Buy
Improve
Sell
Melrose
Melrose Industries PLC 2022
Annual Report
Melrose Industries PLC
For more information visit
melroseplc.net
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.
Cautionary statement
The Strategic Report and certain other sections of this Annual Report and financial statements contain
statements that are, or may be deemed to be “forward-looking statements”. These forward-looking
statements may be identified by the use of forward-looking terminology, including the terms “believes”,
“estimates”, “plans”, “projects”, “anticipates”, “potential”, “predicts”, “expects”, “intends”, “may”, “will”,
“can”, “likely” or “should” or, in each case, their negative or other variations or comparable terminology,
or by discussions of strategy, plans, objectives, goals, future events or intentions. Forward-looking
statements may and often do differ materially from actual results. Any forward-looking statements
reflect the Company’s current view with respect to future events and are subject to risks relating to
future events and other risks, uncertainties and assumptions relating to the business, results of
operations, financial position, liquidity, prospects, growth and strategies of the Group. Forward-looking
statements speak only as of the date they are made.
In light of these risks, uncertainties and assumptions, the events in the forward-looking statements
may not occur or the Company’s or the Group’s actual results, performance or achievements might
be materially different from the expected results, performance or achievements expressed or implied
by such forward-looking statements. Forward-looking statements contained in this Annual Report
speak only as at the date of this Annual Report. The Company expressly disclaims any obligation or
undertaking to update these forward-looking statements contained in this Annual Report to reflect any
change in their expectations or any change in events, conditions, or circumstances on which such
statements are based unless required to do so by applicable law, the Listing Rules or the Disclosure
Guidance and Transparency Rules of the FCA or Regulation (EU) 596/2014 as it forms part of the
domestic law of the United Kingdom by virtue of the European Union (Withdrawal) Act 2018.
Some financial and other numerical data in this Annual Report and financial statements has been
rounded and, as a result, the numerical figures shown as totals may vary slightly from the exact
arithmetic aggregation of the figures that precede them.
Strategic Report
2022 Highlights
Our strategy and business model
Our strong track record
Long-term value creation
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 review
Non-financial information statement
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92
Governance
Governance overview
Board of Directors
Directors’ report
Corporate Governance report
Audit Committee report
Nomination Committee report
Directors’ Remuneration report
Statement of Directors’ responsibilities
Financial statements
Independent auditor’s report to the
members of Melrose Industries PLC
Consolidated Income Statement
Consolidated Statement of Comprehensive Income
Consolidated Statement of Cash Flows
Consolidated Balance Sheet
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100
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116
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145
146
156
157
158
159
Consolidated Statement of Changes in Equity
Notes to the Financial Statements
Company Balance Sheet for Melrose Industries PLC
Company Statement of Changes in Equity
Notes to the Company Balance Sheet
Glossary
Shareholder information
Notice of Annual General Meeting
Company and shareholder information
160
161
214
215
216
227
235
242
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2022 Highlights
2022
Highlights
Adjusted(1) revenue
£8.2bn
Adjusted(1) operating profit
£480m
Statutory revenue
The Group enjoyed another
strong year in 2022, ahead of
expectations on sales, profit
and cash.”
Justin Dowley
Non-executive Chairman
£7.5bn
Ahead of
expectations
Statutory operating loss
Melrose is ahead of expectations for the year on sales,
profit and cash generation
£236m
Demerger on track
The timetable for the demerger of the Dowlais Group(2)
is on track, with completion expected on 20 April 2023,
subject to shareholder approval on 30 March 2023
Divisional performance summary results
(for the year ended 31 December 2022)
Adjusted(1)
revenue
£m
Adjusted(1)
operating
profit/(loss)
£m
Statutory
revenue
£m
Aerospace
Automotive
Powder Metallurgy
Other Industrial
Corporate
2,957
4,211
1,022
1
–
186
250
96
(14)
(38)
2,954
3,586
996
1
–
Statutory
operating
profit/(loss)
£m
(134)
11
36
(14)
(135)
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£539m cash
generated(5)
Cash generation exceeded expectations, with a
particularly strong second half performance, and
therefore Group net debt(1) of £1.14 billion was lower
than expected
(1) Described in the glossary to the financial statements on pages 227 to 234.
(2) Comprising the Automotive, Powder Metallurgy and Hydrogen group of
businesses.
(3) Like-for-like growth is calculated at constant currency against 2021 results.
(4) Pre central costs and at constant currency.
(5) Operating cash flow (pre-capex).
(6) After the date of approval of the Annual Report and financial statements,
the second interim dividend payment date was changed to 11 April 2023
in order to effect the Dividend Reinvestment Plan prior to completion of
the proposed Demerger.
126% higher EPS
The Group recorded an adjusted(1) diluted earnings per
share of 7.0 pence (2021: 3.1 pence), 126% higher than
last year. The statutory loss per share was 5.4 pence per
share (2021: 10.3 pence)
11%(3) Aerospace
sales increase
Aerospace is experiencing continued strong momentum
and market recovery with 11%(3) sales increase to
£2,957 million in 2022 and an increasingly positive outlook
into 2023 and beyond with another double digit revenue
growth year expected
51% Aerospace
profit increase
Aerospace’s adjusted(1) operating profit of £186 million
was up 51%(4) year-on-year from volume and business
improvement actions; extensive restructuring is underway
to deliver further gains. Statutory operating loss was
£134 million (2021: £196 million)
Doubling shareholders’
equity
over the Nortek acquisition, which concluded in 2022
c.£340m climate-related
R&D investment
c.£340 million invested in climate-related research and
development in our businesses over the past three years
50% dividend increase
A second interim dividend of 1.5 pence (50% increase on last
year’s final dividend) will be paid on 18 April 2023(6) just prior to the
proposed demerger. This will replace the final dividend which
would normally be approved at the 2023 AGM. The total full year
dividend for 2022 is 2.325 pence (33% increase on last year)
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Our strategy and business model
Our purpose:
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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Inputs
Value creation
Industry expertise
Core management group has operated in
the UK and the international manufacturing
arena for over two decades.
Long-term value creation
Pages 8 and 9
How has Melrose
created value?(1)
1. Margin growth
Good but underperforming
manufacturing businesses
whose potential is unrealised.
46%
2. Cash generation
A key focus is to make significant
improvement to cash flows in the
businesses we acquire.
27%
3. Multiple expansion
Multiple expansion is never assumed,
but has been achieved on all
previous deals as the businesses
have been improved.
26%
4. Sales
Margin growth and cash generation
prioritised and delivered ahead of
sales growth.
1%
(1) In respect of the McKechnie, Dynacast,
FKI, Elster and Nortek acquisitions
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.
Long-term value creation
Pages 8 and 9
Strong track record
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 having returned over £6.0 billion
of cash to shareholders.
Our strong track record
Pages 6 and 7
Operational efficiency
Our businesses benefit from substantial
investment and changed management
focus in order to drive growth. Melrose
increased the operating margins of
businesses sold by between five and
nine percentage points.
Long-term value creation
Pages 8 and 9
Effective governance
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.
Governance Report
Page 94
Follow-on investment during Melrose ownership for businesses sold
(1) In respect of the McKechnie, Dynacast, FKI, Elster, Nortek and GKN acquisitions
100%
Equity raised to
acquire businesses
36%
Further investment
in the businesses to
improve operations(1)
Reinvestment
Melrose was founded in 2003 to empower businesses to unlock their full potential
for the collective benefit of stakeholders, and to provide shareholders with a superior
return on their investment.
We have achieved this through the implementation of our “Buy, Improve, Sell” strategy.
Outputs
Shareholder investment and gain
(figures up to 31 December 2022):
Average return on equity
across all businesses sold.
2.5x
Cash return to shareholders
since establishment.
£6.0bn
Read more
Pages 6 and 7
Reinvestment
Spent on research and development
for Elster, Nortek and GKN acquisitions.
c.£1.4bn
Spent on climate-related research and
development in the last three years.
c.£340m
Sustainable business
improvement
The Melrose “Buy, Improve, Sell” model relies on building better
businesses that are positioned to prosper over the longer term.
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 compliance 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.
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.
The sustainability improvements that
we promote and encourage among our
businesses benefit from our long-term view
and are underpinned by our focus on the
highest standards of integrity, honesty,
and transparency. Guided by our four
overarching sustainability principles, we
buy good manufacturing businesses whose
performance can be improved, including
by contributing to the decarbonisation of
their sectors and social value creation in
their communities.
We drive long-term success and prosperity
within our businesses with unrelenting focus
on integrating our sustainability targets and
commitments into our businesses’ strategic
agendas, and providing the investment they
need to deliver significant financial returns and
sustainability improvements. We recognise
that 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 review on
pages 55 to 91:
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
Sustainability review
Pages 55 to 91
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Our strong track record
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 17%, with an increase in adjusted 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
Shareholder investment and gain
(figures up to 31 December 2022)
(figures up to 31 December 2022)
£6.0bn
2.5×
17%
Cash return to shareholders
since establishment
Average return on equity
across all businesses sold
Average annual return on equity
investment since the first acquisition(1)(2)
How Elster and Nortek
operating margin improved(3)
Track record for £1 invested in Melrose
Track record for £1 invested in Melrose
– as at 31 December 2022
– as at 31 December 2022
Elster
+6ppts
+2ppts
+1ppt
+9ppts
Investment in May 2005 with all dividends reinvested since
Investment in May 2005 with all dividends reinvested since
(Total shareholder return)(1)
(Total shareholder return)(1)
Nortek
+5ppts +1ppt +1ppt
+7ppts
£1.00
Original investment
in May 2005
Returns on capex and restructuring and other commercial actions.
Central cost savings.
Exit of low margin sales channels.
Total shareholder return (TSR)(1)(2)
1,443%
TSR
higher by
c.8×
187%
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Responsible approach to investing
Maintaining the substantial improvements made to all UK pension schemes
under ownership
Responsible stewardship (figures up to 31 December 2022)
£366m
In aggregate, the GKN UK pension schemes are now in surplus helped
by £366 million cash contributions made to GKN UK defined benefit
pension schemes from the Group so far during Melrose ownership,
reducing the funding deficit on acquisition of c.£1 billion, making them
now fully funded.
Schemes for current businesses
The Melrose funding commitment made on the acquisition of GKN
has been fulfilled ahead of time. Ongoing annual payments remain at
£30 million and there is no funding requirement from future disposal
proceeds or potential demerger activities.
Surplus as at 31 December 2022
£0.1 billion
Improved investment
strategy and other
Significantly increased contributions
in Melrose ownership
£0.7 billion
£0.4 billion
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.
Acquisition commitment
‘Up to £1 billion’
So far we have:
GKN 2012 schemes 1-4
£15.43
Gross return
on original
£1 investment
78%
107%
• Eliminated the GKN UK defined
benefit pension schemes’
net accounting deficit.
• Set 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.
• Achieved a successful buyout
of the GKN 2016 pension plan
in 2021.
• Rebalanced the GKN schemes
across the GKN divisions,
to avoid overburdening any
one business and to provide
stability and better security
for members.
Schemes for businesses sold
Whilst under Melrose ownership, we improve contributions and provide better security to our businesses’
pension schemes in every case improving their percentage funding in advance of departure from
the Group.
122%
109%
108%
99%
95%
87%
60%
58%
McKechnie
FKI UK
FKI
Bridon
Brush
Nortek
Promoting strong sustainability principles
Brush
Nortek
GKN 2012 schemes 1-4
GKN 2016
60%
62%
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FTSE 100
Melrose
(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.
2005
2022
Our Sustainability review (see pages 55 to 91) highlights the investment, support and encouragement we
provide to our businesses, and the Group sustainability targets and commitments we have set, to enable
and drive them to pursue relevant improvements in relation to environmental, social and governance
87%
(“ESG”) matters. We are publishing a standalone Sustainability Report alongside this Annual Report to
provide a full overview.
98%
78%
115%
111%
107%
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Long-term value creation
“Buy, Improve, Sell”
– A history of success
Melrose continues to build on its 19-year track record
of increasing and realising the value in its businesses
and returning the proceeds to its shareholders.
Adjusted(1) operating margin improvement
Company
McKechnie
Dynacast
FKI
Elster
Nortek
Entry
18%
11%
10%
13%
9%
Exit
24%
16%
15%
22%
16%
Improvement
>30%
>40%
>50%
>70%
>70%
+6ppts
+5ppts
+5ppts
+9ppts
+7ppts
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
£391m
Follow-on investment
Sold for
Investment in business
Equity rate of return
£0.8bn
Sold for
£1.4bn
Sold for
51%
Investment in business
30%
Equity rate of return
78%
Investment in business
29%
Equity rate of return
Cash generated during ownership
£934m
Cash generated during ownership
£1.8bn
Cash generated during ownership
£1.8bn
£1.2bn
£287m
£3.3bn
25%
33%
£3.3bn
Nortek
Bought for
Equity raised on acquisition
Follow-on investment(2)
Sold for
Investment in businesses
Equity rate of return
Cash generated during ownership
GKN
£2.2bn
Bought for
£1.6bn
Equity raised on acquisition
£0.35bn
Follow-on investment(2)
£3.1bn
Investment(2) as % of initial equity
Cash generated during ownership
22%
17%
£3.9bn
July 2007
Returned to shareholders
following the disposal of
McKechnie Aerospace
24%
£220m
August 2011
February 2014
Returned to shareholders
following the disposal of
Dynacast
£373m
Returned to shareholders
following the disposal of
various FKI businesses
during 2013
£595m
16%
2015
February 2016
Returned to shareholders
following the disposal of
various FKI businesses
during 2014
£200m
22%
Returned to shareholders
following the disposal
of Elster
£2.4bn
2021 – 2022
Returned to shareholders
following the disposal of
various Nortek businesses
during 2021 and 2022
£1.2bn
2005 —
Today
18%
11%
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McKechnie/Dynacast
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.
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July 2008
FKI
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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.
13%
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August 2012
Elster
15%
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9%
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8%
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August 2016
Nortek
April 2018
GKN
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.
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 Ergotron, being the last
of the businesses remaining from the Nortek Inc
acquisition. Melrose more than doubled
shareholders’ initial investment whilst transforming
the Nortek businesses. Refocusing them away from
unprofitable work, Melrose made the significant
investment necessary to implement operational best
practices, increase R&D, develop new products and
build stronger customer relationships. These actions
resulted in an almost doubling of adjusted operating
margins and ensured each business remained highly
cash generative, with over US$1 billion generated
during Melrose ownership. This strong support and
appropriate investment under Melrose ownership
unlocked the potential of all the Nortek businesses
and set them on the path for further success under
new owners for the next stage of their development.
Shareholder return on original equity
Shareholder return on original equity
Shareholder return on original equity
Shareholder return on original equity
3.0x
2.6x
2.3x
2.1x
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£6.8bn
£2.6bn
38%
£0.8bn
16%
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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 make up three distinct
divisions within Melrose: GKN Aerospace, GKN
Automotive and GKN Powder Metallurgy, in
addition to the early-stage growth business GKN
Hydrogen which forms our Other Industrial division.
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, including by way of
the proposed separation of the GKN Automotive,
GKN Powder Metallurgy and GKN Hydrogen
businesses by way of a demerger of shares of
their new holding company, Dowlais Group plc,
to Melrose shareholders (the “Demerger”).
See pages 14 to 27 to find out more about our
progress in improving the GKN businesses so far,
and our plans for 2023.
Further information about the Demerger can be found
in the Chairman’s statement on pages 10 to 11.
(1) Described in the glossary to the financial statements
on pages 227 to 234.
(2) Up to 31 December 2022.
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10
Chairman’s statement
Justin Dowley
Non-executive Chairman
2022 —
A year in review
I am pleased to report our 20th set of
annual results since flotation in 2003.
Calendar year 2022
The Group enjoyed another strong year in 2022, ahead of
expectations on sales, profit and cash. We achieved statutory revenue
for the Melrose Group of £7,537 million (2021: £6,650 million), with
an adjusted operating profit of £480 million (2021: £317 million) based
on a statutory operating loss of £236 million (2021: £493 million).
Within these results, the key businesses that are intended to be
demerged under Dowlais Group plc (see below for further details),
GKN Automotive and GKN Powder Metallurgy, enter into the Demerger
having collectively delivered good performances in the year, with
sales up 7% and adjusted operating profit up 24%. In the continuing
Melrose Group, GKN Aerospace has been executing its improvement
strategy together with increasing momentum in line with the market
recovery, resulting in sales up 11% and adjusted operating profit
up 51%.
(1) The measurement period for the Takeover Panel undertaking relating to expensed R&D
spend runs to the end of this year, but the Company is already ahead of requirements.
(2) After the date of approval of the Annual Report and financial statements, the second interim
dividend payment date was changed to 11 April 2023 in order to effect the Dividend
Reinvestment Plan prior to completion of the proposed Demerger.
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We saw continued strong cash generation from all businesses,
particularly in the second half, which funded all required restructuring
projects. As a result, net debt was lower than expectations at
£1.14 billion. This will enable each of Melrose and Dowlais to exit the
Demerger with prudent levels of leverage of approximately 1.7x and
1.5x 2022 EBITDA respectively. New standalone bank facilities for
Melrose and Dowlais, conditional on the Demerger, have been signed
with our supportive banking syndicate and will be used to repay
existing facilities in full on completion of the Demerger.
Melrose ran two successful tender exercises during the year.
Following the sale of Ergotron, we conducted a £500 million share
buyback programme, which completed on 1 August 2022 and
resulted in the buyback of 318 million ordinary shares, equating to
7.3% of shares in issue. Then in November 2022, we conducted a
tender in respect of the last remaining listed bonds inherited with the
GKN acquisition, with 57% of outstanding bonds being repurchased
at the tender price of 87 pence.
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.
Demerger proposal
Melrose previously announced its intention to separate its GKN
Automotive, GKN Powder Metallurgy and GKN Hydrogen businesses
by way of a demerger of shares of Dowlais Group plc to Melrose
shareholders. This will result in two independent and separately listed
companies on the London Stock Exchange, Dowlais and Melrose,
each with its own distinct strategy and acquisition currency.
To enable both Melrose and Dowlais to initiate at sensible levels,
we intend to conduct a 1:3 share consolidation the night before
completion of the Demerger, scheduled for 20 April 2023.
Shareholders will then receive one Dowlais share for every post-
consolidation Melrose share they hold. In addition, as a result of
splitting the Group through the Demerger, there are necessary
adjustments required to appropriately reflect the Demerger on the
Melrose long-term incentive arrangements, which seek to incentivise
the creation of shareholder value.
Preparations for the proposed Demerger have progressed well.
The Demerger, the Share Consolidation and the adjustments to
long-term incentives make up the Demerger Proposal that will be
presented to shareholders for approval at a general meeting to be
held at 10.00 am on 30 March 2023. We intend to post a circular
to shareholders on 3 March 2023, which will contain the full details of
the Demerger Proposal together with the notice of meeting. In parallel,
the board of Dowlais will issue a prospectus in respect of the Dowlais
shares proposed to be issued to Melrose shareholders.
Melrose commitments and delivery
Completion of the Demerger will also coincide with the expiry of our
undertakings and commitments in connection with the acquisition
of GKN plc in 2018, including those given to the Takeover Panel
and the Department for Business and Trade(1). We continue to
invest heavily in research and development, much of it in sustainable
technology, at well above the levels promised. We have also invested
in the UK’s industrial future through the Melrose Skills Fund, which is
focused on the next generation of engineers and the UK skills base,
whilst also solving the chronic underfunding in the GKN UK pension
schemes and securing the future for its members. The latest example
of this being a buyout of one of the UK pension schemes in GKN
Aerospace (see opposite).
We have not only turned around the performance of one of the UK’s
longest standing industrial businesses, we are now seeking admission
onto the London Stock Exchange for Dowlais which should make it
the UK’s premier listed automotive business. This is aligned with our
intentions at the outset, that with our help, these businesses could
unlock their potential for the benefit of all stakeholders. We are proud
to have more than delivered on the undertakings we gave.
We are delighted with these results, and everything is
on track for the Demerger. We consider a restructured
Aerospace business to be one of the best businesses
Melrose has ever owned. We are confident that
a combination of restructured and refocused high
class Engines and Structures businesses, and
overall aerospace market recovery, positions these
businesses for a significantly better than expected
performance in 2023 and beyond.”
Sale of Ergotron
We completed the sale of Ergotron during the year, marking the end of
our ownership of the businesses from the Nortek acquisition in 2016.
That acquisition was highly successful both in terms of doubling
the initial investment and transforming the businesses themselves,
with adjusted operating margins almost doubled and strong cash
generation. Together with the £0.8 billion of cash generated by the
Nortek businesses under our ownership, their disposals over the past
two years produced over £3.1 billion in cash proceeds. Part of these
proceeds have enabled Melrose to prepare for the Demerger as well
as benefit from a conservative capital structure in what has been a
turbulent period for the world economy.
Pensions
As stated above, Melrose is 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 ahead
of schedule, overcoming the large funding pension deficit we inherited
of almost £1 billion to bring the UK schemes into being materially fully
funded as at the end of last year, despite the challenges of COVID-19
and without detracting from our investment in the businesses. With
the Demerger Proposal, the schemes attached to GKN Automotive
will transfer to Dowlais, benefitting from their much improved position,
leaving the continuing Melrose Group with the pension schemes
attached to GKN Aerospace. As the next step in securing the future
for members, we have now agreed a buyout of approximately half the
remaining GKN Aerospace UK pension liabilities for £45 million. This
further reduces the pension exposure for the Melrose Group, and
gives certainty to the members of the scheme. This is a complete
transformation from the situation inherited in 2018 and is testimony to
the already strong Melrose track record in respect of pension schemes.
Dividend
Recognising the timetable for the proposed Demerger, the Board has
decided to make a second interim dividend for 2022 of 1.5 pence per
share instead of a final dividend (2021 final dividend: 1.0 pence), which
enables a quicker payment to be made to all shareholders ahead of
the intended date of Completion. Combined with the first 2022 interim
dividend of 0.825 pence per share paid on 20 October 2022, this
represents a total dividend for the year of 2.325 pence per share
(2021: 1.75 pence), a 33% increase. The second interim dividend
will be paid on 18 April 2023(2) to those shareholders on the register
at 10 March 2023.
Board matters
As announced in September last year, recognising the material
circumstances related to the Demerger, the Board proposed that
I extend my tenure as Non-executive Chairman for two years to 2025,
to provide further stability and leadership for the Company, subject
to annual re-elections at the Company’s AGM. This has been
supported in consultations with shareholders since.
Accordingly, I have agreed to the Board’s request and will be standing
for re-election at the Company’s Annual General Meeting, to be held
on 8 June 2023, with full details as set out in the enclosed notice of
meeting. There will be no further extensions proposed to my tenure.
Also, as previously announced, in addition to continuing their existing
Melrose roles and backed by the wider Melrose senior management
team pursuant to a transitional services agreement, Simon Peckham
and Geoffrey Martin will take up executive director roles with Dowlais
for a period post-completion of the Demerger to help drive further
value creation for shareholders. The Board has discussed and agreed
the arrangements, which it considers to be in the best interests of
all shareholders.
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.
Melrose sees sustainability as a key part of improving a business
during our ownership and environmental, social and governance
priorities are an important part of our “Buy, Improve, Sell” strategy.
We see no reason why these priorities cannot be achieved whilst
improving financial returns for our shareholders. There remain plenty
of opportunities for further progress, but it has been nonetheless
pleasing to see our performance being recognised by several of the
key benchmarking agencies, including Sustainalytics which now
ranks Melrose in the top ten of our industrial peers. This year we are
publishing our second standalone Sustainability Report alongside
this Annual Report.
The proposed Demerger is also part of that improvement strategy,
providing the separate platforms necessary for all businesses to
unlock further value. We are confident that Dowlais is now in the best
position to demonstrate the quality of its business for the benefit of
shareholders. Our focus within Melrose for the next 12 months is to
complete the transformation of GKN Aerospace and position it so as
to demonstrate the significant shareholder value that will be created
from this business in 2023 and beyond.
Justin Dowley
Non-executive Chairman
2 March 2023
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12
Chief Executive’s review
We are confident GKN Aerospace
will achieve its stated margin target
of 14%+, which would result in
approximately trebling adjusted
operating profit at pre-pandemic
volume levels.”
Simon Peckham
Chief Executive
With the Demerger reaching
finalisation, much of the focus
turns to the remaining business
in the continuing Melrose Group,
GKN Aerospace.”
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(1) As presented at the previous GKN Aerospace Capital Market Event on 8 June 2022.
Continuing Melrose Group
With the Demerger reaching finalisation, much of the focus turns
to the remaining business in the continuing Melrose Group, GKN
Aerospace. We are very excited about the prospects of this business,
which is centred around its Engines and Structures segments
(consisting of civil and defence). The Engines segment is an
outstanding business with a well-developed commercial strategy
that has secured enviable positions on key leading engines platforms
through risk and revenue sharing partnership (“RRSP”) arrangements.
These positions make GKN Aerospace a key partner in the success
of each platform and, when considering the long lifetime of an engine,
means that it continues to benefit from significant ongoing revenues
for decades after delivery. Based on customer projections, these
agreements are currently forecast to deliver cash flows of
approximately £18.5 billion(1) over the years to come.
In addition to the RRSPs that are entering into their most profitable
phase, Engines is focused on achieving further growth through other
key strategic initiatives, including additive manufacturing and targeted,
profitable aftermarket work that is aligned to its core capabilities and
strong structural demand for engine maintenance. For Structures,
a comprehensive overhaul of its commercial strategy is underway,
with a focus on “design to build” and differentiated products that
better reflect its technological expertise and delivers more appropriate
margins. Importantly, the business is already on a number of key
programmes, increasingly weighted towards single aisle aircraft in the
civil market, that are benefitting from a significant ramp up in demand
in response to the strong recovery in air travel. Both Engines and
Structures are also major contributors to the next generation of
aircraft, including advanced composites and alternative platforms
such as electric, hydrogen and eVTOL.
All of the above has contributed to an 11% growth in revenues for
GKN Aerospace in 2022 and a 51% increase in adjusted operating
profit. With continuing management actions to address its cost base,
we are confident GKN Aerospace will achieve its stated margin
target of 14%+, which would result in approximately trebling adjusted
operating profit at pre-pandemic volume levels. All restructuring
projects required to achieve this result are underway and are expected
to be substantially complete by the end of 2023. This includes
significant footprint rationalisation in Europe and North America and
headcount reductions, as well as enhanced customer quality, which
was improved by 23% in 2022, and a reduction in arrears. There has
been an ongoing focus on resolving the remaining inherited legacy
issues, including non-core or unprofitable contracts.
11% 51%
growth in revenue for
GKN Aerospace in 2022
increase in adjusted operating
profit for GKN Aerospace in 2022
A disciplined approach to cash generation has driven rigour and
visibility into each of the businesses, resulting in £1.8 billion of cash
flow (before capital expenditure) under Melrose ownership, and a
cash conversion rate before capital expenditure of 110%. This is a
significant improvement from the inherited position, more so given
the unique challenges of the global pandemic, and has enabled us
to continue to invest heavily in the businesses, with the businesses
self-funding their extensive restructuring programmes. Critically, this
improvement has been a sustainable change, agreed with its value
chain partners. Dowlais will further benefit from the conservative
level of leverage of approximately 1.5 times 2022 EBITDA intended at
Completion. It will also own the early growth business GKN Hydrogen,
which is now successfully driving its commercialisation strategy.
We believe Dowlais is now very well positioned to deliver value for
shareholders in 2023 and beyond.
Please see the Divisional reviews for further information on each
of the businesses.
Simon Peckham
Chief Executive
2 March 2023
Across the business, GKN Aerospace was very successful in
fully offsetting inflationary pressures, aided by good contractual
protections and customer provided material. Progress in managing
inventory has been disappointing this year partly due to the need to
mitigate supply chain challenges in the context of sector growth and
platform ramp ups. Improvement in this area is a key focus for the
coming year and beyond. Melrose is focused on ensuring that GKN
Aerospace delivers to our increased expectations over the next 12
months and that, having unlocked this value, this is properly reflected
in the value of the Group. We will be holding an Investor Event on 17
May 2023 in London to set out in detail the GKN Aerospace business
and its strategy.
Dowlais Businesses
The market-leading GKN Automotive and GKN Powder Metallurgy
businesses that are due to be demerged have been transformed
under Melrose ownership and are now well positioned to deliver
shareholder value under Dowlais, an independent, automotive
focused company. On acquisition in 2018, each business had well
established engineering foundations and were market share leaders
with long standing diverse customer relationships. GKN Automotive
is the number one global drive system supplier, serving 90% of
Global OEMs with content on approximately 50% of passenger
vehicles, from 47 manufacturing facilities in 17 countries across the
globe. GKN Powder Metallurgy is uniquely vertically integrated as
the global leader in sintered metal products and the number two
global supplier of powder metals, with 27 manufacturing sites in
nine countries across the globe. Despite this, they were each
underperforming their potential.
Under Melrose ownership these businesses have undergone a
successful and comprehensive transformation. There has been
an overhaul of their commercial strategies, which included resolving
an approximate £300 million exposure to low margin or loss-making
contracts. Despite some significant market volatility, we have also
driven order intake growth with well over £20 billion of revenue
booked under Melrose ownership and a book-to-bill ratio well
over 100% each year. Importantly, this growth has been profitable,
consistent with the stated operating margin targets. It has also aligned
with the global transition to electric vehicles (“EV”), with a growing
EV order book which accounted for over 40% of new orders in 2022.
Parallel to this commercial overhaul, we have reshaped the cost base
of the businesses, with a focus on improving purchasing performance
that has delivered material annual savings alongside robust and
increasingly regionalised supply chains. Fixed costs have been
reduced, with a productive utilisation of resources and reduced
headcount. We also redefined the industrial strategy, with a focus
on end to end manufacturing in single plants to better leverage their
unique vertical integration, an increase in digitalisation of production,
and footprint rationalisation. This has increased efficiency and
productivity that has been further boosted through an emphasis
on lean manufacturing technology.
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Divisional review(1)
Proportion of Melrose(3)
36%
Operational geographies
4
Global technology centres
12
Countries with GKN Aerospace
manufacturing locations
(1) All growth metrics are collated at a constant currency.
(2) Described in the glossary to the financial statements
on pages 227 to 234.
(3) Based on adjusted(2) 2022 revenue for continuing businesses.
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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
Adjusted(2) revenue
£3.0bn
Statutory revenue
£3.0bn
Adjusted(2) operating profit
£186m
Statutory operating loss
£134m
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 made great progress during 2022 in executing its
strategic improvement initiatives, refocusing its resources, capabilities
and operations on addressing its core markets with greater precision
and moving towards achieving its adjusted operating margin target of
14%+, as volume returns. The business enjoys established positions
and embedded technology on major civil and defence platforms,
including excellent single aisle exposure.
During the year, there was a strong recovery in air travel, leading to
an increase in like-for-like revenue by 11% compared to 2021. This
was achieved in the face of challenging macroeconomic conditions,
including global supply chain disruption and inflationary pressures.
Airframe OEM build rates and global flight hours continued to improve
over the year but nonetheless remain below pre-pandemic levels,
giving further confidence of continued recovery.
Divisional highlights
Strong market
positions
• Leading global tier 1 supplier on major civil
airframe and defence airframe platforms.
Continued
growth
Margins
expanding
Sustainable
technology
• Attractive engine portfolio with strong
long-term cash flows.
• Civil market recovery progressing well
and production ramp-up underway,
led by narrow body.
• Significant increase in defence budgets
across GKN Aerospace’s key markets.
• Strong and growing demand in attractive
aftermarket and repair work.
• Restructuring accelerated and
nearing completion.
• Adjusted(2) operating margin:
4.4%
6.3%
14%+
2021:
2022:
Target
• Continued, focused improvements
to achieve further efficiencies across
existing fleet.
• Enabling the next generation
of zero-emissions aircraft.
• Reducing Scope 1 manufacturing
emissions.
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Divisional review(1)
Continued
The Engines and Civil Airframes businesses continued to benefit
from the strong recovery in the narrow body market. Performance
within the Engines business was particularly strong, driven by
its outstanding risk and revenue sharing partnership model and
the strength of its position on strategically important engines
programmes which will deliver profit growth and cash generation
beyond our original expectations. The Defence business continued
to refocus its strategy toward positions on higher quality design-to-
build platforms, with significant work still to do. These efforts were
supplemented by ongoing strategic footprint rationalisation which
is progressing and set to be substantially completed during 2023.
Across the business there were many notable commercial wins
during 2022. Engines secured its position and technological
advantage in the early development stage of the next generation
of propulsion systems, looking to partner on the most advanced
technology developments such as the CFM RISE and Pratt &
Whitney’s next generation GTF programmes. The business is
also extending its partnership with the European Ariane space
programme to deliver additively-enhanced turbines and nozzles
for the next 14 rocket launchers, and is Tier 1 for the RM16 engine
that will power the next-generation of Gripen fighters. Engines also
launched an innovative new business based around its recent
acquisition of Permanova, which designs, develops and delivers
additively manufactured alternatives to conventional forgings and
castings. This will offer significant reduction in manufacturing
emissions on structural products for the benefit of both GKN
Aerospace and its global customer base, with a number of
agreements with key customers to introduce additive manufacturing
solutions for major engine structures. The business is on track to
commence deliveries in 2023 and will put sustainability at the heart
of Engines’ approach to manufacturing.
Revenue by business
1
2
3
1 Civil
2 Engines
3 Defence
37%
34%
29%
Revenue by region(2)
3
4
1
2
1 Europe (excl. UK)
2 North America
3 UK
4 Asia
44%
33%
19%
4%
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(1) All growth metrics are collated at a constant currency.
(2) According to manufacturing country of origin.
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In Civil, successes included securing a long term narrow body
commercial agreement with Airbus and a new award for major
structural components on all Gulfstream G800 and G400 business
jets, deploying GKN Aerospace’s industry-leading thermoplastic
technology. Further developments were realised in China, with the
construction of GKN Aerospace’s new aerostructures joint venture
facility with COMAC in Jingjiang progressing well. The Defence
business built on its strong relationship with Lockheed Martin,
securing further aerostructures work on the F-35 as well as signing a
five-year extension to deliver composite structures to Sikorsky for the
Black Hawk helicopter. These commercial successes will be delivered
from GKN Aerospace sites across the UK, Sweden, the Netherlands,
Mexico and the US in the years ahead.
Having commenced all restructuring projects to achieve its stated
operating margin target, by the end of 2023 GKN Aerospace will have
streamlined its operations reduced costs and increased productivity.
These actions have already contributed to an increase in adjusted
operating profit of 51% and a 2 percentage point improvement in
adjusted operating margins. GKN Aerospace successfully managed
its supply chain challenges during 2022, to secure customer deliveries
and offset cost inflation. As part of its Lean Operating Model, the
business continued to reduce its total suppliers, having cut its supplier
roster by approximately 20% over the last four years to secure higher
performance from a simpler, more responsive supply chain. This has
helped minimise disruption from the ongoing macroeconomic
headwinds impacting the industry.
In keeping with its core mission to be a leader in the transition to
sustainable aviation, GKN Aerospace continued sustainable aviation
technology development in 2022. The business supports some of
the industry’s leading programmes to enhance the aircraft of today,
and develop the longer term zero-emissions solutions of the future
including pioneering solutions in electric flight and hydrogen
propulsion development. This includes global partnerships with five
electric aircraft manufacturers, supporting a more sustainable future
while unlocking a potential major new commercial market.
A new Additive Manufacturing (“AM”) Centre of Excellence in Texas,
USA was announced, and the business unveiled its largest AM
aerostructure component ever produced. This investment targets
significant reductions in cost, energy usage and waste from
production, ultimately reducing the weight and emissions of the end
product. Looking further ahead, GKN Aerospace continued to explore
hydrogen combustion technology for longer-range aircraft through
its H2JET programme in Sweden, while delivering innovative solutions
for European Clean Sky2 programmes and passing several major
milestones in its UK-led H2GEAR project.
Market trends
GKN Aerospace
• Flight hours steadily improved throughout the year
and this recovery is set to continue in 2023. During
2022 the market saw further new orders for single-
aisle aircraft, with the expected single-aisle ramp-up
now well underway. With the progressive relief of
COVID-19 travel restrictions, China will remain on
course to become the largest aerospace market in
the 2030s.
• Defence-related spending was stable in 2022 but
is expected to increase in 2023 on the back of the
US Department of Defence budget. New military
programmes in the US, UK and EU are expected
to offer significant opportunities for GKN Aerospace
over the coming years.
• Tackling climate change continued as a priority for
policy makers, investors and the aerospace industry,
with renewed focus on how to reach net zero
emissions by 2050.
GKN Aerospace has responded to these trends, by:
• Finalising its ‘One Aerospace’ transformation
programme through a series of enterprise-level
projects which will reduce its global manufacturing
footprint from 38 to 33 sites. This will reduce its cost
base, simplify the business, build capability within
focused product centres of excellence, and contribute
towards an overall reduction in emissions intensity.
These changes will enable key sites to ensure they
are ready to meet growing customer demand in
the single-aisle market, as well as ensuring a more
balanced global footprint to support the growth
in Asia.
• Strengthening the Defence business by shifting its
balance of work away from build-to-print towards
more profitable “design-to-build” contracts. The
Defence team will seek to enhance its position on
key programmes, while continuing to develop leading
technologies to secure positions on next generation
platforms in Europe and the US.
• Investing for a more sustainable future, both in the
technology it offers customers and the way it operates
every day. GKN Aerospace has continued to push the
boundaries of more sustainable technology for current
aircraft, while pioneering zero-emissions solutions in
electric flight and hydrogen propulsion development.
18
Divisional review(1)
Continued
Outlook
The recovery in the aerospace sector is well underway. GKN
Aerospace’s improved performance is expected to be significantly
stronger than we anticipated for 2023 and beyond. Supported by pent
up demand in civil aviation and increases in defence budgets, double
digit revenue growth is expected again this year. GKN Aerospace
remains well-placed to support near and medium-term volume
ramp-ups, while continuing to execute on its longer term growth and
productivity initiatives. GKN Aerospace is fully committed to offsetting
inflationary pressures and managing supply chain issues. The coming
years are expected to deliver significant profit and cash generation
from its range of best in class Engines platforms.
Looking further ahead, GKN Aerospace’s technology investment
and expertise will enable it to become a leader in the sustainable
transformation of civil aviation, creating market opportunities and
profitable growth for years to come.
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(1) All growth metrics are collated at a constant currency.
Flight hours returning strongly
)
s
n
o
i
l
l
i
m
(
s
r
u
o
h
t
h
g
i
l
F
22-25
CAGR: 12%
250
200
150
100
50
0
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
Narrow Body
Wide Body
Source: Cirium
OEM deliveries ramping fast
s
e
i
r
e
v
i
l
e
D
M
E
O
22-25
CAGR: 17%
2500
2000
1500
1000
500
0
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
Narrow Body
Wide Body
Source: Teal
Defence spending increasing
)
n
o
i
l
l
i
b
$
(
d
n
e
p
s
t
n
e
m
e
r
u
c
o
r
p
S
U
22-27
CAGR: 4%
200
190
180
170
160
150
140
130
120
2019
2020
2021
2022
2023
2024
2025
2026
2027
Source: US DoD, estimates only published until 2027
• Strong ‘bounce back’
in passenger demand in
2021/22
• Global air traffic ramping
up further as China
reopens H1 2023
• Recovery to 2019 levels
now expected in late
2023/early 2024
• Airlines broke revenue
records in summer 2022,
despite struggling to meet
demand due to aircraft
and staff shortages
• Strong demand for new
aircraft from airlines as
travel ramps up on
ageing fleet
• Combination of COVID
and 737 MAX issues
resulted in >2,500 fewer
aircraft produced in last
four years
• OEMs struggling to meet
demand as supply chain
and labour issues pace
production ramp-up
• Backlogs range
between five and eight
years with narrow body
now ~11,000 aircraft
• Forecast sustained
growth in Western
government defence
spending
• Underpinned by
heightened geopolitical
uncertainty and near
peer threat
• Political focus on
increased NATO budget
after years of under
investment v GDP
• Strong demand for
established platforms
e.g. F-35 booking slots
beyond 2030, plus new
technologies
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20
Divisional review(1)
Continued
Proportion of Melrose(3)
51%
Operational geographies
6
Global technology centres
17
Countries – Global
production footprint
(1) All growth metrics are collated at a constant currency.
(2) Described in the glossary to the financial statements
on pages 227 to 234.
(3) Based on adjusted(2) 2022 revenue for continuing
businesses.
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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
Adjusted(2) revenue
£4.2bn
Statutory revenue
£3.6bn
Adjusted(2) operating profit
£250m
Statutory operating profit
£11m
GKN Automotive is a global leader in drive systems. It is
the trusted partner to over 90% of global automotive OEMs,
specialising in developing and manufacturing innovative
drive systems for both conventional and electric vehicles.
Headquartered in the UK with operations in 17 countries,
including 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 enjoyed another successful year, keeping pace
with global industry sales trends, with adjusted revenues increasing by
9% compared to 2021. For the sector, whilst there was some regional
variation in production growth, there remains significant opportunity as
production rates return to pre-pandemic volume levels. Operationally,
although the sector continued to experience challenges, the business
delivered a strong performance in 2022, particularly in the second half,
with adjusted operating profit increasing by 38% and fully offsetting
inflationary pressures through commercial pricing, procurement
productivity and disciplined operational efficiency measures.
2022 was an outstanding year for new business bookings. Lifetime
revenue of programme wins were over £5 billion, of which over 40%
related to pure electric vehicles or plug-in hybrid vehicles (“PHEV”).
This makes total bookings approximately £20 billion over the last four
years, at a book-to-bill ratio of over 100% each year, confirming that
GKN Automotive is both securing future top-line growth and more
than keeping pace with the accelerated market conversion to electric
vehicles, as a result of its continuous portfolio development, product
quality and production capabilities. Almost all business wins were
achieved at terms consistent with GKN Automotive’s margin target.
The business is very well-positioned to deliver its stated margin
expansion targets as the market continues its recovery to pre-
pandemic production volume levels.
Divisional highlights
Strong market
positions
• #1 in Driveline with ICE, hybrid and
electric vehicle technology leadership.
• Supplies 90% of OEMs,
50% of global vehicles.
Growth
underway
• Underlying demand strong but
constrained by supply chain.
• Electrification providing increased growth.
Margins
expanding
• Restructuring completed to achieve
adjusted(2) operating margin target.
• Adjusted(2) operating margin:
4.6%
5.9%
10%+
2021:
2022:
Target
Sustainable
technology
• Leading electric vehicle drive
system technology.
• Significant investment into a range
of eDrive capabilities.
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+38%
Adjusted(7) operating margin
increase in the year
£5 bn+
Lifetime revenue of
programme wins in 2022
40%+
Of programme wins in 2022
related to pure EVs or PHEVs
Customer mix(2)(3)
2%
3%
K
5%
J
7%
15%
L Others
A
5%
6%
I
H
G
6%
F
7%
E
7%
D
11%
13%
B
C
13%
Product mix(2)
4
3
1
2
1 Driveline(4)
2 AWD(5)
3 eDrive
4 Other
72%
25%
2%
1%
22
Divisional review(1)
Continued
In 2022, the business continued to expand its core sideshaft portfolio,
with further innovations to match the changing demands of new EV
platforms. The business completed 55 new programme launches
and continued to secure a significant share of new business wins on
electrified vehicle platforms, achieving the milestone of powering two
million EVs with its eDrive technology. With over 100 joint types and
sizes, 400 active patents, and a highly efficient global manufacturing
footprint, the division is the clear industry leader in drive system
technology for all propulsion systems.
GKN Automotive also continued to deliver impressive cash returns,
with further working capital improvements and strict cash
management controls resulting in pre-capital expenditure cash
generation of £336 million for the year (a conversion rate of 97%).
GKN Automotive’s eDrive systems and components portfolio is also
benefitting from light vehicle electrification and delivering consistent
revenue growth. It is able to offer a full 3-in-1 system whilst maintaining
the flexibility to deliver critical individual components building on
its AWD expertise. In 2022, GKN Automotive continued to drive
innovation of the portfolio, including through the design launch of
its next-generation inverter.
Outlook
Supply chain headwinds are expected to continue to ease in 2023,
with global light vehicle production forecast to increase by
approximately 3%. The business will look to drive further margin
expansion and will be focused on repeating its performance in fully
offsetting inflationary pressure. The business enters the Demerger
with significant momentum and is well-placed to benefit from both
market recovery and transition to electric vehicles.
Propulsion mix 2019(6)
Propulsion mix 2025(6)
4
3
1
2
4
3
1
2
1 ICE
2 Mild Hybrid
3 Full Hybrid
4 BEV
90%
5%
4%
1%
1 ICE
2 Mild Hybrid
3 Full Hybrid
4 BEV
45%
29%
11%
15%
(1) All growth metrics are collated at a constant currency.
(2) Includes joint ventures at GKN share.
(3) Customers anonymised.
(4) Includes Niche, Motorsports, and Aftermarket.
(5) All-Wheel Drive.
(6) Internal combustion engine (ICE), battery electric vehicle (BEV).
(7) Described in the glossary of the financial statements on pages 227 to 234.
(8) S&P global light vehicle production forecast, February 2021 and December 2022.
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Market trends
GKN Automotive
A combination of macroeconomic and
technological factors has resulted in
distinct shifts in the automotive industry
over the course of 2022, impacting both
OEMs and suppliers, which included:
• Unprecedented levels of production
volatility resulting in the streamlining
and regionalisation of supply chains
by many OEMs.
• A combination of COVID-19 related
industrial capacity reduction and ongoing
supply chain disruption leading to a
dramatic inflation of energy, labour, and
raw material prices during the second half
of 2021, that worsened throughout 2022
due to the geopolitical fallout from the
conflict in Ukraine.
• Whilst the four “CASE” (connected,
autonomous, shared mobility,
electrification) trends remain the most
relevant to the automotive industry,
pressure on OEM profitability, especially
related to the raw material costs of
electric vehicles, contributed to a focus
of resources towards the delivery and
profitability of electrified platforms.
Global electric vehicle penetration
projections continued to accelerate
during 2022, with BEV/PHEV share of
production in 2030 now forecast to be
62% (versus a projection of 35% only
two years prior)(8).
The business responded to these
challenges in a number of ways,
which included:
• Strengthening and regionalising
its supply chain, maintaining close
relationships with customers and
suppliers, and its flexible global
manufacturing footprint, making it well
positioned to accommodate these
shifts and minimise internal disruption.
• Through commercial negotiations,
procurement productivity and strict
operational efficiency measures, fully
offsetting inflationary pressures and
expanding operating profit margin
by 1.3 percentage points compared
to 2021.
• Further developing its portfolio towards
products for electrified platforms. GKN
Automotive has been supplying electric
vehicle drive systems for over 20 years
and continue to invest in both its core
sideshaft portfolio and its innovative
eDrive components and systems,
enabling them to continue to support
OEMs in progressing the industry’s
shift towards electrification.
Global share of 2030 light vehicle propulsion types (% share of total light vehicle production)
11%
9%
80%
+9%
(~6m vehicles)
36%
18%
46%
45%
17%
38%
2022 Actual
2021 view of 2030
2022 view of 2030
ICE & mild hybrid
Full Hybrid
BEV/FCEV
Source: S&P Global Mobility light vehicle production forecasts
Change in light vehicle production per region (2022 vs. 2023, million vehicles)
Light vehicle production (million vehicles)
2022
2023
Y-o-Y
change
~3%
81.8
84.6
~0%
26.3
26.4
~6%
16.6
15.6
~5%
14.3
15.1
~7%
11.1
11.9
~0%
9.3
9.4
~4%
~5%
2.8
2.9
2.3
2.4
Greater
China
Europe
North
America
Japan/
Korea
South
Asia
South
America
Middle East/
Africa
Global
Source: S&P Global Mobility 2022 light vehicle production forecast
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24
Divisional review(1)
Continued
Proportion of Melrose(3)
13%
Operational geographies
2
Global technology centres
9
Countries – Global
production footprint
(1) All growth metrics are collated at a constant currency.
(2) Described in the glossary to the financial statements
on pages 227 to 234.
(3) Based on adjusted(2) 2022 revenue for continuing
businesses.
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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
Adjusted(2) revenue
£1.0bn
Statutory revenue
£1.0bn
Adjusted(2) operating profit
£96m
Statutory operating profit
£36m
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 started strongly for GKN Powder Metallurgy with high activity
levels driven by global vehicle order books and backlogs. This was
impacted by the war in Ukraine, ongoing supply chain disruptions and
inflationary headwinds, which tempered results for the rest of the year.
Trading in the second half was softer, mainly in the US and largely due
to enforcing strict pricing discipline to offset inflationary pressures and
underperformance at one site, which is being addressed. This led to
a reduction in annual volumes, although sales were flat at constant
currency, aided by inflation recovery and material surcharges.
Commodity prices for essential production materials such as scrap
steel, copper, nickel and molybdenum increased significantly in the first
half of the year before dropping back towards the end of the year, albeit
remaining higher than pre-pandemic levels. These price variations were
substantially recovered by GKN Powder Metallurgy through surcharge
mechanisms with over 90% of its customers during the year. In addition,
2022 saw unprecedented increases in energy costs across Europe
driven by the ongoing situation in Ukraine.
Despite these challenges, adjusted operating profits for GKN Powder
Metallurgy increased by £5 million to £96 million, with adjusted
operating margins up slightly year-on-year at 9.4% despite the
reduction in volume, demonstrating the resilience of the business.
During the period, we undertook the closure of facilities in Canada
and Germany, with manufacturing transferred to alternative plants.
The business continued to invest in operational efficiency projects
to improve automation and productivity.
Divisional highlights
Strong market
positions
• #1 in supply of precision powder
metal parts.
Continued
growth
• #2 in global powder metal production.
• Innovative leader in the supply of additive
manufacturing parts.
• Conquest wins continue to deliver growth
to offset the impact of electrification.
• Electric vehicle systems bring opportunities
with some important business wins.
Margins
expanding
• Restructuring largely complete and
improving business mix.
• Adjusted(2) operating margin:
9.3%
9.4%
14%
2021:
2022:
Target
Sustainable
technology
• Low waste manufacturing process
using recycled materials.
• Supporting electric vehicle expansion
with innovative new components.
• Commercialising additive manufacturing
through use of new materials.
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Divisional review(1)
Continued
Revenue by end market
1
2
4
3
1 Automotive components 28%
28%
2 Transmission
24%
3 Engine
20%
4 Industrial
Revenue by segment
3
1
2
1 OneSinter
2 Powder
3 Additive
76%
22%
2%
Revenue by destination
4
1
3
In parallel, as part of its ambitious strategy to be a global leader in
the sector’s transition to electric vehicles, the business announced
that it would enter the market for permanent magnets. The process
to manufacture these magnets from rare earth materials builds on
what is already a core powder metallurgy process, and forms the
established foundations on which GKN Powder Metallurgy intends to
become a resilient and dependable supplier of permanent magnets
for the European and North American markets, supported by
establishing a pilot manufacturing plant, and the business is making
good progress with customer trials.
Outlook
The automotive market is expected to grow moderately during 2023
with a significant proportion of the growth coming from electric
vehicles. Growth is also expected in the industrial sector supporting
new market and product development in the Additive Manufacturing
segment. Inflationary pressures are expected to continue throughout
2023 and the business continues to take a proactive approach in
recovering increased costs through a mixture of price increases,
operational efficiencies and commodity or energy surcharges.
2
Market trends
1 North America
2 Europe
3 Asia
4 RoW
44%
32%
18%
6%
(1) All growth metrics are collated at
a constant currency.
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GKN Powder Metallurgy
GKN Powder Metallurgy maintains its strong share in the automotive sector and grew its industrial
market share primarily driven by additive manufacturing. 2022 saw the continued global industry shift
into electric vehicles, particularly in the core European market, driven by legislation and consumer
environmental concerns.
Key trends for GKN Powder Metallurgy are:
• Customers requiring increasing flexibility in terms of lead times and volumes.
• Commercial agility to offset volatile commodity prices achieved through surcharge mechanisms.
• European and North American volumes continuing to lag and not yet recovered back to
pre-pandemic levels.
The electrification of the global automotive industry is driving requirements for new materials and
products to support the transition. GKN Powder Metallurgy won a number of EV-related systems
during the year in both the Sinter and Additive businesses.
GKN Hydrogen is an early-stage growth business
focused on commercialising proprietary metal
hydride technology to store and secure hydrogen
in a safe, compact and green manner.
gknhydrogen.com
Other
Industrial
With the sale of Ergotron during the year, the Other Industrial
division consists solely of the GKN Hydrogen business, which
will transfer with Dowlais Group plc as part of the Demerger.
2022 was another important year in its development, with the
performance of pilot programmes demonstrating the viability
of its metal hydride technology.
The focus has been on commercialising the GKN Hydrogen storage
solution, including refining the value proposition for target markets,
such as standalone and backup power supply and energy
rebalancing. The modular systems provide safe, green energy to
these markets and a growing funnel of potential opportunities has
been developed, particularly in North America. In parallel, key
milestones have been achieved on the path to industrialisation,
with full series production expected to occur in 2024.
Outlook
The business remains on track to deliver increased revenue in
2023 with an expanding pipeline of customers, and it provides
an opportunity for Dowlais post-Demerger.
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Key performance indicators
Key performance indicators
Key performance indicators
Key performance indicators
Measuring our
performance
In order to support the Group’s strategy and to monitor
performance, the Board uses a number of financial and
non-financial key performance indicators (“KPIs”).
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
5.9%
5.9%
4.4%
Adjusted (1) operating profit as a percentage of
adjusted (1) revenue, for the continuing businesses
in existence during the year ended 31 December
2022.
To improve profitability of Group operations.
Adjusted (1) operating
profit margin(2)
‘22
‘21
‘20
1.2%
Net debt to adjusted (1)
EBITDA(3)
‘22
‘21
‘20
1.4x
1.3x
Interest cover
‘22
‘21
‘20
5.9x
5.1x
Final dividend per share(4)
‘22
‘21
‘20
1.0p
0.75p
Net debt(1) reduction /
(increase)
‘22
‘21
‘20
(20)%
13%
1.4x
4.1x
11.6x
11.6x
1.5p
1.5p
(20)%
67%
Net debt to adjusted (1) EBITDA(3) – net debt at
average exchange rates divided by adjusted(1)
EBITDA(3) 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) EBITDA(3) 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.
Amount declared as payable by way of dividends
in terms of pence per share.
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 10 to 11.
Reduction or increase 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) diluted earnings per
share(2)
‘22
‘21
‘20
3.1p
(1.4)p
7.0p
7.0p
Group adjusted (1) profit after tax of continuing
businesses, attributable to owners of the parent,
for the year ended 31 December 2022, divided by
the weighted average number of diluted ordinary
shares in issue.
Adjusted(1) free cash
generation
£128m
Total cash generated from trading after all costs,
excluding restructuring and one-off payments to
defined benefit pension schemes.
To create consistent and long-term value
for shareholders.
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.
Percentage of adjusted (1) EBITDA(3) conversion
to cash, as shown in the glossary to the financial
statements, for continuing businesses in existence
during the year ended 31 December 2022
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 for the continuing
businesses in existence during the year ended
31 December 2022.
To improve profitability of Group operations.
‘22
‘21
‘20
£128m
£323m
Adjusted (1) profit conversion
(pre-capex) to cash percentage(2)
‘22
‘21
‘20
75%
113%
£628m
75%
204%
Adjusted (1) operating
profit(2)
‘22
‘21
‘20
£89m
£480m
£480m
£317m
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(1) Described in the glossary to the financial statements on pages 227 to 234.
(2) Data has been restated for discontinued operations in 2020 and 2021.
(3) Operating profit before depreciation of property, plant and equipment and amortisation of computer software and development costs.
(4) A second interim dividend for 2022 of 1.5 pence per share will be paid on 18 April 2023 in place of the final dividend, which will not be made(5).
(5) After the date of approval of the Annual Report and financial statements, the second interim dividend payment date was changed to 11 April 2023 in order to effect the Dividend Reinvestment Plan
prior to completion of the proposed Demerger.
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 and
presented to the Board on a quarterly basis
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, and supplemented
with qualitative analysis of any key incidents
or drivers behind each business’s
performance, and any material improvement
programmes that are taking place. 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 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
The Group’s current businesses measure
three key health and safety KPIs:
Major Accident
Frequency Rate
‘22
‘21
‘20
0.06
0.04
0.06
0.19
Records the average number of lost time accidents
that have resulted in more than three days off work
(defined as ‘major’ accidents), per 200,000 hours
worked.
Lost Time Accident
Frequency Rate
‘22
‘21
‘20
0.07
0.06
0.07
0.30
Records the number of lost time accidents,
both major and minor, per 200,000 hours worked.
Accident Severity Rate
‘22
‘21
‘20
16.04
20.39
16.04
30.17
Records the average number of days an employee
takes off work following an accident at work.
Since the tragic fatality that occurred in 2021,
GKN Aerospace continued to receive
particular focus from a health and safety
perspective from the Melrose senior
management team and the Board during
2022. A comprehensive Health and Safety
programme has been rolled out across all
GKN Aerospace sites, led by a refreshed
multi-layered, business-wide awareness and
training campaign around GKN Aerospace’s
Golden Safety Rules. The Golden Safety
Rules cover the key red-line standards that all
employees must be aware of and abide by,
and are bolstered by appropriate disciplinary
rules and consequences to ensure best
practices are robustly implemented.
The GKN Aerospace health and safety
function has been upskilled and reorganised
along business lines, and continues to elevate
health and safety awareness and accelerate
improvement actions across the business.
This is being approached both (a) from the
top-down including via an active rolling
programme of in-person executive-led site
inspections and integration of health and
safety in executive management discussions
and enterprise projects, and (b) from
the bottom-up with a focus on improving
shop floor behaviours, standards, and local
management awareness and accountability
for health and safety risks.
The Group’s Major Accident Frequency
rate and Lost Time Accident Frequency rate
has increased year-on-year for the GKN
businesses. Specific lost time incidents at
GKN Automotive and GKN Powder Metallurgy
drove increases compared to 2021, which
has led to significantly increased focus from
each of the businesses in order to drive
physical safety improvements on the shop
floor and to redouble communications around
safety measures and risk assessments.
However, the Group’s Accident Severity
rate has decreased considerably compared
to 2021.
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.
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 Greenhouse
gas 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
Melrose businesses during 2022 can be
found within the Sustainability review on
pages 55 to 91. The Group is required to
disclose its Greenhouse gas emissions and
certain energy use data for the year ended
31 December 2022. Such data can be found
within the Sustainability review on page 65.
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 review on pages 55
to 91.
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30
Finance Director’s review
Geoffrey Martin
Group Finance Director
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The Melrose Group now consists of four continuing businesses,
following the disposal of the Ergotron business on 6 July 2022.
Ergotron has been classified as a discontinued operation in these
Consolidated Financial Statements and the comparative results have
been restated to reflect the disposal.
The intention is for three of the remaining businesses: GKN Automotive,
GKN Powder Metallurgy and the early growth business GKN Hydrogen
Technology, to be demerged in April 2023 and listed as a separate
public company, Dowlais Group plc (“Dowlais”). Following the
proposed demerger this will leave one operating business, Aerospace,
remaining within the Melrose Group.
Melrose Group results – continuing operations
Statutory results:
The statutory IFRS results for continuing operations are shown on the
face of the Income Statement and show revenue of £7,537 million (2021:
£6,650 million), an operating loss of £236 million (2021: £493 million)
and a loss before tax of £307 million (2021: £660 million). The diluted
earnings per share (“EPS”), calculated using the weighted average
number of shares in issue during the year of 4,218 million (2021:
4,695 million), were a loss of 5.4 pence (2021: loss of 10.3 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 control, namely 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 2022 show
revenue of £8,191 million (2021: £7,263 million), an operating profit of
£480 million (2021: £317 million) and a profit before tax of £384 million
(2021: £194 million). Adjusted diluted EPS, calculated using the
weighted average number of shares in issue in the year of 4,218 million
(2021: 4,695 million), were 7.0 pence (2021: 3.1 pence).
Tables summarising the statutory results and adjusted results by
reportable segment are shown later in this review.
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
2022
£m
2021
£m
7,537
6,650
654
613
8,191
7,263
Adjusting item:
Adjusted revenue includes the Group’s share of 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 2022, the Group generated
£654 million of revenue from EAIs (2021: £613 million), which is not
included in statutory revenue but is shown within adjusted revenue
so as not to distort the adjusted operating margins reported in the
businesses when the Group’s share of 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
C urrency movements in derivatives and movements in
associated financial assets and liabilities
Write down of assets
Net release of fair value items
Other
Adjustments to statutory operating loss
Adjusted operating profit
2022
£m
(236)
2021
£m
(493)
458
144
87
20
(26)
33
716
480
436
269
114
–
(49)
40
810
317
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 £458 million (2021: £436 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
£144 million (2021: £269 million). These are shown as adjusting
items due to their size and non-trading nature and these included:
– A charge of £90 million (2021: £104 million) within the Aerospace
business and the central cost centre, both of which will remain
within the Melrose Group following the proposed demerger. These
costs primarily related to the continuation of significant restructuring
projects, necessary for the Aerospace business to achieve its
full potential target operating margins. These included further
progress on European footprint consolidations in both the Civil and
Engines businesses, which commenced in 2021 and are expected
to materially conclude in 2023. In addition, further progress
has been made in North America on multi-site restructuring
programmes across all three Aerospace sub-segments.
– A charge of £54 million (2021: £165 million) relating to Dowlais.
These costs related to multiple restructuring projects which
concluded during the year, including two significant Automotive
footprint consolidation actions in Europe, which commenced
in 2021. In addition, restructuring costs were incurred in
Automotive in North America, continuing the movement of
production from high to low cost countries, along with the
costs associated with the closure of a factory in Canada in
the Powder Metallurgy business.
• Movements in the fair value of derivative financial instruments
(primarily forward foreign currency exchange contracts), where
hedge accounting is not applied, 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
£87 million (2021: £114 million) in the year and is shown as
an adjusting item because of its volatility and size.
• A write down of assets of £20 million (2021: £nil), recognised
in the first half, as a result of exiting any direct trading links with
Russian operations as a consequence of the conflict in Ukraine.
The asset write downs are predominantly within the Automotive
division and are shown as an adjusting item because of their
non-trading nature and size.
• The net release of fair value items in the year of £26 million (2021:
£49 million) where items have been resolved for more favourable
amounts than first anticipated at acquisition. During the year this
included a release of £11 million (2021: £22 million) in respect of
loss-making contract provisions, 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 from items
booked on acquisition.
• Other adjusting items of £33 million (2021: £40 million), which
included items consistent with prior years, the largest of which
is an adjustment of £29 million (2021: £28 million) to gross up
the Group’s share of post-tax profits of EAIs to be consistent with
the adjusted operating profits of subsidiaries within the Group.
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32
Finance Director’s review
Continued
Statutory and adjusted results by reporting segment
The following tables show continuing revenue and operating (loss)/profit split by reporting segment. Adjusting items are described earlier in
this review:
Statutory revenue
Reconciling item:
Revenue from EAIs
Adjusted revenue
Aerospace
£m
Automotive
£m
Powder Metallurgy
£m
Other Industrial
£m
2,954
3
2,957
3,586
625
4,211
996
26
1,022
1
–
1
Aerospace
£m
Automotive
£m
Powder Metallurgy
£m
Other Industrial
£m
Corporate
£m
Statutory operating (loss)/profit
Reconciling item:
Adjusting items
Adjusted operating profit/(loss)
(134)
320
186
11
239
250
36
60
96
(14)
–
(14)
(135)
97
(38)
Total
£m
7,537
654
8,191
Total
£m
(236)
716
480
The adjusted operating loss in the central cost centre of £38 million (2021: £51 million) included £35 million (2021: £34 million) of operating costs
and £3 million (2021: £17 million) of costs relating to divisional cash-based long-term incentive plans.
Had the Demerger already occurred, the adjusted results of the continuing businesses for the year ended 31 December 2022, shown above,
would be split between the remaining Melrose Group and Dowlais as follows:
Adjusted results
Revenue
Operating profit/(loss)
Operating margin
Total Melrose/
Aerospace pre-central costs
£m
Automotive
£m
Powder Metallurgy
£m
Hydrogen
£m
pre-central costs
£m
Total Dowlais
2,957
186
6.3%
4,211
250
5.9%
1,022
96
9.4%
1
(14)
n/a
5,234
332
6.3%
The performances of each of the reporting segments are discussed in the Chief Executive’s Review.
Finance costs and income – continuing operations
Statutory results:
Total net finance costs shown in the statutory IFRS results in the year
ended 31 December 2022 were £71 million (2021: £167 million), of
which £98 million (2021: £125 million) are shown within the adjusted
results, with a credit of £27 million (2021: charge of £42 million) being
treated as adjusting items.
Adjusted results:
Net interest on external bank loans, bonds, overdrafts and cash
balances was £72 million (2021: £91 million).
Net finance costs in adjusted results also included: a £10 million (2021:
£10 million) amortisation charge relating to the arrangement costs
of raising the Group’s current bank facility; an interest charge on net
pension liabilities of £5 million (2021: £8 million); a charge on lease
liabilities of £9 million (2021: £14 million); and a charge for the unwind
of discounting on long-term provisions of £2 million (2021: £2 million).
In addition, a credit of £2 million (2021: £2 million), 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 £96 million
(2021: £123 million).
Adjusting items:
Adjusting items, within finance costs and income, include a £24 million
gain (2021: £nil) made on the settlement of a portion of the 2032 bond,
acquired with GKN, and a credit of £3 million (2021: £3 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 £45 million, 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.
Discontinued operations
In the year ended 31 December 2022, discontinued operations
include the result of the Ergotron business, previously shown within
the Other Industrial division, up until 6 July 2022, when it was
disposed to funds managed by The Sterling Group for total proceeds
of £519 million. Discontinued operations in the prior year include the
results of Ergotron, Nortek Air Management, Nortek Control and
Brush for their period of Melrose ownership.
Discontinued businesses generated £132 million of revenue and
incurred a statutory operating loss of £59 million for the period of the
year under ownership (2021: revenue of £1,117 million and statutory
operating profit of £47 million).
Share buyback and number of shares in issue
The Group commenced a share buyback programme on 9 June
2022, and made market purchases of existing ordinary shares in issue
in the capital of the Company. In line with the Group’s strategy, the
purpose of the programme was to distribute £500 million of capital to
shareholders in the most suitable way following the agreed disposal
of Ergotron.
The buyback programme completed on 1 August 2022, with
318 million ordinary shares purchased at an average price per share
of 157 pence. These ordinary shares were cancelled and the number
of ordinary shares in issue reduced by 7.3%, from 4,372 million to
4,054 million. The weighted average number of shares used for
earnings per share in calculations in the year ended 31 December
2022 was 4,218 million.
Tax – continuing operations
The statutory results show a tax credit of £84 million (2021: £180 million)
which arises on a statutory loss before tax on continuing operations
of £307 million (2021: £660 million), a statutory tax rate of 27%
(2021: 27%).
The effective rate on the adjusted profit before tax for the year ended
31 December 2022 was 22% (2021: 22%).
The statutory tax rate is higher than the adjusted tax rate because
the intangible asset amortisation and certain other adjusting items
generate adjusting tax credits at rates higher than 22%.
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The Group has £856 million (31 December 2021: £792 million) of
deferred tax assets on tax losses, retirement benefit obligations and
other temporary differences. These are offset by deferred tax liabilities
on intangible assets of £923 million (31 December 2021: £993 million)
and £179 million (31 December 2021: £163 million) of other deferred
tax liabilities. Where they arise in the same territory, deferred tax
assets and liabilities must be offset, resulting in deferred tax assets
of £373 million (31 December 2021: £250 million) and deferred tax
liabilities of £619 million (31 December 2021: £614 million) being shown
on the Balance Sheet at 31 December 2022. 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 2022 was
£80 million (2021: £57 million), 21% (2021: 29%) of adjusted profit
before tax.
Cash generation and management
Robust cash management initiatives continue to be run in each of the
businesses within the Group.
Adjusted free cash flow for the Group, in the year ended 31 December
2022, was an inflow of £128 million (2021: £323 million), before
restructuring spend of £136 million (2021: £193 million in continuing
operations and £5 million in discontinued operations), resulting in a
free cash outflow of £8 million (2021: inflow of £125 million).
Both the remaining Melrose Group and Dowlais fully funded all
operating costs in the year, including all capital expenditure and
restructuring spend.
An analysis of the adjusted free cash flow is shown in the table below:
The working capital performance of the Group was, as expected,
stronger in the second half of the year as supply constraints partially
unwound, resulting in a £17 million inflow in the second half despite
stronger revenue growth seen in the businesses, compared to an
outflow of £195 million in the first half.
Working capital movements in Aerospace of £147 million included
a £106 million increase in the unbilled work done contract asset
debtor, as a result of the continued growth of certain engine
programmes. In addition, £41 million was invested in working capital
in the year in the remaining Melrose Group, and £31 million in Dowlais,
to fund the year-on-year revenue growth in the businesses.
Net capital expenditure in the Melrose Group in the year ended
31 December 2022 was £294 million (2021: £223 million), split
£72 million in Aerospace and £222 million in Dowlais. This capital
expenditure represented 0.6x depreciation of owned assets in
remaining Melrose and 0.9x in Dowlais. These amounts exclude
proceeds on disposal of three disused properties of £62 million,
which are shown in the net other category in the table above.
Restructuring spend within the businesses was £136 million (2021:
£193 million), split £53 million in Aerospace and £83 million in Dowlais.
In the continuing Group, net interest paid in the year was £95 million
(2021: £140 million), net tax payments were £80 million (2021:
£57 million) and ongoing contributions to defined benefit pension
schemes were £59 million (2021: £54 million). These included
£30 million (2021: £30 million) paid into the GKN UK pension plans.
The movement in net debt (as defined in the glossary to the
Consolidated Financial Statements) is summarised as follows:
Melrose(1)
£m
Dowlais(1)
£m
2022
£m
2021
£m
Opening net debt
Adverse foreign exchange movement
£m
(950)
(76)
Continuing operations
(unless stated otherwise)
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
Defined benefit pension contributions
ongoing
Restructuring
Dividend income from equity
accounted investments
Net other
Cash generated before interest
and tax
Net interest and net tax paid
Cash flows from operations
discontinued in the year(2)
Free cash flow
Adjusted free cash flow
148
–
145
(29)
(24)
(147)
93
(72)
(23)
(53)
–
58
3
332
(78)
261
(22)
(16)
(31)
446
(222)
(36)
(83)
59
(15)
149
480
(78)
406
(51)
(40)
(178)
539
(294)
(59)
(136)
59
43
152
(175)
15
(8)
128
317
(66)
421
(53)
(48)
75
646
(223)
(54)
(193)
52
3
231
(197)
91
125
323
(1) Melrose includes Aerospace and the continuing central cost centre; Dowlais includes the
Automotive, Powder Metallurgy and Hydrogen Technology businesses.
(2) Includes £nil (2021: £5 million) of restructuring spend.
Opening net debt at 31 December 2022 closing exchange rates
(1,026)
Free cash flow
Net cash flow from acquisition and disposal related activities
Buy back of own shares
Dividends paid to shareholders
Other non-cash movements
(8)
461
(504)
(77)
15
Net debt at 31 December 2022 at closing exchange rates
(1,139)
Net debt at 31 December 2022 at twelve month average
exchange rates
(1,112)
Group net debt at 31 December 2022, translated at closing exchange
rates (being US$1.21 and €1.13), was £1,139 million (31 December
2021: £950 million, translated at closing exchange rates at
31 December 2021).
The movement in net debt during the year included a free cash
outflow of £8 million, dividends paid to shareholders of £77 million,
£504 million spent buying back shares in the market, a net cash inflow
on acquisition and disposal related activities, predominantly being the
disposal of Ergotron, of £461 million and other non-cash movements
mostly relating to a gain on the part settlement of the £300 million
capital market bond acquired with GKN, discussed later in this review.
