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AEROSPACE
EXPERTISE
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023
CONTENTS
Strategic Report
2023 Highlights ��������������������������������������������������������������������������� 1
Chairman’s statement ����������������������������������������������������������������� 2
Chief Executive Officer’s review �������������������������������������������������� 4
Divisional review �������������������������������������������������������������������������� 8
Market trends ���������������������������������������������������������������������������� 12
Our Business Model ����������������������������������������������������������������� 14
20 years of Melrose �������������������������������������������������������������������� 16
Why aerospace? Why now? ������������������������������������������������������� 17
Key performance indicators ������������������������������������������������������ 18
Finance Director’s review ���������������������������������������������������������� 20
Longer‑term viability statement ������������������������������������������������� 27
Risk management ���������������������������������������������������������������������� 28
Risks and uncertainties ������������������������������������������������������������� 31
Section 172 statement �������������������������������������������������������������� 37
Sustainability review ������������������������������������������������������������������ 43
Non‑financial and sustainability information statement ������������� 94
Governance
Governance overview ���������������������������������������������������������������� 98
Board of Directors ������������������������������������������������������������������� 102
Directors’ report ���������������������������������������������������������������������� 104
Corporate Governance report ������������������������������������������������� 109
Audit Committee report ����������������������������������������������������������� 116
Nomination Committee report ������������������������������������������������� 124
Directors’ Remuneration report ����������������������������������������������� 128
Statement of Directors’ responsibilities ����������������������������������� 153
Financial statements
Independent auditor’s report to the
members of Melrose Industries PLC ��������������������������������������� 156
Consolidated Income Statement ��������������������������������������������� 166
Consolidated Statement of Comprehensive Income ��������������� 167
Consolidated Statement of Cash Flows ���������������������������������� 168
Consolidated Balance Sheet ��������������������������������������������������� 169
Consolidated Statement of Changes in Equity ������������������������ 170
Notes to the Financial Statements ������������������������������������������� 171
Company Balance Sheet for Melrose Industries PLC �������������� 223
Company Statement of Changes in Equity ������������������������������ 224
Notes to the Company Balance Sheet ������������������������������������ 225
Glossary ���������������������������������������������������������������������������������� 232
Additional information
Notice of Annual General Meeting ������������������������������������������� 240
Company and shareholder information ����������������������������������� 252
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 of the Company 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 and 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�
4
CHIEF EXECUTIVE
OFFICER’S REVIEW
Read about our 2023 results and our
strategic priorities for 2024 and beyond�
Chief Executive Officer’s review
page 4
14
OUR BUSINESS MODEL
Read about our strategic transformation
into a pureplay aerospace business,
creating long‑term value for our
shareholders, employees and customers�
Our Business Model
page 14
43
INVESTING IN SUSTAINABLE
TECHNOLOGY TO SHAPE
THE FUTURE OF FLIGHT
Read our Sustainability review�
Sustainability review
page 43
A WORLD‑LEADING
AEROSPACE BUSINESS WITH
EXCEPTIONAL POTENTIAL.
Melrose is moving forward as a world‑class
pureplay Aerospace business, building on a 20‑year
history of outstanding value creation.
Melrose Aerospace has delivered record
results in 2023, ahead of upgraded
guidance driven by strong operating margin
progression in both divisions. The Group
is well positioned to deliver continued
growth and margin improvement supported
by positive end markets and excellent
operational momentum. We have upgraded
guidance for 2024 and are confident about
unlocking significant further potential of the
business going forward."
Peter Dilnot
Chief Executive Officer
Chief Executive Officer’s review
page 4
RESULTS 2023
£3,350m
Revenue
£390m
Adjusted operating profit
£57m
Statutory operating profit
5.0 pence
Full year dividend
1
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023STRATEGIC REPORT
CHAIRMAN’S STATEMENT
A TRANSFORMATIONAL YEAR
Calendar year 2023
The Group had a transformational year
in 2023 and delivered financial results
ahead of expectations. We achieved
statutory revenue for the Melrose Group of
£3,350 million (2022: £2,954 million), with an
adjusted operating profit (post‑PLC costs)
of £390 million (2022: £147 million) based
on a statutory operating profit of £57 million
(2022: loss of £270 million).
Following completion of the Dowlais Group plc
demerger (the “Demerger”) in the first half
of the year, Melrose’s strategy shifted from
its previous “Buy, Improve, Sell” model to
becoming a premium‑listed aerospace
business for the long‑term. Your Board is
confident that Melrose is now well positioned
for strong future performance. This will be
driven by our two industry leading aerospace
divisions which have been restructured and
repositioned, coupled with strong market
growth and a disciplined approach to capital
allocation. The positive trajectory is clearly
demonstrated within these results.
Further details of these results are contained
in the CEO’s review and Finance Director’s
review, and I would like to thank all
employees for their efforts this year.
Purpose, strategy & sustainability
Melrose was founded to empower its
businesses to unlock their full potential for
the collective benefit of stakeholders, whilst
providing shareholders with a superior
return on their investment. Our strategy
remains focused on value creation, driven
by operational and financial improvement
over the longer term, now as a pureplay,
UK‑listed aerospace business. Our positive
trajectory is underpinned by leading
positions across the world’s major aircraft
platforms, strong organic growth prospects
within the aerospace sector, and attractive
opportunities to differentiate our business
further through cutting‑edge proprietary
technology that is already shaping the future
of flight.
Our strategy remains focused on value creation,
driven by operational and financial improvement
over the longer term, now as a pureplay,
UK‑listed aerospace business.”
Justin Dowley
Non‑executive Chairman
2
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023 RECOGNITION
Our recent ESG scores
A
MSCI ESG Rating of A(1) (2022: A)
B
CDP Climate Change score
2023 improved to B (2022: C)
27.8
Sustainalytics ESG rating(1) improved
to 27.8 (medium) (2022: 28.3)
Sustainability review
page 43
Melrose sees the decarbonisation of the
aerospace sector as a priority, and this
presents great opportunities to deploy our
innovation and technology leadership to
create and commercialise world‑leading
solutions for cleaner air travel, and to
generate superior financial returns for our
shareholders. We are pleased that our
sustainability performance continues to be
recognised by several key benchmarking
agencies, including Sustainalytics which
ranks Melrose in the top decile of our
industrial peers, MSCI which continues
to rank us in the “A” category, and our
recent elevation to a “B” rating by CDP
Climate Change.
This current set of results illustrates our
strategy in action, and our continued
shareholder value creation is reflected
in Melrose being one of the strongest
performers in the FTSE 100 in 2023.
Dividend
In line with our progressive dividend policy,
the Board proposes to pay a final dividend of
3.5 pence per share for 2023, making a total
dividend for the year of 5.0 pence per share.
The final dividend will be paid on 8 May 2024
to those shareholders on the register at
2 April 2024.
Board matters
Given the evolution of Melrose from the
“Buy, Improve, Sell” model into a focused
aerospace business, Victoria Jarman has
decided not to stand for re‑election at the
2024 Annual General Meeting (“AGM”). We
thank her very much for her contributions
over the last three years.
As announced last year, Christopher Miller,
Simon Peckham and Geoffrey Martin will not
stand for re‑election at the Company’s AGM
on 2 May 2024. Their periods of service as
Directors in a variety of leadership roles have
been filled with great success for Melrose
and its shareholders.
With Melrose’s transformation into a
pureplay aerospace business complete,
your Board is confident that the time is
right for the new management team to take
the Company forward, led by Peter Dilnot
and Matthew Gregory. To that end, on
6 March 2024 Mr Peckham stepped down
as Chief Executive, and on 7 March 2024
Mr Martin stepped down as Group Finance
Director and Mr Peckham, Mr Martin and
Mr Miller resigned from their positions as
Directors. During their tenure, the business
has grown from a start‑up in 2003, to a
well‑positioned FTSE 100 enterprise, having
delivered total returns of capital of over
£8 billion to shareholders, and an average
return of 2.5x shareholders’ equity for the
businesses sold under the previous business
model. We wish them well for the future.
We are pleased to confirm Mr Dilnot’s
appointment as CEO of Melrose effective
6 March 2024. Peter has been at Melrose
for nearly 5 years, serving as COO and
as an executive Director, and CEO of
GKN Aerospace during this time. He has
many years of public company experience,
including as CEO of Renewi PLC and as a
senior executive at Danaher Corporation. He
has an engineering and aviation background,
and started his career as a helicopter pilot in
the British Armed Forces.
We also welcome Mr Gregory to the Board
as an executive Director, and are pleased
to confirm his appointment as CFO of
Melrose effective 7 March 2024. Matthew
was previously CFO of GKN Aerospace,
and is a seasoned public company CFO
with executive leadership experience across
several complex, UK‑listed manufacturing
and transportation businesses, including as
CFO of Essentra plc, and as CFO then CEO
of FirstGroup plc.
Justin Dowley
Non‑executive Chairman
7 March 2024
Governance overview
page 98
(1) As of 2023.
3
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023STRATEGIC REPORT
CHIEF EXECUTIVE OFFICER’S REVIEW
EVOLVING INTO A FOCUSED AEROSPACE
TECHNOLOGY BUSINESS
It has been a transformational year for
Melrose. During 2023 we successfully
evolved into a focused aerospace technology
business while delivering results well
ahead of expectations. Our end markets
continued to recover strongly and we
generated significant margin expansion
from our extensive improvement actions,
including restructuring, operational gains
and repositioning our portfolio to improve
the quality of our earnings. We have built
positive momentum and have a very clear
path to deliver further profitable growth and
shareholder value in the years ahead.
Melrose has an extensive range of
proprietary “Tier One” technology that is
in strong demand from Aerospace OEMs.
This technology is already embedded
into the world’s leading commercial
and defence aircraft platforms – both in
aerospace engines and in structures. We
are reinforcing these established positions
with ongoing business improvements,
targeted investments in organic growth
and a disciplined approach to capital
allocation. This includes making an important
contribution to the future of sustainable
flight with breakthrough technologies
such as additive fabrication now and, in
the longer term, developing new forms of
propulsion. We have significant opportunities
to create value for all stakeholders going
forward and we are confident about our
exciting trajectory from here.
2023 results
In 2023, overall Group revenues grew by
17%(1) with Engines growth of 16%(1), driven
by RRSP strength despite ongoing industry
supply chain challenges, and Structures
growth of 18%(1) largely from OEM deliveries
ramping‑up. There was a 124%(1) increase
in adjusted operating profit to £420 million,
with margins doubling from 6.3% to a
record 12.5% (pre‑PLC costs). The Group
statutory operating profit was £57 million
compared to a loss of £270 million in the
prior year. Our leverage reduced to 1.1x,
including £93 million of share buyback cost
in the period, and net debt was better than
expectations. Going forward, we are guiding
to continued profit expansion to £560 million
(pre‑PLC costs) in 2024, at the midpoint of
the range, and £700 million in 2025 as the
benefits of market growth and the full impact
of our improvement plans read through. Our
confidence in these targets is underpinned by
robust commercial and operational progress.
Our new “Design, Deliver, Improve” business
model reflects how value will be created by
Melrose going forward based on differentiated
technology leadership, consistent delivery of
commitments to our stakeholders, and ongoing
improvement in all areas – including progressive
financial results.”
Peter Dilnot
Chief Executive Officer
(1) Like‑for‑like growth is calculated at constant currency against 2022 results and excludes businesses being exited.
4
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023 On the commercial front, we secured a
flagship new Engines agreement with GE
which is estimated to deliver US$5 billion
in incremental revenue over the contract
lifetime, including an expansion of RRSP
participation on the GEnx programme. In Civil
Structures we agreed a five‑year extension
with Airbus for the sole‑source production of
A220 wiring, and a new multi‑year contract
covering design and build of flight control
surfaces for the new urban air mobility player,
Joby. In Defence Structures, an agreement
has been signed with the Netherlands MoD
and Airbus for new helicopter developments,
and we have secured favourable positioning
for design and build content on the Global
Combat Air Programme, Future Vertical Lift
Programme and European Next Generation
Rotorcraft Programme. In addition, Defence
repricing is proceeding ahead of plan,
with 42% of core defence work now being
sustainably priced. Our leadership in next
generation technologies was cemented
through a new partnership with Embraer
to explore the implementation of hydrogen
technologies in aviation.
We made further progress with operational
gains in 2023, with safety and quality always
being our top priorities. During the year we
reduced total reportable safety incidents by
19%, and the number of quality escapes
(issues reaching our customers) was 44%
lower than prior year. Our performance
on customer deliveries improved with a
reduction in arrears of £40 million, despite
the significant ongoing industry supply
chain issues. Productivity was impacted
by these supply chain shortages, however
underlying gains are being made through
focused Lean implementation, automation
and digitalisation. The plan to rationalise our
footprint from 12 sites to nine in Engines, and
40 sites to 22 in Structures has continued
to progress well. All business improvement
initiatives remain firmly on, or ahead of, plan
and we expect further gains to read through
as we deliver revenue growth from a more
focused and productive operational base.
Strategy
Following completion of the Demerger,
Melrose has now changed strategy to
being purely an aerospace business, and is
reporting publicly as two divisions, Engines
and Structures. The previous Melrose
business model of “Buy, Improve, Sell”,
has been replaced by “Design, Deliver,
Improve”. This new business model reflects
how value will be created by Melrose
going forward based on differentiated
technology leadership, consistent delivery
of commitments to our stakeholders, and
ongoing improvement in all areas – including
progressive financial results.
Our plan is to deliver strong profitable
growth driven in particular by our
exceptional Engines division. By 2025,
Engines is forecast to contribute over
70% of Melrose profit with over 85%
of this being from the accretive and
structurally growing aftermarket. Within
this aftermarket business, our unique
RRSP portfolio – which includes leading
engines from all major OEMs – is expected
to generate £22 billion of future cash flows
(using a rate of USD$1.25). The positive
momentum in Engines is demonstrated by
our guidance that its 2025 margin target of
28% will be achieved a year early in 2024.
Our Structures division also has a positive
profitable growth trajectory and is well
on track to deliver its 9% margin target
in 2025. This represents significant gains
from the modestly above breakeven result
in 2022 (immediately post COVID‑19) and
the 5% margin that was delivered ahead
of expectations in 2023. The ongoing
Structures margin expansion will continue
to come from civil volumes ramping‑up,
our Defence portfolio repositioning
and repricing, and ongoing wider
business improvements.
Our immediate focus will remain
on delivering organic growth with
an increasing number of exciting
technology‑led opportunities emerging for
the future, particularly in Engines where
returns are highly attractive and accretive.
The Board has confirmed that no material
acquisitions will be made in the near‑term.
MELROSE HAS AN EXTENSIVE
RANGE OF PROPRIETARY
“TIER ONE” TECHNOLOGY
THAT IS IN STRONG DEMAND
FROM AEROSPACE OEMS.
THIS TECHNOLOGY IS
ALREADY EMBEDDED INTO
THE WORLD’S LEADING
COMMERCIAL AND DEFENCE
AIRCRAFT PLATFORMS – BOTH
IN AEROSPACE ENGINES AND
IN STRUCTURES.
While our strategy has changed, the Group
will retain the most important elements
of what made Melrose successful: rapid
decision making; empowering management
teams; and accountability for results. Our
determination and focus on improving
businesses at pace will also always remain at
the heart of what we do. This coupled with
GKN Aerospace’s technology leadership and
engineering excellence will be a powerful and
competitive combination.
READ MORE ABOUT OUR
TWO OPERATING DIVISIONS
Engines
page 8
Structures
page 10
5
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023STRATEGIC REPORT
CHIEF EXECUTIVE OFFICER’S REVIEW CONTINUED
Melrose and GKN
Within the markets in which it operates, the
GKN Aerospace brand conveys quality,
reliability and deep technical expertise. This is
both a function of its position as a long‑term
trusted partner to all major airframe and
engine OEMs, and its pioneering approach to
the delivery of next generation solutions.
Within financial markets, since its formation
in 2003, Melrose has established itself as
an excellent steward of capital, empowering
businesses to unlock their full potential for
the collective benefit of stakeholders. As
a focused aerospace group, the Melrose
strategy may have changed but the unstinting
focus on value creation remains.
WHAT MADE MELROSE
SUCCESSFUL: RAPID DECISION
MAKING; EMPOWERING
MANAGEMENT; AND
ACCOUNTABILITY FOR
RESULTS, COUPLED
WITH GKN AEROSPACE’S
TECHNOLOGY LEADERSHIP
AND ENGINEERING
EXCELLENCE WILL BE A
POWERFUL COMBINATION.
We have therefore chosen to preserve
both brands given their inherent value and
reputation to different stakeholders. Going
forward, the Group will operate with one
brand for its customers, GKN Aerospace,
and one brand for financial markets,
Melrose Industries PLC. Internally we have
created one unified and efficient organisation
but with an emphasis on decentralisation that
empowers customer‑facing leaders and local
operating teams.
Market update and
portfolio position
Our end markets continue to recover
strongly and look set for sustained structural
growth in the years ahead. The demand is
compounded by the fact that over the last
four years there was a significant reduction
in aerospace deliveries due to COVID‑19 and
the well‑publicised issues with the Boeing
737 MAX. In addition, the industry supply
chain is currently pacing deliveries due to
capacity and raw material shortages. This
dynamic continues to create a mismatch
between supply and demand, and backlogs
have increased in 2023 in our key markets.
Given our embedded position on all major
civil and defence aircraft, these large
backlogs underpin our expected future
business growth.
In 2023, global revenue passenger kilometres
closed to within 1% of pre‑COVID‑19 levels
and many domestic markets were ahead of
previous peak levels. With strong order intake
and constrained supply, the total civil aircraft
order backlog has reached a record of over
14,000 aircraft.(1) Defence demand has also
increased significantly due to geo‑political
tensions. The book‑to‑bill ratio for leading
global defence businesses is expected to
remain above 1x in the near‑term.
Our positions on all leading commercial
narrowbody and widebody aircraft are
well established with a stronger weighting
towards Airbus over Boeing. Our positions
are largely design to build and sole
source, including metallic and composite
aerostructures, wiring, transparencies and
anti‑ice systems. Within Defence we have a
similar technology portfolio with extensive
content on the leading global F‑35 fighter jet,
plus positions on leading military helicopters
and cargo aircraft. Our Engine portfolio is
unique in terms of its breadth and coverage
of global flying hours. Our deep design
expertise has been embedded in leading
engines from all major engine OEMs with
RRSP positions on 19 engines, including
100% coverage of legacy narrowbody
engines (CFM56 and V2500). In total, our
technology supports more than 100,000
flights per day and our business is therefore
directly linked to global market growth.
Market trends
page 12
OUR BUSINESS
OUR TWO DIVISIONS
GKN ENGINES
GKN STRUCTURES
6
(1) Source: Boeing and Airbus websites.
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023
Sustainability
We are well positioned to play an important
role in the development of sustainable flight
and see this as key to our future success. We
are investing selectively in developing new
technologies, independently or in conjunction
with customers and governments, that
we believe will further enhance our
market position. This includes developing
new manufacturing methods to make
established components more sustainably
today – such as additive fabrication and
thermoplastics. Our partners continue to
embed technological improvements to make
current aircraft more fuel efficient, with Pratt
& Whitney’s Geared Turbofan now certified
on 50% Sustainable Aviation Fuel (“SAF”) and
successfully tested on 100% SAF. In parallel,
we are working on longer‑term developments
such as our pioneering work on Hydrogen
aircraft propulsion and storage, plus
associated electrical distribution systems.
For example, GKN Aerospace is part of the
Hydrogen in Aviation Alliance, established in
September 2023 to accelerate the delivery of
zero carbon aviation.
We are also taking action to reduce the direct
impact of our business on the environment.
This year has seen continued momentum,
with a number of our environmental targets
being achieved early. New 2025 targets have
therefore been set, including a reduction
in Scope 1 & 2 emission intensity by 50%,
and a 40% reduction in water intensity by
2025. To enable aviation’s route to Net Zero
by 2050, we have set 2025 targets for the
percentage of sustainable R&D at 80%.
Sustainability review
page 43
Guidance for 2024 and 2025
Income Statement
Revenue:
Engines
Structures
Aerospace
Adjusted operating profit (pre‑PLC costs):
Engines
Structures
Aerospace
2024 (Targets)
2025 (Targets)
£1.45bn – £1.50bn
£2.15bn – £2.25bn
£3.60bn – £3.75bn
£410m – £420m
£140m – £150m
£550m – £570m
£1.8bn
£2.2bn
£4.0bn
£500m
£200m
£700m
Adjusted operating profit margin (pre‑PLC costs)
>15%
17% – 18%
Adjusted EBITDA (pre‑PLC costs):
Engines
Structures
Aerospace
PLC costs
OUR POSITIVE MOMENTUM
GIVES US CONFIDENCE TO
RAISE OUR OPERATING
PROFIT GUIDANCE BY
£30 MILLION FOR 2024 (6%)
Capital allocation
The Group commenced a £500 million
share buyback programme in
October 2023 with £93 million paid
within the year. The programme is
anticipated to complete by the end
of September 2024. We will maintain
a disciplined approach to capital
allocation going forward with a singular
focus on generating the most attractive
returns for shareholders. This includes
investing in an increasingly promising
range of organic growth opportunities,
particularly in Engines given its very
accretive economics. We will pursue
these opportunities while keeping
leverage comfortably within the
previous guidance.
We also remain committed to paying
a progressive annual dividend. For
2023 the Board has recommended a
final dividend of 3.5 pence per share,
which will be paid on 8 May 2024 to
shareholders on the register at the close
of business on 2 April 2024. This makes
the total dividend for 2023 5.0 pence
per share.
£480m – £490m
£230m – £240m
£710m – £730m
c£30m
£580m
£290m
£870m
c£30m
Group outlook
The Group is well positioned to deliver
further significant progress in 2024 and
beyond. Our positive momentum gives us
confidence to raise our adjusted operating
profit guidance (pre‑PLC costs) by
£30 million for 2024 (6%), driven primarily
by Engines revenue growth and adjusted
operating margins. Notwithstanding the
upgraded operating profit guidance,
there remain revenue headwinds from
industry‑wide supply chain issues,
short‑term destocking due to the phasing
of commercial aircraft build rates, and the
impact of planned exits and disposals in
our Structures division.
The progress we expect in 2024 will
further narrow the gap to our 2025 targets.
These are increasingly underpinned by
the Engines outlook and mix, Civil ramp
up, Defence portfolio improvements
and ongoing business improvements
throughout the Group.
Peter Dilnot
Chief Executive Officer
7 March 2024
7
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023STRATEGIC REPORT
DIVISIONAL REVIEW
ENGINES
The Engines division made
strong financial, operational
and strategic progress during
2023. Divisional growth
was supported by strong
end markets with increasing
flying hours leading to an
acceleration in shop visits
and spare parts demand. Our
unique RRSP portfolio further
matured during the year,
providing good momentum
and visibility to divisional
margins exceeding 30%
beyond 2025.
(1) Like‑for‑like growth is calculated at constant
currency against 2022 results and excludes
businesses being exited.
8
INDUSTRY‑LEADING ENGINES DIVISION
POSITIONED TO ACHIEVE EXCEPTIONAL GROWTH
£1,193m
£360m
Revenue
(2022: £1,035m)
Adjusted EBITDA
(2022: £215m)
£310m
Adjusted operating profit
(2022: £162m)
30.2%
Adjusted EBITDA margin
(2022: 20.8%)
26.0%
Adjusted operating profit margin
(2022: 15.7%)
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023 During the year, revenue was up 16%(1) versus
2022. OE revenue grew 3%, constrained
by ongoing industry supply chain issues.
Underlying demand is therefore higher
than the reported level of growth indicates.
Aftermarket revenue was up 34%, led by 40%
growth in the civil engines aftermarket from a
combination of volume increases, wider shop
visit scope and positive pricing. Adjusted
operating margins improved 10.3 percentage
points to 26%. Encouragingly, the second
half margin was ahead of our initial and most
recent guidance at 27.5%.
Over the course of 2023, commercial
highlights include the signing of a major
new agreement with GE Aerospace. This
agreement expands RRSP participation on
the GEnx programme, the fastest‑selling
high‑thrust engine, and also covers new
technology insertion. The agreement
also enables GKN Aerospace to join
GE Aerospace’s global aftermarket
repair network as well as securing
life‑of‑programme contracts to deliver 100%
of GEnx, CF6 and GE90 fan cases, and
50% of GE9X fan case assembly. Other
commercial highlights include a new contract
with Safran to supply shafts for the LEAP
engine family, plus a ten‑year extension of an
OEM supply agreement with Pratt & Whitney
for their military engine programme family
of cases such as F135, F100 and F119. Our
Engines division also continues to support
the Swedish Air Force with complete engine
production and maintenance for their fighter
fleet and this extends to wider international
military customers who also fly the Gripen
jet. The demand for this support continues
to be elevated due to higher defence flying
hours, most notably due to the ongoing war
in Ukraine.
We continue to work closely with Pratt &
Whitney and other partners to manage the
well‑publicised issues from powder metal
manufacturing on some variants of the GTF.
The associated inspection programme is
now well underway with global airlines and is
progressing according to plan with increasing
clarity on the execution schedule and
regulatory framework. Our previous financial
guidance is unchanged with no profit impact
expected from this issue and with a total
cash cost of around £200 million over the
next few years if it is assumed that this is all
a programme cost. More broadly, we remain
confident that the GTF will be a robust and
attractive narrowbody engine in the decades
ahead. Beyond the GTF, we have 17 other
RRSP life‑of‑programme contracts and these
generated a positive contribution in 2023.
Most notably, we have 100% coverage of
legacy narrowbody engines through our
CFM56 and V2500 positions and these
performed strongly with flying hours returning
towards pre‑COVID‑19 levels. The returns
from our widebody engines, GEnx and XWB,
are also continuing to grow with recovering
long‑haul travel.
Our strategically important repair business
grew by 23% in 2023 as demand continued
to increase strongly and our new capacity
came online. Further growth will be driven by
our Malaysian fan blade repair centre which
gained its Civil Aviation Administration of
China (CAAC) certification in 2023, opening
up the rapidly expanding China and Asia
markets. The development of our new
state‑of‑the‑art dedicated engine component
repair centre in El Cajon, California (US), is
progressing well and remains on target to
open in 2024.
It was also a positive year operationally
for Engines. A breakthrough quality target
of “zero escapes” (issues reaching our
customers from our sites) in the core
Engines business was successfully achieved
throughout 2023. The division also stayed
ahead of OEM production with reliable
customer deliveries, despite supply chain
issues that impacted our own production
flows and productivity. Further progress
continued during the year with our digital
initiatives, including our internally developed
machine and factory connectivity programme
called CO‑PILOT. These initiatives, coupled
with ongoing Lean implementation across
the global site footprint, will deliver further
quality, delivery and productivity gains
going forward. In addition, the US East
Coast sites consolidation and Nordics
restructuring programmes have progressed
well, providing greater financial benefits than
originally envisaged.
The development of our unique additive
fabrication business, using laser wire
deposition in conjunction with other
technologies, has accelerated significantly.
This innovative and proprietary new
manufacturing approach enables complex
engine parts to be made with less reliance
on complex and large forgings and castings
– many of which are currently capacity
constrained. Our additive fabrication
approach is gaining significant traction with
Engine OEMs as they look to alternative
manufacturing methods which can
provide additional sources of supply with
shorter lead times, lower costs and more
sustainable processes. Current subtractive
manufacturing typically results in around
80% of material being machined away
to achieve the final product. By contrast,
additive fabrication effectively builds
and welds parts in near final form
thereby minimising raw material waste,
energy use and shipping emissions.
Our commitment to this breakthrough
proprietary technology is illustrated by
a £50 million investment in a low rate
production additive fabrication plant in
Trollhättan, Sweden, which included
£12 million funding support by the Swedish
Energy Agency’s Industriklivet initiative.
Following a successful certification
process we are now shipping the initial
additive fabrication engine components
to customers. The future opportunities
are extremely promising and they over
time include manufacturing more parts on
existing engines, as well as development
parts for next generation engines such as
CFMI RISE.
Outlook
The Engines division is extremely well
placed to drive profitability throughout
this decade and beyond. The division has
OEM‑level capability, strategic partnerships
with all major engine OEMs, a lucrative
and diverse RRSP portfolio, and GKN
proprietary breakthrough technologies that
are becoming increasingly valuable to the
industry at large.
To unlock the potential of the division we
have a clear and well‑established path
for delivering profitable growth based on:
increasing RRSP portfolio contribution;
focused Engines growth initiatives
including repairs and additive fabrication;
and ongoing business improvements. In
the context of robust demand, partially
tempered by ongoing supply chain issues,
we expect to deliver strong revenue
progress in 2024, led by aftermarket
growth, and our target 2025 adjusted
operating margin of 28% to be achieved
one year early. We are also increasingly
confident that Engines will deliver >30%
margins beyond 2025.
Structures
Divisional Review
page 10
9
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023STRATEGIC REPORT
DIVISIONAL REVIEW CONTINUED
STRUCTURES
Structures had a strong year
delivering adjusted operating
margins of 5.1%, well ahead of
our original plan of 3%. This
performance was driven by
expected volume growth as
civil production ramped up,
as well as the positive impact
of our extensive business
improvement actions reading
through strongly, especially in
the second half.
(1) Like‑for‑like growth is calculated at constant
currency against 2022 results and excludes
businesses being exited.
10
STRONG GROWTH TRAJECTORY,
EXCEEDING PRE‑PANDEMIC PROFITABILITY
£2,157m
£201m
Revenue
(2022: £1,919m)
Adjusted EBITDA
(2022: £115m)
£110m
Adjusted operating profit
(2022: £24m)
9.3%
Adjusted EBITDA margin
(2022: 6.0%)
5.1%
Adjusted operating profit margin
(2022: 1.3%)
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023 These business improvements include good
progress on rationalising our global site
footprint, commercial renegotiations and
operational gains. The division is increasingly
design led with excellent customer positions,
and benefits from technological expertise
well suited for next generation aircraft,
expected to drive long‑term growth. The
division remains firmly on track to achieve
its 9% adjusted operating margin target
by 2025.
The positive trajectory for Structures is
underpinned by strong demand. In civil, order
backlogs are at record levels with A320 order
slots now being booked in 2030 and beyond.
The rate of production ramp‑up is currently
being constrained by ongoing industry wide
supply chain issues, and volumes are set to
increase structurally as capacity expands in
the years ahead. The narrowbody ramp‑up
is evident and is extending to widebody
production rates as long‑haul travel recovers.
In defence, global spending continued its
rapid expansion in 2023 due to geo‑political
tensions and as budgetary plans announced
in the wake of Russia’s 2022 Ukraine invasion
started to positively impact. Total global
defence spending has risen to US$2.2 trillion
in 2023, an increase of 9% on the prior year
(source: IISS). Sustained growth is set to
continue with positive book‑to‑bill ratios
expected for all the leading Defence primes.
We have an established technology position
on all major civil and defence platforms, so
are well placed to capture market growth in
the years ahead.
In 2023 Structures revenue grew 18%(1)
versus prior year. Civil growth of 28%(1)
reflected higher OEM production rates and
Defence was flat(1) due to increased demand
and shipments offset by strategic exit of
business. Divisional adjusted operating
margins improved by 3.8 percentage points
to 5.1% driven by volume increases, improved
pricing and operational improvements, plus
portfolio moves in Defence. Our focused
work on improving the quality of our Defence
portfolio through renegotiation or exit
continues at pace and we are now ahead
of plan. In total 42% of core contracts are
now sustainably priced, more than double
the proportion at the end of 2022. We are
increasingly confident of achieving the target
85% of the portfolio being sustainably priced
by 2025.
Over the course of 2023 we achieved a
number of significant commercial milestones
within our Structures division. This included
successes with Airbus on establishing
electrical wiring interconnectivity systems
(‘EWIS’) capability in Mexico for the A220,
as well as delivering the final trailing edge
in the Wing of Tomorrow development
programme. The division also delivered
its 1000th Honeywell HTF Nacelle and its
600th Gulfstream G650 Empennage with
production rates reaching an all‑time high.
Our position at the forefront of the next
generation Air Mobility Market was reinforced
through partnerships with the leading
players Joby, Archer and Supernal. This is a
market in its early stage but one where we
are making good progress and see multiple
opportunities while limiting our financial risk.
Operationally, Structures made good
progress and has momentum to deliver
further gains. Our top priority is always
safety and quality, and during 2023 the Civil
business achieved a landmark of zero lost
time accidents and the wider Structures
division delivered a 43% reduction in quality
‘escapes’ (issues reaching the customer)
versus prior year. Our deliveries also
ramped‑up strongly despite the ongoing
industry supply chain challenges with arrears
in the division 34% lower than 2022. The
extensive restructuring programme within
Structures is nearing completion with the
successful consolidation and restructuring
of the Netherlands’ footprint down from six
sites to two multiple technology campuses
in Hoogeveen and Papendrecht. In the
US and Mexico the site footprint has been
rationalised to create three centres of
excellence at Chihuahua, Orangeburg and
Wellington. Going forward, we expect to
deliver further quality, productivity and cost
improvements as volumes increase within our
restructured and leaner operating base.
More broadly, our new COMAC and AVIC
joint venture (“JV”) site in Jingjiang, China
remains under construction with production
expected from Q2 2024 and with the first
work packages already agreed. China is set
to become the largest aviation market by
2040, opening 150 new airports by 2035,
and this JV unlocks the path to this promising
and important indigenous market. Our
work on focusing the Defence portfolio has
continued and we divested the non‑core Fuel
Systems business on 1 March 2024.
We are also positioning Structures to play a
valuable and profitable role in future aircraft
developments. This is built upon GKN
Aerospace’s expertise in thermoplastics,
EWIS and lightweight aerostructures, as
well as breakthrough additive manufacturing
methods that can accelerate product
development. During 2023 our technological
leadership was evidenced through our
collaboration with Embraer to explore a
hydrogen flight demonstrator, with Pratt &
Whitney Canada for a hybrid electric flight
demonstrator, and by completing the first
high voltage electrical harness for the Lilium
jet. Our Defence business is well positioned
for design and build content on the Global
Combat Air Programme with the UK, Italy
and Japan, and with two leading OEMs for
uncrewed systems. We also remain well
placed on future rotorcraft programmes
in the US (Future Vertical Lift) and EU
(European Next Generation Rotorcraft).
To further support the Structures
positioning in next generation technology,
and the pursuit of Net Zero, a new Global
Technology Centre (“GTC”) opened in
Hoogeveen, Netherlands, with a particular
focus on lightweight thermoplastics and
high voltage wiring systems. This new
centre complements our established
GTCs across the wider Group in Bristol
(UK), Trollhättan (Sweden) and Fort Worth,
Texas (US).
Outlook
Structures has an embedded position as a
Super Tier One partner to the world’s leading
aircraft OEMs, coupled with unrivalled
technical expertise. The division is therefore
well placed to benefit from civil ramp‑up,
defence spending and new platforms,
and the shift to sustainable aviation over
time. Our design to build business model
and increasingly focused portfolio is set to
deliver high quality earnings.
For 2024 we expect to make revenue
progress reflecting market growth. However,
reported revenue is likely to be flat versus
prior year due to short‑term destocking
at some Civil customers (caused by their
supply chain challenges), the planned exit of
non‑core work previously outlined, and the
disposal of the Fuel Systems business. For
the full year the division is expected to make
further progress in expanding adjusted
operating margins and we expect the year
to have second half seasonal weighting as
usual. Looking forward, we are increasingly
confident of achieving our 2025 adjusted
operating margin target of 9%.
11
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023STRATEGIC REPORT DIVISIONAL REVIEW CONTINUED
MARKET TRENDS
SUSTAINABILITY
FOCUS
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.
CIVIL
RECOVERY
Global flight hours continued
to recover and finished 2023
within 1% of pre‑COVID‑19
levels. The US led the way,
with traveller numbers well
above pre‑pandemic figures,
while Europe and China are
set to overtake 2019 levels in
2024. Demand for new aircraft
grew, led once again by the
single aisle market, as airlines
look to replace ageing fleets
with newer, more efficient
aircraft. Deliveries continue
to be paced by the complex
supply chain and operating
environment.
DEFENCE
GROWTH
Geo‑political instability and
conflicts have driven up
defence budgets and the
demand for key military
platforms. 2023 also saw
investment in Trans‑Atlantic
industrial bases to increase
resilience and address supply
chain challenges. These
trends are set to enable future
business growth through
increased orders for F‑35s
and the rapid adoption of
uncrewed systems.
The Group has responded to these trends, by:
Evolving into a focused Aerospace
technology business, with a
new business model of “Design,
Deliver, Improve”. Following this
strategy, Melrose will create value
through differentiated technology
leadership, consistent delivery for
our stakeholders, and ongoing
improvement in all areas. This
will enable the business to meet
growing customer demand in both
the civil and defence markets,
from a more balanced and
customer‑focused global footprint.
Strengthening the Defence business
to take advantage of future growth,
from operational performance and
technology leadership to refocusing
on higher quality “design‑to‑build”
contracts and repricing activities. In
total 42% of core defence work is
now sustainably priced, well ahead
of target. The Defence team will
continue to strengthen its position
on key programmes in 2024, such
as the F‑35, while positioning itself
to support the next generation
platforms in Europe and the US.
Launching new, more ambitious
2025 Group sustainability targets,
including a reduction in Scope 1 &
2 emission intensity by 50%, and
a 40% reduction in water intensity.
Alongside its own operations, the
Group has continued to push the
boundaries of more sustainable
technology for our customers.
These include ground‑breaking
additive fabrication progress within
our Engines division, and pioneering
zero‑emissions solutions in electric
flight and hydrogen propulsion
development.
12
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023 Engine Flight Hour Forecast (millions)
250
200
150
100
50
0
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
Narrow Body
Wide Body
Source: AWIN
OEM deliveries chart
2,500
2,000
1,500
1,000
500
0
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
2030
Source: Teal
Narrow Body
Wide Body
Allied defence spend ($ trillions)
2.5
2.0
1.5
1.0
0.5
0
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029
Source: AeroDynamic Advisory
Chart relates to spending from NATO, India, Sweden, Finland, Saudi Arabia, Australia, Japan, Israel and South Korea.
• Strong recovery in passenger
demand continued, with 2023
ending at almost 2019 levels
• Passenger load factors
remained high, above 80%
• Holiday traffic drove a strong
finish to 2023, with high demand
across the US and Europe
• Global air cargo saw 8.3%
year‑on‑year growth, the highest
for two years
• Airbus booked a record number
of gross aircraft orders (2,319) in
the year
• Airbus and Boeing’s combined
backlog now stands at more
than 14,000 aircraft, stretching
well into the 2030s
• The number of aircraft in service
in 2023 increased significantly
year‑on‑year for both single aisle
(8.1%) and widebodies (7.6%)
• Complex supply chain
environment continued to
suppress output, but will ease
over time
• Addressable defence market
spending set to rise from $1.5
trillion in 2021 to $1.9 trillion in
2024, a CAGR of more than 8%
• Defence industrial base is under
significant pressure to meet high
rate growth requirements
• Increasing defence budgets
in response to heightened
geopolitical uncertainty
• F‑35 programme ten‑year
forecast now ~$150 billion,
while global military uncrewed
and missile markets set to grow
significantly
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023
13
STRATEGIC REPORT OUR BUSINESS MODEL
A COMPELLING BUSINESS MODEL
DESIGNED TO CREATE CONSISTENT
LONG‑TERM VALUE
OUR COMPETITIVE STRENGTHS
OUR VALUE CHAIN/WHAT WE DO
Design
Improve
Deliver
Aerospace expertise
With our technology leadership, OEM‑heritage and
global manufacturing capability, we are the world’s
leading multi‑technology Tier 1 business across civil
and defence aerospace.
90 yrs
Customer partnerships of up to 90 years
Global partner with market‑leading positions
Our differentiated, high‑quality products give us
established positions on all of today’s high‑volume
aircraft, across all major OEMs, and positions us
strongly for future platforms.
100,000
Technology on‑board 100,000 flights a day
Investment for growth
We invest in our people, in R&D and in sustainable
production to build excellence and generate
long‑term growth across our businesses.
c.£150m
Investment in climate‑related technology
since 2020(1)
Financial discipline
We have a clear focus on operating cash
generation and profitability. The partnership
risk/reward model gives us long‑term visibility
of strong future cashflows.
£22bn
Future cash flows from engine RRSPs
A compelling track record
We have a strong track record of delivering for
our customers and shareholders, securing the
operational and financial health of our businesses.
>£8.2bn
Total returns to shareholders by Melrose
(1) Excluding investments made into climate‑related R&D programmes
within businesses that are no longer part of the Group.
14
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023
Design
We are a design partner for our customers, anticipating their
needs, providing breakthrough technologies and creating
highly engineered solutions where quality always comes
first. We think like a peer, act like a partner, and deliver like
a supplier. We invest in our businesses to drive growth
in attractive markets and develop innovative solutions to
the most pressing and complex challenges across the
aerospace sector.
We are committed to sustainable technology development to
accelerate the future of zero emission flight.
Deliver
Delivering on our customer and financial commitments is the
foundation of our business. We drive operational excellence
to ensure our customers receive high‑quality products on
time, whilst generating long‑term value for our investors. This
ensures a vibrant and trusted business for all stakeholders.
We take pride in our work, take ownership of our
commitments, and always deliver on our promises.
Improve
Melrose doesn’t stand still. Continuous improvement
applies throughout all that we do and will always remain
central to our success. We are committed to unlocking
value through ongoing improvement in customer fulfilment,
employee engagement, environmental impact and
financial performance.
We maintain a relentless focus on profitable, sustainable
and cash generative growth.
S
T
R
A
T
E
G
I
C
R
E
P
O
R
T
DELIVERING VALUE FOR
ALL OUR STAKEHOLDERS
We design
Industry‑leading solutions
>650
global patents granted
Technology design partner
Only
Tier 1 partner on both RISE and next‑generation
GTF engine technology programmes
We deliver
Essential products for our customers
c.90%
On board c.90% of major civil aircraft today
Strong financial performance
11.6%(1)
Adjusted operating profit margin in 2023
We improve
Health and safety
in the workplace
>19%
reduction in total injury rate in 2023 vs 2022
Protecting the environment
through operational and
value chain emissions reductions
38%(2)
reduction in Scope 1 and 2 emissions since 2020
(1) Described in the financial statements on page 232, and
considered by the Board to be a key measure of performance.
(2) Market‑based method has been used for Scope 2 emissions.
15
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023
20 YEARS OF MELROSE
MELROSE – 20 YEARS OF CREATING
VALUE FOR BUSINESSES AND FOR
OUR SHAREHOLDERS
Over the last 20 years,
Melrose has delivered
significant value to
shareholders under its
successful “Buy, Improve,
Sell” business model.
By acquiring underperforming manufacturing
businesses, applying disciplined long‑term
operational and financial improvement measures,
and with the strong and consistent support of
our shareholders, we have created approximately
£6 billion in shareholder value, made total returns
of over £8 billion to shareholders, and generated
an average return of 2.5x shareholders’ equity for
the businesses we have sold.
Following last year’s demerger of Dowlais
Group plc, Melrose became a pureplay, listed,
aerospace‑only business, marking the end of
“Buy, Improve, Sell”. At its heart, our new strategy
remains focused on value creation, founded
upon continuous operational and financial
improvement over the longer term. Our positive
trajectory is underpinned by the strong organic
growth prospects within the aerospace sector,
alongside attractive opportunities to further
differentiate our business through cutting‑edge
proprietary technology.
Track record for £1 invested in Melrose
Investment in May 2005 with all dividends reinvested since
(Total shareholder return)(1)
£1
Original investment
in May 2005
£31.39
Gross return on original
£1 investment
2005
2023
Shareholder investment and gain
(figures up to 31 December 2023)
Total shareholder return (TSR)(1)(2)
£5.7bn
Shareholder value created since establishment
Melrose
3,039%
FTSE 100
210%
TSR
higher
by c.14x
£8.2bn
Total returns to shareholders
2.5x
Average return on equity across all
businesses sold
20%Average annual return on equity investment
since the first acquisition(1)(2)
16
(1) Source: Datastream Total Shareholder Return Index
(2) Since Melrose’s first acquisition (May 2005)
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023 WHY AEROSPACE? WHY NOW?
GKN Aerospace is the highest quality business Melrose has ever owned. It has significant
positive momentum today and is uniquely positioned for long‑term growth. As a pureplay,
listed aerospace company, Melrose offers a compelling equity case.
STRONG MARKET GROWTH
• Rapid aerospace market recovery, followed by long term
structural growth
HUGE ENGINES AFTERMARKET
• RRSP work largely done on engine build, but with
entitlement to lifetime share of aftermarket profits
• Technology embedded on the world's most successful,
• £22 billion of lifetime net cash inflow (£5.7 billion NPV)
highest volume platforms
coming increasingly from Engines aftermarket
30%
Higher global air traffic
in 2023 vs 2022
>70%
revenue from sole
source positions
100%
of all legacy narrowbody
flying hours covered by
an RRSP
>85%
of all future Engines
profit from aftermarket
ATTRACTIVE PROFIT GROWTH
• Increasingly higher profit drop through from strong Engines
STRONG BALANCE SHEET
• Well placed to invest in organic growth, alongside delivering
aftermarket growth
on its ongoing share buyback commitment
• Profit underpinned by restructuring and further operational
• Balance sheet underpinned by Engines’ aftermarket
improvements, plus better pricing
cashflows and improved underlying Group profitability
x2
Profit more than doubled
in 2023
£700m
Adjusted operating profit
guidance for 2025
£500m
Share buyback
scheme underway
Progressive
Annual dividend
to be paid
17
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023STRATEGIC REPORT 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
Adjusted(1) operating profit margin(2)
2023
2022
5.0%
2021
2.4%
METHOD OF CALCULATION
STRATEGIC OBJECTIVE
11.6%
11.6%
Adjusted (1) operating profit as a percentage of
revenue, for the continuing businesses in existence
during the year ended 31 December 2023.
To improve profitability of
Group operations.
