetuity using growth rates shown below,
which do not exceed the long-term growth rate for the relevant market. Based on impairment testing completed at the year end, no
impairment was identified in respect of the Nortek businesses. No reasonable possible change in key assumptions would result in an
impairment in any of the Nortek group of CGUs.
The Group reported on 21 November 2017 that a full review of the Energy group of CGUs was underway following the continued
worsening of the market, recent negative trading statements made by participants in the market sector and the deferral of Generator
orders within Brush. As has been well-publicised, structural changes caused by worldwide environmental policy have triggered a fall in
volumes in the gas turbine market of over 60% from its peak in 2011. This in turn has resulted in Brush’s turbogenerator sales falling.
These circumstances resulted in a reduction in the forecasts of the Brush business and the communication, in the November trading
statement, that the current order intake by Brush would result in a low single-digit margin during 2018.
At 31 December 2017 an agreed restructuring plan had not been publicly announced or communicated to those affected by the
restructure and therefore, in accordance with IAS 37: “Provisions, contingent liabilities and contingent assets”, these costs were not
considered to be committed. The restructuring plan was subsequently announced on 1 February 2018.
Under IAS 36, the value in use basis for calculating the recoverable amount prohibits the inclusion of future uncommitted restructuring
plans, however, the fair value less costs to sell basis valuation should reflect all future events (including restructuring) that would affect the
expected cash flows for a market participant. The recent trading announcements by key players in the market in which Brush operates is
considered to be a good indication that a market participant would restructure the business and therefore the restructuring impact should
be included in the calculation.
The fair value less costs to sell calculation does not include any synergistic savings as these synergies would not be available to most
market participants.
The inclusion of the impacts of the restructuring plan, risk adjusted downwards to reflect the inherent execution risk, results in the fair
value less cost to sell basis giving a value of £300 million (net of expected costs of disposal), which is more than the recoverable amount
calculated using the value in use basis of £177.5 million. The fair value less costs to sell basis has therefore been used in the impairment
assessment of the Energy group of CGUs, in accordance with IAS 36.
Based on the impairment testing completed at year end, an impairment loss of £95.4 million was identified in relation to these assets,
and hence goodwill has been written down accordingly. Combined with the £31.1 million write down of assets in Brush China following
its closure in November 2017 and the £18.2 million impairment of fixed assets, tested separately on a value in use basis as required by
IAS 36 a total impairment charge of £144.7 million is shown in non-underlying items (note 6).
The basis of these impairment tests and the key assumptions are set out in the table below:
31 December 2017
Group of CGUs
Energy(d)
Basis of
valuation
Fair value
less costs of
disposal
Carrying
value of
goodwill
£m
Pre-tax
discount
rates(a)
Post-tax
discount
rates
Period of
forecast
Key assumptions
applied in the
forecast cash flow
projections(b)
Long-term
growth rates(c)
122.0 (1)
11.9%
10.0%
5 years
Air Management
Value in use
580.5
12.6%
9.8%
4 years
Security & Smart Technology
Value in use
320.2
12.6%
9.8%
4 years
Ergonomics
Value in use
409.5
12.6%
9.8%
4 years
(1)
Following a goodwill impairment charge in the year of £95.4 million.
31 December 2016
Group of CGUs
Energy
Restated (1)
carrying value
of goodwill
£m
Basis of
valuation
Pre-tax
discount
rates (a)
Post-tax
discount
rates
Period of
forecast
Value in use
212.9
11.0%
9.2%
5 years
Air Management
Value in use
636.1
12.8%
9.7%
4 years
Security & Smart Technology
Value in use
350.6
12.7%
9.7%
4 years
Ergonomics
Value in use
448.7
12.6%
9.7%
4 years
(1)
Restated to reflect the completion of the acquisition accounting for Nortek.
Revenue growth,
restructuring impact,
operating margins
Revenue growth,
operating margins
Revenue growth,
operating margins
Revenue growth,
operating margins
2.2%
3.0%
3.0%
3.0%
Key assumptions
applied in the
forecast cash flow
projections(b)
Revenue growth,
operating margins
Revenue growth,
operating margins
Revenue growth,
operating margins
Revenue growth,
operating margins
Long-term
growth rates(c)
2.2%
3.0%
3.0%
3.0%
FinancialsMelrose Industries PLC Annual Report 2017 126
Notes to the financial statements
Continued
11. Goodwill and other intangible assets continued
(a) Pre-tax risk adjusted discount rates
Cash flows are discounted using a pre-tax discount rate specific to each group of CGUs. 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. The risk free rate for the Energy group of
CGUs is based on the cost of UK Government bonds, whilst the risk free rate for the Air Management, Security & Smart Technology and
Ergonomics groups of CGUs are based on the cost of US Government bonds. 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 group
of CGUs relative to all other sectors and geographies on average.
The discount rate used for the Energy group of CGUs has been risk adjusted to reflect the execution risk inherent in future restructuring
plans in the fair value less costs of disposal approach.
(b) Assumptions applied in financial forecasts
The Group prepares cash flow forecasts derived from financial budgets and medium-term forecasts. 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 are shown below:
Revenue growth and operating margins:
Revenue growth assumptions in the forecast period are based on financial budgets and medium-term forecasts by management, taking
into account industry growth rates and management’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 achieved 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.
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 the 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. As described above, the impacts of the planned restructuring have been included
in deriving future operating margins within the Energy group of CGUs using a fair value less costs to sell basis. The timing of these
assumed restructuring impacts have been risk adjusted to reflect the execution risk inherent in future restructuring plans of a market
participant and are also a key driver for operating margins in the forecast period.
Nortek is a diversified global manufacturer of innovative air management, security, home automation and ergonomic and productivity solutions.
Air Management is a leading provider of residential indoor air quality improvement solutions, home comfort and convenience products
and heating, ventilation and air conditioning equipment for both residential and commercial markets. The key drivers for revenue and
operating margins are the levels of residential remodelling and replacement activity and the levels of residential and non-residential new
construction in the markets in which Air Management operates. New residential and non-residential construction activity and, to a lesser
extent, residential remodelling and replacement activity are affected by seasonality and cyclical factors such as interest rates, credit
availability, inflation, consumer spending, employment levels and other macroeconomic factors.
Security & Smart Technology is a leading developer and manufacturer of security, home automation and access control technologies
for residential and commercial markets’ service providers. The key driver for revenue and operating margins is global demand for security
and home automation products. Consumer spending, employment levels, regulation, technological advancements and the evolution
of the traditional security market towards home automation and other macroeconomic factors influence demand for these products.
The Ergonomics segment includes Ergotron, one of the world’s largest manufacturers of ergonomics equipment. Ergotron provides a
wide variety of solutions to healthcare, education, corporate office and home applications. The key driver for revenue and operating
margins is demand for technology and wellness products in the markets in which Ergotron operates. Seasonal factors, public authority
spending, corporate and consumer spending, employment levels, the public awareness of wellness, regulation, technological
advancements and other macroeconomic factors influence demand for these products.
Melrose Industries PLC Annual Report 2017 127
11. Goodwill and other intangible assets continued
(c) Long-term growth rates
Long-term growth rates are based on long-term forecasts for growth in the sectors and geography in which the CGU operates. Long-
term growth rates are determined using a blend of publicly available data and a long-term growth rate forecast that takes into account
the international presence and the markets in which each business operates.
(d) Energy group of CGUs
The previous full impairment test performed at 30 June 2017 indicated that although headroom had decreased from 31 December 2016,
the recoverable amount was still in excess of the carrying amount. It is evident that market conditions have deteriorated further since this
date and Brush is facing some of the most challenging market conditions it has ever experienced.
The recoverable amount of the Energy group of CGUs has been determined based on fair value less costs of disposal, which was higher
than value in use. The valuation technique used is an income approach, based on discounted future cash flow projections relevant to a
market participant. This methodology includes a risk adjusted assessment of the results of the restructuring plan that was announced on
1 February 2018. It has been assumed that a market participant would also restructure the business based on the economic data in the
market and the announcements made by key players in the market.
Key assumptions used in the calculation of recoverable amounts are discount rates, revenue growth, operating margins and long-term
growth rates.
Discount rates
The estimate of fair value less disposal costs was determined using a post-tax discount rate of 10.0%. This discount rate has been risk
adjusted to reflect the execution risk inherent in future restructuring plans and hence is higher than would be the case under a non-
restructured basis.
Revenue growth
Structural changes caused by worldwide environmental policy have triggered a fall in volumes in the gas turbine market of over 60%
from its peak in 2011. This in turn has resulted in Brush’s turbogenerator sales falling. The continuing impacts arising from this downturn
in the market are a key assumption. In addition the revenue assumptions applied to Switchgear, Transformers and Aftermarket are a
key assumption.
Revenue is forecast to increase by a compound annual growth rate of 0.2% over the five year projection period.
Restructuring impact and operating margins
Over the five year period, operating margins and EBITDA are anticipated to increase as the impact of the restructuring savings materialise.
The timing and quantitative impact of these restructuring benefits is a key assumption.
Long-term growth rates
The Energy group of CGUs has five years of cash flows included in their discounted cash flow model. A long-term growth rate into
perpetuity has been determined based upon the nominal GDP rates for the countries in which the business operates and the long-term
compound annual growth rate estimated by management.
The fair value measurement of the Energy group of CGUs is categorised within Level 3 of the fair value hierarchy set out in IFRS 13:
“Fair value measurement”.
Based on the impairment testing completed at year end, an impairment loss of £95.4 million was identified in relation to these assets,
and hence goodwill has been written down accordingly. Combined with the £31.1 million write down of assets in Brush China following
its closure in November 2017 and the £18.2 million impairment of fixed assets, tested separately on a value in use basis as required by
IAS 36 a total impairment charge of £144.7 million is shown in non-underlying items (note 6).
Sensitivity analysis
The Energy group of CGUs has been measured at fair value less costs of disposal, a methodology required by IAS 36: “Impairment of
assets”. Following the above impairment, the recoverable amount is equal to the carrying amount and therefore any adverse movement
in a key assumption may lead to further impairment.
The discount rate has been risk adjusted to reflect the uncertainty of achieving the cash flows within the forecast. However, for illustration
purposes a further 0.1 percentage point increase in the discount rate could result in an impairment of £4.5 million. A further £0.5 million
reduction in annual and terminal value operating profit could result in an impairment of £4.9 million. A further 0.1 percentage point
decrease in the long-term growth rate could result in an impairment of £3.5 million.
FinancialsMelrose Industries PLC Annual Report 2017 128
Notes to the financial statements
Continued
11. Goodwill and other intangible assets continued
Allocation of significant intangible assets
The allocation of significant customer relationships, brands and intellectual property is as follows:
Customer relationships
Brands and intellectual property
Remaining amortisation period
Net book value
Remaining amortisation period
Net book value
31 December
2017
years
31 December
2016
years
31 December
2017
£m
31 December
2016
£m
31 December
2017
years
31 December
2016
years
31 December
2017
£m
31 December
2016
£m
13
10
13
9
1
14
11
14
10
2
180.2
97.4
110.3
94.7
1.5
484.1
213.0
117.7
130.4
115.7
4.5
581.3
14
14
14
17
11
15
15
15
18
12
56.1
72.0
25.5
83.5
61.0
298.1
65.9
84.6
30.0
97.4
65.6
343.5
AQH
HVAC
SCS
Ergotron
Brush
Acquisition of businesses
On 31 August 2016 the Group acquired 100 per cent of the issued share capital and obtained control of Nortek Inc. (“Nortek”) for cash
consideration of £1,093.1 million.
Nortek is a leading diversified global manufacturer of innovative air management, security, home automation and ergonomic and
productivity solutions (note 5).
The amounts recognised in respect of the identifiable assets and liabilities assumed on the acquisition of Nortek were set out in the 2016
Annual Report. During the year, the Group has completed its review of the assets and liabilities acquired. As a result the Group recorded
its final adjustments to the opening balance sheet of Nortek at the half year. In accordance with IFRS 3: “Business combinations” the
acquisition Balance Sheet at 31 August 2016 has been restated to reflect this. These adjustments also impacted the Balance Sheet at
31 December 2016 and increased provisions by £3.4 million, deferred tax assets by £0.3 million and other payables by £1.8 million whilst
reducing inventory by £1.2 million and deferred tax liabilities by £63.8 million. The corresponding adjustment is to decrease goodwill by
£57.7 million. The measurement period was closed at 30 June 2017.
Nortek
Property, plant and equipment
Intangible assets, computer software and development costs
Interests in joint ventures
Inventories
Trade and other receivables
Cash and cash equivalents
Trade and other payables
Provisions
Deferred tax
Retirement benefit obligations
Current tax
Interest-bearing loans and borrowings
Net liabilities
Total consideration
Goodwill
Amounts recycled to goodwill
Total goodwill
Total consideration satisfied by:
Cash consideration
(1) Restated to reflect the completion of the acquisition accounting for Nortek.