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 £1,112 million.
The Group net debt leverage on this basis at 31 December 2022 was
1.4x EBITDA (31 December 2021: 1.3x EBITDA).
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34
Finance Director’s review
Continued
Assets and liabilities and impairment review
The summarised Melrose Group assets and liabilities are shown below:
Spend against provisions in the year, of £168 million, included
£121 million of cash spent on restructuring activities.
The net charge to operating profit in the Income Statement of
£107 million primarily includes net costs associated with restructuring
actions of £119 million, discussed within the adjusting items section of
this review, net of releases, mainly relating to fair value items settled for
an amount more favourable than first anticipated.
The utilisation of the loss-making contract provision was £40 million
in the year (31 December 2021: £48 million). Furthermore, £11 million,
approximately 9%, 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
2022 the loss-making contract provision was £108 million,
approximately 80% lower than when GKN was acquired in 2018.
Movement in provisions in the year also included foreign exchange
movements of £36 million, £5 million relating to the Ergotron business
transferred to held for sale at 30 June 2022 and discounting on
certain provisions of £2 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 2022 by
independent actuaries to reflect the latest key assumptions and are
summarised as follows:
Melrose(1)
GKN UK Group pension schemes
(Numbers 1 & 4)
Other Group pension schemes
Total Melrose(1) pension schemes
Dowlais(1)
GKN UK Group pension schemes
(Numbers 2 & 3)
Other Group pension schemes
Total Dowlais(1) pension schemes
Total Group pension schemes
Assets
£m
Liabilities
£m
Accounting
surplus/
(deficit)
£m
1,113
49
1,162
666
113
779
1,941
(1,100)
(89)
(1,189)
(649)
(591)
(1,240)
(2,429)
13
(40)
(27)
17
(478)
(461)
(488)
(1) Melrose includes Aerospace and the continuing central cost centre; Dowlais includes the
Automotive, Powder Metallurgy and Hydrogen Technology businesses.
At 31 December 2022, the two Aerospace UK pension plans
had aggregate gross assets of £1,113 million (31 December 2021:
£1,734 million), gross liabilities of £1,100 million (31 December 2021:
£1,627 million) and an aggregate net surplus of £13 million
(31 December 2021: £107 million).
At 31 December 2022, the two Automotive UK pension plans
had aggregate gross assets of £666 million (31 December 2021:
£1,020 million), gross liabilities of £649 million (31 December 2021:
£948 million) and an aggregate net surplus of £17 million
(31 December 2021: £72 million).
These UK pension plans are closed to new members and to accrual
of future benefits for current members.
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
2022
£m
2021
£m
6,508
7,043
2,937
2,875
435
343
(488)
(611)
(358)
(366)
(93)
429
159
(461)
(701)
(495)
(376)
17
8,307
8,490
The net assets and liabilities shown in the table above will be split
£4,247 million in respect of the remaining Melrose Group business and
£4,060 million held within the businesses intended to be demerged
into Dowlais. The recoverable amounts of these net assets have been
tested in the Group’s goodwill impairment review.
The Group’s goodwill has 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.
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 groups 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 in its businesses as at 31 December 2022.
The assets and liabilities shown above are funded by:
Net debt
Equity
Total
2022
£m
(1,139)
(7,168)
2021
£m
(950)
(7,540)
(8,307)
(8,490)
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.
Provisions
Total provisions at 31 December 2022 were £611 million
(31 December 2021: £701 million), which included: £200 million for
warranty (31 December 2021: £222 million); £108 million for loss-
making contracts (31 December 2021: £167 million); £119 million for
environmental and litigation issues (31 December 2021: £135 million);
£83 million for restructuring (31 December 2021: £81 million); and
other provisions of £101 million (31 December 2021: £96 million).
The following table details the movement in provisions in the year:
At 1 January 2022
Spend against provisions
Charge to operating profit(1)
Release to operating profit(2)
Utilisation of loss-making contract provision
Disposal of businesses
Other (including foreign exchange)
At 31 December 2022
Total
£m
701
(168)
206
(99)
(40)
(18)
29
611
(1) Includes £130 million of adjusting items and £76 million recognised in adjusted operating profit.
(2) Includes £30 million of adjusting items and £69 million recognised in adjusted operating profit.
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The largest deficits within the other pension schemes in the Group
are held within the Automotive business and 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 2022, these plans had a net deficit of
£414 million (31 December 2021: £530 million).
At 31 December 2022, the term loan was fully drawn and there were
drawings of US$130 million, £152 million and €410 million on the
multi-currency revolving credit facility. Applying the exchange rates
at 31 December 2022, the headroom on the bank facilities equated
to £2.6 billion. There are also a number of uncommitted overdraft,
guarantee and borrowing facilities made available to the Group.
The Group’s funding commitment to the GKN UK Group Pension
Schemes, made when GKN was acquired in 2018, was delivered
ahead of schedule. The ongoing contributions to these defined benefit
pension schemes is £30 million per annum, split equally between the
Aerospace and Automotive businesses, 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 2022 were £59 million and are expected to be
£51 million in 2023, split £33 million in Dowlais and £18 million in the
Aerospace business.
Subsequent to the year end, on 9 February 2023, the Trustees of one
of the two UK pension plans in the Aerospace division, GKN Group
Pension Scheme Number 4, signed a contract with a pension annuity
provider to fully secure benefits for all members of the pension plan
for a cash settlement by the Company of £45 million. This will result
in a full buy-out of the plan. At 31 December 2022, this plan had total
liabilities of £433 million (31 December 2021: £628 million) and an
accounting surplus of £52 million (31 December 2021: £87 million).
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 2022 was
£1,139 million (31 December 2021: £950 million).
The Group’s committed bank facilities include a multi-currency
denominated term loan and a multi-currency denominated revolving
credit facility that mature in June 2024:
Facility:
Term loan:
USD
GBP
Revolving credit facility:
USD
GBP
Euro
Bank facility headroom
Net cash in hand
Total headroom
Local currency
£m
Size
Drawn Headroom Headroom
788
30
2,000
1,100
500
788
30
130
152
410
–
–
–
–
1,870
1,546
948
90
948
80
2,574
292
2,866
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 £292 million at
31 December 2022 (31 December 2021: £468 million).
The Group also holds capital market borrowings. In September 2022,
a £450 million bond was repaid and associated cross-currency swaps
with aggregate notional values of US$373 million and €284 million
were settled. Subsequent to this, in November 2022 a tender offer
was launched on the remaining £300 million bond, due to mature in
May 2032, that resulted in £170 million of the outstanding value being
bought back and cancelled for a total cash cost of £148 million
(excluding accrued interest). This represented a gain of £22 million
and, together with a £2 million release of the fair value adjustment on
the bond recognised on the acquisition of GKN in April 2018, resulted
in a total gain of £24 million. This has been reported as an adjusting
item within finance income in the Income Statement, discussed earlier
in this review.
As at 31 December 2022 the capital market borrowings held by
the Group consisted of £130 million outstanding of the original
£300 million bond due to mature in May 2032, with a current coupon
rate of 4.625%.
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 3.75x at
31 December 2022, reducing to 3.5x at 30 June 2023 and onwards.
At 31 December 2022, the Group net debt leverage was 1.4x,
affording comfortable headroom.
The interest cover test is set at 4.0x for the remaining term of the bank
facility. At 31 December 2022, the Group interest cover was 11.6x,
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 2022, these amounted to £325 million (31 December
2021: £310 million) and as a result there was a net cash increase in the
year of £15 million (2021: net cash reduction of £4 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 2022, suppliers had drawn £200 million
(31 December 2021: £102 million) on these facilities. 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 £94 million
(31 December 2021: approximately £60 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.
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36
Finance Director’s review
Continued
Finance cost risk management
The long-term policy of the Board is to fix up to 70% of the interest
rate exposure of the Group to align with the maturity of its debt
facilities. Following the announcement of the intended demerger,
negotiations with lender banks commenced for the two new facilities
that would be required post demerger: one for the remaining Melrose
Group and one for Dowlais.
The bank margin on the current bank facility depends on the Group
leverage. Following the extension of the bank facility in December
2021, the bank margins were set as follows:
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:
Facility:
Term Loan
Revolving Credit Facility
31 Dec 2022
31 Dec 2021
Margin
1.20%
1.20%
Range
0.75%
– 2.0%
0.75%
– 2.0%
Margin
0.75%
0.75%
Range
0.75%
– 2.0%
0.75%
– 2.0%
All cross-currency interest rate swaps held by the Group matured
during the year ended 31 December 2022.
The Group’s cost of drawn debt for the next 12 months is currently
expected to be approximately 5.5%.
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. 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. For GKN Aerospace, the Group hedges
beyond 24 months due to the longer-term nature of some of its
contracts, with the percentage of the expected exposure hedged
reducing for each subsequent year. 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.
US Dollar
2022
2021
Euro
2022
2021
Average
rate
Closing
rate
1.24
1.38
1.17
1.16
1.21
1.35
1.13
1.19
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:
USD
EUR
CNY
Other
Melrose(1)
Increase in adjusted operating profit (£m)
% impact on adjusted operating profit
Dowlais(1)
Increase in adjusted operating profit (£m)
% impact on adjusted operating profit
Group
Increase in adjusted operating profit (£m)
% impact on adjusted operating profit
29
10%
18
5%
47
7%
7
3%
3
1%
10
1%
–
–
8
2%
8
1%
–
–
12
3%
12
2%
(1) Melrose includes Aerospace and the continuing central cost centre; Dowlais includes the
Automotive, Powder Metallurgy and Hydrogen Technology businesses.
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 2022:
Increase in debt – £ million
Increase in debt
USD
EUR
77
5%
36
2%
Contract and warranty risk management
Under Melrose management a suitable bid and contract management
process exists in the businesses, which includes thorough reviews of
contract terms and conditions, contract-specific risk assessments
and clear delegation of authority for approvals. These processes aim
to ensure effective management of risks associated with complex
contracts. The financial risks connected with contracts and warranties
include the consideration of commercial, legal and warranty terms and
their duration, which are all considered carefully by the businesses
and Melrose centrally before being entered into.
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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 projections, which are
based on both market and internal data and recent past experience.
The Directors recognise the challenges in the current economic
environment, including escalating inflation, energy costs and
challenges in supply chains and the Group is actively managing the
associated impacts on trading through a sharp focus on pricing,
productivity and costs. In addition, the Group’s cash flow forecasts
consider any impacts from further economic factors such as rising
interest rates.
In making the going concern assessment, the Directors have
considered the current compilation of the Group, and the circumstance
that the proposed demerger occurs in April 2023. A base case model
and a reasonably possible downside scenario against future cash
flows has been considered for both circumstances.
In all scenarios, when considering a reasonably possible downside
scenario for the businesses, there remains sufficient headroom to
avoid breaching any of the Group’s financial covenants and the Group
would not require any additional sources of financing throughout the
financial period tested.
The macroeconomic environment remains uncertain and volatile and
the impacts of the economic factors discussed above could be more
prolonged or severe than that which the Directors have considered in
the Group’s reasonably possible downside scenario.
Considering the Group’s current committed bank facility headroom,
its access to liquidity, and the sensible level of bank covenants in place
with lending banks, the Directors consider it appropriate that the
Group can manage its business risks successfully and adopt a going
concern basis in preparing these Consolidated Financial Statements.
Geoffrey Martin
Group Finance Director
2 March 2023
Longer-term viability statement
37
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 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 2025.
The Directors’ assessment has been made by reference to the
Group’s financial position as at 31 December 2022, 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
continued implications on supply chains resulting from the COVID-19
pandemic and ongoing inflationary pressures on input costs.
As a result of the Group’s announced intention to demerger its
GKN Automotive, GKN Powder Metallurgy and GKN Hydrogen
businesses (the “Demerger”) the Directors have also considered the
circumstance that the Demerger occurs in April 2023. Modelling of
both a base case and a reasonably possible sensitised case have
also been prepared for the remaining Group, acknowledging the
potential that shareholders approve the Demerger. The Directors’
assessment of the remaining Group’s viability, should the Demerger
occur in April 2023, is also underpinned by modelling and a paper
prepared by management which focuses on the growing GKN
Aerospace business.
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
statement, 2 March 2023, with no consideration of any further
acquisitions or future disposals of continuing businesses,
other than the Demerger as described above. 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 2021, and bank
covenant testing, are committed for much of the period under
review and have sufficient headroom for liquidity and covenant
compliance to continue in operation.
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38
Risk management
Risk management
The Board recognises that operating in a dynamic and rapidly evolving commercial
environment requires a pragmatic, robust and responsive risk management framework
comprising policies, visibility and controls that change with the business and provide
management with a comprehensive view of the Group’s risk profile at any given time,
enabling risk to be identified, assessed and managed.
Risk management responsibilities
The Board, having overall responsibility for risk management, has approved a formalised but pragmatic Group risk
management framework.
Board
Overall responsibility
for risk management
• 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, emerging 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 page 40.
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 111.
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
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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
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.
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. The dashboard’s reporting output was also 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. This exercise was
enhanced during the year, with the Board assessing their current and
optimal level of risk appetite for each of the Group’s principal risks. 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 results of the risk appetite review demonstrated that the Board has a
higher risk appetite towards its strategic risks, with a balanced appetite
towards operational and commercial risk, and macroeconomic, climate
change and political risk. The Board seeks to minimise all health and
safety risks and has a low risk appetite in relation to information security
and cyber threats risk and legal, compliance and regulatory risk.
Similarly, a conservative appetite is indicated by the Board with respect
to pensions and finance-related risks.
The results of the risk appetite review will support the Board’s
decision-making processes during 2023. The Board undertakes
a review of its risk appetite at least annually.
Risk management actions
During 2022, the Board continued to deliver on the key management
priorities identified in the 2021 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:
• enhancing the Board’s risk appetite review process to consider
both the optimal and current risk appetite of the Board for each
principal Group risk, and reviewing and reaffirming the Board’s
risk appetite;
• 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 the 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
• preparing the Group’s second Task Force on Climate-related
Financial Disclosures (“TCFD”) report, which involved developing
linkages between the identified climate-related transition risks and
their potential impact (including operational and financial), to drive
appropriate mitigation and remedial actions. This was supported
by the development of the Group’s first Net Zero Transition Plan
which is available at www.melroseplc.net. The TCFD disclosure is
contained on pages 66 to 77.
Assessment of principal risks
During the year, the Board undertook a 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 concluded that the Group’s risk categories
would remain unchanged in 2022 following on from the categories
having been realigned in 2021. The Board also enhanced its risk
appetite review process and undertook a robust and in-depth review
into their optimal and current risk appetite for each principal risk.
A summary of the principal risks and uncertainties that could impact
on the Group’s performance is shown on pages 40 to 48. Further
information detailing the internal control and risk management policies
and procedures operated within the Group is shown on pages 104 to
109 of the Corporate Governance report.
Risk management priorities for 2023
Continual improvements were made during 2022 in respect of the
Group’s risk management processes. However, the Board recognises
that Melrose cannot be complacent. In 2023, 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.
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Risks and uncertainties
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 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.
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3
8
4
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6
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9
11
10
5
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Low
Likelihood
High
Risk trend
No. Risk title
Risk trend since last
Annual Report
2018
2019
2020
2021
2022
1 Mergers and acquisitions
Increase
n/a
n/a
n/a
2 Operations
Commercial
Increase
Increase
n/a
n/a
n/a
Economic and political
Increase
Loss of key management
and capabilities
No change
Legal and regulatory
Increase
Climate change
No change
n/a
n/a
n/a
Information security and cyber threats
Increase
Foreign exchange
No change
3
4
5
6
7
8
9
Increasing
No change
Decreasing
Realigned risk
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Strategic risks
Risk 1
Mergers and acquisitions
Responsibility
Executive management(1)
Risk trend
Strategic priorities
Buy
Improve
Sell
Operational risks
Risk 2
Operations
Responsibility
Executive management(1)
Risk trend
Strategic priorities
Buy
Improve
Sell
Description and impact
The 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
macroeconomic 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 or other exit opportunities to realise maximum value for shareholders.
• Each disposal/exit is assessed on its merits, with a key focus on a clean disposal/exit.
• Flexibility with timing of disposals and exits to match market sectors and business maturity.
Trend commentary
Global M&A markets continued to experience increased uncertainty due to the knock-on effects of fluctuations
in commodity pricing as well as rising levels of inflation that, for example, impacted the ability to obtain external
financing for transactions. Further, the growing trend by national governments to implement and strengthen
foreign direct investment regimes has increased uncertainty in respect of transaction timetables and mandatory
conditions which may be applied by national governments to such transactions.
Whilst there was an increase in M&A risk during the year, Melrose achieved strong value realisation with the
sale of Ergotron, the last of the businesses remaining from the Nortek acquisition in 2016, as demonstrated on
page 9 of this report. During the year, Melrose also announced its proposed demerger of GKN Automotive,
GKN Powder Metallurgy and GKN Hydrogen (the “Demerger”), which, subject to shareholder approval, is due
to complete in April 2023. Whilst no large acquisitions were made in 2022, the Group remains open to potential
new opportunities.
Description 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, continued supply constraints as a result of geopolitical events, together with the rising challenge of
inflationary pressures on costs of materials and 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.
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Pensions
11
Liquidity
No change
No change
(1) Comprises executive Directors and Melrose senior management.
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Risks and uncertainties
Continued
Operational risks continued
Risk 2
Operations (cont.)
Risk 3
Commercial
Responsibility
Executive management(1)
Risk trend
Strategic priorities
Buy
Improve
Sell
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.
• The business unit executive teams have developed contingency plans with respect to gas shortages
and other key materials or production input shortages which may arise as a result of geopolitical events.
• Health and safety awareness initiatives and performance enhancements continued to be implemented
in alignment with regulations, market practice and site-based risk assessments and requirements.
• 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 that they have identified.
• Proper incentivisation of operational management teams to align with Melrose strategy.
Trend commentary
During the year, particular focus had 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.
Geopolitical events naturally had an impact on the businesses as well as the wider markets in which they
operate, which in turn increased operational risks. Specifically, the conflict in Ukraine disrupted the global supply
of neon gas and other components necessary to the production of semiconductor chips, whilst tensions
between the US and China over the status of Taiwan (a dominant producer of semiconductors) led to uncertainty
as to future supply chain disruption.
Furthermore, the various sanctions imposed on Russia halted the supply of Russian natural gas to Europe and
also threatened the global supply of certain precious metals widely used in the automotive and aerospace
industry, notably titanium and palladium, which are produced in significant proportion in Russia.
Geopolitical events have shone a light on the risks associated with lengthy global supply chains and there
has been an increasing trend towards regionalisation. The business unit executive teams have developed
contingency plans to prepare for, and mitigate against, the operational risks which have arisen from such
geopolitical events, and these operational risks are expected to continue in 2023.
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.
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 the geopolitical events noted under operations risk 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 as well as the shift to new
technologies, such as shifts towards electric vehicle technologies, which changes the customer demand profile.
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, 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 direct and indirect 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”).
(1) Comprises executive Directors and Melrose senior management.
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Operational risks continued
Risk 3
Commercial (cont.)
Risk 4
Economic and political
Responsibility
Executive management(1)
Risk trend
Strategic priorities
Improve
Buy
Sell
Mitigation
• The Group continued to actively invest in research and development activities 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 14 to 27 and in the Sustainability review on pages 55 to 91.
• The Melrose senior management team keeps track of the Group’s Common Commercial Risks through
a number of mediums including by conducting reviews of the Group’s reporting dashboard, which is an
externally hosted dashboard that all divisions report into. The dashboard aggregates and highlights the
Common Commercial Risks and relevant trends across each of the Group’s divisions.
• To combat against the fluctuations in commodity pricing experienced during the year as well as the rapid rise in
inflation, the divisional executive management teams reviewed and, where relevant, renegotiated the terms of,
customer and supplier contracts.
• The Group maintains a diversified customer base and geographical spread, thereby allowing Melrose and
its businesses to remain nimble in order to react quickly to external pressures.
Trend commentary
During the year, macro events such as continued fluctuations in commodity pricing as well as rapidly rising
levels of inflation resulted in heightened commercial risk for the Group. Further, the fast-paced technological
evolution in the markets within which the Group operates, coupled with the impact of geopolitical events, has
also heightened commercial risk for the Group. The Melrose senior management team actively engaged 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 was 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 reported material updates directly to members of the Melrose senior management team, and they
maintain a number of contact points throughout the Group to increase awareness.
Description and impact
The Group operates, through manufacturing and/or sales facilities, in numerous countries and is affected
by global economic conditions. Businesses are also affected by government actions and the willingness of
governments to commit substantial resources. As noted under operations risk, 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 which in particular have
been caused by the conflict in Ukraine and China’s ‘zero-COVID’ policy.
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.
Whilst the conflict in Ukraine, increasing tensions between the US and China, and rising inflation, 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 and commodity prices, 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.
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.
• Strong customer relationships built on long-term partnerships often with plants in close proximity,
technical excellence and quality.
• The Group remains agile and well positioned to deal with any short-term uncertainties.
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Risks and uncertainties
Risks and uncertainties
Continued
Continued
Operational risks continued
Risk 4
Economic and political
(cont.)
Trend commentary
Significant geopolitical and economic uncertainty continued during the year. The conflict in Ukraine, coupled
with the resulting sanctions imposed upon Russia, were a key factor in such uncertainty. Melrose promptly
assessed the risks associated with these geopolitical events by conducting an analysis into any direct or
indirect trade occurring between Russia and the Group. Such trade was found to be very limited and Melrose in
any case prohibited each of the businesses from conducting trade with Russia. Further, the Group’s diversified
business model has meant that, whilst GKN Automotive has felt the pressure resulting from the conflict in
Ukraine through certain customer relationships, other parts of the Group have been relatively unaffected.
The Melrose senior management team actively engaged with those who work on the relevant impact
assessments and mitigation actions, and they reported the material findings to the Board. The Melrose senior
management team monitored 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 that the Group and each of its businesses could respond appropriately to
adverse trading conditions. Tactics for mitigating the potential impact of geopolitical uncertainty included
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.
Risk 5
Loss of key management and capabilities
Responsibility
Executive management(1)
Risk trend
Strategic priorities
Improve
Buy
Sell
Description and impact
The success of the Group is built upon strong management teams. As a result, the loss of key personnel could
have a significant impact on performance, at least for a time. The loss of key personnel or the failure to plan
adequately for succession or develop new talent may impact the reputation of the Group or lead to a disruption
in the leadership of the business. Competition for personnel is intense and the Group may not be successful in
attracting or retaining qualified personnel, particularly engineering professionals.
Mitigation
• Succession planning within the Group is coordinated via the Nomination Committee in conjunction with
the Board and includes all Directors and senior 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.
Trend commentary
Succession planning remained a core focus for the Nomination Committee and the Board. Reviewing the
succession planning arrangements of the Board will remain an area of particular focus in 2023, as will maintaining
awareness of succession planning for Melrose senior management and key individuals within the business units.
Compliance and ethical risks
Risk 6
Legal and regulatory
Responsibility
Executive management(1)
Risk trend
Strategic priorities
Improve
Buy
Sell
Description and impact
Considering 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.
Compliance and ethical risks continued
Risk 6
Legal and regulatory
(cont.)
The Group operates in highly regulated sectors, having been accentuated by the acquisition of GKN in 2018.
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 2022, 76%(2) 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.
• 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 policies and procedures at both a Group and business unit level, including utilisation of
third-party verification providers, training of applicable employees on policies and procedures, 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.
Trend commentary
During the year, each business continued to have a fully developed legal function, headed by their respective
General Counsel reporting to their executive management team. The legal function was properly staffed and
supported by external advisors where necessary or helpful to ensure ongoing compliance in the jurisdictions
in which the businesses operate across the globe. This was augmented by central oversight from the Melrose
legal team and robust annual reviews. As noted under M&A risk, the growing trend by national governments to
implement and strengthen foreign direct investment regimes has led to increased legislation in this area. The
Group’s internal and external legal support meant that Melrose was able to keep track of, and pre-empt issues
which may have arisen from, such legislative changes.
Risk 7
Climate change
Responsibility
Executive management(1)
Risk trend
Strategic priorities
Improve
Buy
Sell
Description and impact
Increased frequency in 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 in their management of climate-related risks and their pursuit of 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. In addition,
obtaining insurance for natural disasters is more difficult, with higher premiums and excesses going forward.
(1) Comprises executive Directors and Melrose senior management.
(2) Data was collected from 98% (by sites) of the Group.
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Risks and uncertainties
Risks and uncertainties
Continued
Continued
Compliance and ethical risks continued
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 progress.
• The Melrose senior management team, through the Group sustainability function, is responsible for
overseeing the aggregation of environmental data by the businesses, and for 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.
• As part of the Group’s assessment of its overall climate change risk, during the year, the Melrose senior
management team has been working on the Group’s second Task Force on Climate-related Financial
Disclosures (“TCFD”) report, building on the largely qualitative assessment of climate-related transition
risks towards developing operational and financial impact linkages and analysis. This ongoing analysis
helps to drive the Group and its businesses to explore appropriate mitigation and remedial actions
towards achieving the Group sustainability targets including in respect of reducing Scope 1 and 2
emissions. Further details can be found in the Sustainability review on pages 55 to 91.
• During the year, the Group also developed and published its first Net Zero Transition Plan, with the aim
of providing stakeholders with clarity around the actions we intend to take in the transition to a net zero
economy, and how we plan to execute on our interim and long-term emissions reduction targets and
achieve Net Zero across the Group by 2050. The Group Net Zero Transition Plan was prepared in line
with the TCFD recommendations and the UK Transition Plan Taskforce’s guidance and is available on
our website at www.melroseplc.net/sustainability.
• The Group also bolstered its engagement with the businesses’ key suppliers to drive more sustainable
practices within their supply chains through participating in the Carbon Disclosure Project (“CDP”) Supply
Chain engagement initiative. The long-term aim is to build a more comprehensive understanding of Scope
3 indirect emissions, to improve performance towards achieving our Group sustainability goals, and
informing our businesses’ risk mitigation efforts.
• 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 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 management 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.
• 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. The Melrose senior management
team has been reviewing climate-related risks associated with water usage as part of the Group’s
inaugural CDP Water Security submission. This deeper analysis of water management practices across
the businesses, coupled with external stakeholder expectations, has led to the development of a Group
water target, a Group Water policy and the roll-out of a Group Water Stewardship Programme to guide
engagement with the divisions and thus seek to improve their water management practices across
operations and with their suppliers going forward.
Trend commentary
Recent 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
continued to be an area of significant focus for the Group in 2022. 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 2023, the Group will continue to look to
balance where possible the risks associated with climate change against potential opportunities for the Group
and its businesses.
Risk 7
Climate change
(cont.)
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Risk 8
Information security and cyber threats
Responsibility
Executive management(1)
Risk trend
Strategic priorities
Improve
Buy
Sell
Description and impact
Information 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 which
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 the year, 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 on a quarterly basis by Ernst & Young, our security partner.
Ernst & Young continued to conduct cyber assurance site reviews covering key locations across the Group.
Trend commentary
Information security and cyber threats are an increasing priority across all industries, particularly given rising
geopolitical tensions as a result of the conflict in Ukraine and deteriorating relations between the US and China.
The lasting impact of the COVID-19 pandemic continued to drive increased online traffic, reduced physical
contact, and has created additional new threats across the Group, which in turn has required 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.
Financial risks
Risk 9
Foreign exchange
Responsibility
Executive management(1)
Risk trend
Strategic priorities
Improve
Buy
Sell
Description and impact
Due to the global nature of operations and volatility in the foreign exchange market, exchange rate fluctuations
have, and could continue to have, a material impact on the reported results of the Group.
The Group is exposed to three types of currency risk: transaction risk; translation risk; and 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 rates change.
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.
• Melrose utilises a multi-currency banking facility to maintain an appropriate mix of debt in US dollars,
Euros and Sterling.
• Protection against specific transaction risks is taken by the Board on a case-by-case basis.
Trend commentary
Group 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 mitigation methods utilised by the Group helped to combat
against foreign exchange risk during the year. This has been particularly important due to the increased volatility
in the foreign exchange market, including the surge in the value of the US dollar against most major currencies,
and the falling value of Sterling during the year. Sensitivity to the key currency pairs is shown in the Finance
Director’s review on pages 30 to 37.
(1) Comprises executive Directors and Melrose senior management.
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Risks and uncertainties
Risks and uncertainties
Continued
Continued
Section 172 statement
Financial risks continued
Risk 10
Pensions
Responsibility
Executive management(1)
Risk trend
Strategic priorities
Improve
Buy
Sell
Description and impact
Any shortfall in the Group’s defined benefit pension schemes may require additional funding. As at
31 December 2022, the Group’s pension schemes had an aggregate deficit, on an accounting basis, of
£488 million (2021: £461 million). Changes in discount rates, inflation, asset values or mortality assumptions
could lead to a materially higher deficit. For example, the cost of a buyout on a discontinued basis uses more
conservative assumptions and is likely to be significantly higher than the accounting deficit.
Alternatively, if the plans are managed on an ongoing basis, there is a risk that the plans’ assets, such as
investments in equity and debt securities, will not be sufficient to cover the value of the retirement benefits to
be provided under the plans. The implications of a higher pension deficit include a direct impact on valuation,
implied credit rating and potential additional funding requirements at subsequent triennial reviews. In the event
of a major disposal that generates significant cash proceeds which are returned to the shareholders, the Group
may be required to make additional cash payments to the plans or provide additional security.
Mitigation
• The Group’s key funded UK defined benefit pension plans are closed to new entrants and future service
accrual. Long-term funding arrangements are agreed with the 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.
Trend commentary
Although the accounting deficit in the year was only slightly higher than the previous year, gross liabilities and
assets have each reduced by just over £1 billion, primarily as a result of the increase in interest rates and
therefore discount rates. The policy of hedging changes in inflation and interest rates continues to be effective
in respect of UK liabilities. Investment returns and mortality changes are not hedged and so some element of
risk remained in those regards. This risk was proportionately smaller than in 2021, given the reduced liabilities.
Risk 11
Liquidity
Responsibility
Executive management(1)
Risk trend
Description and impact
The ability to raise debt or to refinance existing borrowings in the bank or capital markets is dependent on
market conditions and the proper functioning of financial markets. As set out in more detail in the Finance
Director’s review on pages 30 to 37, as at 31 December 2022, the Group had term loans of US$788 million
and £30 million and revolving credit facilities comprising US$2.0 billion, €0.5 billion, and £1.1 billion.
Strategic priorities
Improve
Buy
Sell
In addition, the GKN net debt at acquisition included capital market borrowings across three unsecured bonds
which totalled £1.1 billion. One of these bonds remains outstanding as at 31 December 2022 and further detail
is provided in the mitigation measures below and in the Finance Director’s review on pages 30 to 37.
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 and certain uncommitted overdrafts to mitigate the risk of any
liquidity issues.
• In September 2022, a £450 million bond was repaid and associated cross-currency swaps with aggregate
notional values of US$373 million and €284 million were settled. Subsequent to this, in November 2022 a
tender offer was launched on the remaining £300 million bond, due to mature in May 2032, which resulted
in £170 million of the outstanding value being bought back and cancelled for a total cash cost of £148 million
(excluding accrued interest). Further details can be found in the Finance Director’s review on pages 30 to 37.
• The Group operates a conservative level of headroom across its finance covenants which is designed
to avoid the need for any unplanned refinancing.
Trend commentary
The Group has maintained its strong cash controls and forecasting processes and Melrose senior 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 the bond tender offer process which was undertaken during Q4 2022 as the bonds
were redeemed below par. Going into 2023, the refinancing package that Melrose has agreed with its
supportive banking syndicate means that the Group is satisfied that it has adequate resources available to meet
its liabilities following on from the Demerger. Further details of this are contained in the Finance Director’s review
on pages 30 to 37.
(1) Comprises executive Directors and Melrose senior management.
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Board stakeholder engagement
and decision-making
The Board is responsible for the long-term success of the Company,
for setting and overseeing its culture, and for the Company’s purpose,
strategy and values. The Board’s understanding of the Company’s
stakeholders and their respective interests is central to these
responsibilities, and informs key aspects of its decision-making.
Section 172 statement
In accordance with the Companies Act 2006, the Directors
provide this statement describing how they have had regard to the
matters set out in section 172(1) of the Companies Act 2006 when
performing their duty to promote the success of the Company
under section 172.
Melrose’s purpose, strategy and values
Melrose was founded in 2003 with a strategy 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 good 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 ownership. 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. We act as responsible stewards of the businesses that
we own, investing as if we are going to own them forever, and
managing their balance sheets and pension funds prudently, and
we see this as an important step on their pathway to long-term
sustainable success. We provide the focus and investment to
improve the businesses’ financial performance, through operational
improvements, by driving growth and profitability, and by investing in
research and development to make the businesses and their impact
on the environment and society beneficial. We also recognise that
the building of stronger businesses encompasses a wide range of
non-financial areas including risk management, ethics and
compliance, and sustainability, and we have worked with the
businesses to identify material issues and set meaningful ESG
targets alongside financial metrics. These actions benefit their
long-term future, and that of their stakeholders.
The Board is ultimately accountable to the Company’s shareholders
for setting the Group’s strategy, for overseeing the Group’s financial
and operational performance in line with Melrose’s strategic
objectives, and for taking into account the principal risks facing
the Group. Implementation of the Group’s strategic objectives, as
determined and overseen by the Board, is delegated to the Melrose
senior management team, 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 38 and in line with the Group’s
governance framework, which the Board reviews regularly to
ensure it continues to align with applicable legal requirements and
corporate governance best practice.
The Board recognises that culture, values and standards are key
contributors to how a company creates and sustains value over
the long-term. High standards of business conduct guide and
assist 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 and compliance with 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, with compliance with this framework being 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. The Board considers it to be of the utmost
importance that our businesses continue to uphold high standards
of business conduct, and that they continue to strive for
improvements in this area. Further detail on the Group’s compliance
policies and framework, and reporting to the Board, can be found
on pages 55 to 91 of the Sustainability review.
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Section 172 statement
Continued
Key stakeholder engagement in 2022
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 under section 172 and to pursue the Company’s
strategic objectives. Stakeholder engagement is on the Board’s agenda to assess whether the
Company’s principal stakeholders and their priorities have changed, and whether the Board has
sufficient engagement with each key stakeholder group. Our annual programme of key information
publications and engagement initiatives during 2022 included the annual general meeting,
publication of full and half year results, the publication of this Annual Report and Financial
Statements, investor roadshows, trading updates and capital markets presentation events.
Set out below and on the following pages is a table of our key stakeholders, how we engaged with them during the
year, and the outcomes of these processes. Acknowledging the decentralised structure of the Group, and the
breadth of our stakeholders, engagement takes place at a number of different levels across the Group.
Our key stakeholders
Shareholders
Given that we often need to move quickly to secure the opportunities that
we feel will be (and have been) critical to Melrose’s success, we rely on the
in-depth understanding amongst our investors of our business model and
our “Buy, Improve, Sell” strategy, in order to execute our strategy
successfully. Melrose provides a consistent and transparent flow of
information and management insight to shareholders and to the wider
investment community, taking an honest, transparent and open approach
to investor relations and communications. We recognise that analysts
require robust information in order to inform the information that they
provide to investors, and investors benefit from disclosure in line with
regulatory requirements, as well as enhanced disclosure on topics that are
material to the Company, to inform their independent investment
decisions. As a result, Melrose has attracted long-term support from key
shareholders since it was founded in 2003.
In addition to our annual programme of key information publications and
engagement activities listed above, the Board and 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 twice a year, regular trading updates, open
agenda meetings for key shareholders attended by the Chairman, where
requested, and capital markets presentation events as appropriate in
order to allow key shareholders, analysts and their representatives to
directly access the Board and engage directly with the executive
management teams of our largest businesses during key points in their
improvement cycle.
In 2022, the Board hosted a capital markets event for institutional investors
and financial analysts, which included a presentation from the CEO of
GKN Aerospace on key updates relating to the business’s recent
performance, and in early 2023, a capital markets event was held ahead
of the proposed demerger of GKN Automotive, GKN Powder Metallurgy
and GKN Hydrogen (the “Demerger”). The executive Directors undertook
an additional roadshow immediately following the announcement of the
Demerger in September 2022, to hear key shareholder views on the
proposal as a whole, and to discuss any questions or potential concerns,
all of which were resolved satisfactorily. The executive management team
of the new holding company for the demerged businesses, Dowlais Group
plc, undertook roadshows in late 2022 and early 2023, with the support of
Melrose.
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.
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 2022, these wider interactive engagement
processes particularly focused on sustainability, including discussions with
multiple sustainability benchmarking agencies in relation to topics
including supply chain and water.
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Employees
We recognise that a capable, engaged and passionate workforce is
central to the Group’s performance and ultimately its success. Employees
are an important stakeholder group and the Board requires our
businesses to promote effective engagement with their respective
workforces and maintain an open dialogue with them.
The decentralised nature of the Melrose model is reflected in the structure
of the Workforce Advisory Panel (the “WAP”), which ensures that 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 2022 can be found in the Sustainability
review on pages 55 to 91.
Employees have an opportunity to raise concerns confidentially and
anonymously through the 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 review on
pages 55 to 91.
The Group’s holistic approach to employee management recognises the
importance of protecting employees’ physical health, and mental and
social wellbeing. It rests upon three key areas of diversity and inclusion,
effective employee engagement and ensuring health and safety conditions
in the workplace. In line with the wider Group health and safety framework,
employee wellbeing programmes are implemented at a divisional level to
ensure that they are most impactful and relevant to each business.
We understand that some of the decisions we take in improving our
businesses for the long-term benefit of all stakeholders, such as
restructurings and the introduction of new technology, can have a material
impact on employees. We do not take these difficult decisions lightly, and
where appropriate we seek to undertake thorough event-driven
consultation and engagement activities with relevant stakeholders to
ensure that the decisions we take are based on a well informed view of the
potential impact on those stakeholders, and we always endeavour to
achieve positive outcomes for the workforce in such circumstances.
Lenders
As mentioned opposite, we often need to move quickly to secure
the opportunities that we feel will be critical to Melrose’s success.
In doing this, we also rely on the in-depth understanding amongst
our supportive banking syndicate of our business model and our “Buy,
Improve, Sell” strategy, in order to execute our strategy successfully. We
regularly engage with our banking syndicate and maintaining these
relationships has proven to be vital at times where we have needed to act
quickly and decisively – for example, agreeing amended financial
covenants with our banking syndicate in August 2020, which provided the
Company with the flexibility to continue to improve the businesses and
focus on cash generation during the heights of the economic turbulence
caused by the COVID-19 pandemic.
Suppliers and customers
The relationships that our businesses have with their suppliers and
customers are key to their success, and we encourage each of them to
foster positive and open business relationships with them, providing
support where necessary. Our businesses continue to work hard to build
upon and strengthen these relationships where possible. The Board
recognises the importance of these relationships, and encourages regular
and meaningful engagement by the businesses with this key stakeholder
group. Details are set out in the Sustainability review on pages 55 to 91.
During 2022, the Board increased its focus on supply chain oversight and
improvement in the businesses, including from a climate change
governance perspective, and to increase our businesses’ visibility of their
Scope 3 emissions. Responsible Sourcing was elevated to a topic of
higher materiality in 2021, and in 2022, Melrose set a new Group Supply
Chain policy for implementation within the businesses. Melrose has also
overseen further engagement by the businesses with their respective
supply chains, including through the CDP Supply Chain engagement
initiative. The Board requires our businesses and their suppliers to promote
the strongest responsible, ethical and sustainable business practices
through stringent supplier qualification processes.
The Board remains conscious that modern slavery and human trafficking
are serious issues and seeks to provide investors with as much
In anticipation of the Demerger, we have engaged extensively with our
banking syndicate in order to agree new standalone facilities for the
Melrose Group and the Dowlais group that are appropriate for the two
groups going forward. These standalone facilities have now been agreed
and are conditional on the Demerger, and will be used to repay the
existing Melrose Group facilities in full on completion of the Demerger. As
part of this process, a number of improvements on the existing Melrose
Group facilities have been agreed with the syndicate, which are applicable
to both new facilities. Further detail can be found in the Finance Directors’
review on pages 30 to 37.
transparency, disclosure and assurances regarding the nature of the
supply chains within the businesses that Melrose owns from time to time.
As described in our most recent 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. In line with our
decentralised model, the Melrose senior management team works closely
with the businesses to better understand their respective supplier
landscapes and to support them in this area of critical importance. This is
supported by our Anti-Slavery and Human Trafficking policy, which all of
our businesses are required to and have implemented, and associated
training. Melrose remains 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.
Any material issues of concern in these areas that are identified by the
business unit executive teams are escalated to the Board via the reporting
procedures identified on page 49. During the year, no such issues were
identified, but we remain vigilant in this regard. Further details can be
found in the Sustainability review on pages 55 to 91.
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52
Section 172 statement
Continued
Environment and communities
Improving the performance of our businesses from an environmental, social
and governance perspective is central to our “Buy, Improve, Sell” strategy.
All of the Directors are actively involved and concerned with the Group’s
efforts and progress in relation to sustainability and climate change, and
therefore the Board as a whole, led by the Chairman, is responsible for all
matters concerning sustainability and climate change. The Board continues
to remain focused on ensuring that the long-term performance of the Group
and its businesses is sustainable. The Sustainability review on pages 55 to
91 describes in detail some of the actions that the Group has taken during
2022 towards meeting our sustainability targets and commitments, as well
as measures taken to address the material sustainability topics which were
elevated in importance and prominence in response to the evolving macro
business environment, and were therefore a greater focus in 2022.
Our businesses understand the importance of meeting and fulfilling the
targets and commitments set by Melrose. As manufacturing businesses,
they are acutely aware of the risks and challenges, as well as the ultimate
benefits, that a transition to Net Zero presents. To meet the Group’s
expectations, the businesses continue to review and set their own
sustainability strategies, which are tailored to their organisations, and to the
sectors and communities in which they operate.
In 2022, the Board approved three new Group policies: Supply Chain – to
address the increasing importance of engaging with suppliers on
environmental topics; Biodiversity – to drive the businesses’ efforts in
protecting the natural world; and Water – to ensure good water management
practices as our businesses seek to achieve the newly launched water
withdrawal intensity target, which was approved by the Board in 2022.
During the year, we continued to engage with key ESG benchmarking
agencies to improve data quality and comprehensiveness of their
coverage of our sustainability performance, and to identify and resolve
inconsistencies. We have seen significant delays in scoring and
benchmarking among a number of rating agencies, generally due to their
own resourcing constraints. As they continue to expand their universe of
covered issuers and improve the breadth of and the range of indicators
used in assessment methodologies, we will engage with them directly to
ensure that their review periods roughly reflect our reporting cycle, so that
our most recent full-year data can be captured by their assessments and
made available to our investors on time. In 2022, the Group continued to
submit its response to the CDP Climate Change questionnaire, and made
its inaugural CDP Water Security submission, which the Board views as
excellent progress. The Sustainability review on pages 55 to 91 provides
further detail of progress achieved in the year, and the recent ratings
scores the Group received for its sustainability performance.
Lastly, in recognition of the growing importance of climate change, we
launched our inaugural Group Net Zero Transition Plan in 2022, which sets
out the actions we intend to take in the transition to a net zero economy,
and how we plan to execute on our interim and long-term emissions
reduction targets and achieve Net Zero by 2050.
We recognise the importance of local communities to the effective
operations of our business. The Sustainability review on pages 55 to 91
highlights examples of actions the businesses took during 2022 to engage
with their communities, including business-focused initiatives as well as
charitable activity.
Proxy advisors and independent reporting bodies
In 2022, the Company continued to invest significant time in speaking
regularly to the key corporate governance agencies regarding certain
aspects of corporate governance that we and our investors consider to be
of long-term strategic importance, particularly in the lead-up to the
Company’s annual general meeting, to ensure their support for the
resolutions proposed. The Board appreciates that the key corporate
governance agencies require transparency and active engagement in
order to accurately review and assess our performance in line with
expected practices. In addition, a large part of our investor community
subscribes to these governance bodies and it is therefore important to us
that we are proactive in communicating with them, to ensure their
continued support. The views of the key proxy advisors are reported to the
Board directly by the Group Company Secretariat.
Regulators and government bodies
The Company also continues to engage with independent reporting
bodies supported by the UK Government where relevant, including the
FTSE Women Leaders Review (formerly the Hampton-Alexander Review)
and the Parker Review, on the specific topics governed by those reporting
bodies. In 2022, in particular, we have invested significant time and effort
in continuing to engage with various stakeholders on sustainability-related
topics, which has included sustainability analysts, reporting organisations
and rating agencies such as MSCI, Sustainalytics, V.E., FTSE Russell, S&P
CSA and CDP. For further details, please refer to the Sustainability review
on pages 55 to 91.
The Group and its businesses have 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 and the
businesses’ long-term success. In the UK, the Company has regular
dialogue with the Department for Business and Trade (formerly the
Department for Business, Energy and Industrial Strategy), the Ministry of
Defence (“MoD”), the UK Panel on Takeovers and Mergers, and various
other government departments and bodies, including in respect of 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.
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Key Board decisions and stakeholder considerations
Demerger of GKN Automotive, GKN Powder Metallurgy and GKN Hydrogen
• Shareholders
• Employees
• Lenders
• Suppliers and customers
• Environment and communities
In September 2022, Melrose announced its intention to separate GKN
Automotive, GKN Powder Metallurgy and GKN Hydrogen from the
Melrose Group by way of a demerger of shares in a new holding company,
Dowlais Group plc, to Melrose shareholders (the “Demerger”). The
Demerger will result in two independent and separately listed companies,
Melrose Industries PLC and Dowlais Group plc (“Dowlais”), each with its
own distinct strategy and acquisition platform. Dowlais will effectively
become an automotive platform, owning GKN Automotive, the global
market leader in automotive drive systems, GKN Powder Metallurgy, a
high-quality, market-leading supplier in powder metallurgy, and GKN
Hydrogen, an early-stage growth business focused on developing and
commercialising proprietary metal hydride storage systems. Further details
on the Demerger are set out in the circular to shareholders and the notice
of general meeting dated 3 March 2023, which will be available on our
website.
The Demerger is the latest example of the Board’s focus on delivering
value to shareholders and other stakeholders, with both Melrose and
Dowlais having the potential to benefit from further market recovery and
future M&A opportunities. The Board chose to list Dowlais on the London
Stock Exchange because it presents the best opportunities to pursue its
strategy and attract further investment.
The Board’s decision to undertake the Demerger was based on a fully
informed and considered assessment of the performance of the
businesses to be demerged and their maturity within their Melrose
ownership cycle. Since acquiring GKN plc in 2018, Melrose has
reinvigorated each of the GKN Automotive and GKN Powder Metallurgy
businesses to achieve their potential, positioning them as excellent
generators of cash, with sustainable world leading technology and
experienced management teams executing successful strategies on a
clear path to their adjusted operating margin targets of 10%+ (for GKN
Automotive) and 14% (for GKN Powder Metallurgy). The Demerger will give
Dowlais an exciting opportunity to grow shareholder value through organic
growth and acquisition in its automotive platform. Dowlais will also be able
to further develop its sustainability strategy, for the benefit of its customers
and suppliers, employees, and the environment and communities it
operates within. Simon Peckham, Melrose Chief Executive, and Geoffrey
Martin, Melrose Group Finance Director, have joined the board of Dowlais
as executive directors, for a limited period, to facilitate the further growth
of the independent Dowlais group.
Following the announcement of the Demerger, we commenced a
comprehensive engagement process with shareholders, which involved
approaching shareholders in aggregate representing almost 70% of our
register. As part of the roadshows referred to on page 50, direct
engagement was held with key shareholders of the Company to provide
an opportunity to discuss the proposal in further detail. The Dowlais
executive management team have also undertaken two roadshows, with
Melrose support. The outcomes of these roadshows have been very
positive, and the Board hopes that shareholders will decide to vote in
favour of the Demerger at the general meeting on 30 March 2023.
The Board has determined that now is the right time to proceed with the
Demerger. We are particularly pleased to have fulfilled the commitment
we made at the time we acquired the GKN businesses to protect
pensioners and to continue to invest in research and development. We
are returning GKN Automotive and GKN Powder Metallurgy to the
London market in a much stronger financial position and with leading
positions in the fast-growing global electric vehicle market. Together they
will be well placed to continue delivering for all of their stakeholders and to
take advantage of the opportunities available to Dowlais as a standalone
automotive platform.
Following completion of the Demerger, Melrose will retain its ownership of
GKN Aerospace. Its successful “Buy, Improve, Sell” strategy will continue
unchanged and the Board expects to pursue future acquisitions as soon
as possible following completion of the Demerger, which could either be
in aerospace or the wider industrial sector, as appropriate, in order to
continue to deliver value creation for all Melrose stakeholders.
Dividend payments
• Shareholders
• Lenders
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.
We understand the importance of returns to our shareholders and the
Board continued with its progressive dividend policy in 2022. The Board
determined to pay a final 2021 dividend in May 2022 of 1 pence per share
(an increase of 33% on the final 2020 dividend) and an interim 2022
dividend in October 2022 of 0.825 pence per share (an increase of 10% on
the interim 2021 dividend). Both the decision to pay such amounts, as well
as the amounts themselves, were carefully made by the Board based on a
fully considered assessment of the Group’s performance and of the
impact of such payments on the Company’s shareholders and lenders.
The Board felt that these amounts were sufficiently financially prudent,
would be understood by the Group’s lenders, and satisfy shareholder
expectations in line with our strategy.
In line with this prudent approach, yet reflecting the Company’s improved
performance in 2022, the Board is very pleased to be able to report that it
will pay a second interim dividend to shareholders of 1.5 pence per share.
The proposed final dividend is normally announced as part of our financial
year-end results and paid after shareholder approval at the Company’s
annual general meeting. However, to allow this to be appropriately paid to
Melrose shareholders prior to the Demerger, a second interim dividend will
be paid on 18 April 2023(1) to replace the final dividend. Please see page
242 for further information on the proposed timetable for payment of the
second interim dividend. Combined with the 2022 interim dividend of
0.825 pence per share, this represents a total dividend for the year of
2.325 pence per share (2021: 1.75 pence), an increase of 33% on the prior
year. The Board is satisfied that the proposed dividend is affordable and
appropriate.
The Board was also pleased to return £500 million of capital to
shareholders during 2022 following the sale of Ergotron, which was
completed by way of a share buyback. This is a continuation of Melrose’s
strategy to return value created through acquisitions to our shareholders.
In determining the maximum amount of the share buyback, the Board
balanced the needs of a number of stakeholders, ultimately determining
that a significant portion of the sale proceeds should be returned to
shareholders.
(1) After the date of approval of the Annual Report and financial statements, the second interim dividend payment date was changed to 11 April 2023 in order to effect the Dividend Reinvestment Plan
prior to completion of the proposed Demerger.
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54
Section 172 statement
Continued
Further focus on the Group’s sustainability performance to drive improvements and value creation
• Shareholders
• Employees
• Suppliers and customers
• Environment and
communities
• Proxy advisors and
independent reporting
bodies
• Regulators and
government bodies
Sustainability is a regular topic on the Board’s agenda, receiving
appropriate consideration throughout the year at its scheduled
meetings. Following on from the sustainability targets and
commitments that were set in 2021, the Board took a number of
decisions in 2022 to further progress the Group’s sustainability efforts
and performance, and to support our businesses in their respective
journeys towards Net Zero by 2050. In taking its decisions, the Board
sought to balance the interests of all relevant stakeholders, to ensure
that they are each adequately represented and can hold the Board
accountable for the Group’s progress in relation to these matters.
Detail on some of these key decisions, and how key stakeholders
were engaged with and considered, is set out below and in the
Sustainability review on pages 55 to 91.
Further to the Group’s inaugural reporting against the key areas
recommended by the Task Force on Climate-related Financial
Disclosures (“TCFD”), the Board expanded the Group’s TCFD
reporting framework disclosure to initiate qualitative consideration of
the financial impacts of climate risks. The Board recognises that this
additional disclosure is necessary in order to help to progress the
businesses’ strategies and to provide enhanced disclosure to
shareholders and other stakeholders.
In 2022, the Board adopted the Group’s inaugural Net Zero Transition
Plan, prepared in accordance with the UK Transition Plan Taskforce’s
(“TPT”) guidance, which sets out the actions we intend to take in the
transition to a net zero economy, how we plan to execute on our
interim and long-term emissions reduction targets, and how we plan
to achieve Net Zero across the Group by 2050. The Group Net Zero
Transition Plan also sets out how climate considerations are integrated
into the Group’s strategic thinking and future planning, such as major
capital expenditure, acquisitions and disposals. In adopting the Group
Net Zero Transition Plan, the Board was mindful to ensure that the
actions it sets out are necessary to achieve the agreed-upon targets
within the envisaged timelines, sufficiently focusing our businesses’
executive management teams on the end goals, yet without overly
diverting resources away from the businesses’ core focuses.
The Board elevated the importance and prominence of Responsible
Sourcing and Water across the Group as material sustainability topics
in 2021, and this has resulted in a number of actions being taken in
2022 relating to these areas of importance. It introduced new Group
compliance policies for these areas for implementation within our
businesses, and updated the Melrose Code of Ethics to align it
accordingly. The new policies, which were drafted with support from
our external sustainability consultants and are available on our
website, continue to be (along with all other Group compliance
policies) monitored by the Melrose senior management team to
ensure their effectiveness for the Group. In approving these policies,
the Board sought to balance all relevant stakeholders, including
shareholders and the environment.
With respect to Supply Chain, there has been an increased emphasis
on the businesses to increase their engagement with suppliers, to be
able to expand our Scope 3 data coverage. Melrose joined the CDP
Supply Chain engagement initiative in 2022 to start improving our
visibility of Scope 3 emissions, achieving an engagement rate of over
50% for the year. The expansion of this data coverage will not only
enable our businesses to understand their full value chain emissions, it
will also allow them to focus their efforts on the greatest Greenhouse
gas reduction opportunities, and to hold their suppliers to account in
respect of their emissions. Collectively, this is for the benefit of all of
the Group’s key stakeholders.
For Water, the Board launched the Group Water Stewardship
Programme and set a quantitative Group-level target to reduce water
withdrawal intensity by 25% by 2030. The Group also made its
inaugural CDP Water Security submission in 2022, to improve the
external transparency of our businesses’ water data, in line with
increasing investor expectations in this area, and to demonstrate the
Group’s commitment to ensuring that our businesses remain resilient
to water associated risks.
The third new Group compliance policy that was introduced during
the year was our Biodiversity policy. The Board recognises the
importance of biodiversity and how fundamental it is to our society,
and the policy sets out the key aspects that are expected of our
businesses to promote the growth of the natural world and help
prevent deforestation. The Board intends to continue to evolve the
Group’s understanding and assessment of biodiversity factors during
2023, prior to the official release of a global Taskforce on Nature-
related Financial Disclosures (“TNFD”) framework.
Our Sustainability review on pages 55 to 91 sets out the key priorities
for the Board in this area during 2023.
Sale of Ergotron
• Shareholders
• Employees
• Lenders
• Suppliers and customers
• Environment and communities
The sale of Ergotron completed in July 2022 for total proceeds of
£519 million. This marked the end of our ownership of the businesses
from the Nortek acquisition. That acquisition has been highly
successful both in terms of doubling the initial investment and
transforming the underlying businesses, delivering on our strategy of
creating significant long-term value for shareholders, and achieving
above-average returns on their investment.
The disposal is a clear demonstration of the Melrose strategy in action.
We built a better business through significant investment, operational
and financial improvements, and by supporting its pursuit of product
development to establish a sustainable business for the long-term. The
Board then determined the appropriate time of sale of the business,
found a new home for the next stage of its development, and returned
almost all of the proceeds to shareholders.
In taking its decision to achieve the disposal on the terms and at the
time they did, the Board’s focus was primarily on securing the
maximum disposal proceeds that would ultimately be returned to
shareholders, in order to deliver on its strategy to deliver above-
average returns to shareholders on their investment. However, as
responsible stewards of our businesses, the Board was also keen to
ensure that Ergotron left the Group in a significantly improved position
from both a financial and non-financial perspective, in order to deliver
long-term and sustainable benefits for its employees, suppliers and
customers, communities, and other key stakeholders.
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Implementing business improvement
as we transition to Net Zero
2022
Sustainability
review
Contents
Chairman’s statement
Our purpose and sustainability highlights
Our sustainable improvement strategy
Progress in addressing material sustainability topics
Sustainability and climate change governance
Enabling a sustainable transition to Net Zero
TCFD Report
Environmental leadership
Social
Governance
Outlook for 2023
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56
Sustainability review
This year has been a further significant
step in the execution of our Group
sustainability strategy. I am pleased
to report that the Board adopted
Melrose’s first Net Zero Transition
Plan in 2022. Through this, we provide
our stakeholders with clarity around
the actions we intend to take in the
transition to a net zero economy,
and how we plan to execute on our
interim and long-term emissions
reduction targets.”
In seeking to help address global water challenges, we implemented our
first Group Water Stewardship Programme across our businesses, set a
Group-level water withdrawal reduction target, launched our first Group
Water policy, and made our inaugural CDP Water Security submission.
Looking towards nature-related risks and opportunities as an emerging
focus for the global business community, we also adopted a foundational
Group Biodiversity policy. We recognise the importance of encouraging
good governance practices within each of our businesses and seek to
play our part in protecting the natural world.
Although climate change and other environmental topics remain a priority,
this is not to the exclusion of societal factors. Providing a safe and
supportive working environment, access to learning and development
opportunities, and encouraging diversity and inclusion at all levels, will
help our businesses continue to attract and retain the best talent. Whilst
it is pleasing to note that in line with our Group target, we have achieved
a Lost Time Accident (“LTA”) frequency rate of below 0.1, we continue
to prioritise continuous health and safety improvements across each
of our businesses in the push for a LTA frequency rate of zero.
Our businesses are also encouraged to support the local communities
which they are part of through charitable and community projects. In
2022, this included our businesses’ involvement in community initiatives
towards humanitarian action in Ukraine.
We realise that building strong sustainable businesses is a long-term
journey, and whilst there remains plenty for us to deliver, it has been
promising to see our improvement to date being recognised by several of
the key ESG benchmarking agencies, including MSCI providing Melrose
with an ‘A’ rating, and Sustainalytics who have reduced our risk rating
from ‘high’ to ‘medium’ and placed us in the top 10% of our peers.
Justin Dowley
Non-executive Chairman
2 March 2023
Justin Dowley
Non-executive Chairman
Chairman’s
statement
This year has been a further significant step in the execution of our Group
sustainability strategy. I am pleased to report that the Board adopted
Melrose’s first Net Zero Transition Plan in 2022. Through this, we provide
our stakeholders with clarity around the actions we intend to take in the
transition to a net zero economy, and how we plan to execute on our
interim and long-term emissions reduction targets. Our established Group
environmental sustainability targets include reduction of Greenhouse Gas
(“GHG”) emissions, growth of renewable electricity within the energy mix
of each of our businesses, increase in the percentage of solid non-
hazardous waste diverted from landfill, and reduction in water withdrawal
that will help drive the sustainability of their operations. Sustainability
is embedded in each business’s operational excellence, innovative
climate-focused R&D, and in their respective product ranges that seek
to help decarbonise their sectors, accelerating the global move towards
Net Zero.
We have prepared our second annual disclosures in line with the latest
recommendations of the Task Force on Climate-related Financial
Disclosures (“TCFD”)(1) and the Financial Reporting Council’s (“FRC”)
thematic review of climate-related considerations(2). Key updates
include initial qualitative disclosures relating to the quantification of
the financial impacts of climate-related risks, articulation of our Group
sustainability and climate governance framework, and building on our
climate scenario analysis to inform additional detail on the Group’s
approach to identification, assessment and management of climate
transition risks and opportunities.
Implementing our Group sustainability priorities is an important part
of our “Buy, Improve, Sell” strategy, and is embedded within our efforts
to improve returns for our shareholders as we address the material
sustainability topics that are of most concern to our stakeholders. Last
year, Responsible Sourcing and Water were elevated in our review of the
Melrose Group materiality matrix. In 2022, we took proactive steps to
address these topics across the Group. To further embed Responsible
Sourcing within our businesses, we launched a Group Supply Chain
Management programme which included the development of a Group
Supply Chain policy and expanded our visibility of Scope 3 emissions
attributable to each business through the participation in the Carbon
Disclosure Project (“CDP”) Supply Chain engagement initiative.
(1) https://assets.bbhub.io/company/sites/60/2021/07/2021-TCFD-Implementing_Guidance.pdf.
(2) www.frc.org.uk/getattachment/65fa8b6f-2bed-4a67-8471-ab91c9cd2e85/FRC-TCFD-
disclosures-and-climate-in-the-financial-statements_July-2022.pdf.
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Our purpose
Sustainability has always been an
important part of our “Buy, Improve,
Sell” strategy, and we firmly believe
that this focus is not just the right thing
to do, but is a central enabler of the
success of the Melrose Group and the
manufacturing businesses we own.
The fundamentals of the business strategy that Melrose has followed
since being founded in 2003 are to acquire good quality manufacturing
businesses that are underperforming their potential but have
established positions in sectors which can be among the most difficult
to decarbonise. The success of this business model relies on investing
heavily to improve performance and productivity, accelerating
operational improvements, realising shareholder value at the appropriate
time and then returning this value to shareholders.
Within the “Improve” stage of our ownership, we focus on building our
businesses into new, better organisations that are operationally and
financially positioned to prosper in a sustainable manner, over the longer
term, for the benefit of all stakeholders. We do so through unrelenting
focus on integrating our core sustainability principles and climate
commitments into their strategic agendas.
We view investing in businesses that operate in traditionally carbon-
intensive sectors as an opportunity to create positive change. We
strongly believe that meaningful sustainability improvements towards
transitioning our businesses and their traditionally carbon-heavy
industries to a greener future, will propel global efforts towards achieving
Net Zero by 2050.
In line with our decentralised business model, we provide the strategic
guidance, investment and resources to ensure that each of our
businesses develops and executes on its own sustainability strategy.
We encourage them to prioritise climate-focused projects in line with
their operational, market and sectoral environments, throughout our
ownership. As we reshape the businesses we acquire, we implement
strong targets to drive their long-term strategy and performance.
Whilst we always seek to help enhance our businesses’ longer-term
sustainability profile and act as if we were to own them forever, we
cannot ignore our inevitably limited ownership period. We therefore
align our actions with the dynamic nature of our portfolio such that our
targets and commitments remain relevant as and when the Group
composition changes.
Having built and formalised our own sustainability reporting
infrastructure at a Group level, we do not view sustainability
underperformance as a barrier to an acquisition. As part of pre-
acquisition due diligence, where possible, we would consider and
review available information on a company’s sustainability credentials
(for example, formal energy and carbon disclosures, and climate risks,
amongst any other relevant information).
Sustainability
highlights
44%
of new products launched
in 2022 contributing to the
decarbonisation of our
businesses’ sectors against
the 50% Group target by 2025
>90%
solid non-hazardous waste
diverted from landfill in 2022
against the 95% target by 2025
<0.1
LTA frequency rate in line
with the Group target
c.10%
reduction in emissions intensity
from 2021 against the 20%
reduction target by 2025
14%
year-on-year reduction in energy
consumption intensity compared
to 2021
>£20m
invested in energy efficiency
programmes in 2022
MSCI – ESG Rating
ESG Rating: A (2020: BB)
‘A’
Sustainalytics
ESG risk rating has improved to 28.3 (Medium) from 34.2 (High)
Ranked 8th out of 114 Industrial Conglomerates (2021: 20th out of 114)
ESG Risk Management score improved to 62.5 (Strong)
from 53.6 in 2021
CDP Climate Change score
Climate Change 2022: C (2021: C)
Industry Average 2022: C (2021: C)
Following acquisition, we help our businesses create ambitious but
realistic plans aligned with our Group sustainability targets, which serve
as a framework for driving and measuring longevity and credibility in
our businesses’ sustainability performance over time. Analysis of a
business’s performance against its budgets, targets and strategic
plans feeds into Group decision-making on whether it is the right time,
commercially and strategically, to sell a business for the next stage of
its development.
‘C’
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Sustainability review
Continued
Our sustainable
improvement strategy
The key to the success of our “Buy, Improve, Sell” approach lies in rebuilding
and repositioning businesses to succeed over the long term. We are
committed to investing in our businesses to make meaningful contributions
to decarbonising the sectors in which they operate, supported by ethical
and transparent governance practices.
Our sustainability
principles
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:
• Respect and protect the environment
• Continue to invest in and support our
businesses as they develop products
and services aligned with a net
zero future
• Promote diversity, prioritise and
nurture the wellbeing and skills
development of employees, and
support the communities that they
are part of
• Exercise robust governance, risk
management and compliance
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Group targets and commitments
Our Group sustainability targets and commitments seek to drive our businesses to address
some of the key ESG priorities faced by their industries in support of our sustainability
principles. In 2022, we added an additional water withdrawal intensity reduction target to
reflect the elevated importance of water to our stakeholders.
Our changing Group composition is inherent to our “Buy, Improve, Sell”
strategy, meaning absolute metrics across all areas are expected to
fluctuate as we buy and sell businesses. However, by fostering a culture
of improvement, both operationally and financially, we strengthen our
businesses’ capabilities and resources, allowing them to continue
pursuing sustainable growth that continues beyond our ownership.
Environmental(1)
Respecting and protecting the environment
• Reduce CO2e/£m revenue by 20% on average
across the businesses by 2025 and 40% by 2030(2)
• Achieve net zero Greenhouse gas emissions
by 2050(3)
• Divert 95% of our solid waste from landfill by 2025
and 100% by 2030(4)
• Source 50% of our electricity from renewable
sources by 2025 and 75% by 2030(5)
• Reduce water withdrawal intensity by 25% by
2030(6) and implement a Group Water Stewardship
Programme to improve water management across
our businesses
On track
On track
Fulfilled and being
maintained
In progress
On track
Prioritising health, safety and wellbeing of employees
• Protect our employees from injury and lost time
accidents and maintain a LTA frequency rate
below 0.1
Fulfilled and being
maintained
Nurturing skills and development
• Ensure that all permanent employees receive
regular (annual) formal performance reviews(7)
On track
Exercising robust governance, risk management
and compliance
• All employees, suppliers and contractors must
comply with our Code of Ethics, conducting
business with integrity and in a responsible,
ethical and sustainable manner
Fulfilled and being
maintained
Social
Governance
Continuing to invest in and support our businesses as they
develop products and services aligned with a net zero future
• Achieve 50% of total R&D expenditure on
climate-related R&D per year to contribute to
the decarbonisation of our businesses’ sectors
by 2025, 75% by 2030 and 100% by 2040
• Achieve 50% of new products which contribute
to the decarbonisation of our businesses’ sectors
by 2025, 75% by 2030 and 100% by 2040
On track
On track
Supporting communities that our businesses are part of
• Invest £10 million over five years through the
On track
Melrose Skills Fund
Promoting diversity and inclusion
• Maintain a Board and Melrose Executive
Committee comprising at least 33% female
membership
• Maintain achievement of the Parker Review
recommendations
Fulfilled and being
maintained
Fulfilled and being
maintained
(1) The Group’s chosen intensity ratio is energy consumption, emissions and water withdrawal
reported above normalised MWh, tonnes of CO2e or m3 per £1,000 of turnover. The data has
been standardised from the source units in which it was initially collected. The turnover figures
used to calculate the intensity ratio include continuing businesses only and do not include any
share of revenues from entities in which the Group holds an interest of 50% or less.
(2) Target baselined on full year 2021 performance. Baseline was set in conjunction with the
timeframe of the Group’s target-setting process.
(3) Including Scope 1, 2 and 3 emissions.
(4) Excluding hazardous waste.
(5) Where renewable electricity is commercially and reasonably available in the relevant jurisdiction.
(6) Target baselined on full year 2021 and with consideration of half year 2022 performance.
Baseline was set in conjunction with the timeframe of the Group’s target setting process.
(7) Where permitted by local laws and employee representative bodies.
Delivering on our promises
In 2022, we continued to focus on
improving the key sustainability matters
that impact our businesses and their
sectors, and are of most concern to
key stakeholders. Key developments
included:
• Launching our inaugural Group Net Zero Transition Plan which
sets out the actions we intend to take in the transition to a net zero
economy, and how we plan to execute on our interim and long-term
emissions reduction targets;
• Implementing Group Supply Chain, Biodiversity and Water
policies, and addressing the two elevated material topics of
Responsible Sourcing and Water, and updating our Diversity
and Inclusion policies in light of key regulatory developments;
• Developing a quantitative Group-level target to reduce water
withdrawal intensity by 25% by 2030(6), and supporting each
business to implement our newly launched Group Water
Stewardship Programme. We also made our inaugural CDP
Water Security submission in 2022;
• Expanding our TCFD disclosures to cover qualitative
considerations of financial impacts of climate risks;
• Joining and achieving over 50% engagement rate in the
CDP Supply Chain engagement initiative to assist in beginning to
capture further supplier environmental data to start tracking their
net zero alignment;
• Completing a third-party facilitated review of ESG data collection,
monitoring and tracking processes among all Group businesses
with a view to improving their data governance.
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Sustainability review
Continued
Progress in addressing
material sustainability topics
Our Group materiality assessment initially undertaken in 2020 identified the key
sustainability topics considered to be both important to our stakeholders and
to impact our ability to create value over time. In 2021, the topics of Responsible
Sourcing and Water were elevated in importance and prominence in response
to the evolving macro business environment, and were focused upon in 2022.
>50%
engagement rate generated for
the CDP Supply Chain
engagement initiative in 2022
Responsible sourcing and supply chain
To achieve Net Zero, we need to play our part in accelerating the
climate transition beyond our immediate chain of control. We want to
accelerate the transition to Net Zero for not only our businesses, but
also for the suppliers that they rely on.
To fulfil this commitment at Group level, we have set the supply chain
management programme as a running item on our businesses’
agendas in line with our Group approach to driving our businesses to
improve the understanding of their primary suppliers’ climate positions,
prepare for any supply chain-related risks, seize emissions reduction
opportunities, and ultimately improve their Scope 3 carbon footprints.
As part of this journey, in 2022, Melrose joined the CDP Supply Chain
engagement initiative, which assisted us in beginning to capture
further supplier environmental data and enable efficient tracking of
our businesses’ suppliers’ alignment to Net Zero. In 2022, the Board
approved our inaugural Group Supply Chain policy. Each business is
expected to comply with this policy with each executive management
team taking responsibility for ensuring its effective transmission and
onward implementation, with support from the Melrose senior
management team.
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25% Water
target
to ensure our gradual improvement
in water management, we have
set a target to reduce water
withdrawal intensity(1) across our
businesses by 25% by 2030(2)
We implemented our inaugural Group Water policy in 2022,
which sets out our approach to improving our businesses’ water
management practices. The policy is intended to help our businesses
build resilience to water risks, minimise their potential negative impact
on water availability and quality, and continue to explore ways of
addressing water challenges in their regions of operation where such
challenges are prevalent. To ensure our gradual improvement in this
area, we have set a quantitative target to reduce water withdrawal
intensity(1) across our businesses by 25% by 2030(2). To support this,
we have set an associated process-oriented target as part of our
Group Water Stewardship Programme launched in 2022. Additionally,
we made our inaugural CDP Water Security submission in 2022 to
improve the external transparency of our businesses’ water data and
will continue to report on progress going forward as part of our suite
of CDP disclosures. More information on Group water developments
can be found on page 78.