Net debt to adjusted(1) EBITDA(3)
2023
1.1x
2022
2021
1.1x
1.4x
1.3x
Final dividend per share(4)(5)
2023
3.5p
2022
2021
3.0p
3.5p
4.5p
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. Comparative information remains aligned
to the original calculations supporting the Group’s
bank debt compliance certificate and has not been
restated for discontinued operations.
Amount declared as payable by way of dividends in
terms of pence per share.
Adjusted(1) diluted earnings per share(2)
2023
18.7p
2022
4.1p
2021
(2.6)p
18.7p
Group adjusted(1) profit after tax of continuing
businesses, attributable to owners of the parent,
for the year ended 31 December 2023, divided by
the weighted average number of diluted ordinary
shares in issue. Comparative information includes
the effects of the one for three share consolidation.
Adjusted(1) free cash generation(2)
2023
2022
£(35)m
2021
£1m
£113m
£113m
Total cash generated from trading after all costs,
excluding restructuring and one‑off payments to
defined benefit pension schemes.
Free cash flow pre-interest and tax margin(1)(2)
2023
2.1%
2022
0.0%
2021
3.0%
2.1%
Free cash flow pre‑interest and tax margin(1)
represents free cash flow(1) adjusted for interest
and tax and excluding finance costs on demerger
settled net debt divided by revenue.
Adjusted(1) operating profit(2)
2023
2022
2021
£61m
£147m
£390m
£390m
Adjusted(1) operating profit for the continuing
businesses during the year ended
31 December 2023.
To ensure the Group has
suitable amounts of debt and
remains within its banking
covenants.
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 2 to 3.
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.
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.
To improve profitability of
Group operations.
(1) Described in the glossary to the financial statements on pages 232 to 239.
(2) Data has been restated for discontinued operations in 2022 and 2021.
(3) Operating profit before depreciation of property, plant and equipment and amortisation of computer software and development costs.
(4) A final dividend for 2023 of 3.5 pence per share will be paid on 8 May 2024. For 2022, a second interim dividend of 4.5 pence per share(5) was paid on 11 April 2023 in place of the
final dividend.
(5) Dividends per share have been adjusted for 2022 and 2021 to include the effects of the one for three share consolidation that took place on 19 April 2023.
18
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023 NON‑FINANCIAL KPIs
HEALTH AND SAFETY
Each business line within the Group is
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 on a quarterly basis
on three KPIs – Major Accident Frequency,
Lost Time Accident Frequency, and Accident
Severity (each as defined below) – for the
entire Group and covering all sites. This is
supplemented with qualitative analysis of any
key incidents or drivers behind performance,
and any material improvement programmes
that are taking place. A variety of additional
health and safety KPIs are used by the Group
from time to time, which are specific to the
exact nature of operations and associated
risks. Although responsibility for health and
safety rests with the business units, in the
unfortunate circumstance of a very serious
incident, the Group’s senior management
team will engage directly with the executive
team of the relevant business line and report
any actions taken directly to the Board.
Strategic objective
The Group has an objective to stop all
preventable accidents.
Performance(1)
Major Accident Frequency Rate
2023
2022
2021
0.041
0.036
0.032
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
2023
0.053
2022
2021
0.036
Records the number of lost time
accidents, both major and minor,
per 200,000 hours worked.
Accident Severity Rate
2023
2022
2021
7.83
10.73
0.070
34.4
Records the average number of days
an employee takes off work following an
accident at work.
The Group’s health and safety function
continues to elevate health and safety
awareness and accelerate improvement
actions across operations. This is being
approached both 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 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 was 0.041, and its Lost Time Accident
Frequency Rate was 0.053. Specific lost
time incidents in the Engines business line
drove increases compared to 2022, which
has led to significantly increased focus
from the business surrounding compliance
with the Group’s Golden Safety Rules and
safety governance in order to drive physical
safety improvements on the shop floor,
and to redouble communications around
safety measures and risk assessments.
This resulted in a proactive targeted drive
to enhance risk management education
throughout the organisation. This has been
delivered through in‑person and virtual
task specific risk management workshops.
The Accident Severity Rate has increased
year‑on‑year due to one isolated incident
involving minor injury which resulted in
an employee taking considerable time off
in line with local government policy for
injury‑related leave.
Each incident is promptly and fully
investigated, and responded to through
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
to identify continuous improvement actions
where necessary.
The Group’s focus on minimising preventable
accidents continues, and our business lines
continue to uphold and further develop high
standards of health and safety performance.
ENVIRONMENT
Method of calculation
Following the shift to becoming an
aerospace‑only Group, Melrose has
refreshed its sustainability targets and
KPIs to reflect the new single sector,
integrated Melrose/GKN Aerospace
organisation. Data is provided 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. For
more information on our environmental
KPIs, please see the Sustainability review
section on pages 43 to 93.
Strategic objective
Our shift to becoming an aerospace‑only
business has enabled a refocus of
investment and efforts to better align
our environmental responsibilities within
our operations and the wider sector. We
are fully committed to making efficiency
improvements where possible and to run
our operations with minimum possible
adverse effect on the environment.
Performance
Information in relation to the various
environmental initiatives undertaken by the
Group during 2023 can be found within the
Sustainability review on pages 43 to 93.
The Group is required to disclose its
Greenhouse gas emissions and certain
energy use data for the year ended
31 December 2023. Such data can be
found within the Sustainability review on
page 75.
OTHER NON‑FINANCIAL KPIs
Reflective of the new Group structure
and GKN Aerospace’s progress against
existing targets, we have reviewed
non‑financial KPIs to ensure they are
relevant to the business and take
into account specific operational and
reporting requirements. The KPIs are
used to drive business performance
and assist in managing risk. 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 43 to 93.
(1) All ESG data across our selected KPIs, including Health & Safety KPIs, over prior years has been restated to only include Melrose and GKN Aerospace performance.
19
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023STRATEGIC REPORT FINANCE DIRECTOR’S REVIEW
The year ended 31 December 2023
has seen a significant transformation
for the Melrose Group.”
Geoffrey Martin
Group Finance Director
20
Revenue
£3,350m
(2022: £2,954m)
Adjusted operating profit
£390m
(2022: £147m)
Full year dividend
5.0p
On 20 April 2023 the demerger of the GKN Automotive, GKN Powder
Metallurgy and GKN Hydrogen group of businesses (“Dowlais”)
completed. Dowlais contributed approximately two thirds of the
adjusted revenue and adjusted operating profit of the Group in 2022
and therefore the demerger, and necessary treatment of Dowlais
as discontinued, has a material impact on the presentation of these
Consolidated Financial Statements.
Following the demerger of Dowlais, it was deemed appropriate to
announce a change to the Group’s strategy from ‘Buy, Improve, Sell’,
which has served shareholders well since the first Melrose acquisition
in 2005, to being purely an aerospace business that reports as
two separate operating segments, namely Engines and Structures,
alongside the corporate cost centre.
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 £3,350 million
(2022: £2,954 million), an operating profit of £57 million (2022: loss of
£270 million) and a loss before tax of £8 million (2022: £328 million).
The diluted earnings per share (“EPS”), calculated using the weighted
average number of shares in issue during the year of 1,405 million
(2022: 1,406 million), were 0.1 pence (2022: loss of 16.3 pence).
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023 Adjusted results:
The adjusted results are also shown on the face of the Income
Statement. They are adjusted to exclude certain items which
are significant in size or volatility or by nature are non‑trading or
non‑recurring, or are items released to the Income Statement that
were previously a fair value item booked on an acquisition. It is 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 2023 show
an operating profit of £390 million (2022: £147 million) and a profit
before tax of £331 million (2022: £62 million). Adjusted diluted EPS,
calculated using the weighted average number of shares in issue
in the year of 1,405 million (2022: 1,406 million), were 18.7 pence
(2022: 4.1 pence).
The following table shows the adjusted results for the year ended
31 December 2023 split by reporting segment:
Revenue
Operating profit/(loss)
Operating margin
Engines
£m
Structures
£m
Aerospace
£m
Corporate
£m
Total
£m
1,193
310
26.0%
2,157
110
5.1%
3,350
420
12.5%
–
3,350
(30)
390
n/a 11.6%
Revenue for Engines of £1,193 million (2022: £1,035 million) shows
constant currency growth of 16% over 2022, with adjusted operating
profit of £310 million (2022: £162 million) giving an operating margin of
26.0% (2022: 15.7%), an increase of 10.3 percentage points.
Revenue for Structures of £2,157 million (2022: £1,919 million) shows
like‑for‑like (excluding revenue exited in closing businesses) constant
currency growth of 18% over 2022, (12% including revenue exited
in closing businesses), with adjusted operating profit of £110 million
(2022: £24 million) giving an operating margin of 5.1% (2022: 1.3%), an
increase of 3.8 percentage points.
Corporate costs of £30 million (2022: £39 million) included £29 million
(2022: £36 million) of operating costs and £1 million (2022: £3 million)
of costs relating to a divisional cash‑based long‑term incentive plan.
The performances of each of the Aerospace reporting segments are
discussed in the CEO’s Review.
RECONCILIATION OF STATUTORY
RESULTS TO ADJUSTED RESULTS
The following table reconciles the Group statutory operating
profit/(loss) to adjusted operating profit:
Continuing operations:
Statutory operating profit/(loss)
Adjusting items:
Amortisation of intangible assets acquired
in business combinations
Restructuring costs
Equity‑settled compensation scheme charges
Currency movements in derivatives and movements
in associated financial assets and liabilities
Other
Adjustments to statutory operating profit/(loss)
2023
£m
57
260
149
38
(114)
–
333
2022
£m
(270)
260
90
15
79
(27)
417
Adjusted operating profit
390
147
Adjusting items to the statutory operating profit/(loss) are
consistent with prior years and include:
• The amortisation charge on intangible assets acquired in
business combinations of £260 million (2022: £260 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 £149 million (2022: £90 million), including £59 million
(2022: £11 million) of losses incurred in closing businesses within
the Group. These are shown as adjusting items due to their size
and non‑trading nature.
There are three significant ongoing multi‑year restructuring
programmes, impacting multiple sites across the Engines and
Structures divisions, two of which include European footprint
consolidations, and one significant multi‑site restructuring
programme in North America. These programmes incurred a
combined charge, excluding losses, of £62 million in the year.
Since commencement, the cumulative charges, excluding losses,
on these three restructuring programmes to 31 December 2023
has been £217 million (31 December 2022: £155 million), with
approximately 35% relating to the two significant European
programmes and approximately 65% in North America.
As at 31 December 2023, actions to complete the European
programmes, on average, are approximately 95% complete.
During the year, the North America multi‑site restructuring
programme has been expanded and is now approximately 70%
complete. In addition to the remaining charges to be incurred on
these projects, £37 million is included in restructuring provisions at
31 December 2023 to be settled in cash over the next two years.
Restructuring costs during the year also included charges
of £12 million (2022: £nil) relating to changes made within
the Melrose corporate cost centre following the announced
change to the Group’s ongoing strategy. These include the
costs of merging the Melrose corporate cost function with the
previously separate Aerospace division head office team. These
restructuring actions reshape the corporate cost centre to serve
as an ongoing pureplay aerospace business.
21
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023STRATEGIC REPORT FINANCE DIRECTOR’S REVIEW CONTINUED
• The charge for the equity‑settled compensation schemes of
£38 million (2022: £15 million), which includes a charge to the
accrual for employer’s tax payable of £28 million (2022: credit of
£1 million). This is excluded from adjusted results due to its size
and volatility. The shares that would be issued, based on the
scheme’s current valuation at the end of the year, are included in
the calculation of the adjusted diluted earnings per share, which
the Board considers to be a key measure of performance.
• 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 credit of
£114 million (2022: charge of £79 million) in the year and is
shown as an adjusting item because of its volatility and size.
• Other adjusting items, net to £nil (2022: net credit of £27 million),
which included a charge of £3 million in respect of acquisition
and disposal costs, net of a credit of £3 million relating to the
release of fair value items in the year, where items have been
resolved for more favourable amounts than first anticipated at
acquisition. The net release of fair value items is shown as an
adjusting item, avoiding positively distorting adjusted results
from items booked on acquisition. The prior year also includes
the profit on disposal of two corporate properties.
The following table shows the allocation of adjusting items,
described above, by reporting segment:
Statutory operating profit/(loss)
Adjusting items
Adjusted operating profit/(loss)
Engines
£m
Structures
£m
Corporate
£m
147
163
310
(130)
240
110
40
(70)
(30)
Total
£m
57
333
390
FINANCE COSTS AND INCOME
– CONTINUING OPERATIONS
Statutory results:
Total net finance costs in the statutory IFRS results for the year
ended 31 December 2023 were £65 million (2022: £58 million).
Adjusted results:
Total net finance costs in the adjusted results in the year ended
31 December 2023 were £59 million (2022: £85 million), which
included net interest on external bank loans, bonds, overdrafts and
cash balances of £48 million (2022: £72 million).
Net finance costs in adjusted results also included: a £4 million
(2022: £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 £1 million (2022: credit of £1 million);
a charge on lease liabilities of £5 million (2022: £3 million); and a
charge for the unwind of discounting on long‑term provisions of
£1 million (2022: £1 million).
Adjusting items:
Adjusting items, within finance costs and income, total a net charge
of £6 million (2022: net credit of £27 million).
Adjusting items include a £13 million gain (2022: £24 million) following
the settlement of a portion of the 2032 bond, acquired with GKN,
a £17 million charge (2022: £nil) in respect of the proportion of the
Group’s net debt strategically allocated to Dowlais at the start of the
year and a £2 million charge (2022: £nil) in respect of the write off of
unamortised bank fees when the existing bank facilities at the time of
the demerger were repaid.
In the prior year, adjusting items within finance costs and income also
included a credit of £3 million relating to the fair value changes on
cross‑currency swaps.
DISCONTINUED OPERATIONS
In accordance with IFRS 5, the results of Dowlais are shown as
discontinued for the period up to demerger in 2023 and are restated
to be shown as discontinued operations for the prior year.
These businesses contributed £1,582 million to revenue and achieved
statutory operating profit of £32 million for the period of the year
under ownership in 2023.
SHARE CONSOLIDATION, SHARE BUYBACK AND
NUMBER OF SHARES IN ISSUE
A one for three share consolidation was performed by the
Group on the eve of the demerger of Dowlais, which resulted
in the number of shares in issue reducing from 4,054 million to
1,351 million. Shareholders then received one Dowlais share for every
post‑consolidation Melrose share they held. In accordance with IAS
33, the one for three consolidation is applied to all periods in these
Consolidated Financial Statements.
The Group commenced a share buyback programme on
2 October 2023, and made market purchases of existing ordinary
shares in issue in the capital of the Company. At 31 December 2023,
18 million ordinary shares had been purchased at an average price
per share of 494 pence. These ordinary shares are being held in
treasury and the number of ordinary shares in issue has reduced by
1.3%, from 1,351 million to 1,333 million at 31 December 2023.
The weighted average number of shares used for basic earnings
per share calculations in the year ended 31 December 2023 was
1,349 million (2022: 1,406 million), and when including the number
of shares expected to be issued from the Melrose equity‑settled
share plan, the weighted average number of shares used for diluted
earnings per share, was 1,405 million (2022: 1,406 million).
TAX – CONTINUING OPERATIONS
The statutory results for continuing operations show a tax credit of
£9 million (2022: £99 million) which arises on a statutory loss before
tax on continuing operations of £8 million (2022: £328 million), a
statutory tax rate of 113% (2022: 30%). The effective rate on the
adjusted profit before tax for the year ended 31 December 2023 was
20.5% (2022: 6.5%).
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 21%, and these are
applied to a small statutory loss before tax in the year.
22
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023 The Group has £747 million (31 December 2022: £856 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 £479 million (31 December 2022: £923 million)
and £223 million (31 December 2022: £179 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 £527 million (31 December 2022: £373 million) and deferred tax
liabilities of £482 million (31 December 2022: £619 million) being
shown on the Balance Sheet at 31 December 2023. 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 2023 by continuing
operations was £17 million (2022: £8 million), 5.1% (2022: 12.9%) of
adjusted profit before tax.
CASH GENERATION AND MANAGEMENT
Adjusted free cash flow for the continuing Group in the year ended
31 December 2023 was an inflow of £113 million (2022: outflow
of £35 million), after net interest and tax spend of £82 million
(2022: £89 million), but before restructuring spend of £125 million
(2022: £53 million).
Free cash flow pre‑interest and tax was an inflow of £70 million
(2022: £1 million), which calculated as a percentage of revenue, gives
a free cash flow margin of 2.1% (2022: 0.0%).
An analysis of free cash flow is shown in the table below:
Continuing operations:
Adjusted operating profit
Depreciation and amortisation
Lease obligation payments
Positive non‑cash impact from loss‑making contracts
Working capital movements:
Inventory
Receivables and payables
Adjusted operating cash flow (pre‑capex)
Net capital expenditure
Defined benefit pension contributions – ongoing
Restructuring
Net other
Free cash flow pre‑interest and tax
Free cash flow pre‑interest and tax margin
Net interest and net tax paid
Free cash flow
Adjusted free cash flow
2023
£m
2022
£m
390
142
(32)
(23)
(10)
(136)
331
(102)
(22)
(125)
(12)
70
2.1%
(82)
(12)
113
147
145
(29)
(23)
(88)
(60)
92
(72)
(23)
(53)
57
1
–
(89)
(88)
(35)
Working capital movements in the continuing Group totalled an
outflow of £146 million for the year ended 31 December 2023, being
an outflow of £10 million in inventory and £136 million from receivables
and payables combined. The working capital performance in the first
half was consistent with revenue growing by 15% in that period, but
in the second half the performance was stronger, as expected, with
an inventory inflow of £43 million and with combined receivables and
payables only growing by £20 million, 4%, despite Group revenue
growing by c.12% in the second half of the year.
Capital expenditure in the year ended 31 December 2023 was
£102 million (2022: £72 million). Capital expenditure represented
0.9x (2022: 0.6x) depreciation of owned assets.
Restructuring spend in the year was £125 million
(2022: £53 million).
In the continuing Group, net interest paid in the year was
£65 million (2022: £81 million), net tax payments were £17 million
(2022: £8 million) and ongoing contributions to defined benefit
pension schemes were £22 million (2022: £23 million).
The movement in net debt (as defined in the glossary to the
Consolidated Financial Statements) is summarised as follows:
Opening net debt
Net cash outflow from Dowlais businesses to date of demerger
Reduction in net debt following the demerger of Dowlais
2022 second interim dividend paid to shareholders
Demerger related costs and pension buy‑in
Proforma opening net debt
Free cash flow of the continuing Group
2023 interim dividend paid to shareholders
Buyback of own shares
FX and other non‑cash movements
£m
(1,139)
(54)
885
(61)
(118)
(487)
(12)
(20)
(93)
40
Net debt at 31 December 2023 at closing exchange rates
(572)
Proforma opening net debt of £487 million for the continuing
Melrose Group is calculated after adjusting the closing net debt
at 31 December 2022, of £1,139 million, for: the payment of
demerger related costs of £62 million; bank facility arrangement
fees of £11 million; the cost of fully securing the benefits of all
members of the GKN UK Pension Scheme Number 4 in advance
of an expected buy‑out process, of £45 million; the second interim
dividend for the year ended 31 December 2022 of £61 million; and
the net debt that Dowlais inherited on inception.
Group net debt at 31 December 2023, translated at closing
exchange rates (being US$1.28 and €1.15), was £572 million
(31 December 2022: £1,139 million), after a free cash outflow from
the continuing Group of £12 million, described above. Movements
in Group net debt also included the payment of the 2023 interim
dividend to shareholders of £20 million, £93 million spent buying
back shares in the market, net favourable foreign exchange
movements of £24 million and other non‑cash movements of
£16 million.
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 £584 million.
The Group net debt leverage on this basis at 31 December 2023
was 1.1x EBITDA compared to a proforma opening leverage of 1.8x
EBITDA when using proforma net debt at demerger of £487 million,
described above (31 December 2022: reported 1.4x EBITDA).
23
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023STRATEGIC REPORT FINANCE DIRECTOR’S REVIEW CONTINUED
ASSETS AND LIABILITIES
AND IMPAIRMENT REVIEW
The summarised Melrose Group assets and liabilities are shown
below:
Goodwill and intangible assets acquired
with business combinations
Tangible fixed assets, computer software
and development costs
Equity accounted investments
Net working capital
Net retirement benefit obligations
Provisions
Deferred tax and current tax
Lease obligations
Net other
Total
2023
£m
2022
£m
3,106
6,508
1,022
2,937
7
475
(99)
(286)
31
(192)
75
435
343
(488)
(611)
(358)
(366)
(93)
4,139
8,307
The significant reduction in the Group’s net assets in the year
relates primarily to the assets and liabilities demerged with Dowlais.
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.
The Board is comfortable that no impairment is required in
respect of the valuation of goodwill in its businesses as at
31 December 2023.
The assets and liabilities shown above are funded by:
Net debt
Equity
Total
2023
£m
(572)
(3,567)
(4,139)
2022
£m
(1,139)
(7,168)
(8,307)
Net debt shown in the table above is defined in the glossary to the
Consolidated Financial Statements.
PROVISIONS
Total provisions at 31 December 2023 were £286 million
(31 December 2022: £611 million).
The following table details the movement in provisions in the year:
Provisions at 1 January 2023
Continuing businesses:
Net charge in the year
Spend against provisions
Utilisation of loss‑making contract provision
Other
Discontinued businesses:
Movement in provisions in Dowlais in the period to demerger
Demerger of Dowlais
Provisions at 31 December 2023
Total
£m
611
137
(107)
(23)
(12)
24
(344)
286
The net charge to the Income Statement in the year for continuing
operations was £137 million, and included £78 million relating to
restructuring activities and a £20 million loss making contract
provision charge at a closing site as operations wind down. In
addition, the net charge includes a £28 million charge relating to
employer’s tax payable on equity‑settled compensation schemes.
These sizeable items are shown as adjusting items and are included
in the adjusting items section discussed earlier in this review.
During the year, £23 million was utilised against loss‑making contract
provisions in Aerospace and £107 million of cash was spent against
provisions with £79 million relating to restructuring activities.
Net provision movements relating to property, environmental &
litigation and warranty in Aerospace were not material in the year.
Other movements in provisions, in continuing operations,
included £4 million of provisions classified as held for sale as at
31 December 2023, relating to the contractually agreed sale of a
non‑core business in the Structures segment that completed on
1 March 2024 and £8 million relating to foreign exchange movements.
The net movement on provisions within Dowlais in the period up to
demerger was £24 million, with £344 million of provisions leaving the
Group at the date of demerger.
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 2023
by independent actuaries to reflect the latest key assumptions and
are summarised as follows:
GKN UK Group pension scheme
– Number 1
GKN UK Group pension scheme
– Number 4
Other Group pension schemes
Total Group pension schemes
Assets
£m
Liabilities
£m
Accounting
deficit
£m
632
(692)
(60)
438
48
(438)
(87)
1,118
(1,217)
–
(39)
(99)
At 31 December 2023, following the demerger of Dowlais, the total
plan assets of Melrose Group’s defined benefit pension plans has
reduced to £1,118 million (31 December 2022: £1,941 million) and total
plan liabilities to £1,217 million (31 December 2022: £2,429 million), a
net deficit of £99 million (31 December 2022: £488 million).
The GKN UK Group Pension Schemes (Numbers 1 and 4) are the
most significant pension plans remaining in the Group, and are
closed to new members and to the accrual of future benefits for
current members.
At 31 December 2023, the GKN UK Group Pension Scheme Number
1 had gross assets of £632 million (31 December 2022: £628 million),
gross liabilities of £692 million (31 December 2022: £667 million) and
a net deficit of £60 million (31 December 2022: £39 million).
24
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023 During the year ended 31 December 2023, the Group commenced a
process to buy‑out the GKN UK Group Pension Scheme Number 4.
The first stage of the process, purchasing a buy‑in policy which fully
secures all members’ benefits, was completed in the year, resulting
in assets and liabilities of £438 million being recorded equally at
31 December 2023. The buy‑out process is expected to complete in
the first half of 2024, when assets and liabilities will leave the Group
and cease being shown in the Balance Sheet.
Other pension schemes in the Group include US pension plans
which are generally funded schemes and closed to new members.
At 31 December 2023, these US pension plans had a net deficit of
£25 million.
In total, ongoing contributions to the Group defined benefit pension
plans and post‑employment medical plans in the year ended
31 December 2023 were £22 million and are expected to be a similar
amount in 2024.
A summary of the assumptions used are shown in note 24 to the
Consolidated financial statements.
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 2023 was £572 million
(31 December 2022: £1,139 million).
The Group’s committed bank facilities were refinanced during
the year. The new facilities consist of a multi‑currency term loan
denominated US$300 million and €100 million, and a US$250 million
revolving credit facility, both of which mature in April 2026. In addition,
the Group also entered into multi‑currency revolving credit facilities
totalling US$690 million, £300 million and €300 million that initially
mature in April 2026, but with the potential to be extended for two
additional one‑year periods at the Company’s option. Details of the
new facilities and amounts borrowed as at 31 December 2023 are
shown below:
Term loan:
USD
EUR
Revolving credit facility:
USD
GBP
EUR
Total headroom
Size
300
100
940
300
300
Local currency
£m
Drawn Headroom Headroom
300
100
298
1
22
–
–
642
299
278
–
–
503
299
241
1,043
At 31 December 2023, the term loan was fully drawn and there
were drawings of US$298 million, £1 million and €22 million on
the revolving credit facilities. Applying the exchange rates at
31 December 2023, the headroom equated to £1,043 million.
There are also a number of uncommitted overdraft, guarantee and
borrowing facilities made available to the Group.
In addition to the headroom on the multi‑currency committed
revolving credit facility, cash, deposits and marketable securities,
net of overdrafts, in the Group amounted to £57 million at
31 December 2023 (31 December 2022: £292 million).
At the start of the year the Group held capital market borrowings
with an outstanding notional value of £130 million from an original
£300 million bond, issued in May 2017 and due to mature in
May 2032. In December 2023, an agreement was reached with
certain remaining bondholders that resulted in £120 million of
the outstanding nominal value being bought back and cancelled
for a total cost of £109 million (excluding accrued interest). This
represented a gain of £13 million after associated costs and
the release of a fair value adjustment of £2 million on the bond,
recognised on acquisition of GKN. This gain has been recognised
as an adjusting item within finance income in the Consolidated
Income Statement.
As at 31 December 2023, the capital market borrowings held by
the Group consisted of £10 million of the original £300 million bond
due to mature in May 2032, with a current coupon 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, with the exception that the first testing date for the
interest cover covenant will be 30 June 2024.
The net debt to adjusted EBITDA covenant test level is set at 3.5x
and, as at 31 December 2023, the Group net debt leverage was
1.1x, affording comfortable headroom.
The interest cover test is set at 4.0x for the remaining term of the
bank facility.
A limited number of Group trade receivables are subject to
non‑recourse factoring and customer supply chain finance
arrangements. As at 31 December 2023, these amounted to
£268 million (31 December 2022: £325 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 2023 there were drawings
on these facilities of £86 million (31 December 2022: £200 million).
There is no cost to the Group for providing these programmes
as the cost is borne by the suppliers. These programmes allow
suppliers to choose whether they want to accelerate the payment
of their invoices by the financing banks, at a low interest cost,
based on the credit rating of the Group as determined by the
financing banks. If the Group exited these arrangements or the
banks ceased to fund the programmes there could be a potential
impact of up to £42 million (31 December 2022: £94 million) on
the Group’s cash flows. The risk of this happening is considered
remote 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.
25
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023STRATEGIC REPORT
FINANCE DIRECTOR’S REVIEW CONTINUED
Finance cost risk management
In addition to the fixed coupon payable under the remaining
£10 million bond discussed above, the Group uses financial
derivatives to fix a portion of the interest cost on its committed
bank facilities.
The policy of the Board is to fix approximately 70% of the interest
rate exposure on the Group’s committed bank borrowings to align
with the maturity of its debt facilities. Following the demerger,
the Group fixed an appropriate amount of debt by currency up
to the initial maturity date of the Group’s new bank facilities. The
maximum weighted average rates, excluding the bank margin, the
Group will pay on the fixed portions of its US Dollar and Euro bank
debt are 3.6% and 3.0% respectively.
The bank margin on the bank facilities depends on Group leverage
and were as follows:
Facility:
Term Loan
Revolving Credit Facilities
31 Dec 2023
31 Dec 2022
Margin
Range
Margin
Range
1.30%
1.30%
– 1.55%
0.9%
– 2.2%
0.9%
– 2.4%
0.75%
0.75%
0.75%
– 2.0%
0.75%
– 2.0%
The Group’s cost of drawn debt for the next 12 months is currently
expected to be approximately 5.4%.
Exchange rate risk management
The Group trades in various countries around the world and
is exposed to movements in a number of foreign currencies.
Following the demerger and subsequent update to the Group’s
strategy to be a pureplay aerospace business going forward, the
exposure to foreign exchange movements related to a disposal
now no longer represents a material risk for the Group.
The Group therefore carries exchange rate risk that can be
categorised into two types: transaction and translation risk, as
described in the paragraphs below. The Group’s policy is designed
to protect against the majority of the cash risks but not the
non‑cash risks.
The most common exchange rate risk is the transaction risk the
Group takes when it invoices a customer or purchases from
suppliers in a different currency to the underlying functional
currency of the relevant business. The Group’s policy is to review
transactional foreign exchange exposures, and place necessary
hedging contracts, quarterly on a rolling basis. To the extent the
cash flows associated with a transactional foreign exchange risk
are committed, the Group will hedge 100% at the time the cash
flow becomes committed. For forecast and variable cash flows, the
Group hedges a proportion of the expected cash flows, with the
percentage being hedged lowering as the time horizon lengthens.
The Group hedges on a sliding scale, typically hedging around
90% of foreign exchange exposures expected over the next twelve
months, with the percentage decreasing by approximately 10
percentage points 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.
Exchange rates for currencies most relevant to the Group in the
year were:
US Dollar
2023
2022
Euro
2023
2022
Average
rate
Closing
rate
1.24
1.24
1.15
1.17
1.28
1.21
1.15
1.13
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:
Increase in adjusted operating profit – £ million
% impact on adjusted operating profit
USD
38
7%
EUR
9
2%
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 2023:
Increase in debt – £ million
Increase in debt
USD
50
8%
EUR
12
2%
Contract and warranty risk management
Under Melrose management a suitable bid and contract management
process exists in the businesses, which includes thorough reviews
of contract terms and conditions, contract‑specific risk assessments
and clear delegation of authority for approvals. These processes
aim to ensure effective management of risks associated with
complex contracts. The financial risks connected with contracts
and warranties include the consideration of commercial, legal and
warranty terms and their duration, which are all considered carefully
by the businesses and Melrose centrally before being entered into.
Commodity cost risk management
The cumulative expenditure on commodities is important to the
Group and the risk of base commodity costs increasing is mitigated,
wherever possible, by passing on the cost increases to customers or
by having suitable purchase agreements with suppliers which fix the
price over a certain period. These risks are also managed through
sourcing policies, including the use of multiple suppliers, where
possible, and procurement contracts where prices are agreed in
advance to limit exposure to price volatility.
26
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023 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 challenges in supply chains
and geopolitical risks. 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 high interest rates.
The Group has modelled a reasonably possible downside
scenario against these future cash forecasts and throughout
this scenario the Group would not breach any of the revised
financial covenants and would not require any additional
sources of financing.
The macroeconomic environment remains uncertain and
volatile and the impacts of the economic factors such as
inflation, high interest rates, geopolitical conflict and challenges
in supply chains 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
7 March 2024
LONGER‑TERM VIABILITY STATEMENT
In accordance 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 continue 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 current debt facilities consist of a multi‑currency
denominated term loan and multi‑currency denominated revolving
credit facilities that mature in April 2026 subject to (in the case of the
revolving credit facilities) an option for the Group to extend for up to
two one‑year periods, at slightly reduced levels. The Group uses a
period of five years for impairment testing of its two groups of cash
generating units due to the long‑term nature of cash flows within the
aerospace industry, 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 2026.
The Directors’ assessment has been made by reference to the
Group’s financial position as at 31 December 2023, 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 contractual obligations, transactions and corporate
restructuring. The main assumptions included in the model relate to
forecast revenue, operating margin and cash generation taking into
account the Group’s share buyback programme. 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 growth 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 a medium‑term impact of continued supply chain
disruptions and ongoing inflationary pressures on input costs.
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, 7 March 2024, with no consideration of any further
acquisitions or future disposals of continuing businesses. We note
future acquisitions would be based on the same proven business
model applied previously, with related bank debt and equity
raised to support the acquisition with sufficient headroom to cover
business risks; and
(ii) financing arrangements, which became effective during 2023, 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.
27
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023STRATEGIC REPORT 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 evolve with the business and provide
management with a comprehensive view of the Group’s risk profile at any given time,
enabling risk to be identified, assessed and managed.
RISK MANAGEMENT RESPONSIBILITIES
The Board, having overall responsibility for risk management, has approved
a formalised but pragmatic Group risk management framework.
BOARD
Overall responsibility for risk
management
AUDIT COMMITTEE
Monitors the Group’s internal
financial control processes
SENIOR MANAGEMENT
OPERATIONAL MANAGERS
AND SITE CONTROLLERS
• 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
• 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
T
O
P
‑
D
O
W
N
a
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d
a
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e
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h
t
i
• 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
• Risk identification, assessment and monitoring at a local level
• Implementing, reviewing and continually monitoring compliance with
risk mitigation plans and controls
• Embedding risk awareness and culture throughout the business
B
O
T
T
O
M
‑
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n
The Board’s view of the Group’s principal risks and uncertainties
is detailed in the table on page 31.
Risk management strategy and framework
The objectives of the Board and Melrose senior management
include safeguarding and increasing the value of the business 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 Board has established an organisational structure with clear
reporting procedures, lines of responsibility and delegated authority,
with risk management responsibilities 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 the business.
28
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023
RISK MANAGEMENT FRAMEWORK
IDENTIFICATION
Financial and non‑financial risks recorded in
controlled risk registers
EVALUATION
Risk exposure reviewed and risks prioritised
MITIGATION
Risk owners identified and action plans implemented
ANALYSIS
Risks analysed for impact and probability to determine
gross exposure
REVIEW AND MONITORING
Robust mitigation strategy subject to regular and rigorous review
The 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 senior 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 121.
The divisional management teams are responsible for monitoring
business‑level risk and implementing and maintaining an effective risk
and control environment as part of day‑to‑day operations, in line with
the Group risk management framework and internal control systems
determined by the Board. They are also responsible for specific and
ongoing risks related to the business, which are reported into senior
management and in turn formally to the Audit Committee on an
interim and 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 senior management team on material
items that arise relating to principal Group risks.
Management, with support from Ernst & Young, continued to utilise
a third‑party hosted interactive dashboard which has been tailored
to the requirements of the Group in order to consolidate the Group’s
risk reporting. The dashboard includes data from GKN Aerospace’s
risk register, which was reviewed and approved during 2023
by GKN Aerospace’s senior management key risk owners. The
dashboard has supported the continued enhancement of the
Group’s risk management processes, with in‑depth reporting and
data collection. This has bolstered the Audit Committee’s oversight
of risk areas, mitigations, controls and trends.
The risk management process also involved objective trend
analysis and independent insight from Ernst & Young, and this
year included an analysis of the Group’s principal risk profile
against other aerospace and defence companies based on
public disclosures.
The Audit Committee reviewed and challenged the Group’s
risk management process, and also reviewed and challenged
the interim and annual reports prepared by Melrose senior
management relating to the Group’s principal risk profile. These
reports guided the Board and Audit Committee on relevant
updates to the Group’s principal risks (including the identification
of new principal Group risks and emerging risks), as reported
in the Risks and uncertainties section on pages 31 to 36. They
also aided the Audit Committee’s discussions with the Board on
risk appetite, as detailed further below. 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 on
pages 116 to 123.
Risk appetite
The Board has undertaken an exercise to consider its risk appetite
across a number of key business risk areas by 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 Group’s principal risk areas 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 an open risk appetite towards operational and commercial risk,
with a cautious appetite towards economic and political, loss of key
management and capabilities, legal and regulatory, climate change
and treasury risks. The Board seeks to minimise all health and
safety and information security and cyber threats risks.
The results of the risk appetite review will support the Board’s
decision‑making processes during 2024. The Board undertakes a
review of its risk appetite at least annually.
29
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023STRATEGIC REPORT RISK MANAGEMENT CONTINUED
Risk management actions
During 2023, the Board continued to deliver on the key
management priorities identified in the 2022 review across the
Group. Risk owners continued to take steps to mitigate the risk
exposures across the Group, supported by specific actions
undertaken to improve enterprise risk management across the
Group during the year, as follows:
• reviewing and recalibrating the Group’s principal risks based
on Melrose’s change in business strategy to operating as a
long‑term aerospace group, in order to identify any potential
gaps in the Group’s defined risk profile as compared to other
aerospace and defence companies;
• reviewing and reaffirming the Board’s risk appetite based on the
optimal and current risk appetite of the Board for each principal
Group risk;
• monitoring the implementation of risk management governance
within the business, including the identification, evaluation,
prioritisation, recording, review and reporting of risks and their
management or mitigation throughout the Group;
• continuing to enhance Melrose risk register methods, dashboard
reporting outputs, and risk profile mapping application throughout
the Group. These provide the Board with 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
• resetting the Group sustainability strategy, material topics and
targets to reflect the Group’s new business strategy, supported
by a refreshed sustainability and climate change governance
framework. As part of climate strategy and disclosure, a new
climate scenario analysis was conducted for the Group to review
the specific transition and physical climate risks in preparation
for the Group’s third Task Force on Climate‑related Financial
Disclosures (“TCFD”) report. A new Transition Plan was also
developed to serve as a roadmap for achieving Net Zero, aligned
with the Group’s new aerospace sector focus. The new material
topics, sustainability targets, governance framework, a summary
of the Transition Plan and TCFD report are contained in the
Sustainability review on pages 43 to 93.
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 recalibrated the Group’s principal risk
categories based on Melrose’s change in business strategy to
operating as a long‑term aerospace group, and identified emerging
risks with the support of the Group’s senior management team.
As a result of this assessment, health and safety risk has been
removed from operations risk and is now a standalone principal
Group risk to fully reflect the Group’s zero‑tolerance approach to
preventable accidents. Moreover, liquidity risk, foreign exchange
risk and pension risk have been combined into a new treasury
principal Group risk. Additionally, mergers and acquisitions (“M&A”)
risk has been removed as a principal Group risk given the strategic
shift away from the previous “Buy, Improve, Sell” model, and on the
basis that M&A is no longer a core component of Melrose’s new
aerospace‑only business model. Whilst this is no longer a principal
Group risk, it remains a risk that is monitored and managed by the
Group’s senior management team and, where relevant, the Board
and its committees.
A summary of the principal risks and uncertainties that could impact
on the Group’s performance is shown on pages 31 to 36. Further
information detailing the internal control and risk management
policies and procedures operated within the Group is shown on
pages 109 to 115 of the Corporate Governance report.
Risk management priorities for 2024
Continual improvements were made during 2023 in respect of the
Group’s risk management processes, and the Board recognises that
Melrose cannot be complacent. In 2024, management will continue
to focus on refining the risk management framework and ensure that
this is further tailored to the Group’s change in business strategy
to operating as a long‑term aerospace group. Management will
also further embed 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 and the
Group’s new strategic focus.
Further resources will continue to be devoted to supporting the
implementation of improved controls around Melrose’s non‑financial
reporting together with objective trend analysis on the effectiveness
of the Group’s risk management governance, processes and
controls. Climate change risks, mitigation, adaptation and reporting
will continue to be strengthened with the better understanding of
risks identified in the Group’s new climate scenario analysis, as
guided by the roadmap set out in Melrose’s new Net Zero Transition
Plan and supported by Melrose investment.
30
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023 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 appropriately managed.
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 opposite.
The residual risk scores
have been calculated on a
post‑mitigation basis.
Risk trend
Increasing
No change
Decreasing
No. Risk title
Risk trend since
last Annual Report
2019
2020
2021
2022
2023
1 Operations
Increase
n/a
n/a
Realigned risk
2 Commercial
No change
3 Economic and political
Increase
4
Loss of key management
and capabilities
No change
5 Health and safety
Realigned risk
n/a
n/a
n/a
n/a
6 Legal and regulatory
No change
7 Climate change
No change
n/a
n/a
8 Information security and cyber threats Increase
9 Treasury
Realigned risk
n/a
n/a
n/a
n/a
31
459678132LikelihoodHighLowImpactHighLowMELROSE INDUSTRIES PLC ANNUAL REPORT 2023STRATEGIC REPORT RISKS AND UNCERTAINTIES CONTINUED
Risk trend
Strategic priorities
Responsibility
The Executive management team
(comprising executive Directors and
Melrose senior management) are
responsible for our principal risks.
Increasing
No change
Decreasing
Realigned risk
Design
Deliver
Improve
OPERATIONAL RISKS
RISK 1 – OPERATIONS
Description and impact
The Group is part of complex global supply chains and major disruption
within the Group’s operations may adversely affect the financial performance
of the Group. In particular, such disruption may result in the Group failing to
meet customer commitments, which could result in contractual penalties,
as well as reducing the likelihood of the Group winning future orders from
such customers. Moreover, the Group is dependent on the prompt delivery
of materials and components by suppliers and subcontractors. These
third parties may be impacted by their own economic and geographic
environments (such as pricing pressures and availability issues), which could
impact on the Group’s ability to manufacture and supply products, or to
deliver them in a timely manner.
The Group seeks to drive operational efficiencies through its planned
restructuring projects, including the rationalisation of the Group’s operations
in the US and Europe. Whilst such restructuring projects have driven, and
continue to drive, operational efficiencies, they can also result in higher
operational risks relating to closure, workforce morale and productivity,
ongoing delivery performance and customer relationships, despite relevant
mitigating actions having been taken.
Mitigation
• The Group invests in equipment and capacity within its facilities, as well as
identifying dual source suppliers and alternative materials where available.
• Weekly supply reviews are undertaken in order to assess the Group’s
supplier order book and to confirm commitments over specified timeframes.
• Contingency plans have been developed with respect to potential
shortages of key materials or production inputs which may arise as a result
of geopolitical events.
• The senior management team has actively engaged with and supported
the divisional teams in identifying embedded contractual and business
conduct risks relating to key supply chain and production programme
partners. Those teams have continued to implement and direct a series
of operational change management programmes to mitigate the risks that
they have identified.
• Operational management teams are properly incentivised to align with
Melrose strategy.
Trend commentary
Melrose’s change in business strategy to operating as a long‑term aerospace
group has made it more sensitive and susceptible to industry specific issues
within the aerospace sector that may arise from interdependencies within its
complex global supply chains. As a result, the risk trend for operations risk
has increased during the year. Geopolitical events naturally had an impact
on the Group as well as the aerospace industry as a whole, which in turn
increased operational risks. Specifically, the war in Ukraine, increased attacks
on merchant ships in the Middle East, and rising tensions between China
and Taiwan, resulted in continued supply constraints of raw materials and
products needed in the Group’s manufacturing processes and supply chains.
Melrose seeks to actively identify and track strategic operational
improvements, together with operational risks which may impact on such
improvements. Furthermore, Melrose seeks to identify, and take advantage
of, benefits from supply chain interdependencies. In particular, supply chain
issues may result in legacy engines flying for longer, which is beneficial to the
Group’s aftermarket business.
RISK 2 – COMMERCIAL
Description and impact
The Group operates in competitive markets throughout the world and
is diversified across a variety of production and sales geographies. This
provides a degree of Group‑level impact mitigation from the potential
commercial challenges and market disruptions that face the Group. However,
widespread disruption that may be caused by geopolitical events could
heighten the Group’s exposure to end‑market commercial risk.
Product quality also drives certain commercial risks. For example, the supply
of non‑conforming or defective products by the Group could lead to product
recalls, severe financial penalties and reputational damage to the Group.
• Regular reviews of the Group’s loss‑making contracts take place in order
to identify ways, such as through contract renegotiations, to improve the
Group’s profitability.
• The Group has a diverse portfolio of RRSP contracts across a number
of leading, global OEMs, retaining relatively small shares in any single
programme. Melrose has mitigated against commercial risks associated
with such arrangements by using conservative financial assumptions for all
of its RRSP programmes.
• The Group operates robust quality assurance and management procedures.
• To combat against the fluctuations in commodity pricing experienced during
the year as well as the high inflation levels, the Group has reviewed and
where relevant renegotiated the terms of customer and supplier contracts.
Other common commercial risk areas that may have an adverse impact
on the Group include those related to 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, technological innovation and
market disruption, and the performance and management of programme
partners (“Common Commercial Risks”).
Mitigation
• The 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 risk register and externally facilitated risk reporting
dashboard. The dashboard aggregates and highlights the Common
Commercial Risks and relevant trends across the Group.
• The Group actively invests 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 Sustainability review on pages 43 to 93.
Trend commentary
The risk trend for commercial risk remained the same during the year, with
macroeconomic events continuing to cause fluctuations in commodity
pricing, in addition to wider inflationary pressures. However, the demerger of
Dowlais Group plc (the “Demerger”), coupled with the change in Melrose’s
business strategy, has reframed the nature of this risk. This is because
Melrose no longer owns a diverse range of manufacturing businesses and
instead operates as a single sector business. This enhances the Group’s
exposure to commercial risks that arise within the aerospace industry,
including the shift to new technologies and markets, such as electric and
hydrogen powered aircraft.
The senior management team actively and regularly tracks, monitors and
supports strategic planning activities and impact mitigation assessments
in respect of ongoing commercial risks. This has been a particular focus
of both the Board and senior management team during the year, with the
Group identifying and managing any enhanced or emerging commercial risks
resulting from Melrose’s change in business strategy.
32
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023 RISK 3 – ECONOMIC AND POLITICAL
Description and impact
The Group operates through manufacturing and/or sales facilities in
numerous countries and is affected by global economic and political
conditions. Geopolitical events may lead to an adverse impact on the Group’s
operations, particularly those that involve major trading partners or blocs.