Restated(1)
fair value
£m
143.3
868.4
3.0
254.5
301.5
9.4
(362.1)
(213.0)
(103.4)
(42.2)
(9.4)
(1,065.9)
(215.9)
1,093.1
1,309.0
39.5
1,348.5
1,093.1
Melrose Industries PLC Annual Report 2017 12. Property, plant and equipment
Cost
At 1 January 2016
Additions
Disposals
Acquisition of businesses
Exchange adjustments
At 31 December 2016
Additions
Disposals
Transfer to held for sale(1)
Exchange adjustments
At 31 December 2017
Accumulated depreciation and impairment
At 1 January 2016
Charge for the year
Disposals
Impairments(2)
Exchange adjustments
At 31 December 2016
Charge for the year
Disposals
Transfer to held for sale(1)
Impairments(2)
Exchange adjustments
At 31 December 2017
Net book value
At 31 December 2017
At 31 December 2016
At 1 January 2016
129
Land and
buildings
£m
Plant and
equipment
£m
52.8
1.6
–
74.3
10.2
138.9
9.3
(2.8)
(12.4)
(3.0)
130.0
(4.3)
(2.6)
–
(2.2)
(2.0)
(11.1)
(5.5)
0.3
0.8
(15.6)
0.5
(30.6)
99.4
127.8
48.5
88.5
14.7
(0.5)
69.0
14.7
186.4
39.2
(11.1)
(6.4)
(6.1)
202.0
(24.1)
(13.3)
0.2
(0.3)
(4.8)
(42.3)
(25.4)
9.9
2.1
(28.2)
1.4
(82.5)
119.5
144.1
64.4
Total
£m
141.3
16.3
(0.5)
143.3
24.9
325.3
48.5
(13.9)
(18.8)
(9.1)
332.0
(28.4)
(15.9)
0.2
(2.5)
(6.8)
(53.4)
(30.9)
10.2
2.9
(43.8)
1.9
(113.1)
218.9
271.9
112.9
(1) Transferred to assets held for sale at 30 June 2017 in accordance with IFRS 5, subsequently disposed on 10 August 2017.
(2)
The impairment in 2017 relates to impairments recognised in the Energy segment of £42.3 million and in Nortek central of £1.5 million. The impairment charges in 2016 relate to the closure of the
Nortek head office.
13. 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 results of joint ventures
Dividends received from joint ventures
31 December
2017
£m
31 December
2016
£m
3.1
(2.7)
0.4
3.2
0.6
(0.6)
2.6
(2.6)
–
1.9
0.9
(0.9)
A list of subsidiaries and significant holdings including the name, country of incorporation and proportion of ownership interest is given in
note 3 to the Company’s separate financial statements.
14. Inventories
Raw materials
Work in progress
Finished goods
(1) Restated to reflect the completion of the acquisition accounting for Nortek (note 11).
31 December
2017
£m
Restated(1)
31 December
2016
£m
79.1
54.6
141.7
275.4
74.9
48.4
172.8
296.1
FinancialsMelrose Industries PLC Annual Report 2017 130
Notes to the financial statements
Continued
14. Inventories continued
In 2017 the write-down of inventories to net realisable value amounted to £11.8 million (2016: £9.3 million). The reversal of write-downs
amounted to £2.7 million (2016: £6.6 million). Write-downs and reversals in both years relate to ongoing assessments of inventory
obsolescence, excess inventory holding and inventory resale values across all of the Group’s businesses.
The Directors consider that there is no material difference between the Balance Sheet value of inventories and their replacement cost.
15. Trade and other receivables
Current
Trade receivables
Allowance for doubtful receivables
Other receivables
Prepayments
31 December
2017
£m
31 December
2016
£m
312.5
(14.9)
21.4
13.0
332.0
348.4
(18.3)
15.2
20.5
365.8
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
2017
£m
31 December
2016
£m
1.9
5.2
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 2016
Acquisition of businesses
Income Statement charge
Utilised
Exchange differences
At 31 December 2016
Income Statement charge
Utilised
Transfer to held for sale (1)
Exchange differences
At 31 December 2017
Nortek
£m
Energy
£m
–
16.8
2.2
(2.6)
0.9
17.3
0.1
(1.2)
(0.7)
(1.2)
14.3
0.8
–
0.4
(0.3)
0.1
1.0
0.1
(0.5)
–
–
0.6
Total
£m
0.8
16.8
2.6
(2.9)
1.0
18.3
0.2
(1.7)
(0.7)
(1.2)
14.9
(1) Transferred to assets held for sale at 30 June 2017 in accordance with IFRS 5, subsequently disposed on 10 August 2017.
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:
0 – 30 days
31 – 60 days
60+ days
31 December
2017
£m
31 December
2016
£m
11.0
0.1
3.8
14.9
8.6
6.2
3.5
18.3
Included in the Group’s trade receivables balance are overdue trade receivables with a carrying amount of £54.5 million
(31 December 2016: £62.5 million) against which an appropriate provision of £14.9 million (31 December 2016: £18.3 million) is held.
Melrose Industries PLC Annual Report 2017 15. Trade and other receivables continued
The balance deemed recoverable of £39.6 million (31 December 2016: £44.2 million) is past due as follows:
0 – 30 days
31 – 60 days
60+ days
131
31 December
2017
£m
31 December
2016
£m
27.4
6.3
5.9
39.6
41.9
0.9
1.4
44.2
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.
16. Cash and cash equivalents
Cash and cash equivalents
31 December
2017
£m
31 December
2016
£m
16.3
42.1
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.
17. Trade and other payables
Current
Trade payables
Other payables
Other taxes and social security
Accruals
31 December
2017
£m
Restated(1)
31 December
2016
£m
209.7
17.8
7.2
131.8
366.5
230.2
22.6
7.4
168.0
428.2
(1) Restated to reflect the completion of the acquisition accounting for Nortek (note 11).
Trade payables are non interest-bearing. Normal settlement terms vary by country and the average credit period taken for trade and other
payables is 66 days (2016: 66 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
2017
£m
31 December
2016
£m
1.3
0.5
1.8
9.6
4.1
13.7
FinancialsMelrose Industries PLC Annual Report 2017 132
Notes to the financial statements
Continued
18. 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 23.
Floating rate obligations
Bank borrowings – US Dollar loan
Bank borrowings – Sterling loan
Fixed rate obligations
Bank borrowings – Euro loan
Finance leases
Finance leases
Unamortised finance costs
Total interest-bearing loans and borrowings
Current
Non-current
Total
31 December
2017
£m
31 December
2016
£m
31 December
2017
£m
31 December
2016
£m
31 December
2017
£m
31 December
2016
£m
–
–
–
0.4
0.4
–
0.4
–
–
–
0.5
0.5
–
0.5
461.4
134.0
590.5
–
461.4
134.0
590.5
–
–
1.7
–
1.7
0.2
595.6
(7.9)
587.7
1.1
593.3
(10.2)
583.1
0.6
596.0
(7.9)
588.1
1.6
593.8
(10.2)
583.6
As at 1 January 2017 and at 31 December 2017, the Group held a five year multi-currency facility consisting of a US$350 million term loan
facility and US$900 million revolving credit facility. This facility is due to mature on 6 July 2021.
As at 1 January 2017 and at 31 December 2017, the term loan was fully drawn down at US$350 million.
As at 1 January 2017, the revolving credit facility was drawn down by US$379 million. The drawdowns as at 31 December 2017 under this
facility were US$274 million and £134 million.
Throughout the year, the Group remained compliant with all covenants under the facilities disclosed above. A number of Group
companies continue to be guarantors under the bank facilities.
Drawdowns under the existing facilities bear interest at interbank rates plus a margin determined by reference to the Group’s performance
under its debt covenant ratio, ranging between 0.85% and 2.00% (31 December 2016: range between 0.85% to 2.00%). The margin as at
31 December 2017 was 1.35% (31 December 2016: 1.35%).
Maturity of financial liabilities
The table below shows the maturity profile of anticipated future cash flows, including interest, on an undiscounted basis in relation to the
Group’s financial liabilities. The amounts shown therefore differ from the carrying value and fair value of the Group’s financial liabilities.
The contractual terms of derivative liabilities requires gross settlement. Note 23 provides details on notional amounts, and therefore, gross
settlements, of material currency pairs.
Within one year
In one to two years
In two to five years
After five years
Effect of financing rates
31 December 2017
Within one year
In one to two years
In two to five years
After five years
Effect of financing rates
31 December 2016
(1) Restated to reflect the completion of the acquisition accounting for Nortek (note 11).
Interest-bearing
loans and
borrowings
£m
Derivative
financial
liabilities
£m
18.3
19.7
626.3
–
(76.2)
588.1
15.2
18.6
644.9
0.8
(95.9)
583.6
1.3
–
–
–
–
1.3
4.2
–
–
–
–
4.2
Other financial
Total financial
liabilities(1)
liabilities(1)
£m
359.3
1.8
–
–
–
361.1
420.8
13.7
–
–
–
434.5
£m
378.9
21.5
626.3
–
(76.2)
950.5
440.2
32.3
644.9
0.8
(95.9)
1,022.3
Melrose Industries PLC Annual Report 2017 133
19. Provisions
At 1 January 2017 (1)
Utilised
Net charge to operating profit (2)
Transfer from accruals
Unwind of discount
Transfer to held for sale (3)
Exchange differences
At 31 December 2017
Current
Non-current
Surplus leasehold
property
costs
£m
20.8
(4.2)
(2.1)
–
0.1
–
(1.1)
13.5
4.6
8.9
13.5
Environmental
and legal
costs
£m
66.8
(18.7)
(2.0)
1.3
0.1
(1.0)
(3.6)
42.9
15.9
27.0
42.9
Warranty
related
costs
£m
86.9
(22.8)
14.2
1.6
–
(1.0)
(6.0)
72.9
33.2
39.7
72.9
Product
liability
£m
Employee
related
£m
42.5
(5.7)
3.4
–
–
–
(3.2)
37.0
10.5
26.5
37.0
8.9
(34.6)
35.7
–
–
–
(0.7)
9.3
5.6
3.7
9.3
Other
£m
57.1
(77.9)
57.5
0.7
1.1
(2.9)
(1.4)
34.2
22.4
11.8
34.2
Total
£m
283.0
(163.9)
106.7
3.6
1.3
(4.9)
(16.0)
209.8
92.2
117.6
209.8
(1) Restated to reflect the completion of the acquisition accounting for Nortek (note 11).
(2) Includes restructuring charges and other non-underlying items of £44.3 million and £62.4 million relating to items charged through underlying operating profit.
(3) Transferred to liabilities held for sale at 30 June 2017 in accordance with IFRS 5, subsequently disposed on 10 August 2017.
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 seven 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.
The provision for warranty related costs represents the best estimate of the expenditure required to settle the Group’s obligations, based
on past experiences. Warranty terms are, on average, between one and five years.
The employee related provision relates to the estimated cost of the Group’s health insurance and workers’ compensation plans. The
product liability provision relates to the estimated cost of future product and general liabilities claims. Due to their nature it is not possible
to predict precisely when these provisions will be utilised.
Other provisions relate to costs that will be incurred in respect of restructuring programmes, usually resulting in cash spend within one
year. In addition other provisions include long-term incentive plans for divisional senior management and the employer tax on equity-
settled incentive schemes which are expected to result in cash expenditure over the next five years.
Where appropriate, provisions have been discounted using a discount rate of 3% (31 December 2016: 3%).
20. 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 2016
Acquisition of businesses
Credit/(charge) to income
Credit/(charge) to equity
Exchange differences
Set off of assets and liabilities(2)
Net amount at 31 December 2016
(Charge)/credit to income
Credit to equity
Exchange differences
Movement in set off of assets and liabilities(2)
Net amount at 31 December 2017
Restated(1)
deferred tax assets
Restated(1) deferred tax liabilities
Tax losses and
other assets
£m
Accelerated capital
allowances and
other liabilities
£m
Deferred tax on
intangible assets
£m
Total deferred tax
liabilities
£m
Total net
deferred tax
£m
25.7
228.5
22.8
4.8
5.0
(237.2)
49.6
(107.5)
30.1
(16.3)
93.4
49.3
(6.5)
–
(2.3)
(2.7)
(0.2)
–
(11.7)
(4.9)
1.5
(0.1)
2.7
(12.5)
(13.7)
(331.9)
12.8
–
(22.6)
237.2
(118.2)
129.4
–
28.3
(96.1)
(56.6)
(20.2)
(331.9)
10.5
(2.7)
(22.8)
237.2
(129.9)
124.5
1.5
28.2
(93.4)
(69.1)
5.5
(103.4)
33.3
2.1
(17.8)
–
(80.3)
17.0
31.6
11.9
–
(19.8)
(1) Restated to reflect the impact of Nortek acquisition accounting (note 11).
(2) Set off of deferred tax assets and liabilities in accordance with IAS 12 within the Nortek US Federal tax group.
