Buy
Improve
Sell
Melrose
Annual Report 2019
Melrose Industries PLC
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Melrose Industries PLC
Acquiring good quality manufacturing businesses,
making operational improvements, realising shareholder
value at the appropriate time and then returning this
value to shareholders, continue to be the fundamentals
of the “Buy, Improve, Sell” business strategy that
Melrose has followed since being founded in 2003.
Strategic Report
Highlights of the year
Shareholder value creation
“Buy, Improve, Sell” – A history of success
Our strategy and business model
Chairman’s statement
Chief Executive’s review
Divisional review
Aerospace
Automotive
Powder Metallurgy
Nortek Air Management
Other Industrial
Key performance indicators
Finance Director’s review
Longer-term viability statement
Risk management
Risks and Uncertainties
Section 172 statement
ESG report
04
06
08
10
12
14
16
16
20
24
28
32
36
38
45
46
48
56
58
Governance
Governance overview
Board of Directors
Directors’ report
Corporate Governance report
Audit Committee report
Nomination Committee report
Directors’ Remuneration report
Statement of Directors’ responsibilities
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
Company Statement of Changes in Equity
Notes to the Company Balance Sheet
Glossary
70
72
74
77
82
88
90
112
113
124
125
126
127
128
129
181
181
182
191
For more information visit
melroseplc.net
Shareholder information
Company and shareholder information
196
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.
Unlocking substantial value
“We are delighted with the Melrose performance in
2019 and the substantial value that is being unlocked.
Notwithstanding any implications of the COVID-19 outbreak,
the bedrock has now been built for the GKN businesses
to attain results which were not previously achievable, and,
in addition, the shareholder value built up in our longer held
assets is closer to being realised. This shows, once more,
that the Melrose model thrives by investing properly in
businesses and giving management the entrepreneurial
freedom to succeed. This is just the start of what is
possible for GKN.”
Justin Dowley
Non-executive Chairman
For more information about
our strong track record of
shareholder value creation
See pages 6 to 7
4
Melrose in 2019
Highlights for 2019
The results for 2019 include the first full year of ownership of GKN(1)
which were comfortably ahead of the Board’s expectations for both
profit and cash generation.
Headline figures
13%
Increase in adjusted(2)
diluted earnings per
share, which was
14.3 pence.
72%(4)
Increase in adjusted
free cash flow(5)
on an annualised
like-for-like basis.
£591m 2.25x
Adjusted free cash flow(5),
up 72% on last year.
The bank covenant
leverage ratio(7) has reduced
to 2.25x, ahead of the
previous year (2.28x).
£240m(3)
104%
c.25% 30%
Adjusted profit
conversion to cash.(2)
Of cash contributions
to the GKN UK defined
benefit pension schemes
from the Group so far
during Melrose ownership,
making them significantly
better funded.
Of the remaining provision
for loss-making contracts
has been released(6)
due to improvements
implemented by
management this year.
Reduction in emissions
achieved by GKN facilities
over the past two years.
(1) Results for 2018 include GKN for eight months only and have been restated for discontinued operations.
(2) Considered by the Board to be a key measure of performance. Described in the glossary to the financial statements on pages 191 to 195.
(3) Including the contribution paid on 6 January 2020.
(4) Calculated compared to 2018 annualised adjusted free cash flow, excluding the previously announced £150 million cash outflow from unwinding creditor
stretch in 2018. 2018 annualised adjusted free cash flow includes 12 months of GKN ownership.
(5) Adjusted free cash flow excludes the special one-off pension contributions and restructuring spend.
(6) As previously published, this is not included in adjusted(2) operating profit.
(7) Described in the glossary to the financial statements on pages 191 to 195.
Melrose Industries PLC Annual Report 2019 5
Shareholder value creation
See pages 6 to 7
Group revenue and operating profit
£11.6bn
Adjusted(1) revenue.
£11.0bn
Statutory revenue.
£1.1bn
£318m
Adjusted(1) operating profit.
Statutory operating profit.
A
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Aeros
p
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Adjusted operating profit £m(1)
s t ri a l
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Other In
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Powder Met a l
l u r g y
Divisional performance summary
Divisional results
(figures up to 31 December 2019)
Aerospace
Automotive
Powder Metallurgy
Nortek Air Management
Other Industrial
Corporate
Adjusted(1)
revenue
£m
Adjusted(1) operating
profit/(loss)
£m
Statutory
revenue
£m
Statutory operating
profit/(loss)
£m
3,852
4,739
1,115
1,178
708
–
409
367
117
175
86
(52)
3,836
4,146
1,099
1,178
708
–
104
186
77
139
(170)
(18)
Proportional split between divisions
Adjusted revenue
Adjusted(1) revenue £m
Adjusted operating profit £m(1)
Adjusted(1) operating profit £m
s t ri a l
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Other In
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Aeros
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Other In
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Aeros
p
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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 191 to 195.
Aeros
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Adjusted revenue
s t ri a l
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Other In
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Strategic ReportMelrose Industries PLC Annual Report 2019
6
Our strong track record
Shareholder value creation
Melrose has delivered significant returns
to shareholders since floating on AIM in 2003.
Shareholder investment and gain (figures up to 31 December 2019)
£4.7bn
2.6x
17%
Cash return to shareholders
since establishment
Average return for a shareholder
since the first acquisition
CAGR in ordinary dividends.
£1.1bn ordinary dividends since
our first acquisition in 2005,
in line with our progressive
dividend policy
2nd highest
FTSE 350 performer
For total shareholder return
over the past decade
Total shareholder return (TSR)(1)(3)
How Elster and Nortek operating margin improved(2)
2,579%
Elster
+6ppts
+2ppts
+1ppt +9ppts
TSR higher by c.16x
162%
FTSE 100
Melrose
(1) Since Melrose’s first acquisition (May 2005).
(2) Nortek adjusted operating margin up to 31 December 2019.
(3) Source: Datastream Total Shareholder Return Index.
Nortek
+3ppts
+1ppt +1ppt
+5ppts
Returns on capex and restructuring and other commercial actions.
Central cost savings.
Exit of low margin sales channels.
Track record for £1 invested in Melrose
As at 31 December 2019
Investment in May 2005 with all dividends reinvested since
(Total shareholder return)(3)
Original investment
£1.00
2005–
2019
Melrose Industries PLC Annual Report 2019 7
Responsible approach to investing
Substantial improvements for all the UK pensions schemes under ownership
Whilst under Melrose ownership we improve contributions and provide better
security to our businesses’ pension schemes towards fully funded upon departure
from the Group.
Gross return
£26.79
on original £1 investment
Responsible stewardship (figures up to 31 December 2019)
• For the GKN schemes, we
were proactive, transparent
and constructive in agreeing
commitments with pension trustees
during the acquisition of GKN.
We committed to providing up
to £1 billion of funding contributions;
doubling annual contributions to
£60 million and £150 million
upfront contributions.
So far we have:
• Delivered £150 million upfront
contributions.
• Doubled annual contributions
to £60 million.
• Applied more secure funding
targets of Gilts +25 basis points
(GKN 2016) and Gilts +75 basis
points (GKN 2012 schemes 1-4)
to achieve more prudent funding
levels towards fully funded.
• Funded the GKN 2016 scheme
to £55 million surplus.
• Rebalanced the GKN schemes
across the divisions, to avoid
overburdening any one business
and provide stability and better
security for members.
Second highest performer for
total shareholder return in the
FTSE 350 over the past decade.
Melrose is very pleased with the
track record achieved over its
16-year history since floating on
AIM in 2003. It has achieved an
average annual return on equity
investment of 25% since making
the first acquisition in 2005, with
an increase in operating margins
between four and nine percentage
points across the businesses
sold to date.
Promoting strong ESG principles
This year we have produced a standalone ESG report (see pages 58 to 69),
to highlight the investment, support and encouragement we provide to our
businesses to enable them to pursue relevant improvements in relation to
environmental, social and governance matters.
£719m
2.8%
spent on research and development
for Nortek, Elster and GKN acquisitions
of revenue for the
equivalent period
McKechnieFKI UKFKIBridon58% 87%109%99%95%BrushNortekGKN 2012 schemes 1-4GKN 2016 98%87%78%60%106%111%83%60%McKechnieFKI UKFKIBridon58% 87%109%99%95%BrushNortekGKN 2012 schemes 1-4GKN 2016 98%87%78%60%106%111%83%60%Strategic ReportMelrose Industries PLC Annual Report 2019 8
Long-term value creation
“Buy, Improve, Sell” —
A history of success
Melrose continues to build on its 16-year track record
of increasing and realising the value in its businesses
and returning the proceeds to its shareholders.
18%
11%
t
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g
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24%
July 2007
Returned to shareholders
following the disposal of
McKechnie Aerospace
£220m
10%
t
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B
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August 2011
Returned to shareholders
following the disposal
of Dynacast
£373m
16%
l
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S
2005
2006
2007
2008
2009
2010
2011
2012
Acquisition
May 2005
Company
details
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 3.0x
July 2008
FKI
Bought for
Equity raised on acquisition
Follow-on investment
Sold for
Investment in business
Equity rate of return
£0.4bn
£243m
£124m
£0.8bn
51%
30%
2.6x
£1.0bn
£499m
£328m
£1.4bn
66%
29%
Commentary
McKechnie was a global supplier of specialist engineered
components to the global aerospace industry. During our
ownership we improved operating margins from 18% to 24%
by optimising its cost base and focusing on profitable business.
Dynacast was a global provider of precision die cast components
for a wide variety of industries. During our ownership we
improved operating margins from 11% to 16% by successfully
aligning capacity with customers and installing a success-driven
organisational culture.
Overall we generated over £700 million in cash from the
businesses versus an equity investment of approximately
£240 million, resulting in a return of 3.0x on shareholders’
investment. This includes direct returns to shareholders after
disposals of £220 million in 2007 and £373 million in 2011.
FKI comprised a number of diverse businesses, and our
improvement initiatives were centred around refocusing the FKI
conglomerate to allow each of its businesses to stand alone,
and making necessary investments to strengthen their market
positions. We improved operating margins from 10% to 14%
under our ownership and have since sold all of the businesses
with the exception of Brush.
Overall we generated over £1.3 billion in cash from the
businesses versus an equity investment of approximately
£500 million, resulting in a return of 2.6x on shareholders’
investment. This includes direct returns to shareholders after
disposals of £595 million in 2014 and £200 million in 2015.
Melrose Industries PLC Annual Report 2019 9
Adjusted(1) operating margin improvement
Company
Entry
Current
McKechnie
Elster
Dynacast
FKI
Nortek
GKN
18%
13%
11%
10%
9%
8%
•
•
•
•
14%
9%
Exit
24%
22%
16%
14%
•
•
Improvement
>30%
>70%
>40%
>40%
>50%
>10%
+6ppts
+9ppts
+5ppts
+4ppts
+5ppts
+1ppt
(1) Described in the glossary to the financial statements on pages 191 to 195.
February 2014
Returned to shareholders
following the disposal of
various FKI businesses
during 2013
£595m
February 2016
Returned to shareholders
following the disposal
of Elster
£2.4bn
22%
13%
t
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u
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14%
l
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S
9%
t
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g
u
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B
l
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8%
t
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u
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B
14%
9%
2012
2013
2014
2015
2016
2017
2018
2019
August 2012
Elster
Bought for
Equity raised on acquisition
Follow-on investment
Sold for
Investment in business
Equity rate of return
2.3x
£1.8bn
£1.2bn
£287bn
£3.3bn
25%
33%
Elster was a US publicly-listed German-based manufacturer
of meters operating through three separate divisions with
different markets and drivers (Gas, Electricity, Water).
Under our ownership we oversaw operating profit margins
increase 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.
We significantly expanded on an optimisation programme
announced by Elster before our acquisition and significantly
exceeded expectations.
Overall we 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. This includes direct
returns to shareholders after a disposal of all three businesses
to Honeywell for £3.3 billion in 2015.
April 2018
GKN
GKN, upon our acquisition,
was a multinational group
of businesses making
predominantly aerospace and
automotive components. Upon
taking control we immediately
set about decentralising the
businesses, and refocusing
them on profitable sales rather
than solely on growth. The GKN
businesses now make up three
distinct divisions within Melrose:
Aerospace, Automotive and
Powder Metallurgy. See pages
16 to 27 to find out more about
our progress in improving the
GKN businesses so far, and our
plans for 2020.
August 2016
Nortek
Bought for
Equity raised on
acquisition
Follow-on investment(1)
Investment(1) as %
of initial equity
(1) Up to 31 December 2019.
£2.2bn
£1.6bn
£0.3bn
14%
Nortek, upon our acquisition,
was a global diversified group,
manufacturing innovative air
management, security, home
automation and ergonomic and
productivity solutions. Whilst
we identified strong brands
and products within each of the
Nortek businesses, as a group the
operations were fragmented and
management was underperforming.
Each business has undergone a
significant transformation, freed
from the restrictions of the formerly
centralised group structure,
material investment from Melrose
in research and development, and
productivity improvements. The full
benefits of our ongoing investments
to implement the necessary
improvement programmes are
still unfolding alongside further
improvements planned for 2020,
as we look to maintain the pace of
change in order to deliver further
value for shareholders.
Strategic ReportMelrose Industries PLC Annual Report 2019 10
Our strategy and business model
Our purpose and strategy
Melrose was founded in 2003 to
empower businesses to unlock their
full potential for the collective benefit
of stakeholders, whilst providing
shareholders with a superior return
on their investment.
We have achieved this through the
implementation of our “Buy, Improve,
Sell” strategy.
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
£4.7 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 4 and 9
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.
Buy
Improve
• Good manufacturing businesses
• Free management from bureaucratic
whose performance can be improved.
central structures.
• Use low (public market) leverage.
• Change management focus,
• Melrose management are substantial
equity investors.
incentivise well.
• Set strategy and targets and
sign off investments.
• Drive operational improvements.
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.
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.
t
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ESG
The Melrose “Buy, Improve, Sell” model necessarily
means that we inherit businesses that are
underperforming in a number of different areas,
including their environmental, social and
governance performance.
We implement stronger operational and financial foundations to
build better businesses, for the collective benefit of stakeholders.
In doing this, we encourage them to improve on historic ESG
underperformance, and make sustained, positive contributions
to the environment and communities in which they operate.
Implementing Melrose ESG values
– our decentralised approach
We encourage, support and invest in our businesses to implement the
following Melrose ESG principles and contribute to a sustainable future,
as further detailed in our ESG report on pages 58 to 69:
• Respect and protect the environment.
• Purposefully engage with key stakeholders to better
understand and deliver on their expectations.
• Prioritise and nurture the wellbeing and skills development
of employees and the communities that they are part of.
• Exercise robust governance, risk management, and compliance.
Multiple expansion Margin growthCash generation Sales growthMelrose Industries PLC Annual Report 2019 11
Sell
• Commercially choose the right time
to sell, often between three and five
years but flexible.
• Invest in the business and support
• Engage closely and often with key
research and development.
external stakeholders.
• Focus on profitability and operating
cash generation – not growth for
the sake of growth.
• Invest in the workforce, closely monitor
health and safety, and secure the financial
health of workplace pension schemes.
• Return value to shareholders
from significant disposals.
• Improve products and customer
• Prudent management of debt levels.
relationships.
Value creation
Outputs
Businesses under improvement
How has Melrose created value?(1)
Aerospace
p.16
Automotive
p.20
Powder
Metallurgy
p.24
Nortek Air
Management
p.28
Other
Industrial
p.32
Margin improvement
Multiple arbitrage
Cash generation
Sales growth
(1) In respect of the McKechnie, Dynacast,
FKI and Elster acquisitions.
48%
32%
16%
4%
Shareholder investment
and gain
(figures up to 31 December 2019):
Average return on equity across
all businesses sold
2.6x
Cash return to shareholders
since establishment
£4.7bn
Reinvestment
£719m
Spent on research and development for
Nortek, Elster and GKN acquisitions being
2.8%
of revenue for the equivalent period
Capital expenditure in 2019
£519m
We implement secure pension scheme funding, operational and financial best
practice, and lead in promoting diversity and neutralising our carbon footprint.
We invest in our businesses to bolster their research and development
capabilities, to enable them to help their customers meet their environmental
objectives, and help ensure the safety of their end-users.
We encourage our businesses to champion the interests, safety and skills
development of their employees.
We instil our values through best practice policies, training, and internal
controls, supported by renewed management and governance structures.
Our businesses’ executive management teams are empowered to implement
the necessary measures to improve ESG performance, by leveraging their
understanding of what their respective stakeholders require.
Sustained, positive ESG performance
The success of our “Buy, Improve, Sell” model relies on building better
businesses that are positioned to prosper over the longer term.
The ESG improvements that we promote and encourage among our
businesses benefit from our long-term view, and are underpinned by
our focus on conducting business with the highest standards of integrity,
honesty, and transparency.
By implementing a stronger culture of operational and financial improvement,
we rebuild our businesses’ resources and capabilities, and enable them to
pursue commercially attuned ESG improvement initiatives.
Strategic ReportMelrose Industries PLC Annual Report 2019 12
Chairman’s statement
Unlocking the full potential
of our businesses
While there remains plenty to do, this clearly
demonstrates that the improvements we are
making to the GKN businesses are starting to
deliver the performance that we believe is
achievable. Nortek Global HVAC (“HVAC”)
has enjoyed another strong year as the
installations of its cutting edge sustainable
StatePoint Technology® in large scale data
centres gain momentum across the globe.
With the appointment of advisors to consider
strategic options for Nortek Air Management,
the business is reported in these accounts as
a stand-alone division and Security & Smart
Technology (“Security”) has been moved to
the Other Industrial division.
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
In line with our progressive dividend policy,
the Board proposes to pay a final dividend
of 3.4 pence per share (2018: 3.05 pence),
making a total dividend for the year of
5.1 pence per share (2018: 4.6 pence), an
increase of 11% from last year. The final
dividend will be paid on 20 May 2020 to
those shareholders on the register at 3 April
2020, subject to approval at the Annual
General Meeting (“AGM”) on 7 May 2020.
Pensions
We are very proud of our track record in
improving the funding of pension schemes
under our stewardship. We were proactive,
transparent and constructive in agreeing
commitments with pension trustees during
the acquisition of GKN to provide comfort
that the improvements we had planned for
the businesses included greater security for
their members. We continue to deliver on our
promises, increasing the prudence of their
funding targets, while over £240 million of
cash contributions so far have helped to
significantly improve the funding position.
This improvement in funding has been
matched by structural enhancements. In line
with plans agreed with the trustees, we have
rebalanced the pension liabilities more evenly
across the supporting businesses. Stronger,
better funded and more secure GKN pension
schemes are the latest example in our good
track record for responsible stewardship.
(1) Results for 2018 include GKN businesses for the
eight months of ownership and have been restated
for discontinued operations.
Justin Dowley
Chairman
Calendar year 2019(1)
The past year has seen us take some
important steps towards unlocking the
full potential of the GKN businesses and
this is showing through in these results.
We achieved statutory revenue for the
Melrose Group of £10,967 million (2018:
£8,152 million), with an adjusted operating
profit of £1,102 million (2018: £813 million)
based on a statutory operating profit of
£318 million (2018: loss of £387 million).
Importantly, adjusted free cash flow improved
by 72% to £591 million on an annualised
like-for-like basis, thus reducing leverage in
the Group to 2.25x EBITDA.
Melrose Industries PLC Annual Report 2019 The Melrose model has
always been focused on
performance improvement
rather than end-market growth
and it is in uncertain and
volatile markets that this
shines through most clearly.
Board matters
As announced last year, co-founder and
Executive Vice Chairman Mr David Roper will
retire at the end of May. His period of service,
first as inaugural Chief Executive and then as
Executive Vice Chairman, has been one of
great success for the business he helped
found in 2003. It is a testament to his
leadership that he leaves Melrose in such
good health. We thank him for his long and
successful service and wish him all the best
in his retirement. David’s departure is part of
the ongoing succession planning for the
Board that has also seen us welcome
Ms Funmi Adegoke as a Non-executive
Director last October.
Although I have only served as independent
Non-executive Chairman for a short period,
I will have served as a Director for nine years
in September 2020, which is a key date for
independent directors under the guidance of
the new UK Corporate Governance Code
(the “Code”) that came into force after my
appointment had been announced. The
Company therefore conducted an
engagement exercise with its key
shareholders regarding the possible
extension of my tenure past the nine year
guidance. I am pleased to say that the
feedback was unanimously supportive and
accordingly, the Board proposes that my
appointment as Chairman continues for up to
a further three years, subject to annual
re-election, to provide stability and certainty
following the acquisition of GKN, as well as to
oversee smooth succession and increasing
diversity for the Board.
Purpose and strategy
Melrose was founded in 2003 to empower
businesses to unlock their full potential for
the collective benefit of stakeholders, whilst
providing shareholders with a superior return
on their investment. This has been delivered
through Melrose’s “Buy, Improve, Sell”
strategy, which means we buy good
quality but underperforming manufacturing
businesses and then invest heavily to
improve performance and productivity as
they become stronger, better businesses
under our responsible stewardship. At the
appropriate time, we find them a new home
for the next stage of their development
and return the proceeds to shareholders.
This current set of results is a strong
demonstration of this strategy in action, and
a continuation of the achievements that have
seen Melrose ranked as the second highest
performer for total shareholder return in the
FTSE 350 over the past decade.
Outlook 2020
2019 was a year of significant progress but
encouragingly much remains to be done
and our divisional teams are delivering.
As such, we expect 2020 to be another year
of good progress driven by each of the key
businesses with a dual focus on efficiency
programmes to deliver operational
improvements, as well as record investment
in research and development, to maintain
technological market leadership. The Melrose
model has always been focused on
performance improvement rather than
end-market growth and it is in uncertain and
volatile markets that this shines through most
clearly. While it is too early to be precise on
the impact of COVID-19 on our businesses or
on wider economic conditions, we remain
focused on what we can control. Longer
term, we continue to see significant value in
the Group and the foundations to realise this
are stronger than ever.
Justin Dowley
Chairman
5 March 2020
13
Environmental, social
and governance (“ESG”)
disclosure
You will see that we have produced
our first standalone ESG report as part
of our Annual Report. This ESG report
draws together the key actions,
programmes and performance on
ESG matters for us and our businesses,
to aid the understanding of our
investors and other stakeholders.
Consistent with our “Buy, Improve,
Sell” strategy, some of the businesses
we acquire may be underdeveloped
in one or more areas of ESG focus.
While we set a good example centrally
through strong governance practices
and responsible stewardship, a key
part of our improvement strategy is
providing the investment, support and
encouragement that our businesses
need to make meaningful, continuous
ESG improvements. This delivers
material production efficiencies, such
as the 30% reduction in emissions
achieved by GKN facilities over the
past two years, and sustainability
breakthroughs on product
developments such as the composite
Wing of Tomorrow and electric aircraft
initiatives of GKN Aerospace, GKN
Automotive’s P4 eDrive system which
enables reductions in CO2 emissions by
up to 100%, and HVAC’s cutting-edge
StatePoint Technology®, which enables
savings of up to 30% for energy
consumption and up to 90% for water
usage on cooling systems in the
fast-growing hyperscale data
centre market.
These are all long-term programmes
requiring significant investment that
will continue to deliver sustainable
benefits long after our ownership,
and demonstrate the strength of our
commitment. We welcome the evolving
focus and clarity on ESG matters as yet
another opportunity to demonstrate
how we build better, stronger
businesses for the benefit of all
stakeholders whilst producing excellent
returns for shareholders. We see these
as entirely compatible and I refer you
to the ESG report for full details.
ESG report
See page 58 to 69
Strategic ReportMelrose Industries PLC Annual Report 2019
14
Chief Executive’s review
Our businesses continue to focus on
improving their performance and delivery,
particularly in critical supply chains.
A strong year
of driving value
After a busy eight months following the
acquisition of GKN, our first full year of
ownership has proved to be equally
significant as our investments and
improvement plans have gained momentum.
Having legally separated all the GKN
businesses and with motivated executive
teams, we were able to increase the focus
on performance, with pleasing results.
Although benefiting from a strong sector,
GKN Aerospace was successful in both
growing its sales as well as improving
adjusted operating margins to approximately
11% in the second half of the year. Continued
record investment in technology supported a
number of advances, including the first
composite components for the Wing of
Tomorrow programme for Airbus, while
continuing efficiency and productivity
programmes saw a return to profitability for
the previously troubled North American sites.
Good progress has been made on the “One
Aerospace” reorganisation announced last
September. This has reshaped the division
into three business lines – Civil Airframe,
Defense and Engines – to align with its
customer base and centralise the global
control of operations under the Chief
Operating Officer. It is a key focus for 2020
to evolve the management structure of
this business.
With the global downturn in the automotive
sector continuing into 2019, GKN Automotive
was quick to take corrective action that
limited its impact on profitability. Although
sales declined 6% over the year in line with
the market, the business was able to improve
adjusted operating margins in the second half
to just under 8% and adjusted operating
profit for the same period rose by 14%
compared with the prior year. These actions
are part of GKN Automotive’s ambitious plan
to achieve the margin target announced last
year and are matched by ongoing record
investment in research and development.
The exciting new collaboration with Delta
Electronics Inc. announced in January 2020
to jointly produce 3-in-1 eDrive systems
builds on a strong existing relationship and
will enable both parties to build on their
respective positions in this dynamic market.
Being predominantly an automotive
component manufacturer, GKN Powder
Metallurgy also felt the challenges of the
automotive sector downturn in 2019. This
was accentuated by its exposure to the
General Motors strike in the second half
which drove sales down by 10% and
adjusted operating margins to 10.5%.
Accordingly, it is implementing a plan to
rebalance its cost base and a focus for this
year is on improving its Sinter Large division.
There is now a strong focus on improving
this business and the recent acquisition of
FORECAST 3D is an exciting opportunity
for GKN Powder Metallurgy to be a market
leader in additive manufacturing.
All of our businesses are keeping the
unfolding events surrounding the COVID-19
outbreak under review. To provide some
context of the impact to date, approximately
10% of Group sales are manufactured in
China, of which only 5% is sold in China.
GKN Automotive has the largest exposure
through its SDS joint venture, but all except
one site are operational after the new year
break. Whilst there is clearly going to be a
material impact on the Chinese economy, at
the time of writing there are increasing signs
of a return to normal levels of production.
The working capital improvement programme
is building momentum across the Group,
which delivered significant progress towards
the targeted £400 million of ultimate savings
through a 5% reduction in trade working
capital. Group cash conversion was strong
at 104%. Each of GKN Aerospace and
GKN Automotive have continued their
focus on procurement, delivering significant
savings year-on-year.
Melrose Industries PLC Annual Report 2019 15
Security has been moved to the Other
Industrial division, with the impairment
unchanged from the interim results, and has
a new management team as it looks to
finalise the transition of its production away
from China to minimise tariff exposure. These
results indicate that the new management
team at Ergotron look to have put recent
challenges from tariffs behind them as they
further develop their product portfolio and
clarify their best routes to market. Brush has
emerged from its restructuring programme
better shaped and well positioned to serve its
growing markets.
Simon Peckham
Chief Executive
5 March 2020
The GKN businesses are also making good
progress in addressing the £629 million of
loss-making contracts we inherited on
acquisition. Through a mixture of operational
improvements, productivity, procurement
initiatives and commercial discussions, they
have achieved sufficient improvements in the
long-term positions of these contracts to
enable a release of approximately 25% of the
remaining provision (as previously indicated,
not included in adjusted operating profit).
GKN Automotive has been particularly
effective in making progress, but we are
confident there are significant further
improvements available to all businesses.
Last year saw a number of important
milestones for Nortek Air Management’s
game-changing data centre climate control
technology StatePoint Technology®, with the
business initiating roll out in two mega-scale
facilities for a global technology company,
and developing a strong pipeline of new
opportunities to gain further market share.
Elsewhere, the Nortek Air Solutions business
continues to go from strength to strength,
while the Air Quality and Home Solutions
business overcame some headwinds in its
Canadian market and delivered a number of
important new product launches.
For further details about the
performance of our businesses,
please see the following sections:
Aerospace
p.16
Automotive
p.20
Powder
Metallurgy
p.24
Nortek Air
Management
p.28
Other
Industrial
p.32
Strategic ReportMelrose Industries PLC Annual Report 2019 GKN Aerospace is a world-leading
multi-technology manufacturer of airframe
and engine structures and electrical
interconnection systems for the global
aerospace industry, across both civil
airframe and defense platforms.
16
Divisional review(1)
Aerospace
Key information
GKN Aerospace is a global tier 1 aerospace
partner with market leading positions driven by
technological innovation, advanced processes
and engineering excellence.
Revenue by business
Revenue by destination
Civil Airframe
Engines
Defense
47%
32%
21%
North America
Europe
Rest of the world
61%
34%
5%
Operational geographies
Global Technology Centres
Netherlands, Sweden, UK, US
(1) All growth metrics are calculated at
constant currency against 2018
annualised results, excluding the
impact of loss-making contracts
in both periods for consistency.
2018 annualised results included
12 months of GKN ownership.
(2) Described in the glossary
to the financial statements
on pages 191 to 195.
gknaerospace.com
36%
Proportion of Melrose
Based on adjusted(2) 2019 operating profit
for all continuing trading businesses
£104mStatutory operating profit£3.9bnAdjusted(2) revenueMelrose Industries PLC Annual Report 2019 17
Highlights
• GKN Aerospace sales grew by 7% in 2019 and the adjusted(2) operating
margin rose to 10.6%, up from 9.9% in 2018. The second half margin
was 11.1%, already close to the target previously set.
• GKN Aerospace is implementing its extensive restructuring project,
“One Aerospace”, to improve performance further and is investing heavily
in new technology to improve aeroplane efficiency in the future.
• North American Aerostructures became profitable in 2019;
only two years ago this part of GKN Aerospace made a £43 million loss.
£409mAdjusted(2) operating profit£3.8bnStatutory revenueStrategic ReportMelrose Industries PLC Annual Report 2019 18
Divisional review(1)
Continued
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 technologies help
aircrafts fly faster, further and greener.
During 2019, GKN Aerospace consolidated
on the early gains made since our acquisition
and continued to take the required actions to
increase customer confidence and improve
operational delivery. Those measures have
resulted in good progress being made in
addressing loss-making contracts identified
in the opening Balance Sheet review,
although this remains a work in progress with
significant further opportunities available.
The business has also kept its exposure to
Boeing 737 MAX under close review and,
in discussion with Boeing, is taking the
necessary mitigating action. The exposure
of GKN Aerospace to the Boeing 737 MAX
is approximately a shipset value of up to
£400,000 for each aircraft.
The business also sharpened its focus on
commercial performance improvement,
supported by operational efficiency measures
and significant investment from Melrose.
These have been particularly noticeable in the
North American transformation programme
in 2019 that has enabled this group of sites to
move from a £43 million loss in 2017 to a
small profit in 2019. This contributed to a
stronger second half performance for
GKN Aerospace, with operating margins
for that period reaching 11% and operating
margin growth across the year of more than
one percentage point.
GKN Aerospace commenced a wholesale
reorganisation during the second half of the
year to create a stronger, simpler, more
competitive business, based on a fully
integrated global operating model and
organised around three business lines:
Civil Airframe, Defense and Engines as well
as a regional network of operational sites
supported by global functions. Over the
next 18 months full deployment of the
“One Aerospace” operating model will
refocus the business to better serve its
customers by placing accountability for
customer relationships and product lines
at the heart of the commercial organisation.
The refreshed organisation will better enable
the business to unlock its full potential by
supporting and directing its key improvement
measures including continued investment
in new facilities, centralised control of
operations, further investment in technology,
and improvements to delivery, quality and
customer relationships. It will also result in a
more streamlined and nimble management
structure. Implementation of the
reorganisation will remain a key focus
for the business in 2020 and into 2021.
GKN Aerospace’s continued investment
in technology led to several landmark
achievements in 2019, strengthening its
position as a key partner to several major
blue-chip customers. In the Civil Airframe
market, GKN Aerospace’s advanced
composite leadership saw it manufacture
and deliver the first components for Airbus’
Wing of Tomorrow programme, including a
revolutionary four-metre demonstrator tool
to accelerate future progress. In Engines,
GKN Aerospace’s world-leading additive
manufacturing capability accelerated the
production of a Fan Case Mount Ring
component. This is the largest purely additive
aerospace part ever produced, while
reducing titanium waste, CO2 emissions,
and production time and costs, and
providing opportunities for expansion
into key engine platforms.
GKN Aerospace also strengthened its
additive manufacturing leadership position
within Civil Airframe and Defense, winning
key roles on collaborative research and
development programmes in the UK and
announcing a new world-leading additive pilot
production cell at Oak Ridge National
Laboratory in the US. These advances in
additive manufacturing technology continue
to target untapped productivity and
profitability improvements, as well
as secure new business opportunities.
(1) All growth metrics are calculated at constant currency
against 2018 annualised results, excluding the impact
of loss-making contracts in both periods for consistency.
2018 annualised results include 12 months of
GKN ownership.
Melrose Industries PLC Annual Report 2019 19
Market trends
Aerospace
The global aerospace market remained
healthy in 2019 with growth in both the civil
and defense sectors, supported by the
following market factors:
• Continued growth in global air
passenger traffic of 4.2%.
• Continued high backlog held by the
major OEMs.
• Lower delivery levels of commercial
aircraft in 2019, propagated by the
Boeing 737 MAX production halt.
• Continued strong growth in the
defense market, driven by increased
spending and new platform
developments.
• Business jet output reaching its
highest level for a decade, due to the
introduction and production ramp-up
of new aircraft models and renewed
confidence in the market.
• 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 by reorganising along three
business lines; Civil Airframe, Defense
and Engines, investing in key sites to
drive improved productivity and to meet
customer ramp-up targets, continuing to
establish its footprint in the growing Asia
market, and streamlining its footprint
elsewhere, where sites do not have a
long-term, sustainable future. GKN
Aerospace also placed increased focus
on technology investment in additive
manufacturing to further enhance
productivity and ensure continual
alignment of its customer offering with
expected future demand. In the longer
term, GKN Aerospace’s globally integrated
structure is anticipated to enhance the
benefits that are expected to flow from
each of these improvement initiatives, to
accelerate its prospects of outperforming
the market.
Number of commercial aircraft deliveries (historic & forecast)(1)
Long-term forecast deliveries underpinned by strong orderbook
Number of commercial aircraft deliveries (historic & forecast)(1)
Long-term forecast deliveries underpinned by strong orderbook
-2.2% CAGR 2020-2024
Forecast deliveries
Historic deliveries
2.4% CAGR 2009-2019
2.4% CAGR 2009-2019
Historic deliveries
Forecast deliveries
-0.7% CAGR 2020-2023
-2.2% CAGR 2020-2024
-0.7% CAGR 2020-2023
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
2022
2023
2024
(1) Source: Teal Group, Aircraft Market Forecasts & History, Commercial Aircraft, December 2019
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
World fighter production in number of deliveries(2)
(1) Source: Teal Group, Aircraft Market Forecasts & History, Commercial Aircraft, December 2019
Fighter market shows strongest growth, driven by F-35 ramp-up
World fighter production in number of deliveries(2)
Fighter market shows strongest growth, driven by F-35 ramp-up
Forecast deliveries
Historic deliveries
2022
2023
2024
0.4% CAGR 2009-2019
0.4% CAGR 2009-2019
Historic deliveries
6.6% CAGR 2019-2024
Forecast deliveries
6.6% CAGR 2019-2024
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
2022
2023
2024
■ Wide body
■ Narrow body
■ Wide body
■ Narrow body
■ Undetermined non-F-35
■ Undetermined F-35
■ Undetermined non-F-35
■ US F-35
■ Undetermined F-35
■ US
■ US F-35
■ Rest of the world
■ US
■ Russia
■ Rest of the world
■ Europe
■ Russia
■ Europe
(2) Source: Teal Group, Aircraft Market Forecasts & History, Fighter Aircraft, December 2019 (US F-35 deliveries incl. Partner country delivery numbers)
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
2022
2023
2024
(2) Source: Teal Group, Aircraft Market Forecasts & History, Fighter Aircraft, December 2019 (US F-35 deliveries incl. Partner country delivery numbers)
15
Countries with GKN Aerospace
manufacturing locations, serving
over 90% of the world’s aircraft
and engine manufacturers
4
Global technology centres
£50m
Investment to strengthen previously
underinvested sites in UK and US
Throughout the year, GKN Aerospace
continued its strategic repositioning in the
emerging Asia market, announcing a new
facility in China and starting production in its
new wiring site in Pune, India, while closing
two loss-making sites. With Melrose support,
over £50 million was committed to new
investment in productivity across key
European and US facilities, including
Cowes, Luton and Portsmouth in the UK,
and Garden Grove in the US.
Outlook
Despite some challenges, overall the
long-term civil aerospace market remains
in line with our acquisition assumptions,
with order backlog and predicted aircraft
requirements supporting a positive long-term
outlook for GKN Aerospace globally.
An increase in international defence spending
is driving strong demand expectations in the
aerospace defence market.
While the Boeing 737 MAX has made
headlines over the past 12 months, the full
extent of the impact on the market still
remains unclear for 2020 and, whilst relatively
less significant for GKN Aerospace, the
business is taking appropriate mitigating
actions. GKN Aerospace’s strong
relationships with major OEMs and good
exposure to the growing Asian market,
world-leading technology and a renewed
focus on operational efficiencies driven
centrally across its global footprint, is
expected to enable a reshaped GKN
Aerospace to continue to deliver further
improvements towards achieving its margin
targets and again perform strongly in 2020.
Strategic ReportMelrose Industries PLC Annual Report 2019 20
Divisional review(1)
Continued
Automotive
GKN Automotive is a leading supplier of driveline
technologies to the global automotive industry
and a trusted partner to over 90% of the world’s
car manufacturers.
Highlights
• GKN Automotive sales reduced by 6% over the
full year 2019 in line with the market, but saw an
improved trend in the second half, being 4% down,
despite the General Motors strike in the autumn.
• An exciting new commercial partnership in
eDrive has been signed with Delta Electronics Inc.
to accelerate the development of electric vehicles.
• GKN Automotive’s adjusted(2) operating margin in
the full year was 7.7% with the second half margin
rising to 7.9% up from 6.8% in 2018. This meant
the adjusted(2) operating profit actually rose by
14% in the second half compared to the same
period in 2018 despite the macro automotive
sector headwinds.
£4.1bnStatutory revenue£186mStatutory operating profitMelrose Industries PLC Annual Report 2019 21
Key information
GKN Automotive is a world leading supplier of
automotive driveline technology and systems used
across the automotive industry, from the smallest
ultra-low-cost cars to the most sophisticated
premium vehicles demanding the most complex
driving dynamics.
Revenue by business
Revenue by destination
Driveline
ePowertrain
72%
28%
Europe
North America
Rest of the world
35%
34%
31%
Operational geographies
32%
Proportion of Melrose
Based on adjusted(2) 2019 operating profit
for all continuing trading businesses
Global Technology Centres
China, Germany, Japan, UK, US
(1) All growth metrics are calculated
at constant currency against 2018
annualised results, excluding the
impact of loss-making contracts
in both periods for consistency.
2018 annualised results include
12 months of GKN ownership.
(2) Described in the glossary
to the financial statements
on pages 191 to 195.
gknautomotive.com
£4.7bnAdjusted(2) revenue£367mAdjusted(2) operating profitStrategic ReportMelrose Industries PLC Annual Report 2019
22
Divisional review(1)
Continued
GKN Automotive has global operations
in 21 countries and is principally
organised around its two key core
competencies: (i) Driveline, which is the
world’s pre-eminent global driveshaft
manufacturer; and (ii) ePowertrain, an
industry leader in electric powertrains
(“eDrive”) and intelligent all-wheel drive
(“AWD”) systems.
The Driveline business is an industry leader,
supplying to more than 90% of global vehicle
manufacturers, with more than 50% of the
80 million new cars sold each year running
on GKN Automotive parts. The business
provides a comprehensive range of
sideshafts, propshafts and constant velocity
joints, offering a simple, reliable solution for
every type of hybrid, electric or combustion
passenger vehicle. Despite the global
automotive downturn in 2019, the Driveline
pipeline has expanded throughout the year,
bolstering the division’s market leading
position as it moves into 2020.
GKN Automotive also has an unparalleled
17 years of eDrive development and
integration expertise and has produced
more than one million eDrive systems to date,
with a rapidly expanding order book. The
business has pioneered the advancement of
eDrive technologies, developing its systems
integration and production capabilities. GKN
Automotive recently announced a strategic
collaboration with Delta Electronics Inc., a
global power electronics specialist, for the
joint development of advanced eDrive
technology, with GKN Automotive acting
as system integrator.
1million
One millionth eDrive system
was delivered in 2019
£76m
In powertrain research
and development
21
Countries in the global
production footprint
5
Global technology centres
This partnership will further GKN
Automotive’s technical capabilities and
accelerate time to market for scalable, next
generation semi integrated 2-in-1 and fully
integrated 3-in-1 eDrive systems of power
classes from 80kW to 155kW. This important
development milestone has been matched by
commercial success, with four successful
programme launches and £2.4 billion of
lifetime value ePowertrain programmes
secured, and the delivery of GKN
Automotive’s millionth eDrive system. This
milestone underlines GKN Automotive’s early
technology position in the fast-growing and
competitive eDrive market, which is projected
to be worth more than £12 billion by 2030.
China continues to be an important market
for GKN Automotive. A long-standing
excellent relationship with local partner
HASCO through GKN Automotive’s 50%
equity investment in the strong joint venture,
Shanghai GKN HUAYU Driveline Systems
(“SDS”), continues to generate impressive
returns. The business in this region
experienced a healthy evolution of its eDrive
pipeline in 2019 and executed three major
eDrive programme launches during the year.
GKN Automotive is closely monitoring the
situation surrounding the COVID-19 outbreak,
both in China and elsewhere, and is working
to mitigate the potential impact. It will be
quick to take action where required. Whilst
COVID-19 is very likely to have a negative
effect on the Chinese economy this year, the
market position of the joint venture makes us
confident that China will be a very successful
market for GKN Automotive in the future.
Despite facing challenging global market
conditions, 2019 was a strong year for
GKN Automotive. An inevitable market-driven
sales decline was offset by the disciplined
operational focus of the refreshed and settled
management team and targeted cost
control measures, resulting in an increase
in operating profit margins that were just
short of 8% in the second half. This margin
performance is benefiting from the
implementation of an ambitious improvement
programme based on six main levers,
including procurement optimisation, fixed
cost reduction, commercial improvement
and operational excellence.
(1) All growth metrics are calculated at constant currency
against 2018 annualised results, excluding the impact of
loss-making contracts in both periods for consistency.
2018 annualised results include 12 months of
GKN ownership.
Melrose Industries PLC Annual Report 2019 23
The improvement programme has a very
healthy pipeline of value creation initiatives,
some of which have already contributed to
the margin improvement witnessed in 2019.
Procurement delivered over £40 million of
savings from both direct and indirect material
purchasing and value engineering, while
centralising the function has improved
costing intelligence and diversified supply
sources. Strategic footprint rationalisation
opportunities continue to be assessed,
with the business building greater discipline
around its investment in its core manufacturing
capabilities, driven by smart automation and
insourcing of essential, core GKN Automotive
capabilities, as well as targeted footprint
expansion in best cost locations supported
by rationalisation elsewhere.
The business also made significant progress
in addressing loss-making contracts, taking
an integrated approach to driving efficiencies
while improving commercial terms and
performance delivery, enabling a £60 million
release from the opening Balance Sheet
provision and making a distinct impact on
current programme profitability. Through a
better allocation of resources and increased
focus on working capital management
throughout 2019, GKN Automotive was also
able to make significant improvements in
cash flow, with a conversion rate of greater
than 100% for the full year.
Outlook
GKN Automotive’s performance in 2019
has set strong foundations for further
performance improvements. While global
production volumes are expected to remain
soft and the full impact of the COVID-19
outbreak is not yet known, continued focus
on cost management initiatives in its
improvement plan are expected to have a
further positive impact on underlying
operating profit margins.
Driveline has over 60 programme launches
planned for 2020 and is pushing hard to drive
productivity gains through smart automation
and execution of operational excellence and
industrial strategy initiatives approved and
deployed in 2019. For ePowertrain, market
growth is expected to continue in 2020,
which is expected to accelerate GKN
Automotive’s delivery of next generation semi
integrated 2-in-1 and fully integrated 3-in-1
eDrive systems, further strengthening the
business’s position in the sizeable and rapidly
expanding eDrive market.
With a positive underlying operating margin
trajectory, improved cash position, and the
strategic investments that the business made
during 2019, we believe 2020 is set to be
another year of transformation for GKN
Automotive irrespective of market conditions.
Market trends
Automotive
The global automotive sector has endured
continued challenges in 2019 which
impacted sales performance at GKN
Automotive during the year. The most
significant factors impacting GKN
Automotive’s business environment are:
• Market headwinds: Global light
vehicle production was down 6%
year-on-year, driven by China (-11%),
Western Europe (-7%) and North
America (-4%)(2).
• Evolving technological landscape:
Accelerated adoption of electrification
and new mobility solutions is impacting
GKN Automotive’s supply chain,
product mix and competitive
landscape.
• Political turbulence: Uncertainty
around trade tariffs (particularly
between the US and China), legislative
changes associated with Brexit,
OEM employee industrial action,
and the full impact of COVID-19.
• Sociodemographic behaviours:
Shift in demand for vehicle/platform
types (including the decline of diesel
due to environmental concerns)
and the emergence of new mobility
solutions (such as ride sharing).
GKN Automotive has responded to
these trends through investment in its
leading eDrive technologies, a focus
on operational performance across
the business, close development and
collaboration with OEMs, and the adoption
of a leaner, more agile business model,
which is set to continue. Review of the
business’s cost structure and targeted
restructuring initiatives shall also continue
at certain sites during 2020.
(2) Source: January 2020 IHS Light Vehicle Production.
Strategic ReportMelrose Industries PLC Annual Report 2019
24
Divisional review
Continued
Powder Metallurgy
GKN Powder Metallurgy is a global leader in both
precision powder metal parts for the automotive
and industrial sectors, and the production of
metal powder.
Key information
We combine advanced powder metals with innovative
production technologies to create unique metal
products – smart, reliable and precise.
Revenue by market type
Revenue by destination
Automotive
Industrial
70%
16%
Europe
North America
Hoeganaes Metal Powder 14%
Rest of the world
31%
47%
22%
Operational geographies
Global Technology Centres
Germany, Italy, US
(1) Described in the glossary
to the financial statements
on pages 191 to 195.
gknpm.com
10%
Proportion of Melrose
Based on adjusted(1) 2019 operating profit
for all continuing trading businesses
£1.1bnAdjusted(1) revenueMelrose Industries PLC Annual Report 2019 25
£1.1bnStatutory revenue£117mAdjusted(1) operating profit£77mStatutory operating profitStrategic ReportMelrose Industries PLC Annual Report 2019 26
Divisional review
Continued
GKN Powder Metallurgy comprises
(i) Sinter Metals – the world’s leading
manufacturer of precision automotive
components and components for
industrial and consumer applications
spread across its Small and Large
segments; (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 additive
manufacturing parts, both metals and
polymer, and materials for prototypes,
manufactured through a global, digitally
connected print-network.
During 2019, GKN Powder Metallurgy faced
its most challenging market conditions for
some years, most notably in the automotive
sector, that most significantly impacted the
Sinter Large segment of its business. Whilst
the business largely outperformed the market
in Europe, China and Brazil, in its largest
market of North America the combination
of a weaker domestic automotive market,
the impact of industrial action at certain
customers, and reduced exports to China
proved challenging, as reflected in the 2019
results. This has nonetheless provided some
opportunities, with further market
consolidation expected as smaller
competitors exit the market.
Although sales performance was impacted
by macro events, the business was largely
able to protect margins through investment
and efficiency programmes that are part
of a wider renewed strategic plan for the
business, which is being implemented after a
comprehensive review of its operations and
cost base. This plan has a particular focus on
the underperforming Large segment of Sinter
Metals and has included the closure of two
plants in North America, as well as further
continuous improvement initiatives to bolster
Sinter Metals’ market leadership in product
quality and delivery. These have reduced
non-conformities and unnecessary expedited
freight costs. Further improvement is planned
for the Large segment of Sinter Metals
in 2020.
Melrose Industries PLC Annual Report 2019 Further automation initiatives were deployed
throughout the GKN Powder Metallurgy
production footprint during 2019, supported
by increased shop floor digitisation. The
harnessing of additional activity data points
has enabled more detailed and targeted
mapping of future improvement initiatives in
process efficiency, quality control and supply
chain management, with a view to further
bolstering GKN Powder Metallurgy’s
technological and operational leadership.
While rightly focusing on cost efficiency
improvements, the business nonetheless
continues to pursue expansion opportunities.
After acquiring a small European sinter
business in March 2019, GKN Powder
Metallurgy completed its acquisition of a
leading US plastic 3D polymer printing
company called FORECAST 3D in January
this year. This acquisition has added 25 years
of polymers experience and capability to its
already advanced additive manufacturing
production capabilities. Once fully integrated,
it will build on the success of GKN Powder
Metallurgy’s Metal Jet technology and further
the business’s geographic reach in North
America as well as its market expansion and
leadership ambitions in the high-growth
3D metal and plastics printing solutions
market globally.
Outlook
Delivery of the operational improvement
opportunities remains the key strategic focus
for GKN Powder Metallurgy in 2020 as it
continues to take the steps necessary to
achieve its margin targets. The business is
optimistic for its performance for the year,
despite the challenging end-markets
expected for the foreseeable period.
27
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
through digitisation.
• Legislative clamp-downs to
reduce emissions.
• The increase of electrified vehicles
and manufacturing equipment.
These trends are driving industrial
transformation and digitisation in
all markets in which GKN Powder
Metallurgy operates. Significant
growth potential is seen in the additive
manufacturing market in materials, and
components. The FORECAST 3D
acquisition adds the more evolved
polymer to the parts portfolio.
This will accelerate market penetration
of 3D printing solutions with existing
and new customers.
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.
Strategic ReportMelrose Industries PLC Annual Report 2019 Highlights
• Nortek Global HVAC continues
to benefit from its leading edge
sustainable StatePoint Technology®
to reduce energy and water
consumption in data centres.
28
Divisional review
Continued
Nortek Air
Management
The Nortek Air Management division
comprises (i) Nortek Global HVAC (“HVAC”)
and (ii) Air Quality and Home Solutions (“AQH”).
Key information
HVAC manufactures leading custom and commercial
air solutions and StatePoint Technology® liquid
cooling systems.
AQH is a leading manufacturer of ventilation products
for the residential markets.
Revenue by business
Revenue by destination
Nortek Global HVAC
59%
The Americas
Air Quality
and Home Solutions
41%
Europe
Asia
94%
4%
2%
Operational geographies
15%
(1) Described in the glossary
to the financial statements
on pages 191 to 195.
nortekhvac.com
broan.com
Proportion of Melrose
Based on adjusted(1) 2019 operating profit
for all continuing trading businesses
£1.2bnStatutory revenueMelrose Industries PLC Annual Report 2019 29
£1.2bnAdjusted(1) revenue£175mAdjusted(1) operating profit£139mStatutory operating profitStrategic ReportMelrose Industries PLC Annual Report 2019 30
Divisional review
Continued
Nortek Global HVAC
The HVAC business includes the
custom and commercial business of
Nortek Air Solutions, the residential
and light commercial business of
HVAC and the dedicated data centre
business of StatePoint liquid cooling.
It employs a strategic framework
of sustained growth, operational
excellence, favourable cash flow
conversion and a commitment
to its customers.
During 2019, the HVAC business continued
its focus on creating long-term value through
strategies aimed at driving margin expansion
and future revenue growth. The introduction
of common procedures and optimisation of
footprint and supply chain has simplified the
business while HVAC is starting to benefit
from significant investment in innovation and
technology through the development of
breakthrough products and new portfolios.
It has sought to maximise the impact of these
improvements with sales channel growth
to extend market leadership in critical
segments of the HVAC value chain and
better cover previously under-penetrated
North American regions.
Throughout the year HVAC has successfully
launched new products and value
propositions that address a number of key
global societal challenges, including the
reduction of energy usage intensity, improved
water efficiency and the expansion of broader
air-management standards. The regulatory
changes governing refrigerants used in the
HVAC sector are resulting in the largest
product transition in decades, with HVAC’s
significant investment in innovation and
technology meaning it is strategically well
positioned to gain market share across its
product portfolio.
Market trends
Nortek Global HVAC
Global IT spending on data centre
systems reached US$205 billion in 2019,
an increase of 46% from 2012(2). Such
hypergrowth is anticipated to magnify the
demand on energy resources, especially
electricity and water, and the impact of
data centres on the global energy and
carbon footprint. The macro-economic
drivers that currently fuel the growth of this
sector include the proliferation of
digitisation (capturing analogue information
in a digital format), the adoption of new
applications and services such as cloud
computing, blockchain, connected devices
(from automobiles to smart cities), and
nascent computing methods emanating
from artificial intelligence, virtual reality and
augmented reality, and cryptocurrency.
Building on its market leading position in data
centres, HVAC is harnessing the advantages
of its technology leadership to make
developments right across its product
offering, as well as into adjacent product lines
such as desiccant-enhanced evaporative
cooling systems. With the launch of a suite
of new products and services to help
end-markets react constructively to global
trends, the business continued to lead the
way in 2019. Nortek Air Solutions again
delivered on its investments, showing further
margin improvement as well as strong sales
growth. The residential business faced more
market challenges but was quick to react in
implementing a series of efficiency initiatives,
including footprint rationalisation, that
mitigated some of the impact.
Outlook
Having moved into the construction phase
of hyperscale data centre projects for its
StatePoint Technology® cooling systems
during 2019, HVAC has proven its ability to
deliver on the promise of this transformational
opportunity and expects to pursue similar
large-scale projects in 2020. Further growth
is backed by a product portfolio and
technology leadership that provides a
platform to remain ahead of the market.
Combining this with a balanced and dynamic
capital allocation strategy and experienced
management team, HVAC expects further
strong operational and financial performance
in 2020.
This is most notably highlighted by HVAC’s
market leading position in the global
data centre market, with very significant
demand opportunities. HVAC achieved
standout commercialisation of its
StatePoint Technology® liquid cooling system
in 2019, which included a multi-continent
collaboration with a leading global technology
company to provide cooling solutions. These
systems deliver greatly superior performance
and geographic flexibility in the design and
construction of world-class hyperscale data
centres across the world.
Vitally, this investment has also demonstrated
HVAC’s longstanding commitment to
sustainability, with StatePoint Technology®
cooling systems enabling surrounding
communities to benefit from up to 30%
energy savings and up to 90% water
efficiency. These significant improvements in
performance and efficiency are fundamentally
important for the HVAC equipment market that
is predicted to grow by over US$50 billion at a
CAGR of 5% over the next five years.(1)
HVAC shall continue to serve its core
markets through technological innovation
and product leadership, to provide
infrastructural solutions that seek to
overcome continued environmental and
regulatory pressures aimed at reducing
energy and water usage intensity,
reducing carbon emissions, to enable
consumers and businesses to act in a
more sustainable manner.
(1) Source: Technavio.
(2) Source: https://www.statista.com/statistics/314596/
total-data-center-systems-worldwide-spending-forecast/
Melrose Industries PLC Annual Report 2019 31
Market trends
Air Quality and Home Solutions
• Outlook for the home improvement
industry remains positive but not as
strong as in previous years.
• Home building supply prices
are expected to stabilise as
no new tariffs are anticipated and
commodities stabilize, and in some
segments (steel) see a decline.
• Rising home prices and traditionally
lower interest rates should continue
to encourage homeowners to
engage in ongoing maintenance
and repair spending.
• China’s air quality continues to
improve, slowing growth of fresh air
systems for consumers’ purchases.
Growth continues in big commercial
buildings and projects.
AQH continues to refresh its product
offerings across multiple categories
that address market demands and
competitive pressures. The ventilation
category will be building on the
momentum built during 2019 launches,
including range hood product
introductions to address competitive
pressures in the chimney hood
segment, and the introduction of a
“connectable” whole home air quality
solution. The strategy will leverage the
business’s market share and
established product presence in the
residential sector.
The digital channel and shopping
market opportunity continues to grow,
and the business continues to focus
and invest in its digital platforms to
maximise this, and to work closely with
its trading partners to optimise product
information and online media. This
investment has been well received from
all online partners and is expected to
grow during 2020.
Air Quality and Home Solutions
AQH is a leading manufacturer of
ventilation products for the professional
building remodelling and replacement
market, the residential new construction
market, and the consumer DIY market.
It supplies to distributors and dealers of
electrical and lighting products, kitchen
and bathroom dealers, retail home
centres and private label customers from
its four manufacturing locations around
the world. AQH enjoys a leading market
share and installed base in US residential
ventilation fans and range hoods.
Strong performances in 2019 from the
business’s high margin brands Zephyr and
Best and above-market growth in China were
enough to offset wider market headwinds, in
particular weak housing starts in the US and
Canada. This resulted in largely flat sales for
the year, although there was some targeted
growth in the appliance and wholesale
channels and a breakthrough in the fresh air
segment. The business was successful in
negotiating pass-through arrangements to
partially mitigate the negative impact of tariffs.
An installed base of 80 million units in North
America following years of market leadership
provides a significant opportunity for
recurring replacement and remodelling
revenue. Accordingly, AQH has refocused
some of its new product development to
address this with the aim of increasing its
market share in aftermarket revenue. 2019
also saw a number of product upgrades
including more powerful and efficient fresh
air platforms, a new cooker hood ventilation
range, and a connectable whole home air
quality solution.
Operationally, AQH continued to optimise and
realise production efficiencies throughout
2019 to offset margin challenges from tariffs,
higher first half commodity costs and
competitive pricing pressures. The business
continues to manage the product transfers
that are generating margin opportunities,
with further supply chain and logistics
improvements set to deliver additional
savings in 2020.
Outlook
Some cautious recovery is expected in those
North American markets that had a difficult
2019, with the business targeting sales
growth for 2020 through a strong pipeline
of new product development, scheduled
product extensions, and the opportunities
presented by the large installed base.
Operationally, further supply chain, logistics
and product optimisations are planned for
2020, providing confidence in the outlook
of the business for the year.
Strategic ReportMelrose Industries PLC Annual Report 2019 32
Divisional review
Continued
Other
Industrial
The Other Industrial division(1) comprises
(i) Brush, (ii) Security & Smart Technology
(“Security”), and (iii) Ergotron.
Key information
Brush is a leading independent provider of Turbo-
generators, Transformers and Switchgear, and a
fast-growing provider of Services across these core
product segments.
Security & Smart Technology is a leading developer and
manufacturer of security, home automation and access
control technologies for the residential and commercial
markets, principally in North America.
Ergotron is a leading designer, manufacturer and distributor
of ergonomic products for use in a variety of working,
learning and healthcare environments.
Revenue by business
Revenue by destination
Security & Smart Technology 41%
North America
Ergotron
Brush
35%
24%
Europe
Rest of the world
69%
20%
11%
(1) The Walterscheid Powertrain
Group was sold during the year
and Wheels & Structures is held
for sale and both are classified
as discontinued operations.
(2) Described in the glossary
to the financial statements
on pages 191 to 195.
brush.eu
nortekcontrol.com
ergotron.com
£708mAdjusted(2) revenueMelrose Industries PLC Annual Report 2019
33
Brush
Brush is a profitable, cash generative
business serving more diverse and
growing end-markets than ever
before, which benefit from supporting
macro trends.
The structural realignment of Brush’s
manufacturing footprint is now complete
and cost benefits are being realised by a
strengthened and refocused management
team in line with expectations. Brush is now
repositioned for future growth, driven by
product innovation, asset life extension,
improved productivity and building on its cost
reduction initiatives that continue to generate
savings. Brush has continued to invest in
product development across all of its
businesses, including broadening its product
range in Switchgear and enhancing its
Turbogenerators product portfolio.
While trading conditions in the turbogenerator
market remained challenging, the reshaped
business matches this new reality and has
mitigated the impact. For Switchgear,
increased DC business from China through a
number of new metro projects offset delays
within the UK Distribution Network Operator
sector, and the penetration of new product
lines has been positive. After a slow start,
activity in Transformers increased significantly
during the latter half of 2019, contributing to
a strong order book for deliveries scheduled
well into 2020.
Services activity remained somewhat
subdued across all product segments as
some key customers deferred maintenance
activities as a result of market conditions.
However, Brush’s newly strengthened
commercial function for Services and
increased bespoke collaboration with key
industries began to yield good results in the
latter half of the year.
Outlook
Brush has emerged from 2019 as a stronger
and more agile business, with a significant
order backlog built on a more diversified
customer base and product portfolio that
addresses customer needs in a broad range
of traditional and emerging end-markets.
After putting recent challenges behind it and
now under strategic review, the business is
confident of a good performance from its
current base in the coming years.
Market trends
Brush
Traditional power markets have seen
significant disruption in recent years,
driven by the overall growth in
renewables and rapidly increasing
demand for more efficient sources of
energy. These trends are bolstered by
signs that global energy consumption
is set to increase, with the main growth
driven by China, India and other
emerging markets.(3)
With renewable energy continuing to
cause substantial structural change
to electricity generation and power
distribution, Brush is targeting further
market opportunity in helping network
operators address the challenge of
supply volatility within the grid.(4)
Electrification in developing markets,
greater investment in rail and tram
infrastructure and regulatory strategies
favouring asset upgrade as opposed to
replacement, present significant growth
opportunities for Brush. Brush is
continuing to adapt to these new
market realities, with increased focus
on increased asset performance
visibility, and the digitalisation of service
monitoring, to reduce or avoid the
prohibitive cost of failure and financial
penalties associated with downtime.
(3) Source: https://www.iea.org/data-and-statistics/
charts?energy=electricity&page=4
(4) Source: https://www.iea.org/data-and-statistics/
charts?energy=electricity&page=5
7%
Proportion of Melrose
Based on adjusted(2) 2019 operating profit
for all continuing trading businesses
£708mStatutory revenue£86mAdjusted(2) operating profit£170mStatutory operating lossStrategic ReportMelrose Industries PLC Annual Report 2019 34
Divisional review
Continued
Security & Smart
Technology
Security continues to bolster its
expertise in the design and manufacture
of wireless connectivity devices, to
leverage its strong brand presence in
professional security, integrator and
custom installer channels, and to invest
in its relationships with top resellers.
The business experienced another difficult
year in 2019 as it faced increasing market
competition and higher tariffs on many of its
products, leading to the impairment
announced at the half year. Throughout 2019,
Security rebuilt its management team and
maintained its strong focus on product
development, leading to a strong pipeline of
innovative products, many of which are set
for release in 2020.
Security continued to optimise its operations
and footprint in 2019, including the
consolidation of its research and
development and back-office functions into
newly built headquarters in California, US,
and the successful shift of production away
from China in response to increasing tariffs.
These efforts have resulted in reduced
operating costs and an improved working
capital structure, as well as providing the
business with a more streamlined footprint
moving forward.
Outlook
In 2020 a new management team, with a
renewed discipline and focus on product
development in core offerings, will be
executing an updated go-to-market sales
and marketing strategy. Following the
successful transition of the business’s
production activities to a third-party
manufacturer, the business is repositioned
for a better performance in 2020.
Market trends
Security & Smart Technology
The Security division continues to operate
in a residential security and home
automation market that is:
• Increasingly competitive due to the
dual forces of new market entrants
and expanding offerings by existing
technology companies, security
providers, ISPs, and other electrical
manufacturers.
• Driven by connected solutions
that interact and integrate within
the ever-expanding Internet of
Things product space to provide
enhanced functionality.
• Challenged by growing consumer
concerns about the use and security
of in-home devices and the personal
data they generate.
• Experiencing pricing pressures
due to the continued rise of
DIY solutions.
• Subject to rising trade tariffs
in the US.
In response to these market dynamics,
the business is integrating its security and
control sales groups and streamlining its
marketing and brand approach to better
support and educate customers across
channels on its product offerings and their
integrated capabilities.
The business is investing in new products
with enhanced features and improved
connectivity, including further integration
of IntelliVision technology into a next
generation security panel planned for
release in 2020, that will leverage the
encrypted sensor technology already
developed while providing data storage
and security on the edge.
Melrose Industries PLC Annual Report 2019 35
Market trends
Ergotron
• The healthcare market continues
to present significant expansion
opportunity for ergonomic solutions,
primarily driven by continued global
growth in electronic medical records,
integration of mobile and tablet
devices into healthcare environments,
and initiatives to reduce the strain on
caregivers and provide information
access closer to patients.
• New growth opportunities within the
corporate office market are expected
to emerge from increasing user
awareness about the negative effects
of sedentary disease and its impact
on employee health and wellbeing,
increased usage of dual monitors for
productivity combined with ergonomic
awareness of monitor placement, and
office furniture trends around
collaboration and user choice.
• The evolution and adoption of active
classrooms in the education market
continues to grow, with increasing
demand for height-adjustable student
desks and device/notebook
management and charging.
Ergotron continues to respond to these
ongoing market trends through its broad
product offering, most notably in
healthcare where the business’s solutions
range from industry-leading mobile carts
to wall mounted solutions that can be
integrated with specific applications. The
corporate office business vertical offers
a sit-and-stand solution that retrofits to
existing desks, alongside a height
adjustable electric desk product line.
These strong market offerings now benefit
from a newly refined and repositioned
brand promise, which resonates boldly
with channel partners and end-users
across all verticals. Finally, focus on
growth in markets outside of North
America and entry into new markets such
as Industrial is expected to allow Ergotron
to leverage existing and develop new
products to satisfy market demands.
Ergotron
Highlights
• Ergotron ended the year strongly
with its second half profit being 26%
ahead of the previous year.