Full details of our updated materiality assessment can be found at
www.melroseplc.net/sustainability/our-sustainable-improvement-
strategy/materiality-assessment.
(1) The Group’s chosen intensity ratio is water withdrawal reported above normalised m3 per £1,000 of turnover.
(2) Target baselined on full year 2021 and with consideration of half year 2022 performance. Baseline was set in conjunction with the timeframe of the Group’s target setting process.
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62
Sustainability review
Continued
Sustainability and climate
change governance
In 2022, we further crystallised our Group sustainability and climate change
governance framework, which enables the delivery of our sustainability targets
and commitments. The framework illustrates how we govern the implementation
of our overarching Group sustainability strategy, including identifying, assessing
and managing climate-related risks and opportunities within each business during
our ownership, overseen by the Board with the support of the Melrose senior
management team.
Melrose Board of Directors
Melrose Board of Directors
Has overall responsibility and oversight of Group sustainability strategy, including climate-related risks and opportunities and is supported
Has overall responsibility and oversight of Group sustainability strategy, including climate-related risks and opportunities and is supported
by the Melrose senior management team.
by the Melrose senior management team.
Audit Committee
• Meets at least three times a year.
• Responsible for monitoring, overseeing
and reviewing the effectiveness of the
Group’s risk management processes and
approach, including reviewing the Group’s
principal risks which include climate
change risk, and considering the risks and
opportunities identified by the Melrose
senior management team.
• Reviews and monitors the integrity of
the Group financial statements, control
systems and compliance controls, which
over time shall integrate sustainability-
related financial information more closely,
including in relation to climate change.
• High-level visibility of key divisional risks,
which may include sustainability or climate
change related risks, following a review of
the divisional risk registers by the Melrose
senior management team.
Melrose senior management team
Melrose senior management team
• Meets weekly.
• Meets weekly.
• Cross-functional team including Group corporate, tax, risk,
• Cross-functional team including Group corporate, tax, risk,
finance, legal and sustainability.
finance, legal and sustainability.
• Responsible for executing the Board’s overall sustainability
• Responsible for executing the Board’s overall sustainability
strategy including climate change considerations.
strategy including climate change considerations.
• Oversees quarterly divisional climate performance
• Oversees quarterly divisional climate performance
reporting against Group KPIs and targets.
reporting against Group KPIs and targets.
• Identifies, assesses and prioritises climate-related risks
• Identifies, assesses and prioritises climate-related risks
and opportunities that are presented to the Board and the
and opportunities that are presented to the Board and the
Audit Committee for consideration.
Audit Committee for consideration.
• Advises the Board and the Committees on governance
• Advises the Board and the Committees on governance
and regulatory requirements, including on climate change.
and regulatory requirements, including on climate change.
• Core sustainability team membership includes the Group
• Core sustainability team membership includes the Group
Company Secretariat and the legal function, sustainability
Company Secretariat and the legal function, sustainability
lead and sustainability coordinator.
lead and sustainability coordinator.
External advisors
External advisors
• Help to identify divisional level climate-related risks and
• Help to identify divisional level climate-related risks and
opportunities that are then fed into the overall risk
opportunities that are then fed into the overall risk
management process.
management process.
• Provide sustainability, climate-related and regulatory training
• Provide sustainability, climate-related and regulatory training
and updates to the Melrose senior management team.
and updates to the Melrose senior management team.
The framework fosters good information flows, reporting lines,
and communication channels, enabling the Board, its committees
and the Melrose senior management team to fulfil their respective
governance responsibilities.
Remuneration Committee
• Meets at least twice a year.
• Responsible for setting executive remuneration policy
and integrating sustainability into the executive remuneration structure.
• Addresses sustainability progress as part of the Annual Bonus Plan.
Nomination Committee
• Meets at least twice a year.
• Responsible for ensuring the membership of the Board and the pipeline
for succession planning purposes reflects diversity.
Workforce Advisory Panel
• Responsible for promoting the views and the interests of the workforce.
Divisional CEOs and executive management teams
Divisional CEOs and executive management teams
• Deliver operational ESG initiatives towards fulfilling their divisional
• Deliver operational ESG initiatives towards fulfilling their divisional
and Melrose Group sustainability targets and commitments.
and Melrose Group sustainability targets and commitments.
• Responsible for the management, implementation and
• Responsible for the management, implementation and
oversight of their sustainability strategy and climate-related
oversight of their sustainability strategy and climate-related
risk assessment and implementing mitigation actions
risk assessment and implementing mitigation actions
where necessary.
where necessary.
Divisional sustainability leads
Divisional sustainability leads
• Execute the day-to-day running of the divisional executive
• Execute the day-to-day running of the divisional executive
management teams’ plans and strategy.
management teams’ plans and strategy.
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• Responsible for adapting to changing customer preferences,
• Responsible for adapting to changing customer preferences,
market demands and sectoral regulatory requirements for
market demands and sectoral regulatory requirements for
sustainability and climate-related matters.
sustainability and climate-related matters.
• Responsible for the financial impact of the increased cost of energy and materials and climate-related
• Responsible for the financial impact of the increased cost of energy and materials and climate-related
mitigation opportunities, for example R&D and products contributing to decarbonisation and emissions
mitigation opportunities, for example R&D and products contributing to decarbonisation and emissions
reduction plans.
reduction plans.
• Help to identify division-specific sustainability matters, including
• Help to identify division-specific sustainability matters, including
climate change risks and opportunities, and relay information
climate change risks and opportunities, and relay information
to the divisional CEOs and executive management teams,
to the divisional CEOs and executive management teams,
as well as the Melrose senior management team.
as well as the Melrose senior management team.
• Ensure the monitoring of divisional sustainability targets at a granular level.
• Ensure the monitoring of divisional sustainability targets at a granular level.
• Engage with the Melrose senior management team on a weekly basis.
• Engage with the Melrose senior management team on a weekly basis.
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64
Sustainability review
Continued
Enabling a sustainable
transition to Net Zero
We recognise the serious threat posed by climate change
and the need for meaningful action, and our goal is to
encourage the businesses that we own to avoid harmful
emissions into the air, water and soil as far as possible.
The manufacturing businesses that we acquire often operate in
industries that can be among the most difficult to decarbonise.
Through focused investment, we encourage our businesses to
improve their operations and market offerings and therefore minimise
their negative impact on climate change. Our approach also helps
them reduce their vulnerability to climate-related risks and safeguard
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 climate change within each business that we acquire,
as we invest in improvement actions we enable them to
continue this positive trajectory beyond our ownership period.
UN SDGs
Group climate-related targets
Progress
Respecting and protecting the environment
• Reduce CO2e/£m revenue by 20% on
average across the businesses by 2025
and 40% by 2030(1)
• Achieve net zero GHG emissions by 2050(2)
On track
On track
• Source 50% of our electricity from renewable
sources by 2025 and 75% by 2030(3)
In progress
Investing in and supporting our businesses
as they develop products and services
aligned with a net zero future
• Achieve 50% of total R&D expenditure on
climate-related R&D per year to contribute to
the decarbonisation of our businesses’ sectors
by 2025, 75% by 2030 and 100% by 2040
• Achieve 50% of new products which
contribute to the decarbonisation of our
businesses’ sectors by 2025, 75% by 2030
and 100% by 2040
On track
On track
(1) Target baselined on 2021 performance. Baseline was set in conjunction with the timeframe
of the Group’s target-setting process.
(2) Including Scope 1, 2 and 3 emissions.
(3) Where renewable electricity is commercially and reasonably available in the relevant
jurisdiction.
(4) The data has been standardised from the source units in which it was initially collected.
The turnover figures used to calculate the intensity ratio include continuing businesses
only and do not include any share of revenues from entities in which the Group holds an
interest of 50% or less.
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Energy consumption and carbon emissions
The GHG emissions for the Group, broken down by Scope 1,
Scope 2 and some Scope 3 emissions, for 2022 and 2021, are
set out in the table opposite. In 2022, the Group reported a small
decrease in total absolute Scope 1 and Scope 2 GHG emissions
and a decrease in total operational energy consumption intensity of
6% (based on the MWh of energy used across all of our businesses’
locations). Scope 3 emissions have increased due to the expansion
of data collection across the Group in 2022 versus 2021, and we
expect this percentage to fluctuate in future years as the quality of
our reporting improves. In 2022, despite there being increases in
absolute Scope 2 and 3 emissions, operational energy consumption
decreased and both intensity ratios decreased compared to 2021.
This is reflective of the fact that revenue has increased at a higher
rate than energy consumption year-on-year, as well as the additional
Scope 3 category reported (Category 3: Fuel and energy-related
activities not included in Scope 1 or Scope 2). Increases in Scope 2
emissions are also due in part to the higher country specific emissions
factors compared to previous years. The Group’s chosen intensity
ratio is energy consumption and emissions reported above
normalised MWh and tonnes of CO2e per £1,000 of turnover(4), which
we believe remains the most appropriate intensity ratio for Melrose
given our business model and structure.
c.10%
reduction in emissions intensity
from 2021 against the 20%
reduction target by 2025
Melrose Group energy consumption and GHG emissions for the period 1 January 2022 to 31 December 2022
2022
2021(1)
Global
Global
UK
(excl. UK)
Total
UK
(excl. UK)
Total
Change
(2022/21)
Energy (MWh)(2)
Total operational energy consumption
103,902
2,523,360
2,627,262
123,654
2,662,113
2,785,767
-6%
Company’s chosen intensity measurement(3):
Energy consumption reported above normalised MWh per £1,000 turnover
0.014
0.335
0.349
0.018
0.387
0.405
-14%
Emissions(2) (CO2e)(4)
Scope 1: Direct GHG emissions(5)
Scope 2: Indirect GHG emissions(6)
Total Scope 1 and Scope 2 emissions
7,716
151,656
159,372
9,394
160,476
169,870
11,934
19,650
603,728
755,384
615,662
775,034
15,313
24,707
590,382
605,695
750,858
775,565
Company’s chosen intensity measurement(3):
Emissions reported above normalised tonnes per £1,000 turnover
0.003
0.100
0.103
0.004
0.109
0.113
Scope 3 emissions:
Category 3: Fuel- and energy-related activities (T&D)(7)
Category 3: Fuel- and energy-related activities (WTT)(8)
Category 6: Business travel and business travel (WTT)(9)
Total Scope 3 emissions
1,194
4,172
–
40,178
25,481
–
5,366
65,659
41,372
29,653
14,953
85,978
1,355
1,611
–
44,054
26,467
45,409
28,078
–
6,873
2,966
70,521
80,360
-6%
2%
0%
-9%
-9%
6%
118%
7%
(1) 2021 data has been restated.
(2) The 2022 and 2021 data include continuing businesses only.
(3) The data has been standardised from the source units in which it was initially collected. The turnover figures used to calculate the intensity ratio include continuing businesses only and do not
include any share of revenues from entities in which the Group holds an interest of 50% or less.
(4) CO2e – carbon dioxide equivalent, this figure includes GHGs in addition to carbon dioxide.
(5) 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.
(6) 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.
(7) Electricity transmission and distribution losses.
(8) Emissions from fuel-related well-to-tank.
(9) Including rail and vehicle travel information, collected from 100% (by revenue) of the Group, and air travel collected from 100% (by revenue) of the Group in 2022. For 2021, this category included
only business travel collected from 63% of sites (by revenue) of the Group.
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 best
practices. At the end of 2022, in recognition of the businesses’ strong
focus on ensuring an efficient and sustainable use and management
of energy, 108 sites (76.6%) across our businesses were certified to
ISO 14001 standard (2021: 74%), and 26 sites (18.3%) achieved ISO
50001 certification (2021: 28 sites, 18.4%).
Group Net Zero Transition Plan
In 2022, we published our inaugural Melrose Group Net Zero
Transition Plan, providing our stakeholders with clarity around
the actions we intend to take in the transition to a net zero
economy, and our plan to execute on our interim and long-term
emissions reduction targets through their integration into the
Group’s strategic thinking and future planning, like major capital
expenditures, acquisitions and disposals.
This section has been prepared for the reporting period of 1 January 2022
to 31 December 2022, and in accordance with the reporting 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 material emission sources from within the organisational
and operational scope and boundaries of the Group, as 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. These emission 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. The emission factors from the UK Government’s
GHG Conversion Factors for Company Reporting 2022 (the Department
for Environment, Food and Rural Affairs (“DEFRA”) factors) together with
the International Energy Agency (“IEA”) country-specific factors for the
associated overseas electricity usage have been used to calculate the
GHG emissions figures.
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4
Introduction
Transition Plan
Our objectives
Introduction
Our business model
Melrose Industries PLC (“Melrose”, the
“Company”, the “Group” or “we”) and our
business units (“businesses” or “divisions”)
The success of our “Buy, Improve, Sell”
business model relies on buying high-quality
industrial businesses that are
underperforming their potential, but which
have established positions in markets that
Transition Plan.
This Plan aims to provide our stakeholders
with clarity around the actions we intend to
take in the transition to a Net Zero economy,
and how we plan to execute on our short and
medium-term emissions reduction targets to
achieve Net Zero across the Group by 2050.
We always seek to help enhance the
baseline intensity of our businesses’
emissions within our limited period of
ownership in line with our business model.
We must therefore align our actions with the
dynamic nature of our portfolio to ensure
that our targets and commitments can
remain relevant if and when the Group
composition changes from time to time.
decarbonise. Within the “Improve” stage of
our ownership model, we focus on building
them into new, better businesses that are
positioned to prosper over the longer-term.
This requires us to integrate our core
sustainability principles and our Group
climate commitments into our businesses’
strategic agendas.
In line with our decentralised structure, we
provide our businesses with the investment
and resources to ensure that they each
develop and execute on their respective
sustainability and climate strategies. Our
businesses are encouraged to prioritise
climate-focused projects in alignment with
their operational, market and sectoral
environments throughout our ownership
period and beyond.
We build our businesses’
resources and capabilities, to enable
them to pursue commercially attuned
sustainability improvement initiatives that
can continue beyond our ownership.
With that in mind, we provide the
strategic focus and investment to
improve our businesses’ sustainability,
governance and overall performance,
and their broader stakeholder value.
5
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Given the dynamic nature of our Group composition and the
transitionary nature of the sectors in which our businesses operate,
we have a corporate social responsibility to drive change among
our businesses towards accelerating the transition to a lower
carbon economy.
Our businesses represent almost all of our Group carbon
footprint. The main metric we use to assess performance for our
Net Zero commitment is carbon intensity by turnover, which
enables us to track the carbon intensity of our businesses
When setting the parameters for our medium and long-term
targets and objectives, we took into account the differences
among our businesses, and our distinct “Buy, Improve, Sell”
business model. Our Group environmental targets and
commitments apply to all of our businesses during our ownership
and with their longer-term performance in mind.
Overview
50%
50%
Products contributing
to sectoral
decarbonisation
Achieve 50% of new
products contributing
to the decarbonisation
of the sectors in which
our businesses
operate by 2025,
75% by 2030 and
100% by 2040.
Low-carbon R&D
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.
75%
Renewable electricity
Source 50% of our
electricity from
renewable sources by
2025 and 75% by 2030.
95%
40%
25%
Waste
Divert 95% of our
2025 and 100% by
2030.
Emissions
Water
Achieve a 25%
reduction in water
withdrawal intensity
by 2030
Achieve Net Zero GHG
Emissions by 2050. This
includes reducing CO2e/
£m revenue by 20% on
average for Scope 1 and
2 emissions across our
businesses by 2025 and
40% by 2030.
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Download our Transition Plan:
www.melroseplc.net/media/3036/
melrosetransitionplan.pdf
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Sustainability review
Continued
Executive
summary
Task Force on
Climate-related
Financial Disclosures
Report
The transition and physical effects of climate change continue to accelerate, and
impactful action is required to reduce global emissions. We recognise the need for
transparency to enable our stakeholders to understand the climate-related risks
that we may face as a Group, how we can manage them, and how we support our
businesses as they seize opportunities to decarbonise their own operations and
their respective sectors.
This second TCFD Report reflects our and our businesses’ progress in integrating climate
considerations into business strategy and risk management. Being a continual journey, we
recognise the opportunity to continue to refine our climate-related disclosures over time, as
regulatory requirements and our stakeholders’ expectations evolve, new ways of improving
our climate data availability and quality emerge, and our climate analytics capabilities and
understanding of implications associated with climate change develop.
This report consists of four thematic sections. The Governance section describes how
climate risks and opportunities are managed in our governance structures. The Strategy
section focuses on the integration of climate-related considerations into our Group strategy.
The Risk Management section reflects our established processes for identifying and managing
climate risks across our governance structures, and the eventual oversight of our businesses’
progress on managing climate-related risks and acting on associated opportunities.
Finally, the Metrics and Targets section explores the indicators we use to drive our businesses
as they work to achieve our Group short, medium and long-term climate targets.
For clarity around compliance of the following information with the TCFD framework, the
TCFD All Sector Guidance and Supplemental Guidance for Non-Financial Groups(1) and the
requirements arising from Listing Rule 9.8.6R(8), we consider our disclosure to be consistent
with all TCFD recommendations and recommended disclosures, as shown in the below
TCFD cross-reference and disclosure consistency summary.
Recommendation
Recommended disclosures
Governance
Disclose the organisation’s governance
around climate-related risks and opportunities
Strategy
Disclose the actual and potential impacts
of climate-related risks and opportunities on
the organisation’s businesses, strategy, and
financial planning where such information
is material
a) Describe the Board’s oversight of climate-related risks and opportunities
b) Describe management’s role in assessing and managing climate-related risks
and opportunities
a) Describe the climate-related risks and opportunities the organisation has identified over the
68-72
short, medium, and long term
b) Describe the impact of climate-related risks and opportunities on the organisation’s businesses,
72-74
strategy, and financial planning
c) Describe the resilience of the organisation’s strategy, taking into consideration different
climate-related scenarios, including a 2°C or lower scenario
Page reference
67
67-68
Risk Management
Disclose how the organisation
identifies, assesses, and manages
climate-related risks
a) Describe the organisation’s processes for identifying and assessing climate-related risks
b) Describe the organisation’s processes for managing climate-related risks
c) Describe how processes for identifying, assessing, and managing climate-related risks are
integrated into the organisation’s overall risk management
Metrics and Targets
Disclose the metrics and targets used to
assess and manage relevant climate-related
risks and opportunities where such
information is material
a) Disclose the metrics used by the organisation to assess climate-related risks and opportunities
76
in line with its strategy and risk management process
b) Disclose Scope 1, Scope 2, and, if appropriate, Scope 3 GHG emissions, and the related risks
c) Describe the targets used by the organisation to manage climate-related risks and opportunities
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and performance against targets
(1) https://assets.bbhub.io/company/sites/60/2021/07/2021-TCFD-Implementing_Guidance.pdf.
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Governance
Melrose Board believes that the integration of sustainability and
climate-related matters into our “Buy, Improve, Sell” strategy is crucial
to the success of our businesses. Sustainable value creation is
integrated into our business model, as illustrated on page 5.
Our established sustainability governance and risk framework with
clear accountabilities enables us to identify and review climate-related
risks and opportunities. We recognise that addressing climate-related
risks must reflect our business model, and also take into account
impacts on the Group’s investment focus, existing and future
employees, financial position and performance, and remain relevant
to our businesses’ sectoral challenges. Climate change is reviewed
at various levels on a cross-functional basis including the Board, its
committees, the Melrose senior management team and the divisional
executive management and sustainability teams. Please see our
Group sustainability and climate change governance framework
on pages 62 to 63 for further information.
a) Describe the Board’s oversight of climate-related risks
and opportunities.
The Melrose Board of Directors, supported by the Melrose senior
management team, has oversight of and ultimate responsibility for
Melrose’s sustainability strategy, targets, disclosures, and reporting.
The Board assesses climate-related risks and opportunities among
other sustainability and environmental material topics and monitors the
Group’s performance towards achieving its climate-related targets. The
Board also oversees our alignment with the TCFD recommendations
and the commitments set out in our Group Net Zero Transition Plan,
which was published in 2022 in line with the UK Transition Plan
Taskforce’s (“TPT”) guidance.
The Board receives annual training and quarterly updates on key
sustainability and climate-related matters that impact the Group
and its businesses, and on the specific measures that need to be
implemented to improve our businesses’ performance towards
achieving our Group climate-related targets.
The Board regularly considers climate-related matters when reviewing
and guiding strategy and overseeing its implementation. This oversight
occurs through the Board attending business reviews during the
year at which the CEOs of our Group businesses are regularly invited
to present, as well as through the provision of Board papers and
presentations by the Melrose senior management team at quarterly
Board meetings. Through this oversight of the Group sustainability
strategy, governance policies and risk management, and of the
Melrose senior management team in its supervision of climate-related
matters with the Group businesses, the Board oversees the
implementation of improvement measures. Progress in improving
climate-related matters is monitored by the Melrose senior
management team and reported to the Board for its review, challenge
and discussion on a quarterly basis. This includes the tracking of
Group targets, and key metrics such as year-on-year reduction in
emissions, increase in climate-related R&D spend, the number of
new products contributing to decarbonisation and other innovation
programmes.
The Audit Committee with the support of the Melrose senior
management team updates the Board on climate risk management
by monitoring and reviewing the effectiveness of the risk management
processes, including the review of the Group’s principal risks which
include the climate change risk.
The Remuneration Committee implements the Company’s Directors’
remuneration policy (“Directors’ Remuneration Policy”). The
Remuneration Committee considers that the most appropriate place
to recognise progress in relation to sustainability and climate-related
matters within the Melrose executive remuneration structure is in the
annual bonus plan, as part of the strategic objectives. As part of the
renewal of the existing Directors’ Remuneration Policy at the 2023
annual general meeting, the Remuneration Committee is proposing
to adjust the weightings of the performance measures in the annual
bonus plan such that ESG can become a specific focus of the award,
with a defined component to ensure further incentivisation to deliver
the Company’s ESG strategy. The 2023 Directors’ Remuneration
Policy will enable an award based on financial performance metrics
of at least 50%, ESG performance metrics of at least 10%, and the
remainder based on strategic performance metrics. This structure will
provide the Remuneration Committee with flexibility each year to set
the factors that are most appropriate to the Company and its strategy
and, consistent with current market practice, will be disclosed
retrospectively due to commercial sensitivity (consistent with the
approach taken to the existing strategic element). The intention will
be to increasingly align the ESG factors with performance against
the Company’s published targets in this area, as the quality of data
increases. However, it is proposed that the current executive Directors
for the duration of the 2023 Directors’ Remuneration Policy will
continue on the current arrangements, with a maximum opportunity
of 100% of salary, split between financial performance metrics (at least
50%) and strategic and/or personal objectives (which will continue
to include ESG). Please see the Directors’ Remuneration report on
pages 119 to 144 of the Strategic Report for more details.
Oversight of sustainability and climate-related issues is integrated
across our Board and its committees as outlined in the Group
sustainability and climate change governance framework on
pages 62 to 63.
b) Describe management’s role in assessing and managing
climate-related risks and opportunities.
The Melrose senior management team plays a key role in escalating
material sustainability and climate risks and opportunities to the Board
and ensuring that the implications of these are considered within the
Board’s agenda, governance framework, business strategy and
where relevant, financial plans, to address climate-related risks and
pursue opportunities. More information on how we determine the
materiality of climate-related risks and their financial impact can be
found in the Strategy b) section on pages 72 to 74.
The Melrose senior management team incorporates the Group’s
sustainability function, which is overseen by the Group Company
Secretariat, and is responsible for executing the Group’s sustainability
strategy, as approved by the Board. This includes the monitoring of
improvement actions and performance towards achieving Group
climate-related targets (including reduction in energy consumption
and emissions, increase in climate-focused R&D and new products
contributing to the decarbonisation of our businesses’ sectors),
the TCFD recommendations and the inaugural Group Net Zero
Transition Plan.
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Sustainability review
Continued
Climate-related risks and opportunities are discussed regularly
amongst the Melrose Executive Committee including at weekly
management meetings as appropriate, and in decision-making that
relates to setting strategy to mitigate identified risks or capitalise on
opportunities. Risks and opportunities that are considered by the
Melrose senior management team to be material to the Group are
reported to the Board each quarter.
Where relevant, the Melrose senior management team considers
climate-related risks and opportunities with the businesses’ respective
executive management teams when reviewing and guiding strategy,
which can include the approval of major capital expenditure. As such,
the Melrose senior management team regularly engages with the
executive teams and sustainability leads of each business, to identify
and assess their sustainability and climate-focused improvement
plans, performance against Group climate-related targets, and their
sustainability reporting alongside financial and operational metrics.
The Melrose senior management team oversees the identification
of Group climate-related risks and opportunities with the support of
the businesses, who identify, monitor, and manage the specific risks
relevant to their sectors, markets and operating activities. These are
reported to the Melrose senior management team to ensure that
risks and opportunities are identified with reference to our businesses’
strategies and sectors, and that required controls are in place for
appropriate mitigation and management.
The Melrose senior management team also oversees the assessment
of Group climate-related risks and opportunities with the support of
advisors where appropriate, who contribute to the awareness and
analysis of climate-related risks and opportunities that are relevant
to the Group businesses’ sectors, in light of the evolving regulatory
requirements and industry best practice. Insight and analysis of risk
impacts and trends are collated, challenged and reported to the
Audit Committee, and ultimately to the Board by the Melrose senior
management team.
Melrose runs a decentralised business model and believes that the
tactical implementation of climate-related actions and initiatives is
most effective when carried out by our businesses themselves, and
overseen by their respective executive teams. This is where direct
impact can be made within their distinct business strategies and
sectoral contexts. As such, each business’s CEO and executive
management team are accountable for reducing negative impact on
the climate within their operations and interacting with their respective
supply chains in line with the adopted Group sustainability targets and
commitments. Each business’s sustainability team coordinates and
collaborates with other operational functions to execute programmes
aimed at progressing towards achieving our Group climate-related
targets. The Melrose senior management team has ultimate oversight
of each business’s sustainability and climate-related performance and
conducts quarterly reviews to assess progress and align actions for
each Group climate-related target alongside other sustainability
metrics and targets.
The assessment and management of sustainability and climate-
related risks and opportunities are integrated across our cross-
functional Melrose senior management team, which includes Group
corporate, tax, risk management, finance, legal and sustainability
functions. Our Group sustainability and climate change governance
framework depicts the relationships between the Melrose senior
management team and the Board, its committees, and divisional
executive and sustainability teams, as well as external advisors.
Melrose Group transition and physical risks by time horizon and climate scenario
Risk type
Transition
Technology
Low-carbon scenario RCP 2.6
High-carbon scenario RCP 6.0
Market
Low-carbon scenario RCP 2.6
High-carbon scenario RCP 6.0
Carbon policy and regulations
Low-carbon scenario RCP 2.6
High-carbon scenario RCP 6.0
Reputation
Low-carbon scenario RCP 2.6
High-carbon scenario RCP 6.0
Risk type
Physical
Property
Combined scenario (RCP 2.6/6.0)
Supply Chain
Combined scenario (RCP 2.6/6.0)
Production
Combined scenario (RCP 2.6/6.0)
2024
2027
2040
Medium
Low
Medium
Low
Medium
Low
Low
Medium
Medium
Medium
Medium
Low
High
Low
Medium
Medium
High
Medium
Medium
Medium
High
Medium
Medium
High
2024
2027
2040
Low
Low
Low
Low
Low
Low
Medium
Medium
Medium
Increasing magnitude of risks before mitigation activities
Low
Medium
High
Strategy
a) Describe the climate-related risks and opportunities the organisation has identified over the short, medium and long-term.
Climate scenario analysis
Melrose carried out an initial climate scenario assessment in 2021, using two Representative Concentration Pathways (“RCPs”) scenarios,
which set the most conventional and understood pathways for concentrations of GHG emissions and, effectively, the amount of warming that
could occur by the end of the century. The results of this analysis can be found on our website at www.melroseplc.net/sustainability/our-key-
principles/respect-and-protect-the-environment/climate-change.
To aid readers of this report, we provide a summary of the two scenarios, together with an overview of our climate risks and opportunities.
Low-carbon scenario (RCP 2.6)
Very stringent. Emissions start declining immediately and get to zero
by 2100. Warming likely to be below 2°C.
High-carbon scenario (RCP 6.0)
Some mitigation. Emissions rise to 2080 and fall causing high physical
impacts. Warming likely to exceed 2°C.
Our climate scenario modelling of both risks and opportunities over the short, medium and long-term time horizons reflects the investment
and value creation cycle of our “Buy, Improve, Sell” model as the Group aims to increase the value of its businesses at the point of their sale by
integrating climate risk and opportunity considerations during its ownership. The time horizons used for the scenario analysis are as follows:
Climate scenario time horizons
Short-term until 2024
Medium-term until 2027
Long-term until 2040
Aligned with Melrose’s investments and immediate improvement phase.
Aligned with Melrose’s ownership and the “Improve” aspect of our business model.
Expected to align with the period beyond Melrose’s ownership.
Climate-related risks and opportunities
We have identified four transition risks and three physical risks that
have the potential to materially impact the Group and its current
businesses. Material risks are those that could have a significant
effect on our businesses’ operations, strategy, and financial planning
if they are not managed appropriately over the three time horizons.
As shown by our climate scenario analysis, transition risks are more
material within the Group than physical risks. It was also found that
our transition climate risks are very closely aligned with associated
opportunities, informing the allocation of Melrose investment and
the strategic focus of our businesses’ efforts towards mitigating the
Technology, Regulatory and Market risks.
Against three transition risks we identified three opportunities, which
are considered material and, if seized upon successfully, will improve
not just the Group’s and our businesses’ performance, but also
reduce our impact on the planet. We reflect below on some of the
key short, medium, and long-term transition risks faced by the Group
and some of its businesses and the corresponding opportunities
that they seek to seize with focused investment from Melrose.
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Sustainability review
Continued
Transition climate risks
Technology Risk
Group level scenario analysis
Low-carbon scenario RCP 2.6
High-carbon scenario RCP 6.0
Group level
Risk description
2024
2027
Medium
Low
Medium
Medium
2040
High
Medium
The increasing demand for lower-carbon technologies can render current products obsolete, and the investment in new technologies that are not focused on
climate, unsuccessful. Due to the very nature of its focus on the industrial sectors, the Group is exposed to technology risks as it buys manufacturing businesses
with a view to improving them during its ownership. Very often, the businesses operate in industries in which the reduction of carbon footprint can be challenging.
The participants within these sectors are under increasing pressure to develop and scale new lower-carbon technologies that help to drive down emissions
(for example, use of hydrogen, zero-carbon aircrafts, increasing penetration of battery electric vehicles (“BEVs”) and plug-in hybrid electric vehicles (“PHEVs”)).
This pressure is likely to increase over time under both climate scenarios.
Opportunity description
The Group is well-positioned to contribute to decarbonisation and the acceleration of the global ambition to reach Net Zero given its access to businesses in sectors
that are in most need of investment and support to combine carbon focus with efforts to improve their productivity and international competitiveness. Opportunity
therefore lies in the potential to gain a competitive advantage in the early development of alternative lower-carbon technologies and the manufacturing of products
that are compatible with new emerging technologies which support the transition to a low-carbon economy. Our analysis of the technology risk once again
underlines the business opportunity that Melrose has as a Group in enabling the net zero transition, building on its over two decades long expertise in the UK
and international manufacturing arena.
Divisional/sector level
Risk description
Under the low-carbon scenario in particular, the Technology risk is expected to
increase across the aerospace and automotive industries due to the rising pressure
to develop and scale new lower-carbon technologies to drive down emissions
(for example, use of hydrogen, zero-carbon aircrafts, increasing penetration of BEVs
and PHEVs).
Aerospace: Potential Technology risk is associated with hydrogen fuel aircraft due
to the incompatibility of current aircraft components with hydrogen fuel. Managing
the development of hydrogen technology needs to be carried out carefully to
account for increased operating and R&D costs needed to respond to new
machinery, and the needs for training and competence development.
Automotive: Investment in new technologies such as hydrogen technology
or components for electric vehicles (“EVs”) may fail to gain traction resulting
in R&D losses. The progression in technology is leading to greater
electrification of vehicles and it is projected that the BEVs’ and PHEVs’ share
of global production will be 29% in 2027. This may cause disruptions to
the automotive industry as some components, such as propshafts, used
in internal combustion engine (“ICE”) vehicles are becoming obsolete.
If technology is not made more competitive the overall attractiveness
of EVs will decrease and slow the demand for EV compatible components,
risking the investments made in EV technology.
Opportunity description
Aerospace: GKN Aerospace is already investing in low-carbon R&D in line with the
Group sustainability target and is active in initiatives aimed at upskilling the future
leaders of the aerospace sector. For more information about GKN Aerospace’s
opportunities to address the Technology risk, please see page 73.
Automotive: Opportunity lies in improving the competitiveness of EV
products compared to fossil fuel-based vehicles, to ensure that the overall
attractiveness of EVs does not decrease or slow the demand for EV-
compatible components, and that the investments already made in EV
technology are not at risk. For more information about GKN Automotive’s
opportunities to address the Technology risk, please see page 73.
Opportunity description
Aerospace: The projections for the Market risk to be ‘low’ in the short and
medium term, and only rise to “medium” in the long term under RCP 2.6, are due
to the potential passenger transportation volume expected to increase with global
population and economic growth. This presents multiple opportunities, including
its contribution to the industry in the replenishment of existing fleets with the very
latest lightweight and efficient components and products, and planning new
aircraft and engine design to further improve efficiency and reduce emissions.
With its market position, GKN Aerospace has a unique opportunity to address the
increasing passenger demand for lower-carbon options and become a frontrunner
in the production of parts for zero-carbon aircraft using sustainable aviation fuels.
Automotive: With all of its products designed to meet the highest
international and OEM standards for hazardous materials and recyclability,
therefore minimising the CO2 impact of its customers’ vehicles, GKN
Automotive is well-positioned to address the Market risk. Additionally, it is now
a supplier on nine of the top ten addressable BEV platforms, outside of China,
and has an order book that is matching the market in terms of the shift to EVs.
For more information, please see page 73.
Carbon policy and regulations Risk
Group level scenario analysis
Low-carbon scenario RCP 2.6
High-carbon scenario RCP 6.0
Group level
Risk description
2024
Medium
Low
2027
High
Low
2040
High
Medium
The Group’s exposure to the potential carbon policy and regulatory risk is dictated by its historical focus on buying and improving businesses which often operate in
some of the most carbon-intensive industries. This presents a risk of potential tightening of carbon policies and regulation, including stricter emissions standards for
production activities, taxes on specific products and processes and carbon pricing on carbon-intensive materials, which can affect the Group’s performance.
Divisional/sector level
Risk description
Due to the energy-intensive nature of manufacturing, our businesses are exposed
to increasing carbon policy and regulatory risks in short, medium and long-term
horizons, particularly under the low carbon RCP 2.6 scenario. The high carbon
RCP 6.0 scenario assumes less near-term regulatory intervention and as such,
risk exposure does not begin to manifest until 2040. Carbon prices are forecast to
increase over the medium and long term to make businesses more responsible for
their energy use and carbon emissions. The scope of carbon prices is also forecast
to encompass more industries, with particular attention paid to carbon-intensive
such as manufacturing. Increases in the cost of carbon are also likely to impact not
only our businesses’ direct energy bills but also their supply chain costs. For more
information on mitigation of the policy and legal risk, please see page 74.
Automotive and Powder Metallurgy: Products and components are
being increasingly regulated with various restrictions, such as the EU’s
target of reducing CO2 emissions from new cars and vans by 55% by 2030,
and a complete ban on the sale of new ICE vans and cars by 2030. This
means that components manufactured by GKN Automotive and GKN
Powder Metallurgy must be developed in line with these regulations.
Powder Metallurgy: Several manufacturing practices are more challenging
to decarbonise. For example, some of GKN Powder Metallurgy’s processes,
such as the use of furnaces which are energy-intensive, present a risk with
increasing carbon regulations and pricing. Current limitations of technology
and cost prove a barrier to decarbonising these processes, and GKN
Powder Metallurgy is continuously exploring ways to improve.
Market Risk
Group level scenario analysis
Low-carbon scenario RCP 2.6
High-carbon scenario RCP 6.0
Group level
Risk description
2024
2027
2040
Medium
Low
Medium
Low
Medium
Medium
Sector reputation Risk
Group level scenario analysis
Low-carbon scenario RCP 2.6
High-carbon scenario RCP 6.0
Group level
Risk description
2024
Low
Medium
2027
2040
Medium
Medium
Medium
High
The Market risk comes from the changing demand for products due to shifting customer sentiment towards lower-carbon options. The Market risk is intrinsically
linked with the Technology and Sector reputation risks, hence the mitigation strategies are similar. Under the lower-carbon scenario, Market risk exposure remains a
stable medium across all time horizons. Under the high-carbon scenario, exposure does not manifest until 2040.
Opportunity description
The transition to low-carbon transport presents an opportunity to produce components that will differentiate the Group’s businesses from competitors and position
them for growth in their markets. In line with its sustainability principles, the Group leverages its unique expertise and knowledge of the manufacturing sectors and
markets, to boost its businesses’ productivity, ensuring the highest standards of product safety and encouraging them to adhere to the highest market standards.
Divisional/sector level
Risk description
There is potential uncertainty around which aerospace and automotive
technologies will prevail in the market and which technologies customers will
favour, and the businesses need to be cognisant of shifting consumer preferences.
Aerospace: The projected shift of consumer demand to lower-carbon travel
options can potentially cause a threat to overall air travel demand. This may result
in fewer aircraft and hence fewer component purchases. Additionally, in certain
markets, passengers may prefer to start using alternative modes of transportation
such as trains, and although air traffic is expected to grow until 2040, it is predicted
to be slower than in the early 21st century.
Automotive: As with the Technology risk, a more rapid than the forecast
shift to EVs and sustainable transport could result in several components
manufactured for ICEs not being needed by EV customers. Failure to adapt
to an increased demand for electric components may cause a loss in
market share.
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Melrose’s current portfolio of businesses operate in some of the highest emitting and hardest to decarbonise sectors. The expectation of accelerating the path
towards Net Zero comes with a responsibility for affecting positive climate impact across supply chains, product use habits, and sectoral contribution to more
efficient policy measures. Reputation risk appears to be ‘low’ in the short term under the low-carbon scenario, and it is the only climate risk that was found to
be more prominent under the high-carbon scenario. This is due to assumptions around increased stakeholder pressure and the limited carbon policies and
interventions assumed in this scenario, which could mean that emissions in manufacturing sectors stay relatively high and that the Group’s short and medium-term
emissions reduction targets are missed. This could result in reputational damage, as well as a reduction in access to capital from environmentally conscious
investors.
Opportunity description
The identified challenges also present significant opportunities through process integration (such as combining various operations to reduce consumption of
resources and therefore emissions), developing and commercialising low-carbon alternative components and other innovative solutions that decrease energy use.
Divisional/sector level
Risk description
Stakeholders, including suppliers, customers and investors, prefer manufacturers that better align with their own climate-related targets and commitments.
Those companies that cannot decarbonise fast enough risk becoming misaligned with the expectations of their stakeholders.
Opportunity description
Our businesses are well prepared to meet their major customers’ expectations relating to environmental and climate performance, leveraging the Group’s corporate
governance framework, policies and sustainability targets and commitments (as shown on pages 62 to 63 and 58 to 59), to maintain a focus on decarbonising their
own operations and increase the focus on developing and providing low-carbon components. For examples of mitigation strategies of each of our businesses,
please refer to page 74.
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Property
Supply Chain
Production
2024
2027
2040
2024
2027
2040
2024
2027
2040
Examples of our businesses’ actions to address the Technology climate change risk
72
Sustainability review
Continued
Physical climate risks
In the Group 2021 climate scenario analysis, physical climate risks were given a single combined risk rating, as it was established that physical
outcomes were not likely to begin to diverge significantly until after 2040 under both scenarios assessed. The below overview sets out the
results of the analysis of physical climate risk exposure considering three risk categories.
Melrose Group-level exposure to physical climate risks
Physical Risks and Potential Impact Ranking – Combined scenario RCP 2.6/6.0
2024
2027
2040
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).
Low
Low
Medium
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.
Low
Low
Medium
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.
Low
Low
Medium
Combined scenario
RCP 2.6/6.0
GKN Aerospace
GKN Automotive
GKN Powder Metallurgy
Medium
Medium
Medium
Low
Low
Low
Low
Medium
Medium
Low
Low
Low
Low
Low
Low
Medium
Medium
Medium
Low
Low
Low
Low
Low
Low
Medium
Medium
Medium
Overall, exposure to material or unmitigated physical climate risks was found to be significantly lower across the divisions relative to transition
risks in both the short and medium-term under both scenarios. Physical risks begin to increase in the longer term (from 2040), for example
through the increasing likelihood of river flooding risk in the UK or increasing wildfire risk in California.
Please see pages 75 and 111 for further details on how climate
change risk is taken into account in the Group’s impairment testing
which includes short to medium-term planning (five years) for each of
the Group’s cash-generating units (“CGUs”), and addresses known
risks from climate change and other environmental factors impacting
forecast costs as well as the opportunities in associated markets as
they prepare for change, for example, hydrogen propulsion within the
aerospace industry and electrification within the automotive industry,
which may impact revenues.
We outline further how climate-related risks influence the Group and
its businesses, alongside some cases that exemplify the risks our
businesses face, and how these are addressed through mitigation,
and strategies to capitalise on them. In defining the risk and
opportunity types, we were guided by the examples of climate-related
risks and opportunities and potential financial impacts recommended
by TCFD (Tables A1.1 and A1.2 in the TCFD Implementing Guidance(1)).
b) Describe the impact of climate-related risks and opportunities
on the organisation’s businesses, strategy, and financial
planning.
Climate change has a direct impact on product strategy, development,
and financial planning across our businesses. Over the last three
years, with the support of the Board and Melrose senior management
team, our businesses have invested c.£340 million on climate-related
R&D programmes that primarily aim to develop technologies that help
their customers improve energy efficiency and reduce GHG emissions
compared with conventional technologies.
During 2022, we continued to consider the findings from our
climate scenario analysis and progressed our Group sustainability
improvement actions, including consideration of some of the potential
financial impacts across the assessed climate scenarios for our
businesses’ sectors. Much of this analysis remains qualitative at this
stage, but the Group has begun to consider quantifiable impacts
against certain risks internally, where the underlying data is available
and where current visibility of the risks allows. The potential financial
impacts of the Group’s positive and negative exposure to climate
risks and opportunities require many assumptions to be made in
respect of factors such as low-carbon technology forecasts, energy
consumption, carbon pricing forecasts, and others, which are
subject to high variability. The analysis conducted to date shows
that our overarching business strategy would not be impacted, and
importantly, mitigating actions are already in place for most risks,
which significantly reduces potential negative financial impacts. There
will be opportunities to continue to iterate our analysis as the scope
of relevant data and assumptions becomes available both internally
and externally to support and inform further quantitative assessment.
(1) www.tcfdhub.org/wp-content/uploads/2022/04/Table-A1.1-and-A1.2-marked.pdf.
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TCFD risk type
Technology
Sub-category risks
Potential financial impact
• Substitution of existing products and services with
• Increased R&D costs to respond to technology
lower emissions options
• Costs to transition to lower emissions technology
and market trends and increasing capital
expenditure to invest in new and specialist
machinery
TCFD opportunity type
Opportunity categories
Potential financial impact
Products and services
• Development and/or expansion of low emission
• Increased revenue through demand for lower
goods and services
emissions products and services
• Development of new products or services through
R&D and innovation
• Ability to diversify business activities
• Shift in consumer preferences
Mitigation and strategy to capitalise
Whilst Technology risk is significant for the Group over the medium to long term, mitigating activities can be introduced to reduce risk and ultimately provide the
businesses with new opportunities through continued focus, investment and collaboration. The Group’s targets for climate-related R&D spend, and new low-carbon
products help identify new technologies to guide and capitalise on the businesses’ individual climate-focused capital expenditure programmes. Melrose’s businesses
actively collaborate with other aerospace and automotive sector participants to support the decarbonisation of air and motor travel, ensuring that they are at the
forefront of innovation, as climate-focused organisations.
GKN Aerospace
GKN Automotive
GKN Hydrogen
GKN Aerospace leads a ground-breaking UK
collaboration programme “H2GEAR” which is
developing hydrogen propulsion systems that can
reduce GHG emissions by over 90% compared to
kerosene in sub-regional or regional flights. Critically,
it enables the incorporation of hydrogen-electric
power into engines and minimises the disruption risk
that hydrogen technology could cause. Producing
components that are compatible with new
technological developments will allow GKN
Aerospace to capitalise on developing revenue
streams early on in their lifetime and become
recognised for the production of new sustainable
components.
TCFD risk type
Market
GKN Automotive is well-positioned as a top tier 1
supplier to global automotive OEMs to benefit
from the opportunities presented by the ongoing
transition to EVs, with its product and technology
portfolio aligned to this industry megatrend.
Although the industry transition to EVs may lead to
a certain reduction in production of propshafts, this
will be offset with an increased demand for eDrive
components and systems which GKN Automotive
already has over 20 years’ experience in, and its
market-leading sideshaft technology for BEVs.
GKN Hydrogen’s modular product offering is
expected to be well-placed to flourish alongside
the growth of renewable energy sources, with
applications in micro grids and residential building,
industry and transportation, power back-up, and in
off-grid standalone energy storage. With safety
requirements, sustainability, and flexibility of great
importance to this expansion of energy storage,
GKN Hydrogen’s technologies are primed for rapid
growth in their application as they provide reliable
and secure hydrogen storage.
Sub-category risks
Potential financial impact
• Changing consumer behaviour
• Substitution of existing products and services
with lower emissions options
• Potential impact on revenue due to changing
product demand (for example, reduced demand
for ICE parts and increasing demand for EV parts
in the automotive sector)
TCFD opportunity type
Markets
Opportunity category
• Access to new markets
Potential financial impact
• Better competitive position to reflect shifting
consumer preferences, resulting in increased
revenues
Mitigation and strategy to capitalise
Changing market demands for low-carbon products pose a significant medium to long-term unmitigated risk for the Group. The Group’s businesses are responding
by seeking to gain a better understanding of current and potential future consumer actions and by aligning investment and strategy accordingly.
Examples of our businesses’ actions to address the Market climate change risk
GKN Aerospace
GKN Automotive
GKN Powder Metallurgy
Increased focus on individual carbon footprints
may result in reduced demand for conventional air
travel, particularly for airlines with older, less efficient
fleets. For GKN Aerospace, this presents multiple
opportunities: in the near to medium term,
supporting the industry in the replenishment of
existing fleets with the very latest lightweight and
efficient components and products, and planning
new aircraft and engine design to further improve
efficiency and reduce emissions. In the medium
to long term, it has an opportunity to become a
frontrunner in the production of parts for zero-
carbon aircraft using sustainable aviation fuels.
GKN Automotive continues to grow its significant
share of the rapidly expanding EV market. It already
holds a strong position through its leading driveline
technologies, and over 20 years of eDrive system
development. GKN Automotive has content on nine
out of the top ten selling addressable BEV platforms
outside of China, and its eDrive technologies have
powered more than 2 million EVs to date.
GKN Powder Metallurgy is also well placed to
capitalise on the low-carbon market opportunity with
further development of products such as its e-pump
system that substitutes engine-driven pumps on
vehicle transmissions. The new system can achieve
a fuel benefit of up to 10% compared to a
conventional engine driven pump and offers
customers a lower-carbon alternative. As the world’s
leading provider of powder metal solutions, GKN
Powder Metallurgy is also committed to pursuing
growth opportunities in the magnets for EVs market,
in response to the supply challenges the industry is
facing. Its dedicated magnets project team, bringing
together multidisciplinary experts, operates out of
the business’s Innovation Centres for metal powders
(in Cinnaminson, US) and for sinter metal
manufacturing (in Radevormwald, Germany).
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74
Sustainability review
Continued
TCFD risk type
Policy and legal
Mitigation
Sub-category risks
Potential financial impact
• Increased pricing of GHG emissions
• Enhanced emissions-reporting obligations
• Increased cost of raw materials
• Increased operating costs and revenue deriving
from carbon taxes and regulatory interventions,
as well as increasing costs of the raw components
in manufacturing
Melrose has a Group-level priority to support its businesses in driving the decarbonisation of their respective sectors and has set Group-level emissions reduction
targets. In recognition of the carbon-intensive nature of certain manufacturing production processes within our businesses’ operations, the Group has set a target to
reduce energy intensity, which will help to avoid or mitigate our businesses’ potential exposure to the evolving carbon regulation and the potential financial impact of
increased carbon prices.
Our businesses also invest in identifying and implementing energy reduction initiatives. Our Group interim and long-term targets to source renewable electricity
also guide our businesses in their carbon intensity reduction programmes across their operations. The Group’s participation in the CDP Supply Chain engagement
initiative has helped to quantify some of our businesses’ Scope 3 emissions footprint, and also to identify suppliers with the largest carbon footprint whose products
and components may be most impacted by carbon pricing.
Examples of our businesses’ actions to address the Policy and legal climate change risk
GKN Aerospace
GKN Automotive
GKN Powder Metallurgy
To address the expectations from its large
customers, GKN Aerospace is considering
assessing embodied carbon as part of its product
portfolio which will help it to understand the impact
of using materials with high-carbon footprint to
enable them to adjust product design to reduce it.
To help understand the most carbon-intense parts
of the business in efforts to reduce its emissions,
GKN Automotive is in the process of implementing
a tool which would assess CO2 emissions from
the manufacturing of its purchased components
and raw materials. Additionally, in 2022, it has
set Science Based Targets for its own emissions
which will be validated with the SBTi(1) in 2023.
To reduce its exposure to carbon pricing regulations,
GKN Powder Metallurgy continuously seeks
to reduce the emissions in its manufacturing
processes. One of the examples of this was the
review of its furnaces’ shift patterns which resulted
in 20% of its furnaces being shut down at any one
time, significantly reducing energy consumption
and therefore emissions.
TCFD risk type
Reputation
Sub-category risks
Potential financial impact
• Increased stakeholder concern (investors)
• Reduction in capital availability (due to investor
preferences shifting towards companies that are
less exposed to high-emitting activities)
TCFD opportunity type
Opportunity category
Potential financial impact
Resilience
• Participation in renewable energy programmes
• Increased revenue through new products and
and adoption of energy efficiency measures
services related to ensuring resilience, as well as
increased reliability of supply chain and ability to
operate under various conditions
Melrose has a Group-level priority to support its businesses in driving the decarbonisation of their respective sectors and has set Group-level emissions reduction
targets to support this. The achievement of these Group targets, including the target of 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, will put the Group and its businesses in a good position to have sector-leading positions
on the key industry platforms for producing and commercialising low-carbon products and technologies.
Examples of our businesses’ actions to address the Reputation climate change risk
GKN Aerospace
GKN Automotive
GKN Powder Metallurgy
GKN Aerospace’s collaboration in initiatives such
as the FlyZero programme which aims to realise
zero-carbon emission commercial aviation by 2030.
All GKN Automotive’s products are designed to meet
the highest international and OEM standards for
hazardous materials and recyclability, therefore
minimising the CO2 impact of its customers’ vehicles.
Improved fuel efficiency of GKN Automotive’s
components allows customers to use them with the
confidence that their final product will be within their
fuel efficiency targets.
GKN Powder Metallurgy’s several product and
service offerings with innovative technologies that
will be key to the low-carbon transition, including
the additive manufacturing business, which can
reduce the carbon footprint of manufactured
products by using much less material than traditional
manufacturing processes.
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(1) The Science Based Targets initiative.
c) Describe the resilience of the organisation’s strategy, taking
into consideration different climate-related scenarios, including
a 2°C or lower scenario.
Our climate scenario analysis focused on a selection of climate-related
risk and opportunity categories across physical and transition risk
areas, their materiality, levels of exposure and responses to them
under two scenarios: low-carbon (RCP 2.6) and high-carbon
(RCP 6.0). The scenario analysis is available on our website at
www.melroseplc.net/sustainability/our-key-principles/respect-and-
protect-the-environment/climate-change.
To identify key characteristics for assessing climate-related risks and
opportunities, we took into consideration a number of assumptions
related to policy, macroeconomic trends, emissions pathways, and
technology assumptions that were publicly available. There will be
opportunities to continue to iterate our analysis as the scope of
relevant data and assumptions becomes available both internally
and externally to improve this initial assessment.
The analysis of the two different temperature scenarios has allowed
us to verify and confirm the resilience and adaptability of our “Buy,
Improve, Sell” business strategy in meeting expectations of the global
transition to a low-carbon economy. By concluding that our strategy
can be resilient to climate-related scenarios, we take into account
three key considerations. Firstly, the Group has a responsibility to help
decarbonise manufacturing sectors that can be among the hardest to
decarbonise, and to drive industrial businesses that we own to achieve
Net Zero by 2050. Secondly, the integration of sustainability and
climate considerations into our investment cycle reflects the projected
timelines for temperature changes within our two adopted climate
scenarios(1), meaning that upon acquiring a new business, we instil
best practice governance frameworks and refocus its strategy and
investment to attain stronger performance all round, including towards
achieving our Group sustainability targets and commitments. Finally,
we have a robust risk management framework, which enables the
Board’s and the Melrose senior management team’s continuous focus
on increasing the value of the Group’s businesses for all stakeholders
and safeguarding them from any potential risks.
Risk Management
a) Describe the organisation’s processes for identifying
and assessing climate-related risks.
The objectives of the Board and Melrose senior management team
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 nature of how climate change transition and
physical risks impact each of our businesses is not homogenous and
considering that the Group operates on a decentralised basis, each
business is individually responsible for developing and managing its
own processes to monitor the associated risks that are relevant for its
respective sector and business strategy as overseen by the Melrose
senior management team.
As a principal Group risk, climate change risk undergoes the
continuous assessment through the established Melrose risk
management processes of identification, evaluation, mitigation,
analysis, review and monitoring, as is the case with other principal
Group risks. Melrose’s ‘top-down’, ‘bottom-up’ risk management
framework connects risk oversight and assessment at the Group
level with the identification and assessment of risk exposure at the
business unit level. For further details on the Group approach to
assessing its principal risks, please see the Risk management and
Risks and the uncertainties sections of the Strategic Report on
pages 38 to 48.
In 2021, we conducted and published our first formal Group climate
change scenario analysis, and in 2022, we reassessed climate-related
risks for continued relevance as part of the review of the Group risk
register given the more prominent place that climate change risk has
assumed in the risk register. Climate-related risks were assessed
alongside climate-related opportunities, based on the same criteria
that was used to determine and rate the divisional-level risks and their
relative significance in comparison to Group-level risks. This allowed
for their integration into the wider Group risk management framework.
Climate change risk comprises transition and physical risks, capturing
the climate risks identified by our businesses, and is reviewed and
updated as required, at least annually. Using the three time horizons,
our risks are ranked on both likelihood (the probability of the risk
occurring) and impact (the financial and reputational outcome of the
risk occurring), resulting in a combined Group risk register with a low,
medium or high-risk rating for each time horizon and scenario. In the
initial scenario analysis, the physical risks were given a single rating
across both scenarios(1). This is because the temperature outcomes of
the scenarios do not begin to diverge meaningfully until after 2040.
This is the time at which the physical impacts of climate change are
expected to start becoming noticeably different depending on the
scenario that is being considered. In the 2022 reassessment of
physical risks this assumption has been maintained. The above
likelihood and impact criteria allow the materiality of risks to be
determined, meaning that Melrose can prioritise the management
of the most material risks by allocating appropriate resources to it.
The Group’s exposure to climate-related risks is through the individual
businesses that we own, and the opportunities that derive from
mitigating measures are considered in each business’s own
sustainability strategies, guided by Melrose, but set and implemented
at a business level, in line with our decentralised business model. We
are aware that the effects of climate change on specific sectors and
businesses are highly variable. For more details on the identified
climate-related transition and physical risks, please see page 69.
b) Describe the organisation’s processes for managing
climate-related risks.
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 the Melrose senior management team and a review
of the key findings presented by the internal and external 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 Group.
With Melrose’s support, guidance and oversight, each of our
businesses are individually responsible for developing and managing
their own processes to monitor sustainability and climate-related risks
and opportunities as appropriate to their respective business
strategies and sectors. Each of them invests in and implements
appropriate systems and processes to manage their impact on the
environment and climate change, and continually reviews these in line
with evolving expected practices. As such, the executive management
team of each business is responsible for regularly reviewing and
considering the levels of significant climate-related risks, their impact
on business strategies and the effectiveness of management and
mitigation controls. For more information on how we manage each
identified climate-related risk on Group and divisional levels, please
refer to pages 70 to 71.
(1) Specifically, the RCP 2.6 scenario which is aligned with the Paris Agreement’s stated 2°C
limit/1.5°C aim.
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76
Sustainability review
Continued
c) Describe how processes for identifying, assessing,
and managing climate-related risks are integrated into
the organisation’s overall risk management.
Climate Change as a principal Group risk was previously embedded
within the Legal, Regulatory and Environmental principal Group risk.
In 2021, to reflect the emerging risks involved with the increased
frequency of extreme weather and climate-related disasters, coupled
with tightening legislation and regulations in this area, climate change
risk was realigned as a new standalone principal Group risk.
Climate change risk comprises transition and physical risks as
identified in our 2021 climate scenario analysis. These risks undergo
reassessment every year by the Melrose senior management team to
determine the risk trend, impact and likelihood, taking into account the
composition of the Group at the time of reassessment. The transition
and physical climate risks are then presented to the Audit Committee
for consideration alongside the other principal Group risks on a
biannual basis in the form of reports prepared by the Melrose senior
management team. The Chairman of the Audit Committee updates
the Board to inform the Board’s review, challenge and setting of the
Group’s appetite for each principal Group risk including Climate
Change. The Board’s assessment of each of the principal Group
risks and their management, are disclosed on pages 38 to 48 of the
Strategic Report which shows the relative significance of climate-
related risks compared to other Group risks.
Given the dynamic nature of our Group composition and the
transitionary nature of our businesses’ sectors, the impact of climate
change risk on the Group will fluctuate over time as will its impact on
our businesses, as they each move through our “Buy, Improve, Sell”
cycle. The incorporation of climate change considerations into the
overall risk management process helps to understand the specific
transition and physical risks, as well as the potential opportunities
deriving from mitigating measures.
b) Disclose Scope 1, Scope 2 and, if appropriate, Scope 3 GHG
emissions and the related risks.
Our energy consumption and emissions data, the statement of
alignment with the GHG Protocol and statement on SECR disclosures
can be found on page 65. We currently disclose Scopes 1 and 2
and select Scope 3 GHG emissions in line with the GHG Protocol
methodology, representing a breakdown of the Group’s emissions by
type and intensity measurement. Our chosen intensity ratio is energy
consumption and emissions reported above normalised MWh and
tonnes of CO2e per £1,000 of turnover, which we believe remains the
most appropriate intensity ratio for Melrose given our business model
and structure. The data is reported against normalised MWh and
tonnes of CO2e meaning that the data has been standardised from
the source units in which it was initially collected. The turnover figures
used to calculate the intensity ratio include continuing businesses only
and do not include any share of revenues from entities in which the
Group holds an interest of 50% or less.
We also disclose select Scope 3 GHG emissions against Category 3
(fuel- and energy-related activities not included in Scope 1 or Scope 2)
and Category 6 (business travel). We have started to gather emissions
data from our businesses’ upstream supply chain (through the CDP
Supply Chain engagement initiative(2) and partial GHG inventories
across our businesses) to help us understand, quantify and in future,
disclose a broader range of Scope 3 emissions. Key priorities for 2023
in relation to further developing our climate-related data include the
collection, measurement, understanding and reporting of our
businesses’ suppliers’ emissions (Scope 3), with primary focus on
upstream emissions. The completion of GHG inventories, currently
ongoing within each of our businesses’ carbon footprinting projects,
will allow the Group to assess the materiality of select Scope 3
emissions in line with its reporting boundary. It will also contribute to
further expanding the Group’s Scope 3 emissions reporting in line
with GHG Protocol.
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.
We disclose a wide range of metrics associated with climate change,
including GHG emissions by type, energy consumption by type, as
well as renewable electricity consumption, water withdrawal and
waste generation.
All of our metrics used for assessment of climate-related risks and
opportunities, shown in the table below, are linked to Melrose’s
strategy through the corresponding sustainability targets and
commitments, presented on pages 58 to 59. The Group sustainability
highlights on page 57 depict our performance against select targets.
Risk and opportunity
Metrics
Technology risk
and opportunity
Expenditure on R&D relating to solutions that
contribute to the decarbonisation of our
businesses’ sectors(1)
Market risk and
opportunity
Revenue from new products that contribute to
the decarbonisation of our businesses’ sectors
Carbon policy and
regulations risk
Total GHG footprint, total energy consumption and
percentage of electricity from renewable sources
Sector reputation
risk and opportunity
Melrose’s external sustainability rating
(for example, MSCI or Sustainalytics)
c) Describe the targets used by the organisation to manage
climate-related risks and opportunities and performance
against targets.
Melrose’s overarching decarbonisation ambition is to achieve Net Zero
by 2050. To ensure this long-term target is met, in 2021 we set
milestone targets to achieve reduction of CO2e/£m revenue by 20%
on average across the businesses by 2025. In the medium term we
aim to reduce emissions intensity by 40% by 2030. Our other main
climate-related targets are:
• Source 50% of our electricity from renewable sources by 2025
and 75% by 2030(3).
• 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.
Each business is individually responsible for developing processes to
monitor and manage environmental data and assess progress against
Group and divisional targets. By monitoring these metrics and targets,
we can drive our businesses to seek to mitigate their exposure to
risks such as carbon pricing and technology. We also seek to allocate
resource to capitalise on opportunities that climate change may
provide, particularly in respect of R&D investment, helping to keep
our businesses at the forefront of climate-focused innovation including
hydrogen technologies and the transition to EVs. Please see the
overview of our Group targets and commitments on pages 58 to 59.
(1) Please refer to page 72 for climate-focused R&D investment to date.
(2) For more details, please refer to page 81.
(3) Where renewable electricity is commercially and reasonably available in the relevant jurisdiction.
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The Eviation Alice
© Eviation
The transition and physical effects of climate change
continue to accelerate, and impactful action is required
to reduce global emissions. We recognise the need for
transparency to enable our stakeholders to understand
the climate-related risks that we may face as a Group,
how we can manage them, and how we support our
businesses as they seize opportunities to decarbonise
their own operations and their respective sectors.”
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Sustainability review
Continued
Environmental
leadership
Our strategic sustainability priority is to
respect and protect the environment.
To support this, we continue to invest
in and support our businesses as they
develop products and services aligned
with a net zero future.
UN SDGs
Group environmental targets
Progress
Respecting and protecting the environment
Water
Whilst water withdrawal for the Group is moderate, water conservation
is becoming an increasingly important issue for some of our
stakeholders. In 2021, Water was elevated in the Melrose Group
materiality matrix.
During 2022, the Melrose Board approved a Group Water policy
for implementation by our businesses, which sets out the Group’s
water management position and is centred around ensuring that
our businesses remain resilient to any risks associated with water,
minimise potential impacts on water availability and quality, and
facilitate their contributions to addressing water challenges.
The Group Water policy can be accessed on our website at
www.melroseplc.net/media/3038/water-policy.pdf.
The ambition outlined in the Water policy is supported by a new
quantitative Group-level target of a 25% reduction in water withdrawal
intensity by 2030(2) (reported above normalised m3 per £1,000 of
turnover), and a process-oriented drive to support each business
within the Group towards implementing the Group Water Stewardship
Programme, which was launched in 2022.
• Divert 95% of our solid waste from landfill
by 2025 and 100% by 2030(1)
Fulfilled and being
maintained
Water withdrawal data is presented in the table below, showing
a decrease in total water withdrawn in 2022 compared to 2021.
• Reduce water withdrawal intensity by 25%
by 2030(2) and implement a Group Water
Stewardship Programme to improve water
management across our businesses
On track
(1) Excluding hazardous waste.
(2) Target baselined on full year 2021 and with consideration of half year 2022 performance.
Baseline was set in conjunction with the timeframe of the Group’s target-setting process.
We are believers in the manufacturing industry and its potential to
help solve society’s most pressing needs. We buy good quality but
underperforming industrial businesses, with established positions
in markets that can be among the most difficult to decarbonise.
Our Group Environmental policy, approved by the Board,
demonstrates 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 can be found on our website at
www.melroseplc.net/media/2805/environmental-policy.pdf.
Melrose Group water withdrawal(3) data for the period
1 January 2022 to 31 December 2022
Cubic metres
2022
2021(4)
Change
(2022/2021)
Water withdrawal (m3) in operations(5)
3,590,208 3,788,965
-5%
Company’s chosen intensity
measurement:
Water withdrawal (m3) per £1,000 turnover(6)
0.476
0.550
-13%
(3) 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.
(4) 2021 water withdrawal data has been restated.
(5) Water withdrawal data was collected from 100% of sites across the Group in 2022 and 2021.
(6) The Group’s chosen intensity ratio is water withdrawal reported above normalised m3 per
£1,000 of turnover. The data has been standardised from the source units in which it was
initially collected. The turnover figures used to calculate the intensity ratio include continuing
businesses only and do not include any share of revenues from entities in which the Group
holds an interest of 50% or less.
(7) For these purposes, baseline water stress measures the ratio of total water withdrawals to
available renewable surface and groundwater supplies.
(8) 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.
In 2022, we updated the high-level analysis of our operations in
water-stressed(7) areas to reflect the changing Group composition. Our
businesses’ manufacturing and office sites(8) were reviewed to identify
operations 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 16% of our businesses’ current sites are located in
areas of ‘extremely high’ baseline water stress, and a further 17% of
current sites are currently located in areas of ‘high’ baseline water
stress. Engagement with our businesses to work towards reducing
withdrawals in these areas is an active and ongoing process, towards
addressing and improving water management.
Biodiversity
Melrose recognises the importance of biodiversity and how
fundamental it is to our society. During 2022, the Melrose Board
approved a new Group Biodiversity policy for implementation within
its businesses. The policy sets out our fundamental principles and
expectations of our businesses in promoting the growth of the
natural world and help prevent deforestation. From this, they are
expected to build their own business-level policies and practices
over time. The Group Biodiversity policy can be found on our
website at www.melroseplc.net/media/3037/biodiversity-policy.pdf.
>90%
solid non-hazardous waste
diverted from landfill in 2022
against the 95% target by 2025
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 solid
non-hazardous waste from landfill by 2025 and 100% by 2030.
In 2022, we have improved data collection processes across our
businesses and improved our waste management disclosure. Solid
waste generation data reflected in the table below shows an overall
increase in the total waste generated in 2022 compared to 2021.
This was partially driven by production returning to near pre-pandemic
levels. Despite the increase in absolute waste weight, there have been
reductions in the proportion of non-hazardous waste that is sent to
landfill. Additionally, a larger proportion of waste is being sent to higher
waste hierarchy options of recycling in 2022 compared to 2021.
Melrose Group waste generation data for the period
1 January 2022 to 31 December 2022
Tonnes
Total solid waste
Thereof non-hazardous
Thereof hazardous(11)
Waste incinerated
Waste recycled
Waste to landfill
Non-hazardous solid waste diverted
from landfill
Non-hazardous solid waste diverted
from landfill rate
2022(9)
2021(10)
Change
(2022/2021)
198,718
162,336
172,449
151,900
11,333
14,936
10,436
5,850
174,078
141,947
7,829
9,175
166,219
n/r(12)
96.39%
n/r
22%
14%
9%
155%
23%
-15%
n/r
n/r
(9) Waste generation data collected from 100% of sites across the Group in 2022. In 2022,
total solid waste is made up of non-hazardous, hazardous and incinerated waste.
(10) Waste generation data collected from 100% of sites across the Group in 2021.
(11) Excluding incinerated waste.
(12) Not reported.
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Sustainability review
Continued
Energy efficiency
Our businesses seek 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.
During 2022, the Group more than doubled its investment in energy
efficiency programmes, having as a whole invested over £19 million
(2021: over £9 million) in the following areas:
LED lighting retrofits
>£3m
More efficient air conditioning and heating systems
>£1.5m
Renewable energy installations
>£1m
Insulation improvements
>£1m
Energy-efficient equipment
>£12.5m
Our businesses take a tailored approach to implementing climate-
related initiatives that are most relevant and impactful to their
operational and market environments. Each business is at a different
stage in their climate strategy, but all have implemented or are in the
process of implementing a wide range of positive actions, which will
continue in 2023.
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Supply chain management
We require our businesses to participate responsibly and sustainably
within their supply chains and to mitigate the risk of supply chain
issues. At a minimum, we expect them to source raw materials and
manufacture products in a responsible, ethical and sustainable manner.
In 2021, we elevated the importance and prominence of Responsible
Sourcing across the Group as a material sustainability topic. Supply
chain engagement as the key initial enabler of our commitment to
source responsibly has therefore received greater focus during 2022.
In line with our decentralised model, we require our businesses to
work closely with their suppliers to drive them to minimise their
environmental impact, respect their employees’ human rights and
provide good and safe working conditions across their operations.
In practice, this means that our businesses require their suppliers
to respect and protect the environment in compliance with the
applicable environmental legislation relating to energy use, waste,
emissions, water and resource consumption and management, to
treat their staff equally, to pay their employees a fair wage that meets
or exceeds the minimum standards or prevailing industry standard,
to eliminate excessive working hours for all workers, and protect their
workers’ health and safety rights at work.
Our businesses are expected to implement supplier qualification
processes where relevant which, at a minimum, require suppliers
to complete a risk assessment to identify and appropriately manage
the risks associated with the environmental and social sustainability
of their operations. Our businesses each have a supplier code of
conduct, or an equivalent, which outlines their ambitions to safeguard
both human rights and the natural environment globally and all of
their suppliers are required to comply with these codes of conduct.
In 2022, Melrose joined the CDP Supply Chain engagement initiative,
to assist in beginning to capture our businesses’ additional supplier
environmental data and enable efficient tracking of their alignment
with Net Zero. This first year engagement has provided valuable
insights on suppliers’ environmental data, including their energy use,
emissions reduction initiatives and climate targets alongside other
environmental data. The selected organisations were reflective of our
businesses’ largest suppliers by spend, and engagement with them
was therefore important for pinpointing risks and identifying emissions
reduction opportunities.
As set out in the Group Conflict Minerals policy, we also 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 geographies. Our businesses are also expected to
work with their supply chain partners to ensure compliance with
all applicable laws and regulations. As a minimum, their 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 of the relevant business.
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Sustainability review
Continued
Social
Promoting diversity, prioritising and
nurturing the wellbeing and skills
development of employees, and
contributing to the communities that
they are part of, is instrumental to the
success of our businesses and their
impact in the regions where
they operate.
UN SDGs
Group social targets
Progress
Prioritising health, safety and wellbeing
of employees
• Protect our employees from injury and lost
time accidents (“LTAs”) and maintain a LTA
frequency rate below 0.1
Group social commitments
Nurturing skills and development
Fulfilled and being
maintained
• Ensure that all permanent employees receive
regular annual formal performance reviews
where permitted by local laws and employee
representative bodies
On track
Supporting communities that
our businesses are part of
• Invest £10 million over five years through
the Melrose Skills Fund
On track
Promoting diversity and inclusion
• Maintain a Board and Melrose Executive
Committee comprising at least 33% female
membership
• Maintain achievement of the Parker Review
recommendations
Fulfilled and being
maintained
Fulfilled and being
maintained
The Melrose Group Code of Ethics reinforces our Group sustainability
principles and provides our businesses with clear guidance as to how
the Board and Melrose senior management team expect them to
conduct business, and the consequences of non-compliance. The
Code of Ethics outlines the policies and procedures that Melrose has
put in place to drive best practice in health and safety, wellbeing and
training, and to promote diversity and inclusion throughout the Group.