FinancialsMelrose Industries PLC Annual Report 2017 134
Notes to the financial statements
Continued
20. Deferred tax continued
As at 31 December 2017, the Group had gross unused federal and corporate losses of £497.3 million (31 December 2016: £274.4 million)
available for offset against future profits. At 31 December 2017, a £62.4 million deferred tax asset (31 December 2016: £34.9 million) in
respect of £346.0 million (31 December 2016: £169.1 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. The majority
of these losses may be carried forward indefinitely subject to certain continuity of business requirements. In addition a deferred tax asset
has been recognised on certain federal tax credits and state tax losses with a net tax value of £32.8 million (2016: £31.8 million).
A net deferred tax asset of £3.9 million (31 December 2016: £5.5 million) was recognised in respect of Group retirement benefit obligations
and a deferred tax asset of £94.0 million (31 December 2016: £214.6 million) was recognised in relation to other temporary differences.
Deferred tax liabilities of £197.7 million (31 December 2016: £355.4 million) were recognised in respect of intangible assets and a net
deferred tax liability of £15.2 million (31 December 2016: £11.7 million) was recognised in respect of accelerated capital allowances and
other temporary differences.
In accordance with IAS 12, £143.8 million (31 December 2016: £237.2 million) of deferred tax assets and liabilities have been set off within
these financial statements, £135.5 million (31 December 2016: £237.2 million) in respect of the Nortek US Federal Group and £8.3 million
(31 December 2016: £nil) in respect of the UK entities of Melrose.
As at 31 December 2017, the aggregate amount of temporary differences associated with undistributed earnings of subsidiaries was
£187.9 million (31 December 2016: £187.5 million) on which a deferred tax liability of £3.0 million has been recognised (31 December 2016:
£33.8 million). There are no further liabilities associated with the distribution of these earnings as a result of the new US tax legislation.
21. Share-based payments
Melrose Incentive Plan
On 31 May 2017 the Incentive Plan (2012) crystallised as expected. Prior to crystallisation the Remuneration Committee determined
that 23,494 of the 50,000 options held in respect of the Incentive Plan (2012) should be withheld by the Company in exchange for an
equivalently valued £115.5 million cash payment being sufficient to allow the holders of the options to meet their income tax and employee
national insurance liabilities in respect of the Incentive Plan (2012).
In respect of the remaining 26,506 options that were not withheld, these were exercised on 30 May 2017 in exchange for 26,506 Incentive
Shares (2012), which were issued on 31 May 2017 and converted to 54,453,914 Melrose ordinary shares at that date. As a result the total
number of ordinary shares in the Company increased from 1,886,746,589 shares to 1,941,200,503 shares.
On 11 May 2017, at a Melrose General Meeting, shareholders voted in favour of a new share-based Incentive Plan (2017), on the same
economic principles as the previous Incentive Plan (2012), except that:
(i)
(ii)
the total duration of the replacement plan is five years, split between a three-year performance period (after which it will crystallise
and the next incentive plan will be established) and a further two-year holding period;
instead of a single lump sum allocated on commencement, allocations of interests in the new Incentive Plan (2017) will be phased
in three annual tranches throughout the performance period; and
(iii) executive Directors will be subject to malus provisions during the performance period and to clawback provisions for the duration
of the subsequent holding period.
At the start of the Incentive Plan (2017) the first tranche of 16,542 options were granted. For accounting purposes the IFRS 2 charge
has been calculated as if all three tranches have been granted on day one because of a common expectation, established at that date,
between employees and the Company that the remaining options will be allocated annually in two more equal tranches over the three
year performance period.
The estimated value of the Incentive Shares (2017) at 31 December 2017 was £nil. Using a Black Scholes option pricing model, the
projected value of this plan at 31 May 2020 will be £24.5 million.
The annual IFRS 2 charge to be recognised in respect of the Incentive Plan (2017) has been established at £13.3 million. The inputs into
the Black Scholes valuation model that were used to fair value the plan at the point of establishment in May 2017 were as follows:
Weighted average share price
Weighted average exercise price
Expected volatility
Expected life as at inception
Risk free interest
Valuation
assumptions
£2.41
£2.77
27%
3.05 years
0.2%
Expected volatility was determined by calculating the historical volatility of the Company’s share price.
The Group recognised an IFRS 2 charge of £10.1 million (2016: £4.0 million) in the year ended 31 December 2017. £8.4 million (2016: £nil)
was in respect of the 2017 Melrose Incentive Plan and £1.7 million (2016: £4.0 million) was in respect of the 2012 Melrose Incentive Plan.
During the year, 12,831 of the Incentive Plan (2017) options were converted to Incentive Shares (2017) with a nominal value
of £1 each. The number of Incentive Plan (2017) options in issue at 31 December 2017 is therefore 37,169 (31 December 2016: 50,000
Incentive Plan (2012) options).
Melrose Industries PLC Annual Report 2017 135
22. 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 £7.2 million (2016: £5.9 million) represents 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 in the Group at 31 December 2017 were:
• The Brush Group (2013) (Brush UK) 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.
• The Brush Aftermarket North America, Inc. (FKI US) Group 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.
• The Nortek, Inc. (Nortek US) Retirement 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 to existing members.
Other plans include a number of funded and unfunded defined benefit arrangements in the US and Europe.
The cost of the Group’s defined benefit plans are determined in accordance with IAS 19 (revised): “Employee benefits” using the advice of
independent professionally qualified actuaries on the basis of formal actuarial valuations and using the projected unit credit method. In line
with normal practice, these valuations are undertaken triennially in the UK and annually in the US.
The valuation of the Brush UK Pension Plan was based on a full actuarial valuation as of 31 December 2016, updated at 31 December
2017 by independent actuaries. The FKI US Pension Plan valuation was based on a full actuarial valuation as of 31 December 2016,
updated at 31 December 2017 by independent actuaries. The Nortek US Pension Plan valuation was based on a full actuarial valuation
as of 1 January 2017, updated at 31 December 2017 by independent actuaries.
The Group contributed £4.2 million (2016: £10.5 million) to the defined benefit pension plans in the year ended 31 December 2017.
In total, the Group expects to contribute approximately £3.2 million to its defined benefit plans in the year ending 31 December 2018.
Actuarial assumptions
The major 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
CPI inflation assumption
31 December 2017
31 December 2016
UK Plans
% p.a.
US Plans
% p.a.
UK Plans
% p.a.
US Plans
% p.a.
n/a
3.2
2.5
3.2
2.1
n/a
n/a
3.4
n/a
n/a
n/a
3.3
2.7
3.3
2.2
n/a
n/a
3.9
n/a
n/a
Mortality
Brush UK Pension Plan
Mortality assumptions for the Brush UK Pension Plan, as at 31 December 2017 were based on the Self Administered Pension Scheme
(SAPS) “S2” base tables with a scaling factor of 110%, which reflected 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 were that a member currently aged 65 will live on average for a further 21.4 years (31 December 2016: 21.4 years) if
they are male and for a further 23.3 years (31 December 2016: 23.6 years) if they are female. For a member who retires in 2037 at age 65,
the assumptions were that they will live for a further 22.8 years (31 December 2016: 22.8 years) after retirement if they are male and for a
further 24.8 years (31 December 2016: 25.1 years) after retirement if they are female.
The mortality assumptions were consistent with those adopted for the full valuation as at 31 December 2016.
FinancialsMelrose Industries PLC Annual Report 2017 136
Notes to the financial statements
Continued
22. Retirement benefit obligations continued
FKI US Pension Plan
The mortality assumptions adopted as at 31 December 2017 were set to reflect the Group’s best estimate view of life expectancies of
members of the pension arrangement. Each assumption reflected the characteristics of the membership of the FKI US Pension Plan.
The assumptions were that a member currently aged 65 will live on average for a further 19.3 years (31 December 2016: 19.9 years) if
they are male and for a further 21.3 years (31 December 2016: 21.9 years) if they are female. For a member who retires in 2037 at age 65,
the assumptions were that they will live for a further 21.0 years (31 December 2016: 21.5 years) after retirement if they are male and for a
further 22.9 years (31 December 2016: 23.5 years) after retirement if they are female.
The mortality assumptions were consistent with those adopted for the full valuation as at 31 December 2016.
Nortek US Pension Plan
The mortality assumptions adopted as at 31 December 2017 were set to reflect the Group’s best estimate view of life expectancies of
members of the pension arrangement. Each assumption reflected the characteristics of the membership of the Nortek US Pension Plan.
The assumptions were that a member currently aged 65 will live on average for a further 19.3 years (31 December 2016: 20.2 years) if
they are male and for a further 21.3 years (31 December 2016: 22.3 years) if they are female. For a member who retires in 2037 at age 65,
the assumptions were that they will live for a further 21.0 years (31 December 2016: 21.8 years) after retirement if they are male and for a
further 22.9 years (31 December 2016: 23.9 years) after retirement if they are female.
The mortality assumptions were consistent with those adopted for the full valuation as at 1 January 2017.
Balance Sheet disclosures
The amount recognised in the Balance Sheet arising from net liabilities in respect of defined benefit plans was 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
The plan liabilities and assets at 31 December 2017 were as follows:
Plan liabilities
Plan assets
Net liabilities
31 December
2017
£m
31 December
2016
£m
(537.6)
524.7
(12.9)
(4.7)
(17.6)
UK Plans
£m
(288.5)
283.0
(5.5)
US Plans
£m
(252.6)
241.1
(11.5)
Other Plans
£m
(1.2)
0.6
(0.6)
(549.1)
522.6
(26.5)
(6.9)
(33.4)
Total
£m
(542.3)
524.7
(17.6)
The major categories and fair values of plan assets at the end of the reporting period for each category were as follows:
Equities
Government bonds
Corporate bonds
Property
Other
Total
31 December
2017
£m
31 December
2016
£m
230.8
138.3
114.0
9.8
31.8
524.7
152.4
107.1
155.0
6.7
101.4(1)
522.6
(1) At 31 December 2016, £73.6 million of assets in relation to the Nortek US Plan were held in cash as they were in the process of being transferred to a new plan custodian.
The assets were well diversified and the majority of plan assets had quoted prices in active markets. All government bonds were issued
by reputable governments and were generally AA rated or higher. Interest rate and inflation rate swaps were 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 included maintaining an appropriate asset mix,
managing interest rate sensitivity and maintaining an appropriate equity buffer. Investment results were regularly reviewed.
There was 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.
Melrose Industries PLC Annual Report 2017 22. Retirement benefit obligations continued
Movements in the present value of defined benefit obligations during the year:
At beginning of year
Acquisition of businesses
Transfer to held for sale(1)
Current service cost
Interest cost on obligations
Remeasurement gains – demographic
Remeasurement losses – financial
Remeasurement losses/(gains) – experience
Benefits paid out of plan assets
Benefits paid out of Group assets for unfunded plans
Currency translation differences
At end of year
137
Year ended
31 December
2017
£m
Year ended
31 December
2016
£m
556.0
–
(1.3)
0.2
17.2
(5.8)
23.7
10.2
(32.6)
(1.0)
(24.3)
542.3
360.7
136.3
–
0.1
15.4
(6.1)
42.1
(2.8)
(26.6)
(0.5)
37.4
556.0
(1) Transferred to liabilities held for sale at 30 June 2017 in accordance with IFRS 5, subsequently disposed on 10 August 2017.
The defined benefit plan liabilities were 2% (31 December 2016: 2%) in respect of active plan participants, 47% (31 December 2016: 53%)
in respect of deferred plan participants and 51% (31 December 2016: 45%) in respect of pensioners.
The weighted average duration of the defined benefit plan liabilities at 31 December 2017 was 14.8 years (31 December 2016: 14.4 years).
Movements in the fair value of plan assets during the year:
At beginning of year
Acquisition 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 £56.3 million (2016: £70.4 million).
Income Statement disclosures
Amounts recognised in the Income Statement in respect of these defined benefit plans were as follows:
Continuing operations
Included within underlying operating profit:
– current service cost
– plan administrative costs
Included within net finance costs:
– interest cost on defined benefit obligations
– interest income on plan assets
Year ended
31 December
2017
£m
Year ended
31 December
2016
£m
522.6
–
16.1
40.2
3.2
(32.6)
(2.3)
(22.5)
524.7
343.5
94.1
14.5
55.9
10.0
(26.6)
(1.9)
33.1
522.6
Year ended
31 December
2017
£m
Year ended
31 December
2016
£m
0.2
2.3
17.2
(16.1)
0.1
1.9
15.4
(14.5)
FinancialsMelrose Industries PLC Annual Report 2017 138
Notes to the financial statements
Continued
22. Retirement benefit obligations continued
Statement of Comprehensive Income disclosures
Amounts recognised in the Statement of Comprehensive Income in respect of these defined benefit plans were as follows:
Return on plan assets, excluding amounts included in net interest expense
Actuarial gains arising from changes in demographic assumptions
Actuarial losses arising from changes in financial assumptions
Actuarial (losses)/gains arising from experience adjustments
Net remeasurement gain on retirement benefit obligations
Year ended
31 December
2017
£m
Year ended
31 December
2016
£m
40.2
5.8
(23.7)
(10.2)
12.1
55.9
6.1
(42.1)
2.8
22.7
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 was as follows:
Discount rate
Inflation assumption (1)
Assumed life expectancy at age 65 (rate of mortality)
(1) The 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
Increase/
(decrease) to
profit before tax
£m
7.5
(8.0)
(3.0)
3.2
(18.3)
18.3
0.2
(0.2)
n/a
n/a
n/a
n/a
The sensitivity analysis above was 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 were based on the relevant assumptions and membership profile as at 31 December 2017 and were 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.