For example, they may result in explicit trade protectionism, the potential
for conflict or broader political issues, as well as the introduction of new
tariffs and/or taxes which could adversely affect the financial performance
of the Group or the delivery of its global strategy. Moreover, global economic
and political events may cause sudden and unanticipated disruption to the
Group’s operations.
• Order books, cash performance, cost control and other leading indicators
are regularly monitored to ensure that the Group and both of its divisions
can respond quickly to adverse trading conditions. This includes 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.
• The Group fosters strong customer relationships which are often
long‑term partnerships, built on technical excellence and quality, and
often with plants in close proximity to customers where feasible and
commercially necessary.
Fluctuation in commodity prices and high inflation may materially and
adversely affect the Group’s operational performance and financial condition.
Further, these factors may materially affect customers, suppliers and other
parties with which the Group does business. High 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 suppliers to be unable
to meet their commitments to the Group or to change the credit terms they
extend to the Group.
Mitigation
• The Group has a diversified global footprint mainly across Europe, the
US and Asia, and its commercial split across both the civil and defence
markets helps to mitigate against geopolitical shocks.
Trend commentary
Significant geopolitical and economic uncertainty continued during the year,
leading to an increased risk trend for economic and political risk. The war in
Ukraine and the various sanctions packages imposed upon Russia, increased
attacks on merchant ships in the Middle East, and rising tensions between
China and Taiwan, were a key factor in such uncertainty. Furthermore, the
recent events in Israel and Palestine have further heightened geopolitical
tensions. In each case, Melrose promptly assessed the risks associated
with these events by conducting an analysis into any direct or indirect trade
occurring within the affected regions and the Group. As noted in last year’s
annual report, trade with Russia was found to be very limited and, in any
case, ceased. An impact assessment has also been conducted into the Israel
and Palestine conflict, with no material implications on the Group’s operations
being identified.
GKN Aerospace’s diversified global footprint, and its commercial split across
both civil and defence markets, provide a degree of natural hedging in
the event of regionalised geopolitical shocks. Senior management closely
monitors economic and political events alongside its dedicated export control
team in order to best react to any associated risks as early as practicable.
RISK 4 – LOSS OF KEY MANAGEMENT AND CAPABILITIES
Description and impact
The success of the Group is built upon a strong management team. The
loss of key personnel, or inability to identify, attract and retain key personnel,
could impact the ability of the Group to deliver its business strategy. As
a result, the loss of key personnel could have a significant impact on the
Group’s 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. The Chief Executive Officer is responsible
for the appointment of executive team members, with disclosure to the
Nomination Committee.
• Melrose 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
In light of the change in Melrose’s business strategy to operating as a
long‑term aerospace group, succession planning for the executive Directors
was a key focus for the Nomination Committee and the Board in 2023.
In particular, the Board, with the support of the Nomination Committee,
approved Mr Simon Peckham and Mr Geoffrey Martin stepping down as
Melrose Chief Executive and Group Finance Director respectively with effect
from 6 and 7 March 2024 respectively, to be replaced by Mr Peter Dilnot
and Mr Matthew Gregory (as Chief Executive Officer and Chief Financial
Officer respectively). The focus placed on succession planning has
combatted against the risks associated with the loss of key management
and capabilities, with the changes in key personnel reflecting strong
management continuity. Please refer to the Nomination Committee report on
pages 124 to 127 for further details.
33
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023STRATEGIC REPORT RISKS AND UNCERTAINTIES CONTINUED
Risk trend
Strategic priorities
Responsibility
Increasing
No change
Decreasing
Realigned risk
Design
Deliver
Improve
The Executive management team
(comprising executive Directors and
Melrose senior management) are
responsible for our principal risks.
RISK 5 – HEALTH AND SAFETY
Description and impact
The Group employs over 14,500 people with many operations often involving
risks related, but not limited, to heavy duty machinery, chemical use,
movement of parts such as lifting or transportation, as well as energy, such
as electricity and pressurised systems. A serious accident in the workplace
could have a major impact on employees as well as their families, colleagues
and communities. Such an incident could also result in legal claims,
reputational damage and financial loss.
Mitigation
• The Group has a dedicated health and safety team which has rolled out
a comprehensive health and safety programme across all sites, led by
business‑wide training on risk management for all operational leaders and
an awareness campaign around GKN Aerospace’s Golden Safety Rules.
All sites are required to self‑certify compliance with the Golden Safety
Rules which is validated through internal independent sampling checks
throughout the year.
• Investments have been made into the provision of appropriate safety
equipment and employees are provided with the knowledge and skills
necessary to perform their roles safely. All employees are required under
the Golden Safety Rules to use the equipment provided and adhere to any
safety training and instruction given.
• As at 31 December 2023, 30 sites within the Group were certified to the
ISO 45001 international standard, with additional relevant sites progressing
towards accreditation. Third‑party auditing on a three‑year certification
cycle is required to maintain ISO accreditation, with HSE internal annual
surveillance audits taking place in between on a rotation or risk basis to
ensure minimum standards are being maintained.
• Through the Leadership Safety Tour Programme, senior management take
an active role in physically attending sites and validating the effectiveness
of HSE controls by site leadership, and ensuring compliance and
continuous improvement. In 2023, particular focus has been placed on
strengthening the risk assessments and risk controls of the Golden Safety
Rules by conducting on‑site Task Specific Risk Assessment Workshops
through which over 90% of GKN Aerospace’s operational leaders have
been trained.
• The Board is provided with visibility and oversight on health and safety
risks through the form of quarterly reports, which collates information
for all sites based on three key performance indicators – Major Accident
Frequency, Lost Time Accident Frequency (“LTA”), and Accident Severity.
Trend commentary
Health and safety is of key importance to Melrose and to reflect this, the
Board has elevated it to a standalone principal Group risk, having previously
been captured in operations risk. Given the nature of the Group’s operations,
there will always be an inherent health and safety risk within the Group.
However, to combat against this, comprehensive and appropriate mitigations
and controls have been put in place.
Furthermore, Melrose has a Group target to achieve and maintain an annual
LTA Frequency Rate of below 0.1 per 200,000 hours worked. This underpins
our overarching commitment to stop all accidents from occurring, through
the promotion of safe behaviours across all locations, and an enhanced focus
on hazard identification and awareness. During 2023, we maintained a LTA
Frequency Rate of below 0.1, and continued to prioritise continuous health
and safety improvements in the push for the LTA Frequency Rate of zero.
Please refer to pages 19 and 88 of the Annual Report for further details.
COMPLIANCE AND ETHICAL RISKS
RISK 6 – LEGAL AND REGULATORY
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) 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; (ii) 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, and (iii) 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.
The Group operates in a highly regulated environment across multiple
jurisdictions. 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 takes place at both
a Group and divisional level. Consultation with external advisors is also
undertaken 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.
• A robust control framework is in place, underpinned by comprehensive
corporate governance and compliance policies and procedures at both
Group and divisional 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.
• Melrose operates a Group‑wide whistleblowing platform whereby all
employees have access to a multi‑lingual online portal, together with local
hotline numbers that are available 24/7, in order to allow employees to raise
concerns on possible wrongdoing in any aspect of the business.
Trend commentary
As a result of the geopolitical uncertainty and increase in national
protectionism noted under risk 3, the Group was proactive in monitoring
the changing regulations surrounding export controls and sanctions, and
ensuring that the Group had the relevant licences that it needed in order to
operate. The Group continued to have a fully developed legal function both
at a Group and divisional level. The legal function was supported by external
advisors where necessary or helpful to ensure ongoing compliance in the
jurisdictions in which the businesses operate across the globe.
34
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023 RISK 7 – CLIMATE CHANGE
Description and impact
Increased frequency in extreme weather and climate‑related natural disasters
can lead to physical damage at the Group’s sites in addition to disruptions in
our business lines’ supply chain. Additionally, new legislation and regulations
may require additional investment, restrict commercial flexibility and business
strategies, or introduce additional liabilities for the Group or the Directors.
Changing demand patterns influenced by climate change concerns create
risks for the sustainability of the Group’s products and solutions.
During the year, as part of the Group’s new assessment of climate change
risks, specific and potentially material transition risks were identified. These
risks are related to exposure to carbon pricing mechanisms, raw material
availability, replacement of carbon intensive machinery and successful entry
of new technologies to the market. The physical risk assessment sought
to identify current and potential future physical climate risks facing the
Group’s global facilities and key suppliers, with consideration of revenue
and property value of each facility, to determine the materiality of identified
risks, most material of which were found to be related to flooding and storm
events, and some potential disruptions to key suppliers caused by extreme
weather events.
Mitigation
• We seek to integrate climate considerations, such as energy and climate
management efforts in countries where we operate and sell our products,
expectations of our value chains, and the various commitments to achieve
the goals of the Paris Agreement, into strategic decisions and operational
management.
• To understand better and plan for the effects of climate change within the
Group, a framework has been developed for identifying, understanding,
quantifying, where possible, and, ultimately, managing climate‑related
challenges and opportunities. This framework covers government and
international policy, emissions regulations, energy costs, physical impacts,
access to capital, risks relating to permits, product demand and litigation risks.
• During the year, a new sustainability and climate change governance
framework was developed by the GKN Aerospace sustainability function,
overseen by the Chief Technology Officer. This sets out the responsibilities
for delivering the Group’s climate strategy and addresses progress against
the Group’s climate commitments.
• Scope 1, 2 and 3 emissions are monitored and reported on. This data is
used to manage operational and supply chain emissions, as well as track
the Group’s emissions, energy, and other climate‑related sustainability
targets. Performance is reported annually within Melrose’s Annual and
Sustainability Reports, Task Force on Climate‑related Financial Disclosures
(“TCFD”) report, and through the CDP Climate Change disclosures.
• During the year Melrose developed a new Transition Plan in order to help
the Group deliver its ambition of Net Zero by 2050. The Transition Plan
was prepared in line with the TCFD recommendations and the new UK
Transition Plan Taskforce’s guidance. It is available on Melrose’s website at
www.melroseplc.net/sustainability.
• As part of the assessment of climate transition risks, mitigation and
adaptation opportunities have been identified related to the development
of new technologies such as hydrogen, battery electric and sustainable
aviation fuels as well as improving inflight efficiencies by lightweighting
components and energy efficiency of engines to ensure continued
motivation to be the most sustainable partner in the sky. Further details
can be found in the Sustainability review on pages 43 to 93.
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 the entire aerospace sector. As such, climate
change was given a greater focus in 2023 and addressed through various
strategic and tactical workstreams within the Group. It is an important
consideration across the Group’s business strategy, including in terms of
investment decisions and product development. It is also an increasingly key
strategic concern for the Group’s stakeholders, who are keen to understand
how Melrose is managing climate‑related risk.
Going into 2024, the Group will continue to look to balance where possible the
risks associated with climate change against potential opportunities for the
Group and will report on progress in achieving the Group’s net zero ambition as
set out in the new Net Zero Transition Plan.
RISK 8 – INFORMATION SECURITY AND CYBER THREATS
Description and impact
Information security and cyber threats to our systems are an increasing
priority across all industries and remain a key UK, US and European agenda
item across governments. The Group’s potential exposure to information
security and cyber risks remains at a high status due to its operations within
the aerospace industry, together with the scale and public facing nature of
the Group. There is an inherent security threat within the Group where data is
held in relation to civil aerospace technology and controlled military contracts
in airframe and engines.
The risks associated with information security and cyber threats are far
reaching and include business disruption resulting from attacks to the
Group’s information technology and operational technology infrastructure
and systems, unlawful attempts to obtain access to proprietary or classified
information held by the Group, and the potential for business disruption and
compromise of information as a result of such attacks and unlawful access
attempts within the Group’s wider supply chain.
Mitigation
• Management works closely with the Group’s external security consultants,
Ernst & Young, 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, management continued to monitor and enhance its
information security strategy and risk‑based governance framework within
the Group. The framework follows both the UK Government’s National
Cyber Security Centre recommended steps on cyber security and US
NIST Cyber Security Framework, as well as incorporating Dutch MIVD and
Swedish ISM controls. This strategic management approach has delivered
risk profiling capabilities for aerospace and defence, and the enablement
of mitigation plans to be developed to reduce the Group’s exposure to
cyber risk.
• The progress of the Group is measured against its information security
strategy and is monitored on a quarterly basis. These results are externally
verified on a quarterly basis by Ernst & Young, who also continue to conduct
cyber assurance site reviews covering key locations across the Group.
• Education and awareness initiatives are considered vital to the
management of information security and cyber threat risks. A number of
initiatives are undertaken throughout the year, including phishing exercises,
to help drive better awareness and engagement with such risks.
Trend commentary
Information security and cyber threats risk is an increasing priority of,
and inherently present within, the aerospace industry. Melrose’s change
in business strategy to operating as a standalone aerospace group has
therefore increased its exposure to such risk. Furthermore, the rising
geopolitical tensions noted under risk 3 have heightened information security
and cyber threats risk within the aerospace industry, which in turn has
resulted in an increase in this risk trend for the Group. To counter this, 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 current and future threats.
35
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023STRATEGIC REPORT RISKS AND UNCERTAINTIES CONTINUED
Risk trend
Strategic priorities
Responsibility
The Executive management team
(comprising executive Directors and
Melrose senior management) are
responsible for our principal risks.
Increasing
No change
Decreasing
Realigned risk
Design
Deliver
Improve
FINANCIAL RISKS
RISK 9 – TREASURY
Description and impact
The Group is exposed to a number of treasury‑related risks, including those
related to liquidity, foreign exchange and pensions. 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 20 to 27,
as at 31 December 2023, the Group had term loans of US$300 million and
€100 million, and revolving credit facilities (“RCFs”) totalling US$940 million,
£300 million and €300 million.
Due to the global nature of the Group’s operations, it is susceptible to the
volatility inherent in the foreign exchange market in addition to exchange rate
fluctuations. The Group is primarily exposed to two types of currency risk:
transaction risk and translation risk.
Furthermore, any shortfall in the Group’s defined benefit pension schemes
may require additional funding. As at 31 December 2023, the Group’s
pension schemes had an aggregate deficit, on an accounting basis, of
£99 million (2022: £488 million). Changes in discount rates, inflation, asset
values or mortality assumptions could lead to a materially higher deficit.
Further, 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.
Mitigation
• The Group operates a conservative level of headroom for liquidity purposes
and across its financial covenants, conducting regular reviews of its cash
forecast, which is designed to avoid the need for any unplanned refinancing.
• The Group operates cash management mechanisms, including cash
pooling across the Group and maintenance of RCFs and certain
uncommitted facilities to mitigate the risk of any liquidity issues.
• In preparation for the Demerger, the Group successfully refinanced its
bank facilities to reflect the new size of the Group. The term loans and
US$250 million of the RCFs (noted above) expire in April 2026 and the
remainder of the RCFs (noted above) can be extended by two one‑year
extension periods to April 2028 at Melrose’s option.
• The Group’s policy is to mitigate transactional foreign exchange risk
affecting cash by hedging such risks with financial instruments. The Group
utilises its multi‑currency banking facilities and cross‑currency swaps,
where relevant, to maintain an appropriate mix of debt in US Dollars, Euros
and Sterling. The hedge of having debt drawn in US Dollars and Euros
protects against some of the balance sheet and banking covenant foreign
exchange risk.
• The Group is 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.
• The GKN UK Group Pension Schemes (Numbers 1 and 4) are the most
significant pension plans remaining in the Group and are closed to new
members and to the accrual of future benefits for current members. During
the year, the Group commenced a process to buy‑out the GKN UK Group
Pension Scheme Number 4, which is expected to complete during 2024.
• Melrose actively engages with the Trustees on pension plan asset
allocations and strategies.
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. Debt reduced within the Group on the Demerger
and the refinancing of the Group’s banking facilities has ensured that the
Group has adequate resources available to meet its liabilities. Moreover, the
Demerger has resulted in a significant reduction in the Group’s UK defined
benefit pensions plans net deficit. The Group also utilised its usual controls
to combat against foreign exchange risk during the year and to provide
protection for future years, which remains important due to the continuing
risk of volatility in the foreign exchange market. Please refer to the Finance
Director’s review on pages 20 to 27 for further details.
36
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023 SECTION 172 STATEMENT
BOARD STAKEHOLDER ENGAGEMENT
AND DECISION‑MAKING
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 senior management team, with day‑to‑day
operational management delegated to the divisional 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 28 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, our employees and others associated
with the Group.
The Group has a number of compliance policies, including a
Code of Ethics, which are implemented across the business.
The Board continues to play an active role in overseeing how the
business manages compliance, with adherence to the compliance
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 Melrose’s purpose. The Board
considers it to be of the utmost importance that the business
continues to uphold high standards of business conduct, and
that continuous improvement is strived for in this area. Further
detail on the Group’s compliance policies and framework, and
reporting to the Board, can be found on pages 43 to 93 of the
Sustainability review.
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 a superior
return on their investment. Melrose’s strategy has shifted from its
previous “Buy, Improve, Sell” model to becoming an aerospace
business for the long‑term. Our strategy remains focused on
value creation driven by operational and financial improvement
over the longer‑term. Our positive trajectory is underpinned by
leading positions on the world’s major aircraft platforms, strong
organic growth prospects within the aerospace sector, and
attractive opportunities to further differentiate our business through
cutting‑edge proprietary technology that is already shaping the
future of flight.
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 see the decarbonisation of the aerospace sector
as a priority, and indeed a central tenet of GKN Aerospace’s
mission to be “The Most Trusted and Sustainable Partner in
the Sky”. Whilst the sector and our customers provide many
opportunities for further progress towards cleaner air travel through
our innovation and technology leadership, we see no reason why
this priority cannot be achieved at the same time as generating
superior financial returns for our shareholders.
37
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023STRATEGIC REPORT SECTION 172 STATEMENT CONTINUED
KEY STAKEHOLDER ENGAGEMENT IN 2023
The Board cultivates strong relationships with the Group’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.
Set out below and on the following pages are details of our key stakeholders, how we engaged with them during the year, and the
outcomes of these processes.
OUR KEY STAKEHOLDERS
OUR PEOPLE
SHAREHOLDERS
Our approach
We recognise that a capable, engaged and passionate workforce
is central to the Group’s performance and ultimately its success.
Our people are an important stakeholder group and we foster
a culture of effective engagement with employees in order to
encourage open dialogue where employees feel confident that
their views are taken into consideration.
Engagement activities and consideration
• Melrose operates a Workforce Advisory Panel (“WAP”) in
order to promote effective engagement with, and encourage
participation from, its workforce. The WAP met twice during
the year and the outcomes, together with key workforce views,
were fed back to the Board accordingly.
• 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 Audit
Committee receives reports on whistleblowing activity, and this
is ultimately reported to the Board.
• An annual all‑employee engagement survey is undertaken
across the Group in order to collate the views of employees and
identify areas of strength and those in need of development.
The Board receives a summary of these results, and is provided
with feedback on how employees’ views are taken into account
in executive decision making.
• The Board receives quarterly health and safety reports and
regular updates on the Group’s pension arrangements.
• The Nomination Committee, together with the Board, is focused
on promoting diversity and inclusion within the Group. The
Group’s diversity policies are reviewed on an annual basis to
ensure that the importance of having a diverse and inclusive
culture is understood and embraced throughout the Group.
Sustainability review
pages 43 to 93
Our approach
We provide 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 research
and analysis 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.
Engagement activities and consideration
• The Board and Melrose senior management team have
an annual programme of key information publications and
engagement activities including regular trading updates,
open agenda meetings for key shareholders attended by the
Chairman and/or the Senior Independent Director, where
requested, and a Q&A forum for shareholders at Melrose’s
Annual General Meeting.
• In May 2023, the executive Directors hosted a capital markets
event in London to provide further information to, and
interact directly with, key shareholders, analysts and their
representatives on Melrose’s new business strategy. This was
subsequently followed in October 2023 by an investor event
focusing on our Engines division, which took place at our key
site in Trollhättan, Sweden.
• The Group Company Secretariat engaged with, and facilitated
discussions involving members of the Board with, the
responsible stewardship and sustainability representatives of
key investors on a variety of topics including the Demerger and
the enclosed Directors’ remuneration policy proposal.
Case study
page 40
Directors’ Remuneration report
page 129
38
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023
CUSTOMERS AND SUPPLIERS
ENVIRONMENT AND COMMUNITIES
Our approach
The relationships that we have with our customers and suppliers
are key to our success, and we foster positive and open business
relationships with them. We 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 divisions with this key
stakeholder group.
Engagement activities and consideration
• The Board holds regular business reviews with the Chief
Executive Officer, Chief Financial Officer, Group General
Counsel and Business Line Presidents and as part of these
reviews, management shares feedback on key customer and
supplier initiatives and views, as well as supplier performance
and supply chain disruption.
• Management attends major aerospace industry events
including the Paris Air Show and the Farnborough International
Airshow, which promotes an open dialogue with customers,
suppliers, and other industry players.
• The Group continues to focus on helping our customers deliver
their own sustainability agendas by working with them to find
ways to make products more sustainable.
• To further improve our supplier engagement and in order to
meet our net zero targets, GKN Aerospace has committed via
the Science Based Targets initiative (“SBTi”) to reduce absolute
Scope 3 emissions (from key Scope 3 categories) by 25% by
2030 from a 2022 base year, as well as committing that 70% of
its suppliers by spend will have science‑based targets by 2028.
• We continued supply chain engagement through the CDP
Supply Chain initiative in order to track and encourage supplier
alignment to Net Zero, achieving a response rate of over 70%.
Sustainability review
pages 43 to 93
Our approach
In 2023 we reset the foundations of our sustainability strategy
as a pureplay aerospace business in line with GKN Aerospace’s
mission to be the most trusted and sustainable partner in the
sky. We have refreshed our sustainability governance framework
enabling the delivery of our new sustainability targets and
commitments through an integrated Melrose and GKN Aerospace
sustainability function. This cross‑functional and multi‑disciplinary
team is responsible for executing the Board’s overall sustainability
strategy. The Board as a whole, led by the Chairman, is
responsible for all matters concerning sustainability and climate
change, and sustainability remains a key Board meeting agenda
item, providing a platform for updating the Directors on progress
and strategy.
Engagement activities and consideration
• We conducted our first double materiality assessment to
identify the topics that are most relevant for our new aerospace
focused business and aligned stakeholders. We gained these
perspectives through a series of consultations and interviews
with internal experts who were able to represent the views and
concerns of key stakeholder groups including members of the
executive management team, employees, customers, suppliers
and shareholders.
• We formalised our strategy to enable transition to a net
zero economy. We updated our Net Zero Transition Plan
(the “Transition Plan”) to provide clarity to our stakeholders
around the actions we intend to take to achieve our short‑ and
medium‑term emissions reduction targets to reach net zero
Greenhouse gas (“GHG”) emissions across the value chain by
2050, and how we plan to contribute to reducing the climate
impact of aerospace. This has included the submission of
Board‑approved emissions reduction targets through the
SBTi for validation, and progress against these targets will be
reported annually.
• 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. A key action has been working with the
benchmarking agencies to realign the business to be assessed
against the aerospace sector.
• The Group submitted its response to the CDP Climate Change
and Water Security questionnaires, achieving B (2022: C)
and C (2022: C) respectively, which the Board views as
encouraging progress.
• We recognise the importance of local communities to the
effective operations of our business. The Sustainability review
on pages 43 to 93 highlights examples of actions taken during
2023 to engage with communities, including through the
Melrose Skills Fund.
Case study
page 41
Sustainability review
pages 43 to 93
39
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023STRATEGIC REPORT
SECTION 172 STATEMENT CONTINUED
LENDERS
Our approach
In addition to the long‑term funding requirements of the Group,
we may need to move quickly to secure the opportunities that
we feel will be critical to Melrose’s success. As part of this, we
regularly engage with our supportive banking syndicate to discuss
funding strategy, and maintaining strong banking relationships has
proven to be vital at times where we have needed to act quickly
and decisively.
Engagement activities and consideration
In connection with the Demerger, we engaged extensively with our
banking syndicate in order to refinance our bank facilities to reflect
the new size of the Group. As part of this process, a number of
improvements were made to the existing Group facilities with the
agreement of the syndicate.
Finance Directors’ review
pages 20 to 27
GOVERNMENT BODIES, REGULATORS AND
INDEPENDENT BODIES
Our approach
We interact with government bodies and regulators in a number
of jurisdictions across the world, many of which are of strategic
importance to the Group and our long‑term success. It is therefore
important that we maintain ordinary course dialogue with such
stakeholders to allow our businesses to operate effectively.
Furthermore, we invest significant time in speaking regularly to
key corporate governance agencies and proxy advisors regarding
certain aspects of corporate governance that we and our investors
consider to be of long‑term strategic importance.
Engagement activities and consideration
• We maintain regular dialogue with government bodies and
regulators, including the Department for Business and Trade,
the Ministry of Defence and the Investment Security Unit in
the UK, as well as the Department of Defense in the US. We
also provided our fifth anniversary report to the UK Panel
on Takeovers and Mergers in April 2023, which detailed
our fulfilment of, and compliance with, those post‑offer
undertakings given at the time of Melrose’s acquisition of GKN
plc which had expired during the year.
• We continued to engage with independent reporting bodies
supported by the UK Government where relevant, including
the FTSE Women Leaders Review and the Parker Review.
Significant time and effort was also placed on engaging 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.
• The Company Secretariat interacts on a regular basis with
independent reporting bodies and other corporate governance
bodies. During 2023, this included participating in round
table discussions with the Financial Reporting Council on its
proposed changes to the UK Corporate Governance Code,
as well discussions with the Investment Association on its
Principles of Remuneration.
40
KEY BOARD DECISIONS AND
STAKEHOLDER ENGAGEMENT
AEROSPACE‑ONLY BUSINESS STRATEGY
• Our people
• Shareholders
• Customers and suppliers
• Lenders
• Government bodies, regulators and independent bodies
Melrose announced its change in business strategy to operating
as a pureplay aerospace business, focused on value creation
driven by continuous operational and financial improvement over
the longer term.
The change in business strategy is the latest example of the
Board’s focus on delivering value to shareholders and other
stakeholders, and the Board’s decision to change the Company’s
business strategy was based on a fully informed and considered
assessment of the performance and trajectory of the business. As
announced, the Board considers the GKN Aerospace business
to be one of the best businesses that Melrose has ever owned,
and remains confident that the Group’s new composition of the
restructured and refocused high‑class Engines and Structures
businesses, supported by the recovery and growth prospects of
the aerospace sector at large, positions Melrose for a significantly
better than expected performance for the future.
We have undertaken a significant engagement exercise with
shareholders and other stakeholders in order to provide
transparency and clarity on our new business strategy. This has
been supported from the outset by regular trading updates and
guidance to the market. In May 2023, the executive Directors
hosted a capital markets event in London to provide further
information to, and interact directly with, key shareholders,
analysts and their representatives on our new business strategy.
This was subsequently followed in October 2023 by an investor
event focusing on our Engines division, which took place at one of
our key sites in Trollhättan, Sweden. Both events received positive
feedback with strong attendance rates, and attendees were
provided with an opportunity to ask questions of those Directors
in attendance as well as senior management.
We also recognised the importance of engaging with our
employees on the change in business strategy. This has
included hosting live and online events with leadership to explain
Melrose’s new business strategy and to provide transparency
on the integration of the Melrose and GKN Aerospace senior
management teams. As part of such engagement initiatives,
employees have been given a platform to ask questions and have
been empowered to consider how their roles interlink with the
Company’s new business strategy.
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023
FURTHER FOCUS ON THE GROUP’S
SUSTAINABILITY PERFORMANCE TO DRIVE
IMPROVEMENTS AND VALUE CREATION
• Our people
• Shareholders
• Customers and suppliers
• Environment and communities
• Government bodies, regulators and independent bodies
Sustainability is a key item on the Board’s agenda, receiving
appropriate consideration throughout the year at its scheduled
meetings. The Board has been integral in supporting the
Group’s sustainability efforts in its shift to becoming an
aerospace‑only business.
The GKN Aerospace sustainability function, overseen by the
Chief Technology Officer, has elevated climate change: mitigation
and adaptation; R&D for sustainable aviation; occupational
health, safety, and wellbeing; product safety and quality; and
business integrity as material topics following its completion of
the Group’s first double materiality assessment. As we reset our
Group strategy to align with these topics, we have committed to
new sustainability targets and commitments which have been
approved by the Board. These targets exemplify our dedication to
reducing the impact of our operations on the planet. 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 in the Sustainability review on pages 43 to 93.
As part of our third year of reporting against the Task Force on
Climate‑related Financial Disclosures (“TCFD”) framework, we
have recalibrated our initial 2021 climate‑scenario assessment of
climate‑related risks and opportunities to focus on the aerospace
sector, providing more sector aligned disclosure to shareholders
and other stakeholders.
In 2023, the Board approved the updated Transition Plan, which
was prepared to provide our stakeholders with clarity around
the actions we intend to take to achieve our emissions reduction
targets to reach net zero GHG emissions across the value
chain by 2050, in light of our new aerospace‑only strategy. The
Transition Plan outlines our objectives, priorities, detailed plans,
and projects to reach our science‑based emissions reduction
targets. It 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 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.
With respect to supply chain, there has been an increased
emphasis on businesses to increase their engagement with
suppliers, to be able to expand our Scope 3 data coverage. We
continued our engagement with the CDP Supply Chain initiative
in order to track and encourage supplier alignment to Net Zero,
achieving an engagement rate of over 70% for the year. To further
improve our supplier engagement and in order to meet our Net
Zero targets, GKN Aerospace has committed via the SBTi to
reduce absolute Scope 3 emissions (from key Scope 3 categories)
by 25% by 2030 from a 2022 base year, as well as committing
that 70% of its suppliers by spend will have science‑based targets
by 2028.
41
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023STRATEGIC REPORT SECTION 172 STATEMENT CONTINUED
HELPING TO BUILD THE UK’S INDUSTRIAL
BASE THROUGH THE MELROSE SKILLS FUND
• Our people
• Customers and suppliers
• Environment and communities
In 2023, we met our commitment given at the time of the
acquisition of GKN plc to invest £10 million over five years through
the Melrose Skills Fund to build the UK’s industrial base. This also
included having met our commitment to support the creation
of between 100 to 150 new apprenticeships in engineering,
technology and science, with the total number of apprenticeships
created having exceeded this target. The Melrose Skills Fund was
a Board approved initiative and the Directors have not only been
kept up to date on the various projects undertaken as part of the
fund, but they have also engaged directly with a number of the
charities and third parties whom we have partnered with as part
of these initiatives.
The Melrose Skills Fund has been utilised to develop the technical
skills that support current and future business needs within the
aerospace industry, using digital delivery methods and accredited
learning management systems. This in turn has helped to support
the training and development of more than 3,000 individuals
within GKN Aerospace alone, with key capability gaps closed
and tangible value added to the business. Our employees have
engaged in a number of different training initiatives. In particular,
cryogenics capability training has been provided to employees as
both our customers and wider society look to more towards more
sustainable fuels for aircraft, such as liquid hydrogen. Additionally,
our employees have engaged in training to help identify ways to
reduce noise pollution for our customers that operate within the
advanced air mobility market.
A key focus of the Melrose Skills Fund has been identifying ways
to work with third parties and the community to help bolster the
UK’s manufacturing and engineering industry. We have worked
closely with The Schools’ Aerospace Careers Programme (the
“SACP”), a charity supporting young people and educational
establishments across the UK to increase the number of young
people undertaking STEM learning and pursuing careers in
engineering‑based industries. In addition to supporting school
roadshows organised by the SACP, we have hosted a student
networking event at our UK Global Technology Centre, which was
attended by over 70 students and provided a full day of insights
into aerospace careers. Furthermore, we have provided funding
to Newcastle University for its research activities into human cell
mapping as a basis for both understanding human health and
for diagnosing, monitoring and treating disease. The funding
has enabled Newcastle University to appoint additional research
software engineers to help aid this important research.
42
Another core component of the Melrose Skills Fund has been
supporting initiatives which look to improve diversity in all of its
forms within the manufacturing and engineering industry. We
collaborated with Enginuity, a not‑for‑profit organisation, and the
trade union, Unite, to help develop an engineering task‑oriented
computer game contextualised for the aerospace sector to help
encourage school children from ethnic minorities and different
socio‑economic backgrounds to consider a career within the
engineering industry. Furthermore, we partnered with Cajigo,
an app‑based educational platform which offers mentoring
and career guidance for girls and women, with the objective of
closing the gender gap in engineering and technology. As part
of this initiative, a group of our female engineers volunteered to
support Cajigo’s virtual talks and events. We also partnered with
the University of West England and Ambitious about Autism, a
London‑based charity, to provide two internship opportunities at
our UK Global Technology Centre to neurodivergent students.
£10m
invested over five years through the
Melrose Skills Fund
>3,000
GKN Aerospace employees
supported with technical skills
training and development
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023 SUSTAINABILITY
REVIEW 2023
IN THIS SECTION
2023 Sustainability highlights .................... 44
Outlook for 2024 ....................................... 46
Sustainability targets and commitments ... 48
Environmental impact ............................... 54
TCFD and CFD .......................................... 58
Social impact ............................................ 82
Diversity, equity and inclusion ................... 83
Community impact .................................... 88
Safety ........................................................ 88
Governance .............................................. 89
Sustainability risk management ................. 90
Product quality and safety ......................... 90
Supply chain management ....................... 90
Internal financial controls and reporting ..... 92
43
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023STRATEGIC REPORT SUSTAINABILITY REVIEW CONTINUED
2023 SUSTAINABILITY
HIGHLIGHTS
PERFORMANCE AGAINST MELROSE’S
EXISTING SHORT‑TERM SUSTAINABILITY
TARGETS AND COMMITMENTS
During 2023, the Group demonstrated solid performance and strong
dedication to deliver on our targets and standing commitments
initially introduced in 2021. Having achieved most of our short‑term
and interim targets in 2023, we have reset those sustainability
targets for achievement in 2025 to more ambitious levels
(see pages 48 to 51).
Our medium‑ and long‑term targets will be reviewed over the
coming years to incorporate the results from our double materiality
assessment, and to fully align with changes in regulatory expectations
and our strategic priorities to tackle climate change and other
environmental challenges, build stronger communities and a more
diverse workforce, as well as to further embed sustainability across
our governance systems. Our performance against the Melrose Group
existing sustainability targets is depicted below. ESG data across our
selected KPIs over the last years has been restated throughout this
section to only include Melrose and GKN Aerospace performance.
SDG & Sustainability
principle
Measure
Target
Baseline
year
2023
performance
Target
maturity
Progress
against
target
Reduce Scope 1 & 2 GHG emissions intensity(1)
20%
2020
38%(2)
2025
Achieved
Respect and protect the
environment
Source global electricity from renewable sources(3)
50%
2020
34.4%
2025
On track
Divert solid non‑hazardous waste from landfill
95%
2020
88%
2025
On track
Reduce water withdrawal intensity(1)
25%
2021
32%
2030
Achieved
Increase % of total R&D expenditure on climate‑related R&D
annually to contribute to the decarbonisation of aerospace
50%
2020
80%
2025
Achieved
Continue to invest in
products that help
decarbonise aviation
Increase % of new products which contribute to the
decarbonisation of aerospace
50%
2020
100%
2025
Achieved
Protect our employees from injury and lost time accidents
(“LTA”) and maintain a LTA frequency rate below 0.1
<0.1
2020
0.04
Achieved
Ensure that all permanent employees receive regular annual
formal performance reviews(4)
2020
72%
On track
Invest £10 million(5) in the Melrose Skills Fund to promote
engineering skills across the UK over five years
Ensure at least 33% female membership at Board and in
executive committee and its direct reports
Maintain achievement of Parker Review recommendations
Ensure compliance of all employees, suppliers and
contractors with our Code of Ethics, conducting business
with integrity and in a responsible, ethical and sustainable
manner
2018
Achieved
2020
40%
Achieved
2020
2020
Achieved
On track
Prioritise health
and safety, promote
diversity 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
(1) The Group’s chosen intensity ratio is energy consumption, emissions and water withdrawal reported above normalised megawatts usage (“MWh”), tonnes of CO2e, or m3 per £1,000
of revenue. The data has been standardised from the source units in which it was initially collected. The revenue figures used to calculate the intensity ratio include continuing
operations under operational control only.
(2) Market‑based method has been used for Scope 2 emissions.
(3) Where renewable electricity is commercially and reasonably available in the relevant jurisdiction.
(4) Where permitted by local laws and employee representative bodies.
(5) Investment distributed in line with the public commitment of the Melrose Skills Fund to build the UK’s industrial base and support the creation of 100‑150 UK apprenticeships over
five years.
44
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023
In 2023, we continued to
focus on improving our
material sustainability topics
that impact our business and
are of most concern to our
key stakeholders.
MSCI(1)
A
Sustainalytics(2)
27.8
Key developments include:
ENHANCING OUR CLIMATE STRATEGY AND
ENVIRONMENTAL DISCLOSURES TO DRIVE OUR
COMMITMENT TO NET ZERO
• Continued significant investment in world leading technologies to
enable aviation’s route to Net Zero by 2050 (£48m investment in
decarbonising R&D in 2023);
• Developing our updated Transition Plan to set out our pathway
to Net Zero with an updated climate risks scenario analysis and
emissions targets;
• Submitted near and long‑term emissions targets to the SBTi for
validation;
ESG Rating: A
(2022: A)
ESG risk rating improved to
27.8 (Medium) from 28.3
• Achieved B for our CDP Climate Change and C for CDP Water
Security disclosures;
B
13th
CDP Climate Change
score 2023: B
(2022: C)
Industry Average 2023: C
(2022: C)
Ranked 13th out of 129
Industrial Conglomerates
(2022: 8th out of 114 in
Industrial Conglomerates
Category)
C
CDP Water Security
score 2023: C
(2022: D)
Industry Average 2023: C
(2022: C)
63.3
ESG Risk Management
score improved to 63.3
(Strong) from 62.5 in 2023
• Commenced Water and Biodiversity impact assessments
to improve our understanding of risks, dependencies and
opportunities for improvement.
ACHIEVING KEY MILESTONES AND SHAPING
OUR BUSINESS FOR THE FUTURE
• Met most of our Group short‑term and interim ESG targets ahead of
target year;
• Set more ambitious interim sustainability targets to align with our
transformation into a pureplay aerospace business;
• Commenced a sustainability data pre‑assurance project in
preparation for formal limited assurance in the coming years;
• Updated our Diversity and Inclusion policies to better align with the
latest benchmarks for diversity across the Board and executive
management.
(1) As of 2023, Melrose Industries PLC received an MSCI ESG Rating of A.
(2) As of 2023, Melrose Industries PLC received an ESG Risk Rating of 27.8
from Morningstar Sustainalytics and was assessed to be at medium risk of
experiencing material financial impacts from ESG factors. In no event the
ESG Risk Rating shall be construed as investment advice or expert opinion
as defined by the applicable legislation.
INCREASING ENGAGEMENT
• Completed a double materiality assessment to re‑align the key
focus areas reflective of our future as an aerospace only business,
and re‑assess our material sustainability topics based on their
impact and financial materiality;
• Continued supply chain engagement through the CDP Supply
Chain initiative in order to track and encourage supplier alignment
to Net Zero, achieving a response rate of over 70% (2022: 50%);
• Continued collaboration with customers, governments, industry and
other key stakeholders to actively influence and shape the future
of more sustainable flight.
45
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023STRATEGIC REPORT SUSTAINABILITY REVIEW CONTINUED
OUTLOOK FOR 2024
We are committed to remaining at the
forefront of advancing aircraft efficiency
and pioneering the development of
sustainable aircraft of the future.
This endeavour is underpinned by a steadfast commitment to
technological innovation, advanced processes, and the pursuit of
engineering excellence.
We recognise that the global civil aviation commitments to Net Zero
by 2050 will require improvements in aircraft and engine efficiency,
improved aircraft flight management, the use of sustainable
aviation fuels, and investment in innovative alternative energy
solutions to address residual emissions. Our network of Global
Technology Centres across the UK, Sweden, the Netherlands and
the US (“GTCs”) is instrumental in directing Melrose investment
into decarbonisation technology, enhancing GKN Aerospace’s
capabilities, promoting collaboration, and expediting technological
breakthrough, with a particular focus on the electric and hydrogen
opportunities for sustainable aviation, lightweight (composite)
materials and wiring systems, aircraft engine efficiency and additive
manufacturing. Furthermore, GKN Aerospace will continue to
leverage its distinctive market position to harness the advantages
of newly established partnerships with industry leaders in these
dynamic and emerging markets.
In 2024, we will continue to oversee and enhance our
sustainability performance in the following key areas of focus:
• Identify and drive improvements to attain the new 2025
sustainability targets and associated goals, on or ahead of
time, and across the priority material topics as identified and
prioritised by the double materiality assessment;
• Continue to drive down business emissions and further develop
our decarbonisation roadmap in line with our recently submitted
Science Based Targets(1), in our own operations and across the
value chain;
• Continue to improve sustainability data quality and reporting,
including in preparation for the new regulatory requirements for
sustainability data disclosures;
• Actively manage and mitigate the risks, and pursue appropriate
opportunities, identified in the latest climate scenario analysis
and Task Force on Climate‑Related Financial Disclosures
(“TCFD”) and Climate‑related Financial Disclosure (“CFD”);
• Further improve our supplier engagement in line with the
roadmap outlined in the Transition Plan to ensure progress
towards achieving our Scope 3 engagement target(1).
(1) Submitted to the SBTi in 2023 and pending validation.
46
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023 OUR SUSTAINABLE
IMPROVEMENT STRATEGY
Sustainable value creation
Sustainability is an important part of our strategy, and we firmly
believe that this focus is not just the right thing to do but is a central
enabler of our success and value creation.
In partnering with our customers, we create breakthrough
technologies and highly engineered products and systems where
quality always comes first. We support our customers in tackling the
most pressing and complex challenges across the aerospace sector
and in achieving their own sustainability and net zero ambitions.
With our aerostructures and engine systems enabling over 100,000
flights every day, empowered by innovative solutions based on
breakthrough R&D and sustainable technology, we are committed to
continuously improve all that we do and will always remain central to
our success.
Our established sustainability governance framework helps drive
longevity and credibility of sustainability performance over time as we
seek to apply a long‑term view and the highest standards of integrity,
honesty, and transparency to any sustainability improvements we
make and align them with commercial and operational success.
Double Materiality Assessment 2023
The transformation of the Melrose Group into a pureplay aerospace
business has triggered the need to re‑envision the sustainability
topics that are material to the Group, and the Group sustainability
targets required to drive improvements. In 2023, we conducted our
first double materiality assessment to identify the sustainability topics
that are most relevant for our new aerospace focused business and
aligned stakeholders.
The new double materiality assessment results will help to guide
our sustainability investments and initiatives to help tackle the most
relevant risk exposures to society and the environment. This process
will also help further integrate sustainability into our broader business
strategy. Our near‑term targets have also been reset to ensure
continued drive and focus, with medium and long‑term targets to be
assessed over the coming years.
As illustrated below, the highest priority topics were identified as
Climate change: Mitigation and adaptation, R&D for sustainable
aviation, Occupational health, safety and wellbeing, Product Safety &
Quality, and Business integrity. Going forward, we will tailor activities,
targets, and commitments based on the results of this materiality
assessment. The “Moderate” category ensures ongoing monitoring
and action when necessary. Our journey toward an integrated, holistic
approach to sustainability management reflects our commitment to
supporting GKN Aerospace in its mission to be the most trusted and
sustainable partner in the sky.
Our assessment results are plotted on a materiality matrix to show
both the degree of stakeholder interest (impact materiality) and
potential business impact (financial materiality).
Major
High
t
c
a
p
m
i
l
Moderate
i
a
c
n
a
n
F
i
2
11
4
10
15
14
12
7
3
13
6
5
9
1
8
Environmental and social impact
1
2
3
4
5
6
7
8
9
10
11
12
13
14
Biodiversity
Business integrity
Circularity and waste reduction
Climate change: mitigation
and adaptation
Community impact
Diversity and equal
opportunities
Information security
Occupational health,
safety and wellbeing
Pollution
Product safety & quality
R&D for sustainable innovation
Respect for human rights
Sustainable supply chain and
responsible sourcing
Talent and workforce
engagement and development
15
Water stewardship
47
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023STRATEGIC REPORT
SUSTAINABILITY REVIEW CONTINUED
GROUP TARGETS AND COMMITMENTS
Our Group sustainability targets and commitments are designed
to uphold our company’s sustainability principles and directly
address the most pertinent sustainability issues we face. By
aligning our targets and commitments with the United Nations
Sustainable Development Goals (“UN SDGs”), we connect our
sustainability aspirations with those of society at large. This
alignment also ensures that our value creation strategy aligns with
the expectations of our stakeholders, which we are dedicated to
embedding into our core business agenda.
In order to reflect the business transformation of Melrose into a
pureplay aerospace business, in 2023 our Group sustainability
targets have been reset to align with GKN Aerospace’s
sustainability ambition and the macroeconomic and broader
industry drive for advancing the environmental and social
improvements in aerospace. Our 2025 targets provide a further
short‑term improvement against our existing measures, whilst
we in parallel will develop our interim and long‑term ambitions
incorporating both strategic and regulatory developments. The
baseline for targets was set in conjunction with the timeframe of
the Group’s target‑setting process.
We summarise below our sustainability improvement principles,
linking them to our targets, commitments, material topics, relevant
stakeholders and UN SDGs. By fostering a culture of sustainability
improvements, both operationally and financially, we strengthen our
capabilities and resources, allowing us to pursue sustainable growth.
