Buy
Improve
Sell
Melrose
Melrose Industries PLC
Annual Report
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.
Highlights
for 2021
1
“ It has been another good year
for Melrose, with results ahead
of expectations with better cash
generation and a bigger reduction
in net debt and leverage.”
Justin Dowley
Non-executive Chairman
Strategic Report
Highlights for 2021
Our strategy and business model
Shareholder value creation
“Buy, Improve, Sell” – A history of success
Chairman’s statement
Chief Executive’s review
Divisional review
Aerospace
Automotive
Powder Metallurgy
Other Industrial
Key performance indicators
Finance Director’s review
Longer-term viability statement
Risk management
Risks and uncertainties
Section 172 statement
Sustainability report
Governance
Governance overview
Board of Directors
Directors’ report
Corporate Governance report
Audit Committee report
Nomination Committee report
Directors’ Remuneration report
Statement of Directors’ responsibilities
01
02
04
06
08
10
12
12
18
24
28
30
32
39
40
42
50
54
78
82
84
88
94
99
102
117
Financial statements
Independent auditor’s report to the members of Melrose Industries PLC 118
Consolidated Income Statement
128
Consolidated Statement of Comprehensive Income
129
Consolidated Statement of Cash Flows
130
Consolidated Balance Sheet
131
Consolidated Statement of Changes in Equity
132
Notes to the Financial Statements
133
Company Balance Sheet for Melrose Industries PLC
189
Company Statement of Changes in Equity
190
Notes to the Company Balance Sheet
191
Glossary
203
Shareholder information
Notice of Annual General Meeting
Company and shareholder information
211
217
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.
Tripled
adjusted(1)
operating profit
At constant currency, despite global supply
challenges, sales were up 2% year-on-year and,
notably, Group adjusted(1) operating profit tripled
to £375 million, showing the substantial benefit of
restructuring actions increasingly coming through.
Significant
restructuring
The Group statutory operating loss was
£451 million; of the £826 million adjusting items,
only £200 million were cash items, almost all
relating to restructuring projects.
1.3x leverage(1)
Melrose generated free cash flow(1) of £125 million in
the year, prior to disposal proceeds, with net debt(1)
reduced to £0.95 billion and leverage(1) to 1.3x
adjusted(1) EBITDA. All businesses continued to
be cash positive, therefore fully funding all their
improvement and restructuring costs, with their cash
generation qualities transformed since acquisition.
Reduction in
working capital
to 3%
of sales
Working capital in the GKN businesses has reduced
to 3% of sales from 5% at the GKN acquisition, with
further opportunities existing to improve Aerospace
inventory levels.
£1 in every £3
The GKN UK pension schemes are now in surplus
helped by £1 in every £3 of free cash flow(1) since
acquisition being paid into the Group’s pension
schemes, thereby freeing up more free cash flow(1)
in the future.
Return to growth
All businesses returned to growth with further benefits
coming from restructuring actions. The Melrose
businesses are actively working to mitigate the current
inflationary pressures through all necessary means
and remain fully committed to achieving their
previously stated operating margin targets.
£3.4bn repaid
Ahead of plan, the opening net debt(1) of £3.4 billion
at the GKN acquisition has been fully repaid, in less
than four years, save cash returned to shareholders
over the period, helping to protect shareholder value
and de-risking the GKN transformation during some
of the most challenging trading conditions.
Sustainable
technology
Melrose has improved its ESG positioning and reporting
in the year, including highlighting the substantial benefits
delivered by its proprietary sustainable technology. A new
standalone Melrose Sustainability Report will be published,
for the first time, alongside the 2021 Annual Report.
1 pence per share
A final dividend of 1 pence per share is proposed,
up by one third on last year, giving a full year dividend
of 1.75 pence per share.
For more information visit
www.melroseplc.net
(1) Described in the glossary to the financial statements on pages 203 to 210.
Adjusted(1) revenue
Adjusted(1) operating profit
£7.5bn
£375m
Statutory revenue
£6.9bn
Statutory operating loss
£451m
Divisional performance summary results
(for the year ended 31 December 2021)
Adjusted(1)
revenue
£m
Adjusted(1)
operating
profit/(loss)
£m
Statutory
revenue
£m
Aerospace
Automotive
Powder Metallurgy
Other Industrial
Corporate
2,543
3,745
975
233
–
112
172
91
51
(51)
2,538
3,164
948
233
–
Statutory
operating
profit/(loss)
£m
(196)
(131)
40
35
(199)
Strategic ReportMelrose Industries PLC Annual Report 2021 2
Our strategy and business model
Our purpose:
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.
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Our strategy:
Buy
• Good manufacturing businesses whose performance
can be improved.
• Use low (public market) leverage.
• Melrose management are substantial equity investors.
Improve
• Free management from bureaucratic central structures.
• Change management focus, incentivise well.
• Encourage and implement sustainable business
practices.
• Set strategy and targets and sign off investments.
• Drive operational improvements and sustainable
production.
• Invest in the business and support research and
development, particularly sustainable products.
• Focus on profitability, sustainability, and operating
cash generation – not growth for the sake of growth.
• Improve products and customer relationships.
• Invest in research and development capabilities,
to enable our businesses to develop products that
are more sustainable and safer.
• Enable our businesses to help their customers and
wider industries transition to a net zero economy
by 2050.
• Engage closely and often with key external stakeholders.
• Invest in the workforce, closely monitor health and
safety, and secure the financial health of workplace
pension schemes.
Sell
• Commercially choose the right time to sell to good
homes for the next stage of their development,
often between three and five years, but flexible.
• Return value to shareholders from significant disposals.
• Equip businesses with sustainability strategies
and strong sustainability targets to drive long-term
ESG performance.
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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
Operational efficiency
Effective governance
Melrose has generated
significant financial returns
for its shareholders,
achieving an average return
on equity of 2.5x across the
businesses sold to date and
returned over £5.5 billion of
cash to shareholders.
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 five and nine
percentage points.
The Board maintains high
standards of corporate
governance to ensure that
Melrose achieves success
for the benefit of the
businesses we manage
and our shareholders over
the long term.
Long-term value creation
Long-term value creation
Pages 6 and 7
Page 6 and 7
Our strong track record
Long-term value creation
Governance report
Pages 4 and 5
Page 6 and 7
Page 78
Value creation model
How has Melrose created value?(1)
1.
Margin
growth
2.
Sales
Value
creation
4.
Multiple
expansion
3.
Cash
generation
Businesses under improvement
Aerospace
Automotive
Read more
Page 12
Read more
Page 18
Powder Metallurgy
Read more
Page 24
1. Margin growth
48%
2. Sales
4%
3. Cash generation
16%
Good but underperforming manufacturing businesses
whose potential is unrealised.
Strong track record suggesting growth at least in line
with their market.
A key focus is to make significant improvement to cash
flows in the businesses we acquire.
4. Multiple expansion
32%
(1) In respect of the McKechnie,
Dynacast, FKI and Elster acquisitions
Multiple expansion is never assumed, but has been
achieved on all previous deals (on average +30%)
as the businesses have been improved.
Follow-on investment during Melrose ownership for businesses sold
100%
Equity raised to
acquire businesses
33%
Further
investment in the
businesses to
improve
operations(1)
Reinvestment
Other Industrial
Read more
Page 28
(1) In respect of the McKechnie, Dynacast,
FKI, Elster and Nortek acquisitions
Shareholder investment and gain
(figures up to 31 December 2021):
Reinvestment
Average return on equity
across all businesses sold.
Cash return to shareholders
since establishment.
2.5x
£5.5bn
Spent on research and development
for Nortek, Elster and GKN acquisitions.
Spent on climate-related research and
development in the last two years.
c.£1.2bn
£300m
Sustainability report
Pages 54 to 77
3
Sustainability
The Melrose “Buy, Improve, Sell” model
necessarily means that we inherit businesses that
are underperforming in a number of different
areas, including from a sustainability perspective.
The manufacturing businesses that we acquire often
operate in industries that are some of the most difficult to
decarbonise. By the very nature of our model, (a) we provide
the focus and investment that our businesses need to
deliver significant financial returns and sustainability
improvements; and (b) our Group sustainability performance
and ratings will fluctuate during our investment cycle as we
acquire new businesses in need of improvement, and sell
businesses that we have improved.
Implementing Melrose Sustainability principles
– our decentralised approach
We encourage, support and invest in our businesses to
implement the following Melrose Sustainability principles
and contribute to a sustainable future for the benefit of our
stakeholders, as further detailed in our Sustainability report
on pages 54 to 77:
i. Respect and protect the environment.
ii. Continue to invest in and support our businesses
as they develop products and services aligned
with a net zero future.
iii. Promote diversity, prioritise and nurture the
wellbeing and skills development of employees,
and support the communities that we are part of.
iv. Exercise robust governance, risk management
and compliance.
We invest in our businesses to bolster their research and
development capabilities, to enable them to make
products that are more sustainable and safer, with a focus
on helping their customers and their wider industries to
transition to a net zero economy by 2050. We encourage
our businesses to champion the interests, safety and skills
development of their employees. We implement secure
pension scheme funding, operational and financial best
practice, and lead in promoting diversity. We instil strong
ethical values supported by high governance standards,
through our Melrose Code of Ethics and Group policies,
together with training and internal controls, supported by
renewed management and governance structures.
We set meaningful Group sustainability targets, alongside
financial metrics, and we provide the strategic investment
to achieve them.
Sustained, positive sustainability performance
The success of our “Buy, Improve, Sell” model relies on
building better businesses that are positioned to prosper
over the longer-term. The sustainability 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 sustainability improvement initiatives.
Melrose Industries PLC Annual Report 2021Strategic ReportMelrose Industries PLC Annual Report 2021
4
Our strong track record
5
Shareholder value creation
Melrose has delivered significant returns to shareholders since floating on AIM in 2003.
Since making its first acquisition in 2005, Melrose has achieved an average annualised
return on equity investment of 19%, with an increase in operating margins of between
five and nine percentage points across businesses sold to date. We have also addressed
chronic underfunding in pension schemes we have inherited, securing the future for
scheme members.
Shareholder investment and gain (figures up to 31 December 2021)
£5.5bn
Cash return to shareholders
since establishment
2.5x 19%
Average return on equity
across all businesses sold
Average annual return on equity
investment since the first acquisition(1)
Track record for £1 invested in Melrose — As at 31 December 2021
Investment in May 2005 with all dividends reinvested since (Total shareholder return)(1)
Original investment
£1.00
2005
How Elster and Nortek operating margin improved(3)
Elster
Nortek
(1) Source: Datastream Total Shareholder Return Index.
(2) Since Melrose’s first acquisition (May 2005).
(3) Nortek adjusted operating margin up to 31 December 2021.
+6ppts
+2ppts
+1ppt
+9ppts
+5ppts
+1ppt
+1ppt
+7ppts
Total shareholder return (TSR)(1)(2)
1,706%
TSR
higher by
c.10x
174%
FTSE 100
Melrose
Gross return
£18.06
on original £1 investment
2021
Returns on capex and restructuring
and other commercial actions.
Central cost savings.
Exit of low margin sales channels.
Responsible approach to investing
Substantial improvements for all UK pension schemes under ownership
Responsible stewardship (figures up to 31 December 2021)
£1 in every £3
The GKN UK pension schemes are now in
surplus helped by £1 in every £3 of free cash
flow(1) since acquisition being paid into the
Group’s pensions schemes, thereby freeing
up more free cash flow(1) in the future.
Schemes for current businesses
• GKN UK schemes now in accounting
surplus of £172 million(2), equivalent funding
surplus of c.£100 million.
• The Group’s gross pension plan liabilities have
reduced by 25% during the year, including
£379 million of gross liabilities transferred
with businesses disposed and £366 million
following a successful buyout of the
pensioners of the GKN UK 2016 scheme.
The Melrose funding commitment made on acquisition of GKN has been fulfilled ahead of time.
Ongoing annual payments are halved to £30 million and no funding requirement from future
disposal proceeds.
Acquisition
commitment
Significantly increased
contributions in
Melrose ownership
Improved
investment
strategy and other
At 31 December
2021
‘Up to £1 billion’
£0.35 billion
£0.75 billion
£0.1 billion surplus
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; to
doubling annual contributions to £60 million; to
making £150 million upfront contributions; and
to further contributions on sales of businesses.
So far we have:
• Eliminated the GKN UK defined benefit
pension scheme accounting deficit.
• 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 targets.
• Rebalanced the GKN schemes across the
GKN divisions, to avoid overburdening any
one business and to provide stability and
better security for members.
• Having funded the GKN 2016 scheme to
115%, we arranged a buyout with an
appropriate insurer that secures the futures
of over 8,000 pensioners’ member benefits.
GKN 2012 schemes 1-4
78%
107%
Schemes for businesses sold
Whilst under Melrose ownership, we improve contributions and provide better security to
our businesses’ pension schemes towards fully funded upon departure from the Group.
122%
109%
108%
99%
95%
87%
60%
58%
McKechnie
FKI UK
FKI
Bridon
Brush
Nortek
Promoting strong sustainability principles
Our Sustainability report (see pages 54 to 77) highlights the investment, support and
encouragement we provide to our businesses, and the Group sustainable targets
we have set, to enable and drive them to pursue relevant improvements in relation to
environmental, social and governance (“ESG”) matters. We are publishing alongside
this Annual Report a standalone Sustainability Report to provide a full overview.
115%
111%
107%
98%
87%
c.£1.2bn spent on research and development for Nortek, Elster and GKN
acquisitions, of which over £300m has been spent on climate-related research
and development in the last two years.
60%
62%
78%
Brush
GKN 2016
(1) Described in the glossary to the financial statements on pages 203 to 210.
(2) Includes a surplus of £179 million relating to the GKN UK Group Pension Schemes (numbers 1-4) and a deficit of £7 million
GKN 2012 schemes 1-4
Nortek
relating to the GKN UK Post Employment Medical Scheme.
Strategic ReportMelrose Industries PLC Annual Report 2021Melrose Industries PLC Annual Report 2021 6
Long-term value creation
“Buy, Improve, Sell” –
A history of success
July 2007
Returned to shareholders
following the disposal of
McKechnie Aerospace
£220m
24%
10%
t
h
g
u
o
B
l
d
o
S
August 2011
Returned to shareholders
following the disposal
of Dynacast
£373m
16%
13%
t
h
g
u
o
B
l
d
o
S
18%
11%
t
h
g
u
o
B
Melrose continues to build on its
18-year track record of increasing
and realising the value in its
businesses and returning the
proceeds to its shareholders.
February 2014
February 2016
Returned to shareholders
following the disposal of
various FKI businesses
during 2013
£595m
15%
2015
Returned to shareholders
following the disposal
of Elster
22%
£2.4bn
Returned to shareholders
following the disposal of
various FKI businesses
during 2014
£200m
9%
t
h
g
u
o
B
l
d
o
S
l
d
o
S
Adjusted(1) operating margin improvement
Company
Entry
Exit
Improvement
McKechnie
Elster
Dynacast
FKI
Nortek
18%
13%
11%
10%
9%
24%
22%
16%
15%
16%
>30%
>70%
>40%
>50%
>70%
+6ppts
+9ppts
+5ppts
+5ppts
+7ppts
August 2021
Returned to shareholders
following the disposal of
Nortek Air Management
£729m
16%
l
d
o
S
8%
t
h
g
u
o
B
7
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
Acquisition
May 2005
McKechnie/Dynacast
July 2008
FKI
August 2012
Elster
August 2016
Nortek
April 2018
GKN
Company
details
McKechnie/Dynacast
FKI
Elster
Bought for
£0.4bn
Bought for
£1.0bn
Bought for
Equity raised on acquisition
£243m
Equity raised on acquisition
£499m
Equity raised on acquisition
Follow-on investment
£124m
Follow-on investment
Sold for
£0.8bn
Sold for
Investment in business
51%
Investment in business
Equity rate of return
30%
Equity rate of return
£391m
£1.4bn
78%
29%
Follow-on investment
Sold for
Investment in business
Equity rate of return
£1.8bn
£1.2bn
£287m
£3.3bn
25%
33%
Nortek
Bought for
Equity raised on acquisition
Follow-on investment(2)
Sold for (3)
Investment in businesses
Equity rate of return
Cash generated during ownership
£934m
Cash generated during ownership
£1.8bn
Cash generated during ownership
£3.3bn
Cash generated during ownership
GKN
Bought for
Equity raised on acquisition
Follow-on investment(4)
Investment(4) as % of initial equity
£8.3bn
£6.8bn
£2.2bn
32%
Cash generated during ownership
£0.8bn
£2.2bn
£1.6bn
£0.35bn
£3.1bn
22%
19%
£0.8bn
Shareholder
return on
original equity 3.0x
2.6x
2.3x
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
net cash proceeds 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 15% under our
ownership and have since sold all of
the businesses.
Overall we generated over £1.3 billion in
net cash proceeds 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.
Elster was a US publicly-listed German-
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 net
cash proceeds 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.
2.1x
Upon our acquisition, Nortek was a global
diversified group, manufacturing innovative
air management, security, home automation
and ergonomic and productivity solutions.
Suffering from fragmented operations and
operational underperformance, we identified
a range of world-class product ranges and
strong brands that were underperforming
their potential, but which through further
investment would become well placed
to address emerging market needs.
Under Melrose ownership, we almost
doubled operating profit margins from
9% to 16%. This was achieved by each
business undergoing a significant
transformation, freed from the restrictions
of the formerly centralised group structure,
and propelled by material, targeted
investment in research and development,
and productivity improvements.
We converted Nortek Control into a
technology business through a mix of
organic and acquisition actions, while we
refocused and completely revitalised the
product portfolio of Broan Nutone that
reawakened a sleeping giant previously
drifting into decline. Most notably, we were
instrumental in Nortek Air Management
developing and commercialising the
revolutionary Statepoint Liquid Cooling
technology, capable of delivering 90% water
and 30% energy savings for cooling systems
servicing the booming data centre market, it
quickly became a clear benchmark for the
industry. As a result, Nortek Air Management
enjoys an enviable and growing order book
and customer list that includes all the key
global technology companies.
During the year we sold Nortek Air
Management and Nortek Control, and
with Ergotron the only remaining business
within the Group from the Nortek
acquisition, we remain on the path to
doubling shareholders’ investment.
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. Against
the backdrop of the ongoing market
recovery, with existing improvement
projects largely complete for Automotive
and Powder Metallurgy and well progressed
for Aerospace, there is strong belief in
significant further profit improvement as
they deliver their stated operating margin
targets. We are therefore in good shape
to deliver strong returns and realise
shareholder value.
See pages 12 to 29 to find out more
about our progress in improving the GKN
businesses so far, and our plans for 2022.
(1) Described in the glossary to the financial statements on pages 203 to 210.
(2) Up to 31 December 2021.
(3) Includes book value for businesses not yet sold.
(4) Up to 31 December 2021.
Melrose Industries PLC Annual Report 2021Strategic ReportMelrose Industries PLC Annual Report 2021
8
Chairman’s statement
9
Justin Dowley
Non-executive Chairman
2021 —
A year in review
Melrose is trading ahead of expectations, with
better profit margins, better earnings per share
and significantly lower net debt – building the
Group’s encouraging momentum
Calendar year 2021
Melrose performed well in 2021. Despite
COVID-19 and well-publicised industry supply
chain issues, sales for the Group grew by
2% year-on-year at constant currency(1), and
the benefits from improvement actions are
increasingly evident in these results, which
are ahead of expectations. The statutory
revenue for the Melrose Group was
£6,883 million (2020: £7,132 million), with
adjusted(2) operating profit increasing to
£375 million (2020: £141 million), which
is triple prior year at constant currency(1),
and is based on a statutory operating loss
of £451 million (2020: £487 million).
All businesses have returned to growth and
seen an increase in sales towards the end of
the year, with GKN Aerospace up 18% in the
second half year-on-year and GKN Automotive
sales up 12% from the third quarter to the
fourth. In tandem, improvement actions have
increased adjusted operating profit margins at
GKN Aerospace by 4 percentage points, while
more than doubling those at GKN Automotive
and GKN Powder Metallurgy, with plenty more
to come as the recovery continues and the
full benefits of current and completed projects
are delivered.
We have enjoyed another year of good
cash performance across the Group, while
continuing to invest heavily in sustainable
technology and restructuring improvements.
We achieved strong free cash flow(2) generation,
which has been a feature throughout our
ownership of the GKN businesses. Along with
disposal proceeds, it has enabled us to repay
all of the £3.4 billion of net debt(2) drawn to fund
the GKN acquisition. Thus year-end net debt
is broadly equivalent to the money refunded
to shareholders via dividend and the recent
return of capital. We have reduced net debt to
below £1 billion, which has resulted in a very
comfortable level of leverage equal to 1.3x
adjusted EBITDA(2), significantly below the
Group’s long-term average.
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 this year.
M&A
It was a busy year from a transaction
perspective as well. We sold approximately
a fifth of the Group, including Brush, the last
piece of the FKI acquisition which has been a
great contributor to the Melrose track record,
achieving 2.6 times shareholders’ investment.
We also sold three of the four businesses
from the Nortek acquisition in 2016, putting
us firmly on the path to double shareholders’
investment again. In each case, the
businesses were sold to good homes which
are already building on the improvement
achieved under our ownership.
Pensions
Melrose is also rightly proud of its track
record in addressing pensions challenges
in the businesses we buy and GKN has
been no different. We have delivered on our
commitments to trustees early, overcoming
a large pension deficit we inherited of almost
£1 billion to bring the UK schemes to being
fully funded this year. This has been achieved
despite the challenges of COVID-19 and
without detracting from our investment in
the businesses and repayment of debt.
Mindful of our commitment and as a testament
to our responsible stewardship, the underlying
performance of the businesses has enabled us
to invest a third of the free cash flow produced
by the Group into the pension schemes under
our ownership, helping to secure the future for
pension scheme members and improving the
position of our shareholders. Given the secure
nature of these schemes this naturally frees up
more cash flow in the future.
Dividend
The Board is pleased to be able to return
to its progressive policy by proposing a final
dividend for 2021 of 1 pence per share (2020:
0.75 pence). Combined with the 2021 interim
dividend of 0.75 pence per share, this
represents a total dividend for the year
of 1.75 pence per share (2020: 0.75 pence).
(1) Adjusted results for the year ended 2020 at a constant currency showing adjusted revenue of £7,351 million and adjusted operating profit of £122 million.
(2) Described in the glossary to the financial statements on pages 203 to 210.
We have realised gains for shareholders by doubling the value of
Nortek and significantly outperforming all Group cash generation
targets, which has de-risked the route to value realisation from GKN.
We have transformed the GKN businesses to increase their full
potential including investing in sustainable technology and properly
funding their pension schemes. With the benefits of significant
restructuring increasingly coming through, combined with the strong
cash generation, Melrose is positioned to create, and realise,
significant value for shareholders.”
The final dividend will be paid on 20 May
2022 to those shareholders on the register
at 8 April 2022, subject to approval at
the Annual General Meeting (“AGM”)
on 5 May 2022.
Return of capital
Following the Brush and Nortek sales, we
completed a £729 million return of capital
to shareholders in September last year. We
were clear at the time that, due to lingering
uncertainty in the market, we had been
conservative in determining the amount of
the return in order to ensure a strong balance
sheet in the event of further volatility.
We did indicate at that time that should these
conditions improve sufficiently, we would
move to make a second return of capital this
year to rebalance our capital structure more
in line with a traditional Melrose approach.
While the wider markets still remain below
their pre-pandemic levels, there is a visible
path to recovery. We have enjoyed a strong
performance during the year, with a
conservative balance sheet, reset cost bases
for each of the businesses and another
strong cash flow performance that further
reduced leverage, even with fully funding the
significant restructuring and improvement
plans and taking the UK pension scheme
funding to surplus.
In line with the Melrose model, to return
proceeds from disposals to shareholders,
your Board would have made a second
capital return to rebase our capital structure
alongside these results. However, the very
recent and tragic events unfolding in Ukraine,
with the knock on effects for the world
markets that at this stage are uncertain and
unquantifiable, have led the Board to keep the
timing of this return under review at present.
Your Board recognises that this is a very
conservative position and hopes that the
situation will be resolved as quickly as
possible, in which case the intention would
be to make the return without further delay.
Board matters
In keeping with the Board’s succession
planning, co-founder and Executive Vice-
Chairman David Roper and Non-executive
Director Archie Kane retired last year and we
welcomed to the Board Heather Lawrence
and Victoria Jarman. This year, Liz Hewitt will
reach the end of her tenure with us and retire
from the Board at the close of the AGM in May.
Liz has been a valued member of the Board
and all Board committees at various stages
during her time with Melrose, most importantly
serving as chairman of the Audit Committee
for the past five years, as well as holding the
position of Senior Independent Director for
much of that time, which will be taken up by
David Lis on her departure. It has been a
period of success and change for the
Company and we are very grateful for her
tireless efforts. We will miss her and wish her
all the best for her continuing roles elsewhere.
Purpose, strategy and sustainability
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 manufacturing businesses that are
underperforming their potential and then
invest heavily to improve performance and
productivity as they become stronger, better
businesses under our stewardship. At the
appropriate time, we then find them good
owners for the next stage of their development
and return the proceeds to shareholders.
Sustainability has always been an important
part of this improvement strategy and
Melrose has welcomed the increased
focus it has received in recent years as an
opportunity to demonstrate its commitment
as an active participant across a range of
key areas. The Melrose centre is small with
a tiny carbon footprint, which we nonetheless
fully offset. The primary focus is on our
businesses under our decentralised model.
This year, we have published our targets
aligned to our materiality analysis, including
short, medium and long-term objectives for
the reduction of greenhouse gas emissions,
transition to renewable electricity and reduction
in waste that will help drive a transformation in
the sustainability of their own production.
We also recognise the place of our businesses
in the wider economy. Our strategy means
we inherit underperforming businesses.
We provide the focus and investment
which enables our businesses to be active
participants in addressing these issues,
whether it be through GKN Automotive’s
position at the heart of the electric vehicle
transition, or investing in the establishment
of the hydrogen economy through the UK
hydrogen production start up HiiROC and the
hydrogen storage business GKN Hydrogen.
GKN Aerospace is at the forefront of the
development of technologies to achieve
zero emissions aviation with projects like
the hydrogen propulsion system H2GEAR,
or electric aircraft currently in testing phases
like Eviation Alice, Joby and Vertical.
Melrose sees this as a key part of improving
a business during our ownership and
environmental, social and governance (“ESG”)
priorities are an important part of our “Buy,
Improve, Sell” strategy. We see no reason why
these improvements cannot be implemented
whilst improving returns for our shareholders.
It is a journey and there remains plenty of
improvement for us to deliver, but it has been
nonetheless pleasing to see our improvement
to date being recognised by several of the key
benchmarking agencies, including MSCI who
have given us an “A” rating and Sustainalytics
who have placed us in the top quartile of
our peers. This year we are publishing our
inaugural standalone Sustainability Report
alongside our Annual Report and I refer you
to that for further details.
Justin Dowley
Non-executive Chairman
3 March 2022
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Chief Executive’s review
11
This is a fantastic result achieved largely in a severe
global downturn and shows the outperformance
achievable under the Melrose model as we move to
realise the potential of the GKN businesses.”
Simon Peckham
Chief Executive
Against the backdrop of continued turbulence
in connection with the global pandemic,
2021 provided the opportunity to demonstrate
the strength of the Melrose “Buy, Improve,
Sell” model.
Over the course of the year, we sold
approximately 20% of the Group. Having
overseen the complete reshaping of Brush,
the power generation and distribution
business, we sold it to a good home for the
next stage of its development. It was the
last business held from the FKI acquisition
and its sale caps a successful acquisition
for shareholders, who enjoyed a 2.6 times
return on their original FKI investment.
Except for Ergotron, all the businesses from
the Nortek acquisition were also sold during
the year, putting the Company on track to
double shareholders’ investment in that
acquisition. Under our ownership,
operating margins of these businesses
were approximately doubled while we
invested heavily in their transformation.
We converted Nortek Control into a
technology business through a mix of organic
and acquisition actions, while we refocused
and completely revitalised the product
portfolio of Broan Nutone that reawakened a
sleeping giant previously drifting into decline.
Most notably, we were instrumental in
Nortek Air Management developing and
commercialising the revolutionary Statepoint
Liquid Cooling technology, capable of
delivering 90% water and 30% energy
savings for cooling systems servicing
the booming data centre market, it quickly
became a clear benchmark for the industry.
As a result, Nortek Air Management enjoys
an enviable and growing order book and
customer list that includes all the key global
technology companies.
These are examples of the strong targeted
investments we make in businesses under
our ownership during the “Improve” phase.
We are well progressed in this phase for the
GKN businesses with restructuring spend
during 2021 of over £190 million in addition
to investing £200 million in research and
development in the businesses and bringing
the GKN UK pension schemes to be fully
funded. Critical to this rate of investment has
been that each of the GKN businesses has
been cash generative throughout our
ownership and again this year, with cash
conversion equal to 110%(1). This has enabled
us to repay all the debt drawn down as part
of the GKN acquisition, net of the amount
used to fund dividends and last year’s return
of capital to shareholders.
This is a fantastic result achieved largely in
a severe global downturn and shows the
outperformance achievable under the
Melrose model as we move to realise
the potential of the GKN businesses.
(1) Before capital expenditure and restructuring costs.
For GKN Automotive and GKN Powder
Metallurgy, a healthy initial market recovery
from the pandemic in the first quarter of 2021
was soon overtaken by the impact of the
shortage of semiconductors on the entire
automotive sector. Although demand
indicators remained strong throughout,
supply constraints hampered production
until beginning to ease very late in the year. As
supply constraints continue to ease, we expect
sales growth in coming years to simultaneously
meet pent-up demand and support dealers as
they rebuild their inventory levels.
Despite these market challenges, GKN
Automotive business wins and GKN Powder
Metallurgy sales volumes for the year
increased ahead of the market growth of
3.4%. In GKN Powder Metallurgy’s case this
was by more than double as they increased
their market share. Alongside this growth,
both businesses more than doubled margins
as volumes began to return on a substantially
reduced cost base, which included some
initial benefits from major rationalisations.
There is still plenty of margin improvement to
come for both businesses as market recovery
continues and the full benefit of restructuring
projects flow through to results over the
course of the coming year. The impact of
rising global inflation is also being actively
managed through pricing, procurement and
productivity, and we remain confident in
achieving our margin targets as supply
constraints ease.
GKN Automotive is also seeing major benefits
from the accelerating transition to electric
vehicles, and is converting its decades’
long experience in the sector into significant
wins on e-Drive platforms for both its 3-in-1
solutions and core sideshaft products for
electric vehicles. It was a busy year for
production launches and included the
award of the first fully outsourced 3-in-1
system for a major German manufacturer.
There is a heavy focus on improvement
in GKN Aerospace in 2022 and we are
confident this will position the business
for a strong future, which we will elaborate
on more fully at a Capital Markets Day to
be held on 8 June 2022.
For all businesses, the impact of rising global
inflation is a key focus for the year and our
management teams remain very focused
on ensuring inflation does not affect our
businesses’ performance, albeit with a
potential time lag this year. We are mindful of
the very recent events in Ukraine, which our
businesses are being proactive in addressing
to ensure minimal disruption. Against the
backdrop of the ongoing market recovery,
with existing improvement projects largely
complete for GKN Automotive and GKN
Powder Metallurgy and well progressed for
GKN Aerospace, there is strong belief in
significant further profit improvement as they
deliver their stated operating margin targets.
We are therefore in good shape to deliver
strong returns and realise shareholder value.
Further details of the trading performance of
the businesses are contained in the following
Divisional reviews.
Simon Peckham
Chief Executive
3 March 2022
Excluding China, GKN Automotive is now a
supplier on seven of the top ten global electric
vehicle platforms(1) and has an order book
that is matching the market in the shift to
electric vehicles. This was part of
approximately £5 billion in life of programme
sales wins secured, of which over a third are
for pure battery electric vehicles, representing
a record for the business. This demonstrates
that GKN Automotive is both gaining market
share and keeping pace with the faster than
expected electric vehicle transition.
As highlighted in its Capital Markets Day
in May, GKN Powder Metallurgy has largely
completed its restructuring projects and has
spun out its hydrogen storage business, to
increase the focus on its core powder, sinter
and additive businesses. This has enabled
better clarity on its electric vehicle transition
strategy, which is well on the way to
execution. It has exited some low margin
ICE business and is developing a number
of exciting opportunities for e-motors and
magnet technology for electric vehicles. In
addition, its additive manufacturing business
continues to grow and explore opportunities
in serial component production.
For GKN Aerospace, the continued pandemic
related travel restrictions held back the pace
of the market recovery. This started to ease
toward the back half of the year, having a
positive impact on sales which grew 18%
year-on-year in the second half. Alongside
reorganising the business into Civil, Engines
and Defence segments, GKN Aerospace has
seen a rebalancing of its market exposure
towards the single aisle aircraft segment,
which now accounts for 39% of Civil sales
and is the segment of the aerospace sector
that is leading the recovery. Engines continues
to see the benefit of exceptionally strong
future cash flows from its key platforms.
We have not let the extended market volatility
distract GKN Aerospace from making further
progress on its improvement plans and it has
had another strong year of cash generation,
with a cash conversion rate of 124%(2).
All major restructuring projects from our
acquisition plan are now underway, with
a refreshed executive team driving hard
to deliver the stated 12% operating margin
target. While the full run rate benefits are
not expected until 2023 or beyond, the
business has already achieved an increase
of 4 percentage points in operating margins
for the year on flat sales.
Looking more broadly across the Group, we
have successfully reduced working capital,
which now sits at 3% of sales for the GKN
businesses, compared to 5% at the time of
acquisition. There remains more improvement
available, particularly in GKN Aerospace. We
continue to invest heavily in technology, with
a particular focus on sustainability. GKN
Aerospace’s network of Global Technology
Centres is key to this, with significant success
in the development of decarbonising
technology like the H2GEAR hydrogen
propulsion system and the creation of the
first prototype of emission free aircraft such
as the Eviation Alice.
Ergotron had another good year, with
sales growth of 15% and a return to
premium levels of operating margins of
25%. Finally, GKN Powder Metallurgy’s
hydrogen storage business was spun off
as a standalone business in the Group, in
order to maximise its potential within the
emerging hydrogen economy.
Outlook
GKN Automotive and GKN Powder
Metallurgy are both well progressed in their
Melrose improvement plans and saw the
start of some recovery momentum in the
final quarter of 2021, close to that seen in the
first half. Early signs in the new year show this
recovery continuing, and as the constraints
of the semiconductor shortage ease further,
focus will start to move towards realisation of
this value. The aviation market continues to
navigate pandemic travel restrictions with our
businesses expecting growth for the coming
year albeit still below pre-pandemic levels.
(1) References to electrified vehicle platforms refers to full hybrid or battery electric propulsion systems.
(2) Before capital expenditure and restructuring costs.
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Divisional review(1)
13
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 and defence platforms.
gknaerospace.com
With operations in 12 countries,
GKN Aerospace is a global leader
based on technological innovation,
advanced processes and engineering
excellence, while its products enable
aircraft to fly safely and more efficiently.
GKN Aerospace is structured according
to its three core customer markets –
Civil Airframe, Defence Airframe
and Engines. Its technology is used
throughout the aerospace industry:
from high-use single aisle aircraft and
the world’s longest haul passenger
planes, through to business jets,
helicopters, the world’s most advanced
fighter jets and space launchers.
GKN Aerospace continued to feel the effects
of COVID-19 during 2021. While passenger
flight hours improved against 2020, global
travel restrictions remained prevalent, delaying
the recovery of air travel. In total, sales across
the Civil Airframe and Civil Engines businesses
both made good progress, particularly in the
second half which saw an 18% year-on-year
increase in GKN Aerospace sales, but
remained well below pre-pandemic levels.
Having acted swiftly to reduce its cost base
in 2020 in response to COVID-19, GKN
Aerospace took further steps to adjust to its
new commercial environment at the start of
2021 and improved its profitability, achieving
adjusted(2) operating margins of 4.4%.
Operational geographies
4
Global technology centres
12
Countries with GKN Aerospace
manufacturing locations, serving
over 90% of the world’s aircraft
and engine manufacturers
Proportion of Melrose(1)
34%
Adjusted(2) revenue
£2.5bn
Statutory revenue
£2.5bn
Adjusted(2) operating profit
£112m
Statutory operating loss
£196m
Aerospace
Divisional highlights
GKN Aerospace has seen adjusted(2) operating margins
improve by 4 percentage points and growth return with sales
in the second half of 2021 up 18%(3) on 2020. Under new
leadership, it has materially advanced the restructuring of
its cost base and operations, with all required significant
restructuring projects now underway.
The underlying qualities of the GKN Aerospace businesses are
being improved including the accelerated development of new
sustainable technologies. The Group will also benefit from
exceptionally strong long-term future cash flows in Engines.
An Aerospace Capital Markets Day is to be held on 8 June
2022 to explain its exciting full shareholder value potential.
Strong market positions
• Leading global tier one supplier
on major civil and defence
platforms.
Margins expanding
• All required restructuring
projects now underway.
• Adjusted(2) operating margin:
• Attractive engine portfolio with
strong long-term cash flows.
2020: 0.5% 2021: 4.4%
Target 12%(4).
Growth underway
• Civil market recovery
Sustainable technology
• Improving existing fleet
underway, led by narrowbody.
efficiency.
• Increasing demand in attractive
aftermarket and repair work.
• Developing next generation
of greener aircraft.
(1) All growth metrics are collated at constant currency.
(2) Described in the glossary to the financial statements on pages 203 to 210.
(3) Based on existing businesses at 31 December 2021.
(4) 10% margin target on a partial market recovery and 12% margin target on a recovery to pre-COVID-19 revenue.
(1) Based on adjusted(2) 2021 revenue for continuing businesses.
(2) Described in the glossary to the financial statements on
pages 203 to 210.
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Divisional review(1)
Continued
15
Technology case study
Revenue by business(2)
1
3
2
1 Civil(3)
2 Engines
3 Defence(3)
Revenue by source(2)
2
1
32%
34%
34%
1 OE
2 Aftermarket
90%
10%
Revenue by production
4
1
3
2
1 Europe
2 UK
3 North America
4 Asia and rest of world
42%
20%
35%
3%
(1) All growth metrics are collated at constant currency.
(2) Based on existing businesses at 31 December 2021.
(3) Civil and Defence relates to the airframes and components
businesses.
All major restructuring projects from our
acquisition plan are now underway and the
margin increase reflects the initial benefits
of a number of initiatives in line with its ‘One
Aerospace’ approach, including reducing
management layers, increasing its customer
focus and simplifying its operating structure as
it embedded its global Lean Operating Model,
to reduce process variation and improve
operational efficiency. This is now showing
benefits in quality and delivery performance,
with substantial further opportunities ahead.
Supply chain management has been a
strong focus, securing savings and delivery
improvements, as well as responsiveness to
ensure minimal disruption from situations such
as the recent events in Ukraine. There has been
some further progress on improving working
capital efficiency, which has contributed to the
strong cash generation during the year, but
again plenty more improvement is still to come.
GKN Aerospace also sharpened its focus
through a series of global footprint projects.
On the Civil side, it divested two non-core
businesses in the Netherlands, as well as
completing the planned closure of two subscale
sites. In Engines, initiatives to consolidate major
product families between the two Nordic sites
in Sweden and Norway are well advanced,
leveraging the expertise of each site and creating
advanced Centres of Excellence. Each of these
steps simplified and focused GKN Aerospace
during 2021, reducing costs and increasing
productivity. Further global footprint optimisation
projects are now underway and will be delivered
in 2022. This includes significant work required
to address profitability issues in the US Defence
business and we have recently announced
the closure of the St Louis, US site. This closure
will involve exiting approximately £140 million
of sales relating to less profitable contracts
by 2023.
Despite challenging markets, GKN Aerospace
made progress commercially, securing good
awards in Civil Airframes for electrical wiring
interconnection systems and complex structures
components such as empennage and wings.
Market dynamics have helped weight the mix of
Civil components further towards the single-aisle
aircraft market, which is seeing faster recovery
and preparing for a significant increase in
production rates. Engines further deepened
its exposure to core capabilities with key
customers, including additive manufacturing,
fan blade repair and composites. Focus
has been on higher margin, design to build
opportunities and growing its attractive
aftermarket business. Engines will also benefit
from the exceptionally strong future cash flows
generated by its key risk and revenue sharing
partnership (“RRSP”) platforms.
Advanced Engines technology
targets 25% efficiency improvement
GKN Aerospace’s world-leading Engines
business fulfilled a major milestone in 2021,
with the development of a range of brand
new technologies to optimise the next
generation of aircraft engines. GKN
Aerospace successfully delivered a ground-
breaking Intermediate Compressor Case
(“ICC”) to the Rolls-Royce UltraFan™ engine
demonstrator programme, which is aiming to
achieve a 25% improvement in fuel efficiency
over the first generation of Trent engines.
The ICC structure is situated between an
engine’s compressor cases, and carries
the rotor gas loads to the engine casing
and thrust mounts. The development,
manufacture and testing of GKN Aerospace’s
latest ICC will demonstrate and validate
a range of new technologies, including a
low-cost and robust ‘sectorised’ fabrication
concept with castings. This approach makes
use of an innovative welding method based
on computer simulations and model-based
design methods. It also incorporates
optimised bleed system aerodynamics
and acoustics, as well as shorter duct
design and 3D printing of attaching parts.
GKN Aerospace’s additive manufacturing
expertise in electron beam melting has
enabled it to efficiently create and incorporate
over 15 individual components into the ICC
duct design, optimising the ICC’s design
through cutting-edge manufacturing
technologies and methods.
GKN Aerospace is a Rolls-Royce Core Partner
in the European Clean Sky 2 programme,
with responsibility for design and manufacture
of the ICC. UltraFan™ is Rolls-Royce’s next
generation engine family and features a new
engine core architecture and introduces a
geared design. The aim is full engine ground
test during 2022, with flight-testing to follow.
Clean Sky 2 is the largest European
aeronautics research programme, developing
innovative, cutting-edge technology aimed
at reducing CO2 emissions and noise levels
produced by aircraft. Funded by the EU’s
Horizon 2020 programme and Europe’s
aviation industry, Clean Sky 2 contributes
to strengthening European aero-industry
collaboration, global leadership and
competitiveness.
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16
Divisional review(1)
Continued
Outlook
Despite the recent unrest in Ukraine, GKN
Aerospace expects the recovery of the civil
aviation sector to continue in 2022, which will
benefit both the Civil and Engines businesses.
While uncertainty remains, and there is still
some way to go to reach pre-pandemic levels,
GKN Aerospace is well placed to support the
significant ramp-up of single-aisle aircraft
production which is already underway in 2022.
The defence market outlook remains solid,
which will support the Defence segment while
it implements its improvement programme.
Underpinned by the restructuring work already
undertaken and with its position on major
growth platforms and further optimisation to
come, GKN Aerospace is well placed to benefit
as the market recovery continues and remains
well on track to unlock its potential. The
business has already demonstrated positive
earnings momentum and it has a clear path to
achieving its targeted 12% operating margins
when sales return to pre-pandemic levels.
Looking further ahead, GKN Aerospace’s
technology investment and expertise will
enable it to be a leader in the sustainable
transformation of civil aviation, creating market
opportunities and profitable growth for years
to come.
During 2021, GKN Aerospace took a further
step forward in its sustainability strategy.
Investment was made in technology to
support and enable this strategy to both
achieve reductions in energy, material and
waste in our current factories, as well as
enable improvements in efficiency and
revolutionary capabilities in next generation
aircraft and engine platforms, which will
assist the future of zero emission flight. At
the forefront of this strategy is a new network
of Global Technology Centres (“GTCs”), to
develop and demonstrate capability, drive
collaboration and accelerate technological
breakthroughs in each of its businesses. In
2021 GKN Aerospace opened its £32 million
UK GTC in Bristol, as well as its Dutch GTC
in Hoogeveen, to complement the Swedish
and US hubs that are already established.
GKN Aerospace is now developing the next
generation of lighter and more sustainable
aerostructures and engine products, as
well as lightweight additive manufacturing
solutions and future zero-emission propulsion
systems. Putting this technology strategy into
action, GKN Aerospace established its
position at the forefront of four major
European propulsion programmes during
2021. Two of these – the £54 million H2GEAR
project in the UK and H2JET in Sweden – are
groundbreaking hydrogen projects aiming to
develop propulsion systems to power aircraft
using liquid hydrogen, eliminating carbon
dioxide emissions.
(1) All growth metrics are collated at constant currency.
Civil airframes and components
1
3
2
1 Narrowbody
2 Widebody
3 Regional
39%
24%
37%
Through collaboration in the European Clean
Sky 2 programme, GKN Aerospace also
delivered the first Intermediate Compressor
Case for the Rolls-Royce UltraFan™ engine
demonstrator, which is expected to achieve
significant fuel efficiency improvements
compared with current engines.
There were also notable achievements in
more sustainable aerostructures solutions.
During 2021, GKN Aerospace manufactured
and delivered the first fully integrated wings,
tail and wiring system for Eviation’s Alice
electric aircraft, as well as producing and
delivering the first composite fixed trailing
edge for Airbus’ “Wing of Tomorrow” project,
both from its new UK GTC. All of these
projects form important ingredients on the
sector’s path to achieve net zero greenhouse
gas emissions by 2050 and helped establish
GKN Aerospace’s position as a sustainability
leader in the aviation industry.
17
• Continuing its focus on building a truly
sustainable business. In 2021 GKN
Aerospace set ambitious targets for
cutting Greenhouse gas emissions,
adopting renewable electricity and
cutting waste to landfill, in alignment
with the Melrose Group’s sustainability
targets. In addition, the business has
commenced major research and
development and collaboration
programmes focused on zero-emissions
aircraft, including both the Eviation Alice
and the Vertical VA-X4 electric aircraft,
as well as multiple GKN Aerospace-led
future propulsion system projects.
Market trends
GKN Aerospace
• Despite continued disruption from the
COVID-19 pandemic, flight hours steadily
improved throughout the year, rising 26%
compared to 2020. During 2021 the
market saw the first significant new orders
for single-aisle aircraft since the onset of
the pandemic, with plans for single-aisle
ramp-up also announced.
• Defence-related spending remained
relatively stable in 2021, and this is
expected to continue within the US, UK
and EU over the coming years, with new
programmes expected to offer significant
opportunities. A close watch is being kept
on the developing situation in Ukraine.
• Tackling climate change continued to
grow as a priority for policy makers,
investors and the aerospace industry,
with renewed focus on how to reach
net zero by 2050.
Narrowbody Forecast – Deliveries
Narrowbody Forecast – Deliveries
GKN Aerospace has responded to these
trends, by:
• Enhancing and simplifying its ‘One
Aerospace’ model to drive increased
efficiency and accountability in the
business, and improve profitability at
reduced production rates. In addition,
the business focused on preparing key
sites to ensure they are well-placed to
meet growing customer demand in the
single-aisle market as and when current
market challenges begin to ease.
• Maintaining and strengthening its
position on key Defence programmes,
while continuing to develop leading
technologies to secure positions on
next generation platforms. This includes
further progressing its collaboration
with Team Tempest in the UK, and
close customer partnerships in the
US around Future Vertical Lift.
d
e
r
e
v
i
l
e
D
t
f
a
r
c
r
i
A
f
o
r
e
b
m
u
N
1,800
1,600
1,400
1,200
1,000
800
600
400
200
0
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
Source: Teal Group
Calendar Year
US Military Fixed Wing Aircraft Deliveries
C-17
AV-8B
F/A-18
F-15
F-16
F-22
T-45
T-6
C-130
F-35
T-7
B-21
n
b
$
S
U
30
25
20
15
10
5
0
'94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20 '21 '22 '23 '24 '25 '26 '27 '28 '29 '30
'31
Source: Teal Group
Calendar Year
Melrose Industries PLC Annual Report 2021Strategic ReportMelrose Industries PLC Annual Report 2021
18
Divisional review(1)
Continued
Divisional highlights
GKN Automotive ended the year positively with 2021 fourth quarter
sales up 12% on the third quarter, being almost back to levels seen
in the first half of the year. Sales in early 2022 have started similarly
positively, consistent with the most recent industry data.
In 2021, adjusted(2) operating margins for GKN Automotive more
than doubled despite the well-publicised supply challenges.
During 2022, the full run rate benefits from the required
restructuring projects in GKN Automotive will materialise
giving the opportunity to realise this shareholder value.
Life of programme business wins of c.£5 billion in GKN
Automotive in 2021, of which more than one third are for pure
electric vehicles (“BEV”), confirm that GKN Automotive is both
gaining market share and keeping pace with the faster than
expected market conversion to electric vehicles. Importantly,
these share gains are being achieved at terms consistent with
its higher margin target.
Strong market positions
• #1 in Driveline with ICE, hybrid
and electric vehicle technology
leadership.
• Supplies 90% of OEMs, 50%
of global vehicles.
Margins expanding
• Restructuring accelerated and
nearing completion.
• Adjusted(2) operating margin:
2020: 2.2% 2021: 4.6%
Target >10%.
Growth underway
• Underlying demand strong but
constrained by supply chain.
• Electrification providing
increased growth.
Sustainable technology
• Leading electric vehicle drive
system technology.
• Significant investment into a
range of e-Drive capabilities.
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 for electrification,
all-wheel drive programmes and new vehicle concepts.
gknautomotive.com
19
Automotive
Proportion of Melrose(1)
50%
Adjusted(2) revenue
£3.7bn
Statutory revenue
£3.2bn
Adjusted(2) operating profit
£172m
Statutory operating loss
£131m
GKN Automotive is the trusted partner
for most of the world’s automotive
OEMs, specialising in developing,
manufacturing, and supplying leading
drive systems for conventional and
electric vehicles through its Driveline and
ePowertrain divisions. Headquartered
in the UK and operating in 20 countries,
it also has a leading presence in China
thanks to its long-standing joint venture,
Shanghai GKN HUAYU Driveline Systems
Co Limited, with local partner HASCO.
GKN Automotive’s Driveline division is a global
leader that demonstrates strength in depth
and breadth, with an extensive portfolio of
drive system products that combine value
with technological leadership spanning all light
vehicle types, from high-volume low-cost to
premium models for both conventional and
electrified propulsion systems. The ePowertrain
division offers solutions for all electrified vehicles
and is a go-to technology partner for Global
OEMs with decades of experience. Its ability
to fully integrate e-Drive systems derives from
its all-wheel drive heritage and leadership.
The ongoing COVID-19 pandemic, global
supply chain disruption, and industry-wide
semiconductor shortage significantly stalled the
predicted market recovery in 2021. Even with
very robust underlying demand, global light
vehicle production grew just 3.4% compared
to last year, which was well below initial growth
projections of 13% at the start of the year and
that left production 13% below pre-pandemic
levels. Despite these market challenges, GKN
Automotive sales grew by 4% year-on-year due
to strong growth in its e-Drive business, which
both gained market share and kept pace with
the faster than anticipated transition to electric
vehicles and reflects the expansion of GKN
Automotive’s addressable content per vehicle
as a result of electrification.
In 2021, the Driveline division accelerated its
shift towards electrification by further adapting
its portfolio to match the changing demands
of new-energy vehicles. The business
completed 48 new programme launches and
continued to secure a significant share of new
business wins on electrified vehicle platforms,
reinforcing the division’s industry-leading
position through its premium core products.
The ePowertrain division is increasingly
benefitting from light vehicle electrification
and delivering impressive growth. In 2021, the
business saw the production launch of 12 new
programmes across 11 different global brands
powered by GKN Automotive technology.
Operational geographies
6
Global technology centres
20
Countries – Global production footprint
(1) All growth metrics are collated at constant currency.
(2) Described in the glossary to the financial statements on pages 203 to 210.
(1) Based on adjusted(2) 2021 revenue for continuing businesses.
(2) Described in the glossary to the financial statements on
pages 203 to 210.
Melrose Industries PLC Annual Report 2021Strategic ReportMelrose Industries PLC Annual Report 2021 20
Divisional review(1)
Continued
Technology case study
21
Revenue by destination
1
3
2
1 Europe
2 North America
3 Asia and rest of world
35%
31%
34%
Revenue by vehicle type
1
2
3
4
1 BEC & FCEV
2 Full hybrid
3 Mild hybrid
4 ICE
6%
9%
10%
75%
c.£5bn life of programme business wins
in 2021
1
4
2
3
1 BEC & FCEV
2 Full hybrid
3 Mild hybrid
4 ICE
35%
15%
18%
32%
(1) All growth metrics are collated at constant currency.
(2) References to electrified vehicle platforms refers to full hybrid
or battery electric propulsion systems.
(3) Before capital expenditure and restructuring costs.
The next generation of e-Drive systems
is now in development with a focus on
reduced weight and increased efficiency
and power density. With deep expertise
across all elements of e-Drive, a heritage
of manufacturing excellence and a global
footprint, ePowertrain is a leading
development partner for major leading
electrified vehicle manufacturers, featuring
components on seven of the top ten global
platforms outside of China. New business
wins in 2021 included the award of the first
fully outsourced 3-in-1 system for one of
the major German manufacturers.
The total business being won also remains
strong, with approximately £5 billion of life
of programme revenue secured in new
contracts throughout 2021. The propulsion
split of those business awards reflects the
continuing focus on electrification, with
approximately 50% of the secured life of
programme revenues attributable to electrified
vehicle platforms(2). A healthy proportion of
electric vehicle orders are for core Driveline
products, with an increased specification
due to the elevated torque requirements
of electrified vehicles. For e-Drive products,
the business has the flexibility to be able
to supply any part of the assembly, from
sub-components to full 3-in-1 systems, and is
selective in choosing programmes to develop
capabilities and scale. The business being
won on electric vehicle platforms is also on
terms consistent with GKN Automotive’s
higher margin target, partly as a result of its
premium core product becoming more in
demand as the transition accelerates.
Despite the ongoing COVID-19 challenges
and industrial inefficiencies related to sector
demand fluctuations and supply constraints,
GKN Automotive delivered an impressive
operating margin expansion. Partly in
response to the market challenges outlined
above, the business has strengthened its
supply chain, maintained close relationships
with customers and suppliers and streamlined
its operations, which also enables it to
minimise disruption from events such as the
recent unrest in Ukraine. Disciplined execution
of its full potential transformation programme
and continued strict cost control more than
doubled operating profit margins to 4.6% for
the full year. A continued focus on working
capital and rigorous cash management
throughout 2021 resulted in strong cash
generation for the business, that has enabled
it to be self-funding, with a cash conversion
rate of 96%(3).
Cutting-edge Advanced Cooled
and Controlled high-speed e-Drive
system, in collaboration with Drive
System Design and Nottingham
University
Since the revolutionary GKN Automotive
constant velocity joint enabled a new
generation of front-wheel drive cars over
50 years ago, GKN Automotive has
continued as a pioneer of future mobility.
Over the last 20 years, GKN Automotive’s
technological advancements have evolved
to drive systems to enable electric vehicle
technology, where it continues to lead the
field. In pursuit of developing the most
efficient electric drive unit possible, GKN
Automotive’s engineers based at its UK
Innovation Centre in Abingdon are developing
a cutting-edge Advanced Cooled and
Controlled high-speed e-Drive (“ACeDrive”)
system collaboration with Drive System
Design and Nottingham University. The
programme is partly funded by the Melrose
Skills Fund and GKN Automotive’s UK
Advanced Propulsion Centre. The goal is to
increase the e-Drive system’s power output
and improve system efficiency, whilst
reducing weight and material content.
Improving the efficiency of electric drive units
brings huge benefits for a battery electric
vehicle, enabling increased performance and
reduced system cost. Higher efficiency brings
increased vehicle range for a given battery
charge – range being a key obstacle for
consumers wanting to make the switch to
a battery electric vehicle. Equally, higher
efficiencies bring opportunities for car makers
to opt to use smaller batteries whilst still
achieving a desired vehicle range, hence
reducing vehicle cost, complexity and weight.
ACeDrive focuses on improvements to four
core elements of an electric drive system:
• Down-sized, high-speed motor with
cutting-edge efficiency
For a smaller, highly efficient unit requiring
less raw materials (reduced use of copper
and rare earth magnets) and as a result
offering cost as well as packaging benefits.
• 800V silicon carbide inverter with
variable switching frequency
Enables high system efficiency as well
as facilitating faster battery charging.
• Integrated advanced cooling
and lubrication
A real key for unlocking system
performance and efficiency.
• Enhanced motor control for highest
efficiency and lowest noise, vibrations
and harshness
Advanced software algorithms that
contribute significantly to differentiating
system performance.
To accelerate the advanced cooling element
of this programme, GKN Automotive is
sharing its expertise with the Jaguar Racing
Formula E team. In a sport centred around
efficiency, there is a distinct need for smaller,
lighter, more powerful e-Drive systems. It is
better directed, efficient, advanced cooling
that keeps component temperature under
control and protects the crucial system
efficiency that gives drivers an energy
advantage by the end of the race.
This ability to have smaller, lighter e-Drive
systems is not just essential for progression
on the racetrack but also on the road.
Advanced cooling on future road vehicles
will lead to increased range and enhanced
performance for electric vehicle drivers,
bringing weight, packaging and cost benefits.
During 2021, GKN Automotive further
signalled its intent to remain one of the
leading innovators of next generation
e-Drive systems by announcing the
launch of the Advanced Research Centre.
This world-class collaboration with the
University of Nottingham and Newcastle
University focuses on the development of
ultra-high efficiency electric drive units for
future electric vehicles. GKN Automotive’s
investment in its UK Advanced Research
Centre, which is co-located across three
leading engineering facilities, is supported
through the Melrose Skills Fund, aims to
develop and promote UK engineering
capability in automotive electrification
as well as help strengthen research and
development in the UK.
GKN Automotive has invested over
£200 million in advanced e-Drive
development since 2019. This investment
is delivering innovations that are essential,
not just for the growth of the business,
but for the decarbonisation of the
automotive industry.
Melrose Industries PLC Annual Report 2021Strategic ReportMelrose Industries PLC Annual Report 2021
7 of top 10
Supplier on 7 of top 10 BEV and
PHEV global programmes
c.£5 bn
Life of programme business wins
in 2021, of which more than one
third are for BEVs
Doubled margin
Adjusted(2) operating margins
doubled in the year
22
Divisional review(1)
Continued
The improvement programme has made
a major contribution to this performance,
delivering approximately £60 million of cost
savings in 2021 through initiatives covering
procurement, operational efficiency, and
fixed cost optimisation. A major part of the
programme in 2021 was the continued
execution of the new industrial strategy, most
notably the conclusion of plant closures in
Korea, Germany and the US, the sale and
reindustrialisation of a facility in Italy, and the
agreement of terms to close the Birmingham
site in the UK in the first half of 2022. This
contributed to the strong operating results in
2021 and leaves the business well positioned
to benefit as the market continues its recovery.
Outlook
It is expected that the past two years of
supply restrictions will lead to sustained
demand for new light vehicles amongst
consumers. While some of last year’s market
headwinds are expected to continue into
2022, global light vehicle production volumes
are nonetheless expected to recover, with
increasing electric vehicle penetration. GKN
Automotive will benefit from this electrification
trend through higher content value and
technology differentiation opportunity for both
divisions. There is a strong pipeline of over
60 launches across both the divisions during
2022, with the focus for Driveline on margin
expansion and ePowertrain on growth and
next generation technology.
GKN Automotive’s robust operating
performance in 2021 provides a strong
platform for the business going into 2022.
The restructuring initiatives undertaken during
extremely volatile market conditions provide
every reason to be optimistic about further
operating margin expansion, healthy cash
generation and profitable order book growth
during the coming year. Inflationary pressures
look set to persevere across raw materials,
energy and labour, with the business fully
focused to offset their impact and being
proactive in addressing any potential
disruption caused by the recent unrest in
Ukraine. We are confident that the impact of
inflation can be overcome by management
actions so that, with its adjusted cost base
and as full run rate benefits unfold, GKN
Automotive’s 10% plus operating margin
target will be achieved.
(1) All growth metrics are collated at constant currency.
(2) Described in the glossary to the financial statements on
pages 203 to 210.
23
Market trends
GKN Automotive
The automotive industry is currently facing
continued volatility due to a combination of
factors impacting both OEMs and suppliers.
Some of the most significant impacts include:
• Pent up demand: GKN Automotive has
a strong belief that there is a very healthy
latent demand for new vehicles amongst
consumers. Although supply constraints
hampered production through most of the
year, it is expected that supply constraints
will continue to ease in 2022 and that
a subsequent return to sales growth
will emerge in the coming years in
order to meet pent-up demand and
support dealers as they rebuild their
inventory levels.
• Accelerated BEV penetration:
COP 26, government incentives,
legislative tightening and a continued
public sentiment shift have accelerated
the adoption of electrification and new
mobility solutions, from which
GKN Automotive is set to benefit from
in both its core and e-Drive businesses.
• Residual COVID-19 disruption:
pockets of local lockdowns and flare-ups
from new variants causing global supply
chain and labour challenges.
• Semi-conductor shortage and
in-month call offs: increased
demand for electronics throughout the
pandemic, coupled with other supply
chain complications, led to a global
shortage of semi-conductors in 2021,
which constrained the expected
recovery in 2021 and is expected to
continue to constrain the industry
throughout 2022.
• Inflation: a combination of COVID-19
related industrial capacity reduction,
rebounding demand and ongoing
supply chain disruption is leading to a
dramatic rise in energy, labour, and raw
material prices. Ocean freight rates also
increased, with scarce capacity and
port congestion.
In response to the challenges outlined
above, the business strengthened
its supply chain, maintained close
relationships with customers and suppliers
and streamlined its operations. This
delivered strong operating results in 2021
and leaves the business well positioned
to benefit as the recovery continues and
achieve its margin targets.
Acceleration of light vehicle electrification
Global share of 2030 light vehicle propulsion types (IHS forecasts, % share of total LV production)
ICE & mild hybrid
PHEV
BEV/FCEV
3%
5%
92%
+20m
vehicles
20%
15%
65%
36%
18%
46%
Source: IHS light vehicle production, (Dec ‘20 & Dec ’21)
2020 Actual
Dec ‘20 view of 2030
Dec ‘21 view of 2030
COVID-19 and semiconductor shortage impacting the industry during 2021
Light vehicle production volume forecasts (IHS monthly forecasts, million vehicles)
0
.
9
8
6
.
4
7
6
.
4
8
1
.
4
8
5
.
3
8
:
3
.
3
8
1
.
3
8
0
.
2
8
:
8
.
0
8
8
.
5
7
8
.
4
7
9
.
4
7
5
.
5
7
4
.
6
7
2019
2020
2021
(Jan)
2021
(Feb)
2021
(Mar)
2021
(Apr)
2021
(May)
2021
(Jun)
2021
(Jul)
2021
(Aug)
2021
(Sep)
2021
(Oct)
2021
(Nov)
2021
(Dec)
Month-on-month
forecast change (%)
Forecast 2021 vs.
2020 (%)
-0.6% -0.7% -0.2% -0.2% -1.3% -1.5% -6.2% -1.3% 0.1%
0.8%
1.2%
13.4%
12.8%
12.0% 11.7% 11.4% 9.9%
8.3%
1.6%
0.3%
0.4%
1.2%
2.5%
Source: IHS light vehicle production forecasts
Melrose Industries PLC Annual Report 2021Strategic ReportMelrose Industries PLC Annual Report 2021 24
Divisional review(1)
Continued
25
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, through
its prized vertically integrated business platform.
gknpm.com
Powder
Metallurgy
Divisional highlights
GKN Powder Metallurgy sales volume grew at more than
double the rate of growth in car production in 2021 due to
continued significant market share gains.
Strong market positions
• #1 in supply of precision
powder metal parts.
Margins expanding
• Restructuring largely complete
and improving business mix.
In 2021, adjusted(2) operating profits for GKN Powder Metallurgy
more than doubled despite the well-publicised supply challenges.
During 2022, the full run rate benefits from the required
restructuring projects in GKN Powder Metallurgy will materialise
giving the opportunity to realise this shareholder value.
• #2 in global powder metal
production.
• Adjusted(2) operating margin:
2020: 4.3% 2021: 9.3%
Target 14%.
Growth underway
• Sustainable share gains
above market.
Sustainable technology
• Supporting electric vehicle
expansion.
• Momentum in higher value-add
• Commercialising additive
precision components.
manufacturing.
Proportion of Melrose(1)
13%
Adjusted(2) revenue
£975m
Statutory revenue
£948m
Adjusted(2) operating profit
£91m
Statutory operating loss
£40m
Operational geographies
3
Global technology centres
10
Countries – Global production footprint
GKN Powder Metallurgy combines
the design and production of
advanced powder metals with
innovative sintering and additive
production technologies to create
unique metal and polymer products.
The year was marked by a strong
improvement in activity levels for GKN
Powder Metallurgy across all geographies.
The pent-up demand for vehicles and other
goods in general, combined with the need
by the industry to recover from the low stock
levels maintained during the previous year,
produced very high demand during the first
quarter of the year. This high activity level
registered in the first three months was
followed by lower and more erratic demand,
primarily from the automotive industry caused
by the semiconductors supply issue. For the
full year, GKN Powder Metallurgy achieved a
revenue growth of 13% compared with the
previous year. Although revenue levels remain
below pre-pandemic levels, sales volume
growth for the business in 2021 was double
the production growth of the wider market,
highlighting the increased market share
achieved by the business.
As part of the improvement plan, the core
business has been streamlined, resulting
in the divestment in May 2021 of a non-core
low margin structural plant in the US, and the
planned Canada plant closure, which is set
to be concluded during 2022. In addition,
the closure of a Sinter Metals site in Germany
was communicated in November. Having
taken it through the initial development
phase, GKN Hydrogen, the hydrogen
storage business, was also separated into
a standalone business under direct Melrose
management at the end of the year.
(1) All growth metrics are collated at constant currency.
(2) Described in the glossary to the financial statements on pages 203 to 210.
(1) Based on adjusted(2) 2021 revenue for continuing businesses.
(2) Described in the glossary to the financial statements
on pages 203 to 210.
Strategic ReportMelrose Industries PLC Annual Report 2021Melrose Industries PLC Annual Report 2021 26
Divisional review(1)
Continued
Revenue by market type(2)
1
2
4
3
1 Automotive components
2 Transmission
3 Engine
4 Industrial
26%
29%
23%
22%
Revenue by segment(2)
3
1
2
1 OneSinter
2 Powder
3 Additive
78%
20%
2%
Revenue by destination(2)
3
1
2
1 North America
2 Europe
3 Asia and rest of world
41%
35%
24%
(1) All growth metrics are collated at constant currency.
(2) Based on existing businesses at 31 December 2021.
(3) Before capital expenditure and restructuring costs.
(4) Described in the glossary to the financial statements on
pages 203 to 210.
Furthermore, while the year was also
characterised by a significant increase in
input costs, primarily coming from the cost
of commodities, notably metal scrap, copper,
nickel and molybdenum, the pass-through
mechanisms largely protected the financial
performance. The business was also
proactive in exiting lower margin sales,
particularly on ICE platforms.
These actions have contributed to
GKN Powder Metallurgy’s very strong
performance, with adjusted operating
margins for the full year expanding to 9.3%
and adjusted operating profit up 162%. This
improvement came from the stronger activity
level, primarily during the first quarter, tight
cost management during the lower activity
months and the realisation of benefits arising
from restructuring activities initiated during
prior years.
Another year of strong cash generation saw
the business achieve a cash conversion
rate of 107%(3), reflecting the sustainable
improvements achieved in working capital.
The business made significant investment
in new technologies and continued the
development of the core business during the
year. A key focus has been the development
of the transition plan for the switch to electric
vehicles. As well as innovative solutions like
the launch of an electric pump for hybrid
transmission vehicles, the business is well
progressed in harnessing its unique powder
technologies in connection with break-through
technologies for magnets for e-motors.
Other parts of the business made good
progress as well. For Powders (Hoeganaes),
the hydride powder for hydrogen storage was
further developed and it will be a long-term
supplier to GKN Hydrogen. In Additive, the
expansion of polymers into the Michigan, US
site was initiated, as a way of increasing the
presence in the Midwest and, in particular, to
serve the global automotive manufacturers.
Outlook
Expectations are that supply chain shortages,
particularly relating to the availability of
semiconductors, will ease during the year,
supporting another year of growth in 2022
for GKN Powder Metallurgy. The business is
being proactive in its elimination of the impact
of inflationary pressures, which it expects to
be able to fully offset, and ensuring minimal
disruption from the recent unrest in Ukraine.
The recently completed reorganisation and
refocus on core products, along with the
conclusion of further ongoing activities,
positions GKN Powder Metallurgy well to
continue the margin expansion towards
reaching its 14% operating margin target
as full run rate benefits flow through and we
move towards realising value for shareholders.
27
162% increase
Adjusted(4) operating profit increased
by 162% and adjusted(4) operating
margins doubled
Market trends
GKN Powder Metallurgy
During 2021, GKN Powder Metallurgy
continued to service its core industrial
markets, particularly within the
automotive sector where, despite
significant progress being made
towards increased consumer uptake
in electric vehicles and the product
expansion opportunities that are
expected to materialise over the
coming years, volatility in the sector
continued to weigh on shorter-term
market growth expectations.
Key trends that GKN Powder Metallurgy
continues to address are:
• Customers reducing their supplier
base and staying with the
technology leaders that can serve
their global requirements.
• Further expansion into the electrified
vehicles submarkets, driven by
automotive OEM demands for
increased manufacturing efficiency
and precision parts.
• Demand for product solutions using
additive manufacturing techniques,
supported by increasingly more
digitised manufacturing controls.
These trends are driving further new
product development at GKN Powder
Metallurgy such as components
and solutions that iterate or replace
traditional cooling and lubrication
pumps, and a powder metal-based
electric direct drive motor for an e-bike
which combines increased torque with
better efficiencies and a lower weight.
During 2021, GKN Powder Metallurgy’s
FORECAST 3D business continued its
penetration of new markets with new
polymer-based components being
produced for customers outside of
the business’s traditional core markets,
which would not have been possible
without the unique design freedom
which additive manufacturing
techniques provide.
Technology case study
GKN Powder Metallurgy’s investment in
new technologies continued throughout
2021. In Italy, the Sinter Metals Bruneck
plant launched an electric pump for hybrid
and battery electric transmission vehicles.
Having pursued research and development
leadership in oil pump componentry for car
engines and transmission lubrication over
the last few years, being an area where
traditional pumps combine a variety of
technologies to produce their components
including machined steel or machined
aluminium die casting, GKN Powder
Metallurgy has developed a fully powder
metal design that can produce all
components within an electric pump
system. This technological innovation
targets notable efficiencies and CO2
reductions driven by component precision,
as well as attractive cost benefits delivered
through manufacturing process
improvements such as cost effective
machining and more reliable quality
verification than can be achieved through
traditional methods. To convert customers
to powder metal solutions in this area
a total redesign of traditional electric
pump systems was required, promoting
increased use of GKN Powder Metallurgy’s
components within these systems.
Melrose Industries PLC Annual Report 2021Strategic ReportMelrose Industries PLC Annual Report 2021
28
Divisional review(1)
Continued
Other Industrial
The Other Industrial division comprises (i) Ergotron and (ii) GKN Hydrogen
Having sold Brush and Nortek Control during the year,
the Other Industrial division now consists of Ergotron
and the newly formed GKN Hydrogen business.
Operational geographies
Proportion of Melrose(2)
3%
Adjusted(3) revenue
£233m
Statutory revenue
£233m
Adjusted(3) operating profit
£51m
Statutory operating loss
£35m
Ergotron is a leading designer, manufacturer and distributor of
ergonomic products for use in a variety of working, learning and
healthcare environments. Based near Minneapolis, US, Ergotron
comprises three business segments: Healthcare, Workspace and Custom.
ergotron.com
Ergotron is a leading designer, manufacturer
and distributor of ergonomic products
for use in a variety of working, learning
and healthcare environments. Based in
Minneapolis, US, Ergotron comprises three
business segments: Healthcare, Workspace,
and Custom and is respected for high quality,
professional-grade products that last.
Revenue growth of 15% over 2021 was
driven by continued global growth in
Healthcare of 18% and a 42% growth in
Workspace driven by employees embracing
a more hybrid work environment even as
they return to the office.
Despite a challenging year due to global
supply chain issues and inflationary
pressures, the business successfully offset
these through price increases to maintain
strong profitability. The strong revenue growth
and margin management was reflected in the
19% increase in operating profit for the year.
Outlook
Ergotron expects further profitable growth
in 2022 led by continued growth in its
Healthcare segment due to market expansion
and the focus on new global geographic
territories. Additionally, Ergotron is well
positioned to capture growth in the
Workspace segment due to the expansion
of the hybrid work environment.
(1) All growth metrics are collated at constant currency.
(2) Based on adjusted(3) 2021 revenue for continuing businesses.
(3) Described in the glossary to the financial statements on pages 203 to 210.
29
Technology case study
Ergotron: TRACE™ – Constant Force™
The COVID-19 pandemic has accelerated the trend towards
multiple workspaces as the new workplace reality. With the
blurring of the separation between office, home and third space,
technology has become paramount to the overall employee
experience. With this variability in working environments,
seamless workflow to accommodate individual needs and
enhanced collaboration has become ever more critical. This
has come at a time when society is placing greater focus on
individual employee health and a responsibility on employers
to support all aspects of employee wellbeing.
Ergotron’s innovative TRACE™ Monitor Mount is a hybrid of
Ergotron’s best technologies and innovations, offering users
the freedom to meet the needs of their unique workstyles and
positively impact their performance, wellbeing and satisfaction.
Ergotron’s Constant Force™ technology pairs with a linear guide
system that allows for smooth monitor adjustment and 240
degrees pan for a flexible, ergonomic set-up. In personal or
shared workspaces, users can work seated or standing, with
their monitors at a customisable height to support the ideal
posture for comfortable, healthy working. Ergotron’s proprietary
TRACE™ arm technology provides an easier and more intuitive
positioning of the display. Set apart from traditional monitor
arms, the TRACE™ Monitor Mount is designed with distinct
vertical and lateral movements to move in a straight line, tracing
the user movement along its natural path to effortlessly transition
between individual and collaborative work, always returning to
the personalised home position.
GKN Hydrogen has been separated
from GKN Powder Metallurgy and
launched as a standalone business,
focusing on commercialising
propriety metal hydride technology
to store hydrogen in a safe, compact
and green manner.
gknhydrogen.com
GKN Hydrogen offers a state-of-the-art metal hydride storage
solution that was initially developed under the umbrella of the
GKN Powder Metallurgy business. It harnessed the business’s
unique and industry leading knowledge of powder technology
to create the most reliable and secure hydrogen storage solution
currently available today. The robust system stores hydrogen
compactly and safely in proprietary metal hydrides and it can be
used in a wide range of industrial and commercial applications.