Based in Minneapolis, US, Ergotron
comprises four business segments:
Healthcare, Office, Education
and Custom.
Ergotron continues to drive a product
leadership strategy, focusing on high-growth
industry sectors and growing its presence in
the EMEA and APAC regions. In 2019 the
business was reorganised into focused end
segments positioning it for growth. Tariff
headwinds were mitigated through pass
through arrangements and securing certain
regulatory exclusions.
Significant improvements have been
made in new products, rapid prototyping,
test laboratories, CRM enhancement and
improved channel engagement. Closure of
non-core operations in Tualatin, Oregon and
Phoenix, Arizona, US enabled the business
to refocus its footprint to reflect its
core strengths.
Outlook
Ergotron expects growth of its core
businesses to accelerate in 2020, led by the
healthcare segment, due to a significant
number of new product launches, enhanced
end-market focus, channel partner
realignment and accountability. Alongside
current markets, Ergotron is building its
incremental growth prospects from new
markets such as Office Furniture and
Industrial. A new leadership team, revitalised
channel engagement, new products and
building on the new product momentum
established in 2019, all point to a positive
trajectory in 2020.
Strategic ReportMelrose Industries PLC Annual Report 2019 36
Key performance indicators
Measuring our performance
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.
(1) 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 39 and in
the glossary to the financial statements
on pages 191 to 195.
(2) Where appropriate comparative
amounts have been restated to reflect
the continuing operations only.
(3) Adjusted (1) operating profit before
depreciation, and amortisation
of computer software and
development costs.
Financial KPIs
Adjusted (1) diluted earnings
per share
Adjusted (1) operating profit
Net debt to adjusted (1)
EBITDA(3)
14.3 pence
£1,102m
2.25x
2017
2018
2019
9.8p
12.7p(2)
14.3p
2017
2018
2019
£279m
£813m(2)
£1,102m
2017
2018
2019
1.90x
2.28x
2.25x
Method of calculation
Group adjusted (1) profit after
tax of continuing businesses,
attributable to owners of the
parent, during the year ended
31 December 2019, 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 continuing businesses in
existence during the year ended
31 December 2019.
Strategic objective
To improve profitability
of Group operations.
Method of calculation
Net debt at average exchange
rates divided by 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.
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. Therefore, the
larger the workforce, the more
heavily such division’s 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
0.13
2017
2018
2019
0.13
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
0.23
2017
2018
2019
0.22
0.27
0.23
Records the average number of lost time
accidents that have resulted in more than three
days off work, per 200,000 hours worked.
Accident severity rate
18.23
2017
2018
2019
19.11
18.23
27.64
Records the average number of days an
employee takes off work following an accident
at work.
The Nortek Global HVAC site in
Montreal suffered a tragic fatality.
Although the health and safety
authorities provided their clearance,
the affected business conducted
an immediate and thorough internal
investigation and wider audit,
resulting in measures to ensure the
workforce remains safe including a
complete overhaul of its health and
safety procedures. Within a week of
the incident, the business convened
a safety conference to conduct a
comprehensive health and safety
review, which included process
safety management evaluations
for all relevant operations across
the business, and safety audits of
powered industrial truck operations,
confined space, work at elevated
heights, machine guarding, control
of hazardous materials and process
safety management. The review
resulted in the business redefining
its safety policies to ensure they
aligned with best practice, and
the establishment of an Accident
Review Board to investigate and
recommend improvements.
In addition, regrettably, a separate
fatality occurred at a plant in
Zhoupu, China which, whilst not
under GKN Automotive control, is
managed locally by its joint venture
partner SDS.
Melrose Industries PLC Annual Report 2019 37
Interest cover
10.8x
Final dividend
per share
3.40 pence
Adjusted (1) profit conversion
to cash percentage
Adjusted (1) operating
profit margin
9.5%
104%
2017
2018
2019
95%
90%(2)
104%
2017
2018
2019
13.3%
9.4%(2)
9.5%
2017
2018
2019
19.6x
2017
2018
2019
11.6x
10.8x
2.8p
3.05p
3.40p
Health and safety
Method of calculation
Percentage of adjusted (1) EBITDA(3)
conversion to cash, as shown in the
glossary to the financial statements,
for continuing businesses in existence
during the year ended 31 December
2019 pre-capital expenditure.
Method of calculation
Adjusted (1) operating profit
as a percentage of adjusted (1)
revenue, for the continuing
businesses in existence
during the year ended
31 December 2019.
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.
Strategic objective
To improve profitability
of Group operations.
Method of calculation
Adjusted (1) EBITDA(3) of all
businesses as a multiple of net
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 pages 12 to 13.
In parallel with existing divisional
initiatives, the Group’s insurance
brokers in the US conduct
independent health and safety
compliance audit reviews across
the Group’s US-based businesses.
The audits assess for potential
major and serious injuries and
fatalities exposures such as machine
guarding, manual material handling,
forklift/powered industrial trucks,
occupational health exposures
including noise and chemical
exposures, and confined spaces.
Results vary by site and the insurers
have reported that of the audits that
they reviewed in 2019, the majority
of material findings were addressed.
2019 represented the first full year
of health and safety reporting for the
GKN businesses under the Group
reporting model. At the Board’s
request, the Group’s insurance
brokers are implementing a similar
audit programme across the Group’s
non-US business activities, in close
consultation with the HSE leads at
GKN Aerospace, GKN Automotive
and GKN Powder Metallurgy.
The Group’s major accident
frequency rate, accident frequency
rate and accident severity rate have
all decreased in 2019, representing
positive improvement overall and
high standards of health and safety
performance across all businesses.
The general trend of improvement
reflects that continued investment
in health and safety initiatives at the
Nortek businesses has taken hold,
having achieved two consecutive
years of sustained improvement,
and highlights a distinct culture shift
during Melrose’s stewardship since
the Nortek businesses were acquired
in 2016.
Whilst the GKN businesses
demonstrated a general trajectory
of improvement during the reporting
period, the Board is conscious that
further qualitative site health and
safety reviews are required to audit
the practices and culture that sits
behind the statistics, much as the
Board directed shortly after the
acquisition of the Nortek businesses.
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 encouraging our
businesses to run their operations
with 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 2019 can be found within
the ESG report on pages 58 to 62.
The Group is required to disclose
Greenhouse gas emissions data for
the year ended 31 December 2019.
Such data can be found within the
ESG report on pages 60 to 61.
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 ESG report on
pages 58 to 69.
Strategic ReportMelrose Industries PLC Annual Report 2019 38
Finance Director’s review
The results for the year ended 31 December
2019 include the first full year of ownership of
GKN. As a consequence, the results for the
year are not directly comparable to 2018
as the prior year performance includes only
eight months of GKN trading following its
acquisition on 19 April 2018.
Geoffrey Martin
Group Finance Director
The comparative results in this Annual Report and financial
statements have been restated to show: the results of Walterscheid
Powertrain Group as discontinued following its disposal on 25 June
2019; the results of GKN Wheels & Structures as discontinued
following its classification as an asset held for sale at 31 December
2019; the reclassification of the results of the Security & Smart
Technology business from Nortek Air & Security to the Other Industrial
division, following the Board’s intention to consider strategic options
for the Nortek Air Management business separate to the Nortek
Security business; and to reflect the finalisation of the opening
Balance Sheet review process for GKN.
Melrose Group results – continuing operations
Statutory results:
The statutory IFRS results are shown on the face of the Income
Statement and show revenue of £10,967 million (2018: £8,152 million),
an operating profit of £318 million (2018: loss of £387 million) and a
profit before tax of £106 million (2018: loss of £542 million). The diluted
earnings per share (“EPS”), calculated using the weighted average
number of shares in issue during the year of 4,858 million
(2018: 3,959 million), were 0.9 pence (2018: loss of 11.8 pence).
Adjusted results:
The adjusted results are also shown on the face of the Income
Statement. They are adjusted to include the revenue and operating
profit from equity accounted investments (“EAIs”) and 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 the Group’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”). APMs used by
the Group are defined in the glossary to the Annual Report and
financial statements.
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 for the year ended 31 December 2019 show
revenue of £11,592 million (2018: £8,645 million), an operating
profit of £1,102 million (2018: £813 million) and a profit before tax
of £889 million (2018: £672 million). Adjusted diluted EPS were
14.3 pence (2018: 12.7 pence).
Tables summarising the statutory results and adjusted results by
reportable segment are shown later in this review.
The continuing results in 2019 included a positive impact of £81 million
from utilising loss-making contract provisions as required under
IAS 37: “Provisions, contingent liabilities and contingent assets”, and
identified during the opening Balance Sheet review process for GKN.
Melrose Industries PLC Annual Report 2019 39
Reconciliation of statutory results to adjusted results
The following tables reconcile the Group statutory revenue and
operating profit/(loss) to adjusted revenue and adjusted operating profit:
Continuing operations:
Statutory revenue
Adjusting item:
Revenue from equity accounted investments (“EAIs”)
Adjusted revenue
Adjusting revenue item:
2019
£m
10,967
625
11,592
2018
£m
8,152
493
8,645
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 Automotive business. During
the year ended 31 December 2019, EAIs in the Group generated
£625 million of revenue (2018: £493 million), 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 from these EAIs is included.
Continuing operations:
Statutory operating profit/(loss)
Adjusting items:
Amortisation of intangible assets acquired in
business combinations
Restructuring costs
Write down of asset value
Net release of fair value items
Currency movements in derivatives and movements
in associated financial assets and liabilities
Disposal proceeds net of transaction related costs
Other
Reversal of uplift in value of inventory
Adjustments to statutory operating profit/(loss)
Adjusted operating profit
2019
£m
318
2018
£m
(387)
534
238
179
(153)
(55)
(4)
45
–
784
1,102
391
229
152
(20)
143
153
49
103
1,200
813
Adjusting items to operating profit are consistent with prior years
and include:
The amortisation charge on intangible assets acquired in business
combinations of £534 million (2018: £391 million), 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 excluded from
adjusted results.
Restructuring and other associated costs in the year totalling
£238 million (2018: £229 million), shown as adjusting items due
to their size and non-trading nature and during the year ended
31 December 2019 included:
• A charge of £83 million (2018: £46 million) within the Automotive
division including: costs associated with headcount reduction
programmes addressing the high cost base inherited with the
business and ensuring a more flexible structure; costs incurred
closing two loss-making factories in the second half of the
year; costs associated with further footprint consolidation
opportunities; and costs incurred separating the Automotive
business from other GKN businesses.
• A charge of £79 million (2018: £56 million) within the Aerospace
division including: costs associated with initial headcount
reductions following the commencement of a global integration
process to create ‘One Aerospace’ and achieve a simpler, more
competitive, customer-focused business; costs within the North
America Aerostructures business relating to two factory closures;
and costs relating to footprint rationalisation projects within the
Special Technologies business.
• A charge of £19 million (2018: £11 million) within the
Powder Metallurgy division including costs associated with
headcount reductions and the commencement of footprint
consolidation actions.
• A charge of £11 million (2018: £19 million) within Nortek Air
Management primarily relating to continued factory consolidation
within the HVAC business.
• A charge of £37 million (2018: £65 million) within Other Industrial
businesses, predominantly relating to the closure of the Chinese
manufacturing facility and switching to a third party contract
manufacturing model in the Security & Smart Technology
business. Restructuring charges also included the finalisation
of the restructuring activities announced in Brush last year.
• A charge of £9 million (2018: £32 million) within central activities
mainly relating to the separation of the GKN businesses.
An impairment charge of £179 million, booked in the first half of the
year in respect of the Security & Smart Technology business, shown
within the Other Industrial division, following a deterioration in
performance and assumed future prospects. The impairment charge
is shown as an adjusting item due to its non-trading nature and size,
and has not changed in value in the second half of the year.
The net release of fair value items in the year of £153 million
(2018: £20 million) where items have been resolved for more
favourable amounts than first anticipated. During the year this
included £122 million in respect of the release of loss-making
contract provisions held within the GKN businesses, where either
contractual terms have been renegotiated with the relevant customer
or operational efficiencies have been identified and demonstrated
for a sustained period. The net release of fair value items is shown
as an adjusting item, avoiding positively distorting adjusted results.
Hedge accounting is not applied within the GKN businesses for
transactional foreign exchange exposure. Consequently, for
consistency and because of their volatility and size, the movements
in the fair 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 in the GKN businesses, along with
foreign exchange movements on the associated financial assets and
liabilities are shown as an adjusting item. These movements totalled a
credit of £55 million (2018: charge of £143 million) in the year.
A net acquisition and disposal related credit of £4 million (2018: charge
of £153 million) including a profit on the sale of a small business and
transaction costs in respect of acquisition and disposal activities.
These items are excluded from adjusted results due to their non-
trading nature.
Other adjusting items include the charge for the Melrose equity-settled
Incentive Scheme, including its associated employer’s tax charge, of
£17 million (2018: £13 million) which is excluded from adjusted results
due to its volatility; an adjustment of £28 million (2018: £25 million) to
gross up the post-tax profits of EAIs to be consistent with the adjusted
operating profits of subsidiaries within the Group; and in 2018, an
£11 million past service cost in respect of gender equalisation of
guaranteed minimum pensions for occupational pension schemes,
which was shown as an adjusting item because of its non-trading and
non-recurring nature.
In 2018, in accordance with IFRS 3, the value of finished goods and
work in progress inventory acquired in the GKN business was
required to be uplifted by £103 million. The impact on gross margin as
the inventory was sold through in 2018 was shown as an adjusting
item due to its size and non-recurring nature.
Strategic ReportMelrose Industries PLC Annual Report 2019 40
Finance Director’s review
Continued
Statutory and adjusted results by reporting segment
The following table shows revenue split by reporting segment, including EAIs for adjusted revenue:
Statutory revenue
Reconciling item:
Revenue from EAIs
Adjusted revenue
Aerospace
£m
Automotive
£m
Powder
Metallurgy
£m
Nortek
Air Mgmt.
£m
3,836
4,146
1,099
1,178
16
3,852
593
4,739
16
1,115
–
1,178
Other
Industrial
£m
708
–
708
The following table shows operating profit/(loss) split by reporting segment. Adjusting items are described earlier in this review.
Statutory operating profit/(loss)
Reconciling item:
Adjusting items
Adjusted operating profit/(loss)
Aerospace
£m
Automotive
£m
Powder
Metallurgy
£m
Nortek Air
Mgmt.
£m
104
305
409
186
181
367
77
40
117
139
36
175
Other
Industrial
£m
(170)
256
86
Corporate
£m
(18)
(34)
(52)
Total
£m
10,967
625
11,592
Total
£m
318
784
1,102
The performances of each of the reporting segments are discussed in the Chief Executive’s Review. The adjusted operating costs in the
corporate cost centre of £52 million (2018: £28 million) included £26 million (2018: £20 million) of Melrose corporate costs, £6 million
(2018: £6 million) of the remaining GKN central costs and £20 million (2018: £2 million) of costs relating to divisional cash-based long-term
incentive plans, mainly for GKN businesses in 2019.
Finance costs and income – continuing operations
Net finance costs in the year ended 31 December 2019 were
£212 million (2018: £155 million), which included a credit of £1 million
(2018: charge of £15 million) treated as adjusting items.
Adjusted finance costs:
The net adjusted finance costs for continuing operations in the year
ended 31 December 2019 were £213 million (2018: £141 million), the
year-on-year increase reflecting a full-year ownership of GKN.
Net interest on external bank loans, bonds, overdrafts and cash
balances was £143 million (2018: £98 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 (2018: £11 million)
amortisation charge relating to the arrangement costs of raising the
Group’s current bank facility; an interest charge on net pension
liabilities of £31 million (2018: £21 million); a charge on lease liabilities
of £21 million (2018: £nil) following the adoption of IFRS 16 on
1 January 2019, discussed later in this review; a charge for the
unwind of discounting on long-term provisions of £7 million
(2018: £10 million); and in the prior year £1 million relating to the
interest charge in EAIs.
Adjusting items:
Adjusting items, within finance costs and income, include a credit of
£1 million (2018: charge of £8 million) relating to the fair value changes
on cross-currency swaps, and in the prior year included £7 million
relating to the accelerated amortisation of 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.
Discontinued operations
Discontinued operations include the results of Walterscheid
Powertrain Group up to the date of disposal on 25 June 2019 and
the full year result of the GKN Wheels & Structures business which
was classified as held for sale at 31 December 2019. For the year
ended 31 December 2019 discontinued operations show revenue
of £423 million (2018: £453 million), a statutory operating loss of
£80 million (2018: £5 million) and a statutory loss before tax of
£82 million (2018: £8 million).
Walterscheid Powertrain Group was sold to One Equity Partners, a
US-based private equity firm, for cash consideration of £185 million,
less costs charged in the year of £7 million. Retirement benefit
obligations of £155 million were disposed with the business and the
loss on disposal was £21 million after the recycling of cumulative
translation differences of £13 million.
At 31 December 2019 negotiations are ongoing with potential buyers
for the GKN Wheels & Structures business, which made a small
adjusted operating loss in the year. It is the Board’s strategic priority to
dispose of this business within the next 12 months, and as such the
value of the business has been remeasured on a fair value less costs
to sell basis. Consequently, a charge of £64 million is included in the
discontinued operations operating loss in the year.
Tax – continuing operations
The statutory results show a tax charge of £51 million (2018: credit of
£75 million) which arises on a statutory profit before tax of £106 million
(2018: loss of £542 million), a statutory tax rate of 48% (2018: 14%).
This rate is higher 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 2019 was 21.4% (2018: 23.1%).
The Group has tax losses and other deferred tax assets with a
value of £819 million (31 December 2018: £885 million). These are
offset by deferred tax liabilities on intangible assets of £1,243 million
(31 December 2018: £1,450 million) and £188 million (31 December
2018: £177 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 2019 was £117 million
(2018: £68 million) representing 13% (2018: 10%) of adjusted profit
before tax. This was lower than the effective tax rate on adjusted profit
before tax because the Group benefits from certain adjusting items
being tax allowable and from existing tax losses and other deferred
tax assets brought forward.
Melrose Industries PLC Annual Report 2019 IFRS 3 “Business Combinations”
In the first half of the year, the opening Balance Sheet review of GKN
assets, liabilities and accounting policies was finalised and as a result
the Balance Sheet at 31 December 2018 was restated, increasing
goodwill by £6 million, intangible assets by £21 million, provisions and
trade and other payables by £10 million and decreasing deferred tax
assets by £17 million. These items remain unchanged since the
half year.
Adoption of IFRS 16 “Leases”
IFRS 16 was adopted on 1 January 2019 and required operating
leases to be recognised on the Balance Sheet. Previously only finance
leases were recognised on the Balance Sheet and costs associated
with operating leases expensed through the Income Statement
as incurred.
The impact of IFRS 16, on transition, was to recognise a lease liability
of £589 million with a corresponding right-of-use fixed asset in the
Balance Sheet, which offset each other. The impact of IFRS 16 on the
Income Statement for continuing operations in the year was to
increase finance costs by £21 million, but this was broadly offset by
an associated increase in operating profit. In addition, £72 million of
costs have been reclassified from lease expense to depreciation in
continuing operations.
Leverage calculations in the Group’s banking agreements exclude
lease obligations from the definition of net debt. Similarly, for bank
covenant purposes only, they exclude the depreciation on right-of-use
assets from the definition of EBITDA, by including a lease charge in
the calculation of EBITDA.
Cash generation and management
Group net debt at 31 December 2019, translated at closing exchange
rates (for 2019 being US$1.33 and €1.18), was £3,283 million
(31 December 2018: £3,482 million). For bank covenant purposes the
Group’s net debt is calculated using average exchange rates for the
previous 12 months, to better align the calculation with the currency
rates used to calculate profits, and adjusted operating profit before
depreciation and amortisation (“EBITDA”) is adjusted for leases and
EAIs. The Group net debt leverage for bank covenant purposes at
31 December 2019 was 2.25x EBITDA (31 December 2018: 2.28x).
The movement in net debt during the year is summarised as follows:
Movement in Group net debt
At 1 January
GKN acquisition related net debt movements
Adjusted net debt brought forward
Non-trading items and discontinued operations:
Net cash flow from disposal and acquisition
related activities
Dividend paid to Melrose shareholders
Foreign exchange and other non-cash movements
Discontinued operations
Cash flow from non-trading items and
discontinued operations
Free cash flow from continuing operations
2019
£m
(3,482)
–
(3,482)
2018
£m
(572)
(2,841)
(3,413)
103
(231)
74
(37)
(91)
290
(26)
(129)
(110)
29
(236)
167
41
An analysis of the free cash flow is shown in the table below.
The comparative period includes GKN for 8 months following
the acquisition:
Adjusted operating cash flow
Net capital expenditure
Net interest and net tax paid
Defined benefit pension contributions – ongoing
Dividend income from EAIs
Net other
Adjusted free cash flow
Restructuring costs
Defined benefit pension – special contributions
Free cash flow from continuing operations
2019
£m
1,441
(495)
(295)
(72)
67
(55)
591
(190)
(111)
290
2018
£m
868
(345)
(174)
(43)
66
(36)
336
(113)
(56)
167
The adjusted operating profit conversion to cash for the year ended
31 December 2019 was 104% (2018: 90%). Net trade working capital
in the Group was reduced by £95 million, building momentum
towards achieving the previously announced £400 million target
for GKN.
Net capital expenditure in the year was £495 million (2018:
£345 million), representing 1.2x depreciation on non-leased assets.
Net interest paid in the year was £178 million (2018: £106 million) and
tax paid was £117 million (2018: £68 million).
Adjusted free cash flow of £591 million (2018: £336 million), is 72%
higher than the annualised adjusted free cash flow for 2018, due to
improved Group cash flow processes. Adjusted free cash flow is
shown before restructuring and special pension contributions, which
included: £94 million (2018: £56 million), being the completion of the
Melrose commitment to contribute £150 million to the GKN UK 2012
and 2016 plans within the first 12 months of GKN ownership; and
before a contribution of £17 million, being 10% of the net proceeds
received from the disposal of Walterscheid Powertrain Group.
Free cash flow from continuing operations in the year, after all costs,
was £290 million (2018: £167 million).
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
Lease obligations
2019
£m
2018
£m
9,342
10,618
3,874
3,651
436
821
(1,121)
(1,087)
(698)
(582)
(151)
492
976
(1,413)
(1,471)
(805)
(57)
(248)
10,834
11,743
2019
£m
(3,283)
(7,551)
2018
£m
(3,482)
(8,261)
(10,834)
(11,743)
At 31 December at closing exchange rates
(3,283)
(3,482)
At 31 December at 12-month average
exchange rates
(3,385)
(3,407)
Net other
Total
These assets and liabilities are funded by:
Net debt
Equity
Total
Strategic ReportMelrose Industries PLC Annual Report 2019 42
Finance Director’s review
Continued
Goodwill, intangible assets and impairment review
The total value of goodwill as at 31 December 2019 was £3,653 million (31 December 2018: £4,058 million) and intangible assets acquired with
business combinations was £5,689 million (31 December 2018: £6,560 million). These items are split by reporting segment as follows:
31 December 2019
Goodwill
Intangible assets acquired with business combinations
Total goodwill and intangible assets
Aerospace
£m
Automotive
£m
Powder
Metallurgy
£m
Nortek Air
Mgmt.
£m
Other
Industrial
£m
941
3,076
4,017
1,027
1,293
2,320
503
653
1,156
592
346
938
590
321
911
Total
£m
3,653
5,689
9,342
The goodwill and intangible assets have been tested for impairment
as at 31 December 2019. 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.
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”.
A full impairment review was performed on the Security & Smart
Technology group of CGUs in the first half of the year, which assumed
that US tariffs at the higher rate would remain in place, and resulted in
an impairment charge of £179 million, shown within adjusting items.
This impairment charge has not changed in the second half of
the year.
The GKN businesses were acquired and recorded at fair value on
19 April 2018 and subsequently there has been a global automotive
market decline, naturally reducing the headroom at this point in the
cycle when testing goodwill and intangible assets in respect of the
Automotive and Powder Metallurgy businesses.
The Board is comfortable that no impairment is required in respect
of the goodwill and intangible assets of these businesses at
31 December 2019.
Provisions
Total provisions at 31 December 2019 were £1,087 million
(31 December 2018: £1,471 million).
The following table details the movement in provisions in the year:
At 1 January 2019
Spend against provisions
Net charge to adjusted operating profit
Net charge shown as adjusting items
Release of loss-making contract provision to adjusting items
Utilisation of loss-making contract provision
Other (including foreign exchange)
At 31 December 2019
Total
£m
1,471
(342)
92
158
(122)
(83)
(87)
1,087
The net charge to adjusted operating profit in the year of £92 million
includes £20 million in respect of certain divisional long-term incentive
plans to be paid in future years, and the remainder is primarily in
respect of warranty, product liability and workers’ compensation
charges which are matched by similar cash payments in the year.
The net charge shown as adjusting items in the Income Statement
primarily includes costs associated with restructuring actions of
£193 million, discussed within the adjusting items section of this
review, net of a release of £35 million, mainly relating to fair value items
settled for an amount favourable to first anticipated.
The utilisation of the loss-making contract provision was £83 million,
of which £2 million is included in discontinued operations.
Furthermore, £122 million, approximately 25%, of the remaining
loss-making contract provision was released as an adjusting item in
the year, either because contracts have been favourably resolved
following positive negotiations with customers or because operational
efficiencies have been demonstrated for a sustained period of time.
During the period £190 million of cash was spent on restructuring.
Included within other movements are foreign exchange changes, the
unwind of discounting on certain provisions, the reclassification of
surplus property lease provisions following the adoption of IFRS 16
and provisions either disposed or transferred to held for sale.
The values of the Group plans were updated at 31 December 2019
by independent actuaries to reflect the latest key assumptions.
A summary of the assumptions used are shown in note 24 of the
financial statements.
At 31 December 2019 total plan assets of the Melrose Group’s
defined benefit pension plans were £3,412 million (31 December
2018: £3,273 million) and total plan liabilities were £4,533 million
(31 December 2018: £4,686 million), a net deficit of £1,121 million
(31 December 2018: £1,413 million).
The most significant pension plan in the Group at the beginning
of the year was the GKN UK 2012 plan, when gross assets were
£2,007 million, gross liabilities were £2,613 million and the net deficit
was £606 million. On 1 July 2019 the GKN UK 2012 pension plan was
separated into four pension plans, namely the GKN Group Pension
Schemes (Numbers 1-4), two of which were allocated to the
Aerospace division and two to the Automotive division. In total these
four pension plans had aggregate gross assets of £2,243 million,
gross liabilities of £2,711 million and a net deficit of £468 million at
31 December 2019. No changes to members’ benefits were made on
separation of the plans.
The GKN Group Pension Schemes (Numbers 1-4) are closed to new
members and to the accrual of future benefits for current members.
The Group has fulfilled its commitment to contribute special one-off
payments to the GKN UK plans totalling £150 million in the first
12 months of ownership of GKN, and is also making ongoing annual
contributions of £60 million. In addition, the Group paid £17 million into
the GKN UK plans following the disposal of Walterscheid Powertrain
Group, in line with the commitment to contribute 10% of the net
proceeds from disposal of GKN businesses (other than Powder
Metallurgy) and 5% of the net proceeds from disposal of non-GKN
businesses. The Group has committed to contribute £270 million to
the GKN UK plans when Powder Metallurgy is disposed. These
commitments cease when the funding target, which has been agreed
with the trustees, is achieved, being gilts plus 25 basis points for the
GKN UK 2016 plan and gilts plus 75 basis points for the GKN Group
Pension Schemes (Numbers 1-4).
The disposal of Walterscheid Powertrain Group, the buyout of the
Broan Aftermarket North America, Inc. Group Pension Plan and some
members voluntarily choosing to leave certain pension plans, resulted
in Group gross pension liabilities reducing by approximately
£400 million in the year.
In total, ongoing contributions to the Group defined benefit pension
plans and post-employment medical plans are expected to be
approximately £105 million in 2020.
It is noted that a 0.1 percentage point decrease in the discount rate
would increase the retirement benefit accounting liabilities of the
Group, on an IAS 19 basis, by £78 million, or 2%, and a 0.1
percentage point increase to inflation would increase the liabilities by
£59 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 £186 million, or 4%.
Melrose Industries PLC Annual Report 2019 43
Financial risk management
The financial risks the Group faces have been considered and policies
have been implemented to appropriately deal with each risk. The
most significant financial risks are considered to be liquidity risk,
finance cost risk, exchange rate risk, contract and warranty risk and
commodity cost risk.
These are discussed in turn below.
Liquidity risk management
The Group’s net debt position at 31 December 2019 was
£3,283 million (31 December 2018: £3,482 million). Core funding
comes from a mix of committed bank funding and capital
market borrowings.
Committed bank funding consists of a multi-currency term loan
denominated £100 million and US$960 million that matures in
April 2021 and a multi-currency revolving credit facility, denominated
£1.1 billion, US$2.0 billion and €0.5 billion that matures in January 2023.
The term loan was amended on 31 December 2019, on the same
financial terms, to provide Melrose with the option at its request to
extend the loan for a further three years to April 2024, if required.
Loans drawn under this facility are guaranteed by Melrose Industries
PLC and certain of its subsidiaries, but there is no security over any of
the Melrose assets in respect of this facility. As at 31 December 2019,
the term loan was fully drawn.
There remains a significant amount of headroom on the multi-
currency committed revolving credit facility at 31 December 2019.
Applying the exchange rates at 31 December 2019, the headroom
equated to £1,136 million.
At the start of the year the Group held three capital market
borrowings, inherited as part of the GKN acquisition, totalling
£1.1 billion. During October 2019, one of these bonds reached
maturity and the revolving credit facility was utilised to repay the
notional amount of £350 million, together with the associated
cross-currency swap, which was out of the money by £100 million.
Capital market borrowings as at 31 December 2019 consist of:
Maturity date
September 2022
Notional
amount
£m
450
Cross-
currency
swaps
million
Coupon
% p.a.
5.375%
US$373
May 2032
300
4.625%
€284
n/a
Interest
rate on
swaps
% p.a.
5.70%
3.87%
n/a
To simplify the corporate reporting requirements of the Group, the
bonds were transferred to the Professional Securities Market in March
2019 with the approval of the bondholders. The bondholders now
have the same guarantees from the Melrose Group companies as
those provided to the banks within the committed bank facility.
Cash, deposits and marketable securities amounted to £317 million at
31 December 2019 (31 December 2018: £415 million) and are offset to
arrive at the Group net debt position of £3,283 million (31 December
2018: £3,482 million). The Board takes careful consideration of
counterparty risk with banks when deciding where to place cash on
deposit. The combination of this cash and the headroom on the
revolving credit facility allows the Directors to consider that the Group
has sufficient access to liquidity for its current needs.
The committed bank funding 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 2019 it was 2.25x
(31 December 2018: 2.28x), showing sufficient headroom compared
to the covenant test.
The interest cover covenant is set at 4.0x throughout the life of the
facility and was 10.8x at 31 December 2019 (31 December 2018:
11.6x), affording comfortable headroom compared to the
covenant test.
There are also a number of uncommitted facilities made available
to the Group which include a small number of uncommitted working
capital programmes, which predominately 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.
A limited number of Group trade receivables are subject to
non-recourse factoring and customer supply chain finance
arrangements. As at 31 December 2019, these amounted to
£200 million (31 December 2018: £206 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 2019 the
margin was 1.4% (31 December 2018: 1.4%) on the term loan and
1.65% (31 December 2018: 1.65%) on the revolving credit facility.
In addition to the cross-currency swaps associated with the fixed rate
capital market borrowings, inherited as part of the GKN acquisition,
the Group holds interest rate swap instruments to fix the cost of
LIBOR on borrowings under the bank facility. The policy of the Board
is to fix approximately 70% of the interest rate exposure of the Group.
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.
During the year, cross-currency swaps were also used to convert
US Dollar bank debt into Euro borrowings and at 31 December 2019,
US$620 million had been swapped into €559 million. These swaps
are rolled on a monthly basis and help to reduce the cost of the
Group’s borrowings.
At 31 December 2019, the fair value liability of all cross-currency
swaps held by the Group was £80 million (31 December 2018:
£199 million).
The average cost of the debt for the Group is expected to be
approximately 3.7% 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 Group’s 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
relevant business. The Group’s policy is to review transactional foreign
exchange exposures, and place necessary hedging contracts,
quarterly on a rolling basis. To the extent the cash flows associated
with a transactional foreign exchange risk are committed, the Group
will hedge 100% at the time the cash flow becomes committed. For
forecast and variable cash flows, the Group 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 longer-term nature of the contracts within these divisions.
Typically, in total the Group hedges around 90% of foreign exchange
exposures expected over the next 12 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.
Strategic ReportMelrose Industries PLC Annual Report 2019 44
Finance Director’s review
Continued
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, until foreign currency is subsequently
converted to Sterling. However, the Group utilises its multi-currency
revolving credit facility and cross-currency swaps, where relevant, to
maintain an appropriate mix of debt in each currency. 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 Sterling dividend or Capital Return to shareholders. Protection
against this risk is considered on a case by case basis and, if
appropriate, hedged at the time.
Exchange rates for currencies most relevant to the Group in the
year were:
US Dollar
2019
2018
Euro
2019
2018
12-month
average
rate
8-month
average
(GKN
businesses)
Closing
rate
1.28
1.33
1.14
1.13
n/a
1.31
n/a
1.13
1.33
1.27
1.18
1.11
A 10 percent strengthening of the major currencies within the Group,
if this were to happen in isolation against all other currencies, would
have the following impact on the re-translation of adjusted operating
profit into Sterling:
£m
USD
EUR
CNY
Other
Movement in adjusted
operating profit
% impact on adjusted
operating profit
68
6%
26
2%
9
1%
15
1%
The impact from transactional foreign exchange exposures is
not material in the short term due to hedge coverage being
approximately 90%.
A 10 percent strengthening in either the US Dollar or Euro would have
the following impact on net debt as at 31 December 2019:
Increase in debt – £ million
Increase in debt
USD
204
6%
EUR
75
2%
Contract and warranty risk management
Under Melrose management a suitable 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 cost risk management
The cumulative expenditure on commodities is important to the
Group and 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 certain 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. Occasionally, businesses
within the Group enter financial instruments on commodities when
this is considered to be the most efficient way of protecting against
price movements.
UK’s relationship with the European Union
The UK left the European Union on 31 January 2020 and the
transition period to agree a trade deal is due to run until 31 December
2020, meaning the shape of the future relationship beyond this date
remains unclear. Due to the Group’s geographically balanced
manufacturing footprint, on a micro company level, any resulting tariffs
and/or customs clearance would not have a material negative effect
on the Group as a whole.
Sales of product between the UK and Europe are a relatively small
proportion 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 7%.
On a wider macro global level, the Group’s financial results may be
impacted by general uncertainty and economic instability arising from
the transition period, or from any wider supply-chain disruption
causing scheduling issues for customers or suppliers. Depending
on the outcome of the trade negotiation, 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, however
transactional exposures are generally well protected in the short term
due to approximately 60% to 80% of exposures being hedged over
the next two years.
The Board will continue to monitor developments and adjust the plans
for its businesses accordingly.
Post balance sheet event
On 2 January 2020 GKN Powder Metallurgy completed the
acquisition of FORECAST 3D, a leading US specialist in plastic
additive manufacturing and 3D printing services offering a full range of
services from concept to series production, for a total consideration
of up to £29 million, of which £20 million was paid on 2 January 2020.
The acquisition furthers GKN Powder Metallurgy’s ambition to achieve
global market leadership in industrialising additive manufacturing.
In the year ended 31 December 2019 FORECAST 3D achieved sales
of approximately £17 million.
Going concern
The Group’s business activities, together with the factors likely to
affect its future development, performance and position are set out in
the Chief Executive’s Review. In addition, the Annual Report includes
details of the 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 Group has a strong record of cash management, and, as a
consequence, the Directors believe that the Group is well placed to
manage its business risks successfully taking into account the various
macro headwinds and the general economic environment.
After making enquiries, the Directors have a reasonable expectation
that the Group has adequate resources to continue in operational
existence for the foreseeable future. For this reason, they continue to
adopt the going concern basis in preparing the Financial Statements.
Geoffrey Martin
Group Finance Director
5 March 2020
Melrose Industries PLC Annual Report 2019
Longer-term viability statement
45
In accordance with provision 30 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 2022.
The Directors’ assessment has been made by reference to the
Group’s financial position as at 31 December 2019, 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 consider 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 48 to 55.
Strategic ReportMelrose Industries PLC Annual Report 2019 46
Risk management
The Board recognises that operating in a dynamic and rapidly evolving commercial
environment requires a pragmatic, robust 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.
Board
Overall responsibility
for risk management
Audit Committee
Monitors the Group’s
internal financial control
processes
Melrose senior
management and
business unit senior
managers
• Agrees the Group’s risk management strategy and defines its risk appetite
• Reviews reports and recommendations from the Melrose senior management team
and 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 team
to determine the likelihood of those risks materialising and how they should be
managed or mitigated
• Maintains oversight of principal risks and mitigation plans including cyber security
and fraud risk
• Promotes an appropriate risk management culture and rewards system within the
Group in order to maintain sound risk management and internal control systems
• Monitors, oversees and reviews the effectiveness of the Group’s internal controls
and risk management systems and processes
• Supports the Board in monitoring risk exposure against risk appetite
• Set the risk management processes and controls
• Agrees how the principal risks should be managed or mitigated to reduce the likelihood
of their incidence or impact
• Considers actual and 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
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e
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The Board’s view of the Group’s principal risks and uncertainties is detailed in the table on pages 48 to 55.
Risk management strategy and framework
The objectives of the Directors and Melrose senior management
include safeguarding and increasing the value of the businesses and
assets of the Group for stakeholders as a whole. Achievement of
these objectives requires the development of policies and appropriate
internal control frameworks to ensure the Group’s resources are
managed properly, and for key risks to be 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 this 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” and the
UK Corporate Governance Code (the “Code”).
The Audit Committee monitors, oversees and reviews 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 page 86.
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 Group risk management
Melrose Industries PLC Annual Report 2019
47
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
framework and internal control systems determined by the Board.
The Melrose senior management team sets 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 Audit
Committee on an annual basis.
During the year under review, in accordance with provisions 28 and
29 of the Code, the Board continued to monitor the effectiveness of
the Group’s risk management and internal control systems. The
Board concluded that the Group’s risk management and internal
control systems and processes were operating effectively. Follow-up
actions in respect of progress and improvement in relation to financial
controls are further discussed in the Audit Committee report.
Following the programme of site visits and the detailed workplan
employed to identify the fair value of the operational assets and
liabilities of the GKN businesses during 2018, in 2019 the Melrose
senior management team continued to assess the impact of the
resultant findings on the Group’s principal risks and internal control
and risk management systems. In 2019, the Melrose senior
management team enhanced the monitoring, mapping, reporting and
aggregation of the Group’s risk management performance by building
and implementing an intelligent, interactive, data-driven Group
reporting dashboard to automate the aggregation and reporting of
Group risks identified from the diligence efforts and site visits
undertaken to prepare the GKN opening Balance Sheet during 2018,
in conjunction with ongoing divisional risk reporting and advice from
external risk management consultants to provide objective
independent trend analysis. This marks a significant step forward in
the Group’s journey towards enhancing both divisional management’s
risk reporting transparency, and the Board’s visibility of the Group’s
principal risks, to enable an increasingly robust assessment of each
business’s risk profile and their impact on the Group risk profile as a
whole. The dashboard provides the Audit Committee with objective
trend analysis and data aggregation to facilitate their monitoring,
oversight and review of the effectiveness of the Group’s internal
controls and risk management systems and processes.
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 risks, with
a balanced appetite towards operational and commercial risk, and
macroeconomic 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
risk and information technology cyber risk.
The results of the risk appetite review will support the Board’s
decision-making processes during 2020. The Board undertakes
a review of its risk appetite at least annually.
Risk management actions
During 2019, the Board continued to deliver on the key management
priorities identified in the 2017 review across the Group and in the
2018 review across the GKN businesses. In 2019, the Group’s
governance framework was refreshed and the risk management
reporting platform underwent a wholesale review, in line with our
ongoing continuous improvement of enterprise risk management
across the Group. 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;
• continuing to enhance Melrose risk register methods and risk
profile mapping application throughout the Group. 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;
• reviewing and improving the Group’s processes, data extraction
and consolidation, and trend analysis around the assessment of
principal risks and the ongoing monitoring and reporting of the
Group’s risk management performance; and
• transitioning the GKN businesses out of their previous IT
governance model and establishing a regular quarterly IT
governance assessment for all sites across the Group to enable
clarity and consistency in the assessment of IT and cyber matters
that are appropriate for the stage and sophistication of the
GKN businesses.
Assessment of principal risks
During the year the Board undertook a robust, in-depth and
comprehensive assessment of the emerging and 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 48 to 55. Further
information detailing the internal control and risk management
policies and procedures operated within the Group is shown on
pages 80 to 81 of the Corporate Governance report.
Risk management priorities for 2020
Continual improvements were made during 2019 in respect of the
Group’s risk management processes. However, the Board recognises
that Melrose cannot be complacent. In 2020, management will
continue to focus on refining the risk management framework and
further embedding a culture of effective risk management across
the Group to ensure that risks and opportunities are identified and
managed, to support the delivery of long-term value creation.
Further resources will continue to be devoted to strengthening the
mechanisms for providing independent assurance and objective
trend analysis on the effectiveness of the Group’s risk management
governance, processes and controls. IT cyber risk reporting will
continue to be strengthened, and external cyber security advisors will
be engaged to review findings from the ongoing internal assessments,
validate results, and enable an additional layer of objective review to
bolster the Group’s identification of emerging cyber risks, and
deployment of appropriate mitigation actions.
Strategic ReportMelrose Industries PLC Annual Report 2019 48
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, 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, which is continually reviewed and adapted where
necessary to reflect the risk profile of the 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 aggregated into an interactive data-driven
dashboard reporting tool, to facilitate review by the Melrose senior
management team, the Audit Committee and the 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
Decrease
No change
Increase
No change
No change
6 Moderate
Legal, regulatory and environmental
No change
7 Moderate
Information security and cyber threats
Increase
8 Moderate
Foreign exchange
9 Moderate Pensions
10 Moderate
Liquidity
No change
Decrease
No change
Financial ris k s
8
9
10
Stra
t
e
g
i
c
r
i
s
k
s
1
2
7
6
C
o
m
p
l
i
a
n
c
e
a
n
d
e
thic
al risks
3
5
4
e ratio nal risks
p
O
Risk rating
Moderate impact
Likelihood
Unlikely
Likely
Melrose Industries PLC Annual Report 2019
Strategic risks
49
(1) Comprises executive Directors and Melrose senior management.
Risk 1Acquisition of new businesses and improvement strategiesDescription and impactThe 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.ResponsibilityExecutive management(1)Risk trendTrend commentaryFollowing the acquisition of GKN in 2018, the Group remains focused principally on improvement. Whilst no large acquisitions were made in 2019 relative to the 2018 GKN acquisition, some small bolt-on acquisitions were made by certain businesses and are expected to improve those businesses.Strategic prioritiesBuyImproveRisk 2Timing of disposalsDescription and impactIn 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 macro-economic factors. Depending on the timings of disposals and nature of the 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.ResponsibilityExecutive management(1)Risk trendTrend commentaryAlthough global M&A markets continue to experience some uncertainty there remain opportunities for value realisation. Some non-core businesses were placed under strategic review during 2019. However, management continue to remain disciplined and there is no obligation to sell before it is appropriate to do so.Strategic prioritiesSellStrategic ReportMelrose Industries PLC Annual Report 2019 50
Risks and Uncertainties
Continued
Operational risks
(1) Comprises executive Directors and Melrose senior management.
Risk 3Economic and politicalDescription 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 continued headwinds in the automotive sector and a continued slowdown in US new-build residential housing markets, 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 and financial condition, and could have significant impact on the 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.Since the period under review, the UK left the EU on 31 January 2020. There continues to be uncertainty in the UK regarding the nature of the UK’s future trading relationship with the EU and other international trading partners with which the UK intends to establish new terms on which to trade, and what this will mean for business and the UK economy following expiry of the initial Brexit transition period on 31 December 2020. Whilst the long-term impact of 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. A significant amount of the Group’s revenue is generated from operations located in North America, which this year has continued to (i) experience challenging tariffs relating to the US/China trade war; and (ii) require close monitoring of the expected short to medium-term impact of potential changes to international trading relationships following Brexit. The Group’s exposure to these factors as a whole has been inherently mitigated since acquiring GKN, which created a more geographically balanced manufacturing footprint, and resulted in a larger proportion of the Group’s revenue being generated from the UK and European-based GKN Aerospace and GKN Automotive divisions. Further, the Group’s businesses operating in North America continue to take regular specific actions to mitigate the impact of new relevant North American tariffs and changes to international trading regulations by engaging with the relevant authorities prior to and after any such changes are implemented.Since the period under review, the potential rapid spreading of COVID-19 has become a significant emerging risk to the global economy. The Board continues to monitor the impact of the virus on the Group as more information about the epidemic emerges, with particular focus on the potential for staff shortages and production delays that could arise and potentially affect Group businesses’ China-based operations and their supply chains, as well as monitoring how other operations around the world could become affected depending on the extent to which the virus spreads outside of China.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 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 possible terms on which the UK fully departs from the EU.• 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 if a ‘No Deal’ Brexit emerges when the initial transition period expires.• The Group remains agile, diversified and well positioned to deal with any short-term uncertainty in the UK.ResponsibilityExecutive management(1)Risk trendTrend commentaryGeopolitical uncertainty continued during 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 Melrose senior management team continues to actively engage with the executive teams of each division to track the potential impacts of Brexit and imposition of future expected tariffs, engage actively with those who are working on the impact assessments and mitigation actions, and report the material findings to the Board. Melrose senior management team monitors key issues with the divisional management teams including the impact of geopolitical uncertainty on order books, cash generation, legal and regulatory threats and other key operational and commercial indicators, to ensure the Group and each of its businesses can respond appropriately to adverse trading conditions. Tactics for mitigating the potential impact of geopolitical uncertainty include identifying cost reduction and operational efficiency measures.Strategic prioritiesBuyImproveSellMelrose Industries PLC Annual Report 2019 51
(1) Comprises executive Directors and Melrose senior management.
Risk 4Commercial 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. The Melrose senior management team monitors the aggregated impact of such risks and provide active support and challenge to the divisional management teams in fulfilling their responsibilities. Common commercial risk areas that potentially affect a large proportion of the Group’s businesses include those related to production quality assurance, health and safety performance, customer concentration and uncertainties related to future customer demand, onerous customer and supplier contracts, 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 (the “Common Commercial Risks”).Mitigation• The Group continued to actively invest in research and development activities in 2019 to augment its platforms for future product expansion, quality improvements, customer alignment and achieving further production efficiencies. Details about some of the Group’s research and development activities are provided in the ESG report on pages 58 to 69.• 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 in the non-financial KPIs on pages 36 and 37 and in the ESG report on page 65. • Since acquiring GKN, the Melrose senior management team has actively engaged with and supported the GKN businesses’ divisional management teams in identifying embedded contractual and business conduct risks relating to key supply chain and production programme partners. Those management teams have continued to implement and direct a series of operational change management programmes to mitigate the risks they have identified.• The Melrose senior management team, in collaboration with Ernst & Young, enhanced the Board and Audit Committee’s visibility of the Group’s Common Commercial Risks during 2019 by building and implementing an intelligent, data-driven Group reporting dashboard to automate the aggregation and reporting of numerous Common Commercial Risks across each of the Group’s divisions, including those identified from the diligence efforts and site visits undertaken to prepare the GKN opening Balance Sheet during 2018, and ongoing divisional risk reporting.ResponsibilityExecutive management(1)Risk trendTrend commentaryThe Melrose senior management team actively engages 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 end-markets where customer and/or competitor concentration is high and heavier reliance is placed on supply chain efficiency and programme partner management. The divisional CEOs report material updates directly to members of the Melrose senior management team which maintains a number of contact points throughout the Group to increase awareness. The Group continued to actively invest in research and development initiatives during 2019 to augment its platforms for future expansion, to benefit product quality improvements and increased customer alignment, and to achieve further production efficiencies.Strategic prioritiesImproveStrategic ReportMelrose Industries PLC Annual Report 2019 52
Risks and Uncertainties
Continued
Operational risks continued
Compliance and ethical risks
(1) Comprises executive Directors and Melrose senior management.
Risk 5Loss of key management and capabilities Description and impactThe 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 Group 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 via the Melrose senior management team.• 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.ResponsibilityExecutive management(1)Risk trendTrend commentarySuccession 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, will remain an area of particular management focus in 2020.Strategic prioritiesBuyImproveSellRisk 6Legal, regulatory and environmental Description and impactConsidering the breadth, scale and complexity of the Group, there is a risk that the Group may not always be in complete compliance with laws, regulations or permits. The Group could be held responsible for liabilities and consequences arising from (i) past or future environmental damage, including potentially significant remedial costs; (ii) employee matters including liability for employee accidents in the workplace or consequences of environmental liabilities, which may be susceptible to class action law suits, particularly but not exclusively with respect to Group businesses operating in North America; (iii) restrictions arising from economic sanctions, export controls and customs, which can result in fines, criminal penalties, adverse publicity, payment of back duties and suspension or revocation of the Melrose Group’s import or export privileges; and (iv) product liability claims, which can result in significant total liability or remedial costs, particularly for products supplied to large volume global production programmes spanning multiple years, for example in the aerospace and automotive industries, or to consumer end-markets for example in the air management industry. 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 may impact our business strategy.Mitigation• Regular monitoring of legal and regulatory matters at both a Group and business unit level. Consultation with external advisors where necessary.• Group-wide standard and enhanced application to trade authorisation procedures are in place and regularly reviewed against the ever-changing global trade compliance landscape, supported by access to external trade compliance legal and regulatory specialists and electronic counterparty screening systems.• Our businesses are validated and certified in respect of quality management, environmental management and health and safety with the appropriate bodies including ISO and BS OHSAS, where relevant to their operations. The Group’s businesses are either already compliant with or working towards timely compliance with new and upcoming standards. This includes Group businesses that are currently certified to BS OHSAS 18001 and are actively driving towards full transition to ISO 45001:2018.Melrose Industries PLC Annual Report 2019 53
(1) Comprises executive Directors and Melrose senior management.
• 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.• Insurance cover mitigates certain levels of risk and the Group’s insurers are instructed to carry out external audits of specified areas of legal and compliance risk including health and safety.ResponsibilityExecutive management(1)Risk trendTrend commentaryEach business has a fully developed legal function, headed by their respective General Counsel reporting to their executive management team, and are properly staffed and supported by external advisors where necessary or helpful to ensure ongoing compliance in the jurisdictions in which they operate across the globe. This is augmented by central oversight from the Melrose legal team and robust annual reviews to ensure it has a strong legal and compliance framework and considers the risk to be consistent with prior years.Strategic prioritiesImproveRisk 7Information security and cyber threats Description and impactInformation security and cyber threats are an increasing priority across all industries and remain a key UK Government agenda item.Like many businesses, Melrose recognises that the Group may have a potential exposure in this area. Potential exposure to such risks remains high due to the scale, complexity and public-facing nature of the Melrose Group. 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 defense 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 mitigation measures are in place for the Group.• In 2019, Melrose completed the deployment of its information security strategy and risk-based governance framework to all businesses within the Group. The framework follows the UK Government’s recommended steps on cyber security. This strategy has enabled risk profiling and mitigation plans to be developed for each business to mitigate and reduce their exposure to cyber risk.• As part of Melrose’s overall information security strategy, IT Security awareness training was deployed to all Melrose businesses.• The progress of each business is measured against the information security strategy and is monitored on a quarterly basis.ResponsibilityExecutive management(1)Risk trendTrend commentaryInformation 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 companies to monitor, improve and refine its Group-wide strategy to aid the prevention, identification and mitigation of any threats.Strategic prioritiesImproveStrategic ReportMelrose Industries PLC Annual Report 2019 54
Risks and Uncertainties
Continued
Financial risks
(1) Comprises executive Directors and Melrose senior management.
Risk 8Foreign exchange Description and impactDue 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 the 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.ResponsibilityExecutive management(1)Risk trendTrend commentaryGroup 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 38 to 44.Strategic prioritiesBuyImproveSellRisk 9Pensions Description and impactAny shortfall in the Group’s defined benefit pension schemes may require additional funding. As at 31 December 2019, the Group’s pension schemes had an aggregate deficit, on an accounting basis, of £1,121 million (2018: £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 UK defined benefit pension 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.• On 1 July 2019 the large UK GKN defined benefit pension scheme was split into four new schemes, two of which have been allocated to GKN Aerospace and two to GKN Automotive, in order to more appropriately balance liabilities across supporting businesses.ResponsibilityExecutive management(1)Risk trendTrend commentaryAlthough 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 remains significant. During the period, gross liabilities were reduced as a result of people leaving group schemes on the sale of their employer company, voluntarily or through an insurance buy-out, which together with contributions of £185 million (including the balance of the initial £150 million funding commitment to the GKN schemes) and the better hedging of interest and inflation risks decreased both the overall liability and volatility risk to the Group.Strategic prioritiesBuyImproveSellMelrose Industries PLC Annual Report 2019 55
(1) Comprises executive Directors and Melrose senior management.
Risk 10LiquidityDescription and impactThe 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 38 to 44, the Group has term loans of US$960 million and £100 million and revolving credit facilities comprising US$2.0 billion, €0.5 billion and £1.1 billion.In addition, the GKN net debt at acquisition included capital market borrowings across three unsecured bonds that totalled £1.1 billion. Two of these bonds – totalling £750 million – remain outstanding as at 31 December 2019 and further detail is provided in the Finance Director’s review on pages 38 to 44.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 gained agreement from its lenders to a three-year extension, at the Group’s option to be built into its multi-currency term loan denominated £100 million and US$960 million, exercisable at any time prior to 1 April 2021 that would extend the maturity date of the loan to April 2024.• The Group operates a conservative level of headroom across its financing covenants which is designed to avoid the need for any unplanned refinancing.ResponsibilityExecutive management(1)Risk trendTrend commentaryThe Group is satisfied that it has adequate resources available to meet its liabilities.Strategic prioritiesBuyImproveStrategic ReportMelrose Industries PLC Annual Report 2019 56
Section 172 statement
This is an overview of how the Directors
performed their duty to promote the success
of the Company under section 172 of the
Companies Act 2006.
Purpose, strategy and values
Melrose was founded in 2003 to empower businesses to unlock
their full potential for the benefit of all stakeholders, whilst providing
shareholders with a superior return on their investment. This has
been delivered through our “Buy, Improve, Sell” strategy, whereby
we acquire high quality but underperforming manufacturing
businesses and invest in them heavily to improve performance and
productivity, so that they become stronger, better businesses under
our responsible stewardship. At the appropriate time, we find them
a new home for the next stage of their development and return the
proceeds to shareholders.
The Company’s purpose and strategy is underpinned by the principles
and values on which it was founded in 2003. We act with integrity,
honesty, transparency and decisiveness, and believe in a lean
operating model and high productivity. We invest in the companies we
own as if we are going to own them forever. We do not shy away from
difficult decisions. We provide the space and resources to empower
people to perform and reward them well when they do. These are the
principles that lie at the heart of the success of Melrose and are the
basis on which we strive for more success in the future.
Duty to promote the success of the Company
In executing our strategy, Directors must act in accordance with a set
of general duties detailed in section 172 of the Companies Act 2006.
These general duties include a duty to promote the success of the
Company, and specifically to act in a way that the Director considers,
in good faith, would be most likely to promote the success of the
Company for the benefit of its shareholders as a whole and, in doing
so, having regard (amongst other matters) to the:
• likely consequences of any decisions in the long-term;
• interests of the Company’s employees;
• need to foster the Company’s business relationships with
suppliers, customers and others;
• impact of the Company’s operations on the community
and environment;
• desirability of the Company maintaining a reputation for high
standards of business conduct; and
• need to act fairly as between shareholders of the Company.
This statement has been prepared in accordance with the
requirements of The Companies (Miscellaneous Reporting)
Regulations 2018, which require the Company to describe how the
Directors have had regard to the matters set out in section 172 of the
Companies Act 2006 during the financial year under review. It is noted
that the Directors have always acted in accordance with such duties
in their decision making and they will continue to do so. In light of the
additional disclosure requirements, we have set out below further
detail on how the Directors have fulfilled their duties during the course
of 2019.
The Group operates on a decentralised basis, with the Board having
established an organisational structure with clear reporting
procedures, lines of responsibility and delegated authority, as
depicted in the diagram on page 46 and in line with the Group’s
governance framework, which the Board reviews regularly. The Board
is ultimately accountable to the Company’s shareholders for setting
the Group’s strategy and for overseeing the Group’s financial and
operational performance in line with Melrose’s strategic objectives,
with implementation of the Group’s strategic objectives, as
determined and overseen by the Board, delegated to the Melrose
senior management team, and with day-to-day operational
management delegated to the business unit executive teams.
The Board cultivates strong relationships with key stakeholders
so that it is well placed and sufficiently informed to take their
considerations into account when making decisions where
appropriate in order to discharge their legal obligations and to
pursue the Company’s strategic objectives. Our purpose is to
create long-term value for stakeholders and in order to do this, we
need to understand our stakeholders and what matters to them.
Having regard to the likely consequences of any decisions
in the long-term
In line with our strategy, Melrose’s core purpose is to acquire good
engineering businesses with strong market positions that are
underperforming their potential, with a view to investing in those
businesses and empowering their management teams to unlock
operational improvements and to drive value and performance for the
benefit of all stakeholders. Although our strategy necessarily means
that new homes are eventually found for all our businesses at the
appropriate time, during our ownership we invest in them as if we
were going to own them forever. This has been proven time and
again, with long-term significant investments being made that are
set to generate returns far beyond our ownership period, such as
StatePoint Technology® for HVAC and the Global Technology
Centre for GKN Aerospace. We build better, stronger businesses.
Financial robustness is also an important part of this value creation
process, and we aim to provide our shareholders with sustained
returns through a combination of dividend income and special
distributions following sales of businesses. We operate both
(i) a progressive dividend policy whenever the financial position of
the Company, in the opinion of the Board, justifies the payment
(as discussed in the financial key performance indicators on
pages 36 to 37 and in the Directors’ report, both of which are
incorporated into this Section 172 statement by reference); and
(ii) a prudent approach to capital allocation that considers working
capital requirements, investment, capital expenditure, research and
development and capital distribution (as further discussed in the
financial statements). For each of (i) and (ii), relevant events and
circumstances that have arisen during the relevant period are
considered, alongside the interests of the Company’s shareholders
as a whole, and the long-term viability of the Company (for 2019, as
further discussed in the Longer-term viability statement on page 45),
capital investment requirements, and research and development.
The building of stronger businesses is not limited purely to financial
returns, but also encompasses a wide range of non-financial
improvement areas including risk management and compliance, and
environmental, social and governance matters, all of which we seek
to improve for the long-term, not just during our period of ownership.
With this in mind, we apply the same high standards of responsible
stewardship to our businesses as if we were to own them forever, and
it is this approach to decision making that requires the Directors to
have regard to the likely consequences of decisions for the long-term.
The Board is ultimately responsible for determining and reviewing
Melrose’s strategy, which during 2019 was very much focused on the
“Improve” aspect of “Buy, Improve, Sell”. In considering requests for
major capital expenditure throughout the year, the Chief Executive,
supported by the Directors, considered and approved a number of
operational improvement initiatives to help improve the functioning
of the Group’s businesses. These initiatives included investments in
research and development, organisational design improvements, and
social investments through the Melrose Skills Fund. Further detail on
our approach to stewardship and risk management can be found in
the ESG report on pages 58 to 69.
Having regard to the interests of the Company’s employees
In 2019, the Board established a workforce advisory panel (“WAP”)
in order to promote effective engagement with, and encourage
participation from, the Group’s workforce. The structure of the WAP
deliberately reflects the decentralised nature of the Melrose model and
ensures that the voice of the respective workforce is heard where it is
most effective in the business unit executive decision-making
Melrose Industries PLC Annual Report 2019 57
process. Clarity and oversight of all actions across the Group are
heard at Board level, as well as providing an opportunity for each
business to gain insight into best practice from their peers.
Further details about the WAP can be found in the ESG report
on pages 58 to 69.
The Board continued to monitor the nature of issues reported through
the whistleblowing hotlines operated by the Group. An annual report
is prepared for the Board which highlights whistleblowing activity
across the business units, together with a summary of the approach
taken by each business unit in their whistleblowing process.
The Board reviews this report and instructs the Melrose senior
management team to work with the business unit executives to
identify and rectify any adverse trends relating to material matters
raised through the whistleblowing platform. The integrity of this
process is an important part of the Company’s governance
arrangements and the Board will review this once again in 2020
to ensure it remains effective.
Further to the commitments given on the acquisition of GKN,
constructive engagement with the GKN pension scheme trustees and
members continued in 2019. The Company increased the prudence
of funding targets during 2019, while cash contributions have helped
to halve the amount required to take the GKN pension schemes to
being well funded.
Having regard to the need to foster the Company’s business
relationships with suppliers, customers and others
Fostering positive business relationships with key stakeholders, such
as customers and suppliers, is also important to the success of the
Group’s businesses. As a result of Melrose’s decentralised model,
engagement with customers and suppliers is a matter that is largely
delegated to the management teams of each business, who know
their businesses best. The Board has been, and continues to be,
available to support the businesses in this area as and when required.
Our businesses have heavily invested in their relationships with
suppliers and customers throughout 2019, and details of this
are set out on page 63 of the ESG report.
The Group has multiple interactions with government bodies in a
number of jurisdictions across the world, many of which are of
strategic importance to the Company’s long-term success. In the UK,
the Company specifically has regular dialogue with the Department
for Business, Energy and Industrial Strategy (BEIS), the Ministry of
Defence and the UK Panel on Takeovers and Mergers regarding
ongoing compliance with the undertakings and other continuing
obligations given to the UK Government and other regulatory bodies
in connection with the acquisition of GKN.
The Company also speaks regularly to various governance bodies
regarding the key aspects of our governance framework that the
Board considers to be of long-term strategic importance, including
gender diversity and executive remuneration. These governance
bodies represent a large part of our shareholder community and
it is important to us that we have their support in relation to areas
of corporate governance.
Having regard to the impact of the Company’s
operations on the community and environment
In their decision making, the Directors need to have regard to
the impact of the Company’s operations on the community and
environment. The Board plays a constructive role in tackling issues
through engagement and investment.
It is important for the long-term future of our businesses that we
protect and enhance the environment. Climate change will affect
how much non-renewable energy is available, and stakeholders are
rightly concerned about the resilience of supplies and are looking to
companies to adapt and take the necessary steps to reduce their
climate change risk. We encourage our businesses to innovate and
invest in new technologies to solve environmental challenges for future
generations. We are also committed to reducing our carbon footprint
and contribution to climate change where economically viable.
Throughout 2019, the Board continued to review a range of
ESG matters affecting the Group and relating to the community and
environment. In recognition of the rising emphasis on reporting on
these matters, the Board decided that the 2019 Annual Report and
financial statements would include a dedicated ESG report to provide
external stakeholders with a consolidated view of the Group’s
achievements in this area, including in relation to the businesses’
environmental impacts and delivering improvements to each
business on key matters having a positive environmental, social
or governance-related impact. The ESG report can be found on
pages 58 to 69 of this Annual Report.
Having regard to the desirability of the Company maintaining
a reputation for high standards of business conduct
The Board recognises that culture, values and standards are key
contributors to how a company creates and sustains value over
the longer term, and to enable it to maintain a reputation for high
standards of business conduct. High standards of business conduct
guide and assist in the Board’s decision making, and in doing so, help
promote the Company’s success, recognising, amongst other things,
the likely consequences of any decision in the long-term and wider
stakeholder considerations. The standards set by the Board mandate
certain requirements and behaviours with regards to the activities of
the Directors, the Group’s employees and others associated with
the Group.
Reflecting the decentralised nature of the Group, responsibility for the
adoption of policies, practices and initiatives sits at a divisional level,
including the Melrose Code of Ethics and Group compliance policies.
Further detail on the Group’s policies and compliance framework are
set out on pages 68 to 69.
The Group engages external audit firms to monitor and verify
performance at a business unit level, which is conducted in respect
of both financial and non-financial performance.
Having regard to the need to act fairly as between
shareholders of the Company
The Company has one class of ordinary shares, which have the same
rights as regards voting, distributions and on a liquidation.
Management are also significant shareholders in the Company,
holding approximately 1.5% of the register, together putting them in
the top 10 shareholders of the Company. On this basis the Board
feels that the executive Directors are fully aligned with shareholders.
Shareholder support is integral to the successful execution of our
“Buy, Improve, Sell” strategy. Melrose has attracted long-term support
from its key shareholders since its establishment in 2003 and has
generated consistent returns throughout that time. Melrose has
always prided itself on the timeliness and transparency of the
information we provide to our shareholders. We rely on the depth of
the understanding amongst our investors as we often need to move
quickly to secure the opportunities that have been critical to Melrose’s
success. See pages 63 to 64 for further details on the Board’s
programme of shareholder engagement in 2019.
The views of key analysts and shareholders are also reported to the
Board directly by individual Directors or via the Company’s brokers.
This helps to ensure that all members of the Board develop an
understanding of the views and any concerns of shareholders.
The Chairman and Non-executive Directors are also available
to meet institutional shareholders should there be unresolved
matters that shareholders wish to bring to their attention.
On the basis of the above, the members of the Board
consider, both individually and together, that they have acted
in the way they consider, in good faith, would be most likely
to promote the success of the Company for the benefit of its
members as a whole (having regard to the stakeholders and
matters set out in s172(1)(a-f) of the Companies Act 2006) in
the decisions taken during the year ended 31 December 2019.