SUSTAINABILITY PRINCIPLE:
RESPECT AND PROTECT THE ENVIRONMENT
UN SDGs
Target 6.4
We have set a water withdrawal intensity target to increase efficiency across our business as we seek to address
water challenges such as scarcity and quality
Target 9.4
Contributing to resource‑use efficiency, we aim to consider the impact of our manufactured products on the
environment in terms of raw material and energy use, waste, and carbon footprint throughout each product life cycle
Target 13.2
In recognition of climate change as a principal risk, we integrate it into strategic thinking and future planning
Targets
Reduce Scope 1 and 2 GHG emissions intensity by 50% by 2025(1)
Source 50% of electricity from renewable sources by 2025(2)
Divert 95% of solid waste from landfill by 2025(3)
Reduce water withdrawal intensity(1) by 40% by 2025(4) and continue to implement a Group Water Stewardship
Programme to improve water management
Reduce absolute Scope 1 and 2 GHG emissions by 50% by 2030(5)
Reduce absolute Scope 3 GHG emissions by 25% by 2030(6)
Achieve net zero GHG emissions across the value chain by 2050
Ensure 70% of suppliers by spend covering purchased goods and services have science‑based targets by 2028
• Invest to improve operational efficiencies by minimising environmental impact through reduced energy consumption,
CO2 emissions, water use and waste management
• Align with recognised frameworks such as SASB, TCFD and CDP to increase transparency of actions as a core driver for
Climate targets
submitted
to SBTi for
validation
Sustainability
improvement
objectives
change
Material topics • Climate change: mitigation and adaptation
• Sustainable supply chain and responsible sourcing
• Circularity and waste reduction
• Water stewardship
• Biodiversity
• Pollution
Investors, regulators, contractors, suppliers, customers, communities and joint ventures
Relevance to
stakeholders
48
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023 S
T
R
A
T
E
G
I
C
R
E
P
O
R
T
SUSTAINABILITY PRINCIPLE:
CONTINUE TO INVEST IN DEVELOPMENT PRODUCTS AND SERVICES ALIGNED WITH A NET ZERO FUTURE
UN SDGs
Target 7.3
We invest in improving the energy efficiency in manufacturing processes, enabling the development of effective
solutions for climate change adaptation and mitigation
Target 9.5
Our target for climate‑related R&D facilitates the upgrade of our technological capabilities, bolstering our ability to
help customers achieve their own climate goals
Target 13.2
Integrating climate considerations into product development and commercial strategy, we have set a target to
ensure that new product developments contribute to decarbonisation
Targets
Maintain 80% of total R&D spend on climate‑related R&D per year to contribute to the decarbonisation of
aerospace by 2025
Achieve 100% of new product contracts that contribute to the decarbonisation of aerospace by 2025
Sustainability
improvement
objectives
• Support and harness product innovation and quality, to help our customers deliver on their commercial and
environmental goals and find effective solutions to assist them in addressing climate change
Material topics • R&D for sustainable aviation
• Circularity and waste reduction
Relevance to
stakeholders
Investors, contractors, suppliers, customers, communities and joint ventures
(1) The Group’s chosen intensity ratio is energy consumption, emissions and water withdrawal reported above normalised megawatts usage (“MWh”), tonnes of CO2e, or m3 per
£1,000 of revenue. The data has been standardised from the source units in which it was initially collected. The revenue figures used to calculate the intensity ratio include
continuing operations under operational control only.
(2) Where renewable electricity is commercially and reasonably available in the relevant jurisdiction.
(3) Excluding hazardous waste.
(4) Target baselined on FY2021 with consideration of HY2022 performance.
(5) From a 2020 baseline year.
(6) From a 2022 baseline year. Scope 3 emissions primarily based on spend data, more weight data required to improve calculation accuracy. Target includes Scope 3 emissions
from Category 3: Fuel‑ and energy‑related activities, Category 4: Upstream transportation and distribution, Category 5: Waste generated in operations, Category 6: Business
travel and Category 7: Employee commuting.
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MELROSE INDUSTRIES PLC ANNUAL REPORT 2023
SUSTAINABILITY REVIEW CONTINUED
SUSTAINABILITY PRINCIPLE:
PRIORITISE HEALTH & SAFETY, PROMOTE DIVERSITY AND NURTURE THE WELLBEING AND SKILLS DEVELOPMENT OF
EMPLOYEES, AND SUPPORT THE COMMUNITIES THAT THEY ARE PART OF
UN SDGs
Target 3.9
Our business has a prominent position at the heart of the net zero transition and our products have a key role to
play in achieving air pollution reductions and reducing the associated health damage
Target 5.5
We promote diversity and inclusion to ensure employees’ full and effective participation and equal opportunities
at all levels
Target 8.8
We implement effective policies and procedures to drive best health and safety practices and promote fair
employment and skills development
Targets
Protect our employees(1) from injury and accidents and maintain an LTA(2) frequency rate below 0.1
Ensure that all permanent employees receive regular performance reviews(3)
Invest £5 million on skills development per year
Maintain 40% female Board membership and at least one member of an ethnic minority background on the Board
Achieve 40% female representation in the executive committee and its direct reports by 2025
Sustainability
improvement
objectives
• Follow best health and safety practice across our operations, respect employees’ human rights and positively contribute
to their communities by implementing effective policies and procedures, supported by local management accountability
and a culture of strong awareness, training and investment
• Ensure the pension schemes are managed prudently and effectively for both employees and retirees, and where relevant
seek to create better‑funded schemes with more prudent targets under our stewardship
• Promote diversity and inclusion at all levels
• Promote fair employment and skills development
• Ensure that our people have a voice and can inform executive decisions
Material topics • Occupational health, safety and wellbeing
• Community impact
• Diversity and equal opportunities
• Product safety and quality
• Talent and workforce engagement and development
• Respect for human rights
Relevance to
stakeholders
Regulators, contractors, suppliers, customers, communities and joint ventures
50
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023 S
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R
A
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G
I
C
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SUSTAINABILITY PRINCIPLE:
EXERCISE ROBUST GOVERNANCE, RISK MANAGEMENT AND COMPLIANCE
UN SDGs
Target 8.7
We are committed to acting in an ethical manner with integrity and transparency and create effective systems
and controls across the Group to safeguard our business against adverse human rights impacts
Target 8.8
Protect labour rights of all workers, safeguard their contractual and statutory employment rights and the right to
participate in collective bargaining and freedom of association
Commitment
Ensure that all employees, suppliers and contractors comply with our Code of Ethics, conducting business with
integrity and in a responsible, ethical and sustainable manner
Sustainability
improvement
objectives
• Implement and enforce effective compliance policies, ensuring integrity, responsibility and adherence to ethical
principles
• Protect the ultimate wellbeing of products’ end‑users by adhering to the highest safety standards
• Respect labour and human rights and request suppliers to respect these principles
• Protect information security and data privacy
• Carry out prudent and responsible financial and tax planning and management
• Maintain sensible and sustainable leverage to support investment
Material topics • Business integrity
• Information Security
• Sustainable supply chain and responsible sourcing
Relevance to
stakeholders
Investors, regulators, contractors, suppliers, customers, communities and joint ventures
(1) Excluding contractors.
(2) Lost time accidents.
(3) Where permitted by local laws and employee representative bodies.
51
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023
SUSTAINABILITY REVIEW CONTINUED
SUSTAINABILITY GOVERNANCE
In 2023, we further crystallised our sustainability and climate
change governance framework, which enables the delivery
of our sustainability targets and commitments for our new
integrated company. Our sustainability and climate change
governance framework illustrates how we govern the delivery
of our sustainability ambitions, including identifying, assessing
and managing sustainability and climate‑related risks and
opportunities, setting targets and managing material topics, as
overseen by the Board and committees, with the support of the
integrated multi‑function and multidisciplinary senior management
team with respective responsibilities and accountabilities.
The topics discussed with the Board throughout 2023 include
quarterly performance against the existing Melrose Group
sustainability targets, our new targets and material topics,
advancement of our climate financial disclosures, new Transition
Plan, progress with ESG ratings, and sustainability governance
among other topics.
The Audit Committee is responsible for ensuring that the Climate
Change principal risk is integrated into Group risk management.
It is 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.
The Nomination Committee is responsible for ensuring that
Board membership and pipelines for succession planning are
suitably diverse. The Remuneration Committee is responsible for
recognising sustainability considerations in the strategic element of
the Melrose Group executive remuneration structure.
The GKN Aerospace sustainability function is responsible for
executing the Group’s sustainability priorities, inclusive of climate
change considerations. The function evaluates sustainability
performance against sustainability targets each quarter along
with the implementation status of agreed‑upon actions across the
ESG KPIs.
Group sustainability targets and commitments
pages 48 to 51
TCFD Report: climate change governance, strategy, risk
management and metrics and targets
pages 59 to 77
DELIVERING ON OUR PROMISES
Following strong performance against existing targets and
commitments made, further actions being taken include:
In line with our commitment relating to the setting of
science‑based emissions targets by our businesses,
GKN Aerospace has successfully submitted its application
to SBTi for validation.
We have further advanced our sustainability data
management and reporting tools to track quarterly
performance against our targets which has helped to
bolster regular engagement and focus action planning.
We have increased our Diversity and Inclusion target to
maintain 40% female representation across the Board and
to achieve 40% female representation at Melrose Executive
Committee level and direct reports.
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. Specifically, we have
continued to assess our sites’ exposure to water risks
in their locations and started the analysis of associated
biodiversity risks.
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 suppliers with a view to
expanding our Scope 3 data reporting to ensure we are
well positioned to achieve our Scope 3 SBTi target for
engagement with our supply chain.
As part of the renewal of the Company’s Directors’
remuneration policy in 2023, we have integrated ESG
metrics into executive remuneration as a standalone
element of the annual bonus.
52
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023
SUSTAINABILITY AND CLIMATE CHANGE GOVERNANCE FRAMEWORK
Has oversight responsibility of Group sustainability strategy, including climate‑related risks and opportunities and is supported by the senior management team
MELROSE BOARD OF DIRECTORS
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, incl. 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 senior
management team
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
SENIOR MANAGEMENT TEAM
COMPANY SECRETARIAT
• Cross‑functional team, including Group corporate, HR,
• Identifies, assesses and prioritises climate risks
finance, legal, and sustainability (under CTO)
and opportunities
• Responsible for overseeing sustainability strategy incl.
• Advises the Board and Committees on governance and
climate change considerations
regulatory requirements, incl. on climate change
• Oversees quarterly divisional climate performance reporting
against business KPIs and targets
Workforce
advisory panel
Responsible for
promoting the views
and the interests of
the workforce
CTO / ESG SUSTAINABILITY FUNCTION
• A focused central team responsible for cross‑functional integration, coordination and
governance of all ESG activities.
• Leads materiality assessments, climate scenario analysis, sustainability & climate risk
assessment.
• Responsible for Group Transition Plan creation and execution.
• Proposes key strategic ESG priorities for SMT and Board approval & incorporation
into strategy.
• Responsible for governance of ESG data, quarterly performance, internal and
external assurance and audit, and annual reporting and disclosures.
• Responsible for SBTi targets, plans & reporting.
• Engagement with ESG ratings agencies, advisors and shareholders on sustainability
and climate topics.
BUSINESS LINE (EXECUTION)
• Lead the Divisional Business Lines, providing one face to customers and
suppliers, with complete ownership from customer demand management, through
procurement, supplier management, operations, and customer delivery.
• Responsible for keeping our people safe and delivery of safe products to our
customers.
• Responsible for the development and execution of strategy in line with Board
approved ESG targets and market & customer needs.
• Responsible for the performance of operational sites and suppliers including
execution of plans, performance and reporting in line with ESG goals.
• Responsible for integration, cascade and compliance with all regulatory, customer
and internal standards and policies.
• Responsible for effective management of risk, including risk related to ESG topics
• Responsible for compliance with public company ESG obligations & regulatory
and maintaining business continuity.
requirements.
• Coordinates supply chain programme and initiatives.
• Identification, assessment and management of sustainability risk and opportunities
into risk process.
• Monitoring and integration of ESG initiatives towards sustainability targets and
commitments.
CTO/ESG
HSE
CFO
Legal & CoSec
HR
Quality
FUNCTIONS (STANDARDS & COMPLIANCE)
Primary
focus
• ESG Sustainability
Function leadership
• ESG integration,
governance and
compliance
• Sustainable R&D
investment.
• Sustainable
products
• Supply chain ESG
integration (Scope
2 and 3 emissions)
• Water stewardship
Wider
scope
• ESG external
engagement
• Technical
community
leadership
• Strategy &
portfolio
• Innovation & IP
• Financial resilience
and controls
• Ethics and
compliance
• TCFD financial risks
• Information security
• IT energy efficiency
• Board & committee
oversight
• Diversity & inclusion
• Engagement
• Education, training
& skills
• Human rights
• Health & Safety
• Environmental
compliance (ISO’s,
water, waste, air,
nuisance etc)
• HSE Auditing
• Waste
management
• Product Safety:
Escape prevention
• SMS – Safety
Management System*
• Global Quality
standards
• Quality culture training
and awareness
• Site energy
efficiency best
practice
• Biodiversity
• Data, systems
& reporting
• Listing rules
• Assurance and
compliance
• Wellbeing
• Attrition/retention
• Community
outreach
• Fair employment
• Trade union
engagement
• Delivery of operational ESG initiatives towards fulfilling sustainability targets and
• Implementing actions for adapting to changing customer preferences, divisional
commitments in line with the divisional management, business plans and strategy
markets’ demands and regulatory requirements for sustainability and climate topics
• Responsible for the management of climate‑related risk assessment and implementing
• Helping to identify sustainability matters, including climate change risks and
mitigation actions where necessary
opportunities, and relay information to the sustainability function
• Monitoring of performance against sustainability targets at a granular level
DIVISIONAL SUSTAINABILITY TEAMS
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MELROSE INDUSTRIES PLC ANNUAL REPORT 2023STRATEGIC REPORT SUSTAINABILITY REVIEW CONTINUED
ENVIRONMENTAL IMPACT
GKN Aerospace performs
a key role in achieving its
climate goals through a number
of UK, EU and US industry bodies
alongside its portfolio of innovative
decarbonising R&D projects, to ensure
that the plan for Net Zero can be met
despite projected passenger growth.”
Our strategic sustainability priority is to
respect and protect the environment.
We do so by working to avoid harmful
impact on the air, water and soil as far as
reasonably possible.
Our approach to environmental protection is twofold. Firstly,
we seek to reduce the environmental impact of our operations
through robust and ambitious sustainability targets. Secondly,
we seek to help our customers address their environmental
impact and to contribute to the decarbonisation of aerospace.
Our Group environmental policy, as approved by the Board,
demonstrates our commitment towards driving sustainable
production methods and infrastructure, and minimising the
potential negative impact we may have on the environment
over the longer term. The policy, which applies to all
individuals working across our business, can be found on
our website at https://www.melroseplc.net/governance/
documents‑and‑policies/.
No material environmental fines or penalties were issued against
any of the businesses in 2023 or in the previous four years.
UN SDGs
MATERIAL TOPICS
• Circularity and waste reduction
• Water stewardship
• Biodiversity
• Pollution
54
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023
ENABLING A SUSTAINABLE TRANSITION
TO NET ZERO
UN SDGs
TRANSITION PLAN
In 2023, we developed our updated Transition Plan to provide our
stakeholders with clarity around the actions we intend to take to
achieve our short and medium‑term emissions reduction targets
to reach net zero GHG emissions across the value chain by 2050,
and how we plan to contribute to reducing the climate impact of
aerospace. Our Transition Plan outlines our objectives, priorities,
detailed plans, and projects to reach our science‑based emissions
reduction targets(1), which have been submitted to the Science Based
Targets initiative (“SBTi”) for validation. Progress against these targets
will be reported annually in our Annual and Sustainability Reports and
within our CDP Climate Change responses as applicable.
Opportunity for change
The major manufacturers in the aerospace sector need to collaborate
with all parts of the supply chain to innovate and deliver solutions
that accelerate the path to Net Zero. The size of the challenge cannot
be overestimated and requires a two‑pronged approach whereby
manufacturers need to find a way to scale up current production
levels in a sustainable manner, while developing the aircraft of the
future that will eliminate the climate impact of aviation from the top
down. Central to tackling this challenge successfully, is not only
industry‑wide collaboration given the hugely complex aerospace
supply chains, but also cumulative support delivered through
cross‑sector partnerships, investment in renewable energy sources,
and enabling the required infrastructure.
As set out in the Sustainable Aviation Roadmap, the UK Government
has committed to achieving net zero carbon emissions by 2050,
reducing net CO2e output from around 39 million tonnes to zero
whilst still growing UK aviation by 78%. This will require improvements
in aircraft and engine efficiency, improved aircraft flight management,
the use of sustainable aviation fuels and investment in innovative
alternative energy solutions to address residual emissions. With
its market‑leading positions driven by technological innovation,
advanced processes and engineering excellence that help aircraft
fly safely and more sustainably, GKN Aerospace’s operational
excellence, high‑volume production and smart industry capabilities
are now driving the global development towards lower energy
consumption, reduced material waste and higher performance,
resulting in shorter production lead times and more affordability for
its global customers.
Roadmap for achieving emissions reduction targets
page 78
MATERIAL TOPICS
• Climate change: mitigation and adaptation
• Sustainable supply chain and responsible sourcing
• R&D for sustainable aviation
Strategic ambition
GKN Aerospace performs a key role in achieving this goal through
a number of UK, EU and US industry bodies alongside its portfolio
of innovative sustainable R&D projects, to ensure that the plan
for Net Zero can be met despite projected passenger growth.
GKN Aerospace is driving significant progress to support the net
zero agenda through decarbonising our own operations and driving
impact throughout the value chain. Please see pages 59 to 77 of our
TCFD report to read more about our targets and commitments, and
the roadmap for achieving them.
FROM IMPROVING EFFICIENCY THROUGH
TO CUTTING EDGE TRANSFORMATIONAL
SOLUTIONS, OUR TECHNOLOGIES AND
PRODUCTS AIM TO ENABLE THE AVIATION’S
JOURNEY TO NET ZERO.
COLLABORATION AND INVESTMENT MUST
LOOK BEYOND NEW TECHNOLOGIES AND
PRODUCTS. CRITICAL TO SUCCESS WILL BE
ENSURING THAT REGULATORY FRAMEWORKS
AND ECONOMIC POLICIES ENABLE THE MOST
ENVIRONMENTALLY SUSTAINABLE SOLUTIONS
TO ALSO BE ECONOMICALLY VIABLE.
(1) Scope 1 and 2 targets are aligned with the ambition and emissions reduction trajectory
required to curb global temperature rise to 1.5ºC. Scope 3 target is aligned with the
carbon emission reductions needed to curb global temperature rise to well below 2ºC
and is a significant step towards our net zero ambition by 2050.
Melrose Transition Plan
https://www.melroseplc.net/sustainability/data‑centre/
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MELROSE INDUSTRIES PLC ANNUAL REPORT 2023STRATEGIC REPORT
SUSTAINABILITY REVIEW CONTINUED
Industry leadership
From improving efficiency through to cutting edge transformational
solutions, our technologies and products aim to enable aviation’s
journey to Net Zero. However, collaboration and investment must
look beyond new technologies and products. Critical to success
will be ensuring that regulatory frameworks and economic policies
enable the most environmentally sustainable solutions to also be
economically viable. Participation in major aerospace sustainability
think tanks, councils, regulatory bodies and collaboration forums,
aims to leverage our focus on sustainability for much greater
impact.
GKN Aerospace is an active player in the leading industry and
collaboration platforms, which places it at the forefront of the latest
breakthrough aerospace trends in both R&D and sustainability.
Set out below are some examples of the way we engage with the
industry globally and across the countries where we operate.
• GKN Aerospace is a signatory to the Joint Declaration of
European Aviation Stakeholders related to Clean Aviation in
Horizon Europe, committing to a European Partnership towards
achieving the goals of the Paris Agreement.
• Within the UK, it also works within the Jet Zero Council, the
Aerospace Technology Institute, the Hydrogen in Aviation
alliance, and the Aerospace Growth Partnership, where
GKN Aerospace plays a key role in developing the policy to
support aviation’s transition to Net Zero.
• In Engines, GKN Aerospace’s Permanova business continued
to support business growth while transforming its supply chain
by offering material solutions that are more sustainable than the
current alternatives available on the market. It is expected to
achieve significant savings in emissions through the expansion
of lightweight and much higher buy‑to‑fly product offerings. The
first product using Permanova base material will be a fabricated
fan case mount ring for Pratt & Whitney, saving an estimated
1.5 tonnes of CO2e per unit produced.
• GKN Aerospace’s Engines division is also the only partner
in both of today’s sustainable future civil engine technology
development programmes: the SWITCH consortium – alongside
Pratt & Whitney, Airbus, MTU and Collins Aerospace – to
develop the next‑generation of GTF engine, and the CFM RISE
programme.
• Within the Structures division, development work continued as
a key partner with Airbus on the Wing of Tomorrow project. The
project, funded by the UK Aerospace Technology Institute, aims
to provide technologies for a composite single‑aisle wing to
improve aerodynamic performance and reduce CO2 emissions.
The technology deployed sees a move away from traditional,
pre‑impregnated resin material to dry composite fibres that are
injected with thermoset resin co‑cured within a highly controlled
out‑of‑autoclave manufacturing process. This enables overall
weight reduction, whilst reducing manufacturing process steps
and significantly reducing energy consumption.
• The Wing of Tomorrow programme has also enabled the
testing of more sustainable out‑of‑autoclave thermoplastic
production processes. Initial tests have demonstrated significant
environmental benefits, including an 80% lower production time
compared to conventional autoclave technology, as well as an
80% decrease in energy use and therefore emissions.
• 2023 also saw GKN Aerospace lead the Clean Sky 2 STUNNING
programme to successfully manufacture one of the world’s largest
thermoplastic components – an 8m x 4m half‑fuselage made
from novel thermoplastic manufacturing and joining technologies.
These will help enable the performance benefits of composites
to be deployed with reduced manufacturing emissions, whilst
also improving resilience and material recyclability. The project
was part of the Multi‑Functional Fuselage Demonstrator, led by
Airbus, which aims to reduce fuselage weight by 1 tonne (10%),
substantially reducing in‑flight emissions.
• GKN Aerospace was among the first companies to sign up to
the UK’s new Defence Aviation Net Zero Strategy, which serves
as a comprehensive roadmap to achieve carbon neutrality in the
aviation domain. GKN Aerospace joined key customers and OEMs
in supporting the strategy and was the only Tier 1 supplier to
sign in 2023.
• GKN Aerospace has taken a sustainability leadership role in the
defence markets, including working with Saab and other partners
to support the use of Sustainable Aviation Fuels within the Gripen
RM12 engine. Biofuels have been proven to be interchangeable
within the engine, with tests showing excellent results so far.
GKN Aerospace also supported Bell on the first ever 100% SAF
single engine helicopter flight.
• In the rapidly developing advanced air mobility sector,
GKN Aerospace signed a series of design‑and‑build production
contracts with emerging companies in 2023, including Lilium,
Supernal and Joby. These relationships combine with existing
partnerships – such as with Eviation and Vertical – to accelerate
the future of battery‑electric‑powered, zero emission flight.
• In the same sector, GKN Aerospace partnered with Pratt &
Whitney Canada on its hybrid‑electric flight demonstrator project
in which it will develop, construct and install the electrical wiring
interconnection system for the demonstrator, targeting a 30%
improvement in fuel efficiency and reduced CO2 emissions
compared to today’s most advanced regional turboprop aircraft.
• Enabled by the Future Flight Challenge for Innovate UK,
GKN Aerospace delivered its first ground‑based demonstrator of a
liquid hydrogen aircraft fuel system. The test helped develop new
understanding to support safe system design, manufacturing and
operational knowledge for liquid hydrogen fuel systems.
• Work continued under the £54m H2GEAR programme to develop
technology for zero emissions hydrogen‑powered aircraft. The
programme is on track to ground test a scalable hydrogen‑electric
fuel cell propulsion system in 2025. A memorandum of
understanding with Marshall and Parker Aerospace will expand
GKN Aerospace hydrogen system capability to liquid hydrogen fuel
systems for zero emission aircraft, whilst a further collaboration
with Embraer aims to accelerate the implementation of hydrogen
technologies and pave the way for a potential flight demonstrator.
• GKN Aerospace also turned its hydrogen leadership towards
defence, partnering with Swift Aircraft to develop design concepts
for zero emission light aircraft. Light aircraft are essential for
training military pilots, and the RAF’s net zero 2040 programme
has made a future fleet of sustainable military training aircraft a key
priority.
56
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023 GKN Aerospace is an active
player in the leading industry
and collaboration platforms,
which places it at the forefront
of the latest breakthrough
aerospace trends in both
R&D and sustainability.”
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MELROSE INDUSTRIES PLC ANNUAL REPORT 2023STRATEGIC REPORT SUSTAINABILITY REVIEW CONTINUED
TCFD AND CFD
COMPLIANCE
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 and with the climate‑related financial disclosure requirements under
the Companies (Strategic Report) (Climate‑related Financial Disclosure) Regulations 2022, as shown in the TCFD cross‑reference and
disclosure consistency summary below.
Page
59
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
63
short, medium, and long term
b) Describe the impact of climate‑related risks and opportunities on the organisation’s
businesses, 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
Risk Management
Disclose how the organisation identifies, assesses,
and manages climate‑related risks
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) Describe the organisation’s processes for identifying and assessing climate‑related risks
60
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
a) Disclose the metrics used by the organisation to assess climate‑related risks and
74
opportunities 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 and performance against targets
(1) https://assets.bbhub.io/company/sites/60/2021/07/2021‑TCFD‑Implementing_Guidance.pdf.
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MELROSE INDUSTRIES PLC ANNUAL REPORT 2023 Directors’ Remuneration report
pages 128 to 152
Sustainability and climate change governance
framework
page 53
Management oversight of climate change
The GKN Aerospace sustainability function plays a key role
in escalating material sustainability and climate risks and
opportunities to the Melrose senior management team, who ensure
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. The sustainability function meets with relevant
members of the executive team on a quarterly basis to track the
climate‑related risks and opportunities register. 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
page 59.
The GKN Aerospace sustainability function is responsible for the
identification, design, implementation, monitoring and continuous
evolution of improvement actions and performance towards
achieving our climate targets, and incorporation of the TCFD and
CFD recommendations to improve our disclosures.
Climate‑related risks and opportunities are discussed regularly
within GKN Aerospace and in decision‑making that relates
to setting strategy to mitigate identified risks or capitalise on
opportunities. Where relevant, the Melrose senior management
team engages with the business line senior management
teams when reviewing and guiding strategy, which can include
the approval of major capital expenditure. This engagement
includes the identification and monitoring of sustainability and
climate‑focused improvement plans, performance against climate
targets, management of climate risks and climate reporting
alongside financial and operational metrics, the reviews of which
are embedded in a structure of business reviews cascaded
through the business. The GKN Aerospace sustainability function
engages with the respective business line senior management
teams to guide focus, review progress and identify synergistic
opportunities. The GKN Aerospace sustainability function is
responsible for coordinating key stakeholders across the business
to ensure that required controls are in place for appropriate
risk mitigation and management, and that the assessment and
management of sustainability and climate‑related risks and
opportunities are integrated across the business. Management
of sustainability and climate‑related matters is integrated across
executive levels as outlined in the sustainability and climate change
governance framework on page 53.
GOVERNANCE
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.
Board oversight of climate change
The Melrose Board of Directors, supported by the Melrose senior
management team as informed by the GKN Aerospace sustainability
function, has oversight of and ultimate responsibility for Melrose’s
sustainability strategy (including climate change), targets, disclosures,
and reporting. The Board assesses climate‑related risks and
opportunities among other sustainability and environmental material
topics and monitors performance against targets. Climate‑related
opportunities, such as investment in significant projects, are
presented to the Board for sign‑off where appropriate. The Board
also oversees our alignment with the TCFD recommendations,
compliance with the Climate‑related Financial Disclosure (“CFD”), and
our sustainability and climate commitments and disclosures.
The Board receives annual training and regular updates on key
sustainability and climate‑related matters that impact Melrose
and the GKN Aerospace divisions, and on the specific measures
that need to be implemented to improve performance. The Board
regularly considers climate‑related matters when reviewing and
guiding strategy and overseeing its implementation through oversight
of divisional financial and operational performance and quarterly
Board meetings.
Progress in improving climate‑related matters is monitored by the
GKN sustainability function and reported to the Melrose senior
management team, for the Board’s onward review, challenge
and discussion where required. This includes the tracking of
company sustainability and climate targets, and key metrics such
as year‑on‑year reduction in emissions, increase in spend on R&D
programmes focused on decarbonisation, the number of new
products contributing to the decarbonisation of aerospace and other
innovation programmes.
The Audit Committee updates the Board on climate risk management
by monitoring and reviewing the effectiveness of the risk
management processes, including the review of our principal risks
of which Climate Change risk is one. The Remuneration Committee
implements the Company’s Directors’ remuneration policy (“Directors’
Remuneration Policy”) and as part of the renewal of the Company’s
Directors’ Remuneration Policy in 2023, we have integrated ESG
metrics into executive remuneration as a standalone element of
the annual bonus. Please see the Directors’ Remuneration report
on pages 128 to 152 for more details. Oversight of sustainability
and climate‑related matters is integrated across our Board and its
Committees as outlined in the sustainability and climate change
governance framework on page 53.
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MELROSE INDUSTRIES PLC ANNUAL REPORT 2023STRATEGIC REPORT
SUSTAINABILITY REVIEW CONTINUED
RISK MANAGEMENT
A
Describe the organisation’s processes for identifying and
assessing climate‑related risks.
B
Describe the organisation’s processes for managing
climate‑related risks.
C
Describe how processes for identifying, assessing and
managing climate‑related risks are integrated into the
organisation’s overall risk management.
Identifying and assessing risk
As a principal risk, Climate Change risk undergoes continuous
assessment through the established Melrose risk management
processes of identification, evaluation, mitigation, analysis, review
and monitoring, as is the case with other principal risks. For further
details on our approach to assessing principal risks, please see
the Risk Management and Risks section of the Strategic Report on
pages 28 to 36. To account for the change of structure within the
organisation, we have carried out a new climate scenario analysis
to ensure that the specific climate‑related risks and opportunities
identified by the Company are aligned with the aerospace industry.
Specific climate‑related risks and opportunities have been
Melrose risk assessment criteria
identified at subsidiary level (GKN Aerospace) and are reported up
to the Group level to inform the assessment of the Climate Change
principal risk. The climate scenario analysis will be renewed at
least every three years to ensure the most up‑to‑date and relevant
information on our exposure to risks and mitigation opportunities.
This year, we have recalibrated our initial 2021 climate scenario
assessment of climate‑related risks and opportunities to focus on
the aerospace sector. Climate risks and opportunities were identified
through a comprehensive assessment conducted with the assistance
of third‑party consultants. This assessment involved a combination
of interviews with key stakeholders, including several internal
functions and rigorous desktop research. Two separate climate
risk assessments have been carried out to reflect the differences
in physical and transition risks and opportunities. Both these risk
assessments included a company‑wide review of operations,
customers, supply chain and how this could impact revenue, assets
and other costs. The analysis combined horizon scanning of external
industry and wider macroeconomic aspects of climate risks, as well
as engagement with internal business functions, including but not
limited to R&D, procurement, operations, customers and products
function, senior management, risk, finance and sustainability teams
across GKN Aerospace’s business lines of engines and structures,
and at Melrose level. Risks and opportunities have been prioritised to
determine which have a material financial impact on the organisation
using both likelihood (the probability of the risk occurring) and impact
(the financial and reputational outcome of the risk occurring), resulting
in a combined risk register with a low‑, moderate‑ or high‑risk rating
for each time horizon and scenario. The summary of identified
risks and opportunities outlines the risk and opportunity exposure,
the timeframe to which the impact of the risk and opportunities
will manifest, and also which scenario is likely to have the greater
likelihood of impact.
1 Rare
2 Unlikely
3 Possible
4 Likely
5 Almost certain
Likelihood
Highly unlikely, but
the risk event may
occur in exceptional
circumstances. The
risk event could
happen, but probably
never will.
Not expected, but
there's a slight
possibility the risk
event may occur at
some time.
The risk event might
occur at some time
as there is a history of
casual occurrence.
There is a strong
possibility the risk
event will occur as
there is a history of
frequent occurrence.
The risk event is
expected to occur in
most circumstances
as there is a history of
regular occurrence.
1 Minimal
2 Low
3 Medium
4 High
5 Very high
Impact
Inconvenience, but
not impact on ability to
achieve objectives.
Disruption to activities
but limited to the
immediate term. No
longer‑term impact
on ability to achieve
objectives.
Considerable issue
but short term.
Only relatively minor
concern about
longer‑term business
prospects.
Significant impact.
Casts significant
doubt on the ability to
meet objectives and
places the future of the
business in peril.
Failure of the business.
Unable to achieve
corporate objectives.
Regulator is aware, but
no impact. ‘Slap on the
wrist’. Not in the public
domain.
Small fines or written
warnings. Customers
aware.
Large fines and written
judgements. Public
awareness but limited
long‑term impact on
reputation.
Significant adverse
regulatory judgement
and/or fines. National
press coverage and
significantly tarnished
reputation.
Loss of licence or
ability to operate. Very
significant fines or
criminal proceedings.
60
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023 Integrating climate into existing risk management
Due to the increased frequency of extreme weather and
climate‑related disasters, coupled with tightening legislation and
regulations, Climate Change has been identified as a standalone
principal risk since 2021 and is incorporated into Melrose’s overall
risk management processes. The Climate Change principal
risk comprises a combination of transition and physical risks as
identified in our climate scenario analysis on pages 63 to 71. These
risks undergo reassessment every year by the GKN Aerospace
divisional management teams to determine the risk trend, impact
and likelihood. The transition and physical climate risks are then
presented to the Audit Committee for consideration alongside
the other principal 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 Melrose’s appetite for each
principal risk including Climate Change. The Board’s assessment
of each of the principal risks and their management, are disclosed
on pages 31 to 36 of the Strategic Report which shows the relative
significance of climate‑related risks compared to other principal
risks. The output from the climate change risks assessment is
considered in our strategic business planning as relevant.
Risks and uncertainties
pages 31 to 36
The Melrose senior management team oversees the identification
of climate‑related risks and opportunities with the support of
GKN Aerospace sustainability function, who identify, monitor, and
manage the specific risks relevant to the GKN Aerospace business
lines’ operating activities and ensure that required controls are in
place for appropriate mitigation and management. The identification
and assessment of climate‑related risks and opportunities also
includes horizon scanning as part of our key positions in influential
industry bodies such as Jet Zero Council in order to monitor key
developments and risks, and to engage with policy makers to
mitigate their impact on the business. We also rely on the support of
advisors where appropriate, who contribute to the awareness and
analysis of climate‑related risks and opportunities that are relevant to
the Company. By engaging in this multifaceted approach, we gained
valuable insights into the potential risks associated with climate
change, as well as the opportunities that might emerge in the context
of emerging regulatory landscapes.
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 other non‑climate‑related risks. This allowed for their
integration into the overall risk management framework. Our risks
were ranked on a five‑point scale for both likelihood (the probability of
the risk occurring) and impact (the financial and reputational outcome
of the risk occurring), resulting in a combined risk register with a low‑,
moderate‑ or high‑risk rating for each time horizon and scenario.
The likelihood and impact criteria allow the materiality of risks to
be determined as defined in the table on page 60, meaning that
GKN Aerospace can prioritise the management of the most material
risks (those of high and very high impact) by allocating appropriate
resources to it.
Identified climate‑related transition and physical risks
pages 64 to 71
Management of risk
The GKN Aerospace sustainability function is responsible for regularly
reviewing and considering the levels of significant climate‑related risks,
their impact on business strategy and the effectiveness of management
and mitigation controls. The decision to tolerate, transfer or treat a risk
is partially determined by the risk impact and likelihood criteria. Risks
with higher scores will need to be managed appropriately to bring
the risk impact back in line with an appropriate risk appetite. Action
plans are developed for higher scoring risks which detail existing
controls and descriptions of response actions needed to mitigate
the risk. Responsibility for specific risks is also assigned to ensure
appropriate implementation and management. For more information
on how we manage each identified climate‑related risk, please refer to
pages 64 to 71.
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MELROSE INDUSTRIES PLC ANNUAL REPORT 2023STRATEGIC REPORT
SUSTAINABILITY REVIEW CONTINUED
62
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023 STRATEGY
A
Describe climate‑related risks and opportunities the
organisation has identified over the short, medium
and long term.
B
Describe the impact of climate‑related risks and
opportunities on the organisation’s businesses,
strategy and financial planning.
C
Describe the resilience of the organisation’s strategy,
taking into consideration different climate‑related
scenarios, including a 2°C or lower scenario.
Melrose’s commitment to net zero emissions by 2050 and to manage
emerging risks associated with extreme weather, pose physical and
transitional risks as well as opportunities. The roadmap for achieving our
targets through operational decarbonisation, products and services and
engagement with our value chain, and the approach for addressing our
risks and opportunities are detailed in our Transition Plan.
This year, we have recalibrated our initial 2021 climate scenario
assessment of climate‑related risks and opportunities to focus on the
aerospace sector. Two separate climate risk assessments have been
carried out to reflect the differences in physical and transition risks and
opportunities. Both these risk assessments included a company‑wide
review of operations, customers, supply chain and how this could
impact revenue, assets and other costs. The analysis combined
horizon scanning of external industry and wider macroeconomic
aspects of climate risks, as well as engagement with internal business
functions, including but not limited to R&D, procurement, operations,
customers & products function, senior management, risk, finance
and sustainability teams across GKN Aerospace’s business lines of
engines and structures, and at Melrose level. Risks and opportunities
have been prioritised to determine which have a material financial
impact on the organisation using both likelihood (the probability of the
risk occurring) and impact (the financial and reputational outcome of
the risk occurring), resulting in a combined risk register with a low‑,
moderate‑ or high‑risk rating for each time horizon and scenario. The
summary of identified risks and opportunities outlines the risk and
opportunity exposure, the timeframe to which the impact of the
risk and opportunities will manifest, and also which scenario is
likely to have the greater likelihood of impact.
In aggregate, we conclude that our overall climate risk exposure
is moderate, and our business is financially and operationally
resilient and strategically robust to climate risks in the immediate
term within the bounds of our “business‑as‑usual” operations,
considering that many of the risks are already being addressed
through existing or planned mitigation or adaptation activities
and provisions. In addition, significant focus and investment,
such as our R&D programmes, is ongoing to support realisation
of a number of related climate‑related business opportunities.
TRANSITION RISKS AND OPPORTUNITIES
The speed at which the economy decarbonises will determine
the severity and impact of climate transition risks, as well as the
ability to capitalise on the opportunities related to the transition to
a low‑carbon economy. The TCFD framework defines transition
risks in four categories (Policy and Legal, Market, Technology,
and Reputation) and transition opportunities in five categories
(Resource Efficiency, Energy Source, Products & Services,
Markets and Resilience). As part of our transitional scenario
analysis, we considered risks and opportunities within these nine
categories and ranked them on their impact and likelihood to
Melrose. Several other risks and opportunities were considered
and analysed but only the most material have been disclosed. The
assessment of risks and opportunities was carried out at a gross
level, meaning the impacts of the risks and opportunities assumed
no mitigating actions are already in place.
To understand our business resilience to future climate scenarios, in
line with the TCFD guidance, we used International Energy Agency’s
(“IEA”)(1) Net Zero Emissions by 2050 Scenario (“NZE”)(2) and Stated
Policies (“STEPS”)(3) climate scenarios to model transition risks
and opportunities, and the Intergovernmental Panel on Climate
Change (“IPCC”) framework recommended scenarios. The climate
scenarios we use are kept under review to ensure they remain
viable, plausible and stretching.
In our assessment, we considered the short‑, medium‑ and
long‑term impacts of climate change when examining the
identified transition climate‑related risks (and opportunities) and
their actual and potential business impacts (including on strategy
and financial planning). Three time horizons were used to identify
and assess specific transitional climate‑related issues. These time
horizons allowed us to consider the lifespan of our assets and
infrastructure as well as any longer‑term regulatory changes.
Time horizons
Rationale
Short
2023–2025
In line with short‑term specific business planning.
Medium 2025–2030
Encompasses Melrose’s near‑term emission targets.
Long
2030–2050
Encompasses Melrose and the UK Government’s Net Zero by 2050 target and other long‑term policy trends.
(1) IEA (2022), Global Energy and Climate Model, IEA, Paris https://www.iea.org/reports/global‑energy‑and‑climate‑model.
(2) NZE outlies a pathway for the global energy sector to achieve net zero CO2 emissions by 2050, which limits the global temperature rises to 1.5°C by 2100, with 50% probability. This
scenario is included as it informs decarbonisation pathways used by the SBTi.
(3) STEPS outlines a combination of physical and transition risk impacts as temperatures rise by 2.5°C by 2100, with 50% probability. This scenario is included as it represents a midway
path with the trajectory implied by today’s policy settings.
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MELROSE INDUSTRIES PLC ANNUAL REPORT 2023STRATEGIC REPORT SUSTAINABILITY REVIEW CONTINUED
Key
Anticipated onset of risks and opportunities
Low likelihood
Estimated full impact of risks and opportunities
High likelihood
Transition Risks
Risk type
Description
Mitigation
KPIs(1)
EXPOSURE TO CARBON PRICING MECHANISMS
Policy
& Legal
Increased operational exposure to carbon pricing mechanisms such
as the ReFuel EU, EU Emissions Trading System, and CORSIA.
Additionally, the impact will be felt in our value chain through the EU
and upcoming UK Carbon Border Adjustment Mechanisms (“CBAM”)
applied through raw materials, such as aluminium, imported into
our EU operations. The impact is likely to be felt through potential
increases in airline ticketing prices and increased cost of raw
materials from suppliers. The ultimate impact of increased prices is
a dampening of growth in air traffic, leading to a reduction in future
potential sales. Over time the adoption of carbon pricing instruments
will increase, driving the price levels of all carbon pricing systems
and therefore the overall risk exposure. NZE scenario predicts an
increased number and ambition of carbon pricing mechanisms,
meaning a higher exposure than in STEPS.
• GKN Aerospace’s supplier engagement target
which will reduce exposure to carbon pricing in
our value chain.
• GKN Aerospace’s SBTi submission and Net Zero
Transition Plan sets out ways in which we will
decarbonise our operations and supply chain,
reducing our emissions and therefore reducing
our exposure to carbon pricing mechanisms.
• GKN Aerospace monitors exposure to potential
future carbon price increases through the IEA
World Energy Outlooks carbon prices.
• GKN Aerospace is an active member of the IAEG
and receives regular updates through a newsletter
on global environmental and chemical regulations,
policies, and standards that is shared with key
stakeholders.
Scope 1, 2 and 3
emissions
Carbon pricing
market signals
Potential impact
Risk exposure
Timeframe
Scenario sensitivity
Short 2023–2025
Medium 2025–2030
Long 2030–2050
NZE
STEPS
Higher
costs
High
REGULATORY CHANGES TO FLIGHT TIME AND ROUTES
Policy
& Legal
The risk of an increased number of regulations that prohibit short
haul flights could impact the number of conventional aircraft and
components for conventional aircraft that are sold. NZE scenario
assumes more ambitious sustainable aviation regulations, that could
reduce certain flight routes, are brought in indicating a higher risk
exposure than under STEPS. The regulatory changes transition risk
affects domestic travel directly, while individual country policies can
also have an indirect effect on international air travel.
Number of regulatory
changes to flight
routes and times
• R&D investment in low carbon technologies such
as battery electric and hydrogen can provide
us with avenues to offset potential losses from
conventionally powered aircrafts e.g., H2GEAR
programme. GKN Aerospace is the leader in a
major £54m technology programme, H2GEAR,
to develop core capabilities in electrical power
generation and cryogenic electrical distribution
and motors in five years. H2GEAR aims to deliver
a ground‑based demonstration of a system
capable of delivering 1MW of power, sufficient
to support sub‑regional aircraft and with the
potential to be scaled to regional aircraft of up to
100 seats.
• Melrose’s targets for decarbonising R&D and
new products contributing to the decarbonisation
of aerospace drive continued investment and
efforts to become the most sustainable partner in
the sky.
• Membership in industry bodies such as the IAEG
helps GKN Aerospace stay aware of any incoming
regulatory changes.
Potential impact
Risk exposure
Timeframe
Scenario sensitivity
Short 2023–2025
Medium 2025–2030
Long 2030–2050
NZE
STEPS
Decreased
revenue
Moderate
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MELROSE INDUSTRIES PLC ANNUAL REPORT 2023
Transition Risks continued
Risk type
Description
Mitigation
KPIs(1)
DECLINING DEMAND FOR LEGACY PRODUCT OFFERING AND DAMPENING OF AVIATION MARKET
Market
Changes to societal expectation and behaviour due to concerns
about climate change may impact overall demand for air
transportation and decrease demand for conventional products.
If GKN Aerospace cannot improve alternative technologies such
as electric or hydrogen aviation at the required rate there may be a
demand curtailment of current products. NZE predicts a faster rollout
of lower‑carbon technologies meaning a greater exposure of risk
than under STEPS.
Aviation market
growth predictions
• To retain value in GKN Aerospace core products,
investment in sustainable aviation fuels is a key
priority. GKN Aerospace is actively engaged in key
industry to government forums, such as the UK
government Jet Zero Council, in order to build a
clear strategy to deliver SAF at the scale required
to retain this market value.
• A decrease in demand for conventionally powered
aircraft will be offset by an increased demand
in lower carbon technologies that Melrose
is investing in though R&D and new product
development.
• Engagement to ensure low‑carbon aviation is
at the forefront of regulators and governments
minds to ensure sustainable growth in the aviation
market.
Potential impact
Risk exposure
Timeframe
Scenario sensitivity
Short 2023–2025
Medium 2025–2030
Long 2030–2050
NZE
STEPS
Decreased
revenue
High
RAW MATERIAL AVAILABILITY
Technology An increased focus on developing lower carbon aviation (battery
• Ensure reliable supply from alternative
and hybrid electric propulsion systems) causes demand in materials
needed in these technologies to increase (Rare Earth Materials
(“REM”), composites and titanium). Increased global conflict in areas
where these materials are geographically concentrated could impact
availability. NZE sees a greater demand for REM and other materials
associated with lower carbon aviation, indicating a greater exposure
of risk compared to STEPS. In addition, OEMs are already expecting
manufacturers to increase use of additive manufacturing due to the
much greater “buy‑to‑fly” ratio and also in the view of global concerns
of security of supply.
non‑sanctioned markets.