Having produced and tested pilot systems during 2021, the
business has been separated into a standalone business within
the Melrose Group in order to maximise the growth opportunity.
GKN Hydrogen will now move into the commercialisation phase
with increased focus in 2022 and beyond.
Market trends
Ergotron
Customer buying behaviour in Ergotron’s key end markets
has seen a number of shifts since the onset of the COVID-19
pandemic, the most notable and impactful for Ergotron being the
acceleration towards hybrid office working models, and increased
focus on mind, body and ergonomics to improve health and
productivity. This has propelled Ergotron’s solutions and offerings
relating to adaptable and flexible working environments, such as
innovative monitor arm technologies and solutions that create
seamless workflows and support larger multiple monitor systems,
to accommodate variability in working environments and
encourage ease of movement, whilst enhancing employees’
ability to collaborate regardless of their physical location.
In the Healthcare segment, key trends relate to enhanced
patient-caregiver technology interactions that enable the delivery
of both increased caregiver comfort and high quality patient care,
by offering health and wellness benefits that increase productivity
and service efficiency, and improve physical risk mitigation within
a variety of care settings. Ergotron continues to respond to these
trends predominantly through continually innovating its medical
carts solutions, which remain agile in their design to support a
variety of care settings including nurse stations, mobile clinical
delivery, home environments and virtual delivery.
Ergotron is running efficiently, making 25% adjusted(3)
operating margins.
Market trends
GKN Hydrogen
• Overall energy demand set to increase by 50% by 2050
and renewables must contribute 80% of this growth to
meet emissions regulations.
• Renewable energy generation fluctuates and does not
always meet demand, so energy storage is required –
green hydrogen is the answer as it is 100% emission free.
• Forecasts of over US$600 billion infrastructure investment
in hydrogen storage globally by 2050.
• GKN Hydrogen’s storage technology addresses all
requirements – safest, 100% recyclable, compact and long life.
Melrose Industries PLC Annual Report 2021Strategic ReportMelrose Industries PLC Annual Report 2021 30
Key performance indicators
Key performance indicators
31
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”).
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.
Financial KPIs
Method of calculation
Strategic objective
Adjusted (1) diluted
earnings per share(3)
‘19
‘20
‘21
(0.6)p
4.1p
Adjusted free cash
generation(1)
‘19
‘20
‘21
£323m
Net debt (1) reduction
‘19
‘20
‘21
8%
13%
£591m
£628m
67%
67%
4.1p
11.0p
Group adjusted (1) profit after tax of continuing
businesses, attributable to owners of the parent,
for the year ended 31 December 2021, divided by
the weighted average number of diluted ordinary
shares in issue.
To create consistent and long-term value
for shareholders.
£323m
Total cash generated from trading after all costs,
excluding restructuring and one-off payments to
defined benefit pension schemes.
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.
Reduction in net debt in the year as a percentage of
opening net debt.
To ensure that the Group has suitable
amounts of net debt and remains within
its banking covenants.
Adjusted (1) profit conversion
(pre-capex) to cash percentage(3) 110%
‘19
‘20
‘21
104%
110%
193%
Percentage of adjusted (1) EBITDA(2) conversion to cash,
as shown in the glossary to the financial statements,
for continuing businesses in existence during the year
ended 31 December 2021 pre-capital expenditure.
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.
Adjusted (1) operating
profit(3)
‘19
‘20
‘21
£141m
£375m
£375m
£896m
Adjusted (1) operating profit for the continuing
businesses in existence during the year ended
31 December 2021.
To improve profitability of Group operations.
1.3x
4.1x
5.0%
9.0%
Net debt to adjusted (1) EBITDA(2) – net debt at average
exchange rates divided by adjusted (1) EBITDA(2)
further adjusted to reflect covenant requirements,
for continuing businesses at each year end.
To ensure the Group has suitable amounts
of debt and remains within its banking
covenants.
Adjusted (1) operating profit as a percentage of
adjusted (1) revenue, for the continuing businesses
in existence during the year ended 31 December 2021.
To improve profitability of Group operations.
5.9x
10.8x
Adjusted (1) EBITDA(2) further adjusted to reflect
covenant requirements of all businesses as a multiple
of net interest payable on bank loans and overdrafts
for the Group during each year.
To ensure the Group has sufficient
profitability to meet the interest cost of debt
and remains within its banking covenants.
Net debt to adjusted (1) EBITDA(2)
‘19
‘20
‘21
2.25x
1.3x
Adjusted (1) operating
profit margin(3)
‘19
‘20
‘21
1.8%
5.0%
Interest cover
‘19
‘20
‘21
5.1x
5.9x
Final dividend per
share
0.00p
‘19
‘20
‘21
1.0p
Amount declared as payable by way of dividends in
terms of pence per share.
0.75p
1.0p
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 8 to 9.
(1) Described in the glossary to the financial statements on pages 203 to 210.
(2) Operating profit before depreciation of property, plant and equipment and amortisation of computer software and development costs.
(3) Data has been restated for discontinued operations in 2019 and 2020.
Non-financial KPIs
Health and safety
In line with the Melrose decentralised model, our
businesses are each responsible for implementing
and maintaining health and safety excellence
across their respective operations. To provide
visibility and oversight for the Board, information
is collated quarterly on three key performance
indicators – Major Accident Frequency, Lost Time
Accident Frequency, and Accident Severity
(each as defined below) – for each business and
covering all of their sites. A variety of additional
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. Although responsibility for health
and safety rests with the business units, in the
unfortunate circumstance of a very serious
incident, the Melrose senior management team
will engage directly with the relevant business
unit executive team and report any actions taken
directly to the Board.
Method of calculation
All Melrose Group businesses report the same
three KPI metrics for health and safety. Given the
expansion and diversified nature of the Group,
weightings have been applied to each division’s
reported health and safety performance according
to the size of its workforce relative to that of
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(1)
The Group’s current businesses measure three
key health and safety KPIs:
Major Accident Frequency Rate 0.04
‘19
‘20
‘21
0.04
0.19
0.28
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.
Lost Time Accident
Frequency Rate
‘19
‘20
‘21
0.06
0.30
0.06
0.43
Records the number of lost time accidents,
both major and minor, per 200,000 hours worked.
Accident Severity Rate
‘19
‘20
‘21
30.17
19.15
20.39
30.17
Records the average number of days an employee
takes off work following an accident at work.
(1) Data has been restated for 2019.
The GKN Aerospace site in Papendrecht, the
Netherlands, sadly suffered a tragic fatality in 2021.
A thorough internal investigation was immediately
conducted by the GKN Aerospace executive team
and overseen by the Melrose senior management
team, with regular reporting to the Board. This
triggered a wholesale review of the GKN Aerospace
group safety standards across the business. This
review included risk assessment processes, and
the underlying reporting and oversight systems and
documentation which support the implementation
and ongoing monitoring of GKN Aerospace’s
safety standards, operating procedures and safety
systems, both at site and GKN Aerospace group
level. The Dutch authorities are conducting their
own investigation, in which the business is fully
cooperating, and which remained ongoing as at
the time of writing.
The Group’s Major Accident Frequency rate and
Lost Time Accident Frequency rate has decreased
year-on-year for the GKN businesses. Specific
incidents at GKN Aerospace, GKN Powder
Metallurgy and Ergotron resulted in an increase in
Accident Severity Rate compared to 2020, which
has led to significantly increased focus from each of
the businesses in order to drive improvement. Each
incident was promptly and fully investigated, and
although no systemic issues were identified, each
business responded to their respective incidents
with robust measures to increase health and
safety awareness within specific and similar areas
relevant to those incidents, to reinforce the correct
policies and procedures, and to review the relevant
working environments for continuous improvement
actions where necessary. The Group’s trajectory
of longer-term improvement continues, and our
businesses continue to uphold and further develop
high standards of health and safety performance.
The general trend of improvement reflects the
continued investment in health and safety initiatives
across all businesses and highlights continual
improvement in the GKN businesses since they
were acquired in 2018.
At the Board’s request, external health and safety
compliance experts are engaged through the
Group’s insurance brokers to review the health
and safety audit function for each GKN business,
with a focus on verifying its operation and where
relevant to recommend continuous improvements
as they evolve. This review programme uses a
combination of remote and physical site visits and
regular discussions with the health and safety
leads at each of the GKN businesses to provide
assurance of the robustness of health and safety
systems that operate within the Group’s larger and
most complex businesses. Recommendations
are fed back to the Melrose senior management
team for oversight and challenge as required, and
to the relevant business executive team to manage
their implementation, as part of overall continuous
improvement measures.
During 2021, the Group’s insurance brokers
continued to work with each of the GKN
businesses to review and implement the
recommendations resulting from their initial
review of their health and safety functions and
as recommendations were being implemented
within the businesses, to provide assurance that
improvements were being implemented as required
and to provide further iterative recommendations
to maintain strong health and safety practices
as they evolve. Recent feedback has confirmed
that each relevant business is operating to an
acceptable standard, with further alignment with
recommendations being evident and built upon,
and a continued strong commitment to health
and safety from each of the GKN businesses
both centrally and at site level.
In parallel with existing business unit-led
initiatives, the Group’s insurance brokers in
the US continue to conduct independent
health and safety compliance reviews across
the GKN businesses’ US-based operations.
Some site visits recommenced in 2021 but
were limited due to prolonged pandemic travel
restrictions. This review continues to focus
on potential major and serious injuries and
occupational health exposures, and further site
visits are hoped to recommence in 2022 as this
becomes practicable.
During 2021, each business in the Group
maintained measures and protocols to address
the risks of a COVID-19 outbreak within the
workplace, and to support their employees in
line with national guidelines.
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. Businesses provide data
for relevant environmental indicators, including
energy consumption, CO2 emissions, water
withdrawal, waste disposal, solid waste
generation, and recycling. We have used the
UK Government Environmental Reporting
Guidelines including the UK’s Streamlined
Energy and Carbon Reporting requirements
and the GHG Protocol Corporate Accounting
and Reporting Standard (revised edition), and
data has been gathered in accordance with our
GHG reporting procedure.
Strategic objective
Melrose fully understands the importance of
the Group’s environmental responsibilities and
is committed to encouraging its businesses to
make efficiency improvements where possible
and 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 businesses during 2021 can be found
within the Sustainability report on pages 54 to
77. The Group is required to disclose its
Greenhouse gas emissions and certain energy
use data for the year ended 31 December 2021.
Such data can be found within the Sustainability
report on pages 76 to 77.
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
in these areas can be found within the
Sustainability report on pages 54 to 77.
Melrose Industries PLC Annual Report 2021Strategic ReportMelrose Industries PLC Annual Report 2021 32
Finance Director’s review
33
• A charge of £147 million (2020: £60 million) within the Automotive
division, primarily relating to two significant footprint consolidation
actions in Europe, which significantly progressed during the year,
along with costs incurred on multiple worldwide restructuring
projects as the business accelerates its efforts to position its cost
base during 2022 at a level that will allow the business to achieve
target operating margins when supply constraints ease.
• A charge of £18 million (2020: £48 million) within the Powder
Metallurgy division, relating to multiple restructuring projects
underway that will set the business’ cost base during 2022 at a
level such that target operating margins can be achieved when
supply constraints ease.
• A net charge of £12 million (2020: £3 million) within the Other
Industrial and Corporate divisions which includes the non-cash
accounting loss resulting from actions taken in the year to secure
and buy-out pensioner members from the GKN UK 2016 Pension
Plan with Aviva or Rothesay, as described in the pensions and
post-employment obligations section of this review.
Where hedge accounting is not applied, movements in the fair value
of derivative financial instruments (primarily forward foreign currency
exchange contracts), along with foreign exchange movements on
the associated financial assets and liabilities, entered into within the
businesses to mitigate the potential volatility of future cash flows on
long-term foreign currency customer and supplier contracts. This
totalled a charge of £114 million (2020: credit of £182 million) in the
year and is shown as an adjusting item because of its volatility
and size.
The net release of fair value items in the year of £49 million (2020:
£115 million) where items have been resolved for more favourable
amounts than first anticipated. During the year this included a net
release of £22 million in respect 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.
Other adjusting items of £40 million (2020: £48 million), which included
items consistent with prior years, the largest of which is an adjustment
of £28 million (2020: £30 million) to gross up the post-tax profits of
EAIs to be consistent with the adjusted operating profits of
subsidiaries within the Group.
In the prior year, a write down of assets of £184 million, which was
recognised as a result of the impact of COVID-19, of which £133
million was within the Aerospace division. This was shown as an
adjusting item because of the unprecedented nature of the COVID-19
pandemic, along with its non-trading nature and size.
Reconciliation of statutory results to adjusted results
The following tables reconcile the Group statutory revenue and statutory
operating loss to adjusted revenue and adjusted operating profit:
Continuing operations:
Statutory revenue
Adjusting item:
Revenue from equity accounted investments (“EAIs”)
Adjusted revenue
Adjusting item:
2021
£m
6,883
2020
£m
7,132
613
591
7,496
7,723
Adjusted revenue includes revenue from EAIs, the largest of which is a
50% interest in Shanghai GKN HUAYU Driveline Systems Co Limited
(“SDS”), within the Automotive segment. During the year ended 31
December 2021, EAIs in the Group generated £613 million of revenue
(2020: £591 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 loss
Adjusting items:
Amortisation of intangible assets acquired in business
combinations
Restructuring costs
Currency movements in derivatives and movements in
associated financial assets and liabilities
Net release of fair value items
Other
Write down of assets
Adjustments to statutory operating loss
Adjusted operating profit
2021
£m
(451)
2020
£m
(487)
452
269
114
(49)
40
–
826
375
472
221
(182)
(115)
48
184
628
141
Adjusting items to statutory operating loss in the year are consistent
with prior years and include:
The amortisation charge on intangible assets acquired in business
combinations of £452 million (2020: £472 million), which is excluded from
adjusted results due to its non-trading nature and to enable comparison
with companies that grow organically. However, where intangible assets
are trading in nature, such as computer software and development
costs, the amortisation is not excluded from adjusted results.
Costs associated with restructuring projects in the year totalling
£269 million (2020: £221 million), including a write down of assets in
affected sites of £112 million (2020: £20 million). These are shown as
adjusting items due to their size and non-trading nature and during
the year ended 31 December 2021 these included:
• A charge of £92 million (2020: £110 million) within the Aerospace
division, primarily relating to the commencement of significant
multi-year restructuring projects, necessary for the business to
achieve its full potential target operating margins. These included
the initial stages of European footprint consolidations in both the
Civil and Engines businesses, which commenced in the first half
of the year, and significant restructuring programmes in North
America, across all three Aerospace sub-segments, which
commenced in the second half.
Geoffrey Martin
Group Finance Director
During the year the Group successfully disposed of the Nortek Air Management
division and the Brush and Nortek Control businesses from within the
Other Industrial division. Together, these businesses contributed c.20%
of adjusted revenue in the previous year and are shown as discontinued
operations throughout these Consolidated Financial Statements.
The results of the continuing businesses
in the Group show substantial
improvement this year over last year,
as the benefits of restructuring actions
are increasingly coming through.
Melrose Group results – continuing operations
Statutory results:
The statutory IFRS results are shown on the face of the Income
Statement and show revenue of £6,883 million (2020: £7,132 million),
an operating loss of £451 million (2020: £487 million) and a loss before
tax of £618 million (2020: £679 million). The diluted earnings per share
(“EPS”), calculated using the weighted average number of shares in
issue during the year of 4,695 million (2020: 4,858 million), were a loss
of 9.6 pence (2020: loss of 11.7 pence).
Adjusted results:
The adjusted results are also shown on the face of the Income
Statement. They are adjusted to include the Group’s share of revenue
and operating profit from certain investments in which the Group does
not hold full control, 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 Consolidated 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 2021 show
revenue of £7,496 million (2020: £7,723 million), an operating profit of
£375 million (2020: £141 million) and a profit before tax of £252 million
(2020: loss of £41 million). Adjusted diluted EPS, calculated using the
weighted average number of shares in issue in the year of 4,695 million
(2020: 4,858 million), were 4.1 pence (2020: a loss of 0.6 pence).
Tables summarising the statutory results and adjusted results by
reportable segment are shown later in this review.
Melrose Industries PLC Annual Report 2021Strategic ReportMelrose Industries PLC Annual Report 2021 34
Finance Director’s review
Continued
35
Statutory and adjusted results by reporting segment
The following table shows continuing 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
Other Industrial
£m
2,538
5
2,543
3,164
581
3,745
948
27
975
233
–
233
The following table shows operating (loss)/profit split by reporting segment. Adjusting items are described earlier in this review.
Aerospace
£m
Automotive
£m
Powder Metallurgy
£m
Other Industrial
£m
Corporate
£m
Statutory operating (loss)/profit
Reconciling item:
Adjusting items
Adjusted operating profit/(loss)
(196)
308
112
(131)
303
172
40
51
91
35
16
51
(199)
148
(51)
Total
£m
6,883
613
7,496
Total
£m
(451)
826
375
The performances of each of the reporting segments are discussed in the Chief Executive’s Review. The adjusted operating loss in the corporate
cost centre of £51 million (2020: £46 million) included £34 million (2020: £34 million) of operating costs and £17 million
(2020: £12 million) of costs relating to divisional cash-based long-term incentive plans.
Finance costs and income – continuing operations
Total net finance costs shown in the statutory IFRS results in the year
ended 31 December 2021 were £167 million (2020: £192 million), of
which £125 million (2020: £182 million) are shown within the adjusted
results and £42 million (2020: £10 million) treated as adjusting items.
Adjusted results:
Net interest on external bank loans, bonds, overdrafts and cash
balances was £91 million (2020: £133 million). The Group 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.
Net finance costs in adjusted results also included: a £10 million (2020:
£12 million) amortisation charge relating to the arrangement costs of
raising the Group’s current bank facility; an interest charge on net
pension liabilities of £8 million (2020: £19 million); a charge on lease
liabilities of £14 million (2020: £16 million); and a charge for the unwind
of discounting on long-term provisions of £2 million (2020: £2 million).
Adjusting items:
Adjusting items, within finance costs and income, include: a charge
of £45 million (2020: £nil), relating to the early settlement of certain
interest rate swap instruments that were no longer needed following
the disposals of the Nortek Air Management and Brush businesses;
and a credit of £3 million (2020: charge of £2 million) relating to the fair
value changes on cross-currency swaps. Both are shown as adjusting
items because of their volatility and non-trading nature.
In the prior year, adjusting items within finance costs and income
included a charge of £8 million relating to costs incurred renegotiating
the Group’s financial covenants with its banking facility syndicate in
response to the impact of COVID-19.
In addition, a credit of £2 million (2020: £nil), not included in the statutory
net finance costs, is included in adjusted results, relating to the gross up
of post-tax profits of EAIs to be consistent with the finance costs and
income of other subsidiaries within the Group. This results in net
adjusted finance costs for the year of £123 million (2020: £182 million).
Discontinued operations
Discontinued operations include: Nortek Air Management sold to
Madison Industries LLC on 22 June 2021 for gross proceeds of
£2.6 billion; the Brush business disposed on 18 June 2021 for cash
consideration of £0.1 billion; and Nortek Control on 4 October 2021
for £0.2 billion.
The net proceeds associated with the disposal of Nortek Air
Management and Nortek Control, plus more than £800 million of
cash generated by the Nortek businesses since acquisition and the
retention of the Ergotron business in the Group, means the Group
is well placed to achieve the target of doubling shareholders’
investment on the Nortek acquisition.
The disposal of Brush, the final business to be sold from the FKI
acquisition in 2008, concluded another highly successful investment
for Melrose shareholders, providing a 2.6x return on Shareholders’
initial equity, equivalent to an IRR of 29%.
Discontinued businesses contributed £884 million to revenue and
achieved statutory operating profit of £5 million for the period of the
year under ownership (2020: revenue of £1,782 million and statutory
operating profit of £149 million), before contributing a net £1.3 billion
profit on disposal in the year.
Return of capital and number of shares in issue
In line with the Group’s strategy, following the disposal of Nortek Air
Management and Brush, a return of £729 million in cash to
Shareholders, equivalent to 15 pence per Existing Ordinary Share, was
made on 31 August 2021 via a redeemable share scheme alongside
a 9 for 10 share consolidation. This reduced the number of ordinary
shares in issue by 10%, from 4,858 million to 4,372 million.
The weighted average number of shares used for earnings per share
in calculations in 2021 is 4,695 million.
Tax – continuing operations
The statutory results show a tax credit of £172 million (2020: credit of
£114 million) which arises on a statutory loss before tax on continuing
operations of £618 million (2020: loss of £679 million), a statutory tax
rate of 28% (2020: 17%).
The effective rate on the adjusted profit before tax for the year ended
31 December 2021 was 22%.
The statutory tax rate is higher than the adjusted tax rate because the
statutory tax credit includes exceptional tax credits of £108 million
(2020: £nil) relating to the recognition of Dutch losses that will give
future tax savings as a result of a change in law, partially offset by
exceptional tax charges of £70 million (2020: £nil) in respect of the
extraction of the US Powder Metallurgy companies from the
Automotive tax group.
The Group has £792 million (31 December 2020: £810 million) of
deferred tax assets on tax losses, retirement benefit obligations and
other timing differences. These are offset by deferred tax liabilities on
intangible assets of £993 million (31 December 2020: £1,161 million)
and £163 million (31 December 2020: £201 million) of other deferred
tax liabilities. Most of the tax losses and other deferred tax assets will
generate future cash tax savings, whereas the deferred tax liabilities on
intangible assets are not expected to give rise to cash tax payments.
Net cash tax paid in the year ended 31 December 2021 was
£65 million (2020: £14 million), 26% of adjusted profit before tax.
Cash generation and management
Robust cash management initiatives continue to be run by all
businesses in the Group and resulted in a free cash inflow in the year of
£125 million (2020: £456 million) of which £53 million (2020: £252 million)
was in discontinued operations, with each of the continuing businesses
more than self-funding all costs, including substantial restructuring
spend. Adjusted free cash flow, shown before restructuring cash spend,
was £323 million (2020: £628 million).
An analysis of the adjusted free cash flow is shown in the table below:
Continuing operations (unless stated otherwise)
2021
£m
2020
£m
Adjusted operating profit
Adjusted operating profit from EAIs
Depreciation and amortisation
Lease obligation payments
Positive non-cash impact from loss-making contracts
Working capital movements
Adjusted operating cash flow (pre-capex)
Net capital expenditure
Net interest and net tax paid
Defined benefit pension contributions – ongoing
Restructuring
Dividend income from equity accounted investments
Net other
Cash flows from operations discontinued in the year,
after all costs(1)
Free cash flow
Adjusted free cash flow
(1) includes £5 million (2020: £11 million) of restructuring spend.
375
(66)
425
(54)
(48)
62
694
(225)
(205)
(54)
(193)
52
3
53
125
323
141
(62)
442
(63)
(58)
371
771
(265)
(171)
(107)
(161)
54
83
252
456
628
Net working capital in the continuing businesses was reduced by
£62 million in the year (2020: £371 million), despite Group revenue
growing by 2% in the year, at constant currency. Working capital as
a percentage of sales, within the remaining GKN businesses, has
reduced from 5% at the GKN acquisition date to 3% at 31 December
2021, illustrating the strong cash generation achieved during Melrose
ownership.
Net capital expenditure in the year was £225 million (2020:
£265 million), representing 0.6x (2020: 0.7x) depreciation of
owned assets.
Net interest paid in the year was £140 million (2020: £157 million),
net tax payments were £65 million (2020: £14 million) and ongoing
contributions to defined benefit pension schemes were £54 million
(2020: £107 million). These included £30 million (2020: £60 million)
paid into the GKN UK pension plans, reduced because the funding
commitment made by the Group, when GKN was acquired in 2018,
has been delivered ahead of schedule. The GKN UK pension
schemes are now in surplus helped by £1 in every £3 of free cash
flow since acquisition being paid into the Group’s pension schemes.
The movement in net debt (as defined in the glossary to the
Consolidated Financial Statements) is summarised as follows:
At 1 January
2021
£m
2020
£m
(2,847)
(3,283)
Non-trading items and discontinued operations:
Net cash flow from acquisition and disposal related activities
2,536
(11)
Dividends paid to Melrose shareholders
Return of Capital
Foreign exchange and other non-cash movements(1)
Cash flow from non-trading items and discontinued
operations
Free cash flow
At 31 December at closing exchange rates
(69)
(729)
34
–
–
(9)
1,772
125
(20)
456
(950)
(2,847)
At 31 December at 12 month average exchange rates
(947)
(2,953)
(1) the prior period includes £7 million of cash outflows from operations discontinued last year.
Group net debt at 31 December 2021, translated at closing exchange
rates (being US $1.35 and €1.19), was £950 million (31 December
2020: £2,847 million, translated at closing exchange rates at
31 December 2020).
The significant reduction in net debt during the year consisted of a free
cash inflow of £125 million and substantial inflows primarily relating to
the disposals of Nortek Air Management, Nortek Control and Brush,
together totalling £2,536 million. In addition, payments to shareholders
included dividends of £69 million and a Return of Capital of
£729 million (discussed earlier in this review). There was a £34 million
reduction to net debt in respect of foreign exchange and other
non-cash movements.
The net debt at the acquisition of GKN, of £3.4 billion, has been fully
repaid within four years, save cash returned to shareholders over the
period as dividends or capital returns.
For bank covenant purposes the Group’s net debt is calculated at
average exchange rates for the previous twelve months, to better align
the calculation with the currency rates used to calculate profits, and
was £947 million (31 December 2020: £2,953 million, translated at
twelve month average exchange rates for 2020).
The Group net debt leverage on this basis at 31 December 2021 was
1.3x EBITDA (31 December 2020: 4.1x EBITDA), transforming the
Balance Sheet from last year’s leverage, to be more conservative.
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
Net retirement benefit obligations
Provisions
Deferred tax and current tax
Lease obligations
Net other
Total
2021
£m
2020
£m
7,043
8,790
2,875
3,541
429
159
(461)
(701)
(495)
(376)
17
430
346
(838)
(1,021)
(717)
(555)
(19)
8,490
9,957
Melrose Industries PLC Annual Report 2021Strategic ReportMelrose Industries PLC Annual Report 2021 36
Finance Director’s review
Continued
37
These assets and liabilities are funded by:
The following table details the movement in provisions in the year:
Net debt
Equity
Total
2021
£m
2020
£m
(950)
(2,847)
At 1 January 2021
(7,540)
(7,110)
Spend against provisions
(8,490)
(9,957)
Net charge to adjusted operating profit
Net charge shown as adjusting items
Net debt shown in the table above is defined in the glossary to the
Consolidated Financial Statements and is consistent with the banking
facility covenant testing definition.
Goodwill, intangible assets and impairment review
The total value of goodwill as at 31 December 2021 was
£2,850 million (31 December 2020: £3,640 million) and intangible
assets acquired with business combinations was £4,193 million
(31 December 2020: £5,150 million). These items are split by reporting
segment as follows:
31 December
2021
Aerospace
£m
Automotive
£m
Powder
Metallurgy
£m
Other
Industrial
£m
Total
£m
Goodwill
Intangible assets
acquired with
business
combinations
Total goodwill
and acquired
intangible assets
933
1,001
507
409
2,850
2,542
979
559
113
4,193
3,475
1,980
1,066
522
7,043
The Group’s goodwill and intangible assets have been tested for
impairment, and in accordance with IAS 36 “Impairment of assets”
the recoverable amount has been assessed as being the higher of
the fair value less costs to sell and the value in use.
Under IAS 36, the value in use basis for calculating the recoverable
amount prohibits the inclusion of future uncommitted restructuring
plans, whilst the fair value less costs to sell basis of valuation allows
the inclusion of these plans if it is deemed that a market participant
would also restructure.
With the future benefits of restructuring projects currently forming a
material part of valuations for certain businesses within the Group, the
fair value less costs to sell basis gives the higher valuation at this point
in time for the GKN group of cash generating units, and therefore in
accordance with IAS 36, has been used in assessing the recoverable
amount for these businesses.
The Board is comfortable that no impairment is required in respect of
the valuation of goodwill and intangible assets in its businesses as at
31 December 2021.
Provisions
Total provisions at 31 December 2021 were £701 million
(31 December 2020: £1,021 million), which included: £222 million for
warranty (31 December 2020: £330 million); £167 million for loss-
making contracts (31 December 2020: £241 million); £135 million for
environmental and litigation issues (31 December 2020: £191 million);
£81 million for restructuring (31 December 2020: £147 million); and
other provisions of £96 million (31 December 2020: £112 million).
Total
£m
1,021
(278)
72
96
(22)
(48)
(118)
(22)
701
Release of loss-making contract provision to adjusting items
Utilisation of loss-making contract provision
Disposals
Other (including foreign exchange)
At 31 December 2021
Spend against provisions in the year, of £278 million, included
£167 million of cash spent on restructuring activities.
The net charge to adjusted operating profit in the year of £72 million is
primarily in respect of ongoing warranty and workers’ compensation
charges which are closely matched by similar cash payments in the
year.
The net charge shown as adjusting items in the Income Statement
of £96 million primarily includes costs associated with restructuring
actions of £124 million, discussed within the adjusting items section of
this review, net of a release, mainly relating to fair value items settled
for an amount more favourable than first anticipated.
The utilisation of the loss-making contract provision was £48 million
in the year (31 December 2020: £59 million). Furthermore, £22 million,
approximately 13%, 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. At 31 December
2021 the loss-making contract provision was £167 million,
approximately 70% lower than when GKN was acquired in 2018.
Movement in provisions in the year also included foreign exchange
movements of £21 million and the unwind of discounting on certain
provisions of £1 million. These are shown in the Other category in the
table above.
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”.
The values of the Group plans were updated at 31 December 2021 by
independent actuaries to reflect the latest key assumptions and are
summarised as follows:
GKN UK Group pension schemes
(Numbers 1 – 4)
Other Group pension schemes
Total Group pension schemes
Assets
£m
Liabilities
£m
Accounting
surplus/
deficit
£m
2,754
256
3,010
(2,575)
(896)
(3,471)
179
(640)
(461)
The most significant pension plans remaining in the Group are the GKN
UK Group Pension Schemes (Numbers 1 – 4), two of which are
allocated to the Aerospace division and two to the Automotive division.
At 31 December 2021 in total these four pension plans had aggregate
gross assets of £2,754 million (31 December 2020: £2,556 million),
gross liabilities of £2,575 million (31 December 2020: £2,755 million) and
a net surplus of £179 million (31 December 2020: net deficit of
£199 million), split 60% of the surplus held within Aerospace and 40%
within Automotive. These GKN schemes are closed to new members
and to the accrual of future benefits for current members.
The largest deficits within the other pension schemes in the Group
relate to German GKN pension plans which provide benefits
dependent on final salary and service, and which are generally
unfunded and closed to new members. At 31 December 2021
these plans had a net deficit of £530 million (31 December 2020:
£559 million).
During the year, £53 million of net surplus on pension schemes were
transferred with businesses on disposal. In addition, a successful
buy-out of pensioner liabilities of the GKN UK 2016 Pension Plan was
performed, resulting in c.8,000 pensioners benefits being secured
with Aviva or Rothesay. Prior to the completion of the buy-out
process, the remaining 2,659 deferred members, along with the
resulting net surplus of £43 million, of the GKN UK 2016 Pension Plan
were transferred to a ring-fenced section of the GKN Group Pension
Scheme Number 2.
The Group’s funding commitment of the GKN UK Group Pension
Schemes, made when GKN was acquired in 2018, has been delivered
ahead of schedule following an agreed contribution of £34 million after
the disposal of Nortek Air Management. The ongoing contributions to
these defined benefit pension schemes have now halved to
£30 million per annum, with no further requirement to contribute
amounts following disposals of businesses.
In total, ongoing contributions to the Group defined benefit pension
plans and post-employment medical plans in the year ended
31 December 2021 were £54 million and are expected to be at a
similar level in 2022.
A summary of the assumptions used are shown in the Financial
Statements. 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 £61 million, or 2%, and a
0.1 percentage point increase to inflation would increase the liabilities
by £41 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 £175 million, or 5%.
Financial risk management
The financial risks the Group faces continue to be considered and
policies are 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 2021 was £950 million
(31 December 2020: £2,847 million).
In December 2021, the Group extended the maturity date of both its
term loan and revolving credit facility to 30 June 2024. Subsequent to
this extension, in December 2021 the term loan was partly prepaid by
£70 million and US$172 million. Consequently, the Group’s committed
bank funding includes a multi-currency denominated term loan of
£30 million (31 December 2020: £100 million) and US$788 million
(31 December 2020: US$960 million) and a multi-currency
denominated revolving credit facility of £1.1 billion, US$2.0 billion and
€0.5 billion. 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 Group’s assets in respect of this facility.
At 31 December 2021, the term loan was fully drawn and there were no
amounts drawn on the multi-currency revolving credit facility. Applying
the exchange rates at 31 December 2021, the headroom equated to
£3.0 billion. There are also a number of uncommitted overdraft,
guarantee and borrowing facilities made available to the Group.
In addition to the headroom on the multi-currency committed
revolving credit facility, cash, deposits and marketable securities, net
of overdrafts, in the Group amounted to £468 million at 31 December
2021 (31 December 2020: £160 million).
The Group also holds capital market borrowings as at 31 December
2021 consisting of:
Maturity date
September 2022
Notional
amount
£m
450
Coupon
% p.a.
5.375%
May 2032
300
4.625%
Cross-
currency
swaps
million
Interest rate
on
swaps
% p.a.
US$373
€284
n/a
5.70%
3.87%
n/a
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 net debt to adjusted EBITDA covenant test level is set at 4.25x at
31 December 2021; 4.0x at 30 June 2022; 3.75x at 31 December 2022;
and 3.5x at 30 June 2023 and onwards. At 31 December 2021 the
Group net debt leverage was 1.3x, affording comfortable headroom.
The interest cover test is set at 3.0x at 31 December 2021; 3.25x at 30
June 2022; and 4.0x from 31 December 2022 onwards. At
31 December 2021 the Group interest cover was 5.9x, again showing
comfortable headroom compared to the covenant test.
A limited number of Group trade receivables are subject to non-
recourse factoring and customer supply chain finance arrangements.
As at 31 December 2021, these amounted to £310 million
(31 December 2020: £314 million) and as a result there was a net cash
reduction in the year of £4 million (2020: benefit of £60 million).
In addition, some suppliers have access to utilise the Group’s supplier
finance programmes, which are provided by a number of the Group’s
banks. As at 31 December 2021 there were drawings on these facilities
of £102 million (31 December 2020: £62 million). There is no cost to the
Group for providing these programmes as the cost is borne by the
suppliers. These programmes allow suppliers to choose whether they
want to accelerate the payment of their invoices by the financing banks,
at a low interest cost, based on the credit rating of the Group as
determined by the financing banks. If the Group exited these
arrangements or the banks ceased to fund the programmes there
could be a potential impact of approximately £60 million (31 December
2020: approximately £30 million) on the Group’s cash flows. The risk
of this happening is considered low as the Group has extended the
number of banks that provide this type of financing to ensure there is
not a significant exposure to any one bank.
Finance cost risk management
The policy of the Board is to fix approximately 70% of the interest
rate exposure of the Group. Following the disposals of Nortek Air
Management, Nortek Control and Brush, the Group’s net debt reduced
significantly and, to maintain the policy of fixing approximately 70% of
the Group’s interest rate exposure, several of the interest rate swaps
were cancelled at a cash cost of £47 million.
The bank margin on the bank facility depends on the Group leverage,
which reduced following the disposals completed in the year. Following
the extension of the bank facility in December 2021, the bank margins
were as follows:
31 Dec 2021
31 Dec 2020
Facility:
Term Loan
Margin
0.75%
Revolving Credit Facility
0.75%
Range
0.75%
- 2.0%
0.75%
- 2.0%
Margin
2.0%
2.25%
Range
0.75%
- 2.0%
0.95%
- 2.25%
Melrose Industries PLC Annual Report 2021Strategic ReportMelrose Industries PLC Annual Report 2021 38
Finance Director’s review
Continued
The Group holds cross-currency interest rate swaps associated with
the 2022 fixed rate capital market borrowings, described earlier in this
review. In addition, US$ bank debt of US$170 million is swapped into
€150 million and is used to reduce the cost of the Group’s borrowings.
The Group also holds interest rate swap instruments to fix the cost of
LIBOR on borrowings under the bank facility. The Income Statement
cost on the 2022 cross-currency and interest rate swaps are as follows:
Interest rate swaps associated with:
2022 fixed rate capital market borrowings
Fixing LIBOR on the Group bank facility (excluding
margin)
31 Dec
2021
Maturity
3.4% September
2022
2.2%
January
2023
At 31 December 2021, the fair value liability of all cross-currency swaps
held by the Group was £69 million (31 December 2020: £89 million).
The Group’s combined Income Statement cost of debt for the next
12 months including the prior year comparative is shown below:
Lastly, 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 example 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
2021
2020
Euro
2021
2020
Average
rate
Closing
rate
1.38
1.28
1.16
1.13
1.35
1.37
1.19
1.12
Excluding amortisation of bank arrangement fees
Including amortisation of bank arrangement fees
31 Dec
2021
31 Dec
2020
3.4%
4.1%
3.9%
4.2%
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:
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 for GKN
Aerospace, GKN Automotive and GKN Powder Metallurgy 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 twelve months and approximately 60% to
80% of exposures expected between 12 and 24 months. This policy
does not eliminate the cash risk but does bring some certainty to it.
The translation rate risk is the effect on the Group results in the period
due to the movement of exchange rates used to translate foreign
results into Sterling from one period to the next. No specific exchange
instruments are used to protect against the translation risk because it
is a non-cash risk to the Group, until foreign currency is subsequently
converted to Sterling. However, the Group utilises its multi-currency
banking facilities 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.
£m
USD
EUR
CNY
Other
Increase in adjusted operating profit
% impact on adjusted operating profit
23
6%
4
1%
8
2%
11
3%
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 debt as at 31 December 2021:
Increase in debt – £ million
Increase in debt
USD
74
5%
EUR
37
3%
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.
Going concern
As part of their consideration of going concern, the Directors have
reviewed the Group’s future cash forecasts and profit projections,
which are based on market data, internal information and recent
past experience.
The Group has modelled a reasonably possible downside
scenario against future cash forecasts. The Group’s Balance
Sheet is transformed compared to the same time last year, and
for any reasonably possible downside scenario, the Group has
sufficient headroom to avoid breaching any financial covenant and
would not require any additional sources of financing throughout
the forecast period.
The macroeconomic environment remains uncertain and volatile.
The impacts of the pandemic, political conflict and unrest on
trading conditions and supply chain constraints could be more
prolonged or severe than the Directors have considered in this
reasonably possible scenario. It is recognised that the very recent
events in Ukraine are still unfolding and any wider impacts are
difficult to fully assess at this early time.
The Group’s current committed bank facility headroom, its access
to liquidity, and the sensible levels of bank covenants in place with
lending banks, allow the Directors to consider it appropriate that
the Group can manage its business risks successfully and adopt
a going concern basis in preparing these Financial Statements.
Geoffrey Martin
Group Finance Director
3 March 2022
Longer-term viability statement
39
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 Group uses a period of five years
for impairment testing of certain groups of cash generating units due
to the long-term nature of cash flows within certain industries, but this
is not common across all of the Group’s businesses and is not
necessarily reflective of financing arrangements offered by banks.
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 2024.
The Directors’ assessment has been made by reference to the Group’s
financial position as at 31 December 2021, 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 reduce the rate of
recovery currently being forecast), 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), 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, considering the medium-term impact of the COVID-19
pandemic, and also consider relevant cross-border trade risk
including in respect of 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, renegotiated in the year, and bank
covenant testing, both of which are committed for most of the
period under review. There is a high expectation that when the
Group refinances its £450 million bond maturing in September
2022 and its multi-currency revolving credit facility, before June
2024, it will have sufficient headroom above covenants and in its
liquidity to continue in operation.
Strategic ReportMelrose Industries PLC Annual Report 2021Melrose Industries PLC Annual Report 2021
40
Risk management
Risk management
41
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
• 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
Audit Committee
Monitors the Group’s
internal financial control
processes
• Monitors the Group’s internal financial control processes
• 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
Melrose senior
management and
business unit senior
managers
• Sets 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
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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The Board’s view of the Group’s principal risks and uncertainties is
detailed in the table on pages 42 to 49.
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 and 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 97.
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 respective business
unit as part of day-to-day operations, in line with the Group risk
management framework and internal control systems determined by
the Board. The CEO and senior executive team of each division are
responsible for, and report to the Melrose senior management team in
respect of, specific and ongoing risks related to their respective
business division, which are reported formally to the Audit Committee
on an annual basis. The Audit Committee receives a formal risk
management report on a biannual basis, in addition to their regular
receipt of updates from the Melrose senior management team on
material items that arise relating to principal Group risks.
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
In 2019, the Melrose senior management team supplemented the
Group’s enterprise risk management programme by building and
implementing a data-driven Group reporting dashboard to automate
the aggregation and reporting of Group risks, in conjunction with
ongoing divisional risk reporting and advice from external risk
management consultants. This marked 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 has since been enhanced to provide the Audit
Committee with additional detail and trend analysis compared to each
division’s respective key industries, further visibility on the significance
of key divisional risks, and greater illustration of each division’s risk
appetite. In 2021, the dashboard’s reporting output was enhanced to
further highlight the alignment between divisional and Group risks,
together with providing the Audit Committee with additional detail on
risk control confidence within the Group. Such enhancements have
facilitated the Audit Committee’s monitoring, oversight and review of
the effectiveness of the Group’s internal controls and risk
management systems and processes.
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.
Risk appetite
The Board has undertaken an 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
macro-economic, climate change 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 and cyber risk.
The results of the risk appetite review will support the Board’s
decision-making processes during 2022. The Board undertakes a
review of its risk appetite at least annually.
Risk management actions
During 2021, the Board continued to deliver on the key management
priorities identified in the 2020 review across the Group. Risk owners
continued to take steps to mitigate the risk exposures across the
Group, supported by specific actions undertaken to improve enterprise
risk management across the Group during the year, as follows:
• reviewing and reaffirming the Board’s risk appetite, in addition to
refining and expanding the Group’s risk categories;
• 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, dashboard
reporting outputs, 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
• conducting a qualitative climate scenario analysis to assess how
Melrose and its businesses are exposed to, and how they are
managing, climate-related risks. We have included more details on
these activities in our disclosures against the recommendations of
the Task Force on Climate-related Financial Disclosures (“TCFD”)
and we have set Group-level targets to reduce our Scope 1 and 2
emissions. Further details can be found on pages 58 to 65.
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.
As part of the assessment, the Board refined and expanded the
Group’s risk categories, and identified emerging risks with the support
of the Melrose senior management team based in part on a review of
trends within business level risks.
Operations risk was realigned as a new standalone Group risk to
reflect the strategic importance associated with the Group
successfully managing the risks related to operational performance,
which are key to Melrose’s “Buy, Improve, Sell” business model.
Further, climate change risk was realigned as a new standalone Group
risk to reflect the emerging risks involved with the increased frequency
of extreme weather and climate-related disasters, coupled with
increased legislation and regulations in this area. The Board also
sought to rationalise the Group risks by combining the prior Group risk
of acquisitions of new businesses and improvement strategies, with
the Group risk of timing of disposals, to create a new standalone
mergers and acquisitions Group risk. This was considered appropriate
to reflect the risks associated with the full timeline of transactions,
whilst reallocating the improvement strategy element of the risk to the
new operations Group risk.
A summary of the principal risks and uncertainties that could impact
on the Group’s performance is shown on pages 42 to 49. Further
information detailing the internal control and risk management policies
and procedures operated within the Group is shown on pages 92 to
93 of the Corporate Governance report.
Risk management priorities for 2022
Continual improvements were made during 2021 in respect of the
Group’s risk management processes. However, the Board recognises
that Melrose cannot be complacent. In 2022, 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 supporting divisions
to implement improved controls around our non-financial reporting
together with objective trend analysis on the effectiveness of the
Group’s risk management governance, processes and controls.
Climate change risk reporting and mitigating actions will continue to
be strengthened, with the Group’s sustainability function working
with the businesses in their journeys towards meeting the Group’s
sustainability targets, with Melrose providing investment to help
achieve them.
Melrose Industries PLC Annual Report 2021Strategic ReportMelrose Industries PLC Annual Report 2021
42
Risks and uncertainties
43
Strategic risk profile
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 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 risks
Operational risks
Strategic risk profile
Our updated view of the
Group’s strategic risk
profile is shown below.
The residual risk scores
have been calculated on
a post-mitigation basis.
Risk
Low
Moderate
High
Realigned/New
Likelihood
Unlikely
Likely
Financial risks
Strategic risks
1
11
10
9
Unlikely
1
2
3
6
7
Compliance
and ethical risks
Likely
Likely
4
5
5
4
Unlikely
2
1
3
2
8
3
4
5
Operational risks
No.
Risk rating Risk title
Risk trend since
last Annual Report
Moderate
Mergers and acquisitions
Decrease
Moderate
Operations
n/a
Moderate
Commercial
High
Economic and political
Low
Loss of key management
and capabilities
Increase
Increase
Decrease
Moderate
Legal and regulatory
No change
Moderate
Climate change
n/a
High
Information security and cyber
threats
No change
Low
Foreign exchange
No change
n/a
2017
n/a
2017
n/a
2017
n/a
2018
n/a
2018
n/a
2019
n/a
2019
2020
2021
n/a
2020
2021
2018
2019
2020
2021
2017
2018
2019
2020
2021
2017
2018
2019
2020
2021
2017
2018
2019
2020
2021
n/a
2017
n/a
2018
n/a
2019
n/a
2020
2021
2017
2018
2019
2020
2021
2017
2018
2019
2020
2021
Moderate
Pensions
Moderate
Liquidity
Decrease
Decrease
2017
2018
2019
2020
2021
2017
2018
2019
2020
2021
(1) Comprises executive Directors and Melrose senior management.
Risk 1Mergers and acquisitions Realigned risk Description and impactThe success of the Group’s mergers and acquisitions 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, the expected timing of any disposal of businesses could have a material impact on the Group’s strategy and performance. 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, meaning that the Group may retain liabilities for longer than anticipated. 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• Strong pipeline of potential opportunities supported by a broad network of advisors and contacts. • 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, and leading market share, but which are underperforming their potential and ability to generate sustainable cash flows and profit growth.• 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.• Flexibility with timing disposals to match market sectors and business maturity. Responsibility Executive management(1)Risk trend Trend commentaryAlthough global M&A markets continue to experience uncertainty, Melrose achieved strong value realisation with the sale of Nortek Air Management, Nortek Control and Brush, as demonstrated on pages 6 to 7 of this report. Whilst no large acquisitions were made in 2021, the Group remains open to potential new opportunities.Strategic priorities Buy Improve SellRisk 2Operations Realigned riskDescription and impact The Group’s improvement strategy is a key component of Melrose’s business model of buying and then improving good but underperforming manufacturing businesses. However, 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, that macro events impact on the ability to carry out such improvements, 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 and it may more generally impact on the Group’s overall financial performance. Melrose operates a decentralised control and management structure which empowers divisional management teams to drive operational improvements and sustainable production, whilst planning, mitigating, navigating and responding to the specific operational risks and challenges facing their respective businesses. For the coming year, the rising challenge of inflationary pressures on costs of materials, together with the ability of businesses to offset the impact, are a particular focus. The Melrose senior management team monitors the aggregated impact of such risks and provides active support and challenge to the divisional management teams in fulfilling their responsibilities.Mitigation• 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.• Since acquiring GKN plc, the Melrose senior management team has actively engaged with and supported the GKN businesses’ executive 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.• Proper incentivisation of operational management teams to align with Melrose strategy.Responsibility Executive management(1)Risk trend N/ATrend commentaryDuring the year, particular focus has been placed on risks associated with quality, supply chain, inflation, and third-party dependencies, which are all considered key elements of the Group’s improvement strategy. Specifically, the supply constraints in the wider automotive industry as a result of the global shortage of semi-conductors has naturally affected GKN Automotive and GKN Powder Metallurgy. This particular pressure is expected to ease over 2022, but supply chain challenges and inflationary pressures are nonetheless expected to persist. The Melrose senior management team continues to actively engage with the business unit executive teams to identify and track strategic operational improvements, together with operational risks which may impact on such improvements. Strategic priorities Buy Improve SellStrategic ReportMelrose Industries PLC Annual Report 2021Melrose Industries PLC Annual Report 2021 44
Risks and uncertainties
Continued
Operational risks continued
45
Mitigation
• Regular monitoring of order books, cash performance, cost control
and other leading indicators, to ensure the Group and each of its
businesses could respond quickly to adverse trading conditions.
This included the identification of cost reduction and efficiency
measures.
• Bank financing is readily available to the Group from its supportive
banking syndicate. This support has proven to be available to the
Group even during periods of unprecedented turmoil, including
during the global pandemic.
• Assessment of, and/or use of, national support schemes where
deemed appropriate in the context of COVID-19 disruption.
• Short-term inventory buffers are regularly reviewed and assessed to
minimise the impact of further lockdown restrictions due to
COVID-19.
• Strong customer relationships built on long-term partnerships often
with plants in close proximity, technical excellence and quality.
• The Group remains agile, diversified and well positioned to deal with
any short-term uncertainties.
Responsibility
Executive management(1)
Risk trend
Trend commentary
Significant geopolitical and economic uncertainty continued during 2021.
However, the signing of the UK/EU trade deal, coupled with the Group’s
reduced presence in North America following the disposals of Nortek Air
Management and Nortek Control, helped curb some of these associated
risks. Melrose is mindful of the very recent events in Ukraine, which our
businesses are being proactive in addressing to ensure minimal
disruption.
The Melrose senior management team continues to actively engage with
the business unit executive teams to track the potential impacts of further
lockdowns or tiered restrictions aimed at curbing the impact of
COVID-19, as well as the potential impacts of rising inflation levels and
the possibility of future tariffs.
The Melrose senior management team engages actively with those who
are working on the relevant impact assessments and mitigation actions,
and reports the material findings to the Board. The 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.
The Board notes that economic uncertainty can depress business
valuations and this may increase the number of potential acquisition
opportunities for Melrose.
Strategic priorities
Buy
Improve
Sell
(1) Comprises executive Directors and Melrose senior management.
(1) Comprises executive Directors and Melrose senior management.
(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 Melrose 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, appointments are dependent on Directors and employees with particular managerial, engineering or technical skills. Appropriate remuneration packages and long-term incentive arrangements are offered in an effort to attract and retain such individuals.Responsibility Executive management(1)Risk trend Trend commentarySuccession planning remains a core focus for the Nomination Committee and the Board. Reviewing the succession planning arrangements of the Board as a whole, together with a review of the Melrose senior management team, will remain an area of particular focus in 2022, as well as maintaining oversight of business unit succession planning. Strategic priorities Buy Improve SellRisk 3Commercial 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, thereby allowing the Group to deliver on its commercial strategy of creating value for shareholders. However, the widespread disruption caused by COVID-19 has heightened the Group’s exposure to supply chain and end-market commercial risk.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. It also arises in connection with the restructuring and improvement initiatives. 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 provides 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 (“Common Commercial Risks”).Mitigation• The Group continued to actively invest in research and development activities in 2021 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 Divisional reviews on pages 12 to 29.• 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. In addition, in light of the COVID-19 pandemic, the Group has followed government guidance on hygiene and social distancing protocols. • The Melrose senior management team, in collaboration with Ernst & Young, continues to enhance the Board and Audit Committee’s visibility of the Group’s Common Commercial Risks through the use of the Group reporting dashboard to aggregate and report numerous Common Commercial Risks across each of the Group’s divisions.Responsibility Executive management(1)Risk trend Trend commentaryThe Melrose senior management team actively engages with the divisional executive management 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. Strategic priorities Buy Improve SellRisk 4Economic 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 actions and the willingness of governments to commit substantial resources. Current global economic and financial market conditions have recently been characterised by high levels of volatility and uncertainty. There has been continued widespread disruption to production and trading environments caused by the COVID-19 pandemic, particularly within the aerospace sector, due to ongoing global travel restrictions. Fluctuation in commodity prices, the rise in inflation, the potential for a significant and prolonged global downturn, and uncertainty in the political environment, may materially and adversely affect the Group’s operational performance and financial condition. It could also have a significant impact on the timing of acquisitions and disposals. Further, these factors may materially affect customers, suppliers and other parties with which the Group does business. Rising inflation levels may result in increased Group costs both in terms of the operation of plants and the manufacturing of products, which in turn may be passed on to customers. More generally, 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.The impact of the COVID-19 pandemic remains a significant risk to the global economy. Each of the Group’s businesses and their respective production and market geographies are impacted by the COVID-19 pandemic to various extents, with the most common impacts across the Group during 2021 being the temporary reduction of manufacturing capacity and reduced requirements due to lockdown measures and international travel restrictions. The Board and the Melrose senior management team continue to regularly monitor the impact of the pandemic on the Group with particular focus on the potential for staff shortages, production delays and supply chain disruption.The Group operates a number of sites in North America, which during 2021 continued to experience challenging tariffs relating to the US/China trade war. The US has also required close monitoring related to the expected short to medium-term impact of potential changes to international trading relationships following the conclusion of the UK/EU trade deal. The Group’s exposure to such US trade risk factors is inherently mitigated by its manufacturing footprint across the UK and European-based GKN Aerospace and GKN Automotive divisions, and has in any case been reduced following the disposal of Nortek Air Management and Nortek Control. 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.Whilst rising inflation, the long-term impact of COVID-19, and tariff wars are not isolated as principal risks to the Group as a whole, they present potential risks that the business units continue to monitor and assess closely, particularly in the context of increasing energy prices, potential changes to travel and working restrictions, and the cross-border trade and regulatory environments in which the business units operate. The Board continues to assess and review the potential impact of these evolving risks.Melrose Industries PLC Annual Report 2021Strategic ReportMelrose Industries PLC Annual Report 2021 46
Risks and uncertainties
Risks and uncertainties
Continued
Continued
Compliance and ethical risks
47
(1) Comprises executive Directors and Melrose senior management.
(2) Data has been collected from 98% (by sites) of the Group.
(1) Comprises executive Directors and Melrose senior management.
Risk 7Climate change Realigned riskDescription and impactThe increased frequency of extreme weather and climate-related natural disasters can lead to physical damage to our sites in addition to disruptions in our businesses’ supply chains. Additionally, new legislation, regulations and corporate governance practices in relation to the environment may require additional expense, restrict commercial flexibility and business strategies, or introduce additional liabilities for the Group or the Directors. Changing demand patterns influenced by climate change concerns creates risks for the sustainability of product portfolios. We purchase businesses that are underperforming their potential with respect to their sustainability performance including climate risks and opportunities. Inherent in the nature of the manufacturing businesses we acquire is that they often operate in industries that are the hardest to decarbonise. Group sustainability performance and ratings will fluctuate during our investment cycle as we acquire new businesses in need of improvement, and sell businesses that we have improved.Mitigation• The Board sets the tone on sustainability and climate issues and also holds each business and their management teams accountable for their progress, and provides them with a platform to absorb the Group’s best practices, to accelerate their and others’ progress.• The Melrose senior management team, through the Group sustainability function, is responsible for overseeing the reporting of environmental data by the businesses, and driving the Group sustainability strategy and climate change risk management processes. The Melrose senior management team engages with the businesses’ executive teams in setting meaningful Group sustainability targets, and Melrose provides the investment to achieve them. The businesses subsequently identify, monitor, and manage the specific environmental risks that affect their operating and market environments, and are responsible for ESG disclosure and performance at a business level. • During the year, the Board, with the support of the Melrose senior management team working with the divisional sustainability leaders and Ernst & Young, carried out a qualitative climate scenario analysis to assess how Melrose and its businesses are exposed to and managing climate-related risks. We have included more details on these activities in our disclosures against the recommendations of the Task Force on Climate-related Financial Disclosures (“TCFD”) and have set Group sustainability targets including in respect of reducing Scope 1 and 2 emissions. Further details can be found on pages 58 to 65.• With Melrose support and investment, each 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. The Melrose senior management team is accountable for regularly reviewing any significant climate-related issues, risks and opportunities related to the Group, including appropriate planning for technology and product development roadmaps. These reviews consider the level of climate-related risk that Melrose is prepared to take in pursuit of its Group business strategy and the effectiveness of management controls in place to mitigate climate-related risk. Where the executive team of a Group business identifies climate-related risk that materially impacts their business, this is discussed with the Melrose senior management team and escalated to the Board where necessary.• In line with our decentralised model, our businesses have frameworks in place for identifying principal risks and opportunities appropriate to their business and stakeholders, which include climate-related risks. Each business takes an appropriately tailored approach to climate-related initiatives that suits their requirements, and operational and market environments.• The Board, with the support of the Melrose senior management team, reviews Group performance on energy and water usage, greenhouse gas emissions and waste, and provides strategic support and investment to drive improvements within the businesses’ operations through more efficient use of water, electricity, fuel and heat, including by driving increases in the proportion of renewable energy use where commercially viable, and by encouraging implementation of other climate-positive actions.• Where possible and practicable, acquisition due diligence processes seek to identify climate-related risks. • The Group relies on external consultants to assist in complying with new and emerging environmental regulations. Where new climate-related risks and sustainability risks are identified, we engage with relevant specialist consultants to identify and carry out the necessary mitigating actions.Responsibility Executive management(1)Risk trend N/A Trend commentaryRecent years have shown the frequency and severity of climate-related events are increasing and the low carbon transition is a growing focus area for governments, investors and communities. As such, climate change has been an area of significant focus for the Group in 2021. It is an important consideration across our business strategy, including in terms of the investment decisions we make and the product solutions our businesses develop. It is also an increasingly key strategic concern for our stakeholders, who are keen to understand how we are managing climate-related risk. Going into 2022, the Group will continue to look to balance where possible the risks associated with climate change against potential opportunities with the Group. Strategic priorities Buy Improve SellRisk 6Legal and regulatoryDescription 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) 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; (ii) 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 Group’s import or export privileges; and (iii) 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. 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 the Directors. For example, the Group’s operations are subject to anti-bribery and 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. As at 31 December 2021, 74%(2) of all sites (inclusive of office, production and testing sites) within the Group were certified to the ISO 45001 international standard, with additional relevant sites progressing towards ISO accreditation. • In line with our decentralised model, our businesses have frameworks in place for identifying principal risks and opportunities appropriate to their business and stakeholders. • The Board, with the support of the Melrose senior management team, spends time listening to the Group’s key stakeholders to enable informed strategic decisions and to deliver on their needs. • A robust control framework is in place, underpinned by comprehensive corporate governance and compliance procedures at both a Group and business unit level, including utilisation of third-party verification providers and regular reviews of the Group policies in light of legal and regulatory changes, as well as best practice.• Where possible and practicable, due diligence processes during the acquisition stage seek to identify legal and regulatory risks. At the business unit level, controls are in place to prevent such risks from crystallising.• 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.Responsibility Executive management(1)Risk trend Trend 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.Strategic priorities Buy Improve SellMelrose Industries PLC Annual Report 2021Strategic ReportMelrose Industries PLC Annual Report 2021 48
Risks and uncertainties
Risks and uncertainties
Continued
Continued
Compliance and ethical risks continued
Financial risks
49
(1) Comprises executive Directors and Melrose senior management.
(1) Comprises executive Directors and Melrose senior management.
(1) Comprises executive Directors and Melrose senior management.
(1) Comprises executive Directors and Melrose senior management.
Risk 10Pensions Description and impactAny shortfall in the Group’s defined benefit pension schemes may require additional funding. As at 31 December 2021, the Group’s pension schemes had an aggregate deficit, on an accounting basis, of £461 million (2020: £838 million). Changes in discount rates, inflation, asset values or mortality assumptions could lead to a materially higher deficit. For example, the cost of a buy-out 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 Trustee and reviewed following completion of actuarial valuations.• The Company actively engages with the Trustees on pension plan asset allocations and strategies to better allocate the exposure across the businesses.• The Group utilised part of the disposal proceeds from the sale of Nortek Air Management and Brush to eliminate the actuarial deficit under the UK GKN pension schemes. • The disposal of Nortek Air Management, Brush and Nortek Control resulted in the transfer of the pension schemes related to those businesses to the new owners, which resulted in the transfer of £379 million of pensions liabilities. • During the year, the Company and the Trustees of the GKN 2016 UK pension scheme worked together to complete the buyout of the pensioner liabilities of the GKN 2016 UK pension scheme, which led to a reduction in gross pension liabilities of £366 million. Responsibility Executive management (1)Risk trend Trend commentaryA number of factors have combined to significantly reduce the accounting deficit during the period, including the disposal of the Nortek pension schemes with the sold businesses, the use of some Nortek Air Management disposal proceeds to fund the GKN schemes, strong investment returns and changes in mortality assumptions. As well as decreasing the deficit, the gross liabilities were significantly reduced by the Nortek Air Management disposal and mortality changes, as well as the GKN 2016 pensioner buyout. The investment return and mortality risks remain but are proportionately smaller, given reduced liabilities. As a result of the deficit reduction in the period, the UK Trustees took further action, supported by Melrose, to fully hedge the UK schemes against movements in inflation and interest rates and to reduce investment risk. Accordingly, the volatility risk to the Group has been reduced. Strategic priorities Buy Improve SellRisk 11LiquidityDescription 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 32 to 39, the Group has term loans of US$788 million (2020: US$960 million) and £30 million (2020: £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 2021 and further detail is provided in the Finance Director’s review on pages 32 to 39.Mitigation• To ensure it has comprehensive and timely visibility of the liquidity position, the Group conducts monthly reviews of its cash forecast.• 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.• In December 2021, the Group gained agreement from its lenders to extend the maturity date of its multi-currency term loan and its revolving credit facility from 30 April 2024 and 31 January 2023 respectively, until 30 June 2024. • The Group took a very prudent view in utilising part of the disposal proceeds from the sale of Nortek Air Management, Nortek Control and Brush to reduce net debt to £950 million, which reflects leverage of 1.3 times EBITDA. • The Group operates a conservative level of headroom across its financing covenants which is designed to avoid the need for any unplanned refinancing.Responsibility Executive management (1)Risk trend Trend commentaryThe Group maintains strong cash controls and forecasting processes and, in light of the continued impact of the COVID-19 pandemic, management has maintained its efforts throughout the Group to increase visibility and certainty of cash flow information, robustness of cash controls, and cash-saving initiatives; these have been very successful. Melrose has also reduced debt following receipt of disposal proceeds from the sale of Nortek Air Management, Nortek Control and Brush, which was effectively used to repay the debt drawn in connection with the GKN acquisition and reduce leverage to half of its normal level. Alongside this, the agreed extension of the maturity date of the term loan and revolving credit facility with our supportive banking syndicate means that the Group is satisfied that it has adequate resources available to meet its liabilities. Strategic priorities Buy Improve SellRisk 8Information security and cyber threats Description and impactInformation security and cyber threats to our systems 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 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 military contracts.Mitigation• Management work with the leaders of each business and external security consultants to assess the Group’s increased exposure to cyber security risk and to ensure appropriate mitigation measures are in place for the Group.• During 2021, Melrose continued to monitor and enhance its information security strategy and risk-based governance framework with all businesses within the Group. The framework follows the UK Government’s recommended steps on cyber security. This strategic management approach has delivered risk profiling capabilities by business and the enablement of mitigation plans to be developed for each business to reduce their exposure to cyber risk.• The progress of each business is measured against the information security strategy and is monitored on a quarterly basis. These results are externally verified quarterly by Ernst & Young, our security partner. This year, Ernst & Young have also conducted cyber assurance site reviews covering key locations within the Group.Responsibility Executive management (1)Risk trend Trend commentaryInformation security and cyber threats are an increasing priority across all industries. The impact of the COVID-19 pandemic continues to drive increased online traffic, reduced physical contact, and has created additional new threats to all our businesses requiring increased attention. 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 present and future threats. Strategic priorities Buy Improve SellRisk 9Foreign 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 predominantly trades 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. • The businesses are protected against being over-hedged, due to short to medium-term reductions in forecasts, as the percentage of hedges compared to forecast foreign exchange exposures tapers over future periods.• Protection against specific transaction risks is taken by the Board on a case-by-case basis.Responsibility Executive management (1)Risk trend Trend commentaryGroup results are reported in Sterling but a large proportion of its revenues are denominated in currencies other than Sterling, primarily US dollar and Euro. The sale of Nortek Air Management and Nortek Control during the course of the year has, however, reduced the proportion of Group revenues that are in US dollar, and similarly the sale of Brush during the course of the year has reduced the proportion of Group revenues that are in Euro, therefore reducing exposure to foreign exchange risk. Sensitivity to the key currency pairs is shown in the Finance Director’s review on pages 32 to 39.Strategic priorities Buy Improve SellMelrose Industries PLC Annual Report 2021Strategic ReportMelrose Industries PLC Annual Report 2021 50
Section 172 statement
51
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 (“section 172”).
Duty to promote the success of the Company
In executing the Company’s strategy, the Directors must act in
accordance with the set of general duties detailed in section 172.
These 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
to (amongst other matters) the factors set out in section 172(1)(a-f):
• the likely consequences of any decisions in the long-term;
• the interests of the Company’s employees;
• the need to foster the Company’s business relationships with
suppliers, customers and others;
• the impact of the Company’s operations on the community and
environment;
• the desirability of the Company maintaining a reputation for high
standards of business conduct; and
• the need to act fairly as between shareholders of the Company.
These pages 50 to 53, and the pages incorporated by reference,
include details of how the Directors took these factors into account
in their decision-making in 2021. We set out in this statement the
details of who we consider to be our key stakeholders, how we
have engaged with them during the year, and the outcomes of
these processes.
Our 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 our “Buy, Improve, Sell” strategy, whereby
we acquire high quality but underperforming manufacturing businesses
and set out to solve chronic issues within those businesses, in order to
set them on the pathway to future success. We 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 remain underpinned by the
principles and values on which it was founded. We act with integrity,
honesty, transparency and decisiveness, and believe in a lean operating
model, high productivity and sustainable business practices. Although
we know our businesses will not be part of the Group for the long-term,
we act as responsible stewards, investing as if we are going to own
them forever, and we see this as an important step on their pathway to
long-term sustainable success. We provide the focus and investment to
improve our businesses’ financial performance, through operational
improvements, by driving growth and profitability, and by investing in
research and development to make the businesses more sustainable.
We also recognise that the building of stronger businesses
encompasses a wide range of non-financial areas including risk
management and ethics and compliance, and we have worked with the
businesses to set meaningful sustainability targets alongside financial
metrics. These actions benefit their long-term future, and benefit all
stakeholders. We hold each business and their management team
accountable for their progress against agreed sustainability targets.
We do not shy away from difficult decisions, but understand these
decisions can have a material impact on certain stakeholders, who we
look to treat fairly, whatever the outcome. We provide the space and
resources to empower people to perform and reward them well when
they do. These principles lie at the heart of our success, and are the
basis on which we strive for future success.
The Board is ultimately accountable to the Company’s shareholders
for setting the Group’s strategy, taking into account the principal risks
facing the Group, and for overseeing the Group’s financial and
operational performance in line with Melrose’s strategic objectives.
Implementation of the Group’s strategic objectives, as determined
and overseen by the Board, is delegated to the Melrose senior
management team, and with day-to-day operational management
delegated to the business unit executive teams. The Board has
established an organisational structure with clear reporting
procedures, lines of responsibility and delegated authority, as
depicted in the diagram on page 40 and in line with the Group’s
governance framework, which the Board reviews regularly.
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
long-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.
The Board continues to play an active role in overseeing how the
businesses manage compliance, and compliance with the framework
is reported on and fed back to the Board, to guide and assist in its
decision-making, and to ensure that the business practices of the
Group remain aligned with the Company’s purpose. Further detail on
the Group’s compliance policies and framework, and reporting to the
Board, can be found on pages 72 to 75 of the Sustainability report.
During 2021, the Group continued to work closely with third party
audit firms to monitor and verify performance at Group and business
unit levels, in respect of both financial and non-financial performance.
The outcomes of these processes are reported to the Audit
Committee and, ultimately, the Board. The Board considers it to be of
the utmost importance that our businesses continue to uphold the
highest standards of business conduct possible, and that they strive
for improvements in this area.
Engagement with our key stakeholders in 2021
The Board cultivates strong relationships with the Company’s 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 duties and to pursue the
Company’s strategic objectives. Stakeholder engagement is on the
Board’s agenda to assess whether the identities and priorities of the
Company’s principal stakeholders have changed, and whether the
Board has sufficient engagement with each principal stakeholder group.
We set out below our key stakeholder groups, along with details of how
the Board took them into account in their decision-making in 2021.
Employees
Central to the Group’s performance and success is an engaged,
capable and passionate workforce. The Workforce Advisory Panel
(“WAP”) promotes effective engagement with the Group’s workforce.
The decentralised nature of the Melrose model is reflected in the
structure of the WAP, ensuring that the voice of the workforce is heard
where it is most effective in the business unit executive decision-
making process. The WAP met twice during the year and the
outcomes were fed back to the Board accordingly. Further details
about the WAP and its actions during 2021 can be found in the
Sustainability report on page 67.
Whilst we maintain an open dialogue with employees, they also have an
opportunity to raise concerns confidentially and anonymously through
Melrose’s Group-wide whistleblowing platform. The platform has a
multi-lingual online portal, and local hotline numbers that are available
24/7. The integrity of our whistleblowing practices and procedures are
an important part of the Group’s governance arrangements, and the
Audit Committee oversees such practices and procedures to ensure
they remain effective. This is ultimately reported into the Board, thus
enabling it to have oversight of, and to monitor, culture and practices
within the businesses. Further details about the Group’s whistleblowing
procedures can be found in the Sustainability report on page 73.
We understand that some of the decisions we take in improving our
businesses for the long-term benefit of all stakeholders, such as
restructurings, can have an impact on employees. These are difficult
decisions that we do not take lightly. We undertake thorough event-
driven consultations with relevant stakeholders to ensure that the
decisions we take are based on a fully informed view of the potential
impact on those stakeholders, and we endeavour to achieve the best
outcome for the workforce in the circumstances. During 2021, we
supported the GKN Automotive executive management team in their
decision to close unviable sites in Erdington, UK and Firenze, Italy.
Such decisions are never taken lightly or without exploring all
alternative options, but are the right decisions and central to the
long-term future of these businesses. We nonetheless understand that
they involve a significant impact on a wide variety of stakeholders and
invoke strong feelings for all involved. There is rarely a consensus view
throughout, but we strive to treat people fairly and rely on open and
clear communication. For these particular situations, we and our
business unit teams engaged closely with the relevant workforces and
unions to hear their views and to find an agreed outcome. For
Erdington, the closure proposal received overwhelming support from
the workforce. For Firenze, a process which received support from
local and national governments, we were able to secure a
reindustrialised future for the site with a new owner.
Suppliers and customers
It is key to the success of our businesses that they foster positive and
open business relationships with their customers and suppliers, and we
provide support to them where necessary. Our businesses have worked
hard to maintain their strong relationships with suppliers and customers
throughout the year, and they are a key focus for our business unit
executive teams, who continue to invest heavily in these relationships.
Details are set out in the Sustainability report on pages 54 to 77.
The Board is aware that investors are expecting greater transparency,
disclosure and assurances regarding the nature of the supply chains
within the businesses they invest in. As described in our Modern Slavery
Statement, Melrose itself does not have any global supply chains or
employees in high risk jurisdictions, but we recognise that our businesses
do. We have worked closely with our businesses this year to better
understand their respective supplier landscapes and we will support
them in this area of critical importance during 2022. Any material issues of
concern in this area identified by the business unit executive teams are
escalated to the Board via the reporting procedures identified on page 50.
During the year, the Board approved the Group’s fifth Modern Slavery
Statement, and the implementation of a Group-wide Human Rights
policy, to supplement our other policies in this area including the
Conflict Minerals policy that was implemented in 2020. We remain
committed to addressing the potential risks of modern slavery and
human rights abuses, to acting in an ethical manner with integrity and
transparency in all business dealings, and to investing in the creation
of effective systems and controls across the Group to safeguard
against adverse human rights impacts. Similarly, any material issues
of concern in this area identified by the business unit executive teams
are escalated to the Board via the reporting procedures identified on
page 50. As with supply chains, during the year, no such issues were
identified, but we remain vigilant in this regard. Further details can be
found in the Sustainability report on page 73.
Shareholders
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 information and management insight
to shareholders and to 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, and investors themselves benefit from
disclosure in line with regulatory requirements, as well as enhanced
disclosure on material topics to the Company, to inform their independent
investment decisions. As a result, we have attracted long-term support
from key shareholders since our establishment in 2003.
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 publication of 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 investor roadshows 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 particular, the Board hosted a capital markets day for
institutional investors and financial analysts in 2021, which included
presentations from the CEOs of GKN Automotive and GKN Powder
Metallurgy, containing updates on key financial information. In light of
the travel restrictions in 2021, we continued to keep shareholders
informed as to the Group’s performance during the year primarily
through virtual events alongside bespoke interactions between
investors, analysts and members of management. We expect a return
to face-to-face interactions in 2022 as restrictions ease.
The Group Company Secretariat was also available to engage with
and facilitate discussions with the responsible stewardship and
sustainability representatives of key investors, including direct
discussions with members of the Board. During 2021, these wider
interactive engagement processes were undertaken in relation to a
number of specific topics, including the renewal of the Company’s
long-term incentive arrangements, diversity and sustainability.
The views of key analysts and shareholders are reported to the Board
to ensure that all members of the Board develop an understanding of
the views and any concerns of key shareholders. The Chairman and
other Non-executive Directors are also available to meet institutional
shareholders, where requested.
Environment and communities
Improving the environmental, social and governance performance of
our businesses is central to our “Buy, Improve, Sell” strategy. In light of
the importance of this issue both to the Group and to society as a
whole, we believe that all Directors should be actively involved and
concerned with the Group’s efforts and progress in relation to
sustainability, and therefore the Board as a whole is responsible for all
matters concerning sustainability. The Board continues to remain
extremely focused on ensuring that the long-term performance of the
Group and its businesses is sustainable. The Sustainability report
describes in detail some of the actions that have been taken by the
Group during 2021 in the drive to improve the sustainability of our
businesses and the sectors in which they operate.