Strategic ReportMelrose Industries PLC Annual Report 2019 58
ESG report
Investing in our businesses
to drive ESG excellence
Our ESG purpose and values: Melrose
empowers its businesses to unlock their
full potential for the collective benefit of
stakeholders, whilst providing shareholders
with a superior return on their investment.
This is delivered through our “Buy, Improve,
Sell” strategy, through which we acquire
good quality manufacturing businesses that
are underperforming their potential, and
invest heavily to improve performance and
productivity as they become stronger,
better businesses under our responsible
stewardship.
Consistent with our “Buy, Improve, Sell”
strategy, some of the businesses we acquire
may be underdeveloped in one or more areas
of ESG focus. As a key part of the “Improve”
limb, whilst under our ownership, we look to
empower and resource our businesses to
improve their environmental, social and
governance performance, to enable them to
make better contributions to industry, society
and the environment for the long-term.
The successful execution of our strategy is
underpinned by our focus on conducting
business with the highest standards of
integrity, honesty, and transparency.
We welcome the evolving focus and clarity
on ESG matters as another opportunity to
demonstrate how we build better, stronger
businesses for the collective benefit of
stakeholders, whilst producing excellent
returns for shareholders.
The Melrose opportunity: We set the
example for our manufacturing businesses
and empower them to follow. We provide the
investment, support and encouragement to
improve management practices that seek to
promote long-term growth and prosperity,
whilst addressing ESG underperformance.
Our approach to driving positive ESG
contributions: We implement our
strategy on an accelerated timetable during
our ownership period. We operate a
decentralised management structure, so that
responsibility for implementing the right
measures to improve ESG performance sits
with those who are best placed to be most
effective in achieving our businesses’ ESG
goals and aligned with what is most relevant
to their specific markets and operating
environments. We support the executive
management teams of our businesses by
providing better-targeted investment with
a long-term view. We streamline group
structures to ensure responsive, lean
management and proactive leadership, and
enhance research and development to better
serve customers in achieving their commercial
and environmental objectives. We encourage
our businesses to work with suppliers to
strengthen supply chain resilience, and
implement stronger governance standards
to respect their employees and meet
environmental standards, whilst ingraining
strict financial prudence across our
businesses to enable them to build and
sustain the resources required to deliver
stronger financial, operational and ESG
performance over the long-term.
The Melrose ESG improvement model is founded upon the following key objectives and principles:
Our ESG objectives
Our ESG improvement principles
Respect and protect
the environment
1
Purposefully engage with
key stakeholders to better
understand and deliver on
their expectations
2
Prioritise and nurture
the wellbeing and skills
development of employees
and the communities
that they are part of
3
Exercise robust
governance,
risk management,
and compliance
• Invest in research and development to support and harness product innovation and quality for our businesses,
to help their customers deliver on their commercial and environmental goals and to help find effective solutions
to assist them in combatting climate change.
• Drive divisional management teams to improve their operational, resource and energy efficiency to minimise the
impact of their businesses’ operations on the environment, including Greenhouse gas emissions and water usage.
Improve Sell
• Engage where appropriate in regular, constructive dialogue with a variety of key stakeholders at each stage
of our “Buy, Improve, Sell” cycle, and encourage and empower our businesses to do the same.
• Maintain an informed focus on delivering improved returns for shareholders whilst also meeting best practice for
ESG performance, that is attuned to the expectations and concerns of our businesses’ employees, customers,
regulators, governments, suppliers and investors.
Buy
Improve Sell
• Ensure the pension schemes that we inherit are managed prudently and effectively for both employees and retirees,
and where relevant seek to create better-funded schemes with more prudent targets under our stewardship.
• Implement effective policies and procedures, supported by local management accountability and a culture
of strong awareness, training and investment in employees, to drive health and safety best practice.
• Promote fair employment and skills development.
• Drive our businesses to ensure the highest standards of health and safety for their people, as well as
the protection of human rights, and encourage positive contributions to the communities in which they operate.
• Promote inclusion and diversity at all levels.
• Ensure that our people have a voice and can inform executive decisions.
Buy
Improve Sell
• Direct, oversee and challenge divisional management teams in implementing and enforcing effective compliance
policies and business practices.
• Ensure each division conducts business with integrity and in a responsible, ethical and sustainable manner.
• Invest in research and development to ensure the highest standards of product safety, and encourage our businesses
to protect the ultimate wellbeing of their end-users by adhering to market standards and best practice. Respect labour
and human rights and support our businesses’ suppliers to ensure the environment throughout their supply chains.
• Protect information security and data privacy.
• Carry out prudent and responsible financial and tax planning and management and pay tax responsibly when due.
• Maintain sensible and sustainable leverage to support investment.
4
Improve Sell
Melrose Industries PLC Annual Report 2019 Executing strategic
ESG leadership
Melrose strives to have a good ESG track
record. As an experienced owner of
businesses, we set out to accelerate the
pace of improvement at our businesses
during our ownership period. The Board,
with direct support from the Melrose senior
management team, operates a decentralised
stewardship model that equips the Group’s
businesses with the management expertise,
operational investment, and robust
governance practices to implement ESG
improvements, as enshrined in the Melrose
Code of Ethics, compliance policies and
procedures. By empowering divisional
management teams to run their businesses
in an appropriately self-sufficient manner, we
position them to sustain their improvements
over the long-term, and after they invariably
exit the Group. The Melrose senior
management team applies close oversight
and challenge to encourage the adoption of
better practices and behaviours within each
business whilst owned by Melrose, and keep
the Board well-informed to exercise their role
of oversight, review and challenge.
In particular, the Board:
• proactively reviews, challenges and
approves the Group’s risk management
strategy, which includes financial and
non-financial risks;
• scrutinises quarterly management reports
including material aspects of the Group’s
ESG performance;
• has regular access to divisional
management teams and conducts
regular face-to-face business and
budget reviews during the year,
covering operational, commercial,
finance and ESG matters; and
• reviews, challenges and approves key
policies and compliance statements that
require a coordinated approach across
the Group, including the Modern Slavery
and Human Trafficking Policy and annual
statement, tax strategy, and the Group’s
annual health and safety, diversity, equal
pay, stakeholder engagement and
Greenhouse gas (“GHG”) performance
disclosures.
59
1
Respect and protect
the environment
Improve Sell
Melrose’s position
on climate change
We recognise that climate change may have
significant implications on the long-term
successes of our businesses. We seek to set
a positive example for our businesses to
follow and we invest in and encourage them
to improve their operations and market
offerings in a direction that minimises their
impact on climate change, and makes them
less vulnerable to climate-related risks.
We are true believers in industry, and in the
potential of industry, to help solve society’s
most pressing needs. We buy high-quality
but underperforming industrial businesses,
with established positions in their markets.
By investing heavily in research and
development, we enable our businesses to
develop and provide the innovative and
cost-effective solutions that their customers
need to help tackle underlying causes of
climate change. Examples of such solutions
can be found on page 62 of this ESG report.
Efficiency in this area is a material concern for
nearly all manufacturing industries, and our
businesses are no exception. We therefore
support and invest in them to accelerate their
efforts to reduce their carbon footprint by,
where economically appropriate, taking
measures to improve their energy, water
and material efficiency by seeking viable,
lower-impact, and increasingly lower-cost,
renewable energy sources. Energy
consumption (including GHG consumption)
across the Group as well as examples of our
businesses’ improvement efforts can be
found on page 61 of this ESG report. These
actions not only make good long-term
business sense, but also respond directly to
the expectations set by governments, and
the emerging realities of the markets in which
our businesses operate.
We are already taking active steps to
anticipate how climate change will affect our
businesses, and to encourage firm progress
from our businesses in respect of positive
climate action. We will continue to strengthen
our understanding of the specific climate-
related risks our businesses face as we work
to mitigate these risks.
(1) Source: https://carbonneutral.com/the-carbonneutral-protocol
(2) See Table 2 on page 60.
(3) See Table 1 on page 60.
Melrose sets a positive example, and enables
and empowers its businesses to follow.
Whilst the central Melrose carbon footprint is
relatively limited, we nevertheless offset the
emissions that we do generate. The Melrose
corporate offices have attained the
CarbonNeutral® company certification for
2019 and 2020 through a combination of
internal energy efficiency initiatives and
financing high-quality, high-impact emission
reduction projects in accordance with
The CarbonNeutral Protocol(1). The Melrose
corporate office in the US has also achieved
the HinesGo (Green Office) designation in
recognition of its sustainability practices and
energy efficiency performance, among other
environmental and wellbeing criteria.
We believe that improving operational
efficiency is one of two key factors that shape
the long-term profitability and sustainability of
our businesses, and enables their
compliance with increasing environmental
standards and regulation. The other key
factor is cultivating the technical and
innovation capabilities and foresight to
provide effective solutions to the emerging
ESG challenges that their customers face,
including combatting climate change.
Highlights from 2019 include:
30%
reduction
in combustion of fuel &
operation of facilities
(scope 1)(2) across GKN
compared to 2017, on
a like-for-like basis
23%
reduction
in emissions reported above
normalised to tonnes per
£1,000 turnover(3) across the
non-GKN divisions compared
to 2018, on a like-for-like basis
25%
reduction
in total purchased electricity
(scope 2)(3) across the non-
GKN divisions compared to
2018, on a like-for-like basis
Strategic ReportMelrose Industries PLC Annual Report 2019
60
ESG report
Continued
Reducing the operational
environmental impacts
of our businesses
Our businesses are charged with identifying,
monitoring and managing the environmental
risks that affect their operating and market
environments. With Melrose support, each
Group business invests in and implements
appropriate systems and processes to
manage their impact on the environment,
and continually reviews these in line with
evolving expected practices. For example,
at the end of 2019, over three quarters
of the manufacturing facilities across our
businesses had chosen to be certified
or compliant with the ISO 14001:2015
Environment Management Standard.
Business units also monitor their
environmental progress and plan for
continuous improvements in ways that
are suitably tailored to their activities,
in areas such as energy consumption,
GHG emissions, water consumption,
water disposal quality, waste generation,
recycling and disposal, and volatile organic
compound emissions.
In 2019, our businesses continued to invest
in operational improvements with direct
environmental benefits such as improved
energy and/or water efficiency, reduced
waste or pollution prevention.
Energy and GHG emissions
The Group recognises the serious threat
posed by climate change and the urgent
need for meaningful action. As part of their
improvement plans, our businesses seek to
reduce their GHG emissions over time
through more efficient use of electricity, fuel
and heat, and by increasing the proportion of
renewable energy where commercially viable.
This section of the report has been prepared for the reporting
period of 1 January 2019 to 31 December 2019, and in
accordance with the principles and requirements of the
Greenhouse Gas Protocol, Revised Edition, ISO 14064 Part 1
and the Environmental Reporting Guidelines: including
Streamlined Energy and Carbon Reporting guidance dated
March 2019.
We have reported on all of the emission sources required under
the Companies Act 2006 (Strategic Report and Directors’
Reports) Regulations 2013. We have also reported this year,
complying early, the information required by the Streamlined
Energy and Carbon Reporting requirements (the “SECR”),
which apply to accounting periods beginning on or after 1 April
2019. All material emissions from within the organisational and
operational scope and boundaries of the Group are reported.
These sources fall within our consolidated financial statement.
We do not have responsibility for any emission sources that are
not included in our consolidated statement. We have used the
GHG Protocol Corporate Accounting and Reporting Standard
(revised edition), data gathered in accordance with our
GHG reporting procedure. The emission factors from the UK
Government GHG Conversion Factors for Company Reporting
2019 have been used to calculate the GHG emission figures,
together with International Energy Agency country-specific
factors for the associated overseas electricity usage.
Table 1: Total Melrose Group GHG emissions (excluding the GKN businesses)
Global GHG Emissions data for period 1 January 2019 – 31 December 2019
excluding GKN businesses (tonnes of CO2e(1) unless stated)
Emissions sources
2018
Combustion of fuel & operation of facilities (scope 1)(2)
UK Electricity
Overseas Electricity
Total purchased electricity (scope 2)(3)
Other purchased energy (scope 2)(3)
23,261
1,718
29,592
31,310
1,801
2019
19,638
1,088
22,460
23,548
1,595
Company’s chosen intensity measurement:
Emissions reported above normalised to tonnes per £1,000 turnover(4)
0.030
0.023
(1) CO2e – carbon dioxide equivalent, this figure includes GHGs in addition to carbon dioxide.
(2) 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.
(3) Our scope 2 estimates include emissions from electricity and heat purchased by the Group’s businesses (excluding
the GKN businesses). Scope 2 emissions, and total GHG emissions, are calculated using the location-based method.
(4) The turnover figure used to calculate the intensity ratio does not include any share of revenues from entities in which the
Group holds an interest of 50% or less.
Table 2: Total GKN Group GHG emissions
Global GHG Emissions data for period 1 January 2019 – 31 December 2019
(tonnes CO2e(1) unless stated)
Emissions sources
Combustion of fuel & operation of facilities (scope 1)(3)
Electricity (scope 2)(4)
2017
2019(2)
290,541
204,209
1,003,000
779,499
(1) CO2e – carbon dioxide equivalent, this figure includes GHGs in addition to carbon dioxide.
(2) The 2019 emissions data does not include the Walterscheid Powertrain Group as it was sold part way through that year.
(3) As per page 50 of the GKN 2017 Annual Report, the scope 1 estimates include emissions from fuel used on premises,
transport emissions from owned or controlled vehicles, losses of refrigerant, and process and fugitive emissions.
(4) The scope 2 estimates include emissions from electricity and heat purchased by the Group’s businesses.
Scope 2 emissions, and total GHG emissions, are calculated using the location-based method.
Table 3: Total Melrose Group GHG emissions (including the GKN businesses)
Global GHG Emissions data for period 1 January 2019 – 31 December 2019
(tonnes of CO2e(1) unless stated)
Emissions sources
2018(2)
2019(3)
Combustion of fuel & operation of facilities (scope 1)(4)
23,261
223,847
UK Electricity
Overseas Electricity
Total purchased electricity (scope 2)(5)
Other purchased energy (scope 2)(5)
Company’s chosen intensity measurement:
Emissions reported above normalised to tonnes per £1,000 turnover(6)
1,718
29,592
31,310
1,801
26,909
774,569
801,478
3,165
0.030
0.092
(1) CO2e – carbon dioxide equivalent, this figure includes GHGs in addition to carbon dioxide.
(2) The 2018 emissions data does not include the GKN business units as they were acquired part way through that year.
(3) The 2019 emissions data does not include the Walterscheid Powertrain Group as it was sold part way through that year.
(4) 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.
(5) Our scope 2 estimates include emissions from electricity and heat purchased by the Group’s businesses. Scope 2 emissions,
and total GHG emissions, are calculated using the location-based method.
(6) The turnover figure used does not include any share of revenues from entities in which the Group holds an interest of 50% or less.
Table 4: Melrose Group Energy Consumption by Type
Energy type
Natural Gas
LPG
Heating Fuel
Transport Fuels
Electricity
Steam
Wood Pellets
Renewables
Total Energy
Company’s chosen intensity measurement:
MWh per £1,000 turnover(1)
UK
consumption
MWh
Overseas
consumption
MWh
Total
consumption
MWh
121,350
962,039
1,083,389
320
0
943
50,221
30,071
14,201
50,541
30,071
15,144
108,459
2,055,094
2,163,553
0
0
274
19,383
30,253
6,021
19,383
30,253
6,295
231,346
3,167,283
3,398,629
0.021
0.283
0.304
(1) The turnover figure used does not include any share of revenues from entities in which the Group holds an interest
of 50% or less.
Melrose Industries PLC Annual Report 2019 61
Water and waste
Water consumption and waste generation
improvements are actively encouraged by
Melrose. We have set out below the 2019
water consumption and waste generation for
our largest business units: GKN Aerospace,
GKN Automotive and GKN Power Metallurgy.
This is the first time that this information has
been collated, and therefore no year-on-year
comparison is available for 2019. We will seek
to expand the disclosure in future years to
include other businesses in the Group.
Water and waste prevention initiatives
In 2019 our largest divisions made
encouraging steps towards reducing their
environmental impacts:
• GKN Aerospace’s site in Bristol, UK
worked with supply chain partners to
identify opportunities to successfully
eliminate excessive packaging, saving
4km of excess bubble wrap and strap per
annum with one supplier alone.
• GKN Automotive at its Newton, US site’s
zero landfill programme has achieved an
annual reduction of 660 tonnes of waste
sent to landfill and the ePowertrain
division has successfully reduced waste
to landfill by 90% in 2019 (vs 2018).
• GKN Powder Metallurgy’s site in
Germantown, US replaced piping and
valves to reduce the need for system
improvements and the plant’s reliance
on municipal water supply. In addition,
the sinter metals and forge operation
at Bad Brückenau, Germany made
improvements to its wastewater treatment
system so that it will clean and recirculate
up to 2m3 of service water per day,
expected to eliminate the need for
withdrawal of more than 500m3 of
municipal water annually.
• The Nortek Global HVAC site in Tualatin,
US received the Washington County
Recycling award in recognition of its
efforts to increase recycling rates and
reducing the amount of waste sent
to landfill.
The GHG emissions reported on page 60
cover all entities over which the Group had
financial control for a period of at least one
year as of 31 December 2019. Emissions
from entities acquired or disposed of during
the reporting period (i.e. disposed of before
31 December 2019 or acquired after
1 January 2019) are not accounted for in
this report.
Energy efficiency initiatives in
production and manufacturing
Each business is driven to take an
appropriately tailored approach to energy
efficiency that suits their business
requirements, and operational and market
environments, reflecting their maturity
in this area at the time of becoming part
of the Group.
During 2019, the business units within the
Group implemented a range of energy
efficiency initiatives with expected notable
energy and carbon emission savings, with
significant progress being achieved by our
two largest divisions:
• Along with a number of energy efficiency
projects, including the certification of a
further five sites to ISO 50001 Energy
Management Standard, GKN Aerospace
signed an agreement to generate
hydroelectric power from the Göta Älv
River near to its site in Trollhättan,
Sweden that is expected to generate
material emissions savings over the
long-term.
• GKN Automotive’s European sites
continue to drive efficiency and cost
savings. Notable examples include the
installation of a new chiller system in
the Eskisehir, Turkey plant, which has
resulted in monthly electricity savings of
46,000 kWh, with a new ground water
cooling system at the Bruneck, Italy
plant anticipated to generate savings of
1,000,000 kWh per year. The application
of a new eco-mode for engines and
pumps has also generated further energy
savings of about 38,052 kWh, and the
procurement of green energy for their
Bruneck and Firenze, Italy plants has
resulted in the equivalent annual
reduction of nearly 11,000 tonnes
of CO2 compared to 2018.
The GKN Aerospace, GKN Automotive and
GKN Powder Metallurgy sites globally are
in the process of attaining their certification
to the ISO 50001 Energy Management
Standard, in recognition of their strong focus
on ensuring an efficient and sustainable use
and management of energy.
For all of the emissions data contained in this
report, 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 performance of the
Group’s businesses in the relevant area.
The emissions associated with the GKN
businesses, which were acquired part way
through 2018, are included for the first time in
this report as per our GHG accounting
procedure, and as predicted in our 2018
Annual Report, have contributed to a
significant increase in the overall Melrose
Group emissions. In particular, the increase in
the intensity ratio is reflective of the fact that
whilst relatively low level, the GKN businesses
are more energy-intense operations than the
Group’s other business units, which is to be
expected given the nature of their on-site
activities. Table 3 shows the total 2019
GHG emissions data including the GKN
business units.
In addition, as can be seen from Table 2,
comparing the 2019 emissions figures for the
GKN businesses to the last figures reported
for the GKN Group in its 2017 Annual Report
(being the last financial year in which this data
was reported) shows a 30% reduction in
scope 1 emissions and a 23% reduction in
scope 2 emissions.
Table 4 shows the energy consumption by
type for the Group’s business units, broken
down by UK and overseas consumption,
in accordance with the requirements of
the SECR. This is the first time that this
information has been collated and therefore
no year-on-year comparison is available.
However, this will be provided in future years.
The Company’s chosen intensity ratio in this
regard is megawatts usage (MWh) per £1,000
of turnover.
In addition, in 2019 the Group complied with
its obligations under Article 8 of the EU
Energy Efficiency Directive (known as ESOS
in the UK) in each of the relevant EU member
states. As part of this process, the Group
was required to monitor and calculate the
total energy consumption associated with its
businesses across their European sites, in
order to identify commercially viable
opportunities to save energy.
Water and waste consumption data for period 1 January 2019 – 31 December 2019
Area
GKN
Aerospace
GKN
Automotive
GKN Powder
Metallurgy
Volume of water consumption in operations (m3)
1,605,861
1,264,142
1,032,233
Weight of total generated waste (tonnes)(1)
Recycled (tonnes)
Landfill (tonnes)
Hazardous waste disposed through legally
approved routes (tonnes)(2)
20,189
12,301
4,084
105,590
102,297
1,455
42,023
39,387
2,474
4,751
3,908
4,278
(1) This figure reflects the waste sent to incineration, which is neither recycled nor landfilled.
(2) This figure was calculated on the basis of the guidance published by the EU (see source: https://eur-lex.europa.eu/legal-content/
EN/TXT/?uri=CELEX:02000D0532-20150601), which includes waste from physical and chemical processing of metals that are
hazardous to humans and wildlife, oil spills and waste materials containing oil, wastes containing mercury and heavy metals,
waste paint, varnish and coatings containing organic solvents and other hazardous substances.
Strategic ReportMelrose Industries PLC Annual Report 2019 62
ESG report
Continued
Helping our customers deliver
on their environmental goals
We recognise the opportunities that the
transition to a net-zero emissions economy
present, and our businesses are well
positioned to help their customers tackle
pressing environmental challenges such
as climate change, and to meet emerging
regulatory requirements and wider
environmental expectations. Our businesses
work closely with their customers and
world-class research institutions to develop
market-leading, cost-effective innovations,
that deliver the solutions their markets need.
In 2019, our businesses actively invested
in developing products that help their
customers improve energy efficiency and
reduce GHG emissions, water consumption
and waste generation, in their operations or
during the use of their products, for example:
GKN Aerospace
• Invested in products that are lighter and
more fuel efficient, to enable Customers
to improve fuel efficiency and reduce
their carbon emissions. Through its
Global Technology Centre in Bristol,
UK it manufactured the first composite
components for the Airbus Wing of
Tomorrow research programme,
representing a step change in the
aerospace industry. The new Fixed
Trailing Edge for the Airbus A350 XWB,
is lighter and stronger than its metallic
equivalent and can achieve up to 20%
fuel efficiency per passenger kilometre.
• Developed relationships with companies
focused on the electrification of aircrafts,
including close engagement with Eviation
to support in the lightweight airframe
design of the ‘ALICE’ aircraft. Specifically,
GKN Aerospace has agreed to design
and deliver the prototype flying wing to
enable the aircraft’s first flight in 2020,
with potential future design and
production partnership opportunities.
This aircraft is an exciting proposition in
the quest for sustainable aviation,
integrating existing and maturing
technologies into a commercially feasible
sustainable aircraft. Key technologies
include electric motors, batteries,
lightweight structures and aerodynamic
enhancements. More broadly, with
Melrose support GKN Aerospace will
commence a cutting-edge propulsion
project in 2020, which aims to accelerate
the adoption of hydrogen electric
propulsion within the aerospace industry,
starting with demonstrating significant
improvements in power density and
range capability in the sub-regional,
and later, regional aircraft markets. This
project offers a route to absolute zero
emissions flight for ranges up to 2000km.
(1) Worldwide harmonized light vehicles test procedure is a
global, harmonized standard for determining the levels of
pollutants, CO2 emissions and fuel consumption of
traditional and hybrid cars, as well as the range of fully
electric vehicles.
• Produced electro-thermal heater mats in
Luton, UK for the Boeing 787 aircraft, to
prevent ice from building up on the
leading edge of the wing. This technology
replaces traditional de-icing systems that
rely on engine bleed and can achieve fuel
savings of about 3%.
• Strengthened collaborations with existing
key customers to make progressive
improvements to existing technologies,
for example the development of a
fan case mount ring using additive
manufacturing technology (laser metal
deposition with wire) for engines
customer Pratt & Whitney was a
revolutionary technological development,
which enables an annual reduction
in CO2 from the manufacturing process
alone of over 1500 tonnes per year.
• Was the inaugural sponsor and partner in
the Boeing-ATI Accelerator programme,
which supports start-ups creating
Industry 4.0 and sustainability-enabling
technologies with the potential to bolster
the growth and competitiveness of the
UK aerospace industry. GKN Aerospace
has worked with and offered mentoring
support to dozens of start-ups, leading to
the final selection of ten companies who
were each offered £100,000 equity
investment from Boeing HorizonX
Ventures, and are now actively engaged
in the programme. A second cohort of
start-ups will join the programme in 2020.
GKN Automotive
• Continued to actively contribute towards
low-carbon green transportation solutions.
Its P4 e-Drive systems can lead to 100%
CO2 reduction for battery electric vehicles,
and up to 50% reduction for hybrid
vehicles (tank-to-wheel consideration
based on WLTP(1)). In addition, the
division’s proprietary Active Connect
Technology can generate CO2 savings of
more than 5% compared to traditional
all-wheel-drivetrain technologies.
• Recently initiated a strategic collaboration
with Delta Electronics Inc., representing a
significant milestone in the expansion of
the business’s portfolio of scalable,
integrated 3-in-1 eDrive solutions and the
business’s capabilities in rapidly bringing
new cost competitive technologies
to market.
GKN Powder Metallurgy
• Continued to deliver customised,
scalable and fast metal shape solutions
to help customers solve the world’s
biggest challenges.
• Developed new 100%-recyclable
e-pumps to substitute engine-driven
pumps on vehicle transmissions. These
innovative e-pumps can generate greater
fuel efficiency (of up 30%), compared to
an engine driven pump, by working only
on demand.
• Is a leading producer of variable oil
pumps. This solution can increase the
overall engine efficiency of the vehicle and
lessen CO2 emissions by up to 20% by
modulating the injected oil volume
according to the engine’s actual RPM
(compared to the fixed displacement
system of conventional lubrication
oil pumps).
• Developed a unique high-performance,
cost-effective process to produce the
core components of the variable (cylinder)
valve timing system used by a vehicle’s
engine. The system is crucial for the
optimal performance of the engine and
can achieve up to 25% reduction in
CO2 emissions.
Nortek Global HVAC
• Its StatePoint Technology® reduces the
carbon and water footprint associated
with cooling and maintenance of data
centres, which are power and water
intensive processes. This is saving clients,
including a global technology company,
up to 20% in energy consumption and
up to 90% in water usage.
• Developed technology directly benefitting
communities around the world to ensure
continuity of critical services during
extreme weather, for example the
business supplies best-in-class
earthquake resistant climate control
technology to hospitals on the
US West Coast.
Brush
• Its Power Management Systems are
dedicated microsystems providing
intelligent automation for industrial power
grids to proactively prevent blackouts
and enable uninterrupted performance
of critical processes and operations.
Synchronous Condensers are also
helping customers address this challenge
by absorbing or supplying reactive power,
offering a cost-effective alternative to
supplying bulk variable power compared
to static variable compensators.
Melrose Industries PLC Annual Report 2019 63
2
Purposefully engage with
key stakeholders to better
understand and deliver on
their expectations
Buy
Improve Sell
At each stage of our “Buy, Improve, Sell”
strategy we seek to engage in constructive
dialogue with stakeholders as appropriate to
gather a holistic understanding of their key
expectations and concerns. Our key
stakeholder groups include shareholders,
governments and regulators, employees,
customers, suppliers, corporate governance
agencies, and the communities in which we
operate. Our open and transparent approach
is crucial in supporting our acquisition
strategy, directing our improvement plans,
and supporting our businesses’
implementation of those plans, to deliver
better collective outcomes for stakeholders.
Some examples of how Melrose purposefully
engages with key stakeholder groups are set
out below, with further detail provided in the
Section 172 statement on pages 56 and 57
with respect to engagement specifically
relating to 2019.
Employees and their
representative bodies
For our businesses to outperform their
potential they require a strong and capable
workforce. Employees within the Group are
therefore key strategic stakeholders and the
Board firmly believes that their wellbeing is
central to the long-term sustainability and
prosperity of our businesses. The Board
seeks to ensure that it is informed of
employee interests when making strategic
decisions, whilst recognising that each
business pursues bespoke talent
management and development objectives
that are appropriate to their respective
workforce dynamics.
We invest in and support our businesses
to implement accessible platforms and
forums that foster an inclusive culture, which
encourages employees to propose ideas
and raise concerns. In 2019 the Group
established a workforce advisory panel
(‘WAP’) comprising the Chief Human
Resources Officer (or equivalent) from
each business unit, and a member of the
Melrose senior management team.
Each member of the WAP is responsible
for promoting workforce engagement,
disseminating information, collating the
voice of the workforce and demonstrating
how that voice is fed into executive
management decisions.
Recognising the importance of a strong and
skilled workforce, Melrose requires all Group
businesses to safeguard the contractual and
statutory employment rights of their
employees. Each business is also
encouraged to maintain constructive
relationships with employee representative
bodies, including unions and works councils.
With every acquisition, Melrose seeks to
strengthen pension scheme arrangements
for the benefit of employees and retirees.
The UK pension schemes of each material
business sold by Melrose since its inception
have been transferred to their new owners in
a significantly stronger financial position than
at the time of our acquisition. For further
information about Melrose’s engagement
with pension scheme trustees and our
investment in transforming the UK defined
benefit pension schemes of our businesses,
please refer to pages 64 and 65.
Customers and suppliers
Melrose encourages and supports its
businesses to engage with customers and
suppliers on an ongoing basis, with a view to:
• realise technological breakthroughs and
innovative collaborations to enhance
market and product leadership, and
safety excellence;
• enable our businesses to deliver products
in line with customer expectations and
help customers achieve their
environmental and safety objectives; and
• ensure efficient sourcing of key goods
and services to safeguard stability for the
collective benefit of stakeholders within
our businesses’ value chains.
Further details of our landmark collaborations
with customers and suppliers to benefit key
global environmental aims can be found in
this report on page 62.
Shareholders, analysts, and
corporate governance agencies
The success of our “Buy, Improve, Sell”
strategy relies on maintaining strong investor
support, which Melrose achieves by providing
a consistent and transparent flow of useful
information and management insight to
shareholders and the wider investment
community. Melrose takes an honest,
transparent and open approach to investor
relations and communications. We recognise
that analysts require robust information in
order to best inform investors, investors
themselves benefit from disclosure in line with
regulatory requirements, as well as enhanced
disclosure on material topics to the Company
(including ESG and key acquisition matters) to
inform their independent investment decisions,
and corporate governance agencies require
transparency and active engagement in order
to accurately review and assess our
performance in line with expected practices.
In addition to our annual programme of key
information publications and engagement
initiatives including the annual general
meeting, extraordinary general meetings on
specific material items, publication of full and
half year results, and this Annual Report, the
Board and the Melrose senior management
team meet and communicate with
shareholders on a frequent and proactive
basis throughout the year.
These efforts include face-to-face investor
roadshows in the UK and the US at least
once a year, trading updates, capital markets
presentation days as appropriate to provide
key shareholders, analysts and their
representatives with direct access to the
Directors and the opportunity to engage
directly with the executive management
teams of our largest businesses during key
points in their improvement cycle, and, where
requested, open agenda meetings for key
shareholders attended by the Chairman.
In 2019 the Board hosted a capital markets
day for institutional investors and financial
analysts in London. The event included
presentations from the CEOs of the Group’s
two largest divisions, GKN Aerospace and
GKN Automotive, containing updates on key
financial information. This also allowed
shareholders to hear directly from the
businesses on their progress with the
Company’s investment strategy.
The Melrose investor relations function
schedules further bespoke interactions
between investors, analysts and members of
management on a regular basis. Similarly,
throughout the year the Group company
secretariat engages with the responsible
stewardship and sustainability representatives
of key investors and corporate governance
agencies, including direct discussions with
members of the Board. During 2019 these
wider interactive engagement processes
were undertaken in relation to items of a
particularly material or otherwise multi-
faceted or sensitive nature, including:
• Chairman’s tenure – following the 2019
AGM, the Senior Independent Director
and Chairman of the Nomination
Committee commenced an engagement
process with shareholders with respect to
the tenure of the Chairman of the Board,
who will have served as a director for nine
years in September 2020. The Board’s
eventual decision to extend the
Chairman’s tenure was made only
once the Board understood that the
Company’s key shareholders
supported this proposal.
• Renewal of the Directors’ remuneration
policy and LTIP – building on the
remuneration-focused engagement with
shareholders in 2018, a further extensive
and dedicated engagement process has
been conducted by the Chairman of the
Remuneration Committee with key
shareholders and corporate governance
agencies with respect to the renewal of
the Directors’ remuneration policy and
long-term incentive plan at the 2020
AGM. This process has been informative
and successful so far, with a significant
proportion of shareholders constructively
engaging during meetings, calls and
email exchanges, and almost all of those
that have spoken with the Company
expressing strong support for
the proposals.
In both instances, investors were contacted
by letter, which was followed up with further
communications and, where requested,
in-person meetings.
Strategic ReportMelrose Industries PLC Annual Report 2019 64
ESG report
Continued
Up to
£1bn to the
pension funds
£150 million initially contributed by Melrose
to fund the two inherited underfunded
GKN pension schemes within the first
year of ownership
£60m
continuous annual funding commitment
after year one, doubling existing annual
contributions
5% to 10%
and £270m
Melrose promised to pay between 5%
and 10% of net proceeds of any Melrose
divestment, and £270 million on the sale
of GKN Powder Metallurgy, for so long as
the schemes remain in deficit
3
Prioritise and nurture
the wellbeing and skills
development of employees
and the communities that
they are part of
Buy
Improve Sell
Melrose is responsible for ensuring
that its workers are safe, and prioritises
the safeguarding of their health and
wellbeing. The Group employs more than
55,000 people who are largely based in
manufacturing facilities across the globe,
which requires each business to create and
maintain safe and healthy workplaces and
operational practices, and a robust culture
of health and safety awareness, training
and performance.
More secure
funding targets
enhancing the long-term viability of the
GKN pension schemes meeting their
obligations, by setting funding targets
of Gilts + 75bps for the 2012 scheme and
Gilts +25bps for the 2016 scheme
Independent
stewardship
appointment of the schemes’ first
independent Chairman, to ensure
robust oversight and accountability
In focus: Engaging with key stakeholders and building
their trust and support for the GKN acquisition
The public and unsolicited nature of the
GKN acquisition required Melrose to
engage closely with a wide range of
stakeholders, in order to successfully
acquire GKN and begin the process of
improving the businesses.
Pension scheme beneficiaries
Proactive engagement with the GKN
pension trustees led to the approval of
Melrose’s detailed commitment to improve
GKN’s significantly underfunded pension
schemes for the protection of all GKN
scheme beneficiaries, to reassure them of
Melrose’s intentions that the GKN pension
schemes would emerge from our
ownership better funded.
Melrose aims to ensure that all UK defined
benefit schemes end up stronger under
Melrose ownership than when they joined
the Group.
Governments and regulators
We actively engaged with the UK and US
Governments, the UK Panel on Takeovers
and Mergers, and other regulatory bodies
to reassure stakeholders that Melrose
was conducting the acquisition process
in accordance with the highest standards
of legal and regulatory scrutiny.
After carefully listening to the issues raised
by a number of stakeholders including local
elected representatives, UK parliamentarians
and union representatives about securing
the future of the GKN businesses, providing
comfort to government end-users to protect
national security interests, and to support
national aims to increase the productivity
of the UK’s industrial sector and invest
heavily in research and development,
Melrose responded by making appropriate
commitments in respect of certain key ESG
issues. These commitments were in relation
to long-term research and development
investment, directors’ domiciliation, the
establishment of a skills fund, support for
the GKN name, and safeguards to protect
national security interests. Melrose has and
continues to fully respect and comply with
those commitments and promises.
Shareholders
Melrose has attracted long-term support
from its key shareholders since its
establishment in 2003 and this support is
vital in securing our material acquisitions.
Throughout the GKN acquisition, openness
and transparency about Melrose’s
intentions for the GKN businesses was
paramount in securing shareholder approval
for the acquisition. The unsolicited nature
of the acquisition required Melrose to
demonstrate to its own shareholders
and the GKN plc shareholders that the
long-term prosperity of the GKN businesses
would benefit from Melrose’s stewardship.
This required Melrose to provide timely
information in a wholly transparent manner
throughout the accelerated timetable of a
rigorously regulated takeover process,
to enable shareholders on all sides to
make their investment decisions on an
informed basis. Conclusively, Melrose
shareholders approved the deal, and GKN
shareholders accepted Melrose’s offer.
In its first year
the Melrose
Skills Fund
provided financial support
to initiatives driven by
Melrose, GKN Aerospace,
GKN Automotive and Brush
£593m
contributed
to our businesses’ pension
schemes since 2003
Over
£1m
in cash donations and raised
funds for charitable causes
across the Group
30% and 33%
of the Board and Melrose
Executive Committee
respectively are women
200+
apprenticeships provided
across our GKN Aerospace,
GKN Automotive and GKN
Powder Metallurgy divisions
in 2019
Melrose Industries PLC Annual Report 2019 65
By way of example, GKN Aerospace, one of
the Group’s largest divisions, has made
positive strides towards achieving this,
by having:
• reduced serious incidents by
approximately 90% over the last five
years, with over 80% of that improvement
occurring since 2018;
• reduced near misses by approximately
83% since 2017; and
• demonstrated a greater focus on hazard
identification as an early warning sign to
then mitigate risk of injury, with such
identification increasing by approximately
60% since 2018.
Employee wellbeing and contributing
to the communities around us
The Group recognises the increasing
importance of taking a holistic approach to
employee wellness, to protect their physical
health and social wellbeing, and to foster a
positive workplace culture that attracts and
retains a highly skilled workforce. During
2019 numerous wellbeing initiatives were
implemented across our businesses, from
the provision of occupational health advisors
to the holding of global wellness events.
Our businesses also promote the social
wellbeing of employees by encouraging them
to actively contribute to a range of charitable
and community projects. In total, our
businesses made cash donations and raised
funds for charitable causes in 2019 of over
£1 million:
• GKN Aerospace continued to support the
Aerospace Bristol museum and learning
centre with an annual donation of
£100,000. The charity seeks to inspire
current and future generations through
stories and achievements of the local
aerospace industry and to advance
learning, skills and training, particularly
in science, technology, engineering
and design.
• GKN Automotive continued to support
a village school in India that is home to
underprivileged children, and this year
constructed new bathrooms for
the children.
• GKN Powder Metallurgy contributed over
£321,000 to charitable causes. In the US,
employees are actively involved in the
Hearts of Gold community programme,
volunteering their time and expertise,
participating in sponsored runs and
relays and raising funds for much
needed causes.
The Melrose approach to employee
wellbeing does not stop at the workplace.
We also support Group businesses and their
employees in contributing to charities and
projects that benefit the communities they
operate and live in if they wish to.
Importantly, our support does not end when
employees retire. Assisting with the future of
employees and retirees through responsible
stewardship of their pensions is of
importance to the Board.
Pensions
Since its establishment in 2003, Melrose
has contributed £593 million to the pension
schemes of its businesses. We also take
pride in having substantially improved all the
UK pension schemes under our ownership,
with many of them becoming fully funded
on departure from the Group, as set out
on page 7. Our model for ensuring the
long-term prosperity of our businesses’
pensions schemes is founded on the
following principles:
• Improve funding targets to ensure
improved financial health for the long-
term sustainability of our businesses’
pension schemes.
• Increase funding levels to begin an
enhanced level of immediate support
during our period of stewardship.
• Provide better structural and financial
security to our businesses’ pension
schemes during our ownership.
• Insist on independent chairs to govern
our businesses’ pension schemes in
accordance with governance
best practice.
For further details, please see the “In focus:
stakeholder engagement during the GKN
acquisition” case study on page 64
of this report, and the Shareholder value
creation section on pages 6 and 7 for further
details on pension schemes deficit funding.
Health, safety and wellbeing
Health and safety is a priority for the Board
and the management teams of all Group
divisions. The Board sets high standards of
health and safety management, compliance
and awareness throughout the Group, by
way of robust policies and reporting
requirements. This is first informed by
reviewing and challenging the health and
safety performance of each Group business
every quarter, supplemented by further
reporting from business unit executive teams
in respect of particular or serious health and
safety incidents or issues. This enables the
Board to fulfil its responsibility for driving
implementation of strong investigative,
preventative and corrective actions by the
divisional management teams.
Whilst the Board takes a zero-tolerance
approach to avoidable health and safety
risks, during 2019 the Nortek Global HVAC
site in Montreal, Canada tragically suffered
a fatality. The Board and Melrose senior
management team immediately supported
the business executive team in investigating
the incident without delay, overhauling
relevant health and safety procedures and
employee training and awareness to ensure
implementation of the improvements, and
ensuring that the affected family was duly
compensated. Further details about the
improvement measures that were
implemented are set out in the key
performance indicators section on
pages 36 and 37.
At a business level, the executive teams are
best placed to understand the requirements
of their employees’ specific working
environments, and are therefore empowered
to implement best practice and ensure that
(i) their businesses have robust measures in
place to identify, monitor and manage health
and safety risk; and (ii) their employees are
aware of those practices and trained to
implement them correctly. This is supported
by internal health and safety effectiveness
audits, external Group insurance reviews,
external certifications such as ISO standards,
and regular challenge and continual oversight
from the Melrose senior management team.
Each division is responsible for implementing
local legislation and standards appropriate
to the specific nature of activities undertaken
at each of their facilities. Two-thirds of the
Group’s manufacturing facilities are OHSAS
18001 (Occupational Health and Safety
Assessment Series) certified. In addition,
all GKN and Brush sites have begun the
process of attaining the certification of the
upgraded ISO 45001:2018 standard for
management systems of occupational health
and safety – developed based on the latest
best practices and approaches to prevent
work-related injury and ill-health and to
provide safe and healthy workplaces.
The Group also encourages and supports
divisions to embed a proactive, safety-aware
culture. Behaviour-based programmes
and continuous training and awareness
campaigns remain central to the approach of
all divisions, aided by strengthened emphasis
on leading indicators such as near-misses
and hazard identification and awareness.
Our aim is to drive our businesses to step up
from solely overcoming shortfalls in their
performance, to achieving longer term
improvement. We encourage our businesses
to focus on improving their leading indicators
of attaining a sustainably positive health and
safety regime by preventing incidents and
near misses, to enable enhanced focus on
identifying hazards to change the culture and
performance of their health and safety
functions over the longer term.
Strategic ReportMelrose Industries PLC Annual Report 2019 66
ESG report
Continued
Promoting diversity at all levels
Melrose recognises the importance of
diversity in delivering better business
performance and building a high-calibre
workforce, as well as good labour relations,
employee engagement and people
development. Melrose champions diversity
in the broadest sense, be that along
geographical, cultural, personal or market
lines, encompassing gender, race, sexual
orientation and disability. Whilst remaining a
meritocracy, Melrose is actively engaged in
finding ways to increase the diversity across
the Group, and the sectors in which
it operates.
Melrose leads its businesses by example,
starting at Board level. Since 2018, all Board
appointments have been female and two of
the most important roles on the Board, being
the Senior Independent Director and the
Chairman of the Audit Committee, are
held by a woman. With the retirement of
Mr David Roper in May 2020, Melrose will
have achieved ahead of schedule the 2020
target set out in the Hampton-Alexander
Review of having 33% female representation
on its Board. It has also achieved ahead of
schedule the 2021 target set out in the
Parker Review of having one director of
colour on its Board.
The Board has implemented the same
high standards and values among Melrose
senior management, where 33% of the
Executive Committee are female, and those
standards and values are driven through
our businesses.
At a business unit level, GKN Aerospace has
launched the inaugural ‘Inspired Women’s
Leadership Development Programme’ with
the professional training and coaching
company Forward Ladies, designed to help
women in the organisation succeed and to
encourage women to mentor other female
colleagues in the business. The programme
saw 35 female leaders globally from across
the division come together to hear industry-
leading speakers and to share their own
learning, resources and insights relevant to
their roles and careers. GKN Aerospace was
also pleased to strengthen its executive
committee with two new female
appointments in 2019.
Gender diversity within the Group
as at 31 December 2019
Board
70%
30%
■ Male
■ Female
7
3
Melrose Central (excl. Board)
60%
40%
Aerospace
75%
■ Male
■ Female
28
19
25%
■ Male
■ Female
12,846
4,232
Automotive
87%
13%
■ Male
■ Female
19,495
2,897
Powder Metallurgy
84%
16%
■ Male
■ Female
5,474
1,061
Nortek Air Management
Through the Melrose Skills Fund, Melrose is
working on a diversity project to help improve
diversity within the engineering sector as a
whole. This project is being led by Enginuity
(formerly known as Semta), a not-for-profit
organisation that leads on several initiatives to
support the engineering and manufacturing
sectors, and also involves Unite. The aim of
this project is to conduct research into
identifying barriers that are hindering
socio-economic and ethnic diversity within
the engineering sector, with a view to provide
support to projects and potentially provide
bursaries to help increase diversity based
on these findings. A meeting of the project
steering committee, which consists of
Melrose, Enginuity and Unite, was held in
January 2020 to discuss the findings
of the initial report, which will inform the
development of short, medium and long-term
actions that can be undertaken to increase
diversity in the sector.
Further details on diversity can be found
in the Nomination Committee report on
pages 88 to 89, and a copy of our diversity
policy can be found on our website at
https://www.melroseplc.net/about-us/
governance/code-of-ethics/corporate-
responsibility/.
Senior managers
In accordance with section 414C of the
Companies Act 2006, the definition of senior
managers is required to include Group
employees who are directors of Group
undertakings, but excludes the Board of
Melrose Industries PLC. Melrose does
not consider that including the employee
directors of its undertakings provides an
accurate reflection of the senior management
at Melrose, nor its executive pipeline.
As reflected in note 3 to the financial
statements, Melrose has many undertakings,
including dormant, non-trading and
immaterial subsidiaries. We have 33% female
representation on our Executive Committee
which represents a more accurate reflection
of the senior management team and
executive pipeline at Melrose.
72%
28%
Other Industrial
74%
26%
■ Male
■ Female
3,759
1,497
Total Group gender diversity
Total Group
Total
Male
Female
55,621 44,799 (81%) 10,822 (19%)
■ Male
■ Female
3,190
1,113
Senior Managers (section 414C of the Companies Act 2006)
Employees in senior management positions
Directors of group undertakings, excluding the above
Total Senior Managers
Male
20 (71%)
183 (92%)
Female
8 (29%)
15 (8%)
203 (90%)
23 (10%)
Melrose Industries PLC Annual Report 2019
67
Promoting fair employment
and skills development
Melrose drives its businesses to create
inclusive and rewarding workplaces and is
committed to providing equal opportunities
for all employees within the Group. In line with
our decentralised model, the executive
management team of each business is
empowered to handle employee matters, to
ensure the approach taken is attuned to the
specific needs of the business as well as of
their employees. This enables the divisional
management teams to cultivate their own
authentic employer brand, in a manner
that is sensitive to their respective
commercial, operational, market and
geographical context.
Inclusive and fair employment
A culture of clear communication and
employee consultation and engagement is
inherent across the Group. The majority of
business units, for example, operate “town
hall” meetings to communicate strategy, key
changes, financial results, achievements and
other important issues to employees, and to
listen to their feedback. Employee surveys,
notice boards, team meetings, suggestion
boxes and newsletters are also used to
communicate and engage with employees,
and to seek their feedback on issues of
concern to them. GKN Powder Metallurgy
has developed a ‘PM Connect’ app which
is free for employees to download, has
a translation function, and informs
employees of internal announcements
and communications.
The WAP is a key Group forum to promote
effective engagement with, and encourage
participation from, all people working within
the Group. The Board places strategic
importance on the WAP to report and elevate
all material feedback from the workforce,
whether positive or negative, and how it has
been incorporated into decision making at a
business unit executive level – where it is
most impactful and effective. This feedback
is discussed at Board meetings along with
the whistleblowing report which highlights
whistleblowing activity across the business
units and a summary of the approach taken.
Applications for employment by disabled
persons are fully and fairly considered by the
Group on the basis of merit, with regard only
to the job-specific requirements and the
relevant applicant’s aptitude and ability to
carry out the role. 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 for
disabled persons to be treated fairly, so that
they can contribute on an equal-opportunity
basis to business success, to society and to
economic growth.
Skills development
The Group champions talent development
and recognises the importance of investing in
human capital and skills for the long-term
success of each business. This is central to
Melrose’s strategy to boost productivity and
improve business performance, and the
Melrose senior management team, at the
direction of the Board, work closely with all
divisions to achieve this.
The GKN Aerospace division committed to
invest over £30 million in its Portsmouth,
Luton and Bristol sites in the UK to boost their
capabilities and transform them into global
centres of excellence. Through these
substantial investments the three
manufacturing sites will further support job
creation and engineering skills development,
and reinforce the important role they play in
the communities around them.
Extensive training opportunities are available
and promoted to all workers to ensure that
high skills levels are cultivated and maintained
across the Group. In particular, GKN
Aerospace has launched a new learning
management system for a wide range of
learning activities from e-learnings to
instructor-led courses. Since its launch in
June 2019, 12,500 courses have been
enlisted in and the curriculum has doubled
from 50 to 100 learning and development
opportunities.
Training programmes across the business
units focus on leadership, interpersonal and
functional skills development for managers,
supervisors and shop-floor employees.
Employees across the Group are encouraged
to think innovatively and to have regard for the
financial sustainability of the Group, as well
as their business’s impact on internal and
external stakeholders. The importance of
training extends beyond on-the-job training
and focuses on enhancing personal
development. As a sign of its commitment to
fostering and developing talent, in 2019 GKN
Automotive won the ‘Ovation Award’ from
Capital Associated Industries for the
second time in respect of its career
mapping process.
In addition, apprenticeship programmes
assist with training a new generation of
employees and ensure knowledge is retained
within the businesses. More than 200
apprenticeships were provided across our
GKN Aerospace, GKN Automotive and GKN
Powder Metallurgy divisions in 2019. In
recognition of their strong commitment and
continuous improvement of their
apprenticeship programmes, the GKN
Aerospace’s Filton and Western Approach,
UK sites were named ‘Large Employer of the
Year’ for the sixth consecutive year in the
Bristol & Bath Apprenticeship Awards.
Similar focus is placed on training and
developing graduates. In 2019 GKN
Aerospace held a two-week global graduate
on-boarding event in Sweden, where
graduates were provided with an insight
into the engines business and space industry,
and were also given tours of the site
and facilities.
In focus: The Melrose Skills, Innovation and
Productivity Fund
The GKN acquisition demonstrated
Melrose’s long-standing belief in building
industrial excellence, and investing in
underperforming businesses to unlock and
promote their long-term prosperity for the
collective benefit of stakeholders, including
the next generation of engineers. We
identified a strong need to develop the
human capital required to transform
GKN into a stronger engineering and
manufacturing powerhouse and responded
with a pledge to invest £10 million over
five years to further this cause. 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
it needs.
The GKN Aerospace, GKN Automotive
and Brush businesses have implemented
initiatives with the financial support of
the Melrose Skills Fund. In 2019, GKN
Aerospace deployed funding to develop
a comprehensive programme of training
materials and digital learning modules to
upskill its teams. So far workers across
different disciplines have benefited from
training relating to all manner of topics,
from root cause corrective actions, through
geometric design to robotic language
programming. GKN Automotive has
capitalised on funding to further the aims of
its Innovation Centre’s Engineering Skills
Development Programme which seeks to
develop high-calibre engineering talent and
engage and develop existing staff in the UK.
In 2019, 442 people took part in GKN
Automotive-led STEM activities and the
business recruited apprentices and
sponsored a PhD position.
Melrose is also working on a diversity
project which is supported by the Melrose
Skills Fund with the aim of increasing
socio-economic and ethnic diversity within
the engineering sector. This project is being
led by Enginuity and also involves Unite.
Further details can be found on page 66.
Strategic ReportMelrose Industries PLC Annual Report 2019 68
ESG report
Continued
4
Exercise robust governance,
risk management, and
compliance
Improve Sell
Sound business ethics and integrity are core
to the Group’s values and are fundamental
for the success of our strategy. Melrose is a
UK premium listed company with strong,
established financial controls that are
continually assessed, tested and reviewed.
This robust framework is supported by an
independent internal audit function, regular
public disclosure and financial reporting,
external audits, and public accountability and
conformance with leading benchmarks set by
the UK Corporate Governance Code, investor
requests, corporate governance advisors’
recommendations, and extensive engagement
with the Group’s wider stakeholder base to
ensure best market practice.
These high standards of robust financial
controls, and strong governance backed by
internal and external auditing of financial and
non-financial compliance, are enforced
throughout the Group. All businesses are
required to comply with Melrose’s Code of
Ethics. These include policies covering best
practice with respect to anti-bribery and
anti-corruption, anti-money laundering,
anti-tax evasion, competition, trade
compliance, data privacy, whistleblowing,
treasury and financial controls, anti-slavery
and human trafficking, document retention
and joint ventures.
22,000
employees
completed IT and cyber
security training during 2019
Strict
procedures
in place to ensure Tungsten,
Tantalum, Tin, and Gold are
sourced responsibly and
from conflict-free regions
of the world
In 2019, our businesses continued to invest
in developing products that help customers
achieve better quality, reliability and safety
outcomes, either in their operations, or in the
use of their products. Examples of such
solutions include:
• GKN Automotive’s torque vectoring
technology for all-wheel-drivetrain (‘AWD’)
products stabilises conventional and
electrified cars during cornering and
accelerating and improves the safety of
the vehicle in all conditions, especially on
corners or on wet, dirty, and icy roads.
• As part of its ‘Design for PM’ experience,
GKN Powder Metallurgy offers customers
a product development cooperation
service which often leads to the redesign
of products and sub-assemblies. The
business has invested approximately 71%
of its total research and development
expenditure in helping customers
achieve better quality outcomes through
advanced simulation and lab support,
material optimisation and systematic
testing methods and in 2019 received
nine product quality awards.
• All HVAC products are designed, tested
and rated on safety performance to
exceed industry standards, such as those
set by the California’s Office of Statewide
Health Planning and Development and
the American National Standards Institute,
and are designed with the safety of the
end-user and the maintenance technician
in mind. The business has recently
launched a new platform of entry-level
spilt systems which have eliminated
rattling, removed hard to handle single
piece metal jackets with panelised wire
guards in order to minimize sharp edges
and laceration risks.
• All AQH products are focused on
improving the air quality inside the home
by safely eliminating pollutants that can
adversely impact human health. In 2019
the business invested in innovations to
improve air quality across the whole
house. One such example includes a new
set of air quality sensors linked with a
proprietary algorithm that operates a
cooker range hood autonomously to
maintain the air quality of the kitchen.
Their implementation is then supported by
risk assessments, audits and reviews, annual
compliance certifications, and a Group-wide
whistleblowing platform monitored by the
businesses’ legal and compliance functions
and supported by the Melrose senior
management team, to empower employees
to raise concerns, in confidence, about
possible wrongdoing in any aspect of their
business, including financial and non-financial
matters. Melrose strongly believes that
policies and procedures are only as effective
as the people who implement them. To that
end, all of the above measures are backed
by investment, resources and training.
The Company takes a zero-tolerance
approach to bribery, corruption and other
unethical or illegal practices and is committed
to acting professionally, fairly and with
integrity in all business dealings and
relationships, within all jurisdictions in which
we operate. Melrose also requires its
businesses to adopt high governance
standards, to ensure that the Group
conducts business responsibly, sustainably,
and in the pursuit of long-term success for
collective benefit of stakeholders.
Please refer to pages 46 to 47 for full
details on the Group’s approach to
Risk management.
Ensuring the highest standards
of product quality and safety
Melrose is committed to ensuring that our
businesses achieve the highest standards
of product quality, reliability and safety, in
recognition of their importance in protecting
the wellbeing of ultimate end-users, and
futureproofing each business and its ability
to deliver profitable long-term performance.
Each division follows strict product design
and development procedures to ensure
precise delivery to customer specification,
and to seek opportunities to enhance quality
and safety performance. This is especially
critical in the highly regulated aerospace and
automotive sectors, demonstrating the high
standards that the Group is held to:
• GKN Aerospace’s Zero Defects
programme is aligned to the emerging
aerospace industry Advanced Quality
Product Planning and Production Part
Approval Process and draws on best
practice from across the industry and
GKN Aerospace. To date, leaders
throughout the business and over 25%
of the manufacturing engineers have
completed rigorous, industry-leading
training to uphold production excellence.
• GKN Automotive’s customers continue to
recognise its dedication to quality and
safety excellence and in 2019 its sites
received the Toyota Quality Excellence
Award, Mitsubishi Quality Awards and
Nissan’s Safety Excellence Award.
Melrose Industries PLC Annual Report 2019 69
• As a leading manufacturer of medium
and high voltage technology, safety
considerations are critical to Brush.
In 2019, 10% of its research and
development spend was dedicated
to this area. In one such example, the
Safer Isolation SafeBond project enables
customers to reduce the downtime of
their network during maintenance and
achieve a safer bounding of the live rail
with minimum human interaction.
• All products that Ergotron develops,
from monitor arms to sit-stand desks,
electric desks, and heath care carts, are
designed to improve how people work,
learn, play and care for others and help
customers achieve better health and
safety outcomes.
Working with our suppliers to
ensure respect for labour and
human rights and the environment
Melrose recognises the potential risks of
human rights abuses and modern slavery, as
well as the environmental impacts inherent to
global, complex, multi-tier supply chains. We
are committed to acting in an ethical manner
with integrity and transparency in all business
dealings, and to creating effective systems
and controls across the Group to safeguard
against adverse human rights and
environmental impacts. The Group has also
taken steps to encourage business divisions
to implement effective and proportionate
measures to ensure that there are no forms
of modern slavery in their operations or
supply chain.
Modern slavery and human trafficking
As set out in the Melrose Anti-slavery and
Human Trafficking Policy, the Group has a
zero-tolerance approach to any form of
modern slavery. In accordance with the
Modern Slavery Act 2015, Melrose publishes
its own Modern Slavery Statement which
is approved by the Board annually and
can be found on our website at
https://www.melroseplc.net/media/2487/
modern-slavery-statement-june2019.pdf.
Under Melrose’s decentralised group
structure, each division is responsible
(where applicable) for publishing their own
Modern Slavery Statements in accordance
with the requirements under the Modern
Slavery Act 2015, with support provided by
Melrose where needed. This approach
ensures that those senior managers closest
to the business operations devise appropriate
measures to eradicate slavery from their
supply chains.
measures are in place for the Group. In 2019,
Melrose completed the deployment of its
information security strategy and risk-based
governance framework to all businesses
within the Group, which follows the UK
Government’s recommendations on cyber
security. This strategy has enabled risk
profiling and mitigation plans to be developed
for each business to mitigate and reduce their
exposure to cyber risk in a manner that is
adequate for their level of sophistication.
This ensures clarity and consistency in the
assessment of IT and cybersecurity matters
across our diverse and decentralised Group.
The progress of each business is measured
against the information security strategy and
is monitored on a quarterly basis.
As part of Melrose’s overall information
security strategy, IT Security awareness
training was deployed by all businesses,
with more than 22,000 employees in
attendance over the course of 2019.
Paying tax responsibly
Melrose is committed to paying taxes that
are due, complying with all applicable
laws, and engaging with all applicable tax
authorities in an open and cooperative
manner. The Group’s tax strategy is reviewed,
discussed and approved by the Board
annually with continuous commitment
not to engage in aggressive tax planning.
The Group has adopted a policy in respect
of the prevention of the facilitation of tax
evasion which has been implemented by the
businesses, with guidance on undertaking
risk assessments and training to employees
in relevant roles.
We hope that our inaugural ESG report has
provided clarity and comfort for stakeholders
in respect of all the actions and ambitions
of Melrose and the businesses we own.
We continually strive for improvement and
look forward to providing further updates
on progress in due course.
The Strategic Report, as set out on
pages 4 to 69, has been approved
by the Board.
On behalf of the Board
Simon Peckham
Chief Executive
5 March 2020
Each division is in the process of rolling out
training to employees on the implementation
of Melrose’s anti-slavery and human
trafficking policy so that employees
understand the risks and what actions
should be taken if they suspect that
modern slavery is happening internally
or within the supply chain.
Supplier qualification and compliance
The security, assurance and ethical
compliance of suppliers is very important
to Melrose in building the resilience of its
businesses to supply chain shocks and
reputational risks. Responsibility for the
implementation and management of all
supplier-related policies rests with local
management. The Group supports its
businesses in implementing and managing
such policies across their respective
supply chains, in line with the nature and
geographical representation of their supplier
base. In addition to providing the highest
quality products or services, suppliers are
expected to operate their businesses in a way
that supports the Group’s commitment to
acting ethically and responsibly. All business
divisions have a supplier qualification process
which as a minimum, requires suppliers to
sign the respective division’s Supplier Code
of Conduct or equivalent policy and
depending on the determined level of risk
may also result in an audit or further reviews.
All businesses that source products or raw
materials containing Tungsten, Tantalum,
Tin, and Gold (‘3TG’) have strict procedures
in place to ensure that 3TG minerals are
sourced responsibly and from conflict-free
regions of the world. Relevant suppliers are
required to perform due diligence to ascertain
the point of origin of 3TG minerals in products
and to complete the Responsible Minerals
Initiative reporting template or equivalent.
Protecting information security
and data privacy
Melrose strongly respects privacy and seeks
to minimise the amount of personal data that
it collects, as well as ensuring the robust and
sufficiently segregated storage of any data
that is held. Information security and cyber
threats are an increasing priority across all
industries globally, and like many businesses,
Melrose recognises that the Group must be
protected from potential exposures in this
area particularly in light of its scale, reach,
complexity and public-facing nature, as well
as the potential sensitivity of data held in
relation to civil aerospace technology and
controlled defense contracts.
The Melrose senior management team
continues to work with the divisional
executive teams and external security
consultants to track the Group’s exposure to
cyber security risk and, to ensure appropriate
compliance with the GDPR, mitigation
Strategic ReportMelrose Industries PLC Annual Report 2019 70
Governance overview
Succession planning
Succession planning was an area of focus for
Melrose in 2019. The Nomination Committee
and the Board considered the leadership
needs of the Group, present and future,
together with the skills, experience 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.
In order to facilitate effective succession
planning and the development of a diverse
Board, following discussion and engagement
with key shareholders, the Nomination
Committee and the Board approved
extending my tenure as Non-executive
Chairman for up to a further three years
beyond 2020, subject to my annual re-
election at the Company’s AGM. This is
outlined in further detail in the Nomination
Committee report on pages 88 to 89,
together with further details on how
succession planning arrangements for the
Board and Melrose senior management team
were reviewed and considered.
Following a review by the Nomination
Committee of the composition of the Board
and subsequent recommendation by the
Nomination Committee that the number of
independent Directors be increased, Ms
Funmi Adegoke was appointed to the Board
with effect from 1 October 2019. Further
details of Ms Adegoke’s appointment is
outlined in the Nomination Committee report
on pages 88 to 89.
Melrose Executive Committee
The Melrose Executive Committee operates
under the direction of the Chief Executive.
It is chaired by a member of the Melrose
senior management team on a rotating basis
to encourage diversity, and comprises
members of the Melrose head office team
from London, Birmingham and Atlanta.
The Melrose Executive Committee meets
on a weekly basis and executive and
Non-executive Directors attend by invitation.
Its key roles are to ensure that there is a full
knowledge of, and coordination between,
the central team on all important issues; to
consider what, if any, actions are required
that week in respect of acquisitions,
disposals and day-to-day management; to
ensure that the appropriate resource is being
devoted to resolve any such issues; and to
ensure that actions being taken are
supportive of the Group’s aims, objectives
and culture.
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.
Justin Dowley
Non-executive Chairman
As part of this approach, the
Board has applied the principles
and complied with the provisions
of corporate governance contained
in the UK Corporate Governance
Code 2018 (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 2019
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.
Melrose Industries PLC Annual Report 2019 Remuneration
The Directors’ Remuneration report,
comprising the annual statement from the
Chairman of the Remuneration Committee,
the Annual Report on Remuneration and the
proposed new Directors’ remuneration policy,
are available on pages 90 to 111.
As further detailed in the Directors’
Remuneration report, the current Directors’
remuneration policy and long-term incentive
plan are due for renewal by shareholders this
year. The current Directors’ remuneration
policy and long-term incentive plan have had
significant continuity from Melrose’s
establishment in 2003 and have been at the
heart of Melrose’s long-term success since,
as evidenced by it being the second highest
performer in the FTSE 350 over the past
decade. Recognising the importance of the
renewal, we undertook a detailed planning
process, including engagement with key
shareholders and governance bodies. Having
completed this process, subject to approval
at the 2020 AGM, the Remuneration
Committee is proposing to adopt a new
Directors’ remuneration policy (the “2020
Policy”) and long-term incentive plan on
broadly consistent terms as those previously
approved, save for two key changes to the
long-term incentive plan, which seek to
further enhance protection for shareholders
(see pages 103 to 111 for the 2020 Policy).
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 pay only for
performance.
Risk management and compliance
Melrose has implemented a uniform
Enterprise Risk Management programme
across all its business units. Our processes
and procedures are now fully embedded in
the GKN businesses, alongside Brush and
the Nortek businesses.
The Group’s compliance policies have been
fully implemented across all 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 46 to 47 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. Further details of the Group’s
stance and focus on ensuring effective
stewardship in respect of key environmental,
social and governance matters are set out in
the ESG report on pages 58 to 69.