The Code was approved by the Board and last updated in December
2022. It can be found on our website at www.melroseplc.net/
sustainability/data-reports-and-policies.
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Employee engagement
We recognise the importance of engaging with employees in a
meaningful way to support their development and ensure that the
businesses provide the best working environment. Our businesses
consult regularly with employees to ensure that concerns are
addressed in a meaningful and mutually beneficial way.
In 2022, each of our businesses undertook all-employee engagement
surveys, which are completed confidentially and anonymously,
with the average response rate being over 75% (2021: 75%). Upon
receipt of survey results, the relevant information is shared with the
businesses’ executive management teams, plant directors, HR teams
and other people leaders. These results are then further analysed
through mediums such as employee focus groups. Across all our
businesses, action plans are developed to help address areas for
improvement. 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 Workforce Advisory Panel (“WAP”),
chaired by a member of the Melrose senior management team and
comprising 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
voices of their workforce. Each member is also responsible for
demonstrating how key workforce views are fed into their respective
executive management teams’ decisions, as well as ensuring that the
workforce is aware of their impact on such decisions. Similar to 2021,
key workforce views in 2022 related to learning and development
opportunities, particularly in the context of the current macroeconomic
climate. Please refer to the Talent and career management section on
page 86 for examples of how this has been addressed.
Melrose requires its businesses to safeguard the contractual and
statutory employment rights of their employees. Each business is
encouraged to maintain constructive relationships with employee
representative bodies, including unions and works councils.
The rights of workers to participate in collective bargaining and their
freedom of association is respected across all businesses. Workers
are entitled to join or form trade unions of their own choosing and to
bargain collectively where legally permissible within their jurisdiction.
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.
Melrose Group employees as at 31 December 2022
Permanent employees
of which:
Full-time employees
Part-time employees
Temporary employees
Apprentices
Total
38,691
37,694
997
4,691
405
43,787
Pensions
With every acquisition, Melrose seeks to strengthen pension scheme
funding for the benefit of employees and retirees, improving the
probability that all historic benefit promises are met in full. We take
pride in having substantially improved all of the UK pension schemes
under our ownership, with many of them becoming fully funded on
or prior to 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 100% 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.
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, on top of providing
£150 million of immediate 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.
• Agreed more secure funding targets of Gilts +25 basis points
(GKN 2016 scheme prior to its 2021 buyout) and Gilts +75 basis
points (GKN 2012 schemes 1-4) to achieve more prudent funding
targets and therefore less risky investment strategies.
• 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:
• Set realistic and prudent funding targets to ensure improved
financial health for the long-term delivery of members’ benefits.
• Increase funding levels during our period of stewardship.
• Provide better structural and financial security to our businesses’
pension schemes during our ownership.
• Insist on independent trustees to chair our businesses’ pension
schemes in accordance with governance best practice.
• De-risking our businesses’ pension schemes through
appropriately prudent discount rates, relatively unadventurous
investment return targets and hedging against changes to
liabilities arising from inflation and/or interest rate movements.
Securing our employees’ and retirees’ futures through responsible
stewardship of their pensions is of strategic importance to the Board.
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Sustainability review
Continued
40%
female representation on
the Board, meeting the
expectations of the FTSE
Women Leaders Review
Reward and recognition
Each of our businesses has policies in place relating to recruitment,
talent development and succession planning, supported by training
programmes and effective management. They are required to ensure
that relevant opportunities are in place for employees to discuss
career development with their direct managers, and each business
encourages internal applications for open positions. In 2022, 12% of
open positions were filled by internal candidates (2021: 20%)(1).
Where permitted by local laws and employee representative bodies,
performance evaluations are undertaken across our businesses,
with 46% of employees receiving a performance appraisal in 2022
(2021: 45%)(2). At the time of writing, performance evaluations for 2022
were ongoing. In the pursuit of improvement, in 2022, GKN
Automotive committed to ensuring that all permanent employees
receive performance reviews by 2024. It has also revised its evaluation
guidance and improved the communication of the performance
calendar across employees. Annual salary reviews are aligned with
performance evaluations where applicable 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, over
70% of the Group’s permanent employees (by headcount) benefit
from being a member of a company-based pension scheme.
Diversity, equity and inclusion
Driving our businesses to create and maintain a diverse, inclusive
and safe environment is a priority as a Group. We recognise the
importance of diversity in building a high calibre workforce and are
committed to championing diversity in the broadest sense, be that
along geographical, cultural or personal lines, encompassing gender,
race, ethnicity, country of origin, nationality, colour, social and cultural
background, religion, family responsibilities (including pregnancy),
sexual orientation, age and disability. 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 fair criteria outlined in job
descriptions. For any employees with a disability, we take steps to
ensure reasonable adjustments are made where required.
The Melrose Code of Ethics highlights the importance of diversity and
inclusion and is supported by our Board of Directors Diversity policy
and our Melrose Diversity, Equity and Inclusion policy, both of which
are reviewed and approved each year by the Nomination Committee.
These policies can be found on our website at www.melroseplc.net/
sustainability/data-reports-and-policies.
(1) Data was collected from 100% (by headcount) of the Group in 2021 and in 2022.
(2) Data was collected from 98% (by headcount) of the Group in 2021 and in 2022.
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Promoting diversity at all levels
There are a number of ways in which the Board has proven its
commitment to diversity. In particular, the last four Non-executive
Director appointments have been female. Furthermore, two of the
committee chairs, the Chair of the Audit Committee and the Chair
of the Nomination Committee, are now held by women.
As at 31 December 2022, Melrose had 40% female representation on
the Board (2021: 42%), meeting the expectations of the FTSE Women
Leaders Review (formerly the Hampton-Alexander Review) for 40%
female representation on FTSE 350 boards by the end of 2025,
and the incoming Financial Conduct Authority (“FCA”) requirement
for 40% female representation on boards for financial years starting
on or after 1 April 2022.
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Gender diversity at Board level
At 31 December 2022
At 31 December 2021
Male
Female
6 (60%)
4 (40%)
7 (58%)
5 (42%)
In addition, Melrose continues to meet the Parker Review target of
having one director from an ethnic minority background on its Board.
Diversity is promoted below Board level as well. Melrose established
an Executive Committee at the beginning of 2020 in order to pave
the way for a diverse pipeline for succession planning purposes
and to recognise the diversity of thought leadership at a senior level.
As at 31 December 2022, the Melrose Executive Committee and
its direct reports consisted of 39% female representation (and 36%
female representation specifically at an Executive Committee level),
exceeding the Hampton-Alexander Review target of 33% female
representation within executive teams and their direct reports, and
close to the new target set by the FTSE Women Leaders Review of
having 40% female representation within executive committees and
their direct reports by the end of 2025.
Whilst recognising that the Melrose “Buy, Improve, Sell” strategy
means that we inherit the shape of our workforces, our businesses
are expected to promote diversity once they have entered the Group.
Examples of current divisional initiatives include the creation
of employee resource groups, focused diversity and inclusion
programmes, and mandatory unconscious bias training for leaders.
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. However, the Group has continued to make good progress
in increasing senior manager diversity during the year.
Group permanent employee gender diversity at
31 December 2022
Male
Female
Total
Total Group employees
30,815
7,876
38,691
Male
%
80
Female
%
20
Group senior manager diversity at 31 December 2022
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
Male
%
Female
%
18
8
26
116
134
31
39
147
173
69
79
77
31
21
23
86
Sustainability review
Continued
Talent and career management
Skills development
Melrose is committed to promoting employee career development
and life-long learning. Boosting productivity is central to Melrose’s
strategy to improve performance across its businesses, all of which
are encouraged to ensure that extensive training opportunities are
available and promoted to all workers at all stages of their careers and
that high skills levels are cultivated and maintained across the Group.
Leadership training is an integral part of ensuring the workforce
remains engaged and innovative. We encourage our businesses to
develop a diverse pipeline of successors for key roles and leadership
positions to secure robust succession strategies. Annual talent
reviews help identify individuals who have the ability and aspiration
to grow into more stretching roles.
Our businesses deliver a wide variety of flexible training programmes
through a combination of online and in-person training. Set out in the
table below is the average training time per employee and the total
number of hours spent on workforce training. The decrease in training
time and spend per employee were relative to the lower headcount in
2022 and the increase in COVID-19 related training demand in 2021.
Training and development
Average training time per employee (hours) (1)
Average training spend per employee (£) (2)
2022
17
183
2021
23
209
Total number of training hours (3)
729,474
929,878
Total annual spend on workforce training (£)(4)
7,992,943 8,384,837
(1) Data was collected from 100% (by headcount) of the Group in 2022 and 2021.
(2) Data was collected from 98% (by headcount) of the Group.
(3) Data was collected from 100% (by headcount) of the Group in 2022 and 2021.
(4) Data was collected from 98% (by headcount) of the Group.
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 2022, over 400 apprenticeships were in place
across the Group’s businesses, providing a mix of on-the-job and
classroom training.
The Group also places a strong focus on training and developing
graduates, and our businesses all run a variety 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.
In addition to apprenticeships and graduate programmes, GKN
Aerospace and GKN Automotive also run a number of internship and
cooperative education programmes, whereby students complement
their studies with paid periods of work over the course of their degree.
These programmes give students the opportunity to gain valuable
industry experience that helps broaden their skillsets, whilst helping
businesses develop a talented and diverse recruitment pool.
Apprenticeship and graduate programmes across GKN Aerospace
and GKN Automotive are supported by the Melrose Skills Fund which
was launched 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. Examples of such initiatives include GKN
Aerospace’s support of the restoration of a renowned modified Mk1
Spitfire aircraft and provision of apprentices to work
on the aircraft.
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98%
of the Group’s product portfolio
(by revenue) was certified to a
recognised international quality
management standard
Community
Our businesses are encouraged to engage their employees in
contributing to local charitable and community projects, and lead by
example through providing significant investment in both volunteering
time and material resources. In 2022, the Group made cash donations
to not-for-profit charitable organisations of £1,042,150 (2021:
£703,408).
Examples include GKN Automotive’s sites offering employee hours for
work in educational establishments to provide careers talks, give local
school groups plant tours and run STEM-related competitions such as
the car-building F24 competition and the IET Faraday Challenge days,
an annual competition comprised of STEM activities. GKN Powder
Metallurgy’s site in Buzău, Romania provided direct help for Ukrainian
refugees by donating food, employee time and assisting local
authorities in the setup of a permanent refugee centre.
Safety first
We drive our businesses to prioritise the health, safety and wellbeing
of their employees and contractors, and are committed to setting and
ensuring that the high standards we instil are safeguarded by strong
governance principles, effective and robust policies, procedures and
training programmes. Our businesses take a holistic approach to
employee wellness, which starts with protecting their physical and
mental health, protecting their social wellbeing, and respecting their
human rights, and extends to ensuring a positive workplace culture
that attracts and retains a highly skilled workforce. This underpins
our overarching commitment to stop all preventable accidents from
occurring within our businesses and to their contractors, through the
promotion of safe behaviours at site level and across all locations, and
an enhanced focus on hazard identification and awareness. 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 oversight over any material incidents or issues that arise.
As at 31 December 2022, 76% (2021: 75%)(5) of sites (inclusive of
office, production and testing sites) within the Group were certified
to the ISO 45001 international standard(6), with additional relevant
sites progressing towards accreditation. All of GKN Automotive’s
production sites and test centres and all of GKN Powder Metallurgy’s
manufacturing sites are ISO 45001 certified. 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 that standards are being maintained.
Health and 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
requires 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.
The average LTA frequency rate across the Group was less than 0.1
in 2022, in line with the Group target, and continue to prioritise health
and safety improvements across our businesses in the push for a
LTA rate of zero. Please refer to the Health and Safety section of our
Non-Financial KPIs on page 29 of the Strategic Report.
Ensuring the highest standards of product quality
and safety
We are committed to ensuring that our businesses achieve the highest
standards of product quality, reliability and safety. In recognition of the
importance of protecting the wellbeing of the ultimate end-users of their
products, each business follows strict product design and development
procedures to ensure precise delivery to customer specification and
seeks opportunities to enhance quality and safety performance.
The Group takes a preventative approach to product responsibility.
We ensure that effective controls and processes are in place around
social factors such as safety and quality assurance, including crisis
management procedures and processes including, but not limited to,
potential recall programmes.
In 2022, 98% (2021: 98%) of the Group’s product portfolio (by revenue)
was certified to a recognised international quality management
standard of ISO 9001, ISO/IATF 16949 or EN/AS9100.
(5) Data was collected from 98% (by sites) of the Group.
(6) Occupational health and safety standard.
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Sustainability review
Continued
Governance
Sound business ethics and integrity
are core to the Group’s values and
fundamental for the success of our
strategy. Melrose is a premium listed
company with strong, established
financial and non-financial controls
that are continually assessed, tested
and reviewed.
UN SDG
Group governance commitment
Progress
Exercising robust governance, risk
management and compliance
• All employees, suppliers and contractors must
comply with our Code of Ethics, conducting
business with integrity and in a responsible,
ethical and sustainable manner
Fulfilled and being
maintained
Our robust governance framework is overseen by the Melrose Board
of Directors and supported by independent internal audit and risk
functions, regular public disclosure and financial reporting, external
audits, public accountability and conformance with leading
benchmarks set by the UK Corporate Governance Code (the “Code”).
The framework is also supported by direct engagement with investors,
corporate governance and proxy advisors, and the Group’s wider
stakeholders to ensure best market practice is being implemented.
Strong financial and non-financial controls as well as 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 Group Code of Ethics and compliance policies which reflect
current best practice and strong corporate citizenship. Each business
is required to communicate and embed the Group Code of Ethics and
compliance policies within their operations and activities to ensure that
they conduct business with integrity and in a responsible, ethical and
sustainable manner. The Group Code of Ethics and some of the
compliance policies and statements can be found on our website at
www.melroseplc.net/sustainability/data-reports-and-policies. The
Group Code of Ethics and compliance policies, as approved by the
Board, 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, human rights, supply chain, biodiversity and water.
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During 2022, Melrose implemented new Supply Chain, Biodiversity,
and Water policies, and also updated the Melrose Board of Directors
Diversity policy and Melrose Diversity, Equity and Inclusion policy.
The new and updated policies have been fully implemented across all
businesses, and they (as well as all other Group compliance policies)
continue to be monitored to ensure their effectiveness for the Group.
Implementation of the Group Code of Ethics and compliance policies
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.
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 is available on our website at www.melroseplc.net/
media/2803/abc-policy.pdf. During 2022, two employees were
disciplined or dismissed due to non-compliance with the Anti-Bribery
and Corruption policy.
Although the policy prohibits party political donations, it does,
however, recognise 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.
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
wrongdoing 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 concern
are treated with respect and dignity and do not face retaliation.
During 2022, 120 whistleblowing cases were recorded through the
platform (2021: 103)(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) Excluding any whistleblowing cases received by businesses that were no longer part of the
Group as at the end of 2022 and 2021.
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Modern slavery and human trafficking
The Group has a zero-tolerance approach to any form of modern
slavery, as set out in the Melrose Anti-Slavery and Human Trafficking
policy which is available on the website at www.melroseplc.net/
media/2590/anti-slavery-and-human-trafficking-policy.pdf.
In accordance with the Modern Slavery Act 2015, Melrose publishes
its own Modern Slavery Statement which is approved by the Board
annually, and the latest statement can be found on our website.
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
that 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, as set out in our
Human Rights policy, in support of the principles set out in the UN
Declaration of Human Rights. Our Human Rights policy can be found
on our website at www.melroseplc.net/media/2806/human-rights-
policy.pdf.
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 on human rights reported by our
businesses in 2022 or in the previous two years.
90
Sustainability review
Continued
Paying tax responsibly
Melrose is committed to paying taxes that are due, complying with
all applicable laws, and engaging with all applicable tax authorities
in an open and cooperative manner. The Group does not engage
in aggressive tax planning. The Group’s Tax Strategy is reviewed,
discussed and approved by the Board annually. The Audit Committee
periodically reviews the Group’s tax affairs and risks.
The Group has adopted a policy in respect of the prevention of
the facilitation of tax evasion which has been implemented by the
businesses, with guidance on undertaking risk assessments and
training to employees in relevant roles.
The Group does not operate in countries considered as partially
compliant or non-compliant according to the OECD tax transparency
report, or in any countries blacklisted by the EU, for the purposes of
tax avoidance and/or harmful tax practices, per the lists released as
at 4 October 2022.
Risk and internal controls
Risk management
A key responsibility of the Board and Melrose senior management
team is to safeguard and increase the value of the businesses and
assets in 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.
Melrose recognises 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 Financial Reporting Council’s (“FRC”)
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.
Internal financial controls and reporting
The Group has a comprehensive and robust system for assessing
the effectiveness of the Group’s internal controls, including strategic
business planning and regular monitoring and reporting of ESG data
alongside financial and operational performance. The identification
and oversight of material controls over the ESG data of the businesses
is the responsibility of the Melrose senior management team, which
has established an evolving programme of regular monitoring and
review (at least quarterly) processes that are consistently robust
across the Group. This is complemented by reporting protocols
to ensure the businesses’ executive management teams are
accountable for achieving progress on sustainability and climate-
related matters. ESG data collection, control and decision-making is
supported through regular sustainability training at Board level. The
quality and accuracy of ESG data is continually improved against
relevant guidance from prominent international regulatory frameworks.
Horizon-scanning of applicable external reporting requirements is
conducted regularly by the businesses where relevant to identify the
opportunities to strengthen data management systems and controls.
A detailed annual budget is prepared by the Melrose senior
management team and thereafter is reviewed and formally approved
by the Board. The Group budget and other operational and strategic
targets, including on sustainability and climate change, are regularly
updated via business review meetings which are held with the
involvement of the Melrose senior management team to assess the
businesses’ performance, and update sessions with businesses’
sustainability teams take place at least quarterly. The key messages
of these reviews are in turn reported to, and discussed by, the Board
each quarter.
The Group engages BM Howarth as internal auditor with additional
support as required from Ernst & Young. A total of 50 sites across
the Group were assessed by BM Howarth during 2022. The Directors
can report that based on the sites visited and reviewed in 2022, there
has been progress across the Group following the 2022 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.
The Melrose senior management team is responsible for ensuring
that the Audit Committee’s recommendations in respect of internal
controls and risk management are implemented.
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Information security and data privacy
Melrose strongly respects privacy and seeks to minimise the
amount of personal data that it collects, as well as to ensure 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 executive management teams of each business and external
cyber security risk consultants to track the Group’s exposure
to cyber security risk and, to ensure appropriate compliance
with the General Data Protection Regulation (“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 management 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.
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 National Institute of Standards and
Technology (“NIST”) in the defence sector and the Trusted
Information Security Exchange (“TISAX”) in the automotive sector.
As part of Melrose’s overall information security strategy, IT security
awareness training was provided by all businesses in 2022.
Outlook for 2023
In 2023, we will continue to oversee and
invest in our businesses to accelerate
their sustainability performance.
Key areas of focus for 2023 include:
• Setting a Group commitment relating to the setting of Science
Based Targets within our businesses.
• Developing internal Melrose sustainability performance tools
to display our businesses’ quarterly sustainability performance
against our Group sustainability targets and bolster regular
engagement to measure and track progress, with a view to
further their improvement efforts in impactful areas.
• Increasing our Diversity and Inclusion commitment to maintain
40% female representation across the Board and to achieve
40% female representation at Melrose Executive Committee
level, in line with the new FTSE Women Leaders Review target.
• Continuing to evolve the Group’s understanding and
assessment of biodiversity factors prior to the official release
of a global Taskforce on Nature-Related Financial Disclosures
(“TNFD”) framework.
• Continuing to evolve the Group’s TCFD disclosures, with
increased linkages to quantitative data within the Annual Report
and financial statements where relevant and appropriate.
• Continuing to engage with our businesses’ suppliers with
a view to expanding our Scope 3 data reporting.
• As part of the renewal of the Company’s Directors’
Remuneration policy in 2023, further integrating ESG into
executive remuneration by proposing to carve out a standalone
element of the annual bonus for ESG metrics.
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Reporting requirement
Policies and standards that govern our approach
Principal Group Risk
Where you can find more
Social matters
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Non-financial information statement
In addition to the operational and financial improvements
that we implement within our businesses, we recognise our
responsibility to improve the non-financial performance of the
businesses we acquire, and to build sustainable businesses
for the long-term.
Our efforts to improve our businesses are supported by a foundation of robust governance, risk
management and compliance, and we continue to engage with key internal and external stakeholders
to ensure all our businesses better understand and deliver upon their expectations.
This section of the Strategic Report constitutes the Group’s Non-Financial Information Statement for the
purposes of sections 414CA and 414CB of the Companies Act 2006. The information listed is incorporated
by reference.
Stakeholders
Environmental
matters
Employees
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• Mergers and acquisitions 2022 Annual Report
• Climate change
• Legal and regulatory
• Our strategy and business model
• Our strong track record
• Board stakeholder engagement
and decision-making (Section 172
statement)
• Sustainability review
2022 Annual Report
• Board stakeholder engagement
and decision-making (Section 172
statement)
• Sustainability review
• Melrose Group Task Force on
Climate-related Financial
Disclosures (“TCFD”)
• Group Net Zero Transition Plan
Group Policies
• Conflict Minerals policy
• Environmental policy
• Biodiversity policy
• Water policy
• Operations
• Loss of key management
and capabilities
• Legal and regulatory
• Pensions
2022 Annual Report
• Board stakeholder engagement
and decision-making (Section
172 statement)
• Sustainability review
• Nomination Committee report
Group Policies
• Code of Ethics
• Whistleblowing policy
• Anti-slavery and Human
Trafficking policy
• Melrose Board of Directors
Diversity policy
• Melrose Diversity, Equity and
Inclusion policy
• Human Rights policy
Melrose was founded in 2003 to empower underperforming
manufacturing businesses to unlock their full potential for the
collective benefit of stakeholders, whilst providing shareholders with a
superior return on their investment. The Board understands and takes
into account the interests of its different stakeholders when taking
decisions, and undertakes thorough event-driven consultations with
relevant stakeholders to ensure that the decisions it takes are based
on a fully informed view of the potential impact of the decision on
those stakeholders.
The Sustainability review on pages 55 to 91 sets out our approach
and policy in respect of the environment, sustainability and climate
change and provides examples of the actions our businesses are
taking to contribute to the decarbonisation of the sectors in which
they operate, to promote energy efficiency and to reduce waste and
water consumption. It also provides details of the Group’s energy
consumption and Greenhouse gas emissions.
Our Group established sustainability targets and commitments in
2021, as we transition to a net zero economy by 2050, which support
our four overarching sustainability principles, being aligned with our
material sustainability issues. The integration of the UN Sustainability
Development Goals with our targets and commitments, and our
strategy and business model, links our sustainability objectives
with those of society and aligns our value creation strategy with
our stakeholders.
We also adopted our inaugural Net Zero Transition Plan, prepared in
accordance with the UK Transition Plan Taskforce’s (“TPT”) guidance,
in 2022. The plan sets out the actions we intend to take in the
transition to a net zero economy, how we plan to execute on our
interim and long-term emissions reduction targets, and how we plan
to achieve Net Zero across the Group by 2050.
At Melrose, we promote diversity and prioritise and nurture the
wellbeing and skills development of employees and the communities
that they are part of. Our Sustainability review on pages 55 to 91 sets
out our approach and the policies that support it. We recognise the
increasing importance of taking a holistic approach to employee
wellness by protecting physical health, mental health and social
wellbeing. This helps to foster a positive workplace, and to attract
and retain a highly skilled workforce.
We are committed to building a diverse workforce at all levels and
creating an inclusive culture for all. Our Sustainability review on pages
55 to 91 sets out how we are doing this, and further information
on our policies to promote diversity and inclusion can be found in the
Nomination Committee report.
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.
Our Workforce Advisory Panel provides an important, ongoing forum
for direct engagement and consultation between the workforce and
our businesses’ executive teams.
With every acquisition, Melrose seeks to strengthen pension scheme
arrangements for the benefit of current and former employees.
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.
Reporting requirement
Policies and standards that govern our approach
Principal Group Risk
Where you can find more
• Legal and regulatory
2022 Annual Report
• Sustainability review
Respect for
human rights
We are committed to acting in an ethical manner with integrity and
transparency in all business dealings, and to creating effective
systems and controls across the Group to safeguard against adverse
human rights impacts. The Group has a strong culture of ethics,
which encompasses key human rights considerations, and which is
set out in our Human Rights policy. The Group supports the principles
set out in the UN Declaration of Human Rights. Our businesses are
required to implement effective and proportionate measures to
identify, assess and mitigate potential labour and human rights
abuses across their operations and supply chains.
Melrose takes a zero-tolerance approach to any form of modern
slavery or human trafficking. We are committed to investing in and
working with our businesses to create effective systems and controls
to safeguard against any form of modern slavery taking place within
them or their respective supply chains. You can read more on our
approach and the policies in place to support it in the Sustainability
review on pages 55 to 91.
Our Sustainability review on pages 55 to 91 details our businesses’
approaches to supporting their communities. There you can find out
more on our approach and the policies, schemes and initiatives that
support it. You can also find information on our tax strategy.
• n/a
Group Policies
• Modern Slavery Statement
• Whistleblowing policy
• Anti-slavery and Human
Trafficking policy
• Human Rights policy
• Supply Chain policy
2022 Annual Report
• Sustainability review
Group Policies
• Code of Ethics
• Anti-Bribery and Corruption
policy
• Conflict Minerals policy
• Whistleblowing policy
• Anti-slavery and Human
Trafficking policy
• Environmental policy
• Human Rights policy
• Supply Chain policy
• Biodiversity policy
• Water policy
2022 Annual Report
• Sustainability review
Group Policies
• Code of Ethics
• Anti-Bribery and Corruption
policy
Anti-corruption
and anti-bribery
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.
• Legal and regulatory
All Group policies referred to in the table above as well as additional information in relation to the areas discussed above, are available on our
website at www.melroseplc.net/sustainability/data-reports-and-policies.
Additional information
Description of principal Group risks and
impact of business activity
Risk management
Risks and uncertainties
Description of the business model
Our strategy and business model
Non-financial key performance indicators
Key performance indicators
Our strong track record
Long-term value creation
Page
Pages 38 to 39
Pages 40 to 48
Pages 4 to 5
Pages 6 to 7
Pages 8 to 9
Pages 28 to 29
The Strategic Report, as set out on pages 2 to 93, has been approved by the Board.
On behalf of the Board:
Simon Peckham
Chief Executive
2 March 2023
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94
Governance overview
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.
Succession planning
Succession planning continued to be an area of focus for Melrose
in 2022. 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, the Senior Independent Director and Chairman of the
Audit Committee, Ms Liz Hewitt, retired from the Board as planned.
Mr David Lis, Chairman of the Remuneration Committee, was
appointed as the Senior Independent Director, and Mrs Heather
Lawrence was appointed as the Chairman of the Audit Committee.
There were no other changes made to the Board’s composition during
2022. Biographies for the Directors of the Company as at the date of
this Annual Report can be found on pages 98 to 99.
Succession planning arrangements for the Board as a whole were
reviewed in 2022. 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 116 to 118 contains further details on how succession
planning arrangements for the Board and the Melrose senior
management team were reviewed and considered during 2022.
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
issues, and to ensure that actions being taken are supportive of the
Group’s aims, objectives and culture.
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 2022 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.
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Main responsibilities of the Board
The main responsibilities of the Board are to:
• 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.
• 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 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.
• Review financial and trading performance
in line with the Group’s strategic objectives.
• Determine the nature and extent of the
risks the Group is willing to take.
• 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.
Governance structure
• Agree the Group’s governance
framework and approve Group
compliance 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.
Non-executive Chairman
– Justin Dowley
Executive Directors
Non-executive Directors
Board skills
– Simon Peckham
– Christopher Miller
– David Lis (Senior Independent Director)
– Charlotte Twyning
– Funmi Adegoke
– Geoffrey Martin
– Peter Dilnot
– Heather Lawrence
– Victoria Jarman
Audit Committee
See page 110
Nomination Committee
See page 116
Remuneration Committee
See page 119
Diversity and skills overview(1)
Board skills
Board skills
Board gender diversity
Board ethnic diversity
Industrial
Industrial
7
Accounting and Finance
Accounting and Finance
3
Legal
5
Investment
Legal
Corporate Governance
7
10
Investment
Corporate Governance
Industrial
Accounting and Finance
Legal
Investment
(1) Diversity data as at 31 December 2022.
Corporate Governance
(2) Black, Asian and Minority Ethnic.
7
5
3
7
10
7
5
3
7
10
Male
Female
60%
40%
Non BAME(2)
BAME(2)
90%
10%
Melrose Executive Committee
Melrose Central employees (excl. Board)
Male
Female
64%
36%
Male
Female
52%
48%
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Governance overview
Continued
Remuneration
The Directors’ Remuneration report, comprising the annual statement
from the Chairman of the Remuneration Committee, the Annual
Report on Remuneration and the proposed 2023 Directors’
Remuneration Policy, is available on pages 119 to 144.
As part of the shareholder approval being sought for the proposed
demerger of GKN Automotive, GKN Powder Metallurgy and GKN
Hydrogen (the “Demerger”) at a general meeting to be held on 30
March 2023 (the “General Meeting”), the Company is proposing to
make three key adjustments to the existing Melrose long-term incentive
arrangements, to appropriately reflect the Demerger in them. These
are, in summary: (i) to allocate the invested capital between the
continuing Melrose Group and the Dowlais group according to a fixed
ratio, in order to reflect the separation of the businesses as part of the
Demerger; (ii) to extend the crystallisation date of the 2020 Employee
Share Plan by twelve months to 31 May 2024, to avoid the Demerger
having an unintended inappropriate effect in either direction by
ensuring that the calculation of any award under the 2020 Employee
Share Plan is based on a period without any volatility related to the
Demerger; and (iii) the setting of terms to reward further value creation
in the GKN Automotive and GKN Powder Metallurgy businesses
once they have been demerged from Melrose. Further details will be
provided in the circular to shareholders and notice of general meeting
which will be posted to shareholders on 3 March 2023. These
adjustments will require consequential amendments to the current
2020 Directors’ Remuneration Policy, which are also being proposed
for shareholder approval at the General Meeting and, if passed, will be
effective from completion of the Demerger. The Company will then be
seeking to renew the amended 2020 Directors’ Remuneration Policy
at this year’s AGM, as planned.
As further detailed in the Directors’ Remuneration report, the
Directors’ Remuneration Policy and the Melrose long-term incentive
plan have had significant continuity from Melrose’s establishment in
2003, and have been at the heart of Melrose’s long-term success
since. Melrose undertook a detailed planning process in relation to
the Demerger and, in the six months prior to the date of this report,
has engaged both significantly and extensively with its key
shareholders in preparation for it. Recognising the timetable for the
Demerger, and overlap with the publication of this Annual Report and
financial statements, we envisage that a further round of engagement
with key shareholders on the renewal of the 2020 Directors’
Remuneration Policy may be possible in due course, once the
Demerger has completed and prior to the 2023 AGM. The 2023
Directors’ Remuneration Policy is on broadly consistent terms as
those previously approved, save for a proposed increase to the
maximum opportunity under the annual bonus plan, as further
explained on page 127.
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.
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Sustainability
The Board is mindful of its responsibilities regarding climate change
and sustainability more broadly, which are central to implementing
the Company’s purpose and strategy. In particular, the Board
assesses the basis on which the Company generates and preserves
value over the long-term, including reviewing opportunities and risks,
and the sustainability of the Company’s business model. Further
details on this can be found in the Sustainability review on pages 55
to 91. It has carefully considered how it can strategically address
matters relating to sustainability in the most efficient and appropriate
way, in light of both 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 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.
Sustainability has been historically considered by the Remuneration
Committee as part of executive remuneration within the strategic
element of the annual bonus plan. For the 2023 Directors’
Remuneration Policy the Remuneration Committee is proposing
to include within the annual bonus plan a standalone ESG element
of 10% of the total award, in addition to the current financial and
strategic elements, further highlighting the importance of
sustainability to the long-term performance of the Company.
Further details are provided on page 127.
Risk management and internal control
Melrose has implemented a uniform Enterprise Risk Management
programme across all of its business units, with complementary
processes and procedures. During 2022, 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, the Melrose senior management team, with support
from external consultants, continued to utilise 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 external consultants. This helped to guide the Audit Committee
on relevant updates to the Group risks (including assessing, for
discussion with the Board, whether there were any new and/or
emerging principal Group risks), as reported in the Risks and
uncertainties section on pages 40 to 48.
Full details on the Group’s approach to risk management can be
found in the Risk management section on pages 38 to 39, and in
the Audit Committee report on pages 110 to 115.
Melrose’s reputation for acting
responsibly plays a critical role in its
success as a business and its ability
to generate shareholder value.”
Engagement with stakeholders
In 2022, 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,
following the announcement of the Demerger, we commenced a
comprehensive engagement process with key shareholders, which
involved contacting shareholders who in aggregate represented nearly
70% of our register. This engagement process proved very informative
for key shareholders, and also provided them with an opportunity
to meet with the executive management team of Dowlais Group plc,
the new holding company of the demerged group. As part of this,
I actively engaged with certain key shareholders to discuss their views
on the proposal.
Melrose also continued with a variety of workforce engagement
initiatives, most notably through its Workforce Advisory Panel (“WAP”),
which met twice in 2022. 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 2023. 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 49 to 54.
Justin Dowley
Non-executive Chairman
2 March 2023
Ethics and compliance
Our Code of Ethics (which can be found at 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, human rights, supply chain, biodiversity and water.
The implementation of the Melrose Code of Ethics and Group
compliance policies are supported by a combination of risk
assessment requirements, training and ongoing monitoring to ensure
their effectiveness for the Group. In 2022, the Group introduced its
first Supply Chain policy, Biodiversity policy and Water policy; further
details about these policies can be found in the Sustainability review
on pages 55 to 91. 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 in the Risk
management section on pages 38 to 39 of the Strategic 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 practice. 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 review on
pages 55 to 91. 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.
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Board of Directors
Justin Dowley
Independent Non-executive Chairman
Christopher Miller
Executive Vice-Chairman
Board meetings attended(1)
Business reviews attended
4
3
Other significant appointments
• Senior Independent Director of Scottish
Mortgage Investment Trust PLC
• Deputy Chairman of The Panel on
Takeovers and Mergers
• Director of a number of private companies
Committee membership
• Nomination • Remuneration
Independent
Tenure(2)
Yes
11 years
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
• Trustee of the Prostate Cancer
Research Centre
Independent
Tenure(2)
Not applicable
Not applicable
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.
David Lis
Senior Independent Director
Board meetings attended(1)
Business reviews attended
4
3
Other significant appointments
• Non-executive Director of Hostmore PLC
• Non-executive Director of Dowgate
Capital Limited
• Non-executive Director of Wild Life
Group Limited
Committee membership
• Audit • Nomination
• Remuneration (Chairman)
Independent
Tenure(2)
Yes
6 years
Year appointed
Appointed as the Senior Independent Director on 5 May 2022,
having previously served as a Non-executive Director from 12 May
2016 and Chairman of the Remuneration Committee on 1 January
2019.
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
Board meetings attended(1)
Business reviews attended
Committee membership
• Audit • Nomination (Chairman)
• Remuneration
Independent
Tenure(2)
Yes
4 years
4
3
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 across a number of 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 throughout her career. She now enjoys a
portfolio career, combining a number of non-executive, trustee and
advisory roles.
Simon Peckham
Chief Executive
Board meetings attended(1)
Business reviews attended
Other significant appointments
• Executive Director of Dowlais
4
3
Year appointed
Co-founder of Melrose, appointed as Chief Executive on 9 May 2012,
having previously served as Chief Operating Officer from May 2003.
Funmi Adegoke
Independent Non-executive Director
Group plc(3)
Independent
Tenure(2)
Not applicable
Not applicable
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
Committee membership
• Audit • Nomination
Independent
Tenure(2)
Yes
3 years
Year appointed
Appointed as a Non-executive Director on 1 October 2019.
Skills and experience
Funmi is an experienced executive whose remit has spanned
across senior business, legal, compliance and sustainability
accountabilities. She has worked in global, multi-national
companies including Bombardier and bp, and brings diverse
industrial knowledge across the aerospace, manufacturing, energy,
construction and technology sectors. Funmi is a qualified barrister,
and is currently Group General Counsel and Chief Sustainability
Officer at the FTSE 100 company Halma PLC.
Geoffrey Martin
Group Finance Director
Board meetings attended(1)
Business reviews attended
4
3
Other significant appointments
• Executive Director of Dowlais Group
plc(3)
Independent
Tenure(2)
Not applicable
Not applicable
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.
Heather Lawrence
Independent Non-executive Director
Board meetings attended(1)
Business reviews attended
Committee membership
• Audit (Chairman)
Independent
Tenure(2)
Yes
1 year
4
3
Year appointed
Appointed as a Non-executive Director on 1 June 2021 and
Chairman of the Audit Committee 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.(4)
Peter Dilnot
Chief Operating Officer
Board meetings attended(1)
Business reviews attended
Other significant appointments
• Senior Independent Director
of Rotork PLC
Independent
Tenure(2)
Not applicable
Not applicable
4
3
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.
Victoria Jarman
Independent Non-executive Director
Board meetings attended(1)
Business reviews attended
4
3
Year appointed
Appointed as a Non-executive Director on 1 June 2021.
Other significant appointments
• Non-executive Director of Great
Portland Estates PLC(5)
Committee membership
• Nomination • Remuneration
Independent
Tenure(2)
Yes
1 year
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.
(1) Meetings attended refers to scheduled meetings.
(2) Tenure runs from the date of appointment until 31 December 2022 and is based on full years only.
(3) During the year, Melrose announced its proposed demerger of GKN Automotive, GKN Powder Metallurgy and GKN Hydrogen (the “Demerger”). Dowlais Group plc
(“Dowlais”) is the intended holding company of the demerged businesses, and subject to receipt of approval by Melrose shareholders to the Demerger at a general
meeting to be held on 30 March 2023, and completion of the demerger, Dowlais will be listed on the London Stock Exchange.
(4) Heather Lawrence was also a non-executive director of Coats Group PLC until 31 March 2023.
(5) Victoria Jarman was also a non-executive director of Entain PLC until 17 February 2023.
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Directors’ report
Directors’ report
The Directors of Melrose Industries PLC present the
Annual Report and financial statements of the Group
for the year ended 31 December 2022.
Incorporated information
The Corporate Governance report set out on pages 104 to 109 the
Finance Director’s review on pages 30 to 37 and the Sustainability
review on pages 55 to 91 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 8 June 2023. 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 235
to 241 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 98 to 99.
Post balance sheet events
Since the balance sheet date, the Board has approved the proposed
demerger of GKN Automotive, GKN Powder Metallurgy and GKN
Hydrogen (the “Demerger”). Whilst the Demerger remains subject
to shareholder consent, the costs and expenses that are directly
attributable to the Demerger are estimated to amount to £70 million.
Approximately 75% of this is contingent on the Demerger taking place.
On 9 February 2023, the Trustees of GKN Group Pension Scheme 4
(the “Scheme”), sponsored by the GKN Aerospace division, signed a
contract to fully secure benefits for all members of the Scheme for a
cash settlement of approximately £45 million. At 31 December 2022,
the Scheme had total liabilities of £433 million (31 December 2021:
£628 million) and an accounting surplus of £52 million (31 December
2021: £87 million).
Capital structure
During 2022, the Company completed the disposal of its Ergotron
business, for net cash proceeds of £519 million. After repayment of
debt, in accordance with its strategy to return value to shareholders,
the Company returned £500 million of the proceeds from the Ergotron
disposal to shareholders via a share buyback (the “Share Buyback”).
The Share Buyback commenced on 9 June 2022. In accordance with
the Company’s general authority to repurchase ordinary shares in the
Company granted by its shareholders at the Annual General Meeting
held on 5 May 2022, the Share Buyback was limited to 437,242,947
ordinary shares in the Company (the “General Authority”) and was
further limited to a maximum aggregate consideration payable by the
Company of £500 million (the “Limit”). The Share Buyback completed
on 1 August 2022 when the Limit was reached. The Company
purchased a total of 318,003,512 ordinary shares in the Company
as part of the Share Buyback, which were cancelled shortly after
purchase.
Changes to the Board during the year are set out in the Governance
overview on pages 94 to 97 and the Corporate Governance report on
pages 104 to 109. Details of Directors’ service contracts are set out in
the Directors’ Remuneration report on pages 119 to 144.
The table below shows details of the Company’s issued share capital
as at 31 December 2021; following the cancellation of the ordinary
shares purchased pursuant to the Share Buyback; and as at
31 December 2022.
The Statement of Directors’ responsibilities in relation to the
consolidated financial statements is set out on page 145, 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. 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 cancellation
of ordinary shares
purchased
pursuant to the
Share Buyback
31 December
2021
31 December
2022
4,372,429,473
4,054,425,961
4,054,425,961
Share class
Ordinary shares of
160/21 pence each
The Company’s sole class of ordinary shares is admitted to the
premium segment of the official list.
The Directors note that in connection with the Demerger the Directors
are seeking authority to effect a share consolidation, such that
shareholders will receive one new share in the Company in exchange
for every three existing shares in the Company held by them at the
record time for the consolidation with fractional entitlements being
aggregated and sold in the open market. To effect the proposed share
consolidation, it will be necessary for the Company to issue two
additional existing shares in the Company so that the number of the
Company’s existing shares is exactly divisible by three. A circular to
shareholders and notice of general meeting in connection with the
Demerger and containing further details of the proposed share
consolidation will be published on 3 March 2023.
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.
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Shareholder dividend
The Directors are pleased to announce the payment of a second
interim dividend of 1.5 pence per share to replace the final dividend
which would normally be approved at the 2023 AGM (2021 final
dividend: 1 pence). This second interim dividend will be paid on
18 April 2023(3), prior to the Demerger, to ordinary shareholders on the
register of members of the Company at the close of trading
on 10 March 2023. This will mean a full year dividend for 2022 of
2.325 pence per share (2021: 1.75 pence).
For discussion on the Board’s intentions with regard to the Company’s
dividend policy, please see the Chairman’s statement on pages 10 to
11, which is incorporated into this Directors’ 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 2022, the total amount of unclaimed dividends of Brush
Holdings Limited was £17,417.44. If the unclaimed dividends are not
claimed by 30 June 2023, 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 2022, the
total amount of unclaimed dividends of GKN Limited was £245,010.29.
If the unclaimed dividends are not claimed by 30 June 2023, the
Company will look to donate the funds to charity.
Ability to purchase own shares
Pursuant to sections 693 and 701 of the Act and a special resolution
passed at a general meeting of the Company on 5 May 2022,
the Company is authorised to make market purchases of up to
437,242,947 of its ordinary shares, representing approximately 10%
of the current issued ordinary share capital of the Company. The
Company has made purchases of its own shares pursuant to this
authority. As described on page 100, the Company undertook a share
buyback between June and August 2022, as a result of which
318,003,512 ordinary shares of the Company were repurchased
pursuant to, and in compliance with, this authority. The remainder
of this authority will expire at the end of this year’s AGM.
At the 2023 AGM, the Company is seeking approval to make
market purchases of its ordinary shares up to 202,586,150, being
approximately 14.99% of the issued ordinary share capital of the
Company following the proposed share consolidation as described in
the Capital structure section of this Directors’ report, 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
235 to 241.
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 2 March 2023, 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 2023 AGM are set out in the AGM
Notice on pages 235 to 241.
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.
Substantial shareholdings
As at 31 December 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, had been
notified to the Directors:
Shareholder
Shareholding(1)
The Capital Group Companies, Inc.
BlackRock Inc
Select Equity Group Inc
Norges Bank
Aviva plc
Bank of America Corporation
524,561,063
332,302,037
230,018,297
163,601,346
134,928,387
131,232,533
% of ordinary
share capital as at
31 December 2022(1)
12.94
7.53
5.67
4.04
3.09
3.24
Between 1 January 2023 and 2 March 2023, 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
Shareholding(1)
% of ordinary share
capital as at the date
of disclosure(2)
The Capital Group Companies, Inc.
608,169,502
15.00
(1) Where the holding of shares has not been re-notified to Melrose since the previous share
capital consolidation became effective in August 2021, the number of shares is as notified to
Melrose prior to this consolidation. In addition, where the holding of shares has not been
re-notified to Melrose since the Share Buyback completed in August 2022, the number of
shares is as notified to Melrose prior to this.
(2) Since the disclosure date, the shareholder’s interests in the Company may have changed.
(3) After the date of approval of the Annual Report and financial statements, the second interim
dividend payment date was changed to 11 April 2023 in order to effect the DRIP prior to
completion of the proposed Demerger.
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Directors’ report
Continued
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 30 to 37, the Risks
and uncertainties section of the Strategic Report on pages 40 to 48,
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 in 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 14 to 27 and the
Sustainability review on pages 55 to 91, which are incorporated
by reference into this Directors’ report, investment into research and
development activities continued throughout 2022. GKN Aerospace
is involved in developing ground-breaking liquid hydrogen technology
as part of its £54 million collaborative H2GEAR programme.
This 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 3,000 jobs across
the UK and will reinforce the UK’s position at the forefront of
aerospace technology research and development.
GKN Automotive is continuing to help progress the electric vehicle
revolution and ongoing decarbonisation of the global automotive
sector at its UK Innovation Centre in Abingdon, UK. This has included
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 investment in new technologies continued
during 2022, including in relation to its new proprietary electric pumps
which are substituting engine drive pumps on vehicle transmissions.
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 review on pages 55 to 91.
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 10 to 11 and the
Strategic Report on pages 2 to 93 of this Annual Report (including the
Longer-term viability statement on page 37 and the Risks and
uncertainties section on pages 40 to 48), 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 2022, are shown in the Sustainability
review on pages 55 to 91 and in the Section 172 statement set out in
the Strategic Report on pages 49 to 54, 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 14 to 27, in the Section 172 statement on pages 49
to 54, and in the Sustainability review on pages 55 to 91, 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 (“GHG”) emissions, waste, water usage,
and other energy consumption, as well as the methodology used
to calculate such emissions and consumption, are set out in the
Sustainability review on pages 55 to 91, which is incorporated by
reference into this Directors’ report.
In 2022, the Board oversaw the implementation of the Group
sustainability targets and commitments which were set in 2021.
Details of these targets and commitments are set out in the
Sustainability review on pages 58 to 59. In line with its commitment to
report on progress against its target to achieve net zero GHG
emissions by 2050, the Group published its inaugural Group Net Zero
Transition Plan and enhanced its Task Force on Climate-related
Financial Disclosures (“TCFD”), complying with key recommendations.
In this second year of climate financial reporting, the Group sought to
develop linkages between the identified climate transition risks and
their material operational and financial impacts. The TCFD report can
be found on pages 66 to 76 of the Sustainability review. The Board
also approved three new policies, including Supply Chain, Biodiversity
and Water, as well as overseeing the setting of a reduction target for
Group water withdrawal intensity, the launch of a Water Stewardship
Programme, and initial supply chain engagement initiatives.
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
2022 (2021: 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 2020 Employee Share Plan, which are set out on
page 125 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.
Significant agreements and change of control
With the exception of the Group’s banking facilities, the Notes (as
defined below), 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 2 March 2023.
The Group has bank facilities comprising a multi-currency
denominated term loan of £30 million and US$788 million respectively
and multicurrency denominated revolving credit facilities of £1.1 billion,
US$2.0 billion and €0.5 billion respectively (together, the “Existing
Facilities”). Details of these facilities are provided in the Finance
Director’s review on page 32 and note 25 to the financial statements.
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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 for the
participants 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.
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
2022 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:
Warren Fernandez
Company Secretary
2 March 2023
In contemplation of the Demerger, the Company, among others,
entered into a facilities agreement dated 22 February 2023, pursuant
to which the lenders thereunder have agreed to make available
banking facilities to certain members of the Group (the “New Facilities
Agreement”). Such facilities comprise term loan facilities of
US$300 million and €100 million respectively (each with a term of
three years), multicurrency revolving credit facilities of £300 million,
US$550 million and €300 million respectively (each with a term of
three years, subject to a maximum extension of up to two years) and a
multicurrency revolving credit facility of US$250 million (with a term of
three years) (together, the “New Facilities”). As at 2 March 2023, the
New Facilities are undrawn. It is proposed that certain of the New
Facilities will be drawn on the date of the Demerger and, together with
the proceeds of certain other facilities, be applied to prepay the
Existing Facilities in full.
In the event of a change of control of the Company following a
takeover bid, the Company and lenders under both the Existing
Facilities and the New Facilities (as applicable) are obliged to enter into
negotiations to determine whether, and if so how, to continue with the
facilities. There is no obligation for the lenders to either fund new loans
requested during the 30 day period after a change of control, or, if no
agreement is reached, continue to make the facilities available
following such 30 day period. 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, had
outstanding £450 million fixed rate notes paying 5.375% p.a. interest,
issued under a Euro medium-term note programme, which matured
and were repaid in full on the maturity date of 19 September 2022. In
November 2022, GKN Holdings Limited launched a tender offer (the
“Tender Offer”) in respect of its approximately £300 million fixed rate
notes paying 4.625% p.a. interest and maturing on 12 May 2032 (the
“Notes”), also issued under a Euro medium-term note programme.
The Tender Offer was announced on 21 November 2022 and made
on the terms and subject to the conditions set out in a tender offer
memorandum dated 21 November 2022 prepared by GKN Holdings
Limited. As a result of the Tender Offer, £169,957,000 in aggregate
principal amount of the Notes were validly tendered and were
accepted for repurchase by GKN Holdings Limited, subject to the
terms and conditions described in the tender offer memorandum,
for cash at a purchase price of £870 per £1,000 in principal amount of
the Notes. GKN Holdings Limited also paid the accrued and unpaid
interest in respect of the Notes repurchased pursuant to the Tender
Offer for the period from and including the interest payment date of
the Notes immediately preceding the settlement date of 1 December
2022 to, but excluding, the settlement date of 1 December 2022.
With respect to the remaining Notes, pursuant to their terms and
conditions, 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 at the time the change
of control occurs; or (ii) if the Notes carry an investment grade credit
rating from at least two ratings agencies at the time the change of
control occurs, and the Notes are downgraded to a non-investment
grade rating or that rating is withdrawn and not restored to an
investment grade rating by them or replaced by an investment grade
rating of another rating agency, within 90 days of the change of
control and, in each case, such downgrade or withdrawal is publicly
announced, or notified in writing to the Notes trustee, by such ratings
agencies as being the result of the change of control.
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Corporate Governance report
Corporate Governance
report
In line with the UK Corporate Governance Code (the
“Code”) issued by the Financial Reporting Council
(the “FRC”), 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 2022.
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 review and the Section 172
statement, also form part of this Corporate Governance report.
Statement of compliance
Throughout the year ended 31 December 2022, 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 comprises 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 105.
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
49 to 54 sets out the ways in which the Board took shareholder and
other stakeholder considerations into account in its decision-making
in 2022.
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 good quality but underperforming manufacturing
businesses and set out to solve chronic issues within them, 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 in 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 build businesses that are more sustainable. We
recognise that this also requires a wide range of non-financial areas
to be addressed, including risk management, ethics and compliance,
as well as working with the businesses to set meaningful sustainability
targets alongside financial metrics. These actions benefit their
long-term future, and seek to benefit all stakeholders.
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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 38 to 39
and 110 to 115 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
each 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 2022, 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,
including the proposed demerger of GKN Automotive, GKN Powder
Metallurgy and GKN Hydrogen (the “Demerger”) and associated
changes to the Company’s long-term incentive arrangements and
extension of the Chairman’s tenure, 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 2023 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 49 to 54.
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 review on page 82.
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
Group 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, human rights, supply chain, biodiversity, and water.
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 page 95.
There were four formally scheduled Board meetings held during the
year and the attendance of each Director at these meetings is shown
on page 106.
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 106. 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 the Melrose senior management team.
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 of Association (the “Articles”), and in
compliance with the Companies Act 2006, 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, five Non-executive
Directors (inclusive of the Senior Independent Director) and the
Non-executive Chairman. As such, the Board is satisfied that there is
sufficient challenge by Non-executive Directors of executive
management in meetings of the Board, and that no individual or small
group of individuals dominates its decision-making.
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 107, 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. It is proposed that his tenure is extended by a
further two years in order to provide certainty and stability through the
completion of the Demerger. Mr David Lis is the appointed Senior
Independent Director, and acts as an intermediary for the other
Directors and shareholders. The number of Directors on the Board
decreased during the year following the retirement of Ms Liz Hewitt 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.
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106
Corporate Governance report
Continued
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. The Board does not
consider it appropriate to impose minimum shareholding requirements
on the Non-executive Directors.
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.
Each committee 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 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.
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. New Directors are required to
disclose any directorships held and other business interests, and
existing Directors are required to obtain the Chairman’s consent for
additional external appointments. 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. Mr 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. Mr Simon Peckham and Mr Geoffrey Martin
have also been appointed as executive directors of Dowlais Group plc,
which will be the new UK listed holding company of the GKN
Automotive, GKN Powder Metallurgy and GKN Hydrogen businesses
subject to shareholder approval and completion of the Demerger,
providing their knowledge and expertise through a transitional
services agreement for a period of time following completion of the
Demerger. Both will also continue to perform their current roles as
Melrose Chief Executive and Group Finance Director respectively. The
Board has concluded that these appointments will not affect their
ability to meet their respective 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(4)
David Lis
Charlotte Twyning
Funmi Adegoke
Heather Lawrence
Victoria Jarman
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4
4
4
4
4
2
4
4
4
4
4
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4(2)
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–
4(3)
–
2
4
4
4
4
–
2
2
–
–
–
–
–
2
2
2
–
2
2
2
–
–
–
–
–
2
2
–
–
2
3
3
3
3
3
3
2
3
3
3
3
3
(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) Liz Hewitt retired as a Non-executive Director of the Company on 5 May 2022. She attended
all Board and applicable committee meetings, together with all business reviews, prior to her
retirement.
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 98 to 99, and on the Company’s website at
www.melroseplc.net. These biographies identify any other significant
appointments held by the Directors.
During the year, Liz Hewitt, the Senior Independent Director and
Chairman of the Audit Committee, retired from the Board as planned,
having been appointed as a Non-executive Director of the Company
for almost nine years.
The Board has made significant progress in improving its diversity in
recent years. It continues to meet the FTSE Women Leaders Review
target of having 40% female representation on its Board. In particular,
the last four Non-executive Director appointments have been female.
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 Melrose
senior management. It was a core focus in 2022 and as explained in
section 2 on page 105, the Board has approved the extension of
Justin Dowley’s tenure as Chairman of the Board in order to provide
certainty and stability through the completion of the Demerger.
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.
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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 2022 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, the Senior Independent Director in respect
of the evaluation of 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 and
its committees, the Chairman of the Board, the Senior Independent
Director and the Chairman of each committee 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
2023:
• continuing to monitor senior management succession;
• ensuring the adequacy of 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 2022, it was recognised that cyber
security is an ongoing risk and will, therefore, be focused on again
in 2023;
• continuing to improve and monitor the cash management culture
within the 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 2022 AGM, with the exception of Liz Hewitt, who
retired 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 above 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. He first joined
the Board as a Non-executive Director in September 2011 and served
as the 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.
Recognising the significant events related to the Demerger, the Board
has proposed a further and final extension of his tenure for an
additional two years in order to provide certainty and stability through
the completion of the Demerger. He 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 having been
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. 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. 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 served
as Chief Operating Officer since 2019, 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.
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Corporate Governance report
Continued
The remaining Non-executive Directors are standing for re-election
due to their independence, diversity, skills and experience. In
particular:
• David Lis, the Senior Independent Director, 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 having held numerous senior
positions in various sectors, most recently in aviation, alongside
her substantial board experience.
• Funmi Adegoke brings to the Board diverse industrial knowledge,
and significant transactional and commercial expertise gained
from leadership roles in global multi-national organisations.
• 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 investment
banking, as well as having the necessary expertise required to
perform the role of Chairman of the Audit Committee.
• 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 98 to 99,
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 235 to 241.
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. In
assisting the Board with these responsibilities, the Audit Committee
reviews the effectiveness of, and monitors and oversees, the Group’s
risk management, internal financial control systems and processes
and compliance controls, and provides both feedback and
recommendations to the Board. The role of the Melrose senior
management team is to implement these risk management and
internal control 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 Audit
Committee also supports the Board in monitoring risk exposure
against risk appetite. 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.
The Audit Committee report is set out on pages 110 to 115 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 the acquisition of GKN, 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
guidance. Details on the Group’s risk management strategy are set
out on pages 38 to 39.
Further information regarding the Group’s financial risk objectives and
policies can be found in the Finance Director’s review on pages 30 to
37. A summary of the principal risks and uncertainties that could
impact upon the Group’s performance is set out on pages 40 to 48.
Internal financial controls and reporting
The Group has a comprehensive system for assessing the
effectiveness of the Group’s internal controls, including strategic
business planning and regular monitoring and reporting of financial
performance. A detailed annual budget is prepared by senior
management and thereafter is reviewed and formally adopted by
the Board.
The budget and other targets are regularly updated via a rolling
forecast process and regular business review meetings are held with
the involvement of senior management to assess performance. The
results of these reviews are in turn reported to, and discussed by, the
Board at each meeting. As discussed in the Audit Committee report
on pages 114 to 115, the Group engages BM Howarth as internal
auditor with additional support, as required, from Ernst & Young. A
total of 50 sites across the Group were assessed by BM Howarth
during 2022.
The Directors can report that based on the sites visited and
reviewed in 2022, there has been progress across the Group following
the 2022 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, human
rights, supply chain, biodiversity and water. 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 2022, Melrose introduced its first Supply Chain policy,
Biodiversity policy and Water policy for implementation within the
businesses, and Melrose also updated the Melrose Code of Ethics to
align it with the new policies. The new policies (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.
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The Company’s Modern Slavery Statement is approved by the Board
annually and the most recent statement is available on the Company’s
website at www.melroseplc.net/media/2950/modern-slavery-
statement-fy2021.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 the Audit Committee report on page 113 for details of the
Company’s whistleblowing policies and procedures.
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 currently
has a five-year total vesting and holding period (and, subject to
shareholder approval and completion of the Demerger, will have a
six-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, 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 119 to 144, the Chief
Executive retains responsibility for setting and managing the
remuneration of Melrose senior management and divisional CEOs, of
which the Remuneration Committee has full disclosure. No Director is
involved in deciding their own remuneration outcome.
Independent judgement and discretion
The 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 and, if approved, the
renewed Directors’ remuneration policy will provide the same ability for
the Remuneration Committee to exercise discretion. In 2022, the
Remuneration Committee determined to exercise discretion in respect
of the payment of the 2021 annual bonus to the Chief Operating Officer
in cash. Details were provided in the 2021 Directors’ Remuneration
Report. No further use of discretion was exercised in 2022.
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 119 to 144, which is presented in the
following three sections:
• the annual statement from the Chairman of the Remuneration
Committee, which can be found on pages 119 to 120;
• the Annual Report on Remuneration, which can be found on
pages 121 to 134; and
• the proposed 2023 Directors’ remuneration policy, which can be
found on pages 135 to 144.
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). As part of the Demerger,
certain adjustments are being proposed to the 2020 Employee Share
Plan and the current Directors’ remuneration policy, which are subject
to shareholder approval at the general meeting on 30 March 2023 and
completion of the Demerger. The details of these adjustments, which
will be effective from completion of the Demerger, are set out in
the circular to shareholders and notice of general meeting dated
3 March 2023, which will also be available on the Company’s website
from this date.
As mentioned in the Directors’ Remuneration report, the current
Directors’ remuneration policy is due for renewal by shareholders at
the 2023 AGM and the Group is seeking shareholder approval of the
renewed Directors’ remuneration policy, which, if approved, will apply
to payments made from that date.
(1) The full details of the 2020 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 approved at the January 2021 meeting 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).
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110
Audit Committee report
Audit Committee
report
Heather Lawrence
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
Heather Lawrence (Chairman)(2)*
David Lis*
Charlotte Twyning
Funmi Adegoke
No. of meetings(1)
4/4
4/4
4/4
4/4
(1) Reflects regularly scheduled meetings of the Committee. During the year, meetings of a
sub-group of the Committee were also held to discuss the audit tender process.
(2) Ms Liz Hewitt retired as a Non-executive Director and as Chairman of the Committee on 5 May
2022 and was succeeded by Mrs Heather Lawrence with effect from 5 May 2022. Liz Hewitt
attended all Committee meetings held during the period 1 January 2022 to 5 May 2022.
Indicates Committee members with financial expertise. In total, following the retirement of
Liz Hewitt, 50% of the Committee has financial expertise.
*
Role and responsibilities
The Committee’s role and responsibilities are set out in its terms of
reference. These were last reviewed in November 2022 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;
• developing, implementing and monitoring the Group’s policy on
external audit;
• monitoring and evaluating the independence and effectiveness of
the external audit function and approving the external audit plan
and fee;
• taking into account relevant UK laws, regulations, the Ethical
Standards and other professional requirements and the
relationship with the auditor as a whole;
• 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;
• reviewing and where necessary challenging the provision of
non-audit services by the external auditor;
• developing and overseeing the selection process for the appointment
of the external auditor and in respect of an external audit tender,
making a recommendation to the Board on the appointment of
the external auditor following on from such tender process;
• monitoring and evaluating the independence and effectiveness of
the internal audit function and approving the internal audit plan
and fee; and
• reviewing and considering the Annual Report and financial
statements to ensure that they are fair, balanced and
understandable and advising the Board on whether it can state
that this is the case.
Composition
The Committee is made up 100% of independent Non-executive
Directors. Ms Liz Hewitt, former Chairman of the Committee, retired
from the Board on 5 May 2022, and was succeeded as Chairman of
the Committee by Mrs Heather Lawrence. Heather Lawrence joined
the Board and the Committee in June 2021. She has strong audit
experience having acted as audit committee chair of FlyBe Group plc.
Heather 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
98 to 99.
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
considered appropriate and during the year, the Chairman of the
Board attended all of the scheduled Committee meetings. In addition,
the Committee meets at least once a 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.
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Summary of meetings in the year
The Committee is expected to meet not less than three times a year.
However, during 2022, the Committee met four times (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. During 2022, meetings
were also held by a sub-group of the Committee as part of the
external auditor tender process. Further details on the external auditor
tender process are provided below.
Significant activities related to the 2022 financial
statements
As part of its duties the Committee undertook the following recurring
activities that receive annual scrutiny:
• review of the 2022 Annual Report and financial statements and
the interim financial statements, including the going concern
assumption for the Group 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 2022 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 2022 Annual Report and financial statements. The
Committee advised the Board that, in its view, the 2022 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 2022
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 to, the scope of work to be undertaken
in respect of the 2022 financial statements by the external
auditor and the scope of work to be undertaken in 2023 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 consistent with the industry and geography
of operations.
Due to consequential impacts from the COVID-19 pandemic of disrupted
supply chains, interest rate rises and other inflationary pressure on input
costs, certain businesses within the Group are mitigating the impact of volatile
customer scheduling through cost reduction and efficiency actions, including
restructuring. Additional sensitivities have been disclosed for the Automotive
and Powder Metallurgy groups of CGUs.
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 accounting standards, impairment testing for each
group 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 – unbilled work done, relating to certain risk and revenue
sharing partnerships (“RRSPs”) in a small number of Aerospace businesses.
As required, management continues to review the key assumptions that have
a significant impact on the allocation of overall transaction prices for impacted
aerospace engine components. It is particularly important to reassess the
operational progress and status of engine 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 commercial and operational progress on certain affected
engine programmes during the year, it was concluded that an update to
assumptions was appropriate. Whilst the changes have not had a material
impact on 2022 results (£19 million), they will impact future results too.
The amount of variable consideration recognised in the year is £106 million.
This is due to a ramp up in volumes and operational benefits as well as
implications of changes 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 Automotive and Powder Metallurgy 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 macroeconomic 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 models, in particular regarding
the timing of when volume reductions would recover; and
• the appropriateness of the 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 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.
Following the extensive briefing in the prior year, the Committee received
an update prepared by management and again discussed the implications
of IFRS 15, which included an assessment of estimates used in calculating
variable consideration for certain RRSPs.
The change in estimates, impacting both the amount and timing of revenue
recognition, were primarily based on commercial progress of specific
programmes. Whilst the impact of changes was largely immaterial for 2022,
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 it
remains reasonably possible that assumptions may change which could lead
to the recognition of further unbilled work done in the next year.
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112
Audit Committee report
Continued
Significant issue considered by the Audit Committee
How the issue was addressed by the Audit Committee
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 Financial Reporting Council (“FRC”) and 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, 5 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 longer-term viability statement
before making a recommendation to the Board.
The assessment of going concern uses the same forecast data as in many
other areas of estimation within the full year accounting and takes into account
the covenant tests. Due to the Group’s announced intention to demerge GKN
Automotive, GKN Powder Metallurgy and GKN Hydrogen (the “Demerger”),
additional scenarios have been tested to ensure that there is sufficient liquidity
and covenant headroom to enable the existing Group and the remaining group
following the Demerger to meet obligations as they fall due over the next 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. As a
result of testing provisions, £11 million has been released as an adjusting item
to avoid positively distorting adjusted operating profit.
(Refer to notes 3, 6 and 21 of the financial statements)
The Committee has considered the nature, classification and consistency
of adjusting items, whilst addressing the guidance provided by the FRC and
ESMA. These items are defined and discussed in the Finance Director’s
review and detailed in notes 5 and 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 a write down of assets of £20 million was recognised
as a result of exiting any direct trading links with Russian operations, as a
consequence of the conflict in Ukraine.
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. Reconciliations of adjusted
performance measures to statutory results are set out in notes 5 and 6 to the
financial statements. The Committee found the disclosures to be 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 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
the flexibility of liquidity arrangements to meet obligations. These principles
were considered for different scenarios of how the Group might change during
2023. In addition to base case modelling, which uses approved financial
forecasts, a reasonably possible downside was also considered.
The Committee 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 2022, the carrying value of loss-making contract
provisions in the Group was £108 million (31 December 2021: £167 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 to the Committee on their audit work covering loss-
making contract provisions and assumptions.
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.
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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, Heather Lawrence and David Lis have each held senior
roles at various financial institutions. Furthermore, Heather Lawrence
has held various non-executive directorship positions, including as
audit committee chair of FlyBe Group plc. Charlotte Twyning and
Funmi Adegoke have each held senior legal roles at global companies.
In particular, Funmi Adegoke is currently Group General Counsel and
Chief Sustainability Officer at the FTSE 100 company, Halma PLC.
During 2022, 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 external consultants, continued to
utilise 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 Group’s risk management process, and also
reviewed and challenged an interim and annual report prepared by
Melrose senior management of the Group’s principal risks profile. This
summary report guided the Committee on relevant updates to the
Group’s principal risks (including risk trends and mitigations), as
reported in the Risks and uncertainties section on pages 40 to 48.
The summary report was also enhanced this year to support the
Committee in its discussions with the Board on risk appetite, as
detailed further on page 39.
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 to the
Board. No significant weaknesses were identified.
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 wrongdoing 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 of the
Board 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 2022, a series of questions covering key areas of
the audit process that the Committee is expected to have an opinion
on 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 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 last year’s
report had outlined the Committee’s intention to undertake an external
audit tender process in 2022. The Committee is pleased to confirm
that the tender process has now concluded and, subject to
shareholder approval, PwC LLP has been selected as the Company’s
new external auditor for the financial year ending 31 December 2024.
The current audit engagement partner was appointed in 2019.
Therefore, the audit engagement partner will serve until PwC LLP
assumes the role of the incumbent external auditor.
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Audit Committee report
Continued
The tender process was undertaken in 2022 in order to allow for a
competitive process and to provide participants with sufficient time to
become independent. The Committee expects that Deloitte LLP will
remain the Group’s external auditor until the conclusion of the 2023
financial year (“FY2023”) audit. To facilitate an orderly transition, PwC
LLP will also observe the FY2023 audit. The Chairman of the
Committee led the tender process and oversaw the work of
management, who supported the Committee in developing and
implementing the planned approach. The Chairman of the Committee
met with both the Group Finance Director and senior members of the
Melrose finance team regularly throughout the tender process.
The process was prepared and followed in accordance with best
practice FRC guidelines, and in particular was designed to be
transparent and efficient, and to give firms an equal opportunity to
tender for the services. Except for Deloitte LLP, no other firm was
prohibited from taking part in the tender. After initial consideration of
audit firms by the Committee, two firms were selected to be provided
with a Request for Proposal (“RFP”). Each firm was invited to meet
with the functional heads at Melrose, together with the finance
directors of each business unit. Processes were implemented such
that each firm was provided with equal access to management and
information. Both firms were then invited to present to a sub-group of
the Committee, which included both the Chairman of the Committee
and the Group Finance Director.
The Committee assessed the two firms against a number of criteria,
including audit quality and capability, and organisational capability and
service delivery. The Committee’s final evaluation of the firms took into
account a number of criteria, including analysis of the RFP
submission, audit workshops with the Company’s management,
assessment of the firm’s approach to audit quality, performance in the
final presentations, and due diligence on the firms. After detailed
consideration, the Committee concluded that PwC LLP would be
recommended to the Board for appointment as the Group’s external
auditor from the financial year ending 31 December 2024. The Board
supported this decision.
Planning for transition to PwC LLP has commenced, including steps
to ensure that they are fully independent in time for their appointment.
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 LLP, 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 2019, 2020 and 2021
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. These services will be migrated to
another firm as part of the transition process to PwC LLP as the
Company’s new auditor from the financial year ending 31 December
2024, as detailed further above.
During 2022, the main services provided by Deloitte LLP other than
statutory audits were in relation to non-statutory audits of carve-out
financial statements and assurance reports for various projects
including government grants or subsidies and a review of the half year
interim statement. The Company’s non-audit fee paid to the external
auditor of £0.6 million represents 6% of the audit fees for 2022.
Deloitte LLP also provided reporting accountant services in relation to
the proposed demerger of GKN Automotive, GKN Powder Metallurgy
and GKN Hydrogen (the “Demerger”), and was paid £0.9 million for
this work. This fee was not subject to the non-audit fee cap
calculation.
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, such as in the case of the Demerger. In such cases,
the Chairman of the Committee must first approve such work.
An analysis of the fees earned by the external auditor for audit and
non-audit services can be found in note 7 to the consolidated
financial statements.
Auditor objectivity and independence
The Committee carries out regular reviews to ensure that auditor
objectivity and independence are maintained at all times. As in
previous years, the Committee specifically considered the potential
threats that each limited non-audit engagement may present to the
objectivity and independence of the external auditor. In each case, the
Committee was satisfied with the safeguards in place to ensure that
the external auditor remained independent from the Company and its
objectivity was not, and is not, compromised. No fees were paid to
Deloitte LLP on a contingent basis.
At each year end, Deloitte LLP submits a letter setting out how it
believes its independence and objectivity have been maintained. As
noted above, Deloitte LLP is also required to rotate the audit partner
responsible for the Group audit every five years and significant
subsidiary audits every five years.
Based on these strict procedures, the Committee remains confident
that auditor objectivity and independence have been maintained.
Internal audit
Due to the size and complexity of the Group, it is appropriate for an
internal audit programme to be used within the business. BM Howarth
Ltd, an external firm, provides internal audit services to the Group in
accordance with an annually agreed Internal Audit Charter and
internal audit plan. Where additional or specific resource is required,
additional support is provided by Ernst & Young. A rotation
programme is in place, such that every business unit site will have an
internal audit at least once every three years, with the largest sites
being reviewed at least once every two years. The rotation programme
allows divisional management’s actions and responses to be followed
up on a timely basis. The internal audit programme of planned visits is
discussed and agreed with the Committee during the year.