Melrose Industries PLC Annual Report 2021Strategic ReportMelrose Industries PLC Annual Report 2021 52
Section 172 statement
Continued
53
In 2021, the Board also focused on the risk of climate change to the
Group, including this as a new principal Group risk (please see page
47), setting our inaugural Group sustainability targets and
commitments in line with the UN Sustainable Development Goals
(please see page 55 of the Sustainability report), and reporting for the
first time against all the key areas recommended by the Task Force on
Climate-related Financial Disclosures (“TCFD”) (please see pages 60 to
61 of the Sustainability report). Please see opposite for details on how
the Board considered its key stakeholders when taking these actions.
Melrose is committed to minimising its carbon footprint and
supporting its businesses to drive long-term innovation in their sectors
in order to deal with the challenges presented by climate change and
the transition to a net zero emissions economy. Although the central
Melrose carbon footprint is relatively limited, we offset the emissions
that we operate. The Board has continued to support significant
investment by the businesses in their development of products and
services that deliver environmental improvements and benefits to
their customers, which often includes ground-breaking technology.
For further details, please refer to the Divisional reviews on pages 12
to 29 and the Sustainability report on pages 54 to 77.
We recognise the importance of local communities, including where
our employees live and the operations of our businesses are based, to
the effective operations of our businesses. Our Sustainability report
highlights examples of actions the businesses took during 2021 to
engage with their communities, which include business-focused
initiatives as well as charitable activity.
Proxy advisors and independent reporting bodies
Corporate governance agencies require transparency and active
engagement in order to accurately review and assess our performance
in line with expected practices. In 2021, the Company continued to invest
significant time in speaking regularly to the key corporate governance
agencies regarding certain aspects of our governance framework that
we and our investors consider to be of long-term strategic importance,
including diversity, sustainability and remuneration. A large part of our
investor community subscribes to these governance bodies and it is
important to us that we have their support, and that we are proactive in
our communications with them. The views of the key proxy advisors are
reported to the Board directly by the Group Company Secretariat.
The Company has also engaged with independent reporting bodies
supported by the UK Government where relevant, including the Parker
Review and the Hampton-Alexander Review, on distinct topics
governed by those reporting bodies, as well as investing significant
time engaging with various stakeholders on sustainability, such as
sustainability analysts, reporting organisations and rating agencies,
including MSCI, Sustainalytics, V.E., FTSE Russell, S&P CSA and
CDP. This step change in engagement is reflected in the highly
improved scores received from these bodies in 2021. For further
details, please refer to the Sustainability report on page 56.
Regulators and government bodies
The Group has multiple interactions with regulators and government
bodies in a number of jurisdictions across the world, many of which
are of strategic importance to the Group’s long-term success. In the
UK, the Company has regular dialogue with the Department for
Business, Energy and Industrial Strategy (“BEIS”), the Ministry of
Defence (“MoD”) and the UK Panel on Takeovers and Mergers
regarding its 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 plc.
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
section 172, in the decisions taken during the year ended
31 December 2021.
Key board decisions and
stakeholder considerations
Eliminating the GKN UK defined benefit pension
deficit: employees, pensioners and shareholders
Through a combination of the disposals referred to opposite and
prudent balance sheet management, the Board was able to make
significant progress on eliminating the funding deficit of the GKN
UK defined benefit pension schemes. We have delivered on
our commitment to making the schemes fully funded ahead of
schedule, from a total starting accounting deficit at the time of
the GKN acquisition of approximately £0.7 billion. In addition,
we applied more secure funding targets to achieve more prudent
funding, as well as rebalancing the GKN schemes across the
GKN businesses, to avoid overburdening any one business and
to provide greater stability. These actions have vastly improved
the position of these schemes.
This achievement is a clear illustration of Melrose acting as
a responsible steward of its businesses and delivering on its
acquisition promises. This decision was largely taken for the
benefit of the employees and former employees who form part
of these schemes, who will benefit from the improved security.
For shareholders, we hope this further demonstrates our strategy
of building better, stronger businesses for the long-term, which
will ultimately increase their value.
Return to shareholder distributions on a prudent basis:
shareholders, lenders and other stakeholders
Melrose aims to provide shareholders with sustained returns through
a combination of dividend income and special distributions following
sales of businesses, operating a progressive dividend policy
whenever the financial position of the Company, in the opinion of the
Board, justifies the payment. As with many of our peers, this policy
was uncharacteristically and temporarily halted during 2020, as the
Board focused on retaining cash within the Group in order to keep
the businesses trading through this turbulent period.
We understand the importance of returns to our shareholders.
The Board made the decision to reinstate dividends to shareholders
in 2021, based on its assessment of the Group’s performance,
and consideration of the impact of such payment on the Company’s
shareholders and lenders. The Board determined to pay a final
2020 dividend in May 2021 of 0.75 pence per share and an interim
2021 dividend in October 2021 of 0.75 pence per share. Both the
decision to pay such amounts, as well as the amounts themselves,
were carefully considered by the Board, and the determined
amounts were felt to be at levels that were sufficiently financially
prudent, and would be understood by the Group’s lenders, whilst
still satisfying shareholder expectations in line with our strategy.
It was also after ensuring that all Group companies had repaid in
full any amounts received from the UK Coronavirus Job Retention
Scheme, with all amounts received during 2020 having been repaid
prior to the end of 2020.
In continuance of this prudency, yet reflecting the Company’s
improved performance in 2021, the Board is very pleased to be able
to propose to pay a final dividend to shareholders of 1 pence per
share, subject to approval at the AGM on 5 May 2022. We hope that
this represents to shareholders another step on the journey towards
returning to pre-pandemic performance.
The Board was also pleased to complete a return of capital to
shareholders of £729 million following the sale of Nortek Air
Management. It was very important for Melrose to be able to do this,
it being a key part of the Melrose strategy to return value created
through acquisitions to our shareholders. In determining the amount of
the return, the Board balanced the needs of a number of stakeholders,
first using the disposal proceeds to reduce the GKN UK pension
deficit, as well as to take leverage to a very conservative 1.3x adjusted
EBITDA, alongside making a significant return to shareholders.
Setting sustainability targets and commitments:
shareholders, environment and communities,
employees, suppliers and customers
The Board determined during the year to set its inaugural
sustainability targets and commitments in line with the UN Sustainable
Development Goals and to report for the first time against all key
areas recommended by the Task Force on Climate-related Financial
Disclosures (“TCFD”), as well as elevating climate change to a new
principal Group risk, all of which are set out on page 55 of the
Sustainability Report.
These targets and commitments were set and implemented, and
recommendations have been published, in consultation and following
extensive engagement with our businesses. Our “Buy, Improve,
Sell” strategy causes the composition of the Group to continually
change over time through the eventual exit of each business that
we acquire. It is therefore important that our sustainability targets
and commitments are structured to enable the onboarding and
decoupling of businesses from our Group during the course of
their respective sustainability improvement cycles, whilst ensuring
they are put on a realistically achievable, accelerated trajectory of
sustainability improvement during our ownership.
In setting the targets and commitments, the Board was mindful
of investor expectations, and ensuring that the targets and
commitments sufficiently dealt with these and will result in meaningful
disclosure to investors. The targets and commitments that were finally
determined cover a range of sustainability topics, including emissions,
responsible sourcing, diversity and inclusion, health and safety, the
workforce, and communities. This reflects our desire to ensure that all
of our key stakeholders are represented and can hold the Board
accountable for progress in relation to these matters.
The executive teams of our businesses are fully engaged with,
and understand the importance of, meeting these targets and
commitments. Being manufacturing businesses, they are acutely
aware of the risks and challenges that climate change, and a transition
to a net zero emissions economy, present. However, they are very
different businesses, and a one-size-fits-all approach is
not appropriate. Therefore, Melrose has set its own targets and
expectations on sustainability for businesses under its ownership, but
the businesses will also continue to review and set their own
strategies in this area, which are tailored to them.
Disposal of Nortek Air Management, Brush and
Nortek Control: shareholders, employees,
customers and suppliers, environment and
communities
The Nortek Air Management, Brush and Nortek Control disposals
completed during the year, with an aggregate sale price of
approximately £2.7 billion. This has resulted in (for FKI), or puts the
Company on track to deliver (for Nortek), a doubling of shareholders’
money or more on each acquisition, delivering on our strategy of
creating significant long-term value for shareholders and achieving
above-average returns on their investment.
The disposals are a clear demonstration of the Melrose strategy
in action. We built better businesses through significant investment,
operational and financial improvements, and by supporting them in
their pursuit of product development to establish a sustainable
business for the long-term. The Board then determined the
appropriate time of sale of the businesses, found them a new home
for the next stage of their development, and returned a portion of the
proceeds to shareholders.
During our ownership of Nortek Air Management, Melrose invested
significantly in cutting-edge technology, with over £132 million of
investment in research and development, which resulted in the
development of the highly successful StatePoint Technology®. This
was a key contributor to the financial performance of the Nortek Air
Management business during Melrose’s ownership and, as a result,
the sale price for the business that the Board was able to achieve
for shareholders.
Brush was the final disposal from the hugely successful FKI
acquisition, which has delivered a 2.6x return to shareholders.
During our ownership, we completely reshaped the business into
a power generation and services business, properly aligning it
to the increased importance of the renewable energy sector.
The business emerged from its restructuring programmes better
shaped and positioned to serve its growing markets, and we found
it a new owner who was ready to take the business forward into its
next stage.
In taking the decisions necessary to achieve these disposals, on
the terms and at the time they did, the Board’s focus was primarily
on ensuring the maximum disposal proceeds, and therefore in
delivering on its strategy to shareholders to deliver above-average
returns on their investment. However, as responsible stewards of
our businesses, the Board was also keen to ensure that each of the
businesses left the Group in a significantly improved position from
both a financial and non-financial perspective, for the benefit of all of
their stakeholders. As well as delivering an above-average return for
shareholders, we have set up the businesses to deliver long-term
and sustainable benefits for their employees, suppliers and
customers, and communities.
Melrose Industries PLC Annual Report 2021Strategic ReportMelrose Industries PLC Annual Report 2021 54
Sustainability report
55
Implementing business improvement as we transition
to a net zero economy before 2050
A focus on
sustainability
all our Group policies, sits with the Board
with support from the Melrose senior
management team, and in the case of risk
management, the Audit Committee. The
Board is regularly updated, at least
quarterly, on key climate and sustainability-
related risks and opportunities.
This Sustainability report is an abbreviated
version of our full standalone report, which
we refer to for full details.
Justin Dowley
Non-executive Chairman
3 March 2022
Justin Dowley
Non-executive Chairman
This year, I am pleased to report that we
have set and implemented our inaugural
Group sustainability targets and
commitments, aligned to the UN
Sustainability Development Goals and the
sustainability issues that are most material
to our businesses and key stakeholders.
We firmly believe that a focus on
sustainability is the right thing to do, integral
to our “Buy, Improve, Sell” model, and a
central enabler of industrial success. Many
of our businesses operate in industries
where achieving meaningful progress
towards decarbonisation remains a tough
global challenge, and through our active
investment in operational excellence and
innovative research and development, we
continue to drive our businesses to directly
address society’s most complex longer-term
sustainability challenges as we transition to a
net zero economy before 2050. We provide
our businesses with the strategic focus and
investment to enable them to mitigate the
Group’s impact on the environment, and to
develop and deliver innovative product
solutions and processes to help their
customers and key stakeholders
decarbonise some of the hardest to abate
sectors of the global economy. Notable
examples of this during 2021 include our
continued investment in GKN Aerospace’s
industry-leading development of aircraft
engine solutions that are compatible with
transitionary sustainable aviation fuels, and
GKN Automotive’s continued investment in
further developing and commercialising its
market leading e-Drive solutions.
Investment in people is a key driver of
commercial success throughout the Group,
underpinned by employee engagement
and a firmly integrated culture of employee
development, diversity and inclusion. By
providing a safe working environment,
encouraging diversity and inclusion at all
levels, and ensuring all our employees have
access to training and career development
opportunities, we will continue to attract
and retain the best talent. However, we do
not shy away from making the difficult
decisions that are necessary to build better,
stronger businesses to unlock their full
potential, which we recognise can impact
certain stakeholders and their wider
business communities. To be well placed to
navigate those tough decisions when they
arise and ensure strong engagement with
our businesses and their key stakeholders,
our Workforce Advisory Panel provides an
important, ongoing forum for direct
engagement and consultation between
the workforce and our businesses’
executive teams.
Our efforts to improve our businesses are
supported by a foundation of robust
governance, risk management and
compliance. We instil the highest
standards of integrity, honesty, and
transparency within the businesses we
acquire, and we require them to demand
the same of their supply chains. The
responsibility for Group sustainability
matters, including the setting of our Group
sustainability targets, ultimate oversight of
Group sustainability risk, and the setting of
Our sustainable
improvement strategy
The success of our “Buy, Improve, Sell”
model relies on building better businesses
that are positioned to prosper over
the longer term. The sustainability
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.
In line with the “Sell” aspect of our strategy,
our absolute metrics across all areas will
fluctuate year-on-year. By implementing a
stronger culture of operational and financial
improvement, we rebuild our businesses’
resources and capabilities, and enable
them to pursue commercially attuned
sustainability improvement initiatives that
can continue beyond our ownership.
In 2020, we undertook a materiality
assessment which identified the key
sustainability issues that impact our ability
to create value over time and are of most
concern to our stakeholders.
During 2021, as part of our ongoing
executive review of our material sustainability
topics, and in response to our developing
sustainability strategy and the evolving
macro business environment, we have
elevated the importance and prominence of
Responsible Sourcing and Water across the
Group. Both topics will receive greater focus
during 2022 and beyond.
As we enter a new year, we have renewed
and reiterated our four sustainability principles
to better reflect the current ESG ecosystem
and the positive impact we can have on the
industrial sectors in which our businesses
operate, whilst continuing to engage with key
internal and external stakeholders to ensure
all our businesses better understand and
deliver upon their expectations.
Our sustainability principles are to:
(i) Respect and protect
the environment.
(ii) Continue to invest in and
support our businesses as
they develop products and
services aligned with a net
zero future.
(iii) Promote diversity, prioritise
and nurture the wellbeing
and skills development of
employees, and support
the communities that we
are part of.
(iv) Exercise robust governance,
risk management and
compliance.
Our targets and commitments
In 2021 we set the following Group sustainability targets and commitments to address some of the key ESG priorities of our businesses
and their industries:
Environmental
Addressing our Group impact on the environment
• Source 50% of our electricity from renewable
sources by 2025 and 75% by 2030(1).
Helping our businesses’ customers address their
impact on the environment
• Achieve 50% of total R&D expenditure on
Social
• Divert 95% of our waste from landfill by 2025
and 100% by 2030(2).
• Reduce CO2e/£m revenue by 20% on average
across the businesses by 2025 and 40% by 2030(3).
• Achieve net zero Greenhouse gas emissions
before 2050.
climate-related R&D per year to contribute to the
decarbonisation of the sectors in which our businesses
operate by 2025, 75% by 2030 and 100% by 2040.
• Achieve 50% of new products which contribute to the
decarbonisation of the sectors in which our businesses
operate by 2025, 75% by 2030 and 100% by 2040.
Talent and workforce
• Ensure that all permanent employees receive
regular (annual) formal performance reviews by
2022 where permitted by local laws and employee
representative bodies.
Community
• Invest £10 million over five years through the
Melrose Skills Fund.
Diversity and inclusion
• Achieve by 2021 and maintain a Board and executive
committee comprising at least 33% female membership.
• Maintain achievement of the Parker Review
recommendations.
Health, safety and wellbeing
• Protect our employees from injury and lost time
accidents (LTAs) and achieve and maintain an LTA
frequency rate below 0.1.
Download the report:
www.melroseplc.net/sustainability
(1) Where renewable electricity is commercially and reasonably available in the relevant jurisdiction.
(2) Excluding hazardous waste, which is already disposed of correctly outside landfill.
(3) Target baselined on 2021 performance. Baseline was set in conjunction with the timeframe of the Group’s target setting process.
Governance
• All employees, suppliers and contractors must
comply with our Code of Ethics, conducting
business with integrity and in a responsible,
ethical and sustainable manner.
Strategic ReportMelrose Industries PLC Annual Report 2021Melrose Industries PLC Annual Report 2021 56
Sustainability report
Continued
Progress in
2021:
In 2021, we continued to deliver on our promise to improve
our businesses’ longer-term financial and operational
performance, while delivering against our four overarching
sustainability principles.
Key milestones included:
• Reducing the Group’s total absolute Scope 1 and
MSCI — ESG score
(2020: BB)
>
—
A
57
Scope 2 GHG emissions (-14%), energy consumption
(-6%) and water withdrawal (-8%). Intensity ratios
increased, reflective of the disposals of Nortek Air
Management, Brush and Nortek Control during the
period. However, we remain on track to meet our targets.
• Achieving and maintaining Board gender diversity
of 42% female representation (+12%), and achieving
the Parker Review target of having one director on the
Board from an ethnic minority background.
• Introducing Group-level sustainability targets and
commitments set through extensive consultation with
our businesses. Our targets and commitments aim to
reduce the environmental impacts of all aspects of our
businesses – driving sustainable management of our
input resources, improving operational efficiency, and
minimising the impact of their inputs and outputs, as well
as ensuring a safe working environment for all.
Each of our businesses are at a different stage of their
respective strategic sustainability improvement journey,
and they are at different points in their Melrose ownership.
By the very nature of our “Buy, Improve, Sell” strategy, our
Group sustainability performance will fluctuate during
our investment cycle as we acquire new businesses in
need of improvement, and sell businesses that we have
improved. These differences among our businesses,
and the unique nature of our business model, have
been assessed and considered in setting the
parameters of the Melrose Group sustainability
targets and commitments.
• Elevating the importance and prominence of Water
and Responsible Sourcing across the Group as
material group sustainability topics. Both topics will
receive greater focus during 2022 and beyond.
• Improving disclosure through engagement
and action resulting in significant improvement in
stakeholder awareness. Throughout the year we
undertook a major programme of engagement with key
ESG benchmarking organisations that our investors rely
upon. In October 2021, we received our revised ESG
scores from MSCI and Sustainalytics, which both
demonstrated notable improvements and highlighted
the Group’s increased management focus and delivery
of improvement actions to mitigate the impact of
sustainability risks. The scores provide a snapshot as
at 31 December 2020, meaning that the considerable
improvements made throughout 2021 will be reflected
next year.
• Continuous bolstering of our Group sustainability
governance framework through the formal compilation
of our key environmental and human commitments,
within our inaugural Group Environmental and Human
Rights policies.
In addition, in July 2021 we submitted our inaugural CDP
Climate Change questionnaire for which we scored a C
rating, which reflects our performance as at 31 December
2020. Our CDP submission enabled us to support a
number of our customers by supplying emissions data
to enhance their Scope 3 emissions reporting. We look
forward to building on this in 2022 and broadening the
scope of our engagement with, and submissions to, CDP.
This places us above average for Global
Industrial Conglomerates.
Sustainalytics — ESG Risk Management score
(2020: 28.4 “average”)
>
—53.6
“strong”
Our Sustainalytics ESG Risk exposure score is
34.2 which places us in the top 12% of Global
Industrial Conglomerates.
• Aligning with non-financial reporting frameworks.
As a UK premium listed company, Melrose complies
with the requirements of the new Listing Rule on
climate-related disclosures, reporting against all the
key areas recommended by the Task Force on
Climate-related Financial Disclosures (“TCFD”).
During the second half of 2021, the Melrose senior
management team worked with Ernst & Young and the
divisional sustainability leaders to carry out a qualitative
climate scenario analysis exercise to identify high-level
exposure to climate change. Our TCFD disclosures can
be found on pages 60 to 61.
To further enhance the transparency of our non-financial
reporting, we have provided additional disclosure on our
sustainability performance in line with the Sustainability
Accounting Standards Board (“SASB”) requirements
for Aerospace and Defence and Auto Parts sector
standards, which are referred to on page 60.
• Setting business-level sustainability strategies.
Following the establishment and subsequent
implementation and embedding of our Group
sustainability principles aligned with the UN Sustainable
Development Goals in 2020. During 2021, we kick-
started our businesses’ formulation of their own
sustainability strategies, in pursuit of our Group material
sustainability issues, targets and commitments. Their
strategies are set in alignment with our Group strategy,
and sensitive to the context, needs and priorities of
their respective sectors. In line with our decentralised
business model, we empower and shape the
foundations of our businesses to support sustainability
improvements that they can carry forward responsibly
and proactively after they inevitably leave the Group,
in line with our “Buy, Improve, Sell” strategy.
Integration of climate and sustainability in Melrose’s governance framework
Below we have included a high-level overview of how sustainability and climate-related risk is integrated across our
governance structure.
IMAGE TO COME
Board of Directors
ultimate responsibility for
all matters relating to
sustainability risks including
climate-related risks
Audit
Committee
responsible for risk
management including
climate-related risks
Nomination
Committee
responsible for ensuring
that the membership
of the Board and the
pipeline for succession
planning purposes
reflects diversity
Melrose Senior
Management Team
responsible for
integrating sustainability
and climate into
strategic management
Workforce
Advisory Panel
responsible for
promoting the views
and interests of
the workforce
Remuneration
Committee
responsible for
integrating sustainability
into the executive
remuneration structure
Business Unit
Executive Teams
responsible for the
management, implementation
and oversight of their
business’s sustainability
strategy and
climate-related risks
Melrose Industries PLC Annual Report 2021Strategic ReportMelrose Industries PLC Annual Report 2021
58
Sustainability report
Continued
Environmental
leadership and
climate change
Our Sustainability Objective
UN Goals
Respect and protect
the environment
Continue to invest in and
support our businesses as
they develop products and
services aligned with a net
zero carbon future.
Material Issue
Melrose Group Performance Target
Source our global electricity
from renewable sources
• Source 50% of our electricity from renewable sources by 2025
and 75% by 2030(1)
Divert our waste
from landfill
• Divert 95% of our waste from landfill by 2025 and 100% by 2030(2)
Reduce our global Scope 1
and Scope 2 emissions
intensity
• Reduce CO2e/£m revenue by 20% on average across the
businesses by 2025 and 40% by 2030(3)
• Achieve net zero Greenhouse gas emissions before 2050
Increase expenditure on
research and development
(“R&D”) relating to climate-
related solutions that contribute
to the decarbonisation of
the sectors in which our
businesses operate
Develop new products that
contribute to the decarbonisation
of the sectors in which our
businesses operate
• Achieve 50% of total R&D expenditure on climate-related R&D
per year to contribute to the decarbonisation of the sectors in
which our businesses operate by 2025, 75% by 2030 and
100% by 2040
• Achieve 50% of new products which contribute to the
decarbonisation of the sectors in which our businesses
operate by 2025, 75% by 2030 and 100% by 2040
We are believers in industry and its potential
to help solve society’s most pressing needs.
We buy high-quality but underperforming
industrial businesses, with established
positions in markets that are often among
the most difficult to decarbonise.
Melrose approaches its environmental
strategy from two perspectives. Firstly,
addressing its own emissions, both at a
Group level and within each of the businesses
that it owns, through the introduction of
targets and providing support and targeted
investment to the businesses. More
importantly, we are helping our businesses’
customers to address their emissions and
to contribute to the decarbonisation of their
respective industries.
We recognise the serious threat posed by
climate change and the urgent need for
meaningful action. The manufacturing
businesses that we acquire often operate
in the industries that are some of the most
difficult to decarbonise. We invest in and
encourage our businesses to improve their
operations and market offerings to minimise
their impact on climate change and make
them less vulnerable to climate-related
risks, while safeguarding their long-term
commercial success. We aim to effect
meaningful change and improvement
within our businesses during our ownership
period. By setting a strong focus on
sustainability improvement within each
business we acquire, we want our businesses
to continue their trajectory even after our
ownership period.
(1) Where renewable electricity is commercially and reasonably available in the relevant jurisdiction.
(2) Excluding hazardous waste, which is already disposed of correctly outside landfill.
(3) Target baselined on 2021 performance. Baseline was set in conjunction with the timeframe of the Group’s target setting process.
(4) Source: https://carbonneutral.com/the-carbonneutral-protocol.
Improving the sustainability performance of
our businesses whilst helping their customers
and key stakeholders tackle pressing climate
challenges is at the core of Melrose’s
“Improve” strategy. Through a combination of
investment in our own operations, strategic
oversight and ground-breaking research and
development, we and our businesses are
directly addressing society’s most complex
longer-term sustainability challenges. By
developing and delivering innovative product
solutions and processes, we are supporting
the transition towards a net zero economy
before 2050.
While under our ownership, we enable and
support fast and sustainable operational
improvement through targeted investment,
helping to shape the long-term profitability
and sustainability of our businesses. Our
ambition is to achieve net zero Greenhouse
gas (“GHG”) emissions in our Group’s
operations before 2050 in line with the UK
Government’s target, and in order to achieve
the goals of the Paris Agreement. To meet
this goal, each of our businesses have agreed
and implemented sustainability targets
and commitments aligned with our Group
sustainability targets, which are aligned to
the UN Sustainability Development Goals
(“UN SDGs”) and the sustainability issues that
are most material to our key stakeholders.
In 2021, the Group achieved reductions in
total absolute Scope 1 and Scope 2 GHG
emissions (-14%), energy consumption (-6%)
and water withdrawal (-8%). The Group also
reported some Scope 3 emissions for the first
time. Despite these absolute reductions, there
were increases in the Company’s chosen
intensity ratios, as shown on pages 76 to 77.
This is reflective of the fact that Nortek Air
Management, Brush and Nortek Control,
which were disposed of during the period
(and therefore are not included from both
an emissions and a revenue perspective
for 2021), had less resource-intense
operations than the Group’s remaining
businesses, as well as Nortek Air
Management’s revenues being less
impacted in 2021 than the GKN
businesses in particular.
Melrose sets a positive example and
enables and empowers its businesses
to follow its lead. Although the central
Melrose carbon footprint is relatively
limited, we offset the emissions that we
generate. The Melrose corporate offices
have attained the CarbonNeutral®
company certification for 2019, 2020 and
2021 through a combination of internal
energy efficiency initiatives and financing
high-quality, high-impact emissions
reduction projects in accordance with
The CarbonNeutral Protocol(4). The
Melrose corporate office in the US
also has the HinesGo (Green Office)
designation in recognition of its
sustainability practices and energy
efficiency performance, among other
environmental and wellbeing criteria.
In 2021, we developed our Group
Environmental policy to demonstrate our
commitment towards driving sustainable
production methods and infrastructure,
and minimising the potential negative
impact that our businesses may have
on the environment over the longer term.
The policy, which applies to all individuals
working across our businesses and has
been approved by the Board, can be
found on our website (https://www.
melroseplc.net/media/2805/
environmental-policy.pdf). Our Conflict
Minerals policy, which sets out the
expectations of Melrose and its business
units towards their suppliers with regards
to conflict minerals can also be found on
our website (https://www.melroseplc.
net/media/2593/conflict-minerals-
policy.pdf).
59
Helping customers address climate change
Product responsibility is central to the Melrose model of acquiring and improving
underperforming manufacturing businesses. This is grounded in investing in safe
and sustainable production practices and demonstrated by sustainable product
performance and effective product life cycle management. Furthermore, we recognise
the risks and opportunities that the transition to a net zero economy presents for our
businesses and their customers. Despite operating in some of the hardest industries to
decarbonise, we work closely with our businesses to ensure that they are well positioned
to meet emerging regulatory requirements and wider environmental expectations.
Climate-related issues have a direct impact on product strategy, development, and
financial planning across all our businesses. Our businesses work closely with their
customers and world-class research institutions to develop market-leading and
cost-effective innovations, delivering solutions that address environmental challenges.
In 2021, our businesses invested over £153 million in developing products that help
their customers improve their energy efficiency and to reduce their GHG emissions,
water consumption and waste generation compared with conventional technologies.
Key projects currently in progress include:
GKN Aerospace
GKN Automotive
GKN Powder
Metallurgy
GKN Aerospace’s ground-breaking development in liquid hydrogen
technology. The £54 million collaborative H2GEAR programme
focuses on technology to accelerate aerospace decarbonisation,
with the goal of zero CO2 emissions hydrogen-powered sub-
regional aircraft entering the skies as early as 2026. The programme
is expected to create more than 3,100 jobs across the UK and will
reinforce the UK’s position at the forefront of aerospace technology
research and development.
In addition, GKN Aerospace, in collaboration with HiiROC, a
“turquoise hydrogen” technology developer, is developing a
hydrogen gas generation solution for the GKN Aerospace Global
Technology Centre (“GTC”) in Bristol, UK. The project, which
is in its early stages, aims to combine HiiROC’s H2 generation
technology with current hydrogen storage technology from
GKN Hydrogen to replace the use of natural gas at the GTC.
If successful, this may present a significant opportunity across the
wider business in terms of reducing energy and emissions footprint.
GKN Automotive is at the forefront of increasing the efficiency of key
automotive components and parts that are used across the world.
As well as investing to minimise the CO2 impact in vehicles, all
products are designed to meet the highest international and OEM
standards for hazardous materials and recyclability. At the GKN
Automotive UK Innovation Centre in Abingdon, UK, the business
is helping to progress the electric vehicle revolution and ongoing
decarbonisation of the global automotive sector. In December 2021,
GKN Automotive launched its Advanced Research Centre to help
develop next-generation e-Drive technologies to power future electric
vehicles and increase engineering capability in the UK to help meet
the Group’s net zero commitment. GKN Automotive is partnering
with research teams in the engineering departments at the University
of Nottingham and Newcastle University, operating collaboratively
with engineers at the UK Innovation Centre.
GKN Powder Metallurgy’s new proprietary electric pumps are
substituting engine driven pumps on vehicle transmissions.
A conventional automobile pump system causes the pump to
be constantly driven, resulting in unnecessary energy wastage.
GKN Powder Metallurgy’s new electric pump system operates
on demand, actuated from the electronic controlling unit of the car,
thereby reducing energy waste. This ground-breaking technology
can achieve a fuel benefit of up to 10% compared to a conventional
engine driven pump operating within a conventional driving mode.
For full hybrid and electric vehicles, the electric pump is set to
become the leading solution for lubrication and cooling.
More information on high profile projects can be found within the
Divisional reviews on pages 12 to 29.
Melrose Industries PLC Annual Report 2021Strategic ReportMelrose Industries PLC Annual Report 2021 60
Sustainability report
Continued
Melrose Group Taskforce on Climate-related Financial
Disclosures (“TCFD”)
In alignment with the recommendations of the Taskforce on Climate-related Financial Disclosures
61
In complying with the requirements of
the new Listing Rule on climate-related
disclosures, we have included disclosures
against all the key areas recommended by
the TCFD. This is our first report following the
recommendations of the TCFD and covers
our approach as at 31 December 2021. We
recognise that we will need to build on the
efforts started in 2021 and are committed
to continuously improving our approach.
In the table opposite, we summarise our
disclosures against each of the TCFD
recommendations and we cross-refer to
where the disclosures are in this Annual
Report. In assessing coverage, we took
into consideration the guidance documents
referred to in the guidance notes to the
relevant Listing Rule.
Sustainability Accounting
Standards Board (“SASB”)
reporting for 2021
This is our first year reporting against the
SASB reporting standards. By reporting in line
with the SASB standards we are providing
our investors and other stakeholders with
comparable, consistent, and reliable data on
financially material sustainability factors, which
directly impact our long-term enterprise value.
Further detail, including our established basis
of reporting, can be found in our standalone
Sustainability Report (available on our website
at https://www.melroseplc.net/
sustainability).
Taskforce on Climate-related Financial Disclosures (“TCFD”) Index
Governance
a) Describe the board’s oversight of climate-related risks and opportunities.
The Chairman and the Melrose Board oversees and has ultimate responsibility for
Melrose’s sustainability initiatives, disclosures, and reporting. This includes, but
is not limited to, climate risks and opportunities. The Board has responsibility for
approving the sustainability strategy, sustainability report and sustainability targets,
which also includes climate-related targets. Details of how the Board delegates risk
management authority across the divisions is described in the Risk management
overview on pages 40 and 41.
The Board receives regular training, at least annually, on sustainability issues
that impact our businesses, including climate change. The Board also receives
quarterly updates on key sustainability and climate-related issues that impact the
sectors in which the Group’s businesses operate, and on the specific measures
that need to be implemented to drive improved climate-related performance of the
businesses. Please see the governance overview on page 57 for details of how
sustainability and climate-related issues fit into wider Melrose governance and Board
responsibilities. Our Section 172 statement on pages 50 to 53 describes in more
detail the Board’s decision-making in 2021, including in relation to sustainability
and climate-related matters.
b) Describe management’s role in assessing and managing
climate-related risks and opportunities.
The Melrose senior management team oversees the Group sustainability function.
This responsibility includes the publication of the sustainability report and the
setting of climate-related targets in line with the TCFD recommendations across
the businesses in 2021. We integrate the management of sustainability and climate-
related issues across our existing governance and committee structures. Please see
page 57 for a diagram that outlines how climate is integrated into our governance
and committee structures.
We run a decentralised model and overseeing climate-related issues and
implementing relevant actions and initiatives is most effective at the individual
business level, where most impact can be had. Each business’s CEO and
executive management team are accountable for climate change and sustainability.
Throughout the year, the Melrose Group sustainability function has engaged with the
CEOs and other relevant senior leaders of each business to set expectations and
to ensure there is appropriate oversight of the impacts of climate and other material
sustainability risks and opportunities. Please see the Divisional reviews on pages 12
to 29 for detail of how the divisions are engaging on climate change.
Strategy
a) Describe the climate-related risks and opportunities the organisation
has identified over the short, medium and long-term.
b) Describe the impact of climate-related risks and opportunities
on the organisation’s businesses, strategy, and financial planning.
In alignment with our “Buy, Improve, Sell” business model, we view managing
climate-related risks and opportunities with the aim of protecting and enhancing
both the value of our businesses and their impact on the world. We have considered
climate risk under short, medium, and long-term time horizons that reflect the
investment and value creation cycle of our “Buy, Improve, Sell” model. We have
included a description of the climate-related risks identified as part of our qualitative
climate scenario analysis on pages 62 and 63. The time horizons used for the
scenario analysis were as follows:
• Short-term: until 2023 – aligned with Melrose investment and immediate
improvement phases.
• Medium-term: until 2026 – aligned with Melrose ownership, engagement and
“Improve” period and beyond.
• Long-term: until 2040 – expected to align with the period beyond Melrose
ownership for our current businesses.
In 2021 we invested over £153 million across our businesses on climate-related
research and development, for example, to develop products that help their
customers to improve their energy efficiency and to reduce their GHG emissions
compared with conventional technologies. Please see the Technology case studies
contained within the Divisional reviews on pages 12 to 29 and on page 59 of this
Sustainability report for further examples. We have described how sustainability
and climate-related issues are integrated into our broader strategy in the description
of our strategy and business model on pages 2 and 3.
Climate change has a direct impact on product strategy, development, and financial
planning across all of our businesses. Our businesses work closely with their
customers, partners, and world-class research institutions to develop market-
leading, cost-effective innovations and deliver solutions that address environmental
challenges. In the Sustainability report on pages 58 and 59, we have provided
details on how we are embedding low carbon transition into our businesses
alongside our relevant targets.
Risk
management
a) Describe the organisation’s processes for identifying and assessing
climate-related risks.
b) Describe the organisation’s processes for managing
climate-related risks.
Climate change will continue to have direct physical and transitional impacts on the
businesses, although for each business the impacts will be different. Each business
is individually responsible for developing and managing processes to monitor
and manage their climate-related risks. The qualitative climate scenario analysis
described on pages 62 and 63 was a key step in identifying climate-related risks and
opportunities. Please see the Risks and uncertainties section on pages 42 to 49 for
details of our Group approach to assessing principal risks including climate change.
This year we also assessed water stress. Please see page 64 for details.
With Melrose’s support, each 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. The executive management
team of each business regularly reviews any significant climate-related issues,
risks and opportunities related to the business. These reviews consider the level of
climate-related risk that the business is prepared to take in pursuit of its business
strategy and the effectiveness of management controls in place to mitigate climate-
related risk. In line with our decentralised model, our businesses have frameworks
in place for identifying principal risks and opportunities appropriate to their business
and stakeholders, which include climate-related risks. Each business takes an
appropriately tailored approach to improve relative to their maturity in this area at the
time of becoming part of the Group.
c) Describe the resilience of the organisation’s strategy,
taking into consideration different climate-related scenarios,
including a 2°C or lower scenario.
To understand, and plan for, how Melrose will be impacted in plausible future
climate scenarios and to improve our strategic resilience, we carried out our
first climate scenario assessment, under two scenarios. These scenarios
use Representative Concentration Pathways (“RCPs”) that set pathways for
concentrations of GHGs and, effectively, the amount of warming that could occur
by the end of the century. We used the same criteria to rate the climate-related
risks that is used to rate other strategic Group risks. Further details of how our
businesses are supporting the decarbonisation of their sectors are outlined in
the Technology case studies contained within the Divisional reviews on pages 12
to 29 and on page 59 of this Sustainability report. Details of our 2021 qualitative
climate scenario analysis can be found on pages 62 and 63.
c) Describe how processes for identifying, assessing, and managing
climate-related risks are integrated into the organisation’s overall
risk management.
In 2021, the Group risk categories were expanded and refined to include climate
change as a strategic Group risk, to reflect the emerging risks involved with the
increased frequency of extreme weather and climate-related disasters, coupled
with increased climate transition legislation and regulations in this area. Please
see page 47 for details on how climate change is integrated into our Group
strategic risk profile.
At the end of 2021, in recognition of the businesses’ strong focus on ensuring
an efficient and sustainable use and management of energy, 112 (74%)(1) across
our businesses were certified to ISO 14001 standard, and 28 sites (18%)(1) had
achieved ISO 50001 certification. Compliance to the standards is ensured by
independent auditing, with annual surveillance audits being completed and a full
re-certification carried out every three years.
Metrics and
targets
a) Disclose the metrics used by the organisation to assess climate-
related risks and opportunities in line with its strategy and risk
management process.
Improving operational efficiency is a key factor that shapes the long-term profitability
and sustainability of our businesses and contributes to ensuring that they are
responding appropriately to changing regulatory and stakeholder requirements and
expectations. Our ambition is to achieve net zero GHG emissions in our Group’s
operations before 2050 in line with the UK Government’s target, to achieve the
goals of the Paris Agreement. As part of our evolving sustainability strategy, we
have identified relevant Group-level KPIs to support us in better articulating our
transition plan to meet our net zero ambition. These metrics include GHG emissions,
water (withdrawal and stress) and waste. We have reported Scope 1 and Scope 2
emissions data for the Group for several years and have now set reduction targets
for the short, medium and long-term. In 2021, we also began to report a limited
number of Scope 3 emissions and will shortly incorporate these into our targets.
Please see the environmental reporting section on pages 76 and 77 for our Scope 1,
2 and 3 emissions disclosures.
b) Disclose Scope 1, Scope 2 and, if appropriate, Scope 3 Greenhouse
gas (“GHG”) emissions and the related risks.
c) Describe the targets used by the organisation to manage climate-
related risks and opportunities and performance against targets.
We have reported Scope 1 and Scope 2 emissions data for the Group for several
years. In 2021, we also began to report a limited number of Scope 3 emissions.
Please see the environmental reporting section on pages 76 and 77 for our Scope
1, 2 and 3 emissions disclosures. Our Group emissions are closely linked with our
Group climate transition risk exposure. Please see our 2021 qualitative climate
scenario analysis on pages 62 and 63 for details on our climate transition risk
and how our divisions are addressing and engaging with climate transition risks
and opportunities.
Each of our businesses are at a different stage of their respective strategic
sustainability improvement journey, and at different points in their Melrose
ownership. By the very nature of our “Buy, Improve, Sell” strategy, our Group
sustainability performance will fluctuate during our investment cycle as we
acquire new businesses in need of improvement, and sell businesses that
we have improved. These differences among our businesses, and the unique
nature of our business model, have been assessed and considered in setting
the parameters of the Group sustainability targets, which cover net zero,
Scope 1 and Scope 2 emissions intensity, renewable electricity sourcing, waste
diverted from landfill, climate-related research and development expenditure
and the development of new products that contribute to the decarbonisation
of the sectors in which we operate. Please see page 55 for more details on our
environmental targets including time horizons.
(1) Data has been collected from 98% (by sites) of the Group.
Melrose Industries PLC Annual Report 2021Strategic ReportMelrose Industries PLC Annual Report 2021 62
Sustainability report
Continued
Climate scenario analysis in 2021
The Group is exposed to climate risks and
opportunities through our individual business
divisions. We are aware that the effects of
climate change on specific sectors and
businesses are highly variable. In 2021, we
engaged with external consultants, Ernst &
Young, to carry out our first climate scenario
analysis to qualitatively assess the likelihood
and impacts of climate change related risks
on our Group(1).
The climate scenarios that were used for the
assessment were:
Lower carbon scenario (RCP 2.6)
Very stringent decarbonisation pathways
through policy and technology shifts. In
this scenario, emissions start declining
immediately and reach zero by 2100. It is
likely to keep warming below 2ºC, resulting
in lower expected physical climate risks.
Higher carbon scenario (RCP 6.0)
Some emissions mitigation. Emissions rise
to 2080 and fall. Warming is likely to exceed
2ºC degrees, resulting in higher expected
physical climate impacts.
The analysis focused on a selection of
climate-related risk categories across physical
and transition risk areas. Given the nature of the
analysis and the sectors that our businesses
operate within, we identified key areas of
material risk exposure that are in various stages
of mitigation across the businesses. We have
provided an overview below of the Group’s
physical and transition climate risk exposure
and responses.
63
Overview of Melrose Group transition climate risks and opportunities
Risk description
Risk trends and impacts
Lower carbon scenario Higher carbon scenario
How we are responding
Technology
Technology transition risks through increasing
demand for lower carbon technologies that
render current products obsolete. There are also
potential risks from unsuccessful investment in
new technologies.
Risks and Opportunities
Market
Market risks from changing demand for products
due to shifting customer sentiment towards lower
carbon options.
Risks and Opportunities
Carbon policy and regulations
Risks from carbon policies and regulation,
including taxes and bans on specific products
and processes. This also includes carbon
pricing on carbon intensive materials such
as steel and plastic.
Risks
The businesses are exposed to increasing
technology risks over time under both the lower
and higher carbon scenarios. This is due to rising
pressure on their sectors and customers to develop
and scale new lower carbon technologies to drive
down emissions (for example, use of hydrogen,
zero carbon aircrafts, increasing penetration of
battery electric and plug-in hybrid electric vehicles).
Potential financial impacts include increased operating
costs on research and development to respond to
technology and market trends and increasing capex
to invest in new and specialist machinery.
This risk is intricately linked with Technology risks
and Sector reputation risks. Under the lower
carbon scenario, market risk exposure remains a
stable medium across all time horizons. Under the
higher carbon scenario, the risk exposure does not
manifest until 2040.
Potential impacts to revenue due to changing
product demand (for example, reduced demand
for internal combustion engine parts and
increasing demand for electric vehicle parts
in the automotive sector).
Due to the energy intensive nature of manufacturing,
the divisions are exposed to increasing carbon policy
and regulatory risks in short, medium and long-
term horizons, particularly under the lower carbon
scenario. The higher carbon scenario assumes less
near-term regulatory intervention and as such, risk
exposure does not begin to manifest until 2040.
Potential impacts to operating cost and revenue
due to carbon taxes and regulatory interventions.
Potential impacts due to increasing cost of the raw
components in manufacturing.
Sector reputation
Risk that high-emitting, hard to decarbonise
sectors are exposed to increased sector
stigmatisation. This may affect the attractiveness
of investments in companies exposed to carbon
intensive industries, including within the aerospace
sector and other manufacturing sectors.
Risks and Opportunities
Reputation risks were found to be low in the short-
term under the low carbon scenario but expected to
increase in the medium and long-term. Reputation
risk was the only climate risk that was found to be
higher under the higher carbon scenario. This is
due to assumptions around increased stakeholder
pressure to the limited carbon policies assumed in
this scenario.
Potential impacts include reduced access to capital
due to investor preference for companies less
exposed to high emitting activities.
(1) Ergotron was excluded from the analysis due to low materiality. Its revenue weighting for the Group was 3% based on H1 2021 data.
2023
2026
2040
2023
2026
2040
2023
2026
2040
2023
2026
2040
M ediu m
High
Lo w
M ediu m
High
Lo w
2023
2026
2040
M ediu m
High
Lo w
M ediu m
High
Lo w
2023
2026
2040
Technology is a major strategic focus for the
Group. Please see the Chief Executive’s review
on pages 10 and 11 for further details on our
renewed focus on sustainable technologies.
The Melrose senior management team is
continuing to engage with the businesses
to support strategic investment into the
development of products that will be key to
the low carbon transition, and to consider
the capital requirements to meet its
decarbonisation objectives. See our Divisional
reviews on pages 12 to 29 for details of how
the divisions are investing in lower carbon
technology and research and development.
The businesses are acutely aware of,
and responding to, the changing market
demands for low carbon products. Please
see the Divisional reviews on pages 12 to 29
for details on how our divisions are adapting
to changing market demand for lower
carbon solutions.
M ediu m
High
Lo w
M ediu m
High
Lo w
2023
2026
2040
Melrose has a Group-level priority to drive the
decarbonisation in its businesses’ sectors
and has set Group-level emissions reduction
targets to support this. Please see page
59 for more detail on how our businesses
support the decarbonisation of their sectors
and pages 55 and 76 to 77 for our climate-
related targets and metrics.
M ediu m
High
Lo w
M ediu m
High
Lo w
2023
2026
2040
The Board oversees and challenges the
management of the Group’s sustainability
strategy. Further details are provided
throughout this Sustainability report
including on pages 54 to 57. The Board also
monitors ESG ratings to ensure continuous
improvement across ESG issues that are
important to investors, and to ensure that
the Group is in line with market and key
stakeholder expectations.
Overview of Melrose Group physical climate risk
In the scenario analysis, physical climate risks were given a single combined risk rating
across both scenarios assessed. This is because physical outcomes do not begin to diverge
significantly until after 2040 under the scenarios used. Please see below for an overview of
the Group’s physical climate risk exposure.
The analysis assessed the following physical climate risks categories:
• Property – risks from physical damage to property because of extreme weather
events (acute) or changes to the climate experienced over a period of time (chronic).
• Supply chain – risks from disruption to the supply chain because of extreme weather
events (acute) or changes to the climate experienced over a period of time (chronic).
For example, impacts of extreme weather events in key supplier locations.
• Production – risks to the production process or demand for products because of
changes in the climate. For example, potential impacts of higher temperatures on labour
productivity and production outputs.
Melrose Group-level exposure to physical climate risks
Across both scenarios (RCP 2.6 and RCP 6.0)(1)
2023
2026
2040
Low Medium High
Low Medium High
Low Medium High
Property
Supply-chain
Production
(1) Physical risks have been given a single combined risk rating across both scenarios used.
Overall, physical climate risk exposure was found to be significantly lower across the
divisions relative to transition risk. The scenario analysis found low exposure to material
or unmitigated physical climate risk across divisions in the short and medium-term time
horizons under both scenarios. Physical risks begin to increase in the longer-term time
horizon (from 2040), for example through increasing likelihood of river flooding risk in the
UK or increasing wildfire risk in California.
The businesses have prioritised the most material climate risk exposures, namely the
transition risks outlined in the table opposite. However, physical climate risks will continue
to be monitored as part of the Group strategic risk framework. Please see the Risks and
uncertainties section on page 47 for more details on the Group’s approach to climate
risk management.
Strategic ReportMelrose Industries PLC Annual Report 2021Melrose Industries PLC Annual Report 2021
64
Sustainability report
Continued
Environmental
reporting
Our environmental reporting covers all
entities over which the Group had financial
control for a period of at least one year as
at 31 December 2021. Emissions from
entities acquired or disposed of during the
reporting period (i.e. disposed of before
31 December 2021 or acquired on or
after 1 January 2021) are not accounted
for in this section in respect of 2021 data.
Given that the Melrose business model
is to “Buy, Improve, Sell” businesses,
the consolidated Group emissions data
contained in this report can often show
significant year-on-year changes, which
may not reflect the underlying performance
of each individual business in the Group.
In 2021, the Group achieved reductions in
total absolute Scope 1 and Scope 2 GHG
emissions (-14%), energy consumption (-6%)
and water withdrawal (-8%). The Group also
reported some Scope 3 emissions for the
first time.
Our emissions and other environmental
disclosures are set out on pages 76 and 77.
The Group’s chosen intensity ratio is
emissions, energy consumption and water
withdrawal reported above normalised
tonnes, MwH, or m3 per £1,000 of turnover,
which we believe remains the most
appropriate intensity ratio for Melrose given
our business model and structure. Although
absolute emissions, energy and water
decreased in 2021, the Scope 1 and Scope
2 emissions, energy consumption and
water withdrawal intensity ratios increased.
The increase in the intensity ratios in 2021
is reflective of the fact that Nortek Air
Management, Brush and Nortek Control,
which were disposed of during the period
(and therefore are not included from both
an emissions and a revenue perspective for
2021), had less resource-intense operations
than the Group’s remaining businesses, as
well as Nortek Air Management’s revenues
being less impacted in 2020 than the GKN
businesses in particular.
No material environmental fines or penalties
were issued against any of the businesses
in 2021 or in the previous four years.
Water
Water is an essential resource for multiple
production processes utilised within our
businesses. It is acknowledged, however, that
water scarcity is a global challenge, causing a
range of issues that cannot be solved
unilaterally. Whilst water withdrawal for the
Group is not considerable compared to peers,
water conservation is becoming an increasingly
important issue for some of our stakeholders
and therefore water has been elevated to a key
sustainability topic in terms of materiality.
We encourage our businesses to reduce their
water withdrawal and consumption through
implementing measures to lessen water use
through their production processes. This not
only decreases the impact of our businesses’
activities on water sources at a local level, but
also reduces the risk of water scarcity
impacting operations.
This year we have made progress in our water
data collection and have undertaken a mapping
exercise to identify any operational sites within
the businesses that are in current or potential
future areas of water stress. The improved data
collection processes and scope will enable us
to establish more robust baselines for reporting
our future progress, to establish a water target,
and to highlight sites located in water stressed
areas where engagement is required to reduce
water withdrawal.
During the year, we also conducted a
high-level analysis of our operations in water
stressed(1) areas. We reviewed whether we
have any manufacturing or office sites(2)
operating in areas of ‘high’ (40%-80%) or
‘extremely high’ (>80%) baseline water stress,
according to the World Resources Institute’s
(“WRI”) Aqueduct Water Risk Atlas tool.
Areas of high or extremely high water stress,
according to the WRI definition, are areas
where human demand for water exceeds
40% of resources. We have identified that
20% of our businesses’ current sites are
located in areas of ‘extremely high’ baseline
water stress, and a further 15% of current
sites are currently located in areas of ‘high’
baseline water stress. This analysis is being
built upon alongside ongoing engagement
with our businesses to work towards reducing
withdrawals in these regions.
Waste management
Our businesses are actively encouraged to
reduce the amount of waste they generate
and to divert waste from landfill. To support
this, we have implemented a Group-level
target to divert 95% of non-hazardous waste
to landfill by 2025 and 100% by 2030(3).
Responsible sourcing
We are committed to ensuring that our
businesses source raw materials and
manufacture products in a responsible,
ethical and sustainable manner. This applies
to our businesses’ global supply chains and
is important in mitigating the risk of supply
chain shocks.
This year we have elevated the importance
and prominence of Responsible Sourcing
across the Group as part of our ongoing
executive review of our material sustainability
topics and in response to our developing
sustainability strategy and the evolving macro
business environment.
This section has been prepared for the reporting period of 1 January 2021 to 31 December 2021, 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 the
Streamlined Energy and Carbon Reporting guidance dated March 2019. The Greenhouse Gas Protocol standard covers the accounting and
reporting of seven Greenhouse gases covered by the Kyoto Protocol.
We have reported on all of the emission sources required under the Companies Act 2006 (Strategic Report and Directors’ Reports) Regulations 2013
and under the UK’s Streamlined Energy and Carbon Reporting (“SECR”) requirements. All material emissions from within the organisational and
operational scope and boundaries of the Group are reported.
These sources fall within our Consolidated Financial Statements. We do not have responsibility for any emission sources that are not included in
our Consolidated Financial Statements. We have used the GHG Protocol Corporate Accounting and Reporting Standard (revised edition), and data
has been gathered in accordance with our GHG reporting procedure. The emission factors from the UK Government’s GHG Conversion Factors for
Company Reporting 2021 (DEFRA factors) have been used to calculate the GHG emission figures together with IEA country-specific factors for the
associated overseas electricity usage.
(1) For these purposes, baseline water stress measures the ratio of total water withdrawals to available renewable surface and groundwater supplies. Water withdrawals include domestic,
industrial, irrigation, and livestock consumptive and non-consumptive uses. Available renewable water supplies include the impact of upstream consumptive water users and large dams on
downstream water availability. Higher values indicate more competition among users. Source: WRI Aqueduct 2019 (https://www.wri.org/applications/aqueduct/water-risk-atlas/#/?advance
d=false&basemap=hydro&indicator=w_awr_def_tot_cat&lat=30&lng=-80&mapMode=view&month=1&opacity=0.5&ponderation=DEF&predefined=false&projection=absolute&scena
rio=optimistic&scope=baseline&threshold&timeScale=annual&year=baseline&zoom=3).
(2) For these purposes a ‘site’ is defined as a manufacturing site or office that is under the operational control of the relevant business. It excludes sites in which the Group holds an interest of 50%
or less, and supplier or third-party facilities.
(3) Excluding hazardous waste, which is already disposed of correctly outside landfill.
(4) Data has been collected from 54% (by revenue) of the Group.
Responsible Sourcing will therefore receive
greater focus during 2022 and beyond.
We require our businesses to work closely
with their suppliers to ensure they respect
human rights and promote good working
conditions across their supply bases. In
practice, this means that suppliers are
expected to treat their workers equally and
with respect and dignity, for all workers to
be of an appropriate age in compliance with
the local legal minimum age for work, for all
workers to be paid a fair wage that meets
or exceeds the legal minimum standard or
prevailing industry standard, to eliminate
excessive working hours for all workers
in compliance with local laws, and for all
workers’ health and safety rights to be
protected at work.
We require our businesses to have strict
procedures in place in respect of sourcing
products or raw materials containing 3TG
minerals, to the extent required by applicable
laws or customer expectations, and to seek
to identify whether 3TG minerals are sourced
responsibly and from conflict-free regions of
the world. As a minimum, relevant suppliers
are required to:
• perform due diligence to ascertain
whether any 3TG minerals in products are
conflict-free; and
• complete the Responsible Minerals
Initiative reporting template or equivalent,
as required by the respective business.
In line with our decentralised model, while the
Board retains oversight of supplier-related
Group policies that have applicability across
the Group, including our Conflict Minerals
policy, responsibility for the implementation
and management of all supplier-related
policies rests with divisional 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.
Our businesses implement supplier
qualification processes where relevant which,
at a minimum, require suppliers to complete
a risk assessment. Many of the businesses
require suppliers to sign their supplier code
of conduct or equivalent policies and
depending on the determined level of risk,
may also result in an audit or further reviews.
The GKN businesses each have a supplier
code of conduct that applies globally to all
their suppliers and is based on the ethos of
“doing the right thing”.
65
Environmental
stewardship
To enable the Group to meet its climate-
related targets, our businesses are seeking to
reduce energy usage and GHG emissions
within their operations through more efficient
use of electricity, fuel and heat, by increasing
the proportion of renewable energy where
commercially viable, and by implementing
other climate-positive actions such as
sustainable transport initiatives for employees.
The businesses take an appropriately tailored
approach to implementing climate-related
initiatives that are most relevant and impactful
to improving their business activities and
requirements, and their operational and
market environments. Each business is at
a different stage in their climate strategy
depending on their maturity in this area,
but all have implemented or are in the
process of implementing a wide range
of positive actions.
During 2021, the Group as a whole invested
in the following areas:
£1,936,419
on LED lighting retrofits
£917,525
on more efficient air conditioning
and heating systems
£53,388
on renewable energy installations (4)
£953,738
on insulation improvements
£6,003,353
investment on energy efficient equipment
Strategic ReportMelrose Industries PLC Annual Report 2021Melrose Industries PLC Annual Report 2021 66
Sustainability report
Continued
67
Our people
Our Sustainability Objective
UN Goals
Promote diversity and
prioritise and nurture
the wellbeing and
skills development
of employees and the
communities that they
are part of
Material Issue
Melrose Group Performance Target
Talent and Workforce
• Ensure that all permanent employees receive
regular (annual) formal performance reviews
by 2022 where permitted by local laws and
employee representative bodies
Community
• Invest £10 million over five years through the
Melrose Skills Fund
Diversity and Inclusion
• Achieve by 2021 and maintain a Board and
Health, Safety and Wellbeing
Executive Committee comprising at least 33%
female membership
• Maintain achievement of the Parker Review
recommendations
• Protect our employees from injury and lost time
accidents (“LTAs”) and achieve and maintain an
average LTA frequency rate below 0.1
The Melrose Code of Ethics reinforces our Group sustainability principles
and provides our businesses with clear guidance as to how the Board
expects them to conduct business, and the consequences of non-
compliance. The Melrose Code of Ethics outlines the policies and
procedures in place to drive best practice and to promote diversity and
inclusion at all levels. The code has been approved by the Board and
can be found on our website (https://www.melroseplc.net/media/2804/
code-of-ethics.pdf).
A great place to work
For our businesses to perform well and achieve their potential, it is important
to nurture an engaged, capable and enthusiastic workforce. We want our
people to enjoy the work they do, and to trust that their safety and wellbeing
is our priority. We value and champion diversity in its broadest sense and
drive our businesses to create working environments that encourage and
nurture employees to grow, develop and act with integrity.
Employee engagement
We recognise the importance of engaging
with our employees in a meaningful way to
support their development and for us to deliver
better business performance. We and our
businesses regularly consult with employees
across the Group, and we are highly
responsive in addressing employee concerns.
During the course of the year, all of our
businesses undertook all-employee
engagement surveys. Upon receipt of survey
results, the relevant information is shared
with the businesses’ executive teams, plant
directors, HR teams and other people leaders.
These results are then further analysed
through such mediums as employee focus
groups. Across all our businesses, action
plans are developed to help address areas
for improvement, be that on a global, site or
individual team level. The survey feedback
and resulting measures are then shared with
employees through various other engagement
tools, such as town hall meetings.
In 2019, Melrose established a Group
Workforce Advisory Panel (“WAP”) to enable
key views of the workforce to be heard and
considered by our businesses’ executive
teams where they can have maximum
impact. The WAP reports to the Board
annually to provide visibility and oversight
of key workforce views, which are then
discussed at Board meetings. Such oversight
by the Board also ensures that the WAP and
its underlying engagement processes are
operating effectively for each business.
The WAP is chaired by a member of the
Melrose senior management team and
comprises the Chief Human Resources
Officer (or equivalent) from each business.
Each member of the WAP is responsible
for promoting workforce engagement,
disseminating information and collating the
voice of their workforce. Each member of the
WAP is in turn responsible for demonstrating
(1) Data was collected from 99% (by headcount) of the Group
in 2020 and 2021.
how key workforce views are fed into
executive management decisions, as well
as ensuring that the workforce is aware
of their impact on such executive
management decisions. One of the key
workforce views this year related to
learning and development opportunities.
Please refer to the talent and career
management section on page 70 for
examples of how this has been addressed.
Melrose requires all of its businesses to
safeguard the contractual and statutory
employment rights of their respective
employees. Each business is also
encouraged to maintain constructive
relationships with employee representative
bodies, including unions and works
councils. We respect the rights of workers
across all businesses to participate in
collective bargaining and freedom of
association. Workers, without distinction,
have the right to join or form trade unions
of their own choosing and to bargain
collectively in relation to a host of
employee-related matters. Workers’
representatives are not discriminated
against and have access to carry out their
representative functions in the workplace.
Trade union membership fluctuates
year-on-year depending on the Group
composition. In 2021, 25,550 (64%) of our
employees belonged to a recognised trade
union (2020: 40%)(1).
Melrose and each of its businesses pay all
UK employees at least the real living wage,
save for year-in industry students (of which
there were seven in the Group as at
31 December 2021), who are paid in
accordance with the national minimum
wage rates for their age group. In addition,
Melrose and each of its businesses offer
all employees in the UK the opportunity
to work for at least 15 hours per week.
Reward and recognition
Our businesses have policies in place
on recruitment, talent development and
succession planning, supported by training
programmes and effective management.
Opportunities exist across all businesses for
employees to discuss career development
with their direct managers, and each
business encourages internal applications
for open positions. In 2021, 20% of open
positions were filled by internal candidates
(2020: 25%)(1).
Where permitted by local laws and
employee representative bodies,
performance evaluations are undertaken
across our businesses, with 45% of
employees receiving a performance
appraisal in 2020 (2019: 49%)(2). The
reduction in performance evaluations
compared to 2019 was largely affected by
COVID-19 induced lockdowns, as well as
fewer employees in roles requiring annual
performance evaluations in line with the
guidance of local representative bodies.
In addition to regular communications
with representative bodies, during 2021
a number of event-driven consultation
processes with relevant union
representatives took place following the
difficult decisions to close unviable GKN
Automotive sites in Erdington, UK and
Firenze, Italy. These decisions are never
taken lightly, and we strive to treat
people fairly and with open and clear
communication. The closure of the
Erdington assembly site was announced
in January 2021. Despite significant effort
and investment over the last ten years to
reduce operating costs, the site remained
heavily loss-making. Throughout the
redundancy consultation process, GKN
Automotive worked with employees,
unions and employee representatives
to provide support to those affected. In
November 2021, it was announced that
the 519 employees had accepted a revised
redundancy package, and the plant is due
to close in 2022. For Firenze, a process
which involved local and national
government, we were able to secure a
reindustrialised future for the site with a
new owner.
Group employees as at 31 December 2021
Permanent employees
of which:
Full-time employees
Part-time employees
Temporary employees
Apprentices
Total
38,231
37,336
895
1,056
759
40,046
At the time of writing, performance
evaluations for 2021 were ongoing.
Annual salary reviews are aligned with
performance evaluations to ensure that
employees are paid fairly and correctly for
the position they hold. In compliance with
all applicable local laws relating to the
provision of pensions, 32,936 (82%) of the
Group’s employees (by headcount) benefit
from being a member of a company-based
pension scheme.
(1) Data was collected from 66% (by headcount) in 2020
and 100% (by headcount) in 2021.
(2) Data was collected from 97% (by headcount) of the
Group in 2019 and 2020.
Melrose Industries PLC Annual Report 2021Strategic ReportMelrose Industries PLC Annual Report 2021 68
Sustainability report
Continued
69
Pensions
With every acquisition, Melrose seeks to strengthen
pension scheme arrangements for the benefit of employees
and retirees. We take pride in having substantially improved
all of the UK pension schemes under our ownership, with
many of them becoming fully funded on departure from
the Group. For example, under Melrose ownership, the
McKechnie UK pension scheme was improved from 58%
funded at acquisition to more than fully funded upon leaving
the Group, and the FKI UK pension scheme was improved
from 87% funded at acquisition to fully funded upon its
departure from the Group. Both of those schemes were
sold into Honeywell International Inc., a US-listed group
with the financial covenant strength expected of a market
capitalisation exceeding US$140 billion. For further details,
please refer to page 5.
Our focus on strengthening pension schemes begins
from when we acquire a new business, and the GKN
pension schemes are the latest example of this. The
GKN UK defined benefit pension schemes had been
chronically underfunded, and we were proactive,
transparent and constructive in agreeing commitments
with pension trustees during the acquisition of GKN.
Prior to acquiring GKN, we committed to providing up
to £1 billion of funding contributions, which included
doubling annual contributions to £60 million, and
providing £150 million of upfront contributions. In our short
period of ownership, we have met our commitments and
have significantly strengthened the pension schemes.
For example, so far we have:
• Eliminated the GKN UK defined benefit pension
scheme accounting deficit.
• Applied more secure funding targets of Gilts +25 basis
points (GKN 2016 scheme prior to buyout) and Gilts
+75 basis points (GKN 2012 schemes 1-4) to achieve
more prudent funding targets.
• Rebalanced the GKN schemes across the GKN
businesses to avoid overburdening any one business
and to provide stability and better security for members.
• Having funded the GKN 2016 scheme to 115%, arranged
a buyout with an appropriate insurer that secures the
futures of over 8,000 pensioners’ member benefits.
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.
Securing our employees’ and retirees’ futures through
responsible stewardship of their pensions is of strategic
importance to the Board.
For further information on Melrose’s engagement
with pension scheme trustees and our investment in
transforming the UK defined benefit pension schemes
of our businesses, please refer to page 5.
Diversity
and inclusion
We prioritise creating and maintaining a
diverse, inclusive and safe environment
within our businesses. We recognise
the importance of diversity in building
a high-calibre workforce, and we are
committed to championing diversity
in the broadest sense. We are actively
engaged in finding ways to increase
diversity across the Group, and the
sectors in which our businesses
operate.
Melrose ensures that entry into, and
progression within, the Group is based
on aptitude and the ability to meet set,
fair criteria outlined in job descriptions.
For any employees with a disability,
we take steps to ensure reasonable
adjustments are made where required.
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, society and
economic growth.
The Melrose Code of Ethics highlights
the importance of diversity and
inclusion, and is supported by our
Board of Directors’ Diversity policy and
a Diversity and Inclusion policy for
Melrose more generally, both of which
are reviewed and approved each year
by our Nomination Committee. Copies
of these policies can be found on our
website at https://www.melroseplc.
net/sustainability/data-reports-and-
policies/.
Promoting diversity at all levels
Melrose leads its businesses by example,
starting at Board level. The Board requests
diverse candidates within shortlists, 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.
Further, 100% of Non-executive Director
appointments within the last four years
have been women, including the most
recent two appointments made in 2021,
whilst all departures from the Board have
been men.
As at 31 December 2021, Melrose had
42% female representation on its Board,
exceeding the Hampton-Alexander Review
target of 33% female representation at
Board level. This has increased to 45%
following the retirement of Mr Archie G.
Kane on 31 December 2021.
Melrose also recognises other forms of
diversity, and has achieved the Parker
Review target of having one Director
from an ethnic minority background on
the Board by the end of 2021.
Diversity is valued below Board level.
The Melrose Executive Committee,
having been established in 2020, currently
consists of 36% female representation,
with a total 37% female representation
for the Executive Committee and direct
reports, exceeding the Hampton-
Alexander Review target of 33% female
representation within executive teams
and their direct reports.
Whilst recognising that the Melrose “Buy,
Improve, Sell” strategy means that we inherit
the shape of our workforces, our businesses
are encouraged to promote diversity once
they have entered the Melrose Group.
Examples of current business unit initiatives
include the creation of employee resource
groups, focused diversity and inclusion
programmes, and mandatory unconscious
bias training for leaders.
Gender diversity at Board level
At 31 December 2021
At 31 December 2020
At 31 December 2019
Male
7 (58%)
7 (70%)
7 (70%)
Female
5 (42%)
3 (30%)
3 (30%)
Senior managers
Melrose is required to report on gender
diversity at a senior manager level. 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
that we have inherited and do not remain
in the Group for long. We have 36% female
representation on the Melrose Executive
Committee, which represents a more
accurate reflection of the senior
management team and executive pipeline
at Melrose. However, Melrose has
increased female representation among
its senior managers under section 414C
by 4 percentage points in 2021.
Total Group employee gender diversity at 31 December 2021
Total Group employees
32,204
7,842
40,046
80
20
Male
Female
Total
Male
(%)
Female
(%)
Senior managers diversity at 31 December 2021
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
Female
Total
18
132
150
8
25
33
26
157
183
Male
(%)
Female
(%)
69
84
82
31
16
18
Melrose Industries PLC Annual Report 2021Strategic ReportMelrose Industries PLC Annual Report 2021
70
Sustainability report
Continued
Talent and career
management
Skills development
Melrose champions talent development and
recognises the importance of investing in
human capital. Our businesses are proactive
in anticipating both short and long-term
employment needs and skills requirements
for the long-term success of their businesses.
This is central to Melrose’s strategy to
boost productivity and improve business
performance. Extensive training opportunities
are available and promoted to all workers at
all stages of their careers to ensure that high
skills levels are cultivated and maintained
across the Group.
All employees are encouraged to actively
engage in their career development and
a wide range of learning opportunities
are available throughout their career,
extending beyond functional skills
development to personal development
and leadership opportunities.
Leadership training is an integral part of
ensuring the workforce remains engaged and
innovative, whilst enabling the businesses to
develop a diverse pipeline of successors for
key roles and leadership positions. Annual
talent reviews and regular check-ins between
managers and employees identify individuals
who have the ability and aspiration to grow
into more stretching roles. Leadership training
programmes are in place for high-performing
employees to support their transition from
individual contributor to first leadership
position and beyond. The businesses have
developed their own leadership programmes
that are most relevant to their employees
and organisations with the programmes
becoming increasingly popular and receiving
positive feedback.
In-person training programmes were largely
put on hold in 2020 due to the pandemic,
with training adapted to focus on supporting
the remote workforce, with modules such
as ‘leading remote teams’ and ‘driving
collaboration remotely’ introduced in a
number of businesses. Although the
challenges of the pandemic remained in
2021, our businesses were better enabled to
deliver flexible training programmes through a
combination of online and in-person training,
which is represented in the increased training
time and spend per employee in 2021.
Training and development
Average training time per employee (hours) (2)
Average training spend per employee (£) (3)
Total number of training hours (4)
Apprenticeships and
graduate programmes
Apprenticeship programmes assist with
training a new generation of employees and
help to ensure that knowledge is retained
within the businesses. In 2021, 759
apprenticeships were in place across the
Group’s businesses, providing a mix of
on-the-job and classroom training.
We also place a strong focus on training and
developing graduates, and our businesses
all run a range of graduate development
programmes, ranging from GKN Aerospace’s
Global Graduate Development Programme,
to more localised graduate recruitment and
training, such as GKN Powder Metallurgy’s
graduate programmes in China and India,
hiring local talent and developing them for the
future needs of the business.
Apprenticeship and graduate programmes
across the GKN Aerospace and GKN
Automotive businesses are supported by the
Melrose Skills Fund. The Melrose Skills Fund
was launched in 2019 to provide financing to
develop the capabilities required to build the
UK’s industrial base, with a commitment to
invest £10 million over five years. As well as
supporting apprenticeships and graduate
programmes, the Melrose Skills Fund invests
in STEM programmes, manufacturing hubs,
digital skills and employee development,
helping equip the UK with the future skills it
needs to grow its industrial skillset.
Community
Our businesses promote the social wellbeing
of their employees by encouraging them to
actively contribute to local charitable and
community projects, and lead by example
through the sponsorship of such projects.
The Group made cash donations to
not-for-profit charitable organisations in 2021
of £703,408 (2020: £634,221)(1).
Our businesses continued to support their local
communities through the continued impact of
the pandemic. For example, GKN Aerospace
in India responded to the local impact of the
pandemic by donating dry ration kits to meet the
basic needs of persons with disabilities, as well
as providing nebulisers, hand wash, hand
sanitisers and face masks for quarantine
centres. Further, with hospitals and intensive
care units in Brazil continuing to be under great
stress, GKN Automotive in Brazil donated
ten infusion pumps and a respirator to the
Charqueadas hospital, near to the Porto Alegre
plant. This much needed equipment will be used
to continue to treat patients with COVID-19.
2021
23
209
2020
13
166
2019
15
222
2018
3
128
2017
9
142
929,878
338,406
410,638
39,823
37,951
2016
–
152
–
Total annual spend on workforce training (£) (5)
8,384,837
8,591,293
12,182,473
1,200,461
1,377,247
300,025
(1) Data was collected from 62% (of administration expenses) of the Group in 2020 and 100% in 2021.
(2) Data was collected from 38% (by headcount) of the Group in 2017, 21% (by headcount) in 2018, 25% (by headcount) in 2019, 39% (by headcount) in 2020 and 100% (by headcount) in 2021. Data was
not available in 2016.
(3) Data was collected from 99% (by headcount) of the Group.
(4) Data was collected from 38% (by headcount) of the Group in 2017, 21% (by headcount) in 2018, 25% (by headcount) in 2019, 39% (by headcount) in 2020 and 100% (by headcount) in 2021. Data
was not available in 2016.
(5) Data was collected from 99% (by headcount) of the Group.
71
Safety first
We drive our businesses to prioritise the
health, safety and wellbeing of employees
and contractors. We are committed to setting
high standards and have effective policies,
procedures and training in place to support the
health, safety and wellbeing of all employees
and contractors across the Group. We
recognise the increasing importance of taking
a holistic approach to employee wellness, to
protect their physical and mental health and
social wellbeing, and to foster a positive
workplace culture that attracts and retains a
highly skilled workforce. We are committed to
ensuring that our employees are safe, and we
require our businesses to protect and safeguard
employee health and wellbeing across the
Group. To this end, in 2021 we implemented
a Group-level target, which all our businesses
have implemented and aligned with their
respective sustainability strategies, to achieve
an annual LTA frequency rate of below 0.1. This
underpins our overarching commitment to stop
all preventable accidents for employees and
contractors, through the promotion of safe
behaviours and an enhanced focus on
hazard identification and awareness.
The Group operates a decentralised model,
and in addition to the Group-level expectations
for health and safety standards, each business
is ultimately responsible for creating and
maintaining their own safe and healthy
workplaces, implementing operational best
practices, and maintaining a robust culture
of health and safety awareness, training and
performance. This is delivered through the Group
health and safety management framework.
Health and safety management systems are
implemented across all our businesses to
ensure that robust policies and procedures are
in place to reduce risk and instil an enhanced
focus on continuous improvement. Health and
safety management systems are supported by
internal health and safety effectiveness audits,
external assurance reviews conducted by
the Group’s insurance brokers, with regular
oversight and challenge by the Melrose senior
management team, quarterly reporting to the
Board, and further regular Board and Melrose
senior management team oversight over any
material incidents or issues that arise.
As at 31 December 2021, 74%(1) of sites
(inclusive of office, production and testing sites)
within the Group were certified to the ISO 45001
international standard, with additional relevant sites
progressing towards ISO accreditation. 100% of
GKN Automotive production sites and test centres
are ISO 45001 certified, with successful transition
from OHSAS 18001 completed in 2021. GKN
Aerospace released a Leader’s HSE handbook in
2021 which details the requirements for effective
management that all sites must comply with. To
maintain ISO accreditation, all businesses must
undertake third party auditing on a three-year
certification cycle, with annual surveillance audits
taking place in between to ensure standards are
being maintained.
(1) Data was collected from 98% (by sites) of the Group.
