Buy
Improve
Sell
Melrose
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Annual Report 2018 Melrose Industries PLC
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,
continue to be the fundamentals of the “Buy, Improve, Sell”
business strategy that Melrose has followed since it was
founded in 2003.
Our strategy
Our strategy and business model
Strategy in action
GKN – Buy
Nortek – Improve
Elster – Sell
Strategic Report
Shareholder value creation
Highlights of the year
Chairman’s statement
Chief Executive’s review
Key performance indicators
Divisional review
Aerospace
Automotive
Powder Metallurgy
Nortek Air & Security
Other Industrial
Finance Director’s review
Longer-term viability statement
Risk management
Risks and uncertainties
Corporate Social Responsibility
Governance
Governance overview
Board of Directors
Directors’ report
Corporate governance report
Audit Committee report
Nomination Committee report
Directors’ Remuneration report
Financial 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
Company Balance Sheet
for Melrose Industries PLC
114
126
127
128
129
130
131
182
Company Statement of Changes in Equity 182
Notes to the Company Balance Sheet
Glossary
Shareholder information
Notice of Annual General Meeting
Company and shareholder information
183
193
197
202
For more information visit
melroseplc.net
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36
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Statement of Directors’ responsibilities
113
Cautionary statement
The Strategic Report and certain other sections of this Annual Report and financial statements 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 Annual Report and financial statements 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 and financial statements.
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
have 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.
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A transformational
year for Melrose
“This has been a transformational year
for Melrose and we are delighted to
announce, on an annualised adjusted
basis, an operating profit of over
one billion pounds. The former GKN
businesses are proving their potential
to offer the outstanding opportunities
we expected and much has already
been achieved in the short period
of ownership. Despite the current
economically uncertain environment,
we have every confidence that we will be
able to continue to unlock the substantial
shareholder value from the former GKN
businesses and further improve Nortek.”
Justin Dowley, Non-executive Chairman
For more information about
our successful history of
shareholder value creation
See pages 10 to 11
Our strategy and business model:
“Buy, Improve, Sell”
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.
Our strategy
Buy
• Good manufacturing
businesses whose
performance can
be improved.
• Use low (public market)
leverage.
• Melrose management are
substantial equity investors.
Improve
• Free management from
• Drive operational improvements.
bureaucratic central structures.
• Invest in the business.
• Change management focus,
incentivise well.
• Set strategy and targets
and sign off investments.
• Focus on profitability and operating
cash generation – not growth for
the sake of growth.
Our business model
Inputs
Industry expertise
Core management group has
operated in the UK and the
international manufacturing
arena for over two decades.
Highly experienced
management team
The current team founded Melrose
in 2003 with a view to buying
and improving underperforming
businesses. Since then it has
overseen transactions with a total
market value of over £10 billion.
Strong track record
Melrose has generated significant
financial returns for its shareholders,
achieving an average return on
equity of 2.6x across the businesses
sold to date and returned over
£4.5 billion of cash to shareholders.
Operational efficiency
Our businesses benefit from
substantial investment and
changed management focus in
order to drive growth. Melrose
increased the operating margins
of businesses sold by between
four and nine percentage points.
Effective governance
The Board maintains high standards
of corporate governance to ensure
Melrose achieves success for
the benefit of the businesses we
manage and our shareholders
over the long term.
2
Value creation model
Follow-on investment
during Melrose ownership
for businesses sold
+39% Further investment
in the businesses to
improve operations(1)
100% Equity raised to
acquire businesses
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.
Cash generation
A key focus is to make significant
improvement to cashflows in the
businesses we acquire.
Reinvestment
Multiple expansion
Multiple expansion is never assumed,
but has been achieved on all previous
deals (on average +30%) as the
businesses have been improved.
(1) In respect of the McKechnie, Dynacast,
FKI and Elster acquisitions.
Cash generation Sales growthMultiple expansion Margin growthMelrose Industries PLCAnnual Report 2018 Shareholder value creation
See pages 10 to 11
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.
Sell
• Commercially choose
the right time to sell,
often between three
to five years but flexible.
• Return value to shareholders
from significant disposals.
Giving ownership
to the businesses.
Appropriately incentivising
the management teams.
Freeing businesses from
central bureaucracy.
Quick decision making.
Ready access to funds for
capital expenditure, R&D
and expansion projects.
Value creation
Outputs
Businesses under improvement
How has Melrose created value?(1)
Aerospace
See page 20
Automotive
See page 24
Selling for a higher multiple
than paid
Cash generation
Sales growth
Margin growth
32%
16%
4%
48%
Powder Metallurgy
See page 28
(1) In respect of the McKechnie, Dynacast,
FKI and Elster acquisitions.
Nortek Air & Security See page 32
Other Industrial
See page 36
Shareholder investment
and gain
(figures up to 31 December 2018):
Average return on equity across
all businesses sold
2.6x
Cash return to shareholders
since establishment
£4.5bn
Reinvestment
£436m
Spent on research and development for
Nortek, Elster and GKN acquisitions being
3%
of revenue for the equivalent period.
Capital expenditure in 2018
£422m
3
Annual Report 2018Melrose Industries PLC
Strategy in action
Buy
Melrose underwent a
transformation last year as part
of its successful acquisition of
GKN plc, following a high-profile
takeover bid. This has resulted
in GKN assets representing
approximately 85% of
Melrose’s group sales.
Share equity issued in relation
to acquisition
£6.84bn
100%
Ownership secured within
6 months of launch
Improved funding commitment
agreed with pensions trustees
up to
£1bn
4
Melrose had followed GKN plc for a
number of years, noting that while it
had quality businesses, its performance
had diminished in recent times.
Melrose was confident that, given
the opportunity, it could improve
performance for all stakeholders by
applying its “Buy, Improve, Sell” model.
Melrose’s acquisition strategy centres
on pursuing fundamentally good but
undermanaged manufacturing targets
and investing heavily to achieve margin
improvements, simplifying corporate
structures and streamlining approval
processes, rather than a simple sales
or cycle opportunity, whilst enforcing
discipline and financial controls.
GKN fitted the Melrose model for
a number of reasons: namely, its
businesses were typically either
world number one or two in their
Melrose Industries PLCAnnual Report 2018
Strategy in action
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chosen sectors. However, its
performance had consistently failed
to fulfil its potential under previous
GKN management. Further, the well-
documented issues in North America
presented the opportunity to approach
GKN with an alternative solution under
Melrose control.
Although the GKN board were not
receptive to our approach, they
nonetheless announced a similar
strategy shortly after our offer was made.
We were able to offer GKN shareholders
the opportunity to take a majority share in
the newly created industrial powerhouse
and participate in the future improvement
in performance. After putting our
proposal to shareholders, we were
pleased to be given the opportunity
to unlock the value in the GKN business.
We took control and secured 100%
ownership on an accelerated timetable
implementing the same methods applied
with success to previously acquired
companies. This included decentralisation,
streamlining duplicate functions, securing
operational management changes and
an immediate focus on profit and cash
rather than sales. We implemented
appropriate incentivisation to drive
positive change and effective financial
and operational controls, improved
investment in assets over the long
term, made efficiency enhancements,
corporate restructuring assessments and
rigorous analysis of product profitability.
Melrose was also focused on delivering
for GKN’s wider stakeholder community.
Having agreed contributions and
appointed GKN’s first independent
Chairman of Trustees, Melrose
commenced improving the inherited
GKN UK pension schemes by setting an
improved funding target of Gilts +75bps
for the GKN 2012 Pension Scheme, and
Gilts +25bps for the GKN 2016 Pension
Scheme. The Company committed
to make an initial voluntary contribution
to the two pension schemes totalling
£150 million within the first 12 months,
doubled annual payments to £60 million,
and promised to pay between 5% and
10% of net proceeds of any Melrose
divestment or £270 million on the sale
of GKN Powder Metallurgy, for as long
as the schemes remain in deficit. This is
consistent with our aim of ensuring that
all UK defined benefit schemes end
up stronger under Melrose ownership
than when they join the Group, with
many of them becoming fully funded
during Melrose ownership.
Of GKN’s primary business divisions, the
Automotive division has the opportunity
to drive manufacturing efficiencies and
a more disciplined approach to sales
growth and procurement. Such changes
are already being addressed by the
appointment of a new CEO and senior
team, along with a new cost structure and
increased investment in the business’s
R&D footprint. The Aerospace division is
receiving targeted investments to improve
its performance, particularly in North
America, as well as focus on research and
development through the establishment
of the Global Technology Centre in Filton,
UK. Although GKN Powder Metallurgy
was placed under strategic review,
investment has continued to drive
improved performance.
In less than nine months of ownership,
Melrose has already demonstrated its
ability to achieve a number of noticeable
improvements in management,
operational performance, financial
stability and near-term efficiencies.
These improvements have set a solid
foundation for optimising profit growth
and the enhanced operational
performance that the Melrose
management team believe is
achievable at GKN.
5
Annual Report 2018Melrose Industries PLC Strategy in action
Improve
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.
In August 2016, we acquired
Nortek, a global, diversified group
that manufactures innovative air
management, security, home
automation and productivity
solutions. Nortek was a US publicly-
listed company, which we acquired
for £2.2 billion, including £1.6 billion
in equity raised from our supportive
shareholder base. Our acquisition of
Nortek in 2016 came at a time when
the businesses were struggling from
underinvestment, a loss in focus,
and lacking in coherent business
strategies. We had identified strong
brands and products within each
of the Nortek businesses, but
also fragmented operations and
underperforming management, and
we saw opportunities for significant
improvement and for maximising the
value inherent in these businesses.
6
Melrose Industries PLC
The businesses acquired with
Nortek in 2016 now largely make
up our Nortek Air & Security division,
comprising the Global Heating,
Ventilation & Air Conditioning business
(“HVAC”), the Air Quality & Home
Solutions business (“AQH”) and the
Security & Smart Technology business
(“SST”), together with Ergotron, now
in our Other Industrial division.
Each of the Nortek businesses have
undergone a significant transformation,
delivering a record performance in our
first full year of ownership in 2017, on
which we have continued to build.
We have significantly reduced leverage
from approximately US$1.4 billion and
over 5x EBITDA to the more prudent
2.3x levels of today. Freed from the
restrictions of the formerly centralised
group structure, including the closure
of the central headquarters and
removal of duplicate group functions,
operational improvements have
significantly improved Nortek’s
adjusted operating profit, which has
increased by 48%, and its operating
margins, which have increased by
6ppts. These improvements have
been funded by Melrose investments
equal to approximately 1.6x
depreciation. The businesses have
also been extremely successful in
converting this strong performance
into cash, with a cash conversion rate
under Melrose ownership of 100%.
As responsible stewards of our
businesses, a fundamental part
of our “Improve” strategy is to
implement initiatives throughout
the business in order to increase
profitability, invest for its future
and improve culture.
We have made significant financial
investments into each of the
businesses – during our ownership
to date, Melrose has invested
approximately £144 million in research
and development, representing
approximately 3.4% of revenue
generated by Nortek during this
period. Most materially, we have
invested in developing product
platforms and breakthrough
technologies, such as the patented
innovation of StatePoint®, an industry
leader in data centre cooling that is
being deployed across the globe in
partnership with Facebook, as well as
the integrated CLEANSUITE® product
family. We have also focused on
improving productivity across the
businesses. In HVAC, a targeted
£21 million capital investment into
production facilities, warehousing
systems and quality management
Annual Report 2018
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processes has reinforced a fundamental
culture change throughout the business.
This investment has included an increase
in the capacity of HVAC’s clean room,
premium air handler and healthcare
operating room, as well as upgrades
to its next generation plant and
equipment and the expansion of its
two Canadian plants. We have also
invested £9 million in new machinery and
updated technologies at the Residential
and Light Commercial facilities.
Excess manufacturing capacity in AQH
has been eliminated through a £6 million
site consolidation in Canada and a
consolidation of US warehousing and
distribution into the Hartford, Wisconsin
site, which has also addressed the issue
of inconsistent customer service and
delivered significant improvements to AQH’s
‘On Time and Complete’ delivery rates.
As well as the £16 million upgrade to its
production facility in Hartford, Wisconsin,
AQH has refocused on reversing a slow
decline in its market share through
investment in developing a robust
product development pipeline, including
the Alliance range hood platform.
The sale of the loss-making European
business Best S.p.A. also enabled the
business to refocus on its core
North America markets.
In SST, we have continued to focus
efforts in consolidating supply chain
management and distribution services
through its facility in Carlsbad, California
and a logistics partnership with a globally
recognised provider to service the US
west coast, and in improving the product
mix to take advantage of customer
changes in the market.
As well as consolidating into new
headquarters and upgrading SST’s
R&D capabilities to support its leading
Annual Report 2018
Elan platform development, we also
funded the acquisition of IntelliVision
Technologies Corp., a market leader
in Artificial Intelligence and deep
learning-based video analytics software
for smart cameras, that is being
introduced across its product
portfolio to transformatory effect.
While we look to work with incumbent
operational management teams, who
often shine once freed from the distraction
of a head office, we are focused on
changing the culture of the businesses we
buy and do not hesitate to introduce fresh
leadership where required. Nortek is an
example of this, with each of AQH and
Ergotron having refreshed management
teams hired by newly appointed CEOs,
while HVAC and SST retain the CEOs
we inherited with much of their legacy
teams intact. All management teams
are incentivised to align themselves to
us and to our shareholders in increasing
the value of their businesses.
The scale and rate of success achieved
by Nortek demonstrates the continuing
effectiveness of the Melrose model,
which simplifies corporate structures
and injects pace and accountability
into businesses, while investing in their
long-term success. Nortek has continued
to invest in people, assets, technology
and new products to ensure that the
businesses are prepared to successfully
execute the leverage and innovation/
growth parts of their strategies, as
reflected in the Nortek Group’s increased
adjusted(1) operating margins from 9%
at acquisition to 15% in 2018 with the
potential for further improvement. As
detailed elsewhere in this Report, the
businesses will seek to capitalise on their
strong brands and distinctive capabilities
to continue to grow and improve.
R&D investment
£144m
3.4%
of revenue
Adjusted operating margin improvement(1)
>60%
15%
9%
Current
Entry
How Nortek’s operating margin
has improved
+6ppts
+4ppts
+1ppt
+1ppt
Returns on capex and restructuring
and other commercial actions
Central cost savings
Exit of low margin sales channels
(1)
Described in the glossary to the financial statements
on pages 193 to 196.
Melrose Industries PLC
7
Strategy in action
Sell
Elster is the most recent Melrose
acquisition to have completed its
improvement cycle.
Equity rate of return
33%
Shareholder return on original equity
2.3x
Sold within
3 years
of acquisition
Elster was a US publicly-listed, German-
based manufacturer of meters operating
through three separate divisions with
different markets and drivers (gas,
electricity and water). Elster had a
global presence in 135 countries, large
contracts, long-standing customers
and was on the cusp of a technology
revolution with smart metering.
However, the business had lost its focus
and identity, with a centralised head
office causing inefficiencies and issues
for the businesses. Melrose acquired
Elster in 2012 for £1.8 billion, including
£1.2 billion of equity following a fully
underwritten rights issue (which was
one of the largest equity raises in the UK
market at the time), and modest levels
of leverage. Having decentralised its
structure, the three distinct water, gas
and electricity metering businesses were
empowered to run autonomously in
accordance with their own strategy.
8
Melrose Industries PLC
Annual Report 2018
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Under Melrose ownership, operating profit
margins increased from 13% to 22%,
representing a 70% improvement in just
three years. This was achieved by focusing
each business on performance, end
markets, customers and operations.
Melrose significantly expanded on
a footprint optimisation programme
announced by Elster before the acquisition
and significantly exceeded expectations.
A complementary bolt-on acquisition was
made for the Gas division, building out its
product portfolio and geographic reach.
Melrose also focused on driving operational
efficiencies and exiting loss-making sales,
followed by production optimisation and
a focused investment programme equal
to a quarter of the initial equity price.
In particular, Melrose focused on investing
in research and development in order
to strengthen and grow Elster’s “smart”
capabilities. Throughout the course of
ownership, Melrose invested over
£149 million in research and development,
representing approximately 4.6% of
revenue generated by Elster during
this period.
Three years after making the acquisition,
Melrose sold all three businesses
together to Honeywell International Inc.
for £3.3 billion, representing approximately
14x 2014 headline EBITDA, and in
February 2016 Melrose returned
£2.4 billion in cash to shareholders.
Overall, Melrose generated over
£2.5 billion in cash from Elster versus
an equity investment of approximately
£1.2 billion, resulting in a return of 2.3x
on shareholders’ investment.
In addition, Melrose transferred approximately
£900 million in residual pension fund
liabilities from prior businesses as part of
the sale, ensuring the relevant members
enjoyed the protection of a guarantee from
Honeywell’s US-listed parent, with a market
capitalisation of over US$100 billion. These
schemes had entered Melrose stewardship
chronically underfunded, but a series of
significant contributions had overcome this
so that they were transferred fully funded.
Adjusted operating margin improvement (1)
>70%
22%
13%
Exit
Entry
How Elster’s operating margin improved
+9ppts
+6ppts
+2ppts
+1ppt
Returns on capex and restructuring
and other commercial actions
Central cost savings
Exit of low margin sales channels
(1)
Described in the glossary to the financial statements
on pages 193 to 196.
9
Annual Report 2018Melrose Industries PLC Our track record
Shareholder
value creation
Shareholder investment and gain
(figures up to 31 December 2018)
Total shareholder
return (TSR)(1)(3)
How Elster and Nortek
operating margins improved(2)
+9ppts
£4.5bn
Cash return to shareholders
since establishment
2.6x
Average annual return
for a shareholder since
the first acquisition
Value creation on previous deals
McKechnie/Dynacast
Bought for
Equity raised on acquisition
Follow-on investment
Sold for
Investment in business
Equity rate of return
Shareholder return
on original equity
FKI
Bought for
Equity raised on acquisition
Follow-on investment
Sold for
Investment in business
Equity rate of return
Shareholder return
on original equity
Elster
Bought for
Equity raised on acquisition
Follow-on investment
Sold for
Investment in business
Equity rate of return
Shareholder return
on original equity
£0.4bn
£243m
£124m
£0.8bn
51%
30%
3.0x
£1.0bn
£499m
£328m
£1.4bn
66%
29%
2.6x
£1.8bn
£1.2bn
£287m
£3.3bn
25%
33%
2.3x
10
+1ppt
+2ppts
+6ppts
+6ppts
+1ppt
+1ppt
+4ppts
1,685%
c.14x
higher TSR
123%
Melrose
FTSE 100
Elster
Nortek
(1) Since Melrose’s first acquisition (May 2005).
(2) Nortek adjusted operating margin
Returns on capex and restructuring
and other commercial actions
up to 31 December 2018.
(3) Source: Datastream Total Shareholder
Return Index.
Central cost savings
Exit of low margin sales channels
Responsible stewardship
Contributions to take UK pension schemes towards
fully funded on departure from the Melrose Group.
109%
99%
95%
87%
58%
McKechnie
FKI UK
FKI
Bridon
Melrose has substantially improved all the
UK pensions schemes under its ownership.
87%
105%
98%
78%
77%
60%
61%
Brush
Nortek
GKN 2012 scheme
GKN 2016 scheme
Melrose Industries PLCAnnual Report 2018
Melrose is very pleased with the track
record achieved over its 15-year history
since floating on AIM in 2003.
As at 31 December 2018, track record
for £1 invested in Melrose
Investment in May 2005 with all dividends reinvested
since (Total shareholder return)(3)
Original investment
£1.00
White area represents
additional investment
Gross return
£17.85
on original £1 investment
Adjusted operating margin improvement
18%
13%
11%
10%
9%
15%
24%
22%
16%
14%
Skills, Innovation and
Productivity Fund
Our commitment to skills, innovation and productivity is
clear. We made a commitment at the time of the GKN
acquisition to invest at least 2.2% of GKN sales over
five years to 2023. However, we consider this to be
the floor, and not the ceiling, to our ambitions. Because
we believe in building Britain’s industrial base, and
because we invest for the long term, regardless of how
long we own our businesses for, we have also created
a new Melrose skills, innovation and productivity fund.
This funding will be available to support our businesses,
but will also be available to higher education colleges
in the South West, the Midlands and Oxford, to create
new opportunities for young people in those regions and
help foster the next generation of great British engineers.
Company
Entry
Current
McKechnie
Elster
Dynacast
FKI
Nortek
18%
13%
11%
10%
9%
•
•
•
•
15%
Exit
24%
22%
16%
14%
•
Improvement
>30%
>70%
>40%
>40%
>60%
+6ppts
+9ppts
+5ppts
+4ppts
+6ppts
£436m
Spent on research and development for
Nortek, Elster and GKN acquisitions being
3%
of revenue for the equivalent period
11
Strategic ReportAnnual Report 2018Melrose Industries PLC Melrose in 2018
Highlights
of the year
The results for 2018 are ahead of
the Board’s previous expectations.
Headline figures
2.3x
The net debt to annualised adjusted EBITDA(1)
leverage ratio has reduced to 2.3x, ahead of the
previous guidance of 2.5x.
£103m
The amount of the GKN UK defined benefit pension
accounting deficit has reduced from £691 million
to £588 million since December 2017.
14.7%
Nortek Group adjusted(1) operating margins have
increased from 8.7% at acquisition to 14.7% in
2018 with the potential for further improvement.
(1)
Described in the glossary to the financial statements on pages 193 to 196.
12
Melrose Industries PLCAnnual Report 2018 Group performance summary
Group results
Revenue
Operating (loss)/profit
(Loss)/profit before tax
Diluted earnings per share
Statutory
£m
Adjusted(1)
£m
8,605
(392)
(550)
(12.0p)
9,102
847
703
13.3p
£847m
Adjusted(1) operating profit.
£(392)m
Statutory operating loss arising primarily due
to significant acquisition accounting items,
most of which arise from GKN.
£9.1bn
Adjusted(1) revenue.
£8.6bn
Statutory revenue.
Divisional performance summary
Divisional results
Aerospace
Automotive
Powder Metallurgy
Nortek Air & Security
Other Industrial
Adjusted
revenue(1) £m
Adjusted operating
profit(1) £m
Statutory revenue
£m
Statutory operating
(loss)/profit £m
2,521
3,382
851
1,458
890
250
231
98
198
98
2,479
2,936
846
1,458
886
(44)
15
38
126
(159)
Adjusted revenue £m(1)
Adjusted operating profit £m(1)
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Powder Met a l
l u r g y
Powder Met a l
l u r g y
(1)
Described in the glossary to the financial statements on pages 193 to 196
and shown in note 5 to the financial statements.
13
Strategic ReportAnnual Report 2018Melrose Industries PLC
Chairman’s statement
The past year has been
transformational for Melrose in
a number of ways. We achieved
strong results, with statutory
revenue for the Melrose Group of
£8,605 million (2017: £2,092 million)
and, despite declaring a statutory
operating loss of £392 million
(2017: £7 million) primarily as a result
of the required accounting for the
GKN acquisition, our adjusted (1)
operating profit was £847 million
(2017: £279 million), and adjusted
diluted earnings per share were
up 36% on last year.
A transformational
year for Melrose
I am pleased to report on
our 16th set of annual results
since flotation in 2003.
Justin Dowley, Non-executive Chairman
(1) Considered by the Board to be a key measure
of performance. Adjusted measures are defined
in the glossary to the financial statements
on pages 193 to 196.
14
Melrose Industries PLCAnnual Report 2018 Shareholders
Melrose has been fortunate to enjoy
long-term support from its key
shareholders, many of whom have been
investors since Melrose was established
in 2003 and have experienced a sustained
period of success. We are very pleased
to welcome the large number of new
shareholders who have joined the Melrose
register as a result of our acquisition of
GKN. These shareholders may be less
familiar with the Melrose model and we are
excited about the opportunity of delivering
the same level of performance for them.
Board matters
We are pleased that Charlotte Twyning
joined us as an additional independent
Non-executive Director in October 2018.
A lawyer by training and currently Consents
Director with the Heathrow Expansion
Programme Board, Charlotte is already
making her mark at Melrose and we
welcome her to the team.
From the start of this year, I relinquished
my roles as Senior Independent Director
and Chairman of the Remuneration
Committee to take up the role of inaugural
Non-executive Chairman. The previous
Chairman, co-founder Christopher Miller,
who had held the position since
Melrose started in 2003, will continue
in a full-time executive capacity as
executive Vice-Chairman.
Further details on this and other changes
are set out in the Nomination Committee
report on pages 90 to 91, but I would like
to thank Christopher for his contribution
to the record of Melrose so far and look
forward to working with him to achieve
further success for Melrose and all
of its stakeholders.
This performance builds on the success of
our public takeover of GKN plc. Following
the bid, we immediately set about initiating
the changes we believe are necessary
to unlock the full potential of the GKN
businesses. These changes are already
having a positive effect, as shown in our
2018 results.
We continue to see many opportunities to
improve GKN and have found enthusiastic
and energised employees within the GKN
businesses who are keen on partnering
with us to achieve these ambitions. While it
is still early days, I would like to thank them
all for their hard work already and we look
forward to continuing to work with them to
deliver the exciting opportunity before us.
Although much of the public attention has
been on the GKN businesses, we have
continued to build and improve our existing
businesses in 2018. Nortek Global HVAC
is making good progress with its industry
leading StatePoint Technology®, backed
by the significant investment required to
partner with some of the biggest global
names in the data centre sector. Although
facing challenges elsewhere, Security &
Smart Technology made an important step
in securing the acquisition of IntelliVision
Inc., enabling the application of video
analytics across its product range.
While Brush has delivered its restructuring
in accordance with its plans and is well set
for the future, their generator services
market has faced further declines.
Further details of these results are contained
in the Chief Executive’s review and Finance
Director’s review and I would like to thank
all employees for their efforts in helping
to produce this strong performance.
Dividend
The Board proposes to pay a final dividend
of 3.05 pence per share (2017: 2.8 pence)
making a total of 4.6 pence for the year
(2017: 4.2 pence), an increase of 10% in line
with its progressive annual dividend policy.
This will be paid on 20 May 2019 to those
shareholders on the register at 5 April 2019,
subject to approval at the Annual General
Meeting (AGM) on 9 May 2019.
Buy
Improve
Sell
Our strategy and business model
See pages 2 to 3
Strategy
Melrose continues to demonstrate the
success of its “Buy, Improve, Sell” strategy.
There are already clear indicators in the
GKN businesses that the Melrose model
of simplifying corporate structures and
injecting pace and accountability into
businesses while investing heavily for
their long-term success continues to
be effective. The same strategic focus
continues to be applied within Nortek
to build on its recent successes.
Outlook
There were wider macro challenges
for some of our businesses in 2018 and
we see these continuing into this year.
However, with culture change based
on accountability, backed by significant
investment and a more disciplined strategic
focus being applied to improve all aspects
of our businesses, we remain confident
of further success as we enter 2019.
Justin Dowley
Non-executive Chairman
7 March 2019
15
Strategic ReportAnnual Report 2018Melrose Industries PLC
Chief Executive’s review
An exciting time
for shareholders
Strong customer relationships
are at the centre of any
business and our businesses
have renewed their focus on
improving their performance
and delivery, particularly
in critical supply chains.
Simon Peckham, Chief Executive
16
2018 has obviously been a
significant year in Melrose’s history.
We were pleased to be given the
opportunity by shareholders to
unlock the undoubted potential that
exists within the GKN businesses
and we look forward to delivering
value to all of our shareholders.
Upon taking control of GKN, we
immediately set about removing
the duplicate central functions and
decentralising the GKN businesses,
simultaneously reorganising the Melrose
Group into the five divisions we have
today: GKN Aerospace; GKN Automotive;
GKN Powder Metallurgy; Nortek Air
& Security; and Other Industrial.
For the GKN businesses, decentralisation
was the first step in bringing about the
change in culture we believe is vital to
securing long-term improvement. For GKN
Aerospace and GKN Powder Metallurgy,
we worked with incumbent management
teams to agree their management plans.
Melrose Industries PLCAnnual Report 2018 For GKN Automotive, we were pleased
to fill the CEO vacancy with a high calibre
candidate with a strong track record in the
sector. With an ambitious new executive
team around him, the GKN Automotive
business will be transformed. In all cases
these businesses present the exciting
opportunity to improve their performance,
as expected.
Having agreed their approach, the GKN
businesses have been given the freedom
and responsibility to start to deliver on their
commitments. Part of this has been a
refocus on profitable sales rather than
solely on growth. There is also a clear
expectation that they be good stewards
of their businesses for the benefit of all
stakeholders. Despite inheriting the cash
cost of unwinding the significant creditor
stretch employed by the previous GKN
management, net debt leverage was better
than previous guidance at 2.3x EBITDA.
Following this, a key task for this year
is to have a better control and focus
on the working capital in the GKN Group.
Optimising cash management is a key
area for improvement for all of the
GKN businesses.
Strong customer relationships are at the
centre of any successful business, but
these had been troubled for the GKN
businesses prior to our acquisition. With
our support, the businesses have renewed
their focus on improving their performance
and delivery, particularly in critical supply
chains. To reassure key customers of the
strength of our commitment, Melrose has
funded the significant investment required
to achieve the necessary operational
improvements fundamental to securing
this improved performance.
Part of these improving relationships has
been the focus coming from the opening
balance sheet review that identified a
significant number of poorly performing
contracts, which are further detailed in
the Finance Director’s review. While we
have adopted the appropriate accounting
treatment for these, we have also been
clear that addressing these is a key priority
for each of the GKN businesses and
progress is already being made which has
been welcomed by customers. Some of
our investments to date have also been
supporting this. We look forward to further
updating shareholders on progress
At each of our businesses, investment in
technology and operational improvements
is at the heart of our efforts to unlock their
potential. This translates to ongoing support
for the industry leading StatePoint Technology®
for HVAC and the new Aerospace Global
Technology Centre in Filton, UK.
with these over the months to come.
It is apparent that, at acquisition, these
contracts constituted approximately 10%
of GKN net sales, requiring a provision of
£629 million as discussed in the Finance
Director’s review. We think these contracts
offer a large potential for performance
improvement in the future.
As we said at the time of the GKN
acquisition, we will be responsible
custodians of the GKN pension schemes
and we stand by that commitment.
Since acquisition we have improved their
corporate governance by appointing the first
independent Chairman of the UK schemes.
At each of our businesses, investment in
technology and operational improvements
are at the heart of our efforts to unlock
their potential. For Nortek Air & Security,
ongoing support for the industry leading
StatePoint Technology® for HVAC, the
refreshing of the product range for AQH
and the data analytics acquired for SST
through IntelliVision are vital to their ongoing
development and are paying real dividends.
This has been matched by investments to
upgrade their production capacity and
continue their operational improvements,
which have been key to the increase in
operating margins in Nortek businesses
by approximately six percentage points
since acquisition.
Whilst FKI has been a very successful
acquisition for shareholders, Brush has
in recent years suffered from very difficult
markets. A large-scale restructuring was
initiated in 2018 as a result, and it has been
successfully implemented by Brush’s
management. This will be completed in
2019. Unfortunately, the well-publicised
further difficult market conditions mean
that your Board considers it should again
reduce the holding value of this company
and this has been done in these accounts.
For the GKN businesses, our commitment
at the time of the acquisition to invest an
amount equal to 2.2% of sales on research
and development was always considered
a floor, not a ceiling. We are tracking in line
with expectations, including commencing
work on the new Aerospace Global
Technology Centre in Filton, UK. In parallel,
we are also investing heavily to achieve the
operational improvements and so far we
have approved capital expenditure of more
than £200 million in a mix of initiatives,
including plant extensions, capacity
upgrades and procurement efficiencies. This
investment process has benefited from, and
also been speeded up by, the more rigorous
approval process we have introduced.
Outlook
Alongside the continued progress in Nortek,
we believe that our businesses will deliver
some of the significant upside we see in
2019 despite continuing market volatility,
particularly for GKN Automotive. Our
businesses are not without their challenges,
particularly geopolitical, with Brexit and
automotive sector uncertainty continuing.
However, our businesses are proactive
and will adjust their operations where
appropriate. We will continue to be prudent
in our approach and ambitious in our aims.
We believe the rigorous focus on cost
control, productivity and improved customer
delivery will continue to drive improvement
in performance for all of our businesses.
This gives us confidence that we will
continue to meet our expectations and
that 2019 will be another successful year.
Simon Peckham
Chief Executive
7 March 2019
17
Strategic ReportAnnual Report 2018Melrose Industries PLC 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.
Further detail on these KPIs is disclosed in the glossary to the financial statements and further information
regarding the performance of the Group against its financial KPIs is included in the Finance Director’s review.
Adjusted (1) diluted earnings
per share
Adjusted (1) operating profit
Net debt to annualised (2)
adjusted (1) EBITDA(3)
13.3p
2016
2017
2018
4.4p
9.8p
13.3p
£847m
2016
2017
2018
£104m
£279m
£847m
2.3x
2016
2017
2018
1.9x
1.9x
2.3x
Method of calculation
Group adjusted (1) profit after tax,
attributable to owners of the parent
of businesses in existence during
the year ended 31 December 2018,
divided by the weighted average
number of diluted ordinary shares
in issue.
Strategic objective
To create consistent and long-term
value for shareholders.
Method of calculation
Adjusted (1) operating profit for the
businesses in existence during the
year ended 31 December 2018.
Strategic objective
To improve profitability
of Group operations.
Method of calculation
Net debt at average exchange
rates divided by annualised (2)
adjusted (1) EBITDA(3) further
adjusted to reflect covenant
requirements, for existing
businesses at each year end.
Strategic objective
To ensure the Group has suitable
amounts of debt and remains
within its banking covenants.
Financial
KPIs
(1)
(2)
(3)
Considered by the Board to be
a key measure of performance.
A reconciliation of statutory results to
adjusted performance results to adjusted
profit is given in the Finance Director’s
review on page 41 and in the glossary
to the financial statements on
pages 193 to 196.
Adjusts result to reflect a full year’s
ownership of major acquisitions.
In 2018, this assumes GKN was
acquired on 1 January 2018 and
in 2016 it assumes that Nortek was
acquired on 1 January 2016.
Adjusted (1) operating profit before
depreciation, and amortisation
of computer software and
development costs.
Non-financial KPIs
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.
In 2018, the Nortek and Brush
businesses harmonised their
KPI outputs and, following the
acquisition of GKN, the KPI outputs
for the GKN businesses were
also migrated onto the Melrose
reporting metrics. Given the
expansion and diversified nature
of the Group following the GKN
acquisition, weightings have been
applied to each division’s reported
health and safety performance
according to the size of each
division’s workforce relative
to the other divisions within the
Group. This is to account for
differences in the size of each
division’s workforce.
18
Therefore, the larger the workforce,
the more heavily such divisions’
health and safety performance
drives the Group-wide
performance figures.
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
0.19
2016
2017
2018
0.16
0.13
0.19
Records the average number
of lost time accidents
that have resulted in more
than three days off work
(defined as ‘major’ accidents),
per 200,000 hours worked.
Accident frequency rate
0.27
2016
2017
2018
Records the average number
of lost time accidents,
both major and minor,
per 200,000 hours worked.
0.26
0.22
0.27
Accident severity rate
27.64
2016
2017
2018
15.90
19.11
27.64
Records the average number
of days an employee takes
off work following an accident
at work.
Melrose Industries PLCAnnual Report 2018 Adjusted (1) profit conversion
to cash percentage
Adjusted (1) operating
profit margin
Interest cover
86%
2016
2017
2018
9.3%
2016
2017
2018
11.7%
13.3%
9.3%
123%
95%
86%
11.6x
2016
2017
2018
Final dividend
per share
3.05p
20.7x
19.6x
2016
2017
2018
11.6x
1.9p
2.8p
3.05p
Method of calculation
Percentage of adjusted (1) EBITDA(3)
conversion to cash for subsidiary
businesses in existence during the
year ended 31 December 2018,
pre-capital expenditure.
Strategic objective
To ensure subsidiary 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.
Method of calculation
Adjusted (1) operating profit
as a percentage of adjusted (1)
revenue, for the businesses
in existence during the year
ended 31 December 2018.
Strategic objective
To improve profitability
of Group operations.
Method of calculation
Adjusted (1) EBITDA(3) 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.
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,
please refer to the Chairman’s
statement on page 15.
As at 31 December 2018, the
GKN businesses accounted for
nearly 85% of the Melrose Group
workforce. Having been acquired
in Q2 of 2018, the KPIs for the GKN
businesses for 2016, 2017 and Q1
of 2018 relate to periods when the
businesses were not owned by
Melrose. However these figures
have been included, conformed
and weighted to Melrose’s Group
KPI framework to ensure a
holistic comparison.
As set out in more detail in the
health and safety section of the
Corporate Social Responsibility
report (see page 66), the Group
tragically suffered a fatality in 2018
which has triggered a redoubling
of efforts and increased focus on
keeping our workforce safe.
The accident frequency rate
and accident severity rate figures
demonstrate an increase in 2018,
principally due to the newly
enlarged Melrose Group. The small
size in the upward movements
relative to the increase in the size
of the Group’s workforce reflects
relatively high standards of health
and safety performance within
the GKN businesses, as well as
investment in health and safety
initiatives taking effect at the
Nortek businesses for these two
KPIs. On joining the Melrose Group
in 2016, a full review was conducted
and improvements implemented at
the Nortek businesses, and health
and safety remains a key focus
for them.
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 2018 can be found within the
Corporate Social Responsibility
report on pages 59 to 69. The
Group is required to disclose
Greenhouse gas emissions data for
the year ended 31 December 2018.
Such data can be found within the
Corporate Social Responsibility
report on pages 59 to 69.
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 59 to 69.
19
Strategic ReportAnnual Report 2018Melrose Industries PLC Divisional review
GKN Aerospace is a world-leading
multi-technology manufacturer of aircraft
and engine structures and electrical
interconnection systems for the global
aerospace industry, supplying both civil
and military platforms.
Key information
Financial information
20
GKN Aerospace is the original aerospace innovator. For decades, GKN
Aerospace technologies have inspired and industrialised the aerospace
industry, combining engineering excellence and technology leadership.
Financial results 2018
Statutory revenue
Adjusted revenue(1)
Statutory operating loss
Adjusted operating profit(1)
Revenue by business(2)
Revenue by geography
3
1
3
1
£m
2,479
2,521
(44)
250
2
2
1 Aerostructures
2 Engine Systems
63%
32%
1 Europe
2 Americas
3 Special Technologies
5%
3 RoW
38%
57%
5%
(1)
Described in the glossary to the
financial statements on pages 193
to 196 and shown in note 5 to the
financial statements.
(2) Based on annualised adjusted
2018 revenue.
Melrose Industries PLCAnnual Report 2018
Proportion of Melrose
Based on annualised adjusted
2018 revenue for all businesses.
29%
Operational geographies
Global Technology Centres
Sweden
Netherlands
UK
USA
gknaerospace.com
21
Strategic Report Divisional review
Continued
15
Countries with GKN
Aerospace manufacturing
locations, serving over 90%
of the world’s aircraft and
engine manufacturers
4
Global technology centres
22
GKN Aerospace’s technology is used
throughout the aerospace industry:
from high-use single aisle aircraft and
the world’s largest passenger planes,
through to business jets, helicopters and
the world’s most advanced fighter jets.
GKN Aerospace has manufacturing
locations in 15 countries and supplies more
than 90% of the world’s aircraft and engine
manufacturers. GKN Aerospace has three
core competencies: (i) Aerostructures,
which provides components for most of the
major platforms, making use of lightweight
composites, additive manufacturing
and innovative high-speed machining
technologies, as well as electrical wiring
and interconnection systems and a
complete aerostructures service business;
(ii) Engine Systems, which is a systems
integration partner for global aircraft engine
programmes, supplying high-performance
metallic and composite structural engine
components; and (iii) Special Technologies,
a global partner in transparencies and other
specialist technologies for aircraft.
After a challenging end to 2017, particularly
in North America, GKN Aerospace made
substantial progress in 2018. Embracing
the decentralisation and cultural change
brought about by the Melrose acquisition,
the business has invested heavily in its
North American sites, which will continue
into 2019, with a view to embedding
improved manufacturing processes and
driving long-term site performance. This
was backed by a renewed focus on its
North American footprint strategy that
saw the opening of a new state-of-the-art
advanced composites site in Florida, US,
and the exit of three non-core sites.
Elsewhere, improving relationships with
key blue-chip customers has helped in
winning new, long-term contracts worth
over £2 billion, as well as securing an
important position on Airbus’ Wing of
Tomorrow development platform, all of
which will position Aerostructures well
for future programmes. The existing
commercial position is also the subject
of significant attention, with the opening
balance sheet review undertaken on
acquisition by Melrose having highlighted
a number of loss-making contracts.
Improvement in performance is being
addressed as a priority.
Melrose Industries PLCAnnual Report 2018 US$40m
Investment to open new
sites in Asia
With Melrose’s support, GKN Aerospace
has reinvigorated its investment in research
and development. The centrepiece for this
was the announcement of the development
of a new £32 million UK Global Technology
Centre near its Filton production facility in
the UK. This will be a base for the Wing of
Tomorrow programme to develop the next
generation of composite and additive
manufacturing technologies to ‘Industry
4.0’ standards, enabling GKN Aerospace to
maintain its position as a technology leader,
improving both productivity and profitability.
Recognising emerging opportunities in
Asia, GKN Aerospace is opening three new
sites in the region to support the growing
market. This includes a new US$30 million
fan blade repair centre in Malaysia, a new
US$10 million wiring facility in Pune, India,
and the signing of a framework agreement
with Comac and AVIC for a new
aerostructures joint venture in China.
The Aerospace division overall invested
£154 million in 2018 in various parts
of the business with a view to improve
or accelerate key business cases.
In North America, significant investment
was made at previously underinvested
sites. In Europe, investment was made to
improve productivity and expand capacity
for the benefit of ramp-up programmes
such as for the F-35.
Outlook
The global aerospace market remains
strong and leading indicators – air
passenger traffic, order backlog, and
predicted aircraft requirements – appear
positive. With the North American
operational challenges being overcome,
cultural change taking hold and a clear
improvement plan set out for the business,
GKN Aerospace has a well-balanced
portfolio of work on growth platforms,
improving relationships with a strong
customer base across all major OEMs,
world-leading technology, and a global
footprint. The business is well-established
in the strong US and European aerospace
markets and is well-set for the growth of
the Asian market in the years ahead, giving
the business confidence in meeting its
expectations for 2019.
Market trends
Aerospace
The global aerospace market
remained healthy in 2018 with growth
in both the commercial and military
sectors, supported by the following
market factors:
• Continued growth in global air
passenger traffic of 6.1% compared
to the prior year.
• Record delivery levels of commercial
aircraft (1,780 in 2018).
• High backlog held by the major OEMs
maintained through 1,640 new orders
for commercial aircraft in 2018.
• Continued strong growth in the
military market, driven by increased
defence spending and the F-35
ramp-up.
• Continued evolution of existing aircraft
platforms with new technology.
• Focus on the development of quieter
and more fuel-efficient aircraft and
aero engines.
• Continued demand growth in Asia.
GKN Aerospace has responded to these
trends since being acquired by Melrose
through rapidly implementing operational
fixes within the business to deliver the
production ramp-ups that customers are
demanding, pursuing growth initiatives in
Asia to take advantage of the growing
market, streamlining in other markets
where appropriate, focusing on
technological improvement by investing
in the development of the Filton Global
Technology Centre, and continued
participation in strategic development
and partnership programmes.
Number of commercial aircraft deliveries (historic & forecast)(1)
An extended period of strong commercial aerospace deliveries
Historic deliveries (Actual) (2009-2018)
Forecast deliveries (2019-2022)
5.8% CAGR 2009-2018
2.9% CAGR 2019-2022
2,000
1,500
1,000
500
0
350
300
250
200
150
100
50
0
500
400
300
200
100
0
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
(1)
Teal Group, Aircraft Market Forecasts & History, Commercial Aircraft, January 2019
Large jetliner deliveries to China: total and % of world(1)
Asia-Pacific region has highest share of worldwide passenger
traffic with Asia set to become the largest aerospace market
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
(1)
Teal Group, Aircraft Market Forecasts & History, Commercial Aircraft, January 2019
World fighter production in number of deliveries(2)
Military market deliveries set to grow significantly in
coming years underpinned by F-35
Historic deliveries (Actual) (2009-2018)
Forecast deliveries (2019-2023)
0.4% CAGR
12.4% CAGR
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022 2023
(2)
Teal Group, Aircraft Market Forecasts & History, Fighter Aircraft,
January 2019 (US F-35 deliveries include partner country delivery numbers)
■ Wide body
■ Narrow body
25
20
15
10
5
0
■ % of world total
■ Deliveries
■ Undetermined non-F-35
■ Undetermined F-35
■ US F-35
■ US
■ Rest of the world
■ Russia
■ Europe
23
Strategic ReportAnnual Report 2018Melrose Industries PLC Divisional review
Continued
GKN Automotive supports over 90%
of the world’s car manufacturers as a
market leading developer, manufacturer
and supplier of driveline products
and systems throughout the global
automotive industry.
Proportion of Melrose
Based on annualised adjusted
2018 revenue for all businesses.
40%
24
Melrose Industries PLCAnnual Report 2018 Key information
Financial information
GKN Driveline is the leading automotive driveline technology
and systems engineer. GKN Driveline is a global partner to the
automotive industry.
Financial results 2018
Statutory revenue
Adjusted revenue(1)
Statutory operating profit
Adjusted operating profit(1)
£m
2,936
3,382
15
231
(1)
Described in the glossary to the
financial statements on pages 193
to 196 and shown in note 5 to the
financial statements.
(2) Based on annualised adjusted
2018 revenue.
Revenue by business(2)
Revenue by geography
1
1
2
3
2
1 Driveline
2 ePowertrain
73%
27%
1 Europe
2 Americas
3 RoW
39%
37%
24%
Operational geographies
gkndriveline.com
gknepowertrain.com
Global Technology Centres
China
Germany
Japan
UK
US
25
Strategic ReportAnnual Report 2018Melrose Industries PLC
Divisional review
Continued
GKN Automotive’s recent appointment
of a new Chief Executive has led to
the creation of a focused new central
executive team and a reorganisation
of the management structure of
the business.
Internally the business is principally
organised around its two core
competencies: (i) Driveline, which
is the world’s pre-eminent driveshaft
manufacturer; and (ii) ePowertrain, the
industry leader in electric powertrains
(“eDrive”) and intelligent all-wheel drive
(“AWD”) systems.
GKN Automotive supplies to all subsections
of the automotive industry, from small
ultra-low-cost cars to the most
sophisticated and dynamic premium and
motorsport vehicles. The business is also
centralising its commercial function to
ensure that it presents a globally consistent
and single face to customers, whilst
ensuring the right level of commercial
discipline is in place to drive profitable
growth and manage key commercial
relationships. Like all the GKN businesses,
GKN Automotive is also working hard on
addressing its loss-making contracts
identified during the opening balance
sheet review.
£25m
Investment in new
equipment in a Japanese
manufacturing facility
£50m
In powertrain research
and development
Global production footprint
21countries
5Global technology centres
With an unrivalled global production
footprint across 21 countries, GKN
Automotive is closely aligned with its key
customers. Its unparalleled experience in
the traditional driveshaft business provides
platform opportunities to be the premier
technology partner for OEMs, as well as
having the in-depth knowledge and unique
perspective from which to grow its
market-leading eDrive business.
Accordingly, this year GKN Automotive
invested a further £50 million in powertrain
research and development which was
instrumental in delivering its first fully electric
drive programme with a leading global
OEM. This is an important step forward for
the eDrive business and increases GKN
Automotive’s ability to further differentiate
its business from competitors.
GKN Automotive has been able to
successfully take advantage of the
aggressive growth of the eDrive market in
China by working in close collaboration with
its long-standing partner HASCO, through
its joint venture vehicle Shanghai GKN
HUAYU Driveline Systems (“SDS”), which
resulted in several significant business wins
during 2018. GKN Automotive and SDS
continue to work closely together as the
focus turns to execution to ensure that
these projects deliver their potential.
26
Melrose Industries PLCAnnual Report 2018 To further broaden its opportunities in Asia,
the business opened a new manufacturing
facility in Japan during 2018, investing over
£25 million in new equipment to enable the
specialist production of state-of-the-art
AWD and eDrive systems. The factory will
serve the growing demand in Asia, as well
as global export markets and represents
a substantial technological upgrade in
capabilities for the production and delivery
of advanced eDrive and AWD technologies.
The Driveline business has been and will
continue to be heavily focused on reviewing
its cost structure, driving operational
performance and delivering market-leading
technologies to its OEM customers around
the world. A key component of this focus
is to ensure Driveline’s installed capacity
is fully aligned to its core competencies
and able to serve customers appropriately
in addition to being located in the most
appropriate countries. Under the direction
of a newly appointed CPO and restructured
operating model, GKN Automotive is
conducting an ambitious procurement
efficiency drive, looking to secure savings
in both direct and indirect commodities and
achieve further improvements across all
sites in the business.
With the support of Melrose, further
investment has been approved to deliver
additional capacity expansion at the
Bruneck, Italy site. Additional investment
is scheduled to increase capacity in
North America, Mexico, China and Japan,
and to support automation projects to
further improve productivity, output and
the quality of Driveline products.
Outlook
GKN Automotive has very strong
technology know-how ensuring that
it is uniquely positioned in its markets.
It will continue to build long-term customer
relationships and invest in its world
class manufacturing capabilities. The
opportunities presented by the move to
electrification are significant, but given the
current uncertainties in the automotive
market, GKN Automotive will continue to
adopt a prudent approach. Investment
initiatives are focused on driving towards a
more flexible cost structure, reducing fixed
costs and improving overall commercial
discipline with customers and suppliers.
The business is confident of delivering an
improvement in its performance in 2019.
Market trends
Automotive
The GKN Automotive business has
strong foundations. However, it is not
immune to the wider challenges facing
the automotive sector. There are
several market factors impacting
GKN Automotive’s current
business environment:
• The speed of change in the adoption
of electrification and new mobility
solutions is accelerating and
driving significant change in
GKN Automotive’s supply base,
competitive landscape and OEMs.
• The overall economic slowdown
and in particular, a slower
growth environment in China,
is affecting the market and
overall business sentiment.
• The competitiveness around
emerging and new technologies
is driving the continued growth
of new OEMs as well as increasing
collaboration amongst traditional
OEM’s to share platforms and
development costs.
• Continued uncertainty around
trade and tariffs particularly between
US and China, as well as Brexit.
• Continued shift in demand for
vehicle and platform types (for
example, FWD/SUVs) driven by
new propulsion technologies and
a continued shift away from diesel
due to environmental concerns.
The business has responded to these
trends through expanding its leading
position in ePowertrain, pursuing
operational performance in the Driveline
business, and continuing to build a lean,
market-reactive and high-performing
business model.
The business is also looking to secure
savings with respect to its procurement
of both direct and indirect commodities.
The continued shift away from diesel is
not expected to have a material impact
on the business.
27
Strategic ReportAnnual Report 2018Melrose Industries PLC
Divisional review
Continued
Key information
Financial information
We combine advanced powder metals with innovative
production technologies to create unique metal
products – smart, reliable and precise.
Financial results 2018
Statutory revenue
Adjusted revenue(1)
Statutory operating profit
Adjusted operating profit(1)
£m
846
851
38
98
(1)
Described in the glossary to the
financial statements on pages 193
to 196 and shown in note 5 to the
financial statements.
(2) Based on annualised adjusted
2018 revenue.
Revenue by business(2)
Revenue by geography
1
1
2
3
2
1 Sinter Metals
2 Hoeganaes Metal Powder
83%
17%
1 Europe
2 Americas
3 RoW
36%
47%
17%
Operational geographies
gknpm.com
Global Technology Centres
Germany
Italy
USA
28
Melrose Industries PLCAnnual Report 2018 Powder
Metallurgy
GKN Powder Metallurgy is the top
global producer of industrial powder
metallurgy products and solutions.
Proportion of Melrose
Based on annualised adjusted
2018 revenue for all businesses.
10%
Melrose Industries PLC
29
Strategic ReportAnnual Report 2018 Up to
70%
reduction in production
time due to new laser
metal 3D printing process
Divisional review
Continued
GKN Powder Metallurgy is the global
leader in both precision powder metal
parts for the automotive and industrial
sectors, as well as the production
of metal powder, through its prized
vertically integrated business platform.
Whilst we will continue to review the
position in the months to come, we
expect GKN Powder Metallurgy to
remain in the Group for the present.
GKN Powder Metallurgy comprises:
(i) Sinter Metals – the world’s leading
manufacturer of precision automotive
components and components for
industrial and consumer applications:
(ii) Hoeganaes – the world’s second largest
manufacturer of metal powder, the essential
raw material for powder metallurgy, with
manufacturing facilities in North America,
Europe and China; and (iii) Additive –
a leading digital manufacturer of metal
additive manufacturing parts and materials
for prototypes, planning to quickly expand
into medium series and the aftermarket.
Since entering the Melrose Group, the
GKN Powder Metallurgy business has
continued to expand its partnerships with
technology leaders of additive manufacturing
equipment. As a sought-after partner
with unique production capabilities, GKN
Powder Metallurgy has recently entered into
a new partnership with Hewlett Packard
and Volkswagen to produce additive
manufacturing parts through binder jetting
technology, and a strategic partnership
with EOS, the world’s leading equipment
supplier in the field of industrial 3D printing
of metals and polymers.
These partnerships are dedicated to the
design of a new, high-productivity process
for laser metal 3D printing using GKN
Powder Metallurgy proprietary additive
manufacturing steel powder, which over
time will reduce production time by up to
70% and overall production cost by up to
50%. As customisation trends drive
customer demand for smaller lot sizes,
GKN Powder Metallurgy’s additive
manufacturing expertise puts it ahead of its
peers to benefit from the significant growth
potential. 3D technology will also shorten
time to market substantially as no tools
are required.
30
Melrose Industries PLCAnnual Report 2018 Having consistently outperformed peers’
sales growth in recent years, GKN Powder
Metallurgy is focused on continuous
improvement to ensure its profitability better
reflects its leading position and to improve
its performance in the years to come.
Investment in research and development as
industry trends like electrification continue
and regulatory requirements increase,
have further differentiated GKN Powder
Metallurgy from its peers.
With increasing automation across its
production footprint, GKN Powder
Metallurgy continues to concentrate on
operational improvements, delivering
high-performing continuous improvement
plans, supported by further advances in the
digital agenda. A detailed review has
highlighted some loss-making contracts
and under-performing sites and these are
an area of focus to ensure an improved
performance as well as a reduction in the
overall cost of quality issues.
Outlook
Although it is being prudent in the face of
wider automotive sector uncertainty, with
significant opportunities for organic
improvement as well as step-change
developments through identified acquisition
targets, the confidence of the business is
high. By continuing to put customer service
even more in the centre of its business
activities and enhance its partnerships
to develop and commercialise new
technologies, in particular in additive
manufacturing, GKN Powder Metallurgy
is optimistic of another strong performance
in 2019.
Market trends
Powder Metallurgy
Growth opportunities for GKN Powder
Metallurgy within its core automotive
and industrial markets are primarily
being driven by the following factors:
• Customers’ pursuit of increased
manufacturing efficiency,
functionality and flexibility.
• Legislative clamp-downs to
reduce emissions.
• The increase of electrified vehicles
and manufacturing equipment.
The business continues to respond
to these trends through its ongoing
ramp-up in X-by-Wire applications, as
electrification trends gather momentum.
There continues to be significant growth
potential to leveraging the business’s
strong additive manufacturing base to
capture market share through customer
demand for lightweight system
components and higher speed
transmissions.
The business supports customers’
requirements for lower mass and higher
functionality components with low and
medium lot sizes driving new market
development and new product
development. Similarly, the additive
manufacturing base offers reduced
emissions and reduced cycle time for the
production of parts by customers no
longer having to first build manufacturing
tools – for high growth sectors such as
battery-powered electric vehicles this
offers customers the opportunity to
pursue their own early involvement
strategies before scale is achieved, by
being able to engage in lower volume
and smaller series manufacturing.
31
Strategic ReportAnnual Report 2018Melrose Industries PLC Divisional review
Continued
Nortek Air
& Security
The Nortek Air & Security Division
comprises three businesses:
Nortek Global HVAC, Air Quality
& Home Solutions and Security &
Smart Technology.
Proportion of Melrose
Based on annualised adjusted
2018 revenue for all businesses.
12%
32
Melrose Industries PLCAnnual Report 2018 Financial information
Financial results
£m
Statutory revenue
Adjusted revenue(1)
Statutory operating profit
Adjusted operating profit(1)
2018
1,458
1,458
126
198
Revenue by business(1)
Revenue by geography
3
1
2
3
1
2
1 Nortek Global HVAC
46%
1 Europe
2 Air Quality & Home Solutions 32%
2 Americas
3 Security & Smart Technology 22%
3 RoW
3%
95%
2%
(1)
Described in the glossary to the
financial statements on pages 193
to 196 and shown in note 5 to the
financial statements.
33
Strategic ReportAnnual Report 2018Melrose Industries PLC
Divisional review
Continued
Nortek
Global HVAC
Nortek Global HVAC (“HVAC”) is led by
a management team based in Missouri,
US, and includes the custom and
commercial business Nortek Air
Solutions (“NAS”), a residential and light
commercial business, as well as the
dedicated StatePoint Liquid Cooling
(“SPLC”) business.
Investment in research and development
has continued to enhance core product
platforms and breakthrough technologies,
including the launch of the business’s
StatePoint Technology® for the rapidly
growing data centre sector and its
integrated CLEANSUITE® product family
to capitalise on the retrofit and new
construction opportunity in medical
operating rooms.
The SPLC system offers breakthrough
technology at the heart of many challenges
facing the hyper scale data centre space
and addresses the need for companies
to drive energy and water efficiency, while
in parallel achieving lower lifecycle costs.
Having already secured a commitment
from one global customer with significant
potential upside, HVAC continues to
expand its blue-chip, hyper-scale
customer relationships.
As well as some site consolidations in
accordance with its footprint strategy,
HVAC implemented common operating
procedures across all NAS sites, with
strong costing disciplines to drive further
financial efficiency. The residential business
focused on initiatives to address gaps in
quality, customer service and speed-to-
market, and delivering significant revenue
improvements in end markets with greatest
differentiation. The successful separation
of the light commercial business has
expanded margins and refocused
capacity towards new products such
as high-performance computing for
mission-critical customers.
Outlook
This business is well positioned for further
improvement this year. HVAC is committed
to the successful commercialisation
of the SPLC system and unlocking of the
value within its supply chain and cost to
manufacture products. HVAC is well placed
to meet its expectations in 2019 with the
potential for further upside identified.
34
Market trends
Nortek Global HVAC
Market demand for HVAC products
is generally stable with few structural
concerns. The HVAC market opportunity
is approximately US$118 billion globally,
while the US market is expected to grow
to US$50 billion in 2022. Growth is
generally split between residential (44%)
and non-residential (56%); in parallel,
growth is equally distributed between
new construction and product
replacement. HVAC’s product scope is
approximately US$20 billion focused in
the heating, unitary/duct and applied
segments. Expected market
drivers include:
• Continued growth in the data centre
cooling market.
• Demand for energy efficient products
driven by continued growth in energy
consumption, alongside increased
energy efficiency targets.
• Continued urbanisation – 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.
• Shifting demands of customers,
particularly in cities, resulting in
increased demand for healthcare
and understanding the importance
of air quality.
HVAC continues to target the highly
complex and critical data centre
segment with differentiated product
and value propositions, supported
by state-of-the-art technology that
addresses energy efficiency demand
by lowering both power and water
usage and addressing trends related to
sustainability and life cycle technology
costs. HVAC’s manufacturing footprint
rationalisation activities during the year
have better aligned capacity with
expected demand, with a view to
enabling more profitable growth by
improving asset utilisation. Footprint
rationalisation is also expected
to improve production agility and speed
to market by repositioning HVAC’s
manufacturing infrastructure to support
changing core markets underpinned by
shifting consumer demand.
Air Quality &
Home Solutions
Air Quality & Home Solutions (“AQH”)
is a leading manufacturer of ventilation
products for the professional remodelling
and replacement market, new residential
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.
Despite macro headwinds, AQH had a
strong end to 2018 with an increase in
sales during the second half of the year.
Commodity increases and tariff activity
during the middle of the year presented
some challenges. However, the arrival of
a range of new products resulted in sales
growth gaining momentum in the second
half of the year.
Facility consolidations, capital investments,
sourcing and engineering initiatives and
other improvements yielded cost savings
of over US$10 million in 2018 and the new
Hartford distribution centre has delivered
significant improvements to “On Time
and Complete” delivery rates. The sales
organisation was also restructured in order
to focus on distribution channels and the
investment in digital activity has helped
AQH to respond to new trends for
consumer/distributor interactions.
Outlook
AQH is poised for continuing sales
growth from all regions in the US in 2019,
supported by the new product development
pipeline. Operationally, further incremental
improvement opportunities are planned
for 2019, alongside mitigation plans for
projected tariff and commodity increases.
The business expects to continue
operational improvements, operating profit
gains and sales growth and is optimistic
about its performance for the coming year.
Melrose Industries PLCAnnual Report 2018
Market trends
Security & Smart Technology
The SST division continues to operate
in a residential security market that is:
• Increasingly driven by software and
device-driven solutions that offer
connectivity and interaction within
the ever-expanding Internet of Things
product space.
• Challenged by growing concerns
about cyber security.
• Subject to growing pressures
on pricing.
• The implementation of trade tariffs
in the US.
In response to these market dynamics,
the business has provided encrypted
sensing technology within its security
products thereby protecting the data
that is wirelessly transmitted.
The business has also developed further
intellectual property to support the
development of analytics-driven products
to meet the dynamic nature of current
consumer demand in this space.
The business has acquired IntelliVision
and incorporated its Smart capabilities
into the product portfolio. In response to
the onset of higher tariffs, production is
being moved away from China.
Market trends
Air Quality & Home Solutions
Outlook for the home building
improvement sector remains positive
but not as strong as in previous years.
The key challenges and opportunities
presented by the market primarily
comprise the following:
• Ventilation and air quality in home
construction trends continue to
be an important factor for builders
looking to add differentiation to
their customers.
• Smart homes and value-added
features in home building is a desired
formula for builders looking to grab
more of the step-up premium
home buyers.
• US codes for proper airflow and
ventilation in newly built homes
continue to be established and
expanded for many major US states.
• Growth in connected products and
smart home activity is emerging and
omni channel research, shopping,
and purchasing continue to put
pressure on traditional channels of
distribution for bricks and mortar.
• One of the major market headwinds
is the impact of price inflation on
the price of home building supplies,
in line with commodities and tariffs.
This continues to put pressure
on growth.
To address these factors during 2018,
the business:
• Prepared the launch of multiple
new products for 2019 in order
to continue to address market
needs. Future product development
is focused on ‘smart’ or
‘connectable’ products;
• The ventilation category has
developed the largest bank of
new products, highlighting
Broan-NuTone’s code compliant
capabilities and product depth; and
• The business has also revitalised its
brands’ websites with the relaunch
of the Broan website in 2018 and the
launch of the NuTone and Canadian
websites to follow in 2019.