Melrose Industries PLC Annual Report 2017 23. 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 2017 and 31 December 2016:
139
31 December 2017
Financial assets
Classified as loans and receivables:
Cash and cash equivalents
Net trade receivables
Other receivables
Classified as fair value:
Derivative financial assets
Financial liabilities
Classified as amortised cost:
Interest-bearing loans and borrowings
Other financial liabilities
Classified as fair value:
Derivative financial liabilities
31 December 2016
Financial assets
Classified as loans and receivables:
Cash and cash equivalents
Net trade receivables
Other receivables
Classified as fair value:
Derivative financial assets
Financial liabilities
Classified as amortised cost:
Interest-bearing loans and borrowings
Other financial liabilities(1)
Classified as fair value:
Derivative financial liabilities
(1) Restated to reflect the completion of the acquisition accounting for Nortek (note 11).
Credit risk
The Group considers its maximum exposure to credit risk was as follows:
31 December 2017
Financial assets
Cash and cash equivalents
Net trade receivables
Other receivables
Derivative financial assets
31 December 2016
Financial assets
Cash and cash equivalents
Net trade receivables
Other receivables
Derivative financial assets
Nortek
£m
Energy
£m
Central
£m
Total
£m
–
240.9
15.9
–
56.7
7.4
16.3
–
–
16.3
297.6
23.3
1.3
1.2
11.5
14.0
(0.6)
(304.2)
–
(45.9)
(587.5)
(11.0)
(588.1)
(361.1)
(1.0)
(0.3)
–
(1.3)
–
259.7
15.5
1.0
–
70.2
4.9
0.9
42.1
0.2
–
7.1
42.1
330.1
20.4
9.0
(3.3)
(359.4)
–
(55.4)
(580.3)
(19.7)
(583.6)
(434.5)
(1.5)
(1.7)
(1.0)
(4.2)
Nortek
£m
Energy
£m
Central
£m
Total
£m
–
240.9
15.9
1.3
–
259.7
15.5
1.0
–
56.7
7.4
1.2
–
70.2
4.9
0.9
16.3
–
–
11.5
42.1
0.2
–
7.1
16.3
297.6
23.3
14.0
42.1
330.1
20.4
9.0
The Group’s principal financial assets were cash and cash equivalents, trade receivables, other receivables and derivative financial assets
which represented 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 was limited because the counterparties were banks
with strong credit ratings assigned by international credit rating agencies. The Group’s credit risk was primarily attributable to its trade
receivables. The amounts presented in the Consolidated Balance Sheet were 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 15 provides further
details regarding the recovery of trade receivables.
FinancialsMelrose Industries PLC Annual Report 2017 140
Notes to the financial statements
Continued
23. Financial instruments and risk management continued
Capital risk
The Group manages its capital to ensure that entities in the Group will be able to continue as a going concern.
The capital structure of the Group as at 31 December 2017 consists of net debt, which includes the borrowings disclosed in note 18,
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 Melrose Group’s net debt position at 31 December 2017 was £571.8 million (31 December 2016: £541.5 million).
Melrose has a five year multi-currency US $1.25 billion committed bank facility which was entered into on 6 July 2016 to assist with the
acquisition of Nortek and consists of a US $350 million term loan facility and a US $900 million revolving credit facility.
The facility has two financial covenants. There is a net debt to underlying EBITDA (underlying operating profit before depreciation and
amortisation) covenant and an interest cover covenant, both of which are tested half yearly, each June and December.
The first of these covenants is set at a maximum 3.5x leverage for each of the half yearly measurement dates for the remainder of the term
of the facility. For the year ended 31 December 2017 it was approximately 1.9x (31 December 2016: 1.9x), showing significant headroom
compared to the covenant test.
The interest cover covenant is set at 4.0x or higher throughout the life of the facility and was 19.6x at 31 December 2017 (31 December
2016: 20.7x), affording comfortable headroom compared to the covenant test.
At 31 December 2017 the term loan was fully drawn down and the revolving credit facility was drawn down by US $455 million, split US
$274 million and £134 million. The core currency of Nortek is US $, and debt is drawn down to protect the Melrose 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 Melrose Group.
These uncommitted facilities have been lightly used.
Cash, deposits and marketable securities amounted to £16.3 million at 31 December 2017 (31 December 2016: £42.1 million) and
are offset against gross debt of £588.1 million (31 December 2016: £583.6 million) to arrive at the net debt position of £571.8 million
(31 December 2016: £541.5 million). The combination of this cash and the size of the bank facility allows the Directors to consider that
the Melrose Group has sufficient access to liquidity for its current needs.
The Board takes careful consideration of counterparty risk with banks when deciding where to place Melrose’s cash on deposit.
Fair values
The Directors consider that the financial assets and liabilities have fair values not materially different to the carrying values.
Foreign exchange contracts
As at 31 December 2017, 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 currency pairs with total principals in excess of Sterling £1.0 million equivalent were as follows:
Sell Australian Dollar/Buy Sterling
Sell Canadian Dollar/Buy US Dollar
Sell Euro/Buy Czech Koruna
Sell Euro/Buy Polish Zloty
Sell Euro/Buy Sterling
Sell Euro/Buy US Dollar
Sell Sterling/Buy Czech Koruna
Sell Sterling/Buy Euro
Sell Sterling/Buy US Dollar
Sell US Dollar/Buy Canadian Dollar
Sell US Dollar/Buy Chinese Renminbi
Sell US Dollar/Buy Euro
Sell US Dollar/Buy Mexican Peso
Sell US Dollar/Buy Polish Zloty
Sell US Dollar/Buy Sterling
31 December 2017
Selling currency
millions
31 December 2017
Average hedged
31 December 2016
Selling currency
31 December 2016
Average hedged
rate
millions
rate
GBP/AUD 1.73
AUD 1.9
CAD 21.1
USD/CAD 1.29
EUR 28.8 EUR/CZK 26.08
–
–
GBP/EUR 1.11
EUR 19.3
EUR 8.7
EUR/USD 1.18
GBP 1.4 GBP/CZK 28.79
GBP/EUR 1.13
GBP 9.9
GBP/USD 1.31
GBP 6.5
USD/CAD 1.30
USD 32.7
USD/CNY 6.76
USD 165.5
–
–
USD 14.6 USD/MXN 19.37
–
GBP/USD 1.31
–
USD 15.3
AUD 6.1
CAD 19.7
EUR 31.3
EUR 1.2
EUR 14.4
EUR 12.6
GBP 3.8
GBP 15.3
GBP 5.0
USD 22.6
USD 142.3
USD 2.7
USD 14.7
USD 1.7
USD 15.0
GBP/AUD 1.74
USD/CAD 1.32
EUR/CZK 26.89
EUR/PLN 4.33
GBP/EUR 1.17
EUR/USD 1.13
GBP/CZK 31.95
GBP/EUR 1.16
GBP/USD 1.26
USD/CAD 1.32
USD/CNY 7.10
EUR/USD 1.12
USD/MXN 19.69
USD/PLN 3.87
GBP/USD 1.34
The foreign exchange contracts all mature between January 2018 and January 2019.
The fair value of the contracts at 31 December 2017 was a net asset of £4.5 million (31 December 2016: net liability of £2.3 million).
Melrose Industries PLC Annual Report 2017 141
23. Financial instruments and risk management continued
Hedge of net investments in foreign entities
Included in interest-bearing loans at 31 December 2017 were the following amounts which were designated as hedges of net investments
in the Group’s subsidiaries in the USA and were being used to reduce the exposure to the foreign exchange risks.
Borrowings in local currency designated as hedges of net investments:
US Dollar
Interest rate risk management
The Melrose bank facility carries a cost of LIBOR plus a margin.
31 December
2017
£m
31 December
2016
£m
461.4
590.5
The Melrose Group holds interest rate swap arrangements to fix the cost of LIBOR. The profile of the interest rate swaps has been
designed to hedge, on average, 70% of the interest exposure on the projected gross debt as it reduces over the five year term. Under
the terms of these swap arrangements, the Melrose Group will pay a weighted average fixed cost of 1.0% up to 31 December 2019,
and 0.9% until the remaining swaps terminate on 6 July 2021.
The margin depends on the Melrose Group leverage, and ranges from 0.85% to 2.00%; as at 31 December 2017 the margin was 1.35%
(31 December 2016: 1.35%). The interest on the swaps is payable annually in arrears on 1 July. The bank margin is payable monthly.
The interest swaps are designated as cash flow hedges and were highly effective throughout 2017. The fair value of the contracts at
31 December 2017 was an asset of £8.2 million (31 December 2016: £7.1 million).
Interest rate sensitivity analysis
Assuming the net debt held as at the Balance Sheet date was outstanding for the whole year, a one percentage point rise in market
interest rates for all currencies would increase/(decrease) profit before tax by the following amounts:
Sterling
US Dollar
Year ended
31 December
2017
£m
Year ended
31 December
2016
£m
(0.4)
(1.4)
(0.1)
(1.4)
Foreign currency risk
The Melrose Group trades in various countries around the world and is exposed to many different foreign currencies. The Melrose Group
therefore carries an exchange rate risk that can be categorised into three types, transaction, translation and disposal related risk. The
Board policy is designed to protect against the majority of the cash risks but not the non-cash risks.
The most common exchange rate risk is the transaction risk the Group takes when it invoices a 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 twelve 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.
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 increase/(decrease) in Group operating profit caused by a 10 per cent strengthening of the US
Dollar, Euro and Chinese Renminbi 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
Chinese Renminbi
Year ended
31 December
2017
£m
Year ended
31 December
2016
£m
(2.1)
0.5
(1.8)
(7.4)
0.6
(1.3)
The relatively high sensitivity on the US Dollar in 2016 was due to a currency swap for £55.0 million, that was put in place ahead of
the prior year end, to swap excess Sterling cash in order to temporarily reduce the US Dollar debt. Adjusting for the currency swap,
the sensitivity on the US Dollar at 31 December 2016 would be a loss of £1.3 million. This currency swap matured in 2017.
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 per cent strengthening of the US Dollar, Euro and
Chinese Renminbi against Sterling. The analysis assumes that all other variables, in particular other foreign currency exchange rates,
remain constant.
FinancialsMelrose Industries PLC Annual Report 2017 142
Notes to the financial statements
Continued
23. Financial instruments and risk management continued
US Dollar
Euro
Chinese Renminbi
31 December
2017
£m
31 December
2016
£m
10.2
(1.6)
7.7
12.1
(1.6)
8.8
In addition, the change in equity due to a 10 per cent strengthening of the US Dollar against Sterling for the translation of net investment
hedging instruments would be a decrease of £51.3 million (31 December 2016: decrease £65.6 million). 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
Total recurring financial liabilities
31 December
2017
Current
£m
31 December
2017
Non-current
£m
31 December
2017
Total
£m
31 December
2016
Current
£m
31 December
2016
Non-current
£m
31 December
2016
Total
£m
5.8
4.1
9.9
(1.3)
(1.3)
–
4.1
4.1
–
–
5.8
8.2
14.0
(1.3)
(1.3)
1.9
1.9
3.8
(4.2)
(4.2)
–
5.2
5.2
–
–
1.9
7.1
9.0
(4.2)
(4.2)
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.
24. Issued capital and reserves
Share Capital
Allotted, called-up and fully paid
1,941,200,503 (31 December 2016: 1,886,746,589) ordinary shares of 48/7p each (31 December 2016: 48/7p each)
12,831 (31 December 2016: nil) 2017 Melrose Incentive Plan Shares of £1 each
31 December
2017
£m
31 December
2016
£m
133.1
–
133.1
129.4
–
129.4
The rights of each class of share are described in the Directors’ Report.
On 1 June 2017 the number of ordinary shares in issue increased by 54,453,914 following the crystallisation of the Incentive Plan (2012)
which increased the number of ordinary shares in issue from 1,886,746,589 to 1,941,200,503.
During the course of the year, 12,831 of the Incentive Plan (2017) options issued to the Directors and senior management were exercised
and resulted in the creation of 12,831 of Incentive Shares (2017) with a nominal value of £1 each.
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 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. Other reserves comprise accumulated adjustments in respect of Group reconstructions.