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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. Physical internal audit site
visits were conducted by BM Howarth across a total of 48 sites in
2022. Further, due to continued restrictions in China as a result of
COVID-19, two sites were reviewed remotely, meaning that 50 sites
were reviewed in total.
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.
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 any shortcomings identified. In the
event that significant deficiencies are found in internal financial
controls, these are immediately brought to the attention of the Group
Finance Director and the Melrose accounting function so that urgent
action plans can be agreed. Follow-up site visits were performed
during 2022 which identified significant progress in the improvement
of financial controls at sites.
A review of the internal audit process and scope of work covered by
the internal auditor is the responsibility of the Committee, to ensure
their objectives, level of authority and resources are appropriate for the
nature of the businesses under review. This also considers the insights
provided, improvements achieved and feedback from a number of
sources including key representatives of the Company.
The Committee reviewed the reappointment of BM Howarth Ltd as
internal auditor following an assessment of the services delivered and
approved their reappointment.
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 2022.
Heather Lawrence
Chairman, Audit Committee
2 March 2023
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116
Nomination Committee report
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 Board 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
Charlotte Twyning (Chairman)
Justin Dowley
David Lis
Funmi Adegoke
Victoria Jarman
(1) Reflects regularly scheduled meetings of the Committee.
No. of meetings(1)
2/2
2/2
2/2
2/2
2/2
The Committee is expected to meet not less than twice a year and,
during 2022, 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 2022. This included a review and
discussion of the skill sets, 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 FTSE Women
Leaders Review (formerly 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
is 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, Equity and Inclusion policy, and to ensure that the
Company continues to meet the expectations of the FTSE Women
Leaders 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 2023.
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, Equity 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 2022, 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 is made up of 100% independent Non-executive
Directors and comprises five out of six of the Non-executive Directors.
As mentioned below, Ms Liz Hewitt retired from the Board in 2022
and as a member of the Committee, prior to any scheduled meetings
taking place. Ms Victoria Jarman joined as a member of the
Committee in 2022 and attended all scheduled meetings during the
year.
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It is noted that Liz Hewitt, Senior Independent Director and Chairman
of the Audit Committee, retired from the Board on 5 May 2022 at the
close of the Company’s 2022 Annual General Meeting. She had
served as a Non-executive Director of the Company for just under
nine years. As previously disclosed, and as expected, Mr David Lis,
Chairman of the Remuneration Committee, was appointed as 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, 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, and in the Committee’s view he was very well positioned
to take over this role. Mrs Heather Lawrence was appointed as
Chairman of the Audit Committee upon Liz Hewitt’s retirement from
the Board, having held similar positions on other FTSE boards, and
having benefited from a detailed handover in the year prior to her
taking up this role.
Chairman’s tenure
The Committee also continued to review the role of Mr Justin Dowley
as Melrose’s Non-executive Chairman. Although he was appointed to
this 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. This is a key date in the consideration of his independence
under the UK Corporate Governance Code (the “Code”).
Recognising the significant events related to the proposed demerger of
GKN Automotive, GKN Powder Metallurgy and GKN Hydrogen (the
“Demerger”), the Board (upon the Committee’s recommendation) has
proposed that Justin Dowley’s tenure be extended for two years
beyond 2023. This is primarily to ensure continuity and stability through
the completion of the Demerger. This will be the final extension sought
for his tenure, and his appointment will remain subject to annual
re-election at the Company’s AGM each year. Key shareholders were
formally consulted on this proposal as part of the wider shareholder
engagement on the Demerger, and it was received positively.
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 their individual skills, relevant
experience, contributions and time commitments to the long-term
sustainable success of the Company. The Committee and the Board
have each satisfied themselves that each of the Directors should
stand for re-election, and the justifications for such re-elections are set
out on pages 107 to 108 of this Annual Report and in the Notice of
Annual General Meeting on pages 235 to 241.
Skills
The 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 95, 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. Responsibility for the succession planning
arrangements of the divisional executive teams is the responsibility of
the Chief Executive, although the Committee retains oversight of
succession planning for key individuals 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(2)
Male
Female
60%
40%
Non BAME(3)
BAME(3)
90%
10%
Male
Female
64%
36%
Male
Female
61%
39%
(1) As at 31 December 2022.
(2) 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.
(3) Black, Asian and Minority Ethnic.
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118
Nomination Committee report
Continued
Directors’ Remuneration report
Further details of Melrose’s commitment to diversity and the various
diversity initiatives undertaken within the Group can be found in the
Sustainability review on pages 82 to 87. Additionally, further details
on diversity and Board skills can be found on page 95 of the
Governance overview.
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 2022 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 page 107 for further details.
Charlotte Twyning
Chairman, Nomination Committee
2 March 2023
Diversity, equity 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
its 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, the
last four Non-executive Director appointments have been women.
Furthermore, two of the committee Chair roles, including the
important role of Audit Committee Chair, are held by women. Melrose
also continued to meet the Parker Review target of having one
Director from an ethnic minority background on the Board.
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 2022, Melrose had 40% female representation on
its Board, which meets the current expectations of the FTSE Women
Leaders Review.
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 39% female representation (and 36% female
representation specifically at an Executive Committee level) as at
31 December 2022, which is in line with the current target of diversity
at this level, and is close to the new target set by the FTSE Women
Leaders Review of having 40% female representation within executive
committees and their direct reports by the end of 2025.
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, Equity and Inclusion
policy as a minimum standard, and Melrose provides constant
encouragement to the businesses to make continual improvement.
The Committee acknowledges that diversity, equity and inclusion is a
changing landscape, and reviews its diversity policies on an annual
basis. The policies, which can be viewed on the Company’s website
at www.melroseplc.net/sustainability/ include a Board of Directors’
Diversity policy and a Melrose Diversity, Equity and Inclusion policy.
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 FTSE Women Leaders Review and the
Parker Review. The Melrose Diversity, Equity and Inclusion policy,
which is applicable to all Melrose employees, sets out Melrose’s
position on diversity, equity and inclusion in its workforce.
In particular, it highlights that Melrose aims to create a workforce that
is diverse, equitable and inclusive, and 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.
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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, where it traded ahead of
expectations on sales growth, profit and cash generation. The Group
has continued its strong performance coming out of the pandemic,
with a 126% increase in adjusted diluted earnings per share to 7.0
pence. As discussed elsewhere in this Annual Report and financial
statements, the Board has approved to pay a second interim dividend
of 1.5 pence per share to replace the normal final dividend which
would normally be approved at the Annual General Meeting (“AGM”),
in order to allow for payment to be made to shareholders ahead of the
proposed completion date of the Demerger (see below). This will give
a full year dividend of 2.325 pence per share, a 33% increase on last
year and in addition to the £500 million share buyback completed
in August 2022.
In September 2022, the Board announced its decision to separate
GKN Automotive, GKN Powder Metallurgy and GKN Hydrogen
from the Melrose Group to form Dowlais Group plc (“Dowlais”), an
independent company which will seek admission to listing on the
premium segment of the Official List and to trading on the Main
Market of the London Stock Exchange (the “Demerger”). The
Demerger is expected to unlock value for shareholders and will allow
both Melrose and Dowlais to fulfil their potential independently in their
respective markets with clear organic growth and strategic acquisition
rationale. On admission, the newly independent Dowlais group will
have a dual strategy of pursuing organic market beating profitable
growth with sector leading margins based on its global technology
excellence and positioning. It will also have the platform and
independent access to capital to take advantage of the M&A
opportunities available in the automotive sector. During its ownership,
Melrose has positioned both GKN Automotive and GKN Powder
Metallurgy as excellent generators of cash, with sustainable world-
leading technology and experienced management teams executing
successful strategies on a clear path to their stated margin targets
of 10%+ and 14% respectively. Certain adjustments to the existing
Melrose long-term incentive arrangements are being proposed as
part of the Demerger, in order to properly reflect the Demerger on
these arrangements.
(1) This was approved by the Remuneration Committee subsequent to the meeting of the
Remuneration Committee held on 1 March 2023.
These adjustments are discussed in further detail in the circular to
shareholders and notice of general meeting to be dated 3 March 2023
(the “Circular”), which will be available on our website. Subject to
shareholder approval at the general meeting of the Company on
30 March 2023 (the “Demerger GM”), these adjustments will be
effective from the completion date of the Demerger, which is expected
to be 20 April 2023.
From completion of the Demerger, the Melrose Group will consist
solely of the GKN Aerospace business, which has also continued
to perform well during 2022 and is driving further improvements to
unlock its full potential, with all required major restructuring projects
to reach its stated 14%+ margin target now underway. It will be the
subject of further focus during 2023, particularly once the Demerger
completes. 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 2022 and 2023.
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 current Directors’
Remuneration Policy at the 2020 AGM, and the 2020 Employee Share
Plan at the January 2021 general meeting, and the approval of the
2021 Directors’ Remuneration Report at the 2022 AGM.
Operation of the Directors’ Remuneration Policy in 2022
The Chief Executive’s and the Group Finance Director’s salaries
continue to deliberately remain well below the lower quartile of our
FTSE 100 peers, with annual bonuses currently capped well below
our peers at 100% of salary. The Committee is proposing to amend
the operation of the annual bonus plan as part of the renewal of the
Directors’ Remuneration Policy at the 2023 AGM, by increasing the
maximum opportunity from 100% to 200% of salary(1). This decision
has been made to provide the Committee with the ability to create a
competitive executive remuneration package to attract the best talent
in the context of succession planning. The Committee is aware of the
perception around increasing executive director pay given the external
environment and current higher cost of living. Accordingly, should the
increase be approved by shareholders, the current executive Directors
will not receive the benefit of any increase in annual bonus entitlement
for the duration of the 2023 Directors’ Remuneration Policy. I believe
this provides the Committee with this recruitment flexibility in line with
the best interests of the Company. Any future recipient would remain
positioned at the lower quartile when considering maximum annual
bonus opportunity as a monetary value given the conservative base
salary levels. To the extent it is utilised, it would be proposed to adjust
the weightings of the performance measures in the annual bonus plan
such that ESG can become a specific focus of the award, with a
defined component to ensure further incentivisation to deliver the
Company’s ESG strategy.
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 123 sets out
the most recently available CEO annual remuneration (excluding the
LTIP element for comparison) and puts this deliberate strategy in
context, highlighting that the single total figure of remuneration for the
Chief Executive in 2022 was less than half, or over £1 million less than,
the average FTSE 100 CEO annual remuneration in 2021.
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120
Directors’ Remuneration report
Continued
121
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 2022 and 2023. There were no
deviations from the Directors’ Remuneration Policy in respect of the
year and the Committee did not exercise any discretion to alter the
2022 outcomes from the application of the performance conditions.
Full details are set out in the Annual Report on Remuneration on
pages 121 to 134 that will be put to an advisory vote at the 2023 AGM.
Shareholder support
We were pleased that the 2021 Directors’ Remuneration Report and
the 2020 Directors’ Remuneration Policy both received strong
shareholder support at the 2022 AGM and the 2020 AGM
respectively, receiving voting outcomes of 97.34% 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 2022 Directors’
Remuneration Report and the 2023 Directors’ Remuneration Policy
at the 2023 AGM.
Yours sincerely
David Lis
Chairman, Remuneration Committee
2 March 2023
As this and the table on page 123 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. Under the current long-term incentive
arrangements, executive Directors have the opportunity to share in the
value they create for shareholders above a threshold return over the
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. With the impact of COVID-19 resulting in the
previous incentive plan maturing with no award, the current plan
represents the only incentive plan with possible benefits for Melrose
management since 2017. I also note that the continued market
volatility has weighed on the current scheme, such that if the
crystallisation date had been 31 December 2022, then there would
have been no award to the executive Directors. However, your Board
believes that current work being undertaken by management in the
businesses, including the Demerger, will deliver value to shareholders
within the remainder of the performance period.
As part of the Demerger, certain adjustments are being proposed to
the Company’s long-term incentive arrangements (and consequential
revisions to the 2020 Directors’ Remuneration Policy), as set out in
further detail in the Circular. These revisions will be voted on as part of
the proposal to approve the Demerger (the “Demerger Proposal”) at
the Demerger GM, the outcome of which will be known by the date of
publication of this report (but not by the date of this report). The total
invested capital of the Group as at 31 December 2022 will be split
between the continuing Melrose Group and the Dowlais group
according to a fixed ratio, to match the separation of the businesses
themselves under the Demerger, so that any increase in value from
completion of the Demerger is measured against the invested capital
relating to the relevant businesses. The amount allocated to the
Dowlais group will form the invested capital under a separate, one-off
incentive plan for Melrose senior management (see the Circular for
further details).
In the six months prior to the date of this report, the Company has
engaged both significantly and intensively with its key shareholders in
preparation for the Demerger. Accordingly, although it is never taken
for granted, this Directors’ Remuneration report and the Directors’
Remuneration policy renewal is drafted on the basis of support from
shareholders for the Demerger Proposal. Recognising the timetable
for the Demerger, and the overlap with the reporting of this Annual
Report and financial statements, we envisage that a further round of
engagement with key shareholders on the renewal of the 2020
Directors’ Remuneration Policy may be possible in due course, once
the Demerger has completed and prior to the 2023 AGM.
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 123), CEO pay ratio (pages 127
to 128), and Wider workforce considerations (page 130), 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.
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Annual Report on Remuneration(1)
In this section of the Directors’ Remuneration report, we set out:
• the actual performance and executive remuneration outcomes
for the 2022 financial year; and
• the application of the current Directors’ remuneration policy (the
“Directors’ Remuneration Policy”) to the 2022 financial year and
how the Directors’ Remuneration Policy was operated in 2022.
The current 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 with over 82% of votes cast in favour of the proposal.
On 30 March 2023, as part of the approvals required to implement the
Demerger, shareholders will be asked for approval to make certain
necessary adjustments to the 2020 Employee Share Plan (and
consequential revisions to the current Directors’ Remuneration Policy)
to appropriately reflect the Demerger in the Melrose long-term
incentive arrangements.
The full details of the current Directors’ Remuneration Policy can be
found on pages 103 to 111 of the 2019 Annual Report(2) and on pages
15 to 24 of the circular to shareholders dated 29 December 2020(3).
The circular to shareholders and notice of general meeting to be dated
3 March 2023 (the “Circular”) contains details of the adjustments being
proposed as part of the Demerger proposal, and will be available on
our website.
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
122 and 131
None / 125
126 and 131
128
127 to 128
128 to 129
130
Consideration of matters relating to Directors’ remuneration
121 to 122
Statement of voting
Payments to Past Directors or for Loss of Office
134
123 / None
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 therefore aligned with the workforce) 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.
(1) This Annual Report on Remuneration speaks to the position as at the date of writing, being 2
March 2023. It is noted that, following this date but prior to the expected date of publication of
this Annual Report on Remuneration, a general meeting of shareholders will be held on 30
March 2023 to approve the Demerger, as part of which shareholders will be asked to approve
certain necessary adjustments to the 2020 Employee Share Plan and consequential
amendments to the Company’s current Directors’ Remuneration Policy.
(2) Available at www.melroseplc.net/media/2536/melrose-ar2019.pdf.
(3) Available at www.melroseplc.net/media/2587/291220-melrose-circular.pdf.
(3) Supports the delivery of the value creation strategy – with
the fixed elements being deliberately pegged at the lower quartile of
FTSE 100 peers, the opportunity for any significant reward is heavily
weighted to the Company’s long-term incentive arrangements, which
are entirely based on the creation of shareholder value.
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(4) Pays only for performance – executive remuneration is heavily
weighted to the Company’s long-term incentive arrangements, which
pay nothing to participants unless the executive Directors deliver a
threshold return to shareholders over the relevant performance period,
and only pay 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
page 133. 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.
2022 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 which is proposed to be
amended at the Demerger GM on 30 March 2023 with effect from
completion of the Demerger), and its four key remuneration principles.
There was no long-term incentive arrangement due to vest in respect
of 2022, with the crystallisation date under the 2020 Employee Share
Plan (the “MESP”) being 31 May 2023 (and, subject to shareholder
approval at the Demerger GM and completion of the Demerger, being
31 May 2024). As such there was no payout in respect of the year. As
part of the Demerger, the Committee has proposed certain
adjustments to the Company’s long-term incentive arrangements to
appropriately reflect the Demerger on them. Subject to shareholder
approval at the Demerger GM and completion of the Demerger, this
will split the Company’s long-term incentive arrangements to reflect
the Demerger (see the Circular for further details).
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 2022, consistent with the salary rises awarded to the wider
Melrose head office population, and therefore aligned with the
increases applied to the workforce. The Chief Executive’s and the
Group Finance Director’s salaries remained below the lower quartile of
the FTSE 100, as is demonstrated by the table on page 123. There
were also inflationary increases of 3% made to the Non-executive
Chairman’s fee and the 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 for the
executive Directors. In addition, there were small increases applied to
the additional fees for holding the position of the Senior Independent
Director and the Chairmanship of the Nomination Committee, as set
out in last year’s report.
For 2023, an increase of 5% was made to the executive Directors’
base salaries with effect from 1 January 2023 as set out on page 126,
which was below the increases awarded across the wider workforce.
There were increases of 5% made to the Non-executive Chairman’s
fee and Non-executive Director basic fees with effect from 1 January
2023, consistent with the increases determined for the executive
Directors’ base salaries, as set out on page 131. In determining the
2022 remuneration outcomes and the remuneration approach for
2023, the Committee was mindful of the evolving macroeconomic
challenges impacting the global economy, and aware of the guidance
published by the Investment Association at the end of 2022 setting
out the issues that remuneration committees should consider as they
assess 2022 remuneration outcomes and set remuneration for 2023.
As set out in this report, the executive Director salary increases were
determined to be appropriate in light of the Company’s performance
in 2022, and the salary increases that were awarded across the wider
workforce (both at a Melrose level and in our businesses) for 2023,
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122
Directors’ Remuneration report
Continued
123
which were higher than those awarded to the executive Directors,
whilst recognising and balancing the need to appropriately remunerate
and incentivise the executive team to continue to deliver value to
shareholders. It is also noted that the executive Directors’ 2023
salaries remain well below the lower quartile of the FTSE 100. The
Committee therefore feels that it has been able to balance all relevant
stakeholder considerations when setting salaries for 2023.
Although the annual bonus outcomes for 2022 were finally determined
by the Committee in 2023, 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 any exercise of discretion
to change this outcome. The Committee carefully considered the
strategic objectives (including ESG objectives) and the extent to which
these were met during 2022. As is detailed further on page 124, 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 any exercise of discretion to change this
outcome. We have therefore determined to make a full award for the
strategic objectives of 20%, and thus a total award for the annual
bonus of 100% of salary. For the reasons set out in this report, the
Committee believes that the bonus outcome for 2022 is appropriate,
taking into consideration a number of factors, including the
Company’s strong business performance, and the wider stakeholder
experience.
The Committee has reviewed the remuneration outcomes for the year
and confirms that the Directors’ Remuneration Policy operated as
intended during the year, and felt that the incentive outcomes were in
line with the overall performance of the Group. There were no
deviations from the Directors’ Remuneration Policy in respect of the
year and the Committee did not exercise any discretion to alter the
2022 outcomes from the application of the performance conditions.
Business performance
2022 saw our businesses continue on their improvement tracks to
achieving their respective stated margin targets. The year saw the
completion or substantial completion of a number of enterprise
projects across the businesses, which have been initiated under
Melrose ownership. All businesses improved their adjusted operating
profit and margin in 2022 compared to 2021, and are benefitting from
business improvement actions. Despite the macro challenges facing
the Group in 2022, all of the businesses were able to successfully
offset the impact of inflation, setting them on a good footing for 2023.
Further details on this are set out in the Chief Executive’s review on
pages 12 to 13 and the Divisional reviews on pages 14 to 27.
This Annual Report and financial statements, and specifically the
Group’s strategic KPIs on pages 28 to 29, demonstrates the good
progress that was made in 2022 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
long-term incentive arrangements are designed to reward the
flow-through of the successful implementation of the strategy into
longer-term sustainable shareholder returns, consistent with previous
incentive plans.
ESG
As mentioned in the 2021 Directors’ Remuneration Report, the
Committee’s view is that the most appropriate place to recognise
progress in relation to ESG 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. ESG has historically been considered in
the annual bonus as part of the strategic objectives. With the renewal
of the Directors’ Remuneration Policy at the 2023 AGM, the
Committee is proposing to adjust the weightings of the performance
measures under the annual bonus plan such that ESG can become a
specific focus of the award, with a defined component of at least 10%
of the total annual bonus, to be based on measures to be determined
by the Committee, to ensure that the executive Directors are
incentivised to deliver the Company’s ESG strategy. This structure will
provide the Committee with flexibility each year to set the factors that
are most appropriate to the Company and its strategy, and, consistent
with current market practice, will be disclosed retrospectively due to
commercial sensitivity (consistent with the approach taken to the
existing strategic element). The intention will be to increasingly align
the ESG factors with performance against the Company’s published
targets in this area, as the quality of data in this area increases.
However, as set out in the 2023 Directors’ Remuneration Policy on
pages 135 to 144, even if this change to structure is approved by
shareholders, the current executive Directors will remain on the
current annual bonus structure and opportunity, with ESG
performance forming part of the strategic factors, and a maximum
opportunity of 100% of salary.
Single total figure of remuneration for the executive Directors for the 2022 financial year (audited)
The following chart summarises the single figure of remuneration for 2022 in comparison with 2021(1):
Executive Director
Christopher Miller
Simon Peckham
Geoffrey Martin
Peter Dilnot
Total salary
and fees
£000
Taxable
benefits
£000
Period
2022
2021
2022
2021
2022
2021
2022
2021
567
551
567
551
464
450
464
450
2
2
1
2
12
9
2
15
Bonus
£000
n/a(4)
n/a
567
551
464
450
464
450
LTIP
£000(2)
Pension
£000(3)
Total
£000
Total Fixed
£000
–
–
–
–
–
–
–
–
85
83
85
83
70
68
70
68
654
635
1,221
1,186
1,008
977
998
983
654
635
654
635
545
527
535
533
Total
Variable
£000
–
–
567
551
464
450
464
450
(1) The “Total” figures in the above table may not add up to the sum of the component parts due to rounding.
(2) The 2020 Employee Share Plan, which has a commencement date of 31 May 2020, is expected to be a six-year plan in total (comprised of a four-year performance period (subject to shareholder
approval at the Demerger GM and completion of the Demerger) and a two-year holding period). Accordingly, no value was vested to participants under the 2020 Employee Share Plan in respect of
the year to 31 December 2021 or the year to 31 December 2022.
(3) All amounts attributable to pension contributions were paid as a supplement to base salary in lieu of pension arrangements.
(4) The Executive Vice-Chairman does not participate in the annual bonus scheme.
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Payments to past directors or for loss of office (audited)
Ms Liz Hewitt retired as the Senior Independent Director and as Chairman of the Audit Committee of Melrose on 5 May 2022. She received her
Non-executive Director fees from 1 January 2022 up to and including 5 May 2022. Non-executive Directors do not receive any taxable benefits,
pension contributions or variable remuneration. Other than the amounts disclosed on page 131, no other remuneration payment was made to
Liz Hewitt in the year and therefore no payment was made for loss of office.
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No other payments to past Directors or for loss of office 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 2022 pay against the most recent available remuneration information from our FTSE 100 peers, being 2021(1).
As the table below shows, the single total figure of remuneration for the Melrose Chief Executive in 2022 was less than half, and over £1 million
less than, the FTSE 100 average in 2021. 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 Company’s long-term
incentive arrangements, which are 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)
Total
Melrose Chief Executive
FTSE 100 Lower Quartile
FTSE 100 Average
FTSE 100 Upper Quartile
1,221
1,772
2,579
3,421
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.
Base Salary
The Chief Executive’s salary is 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 2022.
Metric (GBP ’000)
Annual Salary
Melrose Chief Executive
FTSE 100 Lower Quartile
FTSE 100 Average
FTSE 100 Upper Quartile
568
721
952
1,082
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
85
15%
98
10%
162
15%
192
18%
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.
Metric (GBP ’000)
Benefits
Melrose Chief Executive
FTSE 100 Lower Quartile
FTSE 100 Average
FTSE 100 Upper Quartile
1
20
75
82
Annual Bonus
Annual bonuses are entirely performance driven and for 2022 were calculated by the Committee using two elements: 80% being based on
adjusted diluted earnings per share growth; and 20% based on the achievement of strategic elements. The maximum bonus opportunity is
currently 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.
Metric (GBP ’000)
Annual Bonus
Max bonus opportunity %
Melrose Chief Executive
FTSE 100 Lower Quartile
FTSE 100 Average
FTSE 100 Upper Quartile
567
100%
903
150%
1,524
207%
1,835
224%
(1) The peer group for comparison includes the FTSE 100 constituents as at 31 December 2022, with financial year ends between 1 January 2021 and 31 December 2021, excluding joiners and
leavers over the period. 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 2022.
(2) All of the amounts attributable to pension contributions were paid as supplements to base salary in lieu of pension arrangements.
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124
Directors’ Remuneration report
Continued
2022 Annual Bonus (audited)
The 2022 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 2022 base salary, based on 2022 performance, with the full
breakdown of the award calculation set out below.
As is shown by the table, the financial element of the 2022 annual bonus, growth in adjusted diluted earnings per share, was satisfied in full and
therefore a full award was made for this part of it, being 80% of the total bonus. The Committee did not seek to exercise any discretion to adjust
for this. With respect to the strategic element, which included ESG objectives, having given detailed and thorough consideration to each of the
strategic objectives and management’s performance against them during 2022, the Committee determined that each of the strategic objectives
was fully met during 2022 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 the wider stakeholder experience, including
shareholders and employees.
In determining the 2022 annual bonus award, the Committee was mindful of the evolving macroeconomic challenges impacting the global
economy, and aware of the guidance published by the Investment Association at the end of 2022 setting out the issues that remuneration
committees should consider as they assess 2022 remuneration outcomes and set remuneration for 2023. In light of the Company’s
performance during 2022, and that the bonus award (both as a percentage of salary and as an absolute figure) is well below the lower quartile
of the FTSE 100, the Committee believes that the annual bonus awarded for 2022 is appropriate and in line with that guidance.
As mentioned on page 122, the Committee’s view is that the annual bonus plan is the appropriate place within the Melrose executive
remuneration structure to incorporate progress on ESG matters, although is proposing to amend this in the 2023 Directors’ Remuneration
Policy. Specific objectives for ESG were included in the 2022 annual bonus scheme as part of the strategic objectives.
Financial Objectives (80%)
Percentage of maximum bonus earned
Threshold
Target
Maximum
Actual Performance
Growth in adjusted diluted earnings per share 5%
% award
20%
10%
40%
20%
80%
71%(1)
80%
Growth in adjusted diluted earnings per share sub-total:
Percentage of maximum bonus earned
80%
Strategic Objectives (20%)
Significantly offset
inflationary headwinds
– maximum 4%
Execution of GKN
Aerospace enterprise
project plan
– maximum 3%
Completion of GKN
Automotive and GKN
Powder Metallurgy
enterprise projects
– maximum 3%
All of the Group’s businesses faced significant inflationary pressures in 2022, across labour, energy, logistics and raw
materials. Management acted swiftly to work with the businesses to devise and implement effective strategies with the
objective of offsetting, to the fullest extent possible, such inflationary pressures by the end of the period. Such strategies
included a mix of commercial and operational initiatives, including customer agreements (both one-off base price
adjustments and pass-through agreements), continuous operational improvement and proactive management of cost
bases. By the end of 2022, the Group had fully offset all of these inflationary headwinds.
Management have continued to work with GKN Aerospace to ensure that its ambitious and comprehensive restructuring
projects in North America and Europe are executed efficiently and effectively. Some projects have been completed
ahead of schedule and are delivering the anticipated benefits, while the rest remain on track. All enterprise projects
required to achieve the business’s stated operating margin target of 14%+ are under way and are expected to be
substantially complete by the end of 2023.
With Melrose support, GKN Automotive has now completed the restructuring required to achieve its stated adjusted
operating margin target of 10%+ pending the expected market recovery, and has substantially de-risked its balance
sheet by implementing restructuring projects, such as site closures and renegotiating or terminating loss-making
contracts. This has successfully streamlined the business in preparation for the Demerger.
Realignment of capital
structure to enable further
value creation in the GKN
businesses
– maximum 6%
Recognising ongoing market valuation challenges, management have remained intensely focused on the creation and
execution of the plan to unlock value for shareholders across the Group. This has been fully delivered through the sale of
the last non-GKN business, Ergotron, and the creation of a conservative balance sheet, before devising and executing
the proposed Demerger, which will create separate platforms and currencies for further value creation in each of the
GKN businesses.
ESG – maximum 4%
Publish climate transition plan:
In 2022, the Group adopted its inaugural Net Zero Transition Plan, prepared in accordance with the UK Transition Plan
Taskforce’s guidance, which sets out the actions that Melrose intends to take in the transition to a net zero economy,
how it plans to execute on our interim and long-term emissions reduction targets, and how we plan to achieve Net Zero
across the Group by 2050.
Publish water target:
Management have worked closely with the businesses to set a meaningful water target in 2022, which is to reduce water
withdrawal intensity by 25% by 2030, underpinned by the Group’s first Group Water Stewardship Programme, that has
been launched across the businesses.
Initiate SBTi validation for business units:
Management have supported the businesses in their progress towards setting Science Based Targets for their
emissions and having these validated with the SBTi, in line with increasing investor expectations in this regard. GKN
Automotive is the furthest progressed business with this, and set Science Based Targets for its emissions in 2022, which
will be validated with the SBTi in 2023.
Improve sustainability benchmarking scores and external disclosure:
The Group has continued to maintain its sustainability scores with the relevant agencies, due to both continued improved
underlying performance as well as the level and detail of reporting. In line with the approved strategy, the Company’s
MSCI score remained at “A” in 2022, keeping it above average for Global Industrial Conglomerates, and its ESG Risk
Management score with Sustainalytics improved to place it in the top 10% of peers.
Strategic Objectives sub-total:
Total annual bonus for 2022:
4%
3%
3%
6%
4%
20%
100%
(1) The 2021 audited results have been restated to account for discontinued businesses. As a result, adjusted diluted earnings per share for 2021 has been restated from 4.1 pence to 3.1 pence.
However, the Committee has taken the conservative approach of using the original figure for 2021 when calculating growth in adjusted diluted EPS between 2021 and 2022.
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• the terms for Melrose senior management to reward further value
creation in the businesses separated into the Dowlais group will
be set under a separate plan, the Melrose Automotive Share Plan
(the “MASP”). The MASP will measure the creation of shareholder
value in Dowlais above a threshold invested capital over a
performance period to 31 May 2025, with participants being
granted options to acquire ordinary shares in Dowlais for nil
consideration, subject to achieving the necessary performance.
Following completion of the Demerger, 2% of the Dowlais shares
will be placed on trust with an ESOT, which shall be used to
satisfy the exercise of these options where the vesting conditions
have been met. On the crystallisation date, to the extent the
vesting conditions have not been met, the ESOT will transfer the
relevant shares back to Dowlais (or its nominee) to be cancelled.
There will only be one MASP, and it will not be renewed or replaced on
crystallisation. It will be governed by the standard terms that apply to
the MESP, such as malus and clawback and cessation of
employment, and will be overseen by the Committee.
Theoretical value under the MESP if crystallised on 31 December 2022
(rather than on the scheduled payment date)
2020
Invested capital from (and including) May 2020 up to
(and including) 31 December 2022
£5,759,321,924
Index adjustment/minimum return
£892,069,642
Indexed capital
£6,651,391,566
2022
Number of issued ordinary shares on 31 December 2022(2)
4,054,425,961
Average price of an ordinary share for 40 business days prior
to and including 30 December 2022(3)
128.52p
Deemed market capitalisation of Melrose based on average price of an ordinary
share for 40 business days prior to 30 December 2022(3)
£5,210,798,884
Overall change in value for shareholders since 31 May 2020
(£1,440,592,682)
Theoretical value to management and shareholder dilution calculated
at 31 December 2022
7.5% of change in value
0
Total number of new shares issued under the MESP
0
Theoretical dilution to shareholders due to the MESP
0
Break-even price of an ordinary share at 31 December 2022 for the MESP
to start to deliver value
164.00p
The 2022 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
2022 annual bonus payments. In accordance with the terms of the
Directors’ Remuneration Policy, 50% of the 2022 bonus (post-tax)
payment to the Chief Operating Officer will be required to be deferred
into shares for two years. Such shares will be subject to leaver and
clawback conditions. No further performance conditions will apply.
Long-term incentive arrangements (audited)
As at the end of the period, the Company’s long-term incentive
arrangements comprised the 2020 Melrose Employee Share Plan (the
“MESP”). The MESP was approved by shareholders at the general
meeting that was held on 21 January 2021. Full details of the MESP,
including the participation rate percentages of the executive Directors,
are set out in the circular dated 29 December 2020(1). Participants in
the MESP share in 7.5% of the increase in invested capital above a 5%
annual charge, measured at the end of a 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. The awards under the MESP 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 MESP
were made in one grant on 29 December 2020, subject to approval
by shareholders, which was granted on 21 January 2021. No
long-term incentives were either granted or crystallised during the
2022 financial year under the MESP. 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 MESP.
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 MESP, as if the crystallisation date was as at
the end of the period. As this table demonstrates, as at 31 December
2022, the minimum return hurdle of £892,069,642 had not been
achieved and therefore no value had accrued to the MESP. We note
that this disclosure does not take into account the proposed
adjustments to the Company’s long-term incentive arrangements as
part of the Demerger which, if approved, will become effective from
completion of the Demerger.
In connection with the Demerger, three key adjustments are required
to appropriately reflect the Demerger in the existing Melrose incentive
arrangements, which as at the end of the period, comprised only the
MESP. The full details of the proposed adjustments are set out in the
Circular. In summary:
• the total invested capital of the Group will be split between the
continuing Melrose Group and the Dowlais group according to a
fixed ratio, to match the separation of the businesses themselves
under the Demerger, so that any increase in value from
completion of the Demerger is measured against the invested
capital relating to the relevant businesses. The amount allocated
to the Dowlais group will form the invested capital under the
MASP (see below);
• the performance period of the MESP will be extended by 12
months to 31 May 2024, to mitigate any potential initial market
volatility on the measurement of long-term performance in
creating value in GKN Aerospace, the only business that will be
left in the continuing Melrose Group following the Demerger; and
(1) Available at www.melroseplc.net/media/2587/291220-melrose-circular.pdf.
(2) Following the share buyback, which completed on 1 August 2022.
(3) Being the last business day of the 2022 financial year.
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126
Directors’ Remuneration report
Continued
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 MESP (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 Mr David Roper following
his retirement as an executive Director on 31 May 2021, and he remains in compliance with them.
In reality, the executive Directors generally hold well in excess of these minimum amounts, which reflects their long-term stewardship of the
Company and long-term investment in the Company’s shares. 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 2022, 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 2021 and 2022 financial years
and the impact on the value of these ordinary shares taking the closing mid-market prices for those dates:
Applicable
shareholding
requirement
Current
shareholding
Executive Directors(1)
(% salary)(2)
(% salary)(3)
Shareholding
(% ordinary
share capital)
as at
31 December
2022
Shareholding
requirement
met?
Shares
beneficially
held on 31
December
2021(4)
Shares
beneficially
held on 31
December
2022(4)
Value of
shares on 31
December
2021(5) £
Value of
shares on 31
December
2022(3) £
Difference in value
of shares between
31 December 2021
and
31 December
2022(6) £
Christopher Miller
Simon Peckham
Geoffrey Martin
Peter Dilnot
300%
300%
300%
300%(7)
5,399%
2,862%
1,931%
29%
Yes
Yes
Yes
No
0.562% 22,777,659
22,777,659
36,421,477
30,635,951
0.298% 12,071,895
12,071,895
19,302,960
16,236,699
0.164%
6,655,730
6,655,730
10,642,512
8,951,957
0.002%
100,000
100,000
159,900
134,500
(5,785,525)
(3,066,261)
(1,690,555)
(25,400)
(1) In addition to the share interests set out in the table, each of the executive Directors as at 31 December 2022 has an additional exposure by virtue of their conditional awards under the MESP (see
“Long-term incentive arrangements” on page 125).
(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 134.50 pence, being the closing mid-market price on 30 December 2022, being the last business day of the 2022 financial year, and salary is 2022 base
salary as set out in the single figure table on page 122.
(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) 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.
(6) The figures in this column may not add up to the sum of the component parts due to rounding.
(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.
There have been no changes in the ordinary shareholdings of the executive Directors between 31 December 2022 and 2 March 2023 (the date
of this report).
Please see page 131 for a table setting out the equity interests of the Non-executive Directors as at 31 December 2022.
Key decisions and statement of implementation for 2023
Salary review
We note that the Company has historically followed the guidance of
the Investment Association in limiting salary increases for the executive
Directors, in normal circumstances, to the level of inflation or the salary
increases given to all employees. The Committee has taken on board
the Investment Association’s recent guidance in November 2022 and
has awarded salary increases to the executive Directors of 5% for
2023, which is below the rate of salary increases made to the wider
workforce. The executive Director salary increases were determined
to be appropriate in light of the Company’s performance in 2022,
whilst recognising and balancing the need to appropriately remunerate
and incentivise the executive team to continue to deliver value to
shareholders. It is also noted that the Chief Executive’s and Group
Finance Director’s salaries remain well below the lower quartile of the
FTSE 100. The Committee therefore feels that it has been able to
balance all relevant stakeholder considerations when setting salaries
for 2023.
The executive Directors’ salaries for 2023 are 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 2023
£000
596
596
487
487
Pensions and benefits
For 2023, 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 and
therefore aligned with the workforce.
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Annual bonus
The Committee is proposing to make some changes to the overall framework for the executive Director annual bonus arrangements as part of
the renewal of the Directors’ Remuneration Policy, which will be put forward for shareholder approval at the 2023 AGM. However, even if
approved, these will not apply to the 2023 annual bonus for the current executive Directors. Although we are seeking approval to increase the
maximum bonus opportunity to 200% of salary, this will not apply to the current executive Directors for the duration of the 2023 Directors’
Remuneration Policy, who will continue on the current arrangements, with a maximum opportunity of 100% of salary, split between financial
performance metrics (at least 50%) and strategic and/or personal objectives (which will continue to include ESG).
The proposed increase will, however, provide the Committee with flexibility in succession planning, and is considered necessary and
appropriate. Subject to shareholder approval, the 2023 Directors’ Remuneration Policy will enable the award of a maximum bonus opportunity
of 200% of salary, based on financial performance metrics of at least 50%, ESG performance metrics of at least 10%, and the remainder based
on strategic and/or personal objectives. However, to the extent that the increased maximum bonus opportunity of 200% is not utilised, the
structure of the award shall remain as it is currently, being financial performance metrics of at least 50%, and the balance of the award based on
strategic measures and/or personal objectives. The financial performance metric will remain consistent with prior years as adjusted diluted
earnings per share growth, which the Committee considers remains the appropriate metric for the Company. The Committee considers that
the details of the strategic and ESG performance measures are commercially sensitive, but will disclose the nature of all measures on a
retrospective basis, where appropriate, on a similar basis to the disclosure on page 124 in respect of the annual bonus for the year ending
31 December 2022.
Long-term incentive arrangements
Given the nature of the MESP (see “Long-term incentive arrangements” on page 125), no grants were made to the executive Directors under the
MESP in 2022, nor will any be made to them in 2023. Subject to shareholder approval at the Demerger GM and completion of the Demerger,
grants will be made to the executive Directors under the MASP in 2023. Details on such proposed grants are set out in the Circular.
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 2012
Incentive Plan which crystallised in May 2017 is shown for the year ended 31 December 2017, although this represents rewards earned over the
previous five years. The 2017 Incentive Plan crystallised in May 2020 for no value. Per the terms of the Company’s current long-term incentive
arrangements, subject to shareholder approval at the Demerger GM and completion of the Demerger, any award in relation to the MESP is not
scheduled until May 2024, and only then if the performance conditions are met.
Financial year
Year ended 31 December 2022
Year ended 31 December 2021
Year ended 31 December 2020
Year ended 31 December 2019
Year ended 31 December 2018
Year ended 31 December 2017
Year ended 31 December 2016
Year ended 31 December 2015
Year ended 31 December 2014
Year ended 31 December 2013
Chief Executive
Simon Peckham
Simon Peckham
Simon Peckham
Simon Peckham
Simon Peckham
Simon Peckham
Simon Peckham
Simon Peckham
Simon Peckham
Simon Peckham
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)
–
–
–
–
1,221,011
1,186,316
680,113
976,000
1,049,000
42,764,000
987,725
928,541
773,167
927,276
100%
100%
20%
72%
95%
90%
95%
88%
58%
100%
–
–
n/a(2)
–
–
n/a(4)
–
–
–
–
Non-LTIP
£
1,221,011
1,186,316
680,113
976,000
1,049,000
994,000
987,725
928,541
773,167
927,276
(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.
CEO pay ratio
Our median CEO to employee pay ratio for 2022 continued to be low at 26:1. 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 2022
Year ended 31 December 2021
Year ended 31 December 2020
Year ended 31 December 2019
Method
Option A
Option A
Option A
Option A
25th percentile
pay ratio
Median
pay ratio
75th percentile
pay ratio
32:1
34:1
20:1
30:1
26:1
29:1
16:1
24:1
20:1
23:1
13:1
19:1
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128
Directors’ Remuneration report
Continued
The employees used for the purposes of calculating the pay ratios in the table on page 127 were those employed in the UK by any business
within the Group on 31 December 2022 (for the avoidance of doubt, including the Chief Executive), and the remuneration figures were
determined with reference to the financial year ending 31 December 2022. 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 2021 financial year bonuses (which
were paid during 2022) where the 2022 financial year data was not available at the last practical date before the finalisation of this report. No
elements of pay have been omitted. Where required, remuneration was approximately adjusted to reflect full-time and full-year equivalents
based on the employees’ contracted hours and the proportion of the year they were employed.
The following table provides salary and total remuneration information in respect of the employees at each quartile.
Financial year
Year ended 31 December 2022
Element of pay
Salary and wages(1)
Total pay and benefits
25th percentile
pay employee
Median
employee
75th percentile
pay employee
£35,000
£38,000
£42,000
£47,000
£52,000
£60,000
(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 fallen slightly since last year, reflecting that for 2022 compared to 2021, although there was an increase in the Chief Executive’s
total remuneration linked to a 3% salary increase, there was a more significant percentage increase in remuneration at all three quartiles for the
Group’s UK employees.
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 123 of this report.
To give context to the Chief Executive’s 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.
1,000
)
£
(
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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
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R
0
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
0
Average Employee Pay
CEO Total Single Figure excluding LTIP
LTIP
Melrose TSR
FTSE 100
Percentage change in Directors’ remuneration
The table opposite 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 interests 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.
We are required to report on this change based on actual amounts received by the Directors. The percentage increases for 2021 vs 2020 and
for 2020 vs 2019 were naturally impacted by the pandemic, which included temporary salary and fee reductions and reduced annual bonuses
for the executive Directors in 2020.
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2022 vs 2021
2021 vs 2020
2020 vs 2019
Basic
salary/fee
percentage
change(1)
Benefits
percentage
change/
amount
£000(2)
Annual
bonus
percentage
Basic
salary/fee
percentage
change(3)
change(1)
Benefits
percentage
change/
amount
£000(2)
Annual
bonus
percentage
Basic
salary/fee
percentage
change(3)
change(1)
Benefits
percentage
change/
amount
£000(2)
Annual
bonus
percentage
change(3)
3%
3%
3%
3%
3%
-63%
16%
22%
3%
119%
77%
4%
15% / 2
-45% / 1
31% / 12
-88% / 2
n/a
n/a
n/a
n/a
n/a
n/a
n/a
2%
n/a
3%
3%
3%
n/a
n/a
n/a
n/a
n/a
n/a
n/a
2%
12%
12%
14%
–
12%
8%
10%
12%
12%
–
–
6%
-30% / 2
-26% / 2
-6% / 9
– / 15
n/a
n/a
n/a
n/a
n/a
–
–
n/a
415%
422%
–
n/a
n/a
n/a
n/a
n/a
–
–
-6%
-6%
-6%
–
-6%
5%
-4%
-6%
278%
–
–
-20% / 2
-2% / 3
7% / 10
– / –
n/a
n/a
n/a
n/a
n/a
–
–
n/a
-71%
-72%
–
n/a
n/a
n/a
n/a
n/a
–
–
92%
167%
-1%
11%
45%
Element of remuneration
Executive Directors
Christopher Miller
Simon Peckham
Geoffrey Martin
Peter Dilnot(4)
Non-executive Directors
Justin Dowley
Liz Hewitt(5)
David Lis(6)
Charlotte Twyning(7)
Funmi Adegoke
Heather Lawrence(8)
Victoria Jarman(9)
Senior employees(10)
(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 compared to that paid for the prior financial year. For
the Non-executive Directors, this fee includes both their basic fee and any additional fee received for holding the position of the Senior Independent Director, and for holding the Chairmanship of
the Audit Committee, the Remuneration Committee and the Nomination Committee.
(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. Given that the executive Director benefits are minimal, a
small change to the amount of those benefits (for example, an annual increase to the premium charged for private medical insurance) will necessarily result in a large increase. To provide comfort
that these are not large increases in quantum, the benefits data as provided in the single total figure table is included, for context.
(3) The annual percentage change in bonus is calculated by reference to the bonus payable in respect of the financial year compared to the prior financial year, in each case 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.
(4) Peter Dilnot was appointed to the Board with effect from 1 January 2021 and therefore no prior year comparisons are possible.
(5) Liz Hewitt retired from the Board with effect from 5 May 2022. The decrease in her basic fee from 2021 to 2022 reflects the fee actually received for the pro-rated period of directorship in 2022 for
the period 1 January 2022 to 5 May 2022 versus a full year for 2021, so is not a meaningful comparison.
(6) David Lis was appointed as the Senior Independent Director with effect from 5 May 2022. The increase in his basic fee from 2021 to 2022 reflects the additional fee received in respect of being
appointed to this role for the period 5 May 2022 to 31 December 2022 which was not applicable to 2021, so is not a meaningful comparison.
(7) Charlotte Twyning was appointed as the Chairman of the Nomination Committee with effect from 1 January 2022. The increase in her basic fee from 2021 to 2022 reflects the additional fee
received in respect of being appointed to this role for 2022 which was not applicable to 2021, so is not a meaningful comparison.
(8) Heather Lawrence was appointed to the Board with effect from 1 June 2021, and as Chairman of the Audit Committee with effect from 5 May 2022. The increase in her basic fee from 2021 to
2022 reflects the fee actually received for the pro-rated period of directorship in 2021 for the period 1 June 2021 to 31 December 2021 versus a full year for 2022, and reflects the additional fee
received in respect of being appointed to the role of Chairman of the Audit Committee for the period 5 May 2022 to 31 December 2022 which was not applicable to 2021, so is not a meaningful
comparison.
(9) Victoria Jarman was appointed to the Board with effect from 1 June 2021. The increase in her basic fee from 2021 to 2022 reflects the fee actually received for the pro-rated period of directorship
in 2021 for the period 1 June 2021 to 31 December 2021 versus a full year for 2022, so is not a meaningful comparison.
(10) 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.
Total Shareholder Return
The total shareholder return graph below shows the value as at 31 December 2022 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 1,481%
(compared to the FTSE 100 Index TSR of 255%) 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 2022 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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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 Oct 22
Melrose Industries PLC
FTSE All-Share
FTSE 100
FTSE 250
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130
Directors’ Remuneration report
Continued
Wider workforce considerations
Melrose is committed to creating an inclusive working environment and to rewarding our employees throughout the organisation in a fair
manner. 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, wider Melrose workforce or 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. On this basis, the Melrose Chief Executive is responsible for engaging with the Melrose
workforce in relation to remuneration, and the businesses are responsible for engaging with their respective workforces in relation to
remuneration, and each do so throughout the year. 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 to ensure that this is
consistent with the remuneration of the executive Directors. It also receives an annual confirmation from each business, via the Workforce
Advisory Panel, that the remuneration provided by that business to its executive team is consistent with the remuneration that the business
provides to its wider workforce, and that the incentives it operates align with the business’s culture and strategy. This provides the Committee
with comfort that it is discharging its obligations under the Code, and that there is consistency and engagement across all levels of the Group.
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.
In 2022, the Committee was particularly aware of the quickly evolving macroeconomic challenges impacting the global economy, including the
impact of the conflict in Ukraine and the resulting impact on energy prices, supply chain issues, the wider cost of living crisis, and high
inflationary pressures, all of which continue to contribute to a challenging economic environment with general uncertainty. The Committee has
sought to ensure that executive pay decisions in respect of 2022 and 2023 have been taken with this background in mind, and with the benefit
of the oversight described above and advice from its external remuneration advisors. In our decentralised model, the salary management
approach varies from business to business, and is the responsibility of the divisional executive teams, but all of our businesses have generally
chosen to award significantly higher salary increases for their employees than in previous years. The Committee took this into consideration
when making its decision for the executive Director salary increases for 2023, which it decided to make below the rate of those made to the
wider workforce, in consideration of the wider stakeholder experience.
Melrose and each of its businesses continue to pay all UK employees at least the real living wage, and 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.
Melrose is rightly proud of its track record in addressing pensions challenges in the businesses that we buy, and GKN has been no different.
For GKN, we have delivered on our commitments to trustees ahead of schedule, overcoming the large funding pension deficit we inherited of
almost £1 billion to bring the UK schemes to being materially fully funded as at the end of 2022, despite the challenges of COVID-19 and
without detracting from our investment in the businesses. With the Demerger, the schemes attached to GKN Automotive will transfer to Dowlais
benefiting from their much improved position, leaving the continuing Melrose Group with the pension schemes attached to GKN Aerospace. As
the next step in securing the future for members, we have recently agreed a buyout of half of the remaining GKN Aerospace UK pension
liabilities, further reducing the pension exposure for the Group, and giving certainty to the members of the scheme. This is a complete
transformation from the situation inherited in 2018 and is a further testament to the strong Melrose track record in respect of pension schemes.
Long-term incentives
Participation in the Melrose long-term incentive arrangements (being the MESP and, subject to shareholder approval at the Demerger GM and
completion of the Demerger, the MASP) 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 2021
£ million
Year ended
31 December 2022
£ million
2,020
798(2)
2,127
577(3)
Percentage change
5%
-28%
(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) The figure for the year ended 31 December 2022 includes the amount returned to shareholders by way of the share buyback in 2022.
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Non-executive Directors
Single figure table and share interests (audited)
The following table sets out the single figure of remuneration for 2022 in comparison with 2021 for the Company’s Non-executive Directors(1):
Non-executive Directors
Justin Dowley (Chairman)
Liz Hewitt (Senior Independent Director to 5 May 2022)(3)
David Lis (Senior Independent Director from 5 May 2022)
Charlotte Twyning
Funmi Adegoke
Heather Lawrence(4)
Victoria Jarman(5)
Period
2022
2021
2022
2021
2022
2021
2022
2021
2022
2021
2022
2021
2022
2021
Total basic fees
Total other fees
£000
383
371
29
80
82
80
82
80
82
80
82
46
82
46
£000(2)
–
–
17
45
33
20
15
–
–
–
20
–
–
–
Other (bonus,
pension, LTIP,
taxable benefits)
£000
Total
£000
Total Fixed
Total Variable
£000
£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
383
371
46
125
115
100
97
80
82
80
102
46
82
46
383
371
46
125
115
100
97
80
82
80
102
46
82
46
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(1) The “Total” figures in the above table may not add up to the sum of the component parts due to rounding.
(2) These are additional fees for holding the Chairmanship of the Audit Committee, the Remuneration Committee and the Nomination Committee, and for holding the position of the 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.
(3) Liz Hewitt retired as a Non-executive Director of the Company on 5 May 2022 and the fees referred to above for 2022 reflect her fees for the period 1 January 2022 to 5 May 2022.
(4) 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.
(5) 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
2022, as well as an indication as to the size of these interests relative
to the entire issued share capital of the Company:
The Non-executive Director fee levels for 2022 and 2023 are set out in
the table below.
Non-executive Directors
31 December 2022(1)
Ordinary shares
held as at
Shareholding
(% ordinary share capital)
as at 31 December 2022
Fee element
Non-executive Chairman fee
Basic Non-executive Director fee
Justin Dowley
David Lis
Charlotte Twyning
Funmi Adegoke
Heather Lawrence
Victoria Jarman
Total
1,523,844
448,052
86,842
11,556
45,000
33,500
2,148,794
0.0376%
0.0111%
0.0021%
0.0003%
0.0011%
0.0008%
0.0530%
Additional fee for holding the position of the
Senior Independent Director
Additional fee for holding the Chairmanship
of the Audit Committee
Additional fee for holding the Chairmanship
of the Remuneration Committee
Additional fee for holding the Chairmanship
of the Nomination Committee
Fee with effect
from 1 January
2022 £
Fee with effect
from 1 January
2023 £
382,500
82,000
401,650
86,100
20,000
20,000
30,000
30,000
20,000
20,000
15,000
15,000
There have been no changes in the ordinary shareholdings of the
Non-executive Directors between 31 December 2022 and 2 March
2023 (the date of this report).
(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 5% with effect from 1 January
2023, in line with increases made to the executive Directors. 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.
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.
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.
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Directors’ Remuneration report
Continued
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
David Lis (Senior Independent Director)
12 May 2016
Charlotte Twyning
Funmi Adegoke
Heather Lawrence
Victoria Jarman
* Subject to annual re-election.
1 October 2018
1 October 2019
1 June 2021
1 June 2021
2025
2025
2024
2025
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
the divisional executive teams, 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 130, although it retains oversight, the
Committee is not responsible for setting and managing the
remuneration of the Melrose senior management team, the wider
Melrose workforce, or the 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
of the Board) 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 2022, are available on our website,
www.melroseplc.net, and from the Company Secretary at Melrose’s
registered office.
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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 2022 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 page 107 for further details.
Attendance at meetings
The attendance of the Non-executive Directors at the scheduled
meetings of the Committee in 2022 was as follows:
Member
David Lis (Chairman)
Justin Dowley
Liz Hewitt(2)
Charlotte Twyning
Victoria Jarman
No. of meetings (1)
2/2
2/2
1/1
2/2
2/2
(1) Reflects regularly scheduled meetings of the Committee that took place in 2022.
(2) Retired from the Board and the Committee on 5 May 2022 and attended all Committee
meetings held during the period 1 January 2022 to 5 May 2022.
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 121, 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.
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 and 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 FTSE 100 peers for the Chief Executive and the Group Finance Director and in the case of pension
contributions, the same as the rest of the Melrose head office employees, and therefore aligned with the workforce.
There are only two variable elements of remuneration: the annual bonus and the long-term incentive arrangements
(comprising the MESP and, subject to shareholder approval at the Demerger GM and completion of the Demerger, the
MASP), both of which are based on simple and transparent metrics. The operation of the Annual Bonus Plan is linked to
financial performance metrics (at least 50%) and the achievement of strategic and ESG factors. The Company operates
long-term incentive arrangements for the Melrose Group, which simply reward the creation of shareholder value over a
performance 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
proposed maximum of 200% of base salary, subject to shareholder approval at the 2023 AGM (and noting that,
even if approved, the current executive Directors will continue on the current maximum of 100% of base salary for
the duration of the 2023 Directors’ Remuneration Policy), and the application of the annual rolling cap to the MESP.
• 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 MESP (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 Chief Executive and the Group Finance Director is set below the lower quartile of FTSE 100
peers to limit fixed costs for the Group, to provide certainty and to incentivise executive Directors.
Variable remuneration is limited to: (i) the annual bonus, which is proposed to be capped at 200% of salary, subject to
shareholder approval of the 2023 Directors’ Remuneration Policy at the 2023 AGM (remaining at 100% of salary for the
current executive Directors for the duration of the 2023 Directors’ Remuneration Policy) and performance-driven based
on financial growth, and strategic and ESG factors; and (ii) the long-term incentive arrangements, being the MESP and,
subject to shareholder approval at the Demerger GM and completion of the Demerger, the MASP.
The method of calculation, limits and discretions under the Directors’ Remuneration Policy are clearly set out.
Proportionality
The restricted fixed remuneration and capped Annual Bonus Plan is compensated by the opportunity for potentially
significant reward entirely dependent on performance pursuant to the MESP and, subject to shareholder approval at the
Demerger GM and completion of the Demerger, the MASP, that support the Company’s value creation strategy.
Alignment
to culture
The focus on responsible stewardship and long-term sustainable performance is a key part of the Company’s culture.
This is supported by the 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 current Chief Executive and
the Group Finance Director to the lower quartile of the FTSE 100.
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Directors’ Remuneration report
Continued
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 reward advice and advice on the remuneration reporting regulations from PwC LLP. PwC LLP’s fees
for this advice were £73,563 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.
PwC LLP will stand down as the Committee’s remuneration consultants effective 30 June 2023, in anticipation of PwC becoming the external
auditors for the Melrose Group for the reporting period ending 31 December 2024. The Committee is in the process of appointing replacement
remuneration consultants to advise the Committee from 1 July 2023.
The Company Secretary, Mr Warren Fernandez, acts as secretary to the Committee and attends Committee meetings.
Statement of voting at general meetings
The charts below set out the votes on the 2021 Directors’ Remuneration Report at the 2022 AGM, on the Directors’ Remuneration Policy at the
2020 AGM, on the MESP at the January 2021 general meeting, and on the consequential amendments to the Directors’ Remuneration Policy at
the January 2021 general meeting.
Resolution to approve the Directors' Remuneration Report for the year
ended 31 December 2021 (5 May 2022)
Resolution to approve the Directors' Remuneration Policy (7 May 2020)
Percentage of votes cast for the resolution
97.34%
Percentage of votes cast for the resolution
98.40%
Percentage of votes cast against the resolution
2.66%
Percentage of votes cast against the resolution
1.60%
Votes withheld 24,369,433
Votes withheld 422,042,417
Resolution to approve and implement the MESP (21 January 2021)
Resolution to approve the amendments proposed to the 2020 Directors’
Remuneration Policy to accommodate the MESP (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 Annual Report on Remuneration will be put to an advisory vote at the 2023 AGM on 8 June 2023.
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2023 Directors’ Remuneration Policy(1)
This Directors’ remuneration policy (the “2023 Directors’ Remuneration Policy”) shall, subject to shareholder approval at the 2023 Annual
General Meeting (“AGM”), take binding effect from the conclusion of that meeting. The Company’s current Directors’ Remuneration Policy was
approved by shareholders in 2020, with subsequent adjustments relating to the Company’s long-term incentive arrangements and
consequential amendments to the Directors’ Remuneration Policy being approved in January 2021 and March 2023. The main difference
between the current Directors’ Remuneration Policy and the 2023 Directors’ Remuneration Policy set out below is the amendment to the
maximum bonus opportunity under the Annual Bonus Plan to 200% of salary and to adjust the weightings of the performance measures in the
Annual Bonus Plan to include a defined component for ESG.
The proposal seeks to maintain a very successful Melrose remuneration structure that is critical to its “Buy, Improve, Sell” model. This remuneration
structure and the Directors’ Remuneration Policy is based around four key principles as set out on page 121 – namely, that executive
remuneration should be simple, transparent, support the value creation strategy and pay only for performance. Details are set out below.
To place the current Directors’ Remuneration Policy in context, the table on page 123 shows that the single total figure of remuneration for the Chief
Executive in 2022 was less than half, or over £1 million less than, the average of FTSE 100 peers in 2021 (being the most recent available
remuneration information from our FTSE 100 peers). This demonstrates in practice the Company’s policy of deliberately setting salary, benefits and
annual bonus for the executive Directors low, with the opportunity for significant reward being heavily weighted towards the long-term incentive
plan, which is entirely performance based and ensures that executive Directors only receive substantial rewards when they have outperformed and
created very significant value for shareholders. This will continue to be the case under the 2023 Directors’ Remuneration Policy.
How did the Remuneration Committee determine the 2023 Directors’ Remuneration Policy?
In determining the 2023 Directors’ Remuneration Policy, the Remuneration Committee:
• considered the Company’s strategy, how the current Directors’ Remuneration Policy related to and supported the strategy, and formed
its own views on the changes (if any) required to the current Directors’ Remuneration Policy to align with the strategy;
• considered feedback from shareholders and investor bodies on the 2020 and 2021 Directors’ Remuneration Reports;
• sought advice from its independent remuneration consultants on the impact of the UK Corporate Governance Code (the “Code”),
applicable law and regulations and current investor sentiment in formulating the 2023 Directors’ Remuneration Policy;
• considered the disclosures it receives on wider workforce remuneration to ensure the approach to executive remuneration is consistent;
• consulted with the executive Directors and other relevant members of Melrose senior management on the proposed changes to the
current Directors’ Remuneration Policy; and
• will seek to engage with key shareholders and investor bodies on the changes prior to the 2023 AGM.
The Remuneration Committee was mindful in its deliberations on the 2023 Directors’ Remuneration Policy of any potential conflicts of interest
and sought to minimise them through an open and transparent internal consultation process, by seeking independent advice from its external
advisors. In the last six months, the Company has engaged both significantly and intensively with its key shareholders in preparation for the
Demerger. Recognising the timetable for the Demerger, and the overlap with the publication of the 2023 Directors’ Remuneration Policy, we
envisage that a further round of engagement with key shareholders on the 2023 Directors’ Remuneration Policy may be possible in due course,
once the Demerger has completed and prior to the 2023 AGM.
Salary, bonus and benefits
Base Salary
Purpose and link to strategy
Core element of fixed remuneration, reflecting the size and scope of the role, designed to attract and retain executive Directors of the calibre
required for the Group.
Operation
Normally reviewed annually and fixed for 12 months from 1 January, although salaries may be reviewed more frequently or at different times of
the year if the Remuneration Committee determines this to be appropriate. The individual’s contribution and overall performance is one of the
considerations in determining the level of any salary increase.
Salaries are paid in cash and levels are determined by the Remuneration Committee taking into account a range of factors including:
• role, experience and performance;
• prevailing market conditions;
• external benchmarks for similar roles at comparable companies; and
• salary increases awarded for other employees in the Group.
Opportunity
To avoid setting expectations of executive Directors and other employees, no maximum has been set under the 2023 Directors’ Remuneration
Policy. Salary increases will take into account the average increase awarded to other Melrose employees and the wider Group workforce.
Increases may be made to salary levels in certain circumstances as required, for example to reflect:
• an increase in scope of role or responsibility; and
• performance in role.
Changes proposed for 2023 Directors’ Remuneration Policy
No change to policy.
(1) This 2023 Directors’ Remuneration Policy as set out on pages 135 to 144 assumes that the adjustments to the Company’s long-term incentive arrangements (and consequential revisions to the
2020 Directors’ Remuneration Policy) proposed as part of the demerger of GKN Automotive, GKN Powder Metallurgy and GKN Hydrogen (the “Demerger”) have been approved by shareholders at
the general meeting that is scheduled for 30 March 2023 (the “Demerger GM”) and that completion of the Demerger has taken place.
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Directors’ Remuneration report
Continued
Annual Bonus
Purpose and link to strategy
Rewards performance against annual targets which support the strategic direction of the Company.
Operation
Targets are set annually and payout is determined by the Remuneration Committee after the year-end based on performance against those
targets. The Remuneration Committee has discretion to vary the bonus payout (upwards or downwards) should any formulaic output not
produce a fair result for either the individual executive Director or the Company, taking account of overall business performance. The treatment
of bonus payments upon cessation of employment is described on page 143.
Annual bonus awards are discretionary and, accordingly, are subject to a “malus” provision over the course of the relevant year. The annual
bonus award is also subject to a clawback arrangement that may be applied by the Remuneration Committee at any time up until the Annual
General Meeting held in the second year following the payment of the bonus.
The Remuneration Committee may apply these malus or clawback provisions in the event of: (1) material misstatement of financial results that,
in the reasonable opinion of the Remuneration Committee, has a material negative effect; (2) material miscalculation of any performance
measure on which the bonus earned was calculated; (3) gross misconduct by the relevant executive Director; (4) events or behaviour of an
executive Director that have led to the censure of the Company by a significant regulatory authority or have had a significant detrimental impact
on the reputation of the Company, provided that the Board is satisfied that the relevant executive Director was responsible for the censure or
reputational damage and that the censure or reputational damage is attributable to them; and/or (5) the Company becoming insolvent or
otherwise suffering a corporate failure so that the bonus earned is materially reduced, provided that the Board determines, following an
appropriate review of accountability, that the executive Director should be held responsible (in whole or in part) for that insolvency or corporate
failure.
If an executive Director does not satisfy the minimum shareholding requirement (see page 141), up to 50% of any bonus award may be deferred
into shares for up to two years.
Opportunity
Maximum opportunity is 200% of base salary.
However, the executive Directors as of the date on which the 2023 Directors’ Remuneration Policy is approved by shareholders will not receive
the benefit of such increase to the annual bonus maximum entitlement for the duration of the 2023 Directors’ Remuneration Policy, and will
remain on a maximum opportunity of 100% of salary.
Performance metric
The Remuneration Committee will have regard to various performance metrics (which will be determined by the Remuneration Committee)
measured over the relevant financial year, when determining bonuses. For executive Directors with a maximum opportunity of 200% of salary,
at least 50% of the award will be based on financial measures, at least 10% will be based on ESG measures, and the balance of the award will
be based on strategic measures and/or personal objectives, as determined by the Remuneration Committee:
• Financial metrics: The element of the bonus subject to a financial metric will be determined between 0% and 100% for performance
between “threshold” performance (the minimum level of performance that results in any level of payout), “target” performance, and
“maximum” performance, with a linear line for achievement between the threshold and the maximum.
• Strategic element: The strategic element of an award will be determined to the extent assessed by the Remuneration Committee
between 0% and 100% based on the Remuneration Committee’s assessment of a range of financial and non-financial metrics and/or
personal objectives.
• ESG element: The ESG element of an award will be determined to the extent assessed by the Remuneration Committee between 0%
and 100% based on the Remuneration Committee’s assessment of a range of ESG metrics that are most closely aligned to the
Company’s strategy.
Where an executive Director has a maximum opportunity of 100% of salary, the ESG element will continue to be included as part of the
strategic measures.
Stretching performance targets are set each year for the annual bonus, to reflect the key financial, strategic and ESG objectives of the Company
and to reward for delivery against these targets. When setting the targets, the Remuneration Committee will take into account a number of
different reference points, including the Company’s plans and strategy and the market environment.
Changes proposed for 2023 Directors’ Remuneration Policy
Maximum opportunity has been increased from 100% to 200% of base salary. This decision has been made to provide the Remuneration
Committee with the ability to create a competitive executive remuneration package to attract the best talent in the context of succession
planning. However, the executive Directors as of the date on which the 2023 Directors’ Remuneration Policy is approved by shareholders will
not receive the benefit of such increase to the annual bonus maximum entitlement for the duration of the 2023 Directors’ Remuneration Policy,
and will remain on a maximum opportunity of 100% of salary.
A standalone ESG element has been introduced into the annual bonus structure. As a result, at least 50% of the award will be based on
financial measures, at least 10% will be based on ESG measures, and the balance of the award will be based on strategic measures and/or
personal objectives, as determined by the Remuneration Committee. Where an executive Director has a maximum opportunity of 100% of
salary, the ESG element will continue to be included as part of the strategic measures.
Rationale for change
The Remuneration Committee is proposing to increase the maximum opportunity from 100% to 200% of salary. With increasing focus on
succession planning, this will allow the Remuneration Committee the ability to create a competitive executive remuneration package and to
attract the best talent.
In addition, ESG can become a specific focus of the award with a defined component, to ensure that executive Directors are incentivised to
deliver the Company’s ESG strategy.
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Retirement benefits
Purpose and link to strategy
Provides market competitive post-employment benefits (or cash equivalent) to recruit and retain executive Directors of the calibre required for
the Group.
Operation
The executive Directors may elect to receive a Company contribution to an individual defined contribution pension arrangement or a
supplement to base salary in lieu of a pension arrangement. Any new executive Director will be entitled to receive an equivalent pension
contribution.
Opportunity
15% of base salary, the same percentage of salary as the rest of the Melrose employees and within the range of the wider Group workforce,
thereby providing alignment with the workforce. This percentage contribution has remained unchanged since the Company was floated in 2003
and importantly remains consistent with the Melrose workforce.
Changes proposed for 2023 Directors’ Remuneration Policy
No change to policy.
Other benefits
Purpose and link to strategy
Ensures the overall package is competitive to enable the Company to recruit and retain executive Directors of the calibre required for the Group.
Operation
Executive Directors receive benefits consistent with other Melrose employees and market practice, which may include a fuel allowance, private
medical insurance, life insurance and group income protection. Other benefits may be provided based on individual circumstances, such
benefits may include (but are not limited to) travel costs to and from London, accommodation in London for executive Directors who are not
based in London but who are required to work there, and relocation allowances.
Opportunity
Whilst the Remuneration Committee has not set an absolute maximum on the level of benefits that executive Directors may receive, the value of
benefits is set at a level that the Remuneration Committee considers appropriate against the market and to support the ongoing strategy of the
Company.
Changes proposed for 2023 Directors’ Remuneration Policy
No change to policy.
Long-term incentive arrangements
The long-term incentive arrangements that are operated by the Company are directly linked to the value created for shareholders. In order to
appropriately reflect the Demerger on the long-term incentive arrangements, the Company has split its long-term incentive arrangements into
two with effect from completion of the Demerger. The 2020 Employee Share Plan relates to the continuing Melrose Group following the
Demerger, which includes the retained GKN Aerospace business (the “Continuing Melrose Group”), and the Melrose Automotive Share Plan
relates to the GKN Automotive and GKN Powder Metallurgy businesses separated out into the Dowlais Group. The Melrose Automotive Share
Plan is a one-off plan and will not be renewed or replaced. Both the 2020 Employee Share Plan (as amended) and the Melrose Automotive
Share Plan have already been approved at the Demerger GM.
Grants under the MESP will be made to executive Directors in 2020 and no further grants are expected to be made to them during the MESP
Performance Period. Grants under the MASP were made to executive Directors shortly after completion of the Demerger. Further details are
described in the circular to shareholders and notice of general meeting dated 3 March 2023, which is available on our website.
2020 Melrose Employee Share Plan
As approved by shareholders at the General Meeting on 21 January 2021, the 2020 Melrose Employee Share Plan (the “MESP”) was deemed to
commence on 31 May 2020, being the crystallisation date of the 2017 Incentive Plan, and is governed by the plan rules originally adopted from
commencement of the MESP, as amended per the version tabled at the Demerger GM (the “MESP Rules”). Although it is now a contractual plan,
rather than contained within the Articles of Association, the MESP is a continuation of the long-term incentive arrangements for executive Directors
that have applied since the Company was established in 2003. It incentivises executive Directors over the longer-term and aligns their interests with
those of shareholders by linking the level of reward to the value delivered to shareholders.
Purpose and link to strategy
Incentivises executive Directors over the longer term and drives the Company’s value creation strategy. It aligns the interests of executive
Directors with those of shareholders by linking the level of reward to the value delivered. Incentive plans are regularly renewed on consistent terms
to provide continuity and to incentivise long-term performance.
Operation
Awards
Conditional awards under the MESP (“Conditional Awards”) were granted with effect from the deemed commencement date of 31 May 2020
(the “MESP Commencement Date”), and performance will be measured by the increase in value of invested capital of the GKN Aerospace
business to be retained by the Company (the “Continuing Melrose Group”) over a four-year period to (but excluding) the crystallisation date (the
“MESP Crystallisation Date”) on 31 May 2024 or, where an exceptional corporate event affecting the Company occurs prior to that event (such
as a change of control or winding up), an earlier date as determined in accordance with the MESP Rules (the “MESP Performance Period”).