Security &
Smart Technology
The Security & Smart Technology
(“SST”) business is a leading developer
and manufacturer of security, home
automation and access control
technologies for the residential and
commercial markets, principally in
North America.
The business continues to build on its
expertise in the design and manufacture
of wireless connectivity devices, its strong
brand presence in professional security,
integrator and custom installer channels
and its relationships with top resellers.
The business endured a difficult year in
2018. Whilst facing considerable market
headwinds, it completed its move to its new
headquarters in California, consolidating its
management and back-office functions as
well as significantly upgrading its research
and development capabilities. This was
further enhanced through the acquisition of
IntelliVision, a pioneering leader in artificial
intelligence, smart cameras and deep-
learning based video analytics software
which gives the business far more Smart
capabilities across its product range.
SST has also restructured its production
management and sales functions to place
greater focus on lead times to market and
to grow its international sales opportunities.
The business is moving production away
from China in response to the onset of
higher tariffs, which will also reduce
inventory requirements and increase
supply chain flexibility.
Outlook
SST’s core US residential security market
has declined in 2018 and has become
more competitive, requiring a renewed
focus on its differentiating technologies and
the need to accelerate the development of
new analytics-based products, adapt its
sourcing and manufacturing strategies and
reduce its overall cost base for its products.
With these changes in progress, the
business will be as well positioned
as any competitor to participate in the
development in its market.
35
Strategic ReportAnnual Report 2018Melrose Industries PLC
Divisional review
Continued
Other
Industrial
The Other Industrial
division comprises
four businesses.
(i) Brush; (ii) Ergotron; (iii) the Walterscheid
Powertrain Group (previously GKN Off-Highway
Powertrain); and (iv) GKN Wheels & Structures.
Proportion of Melrose
Based on annualised adjusted
2018 revenue for all businesses.
9%
£m
886
890
(159)
98
17%
22%
38%
23%
Financial information
Financial results 2018
Statutory revenue
Adjusted revenue(1)
Statutory operating loss
Adjusted operating profit(1)
Revenue by business(2)
1
1 Brush
2 Ergotron
4
2
3 Walterscheid Powertrain Group
4 GKN Wheels & Structures
(1)
Described in the glossary to the financial
statements on pages 193 to 196 and shown
in note 5 to the financial statements.
(2) Based on annualised adjusted 2018 revenue
for GKN businesses.
3
36
brush.eu
Brush
Having gone through a major
restructuring in 2018, Brush is
now structured around its core
competencies of turbogenerators,
switchgear, transformers and
aftermarket services.
Whilst the restructuring announced at
the start of 2018 has gone successfully,
the market conditions for Brush in the
generator services sector have worsened.
This has negatively impacted the value
of Brush which is discussed more in the
Finance Director’s review. The switchgear
business continued to perform well during
the year and launched the next generation
of an 11KV AC indoor panel called
Quantum, increasing its market penetration
in the utility and industrial sectors, as well as
securing its first significant order from the
UK rail industry. The transformers business
endured another difficult year but enters
2019 well placed to improve.
Outlook
There is some optimism for aftermarket
performance in 2019 with the expansion
of the Brush field service network and
repair capabilities. Nonetheless, global
economic prospects still remain uncertain
in Brush’s main markets and the underlying
trading environment in 2019 is expected to
remain challenging.
Melrose Industries PLCAnnual Report 2018 Market trends
Brush
The global power generation market,
and in particular the gas turbine market,
remains subject to the significant shifts
in macro trends affecting energy
consumption. Namely that:
• The expected increase in general
global energy consumption is not
driven by the traditional power
markets, which have seen a
significant disruption in recent years
driven by the overall growth in
renewables and a more efficient
use of energy.
• The shift in the source of demand
for energy has created substantial
technological and structural demand
change to the electricity generation
sector, which has significantly
impacted the gas turbine market
which has seen orders falling more
than 60% from the peak levels in 2011.
• Renewables such as wind and
solar continue to feed variable
decentralised power and can impact
grid stability, meaning that gas-fired
power generation will remain a major
contributor to electricity supply.
• Electrification continues to take
hold in developing markets.
• Investment continues to increase
in rail and tram infrastructure.
• Regulatory strategies are favouring
asset upgrade as opposed to
replacement, which still presents
growth opportunities.
Brush continues to respond to these
structural market challenges in a number
of ways:
• Nearing completion of a significant
restructure of the entire business
to realign its production footprint.
• With the fall in Generator demand,
Brush has adapted to the new market
realities including an increased focus
upon Service activities.
• Growth strategies have been
implemented to increase Services
market penetration with the
introduction of cost-effective product
upgrades that extend asset life.
ergotron.com
Ergotron
Ergotron is a leading designer,
manufacturer and distributor of
ergonomic products for use in a variety
of working, learning and medical care
environments. Based in Minneapolis,
US, Ergotron comprises three
businesses: Commercial, Consumer
and Original Design and Manufacturer.
The business continues to drive a quality
and design-led product strategy, focusing
on high-growth market segments. In 2018
the business revitalised its leadership team
and launched its proprietary eCommerce
channel supported by a successful digital
marketing campaign. While continuing to
face tariff headwinds that triggered a
production review, there has been further
investment in product leadership and agile
processes and a US$1 million capital
investment in rapid prototyping equipment
and laboratories.
Outlook
Ergotron expects its core businesses to
perform well in 2019, supported by its
restructured leadership team and refined
footprint. New sales leadership, fresh
branding and investments in product
development will accelerate innovative
solutions to give confidence in the
business for 2019.
Market trends
Ergotron
Within the workplace supplies and
furniture market, key opportunities include:
• The pursuit of new growth
opportunities within a corporate
office market of US$900 million+,
driven by increasing user awareness
about the negative effects of
sedentary disease and its impact
on employee health and wellbeing.
• Sit-to-stand solutions remain a
primary product solution to the
issue of sedentary disease. However,
such products have experienced
relatively low market penetration.
• In the healthcare market the
US$650 million+ opportunity for
ergonomic solutions continues to
be driven by the global expansion
of electronic medical records
and the integration of mobile
and tablet devices into the
healthcare environment.
• Similarly, within education,
the evolution and adoption
of active classrooms is creating
a US$500 million+ addressable
market, driven by height-adjustable
student desks and device/
notebook charging.
The business continues to target the
market potential for sit-to-stand product
solutions and has invested in product
development that will accelerate
innovative offerings. Investment in
branding has sought to project a
modern image of the company to reflect
its focus on designing products and
services that progress the aesthetic
appeal and ergonomic effectiveness
of office, healthcare and education
working environments. These efforts
are supported by new sales leadership
within the business and a vertically
oriented sales organisation to drive
informed and targeted sales activity.
37
Strategic ReportAnnual Report 2018Melrose Industries PLC
Divisional review
Continued
Walterscheid
Powertrain Group
The rebranded Walterscheid
Powertrain Group is a leading supplier
of engineered power transmission
products, systems and service
solutions to the world’s leading
off-highway and industrial equipment
manufacturers, driving efficiency
in the agriculture, construction, mining
and industrial markets, as well as
providing aftermarket services for
powertrain solutions.
During 2018, the Walterscheid Powertrain
Group delivered on expectations, with
growth in both revenue and profit on the
back of strong conditions in both the key
agriculture and construction industries,
despite headwinds from tariffs and raw
material price increases, as well as growth
in aftermarket.
The construction of the new highly
automated manufacturing site in Welsburg,
Italy was completed, and the business
continues to adapt to the market’s adoption
of smart, connected drivetrain solutions,
including further automation in the areas
of standard manufacturing processes in its
sites at Lohmar, Germany and Rockford
and Woodridge in the US.
Outlook
As announced on 6 March 2019, Melrose
has agreed to sell the Walterscheid
Powertrain Group to One Equity Partners,
a US-based private equity firm. The sale
is subject to the customary regulatory
conditions and is expected to complete
in the first half of this year.
This coming year, the Walterscheid
Powertrain Group will seek to capitalise on
its distinctive capabilities and strong market
positions to continue to grow and improve.
Several key business growth initiatives are
in place, including continued development
of the Aftermarket & Services offering in
North America, the growth of its business
in China, and selected product initiatives,
which reinforce the business’s positive
outlook for 2019.
38
Market trends
Walterscheid Powertrain Group
The agriculture and construction sectors
are each experiencing strong growth,
largely due to:
• Growing shortage of farm land driving
need for increased efficiency in
farming, including smart, connected
drivetrain solutions.
• Westernisation of diets in most
emerging markets and growing global
middle class leading to shift towards
consumption of corn, wheat and
less crop-efficient food, e.g. feed
for livestock.
• Sustained increase in global
infrastructure investment and trend to
urbanisation across most geographies.
• Strong macro-economic environment
in the US and Europe.
To pursue the opportunities presented by
these trends, the business has focused
on high horse power equipment and
development of products with increased
power density and longer lifetime, growth
of its China operations and targeting the
emerging markets, new product initiatives
for construction equipment in Europe and
Asia to target growing markets following
success in the US within this product
space. The business has also focused
on further development of aftermarket
business in the US to be prepared for
future growth coming from a trend to
a higher portion of leased equipment
with much higher utilisation rates.
Overlaying each of these solutions is the
development of smart and connected
products to drive efficiency of customers’
equipment to avoid unplanned down time.
walterscheid-group.com
Melrose Industries PLCAnnual Report 2018 Market trends
GKN Wheels & Structures
Looking at the current forces and drivers
within the business’s key sectors, being
agricultural, construction and mining:
• The global agricultural segment
continues to target greater efficiency
and sustainability. This is driving
demand for larger higher-powered
tractors, automation and
serviceability for increased
efficiencies, productivity and
greater machine uptime.
• The construction and mining
segments are experiencing
steady growth globally, fuelled
by infrastructure spend.
• The container handling segment
is investing in more automation
globally to drive productivity and
efficiencies at ports.
The business has responded to these
opportunities by:
• Developing new patented technology
with a solutions approach to industry
challenges, including the Profi-Grip
and Profi-Fit wheels;
• Continuing to capitalise on light-
weight and engineered solutions
to allow construction and mining
customers to manufacture more
efficient machinery also suitable
for on-road regulations; and
• Continuing to invest in advanced
manufacturing facilities to allow the
efficient production of larger, more
technologically advanced wheels.
39
Outlook
Market conditions have continued
to improve and the full benefit from
improvement initiatives implemented
in 2018 is expected to flow from 2019.
Although some uncertainty has been
caused by the introduction of import tariffs
in the US, the business is well placed to
deal with this uncertainty and the outlook
for 2019 remains positive.
gknwheels.com
GKN Wheels
& Structures
GKN Wheels & Structures is a leading
global manufacturer of off-highway
wheels for agricultural, construction,
mining and industrial use, as well as
metallic structures for automotive and
off-highway vehicles.
The business continued to make significant
progress during 2018 with major
investments coming on stream and
excellent profit conversion on additional
sales which outgrew the market. Over
£20 million of new business was won
during 2018, including diversifying its
structures customer base into off-highway
customers. Additionally, the business
de-risked over 90% of its input steel
price movement exposure. Improved
performance has come about through
more tightly controlled fixed costs and
introduction of new technology, such as a
fully flexible, automatic welding cell at the
Denmark facility and a new automated
off-highway rim line at the UK facility.
Strategic ReportAnnual Report 2018Melrose Industries PLC
Finance Director’s review
Geoffrey Martin
Group Finance Director
The acquisition of GKN plc (“GKN”)
on 19 April 2018 significantly increased
the size of the Melrose Group.
Consequently, the statutory and
adjusted results for the year ended
31 December 2018 only include eight
months of trading for GKN, whilst the
prior year did not include any results
for GKN. This makes a meaningful
year-on-year comparison of statutory
or adjusted results more difficult.
Acquisition of GKN
Under the terms of the acquisition, GKN shareholders received
1.69 new Melrose shares and 81 pence in cash for every GKN
share. In addition, GKN shareholders received the final GKN
dividend of 6.2 pence per share, which was paid in May 2018
during Melrose ownership.
In accordance with IFRS 3 “Business Combinations”, the
consideration paid to acquire GKN in the financial statements
is calculated using the share price at the date of acquisition of
£2.35 and only includes approximately 85% of the total amount
paid, being the percentage of acceptances received from GKN
shareholders by 19 April 2018. The remaining 15% of shares that
were acquired in the period from 19 April 2018 to 30 June 2018
are treated as the purchase of non-controlling interests and are
shown as a movement in equity.
Details of the banking facilities entered into to allow Melrose to
acquire GKN are discussed later in this review.
Melrose group results
Following the acquisition of GKN in the year, there are three sets
of results to consider:
Statutory results
The statutory results include eight months of trading for GKN,
are shown on the face of the Income Statement and are
audited. The statutory results show revenue of £8,605 million
(2017: £2,092 million), an operating loss of £392 million
(2017: loss of £7 million) and a loss before tax of £550 million
(2017: loss of £28 million). The diluted earnings per share (“EPS”),
calculated using the weighted average number of shares in issue
during the year of 3,959 million, were a loss of 12.0 pence
(2017: loss of 1.2 pence).
40
The statutory loss before tax of £550 million arose primarily due to
significant acquisition-related items and other adjusting items, most
of which arise from GKN.
Adjusted results
The adjusted results include eight months of trading for GKN, are
shown on the face of the Income Statement and are audited. They
are adjusted to exclude certain items which are significant in size or
volatility or by nature are non-trading or non-recurring, or are items
released to the Income Statement that were previously a fair value
item booked on an acquisition. It is Melrose’s accounting policy to
exclude these items from the adjusted results, which are used as
an Alternative Performance Measure (“APM”) as described by the
European Securities and Markets Authority (“ESMA”).
The Melrose Board considers the adjusted results to be an
important measure used to monitor how the businesses are
performing, as they achieve consistency and comparability
between reporting periods when all businesses are held for
the complete reporting period.
The adjusted results in the year ended 31 December 2018
show revenue of £9,102 million (2017: £2,095 million), an operating
profit of £847 million (2017: £279 million) and a profit before tax of
£703 million (2017: £258 million). Adjusted diluted EPS, calculated
using the weighted average number of shares in issue during the
year were 13.3 pence (2017: 9.8 pence).
The description of adjusting items and a reconciliation of the
statutory results to the adjusted results is discussed later in
the review.
Annualised adjusted results
The Melrose Board believes that the annualised adjusted results
give a meaningful measure of annualised performance to guide
ongoing results when adjusted results include businesses owned
for part of a period. They include the adjusted results of the GKN
businesses for twelve months, as if GKN had been acquired on
1 January 2018. They are calculated using the ongoing adjusted
interest charge, the expected ongoing divisional long-term incentive
plan charge, the effective tax rate of the enlarged Group and the
diluted number of shares in issue at 31 December 2018.
Annualised adjusted results in the year ended 31 December 2018
show revenue of £12,247 million, an operating profit of
£1,095 million and a profit before tax of £886 million. Annualised
adjusted diluted EPS, calculated using the number of shares in
issue at 31 December 2018, of 4,858 million were 13.8 pence.
A reconciliation of adjusted results to the annualised adjusted
results is shown later in this review.
The statutory, adjusted and annualised adjusted results for the
year included a positive impact from unwinding loss-making
contract provisions which were required under IAS 37: “Provisions,
contingent liabilities and contingent assets”, and identified during
the opening Balance Sheet review process for GKN, which is
discussed later in this review.
Excluding the positive impact of the unwind of the loss-making
contracts provision, the adjusted results would show an operating
profit of £784 million, the annualised adjusted results would show
an operating profit of £1,002 million and an EPS of 12.5 pence.
Melrose Industries PLCAnnual Report 2018 Statutory, adjusted and annualised adjusted results by reporting segment
The following table shows revenue split by reporting segment, including equity accounted investments (“EAIs”) for adjusted revenue
and annualised adjusted revenue:
Statutory revenue
Reconciling item:
Revenue from EAIs
Adjusted revenue
GKN revenue (1 January to 18 April)
Annualised adjusted revenue
Aerospace
£m
Automotive
£m
Powder
Metallurgy
£m
Nortek Air
& Security
£m
Other
Industrial
£m
Total
£m
2,479
2,936
846
1,458
886
8,605
42
2,521
1,013
3,534
446
3,382
1,567
4,949
5
851
361
1,212
–
1,458
–
1,458
4
890
204
1,094
497
9,102
3,145
12,247
The following table shows operating profit/(loss) split by reporting segment. Adjusting items are described later in this review.
Statutory operating (loss)/profit
Reconciling item:
Adjusting items
Adjusted operating profit
GKN operating profit (1 January to 18 April)
Annualised adjusted operating profit
Aerospace
£m
Automotive
£m
Powder
Metallurgy
£m
Nortek Air
& Security
£m
Other
Industrial
£m
Corporate
£m
(44)
294
250
91
341
15
216
231
130
361
38
60
98
45
143
126
72
198
–
198
(159)
(368)
257
98
18
116
340
(28)
(36)
(64)
Total
£m
(392)
1,239
847
248
1,095
The performance of each of the reporting segments is discussed in the Chief Executive’s review. The adjusted operating costs in the
corporate cost centre of £28 million (2017: £23 million) included £20 million (2017: £15 million) of Melrose corporate costs, £6 million
(2017: £nil) of the remaining GKN central costs and £2 million (2017: £8 million) of costs in respect of the divisional cash-based long-term
incentive plans.
Reconciliation of statutory results to adjusted results
The following table reconciles the statutory operating loss to adjusted operating profit:
Statutory operating loss
Adjusting items:
Amortisation of intangible assets acquired in business combinations
Restructuring costs
Acquisition and disposal costs, including associated transaction taxes
Impairment of assets
Currency movements in derivatives and associated financial assets and liabilities
Reversal of one-off uplift in the value of inventory in GKN businesses
Other
Adjustments to statutory operating loss
Adjusted operating profit
2018
£m
(392)
401
240
153
152
143
121
29
1,239
847
2017
£m
(7)
82
35
6
145
–
–
18
286
279
41
Strategic ReportAnnual Report 2018Melrose Industries PLC Finance Director’s review
Continued
Adjusting items
The value of intangible assets acquired in business combinations
has significantly increased during the year following the acquisition
of GKN. As a result, the amortisation charge in the year was
£401 million (2017: £82 million) and included eight months of
amortisation of intangible assets acquired with GKN. This is
excluded from adjusted results due to its non-trading nature and to
enable comparison with companies that grow organically. Where
intangible assets are trading in nature, such as computer software
and development costs, the amortisation is not adjusted.
Restructuring and other associated costs totalled £240 million
(2017: £35 million), including £7 million (2017: £1 million) of losses
incurred following the announcement of the closure of certain
businesses within the Group. Restructuring costs are adjusting
items due to their size and non-trading nature and during the year
ended 31 December 2018 they included:
• A charge of £156 million in respect of the GKN businesses.
Within this, £56 million related to the Aerospace division,
predominantly in North America, with key focus on improving
quality and delivery for customers. Within the GKN Automotive
business £46 million of costs have been incurred restructuring
and enhancing the future performance of the business under
new leadership. In addition, £54 million of restructuring costs
were incurred in respect of early actions within other GKN
businesses, including the ceasing of GKN head office
functions.
• A charge of £59 million (2017: £6 million) in respect of the
closure of the Dutch turbogenerator facility in Brush and
the restructuring of its turbogenerator production in the
UK following the announcement on 1 February 2018.
• A charge of £22 million (2017: £27 million) within Nortek Air
& Security, which mostly related to footprint rationalisation
within the HVAC business.
Acquisition and disposal costs of £153 million (2017: £6 million)
were incurred in the year and included general transaction fees
and associated transaction taxes, predominantly in respect of the
acquisition of GKN. These costs also included a small amount of
fees relating to the £26 million bolt-on acquisition of IntelliVision Inc.,
by the Security & Smart Technology business and the cost of
certain other corporate deal activities in the year. These items are
excluded from adjusted results due to their non-trading nature.
An impairment charge totalling £152 million (2017: £145 million)
was incurred in the year ended 31 December 2018. This included
£132 million in respect of the carrying value of assets held within
the Brush business of which £123 million related to goodwill,
discussed later in this review, and £9 million to property, plant
and equipment. In addition, £15 million of intangible assets and
£5 million of property, plant and equipment were impaired in
respect of assets held within the GKN businesses. The impairment
charges are shown as an adjusting item due to their non-trading
nature and size.
Melrose policy is to hedge account where possible, however,
hedge accounting has not historically been applied to the GKN
businesses for transactional foreign exchange exposure. For
consistency, the movement in the value of derivative financial
instruments (primarily forward foreign currency exchange contracts)
entered into to mitigate the potential volatility of future cash flows
on long-term foreign currency customer and supplier contracts,
along with foreign exchange movements on the associated
financial assets and liabilities, totalling a charge of £143 million
(2017: £nil), is shown as an adjusting item because of its
volatility and size.
42
Finished goods and work in progress inventory which are present
in a business when acquired, in accordance with IFRS 3, are
required to be uplifted in value to closer to their selling price.
As a result, in the early months of an acquisition, reduced profits
are generated as this inventory is sold. The one-off effect in the
year, relating to GKN acquired inventory, was a charge of
£121 million (2017: £nil) and is excluded from adjusted results
due to its size and non-recurring nature.
The charge for the Melrose equity-settled Incentive Scheme,
including its associated employer’s tax charge, of £13 million
(2017: £24 million), is excluded from adjusted results due to its
volatility. The shares that would be issued, based on the Scheme’s
current value at the end of the reporting period, are included in the
calculation of the adjusted diluted earnings per share, which the
Board considers to be a key measure of performance.
On 26 October 2018, a High Court judgement was made in
respect of the gender equalisation of guaranteed minimum
pensions for occupational pension schemes. The judgement
concluded the schemes should be amended to equalise pension
benefits for men and women in relation to guaranteed minimum
pension benefits, an issue which affects many UK defined benefit
pension schemes. The impact of this amendment on the pension
schemes within the Group resulted in a specific £11 million increase
in the pension deficit with a corresponding past service cost in the
Income Statement. This cost is excluded from adjusted results due
to its non-trading and non-recurring nature.
The Group has a number of EAIs in which it does not hold full
control, the largest of which is a 50% interest in Shanghai GKN
HUAYU Driveline Systems (“SDS”), within the GKN Automotive
business. The EAIs generated £497 million of revenue in 2018,
which is not included in the statutory results but is shown within
adjusted revenue so as not to distort the operating margins
reported in the businesses when the adjusted operating profit
earned from these EAIs is included.
In addition, the profits and losses of EAIs, which are shown after
amortisation of intangible assets, interest and tax in the statutory
results, are adjusted to show the adjusted operating profit
consistent with the adjusted operating profits of the subsidiaries
of the Group. The revenue and profit of EAIs are adjusted because
they are considered to be significant in size and are important in
assessing the performance of the business.
Certain items recognised as fair value items on an acquisition
totalling £20 million (2017: £6 million), which have been resolved for
more favourable amounts than first anticipated, were released as
an adjusting item to avoid positively distorting adjusted results.
Reconciliation of adjusted results to annualised results
Adjusted operating profit
Reconciling item:
Adjusted operating profit of GKN
(1 January 2018 to 18 April 2018)
2018
£m
847
248
Annualised adjusted operating profit
1,095
Melrose Industries PLCAnnual Report 2018 Finance costs and income
The net finance costs in the year ended 31 December 2018
were £158 million (2017: £21 million), which included £15 million
(2017: £nil) of finance costs treated as adjusting items. These
adjusting items include £8 million relating to the fair value changes
on cross-currency swaps entered into by GKN prior to Melrose
ownership, along with £7 million relating to the acceleration of
amortisation of debt fees associated with the previous Melrose
bank facility, written off when the new bank facility was entered into
to acquire GKN and the previous facility was repaid and cancelled.
These charges are shown as adjusting items because of their
volatility and non-trading nature.
The net adjusted finance costs in the year ended 31 December
2018 were £144 million (2017: £21 million), the year-on-year
increase reflecting the increase in the size of the Group and
the new debt facilities following the acquisition of GKN.
Net interest on external bank loans, bonds, overdrafts and cash
balances was £98 million (2017: £16 million). 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, finance charges included an £11 million (2017: £2 million)
amortisation charge relating to the arrangement costs of raising the
bank facility in 2018, a net interest charge on net pension liabilities of
£24 million (2017: £1 million), a charge for the unwind of discounting
on long-term provisions of £10 million (2017: £2 million), of which
£9 million related to the unwind of discounts on the loss-making
contract provisions identified within GKN businesses, and £1 million
relating to the interest charge in EAIs.
Tax
The statutory results show a tax credit of £75 million
(2017: £4 million) which arises on a statutory loss before tax
of £550 million (2017: £28 million), a statutory tax rate of 14%
(2017: 13%). This rate is lower than the adjusted effective tax rate
because many of the adjusting items, discussed earlier in this
review, do not give rise to tax deductions.
The effective rate on the adjusted profit before tax for the year
ended 31 December 2018 was 23% (2017: 26%). The adjusted tax
rate that is applicable to GKN profits is similar to the expected
average tax rate of the Melrose Group had the acquisition of GKN
not happened. In both cases, the reduction in the tax rate between
2017 and 2018 is predominantly due to the reduction of US Federal
tax rates.
The Group has tax losses and other deferred tax assets with
a value of £898 million (31 December 2017: £193 million).
These are offset by deferred tax liabilities of £1,446 million
(31 December 2017: £198 million) on intangible assets and
£177 million (31 December 2017: £15 million) of other deferred
tax liabilities. The Group tax losses will generate future cash tax
savings, whereas the deferred tax liabilities on intangible assets
are not expected to give rise to cash tax payments.
Cash tax paid in the year ended 31 December 2018 was
£66 million (2017: £16 million) representing 9% (2017: 6%) of
adjusted profit before tax. This was lower than the effective tax rate
because the Group benefits from certain adjusting items being tax
allowable, from existing tax assets brought forward, and the new
tax losses and other deferred tax assets acquired with GKN.
IFRS 3 “Business combinations”
In accordance with IFRS 3, the GKN assets, liabilities and accounting policies were reviewed following the acquisition, resulting
in a significant amount of required adjustments to the acquired GKN Balance Sheet.
A summary of these adjustments is shown in the table below:
Goodwill
Intangible assets acquired with business combinations
Tangible assets, computer software and development costs
Equity accounted investments (“EAIs”)
Net working capital
Retirement benefit obligations
Provisions
Deferred tax and current tax
Net debt
Net other
Total Net Assets
GKN acquired
Balance Sheet
at 19 April 2018
£m
Fair Value
& other
adjustments
£m
GKN Balance
Sheet at
Fair Value
£m
466
488
3,043
272
886
(1,369)
(144)
58
(1,159)
(28)
2,513
2,056
5,243
44
240
(131)
–
(1,036)
(908)
–
(73)
5,435
2,522
5,731
3,087
512
755
(1,369)
(1,180)
(850)
(1,159)
(101)
7,948
Third party experts were appointed to value intangible assets, freehold property, the significant EAI in the GKN Automotive business,
SDS, leasehold property commitments and retirement benefit obligations. Adjustments identified in respect of these valuations are
included in the table above.
Acquisition-related intangible assets identified and independently valued on the acquisition of GKN totalled £5,731 million and are
discussed later in this review. A deferred tax liability of £1,285 million was also recognised in respect of the GKN intangible assets,
which is not expected to give rise to a cash liability.
In addition to the independent valuations, external advisers carried out a comprehensive series of visits to all GKN sites to perform
balance sheet reviews line by line. These reviews identified a number of required adjustments, in particular in respect of net working
capital and provisions.
43
Strategic ReportAnnual Report 2018Melrose Industries PLC Finance Director’s review
Continued
The required adjustments to net working capital included a
£252 million reduction in receivables and inventory, partially offset
by the £121 million IFRS 3 uplift to the value of inventory, discussed
in the adjusting items section of this review. Within this, the
receivables balance acquired was reduced by £63 million, 2%,
aligning provisioning policy. The gross reduction in inventory of
£189 million included the reclassification of £52 million of long-life
tooling assets as tangible fixed assets and £137 million, 11% of the
acquired balance, relating to inventory write-offs and alignment of
provisioning policy.
A significant adjustment to the GKN Balance Sheet was the
requirement to increase provisions to £1,180 million, which included
£629 million relating to loss-making contracts identified in GKN at
the time of acquisition. These are discussed later in the provisions
section of this review.
Adoption of IFRS 15 “Revenue from contracts with
customers” and the future impact of IFRS 16 “Leases”
IFRS 15 was adopted on 1 January 2018 and had a sizeable
impact within the Aerospace division but did not materially impact
the other businesses in the Melrose Group.
The overall impact of IFRS 15 was to recognise a contract asset
which was recorded at a fair value of £524 million upon the
acquisition of GKN and predominantly in the Aerospace
division. The impact of IFRS 15 has reduced annual revenue by
approximately £80 million, mainly as a result of the netting of
certain expenses against revenue that were previously shown
within cost of sales, and to increase annual adjusted operating
profit by approximately £15 million, mainly as a result of the earlier
recognition of variable consideration from risk and revenue sharing
partnerships.
IFRS 16 is effective from 1 January 2019 and requires all leases to
be recognised on the Balance Sheet. Currently only finance leases
are recognised on the Balance Sheet, with leases categorised as
operating leases expensed through the Income Statement. The
impact of IFRS 16 will be to recognise a lease liability in the range
£550 million to £600 million, with a corresponding asset in the
Balance Sheet. The expected annual impact of IFRS 16 on the
Income Statement in 2019 will be to increase operating profit, but
is not expected to be significant, and will be more than offset by an
associated increase in finance costs in the year of approximately
£20 million. In addition, approximately £75 million of costs will be
reclassified from a lease expense to depreciation.
Cash generation and management
Group net debt at 31 December 2018, translated at closing
exchange rates (being US$1.27 and €1.11), was £3,482 million
(31 December 2017: £572 million). For bank covenant purposes,
the Group’s net debt is calculated at average exchange rates
(being US$1.33 and €1.13), to align the calculation with the currency
rates used to calculate profits, and was £3,396 million.
The movement in net debt in the year is summarised as follows:
Movement in Group net debt
At 1 January
Non-trading items:
Net debt acquired with GKN
Cash consideration for GKN
(81 pence per share)
Payment of GKN 2017 final dividend
Acquisition costs and related transaction
tax costs
Acquisition of IntelliVision Inc.
Dividend paid to Melrose shareholders
Foreign exchange and other non-cash
movements
Cash flow from non-trading items
Free cash flow
(after all costs including tax)
At 31 December at closing exchange rates
2018
£m
(572)
(1,159)
(1,398)
(107)
(177)
(26)
(129)
(110)
(3,106)
196
(3,482)
2017
£m
(542)
–
–
–
(3)
–
(63)
48
(18)
(12)
(572)
At 31 December at average exchange rates
(3,396)
(595)
The significant increase in Group net debt in the year includes
£3,106 million relating to non-trading items, of which £2,867 million,
92% was in respect of acquisition related activity. The remaining
8% was in respect of the £129 million payment of dividends to
Melrose shareholders and £110 million of foreign exchange and
non-cash movements.
The GKN net debt acquired on 19 April 2018 was higher than
GKN plc announced for 31 December 2017 predominantly
because of trading movements, the payment of £129 million of
GKN defence costs by the GKN Board and a working capital
outflow of £182 million which included resolving the previous late
payments to suppliers.
An analysis of the free cash flow (after all costs) is shown in the
table below:
Free cash flow (after all costs)
Adjusted operating cash flow (pre-capex)
Net capital expenditure
Net interest and net tax paid
Defined benefit pension contributions
Incentive scheme payments
(including associated employer’s tax)
Restructuring
Dividend income from equity
accounted investments
Net other
Free cash flow (after all costs)
2018
£m
921
(359)
(172)
(102)
–
(122)
66
(36)
196
2017
£m
298
(49)
(31)
(4)
(148)
(48)
–
(30)
(12)
44
Melrose Industries PLCAnnual Report 2018 The total free cash flow (after all costs) of £196 million is after cash
spent on restructuring projects of £122 million (2017: £48 million).
The restructuring activities are described earlier in this review, in the
reconciliation of statutory results to adjusted results section.
In addition, net capital expenditure spent in the year was
£359 million (2017: £49 million), representing 1.3x depreciation.
Net interest paid in the year was £106 million (2017: £15 million) and
tax was £66 million (2017: £16 million) representing 9% (2017: 6%)
of adjusted profit before tax. This rate was lower than the effective
tax rate as explained earlier in the tax section of this review.
Defined benefit pension scheme cash contributions of £102 million
included £56 million of the Melrose commitment to contribute
£150 million to the GKN UK 2012 and 2016 plans within the first
twelve months of GKN ownership, in addition to ongoing
payments. The remainder of this upfront commitment is to
be paid by 19 April 2019 as agreed with the Trustees.
Assets and liabilities
The summarised Melrose Group assets and liabilities are
shown below:
Goodwill and intangible assets acquired
with business combinations
Tangible fixed assets, computer software
and development costs
Equity accounted investments
Net working capital
Retirement benefit obligations
Provisions
Deferred tax and current tax
Net other
Total
These assets and liabilities are funded by:
Net debt
Equity
Total
2018
£m
2017
£m
10,591
2,229
3,651
492
960
(1,413)
(1,445)
(788)
(305)
11,743
228
–
241
(18)
(209)
(27)
13
2,457
2018
£m
(3,482)
(8,261)
(11,743)
2017
£m
(572)
(1,885)
(2,457)
Goodwill, intangible assets and impairment review
The total value of goodwill as at 31 December 2018 was £4,052 million (31 December 2017: £1,432 million) and intangible assets acquired
with business combinations was £6,539 million (31 December 2017: £797 million). These items are split by division as follows:
31 December 2018
Goodwill
Intangible assets acquired with business combinations
Total goodwill and intangible assets
Aerospace
£m
Automotive
£m
Powder
Metallurgy
£m
Nortek Air
& Security
£m
Other
Industrial
£m
974
3,410
4,384
1,049
1,478
2,527
529
736
1,265
973
543
1,516
527
372
899
Total
£m
4,052
6,539
10,591
The goodwill and intangible assets have been tested for impairment as at 31 December 2018. 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 the recently acquired GKN
businesses or the Nortek businesses.
Both Security & Smart Technology and Ergotron have manufacturing facilities located in China that export to the US and their results
in 2018, and the ongoing market environment, have been negatively impacted by the increase in US tariffs placed on Chinese goods.
The intention is to pass any increased tariffs through to customers, but the uncertainty around how customers will react and/or a further
escalation of US tariffs on Chinese goods and the impact that this could have on the behaviour of competitors means that there is a risk
that future forecasts could be negatively impacted.
In the previous year, the assets of the Brush business were impaired by £145 million to a value of £300 million, using the fair value less
costs to sell basis. This method of valuation, at the time, was higher than the value in use method, because that excluded the benefits
of the restructuring announced in February 2018, and would have given a value of £178 million.
The restructuring of the Brush business that was announced in February 2018 followed a full review of the power generation industry
and highlighted the surplus generator manufacturing capacity existing in the market. The restructuring programme has been implemented
in line with plan.
However, in 2018 the conditions in the generator services business have also become more challenging as the year has progressed,
with competitors taking a decision to look to service opportunities to offset surplus capacity issues in the generator manufacturing
market. Alongside this, customers and competitors in the power generation sector have continued to reorganise and restructure in
the second half of 2018.
These newly developed generator services market conditions and the decisions from significant market participants have had a direct
impact on the trading of Brush and reduced forecasts in the Brush generator servicing business.
At 31 December 2018, the recoverable amount of the Brush assets, using the reduced forecasts and the value in use method,
was £103 million, resulting in a further impairment to Brush goodwill of £123 million in the year.
45
Strategic ReportAnnual Report 2018Melrose Industries PLC Finance Director’s review
Continued
Provisions
Total provisions at 31 December 2018 were £1,445 million
(31 December 2017: £209 million), a significant increase from
the previous year, due to the acquisition of GKN and inheriting
provisions with a fair value of £1,180 million in the opening
Balance Sheet, discussed earlier in this review.
The most significant pension plans in the Group are the GKN UK
2012 and 2016 plans. The net accounting deficit on these plans
was £579 million at 31 December 2018. These plans had assets at
31 December 2018 of £2,529 million and liabilities of £3,108 million.
In addition, there are GKN UK post-employment medical plans
with a net deficit of £9 million at 31 December 2018.
The following table details the movement in provisions in the year:
At 1 January 2018
Acquisition of GKN
Net charge to adjusted operating profit
Net charge shown as an adjusting item
in the Income Statement
Spend against provisions
Unwind of loss-making contract provision
Other (including foreign exchange)
At 31 December 2018
Total
£m
209
1,180
89
168
(221)
(63)
83
1,445
As discussed earlier in this review, £1,180 million of provisions were
recognised on the acquisition of GKN. These included £629 million
in respect of loss-making contracts, of which £63 million was
utilised in the Income Statement in the eight months of ownership.
Approximately half of the loss-making contract provisions were
recorded in the Aerospace division, approximately one third in
the Automotive division and the remainder predominantly within
Powder Metallurgy. The loss-making contract review identified
approximately 10% of GKN’s annual revenue requiring some
provision, with the majority of relevant contracts spanning multiple
years and with a tail of certain smaller contracts spanning
approximately 15 years.
The provisions in GKN also include warranty related items totalling
£295 million and environmental and litigation related items of
£123 million, equivalent to 1.0% and 0.4% respectively of the
previous three years’ total revenue.
The increase to provisions in the year arising from a net charge to
adjusted operating profit of £89 million relates primarily to warranty,
product liability and workers’ compensation, which are matched by
similar cash payments in the year.
The increase to provisions in the year arising from the net charge
shown as an adjusting item in the Income Statement of
£168 million, primarily related to charges associated with
restructuring, which are discussed in the adjusting items section
of this review. During the year £111 million of cash was spent
on restructuring provisions.
Melrose committed to contribute £150 million in total to the GKN
UK 2012 and 2016 plans in the first 12 months of ownership, as
well as ongoing annual contributions of £60 million. In addition,
Melrose has committed to contribute £270 million upon the
disposal of GKN Powder Metallurgy, 10% of the proceeds from
disposal of other GKN businesses and 5% of the proceeds from
disposal of non-GKN businesses to the GKN UK pension plans.
These commitments cease when the funding target which has
been agreed with Trustees is achieved, being gilts plus 25 basis
points for the GKN UK 2016 plan and gilts plus 75 basis points for
the GKN UK 2012 plan.
The GKN UK 2012 and 2016 plans are closed to new members
and the 2012 plan is closed to the accrual of future benefits for
current members, whilst the 2016 plan has no active members.
The values of the Group plans were updated at 31 December 2018
by independent actuaries to reflect the latest key assumptions.
A summary of the assumptions used is shown in note 23 of the
financial statements.
It is noted that a 0.1 percentage point decrease in the discount rate
would increase the pension accounting liabilities of the Group, on
an IAS 19 basis, by £73 million, or 2%, and a 0.1 percentage point
increase to inflation would increase the liabilities by £52 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 £163 million, or 3%.
Contributions to the Melrose Group defined benefit pension plans
and post-employment plans are expected to be approximately
£192 million in 2019, consisting of £94 million of one-off special
payments, being the balance of the £150 million upfront
commitment, and £98 million of ongoing commitments.
Financial risk management
The financial risks the Group faces were considered and re-
evaluated following the acquisition of GKN 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.
Included within other movements in provisions are foreign
exchange movements and the unwind of discounting
on certain provisions.
Liquidity risk management
The Group’s net debt position at 31 December 2018 was
£3,482 million (31 December 2017: £572 million).
Pensions and post-employment obligations
Melrose operates a number of defined benefit pension schemes
and retiree medical plans across the Group, accounted for
using IAS 19 Revised: “Employee Benefits”. During the year the
acquisition of GKN has significantly increased the Melrose Group’s
IAS 19 net deficit, with £1,402 million of the £1,413 million Group net
deficit recorded in the Balance Sheet at 31 December 2018 relating
to the acquired business.
A new multi-currency committed bank facility was entered into
on 17 January 2018 to assist with the acquisition of GKN,
which replaced the previous bank facility of US$1.25 billion. The
US$1.25 billion facility was repaid and cancelled on 30 April 2018.
The new facility included a £1.5 billion multi-currency term loan
with a duration of three years and six months. In addition, the new
facility included a five-year multi-currency revolving credit facility,
denominated £1.1 billion, US$2.0 billion and €0.5 billion.
At 31 December 2018, total plan assets of the Group’s defined
benefit pension plans were £3,273 million (31 December
2017: £524 million) and total plan liabilities were £4,686 million
(31 December 2017: £542 million), of which £749 million
(31 December 2017: £4 million) related to unfunded plans.
On 29 October 2018, £663 million of the new term loan was
surplus to requirements, and therefore cancelled, because
potential change of control clauses on the bonds were not
exercised by the relevant bond holders.
46
Melrose Industries PLCAnnual Report 2018 At 31 December 2018 the drawings on the term loan were
£100 million and US$960 million. There was a significant amount
of headroom on the multi-currency committed revolving credit
facility, as at 31 December 2018. Applying the exchange rates at
31 December 2018 the headroom equated to £1,352 million, which
includes an amount available to replace the 2019 bond when it
matures, or before. There are also a number of uncommitted
overdraft, guarantee and borrowing facilities made available to the
Group. These uncommitted facilities have been lightly used.
Cash, deposits and marketable securities amounted to £415 million
at 31 December 2018 (31 December 2017: £16 million) and are
offset to arrive at the Group net debt position of £3,482 million
(31 December 2017: £572 million). The combination of this cash
and the headroom on the new facility allows the Directors to
consider that the 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 cash
on deposit.
As with previous facilities the new facility has two financial
covenants being a net debt to adjusted EBITDA covenant and
an interest cover covenant, both of which are tested half yearly
in June and December.
The EBITDA covenant test 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 2018 it was 2.3x
(31 December 2017: 1.9x), showing reasonable headroom
compared to the covenant test.
The interest cover covenant is set at 4.0x throughout the life of the
facility and was 11.6x at 31 December 2018 (31 December
2017: 19.6x), affording comfortable headroom compared to the
covenant test.
The GKN net debt at acquisition included three capital market
borrowings totalling £1.1 billion, which are detailed in the table
below. The bonds maturing in 2019 and 2022 have cross-currency
swaps associated with them.
Maturity date
October 2019
September 2022
May 2032
Notional
amount
£m
350
450
300
Cross-
currency
swaps
million
Coupon
% p.a.
6.75% US$578
5.375% US$373
€284
n/a
3.375%
Interest
rate on
swaps
% p.a.
6.80%
5.70%
3.87%
n/a
The coupon rate on the £300 million bond, maturing in 2032 is
expected to increase to 4.625% from May 2019.
The series of cross-currency swaps which were acquired with
GKN had a fair value liability at the date of acquisition of
£109 million. At 31 December 2018 they were valued at a liability of
£199 million, the rise being predominantly due to the change in
foreign exchange rates.
The bonds remain within the Group at 31 December 2018, but to
simplify the corporate reporting requirements of the Group, the
2019 bonds were transferred onto the Professional Securities
Market in September 2018 and the 2022 and 2032 bonds will
transfer during March 2019. Bond holders and rating agencies no
longer require Consolidated financial statements for GKN Holdings
Limited, but instead will receive the detailed information they require
from the Melrose Group Consolidated financial statements. The
2022 and 2032 bond holders will have the same guarantees from
the Melrose Group companies as those provided to the banks
lending in the new bank facility.
The Group has a small number of uncommitted working capital
programmes, which predominantly relate to programmes inherited as
part of the GKN acquisition. These programmes provide favourable
financing terms on eligible customer receipts and competitive
financing terms to suppliers on eligible supplier payments.
Businesses which participate in the receivables working capital
programme have the ability to choose whether to receive payment
earlier than the normal due date, for specific customers on a
non-recourse basis. Due to the short-term nature of the financing,
the interest cost to the Group for this beneficial cash flow is
favourable compared to the interest cost of the Group’s committed
bank facilities. As at 31 December 2018, the drawings on these
facilities were £139 million, compared to £189 million by GKN
as at 31 December 2017.
Finance cost risk management
The bank margin on the bank facility depends on the Group
leverage, and ranges from 0.75% to 2.0% on the term loan, and
0.95% to 2.25% on the revolving credit facility. As at 31 December
2018 the margin was 1.4% on the term loan and 1.65% on the
revolving credit facility (31 December 2017: 1.35% on the Melrose
committed bank debt).
The Group holds interest rate swap instruments to fix the cost
of LIBOR. The policy of the Board is to hedge approximately
70% of the interest rate exposure of the Group. Given the recent
restructuring of the bonds and noting that the 2019 bonds mature
this year, the Group is in the process of increasing the interest rate
swaps to be in line with Group policy. Under the terms of the
existing swap arrangements and excluding the bank margin,
the Group will pay a weighted average fixed cost of approximately
2% until the swaps terminate on 17 January 2023.
The average cost of the debt for the new enlarged Group is
expected to be approximately 3.8% over the next 12 months.
Exchange rate risk management
The Group trades in various countries around the world and is
exposed to movements in a number of foreign currencies. The
Group therefore carries exchange rate risk that can be categorised
into three types: transaction, translation and disposal related risk,
as described in the paragraphs below. The Melrose 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 customer or purchases from
suppliers in a different currency to the underlying functional
currency of the business. The Melrose policy is to review
transactional foreign exchange exposures and place contracts
quarterly on a rolling basis. To the extent the cash flows associated
with a transactional foreign exchange risk are committed, Melrose
will hedge 100%. For forecast cash flows, Melrose hedges a
proportion of the expected cash flows, with the percentage being
hedged lowering as the time horizon lengthens. The average time
horizons are longer for GKN Aerospace, GKN Automotive and
GKN Powder Metallurgy to reflect the long-term nature of the
contracts within these divisions. Typically, the Group hedges
around 90% of foreign exchange exposures expected over the
next twelve months and approximately 60% to 70% of exposures
expected between 12 and 24 months. This policy does not
eliminate the cash risk but does bring some certainty to it.
The translation rate risk is the effect on the Group results in the
period due to the movement of exchange rates used to translate
foreign results into Sterling from one period to the next. No specific
exchange instruments are used to protect against the translation
risk because it is a non-cash risk to the Group, unless foreign
currency is converted to Sterling. However, the Group has debt
47
Strategic ReportAnnual Report 2018Melrose Industries PLC Finance Director’s review
Continued
drawn in Euros and US Dollars, and the hedge of having debt
drawn in these currencies funding the trading units with US Dollars
or Euro functional currencies protects against some of the Balance
Sheet and banking covenant translation risk.
Lastly, and potentially most significantly for Melrose, exchange rate
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 rate risk
may arise on conversion of foreign currency proceeds into Sterling,
for instance to pay a dividend or Capital Return to shareholders.
Protection against this risk is considered on a case-by-case basis.
Exchange rates used for currencies most relevant to the Group in
the year are:
US Dollar
2018
2017
Euro
2018
2017
8 month
average
(GKN
businesses)
Twelve month
average rate
Closing
rate
1.33
1.29
1.13
1.14
1.31
n/a
1.13
n/a
1.27
1.35
1.11
1.13
A 10% strengthening of the major currencies, if they were to
strengthen in isolation against all other currencies, within the Group
would have the following impact on the re-translation of annualised
adjusted operating profit into Sterling:
£m
USD
EUR
CNY
Other
Movement in adjusted
operating profit
% impact on adjusted
operating profit
72
6%
24
2%
11
1%
17
2%
The impact from transactional foreign exchange exposures is not
material in the short term due to hedge coverage being
approximately 90%.
A 10% strengthening in either the US Dollar or Euro would have the
following impact on net debt as at 31 December 2018:
£m
Increase in debt
USD
176
EUR
59
Contract and warranty risk management
Under Melrose management a robust bid and contract management
process exists in the businesses, which includes thorough reviews
of contract terms and conditions, contract-specific risk assessments
and clear delegation of authority for approvals. These processes aim
to ensure effective management of risks associated with complex
contracts. The financial risks connected with contracts and
warranties include the consideration of commercial, legal and
warranty terms and their duration, which are all considered carefully
by the businesses and Melrose centrally before being entered into.
Commodity risk management
The cumulative expenditure on commodities is important
to the Group and under Melrose management the risk of base
commodity costs increasing is mitigated, wherever possible, by
passing on the cost increases to customers or by having suitable
purchase agreements with suppliers which fix the price over a
future period. These risks are also managed through sourcing
policies, including the use of multiple suppliers, where possible,
and procurement contracts where prices are agreed in advance to
limit exposure to price volatility. On occasion, Melrose does enter
into financial instruments on commodities when this is considered
to be the most efficient way of protecting against price movements.
48
Brexit
Whilst the effect of Brexit on the European economy is unclear at
present, due to the Group’s geographically balanced manufacturing
footprint, resulting tariffs and customs clearance are not expected
to have material negative effects on the Group as a whole.
Sales of product between the UK and Europe are a small minority
of the Group’s overall revenues. Aerospace components are
typically exempt from import duties under global agreements, whilst
Automotive parts tariffs typically range between tariff-free and up to
7%, with the blended result somewhere midway between. However,
the outcome of any Brexit agreement is unknown, which is also the
case for any legal or regulatory changes.
On a wider macro level, the Group’s financial results may be
impacted by general lack of confidence and economic instability
arising from a delayed or disruptive exit from the EU. Depending on
the outcome of Brexit, the Group could be exposed to translational
and transactional foreign exchange fluctuations. The impact from
movements in foreign exchange rates on translating profits into
Sterling is provided in the table above, whilst transactional exposures
are generally well protected in the short-term due to approximately
90% of exposures being hedged for the next 12 months.
The Board will continue to monitor Brexit developments and adjust
the plans for its businesses accordingly.
Post balance sheet event
On 6 March 2019 the Group announced the agreement to sell the
Walterscheid Powertrain Group to One Equity Partners, a US-based
private equity firm. In addition the Group announced the completion
of the sale of the minority 43.57% interest in Société Anonyme Belge
de Constructions Aéronautiques (“SABCA”), previously held within
the Aerospace reporting segment, to SABCA’s majority shareholder,
Dassault Belgique Aviation S.A. The sale of the Walterscheid
Powertrain Group is subject to the customary regulatory conditions
and is expected to complete in the first half of this year. The
combined net proceeds of the sales are approximately £200 million.
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 liquidity risk, finance cost
risk, exchange rate risk, contract and warranty risk and commodity
cost risk.
The Melrose Group has a strong record of cash management, and,
as a consequence, the Directors believe that the Melrose Group is
well placed to manage its business risks successfully despite the
more economically uncertain environment.
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.
Geoffrey Martin
Group Finance Director
7 March 2019
Melrose Industries PLCAnnual Report 2018 Longer-term viability statement
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 2021.
The Directors’ assessment has been made by reference to the
Group’s financial position as at 31 December 2018, 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 underpinned
by a paper prepared by management. The paper 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
and also consideration of relevant cross-border trade risk, as well
as the uncertainty surrounding the UK’s exit from the EU.
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, with no consideration of 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.
(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 52 to 58.
49
Strategic ReportAnnual Report 2018Melrose Industries PLC Board
Overall responsibility
for risk management
Audit Committee
Monitors the Group’s
internal financial control
processes
Melrose senior
management and
business unit senior
managers
Risk management
The Board recognises that operating in a dynamic and rapidly evolving
commercial environment requires a pragmatic, flexible and responsive
risk management framework comprising policies, visibility and controls that
change with the business and provide management with a comprehensive
view of the Group’s risk profile at any given time, enabling risk to be identified,
assessed and managed.
Risk management responsibilities
The Board, having overall responsibility for risk management, has approved a formalised but pragmatic Group risk
management framework.
• Agrees the Group’s risk management strategy and defines its risk appetite
• Reviews reports and recommendations from the Audit Committee on risk
governance and risk processes and controls
• Determines the nature and extent of the Group’s principal risks and regularly discusses
and assesses them throughout the year with the Melrose senior management
• Maintains oversight of principal risks and mitigation plans
• Oversees the process and review of controls
• Supports the Board in monitoring risk exposure against risk appetite
T
o
p
d
o
w
n
A
t
t
h
e
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r
o
u
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e
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e
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,
r
i
s
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o
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e
r
s
g
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t
a
n
d
a
s
s
e
s
s
m
e
n
t
• Sets the risk management processes and controls
• Considers emerging risks
• Oversees and challenges risk mitigation plans and supports the legal
and compliance teams within the business units
i
b
u
s
n
e
s
s
u
n
i
t
Operational
managers and
financial controllers
• Risk identification, assessment and monitoring at the business unit level
• Implementing, reviewing and continually monitoring compliance with risk
mitigation plans and controls
• Embedding risk awareness and culture throughout the business
The Board’s view of our principal risks and uncertainties is detailed in the table on pages 52 to 58.
l
e
v
e
l
B
o
t
t
o
m
u
p
a
n
d
a
s
s
e
s
s
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e
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t
a
t
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h
e
i
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e
x
p
o
s
u
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e
i
d
e
n
t
i
fi
c
a
t
i
o
n
Risk management strategy and framework
The objectives of the Directors and Melrose 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 in the pursuit of 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 mitigation measures to ensure that the nature and
extent of risks taken by the Group are aligned with, and
proportionate to, its strategic objectives.
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 above. Consistent with this, the Group
operates a top-down, bottom-up approach to risk management,
comprising Board and Melrose senior management oversight
coupled with bottom-up risk management embedded in the
day-to-day activities of its individual businesses.
The Board confirms that there is an ongoing process for identifying,
evaluating, tracking and managing the principal risks faced by
the Group and that these systems, which are subject to regular
monitoring and review, have been in place for the year under review
up to the date of approval of the Annual Report and financial
statements. The Board further confirms that the systems, processes
and controls that are 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 divisional 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 pages 80 and 81.
The management team of each business unit is responsible for
monitoring business level risk and implementing and maintaining
an effective risk and control environment within their business unit
as part of day-to-day operations, in line with the risk management
framework and internal control systems determined by the Board.
50
Melrose Industries PLCAnnual Report 2018
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 Melrose senior management team set out the procedures and
controls that each divisional management team is required to
implement and operate. The legal and compliance teams of each
division report to the Melrose senior management team on a
regular basis in respect of specific and ongoing risks related
to their respective business division and report formally to the
Melrose senior management team twice per year.
During 2018, in recognition of the enlarged Melrose Group as a
result of the GKN acquisition and 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.
Due to the size and scale of GKN, following its acquisition Melrose
engaged additional advisors to support the preparation of the
opening balance sheet. A programme of site visits took place
between May and October, covering a significant proportion of the
GKN businesses with a detailed work plan to identify the fair value
of operational assets and liabilities. The Audit Committee reviewed a
final paper prepared by management prior to the 2018 audit close,
which comprehensively addresses the methodologies, assumptions
and judgements taken in preparing the opening balance sheet.
The Melrose senior management team continue to assess the
impact of the resultant findings on the Group’s principal risks and
internal control and risk management systems and the Board has
directed management that the monitoring, mapping and reporting
of the Group’s risk management performance will be further
enhanced by an intelligent data-driven Group reporting tool to
automate the aggregation of Group risks identified from the
diligence efforts and site visits undertaken to prepare the GKN
opening balance sheet, in conjunction with ongoing divisional risk
reporting. Melrose senior management are working with external
risk management advisors to build a risk management aggregation
tool to enhance both the business units’ management and the
Board’s visibility of risk reporting of the enlarged Group, to be
implemented in 2019.
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 2019. It is the intention to
undertake a review of the Board’s risk appetite at least annually.
Risk management actions
During 2018, the Board continued to deliver on the key
management priorities identified in the 2017 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;
• updating and monitoring the implementation of the risk
management governance framework across all business
units. 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 GKN businesses
and maintaining this practice within the Nortek and Brush
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;
• a review and reconciliation of the principal risks identified by the
previous GKN board against those of the Melrose Board; 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 52 to 58.
Further information detailing the internal control and risk
management policies and procedures operated within the Group
is shown on pages 78 to 81 of the Corporate governance report.
Risk management priorities for 2019
Continual improvements have been made during 2018 in respect
of the Group’s risk management processes. However, the
Board recognises that Melrose cannot be complacent. In 2019,
management will continue to focus on refining the risk management
framework and embedding a culture of effective risk management
across the newly enlarged 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.
51
Strategic ReportAnnual Report 2018Melrose Industries PLC Risks and uncertainties
This section outlines the principal risks and
uncertainties that may affect the Group and
highlights the mitigating actions that are being
taken. This section is not intended to be an
exhaustive list of all the risks and uncertainties
that may arise and nor is the order of the content
intended to be any indication of priority.
A risk management and internal controls framework
is in place within the Group and has been reviewed
and adapted following the acquisition of GKN
to reflect the risk profile of the newly enlarged
Group and to continue to ensure that such risks
and uncertainties can be identified and, where
possible, managed suitably. Each Group business
unit maintains a risk register which is reviewed
regularly by Melrose senior management and
by the Melrose Board.
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.
No. Risk rating Risk title
1 Moderate
Acquisition of new businesses
and improvement strategies
2 Moderate Timing of disposals
3 Moderate Economic and political
4 Moderate Commercial
5 Moderate
Loss of key management
and capabilities
Risk trend since
last Annual Report
Increase
No change
Increase
n/a
No change
6 Moderate Legal, regulatory and environmental
Increase
7 Moderate Information security and cyber threats
Increase
8 Moderate Foreign exchange
9 Moderate Pensions
10 Moderate Liquidity
Increase
Increase
Increase
Financial ris k s
8
10
9
Stra
t
e
g
i
c
r
i
s
k
s
2
1
C
o
m
p
l
i
a
n
c
e
a
n
6
7
d
e
thic
al risks
3
4
5
e ratio nal risks
p
O
Risk rating
Likelihood
Moderate impact
Likely
Unlikely
52
Melrose Industries PLCAnnual Report 2018
Risk 2
Timing of disposals
Description and impact
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 the timings of disposals 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.
Mitigation
• 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 a clean disposal.
• Melrose is not bound by a set investment or divestment
period, enabling it to choose the opportune time.
Responsibility
Risk trend
Executive management (1)
Trend commentary
Although global M&A markets have been experiencing some
uncertainty there remain opportunities for value realisation.
Management will remain disciplined and there is no obligation
to sell before it is appropriate to do so.
Strategic priorities
Buy
Improve Sell
Strategic risks
Risk 1
Acquisition of new businesses
and improvement strategies
Description and impact
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,
particularly in the context of limited access in public bids.
Further, as per the Group’s strategy to buy and improve good
but underperforming 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.
Mitigation
• Structured and appropriate due diligence undertaken on
potential new targets where permitted and practicable.
• Focus on acquisition targets that have strong headline
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 executive Directors and other
senior employees of the Group.
• Development of strategic plans, restructuring
opportunities, capital expenditure, procurement and
working capital management.
• Proper incentivisation of operational management teams
to align with Melrose strategy.
Responsibility
Risk trend
Executive management (1)
Trend commentary
Having acquired GKN this year, the Group is focused principally
on improvement but is considering a number of bolt-on
acquisitions, some of which it completed in the year, that
would materially improve the businesses owned by the Group.
Strategic priorities
Buy
Improve Sell
(1) Comprises executive Directors and Melrose senior management.
53
Strategic ReportAnnual Report 2018Melrose Industries PLC Risks and uncertainties
Continued
Operational risks
Risk 3
Economic and political
Description and impact
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 headwinds in the automotive sector, any fluctuation in
commodity prices, 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.
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.
Whilst it is anticipated that the UK will leave the EU in 2019,
there continues to be some uncertainty in the UK regarding the
nature of Brexit and what this will mean for business and the
UK economy. Whilst Brexit is not isolated as a principal risk
to the Group as a whole, it does present potential risks that the
business units continue to monitor and assess closely relating
to potential changes to the cross-border trade and regulatory
environment. The Board continues to assess and review
mitigation plans.
Prior to the GKN acquisition, the majority of the Group’s revenue
was generated in North America, which this year has experienced
challenges such as increasing tariffs from the US/China trade
war. Whilst the impact from Brexit is expected to be minimal
in respect of North America operations, since acquiring GKN
a larger proportion of the Group’s revenue is now generated from
the UK and European-based GKN Aerospace and GKN
Automotive divisions. Therefore, the GKN Automotive and
Aerospace divisions continue to assess the potential short-
to medium-term impact of changes to international trading
relationships, border controls, supply chain friction and customs
tariffs following a ‘No Deal’ Brexit and if the UK reverts to
WTO rules. However, the Group’s geographically balanced
manufacturing footprint is expected to mitigate negative impacts
which may arise from such changes on the Group as a whole.
Mitigation
• Regular monitoring of order books, cash generation 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.
• Short-term inventory buffers are being planned to minimise
the initial impact of a ‘No Deal’ Brexit on import costs and
tariffs and border disruption.
• Sales from the EU to the UK within the GKN Automotive and
GKN Aerospace divisions are frequently on ex works terms
and therefore a cost to customers. This continues to be
reviewed in light of the various potential forms of UK exit
from the EU being considered by the UK Government.
• Strong customer relationships built on long-term partnerships
often with plants in close proximity, technical excellence and
quality. Planning for potential discussions in respect of
increased tariff costs that materialise from a ‘No Deal’ Brexit.
• Applications for third country status for two UK GKN
Aerospace sites holding production organisation approvals
or maintenance organisation approvals have been submitted.
• Actions underway to arrange relevant WTO tariff
administrative requirements.
• The Group remains agile, diversified and well positioned to
deal with any short-term uncertainty in the UK.
Responsibility
Risk trend
Executive management (1)
Trend commentary
There continues to be a degree of geopolitical uncertainty into
2019. However, the Board notes that economic uncertainty can
depress business valuations and this may increase the number
of potential acquisition opportunities for Melrose.
The Group’s senior management are actively engaging with the
executive teams of each division to track the potential impacts
of Brexit, engage actively with those who are working on the
impact assessments and mitigation actions, and report the
material findings to the Board.
Strategic priorities
Buy
Improve Sell
(1) Comprises executive Directors and Melrose senior management.
54
Melrose Industries PLCAnnual Report 2018 • Since acquiring GKN, Melrose senior management have
actively engaged with and supported the GKN Aerospace
and GKN Automotive divisional management teams in
identifying embedded contractual and business conduct
risks relating to key supply chain and production
programme partners. The management teams of the
GKN Aerospace and GKN Automotive divisions have
begun to implement and direct a series of operational
change management programmes to mitigate the risks
they have identified.
Responsibility
Risk trend
Executive management (1)
n /a
Trend commentary
Melrose senior management engage actively with the divisional
executive teams to track, monitor and support strategic planning
activities and impact mitigation assessments in respect of ongoing
commercial risks. Particular focus is placed on certain GKN
Aerospace and GKN Automotive market segments where
customer and/or competitor concentration is high and heavier
reliance is placed on supply chain efficiency and programme
partner management. With support from the Melrose senior
management, the divisional Chief Executives report material
updates directly to the Group’s executive Directors.
Strategic priorities
Buy
Improve Sell
Operational risks
Risk 4
Commercial
Description and impact
The Group operates in competitive markets throughout the world
and is diversified across a variety of industries and production
and sales geographies. This provides a degree of Group-level
impact mitigation from the potential commercial challenges and
market disruptions that face each of the divisions.