Safety performance
We are focused on cultivating a strong safety culture within our
businesses through emphasising the importance of preventing
avoidable incidents and implementing near miss reporting, which
encourages an enhanced focus on hazard identification and
awareness. Behaviour-based programmes and continuous training
and awareness campaigns remain central to the approach of all
divisions in improving their safety performance.
As per the non-financial KPIs on page 31, the Group has achieved an
average LTA frequency rate of less than 0.1 in 2021, hence achieving
the target for the year.
Melrose Industries PLC Annual Report 2021Strategic ReportMelrose Industries PLC Annual Report 2021
72
Sustainability report
Continued
Ethics and
compliance
Our Sustainability Objective
UN Goals
Exercise robust
governance, risk
management
and compliance
Material Issue
Melrose Group commitment
Ethical Conduct
and Compliance
Business Model
Resilience
• All employees, suppliers and contractors must comply with our
Code of Ethics, conducting business with integrity and in a
responsible, ethical and sustainable manner
Exercise robust governance,
risk management, and compliance
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, public accountability and
conformance with leading benchmarks set
by the UK Corporate Governance Code. It
is also supported by investor requests and
direct engagement with them and corporate
governance and proxy advisors, and extensive
engagement with the Group’s wider
stakeholder base to ensure that best market
practice is being implemented.
The high standards of financial and non-financial
controls, and strong governance backed by
internal and, where required, external review
of financial and non-financial compliance, are
enforced throughout the Group. Directors,
officers, employees, and contractors throughout
the Group, whether permanent or temporary,
and in respect of any entities over which
Melrose has effective control, must comply
with Melrose’s Code of Ethics and Group
compliance policies, which reflects current
best practice and strong corporate citizenship.
Each business is required to communicate
and embed the Code of Ethics and Group
compliance policies within their operations and
activities to ensure that they conduct business
with integrity and in a responsible, ethical and
sustainable manner.
The Code of Ethics and Group compliance
policies, which can be found on our website
(https://www.melroseplc.net/
sustainability/data-reports-and-policies/),
have been approved by the Board and
include policies covering best practice
with respect to anti-bribery and corruption,
anti-money laundering, anti-facilitation of tax
evasion, competition, conflict minerals, trade
compliance, data privacy, whistleblowing,
treasury and financial controls, anti-slavery
and human trafficking, document retention,
joint ventures, diversity and inclusion,
environmental, and human rights.
Implementation is supported by risk
assessments, audits and reviews and annual
compliance certifications. 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 Audit Committee reports directly to the
Board. It oversees the Group’s internal control
processes and, together with the Board
and with the support of the Melrose senior
management team, monitors breaches of
the Melrose Code of Ethics. Please refer to
pages 40 to 41 for full details on the Group’s
approach to risk management.
Anti-bribery and corruption
We take a zero-tolerance approach to
bribery, corruption and other unethical
or illegal practices, and are committed to
acting professionally, fairly and with integrity
in all business dealings and relationships,
within all jurisdictions in which we and our
businesses operate. Melrose 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
the collective benefit of stakeholders. This is
outlined in our Anti-Bribery and Corruption
policy, which is implemented and
administered throughout the Group, and
available on our website (https://www.
melroseplc.net/media/2803/abc-policy.
pdf). During 2021, no employees were
disciplined or dismissed due to non-
compliance with the Anti-Bribery and
Corruption policy.
In line with our Anti-Bribery and Corruption
policy noted above, Melrose prohibits party
political donations, and recognises that
from time to time our Group may comprise
businesses that engage in policy debate
and advocacy activities on subjects of
legitimate concern to their respective
industries and key stakeholders, including
their staff and the communities in which
they operate.
73
Whistleblowing
Melrose runs a Group-wide whistleblowing
platform, which is overseen by the Audit
Committee and supported by the Melrose
senior management team, and ultimately
reported to the Board. The platform is
monitored by the businesses’ legal,
compliance and HR functions, with support
from the Melrose senior management team.
All employees have access to a multi-lingual
online portal, together with local hotline
numbers that are available 24/7, in order
to raise concerns, confidentially and
anonymously, about possible wrong-doing
in any aspect of their business, including
financial and non-financial matters. The
businesses take a number of actions to raise
employees’ awareness of the whistleblowing
platform, using online and offline media as
appropriate. Employees who come forward
with a genuine concern are treated with
respect and dignity and do not face retaliation.
During 2021, 103 whistleblowing cases were
recorded through the platform (2020: 120)(1).
This highlights the effectiveness of awareness
campaigns together with the trust placed by
employees in the whistleblowing programme.
Each case is investigated confidentially by the
business with appropriate response measures
taken. Whistleblowing cases are regularly
reported to the Audit Committee and
ultimately to the Board.
(1) These figures exclude any whistleblowing cases received
by businesses that were no longer part of the Group as at
31 December 2021.
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 (https://www.
melroseplc.net/media/2759/modern-
slavery-statement-fy2020.pdf). Under
Melrose’s decentralised Group structure,
each business is responsible (where
applicable) for publishing their own Modern
Slavery Statement 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 ensure slavery is not present
within their supply chains.
Melrose drives its businesses to implement
employee training with respect to anti-slavery
and human trafficking, to ensure that
employees understand the risks and are
prepared to take the required action if they
suspect that modern slavery is happening
internally or within the supply chain.
Human rights
We are committed to acting in an
ethical manner with integrity and
transparency in all business dealings,
and to create effective systems and
controls across the Group to safeguard
against adverse human rights impacts.
The Group has a strong culture of
ethics, which encompasses key human
rights considerations and is set out in
our Human Rights policy. The Group
supports the principles set out in the
UN Declaration of Human Rights.
Our businesses also implement
effective and proportionate measures
to identify, assess and mitigate
potential labour and human rights
abuses across their operations and
supply chains. These include training,
anti-slavery and human trafficking
policies, employee handbooks and
business-specific policies. All business-
specific policies are reviewed locally
within each business in order to ensure
compliance with local laws and
standards as a minimum.
There have been no violations reported
on human rights by our businesses in
2021 or in the previous two years.
Melrose Industries PLC Annual Report 2021Strategic ReportMelrose Industries PLC Annual Report 2021 74
Sustainability report
Continued
75
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
defence contracts.
The Melrose senior management team
continues to work with the businesses’
executive teams and external cyber
security risk consultants to track the
Group’s exposure to cyber security risk
and, to ensure appropriate compliance
with the GDPR, mitigation measures are
in place for the Group.
Melrose has deployed 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
cyber security 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.
The Board, supported by the Melrose senior
management team, oversees the Group’s
cyber security risk profile and, in line with
our decentralised model, each business
is required to protect their business and
personal information, ensuring safe and
appropriate usage of their IT systems and
processes by their employees.
To mitigate the impact of external cyber-
attacks, the Melrose senior management
team works with the executive teams of each
business and external cyber security risk
consultants to review each business’s cyber
risk profile to monitor and drive continuous
improvement actions. The results of this
ongoing review programme are reported
to the Board on a quarterly basis.
Through a hosted, externally auditable
self-assessment process, each business is
reviewed and reports on their compliance
in key areas of cyber management
incorporating disaster recovery processes
and business continuity plans, cyber incident
response plans, applications and database
management including access controls
testing, appropriate security products,
policies and procedures, confirmation of
appropriate change management processes
for all business-critical systems, IT inventory
listings including all classified data to meet
compliance with legal and regulatory
requirements, monitoring and logging
of all cyber incidents, physical environment
access controls and network security, regular
security training, and management of third
party access control.
The businesses regularly perform internal and
external testing of their perimeter defences
through penetration testing, ensuring
appropriate threat monitoring systems are in
place. All of our businesses follow and work
towards national and international business
accreditations in varying aspects of cyber
management where applicable and relevant
to their business activities, including the UK’s
National Cyber Security Strategy (“NCSS”),
ISO 27001, and industry-specific NIST in
the defence sector and TISAX in the
automotive sector.
As part of Melrose’s overall information security
strategy, IT security awareness training was
provided by all businesses in 2021.
Outlook for 2022
With our key sustainability targets now firmly established and
implemented, during 2022 we will continue to oversee and invest
in our businesses to accelerate their sustainability performance. As
global sustainability reporting standards seek to harmonise, we will
continue to bolster our internal reporting standards and controls to
align with new and emerging market standards, including external
data reviews in preparation for eventual third party assurance in
future years, and continued engagement with external reporting
platforms, such as CDP. Responsible Sourcing and Water have
been re-prioritised as material sustainability topics for the Group,
and progress in these two areas will be a focus during 2022.
Having made huge strides in 2021 towards building a more
sustainable future, we recognise that our journey towards
decarbonising our businesses’ industries has much further to go.
In 2022, we will continue to drive our businesses to protect the
workforce to uphold strong ethical and governance principles
and practices, to work more closely with their customers to develop
innovative low carbon products, and to make meaningful changes
within their day-to-day operations, towards helping the planet
transition to a net zero economy. Our plans for 2022 include:
• continuing to develop our multi-year sustainability action plan,
including a formalised transition plan towards a net zero
economy before 2050;
• continuing to expand data collection and measurement,
verified by external reviews in preparation for eventual
third-party assurance in future years, to enable us to better
track progress against targets;
• engaging with our supply chain through the collection and
reporting of Scope 3 emissions and continuing to promote
the strongest responsible, ethical and sustainable business
practices through our businesses’ stringent supplier
qualification processes;
• making our inaugural CDP Water Security submission
and developing a Group-level water reduction target; and
• providing ongoing support to our businesses as they develop
their standalone sustainability strategies in preparation for their
life beyond the Melrose Group.
Much of this work is already underway and we look forward
to accelerating our progress during 2022.
Melrose Industries PLC Annual Report 2021Strategic ReportMelrose Industries PLC Annual Report 2021
76
Sustainability report
Continued
Emissions and other environmental disclosures
Table 1 shows the GHG emissions for the Group, broken down by Scope 1, Scope 2 and some Scope 3 emissions.
Table 1: Total Melrose Group GHG emissions for the period 1 January 2021 – 31 December 2021 (tonnes CO2e(1) unless stated)
Scope 1: Direct GHG emissions
Combustion of fuel and operation of facilities(6)
Scope 2: Indirect GHG emissions
UK electricity
Overseas electricity
Total purchased electricity
Other purchased energy
Total Scope 2 (7)
Total Scope 1 and Scope 2 emissions
2021(2)
2020(3)(4)
2019(5)
Change
(2021/2020)
168,315
185,210
223,847
-9%
15,313
17,614
539,513
631,471
554,825
649,085
220
2,045
26,909
774,569
801,478
3,165
555,045
651,130
804,643
723,360
836,340
1,028,490
-13%
-15%
-15%
-89%
-15%
-14%
Company’s chosen intensity measurement:
Emissions reported above normalised tonnes per £1,000 turnover (8)
0.105
0.096
0.092
9%
Scope 3: Indirect GHG emissions in the value chain
Business travel(9)
Other(10)
Total Scope 3 emissions
6,873
71,961
78,835
–
–
–
–
–
–
–
–
–
(1) CO2e – carbon dioxide equivalent, this figure includes GHGs in addition to carbon dioxide, as set out in Table 2 below.
(2) The 2021 emissions data does not include Nortek Air Management, Brush or Nortek Control, as they were sold part way through the year. The emissions from these businesses fall below our
materiality threshold.
(3) Our 2020 Scope 2 emissions data has been restated.
(4) The 2020 emissions data does not include GKN Wheels & Structures as it was sold part way through that year. The emissions from this business fell below our materiality threshold.
(5) The 2019 emissions data does not include the Walterscheid Powertrain Group as it was sold part way through that year. 2019 was chosen as the base year for the purposes of reporting Group
emissions data in this report as it was the first full reporting year that GKN Aerospace, GKN Automotive and GKN Powder Metallurgy were reported as part of the Group.
(6) Our Scope 1 figures include emissions from fuel used on premises, transport emissions from owned or controlled vehicles, losses of refrigerant, and process and fugitive emission.
(7) Our Scope 2 figures 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.
(8) 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. For 2021, the turnover figure
includes continuing businesses only.
(9) Inclusive of business travel and business travel well-to-tank. Rail and vehicle travel was collected from 17% (by revenue) of the Group and air travel was collected from 54% (by revenue) of the Group.
(10) Includes emissions from fuel-related well-to-tank, electricity transmission and distribution losses, and water supply.
Table 2 shows a breakdown of the Group’s GHG emissions by type and by where those emissions were incurred. Our Scope 1 and Scope 2
emissions for 2021 encompass methane (CH4) and nitrous oxide (N2O). The vast majority of our emissions are from carbon dioxide (CO2), which
is common among most industrial businesses. There have been reductions in all GHG emission types between 2020 and 2021 across the
Group. The reductions in SF6 are attributable to the sale of Brush and the reductions in R134a are attributable to the sale of Nortek Air
Management, which were historically responsible for these emissions. Scope 2 N2O and CH4 emissions have decreased in line with the general
reduction in year-on-year energy usage and a decrease in the emission factors for many countries.
Table 2: Melrose Group GHG emissions by type (CO2e) for the period 1 January 2021 – 31 December 2021
(tonnes CO2e(1) unless stated)
Scope 1(3)
CO2
CH4
N2O
SF6
R134a
Total Scope 1 CO2e
Scope 2(4)
CO2
CH4
N2O
Total Scope 2 CO2e
2021
Global
(excl UK)
UK
Total
UK
Global
(excl UK)
2020(2)
Total
Change in
Total
(2021/2020)
9,375
158,051
167,427
9,700
172,178
181,878
13
6
0
0
210
135
0
0
222
141
0
0
13
6
2,075
0
227
137
741
59
240
143
2,816
59
9,394
158,921
168,315
11,794
173,677
185,471
15,156
537,980
553,136
17,455
630,886
648,341
58
99
281
1,471
339
1,570
54
104
451
2,180
505
2,284
15,313
539,732
555,045
17,614
633,516
651,130
-8%
-7%
-2%
-100%
-100%
-9%
-15%
-33%
-31%
-15%
(1) CO2e – carbon dioxide equivalent, this figure includes GHGs in addition to carbon dioxide.
(2) Our 2020 Scope 2 emissions data has been restated.
(3) Our Scope 1 figures include emissions from fuel used on premises, transport emissions from owned or controlled vehicles, losses of refrigerant, and process and fugitive emission.
(4) Our Scope 2 figures 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.
77
Table 3 shows the energy consumption by type for the Group, broken down by UK and overseas consumption, in accordance with the
requirements of the SECR regulations. The Company’s chosen intensity ratio in this regard is megawatts usage (“MWh”) per £1,000 of turnover.
Table 3: Melrose Group energy consumption by type for the period 1 January 2021 – 31 December 2021 (MWh unless stated)
Natural gas
LPG
Gas oil
Fuel oil
Diesel
Petrol (gasoline)
Steam
Wood pellets
Total non-renewable fuels consumption
Total renewable electricity consumption
Total non-renewable electricity consumption
Total electricity consumption
2021
2020
Global
Global
UK
(excl UK)
Total
UK
(excl UK)
Total
50,903
787,088
837,991
52,132
809,336
861,468
76
0
0
202
28
0
0
37,748
37,824
317
37,716
38,033
4,894
8,998
8,467
1,594
15,150
34,719
4,894
8,998
8,669
1,622
15,150
34,719
0
0
261
13
0
0
5,669
9,189
6,809
667
18,819
21,713
5,669
9,189
7,070
680
18,819
21,713
51,209
898,658
949,867
52,723
909,918
962,641
327
25,743
26,070
0
8,052
8,052
72,118
1,684,384
1,756,502
75,549
1,864,732
1,940,281
72,445
1,710,127
1,782,572
75,549
1,872,784
1,948,333
Total operational energy consumption
123,654
2,608,785
2,732,439
128,272
2,782,702
2,910,974
Change in
Total
(2021/2020)
-3%
-1%
-14%
-2%
23%
139%
-19%
60%
-1%
224%
-9%
-9%
-6%
Company’s chosen intensity measurement:
MWh per £1,000 turnover(1)
0.018
0.379
0.397
0.015
0.318
0.332
19%
(1) 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. For 2021, the turnover figure includes
continuing businesses only.
Water withdrawal data is presented in Table 4, showing a decrease in 2021 compared to 2020.
Table 4: Melrose Group water withdrawal(1) data for the period 1 January 2021 – 31 December 2021
Water withdrawal (m3) in operation
Company’s chosen intensity measurement:
m3 per £1,000 turnover (4)
2021(2)
2020(3)
3,569,002 3,880,393
0.519
0.443
Change
(2021/2020)
-8%
17%
(1) For these purposes, water withdrawal is defined as the sum of all water drawn into the boundaries of the organisation (or facility) from all sources for any use over the course of the reporting period.
(2) Water withdrawal data was collected from 100% of sites across the Group in 2021.
(3) Water withdrawal data was collected from 147 sites (93%) across the Group’s businesses in 2020. Although a small number of sites did not record their water withdrawal, to give an indication as to
size, these sites accounted for less than 3% of the Group’s total GHG emissions in 2020, and so these omissions are not material.
(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. For 2021, the turnover figure includes
continuing businesses only.
Table 5 shows the waste generation data for the Group in 2021, showing an overall increase in the total waste generated compared to 2020.
This was partially driven by the reopening of sites following shutdowns caused by the pandemic. Despite the increase in absolute waste weight,
there have been significant reductions in the proportion of non-hazardous waste that is incinerated and sent to landfill. Additionally, a larger
proportion of waste is being sent to higher waste hierarchy options of recycling and hazardous waste treatment in 2021 compared to 2020.
Table 5: Melrose Group waste generation data for the period 1 January 2021 – 31 December 2021
Weight of total non-hazardous waste (tonnes)
Weight of total hazardous waste (tonnes)
Total waste generated (tonnes)
Breakdown:
– Total recycled (tonnes)
– Total incineration (tonnes)
– Total landfill (tonnes)
– Hazardous waste disposed through legally approved treatment routes (tonnes)(3)
2021(1)
2020(2)
151,900 139,388
10,436
11,087
162,336 150,475
141,947
121,912
5,850
9,103
9,175
15,601
5,394
3,859
Change
(2021/2020)
9%
-6%
8%
16%
-36%
-41%
40%
(1) Waste generation data was collected from 100% of sites across the Group in 2021.
(2) Waste generation data was collected from 136 sites (86%) across the Group in 2020. Although a small number of sites did not record their waste generation, to give an indication as to size, these
sites accounted for less than 3% of the Group’s total GHG emissions in 2020, and so these omissions are not material.
(3) 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.
The Strategic Report, as set out
on pages 1 to 77, has been
approved by the Board.
On behalf of the Board:
Simon Peckham
Chief Executive
3 March 2022
Melrose Industries PLC Annual Report 2021Strategic ReportMelrose Industries PLC Annual Report 2021
78
Governance overview
79
The Board is 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 stakeholders.
Further details on their appointments are
outlined in the Nomination Committee report
on pages 99 to 101.
Recognising that Ms Liz Hewitt has served on
the Board for almost nine years, she will retire
as a Non-executive Director at the conclusion
of the 2022 Annual General Meeting. The
position of Senior Independent Director will
be assumed by Mr David Lis, Chairman of
the Remuneration Committee, and Heather
Lawrence will become Chairman of the
Audit Committee.
Succession planning arrangements by the
Board as a whole were reviewed in 2021.
This included reviewing the skills set, tenure,
diversity and independence of those already
on the Board in order to ensure that the right
balance of skills, experience and diversity
were reflected and being developed.
Diversity and inclusion continues to be a
very important part of succession planning,
and is a key consideration of the Nomination
Committee in its discussions. The Nomination
Committee report on pages 99 to 101
contains further details on how succession
planning arrangements for the Board and
the Melrose senior management team were
reviewed and considered during 2021.
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 full knowledge of, and
coordination between, the Melrose 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.
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.
• Oversee the effective operations of the
Workforce Advisory Panel in ensuring
the views of the Group’s business unit
workforces are considered 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.
• Oversee and retain ultimate responsibility
for Melrose’s enhanced sustainability
and climate-related initiatives, disclosure
and reporting in respect of improving the
sustainability performance of its
businesses.
Remuneration
The Directors’ Remuneration report,
comprising the annual statement from the
Chairman of the Remuneration Committee
and the Annual Report on Remuneration,
is available on pages 102 to 116.
Following a successful consultation with
shareholders during 2020 and 2021, the
Company’s long-term incentive plan
arrangements were successfully renewed
with strong shareholder support in January
2021. The performance period of the 2020
Employee Share Plan will continue to run
until May 2023.
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.
Sustainability
The Board is mindful of its responsibilities
regarding climate change and sustainability
more broadly, which are central to the
Company’s purpose and strategy (for further
details on this, see pages 2 and 3, and pages
54 to 77). It has carefully considered how it can
deal with matters relating to sustainability in the
most efficient and appropriate way, in light of
Melrose’s decentralised model and the
industries in which its businesses operate.
The Board oversees and retains ultimate
responsibility for Melrose’s initiatives,
disclosure and reporting in respect of
improving the sustainability performance of
its businesses. The Board receives regular
training at least annually, and quarterly updates
are provided for the Board, on sustainability
and climate issues that impact the Group’s
businesses. The Board also receives quarterly
updates on key sustainability and climate-
related issues that impact the sectors in which
the Group’s businesses operate, and on the
specific measures that are required to be
implemented to drive improved sustainability
performance over the longer term, for the
benefit of all stakeholders.
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 (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 2021
designed to ensure that Melrose
remains compliant with the provisions
of the Code and to enable continuous
improvement in line with best practice
corporate governance guidelines.
Succession planning
Succession planning continued to be an area
of focus for Melrose in 2021. 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.
During the year, Executive Vice-Chairman
Mr David Roper and Non-executive Director
Mr Archie G. Kane both retired from the
Board, and Mr Peter Dilnot, Chief Operating
Officer, joined the Board as an executive
Director on 1 January 2021. Following a
review by the Nomination Committee of the
composition of the Board and subsequent
recommendation by the Nomination
Committee in 2020 that a new female
Non-executive Director should be appointed,
the Board welcomed two new Non-executive
Directors in 2021, Mrs Heather Lawrence
and Ms Victoria Jarman, who each bring
significant experience to the Board.
Melrose Industries PLC Annual Report 2021GovernanceMelrose Industries PLC Annual Report 2021
80
Governance overview
Continued
81
Risk management and internal
control
Melrose has implemented a uniform
Enterprise Risk Management programme
across all of its business units. These
processes and procedures are now fully
embedded in all Group businesses. During
2021, the Audit Committee continued to keep
under review the Company’s internal financial
controls systems that identify, assess,
manage and monitor financial risks and
other internal control and risk management
systems, and the effectiveness of the Group’s
risk management system, through regular
updates from management. This included a
review of the key findings presented by the
external and internal auditors having agreed
the scope, mandate and review schedule
in advance.
During the year, Melrose senior management,
with support from Ernst & Young, continued
to enhance the online interactive dashboard
that had been developed to consolidate the
businesses’ risk reporting to the Company.
Since the rollout of the dashboard, the
Group’s risk management processes,
together with reporting and data collection
from the businesses, have continued to be
enhanced. 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.
This helped to guide the Audit Committee
on relevant updates to the Group risks
(including the identification of new and
emerging Group risks), as reported in the
Risks and uncertainties section on pages 42
to 49, and set out a consolidated risk profile
report for each business within the Group.
Full details on the Group’s approach to risk
management can be found in the Risk
management section on pages 40 and 41,
and in the Audit Committee report on
pages 94 to 98.
Ethics and compliance
Our Code of Ethics (which can be found at
https://www.melroseplc.net/about-us/
governance/code-of-ethics/) reinforces
our values and provides guidance for all
employees, contractors and business
associates so that they are fully aware of
what is expected of them, their responsibilities
and the consequences of non-compliance.
All business units are required to ensure that
the Code of Ethics is communicated and
embedded into their business operations.
Each business unit is also required to ensure
there is a mechanism in place for anyone to
whom the Code of Ethics applies to seek
guidance on interpreting its principles, where
required. This is supported by a compliance
framework comprising policies covering best
practice with respect to anti-bribery and
corruption, anti-money laundering, anti-
facilitation of tax evasion, competition, conflict
minerals, trade compliance, data privacy,
whistleblowing, treasury and financial controls,
anti-slavery and human trafficking, document
retention, joint ventures, diversity and
inclusion, environmental, and human rights.
The implementation of the Melrose Code
of Ethics and Group compliance policies
are supported by risk assessments, training
and ongoing monitoring to ensure their
effectiveness for the Group. The Group also
introduced its first Environmental policy and
Human Rights policy, and further details
about these policies can be found on
pages 72 to 75 of this Annual Report. Taken
together, these initiatives have enhanced our
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 40 to 49 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. We are committed to acting
professionally, fairly and with integrity in all
business dealings and relationships, within
all jurisdictions in which we operate. 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 Sustainability report
on pages 54 to 77. Supporting our updated
compliance policies are a comprehensive
online training platform, an industry-leading
whistleblowing reporting facility and a
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
In 2021, the Company continued to run
engagement initiatives with key shareholders
and governance bodies on key topics
including diversity, sustainability and
remuneration. Members of the Board also
made themselves available to discuss issues
with key investors and other stakeholders on
an ad-hoc basis upon request. In particular,
there were a number of event-driven
consultations with the Group’s workforce
during the year, which resulted in positive and
agreed outcomes.
Melrose also continued with a variety of
workforce engagement initiatives, most
notably through its Workforce Advisory
Panel (“WAP”), which met twice in 2021.
The purpose of the WAP is to promote
effective engagement with, and encourage
participation from, the Group’s workforce.
Given the Group’s decentralised nature and
Melrose’s strategic business model, which
means that all businesses are eventually
sold, the WAP comprises the Chief Human
Resources Officer (or equivalent) from
each business unit and a Melrose Group
representative. The Board remains of the view
that this structure is the most appropriate and
effective method of ensuring that workforce
voices are heard.
It is our intention to continue with our
programme of stakeholder engagement in
2022. Full details of how the Board engages
with all of its stakeholders and considers
them in its decision-making is set out in our
Section 172 statement on pages 50 to 53.
Justin Dowley
Non-executive Chairman
3 March 2022
Governance structure
Non-executive Chairman
– Justin Dowley
Executive Directors
– Simon Peckham
– Christopher Miller
– Geoffrey Martin
– Peter Dilnot
Non-executive Directors
– Liz Hewitt
– David Lis
– Charlotte Twyning
– Funmi Adegoke
– Heather Lawrence
– Victoria Jarman
Audit Committee
See page 94
Nomination Committee
See page 99
Remuneration Committee
See page 102
Diversity and skills overview(1)
Board gender diversity
Board ethnic diversity
Male
Female
Board skills
58%
42%
Non BAME(2)
BAME(2)
92%
8%
Melrose Executive Committee
Industrial
Accounting and Finance
Legal
Investment
Corporate Governance
7
6
3
8
9
Melrose Central employees (excl. Board)
Male
Female
64%
36%
Male
Female
58%
42%
(1) Diversity data as at 31 December 2021. Archie G. Kane has since retired from the Board.
(2) Black, Asian and Minority Ethnic.
Melrose Industries PLC Annual Report 2021GovernanceMelrose Industries PLC Annual Report 2021 82
Board of Directors
83
Christopher Miller
Executive Vice-Chairman
Year appointed
Co-founder of Melrose, appointed as Executive
Vice-Chairman on 1 January 2019, having previously
served as Executive Chairman from May 2003.
Skills and experience
Christopher’s long-standing involvement in
manufacturing industries and private investment
brings a wealth of experience to the Board. A
chartered accountant, Christopher qualified with
Coopers & Lybrand, following which he was an
Associate Director of Hanson PLC. In September
1988, Christopher joined the board of Wassall PLC
as its Chief Executive.
Simon Peckham
Chief Executive
Year appointed
Co-founder of Melrose, 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.
Board meetings attended(1)
Business reviews attended
4
3
Not applicable
Not applicable
Board meetings attended(1)
Business reviews attended
4
3
Independent
Tenure(2)
Other significant appointments
• Trustee of the Prostate Cancer Research Centre
Independent
Tenure(2)
Not applicable
Not applicable
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 the 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 sectors. A chartered accountant, Justin
qualified with Price Waterhouse and was latterly Vice
Chairman of EMEA Investment Banking, a division
of Nomura International PLC. He was also a founder
partner of Tricorn Partners, Head of Investment
Banking at Merrill Lynch Europe and a director of
Morgan Grenfell.
Board meetings attended(1)
Business reviews attended
4
3
Other significant appointments
• Senior Independent Director of Scottish Mortgage
Investment Trust PLC
• Director of a number of private companies
• Steward of the Jockey Club
• Deputy Chairman of The Panel on Takeovers and Mergers
Committee membership
• Nomination • Remuneration
Independent
Tenure(2)
Yes
10 years
David Lis
Independent Non-executive Director
Year appointed
Appointed as a Non-executive Director on 12 May
2016 and Chairman of the Remuneration Committee
on 1 January 2019. David will become the Senior
Independent Director following Liz Hewitt’s retirement
at the conclusion of the 2022 Annual General Meeting
on 5 May 2022.
Skills and experience
David has held several senior roles in investment
and fund management, as well as other board
appointments. He 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.
Charlotte Twyning
Independent Non-executive Director
Year appointed
Appointed as a Non-executive Director on
1 October 2018 and Chairman of the Nomination
Committee on 1 January 2022.
Skills and experience
Charlotte brings a diverse range of experience and
commercial acumen to the Board. After a successful
legal career specialising in competition and M&A law
in the City, she held various senior positions in the
telecommunications and transport sectors, most
recently in aviation. She has proven leadership skills
in large, complex organisations and has consistently
succeeded in driving performance and building the
foundations for growth.
Funmi Adegoke
Independent Non-executive Director
Year appointed
Appointed as a Non-executive Director on
1 October 2019.
Skills and experience
Funmi has extensive experience as a global legal
and compliance leader, and has also held senior
commercial and project management roles. Having
worked in a number of multi-nationals, and across
sectors including aerospace, manufacturing, energy
and technology, Funmi brings diverse industrial
knowledge and significant commercial expertise to the
Board. Funmi is a qualified barrister, and is currently
Group General Counsel at the FTSE 100 company
Halma PLC.
Board meetings attended(1)
Business reviews attended
4
3
Board meetings attended(1)
Business reviews attended
Committee membership
• Audit • Nomination (Chairman) • Remuneration
Committee membership
• Nomination
• Audit
4
3
Yes
2 years
Board meetings attended(1)
Business reviews attended
Independent
Tenure(2)
4
3
Yes
3 years
Independent
Tenure(2)
Other significant appointments
• Non-executive Director of Hostmore PLC and
Dowgate Capital Limited
Committee membership
• Audit • Nomination • Remuneration (Chairman)
Independent
Tenure(2)
Yes
5 years
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.
Board meetings attended(1)
Business reviews attended
Independent
Tenure(2)
4
3
Not applicable
Not applicable
Peter Dilnot
Chief Operating Officer
Year appointed
Appointed as an executive Director on 1 January
2021, having served as Chief Operating Officer since
April 2019.
Skills and experience
Peter has considerable public company and industrial
business experience having been the Chief Executive
Officer of international recycling company Renewi
PLC (formerly Shanks Group PLC) and having been
a senior executive at Danaher Corporation. Peter also
spent seven years at the Boston Consulting Group,
working primarily with industrial businesses. Peter has
an engineering and aviation background, and was a
helicopter pilot in the British Armed Forces. He also
holds a degree in Mechanical Engineering.
Board meetings attended(1)
Business reviews attended
4
3
Other significant appointments
• Senior Independent Director of Rotork PLC
Independent
Tenure(2)
Not applicable
Not applicable
Liz Hewitt
Senior Independent Director
Year appointed
Appointed as the Senior Independent Director
on 1 January 2019, having previously served as a
Non-executive Director from 8 October 2013, and
appointed as Chairman of the Audit Committee on
11 May 2017. Liz will retire as the Senior Independent
Director and as a Non-executive Director at the
conclusion of the 2022 Annual General Meeting
on 5 May 2022, having served as a Non-executive
Director of the Company for almost nine years.
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 National Grid PLC,
Silverwood Property Ltd, St George’s Fields Ltd
and St George’s Fields (No2) Ltd
Committee membership
• Audit (Chairman) • Nomination
Independent
Tenure(2)
Yes
8 years
Heather Lawrence
Independent Non-executive Director
Year appointed
Appointed as a Non-executive Director on 1 June
2021. Heather will become the Chairman of the Audit
Committee following Liz Hewitt’s retirement at the
conclusion of the 2022 Annual General Meeting on
5 May 2022.
Skills and experience
Heather originally qualified as a chartered accountant
and subsequently spent well over a decade working in
senior roles within corporate finance and investment
banking, where she honed her experience across
industrials and transportation businesses. Heather
has significant non-executive directorship experience,
most recently as non-executive director and audit
committee chair of FlyBe Group plc. She is currently
a senior advisor to a large Swiss-based family office.
Victoria Jarman
Independent Non-executive Director
Year appointed
Appointed as a Non-executive Director on 1 June 2021.
Skills and experience
Victoria has a degree in Mechanical Engineering and
is a qualified chartered accountant. She spent over
a decade working for Lazard in its corporate finance
team where she held various senior roles including as
Chief Operating Officer for its London and Middle East
operations. Victoria has significant and extensive non-
executive directorship experience, including as audit
committee chair and senior independent director.
Board meetings attended(1)
Business reviews attended
3(3)
1(3)
Other significant appointments
• Non-executive Director of Signature Aviation Plc,
Great Portland Estates Plc and Entain Plc
Committee membership
• Remuneration
3(3)
1(3)
Board meetings attended(1)
Business reviews attended
Committee membership
• Audit
Independent
Tenure(2)
Independent
Yes
Tenure(2)
0 years
Yes
0 years
(1) Meetings attended refers to scheduled meetings.
(2) Tenure runs from the date of appointment until
31 December 2021 and is based on full years only.
(3) Appointed to the Board with effect from 1 June 2021 and
attended all Board meetings and business reviews held
during the period 1 June 2021 to 31 December 2021.
Melrose Industries PLC Annual Report 2021GovernanceMelrose Industries PLC Annual Report 2021 84
Directors’ report
85
Directors’ report
The Directors of Melrose Industries PLC present the
Annual Report and financial statements of the Group
for the year ended 31 December 2021.
Incorporated information
The Corporate Governance report set out on pages 88 to 93, the
Finance Director’s review on pages 32 to 39 and the Sustainability
report on pages 54 to 77 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 and the Listing Rules
of the Financial Conduct Authority (the “FCA”).
AGM
The Annual General Meeting (“AGM”) of the Company will be held at
Butchers’ Hall, 87 Bartholomew Close, London EC1A 7EB at 11.00 am
on 5 May 2022. A detailed explanation of each item of business to be
considered at the AGM is included with the Notice of Annual General
Meeting. The notice convening the meeting is shown on pages 211 to
216 and includes full details of the resolutions to be proposed, together
with explanatory notes in relation to such resolutions (the “AGM Notice”).
Directors
The Directors of the Company as at the date of this Annual Report,
together with their biographies, can be found on pages 82 and 83.
Changes to the Board during the year are set out in the Corporate
Governance report on pages 88 to 93. Details of Directors’ service
contracts are set out in the Directors’ Remuneration report on
pages 113 to 114.
The Statement of Directors’ responsibilities in relation to the
consolidated financial statements is set out on page 117, which
is incorporated into this Directors’ report by reference.
Appointment and removal of Directors and their powers
The Company’s articles of association (the “Articles”) give the
Directors the power to appoint and replace other Directors. Under the
terms of reference of the Nomination Committee, any appointment
must be recommended by the Nomination Committee for approval
by the Board.
Pursuant to the Articles and in line with the UK Corporate Governance
Code (the “Code”), all of the Directors of the Company are required
to stand for re-election on an annual basis. With the exception of
Ms Liz Hewitt, who will retire from the Board at the conclusion of
the forthcoming AGM, and Mrs Heather Lawrence and Ms Victoria
Jarman, who will be standing for election for the first time following
their appointments on 1 June 2021, all current Directors of the
Company will be standing for re-election by shareholders at the
forthcoming AGM, and in each case an ordinary resolution will need
to be passed to approve such (re-)election.
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
There are no post balance sheet events which require disclosure.
Capital structure
During 2021, the Company completed the disposals of its Nortek Air
Management, Brush, and Nortek Control businesses, for net cash
proceeds of approximately £2.7 billion. After repayment of debt, in
accordance with its strategy to return value to shareholders, the
Company returned £729 million of the proceeds from the Nortek
Air Management disposal to shareholders (the “Return of Capital”).
In order to realise the Return of Capital, holders of ordinary shares in
the Company as at 6.00 pm on the record date, 6 August 2021,
received one B2 share with a nominal value of 15 pence each in the
capital of the Company for every ordinary share held as at that date.
The B2 shares were not admitted to listing or dealing on any exchange.
On 10 August 2021, the High Court of England and Wales approved
the cancellation of the B2 shares. On 14 September 2021, cheques
representing the nominal value of the B2 shares (15 pence each) were
dispatched to their holdings and CREST accounts were credited with
the proceeds, as appropriate.
Following the Return of Capital, the ordinary share capital of the
Company was sub-divided and consolidated (the “Share Capital
Consolidation”). This was to ensure that, so far as possible, the market
price of an ordinary share in the Company remained approximately
the same before and after the Return of Capital and, so far as
possible, historical per share data remained comparable against
future per share data.
The Share Capital Consolidation was effected by the sub-division
of each existing ordinary share of 48/7 pence in the capital of the
Company into nine undesignated shares and consolidating ten such
undesignated shares resulting from such sub-division into one new
ordinary share of 160/21 pence in the capital of the Company (the
“New Ordinary Shares”). The record date for the Share Capital
Consolidation was 6.00 pm on 27 August 2021 and the New Ordinary
Shares were admitted to listing and trading from 8.00 am on
31 August 2021. Subject to allowance for fractional entitlements,
shareholders continued to own approximately the same proportion
of the ordinary share capital of the Company before and after the
Share Capital Consolidation.
The Return of Capital and the Share Capital Consolidation were
approved by shareholders of the Company at a general meeting
of the Company held on 9 July 2021.
The table below shows details of the Company’s issued share capital
as at 31 December 2020; immediately following the Share Capital
Consolidation becoming effective on 31 August 2021; and as at
31 December 2021.
Share class
Ordinary shares of
48/7 pence each
Ordinary shares of
160/21 pence each
31 August 2021
(Post the Share
Capital
Consolidation)(1)
31 December
2020
31 December
2021
4,858,254,963
Nil
Nil
Nil
4,372,429,473
4,372,429,473
(1) To effect the Share Capital Consolidation, seven ordinary shares of 48/7 pence each were
allotted and issued to Investec Bank plc on 26 August 2021 at 171.65 pence per share, being
the closing mid-market price of an ordinary share on 25 August 2021, in order to ensure that
the number of ordinary shares was exactly divisible by ten. These ordinary shares were issued
pursuant to the general authorities granted by the Company’s shareholders in accordance
with section 551 and section 570 of the Act at the Company’s AGM held on 6 May 2021. The
terms of this issue were fixed on 24 August 2021 following a meeting of a committee of the
Board. These ordinary shares were not entitled to participate in the Return of Capital, but were
subject to the Share Capital Consolidation.
The Company’s sole class of ordinary shares are admitted to the
premium segment of the official list.
The 2017 Incentive Plan was approved by the Company’s
shareholders at a general meeting of the Company held on 11 May
2017, and 12,831 Incentive Shares of £1.00 each (the “2017 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 2017 Incentive Plan expired in May 2020 for no value,
and therefore the 2017 Incentive Shares had no value. As anticipated
in the 2020 Annual Report, on 5 April 2021, the 2017 Incentive Shares
were transferred, for no consideration, to the Company Secretary in
his capacity as custodian and nominee on behalf of the Company,
and were thereafter cancelled. The 2017 Incentive Shares comprised
all of the Incentive Shares in issue, and as a result there are no longer
any Incentive Shares outstanding.
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.
There are currently no special rights or restrictions as to voting
attached to any class of shares.
The Company is not aware of any agreements between
shareholders that restrict voting rights attached to the ordinary
shares in the Company.
Where any call or other amount due and payable in respect of an
ordinary share remains unpaid, the holder of such shares shall not be
entitled to vote at or attend any general meeting of the Company in
respect of those shares. As at 3 March 2022, 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 2022 AGM are set out in the AGM
Notice on pages 211 to 216.
Shareholders whose combined shareholdings amount to at least 5%
of the issued voting share capital may, pursuant to section 303 of the
Act, request that the Directors call a general meeting of the Company.
Shareholders whose combined shareholdings amount to at least 5%
of the issued share capital entitled to vote can also request that the
Company introduces a resolution to be voted on at an AGM.
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, 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. We do not have any anti-takeover devices in place,
including devices that would limit share ownership.
The Company is not aware of any agreements between shareholders
that restrict the transfer of ordinary shares in the Company.
Articles of association
The Articles may only be amended by a special resolution at a general
meeting of the shareholders of the Company. There are no amendments
proposed to be made to the Articles at the forthcoming AGM.
Substantial shareholdings
As at 31 December 2021, the following voting interests in the ordinary
share capital of the Company, disclosable under Chapter 5 of the
Disclosure Guidance and Transparency Rules, had been notified to
the Directors:
Shareholder
The Capital Group Companies, Inc
BlackRock Inc
Select Equity Group Inc
Aviva plc
Shareholding(1)
569,540,208
332,302,037
256,129,470
130,611,965
% of ordinary
share capital as at
31 December 2021
13.03
6.84
5.27
2.98
(1) Some of these disclosures were made before the Share Capital Consolidation, which became
effective on 31 August 2021.
Between 1 January 2022 and 3 March 2022, the following voting
interests in the ordinary share capital of the Company, disclosable
under Chapter 5 of the FCA’s Disclosure Guidance and Transparency
Rules, were notified to the Directors:
Shareholder
Aviva plc
Shareholding(1)
134,928,387
% of ordinary share
capital as at the
date of disclosure(1)
3.09
(1) Since the disclosure date, the shareholder’s interests in the Company may have changed.
Shareholder dividend
The Directors are pleased to recommend the payment of a final
dividend of 1 pence per share (2020: 0.75 pence) to be paid on
20 May 2022 to ordinary shareholders on the register of members
of the Company at the close of trading on 8 April 2022. This dividend
recommendation will be put to shareholders at the forthcoming
AGM of the Company, to be held on 5 May 2022. Subject to
shareholder approval being obtained at the AGM for the final dividend,
this will mean a full year 2021 dividend of 1.75 pence per share (2020:
0.75 pence).
For discussion on the Board’s intentions with regard to the Company’s
dividend policy, please see the Chairman’s statement on pages 8 and
9, 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.
Historical dividends
The Company administers the unclaimed dividends of the former FKI
plc (now Brush Holdings Limited). Pursuant to law and its articles of
association, Brush Holdings Limited 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. 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 2021, the total amount of unclaimed dividends of Brush
Holdings Limited was £17,417.44. If the unclaimed dividends are not
claimed by 30 June 2022, the Company will look to donate the funds
to charity.
Equiniti, the Company’s registrar, administers the unclaimed dividends
of the former GKN plc (now “GKN Limited”). Pursuant to law and its
articles of association, GKN Limited 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. As at 31 December 2021,
the total amount of unclaimed dividends of GKN Limited was
£243,969.03. If the unclaimed dividends are not claimed by 30 June
2022, the Company will look to donate the funds to charity.
Melrose Industries PLC Annual Report 2021GovernanceMelrose Industries PLC Annual Report 2021 86
Directors’ report
Continued
Ability to purchase own shares
Pursuant to sections 693 and 701 of the Act and a special resolution
passed at a general meeting of the Company on 6 May 2021, 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 prior to the
capital reduction referred to above. 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 437,242,947, being approximately 10% of the current issued
ordinary share capital, thereby renewing the authority. The full text
of the resolution, together with minimum and maximum price
requirements, is set out in the AGM Notice on pages 211 to 216.
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 32 to 39, the Risks
and uncertainties section of the Strategic Report on pages 42 to 49,
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 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 and
to support its sustainability goals.
As noted in the Divisional reviews on pages 12 to 29, which are
incorporated by reference into this Directors’ report, investment into
research and development activities continued throughout 2021. GKN
Aerospace has successfully delivered a ground-breaking Intermediate
Compressor Case (“ICC”) to the Rolls-Royce UltraFan™ engine
demonstrator programme, which is aiming to achieve a 25%
improvement in fuel efficiency over the first generation of Trent
engines. It is also a Rolls-Royce Core Partner in the Clean Sky 2
programme, with responsibility for design and manufacture of the ICC.
Clean Sky 2 is the largest European aeronautics research programme,
developing innovative, cutting-edge technology aimed at reducing
CO2 emissions and noise levels produced by aircraft.
GKN Automotive has invested over £200 million in advance e-Drive
development since 2019, which has enabled it to continue to lead
the field. Its engineers based at its UK Innovation Centre in Abingdon
are developing a cutting-edge Advanced Cooled and Controlled
high-speed e-Drive, the goal of which is to increase the e-Drive
system’s power output and improve system efficiency, whilst reducing
weight and material content.
GKN Powder Metallurgy’s investment in new technologies continued
during 2021, resulting in the launch of an electric pump for hybrid and
battery electric transmission vehicles. This technological innovation
targets notable efficiencies and CO2 reductions driven by component
precision, as well as attractive cost benefits delivered through
manufacturing process improvements.
The Melrose Skills Fund has also funded initiatives in the GKN
Aerospace and GKN Automotive businesses and in the wider
community. Further details on the initiatives being implemented
are set out in the Sustainability report on pages 54 to 77.
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 8 and 9 and the
Strategic Report on pages 1 to 77 of this Annual Report (including
the Longer-term viability statement on page 39 and the Risks and
uncertainties section on pages 42 to 49), which are incorporated into
this Directors’ report by reference.
Employee engagement
The Company operates a Workforce Advisory Panel (the “WAP”) as
its chosen method of complying with the requirements of the Code
on employee engagement. Details in relation to the WAP, employment
policies, and employee involvement, consultation and development,
together with details of some of the human resource improvement
initiatives implemented during 2021, are shown in the Sustainability
report on pages 54 to 77 and in the Section 172 statement set out
in the Strategic Report on pages 50 to 53, both of which are
incorporated by reference into this Directors’ report.
Business relationships
Details of our businesses’ clients and suppliers and how our
businesses work and engage with them are described in the Divisional
reviews on pages 12 to 29, in the Section 172 statement on pages 50
to 53, and in the Sustainability report on pages 54 to 77, each in the
Strategic Report, and all of which are incorporated by reference into
this Directors’ report.
Environmental
Details of the sustainability initiatives across the Group, and the
Group’s Greenhouse gas emissions, waste, and water usage, and
other energy consumption, as well as the methodology used to
calculate such emissions and consumption, are set out in the
Sustainability report on pages 54 to 77, which is incorporated by
reference into this Directors’ report.
In 2021, the Board set its inaugural sustainability targets and
commitments for the Group in line with the UN Sustainable
Development Goals, in addition to its target of net zero Greenhouse
gas emissions before 2050. Details of these targets and commitments
is set out in the Sustainability report on page 55. In addition, we
reported for the first time against all the key areas recommended by
the Task Force on Climate-related Financial Disclosures (“TCFD”),
which are set out in the Sustainability report on pages 60 and 61.
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
2021 (2020: nil).
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 allotment of ordinary shares to Investec Bank plc in
connection with the Share Capital Consolidation, which are set
out in the “Capital structure” section of this Directors’ report on
page 84;
• details of the 2020 Employee Share Plan, which are set out on
page 107 of the Directors’ Remuneration report and note 23 to
the financial statements (incorporated by reference into this
Directors’ 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.
87
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. It remains in full compliance
with these obligations and meets its regular reporting requirements.
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 her 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
2021 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
3 March 2022
Significant agreements and change of control
With the exception of the Group’s banking facilities, the 2020
Employee Share 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 3 March 2022.
In December 2021, the Group extended the maturity date of both the
term loan and the revolving credit facility to 30 June 2024. Subsequent
to this extension, in December 2021 the term loan was partly prepaid by
£70 million and US$172 million. Consequently, the Group’s committed
bank funding includes a multi-currency denominated term loan of
£30 million (31 December 2020: £100 million) and US$788 million
(31 December 2020: US$960 million) and a multi-currency
denominated revolving credit facility of £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 34 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 either fund new loans requested during the 30 day period after a
change of control, or 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, awards granted under the
2020 Employee Share Plan would crystallise and convert into ordinary
shares in the Company or give rise to an entitlement to a dividend paid
in cash. The rate of conversion is based upon the offer price of the
Company’s ordinary shares as calculated on the date of the change
of control of the Company. If the offer price, or any element of the offer
price, is not in cash, the Remuneration Committee will determine the
value of the non-cash element, having been advised by a reputable
investment bank that such valuation is fair and reasonable.
Long-term management incentive plans have been put in place for our
key divisions that 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.
Melrose Industries PLC Annual Report 2021GovernanceMelrose Industries PLC Annual Report 2021 88
Corporate Governance report
89
Corporate Governance
report
In line with the UK Corporate Governance Code (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 2021.
The Audit Committee report, Nomination Committee report, Directors’
Remuneration report, Statement of Directors’ responsibilities, Risk
management and Risks and uncertainties sections of the Strategic
Report, together with the Sustainability report and the Section 172
statement, also form part of this Corporate Governance report.
Statement of compliance
Throughout the year ended 31 December 2021, the Company has
applied the principles and complied with the provisions of the Code.
1. Principles A-E: Board Leadership and Company Purpose
Long-term sustainable 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 Executive
Vice-Chairman, is responsible for leadership of the Board. The division
of responsibilities is described further in section 2 on page 89.
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 50 to 53 sets out the ways in which the Board took these
considerations into account in its decision-making in 2021.
Our 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 our “Buy, Improve, Sell” strategy, whereby
we acquire high-quality but underperforming manufacturing businesses
and set out to solve chronic issues within those businesses, in order to
set them on the pathway to future success. We 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 remain underpinned by the
principles and values on which it was founded. We act with integrity,
honesty, transparency and decisiveness, and believe in a lean
operating model, high productivity and sustainable business
practices. Although we know our businesses will not be part of the
Group for the long-term, we act as responsible stewards of them,
investing in them as if we are going to own them forever, and we see
this as an important step on their pathway to long-term sustainable
success. We provide the focus and investment to improve our
businesses’ financial performance, through operational
improvements, by driving growth and profitability, and by investing in
research and development to make the businesses more sustainable.
We also recognise that the building of stronger businesses
encompasses a wide range of non-financial areas including risk
management and ethics and compliance, and we have worked with
the businesses to set meaningful sustainability targets alongside
financial metrics. These actions benefit their long-term future,
and benefit all stakeholders. We hold each business and their
management team accountable for their progress against agreed
sustainability targets. We do not shy away from difficult decisions,
but understand these decisions can have a material impact on certain
stakeholders, who we look to treat fairly, whatever the outcome. We
provide the space and resources to empower people to perform and
reward them well when they do. These principles lie at the heart of our
success, and are the basis on which we strive for future success.
Resources and controls
As described in more detail in the Risk management section of the
Strategic Report and the Audit Committee report on pages 40 and 41
and 94 to 98 respectively, 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 the Melrose senior management team to allocate
resources in a sustainable and appropriate manner, enabling the
Group to meet its objectives and measure performance effectively,
whilst promoting sustainability. 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, including Deloitte who undertake the Group’s
external audit, and BM Howarth and Ernst & Young who assist with
the Group’s internal audit.
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 and trading updates, the Company seeks to build on a
mutual understanding of objectives with its shareholders and other
stakeholders. During 2021, in addition to the usual disclosure rounds
following the release of annual and interim results, the Company
continued its programme of engagement with key investors and
corporate governance bodies in respect of specific material topics,
as well as open-agenda discussions between key shareholders and
members of the Board. Engagement with key shareholders, proxy
advisors, employee bodies, ratings agencies (including sustainability
ratings agencies) 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 2022 Annual
General Meeting (“AGM”). Further details on the Company’s
engagement with stakeholders, including the material topics
discussed with investors and corporate governance bodies, are
contained in the Section 172 statement on pages 50 to 53.
In order to promote effective engagement with, and encourage
participation from, its workforce, Melrose operates a Workforce
Advisory Panel (“WAP”). Given the Group’s decentralised nature and
Melrose’s strategic business model, which means that all businesses
are eventually sold, 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, disseminating information and
collating the voice of their workforce. Each member of the WAP is in
turn responsible for demonstrating how key workforce views are fed
into executive management decisions, which may include executive
remuneration, as well as ensuring that the workforce is aware of their
impact on such executive management decisions. The WAP meets
twice a year and an annual report is prepared for the Board which
highlights workforce engagement and key views. Further details on
the WAP are contained in the Sustainability report on page 67.
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
the compliance policies that are rolled out to the business units, and
cover best practice with respect to anti-bribery and corruption,
anti-money laundering, anti-facilitation of tax evasion, competition,
conflict minerals, trade compliance, data privacy, whistleblowing,
treasury and financial controls, anti-slavery and human trafficking,
document retention, joint ventures, diversity and inclusion,
environmental, and human rights.
The Company also operates an externally hosted whistleblowing
portal which is readily available to all Group employees. This is
supported by regularly updated policies, procedures and awareness
campaigns to create an environment in which the workforce feels it is
safe to raise concerns in confidence without fear of retaliation, and to
foster an ethical and supportive culture within each of the Group’s
business units. The Board and the Audit Committee are provided with
updates on material whistleblowing events as they are reported from
time to time to the Melrose senior management team, and the Audit
Committee is provided with an overview of whistleblowing activity on a
quarterly basis. An annual report is prepared for the Audit Committee
which highlights whistleblowing activity in further detail across the
business units, together with a summary of the approach taken by
each business unit to their whistleblowing process; this is then fed
back to the Board.
2. Principles F-I: Division of Responsibilities
The Board
Details of the structure of the Board and its key responsibilities are
shown on pages 79 and 81.
There were four formally scheduled Board meetings held during the
year and the attendance of each Director at these meetings is shown
on page 90.
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 90. 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
and present at 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.
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, which in turn helps to reduce paper waste.
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, Executive Vice-Chairman and Chief Executive
The roles of each of the Chairman, the Executive Vice-Chairman 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 Executive Vice-Chairman, is
responsible for leadership of the Board. The Chairman sets the Board
agenda and ensures that adequate time is given to the discussion of
issues 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, the Executive Vice-Chairman
and the three 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 to hold management to account.
The Board consists of four executive Directors, six 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.
Together with the Chairman, the majority 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 on page 90, 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 he was
considered independent, and has strong shareholder support for his
current tenure to 2023, which was extended in 2020 with the support
of shareholders, in order to facilitate succession planning arrangements
and the development of a diverse Board, as well as to provide certainty
and stability through the pandemic. Ms Liz Hewitt is the appointed
Senior Independent Director, and acts as an intermediary for the other
Directors and shareholders. She will be succeeded in this role by Mr
David Lis upon her retirement in May 2022. In accordance with the
Code requirements, at least half of the Board, excluding the Chairman,
comprises Non-executive Directors determined by the Board to be
independent. The number of independent Directors on the Board
increased during 2021 with the appointments of Mrs Heather
Lawrence and Ms Victoria Jarman as independent Non-executive
Directors in June 2021.
The Non-executive Directors are not entitled to any cash bonus or
shares under the 2020 Employee Share Plan, nor do they receive
taxable benefits or pension contributions.
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 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 periodically.
Melrose Industries PLC Annual Report 2021GovernanceMelrose Industries PLC Annual Report 2021 90
Corporate Governance report
Continued
91
Each of the Committees has its 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
them 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.
The Board also receives annual training and quarterly updates on key
sustainability issues that impact the sectors within which the Group’s
businesses operate, and on the specific measures that are required
to be implemented to drive improved sustainability performance over
the longer term for the benefit of all stakeholders.
Time commitments and attendance of Directors
at meetings
When considering appointments to the Board, the Board in
conjunction with the Nomination Committee reviews 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. Peter Dilnot is the Senior
Independent Director of Rotork PLC, although the Board has
concluded that this does not affect his ability to meet his Board
responsibilities. None of the other executive Directors hold any
significant appointments nor do they have any non-executive
directorships in any FTSE 100 company.
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
Simon Peckham
Geoffrey Martin
Peter Dilnot
Liz Hewitt
David Lis
Charlotte Twyning
Funmi Adegoke
Heather Lawrence(5)
Victoria Jarman(5)
4
4
4
4
4
4
4
4
4
4
3
3
4
4(2)
–
–
4(3)
–
4
4
4
2(4)
3
–
2
2
–
–
–
–
2
2
2
2
–
–
2
2
–
–
–
–
–
2
2
2
–
1
3
3
3
3
3
3
3
3
3
3
1
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) Justin Dowley attended by invitation.
(3) Geoffrey Martin attended by invitation.
(4) Funmi Adegoke was appointed as a member of the Audit Committee with effect from
1 September 2021. Ms Adegoke attended all Audit Committee meetings held during the
period 1 September 2021 to 31 December 2021.
(5) Heather Lawrence and Victoria Jarman were appointed as Non-executive Directors of the
Board on 1 June 2021. They have each attended all Board and applicable Committee
meetings, together with all business reviews, since their appointment.
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 82 and 83, and on the Company’s website at
www.melroseplc.net. These biographies identify any other
significant appointments held by the Directors.
During the year, David Roper, one of the co-founders of Melrose, and
Archie G. Kane, the Chairman of the Nomination Committee, retired
from the Board as planned. Peter Dilnot, Chief Operating Officer, also
joined the Board. In addition, the Board gained two new Non-executive
Directors, Heather Lawrence and Victoria Jarman, who both bring
significant non-executive experience gained through similar roles.
The Board has made significant progress with paving the way for
diversity. It continues to meet the Hampton-Alexander Review target
of having 33% female representation on its Board, with 45% female
representation as at the date of this report. In particular, four of the last
five Non-executive Director appointments, including the most recent
two made in 2021, have been female, and all departures from the
Board have been male. In addition, the Board continues to meet the
Parker Review target of having one Director from an ethnic minority
background on the Board. Melrose is committed to continuing to
meet these targets.
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 2021 and as explained in section
2 on page 89, the Board and shareholders approved the extension of
Justin Dowley’s tenure as Chairman of the Board in order to aid
effective succession planning.
Succession planning arrangements for the Board as a whole were
reviewed by the Nomination Committee and the Board. This included
reviewing the skills set, tenure, diversity and independence 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. In each case this was to allow
the Nomination Committee 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.
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 2020,
for which the Company engaged Lintstock Ltd. The Company will
again be conducting an external evaluation in 2023.
Whilst the Company is not required to undertake another externally
facilitated Board and Committee evaluation until 2023, during 2021
the Company continued its ongoing internal review of the Board and
each Committee, both internally within each of those bodies and with
the Chairman of the Board and the Chairman of each Committee
respectively. As in prior years, the Company also conducted an
evaluation of the Chairman of the Board’s performance. 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.
Directors were also given the option for meetings to be scheduled with
the Chairman of the Board or the Chairman of the relevant Committee
about any relevant matters that they wished to raise as part of the
ongoing review.
A range of topics were discussed as part of the evaluation including
the mix of the Board, diversity of gender, race and thought, succession
planning oversight, risk management and internal controls, strategic
oversight, understanding of the views and requirements of key
stakeholders, and the integration of sustainability into the Group’s
strategy and operations.
Outputs of the evaluation
The report and subsequent discussion concluded that the Board, the
Chairman of the Board and the Senior Independent Director continue
to be highly effective.
In order to further enhance the Board’s effectiveness, the following areas
were designated as the subject of management focus during 2022:
• continuing to monitor senior management succession;
• further developing the Board’s visibility over the impact of principal
risks on the divisions, and continuing to monitor and enhance the
Group’s management of risk;
• further integrating and embedding sustainability into the Group’s
business strategy and operations, which the Group views as a
process of continuous progression in response to ever-evolving
sustainability developments;
• although considerable steps were taken to improve cyber security
across all business units in 2021, it was recognised that cyber
security is an ongoing risk and will, therefore, be focused on again
in 2022;
• continuing to improve and monitor the cash management culture
within the businesses (particularly within the GKN businesses) and
to improve cash performance; and
• continuing to impress upon all divisions that the health and safety
of their workers is of the utmost importance and ensuring that
their 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.
Annual re-election of Directors
Pursuant to the Company’s Articles and in accordance with the
provisions of the Code, all of the Directors stood for election or
re-election at the 2021 AGM. With the exception of Heather Lawrence
and Victoria Jarman, who are each standing for election for the first
time, and Liz Hewitt, who is retiring at the conclusion of the 2022 AGM,
all current Directors of the Company will be standing for re-election by
shareholders at this year’s AGM, and in each case an ordinary
resolution will need to be passed to approve such re-elections.
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 opposite 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.
Justin Dowley, Non-executive Chairman, is standing for re-election as
Director due to his extensive and long-standing experience within the
banking, investment and asset management sectors. Mr Dowley first
joined the Board as a Non-executive Director in September 2011 and
served as Senior Independent Director in the two years prior to his
appointment as Non-executive Chairman in 2019. Following positive
engagement with key shareholders in 2020, the Nomination
Committee and the Board approved his extended tenure to 2023
subject to annual re-election, in order to facilitate succession planning
arrangements for the Board and the development of a diverse Board.
Mr Dowley was considered independent upon his appointment as
Non-executive Chairman.
Simon Peckham, Chief Executive, is standing for re-election as
Director due to his deep understanding of the Melrose business
model, having co-founded Melrose, and initially appointed as Chief
Operating Officer in 2003. He has widespread expertise in corporate
finance, mergers and acquisitions, strategy and operations.
Christopher Miller, Executive Vice-Chairman, is also standing for
re-election on the basis of his deep understanding of the Melrose
business model, having co-founded Melrose. Mr Miller has long-
standing involvement in manufacturing industries and private investment.
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.
Peter Dilnot, Chief Operating Officer, is standing for re-election due to
his deep understanding of the Melrose business model, having been
appointed as Chief Operating Officer in 2018, as well as having
performed the role of interim chief executive officer for GKN
Aerospace. He has strong sector experience in engineering and
aviation, and has extensive experience in holding executive roles in
listed companies.
The remaining Non-executive Directors are standing for re-election
due to their independence, diversity, skills and experience. In particular,
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. Charlotte Twyning
brings to the Board a diverse range of experience and commercial
acumen due to her experience having held various senior positions
in the telecommunications and transport sectors, most recently in
aviation. Funmi Adegoke brings to the Board diverse industrial
knowledge as well as significant transactional and commercial
management expertise due to her extensive experience working in
and leading teams across the globe at multi-national organisations.
Election of Directors
Heather Lawrence and Victoria Jarman, who joined the Board on
1 June 2021, will be standing for election by shareholders for the first
time at this year’s AGM and in each case an ordinary resolution will
need to be passed to approve such elections.
In considering whether each Director should stand for 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 opposite, assists with
determining whether each Director should stand for 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.
Melrose Industries PLC Annual Report 2021GovernanceMelrose Industries PLC Annual Report 2021 92
Corporate Governance report
Continued
Heather Lawrence and Victoria Jarman are standing for election due
to their independence, diversity, skills and experience. In particular,
Heather Lawrence brings to the Board a diverse range of experience
across the industrials and transportation sectors, having held senior
roles within corporate finance and investing banking, as well as having
the necessary expertise required to perform the role of Chairman of the
Audit Committee upon Liz Hewitt’s retirement. Victoria Jarman brings to
the Board significant and extensive financial and investment experience
and insight gained from a number of senior roles in corporate finance,
as well as extensive non-executive director experience.
Biographies of each of the Directors are shown on pages 82 to 83,
and on the Company’s website at www.melroseplc.net. Detailed
justifications for each Director’s (re-)election are set out in the Notice
of Annual General Meeting, on pages 211 to 216.
4. Principles M-O: Audit, Risk and Internal Control
Objectives and policy
A key responsibility of the Board and Melrose senior management
team is 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 that the Group’s resources are
managed properly and that 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 the Melrose senior management team 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 risk
management and internal control system is complemented by
ongoing monitoring and review, to ensure that the Company is able
to adapt to an evolving risk environment.
A separate Audit Committee report is set out on pages 94 to 98
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 40 to 41.
Further information regarding the Group’s financial risk objectives and
policies can be found in the Finance Director’s review on pages 32 to
39. A summary of the principal risks and uncertainties that could
impact upon the Group’s performance is set out on pages 42 to 49.
Internal financial controls and reporting
The Group has a comprehensive system for assessing the
effectiveness of the Group’s internal controls, including strategic
business planning and regular monitoring and reporting of financial
performance. A detailed annual budget is prepared by senior
management and thereafter is reviewed and formally adopted
by the Board.
The budget and other targets are regularly updated via a rolling
forecast process and regular business review meetings are held with
the involvement of senior management to assess performance. The
results of these reviews are in turn reported to, and discussed by, the
Board at each meeting. As discussed in the Audit Committee report
on page 98, the Group engages BM Howarth as internal auditor with
additional support, as required, from Ernst & Young. A total of 42 sites
across the Group were assessed by BM Howarth and Ernst & Young
during 2021.
As was common across most large, geographically dispersed
companies, COVID-19 disruption continued to present a number
of challenges and limitations throughout the year due to restricted
international travel and extended periods of remote working for many
site-based finance teams. Further details about the additional
assurance measures that were taken to mitigate the impact of
COVID-19 disruption on internal controls during 2021 can be found
in the Audit Committee report on pages 94 to 98.
The Directors can report that based on the sites visited and reviewed
in 2021, there has been progress across the Group following the 2021
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.
Ethics and compliance
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
Group-wide policies relating to anti-bribery and corruption, anti-money
laundering, anti-facilitation of tax evasion, competition, conflict
minerals, trade compliance, data privacy, whistleblowing, treasury
and financial controls, anti-slavery and human trafficking, document
retention, joint ventures, diversity and inclusion, environmental,
and human rights. These policies are in place within each business
and, other than in respect of certain policies where it would not be
appropriate for them to have such a broad reach, they generally
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 2021, Melrose implemented new Environmental and Human
Rights policies, and the Company also updated the Melrose Code of
Ethics in light of key regulatory and legal developments and to align it
with the new policies. The new policies and updated Melrose Code of
Ethics have been fully implemented across all business units, and they
(as well as all other Group compliance policies) continue to be monitored
to ensure their effectiveness for the Group. Online compliance training
continued to be conducted within all businesses, covering topics such
as anti-trust, trade compliance and export controls, data privacy,
anti-bribery and 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 the current statement is available on the Company’s
website at https://www.melroseplc.net/media/2759/modern-
slavery-statement-fy2020.pdf. Under Melrose’s decentralised group
structure, each division is responsible (where applicable) for publishing
their own Modern Slavery Statement 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 on page 89 for details of the
Company’s whistleblowing policies and procedures.
BDO LLP were engaged to conduct an independent non-financial
review programme of the GKN Aerospace and GKN Automotive
businesses, to test and provide additional external assurance in
respect of those businesses’ key compliance areas and safeguards as
a result of their relative scale and complexity. Although COVID-19 travel
restrictions caused some delay to the original site visit schedule during
2020, the review programme was completed during 2021, with a total
of 67 site visits being conducted by BDO (and overseen by the General
Counsels of the businesses) across the programme. The programme
included GKN Aerospace sites across the UK, the Netherlands, India,
Singapore, Thailand, Sweden, and Norway, as well as GKN
Automotive sites including those located in Mexico, France, Malaysia,
Germany, Italy, India and Japan. Overall, both GKN Aerospace and
GKN Automotive were found to demonstrate a good level of
compliance including within the areas of anti-bribery and corruption,
anti-money laundering, whistleblowing, data protection, export control,
contract compliance, health and safety, and trade compliance.
5. Principles P-R: Executive Remuneration
Policies and practices
Melrose’s remuneration philosophy has been the same since being
founded in 2003 and requires that executive remuneration be simple,
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 to below the lower
quartile of its peers, while heavily weighting potential reward to the
long-term employee share plan that is entirely performance based,
reflects those principles and is intended to align management’s
incentive arrangements directly with the interests of shareholders.
In compliance with the Code, the 2020 Employee Share Plan (which
is the only share plan the Company operates for Melrose senior
management) has a five-year total vesting and holding period, which
promotes long-term sustainable success for shareholders, and is
expected to be awarded in shares, further aligning management
with shareholders.
Development of policies
The Remuneration Committee has a formal and transparent
procedure for developing the Company’s policy on executive
remuneration. It regularly engages with shareholders to seek their
views (and particularly more so in advance of renewals), takes those
views into account when formulating proposals on executive
remuneration, obtains advice from external remuneration advisors,
and undertakes benchmarking exercises with respect to executive
pay to ensure that the executive remuneration structure remains
appropriate. Shareholders have the opportunity to vote on executive
remuneration through their binding vote at least every three years on
the Directors’ remuneration policy and their advisory vote annually
on the Directors’ remuneration report. As described further in the
Directors’ Remuneration report on pages 102 to 116, 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.
93
Independent judgement and discretion
The Remuneration Committee exercises 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 Company’s FTSE 100 peers. The current Directors’
remuneration policy provides the Remuneration Committee with the
ability to exercise discretion to override formulaic outcomes. No such
use of discretion was exercised in 2021, although the Remuneration
Committee have determined in 2022 to exercise discretion in respect
of the payment of the 2021 annual bonus to the Chief Operating
Officer in cash. Details can be found on page 102.
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 102 to 116, which is presented in the
following two sections:
• the annual statement from the Chairman of the Remuneration
Committee, which can be found on page 102; and
• the Annual Report on Remuneration, which can be found on
pages 103 to 116.
The current Directors’ remuneration policy, which was approved
by shareholders at the 2020 AGM and subsequently amended in
January 2021 to incorporate the 2020 Employee Share Plan, is
available on the Company’s website(1).
(1) The full details of the Directors’ remuneration policy can be found on pages 103 to 111 of the
2019 Annual Report (www.melroseplc.net/media/2536/melrose-ar2019.pdf), and the full
details of the amendments can be found on pages 15 to 24 of the circular to shareholders dated
29 December 2020 (www.melroseplc.net/media/2587/291220-melrose-circular.pdf).
Melrose Industries PLC Annual Report 2021GovernanceMelrose Industries PLC Annual Report 2021 94
Audit Committee report
Audit Committee
report
Liz Hewitt
Audit Committee Chairman
The responsibilities of the Audit Committee
(the “Committee”) include overseeing
financial reporting, risk management and
internal financial controls, in addition to
making recommendations to the Board
regarding the appointment of the
Company’s internal and external auditors.
Member
Liz Hewitt (Chairman)*
David Lis*
Charlotte Twyning
Heather Lawrence*
Funmi Adegoke
No. of meetings
4/4
4/4
4/4
3/3(1)
2/2(2)
* Indicates Committee members with financial expertise. In total, 60% of the Committee
has financial expertise.
(1) Mrs Heather Lawrence was appointed as a Non-executive Director with effect from
1 June 2021. Mrs Lawrence attended all Committee meetings held during the period
1 June 2021 to 31 December 2021.
(2) Ms Funmi Adegoke was appointed as a member of the Audit Committee with effect
from 1 September 2021. Ms Adegoke attended all Committee meetings held during
the period 1 September 2021 to 31 December 2021.
Role and responsibilities
The Committee’s role and responsibilities are set out in its terms
of reference. These were updated in November 2021 in line with
best practice and are available on the Company’s website at
www.melroseplc.net 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, financial statements
and interim financial statements, and reviewing and reporting to
the Board on the significant financial reporting issues and
judgements which they contain;
• keeping under review the effectiveness of the Group’s financial
reporting;
• reviewing the effectiveness of 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 in
accordance with the Company’s whistleblowing policy, including
about possible wrongdoing in financial reporting or other matters;
• monitoring and evaluating the independence and effectiveness of the
internal audit function and approving the internal audit plan and fee;
• monitoring and evaluating the independence and 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;
• reviewing and, where necessary, challenging the consistency of
accounting policies, the methods used to account for significant or
unusual transactions, and compliance with accounting standards;
• 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 overseeing the objectivity and effectiveness
of the external auditor;
• assessing annually the external auditor’s independence and
objectivity, taking into account relevant UK laws, regulations, 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 where necessary challenging the provision of
non-audit services by the external auditor; and
• reviewing and considering the Annual Report and financial
statements to ensure that it is fair, balanced and understandable
and advising the Board on whether it can state that this is the case.
Composition
Ms Liz Hewitt continues to serve as the Chairman of the Committee.
However, Ms Hewitt will be stepping down from this position upon
her retirement from the Board at the conclusion of the 2022 Annual
General Meeting, and Mrs Heather Lawrence will assume the role of
Chairman of the Committee. Mrs Lawrence joined the Board and
Committee in June 2021. She has strong audit experience, having
acted as audit committee chair of FlyBe Group plc.
Ms Hewitt, Mrs Lawrence and Mr David Lis bring significant and
relevant financial experience to their roles on the Committee.
Furthermore, each member of the Committee, including Ms Charlotte
Twyning and Ms Funmi Adegoke, brings strong corporate governance
experience to the Committee. Further details of the relevant
experience of each member of the Committee are described in the
biographies on pages 82 to 83. The Committee is made up 100%
of independent Non-executive Directors.
The Company Secretary acts as secretary to the Committee.
To enable the Committee to provide robust challenge of the reports
submitted to it, 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 Chairman of the
Committee also speaks with the Group Finance Director prior to each
Committee meeting. The Committee has the right to invite any other
Directors and/or employees to attend meetings where this is
95
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 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.
However, during 2020, the Committee had agreed that an additional
meeting would be scheduled due to the ongoing uncertainty and
disruption caused by COVID-19 in order to enable further review and
challenge of significant accounting matters, and this was continued in
2021. In 2021, the Committee met in March, June, 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 statements 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.
Significant activities related to the 2021 financial
statements
As part of its duties the Committee undertook the following recurring
activities that receive annual scrutiny:
• review of the 2021 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 papers prepared by
management in respect of the going concern, longer-term viability
and significant accounting and control matters;
• consideration of the 2021 Annual Report and financial statements
in the context of being fair, balanced and understandable and a
review of the content of papers prepared by management in
relation to the 2021 Annual Report and financial statements. The
Committee advised the Board that, in its view, the 2021 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 Company’s position
and performance, business model and strategy;
• review of the effectiveness of the Group’s risk management and
internal financial controls and disclosures made in the 2021
Annual Report and financial statements on this matter;
• review of the effectiveness of the Group’s internal and external
auditors; and
• review of, and agreement of, the scope of work to be undertaken
in respect of the 2021 financial statements by the external
auditor and the scope of work to be undertaken in 2022 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:
Significant issue considered by the Audit Committee
Impairment testing of goodwill
Impairment testing is inherently subjective as it includes assumptions in the
calculation of recoverable amount for each of the cash-generating units
(“CGU”) being tested. Assumptions include future cash flows of the relevant
groups of CGUs, discount rates that reflect the appropriate risk and long-term
growth rates which are applicable to the industry and geography of operations.