Melrose Industries PLC Annual Report 2017 25. Cash flow statement
Reconciliation of underlying operating profit to cash generated by continuing operations
Underlying operating profit
Adjustments for:
Depreciation of property, plant and equipment
Amortisation of computer software and development costs
Restructuring costs paid and movements in provisions
Defined benefit pension contributions paid
(Increase)/decrease in inventories
Decrease in receivables
Decrease in payables
Acquisition costs
Tax paid
Interest paid
Incentive scheme tax related payments
Net cash from operating activities
143
Year ended
31 December
2017
£m
Year ended
31 December
2016
£m
Note
6
278.4
104.1
30.9
3.8
(73.4)
(4.2)
(8.1)
8.1
(16.1)
(7.6)
(15.9)
(15.6)
(147.9)
32.4
15.9
2.2
(37.6)
(10.5)
15.0
22.5
(9.3)
(41.3)
(5.9)
(4.5)
–
50.6
Net debt reconciliation
Bank borrowings
Finance leases
Gross debt
Cash
Net debt
31 December
2016
£m
(582.0)
(1.6)
(583.6)
42.1
(541.5)
Other
non-cash
movements
£m
Foreign
exchange
difference
£m
31 December
2017
£m
(0.9)
–
(0.9)
–
(0.9)
51.4
–
51.4
(2.8)
48.6
(587.5)
(0.6)
(588.1)
16.3
(571.8)
Cash flow
£m
(56.0)
1.0
(55.0)
(23.0)
(78.0)
Net debt is presented in the closing Balance Sheet at year end exchange rates. For bank covenant testing purposes net debt is converted
using average exchange rates for the year, which increases net debt at 31 December 2017 by £22.8 million (31 December 2016:
decreases net debt by £51.1 million) to £594.6 million (31 December 2016: £490.4 million).
26. 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
2017
£m
31 December
2016
£m
17.8
47.8
30.9
96.5
21.9
55.1
24.0
101.0
The Group leases properties, plant, machinery and vehicles for operational purposes. Property leases vary in length. Plant, machinery
and vehicle leases typically run for periods of up to five years.
Capital commitments
At 31 December 2017, there were commitments of £9.4 million (31 December 2016: £2.4 million) relating to the acquisition of new plant
and machinery.
27. 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.
FinancialsMelrose Industries PLC Annual Report 2017 144
Notes to the financial statements
Continued
27. Related parties continued
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 page 84.
Short-term employee benefits
Share-based payments
Year ended
31 December
2017
£m
Year ended
31 December
2016
£m
3.2
6.6
9.8
3.2
2.7
5.9
In addition, the 2012 Incentive Plan crystallised during the year and gains attributable to the Directors amounted to £167.1 million
(2016: £nil).
28. Post Balance Sheet events
On 17 January 2018 the Melrose Group announced the terms of a firm offer to acquire the entire issued share capital of GKN plc and
on 1 February 2018 issued a public offer document containing the full terms and conditions of the offer.
In conjunction with this offer, the Company entered into a senior term and revolving credit facilities agreement with Lloyds Bank plc and
Royal Bank of Canada as original lenders which is subject to the acquisition taking place. The new facilities agreement provides for term
facilities and revolving credit facilities in an aggregate principal amount up to £2.6 billion, US $2.0 billion and €0.5 billion. The maturity of
the facilities ranges from three years and six months to five years, after the date of the agreement of the new facility.
On 1 February 2018 Melrose announced that Brush had commenced consultations with employees in relation to restructuring its
Turbogenerator business to reflect the reduced levels of activity. These reduced levels have been caused by worldwide environmental
policy which has triggered a fall in volumes in the gas turbine market of over 60% from its peak in 2011. This in turn has resulted in Brush’s
turbogenerator sales falling.
This restructuring involves the intended closure of the turbogenerator production facility at Ridderkerk, Netherlands and the transfer
of its 4-pole turbogenerator production to the facility in Plzenˇ , Czech Republic, while the factory in Changshu, China has already been
closed. In the UK, Brush has entered into consultation with its workforce about the future of 2-pole turbogenerator production at the
Loughborough, UK facility, which accounts for approximately half the workforce at the site. The 520-strong workforce employed at
Brush’s other UK sites in the transformers, switchgear and mobile generator businesses remain unaffected.
The cash cost of these restructuring items is estimated to be £40 million and is expected to be materially complete by the end of 2018.
29. Contingent liabilities
As a result of acquisitions made by the Group, certain contingent legal and warranty liabilities were identified as part of the fair value
review of the acquisition Balance Sheet. Whilst it is difficult to reasonably estimate the timing and 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 19.
Given the nature of the Group’s business many of the Group’s products have a large installed base, and any recalls or reworks related
to such products could be particularly costly. The costs of product recalls or reworks are not always covered by insurance. Recalls or
reworks may have a material adverse effect on the Group’s financial condition, results of operations and cash flows.
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 PLC Annual Report 2017 Company Balance Sheet for Melrose Industries PLC
145
Fixed assets
Investment in subsidiaries
Debtors:
Amounts falling due within one year
Amounts falling due after one year
Creditors: amounts falling due within one year
Net current (liabilities)/assets
Total assets less current liabilities
Provisions
Net assets
Capital and reserves
Issued share capital
Share premium account
Merger reserve
Retained earnings
Shareholders’ funds
31 December
2017
£m
31 December
2016
£m
Notes
3
4
4
5
6
7
2,213.4
2,209.9
–
25.4
(192.6)
(167.2)
2,046.2
(0.3)
2,045.9
133.1
1,492.6
108.7
311.5
2,045.9
14.1
–
(1.0)
13.1
2,223.0
(12.8)
2,210.2
129.4
1,492.6
112.4
475.8
2,210.2
The Company reported a loss for the financial year ended 31 December 2017 of £21.3 million (2016: profit of £224.0 million).
The financial statements were approved by the Board of Directors on 20 February 2018 and were signed on its behalf by:
Geoffrey Martin
Group Finance Director
20 February 2018
Simon Peckham
Chief Executive
20 February 2018
Registered number: 09800044
Company Statement of Changes in Equity
At 1 January 2016
Profit for the year (note 2)
Total comprehensive income
Return of Capital
Dividends paid
Issue of share capital
Credit to equity for equity-settled share-based payments
At 31 December 2016
Loss for the year (note 2)
Total comprehensive expense
Incentive scheme related(1)
Dividends paid
Credit to equity for equity-settled share-based payments
Deferred tax on share-based payment transactions
At 31 December 2017
Issued share
capital
£m
Share premium
account
£m
Merger
reserve
£m
Retained
earnings
£m
10.0
–
–
–
–
119.4
–
129.4
–
–
3.7
–
–
–
133.1
–
–
–
–
–
1,492.6
–
1,492.6
–
–
–
–
–
–
1,492.6
2,500.9
–
–
(2,388.5)
–
–
–
112.4
–
–
(3.7)
–
–
–
108.7
253.6
224.0
224.0
–
(5.8)
–
4.0
475.8
(21.3)
(21.3)
(115.5)
(63.0)
10.1
25.4
311.5
Total equity
£m
2,764.5
224.0
224.0
(2,388.5)
(5.8)
1,612.0
4.0
2,210.2
(21.3)
(21.3)
(115.5)
(63.0)
10.1
25.4
2,045.9
(1) On 31 May 2017, the Incentive Plan (2012) crystallised. Of the 50,000 options in issue, 23,494 were withheld by the Company in exchange for a cash payment sufficient to allow holders to meet their
income tax and employee national insurance liabilities in respect of the Incentive Plan (2012). This resulted in 23,494 options being exercised for £115.5 million in cash and being paid to the tax
authorities on behalf of the option holders. The remaining 26,506 options were converted into 54,453,914 ordinary shares of 48/7 pence each and resulted in a £3.7 million increase to Issued share
capital and an equivalent reduction to the Merger reserve.
FinancialsMelrose Industries PLC Annual Report 2017 146
Notes to the Company Balance Sheet
1. Significant accounting policies
Basis of accounting
Melrose Industries PLC (the Company) is a company incorporated in the United Kingdom under the Companies Act. 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 the Strategic
Report on pages 2 to 57.
The financial statements have been prepared under the historical cost convention and in accordance with Financial Reporting Standard
102 (FRS 102) issued by the Financial Reporting Council.
The functional currency of Melrose Industries PLC is considered to be pounds Sterling because that is the currency of the primary
economic environment in which the Company operates.
Melrose Industries PLC meets the definition of a qualifying entity under FRS 102 and has therefore taken advantage of the disclosure
exemptions available to it in respect of its separate financial statements. Melrose Industries PLC is consolidated in its Group financial
statements. Exemptions have been taken in these separate Company financial statements in relation to share-based payments,
presentation of a cash flow statement, the remuneration of key management personnel and financial instruments.
The principal accounting policies are consistent with the prior period and are summarised below.
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 40
of the Finance Director’s review.
Investments
Investments in subsidiaries are measured at cost less impairment.
For investments in subsidiaries acquired for consideration including the issue of shares qualifying for merger relief, cost is measured by
reference to the nominal value of the shares issued plus fair value of other consideration. Any premium is ignored.
Impairment of assets
Assets are assessed for indicators of impairment at each balance sheet date. If there is objective evidence of impairment, an impairment
loss is recognised in profit or loss as described below.
Non-financial assets
An asset is impaired where there is objective evidence that, as a result of one or more events that occurred after initial recognition, the
estimated recoverable value of the asset has been reduced. The recoverable amount of an asset is the higher of its fair value less costs
to sell and its value in use.
Where indicators exist for a decrease in impairment loss, the prior impairment loss is tested to determine reversal. An impairment loss is
reversed on an individual impaired asset to the extent that the revised recoverable value does not lead to a revised carrying amount higher
than the carrying value had no impairment been recognised.
Financial instruments
Financial assets and financial liabilities are recognised when the Company becomes a party to the contractual provisions of the
instrument. Financial liabilities are classified according to the substance of the contractual arrangements entered into.
Financial assets and liabilities
All financial assets and liabilities are initially measured at transaction price (including transaction costs).
Financial assets and liabilities are only offset in the Balance Sheet when, and only when there exists a legally enforceable right to set
off the recognised amounts and the Company intends either to settle on a net basis, or to realise the asset and settle the liability
simultaneously.
Financial assets are derecognised when and only when a) the contractual rights to the cash flows from the financial asset expire or are
settled, b) the Company transfers to another party substantially all of the risks and rewards of ownership of the financial asset, or c) the
Company, despite having retained some, but not all, significant risks and rewards of ownership, has transferred control of the asset to
another party.
Financial liabilities are derecognised only when the obligation specified in the contract is discharged, cancelled or expires.
Melrose Industries PLC Annual Report 2017 147
1. Significant accounting policies continued
Share-based payments
The Company issues equity-settled share-based payments to certain employees. The required disclosures are included in the Group
consolidated financial statements.
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.
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.
Provisions
Provisions are recognised when the Company 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.
Critical accounting judgements and key sources of estimation uncertainty
There were no critical accounting judgements that would have a significant effect on the amounts recognised in the parent Company
financial statements or key sources of estimation uncertainty at the Balance Sheet date that would have a significant risk of causing a
material adjustment to the carrying amounts of assets and liabilities within the next financial year.
2. Loss for the year
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 2017 of £21.3 million (2016: profit of
£224.0 million).
The auditor’s remuneration for audit services to the Company is disclosed in note 7 to the Group consolidated financial statements.
Directors’ remuneration is disclosed in the Directors’ Remuneration Report on pages 80 to 90. There were no other employees of the
Company in the year.
3.
Investment in subsidiaries
At 1 January 2017
Additions
At 31 December 2017
£m
2,209.9
3.5
2,213.4
During the year, the Company increased its investment in Melrose Holdings Limited by £3.5 million, all of which related to equity-settled
share-based payments that were made available to employees of subsidiaries.
FinancialsMelrose Industries PLC Annual Report 2017 148
Notes to the Company Balance Sheet
Continued
Investment in subsidiaries continued
3.
The following subsidiaries and significant holdings were owned by the Company as at 31 December 2017:
Equity
interest %
Equity
interest %
Argentina
Corrientes Avenue 311, 7, Capital Federal, 1043
Nordyne Argentina SRL
Australia
2 Fawley Avenue, Narangba, Queensland, 4504
Bristol Meci Australasia Pty Limited
Hawker Siddeley Switchgear Pty Limited
U 2 11-21 Forge St, Blacktown, New South Wales, 2148
Nortek Australia Pty Limited
Belgium
Jean en Maurits Sabbestraat 130A/A000, 8930 Menen
Nortek Global HVAC Belgium NV
Brazil
Rod. Br 101 Norte, Serra Pelada, Espirito Santo,
29161-901
Nordyne do Brasil Distribuidora de Ar Condicionado Ltda
British Virgin Islands
Wickhams Cay 1, P.O. Box 3140, Road Town, Tortola
Nortek Trading Limited
Canada
Edmonton, Alberta, T5J 3N6
Brush Canada Services Inc./Services Brush Canada Inc.
1 Germain Street, Suite 1500, Saint John,
New Brunswick, E2L 4H8
2GIG Technologies Canada, Inc.
1140 Tristar Drive, Mississauga Ontario, L5T 1H9
Broan-NuTone Canada ULC
1300 – 1969 Upper Water Street, Purdy’s Wharf Tower II,
Halifax Nova Scotia, B3J 2VI
Ergotron Canada Corporation
605 Rue Rocheleau, Drummondville, Quebec, J2C 6L8
Innergy Tech, Inc.
1502D Quebec Avenue, Saskatoon, Saskatchewan,
S7K 1V7
Nortek Air Solutions Canada, Inc.