Each division is exposed to particular commercial and market
risks, which are primarily accentuated where customer/
competitor concentration is high within their respective
market segments.
Melrose operates a decentralised control and management
structure which empowers divisional management teams
to take full responsibility for planning, mitigating, navigating and
responding to the specific commercial risks and challenges
facing their respective businesses. Melrose senior management
monitor the aggregated impact of such risks and provides
active support to the divisional management teams in fulfilling
their responsibilities.
Common commercial risk areas that potentially affect a large
proportion of the Melrose businesses include those related to
production quality assurance, health and safety performance,
customer concentration and uncertainties related to future
customer demand, the impact of increased competitive
pressures on the maintenance/improvement of market share,
potential disruptions to supply chains and increases to the price
of raw materials, technological innovation and market disruption,
and the performance and management of programme partners.
Mitigation
• The Group continued to actively invest in research and
development activities in 2018 to augment its platforms for
future product expansion, quality improvements, customer
alignment and achieving further production efficiencies.
Details about the Group’s research and development
activities are provided on page 76.
• Health and safety, awareness initiatives and performance
enhancements continued to be implemented in alignment
with regulation, market practice and site-based risk
assessments and requirements. Further details are
provided on pages 66 and 67.
(1) Comprises executive Directors and Melrose senior management.
55
Strategic ReportAnnual Report 2018Melrose Industries PLC Risks and uncertainties
Continued
Operational risks
Compliance and ethical risks
Risk 5
Loss of key management and capabilities
Risk 6
Legal, regulatory and environmental
Description and impact
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.
Mitigation
• Succession planning within the Group is coordinated via
the Nomination Committee in conjunction with the Board
and includes all Directors and senior employees. In line
with the Group’s decentralised structure, each divisional
CEO, in consultation with the Chief Executive, is responsible
for the appointment of their respective executive team
members, with disclosure to the Nomination Committee.
• 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.
Responsibility
Risk trend
Executive management (1)
Trend commentary
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 2019.
Description and impact
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, which has been
accentuated by the GKN acquisition. 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.
Mitigation
• Regular monitoring of legal and regulatory matters at both
a Group and business unit level. Consultation with external
advisers where necessary.
• A robust control framework is in place, underpinned by
comprehensive corporate governance and compliance
procedures at both a Group and business unit level.
• Where possible and practicable, due diligence processes
during the acquisition stage seek to identify legal, regulatory
and environmental risks. At the business unit 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.
Strategic priorities
Buy
Improve Sell
• Insurance cover mitigates certain levels of risk.
Responsibility
Risk trend
Executive management (1)
Trend commentary
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.
Strategic priorities
Buy
Improve Sell
(1) Comprises executive Directors and Melrose senior management.
56
Melrose Industries PLCAnnual Report 2018 Compliance and ethical risks
Financial risks
Risk 7
Information security and cyber threats
Risk 8
Foreign exchange
Description and impact
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.
Mitigation
• 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 on a case-by-case basis.
Responsibility
Risk trend
Executive management (1)
Trend commentary
Group results are reported in Sterling but a large proportion of
the revenues are denominated in currencies other than Sterling,
primarily US Dollar and Euro. Following the GKN acquisition, the
Group has exposure on both a transactional and translational
basis to more currencies. Sensitivity to the key currency pairs
is shown in the Finance Director’s review on pages 47 and 48.
Strategic priorities
Buy
Improve Sell
Description and impact
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 has increased in the year due to the scale, complexity
and public-facing nature of the acquisition of GKN. In addition,
Melrose recognises that the inherent security threat is considered
highest in GKN Aerospace where data is held in relation to
civil aerospace technology and controlled military contracts.
Mitigation
• Management continues to work with its business leaders
and external security consultants to better understand
the Group’s increased exposure to cyber security risk and
to ensure appropriate mitigations are in place for the
enlarged Group.
• Melrose has deployed its information security strategy
and risk-based governance framework to the acquired
GKN group within the year to mitigate the Group’s exposure
to cyber risk, which follows the UK government’s
recommended steps on cyber security. This strategy has
been successfully implemented across the whole Group
with significant progress made during the year in both our
GKN and existing businesses.
• The progress of each business is measured against
the information security strategy and is monitored on
a quarterly basis.
Responsibility
Risk trend
Executive management (1)
Trend commentary
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
security consultants to monitor, improve and refine its
Group-wide strategy to aid the prevention, identification
and mitigation of any threats.
Strategic priorities
Buy
Improve Sell
(1) Comprises executive Directors and Melrose senior management.
57
Strategic ReportAnnual Report 2018Melrose Industries PLC Risks and uncertainties
Continued
Financial risks
Risk 9
Pensions
Description and impact
The defined benefit pension schemes acquired with GKN were
proportionately less well funded and higher profile than those
of the 2017 Group.
Any shortfall in the Group’s defined benefit pension schemes
may require additional funding. As at 31 December 2018, the
Group’s pension schemes had an aggregate deficit, on an
accounting basis, of £1,413 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.
Mitigation
• The Group’s key funded pension plans, including the
GKN 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.
Responsibility
Risk trend
Executive management (1)
Trend commentary
Although the risks are well understood and funding plans
for the GKN Schemes have already been agreed with Scheme
Trustees, the size of the gross liabilities as a proportion of the
Group’s net assets has increased significantly.
Strategic priorities
Buy
Improve Sell
Risk 10
Liquidity
Description and impact
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 pages 46 to 47,
the Group has term loans of US$960m and £100m and
revolving credit facilities comprising US$2 billion, €0.5 billion
and £1.1 billion.
In addition, the GKN net debt at acquisition included capital
market borrowings across three unsecured bonds which in total
amount to £1.1 billion. These bonds remain outstanding as at
31 December 2018 and further detail is provided in the Finance
Director’s review on pages 46 to 47.
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.
Mitigation
• 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.
• 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.
Responsibility
Risk trend
Executive management (1)
Trend commentary
The Group is satisfied that it has adequate resources available
to meet its liabilities.
Strategic priorities
Buy
Improve Sell
(1) Comprises executive Directors and Melrose senior management.
58
Melrose Industries PLCAnnual Report 2018
Corporate Social Responsibility
Corporate Social
Responsibility
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 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 2018 by each
of the five 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.
01Employment matters
page 60
03Gender diversity
page 63
05Health and safety
page 66
07Human rights and
ethical standards
page 69
02Community and
charitable matters
page 62
04The environment
page 64
06Supply chain assurance
page 68
59
Strategic ReportAnnual Report 2018Melrose Industries PLC Corporate Social Responsibility
Continued
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.
60
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.
Melrose Industries PLCAnnual Report 2018 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.
During 2019, the Board established a
workforce advisory panel (“WAP”) in order
to further promote effective engagement
with, and encourage participation from, its
workforce. Given the Group’s decentralised
nature and Melrose’s strategic business
model and frequent turnover of businesses,
the WAP comprises of the Chief Human
Resources Officer (or equivalent) from
each business unit and a Melrose Group
representative. Each member of the WAP
is responsible for promoting workforce
engagement, collating the voice of the
workforce and demonstrating how that
voice is fed into executive discussions
for their respective business unit. This
information is then fed back to the Board
for consideration in its discussions and
decision making.
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 engagement,
training and advancement as an essential
element of industrial relations.
Employee initiatives
During 2018, a range of employee-related
initiatives were implemented across
the Group:
• GKN Aerospace piloted and launched
‘Talent Assessment and Development
Centres’ which focus on career
development in addition to individual
assessment. The ‘transition centres’
are offered at two levels; those
individuals wanting to become a leader
and those looking to move from being
a leader to leading other managers.
The assessments cover a range of
psychometric testing, real-life
simulations and in one of the
centres, a coaching academy.
• GKN Automotive has focused on
investment in its future workforce
by standardising its global graduate
programme with reinforcement of the
importance of development, mentoring,
performance management and
Corporate Social Responsibility.
GKN Automotive has increased
its total number of graduates to 24,
a quarter of whom are female.
• GKN Powder Metallurgy has a number
of employee training programmes.
In particular, GKN Powder Metallurgy
offers engineering development
programmes, as well as various
leadership training programmes.
In order to adapt to changing market
trends and to help foster talent, some
of these programmes are in the
process of being reviewed.
• The SST division continued its
emphasis on improving its products and
services through the employee invention
process. The Innovation Committee
meets monthly to review employee
submissions, the committee consisting
of internal counsel, external patent
counsel, senior engineering leadership,
and the inventors themselves.
Incentives are in place for employees
to submit their invention ideas, including
financial incentives if a submission
results in applications filed and patents
granted. In 2018, the Innovation
Committee heard 52 invention
idea presentations by employees.
At present, 22 of these invention
ideas are in various stages of either
business development or drafting
of a patent application.
• Brush HGI has partnered with Toyota
Manufacturing (UK) and has enrolled
two HGI staff onto the Toyota
Engineering apprenticeship scheme.
The apprentices will be based at both
HGI and Toyota Manufacturing (UK)
for the duration of their 44-month
apprenticeship, where they will train at
Toyota’s world class training facility in
Derby and they will be taught by some
of the UK’s leading trainers, who will
help develop, support and guide them
into HGI’s engineers of the future.
Not only will this apprenticeship bridge
the gap between education and the
workplace, it will also help HGI address
current and future engineering
skills gaps whilst focusing on the
development of younger people
in this specialist sector.
61
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
Strategic ReportAnnual Report 2018Melrose Industries PLC Corporate Social Responsibility
Continued
In Filton, near Bristol, where GKN
Aerospace has a manufacturing site,
proposals have also been put forward for a
Global Technology Centre, a Digital Training
Centre and Proving Ground where local
communities can be trained to better utilise
the digital capabilities our country needs.
As the technological world around us
accelerates, it is important that the UK has
the digital literacy to remain not just globally
competitive but emerge as a global leader
and this is the vision behind this Centre.
In addition, Brush is setting up a ‘Skills
Development Fund’. This Fund will identify
internal and external development needs,
engage and collaborate with partners and
ensure that sustainable development is at
the heart of its business.
From the creation of STEM programmes,
apprenticeships and degrees, to investment
in manufacturing hubs, digital skills, and
employee development, Melrose is
equipping the UK with the future skills
our country needs.
The funding will be available to support
the Group’s Aerospace and Automotive
divisions, but will also be available to
higher education colleges to create new
opportunities for young people and help
foster the next generation of great British
engineers. In order for this Fund to operate
effectively, Melrose is currently conducting
a Training Needs Analysis to understand
what skills are needed and for whom, where
operational inefficiencies lie, and speaking
to potential partners across business,
government, academia and institutions.
Proposals have already been suggested
to develop the GKN Innovation Centre in
Abingdon, near Oxford, as a global centre
of excellence for eDrive technology,
composites and additive manufacture.
Melrose has also identified potential
university partners, high value
‘manufacturing catapults’, and developed
relationships with institutions including
the Institute of Mechanical Engineers.
In particular, this Centre will be sponsoring
select teams who are building electric
powertrain cars for Formula Student,
a prestigious educational engineering
competition. This Centre would be at the
forefront of creating highly skilled jobs for
the UK manufacturing industry.
Community and charitable matters
Melrose Skills Fund
In 2018, Melrose committed to setting up
the ‘Melrose Skills Fund’, with the ambition
to create a supply chain of high calibre
engineers for the whole of the UK. This
forms part of Melrose’s wider ambition to
create an engineering and manufacturing
powerhouse for the UK. Melrose is
contributing £10 million to the ‘Melrose
Skills Fund’ over five years. The Fund
will operate in collaboration with NGOs.
In addition, employees of the Group continued to support a number of worthwhile charities and
community projects during 2018. Here are a few examples of the great contributions that have
been made.
Samarthanam, India
Since 2016, GKN Aerospace in India has
worked alongside the Samarthanam Trust
to develop a five-year plan to support
450 children with disabilities and from
underprivileged backgrounds. As part of
their commitment, GKN Aerospace has
established a computer-based resource
centre at Samarthanam to help the children
gain essential skills and play an active role
in society. The centre also provides training
to improve their job prospects. So far, GKN
Aerospace has funded 1,824,500 Indian
Rupees for the project.
Sea turtle conservation
Employees at GKN Automotive in Thailand
joined a sea turtle conservation programme
with the aim of creating awareness
amongst the younger generation of the
endangered nature of sea turtles, whilst
teaching children about how they can
better protect them. The employees,
together with school children, created
nesting areas on Kerachut Beach in
Penang National Park for the sea turtles by
planting Merambung trees to attract the
turtles to the area so that they can safely
hatch their eggs away from predators.
American Cancer Society
HVAC held several fundraising activities
for the American Cancer Society, a US
voluntary health organisation that is
dedicated to eliminating cancer. These
activities included participating in the ‘Relay
for Life’ team fundraising cancer walk and a
‘Pink Day’ that was held at the Dyersburg
plant in October 2018. The Dyersburg plant
has raised over US$28,000 to date for the
benefit of the American Cancer Society,
and employees are looking forward to
participating in the ‘Relay for Life’ in 2019.
62
Melrose Industries PLCAnnual Report 2018 Total Group Employees
60,908
Board
9
Male
49,058 (81%)
Female
11,850 (19%)
Male
Female
7 (78%)
2 (22%)
Senior Managers(1)
354
Male
Female
315 (89%)
39 (11%)
Melrose – Central
48
Aerospace
16,670
Automotive
23,401
Male
Female
29 (60%)
19 (40%)
Male
12,601 (76%)
Female
4,069 (24%)
Male
20,464 (87%)
Female
2,937 (13%)
Powder Metallurgy
7,164
Male
5,981 (83%)
Female
1,183 (17%)
Nortek Air & Security
7,405
Male
4,961 (67%)
Female
2,444 (33%)
Other Industrial
6,220
Male
5,022 (81%)
Female
1,198 (19%)
(1) Senior Managers include the Melrose senior management
team and, as required by s414C of the Companies Act
2006, this figure excludes the Board of Melrose Industries
PLC and includes Melrose subsidiary company directors.
63
Diversity
The charts to the right show the total number
of males and females working within the Group
as at 31 December 2018.
Melrose is a participant of the Hampton-
Alexander Review and also notes the
recommendations of Lord Davies’ review,
“Women on Boards”. Melrose continues to
encourage gender diversity throughout the
Group. Although not appropriate to set
specific gender diversity targets at Board
level or 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.
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.
Further details on the Group’s Diversity
Policy can be found on page 91 of this
Annual Report.
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.
Strategic ReportAnnual Report 2018Melrose Industries PLC Corporate Social Responsibility
Continued
The Group ensures that its businesses
understand the importance of monitoring
the impact of their operations on the
environment, although there are no
standardised environmental KPIs currently
used within the Group. 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 2018, the Company continued to
comply with the ongoing annual reporting
requirements of the UK’s Carbon Reduction
Commitment Energy Efficiency Scheme.
Environmental initiatives
During 2018, a range of environmental
initiatives were implemented within the
Group’s divisions. Some of these are
listed below:
• GKN Aerospace remained committed
to further environmental improvements
across the business. By the end of
2018, 84% of GKN Aerospace’s sites
achieved ISO 14001 certification. In
addition, the business’s first certification
to ISO 50001 was achieved at its site in
Munich, Germany. The site at El Cajon,
California, US as part of a consortium of
six large industrial facilities in San Diego,
entered into a Strategic Energy
Management Agreement whereby it
has committed for two years to identify
energy savings measures, with an
ultimate goal of reducing 2019 usage
by 5% (with a 1% reduction already
achieved by the end of 2018).
• ISO 14001:2015 accreditations were
retained by all GKN Automotive sites,
with 13/14 European plants being
certified within ISO 50001. In 2018
all of the Driveline plants were
contributing to the doMORE! Campaign,
which aims to improve use of energy,
and we implemented over 100 energy
efficiency activities. The energy savings
projects in the European sites alone
saved over 1.3 million kWh in 2018.
In addition, the business managed to
achieve its landfill reduction target of 10%.
• All GKN Powder Metallurgy sites
successfully finalised the transition to
ISO 14001:2015 and completed a
comprehensive third-party compliance
audit during the second half of 2018.
To continue its focus on environmental
protection and energy efficiency goals,
Hoegenaes Corporation Romania,
recognized as one of the highest energy
consumers in the business, successfully
obtained a third-party Stand-Alone
Certification for its Energy Management
System according to ISO 50001.
The environment
The Melrose Board
fully understands the
importance of the
Group’s environmental
responsibilities and is
committed to ensuring
that the operations of
its businesses have
the minimum possible
adverse effect on
the environment.
64
Melrose Industries PLCAnnual Report 2018 In addition, the business achieved
a 3.7% global reduction in energy
resulting in savings of 25,000 MWh
(vs. 2017) and a 9.3% global reduction
in landfill waste equalling 242 tons
(vs. 2017).
• HVAC continues to look for opportunities
to reduce its environmental footprint: its
Montreal, Canada facility reduced the
use of wood packaging by approximately
US$48,000 in favour of recyclable
materials for interplant shipments. In
Tualatin, the conversion to LED lighting is
approximately 60% complete and the
business received a three-year Silver
Green Business Certification. Further,
in 2018 the business procured an
enterprise-wide software that will enable
tracking of hazardous waste generation,
recycling of cardboard, paper, metals,
electricity and water use by site by
month with future plans to track
CO2 emissions.
• AQH launched the Hartford Energy
Team with support from WPPI, a local
electric utility, and Focus on Energy, a
state-wide programme in Wisconsin,
US, which have built a robust energy
consumption model to understand
current consumption of electric power
and natural gas and to review the
impact of energy reduction projects.
AQH has also implemented measures
to look for reduction opportunities
and to identify and quickly correct
leaks in its compressed air system.
The business has replaced fluorescent
bulbs with LED tubes at certain facilities
and remodelling projects now use only
LED lighting. As a result of the above
activities, AQH qualified for US$60,000
in rebates in 2018. In addition, the GBIS
Huizhou site maintained its ISO
14001:2015 registration.
• The SST sites continue to ensure that
they either meet or exceed the Universal
Waste and Recycling regulations, as
well as maximising their recycling
efforts. In order to reduce electrical
consumption and Universal Waste
category reductions, the use of
fluorescent bulbs was eliminated and
replaced with LED lighting at two
facilities, as well as implementing energy
efficient exterior LED fixtures at another.
The new Carlsbad, California, US site
was developed with bioswale storm
water collection/subsequent recycled
water distribution for all site
irrigation purposes.
• All GKN Wheels & Structures sites
retained their ISO 14001:2015
accreditations. The Armstrong, US site
installed a new interface to control the
light and air system in the plant, which
resulted in reduced energy usage and a
US$20,000 rebate on lighting. All GKN
Wheels & Structures sites undertook
an independent environmental audit in
2018 to help identify opportunities for
further improvement.
• Brush continued to focus on making
further energy savings. Lighting initiatives
across the Blackwood, UK, Ridderkerk,
The Netherlands and Brisbane, Australia
sites continue, with the installation of LED
lights in the factory and surrounds, which
will deliver an annual CO2 reduction and
generate savings for the business.
The Blackwood site also completed
its transition to ISO 14001:2015 and
recycled 100% of its mixed wood waste
in 2018. A paper reduction initiative was
also introduced in Brisbane, which saw
paper consumption reduce by more than
50% over the year.
Greenhouse gas emissions
The Group is required to measure and
report its direct and indirect Greenhouse
gas (“GHG”) emissions in the UK pursuant
to the Companies Act 2006 (Strategic
Report and Directors’ Reports) Regulations
2013. The reported emissions cover all
entities over which the Group had financial
control over for a period of at least one year
as of 31 December 2018. Emissions from
entities acquired or disposed of during the
reporting period (i.e. disposed of before
31 December 2017 or acquired after
1 January 2018) are not accounted for in
the report. Note the emissions associated
with the purchase of the GKN group
midway through 2018 have not been
included in the report as per the GHG
accounting procedure, and will be included
in next year’s reporting period and lead
to a significant increase in the overall Group
emissions (GKN’s last reported emissions
for 2017 amounted to 1.29 million tonnes).
The year-on-year like-for-like emissions
were down by around 10% mainly due
to continuing significant reductions in
reported energy usage at the Brush
Loughborough, UK and Czech Republic
sites, and the Nortek Saskatoon, Canada
and Shenzhen, China sites and the closure
of the Mississauga, Canada site and a near
20% reduction in the Ergotron group
emissions. These have outweighed an
increase in process related emissions
at the Brush Blackwood and Brisbane
sites and a 12% increase in emissions
across the HVAC division.
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, Revised Edition,
ISO 14064 Part 1 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.
Global GHG emissions data for period 1 January 2018 – 31 December 2018
(tonnes CO2e(1) unless stated)
Emissions sources
2018(2)
2017
Change
Combustion of fuel & operation of facilities (scope 1)(3)
UK electricity
Overseas electricity
Total purchased electricity (scope 2)(4)
Other purchased energy (scope 2)(4)
Company’s chosen intensity measurement:
Emissions reported above normalised to tonnes
per £1,000 turnover
23,261
1,718
29,592
31,310
1,801
23,680
3,236
33,273
36,509
2,027
-2%
-47%
-11%
-14%
-11%
0.030
0.030
0%
(1) CO2e – carbon dioxide equivalent, this figure includes Greenhouse gases in addition to carbon dioxide.
(2) The 2018 emissions data does not include the GKN businesses as they were acquired part way through that year.
(3) Our scope 1 estimates include emissions from fuel used on premises, transport emissions from owned or controlled vehicles,
losses of refrigerant, and process and fugitive emission.
(4) Our scope 2 estimates include emissions from electricity and heat purchased by the Group’s businesses. Scope 2 emissions,
and total Greenhouse gas emissions, are calculated using Market based methods.
65
Strategic ReportAnnual Report 2018Melrose Industries PLC Corporate Social Responsibility
Continued
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 and as is appropriate to the
activities undertaken at each facility. As a
general rule, the Board regularly directs
divisions to 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 Board and
reviewed at each quarterly Board meeting.
The year was overshadowed by the tragic
accident at Telford and efforts have been
redoubled in order to avoid any recurrence.
As would be expected, health and safety
remains the primary focus and there were
no consistent or repeated material issues
or concerns identified by the Board during
2018. Behaviour-based safety programmes
and reinforcement training remain at the
forefront of all business divisions’ health and
safety initiatives, with additional focus on
strengthening near-miss and hazard
awareness programmes to maintain a
culture of safety awareness, informed risk
mitigation, regular workplace training and
reduction of hazardous behaviours in
each division.
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.
During 2018, the recently acquired GKN
businesses introduced a number of
targeted safety-enhancing initiatives in
respect of hazard identification, working at
height, manual handling and ergonomic
safety. Reported attendance at the relevant
information and training sessions was high.
Safety awareness amongst employees
continues to grow and be reinforced as part
of the quarterly “ThinkSAFE” training, with
different topics being aimed at groups
of employees based on their business
function. Monthly refresher sessions are
held on specific topics such as personal
protection equipment and the manual
handling of parts, all within the facility
environment on a localised basis and
tailored to the requirements of each site
where appropriate.
All divisions in the Group have the health
and safety of their workforce as a key
priority. Each business unit uses data
collection methods of comparable scope,
frequency and quality. We have been
working with the GKN businesses to
conform their KPIs to those reported
by the non-GKN businesses, and can
now confirm that all businesses are
reporting in accordance with the
usual Melrose calculations.
The Group has a policy in place, which is
supported by regular top-down monitoring
and bottom-up reporting and continuous
improvement procedures, to ensure that
the Directors are made aware of any
serious health and safety incidents
wherever they occur in the world without
delay and enable suitable investigative,
preventative and corrective actions to be
implemented. Current events and issues
relating to health and safety matters are
also discussed at quarterly Board meetings
of the Company in consultation with the
divisional health and safety leads. Where
an urgent or high priority matter arises, the
Melrose senior executive management
team will monitor and discuss it on an
expedited basis to determine a responsive
action plan for implementation by the
relevant divisional management team.
Tragically, a fatality occurred at the GKN
Wheels & Structures facility in Telford,
Shropshire, UK at the end of 2018. The
incident remains under investigation by the
UK Health and Safety Executive and the
business is cooperating fully whilst
implementing its own health and safety
action plan.
Any fatal incident is one too many and
the Company has responded to this
incident by closely supporting and
monitoring the divisional management team
in implementing a comprehensive detailed
action plan for corrective and improvement
measures without delay, which include
actions related to the accident as well as a
wider health and safety review at the
relevant facility. The business has extended
its support to the family involved and those
working at the plant who have been
affected by the incident. In line with the
Group’s commitment to health and safety
excellence the Board continues to impress
upon divisional management teams the
importance of maintaining high levels of
health and safety awareness that align not
only with regulation, but also good industry
practice and site-specific risk profiles.
The Group emphasises to all divisional
management teams that health and safety
performance and vigilance must be
prioritised at all sites, with focus placed on
those sites that contain production facilities.
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.
66
Melrose Industries PLCAnnual Report 2018 At HVAC, behaviour-based observations,
job safety analysis and personal protection
equipment assessments continued.
A Nortek Safety Executive Council was
formed and the Dyersberg, US facility
received the Safety Award from the State
of Tennessee for having an outstanding
safety programme.
Facilities within the Group generally hold the
ISO 14001 and OHSAS 18001 certifications
where appropriate with a number of sites
planning to roll out ISO 45001 next year.
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 to keep the workforce safe.
Within the Automotive division (which
makes up over 35% of the total Group
workforce) the major accident frequency
rate and total accident frequency rate
decreased compared to 2017. This followed
increased prominence of specific practical
safety initiatives such as machine risk
assessments, safety in setting and
changeover assessments, safe working
on high-voltage automotive systems and
workplace transport risk assessments –
the latter seeing a concurrent reduction
in the number of risks that were identified
in the Automotive division relating to the
interaction between employees and fork
lift trucks. Safety awareness continues to
be conducted in a targeted manner.
The Automotive division’s US plants in
Alamance, Rockwell and Sanford received
safety excellence awards from the US
Department of Labor in acknowledgement of
their injury reduction and risk management.
Other notable site-specific initiatives include
the implementation of a behaviour-based
safety improvement model at the Aerospace
site in Pune, India which saw a reduction of
81% in the total incident rate at that facility.
The Powder Metallurgy division’s Sinter
Metals Conover facility in North Carolina,
US received an award from the North
Carolina Department of Labor recognising
the site’s outstanding health and safety
efforts. The Hoeganaes Cinnaminson site
in New Jersey, US received an MPPA
award for several years of zero lost time
accidents in the workplace and an award
from the New Jersey Governor’s Counsel
in recognition of zero work-related injuries.
Brush continued to focus on enhancing
employee engagement and hazard
reduction across its facilities, with its UK site
continuing to see good performance and
the Czech Republic facility implementing
additional initiatives including increased
visual inspections of key constructions and
lifting devices, and replacement of manual
machines for CNC machines. In the UK,
Czech Republic and The Netherlands, ISO
14001 and OHSAS 18001 standards
continue to be maintained and the transition
from ISO 9001:2008 to ISO 9001:2015 was
completed across all facilities. In the UK,
Brush was awarded the ROSPA Gold
Award in Health and Safety, signalling
industry recognition for its high standards
in health and safety.
Brush’s behavioural safety programme
has continued to improve the strong health
and safety culture within the business.
The programme focuses on developing
a proactive approach among Brush
employees to increase responsibility and
accountability for their own and their
working group’s actions, whilst ensuring
that employees intervene at the earliest
opportunity to stop hazardous acts or
correct any unsafe conditions.
67
Strategic ReportAnnual Report 2018Melrose Industries PLC Corporate Social Responsibility
Continued
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.
A number of initiatives were undertaken
during 2018 to improve supply chain in light
of the acquisition of GKN. With Melrose
support, the GKN divisions have renewed
their focus on improving their performance
and delivery, particularly in critical supply
chains. This requires a focus, on both its
own suppliers, as well as delivering
for its customers.
As part of its supplier focus, as well as
working to ensure its on time payment,
GKN Aerospace and GKN Automotive
launched a joint global procurement
transformation plan to drive business
improvement, which seeks to optimise its
£1.4 billion of spend on indirect products
and services. This involves partnering with
suppliers for indirect products and services
across these divisions. Preferred suppliers
are in the process of being selected for
these indirect products and services,
including consumables and non-OEM
parts. Concurrently, all businesses are
working to achieve similar improvements
with their direct commodity suppliers.
Steps have also been taken to improve
relationships with customers. In particular,
Melrose has funded the significant
investment required to achieve the
necessary operational improvements
fundamental to securing this
improved performance.
Supply chain assurance
Each business 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.
68
Melrose Industries PLCAnnual Report 2018 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/
governance/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.
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.
Finally, the Company’s Modern Slavery
Statement is available on the Company’s
homepage at www.melroseplc.net.
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 ensuring that all
businesses have implemented a robust
policy regarding the prevention of modern
slavery and human trafficking and that
online training has been made available
to employees as the businesses have
determined to be appropriate.
The Strategic Report, as set out on
pages 10 to 69, has been approved
by the Board.
On behalf of the Board
Simon Peckham
Chief Executive
7 March 2019
69
Strategic ReportAnnual Report 2018Melrose Industries PLC Governance overview
Justin Dowley
Non-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.
70
Introduction from the Chairman
As part of this approach, the Board has supported, applied
and complied with the applicable Main Principles, the Supporting
Principles and the respective related provisions of corporate
governance contained in the UK Corporate Governance Code
2016 (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 2018 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 and to ensure that Melrose complies with
the new UK Corporate Governance Code that was published in
July 2018 and applies to accounting periods beginning on or
after 1 January 2019.
Succession planning
Succession planning was an area of focus for Melrose in 2018.
The Nomination Committee and the Board has considered the
leadership needs of the Group, present and future, together with
the skills, experiences and diversity 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.
Following the Company’s elevation to the FTSE 100 and in
compliance with amendments to the Code, a review and refresh
of the Board was undertaken. I was elected to the inaugural role
of Non-executive Chairman of the Board, effective 1 January 2019.
Further detail about my appointment, background and experience
can be found on page 72.
The previous Chairman, co-founder Mr Christopher Miller, who
had held the position of Chairman since Melrose’s establishment
in 2003, will continue in a full-time executive capacity as Executive
Vice Chairman alongside fellow co-founder Mr David Roper.
Ms Liz Hewitt, who has served as a Non-executive Director since
2013, was elected to the role of Senior Independent Director of
the Board as my replacement, while continuing to perform
her role as the Chairman of the Audit Committee. Ms Hewitt is the
second-longest serving Non-executive Director and brings with her
extensive business, financial and investment experience gained
from a number of senior roles in international companies, including
as independent member of the House of Lords Commission, and
as non-executive director of Novo Nordisk A/S and Savills PLC.
Mr David Lis stepped down as Chairman of the Nomination
Committee and was appointed as Chairman of the Remuneration
Committee as my replacement, having served as a member
of the Remuneration Committee since joining the Board as
a non-executive director in March 2016.
Further detail about Mr Lis’ appointment, background and
experience can be found on page 73.
Mr Archie G. Kane was appointed as Chairman of the Nomination
Committee in replacement of Mr Lis, having served as a member
of the Nomination Committee since his appointment as a Non-
executive Director in May 2017.
Melrose Industries PLCAnnual Report 2018 Further detail about Mr Kane’s appointment, background
and experience can be found on page 73.
Following a review by the Nomination Committee of the
composition of the Board and a subsequent recommendation
by the Committee that the number of independent Directors
be increased, 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 Committee reviewed
and produced a shortlist of candidates, from which several
candidates were invited to interview with members of the
Nomination Committee. Ms Charlotte Twyning was identified
as the Board’s preferred candidate and was appointed to the
Board with effect from 1 October 2018. In accordance with the
Articles, Ms Twyning will stand for election at the 2019 AGM.
Remuneration
The Directors’ Remuneration report, comprising the Annual Report
on Remuneration, is available on pages 92 to 112.
After the renewal of the Company’s former long-term incentive
plan in 2017, the second tranche of options over 2017 Incentive
Shares was allocated in 2018 as planned.
As further detailed in the Directors’ Remuneration report, having
undertaken a detailed engagement process with key shareholders
following the 2018 AGM (see below) we are making some
adjustments to the implementation of the Directors’ Remuneration
Policy for 2019 (see pages 104 to 107), to ensure that it remains
appropriate and compliant with the UK Corporate Governance
Code. No material changes are required to the Directors’
Remuneration Policy or its implementation in 2019, and
all other elements will remain the same as approved at the
2017 General Meeting.
Melrose’s remuneration philosophy remains unchanged in
order to align senior management with shareholders; executive
remuneration should be simple, transparent, support the delivery of
the Melrose value creation strategy and only pay for performance.
Risk management and compliance
Melrose has implemented a uniform Enterprise Risk Management
programme across all its business units including the newly
acquired GKN businesses. Brush and the Nortek businesses
have fully embedded our processes and procedures.
The Group’s compliance policies have been fully implemented
across all GKN, Nortek and Brush business units and continue to
be monitored to ensure their effectiveness for the enlarged Group.
Taken together, these initiatives have enhanced the GKN, Nortek
and Brush 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 50 to 51 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 2018, the Company continued its programme of
engagement with major investors and the governance bodies
in respect of our Directors’ Remuneration Policy and incentive
arrangements. In particular, although the 2017 Remuneration
Report received strong support from shareholders, it also received
significant votes against. Recognising this, the Chairman of the
Remuneration Committee and other members of the Board met
with major shareholders in the months following the 2018 AGM to
discuss shareholders’ views in respect of executive remuneration.
The Board is pleased with the support and constructive feedback
received throughout these discussions, which is set out in the
Directors’ Remuneration report on pages 92 to 112, and it is our
intention to continue this programme for the foreseeable future,
especially ahead of seeking approval for the renewal of the
long-term incentive plans next year. Further engagement with
key shareholders and governance bodies was a central part
of our bid for GKN and has continued since its acquisition
and the 2018 AGM.
Justin Dowley
Non-executive Chairman
7 March 2019
Main responsibilities of the Board
• Effectively manage and control the Company via a formal
schedule of matters reserved for its decision
• Determine and review Group strategy and policy and provide
strategic leadership to the Group
• Consider acquisitions, disposals and requests for major
capital expenditure
• Review financial and trading performance in line with the Group’s
strategic objectives
• Ensure that adequate funding and personnel are in place
• 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
• Monitor, assess and review cyber security and fraud risk for the Group
• Delegate and oversee responsibility for entrepreneurial leadership and
strategic management of the Group to the Group senior executives
• Challenge, review and exercise robust managerial oversight across
key decisions, actions and processes performed by the Group’s
business units
71
GovernanceAnnual Report 2018Melrose Industries PLC Board of Directors
1. Justin Dowley
Non-executive Chairman
3. David Roper
Executive Vice-Chairman
1
Year appointed
Appointed as Chairman on 1 January 2019,
having previously served as a Non-executive
Director from 1 September 2011 and as
Senior Independent Director from 11 May 2017
to 31 December 2018.
Skills and experience
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 (1)
Business reviews attended
Other significant appointments
3
3
• Non-executive Director of Scottish Mortgage
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.
Justin Dowley
Non-executive Chairman
2
Board meetings attended (1)
Business reviews attended
4
3
Christopher Miller
Executive Vice-Chairman
Investment Trust PLC
Independent
Not applicable
• Director of a number of private companies
• Steward of the Jockey Club
• Deputy Chairman of The Panel on Takeovers
and Mergers
Committee membership
• Nomination
• Remuneration
Independent
2. Christopher Miller
Executive Vice-Chairman
Yes
Year appointed
Appointed as Executive Vice-Chairman on
1 January 2019, having previously served as
Executive Chairman from May 2003.
Skills and experience
Christopher’s longstanding 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 (1)
Business reviews attended
Other significant appointments
• Trustee of the Prostate Cancer
Research Centre
Committee membership
• Nomination
Independent
4
3
Not applicable
72
4. Simon Peckham
Chief Executive
3
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 (1)
Business reviews attended
4
3
Independent
Not applicable
David Roper
Executive Vice-Chairman
4
5. Geoffrey Martin
Group Finance Director
Simon Peckham
Chief Executive
Year appointed
Appointed as Group Finance Director
on 7 July 2005.
5
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.
Board meetings attended (1)
Business reviews attended
4
3
Independent
Not applicable
Geoffrey Martin
Group Finance Director
Melrose Industries PLCAnnual Report 2018 6
Liz Hewitt
Independent Non-executive Director
7
David Lis
Independent Non-executive Director
8
Archie G. Kane
Independent Non-executive Director
9
Charlotte Twyning
Independent Non-executive Director
6. Liz Hewitt
Independent Non-executive Director
8. Archie G. Kane
Independent Non-executive Director
Year appointed
Appointed as Senior Independent Director on
1 January 2019, having previously served as
a Non-executive Director from 8 October 2013.
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.
Year appointed
Appointed as a Non-executive Director
on 5 July 2017.
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.
Board meetings attended (1)
Business reviews attended
4
3
Board meetings attended (1)
Business reviews attended
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
4
3
Other significant appointments
• Non-executive Governor of the Board
of Bank of Ireland
• Non-executive Chairman of ReAssure Group
Limited (with effect from 18 January 2019)
Committee membership
• Audit
• Independent Member of the House of Lords
• Nomination (Chairman)
Commission
Committee membership
• Audit (Chairman)
• Nomination
• Remuneration
Independent
7. David Lis
Independent Non-executive Director
Year appointed
Appointed as a Non-executive Director
on 12 May 2016.
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.
• Remuneration
Independent
Yes
Yes
9. Charlotte Twyning
Independent Non-executive Director
Year appointed
Appointed as a Non-executive Director
on 1 October 2018.
Skills and experience
Charlotte brings a diverse range of experience
to the Board. After a decade specialising in
competition and M&A law in the City, Charlotte
moved to BT in 2007. Whilst there, she held
various senior roles in legal, policy and customer
service strategy. In 2016, she joined Abellio
as an executive Director to establish a policy,
communications and strategy function
commensurate to its FTSE 250 size. Charlotte
is currently Consents Director on the Heathrow
Expansion Programme Board responsible for
securing the approvals for its expansion.
Board meetings attended (1)
Business reviews attended
Committee membership
• Audit
Board meetings attended (1)
Business reviews attended
Other significant appointments
4
3
• Nomination
• Remuneration
Independent
1(2)
1
Yes
• Non-executive director of Electra Private Equity
PLC and BCA Marketplace PLC
Committee membership
• Audit
• Nomination
• Remuneration (Chairman)
Independent
Yes
(1) Meetings attended refers to scheduled meetings.
(2) Charlotte has attended one meeting, being all meetings
that occurred since her appointment.
73
GovernanceAnnual Report 2018Melrose Industries PLC 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
On 6 March 2019, the Group announced the agreement to sell
the Walterscheid Powertrain Group to One Equity Partners, a
US-based private equity firm. In addition, the Group announced
the completion of the sale of the minority 43.57% interest in
Société Anonyme Belge de Constructions Aéronautiques
(“SABCA”), previously held within the Aerospace reporting
segment, to SABCA’s majority shareholder, Dassault Belgique
Aviation S.A. The sale of the Walterscheid Powertrain Group is
subject to the customary regulatory conditions and is expected
to complete in the first half of this year. The combined net
proceeds of the sales are approximately £200 million.
Capital structure
The Company’s shares are admitted to the premium segment
of the official list.
As at 1 January 2018, the issued share capital of the Company
was 1.9 billion ordinary shares, following which it made an offer to
buy GKN plc on 17 January 2018 for 1.49 new Melrose shares and
£0.81 for every GKN plc share. This initial offer was increased to
1.69 new Melrose shares and £0.81 per GKN plc share as part
of the full and final offer of 13 March 2018. This offer went
unconditional as to acceptances on 29 March 2018 and the
Company took control on 19 April 2018 once all conditions had
been satisfied or waived.
On the basis of authorities obtained at the 2018 AGM, the Directors
allotted a number of shares in connection with the Company’s
acquisition of GKN plc. Following the various share issuances
as part of the acquisition of GKN plc the Company’s issued
share capital now consists of 4,858,254,963 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.
Directors’ report
The Directors of Melrose Industries
PLC present their Annual Report
and financial statements of the Group
for the year ended 31 December 2018.
Incorporated information
The Corporate governance report set out on pages 78 to 81,
the Finance Director’s review on pages 40 to 48 and the
Corporate Social Responsibility section of the Strategic Report
on pages 59 to 69 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 Guidance 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
Barber-Surgeons’ Hall, Monkwell Square, Wood Street, London
EC2Y 5BL at 11am on 9 May 2019. The notice convening the
meeting is shown on pages 197 to 201 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 72 to 73.
Changes to the Board during the year are set out in the Corporate
governance report on pages 78 to 81. Details of Directors’ service
contracts are set out in the Directors’ Remuneration report
on page 112.
The Statement of Directors’ responsibilities in relation to the
consolidated financial statements is set out on page 113,
which is incorporated into this Directors’ report by reference.
Appointment and removal of Directors and their powers
The Company’s articles of association (the “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 UK Corporate
Governance Code, all of the Directors of the Company are required
to stand for re-election on an annual basis. With the exception of
Ms Charlotte Twyning who will be standing for election for the first
time following her appointment on 1 October 2018, 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.
74
Melrose Industries PLCAnnual Report 2018 The table below shows details of the Company’s issued share
capital as at 31 December 2017 and as at 31 December 2018.
Share class
31 December 2017
31 December 2018
Ordinary shares of 48/7 pence each 1,941,200,503
Incentive Shares (2017)
12,831(2)
4,858,254,963(1)
12,831
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.
Includes ordinary shares issued in connection with the Company’s takeover of GKN plc.
(1)
(2) 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.
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
• on a poll, one vote for every ordinary share held by them.
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 7 March 2019, all ordinary shares
issued by the Company are fully paid.
Details of the deadlines for exercising voting rights in respect of the
resolutions to be considered at the 2019 AGM are set out in the
AGM Notice on pages 197 to 201.
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.
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.
Substantial shareholdings
As at 31 December 2018, the following voting interests in the
ordinary share capital of the Company, disclosable under DTR 5,
had been notified to the Directors:
Shareholder
BlackRock Inc
The Capital Group Companies, Inc
Aviva Plc
Shareholding
332,302,037
238,555,954
153,648,939
% of ordinary
share capital as
at 31 December
2018
6.84
4.91
3.16
Between 1 January 2019 and 7 March 2019 no changes to the
voting interests in the ordinary share capital of the Company,
disclosable under DTR 5, were notified to the Directors.
Shareholder dividend
The Directors are pleased to recommend the payment of a final
dividend of 3.05 pence per share (2017: 2.8 pence) to be paid on
20 May 2019 to ordinary shareholders on the register of members
of the Company at the close of trading on 5 April 2019. This
dividend recommendation will be put to shareholders at the
forthcoming AGM of the Company, to be held on 9 May 2019.
Subject to shareholder approval being obtained at the AGM
for the final dividend, this will mean a full year 2018 dividend
of 4.6 pence per share (2017: 4.2 pence).
For discussions on the Board’s intentions with regard to the
dividend policy, please see the Chairman’s statement on
pages 14 to 15, 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 2018, the amount of such Unclaimed
Dividends was £149,687.87. If the Unclaimed Dividends are not
claimed by 30 September 2019, the Company will donate the
funds to charity.
75
GovernanceAnnual Report 2018Melrose Industries PLC Directors’ report
Continued
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
10 May 2018, the Company is authorised to make market
purchases of up to 488,894,454 of its ordinary shares, representing
approximately 10% of the expected issued ordinary share
capital of the Company following the acquisition of GKN plc.
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 485,825,496, being
approximately 10% of the current issued ordinary share capital,
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 197 to 201.
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
liquidity risk, cash flow risk, exchange rate risk, contract and
warranty risk and commodity cost risk, can be found in the Finance
Directors’ review on pages 40 to 48, the risks and uncertainties
section of the Strategic Report on pages 52 to 58 and in note 24
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.
As noted in the Divisional reviews on pages 20 to 39, which are
incorporated by reference into this Directors’ Report, within the
GKN businesses investment is being made into research and
development activities: for example, in 2018 Melrose committed to
setting up the ‘Melrose Skills Fund’, with the ambition to create the
next generation of high calibre engineers in the UK, as well as
investing 2.2% of GKN plc sales in R&D over the next five years.
Further details of this are set out in the Corporate Social
Responsibility section of this report on page 62. So far, such
investment has included the development of a new £32 million
UK Global Technology Centre for GKN Aerospace near its Filton
production facility, GKN Automotive’s £50 million e-Powertrain
R&D investment strategy, and GKN Powder Metallurgy’s strategic
technology partnership with EOS to design a new high-productivity
process for laser metal 3D printing and strategic partnership with
Hewlett Packard to deploy the HP Metal Jet within leading
automotive and industry manufacturers.
An example of the types of new products being launched within
the Nortek businesses include HVAC’s Statepoint Technology®,
an industry leader in data centre cooling, and AQH’s Alliance
range hood platform, as noted in the Divisional reviews
on pages 20 to 39, which are incorporated by reference
into this Directors’ report.
76
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
pages 14 to 15 and the Strategic Report on pages 10 to 69 of this
Annual Report (including the longer-term viability statement on
page 49 and the risks and uncertainties section on pages 52 to 58)
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 2018 are shown on pages 59 to 69 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 64 to 65 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 2018 (2017: nil).
Branches
The Melrose Group and its businesses operate across various
jurisdictions. The GKN businesses, through their various
subsidiaries, have established branches in a number of different
countries in which they operate.
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 2017 Incentive Plan, which are set out on
page 98 of the Directors’ Remuneration report and note 22
to the financial statements (incorporated by reference into
this report); and
• GKN had historically operated employee share option
plan trusts to satisfy the vesting and exercise of awards of
ordinary shares made under GKN’s share-based incentive
arrangements. On the acquisition of GKN, these shares were
converted into Melrose shares. A dividend waiver is in place on
the shareholdings in respect of relevant trusts in part, or in full,
in accordance with the provisions of the relevant trust deeds.
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 7 March 2019.
In January 2018, in connection with the Company’s acquisition of
GKN plc, the Group entered into a new committed bank facility,
comprising of a multi-currency term loan of £1.5 billion and a
multi-currency revolving credit facility denominated £1.1 billion,
US$2.0 billion and €0.5 billion. Details of this facility are provided in
the Finance Director’s review on pages 44 to 45 and note 24 to the
financial statements. On 29 October 2018, £663 million of the new
term loan was surplus to requirements, and therefore cancelled,
because potential change of control clauses of the bonds were not
exercised by the relevant bondholders.
Melrose Industries PLCAnnual Report 2018 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.
The Company’s wholly owned subsidiary, GKN Holdings Limited,
has in issue £450 million fixed rate notes paying 5.375% p.a.
interest and maturing on 19 September 2022 and £300 million
variable rate notes paying 3.375% p.a. interest and maturing on
12 May 2032, in each case issued under Euro medium-term note
programmes (the “Notes”). Pursuant to the terms attaching to
the Notes, a holder of the Notes has the option to require GKN
Holdings Limited to redeem or (at GKN Holdings Limited’s option)
purchase the holder’s Notes at their principal amount if there is a
change of control of GKN Limited and either (i) the Notes are
unrated or do not carry an investment grade credit rating from at
least two ratings agencies; or (ii) if the Notes carry an investment
grade credit rating from at least two ratings agencies, the Notes
are downgraded to a non-investment grade rating or that rating
is withdrawn within 90 days of the change of control and such
downgrade or withdrawal is cited by the ratings agencies as being
the result of the change of control.
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.
Long-term management incentive plans have been put in place
for our key divisions which would be triggered upon a sale of their
respective business or a takeover of the Company. The plans
provide for the payment of bonuses to certain key managers of
these divisions based upon the increase in value of their respective
business. If a sale of the relevant business has not occurred within
a certain period, the incentive plan will crystallise and any payment
to be made to participants will be based on the increase in value of
the business during this period.
Commitments
Melrose entered into certain undertakings and other continuing
obligations with the UK government and other regulatory bodies
in connection with its acquisition of GKN plc. Some of these are
summarised below.
In April 2018, the Company agreed to certain (a) undertakings and
consent requirements with the UK Secretary of State (SoS) for
Business, Energy and Industrial Strategy (BEIS) to preserve the
core GKN Aerospace business until April 2023; and (b) restrictions
and consent requirements with the UK SoS for Defence related
to GKN’s dealing in controlled items and its status as a
government contractor.
The Company also provided post offer undertakings to the UK
Panel on Takeovers and Mergers, which expire in April 2023.
These include the maintenance of a UK group headquarters,
the Company’s listing on the LSE’s Main Market, maintaining its
majority of UK resident board directors, preserving the GKN
trademarks and maintaining an agreed R&D spend.
Outside of its formal undertakings and commitments, the
Company commenced improving the inherited GKN UK pension
schemes by setting an improved funding target of Gilts +75bps for
the GKN 2012 Pension Scheme, and Gilts +25bps for the GKN
2016 Pension Scheme. The Company committed to make an
initial voluntary contribution to the two pension schemes totalling
£150 million within the first 12 months, annual payments of
£60 million, and to pay between 5% and 10% of net proceeds
of any Melrose divestment, or £270 million on the sale of GKN
Powder Metallurgy, for as long as the schemes remain in deficit.
This is consistent with our aim of ensuring that all UK defined
benefit schemes end up stronger under Melrose ownership than
when they join the Group, with many of them becoming fully-
funded during Melrose ownership.
The Company agreed with the SoS for BEIS to create the
‘Melrose Skills Fund’, with the ambition to create a supply chain
of high calibre engineers for the whole of the UK. Further details
of this are set out in the Corporate Social Responsibility section
of this report on page 62.
The Company’s offer document in respect of the acquisition of
GKN plc (published on 1 February 2018) sets out its intentions
relating to its GKN businesses in further detail.
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 or she ought
to have taken as a Director to make him or 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 2018 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
7 March 2019
77
GovernanceAnnual Report 2018Melrose Industries PLC Corporate governance report
In line with the UK Corporate Governance Code 2016 (the “Code”)
and the Listing Rules issued by the Financial Conduct Authority,
this section of the Annual Report and financial statements details
the ways in which the Company has applied and complied with the
principles and provisions of the Code applicable during the year
ended 31 December 2018.
In July 2018, the Financial Reporting Council (“FRC”)
amended the Code, a copy of which is available at
www.frc.org.uk/getattachment/88bd8c45-50ea-4841-
95b0-d2f4f48069a2/2018-UK-Corporate-Governance-
Code-FINAL.PDF. This new version of the Code applies to
accounting periods beginning on or after 1 January 2019 and will
form the basis of the Company’s 2019 Annual Report and financial
statements, although the Company notes its voluntary material
compliance during 2018.
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.
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.
Statement of compliance
Throughout the year ended 31 December 2018, the Company
has applied and complied with the main principles, the supporting
principles and the respective related provisions of the Code.
Main principle A: Leadership
The Board
Details of the structure of the Board and its key responsibilities are
shown on pages 72 to 73.
There were four formally scheduled Board meetings held during
the year and the attendance of each Director at these meetings
is shown on page 80. A number of unscheduled Board meetings
were also held during the year in connection with corporate
transactions, for example in relation to the acquisition of GKN plc.
In addition, business review meetings are held between scheduled
Board meetings. There were three business review meetings held
during the year for each non-GKN division and two business
review meetings held for each GKN division. The attendance of
each Director at these review meetings is set out on page 80.
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. Divisional CEOs 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.
A pack of briefing papers and an agenda are provided to each
Director in advance of each Board, Committee or business
review meeting. The Directors are able to seek further clarification
and information on any matter from any other Director, the
Company Secretary or any other employee of the Group
whenever necessary.
Decisions are taken by the Board in conjunction with the
recommendations of its Committees and advice from external
consultants, advisers and senior management.
The Board has a fully encrypted electronic board portal system,
enabling Board, 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.
Chairman, Vice-Chairmen and Chief Executive
The roles of each of the Chairman, the Vice-Chairmen and the
Chief Executive of the Company are, and will remain, separate
in accordance with best practice and Board policy.
The Chairman, with the assistance of the Vice-Chairmen, 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-Chairmen and the
two other executive Directors.
The Board notes, and confirms, its decision to elect
Mr Justin Dowley to the inaugural position of Non-executive
Chairman of the Board, effective 1 January 2019. Mr Dowley
was the Senior Independent Director and Chairman of the
Remuneration Committee and it was decided that following the
acquisition of GKN, the appointment of Mr Dowley as Chairman
and the retention of Mr Christopher Miller as Vice-Chairman, being
one of the founding members of Melrose and a Director since its
incorporation in 2003, would provide the Board with the necessary
continuity and stability it required. Mr Miller shall continue to play an
active executive 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.
Main principle B: Effectiveness
Board composition
As at 1 January 2019, the Board comprises a Non-executive
Chairman, four 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 72 and 73 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.
78
Melrose Industries PLCAnnual Report 2018 Outputs of the evaluation
Overall, the Board was satisfied with its performance, and agreed
that the appointment of a new Non-executive Chairman and
the new Senior Independent Director would further bolster its
effectiveness, whilst the retention of the current Chairman and
co-founder as an Executive Vice Chairman would retain stability
and depth of experience on the Board.
In order to further enhance the Board’s effectiveness, the following
areas were designated as the subject of management focus
during 2019:
• continued monitoring of senior management succession
(both in Melrose and its Group);
• further enhancement of Board visibility over the impact of
principal risks on the business divisions;
• although considerable steps were taken to improve cyber
security across all business units in 2018, it was recognised
that cyber security is an ongoing risk and will, therefore, be
focused on again in 2019;
• continued improvement and monitoring of the cash
management culture within the businesses (particularly within
the GKN businesses) and improvement of cash performance;
• address onerous contracts and contract dispute resolution
trends within the GKN businesses;
• continue to impress upon all business divisions that the
health and safety of their workers is of utmost importance and
ensure that the business divisions’ senior management teams
place a high degree of focus on implementing, monitoring
and maintaining high standards of health and safety
awareness, coupled with appropriate protective measures
and high performance, with a view to eliminating preventable
accidents; and
• update and implement the Board’s overarching corporate
governance framework to ensure continued alignment
of the Board and Committee members’ roles and division
of responsibilities with the recent changes to the Code,
Melrose’s top-down Board and senior management risk
oversight, and the business divisions’ bottom-up risk
management responsibilities.
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
Ms Twyning who was appointed with effect from 1 October 2018)
stood for re-election at the 2018 AGM. With the exception of Ms
Twyning 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.
On the recommendation of the Nomination Committee, the Board
decided to increase the number of independent Directors. 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.
Ms Charlotte Twyning was identified as the Board’s preferred
candidate and accepted the offer of appointment subject to
certain necessary approvals. Those approvals were granted
and Ms Twyning was appointed to the Board with effect from
1 October 2018.
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.
On Mr Dowley’s appointment to the role of Chairman of the Board
he was considered independent. Ms Liz Hewitt was concurrently
elected to the role of Senior Independent Director. These changes
took effect from 1 January 2019. In accordance with the Code
requirements, at least half the Board, excluding the Chairman of
the Board, comprises Non-executive Directors determined by the
Board to be independent.
The Non-executive Directors are not entitled to any cash bonus or
shares under 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
The Code requires that FTSE 350 companies undertake an
externally facilitated Board and Committee evaluation once every
three years. The last external Melrose Board and Committee review
was in 2017, whereby the Company engaged Lintstock Ltd.
Whilst the Company is not required to undertake another externally
facilitated Board and Committee evaluation until 2020, during 2018
the Company continued its ongoing internal review of the Board
and each Committee, both internally within each of those bodies
and with the Chairman and Chairs of each Committee respectively.
In previous years, this review has been conducted as a discussion
at the Board meeting. Members were also given the option for
direct calls to be scheduled with the Chairman or Chair of the
relevant Committee about any relevant matters that the members
wish to raise as part of the ongoing review.
79
GovernanceAnnual Report 2018Melrose Industries PLC Corporate governance report
Continued
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)
Justin Dowley
Christopher Miller
David Roper
Simon Peckham
Geoffrey Martin
Liz Hewitt
David Lis
Archie G. Kane
Charlotte Twyning (3)
4
3
4
4
4
4
4
4
4
1
4
3
–
–
–
4(2)
4
4
4
1
2
2
2
–
–
–
2
2
2
1
2
2
–
–
–
–
2
2
2
1
3
3
3
3
3
3
3
3
3
1
(1) In addition to the above scheduled meetings, ad hoc Board and Committee 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) Charlotte Twyning was appointed as a Non-executive Director with effect from
1 October 2018 and has attended all meetings since that date.
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.
80
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 82 to 89
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 50 to 51.
Further information regarding the Group’s financial risk objectives
and policies can be found in the Finance Director’s review on
pages 40 to 48. A summary of the principal risks and uncertainties
that could impact upon the Group’s performance is set out on
pages 52 to 58.
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 82 to 89, the Group engages
BM Howarth as internal auditor. A total of 18 internal audit visits
were completed by BM Howarth during 2018 in respect of the
Nortek and Brush businesses. As a result of the GKN acquisition
and as part of the process of determining the post-acquisition
opening balance sheet for the GKN businesses BM Howarth, with
support from Ernst & Young, reviewed a significant proportion of
the GKN sites.
The Directors are pleased to report that there has been progress
across the Group following the 2018 internal audit programme and,
that the majority of the recommendations presented in the internal
audit report have been or are in the process of being implemented.
Some deficiencies in respect of controls relating to inventory
balances were identified at one of the North American Brush sites,
which resulted in the requirement for an immaterial adjustment.
The control weaknesses were identified following a change in the
finance team at the site and plans were immediately put in place to
rectify them. The internal auditor has performed two visits to this
site in 2018 and have scheduled a further follow-up visit in 2019.
Melrose Industries PLCAnnual Report 2018 In addition, the Directors’ Remuneration Policy, which can be found
in the circular dated 7 April 2017 available at www.melroseplc.
net/media/1728/21347274-_-1-_circular.pdf, subject to the
clarifications on pages 104 to 107, 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 2018, in
addition to the usual disclosure rounds following the release of
results, the Company continued its programme of engagement
with major investors and the governance bodies in respect of its
Directors’ Remuneration Policy and incentive arrangements
recognising the votes against the 2017 Directors’ Remuneration
Report at the 2018 AGM. In particular, the Chairman, the Chairman
of the Remuneration Committee and other members of the Board
met with major shareholders following the AGM vote in respect of
the 2017 Incentive Plan, further details of which are set out on
page 95. Further engagement with key shareholders and
governance bodies remains a central part of the Company’s
approach to shareholder communication and governance
management and has continued in the lead up to the 2019 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.
Recognising the recent GKN acquisition, the Company is also
organising a Capital Markets Day on 3 April 2019 so that investors
can hear direct from the operational management in the GKN
businesses about their improvement plans.
The Board welcomes the attendance of shareholders at the AGM,
the notice for which can be found on pages 197 to 201. 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 2019 AGM are set out in the
AGM Notice on pages 197 to 201.
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 are 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, as part of their internal audit function, BM Howarth
include compliance audit questions to identify any areas for
improvement across the Group and its businesses. During 2019
the Company is considering engaging an alternative provider to
augment this review.
During 2018, 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 has made positive progress in rolling this out within
the GKN businesses, to enhance and supplement its existing
compliance regime.
The Company produced its first Modern Slavery Statement in June
2017 which is available at www.melroseplc.net . 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,
the majority of 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 introduction to the Annual Report on Remuneration which
can be found on page 92;
• the annual statement from the Chairman of the Remuneration
Committee, which can be found on pages 93 to 95; and
• the Annual Report on Remuneration, which can be found on
pages 96 to 112.
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GovernanceAnnual Report 2018Melrose Industries PLC Audit Committee report
Liz Hewitt
Audit Committee Chairman
The responsibilities of the Audit
Committee (the “Committee”)
include overseeing financial
reporting, risk management and
internal financial controls, in addition
to making recommendations to the
Board regarding the appointment
of the Company’s internal and
external auditors.
Member
Liz Hewitt (Chairman)
David Lis
Justin Dowley(2)
Archie G. Kane
Charlotte Twyning(3)
No. of meetings (1)
4/4
4/4
3/4
4/4
1/1
(1)
In addition to the usual scheduled 3 meetings per year, an exceptional meeting was held
shortly after taking control of GKN to review and analyse the GKN financial statements
and audit papers with the Company’s external audit partners.
(2) Stepped down from the Audit Committee with effect from 1 January 2019.
(3) Appointed to the Audit Committee with effect from 1 October 2018.
Role and responsibilities
The Committee’s role and responsibilities are set out in its terms
of reference. These were updated in August 2018 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 all stakeholders 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;
• reviewing the effectiveness and monitoring and overseeing the
Group’s risk management (excluding cyber security and fraud
risk, which are retained by the Board), internal financial control
systems and processes and compliance controls;
82
• monitoring and evaluating the effectiveness of the internal
audit function and approving the internal audit plan and fee;
• monitoring and evaluating the effectiveness of the external
audit and approving the external audit plan and fee;
• reviewing, challenging and reporting to the Board on 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;
• reviewing the Group’s arrangements for its employees to raise
concerns in confidence in accordance with the Company’s
whistleblowing policy;
• 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
Following Mr Justin Dowley’s appointment as Chairman of the
Board effective 1 January 2019, Mr Dowley stepped down from
the Audit Committee. Ms Liz Hewitt continues to serve as the
Chairman of the Committee and brings her recent and relevant
financial experience to that role, as described in her biography on
page 73. The Board also appointed Ms Charlotte Twyning as
Non-executive Director and member of the Audit Committee with
effect from 1 October 2018. Ms Twyning serves as a member of
the Remuneration and Nomination Committees.
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 its meetings. 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, and the Chairman
of the Committee speaks with both the external and the internal
auditors prior to each Committee meeting.
Summary of meetings in the year
The Committee is expected to meet not less than three times a
year. In 2018, the Committee met in February, September 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 financial controls and
processes throughout the year.
In addition to the three scheduled meetings, an exceptional
meeting was held in June 2018, shortly after taking control of GKN,
to review, analyse and understand the risks identified from the
previous GKN financial statements and audit committee papers.
Melrose Industries PLCAnnual Report 2018 At this meeting, which included the Company’s external and
internal auditors, the Committee considered the initial scoping of
the audit in relation to the acquisition of GKN. A major item that
was discussed during the course of this initial review related to the
previous control breakdowns and risks that had been identified
at a number of the GKN Aerospace North America businesses.
The Committee was briefed on the key issues and risks that had
previously been identified, including the inappropriate recording
of inventory on the GKN balance sheet which culminated in a
significant exceptional charge being recorded in GKN’s results
for the year ended 31 December 2017.
Significant activities related to the financial statements
As part of its duties the Committee undertook the following
recurring activities that receive annual scrutiny:
• 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, as well as a paper on
viability and a presentation from management;
• reviewed the GKN financial information, including an extensive
opening balance sheet review and outputs from the fair value
exercise and received presentations from external advisors
involved in that work;
• 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 in
relation to the 2018 Annual Report and financial statements.