The invested capital of the Continuing Melrose Group is calculated by allocating the total invested capital of the Company between the
Continuing Melrose Group and the GKN Automotive and GKN Powder Metallurgy businesses that were demerged pursuant to the Demerger
(the “Dowlais Group”), resulting in an allocation of £3,126,154,036 of invested capital to the Continuing Melrose Group as at 31 December 2022.
On the MESP Crystallisation Date, if performance conditions are met, the Conditional Awards will convert into a share award (a “Share Award”)
with an entitlement to ordinary shares in the Company (“Ordinary Shares”) and, in circumstances where the cap based on the Maximum Annual
Share Entitlement (as defined below) applies (the “Cap”), an option or options carrying a right to acquire Ordinary Shares for no payment shall
be issued in addition to the Share Award, which option or options shall also be subject to the Cap (a “Nil Cost Option”).
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Directors’ Remuneration report
Continued
To determine the application of the Cap, the Remuneration Committee shall calculate the maximum number of Ordinary Shares (subject to
adjustment for Ordinary Share Costs and Returns in accordance with the MESP Rules) that an executive Director is able to receive in any
calendar year under the MESP, by (i) in the case of an executive Director holding 16% of Conditional Awards, dividing £10 million by 150 pence,
being approximately 6.7 million Ordinary Shares (the “Maximum Cap”), and adjusting such number to take into account Ordinary Share Costs,
Returns, the Melrose Share Consolidation (as defined in the Circular) and the Demerger; and (ii) for each other executive Director holding above
1% of Conditional Awards, calculating such lower number as reflects a pro rata reduction to the Maximum Cap, based on the number of
Conditional Awards held by that executive Director (the “Reduced Cap”), such resulting number in each case being the “Maximum Annual
Share Entitlement” or the “MASE”.
If, on the MESP Crystallisation Date, the calculation to convert the Conditional Award would result in an executive Director becoming entitled to
receive a Share Award for more Ordinary Shares than the Maximum Cap, then his entitlement to receive Ordinary Shares in respect of the
conversion shall be reduced to the Maximum Cap, and the executive Director shall be issued with a Nil Cost Option exercisable in the first
calendar year following the MESP Crystallisation Date or at any time thereafter during the period of 10 years from the MESP Crystallisation Date
for the balance of his entitlement under the Share Award, PROVIDED THAT if the number of Ordinary Shares the subject of the Nil Cost Option
exceeds that executive Director’s MASE, then such number of Ordinary Shares shall be reduced to that executive Director’s MASE and the
executive Director will be issued with a second Nil Cost Option on the MESP Crystallisation Date for the balance of his entitlement to Share
Awards, such second Nil Cost Option being exercisable in the second calendar year following the MESP Crystallisation Date or at any time
thereafter during the period of 10 years from the MESP Crystallisation Date, PROVIDED FURTHER THAT if the number of Ordinary Shares the
subject of the second Nil Cost Option exceeds that executive Director’s MASE, then such number of shares shall be reduced to that executive
Director’s MASE and the executive Director shall not be entitled to any further shares to which he would otherwise have been entitled under the
Share Award on the MESP Crystallisation Date, which entitlement shall be permanently cancelled, PROVIDED FURTHER THAT, for any
executive Director to whom the Reduced Cap applies, Ordinary Shares in respect of which Nil Cost Options would otherwise have become
exercisable in the two calendar years following the MESP Crystallisation Date may be issued on the MESP Crystallisation Date, provided that
such executive Director cannot receive more than the Maximum Cap on the MESP Crystallisation Date. The number of Ordinary Shares that are
issued (or in respect of which cash settlement proceeds are paid in lieu) on the MESP Crystallisation Date in excess of such executive Director’s
Reduced Cap, shall be deducted from the number of Awards to be issued (or the cash settlement proceeds in lieu of receiving such Awards) to
that executive Director in the two calendar years following the MESP Crystallisation Date (starting with the latest calendar year first), such that
the executive Director does not receive more than three times their Reduced Cap.
At each date when shares subject to awards under the MESP are capable of vesting and becoming exercisable, the Remuneration Committee
shall conduct a performance assessment to ensure that the number of shares vesting and becoming exercisable does not appear anomalous
or where there is quantified material information known to the Remuneration Committee in relation to the current financial position of the
Company that is not in the public domain, the result would not be anomalous if the information were in the public domain. The Remuneration
Committee will disclose its assessment in the relevant Annual Report on Remuneration covering the period which includes the date when the
shares subject to awards vest and become exercisable.
Notwithstanding the above provisions, where the executive Director is resident in the United States for tax purposes the MASE applicable on
the MESP Crystallisation Date shall (where applicable) be increased by the Remuneration Committee to a number equal to 50% of such
executive Director’s total entitlement to the Company’s Ordinary Shares on crystallisation as if all Awards were to vest on that date or such
lesser percentage as shall enable the executive Director to use the proceeds of the sale of such increased entitlement to the Company’s
Ordinary Shares (or the cash settlement proceeds in lieu of receiving such shares) to settle any taxes arising in respect of the crystallisation.
Where this provision applies, the number of Ordinary Shares that are issued (or in respect of which cash settlement proceeds are paid in lieu)
on the MESP Crystallisation Date that are in excess of that participant’s Reduced Cap on the MESP Crystallisation Date shall be deducted from
the number of Awards to be issued (or the cash settlement proceeds in lieu of receiving such Ordinary Shares) to that participant in the two
calendar years following the MESP Crystallisation Date (starting with the latest calendar year first), such that the participant does not receive
more than the aggregate of their Reduced Cap in respect of each calendar year in which Awards are payable.
The above provisions related to the Cap are without prejudice to the Company’s ability to settle any entitlement to Ordinary Shares under the
Share Award or a Nil Cost Option by way of a cash payment calculated in accordance with the MESP Rules, to the provisions of the MESP
Rules permitting the early exercise of the Nil Cost Options in the circumstances specified in those rules, and to the provisions of the MESP
Rules giving the Remuneration Committee the power to adjust the number of shares the subject of the Nil Cost Options.
The Remuneration Committee recognises that corporate events that are rare for other companies are a standard and regular part of the
Company’s “Buy, Improve, Sell” model, and that executive Directors should not be penalised for them. Therefore, if there is a corporate event of
the Group (including, for the avoidance of doubt, any Ordinary Share Costs or Returns) or any variation of the share capital of the Company
(whether by rights issue, open offer, consolidation, subdivision, demerger, reduction of capital or otherwise), the Remuneration Committee shall
adjust the application of the Cap in the manner that it considers to be fair and reasonable.
Holding Period
Any Ordinary Shares awarded pursuant to the MESP, excluding any sold to fund the amount of tax payable in respect of the receipt of such
shares, must be held by executive Directors for two years after the MESP Crystallisation Date (the “Holding Period”).
Cash Settlement
The MESP Rules provide that the Remuneration Committee may, with the agreement of the executive Director, cash settle all or part of the
participant’s entitlement to Ordinary Shares on the conversion of a Conditional Award or the exercise of a Nil Cost Option in full and final
settlement of the executive Director’s rights under the relevant Award.
Leavers
The treatment of an executive Director’s participation in the MESP if he is a ‘leaver’ is described on pages 143 to 144.
Other
The other operative provisions of the MESP are set out in the MESP Rules.
Opportunity
Participants in the MESP share in 7.5% of the increase in value of invested capital (as calculated below) of the Continuing Melrose Group
between the MESP Commencement Date and the MESP Crystallisation Date in excess of a 5% annual charge, calculated in accordance with
the MESP Rules.
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The invested capital of the Continuing Melrose Group is calculated by allocating the total invested capital of the Company between the
Continuing Melrose Group and the businesses comprising the Dowlais Group, resulting in an allocation of £3,126,154,036 of invested capital to
the Continuing Melrose Group as at 31 December 2022.
If the sales for the Aerospace division return to substantially 2019 levels before 31 May 2023, there will be an adjustment by increasing the
effective Start Price through adding an amount to Invested Capital, based on half of the post-tax effect of these additional sales as set out
below.
The amount of any adjustment, should it be necessary, will equal half of the figure reached by calculating Audited 2022 Aerospace Sales (re-
calculated using average foreign exchange rates applicable for the financial year ended 31 December 2019) minus £3,274 million (being 85% of the
Audited 2019 Aerospace Sales), multiplied by a net margin of 12%, net of tax at our Group rate, multiplied by a price to earnings ratio of 15x.
For this purpose:
“Start Price” means the minimum Share Price of the Company’s Ordinary Shares which is required to be met on 31 May 2023 in order for
Awards to be granted under the MESP, being 170 pence, adjusted to take into account any dividend, distribution, capital return or reduction,
share repurchase, bonus issue, subdivision or consolidation of the Ordinary Shares, rights issue, demerger or any other variation of share
capital; and
“Share Price” means the average market value (in pounds sterling) of an Ordinary Share for the 40 Business Days prior to 31 May 2023.
Each individual’s Conditional Awards granted in respect of the MESP shall be determined by reference to a percentage entitlement to the overall
available amount (which shall be subject to adjustment in accordance with the MESP Rules).
Initial Conditional Awards with the following percentage entitlements were granted to the executive Directors on the MESP Commencement Date:
• Christopher Miller: 14% of total
• Simon Peckham: 16% of total
• Geoffrey Martin: 16% of total
• Peter Dilnot: 12% of total
The maximum number of new Ordinary Shares in the Company that may be issued in relation to the MESP is 5% of the aggregate number of
Ordinary Shares in issue on 31 May 2020, plus 5% of any additional Ordinary Shares issued or created by the Company after that date and
prior to the MESP Crystallisation Date. However, this limit will not apply in the event of a change of control or winding up of the Company, as
provided for in the MESP Rules. Further, to the extent it would be exceeded on crystallisation, the excess shall be paid to participants in cash,
subject always to the Cap.
Performance metric
The value that may be delivered under the MESP will be determined by reference to the growth in value of the Company (based on the invested
capital of the Continuing Melrose Group) from and including the MESP Commencement Date of 31 May 2020 to (but excluding) the MESP
Crystallisation Date of 31 May 2024 (or an earlier date in the event of acceleration because of an exceptional corporate event affecting the
Company (other than the Demerger)), calculated in accordance with the MESP Rules.
Discretion
The Committee may make such adjustments as it deems to be fair and reasonable so far as the holders of Ordinary Shares are concerned
(having taken such advice that it deems appropriate in the circumstances, including from an investment bank of repute) to the calculation of the
number of Ordinary Shares and/or cash to which the holders of Conditional Awards or Nil Cost Options shall be entitled in certain
circumstances where the application of a provision of the MESP Rules produces, or is likely to produce, an anomalous result or where there is
quantified material information known to the Remuneration Committee in relation to the current financial position of the Company that is not in
the public domain that would, in the reasonable opinion of the Remuneration Committee, produce an anomalous result if such information were
in the public domain.
Melrose Automotive Share Plan
The Melrose Automotive Share Plan commenced on the date of completion of the Demerger (the “MASP Commencement Date”) and is
governed by the plan rules tabled at the Demerger GM (the “MASP Rules”). The MASP rewards participants in respect of any increase in the
value attributable to the businesses comprising the Dowlais Group (which is proposed to be carved out from the MESP).
Purpose and link to strategy
The MASP aligns the interests of executive Directors with those of shareholders in Dowlais, who, immediately following the Demerger, will be
substantially the same as Melrose’s shareholders, by linking the level of reward to the value delivered.
Operation
MASP Options
A certain number of ordinary shares in Dowlais (the “MASP Shares”) are to be held by an employee share ownership trust established by
Melrose for the purposes of satisfying awards under the MASP (the “MASP ESOT”). Options over the MASP Shares were granted shortly after
the MASP Commencement Date and performance will be measured by the increase in value of invested capital over the period up to (but
excluding) the crystallisation date on 31 May 2025 (the “MASP Crystallisation Date”) or, where an exceptional corporate event affecting the
Company or Dowlais occurs prior to that event (such as a change of control or winding up), an earlier date as determined in accordance with
the MASP Rules (the “MASP Performance Period”).
The invested capital of the businesses comprising the Dowlais Group for the purposes of the MASP will be equal to £3,525,237,530 (the
“Threshold MASP Crystallisation Value”), being equal to the amount of invested capital deducted from the MESP as a result of the allocation of
the total invested capital of the Company between the Continuing Melrose Group and the businesses comprising the Dowlais Group, as
described above.
Any increase in value over the Threshold MASP Crystallisation Value will be calculated by reference to the average market capitalisation of
Dowlais for the 40 Business Days prior to (but excluding) the MASP Crystallisation Date (the “MASP Crystallisation Value”).
The MASP Options shall vest in full and become immediately exercisable if, on the MASP Crystallisation Date, the MASP Crystallisation Value is
equal to or more than £4,500,000,000 (the “Target MASP Crystallisation Value”). If, on the MASP Crystallisation Date, the MASP Crystallisation
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140
Directors’ Remuneration report
Continued
Value is less than or equal to the Threshold MASP Crystallisation Value, then none of the MASP Options shall vest and they shall lapse with
immediate effect. The MASP Options shall vest on a straight-line basis if the MASP Crystallisation Value exceeds the Threshold MASP
Crystallisation Value but is less than the Target MASP Crystallisation Value.
Notwithstanding the vesting provisions described above and on page 139, the MASP Options shall vest in full and become immediately
exercisable if, at any time following the MASP Commencement Date and prior to the MASP Crystallisation Date, the average market
capitalisation of Dowlais for a period of 40 Business Days is equal to the Target MASP Crystallisation Value (as adjusted to take into account
Dowlais Ordinary Share Costs and Dowlais Returns, in accordance with the MASP Rules).
Any MASP Options which have not vested on or prior to the MASP Crystallisation Date shall lapse with immediate effect.
For the purposes of the vesting provisions, the market capitalisation of Dowlais on a given date shall be calculated by multiplying Dowlais Share
Price by the number of Dowlais Shares in issue at close of trading on such date (excluding treasury shares). “Dowlais Share Price” for this
purpose shall be the closing middle market quotation for a Dowlais Share (as derived from the Daily Official List of the London Stock Exchange
or the equivalent list or record for the recognised stock exchange on which the Dowlais Shares are listed) on the relevant date.
Each of the Threshold MASP Crystallisation Value and the Target MASP Crystallisation Value shall be adjusted to take into account any
dividend, distribution, capital return or reduction, share repurchase, bonus issue, subdivision or consolidation, rights issue, demerger or any
other variation of share capital undertaken by Dowlais in relation to the Dowlais Shares held by the MASP ESOT, including amounts paid up on
any Dowlais Shares held by the MASP ESOT (subject to certain exceptions), “Dowlais Ordinary Share Costs” and “Dowlais Returns” (as
applicable), in accordance with the MASP Rules.
In the event of a change of control, scheme of arrangement or winding up of Melrose (or, at the discretion of the Remuneration Committee, a
demerger, distribution or other corporate event of the Melrose Group), the date of the event shall be treated as the MASP Crystallisation Date and
the MASP Crystallisation Value shall be calculated accordingly, provided that, if the MASP Crystallisation Value as a result of such calculation is less
than the mid-point between the Threshold MASP Crystallisation Value and the Target MASP Crystallisation Value (each as adjusted to take into
account Dowlais Ordinary Share Costs and Dowlais Returns) (the “MASP Crystallisation Value Mid-Point”), it shall be deemed to be the MASP
Crystallisation Value Mid-Point. The appropriate portion of the MASP Options shall vest on the basis of such calculation and shall become
immediately exercisable, and shall be deemed automatically exercised, on the date of and immediately prior to such event.
In the event of a change of control, scheme of arrangement or winding up of Dowlais (a “Dowlais Trigger Event”), the MASP Options shall vest in
full and become immediately exercisable (and shall be deemed to be automatically exercised) upon the date of, and immediately prior to, the
Dowlais Trigger Event.
Upon exercise of a MASP Option (which exercise is subject to satisfaction of the vesting conditions described above and on page 139), the
Company shall arrange for the transfer to the optionholder (or as it may direct) of the Dowlais Shares to which the MASP Option relates,
together with all dividends, other distributions and any additional Dowlais Shares received by the MASP ESOT in respect of such Dowlais
Shares from the date of grant of the relevant MASP Option, after deducting such amount as is necessary to allow the Company or the trustees
of the MASP ESOT to account for any tax arising on the payment to it in respect of such dividends, returns of capital or other distributions and
any reasonable costs and expenses incurred by the trustees of the MASP ESOT.
Leavers
The treatment of an executive Director’s participation in the Melrose Automotive Share Plan if he is a ‘leaver’ is described on pages 143 to 144.
Other
The other operative provisions of the MASP are set out in the MASP Rules.
Opportunity
Participants in the MASP share in the increase in value of invested capital during the MASP Performance Period, up to and including the Target
MASP Crystallisation Value, calculated in accordance with the MASP Rules.
The invested capital for the purposes of the MASP will be £3,525,237,530 as at 31 December 2022, being equal to the amount of invested
capital deducted from the MESP as a result of the allocation of the total invested capital of the Company between the Continuing Melrose
Group and the businesses comprising the Dowlais Group, as described above and on page 139.
MASP Options will be granted to the executive Directors shortly after the MASP Commencement Date, in respect of the following percentage
proportions of ordinary shares in Dowlais held by the MASP ESOT for this purpose:
• Christopher Miller: 14%
• Simon Peckham: 16%
• Geoffrey Martin: 16%
• Peter Dilnot: 12%
The maximum number of Dowlais Shares to which all MASP Options in issue relate may not exceed 27,865,471, being 2% of the total issued
ordinary shares of Dowlais as at the MASP Commencement Date, provided that, if there is any variation of the share capital of Dowlais (whether
by rights issue, open offer, consolidation, sub-division, demerger, reduction of capital or otherwise), the Remuneration Committee may adjust
such number in any manner that the Remuneration Committee, in its reasonable opinion, considers to be fair and appropriate.
Performance metric
The value that may be delivered under the MASP will be determined by reference to the growth in value of Dowlais up to (but excluding) 31 May
2025 (or an earlier date in the event of acceleration because of an exceptional corporate event affecting the Company or Dowlais), calculated in
accordance with the MASP Rules. The maximum crystallisation value is £4,500,000,000. To the extent that greater value is created, no
additional award can accrue.
Discretion
The Remuneration Committee may make such adjustments as it deems to be fair and reasonable so far as the holders of MASP Options are
concerned (having taken such advice that it deems appropriate in the circumstances, including from an investment bank of repute) to the
number or description of Dowlais Shares subject to a MASP Option, the terms or number of MASP Options granted to a participant, the
Threshold MASP Crystallisation Value or the Target MASP Crystallisation Value in certain circumstances where the application of a provision of
the MASP Rules produces, or is likely to produce, an anomalous result.
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Terms applying to both the 2020 Employee Share Plan and the Melrose Automotive Share Plan
Malus
In the event of (1) material misstatement of financial results that, in the reasonable opinion of the Remuneration Committee, has a material
negative effect; (2) gross misconduct by the relevant executive Director; (3) events or behaviour of an executive Director that have led to the
censure of the Company by a significant regulatory authority or have had a significant detrimental impact on the reputation of the Company,
provided that the Remuneration Committee is satisfied that the relevant executive Director was responsible for the censure or reputational
damage and that the censure or reputational damage is attributable to them; and/or (4) the Company becoming insolvent or otherwise suffering
a corporate failure so that the value of the Company’s Ordinary Shares is materially reduced, provided that the Remuneration Committee
determines, following an appropriate review of accountability, that the executive Director should be held responsible (in whole or in part) for that
insolvency or corporate failure prior to the MESP Crystallisation Date or the MASP Crystallisation Date (as applicable), the Conditional Awards or
the MASP Options (as applicable) held by the executive Director may be cancelled in whole or in part for nil consideration.
Clawback
In the event of (1) material misstatement of financial results that, in the reasonable opinion of the Remuneration Committee, has a material
negative effect; (2) material miscalculation of any performance measure on which the crystallisation of the Conditional Awards or the MASP
Options (as applicable) was based; (3) gross misconduct by the relevant executive Director; (4) events or behaviour of an executive Director that
have led to the censure of the Company by a significant regulatory authority or have had a significant detrimental impact on the reputation of the
Company, provided that the Remuneration Committee is satisfied that the relevant executive Director was responsible for the censure or
reputational damage and that the censure or reputational damage is attributable to them; and/or (5) the Company becoming insolvent or
otherwise suffering a corporate failure so that the value of the Company’s Ordinary Shares is materially reduced, provided that the Remuneration
Committee determines, following an appropriate review of accountability, that the executive Director should be held responsible (in whole or in
part) for that insolvency or corporate failure, following the MESP Crystallisation Date or the MASP Crystallisation Date (as applicable) but prior to
31 May 2026, the executive Director may be required to transfer (for nil consideration) the number of Ordinary Shares or Dowlais Shares (as
applicable) arising from the relevant crystallisation, less the number of Ordinary Shares or Dowlais Shares (as applicable) sold to fund the tax
liability arising from the relevant crystallisation, and/or, in the case of the MESP, to pay to the Company the amount of any cash received on or
following crystallisation less the amount of any tax paid in relation to that cash, and any Nil Cost Options held by such executive Director may be
cancelled in whole or in part for no payment to the executive Director.
Changes proposed for 2023 Directors’ Remuneration Policy
No change to policy.
Shareholding obligations
Executive Directors are subject to minimum and post-cessation shareholding requirements as set out below. They are also subject to holding
periods under the terms of the MESP.
Component of remuneration
Purpose and link to strategy
Operation
Minimum shareholding
requirements
To align the interests of executive Directors with
shareholders
Post-cessation minimum
shareholding requirements
To ensure alignment of interests following the
departure of an executive Director
There is a minimum shareholding requirement for executive Directors of
300% of salary. New executive Directors will be given a period of five years
from appointment to build up this shareholding.
The executive Directors are required to retain a shareholding equal to 300%
of base salary, or their actual shareholding at the date of departure, if lower,
for a period of two years after cessation of employment.
Non-executive Directors
Non-executive Director fees are set out as follows:
Purpose and link to strategy
Operation
Opportunity
Set at a level that reflects
market conditions and is
sufficient to attract individuals
with appropriate knowledge
and expertise
Fees are reviewed periodically and amended
to reflect market positioning and any change in
responsibilities
Fees for Non-executive Directors are determined
by the Board
Fees are based on the level of fees paid to non-executive directors serving
on boards of similar-sized UK-listed companies and the time commitment
and contribution expected for the role.
Non-executive Directors receive a basic fee and a further fee for the
Chairmanship of a committee of the Board or for holding the office of the
Senior Independent Director.
Non-executive Directors may be eligible to receive benefits such as use of
secretarial support, reimbursement of travel costs and other benefits that
may be appropriate.
Changes proposed for 2023 Directors’ Remuneration Policy
No change to policy.
Illustration of the application of the 2023 Directors’ Remuneration Policy
In illustrating the potential reward under the 2023 Directors’ Remuneration Policy, the following assumptions have been made:
• Minimum performance: fixed elements of remuneration only (base salary effective from 1 January 2023, benefits as set out in the
single figure table in the Company’s Directors’ Remuneration Report for the year ended 31 December 2022, and a pension contribution
of 15% of base salary).
• Performance in line with expectations: fixed elements of remuneration as above, plus bonus of 50% of salary (other than in the case
of Christopher Miller, who does not participate in the annual bonus arrangements).
• Maximum performance: fixed elements of remuneration as above, plus bonus of 100% of salary (other than in the case of Christopher
Miller, who does not participate in the annual bonus arrangements).
• Maximum performance +50% share price growth: fixed elements of remuneration as above, plus bonus of 100% of salary (other
than in the case of Christopher Miller, who does not participate in the annual bonus arrangements). This is no different from the maximum
performance scenario.
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142
Directors’ Remuneration report
Continued
Christopher Miller
(£’000)
Simon Peckham
(£’000)
£687
£687
£687
£687
£687
£687
£1,283
£1,283
£985
£298
30%
£596
46%
£596
46%
£687 100%
£687
100%
£687
100%
£687
100%
£687 100%
£687
70%
£687
54%
£687
54%
Minimum
On-target
Maximum Maximum (+50%
Minimum
On-target
Maximum Maximum (+50%
share price growth)
share price growth)
Fixed
Annual Variable
Geoffrey Martin
LTI
Fixed
Annual Variable
LTI
Peter Dilnot
(£’000)
(£’000)
£816
£244
30%
£572
£1,059
£1,059
£487
46%
£487
46%
£806
£244
30%
£562
£1,049
£1,049
£487
46%
£487
46%
£572 100%
£572
70%
£572
54%
£572
54%
£562 100%
£562
70%
£562
54%
£562
54%
Minimum
On-target
Maximum Maximum (+50%
Minimum
On-target
Maximum Maximum (+50%
share price growth)
share price growth)
Fixed
Annual Variable
LTI
Fixed
Annual Variable
LTI
In connection with the Demerger, the Company has split its long-term incentive arrangements into two, to appropriately reflect the Demerger in
the Melrose long-term incentive arrangements. The two such arrangements are the MESP and the MASP, which have both been approved by
shareholders.
For completeness, it is noted that, in addition to the potential reward that can be earned on a going forward basis under the 2023 Directors’
Remuneration Policy as illustrated above, the executive Directors maintain their exposure to the in-flight Conditional Awards granted under the
MESP and the MASP Options under the MASP.
Recruitment remuneration policy
When agreeing a remuneration package for the appointment of a new executive Director, the Remuneration Committee will apply the following
principles:
• the package will be sufficient to attract the calibre of executive Director required to deliver the Company’s strategy;
• the Remuneration Committee will seek to ensure that no more is paid than is necessary; and
• in the next Directors’ Remuneration Report after an appointment, the Remuneration Committee will explain to shareholders the rationale
for the arrangements implemented.
In addition to the policy elements set out in this 2023 Directors’ Remuneration Policy, the Remuneration Committee retains discretion to make
appropriate remuneration decisions outside of this to meet the individual circumstances of the recruitment, including discretion to include any
other remuneration component or award, with the intention that the outcome of the relevant remuneration package for the new executive
Director be broadly equivalent in all material respects to the remuneration packages of existing executive Directors who are governed by the
policy. The Remuneration Committee has never used this discretion since the Company was founded in 2003, and does not intend to use this
discretion to make a non-performance related incentive payment (for example, a “golden hello”) during the period covered by this 2023
Directors’ Remuneration Policy. Nonetheless, the Remuneration Committee considers it important to retain the ability to exercise such
discretion in exceptional circumstances, notwithstanding that no such exceptional circumstances have arisen in the past.
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In this regard, elements that the Remuneration Committee may consider for the purposes of a remuneration package for the recruitment of a
new executive Director include but are not limited to the following:
Element
Approach
Incentive remuneration opportunity
The Remuneration Committee’s intention is that a new executive Director’s incentive remuneration opportunity will
consist of:
• an annual bonus opportunity of up to a maximum of 200% of base salary (i.e. in line with the ordinary opportunity
under the policy); and
Compensation for forfeited
remuneration arrangements
Notice period
Relocation costs
Retirement benefits
• a pro-rata award of awards under the MESP in proportion to the date of joining to the MESP Crystallisation Date, at a
level up to the level that applies to other executive Directors under the policy.
If a new executive Director did not participate in the MESP, the Remuneration Committee may award a maximum annual
bonus opportunity of up to 300% of salary until such time as that new executive Director participates in a Company long-
term incentive arrangement.
The Remuneration Committee may make awards on hiring an external candidate to buy out remuneration arrangements
forfeited on leaving a previous employer. In doing so, the Remuneration Committee will have regard to relevant factors,
including any performance conditions attached to such arrangements, the form of those awards (e.g. cash or shares)
and the time frame of such awards. While such awards are excluded from the maximum level of variable remuneration
referred to above, the Remuneration Committee’s intention is that the value awarded (as determined by the Remuneration
Committee on a fair and reasonable basis) would be no higher than the expected value of the forfeited arrangements.
Where considered appropriate, buyout awards will be subject to forfeiture or clawback on early departure.
The notice period will be the same as the Company’s ordinary policy of 12 months.
Where necessary, the Company will pay appropriate relocation costs. The Remuneration Committee will seek to ensure that
no more is paid than is necessary.
The maximum contribution of 15% of salary referred to on page 137 will apply to any new executive Director. This is the
same level provided to the rest of the Melrose employees and is the level received by the incumbent executive Directors.
Incentive awards and “buyout” awards may be granted under new plans as permitted under the Listing Rules, which allow for the grant of
awards to facilitate, in unusual circumstances, the recruitment of a Director. Where a position is filled internally, any ongoing remuneration
obligations or outstanding variable pay elements shall be allowed to continue in accordance with their subsisting terms.
The remuneration package for a newly appointed Non-executive Director would normally be in line with the structure set out in the policy table
for Non-executive Directors.
Service contracts and policy on payments for cessation of employment
The Company’s policy is for executive Directors to be employed on the terms of service agreements, which may be terminated by either the
executive Director or the Company on the giving of not less than 12 months’ written notice (subject to certain exceptions). The principles on
which the determination of payments for cessation of employment will be approached are summarised below and on page 144.
Certain treatment is dependent on whether an executive Director is classified as a ‘Good Leaver’ on cessation of employment, which will occur
if that executive Director ceases employment in the following circumstances: death; permanent ill-health; disability; retirement with the
agreement of the Company; resignation in connection with a change of control; or otherwise at the discretion of the Remuneration Committee.
An executive Director will be a ‘Bad Leaver’ if they cease employment other than as a Good Leaver.
Payment in lieu of notice
If the Company terminates an executive Director’s employment with immediate effect, a payment in lieu of notice may be made. This may
include base salary, pension contributions and benefits.
Annual bonus
Bonus in year of cessation
Performance conditions will be measured at the bonus measurement date for Good Leavers only, with the bonus normally to be pro-rated for
the period worked during the financial year and paid in cash. No bonus will be payable to any executive Director other than a Good Leaver for
the year of cessation.
Bonus from prior years deferred into shares
Good Leavers will be entitled to retain those shares awarded in prior years for a deferral of an annual bonus. For an executive Director other
than a Good Leaver, any shares awarded for a deferral of a prior year’s annual bonus and still subject to restrictions will be forfeited.
Discretion
The Remuneration Committee has the following elements of discretion with respect to the annual bonus and deferred share awards in the event
of cessation of employment:
• to determine whether to pro-rate a cash bonus to time. The Remuneration Committee’s normal policy is that it will pro-rate for time. It is
the Remuneration Committee’s intention to use discretion to not pro-rate in circumstances where there is an appropriate business case
which will be explained in full to shareholders; and
• to vest any annual bonus that has been deferred into shares at the end of the original deferral period or at the date of cessation. The
Remuneration Committee will make this determination depending on the type of Good Leaver reason resulting in the cessation.
2020 Employee Share Plan and Melrose Automotive Share Plan
If an executive Director ceases to be employed by the Company, the treatment of the Awards or the MASP Options (as applicable) held by such
executive Director will be determined depending on their classification as a ‘Good Leaver’ or a ‘Bad Leaver’ as defined and summarised below
and on page 144.
Good Leavers
If an executive Director holding Conditional Awards or MASP Options (as applicable) ceases employment in circumstances where he is a ‘Good
Leaver’ before the MESP Crystallisation Date or the MASP Crystallisation Date (as applicable), unless the Remuneration Committee decides
otherwise, the participation percentage under his Conditional Award or the number of his MASP Options (as applicable) shall be reduced on a
pro-rata basis to reflect the period from 31 May 2020 to the date on which he ceased employment as a proportion of the MESP Performance
Period or the MASP Performance Period (as applicable). The Remuneration Committee may award such amount to other eligible employees in
accordance with the MESP Rules or the MASP Rules (as applicable).
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144
Directors’ Remuneration report
Continued
Statement of Directors’ responsibilities
Directors’ responsibility statement
We confirm that to the best of our knowledge:
• the financial statements, prepared in accordance with the relevant
financial reporting framework, give a true and fair view of the
assets, liabilities, financial position and profit or loss of the
Company and the undertakings included in the consolidation
taken as a whole;
• the Strategic Report includes a fair review of the development and
performance of the business and the position of the Company
and the undertakings included in the consolidation taken as a
whole, together with a description of the principal risks and
uncertainties that they face; and
• the Annual Report and financial statements, taken as a whole, are
fair, balanced and understandable and provide the information
necessary for shareholders to assess the Company’s position and
performance, business model and strategy.
This responsibility statement was approved by the Board of Directors
on 2 March 2023 and is signed on its behalf by:
Geoffrey Martin
Group Finance Director
2 March 2023
Simon Peckham
Chief Executive
2 March 2023
In addition, the Remuneration Committee has the discretion (i) to vest any Conditional Awards held or received on the scheduled vesting dates
or such earlier date, provided it is no earlier than the MESP Crystallisation Date, and is for no more Ordinary Shares than the cumulative number
that would have been received on the normal application of the Cap; and (ii) to waive the Holding Period in respect of all or a portion of the
executive Directors’ Conditional Awards.
Bad Leavers
If an executive Director holding Conditional Awards or MASP Options (as applicable) ceases employment in circumstances where he is a ‘Bad Leaver’
before the MESP Crystallisation Date or the MASP Crystallisation Date (as applicable), every Conditional Award or MASP Option (as applicable) he
holds shall lapse, and thereafter may be awarded to other eligible employees in accordance with the MESP Rules or the MASP Rules (as applicable).
If an executive Director ceases to be employed by the Company after the MESP Crystallisation Date for whatever reason, they shall be entitled
to retain any outstanding Nil Cost Options held by them pursuant to the MESP Rules, which shall become exercisable in accordance with their
terms and remain subject to the recovery provisions set out on page 141.
Other payments
The Remuneration Committee reserves the right to make additional exit payments where such payments are made in good faith in discharge of
an existing legal obligation (or by way of damages for breach of such an obligation) or by way of settlement or compromise of any claim arising
in connection with the termination of an executive Director’s employment. In appropriate circumstances, payments may also be made in
respect of legal fees.
The overall amount of any payment made in respect of a loss of office will not exceed the aggregate of any payment in lieu of notice and any
payment made in respect of annual bonus, as referred to on page 143. Entitlements in respect of the MESP and the MASP will be dealt with in
accordance with their terms and, were the Company to make an award on recruitment of an executive Director to buy out remuneration
arrangements forfeited on leaving a previous employer, the leaver provisions for that award would be determined at the time of grant.
Other elements
The 2023 Directors’ Remuneration Policy is based on the four key Melrose principles as set out on page 121, but is also wholly aligned with the
Code factors of clarity, simplicity, risk, predictability, proportionality and alignment to culture, as set out in the table on page 133, which sets out
how the Remuneration Committee has addressed each factor of the Code and its link to strategy. The Committee ensured that it took all these
elements into account when establishing the 2023 Directors’ Remuneration Policy, as well as its application to executive Directors.
Differences between the Company’s policy on Directors’ remuneration and its policy on remuneration for other employees
Remuneration arrangements throughout the Group are determined based on the same principle that rewards should be sufficient as is necessary
to attract and retain high calibre talent, without paying more than is necessary and should be achieved for delivery of the Company’s strategy.
The Company has operations in various countries, with Group employees of differing levels of seniority. Accordingly, though based on the
overarching principle above, reward policies vary to take account of these factors.
As with previous incentive plans, the Remuneration Committee considers it appropriate for participation in the MESP and the MASP to be
extended to those members of Melrose senior management beyond the executive Directors as necessary to develop the business further.
The Company has also implemented divisional long-term incentive plans for senior managers of businesses within the Group to incentivise
them to create value for the Company and its shareholders.
Statement of consideration of employment conditions elsewhere in the Company
Salary, benefits and performance-related awards provided to other employees in the Group are taken into account when setting policy for executive
Director remuneration. Although there is no direct consultation by the Remuneration Committee with employees on Directors’ remuneration, the
Melrose Chief Executive is responsible for engaging with the Melrose workforce in relation to remuneration, and the divisions are responsible for
engaging with their respective workforces in relation to remuneration, and each do so throughout the year. However, the pay and employment
conditions of the wider workforce were taken into consideration by the Remuneration Committee when making decisions on Directors’ remuneration
in 2022, which will continue to be the case for the periods governed by the 2023 Directors’ Remuneration Policy. For instance, the 2023 salary review
for executive Directors was deliberately set at the bottom end of the range of salary increases received by other employees in the Group.
Statement of consideration of shareholder views
The Company is committed to regular and ongoing engagement and seeks the views of key shareholders and other stakeholders on the
application of the Directors’ Remuneration Policy and in advance of amending its Directors’ Remuneration Policy. Further detail is included in the
Chairman’s Annual Statement on page 120. The policy is set to reflect the Company’s commercial strategy.
Payments outside the policy in this report
The Remuneration Committee retains discretion to make any remuneration payments and payments for termination of employment outside this policy:
• where the terms of the payment were agreed before the policy came into effect;
• where the terms of the payment were agreed at a time when the relevant individual was not a Director of the Company and, in the opinion
of the Remuneration Committee, the payment was not in consideration of the individual becoming a Director of the Company; and/or
• to satisfy contractual commitments under legacy remuneration arrangements.
For these purposes, “payments” includes the satisfaction of awards of variable remuneration and, in relation to an award over shares, the terms of
the payment are “agreed” at the time the award is granted. Any such payment shall include: (i) the conversion of any Conditional Award or the
satisfaction of the exercise of any Nil Cost Option under the MESP Rules (or the cancellation of any such Conditional Award or Nil Cost Option in
exchange for a cash payment, as described in the MESP Rules), or the exercise of any MASP Option under the MASP Rules (or the cancellation of
any such MASP Option in exchange for a cash payment, as described in the MASP Rules); and (ii) the delivery of the value attributable to the
Ordinary Shares issued upon the conversion of any Conditional Award or the exercise of any Nil Cost Option in accordance with the MESP Rules,
or the delivery of the value attributable to the Dowlais Shares issued upon the exercise of any MASP Option in accordance with the MASP Rules.
This report was approved by the Board and signed on its behalf by:
David Lis
Chairman, Remuneration Committee
2 March 2023
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The Directors are responsible for preparing the Annual Report and
financial statements in accordance with applicable laws and
regulations.
Company law requires the Directors to prepare financial statements
for each financial year. Under that law, the Directors are required to
prepare the Group financial statements in accordance with
International 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 laws 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.
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Independent auditor’s report to the
members of Melrose Industries PLC
Report on the audit of the financial statements
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 2022 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 31 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 we have not provided any non-audit services prohibited by the FRC’s Ethical Standard to the group or the parent company.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
3. Summary of our audit approach
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
Newly identified
Increased level of risk
Similar level of risk
Decreased level of risk
Materiality
Scoping
• Completeness of loss-making contract provisions.
The materiality that we used for the group financial statements was £30 million which was determined on the basis of a
number of benchmarks including adjusted profit before tax, net assets and revenue.
We selected 16 reporting sites where we requested component auditors to perform a full scope audit of the site
components’ financial information. We also selected 10 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 22
reporting units. Coverage from full scope and SAB scope components totals 79% of the group’s adjusted revenue, 81% 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 Ergotron
business was disposed of during the year.
Significant
changes in our
approach
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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 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 the recent economic downturn, including increased levels of inflation, the recovery 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. This was done through detailed
assessment of the operating and non-operating cash flows for reasonableness and consistency with the underlying forecasts 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 evaluate whether 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.
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
Goodwill on the balance sheet at 31 December 2022 is £2,585 million (2021: £2,850 million), and the acquired
intangible assets balance is £3,923 million (2021: £4,193 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 groups of Cash Generating
Units (“CGUs”):
• Aerospace (goodwill £990 million, other acquired intangible assets £2,499 million)
• Automotive (goodwill £1,056 million, other acquired intangible assets £882 million)
• Powder Metallurgy (goodwill £539 million, other acquired intangible assets £542 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 especially in the automotive industry;
• the margin improvements as a result of restructuring programmes; and
• determination of the appropriate discount and growth rates to be used in the model.
Headroom available at 31 December 2022 has decreased for the Automotive and Powder Metallurgy groups of
CGUs and increased for the Aerospace group of CGUs. Increases in discount rates driven by increases in risk free
rates have impacted the impairment assessment. During the year the automotive industry has been adversely
impacted by the continued shortage in semi-conductors, which disrupted the supply chain, and increased
macro-economic uncertainty, such as cost inflation. Overall, we have identified a heightened risk in relation to the
revenue and operating profit forecasts for the Automotive and Powder Metallurgy groups 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 11 of
the Audit Committee report.
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Independent auditor’s report to the
members of Melrose Industries PLC
Continued
How the scope of our
audit responded to the
key audit matter
We obtained an understanding of the relevant controls over the valuation of goodwill and other intangible assets, in
particular controls over the forecasts that underpin the fair value less cost to sell models and controls around
management’s preparation of impairment models.
How the scope of our
audit responded to the
key audit matter
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 IFRS 13 Fair value measurement and IAS 36 Impairment
of assets;
• performing sensitivity analysis to identify the key assumptions that have a significant effect on the estimate;
• 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; as part of this work benchmarked against previous restructuring programmes;
• benchmarking long term growth rates to applicable macro-economic and market data, also taking into
account the assumed recovery from the Covid-19 pandemic;
• involving our internal valuation specialists to challenge the discount rate applied; this was done 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;
• with assistance from our internal valuation specialists, benchmarking management’s estimate of recoverable
amount against fair value implied from other sources, such as analyst reports and multiple-based valuation
methods; and
• assessing the appropriateness of the disclosures included by management in notes 3 and 11 to the group
financial statements and re-performing the calculations that underpin those disclosures.
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.
Key observations
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 £716
million have been made to the statutory operating loss of £236 million to derive adjusted operating profit of
£480 million.
Adjusting items included:
• amortisation of acquisition-related intangible assets (£458 million);
• restructuring costs (£144 million);
• equity accounted investments adjustments (£29 million charges);
• equity settled compensation scheme charges (£15 million);
• acquisition and disposal related gains (£11 million);
• impairment of assets (£20 million);
• loss on movement in fair value of derivatives (£87 million); and
• net income from releases and changes in discount rate of fair value items (£26 million).
We identified a key audit matter 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 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, and also in note 3 to the
group financial statements in relation to the critical judgements involved in determining adjusting items. Refer also
to page 112 of the Audit Committee report.
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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, the content and 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, acquisition and
disposal costs, 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 reconcile to statutory results.
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.
Key observations
5.3 Revenue Recognition in respect of RRSPs
Key audit matter
description
The group has recognised total revenue of £7,537 million in 2022 (2021: £6,650 million).
There are judgements taken within the revenue recognition of material Risk and Revenue Sharing Partnerships
(“RRSPs”) in the Aerospace division where revenue totals £2,954 million (2021: £2,538 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. This is because of the level of estimation and judgement required
when applying the principles set out in IFRS 15 Revenue from contracts with customers, and recognising revenue
from those contracts 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 the Group has a contractual right to aftermarket
revenues because the requirements of IFRS 15 constrain the variable consideration recognised (referred to as
‘unbilled work done’ in the group financial statements). The amount of revenue recognised from RRSP contracts
during the year was £547 million, which includes variable consideration of £106 million (2021: £402 million, which
included variable consideration of £55 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.
Further details are included in notes 4 and 17 to the group financial statements, and also in note 3 to the group
financial statements in relation to the key sources of estimation uncertainty for the variable consideration. Refer
also to page 111 of the Audit Committee report.
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150
Independent auditor’s report to the
members of Melrose Industries PLC
Continued
How the scope of our
audit responded to the
key audit matter
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:
• obtaining an understanding of the relevant controls in place within the Aerospace businesses, that hold
RRSP contracts, to review the underlying data;
• challenging and assessing the position papers prepared by management, and the model prepared;
• assessing the accuracy of the underlying data used in the determination of the assumptions, including usage
profiles, industry data and customer correspondence; and
• assessing 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 are within an acceptable range and that the overall position is
reasonable.
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 and completeness of the loss-making
contract provision (e.g. new tooling, manufacturing improvements and efficiencies, changes in raw material
costs);
• reviewing relevant correspondence with customers and suppliers;
• 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 and examining 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.
We are satisfied that the loss-making contracts provision at 31 December 2022 is recorded appropriately, that
releases and utilisations recorded during the year are appropriate, and that key estimates are reasonable.
Key observations
6. Our application of materiality
6.1 Materiality
We define materiality as the magnitude of misstatement in the financial statements that makes it probable that the economic decisions of a
reasonably knowledgeable person would be changed or influenced. We use materiality both in planning the scope of our audit work and in
evaluating the results of our work.
• We consider the disclosure provided in the financial statements in relation to the changes in the key
Based on our professional judgement, we determined materiality for the financial statements as a whole as follows:
5.4 Completeness of loss-making contract provisions
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 2022, following utilisation and release in the period since acquisition, £108 million
remained unutilised (2021: £167 million). The methodology supporting the provisions is inherently complex and
involves a high level of 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;
• changes in inputs and assumptions to evaluate the correct timing of releases; and
• the classification of provision utilisation and release in the income statement.
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 risk of misstatement
due to the wider macroeconomic factors that impact the valuation of the loss-making sales already identified, and
a heightened risk that additional contracts may have now become loss-making within the Automotive division.
Further details are included in note 21 to the group financial statements, and also in note 3 to the group financial
statements in relation to the key sources of estimation uncertainty for the loss-making contract provisions. Refer
also to page 112 of the Audit Committee report.
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Materiality
Basis for determining
materiality
Rationale for the
benchmark applied
Group financial statements
£30 million (2021: £30 million)
We considered the following metrics:
• adjusted profit before tax;
• revenue; and
• net assets.
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:
• 7.8% of adjusted profit before tax (2021: 11.9%);
• 0.4% of revenue (2021: 0.4%); and
• 0.4% of net assets (2021: 0.4%).
Parent company financial statements
£15 million (2021: £15 million)
We determined materiality based on net assets, which was
then capped at 50% (2021: 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.
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
Performance materiality
65% (2021: 60%) of group materiality
65% (2021: 60%) of parent company materiality
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;
• the de-centralised nature of the group’s control environment and its variation across the group; and
• our past experience of the audit, which has indicated a low number of corrected and uncorrected misstatements
identified in prior periods.
6.3 Error reporting threshold
We agreed with the Audit Committee that we would report to the Committee all audit differences in excess of £1.5m (2021: £1.5m), 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.
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152
Independent auditor’s report to the
members of Melrose Industries PLC
Continued
153
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 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 operating segment consists of a number of reporting units and manages operations on a geographical and functional basis. There are
192 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 48 components (2021: 49), of which
• 14 relate to components that form part of the Aerospace segment;
• 18 relate to components that form part of the Automotive segment;
• 6 relate to components that form part of the Powder Metallurgy segment; and
• 10 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 £8 million to £11 million.
We selected 16 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 22 reporting units. Coverage
from full scope and SAB scope components totals 79% of the group’s adjusted revenue, 81% of adjusted operating profit and 84% of net
assets.
Aerospace
In respect of the Aerospace segment, 8 components were subject to a full audit and 6 components were subject to SAB scope. These 14
components together accounted for 79% of the Aerospace segment’s adjusted revenue and 77% of the Aerospace segment’s adjusted
operating profit.
Automotive
In respect of the Automotive segment, 7 components were subject to a full audit and 11 components were subject to SAB scope. These 18
components accounted for 85% of the Automotive segment’s adjusted revenue and 89% of the Automotive segment’s adjusted operating
profit.
Powder Metallurgy
In respect of the Powder Metallurgy segment, 1 component was subject to a full audit and 5 components were subject to SAB scope. These 6
components together accounted for 56% of the Powder Metallurgy segment’s adjusted revenue and 80% of the Powder Metallurgy segment’s
adjusted operating profit.
Corporate cost centres
In respect of the corporate cost centres, 10 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.
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.
Adjusted revenue
Adjusted operating profit
Net assets
Full audit scope
Specified audit
procedure
Review at
group level
53%
26%
21%
Full audit scope
Specified audit
procedure
Review at
group level
69%
12%
19%
Full audit scope
Specified audit
procedure
Review at
group level
77%
7%
16%
7.2. Our consideration of the control environment
The Group is reliant on the effectiveness of a number of IT applications and controls to ensure that financial transactions are processed and
recorded completely and accurately. As part of our audit we have performed testing around certain key controls, such as general IT controls for
relevant IT systems, revenue controls for significant and material components, controls over significant estimates and key financial reporting
controls.
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7.3. Our consideration of climate-related risks
The Group continues to develop its assessment of the potential impacts of climate change and the transition to a low carbon economy (“climate
change”), as explained in the Sustainability review on page 55.
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We obtained an understanding of management’s process for considering the impact of climate-related risks. We evaluated these risks to
assess whether they were complete and consistent with our understanding of the entity and our wider risk assessment procedures where they
have the potential to directly or indirectly impact key judgements and estimates within the group financial statements. Our audit considered
those risks that could be material to the key judgements and estimates made in the assessment of the carrying value of non-current assets and
impact on future cashflows.
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We also considered whether the Task Force on Climate-related Financial Disclosures (“TCFD”) in the Annual Report were consistent with our
understanding of the business and the financial statements with involvement of sustainability specialists.
7.4. Working with other auditors
More sites were visited for the 2022 audit due to the easing of restrictions to travel following the Covid-19 pandemic. Regular communication
also 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, discussed and reviewed 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 directors’ responsibilities statement, the directors are responsible for the preparation of the financial statements
and for being satisfied that they give a true and fair view, and for such internal control as the directors determine is necessary to enable the
preparation of financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, the directors are responsible for assessing the group’s and the parent company’s ability to continue as a
going concern, disclosing as applicable, matters related to going concern and using the going concern basis of accounting unless the directors
either intend to liquidate the group or the parent company or to cease operations, or have no realistic alternative but to do so.
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.
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, the directors and the audit committee about their
own identification and assessment of the risks of irregularities, including those that are specific to the Group’s sectors;
• 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
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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
sites 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 20 years, covering the years ending 31 December 2003 to 31 December 2022.
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
2 March 2023
154
Independent auditor’s report to the
members of Melrose Industries PLC
Continued
• the matters discussed among the audit engagement team including significant component audit teams and 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: impairment of goodwill and acquired intangibles, classification of adjusting items, revenue
recognition in respect of RRSPs and loss-making contract 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 Companies Act 2006, Listing Rules, UK Bribery Act, 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 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 impairment of goodwill and acquired intangibles, classification of adjusting items, revenue
recognition in respect of RRSPs and completeness of loss-making contract provisions 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 and external 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.
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 37;
• 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 37;
• the directors’ statement on fair, balanced and understandable set out on page 145;
• the board’s confirmation that it has carried out a robust assessment of the emerging and principal risks set out on page 39;
• the section of the annual report that describes the review of effectiveness of risk management and internal control systems set out on
page 114; and
• the section describing the work of the audit committee set out on page 111.
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156
Consolidated Income Statement
Consolidated Income Statement
Consolidated Statement of Comprehensive Income
Consolidated Statement of Comprehensive Income
157
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
(Loss)/profit for the year from discontinued operations
(Loss)/profit after tax for the year
Attributable to:
Owners of the parent
Non-controlling interests
(cid:3)
Earnings per share
Continuing operations
– Basic
– Diluted
Continuing and discontinued operations
– Basic
– Diluted
Adjusted(2) results from continuing operations
Adjusted revenue
Adjusted operating profit
Adjusted profit before tax
Adjusted profit after tax
Adjusted basic earnings per share
Adjusted diluted earnings per share
(1) Results for the year ended 31 December 2021 have been restated for discontinued operations (note 1).
(2) Defined in the summary of significant accounting policies (note 2).
Year ended
31 December
2022
£m
Restated(1)
Year ended
31 December
2021
£m
7,537
(6,458)
1,079
49
(1,364)
(236)
(104)
33
(307)
84
(223)
(80)
(303)
(308)
5
(303)
6,650
(5,750)
900
38
(1,431)
(493)
(169)
2
(660)
180
(480)
1,317
837
833
4
837
(cid:3)
(5.4)p
(5.4)p
(10.3)p
(10.3)p
(7.3)p
(7.3)p
17.7p
17.7p
(cid:3)
8,191
480
384
299
7.0p
7.0p
7,263
317
194
151
3.1p
3.1p
Notes
4, 5
15
7
5, 6
7
7
8
13
10
10
10
10
5
5, 6
6
6
10
10
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
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Year ended
31 December
2022
£m
Year ended
31 December
2021
£m
Notes
(303)
837
24
12
8
15
13
8
(32)
(34)
(1)
(67)
593
13
(11)
(39)
2
5
563
496
193
187
6
193
297
43
(71)
269
(101)
13
113
54
46
(19)
106
375
1,212
1,208
4
1,212
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(Loss)/profit after tax for the year
(cid:3)
Items that will not be reclassified subsequently to the Income Statement:
Net remeasurement (loss)/gain on retirement benefit obligations
Fair value (loss)/gain 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 (losses)/gains on hedge relationships
Transfer to Income Statement on hedge relationships
Income tax credit/(charge) relating to items that may be reclassified
Other comprehensive income for the year
(cid:3)
Total comprehensive income for the year
Attributable to:
Owners of the parent
Non-controlling interests
(cid:3)
(cid:3)
(cid:3)
(cid:3)
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158
Consolidated Statement of Cash Flows
Consolidated Statement of Cash Flows
Consolidated Balance Sheet
Consolidated Balance Sheet
159
Operating activities
(cid:3)
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(2)
Purchase of computer software and capitalised development costs
Dividends received from equity accounted investments
Purchase of investments
Acquisition of subsidiaries, net of cash acquired
Settlement of derivatives used in net investment hedging
Equity accounted investment additions
Interest received
Net cash from investing activities from continuing operations
Net cash used in investing activities from discontinued operations
Net cash from investing activities
Financing activities
Repayment of borrowings
Drawings on borrowing facilities
Costs of raising debt finance
Repayment of principal under lease obligations
Settlement of interest rate swaps
Purchase of own shares, including associated costs
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 (decrease)/increase 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 2021 have been restated for discontinued operations (note 1).
(2) Includes proceeds from the disposal of a corporate property, held for sale at 30 June 2022.
Year ended
31 December
2022
£m
Restated(1)
Year ended
31 December
2021
£m
187
17
204
478
(271)
66
(27)
59
–
(4)
(109)
(3)
4
193
(1)
192
(598)
632
–
(51)
–
(504)
–
–
(77)
(598)
(1)
(599)
(203)
468
27
292
222
41
263
2,703
(218)
13
(18)
52
(10)
–
–
–
2
(cid:3)
2,524
(13)
2,511
(1,555)
–
(4)
(53)
(cid:3)
(47)
–
(729)
(1)
(cid:3)
(69)
(2,458)
(8)
(2,466)
308
160
–
468
Notes
27
27
15
15
27
9
27
27
27
27
(cid:3)
(cid:3)
As at 31 December 2022, the Group had net debt of £1,139 million (31 December 2021: £950 million). A definition and reconciliation of the
movement in net debt is shown in note 27.
Non-current assets
(cid:3)
Goodwill and other intangible assets
Property, plant and equipment
Investments
Interests in equity accounted investments
Deferred tax assets
Derivative financial assets
Other receivables
Retirement benefit surplus
Current assets
(cid:3)
Inventories
Trade and other receivables
Derivative financial assets
Current tax assets
Cash and cash equivalents
Total assets
(cid:3)
Current liabilities
Trade and other payables
Interest-bearing loans and borrowings
Lease obligations
Derivative financial liabilities
Current tax liabilities
Provisions
Net current liabilities
(cid:3)
Non-current liabilities
Other payables
Interest-bearing loans and borrowings
Lease obligations
Derivative financial liabilities
Deferred tax liabilities
Retirement benefit obligations
Provisions
Total liabilities
(cid:3)
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
31 December
2022
£m
31 December
2021
£m
Notes
11
14
12
15
22
25
17
24
16
17
25
18
5
19
20
28
25
21
19
20
28
25
22
24
21
5
26
26
6,846
2,599
62
435
373
36
670
93
11,114
(cid:3)(cid:3)
1,025
1,426
38
29
355
2,873
13,987
2,347
63
60
86
141
281
2,978
(105)
431
1,433
306
141
619
581
330
3,841
6,819
7,168
309
3,271
109
753
(2,330)
638
4,379
7,129
39
7,168
7,390
2,528
87
429
250
47
523
184
11,438
893
1,184
23
11
473
2,584
(cid:3)
14,022
2,051
462
57
119
142
293
3,124
(cid:3)
(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
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
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The Financial Statements were approved and authorised for issue by the Board of Directors on 2 March 2023 and were signed on its
behalf by:
(cid:3)
Geoffrey Martin
Group Finance Director
2 March 2023
Simon Peckham
Chief Executive
2 March 2023
(cid:3)
(cid:3)
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160
Consolidated Statement of Changes in Equity
Consolidated Statement of Changes in Equity
Notes to the Financial Statements
Notes to the Financial Statements
161
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
At 1 January 2021
333
8,138
109
Profit for the year
Other comprehensive income
Total comprehensive income
Capital reduction(1)
Return of capital(1)
Dividends paid
Equity-settled share-based payments
–
–
–
–
–
–
–
–
–
–
(4,138)
(729)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
729
–
–
(2,330)
–
–
–
–
–
–
–
(30)
(cid:3)
–
106
106
–
–
–
–
(cid:3)
861
833
269
1,102
4,138
(cid:3)
(729)
(cid:3)
(69)
16
Equity
attributable
to owners
of the parent
£m
Non-
controlling
interests
£m
Total
equity
£m
7,081
29
7,110
833
375
1,208
–
(729)
(69)
16
4
–
4
–
–
–
–
837
375
1,212
–
(729)
(69)
16
At 31 December 2021
333
3,271
109
729
(2,330)
76
5,319
7,507
33
7,540
(Loss)/profit for the year
Other comprehensive income/(expense)
–
–
Total comprehensive income/(expense)
Purchase of own shares(1)
Dividends paid
Equity-settled share-based payments
–
(24)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
24
–
–
–
–
–
–
–
–
–
562
(cid:3)
562
–
–
–
(cid:3)
(cid:3)
(308)
(67)
(375)
(504)
(cid:3)
(77)
16
(308)
495
187
(504)
(77)
16
5
1
6
–
–
–
(303)
496
193
(504)
(77)
16
At 31 December 2022
309
3,271
109
753
(2,330)
638
4,379
7,129
39
7,168
(1) Further information is set out in note 1.
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Further information on issued share capital and reserves is set out in note 26.
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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 14 to
27. The Consolidated Financial Statements of the Group for the year ended 31 December 2022 were authorised in accordance with a
resolution of the Directors of Melrose Industries PLC on 2 March 2023.
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
Discontinued operations and disposals
On 6 July 2022, the Group completed the disposal of the Ergotron business, previously included in the Other Industrial segment. The
results of Ergotron 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 2022, the Ergotron 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.
The Aerospace business disposed of a non-core entity during the year, which has not been treated as a discontinued operation. Further
detail is shown in note 13.
In addition, discontinued operations for 2021 include the results of the Nortek Air Management, Brush and Nortek Control businesses,
which were disposed of during 2021.
Capital structure
On 9 June 2022, the Group commenced a £500 million share buyback programme, which completed on 1 August 2022 with 318,003,512
shares repurchased and subsequently cancelled. Costs associated with the share buyback programme were £4 million.
In 2021, following the disposals of Nortek Air Management and Brush, a return of capital of £729 million, alongside a court approved capital
reduction of the Company’s share premium account and a 9 for 10 share consolidation took place.
Proposed demerger
On 8 September 2022, the Group announced its intention to demerge Automotive, Powder Metallurgy and Hydrogen Technology. In these
Financial Statements, the businesses intended for demerger have been treated as continuing operations because at the balance sheet
date there were actions, such as the formation of a board of directors and the arrangement of banking facilities, which meant that a
demerger could not have taken place. The demerger was also still subject to Board approval and shareholder consent at 31 December
2022.
Acquisitions
On 1 October 2022, the Aerospace segment completed the acquisition of Permanova Lasersystem AB, a leader in advanced laser
technology and cell integration, for consideration of £4 million. As the acquisition is not material to the Group, limited information is
provided in note 11.
1.1 New Standards, Amendments and Interpretations affecting amounts, presentation or disclosure reported in the current year
In the current financial year, the Group has adopted the following new and revised Standards, Amendments and Interpretations. Their
adoption has not had a significant impact on the amounts reported in these Financial Statements:
• 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 Accounting Standards: 2018-2020 cycle
1.2 New Standards, Amendments and Interpretations in issue but not yet effective
At 31 December 2022, the following Standards, Amendments and Interpretations were in issue but not yet effective:
• Amendments to IFRS 10 and IAS 28: Sale or contribution of assets between an investor and its associate or joint venture
• Amendments to IAS 1: Classification of liabilities as current or non-current and 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.
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162162
Notes to the Financial Statements
Continued
Notes to the Financial Statements
Continued
163
163
2. Summary of significant accounting policies continued
Alternative Performance Measures
The Group presents Alternative Performance Measures (“APMs”) in addition to the statutory results of the Group. These are presented in
accordance with the Guidelines on APMs issued by the European Securities and Markets Authority (“ESMA”).
APMs used by the Group are set out in the glossary to these Financial Statements on pages 227 to 234 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; 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 debt instruments including interest rate swaps following acquisition or disposal
related activity or non-trading transactions; 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.
The Group’s liquidity and funding arrangements are described in the Finance Director’s Review. There is significant liquidity headroom of £2.6
billion at 31 December 2022 and sufficient headroom throughout the going concern forecast period. Forecast covenant compliance is considered
further below.
2. Summary of significant accounting policies continued
None of the Group’s banking facilities mature in the going concern period following an extension agreed during 2021. The next contractual
maturity is in June 2024 and whilst changes to banking arrangements are being considered following the announced intention to demerge GKN
Automotive, GKN Powder Metallurgy and GKN Hydrogen, these will only be enacted if the shareholders approve the demerger. As part of its
preparation for the intended demerger, the Group has agreed revised banking documentation split between the demerger businesses and
remaining business, which is comparable in nature with existing arrangements and would provide both businesses with sufficient liquidity albeit
contingent on shareholder approval of the demerger.
Covenants
The current 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
2022
3.75x
4.0x
30 June
2023
3.5x
4.0x
31 December
2023
3.5x
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 2023 and the first half of 2024. The sensitised
assumptions are specific to each business taking into account their markets, but on average represents a c. 10% and c. 15% reduction to the
Group’s forecast revenue in each of 2023 and the first half of 2024 respectively. The sensitised revenues have had a consequential impact on
profit and cash flow, along with a further downside sensitivity applied to increase working capital by approximately 2% of revenue. Given that
there is liquidity headroom of £2.6 billion and the Group’s leverage was 1.4x, comfortably below the covenant test at 31 December 2022, no
further sensitivity detail is provided.
Under the reasonably possible sensitised case, even with significant reductions, no covenant is breached at the forecast testing dates being 30
June 2023 and 31 December 2023, and the Group will not require any additional sources of finance. Testing at 30 June 2024 is also favourable,
assuming arrangements similar in nature with existing agreements.
The Group has also considered the circumstance that the proposed demerger occurs in April 2023. Modelling of both a base case and a
reasonably possible sensitised case has also been prepared for the remaining Group and due to revised banking documents having been
formally agreed, consistent with the conclusion above, the Group will not require any additional sources of finance and no covenant is breached
at the forecast testing dates being 30 June 2023 and 31 December 2023.
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 combinatio n 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.
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164164
Notes to the Financial Statements
Continued
Notes to the Financial Statements
Continued
165
165
2. Summary of significant accounting policies continued
As at the acquisition date, any goodwill acquired is allocated to the cash-generating units acquired. Impairment is determined by assessing
the recoverable amount of the cash-generating unit to which goodwill relates. Where the recoverable amount of the cash-generating unit is
less than the carrying amount, an impairment loss is recognised in the Income Statement and is not subsequently reversed. When there is
a disposal of a cash-generating unit, goodwill relating to the operation disposed of is taken into account in determining the gain or loss on
disposal of that operation. The amount of goodwill allocated to a partial disposal is measured on the basis of the relative values of the
operation disposed of and the operation retained.
Equity accounted investments
A joint venture is an entity which is not a subsidiary undertaking but where the interest of the Group is that of a partner in a business over
which the Group exercises joint control with its partners over the financial and operating policies. In all cases voting rights are 50% or
lower.
Associated undertakings are entities that are neither a subsidiary nor a joint venture, but where the Group has a significant influence. The
results, assets and liabilities of equity accounted investments are accounted for using the equity method of accounting. The Group’s share
of equity includes goodwill arising on acquisition.
When a Group entity transacts with an equity accounted investment of the Group, profits and losses resulting from the transactions with the
equity accounted investments are recognised in the Group’s Consolidated Financial Statements only to the extent of interests in equity
accounted investments that are not related to the Group.
Revenue
Revenues are recognised either at the point of transfer of control of goods and services, or recognised over time on an activity basis using
the costs incurred as the measure of the activity. Costs are recognised as they are incurred.
The nature of agreements into which the Group enters means that certain of the Group’s arrangements with its customers have multiple
elements that can include any combination of:
• Sale of products and services;
• Risk and revenue sharing partnerships (“RRSPs”);
• Design and build; and
• Construction contracts.
Contracts are reviewed to identify each performance obligation relating to a distinct good or service and the associated consideration. The
Group allocates revenue to multiple element arrangements based on the identified performance obligations within the contracts in line with
the policies below. A performance obligation is identified if the customer can benefit from the good or service on its own or together with
other readily available resources, and it can be separately identified within the contract. This review is performed by reference to the
specific contract terms.
Sale of products and services
This revenue stream accounts for the majority of Group sales. Contracts in the Automotive, Powder Metallurgy 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 the unbilled work done contract asset
(“unbilled work done”). 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.
Unbilled work done addresses contract matters, such as price or scope amendments, which are 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. Variations in contract work, claims and incentive
payments are included in revenue from construction contracts based on an estimate of the expected value the Group expects to receive.
Variations are included when the customer has agreed to the variation or acknowledged liability for the variation in principle. Claims are
included when negotiations with the customer have reached an advanced stage such that it is virtually certain that the customer will accept
the claim.
Finance income
Finance income is recognised when it is probable that the economic benefits will flow to the Group and the amount of income can be
measured reliably. Finance income is accrued on a time basis, by reference to the principal outstanding and the effective interest rate
applicable.
Borrowing costs
Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily
take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets, until such time as the
assets are substantially ready for their intended use or sale.
Investment income earned on the temporary investment of specific borrowings pending their expenditure on qualifying assets is deducted
from the borrowing costs eligible for capitalisation. All other borrowing costs are recognised in the Income Statement in the period in which
they are incurred.
Issue costs of loans
The finance cost recognised in the Income Statement in respect of the issue costs of borrowings is allocated to periods over the terms of
the instrument using the effective interest rate method.
Property, plant and equipment
Property, plant and equipment is stated at cost less accumulated depreciation and any impairment in value.
The initial cost of an asset comprises its purchase price or construction cost, any costs directly attributable to bring the asset into operation,
and any material 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.
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Notes to the Financial Statements
Continued
Notes to the Financial Statements
Continued
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2. Summary of significant accounting policies continued
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, considering the implications of climate change (see note 11 for further detail), are discounted to their present value using a pre-
tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For an asset that
does not generate largely independent cash inflows, the recoverable amount is determined for the cash-generating unit to which the asset
belongs.
An item of property, plant and equipment is derecognised upon disposal or when no future economic benefits are expected to arise from
the continued use of the asset. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal
proceeds or costs and the carrying amount of the item) is included in the Income Statement in the period that the item is derecognised.
Intangible assets
Intangible assets are stated at cost less accumulated amortisation and accumulated impairment losses.
On acquisition of businesses, separately identifiable intangible assets are initially recorded at their fair value at the acquisition date.
Access to the use of brands and intellectual property are valued using a “relief from royalty” method which determines the net present
value of future additional cash flows arising from the use of the intangible asset.
Customer relationships and contracts are valued on the basis of the net present value of the future additional cash flows arising from
customer relationships with appropriate allowance for attrition of customers.
Technology assets are valued using a replacement cost approach, or a “relief from royalty” method.
Amortisation of intangible assets is recorded in administration expenses in the Income Statement and is calculated on a straight-line basis
over the estimated useful lives of the asset as follows:
Customer relationships and contracts
Brands and intellectual property
Technology
Computer software
Development costs
20 years or less
20 years or less
20 years or less
5 years or less
20 years or less
Where computer software is not integral to an item of property, plant or equipment, its costs are capitalised and categorised as intangible
assets. Computer software is initially recorded at cost. Where these assets have been acquired through a business combination, this will
be the fair value allocated in the acquisition accounting. Where these have been acquired other than through a business combination, the
initial cost is the aggregate amount paid and the fair value of any other consideration given to acquire the asset.
Intangible assets (other than computer software and development costs) are tested for impairment annually or more frequently whenever
events or changes in circumstances indicate that the carrying value may not be recoverable. Impairment losses are measured on a similar
basis to property, plant and equipment. Useful lives are also examined on an annual basis and adjustments, where applicable, are made
on a prospective basis.
Research and development costs
Research costs are expensed as incurred.
Costs relating to clearly defined and identifiable development projects are capitalised when there is a technical degree of exploitation,
adequacy of resources and a potential market or development possibility in the undertaking that are recognisable; and where it is the
intention to produce, market or execute the project. A correlation must also exist between the costs incurred and future benefits and those
costs can be measured reliably. Capitalised costs are expensed on a straight-line basis over their useful lives of 20 years or less. Costs not
meeting such criteria are expensed as incurred.
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 the ir 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.
2. Summary of significant accounting policies continued
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.
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 investments 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.
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168168
Notes to the Financial Statements
Continued
Notes to the Financial Statements
Continued
169
169
2. Summary of significant accounting policies continued
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.
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.
2. Summary of significant accounting policies continued
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 th e 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 amo unt of revenue
recognised in accordance with the principles of IFRS 15: Revenue from contracts with customers.
Pensions and other retirement benefits
The Group operates defined benefit pension plans and defined contribution plans, some of which require contributions to be made to
administered funds separate from the Group.
For the defined benefit pension and retirement benefit plans, plan assets are measured at fair value and plan liabilities are measured on an
actuarial basis and discounted at an interest rate equivalent to the current rate of return on a high quality corporate bond of equivalent
currency and term to the plan liabilities. Any assets resulting from this calculation are limited to past service cost plus the present value of
available refunds and reductions in future contributions to the plan. The present value of the defined benefit obligation, and the related
current service cost and past service cost, are measured using the projected unit credit method.
The service cost of providing pension and other retirement benefits to employees for the period is charged to the Income Statement.
Net interest expense on net defined benefit obligations is determined by applying discount rates used to measure defined benefit
obligations at the beginning of the year to net defined benefit obligations at the beginning of the year. The net interest expense is
recognised within finance costs.
Remeasurement gains and losses comprise actuarial gains and losses, the effect of the asset ceiling (if applicable) and the return on plan
assets (excluding interest). Remeasurement gains and losses, and taxation thereon, are recognised in full in the Statement of
Comprehensive Income in the period in which they occur and are not subsequently recycled.
Actuarial gains and losses may result from differences between the actuarial assumptions underlying the plan obligations and actual
experience during the period or changes in the actuarial assumptions used in the valuation of the plan obligations.
For defined contribution plans, contributions payable are charged to the Income Statement as an operating expense when employees have
rendered services entitling them to the contributions.
Foreign currencies
The individual Financial Statements of each Group company are presented in the currency of the primary economic environment in which it
operates (its functional currency). For the purpose of the Consolidated Financial Statements, the results and financial position of each
Group company are expressed in pounds Sterling, which is the functional currency of the Company, and the presentation currency for the
Consolidated Financial Statements.
In preparing the Financial Statements of the individual companies, transactions in currencies other than the entity’s functional currency
(foreign currencies) are recorded at the rates of exchange prevailing on the dates of the transactions. At each balance sheet date,
monetary assets and liabilities that are denominated in foreign currencies are retranslated at the rates prevailing on the balance sheet date.