Supporting our updated compliance policies
are a comprehensive online training platform,
an industry-leading whistleblowing reporting
facility and a new data-driven risk reporting
dashboard providing increased risk
management visibility and trend analysis to
senior management and the Audit
Committee. The integrity of the compliance
framework is further reinforced by the
use of independent assurance and
compliance audits.
Engagement with stakeholders
Engagement with key shareholders and
governance bodies has continued throughout
2019. In advance of the upcoming renewal of
our Directors’ remuneration policy and
incentive arrangements, in addition to the
decision to extend my tenure as Non-
executive Chairman for up to a further three
years beyond 2020, we have engaged
constructively with major investors and
governance bodies as applicable in order
to understand their views on the proposals.
The Board is pleased with the support and
feedback received throughout these
discussions. Otherwise, we have continued
to engage with shareholders on a number of
important topics, such as diversity and
modern slavery, and it is our intention to
continue with this programme of engagement
in 2020. Further detail on how the Board
considers stakeholders in its decision-making
is set out in our Section 172 statement
on pages 56 to 57 and in the ESG report on
pages 58 to 69.
Justin Dowley
Non-executive Chairman
5 March 2020
71
Main responsibilities
of the Board
• Effectively manage and control the
Company via a formal schedule of
matters reserved for its decision
• Define the Group’s purpose,
determine and review Group
strategy and policy to deliver that
purpose, and provide strategic
leadership to the Group
• Set the Group’s values and
behaviours that shape its culture
and the way it conducts business
• 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
• Engage with stakeholders and key
shareholders on issues that are
most important to the long-term
success of the Company
• Consider the views of the Group’s
workforce as provided in the
feedback from the Workforce
Advisory Panel, in its discussions
and decision making
• 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
• Oversee 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
• Promote the success of the
Company over the long-term for the
benefit of shareholders as a whole,
having regard to a range of other
key stakeholders and interests,
including environmental, social and
governance matters
GovernanceMelrose Industries PLC Annual Report 2019 72
Board of Directors
Justin Dowley
Non-executive Chairman
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.
Christopher Miller
Executive Vice-Chairman
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
4
3
Board meetings attended (1)
Business reviews attended
4
2
Other significant appointments
• Non-executive Director of Scottish Mortgage
Other significant appointments
• Trustee of the Prostate Cancer Research Centre
Investment Trust PLC
• 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
Yes
Independent
Not applicable
David Roper
Executive Vice-Chairman
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.
Board meetings attended (1)
Business reviews attended
4
3
Independent
Not applicable
Liz Hewitt
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.
Board meetings attended (1)
Business reviews attended
4
3
Other significant appointments
• Non-executive Director of Novo Nordisk A/S,
National Grid PLC (with effect from 1 January 2020),
Silverwood Property Ltd, St George’s Fields Ltd and
St George’s Fields (No2) Ltd
• Independent Member of the House of Lords
Commission
Committee membership
• Audit (Chairman) • Nomination
Independent
Yes
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.
Board meetings attended (1)
Business reviews attended
4
3
Other significant appointments
• Non-executive Director of Electra Private Equity PLC
Committee membership
• Audit • Nomination • Remuneration (Chairman)
Independent
Yes
Archie G. Kane
Independent Non-executive Director
Year appointed
Appointed as a Non-executive Director on 5 July 2017.
Skills and experience
Archie has held several senior roles in the financial
services sector and brings extensive financial
experience to the Board. Archie qualified as a
chartered accountant with Mann Judd Gordon &
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 appointed as 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. He was also
Non-Executive Governor of the Board of the
Bank of Ireland until July 2018.
Board meetings attended (1)
Business reviews attended
4
3
Other significant appointments
• Non-executive Chairman of ReAssure Group Limited
Committee membership
• Audit • Nomination (Chairman) • Remuneration
Independent
Yes
Melrose Industries PLC Annual Report 2019 73
Diversity and skills overview
Board gender diversity
Male
Female
70%
30%
Board ethnic diversity(1)
Non BAME
BAME
90%
10%
(1) In accordance with the Parker Review, BAME
individuals are those who identify as or have
evident heritage from African, Asian, Middle Eastern,
Central and South American regions.
Board skills
Industrial
Accounting
and Finance
Legal
Investment
Corporate
Governance
4
6
2
7
5
Melrose Executive Committee
Male
Female
67%
33%
Melrose Central employees (excl. Board)
Male
Female
60%
40%
Simon Peckham
Chief Executive
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
Geoffrey Martin
Group Finance Director
Year appointed
Appointed as Group Finance Director
on 7 July 2005.
Skills and experience
Geoffrey provides considerable public company
experience and expertise in corporate finance, raising
equity finance and financial strategy. A chartered
accountant, Geoffrey qualified with Coopers &
Lybrand, where he worked within the corporate
finance and audit departments. In 1996, Geoffrey
joined Royal Doulton PLC, serving as Group Finance
Director from October 2000 until June 2005.
During this time, Geoffrey was involved in a number
of projects, including raising public equity, debt
refinancing and the restructuring and outsourcing
of the manufacturing and supply chain.
Board meetings attended (1)
Business reviews attended
4
3
Independent
Not applicable
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 Executive Director Policy,
Communications and Strategy. Charlotte is currently
Consents Director on the Heathrow Expansion
Programme Committee responsible for securing
the approvals for its expansion.
Board meetings attended (1)
Business reviews attended
Committee membership
• Audit • Nomination • Remuneration
Independent
4
3
Yes
Funmi Adegoke
Independent Non-executive Director
Year appointed
Appointed as a Non-executive Director
on 1 October 2019.
Skills and experience
Originally qualifying as a barrister, Funmi has well over
a decade of working in and leading legal teams across
the globe at the large multi-nationals Bombardier and
BP. During this time she gained extensive experience
within the aerospace, engineering, manufacturing
and energy sectors. Funmi brings diverse industrial
knowledge as well as significant transactional and
commercial management expertise to the Board.
Board meetings attended (1)
Business reviews attended
Committee membership
• Nomination • Remuneration
Independent
1(2)
1(2)
Yes
(1) Meetings attended refers to scheduled meetings.
(2) Appointed to the Board with effect from 1 October 2019
and attended all Board meetings and business reviews held
during the period 1 October 2019 to 31 December 2019.
GovernanceMelrose Industries PLC Annual Report 2019
74
Directors’ report
The Directors of Melrose Industries PLC
present the Annual Report and financial
statements of the Group for the year ended
31 December 2019.
Incorporated information
The Corporate Governance report set out on pages 77 to 81, the
Finance Director’s review on pages 38 to 44 and the ESG report
section of the Strategic Report on pages 58 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
Leconfield House, Curzon Street, London W1J 5JA at 11am on
7 May 2020. A detailed explanation of each item of business to
be considered at the AGM is included with the Notice of Meeting
(the “AGM Notice”), which is provided to shareholders with this
Annual Report.
Directors
The Directors of the Company as at the date of this Annual Report,
together with their biographies, 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 77 to 81. Details of Directors’ service
contracts are set out in the Directors’ Remuneration report on
page 101.
of services from concept to series production, for a total consideration
of up to £29 million, of which £20 million was paid on 2 January 2020.
The acquisition furthers GKN Powder Metallurgy’s ambition to achieve
global market leadership in industrialising additive manufacturing.
In the year ended 31 December 2019 FORECAST 3D achieved sales
of approximately £17 million.
Capital structure
The table below shows details of the Company’s issued share capital
as at 31 December 2018 and as at 31 December 2019.
Share class
31 December
2018
31 December
2019
Ordinary shares of 48/7 pence each
4,858,254,963 4,858,254,963
Incentive Shares (2017)
12,831(1)
12,831
(1) 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.
The Company’s ordinary shares are admitted to the premium
segment of the official list.
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 Statement of Directors’ responsibilities in relation to the
consolidated financial statements is set out on page 112, which is
incorporated into this Directors’ report by reference.
The Company is not aware of any agreements between
shareholders that restrict voting rights attached to the ordinary
shares in the Company.
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 Funmi Adegoke who will be standing for election for the first time
following her appointment on 1 October 2019, all current Directors of
the Company will be standing for re-election by shareholders at the
forthcoming AGM.
The Directors are responsible for managing the business of the
Company and exercise their powers in accordance with the
Articles, directions given by special resolution and any relevant
statutes and regulations.
Insurance and indemnities
In accordance with the Articles and the indemnity provisions of the
Act, the Directors have the benefit of an indemnity from the Company
in respect of any liabilities incurred as a result of their office. This
indemnity is provided both within the Articles and through a separate
deed of indemnity between the Company and each of the Directors.
The Company has taken out an insurance policy in respect of those
liabilities for which the Directors may not be indemnified. Neither the
indemnities nor the insurance provides cover in the event that a
Director is proved to have acted dishonestly or fraudulently.
Post balance sheet events
On 2 January 2020 GKN Powder Metallurgy completed the
acquisition of Forecast 3D, a leading US specialist in plastic additive
manufacturing and 3D printing services offering a full range
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 5 March 2020, 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 2020 AGM are set out in the AGM
Notice, which is provided to shareholders with this Annual Report.
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 Financial Conduct
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.
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.
Melrose Industries PLC Annual Report 2019 75
Substantial shareholdings
As at 31 December 2019, 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
% of ordinary
share capital as at
31 December
2019
6.84
4.91
3.16
Shareholding
332,302,037
238,555,954
153,648,939
Between 1 January 2020 and 5 March 2020 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 3.4 pence per share (2018: 3.05 pence) to be paid on
20 May 2020 to ordinary shareholders on the register of members
of the Company at the close of trading on 3 April 2020. This dividend
recommendation will be put to shareholders at the forthcoming
AGM of the Company, to be held on 7 May 2020. Subject to
shareholder approval being obtained at the AGM for the final
dividend, this will mean a full year 2019 dividend of 5.1 pence
per share (2018: 4.6 pence).
For discussions on the Board’s intentions with regard to the dividend
policy, please see the Chairman’s statement on pages 12 to 13,
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”) and the former GKN plc
(now “GKN Limited”). Pursuant to law and the articles of association
of the respective companies, the Company is obliged to pay such
unclaimed dividends for a period of 12 years from the date on which
they were declared or became due for payment (“Unclaimed
Dividends”). Six months after this time period has expired, the
Company’s policy is to donate the amount of the Unclaimed
Dividends to a charity of the Company’s choice. As at 31 December
2019, the total amount of such Unclaimed Dividends was
£224,837.06. If the Unclaimed Dividends are not claimed by
30 June 2020, the Company will donate the funds to charity.
Ability to purchase own shares
Pursuant to sections 693 and 701 of the Act and a special resolution
passed at a general meeting of the Company on 9 May 2019,
the Company is authorised to make market purchases of up to
485,825,496 of its ordinary shares, representing approximately 10%
of the current issued ordinary share capital of the Company. The
Company has not made any purchases of its own shares pursuant to
this authority. This authority will expire at the end of this year’s AGM,
at which the Company is seeking approval to make market purchases
of its ordinary shares up to 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, which is
provided to shareholders with this Annual Report.
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 Director’s review on pages 38 to 44, the
Risks and Uncertainties section of the Strategic Report on
pages 48 to 55 and in note 25 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 16 to 35, which are
incorporated by reference into this Directors’ report, investment into
research and development activities continued throughout 2019.
In GKN Aerospace, over £50 million was committed to new
investment productivity across key European and US facilities with
Melrose support. Investment in technology also saw GKN Aerospace
manufacture and deliver the first components for Airbus’ Wing of
Tomorrow programme. GKN Automotive recently announced a
strategic collaboration with Delta Electronics Inc., a global power
electronics specialist, for the joint development of advanced eDrive
technology, with Delta inverters integrated with GKN Automotive’s
eMotor and gearbox systems. This important development milestone
has been matched by the delivery of GKN Automotive’s one millionth
eDrive system.
The significant investment in innovation and technology at
HVAC has culminated in the successful commercialisation of its
StatePoint Technology® cooling system, including a multi-continent
collaboration with a leading global social media conglomerate to
provide cooling systems to data centres across the world. Investment
in this area is expected to continue in order to maximise the full
potential of these technological developments.
Brush has also continued to invest in product development across
all of its businesses, including broadening its product range in
switchgear and enhancing its turbogenerators product portfolio.
The Melrose Skills Fund has also funded initiatives in the GKN
Aerospace, GKN Automotive and Brush businesses. Further details
on the initiatives being implemented are set out in the ESG report
section of the Strategic Report on pages 58 to 69.
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 12 to 13
and the Strategic Report on pages 4 to 69 of this Annual Report
(including the Longer-term viability statement on page 45 and the
Risks and Uncertainties section on pages 48 to 55), which are
incorporated into this Directors’ report by reference.
Employee engagement
Details in relation to the Workforce Advisory Panel, employment
policies, employee involvement, consultation and development,
together with details of some of the human resource improvement
initiatives implemented during 2019 are shown in the ESG report
section of the Strategic Report, and in the Section 172 statement set
out in the Strategic Report, both of which are incorporated by
reference into this Directors’ report.
Business relationships
Details of our businesses’ clients and suppliers and how they work
and engage with them are described in the ESG report section of the
Strategic Report, and in the Section 172 statement set out in the
Strategic Report, both of which are 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 60 to 61 of the ESG report section of the
Strategic Report, which is incorporated by reference into this
Directors’ report.
GovernanceMelrose Industries PLC Annual Report 2019 76
Directors’ report
Continued
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 2019 (2018: nil).
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.
Branches
The Melrose Group and its businesses operate across various
jurisdictions. The 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 95 of the Directors’ Remuneration report and note 23
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 2017 Incentive
Plan (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 5 March 2020.
The Group has a committed bank facility, comprising a multi-currency
term loan denominated £100 million and US$960 million 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 page 43 and note 25 to the
financial statements.
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
outstanding £450 million fixed rate notes paying 5.375% p.a. interest
and maturing on 19 September 2022 and £300 million fixed rate notes
paying 4.625% p.a. interest and maturing on 12 May 2032, in each
case issued under Euro medium-term note programmes (together, the
“Notes”). Pursuant to the terms and conditions of each of 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 together with accrued interest, 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
2017 Incentive Plan 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,
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. Some of these are
summarised below.
In April 2018, the Company agreed to certain (i) undertakings and
consent requirements with the UK Secretary of State (SoS) for
Business, Energy and Industrial Strategy (BEIS) in relation to
maintaining ownership of the core GKN Aerospace business until
April 2023; and (ii) restrictions and consent requirements with the
UK SoS for Defence related to production of controlled items by the
GKN Aerospace business.
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 rights of the GKN Aerospace and
GKN Automotive businesses to use the GKN trademarks, and
maintaining an agreed level of R&D spend for the GKN businesses.
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 2019 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
5 March 2020
Melrose Industries PLC Annual Report 2019 Corporate Governance report
77
In line with the UK Corporate Governance Code
2018 (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 the principles and complied with the
provisions of the Code applicable during the
year ended 31 December 2019.
The Audit Committee report, Nomination Committee report, Directors’
Remuneration report, Statement of Directors’ Responsibilities, the
Risk Management and Risks and Uncertainties sections of the
Strategic Report, together with the ESG report and the Section 172
statement also form part of this Corporate Governance report.
Statement of compliance
Throughout the year ended 31 December 2019, the Company has
applied the principles and complied with the provisions of the Code.
1. Principles A-E: Board Leadership
and Company Purpose
Sustainability of success
The Board is constituted of individuals from a diverse range of
backgrounds and with a wealth of knowledge, understanding and
experience. The Chairman, with the assistance of the Vice-Chairmen,
is responsible for leadership of the Board. The division of
responsibilities is described further in section 2 below.
The Board’s overarching objective is to generate value for the
Company’s shareholders in a way that is sustainable in the long-term
and contributes to wider society. The Section 172 statement on
pages 56 to 57 sets out the ways in which the Board took these
considerations into account in its decision-making in 2019.
Purpose, strategy and values
Melrose was founded in 2003 to empower businesses to unlock
their full potential for the benefit of all stakeholders, whilst providing
shareholders with an above average return on their investment.
This has been delivered through Melrose’s “Buy, Improve, Sell”
strategy, which means we buy good quality but underperforming
manufacturing businesses and then invest heavily to improve
performance and productivity as they become stronger, better
businesses under our responsible stewardship. At the appropriate
time, we find them a new home for the next stage of their
development and return the proceeds to shareholders. This current
set of results is a strong demonstration of this strategy in action, with
improvements across the board in a number of businesses and areas.
The Company’s purpose and strategy is underpinned by the
principles and values on which it was founded. We act with integrity,
honesty and decisiveness and believe in a lean operating model and
high productivity. We do not shy away from difficult decisions based
on sound financial information, holding people accountable but
always treating them fairly. We provide the space and resources to
empower people to perform and reward them well when they do.
These are the principles that lie at the heart of the success of Melrose
and are the basis on which we strive for more success in the future.
Resources and controls
As described in more detail in the Risk Management section of the
Strategic Report, the Board has established a framework of reporting
procedures, lines of responsibility and delegated authority, which is
updated regularly and understood by all Board members and the
Melrose senior management team. These reporting processes
allow the Board and Melrose senior management team to allocate
resources appropriately, enabling the Group to meet its objectives
and measure performance effectively. The Board and the
Audit Committee have access to the Melrose senior management
team and to external assistance in order to satisfy themselves
that appropriate and effective controls are in place.
Stakeholder engagement
Through presentations and regular meetings 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 2019, in addition to the usual
disclosure rounds following the release of annual and interim results,
the Company continued its programme of engagement with major
investors and the corporate governance bodies in respect of specific
material topics including the renewal of the Directors’ remuneration
policy and incentive arrangements, and the Chairman’s tenure, as
well as open-agenda discussions between key shareholders and
members of the Board. Engagement with key shareholders, proxy
advisors and other governance bodies remains a central part of the
Company’s approach to stakeholder engagement and governance
and shall continue in the lead up to the 2020 AGM. Further details on
the Company’s engagement with stakeholders is contained in the
Section 172 statement on pages 56 to 57 and in the ESG report on
pages 58 to 69.
In 2019, the Board established a workforce advisory panel (“WAP”)
in order to 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 the Chief Human Resources
Officer (or equivalent) from each business unit and a Melrose
Group representative. Each member of the WAP is responsible for
determining how the workforce should be defined for their respective
business unit, promoting workforce engagement, collating the voice
of the workforce and demonstrating how that voice is fed into
executive decisions. During the year, the WAP met twice. Further
details on the WAP are contained in the Company’s Section 172
statement on pages 56 to 57.
Workforce policies and practices
Melrose’s reputation for acting responsibly plays a critical role in its
success as a business and its ability to generate shareholder value.
It maintains high standards of ethical conduct which are reflected in
certain policies that are rolled out to the business units, including the
anti-bribery and corruption policy and the anti-slavery and human
trafficking policy.
The Company also operates externally hosted whistleblowing portals
which are readily available to all Group employees and supported by
regularly updated policies, procedures and awareness campaigns to
create an environment in which the workforce feels it is safe to raise
concerns, and to foster an ethical and supportive culture within each
of the Group’s business units. The Board is provided with updates on
material whistleblowing events as they are reported from time to time
to the Melrose senior management team, and they are provided with
an overview of whistleblowing activity on a quarterly basis. An annual
report is prepared for the Board which highlights whistleblowing
activity in further detail across the business units, together with a
summary of the approach taken by each business unit in their
whistleblowing process.
2. Principles F-I: Division of Responsibilities
The Board
Details of the structure of the Board and its key responsibilities are
shown on pages 72 to 73, and 78 to 79.
There were four formally scheduled Board meetings held during the
year and the attendance of each Director at these meetings is shown
on page 79.
Business review meetings are held between scheduled Board
meetings. There were three business review meetings held during
the year, and the attendance of Directors at these review meetings
is set out on page 79. These meetings provide 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 businesses are periodically invited to attend
GovernanceMelrose Industries PLC Annual Report 2019 78
Corporate Governance report
Continued
and present to these meetings, providing the Directors with an
opportunity to discuss each business directly and to develop
relationships with their leadership teams. The executive Directors also
visit the sites of the business units on an ad hoc basis and sessions
are held between the executive Directors and the business unit
executive teams at such site visits.
The Board consists of four executive Directors, five Non-executive
Directors (inclusive of the Senior Independent Director) and the
Non-Executive Chairman. As such, the Board is satisfied that
there is 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.
Detailed briefing papers containing financial and operational business
summaries and an agenda are provided to the Directors in advance of
each Board, Committee (where relevant) 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, advisors and Melrose senior management.
The Board has a fully encrypted electronic portal, enabling Board,
Committee and business 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.
The Company Secretary is responsible for advising and supporting
the Chairman and the Board on corporate governance matters as well
as assisting the Chairman in 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,
supported by the Group company secretariat, acts as secretary to the
Board, the Audit Committee, the Nomination Committee and the
Remuneration Committee.
In accordance with its Articles and in compliance with the Act, the
Company has granted a qualifying third-party indemnity to each
Director. This indemnity is provided both within the Company’s
Articles and through a separate deed of indemnity between the
Company and each of the Directors. The Company also maintains
Directors’ and Officers’ liability insurance.
Chairman, Vice-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 the Code 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 in order to facilitate constructive discussions with effective
contributions from the Non-executive Directors, particularly on those
issues of a strategic nature. The Chairman with the support of the
Company Secretary also facilitates constructive board relations by
providing accurate and clear information in a timely manner.
Responsibility for ensuring effective communications are made to
shareholders rests with the Chairman, Vice-Chairmen and the two
other executive Directors.
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 business review sessions and on an ad hoc basis.
The Non-executive Directors come from a diverse range of
backgrounds and as such are able to draw on their own specialist
knowledge to give necessary guidance and advice, and hold
management to account.
Together with the Chairman, each of the Non-executive Directors are
members of the Nomination Committee and as such, they play a key
role in appointing and removing executive Directors. As considered in
section 3, the Non-executive Directors are also key in evaluating the
performance of the Directors.
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.
Upon Mr Justin 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, and
acts as an intermediary for the other Directors and shareholders.
These changes took effect from 1 January 2019. In accordance with
the Code requirements, at least half of the Board, excluding the
Chairman of the Board, comprises Non-executive Directors
determined by the Board to be independent.
Although Mr Dowley has only served as independent Non-executive
Chairman for a short period, the Board recognises that he will have
served as a Non-executive Director for nine years in September 2020
and the Code provides that service on the Board for more than nine
years from the date of first appointment is a circumstance which may
impair independence. The Company therefore conducted an
engagement exercise with its key shareholders regarding the possible
extension of his tenure past the nine-year period. The feedback was
unanimously supportive and accordingly, the Board has proposed
that Mr Dowley’s appointment as Chairman continue for up to a
further three years, subject to annual re-election, to provide stability
and certainty following the acquisition of GKN and elevation of the
Company to the FTSE 100, as well as to oversee smooth succession
and increasing diversity for the Board.
The Non-executive Directors are not entitled to any cash bonus or
shares under the 2017 Incentive Plan.
Corporate governance framework
and terms of reference
The Board has an 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 units’ bottom-up risk management
responsibilities. Each member of the Board is provided with a copy of
the Company’s corporate governance framework, which they review,
discuss and update regularly.
Each of the Committees have their own written terms of reference.
The Company Secretary supports the Committees in updating these
terms of reference in order to comply with the Code and other good
corporate practice. The terms of reference are continuously reviewed,
although they are more formally reviewed on an annual basis in the
Committee meetings. The terms of reference are available via the
Melrose website at www.melroseplc.net.
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.
Melrose Industries PLC Annual Report 2019 79
Time commitments and attendance
of Directors at meetings
When considering appointments to the Board, the Board in
conjunction with the Nomination Committee review any other
demands on a candidate’s time, and new Directors are required
to disclose any directorships held and other business interests.
The ability of Directors to have sufficient time to meet their board
responsibilities is considered on an annual basis as part of the
performance evaluation process. None of the executive Directors
have any non-executive directorships in any FTSE 100 company
and do not hold any other significant appointments.
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. The table also shows
attendance at business review meetings held between scheduled
Board meetings. Non-executive Directors are invited to, but are not
required to attend, such 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
Funmi Adegoke(5)
4
4
4
4
4
4
4
4
4
4
1
4
4
–
–
–
4(3)
4
4
4
4
–
2
2
1(2)
–
–
–
2
2
2
2
1
2
2
–
–
–
–
1(4)
2
2
2
1
3
3
2
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) Christopher Miller stepped down from his membership on the Nomination Committee
prior to any Committee meetings taking place in 2019 and attended a meeting by invitation.
(3) Geoffrey Martin attends by invitation.
(4) Liz Hewitt stepped down from her membership on the Remuneration Committee prior to the
second scheduled meeting taking place.
(5) Funmi Adegoke was appointed as a Non-executive Director with effect from 1 October 2019
and was also appointed to the Nomination Committee and Remuneration Committee.
She has attended all meetings and business reviews since that date.
3. Principles J-l: Composition,
Succession and Evaluation
Board composition
The Board believes that the Directors bring a combination of skills,
experience and knowledge to the Board that is complementary
to the activities of the Company. Biographies of the Directors are
shown on pages 72 and 73, and on the Company’s website at
www.melroseplc.net. These biographies identify any other significant
appointments held by the Directors.
Mr Dowley, the Company’s inaugural Non-executive Chairman, will
have been on the Board for nine years in September 2020, having
been a Non-executive Director and Senior Independent Director prior
to his appointment to this role. Given the recent acquisition of GKN
and the intended retirement in May 2020 of Mr David Roper, executive
Vice Chairman and co-founder of Melrose, the Nomination Committee
and Board consider that there is a need for continuity and stability at
Board level to facilitate succession planning arrangements. As such,
upon recommendation from the Nomination Committee and support
of shareholders following an engagement exercise, the Board has
approved extending Mr Dowley’s Chairmanship tenure for up to a
further three years beyond September 2020, subject to annual
re-election at the Company’s AGM.
On the recommendation of the Nomination Committee, the Board
decided to increase the number of independent Non-executive
Directors in 2019. 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 Funmi Adegoke was identified as the Board’s
preferred candidate and accepted the offer of appointment with
effect from 1 October 2019.
The Board is satisfied that the appointment of Ms Adegoke has also
further strengthened the diversity of the Board. There is currently
30% female representation on the Board and upon the retirement of
Mr Roper, the Company will have achieved ahead of schedule the
2020 target set out in the Hampton-Alexander Review of having 33%
female representation on the Board. It has also achieved ahead of
schedule the 2021 target set out in the Parker Review of having one
director of colour on the Board.
Succession planning
Succession planning is coordinated via the Nomination Committee
in conjunction with the Board and includes all Directors and senior
management. It was a core focus in 2019 and as explained above, the
Board approved the extension of Mr Dowley’s Chairmanship tenure in
order to aid effective succession planning.
Whilst succession planning arrangements for the Board as a whole
were reviewed, the Nomination Committee and the Board gave
particular focus to reviewing and developing the succession planning
arrangements in place for the roles of Chief Executive and Group
Finance Director. This included reviewing the tenure of those already
on the Board, and reviewing the senior management team including
the career planning and talent management programmes in operation
for them, to ensure that the right balance of skills, experience and
diversity were reflected and being developed.
Given the strength of Melrose’s decentralised operating structure
in achieving the Group’s strategic objectives, the Nomination
Committee does not have direct involvement in the succession
planning arrangements of the divisions. However, the Nomination
Committee has access to the divisional executive teams through the
business review cycle and going forward, the Nomination Committee
will have greater awareness of the high level succession planning
arrangements of each business unit.
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. The Company will
again be conducting an external evaluation in 2020.
Whilst the Company is not required to undertake another externally
facilitated Board and Committee evaluation until 2020, during 2019
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 Chairman of each Committee respectively.
These evaluations were conducted and facilitated by the completion
of questionnaires, and discussions at the applicable Board and
Committee meetings, with follow-up actions taking place as relevant.
Members were also given the option for meetings to be scheduled
with the Chairman or the Chairman of the relevant Committee about
any relevant matters that they wished to raise as part of the
ongoing review.
Outputs of the evaluation
Overall, the Board was satisfied with its performance, and agreed that
the appointment of a new independent Non-executive Director would
further bolster its effectiveness by allowing sufficient challenge by
Non-executive Directors of executive management in meetings of the
Board, whilst the retention of the current Chairman would retain
stability and depth of experience on the Board.
GovernanceMelrose Industries PLC Annual Report 2019 80
Corporate Governance report
Continued
In order to further enhance the Board’s effectiveness, the following
areas were designated as the subject of management focus
during 2020:
• continue to monitor senior management succession;
• having further developed the Board’s visibility over the impact of
principal risks on the business divisions, continue to monitor and
enhance the Group’s management of risk;
• although considerable steps were taken to improve cyber
security across all business units in 2019, it was recognised that
cyber security is an ongoing risk and will, therefore, be focused
on again in 2020;
• continue to improve and monitor the cash management culture
within the businesses (particularly within the GKN businesses)
and to improve cash performance;
• continue to proactively address loss-making 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’ executive 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
• continue to update and implement the Board’s overarching
corporate governance framework to ensure the continued
alignment of the Board and Committee members’ roles and
division of responsibilities with the recent changes to the Code,
and to ensure that the Group’s culture aligns with its purpose,
values and strategy, through Melrose’s top-down Board and
senior management risk oversight, and the business divisions’
bottom-up risk management responsibilities.
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 Adegoke who was appointed with effect from 1 October 2019),
stood for election or re-election at the 2019 AGM. With the exception
of Ms Adegoke 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.
In considering whether each Director should stand for re-election,
the Nomination Committee in consultation with the Board considers
whether the Board has the appropriate balance of skills, experience,
independence and diversity to enable the Board to carry out its duties
and responsibilities effectively. The time commitments of each
Director are also reviewed as part of this assessment, and Directors
are required to disclose any directorships held and other business
interests. The annual performance evaluation referred to on page 79
assists with determining whether each Director should
stand for re-election.
Following performance evaluations of each of the Directors, and
having considered in turn the individual skills, relevant experience,
contributions and time commitment of the Directors to the long-term
sustainable success of the Company, 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.
The justification for Mr Dowley’s re-election as Chairman is considered
in section 2 above.
Mr Simon Peckham, Chief Executive, is standing for re-election as
Director due to his deep understanding of the Melrose business
model, having joined the Company initially in 2003 as Chief Operating
Officer. He has widespread expertise in corporate finance, mergers
and acquisitions, strategy and operations.
Mr Christopher Miller and Mr Roper (Vice-Chairmen) are also standing
for re-election on the basis of their deep understanding of the Melrose
business model, having co-founded Melrose. Mr Miller has long-
standing involvement in manufacturing industries and private
investment, and Mr Roper (who will retire from the Board in May 2020)
has significant financial and operational expertise.
Mr Geoffrey Martin, Group Finance Director, is standing for re-election
due to his deep understanding of the Melrose business model, having
been appointed as Group Finance Director in 2005. He also brings to
the Board considerable public company experience and expertise in
corporate finance, equity finance raising and financial strategy.
Ms Hewitt, Senior Independent Director, is standing for re-election
as Director due to her extensive business, financial and investment
experience gained from a number of senior roles in international
companies. In particular, Ms Hewitt is the longest serving Non-
executive Director after the Chairman, having served on the Board
since 2013, and fulfils the pre-requisite of being independent.
The remaining Non-executive Directors are standing for re-election
(and in the case of Ms Adegoke, election for the first time) due
to their independence, diversity, skills and experience. In particular,
Mr David Lis brings to the Board extensive financial experience and
deep insight into the expectations of Melrose’s institutional investor
base, having held several roles in investment management.
Mr Archie G. Kane has extensive financial and general management
expertise, having held several roles in the financial services sector and
public company boards. Ms Charlotte Twyning brings a broad frame
of reference and acute commercial judgement based on her excellent
experience of working at the highest levels with the UK Government
and regulators. Finally, the Company’s newest appointment to the
Board, Ms Adegoke, brings diverse industrial knowledge as well as
significant transactional and commercial management expertise due
to her extensive experience working in and leading legal teams across
the globe at multi-national organisations.
Biographies of the Directors are shown on pages 72 to 73, and
on the Company’s corporate website at www.melroseplc.net.
Detailed justifications for each Director’s re-election (and election) are
set out in the AGM Notice, which is provided to shareholders with this
Annual Report.
4. Provisions M-O: Audit, Risk and Internal Control
Objectives and policy
The objectives of the Directors and Melrose senior management are
to safeguard and increase the value of the businesses 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 Melrose senior management is to implement these
policies and frameworks across the Group’s business operations.
The Directors recognise that the systems and processes established
by the Board are designed to manage, rather than eliminate, the risk
of failing to achieve business objectives and cannot provide absolute
assurance against material financial misstatement or loss.
The Board is committed to satisfying the internal control guidance for
Directors set out in the FRC’s Guidance on Risk Management, Internal
Control and Related Financial and Business Reporting. In accordance
with this guidance, the Board assumes ultimate responsibility for risk
management and internal controls, including determining the nature
and extent of the principal risks it is willing to take to achieve its strategic
objectives (its “risk appetite”) and ensuring an appropriate culture has
been embedded throughout the organisation. The establishment of a
revised risk management and internal control system has been
complemented by ongoing monitoring and review, to ensure the
Company is able to adapt to an evolving risk environment.
Melrose Industries PLC Annual Report 2019 81
A separate Audit Committee report is set out on pages 82 to 87
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 46 to 47.
Further information regarding the Group’s financial risk objectives
and policies can be found in the Finance Director’s review on
pages 38 to 44. A summary of the principal risks and uncertainties
that could impact upon the Group’s performance is set out on
pages 48 to 55.
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 87, the Group engages BM Howarth as internal
auditor. A total of 44 internal audit visits were completed by
BM Howarth and EY during 2019 in respect of each of the GKN,
Nortek and Brush businesses.
The Directors are pleased to report that there has been progress
across the Group following the 2019 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.
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, anti-tax evasion, 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 advisors, 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.
During 2019, the Company completed its roll-out of an online
compliance training platform to all businesses, covering topics such
as antitrust, trade compliance and export controls, data privacy,
anti-bribery and anti-corruption and anti-money laundering, to
enhance and supplement the existing compliance regime.
The Company’s Modern Slavery Statement is approved by the
Board annually and is available on the Company’s website at
https://www.melroseplc.net/media/2487/modern-slavery-statement-
june2019.pdf. Under Melrose’s decentralised group structure, each
division is responsible (where applicable) for publishing their own
Modern Slavery Statements in accordance with the requirements
under the Modern Slavery Act 2015 and are supported by Melrose
where needed. To support the Company’s belief in
the importance of this matter, it has a Group-wide policy on the
prevention of modern slavery and human trafficking, which the
businesses have rolled out to employees, along with an online
compliance training module. Please also refer to section 1 above for
details of the Company’s whistleblowing policies and procedures.
5. Provisions P-R: Remuneration
Policies and practices
Melrose’s remuneration philosophy has been the same since being
founded in 2003 and requires that executive remuneration be simple
and transparent, support the delivery of the value creation strategy
and pay only for performance. The Company’s policy of restricting
opportunity in annual salary, bonus and benefits, while heavily
weighting potential reward to the variable long-term incentive plan,
reflects those principles and is intended to align management’s
incentive arrangements directly with the interests of shareholders.
In compliance with the Code, the 2017 Incentive Plan has a five-year
total vesting and holding period, which promotes long-term
sustainable success for shareholders. Similarly, the 2020 Incentive
Plan, which is subject to shareholder approval at the 2020 AGM,
will have a five-year total vesting and holding period.
Development of policies
The Remuneration Committee has a formal and transparent
procedure for developing the policy on executive remuneration.
It regularly engages with shareholders to seek their views, obtains
advice from external remuneration advisors, and undertakes
benchmarking exercises with respect to executive pay. As described
further in the Directors’ Remuneration report, the Chief Executive
retains responsibility for setting and managing the remuneration of
Melrose senior management and divisional CEOs, of which the
Remuneration Committee has full disclosure. No Director is involved
in deciding their own remuneration outcome.
Independent judgement and discretion
The Directors exercise independent judgement and discretion when
authorising remuneration outcomes, taking account of both Company
and individual performance, and wider circumstances. As mentioned
above, the Remuneration Committee obtains regular advice from
external remuneration advisors in order to ensure that proposals are
in line with the Code, and benchmarked against the FTSE 100.
The current Directors’ remuneration policy provides the Remuneration
Committee with the ability to exercise discretion to override formulaic
outcomes and, if approved, the new Directors’ remuneration policy
will provide the same ability for the Remuneration Committee to
exercise discretion.
Details regarding Directors’ remuneration, both generally and
in relation to the requirements of the Code, are set out in the
Directors’ Remuneration report on pages 90 to 111, which is
presented in the following three sections:
• the annual statement from the Chairman of the Remuneration
Committee, which can be found on pages 90 to 91;
• the Annual Report on Remuneration, which can be found on
pages 92 to 102; and
• the proposed new Directors’ remuneration policy, which can
be found on pages 103 to 111.
The current Directors’ remuneration policy can be found in the
circular dated 7 April 2017 available at www.melroseplc.net/
media/1728/21347274-_-1-_circular.pdf, as clarified (see pages 104
to 107 of the 2018 Annual Report). As mentioned in the Directors’
Remuneration report, the current Directors’ remuneration policy
is due for renewal by shareholders at the 2020 AGM and the Group
is seeking shareholder approval of the new Directors’ remuneration
policy, which, if approved, will apply to payments made from that date.
GovernanceMelrose Industries PLC Annual Report 2019 82
Audit Committee report
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.
Liz Hewitt
Audit Committee Chairman
Member
Liz Hewitt (Chairman)
David Lis
Archie G. Kane
Charlotte Twyning
No. of meetings(1)
4/4
4/4
4/4
4/4
(1) In addition to the usual scheduled three meetings per year, an exceptional meeting was held
and attended by representatives of the Financial Reporting Council, who presented to the
Audit Committee their Report on the Deloitte audit of GKN’s 2017 Financial Statements.
Role and responsibilities
The Committee’s role and responsibilities are set out in its terms of
reference. These were updated in November 2019 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;
• overseeing the adequacy and security of the Company’s
arrangements for its employees to raise concerns, in confidence,
about possible wrongdoing in financial reporting or other matters;
• 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, and its
systems and controls for the prevention of bribery;
• developing, implementing and monitoring the Group’s policy on
external audit and for overseeing the objectivity and effectiveness
of the external auditor;
• 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;
• 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.
Melrose Industries PLC Annual Report 2019 83
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 significant and relevant financial experience
to that role, as described in her biography on page 72.
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 the external and internal auditors without
management present, and the Chairman of the Committee speaks with
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 2019, the Committee met in March, 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, in June 2019 the
Committee met with representatives from the Financial Reporting
Council (“FRC”) to discuss their Report on Deloitte’s Audit of GKN’s
2017 Financial Statements. At this meeting, the Audit Committee also
presented a summary of the key actions completed by the Company
since acquiring GKN in 2018, in order to strengthen financial controls
at the GKN businesses since acquiring them, most notably in respect
of the North American GKN Aerospace business.
Significant activities related to the
2019 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
the interim financial statements, including the going concern
of the Group 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 statements, as well as a paper
prepared by management in respect of the long-term viability
and a presentation from management;
• 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
2019 Annual Report and financial statements. The Committee
advised the Board that, in its view, the 2019 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 2019 annual accounts by the external auditor and
the scope of work to be undertaken in 2020 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 2019
Significant issue considered by the Audit Committee
How the issue was addressed by the Audit Committee
Finalisation of the GKN acquisition accounting
The Group acquired GKN on 19 April 2018 and the consolidated financial
statements at 31 December 2018 included a provisional assessment of
the fair values of acquired assets and liabilities. It was disclosed that the fair
values remained provisional at 31 December 2018 as there could be further
adjustments recognised if additional information came to light.
During the remaining acquisition accounting measurement period to
19 April 2019, the Group completed its review of the assets and liabilities
acquired. As a result, during the first half of the year, the Group recorded
its final adjustments. In accordance with IFRS 3: “Business Combinations”
the acquisition balance sheet has been updated and the balance sheet at
31 December 2018 restated accordingly.
(Refer to note 1 of the financial statements)
Accounting for revenue under IFRS 15
Following the Group’s adoption of IFRS 15 “Revenue from Contracts
with Customers” in 2018, management undertook a review of the key
assumptions that had a significant impact within the GKN Aerospace
business, specifically regarding recognition of variable consideration
within risk and revenue sharing partnerships (RRSPs).
Management noted in their report to the Committee that there were
very few changes to the GKN opening Balance Sheet provisionally
reported at the 2018 year-end, with goodwill of £2.5 billion only increasing
by £6 million (less than 1%). The changes resulted from businesses
correcting a small number of items and the Group addressing matters
identified too late in the 2018 year-end process to be fully reflected.
Having reviewed management’s paper, the Committee challenged certain
assumptions and enquired of Deloitte’s views.
The Committee was satisfied that the assumptions used were reasonable
and that the updated fair value of assets and liabilities had been
established appropriately.
The Committee discussed with management the implications of IFRS 15,
which included an assessment of estimates used in calculating variable
consideration within RRSPs. In addition, the Committee reviewed
correspondence with the FRC which primarily focused on the disclosures
to be included in the 2019 Annual Report and financial statements.
The review led to updates to assumptions and additional controls which
were introduced by management in light of the complex commercial
arrangements, evolving programme matters and dynamic market
conditions.
The changes in estimates, relating to both the amount and timing of revenue
recognition, were primarily based on commercial progress of specific
programmes. Whilst the impact of changes was immaterial for 2019, there
could be a more significant impact in the future.
Additionally, the Group was selected by the Financial Reporting Council
(‘FRC’) for inclusion in its thematic review of a sample of company annual
reports and accounts where IFRS 15 was being applied for the first time
in 2018. The FRC’s review was based on the Company’s 2018 Annual
Report and financial statements rather than a detailed knowledge of the
Company’s business or an understanding of the underlying transactions
entered into.
(Refer to notes 3, 4 and 17 of the financial statements)
The Committee discussed the audit work performed by Deloitte, to assess
whether the proposed revenue to be recognised, together with incremental
disclosures, were appropriate.
The Committee was satisfied that the approach and assumptions used
remained both reasonable and appropriate. However, it is understood that
there are reasonably possible changes in assumptions, that could lead to
the recognition of further variable consideration in the next year in respect
of previous performance obligations.
The correspondence with the FRC was reviewed and the Committee was
pleased with the transparent additional disclosures proposed, and the
approach and judgements taken.
GovernanceMelrose Industries PLC Annual Report 2019
84
Audit Committee report
Continued
The Audit Committee’s activities during 2019
Significant issue considered by the Audit Committee
How the issue was addressed by the Audit Committee
Provisions for loss-making contracts
The level of provisioning for loss-making contracts requires estimation
and assumptions for long-term programmes.
Although provisions are reviewed on a regular basis and adjusted for
management’s best views, their inherently subjective nature means that
future amounts settled may be different from those provided.
During the year, as a result of a focus on improving profitability primarily
through operational actions or enhancing commercial terms with
customers, a number of contracts have successfully become break-even
or better. There has been a consequential release of provisions of
£122 million, recorded as an adjusting item to avoid positively distorting
adjusted operating profit.
(Refer to notes 3 and 21 of the financial statements)
Discontinued operations and assets held for sale
During the year the Group sold the Walterscheid Powertrain Group and
reclassified its Wheels & Structures business to an asset held for sale due
to formally commencing a disposal process with a high expectation this will
conclude within one year.
Both of these businesses have been deemed a major separate line of
business due to distinct management teams, treatment as a stand-alone
cash generating unit and independent operations. Accordingly, their results
in the period have been presented as discontinued operations in accordance
with IFRS 5 “Non-current Assets Held for Sale and Discontinued Operations”,
and comparative amounts have been restated accordingly.
(Refer to note 13 of the financial statements)
Change in operating segments
Following a review of strategic options during the second half of the year,
the Board (deemed to be the Group’s Chief Operating Decision Maker)
decided to change its internal reporting. The decision was taken to ensure
that the allocation of resources to the segments and assessment of
performance reflected the strategy of the Group.
As a consequence, the Nortek Air & Security operating segment was
revised with the Security & Smart Technology business now included
in Other Industrial. Other Industrial has also been impacted by the
Walterscheid Powertrain Group and Wheels & Structures businesses which
have been included in discontinued operations. Comparative amounts have
been restated accordingly.
(Refer to note 5 of the financial statements)
Adoption of IFRS 16
The Group adopted IFRS 16 “Leases” on 1 January 2019 using the
modified retrospective approach, resulting in no adjustments to the prior
year comparatives. IFRS 16 superseded the previous lease guidance,
including IAS 17: “Leases” and related interpretations.
IFRS 16 requires all leases, except where exemptions are applied, to be
recognised on the balance sheet as a lease liability with a corresponding
right-of-use asset presented within property, plant and equipment. As a
result of the transition to IFRS 16, the Group recognised right-of-use assets
and lease liabilities of £589 million.
(Refer to notes 1, 14 and 28 of the financial statements)
At 31 December 2019, the carrying value of loss-making contract provisions
in the Group was £384 million (2018: £616 million). The Committee
considered management’s position and challenged the proposed changes
during the year as well as the closing provisions. The key assumptions and
estimates include volumes, price and costs to be incurred over the life of the
contract and where changes have occurred in commercial terms, relevant
legal advice.
Deloitte also reported on loss-making contract provisions to the Committee.
Having considered the matters presented and responses to challenge, the
Committee concluded that management’s proposed provisioning, released
amounts and the associated disclosures in the financial statements were
appropriate and the approach taken was consistent with previous years.
The Committee considered management’s paper and the additional
disclosures included in the financial statements as well as the completeness
of reporting in respect of the Group’s other businesses.
Having taken into account the matters presented and responses to
challenge, in particular relating to the remeasurement charge for the
Wheels & Structures business of £64 million, along with Deloitte’s reporting,
the Committee concluded that management’s proposed accounting,
presentation and associated disclosures in the financial statement were
appropriate.
As reported elsewhere in the Annual Report and financial statements,
Nortek Air Management is under strategic review as a stand-alone business.
The Committee reviewed and challenged the rationale presented by
management and challenged the revised segments proposed. In addition,
the work performed by Deloitte was assessed.
The Committee was satisfied that the approach and rationale were
consistent with the accounting requirements.
The Committee discussed management’s report on the adoption of IFRS 16
and sought a view from Deloitte following their audit work, to assess whether
the balances included in the Group consolidated financial statements were
appropriate.
The Committee challenged the impact of IFRS 16, on transition, and the
impact on the income statement in the year. It was noted that the increase in
finance costs of £21 million was broadly offset by an associated increase in
operating profit.
Having considered the matters presented and evidence provided, the
Committee concluded that management’s response to issues was
appropriate and balances were reasonably stated.
Melrose Industries PLC Annual Report 2019
The Audit Committee’s activities during 2019
Significant issue considered by the Audit Committee
How the issue was addressed by the Audit Committee
85
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.
During 2018, the Group disclosed additional sensitivities for the
Security & Smart Technology and Ergotron groups of CGUs due to highly
uncertain matters at that time, particularly with respect to the possible
increase in tariffs in the US for goods being imported from China; and
the level of competition and technological change in the market. Due to
favourable events in the year, there has not been a need to impair the
Ergotron group of CGUs.
However, there has been further deterioration in both the performance
in the year and forecast future prospects, particularly following increases
in US tariffs for goods being imported from China. This along with the
increased level of competition and technological change in the market
has resulted in the necessity to impair goodwill allocated to the
Security & Smart Technology group of CGUs by £179 million.
Whilst there has not been any change to the groups of CGUs in
the year, following the announcement of a new operating model in the
GKN Aerospace business, a new CGU structure will be effective from
1 January 2020. Rather than three groups of CGUs in GKN Aerospace;
Engine Systems, Aerostructures and Special Technologies, there will be
two: Engine Systems and Aerostructures.
(Refer to notes 3 and 11 of the financial statements)
GKN Aerospace North America financial information
in relation to inventory balances
The Group has again reviewed the inventory balances in GKN Aerospace
North America following historical concerns, to ensure that balances were
appropriately stated.
The current year review has been less intrusive into the business than the
prior year, with assurance taken from necessarily higher-level procedures.
The review focused on inventory provisioning, as these calculations often
require judgement by management of the expected value of future sales.
(Refer to notes 3 and 16 of the financial statements)
Going concern and viability
The Committee is required to make an assessment of the going concern
assumptions for the Group and the basis of the viability statement before
making a recommendation to the Board.
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 a key consideration when reviewing
if the financial statements are fair, balanced and understandable.
(Refer to notes 3 and 6 of the financial statements)
The Committee challenged the outcome of the impairment review in respect
of the Security & Smart Technology group of CGUs and also considered the
proposed disclosures in respect of the Automotive, Driveline and Powder
Metallurgy groups of CGUs, given their sensitivity to reasonably possible
changes in assumptions.
In doing so the Committee considered the following:
• a paper prepared by management, which included the key outputs
from the impairment models;
• the trading assumptions, including macro-economic factors, applied in
the models and 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.
During the year, the Committee reviewed a report updating on the previously
disclosed concerns relating to GKN Aerospace’s North American business.
The assessment considered trends in inventory carrying amounts as well as
the overall control environment and progress since the prior year.
The Committee discussed the results from year-end testing with
management as well as the findings from Internal Audit. Additionally,
the Committee sought a view from Deloitte following their audit work, to
assess whether the balances included in the Group consolidated financial
statements were 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.
The Committee reviewed and approved management’s recommendation
to prepare the financial statements on a going concern basis.
The Committee also considered a paper and financial model prepared by
management in respect of the longer-term viability statement to be included
in this Annual Report and financial statements as well as analysis conducted
by the external auditor. The Committee challenged the assumptions and
judgements made by management before concluding that the longer-term
viability statement was appropriate.
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
the financial statements.
The Committee reconsidered the Company’s accounting policy in respect
of restructuring and approved updated internal guidance. Following review
of management’s paper and challenge, the Committee is satisfied that
there has not been any significant change in substance to the policy.
The Committee also determined that disclosures are clear and transparent,
assisting shareholders in measuring the operating performance of the
Group. The Committee therefore concluded that 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 the 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.
GovernanceMelrose Industries PLC Annual Report 2019
86
Audit Committee report
Continued
The Audit Committee’s activities during 2019
Significant issue considered by the Audit Committee
How the issue was addressed by the Audit Committee
Committee evaluation
Monitoring and evaluating the effectiveness of the Committee.
Risk management and internal control
During 2019, the Committee continued to monitor and review the
internal financial control systems and effectiveness of the Group’s
risk management through regular updates from management. This
included review of the key findings presented by the external and
internal auditors having agreed the scope, mandate and review
schedule in advance.
During 2019, management with support from Ernst & Young
consolidated the Group businesses’ risk reporting to the Company
into an online interactive dashboard, which built on the existing Group
risk management processes, to enhance the Committee’s oversight
of risk areas and trends, as well as to provide a more detailed
consolidated view of Group risk. The dashboard includes data from
the risk registers prepared by the risk and legal leads from each
business, as well as objective trend analysis based on that data and
independent insight from Ernst & Young. The Committee reviewed
and challenged the process of compiling the dashboard, as well as
a summary report of the Group enterprise risk management profile
which guided the Committee on relevant updates to the Group risks
as reported in the Risks and Uncertainties section on pages 48 to 55,
and set out a consolidated risk profile report for each business within
the Group.
Management also 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
the Risk Management dashboard across all Group business units.
No significant weaknesses were identified. The Committee reported
its conclusions to the Board at the next scheduled Board meeting.
External audit
Assessment of effectiveness and reappointment
The Committee reviews and makes recommendations with
regard to the reappointment of the external auditor. In making these
recommendations, the Committee considers auditor effectiveness
and independence, partner rotation and any other factors which may
impact the external auditor’s reappointment.
The Committee has reviewed the external auditor’s performance and
effectiveness. For 2019, a series of questions covering key areas of
the audit process, that the Committee is expected to have an opinion
over, was 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.
In 2017, an externally facilitated review of the Committee was undertaken
by Lintstock Ltd. Whilst under the UK Corporate Governance Code (the
“Code”), the Company is not required to undertake another externally
facilitated Committee evaluation until 2020, in 2019 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 the 2017 external review and the 2018 internal review. Alongside such
formal feedback, the Committee continued to facilitate direct ongoing
contact between its members and the Chairman of the Committee 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 members, together with the Group Finance Director and
the divisional finance directors, were requested to provide detailed
feedback on the effectiveness of the external auditor. The Chairman
also sought feedback from the Chief Executive and the internal
auditor. The Company Secretary subsequently produced a report
summarising the responses, which was considered by the Committee
at length. The Committee subsequently 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.
Audit tendering
The Committee has considered 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”). The Committee understands that, under CMA
and EU rules, rotation of the external audit firm is required by 2024.
The Committee’s intention is 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 2019.
The Company’s audit firm is required to be rotated by 2024. Therefore,
the new audit engagement partner will serve a full five-year term for
the Group 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 provided by Deloitte
now apply, which cap the level of permissible non-audit services
awarded to the external auditor at 70% of the average audit fee for the
previous three years. The cap applies prospectively and so will first
apply in respect of the Company’s 2020 financial year, audit fees in
2017, 2018 and 2019 being relevant.
A policy on the engagement of the external auditor for the supply of
non-audit services is in place to ensure that the provision of non-audit
services does not impair the external auditor’s independence or
objectivity. 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. 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).
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 reward,
tax, accounting, consulting advice and advice on the remuneration
reporting regulations and preparation of the Directors’ Remuneration
report from PwC LLP.
Melrose Industries PLC Annual Report 2019
87
During the previous year there were no significant deficiencies found
in internal financial controls that needed action by the Group Finance
Director and the Melrose accounting function. Any control findings are
followed up by the businesses to ensure a strengthening of the local
accounting functions, including specific action plans to address the
shortcomings identified. Follow-up visits were performed during 2019
which identified significant progress in the improvement of financial
controls at sites.
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. This also considers the insights
provided, improvements achieved and feedback from a number of
sources including key representatives of the Company.
The Committee reviewed the reappointment of BM Howarth Ltd as
internal auditor, following an assessment of the services delivered and
approved their reappointment.
Liz Hewitt
Chairman, Audit Committee
5 March 2020
During 2019, the main non-audit services provided by Deloitte LLP
were in relation to non-statutory audits of carve-out financial
statements, assurance reports for government grants or subsidies
and tax compliance in non-EU subsidiaries. The Company did not use
Deloitte LLP for any significant taxation services and does not intend
to during 2020. The Company’s non-audit fee paid to the external
auditor of £1.0 million represents 12% of the audit fees for 2019.
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 the auditor
for non-audit work, for example on certain compliance projects.
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.
Auditor objectivity and independence
The Committee carries out regular reviews to ensure that auditor
objectivity and independence are maintained at all times. As in
previous years, the Committee specifically considered the potential
threats that each limited non-audit engagement 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. No fees were paid to
Deloitte LLP on a contingent basis.
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.
Based on these strict procedures, the Committee remains confident
that auditor objectivity and independence have been maintained.
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 & 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. The rotation
programme allows divisional management’s actions and responses to
be followed up on a timely basis. The internal audit programme of
planned visits is discussed and agreed with the Committee during
the year.
The internal auditor’s remit includes assessment of the effectiveness
of internal 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 Ltd and Ernst & Young across a total of 44 sites in 2019.
A report of significant findings is presented by the internal auditor to
the Committee at each meeting and implementation of
recommendations is followed up at the subsequent
Committee meeting.
GovernanceMelrose Industries PLC Annual Report 2019 88
Nomination Committee report
Discharge of responsibilities
The Committee discharges its responsibilities through:
• regularly reviewing the size, structure and composition of the
Board including by means of overseeing the annual evaluation
processes of the Board and its committees, 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 to
ensure that it meets the needs of the business;
• managing the Board recruitment process and evaluating the skills,
knowledge, diversity and experience of potential Board candidates
in order to make appropriate nominations to the Board;
• reviewing and 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’s terms of reference, which were last revised
in November 2019, are available to view on the Company’s
website at: https://www.melroseplc.net/about-us/governance/
nomination-committee/.
Committee membership and attendance
The Committee consists of independent Non-executive Directors
and all of the current Non-executive Directors are members of the
Committee. Mr Christopher Miller, executive Vice Chairman,
stepped down from the Committee in May 2019 to ensure the
full independence of the Committee, and Ms Funmi Adegoke
was appointed as a member of the Committee following her
appointment to the Board on 1 October 2019.
The Committee is expected to meet not less than twice a year and
during 2019, the Committee met twice. The attendance of its members
at these Committee meetings is shown in the table opposite.
The Company Secretary acts as secretary to the Nomination
Committee. On occasion, the Nomination Committee invites the
Chief Executive, the executive Vice-Chairmen and the Group
Finance Director to attend discussions where their input is required.
Board composition and succession planning
The Committee keeps under review the membership of the Board,
including its size and composition, and makes recommendations to
the Board on any adjustments it thinks necessary. The Committee
recognises the value in attracting Board members from a diverse
range of backgrounds who can contribute a wealth of knowledge,
understanding and experience. The Committee works with the Board
in order to ensure both of these matters are taken into account to
ensure effective succession planning.
During the year, the Committee had recommended that the number
of independent Non-executive Directors be increased. Stonehaven
International, an external recruitment consultancy firm unconnected
with the Company and its Directors, 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 Committee.
Ms Adegoke was identified as the Board’s preferred candidate and
was appointed to the Board with effect from 1 October 2019.
Ms Adegoke brings diverse industrial knowledge as well as significant
transactional and commercial management expertise to the Board.
She has spent well over a decade working in and leading legal teams
across the globe at the large multi-nationals Bombardier and BP.
During this time, she gained extensive experience within the aerospace,
engineering, manufacturing and energy sectors. In accordance with
the Articles, Ms Adegoke will stand for election at the 2020 AGM.
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 to enable them to
discharge their respective duties and
responsibilities effectively.
Archie G. Kane
Nomination Committee Chairman
Member
Archie G. Kane (Chairman)
David Lis
Justin Dowley
Liz Hewitt
Charlotte Twyning
Funmi Adegoke(1)
Christopher Miller(2)
No. of meetings
2/2
2/2
2/2
2/2
2/2
1/1
0/0
(1) Ms Funmi Adegoke was appointed as a Non-executive Director with effect from
1 October 2019. Ms Adegoke attended all Committee meetings held during the period
from 1 October 2019 to 31 December 2019.
(2) Mr Christopher Miller stepped down from the Committee in May 2019 prior to any meetings
taking place.
Diversity overview
Board gender
diversity
Melrose Executive
Committee
Senior management
and direct reports(1)
Male
Female
70%
30%
Male
Female
67%
33%
Male
Female
69%
31%
Board ethnic diversity(2)
(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.
(2) In accordance with the Parker Review, BAME
individuals are those who identify as or have evident
heritage from African, Asian, Middle Eastern,
Central and South American regions.
Non BAME
BAME
90%
10%
Melrose Industries PLC Annual Report 2019
89
In light of Ms Adegoke’s appointment to the Board and her
appointment to the Nomination Committee and the Remuneration
Committee, Ms Liz Hewitt stepped down from her membership of the
Remuneration Committee, whilst continuing her chairmanship of the
Audit Committee and membership of the Nomination Committee.
Whilst succession planning arrangements for the Board as a whole
were reviewed by the Committee, the Committee and the Board gave
particular focus in 2019 to reviewing and developing the succession
planning arrangements in place for the roles of Chief Executive and
Group Finance Director. This included reviewing the tenure of those
already on the Board, and reviewing the Melrose senior management
team including the career planning and talent management
programmes in operation for them, to ensure that the right balance of
skills, experience and diversity were reflected and being developed.
Given the strength of Melrose’s decentralised operating structure in
achieving the Group’s strategic objectives, the Committee does not
have direct involvement in the succession planning arrangements of
the divisions. However, the Committee has access to the divisional
executive teams through the business review cycle and going forward,
the Committee will be provided with greater awareness of the
succession planning arrangements of each business division.
Chairman’s Tenure
The Committee has also reviewed the role of Mr Justin Dowley as
Melrose’s inaugural Non-executive Chairman. Although only recently
taking up the role of Chairman, Mr Dowley first joined the Board as a
Non-executive Director in September 2011, meaning he will have
served for nine years in September 2020. Under the new UK
Corporate Governance Code (the “Code”), which was brought into
force after the announcement of Mr Dowley’s appointment, this is a
key date in the consideration of the independence of the Chairman.
Given the recent acquisition of GKN, the elevation of the Company to
the FTSE 100, and the intended retirement in May 2020 of Mr David
Roper, executive Vice Chairman and co-founder of Melrose, the
Committee considered that there was a need for continuity and
stability at Board level to facilitate succession planning arrangements
and the development of a diverse Board. The Committee therefore
considered it vital that any Chairman must have an in-depth
understanding of the unique and particular drivers behind Melrose’s
business model so as to be able to provide the necessary leadership
in such a period of change. Mr Dowley has served in leadership roles
on a number of boards, including as Melrose senior independent
director for the two years prior to his appointment as Chairman, and
is able to utilise the extensive experience gained during his 35-year
career in the banking, investment and asset management sector.
These were key factors in his appointment, which were well supported
by shareholders at last year’s AGM, and remain critical to the ongoing
success of Melrose now.
The Committee undertook an engagement process with key
institutional shareholders as part of its review of Mr Dowley’s tenure.
This process involved engaging directly with shareholders to explain
the proposed extension of Mr Dowley’s tenure. All feedback received
was instrumental in support of extending Mr Dowley’s tenure. As a
result, the Committee considers Mr Dowley the most appropriate
candidate for the role of Non-executive Chairman and is therefore
recommending to the Board that Mr Dowley stay in this position for up
to a further three years beyond 2020, subject to annual re-election at
the Company’s AGM.
Re-election of Directors
The effectiveness and commitment of each of the Directors is
reviewed annually as part of the Board evaluation upon
recommendations from the Committee. The Committee reviewed
each Director in turn to satisfy itself as to the individual skills, relevant
experience, contributions and time commitment of the Directors to the
long-term sustainable success of the Company. The Committee and
Board have satisfied themselves that each of the Directors should
stand for re-election (and Ms Adegoke should stand for election for
the first time), and the justifications for such re-elections (and election)
are set out on page 80 of this Annual Report.
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 Committee 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 needed to ensure a rounded Board,
and the diversity benefits each candidate can bring to the overall
Board composition.
Since 2018, all Board appointments have been female, and the
recruitment process for these appointments has involved all-female
candidate lists being reviewed. Melrose’s efforts in pursuing gender
diversity at a Board level are reflected in the fact that, with the
retirement of Mr Roper in May 2020, it will have achieved ahead of
schedule the 2020 target set out in the Hampton-Alexander Review
of having 33% female representation on its Board. Further, Melrose’s
efforts in pursuing ethnic diversity at a Board level are reflected in the
fact that Melrose has achieved ahead of schedule the 2021 target set
out in the Parker Review of having one director of colour on its
Board. 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.
Below Board level, Melrose has established an Executive Committee
and focus has been placed on pursuing diversity at this level in order
to pave the way for a diverse pipeline for succession planning
purposes. This focus is represented through the fact that the
Executive Committee consists of 33% female representation,
and the Executive Committee together with its direct reports
consists of 31% female representation.
While recognising that the Melrose “Buy, Improve, Sell” model means
the Company inherits the shape of the workforces of the businesses
it acquires, the Board nonetheless understands the importance of
diversity throughout the Group both in terms of reflecting the values
of stakeholders, and also projecting those values externally. Melrose
is actively engaged in supporting initiatives to increase the Group’s
diversity, as well as supporting diversity initiatives in the industries in
which its businesses operate, and seeks further opportunities to do
so. In particular, Melrose is working with Enginuity (formerly known as
Semta) to identify barriers that are hindering socio-economic and
ethnic diversity within the engineering sector, with a view to supporting
projects and potentially providing bursaries to help increase diversity
based on these findings.
Further details of Melrose’s commitment to diversity and the various
diversity initiatives undertaken within the Group can be found on
page 66 of this Annual Report, and Melrose’s diversity policy can be
viewed on the Company’s website at https://www.melroseplc.net/
about-us/governance/code-of-ethics/corporate-responsibility/.
Additionally further details on diversity and Board skills can be found
on page 73 of this Annual Report.
Evaluations
During 2019 an evaluation of the Chairman, the Board and its
committees was undertaken in line with their respective terms of
reference. These evaluations were conducted internally and were
facilitated by the completion of questionnaires, discussions at the
applicable Board and committee meetings, with follow-up taking place
as relevant. This evaluation process demonstrated that the Board and
its committees were operating effectively and the composition of such
Boards and committees promoted the long-term sustainable success
of the Company. In line with Code guidance, an external evaluation
process will take place in 2020.
Archie G. Kane
Chairman, Nomination Committee
5 March 2020
GovernanceMelrose Industries PLC Annual Report 2019 90
Directors’ Remuneration report
Chairman’s Annual Statement
David Lis
Chairman, Remuneration Committee
Dear Shareholders,
The past few years, including the acquisition of GKN, have been
some of the most exciting since Melrose was founded in 2003, and a
testament to the support of our shareholders and the strength of the
Melrose “Buy, Improve, Sell” model. It is a model that has a proven
track record, and 2019 has been another successful year as this
Annual Report and financial statements describes.
Long-term performance
Our highly successful management team has made the necessary
operational improvements on past acquisitions that have increased
margins by between 30%-70%, building stronger, better businesses.
This has led to the creation of £6.3 billion in shareholder value, of which
£4.7 billion has already been returned to shareholders in cash, and an
average return of 2.6x shareholders’ equity for businesses already sold.
Your Board remains convinced that we will achieve the targeted
performance from GKN and Nortek and continue to deliver the high
level of returns that shareholders have enjoyed for many years.