• Increased focus on resource efficiency by
recycling raw materials and therefore reducing the
amount of virgin materials. For example, there is
an increased use of recycled metals like aluminium
being used in manufactured aerostructures.
• Increasing additive technologies being developed
by GKN Aerospace with a capital investment plan
in Sweden, as well as in the UK and the US.
• Over stocking on key materials to ensure a reliable
Percentage of raw
materials recycled
supply.
• Increased investment in resource efficiency
technologies such as nesting and additive
manufacturing e.g., the Texas additive
manufacturing centre of excellence for large‑scale
titanium aerostructures.
• Investment in composite recycling.
Potential impact
Risk exposure
Timeframe
Scenario sensitivity
Short 2023–2025
Medium 2025–2030
Long 2030–2050
NZE
STEPS
Increased costs
High
(1) Performance measurements on specific KPI’s are conducted through horizon scanning or internal KPI tracking.
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MELROSE INDUSTRIES PLC ANNUAL REPORT 2023STRATEGIC REPORT SUSTAINABILITY REVIEW CONTINUED
Key
Anticipated onset of risks and opportunities
Low likelihood
Estimated full impact of risks and opportunities
High likelihood
Transition Risks continued
Risk
type
Description
Mitigation
KPIs(1)
SUCCESSFUL ENTRY INTO SERVICE OF NEW TECHNOLOGIES
Technology A lack of certification of aircraft with new technologies such as
• Collaboration with certification bodies is a key
hydrogen and battery electric could impact the rate to which
production demand is met. Certifying organisations, including
the CAA and EASA, amongst others, have historically wanted to
make decisions based on significant amounts of data but with new
technologies, data availability is lacking. The lack of successful entry
of lower carbon aviation could impact our ability to benefit from
the transition to a lower carbon economy and more sustainable
aviation. Under NZE, the rate of new technology certification will need
to be high and delays in certification could cause a bottle neck in
production, causing a high‑risk exposure.
mitigation factor to reduce the potential delay in
certification of new technologies. Certifiers are
regularly invited to new aircraft testing.
• Extensive use of both ground and flight validation
of technologies is a critical step both in educating
airworthiness authorities as well as building clarity
of what will be required to be proven in full scale
development programmes. GKN Aerospace is
already planning a series of research tests with
strong engagement with regulators in order to
enable this.
Certification times of
components used in
low carbon aviation
Potential impact
Risk exposure
Timeframe
Scenario sensitivity
Short 2023–2025
Medium 2025–2030
Long 2030–2050
NZE
STEPS
Reduced revenue Moderate
REPLACEMENT OF CARBON INTENSIVE MACHINERY
Technology Risks associated with decarbonising of manufacturing processes
• Electrification of carbon intensive manufacturing
and machinery that are carbon intensive to electric and energy
efficient machinery will increase investment of capital. Currently,
existing technology to electrify carbon intensive processes either
do not exist or are expensive. NZE expects a faster decarbonisation
pathway, meaning carbon intensive assets will need to be replaced
quicker.
processes e.g., furnaces electrification.
• Policies to replace older plant machinery with
electric machinery and more efficient machinery.
• Focus on additive manufacturing to reduce
weight, lead times, tooling and inventory, and
reduce CO2 emissions by 70% compared with
conventional manufacturing processes.
• Out of autoclave composite technologies (such
as RTM) have the potential to reduce energy
consumption by up to 80% as well as the potential
to eliminate carbon intensive energy supply.
Spend on new
electrified machinery
Potential impact
Risk exposure
Timeframe
Scenario sensitivity
Short 2023–2025
Medium 2025–2030
Long 2030–2050
NZE
STEPS
Increased costs
Moderate
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MELROSE INDUSTRIES PLC ANNUAL REPORT 2023
Transition Opportunities
Opportunity
type
Description
Strategy to capitalise
KPIs(1)
OPERATIONAL EFFICIENCY IN WATER, WASTE AND ENERGY
Resource
Efficiency
Actions to reduce waste, water and energy consumption and improve
efficiency will provide incremental improvements to Melrose’s
emissions profile at limited cost to implement. Replacement of older
and less efficient machinery with newer, more efficient, models as
well as improved insulation in certain sites will provide opportunities
to reduce emissions and costs.
Energy, waste and
water consumption
Energy
• Company‑wide energy intensity reduction target.
• Employee engagement to reduce energy
consumption such as the Project Orville scheme
that encourages employees to make individual
efforts to reduce energy consumption.
• Energy efficiency measures such as LED lighting
installations, insulation of sites and booster systems
to increase the energy efficiency of machines using
compressed air.
• Transition to additive manufacturing processes
will electrify hard metal manufacturing as well as
significantly reduce net energy consumption.
• Transition of composite material manufacturing to
out‑of‑autoclave will reduce energy consumption
significantly.
Waste
• Target to divert 95% of solid non‑hazardous waste
from landfill by 2025.
• Reduction and recycling of packaging such as the
adoption of new cardboard shredders to reduce use
of plastic at the Trollhättan site.
Water
• 40% reduction in water withdrawal intensity by 2025.
• Water efficiency improvements at sites such as
irrigation system leak identification at El Cajon.
Potential impact
Opportunity
exposure
Reduced costs
Low
Timeframe
Scenario sensitivity
Short 2023–2025
Medium 2025–2030
Long 2030–2050
NZE
STEPS
MATERIAL EFFICIENCY IMPROVEMENTS OF RAW MATERIALS
Resource
Efficiency
Improved recycling of raw materials and investment in R&D relating
to technologies such as additive manufacturing and nesting provides
opportunities to reduce energy, emissions, waste and associated
costs. Improved efficiency of raw materials specifically provides us
with the opportunity to reduce our Scope 3 emissions associated
with our purchased goods as it means less raw materials are
purchased along with shorter supply chains. NZE sees greater focus
and investment in life cycle sustainability, meaning a greater exposure
to technology that can improve material efficiency compared to
STEPS.
Percentage of raw
materials recycled
• Nesting technology enables the reduction of scrap
raw material produced during cutting and optimises
production.
• Additive manufacturing investments such as the
Permanova acquisition, the additive manufacturing
centre of excellence in Texas and collaboration with
Northrop Grumman delivers additively manufactured
alternatives to conventional forgings and castings,
meaning reduced waste and consumables, and
reduced impact of transportation through vertical
integration.
• Recycling of virgin metals such as aluminium
and titanium means raw materials stay within the
aerospace industry, significantly reducing the
amount of embedded carbon in raw materials
consumed.
• R&D investment in composite recycling.
Potential impact
Opportunity
exposure
Reduced costs
High
Timeframe
Scenario sensitivity
Short 2023–2025
Medium 2025–2030
Long 2030–2050
NZE
STEPS
(1) Performance measurements on specific KPI’s are conducted through horizon scanning or internal KPI tracking.
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MELROSE INDUSTRIES PLC ANNUAL REPORT 2023STRATEGIC REPORT SUSTAINABILITY REVIEW CONTINUED
Key
Anticipated onset of risks and opportunities
Low likelihood
Estimated full impact of risks and opportunities
High likelihood
Transition Opportunities continued
Opportunity
type
Description
RENEWABLE ENERGY (PPAS AND INSTALLATION)
Energy
source
The purchase of renewable electricity contracts or PPAs will allow for
the reduction of emissions without the capital spend associated with
onsite renewable energy installation. Electricity purchase agreements
deliver real world GHG emissions reductions by displacing fossil
energy sources in the grid systems where we consume electricity.
Our US and European sites have easy access to renewable electricity
contracts and whilst the cost of electricity under PPAs is variable,
contracts can provide fixed costs over several year and reduce
Scope 2 emissions to potentially zero. The Group is exploring options
to install solar self‑generation where possible. Solar installations will
reduce reliance on the local grid, reduce GKN Aerospace’s emissions
and may provide operating cost savings. NZE sees more rapid scaling
of renewable energy and grid electrification compared to STEPS.
Strategy to capitalise
KPIs(1)
• Target to procure 50% of electricity from
renewable sources by 2025.
Percentage of
renewable electricity
• Plans are in place to transition the majority of
our European and US sites to renewable energy
contracts as well as the implementation of PV
cells at appropriate sites.
Potential impact
Opportunity
exposure
Reduced costs
High
IN FLIGHT EFFICIENCY
Timeframe
Scenario sensitivity
Short 2023–2025
Medium 2025–2030
Long 2030–2050
NZE
STEPS
Products
& Services
The use of advanced materials and engineering methods provides
an opportunity for components to provide the same, or enhanced,
performance while using less or lighter material and improving flight
fuel efficiency. This can be through the use of composite materials
or bonding technologies. Improving the fuel efficiency of engines
also provides an opportunity to reduce fuel burn and increase flight
efficiency. Increased demand for these technologies and heightened
expectations to reduce emissions associated with flying will increase
the exposure of this opportunity under NZE compared to STEPS.
• GKN Aerospace has an extensive portfolio of
research programmes exploring new design
concepts, materials and manufacturing processes
aimed at increasing air travel efficiency and reducing
fuel burn. These include additive fabrication, resin
transfer moulding, metallic and composite bonding
and electrification of systems. The majority of these
programmes are performed collaboratively with our
airframe and engine customers and within funded
multi‑partner research programmes.
R&D Horizon 1 and 2
programmes
Potential impact
Opportunity
exposure
Reduced costs
High
Timeframe
Scenario sensitivity
Short 2023–2025
Medium 2025–2030
Long 2030–2050
NZE
STEPS
ACCESS TO NEW MARKETS THROUGH LOW‑CARBON AVIATION
Markets
Both battery electric and hydrogen technologies provide potential
new markets for GKN Aerospace. Electric technology opens up the
potential of the commuter market (up to 400 nautical miles) as well as
other regional routes. eVOTLs development also offers new markets
in urban mobility that are low carbon, cheaper and quieter than
current options. Hydrogen technologies can also offset the potential
reduction in market share from conventionally powered engines
as well as opening up the potential for a fragmentation of regional
routes and an overall growth in regional aviation. NZE sees scaled
investment in hydrogen and battery electric technologies resulting in
a greater exposure compared to STEPS.
Revenue from
products that
contribute to
low‑carbon economy
• Continued work as main partner in industry
associations, such as the Jet Zero Council, the
Aerospace Technology Institute, Swedish Aerospace
Industries, Swedish Air Transport Society, the
Dutch National Sustainable Aerospace Funding
Programme (“LIT”), and the Aerospace Growth
Partnership, where GKN Aerospace plays a key role
in developing policy to support aviation’s transition to
Net Zero and the development of hydrogen‑fuelled
aircraft and leads on various policy topics such as
the roadmap to fossil‑free aviation.
• Continued investment in hydrogen propulsion
technologies and the development of routes to
exploitation.
• Global partnerships with electric aircraft
manufacturers such as Joby, Eviation, Supernal and
Lilium to work on experimental eVTOL and electric
aircraft development.
Potential impact
Opportunity
exposure
Increased revenue High
Timeframe
Scenario sensitivity
Short 2023–2025
Medium 2025–2030
Long 2030–2050
NZE
STEPS
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MELROSE INDUSTRIES PLC ANNUAL REPORT 2023
Transition Opportunities continued
Opportunity
type
Description
Strategy to capitalise
KPIs(1)
TECHNOLOGICAL SOLUTIONS FOR CLIMATE CHANGE MITIGATION
R&D investment in
hydrogen and battery
electric technologies
In‑flight
decarbonisation
potential of products
• GKN Aerospace is involved in several R&D
initiatives relating to fuel cell power, liquid
hydrogen, hydrogen combustion and flight trials
such as H2GEAR and H2 Flight Trial.
• The Horizon 3 team, which focuses on disruptive
technologies, helps to focus Melrose’s efforts into
meeting our low‑carbon R&D investment and new
product decarbonisation targets.
• GKN Aerospace also works within the Jet Zero
Council, the Aerospace Technology Institute and
the Aerospace Growth Partnership to develop
policy to support aviation’s transition to Net Zero
and the development of hydrogen‑fuelled aircraft.
• It also carries out engagement activities with the
industry to ensure low‑carbon aviation is at the
forefront of regulators and governments.
• Global partnerships with electric aircraft
manufacturers such as Joby, Eviation, Supernal
and Lilium to work on experimental eVTOL and
electric aircraft development.
• GKN Aerospace is actively engaged with both
customers and regulators to ensure low‑carbon
aviation is at the forefront of regulators and
governments.
• Test flights have been completed by
GKN Aerospace using SAF in the Gripen aircraft.
• Development of the RM12 engine which can be
powered by 100% SAF.
• GKN Aerospace is active with governments and
policy makers to develop the right conditions
within which SAF investment will be successful.
Products
& Services
Hydrogen technology
We view hydrogen technology as one of the most impactful ways of
reducing the aviation industry’s impact on climate. This opportunity
manifests through an increased demand for hydrogen powered
aircraft in both hydrogen electric and hydrogen combustion
technologies. Hydrogen electric is seen as the most likely
candidate for an earlier entry into service due to greater potential
use in smaller aircraft which can be used as a proof of concept
for larger aircraft. 80% of flights are less than 2,000km but these
make up only 45% of CO2 emissions. Just 10% of flights are more
than 3,000km but account for over 50% of CO2 emissions hence
developing the technology to go further will yield significantly
greater impact and market size. Hydrogen combustion provides an
opportunity as it enables us to offset potential revenue losses from
a decrease in conventionally powered aircraft. However, hydrogen
propulsion is not without its challenges, both in the development
of technology and also the availability, supply, infrastructure and
renewable energy base required to enable widespread adoption.
NZE sees scaled investment in hydrogen technologies resulting in a
greater exposure compared to STEPS.
Battery electric technology
Using batteries to power aircraft produces no in‑flight emissions
at all and offers fully net zero travel if renewable electricity is
used. Power density limits the payload and range potential of this
technology. Battery electric flight is likely to have only a small role
in reducing aviation’s impact on global warming, however, this new
market area will be born green and offers the ability to develop
capabilities with wider exploitation such as in commuter markets.
NZE sees greater progression in battery electric technology
than STEPS.
Sustainable Aviation Fuels (“SAF”)
SAF offers the potential to decarbonise the aviation industry,
without any significant aircraft or engine technology development.
The long‑term focus for Melrose is on creating disruptive
technologies to ensure airlines meet their net zero goals,
considering both CO2 and non‑CO2 impacts (aka “True Zero”).
However, SAF can be used to fuel the existing fleet of approximately
25,000 aircraft around the world, significantly reducing aviation’s
impact without requiring fleet replacement with the associated
environmental cost on natural resources and production emissions.
Specifically, to GKN Aerospace, SAF provides an opportunity to
continue to manufacture the same components while also reducing
the environmental impact of aviation. Under NZE, significant
investment into SAF infrastructure occur in comparison to STEPS.
At the same time, the limitations of SAF’s adoption related to the
availability at the right price of the fuel driven means that high level
of investment will be needed to ensure stable SAF production which
may present certain potential limitations to the aviation growth.
Potential
impact
Opportunity
exposure
Increased
revenue
High
Hydrogen
Timeframe
Scenario sensitivity
Short 2023–2025
Medium 2025–2030
Long 2030–2050
NZE
STEPS
Moderate
Battery electric
technology
High
SAF
(1) Performance measurements on specific KPI’s are conducted through horizon scanning or internal KPI tracking.
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Key
Anticipated onset of risks and opportunities
Low likelihood
Estimated full impact of risks and opportunities
High likelihood
Physical Risks
As global temperatures rise, the frequency and severity of extreme weather events are expected to increase, resulting in a higher likelihood of disruptions to our
global operations and supply chain. The Munich Re Location Risk Intelligence Tool has been used to assess current and potential future physical climate‑related
risks facing GKN Aerospace’s global facilities and key suppliers. We have assessed potential physical risks, both acute and chronic, at 42 GKN Aerospace
sites including potential material risks such as drought stress, tornados, storms, sea‑level rise and flooding events among other hazards, while heat stress and
fire stress were considered but were not deemed material for our operations. The revenue and property value of each site was considered to determine the
materiality of identified risks to specific sites.
For the risks assessed we have chosen to use the best‑case and worst‑case scenarios as described below:
• RCP 2.6 (approximately 1.8°C warming by 2100). A scenario in line with the United Nations Climate Change Agreement of 2015. According to the IPCC, it
requires that Greenhouse gas emissions start declining immediately and go to zero by 2100. This relies on global implementation of stringent climate policies;
and
• RCP 8.5 (approximately 4.4°C warming by 2100). A “business as usual” high‑emissions scenario. This scenario is consistent with no major policy changes or
industry moves to reduce emissions globally leading to high atmospheric GHG concentrations.
We have considered three‑time horizons: 2030 (short term), 2050 (medium term) and 2100 (long term). This differs from our time horizons used for our
transitional risk assessment as there are limited predicted material physical climate risks up to 2030 due to the delayed nature of modelled climate impacts.
Risk type
Description
Mitigation
KPIs(1)
FLOODING (STORM SURGE, RIVERINE AND FLASH FLOOD)
Acute
Risk associated with either costal or riverine flooding can cause
damage to site infrastructure, products and equipment stored at
sites. Floods can also cause disruptions to manufacturing output and
delay production times. Riverine flooding in particular poses a risk to
five sites, including Cowes, which are currently located in a 50‑year
return period zone. An additional one site is projected to also be in
a 50‑year return period zone by 2030 under RCP 8.5. Cowes and
Papendrecht are the only sites which have been identified as being at
extreme risk of sea level rise under both scenarios by 2100.
• Collaboration with local environment agencies and
councils on flooding defences and prior flooding
events.
• Alternative suppliers are in place to replace key
Number of days
operations are
disrupted due to
flooding events
infrastructure that might be damaged.
• Flood management plans include the training of
teams to deploy flood barriers and raise at risk
machinery above where flood waters could reach.
• Safety reports take into account the impact of
flooding in at risk sites.
• Property damage and business interruption
insurance specific to natural hazards.
Potential impact
Risk exposure
Timeframe
Short 2030
Medium 2050
Long 2100
Scenario sensitivity
RCP 2.6 RCP 8.5
Increased costs
and decreased
revenue
Moderate
STORM
Acute
Increased exposure to extreme weather events such as tornados,
hailstorms and extratropical storms have the potential to impact the
Company’s operations and production processes through power
outages as well as impacting access to sites through damage to
local roads and infrastructure. 17% of sites, including Wellington,
Dallas and Cromwell have been identified as having a high exposure
to storm risk by Munich RE analysis. However, these sites collectively
only account for 5% of revenue.
Number of days
operations are
disrupted due to
storm events
• Alternative suppliers in place to replace key
infrastructure that might be damaged.
• Incident Commander outlines approach to dealing
with storm events such as internal emergency
communication system for employees to be
notified of hazards.
• Tornado shelters are available for employee safety
at impacted sites.
• Use of semi‑generators for storms that are
anticipated to cause power outages of more than
24 hours.
• The Garden Grove site has subscribed to
county‑wide emergency alert systems and its
standard operating procedure to shelter under
desks during storms.
• Property damage and business interruption
insurance specific to natural hazards.
Potential impact
Risk exposure
Timeframe
Short 2030
Medium 2050
Long 2100
Scenario sensitivity
RCP 2.6 RCP 8.5
Increased costs
and decreased
revenue
Low
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MELROSE INDUSTRIES PLC ANNUAL REPORT 2023
Physical Risks continued
Risk type
Description
Mitigation
KPIs(1)
SUPPLIER DISRUPTION FROM EXTREME WEATHER
Acute
Increased extreme weather events such as flooding and storms
cause supply chain disruptions or site shutdowns. This can impact
the ability of suppliers to provide us with appropriate raw materials
and other services needed to manufacture our products. However, at
this stage, impacts have typically been limited.
• Buffer stocks to protect manufacturing process
from short interruptions.
• Supplier business continuity plans that include
specific climate‑related plans.
• Ability to switch to alternative suppliers in the
event of an extreme weather event.
Number of days
suppliers are
disrupted due to
extreme weather
events
Potential impact
Risk exposure
Timeframe
Short 2030
Medium 2050
Long 2100
Scenario sensitivity
RCP 2.6 RCP 8.5
Loss in revenue
Moderate
(1) Performance measurements on specific KPI’s are conducted through horizon scanning or internal KPI tracking.
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MELROSE INDUSTRIES PLC ANNUAL REPORT 2023STRATEGIC REPORT SUSTAINABILITY REVIEW CONTINUED
Our ongoing activities are on
reducing embodied carbon in
materials we consume, as well
as lowering emissions within
operations through reduced energy
consumption, material waste, by
recycling and reusing materials
during the production phase.”
72
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023 Resilience of the organisation’s strategy
to climate change
Melrose has not only invested in reducing its carbon footprint
but has also shown adaptability by embracing renewable energy
sources, improving energy efficiency, and investing in low carbon
products for its customers. While acknowledging the risks posed
by climate change, we can conclude that our strategy is resilient
to climate change with appropriate mitigating plans in play for
identified risks and opportunities. We will continue to develop
our analysis as new data becomes available, both internally and
externally, and we will continue to monitor our climate exposures
and action plans through the Group’s risk management framework.
Our updated scenario analysis, which can be found on
pages 64 to 71, posed key questions on how different physical
and transitional scenarios would impact future revenue, production
costs and the life of current assets. The limitations of the scenario
analysis we carried out are:
• Scenarios often only provide high‑level global and regional
forecasts.
• Not all risks are easily subject to scenario analysis.
• Scenario analysis requires analysis of specific factors and
modelling them with fixed assumptions.
• Impacts are to be considered in the context of the current
financial performance and prices.
• Gross impacts are assumed to occur without the Company
responding with any mitigation actions, which would reduce the
impact of risks.
• Impacts are modelled to occur in a linear fashion, when in
practice, dramatic climate‑related impacts may occur suddenly
after tipping points are breached.
• The analysis considers each risk and scenario in isolation, when
in practice, climate‑related risks may occur in parallel as part of
wider set of potential global impacts.
• Carbon pricing is informed by the Global Energy Outlook 2022
report from the International Energy Agency (“IEA”).
Impact on strategy and financial planning
Climate change has a direct impact on product strategy, development
and financial planning across Melrose. Our ambition is to produce
long‑term sustainable growth for the coming years through continued
innovation and product quality across our engines and structures
solutions, with fully integrated emissions reduction activities. In the
short‑term horizon, we do not anticipate any material changes in
resource allocation or operational and capital investment to achieve
our plans and targets.
The point in the value chain where our actions could have prominent
potential impact is the emissions from our products through their
design and manufacture. Our ongoing activities work to reduce
the embodied carbon in materials we consume, as well as lower
emissions within our direct operations, for example, through
developing manufacturing processes which reduce energy
consumption and material waste and by recycling and reusing
materials during the production phase. These activities are already
aligned with our existing business targets and therefore are already
part of our operational and innovation pipelines.
In 2023, Melrose invested £48 million on climate‑related R&D
programmes that primarily aim to develop technologies that help our
customers improve energy efficiency and reduce GHG emissions
compared with conventional technologies. For Scope 1 and 2
emissions reductions, our focus in the near term is on implementing
our existing or developing new strategies to minimise emissions in
operations that represent hard to abate carbon intensive assets,
be it through the replacement of old equipment and machinery,
energy efficiency programmes or certain upgrades to our existing
procedures at plants. The impact of climate change on our supply
chain has been considered as part of our submission of emissions
reduction targets to the SBTi. A supplier engagement action
plan has been developed which outlines how climate change
considerations should be incorporated into procurement policies
and encourages suppliers to have science‑based targets. This shift
towards climate‑conscious procurement is indicative of a broader
commitment to mitigating climate change and underscores the
growing recognition of the environmental impact of supply chains in
the global business landscape.
Overall, in the short to medium term, the resourcing for the
implementation our net zero commitment is incorporated into the
running and planned capex and spending. While projects currently
planned for the medium and long term may be outside of the existing
capex processes and will require additional funding which is yet to
be determined, we believe that the actions we will directly take to
reduce emissions in the short term will result in costs or impacts on
revenues that are in line with those already in our strategy and growth
projections.
Please see pages 166 to 170 for further details on how
climate change is taken into account in Melrose’s
Consolidated Financial Statements.
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MELROSE INDUSTRIES PLC ANNUAL REPORT 2023STRATEGIC REPORT SUSTAINABILITY REVIEW CONTINUED
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.
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 and
performance against targets.
Climate‑related metrics
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. Specific metrics used to track
each risk and opportunity are identified on pages 64 to 71.
Our energy consumption and emissions data, the statement
of alignment with the GHG Protocol and statement on SECR
disclosures can be found on page 75. We currently disclose
Scopes 1 and 2 and applicable Scope 3 GHG emissions in line
with the GHG Protocol methodology, representing a breakdown
of the Group’s emissions by type and intensity measurement.
We review our GHG inventory on an annual basis and will restate
our data and/or recalculate our science‑based targets when
required, to reflect significant changes to our company structure,
methodology changes or errors.
TCFD: Strategy
page 63
Scope 1 emissions are emissions from sources that we own or
control directly, and Scope 2 emissions are those that we cause
indirectly as they come from where the energy is purchased and
produced.
• Scope 1 emissions are primarily driven by our use of natural gas
used in manufacturing processes and heating.
• Scope 2 emissions are tied to the electricity we use in our
manufacturing processes, for example autoclaves.
Our Scope 3 emissions represent emissions outside of our direct
operations and that occur in our value chains. In line with the
Greenhouse Gas Protocol’s “Corporate Value Chain (Scope 3)
Accounting and Reporting Standard”, we evaluate GHG emissions
from all 15 categories but report only on categories that are
relevant and material to the Company. Aligned with the rest of the
aerospace manufacturing sector, Category 11: Use of Sold Products
is estimated to be our largest category of Scope 3 emissions from
our initial calculations. Category 11 emissions associated with the
use of GKN Aerospace products have been estimated but are not
included in our emissions footprint. These emissions are classed as
indirect as they indirectly consume energy during use (e.g., aircraft
landing gear, fan blade and wings). Therefore, the indirect emissions
are not within the “minimum boundary”, and as such are listed as
optional and excluded from our Scope 3 footprint and reduction
target. All other downstream categories have been screened and
deemed either negligible or not applicable to GKN Aerospace’s value
chain emissions.
The GHG emissions for Melrose, broken down by Scope 1, Scope 2
and select Scope 3 emissions, for 2022 and 2023, are set out in the
table on page 75. In 2023, the Company reported a decrease in total
absolute Scope 1 GHG emissions and a decrease in total operational
energy consumption of 4% (based on the MWh of energy used
across all of our locations).
Scope 3 emissions show an increase in 2023 versus 2022, largely
due to increased spend against Purchased Goods and Services
and Capital goods (both categories were calculated using the
“spend based” approach). Business Travel emissions also increased
year‑on‑year with travel reverting to pre‑COVID‑19 levels in 2023. We
expect Scope 3 emissions to fluctuate in future years as the quality of
our reporting improves.
In 2023, operational energy consumption decreased in absolute and
associated intensity ratio terms compared to 2022. This is reflective
of the fact that revenue has increased at a higher rate than energy
consumption year‑on‑year. Decreases in Scope 2 emissions are
due in part to increases in use of renewable electricity. The Group’s
chosen intensity ratio is energy consumption and emissions reported
above normalised megawatts usage (“MWh”) and tonnes of CO2e per
£1,000 of revenue(1), which we believe remains the most appropriate
intensity ratio for Melrose.
Our overall emissions reduction targets are closely linked to our new
strategy and business model of an aerospace focused organisation.
The climate related targets reflect our strategy for addressing
climate risks and capitalising on opportunities identified in our latest
climate scenario analysis. The specific KPIs and metrics used to
track the identified climate risks and opportunities are set out in the
individual descriptions of risks and opportunities as demonstrated on
pages 64 to 71.
74
(1) The data has been standardised from the source units in which it was initially collected.
The revenue figure 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.
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023
Total energy consumption and GHG emissions for the period 1 January 2023 to 31 December 2023
Energy consumption (MWh)
Total operational energy consumption
Total renewable energy consumption
Share of renewable electricity in total electricity mix
Energy consumption intensity
Fuels
Total fuels consumption
Non‑renewable fuels consumption
Renewable fuels consumption
Electricity
Total electricity consumption
Renewable electricity consumption (self‑generated, purchased or acquired)
Non‑renewable electricity consumption (purchased or acquired)
Steam
Steam consumption (purchased or acquired)
Operational emissions (tCO2e)(1)
Scope 1: Direct GHG emissions(2)
Scope 2: Indirect GHG emissions (Location‑based)(3)
– Total purchased electricity
– Steam (purchased or acquired)
Scope 2: Indirect GHG emissions (Market‑based)
– Total purchased electricity
– Steam (purchased or acquired)
Total Scope 1 and Scope 2 emissions (Location‑based)
Total Scope 1 and Scope 2 emissions (Market‑based)
Emissions intensity(4) (Market‑based)
Upstream Scope 3 emissions
– Category 1: Purchased Goods & Services
– Category 2: Capital Goods
– Category 3: Fuel & Energy Related Activities
– Category 4: Upstream Transportation and Distribution
– Category 5: Waste Generated in Operations
– Category 6: Business Travel
– Category 7: Employee Commuting
Total Scope 3 emissions
Total emissions
Total Scope 1, Scope 2 (Location‑based) and Scope 3 emissions
Total Scope 1, Scope 2 (Market‑based) and Scope 3 emissions
UK
90,949
Global
(excl. UK)
477,184
Total
2023
568,133
121,917
34%
0.170
UK
94,218
Global
(excl. UK)
495,638
Total
2022
589,856
106,843
29%
0.200
37,155
37,155
140,490
140,490
177,645
177,645
38,236
38,236
147,025
147,025
185,261
185,261
Change
(2023/22)
‑4%
14%
5%
‑15%
‑4%
53,794
0
53,794
300,350
121,917
178,433
354,144
121,917
232,227
55,982
0
55,982
313,663
106,843
206,820
369,645
106,843
262,802
‑4%
14%
‑12%
0
36,344
36,344
0
34,950
34,950
4%
6,858
10,788
10,788
0
19,643
19,643
0
17,646
26,501
26,739
102,260
95,731
6,529
84,746
78,217
6,529
128,999
111,485
33,597
113,048
106,519
6,529
104,389
97,860
6,529
146,645
137,986
0.041
1,539,165
107,198
26,314
42,391
3,497
13,185
12,554
1,744,305
1,890,950
1,882,291
7,204
12,351
12,351
0
20,442
20,442
0
19,555
27,646
27,939
106,578
100,611
5,967
94,802
88,835
5,967
134,517
122,741
35,143
118,929
112,962
5,967
115,244
109,277
5,967
154,072
150,387
0.051
1,492,438
96,111
37,361
46,442
3,742
7,964
16,286
1,700,344
1,854,416
1,850,731
‑4%
‑5%
‑6%
9%
‑9%
‑10%
9%
‑5%
‑8%
‑20%
2.6%
2.0%
1.7%
(1) CO2e – carbon dioxide equivalent, this figure includes GHGs in addition to carbon dioxide.
(2) 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.
(3) Scope 2 figures include emissions from electricity and heat purchased.
(4) Company’s chosen intensity measurement: emissions reported above normalised tonnes CO2e per £1,000 revenue. The data has been standardised from the source units in which
it was initially collected. The revenue figures used to calculate the intensity ratio include continuing operations under operational control only.
This section has been prepared for the reporting period of 1 January 2023 to 31 December 2023. We report on all of the material emission sources in line with an
operational control approach method, as required in Part 7 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.
Our energy consumption and emissions data is reported in accordance with the reporting requirements of the Greenhouse Gas Protocol (“GHG Protocol”),
Revised Edition and the Environmental Reporting Guidelines, including the SECR guidance dated March 2019. The GHG Protocol standard covers the accounting
and reporting of seven Greenhouse gases covered by the Kyoto Protocol. The statement of alignment with the GHG Protocol and statement on SECR disclosures
can be found in our Annual and Sustainability Reports. We currently disclose Scopes 1 and 2 and select Scope 3 GHG emissions, representing a breakdown of
the Group’s emissions by type and intensity measurement.
Emission factors from the UK Government’s GHG Conversion Factors for Company Reporting 2023 (the Department for Environment, Food and Rural Affairs
(“DEFRA”) factors) have been used to calculate Scope 1 emissions. Scope 2 emissions associated with the GHG Protocol “Location‑Based” method have been
calculated using International Energy Agency (“IEA”) country‑specific emission factors. Scope 2 emissions associated with the GHG Protocol “Market‑Based”
method have been calculated using residual mix emission factors from Association of Issuing Bodies 2022 (“AIB”) where applicable. In the absence of residual
mix emission factor availability, International Energy Agency (“IEA”) country specific emissions factors have been used in line with the GHG Protocol guidance. If
sites generate their own renewable electricity or purchase electricity backed by contractual instruments (such as Renewable Energy Guarantee Origin), this has
been taken into consideration within the calculations. For Scope 3 emissions, we reported in accordance with the GHG Protocol Corporate Value Chain (Scope 3)
Accounting and Reporting Standard and the GHG Protocol Technical Guidance. Emissions factors from DEFRA and the Aerospace Industry Tool for Calculating
Scope 3 Greenhouse Gas Emissions have been used to calculate Scope 3 emissions. A Scope 3 inventory was carried out and the relevant categories were
calculated using a combination of spend based and average data based methodologies. Due to recognised inherent uncertainties in calculating Scope 3, we have
adopted a continuous improvement approach. We will continue to review our processes and disclose any restatements in a timely and transparent manner.
75
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023STRATEGIC REPORT SUSTAINABILITY REVIEW CONTINUED
Climate‑related targets
In order to reflect Melrose’s transformation into an aerospace
focused business, our Group sustainability targets have been
reset to align with GKN Aerospace’s sustainability ambition, the
macroeconomic and broader industry drive for advancing the
environmental and social improvements in the aerospace sector
at large. Our new 2025 sustainability targets are more ambitious
to ensure that we set the right foundations to keep up the pace of
improvement in the coming years.
GKN Aerospace has set near and long‑term science‑based
emissions reduction targets which were submitted to the SBTi in
2023 for anticipated validation in 2024. Until the point of validation,
they are subject to change. GKN Aerospace’s sustainability
function is responsible for achieving the targets. SBTi requires
that science‑based targets are recalculated to reflect material
changes in climate science and business context to ensure their
continued relevance. SBTi stipulates that targets shall be reviewed,
and if necessary, recalculated and revalidated every five years at a
minimum. Emissions data is reported quarterly as part of our internal
system which enables us to monitor and assess performance
against our targets. Revisions of targets will be conducted as and
when necessary and updates on progress towards achieving them
will be reported on at least an annual basis within our Annual and
Sustainability Reports.
76
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023 OUR CLIMATE‑RELATED TARGETS
Our new 2025 sustainability targets are
focused on short‑term tangible improvements
as this is where we believe our focus should
be right now.
Our Group climate‑related targets are:
50%
80%
95%
Reduce Scope 1 and 2 emissions intensity
by 50% by 2025 from a 2020 base year.
Maintain 80% of total R&D expenditure on
climate‑related R&D per year to contribute
to aerospace decarbonisation by 2025
from a 2020 base year.
Divert 95% of our solid non‑hazardous
waste from landfill by 2025 from a 2020
base year.
50%
100%
40%
Source at least 50% of our electricity from
renewable sources by 2025 from a 2020
base year.(3)
Achieve 100% of new products which
contribute to aerospace decarbonisation by
2025 from a 2020 base year.
Reduce water withdrawal by 40% by
2025 from a 2021 base year.
70%
Encourage 70% of suppliers by spend,
covering purchased goods and services,
to have science‑based targets by 2028.(1)
Net Zero
GKN Aerospace commits to reach net
zero GHG emissions across the value
chain by 2050.(1)
Additional targets proposed for SBTi validation:
50%
GKN Aerospace commits to reduce
absolute Scope 1 and 2 GHG emissions
by 50% by 2030 from a 2020 base year.(1)
25%
Reduce absolute Scope 3
GHG emissions(2) by 25%
by 2030 from a 2022 base year.(1)
(1) As submitted to the SBTi for validation
(2) Covering Fuel‑ and energy‑related activities (not included in Scope 1 or Scope 2), Upstream transportation and distribution, Waste generated in operations, Business travel
and Employee commuting.
(3) Where renewable electricity is commercially and reasonably available in the relevant jurisdiction.
77
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023STRATEGIC REPORT
SUSTAINABILITY REVIEW CONTINUED
On a mission to be the most
trusted and sustainable
partner in the sky
AMBITION
GKN AEROSPACE’S MISSION IS TO BE THE MOST TRUSTED
AND SUSTAINABLE PARTNER IN THE SKY
Its ambitious targets to reduce direct environmental impact on climate and the environment are supported
by strong governance foundations, focused investment and strong industry leadership.
By taking a global value chain approach through collaboration with customers, suppliers and partners alike,
it will seek to minimise the collective impact of the aerospace sector to enable global aviation to achieve Net Zero by 2050.
Achieving business‑wide Net Zero
Contributing to global Net Zero
NET ZERO
PATHWAY
STREAMS
Net Zero operations
(Scope 1 and 2)
Net Zero upstream
(Scope 3)
Deliver critical internal
and industry‑wide
enabling activities
Co‑create with customers,
invest in R&D and
products contributing to
aerospace decarbonisation
CLIMATE TARGETS AND COMMITMENTS
2023
2025
2028
2030
2050
80%
Invest at least 80%
of our R&D spend
into programmes
towards aerospace
decarbonisation by
2025
100%
Ensure that 100% of
new product launches
are products that
contribute to aerospace
decarbonisation by
2025
25%
reduction in absolute Scope 3 emissions(1) by 2030(2)
Net Zero
Across the value chain by 2050(2)
Creating and fostering the internal foundations and productive industry engagement to drive decarbonisation efforts
50%
reduction in Scope 1 and 2 emissions intensity
by 2025
50%
reduction in absolute Scope 1 and 2 emissions
by 2030(2)
70%
of suppliers by spend covering purchased goods and services will have
science‑based targets by 2028(2)
• Improving energy
efficiency of our assets
• Green optimisation of
operations and sites,
including equipment
and machinery
• Reducing other
Scope 1 emissions
• Greening our purchased
electricity mix
DRIVERS
• Reducing Scope 3
• Continued engagement
• Continued partnerships
emissions(1)
• Increasing our investment
in additive manufacturing,
energy efficient composite
technologies, bonding and
nesting technology and
investment in raw material
and composite recycling
innovation programmes
to help reduce Scope 3
Category 1 emissions in
the long‑term (waste as
resource)
with industry, government
and public sector,
enabling customers to
launch new aircraft and
engine platforms with a
significant reduction in
inflight emissions, through
the provision of our
innovative technologies
with customers on
innovation and climate
action for sustainable
aviation and supporting
them in achieving their
own net zero ambitions
without compromising
business success and
profitability
(1) Including Fuel‑ and energy‑related activities (not included in Scope 1 or 2), Upstream transportation and distribution, Waste generated in operations, Business travel and
Employee commuting.
(2) As submitted to the SBTi for validation.
78
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023 ENERGY EFFICIENCY
In 2023, GKN Aerospace developed and set a company‑wide energy
intensity target to drive more efficient use of electricity, fuel and
heat across the business. Not only has this resulted in an absolute
reduction in consumption, but employees are now also more
aware and supportive of company‑wide sustainability ambitions.
Complementing this target is an effort to increase renewable energy
procurement and implement other climate‑positive actions such as
sustainable transport initiatives.
Type of energy efficiency programmes
2023
2022
LED lighting retrofits
£790,000
£900,000
More efficient air conditioning and
heating systems
Renewable energy installations
Insulation improvements
Energy efficient equipment
Total
£410,000
£600,000
£250,000
£960,000
£3,010,000
£1,250,000
£5,000
£700,000
£2,360,000
£5,215,000
WATER
Water is an essential resource for production processes within
GKN Aerospace’s operations. It is acknowledged that water scarcity
is a global challenge and thus water conservation is an increasingly
important topic for our business and stakeholders. Our Water policy
is centred around two key principles of ensuring that we remain
resilient to any risks associated with water by minimising potential
impacts on water availability and quality and facilitating business
contributions to addressing water challenges and improving water
management practices.
The GKN Aerospace sustainability function has overall responsibility
and oversight of the Group Water Policy. The executive management
team of each GKN Aerospace business line has direct responsibility
for ensuring effective management of their respective water‑related
risks and opportunities throughout operations and with suppliers.
The requirements under our Water Policy are supported by a
Group‑level target of a 40% reduction in water withdrawal intensity by
2025 (reported above normalised m3 per £1,000 of revenue), and a
process‑oriented drive within our Water Stewardship Programme.
Water withdrawal data is presented in the table below, showing
a decrease in total water withdrawn by the business in 2023
compared to 2022. In 2023, the largest proportion of our water is
withdrawn in North America and Europe. The decrease in the water
intensity is reflective of an increase in overall revenue and due to
several water withdrawal reduction strategies that are in place,
especially in North America where particular success was noted
during the reporting period.
GKN Aerospace’s operations use water in production processes to
dilute coolant used in machining, during cleaning cycles, polishing
and chemical treatment processes. In addition, water is required
for staff hydration and hygiene. To date, GKN Aerospace has
not been subject to conditions where water scarcity had led to
interruptions in operations, however, we are aware of the possibility
of operational interruption and are planning to reduce our water
withdrawal to reduce the stress on water supplies.
In 2023, we further advanced the analysis of our operations by
assessing which operational sites are situated in future projected
water stressed(1) areas. Our manufacturing and office sites(2) were
reviewed to identify operations in areas of “high” (40%–80%) or
“extremely high” (>80%) baseline water stress, according to the
Water Research Institute (“WRI”) Aqueduct Water Risk Atlas tool.
WRI defines these areas as those where human demand for water
exceeds 40% of resources. We have identified that 26% of our
current sites are located in areas of “extremely high” water stress,
and a further 13% are currently located in areas of “high” water
stress using 2050 projections.
Some sites have already started to explore initiatives which can
reduce water usage by roughly 20 to 50%. This has been achieved
through operational improvements such as maintenance and
adjustments of irrigation systems, increased surveillance to avoid
leaks and improved maintenance of cooling towers, as well as
other measures at various sites.
Melrose Group water withdrawal(3) data for the period 1 January 2023 to 31 December 2023
Cubic metres
Water withdrawal (m3) in operations(4)
North America
South America
Europe
Asia
Company’s chosen intensity measurement:
Water withdrawal (m3) per £1,000 turnover(5)
2023
1,271,189
898,257
7,272
333,078
32,582
2022
1,372,693
1,009,825
6,446
324,929
31,493
Change
(2023/22)
‑7.4%
‑11.0%
13.0%
3.0%
4.0%
0.379
0.465
‑18.0%
(1) For these purposes, baseline water stress measures the ratio of total water withdrawals to available renewable surface and groundwater supplies.
(2) For these purposes a “site” is defined as a manufacturing site or office that is under the operational control.
(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 or any use over the course of the
reporting period.
(4) Data was collected from 100% of sites across the Group in 2023 and 2022.
(5) The Group’s chosen intensity ratio is water withdrawal reported above normalised m3 per £1,000 of revenue. The data has been standardised from the source units in which it was
initially collected. The revenue figures used to calculate the intensity ratio include continuing operations under operational control only.
79
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023STRATEGIC REPORT SUSTAINABILITY REVIEW CONTINUED
By increasingly incorporating circular
economy principles into design and
manufacturing processes, we are
reducing our environmental impact.
18%
Water withdrawal intensity
reduction in 2023
80
PRODUCT LIFE CYCLE MANAGEMENT
AND CIRCULAR ECONOMY
The global production system promotes a transition
away from the linear model towards maximising
resource intensity and value addition. Business
processes for technology selection, new product
development and supplier selection have been updated
to incorporate sustainability requirements, to ensure
that the life cycle implications are understood as part
of any selection decision. We assess the impact of
our products on the environment in terms of material
usage, waste, energy usage and CO2 emissions
throughout each products’ life cycle. Their impact
on the environment is assessed in terms of use of
materials, waste, energy and emissions. Across the
business, life cycle assessments have been completed
for products sold in 2023, representing 7% of
total revenue.
By increasingly incorporating circular economy
principles into design and manufacturing processes,
we are reducing our environmental impact and deliver
products to end‑markets with increased durability and
longevity, reduced emissions and waste. By way of
example, GKN Aerospace’s continued innovation in
Additive Manufacturing has enabled its development
of a leading Fan Case Mount Ring (“FCMR”) structural
design. GKN Aerospace’s fan blade housing structure
allows significant reduction in source material use,
energy consumption and product weight, with a
view to reducing Greenhouse gas emissions in both
the manufacturing process and across the product
life cycle. GKN Aerospace’s new fabricated FCMR
promotes resource efficiency by reducing the buy‑to‑fly
ratio from 15 in the original design to five. This
represents a 60% reduction in material waste, which
will save over 90 tonnes of forged titanium annually.
Additionally, in line with the circular economy principles,
GKN Aerospace’s maintenance, repair and operation
(“MRO”) services aim to enable products to be
reintroduced into the production cycle and thereby
extending product lifetime instead of disposal at the
end of useful life. This approach will gradually lead us to
a shift from quantitative‑based concept of “expansion
of recycling industry” to the pursuit of optimum
resource recovery quality through “waste as resource”.
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023 The initial analysis showed the operational sites, based on their
location and industry specifics, with the highest risk of direct
pressures on biodiversity. Of 30 industrial sites, five have a high
physical risk score and 25 have a medium physical risk score. The
analysis also indicated pollution and high risk of natural disasters as
other relevant impact indicators to our operations.