The impairment testing for 2021 has been performed on the groups of CGUs
disclosed in the 2021 Annual Report, which specifically now has one group of
CGUs for each of Aerospace and Automotive.
During 2021, due to the impact of the COVID-19 pandemic, additional
sensitivities were disclosed for almost all of the Group’s individual CGUs.
During the year, the businesses have continued to mitigate the impact of
lower levels of demand caused by supply chain shortages (Automotive and
Powder Metallurgy) and continued market depression (Aerospace) through
cost reduction and efficiency actions, including further significant restructuring.
Under IAS 36, the value in use basis prohibits the inclusion of benefits from
future uncommitted restructuring plans although this is permitted when
applying the fair value less costs to sell basis, to the extent that similar actions
would be carried out by a market participant. Consistent with the prior year and
in accordance with the accounts standards, impairment testing for the GKN
businesses’ groups of CGUs remains on a fair value less costs to sell approach
as this has resulted in higher valuations than the value in use approach.
(Refer to notes 3 and 11 of the financial statements)
Accounting for revenue under IFRS 15
The overwhelming majority of the Group’s revenue recognition relates to the
simple sale of products and services where invoices are raised and amounts
are recognised when control of the goods is transferred to the customer.
However, the Group has one revenue stream which includes recognition of
variable consideration for risk and revenue sharing partnerships (“RRSPs”),
in a small number of Aerospace businesses.
As required, management continue to review the key assumptions that have a
significant impact on the allocation of overall transaction prices for aerospace engine
components. It is particularly important to reassess the operational progress and
status of engines’ programmes in the early years of these long-term arrangements,
when performance issues can arise. Specifically, in relation to variable consideration
for certain RRSPs, revenue is significantly constrained until there is better visibility
over the outcome so as to comply with the requirement that amounts are only
recognised when it is highly probable that they will not reverse in the future.
Following positive operational progress on engine programmes within certain
RRSPs in the year, it was concluded that an update to assumptions was
appropriate. Whilst the changes have not led to a material impact on 2021
results (£24 million), they will impact future results too.
The amount of variable consideration recognised in the year of £55 million
reflects an underlying increase from the COVID-impacted results in 2020, ramp
up in volumes based on customer schedules as well as implications of the
change in assumptions.
(Refer to notes 3, 4 and 17 of the financial statements)
How the issue was addressed by the Audit Committee
The Committee challenged the outcome of the impairment review in respect of
all groups of CGUs and also considered the proposed disclosures in respect of
the Aerospace, Automotive, Powder Metallurgy and Ergotron groups of CGUs.
In doing so the Committee considered the following:
• a paper prepared by management, which included the key outputs from
the impairment models;
• trading assumptions, including macro-economic factors, applied in the
models and in particular those that were key, being revenue growth and
profit margin;
• the market-based assumptions for long-term growth rates and discount rates;
• risk adjustments that were applied to the model, in particular regarding
the timing of when volume reductions would recover; 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 disclosures presented.
Considering all of the above, as well as management responses to challenge
and Deloitte’s views, the Committee was satisfied that the assumptions
used were reasonable and that the impairment conclusions together with
disclosures were appropriately presented.
The Committee reviewed the paper prepared by management and
discussed the implications of IFRS 15, which included an assessment of
estimates used in calculating variable consideration within RRSPs.
The changes in estimates, relating to both the amount and timing of revenue
recognition, were primarily based on operational progress of specific
programmes. Whilst the impact of changes was immaterial for 2021, there
could be a more significant impact in the future.
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.
Melrose Industries PLC Annual Report 2021GovernanceMelrose Industries PLC Annual Report 2021 96
Audit Committee report
Continued
97
Significant issue considered by the Audit Committee
How the issue was addressed by the Audit Committee
GKN Aerospace North America financial information in relation to
inventory balances
The Group has again reviewed inventory and other balances in GKN
Aerospace North America following historical pre-acquisition concerns,
to ensure that balances were appropriately stated.
The current year review has involved management from the Group finance
team travelling to four sites to conduct a detailed balance sheet review with
senior site teams. In addition, assurance has been taken from other higher-
level procedures. The review focused on inventory provisioning, among other
things, as these calculations often require estimation by management of
expected future sales.
(Refer to notes 3 and 16 of the financial statements)
Classification of adjusting items and use of Alternative Performance
Measures (“APMs”)
The reporting, classification and consistency of adjusting items continues to be
an area of focus for the Committee, in particular, given the guidance on APMs
provided by the European Securities and Markets Authority (“ESMA”).
The Committee considers this a key consideration when reviewing if the
financial statements are fair, balanced and understandable.
(Refer to notes 3 and 6 of the financial statements)
Going concern and viability
The Committee is required to make an assessment of the going concern
assumption for the Group and the basis of the viability statement before making
a recommendation to the Board. Due to the disposal activity during the year,
significant cash proceeds have been received and to date only a proportion has
been returned to shareholders. This has led to a stronger Group balance sheet
with additional levels of headroom in covenant calculations.
The assessment of going concern for the annual financial statements uses
the same forecast data as included in many other areas of estimation within
the full year accounting and takes into account the covenant tests agreed with
the Group’s banking syndicate during the prior year.
(Refer to note 2 of the financial statements)
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 continued focus on improving profitability
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 net release of provisions originally recognised on
acquisition of £22 million, recorded as an adjusting item to avoid positively
distorting adjusted operating profit.
(Refer to notes 3, 6 and 21 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 Hydrogen Technology business operating segment
was separated from the Powder Metallurgy business. In addition, the Other
Industrial division has been impacted by the sales of Brush and Nortek
Control whose results are included in discontinued operations. The Hydrogen
Technology business was included in Other Industrial for reporting purposes.
Comparative amounts have been restated accordingly.
(Refer to note 5 of the financial statements)
During the year, the Committee reviewed a report prepared by management
updating on the previously disclosed concerns relating to GKN Aerospace’s
North American business. The assessment considered trends in inventory
carrying amounts and other balance sheet accounts as well as the
overall control environment and progress since the prior year. Specifically,
management from the Group finance team travelled to sites and met with local
management as well as senior members of the divisional finance function to
discuss the local control environment, any continued impact of COVID-19 on
compliance and documentation, and results of balance sheet review work.
The Committee discussed the results from year-end testing with
management as well as the findings from Internal Audit, who had visited
many of these sites. 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 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.
Following a review of management’s paper and challenge, the Committee is
satisfied that there has not been any change to the substance of the policy. It
was noted that as a result of certain restructuring programmes management
had reviewed the associated carrying values of operating assets within the
Group. A charge of £112 million, relating to assets within the Group, was
recorded in the second half of the year.
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 the disclosures to be clear and transparent.
The Committee reviewed and approved management’s recommendation
to prepare the financial statements on a going concern basis. The key
principles debated were the level of committed facility headroom on bank
covenants and flexibility of liquidity arrangements to meet obligations. This
discussion took into account the recently agreed extension to facilities until
June 2024. In addition to base case modelling which uses approved financial
forecasts, a reasonably possible downside was considered.
The Committee also considered a paper and financial model prepared by
management in respect of the longer-term viability statement to be included
in the 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.
At 31 December 2021, the carrying value of loss-making contract provisions
in the Group was £167 million (2020: £241 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 their audit work covering loss-making contract
provisions and the key assumptions 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 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.
Risk management and internal control
One of the key roles of the Committee is to review and monitor the
Group’s risk management, internal financial control systems and
processes, and compliance controls. The Committee has a high
degree of risk and compliance expertise to enable it to fulfil this role. In
particular, Ms Hewitt, Mrs Lawrence and Mr Lis have each held senior
roles at various financial institutions. Furthermore, Ms Hewitt was an
Independent Member of the House of Lords Commission and Mrs
Lawrence has held various non-executive directorship positions,
including as audit committee chair of FlyBe Group plc. Ms Twyning
and Ms Adegoke have each held senior legal roles at global
companies. In particular, Ms Adegoke is currently Group General
Counsel at the FTSE 100 company, Halma PLC.
During 2021, the Committee continued to keep under review the
Company’s internal financial controls systems that identify, assess,
manage and monitor financial risks and other internal control and risk
management systems, and the effectiveness of the Group’s risk
management system, through regular updates from management.
This included a review of the key findings presented by the external
and internal auditors having agreed the scope, mandate and review
schedule in advance.
Management with support from Ernst & Young continued to enhance
the online interactive dashboard that had been developed to
consolidate the businesses’ risk reporting to the Company. Since the
rollout of the dashboard, the Group’s risk management processes,
together with reporting and data collection from the businesses,
have continued to be enhanced. This has bolstered the Committee’s
oversight of risk areas and trends. 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, and also
reviewed and challenged a summary report of the Group enterprise
risk management profile. This summary report guided the Committee
on relevant updates to the Group risks (including the identification
of new and emerging Group risks), as reported in the Risks and
uncertainties section on pages 42 to 49, 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. Examples 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 confirmed their effectiveness. No
significant weaknesses were identified. The Committee reported its
conclusions to the Board at the next scheduled Board meeting.
Whistleblowing
The Committee is tasked with overseeing the adequacy and security
of the Company’s arrangements for its employees to raise concerns in
confidence in accordance with the Company’s whistleblowing policy,
including about possible wrongdoing in financial reporting or other
matters. The Company runs a Group-wide whistleblowing platform,
which is overseen by the Audit Committee and supported by the
Melrose senior management team, and ultimately reported to the
Board. The platform is monitored by the businesses’ legal,
compliance and HR functions, with support from the Melrose senior
management team. All employees have access to a multi-lingual
online portal, together with local hotline numbers that are available
24/7, in order to raise concerns, confidentially and anonymously,
about possible wrong-doing in any aspect of their business, including
financial and non-financial matters. The most material whistleblowing
cases are promptly notified to the Chairman of the Committee, and
quarterly whistleblowing reports are prepared by Melrose senior
management for discussion at each Committee meeting with a view
to ultimately reporting such matters to the Board.
Committee evaluation
The UK Corporate Governance Code (the “Code”) requires that FTSE
350 companies undertake a formal and rigorous annual evaluation of
the performance of the Board, its Committees, the Chairman and
individual Directors. In particular, FTSE 350 companies should
undertake an externally facilitated Board and Committee evaluation
once every three years. The last external Melrose Board and
Committee review was undertaken by Lintstock Ltd in 2020 and as
such, the Company is not required to undertake another externally
facilitated Committee evaluation until 2023. During the year, the
Company continued its ongoing internal review of the Committee and
collected feedback from Committee members with a similar range of
focal topics as featured in the 2020 external review. Specifically, the
assessment covered (i) the constitution and performance of the Board
and each Committee; (ii) the Chairman of the Board; and (iii) individual
performance reviews. 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 wished to raise as part of the ongoing review.
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 2021, a series of questions covering key areas of
the audit process that the Committee is expected to have an opinion
over were considered by 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.
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 of
the Committee also sought feedback from the Chief Executive and the
internal auditor. The Company Secretary subsequently produced a
paper 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 reviewed the regulations provided by the
European Commission (as they form part of retained UK law) and
the Competition and Markets Authority (“CMA”) on audit tendering.
Rotation of the external audit firm is required by 2024 and the
Committee has commenced preparation for the tender process in
order to appoint a new external auditor by the end of this financial year.
The current audit engagement partner was appointed in 2019. The
Company’s audit firm is required to be rotated by 2024. Therefore, the
audit engagement partner will serve until the new audit firm assumes
the role of the incumbent external auditor.
Melrose Industries PLC Annual Report 2021GovernanceMelrose Industries PLC Annual Report 2021
98
Audit Committee report
Continued
Nomination Committee report
99
Non-audit services
Under CMA and EU regulations (as they form part of retained UK law),
there are restrictions on the type and amount of non-audit services
provided by Deloitte, 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 in respect of the
current financial year, with audit fees in 2018, 2019 and 2020
being relevant.
A policy on the engagement of the external auditor for the supply of
non-audit services is in place to ensure that the provision of non-audit
services does not impair the external auditor’s independence or
objectivity. 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’s policy in relation to
non-audit services is kept under regular review and was last updated
in 2020 to reflect current market practice.
Despite being well within the CMA guidance, the Committee has
taken into account feedback from institutional shareholder services
and has continued migrating non-audit work to other firms including in
respect of corporate finance affairs and risk management. It has also
obtained reward, tax, consulting advice and advice on the
remuneration reporting regulations and preparation of the Directors’
remuneration report from PwC LLP. This will be reassessed as part of
the preparation for the audit tender this year.
During 2021, the main services provided by Deloitte LLP other than
statutory audits 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 in the future. The Company’s non-audit fee paid to the
external auditor of £1.0 million represents 9% of the audit fees for 2021.
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 Melrose senior management, including the Head of
Financial Reporting, followed by a meeting to discuss these key
findings and to agree on resulting actions.
The 2021 internal audit programme continued to be impacted by
travel disruption caused by the COVID-19 global pandemic, resulting
in the majority of site visits being conducted remotely. However, as
was the case in 2020, the internal audit programme was adapted to
reflect an achievable level of activity, acknowledging the ongoing
implications from the global pandemic. Furthermore, the relaxation of
travel restrictions in Q4 resulted in an increased number of physical
site visits towards the end of the year. A total of 42 sites were
assessed in 2021.
To supplement the internal audit programme, a targeted sample of
sites were selected for a balance sheet review with interviews of site
controllers conducted by the internal auditor and senior management,
together with self-certification questionnaires which were discussed in
detail with divisional finance directors at the internal control sign-off
meetings. A report of all 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.
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. This was particularly relevant in 2021 where
Deloitte LLP audited the carve-out financial statements in respect
of the sale of Nortek Air Management. In such cases, the Chairman
of the Committee must first approve such work.
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
site-based accounting functions, including specific action plans to
address the shortcomings identified. Follow-up visits were performed
during 2021 which identified significant progress in the improvement
of financial controls at sites.
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.
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.
The Committee would like to thank the Group finance team, the
internal auditor, the external auditor and the Group Company
Secretariat for their hard work throughout 2021.
Liz Hewitt
Chairman, Audit Committee
3 March 2022
Nomination
Committee report
Charlotte Twyning
Nomination Committee Chairman
The Nomination Committee (the
“Committee”) has overall responsibility for
making recommendations to the Board on
all new appointments and for ensuring that
the Board and its Committees have the
appropriate balance of skills, experience,
independence, diversity and knowledge to
enable them to discharge their respective
duties and responsibilities effectively.
Member
No. of meetings(1)
Charlotte Twyning (Chairman)(2)
Justin Dowley
Liz Hewitt
David Lis
Funmi Adegoke
2/2
2/2
2/2
2/2
2/2
(1) Reflects regularly scheduled meetings of the Committee.
(2) Mr Archie G. Kane retired as a Non-executive Director and as Chairman of the
Committee on 31 December 2021 and was succeeded by Ms Charlotte Twyning with
effect from 1 January 2022. He attended both scheduled meetings of the Committee
during the year.
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 of
the Board 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 Board of Directors’ Diversity policy
and the Melrose Diversity and Inclusion policy; 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 reviewed by
the Committee in November 2021, are available to view on our
website, www.melroseplc.net, and from the Company Secretary at
Melrose’s registered office.
Committee membership and attendance
The Committee comprises solely independent Non-executive
Directors. Archie G. Kane, former Chairman of the Committee, retired
from the Board on 31 December 2021, and was succeeded as
Chairman of the Committee by Charlotte Twyning effective 1 January
2022, who has been closely involved in the Committee’s activities
since her appointment as a Non-executive Director in 2018.
The Committee is expected to meet not less than twice a year and
during 2021, the Committee met twice. The attendance of its
members at these Committee meetings is shown in the table above.
The Company Secretary acts as secretary to the Nomination
Committee. On occasion, the Nomination Committee invites the Chief
Executive and the Executive Vice-Chairman 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 are 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 aid
effective succession planning across the short, medium and long-term.
Succession planning arrangements for the Board as a whole were
reviewed by the Committee in 2021. This included a review and
discussion of the skills set, tenure, diversity and independence of
those already on the Board, to allow the Committee to satisfy itself
that the right balance of skills, experience and diversity are reflected
and being developed, that the composition of the Board is consistent
with the Board of Directors’ Diversity policy, and to ensure that the
Company continues to meet the expectations of the Hampton-
Alexander Review and the Parker Review. The Committee also took
an active interest in discussing and reviewing succession planning
arrangements for the Melrose senior management team, including the
career planning and talent management programmes currently in
operation for them. Again, this was to allow the Committee to ensure
that the right balance of skills, experience and diversity are reflected
and being developed, that the Melrose senior management team
reflects the requirements of the Melrose Diversity and Inclusion policy,
and to ensure that the Company continues to meet the expectations
of the Hampton-Alexander Review with respect to its Executive
Committee and direct reports. The Committee is satisfied as to the
Company’s current succession planning arrangements, and will
continue to keep these under review and discussion in 2022.
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101
Further details of Melrose’s commitment to diversity and the various
diversity initiatives undertaken within the Group can be found in the
Sustainability report on pages 66 to 71. Additionally, further details
on diversity and Board skills can be found on page 81 of this
Annual Report.
Evaluation
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 2020,
for which the Company engaged Lintstock Ltd.
Whilst the Company is not required to undertake another externally
facilitated Board and Committee evaluation until 2023, during 2021
the Company continued its ongoing internal review of the Board and
each Committee, both internally within each of those bodies and with
the Chairman of the Board and the Chairman of each Committee
respectively. These evaluations were conducted and facilitated by
the completion of questionnaires, and discussions at a Committee
meeting, with follow-up actions taking place as relevant. Members
were also given the option for meetings to be scheduled with the
Chairman of the Committee about any relevant matters that they
wished to raise as part of the ongoing review. Please see the
Corporate Governance report on pages 90 to 91 for further details.
Charlotte Twyning
Chairman, Nomination Committee
3 March 2022
100
Nomination Committee report
Continued
During the year, Mr Peter Dilnot, Chief Operating Officer of Melrose
since April 2019, joined the Board in January as an executive Director.
Mr David Roper, one of Melrose’s co-founders, retired from the Board
in May as planned, having originally delayed his retirement for a year in
order to provide the Board with the benefits of his expertise as the
effects of the pandemic continued to impact the Group. In addition,
as mentioned above, Archie G. Kane, Non-executive Director and
Chairman of the Nomination Committee, retired from the Board on
31 December 2021.
The Board was pleased to welcome two new Non-executive Directors
to the Board in 2021, Mrs Heather Lawrence and Ms Victoria Jarman,
following a thorough recruitment process conducted by Stonehaven
International, an external recruitment consultancy firm unconnected
with the Company and its Directors. Their biographies can be found
on pages 82 to 83. They bring with them a broad range of skills and
experience which complement those skills already on the Board.
It is noted that Ms Liz Hewitt, Senior Independent Director and
Chairman of the Audit Committee, will have served as a Non-executive
Director of the Company for nine years in October 2022. Under the UK
Corporate Governance Code (the “Code”), this is a key date in the
consideration of a Non-executive Director’s independence. Liz Hewitt
has agreed to retire from the Board at the conclusion of the 2022
Annual General Meeting, and will therefore not stand for re-election.
Heather Lawrence will succeed Liz Hewitt as Chairman of the Audit
Committee, having held similar positions on other FTSE boards. This
was a key part of her recruitment, in order to retain the necessary
expertise required to perform this role, and she has benefited from a
detailed handover in the year up to Liz Hewitt’s departure.
Mr David Lis, Chairman of the Remuneration Committee, will
assume the role of the Senior Independent Director upon Liz Hewitt’s
retirement from the Board. As well as being the most senior Non-
executive Director of the Board after the Chairman of the Board and
Liz Hewitt, David Lis also has the necessary experience for the
shareholder facing aspect of this role, having deep insight into the
expectations of Melrose’s institutional investor base gained from his
years of experience in investment management and in his role of
Chairman of the Remuneration Committee. In the Committee’s view,
he is very well positioned to take over this role.
Chairman’s tenure
The Committee also continued to review the role of Mr Justin Dowley
as Melrose’s inaugural Non-executive Chairman. Although he was
appointed to that role in 2019, he first joined the Board as a Non-
executive Director in September 2011, meaning he has served on the
Board for over nine years. As mentioned above, this is a key date in
the consideration of his independence under the Code.
Following positive engagement with key shareholders in 2020, the
Committee and the Board approved Justin Dowley’s extended tenure
for up to three years beyond the expiry of his nine year tenure in 2020
in accordance with the Code, to (amongst other things) help oversee
succession planning for the Board. Justin Dowley remains subject to
annual re-election at the Company’s AGM each year and, reflective of
the positive responses during the engagement, his reappointment
continues to be strongly supported by shareholders.
Re-election and 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
Heather Lawrence and Victoria Jarman should stand for election for
the first time), and the justifications for such (re-)elections are set out
on pages 91 to 92 of this Annual Report and in the Notice of Annual
General Meeting on pages 211 to 216. As noted above, Liz Hewitt will
retire as a Non-executive Director at the conclusion of this year’s AGM
and will therefore not stand for re-election.
Skills
Our Board possesses a wide range of knowledge and experience
from a variety of sectors. In order to ensure the maximum effectiveness
of the Board, the Committee continues to review the balance of skills
and experience of Board members. The Committee considers that the
current Directors, including the Non-executive Directors, have a diverse
range of skills and experience that is necessary both to discharge their
duties as Directors of the Company, and to create a culture of
collaborative and constructive discussion, which enables the Board
to contribute effectively to the delivery of the Company’s strategy.
The balance of skills across the Board is regularly reviewed by the
Committee. As set out on page 81, the current Directors have skills
and experience across five areas that the Committee considers to be
key to delivering the Company’s strategy: industrial; accounting and
finance; legal; investment; and corporate governance.
Business unit succession planning
Given the strength of Melrose’s decentralised operating structure in
achieving the Group’s strategic objectives, the Committee does not
have direct responsibility for the succession planning arrangements
of the businesses. This is the responsibility of the executive Directors,
although the Committee retains oversight of changes and has access
to the divisional executive teams through site visits and the business
review cycle.
Diversity overview(1)
Board gender diversity
Board ethnic diversity
Melrose Executive Committee
Senior management
and direct reports(3)
Male
Female
58%
42%
Non BAME(2)
BAME(2)
92%
8%
Male
Female
64%
36%
Male
Female
63%
37%
(1) As at 31 December 2021. Archie G. Kane has since retired from the Board.
(2) Black, Asian and Minority Ethnic.
(3) 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.
Diversity and inclusion
Melrose is a meritocracy and individual performance is the key
determinant in any appointment, irrespective of ethnicity, gender or
other characteristic, trait or orientation. However, the Board and the
Committee also recognise the importance of diversity, and the
Committee keeps its approach to diversity under regular review,
including ensuring the development of a diverse Board and reviewing
diversity policies on an annual basis. As a central part of its
sustainability strategy, Melrose encourages diversity in all its forms
both internally at all levels of the Group, and externally. In particular,
four of the last five Non-executive Director appointments have been
women, including the most recent two made in 2021, and all
departures from the Board have been men. Furthermore, two of the
Committee Chair roles in 2022 will be held by women. Melrose also
continued to meet the Parker Review target of having one Director
from an ethnic minority background on the Board by the end of 2021.
The Committee currently takes into account a variety of factors before
recommending any new appointments to the Board, including relevant
skills to perform the role, experience and knowledge needed to
ensure a rounded Board and the benefits each candidate can bring
to the overall Board composition. The Committee also takes into
account race, ethnicity, country of origin, nationality, cultural
background and gender in the selection process to ensure a diverse
Board and it also strongly encourages executives to adopt the same
approach when making appointments to the Melrose Executive
Committee and the wider senior management team. The most
important priority of the Committee, however, has been, and will
continue to be, to ensure that the best candidate is selected, and
this approach will remain in place going forward.
As at 31 December 2021, Melrose had 42% female representation
on its Board, which has increased to 45% following the retirement
of Archie G. Kane on 31 December 2021, and therefore meets the
expectations of the Hampton-Alexander Review of having 33% female
representation on its Board.
Below Board level, Melrose established an Executive Committee at
the beginning of 2020, in part, in order to better facilitate the way for
a diverse pipeline for succession planning purposes and to recognise
the diversity of thought at a senior level. This focus is represented
through the fact that the Executive Committee and its direct reports
consisted of 37% female representation (and 36% female
representation specifically at an Executive Committee level) as at
31 December 2021, which is in line with the Hampton-Alexander
Review target of diversity at this level.
As with succession planning, given Melrose’s decentralised operating
structure, the Committee does not have direct responsibility for the
actual diversity policies and initiatives within the businesses, although
they are required to align to the Melrose Diversity and Inclusion policy
as a minimum standard, and Melrose provides constant
encouragement to the businesses to make continual improvement.
The Committee acknowledges that diversity and inclusion is a
changing landscape. In 2021, the Committee determined to separate
the existing Diversity policy into two distinct policies: a Melrose Board
of Directors’ Diversity policy, and a Diversity and Inclusion policy for
Melrose more generally, in order to add clarity to the different policies
in this area. The policies can be viewed on the Company’s website at
www.melroseplc.net/sustainability/. The Board of Directors’
Diversity policy sets out the Committee’s commitment to ensuring that
Board membership and pipeline for succession remains diverse, and
that it takes into account the recommendations of the Hampton-
Alexander Review and the Parker Review. The Melrose Diversity and
Inclusion policy, which is applicable to all Melrose employees, sets
out Melrose’s position on diversity and inclusion in its workforce. In
particular, it highlights that Melrose aims to create a workforce that is
diverse and inclusive, free from bullying, harassment, victimisation and
unlawful discrimination. The principles of the policy apply throughout
the Group, and our businesses are encouraged to promote diversity
once they have entered the Group.
Melrose Industries PLC Annual Report 2021GovernanceMelrose Industries PLC Annual Report 2021 102
Directors’ Remuneration report
103
Directors’
Remuneration report
Chairman’s Annual Statement
David Lis
Remuneration Committee Chairman
Dear Shareholders,
On behalf of the Board, I am pleased to present our report on Director
remuneration (the “Annual Report on Remuneration”) at the end of
another successful year for Melrose, in which the Group recovered
well from the pandemic, despite continued market volatility. This is
reflected in the adjusted diluted earnings per share, which increased
from 2.4 pence in 2020 (restated to a loss of 0.6 pence when including
continuing business only) to a profit of 4.1 pence in 2021, with a
proposed final dividend of 1 pence per share (up 33% on last year),
giving a full year dividend of 1.75 pence per share (up 133% on last
year). The Company also returned £729 million to shareholders as a
result of the successful disposal of Nortek Air Management. It was
generally another strong year of cash generation.
Management continue to work hard on implementing their improvement
strategies within the businesses, driving profitability and improvements
in working capital, and investing significantly in the businesses and their
technologies, including those technologies that are designed to
contribute to the sustainable development of their respective sectors.
In addition, the GKN UK defined benefit pension schemes have been
effectively fully funded, from a total starting accounting deficit at the time
of the GKN acquisition of £0.7 billion. This will significantly improve the
security of members going forward, and is an important milestone for
the Company as a responsible steward of the businesses it acquires.
It is with this performance in mind, and in line with Melrose’s remuneration
philosophy of paying only for performance, that the Remuneration
Committee (the “Committee”) has taken its decisions in respect of
executive Director remuneration arrangements for 2021 and 2022.
Melrose remuneration structure
Our long-standing executive remuneration structure is both well
understood and well supported, being central to the success delivered
for our shareholders. We remain firm believers that Melrose’s existing
remuneration structure is entirely appropriate in supporting our “Buy,
Improve, Sell” strategy. Our reward structure has always enjoyed strong
support from our investors, as most recently demonstrated by the
votes in favour of the Directors’ Remuneration Policy at the 2020
Annual General Meeting (AGM), the 2020 Employee Share Plan at the
January 2021 general meeting, and the approval of the 2020 Directors’
Remuneration Report at the 2021 AGM.
Executive Directors’ salaries continue to deliberately remain well below
the lower quartile of our FTSE 100 peers, with annual bonuses similarly
capped well below our peers at 100% of salary. With the increasing
focus on sustainability, during 2021 the Committee considered how
progress on sustainability matters may be better incorporated into the
Company’s executive remuneration structure. The Committee has
concluded that this is best achieved through the current approach, within
the annual bonus scheme as part of the strategic element, as specific
objectives relating to key items within the broader topic of sustainability,
as determined by the Committee (see page 104 for further details).
Executive Directors received limited benefits and a pension contribution
capped at 15% of salary, being the same percentage contribution that all
Melrose head office employees receive, and therefore aligned with the
workforce. The table on page 105 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
almost £1 million from the average FTSE 100 CEO annual remuneration
in 2020.
As this and the table on page 105 clearly indicate, the opportunity for
significant reward has always been heavily weighted to the Company’s
long-term incentive arrangements, which are long-term in nature and
based entirely 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 they do not
deliver the required level of performance to achieve the threshold return,
they receive no payout, and we strongly believe that this continues to
be the right approach for Melrose. We note that the continued market
volatility has weighed on the current scheme, such that if the
crystallisation date had been 31 December 2021 (effectively the half-way
point of the performance period), then there would have been no award
to the executive Directors. However, your Board believes that current
initiatives being undertaken by management in the businesses will deliver
value to shareholders within the remainder of the performance period.
The Committee has determined to exercise its discretion in relation to
the payment of the 2021 annual bonus to the Chief Operating Officer
in cash, while he continues to build up his minimum shareholding
requirement in compliance with the Directors’ Remuneration Policy.
The Committee’s justification for this is set out on page 107.
Full details are set out in the Annual Report on Remuneration on
pages 103 to 116 that will be put to an advisory vote at the 2022 AGM.
Shareholder engagement
We always strive for the full support of our shareholders in all that we
do. They are critical to our success, we keep them informed, and their
support is never taken for granted. We ran a comprehensive and
successful consultation with shareholders in 2020 and early 2021 on the
renewal of the Melrose long-term incentive arrangements, which was
central to the strong shareholder support received in favour of the 2020
Employee Share Plan at the general meeting in January 2021, with a
voting outcome of 82.64% in favour. There were no other key decisions
relating to our remuneration structure that necessitated a formal
engagement exercise with shareholders in 2021; however, we consult
with our key shareholders and proxy advisors during the year and we are
available to discuss any questions and concerns. The Committee will
continue its programme of engagement during 2022 on matters relating
to executive remuneration as appropriate, particularly as we approach the
next-scheduled renewal of the Directors’ Remuneration Policy in 2023.
We were very pleased that the 2020 Directors’ Remuneration Report
and the Directors’ Remuneration Policy both received strong
shareholder support at the 2021 AGM and the 2020 AGM respectively,
receiving voting outcomes of 99.57% and 98.40% respectively.
Your Board considers that the Melrose remuneration structure is
highly successful, appropriate for the value creation strategy, and
critical to the ongoing long-term performance of the Company. We
encourage you to provide your support for the 2021 Directors’
Remuneration Report at the 2022 AGM.
Yours sincerely
David Lis
Chairman, Remuneration Committee
3 March 2022
Annual Report on Remuneration
In this section of the Directors’ Remuneration report, we set out:
• the actual performance and executive remuneration outcomes for
the 2021 financial year; and
• the application of the current Directors’ remuneration policy (the
“Directors’ Remuneration Policy”) to the 2021 financial year and
how the Directors’ Remuneration Policy was operated in 2021.
The Directors’ Remuneration Policy was approved by shareholders at
the AGM on 7 May 2020 with over 98% of votes cast in favour of the
resolution, and subsequently amended on 21 January 2021 to include
the 2020 Employee Share Plan, which was approved by shareholders on
21 January 2021 with over 82% of votes cast in favour of the proposal.
The full details of the Directors’ Remuneration Policy can be found on
pages 103 to 111 of the 2019 Annual Report(1) and the full details of
the amendments can be found on pages 15 to 24 of the circular to
shareholders dated 29 December 2020(2).
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
CEO pay ratio
Percentage change in remuneration of the CEO
Relative importance of spend on pay
Page
104 and 113
None / 107
108 and 113
110
109 to 110
110 to 111
112
Consideration of matters relating to Directors’ remuneration
103 to 104
Statement of voting
Payments to Past Directors / For Loss of Office
116
None / 105
Melrose’s Remuneration Strategy
Since the Company was first established in 2003, 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
contribution for all Melrose head office employees) and limited
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 Melrose Employee Share Plan.
(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 Melrose Employee Share
Plan, which is entirely based on the creation of shareholder value.
(4) Pays only for performance – executive remuneration is heavily
weighted to the Melrose Employee Share 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 114 to 115. The Committee ensured that it took all of these
elements into account when establishing the Directors’ Remuneration
Policy, as well as its application to executive Directors during the period.
(1) Available at www.melroseplc.net/media/2536/melrose-ar2019.pdf.
(2) Available at www.melroseplc.net/media/2587/291220-melrose-circular.pdf.
Operation of the Directors’ Remuneration Policy in 2021
2021 has been a positive year for Melrose, despite challenging
conditions in the end-markets of our businesses, and the continued
impact of the pandemic. The Board is confident that the hard work of
management and the actions taken during 2021 will deliver the expected
outcomes as we move through 2022. The year marked another
milestone in Melrose’s “Buy, Improve, Sell” strategy, as we disposed of
the Nortek Air Management division, as well as the Brush and Nortek
Control businesses from our Other Industrial division. The sale of Brush
marked the final disposal from the highly successful FKI acquisition
which has overall delivered 2.6x shareholder money, and the Nortek Air
Management and Nortek Control disposals have put the Company on
track to double shareholder investment on the Nortek acquisition.
Management have continued to push the GKN businesses on their
improvement plans during 2021 and will continue to do so through 2022
and beyond. We are starting to see the benefits of the many operational
initiatives and restructuring projects that were executed during 2020 and
2021, which have significantly improved the Group’s trading position and
will continue to do so. Disciplined working capital management
contributed to strong cash generation across all GKN businesses and
enabled a significant reduction in leverage to mitigate against further
market volatility. The Group continues to hold the final business from
the Nortek acquisition, Ergotron, which has also had an extremely
successful year. Further details on the performance of each of our
businesses is included in the Divisional reviews on pages 12 to 29.
In 2021, the GKN UK defined benefit pension plans have been
effectively fully funded, ahead of plan, securing the future for their
members. This was a key milestone for the Company in terms of its
sustainability strategy and continued stewardship of its businesses,
as detailed in the Sustainability report on pages 54 to 77.
It is based on this performance, 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 2021 and 2022.
The Committee understands that shareholders expect executive
remuneration to be aligned with the overall experience of the
Company, its shareholders, employees and other stakeholders. As is
demonstrated elsewhere in this Directors’ Remuneration report – in
particular, Comparison to Peers (page 105), CEO Pay Ratio (pages
109 to 110, and Wider workforce considerations (page 112), we
believe that the remuneration structure operated by Melrose, and the
outcomes produced by the operation of this structure, are appropriate
and result in a strong alignment between the executive Directors,
shareholders and other stakeholders.
2021 key decisions
The Committee remains committed to a responsible approach to
executive pay in accordance with the current Directors’ Remuneration
Policy, which was effective from the conclusion of the 2020 AGM (as
amended with effect from the conclusion of the general meeting that
took place on 21 January 2021), 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
2021, consistent with the salary rises awarded to the wider Melrose head
office population. Salaries remained below the lower quartile of the
FTSE 100, as is demonstrated by the table on page 105. There were also
inflationary increases of 3% made to Non-executive Director basic fees
with effect from 1 January 2021, again consistent with the salary
changes effected in the wider Melrose employee population.
For 2022, an inflationary increase of 3% was made to the executive
Directors’ base salaries with effect from 1 January 2022 as set out on
page 108, consistent with the salary rises awarded to the wider Melrose
head office population. There were also inflationary increases made to
Non-executive Director basic fees with effect from 1 January 2022,
again consistent with the salary changes effected in the wider Melrose
employee population, as well as small increases to the additional fees for
holding the position of Senior Independent Director and Chairmanship
of the Nomination Committee, all as set out on page 113.
Melrose Industries PLC Annual Report 2021GovernanceMelrose Industries PLC Annual Report 2021 104
Directors’ Remuneration report
Continued
105
Although the annual bonus outcomes for 2021 were finally determined by
the Committee in 2022, we refer to them here for completeness, as they
are a key decision relating to the reporting period. The financial element of
the annual bonus was fully met, and the Committee did not consider that
there was any justification for an exercise of discretion to change this
outcome. The Committee carefully considered the strategic objectives
and the extent to which these were met during 2021. As is detailed further
on page 106, the Committee felt that management’s performance met
the strategic objectives in full, and likewise, the Committee did not
consider that there was any justification for an exercise of discretion to
change this outcome. We have therefore determined to make a full award
for the strategic objectives of 20%, and therefore a total award for the
annual bonus of 100%. In light of the Company’s performance during
2021, including the reinstatement of dividends and return of capital made
to shareholders, and the fact that the Group took no payments from the
UK Coronavirus Job Retention Scheme during 2021, with all amounts
received during 2020 having been repaid already prior to the end of 2020,
the Committee believes that the bonus outcome for 2021 is appropriate.
The Committee has determined to exercise its discretion in relation to
the payment of the 2021 annual bonus to the Chief Operating Officer
in cash, while he continues to build up his minimum shareholding
requirement in line with the Directors’ Remuneration Policy. The
Committee’s justification for this is set out on page 107.
There was no long-term incentive arrangement due to vest in respect of
2021, with the crystallisation date under the 2020 Employee Share Plan
being 31 May 2023. As such there was no payout in respect of the year.
The Committee has reviewed the remuneration outcomes for the year
and confirms that the Directors’ Remuneration Policy operated as
intended during the year. The Committee felt that the incentive
outcomes were in line with the overall performance of the Group.
Other than as referred to above, there were no deviations from the
Directors’ Remuneration Policy during the year and the Committee
did not exercise any other discretion to alter the outcomes from the
application of the performance conditions.
Business performance
As anticipated, 2021 saw a repositioning of our businesses on the
improvement tracks that they were on prior to the pandemic. All
businesses improved their adjusted operating margin in 2021
compared to 2020, ahead of plan or on track with their respective
restructuring projects. We also saw a continuation of the encouraging
signs of recovery in the end-markets of some of our businesses that
was seen in 2020, although certain markets remain challenging.
Further details on this are set out in the Chief Executive’s review on
pages 10 to 11 and the Divisional reviews on pages 12 to 29.
This Annual Report and financial statements, and specifically the
Group’s strategic KPIs on pages 30 to 31, demonstrates the good
progress that was made in 2021 towards the achievement of our
objective of building better, stronger businesses under our ownership,
even against a challenging backdrop. The Company’s Annual Bonus
Plan focuses directly and indirectly on rewarding executive Directors
and Melrose senior management for delivering these KPIs. The 2020
Employee Share Plan is designed to reward the flow-through of the
successful implementation of the strategy into longer-term sustainable
shareholder returns, consistent with previous incentive plans.
Sustainability
We mentioned in the last Directors’ Remuneration Report that the
Committee would be reviewing and considering in 2021 how progress
on sustainability matters may be better incorporated into the executive
remuneration structure. We appreciate that stakeholders are looking for
remuneration committees to ensure that executive compensation structures
and performance targets meaningfully reflect sustainability goals, and that
such targets are clearly linked to the Company’s commercial strategy. We
want to ensure that we do not make changes to our remuneration structure
for the sake of it; that we include purposeful targets, which are stretching
and measurable, but which make sense for our business model.
The Committee is of the view that the most appropriate place to
recognise such progress within the Melrose executive remuneration
structure is in the Annual Bonus Plan, as it allows for performance
assessment against a number of strategic elements, in addition to the
focus on financial elements. The Committee has considered whether any
amendments to the Directors’ Remuneration Policy would be necessary
in order to achieve this, and has concluded that currently this progress is
most appropriately measured through the current annual bonus structure
as part of the strategic objectives. This gives the Committee the
maximum flexibility to determine which sustainability objectives are
the most important in any particular period, as well as linking directly
to the Company’s business model by enabling an alignment against
the Company’s typical holding period for its businesses. It will also allow
the Committee to determine what allocation of the strategic element
is appropriate for these objectives, depending on their importance; it
considers this to be important, given that topics relating to sustainability
matters are constantly evolving in nature and priority, and given that
management are still working with the businesses to formulate their
sustainability strategies. Therefore, recognising that shareholders would
not normally be asked to review the Directors’ Remuneration Policy this
year, no amendments to the Directors’ Remuneration Policy were
proposed at this time. However, the Committee noted that there were
limitations that could be addressed and will continue to review the
position as part of its considerations for the next-scheduled renewal
of the Directors’ Remuneration Policy in 2023.
Single total figure of remuneration for the executive Directors for the 2021 financial year (audited)
The following chart summarises the single figure of remuneration for 2021 in comparison with 2020(1):
Executive Director
Christopher Miller
David Roper(5)
Simon Peckham
Geoffrey Martin
Peter Dilnot(6)
Total
Total salary
and fees
Period
£000(2)
Taxable
benefits
£000
2021
2020
2021
2020
2021
2020
2021
2020
2021
2021
2020(7)
551
490
230
490
551
490
450
395
450
2,232
1,866
2
2
1
3
2
3
9
10
15
30
18
Bonus
£000
n/a
n/a
n/a
n/a
551
107
450
86
450
1,451
193
LTIP
£000(3)
Pension
£000(4)
–
–
–
–
–
–
–
–
–
–
–
83
80
34
80
83
80
68
65
68
335
305
Total
£000
635
572
265
574
1,186
680
977
556
983
4,047
2,382
Total Fixed
£000
Total
Variable
£000
635
572
265
574
635
573
527
470
533
2,596
2,189
–
–
–
–
551
107
450
86
450
1,451
193
(1) The “Total” figures in the above table may not add up to the sum of the component parts due to rounding.
(2) The executive Directors, with the rest of the Board, committed to a temporary 20% reduction in salary in 2020 to support the Company’s cash management strategy in light of the pandemic. The
amounts stated in the table for 2020 are the actual amounts that were paid to the executive Directors.
(3) The 2017 Incentive Plan crystallised on 31 May 2020 for no value. The 2020 Employee Share Plan, which has a commencement date of 31 May 2020, is a five-year plan in total (comprised of a
three-year performance period and a two-year holding period). Accordingly, no value was vested to participants under either plan in respect of the year to 31 December 2020 and no value was
vested to participants under the 2020 Employee Share Plan in respect of the year to 31 December 2021.
(4) All amounts attributable to pension contributions were paid as a supplement to base salary in lieu of pension arrangements.
(5) David Roper retired as an executive Director on 31 May 2021. The amounts included in the single figure of remuneration for 2021 are for the months of the year during which he was an executive Director.
(6) Peter Dilnot was appointed as an executive Director on 1 January 2021.
(7) The total amounts for 2020 reflect the total remuneration paid to the executive Directors in role during 2020.
Payments to past directors/for loss of office (audited)
David Roper, co-founder of Melrose, retired as a Director and as Executive Vice-Chairman of Melrose on 31 May 2021. He received his salary
and benefits (including amounts attributable to pension contributions) from 1 January 2021 up to and including the date of his retirement on
31 May 2021. David Roper did not participate in the 2021 Annual Bonus Plan and he was not granted any further long-term incentive or other
share awards in 2021. He retained two elements of his existing compensation during the year which technically qualify as payments for loss of
office. Firstly, he continued to receive private medical insurance from retirement until the end of 2021, with a total value of £1,000. In addition, he
retains his right to his Conditional Awards under the 2020 Employee Share Plan, qualifying as a “good leaver” under the rules of that plan. The
Conditional Awards will vest in accordance with the rules of the 2020 Employee Share Plan. Other than the amounts disclosed on page 104,
no other remuneration payment was made to David Roper in the year.
Archie G. Kane retired as a Director and as Chairman of the Nomination Committee of Melrose on 31 December 2021. He received his
Non-executive Director fees from 1 January 2021 up to and including 31 December 2021. Non-executive Directors do not receive any taxable
benefits, pension contributions or variable remuneration. Other than the amounts disclosed on page 113, no other remuneration payment was
made to Archie G. Kane in the year and therefore no payment was made for loss of office.
No other payments for loss of office or any other payments have been made to former Directors during the year.
Comparison to peers
As part of an ongoing commitment to full transparency around remuneration structures at Melrose, the Committee has again benchmarked the
Melrose Chief Executive’s 2021 pay against the most recent available remuneration information from our FTSE 100 peers, being 2020(1).
As the table below shows, the single total figure of remuneration for the Melrose Chief Executive in 2021 was almost £1 million less than the
FTSE 100 average in 2020, notwithstanding the reductions in both salaries and bonuses seen across the FTSE 100 in 2020 due to the
pandemic, which will have impacted these comparison numbers. 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
Melrose Employee Share Plan, which is entirely performance based, and which ensures that executive Directors only receive substantial
rewards when they have outperformed and created very significant value for shareholders.
Metric (GBP ’000)
Melrose Chief Executive
FTSE 100 Lower Quartile
FTSE 100 Average
FTSE 100 Upper Quartile
Total
1,186
1,048
2,130
2,755
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 2020).
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 3% effective from 1 January 2021.
Metric (GBP ’000)
Annual Salary
Melrose Chief Executive
FTSE 100 Lower Quartile
FTSE 100 Average
FTSE 100 Upper Quartile
551
668
937
1,078
Pensions
Executive Directors receive the same 15% of base salary pension contribution(2) as the rest of the Melrose head office employees, thereby
providing alignment with the workforce. The Committee also notes that this is within the range of the wider workforce contributions provided in
the UK. The level of the executive Director pension contributions 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)
Pension Contribution
Pension Contribution %
Melrose Chief Executive
FTSE 100 Lower Quartile
FTSE 100 Average
FTSE 100 Upper Quartile
83
15%
111
11%
175
17%
217
20%
Benefits
Executive Directors receive the same taxable non-pension benefits as the rest of the Melrose employees, being generally private medical
insurance and a fuel allowance. The Group Finance Director also received paid train travel to and from London and the Chief Operating Officer
received a car allowance.
Metric (GBP ’000)
Melrose Chief Executive
FTSE 100 Lower Quartile
FTSE 100 Average
FTSE 100 Upper Quartile
Benefits
2
20
73
75
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. The Executive Vice-Chairman does not participate in the annual bonus scheme.
For context, it is noted that for 2020, being the year for which the FTSE 100 comparison figures are provided, the Chief Executive received a
bonus of 20% of salary, being £107,000.
Metric (GBP ’000)
Annual Bonus
Max bonus opportunity %
Melrose Chief Executive
FTSE 100 Lower Quartile
FTSE 100 Average
FTSE 100 Upper Quartile
551
100%
0
150%
902
203%
1,369
215%
(1) For comparison purposes, the included peer information excludes any payments made under long-term incentive arrangements, as none were payable to the Melrose Chief Executive in 2021.
(2) All of the amounts attributable to pension contributions were paid as supplements to base salary in lieu of pension arrangements.
Melrose Industries PLC Annual Report 2021GovernanceMelrose Industries PLC Annual Report 2021 106
Directors’ Remuneration report
Continued
107
2021 Annual Bonus (audited)
The 2021 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 100% of their 2021 base salary, based on 2021 performance, with the full
breakdown of the award calculation set out below.
As is shown by the table, the financial element of the 2021 annual bonus was satisfied in full and therefore a full award was made for this part
of it. The Committee did not seek to exercise any discretion to adjust for this. With respect to the strategic element, having given detailed and
thorough consideration to each of the strategic objectives and management’s performance against them during 2021, the Committee
determined that each of the strategic objectives was fully met during 2021 and therefore that the strategic element was met in full. The
Committee determined that no exercise of discretion to adjust this element of the award was required. Full disclosure of the strategic objectives
and why the Committee determined that these had been met is provided below. The Committee considers that the payout is consistent with
wider stakeholder experience, including shareholders and employees.
The Committee continues to be aware of the guidance published by the Investment Association and other governance bodies, as well as
institutional shareholders, regarding the payment of executive annual bonuses while the COVID-19 pandemic continues. In light of the
Company’s performance during 2021, including the reinstatement of dividends and return of capital made to shareholders, the Committee
believes that the executive remuneration awarded for 2021 is appropriate and in line with that guidance. It is noted that the Group took no
payments from the UK Coronavirus Job Retention Scheme during 2021, with all amounts received during 2020 having been repaid already
prior to the end of 2020, and it did not raise any capital from shareholders in response to the pandemic.
As mentioned on page 104, the Committee’s view is that the annual bonus plan is the appropriate place within the Melrose executive
remuneration structure to incorporate process on sustainability matters. The Committee specifically considered environmental, social and
governance factors when considering the strategic objectives for 2021 (outlined below) and the extent to which these were met by the executive
Directors. Specific objectives for sustainability were included in the 2021 annual bonus scheme as part of the strategic objectives.
Financial Objectives (80%)
Percentage of maximum bonus earned
Threshold
Target
Maximum
Actual Performance
EPS Growth
% award
5%
20%
10%
40%
20%
80%
71%(1)
80%
Percentage of maximum bonus earned
80%
EPS Growth sub-total:
Strategic Objectives (20%)
Completion of restructuring
projects – 4%
Management made significant progress with the “Improve” phase of Melrose ownership for the GKN businesses, tackling some
quite complex and chronic challenges, including closures of multiple unviable sites and exiting non-core business. In addition
to completing these restructuring projects and ensuring that the full benefits of these projects will be felt for the businesses,
management were mindful of the impact on wider stakeholders. As discussed in further detail in the Section 172 statement on
pages 50 to 53, no decision to close any site was taken lightly or without exploring all alternative options, and some innovative
solutions were found, such as the reindustrialisation of the GKN Automotive site in Firenze, Italy.
Cash generation across the
Group – 3%
Against the continuing challenges of the global pandemic, it was another strong year of positive cash generation for all businesses
across the Group, at a cash conversion rate of 110% before capital expenditure and restructuring costs. Even after all costs
including restructuring costs, Melrose was able to end the year having generated free cash flow of £125 million, which was
achieved through, amongst other things, strong working capital and inventory management, and which meant that restructuring
projects were self funded throughout the year.
Reduction of Group debt
and liabilities – 3%
The net debt of the Group at 31 December 2021 was £0.95 billion. This represents a reduction of 67% on the previous year,
and has resulted in the Group holding very comfortable leverage of 1.3x adjusted EBITDA, well below the Group’s long-term
average. This represents the repayment of all of the debt drawn down as part of the GKN acquisition in 2018 (net of the amount
used to fund dividends and the return of capital in 2021).
Return to margin target
path – 3%
The global pandemic caused major disruption to the improvement plans of all businesses in the Group during 2020. During
2021, management have ensured that all intended projects to reignite these plans were commenced, and have reset the cost
base of each business, so that they should meet their stated margin targets as their markets recover to pre-pandemic levels.
Sustainability – 4%
Improving UK pension
scheme funding – 3%
Publish sustainability targets and commitments:
Following on from the commitment the Group made in 2020 to net zero Greenhouse gas emissions by 2050, in accordance
with its materiality matrix, management worked closely with each of the businesses to set meaningful sustainability targets and
commitments in 2021, and established a robust data platform that will enable progress against these targets to be measured.
Publish inaugural TCFD disclosures:
Management have conducted a thorough assessment of the Group’s (and each business’s) climate-related risks and
opportunities, detail on which is reflected in the Group’s first disclosures in compliance with the requirements of the new Listing
Rule on climate-related disclosures, reporting against all the key areas recommended by the Task Force on Climate-Related
Financial Disclosures (“TCFD”), which are set out on pages 60 to 61.
Improve sustainability benchmarking scores and external disclosure:
The Group’s sustainability scores with the relevant agencies have increased significantly, due to both improved performance
and the level and detail of reporting. In line with the approved strategy, the Company’s MSCI ESG score improved to A in 2021,
placing Melrose above average for Global Industrial Conglomerates, and its ESG Risk Management score with Sustainalytics
improved from 28.4 (“average”) in 2020 to 53.6 (“strong”) in 2021, which placed it in the top quartile of peers. Furthermore, in the
currently crowded landscape of ESG ratings agencies, there were improvements across the board.
Through a combination of increased annual contributions, special disposal-related contributions and other factors,
management were able to eliminate the funding deficit of the GKN UK defined benefit pension schemes and deliver on
Melrose’s commitment to making the schemes fully funded to a more prudent level, ahead of schedule. These actions have
vastly improved the long-term positions of these schemes and provided security for their members, as well as freeing up future
cash flows for the Group, with no funding requirement from future disposal proceeds.
Strategic Objectives sub-total:
Total annual bonus for 2021:
4%
3%
3%
3%
4%
3%
20%
100%
(1) The 2020 audited results have been restated to account for discontinued businesses. As a result, adjusted earnings per share for 2020 has been restated from 2.4 pence to a loss of 0.6 pence.
However, the Committee has taken the conservative approach of using the original figure for 2020 when calculating growth in EPS between 2020 and 2021.
The 2021 bonus payments to the Chief Executive and the Group
Finance Director will be made in cash, as both have exceeded their
minimum shareholding requirements. As per the terms of the
Directors’ Remuneration Policy, clawback measures will apply
to the 2021 annual bonus payments.
Under the terms of the Directors’ Remuneration Policy, the Chief
Operating Officer, who was appointed as a Director on 1 January
2021, has three years from his appointment in which to meet the
minimum shareholding requirement of 300% of salary. As at
31 December 2021, the Chief Operating Officer did not meet this
requirement, although he made purchases of 82,000 ordinary shares
during the year towards this requirement, for a total purchase price of
approximately £125,000, which is equal to approximately 50% of his
net 2021 annual bonus. Under the terms of the Directors’
Remuneration Policy, up to 50% of an executive Director’s bonus
award may be deferred into shares for up to two years, where he
or she does not meet the minimum shareholding requirement.
The Committee has determined to exercise its discretion and to award
the Chief Operating Officer’s annual bonus for 2021 in cash, while he
continues to build up to the minimum shareholding requirement. This
was considered to be appropriate in light of his acquisition of shares
during the year, which were equal to approximately 50% of his net
2021 annual bonus, the unprecedented impact of the pandemic on
the performance of the 2017 LTIP (in which the Chief Operating Officer
was a participant), which caused it to crystallise for no value (and
would have been awarded in shares and therefore contributed
towards meeting the requirement), the further period available to build
the necessary stake, which will grant him sufficient time outside of the
Company’s closed periods in which to make further purchases of
shares to the extent required, and that such a payment in cash is not
misaligned with shareholders and other stakeholders. The Committee
considers that the Chief Operating Officer continues to remain fully
incentivised under the 2020 Employee Share Plan, which is for the
benefit of, and aligned with, the interests of shareholders.
Long-term incentive arrangements (audited)
No long-term incentives were either granted or crystallised during the
2021 financial year under the 2020 Employee Share Plan.
The 2020 Employee Share Plan, which was approved by shareholders
on 21 January 2021, is due to crystallise on 31 May 2023. Participants
in the 2020 Employee Share Plan share in 7.5% of the increase in
invested capital above a 5% annual charge, measured at the end of a
three-year performance period commencing on 31 May 2020, which
the Committee considers to be the appropriate performance
condition in light of the Company’s business model and strategy.
Awards are subject to an annual rolling cap and downwards
adjustment in the event of an earlier than expected aerospace market
recovery, which means that executive Directors will not be rewarded
for windfall gains. The awards under the 2020 Employee Share Plan
are structured as Conditional Awards, which are contingent rights to
be granted an award of ordinary shares of the Company or a nil cost
option (exercisable into ordinary shares of the Company) on the
crystallisation date.
The Conditional Awards of the executive Directors under the 2020
Employee Share Plan were made in one grant on 29 December 2020,
subject to approval by shareholders. This approval was granted at the
general meeting that was held on 21 January 2021. Full details of the
2020 Employee Share Plan, including the participation rate
percentages of the executive Directors, are set out in the circular
dated 29 December 2020(1).
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 2020 Employee Share Plan as if the
crystallisation date was 31 December 2021 instead of the actual
crystallisation date of 31 May 2023. As this demonstrates, as at
31 December 2021, no value had currently accrued to the 2020
Employee Share Plan.
Theoretical value under the 2020 Employee Share Plan if crystallised on
31 December 2021 rather than on the 2023 scheduled payment date
2020
Invested capital from (and including) May 2020 up to
(and including) December 2021
£6,336,495,231
Index adjustment/minimum return
£559,723,998
Indexed capital
£6,896,219,229
2021
Number of issued ordinary shares on 31 December 2021(2)
4,372,429,473
Average price of an ordinary share for 40 business days prior to
and including 31 December 2021
155.94p
Deemed market capitalisation of Melrose based on average price of an
ordinary share for 40 business days prior to 31 December 2021
£6,818,311,885
Overall change in value for shareholders since 31 May 2020
(£77,907,344)
Theoretical value to management and shareholder dilution calculated
at 31 December 2021
7.5% of change in value
0
Total number of new shares issued under the 2020
Employee Share Plan
0
Theoretical dilution to shareholders due to the 2020
Employee Share Plan
0
Break-even price of an ordinary share at 31 December 2021 for the
2020 Employee Share Plan to start to deliver value
157.7p
As at 31 December 2021 the minimum return hurdle of £559,723,998
had not been achieved. Management would need to create value for
shareholders of an additional £77,907,344, as well as the additional
index adjustment that will arise over the period, in order for the 2020
Employee Share Plan to begin to accrue value for participants.
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 due to share price appreciation on the crystallisation date
of the 2020 Employee Share Plan.
(1) Available at www.melroseplc.net/media/2587/291220-melrose-circular.pdf.
(2) Following the Share Capital Consolidation which became effective on 31 August 2021.
Melrose Industries PLC Annual Report 2021GovernanceMelrose Industries PLC Annual Report 2021 108
Directors’ Remuneration report
Continued
109
Minimum shareholding requirements and equity exposure of the Board (audited)
Executive Directors are subject to two concurrent minimum shareholding requirements. The first is to always hold at least an amount of shares
equal to 300% of salary, for which they are given a period of three years from appointment to meet. The second requirement is for executive
Directors to hold all the shares they acquire pursuant to crystallisation of the 2020 Employee Share Plan (to the extent that crystallisation results in
an award of ordinary shares being made), after satisfying tax obligations following the crystallisation of that plan and subject to capital adjustments,
for the two-year holding period.
In the event that an executive Director were to leave the Company, he would be subject to a post-cessation minimum shareholding requirement of
300% of salary, for a two-year period following the date of cessation. This obligation is enforceable under direct contractual arrangements between
the Company and each executive Director. We note that these post-cessation obligations currently apply to David Roper following his retirement on
31 May 2021, and he remains in compliance with them.
In reality, the executive Directors hold well in excess of these minimum amounts (with the exception of the Chief Operating Officer, who was only
appointed as an executive Director on 1 January 2021), which reflects their long-term stewardship of the Company and long-term investment in
the Company’s shares. It is the Committee’s view that it is important when considering the remuneration paid in the year under the single figure
to take a holistic view of how each executive Director’s total wealth is linked to the performance of the Company. In the Committee’s opinion, the
impact on the total wealth of an executive Director is as important as the single figure in any one year; this approach encourages executive
Directors to take a long-term view of the sustainable performance of the Company and aligns them with shareholders.
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 2021, as well as an indication as to the size of these interests relative to the entire issued share capital of the Company. It
also sets out the number of ordinary shares of the Company held by each executive Director at the end of the 2020 and 2021 financial years
and the impact on the value of these ordinary shares taking the closing mid-market prices for those dates:
Applicable
shareholding
requirement
(% salary)(2)
Current
shareholding
(% salary)(3)
Shareholding
requirement
met?
Shareholding
(% ordinary
share capital)
as at
31 December
2021
Shares
beneficially
held on
31 December
2020(4)
Shares
beneficially
held on
31 December
2021(4)(5)
Value of
shares on
31 December
2020(6) £
Value of
shares on
31 December
2021(3) £
Difference in value
of shares between
31 December
2020 and
31 December
2021 £
300%
300%
300%
300%(7)
6,612%
3,504%
2,365%
36%
Yes
Yes
Yes
No
0.521%
27,108,510
22,777,659
48,266,702
36,421,477
0.276%
17,413,217
12,071,895
31,004,233
19,302,960
0.152%
0.002%
7,395,256
6,655,730
13,167,253
10,642,512
18,000
100,000
32,049
159,900
(11,845,225)
(11,701,273)
(2,524,741)
127,851
Executive Directors(1)
Christopher Miller
Simon Peckham
Geoffrey Martin
Peter Dilnot
(1) In addition to the share interests set out in the table, each of the executive Directors has an additional exposure by virtue of their Conditional Awards under the 2020 Employee Share Plan (see
“Long-term incentive arrangements” on page 107).
(2) The shareholding requirement under the current Directors’ Remuneration Policy is 300% of base salary.
(3) For these purposes, the value of a share is 159.90 pence, being the closing mid-market price on 31 December 2021, being the last business day of the 2021 financial year.
(4) For these purposes, the interests of each executive Director listed in the table include any ordinary shares held by a person closely associated with that executive Director within the meaning of the
EU Market Abuse Regulation, as it forms part of UK domestic law by virtue of the European Union (Withdrawal) Act 2018.
(5) Following the share consolidation that took place on 31 August 2021, the Company’s ordinary share capital changed to 4,372,429,473 ordinary shares of 160/21 pence each.
(6) For these purposes, the value of a share is 178.05 pence, being the closing mid-market price on 31 December 2020, being the last business day of the 2020 financial year.
(7) Peter Dilnot was appointed as an executive Director on 1 January 2021. Under the Directors’ Remuneration Policy, he has three years from appointment to meet this requirement.
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.
Between them, the executive Directors in 2021 purchased a further 82,000 ordinary shares in the Company and none were sold. Christopher
Miller and Simon Peckham gifted 1,800,000 ordinary shares and 4,000,000 ordinary shares respectively during the period to family members
for nil consideration, as part of standard family financial planning. There have been no changes in the ordinary shareholdings of the executive
Directors between 31 December 2021 and 3 March 2022.
Please see page 113 for a table setting out the equity interests of the Non-executive Directors as at 31 December 2021.
Key decisions and statement of implementation for 2022
Salary review
The executive Directors in the period have received an inflationary
increase of 3% to their base salaries with effect from 1 January 2022,
consistent with the wider Melrose head office population. The
executive Directors’ salaries for 2022 are therefore as follows:
Executive Directors Position
Christopher Miller
Executive Vice-Chairman
Simon Peckham
Chief Executive
Geoffrey Martin
Group Finance Director
Peter Dilnot
Chief Operating Officer
Salary with effect from
1 January 2022
£000
567
567
464
464
Pensions and benefits
For 2022, standard benefits will be provided to the executive Directors
in line with the Directors’ Remuneration Policy and the pension
contribution rate remains at 15% of salary, the same percentage
contribution rate as for all Melrose head office employees.
Annual bonus
The overall framework for the executive Director annual bonus
arrangements for 2022 will remain the same as in 2021, with a
maximum bonus opportunity of 100% of salary, based on financial
and strategic performance metrics, allocated 80% to financial
objectives and 20% to strategic objectives (which will include
objectives designed to measure progress in respect of key
sustainability matters). The financial performance metric remains
consistent with prior years as audited diluted earnings per share
growth, which the Committee considers remains the appropriate
metric for the Company. The Committee considers that the targets
for the financial performance metrics and the details of the strategic
performance measures are commercially sensitive but will disclose
the nature of both measures on a retrospective basis, where
appropriate, on a similar basis to the disclosure on page 106 in
respect of the annual bonus for the year ending 31 December 2021.
Long-term incentive arrangements
Given the nature of the long-term incentive arrangements that the
Company has in place (see “Long-term incentive arrangements”
on page 107), no grants will be made to the executive Directors
during 2022.
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 incentives 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 rewards earned
over the previous five years. The 2017 Incentive Plan crystallised in May 2020 for no value. Per the terms of the 2020 Employee Share Plan, the
next award in relation to long-term incentive arrangements is not payable until May 2023, and only if the performance conditions are met.
Financial year
Chief Executive
Year ended 31 December 2021
Simon Peckham
Year ended 31 December 2020
Simon Peckham
Year ended 31 December 2019
Simon Peckham
Non-LTIP
£
1,186,316
680,113
976,000
Year ended 31 December 2018
Simon Peckham
1,049,000
Year ended 31 December 2017
Simon Peckham
Year ended 31 December 2016
Simon Peckham
Year ended 31 December 2015
Simon Peckham
Year ended 31 December 2014
Simon Peckham
Year ended 31 December 2013
Simon Peckham
Year ended 31 December 2012(5)
Simon Peckham
David Roper
994,000
987,725
928,541
773,167
927,276
489,372
259,040
LTIP
£
Total remuneration
£
Annual bonus as a
percentage of
maximum
opportunity
Long-term
incentives as a
percentage of
maximum
opportunity
–
–(1)
–
–
41,770,000(3)
–
–
–
–
19,791,212
10,656,806
1,186,316
680,113
976,000
1,049,000
42,764,000
987,725
928,541
773,167
927,276
20,280,584(6)
10,915,846(6)
100%
20%
72%
95%
90%
95%
88%
58%
100%
64%
64%
–
n/a(2)
–
–
n/a(4)
–
–
–
–
n/a(7)
n/a(7)
(1) The 2017 Incentive Plan crystallised in May 2020 for no value.
(2) Although the 2017 Incentive Plan crystallised in May 2020 for no value, because the value that would have been derived on the crystallisation of the 2017 Incentive Shares and options depended
upon the shareholder value created over the relevant period, it would not have been possible to express the value derived as a percentage of the maximum opportunity.
(3) The value derived in 2017 from the 2012 Incentive Shares represents the Chief Executive’s share, determined in accordance with the terms of those shares, of the shareholder value created over a
period of approximately five years. This amount was paid in shares, not cash.
(4) On the crystallisation in May 2017 of the 2012 Incentive Plan, participants as a whole were entitled to 7.5% of the increase in shareholder value from 22 March 2012 to 31 May 2017. Because the
value derived on the crystallisation of the 2012 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.
(5) In the year ending 31 December 2012, David Roper was Chief Executive for the period from 1 January 2012 until 9 May 2012 and Simon Peckham was Chief Executive for the period from 9 May
2012 onwards. In the table above, the “Total remuneration” figure shows, in respect of David Roper, his total remuneration in respect of his service in the period from 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.
(6) 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.
(7) On the crystallisation in April 2012 of the 2009 Incentive Plan awarded in 2009, participants as a whole were entitled to 10% of the increase in shareholder value from 18 July 2007 to 23 March 2012.
Because the value derived on the crystallisation of the 2009 Incentive Shares depended upon the shareholder value created over the relevant period, it is not possible to express the value derived
as a percentage of the maximum opportunity.
CEO pay ratio
Our median CEO to employee pay ratio for 2021 continued to be low at 29:1. 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 2021
Year ended 31 December 2020
Year ended 31 December 2019
Method
Option A
Option A
Option A
25th percentile
pay ratio
Median
pay ratio
75th percentile
pay ratio
34:1
20:1
30:1
29:1
16:1
24:1
23:1
13:1
19:1
The employees used for the purposes of calculating the pay ratios in the table above were those employed in the UK by any business within the
Group on 31 December 2021 (for the avoidance of doubt, including the Chief Executive), and the remuneration figures were determined with
reference to the financial year to 31 December 2021. 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 for the Chief Executive and
other Directors. 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 2020 financial year bonuses (which were paid during 2021) where
the 2021 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. None of the employees included in the pay ratios were on furlough during any part of 2021.
The following table provides salary and total remuneration information in respect of the employees at each quartile.
Financial year
Year ended 31 December 2021
Element of pay
Salary and wages(1)
Total pay and benefits
25th percentile pay
employee
Median employee
£31,000
£35,000
£37,000
£41,000
75th percentile
employee
£46,000
£52,000
(1) Base salary includes overtime and shift allowances/premiums. The individual at the median received shift premium and overtime during the year.
All ratios have risen slightly since last year. This primarily reflects the return of the Chief Executive’s remuneration to full levels following the
temporary and voluntary 20% reduction to his salary in 2020 during the pandemic, as well as the significant reduction to his 2020 annual bonus
due to the impact of the pandemic. The Chief Executive’s salary returned to its full level in 2021, coupled with strong performance in 2021
resulting in a significantly improved annual bonus payout, for the reasons set out on page 106. We note that there was no element of his
long-term incentive arrangements that was due to vest in 2021.
Melrose Industries PLC Annual Report 2021GovernanceMelrose Industries PLC Annual Report 2021 110
Directors’ Remuneration report
Continued
111
Across the businesses, there was also a return to normality in terms of employee pay levels, with furlough schemes no longer being used and
improved performance resulting in expected higher performance outcomes for employee bonuses earned in relation to 2021 versus 2020.
However, it is noted that 2021 annual bonus data for approximately 84% of the employees included in the 2021 disclosure was not available
as at the date of this disclosure, and therefore 2020 annual bonus data has had to be used in its place. As 2020 bonuses were much lower on
average than 2021 bonuses, this has resulted in lower employee numbers and consequentially higher ratios than if the 2021 bonus data had
been available as at the date of this report. Notwithstanding this, the trend in the median CEO pay ratio over time has, to date, broadly moved
in line with changes in the Chief Executive’s remuneration, and therefore continues to reflect the relationship between the Chief Executive’s pay
and the experience of UK employees as a whole.
We have considered the pay data for the three employees identified and believe that it fairly reflects pay at the relevant quartiles amongst the UK
workforce. 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, and is indeed
likely to be higher in years where long-term incentive arrangements crystallise. The Chief Executive’s remuneration package is otherwise very
reasonable compared to the Company’s FTSE 100 peers, which is also demonstrated on page 105 of this report.
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.
1000
)
£
(
n
r
u
t
e
R
l
r
e
d
o
h
e
r
a
h
S
l
a
t
o
T
750
500
250
45,000
40,000
35,000
30,000
25,000
20,000
15,000
10,000
5,000
)
0
0
0
’
£
(
n
o
i
t
a
r
e
n
u
m
e
R
0
2012
2013
2014
2015
2016
2017
2018
2019
2020
0
2021
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 each Director
compared to the average increase for a group consisting of the Company’s senior head office employees and the divisional CEOs and CFOs
of the Group’s business units. The reporting legislation in this regard requires companies to publish the annual percentage change in the total
remuneration of Directors and employees of the Company. The Company itself does not have any employees other than the executive
Directors. However, in the interest of providing a relevant comparison to stakeholders, we choose to voluntarily disclose a comparison against
the aforementioned group of senior management, which we consider to be 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. The percentages shown relate to the financial year ended 31 December 2021 as a
percentage comparison to the financial year ended 31 December 2020.
We are required to report on this change based on actual amounts received by the Directors. For basic salary and fees for the Directors, the
percentage increases have been distorted by the temporary 20% reduction that all Directors agreed to take during 2020 to support the Group’s
cash management strategy in light of the pandemic. The contractual increases for their basic salary and fees for both 2020 and 2021 were 3%
on the prior year, as is detailed elsewhere in this report. We also note that, given the low levels of annual bonuses paid in 2020 to the executive
Directors due to the pandemic, a full award of 100% of salary for 2021 has resulted in a large percentage increase.
Element of remuneration
Executive Directors
Christopher Miller
Simon Peckham
Geoffrey Martin
Peter Dilnot(7)
Non-executive Directors
Justin Dowley
Liz Hewitt
David Lis
Charlotte Twyning
Funmi Adegoke
Heather Lawrence(9)
Victoria Jarman(10)
Senior employees(11)
2021
2020
Basic salary/fee
percentage
change(1)
Benefits
percentage
change(2)
Annual bonus
percentage
change(3)
Basic salary/fee
percentage
change(4)
Benefits
percentage
change(2)
Annual bonus
percentage
change(5)
12%
12%
14%
–
12%
8%
10%
12%
12%
–
–
6%
-30%
-26%
-6%
–
n/a
n/a
n/a
n/a
n/a
–
–
n/a
415%
422%
–
n/a
n/a
n/a
n/a
n/a
–
–
92%
167%
-6%
-6%
-6%
–
-6%
5%
-4%
-6%
278%(8)
–
–
-1%
-20%
-2%
7%(6)
–
n/a
n/a
n/a
n/a
n/a
–
–
n/a
-71%
-72%
–
n/a
n/a
n/a
n/a
n/a
–
–
11%
45%(12)
(1) The annual percentage change is required to be calculated by reference to actual basic salary or fee (as applicable) paid for the financial year ended 31 December 2021 compared to that paid for
the financial year ended 31 December 2020. All Directors agreed to a temporary 20% reduction in their basic salary or fee (as applicable) during 2020 to support the Group’s cash management
strategy in light of the pandemic. For the Non-executive Directors, this fee includes both their basic fee and any additional fee received for holding the Chairmanship of the Remuneration
Committee, the Audit Committee and the Nomination Committee, and for holding the position of Senior Independent Director.
(2) Benefits data is calculated on the same basis as the benefits data in the single total figure table. It does not include any pension allowances.
(3) The annual percentage change in bonus is calculated by reference to the bonus payable in respect of the financial year ended 31 December 2021 compared to the financial year ended
31 December 2020 for the applicable executive Directors and senior employees. Neither the Executive Vice-Chairman nor the Non-executive Directors are eligible to receive an annual bonus.
It is noted that executive Director annual bonuses for 2020 were significantly reduced as a result of the pandemic, and therefore result in a large increase for 2021.
(4) The annual percentage change is calculated by reference to actual basic salary or fee (as applicable) paid for the financial year ended 31 December 2020 compared to the financial year ended
31 December 2019 and was similarly impacted by the temporary reductions in 2020 basic salary or fee (as applicable) referred to in footnote (1). For the Non-executive Directors, this fee includes
both their basic fee and any additional fee received for holding the Chairmanship of the Remuneration Committee, the Audit Committee and the Nomination Committee, and for holding the
position of Senior Independent Director.
(5) The annual percentage change in bonus is calculated by reference to the bonus payable in respect of the financial year ended 31 December 2020 compared to the financial year ended
31 December 2019 for the applicable executive Directors and senior employees. Neither the Executive Vice-Chairman nor the Non-executive Directors are eligible to receive an annual bonus.
It is noted that executive Director annual bonuses for 2020 were significantly reduced as a result of the pandemic, and therefore result in a large decrease for 2020.