This level of performance compares very favourably against our
peers, with a TSR of 2,579% since our first acquisition in 2005, being
the second highest performance in the FTSE 350 over the past
decade. Our remuneration structure is at the heart of this long-term
performance. Therefore, as we consider the renewal of the Directors’
remuneration policy at the 2020 AGM, including the Company’s
long-term incentive plan (the “LTIP”), we continue to believe that
maintaining the current core principles of simplicity, transparency,
driving the value creation strategy and paying only for performance is
central to Melrose’s ongoing success. The Committee strongly believes
that the current and previous LTIPs have been very effective in
incentivising management to deliver real value to shareholders
over the applicable performance periods.(1)
Current remuneration structure
Executive Directors’ salaries have always been set well below the
lower quartile of our FTSE 100 peers and annual bonuses are similarly
capped well below our peers at 100% of salary. The only significant
benefits executive Directors receive are medical cover and a pension
contribution capped at 15% of salary, which is the same percentage of
salary as all other Melrose employees receive, but far less than directors
at FTSE 100 peers. The table on page 93 sets out the most recently
available CEO annual remuneration (excluding the LTIP element for
comparison) and puts this deliberate strategy in context, highlighting a
difference of over £1.7 million per year from the average FTSE 100 CEO
annual remuneration.
The current year has clearly demonstrated the application of our
remuneration strategy, with executive Directors receiving an inflationary
increase to base salary of 3%, but total remuneration decreasing by
approximately 3%, with no awards crystallising under the LTIP.
Full details are set out in the Annual Report on Remuneration on
pages 92 to 102 that will be put to an advisory vote at the 2020 AGM.
As this and the table on page 93 clearly indicate, the opportunity for
significant reward has always been heavily weighted to the LTIP, which
is long-term in nature and entirely based on performance. Executive
Directors have the opportunity to share in the value they create for
shareholders above a threshold return over a three-year performance
period. However, if executive Directors do not deliver the required level
of performance to achieve the threshold return, they receive no payout.
It is worth noting that at a 31 December 2019 share price, the current
LTIP would have paid nothing to the executive Directors as the value
accretion had been taken up by the charge rate (see page 95).
We strongly believe that this continues to be the right approach.
Furthermore, all LTIP awards are made in shares and are subject to a
further two-year holding period, so that executive Directors remain
aligned with shareholders.
Renewal on consistent terms
These are fundamental elements of our remuneration structure and lie
at the heart of the success enjoyed by Melrose and its shareholders.
These elements, which have always been very strongly supported by
our shareholders, will not change and will be the basis on which the
renewal of the Directors’ renumeration policy is proposed. The full detail
of this proposal is set out in the 2020 Directors’ Remuneration Policy on
pages 103 to 111, which benchmarks very well against governance
standards and will be put to a binding vote at the 2020 AGM.
Notwithstanding the strong support for our current Directors’
remuneration policy, we have also listened to feedback during our
engagement process from certain key shareholders and views
expressed by some in the wider stakeholder community. As a result,
the Remuneration Committee will be proposing two key changes to the
LTIP at renewal, which will bring us in line with best market practice on
governance: an increase in the annual charge rate to 6% and the
introduction of a rolling annual cap for each executive Director on the
vesting of awards.
Increasing the charge rate increases both the challenge for the
management team as well as the amount of returns enjoyed by
shareholders before management are entitled to any award. Set at 6%
per annum, it simplifies the scheme (and makes it more predictable) by
having a known rate from the outset. This annual charge rate is applied
to invested capital, which is initially the market capitalisation of the
Company at the LTIP renewal date on 31 May 2020 (subject to the floor
as set out on page 95). Increasing the charge rate to 6% means that
management will not be eligible for any reward under the renewed LTIP
unless and until they have created at least a further £2.2 billion in
shareholder value over the three-year performance period.(2)
Melrose Industries PLC Annual Report 2019 In introducing a rolling annual cap, we considered it vital to strike a
balance between the core rationale of incentivising management to
maximise the returns for shareholders, whilst ensuring shareholders
have the benefit of adequate protections. With the Melrose
management team’s track record of outperformance, while deliberately
restricting annual salaries, bonuses and benefits, your Remuneration
Committee considers it appropriate to set the cap within the upper
decile range of executive remuneration for the FTSE 100 and thus apply
a rolling annual cap of £10 million, expressed in shares. In order to be
eligible to achieve this maximum, management will need to create at
least £5.5 billion of shareholder value in the next LTIP period and, as
stated above, over £2.2 billion before getting any payment at all.(2)
Although the potential to earn up to the rolling annual cap is rightly
significant in order to properly incentivise executive Directors to
maximise shareholder returns, it is appropriate when put in the
context of that level of performance and the deliberate strategy
on fixed remuneration.
The new Directors’ remuneration policy proposes that, for this next
three-year performance period from 2020 to 2023, there will be a
maximum of up to three annual rolling capped awards in 2023, 2024
and 2025, subject to income tax and made in shares. In each year,
the cap will be the number of shares equivalent to £10 million divided by
the share price on the commencement date in May of this year. Thus,
the executive Directors have a continuing exposure to the share price
(positively and negatively) under the terms of the scheme after
crystallisation in 2023. Depending on the share price at the later dates
of vesting, the value vested may be greater or less than £10 million and
provides continuing incentive to deliver strong performance.
The Remuneration Committee was rightly mindful of how best to
introduce a cap on a successful incentive scheme for the protection of
shareholders, whilst not reducing the incentivisation for the executive
Directors to continue to outperform that the scheme delivers. Setting
the rolling annual cap as a number of shares at the commencement
date best strikes this balance, ensuring that executive Directors are not
unfairly penalised for good performance and are further aligned with
shareholders, while shareholders are not unduly diluted.
Further to feedback received as part of the recent stakeholder
engagement process, we are also proposing to increase both the
minimum shareholding requirements for executive Directors to 300%
of salary, and the post-cessation minimum shareholding requirements
to 300% of salary for two years post-cessation, for the new Directors’
remuneration policy.
Benchmarking
The Remuneration Committee has also always been clear that the
LTIP focus on the creation of shareholder value is not at the expense
of other stakeholders. Pension schemes under Melrose’s responsible
stewardship benefit from more prudent funding targets, improved
funding and increased security for members. Gender and ethnic
diversity are active pursuits, with targets set and hit ahead of time.
Our global workforce is engaged in executive decision making, there
is an awareness of our community responsibilities and the next
generation supported in their development. These factors are taken into
consideration on the strategic element of the annual bonus, and full
disclosure of our actions in these areas is provided in our ESG report
on pages 58 to 69.
The Committee firmly believes that the renewal of the LTIP and
Directors’ remuneration policy on consistent terms whilst incorporating
the added protections of a cap and increased charge rate is vital
for the continuation of the success enjoyed by Melrose stakeholders
to date. As encouraged by the UK Stewardship Code, the Melrose
remuneration structure is deliberately not the same as the average
FTSE company. However, it is appropriate for the Melrose model,
properly incentivises management and drives the value creation
strategy. Furthermore, when benchmarked against the UK Corporate
Governance Code (the “Code”) and the guidelines of other stakeholders
who have published their views on remuneration, it is also clear that it
reflects best market practice from a governance perspective.
91
Stakeholder engagement
Melrose always strives for the full support of all our shareholders in all
that we do. They are critical to our success and their support is never
taken for granted. Following on from similar exercises last year, we have
conducted an extensive and dedicated engagement process on the
proposed renewal of the Directors’ remuneration policy with a wide
variety of stakeholders, including proxy advisors and key shareholders
who together represent over 65% of our register. It was important to us
that we conducted this thorough, comprehensive and open-minded
engagement, understanding the focus on executive remuneration in
the wider governance community. The engagement process was both
informative and successful, and we thank the participants for their time.
We have enjoyed a significant level of constructive engagement that has
helped shape and refine the proposals.
Your Board considers that the Melrose remuneration structure is highly
successful, appropriate for the value creation strategy and is critical to
the ongoing long-term performance of the Company. We encourage
you to provide your support for both the Annual Report on
Remuneration and the new 2020 Directors’ Remuneration Policy.
Yours sincerely
David Lis
Chairman, Remuneration Committee
5 March 2020
(1) All calculations in this section are based on the closing middle market quotation of an
Ordinary Share as derived from the Daily Official List on 31 December 2019 and assume a
continuous shareholding and participation in every fundraising, capital return and dividend
receipt pro rata to ownership.
(2) Based on a 31 December 2019 share price of 240.1 pence, being the closing middle market
quotation of an Ordinary Share as derived from the Daily Official List on 31 December 2019.
GovernanceMelrose Industries PLC Annual Report 2019 92
Directors’ Remuneration report
Continued
Annual Report on Remuneration
On behalf of the Board, I am pleased to present our annual report on Director remuneration (the “Annual Report on Remuneration”)
at the end of another very successful year for Melrose.
In this section of the Directors’ Remuneration report, we set out:
• the actual performance and executive remuneration outcomes for the 2019 financial year; and
• the application of the current Directors’ remuneration policy (the “Directors Remuneration Policy”) to the 2019 financial year
and how the Directors’ Remuneration Policy was operated in 2019.
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.
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
Statement of Director shareholdings and interests
Performance graph and table
CEO pay ratio
Percentage change in remuneration of the CEO
Relative importance of spend on pay
Consideration of matters relating to Directors’ remuneration
Statement of voting
2020 Directors’ Remuneration Policy
Payments to Past Directors / For Loss of Office
Page
93
97 and 101
97 and 101
99
98
99
100
92 to 93
102
103 to 111
None
Melrose’s Remuneration Strategy
Since the Company was first established, the Remuneration Committee (the “Committee”) has pursued a consistent remuneration strategy that
closely aligns the executive Directors with the Company’s shareholders, drives the Company’s “Buy, Improve, Sell” model and has been central to
its success. This strategy is based around four key principles – namely, that executive remuneration is:
(1) Simple – since Melrose was first established, executive Directors have received the same four simple elements as the rest of the
Melrose employees – base salary, annual bonus, pension contribution (15% of salary, being the same percentage as the rest of the
Melrose employees) and medical benefits – as well as being eligible under a single and consistent long-term incentive plan based
on a single value creation metric.
(2) Transparent – each year, there is full and detailed disclosure in the Directors Remuneration report of each component of
remuneration, including an explanation of the calculation of any variable element and the current value of any unvested award pursuant
to the long-term incentive scheme.
(3) Supports the delivery of the value creation strategy – with the fixed elements and the annual bonus cap being deliberately
pegged well below the lower quartile of FTSE 100 peers, the opportunity for any significant reward is heavily weighted to the
long-term incentive plan, that is entirely based on the creation of shareholder value.
(4) Pays only for performance – executive remuneration is heavily weighted to the long-term incentive plan, which pays nothing to
participants unless the executive Directors deliver a threshold return to shareholders over a three-year period, and only pays a
significant award if they materially outperform in the creation of shareholder value.
These four key principles are wholly aligned with the UK Corporate Governance Code (the “Code”) factors of clarity, simplicity, risk, predictability,
proportionality and alignment to culture, as set out on pages 110 to 111. The Committee ensures it takes all these elements into account when
establishing the Directors’ Remuneration Policy, as well as its application to executive Directors.
Operation of the Directors’ Remuneration Policy in 2019
2019 was another successful year for Melrose as highlighted by this Annual Report and financial statements 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 2019 and 2020.
2019 key decisions
The Committee remains committed to a responsible approach to executive pay in accordance with the current Directors’ Remuneration Policy
and its four key remuneration principles.
In line with increases in previous years, an inflationary increase of 3% was made to the executive Directors’ base salaries with effect from
1 January 2019, consistent with the salary rises awarded to the wider Melrose head office population. There were changes made to non-executive
fees as set out on page 101, based on a benchmarking exercise undertaken in 2018 taking into account the increase in the size and scope of the
Non-executive Directors’ roles following the acquisition of GKN.
The Committee has reviewed the remuneration outcomes for the year and confirm that the Directors’ Remuneration Policy has operated as
intended. The 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.
Stakeholder engagement
After conducting an extensive and focused stakeholder engagement exercise at the time, the Committee was pleased that the most recent
Directors’ Remuneration Report and the Directors’ Remuneration Policy were approved by shareholders at the AGM in 2019 and general meeting
in 2017 respectively (with 87.83% and 82.04% voting in favour, respectively).
Melrose Industries PLC Annual Report 2019 93
The Committee has taken the same approach ahead of the renewal of the Directors’ Remuneration Policy this year. As set out in my Annual
Statement on page 91, the multi-round engagement included key shareholders holding approximately 65% of the Company’s ordinary shares in
issue and other stakeholders, commencing shortly after the 2019 AGM and continuing until the renewal proposal was finalised this year. Both the
Directors’ Remuneration report and the 2020 Directors’ Remuneration Policy will be put before shareholders at the 2020 AGM, and we look
forward to your ongoing support.
Business Performance
As set out in my Annual Statement on page 90, the Melrose “Buy, Improve, Sell” model has been highly successful in delivering long-term
performance, with its remuneration structure at its heart. 2019 has seen a continuation of this success, despite some macro challenges,
as the Company continues to unlock the full potential of the businesses it owns. This Annual Report and financial statements and specifically the
Group’s strategic KPIs on pages 36 to 37 demonstrate the strong progress that has been made in 2019 towards the achievement of our objective
of building better, stronger businesses under our ownership.
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, and the 2020 Incentive Plan will be no different.
Single total figure of remuneration for the executive Directors for the 2019 financial year (audited)
The following chart summarises the single figure of remuneration for 2019 in comparison with 2018:
Executive Director
Christopher Miller
David Roper
Simon Peckham
Geoffrey Martin
Total
Total
salary
and fees
£000
Taxable
benefits
£000
Bonus
£000
LTIP (1)
£000
Amount of
LTIP award
attributable to
share price
appreciation(1)
£000
520
490
520
490
520
490
419
392
1,979
1,862
3
11
4
19
3
19
10
28
20
77
n/a
n/a
n/a
n/a
375
466
302
373
677
839
–
–
–
–
–
–
–
–
–
–
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
Period
2019
2018
2019
2018
2019
2018
2019
2018
2019
2018
Pension (2)
£000
Total
Fixed
£000
Total
Variable
£000
78
74
78
74
78
74
63
59
601
575
602
583
601
583
492
479
297
281
2,296
2,220
0
0
0
0
375
466
302
373
677
839
Total
£000
601
575
602
583
976
1,049
794
852
2,973
3,059
(1) 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 2019.
(2) All amounts attributable to pension contributions were paid as a supplement to base salary in lieu of pension arrangements.
Comparison to Peers
The total remuneration of £976,000 paid to the Melrose Chief Executive in 2019 was approximately 7% lower than last year’s total. The Committee
benchmarked Melrose Chief Executive’s pay against the most recent available remuneration information from 2018 with our FTSE 100 peers.(3)
As the table below shows, the single total figure of remuneration for the Melrose Chief Executive was less than half, or over £1 million less than, the
lower quartile of FTSE 100 peers. This demonstrates in practice the Committee’s policy of deliberately setting salary, benefits and annual bonus for
the executive Directors low, with the opportunity for significant reward being heavily weighted towards the long-term incentive plan, which is entirely
performance based and ensures that executive Directors only receive substantial rewards when they have outperformed and created very
significant value for shareholders.
Metric (GBP ’000) 2018
Melrose Chief Executive
FTSE 100 Lower Quartile
FTSE 100 Average
FTSE 100 Upper Quartile
Total
1,049
2,147
2,766
3,735
Each of the elements in the single figure table is set out in more detail below, along with the benchmark for the Melrose Chief Executive to the most
recent available information for our FTSE 100 peers (being 2018).
Base Salary
Salaries are fixed at a level which is well below the lower quartile of FTSE 100 peers. Each executive Director received an inflationary increase in
base salary of approximately 3% effective from 1 January 2019.
Metric (GBP ’000) 2018
Melrose Chief Executive
FTSE 100 Lower Quartile
FTSE 100 Average
FTSE 100 Upper Quartile
Annual Salary
490
720
858
1,098
Pensions
Executive Directors receive the same 15% of base salary pension contribution(4) as the rest of the Melrose employees, which the Committee notes
is well below the lower quartile of pension contributions in the FTSE 100 (as set out in the table below) and is also within the range of the wider
workforce contributions. This contribution rate has not changed since Melrose was founded and no executive Director participates or has ever
participated in a Group defined benefit or final salary pension scheme.
Metric (GBP ’000) 2018
Pension Contribution
Pension Contribution %
Melrose Chief Executive
FTSE 100 Lower Quartile
FTSE 100 Average
FTSE 100 Upper Quartile
74
15%
122
17%
195
25%
283
27%
(3) For comparison purposes, this excludes payments under long-term incentive arrangements, as none were payable to the Melrose Chief Executive in 2018.
(4) All of the amounts attributable to pension contributions were paid as supplements to base salary in lieu of pension arrangements.
GovernanceMelrose Industries PLC Annual Report 2019 94
Directors’ Remuneration report
Continued
Benefits
Executive Directors receive the same non-pension benefits as the rest of the Melrose employees, being generally a fuel allowance, private medical
insurance, life insurance and group income protection. The Group Finance Director also received paid train travel to and from London.
Metric (GBP ’000) 2018
Melrose Chief Executive
FTSE 100 Lower Quartile
FTSE 100 Average
FTSE 100 Upper Quartile
Benefits
19
19
33
69
Annual Bonus
Annual bonuses are entirely performance driven and are calculated by the Committee using two elements: 80% being based on audited diluted
earnings per share growth; and 20% based on the achievement of strategic elements. The maximum bonus opportunity is set at 100% of base
salary, which is significantly below the lower quartile maximum annual bonus opportunity for other FTSE 100 companies as set out in the table
below. Neither of the executive Vice-Chairmen participate in the annual bonus scheme.
Metric (GBP ’000) 2018
Melrose Chief Executive
FTSE 100 Lower Quartile
FTSE 100 Average
FTSE 100 Upper Quartile
Annual Bonus
Max bonus opportunity %
466
100%
1,286
150%
1,680
200%
2,285
225%
2019 Annual Bonus (audited)
The 2019 Annual Bonus has applied a consistent approach to previous years, in line with the current Directors’ Remuneration Policy.
The Committee awarded participating executive Directors a bonus of 72% of base salary, based on 2019 performance, with the full breakdown
of the award calculation set out below:
Financial Objectives (80%)
Percentage of maximum bonus earned
EPS Growth
% award
EPS Growth sub-total:
Strategic Objectives (20%)
• Launch of One Aerospace
restructuring – maximum 4%
Threshold
Target
Maximum
5%
20%
10%
40%
20%
80%
Actual
Performance
13%
52%
Percentage of maximum bonus earned
52%
Management have supported GKN Aerospace’s decision to commence a major restructuring
of its organisation, announced in September, to create a ‘One Aerospace’ organisation.
Management have been heavily involved in all aspects of the planning and implementation of the
restructuring, which will result in the GKN Aerospace businesses being restructured along customer
rather than product lines, creating significant efficiencies and further improving performance.
• Install new GKN Automotive
executive team and update
strategy – maximum 4%
Management have reorganised the GKN Automotive division, supported the establishment of the
new executive team, and worked with them to update the business’s improvement strategy and
move to its implementation that successfully mitigated the margin impact from the global
automotive downturn.
• Delivery of joint procurement
and working capital
improvement exercise,
improvement on loss-making
contracts – maximum 4%
• Pursue targeted M&A and
sales wins at GKN Powder
Metallurgy – maximum 2%
• Establishment of ESG
reporting – maximum 2%
• Execution of StatePoint
Technology® contract –
maximum 2%
The GKN Aerospace and GKN Automotive joint procurement initiative delivered substantial
savings in 2019, while significant improvements were secured on the GKN loss-making contracts.
The Group-wide working capital efficiency programme was initiated that has already delivered
over £90 million of savings in 2019, with more to come.
Management have supported GKN Powder Metallurgy in securing the acquisition of FORECAST 3D,
a leading US plastic 3D printing business, and Sintec, a European sinter business. GKN Powder
Metallurgy is already seeing the benefits of this business combination. While recognising that the
automotive downturn led to a decline in sales, GKN Powder Metallurgy was able to make some
targeted market share gains.
In response to requested additional disclosure on ESG factors by investors and other stakeholders,
management have established a framework that sets Group expectations and supports the
businesses in their pursuits of these aims, whilst monitoring and reporting on progress. The
executive Directors have produced Melrose’s inaugural standalone ESG report, included as part of
this Annual Report, which details the actions, initiatives and progress in these areas.
Having invested heavily in its development, HVAC celebrated the completion of its first
StatePoint Technology® liquid cooling system, signed a significant new contract for its industry
leading new proprietary StatePoint Technology® with a global technology leader, and developed a
significant pipeline of future sales. This has been a significant milestone in the improvement strategy
for HVAC, as well as the ESG strategy for the Group.
• Mitigation of tariff impacts
and rebuild of executive
teams for Ergotron and
Security – maximum 2%
Both Ergotron and Security endured a difficult 2019, in particular challenged by US tariffs given the
location of their operations. With recent departures, management secured appointments to rebuild
the executive teams and worked closely with them to minimise the impact of these challenges
through production initiatives, commercial discussion and regulatory applications.
Strategic Objectives sub-total:
Total annual bonus for 2019:
All bonus payments for 2019 will be made in cash, as both participating executive Directors have exceeded their minimum shareholding
requirements. See page 96 and 97 for details of the requirements.
4%
4%
4%
2%
2%
2%
2%
20%
72%
Melrose Industries PLC Annual Report 2019 95
As at 31 December 2019 the minimum return hurdle of £1,065,155,536
had not been achieved, although Melrose management had created
a significant amount of value compared with the position as at
31 December 2018. Management would need to create at least
an additional £380,996,557 of value for shareholders by 31 May 2020
in order for the 2017 Incentive Plan to begin to accrue value
for participants.
Should this shortfall in value not be created prior to 31 May 2020, no
value will vest to the 2017 Incentive Plan. Because executive Directors
only participate in the excess above this threshold, there are unlikely to
be significant awards even if the threshold is met. In a remuneration
structure so heavily and deliberately weighted to the variable LTIP
award, this will mean that the executive Directors will receive modest
reward for the hard work and success over the past three years.
Nonetheless, this is how the Melrose remuneration strategy was
deliberately structured and the Committee do not intend to make
any change to the 2017 Incentive Plan to compensate for this.
The Committee did not adjust any incentive plan share outcome due
to share price appreciation as none crystallised during the year being
reported on, nor does it intend to adjust the incentive plan share
outcome on the crystallisation date of the 2017 Incentive Plan.
Long-term incentive arrangements (audited)
The third and final tranche of options under the 2017 Incentive Plan
were allocated to executive Directors on 8 March 2019, with
Christopher Miller and David Roper each being granted 2,584 options,
and Simon Peckham and Geoffrey Martin each being granted 2,834
options. The 2017 Incentive Plan is due to crystallise on 31 May 2020
and therefore no long-term incentives crystallised during the 2019
financial year.
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 2019 instead of the actual crystallisation date
of 31 May 2020.
As the table demonstrates, as at 31 December 2019, no value had
accrued to the 2017 Incentive Plan.
Theoretical value under the 2017 Incentive Plan if crystallised
on 31 December 2019 rather than on the 2020 scheduled payment date
2017
Invested capital from (and including) May 2017
up to (and including) December 2019
£10,460,434,993
Index adjustment/minimum return
£1,065,155,536
Indexed capital
£11,525,590,529
2019
Number of issued ordinary shares on 31 December 2019
4,858,254,963
Average price of an ordinary share for 40 business days
prior to 31 December 2019
£2.29395
Deemed market capitalisation of Melrose based on average price of an
ordinary share for 40 business days prior to 31 December 2019
£11,144,593,972
Overall change in value for shareholders since 31 May 2017
£(380,996,557)
Theoretical value to management and shareholder
dilution calculated at 31 December 2019
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 2019
for the 2017 Incentive Plan to deliver value
237p
GovernanceMelrose Industries PLC Annual Report 2019 96
Directors’ Remuneration report
Continued
Illustration and application of the Directors’ Remuneration Policy in 2019
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 current Directors’ Remuneration Policy compared to the actual executive Director remuneration
paid in 2019.
The executive Directors’ options under the 2017 Incentive Plan may 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 of Association). 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)
£3,264
Geoffrey Martin
(£’000)
£3,054
£1,932
£2,143
66%
£1,773
£2,143
70%
£1,071
56%
£601
£260
13%
£520
16%
£976
£375
38%
£601
100%
£601
31%
£601
18%
£601
62%
£1,071
60%
£794
£492
£210
12%
£419
14%
£302
38%
£492
100%
£492
28%
£492
16%
£492
62%
Minimum
On-target
High
Actual
Minimum
On-target
High
Actual
Christopher Miller
(£’000)
David Roper
(£’000)
£2,555
£2,556
£1,578
£1,954
76%
£977
62%
£1,579
£1,954
76%
£977
62%
£601
£601
£602
£602
£601
100%
£601
38%
£601
24%
£601
100%
£602
100%
£602
38%
£602
24%
£602
100%
Minimum
On-target
High
Actual
Minimum
On-target
High
Actual
Fixed
Annual variable
LTI
Fixed
Annual variable
LTI
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 2019,
the following assumptions have been made:
• Minimum performance: fixed elements of remuneration only. Base salary effective from 1 January 2019, and benefits and pension rate as set out in the single figure table for the year ended
31 December 2019 on page 93.
• 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.
Minimum shareholding requirements and equity exposure of the Board (audited)
Executive Directors are subject to two concurrent minimum shareholding requirements. The first is to hold at least half of the shares acquired
pursuant to the crystallisation of the 2012 Incentive Plan, after satisfying tax obligations following the crystallisation of that plan and subject to capital
adjustments. This was increased under the current 2017 Incentive Plan, that will require executive Directors to hold all the shares they acquire
pursuant to the crystallisation in May 2020 for a two-year holding period, which will also apply to the proposed 2020 Incentive Plan. The second
obligation is for executive Directors to always hold at least an amount of shares equal to 200% of salary, which under the new Directors’
Remuneration Policy (the “2020 Directors’ Remuneration Policy”) will be increased to 300% of salary.
Melrose Industries PLC Annual Report 2019 97
In reality, all executive Directors hold well in excess of these minimum amounts, which reflects their long-term stewardship of the Company and
long-term investment in the Company’s shares. This is demonstrated by the following table which sets out all subsisting interests in the equity of the
Company held by the executive Directors as at 31 December 2019:
Unvested interests under share
schemes (2017 Incentive Plan)
Minimum
number of ordinary
shares to be held
by executive
Directors as at
31 December 2019 (1)
4,802,159
4,802,159
4,627,535
4,627,535
Additional
shareholding
requirement
(% salary) (2)
200%
200%
200%
200%
Executive Directors
Christopher Miller
David Roper
Simon Peckham
Geoffrey Martin
Current
shareholding
(% salary) (3)
Ordinary
shares
held
Subject to
performance
conditions
Not subject to
performance
conditions
12,536%
27,108,510(4)
7,572%
7,984%
4,242%
16,373,732
17,265,565
7,395,256
7,750(5)
7,750(5)
8,500(5)
8,500(5)
n/a
n/a
n/a
n/a
Shareholding
requirement
met?
Yes
Yes
Yes
Yes
(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) In addition to the obligation in (1), the shareholding requirement under the current Directors’ Remuneration Policy is 200% of base salary. Under the 2020 Directors’ Remuneration Policy
this will be increased to 300% of base salary.
(3) For these purposes, the value of a share is 240.1 pence, being the closing mid-market price on 31 December 2019, the last business day of the 2019 financial year.
(4) As at 31 December 2019, 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 Companies Act 2006.
(5) Each executive Director was granted options over Incentive Shares (2017) in three equal tranches over the three-year performance period. The first tranche was exercised on 29 June 2017. As a
result, Christopher Miller and David Roper each hold 2,583 Incentive Shares (2017) and 5,167 options, and Simon Peckham and Geoffrey Martin each hold 2,833 Incentive Shares (2017) and 5,667
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.
No executive Director may dispose of any ordinary shares without the consent of the Chairman 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. There have been no changes in the shareholdings of the executive Directors between 31 December 2019 and
5 March 2020.
Please see page 101 for a table setting out the equity interests of the Non-executive Directors as at 31 December 2019.
Key decisions and statement of implementation for 2020
Salary review
The executive Directors’ base salaries have received an inflationary increase of 3% with effect from 1 January 2020, consistent with the wider
Melrose head office population. The overall framework for the executive Directors’ annual bonus arrangements for 2020 will remain the same as in
2019, as set out on page 94. Non-executive Directors’ basic fees for 2020 have also been increased by 3%, with effect from 1 January 2020, which
is consistent with the increase for the executive Directors, with the additional Audit Chairman fee being the only other fee that has been increased,
recognising the additional responsibilities of the position.
Pensions and benefits
For current executive Directors in 2020, standard benefits will be provided in line with the Directors’ Remuneration Policy and the pension
contribution rate will be 15% of salary, the same percentage of salary as the rest of the Melrose employees.
Annual bonus
The overall framework for the executive Director annual bonus arrangements for 2020 will remain the same as in 2019, with a maximum bonus
opportunity of 100% of salary, based on financial and strategic performance metrics. The Committee considers that the strategic performance
measures are commercially sensitive but will disclose the nature of those measures on a retrospective basis, where appropriate, on a similar basis
to the disclosure on page 94 in respect of the annual bonus for the year ending 31 December 2019.
Renewal of the Directors’ Remuneration Policy
Melrose is also due to renew its Directors’ Remuneration Policy (including its annual bonus plan) at the 2020 AGM, including its long-term incentive
plan (“LTIP”), which is due to be renewed on 31 May 2020. As set out in my Annual Statement on pages 90 to 91, the Committee is proposing two
key changes to the LTIP at renewal: an increase in the annual charge rate to 6% and the introduction of a rolling annual cap for each executive
Director on the vesting of awards. We are also proposing to increase both the minimum shareholding requirements for executive Directors to 300%
of salary, and the post-cessation minimum shareholding requirements to 300% of salary for two years post-cessation. The terms of the 2020
Directors’ Remuneration Policy will otherwise be consistent with the current successful Directors’ Remuneration policy, full details of which
are set out on pages 103 to 111.
GovernanceMelrose Industries PLC Annual Report 2019 98
Directors’ Remuneration report
Continued
Regulatory disclosures
Chief Executive remuneration for previous ten years
In accordance with the regulations governing the reporting of executive Director remuneration, the total figure of remuneration set out in the table
below includes the value of long-term incentive vesting in respect of the relevant 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 the year ended 31 December 2017, although these each represent reward earned over the previous five years.
Financial year
Chief Executive
Year ended 31 December 2019
Simon Peckham
Non-LTIP
£
976,000
Year ended 31 December 2018
Simon Peckham
1,049,000
LTIP
£
Total remuneration
£
0
0
976,000
1,049,000
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 (3)
Year ended 31 December 2011
Year ended 31 December 2010
Simon Peckham
Simon Peckham
Simon Peckham
Simon Peckham
Simon Peckham
Simon Peckham
David Roper
David Roper
David Roper
994,000
41,770,000
42,764,000(1)
987,725
928,541
773,167
927,276
489,372
259,040
811,152
849,341
0
0
0
0
19,791,212
10,656,806
0
0
987,725
928,541
773,167
927,276
20,280,584(4)
10,915,846(4)
811,152
849,341
Annual bonus as a
percentage of
maximum
opportunity
Long-term
incentives as a
percentage of
maximum
opportunity
72%
95%
90%
95%
88%
58%
100%
64%
64%
84%
100%
–
–
n/a(2)
–
–
–
–
n/a(5)
n/a(5)
–
–
(1) 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.
(2) 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.
(3) 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, 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.
(4) The value derived in 2012 from the 2009 Incentive Shares represents the relevant 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.
(5) 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.
CEO Pay Ratio
Our median CEO to employee pay ratio for 2019 was 24:1. The following table provides pay ratio data in respect of the Chief Executive’s total
remuneration compared to the 25th, median and 75th percentile UK employees.
Financial year
Year ended 31 December 2019
Method
Option A
25th percentile pay ratio
Median pay ratio
75th percentile pay ratio
30:1
24:1
19:1
The employees used for the purposes of the table above were those employed on 31 December 2019 and remuneration figures were determined
with reference to the financial year to 31 December 2019. Option A was chosen as it is considered to be the most accurate way of identifying the
relevant employees. This captures all relevant pay and benefits and aligns to how the single figure table is calculated. The value of each employee’s
total pay and benefits was calculated using the single figure methodology consistent with the Chief Executive, with the exception of the annual
bonus, which was calculated using 2018 financial year bonuses (which were paid during 2019) where the 2019 financial year data was not
available at the last practical date before the finalisation of this report. No elements of pay have been omitted. Where required, remuneration was
approximately adjusted to reflect full-time and full-year equivalents based on the employees’ contracted hours and the proportion of the year they
were employed.
The following table provides salary and total remuneration information in respect of the employees at each quartile.
Financial year
Element of pay
25th percentile pay employee
Median employee
75th percentile employee
Year ended 31 December 2019
Salary and wages(1)
Total pay and benefits
£31,000
£32,000
£36,000
£40,000
£45,000
£50,000
(1) Base salary includes overtime and shift allowances/premiums. The individual at the median received overtime and shift premium during the year.
The Committee considers that the median pay ratio is consistent with the relative role and responsibilities of the Chief Executive and the identified
employee. Base salaries of all employees, including our executive Directors, are set with reference to a range of factors, including market practice,
experience and performance in role. The Chief Executive’s remuneration package is weighted towards variable pay due to the nature of the role,
and this means that the ratio is likely to fluctuate depending on the outcomes of incentive plans in each year.
Melrose Industries PLC Annual Report 2019 99
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 team at Melrose (and noting that the executive Vice-Chairmen do not participate in the annual bonus plan).
Christopher Miller
David Roper
Geoffrey Martin
2018 CEO to executive
Director pay ratio
2019 CEO to executive
Director pay ratio
1.8:1
1.8:1
1.2:1
1.6:1
1.6:1
1.2.1
To give context to the Chief Executive remuneration for the previous ten years and the CEO pay ratio, we have included an illustrative chart tracking
CEO pay and average employee pay over the last ten financial years alongside Melrose’s TSR performance and the FTSE 100’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.
2,000
1,500
1,000
500
0
45,000
40,000
35,000
30,000
25,000
20,000
15,000
10,000
5,000
0
)
£
(
n
r
u
t
e
R
l
r
e
d
o
h
e
r
a
h
S
l
a
t
o
T
)
0
0
0
’
£
(
n
o
i
t
a
r
e
n
u
m
e
R
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Average Employee Pay
CEO Total Single Figure excluding LTIP
LTIP
Melrose TSR
FTSE 100
Percentage change in Directors’ remuneration
The table below sets out, in relation to base 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 and the divisional CEOs, managing
directors and finance directors of the Group’s business units. The percentages shown relate to the financial year ended 31 December 2019 as
a percentage comparison to the financial year ended 31 December 2018. 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)
6%(2)
-84%
-20%
5%
73%
-23%
(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.
(2) From 1 January 2019, the payroll for executive Directors and Melrose employees was simplified by including (where relevant) the car allowance in base salary. The increase represents a 3%
inflationary review and the addition of the car allowance. As this table and the table on page 93 indicate, there has been an equivalent reduction in benefits.
Total Shareholder Return
The total shareholder return graph below shows the value as at 31 December 2019 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. This shows a TSR of 2,645% and demonstrates very
clearly the long-term performance of the Company.
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 2019 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.
)
£
(
n
r
u
t
e
R
l
r
e
d
o
h
e
r
a
h
S
l
a
t
o
T
3,000
2,500
2,000
1,500
1,000
500
0
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
Oct 19
Melrose Industries PLC
FTSE All-Share
FTSE 100
FTSE 250
GovernanceMelrose Industries PLC Annual Report 2019
100
Directors’ Remuneration report
Continued
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 to ensure that the incentives
operated by the Company align with its culture and strategy.
The Committee does not have responsibility for setting and managing the remuneration of Melrose senior management or divisional executive
teams, which remain the responsibility of the Chief Executive, or the pay policies of the business units, responsibility for which sits with businesses
themselves. The Committee has determined that such an approach is appropriate in light of Melrose’s decentralised business model. The
Committee does, however, have oversight of workforce pay, policies and incentives at both a Melrose level and a business unit executive level,
which enables it to ensure that the approach to executive remuneration is consistent with those workforces. This alignment is evidenced by the
fact that the CEO pay ratio for 2019 remains low, and the 15% pension contribution and other benefits are equal to those for Melrose employees
and within the range of the benefits of the wider group workforce.
Given the differing nature of our businesses, the Committee does not expect a standardised approach to remuneration. However, when
conducting its review, it pays particular attention to whether each element of remuneration is consistent with the Company’s remuneration
philosophy. The Committee also receives confirmation from each business unit that the remuneration provided to its executive team is consistent
with its wider workforce and that the incentives operated by that business unit align with its culture and strategy. Based on these disclosures, the
Committee is satisfied that the approaches to remuneration at all levels are consistent with the Company’s remuneration philosophy.
Long-term incentives
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 are 15% of an employee’s salary for members
of the Melrose pension scheme (including the executive Directors) and these contributions are within the range of pension provisions across our
various business unit pension schemes.
In line with the “Improve” aspect of Melrose’s “Buy, Improve, Sell” strategy, we have continued to improve funding levels in the pension plans of our
business units. As further detailed on page 7, 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 Schemes (1-4) using a discount rate of Gilts +75bps and for the GKN 2016 Pension
Scheme using a discount rate of Gilts +25bps.
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(1)
Distributions to shareholders by way of dividend and share buy back
Year ended
31 December 2018
Year ended
31 December 2019
£ million
2,064(2)
129
£ million
Percentage change
2,868
231
39%
79%
(1) The figure for the year ended 31 December 2018 is the total staff costs as stated in note 7 to the financial statements and the figure for the year ended 31 December 2019 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 2019 costs, which include 12 months. 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.
Melrose Industries PLC Annual Report 2019 101
Non-executive Directors
Single figure table and share interests (audited)
The following table sets out the single figure of remuneration for 2019 in comparison with 2018 for the Company’s Non-executive Directors, along
with the subsisting interests in the equity of the Company held by them:
Non-executive Directors
Justin Dowley (Chairman)
Liz Hewitt
David Lis
Archie G. Kane
Charlotte Twyning
Funmi Adegoke(3)
Total
Total salary
and fees
£000
350(1)
85
110
80
95
72
85
69
75
17(2)
19
–
734
323
Period
2019
2018
2019
2018
2019
2018
2019
2018
2019
2018
2019
2018
2019
2018
Other (bonus,
pension, LTIP,
taxable benefits)
£000
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
n/a
–
n/a
–
n/a
n/a
Total Fixed
£000
350
85
110
80
95
72
85
69
75
17
19
–
734
323
Total Variable
£000
Ordinary shares
held as at
31 December
Total
£000
0
0
0
0
0
0
0
0
0
0
0
–
0
0
350
85
110
80
95
72
85
69
75
17
19
–
1,423,395
1,387,509
188,377
188,377
458,947
458,947
50,000
50,000
36,000
36,000
0
–
734
323
2,156,719
2,120,833
(1) Justin Dowley assumed the inaugural role of Non-executive Chairman of the Board on 1 January 2019. His fee was 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.
(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 for 2018 reflect her fees for the period 1 October 2018
to 31 December 2018.
(3) Funmi Adegoke was appointed as a Non-executive Director of the Company with effect from 1 October 2019 and the fees referred to above for 2019 reflect her fees for the period 1 October 2019 to
31 December 2019.
Non-executive Directors’ fees (audited)
Basic fees for Non-executive Directors and the Non-executive
Chairman’s fee have been increased by 3% with effect from 1 January
2020, in keeping with increases made to executive Directors and other
Melrose employees in previous years (other than for 2018, which was
considered an exceptional year given the acquisition of GKN). The
additional fee for holding the Chairmanship of the Audit Committee
was increased by £10,000, to better reflect the increased scope and
complexity of the role given the diversity of our businesses and
combined profile. The Non-executive Director fee levels for 2019
and 2020 are set out in the table below.
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 2019
Fee with
effect from
1 January 2020
£350,000
£75,000
£360,500
£77,250
£20,000
£20,000
£20,000
£30,000
£10,000
£10,000
£15,000
£15,000
Service contracts and letters of appointment
Consistent with the best practice guidance provided by the 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 Code and the Company’s
Articles of Association.
There is no unexpired term as each of the executive Directors’ contracts
is on a rolling basis.
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 Code’s recommendation that all directors of
FTSE 350 companies be subject to annual re-election by shareholders.
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.
Details of the Non-executive Directors’ terms of appointment are
set out below:
Non-executive Directors
First appointment
Expires*
Justin Dowley (Chairman)
Liz Hewitt
David Lis
Archie G. Kane
Charlotte Twyning
Funmi Adegoke
* Subject to annual re-election.
1 September 2011
8 October 2013
12 May 2016
5 July 2017
1 October 2018
1 October 2019
AGM 2023
AGM 2022
AGM 2022
AGM 2020
AGM 2021
AGM 2022
GovernanceMelrose Industries PLC Annual Report 2019 102
Directors’ Remuneration report
Continued
Governance
Responsibilities
The Board has delegated to the Committee responsibility for
overseeing the remuneration of the Chairman of the Board and the
executive Directors.
The 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 policy for the executive Directors.
• Setting and managing remuneration packages of the executive
Directors and the Chairman of the Board in accordance with the
Directors’ Remuneration Policy.
• Overseeing the 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 long-term incentive arrangements.
As described on page 100, although they retain oversight, the
Committee is not responsible for setting and managing the
remuneration of Melrose senior management and divisional executive
teams, nor is it responsible for determining wider business unit
employee pay, which are the responsibility of the Chief Executive and
the relevant business unit, respectively. Responsibility for determining
the remuneration of the Non-executive Directors (other than the
Chairman) sits with the Board. No Director plays a part in any decision
about his or her own remuneration.
The Committee’s terms of reference, which were last revised in
November 2019, are available on our website, www.melroseplc.net,
and from the Company Secretary at Melrose’s registered office.
Attendance at meetings
The attendance of the Non-executive Directors at the scheduled
meetings of the Committee in 2019 was as follows:
Member
David Lis (Chairman)
Justin Dowley
Liz Hewitt(2)
Archie G. Kane
Charlotte Twyning
Funmi Adegoke(3)
No. of meetings (1)
2/2
2/2
1/1
2/2
2/2
1/1
(1) Reflects regularly scheduled meetings. No other meetings of the Committee took
place in 2019.
(2) Retired as a member of the Committee prior to the second scheduled meeting taking place.
(3) Appointed to the Committee with effect from 1 October 2019 and attended all Committee
meetings held during the period 1 October 2019 to 31 December 2019.
Compliance with legislation and the Code
In 2019 we were already compliant with the key provisions of the
new Code and the Financial Conduct Authority’s Listing Rules and
Disclosure Guidance and Transparency Rules, including in relation
to minimum shareholding requirements, post-cessation minimum
shareholding requirements, pension alignment, malus and clawback,
and discretion to override formulaic outcomes. This will continue
into the 2020 Directors’ Remuneration Policy, as set out on
pages 103 to 111.
The Directors confirm that this report has also 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.
Committee membership
All members of the Committee are independent Non-executive
Directors within the definition of the 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.
Advisors to the Remuneration Committee
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 £83,230
excluding VAT, which were charged on a time/cost basis. During the
year, PwC LLP also provided the Company with reward, tax,
accounting, and consulting advice.
PwC LLP was appointed by the Committee. 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.
Statement of voting at general meeting
The charts below set out the votes on the Annual Report on
Remuneration at the 2019 AGM and on the Directors’ Remuneration
Policy at the 2017 general meeting.
Resolution to approve the Directors’ Remuneration Report
for the year ended 31 December 2018
Percentage of votes cast
for the resolution
Percentage of votes cast
against the resolution
87.83%
12.17%
Votes withheld 180,597,947
Resolution to approve the Directors’ Remuneration Policy
(11 May 2017)
Percentage of votes cast
for the resolution
Percentage of votes cast
against the resolution
82.04%
17.96%
Votes withheld 35,787,047
This Annual Report on Remuneration will be put to an advisory vote and
the 2020 Directors’ Remuneration Policy on pages 103 to 111 will be
put to a binding vote at the AGM, on 7 May 2020.
Melrose Industries PLC Annual Report 2019 103
2020 Directors’ Remuneration Policy
This Directors’ remuneration policy (the “2020 Directors’ Remuneration Policy”) shall, subject to shareholder approval at the 2020 AGM, take
binding effect from the conclusion of that meeting. The Company’s current Directors’ Remuneration Policy was approved by shareholders
in 2017 and the Remuneration Committee made adjustments to its implementation for 2019. The 2020 Directors’ Remuneration Policy is proposed
to take account of the introduction of the 2020 Incentive Plan, which will be on equivalent economic principles to the 2017 Incentive Plan, but with
certain additional shareholder focused features, including the application of a rolling annual cap and an increased penalty charge. The differences
between the current Directors’ Remuneration Policy and the 2020 Directors’ Remuneration Policy set out below are the inclusion of the 2020
Incentive Plan, the increases to the minimum shareholder requirements and post-cessation minimum shareholding requirements, and the
extension of the malus and clawback trigger events.
The proposal seeks to balance the desire to maintain a very successful Melrose remuneration structure that is critical to its “Buy, Improve, Sell”
model, with the certainty of further shareholder protections. This remuneration structure and the Directors’ Remuneration Policy is based around
four key principles as set out on page 92 – namely, that executive remuneration should be simple, transparent, support the value creation strategy
and pay only for performance. Details are set out below.
To place the current Directors’ Remuneration Policy in context, the table below shows that the single total figure of remuneration for the Chief
Executive in 2018 was less than half, or over £1 million less than, the lower quartile of FTSE 100 peers.(1) This demonstrates in practice the
Company’s policy of deliberately setting salary, benefits and annual bonus for the executive Directors low, with the opportunity for significant reward
being heavily weighted towards the long-term incentive plan, which is entirely performance based and ensures that executive Directors only receive
substantial rewards when they have outperformed and created very significant value for shareholders. This will continue to be the case under the
2020 Directors’ Remuneration Policy.
Metric (GBP ’000) 2018
Melrose Chief Executive
FTSE 100 Lower Quartile
FTSE 100 Average
FTSE 100 Upper Quartile
Total
1,049
2,147
2,766
3,735
How did the Remuneration Committee determine the 2020 Directors’ Remuneration Policy?
In determining the 2020 Directors’ Remuneration Policy, the Remuneration Committee:
• considered the Company’s strategy, how the current Directors’ Remuneration Policy related to and supported the strategy,
and formed its own views on the changes (if any) required to the current Directors’ Remuneration Policy to align with the strategy;
• considered feedback from shareholders and investor bodies on the 2017 and 2018 Annual Remuneration Reports;
• sought advice from its independent remuneration consultant on the impact of the UK Corporate Governance Code, applicable
law and regulations and current investor sentiment in formulating the 2020 Directors’ Remuneration Policy;
• considered the disclosures it receives on wider workforce remuneration to ensure the approach to executive remuneration is consistent;
• consulted with the executive Directors and other relevant members of Melrose senior management on the proposed changes to the
current Directors’ Remuneration Policy; and
• conducted a full consultation exercise with key shareholders and investor bodies on the changes.
The Remuneration Committee was mindful in its deliberations on the 2020 Directors’ Remuneration Policy of any potential conflicts of interest and
sought to minimise them through an open and transparent internal consultation process, by seeking independent advice from its external advisors
and by undertaking a full shareholder consultation exercise.
Salary, bonus and benefits
Base Salary
Purpose and link to strategy
Core element of fixed remuneration, reflecting the size and scope of the role, designed to attract and retain executive Directors of the calibre
required for the Group.
Operation
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 Remuneration Committee determines this to be appropriate. The individual’s contribution and overall performance is one of the
considerations in determining the level of any salary increase.
Salaries are paid in cash and levels are determined by the Remuneration Committee taking into account a range of factors including:
• role, experience and performance;
• prevailing market conditions;
• external benchmarks for similar roles at comparable companies; and
• salary increases awarded for other employees in the Group.
Opportunity
To avoid setting expectations of executive Directors and other employees, no maximum has been set under the 2020 Directors’ Remuneration
Policy. Salary increases will take into account the average increase awarded to other Melrose employees and the wider Group workforce.
Increases may be made to salary levels in certain circumstances as required, for example to reflect:
• an increase in scope of role or responsibility; and
• performance in role.
(1) For comparison purposes, this excludes payments under long-term incentive arrangements, as none were payable to the Melrose Chief Executive in 2018.
GovernanceMelrose Industries PLC Annual Report 2019 104
Directors’ Remuneration report
Continued
Operation of the Directors’ Remuneration Policy in 2018 as compared to FTSE 100 peers
Metric (GBP ’000) 2018
Melrose Chief Executive
FTSE 100 Lower Quartile
FTSE 100 Average
FTSE 100 Upper Quartile
Annual Salary
490
720
858
1,098
Annual Bonus
Purpose and link to strategy
Rewards performance against annual targets which support the strategic direction of the Company.
Operation
Targets are set annually and payout is determined by the Remuneration Committee after the year-end based on performance against those
targets. The Remuneration Committee has discretion to vary the bonus 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. The treatment of bonus
payments upon cessation of employment is described on pages 109 to 110.
Annual bonus awards are discretionary and, accordingly, are subject to a “malus” provision over the course of the relevant year. The annual bonus
award is also subject to a clawback arrangement that may be applied by the Remuneration Committee at any time up until the Annual General
Meeting held in the second year following the payment of the bonus.
The Remuneration Committee may apply these malus or clawback provisions in the event of: (1) material misstatement of financial results that,
in the reasonable opinion of the Remuneration Committee, has a material negative effect; (2) material miscalculation of any performance measure
on which the bonus earned was calculated; (3) gross misconduct by the relevant executive Director; (4) events or behaviour of an executive Director
that have led to the censure of the Company by a significant regulatory authority or have had a significant detrimental impact on the reputation of
the Company, provided that the Board is satisfied that the relevant executive Director was responsible for the censure or reputational damage and
that the censure or reputational damage is attributable to them; and/or (5) the Company becoming insolvent or otherwise suffering a corporate
failure so that the bonus earned is materially reduced, provided that the Board determines, following an appropriate review of accountability, that
the executive Director should be held responsible (in whole or in part) for that insolvency or corporate failure.
If an executive Director does not satisfy the minimum shareholding requirement (see below), up to 50% of any bonus award may be deferred into
shares for up to two years.
Opportunity
Maximum opportunity is 100% of base salary.
Performance metric
The Remuneration Committee will have regard to various performance metrics (which will be determined by the Remuneration Committee)
measured over the relevant financial year, when determining bonuses. At least 50% of the award will be based on financial measures and
the balance of the award will be based on strategic measures and/or personal objectives, as determined by the Remuneration Committee.
• Financial metrics: The element of the bonus subject to a financial metric will be determined between 0% and 100% for performance
between “threshold” performance (the minimum level of performance that results in any level of payout), “target” performance, and
“maximum” performance, with a linear line for achievement between the threshold and the maximum.
• Strategic element: The strategic element of an award will be determined to the extent assessed by the Remuneration Committee
between 0% and 100% based on the Remuneration Committee’s assessment of a range of financial and non-financial metrics and/or
personal objectives.
Annual bonus performance measures: stretching performance targets are set each year for the annual bonus, to reflect the key financial and
strategic objectives of the Company and to reward for delivery against these targets. When setting the targets, the Remuneration Committee
will take into account a number of different reference points, including the Company’s plans and strategy and the market environment.
Operation of the Directors’ Remuneration Policy in 2018 as compared to FTSE 100 peers
Metric (GBP ’000) 2018
Melrose Chief Executive
FTSE 100 Lower Quartile
FTSE 100 Average
FTSE 100 Upper Quartile
Annual Bonus
Max bonus opportunity %
466
100%
1,286
150%
1,680
200%
2,285
225%
Retirement benefits
Purpose and link to strategy
Provides market competitive post-employment benefits (or cash equivalent) to recruit and retain executive Directors of the calibre required
for the Group.
Operation
The 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. Any new executive Director will be entitled to receive an equivalent pension contribution.
Melrose Industries PLC Annual Report 2019 105
Opportunity
15% of base salary, the same percentage of salary as the rest of the Melrose employees and within the range of the wider Group workforce.
This percentage contribution has remained unchanged since the Company was floated in 2003.
Operation of the Directors’ Remuneration Policy in 2018 as compared to FTSE 100 peers
Metric (GBP ’000) 2018
Pension Contribution
Pension Contribution %
Melrose Chief Executive
FTSE 100 Lower Quartile
FTSE 100 Average
FTSE 100 Upper Quartile
74
15%
122
17%
195
25%
283
27%
Other benefits
Purpose and link to strategy
Ensures the overall package is competitive to enable the Company to recruit and retain executive Directors of the calibre required for the Group.
Operation
Executive Directors receive benefits consistent with other Melrose employees and market practice, which may include a 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.
Opportunity
Whilst the Remuneration Committee has not set an absolute maximum on the level of benefits that executive Directors may receive, the
value of benefits is set at a level that the Remuneration Committee considers appropriate against the market and to support the ongoing strategy
of the Company.
Operation of the Directors’ Remuneration Policy in 2018 as compared to FTSE 100 peers
Metric (GBP ’000) 2018
Melrose Chief Executive
FTSE 100 Lower Quartile
FTSE 100 Average
FTSE 100 Upper Quartile
Benefits
19
19
33
69
Long-term incentive arrangements
The Company only operates one incentive plan for executive Directors, which is directly linked to the value created for shareholders. This will
continue to be the case upon renewal of the long-term incentive arrangements in May 2020.
2017 Incentive Plan
The 2017 Incentive Plan takes the form of options granted in 2017, 2018 and 2019, following approval by a special resolution of shareholders
on 11 May 2017. In the event that management have generated sufficient value creation over a three-year performance period from 31 May 2017
to 31 May 2020, those options will be exercised in exchange for 2017 Incentive Shares (or cancelled in exchange for a cash payment). Although
no further options will be granted to executive Directors under the 2017 Incentive Plan, the Company may, under this policy, satisfy the exercise
of any option to acquire 2017 Incentive Shares (or cancel any such option in exchange for a cash payment as described in the shareholder
circular dated 7 April 2017 and approved in May 2017 available at www.melroseplc.net/media/1728/21347274-_-1-_circular.pdf) and may deliver
value to any holder of 2017 Incentive Shares in accordance with the Company’s Articles of Association that are in effect as at the date that such
value is to be delivered.
2020 Incentive Plan
Subject to the approval of shareholders at the 2020 AGM, the 2020 Incentive Plan will commence on 31 May 2020, being the crystallisation date of
the 2017 Incentive Plan, and shall be governed by the scheme rules tabled at the 2020 AGM (the “Scheme Rules”). Although it is now a contractual
plan, rather than contained within the Articles of Association, the 2020 Incentive Plan is a continuation of the long-term incentive arrangements for
executive Directors that have applied since the Company was established in 2003. It incentivises executive Directors over the longer-term and
aligns their interests with those of shareholders by linking the level of reward to the value delivered to shareholders.
Purpose and link to strategy
Incentivises executive Directors over the longer term and drives the Company’s value creation strategy. It aligns the interests of executive Directors
with those of shareholders by linking the level of reward to the value delivered. Incentive plans are regularly renewed on consistent terms to provide
continuity and to incentivise long-term performance.
GovernanceMelrose Industries PLC Annual Report 2019 106
Directors’ Remuneration report
Continued
Operation
Awards
Conditional awards under the 2020 Incentive Plan (“Conditional
Awards”) are to be granted on the commencement date of 31 May
2020 (the “Commencement Date”) and performance will be measured
by the increase in value of invested capital over a three-year period to
the crystallisation date (the “Crystallisation Date”) on 31 May 2023 or,
where an exceptional corporate event affecting the Company occurs
prior to that event (such as a change of control or winding up), an earlier
date as determined in accordance with the Scheme Rules (the
“Performance Period”).
On the Crystallisation Date, the Conditional Awards will convert into a
share award (a “Share Award”) with an entitlement to ordinary shares in
the Company (“Ordinary Shares”) and, in circumstances where the cap
based on the Maximum Annual Share Entitlement (as defined below)
applies (the “Cap”), an option or options carrying a right to acquire
Ordinary Shares for no payment shall be issued in addition to the Share
Award, which option or options shall also be subject to the Cap (a “Nil
Cost Option”).
To determine the application of the Cap, on the Commencement Date,
the Remuneration Committee shall calculate the maximum number of
Ordinary Shares (subject to adjustment in accordance with the Scheme
Rules) that an executive Director is able to receive in any calendar year
under the 2020 Incentive Plan, by dividing £10 million by the average
closing mid-market price of an Ordinary Share for the 40 business days
prior to the Commencement Date, such resulting number being the
“Maximum Annual Share Entitlement” or the “MASE”.
If, on the Crystallisation Date, the calculation to convert the Conditional
Award would result in an executive Director becoming entitled to receive
a Share Award for more Ordinary Shares than the Maximum Annual
Share Entitlement, then his entitlement to receive Ordinary Shares in
respect of the conversion shall be reduced to the MASE, and the
executive Director shall be issued with a Nil Cost Option exercisable in
the first calendar year following the Crystallisation Date or at any time
thereafter during the period of 10 years from the Crystallisation Date for
the balance of his entitlement under the Share Award, PROVIDED THAT
if the number of Ordinary Shares the subject of the Nil Cost Option
exceeds the MASE, then such number of Ordinary Shares shall be
reduced to the MASE and the executive Director will be issued with
a second Nil Cost Option on the Crystallisation Date for the balance
of his entitlement to Share Award, such second Nil Cost Option being
exercisable in the second calendar year following the Crystallisation
Date or at any time thereafter during the period of 10 years from the
Crystallisation Date, PROVIDED FURTHER THAT that if the number of
Ordinary Shares the subject of the second Nil Cost Option exceeds the
MASE, then such number of shares shall be reduced to the MASE and
the executive Director shall not be entitled to any further shares to which
he would otherwise have been entitled under the Share Award on the
Crystallisation Date, which entitlement shall be permanently cancelled.
At each date when shares subject to awards under the 2020
Incentive Plan are capable of vesting and becoming exercisable, the
Remuneration Committee shall conduct a performance assessment to
ensure that the number of shares vesting and becoming exercisable
does not appear anomalous or where there is quantified material
information known to the Remuneration Committee in relation to the
current financial position of the Company that is not in the public
domain, the result would not be anomalous if the information were in
the public domain. The Remuneration Committee will disclose its
assessment in the relevant Annual Report on Remuneration covering
the period which includes the date when the shares subject to awards
vest and become exercisable.
Notwithstanding the above provisions, where the executive Director is
resident in the United States for tax purposes the MASE applicable on
the Crystallisation Date shall (where applicable) be increased by the
Remuneration Committee to a number equal to 50% of such executive
Director’s total entitlement to the Company’s Ordinary Shares on
crystallisation as if the Cap did not apply or such lesser percentage as
shall enable the executive Director to use the proceeds of the sale of an
increased entitlement to the Company’s Ordinary Shares (or the cash
settlement proceeds in lieu of receiving such shares) to settle any taxes
arising in respect of the crystallisation. Where this provision applies, the
MASE applicable in the first and, if relevant, second calendar year
following the Crystallisation Date shall be reduced by an amount equal
to the amount by which the MASE applicable on the Crystallisation Date
was increased.
The above provisions related to the Cap are without prejudice to the
Company’s ability to settle any entitlement to Ordinary Shares under the
Share Award or a Nil Cost Option by way of a cash payment calculated
in accordance with the Scheme Rules, to the provisions of the Scheme
Rules permitting the early exercise of the Nil Cost Options in the
circumstances specified in those rules, and to the provisions of the
Scheme Rules giving the Remuneration Committee the power to adjust
the number of shares the subject of the Nil Cost Options.
The Remuneration Committee recognises that corporate events that
are rare for other companies are a standard and regular part of the
Company’s “Buy, Improve, Sell” model, and that executive Directors
should not be penalised for them. Therefore, if there is any variation of
the share capital of the Company (whether by rights issue, open offer,
consolidation, subdivision, demerger, reduction of capital or otherwise),
the Remuneration Committee shall adjust the application of the
Cap in the manner that it considers to be fair and reasonable.
Holding Period
Any Ordinary Shares awarded pursuant to the 2020 Incentive Plan,
excluding any sold to fund the amount of tax payable in respect of the
receipt of such shares, must be held by executive Directors for two
years after the Crystallisation Date (the “Holding Period”).
Malus
In the event of (1) material misstatement of financial results that, in the
reasonable opinion of the Remuneration Committee, has a material
negative effect; (2) gross misconduct by the relevant executive Director;
(3) events or behaviour of an executive Director that have led to the
censure of the Company by a significant regulatory authority or have
had a significant detrimental impact on the reputation of the Company,
provided that the Remuneration Committee is satisfied that the relevant
executive Director was responsible for the censure or reputational
damage and that the censure or reputational damage is attributable to
them; and/or (4) the Company becoming insolvent or otherwise
suffering a corporate failure so that the value of the Company’s Ordinary
Shares is materially reduced, provided that the Remuneration
Committee determines, following an appropriate review of
accountability, that the executive Director should be held responsible
(in whole or in part) for that insolvency or corporate failure prior to the
Crystallisation Date, the Conditional Awards held by the executive
Director may be cancelled in whole or in part for nil consideration.
Clawback
In the event of (1) material misstatement of financial results that, in the
reasonable opinion of the Remuneration Committee, has a material
negative effect; (2) material miscalculation of any performance measure
on which the crystallisation of the Conditional Awards was based;
(3) gross misconduct by the relevant executive Director; (4) events or
behaviour of an executive Director that have led to the censure of the
Company by a significant regulatory authority or have had a significant
detrimental impact on the reputation of the Company, provided that the
Remuneration Committee is satisfied that the relevant executive
Director was responsible for the censure or reputational damage and
that the censure or reputational damage is attributable to them; and/or
(5) the Company becoming insolvent or otherwise suffering a corporate
failure so that the value of the Company’s Ordinary Shares is materially
reduced, provided that the Remuneration Committee determines,
following an appropriate review of accountability, that the executive
Director should be held responsible (in whole or in part) for that
Melrose Industries PLC Annual Report 2019 107
insolvency or corporate failure, following the Crystallisation Date but
prior to 31 May 2025, the executive Director may be required to transfer
(for nil consideration) the number of Ordinary Shares arising from the
crystallisation, less the number of Ordinary Shares sold to fund the tax
liability arising from crystallisation, and/or to pay to the Company the
amount of any cash received on or following crystallisation less the
amount of any tax paid in relation to that cash, and any Nil Cost Options
held by such executive Director may be cancelled in whole or in part for
no payment to the executive Director.
The Scheme Rules provide that the Remuneration Committee may,
with the agreement of the executive Director, cash settle all or part of
the participant’s entitlement to Ordinary Shares on the conversion of a
Conditional Award or the exercise of a Nil Cost Option in full and final
settlement of the executive Director’s rights under the relevant Award.
The treatment of an executive Director’s participation in the 2020
Incentive Plan if he is a ‘leaver’ is described on page 110.
The other operative provisions of the 2020 Incentive Plan are set out in
the Scheme Rules and will be available for inspection at the 2020 AGM.
Opportunity
Participants in the 2020 Incentive Plan share in 7.5% of the increase
in invested capital between the Commencement Date and the
Crystallisation Date in excess of a 6% annual charge, calculated in
accordance with the Scheme Rules.
Each individual’s Conditional Awards granted in respect of the 2020
Incentive Plan shall be determined by reference to a percentage
entitlement to the overall available amount (which shall be subject to
adjustment in accordance with the Scheme Rules). Initial Conditional
Awards with the following percentage entitlements shall be granted to
the executive Directors on the Commencement Date:
• Christopher Miller: 15.5% of total
• Simon Peckham: 17% of total
• Geoffrey Martin: 17% of total
For the avoidance of doubt, David Roper will not be eligible to receive
a Conditional Award given his imminent retirement.
The maximum number of new Ordinary Shares in the Company that
may be issued in relation to the 2020 Incentive Plan is 5% of the
aggregate number of Ordinary Shares in issue on 31 May 2020,
plus 5% of any additional Ordinary Shares issued or created by the
Company after that date and prior to the Crystallisation Date. However,
this limit will not apply in the event of a change of control or winding up
of the Company, as provided for in the Scheme Rules. Further, to the
extent it would be exceeded on crystallisation, the excess shall be paid
to participants in cash, subject always to the Cap.
Performance metric
The value that may be delivered under the 2020 Incentive Plan will be
determined by reference to the growth in value of the Company from
and including the Commencement Date of 31 May 2020 to and
excluding the Crystallisation Date of 31 May 2023 (or an earlier date in
the event of acceleration because of an exceptional corporate event
affecting the Company), calculated in accordance with the
Scheme Rules.
Discretion
The Committee may make such adjustments as it deems to be fair
and reasonable so far as the holders of Ordinary Shares are
concerned (having taken such advice that it deems appropriate in the
circumstances, including from an investment bank of repute) to the
calculation of the number of Ordinary Shares and/or cash to which the
holders of Conditional Awards or Nil Cost Options shall be entitled in
certain circumstances where the application of a provision of the
Scheme Rules produces, or is likely to produce, an anomalous result
or where there is quantified material information known to the
Remuneration Committee in relation to the current financial position of
the Company that is not in the public domain that would, in the
reasonable opinion of the Remuneration Committee, produce an
anomalous result if such information were in the public domain.
Shareholding obligations
Executive Directors are subject to minimum and post-cessation shareholding requirements as set out below.
Component of remuneration
Purpose and link to strategy
Operation
Minimum shareholding
requirements
To align the interests of executive
Directors with shareholders
Post-cessation minimum
shareholding requirements
To ensure alignment of interests
following the departure of an
executive Director
Shareholding guidelines
in respect of 2017 Incentive Plan
To align the interests of executive
Directors with shareholders
There is a minimum shareholding requirement for executive Directors of
300% of salary. New executive Directors will be given a period of five years
from appointment to build up this shareholding.