GKN Aerospace’s sites are mostly located in industrial zones and
operate under general binding rules. Permitting processes which
review the impact of our emissions on the environment and set
limits to prevent harm to the surrounding environment provide the
necessary safeguards against extreme natural events. Through this,
we ensure that our sites do not adversely affect the integrity of a
geographic area, local communities or change its ecological features
and functions, meaning that the operation of our sites should not
contribute to any net loss in biodiversity. We continue to further to
deepen our understanding of physical biodiversity risks and assess
possible impacts of our operations.
88%
solid non‑hazardous waste diverted from
landfill in 2023 against the 95% target by 2025
OPERATIONAL WASTE MANAGEMENT
In 2023, GKN Aerospace continued to make an active effort to
reduce the amount of waste generated and to divert waste from
landfill. To support this, we have a target to divert 95% of solid
non‑hazardous waste from landfill by 2025.
GKN Aerospace’s waste generation data for 2023 shows an overall
decrease in the solid waste generated compared to 2022 due to
operational changes, improvements and a bigger focus placed upon
waste by sustainability and environmental managers. Despite the
decrease in absolute waste weight, there have been increases in the
proportion of non‑hazardous waste per revenue that is sent to landfill.
GKN Aerospace is running a number of significant operational
improvements to reduce the impact of its waste and associated
emissions in transportation of waste contents. These include, among
other programmes, various recycling initiatives and modifications to
equipment such as converting materials into packaging, resulting
in potential significant savings in costs of new packaging materials,
transportation and disposal services, as well as an estimated
significant reduction of the associated emissions if rolled out across
the majority of sites.
Biodiversity
We recognise the importance of biodiversity and how fundamental
it is to our society and are committed to playing our part in
preserving biodiversity for the benefit of future generations. Our
Biodiversity policy sets out the foundational principles in promoting
the growth of the natural world and helping prevent deforestation.
The Group Biodiversity policy can be found on our website at
https://www.melroseplc.net/governance/documents‑and‑policies/.
In 2023, we started a top‑down assessment(1) to identify the physical
risks associated with our operational sites, namely the ways in which our
operations depend on and impact nature and surrounding ecosystems.
Melrose waste generation data for the period 1 January 2023 to 31 December 2023
Tonnes
Total solid waste
thereof non‑hazardous waste
thereof non‑hazardous waste to landfill
thereof non‑hazardous waste for recycling/reused
thereof non‑hazardous waste incinerated
thereof non‑hazardous waste incinerated with energy recovery
thereof hazardous waste
thereof hazardous waste to landfill
thereof hazardous waste for recycling/treatment
thereof hazardous waste incinerated
thereof hazardous waste incinerated with energy recovery
Solid waste to landfill (hazardous and non‑hazardous)
Solid waste diverted from landfill (hazardous and non‑hazardous)
Solid non‑hazardous waste diverted from landfill
Solid non‑hazardous waste diverted from landfill rate
Company’s chosen intensity measurement(2)
Tonnes of solid non‑hazardous waste per £1,000 revenue
(1) Using the WWF Biodiversity Risk Filter at riskfilter.org.
(2) The revenue figures used to calculate the intensity ratio include continuing operations under operational control only.
2023
17,547
15,781
1,893
10,453
3,433
2
1,766
952
632
182
0
2,845
14,702
13,888
88%
Change
(2023/2022)
‑65%
‑52%
‑28%
‑45%
‑69%
‑90%
‑20%
‑96%
‑26%
‑69%
‑54%
2022
50,525
32,884
2,628
19,102
11,154
0
17,642
1,192
16,450
0
0
3,820
46,706
30,256
92%
0.0047
0.0111
‑58%
81
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023STRATEGIC REPORT SUSTAINABILITY REVIEW CONTINUED
SOCIAL IMPACT
OUR PEOPLE
Promoting diversity, prioritising and nurturing the wellbeing
and skills development of our employees, and contributing
to the communities that we are part of, is instrumental to the
success of our business and our impact in the regions where
we operate.
The Melrose Code of Ethics reinforces our sustainability
principles and provides clear guidance as to how the Board
and the Melrose senior management team expect business
to be conducted, 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 our business. The Code was approved by
the Board and last updated in December 2022. It can be found
on our website at https://www.melroseplc.net/governance/
documents‑and‑policies/.
To perform well and achieve our potential, it is important to
nurture an engaged, capable and enthusiastic workforce. We
want to ensure that we prioritise people, enabling them to enjoy
the work they do, and that employees’ safety and wellbeing is a
priority. We value and champion diversity in its broadest sense
and encourage working environments that nurture employees
and encourage them to grow and act with integrity.
Social impact highlights
40%
female representation on
the Board, meeting the
expectations of the FTSE
Women Leaders Review
>£5m
invested in workforce
training in 2023
83%
Average response rate for
employee engagement
surveys in 2023
82
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023
EMPLOYEE ENGAGEMENT
We recognise the importance of engaging with employees in a
meaningful way to support their development and ensure that we
provide the best working environment. Consultations with employees
are held regularly to ensure that concerns are addressed in a
meaningful and mutually beneficial way. In 2023, 72% of employees
received performance reviews. Such consultations are performed
through confidential and anonymous all‑employee engagement
surveys. The results are shared with the executive management
teams, plant directors, HR teams and other people leaders, and
are then further analysed through fora such as employee focus
groups. Action plans are then developed to help address areas for
improvement. The survey feedback and resulting measures are
shared with employees through various engagement tools, such as
town hall meetings.
WE RECOGNISE THE IMPORTANCE OF
SUPPORTING THE WELLBEING AND
DEVELOPMENT OF OUR EMPLOYEES,
DRIVING AND MAINTAINING A DIVERSE,
INCLUSIVE AND SAFE ENVIRONMENT.
The Workforce Advisory Panel (“WAP”) enables key views of the
workforce to be heard and considered by the Group’s senior
management team, where it can have maximum impact. The WAP
reports to the Board on an annual basis to provide visibility and
oversight of key workforce views, which are then discussed and
considered at Board meetings. The WAP comprises the Chief Human
Resources Officer and Group General Counsel from Melrose and
GKN Aerospace and other relevant internal stakeholders as required
as the Group’s new business strategy and integrated structure
evolves. Each member of the WAP is responsible for promoting
workforce engagement, disseminating information and collating the
voice of their workforce. They are also responsible for demonstrating
how key workforce views are fed into executive management
decisions, as well as ensuring that the workforce is aware of their
impact on such decisions. Key workforce views in 2023 related to
learning and development opportunities. Please refer to the Talent
and career management section on pages 86 to 87 for examples of
how this has been addressed.
We are committed to safeguarding the contractual and statutory
employment rights of their employees through constructive
relationships with employee representative bodies, including unions
and works councils.
Group employees as at 31 December 2023
2
B
3
1
A
TOTAL
17,234
1 Permanent employees of which
14,234
some are:
A Full‑time employees
B Part‑time employees
2 Temporary employees
3 Apprentices
Total
13,492
742
2,786
214
17,234
UN SDGs
MATERIAL TOPICS
• Occupational health, safety
and wellbeing
• Community impact
• Diversity and equal
opportunities
• Product safety and quality
• Talent and workforce
engagement and development
• Respect for human rights
The rights of workers to participate in collective bargaining
and their freedom of association is respected across the
business. 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 and GKN Aerospace pay all UK employees at least the
real living wage, save for Apprentices, Interns and year‑in industry
students, who are paid in accordance with the national minimum
wage rates for their age group. In addition, GKN Aerospace offer all
employees in the UK the opportunity to work for at least 15 hours
per week.
83%
Average response rate for employee
engagement surveys we undertook in 2023
DIVERSITY, EQUITY AND INCLUSION
Driving and maintaining a diverse, inclusive and safe environment
is a priority for us. 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, sexual
orientation, age and disability.
We do so by ensuring that our employees’ entry into, and
progression within our business are 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. Melrose is proud to
be a member of the Business Disability Forum, a not‑for‑profit
member organisation that works with the business community to
understand the changes required in the workplace for disabled
persons to be treated fairly, so that they can contribute on
an equal‑opportunity basis to business success, society and
economic growth.
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MELROSE INDUSTRIES PLC ANNUAL REPORT 2023STRATEGIC REPORT
SUSTAINABILITY REVIEW CONTINUED
In addition, Melrose also continues to meet the expectations of the
Parker Review, as well as the target set out in the FCA Listing Rules,
of having one director from an ethnic minority background.
Below Board level, Melrose operates an Executive Committee
which facilitates the development of a diverse pipeline for
succession planning purposes. As at 31 December 2023, the
Executive Committee and its direct reports consisted of 41% female
representation (and 37% female representation specifically at an
Executive Committee level). Melrose therefore currently meets the
expectations of the FTSE Women Leaders Review.
Melrose notes the recent recommendations of the Parker Review
for FTSE 350 companies to set a percentage target for senior
management positions that will be occupied by ethnic minorities in
December 2027, with the target being set by 31 December 2023. The
Nomination Committee and Board agreed that it was not feasible for
Melrose to set a sufficiently informed ethnic diversity target for senior
management by the end of last year. However, this target will be set
during the course of 2024. Please refer to the Nomination Committee
report on pages 124 to 127 for further details.
The following tables provide a breakdown of gender and ethnic
diversity at a Board and executive management level as at
31 December 2023. This information was collected by asking both
the Board and executive management team to complete the same
voluntary questionnaire. This questionnaire set out questions related
to gender and ethnic diversity, as extracted from Acas’s equality
and diversity monitoring form template. In advance of circulating the
questionnaire, Melrose engaged external legal advisors to ensure that
the processes and procedures related to such data collection were
compliant with applicable data protection laws and best practice.
Our 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, updated where relevant
and approved each year by our Nomination Committee.
Copies of these policies can be found on our website at
https://www.melroseplc.net/governance/documents‑and‑policies.
Promoting diversity at all levels
The Board is committed to furthering diversity at all levels. In
particular, the last five Non‑executive Director appointments have
been female. Furthermore, two of the Committee Chair roles, the
Chair of the Audit Committee and the Chair of the Nomination
Committee, are held by women.
As at 31 December 2023, Melrose had 40% female representation
on the Board (2022: 40%), which meets the expectations of the
FTSE Women Leaders Review, as well as the target set out in
the Financial Conduct Authority’s Listing Rules (the “FCA Listing
Rules”). The FTSE Women Leaders Review and the FCA Listing
Rules also set a target for at least one senior board position, being
that of Chairman of the Board, Senior Independent Director, Chief
Executive, or Chief Financial Officer to be held by a woman (the
FTSE Women Leaders Review having a 2025 target date). The
Nomination Committee recognises that Melrose does not currently
meet this requirement and, as noted in the Nomination Committee
report on pages 124 to 127, this is being kept under review
for future improvement. The Nomination 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 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.
Gender diversity as at 31 December 2023
Men
Women
Not specified / prefer not to say
Ethnic diversity as at 31 December 2023
White British or other White (including minority white groups)
Mixed / Multiple ethnic groups
Asian / Asian British
Black / African / Caribbean / Black British
Other ethnic group, including Arab
Not specified / prefer not to say
(1) Including direct reports.
84
Number of
Board members
Percentage of
Board members
Number of senior
positions on the
Board (CEO, CFO,
SID and Chair)
Number in
executive
management
Percentage
of executive
management(1)
6
4
0
60%
40%
0%
4
0
0%
16
11
0
59%
41%
0%
Number of
Board members
Percentage of
Board members
9
0
0
1
0
0
90%
0%
0%
10%
0%
0%
Number of senior
positions on the
Board (CEO, CFO,
SID and Chair)
100%
0%
0%
0%
0%
0%
Number in
executive
management
Percentage
of executive
management
18
0
2
0
0
7
67%
0%
7%
0%
0%
26%
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023 GKN Aerospace has the ambition to increase the representation
of all currently under‑represented groups across the business.
To proactively support this, in 2022 a dedicated Global Diversity,
Inclusion and Belonging Manager was hired to proactively promote
diversity throughout the organisation. Initiatives include starting to
baseline the extent to which GKN Aerospace employee ethnicity
profiles match the communities in which they operate. In 2023,
GKN Aerospace also developed and launched additional Diversity
& Inclusion (“D&I”) training for all employees and managers (via both
e‑learning and face‑to‑face training). This D&I training consists of
five videos covering topics like bias, understanding difference and
workplace culture. Team sessions have also been rolled out using
a form of boardgame which allows teams to have more open and
honest discussions about sensitive topics.
GKN Aerospace also recognises that some of its colleagues face
different challenges and may need support, either to get their voices
heard or to put their ideas into practice. In recognition of this and to
drive a greater sense of Diversity, Inclusion and Belonging (“DIB”),
GKN Aerospace currently has six dedicated Employee Resource
Groups (“ERGs”). The current six ERG’s are: Connected Women,
Future GKN, LGBTQ+, African Black Caribbean Professionals,
Mastering Neurodiverse Strengths and Veterans & Reservists.
Additionally, in 2023, a Menopause support group was also launched
for the first time.
These ERGs are voluntary, company‑endorsed, employee groups, created
by employees specifically to address the concerns of a particular group
or an aspect of our culture that we want to improve. ERGs have brought
together groups of like‑minded people, providing them with opportunities to
collaborate, educate others about the challenges they face – or ways they
can help the organisation – and help to give them a real sense of belonging
within the organisation. Currently the total membership across these groups
is nearing 2,000 employees. In addition, all main countries have dedicated
Employee Assistance Plans (“EAPs”) providing everything from counselling
support, mental health and wellbeing advice and guidance on legal and
financial queries (increasingly important against a backdrop of increased
cost of living).
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. However, the Group has continued to make good
progress in increasing senior manager diversity during the year.
40%
Female representation on the Board,
meeting the expectations of the
FTSE Women Leaders Review
Group permanent employee gender diversity
at 31 December 2023
1
Total Group permanent employees
2
MALE: 73%
FEMALE: 27%
1 Male
2 Female
Total
10,718
3,933
14,651
Group senior manager diversity
at 31 December 2023
Senior managers (section 414C of the Companies Act 2006)
1
MALE: 65%
FEMALE: 35%
1
MALE: 65%
FEMALE: 35%
1
MALE: 65%
FEMALE: 35%
2
2
2
Employees in senior
management positions
1 Male
2 Female
Total
Directors of Group undertakings,
excluding the above
1 Male
2 Female
Total
Total Senior Managers
1 Male
2 Female
Total
13
7
20
35
19
54
48
26
74
85
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023STRATEGIC REPORT
SUSTAINABILITY REVIEW CONTINUED
TALENT AND CAREER MANAGEMENT
Skills development
Melrose is committed to fostering the professional growth and
lifelong learning of its employees. A proactive approach to
anticipating both short and long‑term workforce requirements
and skill prerequisites, is essential in ensuring our workforce
remains at the forefront of innovation. Enhancing productivity
lies at the core of Melrose’s strategy for enhancing performance,
with a strong emphasis on providing extensive training
opportunities that are accessible and actively promoted to
employees at all career stages.
Leadership training is an integral part of ensuring the workforce
remains engaged and innovative. Annual talent reviews help
identify individuals who have the ability and aspiration to grow
into more stretching roles and assist us to develop a diverse
pipeline of successors for key leadership positions.
GKN Aerospace delivers a wide variety of flexible training
programmes through a combination of online and in‑person
training. In 2023, 89% (2022: 87%) of employees received
training during the year. Set out in the table on page 87 is the
average training time per GKN Aerospace’s employee and the
total number of hours spent on workforce training. The average
training time per employee remained static between 2022 and
2023, with increased spend per employee.
Social impact highlights
£292
Average training spend
per employee in 2023(2)
512,238
Total number
of training hours(1)
£5.08m
Total annual spend
on workforce training in 2023(2)
86
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023 REWARD AND RECOGNITION
Our policies and protocols for recruitment, talent development and
succession planning are supported by robust training programmes
and effective management to ensure that relevant opportunities
are in place for employees to pursue career development. We also
encourage internal applications for open positions.
Where permitted by local laws and employee representative bodies,
performance evaluations are undertaken across the business,
with 72% of employees receiving a performance appraisal in 2023
(2022: 59%). At the time of writing, performance evaluations for 2023
were ongoing.
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 82% of our
permanent employees (by headcount) benefit from being a member
of a company‑based pension scheme.
TRAINING AND DEVELOPMENT
Average training time per employee (hours)(1)
Average training spend per employee (£)(2)
2023
29
292
2022
29
279
Total number of training hours(1)
512,238
496,312
Total annual spend on workforce training (£)(2)
5,085,732
4,756,851
APPRENTICESHIPS
AND GRADUATE PROGRAMMES
Apprenticeship and graduate programmes assist with training a
new generation of employees and help to ensure that knowledge
is retained within the business. In 2023, over 200 apprenticeships
were in place at GKN Aerospace, providing a mix of on‑the‑job
and classroom training. In turn, in 2023, GKN Aerospace’s Global
Graduate Development Programme enrolled a further 32 graduates
onto the programme, adding to the existing 32 graduates who joined
as part of the 2021 and 2022 cohorts.
In addition to apprenticeships and graduate programmes,
GKN Aerospace also runs 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.
MELROSE SKILLS FUND
In 2023, we met our commitment given at the time of the acquisition
of GKN plc to invest £10 million over five years through the Melrose
Skills Fund to build the UK’s industrial base and to support the
creation of between 100 to 150 new apprenticeships in engineering,
technology and science, with the total number of apprenticeships
created having exceeded this target. The Melrose Skills Fund has
been utilised to develop the technical skills that support current and
future engineering skills needs, using digital delivery methods and
accredited learning management systems.
The Melrose Skills Fund has helped to support the training and
development of more than 3,000 individuals across GKN Aerospace’s
UK workforce, with key capability gaps closed and tangible
value added to the business. GKN Aerospace investment was
focused on three areas, emphasising the importance of building
technical capabilities to meet future business challenges and
customer expectations: Tactical Skills Standardisation, Future Skills
Differentiation and Skills Delivery Infrastructure.
TACTICAL SKILLS
STANDARDISATION
STRATEGIC SKILLS
DIFFERENTIATION
SKILLS DELIVERY INFRASTRUCTURE
• Tactical Skills Standardisation: A bottom‑up approach used
to identify technical capability gaps and training opportunities
focusing on tactical skills standardisation in areas such as
Manufacturing Engineering, Quality Management, Life Cycle
Assessment Process Development and Automation and Robotics.
• Strategic Skills Differentiation: A top‑down approach used to
proactively identify emerging capabilities and skills that will be
required over the next 10–15 years in the aerospace industry. Areas
highlighted for strategic skills differentiation included Digital Skills,
STEM Pipeline Industry Collaboration and Academic Institution
Collaboration.
• Skills Delivery Infrastructure: To address the need to invest
in infrastructure to effectively govern, accelerate and deliver
the Melrose Skills Fund, investments were made to recruit a
GKN Aerospace Skills Fund Programme Manager, review existing
learning and development systems and set‑up a multi‑purpose
training and development function at GKN Aerospace’s UK GTC.
A key focus of the Melrose Skills Fund has been identifying ways to
work with third parties and the community to help bolster the UK’s
manufacturing and engineering industry. The Melrose Skills Fund has
supported the Schools’ Aerospace Careers Programme (the “ACP”),
a charity supporting young people and educational establishments
across the UK to increase the number of young people undertaking
STEM learning and pursuing careers in engineering‑based industries.
This included employees attending multiple school roadshows
and hosting an ACP Student Networking Event in which around
75 students attended the GKN Aerospace GTC for a full day of
insights into aerospace careers.
Another core component of the Melrose Skills Fund has been
supporting initiatives which look to improve diversity within
manufacturing. In collaboration with Enginuity, a not‑for‑profit
organisation, and the trade union Unite, Melrose helped develop an
engineering task‑oriented computer game contextualised for the
aerospace sector to help encourage school children from ethnic
minorities and different socio‑economic backgrounds to consider a
career within engineering.
(1) Data was collected from 100% (by headcount) of the Group in 2023 and 2022.
(1) Data was collected from 100% (by headcount) of the Group in 2023, and from 98%
in 2022.
More information relating specific projects enabled by the Melrose
Skills Fund can be found in our 2023 Sustainability Report.
87
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023STRATEGIC REPORT SUSTAINABILITY REVIEW CONTINUED
COMMUNITY IMPACT
At Melrose, we firmly believe that our responsibility extends
beyond our core business operations. Our commitment to the
communities where we operate is an integral part of our corporate
ethos. This past year, we continued to contribute to local charitable
and community initiatives, both in terms of volunteering time and
material resources, that create a positive and lasting impact on
the communities we serve. In 2023, GKN Aerospace undertook
community initiatives and invested over £312,000 in a mix of
donations, sponsorships and employee’s volunteering their time
to help others and charitable causes globally. GKN Aerospace
also made cash donations to non‑profit charitable organisations
in excess of £825,000, giving a total contributed of more than
£1,100,000 to support charities and its local communities.
Community investment is led by sites who are required to enter
donation and sponsorship programmes in compliance with the
Anti‑Bribery & Corruption policy. As an example, GKN Aerospace’s
GTC in the UK recently hired, in partnership with a UK Autism
charity, two intern engineers with autism and has since re‑mapped
the hiring processes to make adjustments to the working
environment to ensure they felt safe and included.
SAFETY FIRST
The health, safety and wellbeing of all our employees and
contractors has always been of paramount important to Melrose.
We understand the unique challenges and responsibilities that
come with our industry, and we are resolute in our commitment
to maintaining the highest standards in these areas. In the past
year, we have continued to make significant strides in ensuring the
wellbeing of our workforce and the safety of our operations.
Safety is paramount in our industry and thus our safety culture is
ingrained in our business. We have established strong governance
principles, robust policies and rigorous safety protocols, and
invested in safety equipment whilst ensuring employees are
equipped with the knowledge and skills necessary to perform their
roles safely. We 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.
We have a Group target to achieve and maintain an annual LTA
Frequency Rate of below 0.1. This underpins our overarching
commitment to stop all accidents from occurring, through
the promotion of safe behaviours 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, 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 2023, 30 sites (2022: 30) (inclusive of office,
production and testing sites) within the Group were certified to
the ISO 45001 international standard, with additional relevant
sites progressing towards accreditation. Third‑party auditing
on a three‑year certification cycle is required to maintain ISO
accreditation, with annual surveillance audits taking place in
between to ensure standards are being maintained.
HEALTH AND SAFETY PERFORMANCE
We are focused on cultivating a strong safety culture within our
business through emphasising the importance of preventing 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 in improving safety performance.
In 2023, we maintained an average LTA Frequency Rate of less
than 0.1 and continued to prioritise continuous health and safety
improvements in the push for the LTA Frequency Rate of zero. Please
refer to the Health and Safety section of our Non‑Financial KPIs on
page 19 of the Strategic Report.
HUMAN RIGHTS, MODERN SLAVERY
AND HUMAN TRAFFICKING
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
https://www.melroseplc.net/governance/documents‑and‑policies/.
In accordance with the Modern Slavery Act 2015, Melrose publishes
its own Modern Slavery Statement, which is approved by the
Board annually. The latest statement can be found on our website.
GKN Aerospace also is responsible for publishing their own
Modern Slavery Statement in accordance with the requirements
under the Modern Slavery Act 2015, which can be accessed here:
www.gknaerospace.com/en/utilities/modern‑slavery‑statement. This
approach ensures that those senior managers closest to the business
operations devise appropriate measures to ensure that slavery is not
present within supply chains.
Melrose implements employee training with respect to anti‑slavery
and human trafficking, to ensure that all 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. The Human Rights policy can be found
at https://www.melroseplc.net/governance/documents‑and‑policies/.
GKN Aerospace also implements 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 GKN Aerospace
policies are reviewed locally within each business in order to ensure
compliance with local laws and standards as a minimum.
There have been no violations reported on human rights in 2023 or in
the previous two years.
88
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023 GOVERNANCE
ETHICS AND COMPLIANCE
Sound business ethics and integrity, and effective and transparent
governance, 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.
The Melrose Board oversees our robust governance framework
at a Group level, with risk ownership decentralised across
GKN Aerospace’s business lines and functions. This is 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.
GROUP CODE OF ETHICS
AND COMPLIANCE POLICIES
Our commitment to maintaining a responsible and ethical corporate
environment is underscored by a framework that includes robust
financial and non‑financial controls. This framework is further
reinforced by a strong governance structure that is subject to regular
internal reviews and, when necessary, external assessments to
ensure compliance at every level of the Group.
Directors, officers, employees and contractors, whether they are part
of our permanent or temporary workforce, are obligated to uphold
the highest standards of conduct. This entails strict adherence
to Melrose’s Code of Ethics and compliance policies, which are
continually refined to reflect the latest industry best practices and to
uphold the principles of corporate citizenship.
Each individual business line is tasked with the responsibility of not
only complying with our Code of Ethics and compliance policies
but also promoting and embedding them within their day‑to‑day
operations. This approach ensures that every facet of our business
is conducted with integrity, responsibility, and sustainability at
its core, reinforcing our commitment to ethical and responsible
corporate practices.
The 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.
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.
UN SDGs
MATERIAL TOPICS
• Business integrity
• Information Security
• Sustainable supply chain and responsible sourcing
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 operate. Melrose
adopts 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 https://www.melroseplc.net/
governance/documents‑and‑policies/.
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. There were no political donations made during the
year ended 31 December 2023: £0 (2022: £0).
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.
GKN Aerospace takes a number of actions to raise employees’
awareness of the whistleblowing platform, using online and offline
media as appropriate, including through its six dedicated employee
resource groups: Connected Women, Future GKN, LGBTQ+,
African Black Caribbean Professionals, Mastering Neurodiverse
Strengths and Veterans & Reservists. Currently, the total
membership across these groups is nearing 2,000 employees.
89
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023STRATEGIC REPORT SUSTAINABILITY REVIEW CONTINUED
Employees who come forward with a genuine concern are
treated with respect and dignity and do not face retaliation.
During 2023, 84 whistleblowing cases were recorded through
the platform (2022: 78). 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.
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 17 October 2023.
SUSTAINABILITY AND CLIMATE CHANGE
RISK MANAGEMENT
Sustainability risks, including Climate Change, are integrated into
the Company‑wide risk management framework which serves
as the foundation of the Group’s risk management process. The
process includes identification of relevant risks, risk scoring,
development and assignment of appropriate response actions,
monitoring the effectiveness of key mitigating controls and
reporting of the overall risk trend to the Audit Committee each
year. During 2023, the GKN Aerospace sustainability function
re‑assessed climate‑related risks, taking into account the evolving
landscape associated with climate change in the areas of existing
and expected legislation, supplier and consumer preferences,
government policies and commitments, as well as changes in
climatic patterns. The core sustainability team also engaged with
Health, Safety and Environment leaders across GKN Aerospace
to start the assessment and better the understanding of potential
water and biodiversity risks that sites can be exposed to, and
therefore addressing those risks through mitigation actions in
sustainability and environmental plans will be an area of focus in
2024. Risks are typically assessed for likelihood, magnitude of
impact and their strategic impact on the business with a view to
develop mitigating action plans for risks where the risk scoring
exceeds the Group’s tolerance levels. For more information on
governance and management of the Climate Change principal
risk, please refer to our TCFD report on pages 58 to 63. For more
information on our approach to management of principal risks,
please see the Risks and uncertainties section on pages 31 to 36.
90
ENSURING THE HIGHEST STANDARDS OF
PRODUCT QUALITY AND SAFETY
We are committed to ensuring the highest standards of product
quality, reliability and safety. Recognising the importance of protecting
the wellbeing of the ultimate end users of our products, we follow
structured product design and development procedures to ensure
precise delivery to customer specification. As we develop new designs
or update existing designs, we seek opportunities to enhance quality
and safety performance. Every site has active plans and targets
to reduce the risk of non‑conformance and to reduce the cost of
poor quality.
The Group takes a preventative approach to product responsibility
through instilling effective controls and processes around social factors
such as safety and quality assurance, including crisis management
procedures and processes, including, but not limited to, potential
recall programmes.
In 2023, 96% (2022: 95%) of the Group’s product portfolio (by revenue)
was certified to a recognised international quality management
standard of ISO 9001, or EN/AS9100. The relevant certifying bodies
audit the manufacturing facilities and support functions at least
annually, undertaking surveillance audits, and each site is recertified
once every three years. In addition, a number of GKN Aerospace
certified entities also have additional regulatory approvals, including
EASA, FAA and EMAR, covering design, production and repair.
SUPPLY CHAIN MANAGEMENT
We participate responsibly and sustainably within our supply chains
and mitigate the risk of supply chain issues. At a minimum, we source
raw materials and manufacture products in a responsible, ethical and
sustainable manner.
We encourage our suppliers to respect, protect and minimise
their impact on the environment, respect their employees’ human
rights and provide good and safe working conditions across
their operations. In practice, this means that we require 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.
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023 Implementing supplier qualification processes where relevant,
including through various risk assessments, helps identify and
appropriately manage the risks associated with the environmental
and social sustainability of their operations. Through Melrose’s Supply
Chain Policy and GKN Aerospace’s Supplier Code of Conduct, we
set our ambitions to safeguard both human rights and the natural
environment globally and all suppliers are required to comply with the
policy and the Code.
In 2023, Melrose continued to participate in the CDP Supply Chain
engagement initiative, in order to provide an insight into our supplier’s
environmental data and enable efficient tracking of their alignment
with Net Zero. This second year of engagement has generated an
over 70% response rate (2022: 50%) and provided further insights on
suppliers’ environmental data, their energy consumption, emissions
reduction initiatives and climate targets alongside other environmental
data. The selected organisations were reflective of GKN Aerospace’s
largest suppliers by spend, and engagement with them was
therefore important for pinpointing risks and identifying emissions
reduction opportunities. Internal initiatives for streamlining supply
chain management, assessment and engagement are underway
at GKN Aerospace in close collaboration within sustainability,
procurement, finance and site operations functions to facilitate the
data capture and to ensure we were following best practice.
Responsibility for the implementation and management of
supplier‑related governance principles and policies rests with the
GKN Aerospace business lines and their management teams.
Our Group‑level supplier‑related policies include the new Supply
Chain policy, introduced in 2022 (https://www.melroseplc.net/
governance/documents‑and‑policies/).
CONFLICT MINERALS
As set out in the Group Conflict Minerals policy, we 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. We also work with our supply chain
partners to ensure compliance with all applicable laws and
regulations. As a minimum, relevant suppliers are required to
perform due diligence to ascertain whether any 3TG minerals in
products are conflict‑free and complete the Responsible Minerals
Initiative reporting.
91
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023STRATEGIC REPORT SUSTAINABILITY REVIEW CONTINUED
INTERNAL FINANCIAL CONTROLS
AND REPORTING
We have a comprehensive and robust system for assessing
the effectiveness of 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 GKN Aerospace
sustainability function, which runs an established yet 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 business
lines’ management are accountable for achieving progress
on sustainability and climate‑related matters. The quality and
accuracy of ESG data is continually improved against relevant
guidance from prominent international regulatory frameworks
and as tailored for our chosen metrics and targets. In 2023,
we commenced a sustainability data pre‑assurance project in
preparation for formal limited assurance in the coming years.
Horizon‑scanning of applicable external reporting requirements
is conducted regularly to identify the opportunities to strengthen
data management systems and controls and ensure data‑driven
compliance mechanisms.
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.
92
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 Melrose recognises that the Group must
be protected from potential exposures in this area, particularly
considering 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 routinely works with the GKN Aerospace
Chief Information Officer and external cyber security risk consultants
to review the information security and cyber threats risk profile
which is one of our principal risks. This helps to monitor and track
the Group’s exposure to cyber security risk and drive continuous
improvement actions, as well as ensure appropriate compliance with
the General Data Protection Regulation (“GDPR”).
The GKN Aerospace information security strategy and
risk‑based governance framework follows the UK Government’s
recommendations on cyber security. This strategy has enabled risk
profiling and mitigation plans to be developed to mitigate and reduce
exposure to cyber risk. This ensures clarity and consistency in the
assessment of IT and cyber security matters. Progress is measured
against the information security strategy and is monitored on a
quarterly basis. To mitigate the impact of external cyber‑attacks, the
Melrose senior management team works with the GKN Aerospace
Chief Information Officer and external cyber security risk consultants.
The results of this ongoing review programme are reported to the
Board on a regular basis. The Board, supported by the Melrose
senior management team, oversee the Group’s cyber security
risk profile, and requires each business function to protect any
commercial or personal information ensuring safe and appropriate
usage of their IT systems and processes by their employees.
Regular internal and external testing of perimeter defences through
penetration testing is undertaken, ensuring appropriate threat
monitoring systems are in place. We work towards national and
international business accreditations in varying aspects of cyber
management where applicable and relevant to our business activities,
including the UK’s National Cyber Security Strategy (“NCSS”), ISO
27001, and industry‑specific National Institute of Standards and
Technology (“NIST”). As part of Melrose’s overall information security
strategy, IT security awareness training in various forms was provided
consistently across the business in 2023 to all its employees.
96%
of the Group’s product portfolio (by revenue)
was certified to a recognised international
quality management standard of ISO 9001,
or EN/AS9100 (2022: 95%)
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023 ABOUT THIS REPORT
REPORTING STANDARDS
This report has been prepared with reference to the
following frameworks, standards and guidelines:
• Group sustainability targets and commitments have
been aligned to the United Nations Sustainability
Development Goals (“UN SDGs”).
• Additional disclosure on our sustainability
performance has been prepared in line with the
Sustainability Accounting Standards Board (“SASB”)
requirements for Aerospace and Defence sector
standards.
• Energy and emissions reporting has been prepared
in accordance with the principles and requirements
of the Greenhouse Gas (“GHG”) Protocol Revised
Edition, ISO 14064 Part 1 and the Environmental
Reporting Guidelines, including the Streamlined
Energy and Carbon Reporting guidance dated
March 2019. The GHG Protocol standard covers
the accounting and reporting of seven Greenhouse
gases covered by the Kyoto Protocol.
REPORTING BOUNDARIES, SCOPE
AND BASIS OF PREPARATION
Unless otherwise stated, our sustainability
reporting covers all entities in which the Group has
operational control. Data from entities disposed of
during the reporting period (i.e., disposed of before
31 December 2023) are not accounted for in this section
in respect of the FY 2023 data and all previous years.
INTERNAL DATA CONTROLS
All reported figures represent the latest available
internal data, unless otherwise specified. Some of the
totals presented may reflect the rounding down or up
of subtotals. Melrose has a central internal reporting
system which captures and records the ESG data
alongside financial and operational metrics used in this
report. All data is subject to quarterly internal reviews
by subject matter experts at business line level.
93
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023STRATEGIC REPORT NON‑FINANCIAL AND SUSTAINABILITY INFORMATION STATEMENT
In addition to the operational and financial improvements that we implement
within our business, we recognise our responsibility to improve our
non‑financial performance, focusing on long‑term sustainable value creation
for the aerospace sector and all of our stakeholders.
Our efforts to improve non‑financial and sustainability performance 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 we deliver upon their expectations.
This section of the Strategic Report constitutes the Group’s Non‑Financial and Sustainability Information Statement for the purposes of
sections 414CA and 414CB of the Companies Act 2006. The information listed is incorporated by reference.
Reporting
requirement
Stakeholders
Environmental
matters
Policies and standards that govern our approach
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. Melrose
now operates as a pureplay aerospace business. 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 43 to 93 sets out our approach in respect
of the environment and climate change, and provides examples of the actions
we are taking to contribute to the decarbonisation of the aerospace sector, to
promote energy efficiency, decarbonise our operations and supply chain, and to
reduce waste and water consumption.
As we transition to a net zero economy by 2050, we have reset our sustainability
targets and commitments to focus on immediate tangible improvements. These
targets are supported by our four overarching sustainability principles, being
aligned with our new material sustainability topics as identified within our double
materiality assessment in 2023. For more information on our new sustainability
targets, please see pages 48 to 51 of the Sustainability review. In 2023, we
also updated our Net Zero Transition Plan, prepared in accordance with the UK
Transition Plan Taskforce’s (“TPT”) guidance. 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 by 2050.
As part of our third year of reporting against the Task Force on Climate‑related
Financial Disclosures (“TCFD”) framework, we recalibrated our initial 2021
climate‑scenario assessment of climate‑related risks and opportunities to
focus on the aerospace sector, providing more sector aligned disclosure to
shareholders and other stakeholders.
Principal Group
Risk
• n/a
• Climate change
• Legal and
regulatory
Where you can find more
2023 Annual Report
• Our strategy and
business model
• Our strong track record
• Board stakeholder
engagement and
decision‑making
(Section 172 statement)
• Sustainability review
2023 Annual Report
• Board stakeholder
engagement and
decision‑making
(Section 172 statement)
• Sustainability review
• Melrose Group Task Force
on Climate‑related Financial
Disclosures (“TCFD”)
Group Policies
• Conflict Minerals policy
• Environmental policy
• Biodiversity policy
• Water policy
• Supply Chain policy
Employees
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 43 to 93 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.
• Operations
• Loss of key
management
and capabilities
• Legal and
regulatory
• Treasury
2023 Annual Report
• Board stakeholder
engagement and
decision‑making
(Section 172 statement)
• Sustainability review
• Nomination Committee
We are committed to building a diverse workforce at all levels and creating an
inclusive culture for all. Our Sustainability review on pages 43 to 93 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 divisional
executive teams.
An annual all‑employee engagement survey is undertaken across the Group in
order to collate the views of employees and identify areas of strength and those
in need of development. The Board receives a summary of these results, and
is provided with feedback on how employees’ views are taken into account in
executive decision making.
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
94
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023 Reporting
requirement
Respect for
human rights
Policies and standards that govern our approach
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 which drives the implementation
of effective and proportionate measures to identify, assess and mitigate potential
labour and human rights abuses across our operations and supply chain. The
Group supports the principles set out in the UN Declaration of Human Rights.
We take a zero‑tolerance approach to any form of modern slavery or human
trafficking and are committed to investing in 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 43 to 93.
Principal Group
Risk
Where you can find more
• Legal and
regulatory
2023 Annual Report
• Sustainability review
Group Policies
• Modern Slavery Statement
• Whistleblowing policy
• Anti‑slavery and Human
Trafficking policy
• Human Rights policy
• Supply Chain policy
Social
matters and
communities
Our Sustainability review on pages 43 to 93 details our approach to supporting
communities. There you can find out more information on our policies, schemes,
charity programmes and initiatives that support it.
• n/a
2023 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
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 operate.
Melrose follows 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
2023 Annual Report
• Sustainability review
Group Policies
• Code of Ethics
• Anti‑Bribery and Corruption
policy
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/governance/documents‑and‑policies.
Additional information
Where you can find more
Description of principal Group risks and
impact of business activity
Risk management
Risks and uncertainties
Description of the business model
Our business model
Financial and non‑financial KPIs
Key performance indicators
20 years of Melrose
Why aerospace? Why now?
The Strategic Report, as set out on pages 1 to 95, has been approved by the Board.
Pages 28 to 30
Pages 31 to 36
Pages 14 to 15
Page 16
Page 17
Pages 18 to 19
On behalf of the Board:
Peter Dilnot
Chief Executive
7 March 2024
95
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023STRATEGIC REPORT GOVERNANCE
IN THIS SECTION
Governance overview ............................... 98
Board of Directors ................................... 102
Directors’ report ...................................... 104
Corporate Governance report ................. 109
Audit Committee report ...........................116
Nomination Committee report .................124
Directors’ Remuneration report ................128
Statement of Directors’ responsibilities ....153
96
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023 97
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023GOVERNANCE 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 2023. 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.
Melrose is now a pureplay aerospace business. As a result,
succession planning for the executive Directors was a key focus for
the Nomination Committee and the Board in 2023. In particular, the
Board, with the support of the Nomination Committee, approved
Mr Simon Peckham and Mr Geoffrey Martin stepping down as
Melrose Chief Executive Officer and Group Finance Director with
effect from 6 and 7 March 2024 respectively, to be replaced by
Mr Peter Dilnot and Mr Matthew Gregory as Chief Executive
Officer and Chief Financial Officer respectively. The Committee
considers that these changes provide strong management
continuity. Mr Dilnot has served as Melrose Chief Operating Officer
since April 2019 as well as serving as Chief Executive Officer of
GKN Aerospace for periods during his tenure, most recently from
October 2023 onwards. Mr Gregory has served as Chief Finance
Officer of GKN Aerospace since September 2022. Mr Peckham,
Mr Martin, Mr Christopher Miller and Ms Victoria Jarman will not
stand for re‑election as Directors at the 2024 AGM.
During the year, Ms Funmi Adegoke, Non‑executive Director,
resigned from the Board following her appointment to an executive
role at Halma plc. The Board appointed Ms Gillian Elcock as
a Non‑executive Director of the Board in June 2023 after the
completion of a thorough recruitment process conducted by
an external recruitment consultancy firm which, other than
providing recruitment consultancy services to the Group, has no
commercial dealings or other connection with the Melrose Group
or its Directors. Ms Elcock has extensive asset management and
investment research experience, including in the aerospace and
defence sector. There were no other changes made to the Board’s
composition during 2023. Biographies for the Directors of the
Company as at the date of this Annual Report can be found on
pages 102 to 103.
As previously announced, my tenure will end in 2025, and the
Board has commenced a search for my successor led by our
Senior Independent Director, David Lis. I will therefore be standing
for re‑election at the 2024 AGM as planned, with a view to support
the transition to the new Chair prior to their appointment in 2025.
Furthermore, succession planning arrangements for the Board as
a whole were reviewed and considered in 2023. This included a
review and discussion of the skill set of the Directors in light of the
change in business strategy of the Company, as well as a review
of the tenure, diversity and independence of those already on the
Board. This review allowed the Nomination Committee to satisfy
itself that the right balance of skills, experience and diversity are
reflected and being developed, and that the composition of the
Board is consistent with the Board of Directors’ Diversity policy.
The Nomination Committee report on pages 124 to 127 contains
further details on how succession planning arrangements for the
Board and the Melrose senior management team were reviewed
and considered during 2023.
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 2023 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.
98
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023 MAIN RESPONSIBILITIES OF THE BOARD
The main responsibilities of the Board are to:
• effectively manage and control the Company via a formal schedule of
• oversee the Group’s risk management and internal control systems;
• determine the nature and extent of the risks the Group is willing
matters reserved for its decision;
to take;
• define the Group’s purpose, determine and review Group strategy
• agree the Group’s governance framework and approve Group
and policy to deliver that purpose, and provide strategic leadership to
the Group;
compliance policies;
• monitor, assess and review cyber security and fraud risk for the
• set the Group’s values and behaviours that shape its culture and the
Group;
way it conducts business;
• consider acquisitions, disposals and requests for major capital
• review financial and trading performance in line with the Group’s
expenditure;
strategic objectives;
• ensure that adequate funding and personnel are in place;
• engage with stakeholders and key shareholders on issues that are
• 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
most important to the long‑term success of the Company;
key decisions, actions and processes within the Group;
• oversee the effective operation of the Workforce Advisory Panel in
• promote the long‑term success of the Company for the benefit
ensuring the views of the workforce are considered in its discussions
and decision‑making;
of shareholders as a whole, having regard to a range of other key
stakeholders and interests; and
• report to shareholders and give consideration to all significant
• oversee and retain ultimate responsibility for Melrose’s enhanced
financial matters;
• agree Board succession plans and consider the evaluation of the
Board’s performance over the preceding year;
sustainability and climate‑related initiatives, disclosure and reporting
in respect of improving the sustainability performance of its
businesses.
GOVERNANCE STRUCTURE(1)
Non‑executive Chairman
Executive Directors
Non‑executive Directors
Audit Committee page 116
Nomination Committee page 124
Remuneration Committee page 128
DIVERSITY AND SKILLS OVERVIEW(2)
8
7
6
1
5
2
3
4
Board Skills
1 Accounting and Finance
2 Aerospace
3 Aviation
4 Corporate Governance
5 Industrial
6 Investment
7 Legal
8 Sustainability (Environmental and Social)
7
3
3
5
6
9
2
4
1
1
2
2
Board gender diversity
Board ethnic diversity
1 Male
2 Female
60%
40%
1 White
2 Ethnically diverse
90%
10%
1
1
2
2
Melrose Executive Committee
Melrose Executive Committee and direct reports
1 Male
2 Female
63%
37%
1 Male
2 Female
(1) Please refer to page 3 for details of changes to the Melrose Board.
(2) Diversity data as at 31 December 2023.
59%
41%
99
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023GOVERNANCE GOVERNANCE OVERVIEW CONTINUED
Sustainability
The Board is mindful of its responsibilities regarding climate change
and sustainability, 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 43 to 93. The Company
has carefully considered how it can strategically address matters
relating to sustainability in the most efficient and appropriate way. The
Board oversees and retains ultimate responsibility for the Group’s
strategy, initiatives, and disclosure in respect of improving the Group’s
sustainability performance. The Board receives regular training at
least annually on key sustainability and climate‑related issues, 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 and climate change are also a
standing topic on the Board’s quarterly agenda.
As part of the renewal of the Directors’ Remuneration Policy in 2023,
the Remuneration Committee further integrated ESG metrics into
executive remuneration as a standalone element of the annual bonus.
Please see the Directors’ Remuneration report on pages 128 to 152
for further details.
Risk management and internal control
Melrose has implemented a Group Enterprise Risk Management
programme, with complementary processes and procedures. During
2023, 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.
Management, with support from external advisors, continued to
utilise a third‑party hosted interactive dashboard which has been
tailored to the requirements of the Group in order to consolidate
the Group’s risk reporting. The dashboard includes data from
GKN Aerospace’s risk register, which was reviewed and approved
by GKN Aerospace’s senior management key risk owners. The
dashboard has supported the continued enhancement of the
Group’s risk management processes, with in‑depth reporting and
data collection. The outputs have informed management’s reporting
to the Audit Committee and has bolstered the Audit Committee’s
oversight of risk areas, mitigations, controls and trends. Furthermore,
it has helped to guide the Audit Committee on relevant updates to the
Group’s principal risks (including assessing, for discussion with the
Board, any new and/or emerging principal Group risks), as reported
in the Risks and uncertainties section on pages 31 to 36.