(6) This reflects an increase to the annual train travel fare.
(7) Peter Dilnot was appointed to the Board with effect from 1 January 2021 and therefore no prior year comparison is possible.
(8) Funmi Adegoke was appointed to the Board with effect from 1 October 2019. The increase in her basic fee from 2019 to 2020 reflects the fee actually received for the pro-rated period of
directorship in 2019 for the period 1 October 2019 to 31 December 2019 versus a full year for 2020, so is not a meaningful comparison. If an annualised figure is assumed for her fee in 2019, the
percentage change is -6%.
(9) Heather Lawrence was appointed to the Board with effect from 1 June 2021 and therefore no prior year comparison is possible.
(10) Victoria Jarman was appointed to the Board with effect from 1 June 2021 and therefore no prior year comparison is possible.
(11) 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.
(12) The change shown was impacted by legacy retention awards granted to GKN employees prior to our acquisition, a number of which crystallised during the period.
Total Shareholder Return
The total shareholder return graph below shows the value as at 31 December 2021 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 1,751% 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 2021 for the purposes of this comparison because of the comparable size of the companies which comprise the FTSE 100 Index
and the FTSE 250 Index and the broad nature of companies which comprise the FTSE All-Share Index. The data shown below assumes that all
cash returns to shareholders made by the Company during this period are reinvested in ordinary shares.
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e
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3,000
2,500
2,000
1,500
1,000
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Oct 03 Oct 04 Oct 05 Oct 06 Oct 07 Oct 08 Oct 09 Oct 10 Oct 11 Oct 12 Oct 13 Oct 14 Oct 15 Oct 16 Oct 17
Oct 18
Oct 19
Oct 20
Oct 21
Melrose Industries PLC
FTSE All-Share
FTSE 100
FTSE 250
Melrose Industries PLC Annual Report 2021GovernanceMelrose Industries PLC Annual Report 2021
112
Directors’ Remuneration report
Continued
113
Wider workforce considerations
Melrose is committed to creating an inclusive working environment and to rewarding our employees throughout the organisation in a fair
manner. The Committee is mindful of wider workforce remuneration and conditions, and uses its awareness of these arrangements to ensure
that Melrose executive pay is aligned with the Company’s culture and strategy.
The Committee is responsible for setting the remuneration of the executive Directors and the Non-executive Chairman. It does not have
responsibility for setting and managing the remuneration of the Melrose senior management team nor the divisional executive teams, which are
the responsibility of the Melrose Chief Executive, nor the pay policies of the business units, which are the responsibility of the divisional executive
teams. The businesses are responsible for engaging with their respective workforces in relation to remuneration. The Committee remains of the
view 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 a Melrose level and at a business unit executive level, which enables it to ensure that the approach
taken to executive remuneration is consistent with those workforces. This consistency is evidenced by the 15% pension contribution and other
benefits payable to the executive Directors, which are equal to those for Melrose head office employees and within the range of benefits of the
wider workforce. In addition, the CEO pay ratio continues to remain low.
Given the differing nature of our businesses, the Committee does not expect a standardised approach to remuneration, nor would this be
appropriate. However, when conducting its review, it does pay particular attention to whether each element of remuneration is consistent with
the Company’s remuneration philosophy. The Committee receives detail on divisional executive team remuneration, as well as an annual
confirmation from each business, via the Workforce Advisory Panel, that the remuneration provided to its executive team is consistent with the
remuneration provided to its wider workforce, and that the incentives operated by that business align with its culture and strategy. Based on
these disclosures, and in light of the Company’s decentralised structure, the Committee is satisfied that the approaches taken to remuneration
at all levels are consistent with the Company’s remuneration philosophy.
Melrose and each of its businesses pay all UK employees at least the real living wage, save for year-in industry students (of which there were
seven in the Group as at 31 December 2021), who are paid in accordance with the national minimum wage rates for their age group. In addition,
Melrose and each of its businesses offer all employees in the UK the opportunity to work for at least 15 hours per week.
Retirement provisions
The Company provides retirement benefits to Melrose employees and the business units determine the retirement benefits provided to their
respective employees. 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 UK 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 5, Melrose has a stellar record of successfully taking underfunded pension schemes under our
stewardship and bringing them to being fully funded. In particular, under Melrose ownership, the GKN UK defined benefit pension schemes
have been effectively fully funded, from a total starting accounting deficit at the time of the GKN acquisition of £0.7 billion.
Long-term incentives
Participation in the 2020 Employee Share Plan is limited to senior Melrose head office employees. However, we also recognise the need to
appropriately incentivise the executive teams of our businesses, in order to ensure that they are invested in helping us to build stronger, better
businesses. Consistent with Melrose’s decentralised business model, divisional long-term incentive plans have been implemented for senior
managers of our key businesses, to incentivise them to create value for the Company and our shareholders. Depending on the amount of value
created in relation to that particular business, participants in such incentive plans will receive a cash payment on the sale of the 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.
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 2020
£ million
2,071
–
Year ended
31 December 2021
£ million
Percentage change
2,020
798(2)
-2%
n/a(3)
(1) The figure is the total staff costs as stated in note 7 to the financial statements. In light 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.
(2) The figure for the year ended 31 December 2021 includes the return of capital to shareholders in September 2021.
(3) In light of the prior year figure being zero, no percentage change is possible.
Non-executive Directors
Single figure table and share interests (audited)
The following table sets out the single figure of remuneration for 2021 in comparison with 2020 for the Company’s Non-executive Directors(1):
Non-executive Directors
Justin Dowley (Chairman)
Liz Hewitt (Senior Independent Director)
David Lis
Archie G. Kane(4)
Charlotte Twyning
Funmi Adegoke
Heather Lawrence(5)
Victoria Jarman(6)
Total
Period
2021
2020
2021
2020
2021
2020
2021
2020
2021
2020
2021
2020
2021
2020
2021
2020
2021
2020
Total basic fees
Total other fees
£000(2)
371
330
80
71
80
71
80
71
80
71
80
71
46
–
46
–
863
685
£000(3)
–
–
45
45
20
20
10
10
–
–
–
–
–
–
–
–
75
75
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
n/a
–
n/a
–
n/a
n/a
Total
£000
371
330
125
116
100
91
90
81
80
71
80
71
46
–
46
–
937
760
Total Fixed
£000
Total Variable
£000
371
330
125
116
100
91
90
81
80
71
80
71
46
–
46
–
937
760
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(1) The “Total” figures in the above table may not add up to the sum of the component parts due to rounding.
(2) Along with the executive Directors, all Non-executive Directors of the Company took a temporary 20% reduction in their basic fee payable during 2020 to support the Group’s cash management
strategy in light of the pandemic. The amounts stated in the table for 2020 are the actual amounts that were paid to the Non-executive Directors.
(3) These are additional fees for holding the Chairmanship of the Remuneration Committee, the Audit Committee and the Nomination Committee, and for holding the position of Senior Independent
Director. There are no additional fees payable for membership of a Committee. All of our Non-executive Directors are members of at least one Committee.
(4) Archie G. Kane retired as a Non-executive Director of the Company on 31 December 2021.
(5) Heather Lawrence was appointed as a Non-executive Director of the Company with effect from 1 June 2021 and the fees referred to above for 2021 reflect her fees for the period 1 June 2021 to 31
December 2021.
(6) Victoria Jarman was appointed as a Non-executive Director of the Company with effect from 1 June 2021 and the fees referred to above for 2021 reflect her fees for the period 1 June 2021 to 31
December 2021.
The following table sets out the subsisting interests in the equity of the
Company held by the Non-executive Directors as at 31 December
2021, as well as an indication as to the size of these interests relative
to the entire issued share capital of the Company:
Non-executive Directors
at 31 December 2021(1)
Ordinary shares held as
Shareholding
(% ordinary share capital)
as at 31 December 2021
Justin Dowley
Liz Hewitt
David Lis
Charlotte Twyning
Funmi Adegoke
Heather Lawrence
Victoria Jarman
1,424,480
190,239
413,052
70,246
–
22,500
13,500
0.0326%
0.0044%
0.0094%
0.0016%
–
0.0005%
0.0003%
(1) For these purposes, the interests of each Non-executive Director listed in the table include any
ordinary shares held by a person closely associated with that Non-executive Director within
the meaning of the EU Market Abuse Regulation, as it forms part of UK domestic law by virtue
of the European Union (Withdrawal) Act 2018.
Non-executive Directors’ fees
Non-executive Directors’ basic fees and the Non-executive Chairman’s
fee have been increased by 3% with effect from 1 January 2022, in
keeping with increases made to executive Directors and other Melrose
head office employees, and in line with the Company’s FTSE 100
peers. We note that while all Non-executive Directors serve on at
least one of the Company’s committees (and most serve on multiple
committees), there are no additional committee membership fees.
As noted in the single figure table above, the Company remains of the
view that it is not appropriate for our Non-executive Directors to receive
any taxable benefits, pension contributions or variable remuneration.
The Non-executive Director fee levels for 2021 and 2022 are set out in
the table below. The increases to additional fees for holding the
position of Senior Independent Director and for holding the
Chairmanship of the Nomination Committee were agreed by the
Board to be appropriate in light of the increasing remits of these roles,
and nonetheless remain in line with the market.
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
Fee with effect
from 1 January
2021 £
Fee with effect
from 1 January
2022 £
371,315
79,600
382,500
82,000
20,000
20,000
30,000
30,000
10,000
15,000
15,000
20,000
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).
The 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.
Melrose Industries PLC Annual Report 2021GovernanceMelrose Industries PLC Annual Report 2021
114
Directors’ Remuneration report
Continued
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.
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’ current terms of appointment
are set out below:
Non-executive Directors
Justin Dowley (Chairman)
First appointment
Expires*
1 September 2011
Liz Hewitt (Senior Independent Director)
8 October 2013
David Lis
Charlotte Twyning
Funmi Adegoke
Heather Lawrence
Victoria Jarman
* Subject to annual re-election.
12 May 2016
1 October 2018
1 October 2019
1 June 2021
1 June 2021
2023
2022
2022
2024
2022
2024
2024
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 112, 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 executive team, 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 reviewed
by the Committee in November 2021, are available on our website,
www.melroseplc.net, and from the Company Secretary at
Melrose’s registered office.
Evaluation
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 2020,
for which the Company engaged Lintstock Ltd.
Whilst the Company is not required to undertake another externally
facilitated Board and Committee evaluation until 2023, during 2021
the Company continued its ongoing internal review of the Board and
each Committee, both internally within each of those bodies and with
the Chairman of the Board and the Chairman of each Committee
respectively. These evaluations were conducted and facilitated by the
completion of questionnaires, and discussions at a Committee
meeting, with follow-up actions taking place as relevant. Members
were also given the option for meetings to be scheduled with the
Chairman of the Committee about any relevant matters that they
wished to raise as part of the ongoing review. Please see the
Corporate Governance report on pages 90 to 91 for further details.
Attendance at meetings
The attendance of the Non-executive Directors at the scheduled
meetings of the Committee in 2021 was as follows:
Member
David Lis (Chairman)
Justin Dowley
Archie G. Kane(2)
Charlotte Twyning
Funmi Adegoke(3)
Victoria Jarman(4)
No. of meetings (1)
2/2
2/2
2/2
2/2
2/2
1/1
(1) Reflects regularly scheduled meetings of the Committee that took place in 2021.
(2) Retired from the Board and the Committee on 31 December 2021.
(3) Retired from the Committee at the end of the second Committee meeting.
(4) Appointed to the Committee with effect from 1 June 2021 and attended all Committee
meetings held during the period 1 June 2021 to 31 December 2021.
Compliance with legislation and the Code
We apply the principles of, and are fully compliant with, the key
provisions of the 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.
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.
As mentioned on page 103, the four principles of the Melrose
remuneration structure are wholly aligned with the Code factors of
clarity, simplicity, risk, predictability, proportionality and alignment to
culture, as set out in the table opposite. The Committee ensured that
it took all of these elements into account when establishing the
Directors’ Remuneration Policy, as well as its application to executive
Directors during the period.
115
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 the rest of the Melrose head office employees.
There are only two variable elements of remuneration: the annual bonus and the 2020 Employee Share 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 Committee’s view, this provides a very simple incentive framework which can be understood by all of the
Company’s stakeholders.
The Directors’ Remuneration Policy includes the following elements to mitigate against the risk of target-based incentives:
• Setting defined limits on the maximum award that 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 Employee Share Plan.
• Requiring the deferral of up to 50% of the annual bonus award into ordinary shares of the Company in certain
circumstances and that all of the ordinary shares awarded in relation to the 2020 Employee Share Plan (other than
any ordinary shares sold in order to make adequate provision for any tax liability arising in connection with the
crystallisation) 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 condition with the “Buy, Improve, Sell” strategy of the Company.
• Ensuring there is sufficient flexibility for the Committee to adjust payments through malus and clawback and an
overriding discretion to depart from formulaic outcomes.
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.
Proportionality
Alignment to
culture
Variable remuneration is limited to the annual bonus, which is capped at 100% of salary and performance-driven based
on financial growth and strategic factors, and the 2020 Employee Share Plan.
The method of calculation, limits and discretions under the Directors’ Remuneration Policy are clearly set out.
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 Employee Share Plan that supports the
Company’s value creation strategy.
The focus on responsible stewardship and long-term sustainable performance is a key part of the Company’s culture.
This is supported by the Directors’ Remuneration Policy, which (i) facilitates Committee oversight of workforce pay, policies
and incentives; (ii) aligns executive Director pension 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 to below the lower
quartile of the FTSE 100.
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 from PwC LLP. PwC LLP’s fees for this advice were
£38,850 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.
The Committee appointed PwC LLP to act as its remuneration consultants and the Committee determined to reappoint PwC LLP to act for the
period under review. 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.
Melrose Industries PLC Annual Report 2021GovernanceMelrose Industries PLC Annual Report 2021 116
Directors’ Remuneration report
Continued
Statement of Directors’ responsibilities
117
Statement of voting at general meetings
The charts below set out the votes on the Annual Report on Remuneration at the 2021 AGM, on the Directors’ Remuneration Policy at the 2020
AGM, on the 2020 Employee Share Plan at the January 2021 general meeting, and on the consequential amendments to the Directors’
Remuneration Policy at the January 2021 general meeting.
This Annual Report on Remuneration will be put to an advisory vote at the AGM, on 5 May 2022.
Resolution to approve the Directors’ Remuneration Report for the year
ended 31 December 2020 (5 May 2021)
Resolution to approve the Directors’ Remuneration Policy (7 May 2020)
Percentage of votes cast for the resolution
99.57%
Percentage of votes cast for the resolution
98.40%
Percentage of votes cast against the resolution
0.43%
Percentage of votes cast against the resolution
1.60%
Votes withheld 89,212,976
Votes withheld 422,042,417
Resolution to approve and implement the 2020 Employee Share Plan
(21 January 2021)
Resolution to approve the amendments proposed to the 2020 Directors’
Remuneration Policy to accommodate the 2020 Employee Share Plan
(21 January 2021)
Percentage of votes cast for the resolution
82.64%
Percentage of votes cast for the resolution
81.81%
Percentage of votes cast against the resolution
17.36%
Percentage of votes cast against the resolution
18.19%
Votes withheld 228,313,488
Votes withheld 108,963,824
This report was approved by the Board and signed on its behalf by:
David Lis
Chairman, Remuneration Committee
3 March 2022
The Directors are responsible for preparing the Annual Report and
financial statements in accordance with applicable law and regulations.
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 3 March 2022 and is signed on its behalf by:
Geoffrey Martin
Group Finance Director
3 March 2022
Simon Peckham
Chief Executive
3 March 2022
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 Accounting Standards in conformity with the
requirements of the Companies Act 2006 and with International
Financial Reporting Standards (“IFRSs”) adopted pursuant to
Regulation (EC) No 1606/2002 as it applies in the European Union.
The financial statements also comply with IFRSs as issued by the
IASB. The Directors have also chosen 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 2021GovernanceMelrose Industries PLC Annual Report 2021
118
Independent auditor’s report to the
members of Melrose Industries PLC
119
Report on the audit of the financial statements
3. Summary of our audit approach
1. Opinion
In our opinion:
• the financial statements of Melrose Industries PLC (the ‘parent company’) and its subsidiaries (the ‘group’) give a true and fair view of
the state of the group’s and of the parent company’s affairs as at 31 December 2021 and of the group’s loss for the year then ended;
• the group financial statements have been properly prepared in accordance with United Kingdom adopted international accounting
standards and International Financial Reporting Standards (IFRSs) as issued by the International Accounting Standards Board (IASB);
• the parent company financial statements have been properly prepared in accordance with United Kingdom Generally Accepted
Accounting Practice, including Financial Reporting Standard 102 “The Financial Reporting Standard applicable in the UK and
Republic of Ireland”; and
• the financial statements have been prepared in accordance with the requirements of the Companies Act 2006.
We have audited the financial statements which comprise:
• the Consolidated Income Statement;
• the Consolidated Statement of Comprehensive Income;
• the Consolidated Statement of Cash Flows;
• the Consolidated and Parent Company Balance Sheets;
• the Consolidated and Parent Company Statements of Changes in Equity; and
• the related notes 1 to 30 and the related notes 1 to 8 to the Parent Company Balance Sheet.
The financial reporting framework that has been applied in the preparation of the group financial statements is applicable law, United Kingdom
adopted international accounting standards and IFRSs as issued by the IASB. The financial reporting framework that has been applied in the
preparation of the parent company financial statements is applicable law and United Kingdom Accounting Standards, including FRS 102 “The
Financial Reporting Standard applicable in the UK and Republic of Ireland” (United Kingdom Generally Accepted Accounting Practice).
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 parent company in accordance with the ethical requirements that are relevant to our audit of the
financial statements in the UK, including the Financial Reporting Council’s (the ‘FRC’s’) Ethical Standard as applied to listed public interest
entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements. The non-audit services provided to the
group and parent company for the year are disclosed in note 7 to the financial statements.
We confirm that non-audit services prohibited by the FRC’s Ethical Standard were not provided to the Group, with the exception of advisory
services around the permissibility of paying a dividend in one of the Group’s overseas subsidiaries. This entity was no longer a subsidiary by the
year end and no specific reporting was required from the overseas firm in respect of this component. The fee for this work was approximately
£7,000. In our opinion, based on the monetary value and the nature of services provided, the impact of providing the services was immaterial
and inconsequential, however this is a breach, albeit insignificant, of the Ethical Standard. Following investigation it was concluded in agreement
with the Audit Committee that given the size of the services provided and their potential impact, as well as the safeguards in place, the provision
of these services did not impact upon our integrity, objectivity and independence as auditor to the company.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Key audit matters The key audit matters that we identified in the current
Within this report, key audit matters are identified as follows:
year were:
• Impairment of goodwill and acquired intangibles;
• Classification of adjusting items;
• Revenue recognition in respect of RRSPs; and
• Valuation of loss-making contract provisions.
Newly identified
Increased level of risk
Similar level of risk
Decreased level of risk
Materiality
Scoping
The materiality that we used for the group financial statements was £30 million which was determined on the based on a
number of benchmarks including adjusted profit before tax, net assets and revenue.
We selected 17 reporting sites where we requested component auditors to perform a full scope audit of the site
components’ financial information. We also selected 9 corporate components for a full scope audit of their financial
information.
We also requested component auditors to audit specific account balances and transactions (“SAB”) at a further 23
reporting units. Coverage from full scope and SAB scope components totals 79% of the group’s adjusted revenue, 88%
of adjusted operating profit and 84% of net assets.
The number of components scoped in for the year end audit has reduced in comparison to the prior year, as the Nortek Air
Management, Brush and Nortek Control businesses were disposed of during the year.
Significant
changes in our
approach
4. Conclusions relating to going concern
In auditing the financial statements, we have concluded that the directors’ use of the going concern basis of accounting in the preparation of the
financial statements is appropriate.
Our evaluation of the directors’ assessment of the group’s and parent company’s ability to continue to adopt the going concern basis of
accounting included assessment of the following:
• obtained understanding of the financing facilities including nature of facilities, repayment terms and covenants;
• assessed the impact of risk and uncertainties on the business model and future cash flow forecasts;
• considered as part of our assessment the nature of the group, its business model and related risks including where relevant the impact
of Covid-19 , the requirements of the applicable financial reporting framework and the system of internal control;
• 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. This was done through detailed assessment of the operating and non-operating cash flows for reasonableness and
consistency with the underlying forecast and plans for individual businesses;
• assessed the sufficiency of headroom available in the forecasts (cash and covenants) with respect to the risks and uncertainties;
• assessed management’s sensitivity analysis in order to assess whether that the reasonable worst-case sensitivities capture all the
reasonably possible downside risks and uncertainties; and
• assessed the adequacy of the disclosures provided in the financial statements.
Based on the work we have performed, we have not identified any material uncertainties relating to events or conditions that, individually or
collectively, may cast significant doubt on the group’s and parent company’s ability to continue as a going concern for a period of at least twelve
months from when the financial statements are authorised for issue.
In relation to the reporting on how the group has applied the UK Corporate Governance Code, we have nothing material to add or draw
attention to in relation to the directors’ statement in the financial statements about whether the directors considered it appropriate to adopt the
going concern basis of accounting.
Our responsibilities and the responsibilities of the directors with respect to going concern are described in the relevant sections of this report.
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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
How the scope of our
audit responded to the
key audit matter
Goodwill on the balance sheet at 31 December 2021 is £2,850 million (2020: £3,640 million), and the acquired intangible
assets balance is £4,193 million (2020: £5,150 million). As required by IAS 36 Impairment of assets (“IAS 36”) 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 the following group of groups of Cash Generating Units (CGUs):
• Aerospace (goodwill £933 million, other acquired intangible assets £2,542 million)
• Automotive (goodwill £1,001 million, other acquired intangible assets £979 million)
• Powder Metallurgy (goodwill £507 million, other acquired intangible assets £559 million)
• Ergotron (goodwill £409 million, other acquired intangible assets £113 million)
Impairment of goodwill and acquired intangibles 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,
specifically with respect to:
• The selection of the appropriate methodology (fair value less costs to sell or value in use) in determining recoverable
amount for each group of CGUs;
• the effect on future cash flows as a result of the pace of recovery in the Automotive and the Aerospace industries;
• the margin improvements as a result of restructuring programmes; and
• determination of the correct discount and growth rates to be used in the model.
Headroom available at 31 December 2021 has increased for the groups of CGUs noted above as a result of reduced
economic uncertainty. During the year the automotive industry has been adversely impacted by the shortage in semi-
conductors which disrupted the supply chain. Other economic factors such as cost inflation and increased interest rates
have also affected the group. Overall, we have identified a heightened risk in relation to the Automotive group of CGUs.
Further details are included in note 11 to the group financial statements in relation to the sensitivities reflecting the risks
inherent in the valuation of goodwill and other non-current assets and also in note 3 to the group financial statements in
relation to the key sources of estimation uncertainty for these businesses.
Refer also to page 95 of the report of the audit committee.
We obtained an understanding of the relevant controls over the valuation of goodwill and other intangible assets, in particular
the relevant controls over the forecasts that underpin the value in use and fair value less cost to sell 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 that underpin management’s forecasts. Specifically, our work included, but was not
limited to:
• assessing the methodology selected by management to estimate recoverable amount (fair value less cost to sell or
value in use) against the requirements of IAS 36 and IFRS 13 Fair value measurement;
• understanding management’s process for assessing the impact on operating margin of ongoing and future
restructuring programmes;
• challenging management’s assumptions within the impairment models, particularly forecast cash flows and how
management will achieve improvements to operating margin through ongoing restructuring programmes by
benchmarking against previous restructuring programmes;
• benchmarking long term growth rates to applicable macro-economic and market data, also taking into account the
assumed recovery for the Covid-19 pandemic;
• involving 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;
• evaluating the integrity of the impairment models through testing of the mathematical accuracy, checking the
application of the input assumptions and testing its compliance with IAS 36;
• performed sensitivity analysis to identify the key assumptions that have a significant effect on the model;
• assessing the appropriateness of the disclosures included by management in note 3 and 11 to the group financial
statements and re-performing the calculations that underpin those disclosures.
Key observations
We determined that the assumptions applied in the impairment model were within an acceptable range, that the overall
position adopted was reasonable and that the disclosures in respect of reasonably possible changes to key assumptions are
appropriate.
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 £826 million have been made to
the statutory operating loss of £451 million to derive adjusted operating profit of £375 million.
121
How the scope of our
audit responded to the
key audit matter
Adjusting items included:
• amortisation of acquisition-related intangible assets (£452 million);
• restructuring costs (£269 million);
• equity accounted investments adjustments (£28 million);
• equity settled compensation scheme charges (£19 million);
• acquisition and disposal related gains (£7 million);
• loss on movement in fair value of derivatives (£114 million); and
• net income from releases and changes in discount rate of fair value items (£49 million).
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 costs or income 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 the adjusted costs or income is important for the
comparability of year-on-year reporting.
Explanations of each adjustment are set out in note 6 to the group financial statements. Refer also to page 96 (Report of the
audit committee).
We obtained understanding of the relevant controls over 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 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 group financial statements;
• focussed our challenge on certain categories within adjusting items where we assessed that increased level of
judgement had been applied by management, and there was increased risk for fraud or error. This included additional
testing of restructuring costs, movements in fair value adjustments and impairment of assets;
• 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 classification and assessed
whether events and conditions existed to cause a release of the provision recognised as part of acquisition accounting;
• for restructuring costs, assessed whether the recognised costs meet the recognition criteria set out in IAS 37
‘Provisions’; and
• assessed whether the disclosures within the group 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.
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5.3 Revenue Recognition in respect of RRSPs
5.4 Valuation of Loss-making contracts provision
Key audit matter
description
How the scope of our
audit responded to the
key audit matter
The group has recognised total revenue of £6,883 million in 2021 (2020: £7,132 million).
There are judgements taken within the revenue recognition of material Risk and Revenue Sharing Partnerships (“RRSPs”) in
the Aerospace division (where revenue totals £2,543 million (2020: £2,804 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 in consideration of the requirements of IFRS 15 to constrain
variable consideration recognised. The amount of revenue recognised from RRSP contracts during the year was £402 million,
which includes variable consideration of £55 million (2020: £354 million, which included variable consideration of £13 million).
Furthermore, the revenue recognition models used by management for RRSPs involve a number of significant assumptions
based on any modifications to the contracts including programme share or changes in pricing and historical data and trends,
such as engineering requirements to support programmes and the expected life of mature engines. Any changes to these
assumptions require a higher level of judgement and estimation. This increases the risk that revenue recognition may not
be appropriate.
Refer to page 95 (Report of the audit committee) and pages 143 to 145 (note 3 to the group financial statements) and
page 145 (note 4 to the financial statements ).
We obtained an understanding of the relevant controls over the recognition of revenue for RRSP contracts.
For each RRSP contract with material variable consideration, we recalculated the amount of revenue recognised to assess
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 checking
historical estimation accuracy;
• challenged the assumptions used in arriving at the element of variable consideration recognised. This was done by
performing a number of procedures listed below;
• performed an assessment of the timing at which control is transferred and revenue is recognised by identifying the
performance obligations from the contract and checking the recognition triggers;
• obtained and reviewed the contract modifications, including programme share or changes in pricing, and assessed
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.
In assessing the key assumptions in the revenue recognition model, we performed specific procedures that included:
• obtained an understanding of the relevant controls in place within the Aerospace businesses, that hold RRSP contracts,
to review the underlying data;
• challenged and assessed the position papers prepared by management, and the model prepared;
• assessed accuracy of the underlying data that has been used in the determination of the assumptions including usage
profiles, industry data and customer correspondence; and
• assessed of the disclosure provided in the group 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 is within an acceptable range and the overall position is 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.
Key audit matter
description
In 2018, upon acquisition of GKN, the group recognised provisions of £629 million in relation to loss-making contracts. At
31 December 2021, following utilisation and release during the year, £167 million remained unutilised (2020: £241 million).
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 contract
provisions;
• 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 evaluate the correct timing of releases; and
• the classification of provision utilisation and release in the income statement.
While the level of loss-making provisions in Automotive is no longer material, we have identified wider macroeconomic
factors such as the semi-conductor shortage and its impact on sales volumes, increasing energy and freight charges, and
increasing commodity prices, which all have an impact on the profitability of the components sold by GKN Automotive. While
there have not been material changes to the existing provisions which were identified during the Melrose acquisition of GKN,
there is still a heightened risk due to the wider macroeconomic factors that impact the valuation of the loss-making sales
already identified, but also increases the risk that additional contracts may have now become loss-making. Therefore there is
still a heightened risk around the completeness of loss-making sales
Refer to page 96 (of the audit committee report) and pages 143 to 145 (note 3 to the group financial statements and
pages 169 to 170 (note 21 to the group financial statements).
How the scope of our
audit responded to the
key audit matter
We obtained an understanding of the relevant 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 checking 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;
• 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 challenging assumptions and inputs used to calculate
utilisation;
• for any releases of provisions, challenging the judgements applied by management and examined appropriate evidence
supporting the release (new commercial agreements, price amendments, support for cost reductions such as labour
cost and direct overheads savings etc); and
• evaluating whether 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 2021 is valued appropriately, that releases and
utilisations recorded during the year are appropriate, and that key estimates formed by management are reasonable.
6. Our application of materiality
6.1 Materiality
We define materiality as the magnitude of misstatement in the group and parent company 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
£30 million (2020: £30 million)
We considered the following metrics:
• adjusted profit before tax;
• revenue; and
• net assets.
Using professional judgement we determined materiality to
be £30m.
In determining our benchmark for materiality, we considered
a number of different metrics used by investors and other
readers of the Financial Statements. This approach is
consistent with the prior year to reflect the volatility in the
results of the group arising from the impact of Covid-19 and
the recovery thereof.
Materiality for the current year represents:
• 11.9% of adjusted profit before tax (FY20: 19.6%);
• 0.4% of revenue (FY20: 0.3%); and
• 0.4% of net assets (FY20: 0.4%).
Parent company financial statements
£15 million (2020: £15 million)
We determined materiality based on net assets, which was
then capped at 50% (2020: 50%) 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. This is with reference to the net asset position of
the company when compared to the net asset position of
the group.
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125
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 financial statements
Parent company financial statements
Residual balances
All entities not subject to the audit procedures above were subject to analytical procedures by the group engagement team.
While we understood and tested design and implementation of relevant controls in key areas, given the number and diverse nature of the
components of the group, we took controls reliance in certain limited areas of the audit only.
Performance materiality
60% (2020: 60%) of group materiality
60% (2020: 60%) of parent company materiality
Adjusted revenue
Adjusted operating profit
Net assets
Basis and rationale for
determining performance
materiality
In determining performance materiality, we considered the following factors:
• the 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 £1.5million (2020: £1.5 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.
7. An overview of the scope of our audit
7.1 Identification and scoping of components
In order to determine the scoping of components we consider the nature of the Group and its structure. There are now four operating segments
in the continuing operations of the group:
• Aerospace;
• Automotive;
• Powder Metallurgy; and
• Other Industrial
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.
Each division consists of a number of reporting units and manages operations on a geographical and functional basis. There are 200 sites 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 49 components (2020: 60), of which
• 13 relate to components that form part of the Aerospace segment;
• 19 relate to components that form part of the Automotive segment;
• 6 relate to components that form part of the Powder Metallurgy segment;
• 2 relate to components that form part of the Other Industrial segment; and
• 9 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 £7 million to £14 million.
We selected 17 reporting units where we requested component auditors to perform a full scope audit of the components’ financial information.
We also requested component auditors to audit specified account balances and transactions (“SAB”) at a further 23 reporting units. Coverage
from full scope and SAB scope components totals 79% of the group’s adjusted revenue, 88% of adjusted operating profit and 84% of net assets.
Aerospace
In respect of the Aerospace division, 7 components were subject to a full audit and 6 components were subject to SAB scope. These 13
components together accounted for 73% of the Aerospace division’s adjusted revenue and 87% of the Aerospace division’s adjusted operating
profit and divisional costs.
Automotive
In respect of the Automotive division, 8 components were subject to a full audit and 11 components were subject to SAB scope. These 19
components accounted for 88% of the Automotive division’s adjusted revenue and 91% of the Automotive division’s adjusted operating profit
and divisional costs.
Powder Metallurgy
In respect of the Powder Metallurgy division, 1 component was subject to a full audit and 5 components were subject to SAB scope. These 6
components together accounted for 55% of the Powder Metallurgy division’s adjusted revenue and 80% of the Powder Metallurgy division’s
adjusted operating profit and divisional costs.
Other Industrial
In respect of the Other Industrial division, 1 component was subject to a full audit and 1 component was subject to SAB scope. These 2
components together accounted for 81% of the Other Industrial division’s adjusted revenue and 92% of the Other Industrial division’s adjusted
operating profit and divisional costs.
Corporate cost centres
In respect of the corporate cost centres, 9 components were subject to a full audit.
Company
The audit of the Company was performed by the group engagement team based at the Company’s head office.
Full audit scope
SAB
Review at
group level
51%
28%
21%
Full audit scope
SAB
Review at
group level
70%
18%
12%
Full audit scope
SAB
Review at
group level
83%
1%
16%
7.2. Our consideration of climate-related risks
Climate change and the transition to a low carbon economy (“climate change”) were considered in our audit where they have the potential to
directly or indirectly impact key judgements and estimates within the group financial statements. The Group continues to develop its
assessment of the potential impacts of climate change, as explained in the Sustainability Report on pages 54 to 77. Climate risks have the
potential to materially impact the key judgements and estimates within the financial statements. Our audit considered those risks that could be
material to the key judgement and estimates in the assessment of the carrying value of non-current assets and impact on future cashflows.
We also considered whether information included in the climate related disclosures in the Annual Report were consistent with our
understanding of the business and the financial statements with involvement of sustainability specialists.
7.3. Working with other auditors
Due to intermittent restrictions on working practices caused by Covid-19 the majority of the audit work was executed remotely. Limited sites
were visited due to the restrictions to travel. In order to address the Impact of Covid, regular communication took place with component audit
teams and component management teams using conference and video calls, with a particular focus on locations where work was performed
on significant audit risks.
In addition to the above, the group audit partners including 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. We included the component audit teams in our
team briefing, discuss and review their risk assessment, and reviewed documentation of the findings from their work. We also reviewed the
audit work papers supporting component teams’ reporting to us remotely using shared desktop technology.
8. Other information
The other information comprises the information included in the annual report, other than the financial statements and our auditor’s report
thereon. The directors are responsible for the other information contained within the annual report.
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.
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 course of 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 this gives rise to a
material misstatement in the financial statements themselves. 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.
We have nothing to report in this regard.
9. Responsibilities of directors
As explained more fully in the Statement of Directors’ responsibilities, the directors are responsible for the preparation of the financial statements
and for being satisfied that they give a true and fair view, and for such internal control as the directors determine is necessary to enable the
preparation of financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, the directors are responsible for assessing the group’s and the parent company’s ability to continue as a
going concern, disclosing as applicable, matters related to going concern and using the going concern basis of accounting unless the directors
either intend to liquidate the group or the parent company or to cease operations, or have no realistic alternative but to do so.
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.
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.
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11. Extent to which the audit was considered capable of detecting irregularities, including fraud
Irregularities, including fraud, are instances of non-compliance with laws and regulations. We design procedures in line with our responsibilities,
outlined above, to detect material misstatements in respect of irregularities, including fraud. The extent to which our procedures are capable of
detecting irregularities, including fraud is detailed below.
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; and
• the matters discussed among the audit engagement team including significant component audit teams and involving relevant internal
specialists, including tax, valuations, pensions and IT specialists 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: classification of adjusted items, revenue recognition in respect of RRSPs and valuation of
loss-making contracts provisions. 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 provisions of other laws and regulations that do not have a direct effect on the financial statements but compliance
with which may be fundamental to the group’s ability to operate or to avoid a material penalty. These included the group’s environmental
regulations in the jurisdictions the group operates in.
11.2 Audit response to risks identified
As a result of performing the above, we identified classification of adjusted items, revenue recognition in respect of RRSPs 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, reviewing internal audit reports and reviewing correspondence with
HMRC; 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.
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 parent company and their environment obtained in the course of the audit, we
have not identified any material misstatements in the strategic report or the directors’ report.
127
13. Corporate Governance Statement
The Listing Rules require us to review the directors’ statement in relation to going concern, longer-term viability and that part of the Corporate
Governance Statement relating to the group’s compliance with the provisions of the UK Corporate Governance Code specified for our review.
Based on the work undertaken as part of our audit, we have concluded that each of the following elements of the Corporate Governance
Statement is materially consistent with the financial statements and our knowledge obtained during the audit:
• the directors’ statement with regards to the appropriateness of adopting the going concern basis of accounting and any material
uncertainties identified set out on page 39;
• the directors’ explanation as to its assessment of the group’s prospects, the period this assessment covers and why the period is
appropriate set out on page 39;
• the directors’ statement on fair, balanced and understandable set out on page 117;
• the board’s confirmation that it has carried out a robust assessment of the emerging and principal risks set out on pages 43 to 49;
• the section of the annual report that describes the review of effectiveness of risk management and internal control systems set out on
page 40; and
• the section describing the work of the audit committee set out on page 94.
14. Matters on which we are required to report by exception
14.1 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 parent company, or returns adequate for our audit have not been received from
branches not visited by us; or
• the parent company financial statements are not in agreement with the accounting records and returns.
We have nothing to report in respect of these matters.
14.2 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.
15. Other matters which we are required to address
15.1 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 19 years, covering the years ending 31 December 2003 to 31 December 2021.
15.2 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).
16. 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.
As required by the Financial Conduct Authority (FCA) Disclosure Guidance and Transparency Rule (DTR) 4.1.14R, these financial statements
form part of the European Single Electronic Format (ESEF) prepared Annual Financial Report filed on the National Storage Mechanism of the
UK FCA in accordance with the ESEF Regulatory Technical Standard ((‘ESEF RTS’). This auditor’s report provides no assurance over whether
the annual financial report has been prepared using the single electronic format specified in the ESEF RTS.
Edward Hanson (Senior statutory auditor)
For and on behalf of Deloitte LLP
Statutory Auditor
London, United Kingdom
3 March 2022
Melrose Industries PLC Annual Report 2021Financial statementsMelrose Industries PLC Annual Report 2021 128
Consolidated Income Statement
Consolidated Income Statement
Consolidated Statement of Comprehensive Income
129
Consolidated Statement of Comprehensive Income
Profit/(loss) after tax for the year
Items that will not be reclassified subsequently to the Income Statement:
Net remeasurement gain on retirement benefit obligations
Fair value gain/(loss) on investments in equity instruments
Income tax charge relating to items that will not be reclassified
Items that may be reclassified subsequently to the Income Statement:
Currency translation on net investments
Share of other comprehensive income from equity accounted investments
Transfer to Income Statement from equity of cumulative translation differences
on disposal of foreign operations
Derivative gains/(losses) on hedge relationships
Transfer to Income Statement on hedge relationships
Income tax (charge)/credit relating to items that may be reclassified
Other comprehensive income for the year
Total comprehensive income/(expense) for the year
Attributable to:
Owners of the parent
Non-controlling interests
Year ended
31 December
2021
£m
Year ended
31 December
2020
£m
Notes
837
(533)
24
12
8
15
13
8
297
43
(71)
269
(101)
13
113
54
46
(19)
106
375
1,212
1,208
4
1,212
244
(16)
(42)
186
(42)
16
–
(99)
8
9
(108)
78
(455)
(458)
3
(455)
Continuing operations
Revenue
Cost of sales
Gross profit
Share of results of equity accounted investments
Net operating expenses
Operating loss
Finance costs
Finance income
Loss before tax
Tax
Loss after tax for the year from continuing operations
Discontinued operations
Profit for the year from discontinued operations
Profit/(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/(loss) before tax
Adjusted profit/(loss) after tax
Adjusted basic earnings per share
Adjusted diluted earnings per share
(1) Results for the year ended 31 December 2020 have been restated for discontinued operations (note 1).
(2) Defined in the summary of significant accounting policies (note 2).
Year ended
31 December
2021
£m
Restated(1)
Year ended
31 December
2020
£m
6,883
(5,872)
1,011
38
(1,500)
(451)
(169)
2
(618)
172
(446)
1,283
837
833
4
837
7,132
(6,330)
802
32
(1,321)
(487)
(195)
3
(679)
114
(565)
32
(533)
(536)
3
(533)
(9.6)p
(9.6)p
(11.7)p
(11.7)p
17.7p
17.7p
(11.0)p
(11.0)p
7,496
375
252
197
4.1p
4.1p
7,723
141
(41)
(27)
(0.6)p
(0.6)p
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 2021Financial statementsMelrose Industries PLC Annual Report 2021 130
Consolidated Statement of Cash Flows
Consolidated Statement of Cash Flows
Consolidated Balance Sheet
Consolidated Balance Sheet
Operating activities
Net cash from operating activities from continuing operations
Net cash from operating activities from discontinued operations
Net cash from operating activities
Investing activities
Disposal of businesses, 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
Acquisition of subsidiaries, net of cash acquired
Interest received
Net cash from/(used in) investing activities from continuing operations
Net cash used in investing activities from discontinued operations
Net cash from/(used in) investing activities
Financing activities
Repayment of borrowings
Costs of raising debt finance
Repayment of principal under lease obligations
Settlement of interest rate swaps
Return of capital
Return of capital costs
Dividends paid to owners of the parent
Net cash used in financing activities from continuing operations
Net cash used in financing activities from discontinued operations
Net cash used in financing activities
Net increase/(decrease) in cash and cash equivalents, net of bank overdrafts
Cash and cash equivalents, net of bank overdrafts at the beginning of the year
Effect of foreign exchange rate changes
Cash and cash equivalents, net of bank overdrafts at the end of the year
(1) Results for the year ended 31 December 2020 have been restated for discontinued operations (note 1).
Year ended
31 December
2021
£m
Notes
Restated(1)
Year ended
31 December
2020
£m
27
27
13
15
12
27
27
25
9
9
27
27
27
27
263
–
263
2,703
(220)
13
(18)
52
(10)
–
2
2,522
(11)
2,511
(1,555)
(4)
(54)
(47)
(729)
(1)
(69)
(2,459)
(7)
(2,466)
308
160
–
468
476
288
764
10
(253)
25
(37)
54
(2)
(19)
3
(219)
(29)
(248)
(598)
(1)
(63)
–
–
–
–
(662)
(14)
(676)
(160)
317
3
160
As at 31 December 2021, the Group had net debt of £950 million (31 December 2020: £2,847 million). A definition and reconciliation
of the movement in net debt is shown in note 27.
Non-current assets
Goodwill and other intangible assets
Property, plant and equipment
Investments
Interests in equity accounted investments
Deferred tax assets
Derivative financial assets
Other receivables
Current assets
Inventories
Trade and other receivables
Derivative financial assets
Current tax assets
Cash and cash equivalents
Total assets
Current liabilities
Trade and other payables
Interest-bearing loans and borrowings
Lease obligations
Derivative financial liabilities
Current tax liabilities
Provisions
Net current liabilities
Non-current liabilities
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
Capital redemption reserve
Other reserves
Translation and hedging reserve
Retained earnings
Equity attributable to owners of the parent
Non-controlling interests
Total equity
131
31 December
2021
£m
31 December
2020
£m
Notes
11
14
12
15
22
25
17
16
17
25
18
5
19
20
28
25
21
19
20
28
25
22
24
21
5
26
26
7,390
2,528
87
429
250
47
707
9,198
3,133
34
430
180
101
439
11,438
13,515
893
1,184
23
11
473
2,584
1,126
1,658
47
23
311
3,165
14,022
16,680
2,051
462
57
119
142
293
3,124
(540)
390
903
319
79
614
645
408
3,358
6,482
7,540
333
3,271
109
729
(2,330)
76
5,319
7,507
33
7,540
2,456
165
81
58
188
415
3,363
(198)
421
2,926
474
210
732
838
606
6,207
9,570
7,110
333
8,138
109
–
(2,330)
(30)
861
7,081
29
7,110
The Financial Statements were approved and authorised for issue by the Board of Directors on 3 March 2022 and were signed on its
behalf by:
Geoffrey Martin
Group Finance Director
3 March 2022
Simon Peckham
Chief Executive
3 March 2022
Melrose Industries PLC Annual Report 2021Financial statementsMelrose Industries PLC Annual Report 2021 132
Consolidated Statement of Changes in Equity
Consolidated Statement of Changes in Equity
Notes to the Financial Statements
Notes to the Financial Statements
133
Issued
share
capital
£m
Share
premium
account
£m
Merger
reserve
£m
Capital
redemption
reserve
£m
Other
reserves
£m
Translation
and hedging
reserve
£m
Retained
earnings
£m
Equity
attributable to
owners
of the parent
£m
Non-
controlling
interests
£m
Total
equity
£m
At 1 January 2020
333
8,138
109
– (2,330)
78
1,197
7,525
26
7,551
(Loss)/profit for the year
Other comprehensive
(expense)/income
Total comprehensive
(expense)/income
Equity-settled share-based
payments
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(536)
(536)
(108)
186
78
(108)
(350)
(458)
–
14
14
3
–
3
–
(533)
78
(455)
14
At 31 December 2020
333
8,138
109
– (2,330)
(30)
861
7,081
29
7,110
Profit for the year
Other comprehensive income
Total comprehensive income
Capital reduction
Return of capital
Dividends paid
Equity-settled share-based
payments
–
–
–
–
–
–
–
–
–
–
(4,138)
(729)
–
–
–
–
–
–
–
–
–
–
–
–
–
729
–
–
–
–
–
–
–
–
–
–
106
106
–
–
–
833
269
1,102
4,138
(729)
(69)
833
375
1,208
–
(729)
(69)
–
16
16
4
–
4
–
–
–
–
837
375
1,212
–
(729)
(69)
16
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 12 to 29. The Consolidated Financial Statements of the Group for the year ended 31 December 2021 were
authorised in accordance with a resolution of the Directors of Melrose Industries PLC on 3 March 2022.
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.
Corporate structure
During the year, the Group completed the disposal of the Nortek Air Management segment and the Brush and Nortek Control
businesses, previously included in the Other Industrial segment. The results of Nortek Air Management, Brush and Nortek Control
have been classified within discontinued operations for both years presented; with the Income Statement, the Statement of Cash
Flows and their associated notes being restated accordingly. At 30 June 2021, the Nortek Control business met the criteria within
IFRS 5: Non-current Assets Held for Sale and Discontinued Operations to be classified as an asset held for sale. In addition,
discontinued operations for 2020 include the results of the Wheels and Structures business, which was disposed in November 2020.
Furthermore, the Aerospace, Automotive and Powder Metallurgy businesses disposed of certain non-core entities, which have not
been treated as discontinued operations. Further detail is shown in note 13.
In line with the Group’s strategy, following the disposals of Nortek Air Management and Brush, a return of capital of £729 million,
equivalent to 15 pence per existing ordinary share, was approved by shareholders on 9 July 2021. On 10 August 2021, a court
approved a capital reduction of the Company’s share premium account by £4,138 million, taking the Company’s share premium
account from £8,138 million to £4,000 million. Subsequently, the return of capital was paid in cash to shareholders on 14 September
2021, via a redeemable preference share scheme alongside a 9 for 10 share consolidation which reduced the number of ordinary
shares by 10%, from 4,858 million to 4,372 million (further details are contained in note 26).
1.1 New Standards, Amendments and Interpretations affecting amounts, presentation or disclosure reported in the current
At 31 December 2021
333
3,271
109
729 (2,330)
76
5,319
7,507
33
7,540
year
Details of the Group’s capital reduction and return of capital are set out in note 1.
Further information on issued share capital and reserves is set out in note 26.
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 amounts reported in these Financial Statements:
• Amendments to IFRS 9, IAS 39, IFRS 7 and IFRS 4: Interest Rate Benchmark Reform (Phase 2)
• Amendments to IFRS 16: Leases
1.2 New Standards, Amendments and Interpretations in issue but not yet effective
At 31 December 2021, the following Standards, Amendments and Interpretations were in issue but not yet effective:
• 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 IAS 1: Classification of liabilities
• Amendments to IFRS 3: Reference to the Conceptual Framework
• Amendments to IAS 16: Property, Plant and Equipment – Proceeds before Intended Use
• Amendments to IAS 37: Onerous Contracts – Cost of Fulfilling a Contract
• Annual Improvements to IFRS Standards: 2018-2020 Cycle
• Amendments to IAS 1 and IFRS Practice Statement 2: Disclosure of Accounting Policies
• Amendments to IAS 8: Definition of Accounting Estimates
• Amendments to IAS 12: Deferred Tax related to Assets and Liabilities arising from a Single Transaction
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 the requirements of the Companies Act 2006 and
International Financial Reporting Standards (“IFRSs”) as issued by the IASB. The Consolidated Financial Statements have been
prepared on an historical cost basis, except for the revaluation of certain financial instruments and investments 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”).
Melrose Industries PLC Annual Report 2021Financial statementsMelrose Industries PLC Annual Report 2021 134
134
135
2. Summary of significant accounting policies continued
APMs used by the Group are set out in the glossary to these Financial Statements on pages 203 to 210 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 project 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 gains and losses;
• 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;
• 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;
• Costs associated with the gender equalisation of guaranteed minimum pension (“GMP”) for occupational schemes; and
• The net release of fair value items booked on acquisitions.
Further to the adjusting items above, adjusting items impacting profit before tax include:
• Acceleration of unamortised debt issue costs written off as a consequence of Group refinancing;
• Significant settlement gains and losses associated with interest rate swaps following acquisition or disposal related activity, which is
not considered by the Group to be part of the normal financing costs; 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;
• The net effect of significant new tax legislation; 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 Consolidated Financial Statements have been prepared on a going concern basis as the Directors consider that adequate
resources exist for the Company to continue in operational existence for the foreseeable future.
2. Summary of significant accounting policies continued
The Group’s liquidity and funding arrangements are described in the Finance Director’s Review. There is significant liquidity headroom
of £3 billion at 31 December 2021 and sufficient headroom throughout the going concern forecast period. Forecast covenant
compliance is considered further below.
Covenants
The Group’s banking facility was extended in the year, from its original maturity in January 2023 to June 2024. 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 financial covenants during the period of assessment for going concern are as follows:
Net debt to adjusted EBITDA
Interest cover
31 December
2021
4.25x
3.0x
30 June
2022
4.0x
3.25x
31 December
2022
3.75x
4.0x
Testing
The Group has modelled two scenarios in its assessment of going concern; a base case and a reasonably possible sensitised case.
The base case takes into account the estimated impact of a continued recovery from the COVID-19 pandemic as well as other end
market and operational factors, including supply chain challenges, throughout the going concern period and has been monitored
against the actual results and cash generation in the year.
The reasonably possible sensitised case models more conservative sales assumptions for 2022 and the first half of 2023. Given that
there is liquidity headroom of £3 billion and the Group’s leverage was 1.3x, comfortably below the covenant test at 31 December
2021, no further sensitivity detail is provided.
Under the reasonably possible sensitised case, even with significant reductions, no covenant is breached at any of the forecast testing
dates being 30 June 2022 and 31 December 2022, with the testing at 30 June 2023 also favourable, and the Group will not require
any additional sources of finance, even following repayment of the £450 million bond in September 2022.
Business combinations and goodwill
The acquisition of subsidiaries is accounted for using the acquisition method. The cost of acquisition is measured at the fair value of
assets transferred, the liabilities incurred or assumed at the date of exchange of control and equity instruments issued by the Group in
exchange for control of the acquiree. Control is achieved where the Company has the power to govern the financial and operating
policies of an investee entity so as to obtain benefits from its activities. Costs directly attributable to business combinations are
recognised as an expense in the Income Statement as incurred.
The acquired identifiable assets and liabilities are measured at their fair value at the date of acquisition except those where specific
guidance is provided by IFRSs. Non-current assets and directly attributable liabilities that are classified as held for sale in accordance
with IFRS 5: Non-current assets held for sale and discontinued operations, are recognised and measured at fair value less costs to
sell. Also, deferred tax assets and liabilities are recognised and measured in accordance with IAS 12: Income taxes, liabilities and
assets related to employee benefit arrangements are recognised and measured in accordance with IAS 19 (revised): Employee
benefits and liabilities or equity instruments related to the replacement by the Group of an acquiree’s share-based payments awards
are measured in accordance with IFRS 2: Share-based payment. Any excess of the cost of the acquisition over the fair values of the
identifiable net assets acquired is recognised as goodwill.
If the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs,
the Group reports provisional amounts where appropriate. Those provisional amounts are adjusted during the measurement period, or
additional assets or liabilities recognised, to reflect new information obtained about facts and circumstances that existed as of the
acquisition date that, if known, would have affected the amounts recognised at that date.
The measurement period is the period from the date of acquisition to the date the Group obtains complete information about facts and
circumstances that existed as of the acquisition date and is subject to a maximum period of one year.
Goodwill on acquisition is initially measured at cost, being the excess of the sum of the consideration transferred, the amount of any
non-controlling interest in the acquiree and the fair value of the acquirer’s previously held equity interest in the acquiree over the
acquirer’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities. Following initial recognition,
goodwill is measured at cost less any accumulated impairment losses. Goodwill is reviewed for impairment annually or more
frequently if events or changes in circumstances indicate that the carrying value may be impaired.
If, after reassessment, the Group’s interest in the fair value of the acquiree’s identifiable net assets exceeds the sum of the
consideration transferred, the amount of any non-controlling interest in the acquiree and the fair value of the acquirer’s previously held
equity interest in the acquiree, the excess is recognised immediately in profit or loss as a bargain purchase gain.
As at the acquisition date, any goodwill acquired is allocated to the cash generating units acquired. Impairment is determined by
assessing the recoverable amount of the cash generating unit to which goodwill relates. Where the recoverable amount of the cash
generating unit is less than the carrying amount, an impairment loss is recognised in the Income Statement and is not subsequently
reversed. When there is a disposal of a cash generating unit, goodwill relating to the operation disposed of is taken into account in
determining the gain or loss on disposal of that operation. The amount of goodwill allocated to a partial disposal is measured on the
basis of the relative values of the operation disposed of and the operation retained.
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2. Summary of significant accounting policies continued
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.
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.
Property, plant and equipment
Property, plant and equipment is stated at cost less accumulated depreciation and any impairment in value.
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2. Summary of significant accounting policies continued
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
nil
Freehold buildings and long leasehold property
over expected economic life not exceeding 50 years
Short leasehold property
Plant and equipment
over the term of the lease
3-15 years
The estimated useful lives of property, plant and equipment are reviewed on an annual basis and, if necessary, changes in useful
lives are accounted for prospectively.
The carrying values of property, plant and equipment are reviewed annually for indicators of impairment, or if events or changes in
circumstances indicate that the carrying value may not be recoverable. If 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.
2. Summary of significant accounting policies continued
Costs relating to clearly defined and identifiable development projects are capitalised when there is a technical degree of exploitation,
adequacy of resources and a potential market or development possibility in the undertaking that are recognisable; and where it is the
intention to produce, market or execute the project. A correlation must also exist between the costs incurred and future benefits and
those costs can be measured reliably. Capitalised costs are expensed on a straight-line basis over their useful lives of 20 years or
less. Costs not meeting such criteria are expensed as incurred.
Inventories
Inventories are valued at the lower of cost and net realisable value and are measured using a first in, first out or weighted average
cost basis. Cost includes all direct expenditure and appropriate production overhead expenditure incurred in bringing goods to their
current state under normal operating conditions. Net realisable value is based on estimated selling price less costs expected to be
incurred to completion and disposal. Provisions are made for obsolescence or other expected losses where necessary.
Cash and cash equivalents
Cash and cash equivalents comprise cash in hand, balances with banks and similar institutions, and short-term deposits which are
readily convertible to cash and are subject to insignificant risks of changes in value.
For the purpose of the Consolidated Statement of Cash Flows, cash and cash equivalents consist of cash and cash equivalents as
defined above, net of outstanding bank overdrafts.
Interest-bearing loans and borrowings
All loans and borrowings are initially recognised at fair value of the consideration received net of issue costs associated with the
borrowings.
After initial recognition, interest-bearing loans and borrowings are subsequently measured at amortised cost using the effective
interest rate method. Amortised cost is calculated by taking into account any issue costs, and any discount or premium on settlement.
Gains and losses are recognised in the Income Statement when the liabilities are derecognised or impaired, as well as through the
amortisation process.
Government refundable advances
Government refundable advances are reported in “Trade and other payables” in the Balance Sheet. Refundable advances include
amounts advanced by a government, accrued interest and directly attributable costs. Refundable advances are provided to the Group
to part-finance expenditures on specific development programmes. The advances are provided on a risk sharing basis, i.e. repayment
levels are determined subject to the success of the related programme. Balances are held at amortised cost and interest is calculated
using the effective interest rate method.
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. The
discount rate used to calculate the lease liability is the Group’s incremental borrowing rate, unless there is a rate implicit in the lease.
The incremental borrowing rate is used for the majority of leases. Incremental borrowing rates are based on the term, currency,
country and start date of the lease and reflect the rate the Group would pay for a loan with similar terms and security.
Following initial recognition, the lease liability is measured at amortised cost using the effective interest rate method. Where there is a
change in future lease payments due to a rent review, change in index or rate, or a change in the Group’s assessment of whether it is
reasonably certain to exercise a purchase, extension or break option, the lease obligation is remeasured. A corresponding adjustment
is made to the associated right-of-use asset.
Right-of-use assets are depreciated over the shorter of the estimated useful life of the asset and the lease term.
Lease payments are apportioned between finance costs and a reduction in the lease obligation so as to reflect the interest on the
remaining balance of the obligation. Finance charges are recorded in the Income Statement within finance costs.
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. Expenses relating to variable lease
payments which are not included in the lease liability, due to being based on a variable other than an index or rate, are recognised as
an expense in the Income Statement.
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.
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Impairment of financial assets
For trade 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 and other receivables 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. For
trade receivables, the carrying amount is reduced by an allowance for 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.
Other receivables are also considered for impairment and if required the carrying amount is reduced by any loss arising which is
recorded in the Income Statement, although for the Group this is not material.
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 speculative
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.
2. Summary of significant accounting policies continued
The Group designates certain hedging instruments as either cash flow hedges or hedges of net investments in foreign operations.
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.
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.
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2. Summary of significant accounting policies continued
Foreign currencies
The individual Financial Statements of each Group company are presented in the currency of the primary economic environment in
which it operates (its functional currency). For the purpose of the Consolidated Financial Statements, the results and financial position
of each Group company are expressed in pounds Sterling, which is the functional currency of the Company, and the presentation
currency for the Consolidated Financial Statements.
In preparing the Financial Statements of the individual companies, transactions in currencies other than the entity’s functional
currency (foreign currencies) are recorded at the rates of exchange prevailing on the dates of the transactions. At each balance sheet
date, monetary assets and liabilities that are denominated in foreign currencies are retranslated at the rates prevailing on the balance
sheet date. Non-monetary items carried at fair value that are denominated in foreign currencies are translated at the rates prevailing
at the date when the fair value was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency
are not retranslated.
Exchange differences arising on the settlement of monetary items, and on the retranslation of monetary items, are included in the
Income Statement for the period. Exchange differences arising on the retranslation of non-monetary items carried at fair value are
included in the Income Statement for the period except for differences arising on the retranslation of non-monetary items in respect of
which gains and losses are recognised directly in equity. For such non-monetary items, any exchange component of that gain or loss
is also recognised directly in equity.
For the purpose of presenting Consolidated Financial Statements, the assets and liabilities of the Group’s foreign operations are
translated at exchange rates prevailing on the balance sheet date. Income and expense items are translated at the average exchange
rates for the period, unless exchange rates fluctuate significantly during that period, in which case the exchange rates at the date of
transactions are used. Exchange differences arising, if any, are recognised in the Statement of Comprehensive Income and
accumulated in equity (attributed to non-controlling interests as appropriate). Such translation differences are recognised as income or
as expenses in the period in which the related operation is disposed of. Any exchange differences that have previously been attributed
to non-controlling interests are derecognised but they are not reclassified to the Income Statement.
Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign
entity and translated at the rate prevailing at the balance sheet date.
Taxation
The tax expense is based on the taxable profits for the period and represents the sum of the tax paid or currently payable and
deferred tax.
Taxable profit differs from net profit as reported in the Income Statement because it excludes items of income or expense that are
taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group’s liability for current
tax is calculated using tax rates and tax laws that have been enacted or substantively enacted by the balance sheet date.
A tax provision is recognised for those matters for which the tax determination is uncertain but it is considered probable that there will
be a future outflow of funds to a tax authority. The provisions are measured at the best estimate of the amount expected to become
payable. The assessment is based on the judgement of tax professionals within the Company supported by previous experience in
respect of such activities and in certain cases based on specialist independent advice.
Deferred tax is provided, using the liability method, on all temporary differences at the balance sheet date between the tax bases of
assets and liabilities and their carrying amounts for financial reporting purposes.
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.
2. Summary of significant accounting policies continued
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.
Government grants
Government grants are not recognised in the Income Statement until there is reasonable assurance that the Group will comply with
the conditions attached to them and that the grants will be received. Government grants are recognised in the Income Statement on a
systematic basis over the periods in which the Group recognises the related costs for which the grants are intended to compensate.
Specifically, government grants where the primary condition is that the Group should purchase, construct or otherwise acquire non-
current assets (including property, plant and equipment) are recognised as deferred government grants in the Balance Sheet and
transferred to the Income Statement on a systematic and rational basis over the useful lives of the related assets.
Government grants that are receivable as compensation for expenses or losses already incurred or for the purpose of giving
immediate financial support to the Group with no future related costs are recognised in the Income Statement in the period in which
they become receivable.
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 2021 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.
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3. Critical accounting judgements and key sources of estimation uncertainty continued
a) Assumptions used to determine the recoverable amount of goodwill and other assets
The carrying value of goodwill in the Group at 31 December 2021 was £2,850 million (31 December 2020: £3,640 million).
Determining whether the goodwill of groups of cash generating units (“CGUs”) is impaired requires an estimation of its recoverable
amount which is compared against the carrying value. The recoverable amount is deemed to be the higher of the value in use and fair
value less costs to sell. The value in use calculation requires the Directors to estimate the future cash flows expected to arise from the
groups of CGUs and a suitable discount rate in order to calculate present value. The fair values of the groups of CGUs are calculated
using a combination of estimated discounted cash flows and EBITDA multiple valuations, as in the current environment it has been
difficult to assess a sales value using observable market inputs (level 1) or inputs based on market evidence (level 2) and so
unobservable inputs (level 3) have been used.
Certain groups of CGUs are more at risk than others and this could possibly lead to an impairment or loss on disposal in the next
year, depending on how markets continue to recover from COVID-19 implications. The voluntary sensitivity disclosure in note 11
shows there is no reasonably possible change in key assumptions that could result in an impairment in any of the groups of CGUs.
The Aerospace group of CGUs is the most sensitive to a change in estimates. As at 31 December 2021, the carrying amount of
goodwill and other intangible assets (not including computer software and development costs) in the Aerospace group of CGUs is
£3,475 million (31 December 2020: £3,735 million).
In order for a material impairment to be recorded, a change in discount rate for the Aerospace group of CGUs from 7.8% to 9.0%
would be required.
b) Assumptions used to determine the carrying amount of the Group’s net 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 2021, the retirement benefit obligation was a net deficit of £461 million (31 December 2020: £838
million).
Further details of the assumptions applied and a sensitivity analysis on the principal assumptions used to determine the defined
benefit liabilities of the Group’s obligations are shown in note 24. Whilst actual movements might be different to sensitivities shown,
these are a reasonably possible change that could occur.
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, or commercial progress could have a material impact on the provision in future periods. At 31
December 2021, the carrying value of the loss-making contract provision in the Group was £167 million (31 December 2020: £241
million). In the last three years significant progress has been made resolving commercial and operational issues within a large number
of loss-making contracts inherited on acquisition of GKN. The release has on average been 18% of the balance immediately before
reassessment. If the Group were to achieve a similar level of success on the amount outstanding at 31 December 2021, there could
be a further £30 million released to adjusting items in the next year.
d) 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 allocate total
associated consideration.
A key judgement is the 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.
3. Critical accounting judgements and key sources of estimation uncertainty continued
The variable consideration contract 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 lead to the variable consideration
asset on the Balance Sheet of £305 million (2020: £247 million) increasing to between £335 million and £345 million. This would lead
to recognition of additional profit in the next year of between £30 million and £40 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
(1) Restated for discontinued operations (note 1).
Year ended
31 December
2021
£m
Restated(1)
Year ended
31 December
2020
£m
5,946
937
6,883
6,038
1,094
7,132
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 3d, 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 £11 billion (31 December 2020: £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 2021. These performance obligations will be
satisfied and revenue will be recognised over a period of up to 30 years (2020: 28 years).
The amount of revenue recognised from RRSP contracts during the year was £402 million, which includes variable consideration of
£55 million (2020: £354 million, which included variable consideration of £13 million). Within this there is revenue from the delivery of
product which is recognised at a point in time of £377 million (2020: £326 million) and revenue from provision of service which is
recognised over time of £25 million (2020: £28 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.
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.
There has been £24 million (2020: £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 by customers.
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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 the disposal of the Nortek Air Management segment during the year its results are classified within discontinued operations
and the comparative results for 2020 have been restated accordingly. In addition, the results of the Brush and Nortek Control
businesses, which were disposed of in the year, have also been classified as discontinued operations. The Brush and Nortek Control
businesses were previously included within the Other Industrial segment and the comparative results for 2020 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.
Automotive – a global technology and systems engineer which designs, develops, manufactures and integrates an extensive range
of driveline technologies, including electric vehicle components.
Powder Metallurgy – a global leader in precision powder metal parts for the automotive and industrial sectors, as well as the
production of powder metal.
Other Industrial – comprises the Group’s Ergotron and Hydrogen Technology businesses. The Hydrogen Technology business was
launched in the year.
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 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.
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 2021.
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 2021
Continuing operations
Adjusted revenue
Equity accounted investments
Revenue
Timing of revenue recognition
At a point in time
Over time
Revenue
Year ended 31 December 2020 – restated(2)
Continuing operations
Adjusted revenue
Equity accounted investments
Revenue
Timing of revenue recognition
At a point in time
Over time
Revenue
(1) Includes revenue in respect of Ergotron of £233 million (2020: £217 million).
(2) Restated for discontinued operations (note 1).
Aerospace
£m
Automotive
£m
Powder
Metallurgy
£m
Other
Industrial(1)
£m
2,543
(5)
2,538
1,601
937
2,538
3,745
(581)
3,164
3,164
–
3,164
975
(27)
948
948
–
948
233
–
233
233
–
233
Aerospace
£m
Automotive
£m
Powder
Metallurgy
£m
Other
Industrial(1)
£m
2,804
(6)
2,798
1,704
1,094
2,798
3,797
(566)
3,231
3,231
–
3,231
905
(19)
886
886
–
886
217
–
217
217
–
217
Total
£m
7,496
(613)
6,883
5,946
937
6,883
Total
£m
7,723
(591)
7,132
6,038
1,094
7,132
5. Segment information continued
b) Segment operating profit
Year ended 31 December 2021
Continuing operations
Aerospace
£m
Automotive
£m
Powder
Metallurgy
£m
Other
Industrial(1)
£m
Corporate(2)
£m
Adjusted operating profit/(loss)
112
172
91
51
(51)
Items not included in adjusted operating profit(3):
Amortisation of intangible assets acquired in
business combinations
Restructuring costs
Movement in derivatives and associated
financial assets and liabilities
Equity accounted investments adjustments
Melrose equity-settled compensation scheme
charges
Net release and changes in discount rates of fair
value items
Acquisition and disposal related gains and losses
(245)
(92)
4
–
–
23
2
(142)
(147)
(1)
(28)
–
14
1
Operating (loss)/profit
(196)
(131)
(49)
(18)
(3)
–
–
11
8
40
(16)
–
–
–
–
–
–
–
(12)
(114)
–
(19)
1
(4)
35
(199)
Finance costs
Finance income
Loss before tax
Tax
Loss for the year from continuing operations
Year ended 31 December 2020 – restated(4)
Continuing operations
Aerospace
£m
Automotive
£m
Powder
Metallurgy
£m
Other
Industrial(1)
£m
Corporate(2)
£m
Adjusted operating profit/(loss)
14
82
39
52
(46)
Items not included in adjusted operating profit(3):
Amortisation of intangible assets acquired in
business combinations
Restructuring costs
Impairment of assets
Equity accounted investments adjustments
Melrose equity-settled compensation scheme
charges
Acquisition and disposal related gains and losses
Impact of GMP equalisation on UK pension schemes
Movement in derivatives and associated
financial assets and liabilities
Net release and changes in discount rates of fair
value items
Operating (loss)/profit
Finance costs
Finance income
Loss before tax
Tax
Loss for the year from continuing operations
(256)
(110)
(133)
–
–
–
(1)
(9)
85
(410)
(147)
(60)
(21)
(30)
–
–
(1)
(2)
(4)
(183)
(52)
(48)
(30)
–
–
–
–
–
34
(57)
(17)
(1)
–
–
–
–
–
–
–
34
–
(2)
–
–
(11)
(5)
–
193
–
129
Total
£m
375
(452)
(269)
(114)
(28)
(19)
49
7
(451)
(169)
2
(618)
172
(446)
Total
£m
141
(472)
(221)
(184)
(30)
(11)
(5)
(2)
182
115
(487)
(195)
3
(679)
114
(565)
(1) Includes adjusted operating profit in respect of Ergotron of £58 million (2020: £52 million).
(2) Corporate adjusted operating loss of £51 million (2020: £46 million), includes £17 million (2020: £12 million) of costs in respect of divisional management long-term incentive plans.
(3) Further details on adjusting items are discussed in note 6.
(4) Restated for discontinued operations (note 1).
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5. Segment information continued
c) Segment total assets and liabilities
Aerospace
Automotive
Powder Metallurgy
Other Industrial(2)
Corporate
Continuing operations
Discontinued operations
Total
Total assets
Total liabilities
31 December
2021
£m
Restated(1)
31 December
2020
£m
31 December
2021
£m
Restated(1)
31 December
2020
£m
6,267
4,608
1,669
631
847
6,614
5,172
1,816
604
513
14,022
14,719
–
1,961
2,231
2,042
405
86
1,718
6,482
–
2,691
2,407
476
76
3,281
8,931
639
14,022
16,680
6,482
9,570
(1) Restated for discontinued operations (note 1).
(2) Includes total assets of £617 million (31 December 2020: £604 million) and total liabilities of £86 million (31 December 2020: £76 million) in respect of Ergotron.
d) Segment capital expenditure and depreciation
Capital expenditure(1)
Depreciation of
owned assets(1)
Depreciation of
leased assets
Year ended
31 December
2021
£m
Restated(2)
Year ended
31 December
2020
£m
Year ended
31 December
2021
£m
Restated(2)
Year ended
31 December
2020
£m
Year ended
31 December
2021
£m
Restated(2)
Year ended
31 December
2020
£m
66
113
40
3
–
222
12
234
98
130
33
2
–
263
27
290
122
198
51
3
1
375
17
392
121
199
61
3
1
385
33
418
24
15
9
1
1
50
7
57
28
18
9
1
1
57
17
74
Aerospace
Automotive
Powder Metallurgy
Other Industrial(3)
Corporate
Continuing operations
Discontinued operations
Total
(1) Including computer software and development costs. Capital expenditure excludes lease additions.
(2) Restated for discontinued operations (note 1).
(3) Capital expenditure includes £2 million (2020: £2 million) in respect of Ergotron. Depreciation of owned and leased assets in both years relates to Ergotron.
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 other receivables; and non-current derivative financial assets) by geographical location are detailed below:
Revenue(1)
from external customers
Year ended
31 December
2021
£m
Restated(2)
Year ended
31 December
2020
£m
Segment assets
31 December
2021
£m
Restated(2)
31 December
2020
£m
580
1,857
3,437
1,009
6,883
884
7,767
571
1,892
3,642
1,027
7,132
1,782
8,914
1,977
4,375
2,937
1,145
10,434
–
10,434
2,132
4,820
3,137
1,216
11,305
1,490
12,795
UK
Rest of Europe
North America
Other
Continuing operations
Discontinued operations
Total
(1) Revenue is presented by destination.
(2) Restated for discontinued operations (note 1).
6. Reconciliation of adjusted profit measures
As described in note 2, adjusted profit measures are an alternative performance measure used by the Board to monitor the operating
performance of the Group.
a) Operating profit
Continuing operations
Operating loss
Amortisation of intangible assets acquired in business combinations
Restructuring costs
Movement in derivatives and associated financial assets and liabilities
Equity accounted investments adjustments
Melrose equity-settled compensation scheme charges
Net release and changes in discount rates of fair value items
Acquisition and disposal related gains and losses
Impairment of assets
Impact of GMP equalisation on UK pension schemes
Total adjustments to operating loss
Adjusted operating profit
(1) Restated for discontinued operations (note 1).
Year ended
31 December
2021
£m
Notes
Restated(1)
Year ended
31 December
2020
£m
a
b
c
d
e
f
g
h
i
(451)
452
269
114
28
19
(49)
(7)
–
–
826
375
(487)
472
221
(182)
30
11
(115)
5
184
2
628
141
a. The amortisation charge on intangible assets acquired in business combinations of £452 million (2020: £472 million) is excluded
from adjusted results due to its non-trading nature and to enable comparison with companies that grow organically. However,
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 £269 million (2020: £221 million), including a write down of assets in
affected sites of £112 million (2020: £20 million). These are shown as adjusting items due to their size and non-trading nature and
during the year ended 31 December 2021 these included:
•
•
•
•
A charge of £92 million (2020: £110 million) within the Aerospace division primarily relating to the commencement of
significant multi-year restructuring projects, necessary for the business to achieve its full potential target operating margins.
These included the initial stages of European footprint consolidations in both the Civil and Engines businesses, which
commenced in the first half of the year, and significant restructuring programmes in North America, across all three
Aerospace sub-segments, which commenced in the second half of the year.
A charge of £147 million (2020: £60 million) within the Automotive division, primarily relating to two significant footprint
consolidation actions in Europe, which significantly progressed during the year, along with costs incurred on multiple
worldwide restructuring projects as the business accelerates its efforts to position its cost base during 2022 at a level that
will allow the business to achieve target operating margins when supply constraints ease.
A charge of £18 million (2020: £48 million) within the Powder Metallurgy division relating to multiple restructuring projects
underway that will set the business’ cost base during 2022 at a level such that target operating margins can be achieved
when supply constraints ease.