The Committee advised the Board that, in its view, the 2018
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;
• reviewed the effectiveness of the Group’s risk management
and internal financial 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 2018 annual accounts by the external auditor
and the scope of work to be undertaken in 2019 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 2018
Significant issue considered by the Audit Committee
How the issue was addressed by the Audit Committee
GKN Acquisition Accounting
The GKN acquisition was completed on 19 April 2018, and the
consolidated Group financial statements include the results of the GKN
businesses for the period from acquisition to 31 December 2018.
Judgement was required in identifying the fair values of certain assets
and liabilities acquired.
Due to the size and scale of the GKN businesses, advisors were
engaged to support the preparation of the opening balance sheet for
the GKN businesses. A programme of site visits took place between
May and October 2018, covering a significant portion of the GKN
businesses with a detailed work plan to identify the fair value of
operational assets and liabilities. In addition, specialist valuers were
engaged to appraise the land and buildings, intangible assets,
post-retirement obligations and the value of equity accounted
investments on acquisition.
(Refer to note 12 of the financial statements)
The Committee reviewed a paper prepared by management which
explained the methodologies, assumptions and judgements taken in
preparing the opening balance sheet.
Specifically, the Committee focused on:
• the inclusion of certain provisions and liabilities, principally in relation to
loss-making contracts, which included consideration of potential plans to
address the contractual positions on acquisition, ongoing warranty
matters and commercial obligations and unresolved regulatory exposures;
• the valuation of intangible assets which involved valuing customer
contracts and relationships, technology assets and brands. Assumptions
included growth rates, discount rates, royalty rates and the achievement
of operational plans that underpinned future cash flow; and
• valuation and appraisal of property, plant and equipment which involved
independent evaluation of 81 properties as well as a detailed appraisal
of the acquired plant and equipment.
The Group’s external advisors were invited to Committee meetings to
present the results of their work which were discussed in detail. The
Committee discussed with Deloitte the audit work performed by them,
including the sites visited, to assess whether the assets and liabilities
were properly included at fair value.
Considering all of the above, management responses to challenge and
Deloitte’s views, the Committee was satisfied that the assumptions used
were reasonable and that the provisional fair value of assets and
liabilities had been established appropriately.
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GovernanceAnnual Report 2018Melrose Industries PLC Audit Committee report
Continued
The Audit Committee’s activities during 2018
Significant issue considered by the Audit Committee
How the issue was addressed by the Audit Committee
IFRS 15
The Group adopted IFRS 15 “Revenue from Contracts with
Customers” on 1 January 2018 using the modified retrospective
approach and for Melrose, at that date, the impact was not material.
However, for the acquired GKN business, IFRS 15 which requires
revenue to be allocated to performance obligations identified in a
contract, had a significant impact within the GKN Aerospace division,
specifically regarding recognition of variable consideration.
(Refer to note 16 of the financial statements)
GKN Aerospace North America financial information in relation
to inventory balances
During 2017 GKN made a number of external announcements regarding
its GKN Aerospace North American business. This culminated in a
significant charge being recorded in its results for the year ended
31 December 2017. The majority of the charge related to inventory
that was assessed as having been inappropriately recorded on the
balance sheet.
The Group has reviewed the issues in GKN Aerospace in
North America during its fair value process to ensure that inventory
balances were appropriately valued on acquisition and further evidence
that any defective product produced in post-acquisition period has
been expensed.
(Refer to note 15 of the financial statements)
In September 2018, the Committee reviewed a management report on
the implications of IFRS 15. The assessment considered areas of the
new standard that drive changes in the Group’s financial statements as
well as the estimates and judgement in application, particularly in the
GKN Aerospace division. Changes impact both the amount and timing
of revenue recognition and more details can be found in notes 4 and 16
to the financial statements.
The Committee discussed the audit work performed by Deloitte, to
assess whether the revenue recognised together with contract assets
and liabilities recorded in the balance sheet were appropriate.
Considering the judgements made in applying the new accounting
standard and Deloitte’s views, the Committee was satisfied that the
approach and assumptions used were reasonable and that judgements
made were appropriate.
During the year, the Committee reviewed a report addressing the concerns
relating to GKN Aerospace’s North American business. The assessment
considered trends in inventory carrying amounts, scrap values expensed
as well as the overall control environment and progress since the prior year.
As a result of the known pre-acquisition issues, Group management had
overseen additional work designed to provide incremental assurance that
financial results and the balance sheet were appropriate.
The Committee discussed the results with management and sought
a view from Deloitte following their additional audit work, to assess
whether the financial information included in the Group consolidated
financial statements was appropriate.
Having considered the matters presented and evidence provided,
the Committee concluded that management’s response to issues was
appropriate and balances were reasonably stated.
Provisions for loss-making contracts, warranty, legal and
environmental claims
The level of provisioning for loss-making contracts, warranty, legal and
environmental claims, restructuring and other provisions requires
estimation and assumptions.
The Committee considered management’s proposed provisioning in
respect of material exposures including the key assumptions and
estimates used and relevant legal advice. Amounts recorded at
31 December 2018 were materially impacted by the acquisition
of GKN, which is discussed above.
Although provisions are reviewed on a regular basis and adjusted for
management’s best views, the inherently subjective nature of these
items means that future amounts settled may be different from
those provided.
(Refer to note 20 of the financial statements)
Deloitte also reported on all provisions in the GKN businesses on
acquisition to the Committee.
Having considered the matters presented and responses to challenge,
the Committee concluded that management’s proposed provisioning and
the associated disclosures in the financial statement were appropriate
and the approach taken was consistent with previous years.
84
Melrose Industries PLCAnnual Report 2018 The Audit Committee’s activities during 2018
Significant issue considered by the Audit Committee
How the issue was addressed by the Audit Committee
Impairment testing of goodwill
Impairment testing is inherently subjective as it includes assumptions in
calculating the recoverable amount of the cash-generating unit (“CGU”)
being tested. Assumptions include future cash flows of the relevant
CGU, discount rates that reflect the appropriate risk and long-term
growth rates which are applicable to the geography of operations.
In 2017 there was an impairment of goodwill and other assets in the
Brush CGU totalling £145 million, which reduced the value to
£300 million. This was primarily driven by a decline in the generator
market. Following any impairment, a CGU is immediately sensitive to
any new decline in operating cash flows not forecast, or changes to
either the discount rate or long-term growth rate.
During 2018, following a new decline in market conditions in generator
services that was not anticipated, as well as announcements by key
customers during the second half of the year, management have
concluded that another impairment charge is required to bring the
carrying value to £103 million. The revised carrying amount has been
derived from a value-in-use calculation and as a consequence an
impairment charge of £123 million has been recognised in the income
statement during the second half of 2018.
(Refer to note 11 of the financial statements)
Classification of adjusting items and use of Alternative
Performance Measures (“APMs”)
The reporting, classification and consistency of adjusting items
continues to be an area of focus for the Committee. In particular,
given the guidance on APMs provided by the European Securities
and Markets Authority (“ESMA”).
The Committee considers this to be a key consideration when
reviewing whether the financial statements give a fair, balanced
and understandable view of events.
(Refer to note 6 of the financial statements and the glossary
to this Annual Report and financial statements)
Non-audit fees
Under EU and Competition Commission rules, effective from
17 June 2016, there are restrictions on non-audit services.
The Committee challenged the outcome of the impairment review in
respect of the Brush group CGUs and also considered the proposed
disclosures in respect of the SST and Ergotron groups of CGUs. In doing
so the Committee considered the following:
• a paper prepared by management, which included the key outputs of the
impairment model;
• the trading assumptions, including macroeconomic factors such as trade
tariffs applied in the model, in particular those that were key, being
revenue growth and operating margin;
• the market-based assumptions for the long-term growth rates and the
discount rate;
• risk adjustments that were applied to the model, in particular regarding the
extent of market decline and timing of when volume reductions would
cease; and
• the appropriateness of the full disclosures in the financial statements in
respect of the impairment review performed and the impact, together with
sensitivities that could cause a future impairment.
The Committee discussed with Deloitte the audit work performed by
them and their conclusion regarding the impairment charge recorded.
Considering all of the above, management responses to challenge and
Deloitte’s views, the Committee was satisfied that the assumptions used
were reasonable and that the impairment charge together with
disclosures were appropriately presented.
The Committee has considered the nature, classification and consistency
of adjusting items, whilst addressing the guidance provided by ESMA.
These items are defined and discussed in the Finance Director’s review
and detailed in note 6 to the financial statements together with the
glossary to this Annual Report and financial statements.
The Committee has reconsidered the Company’s accounting policy in
light of the material acquisition during the year and evolving reporting
practice for adjusting items. Following review of management’s paper
and challenge, the Committee is satisfied that whilst additional items
have been included, such as the proportionate share of turnover and
adjusted operating profit from equity accounted investments and
changes in fair value of derivative instruments, as a result of the
acquisition of GKN, there has not been any change to the policy. The
Committee has determined that disclosures are clear and transparent,
thereby assisting shareholders in measuring the operating performance
of the Group. The Committee therefore concluded that these adjusting
items were appropriately captured and disclosed.
The Committee also considered disclosure of the Group’s APMs with
respect to applicable guidelines and noted that these are set out in detail
in the glossary to this Annual Report and financial statements together
with reconciliations of adjusted performance measures to statutory
results in note 6 to the financial statements. The Committee found
disclosures to be clear and transparent.
The Committee has considered the application of 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 2018, 2019 and 2020 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 of £1 million represents 14% of the audit
fees for 2018.
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 Audit Committee Chairman approves all non-audit services in
advance of the service being provided and cumulative non-audit fees
are reviewed at Committee meetings.
85
GovernanceAnnual Report 2018Melrose Industries PLC Audit Committee report
Continued
The Audit Committee’s activities during 2018
Significant issue considered by the Audit Committee
How the issue was addressed by the Audit Committee
Risk management and internal control
Monitored the risk management and the internal financial control
systems and conducted a review of their effectiveness.
The Committee received updates during the year from senior
management on the Company’s risk management framework
and internal financial control systems.
Going concern and viability
Assessment of the going concern assumptions and the basis
of the viability statement.
Internal audit
Monitoring and evaluating the effectiveness of the internal
audit function.
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 was presented with the findings of the
internal audit visits on a bi-annual basis to assist them with determining
the effectiveness of internal financial controls within the Group.
The Committee considered the risk management and internal financial
control systems and concluded that they were effective and reported
this to the Board.
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 in
respect of the longer-term viability statement to be included in the 2018
Annual Report. The Committee concurred with the assumptions and
judgements made by management and concluded that the longer-term
viability statement was appropriate.
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 2018, 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 2018 in light of the services provided to the Company during 2018
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 Group 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.
In 2017, an externally facilitated review of the Committee was undertaken
by Lintstock Ltd. During 2018 the Company continued its ongoing
internal review of the Committee and collected feedback from
Committee members within a similar range of focal topics as featured
in last year’s review. Alongside such formal feedback, the Committee
continued to facilitate direct ongoing contact between its members and
the Chair about any relevant matters that the members wish to raise
as part of the ongoing review. The Code requires the Company to
undertake another externally facilitated Board and Committee
evaluation by 2020.
Committee evaluation
Monitoring and evaluating the effectiveness of the Committee.
86
Melrose Industries PLCAnnual Report 2018 Risk management and internal control
During 2018, 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 the UK Corporate Governance 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 Brush and Nortek business units, and
that changes and adaptations were made to a similar risk
management framework already in place at GKN prior to its
acquisition by the Company.
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 financial control systems were
reviewed and the Committee approved the implementation of an
enhanced Enterprise Risk Management programme across all
Group business units, which build on their pre-existing internal risk
management processes, to account for the Group’s enlarged size
as a result of the GKN acquisition. The improvements involved
regular input from the senior executives heading the key business
functions to ensure that a comprehensive view of the Group’s risk
exposure is captured. The Committee concluded that these
systems were effective. The Committee reported its conclusions to
the Board at the next scheduled Board meeting.
Following the acquisition of GKN, the Committee reviewed and
assessed the findings of the internal financial controls review
conducted by the previous GKN group management, paying
particular attention to the issues in respect of inventory
management and related controls, policy application, management
review and oversight that led to the GKN inventory adjustment in
2017. After the acquisition of GKN, the Committee immediately
began to monitor and oversee the integrity and application of the
corrective measures in respect of those issues that were put in
place by the previous GKN senior management, primarily by way of
reports from the internal auditor to each Committee meeting and
ongoing Group senior management risk reporting, which
continued throughout 2018.
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 2018, 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, experience, resources, leadership 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; and
• the quality of support provided to the Committee by the
external audit partner.
The Committee, together with the Group Finance Director and
the divisional finance directors, was 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.
UK Financial Reporting Council (“FRC”) Audit Quality Review
The FRC’s Audit Quality Review team selected to review the audit
of the 2017 Melrose Industries PLC financial statements as part of
their 2017 annual inspection of audit firms. The focus of the review
and their reporting is on identifying areas where improvements are
required rather than highlighting areas performed to or above the
expected level. The Chairman of the Committee received a full
copy of the findings of the Audit Quality Review team and has
discussed these with Deloitte. The Committee confirmed that there
were no significant areas for improvement identified within the
report and was satisfied that there is nothing within the report
which might have a bearing on the audit appointment.
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 2019 AGM.
87
GovernanceAnnual Report 2018Melrose Industries PLC 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 risk management and obtained tax
advice and advice on remuneration reporting regulations 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. Where additional or specific
resource is required, additional support is provided by Ernst and
Young. 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 internal 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.
Audit Committee report
Continued
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.
The Company’s audit firm is required to be rotated by 2024, this
will be the last partner rotation and the decision was made for the
current engagement partner to rotate off the audit team after the
financial year ended 31 December 2018, such that the new audit
engagement partner will serve a full five-year term for the enlarged
Group from the financial year ending 31 December 2019 until the
firm rotation in 2024.
Non-audit services
Under EU and Competition and Markets Authority 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 2018,
2019 and 2020 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 2018, the main non-audit services provided by Deloitte LLP
were in relation to the reporting accountant’s role for the profit
estimate made by the Company as part of its bid for GKN,
non-statutory audit of carve out financial statements services
for GKN including assurance reports for government grants or
subsidies and tax compliance in non-EU subsidiaries. The
Company did not use Deloitte for any taxation services and does
not intend to during 2019. The Company’s non-audit fee represents
14% of the audit fees for 2018.
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.
88
Melrose Industries PLCAnnual Report 2018 The internal auditor’s remit includes assessment of the
effectiveness of internal financial 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. Internal audit
site visits were conducted by BM Howarth across a total of
18 sites, in respect of the Nortek and Brush businesses. In addition
to this, BM Howarth visited 67 of GKN’s sites to support the
acquisition accounting process.
During the previous year deficiencies were found in Nortek Global
HVAC’s internal financial controls at two sites which prompted
immediate action by the Group 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. Follow-up visits were performed during
the first half of 2018 which identified significant progress in the
improvement of financial controls at both sites.
During 2018 some deficiencies in respect of controls relating to
inventory balances were identified at one of the North American
Brush sites, which resulted in the requirement for an immaterial
adjustment. The control weaknesses were identified following a
change in the finance team at the site and plans were immediately
put in place to rectify. The internal auditor has performed two visits
to this site in 2018 and have scheduled a further follow-up visit
in 2019.
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
7 March 2019
89
GovernanceAnnual Report 2018Melrose Industries PLC Nomination Committee report
Archie G. Kane
Nomination Committee Chairman
The Nomination Committee
(the “Committee”) has overall
responsibility for making
recommendations to the Board
on all new appointments 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
Archie G. Kane (Chairman) (1)
David Lis
Christopher Miller
Justin Dowley
Liz Hewitt
Charlotte Twyning (2)
No. of meetings
2/2
2/2
2/2
2/2
2/2
1/1
(1) With effect from 1 January 2019, Mr David Lis stepped down from his position
as Chairman of the Committee and was replaced by Mr Archie G. Kane.
(2) Ms Charlotte Twyning was appointed as a Non-executive Director with effect from
1 October 2018. Ms Twyning attended all Board and Committee meetings held during
the period 1 October 2018 to 31 December 2018.
Discharge of responsibilities
The Committee discharges its responsibilities through:
• regularly reviewing the size, structure and composition of the
Board and 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, and in
particular formulating plans for succession for the key roles
of Chairman and Chief Executive;
• reviewing the career planning and talent management
programme related to senior executives of the Company and
the senior executives of the business units to ensure that it
meets the needs of the business;
• managing the Board recruitment process and evaluating the
skills, knowledge and experience of potential Board candidates
in order to make appropriate nominations to the Board;
90
“ Melrose is a meritocracy and
individual performance is the key
determinant in any appointment,
irrespective of ethnicity, gender
or other characteristic, trait
or orientation.”
• approving the diversity policy of the Company; 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 2018, 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
December 2018, 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
2018 activities of the Committee are set out below and overleaf.
Composition
The majority of the members of the Committee were
independent Non-executive Directors throughout 2018, with
Mr Christopher Miller being the only non-independent member.
In compliance with amendments to the UK Corporate Governance
Code, Mr Justin Dowley was elected to the inaugural role of
Non-executive Chairman of the Board, effective 1 January 2019.
Mr Dowley brings a wealth of skills and experience to the role
garnered over a 35-year career in banking, investment and asset
management. It was decided that Mr Dowley provided the
necessary continuity and stability that the Company and the
Board required following the acquisition of GKN as Mr Dowley
understood intimately the Company model and the key drivers
of its success since his appointment in 2011. Mr Dowley was the
Senior Independent Director and Chairman of the Remuneration
Committee. His appointment as Non-executive Chairman therefore
led to a change in the composition of the Board and Committees
effective 1 January 2019.
Mr Miller, who has served as Chairman since May 2003, stepped
down from his role as executive Chairman. It was decided that
Mr Miller should continue to serve as an executive Director of the
Board given his exemplary service to date and as such, Mr Miller
was appointed as executive Vice Chairman to act alongside
Mr David Roper.
Ms Liz Hewitt, who has served as a Non-executive Director since
2013, was elected to the role of Senior Independent Director of the
Board in replacement of Mr Dowley, while continuing to perform
her role as the Chairman of the Audit Committee. Ms Hewitt
is the longest serving Non-executive Director and brings with her
extensive business, financial and investment experience gained
from a number of senior roles in international companies, including
as independent member of the House of Lords Commission, and
as non-executive director of Novo Nordisk A/S and Savills PLC.
Mr David Lis stepped down as Chairman of the Nomination
Committee and was appointed as Chairman of the Remuneration
Committee in replacement of Mr Dowley, having served as a
member of the Remuneration Committee since joining the Board
Melrose Industries PLCAnnual Report 2018 as a Non-executive Director in March 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’s strategic business model and frequent turnover of
businesses, Melrose is actively engaged in finding ways to increase
the Group’s diversity.
Mr Archie G. Kane was appointed as Chairman of the Nomination
Committee in replacement of Mr Lis, having served as a member
of the Nomination Committee since his appointment as a Non-
executive Director in May 2017. Mr Kane brings a wealth of
experience to this role, including as non-executive Governor
of the Bank of Ireland and non-executive Chairman of ReAssure
Group Limited.
Following a review by the Committee of the composition of the
Board and a subsequent recommendation by the Committee
that the number of independent Directors be increased, 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 Committee reviewed and produced a
shortlist of candidates, from which several candidates were
invited to interview with members of the Nomination Committee.
Ms Charlotte Twyning was identified as the Board’s preferred
candidate and was appointed to the Board with effect from
1 October 2018.
Ms Twyning brings a diverse range of experience to the Board.
After a decade specialising in competition and M&A law in the City,
Ms Twyning moved to BT in 2007. Whilst there, she held various
senior roles in legal, policy and customer service strategy. In 2016,
Ms Twyning joined Abellio as an executive director to establish a
policy, communications and strategy function commensurate to its
FTSE 250 size. Ms Twyning is currently Consents Director on the
Heathrow Expansion Programme Board responsible for securing
the approvals for its expansion. In accordance with the Articles,
Ms Twyning will stand for election at the 2019 AGM.
The Company Secretary acts as secretary to the Nomination
Committee. On occasion, the Nomination Committee invites the
Chief Executive, the executive Vice-Chairmen (to the extent not
already on the Nomination Committee) 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 it is not appropriate to set specific diversity targets
at Board level and throughout the Group’s workforce due to
The charts below show the gender balance of the Board and senior
management and their direct reports as at 31 December 2018.
Board
Senior management and
their direct reports (1)
Male
Female
78%
22%
Male
Female
59%
41%
(1)
In accordance with the UK Corporate Governance Code, senior management is defined as
the executive committee or the first layer of management below board level, including the
Company Secretary.
What the Committee did in 2018
The principal focus of the Committee during 2018 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 UK Corporate Governance Code. In particular, action
was taken to appoint Mr Dowley as Non-executive Chairman
of the Board in replacement of Mr Miller as executive
Chairman, such change effective from 1 January 2019.
The Committee further recommended the appointment of
Ms Twyning with effect from 1 October 2018 to increase the
number of Non-executive Directors on the Board;
• the existing time commitment of the Company’s Non-executive
Directors was reviewed and confirmed as appropriate;
• consideration was given to the reappointment of each of the
Directors (with the exception of Ms Twyning who is standing
for election for the first time since her appointment took effect
on 1 October 2018) before making a recommendation to the
Board regarding each Director’s re-election at the 2019 AGM;
• a review of the leadership requirements of Melrose, both
executive and non-executive, was undertaken and this
confirmed that the existing management team are 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 internal evaluation of itself
to identify areas where performance and procedures might
be further improved.
Archie G. Kane
Chairman, Nomination Committee
7 March 2019
91
GovernanceAnnual Report 2018Melrose Industries PLC
Directors’ Remuneration report
Introduction to Directors’ Remuneration report
Strategy
Since the Company was first established, the Remuneration
Committee has pursued a remuneration strategy designed
to closely align the executive Directors and Melrose senior
management team with the Company’s shareholders.
Accordingly, base salaries for the executive Directors are kept
low in comparison to peers, and the maximum annual bonus is
capped at 100% of base salary. The opportunities for significant
reward rest with the Company’s long-term incentive plan,
regularly renewed with the support of shareholders and only
creating significant reward for participants where they have
delivered outperformance for shareholders. This heavy
weighting to variable remuneration that is entirely dependent on
performance and vests in shares (not cash) remains unchanged,
irrespective of the Company’s position in the FTSE indices, and
the Committee feels it has been central to the success of the
Company to date.
Business Performance
Since its first acquisition in 2005, Melrose has sought to generate
superior returns for its shareholders, through the acquisition of
underperforming but high-quality businesses, investing heavily to
improve operational performance before selling at an appropriate
time to a buyer who is looking to guide the business through the
next stage of its development.
2018 was a transformational year for Melrose. As well as
continuing to build upon the success of Nortek, we embarked
upon the much-publicised takeover of GKN. The Board has
immediately started initiating the changes it believes are
necessary to unlock the full potential of the GKN businesses
and to deliver substantial returns for its shareholders.
The Group’s KPIs monitor progress towards the achievement
of our objectives. All of the Group’s strategic KPIs have moved
forward strongly during 2018. See pages 18 to 19 for detailed
analysis of our KPIs.
The Company’s Annual Bonus Plan focuses directly and
indirectly on rewarding executive Directors and Melrose senior
management for delivering these KPIs. The 2017 Incentive
Plan is designed to reward the flow-through of the successful
implementation of the strategy into longer-term sustainable
shareholder returns.
Outcomes for 2018
Page 97 sets out the performance conditions, targets set, level of
satisfaction and the corresponding percentages of salary earned
under the Annual Bonus Plan in 2018 by the executive Directors.
Simon Peckham, Chief Executive, received a bonus equal to 95%
of his base salary (maximum 100%), and Geoffrey Martin, Group
Finance Director, received a bonus equal to 95% of his base
salary (maximum 100%).
No 2017 Incentive Plan Shares were eligible to crystallise in this
financial year, with the first crystallisation date being 31 May 2020.
Discretions
It should be noted that the Remuneration Committee felt that the
incentive outcomes were in line with the overall performance of
the Group and therefore did not exercise any discretion to alter
the outcomes from the application of the performance conditions.
The Remuneration Committee did not adjust any incentive plan
share outcome due to share price appreciation as none
crystallised during the year being reported on.
Responsibilities
The Remuneration Committee’s responsibilities include:
• Establishing and maintaining an executive director
remuneration policy that is appropriate, consistent
and reflective of Melrose’s remuneration philosophy.
• Determining the remuneration packages of the
executive Directors.
• Setting and managing remuneration of the executive
Directors and the Chairman of the Board in accordance
with the Directors’ Remuneration Policy.
• Oversight of remuneration of Melrose senior management
and divisional CEOs, to enable the Committee to
consider their consistency with the executive Director
remuneration packages.
• Operating the Company’s share incentive arrangements.
The Committee is not responsible for setting and managing
the remuneration of Melrose senior management and divisional
CEOs nor is the Committee responsible for determining wider
business unit employee pay, both of which are the responsibility
of the Chief Executive, for the reasons set out in further detail
in this report. Responsibility for determining the remuneration
of the Non-executive Directors sits with the Board.
No Director plays a part in any decision about his or her
own remuneration.
All members of the Committee are independent Non-executive
Directors within the definition of the UK Corporate Governance
Code. None of the Committee members have any personal
financial interest (other than as shareholders in the Company) in
matters to be decided, nor do they have any conflicts of interest
from cross-directorships or any day-to-day involvement in running
the business.
Our terms of reference
Our terms of reference were reviewed by the Remuneration
Committee in light of the recent changes to the UK Corporate
Governance Code and were subsequently amended and
approved by the Board on 7 March 2019. They are available
on our website, www.melroseplc.net, and from the
Company Secretary at Melrose’s registered office.
Structure of the report
• Introduction to Directors’ Remuneration report (page 92).
• Chairman’s Annual Statement (pages 93 to 95).
• Annual Report on Remuneration (pages 96 to 112).
During the year, the Committee received advice on the remuneration
reporting regulations and preparation of the Directors’ Remuneration
report from PwC LLP. PwC LLP’s fees for this advice were £46,500,
which were charged on a time/cost basis.
PwC 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 Committee is satisfied that the advice provided by PwC LLP in
relation to remuneration matters is objective and independent.
The Company Secretary acts as secretary to the Committee and
attends Committee meetings.
This Directors’ Remuneration report has been prepared in accordance
with the Companies Act 2006 and Schedule 8 of the Large and
Medium-sized Companies and Groups (Accounts and Reports)
(Amendment) Regulations 2013. It also meets the requirements of the
UK Corporate Governance Code and the UK Listing Authority’s Listing
Rules and Disclosure Guidance and Transparency Rules.
92
Melrose Industries PLCAnnual Report 2018 Chairman’s Annual Statement
David Lis
Remuneration Committee Chairman
The Board has delegated to the
Remuneration Committee (the
“Committee”) responsibility for
overseeing the remuneration of
the Company’s Chairman, executive
Directors, Company Secretary and
other senior employees.
Member
David Lis (Chairman) (2)
Justin Dowley (3)
Liz Hewitt
Archie G. Kane
Charlotte Twyning (4)
No. of meetings (1)
2/2
2/2
2/2
2/2
1/1
(1) Reflects regularly scheduled meetings. No other meetings of the Committee took place in 2018.
(2) Appointed as Chairman of the Committee with effect from 1 January 2019.
(3) Retired as Chairman of the Committee with effect from 31 December 2018.
(4) Appointed to the Committee with effect from 1 October 2018 and attended all Committee
meetings held during the period 1 October 2018 to 31 December 2018.
“ 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
Director remuneration (the “Annual Report on Remuneration”) at
the end of yet another successful year for Melrose. Adjusted diluted
earnings per share were up 36% on last year, with a proposed final
dividend of 3.05 pence per share (up 9% on last year), giving a full
year dividend of 4.6 pence per share (up 10% on last year). The
acquisition of GKN in 2018 was a significant transaction for the
Company and one that was not without its complexities. However,
as set out elsewhere in this Annual Report on Remuneration, the
benefits of Melrose ownership are already being felt by the GKN
businesses, with improvement strategies agreed with the
management teams, significant investment being made and
tangible gains shown in the annual results. Notably, the GKN UK
defined benefit pension accounting deficit has reduced from
£691 million to £588 million since December 2017, and an
independent Chairman of the Trustees has been appointed.
The existing Melrose businesses also made progress over the
year, with the Nortek Group adjusted operating margins increasing
from 9% at acquisition to 15% in 2018, with the potential for
further improvement.
Performance in 2018
2018 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 Director remuneration
arrangements for 2018 and 2019.
Our remuneration structure
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 that restricts the opportunity in
annual salary and bonus, and weights potential reward to the
variable long-term incentive plan based entirely on performance.
The Committee feels strongly that rewards should be linked to
generation and delivery of real returns to shareholders.
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.
93
GovernanceAnnual Report 2018Melrose Industries PLC Directors’ Remuneration report
Continued
The awards paid under the 2012 Incentive Plan 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 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. To build on the success of this
approach, the 2017 Incentive Plan was adopted in May 2017 on
similar terms, but with additional shareholder protections.
The first tranche of awards under the 2017 Incentive Plan was
allocated on establishment, and we have included on page 98
details of the second tranche of awards provided to the executive
Directors in 2018 under the 2017 Incentive Plan, in line with the
expected allocation of options in three tranches over the vesting
period. The 2017 Incentive Plan provides its participants with 7.5%
of the increase in the index-adjusted value of the Company over the
course of the performance period from and including 31 May 2017,
to (but excluding) 31 May 2020.
2018 key decisions and incentive payouts
The 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’ base salaries with effect from
1 January 2018. This rise was 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 were increased by 3% with
effect from 1 January 2018. However, the additional fees payable
to the Committee Chairs 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 the achievement of strategic elements,
consistent with UK Corporate Governance Code expectations
that at least 70% should be based on financial performance. The
maximum bonus opportunity is set at 100% of base salary, which
is significantly below the maximum lower quartile annual bonus
opportunity for other FTSE 100 companies, and reflects the
participation of the Chief Executive and Group Finance Director
in the 2017 Incentive Plan. The Chairman and the executive
Vice-Chairmen 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 97.
The second tranche of options to acquire incentive shares under
the 2017 Incentive Plan was allocated on 7 June 2018. No value
can be realised in respect of these shares until crystallisation of the
2017 Incentive Plan, which is intended to occur on 31 May 2020.
Approach to Director remuneration for 2019
The executive Directors’ base salaries have been increased by 3%
with effect from 1 January 2019. Again, 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.
After conducting a benchmarking exercise against our peers,
Non-executive Directors’ basic fees for 2019 have been increased
by 8%, with effect from 1 January 2019, to reflect the fact that while
all Non-executive Directors serve on the Company’s committees,
there are no additional base committee membership fees. There
were also increases made to the fees payable to the Committee
Chairs and the Senior Independent Director as set out on page 111.
These were the first changes to these fees for a number of years,
and the Committee’s view is that these increases are appropriate.
The overall framework for the executive Directors’ annual bonus
arrangements for 2019 will remain the same as in 2018, 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. However, the Committee
has revised its approach to the operation of the performance
conditions to bring it more into line with UK Corporate Governance
Code standard practice; details are set out on page 105.
In accordance with terms of the 2017 Incentive Plan, allocations
of options are phased over the course of the performance period.
Accordingly, the Committee expects to make a further allocation
of options over incentive shares in the 2017 Incentive Plan to
executive Directors and other participants on 8 March 2019.
Compliance with the updated UK Corporate
Governance Code
We have considered the current compliance of our Directors’
Remuneration Policy and its operation with the new UK Corporate
Governance Code, which applies to financial years beginning on
or after 1 January 2019. While we were not required to comply
with the new UK Corporate Governance Code for the current year
being reported, the Committee has reviewed the Directors’
Remuneration Policy in light of these changes and as a result we
have made a very small number of clarificatory changes to the
Directors’ Remuneration Policy, as set out on pages 104 to 107.
We are already compliant with the following key provisions of the
new UK Corporate Governance Code, as demonstrated by the
table below:
Key remuneration element
of the UK Corporate
Governance Code
Five year period between the
date of grant and realisation
Phased release
of equity awards
Discretion to override
formulaic outcomes
Company position
The 2017 Incentive Plan has
a five year period including the
performance and holding periods
The 2017 Incentive Plan
provides for a phased release
of equity awards
The Directors’ Remuneration
Policy approved by shareholders
in 2017 provides the Committee
with such discretion
94
Melrose Industries PLCAnnual Report 2018 Company position
Resolution to approve the Directors’ Remuneration Report
for the year ended 31 December 2017
Key remuneration element
of the UK Corporate
Governance Code
Post-termination
holding requirements
Pension alignment
Extended malus
and clawback
The Directors’ Remuneration
Policy approved by shareholders
in 2017 has been clarified for 2019
to include such a requirement –
see pages 104 to 107
The pension provision for the
current executive Directors is
within the range provided to the
wider workforce of the Group and
this will continue to be the case for
future executive Directors
The current malus and clawback
provisions in the Directors’
Remuneration Policy already
exceed the best practice
suggested in relation to the new
UK Corporate Governance Code
Wider workforce considerations
Melrose is committed to creating an inclusive working environment
and to rewarding our employees throughout the organisation
in a fair manner. In making decisions on executive pay, the
Committee is alive to wider workforce remuneration and
conditions. See page 91 of the Nomination Committee report
and page 63 of the Corporate Social Responsibility report for
further details on some of the work being done in this area.
Shareholder engagement
We remain committed to maintaining an open and transparent
engagement with our investors. We believe that a key objective of
the Annual Report on Remuneration is to communicate clearly to
shareholders how our Directors’ Remuneration Policy is operating
in practice and to demonstrate how our executive remuneration is
clearly linked to the Company’s performance. We are engaged in
an ongoing dialogue with investors and corporate governance
advisory agencies in order to better understand their views on
Melrose’s approach to executive remuneration.
Specifically, during 2018, the Company conducted a formal
engagement with key shareholders and corporate governance
advisory agencies in respect of feedback received at the 2018
AGM and the vote on the 2017 Directors’ Remuneration Report.
We listen to our shareholders and the clarifications to the
implementation of the Directors’ Remuneration Policy that we are
making in 2019 (see pages 104 to 107) have been influenced by
this dialogue. Furthermore, following feedback from the
shareholder engagement, advice is being sought on potential
changes to the long-term incentive arrangements at the next
proposed renewal in 2020.
Percentage of votes cast for the resolution
77.13%
Percentage of votes cast against the resolution
22.87%
Percentage of votes withheld: 4.9%
Resolution to approve the Directors’ Remuneration Policy
(11 May 2017)
Percentage of votes cast for the resolution
82.04%
Percentage of votes cast against the resolution
17.96%
Percentage of votes withheld: 2.1%
The Remuneration Committee believes that the strong level of
shareholder support received for the Directors’ Remuneration
Policy at the 2017 General Meeting and the Annual Report on
Remuneration at the 2018 AGM, as well as the feedback received
during discussions with shareholders in 2018, means that no
material changes are required to the approach behind the
Directors’ Remuneration Policy or its implementation in 2019.
David Lis
Chairman, Remuneration Committee
7 March 2019
95
GovernanceAnnual Report 2018Melrose Industries PLC Directors’ Remuneration report
Continued
Annual Report on Remuneration
In this section, we set out:
• the actual performance and executive remuneration outcomes for the 2018 financial year;
• the application of the Directors’ Remuneration Policy to the 2018 financial year, how the Directors’ Remuneration Policy
was operated in 2018 and the proposed alterations to how it is to be applied from 1 January 2019 onwards; and
• the link between our strategy for 2019 and the Directors’ Remuneration Policy.
The Directors’ Remuneration Policy was approved by shareholders 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 2017 Incentive Plan.
The following table sets out the key elements of the Annual Report on Remuneration and where to find them.
Element
Single figure of remuneration
Share Interests awarded in the Financial Year
Payments to Past Directors / For Loss of Office
Statement of Director Shareholdings and Interests
Performance Graph and Table
Percentage Change in Remuneration of the CEO
Relative Importance of Spend on Pay
Statement of Implementation of the Directors’ Remuneration Policy for 2019
Consideration of Matters Relating to Directors’ Remuneration
Statement of Voting
See page 96
See pages 100 and 112
None
See pages 100 and 112
See page 102
See page 111
See page 111
See pages 104 to 107
See pages 97 to 98
See page 95
How have we performed in 2018?
Single total figure of remuneration for the Chairman and the executive Directors for the 2018 financial year (audited)
The following chart summarises the single figure of remuneration for 2018 in comparison with 2017.
Chairman
Justin Dowley (3)
Executive Directors
Christopher Miller
David Roper
Simon Peckham
Geoffrey Martin
Total (executive Directors)
Total salary
and fees
£000
Taxable
benefits
£000
85
81
490
475
490
475
490
475
392
380
1,862
1,805
n/a
n/a
11
19
19
18
19
20
28
27
77
84
Period
2018
2017
2018
2017
2018
2017
2018
2017
2018
2017
2018
2017
Bonus
£000
n/a
n/a
n/a
n/a
n/a
n/a
466
428
373
342
839
770
LTIP (1)
£000
n/a
n/a
–
41,770
–
41,770
–
41,770
–
41,770
–
167,080
Pension (2)
£000
n/a
n/a
74
71
74
71
74
71
63
57
285
270
Total
£000
85
81
575
42,335
583
42,334
1,049
42,764
856
42,576
3,063
170,009
(1) The 2012 Incentive Plan crystallised in 2017. The values included in the above table are calculated in accordance with the applicable regulations. The 2017 Incentive Plan is a five-year plan
in total (comprised of a three-year performance period and a two-year holding period) and, accordingly, no value was vested to participants in respect of the year to 31 December 2018.
(2) All of the amounts attributable to pension contributions were paid as supplements to base salary in lieu of pension arrangements.
(3) Appointed as Chairman of the Board with effect from 1 January 2019.
Base Salary
Salaries are fixed at a level which is considered low in comparison to peers. Each executive Director received an increase in base salary
of approximately 3% effective from 1 January 2018.
Benefits
The range of benefits provided to executive Directors, including a pension contribution equal to 15% of base salary (which the Committee
notes is materially below the lower quartile of pension contributions in the FTSE 100 of 20%), 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 2018, 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. No executive Director participates in, or has ever
participated in, a Group defined benefit or final salary pension scheme.
96
Melrose Industries PLCAnnual Report 2018 2018 Annual Bonus (audited)
The maximum bonus opportunity is capped at 100% of base salary, which is significantly below the maximum lower quartile annual
bonus opportunity for other FTSE 100 companies, reflecting the participation of the Chief Executive and Group Finance Director in the
2017 Incentive Plan. 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 95% of base salary.
KPIs
Annual Bonus Plan
Actual
out-turn
Percentage
of maximum
bonus earned
Bonus (%)
of base
salary
EPS Growth (80%)
% payout
5%
25%
10%
50%
15%
75%
20%
100%
EPS Growth of 25%, resulting
in the maximum award.
EPS Growth sub-total:
100%
80%
Strategic Objectives (20%)
• Secure the GKN bid within
the parameter for price and terms
approved by the Board
– maximum 20%
• Take control of GKN, including
decentralising Group functions
and implementing controls
– maximum 20%
• Establish the GKN divisions
as standalone businesses,
including security operational
management teams and
agree strategic plans with
the GKN businesses and
commence implementation
of improvement actions
– maximum 20%
• Conduct a strategic review of
Melrose’s non-core businesses
– maximum 20%
• Progress improvement
plans for Nortek and
restructuring for Brush
– maximum 20%
Strategic Objectives sub-total:
Total annual bonus for 2018:
Management secured the successful takeover of GKN within the parameters
for price and other terms approved by the Board, and therefore the
Committee considers this strategic objective to have been fully achieved.
Management secured 100% ownership within six months of launch of the
offer and immediately set about decentralising former GKN Group functions
and to implement various controls throughout the GKN businesses. The
majority of the decentralisation was completed within one month, whilst
certain separation projects continue. In light of this, the Committee considers
this strategic objective to have been achieved in full.
Management moved quickly to establish the GKN divisions as standalone
businesses, in particular focusing on ensuring strong executive leadership for
each of the businesses. Management confirmed the continued executive
leadership of the GKN Aerospace and GKN Powder Metallurgy businesses,
and secured a new CEO to lead the GKN Automotive division. The
Committee further notes the work of Management in agreeing strategic plans
with each of the GKN businesses. As a result of these achievements, the
Committee considers this strategic objective to have been largely achieved.
A review of Melrose’s non-core businesses, particularly those within the
GKN group, was undertaken during the year. This has resulted in
agreements to dispose of the Walterscheid Powertrain Group (previously
GKN Off-Highway Powertrain), which was announced on 6 March 2019, and
other smaller non-core businesses. There are, however, businesses that
remain under strategic review. As a result, the Committee therefore feels that
an award of 50% of the maximum for this strategic element is appropriate.
Although improvement plans for Nortek and the Brush restructuring were
successfully progressed during the year, the Committee felt that in light of
further impairments for Brush and challenging trading years for the SST and
Ergotron businesses, an award of 50% of the maximum for this strategic
objective is considered appropriate.
20%
20%
15%
10%
10%
75%
All bonus payments for 2018 will be made in cash, as both the Chief Executive and Group Finance Director have exceeded their minimum
shareholding requirements. See page 105 for details of the requirements.
15%
95%
97
GovernanceAnnual Report 2018Melrose Industries PLC Directors’ Remuneration report
Continued
2017 Incentive Plan (audited)
No long-term incentives crystallised during the 2018 financial year,
although options were allocated during it. On 7 June 2018, each
executive Director was granted options over Incentive Shares
(2017) as part of the second tranche of the 2017 Incentive Plan:
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.
As part of an ongoing commitment to full transparency
around remuneration structures at Melrose, set out below
is a ‘snapshot’ of the current value of the 2017 Incentive Plan
as if the crystallisation date was 31 December 2018 instead
of the actual crystallisation date in May 2020.
Value delivered under 2012 Incentive Plan and illustrative increase
in value for 2017 Incentive Plan, if crystallised on 31 December 2018
£240,416,073
£2,965,131,562
£392,314,976
392,314,976
£590,024,505
(£2,519,313,616)
(
£
3
,
1
0
9
,
3
3
8
,
1
2
1
)
2012 Incentive Plan
2017 Incentive Plan (to 31/12/2018)
Index adjustment/minimum return
Value delivered to shareholders
Value delivered to participants
Please note that as at 31 December 2018 the minimum return
hurdle of £590,024,505 had not been achieved. Melrose would
need to create £3,109,338,121 of value for shareholders in order for
the 2017 Incentive Plan to begin to accrue value for participants.
Shareholder Protections
As part of the shareholder consultation that took place during the
course of 2018, Melrose was asked to clarify the leaver provisions
of the 2017 Incentive Plan. The section below sets out the leaver
provisions in detail for the 2017 Incentive Scheme, as well as the
applicable malus and clawback provisions, as so clarified.
As the table demonstrates, no value has currently accrued to the
2017 Incentive Plan.
Theoretical value under the 2017 Incentive Plan if crystallised
on 31 December 2018 rather than on the 2020 scheduled
payment date
2017
Invested capital from (and including) May 2017
up to (and including) December 2018
£10,691,202,105
Index adjustment/minimum return
£590,024,505
Indexed capital
£11,281,226,610
2018
Number of issued ordinary shares on 31 December 2018
4,858,254,963
Average price of an ordinary share for 40 business days
prior to 31 December 2018
£1.682
Deemed market capitalisation of Melrose based on average price of
an ordinary share for 40 business days prior to 31 December 2018
£8,171,888,489
Overall change in value for shareholders since 31 May 2017
(£3,109,338,121)
Theoretical value to management and shareholder dilution
calculated at 31 December 2018
7.5% of change in value
0
Total number of new shares issued under the 2017 Incentive Plan
0
Theoretical dilution to shareholders due to the 2017 Incentive Plan
0
Break-even price of an ordinary share at 31 December 2018
for the 2017 Incentive Plan to deliver value
232p
Good leaver definition
A good leaver is defined as cessation in the following
circumstances: death; permanent ill-health; permanent disability;
retirement at or above 65 years of age; resignation in connection
with a “Change of Control”; and at the discretion of the
Committee. Cessation in any other circumstances constitutes
a bad leaver.
Application
If an executive Director holding 2017 Incentive Shares or Options
ceases employment in circumstances where he is a “good
leaver”, the Committee may require that he transfer some or all of
the “unvested portion” of his 2017 Incentive Shares for the lower
of their nominal value and the price of an Ordinary Share and any
Options he has may lapse.
If an executive Director holding 2017 Incentive Shares or Options
ceases employment in circumstances where he is a “bad leaver”,
every 2017 Incentive Share he holds shall, unless the Committee
determines otherwise, be transferred for the lower of their nominal
value and the price of an Ordinary Share and any Options he has
may lapse.(1)
Malus and clawback
The 2017 Incentive Plan includes a three-year performance
period, during which any 2017 Incentive Shares and Options are
subject to malus, and a two-year holding period post-
crystallisation, during which any ordinary shares arising from
crystallisation of 2017 Incentive Shares are subject to clawback.
(1) The “unvested portion” of the participant’s 2017 Incentive Shares means any such shares
acquired pursuant to an option granted within less than one year of the date on which that
participant becomes a leaver and the “unvested portion” of the participant’s unexercised
options to acquire 2017 Incentive Shares means any option granted within less than one
year of the date on which that participant becomes a leaver.
98
Melrose Industries PLCAnnual Report 2018 Remuneration Philosophy
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:
• the base salary, benefits and annual bonus of the executive Directors are positioned below the lower quartile maximum opportunity
for FTSE 100 companies; and
• long-term incentive remuneration is intended to directly align the executive Directors’ remuneration with that of shareholders by
connecting remuneration specifically to the creation of shareholder value and with any award typically being granted in shares,
not cash.
The Remuneration 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.
To help illustrate the application of this philosophy, we have set out below a series of tables that clearly demonstrate the alignment between
the executive Directors and our shareholders.
Illustration and application of the Directors’ Remuneration Policy in 2018
The charts set out below are updated versions of charts which appeared in the Directors’ Remuneration Policy shareholder circular
approved in May 2017. These set out an illustration of the Directors’ Remuneration Policy compared to the actual executive Director
remuneration paid in 2018.
The executive Directors’ options under the 2017 Incentive Plan will deliver to them part of the growth in value of the Company from
May 2017 to May 2020 (or an earlier trigger date determined in accordance with the Articles). Accordingly, the value of participation in the
2017 Incentive Plan was not expressed as a multiple of salary but on a valuation done at the time of the renewal of the incentive plan in
2017 (see shareholder circular dated 7 April 2017 available at www.melroseplc.net/media/1728/21347274-_-1-_circular.pdf).
Simon Peckham
(£’000)
£3,215
Geoffrey Martin
(£’000)
£3,017
£1,899
£2,142
67%
£1,071
56%
£1,049
£583
£245
13%
£490
15%
£466
44%
£483
£1,750
£2,142
71%
£1,071
61%
£196
11%
£856
£392
13%
£373
44%
£583
100%
£583
31%
£583
18%
£583
56%
£483
100%
£483
28%
£483
16%
£483
56%
Minimum
On-target
High
Actual
Minimum
On-target
High
Actual
Christopher Miller
(£’000)
David Roper
(£’000)
£2,528
£1,953
77%
£1,551
£976
63%
£2,536
£1,559
£1,953
77%
£976
63%
£575
£575
£583
£583
£575
100%
£575
37%
£575
23%
£575
100%
£583
100%
£583
37%
£583
23%
£583
100%
Minimum
On-target
Fixed
Annual variable
High
LTI
Actual
Minimum
On-target
High
Actual
Fixed
Annual variable
LTI
(1)
In illustrating the potential reward under the Directors’ Remuneration Policy (set out in this Annual Report on Remuneration) compared to the actual single figures awarded for 2018, the following
assumptions have been made:
• Minimum performance: fixed elements of remuneration only. Base salary effective from 1 January 2018, and benefits and pension rate as set out in the single figure table for the year ended
31 December 2018 on page 96.
• On-Target: fixed elements of remuneration as above, plus a bonus of 50% of salary (other than in the case of Christopher Miller and David Roper, who do not participate in the annual bonus
arrangements), plus an amount in relation to the executive Directors’ entitlements under the 2017 Incentive Plan, being 50% of the fair value of the award, calculated as set out above.
• High-performance: fixed elements of remuneration as above, plus a bonus of 100% of salary (other than in the case of Christopher Miller and David Roper who do not participate in the annual
bonus arrangements), plus an amount in relation to the executive Directors’ entitlements under the 2017 Incentive Plan, being 100% of the fair value of the award, calculated as set out above.
99
GovernanceAnnual Report 2018Melrose Industries PLC
Directors’ Remuneration report
Continued
Comparison to Peers
The following chart shows the relative position of base salary and total compensation for our executive Directors in 2018 compared to
the FTSE 100 in 2018. The charts demonstrate the Remuneration Committee’s policy of providing conservative salary, benefits and
annual bonus to the executive Directors, with heavily-weighted variable incentives in the form of the 2017 Incentive Plan, which ensures
that the executive Directors only receive very substantial rewards when they have outperformed and created very significant value
for shareholders.
The chart below includes the actual salary, benefits and annual bonus awarded to the Chief Executive and Group Finance Director in
2018. Although no value accrued to the executive Directors under the 2017 Incentive Plan during 2018, for comparison purposes only,
we have included in the LTIP element of total remuneration in the chart below an amount equivalent to the annualised award from the
crystalisation of the 2012 Incentive Plan. This is the total award under the 2012 Incentive Scheme in 2017 as set out on page 98, divided
by the five year performance period, which equates to £8.354 million per year for the Chief Executive and Group Finance Director. No
payment under the 2017 Incentive Plan was due in 2018 and this figure is therefore an assumed amount.
CEO
GFD
Top quartile
Second quartile
Third quartile
Bottom quartile
Top quartile
Second quartile
Third quartile
Bottom quartile
Salary
Total Rem
Salary
Total Rem
Positioning of salary of CEO/GFD relative to the FTSE 100
Positioning of total remuneration (including 2012 LTIP calculation) of CEO/GFD relative to the FTSE 100
Positioning of total remuneration (excluding 2012 LTIP calculation) of CEO/GFD relative to the FTSE 100
Equity exposure of the Board (audited)
The following table and chart set out all subsisting interests in the equity of the Company held by the executive Directors as at
31 December 2018:
Minimum
number of
ordinary shares
to be held by
executive
Directors as at
31 December
Additional
shareholding
requirement
Current
shareholding
2018 (1)
(% salary) (2)
(% salary) (3)
Ordinary
shares
held (4)
Subject to
performance
conditions(5)
Not subject to
performance
conditions
Shareholding
requirement
met?
Unvested interests
under share schemes
4,802,159
4,802,159
4,627,535
4,627,535
200%
200%
200%
200%
10,078%
5,481%
5,779%
3,093%
30,108,510(4)
16,373,732
17,265,565
7,395,256
5,166(6)
5,166(6)
5,666(6)
5,666(6)
n/a
n/a
n/a
n/a
Yes
Yes
Yes
Yes
Director
Executive Directors
Christopher Miller
David Roper
Simon Peckham
Geoffrey Martin
In addition to the obligations in (1), the shareholding requirement under the adjusted Directors’ Remuneration Policy will be 200% of base salary.
(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)
(3) For these purposes, the value of a share is 163.85 pence, being the closing mid-market price on 31 December 2018, the last business day of the 2018 financial year.
(4) As at 31 December 2018, 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.
(5) An additional amount of 10,386 options over Incentive Shares (2017) is expected to be allocated on 8 March 2019 to the executive Directors as follows: Christopher Miller will be granted
2,584 options, David Roper will be granted 2,584 options, Simon Peckham will be granted 2,834 options and Geoffrey Martin will be granted 2,834 options.
(6) 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 options 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. In addition, each executive Director was granted options over
Incentive Shares (2017) on 7 June 2018: 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. The value which may be derived from the Incentive Shares (2017) acquired on exercise will be determined on 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 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 participants and the Company that the remaining options will be allocated annually in two
more equal tranches over the three-year performance period.
100
Melrose Industries PLCAnnual Report 2018 As disclosed at the time of 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 Committee has
adopted the minimum share retention guidelines outlined above 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 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 above
following any such disposal.
As at 31 December 2018, 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 Melrose senior management on a similar basis to executive Directors.
There have been no changes in the shareholdings of the executive Directors between 31 December 2018 and 7 March 2019.
10,078%
l
y
r
a
a
s
f
o
%
5,481%
5,779%
200%
798%
200%
798%
200%
200%
875%
3,093%
1,093%
Christopher Miller
David Roper
Simon Peckham
Geoffrey Martin
Shareholding requirement
Unconditional shares
Outstanding share awards(1)
(1) The value of the outstanding share awards in this chart, which includes both 2017 Incentive Shares and options over 2017 Incentive Shares held as at 31 December 2018, has been calculated as the
fair value of the 2017 Incentive Plan awards based on the estimated binomial option pricing model value per 2017 Incentive Share (£756 as at the last practical date before the finalisation of the
Directors’ Remuneration Policy, 11 May 2017) multiplied by the number of 2017 Incentive Shares and options over 2017 Incentive Shares held by or granted to the executive Directors in 2018, in each
case as a percentage of base salary.
Please see page 112 for a table setting out the equity interests of the Non-executive Directors as at 31 December 2018.
101
GovernanceAnnual Report 2018Melrose Industries PLC
Directors’ Remuneration report
Continued
Overall Link to Remuneration, Equity and Wealth of the executive Directors
It is the Remuneration Committee’s view that it is important when considering the remuneration paid in the year under the single figure to
take a holistic view of how each executive Director’s total wealth is linked to the performance of the Company. In the Committee’s opinion,
the impact on the total wealth of the executive Director is as important than the single figure in any one year; this approach encourages
executive Directors to take a long-term view of the sustainable performance of the Company and aligns them with shareholders. A key
facet of the Directors’ Remuneration Policy is the ability for the executive Directors to gain and lose dependent on the share price
performance of the Company at a level which is material to their total remuneration. The following table sets out the single figure for 2018,
the number of ordinary shares of the Company held by each executive Director at the end of the 2017 and 2018 financial years and the
impact on the value of these ordinary shares taking the closing mid-market prices for those dates.
2018
single total figure
of remuneration
£000
Shares
beneficially held on
31 December 2017
Shares
beneficially held on
31 December 2018
Value of shares on
31 December 2017
Value of shares on
31 December 2018
Difference in value
of shares between
31 December 2017 and
31 December 2018
(£) (1)
(£) (2)
(£)
Christopher Miller
David Roper
Simon Peckham
Geoffrey Martin
575
583
1,049
856
30,108,510(3)
15,730,130
17,265,565
7,395,256
30,108,510(4)
16,373,732
17,265,565
7,395,256
63,890,258
33,379,336
36,637,529
15,692,733
49,332,794
26,828,360
28,289,628
12,117,127
-14,557,464
-6,550,976
-8,347,901
-3,575,600
(1) 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.
(2) For these purposes, the value of a share is 163.85 pence, being the closing mid-market price on 31 December 2018, being the last business day of the 2018 financial year.
(3) 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.
(4) As at 31 December 2018, 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.
Long-term Performance
The following chart shows the single figure of remuneration for the Chief Executive over the last ten financial years compared to the
Company’s comparative (FTSE 100) and absolute shareholder return. The chart demonstrates a strong correlation between Company
performance demonstrated by these measures and the remuneration paid to the Chief Executive.
)
£
(
n
r
u
t
e
R
l
r
e
d
o
h
e
r
a
h
s
l
a
t
o
T
1,400
1,200
1,000
800
600
400
200
0
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
45,000
40,000
35,000
30,000
25,000
20,000
15,000
10,000
5,000
0
)
0
0
0
’
£
(
n
o
i
t
a
r
e
n
u
m
e
R
CEO total single figure
Melrose TSR
FTSE 100 TSR
CEO total single figure excluding LTIP
102
Melrose Industries PLCAnnual Report 2018
Determining the Directors’ Remuneration Policy
When determining the Directors’ Remuneration Policy specifically for the executive Directors, the Committee addressed the following:
Factor
Clarity
Simplicity
How the Committee has addressed
The Company’s performance remuneration is based on supporting the implementation of the Company’s strategy,
which is primarily to create sustainable long-term shareholder value. This provides clarity to all stakeholders on the
relationship between the successful implementation of the Company’s strategy and the remuneration paid.
The operation of the Annual Bonus Plan is linked to an earnings-based target (80%) and the achievement of strategic
factors (20%). The 2017 Incentive Plan simply rewards the creation of shareholder value and has been awarded in shares,
not cash. In the Committee’s view, this provides a simple incentive framework which can be understood by all of the
Company’s stakeholders.
Risk
The Directors’ Remuneration Policy includes the following:
• Setting defined limits on the maximum award which can be earned.
• Requiring the deferral of a substantial proportion of the incentives in shares for a material period of time.
• Aligning the performance conditions with the strategy of the Company.
• Ensuring there is sufficient flexibility to adjust payments through malus and clawback and an overriding discretion to depart
from formulaic outcomes.
These elements mitigate against the risk of target-based incentives by:
• Capping the maximum annual bonus to 100% of base salary.
• The requirement to hold any ordinary shares arising from crystallisation of Incentive Shares (2017) for a period of two years
post-crystallisation date and the ability to defer 50% of the annual bonus into shares where the minimum shareholding
requirement is not met, which help ensure that the performance earning the award was sustainable and thereby discouraging
short term behaviours.
• Aligning any reward to the agreed strategy of the Company.
• Reducing the award or cancelling it if the behaviours giving rise to the award are inappropriate or if it appears that the criteria
on which the award was based do not reflect the underlying performance of the Company.
The Committee sets out the possible values on approval of the Company’s incentive plan by shareholders. In addition,
the limits and discretions under the Directors’ Remuneration Policy were clearly set out on shareholder approval.
The Annual Bonus Plan clearly rewards the successful implementation of the Company’s strategy and the 2017 Incentive Plan
ensures that the executive Directors have a strong drive to ensure that the performance is sustainable over the long-term.
Predictability
Proportionality
Alignment to culture
The focus on ownership and long term sustainable performance is a key part of the Company’s culture.
This is supported by the Directors’ Remuneration Policy.
It should be noted that the Directors’ Remuneration Policy operated over the 2018 financial year as intended by the Committee.
The link between our strategy and the Directors’ Remuneration Policy
The Company’s “Buy, Improve, Sell” strategy, full details of which are set out in the Strategic Report on pages 2 to 3, is well formulated
and known by our shareholders. The Committee believes that the strategy is clearly linked to the Directors’ Remuneration Policy, which
sets the base salary, benefits and annual bonus for the executive Directors low, but with a heavy weighting towards long-term incentives,
which reward only for significant outperformance and where our shareholders also share in that success.
In particular:
• The executive Directors are wholly aligned with shareholders as substantial equity investors themselves (see page 100 for further
details), and are also required to defer their annual bonus payments if they do not meet the shareholding requirement of 200%
of base salary (and it is noted that all executive Directors meet – and exceed – this shareholding requirement).
• Strategic metrics for use in calculating the strategic elements of the annual bonus are focused on the specific investments
of the Company and its strategy.
• Fixed remuneration for the executive Directors is set at the lower end of the market to limit fixed costs for the Group and
to ensure desirable levels of profitability.
• Management are incentivised to maximise returns for shareholders through the LTIP metrics, which entitle incentive shareholders
to 7.5% of the increase in the index-adjusted value of the Company from and including May 2017 to May 2020 – i.e., returns are
only received for successful investment strategies – and have been awarded in shares, not cash.
103
GovernanceAnnual Report 2018Melrose Industries PLC Directors’ Remuneration report
Continued
Operation of the Directors’ Remuneration Policy in 2018 and 2019
The Committee has taken into account feedback received from shareholders over the course of the year on the current Directors’
Remuneration Policy (a copy of which can be found in the circular dated 7 April 2017, available at www.melroseplc.net/
media/1728/21347274-_-1-_circular.pdf), and will be using such feedback to guide the Directors’ Remuneration Policy review ahead
of the new Directors’ Remuneration Policy being put to shareholders in 2020. For 2019, the Committee has made clarifications to the
implementation of the Directors’ Remuneration Policy to ensure alignment with the new UK Corporate Governance Code, which takes
effect for financial years on and from 1 January 2019, and to reflect shareholder feedback received during 2018.
The table below summarises the following information:
• A summary of the key terms of the Directors’ Remuneration Policy;
• The operation of the key terms of the Directors’ Remuneration Policy in 2018; and
• The proposed operation of the key terms of the Directors’ Remuneration Policy in 2019.
Element
Current Directors’
Remuneration Policy
Proposed adjustments
to implementation
for 2019
Operation
in 2018
Operation
in 2019
No change.
Executive Directors
received a 3% increase
on 1 January 2018.
As a result, the salaries for
the executive Directors in
2018 were:
Executive Directors
received a 3% increase
on 1 January 2019.
As a result, the salaries
for the executive
Directors are:
• Christopher Miller:
• Christopher Miller:
£490,000
• David Roper: £490,000
• Simon Peckham: £490,000
• Geoffrey Martin: £392,000
£505,000
• David Roper:
£505,000
• Simon Peckham:
£505,000
• Geoffrey Martin:
£403,000
No change.
Standard benefits.
No change.
All executive Directors
received a supplement in lieu
of their pension contribution.
No change.
It is the Committee’s intention
that any new executive
Directors will receive a pension
contribution that is in line with
the range of contributions
provided to the wider
workforce of the Group.
Normally reviewed annually and
fixed for 12 months from 1 January,
although salaries may be reviewed
more frequently or at different times
of the year if the Committee
determines this to be appropriate.
Salaries are paid in cash and levels
are determined by the Committee
taking into account a range of
factors including:
• role, experience and performance;
• prevailing market conditions;
• external benchmarks for similar
roles at comparable companies;
and
• salary increases awarded for other
employees in the Group.
Executive Directors receive benefits
in line with market practice and
these include a company car
allowance, fuel allowance, private
medical insurance, life insurance and
group income protection.
Other benefits may be provided
based on individual circumstances,
such benefits may include (but are
not limited to) travel costs to and
from London and accommodation in
London for executive Directors who
are not based in London but who
are required to work there and
relocation allowances.
Executive Directors may elect to
receive a Company contribution to
an individual defined contribution
pension arrangement or a
supplement to base salary in
lieu of a pension arrangement.
Base Salary
Base salaries are
considered reasonably
conservative in
comparison to a
market-competitive range
for companies of similar
size and complexity. See
the benchmarks set out on
page 100. Since Melrose
was floated 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%.
Benefits
Pension
Pension contributions/
salary supplements for
executive Directors are
payable at the level of
15% of base salary, which
is within the market range
for a business of the size
and complexity of Melrose
and is within the range of
pension contributions
provided to the wider
workforce of the Group.
No executive Director
participates in, or has
ever participated in, any
Group defined benefit
pension scheme.
104
Melrose Industries PLCAnnual Report 2018 Element
Current Directors’
Remuneration Policy
Proposed adjustments
to implementation
for 2019
Operation
in 2018
Operation
in 2019
Annual Bonus
The maximum bonus
payable is set at 100%
of base salary, which is
conservative compared to
the Company’s peers, as
shown on page 100. All
executive Directors who
participate in the annual
bonus scheme receive the
same percentage bonus.