9100 Rue du Parcours, Montreal, Quebec, H1J 2Z1
Nortek Air Solutions Quebec, Inc.
550 Lemire Boulevard, Drummondville, Quebec,
J2C 7W9
Venmar Ventilation ULC
China
8 Changhong Road, Changshu Economic Development
Zone, Jiangsu Province, 215500
Brush Electrical Machines (Changshu) Co. Limited
Building 2 558 Taibo Road, Anting Town, Jiading
District. Shanghai 201814
FKI Engineering Shanghai Limited
Zone 6, Daxin Jituan, Chenjiang Town, Huicheng
District, Guangdong, 516229
Guangdong Broan IAQ Systems Co. Limited
The 3rd Industry Area, Juzhou Shijie, Dongguan,
Guangdong
Dongguan Ergotron Precision Technology Co Limited
Dongguan Ergotron Precision Technology Design Services
Co Limited
172 Hangcheng Avenue, Baoan District, Shenzhen Shi,
Guangdong Sheng, 518126
Linear Electronics (Shenzhen) Co Limited
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
Room 28D2, 895 Yan’an West Road, Changning District,
Shanghai
Nortek (Shanghai) Trading Co Limited
Colombia
1301, 13/F Bank of America Tower, 12 Harcourt Road,
Central
MiOS Colombia
Czech Republic
Edvarda Beneše 564/39, Doudlevce, 301 00 Plzenˇ
Brush SEM s.r.o.
France
44 Rue du Louvre, 75001 Paris
Ergotron France SARL
Z.I. de Rosarge, 230, rue de la Dombes, Les Echets,
01706 Miribel Cedex, Lyon
Nortek Global HVAC France SAS
Germany
Teichhorn 4-6, 24119, Kronshagen
Ergotron Deutschland GmbH
Hong Kong
28/F Bank of East Asia Harbour View Centre,
56 Gloucester Road, Wanchai
Broan-NuTone (HK) Limited
6 Sun Yip Street, 19/F Honour Industrial Centre,
Chai Wan
Linear HK Manufacturing Limited
1301 13/F Bank of America Tower, 12 Harcourt Road,
Central
MiOS Hong Kong
MiOS Limited
Japan
Shiroyama Trust Tower, 4-3-1, Toranomon, Minatuo-ku,
Tokyo
Ergotron Japan KK
Malta
Marsa Industrial Estate, Marsa, MRS 3000
Mediterranean Power Electric Company Limited
Mexico
Avenue de los Olivos 100-A, Parque Industrial El Pajio,
Tecata, Baja California, 21438
Broan Building Products-Mexico S de RL de CV
Vicente Guerrero 2822, Anáhuac, 64500 San Nicolas de
los Graza, Nuevo Leon
Miller de Mexico S de RL de CV
Nortek Global HVAC de Mexico SA de RL de CV
Romania
Bulevardul Poitiers, Las¸ i
MiOS Romania SRL
Saudi Arabia
P.O.Box 2091, Riyadh 11451
Huntair Arabia
The Netherlands
Beeldschermweg 3, 3821 AH Amersfoort
Ergotron Nederland BV
Ringdijk 390B, 2983 GS, Postbus 3007, 2980 DA,
Ridderkerk
Brush HMA BV
100
42
100
100
100
100
100
100
42
42
100
26
100
100
100
42
49
100
100
Melrose Industries PLC Annual Report 2017 149
3.
Investment in subsidiaries continued
Strawinskylaan 3127 8e Verdiepin, Amsterdam,
Noord-Holland, 1077 ZX
CES Holding BV
Nortek Holding BV
Nortek International Holdings BV
United Kingdom
11th Floor, The Colmore Building, 20 Colmore Circus
Queensway, Birmingham, B4 6AT
Alcester Capricorn
Alcester EP1 Limited
Alcester Number 1 Limited
Ambi-Rad Group Limited
Brush Electrical Engineering Company Limited
Brush Electrical Machines Limited
Brush Holdings Limited
Brush Properties Limited
Brush Scheme Trustees Limited
Brush Switchgear Limited
Brush Transformers Limited
Colmore Lifting Limited
Colmore Overseas Holdings Limited
Danks Holdings Limited
Eachairn Aerospace Holdings Limited
Eaton-Williams (Millbank) Limited
Eaton-Williams Exports Limited
Eaton-Williams Group Limited
Eaton-Williams Holdings Limited
Eaton-Williams Limited
Eaton-Williams Products Limited
Eaton-Williams Service Limited
Edenaire Limited
Electro Dynamic Limited
Ergotron UK Limited
FKI Plan Trustees Limited
Harrington Generators International Limited
Hawker Siddeley Switchgear Limited
McKechnie 2005 Pension Scheme Trustee Limited
Melrose Holdings Limited
Melrose Intermediate Limited
Melrose PLC
Melrose UK 4 Limited
Melrose UK Holdings Limited
Melrose USD 1 Limited
Nortek (UK) Limited
Nortek Global HVAC (UK) Limited
Precision Air Control Limited
Precision House Management Services Limited
Reznor (UK) Limited
Sageford UK Limited
Vapac Humidity Control Limited
Whipp & Bourne Limited
Equity
interest %
Equity
interest %
USA
601 Braddock Avenue, Turtle Creek, Pittsburgh,
Pennsylvania, 15145
Brush Aftermarket North America Inc.
Generator and Motor Services of Pennsylvania, LLC
421 West Main Street, Franklin, Frankfort, Kentucky,
40601
Barcom Asia Holdings, LLC
2711 Centerville Road, Suite 400, New Castle,
Wilmington, Delaware
BNSS LP, Inc.
926 West State Street, Hartford, Wisconsin, 53027
Broan-NuTone, LLC
1800 South McDowell Boulevard, Petaluma, California,
94954
Core Brands, LLC
1181 Trapp Road, Eagan, Minnesota, 55121
Ergotron, Inc.
3121 Hartsfield Road, Tallahassee, Florida, 32303
GTO Access Systems, LLC
19855 South West 124th Avenue, Tualatin, Oregon,
97062
Huntair Middle East Holdings, Inc.
2077 Convention Center Concourse, Suite 175, Atlanta,
Georgia, 30337
Linear HK, LLC
Melrose North America, Inc.
Neveda Holdco Corp
Nortek Distribution Services, LLC
Nortek Global HVAC de Puerto Rico, LLC
Nortek Global HVAC, Latin America, Inc.
Nortek Home Control Holdings, LLC
Nortek, Inc.
Nortek International, Inc.
Nortek Shared Services, LLC
1950 Camino Vida Roble, Suite 150, Carlsbad,
California, 92008
Nortek Security & Control, LLC
2547 Three Mile Road, Grand Rapids, Michigan
Operator Speciality Company, Inc.
2277 Harbor Bay Parkway, Alameda, California, 94502
Zephyr Ventilation, LLC
8000 Phoenix Parkway, O’Fallon, Missouri, 63368
Nortek Air Solutions, LLC
Nortek Global HVAC, LLC
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
Each of the subsidiaries listed are included in the consolidated
financial statements of the Company and are held in each case
by a subsidiary undertaking, except for Melrose Holdings Limited
which is held directly by Melrose Industries PLC.
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
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
FinancialsMelrose Industries PLC Annual Report 2017 150
Notes to the Company Balance Sheet
Continued
4. Debtors
Amounts falling due within one year:
Amounts owed by Group undertakings
Amounts falling due after one year:
Deferred tax
31 December
2017
£m
31 December
2016
£m
–
25.4
25.4
14.1
–
14.1
Amounts owed by Group undertakings are either interest-bearing or non interest-bearing depending on the type and duration of the
receivable relationship.
The Directors consider that amounts owed by Group undertakings approximate to their fair value.
The deferred tax included in the Balance Sheet is as follows:
Tax losses available for carry forward
Other timing differences
The tax losses may be carried forward indefinitely.
At 1 January 2017
Amount credited to equity
At 31 December 2017
5. Creditors
Amounts falling due within one year:
Amounts owed to Group undertakings
Accruals and other payables
31 December
2017
£m
31 December
2016
£m
25.3
0.1
25.4
–
–
–
£m
–
25.4
25.4
31 December
2017
£m
31 December
2016
£m
191.6
1.0
192.6
–
1.0
1.0
Amounts owed to Group undertakings are repayable on demand and are either interest-bearing or non interest-bearing depending on the
type and duration of the payable relationship.
The Directors consider that amounts owed to Group undertakings approximate to their fair value.
6. Provisions
At 1 January 2017
Charge to profit and loss account
Utilised
At 31 December 2017
Incentive
plan related
£m
12.8
11.4
(23.9)
0.3
Total
£m
12.8
11.4
(23.9)
0.3
The provision for Incentive Plan (2017) related costs relates to employer national insurance costs which are expected to be incurred when
the Incentive Plan (2017) matures. Further details of the plan are set out in the Directors’ Remuneration Report. The costs are expected to
be incurred within three years.
Melrose Industries PLC Annual Report 2017 7.
Issued share capital
Share Capital
Allotted, called-up and fully paid
1,941,200,503 (31 December 2016: 1,886,746,589) ordinary shares of 48/7p each (31 December 2016: 48/7p each)
12,831 (31 December 2016: nil) Incentive Shares (2017) of £1 each
151
31 December
2017
£m
31 December
2016
£m
133.1
–
133.1
129.4
–
129.4
The rights of each class of share are described in the Directors’ Report.
On 1 June 2017 the number of ordinary shares in issue increased by 54,453,914 following the crystallisation of the Incentive Plan (2012)
which increased the number of ordinary shares in issue from 1,886,746,589 to 1,941,200,503.
During the course of the year, 12,831 of the Incentive Plan (2017) options issued to the Directors and senior management were exercised
and resulted in the creation of 12,831 of Incentive Shares (2017) with a nominal value of £1 each.
8. Related party transactions
The Company has taken the exemption in FRS 102.33: “Related party information” not to disclose intercompany balances and
transactions in the year with fully owned subsidiary undertakings.
FinancialsMelrose Industries PLC Annual Report 2017 152
Glossary
Alternative Performance Measures (APMs)
In response to the Guidelines on APMs issued by the European Securities and Markets Authority (ESMA), additional information is
provided on the APMs used by the Group below.
In the reporting of financial information, the Group uses certain measures that are not required under IFRS. These additional measures
(commonly referred to as Alternative Performance Measures) provide additional information on the performance of the business and
trends to shareholders. These measures are consistent with those used internally, and are considered critical to understanding the
financial performance and financial health of the Group. APMs are considered to be a key measure to monitor how the businesses are
performing because this provides a more meaningful comparison of how the business is managed and measured on a day-to-day basis
and achieves consistency and comparability between reporting periods.
These alternative performance measures may not be directly comparable with similarly titled profit measures reported by other
companies and they are not intended to be a substitute for, or superior to, IFRS measures.
Income Statement Measures
APM
Proforma revenue and proforma revenue growth
APM
Non-underlying items
Closest
equivalent
statutory
measure
Reconciling
items to
statutory
measure
Revenue and movement in revenue per the Income
Statement.
Full year impact of acquisitions, revenue from exited sales
channels and translational currency impacts.
None.
See note 6.
Closest
equivalent
statutory
measure
Reconciling
items to
statutory
measure
Definition and purpose
The year-on-year change in revenue from sales that are continuing,
retranslating the current year revenue at the average actual periodic
exchange rates used in the prior year.
This measure includes the full year impact of businesses acquired and
excludes the impact of exited sales channels from both years to provide
a more direct comparative of year-on-year performance.
This measure is presented as a means of eliminating the effects of
exchange rate fluctuations, acquisitions and business closures on the
year-on-year reported results.
%
2017
£m
2,092.2
–
(28.8)
(100.0)
2016
£m
889.3
1,187.3
(108.4)
–
1,963.4
1,968.2
flat
%
2017
£m
1,873.2
–
(28.8)
(92.5)
2016
£m
642.9
1,187.3
(108.4)
–
1,751.9
1,721.8
+2%
Group – Revenue
Statutory
Full year impact of acquisitions
Exited sales channels
Impact of foreign exchange
Proforma revenue at
constant currency
Nortek – Revenue
Statutory (note 5)
Full year impact of acquisitions
Exited sales channels
Impact of foreign exchange
Proforma revenue at
constant currency
Brush – Revenue
Statutory (note 5)
Impact of foreign exchange
Proforma revenue at
constant currency
Definition and purpose
Those items which the Group excludes from its underlying profit metrics
in order to present a further measure of the Group’s performance.
Underlying profit/(loss) excludes items which are significant in size or
volatility or by nature are non-trading or non-recurring, and excludes any
item released to the Income Statement that was previously a fair value
item booked on acquisition.
The Board consider the underlying results to be a key measure to
monitor how the businesses are performing because this provides a
more meaningful comparison of how the business is managed and
measured on a day-to-day basis and achieves consistency and
comparability between reporting periods.
The underlying measures are used to partly determine the variable
element of remuneration of senior management throughout the Group
and are also in alignment with performance measures used by certain
external stakeholders. The underlying measures are also one measure
used to value individual businesses as part of the “Buy, Improve and
Sell” Melrose strategy model.