A net charge of £12 million (2020: £3 million) within the Other Industrial and Corporate divisions which includes a non-cash
accounting loss resulting from actions taken in the year to secure and buy-out pensioner members from the GKN UK 2016
Pension Plan, see note 24 for further details.
c. Movements in the fair value of derivative financial instruments (primarily forward foreign currency exchange contracts where
hedge accounting is not applied) entered into within the GKN businesses to mitigate the potential volatility of future cash flows, on
long-term foreign currency customer and supplier contracts, including foreign exchange movements on the associated financial
assets and liabilities are shown as an adjusting item because of its volatility and size. This totalled a charge of £114 million (2020:
a credit of £182 million) in the year.
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 Co Limited (“SDS”), within the Automotive business. The EAIs
generated £613 million (2020: £591 million) of revenue in the year, which is not included in the statutory results but is shown within
adjusted revenue so as not to distort the operating margins reported in the businesses when the adjusted operating profit earned
from these EAIs is included.
In addition, the profits and losses of EAIs, which are shown after amortisation of 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.
Notes to the Financial StatementsContinuedMelrose Industries PLC Annual Report 2021Financial statementsMelrose Industries PLC Annual Report 2021Melrose Industries PLC Annual Report 2021Financial statementsMelrose Industries PLC Annual Report 2021 150
150
151
151
6. Reconciliation of adjusted profit measures continued
e. The charge for the Melrose equity-settled Employee Share Scheme, including its associated employer’s tax charge, of £19 million
(2020: £11 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.
f. The net release of fair value items in the year of £49 million (2020: £115 million) where items have been resolved for more
favourable amounts than first anticipated are shown as an adjusting item, avoiding positively distorting adjusted operating profit.
During the year this included a net release of £22 million in respect 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.
g.
An acquisition and disposal related net credit of £7 million (2020: charge of £5 million) arose in the year. These items are excluded
from adjusted results due to their non-trading nature.
h. The write down of assets in 2020 of £184 million, mostly recognised in the second quarter of the year as a result of the impact of
COVID-19, included £133 million within the Aerospace division. The write down of these assets was shown as an adjusting item
due to the unprecedented nature of the COVID-19 pandemic, its non-trading nature and size.
i. During 2020, the Company incurred a further charge of £2 million in respect of gender equalisation of guaranteed minimum
pensions for occupational pension schemes in the UK. For consistency with the accounting treatment in 2018 and because of its
non-trading nature the charge was excluded from adjusted results.
b) Profit before tax
Continuing operations
Loss before tax
Adjustments to operating loss as above
Settlement of interest rate swaps
Equity accounted investments – interest
Fair value changes on cross-currency swaps
Bank facility negotiation fees
Total adjustments to loss before tax
Adjusted profit/(loss) before tax
(1) Restated for discontinued operations (note 1).
Year ended
31 December
2021
£m
Notes
Restated(1)
Year ended
31 December
2020
£m
(618)
(679)
j
k
l
m
826
45
2
(3)
–
870
252
628
–
–
2
8
638
(41)
6. Reconciliation of adjusted profit measures continued
c) Profit after tax
Continuing operations
Loss after tax
Adjustments to loss before tax as above
Tax effect of adjustments to loss before tax
Tax effect of significant legislative changes
Tax effect of significant restructuring
Equity accounted investments – tax
Total adjustments to loss after tax
Adjusted profit/(loss) after tax
(1) Restated for discontinued operations (note 1).
7. Expenses
Continuing operations
Net operating expenses comprise:
Selling and distribution costs
Administration expenses(2)
Total net operating expenses
(1) Restated for discontinued operations (note 1).
(2) Includes £798 million (2020: £598 million) of adjusting items (note 6).
j. On disposal of Nortek Air Management and Brush, the significant proceeds received together with future expectations of debt
Continuing operations
requirements enabled the Group to settle certain interest rate swap instruments that were no longer needed. Specific recycling
from the cash flow hedge reserve, under IFRS 9, of £45 million has been accelerated and shown as an adjusting item due to its
non-trading nature.
k. As explained in paragraph d above, the profits and losses of EAIs are shown after adjusting items, 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.
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.
m. Following the impact of COVID-19 in 2020, the Group paid fees in negotiating waivers and amendments to its bank facility
covenants for the remaining period of the facilities. These fees were immediately written off and are shown as an adjusting item
because of their non-trading nature.
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
Amortisation and impairment of computer software and development costs
Lease expense(2)
Staff costs
Research and development costs(3)
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
Year ended
31 December
2021
£m
Notes
Restated(1)
Year ended
31 December
2020
£m
8
8
8
k
(446)
870
(180)
(70)
32
(9)
643
197
(565)
638
(99)
–
7
(8)
538
(27)
Year ended
31 December
2021
£m
Restated(1)
Year ended
31 December
2020
£m
(59)
(1,441)
(57)
(1,264)
(1,500)
(1,321)
Year ended
31 December
2021
£m
Restated(1)
Year ended
31 December
2020
£m
5,872
452
483
54
4
2,020
201
(3)
76
(67)
2
(3)
6,330
472
552
69
3
2,071
193
(6)
144
(54)
17
(14)
(1) Restated for discontinued operations (note 1).
(2) Includes costs relating to short-term leases of £2 million (2020: £1 million), low value leases of £1 million (2020: £1 million) and variable lease payments not included in lease liabilities of
£1 million (2020: £1 million).
(3) Includes staff costs totalling £143 million (2020: £137 million).
Notes to the Financial StatementsContinuedMelrose Industries PLC Annual Report 2021Financial statementsMelrose Industries PLC Annual Report 2021Melrose Industries PLC Annual Report 2021Financial statementsMelrose Industries PLC Annual Report 2021
152
152
153
153
7. Expenses continued
The analysis of auditor’s remuneration is as follows:
7. Expenses continued
An analysis of finance costs and income 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 and their associates for other audit services to the Group:
The audit of the Company’s subsidiaries
Non-statutory audit of certain of the Company’s businesses
Total audit fees
Audit-related assurance services:
Review of the half year interim statement
Other assurance services
Total audit-related assurance services
Total audit and audit-related assurance services
Tax services
Reporting accountant services
Total audit and non-audit fees
Year ended
31 December
2021
£m
Year ended
31 December
2020
£m
5.9
1.0
3.8
10.7
0.4
0.5
0.9
11.6
–
0.1
11.7
7.7
1.2
1.6
10.5
0.4
0.4
0.8
11.3
–
–
11.3
Continuing operations
Finance costs and income
Interest on bank loans and overdrafts(2)
Amortisation of costs of raising finance(3)
Net interest cost on pensions
Lease interest
Unwind of discount on provisions
Fair value changes on cross-currency swaps(4)
Total finance costs
Finance income
Total net finance costs
(1) Restated for discontinued operations (note 1).
(2) Includes a £45 million (2020: £nil) charge in respect of the settlement of interest rate swaps which are shown as an adjusting item (note 6).
(3) Includes £nil (2020: £8 million) in respect of bank facility negotiation fees. These costs are shown as adjusting items (note 6).
(4) These costs are shown as adjusting items (note 6).
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 94 to 98. No services were provided pursuant to contingent fee
arrangements.
8. Tax
An analysis of staff costs and employee numbers is as follows:
Continuing operations
Staff costs during the year (including executive Directors)
Wages and salaries(2)
Social security costs(3)
Pension costs (note 24)
– defined benefit plans(4)
– defined contribution plans
Share-based compensation expense(5) (note 23)
Total staff costs
Year ended
31 December
2021
£m
Restated(1)
Year ended
31 December
2020
£m
1,644
283
8
69
16
1,671
309
12
65
14
2,020
2,071
(1) Restated for discontinued operations (note 1).
(2) Includes net amounts received of £6 million (2020: £84 million) from global government assistance schemes during the COVID-19 pandemic. All amounts received from the UK
government in 2020 were repaid.
(3) Includes an employer’s tax charge of £3 million (2020: credit of £3 million) on the change in value of the employee share plans, shown as an adjusting item (note 6).
(4) Includes a past service cost of £nil (2020: £2 million) in respect of GMP equalisation, shown as an adjusting item (note 6).
(5) Shown as an adjusting item (note 6).
Average monthly number of persons employed (including executive Directors)
Aerospace
Automotive
Powder Metallurgy
Other Industrial
Corporate
Continuing operations
Discontinued operations
Total average number of persons employed
(1) Restated for discontinued operations (note 1).
Year ended
31 December
2021
Number
Restated(1)
Year ended
31 December
2020
Number
14,316
19,141
6,080
1,163
50
40,750
7,908
48,658
16,402
20,040
6,433
1,140
50
44,065
7,330
51,395
Continuing operations
Analysis of tax 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 credit on continuing operations
Tax charge on discontinued operations
Total tax credit for the year
Analysis of tax credit on continuing operations in the year:
Tax charge/(credit) in respect of adjusted profit before tax
Tax credit recognised as an adjusting item
Tax credit on continuing operations
(1) Restated for discontinued operations (note 1).
Year ended
31 December
2021
£m
Restated(1)
Year ended
31 December
2020
£m
(138)
(10)
(8)
(14)
(2)
3
(169)
2
(167)
(136)
(20)
(19)
(16)
(2)
(2)
(195)
3
(192)
Year ended
31 December
2021
£m
Restated(1)
Year ended
31 December
2020
£m
63
(1)
62
(127)
(4)
(27)
(5)
4
(75)
(234)
(172)
53
(119)
£m
55
(227)
(172)
56
(13)
43
(248)
(9)
41
(6)
65
–
(157)
(114)
104
(10)
£m
(14)
(100)
(114)
The tax charge of £55 million (2020: credit of £14 million) arising on adjusted profit before tax of £252 million (2020: loss of £41
million), results in an effective tax rate of 21.8% (2020: 34.1%).
The £227 million (2020: £100 million) tax credit recognised as an adjusting item includes £180 million (2020: £99 million) in respect of
tax credits on adjustments to loss before tax of £870 million (2020: £638 million), £9 million (2020: £8 million) in respect of the tax on
equity accounted investments, a charge of £32 million (2020: £7 million) in respect of internal Group restructuring and a £70 million
credit (2020: £nil) in respect of additional deferred tax asset recognition, primarily as a result of legislative changes in The
Netherlands, and rate changes in both The Netherlands and the UK.
Notes to the Financial StatementsContinuedMelrose Industries PLC Annual Report 2021Financial statementsMelrose Industries PLC Annual Report 2021Melrose Industries PLC Annual Report 2021Financial statementsMelrose Industries PLC Annual Report 2021
154
154
155
155
8. Tax continued
The tax (credit)/charge for the year for continuing and discontinued operations can be reconciled to the (loss)/profit before tax per the
Income Statement as follows:
10. Earnings per share
(Loss)/profit before tax:
Continuing operations
Discontinued operations (note 13)
Tax credit on loss before tax at the weighted average rate of 23.0% (2020: 27.0%)
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 charge classified within adjusting items
Effect of changes in tax rates
Total tax credit for the year
(1) Restated for discontinued operations (note 1).
Year ended
31 December
2021
£m
Restated(1)
Year ended
31 December
2020
£m
(618)
3
(615)
(141)
(2)
31
4
(75)
11
(5)
63
(5)
(119)
(679)
144
(535)
(144)
–
3
65
–
6
(12)
78
(6)
(10)
The reconciliation has been performed at a blended Group tax rate of 23.0% (2020: 27.0%) which represents the weighted average of
the tax rates applying to profits and losses in the jurisdictions in which those results arose in the year.
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
Total charge for the year
Year ended
31 December
2021
£m
Year ended
31 December
2020
£m
71
19
90
42
(9)
33
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 Supreme Court judgment in the case was published in July 2021. The Supreme Court ruled on a number of
technical points, the most important being that, if any interest is due to taxpayers, it should be calculated on a statutory or simple basis
and not compounded. Whilst this limits the size of the claims against HMRC, a number of points remain outstanding, including
whether or not the taxpayer claims are within the relevant time limits and thus whether they are valid claims at all, which the Supreme
Court referred back to the High Court in November 2020. Accordingly, significant uncertainty over the future outcome remains.
The continuing complexity of the case and uncertainty over the issues raised (and in particular the timetable issue referred back to the
High Court) means that it is not possible to predict the final outcome of the litigation with any reasonable degree of certainty.
9. Dividends
Interim dividend for the year ended 31 December 2021 of 0.75p
Final dividend for the year ended 31 December 2020 of 0.75p
Year ended
31 December
2021
£m
Year ended
31 December
2020
£m
33
36
69
–
–
–
Proposed final dividend for the year ended 31 December 2021 of 1.00p per share totalling £44 million. The final dividend of 1.00p per
share was proposed by the Board on 3 March 2022 and in accordance with IAS 10: Events after the reporting period, has not been
included as a liability in the Consolidated Financial Statements.
A return of capital of 15 pence per ordinary share, totalling £729 million was paid in September 2021 (note 1).
Earnings attributable to owners of the parent
Earnings for basis of earnings per share
Less: profit for the year from discontinued operations (note 13)
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(2)
Adjusted earnings per share from continuing operations
Adjusted basic earnings per share
Adjusted diluted earnings per share
Year ended
31 December
2021
£m
833
(1,283)
(450)
Restated(1)
Year ended
31 December
2020
£m
(536)
(32)
(568)
Year ended
31 December
2021
Number
Year ended
31 December
2020
Number
4,695
–
4,695
4,858
–
4,858
Year ended
31 December
2021
pence
Restated(1)
Year ended
31 December
2020
pence
17.7
(9.6)
27.3
17.7
(9.6)
27.3
(11.0)
(11.7)
0.7
(11.0)
(11.7)
0.7
Year ended
31 December
2021
£m
Restated(1)
Year ended
31 December
2020
£m
193
(30)
Year ended
31 December
2021
pence
Restated(1)
Year ended
31 December
2020
pence
4.1
4.1
(0.6)
(0.6)
(1) Restated for discontinued operations (note 1).
(2) Adjusted earnings for the year ended 31 December 2021 comprises adjusted profit after tax of £197 million (2020: loss of £27 million) (note 6), net of an allocation to non-controlling
interest of £4 million (2020: £3 million).
Notes to the Financial StatementsContinuedMelrose Industries PLC Annual Report 2021Financial statementsMelrose Industries PLC Annual Report 2021Melrose Industries PLC Annual Report 2021Financial statementsMelrose Industries PLC Annual Report 2021 156
156
157
157
11. Goodwill and other intangible assets
11. Goodwill and other intangible assets continued
Cost
At 1 January 2020
Additions
Acquisition of businesses(2)
Disposals
Exchange adjustments
At 31 December 2020
Additions
Disposals
Disposal of businesses(3)
Transfer to held for sale(4)
Exchange adjustments
At 31 December 2021
Amortisation and impairment
At 1 January 2020
Charge for the year:
Adjusted operating profit
Adjusting items
Impairments(5)
Disposals
Exchange adjustments
At 31 December 2020
Charge for the year:
Adjusted operating profit
Adjusting items
Impairments(5)
Disposals
Disposal of businesses(3)
Transfer to held for sale(4)
Exchange adjustments
At 31 December 2021
Net book value
At 31 December 2021
At 31 December 2020
Customer
relationships
and contracts
£m
Brands and
intellectual
property
£m
Goodwill
£m
4,038
–
15
–
(30)
4,023
–
–
(778)
(330)
(65)
2,850
4,961
–
10
–
(55)
4,916
–
–
(331)
(120)
(59)
4,406
776
–
–
–
–
776
–
–
(250)
(37)
(9)
480
Other(1)
£m
1,037
–
9
–
(1)
1,045
–
–
(3)
(26)
(5)
1,011
(385)
(726)
(156)
(203)
–
–
–
–
2
–
(379)
–
–
22
–
(43)
–
–
1
(383)
(1,083)
(198)
–
–
–
–
214
165
4
–
2,850
3,640
–
(339)
–
–
143
42
11
(1,226)
3,180
3,833
–
(30)
–
–
117
13
3
(95)
385
578
–
(104)
–
–
1
(306)
–
(107)
–
–
3
26
1
(383)
628
739
Computer
software
£m
Development
costs
£m
Total
£m
11,373
42
34
(13)
(88)
11,348
19
(4)
(1,387)
(513)
(145)
9,318
513
25
–
(8)
(1)
529
13
(3)
(11)
–
(6)
522
(96)
(1,589)
(44)
–
(17)
8
–
(57)
(526)
(18)
13
27
(149)
(2,150)
(46)
–
(3)
–
2
–
1
(54)
(476)
(3)
1
486
246
22
48
17
–
(5)
(1)
59
6
(1)
(14)
–
(1)
49
(23)
(13)
–
(1)
5
1
(31)
(8)
–
–
1
7
–
2
(29)
(195)
(1,928)
20
28
327
380
7,390
9,198
(1) Other includes technology and order backlog intangible assets recognised on acquisitions.
(2) Acquisition of businesses in 2020 related to the purchase of FORECAST 3D in the Powder Metallurgy division.
(3) Disposal of businesses in 2021 relates to the sales of Nortek Air Management, Brush and certain other non-core entities (note 1).
(4) Transfer to held for sale in 2021 relates to the Nortek Control business, which was subsequently disposed of during the second half of the year (note 1).
(5) Includes £3 million (2020: £nil) within restructuring costs and £nil (2020: £18 million) within impairment of assets, both shown as adjusting items (note 6).
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”). The goodwill is tested annually for impairment, or as required if indicators of impairment are
identified. The date of the annual impairment test is 31 October, aligned with internal forecasting and review processes.
Goodwill
Ergotron
Aerospace(2)
Automotive(2)
Powder Metallurgy
Continuing operations
Discontinued operations
Total
31 December
2021
£m
Restated(1)
31 December
2020
£m
409
933
1,001
507
2,850
–
2,850
406
942
1,026
524
2,898
742
3,640
(1) Restated for discontinued operations (note 1).
(2) Reflects the revised groups of CGUs effective 1 November 2020 whereby the Aerostructures and Aerospace Engine Systems groups of CGUs were organised into one Aerospace group
of CGUs and the Automotive Driveline and Automotive ePowertrain groups of CGUs were organised into one Automotive group of CGUs.
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. Due to the maturity of the different groups of CGUs within Melrose’s strategic life cycle of “Buy, Improve,
Sell” the value in use methodology generally yields a higher recoverable amount for businesses owned for a longer time and fair value
less costs to sell give a higher value where the improvement phase is ongoing.
Value in use calculations have been used to determine the recoverable amount of goodwill and other relevant net assets allocated to
the Ergotron groups of CGUs. The calculation used the latest approved forecasts extrapolated into perpetuity using growth rates
shown below, which do not exceed the long-term growth rate for the relevant market.
Fair value less costs to sell calculations have been used to determine the recoverable amount of goodwill and other relevant net
assets allocated to the Aerospace, Automotive and Powder Metallurgy groups of CGUs. When applying the fair value less cost to sell
methodology, it has been difficult to assess a sale value using observable market inputs (level 1) or inputs based on market evidence
(level 2) in the current environment and so unobservable inputs (level 3) have been used. A combination of discounted cash flows and
EBITDA multiple valuations have been used to establish fair values for each of the groups of CGUs.
Under IAS 36, the value in use basis prohibits inclusion of benefits from future uncommitted restructuring plans although this is
permitted when applying the fair value less costs to sell basis, to the extent that similar actions would be carried out by a market
participant.
Based on impairment testing completed no impairment was identified in respect of any of the groups of CGUs. There is no reasonably
possible change in key assumptions that could result in an impairment in any of the groups of CGUs. Given the continued market
recovery from the COVID-19 pandemic, additional sensitivity information has been included to help understanding of the headroom in
each of the groups of CGUs.
Significant assumptions and estimates
The basis of impairment tests and the key assumptions are set out in the tables below:
Groups of CGUs – value in use
Ergotron
31 December 2021
31 December 2020
Pre-tax
discount rates
Long-term
growth rates
Years in
forecast
Pre-tax
discount rates
Long-term
growth rates
Years in
forecast
10.1%
3.0%
3
9.4%
3.0%
3
31 December 2021
31 December 2020
Groups of CGUs – fair value less costs to sell
Post-tax
discount rates
Long-term
growth rates
Years in
forecast
Post-tax
discount rates
Long-term
growth rates
Years in
forecast
Aerospace(1)
Automotive(1)
Powder Metallurgy
7.8%
8.8%
8.8%
3.0%
2.5%
2.5%
5
5
5
7.5%
9.0%
9.0%
2.8%
2.5%
2.5%
5
5
5
(1) Reflects the revised groups of CGUs effective 1 November 2020 whereby the Aerostructures and Aerospace Engine Systems groups of CGUs were organised into one Aerospace group
of CGUs and the Automotive Driveline and Automotive ePowertrain groups of CGUs were organised into one Automotive group of CGUs.
Notes to the Financial StatementsContinuedMelrose Industries PLC Annual Report 2021Financial statementsMelrose Industries PLC Annual Report 2021Melrose Industries PLC Annual Report 2021Financial statementsMelrose Industries PLC Annual Report 2021 158
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159
11. Goodwill and other intangible assets continued
Risk adjusted discount rates
Cash flows within the Ergotron group of CGUs are discounted using a pre-tax discount rate. Cash flows within the Aerospace,
Automotive and Powder Metallurgy groups of CGUs are discounted using a post-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 group of CGUs
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 the Group.
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 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. Revenue assumptions are made using external market data, where available,
and also consider the recovery period to return to pre COVID-19 levels.
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 and increases from returning
sale volumes. The projections do not include the impact of future restructuring projects to which the Group is not yet committed, where
testing has been performed using a value in use methodology. Where testing has been performed using the fair value less costs to
sell methodology, the assumptions to derive operating margins take into account both normal cost saving activities and, where
applicable a significant contribution from planned restructuring activity. Forecasts for other operating costs are based on inflation
forecasts and supply and demand factors, taking into account climate change implications for affected markets.
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, ranging from
smaller low-cost cars to larger premium vehicles. This is impacted in the short to medium-term by expectations of recovery in supply
chains, interrupted by the COVID-19 pandemic. 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 and expectations
of their recovery, 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. This is impacted in the short to medium-term by expectations of recovery in supply chains, interrupted by the COVID-19
pandemic. Market expectations for global light vehicle production requirements, raw material input costs and technological
advancements, particularly in additive manufacturing, influence demand for these products along with other macro-economic factors.
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 group of CGUs
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.
Sensitivity analysis
There is no reasonably possible change in key assumptions that could result in an impairment in any of the groups of CGUs. Given
the continued market recovery from the COVID-19 pandemic, additional sensitivity information has been included to help
understanding of the headroom in each of the groups of CGUs.
Aerospace group of CGUs – sensitivity analysis
Sensitivity analysis has been carried out and a change in the discount rate and long-term growth rate from 7.8% to 8.9% or from 3.0%
to 1.5% respectively would reduce headroom to £nil. A failure to execute restructuring plans or a delay in currently anticipated market
recovery would impact operating profit and operating margin assumptions and a reduction in the terminal operating profit of 22%
would reduce the terminal operating margin by 2.8 percentage points and would reduce headroom to £nil.
11. Goodwill and other intangible assets continued
Automotive group of CGUs – sensitivity analysis
Sensitivity analysis has been carried out and a change in the discount rate from 8.8% to 11.2% would reduce headroom to £nil.
Powder Metallurgy group of CGUs – sensitivity analysis
Sensitivity analysis has been carried out and a change in the discount rate from 8.8% to 11.1% would reduce headroom to £nil.
Ergotron group of CGUs – sensitivity analysis
Sensitivity analysis has been carried out and a change in the discount rate from 10.1% to 14.3% would reduce headroom to £nil.
Allocation of significant intangible assets
The allocation of significant customer relationships and contracts, brands, intellectual property and technology is as follows:
Customer relationships and contracts
Brands, intellectual property and technology
Remaining amortisation
period
Net book value
Remaining amortisation
period
Net book value
31 December
2021
years
31 December
2020
years
31 December
2021
£m
Restated(1)
31 December
2020
£m
31 December
2021
years
31 December
2020
years
31 December
2021
£m
Restated(1)
31 December
2020
£m
5
17
9
14
6
18
10
15
51
1,967
670
492
61
2,145
790
551
3,180
3,547
–
286
3,180
3,833
13
17
17
17
14
18
18
18
62
575
309
67
67
648
356
77
1,013
1,148
–
169
1,013
1,317
Ergotron
Aerospace(2)
Automotive(2)
Powder Metallurgy
Continuing operations
Discontinued operations
Total
(1) Restated for discontinued operations (note 1).
(2) Reflects the revised groups of CGUs effective 1 November 2020 whereby the Aerostructures and Aerospace Engine Systems groups of CGUs were organised into one Aerospace group
of CGUs and the Automotive Driveline and Automotive ePowertrain groups of CGUs were organised into one Automotive group of CGUs.
12. Investments
Investments, carried at fair value
Shares
31 December
2021
£m
31 December
2020
£m
87
34
During the year, the Group invested £10 million in HiiROC Limited, a hydrogen technology company, for a 10% equity share.
The Group continues to hold a 4% investment in PW1100G-JM Engine Leasing LLC, an engine leasing business. There was a gain
on remeasurement to fair value of £43 million (2020: a loss of £16 million) and a foreign exchange translation impact of £nil (2020:
£nil). A dividend of £17 million (2020: £4 million) was received during the year which was recorded within operating profit.
These investments are classified as a level 3 fair value under the IFRS 13 fair value hierarchy. To calculate the value at 31 December
2021, the expected dividend flow was discounted to net present value using a discount rate of 9.0%. If the discount rate changed from
9.0% to 8.0% the fair value would have changed by £9 million.
13. Discontinued operations
On 18 June 2021, the Group completed the sale of the Brush business, previously included in the Other Industrial division, for net
cash consideration of £127 million. The costs charged to the Income Statement associated with the disposal were £2 million. The
profit on disposal was £24 million after the recycling of cumulative translation gains of £22 million.
On 22 June 2021, the Group announced the completion of the sale of the Nortek Air Management business for net cash consideration
of £2,470 million. The costs charged to the Income Statement associated with the disposal were £41 million. The profit on disposal
was £1,347 million after the recycling of cumulative translation losses of £110 million.
At 30 June 2021, the Nortek Control business met the criteria within IFRS 5: Non-current Assets Held for Sale and Discontinued
Operations to be classified as an asset held for sale. On 4 October 2021, the Group completed the sale of the Nortek Control
business for net cash consideration of £212 million. The costs charged to the Income Statement associated with the disposal were £1
million. The loss on disposal was £38 million after the recycling of cumulative translation losses of £26 million.
During the year, the Aerospace, Automotive and Powder Metallurgy businesses disposed of certain non-core entities. Cumulative
disposal proceeds from these activities amounted to £3 million and a profit on disposal was £2 million after the recycling of cumulative
translation gains of £1 million, and disposal costs of £5 million.
Notes to the Financial StatementsContinuedMelrose Industries PLC Annual Report 2021Financial statementsMelrose Industries PLC Annual Report 2021Melrose Industries PLC Annual Report 2021Financial statementsMelrose Industries PLC Annual Report 2021 160
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13. Discontinued operations continued
The results of Nortek Air Management, Brush and Nortek Control have been classified within discontinued operations for both years
presented. In addition, discontinued operations for 2020 include the results of the Wheels and Structures business which was
disposed in November 2020.
Financial performance of discontinued operations:
Revenue
Operating costs(2)
Operating profit
Finance costs
Profit before tax
Tax
(Loss)/profit after tax
Gain/(loss) on disposal of net assets of discontinued operations, net of recycled cumulative translation
differences
Profit for the year from discontinued operations
Year ended
31 December
2021
£m
884
(879)
5
(2)
3
(53)
(50)
1,333
1,283
Restated(1)
Year ended
31 December
2020
£m
1,782
(1,633)
149
(5)
144
(104)
40
(8)
32
(1) Restated for discontinued operations (note 1).
(2) Operating costs in the year ended 31 December 2021 included an £85 million charge on remeasurement to fair values less costs of disposal relating to the Nortek Control business on
reclassification to assets held for sale.
13. Discontinued operations continued
Classes of assets and liabilities held for sale and disposed of during the year were as follows:
Held for sale
Reclassified
Remeasured
Held for sale
Businesses
disposed
Goodwill and other intangible assets
Property, plant and equipment
Retirement benefit surplus
Inventories
Trade and other receivables
Cash and cash equivalents
Total assets
Trade and other payables
Lease obligations
Provisions
Current and deferred tax
Total liabilities
Net assets
Movement in the value of net assets classified as held for sale in the
period prior to disposal
Net assets held for sale disposed
Total net assets disposed
Cash consideration, net of costs(1)
Cumulative translation difference recycled on disposals
Profit on disposal of businesses
Profit on disposal of businesses classified as discontinued operations
Profit on disposal of businesses classified within continuing operations
Net cash inflow arising on disposal:
Consideration received in cash and cash equivalents, net of costs(1)
Less: cash and cash equivalents disposed(2)
(1) Cash consideration of £2,812 million net of £49 million of disposal costs.
(2) Includes £7 million related to Nortek Control.
£m
267
18
–
46
36
–
367
(35)
(13)
(6)
(18)
(72)
295
£m
(85)
–
–
–
–
–
(85)
–
–
–
–
–
(85)
£m
182
18
–
46
36
–
282
(35)
(13)
(6)
(18)
(72)
210
13
223
£m
901
254
53
233
248
53
1,742
(333)
(138)
(112)
(67)
(650)
1,092
223
1,315
2,763
(113)
1,335
1,333
2
1,335
2,763
(60)
2,703
Notes to the Financial StatementsContinuedMelrose Industries PLC Annual Report 2021Financial statementsMelrose Industries PLC Annual Report 2021Melrose Industries PLC Annual Report 2021Financial statementsMelrose Industries PLC Annual Report 2021 162
162
163
163
14. Property, plant and equipment
Cost
At 1 January 2020
Additions
Right-of-use asset reassessments
Acquisition of businesses
Disposals
Exchange adjustments
At 31 December 2020
Additions
Right-of-use asset reassessments
Disposals
Disposal of businesses(1)
Transfer to held for sale(2)
Exchange adjustments
At 31 December 2021
Accumulated depreciation and impairment
At 1 January 2020
Charge for the year
Disposals
Impairments(3)
Exchange adjustments
At 31 December 2020
Charge for the year
Disposals
Disposal of businesses(1)
Transfer to held for sale(2)
Impairments(3)
Exchange adjustments
At 31 December 2021
Net book value
At 31 December 2021
At 31 December 2020
Land and
buildings
£m
Plant and
equipment
£m
Total
£m
1,335
74
14
3
(33)
1
1,394
68
4
(12)
(256)
(24)
(31)
1,143
(168)
(86)
4
(68)
2
(316)
(69)
2
112
9
(40)
2
(300)
843
1,078
2,805
230
–
8
(54)
6
2,995
192
(1)
(42)
(314)
(13)
(95)
2,722
(540)
(349)
44
(93)
(2)
(940)
(326)
40
204
10
(69)
44
(1,037)
1,685
2,055
4,140
304
14
11
(87)
7
4,389
260
3
(54)
(570)
(37)
(126)
3,865
(708)
(435)
48
(161)
–
(1,256)
(395)
42
316
19
(109)
46
(1,337)
2,528
3,133
14. Property, plant and equipment continued
Property, plant and equipment includes the net book value of right-of-use assets as follows:
Right-of-use asset
At 1 January 2020
Additions
Right-of-use asset reassessments
Depreciation
Disposals
Impairments
Exchange adjustments
At 31 December 2020
Additions
Right-of-use asset reassessments
Depreciation
Disposals
Disposal of businesses(1)
Transfer to held for sale(2)
Impairments
Exchange adjustments
At 31 December 2021
Land and
buildings
£m
Plant and
equipment
£m
478
39
14
(52)
(18)
(68)
(12)
381
31
4
(39)
(3)
(75)
(8)
(15)
(11)
265
88
17
–
(22)
(2)
(14)
–
67
14
(1)
(18)
–
(3)
–
–
(11)
48
Total
£m
566
56
14
(74)
(20)
(82)
(12)
448
45
3
(57)
(3)
(78)
(8)
(15)
(22)
313
(1) Disposal of businesses in 2021 relates to the sales of Nortek Air Management, Brush and certain other non-core entities (note 1).
(2) Transfer to held for sale in 2021 relates to the Nortek Control business, which was subsequently disposed of during the second half of 2021 (note 1).
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
(1) Disposal of businesses in 2021 relates to the sales of Nortek Air Management, Brush and certain other non-core entities (note 1).
(2) Transfer to held for sale in 2021 relates to the Nortek Control business, which was subsequently disposed of during the second half of 2021 (note 1).
(3) Includes £109 million (2020: £20 million) within restructuring costs and £nil (2020: £141 million) within impairment of assets, both shown as adjusting items (note 6).
Assets under the course of construction at 31 December 2021 totalled £150 million (31 December 2020: £227 million).
Group share of results from continuing operations
The basis of testing for impaired assets, which resulted in a charge totalling £109 million, used a mix of the value in use and fair value
less costs to sell methodologies. The aggregate recoverable amount was £19 million and where a value in use methodology was
used, discount rates ranged from 8.3% to 10.5%.
Revenue
Operating costs
Adjusted operating profit
Adjusting items
Net finance income
Profit before tax
Tax
Share of results of equity accounted investments
Group share of equity accounted investments
At 1 January
Share of results of equity accounted investments
Dividends paid to the Group
Exchange adjustments
At 31 December
31 December
2021
£m
31 December
2020
£m
403
350
(310)
(14)
429
334
371
(263)
(12)
430
Year ended
31 December
2021
£m
Year ended
31 December
2020
£m
613
(547)
66
(21)
2
47
(9)
38
591
(529)
62
(22)
–
40
(8)
32
Year ended
31 December
2021
£m
Year ended
31 December
2020
£m
430
38
(52)
13
429
436
32
(54)
16
430
Notes to the Financial StatementsContinuedMelrose Industries PLC Annual Report 2021Financial statementsMelrose Industries PLC Annual Report 2021Melrose Industries PLC Annual Report 2021Financial statementsMelrose Industries PLC Annual Report 2021 164
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165
15. Equity accounted investments continued
Within the Group’s share of equity accounted investments there is 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 £1,159 million (2020: £1,101
million), adjusted operating profit of £116 million (2020: £116 million), adjusting items of £41 million (2020: £44 million), statutory
operating profit of £75 million (2020: £72 million), an interest credit of £4 million (2020: £nil) and a tax charge of £16 million (2020: £15
million), leaving retained profit of £63 million (2020: £57 million).
Total net assets of SDS at 31 December 2021 were £790 million (31 December 2020: £798 million). These comprised non-current
assets of £636 million (31 December 2020: £684 million), current assets of £668 million (31 December 2020: £598 million), current
liabilities of £508 million (31 December 2020: £484 million) and non-current liabilities of £6 million (31 December 2020: £nil). During
2021, SDS paid a dividend to the Group of £50 million (2020: £53 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
2021
£m
31 December
2020
£m
413
280
200
893
481
292
353
1,126
In 2021 the write down of inventories to net realisable value amounted to £93 million (2020: £163 million), of which £8 million related
to restructuring activities (2020: £1 million in restructuring activities and £14 million in write down of assets) and is included within
adjusting items (note 6). The reversal of write downs amounted to £77 million (2020: £65 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.
17. Trade and other receivables
Current
Trade receivables
Allowance for expected credit loss
Other receivables
Prepayments
Contract assets
31 December
2021
£m
31 December
2020
£m
847
(23)
200
40
120
1,184
1,269
(41)
258
54
118
1,658
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
Retirement benefit surplus (note 24)(1)
31 December
2021
£m
31 December
2020
£m
32
491
184
707
13
426
–
439
(1) Includes a surplus relating to the GKN Group Pension Plans Numbers 1-4 of £179 million (31 December 2020: deficit of £199 million) and the Japan Employee plan of £5 million (31
December 2020: £nil).
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 2021,
eligible receivables under these programmes have been factored and derecognised in line with the derecognition criteria of IFRS 9.
17. Trade and other receivables continued
An allowance has been made for expected lifetime credit losses with reference to past default experience and management’s
assessment of credit worthiness over trade receivables, an analysis of which is as follows:
At 1 January 2020
Income Statement charge/(credit)
Utilised
At 31 December 2020
Income Statement (credit)/charge
Utilised
Disposal of businesses(2)
Transfer to held for sale(3)
Exchange adjustments
At 31 December 2021
Aerospace
£m
Automotive
£m
Powder Metallurgy
£m
Restated(1)
Other Industrial
£m
Restated(1)
Discontinued
Operations
£m
12
3
(3)
12
–
(1)
(3)
–
(1)
7
12
–
(1)
11
(1)
(1)
–
–
–
9
5
–
–
5
–
–
–
–
–
5
2
–
–
2
–
–
–
–
–
2
16
(2)
(3)
11
4
(6)
(7)
(2)
–
–
Total
£m
47
1
(7)
41
3
(8)
(10)
(2)
(1)
23
(1) Restated for discontinued operations (note 1).
(2) Disposal of businesses in 2021 relates to the sales of Nortek Air Management, Brush and certain other non-core entities (note 1).
(3) Transfer to held for sale in 2021 relates to the Nortek Control business, which was subsequently disposed of during the second half of 2021 (note 1).
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
2021
£m
31 December
2020
£m
12
–
11
23
15
1
25
41
Included in the Group’s trade receivables balance are overdue trade receivables with a gross carrying amount of £63 million (31
December 2020: £97 million) against which a provision of £23 million (31 December 2020: £41 million) is held. There are no amounts
provided against balances that are not overdue as these are deemed recoverable, following an assessment for impairment in
accordance with policies described in note 2.
The ageing of the balance deemed recoverable of £40 million (31 December 2020: £56 million) is as follows:
0 – 30 days
31 – 60 days
60+ days
31 December
2021
£m
31 December
2020
£m
27
11
2
40
41
10
5
56
The Directors consider that the carrying amount of trade and other receivables approximates to their fair value.
Notes to the Financial StatementsContinuedMelrose Industries PLC Annual Report 2021Financial statementsMelrose Industries PLC Annual Report 2021Melrose Industries PLC Annual Report 2021Financial statementsMelrose Industries PLC Annual Report 2021 166
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17. Trade and other receivables continued
The Group’s contract assets comprise the following:
18. Cash and cash equivalents
Participation
fees
£m
Unbilled
receivables
£m
Variable
consideration
£m
Other
£m
Total
£m
Cash and cash equivalents
31 December
2021
£m
31 December
2020
£m
473
311
At 1 January 2020
Additions
Utilised
Exchange adjustments
At 31 December 2020
Additions
Utilised
Exchange adjustments
At 31 December 2021
202
9
(11)
(5)
195
5
(9)
2
193
105
1,096
(1,149)
–
52
949
(941)
1
61
242
26
(13)
(8)
247
68
(13)
3
305
48
5
(3)
–
50
9
(6)
(1)
52
597
1,136
(1,176)
(13)
544
1,031
(969)
5
611
An assessment for impairment of contract assets has been performed in accordance with policies described in note 2. No such
impairment has been recorded.
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 3d 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 constraints applied to variable consideration
are 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. Further information is
shown in note 4.
Cash and cash equivalents comprises cash at bank and in hand which earns interest at floating rates based on daily bank deposit
rates and short-term deposits which are made for varying periods of between one day and one month. 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
2021
£m
31 December
2020
£m
1,016
338
347
59
5
264
22
2,051
1,153
417
397
91
7
371
20
2,456
As at 31 December 2021, and as described in note 25, included within trade payables were drawings on supplier finance facilities of
£102 million (31 December 2020: £62 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 86 days (31 December 2020: 69 days).
Non-current
Other payables
Customer advances and contract liabilities
Other taxes and social security
Government refundable advances
Accruals
Deferred government grants
31 December
2021
£m
31 December
2020
£m
12
273
6
50
27
22
390
13
304
3
51
36
14
421
The Directors consider that the carrying amount of trade and other payables approximates to their fair value.
Non-current amounts; other payables, other taxes and social security and accruals fall due for payment within one to two years;
government refundable advances are forecast to fall due for repayment between 2022 and 2055 and the deferred government grants
will be utilised over the next five years.
Customer advances and contract liabilities include cash receipts from customers in advance of the Group completing its performance
obligations and are 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 £33 million, two to five years £91 million and over five years £149 million (31
December 2020: one to two years £90 million, two to five years £124 million and over five years £90 million).
Notes to the Financial StatementsContinuedMelrose Industries PLC Annual Report 2021Financial statementsMelrose Industries PLC Annual Report 2021Melrose Industries PLC Annual Report 2021Financial statementsMelrose Industries PLC Annual Report 2021 168
168
169
169
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
Other loans and bank overdrafts
Fixed rate obligations
2022 £450 million bond
2032 £300 million bond
Other loans
Unamortised finance costs(1)
Non-cash acquisition fair value adjustment
Total interest-bearing loans and borrowings
Current
Non-current
Total
31 December
2021
£m
31 December
2020
£m
31 December
2021
£m
31 December
2020
£m
31 December
2021
£m
31 December
2020
£m
–
–
5
450
–
–
455
–
7
462
–
–
151
–
–
3
154
–
11
165
582
30
–
–
300
–
912
(13)
4
903
1,850
254
80
450
300
–
2,934
(19)
11
2,926
582
30
5
450
300
–
1,367
(13)
11
1,365
1,850
254
231
450
300
3
3,088
(19)
22
3,091
(1) Includes an increase of £4 million relating to debt issue costs paid during the year (2020: £1 million).
In December 2021, the Group extended the maturity date of both the term loan and the revolving credit facility to 30 June 2024.
Subsequent to this extension, in December 2021 the term loan was partly prepaid by £70 million and US$172 million. Consequently,
the Group’s committed bank funding includes a multi-currency denominated term loan of £30 million (31 December 2020: £100
million) and US$788 million (31 December 2020: US$960 million) and a multi-currency denominated revolving credit facility of £1.1
billion, US$2.0 billion and €0.5 billion. 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 2021, the term loan was fully drawn and there were no amounts drawn on the multi-currency revolving credit facility.
Applying the exchange rates at 31 December 2021, the headroom equated to £3.0 billion. 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. Further details on covenant compliance for the year ended 31
December 2021 are contained in note 25.
The bank margin on the bank facility depends on the Group leverage, which reduced following the disposals completed in the year. As
part of the extension of the bank facility in December 2021, the bank margin on the revolving credit facility was reduced to align to the
term loan and ranges from 0.75% to 2.0%. As at 31 December 2021 the margin was 0.75% (31 December 2020: 2.0%) on the term
loan and 0.75% (31 December 2020: 2.25%) on the revolving credit facility.
The £450 million 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
Coupon
% p.a.
Cross-currency
swaps
million
Interest rate on
swaps
% p.a.
450
5.375%
US$373
€284
300
4.625%
n/a
5.70%
3.87%
n/a
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 2021
Within one year
In one to two years
In two to five years
After five years
Effect of financing rates
31 December 2020
21. Provisions
At 1 January 2021
Utilised
Charge to operating profit(1)
Release to operating profit(2)
Disposal of businesses(3)
Transfer to held for sale(4)
Unwind of discount(5)
Exchange adjustments
31 December 2021
Current
Non-current
501
27
661
383
(207)
1,365
242
539
2,252
397
(339)
3,091
4
3
–
–
–
7
33
34
22
–
(2)
87
1,623
45
15
29
–
1,712
1,948
53
17
30
–
2,048
Loss-making
contracts
£m
Property
related costs
£m
Environmental
and litigation
£m
Warranty
related costs
£m
Restructuring
£m
Other
£m
241
(48)
6
(22)
(4)
–
(1)
(5)
167
43
124
167
43
(1)
–
(7)
(6)
–
–
–
29
5
24
29
191
(34)
50
(38)
(30)
(2)
–
(2)
135
70
65
135
330
(73)
69
(56)
(35)
(4)
–
(9)
222
100
122
222
147
(167)
138
(14)
(18)
–
–
(5)
81
72
9
81
69
(3)
21
(1)
(19)
–
–
–
67
3
64
67
2,128
75
676
412
(207)
3,084
2,223
626
2,291
427
(341)
5,226
Total
£m
1,021
(326)
284
(138)
(112)
(6)
(1)
(21)
701
293
408
701
(1) Includes £142 million of adjusting items and £142 million recognised in adjusted operating profit.
(2) Includes £68 million of adjusting items and £70 million recognised in adjusted operating profit.
(3) Disposal of businesses in 2021 relates to the sales of Nortek Air Management, Brush and certain other non-core entities (note 1).
(4) Transfer to held for sale in 2021 relates to the Nortek Control business, which was subsequently disposed of during the second half of 2021 (note 1).
(5) Includes £2 million within finance costs relating to the time value of money and a £3 million credit 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).
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.
Utilisation during the year of £48 million (2020: £59 million) has benefited adjusted operating profit with £23 million recognised in
Aerospace, £21 million recognised in Automotive, £4 million recognised in Powder Metallurgy and £nil recognised in Other
Industrial. In addition, £22 million has been released on a net basis and is shown as an adjusting item, as described in note 6, as part
of the release of fair value items split; £4 million in Aerospace, £8 million in Automotive and £10 million in Powder Metallurgy.
Notes to the Financial StatementsContinuedMelrose Industries PLC Annual Report 2021Financial statementsMelrose Industries PLC Annual Report 2021Melrose Industries PLC Annual Report 2021Financial statementsMelrose Industries PLC Annual Report 2021 170
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171
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, assesses 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, as described in note 6, 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 during the next five years.
Where appropriate, provisions have been discounted using discount rates between 0% and 11% (31 December 2020: 0% and 7%)
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 year.
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
160
–
17
(33)
7
29
180
149
(90)
(53)
(6)
(18)
88
250
(174)
–
(13)
–
1
19
(167)
41
–
–
–
(3)
2
(127)
(598)
(5)
84
–
2
(48)
(565)
48
–
78
24
18
(90)
(487)
(772)
(5)
71
–
3
(29)
(732)
89
–
78
24
15
(88)
(614)
(612)
(5)
88
(33)
10
–
(552)
238
(90)
25
18
(3)
–
(364)
At 1 January 2020
Acquisition of businesses
Credit/(charge) to income
Charge to equity
Exchange adjustments
Movement in set off of assets and liabilities(1)
At 31 December 2020
Credit to income
Charge to equity
Disposal of businesses(2)
Transfer to held for sale(3)
Exchange adjustments
Movement in set off of assets and liabilities(1)
At 31 December 2021
(1) Set off of deferred tax assets and liabilities in accordance with IAS 12 within territories with a right of set off.
(2) Disposal of businesses in 2021 relates to the sales of Nortek Air Management, Brush and certain other non-core entities (note 1).
(3) Transfer to held for sale in 2021 relates to the Nortek Control business, which was subsequently disposed of during the second half of 2021 (note 1).
As at 31 December 2021, the Group had gross unused corporate income tax losses of £1,841 million (31 December 2020: £2,166
million) available for offset against future profits. A deferred tax asset of £396 million (31 December 2020: £290 million) has been
recognised in respect of £1,683 million (31 December 2020: £1,377 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. Despite incurring tax
losses in certain territories due to the effects of COVID-19, the Group continues to recognise deferred tax assets in those territories as
it is confident that the global recovery, together with restructuring actions taken, will result in future taxable profits against which the
deferred tax assets will be realised. In addition to the corporate income tax losses included above, a deferred tax asset of £50 million
(31 December 2020: £60 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 £33 million (31 December 2020: £122
million) and on other temporary differences at £313 million (31 December 2020: £338 million). The gross deferred tax assets therefore
amount to £792 million (31 December 2020: £810 million).
Deferred tax liabilities have been recognised on intangible assets at £993 million (31 December 2020: £1,161 million) and accelerated
capital allowances and other temporary differences at £163 million (31 December 2020: £201 million). The gross deferred tax liabilities
therefore amount to £1,156 million (31 December 2020: £1,362 million).
There are no material unrecognised deferred tax assets at 31 December 2021 (31 December 2020: £nil), 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 £53 million (31 December 2020: £65 million) would be payable.
23. Share-based payments
2020 Employee Share Plan
During the year, the Group recognised a charge of £19 million (2020: £10 million) in respect of the 2020 Employee Share Plan,
inclusive of a £3 million charge in respect of related national insurance (2020: £1 million) and a charge of £nil (2020: £1 million) in
respect of the 2017 Incentive Plan, inclusive of a £nil credit in respect of related national insurance (2020: £4 million), recognised in
adjusting items (note 6).
Further details of the 2020 Employee Share Plan are set out in the Directors’ Remuneration Report on page 107.
The estimated value of the 2020 Employee Share Plan at 31 December 2021 if settled at that date was £nil (31 December 2020: £33
million). Using a Black-Scholes option pricing model, the projected value of this plan at 31 May 2023 (being the end of the three year
performance period) is £51 million (31 December 2020: projected value of the 2020 Incentive Plan at 31 May 2023 was £34 million).
The projected value is impacted by future acquisition and disposal assumptions.
Notes to the Financial StatementsContinuedMelrose Industries PLC Annual Report 2021Financial statementsMelrose Industries PLC Annual Report 2021Melrose Industries PLC Annual Report 2021Financial statementsMelrose Industries PLC Annual Report 2021 172
172
173
173
23. Share-based payments continued
The annual IFRS 2 charge to be recognised in respect of the 2020 Employee Share Plan is £16 million. The inputs into the Black-
Scholes valuation model that were used to fair value the plan at the grant date were as follows:
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:
Weighted average share price
Weighted average exercise price
Expected volatility
Expected life as at inception
Risk free interest
Valuation assumptions
£1.81
£1.71
58%
2.4 years
0.0%
Expected volatility was determined by calculating the historical volatility of the Company’s share price.
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 £69 million (2020: £65 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.
During the year, a buy-in policy was purchased fully insuring all pensioner members who were in the GKN UK 2016 Pension Plan as
of October 2020. Effective as at 31 December 2021, a buy-out was performed with any remaining liabilities for members of the GKN
UK 2016 Pension Plan who were not part of the buy-out, along with the residual assets, transferred into GKN Group Pension Scheme
No.2. In addition, defined benefit pension plans with a net surplus of £53 million were disposed with Nortek Air Management, Brush
and certain other non-core entities.
The most significant defined benefit pension plans in the Group at 31 December 2021 were:
GKN Group Pension Schemes (Numbers 1 – 4)
The GKN Group Pension Schemes (Numbers 1 – 4) are shown within the Aerospace and Automotive segments and the net surplus is
split 60% and 40% respectively as at 31 December 2021. These plans are funded, 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 30 June 2019, updated to 31 December 2021
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 2021, updated to 31 December 2021 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.
Other plans include a number of funded and unfunded defined benefit arrangements and retiree medical insurance plans,
predominantly in the US and Europe.
The cost of the Group’s defined benefit plans is determined in accordance with IAS 19 (revised): Employee benefits using the advice
of independent professionally qualified actuaries on the basis of formal actuarial valuations and using the projected unit credit method.
In line with normal practice, these valuations are undertaken triennially in the UK and annually in the US and Germany.
Contributions
During the year, the funding target agreed on acquisition of GKN was achieved, being gilts plus 25 basis points for the GKN UK 2016
Pension Plan and gilts plus 75 basis points for the GKN Group Pension Schemes (Numbers 1 – 4). The commitments from acquisition
have ceased as a result and the Group will now contribute £30 million per year into the GKN Group Pension Schemes (Numbers 1 –
4).
The Group contributed £128 million (2020: £111 million) to defined benefit pension plans and post-employment plans in the year
ended 31 December 2021; comprising £54 million of ongoing payments to Group pension plans, £34 million paid to the GKN UK
Group Pension Schemes following the disposal of Nortek Air Management, to satisfy the funding commitment made on the acquisition
of GKN, £39 million paid to pension schemes disposed with Nortek Air Management and Brush and £1 million relating to discontinued
operations. The Group expects to contribute £56 million in 2022.
31 December 2021
GKN Group Pension Schemes (Numbers 1 – 4)
GKN US plans
GKN Europe plans
31 December 2020
GKN Group Pension Schemes (Numbers 1 – 4)
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
%
Price inflation
(RPI/CPI)
%
2.7
n/a
2.1
2.4
1.9
n/a
1.4
3.1
2.0
2.7
1.1
1.4
1.4
2.4
0.6
1.4
3.2/2.7
n/a
2.1/2.1
2.7/2.2
2.7/2.2
n/a
1.4/1.4
2.7/2.2
Mortality
GKN Group Pension Schemes (Numbers 1 – 4)
The GKN Group Pension Schemes (Numbers 1 – 4) use the SAPS “S3PA” base tables with scheme-specific 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 2020 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
GKN US Pension and Medical Plans use base mortality tables that are adjusted for recent plan experience (equivalent to RP2006
projected to 2018 using scale MP2018 with a 6.1001% load). Future improvements for all US plans are in line with MP2021.
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 aged 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
GKN US
Consolidated
Pension Plan
years
GKN Germany
Pension Plans
years
21.3
24.3
22.2
25.7
19.1
21.1
20.6
22.5
20.5
23.9
23.2
26.1
Balance Sheet disclosures
The amounts recognised in the Consolidated Balance Sheet in respect of defined benefit plans were 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
Analysed as:
Retirement benefit surplus (non-current other receivables)(1)
Retirement benefit obligations (non-current liabilities)
Net liabilities
31 December
2021
£m
31 December
2020
£m
Notes
(2,848)
3,010
(3,930)
3,775
162
(623)
(461)
184
(645)
(461)
(155)
(683)
(838)
–
(838)
(838)
17
(1) Includes a surplus relating to the GKN Group Pension Plans Numbers 1-4 of £179 million (31 December 2020: deficit of £199 million) and the Japan Employee plan of £5 million (31
December 2020: £nil).
Notes to the Financial StatementsContinuedMelrose Industries PLC Annual Report 2021Financial statementsMelrose Industries PLC Annual Report 2021Melrose Industries PLC Annual Report 2021Financial statementsMelrose Industries PLC Annual Report 2021 174
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24. Retirement benefit obligations continued
The net retirement benefit obligation in continuing businesses is attributable to Aerospace: asset of £67 million (31 December 2020:
liability of £171 million), Automotive: liability of £484 million (31 December 2020: £693 million), Powder Metallurgy: liability of £37
million (31 December 2020: £47 million), Other Industrial: £nil (31 December 2020: £nil) and Corporate: liability of £7 million (31
December 2020: asset of £64 million). The net retirement benefit obligation in respect of discontinued businesses was an asset of £9
million at 31 December 2020.
The plan assets and liabilities at 31 December 2021 were as follows:
24. Retirement benefit obligations continued
The defined benefit plan liabilities were 23% (31 December 2020: 20%) in respect of active plan participants, 27% (31 December
2020: 27%) in respect of deferred plan participants and 50% (31 December 2020: 53%) in respect of pensioners.
The weighted average duration of the defined benefit plan liabilities at 31 December 2021 was 17.7 years (31 December 2020:
16.4 years).
Movements in the fair value of plan assets during the year:
Plan assets
Plan liabilities
Net assets/(liabilities)
UK
Plans(1)
£m
2,754
(2,582)
172
US
Plans
£m
203
(289)
(86)
European
Plans
£m
23
(566)
(543)
Other
Plans
£m
30
(34)
(4)
Total
£m
3,010
(3,471)
(461)
(1) Includes a liability in respect of the GKN post-employment medical plans of £7 million and a surplus in respect of the GKN Pension Scheme Numbers 1 – 4 of £179 million.
The major categories and fair values of plan assets at the end of the year for each category were as follows:
Equities
Government bonds
Corporate bonds
Property
Insurance contracts
Multi-strategy/Diversified growth funds
Private equity
Other(1)
Total
31 December
2021
£m
31 December
2020
£m
141
1,420
459
71
38
424
209
248
3,010
699
1,164
671
96
162
83
175
725
3,775
(1) Primarily consists of cash collateral and liability driven investments.
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
Current service cost
Past service cost(1)
Interest cost on obligations
Remeasurement (gains)/losses – demographic
Remeasurement (gains)/losses – financial
Remeasurement gains – experience
Benefits paid out of plan assets
Benefits paid out of Group assets for unfunded plans
Settlements(2)
Disposal of businesses(3)
Exchange adjustments
At 31 December
Year ended
31 December
2021
£m
Year ended
31 December
2020
£m
4,613
8
–
59
(14)
(162)
(49)
(186)
(16)
(366)
(379)
(37)
3,471
4,533
10
2
88
7
365
(178)
(192)
(36)
(7)
–
21
4,613
(1) An expense of £2 million was recorded in the year ended 31 December 2020 as a past service cost in respect of the equalisation of guaranteed minimum pension (“GMP”) benefits
in the UK. This was treated as an adjusting item (note 6).
(2) A settlement loss of £6 million (2020: £nil) was recognised relating to the buy-out of the GKN UK 2016 Pension Plan. This was treated as an adjusting item (note 6).
(3) Disposal of businesses in 2021 relates to the sales of Nortek Air Management, Brush and certain other non-core entities (note 1).
At 1 January
Interest income on plan assets
Return on plan assets, excluding interest income
Contributions
Benefits paid out of plan assets
Plan administrative costs
Settlements(1)
Disposal of businesses(2)
Exchange adjustments
At 31 December
Year ended
31 December
2021
£m
Year ended
31 December
2020
£m
3,775
51
72
112
(186)
(7)
(372)
(432)
(3)
3,010
3,412
69
438
75
(192)
(14)
(7)
–
(6)
3,775
(1) A settlement loss of £6 million (2020: £nil) was recognised relating to the buy-out of the GKN UK 2016 Pension Plan. This was treated as an adjusting item (note 6).
(2) Disposal of businesses in 2021 relates to the sales of Nortek Air Management, Brush and certain other non-core entities (note 1).
The actual return on plan assets was a gain of £123 million (2020: £507 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 loss:
– current service cost
– past service cost(2)
– settlements(3)
– plan administrative costs(4)
Included within net finance costs:
– interest cost on defined benefit obligations
– interest income on plan assets
Discontinued operations
Included within operating profit:
– plan administrative costs
Included within net finance costs:
– interest cost on defined benefit obligations
– interest income on plan assets
Year ended
31 December
2021
£m
Restated(1)
Year ended
31 December
2020
£m
8
–
6
7
56
(48)
10
2
–
12
80
(61)
Year ended
31 December
2021
£m
Restated(1)
Year ended
31 December
2020
£m
–
3
(3)
2
8
(8)
(1) Restated for discontinued operations (note 1).
(2) An expense of £2 million was recorded in the year ended 31 December 2020 as a past service cost in respect of the equalisation of guaranteed minimum pension (“GMP”) benefits
in the UK. This was treated as an adjusting item (note 6).
(3) A settlement loss of £6 million (2020: £nil) was recognised in the year relating to the buy-out of the GKN UK 2016 Pension Plan. This was treated as an adjusting item (note 6).
(4) Includes £1 million (2020: £nil) of costs relating to the buy-out of the GKN UK 2016 Pension Plan. This was treated as an adjusting item (note 6).
Notes to the Financial StatementsContinuedMelrose Industries PLC Annual Report 2021Financial statementsMelrose Industries PLC Annual Report 2021Melrose Industries PLC Annual Report 2021Financial statementsMelrose Industries PLC Annual Report 2021 176
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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/(losses) arising from changes in demographic assumptions
Remeasurement gains/(losses) arising from changes in financial assumptions
Remeasurement gains arising from experience adjustments
Net remeasurement gain on retirement benefit obligations
Year ended
31 December
2021
£m
Year ended
31 December
2020
£m
72
14
162
49
297
438
(7)
(365)
178
244
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)
Change in assumption
Increase by 0.1 ppts
Decrease by 0.1 ppts
Increase by 0.1 ppts
Decrease by 0.1 ppts
Increase by 1 year
Decrease by 1 year
Decrease/(increase)
to plan liabilities
£m
Increase/(decrease)
to profit before tax
£m
58
(61)
(41)
38
(175)
171
1
(1)
n/a
n/a
n/a
n/a
(1) The inflation sensitivity encompasses the impact on pension increases, where applicable.
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 or assumptions used in preparing the sensitivity analysis from
prior years. Sensitivities are based on the relevant assumptions and membership profile as at 31 December 2021 and are applied to
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 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.
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 2021 and 31 December 2020:
31 December 2021
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
Embedded derivatives(1)
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)
31 December 2020 (restated)(2)
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
Embedded derivatives(1)
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)
Aerospace
£m
Automotive
£m
Powder
Metallurgy
£m
Other
Industrial
£m
Corporate
£m
Discontinued
Operations
£m
–
393
77
–
11
–
(55)
(203)
(585)
–
–
–
(6)
–
453
34
–
13
–
(58)
(266)
(564)
–
–
–
(6)
–
274
–
–
–
–
–
(105)
(798)
(2)
–
–
–
–
372
–
1
–
–
–
(113)
(899)
(4)
–
–
–
–
123
–
–
–
–
–
(58)
(165)
(1)
–
–
–
–
143
–
–
–
–
–
(59)
(179)
–
–
–
–
–
34
10
1
–
–
–
(1)
(52)
–
–
–
–
–
24
–
1
–
–
–
(2)
(39)
–
–
–
–
473
–
–
58
–
(1,365)
–
(9)
(57)
(113)
(7)
(69)
–
311
–
–
126
–
(3,091)
–
(3)
(53)
(69)
(87)
(89)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
236
–
7
–
–
–
(112)
(256)
(13)
–
–
–
Total
£m
473
824
87
59
11
(1,365)
(55)
(376)
(1,657)
(116)
(7)
(69)
(6)
311
1,228
34
135
13
(3,091)
(58)
(555)
(1,990)
(86)
(87)
(89)
(6)
(1) The embedded derivative is classified as a level 3 fair value under the IFRS 13 fair value hierarchy.
(2) Restated for discontinued operations (note 1).
Reconciliation of liabilities arising from financing activities
Liabilities arising from financing activities, as defined by IAS 7, totalled £3,584 million at 31 December 2020 comprising; external debt
of £2,940 million (excluding £151 million of bank overdrafts), cross-currency swaps of £89 million and lease obligations of £555
million. During the year a cash outflow in those liabilities totalled £1,616 million as follows: repayment of external debt and cross-
currency swaps associated with debt of £1,555 million (note 27) and repayment of principal on lease obligations of £61 million (note
28). Whilst there is a payment of £4 million included within the financing activities section of the Consolidated Statement of Cash
Flows, in respect of costs of raising debt finance, this does not affect liabilities arising from financing activities. There is also a
decrease to liabilities arising from financing activities relating to non-cash items totalling £163 million comprising; a reduction in
external debt and cross-currency swaps associated with debt of £45 million due to changes in foreign exchange rates and other non-
cash movements and a net decrease in respect of lease obligations of £118 million. As at 31 December 2021, liabilities arising from
financing activities, as defined by IAS 7, totalled £1,805 million comprising; external debt of £1,360 million (excluding £5 million of
bank overdrafts), cross-currency swaps of £69 million and lease obligations of £376 million.
Notes to the Financial StatementsContinuedMelrose Industries PLC Annual Report 2021Financial statementsMelrose Industries PLC Annual Report 2021Melrose Industries PLC Annual Report 2021Financial statementsMelrose Industries PLC Annual Report 2021 178
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25. Financial instruments and risk management continued
Liabilities arising from financing activities, as defined by IAS 7, totalled £4,215 million at 31 December 2019 comprising; external debt
of £3,553 million (excluding £195 million of bank overdrafts), cross-currency swaps of £80 million and lease obligations of £582
million. During the year a cash outflow in those liabilities totalled £674 million as follows: repayment of external debt and cross-
currency swaps associated with debt of £598 million (note 27) and repayment of principal on lease obligations of £76 million (note 28).
Whilst there is a payment of £1 million included within the financing activities section of the Consolidated Statement of Cash Flows, in
respect of costs of raising debt finance, this does not affect liabilities arising from financing activities. There is also an increase to
liabilities arising from financing activities relating to non-cash items totalling £43 million comprising; a reduction in external debt and
cross-currency swaps associated with debt of £6 million due to changes in foreign exchange rates and an increase in respect of lease
obligations of £49 million. As at 31 December 2020, liabilities arising from financing activities, as defined by IAS 7, totalled £3,584
million comprising; external debt of £2,940 million (excluding £151 million of bank overdrafts), cross-currency swaps of £89 million and
lease obligations of £555 million.
Fair values
As at 31 December 2021, the £450 million bond maturing in 2022 had a carrying value of £457 million (31 December 2020: £467
million) and a fair value of £462 million (31 December 2020: £478 million), and the £300 million bond maturing in 2032 had a carrying
value of £304 million (31 December 2020: £305 million) and a fair value of £321 million (31 December 2020: £322 million).
The Directors consider that the other 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 allowance for expected credit loss, 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.
The following financial assets and liabilities are subject to offsetting, enforceable master netting arrangements and similar
agreements:
Gross amounts of
recognised financial
assets/(liabilities)
£m
Gross amounts of
recognised financial
assets/(liabilities)
set off in the
Balance Sheet
£m
Net amounts of
financial
assets/(liabilities)
presented in the
Balance Sheet
£m
Related amounts
of financial
instruments not
set off in the
Balance Sheet
£m
31 December 2021
Cash and cash equivalents
Derivative financial assets
Financial assets subject to master
netting arrangements
Interest-bearing loans and borrowings
Derivative financial liabilities
Financial liabilities subject to master
netting arrangements
473
70
543
(1,365)
(198)
(1,563)
–
–
–
–
–
–
473
70
543
(1,365)
(198)
(5)
(58)
(63)
(127)
190
Net amount
£m
468
12
480
(1,492)
(8)
(1,563)
63
(1,500)
25. Financial instruments and risk management continued
31 December 2020
Cash and cash equivalents
Derivative financial assets
Financial assets subject to master netting
arrangements
Interest-bearing loans and borrowings
Derivative financial liabilities
Financial liabilities subject to master
netting arrangements
Gross amounts of
recognised financial
assets/(liabilities)
£m
Gross amounts of
recognised financial
assets/(liabilities)
set off in the
Balance Sheet
£m
Net amounts of
financial
assets/(liabilities)
presented in the
Balance Sheet
£m
Related amounts
of financial
instruments not
set off in the
Balance Sheet
£m
338
148
486
(3,118)
(268)
(3,386)
(27)
–
(27)
27
–
27
311
148
459
(3,091)
(268)
(3,359)
(146)
(131)
(277)
19
258
277
Net amount
£m
165
17
182
(3,072)
(10)
(3,082)
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 2021 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
In December 2021, the Group extended the maturity date of both the term loan and the revolving credit facility to 30 June 2024.
Subsequent to this extension, in December 2021 the term loan was partly prepaid by £70 million and US$172 million. Consequently,
the Group’s committed bank funding includes a multi-currency denominated term loan of £30 million (31 December 2020: £100
million) and US$788 million (31 December 2020: US$960 million) and a multi-currency denominated revolving credit facility of £1.1
billion, US$2.0 billion and €0.5 billion. 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 2021 the term loan was fully drawn and there were no drawings on the multi-currency revolving credit facility.
There remains a significant amount of headroom on the multi-currency committed revolving credit facility at 31 December 2021.
Applying the exchange rates at 31 December 2021, the headroom equated to £2,998 million (31 December 2020: £1,632 million).
Cash, deposits and marketable securities amounted to £473 million at 31 December 2021 (31 December 2020: £311 million) and are
offset to arrive at the Group net debt position of £950 million (31 December 2020: £2,847 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 committed bank funding has two financial covenants, being a net debt to adjusted EBITDA covenant and an interest cover
covenant, both of which are normally tested half-yearly in June and December.
Following the sale of Nortek Air Management in the year, the net debt to adjusted EBITDA covenant test level is 4.25x at 31
December 2021, 4.0x at 30 June 2022, 3.75x at 31 December 2022 and 3.5x at 30 June 2023 onwards. At 31 December 2021, the
Group net debt leverage was 1.3x.
The interest cover bank covenant test as at 31 December 2021 is set at 3.0x at 31 December 2021, 3.25x at 30 June 2022 and 4.0x
from 31 December 2022 onwards. At 31 December 2021, the Group interest cover was 5.9x, affording comfortable headroom.
Bonds
Capital market borrowings as at 31 December 2021, inherited as part of the GKN acquisition, consist of a £450 million bond maturing
September 2022 and a £300 million bond maturing May 2032. Details of the bonds outstanding at 31 December 2021 are shown in
note 20.
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 2021, the fair value liability of these cross-currency swaps was £68 million (31 December
2020: £80 million).
In respect of the cross-currency swaps on the £450 million bond, during the year there was a charge of £2 million (2020: £1 million)
recognised within the cost of hedge reserve related to the cost of hedging. At 31 December 2021, the cumulative value of the cost of
hedging recognised within the cost of hedge reserve is £10 million (2020: £8 million).
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.
Notes to the Financial StatementsContinuedMelrose Industries PLC Annual Report 2021Financial statementsMelrose Industries PLC Annual Report 2021Melrose Industries PLC Annual Report 2021Financial statementsMelrose Industries PLC Annual Report 2021 180
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181
25. Financial instruments and risk management continued
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 2021, the drawings on
these facilities were £310 million (31 December 2020: £314 million), as a result there was a net cash reduction in the year of £4 million
(2020: benefit of £60 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. If the Group
exited these arrangements there could be a potential impact of up to £60 million (31 December 2020: £32 million) on the Group’s cash
flow. 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 2021, total facilities were £321 million (31 December 2020: £250 million) with drawings of
£102 million (31 December 2020: £62 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
2021
£m
31 December
2020
£m
457
126
276
239
1,478
381
273
255
The foreign exchange movement on the local borrowings, which is recorded in currency translation on net investments within Other
Comprehensive Income, was a gain of £13 million (2020: £61 million).
The Euro borrowings include US$170 million debt that was swapped into €150 million using cross-currency swaps. The fair value of
these cross-currency swaps was a liability of £1 million (31 December 2020: £9 million). The foreign exchange movement on these
cross-currency swaps, which is recorded in derivative gains/(losses) on hedge relationships within Other Comprehensive Income, was
a gain of £15 million (2020: loss of £49 million). Net cash receipts in the year totalled £7 million (2020: settlement of £46 million).
The foreign exchange movement on the GKN cross-currency swaps, which is recorded in derivative gains/(losses) on hedge
relationships, was a gain of £12 million (2020: loss of £6 million).
Finance cost risk management
The bank margin on the bank facility depends on the Group leverage, which reduced following the disposals completed in the
year. Following the extension of the bank facility in December 2021, the bank margin on the revolving credit facility was reduced to
align to the term loan and ranges from 0.75% to 2.0%. As at 31 December 2021 the margin was 0.75% (31 December 2020: 2.0%) on
the term loan and 0.75% (31 December 2020: 2.25%) on the revolving credit facility.
The policy of the Board is to fix approximately 70% of the interest rate exposure of the Group. Following the sale of Nortek Air
Management, Nortek Control and Brush, the Group’s net debt reduced significantly and, to maintain the policy of fixing approximately
70% of the Group’s interest rate exposure, several of the interest rate swaps were cancelled at a cash cost of £47 million, with £45
million booked through adjusting items (note 6) and £2 million retained in the cash flow hedge reserve.
The interest rate swaps are designated as cash flow hedges and were highly effective throughout 2021. The fair value of the contracts
as at 31 December 2021 was a net liability of £7 million (31 December 2020: £87 million). The movement of £80 million for the year
ended 31 December 2021 (2020: charge of £28 million) comprised of a credit of £19 million (2020: charge of £28 million) booked to
derivatives gains/(losses) on hedge relationships in the year within Other Comprehensive Income, a £47 million cash outflow from
cancelling the interest rate swaps described above and a £14 million reduction in the interest accrual.
During the year ended 31 December 2021, some of the critical terms of the interest rate swaps and the hedged items were not
perfectly matched; however, this did not give rise to any ineffectiveness through the Income Statement in the year (2020: £nil). Going
forward, the critical terms of the interest rate swaps and the hedged items are perfectly matched and no ineffectiveness is expected in
future periods.
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
2021
£m
Year ended
31 December
2020
£m
–
(2)
(1)
(1)
(2)
–
On the basis of the floating-to-fixed interest rate swaps in place at the balance sheet date, a one percentage point fall in market
interest rates for all currencies would decrease Group equity by £2 million (31 December 2020: £35 million).
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 for GKN Aerospace, GKN Automotive and GKN
Powder Metallurgy reflect the long-term nature of the contracts within these divisions. Typically, in total the Group hedges around 90%
of foreign exchange exposures expected over the next year, and approximately 60% to 80% of exposures between one and two
years. This policy does not eliminate the cash risk but does bring some certainty to it.
The translation rate risk is the effect on the Group results in the period due to the movement of exchange rates used to translate
foreign results into Sterling from one period to the next. No specific exchange instruments are used to protect against the translation
risk because it is a non-cash risk to the Group, until foreign currency is 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, 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.
As at 31 December 2021, 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 net liability at 31 December 2021 of £57 million (31 December 2020: net asset of £49 million). A small
proportion of these contracts have been designated as cash flow hedges within the Other Industrial reporting segment. Contracts
where hedge accounting was applied had a fair value asset as at 31 December 2021 of £1 million (31 December 2020: liability of £5
million) within Other Industrial and Discontinued Operations. These contracts all mature between January 2022 and September 2022.
The change in fair value of foreign exchange forward contracts recognised in derivative gains/(losses) on hedging relationships within
Other Comprehensive Income was a credit of £8 million (2020: charge of £16 million) and a credit of £2 million (2020: charge of £6
million) was reclassified to the Income Statement.
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 2021 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 2021, a credit of £4
million (2020: £5 million) was booked through the Income Statement in finance costs, of which a credit of £3 million (2020: charge of
£2 million) was reclassified to the Income Statement from Other Comprehensive Income and has been treated as an adjusting item
(note 6). 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 is the spot rate, which represents the significant component of the movement and
therefore has been recorded in the foreign currency translation reserve (note 26).
Notes to the Financial StatementsContinuedMelrose Industries PLC Annual Report 2021Financial statementsMelrose Industries PLC Annual Report 2021Melrose Industries PLC Annual Report 2021Financial statementsMelrose Industries PLC Annual Report 2021 182
182
183
183
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:
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:
Year ended 31 December 2021
Foreign exchange forward contracts
Cross-currency swaps
Year ended 31 December 2020
Foreign exchange forward contracts
Cross-currency swaps
0-1 years
£m
1-2 years
£m
2-5 years
£m
5+ years
£m
Total
£m
1,051
666
712
407
479
–
393
553
715
–
374
–
28
–
–
–
2,273
666
1,479
960
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 shown below:
US Dollar
Euro
Year ended
31 December
2021
£m
Year ended
31 December
2020
£m
2
7
(10)
(2)
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
2021
£m
31 December
2020
£m
(5)
(10)
8
(7)
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 £74 million (2020: £178 million) and for the Euro, a decrease of £37 million (2020: £65
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.