Non-monetary items carried at fair value that are denominated in foreign currencies are translated at the rates prevailing at the date when
the fair value was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated.
Exchange differences arising on the settlement of monetary items, and on the retranslation of monetary items, are included in the Income
Statement for the period. Exchange differences arising on the retranslation of non-monetary items carried at fair value are included in the
Income Statement for the period except for differences arising on the retranslation of non-monetary items in respect of which gains and
losses are recognised directly in equity. For such non-monetary items, any exchange component of that gain or loss is also recognised
directly in equity.
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170170
Notes to the Financial Statements
Continued
Notes to the Financial Statements
Continued
171
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2. Summary of significant accounting policies continued
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.
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.
2. Summary of significant accounting policies continued
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 qua litative
factors. Further information about the determination of adjusting items in the year ended 31 December 2022 is included in note 2.
There are no other critical judgements other than those involving estimates, that have had a significant effect on the amounts recognised in
the Financial Statements. Those involving estimates are set out below.
Key sources of estimation uncertainty
Assumptions concerning the future and other key sources of estimation uncertainty at the balance sheet date, that may have a significant
risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year, are discussed below.
a) Assumptions used to determine the recoverable amount of goodwill and other assets
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. For the year ended 31 December 2022, impairment testing has been performed for each group of CGUs using the fair value
less costs to sell method. 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 economic 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.
The Automotive and Powder Metallurgy groups of CGUs are the most sensitive to a change in estimates, depending on how their markets
continue to recover from the implications of the COVID-19 pandemic and supply chain disruption as well as how they continue to recover
inflation impacts on input costs. As at 31 December 2022, the carrying amount of goodwill and other intangible assets (not including
computer software and development costs) in the Automotive group of CGUs is £1,938 million (31 December 2021: £1,980 million) and in
the Powder Metallurgy group of CGUs is £1,081 million (31 December 2021: £1,066 million). The sensitivity disclosures in note 11 show
reasonably possible changes to key assumptions and their effect on the impairment models, which could reduce headroom to nil. In order
for a material impairment charge or loss on disposal to be recorded in the next year the following reasonably possible changes in key
assumptions would need to occur:
• In the Automotive groups of CGUs, terminal operating profit would need to reduce by 16% which would reduce the terminal operating
margin by 1.7 percentage points.
• In the Powder Metallurgy groups of CGUs, terminal operating profit would need to reduce by 10% which would reduce the terminal
operating margin by 1.3 percentage points.
(cid:3)
(cid:3)
(cid:3)
(cid:3)
2
2
0
2
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F
n
n
a
a
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n
c
c
a
a
i
i
l
l
s
s
t
t
a
a
t
t
e
e
m
m
e
e
n
n
t
t
s
s
2
2
0
2
t
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172172
Notes to the Financial Statements
Continued
Notes to the Financial Statements
Continued
173
173
3. Critical accounting judgements and key sources of estimation uncertainty continued
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 2022, the retirement benefit obligation was a net deficit of £488 million (31 December 2021: £461 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
2022, the carrying value of the loss-making contract provision in the Group was £108 million (31 December 2021: £167 million). In the last
four 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 2022, there could be a further £19 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 unbilled work done, in particular relating to certain risk and revenue sharing partnerships
(“RRSPs”). A detailed review of the Group’s RRSP contracts determined where terms and conditions result in unbilled work done 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 unbilled work done 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 unbilled work done is driven by forecasting
aftermarket revenue per delivered engine which is in turn contingent on overall programme success, levels of discounting that might be
offered by the engine manufacturers (the Group’s customers), engineering requirements needed for optimal performance of the engine and
the allocation of revenue to individual units. In addition, where programmes are at an early stage the wider implications of any competing
engines as well as complications outside of the Group can be difficult to assess. Any of these inputs could change in the next year as
programmes evolve and due to the size and scale of these contracts, almost any modification could result in material changes in future
periods.
The unbilled work done 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. As the impacted RRSP contracts mature, there are reasonably possible
changes to assumptions, such as engineering requirements to support programmes and the expected life of certain engines which could
lead to the unbilled work done contract asset on the Balance Sheet of £450 million (31 December 2021: £305 million) increasing to
between £480 million and £500 million. This would lead to recognition of additional revenue and profit in the next year of between £30
million and £50 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
2022
£m
Restated(1)
Year ended
31 December
2021
£m
6,613
924
7,537
5,713
937
6,650
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.
4. Revenue continued
Risk and revenue sharing partnerships
The Group has approximately £13 billion (31 December 2021: £11 billion) in respect of contractual transaction prices including a
constrained estimate of unbilled work done, 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 2022. These performance obligations will be satisfied and
revenue will be recognised over a period of up to 30 years (2021: 30 years).
The amount of revenue recognised from RRSP contracts during the year was £547 million, which includes an increase in the unbilled work
done contract asset of £106 million (2021: £402 million, which included an increase in the unbilled work done contract asset of £55 million).
Within this there is revenue from the delivery of product which is recognised at a point in time of £517 million (2021: £377 million) and
revenue from provision of service which is recognised over time of £30 million (2021: £25 million). Due to the nature of certain of these
RRSP arrangements, there is an associated unbilled work done contract asset including movements during the year which 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 £19 million (2021: £24 million) of revenue recognised from changes in assumptions which will also impact the revenue
allocation between future years. Assumption changes were made following commercial and operational progress by engine manufacturers
with their customers, providing more certainty over future volumes for the RRSP partners.
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 Ergotron business during the year its results, which were previously included within the Other Industrial
segment, are classified within discontinued operations and the comparative results for 2021 have been restated accordingly. In addition,
the results of the Nortek Air Management, Brush and Nortek Control businesses, which were disposed of in the prior year, are also
classified as discontinued operations.
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 Hydrogen Technology business which was launched in the prior year.
In addition, there is a central cost centre which is also reported to the Board. The central cost centre contains 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 centre for the year ended 31 December 2022.
(cid:3)
(cid:3)
(cid:3)
(cid:3)
2
2
0
2
t
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A
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i
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F
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n
a
a
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c
c
a
a
i
i
l
l
s
s
t
t
a
a
t
t
e
e
m
m
e
e
n
n
t
t
s
s
2
2
0
2
t
r
o
p
e
R
l
a
u
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174174
Notes to the Financial Statements
Continued
Notes to the Financial Statements
Continued
175
175
5. Segment information continued
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 2022
Continuing operations
Adjusted revenue
Equity accounted investments
Revenue
Timing of revenue recognition
At a point in time
Over time
Revenue
Year ended 31 December 2021 – restated(1)
Continuing operations
Adjusted revenue
Equity accounted investments
Revenue
Timing of revenue recognition
At a point in time
Over time
Revenue
(1) Restated for discontinued operations (note 1).
b) Segment operating profit
Year ended 31 December 2022
Continuing operations
Aerospace
£m
Automotive
£m
2,957
(3)
2,954
2,030
924
2,954
4,211
(625)
3,586
3,586
–
3,586
Powder
Metallurgy
£m
1,022
(26)
996
996
–
996
Other
Industrial
£m
1
–
1
1
–
1
Aerospace
£m
Automotive
£m
Powder
Metallurgy
£m
Other
Industrial
£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
–
–
–
–
–
–
Aerospace
£m
Automotive
£m
Powder
Metallurgy
£m
Other
Industrial
£m
Corporate(1)
£m
Adjusted operating profit/(loss)
186
250
96
(14)
(38)
(260)
(88)
21
–
–
–
12
(5)
(134)
(147)
(37)
(7)
(29)
(20)
–
5
(4)
11
(51)
(17)
(1)
–
–
–
9
–
36
–
–
–
–
–
–
–
–
(14)
–
(2)
(100)
–
–
(15)
–
20
(135)
Items not included in adjusted operating profit(2):
Amortisation of intangible assets acquired in
business combinations
Restructuring costs
Movement in derivatives and associated
financial assets and liabilities
Equity accounted investments adjustments
Impairment of assets
Melrose equity-settled compensation scheme
charges
Net release and changes in discount rates of fair
value items
Acquisition and disposal related gains and losses
Operating (loss)/profit
Finance costs
Finance income
Loss before tax
Tax
Loss for the year from continuing operations
(cid:3)
(cid:3)
2
2
0
2
t
r
o
p
e
R
l
a
u
n
n
A
C
L
P
s
e
i
r
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s
u
d
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I
e
s
o
r
l
e
M
Total
£m
8,191
(654)
7,537
6,613
924
7,537
Total
£m
7,263
(613)
6,650
5,713
937
6,650
Total
£m
480
(458)
(144)
(87)
(29)
(20)
(15)
26
11
(236)
(104)
33
(307)
84
(223)
5. Segment information continued
b) Segment operating profit continued
Year ended 31 December 2021 – restated(3)
Continuing operations
Aerospace
£m
Automotive
£m
Powder
Metallurgy
£m
Other
Industrial
£m
Corporate(1)
£m
Adjusted operating profit/(loss)
112
172
91
(7)
(51)
Items not included in adjusted operating profit(2):
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
–
–
–
–
–
–
–
–
(12)
(114)
–
(19)
1
(4)
(7)
(199)
Finance costs
Finance income
Loss before tax
Tax
Loss for the year from continuing operations
Total
£m
317
(436)
(269)
(114)
(28)
(19)
49
7
(493)
(169)
2
(660)
180
(480)
(1) Corporate adjusted operating loss of £38 million (2021: £51 million), includes £3 million (2021: £17 million) of costs in respect of divisional management long-term incentive plans.
(2) Further details on adjusting items are discussed in note 6.
(3) Restated for discontinued operations (note 1).
c) Segment total assets and liabilities
(cid:3)
Aerospace
(cid:3)
Automotive
Powder Metallurgy
Other Industrial
Corporate
Continuing operations
Discontinued operations
Total
(1) Restated for discontinued operations (note 1).
Total assets
Total liabilities
31 December
2022
£m
(cid:3)
Restated(1)
31 December
2021
£m
31 December
2022
£m
Restated(1)
31 December
2021
£m
6,692
4,711
1,791
17
776
13,987
–
13,987
(cid:3)
6,267
4,608
1,669
14
847
13,405
617
14,022
2,517
2,033
421
5
1,843
6,819
–
6,819
2,231
2,042
405
–
1,718
6,396
86
6,482
(cid:3)
(cid:3)
i
i
F
F
n
n
a
a
n
n
c
c
a
a
i
i
l
l
s
s
t
t
a
a
t
t
e
e
m
m
e
e
n
n
t
t
s
s
2
2
0
2
t
r
o
p
e
R
l
a
u
n
n
A
C
L
P
s
e
i
r
t
s
u
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I
e
s
o
r
l
e
M
176176
Notes to the Financial Statements
Continued
5. Segment information continued
d) Segment capital expenditure and depreciation
(cid:3)
Aerospace
(cid:3)
Automotive
Powder Metallurgy
Other Industrial
Corporate
Continuing operations
Discontinued operations
Total
Capital expenditure(1)
Year ended
31 December
2022
£m
Restated(2)
Year ended
31 December
2021
£m
77
187
44
–
–
308
–
308
66
113
40
1
–
220
14
234
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(1) Including computer software and development costs. Capital expenditure excludes lease additions.
(2) Restated for discontinued operations (note 1).
(cid:3)
Depreciation of
owned assets(1)
Depreciation of
leased assets
Year ended
31 December
2022
£m
Restated(2)
Year ended
31 December
2021
£m
123
184
53
–
–
360
1
361
122
198
51
–
1
372
20
392
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
Year ended
31 December
2022
£m
Restated(2)
Year ended
31 December
2021
£m
21
14
10
–
1
46
1
47
24
15
9
–
1
49
8
57
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 derivative financial assets; non-current other receivables; and non-current retirement benefit surplus) by geographical location
are detailed below:
(cid:3)
UK
(cid:3)
Rest of Europe
North America
Other
Continuing operations
Discontinued operations
Total
(1) Revenue is presented by destination.
(2) Restated for discontinued operations (note 1).
Revenue(1) from
external customers
Year ended
31 December
2022
£m
Restated(2)
Year ended
31 December
2021
£m
Segment assets
31 December
2022
£m
Restated(2)
31 December
2021
£m
682
1,902
3,906
1,047
7,537
132
7,669
(cid:3)
570
1,824
3,275
981
6,650
1,117
7,767
1,785
4,453
2,562
1,142
9,942
–
9,942
1,977
4,374
2,404
1,145
9,900
534
10,434
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
Impairment of assets
Melrose equity-settled compensation scheme charges
Net release and changes in discount rates of fair value items
Acquisition and disposal related gains and losses
Total adjustments to operating loss
Adjusted operating profit
(1) Restated for discontinued operations (note 1).
(cid:3)
(cid:3)
2
2
0
2
t
r
o
p
e
R
l
a
u
n
n
A
C
L
P
s
e
i
r
t
s
u
d
n
I
e
s
o
r
l
e
M
Year ended
31 December
2022
£m
Notes
Restated(1)
Year ended
31 December
2021
£m
(236)
(493)
a
b
c
d
e
f
g
h
458
144
87
29
20
15
(26)
(11)
716
480
436
269
114
28
–
19
(49)
(7)
810
317
(cid:3)
(cid:3)
(cid:3)
Notes to the Financial Statements
Continued
177
177
6. Reconciliation of adjusted profit measures continued
a. The amortisation charge on intangible assets acquired in business combinations of £458 million (2021: £436 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 £144 million (2021: £269 million), including a write down of assets in
affected sites of £11 million (2021: £112 million). These are shown as adjusting items due to their size and non-trading nature and
during the year ended 31 December 2022 these included:
• A charge of £88 million (2021: £92 million) within the Aerospace division primarily relating to the continuation of significant
restructuring projects, necessary for the Aerospace business to achieve its full potential target operating margins. These included
further progress on European footprint consolidations in both the Civil and Engines businesses, which commenced in 2021 and are
expected to materially conclude in 2023. In addition, further progress has been made in North America on multi-site restructuring
programmes across all three Aerospace sub-segments. There are three significant ongoing multi-year restructuring programmes,
impacting multiple sites across the Aerospace division, incurring a combined charge of £79 million in the year. Since commencement
in 2020, the cumulative charge on these three restructuring programmes at 31 December 2022 was £155 million (31 December 2021:
£76 million, 31 December 2020: £7 million). As at 31 December 2022, these projects on average are approximately 75% complete
and are expected to be substantially complete by the end of 2023. In addition to the remaining charges to be incurred on these
projects, £40 million is included in restructuring provisions at 31 December 2022 to be settled in cash in the next twelve months.
• A charge of £37 million (2021: £147 million) within the Automotive division. These included multiple restructuring projects which
concluded within the year, including two significant footprint consolidation actions in Europe, which commenced last year. In addition,
restructuring costs were incurred in North America, continuing the movement of production from high to low cost countries.
• A charge of £17 million (2021: £18 million) within the Powder Metallurgy division. Multiple restructuring projects in the business
concluded within the year, including the closure of a factory in Canada.
• A net charge of £2 million (2021: £12 million) within the central cost centre.
c. Movements in the fair value of derivative financial instruments (primarily forward foreign currency exchange contracts where hedge
accounting is not applied) entered into 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 £87 million (2021: £114 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 £654
million (2021: £613 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.
e. A write down of assets of £20 million (2021: £nil), has been recognised as a result of exiting any direct trading links with Russian
operations as a result of the conflict in Ukraine. The write down of these assets are predominantly within the Automotive division and
are shown as an adjusting item due to their non-trading nature and size.
f. The charge for the Melrose equity-settled Employee Share Scheme, including its associated employer’s tax charge, of £15 million
(2021: £19 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.
g. The net release of fair value items in the year of £26 million (2021: £49 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 £11 million in respect of loss-making contract provisions, where either contractual terms have been
renegotiated with the relevant customer or operational efficiencies have been identified and demonstrated for a sustained period.
h. An acquisition and disposal related net credit of £11 million (2021: £7 million) arose in the year which primarily includes the net profits
on disposal of two disused properties, a loss on disposal of a non-core Aerospace business and the initial costs incurred in respect of
the proposed demerger. These items are excluded from adjusted results due to their non-trading nature.
(cid:3)
(cid:3)
i
i
F
F
n
n
a
a
n
n
c
c
a
a
i
i
l
l
s
s
t
t
a
a
t
t
e
e
m
m
e
e
n
n
t
t
s
s
2
2
0
2
t
r
o
p
e
R
l
a
u
n
n
A
C
L
P
s
e
i
r
t
s
u
d
n
I
e
s
o
r
l
e
M
178178
Notes to the Financial Statements
Continued
6. Reconciliation of adjusted profit measures continued
b) Profit before tax
Continuing operations
Loss before tax
Adjustments to operating loss as above
Equity accounted investments – interest
Settlement of bonds
Fair value changes on cross-currency swaps
Settlement of interest rate swaps
Total adjustments to loss before tax
Adjusted profit before tax
(1) Restated for discontinued operations (note 1).
Year ended
31 December
2022
£m
Notes
Restated(1)
Year ended
31 December
2021
£m
(307)
(660)
i
j
k
l
716
2
(24)
(3)
–
691
384
810
2
–
(3)
45
854
194
(cid:3)
(cid:3)
(cid:3)
i. 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.
j. During the year, the Group undertook a tender to buy back the 2032 £300 million bond. There were £170 million of bonds repurchased,
on which a gain of £24 million was realised. This is shown as an adjusting item due to its non-trading nature.
k. 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.
l. On disposal of Nortek Air Management and Brush in the prior year, the significant proceeds received together with expectations of debt
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 was accelerated and shown as an adjusting item due to its non-trading nature.
Year ended
31 December
2022
£m
Notes
Restated(1)
Year ended
31 December
2021
£m
8
i
8
8
(223)
691
(170)
(9)
–
10
522
299
(480)
854
(176)
(9)
(70)
32
631
151
(cid:3)
(cid:3)
(cid:3)
Year ended
31 December
2022
£m
Restated(1)
Year ended
31 December
2021
£m
(31)
(1,333)
(1,364)
(28)
(1,403)
(1,431)
c) Profit after tax
Continuing operations
Loss after tax
Adjustments to loss before tax as above
Tax effect of adjustments to loss before tax
Equity accounted investments – tax
Tax effect of significant legislative changes
Tax effect of significant restructuring
Total adjustments to loss after tax
Adjusted profit 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 £687 million (2021: £782 million) of adjusting items (note 6).
(cid:3)
(cid:3)
(cid:3)
2
2
0
2
t
r
o
p
e
R
l
a
u
n
n
A
C
L
P
s
e
i
r
t
s
u
d
n
I
e
s
o
r
l
e
M
Notes to the Financial Statements
Continued
7. Expenses continued
Continuing operations
Operating loss is stated after charging/(crediting):
Cost of inventories
Amortisation of intangible assets acquired in business combinations
Depreciation and impairment of property, plant and equipment
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(4)
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
2022
£m
Restated(1)
Year ended
31 December
2021
£m
(cid:3)
6,458
458
374
59
3
2,127
198
(42)
59
(55)
6
(7)
5,750
436
479
54
4
1,986
193
(3)
76
(67)
2
(3)
(1) Restated for discontinued operations (note 1).
(2) Includes costs relating to short-term leases of £2 million (2021: £2 million), low value leases of £1 million (2021: £1 million) and variable lease payments not included in lease liabilities of
£nil (2021: £1 million).
(3) Includes staff costs totalling £145 million (2021: £136 million).
(4) Includes the profit from the disposal of a corporate property, held for sale at 30 June 2022.
The analysis of auditor’s remuneration is as follows:
Fees payable to the Company’s auditor for the audit of the Company’s annual accounts
(cid:3)
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
2022
£m
Year ended
31 December
2021
£m
6.8
1.1
1.9
9.8
0.4
0.2
0.6
10.4
–
0.9
11.3
5.9
1.0
3.8
10.7
0.4
0.5
0.9
11.6
–
0.1
11.7
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 110 to 115. No services were provided pursuant to contingent fee
arrangements.
An analysis of staff costs and employee numbers is as follows:
Continuing operations
Staff costs during the year (including executive Directors)
Wages and salaries(2)
Social security costs(3)
Pension costs (note 24)
– defined benefit plans
– defined contribution plans
Share-based compensation expense(4) (note 23)
Total staff costs
Year ended
31 December
2022
£m
Restated(1)
Year ended
31 December
2021
£m
(cid:3)
1,746
(cid:3)
287
9
69
16
1,613
281
8
68
16
2,127
1,986
(1) Restated for discontinued operations (note 1).
(2) Wages and salaries for discontinued operations was £18 million in the period prior to disposal (2021: £216 million).
(3) Includes an employer’s tax credit of £1 million (2021: charge of £3 million) on the change in value of the employee share plans, shown as an adjusting item (note 6).
(4) Shown as an adjusting item (note 6).
(cid:3)
(cid:3)
179
179
i
i
F
F
n
n
a
a
n
n
c
c
a
a
i
i
l
l
s
s
t
t
a
a
t
t
e
e
m
m
e
e
n
n
t
t
s
s
2
2
0
2
t
r
o
p
e
R
l
a
u
n
n
A
C
L
P
s
e
i
r
t
s
u
d
n
I
e
s
o
r
l
e
M
180180
Notes to the Financial Statements
Continued
7. Expenses continued
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).
An analysis of finance costs and income is as follows:
Continuing operations
Finance costs and income
Interest on bank loans and overdrafts(2)
Amortisation of costs of raising finance
Net interest cost on pensions
Lease interest
Unwind of discount on provisions
Fair value changes on cross-currency swaps(3)
Total finance costs
Interest receivable
Bond redemption gains(3)
Total finance income
Total net finance costs
(1) Restated for discontinued operations (note 1).
(2) Includes a £nil (2021: £45 million) charge in respect of the settlement of interest rate swaps which are shown as an adjusting item (note 6).
(3) These are shown as adjusting items (note 6).
8. Tax
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 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).
(cid:3)
(cid:3)
2
2
0
2
t
r
o
p
e
R
l
a
u
n
n
A
C
L
P
s
e
i
r
t
s
u
d
n
I
e
s
o
r
l
e
M
(cid:3)
(cid:3)
Year ended
31 December
2022
Number
Restated(1)
Year ended
31 December
2021
Number
(cid:3)
14,466
18,520
5,672
65
49
38,772
1,187
39,959
14,316
19,141
6,080
23
50
39,610
9,048
48,658
Year ended
31 December
2022
£m
Restated(1)
Year ended
31 December
2021
£m
(cid:3)
(81)
(10)
(5)
(9)
(2)
3
(104)
9
24
33
(71)
(138)
(10)
(8)
(14)
(2)
3
(169)
2
–
2
(167)
Year ended
31 December
2022
£m
Restated(1)
Year ended
31 December
2021
£m
(cid:3)
(cid:3)
73
(9)
64
(118)
(20)
(24)
1
13
–
(148)
(84)
5
(79)
£m
85
(169)
(84)
53
(1)
52
(125)
(4)
(27)
(5)
4
(75)
(232)
(cid:3)
(180)
61
(119)
£m
43
(223)
(180)
Notes to the Financial Statements
Continued
181
181
8. Tax continued
The tax charge of £85 million (2021: £43 million) arising on adjusted profit before tax of £384 million (2021: £194 million), results in an
effective tax rate of 22.1% (2021: 22.2%).
i
i
F
F
n
n
a
a
n
n
c
c
a
a
i
i
The £169 million (2021: £223 million) tax credit recognised as an adjusting item includes a credit of £170 million (2021: £176 million) in
respect of tax credits on adjustments to loss before tax of £691 million (2021: £854 million), £9 million (2021: £9 million) in respect of the
tax on equity accounted investments, a charge of £10 million (2021: £32 million) in respect of internal Group restructuring and £nil (2021:
credit of £70 million) in respect of additional deferred tax asset recognition from legislative changes.
The tax credit for the year for continuing and discontinued operations can be reconciled to the (loss)/profit before tax per the Income
Statement as follows:
l
l
s
s
t
t
a
a
t
t
e
e
m
m
e
e
n
n
t
t
s
s
(Loss)/profit before tax:
(cid:3)
Continuing operations
Discontinued operations (note 13)
(cid:3)
Tax credit on loss before tax at the weighted average rate of 25.0% (2021: 23.0%)
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 – continuing operations
Tax charge classified within adjusting items – discontinued operations
Effect of changes in tax rates
Total tax credit for the year
(1) Restated for discontinued operations (note 1).
Year ended
31 December
2022
£m
Restated(1)
Year ended
31 December
2021
£m
(307)
(59)
(366)
(91)
4
(2)
13
–
15
(29)
10
–
1
(79)
(660)
45
(615)
(141)
(2)
31
4
(75)
11
(5)
32
31
(5)
(119)
The reconciliation has been performed at a blended Group tax rate of 25.0% (2021: 23.0%) 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 (credits)/charges included in Other Comprehensive Income are as follows:
Deferred tax on retirement benefit obligations
(cid:3)
Deferred tax on hedge relationship gains and losses
Total (credit)/charge for the year
Year ended
31 December
2022
£m
Year ended
31 December
2021
£m
1
(5)
(4)
71
19
90
Franked investment income – litigation
Since 2003, certain entities in the Group have been involved in litigation with HMRC in respect of various advance corporate tax payments
and corporate tax paid on certain foreign dividends which, in their view, were levied by HMRC in breach of the Group’s EU community law
rights. The continuing complexity of the case and uncertainty over the issues raised 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 2022 of 0.825p
(cid:3)
Final dividend for the year ended 31 December 2021 of 1.0p
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
2022
£m
Year ended
31 December
2021
£m
33
44
–
–
77
–
–
33
36
69
(cid:3)
A second interim dividend for the year ended 31 December 2022 of 1.5p per share totalling £61 million is declared by the Board. The
second interim dividend of 1.5p per share was declared by the Board on 2 March 2023 and in accordance with IAS 10: Events after the
reporting period, has not been included as a liability in the Consolidated Financial Statements.
(cid:3)
(cid:3)
2
2
0
2
t
r
o
p
e
R
l
a
u
n
n
A
C
L
P
s
e
i
r
t
s
u
d
n
I
e
s
o
r
l
e
M
182182
Notes to the Financial Statements
Continued
9. Dividends continued
During the year, the Group undertook a £500 million share buy back programme (note 1). In the prior year, a return of capital of 15p per
ordinary share, totalling £729 million was paid.
10. Earnings per share
Earnings attributable to owners of the parent
Earnings for basis of earnings per share
Less: earnings 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)
(cid:3)
Further shares for the purposes of diluted earnings per share (million)
Weighted average number of ordinary shares for the purposes of diluted earnings per share (million)
Year ended
31 December
2022
£m
(308)
80
(228)
Restated(1)
Year ended
31 December
2021
£m
833
(1,317)
(484)
Year ended
31 December
2022
Number
Year ended
31 December
2021
Number
4,218
–
4,218
4,695
–
4,695
On 9 June 2022, the Group commenced a £500 million share buyback programme, which completed on 1 August 2022 with 318,003,512
shares repurchased and subsequently cancelled.
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 continuing operations
Adjusted earnings for the basis of adjusted earnings per share(2)
Adjusted earnings per share from continuing operations
Adjusted basic earnings per share
(cid:3)
Adjusted diluted earnings per share
Year ended
31 December
2022
pence
Restated(1)
Year ended
31 December
2021
pence
(cid:3)
(cid:3)
(7.3)
(5.4)
(1.9)
(cid:3)
(7.3)
(5.4)
(1.9)
17.7
(10.3)
28.0
17.7
(10.3)
28.0
Year ended
31 December
2022
£m
Restated(1)
Year ended
31 December
2021
£m
294
147
Year ended
31 December
2022
pence
Restated(1)
Year ended
31 December
2021
pence
7.0
7.0
3.1
3.1
2
2
0
2
t
r
o
p
e
R
l
a
u
n
n
A
C
L
P
s
e
i
r
t
s
u
d
n
I
e
s
o
r
l
e
M
(1) Restated for discontinued operations (note 1).
(2) Adjusted earnings for the year ended 31 December 2022 comprises adjusted profit after tax of £299 million (2021: £151 million) (note 6), net of an allocation to non-controlling interests of £5
million (2021: £4 million).
(cid:3)
(cid:3)
(cid:3)
(cid:3)
Notes to the Financial Statements
Continued
11. Goodwill and other intangible assets
Cost
(cid:3)
At 1 January 2021
Additions
Disposals
Disposal of businesses(2)
Transfer to held for sale(3)
Exchange adjustments
At 31 December 2021
Additions
Acquisition of businesses(4)
Disposals
Transfer to held for sale(3)
Exchange adjustments
At 31 December 2022
Amortisation and impairment
At 1 January 2021
Charge for the year:
Adjusted operating profit
Adjusting items
Impairments(5)
Disposals
Disposal of businesses(2)
Transfer to held for sale(3)
Exchange adjustments
At 31 December 2021
Charge for the year:
Adjusted operating profit
Adjusting items
Impairments(5)
Disposals
Transfer to held for sale(3)
Exchange adjustments
At 31 December 2022
Net book value
At 31 December 2022
At 31 December 2021
Customer
relationships
and contracts
£m
Brands and
intellectual
property
£m
Goodwill
£m
Other(1)
£m
Computer
software
£m
Development
costs
£m
(cid:3)
4,023
–
–
(778)
(330)
(65)
2,850
–
1
–
(455)
189
2,585
(cid:3)
4,916
–
–
(331)
(120)
(59)
4,406
–
–
–
(122)
386
4,670
(cid:3)
776
–
–
(250)
(37)
(9)
480
–
–
–
(100)
13
393
(cid:3)
1,045
–
–
(3)
(26)
(5)
1,011
–
3
–
–
33
1,047
(cid:3)
59
6
(1)
(14)
–
(1)
49
6
–
(2)
–
3
56
(cid:3)
529
13
(3)
(11)
–
(6)
522
21
–
(4)
–
31
570
Total
£m
11,348
19
(4)
(1,387)
(513)
(145)
9,318
27
4
(6)
(677)
655
9,321
(383)
(cid:3)
(1,083)
(cid:3)
(198)
(cid:3)
(306)
(cid:3)
(31)
(cid:3)
(149)
(cid:3)
(2,150)
(cid:3)
(cid:3)
–
–
–
–
214
165
4
–
–
–
–
–
–
–
–
–
(339)
–
–
143
42
11
(1,226)
–
(338)
–
–
71
(105)
(1,598)
2,585
2,850
3,072
3,180
–
(30)
–
–
117
13
3
(95)
–
(24)
–
–
35
(9)
(93)
300
385
–
(107)
–
–
3
26
1
(383)
–
(104)
–
–
–
(9)
(496)
551
628
(8)
–
–
1
7
–
2
(46)
–
(3)
–
2
–
1
(54)
(476)
(3)
1
486
246
22
(29)
(195)
(1,928)
(7)
–
–
2
–
(2)
(43)
–
(9)
4
–
(9)
(50)
(466)
(9)
6
106
(134)
(36)
(252)
(2,475)
20
20
318
327
6,846
7,390
(1) Other includes technology and order backlog intangible assets recognised on acquisitions.
(2) Disposal of businesses in 2021 relate to the sales of Nortek Air Management, Brush and certain other non-core entities (note 1).
(3) Transfer to held for sale in 2022 relates to the Ergotron business (2021: Nortek Control business), which was subsequently disposed of during the second half of the year (note 1).
(4) Acquisition of businesses in 2022 relates to Permanova Lasersystem AB within the Aerospace segment (note 1).
(5) Includes £9 million within impairment of assets (2021: £3 million within restructuring costs) 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”).
183
183
i
i
F
F
n
n
a
a
n
n
c
c
a
a
i
i
l
l
s
s
t
t
a
a
t
t
e
e
m
m
e
e
n
n
t
t
s
s
2
2
0
2
t
r
o
p
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R
l
a
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184184
Notes to the Financial Statements
Continued
11. Goodwill and other intangible assets continued
Goodwill
Aerospace
Automotive
Powder Metallurgy
Continuing operations
Discontinued operations
Total
(1) Restated for discontinued operations (note 1).
31 December
2022
£m
Restated(1)
31 December
2021
£m
990
1,056
539
2,585
–
2,585
933
1,001
507
2,441
409
2,850
Impairment testing
The Group tests goodwill annually or more frequently if there are indications that goodwill might be impaired. The date of the annual
impairment test is 31 October, aligned with internal forecasting and review processes. In accordance with IAS 36: Impairment of assets, the
Group assesses goodwill based on the recoverable amount, being the higher of the value in use basis and the fair value less costs to sell
basis. Due to the nature of the groups of CGUs within Melrose’s strategic life cycle of “Buy, Improve, Sell”, the fair value less costs to sell
methodology has been used as the improvement phase is ongoing.
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 costs 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 benefits from future uncommitted restructuring plans are 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. The COVID-19 pandemic
had a significant effect on global end markets in which certain of the Group’s businesses operate and whilst these markets continue to
recover, there have been consequential impacts of disrupted supply chains, interest rate rises and other inflationary pressure on input
costs. Implications on the levels of headroom are shown in the sensitivity analysis which has been provided in respect of reasonably
possible changes to key assumptions.
Significant assumptions and estimates
The basis of impairment tests and the key assumptions are set out in the tables below:
Groups of CGUs – fair value less costs to sell
Aerospace
Automotive
Powder Metallurgy
Groups of CGUs – value in use
Ergotron
31 December 2022
31 December 2021
Post-tax
discount rates
Long-term
growth rates
Years in
forecast
(cid:3)
Post-tax
discount rates
Long-term
growth rates
Years in
forecast
10.75%
11.25%
12.0%
3.0%
3.5%
3.9%
5
5
5
(cid:3)
(cid:3)
(cid:3)
%
7.8%
8.8%
8.8%
3.0%
2.5%
2.5%
5
5
5
31 December 2021
Pre-tax
discount rates
Long-term
growth rates
Years in
forecast
10.1%
3.0%
3
Risk adjusted discount rates
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.
(cid:3)
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:
2
2
0
2
t
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o
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M
(cid:3)
(cid:3)
(cid:3)
(cid:3)
Notes to the Financial Statements
Continued
185
185
11. Goodwill and other intangible assets continued
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. Testing has been
performed using the fair value less costs to sell methodology and the assumptions to derive operating margins take into account both
normal cost saving activities and, where applicable, a significant contribution from planned restructuring activity to improve operational
efficiency and leverage scale. Forecasts for other operating costs are based on inflation forecasts and supply and demand factors, which
take account of climate change implications for affected markets. Overall, climate risk exposure is considered to be relatively low across
the divisions in the short and medium-term but starts to increase in the longer-term, for example through increasing likelihood of river
flooding risk in the UK or increasing wildfire risk in California. Impairment testing includes short to medium-term planning (five years) for
each of the groups of CGUs, which will address known risks from climate change and other environmental factors impacting forecast costs
as well as the opportunities in associated markets as they prepare for change e.g. electrification in automotive and hydrogen propulsion in
aerospace which impact revenues.
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, 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.
Long-term growth rates:
Long-term growth rates are based on long-term forecasts for growth in the sectors and geography in which the groups of CGUs operate.
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
Due to consequential impacts from the COVID-19 pandemic of disrupted supply chains, interest rate rises and other inflationary pressure
on input costs, certain businesses are mitigating the impact of volatile customer scheduling through cost reduction and efficiency actions,
including restructuring. The Automotive and Powder Metallurgy groups of CGUs are the most affected at this point in the cycle, as they rely
on the global automotive market.
Automotive group of CGUs – sensitivity analysis
The forecasts show headroom above the carrying amount for the Automotive group of CGUs. Sensitivity analysis has been carried out and
a reasonably possible change in the discount rate and long-term growth rate from 11.25% to 12.50% or from 3.5% to 1.8% respectively
would reduce headroom to £nil. Executing restructuring plans and continuing the recovery of inflationary impacts on input costs are key to
margin assumptions and a reduction in the terminal operating profit of 15% would reduce the terminal operating margin by 1.6 percentage
points and would reduce headroom to £nil.
Powder Metallurgy group of CGUs – sensitivity analysis
The forecasts show headroom above the carrying amount for the Powder Metallurgy group of CGUs. Sensitivity analysis has been carried
out and a reasonably possible change in the discount rate and long-term growth rate from 12.0% to 12.5% or from 3.9% to 3.2%
respectively would reduce headroom to £nil. Executing restructuring plans and optimising market penetration are key to margin
assumptions and a reduction in the terminal operating profit of 8% would reduce the terminal operating margin by 1.0 percentage points
and would reduce headroom to £nil.
i
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n
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a
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c
a
a
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a
a
t
t
e
e
m
m
e
e
n
n
t
t
s
s
2
2
0
2
t
r
o
p
e
R
l
a
u
n
n
A
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P
s
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i
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186186
Notes to the Financial Statements
Continued
11. Goodwill and other intangible assets continued
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
31 December
2022
years
31 December
2021
years
(cid:3)
31 December
2022
£m
Restated(1)
31 December
2021
£m
(cid:3)
(cid:3)
Remaining amortisation
period
Net book value
31 December
2022
years
31 December
2021
years
(cid:3)
31 December
2022
£m
Restated(1)
31 December
2021
£m
16
8
13
17
9
14
(cid:3)
1,965
621
486
3,072
–
(cid:3)
1,967
670
492
3,129
51
3,072
3,180
16
16
16
17
17
17
(cid:3)
534
261
56
851
–
851
575
309
67
951
62
1,013
31 December
2022
£m
31 December
2021
£m
62
87
Aerospace
(cid:3)
Automotive
Powder Metallurgy
Continuing operations
Discontinued operations
Total
(1) Restated for discontinued operations (note 1).
12. Investments
Investments, carried at fair value
Shares
The Group holds a 10% equity share in HiiROC Limited, a hydrogen technology company, and a 4% investment in PW1100G-JM Engine
Leasing LLC, an engine leasing business.
There was a loss on remeasurement to fair value of £34 million (2021: gain of £43 million) and a foreign exchange translation gain of £9
million (2021: £nil). A dividend of £4 million (2021: £17 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
2022, the expected dividend flow was discounted to net present value using a discount rate of 12.75%. If the discount rate changed from
12.75% to 11.75% the fair value would increase by £5 million.
13. Discontinued operations
At 30 June 2022, the Ergotron business, previously included within the Other Industrial division, 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 6 July 2022, the Group completed the sale
of the Ergotron business for cash consideration of £496 million. The costs charged to the Income Statement associated with the disposal,
in the year, were £7 million. The loss on disposal was £16 million after the recycling of cumulative translation gains of £11 million.
A corporate property with a carrying value of £10 million was classified as held for sale at 30 June 2022 and subsequently sold for cash
consideration of £31 million. The profit on disposal of £21 million has been included within acquisition and disposal related gains and
losses shown as an adjusting item (note 6).
During the year, Aerospace disposed of a non-core business. Consideration was £nil and the loss on disposal was £5 million, which has
been included in acquisition and disposal related gains and losses shown as an adjusted item (note 6).
Discontinued operations for 2021 include the results of the Nortek Air Management, Brush and Nortek Control businesses which were
disposed during 2021.
2
2
0
2
t
r
o
p
e
R
l
a
u
n
n
A
C
L
P
s
e
i
r
t
s
u
d
n
I
e
s
o
r
l
e
M
(cid:3)
(cid:3)
Notes to the Financial Statements
Continued
13. Discontinued operations continued
Financial performance of discontinued operations:
Revenue
(cid:3)
Operating costs(2)
Operating (loss)/profit
Finance costs
(Loss)/profit before tax
Tax
Loss after tax
(Loss)/gain on disposal of net assets of discontinued operations, net of recycled cumulative translation
differences
(Loss)/profit for the year from discontinued operations
Year ended
31 December
2022
£m
132
(191)
(59)
–
(59)
(5)
(64)
(16)
(80)
Restated(1)
Year ended
31 December
2021
£m
1,117
(1,070)
47
(2)
45
(61)
(16)
1,333
1,317
(1) Restated for discontinued operations (note 1).
(2) Operating costs included an £86 million charge on remeasurement to fair value less costs of disposal relating to the Ergotron business on reclassification to assets held for sale
(2021: £85 million relating to the Nortek Control business).
Goodwill and other intangible assets
Property, plant and equipment(1)
Inventories
Trade and other receivables
Derivative financial assets
Cash and cash equivalents
Total assets
Trade and other payables
Lease obligations
Provisions
Derivative financial liabilities
Current and deferred tax
Total liabilities
Net assets
Held for sale
Reclassified to
assets classified
as held for sale Remeasured
£m
571
27
51
51
1
26
727
(63)
(7)
(5)
(1)
(21)
(97)
630
£m
(86)
–
–
–
–
–
(86)
–
–
–
–
–
–
(86)
Movement in the value of net assets classified as held for sale in the period prior to disposal(2)
Net assets held for sale disposed
Total net assets disposed
Consideration, net of costs(3)
Cumulative translation difference recycled on disposals
Profit on disposal of businesses and disposal groups of assets
Analysed as:
Profit on disposal of assets classified as continuing operations
Loss on disposal of businesses classified as discontinued operations
Net cash inflow arising on disposal of businesses and disposal groups of assets:
Consideration received in cash and cash equivalents, net of costs(4)
Less: cash and cash equivalents disposed
Disposed
Businesses
disposed
£m
£m
485
27
51
51
1
26
641
(63)
(7)
(5)
(1)
(21)
(97)
544
(18)
526
–
–
9
5
–
6
20
(4)
(3)
(18)
–
10
(15)
5
526
531
520
11
–
16
(16)
519
(10)
509
(1) Includes £10 million relating to a corporate property.
(2) Includes £23 million of cash extracted from the business prior to disposal.
(3) Includes cash consideration of £496 million and £7 million of related disposal costs following the disposal of Ergotron and £31 million of proceeds from the sale of a corporate property.
(4) Includes cash consideration of £496 million and £8 million of related cash disposal costs following the disposal of Ergotron and £31 million of proceeds from the sale of a corporate property.
(cid:3)
(cid:3)
187
187
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F
n
n
a
a
n
n
c
c
a
a
i
i
l
l
s
s
t
t
a
a
t
t
e
e
m
m
e
e
n
n
t
t
s
s
2
2
0
2
t
r
o
p
e
R
l
a
u
n
n
A
C
L
P
s
e
i
r
t
s
u
d
n
I
e
s
o
r
l
e
M
188188
Notes to the Financial Statements
Continued
14. Property, plant and equipment
Cost
(cid:3)
At 1 January 2021
Additions
Right-of-use asset reassessments
Disposals
Disposal of businesses(1)
Transfer to held for sale(2)
Exchange adjustments
At 31 December 2021
Additions
Acquisition of businesses(3)
Right-of-use asset reassessments
Disposals
Disposal of businesses(1)
Transfer to held for sale(2)
Exchange adjustments
At 31 December 2022
Accumulated depreciation and impairment
At 1 January 2021
Charge for the year
Disposals
Disposal of businesses(1)
Transfer to held for sale(2)
Impairments(4)
Exchange adjustments
At 31 December 2021
Charge for the year
Disposals
Disposal of businesses(1)
Transfer to held for sale(2)
Impairments(4)
Exchange adjustments
At 31 December 2022
Net book value
At 31 December 2022
At 31 December 2021
Land and
buildings
£m
Plant and
equipment
£m
Total
£m
1,394
68
4
(12)
(256)
(24)
(31)
1,143
38
1
–
(19)
(6)
(49)
61
1,169
(316)
(69)
2
112
9
(40)
2
(300)
(59)
4
6
27
(2)
(6)
(330)
839
843
2,995
192
(1)
(42)
(314)
(13)
(95)
2,722
281
–
(1)
(117)
–
(20)
263
3,128
(940)
(326)
40
204
10
(69)
44
(1,037)
(299)
108
–
15
(16)
(139)
(1,368)
1,760
1,685
4,389
260
3
(54)
(570)
(37)
(126)
3,865
319
1
(1)
(136)
(6)
(69)
324
4,297
(1,256)
(395)
42
316
19
(109)
46
(1,337)
(358)
112
6
42
(18)
(145)
(1,698)
2,599
2,528
(1) Disposal of businesses in 2022 relates to the sale of a non-core entity. 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 2022 relates to a corporate property and the Ergotron business (2021: Nortek Control business) which were subsequently disposed of during the second half of the
year (note 1).
(3) Acquisition of businesses in 2022 relates to Permanova Lasersystem AB within the Aerospace segment (note 1).
(4) Includes £11 million (2021: £109 million) within restructuring costs and £7 million (2021: £nil) within impairment of assets both shown as adjusting items (note 6).
Assets under the course of construction at 31 December 2022 totalled £243 million (31 December 2021: £150 million).
The basis of testing for impaired assets, which resulted in a charge totalling £18 million, primarily used a fair value less costs to sell
methodology which was classified as a level 3 fair value under the IFRS 13 fair value hierarchy. The largest impairment, in the Aerospace
segment, at a site subject to restructuring activities, was derived by calculating the net present value from a discounted cash flow
assessment, using a post-tax discount rate of 10.5%. The assets were deemed to have no further recoverable value.
2
2
0
2
t
r
o
p
e
R
l
a
u
n
n
A
C
L
P
s
e
i
r
t
s
u
d
n
I
e
s
o
r
l
e
M
(cid:3)
(cid:3)
Notes to the Financial Statements
Continued
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 2021
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
Additions
Acquisition of businesses(3)
Right-of-use asset reassessments
Depreciation
Disposals
Transfer to held for sale(2)
Exchange adjustments
At 31 December 2022
Land and
buildings
£m
Plant and
equipment
£m
381
31
4
(39)
(3)
(75)
(8)
(15)
(11)
265
19
1
–
(31)
(2)
(1)
14
265
67
14
(1)
(18)
–
(3)
–
–
(11)
(cid:3)
48
19
–
(1)
(16)
(3)
(5)
4
46
Total
£m
448
45
3
(57)
(3)
(78)
(8)
(15)
(22)
313
38
1
(1)
(47)
(5)
(6)
18
311
(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 2022 relates to the Ergotron business (2021: Nortek Control business), which was subsequently disposed of during the second half of the year (note 1).
(3) Acquisition of businesses in 2022 relates to Permanova Lasersystem AB within the Aerospace segment (note 1).
15. Equity accounted investments
Aggregated amounts relating to equity accounted investments:
(cid:3)
Share of current assets
Share of non-current assets
Share of current liabilities
Share of non-current liabilities
Interests in equity accounted investments
Group share of results from continuing operations
Revenue
Operating costs
Adjusted operating profit
Adjusting items
Net finance 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
Additions
Dividends paid to the Group
Exchange adjustments
At 31 December
(cid:3)
(cid:3)
31 December
2022
£m
31 December
2021
£m
416
322
(289)
(14)
435
403
350
(310)
(14)
429
Year ended
31 December
2022
£m
Year ended
31 December
2021
£m
654
(576)
78
(22)
2
58
(9)
49
613
(547)
66
(21)
2
47
(9)
38
Year ended
31 December
2022
£m
Year ended
31 December
2021
£m
429
49
3
(59)
13
435
430
38
–
(52)
13
429
189
189
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F
n
n
a
a
n
n
c
c
a
a
i
i
l
l
s
s
t
t
a
a
t
t
e
e
m
m
e
e
n
n
t
t
s
s
2
2
0
2
t
r
o
p
e
R
l
a
u
n
n
A
C
L
P
s
e
i
r
t
s
u
d
n
I
e
s
o
r
l
e
M
190190
Notes to the Financial Statements
Continued
Notes to the Financial Statements
Continued
191
191
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 £1,243 million (2021: £1,159 million),
adjusted operating profit of £142 million (2021: £116 million), adjusting items of £44 million (2021: £41 million), statutory operating profit of
£98 million (2021: £75 million), an interest credit of £4 million (2021: £4 million) and a tax charge of £18 million (2021: £16 million), leaving
retained profit of £84 million (2021: £63 million).
Total net assets of SDS at 31 December 2022 were £786 million (31 December 2021: £790 million). These comprised non-current assets
of £580 million (31 December 2021: £636 million), current assets of £715 million (31 December 2021: £668 million), current liabilities of
£504 million (31 December 2021: £508 million) and non-current liabilities of £5 million (31 December 2021: £6 million). During 2022, SDS
paid a dividend to the Group of £58 million (2021: £50 million). Further information about SDS can be found in note 3 to the Melrose
Industries PLC Company Financial Statements.
16. Inventories
Raw materials
(cid:3)
Work in progress
Finished goods
31 December
2022
£m
31 December
2021
£m
518
328
179
1,025
413
280
200
893
(cid:3)
In 2022, the write down of inventories to net realisable value amounted to £59 million (2021: £93 million), of which £nil related to
restructuring activities (2021: £8 million) and £2 million related to impairment of assets (2021: £nil) and are included within adjusting items
(note 6). The reversal of write downs amounted to £55 million (2021: £77 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
2022
£m
31 December
2021
£m
989
(20)
286
36
135
847
(23)
200
40
120
1,426
1,184
(cid:3)
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.
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:
i
i
F
F
n
n
a
a
n
n
c
c
a
a
i
i
At 1 January 2021
(cid:3)
Income Statement (credit)/charge
Utilised
Disposal of businesses(2)
Transfer to held for sale(3)
Exchange adjustments
At 31 December 2021
Income Statement charge/(credit)
Utilised
Transfer to held for sale(3)
Exchange adjustments
At 31 December 2022
Aerospace
£m
Automotive
£m
Powder Metallurgy
£m
Other Industrial
£m
Restated(1)
Restated(1)
Discontinued
Operations
£m
12
–
(1)
(3)
–
(1)
7
1
(2)
–
1
7
11
(1)
(1)
–
–
–
9
(3)
–
–
–
6
5
–
–
–
–
–
5
1
–
–
1
7
–
–
–
(cid:3)
–
–
–
–
–
–
–
–
–
13
4
(6)
(7)
(2)
–
2
–
–
(2)
–
–
l
l
s
s
t
t
a
a
t
t
e
e
m
m
e
e
n
n
t
t
s
s
Total
£m
41
3
(8)
(10)
(2)
(1)
23
(1)
(2)
(2)
2
20
(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 2022 relates to the Ergotron business (2021: Nortek Control business), which was subsequently disposed of during the second half of the year (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
(cid:3)
31 – 60 days
60+ days
31 December
2022
£m
31 December
2021
£m
4
–
16
20
12
–
11
23
(cid:3)
Included in the Group’s trade receivables balance are overdue trade receivables with a gross carrying amount of £53 million (31 December
2021: £63 million) against which a provision of £20 million (31 December 2021: £23 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 £33 million (31 December 2021: £40 million) is as follows:
Non-current
Other receivables
Contract assets
31 December
2022
£m
31 December
2021
£m
23
647
670
32
491
523
0 – 30 days
(cid:3)
31 – 60 days
60+ days
31 December
2022
£m
31 December
2021
£m
30
3
–
33
27
11
2
40
(cid:3)
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 2022, eligible
receivables under these programmes have been factored and derecognised in line with the derecognition criteria of IFRS 9.
(cid:3)
The Directors consider that the carrying amount of trade and other receivables approximates to their fair value.
2
2
0
2
t
r
o
p
e
R
l
a
u
n
n
A
C
L
P
s
e
i
r
t
s
u
d
n
I
e
s
o
r
l
e
M
(cid:3)
(cid:3)
(cid:3)
(cid:3)
2
2
0
2
t
r
o
p
e
R
l
a
u
n
n
A
C
L
P
s
e
i
r
t
s
u
d
n
I
e
s
o
r
l
e
M
192192
Notes to the Financial Statements
Continued
17. Trade and other receivables continued
The Group’s contract assets comprise the following:
At 1 January 2021
(cid:3)
Additions
Utilised
Exchange adjustments
At 31 December 2021
Additions
Utilised
Disposal of businesses(1)
Exchange adjustments
At 31 December 2022
Participation
fees
£m
Unbilled
receivables
£m
Unbilled work
done
£m
195
5
(9)
2
193
2
(13)
–
22
204
52
949
(941)
1
61
929
(918)
(3)
10
79
247
68
(13)
3
305
124
(18)
–
39
450
Other
£m
50
9
(6)
(1)
52
–
(7)
–
4
49
Total
£m
544
1,031
(969)
5
611
1,055
(956)
(3)
75
782
(1) Disposal of businesses in 2022 relates to the disposal of a non-core entity.
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.
Unbilled work done
Unbilled work done only has a material impact on one entity in the Group, exclusively relating to certain RRSP arrangements in the
Aerospace business.
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 unbilled work done 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 unbilled work done contract asset 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 unbilled work done, and the total contract revenue is allocated to the
distinct performance obligations.
Unbilled work done 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, an unbilled work done contract asset has been
recognised which will be satisfied through cash receipt during the aftermarket phase. The constraints applied to unbilled work done 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.
Notes to the Financial Statements
Continued
193
193
19. Trade and other payables
Current
Trade payables
Other payables
Customer advances and contract liabilities
Other taxes and social security
Government refundable advances
Funded development costs
Accruals
Deferred government grants
31 December
2022
£m
31 December
2021
£m
1,257
375
281
73
7
57
279
18
2,347
1,016
338
263
59
5
84
264
22
2,051
(cid:3)
As at 31 December 2022, and as described in note 25, included within trade payables were drawings on supplier finance facilities of £200
million (31 December 2021: £102 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 93 days (31 December 2021: 86 days).
Non-current
Other payables
Customer advances and contract liabilities
Other taxes and social security
Government refundable advances
Funded development costs
Accruals
Deferred government grants
31 December
2022
£m
31 December
2021
£m
19
213
3
52
89
29
26
431
12
185
6
50
88
27
22
390
(cid:3)
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 2023 and 2055 and the deferred government grants will
be utilised over the next five years.
Funded development costs
When the Group is awarded design and development work as part of a related serial production of components contract, management
assesses whether the two phases of work are distinct under IFRS 15: Revenue from contracts with customers.
Where it is considered there is only one performance obligation under the contract, being the delivery of manufactured product, any cash
received from customers which contributes to ‘funding’ the up-front design and development expenditure incurred, is deferred on the
Balance Sheet as an obligation and released to revenue in the Income Statement based on expectations of volumes.
Development cost funding is in the Aerospace division (£131 million) and Automotive division (£15 million).
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 £65 million, two to five years £50 million and over five years £98 million (31 December 2021:
one to two years £22 million, two to five years £62 million and over five years £101 million).
The Group’s Customer advances and contract liabilities comprise the following:
18. Cash and cash equivalents
Cash and cash equivalents
(cid:3)
31 December
2022
£m
31 December
2021
£m
355
473
Customer cash advances
Material rights given
RRSP related obligations
31 December
2022
£m
31 December
2021
£m
95
34
365
494
92
48
308
448
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.
(cid:3)
Customer cash advances
There are a discrete number of contracts with customers, exclusively in the Aerospace business, where commercial terms lead to customer
advances relating to serial production of components. Where cash is received in advance of performance, this usually addresses non-
standard commercial impacts on the Group such as long lead times on inventory.
Customer cash advances received before the Group delivers product is deferred on the Balance Sheet as an obligation and released to
revenue based on expectations of volumes.
(cid:3)
(cid:3)
(cid:3)
(cid:3)
2
2
0
2
t
r
o
p
e
R
l
a
u
n
n
A
C
L
P
s
e
i
r
t
s
u
d
n
I
e
s
o
r
l
e
M
i
i
F
F
n
n
a
a
n
n
c
c
a
a
i
i
l
l
s
s
t
t
a
a
t
t
e
e
m
m
e
e
n
n
t
t
s
s
2
2
0
2
t
r
o
p
e
R
l
a
u
n
n
A
C
L
P
s
e
i
r
t
s
u
d
n
I
e
s
o
r
l
e
M
194194
Notes to the Financial Statements
Continued
Notes to the Financial Statements
Continued
195
195
19. Trade and other payables continued
Material rights given
Where the Group has agreed contracts with customers that contain any unusual pricing features, these are assessed to determine if
material rights have been transferred to the customer. A material right could occur when there is a material step down in price or if
contracts are modified with lump sum cash receipts offset by a reduction in future pricing.
If a material right has transferred to the customer, any cash received in advance of the Group performing its obligations under a contract is
deferred on the Balance Sheet and released to revenue in the Income Statement based on the terms of the contract.
Material rights given are exclusively in the Aerospace business.
RRSP related obligations
As detailed in the accounting policies (note 2), significant estimates disclosure (note 3), revenue disclosures (note 4) and contract asset
disclosure (note 17), the Group has certain RRSP arrangements in the Aerospace business, with more complex revenue recognition
considerations. Whilst the Group has an unbilled work done contract asset of £450 million (31 December 2021: £305 million), detailed in
note 17, which represents the Group having completed certain of its performance obligations in advance of cash receipt, it also has
contract liabilities.
These include:
• Cash received for a “stand ready” obligation (described in note 4) of £91 million (31 December 2021: £92 million) to contribute to
aftermarket activities of certain RRSPs, which typically results in the provision of services such as technical and other programme
support activities over the whole life of the engine. This will be recognised over time in line with the engine manufacturer’s actual
maintenance, repair and overhaul costs.
• A pricing rebate provision for estimated discounts provided by engine manufacturers on the sale of OE of £63 million (31 December
2021: £85 million).
• Cash received to compensate where the production cost incurred on an RRSP contract is in excess of the Group’s share of the
programme, totalling £8 million (31 December 2021: £nil). This will be released to the Income Statement when the Group has satisfied its
performance obligations.
• Cash received in respect of RRSP contract amendments of £61 million (31 December 2021: £33 million). This will be released over the
life of the contract in accordance with the original terms of the contract.
• A provision for engineering and warranty commitments in respect of RRSP contracts of £27 million (31 December 2021: £26 million).
This is expected to be utilised over the warranty terms of the contracts.
• Other contract liabilities of £115 million (31 December 2021: £72 million).
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
(cid:3)
Bank borrowings – US Dollar loan
Bank borrowings – Sterling loan
Bank borrowings – Euro loan
Other loans and bank overdrafts
Fixed rate obligations
2022 bond
2032 bond
Unamortised finance costs
Non-cash acquisition fair value adjustment
Total interest-bearing loans and borrowings
Current
Non-current
Total
31 December
2022
£m
(cid:3)
31 December
2021
£m
31 December
2022
£m
31 December
2021
£m
(cid:3)
(cid:3)
–
–
–
63
(cid:3)
–
–
63
–
–
63
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
–
–
–
5
450
–
455
–
7
462
(cid:3)
(cid:3)
759
182
363
–
–
130
1,434
(3)
2
1,433
582
30
–
–
–
300
912
(13)
4
903
(cid:3)
(cid:3)
(cid:3)
(cid:3)
31 December
2022
£m
31 December
2021
£m
(cid:3)
759
182
363
63
–
130
1,497
(3)
2
1,496
582
30
–
5
450
300
1,367
(13)
11
1,365
The Group’s committed bank funding includes a multi-currency denominated term loan of £30 million (31 December 2021: £30 million) and
US$788 million (31 December 2021: US$788 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.
(cid:3)
At 31 December 2022, the term loan was fully drawn and £152 million (31 December 2021: £nil), US$130 million (31 December 2021: £nil)
and €410 million (31 December 2021: £nil) were drawn on the multi-currency revolving credit facility. Applying the exchange rates at 31
December 2022, the headroom equated to £2.6 billion (31 December 2021: £3.0 billion). There are also a number of uncommitted
overdraft, guarantee and borrowing facilities made available to the Group.
20. Interest-bearing loans and borrowings continued
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 2022 are
contained in note 25.
The bank margin on the bank facility depends on the Group leverage, and ranges from 0.75% to 2.0% for both the term loan and revolving
credit facility. As at 31 December 2022, the margin was 1.2% (31 December 2021: 0.75%).
The £450 million bond along with associated cross-currency swaps matured in 2022.
During the year, the Group undertook a tender to buy back the 2032 £300 million bond with £170 million repurchased and a cash outflow of
£148 million. The Group has £130 million of the bond remaining which matures in 2032 on its existing terms.
Details of the remaining bond are in the table below:
Maturity date
May 2032
Notional amount
£m
Coupon
% p.a.
130
4.625%
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
(cid:3)
In one to two years
In two to five years
After five years
Effect of financing rates
31 December 2022
(cid:3)
Within one year
In one to two years
In two to five years
After five years
Effect of financing rates
31 December 2021
21. Provisions
At 1 January 2022
(cid:3)
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 2022
Current
Non-current
131
1,358
18
160
(171)
1,496
(cid:3)
501
27
661
383
(207)
1,365
(cid:3)
3
–
–
–
–
3
4
3
–
–
–
7
(cid:3)
1,918
60
15
25
–
2,018
(cid:3)
1,623
45
15
29
–
1,712
Loss-making
contracts
£m
Property
related costs
£m
Environmental
and litigation
£m
Warranty
related costs
£m
Restructuring
£m
Other
£m
167
(40)
–
(15)
(9)
–
(3)
8
108
40
68
108
29
–
2
–
(5)
–
–
2
28
4
24
28
135
(16)
16
(21)
–
(2)
–
7
119
61
58
119
222
(29)
48
(50)
(2)
(3)
–
14
200
98
102
200
81
(121)
130
(11)
–
–
–
4
83
67
16
83
67
(2)
10
(2)
(2)
–
1
1
73
11
62
73
2,052
1,418
33
185
(171)
3,517
2,128
75
676
412
(207)
3,084
Total
£m
701
(208)
206
(99)
(18)
(5)
(2)
36
611
281
330
611
(1) Includes £130 million of adjusting items and £76 million recognised in adjusted operating profit.
(2) Includes £30 million of adjusting items and £69 million recognised in adjusted operating profit.
(3) Disposal of businesses in 2022 relates to the sale of a non-core entity.
(4) Transfer to held for sale relates to the Ergotron business, which was subsequently disposed of during the second half of the year (note 1).
(5) Includes £2 million within finance costs relating to the time value of money and a £4 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).
(cid:3)
(cid:3)
(cid:3)
(cid:3)
2
2
0
2
t
r
o
p
e
R
l
a
u
n
n
A
C
L
P
s
e
i
r
t
s
u
d
n
I
e
s
o
r
l
e
M
i
i
F
F
n
n
a
a
n
n
c
c
a
a
i
i
l
l
s
s
t
t
a
a
t
t
e
e
m
m
e
e
n
n
t
t
s
s
2
2
0
2
t
r
o
p
e
R
l
a
u
n
n
A
C
L
P
s
e
i
r
t
s
u
d
n
I
e
s
o
r
l
e
M
196196
Notes to the Financial Statements
Continued
Notes to the Financial Statements
Continued
197
197
21. Provisions continued
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. At 31 December 2022, the loss-making contracts provision within
Aerospace totalled £62 million (31 December 2021: £98 million), Automotive £39 million (31 December 2021: £54 million) and Powder
Metallurgy £7 million (31 December 2021: £15 million).
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 £40 million (2021: £48 million) has benefited adjusted operating profit with £23 million (2021: £23 million)
recognised in Aerospace, £15 million (2021: £21 million) recognised in Automotive, £2 million (2021: £4 million) recognised in Powder
Metallurgy. In addition, £15 million (2021: £22 million) has been released on a net basis with £11 million (2021: £22 million) shown as an
adjusting item, as described in note 6, as part of the release of fair value items split; £4 million (2021: £4 million) in Aerospace, £nil (2021:
£8 million) in Automotive and £7 million (2021: £10 milion) in Powder Metallurgy.
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
There are environmental provisions amounting to £26 million (31 December 2021: £26 million) relating 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 amounting to £93 million (31 December 2021: £109 million). Liabilities for environmental costs are recognised
when environmental assessments are probable and the associated costs can be reasonably estimated.
Provisions are recorded for product and general liability claims which are probable and for which the cost can be reliably estimated. These
liabilities include an estimate of claims incurred but not yet reported and are based on actuarial valuations using claim data. Due to their
nature, it is not possible to predict precisely when these provisions will be utilised.
The Group has on occasion been required to take legal or other actions to defend itself against proceedings brought by other parties.
Provisions are made for the expected costs associated with such matters, based on past experience of similar items and other known
factors, considering professional advice received. This represents management’s best estimate of the likely outcome. The timing of
utilisation of these provisions is frequently uncertain, reflecting the complexity of issues and the outcome of various court proceedings and
negotiations. Contractual and other provisions represent management’s best estimate of the cost of settling future obligations and reflect
management’s assessment of the likely settlement method, which may change over time. However, no provision is made for proceedings
which have been, or might be, brought by other parties against Group companies unless management, considering professional advice
received, assess that it is more likely than not that such proceedings may be successful.
Warranty related costs
Provisions for the expected cost of warranty obligations under local sale of goods legislation are recognised at the date of sale of the
relevant products and subsequently updated for changes in estimates as necessary. The provision for warranty related costs represents
the best estimate of the expenditure required to settle the Group’s obligations, based on past experience, recent claims and current
estimates of costs relating to specific claims. Warranty terms are, on average, between one and five years.
Restructuring
Restructuring provisions relate to committed costs in respect of restructuring programmes, 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 four years.
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.
i
i
F
F
n
n
a
a
n
n
c
c
a
a
i
i
(cid:3)
At 1 January 2021
(cid:3)
Credit to income
Charge to equity
Disposal of businesses(1)
Transfer to held for sale(2)
Exchange adjustments
Movement in set off of assets and liabilities(3)
At 31 December 2021
Credit to income
Credit to equity
Disposal of businesses(1)
Acquisition of businesses(4)
Transfer to held for sale(2)
Exchange adjustments
Movement in set off of assets and liabilities(3)
At 31 December 2022
(cid:3)
(cid:3)
Deferred tax
assets
Tax losses and
other assets
£m
180
149
(90)
(53)
(6)
(18)
88
250
35
4
(10)
–
(9)
44
59
373
(cid:3)
Deferred tax liabilities
Accelerated
capital allowances
and other liabilities
£m
Deferred tax on
intangible assets
£m
(cid:3)
Total deferred
tax liabilities
£m
(cid:3)
Total net
deferred tax
£m
l
l
s
s
t
t
a
a
t
t
e
e
m
m
e
e
n
n
t
t
s
s
(167)
41
–
–
–
(3)
2
(127)
3
–
–
(1)
–
(18)
(7)
(150)
(565)
48
–
78
24
18
(90)
(487)
111
–
–
–
30
(71)
(52)
(469)
(cid:3)
(732)
89
–
78
24
15
(88)
(614)
114
–
–
(1)
30
(89)
(59)
(619)
(cid:3)
(552)
238
(90)
25
18
(3)
–
(364)
149
4
(10)
(1)
21
(45)
–
(246)
(1) Disposal of businesses in 2022 relates to the sale of a non-core entity. 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 2022 relates to the Ergotron business (2021: Nortek Control business), which was subsequently disposed of during the second half of the year (note 1).
(3) Set off of deferred tax assets and liabilities in accordance with IAS 12 within territories with a right of set off.
(4) Acquisition of businesses in 2022 relates to Permanova Lasersystem AB within the Aerospace segment (note 1).
As at 31 December 2022, the Group had gross unused corporate income tax losses of £2,176 million (31 December 2021: £1,841 million)
available for offset against future profits. A deferred tax asset of £477 million (31 December 2021: £396 million) has been recognised in
respect of £1,938 million (31 December 2021: £1,683 million) of these gross losses. The movement in deferred tax assets relating to tax
losses arises primarily through the Income Statement. There is also a credit of £6 million (2021: £nil) included within equity. 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 £47 million (31
December 2021: £50 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 £14 million (31 December 2021: £33 million) and
on other temporary differences at £318 million (31 December 2021: £313 million). The gross deferred tax assets therefore amount to £856
million (31 December 2021: £792 million).
Deferred tax liabilities have been recognised on intangible assets at £923 million (31 December 2021: £993 million) and accelerated capital
allowances and other temporary differences at £179 million (31 December 2021: £163 million). The gross deferred tax liabilities therefore
amount to £1,102 million (31 December 2021: £1,156 million).
There are no material unrecognised deferred tax assets at 31 December 2022 (31 December 2021: £nil), other than the losses referred to
above.
Where appropriate, provisions have been discounted using discount rates between 0% and 14% (31 December 2021: 0% and 11%)
depending on the territory in which the provision resides and the length of its expected utilisation.
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 £62 million (31 December 2021: £53 million) would be payable.
2
2
0
2
t
r
o
p
e
R
l
a
u
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n
A
C
L
P
s
e
i
r
t
s
u
d
n
I
e
s
o
r
l
e
M
(cid:3)
(cid:3)
23. Share-based payments
2020 Employee Share Plan
During the year, the Group recognised a charge of £15 million (2021: £19 million) in respect of the 2020 Employee Share Plan, inclusive of
a £1 million credit in respect of related national insurance (2021: charge of £3 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 125.
The estimated value of the 2020 Employee Share Plan at 31 December 2022 if settled at that date was £nil (31 December 2021: £nil).
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 £22 million (31 December 2021: £51 million). The projected value is impacted by future acquisition and disposal assumptions.
(cid:3)
(cid:3)
2
2
0
2
t
r
o
p
e
R
l
a
u
n
n
A
C
L
P
s
e
i
r
t
s
u
d
n
I
e
s
o
r
l
e
M
198198
Notes to the Financial Statements
Continued
Notes to the Financial Statements
Continued
199
199
23. Share-based payments continued
The annual IFRS 2 charge 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:
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 (2021: £68 million) represent contributions
payable to these plans by the Group at rates specified in the rules of the plans.
Defined benefit plans
The Group sponsors defined benefit plans for qualifying employees of certain subsidiaries. The funded defined benefit plans are
administered by separate funds that are legally separated from the Group. The Trustees of the funds are required by law to act in the
interest of the fund and of all relevant stakeholders in the plans. The Trustees of the pension funds are responsible for the investment
policy with regard to the assets of the fund.
The most significant defined benefit pension plans in the Group at 31 December 2022 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
43% and 57% respectively as at 31 December 2022. 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 5 April 2022, updated to 31 December 2022 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 2022, updated to 31 December 2022 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 prior 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
ceased as a result and the Group now contributes £30 million per year into the GKN Group Pension Schemes (Numbers 1 – 4).
The Group contributed £59 million (2021: £128 million) to defined benefit pension plans and post-employment plans in the year ended 31
December 2022. The Group expects to contribute £51 million in 2023.
Actuarial assumptions
The major assumptions used by the actuaries in calculating the Group’s pension liabilities are as set out below:
Rate of increase
of pensions in payment
% per annum
Discount rate
%
Price inflation
(RPI/CPI)
%
(cid:3)
(cid:3)
(cid:3)
2.7
n/a
2.6
(cid:3)
2.7
n/a
2.1
(cid:3)
4.8
5.0
3.7
(cid:3)
2.0
2.7
1.1
3.2/2.7
n/a
2.6/2.6
3.2/2.7
n/a
2.1/2.1
31 December 2022
(cid:3)
GKN Group Pension Schemes (Numbers 1 – 4)
GKN US plans
GKN Europe plans
31 December 2021
GKN Group Pension Schemes (Numbers 1 – 4)
GKN US plans
GKN Europe plans
(cid:3)
(cid:3)
2
2
0
2
t
r
o
p
e
R
l
a
u
n
n
A
C
L
P
s
e
i
r
t
s
u
d
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I
e
s
o
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e
M
24. Retirement benefit obligations continued
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 2021 Continuous Mortality Investigation (“CMI”) core projection model (SK = 7.5,
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 6.1% 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 age 65 at the year end and the future life expectancy of individuals aged
65 in 20 years’ time.
Male today
(cid:3)
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
21.7
23.6
22.6
24.8
19.2
21.1
20.7
22.6
20.6
24.0
23.4
26.3
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
(cid:3)
Fair value of plan assets
Funded status
Present value of unfunded defined benefit obligations
Net liabilities
Analysed as:
Retirement benefit surplus(1)
Retirement benefit obligations
Net liabilities
31 December
2022
£m
31 December
2021
£m
(1,931)
1,941
(2,848)
3,010
10
(498)
(488)
93
(581)
(488)
162
(623)
(461)
184
(645)
(461)
(1) Retirement benefit surplus at 31 December 2021 was previously shown within other receivables.