APM
Underlying operating profit/(loss)
Operating profit/(loss) (1).
Non-underlying items (note 6).
Closest
equivalent
statutory
measure
Reconciling
items to
statutory
measure
2017
£m
219.0
(7.5)
2016
£m
246.4
–
%
Definition and purpose
Profit before the impact of non-underlying items, finance costs,
finance income and tax.
211.5
246.4
-14%
As discussed above, the Group uses underlying profit measures
to provide a useful and more comparable measure of the ongoing
performance of the Group. These are adjusted from statutory
measures to remove non-underlying items, the nature of which
are disclosed above.
Melrose Industries PLC Annual Report 2017 153
Income Statement Measures continued
APM
Underlying operating margin
APM
Underlying EBITDA
Operating margin (2).
Non-underlying items (note 6).
Closest
equivalent
statutory
measure
Reconciling
items to
statutory
measure
None.
Not applicable.
Closest
equivalent
statutory
measure
Reconciling
items to
statutory
measure
Definition and purpose
Underlying operating profit as a percentage of revenue.
APM
Proforma underlying operating profit growth
Closest
equivalent
statutory
measure
Reconciling
items to
statutory
measure
Movement in operating profit/(loss) (1) per the
Income Statement.
Non-underlying items (note 6) full year impact
of acquisitions and translational currency impacts.
Definition and purpose
The year-on-year change in underlying operating profit including the
full year impact of acquisitions, retranslating the current year underlying
operating profit at the average actual periodic exchange rates used in
the prior year.
This measure is presented as a means of eliminating the effects
of exchange rate fluctuations and acquisitions on the year-on-year
reported results.
To aid comparability, the full year impact of acquisitions includes an
additional charge of £7.6 million for divisional long-term incentive plans
in 2016 as if Nortek were owned for the full year.
Definition and purpose
Underlying operating profit before depreciation and impairment
of property, plant and equipment and before the amortisation and
impairment of computer software and development costs.
Underlying EBITDA is one measure used to value individual businesses
as part of the “Buy, Improve and Sell” Melrose strategy model and by
certain external stakeholders to measure performance.
Underlying EBITDA
Underlying operating profit
Depreciation
Amortisation
Underlying EBITDA
2017
£m
278.4
30.9
3.8
313.1
2016
£m
104.1
15.9
2.2
122.2
APM
Underlying profit/(loss) before tax
Profit/(loss) before tax.
Non-underlying items (note 6).
Closest
equivalent
statutory
measure
Reconciling
items to
statutory
measure
Group – Underlying operating profit
As reported
Full year impact of acquisitions
Impact of foreign exchange
At constant currency
Nortek – Underlying operating profit
2017
£m
278.4
–
(15.1)
263.3
2017
£m
2016
£m
104.1
83.9
–
188.0 +40%
2016
£m
%
As reported (note 5)
Full year impact of acquisitions
Impact of foreign exchange
At constant currency
(a) Translated at an average GBP:USD exchange rate of 1.3554 equates to $241.0 million.
284.3
–
(14.5)
269.8
86.3
91.5
–
177.8 (a) +52%
Nortek – Underlying operating profit
2017
£m
2015
£m
%
As reported (note 5)
Full year impact of acquisitions
Impact of foreign exchange
At constant currency
(a) Translated at an average GBP:USD exchange rate of 1.5284 equates to $220.1 million.
284.3
–
(43.6)
240.7
–
144.0
–
144.0 (a) +67%
%
Definition and purpose
Profit before the impact of non-underlying items and tax.
As discussed above, the Group uses underlying profit measures
to provide a useful and more comparable measure of the ongoing
performance of the Group. These are adjusted from statutory
measures to remove non-underlying items, the nature of which
are disclosed above.
APM
Underlying profit/(loss) after tax
Profit/(loss) after tax.
Non-underlying items (note 6).
Closest
equivalent
statutory
measure
Reconciling
items to
statutory
measure
Definition and purpose
Profit after tax attributable to owners of the parent and before the
impact of non-underlying items.
Brush – Underlying operating profit
As reported (note 5)
Impact of foreign exchange
At constant currency
2017
£m
17.5
(0.6)
16.9
2016
£m
32.0
–
32.0
%
-47%
As discussed above, the Group uses underlying profit measures
to provide a useful and more comparable measure of the ongoing
performance of the Group. These are adjusted from statutory
measures to remove non-underlying items as well as non-underlying
tax and the tax effects of non-underlying items, the nature of which
are disclosed above.
(1)
(2)
Operating profit/(loss) is not defined within IFRS but is a widely accepted profit measure being
profit/(loss) before finance costs, finance income and tax.
Operating margin is not defined within IFRS but is a widely accepted profit measure being
derived from operating profit/(loss)(1) divided by revenue.
FinancialsMelrose Industries PLC Annual Report 2017 154
Glossary
Continued
Income Statement Measures continued
APM
Underlying Income Statement tax rate
Closest
equivalent
statutory
measure
Reconciling
items to
statutory
measure
Effective tax rate.
Proforma underlying diluted earnings per share
Non-underlying items, non-underlying tax and the tax
impact of non-underlying items (note 6).
Proforma underlying operating profit
Finance costs (proforma)
Tax (proforma)
Underlying proforma profit after tax
Number of shares (million)
Proforma underlying diluted
2017
constant
currency
£m
263.3
(20.7)
(62.8)
179.8
1,941.2
2016
£m
188.0
(20.7)
(43.3)
124.0
1,941.2
2017
£m
278.4
(20.7)
(66.8)
190.9
1,941.2
Definition and purpose
The income tax charge for the Group excluding non-underlying tax and
the tax impact of non-underlying items divided by underlying profit
before tax.
This measure is a useful indicator of the ongoing tax rate for the Group.
earnings per share
9.8p
9.3p
6.4p
Proforma underlying diluted earnings per share growth of 45% at
constant currency, and 54% using actual average exchange rates for
both years.
Underlying Income Statement tax rate
Tax credit per Income Statement
Non-underlying tax
Tax impact of non-underlying items
Underlying tax charge
Underlying profit before tax
Underlying Income Statement tax rate
APM
Interest cover
2017
£m
3.7
(26.4)
(44.1)
(66.8)
257.7
25.9%
2016
£m
30.3
(10.4)
(45.9)
(26.0)
96.4
27.0%
Closest
equivalent
statutory
measure
Reconciling
items to
statutory
measure
None.
Not applicable.
APM
Underlying diluted earnings per share
Diluted earnings per share.
Non-underlying items (note 6).
Closest
equivalent
statutory
measure
Reconciling
items to
statutory
measure
Definition and purpose
Profit after tax attributable to owners of the parent and before the impact
of non-underlying items, divided by the weighted average number of
ordinary shares in issue during the financial year adjusted for the effects
of any potentially dilutive options.
The Board considers this to be a key measure of performance.
Proforma underlying diluted earnings per share
and proforma underlying diluted earnings per
share growth
Diluted earnings per share.
Full year impact of acquisitions, non-underlying items
(note 6) and translational currency impacts.
APM
Closest
equivalent
statutory
measure
Reconciling
items to
statutory
measure
Definition and purpose
Underlying diluted earnings per share adjusted to include the full year
impact of businesses acquired and, for growth purposes, translational
currency impacts.
Definition and purpose
Underlying EBITDA as a multiple of net interest payable on bank loans
and overdrafts.
This measure is used for bank covenant testing.
Balance Sheet Measures
APM
Net debt
Cash and cash equivalents less interest-bearing loans
and borrowings.
Reconciliation of net debt (note 25).
Closest
equivalent
statutory
measure
Reconciling
items to
statutory
measure
Definition and purpose
Net debt comprises total borrowings (interest-bearing loans and finance
leases) and cash and cash equivalents.
Net debt is one measure that could be used to indicate the strength
of the Group’s Balance Sheet position and is a useful measure of the
indebtedness of the Group.
APM
Net debt at average exchange rates
Cash and cash equivalents less interest-bearing loans
and borrowings.
Translational currency impacts.
Closest
equivalent
statutory
measure
Reconciling
items to
statutory
measure
This measure uses the proforma underlying operating profit, described
above, and to aid comparability, this measure also makes allowance
for the same net finance costs, effective tax rate and number of shares
in both periods to aid comparability.
Definition and purpose
Net debt (as above) is presented in the Balance Sheet translated at year
end exchange rates. For bank covenant testing purposes net debt is
converted using average exchange rates for the year.
Net debt
As reported
Impact of foreign exchange
At average exchange rates
31 December
2017
£m
31 December
2016
£m
571.8
22.8
594.6
541.5
(51.1)
490.4
Melrose Industries PLC Annual Report 2017 155
Balance Sheet Measures continued
APM
Leverage or net debt to underlying EBITDA
None.
Not applicable.
Closest
equivalent
statutory
measure
Reconciling
items to
statutory
measure
Underlying profit conversion to cash (pre capex)
percentage
None.
Not applicable.
APM
Closest
equivalent
statutory
measure
Reconciling
items to
statutory
measure
Definition and purpose
Net debt at average exchange rates divided by underlying EBITDA
for existing businesses at each year end.
This measure is used for bank covenant testing.
APM
Working capital
Definition and purpose
Underlying operating cash flow (pre capex) as a percentage
of underlying EBITDA, being 95% in 2017 and 123% in 2016.
This is a key performance measure that is used by the Board to
measure performance.
Inventories, trade and other receivables less trade and
other payables.
Other Measures
Closest
equivalent
statutory
measure
Reconciling
items to
statutory
measure
Not applicable.
Definition and purpose
Working capital comprises inventories, current and non-current
trade and other receivables, and current and non-current trade
and other payables.
Cash Flow Measures
APM
Underlying operating cash flow (pre capex)
Net cash from operating activities.
Non-working capital items.
Closest
equivalent
statutory
measure
Reconciling
items to
statutory
measure
Definition and purpose
Underlying operating cash flow (pre capex) is calculated as underlying
EBITDA adjusted for movements in working capital.
This measure provides additional useful information in respect of cash
generation and is consistent with how business performance is
measured internally.
APM
Capital expenditure (capex)
Additions to non-current assets.
Refer to definition.
Closest
equivalent
statutory
measure
Reconciling
items to
statutory
measure
Definition and purpose
Calculated as the purchase of property, plant and equipment and
computer software, and expenditure on capitalised development
costs during the year, excluding any assets acquired as part of a
business combination.
APM
Capital expenditure to depreciation ratio
None.
Not applicable.
Closest
equivalent
statutory
measure
Reconciling
items to
statutory
measure
Definition and purpose
Capital expenditure divided by depreciation of property, plant and
equipment and amortisation of computer software and development costs.
Underlying operating cash flow
Underlying EBITDA
(Increase)/decrease in inventory
Decrease in receivables
Decrease in payables
Underlying operating cash flow
2017
£m
313.1
(8.1)
8.1
(16.1)
297.0
2016
£m
122.2
15.0
22.5
(9.3)
150.4
APM
Dividend per share
None.
Not applicable.
Closest
equivalent
statutory
measure
Reconciling
items to
statutory
measure
Definition and purpose
Amount payable by way of dividends in terms of pence per share.
FinancialsMelrose Industries PLC Annual Report 2017 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, 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.
If you have sold or otherwise transferred or sell or otherwise transfer
all of your shares in Melrose Industries PLC (the “Company”), please
send this document, together with the accompanying form of proxy,
as soon as possible to the purchaser or transferee or to the 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 Saddlers’ Hall, 40 Gutter Lane, London EC2V 6BR at 11.00
a.m. on 10 May 2018 for the purposes set out below. Resolutions 1 to
14 (inclusive) will be proposed as ordinary resolutions and resolutions
15 to 18 (inclusive) as special resolutions.
Ordinary resolutions
1.
To receive the Company’s audited financial statements for the
financial year ended 31 December 2017, together with the
Directors’ Report, Strategic Report and the Auditor’s Report
on those financial statements.
2.
To approve the Directors’ Remuneration Report for the year
ended 31 December 2017, as set out on pages 80 to 90 of the
Company’s 2017 Annual Report.
3.
To declare a final dividend of 2.8 pence per ordinary share for
the year ended 31 December 2017.
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 Justin Dowley as a Director of the Company.
9. To re-elect Liz Hewitt as a Director of the Company.
10. To re-elect David Lis as a Director of the Company.
11. To elect Archie G. Kane 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.
13. To authorise the Audit Committee to determine the
remuneration of the auditor of the Company.