The executive Directors are required to retain a shareholding equal to 300%
of base salary for a period of two years after cessation of employment.
On crystallisation of the 2017 Incentive Plan, Executive Directors will be
required to retain any Ordinary Shares acquired pursuant to the crystallisation
of the 2017 Incentive Plan, other than any Ordinary Shares sold in order to
make adequate provision for any tax liability arising in connection with the
crystallisation, for a period of two years.
The number of Ordinary Shares required to be retained will be adjusted
as determined by the Remuneration Committee to reflect any subsequent
variations in the capital of the Company, including share capital
consolidations, sub-divisions or bonus issues.
Non-executive Directors
Non-executive Director fees are set out as follows:
Purpose and link to strategy
Operation
Opportunity
Set at a level that reflects market
conditions and is sufficient to
attract individuals with appropriate
knowledge and expertise.
Fees are reviewed periodically
and amended to reflect market
positioning and any change in
responsibilities. Fees for Non-
executive Directors are determined
by the executive Directors.
Fees are based on the level of fees paid to non-executive directors serving
on boards of similar-sized UK-listed companies and the time commitment
and contribution expected for the role.
Non-executive Directors receive a basic fee and a further fee for the
Chairmanship of a Board Committee or for holding the office of Senior
Independent Director.
Non-executive Directors may be eligible to receive benefits such as use of
secretarial support, reimbursement of travel costs and other benefits that
may be appropriate.
GovernanceMelrose Industries PLC Annual Report 2019 108
Directors’ Remuneration report
Continued
Illustration of the application of the 2020 Directors’
Remuneration Policy
In illustrating the potential reward under the 2020 Directors’
Remuneration Policy, the following assumptions have been made:
• Minimum performance: fixed elements of remuneration only
(base salary effective from 1 January 2020, benefits as set out in
the single figure table in the Company’s Directors’ Remuneration
Report for that year, and a pension contribution of 15% of
base salary).
• Performance in line with expectations: fixed elements of
remuneration as above, plus bonus of 50% of salary (other than in
the case of Christopher Miller, who does not participate in the
annual bonus arrangements), plus an amount in relation to the
executive Directors’ entitlements under the 2020 Incentive Plan,
as described below.
• Maximum performance: fixed elements of remuneration as
above, plus bonus of 100% of salary (other than in the case of
Christopher Miller, who does not participate in the annual bonus
arrangements), plus an amount in relation to the executive
Directors’ entitlements under the 2020 Incentive Plan, as
described below.
• Maximum performance +50% share price growth: fixed
elements of remuneration as above, plus bonus of 100% of
salary (other than in the case of Christopher Miller, who does not
participate in the annual bonus arrangements), plus an amount in
relation to the executive Directors’ entitlements under the 2020
Incentive Plan, as described below. This is no different from the
maximum performance scenario because the 2020 Incentive
Plan is based on shareholder returns and therefore share price
growth is inbuilt in its value for any given level of performance.
The executive Directors’ Conditional Awards under the 2020 Incentive
Plan will deliver to them part of the growth in value of the Company from
May 2020 to May 2023 (or an earlier trigger date determined in
accordance with the Scheme Rules). Accordingly, the value of
participation in the 2020 Incentive Plan cannot be expressed as a
multiple of salary. Therefore, for each executive Director below we have
included a value based on the annualised estimated Black Scholes
option pricing model value per Conditional Award granted (as at the last
practical date before the finalisation of the policy). For “performance in
line with expectations”, 50% of this value is shown. For “maximum
performance”, 100% of this value is shown.
£4,999
£3,846
77%
£535
£618
11%
12%
£2,808
£1,923
68%
£267
£618
10%
22%
On-target
Maximum
Total remuneration
Christopher Miller
(£’000)
Simon Peckham
(£’000)
£4,357
£2,488
£3,739
86%
£1,870
75%
100%
£618
25%
£618
14%
On-target
Maximum
£618
£618
Minimum
100%
£618
£618
Minimum
Geoffrey Martin
(£’000)
£4,782
£3,846
80%
£431
£505
9%
11%
£2,644
£1,923
73%
£216
£505
8%
19%
On-target
Maximum
£505
£505
Minimum
100%
Fixed
Annual variable
LTI
Melrose Industries PLC Annual Report 2019 109
Recruitment remuneration policy
When agreeing a remuneration package for the appointment of a new executive Director, the Remuneration Committee will apply
the following principles:
• the package will be sufficient to attract the calibre of executive Director required to deliver the Company’s strategy;
• the Remuneration Committee will seek to ensure that no more is paid than is necessary; and
• in the next Annual Report on Remuneration after an appointment, the Remuneration Committee will explain to shareholders the rationale
for the arrangements implemented.
In addition to the policy elements set out in this 2020 Directors’ Remuneration Policy, the Remuneration Committee retains discretion to make
appropriate remuneration decisions outside the standard policy to meet the individual circumstances of the recruitment, including discretion to
include any other remuneration component or award, with the intention that the outcome of the relevant remuneration package for the new
executive Director be broadly equivalent in all material respects to the remuneration packages of existing executive Directors who are governed
by the policy. The Remuneration Committee has never used this discretion since the Company was founded in 2003, and does not intend to
use this discretion to make a non-performance related incentive payment (for example, a “golden hello”) during the period covered by this 2020
Directors’ Remuneration Policy, but considers it important to retain the ability to do so in exceptional circumstances. In this regard, elements
that the Remuneration Committee may consider for the purposes of a remuneration package for the recruitment of a new executive Director
include but are not limited to the following:
Element
Approach
Incentive remuneration
opportunity
The Remuneration Committee’s intention is that a new executive Director’s incentive remuneration
opportunity will consist of:
• an annual bonus opportunity of up to a maximum of 100% of base salary (i.e. in line with the ordinary
opportunity under the policy); and
• a pro-rata award of awards under the 2020 Incentive Plan in proportion to the date of joining to the
crystallisation date, at a level up to the level that applies to other executive Directors under the policy.
If a new executive Director did not participate in the 2020 Incentive Plan, the Remuneration Committee may
award a maximum annual bonus opportunity of up to 300% of salary until such time as that new executive
Director participated in a long-term incentive arrangement.
The Remuneration Committee may make awards on hiring an external candidate to buy out remuneration
arrangements forfeited on leaving a previous employer. In doing so, the Remuneration Committee will have
regard to relevant factors, including any performance conditions attached to such arrangements, the form of
those awards (e.g. cash or shares) and the time frame of such awards. While such awards are excluded from
the maximum level of variable remuneration referred to on page 109, the Remuneration Committee’s intention
is that the value awarded (as determined by the Remuneration Committee on a fair and reasonable basis)
would be no higher than the expected value of the forfeited arrangements. Where considered appropriate,
buyout awards will be subject to forfeiture or clawback on early departure.
The notice period will be the same as the Company’s ordinary policy of 12 months.
Where necessary, the Company will pay appropriate relocation costs. The Remuneration Committee
will seek to ensure that no more is paid than is necessary.
The maximum contribution of 15% of salary referred to on pages 104 to 105 will apply to any new executive
Director. This is the same level provided to the rest of the Melrose employees and is the level received by the
incumbent executive Directors.
Compensation for forfeited
remuneration arrangements
Notice period
Relocation costs
Retirement benefits
Incentive awards and “buyout” awards may be granted under new plans as permitted under the Listing Rules, which allow for the grant of awards
to facilitate, in unusual circumstances, the recruitment of a Director. Where a position is filled internally, any ongoing remuneration obligations or
outstanding variable pay elements shall be allowed to continue in accordance with their subsisting terms.
The remuneration package for a newly appointed non-executive Director would normally be in line with the structure set out in the policy table for
non-executive Directors.
Service contracts and policy on payments for cessation of employment
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). The principles on which
the determination of payments for cessation of employment will be approached are summarised below.
Certain treatment is dependent on whether an executive Director is classified as a ‘Good Leaver’ on cessation of employment, which will occur if
that executive Director ceases employment in the following circumstances: death; permanent ill-health; permanent disability; retirement at or over
65 years of age or otherwise with the agreement of the Company; resignation in connection with a change of control; or otherwise at the discretion
of the Remuneration Committee. An executive Director will be a ‘Bad Leaver’ if they cease employment other than as a Good Leaver.
Payment in lieu of notice
If the Company terminates an executive Director’s employment with immediate effect, a payment in lieu of notice may be made. This may include
base salary, pension contributions and benefits.
Annual bonus
Bonus in year of cessation
Performance conditions will be measured at the bonus measurement date for Good Leavers only, with the bonus normally to be pro-rated for the
period worked during the financial year and paid in cash. No bonus will be payable to any executive Director other than a Good Leaver for the year
of cessation.
Bonus from prior years deferred into shares
Good Leavers will be entitled to retain those shares awarded in prior years for a deferral of an annual bonus. For an executive Director other than a
Good Leaver, any shares awarded for a deferral of a prior year’s annual bonus and still subject to restrictions will be forfeited.
GovernanceMelrose Industries PLC Annual Report 2019 110
Directors’ Remuneration report
Continued
Discretion
The Remuneration Committee has the following elements of
discretion with respect to the annual bonus and deferred share
awards in the event of cessation of employment:
• to determine whether to pro-rate a cash bonus to time.
The Remuneration Committee’s normal policy is that it will
pro-rate for time. It is the Remuneration 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 Remuneration Committee will make this determination
depending on the type of Good Leaver reason resulting in the
cessation.
2020 Incentive Plan
If an executive Director ceases to be employed by the Company
before the Crystallisation Date, the treatment of the Conditional Awards
held by such executive Director will be determined depending on their
classification as a ‘Good Leaver’ or a ‘Bad Leaver’ as defined and
summarised above and below.
Good Leavers
If an executive Director holding Conditional Awards ceases employment
in circumstances where he is a ‘Good Leaver’ before the Crystallisation
Date, unless the Remuneration Committee decides otherwise, the
participation percentage under his Conditional Award shall be reduced
on a pro-rata basis to reflect the period from 31 May 2020 to the date
on which he ceased employment as a proportion of the Performance
Period, and the Remuneration Committee may award such amount to
other eligible employees in accordance with the Scheme Rules.
Bad Leavers
If an executive Director holding Conditional Awards ceases employment
in circumstances where he is a ‘Bad Leaver’ before the Crystallisation
Date, every Conditional Award he holds shall lapse and, thereafter may
be awarded to other eligible employees in accordance with the
Scheme Rules.
If an executive Director ceases to be employed by the Company after
the Crystallisation Date for whatever reason, they shall be entitled to
retain any outstanding Nil Cost Options held by them pursuant to the
Scheme Rules, which shall become exercisable in accordance with
their terms and remain subject to the recovery provisions set out on
pages 106 to 107.
Other payments
The Remuneration Committee reserves the right to make additional exit
payments where such payments are made in good faith in discharge of
an existing legal obligation (or by way of damages for breach of such an
obligation) or by way of settlement or compromise of any claim arising in
connection with the termination of an executive Director’s employment.
In appropriate circumstances, payments may also be made in respect
of legal fees.
The overall amount of any payment made in respect of a loss of office
will not exceed the aggregate of any payment in lieu of notice and any
payment made in respect of annual bonus, as referred to above.
Entitlements in respect of the 2017 Incentive Plan and the 2020
Incentive Plan will be dealt with in accordance with their terms and,
were the Company to make an award on recruitment of an executive
Director to buy out remuneration arrangements forfeited on leaving a
previous employer, the leaver provisions for that award would be
determined at the time of grant.
Other elements
The 2020 Directors’ Remuneration Policy is based on the four key
Melrose principles as set out above, but is also wholly aligned with the
Code factors of clarity, simplicity, risk, predictability, proportionality and
alignment to culture, as set out in the table below. The Remuneration
Committee ensures it takes all these elements into account when
establishing the Directors’ Remuneration Policy, as well as its
application to executive Directors.
Factor
Clarity
Simplicity
Risk
How the Remuneration Committee has addressed and link to strategy
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 Company seeks to present its remuneration arrangements to investors in the clearest and most transparent way
possible. We also remain committed to maintaining an open and transparent dialogue with our investors, both through
formal engagement processes, ad hoc discussions, and through the disclosures in our annual reports.
The fixed elements of remuneration are limited to base salary, pension contribution and benefits, all below the lower quartile
of peers and in the case of pension contributions, the same as other Melrose employees. There are only two variable
elements of remuneration: the annual bonus and the 2020 Incentive Plan, both of which are based on simple and
transparent metrics. The operation of the Annual Bonus Plan is linked to an earnings-based target (at least 50%) and the
achievement of strategic factors. The Company operates a single long-term incentive scheme, which simply rewards the
creation of shareholder value over a three-year period above a minimum level of return for shareholders.
In the Remuneration Committee’s view, this provides a very simple incentive framework which can be understood by all of
the Company’s stakeholders.
The 2020 Directors’ Remuneration Policy includes the following elements to mitigate against the risk of target-based incentives:
• Setting defined limits on the maximum award which can be earned, including capping the annual bonus to a
maximum of 100% of base salary and the application of the annual rolling cap to the 2020 Incentive Plan.
• Requiring the deferral of up to 50% of annual bonus award into Ordinary Shares in certain circumstances and all of
the Ordinary Shares awarded in relation to the 2020 Incentive Plan to be held for a two-year holding period following
the crystallisation date.
• The post-cessation minimum shareholding requirements, which require executive Directors to maintain the minimum
shareholding for a period of two years after leaving the Company.
• Aligning the performance conditions with the “Buy, Improve, Sell” strategy of the Company.
• Ensuring there is sufficient flexibility for the Remuneration Committee to adjust payments through malus and
clawback and an overriding discretion to depart from formulaic outcomes.
Melrose Industries PLC Annual Report 2019 111
Factor
How the Remuneration Committee has addressed and link to strategy
Predictability
Fixed remuneration for the executive Directors is set below the lower quartile of FTSE peers to limit fixed costs for the
Group, to provide certainty and to incentivise executive Directors.
Variable remuneration is limited to the annual bonus, which is capped at 100% and performance-driven based on
financial growth and strategic factors, and the 2020 Incentive Plan. The Remuneration Committee sets out the possible
values that may be earned under the 2020 Incentive Plan upon approval of the plan by shareholders, and updates this
every year.
The method of calculation, limits and discretions under the 2020 Directors’ Remuneration Policy are clearly set out. For
the 2020 Incentive Plan, the two proposed changes will lead to greater certainty for investors:
• The annual charge rate will be increased from RPI+2% to a fixed rate of 6%.
• A rolling annual cap will be introduced, which will cap the award that an executive Director can receive under the
2020 Incentive Plan on crystallisation to a number of shares equivalent to £10 million divided by the share price on
the commencement date in May of this year.
Proportionality The restricted fixed remuneration and capped Annual Bonus Plan is compensated by the opportunity for potentially
significant reward entirely dependent on performance pursuant to the 2020 Incentive Plan that supports the Company’s
value creation strategy.
Alignment to
culture
The focus on responsible stewardship and long-term sustainable performance is a key part of the Company’s culture.
This is supported by the 2020 Directors’ Remuneration Policy, which (i) facilitates Remuneration Committee oversight of
workforce pay, policies and incentives; (ii) aligns executive Director contributions to those provided to the rest of the
Melrose employees; and (iii) deliberately restricts the annual salaries, bonuses and benefits for the executive Directors well
below the lower quartile of the FTSE 100.
Differences between the Company’s policy on
Directors’ remuneration and its policy on remuneration
for other employees
Remuneration arrangements throughout the Group are determined
based on the same principle that rewards should be sufficient as is
necessary to attract and retain high calibre talent, without paying more
than is necessary and should be achieved for delivery of the
Company’s strategy.
The Company has operations in various countries, with Group
employees of differing levels of seniority. Accordingly, though based
on the over-arching principle above, reward policies vary to take
account of these factors.
The Company has also implemented divisional long-term incentive
plans for senior managers of businesses within the Group to incentivise
them to create value for the Company and its shareholders.
As with the 2017 Incentive Plan, the Remuneration Committee
considers it appropriate for participation in the 2020 Incentive Plan
to be extended to those members of senior management beyond the
executive Directors necessary to develop the business further.
Statement of consideration of employment conditions
elsewhere in the Company
Salary, benefits and performance-related awards provided to
employees are taken into account when setting policy for executive
Directors’ remuneration. There is no consultation with employees on
Directors’ remuneration.
Statement of consideration of shareholder views
The Company is committed to regular and ongoing engagement and
seeks the views of key shareholders and other stakeholders on the
application of the Directors’ Remuneration Policy and in advance of
amending its Directors’ Remuneration Policy. The Chairman’s Annual
Statement at page 91 details how this was done in practice for the 2020
Directors’ Remuneration Policy. The policy is set to reflect the
Company’s commercial strategy.
Payments outside the policy in this report
The Remuneration Committee retains discretion to make any
remuneration payments and payments for termination of employment
outside this policy:
• where the terms of the payment were agreed before the policy
came into effect;
• where the terms of the payment were agreed at a time when the
relevant individual was not a Director of the Company and, in the
opinion of the Remuneration Committee, the payment was not in
consideration of the individual becoming a Director of the
Company; and/or
• to satisfy contractual commitments under legacy remuneration
arrangements.
For these purposes, “payments” includes the satisfaction of awards of
variable remuneration and, in relation to an award over shares, the
terms of the payment are “agreed” at the time the award is granted. Any
such payment shall include the conversion of any Conditional Award or
the satisfaction of the exercise of any Nil Cost Option under the Scheme
Rules (or the cancellation of any such Conditional Award or Nil Cost
Option in exchange for a cash payment, as described in the Scheme
Rules) and the delivery of the value attributable to the Ordinary Shares
issued upon the conversion of any Conditional Award or the exercise of
any Nil Cost Option in accordance with the Scheme Rules.
This report was approved by the Board and signed on its behalf by:
David Lis
Chairman, Remuneration Committee
5 March 2020
GovernanceMelrose Industries PLC Annual Report 2019 112
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
position and performance, business model and strategy.
This responsibility statement was approved by the Board of Directors
on 5 March 2020 and is signed on its behalf by:
Geoffrey Martin
Group Finance Director
5 March 2020
Simon Peckham
Chief Executive
5 March 2020
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.
Under applicable law and regulations, the Directors are also
responsible for preparing a strategic report, directors’ report,
directors’ remuneration report and corporate governance statement,
each of which complies with law and regulation.
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.
Melrose Industries PLC Annual Report 2019
Independent auditor’s report to the members
of Melrose Industries PLC
113
Report on the audit of the financial statements
1. Opinion
In our opinion:
• the financial statements of Melrose Industries PLC (the ‘Company’) and its subsidiaries (the ‘group’) give a true and fair view
of the state of the group’s and of the Company’s affairs as at 31 December 2019 and of the group’s profit for the year then ended;
• the group financial statements have been properly prepared in accordance with International
Financial Reporting Standards (IFRSs) as adopted by the European Union;
• the 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 and Company Balance Sheets;
• the Consolidated and Company Statements of Changes in Equity;
• the Consolidated Statement of Cash Flows; and
• the related notes 1 to 31 to the consolidated financial statements and the related notes 1 to 14 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 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).
2. 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 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. The non-audit services provided to the group for the
year are disclosed in note 7 to the financial statements. We confirm that the non-audit services prohibited by the FRC’s Ethical Standard were
not provided to the group or the Company.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Financial statementsMelrose Industries PLC Annual Report 2019 114
Independent auditor’s report to the members
of Melrose Industries PLC
3. Summary of our audit approach
Key audit matters
Materiality
Scoping
Significant changes
in our approach
The key audit matters that we identified in the current year were:
• Impairment of goodwill and acquired intangibles
• Classification of adjusting items
• Revenue recognition
• Loss-making contract provisions; and
• Valuation of inventory
Within this report, key audit matters are identified as follows:
Newly identified
Increased level of risk
Similar level of risk
Decreased level of risk
The materiality that we used for the group financial statements was £42 million (FY 18: £29 million) which was
determined on the basis of adjusted profit before tax. The approach to materiality was different in 2018, when the
materiality was a judgement based on a range of benchmarks (including revenue, net assets and adjusted profit before
tax) due to the effects of the mid-year acquisition of GKN. More details on this are provided in application of materiality
section of this report.
We selected 34 reporting units representing 59% of the Group’s 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 (“SAP”) on certain account balances and
transactions at a further 34 reporting units. Coverage from full scope and SAP scope components totals 79% of the
Group’s revenue and 93% of operating profit.
Following the acquisition of GKN plc in 2018, last year we identified a key audit matter in relation to recognition and
measurement of intangible assets, provisions and contingent liabilities acquired. Following the completion of the
accounting for the acquisition during 2019, and given the scale of the adjustments recorded upon completion, this was
not considered to be a key audit matter for the 2019 audit.
Valuation of Loss-making contract provisions recognised upon acquisition was a part of the acquisition accounting key
audit matter in 2018, and continues as a separate key audit matter in the current year, which reflects changes to our risk
assessment for the ongoing group.
Our approach to scoping has remained consistent with prior year.
4. Conclusions relating to going concern, principal risks and viability statement
4.1. 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 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.
4.2. Principal risks and viability statement
Based solely on reading the directors’ statements and considering whether they were consistent with the
knowledge we obtained in the course of the audit, including the knowledge obtained in the evaluation of the
directors’ assessment of the group’s and the company’s ability to continue as a going concern, we are required
to state whether we have anything material to add or draw attention to in relation to:
• the disclosures on pages 46 to 55 that describe the principal risks, procedures to identify emerging risks,
and an explanation of how these are being managed or mitigated;
• the directors’ confirmation on page 47 that they have carried out a robust assessment of the principal and
emerging risks facing the group, including those that would threaten its business model, future performance,
solvency or liquidity; or
• the directors’ explanation on page 45 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.
Going concern is the
basis of preparation of
the financial statements
that assumes an entity will
remain in operation for a
period of at least 12 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.
Viability means the ability of
the group to continue over
the time horizon considered
appropriate by the directors.
We confirm that we have
nothing material to report, add
or draw attention to in respect
of these matters.
Melrose Industries PLC Annual Report 2019 115
5. 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.
5.1. Impairment of Goodwill and Acquired Intangibles
Key audit matter
description
Total goodwill on the balance sheet at 31 December 2019 is £3,653 million, and total acquired intangible assets is
£5,689 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 is limited and sensitive to changes in key assumptions:
• Driveshafts – Automotive division (goodwill £688 million, other intangible assets £719 million);
• Security and Smart Technologies (goodwill £172 million following a recorded impairment of £179 million, other
intangible assets £124 million);
• Powder Metallurgy (“PM”) (goodwill £503 million, other intangible assets £654 million)
The impairment in the Security and Smart Technologies CGU was recorded in the first half of the year, following
deterioration in its performance due to a combination of both external and internal factors, including the impact
of US tariffs and trading headwinds.
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 (taking into account the current downturn in the
automotive market and the impact of restructuring activity in PM and Driveshafts and planned product launches in
Security) and determination of the correct discount and growth rates to be used in the model.
Further details are included 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.
Refer also to page 85 of the Audit Committee report.
How the scope of
our audit responded
to the key audit matter
We assessed the design and implementation of management’s controls covering the valuation of goodwill and other
intangible assets, in particular the key controls over the forecasts that underpin the value in use models and controls
around management’s preparation of impairment models.
We assessed management’s impairment paper, underlying analysis and supporting financial models, 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 2020 forecast and later forecast periods with
reference to historical performance and our knowledge of the businesses, in particular pricing assumptions,
restructuring activity in the year and the status of the end-markets, as well as the current order book and external
market data;
• considering the extent to which the possible effects of Brexit, climate change and coronavirus should be included
in the impairment models;
• benchmarking long-term growth rates to applicable macro-economic and market data;
• engaging our internal valuation specialists to challenge the discount rate applied, by obtaining the underlying data
used in the calculation and benchmarking it against market data and comparable organisations, and by
evaluating the underlying process used to determine the risk adjusted cash flow projections;
• validating the integrity of the impairment models through testing of the mathematical accuracy, verifying the
application of the input assumptions and testing its compliance with IAS 36;
• performing sensitivity analysis to identify the key assumptions which have a significant effect on the model; and
• reviewing the sensitivity disclosures included by management in note 11 to the financial statements,
challenging management’s choice regarding the assumptions to be sensitised, and re-performing the
underpinning calculations.
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.
The results of the impairment tests revealed that the recoverable amount is dependent on the success of new product
launches for Security, and the recovery of the automotive market and effect on margin of recent restructuring activity for
Driveshafts and PM.
We determined that the assumptions applied in the impairment model were within an acceptable range, that the overall
position adopted was reasonable and that the disclosures in respect of sensitivity to reasonably possible changes to
key assumptions are appropriate.
Key observations
Financial statementsMelrose Industries PLC Annual Report 2019
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Independent auditor’s report to the members
of Melrose Industries PLC
Continued
5.2. Classification of adjusting items
Key audit matter
description
In addition to the statutory results, the Group continues to present adjusted profit measures which are before the impact
of adjusting items. Judgements made by management regarding the classification of adjusting costs and income
therefore have a significant impact on the presentation of the Group’s results. In total, adjustments of £783 million have
been made to the statutory profit before tax of £106 million to derive adjusted profit before tax of £889 million.
How the scope of
our audit responded
to the key audit matter
Adjusting items included:
• Amortisation of acquisition intangible assets (£534 million);
• Restructuring costs (£238 million);
• Impairment of assets (£179 million);
• Equity accounted investments adjustments (£28 million);
• Equity settled compensation scheme charges (£17 million);
• Income from releases and changes in discount rate of fair value items (£153 million credit);
• Gain on movement in fair value of derivatives (£55 million); and
• Acquisition and disposal costs (£4 million).
Explanations of each adjustment are set out in note 6 to the financial statements. Refer also to page 85 (of the Audit
Committee report).
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.
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.
Specifically, we:
• assessed the consistency of items included year on year and the application of management’s accounting policy,
challenging the nature of these items in comparison to ESMA guidance and latest FRC guidance, and challenging
in particular the inclusion of those items that recur annually.
• tested a sample of adjusting items by agreeing to source documentation and evaluating 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.
• focused our challenge on certain categories within adjusted items where we assessed that increased level of
judgement had been applied by management, and there was increased opportunity for fraud or error. These
included restructuring costs and movements in fair value adjustments.
• agreed the amounts recorded through to underlying financial records and other audit support to test that the
amounts disclosed were complete and accurate.
• where management recognised releases to fair value adjustments, we challenged this classifcation and assessed
whether events and conditions existed to cause a release of the provision recognised as part of acquisition
accounting.
• for the restructuring costs, ascertained that the recognised costs meet the recognition criteria set out in
IAS 37 ‘Provisions’.
• 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.
Key observations
The value of adjusting items results in a material difference between the statutory and adjusted results. Whilst we note
that the majority of adjusting items recur from period to period, their classification and presentation is consistent with the
Group’s policy.
Melrose Industries PLC Annual Report 2019
5.3. Revenue Recognition in respect of RRSPs
117
Key audit matter
description
How the scope of
our audit responded
to the key audit matter
The group has recognised total revenue of £10,967 million in 2019.
There are judgements taken within the revenue recognition of material Risk and Revenue Sharing Partnerships
(“RRSPs”) in the Aerospace division (where revenue totals £3,852 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 on application of principles set out in
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. The amount of
revenue recognised from RRSP contracts during the year was £679 million, which includes variable consideration of
£45 million (2018: £415 million, which included variable consideration of £16 million).
Furthermore, the revenue recognition models used by management for RRSPs involve a number of significant
assumptions based on historical data and trends, such as engineering requirements to support programmes and the
expected life of mature engines. Any changes to these assumptions requires a higher level of judgement and estimation.
This increases the risk that revenue recognition may not be appropriate.
Refer to page 83 (of the Audit Committee report) and page 140 (note 3 significant accounting policies)
and pages 140 to 141 (note 4).
We assessed the design and implementation of controls around the recognition of revenue for RRSP contracts.
For each RRSP contract with material variable consideration, we recalculated the amount of revenue recognised to
verify 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;
• 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;
• obtained and reviewed contract modifications, including programme share or changes in pricing, and tested that
they have been appropriately included in the RRSP models; and
• tested underlying data included in the trend analysis above and performed independent industry research for
evidence that may contradict management’s assumptions on margin and engine life.
For the changes in the key assumptions in the revenue recognition model, we performed specific procedures
that included:
• consideration and challenge of the position papers prepared by management, and the updated model prepared
to reflect the changed assumptions;
• audit of the underlying data that has been used in the determination of the assumptions including usage profiles,
industry data and customer correspondence. We also assessed the processes and controls in place within the
Aerospace business to review the underlying data; and
• assessment of the disclosure provided in the financial statements in relation to the changes in these assumptions
against the requirements of IFRS 15.
Key observations
We are satisfied that the key assumptions made in determining the value of revenue recognised on RRSP contracts
with variable consideration were within an acceptable range and the overall position was reasonable.
We consider the disclosure provided in the financial statements in relation to the changes in the key assumptions is
appropriate and consistent with the requirements of IFRS 15.
Financial statementsMelrose Industries PLC Annual Report 2019
118
Independent auditor’s report to the members
of Melrose Industries PLC
Continued
5.4. Valuation of Loss-making contracts provision
Key audit matter
description
How the scope of
our audit responded
to the key audit matter
In 2018, upon acquisition of GKN, the group recognised provisions of £629 million in relation to loss-making contracts.
At 31 December 2019, following utilisation and release during the year, £384 million remained unutilised. The
methodology supporting the provisions is inherently complex and involves a high level of management judgement
and estimation. We consider the following to be the key judgements and estimates in relation to these provisions:
• accounting for the effect of negotiations and correspondence with customers on the existing loss-making
contracts provision;
• forecast cost projections including the level of material, direct labour and contract-related overheads;
• calculation of utilisation for the year;
• assessing changes in inputs and assumptions to ascertain the correct timing of releases; and
• the classification of provision utilisation and release.
Refer to page 84 (of the Audit Committee report) and page 139 (note 3 significant accounting policies) and
page 162 (note 21).
We assessed the design and implementation of key controls over the review and estimation of loss-making
contract provisions.
For a sample of loss-making contract provision balances (including all material provisions) our work included, but was
not limited to:
• obtaining and validating supporting documentation for key assumptions and inputs, for example:
– price data from corresponding contracts;
– volumes from independent and recognised industry reports;
– invoice and supplier documentation that supports costs; and
– executed agreements for changes to pricing or early termination of contracts and other terms;
• making enquiry of legal, commercial, operational, programme and engineering management to understand any
changes to the relevant programmes that would impact valuation (e.g. new tooling, manufacturing improvements
and efficiencies, changes in raw material costs);
• reviewing relevant third party correspondence (with customers and suppliers) and assessed the impact on the
valuation of the provision;
• recalculating the amount of the provision utilised in the year, and testing assumptions and inputs used to
calculate utilisation;
• for any releases of provisions, challenging the judgements applied by management and examined appropriate
audit evidence supporting the release (new commercial agreements, price amendments, support for cost
reductions); and
• ascertaining that the releases and utilisation are classified in accordance with the accounting policy.
Key observations
We are satisfied that the loss-making contracts provision at 31 December 2019 is valued appropriately, that
releases and utilisation recorded during the year were appropriate, and that key estimates formed by management
are reasonable.
5.5. Valuation of inventory
Key audit matter
description
The group has recorded inventory amounts (net of provisions) of £1,332 million. We have identified a key audit matter
in respect of inventory valuation across the group, due to the level of judgement required in determining provisions for
obsolete items and the appropriate point at which to recognise permanent write downs. We paid particular regard to
those former GKN businesses (Aerospace division) where there is a history of inventory writedowns and rework stock.
Net inventory for these sites totals £99 million. We consider this to be a potential risk of fraud.
Refer to page 85 (of the Audit Committee report), note 3: Critical accounting judgements and key sources of estimation
uncertainty and note 16: Inventory.
How the scope of
our audit responded
to the key audit matter
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:
• 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; and
• performing testing of net realisable value of finished goods and subsequent sales;
For the inventory held with in GKN businesses (Aerospace division), we the performed the following additional
procedures:
• assessing the design and implementation of inventory provisioning controls both at the local plant level and
at the divisional and group level;
• performing detailed sample tests of inventory identified at the stock count, making for those GKN Aerospace
businesses where there is a fraud risk, making direct enquires of engineers and programme managers where
applicable to understand the nature of the stock and its realisable value; and
• performing an analytical review of levels of scrap year on year, relative to programme, nature of inventory and any
other site specifics.
Key observations
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.
Melrose Industries PLC Annual Report 2019
119
6. Our application of materiality
6.1. 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:
Materiality
Basis for determining
materiality
Rationale for the
benchmark applied
Group financial statements
£42 million (2018: £29 million). The increase was driven
by an increased profit for the year, with GKN being
owned for the full year.
5% of adjusted pre-tax profit.
We consider the adjusted pre-tax profit to be the
appropriate benchmark. This has been reconciled at
page 144 of the financial statements.
In prior year, 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.
Adjusted profit before tax is a key measure used by
management in monitoring the Group’s performance
and in communication to shareholders. This approach
differs from the prior year where we considered a
range of benchmarks, including revenue, underlying
profit and net assets, due to the impact of the timing of
the acquisition of GKN Plc. and the resulting focus on
the balance sheet.
Company financial statements
£8.7 million (2018: £14.5 million)
We determined materiality based on net assets, which
was then capped at 35% of Group materiality in order
to address the risk of aggregation when combined with
other businesses.
In our professional judgement we believe that use of
a balance sheet measure is appropriate for a holding
company. Materiality has been capped at 35% of
Group materiality. This is with reference to the net asset
position of the Company when compared to the net
asset position of the Group.
Adjusted PBT and Group materiality
Group materiality
£41.6 million
Component materiality
range £12.5 million to £5 million
Audit Committee reporting
threshold £2 million
Adjusted PBT £889 million
6.2. Performance materiality
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 for the 2019 audit (2018: 60%). In determining performance materiality, we considered the following factors:
• our assessment of the complexity of the group and nature of the group’s business model; and
• the de-centralised nature of the group’s control environment and its variation across the group.
6.3. Error reporting threshold
We agreed with the Audit Committee that we would report to the Committee all audit differences in excess of £2 million (2018: £1 million), 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.
Financial statementsMelrose Industries PLC Annual Report 2019 120
Independent auditor’s report to the members
of Melrose Industries PLC
Continued
7. An overview of the scope of our audit
7.1. Identification and scoping of components
There has been significant change in the structure of the Group over the past two years following the acquisition of GKN Plc.
There are now five operating segments in the continuing operations of the group:
• Aerospace;
• Automotive;
• Powder Metallurgy;
• Nortek Air Management; and
• Other Industrial (which consists of Brush, Security, and Ergotron).
In addition to the operating segments above, the group has a number of central cost centres which report to the Board and include head office
companies for corporate functions and costs.
Discontinued operations includes the Walterscheild Powertrain business for the 6 months it was part of the group, and the Wheels business
for the full year. The scoping discussed below is based on consolidated group results including continuing and discontinued operations.
Each division consists of a number of reporting units, and manages operations on a geographical and functional basis. There are
326 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 68 components (2018: 72), of which
• 19 relate to components that form part of the Aerospace segment;
• 23 relate to components that form part of the Automotive segment;
• 7 relate to components that form part of the Powder Metallurgy segment;
• 4 relate to components that form part of the Nortek Air management;
• 5 relate to components that form part of the Other Industrial segment;
• 2 related to discontinued operations; and 8 relate to corporate cost centres.
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 million to £12.5 million.
Overall scope
Full scope audit work was completed on 34 components and the head office function, and audit procedures have also been performed over
certain balances within 34 other components. In total our scope represented 79% of Group revenue, 93% of the operating profit and 89% of
Group net assets.
Aerospace
In respect of the Aerospace division, 9 components were subject to a full audit and 10 components were subject to the audit of specified
account balances. These 19 components together accounted for 85% of the Aerospace division’s revenue and 96% of the Aerospace division’s
operating profit and divisional costs.
Automotive
In respect of the Automotive division, 9 components were subject to a full audit and 14 components were subject to the audit of specified
account balances. These 23 components accounted for 88% of the Automotive division’s revenue and 97% of the Automotive division’s
operating profit and divisional costs.
Powder Metallurgy
In respect of the Powder Metallurgy division, 3 components were subject to a full audit and 4 components were subject to the audit of specified
account balances. These 7 components together accounted for 63% of the Powder Metallurgy division’s revenue and 92% of the Powder
Metallurgy division’s operating profit and divisional costs.
Nortek Air Management
In respect of the Nortek Air Management division, 3 components were subject to a full audit and 1 component was subject to an audit of
specified account balances. These 4 components together accounted for 62% of the Nortek Air Management division’s revenue and 76%
of the Nortek Air Management division’s adjusted operating profit and divisional costs.
Other Industrial
In respect of the Other Industrial division, 4 components were subject to a full audit and 1 components were subject to the audit of specified
account balances. These 5 components together accounted for 80% of the Other Industrial division’s revenue and 90% of the Other Industrial
division’s operating profit and divisional costs.
Company
The audit of the Company was performed by the group engagement team based at the Company’s head office.
Residual balances
All entities not subject to the audit procedures above were subject to analytical procedures by the group engagement team.
Melrose Industries PLC Annual Report 2019 121
7.2 How we worked with other auditors
The Group engagement team visited 28 of the Group’s largest and most complex businesses during 2019 with a particular focus on locations
where work was performed on significant audit risks. These visits, together with central analytics and enquiries of management and visits
performed in previous years, informed our risk assessment.
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 division has a dedicated senior member of the group audit team responsible for the supervision and
direction of components, including where appropriate sector-specific expertise. 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. Where we were unable to visit components after the year end due to the effects of
coronavirus, we performed alternative procedures to supervise and direct their work.
In total, as set out in the chart below we performed audit work on site at locations which together contributed 79% of Group revenue. 93% of
operating profit and net assets of 89%.
Revenue
Profit before tax
Net assets
Full audit scope
Audit of
specified balances
Review at
group level
59%
20%
21%
Full audit scope
Audit of
specified balances
Review at
group level
84%
9%
7%
Full audit scope
Audit of
specified balances
Review at
group level
81%
8%
11%
8. 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.
9. 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 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 Company or to cease operations, or have no realistic alternative but to do so.
Financial statementsMelrose Industries PLC Annual Report 2019 122
Independent auditor’s report to the members
of Melrose Industries PLC
Continued
10. 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 and non-compliance with laws
and regulations 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.
11. 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.
11.1. 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, we considered the following:
• the nature of the industry and sector, control environment and business performance including the design of the group’s remuneration
policies, key drivers for directors’ remuneration, bonus levels and performance targets;
• results of our enquiries of management, internal audit, legal counsel, operational staff and the audit committee about their own
identification and assessment of the risks of irregularities;
• any matters we identified having obtained and reviewed the group’s documentation of their 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 of fraud or non-compliance with laws and regulations;
• the matters discussed among the audit engagement team including significant component audit teams and involving relevant internal
specialists, including tax, valuations, pensions and IT regarding how and where fraud might occur in the financial statements and any
potential indicators of fraud.
As a result of these procedures, we considered the opportunities and incentives that may exist within the organisation for fraud and identified
the greatest potential for fraud in the following areas: impairment of goodwill and intangibles, classification of adjusted items, revenue
recognition, valuation of loss-making contracts provisions, inventory and the finalisation of the acquisition accounting for GKN plc. In common
with all audits under ISAs (UK), we are also required to perform specific procedures to respond to the risk of management override.
We also obtained an understanding of the legal and regulatory frameworks that the group operates in, focusing on provisions of those laws
and regulations that had a direct effect on the determination of material amounts and disclosures in the financial statements. The key laws and
regulations we considered in this context included the UK Companies Act and Listing Rules, UK Bribery Act as well as pensions legislation and
tax legislation. In addition, we considered environment legislation in the jurisdictions the group operates in as having a fundamental effect on the
operations of the group.
11.2. Audit response to risks identified
As a result of performing the above, we identified the following key audit matters: impairment of goodwill and intangibles, classification of
adjusted items, revenue recognition, valuation of inventory and valuation of loss-making contracts provision as key audit matters related to the
potential risk of fraud. The key audit matters section of our report explains the matters in more detail and also 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 provisions of relevant
laws and regulations described as having a direct effect on the financial statements;
• enquiring of management, the audit committee and in-house legal counsel concerning actual and potential litigation and claims;
• 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, reading correspondence with HMRC and reviewing internal audit
reports; 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.
Melrose Industries PLC Annual Report 2019 123
Report on other legal and regulatory requirements
12. 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 the 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.
13. Matters on which we are required to report by exception
13.1. 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 Company, or returns adequate for our audit have not been received from
branches not visited by us; or
• the Company financial statements are not in agreement with the accounting records and returns.
We have nothing to report in respect of these matters.
13.2. 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.
14. Other matters
14.1. 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 17 years, covering the years ending 31 December 2003 to 31 December 2019.
14.2. 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).
15. 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.
Edward Hanson (Senior statutory auditor)
For and on behalf of Deloitte LLP
Statutory Auditor
London, United Kingdom
5 March 2020
Financial statementsMelrose Industries PLC Annual Report 2019 124
Consolidated Income Statement
Continuing operations
Revenue
Cost of sales
Gross profit
Share of results of equity accounted investments
Net operating expenses
Operating profit/(loss)
Finance costs
Finance income
Profit/(loss) before tax
Tax
Profit/(loss) after tax for the year from continuing operations
Discontinued operations
Loss for the year from discontinued operations
Loss after tax for the year
Attributable to:
Owners of the parent
Non-controlling interests
Earnings per share
Continuing operations
– Basic
– Diluted
Continuing and discontinued operations
– Basic
– Diluted
Adjusted(2) results from continuing operations
Adjusted revenue
Adjusted operating profit
Adjusted profit before tax
Adjusted profit after tax
Adjusted basic earnings per share
Adjusted diluted earnings per share
(1) Results for the year ended 31 December 2018 have been restated for discontinued operations (note 1).
(2) Defined in the summary of significant accounting policies (note 2).
Year ended
31 December
2019
£m
Restated(1)
Year ended
31 December
2018
£m
10,967
(8,732)
2,235
38
(1,955)
318
(221)
9
106
(51)
55
(106)
(51)
(60)
9
(51)
0.9p
0.9p
(1.2)p
(1.2)p
11,592
1,102
889
699
14.3p
14.3p
8,152
(6,573)
1,579
34
(2,000)
(387)
(160)
5
(542)
75
(467)
(8)
(475)
(475)
–
(475)
(11.8)p
(11.8)p
(12.0)p
(12.0)p
8,645
813
672
517
12.7p
12.7p
Notes
4, 5
15
7
5, 6
7
7
8
13
10
10
10
10
5
5, 6
6
6
10
10
Melrose Industries PLC Annual Report 2019
Consolidated Statement of Comprehensive Income
125
Loss after tax for the year
Items that will not be reclassified subsequently to the Income Statement:
Net remeasurement loss on retirement benefit obligations
Income tax credit 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 (expense)/income from equity accounted investments
Transfer to Income Statement from equity of cumulative translation differences
on disposal of foreign operations
Losses on hedge relationships
Transfer to Income Statement on hedge relationships
Income tax (charge)/credit relating to items that may be reclassified
Other comprehensive (expense)/income for the year
Total comprehensive (expense)/income for the year
Attributable to:
Owners of the parent
Non-controlling interests
Year ended
31 December
2019
£m
Year ended
31 December
2018
£m
(51)
(475)
Notes
24
8
15
13
8
(32)
15
(17)
(346)
(23)
(13)
(17)
–
(19)
(418)
(435)
(486)
(494)
8
(486)
(36)
9
(27)
625
9
–
(97)
(2)
29
564
537
62
44
18
62
Financial statementsMelrose Industries PLC Annual Report 2019
126
Consolidated Statement of Cash Flows
Operating activities
Net cash from operating activities from continuing operations
Net cash (used in)/from operating activities from discontinued 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
Purchase of investments
Settlement of derivatives used in net investment hedging
Equity accounted investment additions
Acquisition of subsidiaries, net of cash acquired
Interest received
Net cash used in investing activities from continuing operations
Net cash used in investing activities from discontinued operations
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 principal under lease obligations
Dividends paid to non-controlling interests
Dividends paid to owners of the parent
Net cash (used in)/from financing activities from continuing operations
Net cash used in financing activities from discontinued operations
Net cash (used in)/from financing activities
Net (decrease)/increase in cash and cash equivalents
Cash and cash equivalents at the beginning of the year
Effect of foreign exchange rate changes
Cash and cash equivalents at the end of the year
Year ended
31 December
2019
£m
Notes
Restated(1)
Year ended
31 December
2018
£m
27
27
13
15
12
15
27
9
27
27
27
18, 27
769
(20)
749
169
(465)
24
(54)
67
(50)
(100)
–
–
9
(400)
(15)
(415)
–
–
(456)
350
–
(70)
(6)
(231)
(413)
(2)
(415)
(81)
415
(17)
317
330
43
373
(4)
(328)
18
(35)
66
–
–
(3)
(1,009)
5
(1,290)
(14)
(1,304)
(224)
(1)
(820)
2,558
(51)
–
(1)
(129)
1,332
–
1,332
401
16
(2)
415
(1) Amounts for the year ended 31 December 2018 have been restated for discontinued operations (notes 1 and 27).
As at 31 December 2019, the Group had net debt of £3,283 million (31 December 2018: £3,482 million). A reconciliation of the movement
in net debt is shown in note 27.
Melrose Industries PLC Annual Report 2019
Consolidated Balance Sheet
127
Non-current assets
Goodwill and other intangible assets
Property, plant and equipment
Investments
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
Assets classified as held for sale
Total assets
Current liabilities
Trade and other payables
Interest-bearing loans and borrowings
Lease obligations
Derivative financial liabilities
Current tax liabilities
Provisions
Liabilities associated with assets held for sale
Net current assets
Non-current liabilities
Trade and other payables
Interest-bearing loans and borrowings
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
Translation and hedging reserve
Retained earnings
Equity attributable to owners of the parent
Non-controlling interests
Total equity
31 December
2019
£m
Notes
Restated(1)
31 December
2018
£m
11
14
12
15
22
25
17
16
17
25
18
13
5
19
20
28
25
21
13
19
20
28
25
22
24
21
5
26
26
9,784
3,432
48
436
160
38
424
11,098
3,171
–
492
132
26
504
14,322
15,423
1,332
1,970
19
20
317
65
3,723
18,045
1,489
2,328
15
74
415
–
4,321
19,744
2,461
2,583
89
71
106
106
412
46
3,291
432
444
3,464
511
216
772
1,121
675
7,203
10,494
7,551
333
8,138
109
(2,330)
78
1,197
7,525
26
7,551
377
5
204
137
391
–
3,697
624
762
3,378
52
227
874
1,413
1,080
7,786
11,483
8,261
333
8,138
109
(2,330)
495
1,492
8,237
24
8,261
(1) Amounts at 31 December 2018 have been restated for the finalisation of acquisition accounting for GKN (note 1).
The Financial Statements were approved and authorised for issue by the Board of Directors on 5 March 2020 and were signed on its behalf by:
Geoffrey Martin
Group Finance Director
5 March 2020
Simon Peckham
Chief Executive
5 March 2020
Financial statementsMelrose Industries PLC Annual Report 2019
128
Consolidated Statement of Changes in Equity
Issued
share
capital
£m
Share
premium
account
£m
Merger
reserve
£m
Other
reserves
£m
Translation
and hedging
reserve
£m
At 1 January 2018
Loss for the year
Other comprehensive income/(expense)
Total comprehensive income/(expense)
Acquisition of GKN
Purchase of non-controlling interests
Implementation of IFRS 9
Dividends paid
Equity–settled share–based payments
At 31 December 2018
(Loss)/profit for the year
Other comprehensive expense
Total comprehensive (expense)/income
Dividends paid
Equity–settled share–based payments
133
1,493
109
(2,330)
–
–
–
–
–
–
169
31
5,631
1,014
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
333
8,138
109
(2,330)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
At 31 December 2019
333
8,138
109
(2,330)
Further information on issued share capital and reserves is set out in note 26.
(58)
–
553
553
–
–
–
–
–
495
–
(417)
(417)
–
–
78
Retained
earnings
£m
2,538
(475)
(34)
(509)
–
(419)
(2)
(129)
13
1,492
(60)
(17)
(77)
(231)
13
1,197
Equity
attributable
to owners
of the
parent
£m
Non-
controlling
interests
£m
Total
equity
£m
1,885
(475)
537
62
6,657
(224)
(2)
(130)
13
–
–
18
18
857
(850)
–
(1)
–
24
8,261
9
(1)
8
(6)
–
(51)
(435)
(486)
(237)
13
26
7,551
1,885
(475)
519
44
5,800
626
(2)
(129)
13
8,237
(60)
(434)
(494)
(231)
13
7,525
Melrose Industries PLC Annual Report 2019 Notes to the Financial Statements
129
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 16 to 35.
The Consolidated Financial Statements of the Group for the year ended 31 December 2019 were authorised in accordance with a resolution
of the Directors of Melrose Industries PLC on 5 March 2020.
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.
Prior year information
The results for the year ended 31 December 2018 include GKN for eight months only.
The Consolidated Income Statement and Consolidated Statement of Cash Flows have been restated for discontinued operations.
The Consolidated Balance Sheet has been restated for the finalisation of acquisition accounting for the purchase of GKN.
Discontinued operations
On 25 June 2019, the Group completed the disposal of the Walterscheid Powertrain Group to One Equity Partners. Additionally, during
the second half of the year the Group formally commenced a disposal process, aligned to its strategic priority, to dispose of the Wheels &
Structures business, with a high expectation this process will conclude within one year. Both the Walterscheid Powertrain Group and Wheels
& Structures businesses were previously reported within the Other Industrial operating segment and are shown as discontinued operations in
these Consolidated Financial Statements, with the Income Statement, the Statement of Cash Flows and their associated notes restated
accordingly. Further detail is shown in note 13.
Finalisation of acquisition accounting for the purchase of GKN
There were a small number of final adjustments to the fair value of assets and liabilities acquired that were identified in the first half of the year
up to 18 April 2019, being 12 months since the acquisition, that have impacted the restated Balance Sheet at 31 December 2018, as follows:
• Provisions and non-current trade and other payables have increased by £10 million;
– Provisions increased by £26 million, including a £16 million reclassification from trade and other payables;
– Trade and other payables decreased by £16 million due to a reclassification to provisions;
• Deferred tax assets have reduced by £17 million;
• Acquisition intangible assets have increased by £21 million; and
• Goodwill has correspondingly increased by £6 million.
There has been no restatement of the Income Statement or Statement of Comprehensive Income for the year ended 31 December 2018
as a result of the finalisation of fair values on acquisition accounting.
1.1 New Standards, Amendments 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, Amendments and Interpretations. Their adoption
has not had a significant impact on the comparative amounts reported in these Financial Statements but IFRS 16 has had a significant impact
on the current year:
• 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
• Amendments to IFRS 9, IAS 39 and IFRS 7: Modification of specific hedge accounting requirements as a result
of the ongoing interest rate benchmark reforms
The Group adopted IFRS 16 “Leases” on 1 January 2019 using the modified retrospective approach, resulting in no adjustments to the prior
year comparatives. IFRS 16 superseded the previous lease guidance, including IAS 17: “Leases” and related interpretations. IFRS 16 requires all
leases, except where exemptions are applied, to be recognised on the Balance Sheet as a lease liability with a corresponding right-of-use asset
presented within property, plant and equipment. As a result of the transition to IFRS 16, the Group recognised right-of-use assets of
£589 million and lease liabilities of £589 million.
As part of the initial application of IFRS 16, the Group has applied the following exemptions available: IFRS 16 guidance has not been applied
to leases with a lease term which ends within 12 months of the date of initial application or to leases of low value assets. Payments relating
to these leases are recognised as an expense in the Income Statement over the lease term and no right-of-use asset or lease liability
is recognised.
The Group opted to apply the relief option available under IFRS 16, which permits any right-of-use asset to be adjusted by the value of any
associated onerous lease provision recognised in the Balance Sheet as at 31 December 2018, as an alternative to performing an impairment
review. As a result onerous lease liabilities, previously held within property related cost provisions, of £20 million have been transferred to the
IFRS 16 right-of-use asset following adoption of IFRS 16 on 1 January 2019.
The lease liabilities were measured at the present value of the remaining lease payments discounted at the incremental borrowing rate as at
1 January 2019. On transition, the right-of-use assets were measured at an amount equal to the lease liability, adjusted by the amount of any
prepaid or accrued lease payments.
Financial statementsMelrose Industries PLC Annual Report 2019 130
Notes to the Financial Statements
Continued
1. Corporate information continued
1.1 New Standards, Amendments and Interpretations affecting amounts, presentation or disclosure
reported in the current year continued
In order to calculate the incremental borrowing rate, reference interest rates were derived for corporate bonds, for a period of up to 15 years.
Interest rates were obtained for all key currencies and were subsequently adjusted to reflect the country risk premium and a leasing risk
premium. The leasing risk premium derived was adjusted to reflect whether the lease was deemed to be secured or unsecured. The Group
applied a single discount rate to a portfolio of leases with similar characteristics, in line with the practical expedient available under IFRS 16.
For leases that were classified as finance leases under IAS 17, the carrying amount of the right-of-use asset and the corresponding lease liability
at 1 January 2019 was determined to be the carrying amount of the lease asset and lease liability under IAS 17 immediately before that date.
The following explains the difference between operating lease commitments disclosed, applying IAS 17, at 31 December 2018 and the lease
liability recognised on adoption of IFRS 16 at 1 January 2019.
Total minimum lease payments reported at 31 December 2018 under IAS 17
Change in assessment of lease term under IFRS 16
Leases outside the scope of IFRS 16
Impact of discounting lease liability under IFRS 16
Lease liability recognised on transition to IFRS 16 at 1 January 2019
£m
710
32
(11)
(142)
589
1.2 New Standards, Amendments and Interpretations in issue but not yet effective
At 31 December 2019, the following Standards, Amendments and Interpretations were in issue but not yet effective (and in some cases have
not been adopted by the EU):
• IFRS 17: Insurance contracts
• IFRS 10 and IAS 28 (amendments): Sale or contribution of assets between an investor and an associate or joint venture
• Amendments to IFRS 3: Definition of a business
• Amendments to IAS 1 and IAS 8: Definition of material
The Directors do not expect that the adoption of the above Standards, Amendments and Interpretations will have a material impact on the
Financial Statements of the Group in future periods.
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.
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 191 to 195 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 (“EAIs”).
Adjusted profit measures exclude items which are significant in size or volatility or by nature are non-trading or non-recurring, any item released
to the Income Statement that was previously a fair value item booked on an acquisition, and include adjusted profit from EAIs.
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 related 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”) in 2018 for occupational schemes; and
• The net release of fair value items booked on acquisitions.
Melrose Industries PLC Annual Report 2019 131
2. Summary of significant accounting policies continued
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:
• The net effect on tax of significant restructuring from strategy changes that are not considered by the Group to be part of the normal
operating costs of the business; 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 44 of the Finance Director’s review.
Business combinations and goodwill
The acquisition of subsidiaries is accounted for using the acquisition method. The cost of acquisition is measured at the fair value of assets
transferred, the liabilities incurred or assumed at the date of exchange of control and equity instruments issued by the Group in exchange for
control of the acquiree. Control is achieved where the Company has the power to govern the financial and operating policies of an investee
entity so as to obtain benefits from its activities. Costs directly attributable to business combinations are recognised as an expense in the
Income Statement as incurred.
The acquired identifiable assets and liabilities are measured at their fair value at the date of acquisition except those where specific guidance
is provided by IFRSs. Non-current assets and directly attributable liabilities that are classified as held for sale in accordance with IFRS 5:
“Non-current assets held for sale and discontinued operations”, are recognised and measured at fair value less costs to sell. Also, deferred tax
assets and liabilities are recognised and measured in accordance with IAS 12: “Income taxes”, liabilities and assets related to employee benefit
arrangements are recognised and measured in accordance with IAS 19 (revised): “Employee benefits” and liabilities or equity instruments
related to the replacement by the Group of an acquiree’s share-based payments awards are measured in accordance with IFRS 2: “Share-
based payment”. Any excess of the cost of the acquisition over the fair values of the identifiable net assets acquired is recognised as goodwill.
If the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, the Group
reports provisional amounts where appropriate. Those provisional amounts are adjusted during the measurement period, or additional assets
or liabilities recognised, to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known,
would have affected the amounts recognised at that date.
The measurement period is the period from the date of acquisition to the date the Group obtains complete information about facts and
circumstances that existed as of the acquisition date and is subject to a maximum period of one year.
Goodwill on acquisition is initially measured at cost, being the excess of the sum of the consideration transferred, the amount of any non-
controlling interest in the acquiree and the fair value of the acquirer’s previously held equity interest in the acquiree over the acquirer’s interest in
the net fair value of the identifiable assets, liabilities and contingent liabilities. Following initial recognition, goodwill is measured at cost less any
accumulated impairment losses. Goodwill is reviewed for impairment annually or more frequently if events or changes in circumstances indicate
that the carrying value may be impaired.
If, after reassessment, the Group’s interest in the fair value of the acquiree’s identifiable net assets exceeds the sum of the consideration
transferred, the amount of any non-controlling interest in the acquiree and the fair value of the acquirer’s previously held equity interest in the
acquiree, the excess is recognised immediately in profit or loss as a bargain purchase gain.
Financial statementsMelrose Industries PLC Annual Report 2019
132
Notes to the Financial Statements
Continued
2. Summary of significant accounting policies continued
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.
Sale of products and services
This revenue stream accounts for the majority of Group sales. Contracts in the Automotive, Powder Metallurgy, Nortek Air Management 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.
Melrose Industries PLC Annual Report 2019 133
2. Summary of significant accounting policies continued
Generally, during the design and development phase of a typical RRSP contract, the Group performs contractually agreed-upon tasks for
a customer. It is usual for the Intellectual Property Rights (“IPRs”) that underpin technology advancement or know-how to remain with the
Group such that the customer cannot benefit from the IPRs either on their own or together with other resources that are readily available to the
customer. Where IPRs are transferred to the customer the Group has determined this is not separately identifiable from other promises in the
contract due to an exclusivity clause for the supply of product. Accordingly, it has been determined that the Group’s promise to transfer goods
to its customer is a performance obligation that is separately identifiable and this uses development and know-how as an input.
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.
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 any of 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.
Financial statementsMelrose Industries PLC Annual Report 2019 134
Notes to the Financial Statements
Continued
2. Summary of significant accounting policies continued
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. 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.
Right-of-use assets arise under IFRS 16 and are depreciated over the shorter of the estimated life and the lease term.
Depreciation is calculated on a straight-line basis over the estimated useful life of the asset as follows:
Freehold land
Freehold buildings and long leasehold property
Short leasehold property
Plant and equipment
nil
over expected economic life not exceeding 50 years
over the term of the lease
3-15 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 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.
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.
Melrose Industries PLC Annual Report 2019 135
2. Summary of significant accounting policies continued
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, where there is a legal right of offset and an intention to net settle.
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.
Leases
Where a lease arrangement is identified, a liability to the lessor is included in the Balance Sheet as a lease obligation calculated at the present
value of minimum lease payments. A corresponding right-of-use asset is recorded in property, plant and equipment. Lease payments are
apportioned between finance costs and reduction of the lease liability so as to reflect the interest on the remaining balance of the liability.
Finance charges are recorded in the Income Statement within finance costs. Right-of-use assets are depreciated over the shorter of the
estimated useful life of the asset and the lease term.
Leases with a term of 12 months or less and leases for low value are not recorded on the Balance Sheet and lease payments are recognised
as an expense in the Income Statement on a straight-line basis over the lease term.
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 and contract assets, 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.
Investments
The Group has an investment in unlisted shares that are not traded in an active market, but are classified as financial assets, measured at fair
value. Fair value is determined by assessment of expected future dividends discounted to net present value. Any changes in fair value are
recognised in Other Comprehensive Income and accumulated in retained earnings. Dividends from investments are recognised in the Income
Statement when the Group’s right to receive the dividend is established.
Trade and other receivables
Trade 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. In measuring the
expected credit losses, the Group considers all reasonable and supportable information such as the Group’s past experience at collecting
receipts, any increase in the number of delayed receipts in the portfolio past the average credit period, and forward looking information such
as forecasts of future economic decisions.
Financial statementsMelrose Industries PLC Annual Report 2019 136
Notes to the Financial Statements
Continued
2. Summary of significant accounting policies continued
Financial instruments – liabilities
Recognition and derecognition of financial 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. The Group derecognises financial liabilities when the Group’s
obligations are discharged, significantly modified, cancelled or they expire.
Classification and measurement
Non-derivative financial liabilities are subsequently measured at amortised cost using the effective interest method, with interest expense
recognised on an effective interest rate 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 gross carrying amount of the financial liability.
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 25 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 and are designated as such.
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.
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 cash flow hedges or hedges of net investments in foreign operations.
The Group has chosen to early adopt the amendments to IFRS 9 for the reporting period ending 31 December 2019, which are mandatory for
annual reporting periods on or after 1 January 2020. Adopting these amendments allows the Group to continue hedge accounting during the
period of uncertainty arising from interest rate benchmark reforms. Further disclosure is set out in note 25.
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 equity. If the hedged item is
time-period related, then the amount accumulated in equity is reclassified to profit or loss on an appropriate basis.
Gains and losses accumulated in equity are recognised immediately in the Income Statement when the foreign operation is disposed.
Melrose Industries PLC Annual Report 2019 137
2. Summary of significant accounting policies continued
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: “Revenue from contracts with customers”.
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.
Financial statementsMelrose Industries PLC Annual Report 2019 138
Notes to the Financial Statements
Continued
2. Summary of significant accounting policies continued
Taxation
The tax expense is based on the taxable profits for the period and represents the sum of the tax paid or currently payable and deferred tax.
Taxable profit differs from net profit as reported in the Income Statement because it excludes items of income or expense that are taxable or
deductible in other years and it further excludes items that are never taxable or deductible. The Group’s liability for current tax is calculated
using tax rates and tax laws that have been enacted or substantively enacted by the balance sheet date.
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.
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 disposal groups
Non-current assets and businesses classified as held for sale are measured at the lower of carrying amount and fair value less costs to sell.
Non-current assets and businesses are classified as held for sale if their carrying amount will be recovered principally through a sale transaction
rather than through continuing use. This condition is regarded as having been met only when the sale is highly probable and the asset or
business is available for immediate sale in its present condition. Management must be committed to the sale which should be expected to
qualify for recognition as a completed sale within one year from the date of classification.
Melrose Industries PLC Annual Report 2019 139
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.
Critical judgements
In the course of preparing the Financial Statements, a critical judgement within the scope of paragraph 122 of IAS 1: “Presentation of Financial
Statements” is made during the process of applying the Group’s accounting policies:
Adjusting items
Judgements are required as to whether items are disclosed as adjusting, with consideration given to both quantitative and qualitative factors.
Further information about the determination of adjusting items in the year ended 31 December 2019 is included in note 2.
There are no other critical judgements other than those involving estimates, that have had a significant effect on the amounts recognised in the
Financial Statements. Those involving estimates are set out below.
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 2019 was £3,653 million (31 December 2018: £4,058 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.
Security & Smart Technology (“SST”) group of CGUs
During the first half of the year ended 31 December 2019, a full impairment review was performed and an impairment charge of £179 million
was recorded in respect of the goodwill held in the SST group of CGUs. At 31 December 2019, goodwill and other intangible assets (not
including computer software and development costs) in the SST group of CGUs had a carrying value of £297 million, and no further impairment
charge was required. Should the business experience further unforeseen deterioration of results a future impairment may be required for these
assets. Further details and sensitivity disclosures are included in note 11.
Automotive Driveline and Powder Metallurgy groups of CGUs
The GKN businesses were acquired and recorded at fair value on 19 April 2018 and subsequently there has been a global automotive market
decline, naturally reducing the headroom, when testing goodwill and intangible assets in respect of the Automotive Driveline and Powder
Metallurgy groups of CGUs, at this point in the cycle.
The carrying amount of goodwill and other intangible assets (not including computer software and development costs) at the balance sheet
date was £1,407 million (31 December 2018: £1,530 million) for Automotive Driveline.
The carrying amount of goodwill and other intangible assets (not including computer software and development costs) at the balance sheet
date was £1,156 million (31 December 2018: £1,265 million) for Powder Metallurgy.
No impairment loss has been recognised in respect of these assets. Further information including sensitivity analysis on the key assumptions
is provided in note 11.
b) 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 and inflation rates to be used when valuing the plan’s defined benefit obligations. At 31 December 2019, the Group’s
retirement benefit obligation was a deficit of £1,121 million (31 December 2018: £1,413 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 24.
c) Loss-making contracts
Loss-making contract provisions represent 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 2019, the carrying value of the loss-making contract
provision in the Group was £384 million (31 December 2018: £616 million). If the margin of these contracts were to improve by one percentage
point, the impact on the loss-making contract provision would be £36 million.
Financial statementsMelrose Industries PLC Annual Report 2019 140
Notes to the Financial Statements
Continued
3. Critical accounting judgements and key sources of estimation uncertainty continued
d) Inventory provisioning
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 2019, there were provisions of £292 million (31 December 2018: £358 million) against gross inventory of £1,624 million
(31 December 2018: £1,847 million). A one percentage point increase in the proportion of gross inventory provided would increase the provision
by £16 million. An analysis of inventory is in note 16.
e) Estimates of future revenues and costs of long-term contractual arrangements
The Group has certain large, complex contracts where significant judgements and estimates are required in order to identify the performance
obligations and associated consideration.