The net retirement benefit obligation in continuing businesses is attributable to Aerospace: liability of £27 million (31 December 2021: asset
of £67 million), Automotive: liability of £427 million (31 December 2021: £484 million), Powder Metallurgy: liability of £34 million (31
December 2021: £37 million) and Corporate: liability of £nil (31 December 2021: liability of £7 million).
The plan assets and liabilities at 31 December 2022 were as follows:
(cid:3)
Plan assets
Plan liabilities
Net assets/(liabilities)
UK
Plans(1)
£m
1,779
(1,755)
24
US
Plans
£m
120
(202)
(82)
European
Plans
£m
20
(443)
(423)
Other
Plans
£m
22
(29)
(7)
Total
£m
1,941
(2,429)
(488)
(1) Includes a liability in respect of the GKN post-employment medical plans of £6 million and a net surplus in respect of the GKN Group Pension Scheme (Numbers 1 – 4) of £30 million.
(cid:3)
(cid:3)
i
i
F
F
n
n
a
a
n
n
c
c
a
a
i
i
l
l
s
s
t
t
a
a
t
t
e
e
m
m
e
e
n
n
t
t
s
s
2
2
0
2
t
r
o
p
e
R
l
a
u
n
n
A
C
L
P
s
e
i
r
t
s
u
d
n
I
e
s
o
r
l
e
M
200200
Notes to the Financial Statements
Continued
Notes to the Financial Statements
Continued
201
201
24. Retirement benefit obligations continued
The major categories and fair values of plan assets at the end of the year for each category were as follows:
24. Retirement benefit obligations continued
The actual return on plan assets was a loss of £942 million (2021: gain of £123 million).
Equities
(cid:3)
Government bonds
Corporate bonds
Property
Insurance contracts
Multi-strategy/Diversified growth funds
Private equity
Other(1)
Total
31 December
2022
£m
31 December
2021
£m
85
722
196
18
28
354
80
458
1,941
141
1,420
459
71
38
424
209
248
3,010
(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 asse t 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
(cid:3)
Current service cost
Interest cost on obligations
Remeasurement gains – demographic
Remeasurement gains – financial
Remeasurement losses/(gains) – experience
Benefits paid out of plan assets
Benefits paid out of Group assets for unfunded plans
Settlements(1)
Disposal of businesses(2)
Exchange adjustments
At 31 December
Year ended
31 December
2022
£m
Year ended
31 December
2021
£m
3,471
9
66
(1)
(1,072)
102
(134)
(24)
(44)
–
56
2,429
4,613
8
59
(14)
(162)
(49)
(186)
(16)
(366)
(379)
(37)
3,471
(1) During 2022, a settlement gain of £2 million was recognised relating to the buy-out of certain US pension schemes and is shown as an adjusting item (note 6). During 2021, a settlement
loss of £6 million was recognised relating to the buy-out of the GKN UK 2016 pension plan and was shown 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 defined benefit plan liabilities were 15% (31 December 2021: 23%) in respect of active plan participants, 25% (31 December 2021:
27%) in respect of deferred plan participants and 60% (31 December 2021: 50%) in respect of pensioners.
The weighted average duration of the defined benefit plan liabilities at 31 December 2022 was 12.8 years (31 December 2021: 17.7
years).
Movements in the fair value of plan assets during the year:
At 1 January
(cid:3)
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
2022
£m
Year ended
31 December
2021
£m
3,010
61
(1,003)
35
(134)
(8)
(42)
–
22
1,941
3,775
51
72
112
(186)
(7)
(372)
(432)
(3)
3,010
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
– settlement (gains)/losses(1)
– plan administrative costs(2)
Included within net finance costs:
– interest cost on defined benefit obligations
– interest income on plan assets
Discontinued operations
Included within net finance costs:
– interest cost on defined benefit obligations
– interest income on plan assets
Year ended
31 December
2022
£m
Year ended
31 December
2021
£m
9
(2)
8
66
(61)
8
6
7
56
(48)
Year ended
31 December
2022
£m
Year ended
31 December
2021
£m
–
–
3
(3)
(1) During 2022, a settlement gain of £2 million was recognised relating to the buy-out of certain US pension schemes and is shown as an adjusting item (note 6). During 2021, a settlement
loss of £6 million was recognised relating to the buy-out of the GKN UK 2016 pension plan and was shown as an adjusting item (note 6).
(2) Includes £1 million of costs relating to the buy-out of the GKN UK 2016 Pension Plan in 2021. This was treated as an adjusting item (note 6).
Statement of Comprehensive Income disclosures
Amounts recognised in the Consolidated Statement of Comprehensive Income in respect of these defined benefit plans were as follows:
Return on plan assets, excluding interest income
(cid:3)
Remeasurement gains arising from changes in demographic assumptions
Remeasurement gains arising from changes in financial assumptions
Remeasurement (losses)/gains arising from experience adjustments
Net remeasurement (loss)/gain on retirement benefit obligations
Year ended
31 December
2022
£m
Year ended
31 December
2021
£m
(1,003)
1
1,072
(102)
(32)
72
14
162
49
297
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
(cid:3)
Inflation assumption(1)
Assumed life expectancy at age 65 (rate of mortality)
Change in assumption
Increase by 0.5 ppts
Decrease by 0.5 ppts
Increase by 0.5 ppts
Decrease by 0.5 ppts
Increase by 1 year
Decrease by 1 year
Decrease/(increase)
to plan liabilities
£m
Increase/(decrease)
to profit before tax
£m
142
(156)
(90)
91
(99)
100
(5)
5
n/a
n/a
n/a
n/a
(1) The inflation sensitivity encompasses the impact on pension increases, where applicable.
(cid:3)
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 2022 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.
(1) During 2022, a settlement gain of £2 million was recognised relating to the buy-out of certain US pension schemes and is shown as an adjusting item (note 6). During 2021, a settlement
loss of £6 million was recognised relating to the buy-out of the GKN UK 2016 pension plan and was shown 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).
(cid:3)
(cid:3)
(cid:3)
(cid:3)
2
2
0
2
t
r
o
p
e
R
l
a
u
n
n
A
C
L
P
s
e
i
r
t
s
u
d
n
I
e
s
o
r
l
e
M
i
i
F
F
n
n
a
a
n
n
c
c
a
a
i
i
l
l
s
s
t
t
a
a
t
t
e
e
m
m
e
e
n
n
t
t
s
s
2
2
0
2
t
r
o
p
e
R
l
a
u
n
n
A
C
L
P
s
e
i
r
t
s
u
d
n
I
e
s
o
r
l
e
M
202202
Notes to the Financial Statements
Continued
Notes to the Financial Statements
Continued
203
203
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 2022 and 31 December 2021:
Aerospace
£m
Automotive
£m
Powder
Metallurgy
£m
Other
Industrial
£m
Corporate
£m
Discontinued
Operations
£m
(cid:3)
(cid:3)
31 December 2022
(cid:3)
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
Embedded derivatives(1)
31 December 2021 (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)
(cid:3)
(cid:3)
–
458
52
–
12
–
(59)
(199)
(758)
–
–
(6)
–
393
77
–
11
–
(55)
(203)
(585)
–
–
–
(6)
(cid:3)
(cid:3)
–
365
–
1
–
–
–
(100)
(981)
(1)
–
–
–
274
–
–
–
–
–
(105)
(798)
(2)
–
–
–
(cid:3)
(cid:3)
–
145
–
–
–
–
–
(59)
(168)
–
–
–
–
123
–
–
–
–
–
(58)
(165)
(1)
–
–
–
(cid:3)
(cid:3)
–
1
10
–
–
–
–
–
(5)
–
–
–
–
1
10
–
–
–
–
–
–
–
–
–
–
(cid:3)
(cid:3)
355
–
–
61
–
(1,496)
–
(8)
(47)
(217)
(3)
–
473
–
–
58
–
(1,365)
–
(9)
(57)
(113)
(7)
(69)
–
(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).
–
–
–
–
–
–
–
–
–
–
–
–
(cid:3)
(cid:3)
–
33
–
1
–
–
–
(1)
(52)
–
–
–
–
(cid:3)
Total
£m
355
969
62
62
12
(1,496)
(59)
(366)
(1,959)
(218)
(3)
(6)
473
824
87
59
11
(1,365)
(55)
(376)
(1,657)
(116)
(7)
(69)
(6)
Reconciliation of liabilities arising from financing activities
Liabilities arising from financing activities, as defined by IAS 7, totalled £1,805 million at 31 December 2021 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. During
the year a cash outflow in those liabilities totalled £127 million as follows: net repayment of external debt and cross-currency swaps
associated with debt of £75 million (note 27) and repayment of principal on lease obligations of £52 million (note 28). There is also an
increase to liabilities arising from financing activities relating to non-cash items totalling £121 million comprising; an increase in external
debt and cross-currency swaps associated with debt of £79 million due to changes in foreign exchange rates and other non-cash
movements and an increase in respect of lease obligations of £42 million. As at 31 December 2022, liabilities arising from financing
activities, as defined by IAS 7, totalled £1,799 million comprising; external debt of £1,433 million (excluding £63 million of bank overdrafts),
cross currency swaps of £nil and lease obligations of £366 million.
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(cid:3)
(cid:3)
25. Financial instruments and risk management continued
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.
Fair values
As at 31 December 2022, the £130 million (31 December 2021: £300 million) bond maturing in 2032 had a carrying value of £132 million
(31 December 2021: £304 million) and a fair value of £110 million (31 December 2021: £321 million). At 31 December 2021, the £450
million bond which matured in 2022 had a carrying value of £457 million and a fair value of £462 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
355
74
429
(1,496)
(227)
(1,723)
–
–
–
–
–
–
355
74
429
(1,496)
(227)
(1,723)
(71)
(62)
(133)
(81)
214
133
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
473
70
543
(1,365)
(198)
(1,563)
–
–
–
–
–
–
473
70
543
(1,365)
(198)
(1,563)
(5)
(58)
(63)
(127)
190
Net amount
£m
284
12
296
(1,577)
(13)
(1,590)
Net amount
£m
468
12
480
(1,492)
(8)
63
(1,500)
31 December 2022
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
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
(cid:3)
(cid:3)
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204204
Notes to the Financial Statements
Continued
Notes to the Financial Statements
Continued
205
205
25. Financial instruments and risk management continued
Capital risk
The Group manages its capital to ensure that entities in the Group will be able to continue as a going concern.
25. Financial instruments and risk management continued
The foreign exchange movement on the local borrowings, which is recorded in currency translation on net investments within Other
Comprehensive Income, was a loss of £60 million (2021: gain of £13 million).
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The capital structure of the Group as at 31 December 2022 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
The Group’s committed bank facilities include a multi-currency denominated term loan of £30 million and US$788 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 facil ity 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 2022, the term loan was fully drawn and there were drawings of US$130 million, £152 million and €410 million on the
multi-currency revolving credit facility. Applying the exchange rates at 31 December 2022, the headroom equated to £2.6 billion (31
December 2021: £3.0 billion).
Cash, deposits and marketable securities amounted to £355 million at 31 December 2022 (31 December 2021: £473 million) and are offset
to arrive at the Group net debt position of £1,139 million (31 December 2021: £950 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.
At 31 December 2021, Euro borrowings included 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. The foreign exchange movement on these cross-currency swaps,
which was recorded in derivative gains/(losses) on hedge relationships within Other Comprehensive Income, was a gain of £19 million
(2021: £15 million) and net cash receipts in the year totalled £18 million (2021: £7 million). There were no cross-currency swaps
outstanding at 31 December 2022.
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The foreign exchange movement on the GKN cross-currency swaps, which is recorded in derivative gains/(losses) on hedge relationships,
was a loss of £62 million (2021: gain of £12 million).
Finance cost risk management
The bank margin on the bank facility depends on the Group leverage. 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 2022,
the margin was 1.2% (31 December 2021: 0.75%) on both the term loan and revolving credit facility.
The policy of the Board is to fix up to approximately 70% of the interest rate exposure of the Group.
The interest rate swaps are designated as cash flow hedges and were highly effective throughout 2022. The fair value of the contracts as
at 31 December 2022, was a net liability of £3 million (31 December 2021: £7 million). The movement of £4 million for the year ended 31
December 2022 (2021: charge of £80 million) comprised of a credit of £4 million (2021: £19 million) booked to derivatives gains/(losses) on
hedge relationships in the year within Other Comprehensive Income, a £nil cash outflow (2021: £47 million) from cancelling interest rate
swaps and a £nil (2021: £14 million) reduction in the interest accrual. During the year, a balance of £2 million retained in the cash flow
hedge reserve following the cancellation of interest rate swaps in 2021 was recycled to finance costs in the Income Statement.
The net debt to adjusted EBITDA covenant test level is 3.75x at 31 December 2022 and 3.5x at 30 June 2023 onwards. At 31 December
2022, the Group net debt leverage was 1.4x.
During the year ended 31 December 2022, 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 (2021: £nil).
The interest cover bank covenant test is set at 4.0x at 31 December 2022 onwards. At 31 December 2022, the Group interest cover was
11.6x, affording comfortable headroom.
Bonds
Capital market borrowings as at 31 December 2022, inherited as part of the GKN acquisition, consist of a £130 million bond maturing May
2032 following the tender during the year, see note 20 for further details. The £450 million bond matured in September 2022. Details of the
bond outstanding at 31 December 2022 is shown in note 20.
Working capital
The Group has a small number of uncommitted working capital programmes that provide favourable financing terms on eligible customer
receipts and competitive financing terms to suppliers on eligible supplier payments.
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 2022, the drawings on these facilities were
£325 million (31 December 2021: £310 million), as a result there was a net cash increase in the year of £15 million (2021: reduction of £4
million). At 31 December 2022, the drawings within Aerospace were £138 million (31 December 2021: £114 million), Automotive £178
million (31 December 2021: £187 million) and Powder Metallurgy £9 million (31 December 2021: £9 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 £94 million (31 December 2021: £60 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 2022, total facilities were £328 million (31 December 2021: £321 million) with drawings of £200 million (31 December 2021:
£102 million). The arrangements do not change the timing of the Group’s cash outflows. At 31 December 2022, the drawings within
Aerospace were £75 million (31 December 2021: £50 million) and Automotive £125 million (31 December 2021: £52 million).
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:
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Local borrowing:
(cid:3)
US Dollar
Euro
GKN cross-currency swaps:
US Dollar
Euro
(cid:3)
(cid:3)
31 December
2022
£m
31 December
2021
£m
759
363
–
–
457
126
276
239
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
(cid:3)
US Dollar
Euro
Year ended
31 December
2022
£m
Year ended
31 December
2021
£m
(2)
(5)
(2)
–
(2)
(1)
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 £nil (31 December 2021: £2 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. 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. For GKN Aerospace, the Group hedges beyond two years due to the
longer term nature of some of its contracts, with the percentage of expected exposure hedged reducing for each subsequent year. 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.
(cid:3)
(cid:3)
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206206
Notes to the Financial Statements
Continued
Notes to the Financial Statements
Continued
207
207
25. Financial instruments and risk management continued
As at 31 December 2022, 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 2022 of £156 million (31 December 2021: £57 million). There were no contracts where hedge
accounting was applied as at 31 December 2022 (31 December 2021: fair value asset of £1 million).
The change in fair value of foreign exchange forward contracts recognised in derivative gains/(losses) on hedging relationships within
Other Comprehensive Income was £nil (2021: credit of £8 million) and a credit of £1 million (2021: £2 million) was reclassified to the
Income Statement.
In respect of the cross-currency swaps designated as net investment hedges, for the year ended 31 December 2022, a credit of £5 million
(2021: £4 million) was booked through the Income Statement in finance costs, of which a credit of £3 million (2021: £3 million) was treated
as an adjusting item (note 6). The cross-currency swaps matured in the year and were designated in a net investment hedge accounting
relationship against US Dollar and Euro net assets of certain subsidiaries. The hedged risk was the spot rate, which represented the
significant component of the movement and therefore was recorded in the foreign currency translation reserve (note 26).
The following table shows the maturity profile of undiscounted contracted gross cash outflows of derivative financial liabilities used to
manage currency risk, being both the cross-currency swaps above and foreign exchange forward contracts used to manage transaction
exchange rate risk:
Year ended 31 December 2022
(cid:3)
Foreign exchange forward contracts
Year ended 31 December 2021
Foreign exchange forward contracts
Cross-currency swaps
0-1 year
£m
1-2 years
£m
2-5 years
£m
5+ years
£m
Total
£m
(cid:3)
(cid:3)
855
(cid:3)
618
(cid:3)
834
(cid:3)
19
(cid:3)
2,326
1,051
666
(cid:3)
(cid:3)
479
–
(cid:3)
715
–
(cid:3)
28
–
2,273
666
Foreign currency sensitivity analysis
Currency risks are defined by IFRS 7: Financial instruments: Disclosures as the risk that the fair value or future cash flows of a financial
asset or liability will fluctuate because of changes in foreign exchange rates.
The following table details the transactional impact of hypothetical changes in foreign exchange rates on financial assets and liabilities at
the balance sheet date, illustrating the (decrease)/increase in Group operating profit caused by a 10% 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
(cid:3)
Euro
Year ended
31 December
2022
£m
Year ended
31 December
2021
£m
(11)
(3)
2
7
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
(cid:3)
Euro
31 December
2022
£m
31 December
2021
£m
(10)
(7)
(5)
(10)
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 £77 million (2021: £74 million) and for the Euro, a decrease of £36 million (2021: £37 million).
However, there would be no overall effect on equity because there would be an offset in the currency translation of the foreign operation.
(cid:3)
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.
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:
(cid:3)
Hedging Instruments
Pay fixed, receive floating interest rate swaps
Within one year
In one to two years
Total
Pay fixed, receive fixed cross-currency swaps
Within one year
In one to two years
Total
Average fixed rate
Notional principal
31 December
2022
%
31 December
2021
%
2.24%
–
2.24%
2.24%
(cid:3)
(cid:3)
–
–
4.85%
–
(cid:3)
(cid:3)
31 December
2022
£m
31 December
2021
£m
260
–
–
–
246
246
515
–
Fair value of assets/
(liabilities)
31 December
2022
£m
31 December
2021
£m
(3)
–
(3)
–
–
–
–
(7)
(7)
(68)
–
(68)
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.
In response to the announcements, the Group has Sterling borrowings under SONIA and US Dollar borrowings continuing 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
$315 million
Interest rate 0% caps, pay Euro fixed annually,
receive 1 month EURIBOR
January 2023
€220 million
US Dollar floating rate
debt linked to US LIBOR
Euro floating rate debt
linked to EURIBOR
The Group will continue to apply the amendments to IFRS 9 until the uncertainty arising from the interest rate benchmark reforms with
respect to the timing and the amount of the underlying cash flows that the Group is exposed to ends. The Group has assumed that this
uncertainty will not end until the Group’s contracts that reference IBORs are amended to specify the date on which the interest rate
benchmark will be replaced, the cash flows of the alternative benchmark rate and the relevant spread adjustment. This will, in part, be
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
(cid:3)
Current assets
Current liabilities
Non-current liabilities
31 December
2022
£m
31 December
2021
£m
36
38
(86)
(141)
47
23
(119)
(79)
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.
(cid:3)
(cid:3)
(cid:3)
(cid:3)
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u
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n
A
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P
s
e
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t
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e
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M
208208
Notes to the Financial Statements
Continued
25. Financial instruments and risk management continued
The following table sets out details of the Group’s material hedged items at the balance sheet date where hedge accounting is applied:
(cid:3)
Hedged items
(cid:3)
Floating rate borrowings – interest risk
Net assets of designated investments
Change in fair value for
calculating ineffectiveness
31 December
2022
£m
31 December
2021
£m
(cid:3)
(cid:3)
Balance in translation
and hedging reserve
for continuing hedges
Balance in translation
and hedging reserve
for discontinued hedges
31 December
2022
£m
31 December
2021
£m
31 December
2022
£m
31 December
2021
£m
(4)
–
(66)
6
(cid:3)
–
–
(cid:3)
(cid:3)
4
53
(cid:3)
–
116
2
–
There is no balance held in cash flow hedge reserve from hedging relationships for which hedge accounting is no longer applie d. 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 dis continued hedge,
reducing to £nil by 31 December 2022 (31 December 2021: £2 million).
26. Issued share capital and reserves
Share Capital
Allotted, called-up and fully paid
4,054,425,961 (31 December 2021: 4,372,429,473) Ordinary Shares of 160/21 pence each(1)
31 December
2022
£m
31 December
2021
£m
(cid:3)
309
(cid:3)
309
333
333
(cid:3)
(1) During the year, a share buyback programme occurred where 318,003,512 shares were repurchased and subsequently cancelled (note 1).
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 Statements
Continued
26. Issued share capital and reserves continued
Cost of hedge
reserve
£m
Cash flow
hedge reserve
£m
Foreign
currency
translation
reserve
£m
Translation
and hedging
reserve
£m
At 1 January 2021
(cid:3)
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
Movements within other comprehensive income/(expense):
Retranslation of net assets
Associated deferred tax
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 2022
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(8)
–
–
–
–
–
–
–
(2)
(10)
–
–
–
–
–
–
–
–
10
–
(63)
41
(30)
(cid:3)
(cid:3)
–
–
–
–
–
27
(19)
46
(9)
–
–
–
–
–
–
4
(1)
6
–
(cid:3)
(cid:3)
(101)
13
–
27
–
–
–
115
95
665
6
(60)
–
(43)
–
–
–
(25)
638
(101)
13
–
27
–
27
(19)
159
76
665
6
(60)
–
(43)
–
4
(1)
(9)
638
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.
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 a credit of £11 million (2021: charge of £113 million) following the
disposal of businesses.
2
2
0
2
t
r
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a
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(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
209
209
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a
a
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c
c
a
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s
s
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t
a
a
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e
m
m
e
e
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t
t
s
s
2
2
0
2
t
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210210
Notes to the Financial Statements
Continued
27. Cash flow statement
Reconciliation of operating loss to net cash from operating activities generated by
(cid:3)
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
2022
£m
Notes
Restated(1)
Year ended
31 December
2021
£m
(cid:3)
(cid:3)
6
6
15
(236)
716
(cid:3)
480
356
50
(78)
(195)
(59)
(119)
(268)
209
(80)
(87)
(12)
(10)
187
(493)
810
317
370
51
(66)
(233)
(88)
(14)
89
–
(57)
(128)
(14)
(5)
222
(1) Restated for discontinued operations (note 1).
(2) The year ended 31 December 2021 includes £34 million paid to the GKN UK Pension Schemes following the disposal of Nortek Air Management, satisfying the funding commitment made
(cid:3)
on the acquisition of GKN.
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
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
2022
£m
31 December
2021
£m
355
(63)
292
473
(5)
468
Year ended
31 December
2022
£m
Restated(1)
Year ended
31 December
2021
£m
26
–
–
(9)
17
(1)
–
–
(1)
(1)
(1)
133
(40)
(2)
(50)
41
(14)
2
(1)
(13)
(8)
(8)
(1) Restated for discontinued operations (note 1).
(2) The year ended 31 December 2021 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.
2
2
0
2
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(cid:3)
(cid:3)
(cid:3)
(cid:3)
Notes to the Financial Statements
Continued
211
211
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
(cid:3)
Interest-bearing loans and borrowings – due after one year
External debt
Less:
Cash and cash equivalents
Adjustments:
(cid:3)
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
2022
£m
31 December
2021
£m
(63)
(1,433)
(1,496)
355
(1,141)
–
2
(1,139)
(462)
(903)
(1,365)
473
(892)
(69)
11
(950)
External debt (excluding bank overdrafts)
(cid:3)
Cross-currency swaps
Non-cash acquisition fair value adjustments
Cash and cash equivalents, net of bank
(cid:3)
overdrafts
Net debt
28. Commitments
Amounts payable under lease obligations:
Minimum lease payments
Amounts payable:
Within one year
After one year but within five years
Over five years
Less: future finance charges
Present value of lease obligations
Analysed as:
Amounts due for settlement within one year
Amounts due for settlement after one year
Present value of lease obligations
At
31 December
2021
£m
(1,360)
(69)
11
(1,418)
468
(950)
Cash flow
£m
Acquisitions
and disposals
£m
Other non-cash
movements
£m
Effect of foreign
exchange
£m
(34)
109
–
75
(664)
(589)
–
–
–
–
461
461
21
3
(9)
15
–
15
(60)
(43)
–
(103)
27
(76)
At
31 December
2022
£m
(1,433)
–
2
(1,431)
292
(1,139)
31 December
2022
£m
31 December
2021
£m
69
166
209
(78)
366
60
306
366
64
166
206
(60)
376
57
319
376
It is the Group’s policy to lease certain of its property, plant and equipment. The average lease term is 10 years. Interest rates are fixed at
the contract date. All leases are on a fixed repayment basis and no arrangements have been entered into for contingent rental payments.
The Group’s obligations under lease arrangements are secured by the lessors’ rights over the leased assets.
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 £171 million (31 December 2021: £242 million).
i
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F
n
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a
a
n
n
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a
a
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t
a
a
t
t
e
e
m
m
e
e
n
n
t
t
s
s
2
2
0
2
t
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o
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R
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212212
Notes to the Financial Statements
Continued
28. Commitments continued
The table below shows the key components in the movement in lease obligations.
(cid:3)
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
2022
£m
Year ended
31 December
2021
£m
376
38
9
(1)
(52)
(12)
(5)
(3)
(7)
23
366
555
45
16
3
(61)
(16)
(3)
(138)
(13)
(12)
376
Notes to the Financial Statements
Continued
31. Post balance sheet events
Since the balance sheet date, the Board has approved the demerger of the Automotive, Powder Metallurgy and Hydrogen businesses (“the
Demerger”). Whilst the Demerger remains subject to shareholder consent, the costs and expenses that are directly attributable to the
Demerger are estimated to amount to £70 million. Approximately 75% of this is contingent on the Demerger taking place.
On 9 February 2023, the Trustees of GKN Group Pension Scheme 4 (“the Scheme”), sponsored by the Aerospace division, signed a
contract to fully secure benefits for all members of the Scheme for a cash settlement of approximately £45 million. At 31 December 2022,
the Scheme had total liabilities of £433 million (31 December 2021: £628 million) and an accounting surplus of £52 million (31 December
2021: £87 million).
(1) Disposal of businesses in 2022 relates to the disposal of a non-core entity. 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 2022 relates to the Ergotron business (2021: Nortek Control business), which was subsequently disposed of during the second half of the year (note 1).
Capital commitments
At 31 December 2022, there were commitments of £127 million (31 December 2021: £115 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 2022
totalled £17 million (2021: £21 million). Purchases by subsidiaries from equity accounted investments in the year ended 31 December 2022
totalled £8 million (2021: £10 million). At 31 December 2022, amounts receivable from equity accounted investments totalled £3 million (31
December 2021: £2 million) and amounts payable to equity accounted investments totalled £2 million (31 December 2021: £2 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 122 and 131.
Short-term employee benefits
(cid:3)
Share-based payments
(cid:3)
Year ended
31 December
2022
£m
Year ended
31 December
2021
£m
5
10
15
5
10
15
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.
(cid:3)
(cid:3)
(cid:3)
(cid:3)
2
2
0
2
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213
213
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a
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c
a
a
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t
a
a
t
t
e
e
m
m
e
e
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n
t
t
s
s
2
2
0
2
t
r
o
p
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R
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214
Company Balance Sheet for Melrose Industries PLC
Company Balance Sheet for Melrose Industries PLC
Company Statement of Changes in Equity
Company Statement of Changes in Equity
215
215
Fixed assets
(cid:3)
Investment in subsidiaries
Debtors:
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
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
31 December
2022
£m
31 December
2021
£m
Notes
3
(cid:3)
4
5
6
7
10,591
(cid:3)
10,585
487
477
(3,443)
(2,956)
7,635
(2)
7,633
(cid:3)
309
3,271
109
753
3,191
7,633
(2,842)
(2,365)
8,220
(3)
8,217
333
3,271
109
729
3,775
8,217
The Company reported a loss for the financial year ended 31 December 2022 of £19 million (2021: profit of £8 million).
(cid:3)
The financial statements were approved by the Board of Directors on 2 March 2023 and were signed on its behalf by:
Geoffrey Martin
Group Finance Director
2 March 2023
Registered number: 09800044
Simon Peckham
Chief Executive
2 March 2023
2
2
0
2
t
r
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a
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n
A
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P
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e
i
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t
s
u
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I
e
s
o
r
l
e
M
(cid:3)
(cid:3)
At 1 January 2021
(cid:3)
Profit for the year (note 2)
Total comprehensive income
Capital reduction(1)
Return of capital(1)
Dividends paid
Equity-settled share-based payments
At 31 December 2021
Loss for the year (note 2)
Total comprehensive loss
Purchase of own shares(1)
Dividends paid
Equity-settled share-based payments
At 31 December 2022
(1) Further information is set out in note 1.
Issued share
capital
£m
Share premium
account
£m
Merger reserve
£m
Capital redemption
reserve
£m
Retained
earnings
£m
Shareholders’
funds
£m
i
i
F
F
n
n
a
a
n
n
c
c
a
a
i
i
333
8,138
109
–
–
(4,138)
(729)
–
–
3,271
–
–
–
–
–
–
–
–
–
–
–
109
–
–
–
–
–
–
–
–
–
–
–
333
–
–
(24)
–
–
309
l
l
s
s
t
t
a
a
t
t
e
e
m
m
e
e
n
n
t
t
s
s
–
–
–
–
729
–
–
729
–
–
24
–
–
411
8
8
4,138
(729)
(69)
16
3,775
(19)
(19)
(504)
(77)
16
8,991
8
8
–
(729)
(69)
16
8,217
(19)
(19)
(504)
(77)
16
3,271
109
753
3,191
7,633
Refer to the Section 172 statement in the Strategic Report on pages 49 to 54 for further details on the Company’s Distribution Policy.
(cid:3)
(cid:3)
(cid:3)
2
2
0
2
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216
Notes to the Company Balance Sheet
Notes to the Company Balance Sheet
217
217
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 2 to 93.
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.
On 9 June 2022, the Group commenced a £500 million share buyback programme, which completed on 1 August 2022 with 318,003,512
shares repurchased and subsequently cancelled. Costs associated with the share buyback programme were £4 million. In 2021, following
the disposals of Nortek Air Management and Brush, a return of capital of £729 million, alongside a court approved capital reduction of the
Company’s share premium account and a 9 for 10 share consolidation took place.
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 £2.6
billion at 31 December 2022 and sufficient headroom throughout the going concern forecast period. Forecast covenant compliance is considered
further below.
None of the Group’s banking facility matures in the going concern period following an extension agreed during 2021. The next contractual
maturity is in June 2024 and whilst changes to banking arrangements are being considered following the announced intention to demerge GKN
Automotive, GKN Powder Metallurgy and GKN Hydrogen, these will only be enacted if the shareholders approve the demerger. As part of its
preparation for the intended demerger, the Group has agreed revised banking documentation split between the demerger businesses and
remaining business, which is comparable in nature with existing arrangements and would provide both businesses with sufficient liquidity albeit
contingent on shareholder approval of the demerger.
Covenants
The current 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
2022
3.75x
4.0x
30 June
2023
3.5x
4.0x
31 December
2023
3.5x
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 2023 and the first half of 2024. The sensitised
assumptions are specific to each business taking into account their markets, but on average represents a c. 10% and c. 15% reduction to the
Group’s forecast revenue in each of 2023 and the first half of 2024 respectively. The sensitised revenues have had a consequential impact on
profit and cash flow, along with a further downside sensitivity applied to increase working capital by approximately 2% of revenue. Given that
there is liquidity headroom of £2.6 billion and the Group’s leverage was 1.4x, comfortably below the covenant test at 31 December 2022, no
further sensitivity detail is provided.
Under the reasonably possible sensitised case, even with significant reductions, no covenant is breached at the forecast testing dates being 30
June 2023 and 31 December 2023, and the Group will not require any additional sources of finance. Testing at 30 June 2024 is also favourable,
assuming arrangements similar in nature with existing agreements.
The Group has also considered the circumstance that the proposed demerger occurs in April 2023. Modelling of both a base case and a
reasonably possible sensitised case has also been prepared for the remaining Group and due to revised banking documents having been
formally agreed, consistent with the conclusion above, the Group will not require any additional sources of finance and no covenant is breached
at the forecast testing dates being 30 June 2023 and 31 December 2023.
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.
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1. Significant accounting policies continued
Impairment of assets
Assets are assessed for indicators of impairment at each balance sheet date. If there is objective evidence of impairment, an impairment
loss is recognised in profit or loss as described below.
Non-financial assets
An asset is impaired where there is objective evidence that, as a result of one or more events that occurred after initial recognition, the
estimated recoverable value of the asset has been reduced. The recoverable amount of an asset is the higher of its fair value less costs to
sell and its value in use.
Where indicators exist for a decrease in impairment loss, the prior impairment loss is tested to determine reversal. An impairment loss is
reversed on an individual impaired asset to the extent that the revised recoverable value does not lead to a revised carrying amount higher
than the carrying value had no impairment been recognised.
Financial instruments
Financial assets and financial liabilities are recognised when the Company becomes a party to the contractual provisions of the instrument.
Financial liabilities are classified according to the substance of the contractual arrangements entered into.
Financial assets and liabilities
All financial assets and liabilities are initially measured at transaction price (including transaction costs).
Financial assets and liabilities are only offset in the Balance Sheet when, and only when, there exists a legally enforceable right to set off
the recognised amounts and the Company intends either to settle on a net basis, or to realise the asset and settle the liability
simultaneously.
Financial assets are derecognised when, and only when, a) the contractual rights to the cash flows from the financial asset expire or are
settled, b) the Company transfers to another party substantially all of the risks and rewards of ownership of the financial asset, or c) the
Company, despite having retained some, but not all, significant risks and rewards of ownership, has transferred control of the asset to
another party.
Financial liabilities are derecognised only when the obligation specified in the contract is discharged, cancelled or expires.
Share-based payments
The Company issues equity-settled share-based payments to certain employees. The required disclosures are included in the Group
Consolidated Financial Statements.
Equity-settled share-based payments are measured at fair value (excluding the effect of non-market based vesting conditions) at the date
of grant. The fair value determined at the grant date of the equity-settled share-based payments is expensed on a straight-line basis over
the vesting period, based on the Company’s estimate of the shares that will eventually vest and adjusted for the effect of non-market based
vesting conditions.
Fair value is measured by use of the Black-Scholes pricing model. The expected life used in the model has been adjusted, based on the
Directors’ best estimate, for the effects of non-transferability, exercise restrictions, and behavioural considerations.
Where equity-settled share-based payments are made available to employees of the Company’s subsidiaries, these are treated as
increases in equity over the vesting period of the award with a corresponding increase in the Company’s investment in subsidiaries.
Taxation
Current tax, including UK corporation tax and foreign tax, is provided at amounts expected to be paid (or recovered) using the tax rates and
laws that have been enacted or substantively enacted by the balance sheet date.
Deferred tax is recognised in respect of all timing differences that have originated but not reversed at the balance sheet date where
transactions or events that result in an obligation to pay more tax in the future or a right to pay less tax in the future have occurred. Timing
differences are differences between the Company’s taxable profits and its results as stated in the Financial Statements that arise from the
inclusion of gains and losses in tax assessments in periods different from those in which they are recognised in the Financial Statements.
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 loss for the financial year ended 31 December 2022 of £19 million (2021: profit of £8 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 119 to 144. There were no other employees of the
Company in the year.
(cid:3)
(cid:3)
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218
Notes to the Company Balance Sheet
Notes to the Company Balance Sheet
Continued
Continued
3.
Investment in subsidiaries
(cid:3)
At 1 January 2022
Additions
At 31 December 2022
£m
10,585
6
10,591
A £6 million investment from equity-settled share-based payments for subsidiaries is included as an addition to investments in subsidiaries
at 31 December 2022. 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 2022, the market capitalisation of the Company of £5,453 million was below the carrying value of its
investment (£10,591 million) net of intercompany positions (£2,995 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 2022:
Equity interest %
Class of Share held
Brazil
(cid:3)
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.
7 Michigan Boulevard, St. Thomas, Ontario
GKN Sinter Metals – St. Thomas, Ltd.
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
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
18 North Shitan Road, North Industrial Park, Development Zone, Danyang, Jiangsu, 212310
GKN Danyang Industries Company Limited
No. 1 Cuigu, Northern New Zone, Chongqing, 401122
GKN HUAYU Driveline Systems (Chongqing) Co. Ltd
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
100
100
100
100
100
Quota capital
Common
Common
Ordinary
Common stock
100
Registered investment
100
Registered investment
40
Registered investment
100
Registered investment
100
Registered investment
34.5
Ordinary(1)
50 Registered investment(2)
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
(cid:3)
(cid:3)
2
2
0
2
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3.
Investment in subsidiaries continued
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
No. 3, Wanfugang Road, Jingjiang Economic and Technological Development Zone,
Jingjiang City, Jiangsu Province, China
Kaifei Aerospace Manufacturing 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.
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 Automotive Management SAS
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
Germany
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 Powder Metallurgy Engineering GmbH
Pennefeldsweg 11-15, 53177, Bonn
GKN Powder Metallurgy Holding GmbH
GKN Sinter Metals Components GmbH
GKN Hydrogen 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
219
219
i
i
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F
n
n
a
a
n
n
c
c
a
a
i
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49
Ordinary
50
Registered investment
100
Ordinary
l
l
s
s
t
t
a
a
t
t
e
e
m
m
e
e
n
n
t
t
s
s
40
49
Ordinary
Ordinary
1.6320
Ordinary
100
100
100
100
100
5.5
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
2
2
0
2
t
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R
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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
49
Ordinary
(cid:3)
(cid:3)
(cid:3)
(cid:3)
220
Notes to the Company Balance Sheet
Continued
221
3.
Investment in subsidiaries continued
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
GKN Hydrogen Italy Srl
GKN Hydrogen Srl
Japan
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
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
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.
2
2
0
2
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M
(cid:3)
(cid:3)
97.03
Ordinary
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
68.42
Ordinary
100
100
100
100
100
100
20
49
49
49
49
100
100
100
Ordinary
Ordinary
Ordinary
Membership interest
Membership interest
Ordinary
Ordinary
Ordinary
Ordinary(3)
Ordinary
Ordinary(4)
Ordinary
Ordinary
A Ordinary
3.
Investment in subsidiaries continued
Industrieweg 4, 3351 LB, Papendrecht
Cooperative Delivery of Retrokits (CDR) V.O.F.
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 Aerospace B.V.
Fokker Aerostructures B.V.
Fokker (CDR) B.V.
11th Floor, The Colmore Building, 20 Colmore Circus Queensway, Birmingham, B4 6AT
GKN UK Holdings BV
Norway
Kirkegårdsveien 45, 3616 Kongsberg
GKN Aerospace Norway AS
Kongsberg Technology Training Centre AS
Kongsberg Terotech AS
Poland
Ul. B. Krzywoustego 31 G, 56-400 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
GKN Specialty Products Europe S.R.L.
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
Kryptongatan 11, 431 53 Mölndal
Permanova Lasersystem 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
(cid:3)
(cid:3)
i
F
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a
n
c
a
i
50
100
100
100
100
100
100
100
100
100
100
33.33
50
100
100
100
49
100
100
100
100
100
100
100
100
100
100
100
100
20
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Quota
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
36.25
Common stock
100
Ordinary
l
s
t
a
t
e
m
e
n
t
s
2
2
0
2
t
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R
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222
Notes to the Company Balance Sheet
Continued
223
3.
Investment in subsidiaries continued
Eastern Seaboard Industrial Estate, 64/9 Moo 4, Tambon Pluakdaeng, Amphur Pluakdaeng,
Rayong 21140
GKN Driveline (Thailand) Limited
Turkey
Ege Serbest Bölgesi, SADI Sok. No:10, 35410 Gaziemir, Izmir
Fokker Elmo Havacilik Sanayi Ve Ticaret Limited Sirketi
Organize Sanayi 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
Dowlais Automotive 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
GKN Trading Limited
GKN UK Investments Limited
GKN U.S. Investments Limited
GKN USD Investments Limited
GKN Ventures Limited
2
2
0
2
t
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e
R
l
a
u
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n
A
C
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P
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e
i
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s
u
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I
e
s
o
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e
M
(cid:3)
(cid:3)
100
100
100
100
Ordinary
Ordinary
Ordinary
Ordinary
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
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 and redeemable
preference
Ordinary
Ordinary and deferred
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary and deferred(5)
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
3.
Investment in subsidiaries continued
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
Rigby Metal Components Limited
Rzeppa 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
Dowlais Industries Limited
GKN Automotive Limited
GKN Driveline UK Limited
GKN EVO eDrive Systems Limited
GKN Freight Services Limited
GKN Hybrid Power Limited
Rhodium Building Central Boulevard, Blythe Valley Park, Solihull, B90 8AS
GKN Powder Metallurgy Holdings Limited
Unit 1, Cobnar Wood Close, Chesterfield Trading Estate, Chesterfield, Derbyshire, S41 9RQ
GKN Cylinder Liners UK Limited
2nd Floor, Nova North, 11 Bressenden Place, London, SW1E 5BY
Dowlais Group Limited
Number 22 Mount Ephraim, Tunbridge Wells, England, TN4 8AS
HiiROC Limited
USA
2 Sun Court, Suite 400, Peachtree Corners, GA, 30092
Fokker Elmo Inc.
(cid:3)
(cid:3)
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 and convertible
preference
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary and redeemable
preference
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Membership interest
Ordinary
Membership interest
Ordinary
Ordinary
37.5
Ordinary
100
100
100
100
100
100
100
100
100
100
100
100
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary and preference
Ordinary
Ordinary
Ordinary and cumulative
preference
Ordinary
Ordinary
Ordinary
Ordinary
10.21
Ordinary
100
Common stock
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a
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2
2
0
2
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224
Notes to the Company Balance Sheet
Continued
3.
Investment in subsidiaries continued
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
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
100
100
100
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
Common stock
Common
Common
4. Debtors
Amounts falling due after one year:
(cid:3)
Amounts owed by Group undertakings
Deferred tax
31 December
2022
£m
31 December
2021
£m
446
41
487
434
43
477
(cid:3)
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 2022, the amount receivable of £446 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 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
(cid:3)
Other timing differences
The tax losses may be carried forward indefinitely.
5. Creditors
Amounts falling due within one year:
(cid:3)
Amounts owed to Group undertakings
Accruals and other creditors
31 December
2022
£m
31 December
2021
£m
36
5
41
36
7
43
31 December
2022
£m
31 December
2021
£m
3,441
2
3,443
2,841
1
2,842
(cid:3)
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.
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.
6. Provisions
Notes
(1) The Group owns 9% directly with a total effective ownership of 34.5% in the company.
(2) The Group indirectly has a total effective ownership of 50% in the company.
(3) The Group owns 49% directly with a total effective ownership of 49.98% in the company.
(4) The Group owns 49% directly with a total effective ownership of 49.98% in the company.
(5) The Group has a direct interest in 100% of the issued ordinary share capital. The deferred shares are held by third parties.
At 1 January 2022
(cid:3)
Credit to profit and loss account
At 31 December 2022
Incentive plan
related
£m
3
(1)
2
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 one year.
2
2
0
2
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(cid:3)
(cid:3)
(cid:3)
(cid:3)
225
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2
2
0
2
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226
Notes to the Company Balance Sheet
Notes to the Company Balance Sheet
Continued
Continued
Glossary
Glossary
227
7.
Issued share capital
Share Capital
Allotted, called-up and fully paid
4,054,425,961 (31 December 2021: 4,372,429,473) Ordinary Shares of 160/21 pence each(1)
(cid:3)
(1) During the year, a share buyback programme occurred where 318,003,512 shares were repurchased and subsequently cancelled.
The rights of each class of share are described in the Directors’ Report.
(cid:3)
31 December
2022
£m
31 December
2021
£m
(cid:3)
309
(cid:3)
309
333
333
8. Related party transactions
The Company has taken the exemption in FRS 102.33: “Related party information” not to disclose intercompany balances and transactions
in the year with fully owned subsidiary undertakings.
2
2
0
2
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(cid:3)
(cid:3)
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.
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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.
l
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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.
Income Statement Measures
APM
Adjusted revenue
Closest equivalent statutory measure
Revenue
Reconciling items to statutory measure
Share of revenue of equity accounted investments (note 5)
Definition and purpose
Adjusted revenue includes the Group’s share of revenue of equity accounted investments (“EAIs”). This enables comparability between
reporting periods.
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)
Year ended
31 December
2022
£m
7,537
654
8,191
Restated(1)
Year ended
31 December
2021
£m
6,650
613
7,263
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.
(cid:3)
(cid:3)
(cid:3)
2
2
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2
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228
Glossary
Continued
APM
Adjusted operating profit
Closest equivalent statutory measure
Operating loss(2)
Reconciling items to statutory measure
Adjusting items (note 6)
Glossary continued
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
2022
£m
Restated(1)
Year ended
31 December
2021
£m
(236)
716
480
(493)
810
317
Adjusted profit after tax
Loss after tax
Adjusting items to loss after tax (note 6)
Adjusted profit after tax
APM
Constant currency
Closest equivalent statutory measure
Income Statement, which is reported using actual average foreign exchange rates
Year ended
31 December
2022
£m
Restated(1)
Year ended
31 December
2021
£m
(223)
522
299
(480)
631
151
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 2022 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.
Year ended
31 December
2022
£m
Restated(1)
Year ended
31 December
2021
£m
(307)
691
384
(660)
854
194
Adjusted profit before tax
Loss before tax
Adjusting items to loss before tax (note 6)
Adjusted profit before tax
2
2
0
2
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(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
(cid:3)
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 leverage 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 leverage 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 leverage covenant purposes(4)
Adjusted EBITDA for leverage covenant purposes
Year ended
31 December
2022
£m
Year ended(5)
31 December
2021
£m
480
406
(63)
(5)
(19)
799
375
425
(68)
(4)
(14)
714
(cid:3)
(cid:3)
229
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2
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230
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)
Glossary continued
APM
Interest cover
Closest equivalent statutory measure
None
Reconciling items to statutory measure
Not applicable
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 adjusted 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 EAIs
Tax impact of significant legislative changes
Tax impact of significant restructuring
Adjusted tax charge
Adjusted profit before tax
Adjusted tax rate
APM
Adjusted basic earnings per share
Closest equivalent statutory measure
Basic earnings per share
Reconciling items to statutory measure
Adjusting items (note 6 and note 10)
Year ended
31 December
2022
£m
Restated(1)
Year ended
31 December
2021
£m
84
(170)
(9)
–
10
(85)
384
180
(176)
(9)
(70)
32
(43)
194
22.1%
22.2%
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)
Interest receivable (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
2022
£m
Year ended(5)
31 December
2021
£m
799
36
835
(81)
9
–
(72)
11.6x
714
127
841
(138)
2
(6)
(142)
5.9x
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.
2
2
0
2
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M
(cid:3)
(cid:3)
Definition and purpose
Working capital comprises inventories, current trade and other receivables, non-current other receivables, 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.
(cid:3)
(cid:3)
231
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232
Glossary
Continued
APM
Bank covenant definition of net debt at average rates and leverage
Glossary continued
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 (net of bank overdrafts)
(cid:3)
Reconciling items to statutory measure
Impact of foreign exchange and adjustments for bank covenant purposes
Definition and purpose
Net debt (as above) is presented in the Balance Sheet translated at year end exchange rates.
For bank covenant testing purposes net debt is converted using average exchange rates for the previous 12 months.
Leverage is calculated as the bank covenant definition of net debt divided by adjusted EBITDA for leverage covenant purposes.
This measure is used for bank covenant testing.
Net debt
Net debt at closing rates (note 27)
Impact of foreign exchange
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
2022
£m
31 December(5)
2021
£m
1,139
(27)
1,112
1.4x
950
(3)
947
1.3x
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)
Net cash from operating activities
Operating activities:
Net cash from operating activities from discontinued operations
Restructuring costs paid and movement in provisions(7)
Defined benefit pension contributions paid
Tax paid
Interest paid on loans and borrowings
Interest paid on lease obligations
Acquisition and disposal costs
Debt related:
Repayment of principal under lease obligations
Adjusted operating cash flow (pre-capex)
Change in inventories
Change in receivables
Change in payables
Adjusted operating cash flow (pre-capex) conversion
2
2
0
2
t
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M
(cid:3)
(cid:3)
Year ended
31 December
2022
£m
Restated(1)
Year ended
31 December
2021
£m
204
(17)
155
59
80
87
12
10
(51)
539
119
268
(209)
717
75%
263
(41)
185
88
57
128
14
5
(53)
646
14
(89)
–
571
113%
Reconciling items to statutory measure
Acquisition and disposal related cash flows, dividends paid to owners of the parent, transactions in own shares, movements on borrowing
facilities and the settlement of interest rate swaps
Definition and purpose
Free cash flow represents cash generated after all trading costs including restructuring, pension contributions, tax and interest payments.
Year ended
31 December
2022
£m
Year ended
31 December
2021
£m
(203)
308
1,555
–
47
69
–
729
(2,703)
–
–
10
5
–
105
125
598
(632)
–
77
504
–
(478)
3
4
–
10
109
–
(8)
(cid:3)
Year ended
31 December
2022
£m
Year ended
31 December
2021
£m
(8)
136
128
125
198
323
Free cash flow
Net (decrease)/increase in cash and cash equivalents (net of bank overdrafts)
Debt related:
Repayment of borrowings
Drawings on borrowing facilities
Settlement of interest rate swaps
Equity related:
Dividends paid to owners of the parent
Purchase of own shares, including associated costs
Return of capital
Acquisition and disposal related:
Disposal of businesses, net of cash disposed
Equity accounted investments additions
Acquisition of subsidiaries, net of cash acquired
Purchase of investments
Acquisition and disposal costs and associated transaction taxes
Settlement of derivatives used in net investment hedging
Extraction tax paid and special pension contributions
Free cash flow
APM
Adjusted free cash flow
Closest equivalent statutory measure
Net increase/decrease in cash and cash equivalents (net of bank overdrafts)
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
(cid:3)
(cid:3)
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Glossary
Continued
APM
Capital expenditure (capex)
Closest equivalent statutory measure
None
Reconciling items to statutory measure
Not applicable
(cid:3)
Definition and purpose
Calculated as the purchase of owned property, plant and equipment and computer software and expenditure on capitalised development
costs during the year, excluding any assets acquired as part of a business combination.
Net capital expenditure is capital expenditure net of proceeds from disposal of property, plant and equipment.
APM
Capital expenditure to depreciation ratio
Closest equivalent statutory measure
None
Reconciling items to statutory measure
Not applicable
(cid:3)
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
(cid:3)
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 2021 remains aligned to the original calculations supporting the Group’s bank debt compliance certificate and has not been restated for discontinued operations.
(6) Other interest for covenant purposes includes bank facility renegotiation fees and debt issue costs paid during the prior year and cash paid to settle interest rate swaps not included in finance
costs.
(7) Excludes non-cash utilisation of loss-making contract provisions of £40 million (2021: £48 million).
(8) Includes restructuring costs of £nil (2021: £5 million) relating to operations discontinued in the year.
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(cid:3)
(cid:3)
Notice of Annual General Meeting
The Annual General Meeting of Melrose Industries PLC (the
“Company”) will be held at 11.00 am on Thursday 8 June 2023
at Butchers’ Hall, 87 Bartholomew Close, London EC1A 7EB.
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
advisor 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 advisor.
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 8 June 2023 for the purposes set out below.
Resolutions 1 to 16 (inclusive) will be proposed as ordinary resolutions
and resolutions 17 to 21 (inclusive) as special resolutions.
Ordinary resolutions
1.
To receive the Company’s audited financial statements for the
financial year ended 31 December 2022, 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 2022, as set out on pages 119 to 144 of the
Company’s 2022 Annual Report.
3.
To approve the 2023 Directors’ Remuneration Policy, as set out
on pages 135 to 144 of the Company’s 2022 Annual Report.
(i) to ordinary shareholders in proportion (as nearly as may be
practicable) to their existing holdings; and
(ii) to holders of other equity securities as required by the
rights of those securities or, subject to such rights, as the
Directors otherwise consider necessary,
and so that the Directors may impose any limits or restrictions
and make any arrangements which they consider necessary or
appropriate to deal with treasury shares, fractional entitlements,
record dates, legal, regulatory or practical problems in, or under
the laws of, any territory or any other matter, such authorities to
expire at the conclusion of the Company’s next Annual General
Meeting after this resolution is passed or, if earlier, at the close
of business on 30 June 2024, 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 a fully pre-emptive offer):
(i) to ordinary shareholders in proportion (as nearly as may be
4. To re-elect Christopher Miller as a Director of the Company.
practicable) to their existing holdings; and
5. To re-elect Simon Peckham as a Director of the Company.
(ii) to holders of other equity securities, as required by the
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 re-elect Heather Lawrence as a Director of the Company.
13. To re-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 £102,969,548; and
(B) comprising equity securities (as defined in section 560 of the
Act) up to an aggregate nominal amount of £205,939,096
(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 a fully pre-emptive offer:
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;
(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
£30,890,864; and
(C) to the allotment of equity securities or sale of treasury shares
(otherwise than under paragraph (A) or paragraph (B) of this
resolution) up to a nominal amount equal to 20% of any
allotment of equity securities or sale of treasury shares from
time to time under paragraph (B) above, such authority to be
used only for the purposes of making a follow-on offer which
the Directors determine to be of a kind contemplated by
paragraph 3 of Section 2B of 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 2024, 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
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shares of a nominal amount equal to that sum, and
to allot the shares to such Employee Beneficiary or
as they may direct, pursuant to or in connection
with an Employees’ Share Scheme.
(B) For the purposes of this Article 125A:
(i)
(ii)
“Employee Beneficiary” means any beneficiary
of an Employees’ Share Scheme; and
“Employees’ Share Scheme” has the same
meaning as in section 1166 of the Companies
Act 2006.
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
Warren Fernandez
Company Secretary
25 April 2023
Registered Office:
11th Floor The Colmore Building
20 Colmore Circus Queensway
Birmingham
West Midlands
B4 6AT
236
Notice of Annual General Meeting
Continued
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:
(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 £30,890,864,
such authority to be used only for the purposes of financing
(or refinancing, if the authority is to be used within twelve
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; and
(B) limited to the allotment of equity securities or sale of treasury
shares (otherwise than under paragraph (A) of this resolution)
up to a nominal amount equal to 20% of any allotment of
equity securities or sale of treasury shares from time to time
under paragraph (A) above, such authority to be used only for
the purposes of making a follow-on offer which the Directors
determine to be of a kind contemplated by paragraph 3 of
Section 2B of 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 2024, 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:
(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.
21. That the articles of association of the Company be and are
amended by:
(A) deleting the following defined terms from article 1(A):
“2012 Incentive Shares” means 2012 Incentive Shares of £1
each in the capital of the Company;
“Effective Date” means 8 a.m. on the date on which the
ordinary shares of the Company are admitted to the Official
List maintained by the United Kingdom Listing Authority and
to trading on the main market for listed securities of the
London Stock Exchange;
“Melrose PLC” means Melrose PLC, company number:
4763064;
“Melrose PLC 2012 Incentive Shares” means 2012 Incentive
Shares of £1 each in the capital of Melrose PLC;
“Old Melrose” means Melrose Industries PLC, company
number: 8243706, to be renamed after the Effective Date and
re-registered as a private limited company;
“Old Melrose 2012 Incentive Shares” means 2012 Incentive
Shares of £1 each in the capital of Old Melrose;
“Old Scheme” means the scheme of arrangement under
section 899 of the Act between Melrose PLC, Old Melrose
and the holders of ordinary shares in Melrose PLC which was
effective on 27 November 2012, pursuant to which Old
Melrose became the holding company of Melrose PLC;
“Scheme of Arrangement” means the proposed scheme of
arrangement under section 899 of the Act between Old
Melrose, the Company and holders of ordinary shares in Old
Melrose pursuant to which the Company will become the
holding company of Old Melrose;
(B) deleting articles 6 to 9A (inclusive); and
(A) the maximum aggregate number of ordinary shares
(C) inserting the following as article 125A:
authorised to be purchased is 202,586,150;
(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 2024;
125A. Capitalisation of profits for an Employees’ Share Scheme
(A) Notwithstanding the provisions of Article 125, the
Directors may, without the requirement for any
further resolution of the Company or of the holders
of any class of shares:
(i)
capitalise any sum standing to the credit of any
of the Company’s reserve accounts (including
any share premium account, capital
redemption reserve or any other reserve or
fund (whether or not it is available for
distribution)); and/or
(ii)
capitalise any sum standing to the credit of the
profit and loss account that is not required for
payment of any preferential dividend,
and appropriate the sum to be capitalised to any
one or more Employee Beneficiaries and apply that
sum on any such Employee Beneficiary’s behalf in
or towards paying up in full unissued ordinary
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238
Notice of Annual General Meeting
Continued
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 21 (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 2022 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 “2022 Annual Report”) before
shareholders each year at the Annual General Meeting (“AGM”).
Resolution 2 – Approval of Directors’ remuneration report
The Directors’ remuneration report (the “Directors’ Remuneration
report”) is presented in three sections:
• the annual statement from the Chairman of the Remuneration
Committee;
• the annual report on remuneration; and
• the new Directors’ remuneration policy, which is the subject
of resolution 3.
The annual statement from the Chairman of the Remuneration
Committee, set out on pages 119 to 120 (inclusive) of the 2022 Annual
Report, summarises, for the year ended 31 December 2022, 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 pages 121 to 134
(inclusive) of the 2022 Annual Report, provides details of the
remuneration paid to Directors in respect of the year ended
31 December 2022, 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 Company’s auditors for the financial year ended 31 December
2022, Deloitte LLP, have audited those parts of the Directors’
Remuneration Report which are required to be audited and their
report may be found on pages 146 to 155 of the 2022 Annual Report.
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 and will not affect the way
in which the Directors’ remuneration policy has been implemented.
Resolution 3 – Approval of 2023 Directors’ remuneration
policy
The new Directors’ remuneration policy (the “2023 Directors’
Remuneration Policy”) is set out in full on pages 135 to 144 (inclusive)
of the 2022 Annual Report. The annual statement from the Chairman
of the Remuneration Committee, set out on pages 119 to 120
(inclusive) of the 2022 Annual Report, explains in more detail the
background and rationale for the 2023 Directors’ Remuneration Policy.
As noted in the 2023 Directors’ Remuneration Policy, the 2023
Directors’ Remuneration Policy will take effect immediately after the
close of the AGM on 8 June 2023, subject to approval by
shareholders. Payments will continue to be made to Directors and
former Directors in line with existing arrangements until this date. Once
the 2023 Directors’ Remuneration Policy has taken effect, all
payments by the Company to the Directors and any former Directors
must be made in accordance with the 2023 Directors’ Remuneration
Policy (unless a payment has been separately approved by a
shareholder resolution).
If the 2023 Directors’ Remuneration Policy is approved and remains
unchanged, it will be valid for three years without further shareholder
approval. If the Company wishes to change the 2023 Directors’
Remuneration Policy, it will need to put the revised policy to a vote
again before it can be implemented. The Directors expect that the
Company will next propose a resolution to approve a new Directors’
remuneration policy at the annual general meeting to be held in 2026.
If the 2023 Directors’ Remuneration Policy is not approved, the
Company will, if and to the extent permitted by the Act, continue to
make payments to Directors in accordance with existing
arrangements and will seek shareholder approval for a revised policy
as soon as is practicable.
Resolutions 4 to 13 (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.
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 the
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, in order to facilitate succession
planning arrangements for the Board and the development of a
diverse Board. A further and final extension of his tenure for an
additional two years is being sought in order to provide certainty
and stability through the completion of the demerger of GKN
Automotive, GKN Powder Metallurgy and GKN Hydrogen. 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 served as Chief Operating Officer since 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, Senior Independent 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. He was appointed to the
role of the Senior Independent Director on 5 May 2022.
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• Charlotte Twyning, Non-executive Director, is standing for
re-election due to her diverse range of experience and
commercial acumen having held numerous senior positions
across various sectors, most recently in aviation, alongside her
substantial board experience.
• Funmi Adegoke, Non-executive Director, is standing for re-
election due to her diverse industrial knowledge, and significant
transactional and commercial expertise gained from leadership
roles in global multi-national organisations.
• Heather Lawrence, Non-executive Director, is standing for
re-election due to her diverse range of experience across the
industrials and transportation sectors, having extensive
experience in corporate finance and investment banking, as well
as having the necessary expertise required to perform the role of
Chairman of the Audit Committee.
• Victoria Jarman, Non-executive Director, is standing for re-election
due to her 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 of each Director standing for re-election can be
found on pages 98 to 99 (inclusive) of the 2022 Annual Report. All of
the Non-executive Directors standing for re-election are currently
considered independent under the Code.
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 of the Company at which accounts
are laid.
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 £102,969,548, being
approximately one-third of the Company’s issued ordinary share
capital as at 24 April 2023 (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 fully pre-emptive
offer up to an aggregate nominal amount of £205,939,096,
representing approximately two-thirds of the Company’s issued
ordinary share capital as at 24 April 2023 (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 2024. 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
If the Directors wish to allot new shares or other equity securities or
sell treasury shares for cash (other than in connection with an
executive or employee share scheme), company law requires that
these shares are offered first to shareholders in proportion to their
existing holdings. The statutory pre-emption rights may be disapplied
by shareholders.
The purpose of resolution 17 is to authorise the Directors to allot new
shares and other equity securities of the Company or sell shares held
in treasury for cash: (a) in connection with a fully pre-emptive offer,
subject to any arrangements that the Directors consider appropriate
to deal with fractions and overseas requirements; (b) otherwise than
pursuant to (a) up to an aggregate nominal value of £30,890,864,
without first making an offer under company law to existing
shareholders in proportion to their existing holdings; and (c) otherwise
than pursuant to (a) and (b), 20% of the amount referred to in (b) for the
purposes of making a follow-on offer which the Directors determine to
be of a kind contemplated by paragraph 3 of Section 2B of the
Pre-emption Group’s Statement of Principles (the “Pre-Emption Group
Principles”). The limit of £30,890,864 is equivalent to 10% of the total
issued ordinary share capital of the Company (excluding treasury
shares) as at 24 April 2023, being the latest practicable date prior to
publication of this Notice.
Resolution 18 is being proposed as a separate resolution to authorise
the Directors to allot additional shares and other equity securities or
sell shares held in treasury for cash up to a maximum nominal value of
£30,890,864 (representing a further 10% of the issued ordinary share
capital of the Company (excluding treasury shares) as at 24 April 2023,
being the latest practicable date prior to publication of this Notice)
otherwise than in connection with a pre-emptive offer to existing
shareholders (the “Acquisition/SCI Disapplication”). This authority is
limited to allotments and sales for the purposes of financing
acquisitions or specified capital investments contemplated by the
Pre-Emption Group Principles (or refinancing any such acquisition or
investment within twelve months after the original transaction). The
Directors intend to use this authority only in connection with an
acquisition or specified capital investment which is announced
contemporaneously with the issue or which has taken place in the
preceding twelve-month period and is disclosed in the announcement
of the issue. The resolution also disapplies pre-emption rights in
relation to a further 20% of the amount subject to the Acquisition/SCI
Disapplication for the purposes of making a follow-on offer which the
Directors determine to be of a kind contemplated by paragraph 3 of
Section 2B of the Pre-Emption Group Principles.
These disapplication authorities are in line with institutional
shareholder guidance, in particular the Pre-Emption Group Principles.
The Directors believe that it is appropriate to seek these authorities to
give the Company the flexibility to raise further equity funding and to
pursue acquisition opportunities as and when they arise, and to seek
authority to make the follow-on offers so as to ensure that pre-
emption is respected.
If approved, these powers 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 2024. 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
these powers and if ever used, the Directors intend to follow the
shareholder protections and approach to follow-on offers as set out in
Section 2B of the Pre-Emption Group Principles.
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240
Notice of Annual General Meeting
Continued
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
202,586,150 ordinary shares, representing approximately 14.99% of
the Company’s issued ordinary share capital as at 24 April 2023
(being the last business day prior to the publication of this notice).
The approval sought at resolution 19 is an increase from the 10%
authority approved by shareholders at prior year annual general
meetings and is proposed to provide the Company with additional
flexibility to implement its strategy of returning value to shareholders.
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 2024. 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 21 – Amendment of Articles of Association
This resolution seeks shareholder approval to amend the existing
articles of association of the Company (the “Existing Articles”). The
amendment removes articles 6 to 9A (inclusive) of the Existing Articles
(along with certain related defined terms), which contain provisions
relevant to the Incentive Shares (as defined in the Existing Articles) that
were issued by the Company in connection with historic share plans.
Since 2020, the Company has operated a contractual employee share
plan (the “2020 Melrose Employee Share Plan” or “MESP”) instead of
an incentive plan pursuant to which Incentive Shares are issued.
Consequently, no Incentive Shares have been issued under the MESP,
nor does the Company have any present intention to issue any further
Incentive Shares, so the articles relating to the Incentive Shares are no
longer required.
In addition, this resolution seeks to insert a new article (article 125A)
which allows the capitalisation of profits or reserves of the Company
for the purposes of paying up the nominal value of new ordinary
shares to be issued in satisfaction of awards granted under an
employees’ share scheme. The power for the board to capitalise
profits or reserves of the Company is currently contained in article 6(L)
of the Existing Articles, which was intended for the purposes of
conversion of Incentive Shares into ordinary shares upon
crystallisation of historic incentive plans. However, since the MESP is a
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contractual employee share plan instead of an incentive plan pursuant
to which Incentive Shares are issued, article 125A seeks to grant the
same power to the board to capitalise profits or reserves of the
Company, but in order to allow the conversion of contractual awards
under the MESP into ordinary shares upon crystallisation of the MESP
(to the extent applicable).
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 6 June 2023 (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 24 April 2023 (being the last business day prior to the
publication of this notice), the Company’s issued ordinary share
capital consists of 1,351,475,321 ordinary shares of 160/7 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.
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 6 June 2023.
7.
8.
In order for a proxy appointment or instruction made using the
CREST service to be valid, the appropriate CREST message (a
“CREST Proxy Instruction”) must be properly authenticated in
accordance with Euroclear UK & Ireland Limited’s specifications,
and must contain the information required for such instruction, as
described in the CREST Manual. The message, regardless of
whether it constitutes the appointment of a proxy or is an
amendment to the instruction given to a previously appointed
proxy, must, in order to be valid, be transmitted so as to be
received by the issuer’s agent (ID RA19) by 11.00 am (BST) on 6
June 2023. For this purpose, the time of receipt will be taken to be
the time (as determined by the time stamp applied to the message
by the CREST Application Host) from which the issuer’s agent is
able to retrieve the message by enquiry to CREST in the manner
prescribed by CREST. After this time any change of instructions to
proxies appointed through CREST should be communicated to
the appointee through other means.
CREST members and, where applicable, their CREST sponsors,
or voting service providers, should note that Euroclear UK &
Ireland Limited does not make available special procedures in
CREST for any particular message. Normal system timings and
limitations will, therefore, apply in relation to the input of CREST
Proxy Instructions. It is the responsibility of the CREST member
concerned to take (or, if the CREST member is a CREST Personal
Member, or sponsored member, or has appointed a voting
service provider, to procure that his/her CREST sponsor or voting
service provider(s) take(s)) such action as shall be necessary to
ensure that a message is transmitted by means of the CREST
system by any particular time. In this connection, CREST
members and, where applicable, their CREST sponsors or voting
system providers are referred, in particular, to those sections of
the CREST Manual concerning practical limitations of the CREST
system and timings.
9.
The Company may treat as invalid a CREST Proxy Instruction in
the circumstances set out in Regulation 35(5)(a) of the
Uncertificated Securities Regulations 2001.
10. 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 6 June 2023 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. 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.
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Company and shareholder information
As at 31 December 2022, there were 16,714 holders of ordinary shares of 160/21 pence each in the Company. An analysis of these
shareholdings as at 31 December 2022 is set out in the table below(1).
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 2023(2)
Ex-dividend date for second interim dividend
Record date for second interim dividend
Payment date of second interim dividend
Annual General Meeting
Announcement of interim results
Intended payment of interim dividend
Preliminary announcement of 2023 results
Total number of holdings
Percentage of holders
Total number of shares Percentage issued capital
13,476
2,426
448
364
16,714
15,400
1,314
16,714
80.63%
14.51%
2.68%
2.18%
100.00%
92.14%
7.86%
100.00%
15,546,488
31,684,675
80,411,151
3,926,783,647
4,054,425,961
46,465,062
4,007,960,899
4,054,425,961
0.383%
0.782%
1.983%
96.852%
100.000%
1.15%
98.85%
100.00%
9 March 2023
10 March 2023
18 April 2023(3)
8 June 2023
September 2023
October 2023
March 2024
Skandinaviska Enskilda Banken
AB (publ)
UniCredit Bank AG
Wells Fargo Bank, N.A.,
London Branch
Registrar
Equiniti
Aspect House
Spencer Road
Lancing
West Sussex BN99 6DA
Tel: +44 (0)371 384 2030
(please use the country code
when calling from outside the UK)
Lines are open from 8.30 am
to 5.30 pm Monday to Friday,
excluding public holidays in
England and Wales.
Brokers
Investec
30 Gresham Street
London EC2V 7QN
J.P. Morgan Cazenove
25 Bank Street
London E14 5JP
Legal Advisors
Simpson Thacher & Bartlett LLP
CityPoint
One Ropemaker Street
London EC2Y 9HU
Bankers(4)
Banco Santander S.A.,
London Branch
Bank of America Europe
Designated Activity Company
Bank of China Limited,
London Branch
Barclays Bank plc
BNP Paribas Fortis SA/NV
Citibank, N.A., London Branch
Commerzbank
Aktiengesellschaft, London
Branch
Coöperatieve Rabobank U.A.
Crédit Agricole Corporate
and Investment Bank
Crédit Industriel et Commercial
Deutsche Bank Luxembourg
S.A.
HSBC Bank plc
Industrial and Commercial Bank
of China Limited, London Branch
ING Bank N.V., London Branch
J.P. Morgan Chase Bank N.A.,
London Branch
MUFG Bank, Ltd.
National Westminster Bank plc
Royal Bank of Canada
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.
(1)
The Directors note that in connection with the demerger of GKN Automotive, GKN Powder Metallurgy and GKN Hydrogen (the “Demerger”), which completed on 20 April 2023, the Company
effected a share consolidation on 19 April 2023, such that shareholders received one new share in the Company in exchange for every three existing shares in the Company held by them at the
record time for the consolidation. To effect the share consolidation, it was necessary for the Company to issue two additional existing shares in the Company so that the number of the Company’s
existing shares was exactly divisible by three.
As per the Company’s announcement on 2 March 2023, recognising the timeline for the Demerger, the Board has determined to make a second interim dividend for 2022 in place of the final
dividend, which will not be made.
After the date of approval of the Annual Report and financial statements, the second interim dividend payment date was changed to 11 April 2023 in order to effect the Dividend Reinvestment Plan
prior to completion of the proposed Demerger.
(4) As at completion of the Demerger on 20 April 2023.
(3)
(2)
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This Report is printed on material which is derived from sustainable
sources. Both the manufacturing paper mill and printer are registered
to the Environmental Management System ISO 14001 and are
Forest Stewardship Council® (FSC) chain-of-custody certified.
Designed and produced by SampsonMay
Telephone: 020 7403 4099 www.sampsonmay.com
www.melroseplc.net
London Stock Exchange
Code: MRO
SEDOL: BNGDN82
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