In the last three years prior
to 2018, the average
percentage of base salary
payable has been 93%.
The maximum opportunity
is deliberately positioned
below the lower quartile
maximum opportunity for
FTSE 100 companies.
Maximum opportunity of 100%
of base salary. Targets are set
annually and payout is determined
by the Committee after the year end
based on performance against
those targets. The Committee has
discretion to vary the bonus payout
(upwards or downwards) should any
formulaic output not produce a fair
result for either the individual
executive Director or the Company,
taking account of overall
business performance.
At least 50% of the award will be
based on financial measures and the
balance of the award will be based
on strategic measures and/or
personal objectives, as determined
by the Committee.
An 80/20 split
between financial
and strategic targets.
See page 97 for details of
the performance conditions,
the targets and their level
of satisfaction.
Where an executive Director
holds less than the minimum
shareholding requirement
(being 200% of base salary),
up to 50% of their annual
bonus will be deferred into
shares, and required to be
held for three years or until
the minimum shareholding
requirement has been met,
subject to the discretion
of the Committee.
The maximum bonus
opportunity under the
recruitment policy for new
executive Directors not
participating in the 2017
Incentive Plan is 300% of
base salary. In the event
a bonus of above 100%
of base salary is awarded, and
the executive Director does
not meet the minimum
shareholding requirement of
200% of base salary, up to
50% of such excess bonus
will be subject to deferral
into shares for a period of
three years.
Clarification: see below
for the Committee’s
proposed treatment on
cessation of employment.
Introduction of a separate
minimum shareholding
requirement for executive
Directors of 200% of salary.
Only the 2012 Incentive Plan
Obligations operated in
2018, noting that the
executive Directors all met
(and exceeded) this
requirement.
Minimum
Shareholding
Requirement
No standard minimum shareholding
requirement as a percentage of
salary; but a requirement to retain
50% of the shares awarded
in 2017 pursuant to the
crystallisation of the 2012 Incentive
Plan (the “2012 Incentive Plan
Obligations”). On crystallisation of
the 2017 Incentive Plan, this will be
superseded by the obligation for the
executive Directors to retain any
ordinary shares arising from
crystallisation of 2017 Incentive
Shares for the two year holding
period. In any event, the executive
Directors already hold significant
shareholdings in the Company
(see page 100).
No change to bonus
maximum of 100% of
base salary.
An 80/20 split
between financial and
strategic targets:
• 80% based on EPS
Growth including:
• threshold of 5%
(20% of bonus);
• target of 10%
(40% bonus); and
• maximum of 20%
(80% of bonus),
and with a
linear line
for achievement
between the threshold
and the maximum; and
• 20% based on
strategic
measures to be
determined
by the Committee.
It is the view of the
Committee that the
strategic measures
for the bonus are
commercially sensitive
and therefore their
disclosure in advance is
not in the interests of
the Company or
shareholders. The
Committee will,
however, provide full
retrospective disclosure
to enable shareholders
to judge the level of
award against the
targets set.
Alongside the 2012
Incentive Plan
Obligations, the
executive Directors will
be required to retain a
shareholding equal
to 200% of base salary
throughout their
directorship.
As at 31 December
2018, the executive
Directors held shares in
the Company as set
out on page 100.
105
GovernanceAnnual Report 2018Melrose Industries PLC Directors’ Remuneration report
Continued
Element
Current Directors’
Remuneration Policy
Post-Cessation
Minimum
Shareholding
Requirement
2017 Incentive Plan
At the time the Directors’
Remuneration Policy was approved,
there was no requirement in the Code
to provide for post-cessation minimum
shareholding requirements beyond the
obligation to hold any shares in
connection with the 2017 Incentive
Plan for the two-year holding period.
In any event, the executive Directors
already hold significant shareholdings
in the Company (see page 100).
Options are granted over a separate
class of incentive shares and may
be exercised at any time
up to and including 31 May 2020
(the “trigger date”).
Following the trigger date, the
participants shall be entitled to 7.5%
of the index-adjusted increase in
value of the Company from and
including 31 May 2017 to but
excluding the trigger date. At the
discretion of the Committee, this
value is typically delivered through
the conversion of the 2017 Incentive
Shares into an appropriate number
of ordinary shares, subject to tax
requirements.
Each executive Director is required
to retain all of the ordinary shares
they receive in connection with the
crystallisation of the 2017 Incentive
shares until 31 May 2022, other than
any ordinary shares sold in order to
make adequate provision for any tax
liability arising in connection with the
crystallisation.
The maximum number of new
ordinary shares in the Company that
may be issued on conversion of the
2017 Incentive Shares is 5% of the
aggregate number of ordinary shares
in issue on 31 May 2017 plus 5% of
any additional ordinary shares issued
or created by the Company after that
date and prior to the trigger date.
Proposed adjustments
to implementation
for 2019
Operation
in 2018
Introduction of a post
cessation minimum
shareholding requirement.
Not operated
in 2018.
No changes.
The 2017 Incentive Plan
was designed with a
three-year performance period
and two-year additional
holding period in anticipation
of the changes to the UK
Corporate Governance Code.
Clarification: see table
on page 98 for the
Committee’s proposed
treatment on cessation
of employment.
Operation
in 2019
The executive Directors
will be required to retain
a shareholding equal
to 200% of base salary
for the first 12 months
after cessation of
employment, and
100% of base salary
for the following
12 months.
Same as in 2018.
The third tranche
of options for the
executive Directors to
be issued in respect of
2019 are expected
to be:
• Christopher Miller:
2,584
• David Roper:
2,584
• Simon Peckham:
2,834
• Geoffrey Martin:
2,834
The total number of
2017 Incentive Shares
and options expected
to be held by the
executive Directors as
at 31 December 2019
is as follows:
• Christopher Miller:
7,750
• David Roper:
7,750
• Simon Peckham:
8,500
• Geoffrey Martin:
8,500
As described in
the Directors’
Remuneration Policy.
The first tranche of options
for the executive Directors
issued in respect of
2017 were:
• Christopher Miller: 2,583
• David Roper: 2,583
• Simon Peckham: 2,833
• Geoffrey Martin: 2,833
On 29 June 2017, these
options were exercised by
each of the executive
Directors and a total
of 12,831 2017 Incentive
Shares were issued to the
executive Directors in
accordance with the
proportions set out above.
The second tranche of
options for the executive
Directors issued on 7 June
2018 were:
• Christopher Miller: 2,583
• David Roper: 2,583
• Simon Peckham: 2,833
• Geoffrey Martin: 2,833
The total number of 2017
Incentive Shares and options
held by the executive
Directors as at 31 December
2018 was as follows:
• Christopher Miller: 5,166
• David Roper: 5,166
• Simon Peckham: 5,666
• Geoffrey Martin: 5,666
As described in the Directors’
Remuneration Policy.
There was no application of
the malus and clawback
provisions to the executive
Directors in 2018.
Malus and clawback
Applies to both the annual bonus and
the 2017 Incentive Plan.
No change.
106
Melrose Industries PLCAnnual Report 2018 Element
Current Directors’
Remuneration Policy
Proposed adjustments
to implementation
for 2019
Operation
in 2018
Operation
in 2019
Not operated in 2018.
As per the adjustments
described.
Note that the executive
Directors all meet the
minimum shareholding
requirement of 200% of
base salary.
Cessation of
employment and
use of discretion
(Annual Bonus)
In the event of cessation
of employment of an
executive Director,
the Committee has
discretion on an individual
basis as to whether or not
to award a bonus in full
or in part. The decision will
be dependent on a number
of factors, including the
circumstances of the
executive Director’s
departure and their
contribution to the
business during the
bonus period in question.
Typically the bonus
amounts will be pro-rated
for time in service up to
termination.
A good leaver is defined at cessation in the
following circumstances: death; permanent
ill-health; permanent disability; retirement at
or over 65 years of age; resignation in
connection with a “Change of Control”
and at the discretion of the Committee.
Bonus in year of cessation
Good leaver reason
Performance conditions will be measured at
the bonus measurement date. Bonus will
normally be pro-rated for the period worked
during the financial year and will be paid
in cash.
Other reason
No bonus will otherwise be payable for year
of cessation.
Bonus from prior years deferred
into shares
Good leaver reason
Good leavers will be entitled to retain those
shares awarded in prior year’s deferral
of annual bonus.
Other reason
Any shares awarded for a deferral of a prior
year’s annual bonus and still subject to
restrictions will be forfeited.
Discretion
The Committee will have the following
elements of discretion with respect to the
annual bonus and deferred share awards in
the event of cessation of employment:
• to determine that an executive Director is a
good leaver. It is the Committee’s intention
to only use this discretion in circumstances
where there is an appropriate business
case which will be explained in full
to shareholders;
• to determine whether to pro-rate a cash
bonus to time. The Committee’s normal policy
is that it will pro-rate for time. It is the
Committee’s intention to use discretion to not
pro-rate in circumstances where there is an
appropriate business case which will be
explained in full to shareholders; and
• to vest any annual bonus that has been
deferred into shares at the end of the original
deferral period or at the date of cessation.
The Committee will make this determination
depending on the type of good leaver
reason resulting in the cessation.
107
GovernanceAnnual Report 2018Melrose Industries PLC Directors’ Remuneration report
Continued
Wider workforce considerations
Introduction
The Committee’s focus is on setting the level of executive
remuneration policy and practices to ensure that the incentives
operated by the Company align with its culture and strategy.
The Committee has oversight of workforce pay and policies and
incentives at both a Melrose level and a business unit level, which
enables it to ensure that the approach to executive remuneration
is consistent with those workforces. The Committee has the
authority to ask for additional information from the Company in
order to carry out these responsibilities.
The Committee does not have responsibility for setting and
managing the remuneration of Melrose senior management or
divisional CEOs. The Chief Executive retains responsibility for
setting and managing the remuneration of these groups; however,
the terms of such remuneration are fully disclosed to the
Committee to enable visibility and comparison against the
remuneration of the executive Directors. The Committee has
determined that such an approach is appropriate in light of
Melrose’s business model.
Similarly, the Committee does not directly set and manage pay
policies of the business units. The structure and the business
model of Melrose requires each of its business units to operate
independently and to set its own pay policy guidelines, which
are aligned to its culture and strategy and deemed appropriate
by the business unit in light of a number of factors, including its
performance and the industry in which it operates. The divisional
CEOs retain responsibility for setting and managing the
remuneration of their senior executive team members, subject to
approval by the Chief Executive, with the terms of such
remuneration being fully disclosed to the Committee to enable
visibility and comparison against the remuneration of the executive
Directors. Wider business unit pay is determined by the divisional
CEOs and the relevant executive team within the agreed annual
budgetary requirements. The Committee may provide guidance on
the areas that it would expect the business units to look at in
determining that the remuneration provided to their respective
employees is consistent with the wider workforce of that business
unit and that the incentives operated by it align with its culture
and strategy.
As part of the disclosures described above, the Committee
receives an annual summary setting out the key details of
remuneration changes for Melrose senior management, the wider
Melrose workforce, divisional CEOs and their respective executive
team members. The Committee is also provided with confirmation
from each business unit that the remuneration provided to its
executive team is consistent with the wider workforce of that
business unit and that the incentives operated by that business
unit align with its culture and strategy.
Clearly, the level and type of remuneration offered will vary across
employees depending on the employee’s level of seniority and
nature of his or her role. The Committee is not looking for a
homogeneous approach to remuneration; however, when
conducting its review, it pays particular attention to: whether the
element of remuneration is consistent with the Company’s
remuneration philosophy; if there are differences, they are
objectively justifiable; and whether the approach seems fair
and equitable in the context of other Melrose senior management,
Melrose employees, divisional CEOs or divisional executive teams,
as the case may be.
108
In summary, based on the disclosures that have been made
to it, the Committee is satisfied that the approaches to
remuneration at all levels are consistent with the Company’s
remuneration philosophy.
Long-term incentives
As mentioned, the Melrose remuneration philosophy is that
executive remuneration should be simple and transparent,
support the delivery of the value creation strategy and pay only
for performance. To this end, the 2017 Incentive Plan is in place for
the executive Directors and Melrose senior management, which
the Committee feels aligns this group with shareholders as it is
based purely on performance and on the increase in value of the
Company, and has been paid in shares, not cash.
In addition, divisional long-term incentive plans have been
implemented for senior managers of certain business units, to
incentivise them to create value for the Company and our
shareholders. Depending on the amount of value created,
participants in such incentive plans will receive a cash payment on
the sale of their respective business. If a sale of the relevant business
has not occurred within a certain period, the incentive plan will
crystallise and any payment to be made to participants will be
based on the increase in value of the business during this period.
Retirement Provisions
The Company provides retirement benefits to Melrose employees
and the business units determine the retirement benefits provided
to their respective employees. In the UK, the Group’s commitments
with regards to pension contributions, consistent with the prior
year, range from 8% to 15% of an employee’s salary for members
of the Melrose pension scheme and from 3% to 20% across our
various business unit pension schemes.
In line with Melrose’s “Improve” strategy, we have continued to
improve funding levels in the pension plans of our business units.
As further detailed on pages 10 to 11, Melrose has a stellar record
of successfully taking underfunded pension schemes under
our stewardship and bringing them to full funding. In particular,
as part of our acquisition of GKN, the Board made a number
of commitments regarding the existing GKN pension schemes,
including an agreement to make cash contributions of up to
c.£1 billion to prudently fund the GKN pension schemes, and a
target of full funding for the GKN 2012 Pension Scheme using a
discount rate of Gilts +75bps. Payments to the GKN pension
schemes will also be secured by a Melrose guarantee.
Pay comparisons – CEO ratio
Our CEO to employee pay ratio for 2018 was 20:1.
To calculate the average employee figure, we divided the total
remuneration paid to UK employees (including basic salary and
annual bonus) in 2018 by the total number of UK employees as
at 31 December 2018. The CEO pay figure used is the 2018
single figure amount (which includes basic salary, annual bonus,
pension contributions, and benefits).
The pay ratio across the entire Melrose executive team is
consistent with that of the Chief Executive, reflecting the
consistent nature of the pay structure across the executive
management team at Melrose (noting that the executive
Vice-Chairmen do not participate in the annual bonus plan).
2018 CEO to executive Director pay ratio
Christopher Miller
David Roper
Geoffrey Martin
1.8:1
1.8:1
1.2:1
Melrose Industries PLCAnnual Report 2018 To give context to this ratio, we have included an illustrative chart tracking CEO pay and average employee pay alongside Melrose’s
TSR performance over the same period. The Committee has always been committed to ensuring that the Chief Executive’s reward
is commensurate with performance. The chart shows a clear alignment between shareholder returns and the Chief Executive’s
single figure pay.
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2012
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2014
2015
2016
2017
2018
CEO total single figure
Average employee pay
Melrose TSR
CEO total single figure excluding LTIP
Shareholders expect the Chief Executive to have a significant proportion of his pay based on performance and paid in shares. It is this
element of his package which provides the volatility in his remuneration when comparing on a year-to-year basis. The Committee is
comfortable through the analysis set out above that the underlying picture is not one of a greater divergence of the Chief Executive’s
remuneration from employees, i.e. excluding the volatility of the LTIP, the relationship is consistent.
There is likely to be significant volatility in this ratio year-on-year, and we believe that this is likely to be caused by the following factors:
• Our Chief Executive’s pay is made up of a higher proportion of incentive pay than that of our employees, in line with the
expectations of our shareholders. This introduces a higher degree of variability in his pay each year, which will affect the ratio.
• The value of long-term incentives which measure performance over three years is disclosed in pay in the year it vests,
which increases the Chief Executive’s pay in that year, again impacting the ratio for that year.
• Long-term incentives are typically provided in shares, and therefore an increase in share price over the three years magnifies the
impact of a long-term incentive award vesting in a year.
• We recognise that the ratio is driven by the different structure of the pay of our Chief Executive versus that of our employees,
as well as the make-up of our workforce. This ratio varies between businesses even in the same sector. What is important from
our perspective is that this ratio is influenced only by the differences in structure, and not by divergence in fixed pay between the
Chief Executive and the wider workforce.
• Where the structure of remuneration is similar, as for the executive Directors and the Chief Executive, the ratio will be much
more stable over time.
Total Shareholder Return
The total shareholder return graph below shows the value as at 31 December 2018 of £100 invested in the Company in October 2003,
compared with £100 invested in the FTSE 100 Index, the FTSE 250 Index and 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 2018 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.
)
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3000
2500
2000
1500
1000
500
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Oct 03
Oct 04
Oct 05
Oct 06
Oct 07
Oct 08
Oct 09
Oct 10
Oct 11
Oct 12
Oct 13
Oct 14
Oct 15
Oct 16
Oct 17
Oct 18
Melrose Industries PLC
FTSE All Share
FTSE 100
FTSE 250
109
GovernanceAnnual Report 2018Melrose Industries PLC
Directors’ Remuneration report
Continued
Chief Executive remuneration for previous nine years
In accordance with the regulations governing the reporting of Director 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 2012 Incentive Plan 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, a separate column has been added showing the
total remuneration with the incentives averaged over the five-year periods during which they were earned (the value used is based
on their value on maturity). 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
Non-LTIP
LTIP
Total remuneration
with average long-term
Total
remuneration
£
incentive value (1)
£
Annual bonus
as a percentage
of maximum
opportunity
Long-term incentives
as a percentage
of maximum
opportunity
–
n/a(4)
–
–
–
–
n/a(7)
n/a(7)
–
–
Year ended
31 December 2018
Year ended
31 December 2017
Year ended
31 December 2016
Year ended
31 December 2015
Year ended
31 December 2014
Year ended
31 December 2013
Year ended
31 December 2012 (5)
Year ended
31 December 2011
Year ended
31 December 2010
Simon Peckham 1,049,000
0
1,049,000
–(2)
Simon Peckham
994,000
41,770,000
42,764,000(3)
9,348,056
Simon Peckham
987,725
Simon Peckham
928,541
Simon Peckham
773,167
0
0
0
987,725
9,341,781
928,541
9,282,597
773,167
9,127,223
Simon Peckham
Simon Peckham
David Roper
927,276
489,372
259,040
0
19,791,212
10,656,806
927,276
20,280,584(6)
10,915,846(6)
9,281,332
4,447,614
2,390,401
95%
90%
95%
88%
58%
100%
64%
64%
84%
David Roper
811,152
David Roper
849,341
0
0
811,152
2,942,513
849,341
2,980,702
100%
(1) To provide a more meaningful comparison of total remuneration year-on-year, we have added an amount equal to one-fifth of the value derived by the CEOs in 2017 and 2012 from the
2012 Incentive Shares and the 2009 Incentive Shares respectively, to the Non-LTIP remuneration, as set out in the column titled “Non-LTIP”.
(2) The value of the 2017 Incentive Shares will only be known upon the crystallisation date, which is 31 May 2020.
(3) The value derived in 2017 from the 2012 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. This amount was paid in shares, not cash.
(5)
(4) On the crystallisation in May 2017 of the 2012 Incentive Plan, 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.
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 including average 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.
(6) 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.
(7) 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.
110
Melrose Industries PLCAnnual Report 2018
Percentage change in Chief Executive’s remuneration
The table sets out, in relation to basic salary, taxable benefits
and annual bonus, the percentage increase in pay for the Chief
Executive compared to the average increase for a group consisting
of the Company’s senior head office employees, the divisional
CEOs, managing directors and finance directors of the Group’s
business units and the direct senior reports of those individuals.
The percentages shown opposite relate to the financial year ended
2018 as a percentage comparison to the financial year ended 2017.
This group of senior management was considered an appropriate
comparator group because of their level of seniority and the
structure of their remuneration packages. 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.
Element of remuneration
Basic salary
Benefits
Annual bonus
Chief Executive
percentage
change
Senior employees
percentage
change (1)
3%
-5%
9%
5%
-5%
4%
(1)
In light of the Company’s business model of “Buy, Improve, Sell”, this group of senior
management inevitably varies from year to year, and can vary significantly in acquisition
and disposal years.
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 Group).
Expenditure
Remuneration paid to
all employees
Distributions to shareholders
by way of dividend and share
buy back
Year ended
31 December
2017
£ million
Year ended
31 December
2018
£ million
Percentage
change
503(1)
2,192(2)
336%
63
129
105%
(1) The figure for the year ended 31 December 2017 is the total staff costs as stated in note 7 to
the financial statements and the figure for the year ended 31 December 2018 is the total staff
costs as stated in note 7 to the financial statements.
(2) The 2018 total staff costs include eight months of GKN staff costs as compared to the 2017
costs, which do not reflect any GKN staff costs. In light of this, and of the Company’s business
model of “Buy, Improve, Sell”, 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.
Non-executive Directors
Single figure table (audited)
The following table sets out the single figure of remuneration
for 2018 in comparison with 2017 for the Company’s
Non-executive Directors:
Total
salary
and fees
£000
Taxable
benefits
£000
Period
Bonus
£000
LTIP
£000
Pension
£000
Total
£000
Non-executive
Directors
Justin Dowley
Liz Hewitt
David Lis
Archie G. Kane
Charlotte
Twyning (2)
Total
2018
2017
2018
2017
2018
2017
2018
2017
2018
2017
2018
2017
85
81
80
75
72
69
69
33(1)
17
–
323
258
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
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
n/a
n/a
n/a
n/a
n/a
85
81
80
75
72
69
69
33
n/a
–
17
–
n/a 323
n/a 258
(1) 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 for 2017 reflect his fees for the period 5 July 2017
to 31 December 2017.
(2) Charlotte Twyning was appointed as a Non-executive Director of the Company with
effect from 1 October 2018 and the fees referred to above reflect her fees for the period
1 October 2018 to 31 December 2018.
Non-executive Directors’ fees (audited)
Basic fees for Non-executive Directors have been increased by 8%
with effect from 1 January 2019. The Non-executive Director fee
levels for 2018 and 2019 are set out in the table below. The reason
for the increase in the base fee compared with last year’s base fee
increase is due to both (i) the benchmarking exercise undertaken
with respect to Non-executive Director fees, which took into
account the increase in the size and scope of the roles following
the acquisition of GKN; and (ii) there being no additional base
committee membership fee, whilst all Non-executive Directors
serve on all of the Board’s committees (other than Justin Dowley,
who does not sit on the Audit Committee as a result of his role
as Chairman of the Board), which has been determined
to be appropriate.
Fee element
Non-executive Chairman fee
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
1 January 2018
Fee
with effect from
1 January 2019
–
£69,715
£350,000
£75,000
£10,000
£20,000
£10,000
£20,000
£2,500
£10,000
£5,000
£15,000
In line with the move to appointing an inaugural Non-executive
Chairman of the Board, the Chairman’s fee has been set by the
Board under advice and following a benchmarking exercise against
the Company’s peers. There was no Chairman fee for the 2018
financial year as in previous years this role was undertaken by one
of the executive Directors, who was not paid a separate fee.
111
GovernanceAnnual Report 2018Melrose Industries PLC Directors’ Remuneration report
Continued
Share interests (audited)
The table below sets out the subsisting interests in the equity
of the Company held by the Non-executive Directors as at
31 December 2018:
Director
Justin Dowley
Liz Hewitt
David Lis
Archie G. Kane (1)
Charlotte Twyning (2)
Ordinary shares held
at 31 December 2017
Ordinary shares held
at 31 December 2018
1,065,661
120,877
433,947
–
–
1,387,509
188,377
458,947
50,000
36,000
(1) Archie G. Kane was appointed as a Non-executive Director of the Company with effect
from 5 July 2017.
(2) Charlotte Twyning was appointed as a Non-executive Director of the Company with effect
from 1 October 2018.
Service contracts and letters of appointments
Consistent with the best practice guidance provided by the
UK Corporate Governance Code, the Company’s policy is for
executive Directors to be employed on the terms of service
agreements, which may be terminated by either the executive
Director or the Company on the giving of not less than 12 months’
written notice (subject to certain exceptions).
Executive Directors’ service contracts do not provide for pre-
determined compensation in the event of termination. Any
payments made would be subject to normal contractual principles,
including mitigation as appropriate. The length of service for any
one executive Director is not defined and is subject to the
requirement for annual re-election under both the UK Corporate
Governance Code and the Company’s Articles of Association.
The Non-executive Directors do not have service contracts but
have letters of appointment for an initial term of three years, which
may be renewed by mutual agreement. Generally, a Non-executive
Director may be appointed for one or two periods of three years
after the initial three-year period has expired, subject to re-election
by shareholders at each AGM. The terms of appointment do not
contain any contractual provisions regarding a notice period or the
right to receive compensation in the event of early termination.
The Company follows the UK Corporate Governance Code’s
recommendation that all directors of FTSE 350 companies be
subject to annual re-appointment by shareholders.
Directors
Chairman
Justin Dowley (1)
Date of original appointment
as a Director of Melrose
1 September 2011
Executive Directors (2)
Christopher Miller
David Roper
Simon Peckham
Geoff Martin
29 May 2003
29 May 2003
29 May 2003
7 July 2005
Non-executive Directors
Liz Hewitt (1)
David Lis
Archie G. Kane
8 October 2013
12 March 2016
5 July 2017
Charlotte Twyning
1 October 2018
(1) Original letter of appointment novated to Melrose Industries PLC
(f/k/a New Melrose Industries PLC).
(2) Service agreements novated from Melrose PLC to Melrose Holdings Limited
(f/k/a Melrose Industries PLC) on 27 November 2012, and from Melrose Holdings Limited
to Melrose Industries PLC (f/k/a New Melrose Industries PLC) on 19 November 2015.
Each executive Director’s service contract and each Non-executive
Director’s letter of appointment are available for inspection at the
Company’s registered office during normal business hours.
This report was approved by the Board and signed
on its behalf by:
David Lis
Chairman, Remuneration Committee
7 March 2019
112
Melrose Industries PLCAnnual Report 2018 Statement of Directors’ responsibilities
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 7 March 2019 and is signed on its behalf by:
Geoffrey Martin
Group Finance Director
7 March 2019
Simon Peckham
Chief Executive
7 March 2019
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 Companies Act 2006.
They are also responsible for safeguarding the assets of the
Company and hence for taking reasonable steps for the prevention
and detection of fraud and other irregularities.
The Directors are responsible for the maintenance and integrity of
the corporate and financial information included on the Company’s
website. Legislation in the United Kingdom governing the
preparation and dissemination of financial statements may differ
from legislation in other jurisdictions.
113
GovernanceAnnual Report 2018Melrose Industries PLC
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 of Melrose Industries PLC (the ‘parent company’) and its subsidiaries (the ‘Group’) give a true and fair
view of the state of the Group’s and of the parent company’s affairs as at 31 December 2018 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 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 30 to the consolidated financial statements and the related notes 1 to 8 to the Company Balance Sheet.
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 Financial Reporting Council’s (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.
114
Melrose Industries PLCAnnual Report 2018 Summary of our audit approach
Significant changes
in our approach
Melrose Industries plc completed the acquisition of GKN plc on 19 April 2018. As a result of the acquisition there
was a significant change in the structure of the Group.
Considering the effects of the acquisition on the 2018 income statement, we changed the basis for materiality from a
% of adjusted profit to a blended measure reflecting a number of relevant metrics using our professional judgement.
We have revised our audit scoping in the context of the enlarged Group. This includes the addition of 102 reporting
units where either the Group audit team performed procedures or we requested component auditors to perform
procedures under the Group audit team’s supervision.
In addition, we have considered the significant risks to the enlarged Group. We identified a number of additional
risks relating to the underlying business operations as well as risks in relation to accounting for the acquisition of
the GKN group.
New key audit matters in the current year reflect changes in our risk assessment and include:
• Acquisition accounting – recognition and measurement of intangible assets, provisions and contingent liabilities
acquired as part of GKN.
• Revenue recognition – this risk arises principally in the Engine Systems businesses, acquired as part of GKN
Aerospace, and focuses on the valuation of revenue recognised given the increased level of estimation and judgement
following the adoption of IFRS 15.
• Valuation of inventory – specifically in relation to sites where there are high levels of rework stock.
There were no key audit matters included in the prior year audit report that have not been included below.
Key audit matters
The key audit matters that we identified in the current year were:
• Acquisition accounting – intangible asset valuation
• Acquisition accounting – onerous contract, warranty and contingent liability provisions
• Impairment of goodwill and acquired intangibles
• Classification of adjusting items
• Revenue recognition
• Valuation of inventory
Materiality
Scoping
Within this report, any new key audit matters are identified with
as the prior year are identified with
.
and any key audit matters which are the same
The materiality that we used for the group financial statements was £29 million. We considered a number of
benchmarks including operating profit, adjusted profit before tax and net assets, derived a materiality from each
benchmark and then selected materiality from within the range which in our professional judgement is appropriate
to the enlarged group financial statements.
We selected 40 reporting units representing 58% of the Group’s revenue (including the group’s share of joint
venture revenue) where we requested component auditors to perform a full scope audit of the components’
financial information.
We also requested component auditors to perform specified audit procedures on certain account balances and
transactions at a further 32 reporting units. These units represented 17% of the Group’s revenue.
The remaining reporting units were subject to desktop review procedures performed by the Group audit team.
115
Financial statementsAnnual Report 2018Melrose Industries PLC Independent auditor’s report to the members
of Melrose Industries PLC Continued
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 confirm that we have
nothing material to report,
add or draw attention to in
respect of these matters.
We considered as part of our risk assessment the nature of the Group, its business model and related risks
including where relevant the impact of Brexit, the requirements of the applicable financial reporting framework and
the system of internal control. We evaluated the directors’ assessment of the group’s ability to continue as a going
concern, including challenging the underlying data and key assumptions used to make the assessment, and
evaluated the directors’ plans for future actions in relation to their going concern assessment.
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:
We confirm that we have
nothing material to report,
add or draw attention to in
respect of these matters.
• the disclosures on pages 52 to 58 that describe the principal risks and explain how they are being managed
or mitigated;
• the directors’ confirmation on page 51 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 49 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.
116
Melrose Industries PLCAnnual Report 2018 Key audit matter description
How the scope of our audit responded to the key audit matter
Key observations
Intangible assets recognised on the balance sheet upon acquisition of GKN plc
The Group completed the acquisition of
GKN plc on 19 April 2018. The Group applied
IFRS 3 Business Combinations (“IFRS 3”)
to identify and value the identifiable net assets
of the acquisition business at this time, using
the assistance of an external valuations expert.
The valuation of certain intangible assets of
£5.7 billion arising on the acquisition of GKN
plc is considered to be a key audit matter.
The assets driven by particularly sensitive
assumptions are:
We assessed management’s processes and controls covering the
measurement of intangible assets, in particular the key controls over the
forecasts that underpin customer relationship and technology valuations.
We assessed the competence, capability and objectivity of
management’s expert.
We engaged valuation specialists to evaluate the methodology and key
assumptions used by management’s expert and to test the mathematical
accuracy of the valuation models.
We have challenged the key assumptions used within the
valuations including:
We found that the
judgements formed
by management were
within an acceptable
range, the overall
position adopted
was reasonable and
disclosures made in
the financial statements
were appropriate.
• technology and customer programmes
• assessment of discount, long-term growth and royalty rates against
in the Aero and Auto segments; and
external market sources;
• customer relationships in the Auto and Powder
• challenging revenue and earnings projections forecast by management
Metallurgy segments.
The valuations are based on a number
of assumptions that require significant
judgement including:
• forecast revenue and EBIT projections
for the relevant acquired businesses;
• royalty rates and discount rates applied; and
• estimates of useful economic lives.
Refer to pages 82 to 89 (Report of the
Audit Committee) and note 12: Acquisitions.
through agreement to the approved mid-term plan, challenge of volumes
against external industry consensus and customer order books, and
challenge of margin trends over the forecast period compared with
historical performance;
• assessment of the methodology used to establish useful economic lives
of assets with the assistance of our valuations expert;
• agreeing data including customer attrition and contract length, which
feed into the determination of useful economic lives, back to supporting
documentation;
• searching for and assessing contradictory evidence through review of
programme minutes, analyst reports and industry publications; and
• performing overall cross checks based on earnings multiples and the
weighted average return on assets.
We have tested that the intangible assets recognised were consistent
with our knowledge of the business.
Onerous contract, warranty and contingent liability provisions recognised on the balance sheet
upon acquisition of GKN plc
The Group has recognised onerous contract
provisions of £629 million and provisions in
respect of contractual, regulatory or legal
issues of £264 million at estimated fair value
upon acquisition of GKN plc in line
with IFRS 3.
In respect of onerous contract provisions
there is judgement required in determining
a best estimate of the unavoidable costs
of fulfilling the company’s obligations on
such contracts.
In respect of other provisions recognised,
there is judgement required in determining
the significance of any instances of:
• potential non-compliance with
contractual terms;
• regulatory or legal issues; or
• future warranty costs.
These have been provided based on
management’s best estimate of the
expenditure to settle the obligation.
Because of the quantitative significance,
complexity and level of judgement in both
provisions, we consider the valuation of
these provisions to be a key audit matter.
Refer to pages 82 to 89 (Report of the Audit
Committee), note 3: Critical accounting
judgements and key sources of estimation
uncertainty and note 20: Provisions.
We assessed management’s processes and controls over legal
and regulatory claims and issues and onerous contracts and assessed
the design and implementation of relevant controls.
We challenged the assumptions underlying the valuation of onerous
contract and warranty provisions through:
• verifying volume, price and cost inputs used to calculate the provision;
• reviewing contracts upon which the provisions were based;
• reviewing internal audit reports and customer correspondence;
• visiting relevant sites and discussing the contracts with
programme managers;
• benchmarking projected volumes against market volume data;
• assessing contract-related overhead allocations for each business;
• testing the data and assumptions used in calculating the utilisation
of the provisions in the post-acquisition period;
• challenging the forecast margin by assessing against current performance
and historical evidence on similar contracts; and
• assessing contradictory evidence.
In respect of contractual/legal/regulatory provisions we made direct
enquiries of the Group’s internal and external lawyers and commercial
and operational management and reviewed relevant third party
correspondence and customer files.
In respect of warranty provisions, we challenged management’s
estimates of the most likely outcomes by critically evaluating the range
of possible outcomes based on historical experience to determine if
the amounts provided are appropriate.
We assessed the adequacy of the Group’s financial statement
disclosures and adherence to accounting standards.
We found that the
judgements formed
by management were
within an acceptable
range, the overall
position adopted
was reasonable and
disclosures made in
the financial statements
were appropriate.
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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
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.
Impairment of goodwill and acquired intangibles
Total goodwill on the balance sheet at
31 December 2018 is £4,052 million,
and total acquired intangible assets is
£7,019 million. As required by IAS 36
Impairment of assets management performs
an impairment review for all goodwill balances
on an annual basis and for other assets
whenever an indication of impairment is
identified. This review identified three groups
of CGUs where headroom was limited:
• Energy (goodwill £nil following a recorded
impairment of £123 million, other intangible
assets £55 million)
• Security and Smart Technologies
(goodwill £357 million, other intangible
assets £141 million)
• Ergotron (goodwill £435 million, other
intangible assets £171 million)
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:
• challenging management’s key assumptions relating to the 2019 forecast
and later forecast periods with reference to the recent and historical
performance of all three businesses, our knowledge of the businesses,
in particular the restructuring activity in the year and the status of end
markets, as well as the current order book and external market data;
• challenging of management’s assumptions around the effects of US/China
trade tariffs on the Security and Smart Technology and Ergotron
businesses by comparing to the impact on performance in 2018, and
performing independent research as to the probability of future tariffs
being implemented;
• considering the extent to which the possible effects of Brexit should
be included in the impairment models;
The impairment in the Energy CGU was
recorded following deterioration in its end
markets in the second half of the year.
• specifically for Energy, challenging the timing of the recorded impairment
by performing independent research of the generator market;
• benchmarking long-term growth rates to applicable macro-economic
This has been identified as a key audit matter
as a result of the quantitative significance
of the balances, and the application of
management judgement and estimation in
performing impairment reviews for these
groups of CGUs in particular. Specifically,
support for the carrying value of assets relies
on assumptions and judgements made by
management in respect of the forecasting
of future cash flows and growth rates used
in the model.
The key judgements and estimates and
impairment accounting policy are described
in more detail in the audit committee report
and in notes 3 and 11 to the consolidated
financial statements.
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; and
• validating the integrity of the impairment models through testing
of the mathematical accuracy, verifying the application of the input
assumptions and testing its compliance with IAS 36.
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 these businesses.
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Melrose Industries PLCAnnual Report 2018
Key audit matter description
How the scope of our audit responded to the key audit matter
Key observations
We consider the
disclosure of adjusting
items to be in line with
the Group’s accounting
policies and that the
presentation of
adjusting items is
consistent between
the periods presented
where applicable.
We assessed the design and implementation of management’s controls
around the classification of adjusting items in the financial statements.
We evaluated the appropriateness of the inclusion of items, both
individually and in aggregate, within adjusted 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 against IFRS requirements, ESMA guidance and latest FRC
guidance. In particular we challenged the inclusion of those items
that recur annually.
A sample of adjusting 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 disclosed in
accordance with the Group’s accounting policy, and also to assess
consistency of adjusting items between periods in the financial statements.
We agreed the amounts recorded through to underlying financial records
and other audit support to test that the amounts disclosed were complete
and accurate.
Where new items were included as a result of the GKN acquisition (in
particular the movement on un-hedged derivatives) we challenged whether
these were consistent with the Melrose definition of adjusting items.
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 adjusted results are reconciled to statutory results.
Classification of adjusting items
While there is no definition of adjusting
items within IFRS, this is an area of focus
for regulators including ESMA and the FRC.
The Group continues to classify certain costs or
income in accordance with its accounting
policy on adjusting items. Given the acquisition
and restructure of the GKN businesses, there
are a significant level of adjusting items reported
across the Group, including:
• restructuring costs of £240 million
• acquisition costs of £153 million
• amortisation of £401 million
• impairment totalling £152 million
• reversal of the IFRS 3 inventory uplift
for GKN £121 million
• movement in derivatives £143 million
Explanations of each adjustment are set
out in note 6 to the financial statements.
Refer also to pages 82 to 89 (Report of the
Audit Committee).
In total, adjustments totalling £1.3 billion have
been made to the statutory loss before tax of
£550 million to derive adjusted profit before
tax of £703 million.
As such, a key audit matter has been identified
in respect of the classification of items
recorded as adjusting. While the key measure
used by management to monitor performance
is adjusted operating profit, adjusted profit
before tax is also a key measure used by
management in communication with
shareholders. There is a risk that items may be
classified as adjusting which are underlying or
recurring items and therefore distort the
reported adjusted profit, 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.
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Financial statementsAnnual Report 2018Melrose Industries PLC
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
Revenue recognition
The group has recognised total revenue of
£8,605 million in 2018.
We assessed the design and implementation of controls around the
recognition of revenue for RRSP contracts.
We are satisfied that
the key assumptions
made in determining
the fair value of revenue
recognised on RRSP
contracts with variable
consideration were
within an acceptable
range and the overall
position was
reasonable.
For each material RRSP contract with variable consideration, we
recalculated the amount of revenue recognised to check that it has been
calculated in accordance with IFRS 15, the contractual agreement and
the latest correspondence with the customer. In particular, we have:
• agreed the percentage of revenue entitlement to the customer contract;
• reviewed correspondence with the customer in the period, in particular
entitlement reports;
• challenged estimations made by management at the year end
by taking account of historical settlements and reviewing previous
estimation accuracy;
• challenged the assumptions used in arriving at the element of variable
consideration recognised; and
• performed an assessment of the timing at which control is transferred
and revenue is recognised by identifying the performance obligations
from the contract and verifying the recognition triggers.
We consider the
valuation of inventory
at the sites referred
to above to be within
an acceptable range,
the overall position
was reasonable and
the disclosures are
appropriate.
As part of our risk assessment we identified inventory balances that
appeared to be outliers using a range of metrics including stock turn
and inventory provisioning percentage.
We have evaluated the valuation of inventory by:
• assessing the design and implementation of inventory provisioning controls
both at the local plant level and at the divisional and group level;
• evaluating the appropriateness of the inventory provisioning policy with
reference to stock count results and recalculating its application to the
year-end inventory balance;
• performing test counts with attendance from the audit management team,
with a focus on consideration of obsolescence and defective inventory,
including a sample of WIP items;
• performing detailed sample tests of inventory identified at the stock count,
making direct enquires of engineers and programme managers where
applicable to understand the nature of the stock and its realisable value;
• performing testing of net realisable value of finished goods and subsequent
sales; and
• performing an analytical review of levels of scrap year on year, relative to
programme, nature of inventory and any other site specifics.
There are judgements taken within the revenue
recognition of material Risk and Revenue
Sharing Partnerships (“RRSPs”) in the
Aerospace division (where revenue totals
£2,479 million). The risk specifically arises in the
Engine Systems businesses and focuses on
the timing at which performance obligations
are met as well as the valuation of revenue
recognised given the increased level of
estimation and judgement following the
adoption of IFRS 15 Revenue from contracts
with customers. This includes the revenue
recognised from those contracts identified by
management where the pricing for the same
parts varies across the contract. There is
judgement in how the overall price is allocated
across the units supplied where there is a
contractual right to aftermarket revenues.
Refer to pages 82 to 89 (Report of the
Audit Committee), note 3: Critical accounting
judgements and key sources of estimation
uncertainty and note 4: Revenue.
Valuation of inventory
The group has recorded inventory amounts
(net of provisions) of £1,489 million.
We have identified a key audit matter in
respect of inventory valuation in those former
GKN businesses (Aero and Auto divisions)
where there is a history of inventory write-
downs and rework stock, and judgement is
required in determining provisions for obsolete
items and the appropriate point at which to
recognise permanent write downs. Net
inventory for these sites totals £108 million.
Refer to pages 82 to 89 (Report of the
Audit Committee), note 3: Critical accounting
judgements and key sources of estimation
uncertainty and note 15: Inventory.
120
Melrose Industries PLCAnnual Report 2018
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
Materiality
£29 million (2017: £12.5 million)
Basis for
determining
materiality
We considered a number of benchmarks including operating profit,
net assets and adjusted profit before tax, and the materiality figures
derived from those, then selected a materiality within that range that
we considered to be appropriate.
Parent company financial statements
£14.5 million (2017: £6.25 million)
We calculated materiality based on
net assets, which was then capped
at 50% of Group materiality.
Rationale for
the benchmark
applied
In 2017, materiality was determined on the basis of 5% of underlying
profit before tax.
In our professional judgement we believe that use of this blended
measure is appropriate because we consider that the current year
loss does not represent a long term decline in the size and scale of
the business and therefore solely using a profit measure would not
appropriately reflect the characteristics of the underlying business
operations in particular given that GKN was owned for only part of
the year.
The selected materiality represents 4% of adjusted profit before tax
(2017: 5% of underlying profit before tax) and 0.3% of net assets
(2017: 0.7%)
In our professional judgement we
believe that use of a balance sheet
measure is appropriate for a holding
company. Materiality 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.
We set performance materiality at a level lower than materiality to reduce the probability that, in aggregate, uncorrected and undetected
misstatements exceed the materiality for the financial statements as a whole. Group performance materiality was set at 60% of group
materiality (2017: 60%), In determining performance materiality we considered factors including:
• our risk assessment, including the proportion of significant audit risks versus normal audit risks in the audit;
• the historical control environment in the newly acquired GKN businesses; and
• our assessment of the complexity of the Group and the level of change during the year.
We agreed with the Audit Committee that we would report to the Committee all audit differences in excess of £1 million (2017: £500,000),
as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds. We also report to the Audit
Committee on disclosure matters that we identified when assessing the overall presentation of the financial statements.
An overview of the scope of our audit
Melrose completed the acquisition of GKN plc on 19 April 2018. As a result of the acquisition there was a significant change in the
structure of the Group from last year which had a significant impact on the scope of our audit.
Following the acquisition of the GKN group, the group reorganised to recognise five separate operating segments which reflected the
industries the group operates in. The five segments are:
• Aerospace
• Automotive
• Powder Metallurgy
• Nortek Air & Security
• Other Industrial
Each division consists of a number of reporting units, and manages operations on a geographical and functional basis.
There are 338 reporting units in total, each of which is responsible for maintaining their own accounting records and controls and using an
integrated consolidation system to report to UK head office.
Our Group audit scope focused on audit work at 72 components (2017: 15), of which 16 relate to components that form part of the
Aerospace segment; 26 relate to components that form part of the Automotive segment; 13 relate to components that form part of the
Powder Metallurgy segment; 5 relate to components that form part of the Nortek Air & Security segment; and 12 relate to components
that form part of the Other Industrial segment. The change in the number of components reflects the acquisition of the GKN business
by Melrose.
Each component was set a specific component materiality, considering its relative size and any component-specific risk factors such as
internal audit findings and history of error. The component materialities applied were in the range £5-10 million.
121
Financial statementsAnnual Report 2018Melrose Industries PLC Independent auditor’s report to the members
of Melrose Industries PLC Continued
General scope
Full scope audit work was completed on 40 components and the head office function, and audit procedures have also been performed
over certain balances within 32 other components. In total our scope represented 75% of Group revenue, 66% of Group operating profit
and 84% of Group net assets.
Aerospace
In respect of the Aerospace division, 9 components were subject to a full audit and 7 components were subject to the audit of specified
account balances. These 16 components together accounted for 81% of the Aerospace division’s revenue and 70% of the Aerospace
division’s adjusted operating profit and divisional costs (before central costs).
Automotive
In respect of the Aerospace division, 13 components were subject to a full audit and 13 components were subject to the audit of specified
account balances. These 26 components accounted for 87% of the Automotive division’s revenue and 55% of the Automotive division’s
adjusted operating profit and divisional costs (before central costs).
Powder Metallurgy
In respect of the Powder Metallurgy division, 4 components were subject to a full audit and 9 components were subject to the audit of
specified account balances. These 13 components together accounted for 80% of the Powder Metallurgy division’s revenue and 61%
of the Powder Metallurgy division’s adjusted operating profit and divisional costs (before central costs).
Nortek Air & Security
In respect of the Nortek Air & Security division, 4 components were subject to a full audit and 1 component was subject to an audit of
specified account balances. These 5 components together accounted for 71% of the Nortek Air & Security division’s revenue and 71%
of the Nortek Air & Security division’s adjusted operating profit and divisional costs (before central costs).
Other Industrial
In respect of the Other Industrial division, 10 components were subject to a full audit and 2 components were subject to the audit of
specified account balances. These 12 components together accounted for 51% of the Other Industrial division’s revenue and 54%
of the Other Industrial division’s adjusted operating profit and divisional costs (before central costs).
The increase in scale and complexity of the group had a direct impact on the global audit teams engaged to perform the Group audit and
our supervision thereof. The Group engagement team visited 23 of the Group’s largest and most complex businesses during 2018 with a
particular focus on newly acquired GKN businesses as well as some legacy businesses. These visits, together with central analytics and
enquiries of management, the knowledge of local auditors already in role and the output from management’s advisors as they performed
the fair value visits, informed our risk assessment.
In scoping the audit we were mindful of the North American balance sheet review and associated controls issues reported by GKN plc
in their 2017 Annual report. We focussed on the businesses that reported material write offs in 2017 including visits from the senior
statutory auditor and other members of the Group engagement team, and instructing our component audit team to apply a risk adjusted,
and therefore lower, level of materiality than other components of a similar size. We also subjected other component auditors whose work
was a response to a key audit matter, for instance Engine Systems, to additional supervision and direction including visits from the senior
statutory auditor.
In addition to the programme of visits above, the senior statutory auditor held group-wide, divisional and individual planning and close
meetings which covered all businesses. Each segment has a dedicated member of the group audit team responsible for the supervision
and direction of components, including where appropriate sector-specific expertise, and for GKN components we maintained some
continuity from the previous audit teams where possible and appropriate. Where we do not visit a component within our Group audit
scope, we include the component audit team in our team briefing, discuss and review their risk assessment, and review documentation
of the findings from their work. We also reviewed the audit work papers supporting component teams’ reporting to us either in person
during the visits above, or remotely using shared desktop technology.
In total, as set out in the chart below we performed audit work on site at locations which together contributed 75% of Group revenue and
66% of adjusted operating profit.
Revenue %
Full
SAP
DTR
OP %
60%
15%
25%
Full
SAP
DTR
42%
24%
34%
The Group engagement team also performed central procedures on:
• post-employment benefit obligations;
• derivative financial instruments;
• UK and corporate taxation;
• goodwill and intangible asset impairment assessments; and
• self-insurance provisions and equity.
122
Melrose Industries PLCAnnual Report 2018 The Company was also subject to a full scope audit by the Group audit team, and 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.
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.
Details of the extent to which the audit was considered capable of detecting irregularities, including fraud are set out below.
A further description of our responsibilities for the audit of the financial statements is located on the FRC’s website at:
www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor’s report.
123
Financial statementsAnnual Report 2018Melrose Industries PLC Independent auditor’s report to the members
of Melrose Industries PLC Continued
Extent to which the audit was considered capable of detecting irregularities, including fraud
We identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, and then design and
perform audit procedures responsive to those risks, including obtaining audit evidence that is sufficient and appropriate to provide a basis
for our opinion.
Identifying and assessing potential risks related to irregularities
In identifying and assessing risks of material misstatement in respect of irregularities, including fraud and non-compliance with laws
and regulations, our procedures included the following:
• enquiring of group management and local management at each component and the audit committee, including obtaining
and reviewing supporting documentation, concerning the group’s policies and procedures relating to:
• identifying, evaluating and complying with laws and regulations and whether they were aware of any instances of
non-compliance;
• detecting and responding to the risks of fraud and whether they have knowledge of any actual, suspected or alleged fraud;
• the internal controls established to mitigate risks related to fraud or non-compliance with laws and regulations including
the work of the internal audit function;
• discussing among the engagement team including significant component audit teams and involving relevant internal specialists
including tax, valuations, pensions, and industry specialists regarding how and where fraud might occur in the financial statements
and any potential indicators of fraud. As part of this discussion, we identified potential for fraud in the following areas: classification
of adjusting items, acquisition accounting (in particular intangible asset valuation and valuation of provisions) and revenue
recognition. We determined that inventory valuation and impairment did not represent fraud risks; and
• obtaining an understanding of the legal and regulatory frameworks that the group operates in, focusing on those laws and
regulations that had a direct effect on the financial statements. The key laws and regulations we considered in this context included
the UK Companies Act and Listing Rules as well as the pensions legislation, tax legislation. In addition, we considered
environmental legislation in the jurisdictions the Group operates in as having a fundamental effect on the operations of the group.
Audit response to risks identified
As a result of the above, we identified the following as key audit matters: classification of adjusting items, acquisition accounting (in
particular intangible asset valuation and valuation of provisions) and revenue recognition. The key audit matters section of our report
describes the specific procedures we performed in response to those key audit matters.
In addition to the above, our procedures to respond to risks identified included the following:
• reviewing the financial statement disclosures and testing to supporting documentation to assess compliance with relevant laws
and regulations discussed above;
• enquiring of management, the audit committee and in-house legal counsel concerning actual and potential litigation and claims,
including through a centrally managed global fraud questionnaire sent to key management personnel at the component, divisional
and group level;
• performing analytical procedures to identify any unusual or unexpected relationships that may indicate risks of material
misstatement due to fraud;
• reading minutes of meetings of those charged with governance and reviewing internal audit reports;
• making direct enquiries of internal audit; and
• in addressing the risk of fraud through management override of controls, testing the appropriateness of journal entries and other
adjustments; assessing whether the judgements made in making accounting estimates are indicative of a potential bias; and
evaluating the business rationale of any significant transactions that are unusual or outside the normal course of business.
We also communicated relevant identified laws and regulations and potential fraud risks to all engagement team members including
internal specialists and significant component audit teams, and remained alert to any indications of fraud or non-compliance with laws
and regulations throughout the audit.
124
Melrose Industries PLCAnnual Report 2018 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. The period of total uninterrupted engagement
including previous renewals and reappointments of the firm is 16 years, covering the years ending 31 December 2003 to
31 December 2018.
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).
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.
Stephen Griggs FCA (Senior statutory auditor)
For and on behalf of Deloitte LLP
Statutory Auditor
London, United Kingdom
7 March 2019
125
Financial statementsAnnual Report 2018Melrose Industries PLC Consolidated Income Statement
Continuing operations
Revenue
Cost of sales
Gross profit
Share of results of equity accounted investments
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
Non-controlling interests
Earnings per share
– Basic
– Diluted
Adjusted Results
Adjusted revenue
Adjusted operating profit
Adjusted profit before tax
Adjusted profit after tax
Adjusted basic earnings per share
Adjusted diluted earnings per share
Year ended
31 December
2018
£m
Year ended
31 December
2017
£m
8,605
(6,920)
1,685
34
(2,111)
(392)
(163)
5
(550)
75
(475)
(475)
–
(475)
2,092
(1,439)
653
–
(660)
(7)
(22)
1
(28)
4
(24)
(24)
–
(24)
(12.0)p
(12.0)p
(1.2)p
(1.2)p
9,102
847
703
539
13.3p
13.3p
2,095
279
258
191
9.9p
9.8p
Notes
4, 5
14
7
5, 6
7
7
8
10
10
5
5, 6
6
6
10
10
126
Melrose Industries PLCAnnual Report 2018 Consolidated Statement of Comprehensive Income
Loss for the year
Items that will not be reclassified subsequently to the Income Statement:
Net remeasurement (loss)/gain on retirement benefit obligations
Income tax credit/(charge) relating to items that will not be reclassified
Items that may be reclassified subsequently to the Income Statement:
Currency translation on net investments
Share of other comprehensive income from equity accounted investments
Transfer to Income Statement from equity of cumulative translation differences
on disposal of foreign operations
(Losses)/gains on hedge relationships
Transfer to Income Statement on hedge relationships
Income tax credit/(charge) relating to items that may be reclassified
Other comprehensive income/(expense) for the year
Total comprehensive income/(expense) for the year
Attributable to:
Owners of the parent
Non-controlling interests
Notes
23
8
8
Year ended
31 December
2018
£m
Year ended
31 December
2017
£m
(475)
(24)
(36)
9
(27)
625
9
–
(97)
(2)
29
564
537
62
44
18
62
12
(1)
11
(133)
–
(1)
9
(4)
(1)
(130)
(119)
(143)
(143)
–
(143)
127
Financial statementsAnnual Report 2018Melrose Industries PLC
Consolidated Statement of Cash Flows
Continuing operations
Net cash from operating activities
Investing activities
Disposal of businesses, net of 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 equity accounted investments
Equity accounted investment additions
Acquisition of subsidiaries, net of cash acquired(1)
Interest received
Net cash used in investing activities
Financing activities
Purchase of non-controlling interests
Costs of issuing shares
Repayment of borrowings
New bank loans raised
Costs of raising debt finance
Repayment of finance leases
Dividends paid to non-controlling interests
Dividends paid to owners of the parent
Net cash from/(used in) financing activities
Net increase/(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
2018
£m
Year ended
31 December
2017
£m
373
(4)
(344)
20
(35)
66
(3)
(1,009)
5
(1,304)
(224)
(1)
(820)
2,558
(51)
–
(1)
(129)
1,332
401
16
(2)
415
32
10
(48)
2
(3)
–
–
(9)
1
(47)
–
–
–
56
–
(1)
–
(63)
(8)
(23)
42
(3)
16
Notes
26
14
14
9
26
26
17, 26
(1) Comprises consideration of £1,316 million, net of cash and cash equivalents acquired of £307 million (note 12).
As at 31 December 2018, the Group had net debt of £3,482 million (31 December 2017: £572 million). A reconciliation
of the movement in net debt is shown in note 26.
128
Melrose Industries PLCAnnual Report 2018 Consolidated Balance Sheet
Non-current assets
Goodwill and other intangible assets
Property, plant and equipment
Interests in equity accounted investments
Deferred tax assets
Derivative financial assets
Trade and other receivables
Current assets
Inventories
Trade and other receivables
Derivative financial assets
Current tax assets
Cash and cash equivalents
Total assets
Current liabilities
Trade and other payables
Interest-bearing loans and borrowings
Finance lease obligations
Derivative financial liabilities
Current tax liabilities
Provisions
Net current assets
Non-current liabilities
Trade and other payables
Interest-bearing loans and borrowings
Finance lease obligations
Derivative financial liabilities
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
Equity attributable to owners of the parent
Non-controlling interests
Total equity
31 December
2018
£m
31 December
2017
£m
Notes
11
13
14
21
24
16
15
16
24
17
5
18
19
27
24
20
18
19
27
24
21
23
20
5
25
11,071
3,171
492
149
26
504
15,413
1,489
2,328
15
74
415
4,321
19,734
2,583
377
5
204
137
381
3,687
634
778
3,378
52
227
874
1,413
1,064
7,786
11,473
8,261
333
8,138
109
(2,330)
(67)
562
1,492
8,237
24
8,261
2,238
219
–
49
4
2
2,512
276
332
10
–
16
634
3,146
367
–
–
1
7
92
467
167
2
588
–
–
69
18
117
794
1,261
1,885
133
1,493
109
(2,330)
8
(66)
2,538
1,885
–
1,885
The financial statements were approved and authorised for issue by the Board of Directors on 7 March 2019 and were signed on its
behalf by:
Geoffrey Martin
Group Finance Director
7 March 2019
Simon Peckham
Chief Executive
7 March 2019
129
Financial statementsAnnual Report 2018Melrose Industries PLC Consolidated Statement of Changes in Equity
Issued
share
capital
£m
Share
premium
account
£m
Merger
reserve
£m
Other
reserves
£m
Hedging
reserve
£m
Translation
reserve
£m
Retained
earnings
£m
Equity
attributable
to owners
of the
parent
£m
Non-
controlling
interests
£m
129
–
–
–
–
–
–
4
133
–
–
–
169
31
–
–
–
333
1,493
–
–
–
–
–
–
–
1,493
–
–
–
5,631
1,014
–
–
–
8,138
112
–
–
–
–
–
–
(3)
109
–
–
–
–
–
–
–
–
109
(2,330)
–
–
–
–
–
–
–
(2,330)
–
–
–
–
–
–
–
–
(2,330)
4
–
4
4
–
–
–
–
8
–
(75)
(75)
–
–
–
–
–
(67)
68
–
(134)
(134)
–
–
–
–
(66)
–
628
628
–
–
–
–
–
562
2,686
(24)
11
(13)
(63)
10
34
(116)
2,538
(475)
(34)
(509)
–
(419)
(2)
(129)
13
1,492
2,162
(24)
(119)
(143)
(63)
10
34
(115)
1,885
(475)
519
44
5,800
626
(2)
(129)
13
8,237
–
–
–
–
–
–
–
–
–
–
18
18
857
(850)
–
(1)
–
24
Total
equity
£m
2,162
(24)
(119)
(143)
(63)
10
34
(115)
1,885
(475)
537
62
6,657
(224)
(2)
(130)
13
8,261
At 1 January 2017
Loss for the year
Other comprehensive income/(expense)
Total comprehensive income/(expense)
Dividends paid
Equity-settled share-based payments
Deferred tax on share-based payment
transactions
Incentive scheme related
At 31 December 2017
Loss for the year
Other comprehensive (expense)/income
Total comprehensive (expense)/income
Acquisition of GKN(1)
Purchase of non-controlling interests
Implementation of IFRS 9(2)
Dividends paid
Equity-settled share-based payments
At 31 December 2018
(1)
Relates to the purchase of approximately 85% of the issued share capital of GKN plc. The amount recognised within the share premium account for the acquisition of GKN of £5,631 million is net of
£1 million for costs associated with issuing shares.
(2) The Group adopted IFRS 9 on 1 January 2018. See note 1 for details.
130
Melrose Industries PLCAnnual Report 2018 Notes to the Financial Statements
1. Corporate information
Melrose Industries PLC (“the Company”) is a public company limited by shares. The Company is incorporated in the United Kingdom
under the Companies Act 2006 and registered in England and Wales. The address of the registered office is given on the back cover.
The nature of the Group’s operations and its principal activities by operating segment are set out in note 5 and in the Divisional reviews
on pages 20 to 39.
The Consolidated Financial Statements of the Group for the year ended 31 December 2018 were authorised in accordance with
a resolution of the Directors of Melrose Industries PLC on 7 March 2019.
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 19 April 2018 the Group acquired approximately 85% of the issued share capital and obtained control of GKN plc (“GKN”)
for consideration of £7,091 million (note 12). The remaining 15% of the issued share capital of GKN was acquired in the period from
19 April 2018 to 30 June 2018, at a cost of £1,260 million which has been treated as a purchase of a non-controlling interest.
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 the following new and revised Standards and Interpretations. Their adoption
has not had a significant impact on the comparative amounts reported in these Financial Statements:
• IFRS 9: Financial Instruments
• IFRS 15: Revenue from Contracts with Customers (and the related clarifications)
• Amendments to IFRS 2: Classification and Measurement of Share-Based Payment Transactions
• 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
• IFRIC 22: Foreign currency transactions and advance consideration
• Amendments to IAS 28: Investments in associates and joint ventures
The Group adopted IFRS 15: “Revenue from Contracts with Customers” on 1 January 2018 using the full retrospective approach.
Due to the immaterial impact of IFRS 15 on the Group for the year ended 31 December 2017, no further disclosure is provided on the
comparative results or balance sheet position. The GKN IFRS 15 impact forms part of the acquired business and therefore is not included
in the transitional impact within these Financial Statements. The impact of IFRS 15 on the enlarged Group reduced annual revenue by
approximately £80 million, due to the reclassification of certain costs. There was a £15 million increase in operating profit, which principally
relates to recognition of variable consideration.
The Group adopted IFRS 9: “Financial Instruments” on 1 January 2018. IFRS 9 replaces IAS 39 and the main impacts relate to; a)
classification and measurement of financial assets and liabilities, b) impairment of financial assets, and c) hedge accounting. The Group
has elected not to restate the comparatives but instead record any adjustments identified in retained earnings in line with the transition
arrangement within the standard. Following management’s review, a £2 million reduction in net assets was identified. The GKN IFRS 9
impact forms part of the acquired business and therefore is not included in the transitional impact within these Financial Statements.
The Group has reviewed the classification of its financial instruments and has concluded the following:
• There is no change in the classification of derivative financial instruments that were classified as “fair value through profit or loss”,
as under IFRS 9 they fail the contractual cash flow characteristics test in IFRS 9 (4.1.2(b)) and (4.1.2A(b));
• Financial instruments designated in cash flow hedge relationships under IAS 39 continue to qualify for hedge accounting under
IFRS 9; and
• Financial assets previously classified within the “loans and receivables” category are classified in the “amortised cost” category.
The introduction of IFRS 9 has resulted in changes to the accounting policies in the following areas:
• Trade and other receivables;
• Derivative financial instruments;
• Amounts due from equity accounted investments; and
• Contract assets.