A key judgement is the recognition and measurement of variable consideration, in particular relating to risk and revenue sharing partnerships
(“RRSPs”). A detailed review of the Group’s RRSP contracts determined where terms and conditions result in variable consideration and this is
further set out in note 17. Distinguishing between a contractual right and the economic compulsion of partners with regard to the sale of original
equipment (“OE”) components and aftermarket activities relies on an interpretation of complex legal agreements. This specific point governs
whether variable consideration is recognised on the sale of OE components and this can significantly impact the level of profitability from one
period to the next. Further disclosure is set out in note 4.
The forecast revenues and costs in respect of RRSP contracts are inherently imprecise and significant estimates are required to assess
the pattern of future maintenance activity, the costs to be incurred and escalation of revenue and costs. The estimates take account of the
uncertainties, constraining the expected level of revenue as appropriate. Measurement of variable consideration is driven by forecasting
aftermarket revenue per delivered engine which is in turn contingent on overall programme success, levels of discounting that might be offered
by the engine manufacturers (the Group’s customers), engineering requirements needed for optimal performance of the engine and the
allocation of revenue to individual units. In addition, where programmes are at an early stage the wider implications of any competing engines
as well as complications outside of the Group can be difficult to assess. Any of these inputs could change in the next year as programmes
evolve and due to the size and scale of these contracts, almost any modification could result in material changes in future periods.
The variable consideration asset calculated is the best estimate of revenue allocated to completed performance obligations using input
assumptions and constraints as detailed further in note 17. A reasonably possible change in assumptions, such as engineering requirements
to support programmes and the expected life of certain engines could have led to the variable consideration asset on the Balance Sheet
of £242 million (2018: £206 million) increasing to between £258 million and £263 million. This would have led to additional profit of between
£16 million and £21 million.
4. Revenue
An analysis of the Group’s revenue is as follows:
Continuing operations
Revenue recognised at a point in time
Revenue recognised over time
Revenue
Year ended
31 December
2019
£m
Restated
Year ended
31 December
2018
£m
9,751
1,216
10,967
7,149
1,003
8,152
As set out in the accounting policies in note 2, the Group has four primary revenue streams. There is little judgement or estimation in the
revenue recognition of three of these areas; (i) sale of products and services, (ii) design and build and (iii) construction contracts. However,
in the fourth area, as disclosed in note 3e, there is estimation involved in accounting for certain RRSP contracts, which arise exclusively in the
Aerospace business. RRSP contracts generally include the sale of products and services as well as certain aspects of design and build
arrangements. Further details are set out below.
Risk and revenue sharing partnerships
The Group has approximately £9 billion (2018: £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 2019. These performance obligations will be satisfied and revenue will be recognised
over a period of up to 29 years (2018: 30 years).
The amount of revenue recognised from RRSP contracts during the year was £679 million, which includes variable consideration of £45 million
(2018: £415 million, which included variable consideration of £16 million). Within this there is revenue from the delivery of product which is
recognised at a point in time of £637 million (2018: £393 million) and revenue from provision of service which is recognised over time of
£42 million (2018: £22 million). Due to the nature of certain of these RRSP arrangements, there is associated variable consideration and the
contract asset, including movements during the year, is disclosed in note 17.
Melrose Industries PLC Annual Report 2019 141
4. Revenue continued
The nature of products and services delivered in RRSP contracts varies depending on the individual terms. Typically, they include a design and
development phase (which has been determined not to be a distinct performance obligation and so no revenue is recognised) and two other
phases where the Group does have performance obligations and earns revenue:
i)
ii)
Sale of structural OE engine components, such as turbine cases, principally to engine manufacturers, where revenue is recognised at a
point in time; and
Aftermarket support which can include: sale of spare parts where revenue is recognised at a point in time and stand ready services for life
of engine obligations to maintain permanent technical, and other programme related, support functions. Obligations can occur at any time
during the engine life and include; engineering and technical support for engine configuration changes and provision of aftermarket
inventory support solutions.
RRSP revenue recognised over time
The nature of these RRSP contracts on long-term engine programmes means that, as a partner, the Aerospace business can share revenue
earned from maintenance, repair and overhaul services which are provided by the engine manufacturers (the Group’s customers) or their
sub-contractors, but not the Group. The Group has a stand ready obligation to contribute to certain of the partnerships which typically results
in the provision of services such as technical and other programme support activities over the whole life of the engine. These services occur
over the life of the engine and due to the nature of compensation from customer arrangements, which is often flight hour based, as well as
costs which are less predictable, revenue is recognised over time using the engine manufacturer’s actual overhaul costs as an input method.
This method is considered appropriate as it best reflects the customers’ receipt and consumption of benefit from the Group’s stand ready
performance obligation.
The total contract revenue includes amounts from: expected sales of OE engine components, expected sales of spare parts and aftermarket
revenue per delivered engine for stand ready services for the life of engine obligations. The total contract revenue is allocated to all of the
performance obligations.
During the year £3 million (2018: £nil) of revenue has been recognised relating to performance obligations satisfied by the Group in the previous
year, as risks have been reduced and the constraint reassessed. There has been a further £7 million (2018: £nil) of revenue recognised from
changes in assumptions which will also impact the revenue allocation between future years. Assumption changes were made following
operational progress with customers.
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.
Following a decision to explore strategic options for the Nortek Air Management business separate to the Security & Smart Technology
business, internal reporting provided to the CODM was revised. As a consequence, the Nortek Air & Security operating segment was revised
with the Security & Smart Technology business now included in the Other Industrial operating segment. Other Industrial has also been
impacted by the removal of the Walterscheid Powertrain and Wheels & Structures businesses, which have been included in discontinued
operations (note 13). Comparative results have been restated accordingly.
The operating segments are as follows:
Aerospace – a multi-technology global tier one supplier of both civil and defence airframes and engine structures, including Aerostructures
and Engine Systems.
Automotive – comprises 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 precision powder metal parts for the automotive and industrial sectors, as well as the production of
powder metal.
Nortek Air Management – comprises the Group’s Air Management businesses, which includes the Air Quality and 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. 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 data centres and non-residential applications.
Other Industrial – comprises the Group’s Ergotron, Brush and Security & Smart Technology businesses.
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.
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.
Financial statementsMelrose Industries PLC Annual Report 2019 142
Notes to the Financial Statements
Continued
5. Segment information continued
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 2019.
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 segment 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 2019
Continuing operations
Adjusted revenue
Equity accounted investments
Revenue
Timing of revenue recognition
At a point in time
Over time
Revenue
Year ended 31 December 2018 – restated
Continuing operations
Adjusted revenue
Equity accounted investments
Revenue
Timing of revenue recognition
At a point in time
Over time
Revenue
b) Segment operating profit
Aerospace
£m
Automotive
£m
Powder
Metallurgy
£m
Nortek Air
Management
£m
Other
Industrial
£m
3,852
(16)
3,836
2,644
1,192
3,836
4,739
(593)
4,146
4,146
–
4,146
1,115
(16)
1,099
1,099
–
1,099
1,178
–
1,178
1,157
21
1,178
708
–
708
705
3
708
Aerospace
£m
Automotive
£m
Powder
Metallurgy
£m
Nortek Air
Management
£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
1,140
–
1,140
1,140
–
1,140
751
–
751
744
7
751
Total
£m
11,592
(625)
10,967
9,751
1,216
10,967
Total
£m
8,645
(493)
8,152
7,149
1,003
8,152
Year ended 31 December 2019
Continuing operations
Aerospace
£m
Automotive
£m
Powder
Metallurgy
£m
Nortek Air
Management
£m
Adjusted operating profit/(loss)
409
367
117
175
Other
Industrial
£m
86
Corporate(2)
£m
(52)
Total
£m
1,102
Items not included in adjusted
operating profit(1):
Amortisation of intangible assets
acquired in business combinations
Restructuring costs
Impairment of assets
Equity accounted investments adjustments
Melrose equity-settled compensation
scheme charges
Release and changes in discount rate
of fair value items
Movement in derivatives and associated
financial assets and liabilities
Acquisition and disposal costs
Operating profit/(loss)
Finance costs
Finance income
Profit before tax
Tax
Profit for the year from
continuing operations
(261)
(79)
–
(1)
–
34
2
–
104
(148)
(83)
–
(27)
–
79
(2)
–
186
(48)
(19)
–
–
–
28
–
(1)
77
(36)
(11)
–
–
–
11
–
–
(41)
(37)
(179)
–
–
1
–
–
139
(170)
–
(9)
–
–
(17)
–
55
5
(18)
(534)
(238)
(179)
(28)
(17)
153
55
4
318
(221)
9
106
(51)
55
Melrose Industries PLC Annual Report 2019
5. Segment information continued
Year ended 31 December 2018 – restated
Continuing operations
Aerospace
£m
Automotive
£m
Powder
Metallurgy
£m
Nortek Air
Management
£m
Adjusted operating profit/(loss)
250
231
98
158
Other
Industrial
£m
104
Corporate(2)
£m
(28)
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 and changes in discount rate
of fair value items
Operating (loss)/profit
Finance costs
Finance income
Loss before tax
Tax
Loss for the year from
continuing operations
(176)
(56)
(7)
(17)
–
(50)
(1)
–
(2)
15
(44)
(103)
(46)
–
–
–
(42)
(24)
–
(1)
–
15
(34)
(11)
(1)
(3)
–
(11)
–
–
–
–
(34)
(19)
–
–
–
–
–
–
–
4
(44)
(65)
–
(132)
–
–
–
–
(1)
1
–
(32)
(145)
–
(143)
–
–
(13)
(7)
–
38
109
(137)
(368)
143
Total
£m
813
(391)
(229)
(153)
(152)
(143)
(103)
(25)
(13)
(11)
20
(387)
(160)
5
(542)
75
(467)
(1) Further details on adjusting items are discussed in note 6.
(2) Corporate adjusted operating loss of £52 million (2018: £28 million), includes £6 million in respect of remaining GKN central costs (2018: £6 million) and £20 million (2018: £2 million) of costs in
respect of divisional long-term incentive plans.
c) Segment total assets and liabilities
Aerospace
Automotive
Powder Metallurgy
Nortek Air Management
Other Industrial
Corporate
Total continuing operations
Discontinued operations
Total
Total assets
Total liabilities
31 December
2019
£m
Restated
31 December
2018
£m
Restated
31 December
2019
£m
31 December
2018
£m
7,478
5,391
1,906
1,415
1,237
553
17,980
65
18,045
7,725
5,685
2,070
1,476
1,574
628
19,158
586
19,744
3,089
2,304
472
362
259
3,962
10,448
46
10,494
3,040
2,330
521
390
301
4,601
11,183
300
11,483
Financial statementsMelrose Industries PLC Annual Report 2019
144
Notes to the Financial Statements
Continued
5. Segment information continued
d) Segment capital expenditure and depreciation
Capital expenditure(1)
Depreciation of
owned assets(1)
Depreciation of
leased assets
Year ended
31 December
2019
£m
Restated
Year ended
31 December
2018
£m
Year ended
31 December
2019
£m
Restated
Year ended
31 December
2018
£m
Year ended
31 December
2019
£m
Year ended
31 December
2018
£m
178
231
55
37
8
–
509
11
520
105
198
53
35
15
–
406
16
422
139
194
59
23
11
–
426
12
438
88
116
37
20
12
–
273
9
282
30
16
8
11
6
1
72
1
73
–
–
–
–
–
–
–
–
–
Aerospace
Automotive
Powder Metallurgy
Nortek Air Management
Other Industrial
Corporate
Total continuing operations
Discontinued operations
Total
(1) Including computer software and development costs. Capital expenditure excludes 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 the rest of 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:
UK
Rest of Europe
North America
Other
Continuing operations
Discontinued operations
Total
(1) Revenue is presented by destination.
Revenue(1)
from external customers
Year ended
31 December
2019
£m
Restated
Year ended
31 December
2018
£m
Segment assets
Restated
31 December
2019
£m
31 December
2018
£m
1,048
2,426
6,073
1,420
10,967
423
11,390
794
1,799
4,490
1,069
8,152
453
8,605
2,319
5,136
4,917
1,328
13,700
–
13,700
2,400
5,489
5,056
1,430
14,375
386
14,761
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 profit/(loss)
Amortisation of intangible assets acquired in business combinations
Restructuring costs
Impairment of assets
Equity accounted investments adjustments
Melrose equity-settled compensation scheme charges
Release and changes in discount rate of fair value items
Movement in derivatives and associated financial assets and liabilities
Acquisition and disposal costs
Reversal of uplift in value of inventory
Impact of GMP equalisation on UK pension schemes
Total adjustments to operating profit/(loss)
Adjusted operating profit
Year ended
31 December
2019
£m
Notes
Restated
Year ended
31 December
2018
£m
a
b
c
d
e
f
g
h
i
j
318
534
238
179
28
17
(153)
(55)
(4)
–
–
784
1,102
(387)
391
229
152
25
13
(20)
143
153
103
11
1,200
813
Melrose Industries PLC Annual Report 2019 145
6. Reconciliation of adjusted profit measures continued
a.
The amortisation charge on intangible assets acquired in business combinations of £534 million (2018: £391 million) 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 excluded from adjusted results.
b.
Restructuring and other associated costs in the year totalled £238 million (2018: £229 million). Restructuring costs are shown as adjusting
items due to their size and non-trading nature and during the year ended 31 December 2019 included:
• A charge of £83 million (2018: £46 million) within the Automotive division, including: costs associated with headcount reduction
programmes addressing the high cost base inherited with the business and ensuring a more flexible cost structure; costs incurred
closing two loss-making factories; costs associated with further footprint consolidation opportunities; and costs incurred separating
the Automotive business from other GKN businesses.
• A charge of £79 million (2018: £56 million) within the Aerospace division which included: costs associated with initial headcount
reductions following the commencement of a global integration process to create “One Aerospace” and achieve a simpler, more
competitive, customer focused business; costs within the North America Aerostructures business relating to two factory closures;
and costs relating to footprint rationalisation projects within the Special Technologies business.
• A charge of £19 million (2018: £11 million) within the Powder Metallurgy division including costs associated with headcount
reductions and the commencement of footprint consolidation actions.
• A charge of £11 million (2018: £19 million) within Nortek Air Management primarily relating to continued factory consolidation within
the HVAC business.
• A charge of £37 million (2018: £65 million) within Other Industrial businesses, predominantly relating to the closure of the Chinese
manufacturing facility and switching to a third party contract manufacturing model in the Security & Smart Technology business.
Restructuring charges also included the finalisation of the restructuring activities announced in Brush last year.
• A charge of £9 million (2018: £32 million) within central activities, mainly relating to the separation of the GKN business.
c.
The 2018 Annual Report disclosed that the determination of the recoverable amount in respect of the Security & Smart Technology group
of cash generating units (“CGUs”) involved management estimation of the impact of highly uncertain matters at that time. Enhanced
disclosures, including sensitivity analysis in respect of the key assumptions used in the forecast models, were shown at the 2018 year end.
During the first half of the year ended 31 December 2019, there was further deterioration in both the performance and forecast future
prospects of the business, particularly following increases in US tariffs for goods being imported from China. This along with the increased
level of competition and technological change in the market resulted in the necessity to impair goodwill allocated to the Security & Smart
Technology group of CGUs by £179 million. The impairment charge is shown as an adjusting item due to its non-trading nature and size.
d.
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 £625 million
(2018: £493 million) of revenue in the period, 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.
e.
f.
g.
h.
i.
j.
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 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.
The charge for the Melrose equity-settled Incentive Scheme, including its associated employer’s tax charge, of £17 million (2018: £13 million)
is excluded from adjusted results due to its size and 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.
Certain items previously recorded as fair value items on acquisitions, have been resolved for more favourable amounts than first anticipated.
The net release of fair value items recognised on acquisitions in the year of £153 million (2018: £20 million) includes a credit of £122 million
in respect of the release of certain loss-making contracts, recognised on the acquisition of GKN, where either contractual terms have been
renegotiated with the relevant customer or operational efficiencies have been identified and demonstrated for a sustained period. The net
release of fair value items are shown as an adjusting item, avoiding positively distorting adjusted results.
Hedge accounting is not applied within the GKN businesses for transactional foreign exchange exposure. Consequently, for consistency
and because of their volatility and size, the movements in the fair 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 in the GKN businesses, along with foreign exchange movements on the associated financial assets and liabilities, are shown as
an adjusting item. These movements totalled a credit of £55 million (2018: charge of £143 million), in the year.
A net acquisition and disposal related credit of £4 million (2018: costs of £153 million), that arose in the year, includes a profit on the sale
of a small business and transaction costs in respect of acquisition and disposal activities. These items are excluded from adjusted results
due to their non-trading nature.
In the prior year, finished goods and work in progress inventory which were present in the GKN businesses when acquired, in accordance
with IFRS 3, were required to be uplifted in value to closer to their selling price. As a result, in the early months of the acquisition, reduced
profits were generated as this inventory was sold. The one-off effect in 2018, relating to GKN’s acquired inventory was a charge of
£103 million and was excluded from adjusted results due to its size and non-recurring nature.
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 in the year
ended 31 December 2018, with a corresponding past service cost in the Income Statement. This cost is excluded from adjusted results
in the prior year due to its non-trading and non-recurring nature.
Financial statementsMelrose Industries PLC Annual Report 2019
146
Notes to the Financial Statements
Continued
6. Reconciliation of adjusted profit measures continued
b) Profit before tax
Continuing operations
Profit/(loss) before tax
Adjustments to operating profit/(loss) as above
Fair value changes on cross-currency swaps
Write-off previous debt facility unamortised fees
Equity accounted investments – interest
Total adjustments to profit/(loss) before tax
Adjusted profit before tax
Year ended
31 December
2019
£m
Notes
Restated
Year ended
31 December
2018
£m
k
l
m
106
784
(1)
–
–
783
889
(542)
1,200
8
7
(1)
1,214
672
k.
l.
The fair value changes on cross-currency swaps relating to cost of hedging which are not deferred in equity, is shown as an adjusting item
because of its volatility and non-trading nature.
To enable the acquisition of GKN in 2018, 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. This prior year charge is
shown as an adjusting item because of its one-off non-trading nature.
m. As explained in paragraph d 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
Profit/(loss) after tax
Adjustments to profit/(loss) before tax as above
Tax effect of adjustments to profit/(loss) before tax
Tax effect of significant restructuring
Equity accounted investments – tax
Total adjustments to profit/(loss) after tax
Adjusted profit after tax
7. Expenses
Continuing operations
Net operating expenses comprise:
Selling and distribution costs
Administration expenses(1)
Total net operating expenses
(1) Includes £756 million (2018: £1,072 million) of adjusting items (note 6).
Year ended
31 December
2019
£m
Notes
Restated
Year ended
31 December
2018
£m
8
8
m
55
783
(123)
(9)
(7)
644
699
(467)
1,214
(221)
–
(9)
984
517
Year ended
31 December
2019
£m
Restated
Year ended
31 December
2018
£m
(224)
(1,731)
(1,955)
(205)
(1,795)
(2,000)
Melrose Industries PLC Annual Report 2019 7. Expenses continued
Continuing operations
Operating loss is stated after charging/(crediting):
Cost of inventories
Amortisation of intangible assets acquired in business combinations
Depreciation and impairment of property, plant and equipment
Impairment of goodwill (note 11)
Amortisation and impairment of computer software and development costs
Lease expense(1)
Staff costs
Research and development costs(2)
Profit on disposal of property, plant and equipment
Expense of writing down inventory to net realisable value
Reversals of previous write-downs of inventory
Impairment recognised on trade receivables
Impairment reversed on trade receivables
(1) Lease expense impacted by the adoption of IFRS 16 on 1 January 2019 (note 1).
(2) Includes staff costs totalling £195 million (2018: £152 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
147
Year ended
31 December
2019
£m
Restated
Year ended
31 December
2018
£m
8,732
6,573
534
448
179
64
3
2,868
283
(6)
66
(38)
21
(6)
391
243
123
59
63
2,064
195
(4)
64
(19)
31
(11)
Year ended
31 December
2019
£m
Year ended
31 December
2018
£m
7.6
–
7.6
1.1
8.7
0.4
0.4
0.8
9.5
0.1
0.1
–
9.7
6.9
1.9
8.8
1.2
10.0
0.3
0.7
1.0
11.0
–
–
0.3
11.3
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 86 to 87. No services were provided pursuant to contingent fee arrangements.
An analysis of staff costs and employee numbers is as follows:
Continuing operations
Staff costs during the year (including executive Directors)
Wages and salaries
Social security costs(1)
Pension costs (note 24)
– defined benefit plans(2)
– defined contribution plans
Share based compensation expense(3) (note 23)
Total staff costs
Year ended
31 December
2019
£m
Restated
Year ended
31 December
2018
£m
2,373
388
8
86
13
1,705
263
20
63
13
2,868
2,064
(1) Includes an employer’s tax charge of £4 million (2018: £nil) 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 £nil (2018: £11 million) in respect of GMP equalisation on UK pension schemes, shown as an adjusting item (note 6).
(3) Shown as an adjusting item (note 6).
Financial statementsMelrose Industries PLC Annual Report 2019 148
Notes to the Financial Statements
Continued
7. Expenses continued
Continuing operations
Average monthly number of persons employed (including executive Directors)
Aerospace
Automotive
Powder Metallurgy
Nortek Air Management
Other Industrial
Corporate – Melrose
Corporate – GKN
Total average number of persons employed
Year ended
31 December
2019
Number
Restated
Year ended
31 December
2018
Number(1)
17,050
22,596
6,934
5,571
3,894
47
–
56,092
16,302
24,365
7,369
5,622
4,985
37
32
58,712
(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.
An analysis of finance costs and income is as follows:
Continuing operations
Finance costs and income
Interest on bank loans and overdrafts
Amortisation of costs of raising finance(1)
Net interest cost on pensions
Lease interest
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
2019
£m
Restated
Year ended
31 December
2018
£m
(152)
(11)
(31)
(21)
(7)
1
(221)
9
(212)
(103)
(18)
(21)
–
(10)
(8)
(160)
5
(155)
(1) In 2018 there was £7 million in respect of accelerated future year charges following the repayment of debt facilities as a result of the acquisition of GKN. This cost was excluded from adjusted
finance costs (note 6).
(2) These costs are excluded from adjusted finance costs (note 6).
8. Tax
Continuing operations
Analysis of tax charge/(credit) in the 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
Non-recognition of deferred tax
Recognition of previously unrecognised deferred tax assets
Total deferred tax credit
Tax charge/(credit) on continuing operations
Tax charge on discontinued operations
Total tax charge/(credit) in year
Analysis of charge/(credit) on continuing operations in the year:
Tax charge in respect of adjusted profit before tax
Tax credit recognised as an adjusting item
Total tax charge/(credit) on continuing operations
Year ended
31 December
2019
£m
Restated
Year ended
31 December
2018
£m
156
(10)
146
(89)
5
(10)
(2)
17
(16)
(95)
51
3
54
£m
190
(139)
51
55
(21)
34
(33)
(6)
(31)
(34)
–
(5)
(109)
(75)
–
(75)
£m
155
(230)
(75)
The tax charge of £190 million (2018: £155 million) arising on adjusted profit before tax of £889 million (2018: £672 million), results in an effective
tax rate of 21.4% (2018: 23.1%).
Melrose Industries PLC Annual Report 2019
8. Tax continued
The £139 million (2018: £230 million) tax credit recognised as an adjusting item includes £123 million (2018: £221 million) in respect of tax credits
on adjustments to profit/(loss) before tax of £783 million (2018: £1,214 million), £7 million (2018: £9 million) in respect of the tax charge on equity
accounted investments and £9 million (2018: £nil) in respect of net tax credits on restructuring, being a £1 million (2018: £nil) tax charge on the
legal separation of the GKN Aerospace and Automotive divisions and a £10 million (2018: £nil) tax credit on other internal Group restructuring.
The tax charge for the year for continuing and discontinued operations can be reconciled to the profit/(loss) before tax per the Income
Statement as follows:
149
Profit/(loss) before tax:
Continuing operations
Discontinued operations (note 13)
Tax charge/(credit) on profit/(loss) before tax at the weighted average rate of 21.0% (2018: 20.0%)
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
Tax credits, withholding taxes and other rate differences
Adjustments in respect of prior years
Tax (credit)/charge classified within adjusting items
Effect of changes in tax rates
Total tax charge/(credit) for the year
Year ended
31 December
2019
£m
Restated
Year ended
31 December
2018
£m
106
(82)
24
5
6
54
17
(16)
4
(5)
(9)
(2)
54
(542)
(8)
(550)
(110)
10
57
14
(5)
10
(27)
10
(34)
(75)
The reconciliation has been performed at a blended Group tax rate of 21.0% (2018: 20.0%) which represents the weighted average of the tax
rates applying to profits and losses in the jurisdictions in which those results arose.
Tax charges/(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 charge/(credit) for the year
Year ended
31 December
2019
£m
Year ended
31 December
2018
£m
(15)
16
3
4
(9)
(24)
(5)
(38)
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 and
obtained leave to appeal on various aspects of the case. The hearings will take place in 2020.
The continuing complexity of the case and uncertainty over the issues raised (and in particular the points HMRC have been granted leave to
appeal) means that it is not possible to predict the final outcome of the litigation with any reasonable degree of certainty.
9. Dividends
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
Final dividend for the year ended 31 December 2018 of 3.05p
Interim dividend for the year ended 31 December 2019 of 1.7p
Year ended
31 December
2019
£m
Year ended
31 December
2018
£m
–
–
148
83
231
54
75
–
–
129
Proposed final dividend for the year ended 31 December 2019 of 3.4p per share (2018: 3.05p per share) totalling £165 million (2018: £148 million).
The final dividend of 3.4p was proposed by the Board on 5 March 2020 and, in accordance with IAS 10: “Events after the reporting period”,
has not been included as a liability in these Consolidated Financial Statements.
Financial statementsMelrose Industries PLC Annual Report 2019 150
Notes to the Financial Statements
Continued
10. Earnings per share
Earnings attributable to owners of the parent
Earnings for basis of earnings per share
Less: loss for the year from discontinued operations
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)
Earnings per share
Basic earnings per share
From continuing and discontinued operations
From continuing operations
From discontinued operations
Diluted earnings per share
From continuing and discontinued operations
From continuing operations
From discontinued operations
Adjusted earnings from continued operations
Adjusted earnings for the basis of adjusted earnings per share(1)
Year ended
31 December
2019
£m
Restated
Year ended
31 December
2018
£m
(60)
106
46
(475)
8
(467)
Year ended
31 December
2019
Number
Year ended
31 December
2018
Number
4,858
–
4,858
3,959
–
3,959
Year ended
31 December
2019
pence
Restated
Year ended
31 December
2018
pence
(1.2)
0.9
(2.1)
(1.2)
0.9
(2.1)
(12.0)
(11.8)
(0.2)
(12.0)
(11.8)
(0.2)
Year ended
31 December
2019
£m
Restated
Year ended
31 December
2018
£m
693
504
(1) Adjusted earnings for the year ended 31 December 2019 comprises adjusted profit after tax of £699 million (2018: £517 million) (note 6), net of an allocation to non-controlling interest of £6 million
(2018: £13 million).
Adjusted earnings per share from continuing operations
Adjusted basic earnings per share
Adjusted diluted earnings per share
Year ended
31 December
2019
pence
14.3
14.3
Restated
Year ended
31 December
2018
pence
12.7
12.7
Melrose Industries PLC Annual Report 2019
11. Goodwill and other intangible assets
Restated
Customer
relationships
and contracts
£m
Restated
Goodwill
£m
Brands and
intellectual
property
£m
Cost
At 1 January 2018
Acquisition of businesses
Additions
Disposals
Exchange adjustments
At 31 December 2018
Additions
Transfer to held for sale(3)
Disposal of businesses(4)
Disposals
Exchange adjustments
At 31 December 2019
Amortisation and impairment
At 1 January 2018
Charge for the year:
Adjusted operating profit
Adjusting items
Impairments(2)
Disposals
Exchange adjustments
At 31 December 2018
Charge for the year:
Adjusted operating profit
Adjusting items
Impairments(2)
Transfer to held for sale(3)
Disposal of businesses(4)
Disposals
Exchange adjustments
At 31 December 2019
Net book value
At 31 December 2019
At 31 December 2018
1,528
2,544
–
–
205
4,277
–
–
(92)
–
571
4,289
–
–
366
5,226
–
(10)
(65)
–
(147)
4,038
(190)
4,961
(96)
(87)
–
–
(123)
–
–
(219)
–
–
(179)
–
–
–
13
(385)
3,653
4,058
–
(275)
–
–
(10)
(372)
–
(383)
–
1
5
–
23
(726)
4,235
4,854
151
Computer
software
£m
Development
costs
£m
Restated
Total
£m
20
24
11
(5)
3
53
6
(2)
(5)
(1)
(3)
48
(14)
(11)
–
–
4
(1)
(22)
(12)
–
–
2
4
1
4
(23)
25
31
3
444
24
(1)
26
496
48
–
–
(1)
(30)
513
–
(33)
–
(15)
1
–
(47)
(52)
–
–
–
–
1
2
2,526
8,773
35
(6)
652
11,980
54
(23)
(230)
(2)
(406)
11,373
(288)
(44)
(401)
(138)
5
(16)
(882)
(64)
(540)
(179)
5
20
2
49
(96)
(1,589)
417
449
9,784
11,098
Other(1)
£m
29
999
–
–
29
1,057
–
(3)
–
–
(17)
1,037
(14)
–
(82)
–
–
(2)
(98)
–
(109)
–
1
–
–
3
375
473
–
–
23
871
–
(8)
(68)
–
(19)
776
(77)
–
(44)
–
–
(3)
(124)
–
(48)
–
1
11
–
4
(156)
(203)
620
747
834
959
(1) Other includes technology and order backlog intangible assets acquired with the Nortek and GKN businesses.
(2) The impairment in 2019 relates to goodwill in Security & Smart Technology and in 2018 relates to goodwill in Brush and development costs in Aerospace, shown as adjusting items (note 6).
(3) Transfers to held for sale relate to the Wheels & Structures business (note 13), which is shown as a discontinued operation.
(4) Disposal of businesses relates to the sale of the Walterscheid Powertrain Group (note 13), which is shown as a discontinued operation.
The goodwill generated as a result of major acquisitions represents the premium paid in excess of the fair value of all net assets, including
intangible assets, identified at the point of acquisition. The carrying value of goodwill includes a premium, paid in order to secure shareholder
agreement to the business combination, that is less than the value that the Directors believed could be added to the acquired businesses
through the application of their specialist turnaround experience.
The goodwill arising on bolt-on acquisitions is attributable to the anticipated profitability and cash flows arising from the businesses acquired,
synergies as a result of the complementary nature of the business with existing Melrose businesses, the assembled workforce, technical
expertise, knowhow, market share and geographical advantages afforded to the Group.
The future improvements applied to the acquired businesses, achieved through a combination of revised strategic direction, operational
improvements and investment, are expected to result in improved profitability of the acquired businesses during the period of ownership and
are also expected to result in enhanced disposal proceeds when the acquired businesses are ultimately disposed. The combined value
achieved from these improvements is expected to be in excess of the value of goodwill acquired.
Goodwill acquired in business combinations, net of impairment, has been allocated to the businesses, each of which comprises several
cash-generating units (“CGUs”).
There has been no change in the CGU structure in 2019. Following the GKN Aerospace reorganisation, announced on 3 September 2019, the
Aerostructures, Aerospace Engine Systems and Aerospace Special Technologies groups of CGUs will be reorganised into Aerospace Engine
Systems and Aerostructures effective 1 January 2020.
Financial statementsMelrose Industries PLC Annual Report 2019 152
Notes to the Financial Statements
Continued
11. Goodwill and other intangible assets continued
Goodwill
Nortek businesses:
AQH
HVAC
Security & Smart Technology
Ergotron
GKN businesses:
Aerostructures
Aerospace Engine Systems
Aerospace Special Technologies
Automotive Driveline
Automotive ePowertrain
Powder Metallurgy
Walterscheid Powertrain Group(1)
(1) Disposed on 25 June 2019.
31 December
2019
£m
Restated
31 December
2018
£m
355
237
172
418
545
346
50
688
339
503
–
370
246
357
435
558
360
51
715
345
529
92
3,653
4,058
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 forecasts extrapolated to perpetuity using growth rates shown below, which do not exceed the long-term growth rate
for the relevant market.
An impairment charge of £179 million was recorded in respect of the Security & Smart Technology group of CGUs during the first half of the
year as a result of further deterioration in both the performance and forecast future prospects, particularly following increases in US tariffs for
goods being imported from China. The impairment charge recorded in the Consolidated Income Statement, is shown as an adjusting item (note
6) and has not changed in value in the second half of the year. Sensitivity analysis has been provided in respect of reasonably possible changes
to key assumptions.
Based on impairment testing completed at the year-end no further impairment was identified in respect of the Nortek and GKN businesses.
No reasonably possible change in key assumptions would result in an impairment in the AQH, HVAC and Ergotron groups of CGUs. Due to the
proximity of the recent acquisition of GKN, the recoverable amounts for GKN businesses will be close to carrying values. There is no reasonably
possible change in the key assumptions for the three Aerospace and Automotive ePowertrain groups of CGUs that could result in an
impairment. There is also no reasonably possible change in the key assumptions for the revised two Aerospace groups of CGUs that are
effective from 1 January 2020 that could result in an impairment.
The Automotive Driveline and Powder Metallurgy groups of CGUs, impacted by the automotive market downturn, are mitigating reductions in
demand through cost and efficiency actions. No impairment of goodwill is required within these businesses, but sensitivity analysis has been
provided in respect of reasonably possible changes to key assumptions.
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
AQH
HVAC
Security & Smart Technology
Ergotron
Aerostructures
Aerospace Engine Systems
Aerospace Special Technologies
Automotive Driveline
Automotive ePowertrain
Powder Metallurgy
(1) Adjusted for the impact of IFRS 16.
31 December 2019
31 December 2018
Pre-tax(1)
discount rates
Long-term
growth rates
Period of
forecast
Pre-tax
discount rates
Long-term
growth rates
Period of
forecast
11.0%
11.2%
11.5%
10.9%
9.4%
9.4%
9.8%
13.5%
10.0%
11.8%
3.3%
3.1%
3.5%
3.4%
2.9%
3.0%
2.9%
2.5%
2.8%
2.5%
3
3
3
3
5
5
5
5
5
5
11.8%
11.8%
12.0%
11.8%
10.2%
10.1%
9.7%
11.6%
12.0%
12.0%
3.3%
3.1%
3.3%
3.3%
2.0%
2.5%
2.5%
0.0%
3.0%
2.0%
3
3
3
3
5
5
5
5
5
5
Melrose Industries PLC Annual Report 2019 153
11. Goodwill and other intangible assets continued
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.
The Group adopted IFRS 16: “Leases” on 1 January 2019 which has affected the calculation of pre-tax discount rates. The change in
accounting standard does not affect impairment conclusions.
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 macro-economic 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 cars 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 macro-economic 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 macro-economic factors.
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 macro-economic 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 macro-economic 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 macro-economic factors influence demand for these products.
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 long-term growth rate forecasts that take into account the international presence and the markets in which
each business operates.
Security & Smart Technology group of CGUs
The 2018 Annual Report disclosed that the determination of the recoverable amount in respect of the Security & Smart Technology group of
CGUs involved management estimation of the impact of highly uncertain matters at that time. Enhanced disclosures, including sensitivity
analysis in respect of the key assumptions used in the forecast models, were shown at the 2018 year end. Subsequently, in the first half of 2019
there was further deterioration in both the performance and forecast future prospects, particularly following increases in US tariffs for goods
being imported from China. This along with the increased level of competition and technological change in the market resulted in the necessity
to impair goodwill allocated to the Security & Smart Technology group of CGUs by £179 million. The impairment charge is shown as an
adjusting item (note 6) due to its non-trading nature and size and is unchanged in value from the first half of the year.
Sensitivity analysis
The forecasts are prepared using the methodology required by IAS 36 and show headroom of £43 million above the carrying amount for the
Security & Smart Technology group of CGUs. Sensitivity analysis has been carried out and a reasonably possible change in the discount rate
and long-term growth rate from 11.5% to 12.5% or from 3.5% to 2.4% respectively would reduce headroom to £nil. A reduction in the terminal
operating margin from 10.8% to 9.5% would also reduce headroom to £nil.
Financial statementsMelrose Industries PLC Annual Report 2019 154
Notes to the Financial Statements
Continued
11. Goodwill and other intangible assets continued
Powder Metallurgy and Automotive group of CGUs
The GKN businesses were acquired and recorded at fair value on 19 April 2018 and subsequently there has been a global automotive market
decline, naturally reducing the headroom when testing goodwill and intangible assets in respect of the Automotive and Powder Metallurgy
businesses at this point in the cycle.
Powder Metallurgy group of CGUs – sensitivity analysis
The forecasts are prepared using the methodology required by IAS 36 and show headroom of £90 million above the carrying amount for
the Powder Metallurgy group of CGUs. Sensitivity analysis has been carried out and a reasonably possible change in the discount rate and
long-term growth rate from 11.8% to 12.3% or from 2.5% to 1.7% respectively would reduce headroom to £nil. A reduction in the terminal
operating margin from 14.2% to 13.2% would also reduce headroom to £nil.
Automotive Driveline group of CGUs – sensitivity analysis
The forecasts are prepared using the methodology required by IAS 36 and show headroom of £103 million above the carrying amount for
the Automotive Driveline group of CGUs. Sensitivity analysis has been carried out and a reasonably possible change in the discount rate and
long-term growth rate from 13.5% to 14.0% or from 2.5% to 1.7% respectively would reduce headroom to £nil. A reduction in the terminal
operating margin from 10.0% to 9.4% would also reduce headroom to £nil.
Allocation of significant intangible assets
The allocation of significant customer relationships, brands, intellectual property and technology is as follows:
Customer relationships
Brands, intellectual property and technology
Remaining amortisation
period
Net book value
Remaining amortisation
period
Net book value
31 December
2019
years
31 December
2018
years
31 December
2019
£m
Restated
31 December
2018
£m
31 December
2019
years
31 December
2018
years
31 December
2019
£m
31 December
2018
£m
–
11
8
11
7
9
19
9
11
8
16
–
–
–
12
9
12
8
10
20
10
12
9
17
15
20
–
155
79
95
74
554
1,761
50
604
285
578
–
–
–
176
93
108
88
625
1,960
53
693
334
651
63
10
9
12
12
12
15
19
19
19
19
19
19
–
–
10
13
13
13
16
20
20
20
20
20
20
8
20
48
49
63
30
74
469
188
54
115
289
75
–
–
55
55
71
40
83
529
203
61
122
329
85
62
11
4,235
4,854
1,454
1,706
Year ended
31 December
2019
£m
Year ended
31 December
2018
£m
48
–
Brush
AQH
HVAC
Security & Smart Technology
Ergotron
Aerostructures
Aerospace Engine Systems
Aerospace Special Technologies
Automotive Driveline
Automotive ePowertrain
Powder Metallurgy
Walterscheid Powertrain Group
Wheels & Structures
12. Investments
Investments, carried at fair value
Shares
The investment in shares acquired in the year, represents the Group’s 4% investment in PW1100G-JM Engine Leasing LLC, an engine leasing
business. The Group paid £50 million for this investment and incurred a foreign exchange translation loss of £2 million in the year. This
investment is classified as a level 3 fair value under the IFRS 13 fair value hierarchy.
Melrose Industries PLC Annual Report 2019 155
13. Assets held for sale and discontinued operations
Wheels & Structures
During the second half of the year, following a strategic review, the Board formally commenced a disposal process aligned to its strategic
priority, to dispose of the Wheels & Structures business, with a high expectation that this process will conclude within one year. In accordance
with IFRS 5: “Non-current assets held for sale and discontinued operations”, associated assets and liabilities have been classified as held for
sale and are separately shown on the Balance Sheet, having been remeasured to the fair value less costs of disposal.
Walterscheid Powertrain Group
On 25 June 2019, the Group completed the sale of the Walterscheid Powertrain Group for cash consideration of £185 million. The costs
charged to the Income Statement associated with the disposal were £7 million. The loss on disposal was £21 million after the recycling of a net
favourable cumulative translation difference of £13 million.
The results of the Walterscheid Powertrain Group and Wheels & Structures business were previously included within the Other Industrial
operating segment and are classified as discontinued operations, in accordance with IFRS 5.
Financial performance of discontinued operations:
Revenue
Operating costs(1)
Operating loss
Finance costs
Loss before tax
Tax
Loss after tax
Loss on disposal of businesses
Loss for the year from discontinued operations
Year ended
31 December
2019
£m
Year ended
31 December
2018
£m
423
(503)
(80)
(2)
(82)
(3)
(85)
(21)
(106)
453
(458)
(5)
(3)
(8)
–
(8)
–
(8)
(1) The operating loss in the year includes a £64 million charge on remeasurement to fair values less costs of disposal relating to the Wheels & Structures business on
reclassification to assets held for sale.
The major classes of assets and liabilities held for sale or disposed of during the year were as follows:
Wheels & Structures
Reclassified
£m
Remeasurement
£m
Held for sale
£m
Waltersheid
Powertrain
Group disposed
£m
Goodwill and other intangible assets
Property, plant and equipment
Interests in equity accounted investments
Inventories
Deferred tax assets
Trade and other receivables
Cash and cash equivalents
Total assets
Trade and other payables
Lease obligations
Retirement benefit obligations
Provisions
Current and deferred tax
Total liabilities
Net assets
Cash consideration, net of costs(1)
Cumulative translation difference recycled on disposals
Loss on disposal of businesses
Net cash inflow arising on disposal:
Consideration received in cash and cash equivalents, net of costs(1)
Less: cash and cash equivalents disposed
(1) Cash consideration of £185 million net of £7 million of disposal costs charged to the Income Statement.
18
60
–
22
6
26
–
132
(36)
(2)
–
(3)
(8)
(49)
83
(18)
(49)
–
–
–
–
–
(67)
–
–
–
–
3
3
(64)
–
11
–
22
6
26
–
65
(36)
(2)
–
(3)
(5)
(46)
19
210
110
4
74
25
67
9
499
(54)
(34)
(155)
(10)
(34)
(287)
212
178
13
(21)
178
(9)
169
Financial statementsMelrose Industries PLC Annual Report 2019
156
Notes to the Financial Statements
Continued
14. Property, plant and equipment
Land and
buildings
£m
Plant and
equipment
£m
Cost
At 1 January 2018
Acquisition of businesses
Additions
Disposals
Disposal of businesses
Exchange adjustments
At 31 December 2018
Recognition of right-of-use assets
Additions
Disposals
Transfer to held for sale
Disposal of businesses
Exchange adjustments
At 31 December 2019
Accumulated depreciation and impairment
At 1 January 2018
Charge for the year
Disposals
Impairments
Exchange adjustments
At 31 December 2018
Charge for the year
Disposals
Transfer to held for sale
Disposal of businesses
Impairments(1)
Exchange adjustments
At 31 December 2019
Net book value
At 31 December 2019
At 31 December 2018
130
715
57
(10)
–
51
943
486
89
(25)
(21)
(62)
(75)
1,335
(31)
(26)
–
(3)
(2)
(62)
(90)
1
3
1
(27)
6
(168)
1,167
881
Total
£m
332
2,619
426
(51)
(8)
196
3,514
589
547
(90)
(86)
(130)
(204)
4,140
(113)
(238)
36
(14)
(14)
(343)
(447)
58
26
20
(34)
12
(708)
202
1,904
369
(41)
(8)
145
2,571
103
458
(65)
(65)
(68)
(129)
2,805
(82)
(212)
36
(11)
(12)
(281)
(357)
57
23
19
(7)
6
(540)
2,265
2,290
3,432
3,171
(1) Includes £14 million of impairments, treated as a restructuring cost within adjusting items (note 6) and £20 million of onerous lease liabilities transferred from property related cost provisions (note 21).
Property, plant and equipment includes the net book value of right-of-use assets as follows:
Right-of-use asset
At 1 January 2019(1)
IFRS 16 transition adjustment
Additions
Depreciation and impairments(2)
Disposal of businesses
Transfer to held for sale
Exchange adjustments
At 31 December 2019
Land and
buildings
£m
Plant and
equipment
£m
57
486
59
(79)
(28)
–
(17)
478
–
103
22
(26)
(6)
(2)
(3)
88
Total
£m
57
589
81
(105)
(34)
(2)
(20)
566
(1) The balance at 1 January 2019 represents finance lease assets held within property, plant and equipment prior to the adoption of IFRS 16.
(2) Includes a £20 million reduction in right-of-use assets following the transfer of onerous lease liabilities from property related cost provisions.
Melrose Industries PLC Annual Report 2019
15. 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 from continuing operations
Revenue
Operating costs
Adjusted operating profit
Adjusting items
Net finance costs
Profit before tax
Tax
Share of results of equity accounted investments
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
Disposal of businesses
Exchange adjustments
At 31 December
157
31 December
2019
£m
31 December
2018
£m
278
386
(205)
(23)
436
382
420
(231)
(79)
492
Year ended
31 December
2019
£m
Restated
Year ended
31 December
2018
£m
625
(559)
66
(21)
–
45
(7)
38
493
(434)
59
(15)
(1)
43
(9)
34
Year ended
31 December
2019
£m
Year ended
31 December
2018
£m
492
–
38
–
(67)
(4)
(23)
436
–
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 year of £1,158 million (2018: £839 million), adjusted
operating profit of £123 million (2018: £108 million), adjusting items of £39 million (2018: £30 million), statutory operating profit of £84 million
(2018: £78 million), an interest charge of £nil (2018: £nil) and a tax charge of £13 million (2018: £16 million), leaving retained profit of £71 million
(2018: £62 million).
Total net assets of SDS at 31 December 2019 were £816 million (2018: £937 million). These comprised non-current assets of £710 million
(2018: £805 million), current assets of £488 million (2018: £464 million), current liabilities of £382 million (2018: £319 million) and non-current
liabilities of £nil (2018: £13 million). During 2019, SDS paid a dividend to the Group of £65 million (2018: £58 million). Further information about
SDS can be found in note 3 to the Melrose Industries PLC Company Financial Statements.
16. Inventories
Raw materials
Work in progress
Finished goods
31 December
2019
£m
31 December
2018
£m
597
329
406
1,332
659
328
502
1,489
In 2019 the write-down of inventories to net realisable value amounted to £68 million (2018: £65 million), of which £6 million (2018: £18 million)
related to restructuring activities and is included within adjusting items. The reversal of write-downs amounted to £38 million (2018: £20 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 net book value of inventories and their replacement cost.
Financial statementsMelrose Industries PLC Annual Report 2019
158
Notes to the Financial Statements
Continued
17. Trade and other receivables
Current
Trade receivables
Allowance for doubtful receivables
Other receivables
Prepayments
Contract assets
31 December
2019
£m
31 December
2018
£m
1,473
1,877
(47)
298
71
175
1,970
(42)
256
37
200
2,328
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
2019
£m
31 December
2018
£m
2
422
424
108
396
504
As described in note 25, 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 2019, 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.
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, an analysis of which is as follows:
At 1 January 2018
Adoption of IFRS 9
Income Statement charge/(credit)
Utilised
Exchange adjustments
At 31 December 2018
Income Statement charge/(credit)
Utilised
Disposal of businesses
Transfer to assets held for sale
Exchange adjustments
At 31 December 2019
Aerospace
£m
Automotive
£m
Powder
Metallurgy
£m
Nortek Air
Management
£m
Other
Industrial
£m
Discontinued
Operations
£m
Total
£m
–
–
13
–
2
15
1
(3)
–
–
(1)
12
–
–
6
–
–
6
7
–
–
–
(1)
12
–
–
3
–
–
3
2
–
–
–
–
5
6
2
(2)
(1)
2
7
–
–
–
–
(1)
6
9
–
–
(1)
1
9
5
(2)
–
–
–
12
–
–
3
(1)
–
2
1
–
(2)
(1)
–
–
15
2
23
(3)
5
42
16
(5)
(2)
(1)
(3)
47
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
2019
£m
31 December
2018
£m
15
1
31
47
12
1
29
42
Included in the Group’s trade receivables balance are overdue trade receivables with a carrying amount of £154 million (31 December 2018:
£208 million) against which a provision of £47 million (31 December 2018: £42 million) is held.
Melrose Industries PLC Annual Report 2019
17. Trade and other receivables continued
The balance deemed recoverable of £107 million (31 December 2018: £166 million) is past due as follows:
159
31 December
2019
£m
31 December
2018
£m
0 – 30 days
31 – 60 days
60+ days
72
24
11
107
The Directors consider that the carrying amount of trade and other receivables approximates to their fair value.
The Group’s contract assets comprise the following:
At 1 January 2018
Acquisition of businesses
Additions
Utilised
Exchange adjustments
At 31 December 2018
Additions
Utilised
Exchange adjustments
At 31 December 2019
Participation
fees
£m
Unbilled
receivables
£m
Variable
consideration
£m
Other
£m
–
173
25
(6)
21
213
10
(12)
(9)
202
–
164
145
(164)
–
145
1,192
(1,227)
(5)
105
–
171
28
(12)
19
206
60
(15)
(9)
242
–
16
15
–
1
32
25
(6)
(3)
48
124
33
9
166
Total
£m
–
524
213
(182)
41
596
1,287
(1,260)
(26)
597
Participation fees
Participation fees are described in the accounting policies (note 2) and 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 work completed 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 has a material impact on one entity in the Group, exclusively relating to certain RRSP arrangements in the
Aerospace business. RRSP contracting is a feature of the aircraft engine market and typically reflects the engine manufacturer’s economic
model where discounts are given on the sale of original equipment (“OE”) and generally a higher value is associated with the subsequent
maintenance, repair and overhaul services. The nature of RRSP arrangements is covered further in the accounting policies (note 2) and the
impact on the Group is that OE products sold to engine manufacturers are at a lower margin with more favourable pricing in the aftermarket
phase. As a partner in the arrangements, the Aerospace business’ cash compensation profile often reflects that of the OE engine manufacturer.
Where the Group has a contractual right to aftermarket revenue, IFRS 15 requires that the total contract revenue is allocated to the performance
obligations. The principal contractual term that determines the existence of variable consideration is the absence of a termination clause that the
customer can unilaterally exercise and which results in future purchases being considered optional. Where there is such a termination clause
and the Group commercially relies on economic compulsion of the contracting parties, the two phases of activity are treated as distinct and no
variable consideration is recognised. In the absence of such a term, there is a contractual link between the sale of OE components and
aftermarket, which results in variable consideration, and the total contract revenue is allocated to the distinct performance obligations.
Variable consideration is measured using a weighted average unit method, taking account of an estimate of stand-alone selling price for
individual performance obligations and is recognised when control of the OE component passes to the customer (the engine manufacturer).
Due to the long-term nature of agreements, calculation of the total programme revenues is inherently imprecise and as set out in note 3e
requires significant estimates, including an assessment of the aftermarket revenue per engine which reflects the pattern of future maintenance
activity and associated costs to be incurred. In order to address the future uncertainties, risk adjustments as well as constraints have been
applied to the expected level of revenue as appropriate. This approach best represents the value of goods and services supplied taking
account of the performance obligations, risk and overall contract revenues.
As a consequence of allocating additional revenue to the sale of OE components, a variable consideration contract asset has been recognised
which will be satisfied through cash receipt during the aftermarket phase. The constraint applied to variable consideration is reassessed at each
period end, and will unwind as risks reduce and when uncertainties are resolved. This is expected to lead to additional revenue recognition in
future periods in relation to items sold in the current and preceding periods.
Financial statementsMelrose Industries PLC Annual Report 2019 160
Notes to the Financial Statements
Continued
18. Cash and cash equivalents
Cash and cash equivalents
31 December
2019
£m
31 December
2018
£m
317
415
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.
19. 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
2019
£m
31 December
2018
£m
1,223
1,307
387
343
74
7
413
14
568
190
64
8
434
12
2,461
2,583
As at 31 December 2019, and as described in note 25, included within trade payables were drawings on supplier finance facilities
of £75 million (2018: £97 million).
Trade payables are non-interest-bearing. Normal settlement terms vary by country and the average credit period taken for trade and other
payables is 78 days (2018: 81 days).
Non-current
Other payables
Customer advances and contract liabilities
Other taxes and social security
Government refundable advances
Accruals
Deferred government grants
31 December
2019
£m
Restated
31 December
2018
£m
11
352
2
59
2
18
444
78
552
23
73
28
8
762
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 2020 and 2055.
Customer advances and contract liabilities include 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 £132 million, two to five years £154 million and over five years £66 million (2018: one to two years
£241 million, two to five years £136 million and over five years £175 million).
Melrose Industries PLC Annual Report 2019
161
20. 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 25.
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
2019
£m
31 December
2018
£m
31 December
2019
£m
31 December
2018
£m
31 December
2019
£m
31 December
2018
£m
–
–
–
–
–
–
78
78
–
11
89
–
–
–
350
–
–
13
363
–
14
377
2,199
520
–
–
450
300
3
1,118
1,139
363
–
450
300
6
3,472
3,376
(30)
22
(41)
43
3,464
3,378
2,199
520
–
–
450
300
81
3,550
(30)
33
3,553
1,118
1.139
363
350
450
300
19
3,739
(41)
57
3,755
Committed bank funding consists of a multi-currency term loan denominated £100 million and US$960 million that matures in April 2021 and a
multi-currency revolving credit facility, denominated £1.1 billion, US$2.0 billion and €0.5 billion that matures in January 2023. The term loan was
amended on 31 December 2019 to provide the Group with the option at its request to extend the loan for a further three years to April 2024, if
required. Loans drawn under this facility are guaranteed by Melrose Industries PLC and certain of its subsidiaries, and there is no security over
any of the Group’s assets in respect of this facility.
At 31 December 2019 the term loan was fully drawn. There was a significant amount of headroom on the multi-currency committed revolving
credit facility, as at 31 December 2019. Applying the exchange rates at 31 December 2019 the headroom equated to £1,136 million. There are
also a number of uncommitted overdraft, guarantee and borrowing facilities made available to the Group.
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 2019 the margin was 1.4% (31 December 2018: 1.4%) on the term loan and 1.65% (31 December 2018: 1.65%) on the revolving
credit facility.
The bond maturing in 2022 has associated cross-currency swaps. Details of the bonds are in the table below:
Maturity date
September 2022
May 2032
Notional amount
£m
450
300
Coupon
% p.a.
5.375%
4.625%
Cross-currency
swaps
million
Interest rate on
swaps
% p.a.
US $373
€284
n/a
5.70%
3.87%
n/a
The coupon rate on the £300 million bond, maturing in 2032, increased from 3.375% to 4.625% in May 2019.
Financial statementsMelrose Industries PLC Annual Report 2019 162
Notes to the Financial Statements
Continued
20. Interest-bearing loans and borrowings continued
Maturity of financial liabilities (excluding currency contracts and lease obligations)
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 25, and lease obligations which are shown
in note 28). The amounts shown therefore differ from the carrying value and fair value of the Group’s financial liabilities.
Interest-bearing
loans and
borrowings
£m
Interest rate
derivative
financial
liabilities
£m
Other financial
liabilities
£m
Total financial
liabilities
£m
Within one year
In one to two years
In two to five years
After five years
Effect of financing rates
31 December 2019
Within one year
In one to two years
In two to five years
After five years
Effect of financing rates
31 December 2018 – restated
21. Provisions
At 1 January 2019 – restated
Utilised
Net (credit)/charge
to operating profit(2)
Unwind of discount(3)
Transfers(4)
Transfer to held for sale
Disposal of businesses
Exchange adjustments
31 December 2019
Current
Non-current
198
929
2,495
411
(480)
3,553
502
122
3,285
425
(579)
3,755
11
14
35
–
–
60
1
3
14
–
(4)
14
2,030
33
21
18
–
2,102
2,317
106
18
55
–
2,496
Loss-making
contracts(1)
£m
616
(83)
(122)
20
(10)
(1)
(1)
(35)
384
70
314
384
Property
related costs
£m
Environmental
and litigation
£m
Warranty
related costs
£m
Restructuring
£m
Other
£m
74
(5)
(1)
–
(20)
–
(1)
(2)
45
9
36
45
218
(87)
35
1
(2)
(2)
(1)
(7)
155
86
69
155
397
(54)
(2)
–
–
–
(1)
(16)
324
114
210
324
116
(190)
193
–
–
–
(2)
(3)
114
110
4
114
50
(6)
25
1
–
–
(4)
(1)
65
23
42
65
2,239
976
2,551
429
(480)
5,715
2,820
231
3,317
480
(583)
6,265
Total
£m
1,471
(425)
128
22
(32)
(3)
(10)
(64)
1,087
412
675
1,087
(1) Utilisation of loss-making contracts includes £81 million shown within continuing adjusted operating profit and £2 million within discontinued operating profit.
(2) Includes £36 million of adjusting items and £92 million recognised in adjusted operating profit.
(3) Includes £7 million within finance costs relating to the time value of money and £15 million relating to changes in discount rates on loss-making contract provisions recognised as fair value items on
the acquisition of GKN, which has been included as an adjusting item within operating profit (note 6).
(4) Onerous lease liabilities of £20 million have been transferred to the ‘right-of-use asset’ following the adoption of IFRS 16 on 1 January 2019 (note 14). Other transfers have occurred due to
developments in commercial matters where the expected value and timing of cash outflow have become more certain.
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.
Melrose Industries PLC Annual Report 2019
163
21. Provisions continued
Property related costs
The provision for property related costs represents dilapidation costs for ongoing leases and is expected to result in cash expenditure over the
next eight years. Calculation of dilapidation obligations 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.
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 7% (31 December 2018: 0% and 9%) depending
on the territory in which the provision resides and the length of its expected utilisation.
22. 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 2018
Acquisition of businesses (restated)
(Charge)/credit to income
Credit to equity
Exchange adjustments
Movement in set off of assets and liabilities(1)
At 31 December 2018 (restated)
Transfer to held for sale
Disposal of businesses
(Charge)/credit to income
Charge to equity
Exchange adjustments
Movement in set off of assets and liabilities(1)
At 31 December 2019
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
49
695
(64)
37
20
(605)
132
(6)
(25)
(13)
(4)
(19)
95
160
(12)
(188)
42
1
(17)
8
(166)
2
1
(15)
–
1
3
(174)
(57)
(1,285)
131
–
(94)
597
(708)
–
33
124
–
51
(98)
(598)
(69)
(1,473)
173
1
(111)
605
(874)
2
34
109
–
52
(95)
(772)
(20)
(778)
109
38
(91)
–
(742)
(4)
9
96
(4)
33
–
(612)
(1) Set off of deferred tax assets and liabilities in accordance with IAS 12 within territories with a right of set off.
Financial statementsMelrose Industries PLC Annual Report 2019 164
Notes to the Financial Statements
Continued
22. Deferred tax continued
As at 31 December 2019, the Group had gross unused corporate income tax losses of £2,036 million (31 December 2018: £1,991 million)
available for offset against future profits. A deferred tax asset of £204 million (31 December 2018: £192 million) has been recognised in respect
of £1,052 million (31 December 2018: £978 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 £46 million (31 December 2018: £42 million) has been recognised on tax credits (primarily US) and US state tax losses.
Deferred tax assets have also been recognised on Group retirement benefit obligations at £122 million (31 December 2018: £170 million) and on
other temporary differences at £447 million (31 December 2018: £481 million). The gross deferred tax assets therefore amount to £819 million
(31 December 2018: £885 million).
Deferred tax liabilities have been recognised on intangible assets at £1,243 million (31 December 2018: £1,450 million) and accelerated capital
allowances and other temporary differences at £188 million (31 December 2018: £177 million). The gross deferred tax liabilities therefore amount
to £1,431 million (31 December 2018: £1,627 million).
There are no material unrecognised deferred tax assets at 31 December 2019, 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 £51 million (31 December 2018: £59 million) would be payable. As at the balance sheet date the
EU (withdrawal agreement) Act had not been enacted and as such withholding taxes have been measured at rates assuming EU membership.
Following the UK’s exit from the EU, the Group will rely on withholding tax rates as set out in Double Taxation Conventions agreed between the
UK and other countries. The unrecognised deferred tax would be higher as a result, primarily on dividend receipts from Germany and Italy.
23. 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 were to be issued to Directors and Senior Management in three annual tranches and 48,250
options had been issued at 31 December 2019 (31 December 2018: 31,203). 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 95.
During 2017, 12,831 of the incentive plan options were converted to incentive shares with a nominal value of £1 each. The number of
unexercised incentive plan options at 31 December 2019 is therefore 37,169 (31 December 2018: 37,169).
The estimated value of the 2017 Melrose Incentive Plan at 31 December 2019 was £nil (31 December 2018: £nil). Using a Black-Scholes option
pricing model, the projected value of this plan at 31 May 2020 will be £39 million (31 December 2018: projected value of £13 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 a charge of £17 million (2018: £13 million) in the year ended 31 December 2019 in respect of the 2017 Melrose Incentive
Plan, including a £4 million (2018: £nil) associated national insurance charge.
Melrose Industries PLC Annual Report 2019 165
24. 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 £86 million (2018: £63 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 2019 were:
GKN Group Pension Schemes (Numbers 1 – 4)
On 1 July 2019 the GKN UK 2012 Pension Plan was split into four separate pension schemes which have been allocated to the Aerospace and
Automotive segments resulting in no change to the benefits accrued by members or to the amounts recognised by the Group. The four new
plans are called the GKN Group Pension Schemes (Numbers 1 – 4). All four schemes are funded plans, closed to new members and were
closed to future accrual in 2017. The valuation of the plans was based on a full actuarial valuation as of 5 April 2016, updated to 31 December
2019 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 2019 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 2019, updated to 31 December 2019 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.
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 2019 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.
During the year, an enhanced transfer value (“ETV”) exercise has been carried out in the GKN UK 2012 Pension Plan prior to its split into four
separate schemes. This has resulted in a settlement credit of £6 million. In addition, the liabilities of the Broan Aftermarket North America, Inc.
Group Pension Plan have been settled resulting in a settlement charge of £7 million.
Contributions
The Group committed to contribute and has subsequently now fully paid £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 Group Pension Schemes
(Numbers 1 – 4).
The Group contributed £185 million (2018: £102 million) to defined benefit pension plans and post-employment plans in the year ended
31 December 2019, including £94 million (2018: £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. Furthermore, in July 2019 the Group contributed £17 million following the disposal
of the Walterscheid Powertrain Group.
The Group expects to contribute £105 million to defined benefit pension plans and post-employment plans in 2020.
Financial statementsMelrose Industries PLC Annual Report 2019 166
Notes to the Financial Statements
Continued
24. Retirement benefit obligations continued
Actuarial assumptions
The major assumptions used by the actuaries in calculating the Group’s pension liabilities are as set out below:
31 December 2019
GKN Group Pension Schemes (Numbers 1 – 4)
GKN UK – 2016 Pension Plan
GKN US plans
GKN Europe plans
Brush UK Pension Plan
31 December 2018
GKN UK – 2012 Pension Plan
GKN UK – 2016 Pension Plan
GKN US plans
GKN Europe plans
Brush UK Pension Plan
Rate of increase
of pensions in payment
% per annum
Discount rate
% per annum
Price inflation
% per annum
2.8
2.8
n/a
1.5
2.8
3.1
3.1
n/a
2.5
3.2
2.0
2.0
3.1
1.1
2.0
2.9
2.9
4.1
1.9
2.9
2.1
2.1
2.1
1.5
2.1
2.1
2.1
2.5
1.8
2.1
Mortality
GKN Group Pension Schemes (Numbers 1 – 4), GKN UK 2016 Pension Plan and the Brush UK Pension Plan
Mortality assumptions for the Brush UK pension plan as at 31 December 2019 was based on the Self Administered Pension Scheme (“SAPS”)
“S2” base tables, using a scaling factor of 110%. The GKN Group Pension Schemes (Numbers 1 – 4) and the GKN UK 2016 Pension Plan use
the SAPS “S3PA” base tables with adjustments. The base table mortality assumption for each of the UK plans reflects best estimate results
from the most recent mortality experience analyses for each scheme-weighting factors vary by scheme.
Future improvements for all UK plans are in line with the 2018 Continuous Mortality Investigation (“CMI”) core projection model
(SK = 7.0, A = 0%) with a long-term rate of improvement of 1.25% p.a. for both males and females.
GKN US Consolidated Pension Plan
All plans use base mortality in line with the PR1-2012 tables. Future improvements for all US plans are in line with MP2019.
GKN Germany Pension Plans
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 Group
Pension
Schemes
(Numbers 1 – 4)
years
21.1
24.0
22.4
25.5
GKN UK 2016
Pension Plan
years
GKN US
Consolidated
Pension Plan
years
GKN Germany
Pension Plans
years
Brush UK
Pension Plan
years
21.2
23.6
22.5
25.1
19.6
21.6
21.2
23.1
20.2
23.7
23.0
25.9
20.8
22.7
22.1
24.3
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
31 December
2019
£m
31 December
2018
£m
(3,899)
3,412
(487)
(634)
(1,121)
(3,937)
3,273
(664)
(749)
(1,413)
Melrose Industries PLC Annual Report 2019 167
24. Retirement benefit obligations continued
The plan assets and liabilities at 31 December 2019 were as follows:
Plan assets
Plan liabilities
Net liabilities
UK
Plans(1)
£m
3,082
(3,502)
(420)
US
Plans
£m
262
(417)
(155)
European
Plans
£m
28
(561)
(533)
Other
Plans
£m
40
(53)
(13)
Total
£m
3,412
(4,533)
(1,121)
(1) Includes a net liability in respect of the GKN Group Pension Schemes (Numbers 1 – 4) (formerly GKN UK 2012 plan), GKN post-employment medical plans, and the Nortek UK plan and a net asset
in respect of the Brush UK Pension Plan and the GKN UK 2016 Pension 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
2019
£m
31 December
2018
£m
749
1,051
437
97
174
432
177
295
639
802
524
147
181
781
140
59
3,412
3,273
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.