In resolutions 14 to 18 (inclusive):
“Acquisition” means the acquisition of all or any part of the issued
and to be issued share capital of GKN plc by the Company or
any wholly owned subsidiary of the Company, to be implemented
by way of the Offer (or by way of Scheme, under certain
circumstances described in the Offer Document);
“Offer” means the offer made by Melrose to acquire the entire
issued and to be issued share capital of GKN plc on the terms and
subject to the conditions set out in the Offer Document (and, where
the context admits, any subsequent revision, variation, extension or
renewal of such offer including any election or alternative available
in connection with it);
“Offer Document” means the offer document dated 13 March 2018
containing (among other things) the terms and conditions of the Offer;
“Scheme” means, should the Acquisition be implemented by way
of a scheme of arrangement under Part 26 of the Companies Act
2006, the scheme of arrangement between GKN plc and the
shareholders of GKN plc to implement the Acquisition, with or
subject to any modification, addition or condition approved or
imposed by the High Court of Justice of England and Wales; and
“the Offer becoming effective” means (a) the Acquisition becoming
or being declared wholly unconditional, or (b) if the Company elects
to implement the Acquisition by way of a Scheme, the Scheme
becoming effective in accordance with its terms.
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 £44,370,297 and,
subject to and conditional on the Offer becoming effective,
up to an additional aggregate nominal amount of
£67,377,007; and
(B) comprising equity securities (as defined in section 560 of
the Act) up to an aggregate nominal amount of £88,740,594
and, subject to and conditional on the Offer becoming
effective, up to an additional aggregate nominal value of
£134,754,013 (such amount or amounts 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 a 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 2019, 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.
Special resolutions
15. That, subject to the passing of resolution 14, 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 and/or to sell ordinary shares
held by the Company as treasury shares for cash, in each case
as if section 561 of the Act did not apply to any such allotment
or sale, 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 a
rights issue only):
Melrose Industries PLC Annual Report 2017
157
(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 circumstances set out in
paragraph (A) of this resolution) of equity securities pursuant
to the authority granted by paragraph (A) of resolution 14
or sale of treasury shares up to a nominal amount of
£6,655,545 and, subject to and conditional on the Offer
becoming effective, up to an additional nominal amount
of £10,106,551,
such powers 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 2019, but,
in each case, so that the Company may make offers or
agreements before the power expires which would or might
require equity securities to be allotted (and/or treasury
shares sold) after the power expires and so that the
Directors may allot equity securities (and/or sell treasury
shares) in pursuance of any such offer or agreement
notwithstanding that the power conferred by this authority
has expired.
16. That, subject to the passing of resolution 14 and in addition to
any power granted under resolution 15, 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 and/or to sell ordinary shares held by
the Company as treasury shares for cash, in each case as if
section 561 of the Act did not apply to any such allotment or
sale, provided that this power shall be:
(A) limited to the allotment of equity securities pursuant to the
authority granted by sub paragraph (A) of resolution 14
or sale of treasury shares up to a nominal amount of
£6,655,545 and, subject to and conditional on the Offer
becoming effective, up to an additional nominal amount
of £10,106,551; and
(B) used only for the purposes of financing (or refinancing, if
the authority is to be used within six months of the original
transaction) a transaction which the Directors determine
to be an acquisition or other capital investment of a kind
contemplated by the Statement of Principles on Disapplying
Pre-Emption Rights most recently published by the
Pre-Emption Group prior to the date of this notice of the
Annual General Meeting,
such powers 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 2019, but, in each
case, so that the Company may make offers or agreements
before the power expires which would or might require equity
securities to be allotted (and/or treasury shares sold) after
the power expires and so that the Directors may allot equity
securities (and/or sell treasury shares) in pursuance of any
such offer or agreement notwithstanding that the power
conferred by this authority has expired.
17. 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:
(A) the maximum aggregate number of ordinary shares
authorised to be purchased is 194,120,050 and, subject
to and conditional on the Offer becoming effective, an
additional 294,774,404 ordinary shares;
(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;
(C) the maximum price which may be paid for an ordinary
share is not more than the higher of:
(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 2019;
(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.
18. 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
Jonathon Crawford
Company Secretary
10 April 2018
Registered Office:
11th Floor The Colmore Building
20 Colmore Circus Queensway
Birmingham
West Midlands
B4 6AT
Shareholder InformationMelrose Industries PLC Annual Report 2017
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 18 (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 2017 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 “2017 Annual
Report”) before shareholders each year at the Annual General
Meeting (“AGM”).
Resolution 2 – Approval of Directors’ remuneration report
The Directors’ remuneration report (the “Directors’ Remuneration
Report”) is presented in two sections:
• the annual statement from the Chairman of the Remuneration
Committee; and
• the annual report on remuneration.
The annual statement from the Chairman of the Remuneration
Committee, set out on pages 80 to 82 of the 2017 Annual Report,
summarises, for the year ended 31 December 2017, 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 80 to 90
of the 2017 Annual Report, provides details of the remuneration
paid to Directors in respect of the year ended 31 December 2017,
including base salary, taxable benefits, short-term incentives,
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 Report is subject to an annual
advisory shareholder vote by way of an ordinary resolution.
Resolution 2 is to approve the Directors’ Remuneration Report.
Resolution 3 – Declaration of final dividend
The Board is recommending, and shareholders are being asked
to approve, the declaration of a final dividend of 2.8p per ordinary
share for the year ended 31 December 2017. The final dividend
will, subject to shareholder approval, be paid on 21 May 2018 to
the holders of ordinary shares whose names are recorded on the
register of members of the Company at the close of business on
6 April 2018.
Resolutions 4 to 10 (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 (with the
exception of Archie G. Kane, who is standing for election).
Biographical details of each Director can be found on pages 62
to 63 of the 2017 Annual Report. All of the non-executive Directors
standing for re-election are currently considered independent
under the Code.
Resolution 11 – Election of Director
In accordance with the Articles, Archie G. Kane is standing for
election as a Director of the Company following his appointment
to the Board with effect from 5 July 2017. Biographical details
for Archie G. Kane can be found on page 63 of the 2017
Annual Report.
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 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 (“Section
551 authority”). The authority contained in paragraph (A) of the
resolution will be limited to an aggregate nominal amount of
£44,370,297, being approximately one-third of the Company’s
issued ordinary share capital as at 9 April 2018 (being the last
business day prior to the publication of this notice) and, subject
to and conditional on the Offer becoming effective, an additional
aggregate nominal amount of £67,377,007, being an amount which,
when aggregated with £44,370,297, provides an authority in
respect of one-third of the Company’s expected issued ordinary
share capital following the Acquisition.
In line with guidance issued by the Investment Association,
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 £88,740,594,
representing approximately two-thirds of the Company’s issued
ordinary share capital as at 9 April 2018, and, subject to and
conditional on the Offer becoming effective, an additional
aggregate nominal amount of £134,754,013, being an amount
which, when aggregated with £88,740,594, provides an authority
in respect of two-thirds of the Company’s expected issued ordinary
share capital following the Acquisition. This resolution provides
that such amounts, when aggregated, shall be reduced by the
aggregate nominal amount of any allotments or grants under
paragraph (A).
The Company does not hold any shares in treasury.
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 2019. 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.
Melrose Industries PLC Annual Report 2017 159
Explanatory notes to the proposed resolutions
continued
Resolutions 15 to 16 – Partial disapplication
of pre-emption rights
These resolutions seek 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 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 2019.
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 18 – 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 Act, as amended by 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). 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.
The Company intends to only use the shorter notice period where
this flexibility is merited by the purpose of the meeting and is
considered to be in the interests of shareholders generally, and
not as a matter of routine. 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.
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 £13,311,090, representing approximately 10% of the
Company’s issued ordinary share capital as at 6 April 2017 (being
the last business day prior to the publication of this notice) and,
subject to and conditional on the Offer becoming effective, up
to an additional nominal value of £20,213,102, being an amount
which, when aggregated with £13,311,090, provides an authority
in respect of 10% of the Company’s expected issued ordinary
share capital following the Acquisition.
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 a relevant authority in resolutions 15 or 16:
• in excess of an amount equal to 5% of the Company’s issued
ordinary share capital (excluding treasury shares) in any
one-year period, whether or not in connection with an
acquisition or specified capital investment; 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 2019. 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.
Resolution 17 – 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
194,120,050 ordinary shares, representing 10% of the Company’s
issued ordinary share capital as at 9 April 2018 and, subject to
and conditional on the Offer becoming effective, an additional
294,774,404 ordinary shares, being an amount which, when
aggregated with 194,120,050 ordinary shares, provides an
authority in respect of 10% of the Company’s expected issued
ordinary share capital following the Acquisition.
Shareholder InformationMelrose Industries PLC Annual Report 2017 160
Notice of Annual General Meeting
Continued
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, speak and vote at the AGM is also entitled to appoint
a proxy to exercise all or any of his/her rights to attend, speak
and vote at the AGM in his/her place. 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.
3.
4.
5.
6.
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 (or, in the event of an adjournment, not
less than 48 hours before the stated time of the adjourned
meeting (excluding any part of a day which is not a working
day)). Returning a completed form of proxy will not preclude
a member from attending the meeting and voting in person.
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/her and the shareholder by whom he/she 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/she 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
opposite does not apply to Nominated Persons. The rights
described in paragraphs 1 and 2 can only be exercised by
the holders of ordinary shares in the Company.
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 6.30 p.m. on 8 May 2018
(or, in the event of an adjournment, on the date which is two
days, excluding any day which is not a working day, 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.
As at 9 April 2018 (being the last business day prior to the
publication of this notice), the Company’s issued share capital
consists of 1,941,200,503 ordinary shares of 48/7p each,
carrying one vote each.
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 (available at www.euroclear.com). 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.
7.
8.
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. 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 a.m. on 8 May 2018. 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.
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/
her 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
Uncertificated 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.
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 AGM includes any statement that the
Company has been required under section 527 of the Act
to publish on a website.
Melrose Industries PLC Annual Report 2017 161
Explanatory notes as to the proxy, voting and
attendance procedures at the Annual General
Meeting (AGM) continued
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: (i) to do so
would interfere unduly with the preparation for the meeting or
involve the disclosure of confidential information; (ii) the answer
has already been given on a website in the form of an answer
to a question; and/or (iii) 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 during 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 AGM or any related documents (including the form
of proxy) 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 AGM and at the place
of the AGM 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 Voting ID, Task ID and Shareholder
Reference Number which are set out on the enclosed form of
proxy. The return of the form of proxy by post or registering your
vote online will not prevent you from attending the AGM 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 using your
usual user ID and password. Once logged in simply click “View”
on the “My Investments” page, click on the link to vote then
follow the on screen instructions. A proxy appointment made
electronically will not be valid if sent to any address other than
those provided or if received after 11.00 a.m. on 8 May 2018.
Shareholder InformationMelrose Industries PLC Annual Report 2017
162
Company and shareholder information
As at 31 December 2017, there were 6,808 holders of ordinary shares of 48/7 pence each in the Company. Analysis of these
shareholdings as at 31 December 2017 are set out in the table below.
Total number
of holdings
5,217
1,051
274
266
6,808
4,884
1,924
6,808
Shareholder analysis
Balance Ranges
1–5,000
5,001–50,000
50,001–500,000
Over 500,000
Total
Held by
Individuals
Institutions
Financial calendar 2018
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 2018 results
Total number
of shares
Percentage
issued capital
Percentage
of holders
76.63%
15.44%
4.02%
3.91%
100.00%
4,490,871
15,321,105
51,292,654
1,870,095,873
1,941,200,503
71.74%
28.26%
100.00%
11,492,756
1,929,707,747
1,941,200,503
0.23%
0.79%
2.64%
96.34%
100.00%
0.59%
99.41%
100.00%
5 April 2018
6 April 2018
10 May 2018
21 May 2018
August 2018
October 2018
March 2019
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
Registrar
Equiniti
Aspect House
Spencer Road
Lancing
West Sussex
BN99 6DA
Tel: 0371 384 2946
or +44 (0) 121 415 0851
(from outside UK)
Lines are open from 8.30 a.m.
to 5.30 p.m. Monday to Friday,
excluding UK public holidays.
Bankers
Bank of America Merrill Lynch
Barclays Bank PLC
BNP Paribas
Citizens Bank
Commerzbank AG
HSBC Bank plc
J.P. Morgan Limited
Lloyds Bank plc
Royal Bank of Canada
BayernLB
ICBC
ING
Santander UK PLC
Unicredit
Wells Fargo Bank International
A range of shareholder information is available at Equiniti’s online portfolio service www.shareview.co.uk, where you can register for a
Shareview Portfolio to access information about your holding and undertake a number of activities, including appointing a proxy, 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) 20 7930 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 PLC Annual Report 2017 Notes
163
Melrose Industries PLC Annual Report 2017 164
Notes
Melrose Industries PLC Annual Report 2017 This Report is printed on material which is derived from sustainable sources. Both the manufacturing
paper mill and printer are registered to the Environmental Management System ISO 14001 and are
Forest Stewardship Council® (FSC) chain-of-custody certified.
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Head Office
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Tel: +44 (0) 20 7647 4500
Fax: +44 (0) 20 7647 4501
Buy
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Melrose
Melrose Industries PLC
Registered Office
11th Floor, The Colmore Building
20 Colmore Circus Queensway
Birmingham
West Midlands
B4 6AT
Tel: +44 (0) 121 296 2800
Fax: +44 (0) 121 296 2839
Registered Number: 09800044
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: BZ1G432
LEI: 213800RGNXXZY2M7TR85
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