131
Financial statementsAnnual Report 2018Melrose Industries PLC 1. Corporate information continued
1.2 New Standards and Interpretations in issue but not yet effective
At 31 December 2018, the following Standards and Interpretations were in issue but not yet effective (and in some cases have
not been adopted by the EU):
• IFRS 16: Leases
• Amendments to IFRS 10 and IAS 28: Sale or contribution of assets between an investor and its associate or joint venture
• IFRIC 23: Uncertainty over income tax treatments
• Amendments to IFRS 9: Prepayment Features with Negative Compensation
• Amendments to IAS 28: Long-term Interests in Associates and Joint Ventures
• Annual Improvements to IFRS Standards 2015–2017 Cycle
• Amendments to IAS 19: Employee Benefits
The Directors do not expect that the adoption of the above Standards and Interpretations, with the exception of IFRS 16, will have a
material impact on the Financial Statements of the Group in future periods.
IFRS 16 is effective for accounting periods beginning on or after 1 January 2019. IFRS 16 will supersede the current lease guidance
including IAS 17: “Leases” and related interpretations. It will require all leases to be recognised on the Balance Sheet. Currently, IAS 17
only requires arrangements categorised as finance leases to be recognised on the Balance Sheet, with other arrangements categorised
as operating leases not recognised on the Balance Sheet but 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, except for short-term leases and leases of low value assets. There will also be a specific reclassification from
operating costs to finance costs.
IFRS 16 will be adopted for the year ending 31 December 2019 via a modified retrospective approach and it is anticipated that the
right-of-use asset recognised on transition will be measured at an amount materially equal to the lease liability. At 31 December 2018,
the Group had non-cancellable operating lease commitments of £710 million (note 27). A preliminary assessment has been undertaken
involving all businesses. This entailed a review of all arrangements to identify those affected by IFRS 16. Future cash flow obligations have
been collated for each identified lease and the associated lease liability has been assessed. For arrangements that meet the definition
of a lease under IFRS 16, the Group will recognise a right-of-use asset and corresponding liability unless they qualify as low value or
short-term leases as defined by IFRS 16. The right-of-use asset and lease liability to be recognised upon transition is expected to be
in the range of £550 million to £600 million. The expected annual impact of IFRS 16 on the Income Statement in the year ended
31 December 2019 will be an increase to operating profit, expected to be in the range of £10 million to £15 million. This is expected
to be more than offset by an increase in finance costs in the range of £15 million to £20 million.
For arrangements previously classified as finance leases, where the Group is a lessee, as the Group has already recognised an asset
and a related finance lease liability for the lease arrangement, the Directors do not anticipate that the application of IFRS 16 will have
a significant impact on the amounts recognised in the Group’s Consolidated Financial Statements, at 31 December 2018.
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. Following the acquisition of GKN on 19 April 2018, where relevant the Group has
applied certain accounting policies to align them with the enlarged business.
Alternative Performance Measures
The Group presents Alternative Performance Measures (“APMs”) in addition to the statutory results of the Group. These are presented
in accordance with the Guidelines on APMs issued by the European Securities and Markets Authority (“ESMA”).
APMs used by the Group are set out in the glossary to these Financial Statements on pages 193 to 196 and the reconciling items
between statutory and adjusted results are listed below and described in more detail in note 6.
Adjusted revenue includes the Group’s share of revenue from equity accounted investments.
Adjusted profit/(loss) excludes items 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 an acquisition.
132
Notes to the Financial StatementsContinuedMelrose Industries PLCAnnual Report 2018 2. Summary of significant accounting policies continued
On this basis, the following are the principal items included within adjusting items impacting operating profit:
• Amortisation of intangible assets that are acquired in a business combination, excluding computer software and development
costs;
• Significant restructuring costs and other associated costs, including losses incurred following the announcement of closure for
identified businesses, 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;
• Impairment charges that are considered to be significant in nature and/or value to the trading performance of the business;
• Movement in derivative financial instruments not designated in hedging relationships, including revaluation of associated financial
assets and liabilities;
• Reversal of inventory uplift in value recorded on acquisition;
• Removal of adjusting items, interest and tax on equity accounted investments to reflect operating results;
• The charge for the Melrose equity-settled compensation scheme, including its associated employer’s tax charge;
• One-off costs associated with gender equalisation of guaranteed minimum pensions (“GMP”) for occupational schemes; and
• The release of fair value items booked on acquisitions.
Further to the adjusting items above, adjusting items impacting profit before tax include:
• Acceleration of unamortised debt issue costs written off as a consequence of Group refinancing; and
• The fair value changes on cross-currency swaps, entered into by GKN prior to acquisition, relating to cost of hedging which
are not deferred in equity.
In addition to the items above, adjusting items impacting profit after tax include:
• Net effect of significant new tax legislation changes; and
• The tax effects of adjustments to profit/(loss) before tax.
The Board considers the adjusted results to be an important measure used to monitor how the businesses are performing as this
provides a meaningful reflection of how the businesses are managed and measured on a day-to-day basis and achieves consistency
and comparability between reporting periods, when all businesses are held for a complete reporting period.
The adjusted 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 adjusted measures are also taken into
account when valuing individual businesses as part of the “Buy, Improve, Sell” Group strategy model.
Adjusted 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’s Financial Statements include the results of the parent undertaking and all of its subsidiary undertakings. In addition, the
Group’s share of the results and equity of joint ventures and associated undertakings (together “equity accounted investments”) are
included. The results of businesses acquired during the period are included from the effective date of acquisition and, for those sold
during the period, to the effective date of disposal. Where necessary, adjustments are made to the Financial Statements of subsidiaries
to bring the accounting policies used into line with those used by the Group.
All intra-Group balances and transactions, including unrealised profits arising from intra-Group transactions, have been eliminated in full.
Non-controlling interests in subsidiaries are identified separately from the Group’s equity therein. The interest of non-controlling
shareholders is initially measured at the non-controlling interests’ proportion of the share of the fair value of the acquiree’s identifiable net
assets. Subsequent to acquisition, the carrying amount of non-controlling interests is the amount of those interests at initial recognition
plus the non-controlling interests’ share of subsequent changes in equity. Total comprehensive income is attributed to non-controlling
interests even if this results in the non-controlling interests having a deficit balance.
Going concern
The Directors have, at the time of approving the Financial Statements, a reasonable expectation that the Company and the Group have
adequate resources to continue in operational existence for the foreseeable future. Thus they continue to adopt the going concern basis
of accounting in preparing the Financial Statements. Further detail is contained on page 48 of the Finance Director’s review.
133
Financial statementsAnnual Report 2018Melrose Industries PLC 2. Summary of significant accounting policies continued
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.
Equity accounted investments
A joint venture is an entity which is not a subsidiary undertaking but where the interest of the Group is that of a partner in a business over
which the Group exercises joint control with its partners over the financial and operating policies. In all cases voting rights are 50% or lower.
Associated undertakings are entities that are neither a subsidiary nor a joint venture, but where the Group has a significant influence.
The results, assets and liabilities of equity accounted investments are accounted for using the equity method of accounting. The Group’s
share of equity includes goodwill arising on acquisition.
When a group entity transacts with an equity accounted investment of the Group, profits and losses resulting from the transactions with
the equity accounted investments are recognised in the Group’s Consolidated Financial Statements only to the extent of interests in equity
accounted investments that are not related to the Group.
Revenue
Revenues are recognised either at the point of transfer of control of goods and services, or recognised over time on an activity basis using
the costs incurred as the measure of the activity. Costs are recognised as they are incurred.
The nature of agreements into which the Group enters means that certain of the Group’s arrangements with its customers have multiple
elements that can include any combination of:
• Sale of products and services;
• Risk and revenue sharing partnerships (“RRSPs”);
• Design and build; and
• Construction contracts.
Contracts are reviewed to identify each performance obligation relating to a distinct good or service and the associated consideration.
The Group allocates revenue to multiple element arrangements based on the identified performance obligations within the contracts in
line with the policies below. A performance obligation is identified if the customer can benefit from the good or service on its own or
together with other readily available resources, and it can be separately identified within the contract. This review is performed by
reference to the specific contract terms.
134
Notes to the Financial StatementsContinuedMelrose Industries PLCAnnual Report 2018 2. Summary of significant accounting policies continued
Sale of products and services
This revenue stream accounts for the majority of Group sales. Contracts in the Automotive, Powder Metallurgy, Nortek Air & Security
and Other Industrial segments operate almost exclusively on this basis, and it also covers a high proportion of the Aerospace
segment’s revenues.
Invoices for goods are raised and revenue is recognised when control of the goods is transferred to the customer. Dependent upon
contractual terms this may be at the point of despatch, acceptance by the customer or, in Aerospace, certification by the customer.
The revenue recognised is the transaction price as it is the observable selling price per product.
Cash discounts, volume rebates and other customer incentive programmes are based on certain percentages agreed with the Group’s
customers, which are typically earned by the customer over an annual period. These are allocated to performance obligations and are
recorded as a reduction in revenue at the point of sale based on the estimated future outcome. Due to the nature of these arrangements
an estimate is made based on historical results to date, estimated future results across the contract period and the contractual provisions
of the customer agreement.
Many businesses in the Powder Metallurgy and Automotive segments recognise an element of revenue via a surcharge or similar raw
material cost recovery mechanism. The surcharge is generally based on prior period movement in raw material price indices applied to
current period deliveries.
Risk and revenue sharing partnerships (“RRSPs”)
This revenue stream affects a small number of businesses, exclusively in the Aerospace segment. Revenue is recognised under RRSPs
for both the sale of product as detailed above and sales of services, which are recognised by reference to the stage of completion based
on the performance obligations in the contract. In most RRSP contracts, there are two separate phases where the Group earns revenue;
sale of products principally to engine manufacturers and aftermarket support.
The assessment of the stage of completion is dependent on the nature of the contract and the performance obligations within it.
The value of revenue is based on the standalone selling price for each element of the contract.
Revenue is recognised at the point control passes to the customer. For products and services, this has been identified as the point of
despatch, acceptance by the customer or certification by the customer. Where the amount of revenue recognised is not yet due for
collection under the terms of the contract, it will be recognised as variable consideration within contract assets. Revenue is not recognised
where recovery is not probable due to potential significant reversals in the future. This can be affected by assessment of future volumes
including aftermarket expectations which are impacted by technology development, fuel price and competition.
Participation fees are payments made to engine manufacturers and original equipment manufacturers relating to RRSPs and long-term
agreements. They are recognised as contract assets to the extent they can be recovered from future sales. Where participation fees
have been paid under the RRSP, the amortisation is recognised as a revenue reduction under IFRS 15, as performance obligations
are satisfied.
Design and build
This revenue stream affects a discrete number of businesses, primarily in the Aerospace segment but also on a smaller scale in the
Automotive segment. Generally, revenue is only recognised on the sale of product as detailed above, however, on occasions cash is
received in advance of work performed to compensate the Group for costs incurred in design and development activities. The Group
performs an assessment of its performance obligations to understand multiple elements. Where it is determined there is only one type
of performance obligation, being the delivery of product, any cash advance is factored into the revenue allocated across the deliveries
required under the contract. Where the performance obligation has not been satisfied amounts received are recognised as a contract
liability. If there is more than one performance obligation, revenue is allocated to each one based on a standalone selling price for each
element of the contract.
Due to the nature of design and build contracts, there can be significant ‘learning curves’ while the Group optimises its production
processes. During the early phase of these contracts, all costs including any start-up losses are taken directly to the Income Statement,
as they do not meet the criteria for fulfilment costs.
Construction contracts
Where multiple performance obligations are identified, revenue is recognised as each performance obligation is met. This requires an
assessment of total revenue to identify the allocation across the performance obligations, based on the standalone selling price for
each obligation.
In cases where one of the following criteria is met, revenue is recognised over time:
• The customer simultaneously receives and consumes the benefits provided by the Group’s performance;
• The Group’s performance creates or enhances an asset that the customer controls as the asset is created or enhanced; or
• The Group’s performance does not create an asset with an alternative use to the Group and it has an enforceable right to payment
for performance completed to date.
135
Financial statementsAnnual Report 2018Melrose Industries PLC 2. Summary of significant accounting policies continued
Due to the nature of the criteria above, only certain contracts in the Group qualify for over time recognition. On this basis revenue is
recognised using the input method, which uses costs incurred and the assessed margin across the contract. The input method is used to
measure progress as it best depicts the transfer of control to the customer. The margin and associated revenue are calculated based on
the estimated transaction price and expected total costs, with considerations made for the associated contract risks.
If the above criteria are not met, revenue is recognised at a point in time when control transfers to the customer which, in line with the sale
of goods and services above, is the point of delivery or customer acceptance dependent on the terms of the contract.
Variable consideration, such as price or scope amendments, is included based on the expected value or most likely amount. A constraint
is included unless it is highly probable that the revenue will not significantly reverse in the future. This constraint is calculated based on a
cautious expectation of the life of certain RRSPs and by assessing the impact of a 10% reduction in expected spares sales. Variations in
contract work, claims and incentive payments are included in revenue from construction contracts based on an estimate of the expected
value the Group expects to receive. 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 virtually
certain that the customer will accept the claim.
Finance income
Finance income is recognised when it is probable that the economic benefits will flow to the Group and the amount of income can
be measured reliably. Finance income is accrued on a time basis, by reference to the principal outstanding and the effective interest
rate applicable.
Borrowing costs
Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily
take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets, until such time as the
assets are substantially ready for their intended use or sale.
Investment income earned on the temporary investment of specific borrowings pending their expenditure on qualifying assets is deducted
from the borrowing costs eligible for capitalisation.
All other borrowing costs are recognised in the Income Statement in the period in which they are incurred.
Issue costs of loans
The finance cost recognised in the Income Statement in respect of the issue costs of borrowings is allocated to periods over the terms
of the instrument using the effective interest rate method.
Property, plant and equipment
Property, plant and equipment is stated at cost less accumulated depreciation and any impairment in value.
The initial cost of an asset comprises its purchase price or construction cost, any costs directly attributable to bring the asset into
operation, and any borrowing costs on qualifying assets. Qualifying assets are defined as an asset or programme where the period of
capitalisation is more than 12 months. The purchase price or construction cost is the aggregate amount paid and the fair value of any
other consideration given to acquire the asset.
Where assets are in the course of construction at the balance sheet date, they are classified as capital work-in-progress. Transfers are
made to other asset categories when they are available for use, at which point depreciation commences.
Depreciation is calculated on a straight-line basis over the estimated useful life of the asset as follows:
Freehold land
nil
Freehold buildings and long leasehold property
over expected economic life not exceeding 50 years
Short leasehold property
Plant and equipment
over the term of the lease
3-15 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 annually for indicators of impairment, or if events or changes in
circumstances indicate that the carrying value may not be recoverable. If any such indication exists an impairment test 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,
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 period that the item
is derecognised.
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2. Summary of significant accounting policies continued
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 and contracts 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, or a “relief from royalty” method.
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 and contracts
Brands and intellectual property
Technology
Computer software
Development costs
20 years or less
20 years or less
20 years or less
5 years or less
20 years or less
Where computer software is not integral to an item of property, plant or equipment, its costs are capitalised and categorised as intangible
assets. 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 20 years or less.
Costs not meeting such criteria are expensed as incurred.
Inventories
Inventories are valued at the lower of cost and net realisable value and are measured using a first in, first out or weighted average cost
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.
Cash and cash equivalents
Cash and cash equivalents comprise cash in hand, current balances with banks and similar institutions, and short-term deposits which
are readily convertible to cash and are subject to insignificant risks of changes in value.
For the purpose of the Consolidated Statement of Cash Flows, 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
rate 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.
Government refundable advances
Government refundable advances are reported in “Trade and other payables” in the Balance Sheet. Refundable advances include
amounts advanced by a government, accrued interest and directly attributable costs. Refundable advances are provided to the Group to
part-finance expenditures on specific development programmes. The advances are provided on a risk sharing basis, i.e. repayment levels
are determined subject to the success of the related programme. Balances are held at amortised cost and interest is calculated using the
effective interest rate method.
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2. Summary of significant accounting policies continued
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.
Financial instruments – assets
Classification and measurement
All financial assets are classified as either those which are measured at fair value, through profit or loss or Other Comprehensive Income,
and those measured at amortised cost.
Financial assets are initially recognised at fair value. For those which are not subsequently measured at fair value through profit or loss,
this includes directly attributable transaction costs. Trade and other receivables, contract assets and amounts due from equity accounted
investments are subsequently measured at amortised cost.
Recognition and derecognition of financial assets
Financial assets are recognised in the Group’s Balance Sheet when the Group becomes a party to the contractual provisions of the
instrument. The Group derecognises a financial asset only when the contractual rights to the cash flows from the asset expire, or when it
transfers the financial asset and substantially all the risks and rewards of ownership of the asset to another entity.
Impairment of financial assets
For trade and other receivables, contract assets and amounts due from equity accounted investments, the simplified approach permitted
under IFRS 9 is applied. The simplified approach requires that at the point of initial recognition the expected credit loss across the life of
the receivable must be recognised. As these balances do not contain a significant financing element, the simplified approach relating to
expected lifetime losses is applicable under IFRS 9. Cash and cash equivalents are also subject to impairment requirements.
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 by the expected lifetime losses. 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.
Financial instruments – liabilities
Financial liabilities are recognised in the Group’s Balance Sheet when the Group becomes a party to the contractual provisions of the
instruments and are initially measured at fair value, net of transaction costs. Non-derivative financial liabilities are subsequently measured
at amortised cost using the effective interest method, with interest expense recognised on an effective yield basis. The effective interest
method is a method of calculating the amortised cost of a financial liability and of allocating interest expense over the relevant periods.
The effective interest rate is the rate that discounts estimated future cash payments throughout the expected life of the financial liability,
or, where appropriate, a shorter period to the net carrying amount on initial recognition. The Group derecognises financial liabilities when
the Group’s obligations are discharged, cancelled or they expire.
Derivative financial instruments and hedging
The Group uses derivative financial instruments to manage its exposure to interest rate, foreign exchange rate and commodity risks,
arising from operating and financing activities. The Group does not hold or issue derivative financial instruments for trading purposes.
Details of derivative financial instruments are disclosed in note 24 of the Financial Statements.
Derivative financial instruments are recognised and stated at fair value in the Group’s Balance Sheet. 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.
Derivatives embedded in non-derivative host contracts are recognised at their fair value in the Group’s Balance Sheet when the nature,
characteristics and risks of the derivative are not closely related to the host contract. Gains and losses arising on the remeasurement of
these embedded derivatives at each balance sheet date are recognised in the Income Statement.
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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, along with its risk management objectives and its strategy for undertaking various hedge
transactions. Furthermore, at the inception of the hedge and on an ongoing basis, the Group documents that the hedge will be
highly effective, which is when the hedging relationships meet all of the following hedge effectiveness requirements:
• there is an economic relationship between the hedged item and the hedging instrument;
• the effect of credit risk does not dominate the value changes that result from that economic relationship; and
• the hedge ratio of the hedging relationship is the same as that resulting from the quantity of the hedged item that the Group
actually hedges and the quantity of the hedging instrument that the Group actually uses to hedge that quantity of hedged item.
The Group discontinues hedge accounting only when the hedging relationship (or a part thereof) ceases to meet the qualifying criteria
(after rebalancing, if applicable). This includes instances when the hedging instrument expires or is sold, terminated or exercised.
The discontinuation is accounted for prospectively.
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 Group designates the full change in the fair value of a foreign exchange forward contract (i.e. including the forward elements) as the
hedging instrument for all of its hedging relationships involving foreign exchange forward contracts.
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.
The Group designates only the spot rate component of cross-currency swaps in net investment hedges. The changes in the fair value
of the aligned forward and currency basis elements are recognised in Other Comprehensive Income and accumulated in the cost of
hedging reserve. If the hedged item is transaction-related, the time value is reclassified to profit or loss when the hedged item affects profit
or loss. If the hedged item is time-period related, then the amount accumulated in the cost of hedging reserve is reclassified to profit or
loss on a rational basis.
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.
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
amount of revenue recognised in accordance with the principles of IFRS 15.
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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. The 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.
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.
A tax provision is recognised for those matters for which the tax determination is uncertain but it is considered probable that there will be
a future outflow of funds to a tax authority. The provisions are measured at the best estimate of the amount expected to become payable.
The assessment is based on the judgement of tax professionals within the Company supported by previous experience in respect of
such activities and in certain cases based on specialist independent advice.
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.
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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 equity
accounted investments 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 equity accounted
investments, 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.
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Financial statementsAnnual Report 2018Melrose Industries PLC 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 critical judgements to disclose within the scope of paragraph 122 of IAS 1: “Presentation of Financial Statements”, as well as
those involving estimations.
Key sources of estimation uncertainty
Assumptions concerning the future and other key sources of estimation uncertainty at the balance sheet date, 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.
a) Assumptions used to determine the carrying amount of goodwill and other assets
The carrying value of goodwill in the Group at 31 December 2018 was £4,052 million (2017: £1,432 million).
Determining whether goodwill is impaired requires an estimation of the value in use of the cash-generating units (“CGUs”) to which the
goodwill has been allocated. The value in use calculation requires the Directors to estimate the future cash flows expected to arise from
the CGU and a suitable discount rate in order to calculate present value.
Brush group of CGUs
During the year ended 31 December 2018, an impairment charge of £123 million has been recorded in respect of the goodwill held
in the Brush group of CGUs. At 31 December 2018, goodwill in the Brush group of CGUs had a carrying value of £nil, and therefore there
is no further estimation uncertainty in this balance. Total remaining assets at 31 December 2018 are £103 million. Should the business
experience further unforeseen deterioration of results a future impairment may be required for these assets. Further details and sensitivity
disclosure is included in note 11.
Security & Smart Technology and Ergotron groups of CGUs
The determination of the recoverable amount, including goodwill, in respect of the Security & Smart Technology and Ergotron groups
of CGUs involved management estimation of the impact of highly uncertain matters, particularly with respect to the possible increase in
tariffs in the US for goods being imported from China; the level of competition and technological change in the market; the timing and
quantity of forecast unit sales; long-term growth rates and discount factors.
The carrying amount of goodwill and other intangible assets (not including computer software and development costs) at the balance
sheet date was £505 million (31 December 2017: £470 million) for Security & Smart Technology.
The carrying amount of goodwill and other intangible assets (not including computer software and development costs) at the balance
sheet date was £606 million (31 December 2017: £589 million) for Ergotron.
At 31 December 2018 and 2017, the Group recognised no impairment loss in respect of these assets. Further information including
a sensitivity analysis on the key assumptions, is provided in note 11.
b) Valuation of warranty liabilities
The warranty related costs provision in the Financial Statements at 31 December 2018 was £387 million (2017: £73 million), as shown
in note 20.
The increase in the year was predominantly from the acquisition of GKN and the £295 million provision recorded at the acquisition date.
To quantify the fair value of the warranty provision estimates have been made based on historical failure rates, volumes and cost of
rectification based on the most up to date information available. As investigations into warranty claims continue, methods and costs of
rectification could change materially, giving a variety of ranges of possible outcomes, which could result in a change in the provision. The
warranty terms of the Group are, on average, between one and five years, and at 31 December 2018 is equivalent to 1% of the previous
three years’ total revenue. If the percentage were to increase or decrease by 0.1 percentage points the provision would move by £29 million.
c) Assumptions used to determine the carrying amount of the Group’s retirement benefit obligations
The Group’s pension plans are significant in size. The defined benefit obligations in respect of the plans are discounted at rates set by
reference to market yields on high quality corporate bonds. Significant estimation 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 to
include are the issue size of the corporate bonds, quality of the bonds and the identification of outliers which are excluded. In addition,
assumptions are made in determining mortality rates to be used when valuing the plan’s defined benefit obligations. At 31 December 2018,
the Group’s retirement benefit obligation was a deficit of £1,413 million (31 December 2017: £18 million).
Further details of the assumptions applied and a sensitivity analysis on the principal assumptions used to determine the defined benefit
obligations of the Group’s pension plans are shown in note 23.
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d) Loss-making contracts
On acquisition of GKN, loss-making contract provisions were recorded, which represented the forecast unavoidable costs required
to meet the obligations of long-term agreements, in excess of the contractual inflow expected to be generated in respect of these
agreements. In assessing the unavoidable costs, management has considered the possibility that future actions could impact the
profitability of the contracts. Calculation of the liability includes estimations of volumes, price and costs to be incurred over the life
of the contract, which are discounted to a current value. Future changes within these estimates could have a material impact on the
provision in future periods. At 31 December 2018, the carrying value of the loss-making contract provision in the Group was £616 million
(2017: £3 million). If the margin of these contracts were to improve by one percentage point, the impact on the loss-making contract
provision would be £49 million.
Inventory provisioning
e)
The calculation of inventory provisions requires judgement by management of the expected value of future sales. If the carrying value of
inventory is higher than the expected recoverable value, the Group makes provisions writing inventory down to its net recoverable value.
The inventory is initially assessed for impairment by comparing inventory levels to recent utilisation rates and carrying values to historical
selling prices. A detailed review is completed for inventory lines identified in the initial assessment considering sales activity, order flow,
customer contracts and current selling price.
At 31 December 2018, there were provisions of £358 million (31 December 2017: £33 million) against gross inventory of £1,847 million
(31 December 2017: £309 million). A one percentage point increase in the proportion of gross inventory provided would increase the
provision by £18 million. See note 15 for an analysis of inventory.
IFRS 15 – Estimates of future revenues and costs of long-term contractual arrangements
f)
During the financial year, the Group has adopted IFRS 15: “Revenue from Contracts with Customers”. IFRS 15 required contracts to be
reviewed to identify each performance obligation and the associated consideration. Whilst the impact on the Group was immaterial at
1 January 2018, following the acquisition of GKN on 19 April 2018, the Group now has a number of large, complex contracts where
significant judgements and estimates are required in order to identify the performance obligations, the associated consideration and the
timing of revenue recognition.
A key judgement is the timing of revenue recognition and the associated quantum of variable consideration, in particular relating to risk
and revenue sharing partnerships (“RRSPs”). A detailed review has been performed of the Group’s RRSP contracts where terms and
conditions result in variable consideration. The estimated revenue and costs in respect of these contracts are inherently imprecise and
significant estimates are required to assess the pattern of future maintenance activity and the costs to be incurred and escalation of
revenue and costs. The estimates take account of the inherent uncertainties, constraining the expected level of revenue as appropriate.
Whilst the acquisition of GKN has impacted the Group during the year, due to the maturity profile of certain RRSP contract judgements,
beyond initial adoption, IFRS 15 could have a far greater impact in future periods.
Key Judgement
Allocation of goodwill on acquisition of GKN
The purchase consideration on acquisition of GKN has been allocated to each of the group of CGUs monitored for impairment purposes.
Judgement is applied in the basis of allocation which has been completed on an income approach using the proportion of the forecast
discounted cash flows of each of the group of CGUs as a percentage of the total as calculated by an external advisor. A validation of the
allocation was completed based on market multiples.
4. Revenue
An analysis of the Group’s revenue, as defined by IFRS 15: “Revenue from Contracts with Customers”, is as follows:
Continuing operations
Revenue recognised at a point in time
Revenue recognised over time
Revenue
Year ended
31 December
2018
£m
Year ended
31 December
2017
£m
7,602
1,003
8,605
2,087
5
2,092
The Group has approximately £9 billion in respect of contractual transaction prices including a constrained estimate of variable
consideration, on four engine programmes, out of a wider population of such programmes, which has been allocated to contracted
performance obligations not satisfied at 31 December 2018. These performance obligations will be satisfied and revenue will be
recognised over a period of up to 30 years.
As permitted under the transitional provisions in IFRS 15, the comparable amount for the year ended 31 December 2017 is not disclosed.
As a practical expedient, performance obligations within a contract that had an original expectation of less than one year in duration have
been excluded.
There was no revenue recognised in the current reporting period that related to performance obligations satisfied by the Group in the
prior year.
143
Financial statementsAnnual Report 2018Melrose Industries PLC 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 Chief Operating
Decision Maker (“CODM”), which has been deemed to be the Group’s Board, in order to allocate resources to the segments and
assess their performance.
The Group’s reportable operating segments were reconsidered following the acquisition of GKN in April 2018. The Group now reports
under a revised segment structure and comparative results have been restated accordingly. The operating segments are as follows:
Aerospace – comprises GKN’s aerospace operations: a multi-technology tier one supplier of air frame and engine structures, including
Aerostructures, Engine Systems and Special Technologies.
Automotive – comprises GKN’s Driveline, All-Wheel Drive and eDrive (together ePowertrain), and Cylinder Liners businesses; a global
technology and systems engineer which designs, develops, manufactures and integrates an extensive range of driveline technologies.
Powder Metallurgy – a global leader in the manufacture of precision powder metal parts for the automotive and industrial sectors,
as well as the production of powder metal.
Nortek Air & Security – comprises the Group’s Air Management and Security & Smart Technology businesses, previously reported as
separate segments. The Air Management and Security & Smart Technology segments have been aggregated based on commonality of
economic characteristics, including manufacturing footprint. Air Management includes the Air Quality & Home Solutions business (“AQH”)
and the Global Heating, Ventilation & Air Conditioning business (“HVAC”). AQH is a leading manufacturer of ventilation products for the
professional remodelling and replacement markets, residential new construction market and DIY market. Global HVAC 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 products and systems for non-residential applications. Security &
Smart Technology manufactures and distributes products designed to provide convenience and security primarily for residential
applications and audio-visual equipment for the residential audio video and professional video market.
Other Industrial – comprises the Group’s Ergotron and Brush businesses, previously reported separately as the Ergonomics and Energy
segments respectively, as well as GKN’s Wheels & Structures and the Walterscheid Powertrain Group (formerly Off-Highway Powertrain)
businesses. Further details are provided in the Divisional review.
In addition, there are central cost centres which are also reported to the Board. The central corporate cost centres contain the Melrose
Group head office costs, the remaining GKN central costs and charges related to the divisional management long-term incentive plans.
Prior year comparatives have been restated following the change in the Group’s segment structure. Reportable segment results include
items directly attributable to a segment as well as those which can be allocated on a reasonable basis. Inter-segment pricing is
determined on an arm’s length basis in a manner similar to transactions with third parties.
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.
The following tables present the results and certain asset and liability information regarding the Group’s operating segments and central
cost centres for the year ended 31 December 2018.
a) Segment revenues
The Group derives its revenue from the transfer of goods and services over time and at a point in time. The Group has assessed that
the disaggregation of revenue recognised from contracts with customers by operating segments is appropriate as this is the information
regularly reviewed by the CODM in evaluating financial performance. The Group also believes that presenting this disaggregation of
revenue based on the timing of transfer of goods or services provides useful information as to the nature and timing of revenue from
contracts with customers.
Year ended 31 December 2018
Continuing operations
Adjusted revenue
Equity accounted investments
Revenue
Timing of revenue recognition
At a point in time
Over time
Revenue
Year ended 31 December 2017 – restated
Continuing operations
Adjusted revenue
Equity accounted investments
Revenue
144
Aerospace
£m
Automotive
£m
Powder
Metallurgy
£m
Nortek Air &
Security
£m
Other Industrial
£m
2,521
(42)
2,479
1,483
996
2,479
3,382
(446)
2,936
2,936
–
2,936
851
(5)
846
846
–
846
1,458
–
1,458
1,458
–
1,458
890
(4)
886
879
7
886
Aerospace
£m
Automotive
£m
Powder
Metallurgy
£m
Nortek Air &
Security
£m
Other Industrial
£m
–
–
–
–
–
–
–
–
–
1,600
–
1,600
495
(3)
492
Total
£m
9,102
(497)
8,605
7,602
1,003
8,605
Total
£m
2,095
(3)
2,092
Notes to the Financial StatementsContinuedMelrose Industries PLCAnnual Report 2018 5. Segment information continued
b) Segment operating profit
Year ended 31 December 2018
Continuing operations
Aerospace
£m
Automotive
£m
Powder
Metallurgy
£m
Nortek Air &
Security
£m
Other Industrial
£m
Adjusted operating profit/(loss)
250
231
98
198
98
Corporate(2)
£m
(28)
Total
£m
847
Items not included in adjusted operating
profit(1):
Amortisation of intangible assets acquired
in business combinations
Restructuring costs
Acquisition and disposal costs
Impairment of assets
Movement in derivatives and associated
financial assets and liabilities
Reversal of uplift in value of inventory
Equity accounted investments adjustments
Melrose equity-settled compensation
scheme charges
Impact of GMP equalisation
on UK pension schemes
Release of fair value items
Operating (loss)/profit
Finance costs
Finance income
Loss before tax
Tax
Loss for the year
Year ended 31 December 2017 – restated
Continuing operations
Adjusted operating profit/(loss)
Items not included in adjusted operating profit(1):
Impairment of assets
Amortisation of intangible assets acquired in
business combinations
Restructuring costs
Melrose equity-settled compensation
scheme charges
Acquisition and disposal costs
Release of fair value items
Operating profit/(loss)
Finance costs
Finance income
Loss before tax
Tax
Loss for the year
(176)
(56)
(7)
(17)
–
(50)
(1)
–
(2)
15
(44)
(103)
(46)
–
–
–
(42)
(24)
–
(1)
–
15
(34)
(11)
(1)
(3)
–
(11)
–
–
–
–
38
(54)
(22)
–
–
–
–
–
–
–
4
126
(34)
(73)
–
(132)
–
(18)
–
–
(1)
1
(159)
Aerospace
£m
Automotive
£m
Powder
Metallurgy
£m
Nortek Air &
Security
£m
Other Industrial
£m
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
215
87
–
(56)
(27)
–
–
5
137
(145)
(26)
(8)
–
–
1
(91)
–
(32)
(145)
–
(143)
–
–
(13)
(7)
–
(368)
Corporate(2)
£m
(23)
–
–
–
(24)
(6)
–
(53)
(401)
(240)
(153)
(152)
(143)
(121)
(25)
(13)
(11)
20
(392)
(163)
5
(550)
75
(475)
Total
£m
279
(145)
(82)
(35)
(24)
(6)
6
(7)
(22)
1
(28)
4
(24)
(1) Further details on adjusting items are discussed in note 6.
(2)
Corporate adjusted operating loss of £28 million (2017: £23 million), includes £6 million in respect of remaining GKN central costs (2017: £nil) and £2 million (2017: £8 million) of costs in respect of
divisional long-term incentive plans.
145
Financial statementsAnnual Report 2018Melrose Industries PLC Total
£m
3,146
(1,261)
Total
£m
422
282
Total
£m
52
35
5. Segment information continued
c) Segment total assets and liabilities
At 31 December 2018
Total assets
Total liabilities
At 31 December 2017 – restated
Total assets
Total liabilities
Aerospace
£m
Automotive
£m
7,738
(3,053)
5,675
(2,320)
Powder
Metallurgy
£m
2,070
(521)
Nortek Air &
Security
£m
2,142
(492)
Other Industrial
£m
1,494
(499)
Corporate
£m
615
(4,588)
Total
£m
19,734
(11,473)
Aerospace
£m
Automotive
£m
Powder
Metallurgy
£m
Nortek Air &
Security
£m
Other Industrial
£m
Corporate
£m
–
–
–
–
–
–
2,030
(484)
1,047
(173)
69
(604)
d) Segment capital expenditure and depreciation
Year ended 31 December 2018
Capital expenditure(1)
Depreciation(1)
Aerospace
£m
Automotive
£m
105
88
198
116
Powder
Metallurgy
£m
Nortek Air &
Security
£m
Other Industrial
£m
Corporate
£m
53
37
44
24
22
17
–
–
Year ended 31 December 2017 – restated
Capital expenditure(1)
Depreciation(1)
Aerospace
£m
Automotive
£m
Powder
Metallurgy
£m
Nortek Air &
Security
£m
Other Industrial
£m
Corporate
£m
–
–
–
–
–
–
48
23
4
12
–
–
(1) Including computer software and development costs. Capital expenditure excludes finance lease additions.
e) Geographical information
The Group operates in various geographical areas around the world. The parent company’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 deferred tax
assets; non-current trade and other receivables; and non-current derivative financial assets) by geographical location are detailed below:
Revenue(1) from external customers
Segment assets
Year ended
31 December
2018
£m
Year ended
31 December
2017
£m
31 December
2018
£m
31 December
2017
£m
852
2,043
4,602
1,108
8,605
105
124
1,768
95
2,092
2,432
3,609
7,241
1,452
14,734
130
109
2,207
11
2,457
Continuing operations
UK
Rest of Europe
North America
Other
Total
(1) Revenue is presented by destination.
146
Notes to the Financial StatementsContinuedMelrose Industries PLCAnnual Report 2018 6. Reconciliation of adjusted profit measures
As described in note 2, adjusted profit measures are an alternative performance measure used by the Board to monitor the operating
performance of the Group.
a) Operating profit
Continuing operations
Operating loss
Amortisation of intangible assets acquired in business combinations
Restructuring costs
Acquisition and disposal costs
Impairment of assets
Movement in derivatives and associated financial assets and liabilities
Reversal of uplift in value of inventory
Equity accounted investments adjustments
Melrose equity-settled compensation scheme charges
Impact of GMP equalisation on UK pension schemes
Release of fair value items
Total adjustments to operating loss
Adjusted operating profit
Year ended
31 December
2018
£m
Year ended
31 December
2017
£m
Notes
a
b
c
d
e
f
g
h
i
j
(392)
401
240
153
152
143
121
25
13
11
(20)
1,239
847
(7)
82
35
6
145
–
–
–
24
–
(6)
286
279
a.
b.
c.
d.
e.
f.
The value of intangible assets acquired in business combinations has significantly increased during the year following the
acquisition of GKN. As a result, the amortisation charge in the year was £401 million (2017: £82 million) and included eight months
of amortisation of intangible assets acquired with GKN. This is excluded from adjusted results due to its non-trading nature and to
enable comparison with companies that grow organically. Where intangible assets are trading in nature, such as computer software
and development costs, the amortisation is not adjusted.
Restructuring and other associated costs totalled £240 million (2017: £35 million), including £7 million (2017: £1 million) of losses
incurred following the announcement of the closure of certain businesses within the Group. Restructuring costs are adjusting items
due to their size and non-trading nature and during the year ended 31 December 2018 they included:
•
•
•
A charge of £156 million in respect of the GKN businesses. Within this, £56 million related to the Aerospace division,
predominantly in North America, with key focus on improving quality and delivery for customers. Within the Automotive business
£46 million of costs have been incurred restructuring and enhancing the future performance of the business under new
leadership. In addition, £54 million of restructuring costs were incurred in respect of early actions within other GKN businesses,
including the ceasing of GKN head office functions.
A charge of £59 million (2017: £6 million) in respect of the closure of the Dutch turbogenerator facility in Brush and the
restructuring of its turbogenerator production in the UK following the announcement on 1 February 2018.
A charge of £22 million (2017: £27 million) within Nortek Air & Security, which mostly related to footprint rationalisation
within the HVAC business.
Acquisition and disposal costs of £153 million (2017: £6 million) were incurred in the year and included general transaction fees and
associated transaction taxes, predominantly in respect of the acquisition of GKN. These costs also included a small amount of fees
relating to the £26 million bolt-on acquisition of IntelliVision Inc., by the Security & Smart Technology business and the cost of certain
other corporate deal activities in the year. These items are excluded from adjusted results due to their non-trading nature.
An impairment charge totalling £152 million (2017: £145 million) was incurred in the year ended 31 December 2018. This included
£132 million in respect of the carrying value of assets held within the Brush business of which £123 million related to goodwill and
£9 million to property, plant and equipment. In addition, £15 million of intangible assets and £5 million of property, plant and
equipment were impaired in respect of assets held within the GKN businesses. The impairment charges are shown as an adjusting
item due to their non-trading nature and size.
Melrose policy is to hedge account where possible, however, hedge accounting has not historically been applied in the GKN
businesses for transactional foreign exchange exposure. For consistency, the movement in the value of derivative financial
instruments (primarily forward foreign currency exchange contracts) entered into to mitigate the potential volatility of future cash flows
on long-term foreign currency customer and supplier contracts, along with foreign exchange movements on the associated financial
assets and liabilities, totalling a charge of £143 million (2017: £nil), is shown as an adjusting item because of its volatility and size.
Finished goods and work in progress inventory which are present in a business when acquired, in accordance with IFRS 3, are
required to be uplifted in value to closer to their selling price. As a result, in the early months of an acquisition, reduced profits are
generated as this inventory is sold. The one-off effect in the year, relating to GKN acquired inventory, was a charge of £121 million
(2017: £nil) and is excluded from adjusted results due to its size and non-recurring nature.
147
Financial statementsAnnual Report 2018Melrose Industries PLC
6. Reconciliation of adjusted profit measures continued
g.
The Group has a number of equity accounted investments (“EAIs”) in which it does not hold full control, the largest of which
is a 50% interest in Shanghai GKN HUAYU Driveline Systems (“SDS”), within the Automotive business. The EAIs generated
£497 million of revenue in 2018, which is not included in the statutory results but is shown within adjusted revenue so as not to
distort the operating margins reported in the businesses when the adjusted operating profit earned from these EAIs is included.
h.
i.
In addition, the profits and losses of EAIs, which are shown after amortisation of acquired intangible assets, interest and tax in the
statutory results, are adjusted to show adjusted operating profit consistent with the adjusted operating profits of the subsidiaries of
the Group. The revenue and profit of EAIs are adjusted because they are considered to be significant in size and are important in
assessing the performance of the business.
The charge for the Melrose equity-settled Incentive Scheme, including its associated employer’s tax charge, of £13 million
(2017: £24 million), is excluded from adjusted results due to its volatility. The shares that would be issued, based on the Scheme’s
current value at the end of the reporting period, are included in the calculation of the adjusted diluted earnings per share, which the
Board considers to be a key measure of performance.
On 26 October 2018, a High Court judgement was made in respect of the gender equalisation of guaranteed minimum pensions for
occupational pension schemes. The judgement concluded the schemes should be amended to equalise pension benefits for men
and women in relation to guaranteed minimum pension benefits, an issue which affects many UK defined benefit pension schemes.
The impact of this amendment on the pension schemes within the Group resulted in a specific £11 million increase in the pension
deficit with a corresponding past service cost in the Income Statement. This cost is excluded from adjusted results due to its
non-trading and non-recurring nature.
j.
Certain items recognised as fair value items on an acquisition totalling £20 million (2017: £6 million), which have been resolved for
more favourable amounts than first anticipated, were released as an adjusting item to avoid positively distorting adjusted results.
b) Profit before tax
Continuing operations
Loss before tax
Adjustments to operating loss per above
Write-off previous debt facility unamortised fees
Fair value changes on cross-currency swaps
Equity accounted investments – interest
Total adjustments to loss before tax
Adjusted profit before tax
Year ended
31 December
2018
£m
Year ended
31 December
2017
£m
Notes
k
l
m
(550)
1,239
7
8
(1)
1,253
703
(28)
286
–
–
–
286
258
k.
l.
m.
To enable the acquisition of GKN, a new bank facility was negotiated which replaced the old Group bank facility. As a result,
the amortisation of the remaining £7 million of debt fees relating to the old facility was accelerated and written off in the year.
This charge is shown as an adjusting item because of its one-off, non-trading nature.
The fair value changes on cross-currency swaps relating to cost of hedging which are not deferred in equity, are shown as an
adjusting item because of its volatility and non-trading nature.
As explained in paragraph g above, the profits and losses of EAIs are shown after interest and tax in the statutory results.
They are adjusted to show the profit before tax and the profit after tax, consistent with the subsidiaries of the Group.
c) Profit after tax
Continuing operations
Loss after tax
Adjustments to loss before tax per above
Equity accounted investments – tax
Net effect of new tax legislation in the US
Tax effect of adjustments to loss before tax
Total adjustments to loss after tax
Adjusted profit after tax
Notes
m, 8
n
8
Year ended
31 December
2018
£m
Year ended
31 December
2017
£m
(475)
1,253
(9)
–
(230)
1,014
539
(24)
286
–
(27)
(44)
215
191
n.
The net tax credit arising from 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%, was included as an adjusting item because
of its size and nature.
148
Notes to the Financial StatementsContinuedMelrose Industries PLCAnnual Report 2018
7. Revenues and expenses
Continuing operations
Net operating expenses comprise:
Selling and distribution costs
Administration expenses(1)
Total net operating expenses
(1) Includes £1,093 million (2017: £286 million) of adjusting items (note 6).
Continuing operations
Operating loss 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 13)
Impairment of goodwill (note 11)
Amortisation and impairment of computer software and development costs (note 11)
Operating lease expense
Staff costs
Research and development costs(1)
(Profit)/loss on disposal of property, plant and equipment
Expense of writing down inventory to net realisable value (note 15)
Reversals of previous write-downs of inventory (note 15)
Impairment recognised on trade receivables
Impairment reversed on trade receivables
(1) Includes staff costs totalling £161 million (2017: £44 million).
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 Company’s auditor for the audit of the GKN acquisition Balance Sheet
Total fees payable for the audit of the Company’s annual accounts
Fees payable to the Company’s auditor and their associates for other audit services to the Group:
The audit of the Company’s subsidiaries pursuant to legislation
Total audit fees
Audit-related assurance services:
Review of the half year interim statement
Non-statutory audit of certain of the Company’s businesses
Total audit-related assurance services
Total audit and audit-related assurance services
Tax compliance services
Other tax advisory services
Corporate finance services
Total audit and non-audit fees
Year ended
31 December
2018
£m
Year ended
31 December
2017
£m
(240)
(1,871)
(2,111)
(168)
(492)
(660)
Year ended
31 December
2018
£m
Year ended
31 December
2017
£m
6,920
401
252
123
59
68
2,192
203
(5)
65
(20)
35
(12)
1,439
82
75
96
4
20
503
63
2
12
(3)
5
(5)
Year ended
31 December
2018
£m
Year ended
31 December
2017
£m
7
2
9
1
10
–
1
1
11
–
–
–
11
2
–
2
1
3
–
1
1
4
–
–
–
4
149
Financial statementsAnnual Report 2018Melrose Industries PLC 7. Revenues and expenses continued
Details of the Company’s policy on the use of the auditors for non-audit services and how auditor’s independence and objectivity were
safeguarded are set out in the Audit Committee report on page 88. No services were provided pursuant to contingent fee arrangements.
Continuing operations
Staff costs during the year (including executive Directors)
Wages and salaries
Social security costs(1)
Pension costs (note 23)
– defined benefit plans(2)
– defined contribution plans
Share based compensation expense(3) (note 22)
Total staff costs
(1) Includes the employer’s tax charge on the change in value of the Melrose equity-settled Incentive Scheme, shown as an adjusting item (note 6).
(2) Includes past service cost of £11 million (2017: £nil) in respect of GMP equalisation on UK pension schemes, shown as an adjusting item (note 6).
(3) Shown as an adjusting item (note 6).
Continuing operations
Average monthly number of persons employed (including executive Directors)
Aerospace
Automotive
Powder Metallurgy
Nortek Air & Security
Other Industrial
Corporate – Melrose
Corporate – GKN(3)
Total average number of persons employed
Year ended
31 December
2018
£m
Year ended
31 December
2017
£m
1,808
283
21
67
13
2,192
434
52
–
7
10
503
Year ended(1)
Year ended(2)
31 December
2018
Number
31 December
2017
Number
16,302
24,365
7,369
7,827
6,418
37
32
62,350
–
–
–
8,714
3,216
30
–
11,960
(1) For GKN businesses the average monthly number of persons employed in the year ended 31 December 2018 reflects the average for the eight-month period from the date of acquisition.
(2) Restated to show average monthly number of persons employed in line with the revised segment structure, following the acquisition of GKN.
(3) At 31 December 2018, two GKN central employees remained within the Group.
Continuing operations
Finance costs and income
Interest on bank loans and overdrafts
Amortisation of costs of raising finance(1)
Net interest cost on pensions
Unwind of discount on provisions
Fair value changes on cross-currency swaps(2)
Total finance costs
Finance income
Total net finance costs
Year ended
31 December
2018
£m
Year ended
31 December
2017
£m
(103)
(18)
(24)
(10)
(8)
(163)
5
(158)
(17)
(2)
(1)
(2)
–
(22)
1
(21)
(1) Includes £7 million (2017: £nil) in respect of accelerated future year charges following the repayment of debt facilities as a result of the acquisition of GKN. This cost is excluded from adjusted finance
costs (note 6).
(2) These costs are excluded from adjusted finance costs (note 6).
150
Notes to the Financial StatementsContinuedMelrose Industries PLCAnnual Report 2018 8. Tax
Continuing operations
Analysis of tax credit in year:
Current tax
Current year tax charge
Adjustments in respect of prior years
Total current tax charge
Deferred tax
Origination and reversal of temporary differences
Adjustments in respect of prior years
Tax on the change in value of derivative financial instruments
Adjustments to deferred tax attributable to changes in tax rates
Loss utilisation against US repatriation charge
Recognition of previously unrecognised deferred tax assets
Total deferred tax credit
Total tax credit
Analysis of credit in year:
Tax charge in respect of adjusted profit before tax
Tax credit in respect of adjusting items
Total tax credit
Year ended
31 December
2018
£m
Year ended
31 December
2017
£m
55
(21)
34
(33)
(6)
(31)
(34)
–
(5)
(109)
(75)
£m
164
(239)
(75)
13
–
13
6
–
–
(39)
16
–
(17)
(4)
£m
67
(71)
(4)
The tax charge of £164 million (2017: £67 million) arising on adjusted profit before tax of £703 million (2017: £258 million), results in an
effective tax rate of 23% (2017: 26%).
Tax in respect of adjusting items includes a credit of £230 million (2017: £44 million) arising on adjusting items of £1,253 million
(2017: £286 million), £nil (2017: £27 million) arising from the impact of the US tax measures enacted in December 2017 and £9 million
(2017: £nil) in respect of tax on equity accounted investments.
The tax credit for the year for continuing operations can be reconciled to the loss before tax per the Income Statement as follows:
Loss before tax
Tax credit on loss before tax at the weighted average rate of 20% (2017: 14%)
Tax effect of:
Disallowable expenses and other permanent differences within adjusted profit
Disallowable items included within adjusting items
Temporary differences not recognised in deferred tax
Recognition of previously unrecognised deferred tax assets
Withholding taxes
Adjustments in respect of prior years
Tax charge/(credit) classified within adjusting items
Effect of changes in tax rates
Total tax credit for the year
Year ended
31 December
2018
£m
Year ended
31 December
2017
£m
(550)
(110)
10
57
14
(5)
10
(27)
10
(34)
(75)
(28)
(4)
5
22
11
–
–
(10)
(27)
(1)
(4)
The reconciliation has been performed at a blended Group tax rate of 20% (2017: 14%) which represents the weighted average of the tax
rates applying to profits and losses in the jurisdictions in which those results arose.
151
Financial statementsAnnual Report 2018Melrose Industries PLC 8. Tax continued
Tax credits included in Other Comprehensive Income are as follows:
Deferred tax on retirement benefit obligations
Deferred tax on hedge relationship gains and losses
Deferred tax on foreign currency gains and losses
Total (credit)/charge for the year
Year ended
31 December
2018
£m
Year ended
31 December
2017
£m
(9)
(24)
(5)
(38)
1
1
–
2
In addition to the amounts recognised in Other Comprehensive Income in 2017, a deferred tax credit of £34 million in respect of share-
based payments was recognised directly in retained earnings.
Franked investment income – litigation
Since 2003, the GKN Group has been involved in litigation with HMRC in respect of various advance corporate tax payments and
corporate tax paid on certain foreign dividends which, in its view, were levied by HMRC in breach of the Group’s EU community law
rights. The most recent Court of Appeal judgement in the case was published in November 2016. This judgement was broadly positive
but HMRC have sought leave to appeal.
The continuing complexity of the remaining case and uncertainty over the issues raised (and in particular which points HMRC may seek
to appeal) means that it is not possible to predict the final outcome of the litigation with any reasonable degree of certainty. A successful
outcome could result in the Group being able to recognise additional deferred tax assets in the UK and receiving cash payments from HMRC.
9. Dividends
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
Final dividend for the year ended 31 December 2017 paid of 2.8p
Interim dividend for the year ended 31 December 2018 paid of 1.55p
Year ended
31 December
2018
£m
Year ended
31 December
2017
£m
–
–
54
75
129
36
27
–
–
63
Proposed final dividend for the year ended 31 December 2018 of 3.05p per share (2017: 2.8p per share) totalling £148 million (2017: £54 million).
The final dividend of 3.05p was proposed by the Board on 7 March 2019 and, in accordance with IAS 10: “Events after the reporting
period”, has not been included as a liability in these Consolidated Financial Statements.
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)
Year ended
31 December
2018
£m
Year ended
31 December
2017
£m
(475)
(24)
Year ended
31 December
2018
Number
Year ended
31 December
2017
Number
3,959
–
3,959
1,919
22
1,941
On 19 April 2018, 2,469 million ordinary shares were issued as a result of the acquisition of GKN. Further issues of share capital totalling
448 million took place between 19 April 2018 and 30 June 2018 in order to purchase the remaining non-controlling interests of GKN. The
total number of ordinary shares in issue therefore increased from 1,941 million at 31 December 2017 to 4,858 million at 31 December 2018.
Earnings per share
Basic earnings per share
Diluted earnings per share
152
Year ended
31 December
2018
Year ended
31 December
2017
(12.0)p
(12.0)p
(1.2)p
(1.2)p
Notes to the Financial StatementsContinuedMelrose Industries PLCAnnual Report 2018 10. Earnings per share continued
Adjusted earnings
Adjusted earnings for the basis of adjusted earnings per share(1)
Year ended
31 December
2018
£m
Year ended
31 December
2017
£m
526
191
(1) Adjusted earnings for the year ended 31 December 2018 comprises adjusted profit after tax of £539 million (note 6), net of an allocation to non-controlling interest of £13 million.
Adjusted earnings per share
Continuing operations
Adjusted basic earnings per share
Adjusted diluted earnings per share
11. Goodwill and other intangible assets
Year ended
31 December
2018
Year ended
31 December
2017
13.3p
13.3p
9.9p
9.8p
Cost
At 1 January 2017
Additions
Disposals
Exchange adjustments
At 31 December 2017
Acquisition of businesses
Additions
Disposals
Exchange adjustments
At 31 December 2018
Amortisation and impairment
At 1 January 2017
Charge for the year:
Adjusted operating profit
Adjusting items
Impairments(3)
Disposals
Exchange adjustments
At 31 December 2017
Charge for the year:
Adjusted operating profit
Adjusting items
Impairments(4)
Disposals
Exchange adjustments
At 31 December 2018
Net book value
At 31 December 2018
At 31 December 2017
Customer
relationships and
contracts
£m
Goodwill
£m
Brands and
intellectual
property
£m
1,648
–
–
(120)
1,528
2,538
–
–
205
4,271
–
–
–
(96)
–
–
(96)
–
–
(123)
–
–
(219)
4,052
1,432
623
–
–
(52)
571
4,268
–
–
366
5,205
(41)
–
(50)
–
–
4
(87)
–
(275)
–
–
(10)
(372)
4,833
484
398
–
–
(23)
375
473
–
–
23
871
(55)
–
(23)
–
–
1
(77)
–
(44)
–
–
(3)
(124)
747
298
Other(1)
£m
32
–
–
(3)
29
999
–
–
29
1,057
(6)
–
(9)
–
–
1
(14)
–
(82)
–
–
(2)
(98)
959
15
Computer(2)
software
£m
Development(2)
costs
£m
22
–
(1)
(1)
20
24
11
(5)
3
53
(11)
(4)
–
–
1
–
(14)
(11)
–
–
4
(1)
(22)
31
6
–
4
–
(1)
3
444
24
(1)
26
496
–
–
–
–
–
–
–
(33)
–
(15)
1
–
(47)
449
3
Total
£m
2,723
4
(1)
(200)
2,526
8,746
35
(6)
652
11,953
(113)
(4)
(82)
(96)
1
6
(288)
(44)
(401)
(138)
5
(16)
(882)
11,071
2,238
(1) Other includes technology and order backlog intangible assets acquired with the Nortek and GKN businesses.
(2) Computer software and development costs were shown aggregated in 2017.
(3) The impairment in 2017 relates to an impairment recognised in Brush.
(4) The impairments in 2018 relate to goodwill in Brush and development costs in Aerospace.
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, know-how, market share and geographical advantages afforded to the Group.
153
Financial statementsAnnual Report 2018Melrose Industries PLC
11. Goodwill and other intangible assets continued
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 (“CGUs”). Goodwill in respect of GKN businesses remains provisional at 31 December 2018.
Goodwill
Brush
Nortek businesses:
AQH
HVAC
Security & Smart Technology
Ergotron
GKN businesses:
Aerostructures
Aerospace Engine Systems
Aerospace Special Technologies
Automotive Driveline
Automotive ePowertrain
Powder Metallurgy
The Walterscheid Powertrain Group
31 December
2018
£m
31 December
2017
£m
–
370
246
357
435
576
347
51
704
345
529
92
4,052
122
348
232
320
410
–
–
–
–
–
–
–
1,432
Impairment Testing
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.
Value in use calculations have been used to determine the recoverable amount of goodwill allocated to each group of CGUs. 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 or the
GKN businesses. No reasonably possible change in key assumptions would result in an impairment in the AQH and HVAC groups
and GKN groups of CGUs. The recoverable amount of the GKN groups of CGUs at 31 December 2018 are higher than the recent
acquisition date fair values. As a result, no sensitivity analysis has been disclosed for these businesses.
Both Security & Smart Technology and Ergotron have manufacturing facilities located in China that export to the US and their results
in 2018, and the ongoing market environment, have been negatively impacted by the increase in US tariffs placed on Chinese goods.
The intention is to pass any increased tariffs through to customers, but the uncertainty around how customers will react and/or a further
escalation of US tariffs on Chinese goods and the impact that this could have on the behaviour of competitors means that there is a risk
that future forecasts could be negatively impacted. No impairment of goodwill is required within these businesses, but sensitivity analysis
has been provided.
An impairment charge of £123 million in respect of goodwill recorded in the Brush group of CGUs has been recorded in the Consolidated
Income Statement and is shown as an adjusting item (note 6).
154
Notes to the Financial StatementsContinuedMelrose Industries PLCAnnual Report 2018 11. Goodwill and other intangible assets continued
Significant assumptions and estimates
Each group of CGUs has been assessed through a value in use methodology, using the following significant assumptions.
The basis of these impairment tests and the key assumptions are set out in the table below:
Group of CGUs
Brush
AQH
HVAC
Security & Smart Technology
Ergotron
Aerostructures
Aerospace Engine Systems
Aerospace Special Technologies
Automotive Driveline
Automotive ePowertrain
Powder Metallurgy
The Walterscheid Powertrain Group
31 December 2018
31 December 2017
Pre-tax
discount rates
Long-term
growth rates
Period of
forecast
Pre-tax
discount rates
Long-term
growth rates
Period of
forecast
10.8%
11.8%
11.8%
12.0%
11.8%
10.2%
10.1%
9.7%
11.6%
12.0%
12.0%
14.5%
1.5%
3.3%
3.1%
3.3%
3.3%
2.0%
2.5%
2.5%
0.0%
3.0%
2.0%
2.0%
5
3
3
3
3
5
5
5
5
5
5
5
11.9%
12.6%
12.6%
12.6%
12.6%
–
–
–
–
–
–
–
2.2%
3.0%
3.0%
3.0%
3.0%
–
–
–
–
–
–
–
5
4
4
4
4
–
–
–
–
–
–
–
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 the territories in which the CGU operates. 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, 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 cost of debt is determined using a risk-free rate based on the cost of government bonds, and an interest rate premium equivalent
to a corporate bond with a similar credit rating to Melrose.
Assumptions applied in financial forecasts
The Group prepares cash flow forecasts derived from financial budgets and medium-term forecasts. Each forecast has been prepared
using a cash flow period deemed most appropriate by management, considering the nature of each group of CGUs. The key assumptions
used in forecasting pre-tax cash flows relate to future budgeted revenue and operating margins likely to be achieved and the expected
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 forecast 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.
Aerospace – The key drivers for growth in revenue and operating margins are global demand for commercial and military aircraft.
Consumer spending, passenger load factors, raw material input costs, market expectations for aircraft production requirements,
technological advancements, and other macroeconomic factors influence demand for these products.
Automotive – The key drivers for growth in revenue and operating margins are global demand for a large range of cars including smaller
low-cost to larger premium vehicles. Demand is influenced by technological advancements particularly in electric and full hybrid vehicles,
market expectations for global vehicle production requirements, fuel prices, raw material input costs, consumer spending, credit
availability, and other macroeconomic factors.
Powder Metallurgy – The key drivers for growth in revenue and operating margins are trends in the automotive and industrial markets.
Market expectations for global light vehicle production requirements, raw material input costs, technological advancements, particularly
in additive manufacturing, influence demand for these products along with other macroeconomic factors.
The Walterscheid Powertrain Group – The key drivers for growth in revenue and operating margins are the global demand in the
agricultural, construction, mining, utility and industrial markets. Demand for these products is impacted by raw material input costs,
consumer spending, market expectations on future production requirements, particularly in the agricultural and industrial sectors, and
other macroeconomic factors.
155
Financial statementsAnnual Report 2018Melrose Industries PLC 11. Goodwill and other intangible assets continued
HVAC and AQH – The key drivers for growth in 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 these businesses operate. 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 – The key driver for growth in 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.
Ergotron – The key driver for growth in 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.
Brush – The key drivers for growth in 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.
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.
Brush group of CGUs
In the previous year, the assets of the Brush business were impaired by £145 million to a value of £300 million, using the fair value less
costs to sell basis. This method of valuation, at the time, was higher than the value in use method, because the latter excluded the
benefits of the restructuring announced in February 2018, and would have given a value of £178 million.
The restructuring of the Brush business that was announced in February 2018 followed a full review of the power generation industry and
highlighted the surplus generator manufacturing capacity existing in the market. The restructuring programme has been implemented in
line with plan.
However, in 2018 the conditions in the generator services business have also become more challenging as the year has progressed, with
competitors taking a decision to look to service opportunities to offset surplus capacity issues in the generator manufacturing market.
Alongside this, customers and competitors in the power generation sector have continued to reorganise and restructure in the second
half of 2018.
These newly developed generator services market conditions and the decisions from significant market participants have had a direct
impact on the trading of Brush and reduced forecasts in the Brush generator servicing business.
At 31 December 2018, the recoverable amount of the Brush assets, using the reduced forecasts and the value in use method,
was £103 million, resulting in a further impairment to Brush goodwill of £123 million in the year.
Sensitivity analysis
Further sensitivity analysis has been carried out on the Brush group of CGUs. For illustration purposes, a further 0.1 percentage point
increase in the discount rate or a further five per cent reduction in the annual and terminal value of operating profit could result in a
reduction in the value in use of £1 million and £5 million respectively. A further 0.1 percentage point decrease in the long-term growth
rate could result in a reduction in the value in use of £1 million.
Security & Smart Technology group of CGUs
The goodwill related to the Security & Smart Technology (“SST”) group of CGUs is tested for impairment by comparing the carrying
amount of the SST group against recoverable amounts of the SST CGUs. As disclosed within note 3, determination of the recoverable
amount involved management judgement on highly uncertain matters, particularly with respect to the possible increase in tariffs in the US
for goods being imported from China; the level of competition and technological change in the market; the timing and quantity of forecast
unit sales; long-term growth rates and discount factors. The value in use model prepared for the SST group was prepared using latest
cash flow projections for the period 2019-2021 followed by an assumed long-term growth rate of 3.3%. These cash flow projections were
discounted at a pre-tax discount rate of 12.0% and used sale price and cost inflation data from available market sources.