Movements in the present value of defined benefit obligations during the year:
At 1 January
Acquisition of businesses
Current service cost
Past service cost(1)
Interest cost on obligations
Remeasurement gains – demographic
Remeasurement losses/(gains) – financial
Remeasurement gains – experience
Benefits paid out of plan assets
Benefits paid out of Group assets for unfunded plans
Settlements
Disposal of businesses
Exchange adjustments
At 31 December
Year ended
31 December
2019
£m
Year ended
31 December
2018
£m
4,686
–
12
(4)
125
(157)
569
(1)
(181)
(28)
(261)
(175)
(52)
542
4,216
10
11
96
(7)
(77)
(1)
(159)
(17)
(1)
–
73
4,533
4,686
(1) A credit of £4 million was recorded as a past service cost during the year following a curtailment gain on a GKN Germany pension scheme. An expense of £11 million was 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. Both were treated as adjusting items (note 6).
The defined benefit plan liabilities were 27% (31 December 2018: 31%) in respect of active plan participants, 26% (31 December 2018: 23%)
in respect of deferred plan participants and 47% (31 December 2018: 46%) in respect of pensioners.
The weighted average duration of the defined benefit plan liabilities at 31 December 2019 was 17.1 years (31 December 2018: 16.6 years).
Financial statementsMelrose Industries PLC Annual Report 2019 168
Notes to the Financial Statements
Continued
24. Retirement benefit obligations continued
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
Disposal of businesses
Exchange adjustments
At 31 December
Year ended
31 December
2019
£m
3,273
–
93
379
157
(181)
(15)
(262)
(20)
(12)
3,412
Year ended
31 December
2018
£m
524
2,847
72
(121)
85
(159)
(12)
(1)
–
38
3,273
The actual return on plan assets was a gain of £472 million (2018: loss of £49 million).
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/(loss):
– current service cost
– past service (credit)/cost(1)
– plan administrative costs
Included within net finance costs:
– interest cost on defined benefit obligations
– interest income on plan assets
Discontinued operations
Included within operating profit/(loss):
– current service cost
Included within net finance costs:
– interest cost on defined benefit obligations
Year ended
31 December
2019
£m
Restated
Year ended
31 December
2018
£m
12
(4)
15
124
(93)
9
11
12
93
(72)
Year ended
31 December
2019
£m
Year ended
31 December
2018
£m
–
1
1
3
(1) A credit of £4 million was recorded as a past service cost during the year following a curtailment gain on a GKN Germany pension scheme. Furthermore, an expense of £11 million was 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. Both were treated as adjusting items (note 6).
Melrose Industries PLC Annual Report 2019 169
24. Retirement benefit obligations continued
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 (losses)/gains arising from changes in financial assumptions
Remeasurement gains arising from experience adjustments
Net remeasurement loss on retirement benefit obligations
Year ended
31 December
2019
£m
Year ended
31 December
2018
£m
379
157
(569)
1
(32)
(121)
7
77
1
(36)
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.
Decrease/
(increase) to plan
liabilities
£m
Increase/
(decrease)
to profit
before tax
£m
76
(78)
(59)
57
(186)
180
1
(1)
n/a
n/a
n/a
n/a
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
The sensitivity analysis above was determined based on reasonably 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 2019 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.
Financial statementsMelrose Industries PLC Annual Report 2019 170
Notes to the Financial Statements
Continued
25. 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 2019 and 31 December 2018:
Aerospace
£m
Automotive
£m
Powder
Metallurgy
£m
Restated
Nortek Air
Management
£m
Restated
Other
Industrial
£m
Corporate
£m
Discontinued
Operations
£m
Total
£m
31 December 2019
Financial assets
Classified as amortised cost:
Cash and cash equivalents
Net trade receivables
Classified as fair value:
Investments
Derivative financial assets
Foreign currency forward contracts
Interest rate swaps
Embedded derivatives(1)
Assets classified as held for sale(2)
Financial liabilities
Classified as amortised cost:
Interest-bearing loans and borrowings
Government refundable advances
Lease obligations
Other financial liabilities
Classified as fair value:
Derivative financial liabilities
Foreign currency forward contracts
Interest rate swaps
Cross-currency swaps
Embedded derivatives(1)
Liabilities associated with assets
held for sale(2)
31 December 2018
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
Embedded derivatives(1)
Financial liabilities
Classified as amortised cost:
Interest-bearing loans and borrowings
Government refundable advances
Lease obligations
Other financial liabilities (restated)
Classified as fair value:
Derivative financial liabilities
Foreign currency forward contracts
Interest rate swaps
Cross-currency swaps
Embedded derivatives(1)
–
626
48
–
–
16
–
–
(66)
(287)
(741)
–
–
–
(8)
–
–
837
–
–
18
–
(81)
(21)
(832)
–
–
–
(9)
–
402
–
155
–
141
–
102
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
2
–
–
–
–
–
–
1
–
–
–
–
–
(117)
(842)
(59)
(138)
(89)
(154)
(26)
(115)
(2)
–
–
–
–
–
–
–
–
–
(1)
–
–
–
–
(1)
–
–
–
–
–
458
–
177
–
156
–
125
–
–
–
–
–
(35)
(909)
–
–
–
–
–
–
–
–
–
–
2
–
–
–
–
(1)
1
–
–
–
–
–
(153)
(166)
(144)
–
–
–
–
(2)
–
–
–
(2)
–
–
–
317
–
–
37
1
–
–
(3,553)
–
(4)
(46)
(170)
(60)
(80)
–
–
415
–
12
8
–
(3,755)
–
–
(80)
(205)
(14)
(199)
–
–
–
–
–
–
–
65
–
–
–
–
–
–
–
–
(46)
317
1,426
48
40
1
16
65
(3,553)
(66)
(582)
(2,036)
(174)
(60)
(80)
(8)
(46)
–
82
415
1,835
–
–
–
–
–
–
15
8
18
(3,755)
(81)
(57)
(131)
(2,415)
–
–
–
–
(209)
(14)
(199)
(9)
(1) The embedded derivative is classified as a level 3 fair value under the IFRS 13 fair value hierarchy.
(2) Details of the assets and liabilities classified as held for sale are disclosed in note 13.
Melrose Industries PLC Annual Report 2019
171
25. 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 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. 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 17 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 2019 consists of net debt, as disclosed in note 27, 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
Committed bank funding consists of a multi-currency term loan denominated £100 million and US$960 million that matures in April 2021 and a
multi-currency revolving credit facility, denominated £1.1 billion, US$2.0 billion and €0.5 billion that matures in January 2023. The term loan was
amended on 31 December 2019 to provide the Group with the option at its request to extend the loan for a further three years to April 2024, if
required. Loans drawn under this facility are guaranteed by Melrose Industries PLC and certain of its subsidiaries, and there is no security over
any of the Group’s assets in respect of this facility.
As at 31 December 2019 the term loan was fully drawn. During October 2019, the 2019 GKN bond reached maturity and the revolving credit
facility was utilised to repay this bond amounting to £350 million, together with the associated cross currency swap which was out of the money
by £100 million. There remains a significant amount of headroom on the multi-currency committed revolving credit facility at 31 December 2019.
Applying the exchange rates at 31 December 2019, the headroom equated to £1,136 million (31 December 2018: £1,352 million).
Cash, deposits and marketable securities amounted to £317 million at 31 December 2019 (31 December 2018: £415 million) and are offset to
arrive at the Group net debt position of £3,283 million (31 December 2018: £3,482 million). The combination of this cash and the headroom on
the revolving credit 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
The 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 2019 it was 2.25x (31 December 2018: 2.28x), 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 10.8x at 31 December 2019 (31 December 2018: 11.6x),
affording comfortable headroom compared to the covenant test.
Bonds
Capital market borrowings as at 31 December 2019, inherited as part of the GKN acquisition, consist of a £450 million bond maturing
September 2022 and a £300 million bond maturing May 2032. During the year, a £350 million bond was repaid. Details of the bonds
outstanding at 31 December 2019 are shown in note 20.
To simplify corporate reporting requirements of the Group, the bonds were transferred to the Professional Securities Market in March 2019 with
the approval of the bond holders. In exchange for this concession, the bondholders now have the same guarantees from the Melrose Group
companies as those provided to the banks lending in the committed bank facility.
The £450 million bond was fully swapped into US$373 million and €284 million by GKN in September 2014 by using a number of cross-
currency swaps. At 31 December 2019, the fair value liability of these cross-currency swaps was £74 million (31 December 2018: £199 million,
including a liability of £102 million on the cross-currency swap linked to the £350 million bond that matured in October 2019). The coupon rate
on the £300 million bond maturing in 2032 increased by 1.25% to 4.625% from May 2019.
In respect of the cross-currency swaps on the £450 million bond, during the year there was a charge of £1 million (2018: £6 million) recognised
within the cost of hedge reserve related to the cost of hedging. At 31 December 2019, the cumulative value of the cost of hedging recognised
within the cost of hedge reserve is £7 million (2018: £6 million).
Financial statementsMelrose Industries PLC Annual Report 2019 172
Notes to the Financial Statements
Continued
25. Financial instruments and risk management continued
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.
GKN businesses which participate in these customer related finance programmes 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 2019, the drawings on these facilities were
£200 million (31 December 2018: £206 million).
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 on the credit 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 2019, total
facilities were £161 million (31 December 2018: £204 million) with drawings of £75 million (31 December 2018: £97 million). The arrangements do
not change the timing of the Group’s cash outflows.
Hedge of net investments in foreign entities using loans and derivatives
Interest-bearing loans and borrowings together with cross-currency swaps are designated as hedges of net investments in the Group’s
subsidiaries in the USA and Europe to reduce the exposure to the related foreign exchange risks.
The value of these were as follows:
Local borrowing:
US Dollar
Euro
GKN cross-currency swaps:
US Dollar
Euro
31 December
2019
£m
31 December
2018
£m
1,731
473
281
241
1,118
363
746
255
The Euro borrowings consist of US Dollar debt that was swapped into Euros using cross-currency swaps. The fair value of these cross-
currency swaps was a liability of £6 million (2018: £nil).
The foreign exchange movement on these borrowings, which is recorded in currency translation on net investments within other comprehensive
income was a gain of £83 million (2018: loss of £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 2019 the margin was 1.40% on the term loan and 1.65% on the revolving credit facility
(31 December 2018: 1.40% on the term loan and 1.65% on the revolving credit facility).
The policy of the Board is to hedge approximately 70% of the interest rate exposure of the Group. In addition to the fixed rate bonds inherited
as part of the GKN acquisition, the Group holds interest rate swap instruments to fix the cost of LIBOR on borrowings under the bank facility.
Under the terms of the swaps on the bank borrowings 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 Group is expected to be approximately 3.7% over the next 12 months.
The interest rate swaps are designated as cash flow hedges and were highly effective throughout 2019. The fair value of the contracts
as at 31 December 2019 was a net liability of £59 million (31 December 2018: £6 million). The net charge of £36 million for the year ended
31 December 2019 (2018: £14 million) being the movement in the year, excluding accrued interest, was booked to gains/losses on hedge
relationships within Other Comprehensive Income.
Due to some of the 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 2019 (2018: £nil).
Melrose Industries PLC Annual Report 2019 173
25. Financial instruments and risk management continued
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
2019
£m
Year ended
31 December
2018
£m
(4)
(3)
(1)
(10)
(4)
(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 Group 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 the Group will hedge 100%. For forecast cash flows, the Group 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
that are not denominated in Sterling 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 utilises its
multi-currency revolving credit facility and uses cross-currency swaps, where relevant, to maintain an appropriate mix of debt in each currency.
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 the Group, 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 and, if appropriate, hedged at the time.
As at 31 December 2019, 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. The fair value of all foreign exchange forward contracts across the Group was a
liability at 31 December 2019 of £134 million (31 December 2018: £194 million). A small proportion of these contracts have been designated as
cash flow hedges within the Nortek Air Management and Other Industrial reporting segments. Contracts where hedge accounting was applied
had a fair value asset as at 31 December 2019 of £2 million (31 December 2018: liability of £2 million). These contracts all mature between
January 2020 and December 2020.
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 credit of £1 million (2018: charge of £1 million).
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
2019, and could also do so in future reporting periods.
In respect of the cross-currency swaps designated as net investment hedges, for the year ended 31 December 2019, £7 million (31 December
2018: £16 million) was booked through the Income Statement in finance costs, of which a credit of £1 million (31 December 2018: charge of
£8 million) has been treated as an adjusting item (note 6). In addition, there is a £24 million credit (31 December 2018: charge of £84 million) 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 foreign currency
translation reserve (note 26).
Financial statementsMelrose Industries PLC Annual Report 2019 174
Notes to the Financial Statements
Continued
25. Financial instruments and risk management continued
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 2019
Foreign exchange forward contracts
Cross-currency swaps
Year ended 31 December 2018
Foreign exchange forward contracts
Cross-currency swaps
0-1 years
£m
1-2 years
£m
2-5 years
£m
5+ years
£m
1,104
499
1,203
511
552
25
624
27
703
547
918
603
42
–
43
–
Total
£m
2,401
1,071
2,788
1,141
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 below:
US Dollar
Euro
Year ended
31 December
2019
£m
Year ended
31 December
2018
£m
3
(3)
10
6
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
2019
£m
31 December
2018
£m
15
–
32
1
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 £204 million (2018: £186 million) and for Euro, a decrease of £75 million (2018: £62 million). However, there
would be no overall effect on equity because there would be an offset in the currency translation of the foreign operation.
Fair value measurements recognised in the Balance Sheet
Foreign currency forward contracts are measured using quoted forward exchange rates and yield curves derived from quoted interest rates
matching the maturities of the contracts.
Interest rate swap and cross-currency swap contracts are measured using yield curves derived from quoted interest and foreign
exchange rates.
Melrose Industries PLC Annual Report 2019 175
25. 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
Hedging Instruments
Pay fixed, receive floating interest rate swaps – assets
2019
%
2018
%
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
0.96%
0.92%
–
–
2.04%
2.06%
2.02%
–
4.86%
4.86%
4.86%
–
0.96%
0.99%
0.93%
–
1.81%
2.37%
2.27%
–
5.65%
4.85%
4.85%
–
2019
£m
259
223
–
–
1,523
1,617
1,889
–
522
522
522
–
2018
£m
393
303
228
–
379
946
1,301
–
1,001
548
548
–
Fair value assets/
(liabilities)
2019
£m
2018
£m
–
1
–
–
1
(18)
(13)
(29)
–
(60)
(1)
(1)
(72)
–
(74)
6
2
–
–
8
(1)
(3)
(10)
–
(14)
(101)
(3)
(95)
–
(199)
The Group also has cross-currency swaps designated in net investment hedge accounting relationships which convert US Dollar borrowings to
Euros. The fair value of these cross-currency swaps at 31 December 2019 was a liability of £6 million (31 December 2018: £nil), repayable within
one year. The movement on these cross-currency swaps of £6 million (2018: £nil) has been recorded in Other Comprehensive Income.
The Group is exposed to the following interest rate benchmarks within its hedge accounting relationships, which are subject to interest rate
benchmark reform: GBP LIBOR, USD LIBOR, EURIBOR (“IBORs”). The hedged items are Sterling, US Dollar and Euro floating rate debt.
The Group has closely monitored the market and the output from various industry working groups managing the transition to new benchmark
interest rates. This includes announcements made by LIBOR regulators (including the Financial Conduct Authority (“FCA”) and the US
Commodity Trading Futures Commission) regarding the transition away from LIBOR to the Sterling Overnight Indexed Average Rate (“SONIA”),
Secured Overnight Financing Rate (“SOFR”) and Euro Short-Term Rate (“ESTR”) respectively. The FCA has made it clear that, at the end of
2021, it will no longer seek to persuade, or compel banks to submit to LIBOR.
In response to the announcements, the Group will begin dialogue with its banking group in respect of IBOR reform, with the expectation that
the banking facility will transition to updated referenced benchmarked rates prior to the end of 2021.
Financial statementsMelrose Industries PLC Annual Report 2019 176
Notes to the Financial Statements
Continued
25. Financial instruments and risk management continued
Below are the details of the hedging instruments and hedged items in scope of the IFRS 9 amendments due to interest rate benchmark reform
by hedge type. The terms of hedged items listed match those of the corresponding hedging instruments.
Hedge type
Instrument type
Maturing
Notional
Hedged item
Interest rate swaps, pay Sterling fixed annually,
receive 1 month GBP LIBOR
Interest rate swaps, pay Sterling fixed annually,
receive 1 month GBP LIBOR
July 2021
£95 million
January 2023
Cash flow
hedges
Interest rate swaps, pay US Dollar fixed annually,
receive 3 month US Dollar LIBOR
July 2021
Interest rate swaps, pay 3 month US Dollar LIBOR,
receive 1 month US Dollar LIBOR
July 2021
Interest rate swaps, pay US Dollar fixed annually,
receive 1 month US Dollar LIBOR
Interest rate swaps, pay US Dollar fixed annually,
receive 1 month US Dollar LIBOR
January 2023
January 2023
Interest rate swaps, pay Euro fixed annually, receive
1 month EURIBOR
January 2023
Interest rate 0% caps, pay Euro fixed annually,
receive 1 month EURIBOR
January 2023
€220 million
Variable
(£30 million – £110 million)
Variable
($170 million – $265 million)
Variable
($170 million – $265 million)
Variable
($1,100 million – $1,500 million)
Variable
($450 million – $500 million)
Variable
(€160 million – €400 million)
Sterling floating rate debt
linked to LIBOR
US Dollar floating rate debt
linked to US LIBOR
Euro floating rate debt
linked to EURIBOR
The Group will continue to apply the amendments to IFRS 9 until the uncertainty arising from the interest rate benchmark reforms with respect
to the timing and the amount of the underlying cash flows that the Group is exposed to ends. The Group has assumed that this uncertainty will
not end until the Group’s contracts that reference IBORs are amended to specify the date on which the interest rate benchmark will be
replaced, the cash flows of the alternative benchmark rate and the relevant spread adjustment. This will, in part, be dependant on the
introduction of fallback clauses which have yet to be added to the Group’s contracts and the negotiation with lenders.
Derivative and financial assets and liabilities are presented within the Balance Sheet as:
Non-current assets
Current assets
Non-current liabilities
Current liabilities
31 December
2019
£m
31 December
2018
£m
38
19
(216)
(106)
26
15
(227)
(204)
The change in fair value of interest rate swaps, excluding accrued interest, was a £36 million charge (2018: £14 million) 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 translation
and hedging reserve
for continuing hedges
2019
£m
36
27
2018
£m
14
237
2019
£m
42
60
2018
£m
6
84
There is no balance held in cash flow hedge reserve from hedging relationships for which hedge accounting is no longer applied.
Melrose Industries PLC Annual Report 2019 26. Issued share capital and reserves
Share Capital
Allotted, called-up and fully paid
4,858,254,963 (31 December 2018: 4,858,254,963) Ordinary Shares of 48/7p each
(31 December 2018: 48/7p each)
12,831 (31 December 2018: 12,831) 2017 Melrose Incentive Plan Shares of £1 each
177
31 December
2019
£m
31 December
2018
£m
333
–
333
333
–
333
The rights of each class of share are described in the Directors’ Report.
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.
Translation and hedging reserve
In order to provide more useful information about the Group’s hedging arrangements, the translation reserve and hedging reserve have been
combined for the current and prior year. With the different components of hedging in one place it enables a clearer explanation of the three
components of hedging. These components are provided below with movements within other comprehensive income during the year shown
below and further explanation provided in note 25.
At 1 January 2018
Movements within other comprehensive income/(expense):
Retranslation of net assets
Foreign exchange differences on borrowings hedging net assets
Associated deferred tax
Change in fair value of derivatives designated in net investment hedges
Associated deferred tax
Change in fair value of derivatives designated in cash flow hedges
Amounts reclassified to the Income Statement
Associated deferred tax
Net movement in cost of hedging
At 31 December 2018
Movements within other comprehensive income/(expense):
Retranslation of net assets
Foreign exchange differences on borrowings hedging net assets
Associated deferred tax
Change in fair value of derivatives designated in net investment hedges
Associated deferred tax
Change in fair value of derivatives designated in cash flow hedges
Amounts reclassified to the Income Statement
Associated deferred tax
Net movement in cost of hedging
At 31 December 2019
Cost of hedge
reserve
Cash flow
hedge reserve
Foreign
currency
translation
reserve
Translation
and hedging
reserve
£m
–
–
–
–
–
–
–
–
–
(6)
(6)
–
–
–
–
–
–
–
–
(1)
(7)
£m
8
–
–
–
–
–
(13)
(2)
2
–
(5)
–
–
–
–
–
(35)
–
6
–
(34)
£m
(66)
677
(54)
5
(78)
22
–
–
–
–
506
(451)
83
(3)
19
(22)
–
(13)
–
–
119
£m
(58)
677
(54)
5
(78)
22
(13)
(2)
2
(6)
495
(451)
83
(3)
19
(22)
(35)
(13)
6
(1)
78
The cost of hedge reserve was previously reported as part of the hedging reserve and has been disaggregated.
The cash flow hedge reserve was previously reported as part of the hedging reserve and represents the cumulative fair value gains and losses
on derivatives for which cashflow hedge accounting has been applied. Movements and balances on derivatives designated in net investment
hedges were previously reported as part of the hedging reserve and are shown as part of the foreign currency translation reserve.
The foreign currency translation reserve contains exchange differences on the translation of subsidiaries with a functional currency other than
Sterling, together with gains and losses on the translation of liabilities and cumulative fair value gains and losses on derivatives that hedge the
Company’s net investment in foreign subsidiaries.
Financial statementsMelrose Industries PLC Annual Report 2019 178
Notes to the Financial Statements
Continued
27. Cash flow statement
Reconciliation of operating profit to cash generated by continuing operations
Operating profit/(loss)
Adjusting items
Adjusted operating profit
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(1)
Change in inventories
Change in receivables
Change in payables
Acquisition costs and associated transaction taxes
Tax paid
Interest paid on loans and borrowings
Interest paid on lease obligations
Net cash from operating activities
Year ended
31 December
2019
£m
Notes
Restated
Year ended
31 December
2018
£m
6
6
15
318
784
1,102
434
64
(66)
(320)
(183)
(12)
72
(2)
(16)
(117)
(166)
(21)
769
(387)
1,200
813
229
44
(59)
(198)
(99)
(108)
172
(160)
(125)
(68)
(111)
–
330
(1) The Group committed to contribute £150 million in total to the GKN UK 2012 and GKN UK 2016 plans in the first 12 months of ownership, £56 million was contributed in the year ended
31 December 2018 and £94 million was contributed in the year ended 31 December 2019. Furthermore, in July 2019 the Group contributed £17 million to the GKN UK plans following the
disposal of the Walterscheid Powertrain Group.
Cash flow from discontinued operations
Net cash (used in)/from discontinued operations
Defined benefit pension contributions paid
Interest paid on lease obligations
Tax (paid)/received
Net cash (used in)/from operating activities from discontinued operations
Purchase of property, plant and equipment
Disposal costs
Proceeds from disposal of property, plant and equipment
Net cash used in investing activities from discontinued operations
Repayment of principal under lease obligations
Net cash used in financing activities from discontinued operations
Year ended
31 December
2019
£m
Year ended
31 December
2018
£m
(16)
(2)
(1)
(1)
(20)
(12)
(3)
–
(15)
(2)
(2)
44
(3)
–
2
43
(16)
–
2
(14)
–
–
Melrose Industries PLC Annual Report 2019 179
27. Cash flow statement continued
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. 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
2019
£m
31 December
2018
£m
(89)
(3,464)
(3,553)
317
(3,236)
(80)
33
(377)
(3,378)
(3,755)
415
(3,340)
(199)
57
(3,283)
(3,482)
External debt
Cross-currency swaps
Non-cash acquisition fair value adjustments
Cash and cash equivalents
Net debt
28. Commitments
Amounts payable under 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
Amount due for settlement after one year
Present value of lease obligations
At
31 December
2018
£m
(3,755)
(199)
57
(3,897)
415
(3,482)
Cash flow
£m
Acquisitions
and disposals
£m
Other non-cash
movements
£m
106
100
–
206
(234)
(28)
–
–
–
–
153
153
13
(5)
(24)
(16)
–
(16)
Effect of foreign
exchange
£m
83
24
–
107
(17)
90
At
31 December
2019
£m
(3,553)
(80)
33
(3,600)
317
(3,283)
31 December
2019
£m
31 December
2018
£m
91
235
375
(119)
582
71
511
582
8
28
48
(27)
57
5
52
57
The Group recognised £589 million of lease liabilities on adoption of IFRS 16 on 1 January 2019. There was a corresponding right-of-use asset,
shown in property, plant and equipment in note 14. Further details on the adoption of IFRS 16 are shown in note 1.
It is the Group’s policy to lease certain of its property, plant and equipment. The average lease term is 10 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.
The Group’s obligations under lease arrangements are secured by the lessors’ rights over the leased assets.
Capital commitments
At 31 December 2019, there were commitments of £164 million (31 December 2018: £137 million) relating to the acquisition of new plant
and machinery.
Financial statementsMelrose Industries PLC Annual Report 2019 180
Notes to the Financial Statements
Continued
29. 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 2019
totalled £12 million (2018: £28 million). Purchases by subsidiaries from equity accounted investments in the year ended 31 December 2019
totalled £7 million (2018: £14 million). At 31 December 2019, amounts receivable from equity accounted investments totalled £5 million
(31 December 2018: £6 million) and amounts payable to equity accounted investments totalled £1 million (31 December 2018: £2 million).
Sales to and purchases from Group companies are priced on an arm’s length basis and generally are settled on 30 day terms.
Remuneration of key management personnel
The remuneration of the Directors, who are the key management personnel of the Group, is set out below in aggregate for each of the
categories specified in IAS 24: “Related party disclosures”. Further information about the remuneration of individual Directors is provided
in the audited part of the Directors’ Remuneration Report on pages 93 and 101.
Short-term employee benefits
Share-based payments
Year ended
31 December
2019
£m
Year ended
31 December
2018
£m
4
9
13
3
9
12
30. Post Balance Sheet events
On 2 January 2020 GKN Powder Metallurgy completed the acquisition of FORECAST 3D, a leading US specialist in plastic additive
manufacturing and 3D printing services offering a full range of services from concept to series production, for a total consideration of up to
£29 million, of which £20 million was paid on 2 January 2020. The acquisition furthers GKN Powder Metallurgy’s ambition to achieve global
market leadership in industrialising additive manufacturing. In the year ended 31 December 2019 FORECAST 3D achieved sales of
approximately £17 million.
31. 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 21.
Given the nature of the Group’s business many of the Group’s products have a large installed base, and any recalls or reworks related to such
products could be particularly costly. The costs of product recalls or reworks are not always covered by insurance. Recalls or reworks may have
a material adverse effect on the Group’s financial condition, results of operations and cash flows.
The Group has contingent liabilities representing guarantees and contract bonds given in the ordinary course of business on behalf of trading
subsidiaries. No losses are anticipated to arise on these contingent liabilities. The Group does not have any other significant contingent liabilities.
Melrose Industries PLC Annual Report 2019 Company Balance Sheet for Melrose Industries PLC
181
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
2019
£m
31 December
2018
£m
Notes
3
4
4
5
6
7
10,573
10,569
413
25
(2,016)
(1,578)
8,995
(3)
8,992
333
8,138
109
412
8,992
400
25
(1,773)
(1,348)
9,221
(1)
9,220
333
8,138
109
640
9,220
The Company reported a loss for the financial year ended 31 December 2019 of £10 million (2018: profit of £445 million).
The financial statements were approved by the Board of Directors on 5 March 2020 and were signed on its behalf by:
Geoffrey Martin
Group Finance Director
5 March 2020
Registered number: 09800044
Simon Peckham
Chief Executive
5 March 2020
Company Statement of Changes in Equity
At 1 January 2018
Profit for the year (note 2)
Total comprehensive income
Dividends paid
Acquisition of GKN(1)
Equity-settled share-based payments
At 31 December 2018
Loss for the year (note 2)
Total comprehensive expense
Dividends paid
Equity-settled share-based payments
At 31 December 2019
Issued share
capital
Share premium
account
£m
133
–
–
–
200
–
333
–
–
–
–
£m
1,493
–
–
–
6,645
–
8,138
–
–
–
–
Merger reserve
£m
109
–
–
–
–
–
109
–
–
–
–
333
8,138
109
Retained
earnings
£m
311
445
445
(129)
–
13
640
(10)
(10)
(231)
13
412
Shareholders’
funds
£m
2,046
445
445
(129)
6,845
13
9,220
(10)
(10)
(231)
13
8,992
(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.
Refer to the Section 172 statement in the Strategic Report on pages 56 to 57 for further details on the Company’s Distribution Policy.
Financial statementsMelrose Industries PLC Annual Report 2019
182
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 4 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 44 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.
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. 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.
Melrose Industries PLC Annual Report 2019 183
1. Significant accounting policies continued
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 loss for the financial year ended 31 December 2019 of £10 million (2018: profit of £445 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 90 to 111. There were no other employees of the Company
in the year.
3. Investment in subsidiaries
At 1 January 2019
Additions
At 31 December 2019
£m
10,569
4
10,573
A £4 million investment from equity-settled share-based payments for subsidiaries is included as an addition to investments in subsidiaries at
31 December 2019.
The following subsidiaries and significant holdings were owned by the Company as at 31 December 2019:
Equity
interest %
Class of
Share held
Equity
interest %
Class of
Share held
Argentina
Avenida Del Libertador 602, 4’ Piso,
Buenos Aires
Transmisiones Homocineticas
Argentinas SA (in liquidation)
Australia
Unit 6, 256-258 Leitchs Road, Brendale,
Queensland, 4500
Bristol Meci Australasia Pty Limited
Hawker Siddeley Switchgear Pty Limited
45-49 McNaughton Road,
Clayton Victoria, 3168
Unidrive Pty Ltd
7 Eden Park Road, Level 5,
Macquarie Park, NSW 2113
Ergotron Australia Pty Ltd
Belgium
Jean en Maurits, Sabbestraat 130A/A000,
8930 Menen
Nortek Global HVAC Belgium NV
Brazil
Cicada de Vitoria, Estado do Espirio Santo, na
Av. Nossa, Senhora da Penha, 520, Sala 404,
Praia do Canto, 29055-131
Nordyne do Brasil Participações 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
49 Ordinary B(1)
100
100
Ordinary
Ordinary
100
Ordinary
100
Ordinary
100
Ordinary
100
Common
100
Quota
capital
100
Common
99.99
Common
British Virgin Islands
Commerce House, Wickhams Cay 1,
P.O. Box 3140, Road Town, Tortola VG1110
Nortek Trading Limited
Canada
1134 Grande Allée Ouest, bureau 600,
Quebec, G1S 1E5
Brush Canada Services Inc./Services Brush
Canada Inc.
Fokker Elmo Canada Inc.
330 Bay Street, 920, Toronto, Ontario, M5H2S8
Nortek Air Solutions Quebec, Inc
55 Union Street, Suite 710, Saint John, New
Brunswick, E2L 5B7
2GIG Technologies Canada, Inc.
1300 – 1969 Upper Water Street, Purdy’s Wharf
Tower II, Halifax Nova Scotia, B3J 2VI
Ergotron Canada Corporation
550, Lemire Blvd, Drummondville
Québec J2C 7W9
Innergy Tech, Inc.
Venmar Ventilation ULC
1500-1874 Scarth Street, Regina,
Saskatchewan, S4P 4E9
Nortek Air Solutions Canada, Inc.
7 Michigan Boulevard, St. Thomas, Ontario
GKN Sinter Metals – St. Thomas, Ltd.
100
Ordinary
100
100
Common
stock
Ordinary
100
Ordinary
100
Class A
Common
100
Ordinary
100
100
Ordinary
Common
Class A
Special
100
Ordinary
100
Common
stock
Financial statementsMelrose Industries PLC Annual Report 2019 184
Notes to the Company Balance Sheet
Continued
3. Investment in subsidiaries continued
Equity
interest %
Class of
Share held
Equity
interest %
Class of
Share held
China
No.8 Changhong Road, Changshu Economic
Development Zone, Jiangsu Province, 21550
Brush Electrical Machines (Changshu) Co. Limited
2025, 2031 2nd Floor, Tower C.,
155 West Fute Road, Waigaoqi Bonded Zone
Shanghai, 200131
FKI Engineering Shanghai Limited
No. 6 Zone, Daxin Group, Zhongkai Hi-tech
District, Huizhou
Guangdong Broan IAQ Systems Co. Limited
The 3rd Industry Area, Juzhou Shijie,
Dongguan, Guangdong, 523290
Dongguan Ergotron Precision Technology
Co Limited
Room 2913 and 2914, Taiwan Merchants
Building, 11th Dongguan Avenue, Dongcheng,
Dongguan, Guangdong Province
Dongguan Ergotron Precision Technology Design
Services Co., Limited
Building 5, 6, 7 and 8, No. 2 Industrial Park,
Bao An District, Shenzhen
Linear Electronics (Shenzhen) Co Limited
Room 22D2, 22D3, No.895 South Yan’an Rd,
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
GKN China Holding Co Ltd
18 North Shitan Road, North Industrial Park,
Development Zone, Danyang, Jiangsu, 212310
GKN Danyang Industries Company Limited
No. 1 Cuigu, Northern New Zone,
Chongqing, 401122
GKN HUAYU Driveline Systems
(Chongqing) Co. Ltd
928 JingDu Road, Donghai Economic
Development Zone, Jiangsu, 222300
GKN (Lianyungang) Company Limited
1 Xinwang Road, Jingjiang Economic and
Technic Development Zone, Jingjiang, Jiangsu
GKN Aerospace (Jingjiang) Co., Ltd
No. 7 Liutai Road, Liuzhou, Guangxi, 545007
GKN Power Solutions (Liuzhou) Company Limited
No.8 Kangmin Road, Yizheng
GKN Sinter Metals Yizheng Co Ltd
Xiguo Industrial Zone, Mengzhou City, Henan
Province, 454750
GKN Zhongyuan Cylinder Liner Company Limited
Zijin Kechuang Center 4 Level, 416 Room,
Economy Development Zone, Lishui, 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
Room 805, 8th floor, Building 2, No. 1859,
Shibo Avenue, Shanghai
GKN Aerospace (Shanghai) Co., Ltd
Registered
investment
100
100
Ordinary
100
Ordinary
Registered
investment
100
Registered
investment
100
100
Ordinary
100
Ordinary
Registered
investment
100
Registered
investment
40
Registered
investment
Registered
investment
100
100
9
Ordinary(2)
Registered
investment
Registered
investment
Registered
investment
Registered
investment
100
100
100
100
Registered
investment
59
19.79
Registered
investment
49
Ordinary
Registered
investment
50
100
Ordinary
Colombia
1301, 13/F Bank of America Tower,
12 Harcourt Road, Central
MiOS Colombia (in liquidation)
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
Nagbølvej 31, 6640 Lunderskov
GKN Wheels Nagbol A/S
France
Boulevard De L Europe, BP 177 91006
Evry-Courcouronnes CEDEX
Arianespace Participation S.A.
12 Quai du Commerce 69009 Lyon
Ergotron France SARL
Zl de Rosarge, 230 Rue de la Dombes,
Les Echets, 01700, Mirabel
Nortek Global HVAC France SAS
7 rue de la Briqueterie, 02240 Ribemont
GKN Driveline Ribemont SARL
100 Avenue Vanderbilt, 78955 Carrieres-sous-
Poissy
GKN Automotive SAS
GKN Driveline SA
GKN Freight Services EURL
765 rue Albert Einstein, CS 70402, 13591
Aix-en-Provence Cedex 3
NH Industries SAS
20 rue Lavoisier, 95300 Pontoise
GKN Aerospace France SARL
Germany
c/o Meier & Collegen GmbH, 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, Rosrath, Germany
GKN Driveline Service GmbH
Opelkreisel 1-9, 67663 Kaiserslautern
GKN Gelenkwellenwerk Kaiserslautern GmbH
Krebsoege 10, 42477 Radevormwald
GKN Powder Metallurgy Holding 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
Peterstrasse 69, 42499, Hueckeswagen
Hoeganaes Corporation Europe GmbH
42
Ordinary
49
Ordinary
100
Ordinary
100
Ordinary
1.6110
Ordinary
100
Ordinary
100
Ordinary
100
Ordinary
100
99.99
100
Ordinary
Ordinary
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
Melrose Industries PLC Annual Report 2019 185
3. Investment in subsidiaries continued
Equity
interest %
Class of
Share held
Equity
interest %
Class of
Share held
Hong Kong
Tricor Services Limited, 28/F,
Bank of East Asia Harbour View Center,
56 Gloucester Road, Wanchai
Broan-NuTone (HK) Limited (in liquidation)
31/F, Tower Two, Times Square,
1 Matheson Street, Causeway Bay
Linear HK Manufacturing Limited
Citicorp Centre, STE 1607-8,
18 Whitfield Road, Causeway Bay
MiOS Limited (in liquidation)
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
Office No. 301-308, 3rd Floor, Pride Silicon
Plaza Survey No 106A, Nr Chaturshringi
Temple, S.B. Road, Pune, Maharashtra, 411016
IntelliVision Technologies Private Limited
Ireland
3rd Floor, Kilmore House, Park Lane,
Spencer Dock, Dublin 1, Ireland
Nortek Air Solutions (Ireland) Limited
Isle of Man
c/o Willis Management (Isle of Man) Ltd, Tower
House, Loch Promenade, Douglas, IM1 2LZ
Ipsley Insurance Limited
Italy
Corso Vercelli, Milan, 40 - 20145
GKN Wheels Italy S.r.l
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 Delle Fabbriche 5, 39031 Brunico, BZ, Italy
GKN Sinter Metals SpA
Japan
c/o TA Lawyers GKJ, 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
100
Ordinary
100
Ordinary
42
Ordinary
49
Ordinary
97.03
Ordinary
100
Ordinary
100
Ordinary
100
Ordinary
99.99
Ordinary
100
Ordinary
100
Ordinary
100
Ordinary
100
Ordinary
100
Ordinary
100
Ordinary
100
Ordinary
100
Ordinary
100
Ordinary
2388 Ohmiya-cho, Tochigi City,
328-8502 Tochigi
GKN Driveline Tochigi Holdings KK
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
53 3Gongdan2-ro, Seobuk-gu,
CheonAn-si, Chungcheongnam-do
GKN Driveline Korea Limited
Malaysia
Lot 6.05, Level 6 KPMG Tower 8, First Avenue,
Bandar Utama, 47800 Petaling Jaya, Selangor
GKN Engine Systems Component
Repair Sdn Bhd
Suite A, Level 9, Wawasan Open University, 54,
Jalan Sultan Ahmad Shah, Georgetown, Pulau,
10050, Penang
GKN Driveline Malaysia Sdn Bhd
Malta
A18b, Industrial Estate, Marsa, 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
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, CP 67119
Manufactura e Innovacion Monterrey,
S. de R.L. de C.V.
Herminia Castro de Aguirre 1805-8, Parque
Industrial Amistad Aeropuerto, Ramos Arizpe,
Coahuila, 25900
Manufacturas Avanzadas Ramsal,
S. de. R.L. de C.V.
100
Ordinary
100
Ordinary
100
Ordinary
100
Common
stock
100
Ordinary
68.42
Ordinary
26
A Ordinary(3)
Registered
investment
100
100
Ordinary
100 Fixed equity
99.86
98
98
Ordinary
Ordinary
Ordinary
98
Ordinary
Membership
interest
Membership
interest
100
100
Membership
interest
100
Membership
interest
100
Financial statementsMelrose Industries PLC Annual Report 2019 186
Notes to the Company Balance Sheet
Continued
3. Investment in subsidiaries continued
The Netherlands
Beeldschermweg 3, 3821 AH Amersfoort
Ergotron Nederland BV
Ringdijk 390B, 2983 GS Ridderkerk
Brush HMA BV
c/o Vistra, Atrium Building, 8th Floor,
Strawinskylaan 3127, 1077, Amsterdam
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
Fabriek Slobbengors Beheer B.V.
Fabriek Slobbengors C.V.
Hoofdkantoor Slobbengors Beheer B.V.
Kantoor Industrieweg C.V.
Aviolandalaan 31, 4631 RP, Hoogerheide
Fokker Aircraft Services B.V.
Fokker Techniek BV
Aviolandalaan 33, Hoogerheide, 4631 RP
Fokker Elmo B.V.
Grasbeemd 28, 5705 DG, Helmond
Fokker Landing Gear B.V.
Industrieweg 4, 3351 LB, Papendrecht
Fokker (CDR) B.V.
Fokker Aerospace B.V.
Fokker Aerostructures B.V.
Fokker Engineers & Contractors B.V.
Fokker Procurement Combination B.V.
Fokker Technologies Group B.V.
Fokker Technologies Holding B.V.
Fokker Technology B.V.
GKN Aerospace Netherlands B.V.
Structural Laminates Industries B.V.
Hoeksteen 40, 2132 MS, Hoofddorp
Fokker Services B.V.
11th Floor, The Colmore Building, 20 Colmore
Circus Queensway, Birmingham, B4 6AT
GKN UK Holdings BV
Herikerbergweg 238, 1101CM, Amsterdam
Ridderkerk Property 1 BV
Norway
Kirkegårdsveien 45, 3616 Kongsberg
GKN Aerospace Norway AS
Kongsberg Technology Training Centre AS
Kongsberg Terotech AS
Oman
Street 14, Nizwa Industrial Estate, P.O Box
1896 PC112, Ruwi
Brush Middle East LLC
Poland
Ul. B. Krzywoustego 31 G, 56-400 Oleśnica,
GKN Driveline Polska Sp z o o
Portugal
Avenida Marechal Gomes da Costa, 1131,
4150-360, Porto
GKN Automotive Portugal, Limitada
Equity
interest %
Class of
Share held
Equity
interest %
Class of
Share held
100
Ordinary
100
Ordinary
100
100
Ordinary
Ordinary
20
50
49
49
49
49
Ordinary
Ordinary
Ordinary
Ordinary(4)
Ordinary
Ordinary
100
100
Ordinary
Ordinary
100
Ordinary
100
A 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
Membership
interest
70
100
Ordinary
100
Quota
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
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
Nizhniy Novgorod, 77 Ulitsa Gorkogo,
Premises P6
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
38 Beach Road #29-11, South Beach Tower,
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
Sweden
SE – 461 81, Trollhättan
GKN Aerospace Sweden AB
GKN Sweden Holdings AB
SE – 731 36, Köping
GKN Driveline Köping AB
BRÖDERNA UGGLAS GATA,
SE – 58254 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
GKN Driveline Manufacturing Ltd (in liquidation)
49
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
100
Ordinary
Ordinary
100
Ordinary
20
Ordinary
36.25
Common
stock
100
Ordinary
100
100
Ordinary
Ordinary
Melrose Industries PLC Annual Report 2019 187
3. Investment in subsidiaries continued
Turkey
Ege Serbest Bölgesi, SADI Sok. No:10,
35410 Gaziemir, Izmir
Fokker Elmo Havacilik Sanayi Ve Ticaret Limited
Sirketi
Organize Sanayi Bolgesi 20, Cadde No: 17,
26110, Eskisehir
GKN Eskisehir Automotive Products Manufacture
and Sales A.S.
Yakuplu Mah. Haramidere Sanayi Sitesi,
J Blok, No. 106-107-108, Beylikdüzü, Istanbul
GKN Sinter Istanbul Metal Sanayi Ve Ticaret
Anonim Şirketi
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 Holdings Limited
Ergotron UK Limited
FAD (UK) Limited
Falcon Works Property Limited
Firth Cleveland Limited
FKI Plan Trustees Limited
F.P.T Industries Limited
GKN Aerospace Holdings Limited
GKN Aerospace Transparency Systems (Kings
Norton) Limited
GKN Aerospace Transparency Systems (Luton)
Limited
GKN Automotive Holdings 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
Equity
interest %
Class of
Share held
GKN Group Pension Trustee (No.2) Limited
GKN Group Pension Trustee Limited
Equity
interest %
100
100
100
Ordinary
GKN Group Services Limited
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
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
100
Ordinary
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
GKN Hardy Spicer Limited
GKN Holdings Limited
G.K.N. 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 Quest Trustee 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
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 Holdings Limited (in liquidation)
Melrose USD 1 Limited
Nortek (UK) Limited
Nortek Global HVAC (UK) Limited
P.F.D. Limited
Raingear Limited
Rigby Metal Components Limited
Rzeppa Limited
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
Class of
Share held
Ordinary
Ordinary
Ordinary and
redeemable
preference
Ordinary
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
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary and
redeemable
preference
Financial statementsMelrose Industries PLC Annual Report 2019 188
Notes to the Company Balance Sheet
Continued
3. Investment in subsidiaries continued
Sageford UK Limited
Sheepbridge Stokes Limited
Westland Group PLC
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 II GP Limited
GKN Investments II LP
GKN Investments III GP Limited
GKN Investments III LP
26-28 Goodall Street, Walsall,
West Midlands, WS1 1QL
Chassis Systems Limited (in liquidation)
Hadley Castle Works, Telford, Shropshire,
TF1 6AA
GKN AutoStructures Limited
GKN Sankey 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 Holding Limited
2nd Floor, One Central Boulevard Blythe Valley
Park, Shirley, Solihull, B90 8BG
GKN Aerospace Services Limited
2100 The Crescent, Birmingham Business
Park, Birmingham, West Midlands, B37 7YE
GKN Automotive Limited
GKN Driveline UK Limited
GKN Driveline Mexico (UK) Limited
GKN EVO eDrive Systems Limited
GKN Freight Services Limited
GKN Hybrid Power Limited
Unit 7 Chestnut Court, Jill Lane, Sambourne,
Redditch, B96 6EW
GKN Powder Metallurgy Holdings Limited
79 Caroline Street, Birmingham, B3 1UP
Eaton-Williams Exports Limited (in liquidation)
Eaton-Williams Group Limited (in liquidation)
Eaton-Williams Limited (in liquidation)
Eaton-Williams (Millbank) Limited (in liquidation)
Eaton-Williams Products Limited (in liquidation)
Eaton-Williams Service Limited (in liquidation)
Edenaire Limited (in liquidation)
Electro Dynamic Limited (in liquidation)
GKN Aerospace Limited (in liquidation)
Melrose UK 4 Limited (in liquidation)
Precision Air Control Limited (in liquidation)
Precision House Management Services Limited
(in liquidation)
Reznor (UK) Limited (in liquidation)
Vapac Humidity Control Limited (in liquidation)
Equity
interest %
100
100
100
100
100
100
Class of
Share held
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
100
100
100
100
100
Ordinary
Ordinary
Membership
interest
Ordinary
Membership
interest
50
Ordinary
100
100
100
Ordinary
Ordinary
Ordinary
100
Ordinary
100
Ordinary
37.5
Ordinary
100
Ordinary
Ordinary
and
preference
Ordinary
Ordinary
Ordinary
Ordinary
and
cumulative
preference
Ordinary
100
100
100
100
100
100
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
40 Technology Parkway, South #300,
Norcross, GA, 30092
Aerotron AirPower, Inc.
Fokker Elmo Inc.
421 West Main Street, Frankfort, Kentucky,
40601
Barcom Asia Holdings, LLC
2345 Rice Street, Suite 230, Roseville MN,
55113
Ergotron, Inc.
1209 Orange Street, Wilmington, Delaware,
19801
Melrose North America, Inc
BBVA Tower 254 Munoz, Rivera Ave, 6th Floor,
San Juan, 00918, Puerto Rico
Nortek Global HVAC de Puerto Rico, LLC
601 Abbott Road, Ingham, East Lansing,
Michigan, 48823
Operator Specialty Company, Inc.
300 Deschutes Way SW, Suite 304, Tumwater,
WA, 98501
Fokker Aerostructures Inc.
2710 Gateway Oaks Drive, Suite 150 N,
Sacramento, CA, 95833
GENIL, Inc.
GKN Aerospace Camarillo, Inc.
GKN Aerospace Chem-tronics Inc.
GKN Aerospace Transparency Systems, Inc
Nortek Security & Control LLC
Zephyr Ventilation, LLC
251 Little Falls Drive, Wilmington Delaware,
19808
BNSS LP, Inc.
Broan-NuTone LLC
100
Ordinary
GKN Driveline Newton LLC
GKN Aerospace Aerostructures, Inc
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
GKN Aerospace Florida LLC
GKN Aerospace, Inc
GKN Aerospace New England, Inc.
GKN Aerospace Newington LLC
GKN Aerospace St. Louis LLC
GKN Aerospace Precision Machining, Inc.
GKN Aerospace Services Structures LLC
GKN Aerospace South Carolina, Inc.
GKN Aerospace US Holdings LLC
GKN America Corp.
Equity
interest %
Class of
Share held
100
Ordinary
Common
stock
Membership
interest
Common
stock
Common
stock
100
100
100
100
Membership
interest
100
100
Common
100
Common
Membership
interest
100
100
Common
Common
stock
Ordinary
Ordinary
Ordinary
Common
Membership
interest
Membership
interest
Common
Membership
interest
Membership
interest
Common
Membership
interest
Common
stock
Ordinary
Membership
interest
Membership
interest
Ordinary
Membership
interest
Common
Stock
Membership
interest
Common
stock
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
Melrose Industries PLC Annual Report 2019 189
3. Investment in subsidiaries continued
Equity
interest %
Class of
Share held
USA continued
GKN Cylinder Liners, LLC
GKN Driveline North America, Inc.
GKN Freight Services, Inc.
GKN North America Investments, Inc
GKN North America Services, Inc
GKN Sinter Metals, LLC
GKN Westland Aerospace, Inc.
Hoeganaes Corporation
Hoeganaes Specialty Metal Powders LLC
Huntair Middle East Holdings, Inc.
IntelliVision Technologies Corp.
Linear H.K. LLC
Nevada Holdco Corp.
Nortek Air Solutions, LLC
Nortek Global HVAC, LLC
Nortek Global HVAC Latin America, Inc.
Nortek Home Control Holdings LLC
Nortek, Inc.
Nortek International, Inc
XIK, LLC
505 5th Avenue, Suite 729,
Des Moines IA, 50309
GKN Armstrong Wheels, Inc
50 West Broad Street, Suite 1330, Columbus,
Ohio, 43215
GKN Driveline Bowling Green, Inc.
80 State Street, Albany New York, 12207
GKN Aerospace Monitor, Inc.
135 North Pennsylvania Street, Suite 1610,
Indianapolis, Indiana, 46204
GKN Aerospace Muncie, Inc.
400 Main Street, East Hartford, CT, 06108
PW1100G-JM Engine Leasing, LLC
Membership
interest
Common
stock
Common
stock
Ordinary
Common
Membership
interest
Common
stock
Common
stock
Membership
interest
Common
Ordinary
Membership
interest
Ordinary
Membership
interest
Membership
interest
Common
Membership
interest
Ordinary
Common
Membership
interest
100
100
100
100
100
100
100
100
70
100
100
100
100
100
100
100
100
100
100
100
100
Ordinary
100
Common
stock
100
Common
100
Common
4 Class C Unit
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.
Notes
(1) The Group owns 100% of the Ordinary Class B shares with a total effective ownership of 49%
in the company.
(2) The Group owns 9% directly with a total effective ownership of 34.5% in the company.
(3) The Group owns 100% of the Ordinary Class A shares with a total effective ownership of 26%
in the company.
(4) The Group owns 49% directly with a total effective ownership of 49.98% in the company.
Financial statementsMelrose Industries PLC Annual Report 2019 190
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
2019
£m
31 December
2018
£m
413
25
438
400
25
425
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
2019
£m
31 December
2018
£m
25
25
31 December
2019
£m
31 December
2018
£m
2,015
1
2,016
1,772
1
1,773
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 2019
Charge to profit and loss account
At 31 December 2019
Incentive plan
related
£m
1
2
3
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 one year.
7. Issued share capital
Share Capital
Allotted, called-up and fully paid
4,858,254,963 (31 December 2018: 4,858,254,963) Ordinary Shares of 48/7 pence each
(31 December 2018: 48/7 pence each)
12,831 (31 December 2018: 12,831) 2017 Melrose Incentive Plan Shares of £1 each
The rights of each class of share are described in the Directors’ Report.
31 December
2019
£m
31 December
2018
£m
333
–
333
333
–
333
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.
Melrose Industries PLC Annual Report 2019
Glossary
191
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.
APM
Adjusted operating profit
Closest equivalent statutory measure
Operating profit/(loss)(2)
Reconciling items to statutory measure
Adjusting items (note 6)
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.
These APMs may not be directly comparable with similarly titled
measures reported by other companies and they are not intended to
be a substitute for, or superior to, IFRS measures. All Income
Statement and cash flow measures are provided for continuing
operations unless otherwise stated.
Operating profit
Operating profit/(loss)
Adjusting items (note 6)
Adjusted operating profit
Year ended
31 December
2019
£m
Restated(1)
Year ended
31 December
2018
£m
318
784
1,102
(387)
1,200
813
Income Statement Measures
APM
Adjusted revenue
Closest equivalent statutory measure
Revenue
Reconciling items to statutory measure
Share of revenue of equity accounted investments (note 5)
Definition and purpose
Adjusted revenue includes the Group’s share of revenue of equity
accounted investments (“EAIs”). This enables comparability between
reporting periods.
Revenue
Revenue
Share of revenue of equity
accounted investments
Adjusted revenue
Year ended
31 December
2019
£m
Restated(1)
Year ended
31 December
2018
£m
10,967
625
11,592
8,152
493
8,645
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, any item released to the
Income Statement that was previously a fair value item booked
on an acquisition, and includes adjusted profit from EAIs.
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
Closest equivalent statutory measure
Operating margin(3)
Reconciling items to statutory measure
Share of revenue of equity accounted investments (note 5) and
adjusting items (note 6)
Definition and purpose
Adjusted operating margin represents Adjusted operating profit
as a percentage of Adjusted revenue.
APM
Adjusted profit before tax
Closest equivalent statutory measure
Profit/(loss) before tax
Reconciling items to statutory measure
Adjusting items (note 6)
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.
Profit before tax
Profit/(loss) before tax
Adjusting items (note 6)
Adjusted profit before tax
Year ended
31 December
2019
£m
Restated(1)
Year ended
31 December
2018
£m
106
783
889
(542)
1,214
672
Financial statementsMelrose Industries PLC Annual Report 2019 192
Glossary
Continued
APM
Adjusted profit after tax
Closest equivalent statutory measure
Profit/(loss) after tax
Reconciling items to statutory measure
Adjusting items (note 6)
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.
Profit after tax
Profit/(loss) after tax
Adjusting items (note 6)
Adjusted profit after tax
Year ended
31 December
2019
£m
Restated(1)
Year ended
31 December
2018
£m
55
644
699
(467)
984
517
APM
Adjusted EBITDA for leverage covenant purposes
Closest equivalent statutory measure
Operating profit/(loss)(2)
Reconciling items to statutory measure
Adjusting items (note 6), depreciation of property, plant and
equipment and amortisation of computer software and development
costs, imputed lease charge, share of non-controlling interests and
other adjustments required for covenant purposes(5)
Definition and purpose
Adjusted operating profit for 12 months prior to the reporting date,
before depreciation and impairment of property, plant and equipment
and before the amortisation and impairment of computer software
and development costs.
Adjusted EBITDA for covenant purposes is a measure used by
external stakeholders to measure performance.
Adjusted EBITDA for leverage
covenant purposes
Adjusted operating profit
Depreciation of property, plant
and equipment and amortisation
of computer software and
development costs
Full year impact of acquisitions
Imputed lease charge
Non-controlling interests
Other adjustments required
for covenant purposes(5)
Adjusted EBITDA for
leverage covenant purposes
Year ended
31 December
2019
£m
Year ended(4)
31 December
2018
£m
1,102
847
498
–
(91)
(6)
2
282
378
(6)
–
(9)
1,505
1,492
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, 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.
Adjusted tax rate
Tax (charge)/credit per
Income Statement
Tax impact of adjusting items
Tax impact of restructuring
Tax impact of EAIs
Adjusted tax charge
Adjusted profit before tax
Adjusted tax rate
Year ended
31 December
2019
£m
Restated(1)
Year ended
31 December
2018
£m
(51)
(123)
(9)
(7)
(190)
889
21.4%
75
(221)
–
(9)
(155)
672
23.1%
APM
Adjusted basic earnings per share
Closest equivalent statutory measure
Basic earnings per share
Reconciling items to statutory measure
Adjusting items (note 6 and note 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.
APM
Adjusted diluted earnings per share
Closest equivalent statutory measure
Diluted earnings per share
Reconciling items to statutory measure
Adjusting items (note 6 and note 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.
Melrose Industries PLC Annual Report 2019
193
APM
Interest cover
Closest equivalent statutory measure
None
Reconciling items to statutory measure
Not applicable
Definition and purpose
Adjusted EBITDA calculated for covenant purposes (including EBITDA
of businesses disposed) as a multiple of net interest payable on bank
loans and overdrafts.
This measure is used for bank covenant testing.
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.
Interest cover
Adjusted EBITDA for leverage
covenant purposes
Adjusted EBITDA from
businesses disposed in the year
Removal of full year impact
of acquisitions
Other adjustments required
for covenant purposes
Adjusted EBITDA for interest cover
1,541
Interest on bank loans
and overdrafts (note 7)
Finance income (note 7)
Net finance charges
for covenant purposes
Interest cover
(152)
9
(143)
10.8x
Year ended
31 December
2019
£m
Year ended(4)
31 December
2018
£m
1,505
1,492
36
–
–
–
(378)
18
1,132
(103)
5
(98)
11.6x
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 27)
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
Bank covenant definition of net debt at average rates and leverage
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 previous 12 months.
Leverage is calculated as the bank covenant definition of net debt
divided by adjusted EBITDA for leverage covenant purposes.
This measure is used for bank covenant testing.
Net debt
Net debt at closing rates (note 27)
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
31 December
2019
£m
31 December
2018
£m
3,283
94
3,377
8
3,385
2.25x
3,482
(86)
3,396
11
3,407
2.28x
Financial statementsMelrose Industries PLC Annual Report 2019
194
Glossary
Continued
Cash Flow Measures
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 27)
Definition and purpose
Adjusted operating cash flow (pre-capex) is calculated as adjusted
profit before depreciation and amortisation attributable to subsidiaries
less lease obligation payments, the positive non-cash impact from
loss-making contracts and movements in working capital.
Adjusted operating cash flow (pre-capex) conversion is adjusted
operating cash flow (pre-capex) divided by adjusted profit before
depreciation and amortisation attributable to subsidiaries, less lease
obligation payments and the positive non-cash impact from loss-
making contracts.
This measure provides additional useful information in respect of cash
generation and is consistent with how business performance is
measured internally.
Adjusted operating cash flow
Adjusted operating profit
Share of adjusted operating profit of
equity accounted investments (note 15)
Depreciation of owned property,
plant and equipment and
amortisation of computer software
and development costs
Depreciation of leased property,
plant and equipment and
amortisation of leased computer
software and development costs
Lease obligation payments
Positive non-cash impact from
loss-making contracts
Change in inventories
Change in receivables
Change in payables
Adjusted operating
cash flow (pre-capex)
Adjusted operating
cash flow conversion
APM
Movement in net trade working capital and percentage change
Closest equivalent statutory measure
Change in inventories, change in receivables and change in payables
as included within net cash from operating activities (note 27)
Reconciling items to statutory measure
The year-on-year movement in non-trade working capital comprising
movements in other receivables and other payables
Definition and purpose
Movement in net trade working capital represents the cash flow from
inventories, net trade receivables and trade payables during the year.
The percentage reduction in net trade working capital is the
movement in net trade working capital divided by net trade working
capital as at 31 December 2018.
Year ended
31 December
2019
£m
Restated(1)
Year ended
31 December
2018
£m
1,102
(66)
813
(59)
Movement in net trade working capital
Change in inventories (note 27)
Change in receivables (note 27)
Change in payables (note 27)
Movement in working capital
Removal of change in other receivables
and change in other payables
Movement in net trade working capital
Net trade working capital at
31 December 2018 comprises:
Inventories (note 16)
Trade receivables (note 17)
Allowance for doubtful receivables (note 17)
Trade payables (note 19)
Year ended
31 December
2019
£m
(12)
72
(2)
58
37
95
1,489
1,877
(42)
(1,307)
2,017
5%
426
273
Net trade working capital
Percentage reduction in net trade working capital
72
(70)
(81)
1,383
(12)
72
(2)
1,441
104%
–
–
(63)
964
(108)
172
(160)
868
90%
APM
Free cash flow
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, discontinued operating cash flows and other
non-cash movements
Definition and purpose
Free cash flow represents cash generated from trading from
continuing businesses after all costs including restructuring,
pension contributions, tax and interest payments.
Free cash flow
Adjusted operating
cash flow (pre-capex)
Net capital expenditure
Net interest and tax paid
Defined benefit pension contributions
paid (note 27)
Restructuring costs paid
Dividends received from EAIs
Trading net other cash flows(6)
Free cash flow
Year ended
31 December
2019
£m
Year ended
31 December
2018
£m
1,441
(495)
(295)
(183)
(190)
67
(55)
290
868
(345)
(174)
(99)
(113)
66
(36)
167
Melrose Industries PLC Annual Report 2019
195
APM
Adjusted free cash flow
Closest equivalent statutory measure
Net increase/decrease in cash and cash equivalents
Reconciling items to statutory measure
Free cash flow, as defined above, adjusted for special pension
contributions and restructuring cash flows
Definition and purpose
Adjusted free cash flow represents free cash flow adjusted for special
pension contributions and restructuring cash flows.
APM
Capital expenditure to depreciation ratio
Closest equivalent statutory measure
None
Reconciling items to statutory measure
Not applicable
Definition and purpose
Net capital expenditure divided by depreciation of owned property,
plant and equipment and amortisation of computer software and
development costs.
Adjusted free cash flow
Free cash flow
Special pension contributions(7)
Restructuring costs paid
Full year impact of acquisitions
Reversal of creditor stretch under
previous ownership
Adjusted free cash flow
Increase in adjusted free cash flow
Year ended
31 December
2019
£m
Year ended
31 December
2018
£m
290
111
190
–
–
591
72%
167
56
113
(143)
150
343
APM
Capital expenditure (capex)
Closest equivalent statutory measure
None
Reconciling items to statutory measure
Not applicable
Definition and purpose
Calculated as the purchase of owned 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.
Net capital expenditure is capital expenditure net of proceeds from
disposal of property, plant and equipment.
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.
(1) Results for the year ended 31 December 2018 have been restated for discontinued operations
(note 13).
(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.
(3) Operating margin is not defined within IFRS but is a widely accepted profit measure being
derived from operating profit/(loss)(2) divided by revenue.
(4) Year ended 31 December 2018 remains aligned to the original calculations supporting the
Group’s bank debt compliance certificate, and has not been restated for discontinued
operations.
(5) Included within other adjustments required for covenant purposes are dividends received from
equity accounted investments, the removal of adjusted operating profit of equity accounted
investments and the inclusion of operating profit and depreciation in respect of businesses
classified as held for sale.
(6) Trading net other cash flows include cash paid against provisions and dividends paid to
non-controlling interests.
(7) Special pension contributions include £94 million of one-off payments, being the balance
of the £150 million upfront commitment and a £17 million contribution following the
disposal of the Walterscheid Powertrain Group.
Financial statementsMelrose Industries PLC Annual Report 2019 196
Company and shareholder information
As at 31 December 2019, there were 17,930 holders of ordinary shares of 48/7 pence each in the Company. An analysis of these shareholdings
as at 31 December 2019 is set out in the table below.
Shareholder analysis
Balance Ranges
1–5,000
5,001–50,000
50,001–500,000
Over 500,000
Total
Held by
Individuals
Institutions
Total
Financial calendar 2020
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 2020 results
Total number of holdings
Percentage of holders
Total number of shares Percentage issued capital
13,544
3,427
515
444
17,930
14,878
3,052
17,930
75.54%
19.11%
2.87%
2.48%
100.00%
82.98%
17.02%
100.00%
18,045,853
44,857,131
95,403,656
4,699,948,323
4,858,254,963
55,219,143
4,803,035,820
4,858,254,963
0.38%
0.92%
1.96%
96.74%
100.00%
1.14%
98.86%
100.00%
2 April 2020
3 April 2020
7 May 2020
20 May 2020
September 2020
October 2020
March 2021
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
Bankers
ABN AMRO Bank N.V.
Banca IMI S.p.A, London Branch
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
Citibank, N.A., London Branch
Citizens Bank, N.A.
Commerzbank
Aktiengesellschaft, London
Branch
Crédit Agricole Corporate and
Investment Bank
Crédit Industriel et Commercial
Deutsche Bank Luxembourg S.A.
HSBC Bank plc
Industrial and Commercial Bank
of China Limited, London Branch
ING Bank N.V., London Branch
J.P. Morgan Chase Bank N.A.,
London Branch
Mediobanca International
(Luxembourg) S.A.
National Westminster Bank plc
Royal Bank of Canada
Skandinaviska Enskilda Banken
AB (publ)
Standard Chartered Bank
The Governor and Company
of the Bank of Ireland
UniCredit Bank AG
Wells Fargo Bank, N.A.,
London Branch
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 +44 (0)800 111 6768 or visit
www.fca.org.uk/consumers/scams.
Melrose Industries PLC Annual Report 2019
Notes
197
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Melrose Industries PLC Annual Report 2019
198
Notes
Melrose Industries PLC Annual Report 2019 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.
Designed and produced by SampsonMay
Telephone: 020 7403 4099 www.sampsonmay.com
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London Stock Exchange
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