Hedging Instruments
Pay fixed, receive floating interest rate swaps
Within one year
In one to two years
In two to five years
Total
Pay fixed, receive fixed cross-currency swaps
Within one year
In one to two years
In two to five years
Total
Average fixed rate
Notional principal
Fair value of assets/
(liabilities)
31 December
2021
%
31 December
2020
%
31 December
2021
£m
31 December
2020
£m
31 December
2021
£m
31 December
2020
£m
2.24%
2.24%
–
1.95%
1.98%
1.94%
4.85%
–
–
4.82%
4.82%
–
246
246
–
515
–
–
1,752
1,876
2,079
528
528
–
–
(7)
–
(7)
(68)
–
–
(68)
(2)
–
(85)
(87)
–
(80)
–
(80)
The Group also has cross-currency swaps designated in net investment hedge accounting relationships which convert US Dollar
borrowings to Euros as discussed in the Hedge of net investments in foreign entities using loans and derivatives section of this note.
The Group is exposed to the following interest rate benchmarks within its hedge accounting relationships, which are subject to interest
rate benchmark reform: USD LIBOR, EURIBOR (“IBORs”). The hedged items are 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 amended the banking facility in December 2021 with its banking group in respect of
IBOR reform, with Sterling borrowings under SONIA from that date. The Group has no Sterling interest rate swaps as at 31 December
2021. US Dollar borrowings continue under USD LIBOR with the option to switch to SOFR on or prior to discontinuation in June 2023.
The Group expects to continue using EURIBOR for Euro borrowings going forward.
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
Cash flow
hedges
Interest rate swaps, pay US Dollar fixed
annually, receive 1 month US Dollar LIBOR
January 2023
Variable
(US$315 million – US$350 million)
US Dollar floating rate
debt linked to US LIBOR
Interest rate 0% caps, pay Euro fixed annually,
receive 1 month EURIBOR
January 2023 €220 million
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 dependent 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
Current liabilities
Non-current liabilities
31 December
2021
£m
31 December
2020
£m
47
23
(119)
(79)
101
47
(58)
(210)
Notes to the Financial StatementsContinuedMelrose Industries PLC Annual Report 2021Financial statementsMelrose Industries PLC Annual Report 2021Melrose Industries PLC Annual Report 2021Financial statementsMelrose Industries PLC Annual Report 2021 184
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185
185
25. Financial instruments and risk management continued
The change in fair value of interest rate swaps is discussed in the Finance Risk Management section of the Finance Director’s
Review.
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:
Change in fair value for
calculating ineffectiveness
Balance in translation
and hedging reserve
for continuing hedges
Balance in translation
and hedging reserve
for discontinued hedges
31 December
2021
£m
31 December
2020
£m
31 December
2021
£m
31 December
2020
£m
31 December
2021
£m
31 December
2020
£m
Hedged items
Floating rate borrowings – interest risk
Net assets of designated investments
(66)
6
28
3
4
53
70
63
2
–
7
–
There is no balance held in cash flow hedge reserve from hedging relationships for which hedge accounting is no longer applied.
During 2020, at the request of one of its financial counterparties, the Group novated one of its interest rate swaps to another of its
financial counterparties, which had the initial effect of leaving a £9 million debit in the translation and hedging reserve for the
discontinued hedge, reducing to £2 million by 31 December 2021 (31 December 2020: £7 million). The remaining value in reserves
will be charged to the Income Statement over the remaining life of the cash flows to January 2023, reflecting the cash flow profile on
which the hedge had been originally designated.
26. Issued share capital and reserves continued
At 1 January 2020
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
Associated deferred tax
Amounts reclassified to the Income Statement
At 31 December 2020
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
Associated deferred tax
Amounts reclassified to the Income Statement
At 31 December 2021
Cost of hedge
reserve
£m
Cash flow
hedge reserve
£m
Foreign
currency
translation
reserve
£m
Translation
and hedging
reserve
£m
(7)
–
–
–
–
–
–
–
(1)
(8)
–
–
–
–
–
–
–
(2)
(10)
(34)
119
78
–
–
–
–
–
(44)
9
6
(63)
–
–
–
–
–
27
(19)
46
(9)
(87)
61
–
(55)
–
–
–
3
41
(101)
13
–
27
–
–
–
115
95
(87)
61
–
(55)
–
(44)
9
8
(30)
(101)
13
–
27
–
27
(19)
159
76
26. Issued share capital and reserves
Share Capital
Allotted, called-up and fully paid
4,372,429,473 (31 December 2020: 4,858,254,963) Ordinary Shares of 160/21p each
(31 December 2020: 48/7p each)(1)
Nil (31 December 2020: 12,831) 2017 Incentive Plan Shares of £1 each(2)
The cash flow hedge reserve represents the cumulative fair value gains and losses on derivatives for which cash flow hedge
accounting has been applied. Movements and balances on derivatives designated in net investment hedges are shown as part of the
foreign currency translation reserve.
31 December
2021
£m
31 December
2020
£m
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.
Amounts reclassified to the Income Statement during the year includes £113 million (2020: £nil) following the disposal of businesses.
333
–
333
333
–
333
(1) A return of capital was paid in cash to shareholders on 14 September 2021, via a redeemable preference share scheme alongside a 9 for 10 share consolidation which reduced the
number of ordinary shares by 10%, from 4,858 million to 4,372 million (note 1).
(2) Following the crystallisation of the 2017 Incentive Plan on 31 May 2020 for £nil, the 2017 Incentive Plan shares were re-designated as deferred shares and cancelled by the Company in
the year ended 31 December 2021.
The rights associated with 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 useful information about the Group’s hedging arrangements, the translation reserve and hedging reserve are
combined. Including the different components of hedging in one place enables a clearer explanation of the three components of
hedging. These components are disaggregated below with movements within Other Comprehensive Income during the year shown
below and further explanation provided in note 25.
Notes to the Financial StatementsContinuedMelrose Industries PLC Annual Report 2021Financial statementsMelrose Industries PLC Annual Report 2021Melrose Industries PLC Annual Report 2021Financial statementsMelrose Industries PLC Annual Report 2021 186
186
187
187
(1) Restated for discontinued operations (note 1).
(2) Comprises £54 million (2020: £107 million) of ongoing contributions to Group pension plans and £34 million paid to the GKN UK Pension Schemes following the disposal of Nortek Air
Management, satisfying the funding commitment made on the acquisition of GKN.
External debt (excluding bank overdrafts)
Cross-currency swaps
Non-cash acquisition fair value adjustments
27. Cash flow statement
Reconciliation of operating loss to net cash from operating activities generated by
continuing operations
Operating 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(2)
Change in inventories
Change in receivables
Change in payables
Tax paid
Interest paid on loans and borrowings
Interest paid on lease obligations
Acquisition and disposal costs
Net cash from operating activities
Year ended
31 December
2021
£m
Restated(1)
Year ended
31 December
2020
£m
Notes
6
6
15
(451)
826
375
374
51
(66)
(233)
(88)
(31)
79
14
(65)
(128)
(14)
(5)
263
(487)
628
141
391
51
(62)
(135)
(107)
173
269
(71)
(14)
(144)
(16)
–
476
Reconciliation of cash and cash equivalents, net of bank overdrafts
Cash and cash equivalents per Balance Sheet
Bank overdrafts included within current interest-bearing loans and borrowings (note 20)
Cash and cash equivalents, net of bank overdrafts per Statement of Cash Flows
Cash flow information relating to discontinued operations is as follows:
Cash flow from discontinued operations
Net cash from discontinued operations
Defined benefit pension contributions paid
Interest paid on lease obligations
Tax (paid)/received
Net cash from operating activities from discontinued operations(2)
Purchase of property, plant and equipment
Proceeds from disposal of property, plant and equipment
Purchase of computer software and capitalised development costs
Net cash used in investing activities from discontinued operations
Repayment of principal under lease obligations
Net cash used in financing activities from discontinued operations
31 December
2021
£m
31 December
2020
£m
473
(5)
468
311
(151)
160
Year ended
31 December
2021
£m
Restated(1)
Year ended
31 December
2020
£m
84
(40)
(2)
(42)
–
(12)
2
(1)
(11)
(7)
(7)
284
(4)
(5)
13
288
(24)
–
(5)
(29)
(14)
(14)
(1) Restated for discontinued operations (note 1).
(2) Includes tax paid in the year of £32 million following the extraction of Ergotron and Nortek Control from the Nortek tax group prior to the disposal of Nortek Air Management and specific
defined benefit pension contributions of £39 million paid on disposal of Nortek Air Management and Brush.
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.
27. Cash flow statement continued
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, used as a basis for banking covenant calculations, 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
2021
£m
31 December
2020
£m
(462)
(903)
(1,365)
473
(892)
(69)
11
(165)
(2,926)
(3,091)
311
(2,780)
(89)
22
(950)
(2,847)
Cash flow
£m
Acquisitions
and disposals
£m
Other non-cash
movements
£m
Effect of foreign
exchange
£m
At
31 December
2020
£m
(2,940)
(89)
22
(3,007)
1,562
(7)
–
1,555
–
–
–
–
At
31 December
2021
£m
(1,360)
(69)
11
(1,418)
468
(950)
5
–
(11)
(6)
–
(6)
13
27
–
40
–
40
Cash and cash equivalents, net of bank
overdrafts
Net debt
160
(2,380)
(2,847)
(825)
2,688
2,688
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
Amounts due for settlement after one year
Present value of lease obligations
31 December
2021
£m
31 December
2020
£m
64
166
206
(60)
376
57
319
376
101
239
325
(110)
555
81
474
555
It is the Group’s policy to lease certain of its property, plant and equipment. The average lease term is ten years. Interest rates are
fixed at the contract date. All leases are on a fixed repayment basis and no arrangements have been entered into for contingent rental
payments.
The Group’s obligations under lease arrangements are secured by the lessors’ rights over the leased assets.
Certain leases within the Group contain extension or termination options to allow for flexibility within these lease agreements. Where
these options are not reasonably certain to be exercised, they are not included in the lease obligation. The value of these associated
undiscounted cash flows is £232 million.
Notes to the Financial StatementsContinuedMelrose Industries PLC Annual Report 2021Financial statementsMelrose Industries PLC Annual Report 2021Melrose Industries PLC Annual Report 2021Financial statementsMelrose Industries PLC Annual Report 2021 Company Balance Sheet for Melrose Industries PLC
189
189
Company Balance Sheet for Melrose Industries PLC
Fixed assets
Investment in subsidiaries
Debtors:
Amounts falling due within one year
Amounts falling due after one year
Creditors:
Amounts falling due within one year
Net current liabilities
Total assets less current liabilities
Provisions
Net assets
Capital and reserves
Issued share capital
Share premium account
Merger reserve
Capital redemption reserve
Retained earnings
Shareholders’ funds
31 December
2021
£m
31 December
2020
£m
Notes
3
4
4
5
6
7
10,585
10,579
–
477
425
29
(2,842)
(2,041)
(2,365)
(1,587)
8,220
8,992
(3)
(1)
8,217
8,991
333
3,271
109
729
3,775
8,217
333
8,138
109
–
411
8,991
The Company reported a profit for the financial year ended 31 December 2021 of £8 million (2020: loss of £15 million).
The financial statements were approved by the Board of Directors on 3 March 2022 and were signed on its behalf by:
Geoffrey Martin
Group Finance Director
3 March 2022
Registered number: 09800044
Simon Peckham
Chief Executive
3 March 2022
188
188
28. Commitments continued
The table below shows the key components in the movement in lease obligations.
At 1 January
Additions
Interest charge
Reassessment of lease obligation
Payment of principal
Payment of interest
Disposals
Disposal of businesses(1)
Transfer to held for sale(2)
Exchange adjustments
At 31 December
Year ended
31 December
2021
£m
Year ended
31 December
2020
£m
555
45
16
3
(61)
(16)
(3)
(138)
(13)
(12)
376
582
56
21
14
(76)
(21)
(20)
–
–
(1)
555
(1) Disposal of businesses in 2021 relates to the sales of Nortek Air Management, Brush and certain other non-core entities (note 1).
(2) Transfer to held for sale in 2021 relates to the Nortek Control business, which was subsequently disposed of during the second half of 2021 (note 1).
Capital commitments
At 31 December 2021, there were commitments of £115 million (31 December 2020: £106 million) relating to the acquisition of new
plant and machinery.
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. Sales to and purchases from Group companies are priced on an arm’s length basis and generally are settled on
30-day terms.
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
2021 totalled £21 million (2020: £23 million). Purchases by subsidiaries from equity accounted investments in the year ended 31
December 2021 totalled £10 million (2020: £7 million). At 31 December 2021, amounts receivable from equity accounted investments
totalled £2 million (31 December 2020: £9 million) and amounts payable to equity accounted investments totalled £2 million (31
December 2020: £1 million).
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 104 and 113.
Short-term employee benefits
Share-based payments
Year ended
31 December
2021
£m
Year ended
31 December
2020
£m
5
10
15
3
7
10
30. Contingent liabilities
As a result of acquisitions made by the Group, certain contingent legal and warranty liabilities have been identified as part of the fair
value review of these acquisition balance sheets. Whilst it is difficult to reasonably estimate the timing and ultimate outcome of these
claims, the Directors’ best estimate has been included in the Balance Sheet where they existed at the time of acquisition and hence
were recognised in accordance with IFRS 3: Business combinations. Where a provision has been recognised, information regarding
the different categories of such liabilities and the amount and timing of outflows is included within note 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.
Notes to the Financial StatementsContinuedMelrose Industries PLC Annual Report 2021Financial statementsMelrose Industries PLC Annual Report 2021Melrose Industries PLC Annual Report 2021Financial statementsMelrose Industries PLC Annual Report 2021 190
Company Statement of Changes in Equity
Company Statement of Changes in Equity
Notes to the Company Balance Sheet
Notes to the Company Balance Sheet
191191
Issued share
capital
£m
Share premium
account
£m
Merger reserve
£m
Capital redemption
reserve
£m
Retained
earnings
£m
Shareholders’
funds
£m
At 1 January 2020
Loss for the year (note 2)
Total comprehensive expense
Equity-settled share-based payments
At 31 December 2020
Profit for the year (note 2)
Total comprehensive income
Capital reduction
Return of capital
Dividends paid
Equity-settled share-based payments
333
8,138
109
–
–
–
–
–
–
–
–
–
333
8,138
109
–
–
–
–
–
–
–
–
(4,138)
(729)
–
–
–
–
–
–
–
–
At 31 December 2021
333
3,271
109
Details of the Company’s capital reduction and return of capital are set out in note 1.
–
–
–
–
–
–
–
–
729
–
–
729
412
(15)
(15)
14
8,992
(15)
(15)
14
411
8,991
8
8
4,138
(729)
(69)
16
8
8
–
(729)
(69)
16
3,775
8,217
Refer to the Section 172 statement in the Strategic Report on pages 50 to 53 for further details on the Company’s Distribution Policy.
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 1 to 77.
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.
In line with the Group’s strategy, following the disposals of Nortek Air Management and Brush by the Group, a return of capital of £729
million, equivalent to 15 pence per existing ordinary share, was approved by shareholders on 9 July 2021. On 10 August 2021, a court
approved a capital reduction of the Company’s share premium account by £4,138 million, taking the Company’s share premium
account from £8,138 million to £4,000 million. Subsequently, the return of capital was paid in cash to shareholders on 14 September
2021, via a redeemable preference share scheme alongside a 9 for 10 share consolidation which reduced the number of ordinary
shares by 10%, from 4,858 million to 4,372 million. Further details are contained in note 7.
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 year and are summarised below.
Going concern
The Financial Statements have been prepared on a going concern basis as the Directors consider that adequate resources exist for
the Company to continue in operational existence for the foreseeable future.
The Group’s liquidity and funding arrangements are described in the Finance Director’s Review. There is significant liquidity headroom
of £3 billion at 31 December 2021 and sufficient headroom throughout the going concern forecast period. Forecast covenant
compliance is considered further below.
Covenants
The Group’s banking facility was extended in the year, from its original maturity in January 2023 to June 2024. 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 financial covenants during the period of assessment for going concern are as follows:
Net debt to adjusted EBITDA
Interest cover
31 December
2021
4.25x
3.0x
30 June
2022
4.0x
3.25x
31 December
2022
3.75x
4.0x
Testing
The Group has modelled two scenarios in its assessment of going concern; a base case and a reasonably possible sensitised case.
The base case takes into account the estimated impact of a continued recovery from the COVID-19 pandemic as well as other end
market and operational factors, including supply chain challenges, throughout the going concern period and has been monitored
against the actual results and cash generation in the year.
The reasonably possible sensitised case models more conservative sales assumptions for 2022 and the first half of 2023. Given that
there is liquidity headroom of £3 billion and the Group’s leverage was 1.3x, comfortably below the covenant test at 31 December
2021, no further sensitivity detail is provided.
Under the reasonably possible sensitised case, even with significant reductions, no covenant is breached at any of the forecast testing
dates being 30 June 2022 and 31 December 2022, with the testing at 30 June 2023 also favourable, and the Group will not require
any additional sources of finance, even following repayment of the £450 million bond in September 2022.
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.
Melrose Industries PLC Annual Report 2021Financial statementsMelrose Industries PLC Annual Report 2021Financial statementsMelrose Industries PLC Annual Report 2021 192
192
Notes to the Company Balance Sheet
Continued
193
193
1. Significant accounting policies continued
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.
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. Result for the year
As permitted by section 408 of the Companies Act 2006 the Company has elected not to present its own Profit and Loss Account for
the year. Melrose Industries PLC reported a profit for the financial year ended 31 December 2021 of £8 million (2020: loss of £15
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 102 to 116. There were no other employees of
the Company in the year.
3.
Investment in subsidiaries
At 1 January 2021
Additions
At 31 December 2021
£m
10,579
6
10,585
A £6 million investment from equity-settled share-based payments for subsidiaries is included as an addition to investments in
subsidiaries at 31 December 2021. Further details on the Group’s share-based payment schemes are included in note 23 to the
Group Consolidated Financial Statements.
The Company evaluates its investments in subsidiary undertakings annually for any indicators of impairment. The Company considers
the relationship between its market capitalisation and the carrying value of its investments, among other factors, when reviewing for
indicators of impairment. As at 31 December 2021, the market capitalisation of the Company of £6,991 million was below the carrying
value of its investment (£10,585 million) net of intercompany positions (£2,407 million) indicating a potential impairment.
The recoverable amount of the investment has been determined using the information set out in note 11 to the Group Consolidated
Financial Statements and is in excess of its carrying value, therefore no impairment has been recognised.
The following subsidiaries and significant holdings were owned by the Company as at 31 December 2021:
Argentina
Avenida Del Libertador 602, 4’ Piso, Buenos Aires
Transmisiones Homocineticas Argentinas SA (in liquidation)
Australia
45-49 McNaughton Road, Clayton Victoria, 3168
Unidrive Pty Ltd (in liquidation)
Suite 1, Level 11, 66 Goulburn Street, Sydney, NSW 2000
Ergotron Australia Pty Ltd
Brazil
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
Canada
600-1134 Grande Allée Ouest, Quebec, G1S 1E5
Fokker Elmo Canada Inc.
Queen’s Marque 600-1741 Lower Water Street, Halifax, N.S. B3J 0J2
Ergotron Canada Corporation
7 Michigan Boulevard, St. Thomas, Ontario
GKN Sinter Metals – St. Thomas, Ltd.
Equity interest
%
Class of Share held
49
Ordinary B(1)
100
100
100
100
100
100
100
100
Ordinary
Ordinary
Quota capital
Common
Common
Ordinary
Ordinary
Common stock
China
Room 1108, Binjiang International Building, No.88 Tonggang Road, Changshu Economic and
Technological Development Zone, Jiangsu Province, 21550
Brush Electrical Machines (Changshu) Co. Limited
100 Registered investment
Melrose Industries PLC Annual Report 2021Financial statementsMelrose Industries PLC Annual Report 2021Melrose Industries PLC Annual Report 2021Financial statementsMelrose Industries PLC Annual Report 2021 194
194
Notes to the Company Balance Sheet
Continued
Investment in subsidiaries continued
3.
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
No 71 Xiangyun Road, Langfang Economic & Technical Development Zone, Langfang
Fokker Elmo (Langfang) Electrical Systems Co. Ltd
Wuping East Road, Shengfang Town, Bazhou City, Hebei Province, 065701
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
100 Registered investment
100 Registered investment
100 Registered investment
40 Registered investment
100 Registered investment
18 North Shitan Road, North Industrial Park, Development Zone, Danyang, Jiangsu, 212310
GKN Danyang Industries Company Limited
100 Registered investment
No. 1 Cuigu, Northern New Zone, Chongqing, 401122
GKN HUAYU Driveline Systems (Chongqing) Co. Ltd
Factory No.1, No. 2188 Zhongxi Road, Pinghu, Jiaxing, Zhejiang Province
GKN HUAYU Driveline Systems (Pinghu) Co. Ltd
1 Xinwang Road, Jingjiang Economic and Technic Development Zone, Jingjiang, Jiangsu
GKN Aerospace (Jingjiang) Co., Ltd
No.8 Kangmin Road, Industrial Automotive Park, Yizheng City, Jiangsu Province
GKN Sinter Metals Yizheng Co Ltd
Xiguo Industrial Zone, Mengzhou City, Henan Province, 454750
GKN Zhongyuan Cylinder Liner Company Limited
34.5
Ordinary(2)
50 Registered investment(3)
100 Registered investment
100 Registered investment
59 Registered investment
Zijin Kechuang Center 4 Level, 416 Room, Economy Development Zone, Lishui, Nanjing
Nanjing FAYN Piston Ring Company Limited
19.79 Registered investment
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
Colombia
Calle 32 No. 15–23 Barrio Rincon de Girón, Girón Santander
Transejes Transmisiones Homocineticas de Colombia SA
France
Boulevard De L Europe, BP 177 91006 Evry-Courcouronnes CEDEX
Arianespace Participation S.A.
12 Quai du Commerce 69009 Lyon
Ergotron France SARL
7 rue de la Briqueterie, 02240 Ribemont
GKN Driveline Ribemont SARL
100 Avenue Vanderbilt, 78955 Carrieres-sous-Poissy
GKN Automotive SAS
GKN Freight Services EURL
5-7 Rue Charles-Edouard Jeanneret 78300 Poissy
GKN Driveline SA
765 rue Albert Einstein, CS 70402, 13591 Aix-en-Provence Cedex 3
NH Industries SAS
20 rue Lavoisier, 95300 Pontoise
GKN Aerospace France SARL
49
Ordinary
50 Registered investment
100
49
Ordinary
Ordinary
1.6320
Ordinary
100
100
100
100
100
5.5
100
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
3.
Investment in subsidiaries continued
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 Automotive Management GmbH
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
GKN Driveline Service GmbH
Krebsoege 10, 42477 Radevormwald
GKN Sinter Metals Engineering GmbH
Pennefeldsweg 11-15, 53177, Bonn
GKN Powder Metallurgy Holding GmbH
GKN Sinter Metals Components 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
Hungary
1085 Budapest, Kálvin tér 12-13. 4. Em.
Rubin NewCo 2021 Korlátolt Felelősségű Társaság
195
195
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
100
100
100
100
100
100
100
100
100
100
100
100
100
100
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
No. 1 Techno Industrial Complex, 1st Stage, Peenya Industrial Area, Bengaluru
GKN Automotive Bengaluru Private Limited
Italy
Via dei Campi della Rienza 8, 39031 Brunico, BZ
GKN Driveline Brunico SpA
Via Delle Fabbriche 5, 39031 Brunico, BZ
GKN Sinter Metals SpA
Japan
Tokyo Club Building 11F, 3-2-6 Kasumigaseki, Chiyoda-ku, Tokyo 100-0013
Ergotron Japan KK
49
Ordinary
97.03
Ordinary
100
100
100
100
100
100
100
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Melrose Industries PLC Annual Report 2021Financial statementsMelrose Industries PLC Annual Report 2021Melrose Industries PLC Annual Report 2021Financial statementsMelrose Industries PLC Annual Report 2021 196
196
Notes to the Company Balance Sheet
Continued
197
197
3.
Investment in subsidiaries continued
2388 Ohmiya-cho, Tochigi City, 328-8502 Tochigi
GKN Driveline Japan Ltd
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
JTC House, 28 The Esplanade, St. Helier, JE2 3QA
GKN Finance Limited
Malaysia
10th Floor, Menara Hap Seng, No.1 & 3, Jalan P. Ramless, 50250 Kuala Lumpur
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
Mexico
Calle Washinton 3701, interior 18, Complejo Industrial Las Americas, Chihuahua, Chihuahua,
C.P. 31114
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 Trading SA de CV
104, San Jose Agua Azul, Apaseo El Grande, Guanajuato
GKN Sinter Metals Mexico S. De. R.L. De. C.V.
GKN Sinter Metals Mexico (Services) S. De. R.L. De. C.V.
The Netherlands
Beeldschermweg 3, 3821 AH Amersfoort
Ergotron Nederland BV
Luna Arena, Herikerbergweg 238, 1101 CM, Amsterdam
Ridderkerk Property 1 BV
Aviolandalaan 37, 4631 RP, Hoogerheide
Business Park Aviolanda B.V.
Markt 22, 3351 PB, Papendrecht
Fabriek Slobbengors Beheer B.V.
Fabriek Slobbengors C.V.
Hoofdkantoor Slobbengors Beheer B.V.
Kantoor Industrieweg C.V.
Aviolandalaan 33, Hoogerheide, 4631 RP
Fokker Elmo B.V.
Fokker Elmo Holding BV
Grasbeemd 28, 5705 DG, Helmond
Fokker Landing Gear B.V.
Industrieweg 4, 3351 LB, Papendrecht
Cooperative Delivery of Retrokits (CDR) V.O.F.
Fokker Procurement Combination B.V.
Structural Laminates Industries B.V.
Fokker Technologies Group B.V.
Fokker Technologies Holding B.V.
Fokker Technology B.V.
GKN Aerospace Netherlands B.V.
Fokker Engineers & Contractors B.V.
Fokker Aerospace B.V.
Fokker Aerostructures B.V.
Fokker (CDR) B.V.
100
100
100
100
100
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
68.42
Ordinary
100
100
100
100
100
100
100
100
20
49
49
49
49
100
100
100
50
100
100
100
100
100
100
100
100
100
100
Ordinary
Fixed equity
Ordinary
Ordinary
Membership interest
Membership interest
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary(4)
Ordinary
Ordinary
Ordinary
Ordinary
A Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
3.
Investment in subsidiaries continued
11th Floor, The Colmore Building, 20 Colmore Circus Queensway, Birmingham, B4 6AT
GKN UK Holdings BV
100
Ordinary
Norway
Kirkegårdsveien 45, 3616 Kongsberg
GKN Aerospace Norway AS
Kongsberg Technology Training Centre AS
Kongsberg Terotech AS
Poland
Ul. B. Krzywoustego 31 G, 56-400 Oleśnica,
GKN Driveline Polska Sp z o o
Aleje Ujazdowskie 41, 00-540 Warsaw
Eljas sp. z o. o.
Portugal
Avenida Marechal Gomes da Costa, 1131, 4150-360, Porto
GKN Automotive Portugal, Limitada
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
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)
100
33.33
50
100
100
100
49
100
100
100
100
100
100
100
100
100
100
20
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Quota
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
36.25
Common stock
100
100
100
Ordinary
Ordinary
Ordinary
Melrose Industries PLC Annual Report 2021Financial statementsMelrose Industries PLC Annual Report 2021Melrose Industries PLC Annual Report 2021Financial statementsMelrose Industries PLC Annual Report 2021 198
198
Notes to the Company Balance Sheet
Continued
199
199
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
Ball Components Limited
Birfield Limited
British Hovercraft Corporation Limited
Brush Holdings Limited
Colmore Lifting Limited
Colmore Overseas Holdings Limited
Eachairn Aerospace Holdings Limited
Ergotron (UK) Limited
FAD (UK) Limited
Falcon Works Property Limited
Firth Cleveland 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
GKN Group Pension Trustee (No.2) Limited
GKN Group Pension Trustee Limited
GKN Group Services Limited
GKN Hardy Spicer Limited
GKN Holdings Limited
GKN Hydrogen 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
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary and
redeemable preference
Ordinary
Ordinary and deferred
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary and deferred
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
3.
Investment in subsidiaries continued
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
Laycock Engineering Limited
McKechnie 2005 Pension Scheme Trustee Limited
Melrose Holdings Limited
Melrose Intermediate Limited
Melrose PLC
Melrose USD 1 Limited
Nevada UK Holding Limited
P.F.D. Limited
Raingear Limited
Rzeppa Limited
Rigby Metal Components Limited
Sageford UK Limited
Sheepbridge Stokes Limited
Westland Group PLC
Westland Group Services Limited
Westland System Assessment 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
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 Civil Services Holdings Limited
GKN Aerospace Civil Services Limited
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
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
37.5
100
100
100
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 and
redeemable preference
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Membership interest
Ordinary
Membership interest
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
100
100
100
100
100
100
Ordinary and preference
Ordinary
Ordinary
Ordinary
Ordinary and cumulative
preference
Ordinary
100
Ordinary
Melrose Industries PLC Annual Report 2021Financial statementsMelrose Industries PLC Annual Report 2021Melrose Industries PLC Annual Report 2021Financial statementsMelrose Industries PLC Annual Report 2021 200
200
Notes to the Company Balance Sheet
Continued
3.
Investment in subsidiaries continued
Unit 1, Cobnar Wood Close, Chesterfield Trading Estate, Chesterfield, Derbyshire, S41 9RQ
GKN Cylinder Liners UK Limited
Number 22 Mount Ephraim, Tunbridge Wells, England, TN4 8AS
HiiROC Limited
100
10.21
Ordinary
Ordinary
USA
2 Sun Court, Suite 400, Peachtree Corners, GA, 30092
Fokker Elmo Inc.
2345 Rice Street, Suite 230, Roseville MN, 55113
Ergotron, Inc.
1209 Orange Street, Wilmington, Delaware, 19801
Melrose North America, Inc
PW1100G-JM Engine Leasing, LLC
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
Product Slingshot, Inc.
251 Little Falls Drive, Wilmington Delaware, 19808
GKN Driveline Newton LLC
GKN Sinter Metals, LLC
GKN Aerospace Aerostructures, Inc
GKN Aerospace Florida LLC
GKN Aerospace, Inc.
GKN Aerospace New England, Inc.
GKN Aerospace Newington LLC
GKN Aerospace St. Louis LLC
GKN Aerospace Precision Machining, Inc.
GKN Aerospace Services Structures LLC
GKN Aerospace South Carolina, Inc.
GKN Aerospace US Holdings LLC
GKN America Corp.
GKN Cylinder Liners, LLC
GKN Driveline North America, Inc.
GKN Freight Services, Inc.
GKN Hydrogen Corp.
GKN North America Investments, Inc.
GKN North America Services, Inc.
GKN Powder Metallurgy Holdings, Inc.
GKN Specialty Products Americas Corp.
GKN Westland Aerospace, Inc.
Hoeganaes Corporation
Hoeganaes Specialty Metal Powders LLC
XIK, LLC
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.
100
100
100
4
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
70
100
Common stock
Common
Common
Class C Unit
Ordinary
Ordinary
Ordinary
Common
Common Stock
Membership interest
Membership interest
Common
Membership interest
Common stock
Ordinary
Membership interest
Membership interest
Ordinary
Membership interest
Common Stock
Membership interest
Common stock
Membership interest
Common stock
Common stock
Common stock
Ordinary
Common
Common stock
Common stock
Common stock
Common stock
Membership interest
Membership interest
100
Common stock
100
100
Common
Common
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 indirectly has a total effective ownership of 50% in the company.
(4) The Group owns 49% directly with a total effective ownership of 49.98% in the company.
4. Debtors
Amounts falling due within one year:
Amounts owed by Group undertakings
Amounts falling due after one year:
Amounts owed by Group undertakings
Deferred tax
201
201
31 December
2021
£m
31 December
2020
£m
–
434
43
477
425
–
29
454
Amounts owed by Group undertakings are either interest-bearing or non interest-bearing depending on the type and duration of the
receivable relationship. At 31 December 2021, the amount receivable of £434 million has been classified as a non-current asset in
accordance with the expectations of management that it will not be settled within the next year. The comparative amount of £425
million at 31 December 2020, was classified as a current asset based on the expectations of management that during 2021 there
would be material disposals of businesses within the Group with significant cash proceeds, as well as a refinancing of the Group’s
revolving credit facility. These anticipated events during 2021 were expected to lead to settlement of intercompany loan positions
within the Company.
The Directors consider that amounts owed by Group undertakings approximate to their fair value.
The deferred tax included in the Balance Sheet is as follows:
Tax losses available for carry forward
Other timing differences
The tax losses may be carried forward indefinitely.
5. Creditors
Amounts falling due within one year:
Amounts owed to Group undertakings
Accruals and other creditors
31 December
2021
£m
31 December
2020
£m
36
7
43
29
–
29
31 December
2021
£m
31 December
2020
£m
2,841
1
2,842
2,041
–
2,041
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 2021
Charge to profit and loss account
At 31 December 2021
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
2020 Employee Share Plan matures. Further details of this plan are set out in the Directors’ Remuneration Report. The costs are
expected to be incurred within two years.
Melrose Industries PLC Annual Report 2021Financial statementsMelrose Industries PLC Annual Report 2021Melrose Industries PLC Annual Report 2021Financial statementsMelrose Industries PLC Annual Report 2021 202
202
Notes to the Company Balance Sheet
Continued
7.
Issued share capital
Share Capital
Allotted, called-up and fully paid
4,372,429,473 (31 December 2020: 4,858,254,963) Ordinary Shares of 160/21p each
(31 December 2020: 48/7p each)(1)
Nil (31 December 2020: 12,831) 2017 Incentive Plan Shares of £1 each(2)
Glossary
Glossary
203
203
31 December
2021
£m
31 December
2020
£m
333
–
333
333
–
333
Alternative Performance Measures (“APMs”)
In accordance with the Guidelines on APMs issued by the European Securities and Markets Authority (“ESMA”), additional information
is provided on the APMs used by the Group below.
In the reporting of financial information, the Group uses certain measures that are not required under IFRS. These additional
measures (commonly referred to as APMs) provide additional information on the performance of the business and trends to
stakeholders. These measures are consistent with those used internally, and are considered important to understanding the financial
performance and financial health of the Group. APMs are considered to be an important measure to monitor how the businesses are
performing because this provides a meaningful comparison of how the business is managed and measured on a day-to-day basis and
achieves consistency and comparability between reporting periods.
These APMs may not be directly comparable with similarly titled 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.
(1) A return of capital was paid in cash to shareholders on 14 September 2021, via a redeemable preference share scheme alongside a 9 for 10 share consolidation which reduced the
number of ordinary shares by 10%, from 4,858 million to 4,372 million (note 1).
(2) Following the crystallisation of the 2017 Incentive Plan on 31 May 2020 for £nil, the 2017 Incentive Plan shares were re-designated as deferred shares and cancelled by the Company in
the year ended 31 December 2021.
The rights of each class of share are described in the Directors’ Report.
Income Statement Measures
APM
Adjusted revenue
Closest equivalent statutory measure
Revenue
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.
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.
Year ended
31 December
2021
£m
6,883
613
7,496
Restated(1)
Year ended
31 December
2020
£m
7,132
591
7,723
Adjusted revenue
Revenue
Share of revenue of equity accounted investments (note 5)
Adjusted revenue
APM
Adjusting items
Closest equivalent statutory measure
None
Reconciling items to statutory measure
Adjusting items (note 6)
Definition and purpose
Those items which the Group excludes from its adjusted profit metrics in order to present a further measure of the Group’s
performance.
These include items which are significant in size or volatility or by nature are non-trading or non-recurring, 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.
Melrose Industries PLC Annual Report 2021Financial statementsMelrose Industries PLC Annual Report 2021Melrose Industries PLC Annual Report 2021Financial statementsMelrose Industries PLC Annual Report 2021
204
204
Glossary
Continued
APM
Adjusted operating profit
Closest equivalent statutory measure
Operating loss(2)
Reconciling items to statutory measure
Adjusting items (note 6)
205
205
f APM
Adjusted profit after tax
Closest equivalent statutory measure
Loss after tax
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.
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.
Adjusted operating profit
Operating loss
Adjusting items to operating loss (note 6)
Adjusted operating profit
APM
Adjusted operating margin
Closest equivalent statutory measure
Operating margin(3)
Year ended
31 December
2021
£m
Restated(1)
Year ended
31 December
2020
£m
(451)
826
375
(487)
628
141
Adjusted profit/(loss) after tax
Loss after tax
Adjusting items to loss after tax (note 6)
Adjusted profit/(loss) after tax
APM
Constant currency
Closest equivalent statutory measure
Income Statement, which is reported using actual average foreign exchange rates
Year ended
31 December
2021
£m
Restated(1)
Year ended
31 December
2020
£m
(446)
643
197
(565)
538
(27)
Reconciling items to statutory measure
Share of revenue of equity accounted investments (note 5) and adjusting items (note 6)
Reconciling items to statutory measure
Constant currency foreign exchange rates
Definition and purpose
Adjusted operating margin represents Adjusted operating profit as a percentage of Adjusted revenue. The Group uses adjusted profit
measures to provide a useful and more comparable measure of the ongoing performance of the Group.
Definition and purpose
The Group uses GBP based constant currency models to measure performance. These are calculated by applying 2021 average
exchange rates to local currency reported results for the current and prior year. This gives a GBP denominated Income Statement
which excludes any variances attributable to foreign exchange rate movements.
APM
Adjusted profit before tax
Closest equivalent statutory measure
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.
Adjusted profit/(loss) before tax
Loss before tax
Adjusting items to loss before tax (note 6)
Adjusted profit/(loss) before tax
Year ended
31 December
2021
£m
Restated(1)
Year ended
31 December
2020
£m
(618)
870
252
(679)
638
(41)
APM
Adjusted EBITDA for leverage covenant purposes
Closest equivalent statutory measure
Operating 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(4)
Definition and purpose
Adjusted operating profit for 12 months prior to the reporting date, before depreciation of property, plant and equipment and before the
amortisation 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
Imputed lease charge
Non-controlling interests
Other adjustments required for covenant purposes(4)
Adjusted EBITDA for leverage covenant purposes
Year ended
31 December
2021
£m
Year ended(5)
31 December
2020
£m
375
425
(68)
(4)
(14)
714
340
492
(97)
(3)
(8)
724
Melrose Industries PLC Annual Report 2021Financial statementsMelrose Industries PLC Annual Report 2021Melrose Industries PLC Annual Report 2021Financial statementsMelrose Industries PLC Annual Report 2021 206
206
Glossary
Continued
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)
APM
Interest cover
Closest equivalent statutory measure
None
Reconciling items to statutory measure
Not applicable
207
207
Definition and purpose
The income tax charge for the Group excluding adjusting tax items, and the tax impact of adjusting items, divided by adjusted profit
before tax.
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 a useful indicator of the ongoing tax rate for the Group.
This measure is used for bank covenant testing.
Adjusted tax rate
Tax credit per Income Statement
Adjusted for:
Tax impact of adjusting items
Tax impact of significant legislative changes
Tax impact of significant restructuring
Tax impact of EAIs
Adjusted tax (charge)/credit
Adjusted profit/(loss) before tax
Adjusted tax rate
APM
Adjusted basic earnings per share
Closest equivalent statutory measure
Basic earnings per share
Reconciling items to statutory measure
Adjusting items (note 6 and note 10)
Year ended
31 December
2021
£m
Restated(1)
Year ended
31 December
2020
£m
172
(180)
(70)
32
(9)
(55)
252
21.8%
114
(99)
–
7
(8)
14
(41)
34.1%
Interest cover
Adjusted EBITDA for leverage covenant purposes
Adjusted EBITDA from businesses disposed in the year
Adjusted EBITDA for interest cover
Interest on bank loans and overdrafts (note 7)
Finance income (note 7)
Other interest for covenant purposes(6)
Net finance charges for covenant purposes
Interest cover
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
Year ended
31 December
2021
£m
Year ended(5)
31 December
2020
£m
714
127
841
(138)
2
(6)
(142)
5.9x
724
2
726
(136)
3
(9)
(142)
5.1x
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.
Definition and purpose
Working capital comprises inventories, current trade and other receivables, non-current other receivables (excluding retirement benefit
surpluses), current trade and other payables and non-current other payables. This measure provides additional information in respect
of working capital management.
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.
Melrose Industries PLC Annual Report 2021Financial statementsMelrose Industries PLC Annual Report 2021Melrose Industries PLC Annual Report 2021Financial statementsMelrose Industries PLC Annual Report 2021 208
208
Glossary
Continued
209
209
APM
Bank covenant definition of net debt at average rates and leverage
APM
Free cash flow
Closest equivalent statutory measure
Cash and cash equivalents less interest-bearing loans and borrowings and finance related derivative instruments
Closest equivalent statutory measure
Net increase/decrease in cash and cash equivalents
Reconciling items to statutory measure
Impact of foreign exchange and adjustments for bank covenant purposes
Reconciling items to statutory measure
Acquisition related cash flows, dividends paid to owners of the parent, foreign exchange and other non-cash movements
Definition and purpose
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
Bank covenant definition of net debt at average rates
Leverage
Cash Flow Measures
APM
Adjusted operating cash flow (pre-capex) and Adjusted operating cash flow (pre-capex) conversion
Closest equivalent statutory measure
Net cash from operating activities
Reconciling items to statutory measure
Non-working capital items (note 27)
31 December
2021
£m
31 December(5)
2020
£m
950
(3)
947
1.3x
2,847
106
2,953
4.1x
Definition and purpose
Adjusted operating cash flow (pre-capex) is calculated as adjusted operating profit before depreciation and amortisation attributable to
subsidiaries, repayment of principal under lease obligations, the positive non-cash utilisation 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 repayment of principal under lease obligations and the positive non-
cash utilisation 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 (pre-capex)
Adjusted operating profit
Share of adjusted operating profit of equity accounted investments
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
Repayment of principal under lease obligations
Positive non-cash utilisation from loss-making contracts
Change in inventories
Change in receivables
Change in payables
Adjusted operating cash flow (pre-capex)
Year ended
31 December
2021
£m
Restated(1)
Year ended
31 December
2020
£m
375
(66)
375
50
(54)
(48)
632
(31)
79
14
694
141
(62)
385
57
(63)
(58)
400
173
269
(71)
771
Adjusted operating cash flow (pre-capex) conversion
110%
193%
Definition and purpose
Free cash flow represents cash generated from trading 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 – ongoing
Restructuring costs paid
Dividends received from EAIs
Trading net other cash flows(7)
Operations discontinued in the year
Free cash flow
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 restructuring cash flows
Definition and purpose
Adjusted free cash flow represents free cash flow adjusted for restructuring cash flows.
Adjusted free cash flow
Free cash flow
Restructuring costs paid(8)
Adjusted free cash flow
APM
Capital expenditure (capex)
Closest equivalent statutory measure
None
Reconciling items to statutory measure
Not applicable
Year ended
31 December
2021
£m
Restated(1)
Year ended
31 December
2020
£m
694
(225)
(205)
(54)
(193)
52
3
53
125
771
(265)
(171)
(107)
(161)
54
83
252
456
Year ended
31 December
2021
£m
Year ended
31 December
2020
£m
125
198
323
456
172
628
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.
Melrose Industries PLC Annual Report 2021Financial statementsMelrose Industries PLC Annual Report 2021Melrose Industries PLC Annual Report 2021Financial statementsMelrose Industries PLC Annual Report 2021 210
210
Glossary
Continued
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.
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) Restated for discontinued operations (note 1).
(2) Operating loss is not defined within IFRS but is a widely accepted profit measure being 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 loss(2) divided by revenue.
(4) Included within other adjustments required for covenant purposes are dividends received from equity accounted investments and the removal of adjusted operating profit of equity
accounted investments.
(5) Year ended 31 December 2020 remains aligned to the original calculations supporting the Group’s bank debt compliance certificate and have not been restated for discontinued
operations.
(6) Other interest for covenant purposes includes bank facility renegotiation fees and debt issue costs paid during the year and cash paid to settle interest rate swaps not included in finance
costs.
(7) Trading net other cash flows include non-cash movements included in adjusted operating profit, cash paid against provisions, costs relating to a return of capital and dividends paid to
non-controlling interests.
(8) Includes restructuring costs of £5 million (2020: £11 million) relating to operations discontinued in the year.
Notice of Annual General Meeting
211
The Annual General Meeting of Melrose Industries PLC (the
“Company”) will be held at 11.00 am on Thursday 5 May 2022
at Butchers’ Hall, 87 Bartholomew Close, London EC1A 7EB.
(ii) to holders of other equity securities as required by the
rights of those securities or, subject to such rights, as the
Directors otherwise consider necessary,
This document is important and requires your immediate
attention. If you are in any doubt as to the action you should
take, you should consult your stockbroker, bank, solicitor,
accountant, fund manager or other independent financial
adviser authorised under the Financial Services and Markets
Act 2000 if you are resident in the United Kingdom or, if not,
another appropriately authorised independent financial adviser.
If you have sold or otherwise transferred or sell or otherwise transfer all
of your shares in the Company, please send this document, together
with the accompanying form of proxy, as soon as possible to the
purchaser or transferee or to the agent through whom the sale or
transfer was effected for delivery to the purchaser or transferee.
Notice is given that the Annual General Meeting of the Company will
be held at Butchers’ Hall, 87 Bartholomew Close, London EC1A 7EB
at 11.00 am on Thursday 5 May 2022 for the purposes set out below.
Resolutions 1 to 16 (inclusive) will be proposed as ordinary resolutions
and resolutions 17 to 20 (inclusive) as special resolutions.
Ordinary resolutions
1.
To receive the Company’s audited financial statements for the
financial year ended 31 December 2021, together with the
Directors’ Report, the Strategic Report and the Auditor’s Report
on those financial statements.
2.
To approve the Directors’ Remuneration Report for the year
ended 31 December 2021, as set out on pages 102 to 116 of the
Company’s 2021 Annual Report.
and so that the Directors may impose any limits or restrictions and
make any arrangements which they consider necessary or
appropriate to deal with treasury shares, fractional entitlements,
record dates, legal, regulatory or practical problems in, or under
the laws of, any territory or any other matter, such authorities to
expire at the conclusion of the Company’s next Annual General
Meeting after this resolution is passed or, if earlier, at the close of
business on 30 June 2023, but, in each case, so that the
Company may make offers or agreements before the authority
expires which would or might require shares to be allotted or
Rights to be granted after the authority expires, and so that the
Directors may allot shares or grant Rights in pursuance of any
such offer or agreement notwithstanding that the authority
conferred by this resolution has expired.
Special resolutions
17. That, subject to the passing of resolution 16, the Directors be and
are generally empowered to allot equity securities (as defined in
section 560 of the Act) for cash pursuant to the authorities granted
by resolution 16 and/or to sell ordinary shares held by the
Company as treasury shares for cash, in each case as if section
561 of the Act did not apply to any such allotment or sale, provided
that this power shall be limited:
(A) to the allotment of equity securities in connection with an offer
of equity securities (but in the case of an allotment pursuant to
the authority granted under paragraph (B) of resolution 16,
such power shall be limited to the allotment of equity securities
in connection with an offer by way of a rights issue only):
3.
To declare a final dividend of 1 pence per ordinary share for the
year ended 31 December 2021.
(i) to ordinary shareholders in proportion (as nearly as may be
practicable) to their existing holdings; and
4. To re-elect Christopher Miller as a Director of the Company.
(ii) to holders of other equity securities, as required by the
5. To re-elect Simon Peckham as a Director of the Company.
6. To re-elect Geoffrey Martin as a Director of the Company.
7. To re-elect Peter Dilnot as a Director of the Company.
8. To re-elect Justin Dowley as a Director of the Company.
9. To re-elect David Lis as a Director of the Company.
10. To re-elect Charlotte Twyning as a Director of the Company.
11. To re-elect Funmi Adegoke as a Director of the Company.
12. To elect Heather Lawrence as a Director of the Company.
13. To elect Victoria Jarman as a Director of the Company.
14. To re-appoint Deloitte LLP as auditor of the Company to hold office
from the conclusion of this meeting until the conclusion of the next
Annual General Meeting of the Company at which accounts are laid.
15. To authorise the Audit Committee to determine the remuneration
of the auditor of the Company.
16. That, in accordance with section 551 of the Companies Act 2006
(the “Act”), the directors of the Company (the “Directors”) be and
are generally and unconditionally authorised to allot shares in the
Company, or to grant rights to subscribe for or to convert any
security into shares in the Company (“Rights”):
(A) up to an aggregate nominal amount of £111,045,827; and
(B) comprising equity securities (as defined in section 560 of the
Act) up to an aggregate nominal amount of £222,091,655
(such amount to be reduced by the aggregate nominal amount
of any allotments or grants made under paragraph (A) of this
resolution) in connection with an offer by way of a rights issue:
(i) to ordinary shareholders in proportion (as nearly as may be
practicable) to their existing holdings; and
rights of those securities or, subject to such rights, as the
Directors otherwise consider necessary, and so that the
Directors may impose any limits or restrictions and make
any arrangements which they consider necessary or
appropriate to deal with treasury shares, fractional
entitlements, record dates, legal, regulatory or practical
problems in, or under the laws of, any territory or any other
matter; and
(B) to the allotment (otherwise than in circumstances set out in
paragraph (A) of this resolution) of equity securities pursuant to
the authority granted by paragraph (A) of resolution 16 or sale
of treasury shares up to a nominal amount of £16,656,874,
such powers to expire at the conclusion of the Company’s next
Annual General Meeting after this resolution is passed or, if earlier,
at the close of business on 30 June 2023, but, in each case, so that
the Company may make offers or agreements before the power
expires which would or might require equity securities to be allotted
(and/or treasury shares sold) after the power expires and so that
the Directors may allot equity securities (and/or sell treasury shares)
in pursuance of any such offer or agreement notwithstanding that
the power conferred by this authority has expired.
18. That, subject to the passing of resolution 16 and in addition to any
power granted under resolution 17, the Directors be and are
generally empowered to allot equity securities (as defined in
section 560 of the Act) for cash pursuant to the authorities granted
by resolution 16 and/or to sell ordinary shares held by the
Company as treasury shares for cash, in each case as if section
561 of the Act did not apply to any such allotment or sale,
provided that this power shall be:
Melrose Industries PLC Annual Report 2021Additional informationMelrose Industries PLC Annual Report 2021Melrose Industries PLC Annual Report 2021 212
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213
Recommendation
The Board believes that each of the resolutions to be proposed at the
Annual General Meeting is in the best interests of the Company and its
shareholders as a whole. Accordingly, the Directors unanimously
recommend that ordinary shareholders vote in favour of all of the
resolutions proposed, as the Directors intend to do in respect of their
own beneficial holdings.
By order of the Board
Jonathon Crawford
Company Secretary
31 March 2022
Registered Office:
11th Floor The Colmore Building
20 Colmore Circus Queensway
Birmingham
West Midlands
B4 6AT
(A) limited to the allotment of equity securities pursuant to the
authority granted by paragraph (A) of resolution 16 or sale of
treasury shares up to a nominal amount of £16,656,874; and
(B) used only for the purposes of financing (or refinancing, if the
authority is to be used within six months of the original
transaction) a transaction which the Directors determine to be
an acquisition or other capital investment of a kind
contemplated by the Statement of Principles on Disapplying
Pre-Emption Rights most recently published by the Pre-
Emption Group prior to the date of this notice,
such powers to expire at the conclusion of the Company’s next
Annual General Meeting after this resolution is passed or, if earlier,
at the close of business on 30 June 2023, but, in each case, so that
the Company may make offers or agreements before the power
expires which would or might require equity securities to be allotted
(and/or treasury shares sold) after the power expires and so that
the Directors may allot equity securities (and/or sell treasury shares)
in pursuance of any such offer or agreement notwithstanding that
the power conferred by this authority has expired.
19. That the Company be and is generally and unconditionally
authorised to make one or more market purchases (within the
meaning of section 693 of the Act) of ordinary shares in the capital
of the Company provided that:
(A) the maximum aggregate number of ordinary shares
authorised to be purchased is 437,242,947;
(B) the minimum price which may be paid for an ordinary share is
the nominal value of an ordinary share at the time of such
purchase;
(C) the maximum price which may be paid for an ordinary share is
not more than the higher of:
(i) 105% of the average of the middle-market quotation for an
ordinary share as derived from the Daily Official List of the
London Stock Exchange for the five business days
immediately preceding the day on which the ordinary share
is purchased; and
(ii) the higher of the price of the last independent trade and the
highest current independent bid on the trading venue
where the purchase is carried out, in each case, exclusive
of expenses;
(D) this authority shall expire at the conclusion of the Company’s
next Annual General Meeting after this resolution is passed or,
if earlier, at the close of business on 30 June 2023;
(E) the Company may make a contract of purchase of ordinary
shares under this authority which would or might be executed
wholly or partly after the expiry of this authority, and may make
a purchase of ordinary shares in pursuance of any such
contract; and
(F) any ordinary shares purchased pursuant to this authority may
either be held as treasury shares or cancelled by the
Company, depending on which course of action is considered
by the Directors to be in the best interests of shareholders at
the time.
20. That a general meeting other than an Annual General Meeting may
be called on not less than 14 clear days’ notice.
Explanatory notes to the proposed resolutions
Resolutions 1 to 16 (inclusive) are proposed as ordinary resolutions,
which means that for each of those resolutions to be passed, more
than half the votes cast must be cast in favour of the resolution.
Resolutions 17 to 20 (inclusive) are proposed as special resolutions,
which means that for each of those resolutions to be passed, at least
three-quarters of the votes cast must be cast in favour of the resolution.
Resolution 1 – Receipt of 2021 Annual Report and Financial
Statements
The Directors are required to lay the Company’s financial statements,
the Strategic Report and the Directors’ and auditor’s reports on those
financial statements (collectively, the “2021 Annual Report”) before
shareholders each year at the Annual General Meeting (“AGM”).
Resolution 2 – Approval of Directors’ remuneration report
The Directors’ remuneration report (the “Directors’ Remuneration
Report”) is presented in two sections:
• the annual statement from the Chairman of the Remuneration
Committee; and
• the annual report on remuneration.
The annual statement from the Chairman of the Remuneration
Committee, set out on page 102 of the 2021 Annual Report,
summarises, for the year ended 31 December 2021, the major decisions
taken on Directors’ remuneration, any substantial changes relating to
Directors’ remuneration made during the year, and the context in which
those changes occurred and decisions have been taken.
The annual report on remuneration, set out on page 103 to 116 of
the 2021 Annual Report, provides details of the remuneration paid to
Directors in respect of the year ended 31 December 2021, including
base salary, taxable benefits, short-term incentives, long-term
incentives vested in the year, pension-related benefits, any other items
in the nature of remuneration and any sum(s) recovered or withheld
during the year in respect of amounts paid in earlier years.
The Directors’ Remuneration Report is subject to an annual advisory
shareholder vote by way of an ordinary resolution. Resolution 2 is to
approve the Directors’ Remuneration Report.
Resolution 3 – Declaration of final dividend
The Board is recommending, and shareholders are being asked to
approve, the declaration of a final dividend of 1 pence per ordinary
share for the year ended 31 December 2021. The final dividend will,
subject to shareholder approval, be paid on 20 May 2022 to the
holders of ordinary shares whose names are recorded on the register
of members of the Company at the close of business on 8 April 2022.
Resolutions 4 to 11 (inclusive) – Re-election of Directors
In accordance with the UK Corporate Governance Code (the “Code”)
and the Company’s Articles of Association (the “Articles”), every
Director will stand for re-election at the AGM, with the exception of Liz
Hewitt, who will retire at the conclusion of the Annual General Meeting,
and Heather Lawrence and Victoria Jarman, who are standing for
election for the first time.
The Board considers that the contribution of each Director who is
standing for re-election is, and continues to be, important to the
sustainable success of the Company for the following reasons:
• Justin Dowley, Non-executive Chairman, is standing for re-
election as Director due to his extensive and long-standing
experience within the banking, investment and asset
management sectors. Justin Dowley first joined the Board as a
Non-executive Director in September 2011 and served as Senior
Independent Director in the two years prior to his appointment as
Non-executive Chairman in 2019, meaning he has served on the
Board for over nine years. Following positive engagement with
key shareholders in 2020, the Nomination Committee and the
Board approved his extended tenure to 2023, subject to annual
re-election, to (amongst other things), help oversee the
succession planning arrangements for the Board and the
development of a diverse Board. Justin Dowley was considered
independent upon his appointment as Non-executive Chairman.
• Simon Peckham, Chief Executive, co-founder of Melrose, 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, and having been
appointed as Chief Executive in 2012. He has widespread
expertise in corporate finance, mergers and acquisitions, strategy
and operations and has overseen a period of substantial success
for Melrose.
• Christopher Miller, Executive Vice-Chairman, co-founder of
Melrose, is standing for re-election on the basis of his deep
understanding of the Melrose business model. He has long-
standing involvement in manufacturing industries and private
investment.
• 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, and central to the success of the Group since then. He
also brings to the Board considerable public company experience
and expertise in corporate finance, equity finance raising and
financial strategy.
• Peter Dilnot, Chief Operating Officer, is standing for re-election
due to his deep understanding of the Melrose business model,
having been appointed as Chief Operating Officer in 2019, and
having performed the role of interim chief executive officer for
GKN Aerospace. He also brings to the Board strong sector
experience in engineering and aviation, and has extensive
experience in holding executive roles in listed companies.
• David Lis, Non-executive Director, is standing for re-election due
to his extensive financial experience and deep insight into the
expectations of Melrose’s institutional investor base, having held
several roles in investment management. Upon Liz Hewitt’s
retirement, he will succeed to the role of Senior Independent
Director, being the longest-serving Non-executive Director after
the Chairman.
• Charlotte Twyning, Non-executive Director, is standing for
re-election due to her diverse range of experience and
commercial acumen having held various senior positions in the
telecommunications and transport sectors, and most recently in
aviation.
• Funmi Adegoke, Non-executive Director, is standing for re-
election due to her diverse industrial knowledge as well as
significant transactional and commercial management expertise
based on her extensive experience working in and leading teams
across the globe at multi-national organisations.
Biographical details of each Director standing for re-election can be
found on pages 82 to 83 of the 2021 Annual Report. All of the
Non-executive Directors standing for re-election are currently
considered independent under the Code.
Resolutions 12 to 13 – Election of Directors
In accordance with the Articles:
• Heather Lawrence, Non-executive Director, is standing for
election as a Director of the Company following her appointment
to the Board with effect from 1 June 2021. She brings to the
Board a diverse range of experience across the industrials and
transportation sectors, having extensive experience in corporate
finance and investment banking. Upon Liz Hewitt’s retirement,
she will succeed to the role of Audit Committee Chair, having
significant experience in this area.
• Victoria Jarman, Non-executive Director, is standing for election
as a Director of the Company following her appointment to the
Board with effect from 1 June 2021. She brings to the Board
significant and extensive financial and investment experience and
insight gained from a number of senior roles in corporate finance,
as well as extensive non-executive director experience.
Biographical details for Heather Lawrence and Victoria Jarman can be
found on page 83 of the 2021 Annual Report.
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Notice of Annual General Meeting
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• in excess of an amount equal to 7.5% of the Company’s issued
ordinary share capital in a rolling three-year period,
in each case other than in connection with an acquisition or specified
capital investment which is announced contemporaneously with the
allotment or which has taken place in the preceding six-month period
and is disclosed in the announcement of the allotment.
If approved, the Section 570 and 573 power shall apply until the end
of the Company’s next AGM after the resolutions are passed or, if
earlier, until the close of business on 30 June 2023. The exception to
this is that the Directors may allot equity securities after the power has
expired in connection with an offer or agreement made or entered into
before the power expired. The Directors have no present intention to
exercise the Section 570 and 573 power.
Resolution 19 – Authority to purchase own shares
This resolution seeks shareholder approval to grant the Company the
authority to purchase its own shares pursuant to sections 693 and
701 of the Act.
This authority is limited to an aggregate maximum number of
437,242,947 ordinary shares, representing 10% of the Company’s
issued ordinary share capital as at 30 March 2022 (being the last
business day prior to the publication of this notice).
The maximum price which may be paid for an ordinary share will be
an amount which is not more than the higher of: (i) 5% above the
average of the middle market quotation for an ordinary share as
derived from the Daily Official List of the London Stock Exchange for
the five business days immediately preceding the day on which the
ordinary share is purchased; and (ii) the higher of the price of the last
independent trade and the highest current independent bid on the
trading venue where the purchase is carried out (in each case,
exclusive of expenses).
If approved, the authority shall, unless varied, revoked or renewed,
expire at the end of the Company’s next AGM after the resolution is
passed or, if earlier, at the close of business on 30 June 2023. The
Directors will only exercise their authority if it is in the interests of
shareholders generally.
Resolution 20 – Notice period for general meetings other than
AGMs
This resolution seeks shareholder approval to allow the Company to
continue to call general meetings (other than AGMs) on 14 clear days’
notice. In accordance with the Act, as amended by the Companies
(Shareholders’ Rights) Regulations 2009, the notice period required
for general meetings of the Company is 21 clear days unless
shareholders approve a shorter notice period (subject to a minimum
period of 14 clear days). In accordance with the Act, the Company
must make a means of electronic voting available to all shareholders
for that meeting in order to be able to call a general meeting on less
than 21 clear days’ notice.
The Company intends to only use the shorter notice period where this
flexibility is merited by the purpose of the meeting and is considered to
be in the interests of shareholders generally, and not as a matter of
routine. AGMs will continue to be held on at least 21 clear days’ notice.
The approval will be effective until the Company’s next AGM, when it
is intended that a similar resolution will be proposed.
Resolution 14 – Re-appointment of auditor
The Company is required to appoint auditors at each general meeting
at which accounts are laid before shareholders, to hold office until the
next such meeting.
The Audit Committee has reviewed the effectiveness, performance,
independence and objectivity of the existing external auditor, Deloitte
LLP, on behalf of the Board, and concluded that the external auditor
was in all respects effective.
This resolution proposes the re-appointment of Deloitte LLP until the
conclusion of the next AGM.
Resolution 15 – Authority to agree auditor’s remuneration
This resolution seeks authority for the Audit Committee to determine
the level of the auditor’s remuneration.
Resolution 16 – Authority to allot shares
This resolution seeks shareholder approval to grant the Directors the
authority to allot shares in the Company, or to grant rights to subscribe
for or convert any securities into shares in the Company (“Rights”),
pursuant to section 551 of the Act (the “Section 551 authority”). The
authority contained in paragraph (A) of the resolution will be limited to
an aggregate nominal amount of £111,045,827, being approximately
one-third of the Company’s issued ordinary share capital as at 30 March
2022 (being the last business day prior to the publication of this notice).
In line with guidance issued by the Investment Association, paragraph
(B) of this resolution would give the Directors authority to allot shares in
the Company or grant Rights in connection with a rights issue up to
an aggregate nominal amount of £222,091,655, representing
approximately two-thirds of the Company’s issued ordinary share
capital as at 30 March 2022 (being the last business day prior to the
publication of this notice). This resolution provides that such amount
shall be reduced by the aggregate nominal amount of any allotments
or grants under paragraph (A).
The Company does not hold any shares in treasury.
If approved, the Section 551 authority shall, unless renewed, revoked
or varied by the Company, expire at the end of the Company’s next
AGM after the resolution is passed or, if earlier, at the close of
business on 30 June 2023. The exception to this is that the Directors
may allot shares or grant Rights after the authority has expired in
connection with an offer or agreement made or entered into before
the authority expired. The Directors have no present intention to
exercise the Section 551 authority.
Resolutions 17 to 18 – Partial disapplication of
pre-emption rights
These resolutions seek shareholder approval to grant the Directors the
power to allot equity securities (as defined by section 560 of the Act) or
sell treasury shares of the Company pursuant to sections 570 and 573
of the Act (the “Section 570 and 573 power”) without first offering them
to existing shareholders in proportion to their existing shareholdings.
The power is limited to allotments for cash in connection with
pre-emptive offers, subject to any arrangements that the Directors
consider appropriate to deal with fractions and overseas
requirements, and otherwise pursuant to non pre-emptive offers for
cash up to a maximum nominal value of £33,313,748, representing
approximately 10% of the Company’s issued ordinary share capital as
at 30 March 2022 (being the last business day prior to the publication
of this notice).
The Directors intend to adhere to the guidelines set out in the
Pre-Emption Group’s Statement of Principles (as updated in March
2015) and not to allot shares for cash on a non pre-emptive basis
pursuant to a relevant authority in resolutions 17 or 18:
• in excess of an amount equal to 5% of the Company’s issued
ordinary share capital (excluding treasury shares) in any one-year
period; or
7.
Explanatory notes as to the proxy, voting and attendance
procedures at the Annual General Meeting (“AGM”)
1.
The holders of ordinary shares in the Company are entitled to
attend the AGM and are entitled to vote. A member entitled to
attend, speak and vote at the AGM is also entitled to appoint a
proxy to exercise all or any of his/her rights to attend, speak and
vote at the AGM in his/her place. Such a member may appoint
more than one proxy, provided that each proxy is appointed to
exercise the rights attached to different shares. A proxy need not
be a member of the Company.
2.
3.
4.
5.
6.
A form of proxy which may be used to appoint and give proxy
instructions for use at the AGM is enclosed with this notice. To be
effective, a form of proxy must be completed and returned,
together with any power of attorney or authority under which it is
completed or a certified copy of such power or authority, so that it
is received by the Company’s registrar at the address specified
on the form of proxy not less than 48 hours (excluding any part of
a day that is not a working day) before the stated time for holding
the meeting (or, in the event of an adjournment, not less than 48
hours before the stated time of the adjourned meeting (excluding
any part of a day which is not a working day)). Returning a
completed form of proxy will not preclude a member from
attending the meeting and voting in person.
Any person to whom this notice is sent who is a person
nominated under section 146 of the Act to enjoy information rights
(a “Nominated Person”) may, under an agreement between him/
her and the shareholder by whom he/she was nominated, have a
right to be appointed (or to have someone else appointed) as a
proxy for the AGM. If a Nominated Person has no such proxy
appointment right or does not wish to exercise it, he/she may,
under any such agreement, have a right to give instructions to the
shareholder as to the exercise of voting rights. The statement of
the rights of shareholders in relation to the appointment of proxies
in notes 1 and 2 above does not apply to Nominated Persons.
The rights described in notes 1 and 2 can only be exercised by
the holders of ordinary shares in the Company.
To be entitled to attend and vote at the AGM (and for the purposes
of the determination by the Company of the number of votes they
may cast), members must be entered on the Company’s register
of members by 6.30 pm (BST) on 3 May 2022 (or, in the event of
an adjournment, on the date which is two days, excluding any day
which is not a working day, before the time of the adjourned
meeting). Changes to entries on the register of members after this
time shall be disregarded in determining the rights of any person
to attend or vote at the meeting.
As at 30 March 2022 (being the last business day prior to the
publication of this notice), the Company’s issued ordinary share
capital consists of 4,372,429,473 ordinary shares of 160/21 pence
each, carrying one vote each.
CREST members who wish to appoint a proxy or proxies through
the CREST electronic proxy appointment service may do so by
using the procedures described in the CREST Manual (available
at www.euroclear.com). CREST Personal Members or other
CREST sponsored members, and those CREST members who
have appointed a service provider(s), should refer to their CREST
sponsor or voting service provider(s), who will be able to take the
appropriate action on their behalf.
In order for a proxy appointment or instruction made using the
CREST service to be valid, the appropriate CREST message (a
“CREST Proxy Instruction”) must be properly authenticated in
accordance with Euroclear UK & Ireland Limited’s specifications,
and must contain the information required for such instruction, as
described in the CREST Manual. The message, regardless of
whether it constitutes the appointment of a proxy or is an
amendment to the instruction given to a previously appointed
proxy, must, in order to be valid, be transmitted so as to be
received by the issuer’s agent (ID RA19) by 11.00 am (BST) on
3 May 2022. For this purpose, the time of receipt will be taken to
be the time (as determined by the time stamp applied to the
message by the CREST Application Host) from which the issuer’s
agent is able to retrieve the message by enquiry to CREST in the
manner prescribed by CREST. After this time any change of
instructions to proxies appointed through CREST should be
communicated to the appointee through other means.
CREST members and, where applicable, their CREST sponsors,
or voting service providers, should note that Euroclear UK &
Ireland Limited does not make available special procedures in
CREST for any particular message. Normal system timings and
limitations will, therefore, apply in relation to the input of CREST
Proxy Instructions. It is the responsibility of the CREST member
concerned to take (or, if the CREST member is a CREST Personal
Member, or sponsored member, or has appointed a voting
service provider, to procure that his/her CREST sponsor or voting
service provider(s) take(s)) such action as shall be necessary to
ensure that a message is transmitted by means of the CREST
system by any particular time. In this connection, CREST
members and, where applicable, their CREST sponsors or voting
system providers are referred, in particular, to those sections of
the CREST Manual concerning practical limitations of the CREST
system and timings.
8.
9.
The Company may treat as invalid a CREST Proxy Instruction in
the circumstances set out in Regulation 35(5)(a) of the
Uncertificated Securities Regulations 2001.
10. If you are an institutional investor you may be able to appoint a
proxy electronically via the Proxymity platform, a process which
has been agreed by the Company and approved by the
Company’s registrar. For further information regarding Proxymity,
please go to www.proxymity.io. Your proxy must be lodged by
11:00 am (BST) on 3 May 2022 in order to be considered valid.
Before you can appoint a proxy via this process you will need to
have agreed to Proxymity’s associated terms and conditions. It is
important that you read these carefully as you will be bound by
them and they will govern the electronic appointment of your proxy.
11. Any corporation which is a member can appoint one or more
corporate representatives who may exercise on its behalf all of its
powers as a member provided that they do not do so in relation to
the same shares.
12. Under section 527 of the Act, members meeting the threshold
requirements set out in that section have the right to require the
Company to publish on a website a statement setting out any
matter relating to: (i) the audit of the Company’s accounts (including
the auditor’s report and the conduct of the audit) that are to be laid
before the AGM; or (ii) any circumstance connected with an auditor
of the Company ceasing to hold office since the previous meeting
at which annual accounts and reports were laid in accordance with
section 437 of the Act. The Company may not require the
shareholders requesting any such website publication to pay its
expenses in complying with sections 527 or 528 of the Act.
Melrose Industries PLC Annual Report 2021Additional informationMelrose Industries PLC Annual Report 2021 216
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217
Where the Company is required to place a statement on a website
under section 527 of the Act, it must forward the statement to the
Company’s auditor not later than the time when it makes the
statement available on the website. The business which may be
dealt with at the AGM includes any statement that the Company
has been required under section 527 of the Act to publish on
a website.
13. Any member holding ordinary shares attending the meeting has
the right to ask questions. The Company must answer any such
questions relating to the business being dealt with at the meeting
but no such answer need be given if: (i) to do so would interfere
unduly with the preparation for the meeting or involve the
disclosure of confidential information; (ii) the answer has already
been given on a website in the form of an answer to a question;
and/or (iii) it is undesirable in the interests of the Company or the
good order of the meeting that the question be answered.
14. Voting at the AGM will be by poll. The Chairman of the AGM will
invite each shareholder, corporate representative and proxy
present at the meeting to complete a poll card indicating how they
wish to cast their votes in respect of each resolution. In addition,
the Chairman of the AGM will cast the votes for which he has
been appointed as proxy. Poll cards will be collected during the
meeting. Once the results have been verified by the Company’s
registrar, Equiniti, they will be notified to the Financial Conduct
Authority, announced through a Regulatory Information Service
and will be available to view on the Company’s website.
15. A copy of this notice, and other information required by section
311A of the Act, can be found at www.melroseplc.net.
16. You may not use an electronic address provided in either this
notice or any related documents (including the form of proxy) to
communicate with the Company for any purposes other than
those expressly stated.
17. The following documents will be available for inspection upon
request at the Company’s registered office during normal
business hours on any weekday (Saturdays, Sundays and public
holidays excepted) from the date of this notice up to and including
the date of the AGM and at the place of the AGM for 15 minutes
prior to and during the meeting:
(A) copies of all service agreements under which Directors of the
Company are employed by the Company or any subsidiaries;
and
(B) a copy of the terms of appointment of the Non-executive
Directors of the Company.
18. You may register your vote online by visiting Equiniti’s website at
www.sharevote.co.uk. In order to register your vote online, you
will need to enter the Voting ID, Task ID and Shareholder
Reference Number which are set out on the enclosed form of
proxy. The return of the form of proxy by post or registering your
vote online will not prevent you from attending the AGM and voting
in person, should you wish. Alternatively, shareholders who have
already registered with Equiniti’s online portfolio service,
Shareview, can appoint their proxy electronically by logging on to
their portfolio at www.shareview.co.uk using your usual user ID
and password. Once logged in simply click “View” on the “My
Investments” page, click on the link to vote then follow the
on-screen instructions. A proxy appointment made electronically
will not be valid if sent to any address other than those provided or
if received after 11.00 am (BST) on 3 May 2022.
As at 31 December 2021, there were 18,132 holders of ordinary shares of 160/21 pence each in the Company. An analysis of these
shareholdings as at 31 December 2021 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 2022
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 2022 results
Total number of holdings
Percentage of holders
Total number of shares Percentage issued capital
14,308
2,900
514
410
18,132
15,655
2,477
18,132
78.91%
15.99%
2.84%
2.26%
100.00%
86.34%
13.66%
100.00%
17,467,058
37,765,633
90,916,818
4,226,279,964
4,372,429,473
48,373,035
4,324,056,438
4,372,429,473
0.40%
0.86%
2.08%
96.66%
100.00%
1.11%
98.89%
100.00%
7 April 2022
8 April 2022
5 May 2022
20 May 2022
September 2022
October 2022
March 2023
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
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
Bank of China Limited, London
Branch
Industrial and Commercial Bank
of China Limited, London Branch
Barclays Bank plc
ING Bank N.V., London Branch
BNP Paribas Fortis SA/NV
Caixabank SA, UK 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
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 2021Additional informationMelrose Industries PLC Annual Report 2021
218
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Melrose Industries PLC Annual Report 2021 Buy
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Melrose
www.melroseplc.net
London Stock Exchange
Code: MRO
SEDOL: BZ1G432
LEI: 213800RGNXXZY2M7TR85
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
Stratton House
5 Stratton Street
London
W1J 8LA
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