Full details on the Group’s approach to risk management can be
found in the Risk management section on pages 28 to 30, and in the
Audit Committee report on pages 116 to 123.
Melrose Executive Committee
The Melrose Executive Committee operates under the direction
of the Chief Executive Officer. 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, including the executive Directors. Its key roles are to ensure
that there is full knowledge of, and coordination between, the
Melrose corporate team and the GKN Aerospace business lines,
including in respect of the Group’s key transformation projects, as
well as 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.
Remuneration
The Directors’ Remuneration report, comprising the annual
statement from the Chairman of the Remuneration Committee, the
Annual Report on Remuneration and the proposed 2024 Directors’
Remuneration Policy, is available on pages 128 to 152.
Our long‑standing executive remuneration structure has
traditionally been characterised by setting salary, benefits and
annual bonuses below the lower quartile of our FTSE 100 peers,
with the opportunity for significant reward being weighted towards
long‑term incentivisation. This approach has been entirely
appropriate in complementing our “Buy, Improve, Sell” strategy
and has been central to the success that has been delivered for
our shareholders. It has also been both well understood and well
supported by our investors, as most recently demonstrated by the
votes in favour of the 2022 Directors’ Remuneration Report and the
2023 Directors’ Remuneration Policy at the 2023 AGM.
With Melrose’s strategy having shifted from its previous “Buy,
Improve, Sell” model to becoming an aerospace business
for the long term, now is the appropriate time to realign the
Company’s executive remuneration structure to reflect our new
strategic direction, subject to approval by shareholders of the
2024 Directors’ Remuneration Policy. Our new strategy remains
focused on value creation, driven by operational and financial
improvement over the longer term. Our positive trajectory is
underpinned by leading positions on the world’s major aircraft
platforms, strong organic growth prospects within the aerospace
sector, and attractive opportunities to differentiate our business
through cutting‑edge proprietary technology that is already
shaping the future of flight. To support this change in strategy,
the Board believes that the new executive management team
should be remunerated under a structure that resembles more
closely Melrose’s FTSE 100 peers. In particular, we propose to
rebalance Melrose’s weighting of fixed to variable remuneration,
and of medium‑ to longer‑term incentivisation, using a structure
reflective of the majority of FTSE 100 companies, including through
the introduction of a performance share plan which will replace the
Melrose Employee Share Plan as the Group’s ongoing long‑term
incentive plan. We have engaged with key shareholders and
other stakeholders in relation to the proposed 2024 Directors’
Remuneration Policy as further described on page 129.
Melrose’s remuneration philosophy remains unchanged in
order to align senior management with shareholders: executive
remuneration should be simple, transparent, support value creation
and pay only for performance.
100
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023 Ethics and compliance
Our Code of Ethics (which can be found at www.melroseplc.net/
governance/documents‑and‑policies) 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.
The principles outlined in our Code of Ethics are embedded within
the Group, and mechanisms and policies are in place for anyone to
whom the Code of Ethics applies to seek guidance on interpreting its
principles, where required.
The Code of Ethics is supported by Group compliance 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 Code of Ethics and Group compliance
policies is supported by a combination of risk assessment
requirements, training and ongoing monitoring to ensure their
effectiveness for the Group. Taken together, these initiatives have
enhanced our business’s 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 28 to 30.
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 43 to 93. Supporting our 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 compliance reviews where required.
Engagement with stakeholders
In 2023, 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.
Stakeholder engagement was considered particularly important in
2023 following the Company’s change in business strategy. The
Company held a successful capital markets event in May 2023 to
provide further information on the Company’s new strategy, and
the executive Directors also engaged with key investors on the new
strategy as part of the investor roadshow programme.
Melrose also continued with a variety of workforce engagement
initiatives, most notably through its Workforce Advisory Panel
(“WAP”), which met twice in 2023. The purpose of the WAP is to
promote effective engagement with, and encourage participation
from, the Group’s workforce. The WAP comprises the Chief Human
Resources Officer and Group General Counsel from Melrose
and GKN Aerospace and other relevant internal stakeholders as
required as the Group’s new business strategy and integrated
structure evolves. Each member of the WAP is responsible for
promoting workforce engagement, disseminating information
and collating the voice of their workforce. 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 2024. 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 37 to 42.
Justin Dowley
Non‑executive Chairman
7 March 2024
101
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023GOVERNANCE BOARD OF DIRECTORS
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. As previously announced,
Mr Dowley’s tenure will end in 2025, and a search for his successor has been
commenced. Mr Dowley will be standing for re‑election at the Company’s Annual
General Meeting on 2 May 2024 (the “2024 AGM”) as planned, with a view to
support the transition to the new Chairman prior to their appointment in 2025.
Skills and experience
Mr Dowley has extensive experience with over 35 years spent within the
banking, investment and asset management sectors. A chartered accountant,
Mr Dowley 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.
Year appointed
Appointed as an executive Director on 1 January 2021, having served
as Chief Operating Officer since April 2019. Mr Dilnot was appointed as
Chief Executive Officer on 6 March 2024.
Skills and experience
Mr Dilnot has been at Melrose since April 2019. As well as serving as an executive
Director and Chief Operating Officer during this time, he has also fulfilled the
role of Chief Executive Officer of GKN Aerospace for periods during his tenure,
most recently from October 2023. Mr Dilnot 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. He also spent seven
years at the Boston Consulting Group in London and Chicago, working primarily
with industrial businesses. Mr Dilnot has an engineering and aviation background,
and started his career as a helicopter pilot in the British Armed Forces. He also
holds a degree in Mechanical Engineering.
Year appointed
Mr Gregory was appointed as an executive Director on 7 March 2024, joining the
Board as Chief Financial Officer. He will stand for election for the first time at the
2024 AGM.
Skills and experience
Mr Gregory has extensive knowledge of GKN Aerospace, having served as
Chief Financial Officer of GKN Aerospace since September 2022. Matthew is a
seasoned Chief Financial Officer, with considerable public company leadership
experience, having served as both Chief Executive Officer and Chief Financial
Officer of FirstGroup plc and Chief Financial Officer of Essentra plc. Matthew
has strong strategic and operational expertise, including in driving strategy and
operational turnaround in complex multinational listed companies, alongside
international and corporate development experience. Mr Gregory is a qualified
chartered accountant having started his career at Ernst & Young, working in
London and Milan.
Board meetings attended(1)
Business reviews attended
4
3
Other significant appointments
• Chair 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)
Board meetings attended(1)
Business reviews attended
Other significant appointments
• Trustee of Autistica
Yes
12 years
4
3
Independent
Tenure(2)
Not applicable
Not applicable
Board meetings attended(1)
Not applicable
Business reviews attended
Not applicable
Other significant appointments
None
Independent
Tenure(2)
Not applicable
Not applicable
Justin Dowley
Independent
Non‑executive Chairman
Peter Dilnot
Chief Executive Officer
Matthew Gregory
Chief Financial Officer
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 Chair of the
Remuneration Committee on 1 January 2019.
Skills and experience
Mr Lis has held several senior roles in investment and fund management, as
well as other board appointments. He brings extensive financial experience
to the Board. Mr Lis commenced his career at NatWest, and held positions
at J Rothschild Investment Management and Morgan Grenfell after which
David founded Windsor Investment Management. David joined Norwich Union
Investment Management in 1997 (later merging to form Aviva Investors), before
becoming Head of Equities in 2012 and latterly Chief Investment Officer, Equities
and Multi Assets, until his retirement in March 2016.
Board meetings attended(1)
Business reviews attended
4
3
Other significant appointments
• Chairman of Windar Photonics Plc
• Senior Independent Director of Hostmore plc
• Director of a number of private companies
Committee membership
• Audit • Nomination
• Remuneration (Chair)
Independent
Tenure(2)
Yes
7 years
David Lis
Senior Independent Director
Year appointed
Appointed as a Non‑executive Director on 1 October 2018 and Chair of the
Nomination Committee on 1 January 2022.
Skills and experience
Ms Twyning 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 and transportation. Ms Twyning has proven leadership and
operational 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.
Board meetings attended(1)
Business reviews attended
4
3
Other significant appointments
• Governor of the Museum of London
Committee membership
• Audit • Nomination (Chair)
• Remuneration
Independent
Tenure(2)
Yes
5 years
Charlotte Twyning
Independent
Non‑executive Director
102
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023
Year appointed
Appointed as a Non‑executive Director on 1 June 2021 and Chair of the
Audit Committee on 5 May 2022.
Skills and experience
Mrs Lawrence 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. Mrs Lawrence has significant non‑executive
directorship experience, including as non‑executive director of Antofagasta PLC
and non‑executive director and audit committee chair of FlyBe Group plc.(3)
Board meetings attended(1)
Business reviews attended
4
3
Other significant appointments
• Non‑executive Director of Antofagasta PLC
Committee membership
• Audit (Chair)
Independent
Tenure(2)
Yes
2 years
Year appointed
Appointed as a Non‑executive Director on 1 June 2021.
Skills and experience
Ms Jarman is a chartered accountant who qualified at KPMG before spending
over ten years with Lazard Ltd working in the investment banking team and then
as Chief Operating Officer for the London and Middle East operations until 2009.
Ms Jarman has previously been a non‑executive director of Equiniti Group plc,
Hays plc and De La Rue plc, a Non‑Executive Director of Signature Aviation plc
and Entain plc and Senior Independent Director at Equiniti Group plc. Ms Jarman
will not be standing for re‑election at the 2024 AGM.
Board meetings attended(1)
Business reviews attended
4
3
Other significant appointments
• Non‑executive Director of Great Portland
Estates plc
Committee membership
• Audit • Nomination • Remuneration
Independent
Tenure(2)
Yes
2 years
Year appointed
Appointed as a Non‑executive Director on 21 June 2023.
Skills and experience
Ms Elcock has extensive asset management and investment research
experience, including covering the aerospace and defence sector. Ms Elcock
is the founder and former Managing Director of Denny Ellison, an independent
investment research and training company. She also brings insight gained from
several non‑executive director roles.
Board meetings attended(1)(4)
Business reviews attended(4)
2
1
Other significant appointments
• Non‑executive Director of International
Biotechnology Trust Plc
• Non‑executive Director of STS Global
Income & Growth Trust plc
• Member of the Board of the CFA UK
• Non‑executive Director of Octopus Apollo
VCT plc
Committee membership
• Audit • Nomination • Remuneration
Independent
Tenure(2)
Yes
0 years
Heather Lawrence
Independent
Non‑executive Director
Victoria Jarman
Independent
Non‑executive Director
Gillian Elcock
Independent
Non‑executive Director
Former Directors
Christopher Miller
Former Executive Vice‑Chairman
Co‑founder of Melrose, appointed as Executive Vice‑Chairman on
1 January 2019, having previously served as Executive Chairman from May 2003.
Mr Miller stepped down from the Board on 7 March 2024 and therefore will not be
standing for re‑election at the 2024 AGM.
Board meetings attended(1)
Business reviews attended
Other significant appointments
None
Simon Peckham
Former Chief Executive
Co‑founder of Melrose, appointed as Chief Executive on 9 May 2012, having
previously served as Chief Operating Officer from May 2003. Mr Peckham
stepped down from the Board on 7 March 2024, and therefore will not
be standing for re‑election at the 2024 AGM.
Board meetings attended(1)
Business reviews attended
Other significant appointments
None
Geoffrey Martin
Former Group Finance Director
Appointed as Group Finance Director on 7 July 2005. Mr Martin stepped down
from the Board on 7 March 2024, and therefore will not be standing for re‑election
at the 2024 AGM.
Board meetings attended(1)
Business reviews attended
Other significant appointments
• Executive Director of Dowlais Group plc
(1) Meetings attended refers to scheduled meetings.
(2) Tenure runs from the date of appointment until 31 December 2023 and is based on full years only.
(3) Ms Lawrence was also a non‑executive director of Coats Group PLC until 31 March 2023.
(4) Ms Elcock was appointed to the Board on 21 June 2023. She has attended all Board and applicable meetings and business reviews since her appointment. She will stand for
election for the first time at the 2024 AGM.
4
3
4
3
4
3
103
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023GOVERNANCE
DIRECTORS’ REPORT
The Directors of Melrose Industries PLC
present the Annual Report and financial
statements of the Group for the year
ended 31 December 2023.
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.
Incorporated information
The Corporate Governance report set out on pages 109 to 115, the
Finance Director’s review on pages 20 to 27, and the Sustainability
review on pages 43 to 93 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 2 May 2024. 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 240 to 242 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 102 to 103.
Changes to the Board during the year are set out in the
Governance overview on pages 98 to 101 and the Corporate
Governance report on pages 109 to 115. Details of Directors’
service contracts are set out in the Directors’ Remuneration report
on pages 128 to 152.
The Statement of Directors’ responsibilities in relation to the
consolidated financial statements is set out on page 153, 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.
Mr Simon Peckham, Mr Geoffrey Martin, Mr Christopher Miller and
Ms Victoria Jarman will not stand for re‑election by shareholders
at this year’s AGM. With the exception of Mr Matthew Gregory and
Ms Gillian Elcock, who are standing for election for the first time,
all of the remaining 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.
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 provide cover in the event that a
Director is proved to have acted dishonestly or fraudulently.
Post balance sheet events
On 1 March 2024, the Group completed the disposal of its Fuel
Systems business for £50 million, before costs and other deductions.
Capital structure
In connection with the demerger of Dowlais Group plc (the
“Demerger”), the ordinary share capital of the Company was
consolidated (the “Share Capital Consolidation”). Recognising that
the Demerger involved the extraction of businesses from the Group
which accounted for a significant proportion of the Company’s market
capitalisation, the Share Capital Consolidation was undertaken in
order to enable the post‑Demerger share price of both the Company
and the new demerger entity, Dowlais Group plc (“Dowlais”), to initiate
at sensible levels.
The Share Capital Consolidation was effected by each holding of
three existing ordinary shares of 160/21 pence in the capital of
the Company being consolidated into one new ordinary share of
160/7 pence in the capital of the Company. The record date for the
Share Capital Consolidation was 6.00 pm on 19 April 2023 and the
new ordinary shares were admitted to listing and trading at 8.00 am
on 20 April 2023. Subject to allowance for fractional entitlements,
shareholders continued to own approximately the same proportion of
the ordinary share capital of the Company before and after the Share
Capital Consolidation.
The Share Capital Consolidation was approved by shareholders
of the Company at a general meeting of the Company held on
30 March 2023.
Additionally, the Company commenced a share buyback programme
on 2 October 2023, which is intended to be conducted over a
period of 12 months, and will end no later than 1 October 2024
(the “Share Buyback”). 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 8 June 2023,
the Share Buyback is limited to 202,586,150 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 continuation of the Share Buyback
beyond the conclusion of this year’s AGM is subject to the Company
obtaining approval for a new General Authority from shareholders at
this year’s AGM.
The ordinary shares in the Company repurchased as part of
the Share Buyback are intended to be either held in treasury or
cancelled. As at 31 December 2023, 18,761,840 ordinary shares had
been repurchased, all of which are currently held in treasury, meaning
that the Company had 1,351,475,321 ordinary shares in issue as
at 31 December 2023, with 18,761,840 of these shares being held
in treasury.
104
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023 The table below shows details of the Company’s issued share capital
as at 31 December 2022; following the Share Capital Consolidation;
and as at 31 December 2023.
Share class
Ordinary shares of
160/21 pence each
Ordinary shares of
160/7 pence each
31 December
2022
19 April 2023
Post Share Capital
Consolidation(1)
31 December
2023
4,054,425,961
Nil
Nil
n/a
1,351,475,321
1,351,475,321
The Company’s sole class of ordinary shares is admitted to the
premium segment of the official list.
Shareholders’ voting rights
Subject to any special rights or restrictions as to voting attached to
any class of shares by or in accordance with the Articles, at a general
meeting of the Company, each member who holds ordinary shares
in the Company and who is present (in person or by proxy) at such
meeting is entitled to:
• on a show of hands, one vote; and
• on a poll, one vote for every ordinary share held by them.
There are currently no special rights or restrictions as to voting
attached to any class of shares.
The Company is not aware of any agreements between shareholders
that restrict voting rights attached to the ordinary shares in the
Company.
Where any call or other amount due and payable in respect of an
ordinary share remains unpaid, the holder of such shares shall not
be entitled to vote at or attend any general meeting of the Company
in respect of those shares. As at 7 March 2024, 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 2024 AGM are set out in the AGM
Notice on pages 240 to 242.
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 approved by the relevant
investment exchange, provided such refusal would not disturb
the market in such shares. Restrictions may also be imposed by
laws and regulations (such as insider trading and market abuse
provisions). Directors and certain senior employees of the Group
may also be subject to internal approvals before dealing in ordinary
shares of the Company and minimum shareholding requirements.
The Company does not have any anti‑takeover devices in place,
including devices that would limit share ownership.
The Company is not aware of any agreements between
shareholders that restrict the transfer of ordinary shares in the
Company.
Articles of association
The Articles may only be amended by a special resolution at
a general meeting of the shareholders of the Company. There
are no amendments proposed to be made to the Articles at the
forthcoming AGM.
Substantial shareholdings
As at 31 December 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, had
been notified to the Directors:
Shareholder
Shareholding(2)
% of ordinary
share capital as at
31 December
2023(2)
The Capital Group Companies, Inc.
256,866,618
19.01%
BlackRock Inc
Select Equity Group Inc
Norges Bank
Aviva plc
Bank of America Corporation
Permian Investment Partners, LP
94,720,155
67,196,570
81,260,011
118,577,085
131,232,533
38,240,723
7.00%
4.97%
6.06%
2.92%
3.24%
2.85%
(1) To effect the Share Capital Consolidation, two ordinary shares of 160/21 pence each were allotted and issued to Investec Bank plc on 19 April 2023 at 163.125 pence per share,
being the closing mid‑market price of an ordinary share on 19 April 2023, in order to ensure that the number of ordinary shares of the Company was exactly divisible by three. These
ordinary shares were issued pursuant to the general authorities granted by the Company’s shareholders in accordance with section 551 and section 570 of the Act at the Company’s
AGM held on 5 May 2022. The terms of this issue were fixed on 19 April 2023 following a meeting of a committee of the Board. These ordinary shares were subject to the Share
Capital Consolidation.
(2) Where the holding of shares has not been re‑notified to Melrose since the Share Capital Consolidation, the number of shares and percentage of ordinary share capital is as notified
to Melrose prior to this consolidation. In addition, where the holding of shares was notified to Melrose prior to commencement of the Share Buyback and has not been re‑notified to
Melrose since the commencement of the Share Buyback, and where the holding of shares was notified to Melrose after commencement of the Share Buyback, the number of shares
and percentage of ordinary share capital is as notified to Melrose.
105
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023GOVERNANCE DIRECTORS’ REPORT CONTINUED
Shareholder dividend
The Directors are pleased to recommend the payment of a final
dividend of 3.5 pence per share (2022: second interim dividend
of 1.5 pence per share)(1) to be paid on 8 May 2024 to ordinary
shareholders on the register of members of the Company at the
close of trading on 2 April 2024. This dividend recommendation will
be put to shareholders at the forthcoming AGM of the Company,
to be held on 2 May 2024. Subject to shareholder approval being
obtained at the AGM for the final dividend, this will mean a full year
2023 dividend of 5.0 pence per share (2022: 2.325 pence).
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 20 to 27, the Risks
and uncertainties section of the Strategic Report on pages 31 to 36,
and in note 25 to the financial statements, which are incorporated by
reference into this Directors’ report.
For discussion on the Board’s intentions with regard to the
Company’s dividend policy, please see the Chairman’s statement
on pages 2 to 3, 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
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 2023, the total amount of dividends of GKN Limited
remaining unclaimed for more than 12 years was £244,458.77. If
the unclaimed dividends are not claimed by 30 June 2024, 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
8 June 2023, the Company is authorised to make market
purchases of up to 202,586,150 of its ordinary shares, representing
approximately 14.99% 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 104, the
Company commenced the Share Buyback on 2 October 2023. As
at 31 December 2023, 18,761,840 ordinary shares of the Company
had been 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 2024 AGM, the Company is seeking approval to make
market purchases of its ordinary shares up to 197,373,991, being
approximately 14.99% of the issued ordinary share capital of the
Company (excluding treasury shares) as at the latest practicable
date prior to notice of AGM, thereby renewing the authority.
The continuation of the Share Buyback beyond the conclusion
of this year’s AGM is therefore subject to this authority being
renewed. The full text of the resolution, together with minimum
and maximum price requirements, is set out in the AGM Notice on
pages 240 to 242.
Research and development activities
The aerospace industry is highly competitive and as such the Group
researches and develops 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 Sustainability review on pages 43 to 93, which is
incorporated by reference into this Directors’ report, investment into
research and development activities continued throughout 2023.
GKN Aerospace is a technology leader in aerostructures, engine
structures and wiring systems. Its lightweight composites, additive
manufacturing, innovative engine systems and smart transparencies
help to reduce emissions and weight on the aircraft and enhance
passenger comfort, pushing the boundaries for the next generation
of aircraft. It is at the forefront of many research and developments
partnerships and industry collaboration programmes, including
the development of a ground‑breaking liquid hydrogen technology
as part of its £54 million collaborative H2GEAR programme which
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.
Other examples include the Future of Flight Challenge for Innovate
UK where GKN Aerospace leads in the development of safe
system design, manufacturing and operational knowledge for
liquid hydrogen fuel systems; development of an out‑of‑autoclave
technology, addressing the energy intensive nature of composite
material structures to enable their wider application for lowering an
aircraft’s CO2 emissions through their reduced weight and additional
benefits such as material toughness, high processing speeds and
recyclability; work with Eviation on an experimental electric aircraft,
providing expertise for the integration of large‑scale components; as
well as industry collaboration to develop a hydrogen gas generation
solution which aims to substitute natural gas with combined H2
generation and hydrogen storage technologies, thus reducing
reliance on fossil fuels.
The Melrose Skills Fund has also funded initiatives within the Group
and in the wider community. Further details on these initiatives are set
out in the Sustainability review on pages 43 to 93.
(1) The Company paid a second interim dividend of 1.5 pence per share to replace the final dividend which would normally have been approved at the Company’s 2023 AGM.
This second interim dividend was paid on 11 April 2023, prior to the Demerger, to ordinary shareholders on the register of members of the Company at the close of trading on
10 March 2023.
106
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023 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 2 to 3 and the
Strategic Report on pages 1 to 94 of this Annual Report (including
the Longer‑term viability statement on page 27 and the Risks and
uncertainties section on pages 31 to 36), 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. The WAP comprises the Chief Human
Resources Officer and Group General Counsel of Melrose and
GKN Aerospace and other relevant internal stakeholders as required
as the Group’s new business strategy and integrated structure
evolves. 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 2023, are highlighted in the Sustainability review
on pages 43 to 93 and in the Section 172 statement set out in the
Strategic Report on pages 37 to 42, both of which are incorporated
by reference into this Directors’ report.
Diversity Policies
The Company acknowledges that diversity, equity and inclusion is
a changing landscape, and the Nomination Committee reviews its
diversity policies on an annual basis, with any recommendations
for amendments being approved by the Board. The policies, which
can be viewed on the Company’s website at www.melroseplc.net/
governance/documents‑and‑policies include a Board of Directors’
Diversity policy and a Melrose Diversity, Equity and Inclusion policy.
The Board of Directors’ Diversity policy sets out the Nomination
Committee’s commitment to ensuring that Board membership and
pipeline for succession remains diverse, which is equally applicable
to each of the Board’s committees. It also sets out the Company’s
diversity targets for the Board. The Melrose Diversity, Equity and
Inclusion policy, which is applicable to all Melrose employees, sets
out the Company’s position on diversity, equity and inclusion in its
workforce. Further details can be found in the Nomination Committee
report on pages 124 to 127.
Business relationships
Details of our business’s clients and suppliers and how we work
and engage with them are described in the Divisional review on
pages 8 to 11, in the Section 172 statement on pages 37 to 42 and
in the Sustainability review on pages 43 to 93, 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 43 to 93, which is incorporated by
reference into this Directors’ report.
In 2023, the Board oversaw the implementation of the Group’s
sustainability targets and commitments which were set in 2021,
and the setting of new sustainability and environmental targets as
part of the Group’s evolved sustainability strategy as it shifted to
become a pureplay aerospace business. Details on performance
against the existing targets are set out on page 44, and the new
targets and commitments are set out in the Sustainability review
on pages 48 to 51. The GKN Aerospace sustainability function
conducted a Double Materiality Assessment which resulted in a
set of material sustainability topics to reset the foundations of the
Group’s sustainability strategy and address the emerging trend of
assessing material sustainability topics through the prism of the
Company’s impact on the environment and society, and financial
materiality of these topics. The Group’s new priority material topics
are: climate change; mitigation and adaptation; research and
development for sustainable aviation; occupational health, safety
and wellbeing; product safety and quality; and business integrity.
As part of the Group’s new business model and strategy, the
GKN Aerospace sustainability function developed an updated
Transition Plan which sets out the Group’s commitment to
addressing climate change and ongoing dedication to reducing
our carbon footprint and promoting climate‑aware practices
throughout the Group’s operations and supply chain.
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 2023 (2022: nil).
Branches
The Melrose Group and its business operates across various
jurisdictions. The Group, through its various subsidiaries, has
established branches in a number of different countries in which
the business operates.
Disclosures required under Listing Rule 9.8.4R
Other than the following, no further information is required to be
disclosed by the Company in respect of Listing Rule 9.8.4R:
• details of the allotment of ordinary shares to Investec Bank plc
in connection with the Share Capital Consolidation, which is set
out in the “Capital structure” section of this Directors’ report on
pages 104 to 105;
• 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.
107
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023GOVERNANCE In the event of a takeover of the Company, awards granted under the
Melrose Automotive Share Plan would crystallise, giving participants
a right to receive ordinary shares in Dowlais. The number of Dowlais
shares to which participants would be entitled is based upon the
amount of increase in shareholder value in Dowlais created above
an initial invested capital of £3,525,237,530, as calculated based
on the average market capitalisation of Dowlais for the 40 business
days prior to (but excluding) the date of the change of control of
the Company, subject to certain adjustments and a minimum level
of crystallisation.
A long‑term management incentive plan is in place for
GKN Aerospace which would be triggered upon a sale of the
business or a takeover of the Company. The plan provides for the
payment of bonuses to certain key managers of GKN Aerospace
based upon the increase in value of the business. If a sale of the
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.
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 financial year ended
31 December 2023 and concluded that the external auditor was in
all respects effective. PricewaterhouseCoopers LLP (“PwC LLP”) has
agreed to be appointed as the external auditor from the financial year
ending 31 December 2024. Accordingly, resolutions will be proposed
at this year’s AGM for the appointment of PwC 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
7 March 2024
DIRECTORS’ REPORT CONTINUED
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,
the Melrose Automotive Share Plan and the GKN Aerospace
long‑term incentive plan, there are no other agreements that
would have a significant effect upon a change of control of
Melrose Industries PLC as at 7 March 2024.
The Group’s committed bank facilities were refinanced during
the year, resulting in term loan facilities of US$300 million
and €100 million and a multi‑currency revolving credit facility
of US$250 million (in each case maturing in April 2026) and
additionally multi‑currency revolving credit facilities totalling
US$690 million, £300 million and €300 million that initially mature in
April 2026, but with the potential to be extended for two additional
one‑year periods at the Company’s option. Details of these facilities
are provided in the Finance Director’s review on page 25 and
note 25 to the financial statements.
In the event of a change of control of the Company following a
takeover bid, the Company and lenders under the bank facilities
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 on any revised terms
requested by the lenders could require an acquirer to put in place
replacement facilities.
The Company’s wholly‑owned subsidiary, GKN Holdings Limited,
has approximately £9.74 million fixed rate notes outstanding paying
4.625% p.a. interest and maturing on 12 May 2032 (the “Notes”),
issued under a Euro medium‑term note programme. 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.
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.
108
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023 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 2023.
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 2023, 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 is responsible for leadership of
the Board. The division of responsibilities is described further in
section 2 on page 111.
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 37 to 42 sets out the ways in which the
Board took shareholder and other stakeholder considerations into
account in its decision‑making in 2023.
Our purpose, strategy and values
Melrose is a pureplay, UK‑listed, aerospace business, focused
on value creation driven by continuous operational and financial
improvement over the longer term. Our positive trajectory is
underpinned by the strong organic growth prospects within
the aerospace sector, alongside attractive opportunities
to further differentiate our business through cutting‑edge
proprietary technology.
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 see the decarbonisation of the aerospace sector
as a priority, and indeed a central tenet of GKN Aerospace’s
mission to be “The Most Trusted and Sustainable Partner in
the Sky”. Whilst the sector and our customers provide many
opportunities for further progress towards cleaner air travel through
our innovation and technology leadership, we see no reason why
this priority cannot be achieved at the same time as generating
superior financial returns for our shareholders.
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, our employees and others associated
with the Group.
Resources and controls
As described in more detail in the Risk management section of
the Strategic Report and the Audit Committee report on pages 28
to 30 and 116 to 123 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. This has been particularly
important following the Company’s change in business strategy
to operating as a pureplay aerospace group. The Company held
a successful capital markets event in May 2023 to provide further
information on the Company’s new strategy, and the executive
Directors also engaged with key investors on the new strategy as
part of the investor roadshow programme. Furthermore, 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
2024 Directors’ Remuneration Policy, which can be found on
pages 145 to 152, 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 will continue in the lead up to the 2024 Annual General
Meeting (“2024 AGM”).
109
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023GOVERNANCE CORPORATE GOVERNANCE REPORT CONTINUED
2. Principles F‑I: Division of Responsibilities
The Board
Details of the structure of the Board and its key responsibilities are
shown on page 99.
There were four formally scheduled Board meetings held during the
year and the attendance of each Director at these meetings is shown
on page 112.
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 112. These meetings provide the Directors with
a comprehensive understanding of the current performance of,
and the key issues affecting the Group, without the formality of a
Board meeting. Members of the GKN Aerospace executive team are
periodically invited to attend and present at these meetings, providing
the Directors with an opportunity to further strengthen the relationship
with the team as well as enabling detailed insight into the operation of
the business. The executive Directors also undertake site visits on an
ad‑hoc basis and sessions are held between the executive Directors
and the GKN Aerospace executive team 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 or (where relevant) 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 devices, 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 Assistant Company Secretary, 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.
The Company notes that the majority of shareholder resolutions
put to shareholders at the 2023 AGM attracted support in excess
of 97% votes in favour. However, whilst special resolutions 17
(general disapplication of pre‑emption rights) and 18 (disapplication
of pre‑emption rights in connection with an acquisition or specified
capital investment) were passed, they received just under 80% of
votes in favour. Since the 2023 AGM, in accordance with provision
4 of the Code, the Board has engaged with relevant shareholders to
understand and discuss their views with respect to these resolutions.
Whilst the Board considers the flexibility sought by resolutions 17
and 18 to have been in the best interests of the Company and its
shareholders, and notes that both resolutions had followed the
provisions of the Pre‑Emption Group’s 2022 Statement of Principles
for the disapplication of pre‑emption rights, having taken into
consideration shareholder feedback and to seek alignment with
shareholder preferences, the Board has decided to revert to a limit
of 5% of the issued share capital of the Company (excluding treasury
shares) in respect of the equivalent resolutions at the 2024 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 37 to 42.
In order to promote effective engagement with, and encourage
participation from, its workforce, Melrose operates a Workforce
Advisory Panel (“WAP”). The WAP comprises the Chief Human
Resources Officer and Group General Counsel of Melrose and
GKN Aerospace and other relevant internal stakeholders as required
as the Company’s new business strategy and integrated structure
evolves. Each member of the WAP is responsible for determining
how the workforce should be defined, 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 83.
Workforce policies and practices
Melrose’s reputation for acting responsibly plays a critical role in
its success as a business. It maintains high standards of ethical
conduct which are reflected in the Group compliance policies, 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 Group
culture. 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 Group, together with a summary of the
whistleblowing processes and awareness activities undertaken
during the year; this is then fed back to the Board.
110
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023 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, and this will
remain the case after the upcoming Board changes as outlined
on page 3.
The Non‑executive Directors are not entitled to any cash bonus
or shares under the 2020 Employee Share Plan or the Melrose
Automotive 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 Group’s bottom‑up risk management approach. 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/
governance/documents‑and‑policies.
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.
Chairman and Chief Executive Officer
The roles of each of the Chairman and the Chief Executive Officer of
the Company are, and will remain, separate in accordance with the
Code and Board policy.
The 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
and the executive Directors.
The Chief Executive Officer 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.
During 2023, the Board consisted 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 113, 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. He has strong shareholder support
for his current tenure to 2025, subject to annual re‑election at the
Company’s AGM each year, and his extended term helps to ensure
continuity and stability following the completion of the Demerger.
It is also important to ensure continuity and stability through 2024
following the change in the Company’s business strategy, as well as
aiding the development of a diverse pipeline for succession planning
purposes, with the planned retirement of Mr Simon Peckham,
Mr Geoffrey Martin and Mr Christopher Miller from the Board.
Mr David Lis is the appointed Senior Independent Director, and acts
as an intermediary for the other Directors and shareholders.
111
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023GOVERNANCE CORPORATE GOVERNANCE REPORT CONTINUED
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 Martin(7) is an executive director of Dowlais Group plc, the UK
listed holding company incorporated as part of the Demerger,
having agreed to take on this role to provide his knowledge and
expertise to Dowlais for a period of time following the Demerger.
The Board has concluded that this appointment does not affect
Mr Martin’s ability to meet his Board responsibilities. Other than
Peter Dilnot’s position as a trustee of the charity Autistica, which
the Board has concluded does not affect his ability to meet his
Board responsibilities, none of the other executive Directors hold
any significant appointments nor do they have any non‑executive
directorships in any FTSE 100 company.
The following table shows the attendance of each of the Directors
at the scheduled meetings of the Board and its committees held
during the year. The quorum necessary for the transaction of
business by the Board and each of its committees is two. The table
also shows attendance at business review meetings held between
scheduled Board meetings. Non‑executive Directors are invited but
are not required to attend such meetings.
Attendance of Directors
Board Audit Nomination Remuneration
Business
review
Number of meetings(1)
Justin Dowley(2)
Christopher Miller
Simon Peckham
Geoffrey Martin
Peter Dilnot
David Lis
Charlotte Twyning
Funmi Adegoke(4)
Heather Lawrence
Victoria Jarman(5)
Gillian Elcock(6)
4
4
4
4
4
4
4
4
2
4
4
2
4
3(2)
–
–
4(3)
–
4
4
2
4
–
2
2
1
–
–
–
–
2
2
1
–
2
1
2
1
–
–
–
–
2
2
–
–
2
–
3
3
3
3
3
3
3
3
2
3
3
1
(1) In addition to the above scheduled meetings, ad‑hoc Board and committee meetings
are held from time to time which are attended by a quorum of Directors and are
convened to deal with specific items of business.
(2) Mr Dowley attended these Audit Committee meetings by invitation. He was unable
to attend the Nomination Committee and Remuneration Committee meetings held in
November due to a conflicting mandatory commitment. He was in any case briefed
on the matters discussed at the meetings, with his feedback being considered by the
committees.
(3) Mr Martin attended by invitation.
(4) Ms Adegoke resigned as a Non‑executive Director of the Company on 16 June 2023.
She attended all Board and applicable committee meetings, together with all
business reviews, prior to her resignation.
(5) At the meeting of the Board held on 6 December 2023, Ms Jarman was appointed
to the Audit Committee. No meetings of the Audit Committee were held between
6 December 2023 and 31 December 2023.
(6) Ms Elcock was appointed as a Non‑executive Director of the Company on
21 June 2023. She has attended all Board and applicable committee meetings,
together with all business reviews, since her appointment. At the meeting of the
Board held on 6 December 2023, Ms Elcock was appointed to the Remuneration
Committee. No meetings of the Remuneration Committee were held between
6 December 2023 and 31 December 2023.
(7) Mr Peckham, Mr Martin and Mr Miller resigned from the Board on 7 March 2024.
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 102 to 103, and on the Company’s website
at www.melroseplc.net/governance/board‑leadership. These
biographies identify any other significant appointments held by
the Directors.
During the year, Ms Funmi Adegoke, Non‑executive Director, resigned
from the Board following her appointment to an executive role at
Halma plc. Ms Gillian Elcock was appointed as a Non‑executive
Director on 21 June 2023 and brings to the Board extensive asset
management and investment research experience, including in the
aerospace and defence sector.
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 five 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. The
FTSE Women Leaders Review and the FCA Listing Rules also set a
target for at least one senior board position, being that of Chairman
of the Board, Senior Independent Director, Chief Executive Officer
or Chief Financial Officer, to be held by a woman (the FTSE Women
Leaders Review having set a target date of the end of 2025). The
Committee recognises that Melrose does not currently meet this
requirement and that it is under active review. Whilst there is a need
for continuity and stability amongst the Board during the current
period of significant strategic change for Melrose, this requirement is
being factored into ongoing succession planning discussions.
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 2023 in light
of the transition to operating as an aerospace‑only business. In
particular, the Board, with the support of the Nomination Committee,
approved Mr Peckham and Mr Martin stepping down as Melrose’s
Chief Executive Officer and Group Finance Director with effect from
6 March 2024 and 7 March 2024 respectively, to be replaced by
Mr Peter Dilnot and Mr Matthew Gregory as Chief Executive Officer
and Chief Financial Officer respectively. Both changes provide
strong management continuity. Mr Dilnot has served as Melrose’s
Chief Operating Officer since April 2019 as well as serving as Chief
Executive Officer of GKN Aerospace from October 2023 onwards.
Mr Gregory has served as Chief Finance Officer of GKN Aerospace
since September 2022. Mr Peckham, Mr Martin, Mr Christopher Miller
and Ms Victoria Jarman will not stand for re‑election as Directors at
the 2024 AGM.(7)
As previously announced, Mr Dowley’s tenure will end in 2025, and
the Board has commenced a search for his successor led by our
Senior Independent Director, David Lis. Mr Dowley will therefore be
standing for re‑election at the 2024 AGM as planned, with a view to
support the transition to the new Chairman of the Board prior to their
appointment in 2025.
112
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023 Succession planning arrangements for the Board as a whole were
reviewed by the Nomination Committee and the Board. This included
reviewing the skill sets of the Directors in light of the change in
business strategy of the Company, as well as reviewing the tenure,
diversity and independence of those already on the Board. The
Nomination Committee and the Board also reviewed 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.
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 re‑election at
the 2023 AGM. As detailed on page 112, Mr Peckham, Mr Martin,
Mr Miller and Ms Jarman will not be standing for re‑election
by shareholders at this year’s AGM.(7) With the exception of
Mr Gregory and Ms Elcock, who are standing for election for the
first time, all of the remaining Directors of the Company will be
standing for re‑election, and in each case an ordinary resolution
will need to be passed to approve such (re‑)elections.
Board performance review
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.
Therefore, the Board engaged Lintstock Ltd in 2023 to undertake an
independently facilitated evaluation of the Board and each committee
in order to identify areas where performance and procedures might
be further improved. As in prior years, Lintstock also conducted an
evaluation of the Chairman of the Board’s performance. Lintstock is
a specialist corporate governance consultancy and, other than the
Board, committee and Chairman evaluations, has no commercial
dealings or other connection with the Melrose Group or its Directors.
The 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 where
relevant. A range of topics were discussed as part of the evaluations
including reviewing the composition and skills set of the Board in
light of the change in business strategy, consideration of the Board’s
transition to overseeing an aerospace‑only business, succession
planning and diversity, and risk management. 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 Chair of the relevant
committee about any relevant matters that they wished to raise as
part of the review.
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 Chair 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 focus for the Board and
management during 2024:
• continuing to monitor Board and senior management succession
to ensure effective management at all levels;
• ensuring the adequacy of the Board’s visibility over the impact of
principal risks on the business 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;
• continuing to focus on cyber security, recognising that it remains
an ongoing risk for a business of the Group’s nature;
• continuing to monitor the cash management culture within the
businesses and to drive cash performance; and
• continuing to impress upon all levels of the business that the health
and safety of our workers is of the utmost importance and ensuring
that management places 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.
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. He has strong shareholder support for his current tenure to
2025, which has been approved by the Nomination Committee and
the Board, subject to annual re‑election. Mr Dowley’s extended
tenure is thought appropriate in order to facilitate succession
planning arrangements for the Board and the development of a
diverse Board, as well as providing continuity and stability following
the change in the Company’s business strategy, and the upcoming
changes in executive leadership. He was considered independent
upon his appointment as Non‑executive Chairman.
Peter Dilnot, Chief Executive Officer with effect from 6 March 2024,
is standing for re‑election due to his deep understanding of
Melrose and its investor base and GKN Aerospace, having served
as Chief Operating Officer since 2019 as well as serving as
Chief Executive Officer of GKN Aerospace for periods during his
tenure, most recently from October 2023 onwards. He has strong
sector experience in engineering and aviation, and has extensive
experience in holding executive roles at listed companies.
Matthew Gregory, Chief Financial Officer with effect from
7 March 2024, is standing for election for the first time. Mr Gregory
brings strong management continuity and a deep understanding
of GKN Aerospace, having served as Chief Financial Officer
for GKN Aerospace since September 2022. He has extensive
experience in holding chief financial officer roles at listed companies.
113
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023GOVERNANCE CORPORATE GOVERNANCE REPORT CONTINUED
Gillian Elcock, Non‑executive Director, is standing for election
for the first time. She has extensive asset management and
investment research experience, including covering the aerospace
and defence sector. She also brings insight gained from several
non‑executive director roles.
The following 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.
• 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 Chair of the Audit Committee.
Biographies of each of the Directors are shown on pages 102 to
103, and on the Company’s website at www.melroseplc.net/
governance/board‑leadership. Detailed justifications for each
Director’s re‑election (or election, as the case may be) are set out
in the Notice of Annual General Meeting, on pages 240 to 248.
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 and maintaining such
policies and 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 and maintaining
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 116 to 123 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
The Group’s approach to risk management is regularly 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 28 to 30.
Further information regarding the Group’s financial risk objectives and
policies can be found in the Finance Director’s review on pages 20
to 27. A summary of the principal risks and uncertainties that could
impact upon the Group’s performance is set out on pages 31 to 36.
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 116 to 123, the Group engages BM Howarth as internal
auditor with additional support, as required, from Ernst & Young. A
total of 21 GKN Aerospace sites across the Group were assessed by
BM Howarth during 2023.
The Directors can report that based on the sites reviewed in 2023,
there has been progress across the Group following the 2023 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 is 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. Other than in respect of
certain policies where it would not be appropriate for them to have
such a broad reach, these policies 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.
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MELROSE INDUSTRIES PLC ANNUAL REPORT 2023 Online compliance training continued to be conducted within the
business, covering topics such as anti‑trust, trade compliance
and export controls, data privacy, anti‑bribery and corruption, and
anti‑money laundering, to enhance and supplement the existing
compliance regime.
The Company’s Modern Slavery Statement is approved by the
Board annually and the most recent statement is available on
the Company’s website at www.melroseplc.net/governance/
documents‑and‑policies. GKN Aerospace (through GKN Aerospace
Services Limited) has also published its own Modern Slavery
Statement, which is available on GKN Aerospace’s website at
www.gknaerospace.com/en/utilities/modern‑slavery‑statement. Both
statements have been published in accordance with the requirements
under the Modern Slavery Act 2015. 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 has been
rolled out to employees, along with an online compliance training
module. Please also refer to the Audit Committee report on page 116
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
the business was founded in 2003 and requires that executive
remuneration be simple, transparent, support the delivery of the
value creation strategy, and pay only for performance. Under the
previous “Buy, Improve, Sell” business strategy, the Company’s
policy was to restrict 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 promotes long‑term sustainable success for shareholders,
and is expected to be awarded in shares, further aligning
management with shareholders. Whilst the Melrose Automotive Share
Plan has a total vesting and holding period of less than five years,
value delivered is awarded in shares in Dowlais Group plc in order to
reward participants in respect of any increase in the value attributable
to the businesses comprising the Dowlais group and to properly
recognise the platform built under Melrose ownership.
Melrose became a pureplay aerospace business, marking the end
of the “Buy, Improve, Sell” business strategy. Going into 2024,
and subject to approval by shareholders of the proposed 2024
Directors’ Remuneration Policy, the Company’s remuneration
structure will be revised to reflect our change in strategic direction.
The Company’s new strategy remains focused on value creation,
founded on continuous operational and financial improvement
over the longer term with a positive trajectory underpinned by the
strong organic growth prospects within the aerospace sector,
alongside attractive opportunities to differentiate its business through
cutting‑edge proprietary technology. To support this change in
strategy, the Board believes that the new executive management
team should be remunerated under a structure that resembles more
closely Melrose’s FTSE 100 peers. In particular, the proposed 2024
Directors’ Remuneration Policy will rebalance Melrose’s weighting
of fixed to variable remuneration, and of medium‑ to longer‑term
incentivisation, using a structure more closely aligned with other
FTSE 100 companies.
Development of policies
The Remuneration Committee has a formal and transparent
procedure for developing the Company’s policy on executive
remuneration. It engages with shareholders on a regular basis 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 128 to 152, the Chief Executive Officer retains
responsibility for setting and managing the remuneration of Melrose
senior management, 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. There were
no deviations from the Directors’ Remuneration Policy in respect
of 2023 and the Remuneration Committee did not exercise any
discretion to alter the 2023 outcomes from the application of the
performance conditions.
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 128 to 152, which is
presented in the following three sections:
• the annual statement from the Chair of the Remuneration
Committee, which can be found on pages 128 to 129;
• the Annual Report on Remuneration, which can be found on
pages 130 to 145; and
• the proposed 2024 Directors’ Remuneration Policy, which can
be found on pages 145 to 152.
The current Directors’ remuneration policy, which was
approved by shareholders at the 2023 AGM, is available on the
Company’s website(1). It is intended that a revised 2024 Directors’
Remuneration Policy will come into effect at the conclusion of the
2024 AGM. The 2024 Directors’ Remuneration Policy is subject
to shareholder approval at the 2024 AGM and can be found at
pages 145 to 152.