Sensitivity analysis
The forecasts, prepared using a methodology required by IAS 36, show headroom of £88 million above the carrying amount for the SST
group of CGUs. In accordance with IAS 36 a sensitivity analysis has been undertaken and a reasonably possible increase in the discount
rate from 12.0% to 13.4% would reduce headroom to £nil. A reasonably possible decrease in the long-term growth rate from 3.3% to
1.7% would reduce headroom to £nil. In relation to a possible increase in US tariffs, it is difficult to model the precise impact on business
performance at this time but this would likely lead to reduced sales and margins in the short term. A five per cent reduction in the annual
and terminal value of operating profit could result in a reduction in the value in use of £34 million.
156
Notes to the Financial StatementsContinuedMelrose Industries PLCAnnual Report 2018 11. Goodwill and other intangible assets continued
Ergotron group of CGUs
The goodwill related to the Ergotron group of CGUs is tested for impairment by comparing the carrying amount of the Ergotron group
against recoverable amounts of the Ergotron CGUs. As disclosed within note 3, determination of the recoverable amount involved
management judgement on highly uncertain matters, particularly with respect to the possible increase in tariffs in the US for goods being
imported from China as well as long-term growth rates. The value in use model prepared for the Ergotron group used the latest cash
flow projections for the period 2019-2021 followed by an assumed long-term growth rate of 3.3%. These cash flow projections were
discounted at a pre-tax discount rate of 11.8% and used sale price and cost inflation data from available market sources.
Sensitivity analysis
The forecasts, prepared using a methodology required by IAS 36, show headroom of £198 million above the carrying amount for the
Ergotron group of CGUs. In accordance with IAS 36 a sensitivity analysis has been undertaken and a reasonably possible decrease
in the long-term growth rate from 3.3% to 0.2% would reduce headroom to £nil. In relation to a possible increase in US tariffs, it is difficult
to model the precise impact on business performance at this time but this would likely lead to reduced sales and margins in the short
term. A five per cent reduction in the annual and terminal value of operating profit could result in a reduction in the value in use of £42 million.
Allocation of significant intangible assets
The allocation of significant customer relationships, brands, intellectual property and technology is as follows:
Brush
AQH
HVAC
Security & Smart Technology(1)
Ergotron
Aerostructures
Aerospace Engine Systems
Aerospace Special Technologies
Automotive Driveline
Automotive ePowertrain
Powder Metallurgy
The Walterscheid Powertrain Group
Wheels & Structures
Customer relationships
Brands, intellectual property and technology
Remaining amortisation period
Net book value
Remaining amortisation period
Net book value
31 December
2018
years
31 December
2017
years
31 December
2018
£m
31 December
2017
£m
31 December
2018
years
31 December
2017
years
31 December
2018
£m
31 December
2017
£m
–
12
9
12
8
10
20
10
12
9
17
15
20
1
13
10
13
9
–
–
–
–
–
–
–
–
–
176
93
108
88
604
1,960
53
693
334
651
63
10
4,833
2
180
97
110
95
–
–
–
–
–
–
–
–
484
10
13
13
13
16
20
20
20
20
20
20
8
20
11
14
14
14
17
–
–
–
–
–
–
–
–
55
55
71
40
83
529
203
61
122
329
85
62
11
1,706
61
56
72
40
84
–
–
–
–
–
–
–
–
313
(1) The Security & Smart Technology brands, intellectual property and technology balance at 31 December 2018 includes £9 million in relation to IntelliVision, acquired in the year.
157
Financial statementsAnnual Report 2018Melrose Industries PLC 12. Acquisitions
GKN
On 19 April 2018 the Group acquired approximately 85% of the issued share capital and obtained control of GKN plc for consideration
of £7,091 million. The remaining 15% of share capital was acquired subsequently, at a cost of £1,260 million which has been treated
as a purchase of a non-controlling interest.
GKN is a global engineering business which designs, manufactures and services systems and components for original equipment
manufacturers, specialising in the aerospace and automotive markets.
The Group has reviewed the assets and liabilities acquired. Due to the size of the acquired business, the assessment of the fair value of
the assets and liabilities acquired has not yet been finalised. In accordance with IFRS 3: “Business combinations”, the acquisition Balance
Sheet of GKN at 19 April 2018 remains provisional as of 31 December 2018 as there could be further adjustment to the fair values
recognised in the table below, if additional information comes to light.
Property, plant and equipment
Intangible assets
Interests in equity accounted investments
Inventories
Trade and other receivables, excluding contract assets(1)
Contract assets
Cash and cash equivalents
Trade and other payables
Derivative financial instruments
Provisions and contingent liabilities
Deferred tax
Retirement benefit obligations
Current tax liabilities
Interest-bearing loans and borrowings
Non-controlling interests(2)
Net assets attributable to the parent
Total consideration
Provisional goodwill
Total consideration satisfied by:
Cash consideration
Shares issued to GKN shareholders
GKN
£m
2,619
6,199
512
1,173
1,973
524
307
(2,915)
(137)
(1,180)
(761)
(1,369)
(89)
(1,430)
(857)
4,569
7,091
2,522
1,290
5,801
IntelliVision
£m
Provisional
fair value
£m
–
9
–
–
1
–
–
–
–
–
–
–
–
–
–
10
26
16
26
–
2,619
6,208
512
1,173
1,974
524
307
(2,915)
(137)
(1,180)
(761)
(1,369)
(89)
(1,430)
(857)
4,579
7,117
2,538
1,316
5,801
(1) The fair value of financial assets includes gross trade and other receivables of £1,994 million. The best estimate at the acquisition date of the contractual cash flows not to be collected is £20 million.
(2) Non-controlling interests include an amount of £830 million in respect of approximately 15% of the issued share capital of GKN not acquired on 19 April 2018, but subsequently purchased in the
period 19 April 2018 to 30 June 2018.
158
Notes to the Financial StatementsContinuedMelrose Industries PLCAnnual Report 2018
12. Acquisitions continued
GKN contributed £7,212 million to adjusted revenue and £607 million to adjusted operating profit for the period between the date of
acquisition and the balance sheet date. The amounts recognised in relation to GKN for the period from 19 April to 31 December 2018
include revenue and profit and the associated impact on working capital, based on an estimate of activity from 19 April to 30 April 2018.
If the acquisition of GKN had been completed on the first day of the financial year, Group adjusted revenues would have been
£12,247 million and Group adjusted operating profit would have been £1,095 million.
The goodwill arising on acquisition of GKN is attributable to the anticipated profitability and cash flows arising from the businesses
acquired, the assembled workforce, technical expertise, know-how, market share and geographical advantages afforded to the Group,
and which, the Group expects to realise through a combination of revised strategic direction, operational improvements and investment.
None of the goodwill is expected to be deductible for income tax purposes.
Contingent liabilities acquired in respect of legal claims of £15 million have been recognised within provisions, none of which were utilised
in the period. The majority of expenditure is expected to be incurred over the next five years.
In determining the fair value of assets acquired in the GKN business combination, a number of estimates and judgements have been
made. The fair value exercise was carried out in conjunction with independent experts and considered the existence and valuation of the
acquired assets and liabilities, and the goodwill which has arisen.
Intangible assets
Intangible assets inherent in GKN’s customer relationships/contracts were valued using an excess earnings method. This methodology
places a value on the asset as a function of (a) management’s estimate of the expected cash flows arising from the customer contracts;
(b) discount rates reflective of the risks inherent in the cash flows; and (c) a contributory charge attributable to assets needed to generate
the operating cash flows. An after-tax discount rate of 8.5% to 10.8% was applied to the forecast cash flows.
The tradenames within the GKN business were deemed to have measurable value as they are well recognised in their industries. They
have been valued using a relief from royalty methodology based on projected cash flows attributable to the tradename and an assumed
royalty rate that would be charged if the name were subject to licence within a comparable trade situation and an appropriate discount
rate reflecting inherent risk in the projected cash flows. A total fair value of £473 million has been recognised for tradenames and
intellectual property.
The proprietary technology and know-how has been valued using a relief from royalty methodology, consistent with the Group accounting
policy. The cash flow forecasts supporting this valuation reflect the future sales to be generated in conjunction with the technology. The
fair value is attributed to the proprietary technology and represents the theoretical costs avoided by GKN from not having to pay a licence
fee for the technology. The royalty rates used in the valuation were 3.0% to 4.5% based on review of licence agreements for comparable
technologies in a similar segment. After-tax discount rates of 9.5% to 10.5% were applied to the forecast cash flows, rates that reflects the
inherent risk within cash flows and are comparable with the weighted average cost of capital for the acquisition.
The valuation of all intangible assets reflects the tax benefit of amortisation, which has been assessed with reference to country tax laws.
IntelliVision Inc. (“IntelliVision”)
On 27 April 2018, the Group’s Security & Smart Technology business acquired 100% of the issued share capital and obtained control of
IntelliVision, a leader in artificial intelligence, smart cameras and video analytics software, for consideration of £26 million. The amounts
recognised in respect of the identifiable assets acquired and liabilities assumed are set out in the table above. Fair values remain
provisional as at 31 December 2018 in case additional information comes to light that would require adjustment to the fair values
recognised in the table above.
Transaction costs incurred on all acquisition and disposal activities during the year and charged through the Income Statement totalled
£153 million (note 6).
159
Financial statementsAnnual Report 2018Melrose Industries PLC 13. Property, plant and equipment
Cost
At 1 January 2017
Additions
Disposals
Transfer to held for sale
Exchange adjustments
At 31 December 2017
Acquisition of businesses
Additions(1)
Disposals
Disposal of businesses
Exchange adjustments
At 31 December 2018
Accumulated depreciation and impairment
At 1 January 2017
Charge for the year
Disposals
Transfer to held for sale
Impairments
Exchange adjustments
At 31 December 2017
Charge for the year
Disposals
Impairments(2)
Exchange adjustments
At 31 December 2018
Net book value
At 31 December 2018
At 31 December 2017
(1) Additions include £39 million (2017: £nil) in relation to assets acquired under finance leases.
(2) Treated as an adjusting item (note 6).
14. Equity accounted investments
Aggregated amounts relating to equity accounted investments:
Share of current assets
Share of non-current assets
Share of current liabilities
Share of non-current liabilities
Interests in equity accounted investments
Group share of results
Revenue
Operating costs
Adjusted operating profit
Adjusting items
Net finance costs
Profit before tax
Tax
Share of results of equity accounted investments
160
Land and
buildings
£m
Plant and
equipment
£m
139
9
(3)
(12)
(3)
130
715
57
(10)
–
51
943
(11)
(6)
–
1
(16)
1
(31)
(26)
–
(3)
(2)
(62)
186
39
(11)
(6)
(6)
202
1,904
369
(41)
(8)
145
2,571
(42)
(25)
10
2
(28)
1
(82)
(212)
36
(11)
(12)
(281)
Total
£m
325
48
(14)
(18)
(9)
332
2,619
426
(51)
(8)
196
3,514
(53)
(31)
10
3
(44)
2
(113)
(238)
36
(14)
(14)
(343)
881
99
2,290
120
3,171
219
31 December
2018
£m
31 December
2017
£m
382
420
(231)
(79)
492
3
–
(3)
–
–
Year ended
31 December
2018
£m
Year ended
31 December
2017
£m
497
(438)
59
(15)
(1)
43
(9)
34
3
(3)
–
–
–
–
–
–
Notes to the Financial StatementsContinuedMelrose Industries PLCAnnual Report 2018 14. Equity accounted investments continued
Group share of equity accounted investments
At 1 January
Acquisition of businesses
Share of results of equity accounted investments
Additions
Dividends paid to the Group
Exchange adjustments
At 31 December
Year ended
31 December
2018
£m
Year ended
31 December
2017
£m
–
512
34
3
(66)
9
492
–
–
–
–
–
–
–
Within the Group’s share of equity accounted investments the Group has one significant joint venture, held within the Automotive
segment, Shanghai GKN HUAYU Driveline Systems Co Limited (“SDS”). SDS had total sales in the post-acquisition period of £839 million,
adjusted operating profit of £108 million, adjusting items of £30 million, an interest charge of £nil and a tax charge of £16 million, leaving
retained profit of £62 million.
Total net assets of SDS at 31 December 2018 were £937 million. These comprised non-current assets of £805 million, current assets of
£464 million, current liabilities of £319 million and non-current liabilities of £13 million. During 2018, SDS paid a dividend to the Group of
£58 million. Further information about SDS can be found in note 3 to the Melrose Industries PLC Company Financial Statements.
15. Inventories
Raw materials
Work in progress
Finished goods
31 December
2018
£m
31 December
2017
£m
659
328
502
1,489
79
55
142
276
In 2018 the write-down of inventories to net realisable value amounted to £65 million (2017: £12 million), of this, £18 million (2017: £4 million)
related to restructuring activities and is included within adjusting items. The reversal of write-downs amounted to £20 million (2017: £3 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.
16. Trade and other receivables
Current
Trade receivables
Allowance for doubtful receivables
Other receivables
Prepayments
Contract assets
31 December
2018
£m
31 December
2017
£m
1,877
(42)
256
37
200
2,328
313
(15)
21
13
–
332
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
Contract assets
31 December
2018
£m
31 December
2017
£m
108
396
504
2
–
2
As described in note 24, certain businesses participate in receivables working capital programmes and have the ability to choose whether
to receive payment earlier than the normal due date, for specific customers on a non-recourse basis. As at 31 December 2018, all eligible
receivables under these programmes have been factored and derecognised in line with the derecognition criteria of IFRS 9. There are no
amounts due under such schemes at the year end.
161
Financial statementsAnnual Report 2018Melrose Industries PLC 16. Trade and other receivables continued
An allowance has been made for expected lifetime credit losses with reference to past default experience and management’s
assessment of credit worthiness over trade receivables, other receivables and contract assets, an analysis of which is as follows:
At 1 January 2017
Income Statement charge
Utilised
Transfer to held for sale
Exchange adjustments
At 31 December 2017
Adoption of IFRS 9
Income Statement charge/(credit)
Utilised
Exchange adjustments
At 31 December 2018
Aerospace
£m
Automotive
£m
Powder
Metallurgy
£m
Nortek Air &
Security
£m
Other Industrial
£m
–
–
–
–
–
–
–
13
–
2
15
–
–
–
–
–
–
–
6
–
–
6
–
–
–
–
–
–
–
3
–
–
3
17
–
(1)
(1)
(1)
14
2
(4)
(2)
2
12
1
–
–
–
–
1
–
5
(1)
1
6
Total
£m
18
–
(1)
(1)
(1)
15
2
23
(3)
5
42
The concentration of credit risk is limited due to the large number of unrelated customers. 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
2018
£m
31 December
2017
£m
12
1
29
42
11
–
4
15
Included in the Group’s trade receivables balance are overdue trade receivables with a carrying amount of £208 million
(31 December 2017: £55 million) against which a provision of £42 million (31 December 2017: £15 million) is held.
The balance deemed recoverable of £166 million (31 December 2017: £40 million) is past due as follows:
0 – 30 days
31 – 60 days
60+ days
31 December
2018
£m
31 December
2017
£m
124
33
9
166
28
6
6
40
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.
162
Notes to the Financial StatementsContinuedMelrose Industries PLCAnnual Report 2018 16. Trade and other receivables continued
The Group’s contract assets comprise the following:
At 1 January 2018
Acquisition of businesses
Additions
Utilised
Exchange adjustments
At 31 December 2018
Participation
fees
£m
Unbilled
receivables
£m
Variable
consideration
£m
–
173
25
(6)
21
213
–
164
145
(164)
–
145
–
171
28
(12)
19
206
Other
£m
–
16
15
–
1
32
Total
£m
–
524
213
(182)
41
596
Participation fees
Participation fees are described in the accounting policies (note 2) and under IFRS 15 they are considered to be a reduction in revenue
for the related customer contract. Amounts are capitalised and ‘amortised’ to match to the related performance obligation.
Unbilled receivables for over time recognition
Unbilled receivables for over time recognition represent amounts previously recorded in inventory along with associated margins
where contracts contain a legal right to compensation for work completed, including a margin, and there is no alternative use for the
customer’s asset.
Variable consideration
Variable consideration only impacts a small number of businesses in the Group, exclusively in the Aerospace reporting segment.
Due to the nature of risk and revenue sharing partnerships, covered in detail in the accounting policies (note 2), original equipment (“OE”)
products sold to engine manufacturers are at a lower margin with more favourable pricing in the aftermarket phase. Where the Group has
a contractual right to this aftermarket revenue, IFRS 15 requires that the total contract revenue is allocated to the performance obligations
based on their standalone selling price and recognised as control is transferred to the customer. Whilst this has resulted in a material
value, attributable to previously delivered OE components, being recognised ahead of cash recovery during the aftermarket phase, risk
adjustments as well as a constraint applied to revenue recognised in the year, have been applied due to future uncertainty. Any constraint
applied to variable consideration will only unwind when uncertainties are resolved. This could lead to additional revenue recognition in
future periods.
A contract asset of £524 million was recognised on acquisition of GKN (note 12) and the movement up to 31 December 2018 is shown
in the table above.
17. Cash and cash equivalents
Cash and cash equivalents
31 December
2018
£m
31 December
2017
£m
415
16
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. The carrying amount of these assets is
considered to be equal to their fair value.
163
Financial statementsAnnual Report 2018Melrose Industries PLC 18. Trade and other payables
Current
Trade payables
Other payables
Customer advances and contract liabilities
Other taxes and social security
Government refundable advances
Accruals
Deferred government grants
31 December
2018
£m
31 December
2017
£m
1,307
568
190
64
8
434
12
2,583
210
18
–
7
–
132
–
367
As at 31 December 2018, and as described in note 24, included within trade payables were drawings on supplier finance facilities
of £94 million (2017: £nil).
Trade payables are non interest-bearing. Normal settlement terms vary by country and the average credit period taken for trade and other
payables is 81 days (2017: 66 days).
Non-current
Other payables
Customer advances and contract liabilities
Other taxes and social security
Government refundable advances
Deferred government grants
Accruals
31 December
2018
£m
31 December
2017
£m
94
552
23
73
8
28
778
1
–
–
–
–
1
2
The Directors consider that the carrying amount of trade and other payables approximates to their fair value.
Non-current amounts owed to suppliers fall due within two years. Government refundable advances are forecast to fall due for repayment
between 2019 and 2055.
Customer advances and contract liabilities increased significantly on acquisition of GKN. The balance includes cash receipts from
customers in advance of the Group completing its performance obligations and is generally utilised as product is delivered. Non-current
amounts in respect of customer advances and contract liabilities will be utilised as follows: one to two years £241 million, two to five years
£136 million and over five years £175 million.
19. Interest-bearing loans and borrowings
This note provides information about the contractual terms of the Group’s interest-bearing loans and borrowings. Details of the Group’s
exposure to credit, liquidity, interest rate and foreign currency risk are included in note 24.
Floating rate obligations
Bank borrowings – US Dollar loan
Bank borrowings – Sterling loan
Bank borrowings – Euro loan
Fixed rate obligations
2019 £350 million bond
2022 £450 million bond
2032 £300 million bond
Other loans
Unamortised finance costs
Non-cash acquisition fair value adjustment
Total interest-bearing loans and borrowings
Current
Non–current
Total
31 December
2018
£m
31 December
2017
£m
31 December
2018
£m
31 December
2017
£m
31 December
2018
£m
31 December
2017
£m
–
–
–
350
–
–
13
363
–
14
377
–
–
–
–
–
–
–
–
–
–
–
1,118
1,139
363
–
450
300
6
3,376
(41)
43
3,378
462
134
–
–
–
–
–
596
(8)
–
588
1,118
1,139
363
350
450
300
19
3,739
(41)
57
3,755
462
134
–
–
–
–
–
596
(8)
–
588
A new multi-currency committed bank facility was entered into on 17 January 2018 to assist with the acquisition of GKN, which replaced
the previous bank facility of US$1.25 billion. The US$1.25 billion facility was repaid and cancelled on 30 April 2018. The new facility
included a £1.5 billion multi-currency term loan with a duration of three years and six months. In addition, the new facility included a
five-year multi-currency revolving credit facility, denominated £1.1 billion, US$2.0 billion and €0.5 billion.
164
Notes to the Financial StatementsContinuedMelrose Industries PLCAnnual Report 2018 19. Interest-bearing loans and borrowings continued
On 29 October 2018, £663 million of the new term loan was surplus to requirements, and therefore cancelled, because potential change
of control clauses on the bonds were not exercised by the relevant bondholders.
At 31 December 2018 the drawings on the term loan were £100 million and US$960 million. There was a significant amount of headroom
on the multi-currency committed revolving credit facility, as at 31 December 2018. Applying the exchange rates at 31 December 2018 the
headroom equated to £1,352 million, which includes an amount available to replace the 2019 bond when it matures, or before. There are
also a number of uncommitted overdraft, guarantee and borrowing facilities made available to the Group. These uncommitted facilities
have been lightly used.
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 cover ratio, ranging between 0.75% to 2.0% on the term loan, and 0.95% to 2.25% on the revolving credit facility. As at
31 December 2018 the margin was 1.4% on the term loan and 1.65% on the revolving credit facility (31 December 2017: 1.35% on the
Melrose committed bank debt).
The GKN net debt at acquisition included three capital market borrowings totalling £1.1 billion. The bonds maturing in 2019 and 2022 have
cross-currency swaps associated with them. Details are in the table below:
Maturity date
October 2019
September 2022
May 2032
Notional
amount
£m
350
450
Coupon
% p.a.
6.75%
5.375%
300
3.375%
Cross-currency
swaps
million
Interest rate
on swaps
% p.a.
US$578
US$373
€284
n/a
6.80%
5.70%
3.87%
n/a
The coupon rate on the £300 million bond, maturing in 2032, is expected to increase to 4.625% from May 2019.
Maturity of financial liabilities (excluding currency contracts)
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 (other than those associated with currency risk, which are shown in note 24, and finance lease obligations
which are shown in note 27). The amounts shown therefore differ from the carrying value and fair value of the Group’s financial liabilities.
Within one year
In one to two years
In two to five years
After five years
Effect of financing rates
31 December 2018
Within one year
In one to two years
In two to five years
After five years
Effect of financing rates
31 December 2017
Interest–bearing
loans and
borrowings
£m
Interest rate
derivative
financial
liabilities
£m
502
122
3,285
425
(579)
3,755
18
20
626
–
(76)
588
1
3
14
–
(4)
14
–
–
–
–
–
–
Other
financial
liabilities
£m
2,317
122
18
55
–
2,512
360
2
–
–
–
362
Total
financial
liabilities
£m
2,820
247
3,317
480
(583)
6,281
378
22
626
–
(76)
950
165
Financial statementsAnnual Report 2018Melrose Industries PLC 20. Provisions
At 1 January 2018
Acquisition of businesses
Utilised(1)
Net charge to operating profit(2)
Unwind of discount
Disposal of businesses
Exchange adjustments
At 31 December 2018
Current
Non-current
Loss-making
contracts
£m
Property
related
costs
£m
Environmental
and
litigation
£m
Warranty
related
costs
£m
Restructuring
£m
Other
£m
3
629
(63)
(1)
9
(8)
47
616
65
551
616
14
62
(5)
–
–
–
3
74
15
59
74
88
123
(60)
43
–
–
8
202
58
144
202
73
295
(36)
37
–
–
18
387
130
257
387
20
24
(111)
181
–
–
2
116
108
8
116
11
47
(9)
(3)
1
–
3
50
5
45
50
Total
£m
209
1,180
(284)
257
10
(8)
81
1,445
381
1,064
1,445
(1) Includes £63 million of non-cash unwind of loss-making contracts provisions, positively impacting operating profit in 2018.
(2) Includes restructuring charges and other adjusting items of £168 million, along with £89 million relating to items charged through adjusted operating profit.
The Group’s provision categories have been reconsidered following the acquisition of GKN which has resulted in certain reclassifications
between provision categories.
Loss-making contracts
Provisions for loss-making contracts are considered to exist where the Group has a contract under which the unavoidable costs of
meeting the obligations exceed the economic benefits expected to be received under it. This obligation has been discounted and will be
utilised over the period of the respective contracts, which is up to 15 years.
Calculation of loss-making contract provisions is based on contract documentation and delivery expectations, along with an estimate
of directly attributable costs and represents management’s best estimate of the unavoidable costs of fulfilling the contract.
Property related costs
The provision for property related costs represents the estimated net payments for surplus property or off-market lease contracts on
acquisition, due over the term of the leases and any dilapidation costs for ongoing leases. This is expected to result in cash expenditure
over the next eight years. Calculations of surplus leasehold property costs and dilapidations are based on lease agreements with
landlords and external quotes, or in the absence of specific documentation, management’s best estimate of the costs required to
fulfil obligations.
Environmental and litigation
Environmental and litigation 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 and associated insurance obligations. Liabilities for
environmental costs are recognised when environmental assessments are probable and the associated costs can be reasonably estimated.
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.
Due to their nature, it is not possible to predict precisely when these provisions will be utilised.
The Group has on occasion been required to take legal or other actions to defend itself against proceedings brought by other parties.
Provisions are made for the expected costs associated with such matters, based on past experience of similar items and other known
factors, considering professional advice received. This represents management’s best estimate of the likely outcome. The timing of
utilisation of these provisions is frequently uncertain, reflecting the complexity of issues and the outcome of various court proceedings and
negotiations. Contractual and other provisions represent management’s best estimate of the cost of settling future obligations and reflect
management’s assessment of the likely settlement method, which may change over time. However, no provision is made for proceedings
which have been, or might be, brought by other parties against Group companies unless management, considering professional advice
received, assess that it is more likely than not that such proceedings may be successful.
Warranty related costs
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 provision for warranty related costs represents
the best estimate of the expenditure required to settle the Group’s obligations, based on past experience, recent claims and current
estimates of costs relating to specific claims. Warranty terms are, on average, between one and five years.
166
Notes to the Financial StatementsContinuedMelrose Industries PLCAnnual Report 2018 20. Provisions continued
Restructuring
Restructuring provisions relate to committed costs in respect of restructuring programmes, usually resulting in cash spend within one
year. 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 necessarily entailed by the restructuring programmes.
Other
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 two to five years.
Where appropriate, provisions have been discounted using discount rates between 0% and 9% (31 December 2017: 3%) depending
on the territory in which the provision resides and the length of its expected utilisation.
21. Deferred tax
The following are the major deferred tax assets and liabilities recognised by the Group and movements thereon during the current and
prior reporting period.
At 1 January 2017
(Charge)/credit to income
Credit to equity
Exchange adjustments
Movement in set off of assets and liabilities(1)
At 31 December 2017
Acquisition of businesses
(Charge)/credit to income
Credit to equity
Exchange adjustments
Movement in set off of assets and liabilities(1)
At 31 December 2018
Deferred tax
assets
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
50
(108)
30
(16)
93
49
712
(64)
37
20
(605)
149
(12)
(5)
2
–
3
(12)
(188)
42
1
(17)
8
(166)
(118)
130
–
27
(96)
(57)
(1,285)
131
–
(94)
597
(708)
(130)
125
2
27
(93)
(69)
(1,473)
173
1
(111)
605
(874)
(80)
17
32
11
–
(20)
(761)
109
38
(91)
–
(725)
(1) Set off of deferred tax assets and liabilities in accordance with IAS 12 within territories with a right of set off.
As at 31 December 2018, the Group had gross unused corporate income tax losses of £1,991 million (31 December 2017: £497 million)
available for offset against future profits. A deferred tax asset of £192 million (31 December 2017: £62 million) has been recognised in
respect of £978 million (31 December 2017: £346 million) of these gross losses. No asset has been recognised in respect of the remaining
losses due to the divisional and geographic split of anticipated future profit streams. Most of these losses may be carried forward
indefinitely subject to certain continuity of business requirements. Where losses are subject to time expiry, a deferred tax asset is
recognised to the extent that sufficient future profits are anticipated to utilise these losses. In addition to the corporate income tax losses
included above, a deferred tax asset of £42 million (31 December 2017: £33 million) has been recognised on US tax credits and US state
tax losses.
Deferred tax assets have also been recognised on Group retirement benefit obligations at £170 million (31 December 2017: £4 million)
and on other temporary differences at £494 million (31 December 2017: £94 million). The gross deferred tax assets therefore amount to
£898 million (31 December 2017: £193 million).
Deferred tax liabilities have been recognised on intangible assets at £1,446 million (31 December 2017: £198 million) and accelerated
capital allowances and other temporary differences at £177 million (31 December 2017: £15 million). The gross deferred tax liabilities
therefore amount to £1,623 million (31 December 2017: £213 million).
There are no material unrecognised deferred tax assets at 31 December 2018, other than the losses referred to above.
No deferred tax is recognised on the unremitted earnings of overseas subsidiaries except where the distribution of such profits is planned.
If these earnings were remitted in full, tax of £59 million (31 December 2017: £3 million) would be payable. This figure could increase
significantly if, as a result of Brexit, the Group had to rely on withholding tax rates as set out in Double Taxation Conventions agreed
between the UK and other countries, rather than the EU Parent-Subsidiary Directive. Due to the ongoing uncertainty around the UK’s exit
from the EU, this amount has not been quantified at the current time.
167
Financial statementsAnnual Report 2018Melrose Industries PLC 22. Share-based payments
Melrose Incentive Plan
The 2017 Melrose Incentive Plan was established on 11 May 2017 and comprised 50,000 2017 options which enable the holders to
subscribe for 2017 Melrose Incentive Shares. These options are to be issued to Directors and Senior Management in three annual
tranches and 31,203 options had been issued at 31 December 2018 (31 December 2017: 16,542). For accounting purposes the
IFRS 2 charge has been calculated as if all three tranches had been granted on day one because of a common expectation, established
at that date, between employees and the Company that the options will be allocated annually over the three-year performance period.
It is expected that the remaining options will be issued prior to the crystallisation of the Plan in May 2020. Further details of the 2017
Melrose Incentive Plan are set out in the Directors’ Remuneration Report on page 98.
During 2017, 12,831 of the incentive plan options were converted to incentive shares with a nominal value of £1 each. The number of
incentive plan options in issue as at 31 December 2018 is therefore 37,169 (31 December 2017: 37,169).
The estimated value of the 2017 Melrose Incentive Plan at 31 December 2018 was £nil (31 December 2017: £nil). Using a Black
Scholes option pricing model, the projected value of this plan at 31 May 2020 will be £13 million (31 December 2017: projected value
of £25 million).
The annual IFRS 2 charge to be recognised in respect of the 2017 Melrose Incentive Plan is £13 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 £13 million (2017: £10 million) in the year ended 31 December 2018. £13 million (2017: £8 million)
was in respect of the 2017 Melrose Incentive Plan and £nil (2017: £2 million) was in respect of the 2012 Melrose Incentive Plan.
23. Retirement benefit obligations
Defined contribution plans
The Group operates defined contribution plans for qualifying employees across several jurisdictions. The assets of the plans are held
separately from those of the Group in funds under the control of trustees.
The total costs charged in relation to the continuing businesses during the year of £67 million (2017: £7 million) represent contributions
payable to these plans by the Group at rates specified in the rules of the plans.
Defined benefit plans
The Group sponsors defined benefit plans for qualifying employees of certain subsidiaries. The funded defined benefit plans are
administered by separate funds that are 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 2018 were:
GKN UK 2012 Pension Plan
The GKN UK 2012 Pension Plan is a funded plan, closed to new members and was closed to future accrual in 2017. The valuation of the
plan was based on a full actuarial valuation as of 5 April 2016, updated at 31 December 2018 by independent actuaries.
GKN UK 2016 Pension Plan
The GKN UK 2016 Pension Plan is a funded plan, closed to new members with no active members, containing assets and liabilities in
respect of the pension schemes from various legacy GKN businesses. The valuation of the plan was based on a full actuarial valuation as
of 5 April 2016, updated to 31 December 2018 by independent actuaries.
GKN US Consolidated Pension Plan
The GKN US Consolidated Pension Plan is a funded plan, closed to new members and closed to future accrual. The US Pension Plan
valuation was based on a full actuarial valuation as of 1 January 2018, updated to 31 December 2018 by independent actuaries.
GKN Germany Pension Plans
The GKN Germany Pension Plans provide benefits dependent on final salary and service with the Company. The plans are generally
unfunded and closed to new members.
168
Notes to the Financial StatementsContinuedMelrose Industries PLCAnnual Report 2018 23. Retirement benefit obligations continued
Brush UK Pension Plan
The Brush Group (2013) (“Brush UK”) Pension Plan is a funded plan, closed to new members and closed to future accrual. The valuation
of the Brush UK Pension Plan was based on a full actuarial valuation as of 31 December 2016, updated to 31 December 2018 by
independent actuaries.
Other plans include a number of funded and unfunded defined benefit arrangements and retiree medical insurance plans, predominantly
in the US and Europe.
The cost of the Group’s defined benefit plans is 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 and Germany.
Contributions
The Group committed to contribute £150 million in total to the GKN UK 2012 and 2016 plans in the first 12 months of ownership, as well
as ongoing annual contributions of £60 million. In addition, the Group has committed to contribute £270 million upon the disposal of
Powder Metallurgy, 10% of the proceeds from disposal of other GKN businesses and 5% of the proceeds from disposal of non-GKN
businesses to the GKN UK pension plans. These commitments cease when the funding target which has been agreed with Trustees is
achieved, being gilts plus 25 basis points for the GKN UK 2016 plan and gilts plus 75 basis points for the GKN UK 2012 plan.
The Group contributed £102 million (2017: £4 million) to defined benefit pension plans and post-employment plans in the year ended
31 December 2018, including £56 million of the Melrose commitment to contribute £150 million to the GKN UK 2012 and 2016 plans
within the first 12 months of GKN ownership.
The Group expects to contribute £192 million to defined benefit pension plans and post-employment plans in 2019, consisting of £94 million
of one-off special payments, being the balance of the £150 million upfront commitment, and £98 million of ongoing commitments.
Actuarial assumptions
The major assumptions used by the actuaries in calculating the Group’s pension liabilities are as set out below:
31 December 2018
GKN UK – 2012 plan
GKN UK – 2016 plan
GKN US plans
GKN Europe plans
Brush UK plan
31 December 2017
Brush UK plan
Rate of increase
of pensions in
payment
% per annum
Discount rate
% per annum
Price inflation
% per annum
3.1
3.1
n/a
2.5
3.2
3.2
2.9
2.9
4.1
1.9
2.9
2.5
2.1
2.1
2.5
1.8
2.1
2.1
Mortality
GKN UK 2012 Pension Plan, GKN UK 2016 Pension Plan and the Brush UK Pension Plan
Mortality assumptions for all UK pension plans as at 31 December 2018 were based on the Self-Administered Pension Scheme (“SAPS”)
“S2” base tables. The Brush UK Pension Plan uses a scaling factor of 110%. The GKN UK 2012 scheme (and the small post-retirement
medical plan) use scaling factors of 96% for male and 85% for females. The GKN UK 2016 scheme uses scaling factors of 100% for male
and 91% for females.
Future improvements for all UK plans are in line with the 2017 Continuous Mortality Investigation (“CMI”) improvement model with a
long-term rate of improvement of 1.25% p.a. for both males and females.
GKN US Consolidated Pension Plan
The GKN US Consolidated Pension Plan uses RP2006 mortality tables, consistent with the plan’s most recent formal valuation
(1 January 2018). Other US plans also use RP2006 but in some cases the base table is adjusted to reflect scheme experience.
Future improvements for all US plans are in line with MP2018.
GKN Germany Pension Plan
All German plans use the Richttafein 2018 G tables, with no adjustment.
The following table shows the future life expectancy of individuals age 65 at the year-end and the future life expectancy of individuals aged
65 in 20 years’ time.
Male today
Female today
Male in 20 years’ time
Female in 20 years’ time
GKN UK 2012
Pension Plan
years
GKN UK 2016
Pension Plan
years
GKN US
Consolidated
Pension Plan
years
GKN Germany
Pension Plan
years
Brush UK
Pension Plan
years
22.3
25.1
23.7
26.6
22.0
24.6
23.4
26.1
19.7
21.7
21.3
23.3
20.0
23.6
22.8
25.8
21.3
23.2
22.7
24.7
169
Financial statementsAnnual Report 2018Melrose Industries PLC 23. Retirement benefit obligations continued
Balance Sheet disclosures
The amount recognised in the Consolidated 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 2018 were as follows:
Plan assets
Plan liabilities
Net liabilities
UK
Plans(1)
£m
2,791
(3,378)
(587)
US
Plans
£m
412
(565)
(153)
European
Plans
£m
29
(690)
(661)
31 December
2018
£m
31 December
2017
£m
(3,937)
3,273
(664)
(749)
(1,413)
Other
Plans
£m
41
(53)
(12)
(538)
524
(14)
(4)
(18)
Total
£m
3,273
(4,686)
(1,413)
(1) Includes a net deficit in respect of the GKN UK 2012 plan, GKN post-employment medical plans, and the Nortek UK plan and a surplus in respect of the Brush UK plan and the GKN UK 2016 plan.
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
Insurance contracts
Multi-strategy/Diversified Growth Funds
Private equity
Other
Total
31 December
2018
£m
31 December
2017
£m
639
802
524
147
181
781
140
59
3,273
231
138
114
10
–
–
–
31
524
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 are regularly reviewed.
170
Notes to the Financial StatementsContinuedMelrose Industries PLCAnnual Report 2018 23. Retirement benefit obligations continued
Movements in the present value of defined benefit obligations during the year:
At 1 January
Acquisition of businesses
Transfer to held for sale
Current service cost
Past service cost(1)
Interest cost on obligations
Remeasurement gains – demographic
Remeasurement (gains)/losses – financial
Remeasurement (gains)/losses – experience
Benefits paid out of plan assets
Benefits paid out of Group assets for unfunded plans
Settlements
Exchange adjustments
At 31 December
Year ended
31 December
2018
£m
Year ended
31 December
2017
£m
542
4,216
–
10
11
96
(7)
(77)
(1)
(159)
(17)
(1)
73
4,686
556
–
(1)
–
–
17
(6)
24
10
(33)
(1)
–
(24)
542
(1) An expense of £11 million has been recorded in the year ended 31 December 2018 as a past service cost in respect of the equalisation of guaranteed minimum pension (“GMP”) benefits in the UK.
This has been treated as an adjusting item (note 6).
The defined benefit plan liabilities were 31% (31 December 2017: 2%) in respect of active plan participants, 23% (31 December 2017: 47%)
in respect of deferred plan participants and 46% (31 December 2017: 51%) in respect of pensioners.
The weighted average duration of the defined benefit plan liabilities at 31 December 2018 was 16.6 years (31 December 2017: 14.8 years).
Movements in the fair value of plan assets during the year:
At 1 January
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
Settlements
Exchange adjustments
At 31 December
The actual return on plan assets was a loss of £49 million (2017: gain of £56 million).
Year ended
31 December
2018
£m
Year ended
31 December
2017
£m
524
2,847
72
(121)
85
(159)
(12)
(1)
38
3,273
522
–
16
40
3
(33)
(2)
–
(22)
524
171
Financial statementsAnnual Report 2018Melrose Industries PLC 23. Retirement benefit obligations continued
Income Statement disclosures
Amounts recognised in the Consolidated Income Statement in respect of these defined benefit plans were as follows:
Continuing operations
Included within operating profit:
– current service cost
– past service cost(1)
– plan administrative costs
Included within net finance costs:
– interest cost on defined benefit obligations
– interest income on plan assets
Year ended
31 December
2018
£m
Year ended
31 December
2017
£m
10
11
12
96
(72)
–
–
2
17
(16)
(1) An expense of £11 million has been recorded in the year ended 31 December 2018 as a past service cost in respect of the equalisation of guaranteed minimum pension (“GMP”) benefits in the UK.
This has been treated as an adjusting item (note 6).
Statement of Comprehensive Income disclosures
Amounts recognised in the Consolidated Statement of Comprehensive Income in respect of these defined benefit plans were as follows:
Return on plan assets, excluding interest income
Remeasurement gains arising from changes in demographic assumptions
Remeasurement gains/(losses) arising from changes in financial assumptions
Remeasurement gains/(losses) arising from experience adjustments
Net remeasurement (loss)/gain on retirement benefit obligations
Year ended
31 December
2018
£m
Year ended
31 December
2017
£m
(121)
7
77
1
(36)
40
6
(24)
(10)
12
Risks and sensitivities
The defined benefit plans expose the Group to actuarial risks, such as longevity risk, inflation 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 0.1 ppts
Decrease by 0.1 ppts
Increase by 0.1 ppts
Decrease by 0.1 ppts
Increase by 1 year
Decrease by 1 year
Decrease/
(increase) to plan
liabilities
£m
Increase/
(decrease) to
profit before tax
£m
68
(73)
(52)
51
(163)
159
1
(1)
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 are based on the relevant assumptions and membership profile as at 31 December 2018 and are applied to the obligations
at the end of the reporting period. Whilst the analysis does not take account of the full distribution of cash flows expected, it does provide
an approximation to the sensitivity of the assumptions shown. Extrapolation of these results beyond the sensitivity figures shown may not
be appropriate and the sensitivity analysis presented may not be representative of the actual change in the defined benefit obligation as it is
unlikely that the change in assumptions would occur in isolation of one another as some of the assumptions may be correlated.
172
Notes to the Financial StatementsContinuedMelrose Industries PLCAnnual Report 2018 24. Financial instruments and risk management
The table below sets out the Group’s accounting classification of each category of financial assets and liabilities and their carrying values
at 31 December 2018 and 31 December 2017:
Aerospace
£m
Automotive
£m
Powder
Metallurgy
£m
Nortek Air &
Security
£m
Other
Industrial
£m
Corporate
£m
Total
£m
31 December 2018
Financial assets
Classified as amortised cost:
Cash and cash equivalents
Net trade receivables
Contract assets
Classified as fair value:
Derivative financial assets
Foreign currency forward contracts
Interest rate swaps
Embedded derivatives
Financial liabilities
Classified as amortised cost:
Interest-bearing loans and borrowings
Government refundable advances
Finance lease obligations
Other financial liabilities
Classified as fair value:
Derivative financial liabilities
Foreign currency forward contracts
Interest rate swaps
Cross-currency swaps
Embedded derivatives
31 December 2017
Financial assets
Classified as amortised cost:
Cash and cash equivalents
Net trade receivables
Classified as fair value:
Derivative financial assets
Foreign currency forward contracts
Interest rate swaps
Financial liabilities
Classified as amortised cost:
Interest-bearing loans and borrowings
Other financial liabilities
Classified as fair value:
Derivative financial liabilities
Foreign currency forward contracts
–
837
584
–
–
18
–
(81)
(21)
(842)
–
–
–
(9)
–
–
–
–
–
–
–
–
458
12
–
–
–
–
–
(35)
(913)
–
–
–
–
–
–
–
–
–
–
–
–
177
–
–
–
–
–
–
–
(155)
–
–
–
–
–
–
–
–
–
–
–
–
193
–
2
–
–
–
–
(1)
(217)
(3)
–
–
–
–
208
1
–
–
170
–
1
–
–
–
–
–
(224)
(1)
–
–
–
–
90
1
–
415
–
–
12
8
–
(3,755)
–
–
(80)
(205)
(14)
(199)
–
16
–
4
8
(1)
(246)
–
(105)
(587)
(11)
415
1,835
596
15
8
18
(3,755)
(81)
(57)
(2,431)
(209)
(14)
(199)
(9)
16
298
6
8
(588)
(362)
–
(1)
–
(1)
173
Financial statementsAnnual Report 2018Melrose Industries PLC
24. Financial instruments and risk management continued
Fair values
The Directors consider that the financial assets and liabilities have fair values not materially different to the carrying values.
Credit risk
The Group’s principal financial assets were cash and cash equivalents, trade receivables, contract assets 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. Exposure is managed on the basis of risk rating and
counterparty limits. The value of credit risk in derivative assets has been modelled using publicly available inputs as part of their fair value.
The Group’s credit risk was therefore primarily attributable to its trade receivables and contract assets. 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 16 provides further details regarding the recovery of
trade receivables.
Capital risk
The Group manages its capital to ensure that entities in the Group will be able to continue as a going concern.
The capital structure of the Group as at 31 December 2018 consists of net debt, as disclosed in note 26, and equity attributable to the
owners of the parent, comprising issued share capital, reserves and retained earnings as disclosed in the Consolidated Statement of
Changes in Equity.
Liquidity risk management
Overview of banking facilities
A new multi-currency committed bank facility was entered into on 17 January 2018 to assist with the acquisition of GKN, which replaced
the previous bank facility of US$1.25 billion. The US$1.25 billion facility was repaid and cancelled on 30 April 2018. The new facility
included a £1.5 billion multi-currency term loan with a duration of three years and six months. In addition, the new facility included a
five-year multi-currency revolving credit facility, denominated £1.1 billion, US$2.0 billion and €0.5 billion.
On 29 October 2018, £663 million of the new term loan was surplus to requirements, and therefore cancelled, because change of control
clauses on the bonds were not exercised by the relevant bondholders.
At 31 December 2018 the drawings on the term loan were £100 million and US$960 million. There was a significant amount of headroom
on the multi-currency committed revolving credit facility, as at 31 December 2018. Applying the exchange rates at 31 December 2018 the
headroom equated to £1,352 million, which includes an amount available to replace the 2019 bond when it matures, or before. There are
also a number of uncommitted overdraft, guarantee and borrowing facilities made available to the Group. These uncommitted facilities
have been lightly used.
Cash, deposits and marketable securities amounted to £415 million at 31 December 2018 (31 December 2017: £16 million) and
are considered together with loans and borrowings to arrive at the Group net debt position of £3,482 million (31 December 2017:
£572 million), shown in note 26. The combination of this cash and the headroom on the new facility allows the Directors to consider
that the 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 cash on deposit.
Covenants
As with previous facilities the new facility has two financial covenants being a net debt to adjusted EBITDA covenant and an interest cover
covenant, both of which are tested half yearly in June and December.
The EBITDA covenant test 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 2018 it was 2.3x (31 December 2017: 1.9x), showing reasonable headroom compared to the
covenant test.
The interest cover covenant is set at 4.0x throughout the life of the facility and was 11.6x at 31 December 2018 (31 December 2017: 19.6x),
affording comfortable headroom compared to the covenant test.
174
Notes to the Financial StatementsContinuedMelrose Industries PLCAnnual Report 2018 24. Financial instruments and risk management continued
Bonds
The GKN net debt at acquisition included three capital market borrowings totalling £1.1 billion. The bonds maturing in 2019 and 2022 have
cross-currency swaps associated with them. Details are in the table below:
Maturity date
October 2019
September 2022
May 2032
Notional
amount
£m
350
450
Coupon
% p.a.
6.75%
5.375%
300
3.375%
Cross-currency
swaps
million
Interest rate
on swaps
% p.a.
US$578
US$373
€284
n/a
6.80%
5.70%
3.87%
n/a
The series of cross-currency swaps which were acquired with GKN had a fair value liability at the date of acquisition of £109 million.
At 31 December 2018 they were valued at a liability of £199 million, the rise being predominantly due to the change in foreign
exchange rates.
The bonds remain within the Group at 31 December 2018, but to simplify the corporate reporting requirements of the Group, the 2019
bonds were transferred onto the Professional Securities Market in September 2018 and the 2022 and 2032 bonds will transfer during
March 2019. Bond holders and rating agencies no longer require Consolidated Financial Statements for GKN Holdings Limited, but
instead will receive the detailed information they require from the Melrose Group Consolidated Financial Statements. The 2022 and 2032
bond holders will have the same guarantees from the Melrose Group companies as those provided to the banks lending in the new
bank facility.
The cross-currency swaps are designated as net investment hedges. The critical terms of the hedges are not perfectly matched against
the hedged item in terms of the cost of hedging; this gives rise to ineffectiveness through the Income Statement for the year ended
31 December 2018, and could also do so in future reporting periods.
In respect of the cross-currency swaps, for the year ended 31 December 2018, £16 million (31 December 2017: £nil) was booked
through the Income Statement in finance costs, of which £8 million has been treated as an adjusting item (note 6). In addition, there
is an £84 million charge in losses/gains on hedge relationships within Other Comprehensive Income in respect of hedge accounting
relationships. The cross-currency swaps are designated in a net investment hedge accounting relationship against US Dollar and Euro net
assets of certain subsidiaries. The hedged risk of spot rate represents the significant component of the movement and therefore has been
recorded in the hedging reserve.
Currency derivatives
The following table shows the maturity profile of undiscounted contracted gross cash outflows of derivative financial liabilities used to
manage currency risk, being both the cross-currency swaps above and foreign exchange forward contracts used to manage transaction
exchange rate risk:
Year ended 31 December 2018
Foreign exchange forward contracts – payments
Cross-currency swaps
Year ended 31 December 2017
Foreign exchange forward contracts – payments
0-1 years
£m
1-2 years
£m
2-5 years
£m
5+ years
£m
1,203
511
51
624
27
–
918
603
–
43
–
–
Total
£m
2,788
1,141
51
Working capital
The Group has a small number of uncommitted working capital programmes, which predominantly relate to the programmes inherited as
part of the GKN acquisition. These programmes provide favourable financing terms on eligible customer receipts and competitive
financing terms to suppliers on eligible supplier payments.
Businesses which participate in the receivables working capital programme have the ability to choose whether to receive payment earlier
than the normal due date, for specific customers on a non-recourse basis. Due to the short-term nature of the financing, the interest cost
to the Group for this beneficial cash flow is favourable compared to the interest cost of the Group’s committed bank facilities. As at
31 December 2018, the drawings on these facilities were £139 million, compared to £189 million by GKN as at 31 December 2017.
In addition, some suppliers have access to utilise the Group’s supplier finance programmes, which are provided by a small number of the
Group’s banks. There is no cost to the Group for providing these programmes to its suppliers. These arrangements do not change the
date suppliers are due to be paid by the Group, and therefore there is no additional impact on the Group’s liquidity. These programmes
allow suppliers to choose whether they want to accelerate the payment of their invoices, by the financing banks, for an interest cost which
is competitive, based off the rating of the Group as determined by the financing banks. The amounts owed to the banks are presented in
trade payables on the Balance Sheet and the cash flows are presented in cash flows from operating activities. As at 31 December 2018,
total facilities were £204 million with drawings of £97 million.
175
Financial statementsAnnual Report 2018Melrose Industries PLC
24. Financial instruments and risk management continued
Hedge of net investments in foreign entities using loans
Included in interest-bearing loans and borrowings at 31 December 2018, were the following amounts which were designated as
hedges of net investments in the Group’s subsidiaries in the US and Europe 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
Euro
31 December
2018
£m
31 December
2017
£m
1,118
363
462
–
The foreign exchange movement on these borrowings, which is recorded in currency translation on net investments within Other
Comprehensive Income was £54 million.
Finance cost risk management
The bank margin on the bank facility depends on the Group leverage, and ranges from 0.75% to 2.0% on the term loan, and 0.95% to
2.25% on the revolving credit facility. As at 31 December 2018 the margin was 1.4% on the term loan and 1.65% on the revolving credit
facility (31 December 2017: 1.35% on the Melrose committed bank debt).
The Group holds interest rate swap instruments to fix the cost of LIBOR. The policy of the Board is to hedge approximately 70% of the
interest rate exposure of the Group. Given the recent restructuring of the bonds and noting that the 2019 bonds mature this year, the
Group is in the process of increasing the interest rate swaps to be in line with Group policy from the current position of approximately
50%. Under the terms of the existing swap arrangements and excluding the bank margin, the Group will pay a weighted average fixed
cost of approximately 2% until the swaps terminate on 17 January 2023.
The average cost of the debt for the new enlarged Group is expected to be approximately 3.8% over the next 12 months.
The interest rate swaps are designated as cash flow hedges and were highly effective throughout 2018. The fair value of the contracts as
at 31 December 2018 was a liability of £6 million (31 December 2017: asset of £8 million). The net charge of £14 million for the year ended
31 December 2018 (2017: credit of £1 million) being the movement in the year, was booked to gains/losses on hedge relationships within
Other Comprehensive Income.
Due to some of the minor critical terms of the interest rate swaps and the hedged items not being perfectly matched, this could give rise
to ineffectiveness through the Income Statement in future periods. This is not expected to be material and no ineffectiveness was booked
through the Income Statement in the year ended 31 December 2018 (2017: £nil).
Interest rate sensitivity analysis
Assuming the net debt, inclusive of interest rate swaps, 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 decrease profit before tax by the following amounts:
Sterling
US Dollar
Euro
Year ended
31 December
2018
£m
Year ended
31 December
2017
£m
(10)
(4)
(1)
–
(1)
–
Exchange rate risk management
The Group trades in various countries around the world and is exposed to movements in a number of foreign currencies. The Group
therefore carries exchange rate risk that can be categorised into three types, transaction, translation and disposal related risk as described
in the paragraphs below. The Melrose 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 customer or purchases from suppliers in
a different currency to the underlying functional currency of the business. The Melrose policy is to review transactional foreign exchange
exposures and place contracts quarterly on a rolling basis. To the extent the cash flows associated with a transactional foreign exchange
risk are committed Melrose will hedge 100%. For forecast cash flows, Melrose hedges a proportion of the expected cash flows with the
percentage being hedged lowering as the time horizon lengthens. The average time horizons are longer for GKN Aerospace, GKN
Automotive and GKN Powder Metallurgy to reflect the long-term nature of the contracts within these divisions. Typically the Group hedges
around 90% of foreign exchange exposures expected over the next year, and approximately 60% to 70% of exposures between one and
two years. This policy does not eliminate the cash risk but does bring some certainty to it.
The translation rate risk is the effect on the Group results in the period due to the movement of exchange rates used to translate foreign
results into Sterling from one period to the next. No specific exchange instruments are used to protect against the translation risk because
it is a non-cash risk to the Group, unless foreign currency is converted to Sterling. However, the Group has debt drawn in Euros and
US Dollars, and the hedge of having debt drawn in these currencies funding the trading units with US Dollars or Euro functional currencies
protects against some of the Balance Sheet and banking covenant translation risk.
176
Notes to the Financial StatementsContinuedMelrose Industries PLCAnnual Report 2018 24. Financial instruments and risk management continued
Lastly, and potentially most significantly for Melrose, exchange rate 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 rate risk may arise
on conversion of foreign currency proceeds into Sterling, for instance to pay a dividend or Capital Return to shareholders. Protection
against this risk is considered on a case-by-case basis.
As at 31 December 2018, the Group held foreign exchange forward contracts to mitigate expected exchange rate fluctuations on future
cash flows from sales to customers and purchases from suppliers. A small proportion of these contracts have been designated as cash
flow hedges within the Nortek Air & Security and Other Industrial reporting segments. Contracts where hedge accounting was applied
had a fair value liability as at 31 December 2018 of £2 million (31 December 2017: asset of £5 million). These contracts all mature
between January 2019 and December 2019. The fair value of all foreign exchange forward contracts across the Group was a liability
at 31 December 2018 of £194 million (31 December 2017: asset of £5 million).
The change in fair value of foreign exchange forward contracts recognised in losses/gains on hedging relationships, net of recycling,
within Other Comprehensive Income was a charge of £1 million (2017: credit of £4 million).
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% strengthening of the US Dollar
and Euro 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
Year ended
31 December
2018
£m
Year ended
31 December
2017
£m
10
6
(2)
1
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% strengthening of the US Dollar and Euro against Sterling.
The analysis assumes that all other variables, in particular other foreign currency exchange rates, remain constant.
US Dollar
Euro
31 December
2018
£m
31 December
2017
£m
32
1
10
(2)
In addition, the change in equity due to a 10% strengthening of the US Dollar against Sterling for the translation of net investment hedging
instruments would be a decrease of £186 million (2017: decrease £51 million) and for Euro, a decrease of £62 million (2017: £nil). 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 and cross-currency swap contracts are measured using yield curves derived from quoted interest and foreign
exchange rates.
177
Financial statementsAnnual Report 2018Melrose Industries PLC 24. Financial instruments and risk management continued
Hedge accounted derivatives
The following table sets out details of the Group’s material hedging instruments where hedge accounting is applied at the balance sheet date:
Average fixed rate
Notional principal
Fair value assets/(liabilities)
Hedging Instruments
Pay fixed, receive floating interest rate swaps – assets
Within one year
In one to two years
In two to five years
After five years
Total
Pay fixed, receive floating interest rate swaps – liabilities
Within one year
In one to two years
In two to five years
After five years
Total
Pay fixed, receive fixed cross-currency swaps
Within one year
In one to two years
In two to five years
After five years
Total
2018
%
2017
%
0.96%
0.99%
0.93%
–
1.81%
2.37%
2.27%
–
5.65%
4.85%
4.85%
–
0.94%
0.95%
0.96%
–
–
–
–
–
–
–
–
–
2018
£m
393
303
228
–
379
946
1,301
–
1,001
548
548
–
2017
£m
428
376
256
–
–
–
–
–
–
–
–
–
Derivative and financial assets and liabilities are presented within the Balance Sheet as:
Non-current assets
Current assets
Non-current liabilities
Current liabilities
2018
£m
2017
£m
6
2
–
–
8
(1)
(3)
(10)
–
(14)
(101)
(3)
(95)
–
(199)
4
2
2
–
8
–
–
–
–
–
–
–
–
–
–
31 December
2018
£m
31 December
2017
£m
26
15
(227)
(204)
4
10
–
(1)
The change in fair value of interest rate swaps was a £14 million charge (2017: £1 million credit) which is discussed in the finance cost risk
management section.
All hedging instruments are booked in the Balance Sheet as derivative financial assets or derivative financial liabilities.
The fair value of derivative financial instruments is 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.
The following table sets out details of the Group’s material hedged items at the balance sheet date where hedge accounting is applied:
Hedged items
Floating rate borrowings – interest risk
Net assets of designated investments
Change in fair value for calculating
ineffectiveness
Balance in hedging reserve for
continuing hedges
2018
£m
14
237
2017
£m
(1)
–
2018
£m
6
84
2017
£m
(8)
–
There is no balance held in the cash flow hedge reserve from hedging relationships for which hedge accounting is no longer applied.
178
Notes to the Financial StatementsContinuedMelrose Industries PLCAnnual Report 2018 25. Issued capital and reserves
Share Capital
Allotted, called-up and fully paid
4,858,254,963 (31 December 2017: 1,941,200,503) Ordinary Shares of 48/7p each (31 December 2017: 48/7p each)
12,831 (31 December 2017: 12,831) 2017 Melrose Incentive Plan Shares of £1 each
31 December
2018
£m
31 December
2017
£m
333
–
333
133
–
133
The rights of each class of share are described in the Directors’ Report.
On 19 April 2018, 2,469 million ordinary shares were issued as a result of the acquisition of GKN. Further issues of share capital totalling
448 million took place between 19 April 2018 and 30 June 2018 in order to purchase the remaining non-controlling interest of GKN. The
total number of ordinary shares in issue therefore increased from 1,941 million at 31 December 2017 to 4,858 million at 31 December 2018.
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
and net investment 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.
26. Cash flow statement
Reconciliation of adjusted operating profit to cash generated by continuing operations
Adjusted operating profit(1)
Adjustments for:
Depreciation of property, plant and equipment
Amortisation of computer software and development costs
Share of adjusted operating profit of equity accounted investments
Restructuring costs paid and movements in provisions
Defined benefit pension contributions paid
Increase in inventories
Decrease in receivables
Decrease in payables
Acquisition costs and associated transaction taxes
Tax paid
Interest paid
Incentive scheme tax related payments
Net cash from operating activities
(1) See note 6 for reconciliation of operating loss to adjusted operating profit.
Note
6
Year ended
31 December
2018
£m
Year ended
31 December
2017
£m
847
238
44
(59)
(207)
(102)
(108)
181
(159)
(125)
(66)
(111)
–
373
279
31
4
–
(74)
(4)
(8)
8
(16)
(8)
(16)
(16)
(148)
32
Net debt reconciliation
Net debt consists of interest-bearing loans and borrowings (excluding any acquisition related fair value adjustments), cross-currency
swaps and cash and cash equivalents. Currency denominated balances within net debt are translated to Sterling at swapped rates where
hedged by cross-currency swaps.
Net debt is considered to be an alternative performance measure as it is not defined in IFRS. The most directly comparable IFRS measure
is the aggregate of interest-bearing loans and borrowings (current and non-current) and cash and cash equivalents.
179
Financial statementsAnnual Report 2018Melrose Industries PLC 26. Cash flow statement continued
A reconciliation from the most directly comparable IFRS measure to net debt is given below:
Interest-bearing loans and borrowings – due within one year
Interest-bearing loans and borrowings – due after one year
External debt
Less:
Cash and cash equivalents
Adjustments:
Impact of cross-currency swaps
Non-cash acquisition fair value adjustments
Net debt
The table below shows the key components of the movement in net debt:
31 December
2018
£m
31 December
2017
£m
(377)
(3,378)
(3,755)
415
(3,340)
(199)
57
(3,482)
–
(588)
(588)
16
(572)
–
–
(572)
At 31 December
2017
£m
Cash flow
£m
Acquisitions
£m
Other non-cash
movements
£m
Effect of foreign
exchange
£m
At 31 December
2018
£m
(588)
–
–
(588)
16
(572)
(1,732)
10
–
(1,722)
1,802
80
(1,430)
(109)
73
(1,466)
(1,401)
(2,867)
49
(16)
(16)
17
–
17
(54)
(84)
–
(138)
(2)
(140)
(3,755)
(199)
57
(3,897)
415
(3,482)
External debt
Impact of cross-currency swaps
Non-cash acquisition fair value adjustments
Cash and cash equivalents
Net debt
27. Commitments and contingencies
Amounts payable under finance leases:
Present value of minimum lease payments
Amounts payable:
Within one year
After one year but within five years
Over five years
Present value of lease obligations
Minimum lease payments
Amounts payable:
Within one year
After one year but within five years
Over five years
Less: future finance charges
Present value of lease obligations
Analysed as:
Amounts due for settlement within one year (shown within current liabilities)
Amount due for settlement after one year
Present value of lease obligations
31 December
2018
£m
31 December
2017
£m
5
22
30
57
–
–
–
–
31 December
2018
£m
31 December
2017
£m
8
28
48
(27)
57
5
52
57
–
–
–
–
–
–
–
–
It is the Group’s policy to lease certain of its property, plant and equipment under finance leases. The average lease term is ten years.
Interest rates are fixed at the contract date. All leases are on a fixed repayment basis and no arrangements have been entered into for
contingent rental payments.
180
Notes to the Financial StatementsContinuedMelrose Industries PLCAnnual Report 2018 27. Commitments and contingencies continued
The Group’s obligations under finance leases are secured by the lessors’ rights over the leased assets.
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
2018
£m
31 December
2017
£m
94
296
320
710
18
48
31
97
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 2018, there were commitments of £137 million (31 December 2017: £9 million) relating to the acquisition of new plant
and machinery.
28. Related parties
Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not
disclosed in this note.
In the ordinary course of business sales and purchases of goods take place between subsidiaries and equity accounted investment
companies priced on an arm’s length basis. Sales by subsidiaries to equity accounted investments in the year ended 31 December 2018
totalled £28 million (2017: £nil). Purchases by subsidiaries from equity accounted investments in the year ended 31 December 2018
totalled £14 million (2017: £nil). At 31 December 2018, amounts receivable from equity accounted investments totalled £6 million
(31 December 2017: £nil) and amounts payable to equity accounted investments totalled £2 million (31 December 2017: £nil).
Sales to and purchases from Group companies are priced on an arm’s length basis and generally are settled on 30-day terms.
Remuneration of key management personnel
The remuneration of the Directors, who are the key management personnel of the Group, is set out below in aggregate for each of the
categories specified in IAS 24: “Related party disclosures”. Further information about the remuneration of individual Directors is provided in
the audited part of the Directors’ Remuneration Report on page 96.
Short-term employee benefits
Share-based payments
Year ended
31 December
2018
£m
Year ended
31 December
2017
£m
3
9
12
3
7
10
29. Post Balance Sheet events
On 6 March 2019 the Group announced the agreement to sell the Walterscheid Powertrain Group to One Equity Partners, a US-based
private equity firm. In addition the Group announced the completion of the sale of the minority 43.57% interest in Société Anonyme Belge
de Constructions Aéronautiques (“SABCA”), previously held within the Aerospace reporting segment, to SABCA’s majority shareholder,
Dassault Belgique Aviation S.A. The sale of the Walterscheid Powertrain Group is subject to the customary regulatory conditions and is
expected to complete in the first half of this year. The combined net proceeds of the sales are approximately £200 million.
30. Contingent liabilities
As a result of acquisitions made by the Group, certain contingent legal and warranty liabilities have been identified as part of the fair value
review of these acquisition Balance Sheets. 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 20.
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.
181
Financial statementsAnnual Report 2018Melrose Industries PLC Company Balance Sheet for Melrose Industries PLC
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
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
2018
£m
31 December
2017
£m
Notes
3
4
4
5
6
7
10,569
2,213
400
25
(1,773)
(1,348)
9,221
(1)
9,220
333
8,138
109
640
9,220
–
25
(192)
(167)
2,046
–
2,046
133
1,493
109
311
2,046
The Company reported a profit for the financial year ended 31 December 2018 of £445 million (2017: loss of £21 million).
The financial statements were approved by the Board of Directors on 7 March 2019 and were signed on its behalf by:
Geoffrey Martin
Group Finance Director
7 March 2019
Registered number: 09800044
Simon Peckham
Chief Executive
7 March 2019
Company Statement of Changes in Equity
At 1 January 2017
Loss for the year (note 2)
Total comprehensive expense
Dividends paid
Equity-settled share-based payments
Incentive scheme related
Deferred tax on share-based payment transactions
At 31 December 2017
Profit for the year (note 2)
Total comprehensive income
Dividends paid
Acquisition of GKN(1)
Equity-settled share-based payments
At 31 December 2018
Issued share
capital
£m
Share premium
account
£m
Merger
reserve
£m
Retained
earnings
£m
Shareholders’
funds
£m
129
–
–
–
–
4
–
133
–
–
–
200
–
333
1,493
–
–
–
–
–
–
1,493
–
–
–
6,645
–
8,138
112
–
–
–
–
(3)
–
109
–
–
–
–
–
109
476
(21)
(21)
(63)
10
(116)
25
311
445
445
(129)
–
13
640
2,210
(21)
(21)
(63)
10
(115)
25
2,046
445
445
(129)
6,845
13
9,220
(1) Relates to purchase of the issued share capital of GKN plc. The amount recognised within the share premium account for the acquisition of GKN of £6,645 million is net of £1 million for costs
associated with issuing shares.
182
Melrose Industries PLCAnnual Report 2018 Notes to the Company Balance Sheet
1. Significant accounting policies
Basis of accounting
Melrose Industries PLC (“the Company”) is a public company limited by shares. The Company is incorporated in the United Kingdom
under the Companies Act 2006 and registered in England and Wales. 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 10 to 69.
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 48 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.
183
Financial statementsAnnual Report 2018Melrose Industries PLC Notes to the Company Balance Sheet
Continued
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. Profit 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 profit for the financial year ended 31 December 2018 of £445 million (2017: loss of £21 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 92 to 112. There were no other employees of the
Company in the year.
3.
Investment in subsidiaries
At 1 January 2018
Additions
At 31 December 2018
£m
2,213
8,356
10,569
During the year, the Company acquired 100% of the issued share capital of GKN plc resulting in an increase in investments of
£8,351 million. In addition, a £5 million investment from equity-settled share-based payments for subsidiaries is included in investment
in subsidiaries at 31 December 2018.
184
Melrose Industries PLCAnnual Report 2018 Investment in subsidiaries continued
3.
The following subsidiaries and significant holdings were owned by the Company as at 31 December 2018:
Equity
interest %
Class of
Share held
Equity
interest %
Class of
Share held
Argentina
Corrientes Avenue 311, 7, Capital Federal, 1043
Nordyne Argentina SRL
Avenida Del Libertador 602, 4’ Piso,
Buenos Aires
Transmisiones Homocineticas Argentinas SA
(in liquidation)
Australia
2 Fawley Avenue, Narangba,
Queensland, 4504
Bristol Meci Australasia Pty Limited
Hawker Siddeley Switchgear Pty Limited
45-49 McNaughton Road,
Clayton Victoria 3168
Unidrive Pty Ltd
c/o Baker & McKenzie, Level 27, AMP Centre,
50 Bridge Street, Sydney, NSW 2000
Ergotron Australia Pty Ltd
Austria
Slamastrasse 32, Postfach 36, 1230 Wien
GKN Service Austria GmbH
Belgium
Robert Klingstraat 96A, 8940 Wervik
Nortek Global HVAC Belgium NV
Chaussée de Haecht 1470, B – 1130 Brussels
Société Anonyme Belge de Constructions
Aéronautiques
Brazil
Cicada de Vitoria, Estado do Espiriot Santo,
na Av. Nossa, Senhora da Penha, 520,
Sala 404, Praia do Canto, 29055-131
Nordyne do Brasil Distribuidora de Ar
Condicionado Ltda
Av. Alfredo Ignácio Noqueira Penido, 335 –
Sala 1103 – Edifício Madison Power,
São José dos Campos, SP, 12246-000
GKN Aerospace Transparency Systems
do Brasil Ltda
Rua Joaquim Silveira 557, Parque Sao
Sebastiao, 91060-320 Porto Alegre, RS
GKN do Brasil Ltda
Av. da Emancipacao no. 4.500,
CEP 13.184-542, Bairro Santa Esmeralda,
Hortolandia, Sao Paulo
GKN Sinter Metals Ltda
Av. Sargento Geraldo Santana, 154,
04674-225, Sao Paulo, SP
GKN Brasil Equipamentos Ltda
British Virgin Islands
Wickhams Cay 1, P.O. Box 3140,
Road Town, Tortola
Nortek Trading Limited
Canada
19 rue des Mésanges, Montréal,
Québec H3E 1W2
Brush Canada Services Inc./Services Brush
Canada Inc.
44 Chipman Hill, Suite 100, Saint John,
New Brunswick E2L 2A9
2GIG Technologies Canada, Inc.
100
Ordinary
49 Ordinary B(1)
100
100
Ordinary
Ordinary
100
Ordinary
100
Ordinary
100
Ordinary
100
Ordinary
43.57
Ordinary
100 Quota capital
100 Quota capital
100 Quota capital
99.99 Quota capital
100 Quota capital
100
Ordinary
100
Common
Stock
100
Ordinary
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.
1900, 520 3rd Avenue, Calgary, AB t2P 0R3
Venmar Ventilation ULC
1635 rue Blueberry Forest, Saint-Lazare
Québec, J7T2J9
Fokker Elmo Canada Inc
7 Michigan Boulevard, St. Thomas,
Ontario, Canada
GKN Sinter Metals – St. Thomas, Ltd.
China
8 Changhong Road, Changshu Economic
Development Zone, Jiangsu Province, 215500
Brush Electrical Machines (Changshu) Co. Limited
2025, 2031, 1st Floor, Building C, No.155 West
Fute Road One, Shanghai Waigaoqiao Bonded
Area, China (Shanghai) Free Trade Pilot Zone
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
Room 2913&2914 TaiShang Building,
Dongguan Road 11#, Dongcheng, Guangdong
Dongguan Ergotron Precision Technology Design
Services Co Limited
3/F, Building A5, Anle Industrial Zone,
Hangcheng Ave, Baoan District,
Shenzhen City, China
Linear Electronics (Shenzhen) Co Limited
Room 28D2, 895 Yan’an West Road,
Changning District, Shanghai
Nortek (Shanghai) Trading Co Limited
No 71 Xiangyun Road, Langfang Economic
& Technical Development Zone, Langfang
Fokker Elmo (Langfang) Electrical Systems Co. Ltd
On the north of 1500 meters, Wuping Dong
Road, Shengfang Town, Bazhou City,
Hebei Province
GKN (Bazhou) Metal Powder Company Limited
Unit A, 6/F, Building A1#, No. 2555 Xiupu Road,
Pudong New Area, Shanghai, 201315, China
GKN China Holding Co Ltd
18 North Shitan Road, North Industrial Park,
Development Zone, Danyang, Jiangsu 212310,
China
GKN Danyang Industries Company Limited
100
Ordinary
100
Ordinary
100
Ordinary
100
Ordinary
100
Ordinary
100
100
Common
stock
Common
stock
100
Registered
investment
100
Ordinary
100
Ordinary
100
Ordinary
100
Ordinary
100
Ordinary
100
Ordinary
100
Registered
investment
Registered
investment
40
100
Registered
investment
100
Registered
investment
185
Financial statementsAnnual Report 2018Melrose Industries PLC Notes to the Company Balance Sheet
Continued
3.
Investment in subsidiaries continued
Equity
interest %
Class of
Share held
No. 1 Cuigu, Northern New Zone,
Chongqing, 401122
GKN HUAYU Driveline Systems (Chongqing) Co. Ltd
928 JingDu Road, Donghai Economic
Development Zone, Jiangsu, 222300 China
GKN (Lianyungang) Company Limited
No. 7 Liutai Road, Liuzhou, Guangxi, 545007
GKN Power Solutions (Liuzhou) Company Limited
No. 8 Kangming Road, Industrial Automotive
Park, Yizhenb City, Jiangsu 21400, China
GKN Sinter Metals Yizheng Co Ltd
188 East Guangzhou Road, Taicang Economic
Development Area, Jiangsu Province
GKN (Taicang) Co Ltd
Xiguo Industrial Zone, Mengzhou City,
Henan Province, 454750
GKN Zhongyuan Cylinder Liner Company Limited
17 Zhongshan Road, Yong Yang County,
Lishui District, Nanjing
Nanjing FAYN Piston Ring Company Limited
898 Kangshen Road, Pudong, Shanghai
Shanghai GKN Driveline Sales Co Ltd
950 KangQiao Road, Pudong New Area,
Shanghai
Shanghai GKN HUAYU Driveline Systems
Company Limited
Building 48, 128 Dieqiao Road, Kangqiao
Industrial Zone, Pudong, Shanghai, 201315
Shanghai GKN HUAYU Driveline Systems Torque
Technology Company Limited
Suite 805, Block 2, BaoWu Plaza, 1859 Shibo
Avenue, Shanghai, 200126, China
GKN Aerospace (Shanghai) Co., Ltd
Colombia
1301, 13/F Bank of America Tower,
12 Harcourt Road, Central
MiOS Colombia
Calle 32 No. 15 – 23 Barrio Rincon de Girón,
Girón Santander
Transejes Transmisiones Homocineticas
de Colombia SA
Czech Republic
Edvarda Beneše 564/39, Doudlevce,
301 00 Plzen
Brush SEM s.r.o.
Denmark
Baldershøj 11, 2635 Ishøj
GKN Walterscheid Service & Distribution A/S
Nagbølvej 31, 6640 Lunderskov
GKN Wheels Nagbol A/S
France
Boulevard De L Europe, 91000 Evry, France
Arianespace Participation S.A.
12 Quai du Commerce 69009 Lyon
Ergotron France SARL
Z.I. de Rosarge, 230, rue de la Dombes,
Les Echets, 01706 Miribel Cedex, Lyon
Nortek Global HVAC France SAS
20 rue Lavoisier, 95300 Pontoise
Automotive Group Services SARL
7 rue de la Briqueterie, 02240 Ribemont
GKN Driveline Ribemont SARL
186
Registered
investment(2)
9
100
100
Registered
investment
Registered
investment
100
Registered
investment
100
Registered
investment
Registered
investment
59
19.79
Registered
investment
Registered
investment
49
Registered
investment
50
100
Registered
investment
100
Registered
investment
42
Ordinary
49
Ordinary
100
Ordinary
100
Ordinary
100
Ordinary
1.6110
Ordinary
100
Ordinary
100
Ordinary
100
Ordinary
100
Ordinary
100 Avenue Vanderbilt, 78955
Carrieres-sous-Poissy
GKN Automotive SAS
GKN Driveline SA
GKN Freight Services EURL
8 rue Panhard et Levassor, Ecoparc des
Cettons, 78570, Chanteloup-les-Vignes
GKN Service France SAS
765 rue Albert Einstein, CS 70402,
13591 Aix-en-Provence Cedex 3
NH Industries SAS
Germany
Teichhorn 4-6, 24119, Kronshagen
Ergotron Deutschland GmbH
Brunhamstr. 21, 81249, Munich
GKN Aerospace Deutschland GmbH
Carl-Legien-Strasse 10,
63073 Offenbach am Main
GKN Driveline Deutschland GmbH
Hauptstrasse 130, 53797 Lohmar
GKN Driveline International GmbH
Hafenstrasse 41, 54293 Trier
GKN Driveline Trier GmbH
Nussbaumweg 19-21 51503, Rösrath, Germany
GKN Driveline Service GmbH
Opelkreisel 1-9, 67663 Kaiserslautern
GKN Gelenkwellenwerk Kaiserslautern GmbH
Krebsoege 10, 42477 Radevormwald
GKN Powder Metallurgy Holding GmbH
Nussbaumweg 19-21, 51503 Roesrath
GKN Service International GmbH
Pennefeldsweg 11-15, 53177, Bonn
GKN Sinter Metals Components GmbH
Krebsoege 10, 42477 Radevormwald
GKN Sinter Metals Engineering GmbH
Dahlienstrasse 43, 42477 Radevormwald
GKN Sinter Metals Filters GmbH Radevormwald
Industriestr. 1, 97769 Bad Brückenau
GKN Sinter Metals & Forge Operations GmbH
Am Fliegerhorst 9, 99947 Bad Langensalza
GKN Sinter Metals GmbH, Bad Langensalza
Alte Bautzener Strasse 1-3,
02689 Sohland/Spree
GKN Walterscheid Getriebe GmbH
Hauptstrasse 150, 53797 Lohmar
GKN Walterscheid GmbH
Peterstrasse 69, 42499 Hueckeswagen
Hoeganaes Corporation Europe GmbH
Nymhenburger Str. 3c, D-80335, München
Gefen Europe GmbH
Hong Kong
28/F Bank of East Asia Harbour View Center,
56 Gloucester Road, Wanchai
Broan-NuTone (HK) Limited
19F Hounor Industrial Centre, 6 Sun Yip Street,
Chai Wan, Hong Kong
Linear HK Manufacturing Limited
Citicorp Centre, STE 1607-8, 18 Whitfield
Road, Causeway Bay, Hong Kong
MiOS Limited
Equity
interest %
Class of
Share held
100
99.99
100
Ordinary
Ordinary
Ordinary
100
Ordinary
5.5
Ordinary
100
Ordinary
100
Ordinary
100
Ordinary
100
Ordinary
100
Ordinary
100
Ordinary
100
Ordinary
100
Ordinary
100
Ordinary
100
Ordinary
100
Ordinary
100
Ordinary
100
Ordinary
100
Ordinary
100
Ordinary
100
Ordinary
100
Ordinary
100
Ordinary
100
Ordinary
100
Ordinary
42
Ordinary
Melrose Industries PLCAnnual Report 2018 3.
Investment in subsidiaries continued
Equity
interest %
Class of
Share held
Equity
interest %
Class of
Share held
India
Block 2A No. 311, NPR Complex. Survey No
197, Hoody Village, K R Puram Hobli, Whitefield
Road, Bangalore – 560048, Karnataka
Fokker Elmo SASMOS Interconnection
Systems Limited
270, Sector-24, Faridabad 121 005, Haryana
GKN Driveline (India) Limited
146 Mumbai Pune Road, Pimpri, Pune 411 018
GKN Sinter Metals Private Limited
Shop No. 002, Lumkad Sky Vista,
S. No. 230/AViman Naga/3/2, Viman Nagar,
Pune, Maharashtra, 411014
GKN Fokker Elmo India Private Limited
135, 2nd Floor, RMZ Titanium,
Old Airport Road, Bengaluru, 560 017
GKN Aerospace Engine Systems India Private Limited
214 Navi Peth (Sadashiv Peth), L.B.S. Marg,
Tal Haveli District, Pune, 411030, India
IntelliVision Technologies
Iran
N° 9, Yas Alley Fath St, Sadr Express Way,
1939753151 Tehran, Iran
GKN Driveline Beshel Private Joint Stock
Company
Ireland
3rd Floor, Kilmore House, Park Lane,
Spencer Dock, Dublin, Ireland
Nortek Air Solutions (Ireland) Limited
Isle of Man
Tower House, Loch Promenade,
Douglas, IM1 2LZ
Ipsley Insurance Limited
Italy
Via dei Campi della Rienza 8,
39031 Brunico, BZ, Italy
GKN Driveline Brunico SpA
Via Fratelli Cervi 1, 50013 Campi Bisenzio,
FI, Italy
GKN Driveline Firenze SpA
Via dei Campi della Rienza 8, 39031 Brunico,
BZ, Italy
GKN Italia SpA
Via G. Ferraris 125/C 20021 Bollate, MI, Italy
GKN Service Italia SpA
Via Delle Fabbriche 5, 39031 Brunico, BZ, Italy
GKN Sinter Metals SpA
Viale Santa Maria 76, 25013 Carpenedolo,
BS, Italy
GKN Wheels Carpenedolo SpA
Zona industriale Est 1 39035 Monguelfo BZ, Italy
Walterscheid Monguelfo SpA
Japan
Shiroyama Trust Tower, 4-3-1, Toranomon,
Minatuo-ku, Tokyo
Ergotron Japan KK
2388 Ohmiya-cho, Tochigi City,
328-8502 Tochigi
GKN Driveline Japan Ltd
2388 Ohmiya-cho, Tochigi City,
328-8502 Tochigi
GKN Driveline Tochigi Holdings KK
49
Ordinary
97.03
Ordinary
100
Ordinary
100
Ordinary
100
Ordinary
100
Ordinary
59.995
Ordinary
100
Ordinary
100
Ordinary
100
Ordinary
100
Ordinary
100
Ordinary
100
Ordinary
100
Ordinary
100
Ordinary
100
Ordinary
100
Ordinary
100
Ordinary
100
Ordinary
21-15 Azusawa 2-chome, Itabashi-ku,
Tokyo 174 (4)
Matsui-Walterscheid Ltd
Senri Life Science Centre Building. 12F, 1-4-2
Shin Senri Higashi-machi, Toyonaka-shi, Osaka
GKN Powder Metallurgy Japan K.K.
Jersey
13 Castle Street, St Helier, JE4 5UT
GKN Finance Limited
Korea
Foreign Investors Industrial Park, 2 Ro,
3 Kongdan, Subuk- gu, Choongnam-do, 330-220
GKN Driveline Korea Limited
Malaysia
Boardroom Corporate Services (KL) SDN. BHD.
LOT 6.05, Level 6 KPMG Tower 8 First Avenue,
Bandar Utama, 47800 Petaling Jaya, Selangor
GKN Engine Systems Component Repair Sdn Bhd.
2445 Lorong Perusahaan Enam B, Kawasan
Perindustrian Prai 13600 Prai, Penang
GKN Driveline Malaysia Sdn Bhd
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
Rodolfo González #100, Col. Jardines La
Victoria, Guadalupe, Nuevo Leon, Mexico,
Zip Code 67119
Nortek Global HVAC Mexico S. de RL de CV
Tabalaopa #8301, Parque Industrial, Chihuahua
FAE Aerostructures SA de CV
Av. CFE No. 709, Parque Industrial Millennium,
San Luis Potosi S.L.P 78395
GKN Aerospace San Luis Potosi S. de R.L. de C.V.
(in liquidation)
Carretera Panamericana km 284, Celaya,
Guanajuato, C.P. 38110
GKN Driveline Celaya SA de CV
GKN Driveline Mexico Services SA de CV
GKN Driveline Mexico Trading SA de CV
Carretera Alterna Celaya Villagrán Km 11, Col.
El Pintor, Villagrán, Guanajuato, C.P. 38260
GKN Driveline Villagran SA de CV
Av. Constituyentes Pte. 206, El Jacal,
Queretaro, C.P. 76187
GKN Sinter Metals Mexico S. De. R.L. De. C.V.
GKN Sinter Metals Mexico (Services)
S. De. R.L. De. C.V.
Calle Profesor Rodolfo Gonzalez 100, Colonia
Jardines de la Victoria, Guadalupe, Nuevo
Leon, C.P. 67119
Manufactura e Innovacion Monterrey,
S. de R.L. de C.V.
Herminia Castro de Agiurre 1805-8, Parque
Industrial Amistad Aeropuerto, Ramos Arizpe,
Coahila, 25900
Manufacturas Avanzadas Ramsal,
S. de. R.L. de C.V.
40
Common
stock
100
Ordinary
100
Ordinary
100
Common
stock
100
Ordinary
68.42
Ordinary
26
Ordinary
100
Ordinary
100
Ordinary
100
Ordinary
100
Fixed equity
99.68
98
98
Ordinary
Ordinary
Ordinary
98
Ordinary
100
Ordinary
100
Ordinary
Membership
interest
100
Membership
interest
100
187
Financial statementsAnnual Report 2018Melrose Industries PLC Notes to the Company Balance Sheet
Continued
3.
Investment in subsidiaries continued
Equity
interest %
Class of
Share held
The Netherlands
Beeldschermweg 3, 3821 AH Amersfoort
Ergotron Nederland BV
Ringdijk 390B, 2983 GS, Postbus 3007,
2980 DA, Ridderkerk
Brush HMA BV
Strawinskylaan 3127 8e Verdiepin,
Amsterdam, Noord-Holland, 1077 ZX
Nortek Holding BV
Nortek International Holdings BV
Aviolandalaan 37, 4631 RP, Hoogerheide
Business Park Aviolanda B.V.
Industrieweg 4, 3351 LB, Papendrecht
Cooperative Delivery of Retrokits (CDR) V.O.F.
Markt 22, 3351 PB, Papendrecht, Netherlands
Fabriek Slobbengors Beheer B.V.
Fabriek Slobbengors C.V.
Hoofdkantoor Slobbengors Beheer B.V.
Kantoor Industrieweg C.V.
Aviolandalaan 31, 4631 RP, Hoogerheide,
Netherlands
Fokker Aircraft Services B.V.
Fokker Techniek BV
Aviolandalaan 33, Hoogerheide, 4631 RP,
Netherlands
Fokker Elmo B.V.
Grasbeemd 28, 5705 DG, Helmond,
Netherlands
Fokker Landing Gear B.V.
Industrieweg 4, 3351 LB, Papendrecht,
Netherlands
Fokker Procurement Combination B.V.
Structural Laminates Industries B.V.
Fokker Technologies Group B.V.
Fokker Technologies Holding B.V.
Fokker Technology B.V.
GKN Aerospace Netherlands B.V.
Fokker Engineers & Contractors B.V.
Fokker Aerospace B.V.
Fokker Aerostructures B.V.
Fokker (CDR) B.V.
Hoeksteen 40, 2132 MS, Hoofddorp,
Netherlands
Fokker Services B.V.
Haarlemmerstraatweg 153-157, 1165 MK
Halfweg, Netherlands
GKN Service Benelux BV
PO BOX 55 Ipsley House, Ipsley Church Lane,
Redditch, Worcestershire, United Kingdom,
B98 0TL
GKN UK Holdings BV
Norway
Kirkegårdsveien 45, 3616 Kongsberg
GKN Aerospace Norway AS
Kongsberg Technology Training Centre AS
Kongsberg Terotech AS
Poland
Ul. B. Krzywoustego 31 G, 56-400 Oles´nica,
GKN Driveline Polska Sp z o o
188
Al. Katowicka 33, 05-830, Nadarzyn
GKN Service Polska Sp. z o.o (in liquidation)
Romania
Str. Condorilor 9, 600302, Bacau
FOAR S.R.L.
Hermes Business Campus, Dimitrie Pompeiu
Blvd 5-7, Building 2, 3rd floor Bucharest
020337 RO, Bucures‚ti 077190
Fokker Engineering Romania S.R.L.
33 Urziceni Street, Buzau 120226 Romania
Hoeganaes Corporation Europe SA
Russian Federation
The Land Plot No.3, Building No.4, Roadway
No.2, Territory of OEZ IPT, Podstepki Village,
Stavropolsky District, Samara Region,
Podstepki Village, 445143
GKN Driveline Togliatti LLC
Office 21K, Building 19, Leninskaya Sloboda
Street, 115280, Moscow
GKN Engineering (RUS) LLC
Nizhniy Novgorod, 77 Ulitsa Gorkogo,
Premises P6, Russian Federation
IntelliVision Limited
Saudi Arabia
P.O. Box 2091, Riyadh 11451
Huntair Arabia
Singapore
1800 West Camp Road, Seletar Aerospace Park
Fokker Services Asia Pte Ltd
10 Eunos Road 8, #13-06, Singapore Post
Centre, 408600
GKN Driveline Singapore Pte Ltd
38 Beach Road #29-11, South Beach Tower,
Singapore 189767
Nortek Air Solutions Pte. Ltd
Slovenia
Rudniska cesta 20, Zrece 3214
GKN Driveline Slovenija d o o
Spain
Pol. Ind. Can Salvatella, Avenida Arrahona
54-56, 08210 Barbera del Valles, Barcelona
GKN Ayra Servicio, SA
Avenida de Citroen s/n, 36210 Vigo
GKN Driveline Vigo, SA
Sagarbidea 2, 20750 Zumaia
GKN Driveline Zumaia, SA
Polígono Industrial s/n, Maçanet de la Selva,
17412 Girona
Stork Prints Iberia SA
C/ Garzas 10, Apinto 28 Madrid
Off-Highway Powertrain Service Spain SL
Sweden
SE – 461 81, Trollhättan
GKN Aerospace Sweden AB
GKN Sweden Holdings AB
SE – 731 36, Köping
GKN Driveline Köping AB
Alfred Nobels allé 110, 14621, Tullinge
GKN Driveline Service Scandinavia AB
GKN Shafts and Services AB
100
Ordinary
100
Ordinary
100
100
Ordinary
Ordinary
20
50
49
49
49
49
Ordinary
Registered
investment
Ordinary
Registered
investment
Ordinary
Registered
investment
100
100
Ordinary
Ordinary
100
Ordinary
100
Ordinary
100
100
100
100
100
100
100
100
100
100
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
100
Ordinary
100
Ordinary
100
Ordinary
100
33.33
50
Ordinary
Ordinary
Ordinary
100
Ordinary
Equity
interest %
Class of
Share held
100
Ordinary
49
Ordinary
100
Ordinary
100
Ordinary
100
Ordinary
100
Ordinary
100
Ordinary
49
Ordinary
100
Ordinary
100
Ordinary
100
Ordinary
100
Ordinary
100
Ordinary
100
Ordinary
100
Ordinary
100
Ordinary
100
Ordinary
100
100
Ordinary
Ordinary
100
Ordinary
100
100
Ordinary
Ordinary
Melrose Industries PLCAnnual Report 2018 3.
Investment in subsidiaries continued
581 88 Linköping
Industrigruppen JAS AB
Taiwan
14 Kwang Fu Road, Hsin-Chu Industrial Park,
Hukou, Hsin Chu 30351
Taiway Limited
Thailand
9/21 Moo 5, Phaholyothin Road Klong 1,
Klong Luang, Patumthanee, 12120
GKN Aerospace Transparency Systems (Thailand)
Limited
Eastern Seaboard Industrial Estate, 64/9 Moo
4, Tambon Pluakdaeng, Amphur Pluakdaeng,
Rayong 21140
GKN Driveline (Thailand) Limited
Turkey
Ege Serbest Bölgesi, SADI Sok. No:10, 35410
Gaziemir, Izmir
Fokker Elmo Havacilik Sanayi Ve Ticaret
Limited Sirketi
Organize Sanayi Bölgesi 20, Cadde No: 17,
26110, Eskisehir
GKN Eskisehir Automotive Products Manufacture
and Sales A.S.
Istanbul AHL Serbest Bölgesi, Yesilkoy SB
Mah. Havalimani Cd. L2 Blok Sokak No:1,
34149 Yesilkoy, Bakirkoy, Istanbul, Turkey
GKN Sinter Istanbul Metal Sanayi Ve Ticaret
Anonim S‚irketi
United Kingdom
11th Floor, The Colmore Building, 20 Colmore
Circus Queensway, Birmingham, B4 6AT
Alcester Capricorn
Alcester EP1 Limited
Alcester Number 1 Limited
Alder Miles Druce Limited
Ambi-Rad Group Limited
Ball Components Limited
Birfield Limited
British Hovercraft Corporation 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
Equity
interest %
Class of
Share held
20
Ordinary
36.25
Common
Stock
100
Ordinary
100
Ordinary
100
Ordinary
100
Ordinary
100
Ordinary
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
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
FAD (UK) Limited
Firth Cleveland Limited
FKI Plan Trustees Limited
GKN Aerospace Transparency Systems
(Luton) Limited
GKN Birfield Extrusions Limited
GKN Bound Brook Limited
GKN Building Services Europe Limited
GKN CEDU Limited
GKN Composites Limited
GKN Computer Services Limited
GKN Countertrade Limited
GKN Defence Holdings Limited
GKN Defence Limited
GKN Enterprise Limited
GKN Euro Investments Limited
GKN Export Services Limited
GKN Fasteners Limited
GKN Finance (UK) Limited
GKN Firth Cleveland Limited
GKN Group Services Limited
GKN Hardy Spicer Limited
GKN Holdings Limited
GKN Industries Limited
G.K.N. International Trading (Holdings) Limited
GKN Limited
GKN Marks Limited
GKN Overseas Holdings Limited
GKN Pistons Limited
G.K.N. Powder Met. Limited
GKN Sankey Finance Limited
GKN SEK Investments Limited
GKN Service UK Limited
GKN Sheepbridge Limited
GKN Sheepbridge Stokes Limited
GKN Sinter Metals Limited
GKN Technology Limited
GKN Thompson Chassis Limited
GKN Trading Limited
GKN UK Investments Limited
GKN U.S. Investments Limited
GKN USD Investments Limited
GKN Ventures Limited
GKN Westland Aerospace (Avonmouth) Limited
GKN Westland Aerospace Advanced Materials
Limited
GKN Westland Aerospace Aviation Support
Limited
GKN Westland Aerospace Holdings Limited
GKN Westland Design Services Limited
GKN Westland Limited
GKN Westland Overseas Holdings Limited
GKN Westland Services Limited
GKN 1 Trustee 2018 Limited
GKN 2 Trustee 2018 Limited
GKN 3 Trustee 2018 Limited
GKN 4 Trustee 2018 Limited
Equity
interest %
Class of
Share held
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
100
100
100
100
100
100
100
100
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary and
redeemable
preference
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary and
deferred
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary and
convertible
preference
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
189
Financial statementsAnnual Report 2018Melrose Industries PLC Notes to the Company Balance Sheet
Continued
3.
Investment in subsidiaries continued
Equity
interest %
Class of
Share held
Equity
interest %
Class of
Share held
Guest, Keen and Nettlefolds, Limited
Harrington Generators International Limited
Hawker Siddeley Switchgear Limited
Laycock Engineering 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
P.F.D. Limited
Powertrain Services UK Limited
Powertrain Services (UK Newco) Limited
Precision Air Control Limited
Precision House Management Services Limited
Raingear Limited
Reznor (UK) Limited
Rzeppa Limited
Rigby Metal Components Limited
Sageford UK Limited
Sheepbridge Stokes Limited
Vapac Humidity Control Limited
Westland Group Services Limited
Westland System Assessment Limited
Whipp & Bourne Limited
15 Atholl Crescent, Edinburgh, Scotland,
EH3 8HA
A. P. Newall & Company Limited
GKN Investments LP
26-28 Goodall Street, Walsall, West Midlands,
WS1 1QL
Chassis Systems Limited (in liquidation)
PO BOX 55 Ipsley House, Ipsley Church Lane,
Redditch, Worcestershire, United Kingdom,
B98 0TL
F.P.T. Industries Limited
GKN Aerospace Limited
GKN Aerospace Services Limited
GKN Aerospace Transparency Systems
(Kings Norton) Limited
GKN EVO eDrive Systems Limited
GKN Freight Services Limited
GKN Group Pension Trustee (No.2) Limited
GKN Group Pension Trustee Limited
GKN Hybrid Power Limited
GKN Quest Trustee Limited
GKN Powder Metallurgy Holdings Limited
Westland Group plc
PO Box 4128, Ipsley House, Ipsley Church
Lane, Redditch, Worcestershire, B98 0WR
GKN Automotive Limited
GKN Driveline UK Limited
GKN Driveline Mexico (UK) Limited
190
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
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary and
redeemable
preference
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
50
Ordinary
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary and
cumulative
preference
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary and
preference
Ordinary
Ordinary
Hadley Castle Works, Telford, Shropshire,
TF1 6AA
GKN Sankey Limited
GKN AutoStructures Limited
GKN Wheels Limited
Chester Road, Erdington, Birmingham,
B24 0RB
GKN Driveline Birmingham Limited
Unit 5, Kingsbury Business Park, Kingsbury
Road, Minworth, Sutton Coldfield, B76 9DL
GKN Driveline Service Limited
30 Milbank, London, SW1P 4WY
Hadfields Holdings Limited
Uruguay
Arq. Baldomiro, 2408, Montevideo
GKN Driveline Uruguay SA (in liquidation)
USA
601 Braddock Avenue, Turtle Creek,
Pittsburgh, Pennsylvania, 15145
Brush Aftermarket North America Inc.
Generator and Motor Services of Pennsylvania, LLC
456 Aerotron Parkway, LaGrange, 30240 GA
Aerotron AirPower, Inc.
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
1181 Trapp Road, Eagan, Minnesota, 55121
Ergotron, Inc.
19855 South West 124th Avenue, Tualatin,
Oregon, 97062
Huntair Middle East Holdings, Inc.
c/o Nortek, Inc., 50 Kennedy Plaza,
Providence, RI 02903
Linear HK, LLC
1180 Peachtree Street NE, Suite 2450, Atlanta,
Georgia, 30309
Melrose North America, Inc.
Nevada Holdco Corp.
Nortek Global HVAC de Puerto Rico, LLC
Nortek Global HVAC, Latin America, Inc.
Nortek, Inc.
Nortek International, Inc.
5919 Sea Otter Place, Ste 100, Carlsbad,
CA 92010
Nortek Security & Control LLC
601 Abbott Road, East Lansing,
Michigan 48823
Operator Specialty Company, Inc.
2277 Harbor Bay Parkway, Alameda,
California, 94502
Zephyr Ventilation, LLC
100
100
100
Ordinary
Ordinary
Ordinary
100
Ordinary
100
Ordinary
37.5
Ordinary
100
Ordinary
Common
Stock
Membership
Interest
Common
Stock
100
100
100
Membership
Interest
100
100
Ordinary
Membership
Interest
100
100
Ordinary
100
Ordinary
Membership
Interest
100
100
100
100
100
100
100
Ordinary
Ordinary
Membership
Interest
Ordinary
Ordinary
Ordinary
Membership
Interest
100
100
Ordinary
Membership
Interest
100
Melrose Industries PLCAnnual Report 2018 3.
Investment in subsidiaries continued
Equity
interest %
Class of
Share held
Equity
interest %
Class of
Share held
8000 Phoenix Parkway, O’Fallon,
Missouri, 63368
Nortek Air Solutions, LLC
Nortek Global HVAC, LLC
Corporation Service Company, 300 Deschutes
Way SW, Suite 304, Tumwater WA 98501
Fokker Aerostructures Inc.
Corporation Service Company, 40 Technology
Pkwy South, #300, Norcross GA 30092
Fokker Elmo Inc.
CSC – Lawyers Incorporating Service,
2710 Gateway Oaks Drive, Suite 150 N,
Sacramento CA 95833
GENIL, Inc.
GKN Aerospace Camarillo, Inc.
GKN Aerospace Chem-tronics Inc.
Corporation Service Company, 251 Little Falls
Drive, Wilmington Delaware 19808
GKN Aerospace Aerostructures, Inc
GKN Aerospace Florida LLC
GKN Aerospace, Inc.
GKN Aerospace New England, Inc.
GKN Aerospace Newington LLC
GKN Aerospace St. Louis LLC
GKN Aerospace Transparency Systems, Inc.
GKN Aerospace Precision Machining, Inc.
GKN Aerospace Services Structures LLC
GKN Aerospace South Carolina, Inc.
GKN Aerospace US Holdings LLC
GKN America Corp
GKN Armstrong Wheels, Inc.
GKN Cylinder Liners, LLC
GKN Driveline Newton LLC
GKN Driveline North America, Inc.
GKN Freight Services, Inc.
GKN North America Investments Inc.
GKN Rockford, Inc.
GKN Sinter Metals LLC
GKN Westland Aerospace, Inc.
Hoeganaes Corporation
Hoeganaes Specialty Metal Powders LLC
XIK, LLC
CSC-Lawyers Incorporating Service,
50 West Broad Street, Suite 1300,
Columbus Ohio 43215
GKN Driveline Bowling Green, Inc.
GKN Ohio, Inc.
Membership
Interest
Membership
Interest
Common
Stock
Common
Stock
Ordinary
Ordinary
Ordinary
Ordinary
Membership
Interest
Common
Stock
Ordinary
Membership
Interest
Membership
Interest
Membership
Unit
Ordinary
Membership
Interest
Common
Stock
Membership
Interest
Common
Stock
Ordinary
Membership
Interest
Membership
Interest
Common
Stock
Common
Stock
Ordinary
Ordinary
Membership
Interest
Common
Stock
Common
Stock
Membership
Interest
Membership
Interest
Common
Stock
Common
Stock
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
70
100
100
100
Corporation Service Company,
80 State Street, Albany New York 12207
GKN Aerospace Monitor, Inc.
Corporation Service Company, 251 East Ohio
Street, Suite 500, Indianapolis Indiana 46204
GKN Aerospace Muncie, Inc.
Illinois Corporation Service Company,
801 Adlai Stevenson Drive,
Springfield Illinois 62703
GKN Walterscheid, Inc.
6203 San Ignacio Avenue, Suite 112, San Jose,
CA 95119
IntelliVision Technologies Corp.
c/o 3PL – 1144 65th Unit F, Oakland, CA 94608
MiOS Limited
100
Ordinary
100
Ordinary
100
Ordinary
100
Ordinary
42
Ordinary
Each of the subsidiaries and significant holdings 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 and GKN Limited which are held directly by
Melrose Industries PLC.
(1)
The Group owns 100% of the Ordinary Class B shares with a total ownership of 49%
in the company.
(2) The Group owns 9% directly with a total effective ownership of 34.5%.
191
Financial statementsAnnual Report 2018Melrose Industries PLC 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
2018
£m
31 December
2017
£m
400
25
425
–
25
25
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
The tax losses may be carried forward indefinitely.
5. Creditors
Amounts falling due within one year:
Amounts owed to Group undertakings
Accruals and other creditors
31 December
2018
£m
31 December
2017
£m
25
25
25
25
31 December
2018
£m
31 December
2017
£m
1,772
1
1,773
191
1
192
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 2018
Charge to profit and loss account
At 31 December 2018
Incentive plan
related
£m
–
1
1
Total
£m
–
1
1
The provision for incentive plan related costs relates to employer national insurance costs which are expected to be incurred when the
Melrose incentive plan matures. Further details of this plan are set out in the Directors’ Remuneration Report. The costs are expected to
be incurred within two years.
7.
Issued share capital
Share Capital
Allotted, called-up and fully paid
4,858,254,963 (31 December 2017: 1,941,200,503) Ordinary Shares of 48/7p each (31 December 2017: 48/7p each)
12,831 (31 December 2017: 12,831) 2017 Melrose Incentive Plan Shares of £1 each
31 December
2018
£m
31 December
2017
£m
333
–
333
133
–
133
The rights of each class of share are described in the Directors’ Report.
On 19 April 2018, 2,469 million ordinary shares were issued as a result of the acquisition of GKN. Further issues of share capital totalling
448 million took place between 19 April 2018 and 30 June 2018 in order to purchase the remaining non-controlling interest of GKN. The
total number of ordinary shares in issue therefore increased from 1,941 million at 31 December 2017 to 4,858 million at 31 December 2018.
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.
192
Melrose Industries PLCAnnual Report 2018 Glossary
Alternative Performance Measures (“APMs”)
In accordance with 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 APMs) provide additional information on the performance of the business and trends to stakeholders. These
measures are consistent with those used internally, and are considered important to understanding the financial performance and
financial health of the Group. APMs are considered to be an important measure to monitor how the businesses are performing because
this provides a 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 APMs 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
Adjusted revenue and Annualised adjusted revenue
Closest equivalent statutory measure
Revenue.
Reconciling items to statutory measure
Share of revenue of equity accounted investments (note 5) and full period
impact of acquisitions.
APM
Adjusted operating profit and Annualised adjusted
operating profit
Closest equivalent statutory measure
Operating profit/(loss) (1).
Reconciling items to statutory measure
Adjusting items (note 6) and full period impact of acquisitions.
Definition and purpose
Adjusted revenue includes the Group’s share of revenue of equity
accounted investments. Annualised adjusted revenue reflects the Group’s
adjusted revenue as if all acquisitions in the period had occurred on the
first day of the financial year.
Definition and purpose
The Group uses adjusted profit measures to provide a useful and more
comparable measure of the ongoing performance of the Group. Adjusted
measures are reconciled to statutory measures by removing adjusting
items, the nature of which are disclosed above and further detailed in note 6.
This enables comparability between reporting periods.
Year ended
31 December
2018
£m
Year ended
31 December
2017
£m
8,605
2,092
Annualised adjusted operating profit reflects the Group adjusted
operating profit as if all acquisitions in the period had occurred on the first
day of the financial year.
Operating profit
Year ended
31 December
2018
£m
Year ended
31 December
2017
£m
497
9,102
3,145
12,247
3
2,095
–
2,095
Operating loss
Adjusting items (note 6)
Adjusted operating profit
Full year impact of acquisitions
Annualised adjusted operating profit
(392)
1,239
847
248
1,095
(7)
286
279
–
279
Revenue
Revenue
Share of revenue of equity accounted
investments
Adjusted revenue
Full year impact of acquisitions
Annualised adjusted revenue
APM
Adjusting items
Closest equivalent statutory measure
None.
Reconciling items to statutory measure
Adjusting items (note 6).
Definition and purpose
Those items which the Group excludes from its adjusted profit metrics
in order to present a further measure of the Group’s performance.
These include items 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 an acquisition.
This provides a meaningful comparison of how the business is managed
and measured on a day-to-day basis and provides consistency and
comparability between reporting periods.
APM
Adjusted operating margin and Annualised adjusted
operating margin
Closest equivalent statutory measure
Operating margin (2).
Reconciling items to statutory measure
Share of revenue of equity accounted investments (note 5), adjusting
items (note 6) and full period impact of acquisitions.
Definition and purpose
Adjusted operating margin represents Adjusted operating profit as a
percentage of Adjusted revenue. Annualised adjusted operating margin
represents Annualised adjusted operating profit as a percentage of
Annualised adjusted revenue.
193
Financial statementsAnnual Report 2018Melrose Industries PLC Glossary
Continued
Income Statement Measures continued
APM
Adjusted EBITDA, Annualised adjusted EBITDA and
Annualised adjusted EBITDA for covenant purposes
Closest equivalent statutory measure
Operating profit/(loss)(1).
Reconciling items to statutory measure
Adjusting items (note 6), depreciation of property, plant and equipment
(note 13) and amortisation of computer software and development costs
(note 11), share of depreciation of property, plant and equipment and
amortisation of computer software and development costs of equity
accounted investments, as well as full period impact of acquisitions
and adjustments for covenant purposes.
Definition and purpose
Adjusted operating profit before depreciation and impairment of property,
plant and equipment and before the amortisation and impairment of
computer software and development costs.
Adjusted EBITDA and Annualised adjusted EBITDA are measures used
to value individual businesses as part of the “Buy, Improve, Sell” Melrose
strategy model and by certain external stakeholders to
measure performance.
Adjusted EBITDA
Adjusted operating profit
Depreciation of property, plant and
equipment (note 13)
Amortisation of computer software and
development costs (note 11)
Share of depreciation and amortisation
of equity accounted investments
Adjusted EBITDA
Full year impact of acquisitions
Annualised adjusted EBITDA
Other adjustments required for covenant
purposes
Annualised adjusted EBITDA for
covenant purposes
Year ended
31 December
2018
£m
Year ended
31 December
2017
£m
847
238
44
18
1,147
378
1,525
(33)
1,492
279
31
4
–
314
–
314
–
314
APM
Adjusted profit before tax and Annualised adjusted profit
before tax
Closest equivalent statutory measure
Profit/(loss) before tax.
Reconciling items to statutory measure
Adjusting items (note 6) and full period impact of acquisitions.
Definition and purpose
Profit before the impact of adjusting items and tax. As discussed above,
adjusted profit measures are used to provide a useful and more comparable
measure of the ongoing performance of the Group. Adjusted measures are
reconciled to statutory measures by removing adjusting items, the nature of
which are disclosed above and further detailed in note 6.
As discussed above, the Group uses adjusted profit measures to provide a
useful and comparable measure of the ongoing performance of the Group.
Profit before tax
Loss before tax
Adjusting items (note 6)
Adjusted profit before tax
Full year impact of acquisitions
Annualised adjusted profit before tax
Year ended
31 December
2018
£m
Year ended
31 December
2017
£m
(550)
1,253
703
183
886
(28)
286
258
–
258
194
APM
Adjusted profit after tax and Annualised adjusted profit after tax
Closest equivalent statutory measure
Profit/(loss) after tax.
Reconciling items to statutory measure
Adjusting items (note 6) and full period impact of acquisitions.
Definition and purpose
Profit after tax but before the impact of the adjusting items. As discussed
above, adjusted profit measures are used to provide a useful and more
comparable measure of the ongoing performance of the Group. Adjusted
measures are reconciled to statutory measures by removing adjusting items,
the nature of which are disclosed above and further detailed in note 6.
As discussed above, the Group uses adjusted profit measures to provide a
useful and comparable measure of the ongoing performance of the Group.
Year ended
31 December
2018
£m
Year ended
31 December
2017
£m
(475)
1,014
539
141
680
(24)
215
191
–
191
Profit after tax
Loss after tax
Adjusting items (note 6)
Adjusted profit after tax
Full year impact of acquisitions
Annualised adjusted profit after tax
APM
Adjusted tax rate
Closest equivalent statutory measure
Effective tax rate.
Reconciling items to statutory measure
Adjusting items, adjusting tax items and the tax impact of adjusting items
(note 6 and note 8).
Definition and purpose
The income tax charge for the Group excluding adjusting tax, the net
effect of new tax legislation in the US enacted in December 2017 and the
tax impact of adjusting items, divided by adjusted profit before tax.
This measure is a useful indicator of the ongoing tax rate for the Group.
Year ended
31 December
2018
£m
Year ended
31 December
2017
£m
75
–
(239)
(164)
703
23.3%
4
(27)
(44)
(67)
258
25.9%
Adjusted tax rate
Tax credit per Income Statement
Adjusting tax items
Tax impact of adjusting items
Adjusted tax charge
Adjusted profit before tax
Adjusted tax rate
APM
Adjusted basic earnings per share
Closest equivalent statutory measure
Basic earnings per share.
Reconciling items to statutory measure
Adjusting items (notes 6 and 10).
Definition and purpose
Profit after tax attributable to owners of the Parent and before the impact
of adjusting items, divided by the weighted average number of ordinary
shares in issue during the financial year.
Melrose Industries PLCAnnual Report 2018 Income Statement Measures continued
Balance Sheet Measures
APM
Working capital
Closest equivalent statutory measure
Inventories, trade and other receivables less trade and other payables.
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.
APM
Net debt
Closest equivalent statutory measure
Cash and cash equivalents less interest-bearing loans and borrowings
and finance related derivative instruments.
Reconciling items to statutory measure
Reconciliation of net debt (note 26).
Definition and purpose
Net debt comprises cash and cash equivalents, interest-bearing loans
and borrowings and cross-currency swaps but excludes non-cash
acquisition fair value adjustments.
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
Leverage of net debt to Annualised adjusted EBITDA
Closest equivalent statutory measure
None.
Reconciling items to statutory measure
Not applicable.
Definition and purpose
Bank covenant definition of net debt divided by Annualised adjusted
EBITDA for bank covenant purposes.
This measure is used for bank covenant testing.
APM
Adjusted diluted earnings per share
Closest equivalent statutory measure
Diluted earnings per share.
Reconciling items to statutory measure
Adjusting items (notes 6 and 10).
Definition and purpose
Profit after tax attributable to owners of the Parent and before the impact
of adjusting 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 when all
businesses are held for the complete reporting period.
APM
Annualised adjusted diluted earnings per share
Closest equivalent statutory measure
Diluted earnings per share.
Reconciling items to statutory measure
Adjusting items (notes 6 and 10) and full period impact of acquisitions.
Definition and purpose
Annualised profit after tax attributable to owners of the Parent and before
the impact of adjusting items, divided by the number of ordinary shares in
issue at 31 December 2018 adjusted for the effects of any potentially
dilutive options.
The Board considers this to be a key measure of performance when
adjusted results include businesses owned for part of a period.
Annualised adjusted diluted earnings per share
Annualised adjusted profit after tax
Attributable to:
Owners of the parent
Non-controlling interests
Diluted number of shares at 31 December 2018 (million)
Annualised adjusted diluted earnings per share
Year ended
31 December
2018
£m
680
670
10
4,858
13.8p
APM
Interest cover
Closest equivalent statutory measure
None.
Reconciling items to statutory measure
Not applicable.
Definition and purpose
Adjusted EBITDA as a multiple of net interest payable on bank loans and
overdrafts, being 11.6x in year ended 31 December 2018 (2017: 19.6x).
This measure is used for bank covenant testing.
195
Financial statementsAnnual Report 2018Melrose Industries PLC Glossary
Continued
Balance Sheet Measures continued
Cash flow measures continued
APM
Bank covenant definition of net debt at average rates
APM
Free cash flow
Closest equivalent statutory measure
Cash and cash equivalents less interest-bearing loans and borrowings
and finance related derivative instruments.
Reconciling items to statutory measure
Impact of foreign exchange and adjustments for bank covenant purposes.
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
Net debt at closing rates (note 26)
Impact of foreign exchange
Net debt at average rates
Other adjustments required for covenant
purposes
Bank covenant definition of net debt
at average rates
Leverage
Cash flow measures
31 December
2018
£m
31 December
2017
£m
3,482
(86)
3,396
11
3,407
2.3x
572
23
595
–
595
1.9x
APM
Adjusted operating cash flow (pre-capex) and Adjusted
operating cash flow conversion
Closest equivalent statutory measure
Net cash from operating activities.
Reconciling items to statutory measure
Non-working capital items (note 26).
Definition and purpose
Adjusted operating cash flow (pre-capex) is calculated as adjusted
EBITDA attributable to subsidiaries less movements in working capital.
Adjusted operating cash flow (pre-capex) conversion is adjusted
operating cash flow (pre-capex) divided by adjusted EBITDA attributable
to subsidiaries.
This measure provides additional useful information in respect of cash
generation and is consistent with how business performance is
measured internally.
Closest equivalent statutory measure
Net increase/decrease in cash and cash equivalents.
Reconciling items to statutory measure
Acquisition related cash flows, dividends paid to owners of the parent,
foreign exchange and other non-cash movements.
Definition and purpose
Free cash flow represents cash generated from trading after all costs
including restructuring, pension contributions, tax and interest payments.
APM
Capital expenditure (capex)
Closest equivalent statutory measure
None.
Reconciling items to statutory measure
Not applicable.
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
Closest equivalent statutory measure
None.
Reconciling items to statutory measure
Not applicable.
Definition and purpose
Capital expenditure divided by depreciation of property, plant and
equipment and amortisation of computer software and development costs.
APM
Dividend per share
Closest equivalent statutory measure
Dividend per share.
Reconciling items to statutory measure
Not applicable.
Definition and purpose
Amounts payable by way of dividends in terms of pence per share.
31 December
2018
£m
31 December
2017
£m
1,147
314
(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.
(18)
(59)
1,070
(108)
181
(159)
(63)
921
–
–
314
(8)
8
(16)
–
298
86%
95%
Adjusted operating cash flow
Adjusted EBITDA
Share of depreciation and amortisation of
equity accounted investments
Share of adjusted operating profit of equity
accounted investments
Adjusted EBITDA attributable to
subsidiaries
Change in inventories
Change in receivables
Change in payables
Positive non-cash impact from loss-
making contracts
Adjusted operating cash flow
(pre-capex)
Adjusted operating cash flow
conversion
196
Melrose Industries PLCAnnual Report 2018 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 Barber-Surgeons’ Hall, Monkwell Square, Wood
Street, London EC2Y 5BL at 11.00 am on 9 May 2019 for the
purposes set out below. Resolutions 1 to 15 (inclusive) will be
proposed as ordinary resolutions and resolutions 16 to 19
(inclusive) as special resolutions.
Ordinary resolutions
1. To receive the Company’s audited financial statements for
the financial year ended 31 December 2018, 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 2018, as set out on pages 92 to 112 of
the Company’s 2018 Annual Report.
3. To declare a final dividend of 3.05 pence per ordinary share for
the year ended 31 December 2018.
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 re-elect Archie G. Kane as a Director of the Company.
12. To elect Charlotte Twyning as a Director of the Company.
13. 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.
14. To authorise the Audit Committee to determine the
remuneration of the auditor of the Company.
15. 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 £111,045,827; and
(B) comprising equity securities (as defined in section 560
of the Act) up to an aggregate nominal amount of
£222,091,655 (such amount to be reduced by the
aggregate nominal amount of any allotments or grants
made under paragraph (A) of this resolution) in connection
with an offer by way of 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 2020, 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
16. That, subject to the passing of 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 15 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 15, such power shall be limited to the allotment
of equity securities in connection with an offer by way of
a rights issue only):
(i)
to ordinary shareholders in proportion (as nearly as
may be practicable) to their existing holdings; and
(ii) to holders of other equity securities, as required by the
rights of those securities or, subject to such rights, as
the Directors otherwise consider necessary, and so
that the Directors may impose any limits or restrictions
and make any arrangements which they consider
necessary or appropriate to deal with treasury shares,
fractional entitlements, record dates, legal, regulatory or
practical problems in, or under the laws of, any territory
or any other matter; and
197
Shareholder informationAnnual Report 2018Melrose Industries PLC Notice of Annual General Meeting
Continued
(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 15 or
sale of treasury shares up to a nominal amount of
£16,656,874,
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 2020, 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, subject to the passing of resolution 15 and in addition to
any power granted under resolution 16, 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 15 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 15
or sale of treasury shares up to a nominal amount of
£16,656,874; 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 2020, 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.
18. 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 485,825,496;
(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 2020;
(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.
19. 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
5 April 2019
Registered Office:
11th Floor The Colmore Building
20 Colmore Circus Queensway
Birmingham
West Midlands
B4 6AT
198
Melrose Industries PLCAnnual Report 2018 Explanatory notes to the proposed resolutions
Resolutions 1 to 15 (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 16 to 19 (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 2018 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 “2018 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 three sections:
• the introduction to the Directors’ Remuneration report;
• the annual statement from the Chairman of the Remuneration
Committee; and
• the Annual Report on Remuneration.
The introduction to the Directors’ Remuneration report, set out on
page 92 of the 2018 Annual Report, provides an introduction to, and
an overview of, the remainder of the Directors’ Remuneration report.
The annual statement from the Chairman of the Remuneration
Committee, set out on pages 93 to 95 of the 2018 Annual Report,
summarises, for the year ended 31 December 2018, 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 92 to 112
of the 2018 Annual Report, provides details of the remuneration
paid to Directors in respect of the year ended 31 December 2018,
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 3.05p per ordinary
share for the year ended 31 December 2018. The final dividend
will, subject to shareholder approval, be paid on 20 May 2019 to
the holders of ordinary shares whose names are recorded on the
register of members of the Company at the close of business
on 5 April 2019.
Resolutions 4 to 11 (inclusive) – Re-election of Directors
In accordance with the UK Corporate Governance Code (the
“Code”) and the Company’s Articles of Association (the “Articles”),
every Director will stand for re-election at the AGM (with the
exception of Charlotte Twyning, who is standing for election).
Biographical details of each Director can be found on pages 72
to 73 of the 2018 Annual Report. All of the Non-executive Directors
standing for re-election are currently considered independent
under the Code.
Resolution 12 – Election of Director
In accordance with the Articles, Charlotte Twyning is standing for
election as a Director of the Company following her appointment
to the Board with effect from 1 October 2018. Biographical details
for Charlotte Twyning can be found on page 73 of the 2018
Annual Report.
Resolution 13 – 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 14 – Authority to agree auditor’s remuneration
This resolution seeks authority for the Audit Committee to
determine the level of the auditor’s remuneration.
Resolution 15 – 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
£111,045,827, being approximately one-third of the Company’s
issued ordinary share capital as at 4 April 2019 (being the last
business day prior to the publication of this notice).
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 £222,091,655,
representing approximately two-thirds of the Company’s issued
ordinary share capital as at 4 April 2019. This resolution provides
that such amount 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 2020. 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.
Resolutions 16 to 17 – 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 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 £33,313,748, representing approximately 10% of the
Company’s issued ordinary share capital as at 4 April 2019
(being the last business day prior to the publication of this notice).
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Shareholder informationAnnual Report 2018Melrose Industries PLC Notice of Annual General Meeting
Continued
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 16 or 17:
• 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 2020. 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 18 – 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
485,825,496 ordinary shares, representing 10% of the Company’s
issued ordinary share capital as at 4 April 2019.
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 2020. 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 19 – 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.
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. 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.
3. Any person to whom this notice is sent who is a person
nominated under section 146 of the Act to enjoy information
rights (a “Nominated Person”) may, under an agreement
between him/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 notes 1 and 2 above
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.
4. To be entitled to attend and vote at the AGM (and for the
purposes of the determination by the Company of the number
of votes they may cast), members must be entered on the
Company’s register of members by 6.30pm on 8 May 2019 (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.
5. As at 4 April 2019 (being the last business day prior to the
publication of this notice), the Company’s issued share capital
consists of 4,858,254,963 ordinary shares of 48/7p each,
carrying one vote each.
200
Melrose Industries PLCAnnual Report 2018 Explanatory notes as to the proxy,
voting and attendance procedures at the
Annual General Meeting (AGM) continued
6. CREST members who wish to appoint a proxy or proxies
through the CREST electronic proxy appointment service
may do so by using the procedures described in the CREST
Manual (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.
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 am on 8 May 2019. For this purpose, the
time of receipt will be taken to be the time (as determined by
the time stamp applied to the message by the CREST
Application Host) from which the issuer’s agent is able to
retrieve the message by enquiry to CREST in the manner
prescribed by CREST. After this time any change of instructions
to proxies appointed through CREST should be communicated
to the appointee through other means.
8. CREST members and, where applicable, their CREST
sponsors, or voting service providers should note that
Euroclear UK & Ireland Limited does not make available special
procedures in CREST for any particular message. Normal
system timings and limitations will, therefore, apply in relation
to the input of CREST Proxy Instructions. It is the responsibility
of the CREST member concerned to take (or, if the CREST
member is a CREST Personal Member, or sponsored member,
or has appointed a voting service provider, to procure that his/
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.
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 11.00am on 8 May 2019.
201
Shareholder informationAnnual Report 2018Melrose Industries PLC Company and shareholder information
As at 31 December 2018, there were 18,405 holders of ordinary shares of 48/7 pence each in the Company. An analysis of these
shareholdings as at 31 December 2018 is set out in the table below.
Total number
of holdings
13,875
3,546
522
462
18,405
15,207
3,198
18,405
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 2019
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 2019 results
Total number
of shares
Percentage
issued capital
Percentage
of holders
75.39%
19.27%
2.83%
2.51%
100.00%
18,706,523
46,545,041
90,691,687
4,702,311,712
4,858,254,963
82.62%
17.38%
100.00%
58,941,326
4,799,313,637
4,858,254,963
0.39%
0.96%
1.86%
96.79%
100.00%
1.21%
98.79%
100.00%
4 April 2019
5 April 2019
9 May 2019
20 May 2019
September 2019
October 2019
March 2020
Registrar
Equiniti
Aspect House
Spencer Road
Lancing
West Sussex
BN99 6DA
Tel: 0371 384 2030
or +44 (0) 121 415 7047
(from outside UK)
Lines are open from 8.30 am
to 5.30 pm Monday to Friday,
excluding public holidays in
England and Wales.
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
Citizens Bank, N.A.
Commerzbank AG,
London Branch
Crédit Agricole Corporate
and Investment Bank
National Westminster
Bank plc
Royal Bank of Canada
ICBC
Santander UK plc
Bankers
ABN AMRO Bank N.V.
Banco Santander S.A.,
London Branch
Bank of America Merrill Lynch
International Limited
Bank of China Limited,
London Branch
Barclays Bank plc
Bayerische Landesbank
BNP Paribas Fortis SA/NV
Caixabank SA, UK Branch
Crédit Industriel et Commercial
Deutsche Bank Luxembourg S.A.
Skandinaviska Enskilda
Banken AB (publ)
HSBC Bank plc
Standard Chartered Bank
Industrial and Commercial Bank
of China Limited, London Branch
The Governor and Company
of the Bank of Ireland
ING Bank N.V., London Branch
Unicredit Bank AG
J.P. Morgan Chase Bank N.A.,
London Branch
Wells Fargo Bank, N.A.,
London Branch
Lloyds Bank plc
Mediobanca International
(Luxembourg) S.A.
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 telephone 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.
202
Melrose Industries PLCAnnual Report 2018 Notes
203
Annual Report 2018Melrose Industries PLC Notes
204
Melrose Industries PLCAnnual Report 2018 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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www.melroseplc.net
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Code: MRO
SEDOL: BZ1G432
LEI: 213800RGNXXZY2M7TR85
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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
Head Office
Leconfield House
Curzon Street
London
W1J 5JA
North America Office
1180 Peachtree Street NE
Suite 2450
Atlanta
GA 30309
Tel: +44 (0) 20 7647 4500
Fax: +44 (0) 20 7647 4501
Tel: +1 404 941 2100
Fax: +1 404 941 2772