(1) The full details of the 2023 Directors’ remuneration policy approved at the 2023 AGM
can be found on pages 135 to 144 of the 2022 Annual Report (www.melroseplc.net/
investors/results‑reports‑and‑presentations).
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MELROSE INDUSTRIES PLC ANNUAL REPORT 2023GOVERNANCE AUDIT COMMITTEE REPORT
Heather Lawrence
Audit Committee Chair
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 (Chair)*
David Lis*
Charlotte Twyning
Gillian Elcock(2)*
Victoria Jarman(3)*
No. of meetings(1)
4/4
4/4
4/4
2/2
0/0
(1) Reflects regularly scheduled meetings of the Committee.
(2) Ms Gillian Elcock was appointed as a Non‑Executive Director with effect from
21 June 2023. Ms Elcock attended all Committee meetings held during the period
between 21 June 2023 and 31 December 2023. Ms Funmi Adegoke resigned as
a Non‑executive Director and as a member of the Committee on 16 June 2023.
Ms Adegoke attended all Committee meetings held up to the point of her resignation.
(3) Ms Victoria Jarman was appointed to the Committee on 6 December 2023. There
were no scheduled meetings of the Committee between 6 December 2023 and
31 December 2023.
Indicates Committee members with financial expertise. In total, 80% 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 2023 in line
with best practice and are available on the Company’s website
at www.melroseplc.net/governance/documents‑and‑policies
and 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, annual 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 processes (excluding cyber
security and fraud risk, which are retained by the Board), internal
financial control systems that identify, assess, manage and
monitor financial risks and risk management systems;
• overseeing the adequacy and security of the Company’s
arrangements for its employees to raise concerns in confidence
in accordance with the Company’s whistleblowing policy,
including about possible wrongdoing in financial reporting or
other matters;
• monitoring and evaluating the independence and effectiveness
of the external audit function, taking into account relevant UK
laws, regulations, the Ethical Standards and other professional
requirements and the relationship with the auditor as a whole and
approving the external audit plan and fee;
• reviewing, challenging and reporting to the Board on the going
concern assumption and the assessment forming the basis of the
longer‑term viability statement;
• reviewing and, where necessary, challenging the consistency of
accounting policies, the methods used to account for significant or
unusual transactions, and compliance with accounting standards;
• reviewing the Company’s procedures for detecting fraud, and its
systems and controls for the prevention of bribery;
• 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 including ensuring the internal audit
function has the unrestricted scope and resources necessary to
enable it to fulfil its mandate 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.
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MELROSE INDUSTRIES PLC ANNUAL REPORT 2023
Composition
The Committee is made up 100% of independent Non‑executive
Directors. Mrs Heather Lawrence continued to act as Chair of the
Committee. She has strong audit experience having acted as audit
committee chair of FlyBe Group plc.
Mrs Lawrence, Mr David Lis, Ms Victoria Jarman and
Ms Gillian Elcock bring significant and relevant financial experience
to their roles on the Committee. Furthermore, each member of the
Committee, including Ms Charlotte Twyning, 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 102 to 103.
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 invited the Group Finance Director,
the Head of Financial Reporting, and senior representatives of the
external and internal auditors to attend its meetings during 2023. The
Chair of the Committee also spoke 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 the majority 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 Chair of the Committee speaks with the external and internal
auditors prior to each Committee meeting.
Summary of meetings in the year
The Committee is expected to meet not less than three times a year.
However, during 2023, 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.
Significant activities related to the
2023 financial statements
As part of its duties the Committee undertook the following
recurring activities that receive annual scrutiny:
• review of the 2023 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 going
concern, longer‑term viability and significant accounting and
control matters;
• consideration of the 2023 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 2023 Annual Report and
financial statements. The Committee advised the Board that,
in its view, the 2023 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 2023
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 2023 financial statements by the external
auditor and the scope of work to be undertaken in 2024 by the
internal auditor.
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MELROSE INDUSTRIES PLC ANNUAL REPORT 2023GOVERNANCE AUDIT COMMITTEE REPORT CONTINUED
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
How the issue was addressed by the Audit Committee
The Committee received an update prepared by management
and discussed each aspect of the demerger impact. This included
challenge over the conclusion reached by management when
reassessing the carrying value of the assets prior to classification
as held for sale, the rationale for using the opening share price to
derive a fair value of the demerger distribution and the consequential
impairment testing outcomes on the change in groups of CGUs.
The Committee discussed the audit work performed by Deloitte to
assess whether the proposed accounting to be recognised, together
with incremental disclosures, were appropriate.
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 conclusions reached together with
disclosures were appropriately presented.
Demerger of GKN Automotive, GKN Powder Metallurgy and
GKN Hydrogen (collectively ‘Dowlais’)
Discontinued operations and an asset held for sale
Prior to 2023, the Dowlais businesses were included as continuing
operations as demerger actions remained outstanding. On
30 March 2023, following shareholder approval for the demerger,
all of the conditions for the Dowlais businesses to be reported as
‘held for sale’ were met and the assets and liabilities of the Dowlais
group were reclassified accordingly.
It was considered whether any write down to the carrying
value was required, and impairment testing was updated to
30 March 2023. It was concluded that the carrying values were
appropriate and at this date there was no contradictory public
share valuation evidence. On 20 April 2023, the demerger
completed and disposal of the associated net assets took place.
Post demerger, as the businesses were material and separate
operations, the Dowlais group has been treated as discontinued
in the Group’s financial statements for 2023 in accordance with
IFRS 5 Non‑current Assets Held for Sale and Discontinued
Operations, with comparative amounts in the income statement
and cash flow restated as required. Comparative amounts
for earnings per share have also been restated for the
share consolidation.
Distribution to shareholders
The demerger of the Dowlais businesses represented a distribution
to shareholders and it has been recognised at fair value (based on
Dowlais’ public market capitalisation), in accordance with IFRIC 17
Distributions of Non‑cash Assets to Owners. Considering the
various share price data available, the purest valuation approach
was determined to be the opening traded share price on the day of
flotation because of its proximity to the demerger. The fair value of
the distribution to shareholders has been calculated at £2.0 billion
using the number of Dowlais shares distributed and an opening
price per share of £1.46.
Using this short‑term market value meant there was a loss on
disposal of £1.0 billion when comparing against the carrying value
of the Dowlais businesses, net of transaction costs and recycling
of cumulative foreign exchange differences. Disclosure has been
included in the Group financial statements for 2023, including
sensitivity analysis on the distribution value.
Other demerger related matters
Following the demerger, the Group changed its segmental
reporting structure so that rather than reporting just Aerospace in
total alongside Melrose corporate costs, it now reports the Engines
and Structures businesses separately. This change has been
aligned with the internal reporting, as required by IFRS 8 Operating
Segments, and as a consequence prior period segmental
information has been restated.
To further drive consistency and comply with IAS 36 Impairment
of Assets, the Group updated its groups of cash generating units
(‘CGUs’) which are used for impairment testing purposes from one
(Aerospace in total) to two; Engines and Structures. This change
has led to additional disclosure in the Group’s financial statements
for 2023, with initial testing on both 19 April (old basis) and 20 April
(new basis) all being positive.
(Refer to notes 3, 13 and 27 of the financial statements)
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MELROSE INDUSTRIES PLC ANNUAL REPORT 2023 Significant issue considered by the Audit Committee
How the issue was addressed by the Audit Committee
LTIP valuations, Melrose and Dowlais schemes
It was determined that changes to share‑based payment
arrangements were made with the purpose to preserve, rather
than enhance, rights of option holders and so no additional charge
has been made in addition to the IFRS 2 Share‑based Payments
charge already being recorded. As changes made to the Group’s
2020 Melrose Employee Share Plan (“MESP”) were a consequence
of the demerger, with approval by shareholders, there has been
no change to the accounting, with a residual charge of £7 million
recorded in the Group’s financial statements for the period until
31 May 2023, being the original maturity date.
The Melrose Automotive Share Plan (“MASP”), for which 2% of
Dowlais’ equity is held by a Melrose sponsored employee benefit
trust, provides a further aspect to incentive arrangements as any
settlement has been advance funded. As any compensation for
this arrangement would be issued in Dowlais rather than Melrose
equity, the accounting is governed by IAS 19 Employee Benefits
rather than IFRS 2, which requires the use of expected value
calculations. The net outcome means that there was an income
statement charge of £3 million in the Group’s financial statements
for 2023.
(Refer to note 23 of the financial statements)
Impairment testing of goodwill
Impairment testing is inherently subjective as it includes
assumptions in the calculation of recoverable amount for each of
the groups of CGUs 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 continued disruption of supply
chains, interest rate rises and other inflationary pressure on input
costs, businesses within the Group are continuing to mitigate the
impact of volatile customer scheduling through cost reduction and
efficiency actions.
Given the change in Group strategy during the year, impairment
testing has now been performed using a value in use basis
which prohibits the inclusion of benefits from future uncommitted
restructuring plans. No impairment has been recorded in the
Group financial statements for 2023 consistent with the strong
performance seen during the year and expectations for the future.
(Refer to notes 3 and 11 of the financial statements)
The Committee received a summary of the accounting impacts
prepared by management and discussed the important implications.
This included challenge over the conclusion reached by management
when assessing the approach, the assumptions used to derive
a fair value of the MASP and the consequential recognition and
presentation of the charges calculated.
The Committee discussed the audit work performed by Deloitte
to assess whether the proposed accounting and disclosures
were appropriate.
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 conclusions reached together with
disclosures were appropriately presented.
The Committee challenged the outcome of the impairment testing
in respect of both 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;
• the market‑based assumptions for long‑term growth rates and
discount rates; and
• the appropriateness of the disclosures in the financial statements in
respect of the impairment testing performed.
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.
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MELROSE INDUSTRIES PLC ANNUAL REPORT 2023GOVERNANCE AUDIT COMMITTEE REPORT CONTINUED
Significant issue considered by the Audit Committee
How the issue was addressed by the Audit Committee
Accounting for revenue under IFRS 15
The majority of the Group’s revenue relates to the 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. 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.
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 and
the unbilled work done contract asset for certain RRSPs.
The support for changes in estimates, impacting both the amount and
timing of revenue recognition, was considered and this was deemed
to follow commercial progress on specific programmes. The impact of
changes will be more significant in the future.
Specifically, the accounting for matters arising in the year relating to the
powder metal issues on the PW1100G (GTF) engine and changes to
the GEnx engine contract was considered. The conclusions reached by
management were debated and challenged.
The Committee discussed the audit work performed by Deloitte to
assess whether the proposed revenue to be recognised, together with
incremental disclosures, was appropriate.
Following positive commercial and operational progress on certain
affected engine programmes during the year, it was concluded that
an update to assumptions was appropriate. The changes have had
an impact on 2023 results (£57 million, included a retrospective
catch up of £30 million) and they will impact future results too.
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.
There have been two specific events during the year which have
meant further reviews of accounting assumptions and the level of
revenue being recognised, both in the year and retrospectively:
• The first related to a fleet of the GTF engines which have
been impacted by a rare condition in powder metal used to
manufacture certain of the engine parts, which are not supplied
by the Group. The full potential cash impact to Melrose of
approximately £200 million will be incurred over the next three
to four years, if it is assumed that this is all a programme cost
to be shared by partners in the PW1100G RRSP programme.
Melrose’s financial assumptions for all of its RRSP programmes
are very constrained, recognising that most of the Group’s work
is done on the delivery of its parts which typically last the life of
the engine, appropriately allowing for risks to arise over the full
programme duration. The unbilled work done contract asset
remains appropriately constrained at 31 December 2023, in
accordance with the requirements of IFRS 15.
• The second related to an additional programme which has
been included in calculations of unbilled work done during the
year as a result of a modification to a contract. Whilst the new
agreement has not had a material impact on the reported results
for the year ended 31 December 2023 or Balance Sheet as at
31 December 2023, the future implications have been assessed
under IFRS 15 and are material in future years. The important
change is that the Group’s involvement on the GEnx RRSP has
been extended beyond its current focus on delivery of original
equipment to include significantly greater participation in the
aftermarket phase. The contract modification will be accounted
for prospectively, with pricing implications affecting revenue
from 1 January 2024. Following changes to the termination
rights, to commercially protect the Group for its increased
aftermarket share, the Group now has a contractual right to
aftermarket revenue.
The amount of variable consideration recognised in the year is
£173 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)
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MELROSE INDUSTRIES PLC ANNUAL REPORT 2023 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 and 6 of the financial statements)
The Committee has reviewed the nature, classification and consistency
of adjusting items, whilst considering the guidance provided by the
FRC and ESMA. These items are defined and discussed in the Finance
Director’s review and detailed in note 6 to the financial statements,
together with the glossary to the financial statements.
Following a review of management’s paper and challenge, the
Committee is satisfied that there has not been any change to the
substance of the policy.
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 note 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.
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.
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. In addition to base case
modelling, which uses approved financial forecasts, a reasonably
possible downside was also considered.
(Refer to note 2 of the financial statements)
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.
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, Mrs Lawrence and Mr Lis have each held senior roles at
various financial institutions. Furthermore, Mrs Lawrence, Mr Lis and
Ms Elcock have held various non‑executive directorship positions on
the boards of UK listed public companies.
During 2023, the Committee continued to keep under review the
Company’s internal financial controls systems that identify, assess,
manage and monitor financial risks and other internal control and
risk management systems, and the effectiveness of the Group’s risk
management system, through regular updates from management.
This included a review of the key findings presented by the external
and internal auditors having agreed the scope, mandate and review
schedule in advance.
Management, with support from Ernst & Young, continued to utilise
a third‑party hosted interactive dashboard which has been tailored
to the requirements of the Group in order to consolidate the Group’s
risk reporting for the benefit of the Committee and the Group as
a whole. The dashboard includes data from GKN Aerospace’s
risk register, which was reviewed and approved during 2023 by
GKN Aerospace’s senior management, and key risk owners. The
dashboard has supported the continued improvement of the Group’s
risk management processes, with in‑depth reporting and data
collection. This has bolstered the Committee’s oversight of risk areas,
mitigations, controls and trends.
The risk management process also involved objective trend analysis
and independent insight from Ernst & Young, and this year included
an analysis of the Group’s principal risks profile against other
aerospace and defence companies based on public disclosures.
The Committee reviewed and challenged the Group’s risk
management processes, and also reviewed and challenged
the interim and annual reports prepared by Melrose senior
management relating to the Group’s principal risks profile.
These reports guided the Committee on relevant updates to the
Group’s principal risks (including the identification of new principal
Group risks and emerging risks), as reported in the Risks and
uncertainties section on pages 31 to 36. They also aided the
Committee’s discussions with the Board on risk appetite, as
detailed further on page 29.
Management also reported on the Group’s internal control
systems supported by the internal audit review. Examples of both
Group and divisional 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.
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MELROSE INDUSTRIES PLC ANNUAL REPORT 2023GOVERNANCE AUDIT COMMITTEE REPORT CONTINUED
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
Committee and supported by the Melrose senior management
team, and ultimately reported to the Board. The platform is
monitored by the legal, compliance and HR functions. 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 the business, including financial
and non‑financial matters. The most material whistleblowing
cases are notified to the Chair of the Committee promptly, 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 so the Company was required to undertake
another in 2023. For this purpose, the Company engaged Lintstock
who engaged directly with the Directors on: (i) the constitution
and performance of the Board and each committee; (ii) the
Chairman of the Board; and (iii) individual performance reviews.
Lintstock produced a report based on the feedback of Committee
members and analysis of the responses, which was presented and
discussed at the December Board meeting. Alongside such formal
feedback, the Committee continued to facilitate direct ongoing
contact between its members and the Chair of the Committee
about any relevant matters that the members wished to raise as
part of the ongoing review.
External audit
Appointment of new External Auditor
The Committee was pleased to confirm in last year’s report that it
had undertaken an external auditor tender process and, subject to
shareholder approval at the Company’s Annual General Meeting
on 2 May 2024, PricewaterhouseCoopers (“PwC LLP”), had been
selected as the Company’s new external auditor for the financial
year ending 31 December 2024. The audit engagement partner
would also change at the same time.
Steps have been taken in order to transition to PwC LLP as the
Company’s external auditor, including PwC LLP ensuring that they
are fully independent in time for their appointment. PwC LLP has
attended all Committee meetings since November 2023 in order to
aid a smooth handover process.
For further information on the audit tender process, please refer to
pages 113 to 114 of the 2022 Annual Report.
Assessment of effectiveness of incumbent External Auditor
The Committee has reviewed the performance and effectiveness
of the incumbent external auditor, Deloitte LLP. For 2023, 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 GKN Aerospace Chief Financial Officer, were requested
to provide detailed feedback on the effectiveness of the external
auditor. The Chair 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 remained very high, the external
audit process was operating effectively, and Deloitte LLP continued
to prove effective in its role as external auditor.
Non‑audit services
Under the Competition and Markets Authority (the “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. These 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 2020, 2021 and 2022 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 from PwC LLP. During the course
of 2023, these services have been migrated to other firms as part of
the transition process to PwC LLP as the Company’s new external
auditor for the financial year ending 31 December 2024, as detailed
further above.
122
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023 During 2023, no services were provided by Deloitte LLP other than
for statutory audit and audit‑related assurance services. Deloitte
LLP also provided reporting accountant services in relation to the
demerger of Dowlais Group plc (the “Demerger”), and were paid
£0.2 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 Chair 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, the external auditor submits a letter setting out how
it believes its independence and objectivity have been maintained.
The external auditor 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.
Furthermore, the incoming external auditor, PwC LLP, has provided
the Committee with confirmation of its independence and objectivity
in advance of its appointment as external auditor for the financial year
ending 31 December 2024.
Internal audit
An internal audit programme is used within the Group. 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 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 local
management’s actions and responses to be followed up on a timely
basis. The internal audit programme of planned visits is discussed
and agreed with the Committee during the year.
The internal auditor’s remit includes assessment of the
effectiveness of internal financial control systems, compliance
with the Group’s Policies and Procedures Manual and a review
of GKN Aerospace’s balance sheet. 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.
Internal audit site visits were conducted by BM Howarth across a
total of 21 GKN Aerospace sites in 2023.
To supplement the internal audit programme, a targeted sample
of sites was 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 the GKN Aerospace chief financial
officer 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 business 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 2023 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 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 2023.
Heather Lawrence
Chair, Audit Committee
7 March 2024
123
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023GOVERNANCE NOMINATION COMMITTEE REPORT
Charlotte Twyning
Nomination Committee Chair
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 Officer;
• 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
and updated by the Committee in November 2023, are available to
view on our website, www.melroseplc.net, and from the Company
Secretary at Melrose’s registered office.
124
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 (Chair)
Justin Dowley
David Lis
Victoria Jarman
Gillian Elcock
No. of meetings(1)
2/2
1/2(2)
2/2
2/2
1/1(3)
(1) Reflects regularly scheduled meetings of the Committee.
(2) Mr Justin Dowley did not attend the Committee meeting held in November due to
a conflicting mandatory commitment. He was in any case briefed on the matters
discussed at the meeting, with his feedback being considered by the Committee.
(3) Ms Gillian Elcock was appointed as a member of the Committee with effect
from 21 June 2023. Ms Elcock attended all Committee meetings held during the
period 21 June 2023 to 31 December 2023. Ms Funmi Adegoke resigned as a
Non‑executive Director and as a member of the Committee on 16 June 2023.
Ms Adegoke attended all Committee meetings held up to the point of her resignation.
Committee membership and attendance
The Committee is made up 100% of independent Non‑executive
Directors and comprises five out of the six Non‑executive Directors.
As mentioned below, Ms Funmi Adegoke resigned from the Board,
and as a member of the Committee, in June 2023. She attended all
scheduled meetings up to her resignation. Ms Gillian Elcock joined
as a member of the Committee in June 2023. She has attended all
scheduled meetings since her appointment.
The Committee is expected to meet not less than twice a year and,
during 2023, the Committee held two scheduled meetings. The
attendance of its members at these Committee meetings is shown in
the table above. The Committee also held a meeting to discuss the
executive Board changes, further details of which are included below.
The Company Secretary acts as secretary to the Committee. On
occasion, the Committee invites the Chief Executive Officer to attend
discussions where his input is required.
Board composition and succession planning
The Committee keeps the membership of the Board under review,
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.
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023
Melrose is now a pureplay, listed aerospace business. As a
result, succession planning for the executive Directors was a key
focus for the Committee in 2023. In particular, the Board, with
the support of the Committee, approved Mr Simon Peckham
and Mr Geoffrey Martin stepping down as Chief Executive and
Group Finance Director with effect from 6 March 2024 and
7 March 2024 respectively, to be replaced by Mr Peter Dilnot and
Mr Matthew Gregory as Chief Executive Officer and Chief Financial
Officer respectively. The Committee considers that these changes
provide strong management continuity. Mr Dilnot has served as
Melrose Chief Operating Officer since April 2019 as well as serving
as Chief Executive Officer of GKN Aerospace from October 2023
onwards. Mr Gregory has served as Chief Finance Officer of
GKN Aerospace since September 2022. Mr Peckham, Mr Martin,
Mr Christopher Miller and Ms Victoria Jarman will not stand for
re‑election as Directors at the 2024 AGM.
During the year, Ms Adegoke, Non‑executive Director, resigned
from the Board following her appointment to an executive role at
Halma plc. The Board appointed Ms Elcock as a Non‑executive
Director of the Board in June 2023 after the completion of a thorough
recruitment process conducted by Stonehaven International, an
external recruitment consultancy firm unconnected with the Company
or its Directors. Ms Elcock has extensive asset management and
investment research experience, including in the aerospace and
defence sector.
Furthermore, succession planning arrangements for the Board as
a whole were reviewed by the Committee in 2023. This included a
review and discussion of the skills set of the Directors in light of the
change in business strategy of the Company, as well as a review of
the tenure, diversity and independence of those already on the Board.
This review allowed the Committee to satisfy itself that the right
balance of skills, experience and diversity are reflected and being
developed, and that the composition of the Board is consistent with
the Board of Directors’ Diversity policy. It also allowed the Committee
to satisfy itself that the Company continues to meet the expectations
of the FTSE Women Leaders 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 2024.
Non‑executive Directors’ tenure
The Committee also continued to review the role of
Mr Justin Dowley as Melrose’s Non‑executive Chairman. Although
Mr Dowley 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 Demerger, in
2022 the Board (upon the Committee’s recommendation) had
approved that Mr Dowley’s tenure be extended for a final two years
beyond 2023, subject to annual re‑election at the Company’s AGM
each year. This was to ensure continuity and stability following
the completion of the Demerger, and remains important going
into 2024 to ensure continuity and stability with the retirement of
Mr Peckham, Mr Martin and Mr Miller from the Board. Mr Dowley
had received strong shareholder support for his re‑election at
the 2023 AGM.
In order to aid a smooth transition of the Chairmanship role, during
2023, Mr David Lis, the Senior Independent Director, commenced
a search for the new Chairman of the Board ahead of the expiry
of Mr Dowley’s tenure in 2025. The Committee also has oversight
and input into the recruitment process. Mr Lis’s tenure as a
Non‑executive Director and Senior Independent Director is also
due to expire in 2025.
Details of the tenure of the remaining Non‑executive Directors can
be found on pages 102 to 103.
Re‑election and election of Directors
The effectiveness and commitment of each of the Directors is
reviewed annually as part of the Board performance review 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. Whilst noting
that Mr Peckham, Mr Martin, Mr Miller and Ms Jarman will not
be standing for re‑election by shareholders at this year’s AGM(1),
the Committee and the Board have each satisfied themselves
that each of the remaining Directors, together with Mr Gregory,
should stand for re‑election or election (as applicable), and the
justifications for such (re‑)elections are set out on pages 113 to 114
of this Annual Report and in the Notice of Annual General Meeting
on pages 240 to 248.
(1) Mr Peckham, Mr Martin and Mr Miller resigned from the Board on 7 March 2024.
125
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023GOVERNANCE NOMINATION COMMITTEE REPORT CONTINUED
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 99, the current Directors have skills and
experience across eight areas that the Committee considers to
be key to delivering the Company’s strategy: aerospace, aviation,
industrial, accounting and finance, legal, investment, corporate
governance and sustainability (environmental and social).
Wider succession planning
The Committee does not have direct responsibility for the
succession planning arrangements below Board level.
Responsibility for the succession planning arrangements of
the senior management team is the responsibility of the Chief
Executive Officer, although the Committee retains oversight of
succession planning for key individuals within this team and has
access to them through a combination of site visits, the business
review cycle, Board and committee meetings, as well as being
provided with relevant information in order to monitor diversity
among them.
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. Melrose encourages diversity
at all levels of the Group. In particular, the last five 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 Financial Conduct Authority (“FCA”) Listing Rules and Parker
Review target, and its own Board diversity 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.
During the year, the Board continued to meet its target of
maintaining at least 40% female representation on its Board. As at
31 December 2023, Melrose had 40% female representation on its
Board, meaning that Melrose has met its target and the expectations
of the FTSE Women Leaders Review and the FCA Listing Rules.
DIVERSITY OVERVIEW(1)
1
1
2
1
1
2
2
2
Board gender diversity
Board ethnic diversity
Melrose Executive Committee
Senior Management
and direct reports(2)
1 Male
2 Female
60%
1 White
90%
1 Male
40%
2 Ethnically diverse
10%
2 Female
63%
1 Male
37%
2 Female
59%
41%
(1) As at 31 December 2023.
(2) In accordance with the Code, senior management is defined as the executive committee, or the first layer
of management below Board level, including the Company Secretary.
126
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023 The FTSE Women Leaders Review and the FCA Listing Rules also set
a target for at least one senior board position, being that of chairman
of the board, senior independent director, chief executive or chief
financial officer, to be held by a woman (the FTSE Women Leaders
Review having set a target date of the end of 2025). The Committee
recognises that Melrose does not currently meet this requirement
and that it is under review. Whilst there is a need for continuity and
stability amongst the Board during the current period of significant
strategic change for Melrose, this requirement is being factored into
ongoing succession planning discussions.
During the year, the Board updated its senior management diversity
target to align with the FTSE Women Leaders Review of having
40% female representation within its Executive Committee and
direct reports by the end of 2025. As at 31 December 2023, the
Executive Committee and its direct reports consisted of 41%
female representation (and 37% female representation specifically
at an Executive Committee level). Melrose therefore currently
meets its diversity target and the expectation of the FTSE Women
Leaders Review.
The Committee notes the recent recommendations of the Parker
Review for FTSE 350 companies to set a percentage target for senior
management positions that will be occupied by ethnic minorities by
the end of 2027, with the target being set by 31 December 2023.
Following engagement by the Company Secretariat with a member
of the Parker Review Committee, and external advice to track the
scope and timing of setting such targets among FTSE 100 peers,
both the Committee and Board agreed that it was not feasible for
Melrose to set a sufficiently informed ethnic diversity target for senior
management by the end of last year. In particular, Melrose has not
traditionally collected sensitive data, such as ethnic diversity data,
from its employees. However, the Group is proactively assessing
the collection of such data across its operations noting that there
are legal and regulatory barriers to overcome in certain jurisdictions.
Furthermore, as Melrose’s change in business strategy has meant
that there will be corresponding changes to the senior management
population of the Group into the first half of 2024, it would be timely
and appropriate to set a target in light of these changes having
taken place. The Committee will seek to set a senior management
ethnic diversity target during the course of 2024. With the assistance
of external lawyers, Melrose has already reviewed its policies and
procedures for the collection of ethnic diversity data, and has
asked Melrose employees to complete a voluntary equality and
diversity form.
The Committee acknowledges that diversity, equity and inclusion
is a changing landscape, and reviews its diversity policies on an
annual basis, with any recommendations for amendments being
approved by the Board. The policies, which can be viewed on
the Company’s website at www.melroseplc.net/governance/
documents‑and‑policies 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, which is equally applicable to each of
the Board’s committees. It also sets out the Company’s diversity
targets for the Board, the details of which are noted above. 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. The principles of the policy apply throughout the Group,
and our divisions are encouraged to promote diversity.
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 43 to 93. Additionally,
further details on diversity and Board skills can be found on
page 99 of the Governance overview.
Evaluation
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 externally facilitated Melrose Board and
committee review was undertaken by Lintstock Ltd in 2020 and so
the Company was required to undertake another in 2023. For this
purpose, the Company engaged Lintstock who engaged directly
with the Directors on: (i) the constitution and performance of the
Board and each committee; (ii) the Chairman of the Board; and
(iii) individual performance reviews. Lintstock produced a report
based on the feedback of Committee members and analysis of the
responses, which was presented and discussed at the December
Board meeting. Alongside such formal feedback, the Committee
continued to facilitate direct ongoing contact between its members
and the Chair of the Committee about any relevant matters that the
members wished to raise as part of the ongoing review.
Charlotte Twyning
Chair, Nomination Committee
7 March 2024
127
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023GOVERNANCE DIRECTORS’ REMUNERATION REPORT
Melrose remuneration structure
Our long‑standing executive remuneration structure has traditionally
been characterised by setting salary, benefits and annual
bonuses below the lower quartile of our FTSE 100 peers, with the
opportunity for significant reward being weighted towards long‑term
incentivisation. This approach has been entirely appropriate in
complementing our “Buy, Improve, Sell” strategy and has been
central to the success that has been delivered for our shareholders.
It has also been both well understood and well supported by our
investors, as most recently demonstrated by the votes in favour
of the 2022 Directors’ Remuneration Report and the current
Directors’ remuneration policy (the “2023 Directors’ Remuneration
Policy”), at the 2023 Annual General Meeting held on 8 June 2023
(the “2023 AGM”).
With Melrose’s strategy having shifted from its previous “Buy,
Improve, Sell” model to becoming an aerospace business for the
long term, now is the appropriate time to realign the Company’s
executive remuneration structure to reflect our new strategic
direction, subject to approval by shareholders of the 2024
Directors’ remuneration policy set out below (the “2024 Directors’
Remuneration Policy”) at the 2024 Annual General Meeting to be
held on 2 May 2024 (the “2024 AGM”). Our new strategy remains
focused on value creation, founded on continuous operational and
financial improvement over the longer term. Our positive trajectory
is underpinned by the strong organic growth prospects within the
aerospace sector, alongside attractive opportunities to differentiate
our business through cutting‑edge proprietary technology. To
support this change in strategy, the Board believes that the new
executive management team should be remunerated under a
structure that resembles more closely Melrose’s FTSE 100 peers,
having undertaken an external benchmarking exercise, which
also took account of international aerospace peers comprising
companies that are more analogous in make‑up to Melrose. In
particular, we propose to rebalance Melrose’s weighting of fixed to
variable remuneration, and of medium‑ to longer‑term incentivisation,
using a long‑term incentive structure reflective of the majority of
FTSE 100 companies.
Operation of the 2023 Directors’ Remuneration Policy
During the year, the Chief Executive’s and the Group Finance
Director’s salaries remained well below the lower quartile of our
FTSE 100 peers, with annual bonuses capped for Melrose’s current
executive Directors well below our peers at 100% of salary. The
Committee amended the operation of the annual bonus plan as part
of the renewal of the 2023 Directors’ Remuneration Policy at the 2023
AGM, by increasing the maximum opportunity from 100% to 200%
of salary for any newly appointed executive Directors. This decision
had 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. However, no new executive
Directors were appointed during the year and so no Directors
benefitted from this increased annual bonus entitlement.
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 received. The
table on page 132 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(1) in 2023 was less than
half, or over £1 million less than, the average FTSE 100 CEO annual
remuneration in 2022 (excluding the LTIP element).
David Lis
Remuneration Committee Chair
Now is the right time to revisit
Melrose’s remuneration structure
to reflect our new “Design, Deliver,
Improve” business model.”
CHAIR’S ANNUAL STATEMENT
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 a highly successful year for Melrose, and one of
significant strategic change.
During the year, the Board announced its decision to move away
from its traditional “Buy, Improve, Sell” business model to operate
as a long‑term aerospace group.
Given this significant strategic shift, the Remuneration Committee
(the “Committee”) believes that now is the right time to revisit
Melrose’s remuneration structure to reflect our new “Design,
Deliver, Improve” business model and help drive the long‑term
performance of the Company.
It is with this background and Company performance during the
year that the Committee has taken its decisions in respect of
executive Director remuneration arrangements for 2023 and 2024.
(1) References in the Directors’ Remuneration report to the “Chief Executive” refer to Simon Peckham who stepped down as Chief Executive on 6 March 2024.
128
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023 As this and the table on page 132 clearly indicate, the opportunity
for significant reward has traditionally been heavily weighted to
the Company’s long‑term incentive arrangements, which have
been based entirely on value creation. 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. With the impact of COVID‑19 resulting in the
previous incentive plan maturing with no award, the current plans
represent the only incentive plans with possible benefits for Melrose
management since 2017.
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 132), CEO pay ratio
(pages 137 to 138), and Wider workforce considerations (page 140),
we believe that the remuneration structure operated by Melrose,
and the outcomes produced by the operation of this structure, were
appropriate and resulted in a strong alignment between the executive
Directors, shareholders and other stakeholders.
It is based on this performance, and in the context of Melrose’s
change of strategy, that the Committee has taken its decisions
in respect of executive Director remuneration arrangements for
2023 and 2024. There were no deviations from the 2023 Directors’
Remuneration Policy in respect of 2023 and the Committee did
not exercise any discretion to alter the 2023 outcomes from the
application of the performance conditions. Full details are set out in
the Annual Report on Remuneration on pages 130 to 145 that will be
put to an advisory vote at the 2024 AGM.
2024 Directors’ Remuneration Policy
We are proposing to introduce the 2024 Directors’ Remuneration
Policy, subject to approval at the 2024 AGM. The 2024 Directors’
Remuneration Policy is proposed to rebalance the Company’s
remuneration structure to align with its FTSE 100 peers across
fixed and variable aspects, to reflect the new long‑term aerospace
business model, using a structure and mechanics that are more
reflective of the majority of FTSE 100 companies.
The main differences between the 2023 Directors’ Remuneration
Policy and the 2024 Directors’ Remuneration Policy are:
• rebalancing the remuneration structure to align with the
Company’s FTSE 100 peers across fixed and variable aspects,
to reflect the new long‑term aerospace business model, using
a structure and mechanics that are reflective of the majority of
FTSE 100 companies;
• reducing the pension contribution rate for the executive Directors
from 15% to 10% of base salary in order to bring the contribution
to a level consistent with the Group’s wider UK workforce as it
stands after the demerger of Dowlais Group plc in April 2023 (the
“Demerger”) and the merging of Melrose and GKN Aerospace into
a single standalone business; and
• the introduction of the Melrose Performance Share Plan (“PSP”)
which will replace the 2020 Melrose Employee Share Plan (the
“MESP”) as the Group’s ongoing long‑term incentive plan.
As announced last year, our executive Directors and co‑founders,
Christopher Miller and Simon Peckham, together with longstanding
executive Director Geoffrey Martin, will not stand for re‑election
at the 2024 AGM.(1) To take forward the Company’s new pureplay
aerospace strategy, we welcome Peter Dilnot as Chief Executive
Officer and Matthew Gregory as Chief Financial Officer. The
proposed 2024 Directors’ Remuneration Policy would only be
applicable to Mr Dilnot and Mr Gregory and not to the departing
executive Directors.
Stakeholder engagement
We were pleased that the 2022 Directors’ Remuneration Report
and the 2023 Directors’ Remuneration Policy both received strong
shareholder support at the 2023 AGM, receiving voting outcomes
of 97.29% and 82.02% respectively.
At Melrose, we always strive for the full support of our shareholders
in everything we do. This is critical to our success and is
never taken for granted. We have engaged with a wide variety
of stakeholders, including through communications to key
shareholders together representing over 65% of our register and
proxy advisers, on the proposed 2024 Directors’ Remuneration
Policy, and as at the time of writing some of those discussions
are ongoing. It is important to us that we conduct a thorough and
open‑minded engagement, understanding the focus on executive
remuneration in the wider governance community and the views
of our key shareholders in particular, many of whom have been
long‑term investors in Melrose. The engagement process has so
far been informative and feedback received has been factored into
our proposal. We thank the participants for their time.
Your Board considers that the Melrose remuneration structure that
has been adopted to date has been highly successful, appropriate
for the value creation strategy, and integral to the long‑term
performance of the Company under its former “Buy, Improve, Sell”
strategy. As Melrose embarks on its next chapter as a pureplay
aerospace group, your Board considers that the revised Melrose
remuneration structure set out in the 2024 Directors’ Remuneration
Policy is appropriate for the Company’s go‑forward strategy,
as well as being critical to driving long‑term performance and
shareholder value creation, and best meets the expectations of our
shareholders as a whole.
We encourage you to provide your support for the 2023 Directors’
Remuneration Report and the new 2024 Directors’ Remuneration
Policy at the 2024 AGM.
Yours sincerely
David Lis
Chair, Remuneration Committee
7 March 2024
(1) Mr Peckham, Mr Martin and Mr Miller resigned from the Board on 7 March 2024.
129
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023GOVERNANCE DIRECTORS’ REMUNERATION REPORT CONTINUED
ANNUAL REPORT ON REMUNERATION
In this section of the Directors’ Remuneration report, we set out:
• the actual performance and executive remuneration outcomes
for the 2023 financial year;
• the application of the 2023 Directors’ Remuneration Policy to the
2023 financial year and how the 2023 Directors’ Remuneration
Policy was operated in 2023; and
• details of how the 2024 Directors’ Remuneration Policy is
intended to be implemented in 2024.
The 2023 Directors’ Remuneration Policy was approved by
shareholders at the 2023 AGM with over 82% of votes cast in
favour of the resolution. The full details of the current Directors’
Remuneration Policy can be found on pages 135 to 144 of
the 2022 Annual Report which is available on our website at
www.melroseplc.net/investors/results‑reports‑and‑presentations.
It is proposed that, subject to approval of shareholders at the
AGM on 2 May 2024, the 2023 Directors’ Remuneration Policy
be updated to align the Company’s remuneration principles with
the new business strategy of the Company. The 2024 Directors’
Remuneration Policy is set out on pages 145 to 152.
Key elements of the Annual Report on Remuneration
and where to find them
Element
Single figure of remuneration
Share interests awarded in the 2023 financial year
Page
131 and 141
None(1)
Statement of Director shareholdings and interests
135 and 141
Performance graph
CEO pay ratio
Percentage change in remuneration of the CEO
Relative importance of spend on pay
138
137 to 138
138 to 139
140
Consideration of matters relating to Directors’ remuneration
130 to 131
Statement of voting
Payments to past directors or for loss of office
2024 Directors’ Remuneration Policy
145
141
145 to 152
(1) No value was vested to participants under incentive plans in the 2023 financial year
– please see the single total figure of remuneration for the executive Directors for the
2023 financial year (audited) on page 131.
Melrose’s remuneration strategy
Since the Company was first established in 2003, the Committee
has pursued a consistent remuneration strategy that has closely
aligned the executive Directors with the Company’s shareholders,
has driven the Company’s traditional “Buy, Improve, Sell” model
prior to its shift to operating as a pureplay aerospace company,
and has been central to its success. This strategy has been based
around four key principles – namely, that executive remuneration
is simple, transparent, supports the delivery of the value creation
strategy, and pays only for performance.
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 144. The Committee ensured that it took all of these elements
into account when establishing the 2023 Directors’ Remuneration
Policy, as well as its application to executive Directors during
the period.
2023 key decisions
The Committee remained committed to a responsible approach to
executive pay in accordance with the 2023 Directors’ Remuneration
Policy which was approved at the 2023 AGM, and its four key
remuneration principles.
There was no long‑term incentive arrangement due to vest in 2023,
with the crystallisation date under the MESP being 31 May 2024
following shareholder approval at the general meeting related to the
Demerger which took place on 30 March 2023. As such there was no
payout in the year.
In line with the prior year, an inflationary increase of 5% was
made to the executive Directors’ base salaries with effect from
1 January 2023, which was below the salary rises awarded to the
wider Melrose head office population. The Chief Executive’s and the
Group Finance Director’s salaries remained below the lower quartile
of the FTSE 100, as is demonstrated in the table on page 132. There
were also inflationary increases of 5% made to the Non‑executive
Chairman’s fee and the Non‑executive Director basic fees with effect
from 1 January 2023, again consistent with the salary changes for
the executive Directors. There were no changes to the additional fees
for holding the position of Senior Independent Director or committee
chair positions.
For 2024, an increase of 5% was made to the executive Directors’
base salaries with effect from 1 January 2024 as set out on
page 136, which was consistent with the increases awarded across
the wider UK 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 2024, consistent with the increases
determined for the executive Directors’ base salaries, as set out on
page 142. There were no changes to the additional fees for holding
the position of Senior Independent Director or committee chair
positions for 2024.
In determining the 2023 remuneration outcomes and the
remuneration approach for 2024, the Committee was mindful of the
evolving macroeconomic challenges impacting the global economy.
As set out in this report, the executive Director salary increases were
determined to be appropriate in light of the Company’s performance
in 2023, whilst recognising and balancing the need to appropriately
remunerate and incentivise the executive team to continue to deliver
value to shareholders.
In light of the appointments of Mr Peter Dilnot to the role of Chief
Executive Officer and Mr Matthew Gregory to the role of Chief
Financial Officer with effect from 6 and 7 March 2024 respectively,
the Committee has approved new remuneration structures for
these roles. The salary changes are set out on page 136, and
are intended to be effective from their dates of appointment and
prorated accordingly.
The Committee feels that it has been able to balance all relevant
stakeholder considerations when setting salaries for 2024 and having
benchmarked against FTSE 100 peers based on analysis from
external advisers.
130
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023 Although the annual bonus outcomes for 2023 were finally
determined by the Committee in 2024, 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 2023.
As is detailed further on page 133, the Committee felt that while
management’s performance had substantially met the strategic
objectives it had not done so in full. We have therefore determined to
make an award of 15% for the strategic objectives (out of a maximum
of 20%), and thus a total award for the annual bonus of 95% of salary.
For the reasons set out in this report, the Committee believes that
the bonus outcome for 2023 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 2023 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 2023 Directors’ Remuneration Policy in respect of
the year and the Committee did not exercise any discretion to alter the
2023 outcomes from the application of the performance conditions.
Business performance
With the strategic shift to the new, pureplay aerospace business
model, 2023 has been a transformational year for Melrose,
delivering financial results ahead of expectations. Revenues grew
substantially in both the Engines and Structures divisions. There
was a 124% increase in adjusted operating profit to £420 million,
with margins doubling from 6.3% to a record 12.5% (pre‑PLC
costs). Leverage reduced to 1.1x, including £93 million of share
buybacks completed over the period. Further details on this are set
out in the CEO’s review on pages 4 to 7 and the Divisional reviews
on pages 8 to 11.
This Annual Report and financial statements, and specifically
the Group’s strategic KPIs on pages 18 to 19, demonstrates the
good progress that was made in 2023 towards the successful
implementation of the Company’s new strategy and business plan
as a pureplay aerospace business. The Company’s annual bonus
plan focuses directly and indirectly on rewarding executive Directors
and Melrose senior management for delivering these KPIs.
Single total figure of remuneration for the executive Directors for the 2023 financial year (audited)
The following chart summarises the single figure of remuneration for 2023 in comparison with 2022(1):
Executive Director
Christopher Miller
Simon Peckham
Geoffrey Martin
Peter Dilnot
Total salary
and fees
£000
Taxable
benefits
£000
596
567
596
567
487
464
487
464
2
2
4
1
14
12
2
2
Period
2023
2022
2023
2022
2023
2022
2023
2022
Bonus
£000
n/a(4)
n/a
566
567
463
464
463
464
LTIP
£000(2)
Pension
£000(3)
–
–
–
–
–
–
–
–
89
85
89
85
73
70
73
70
Total
£000
688
654
1,256
1,221
1,037
1,008
1,025
998
Total
Fixed
£000
Total
Variable
£000
688
654
689
654
574
545
562
535
–
–
566
567
463
464
463
464
(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, has a four‑year performance period. Accordingly, no value was vested to participants under the
2020 Employee Share Plan in respect of the year to 31 December 2022 or the year to 31 December 2023.
(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.
131
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023GOVERNANCE DIRECTORS’ REMUNERATION REPORT CONTINUED
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 2023 pay against the most recent available remuneration information from our FTSE 100 peers, being 2022(1),
excluding long‑term incentives as there was no long‑term incentive vesting in 2023 for Melrose’s Chief Executive.
As the table below shows, the single total figure of remuneration for the Melrose Chief Executive in 2023 was less than half, and over
£1 million less than, the FTSE 100 average in 2022. This demonstrates in practice the Committee’s policy to date 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
1,256
1,950
2,737
3,305
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 5% effective from 1 January 2023.
Metric (GBP ’000)
Annual Salary
Melrose Chief Executive FTSE 100 Lower Quartile
FTSE 100 Average FTSE 100 Upper Quartile
596
742
933
1,058
Pensions
Executive Directors receive the same 15% of base salary pension contribution(2) as the rest of the Melrose head office employees. 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
89
15%
73
9%
121
11%
168
15%
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
4
20
75
90
Annual Bonus
Annual bonuses are entirely performance driven. As part of the changes to the 2023 Directors’ Remuneration Policy that were approved
by shareholders at the 2023 AGM, the maximum bonus opportunity was increased to 200% of salary. However, the 2023 Directors’
Remuneration Policy expressly excluded these changes applying to the 2023 annual bonus for the existing executive Directors. No new
executive Director appointments were made in 2023 and the annual bonus for 2023 was calculated by the Committee in accordance with
the 2020 Directors’ Remuneration Policy which stipulates two elements for the current eligible executive Directors, being: 80% based on
adjusted diluted earnings per share growth; and 20% based on the achievement of strategic elements. The maximum bonus opportunity
for these executive Directors 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
Maximum bonus opportunity %
Melrose Chief Executive FTSE 100 Lower Quartile
FTSE 100 Average FTSE 100 Upper Quartile
566
100%
956
176%
1,499
214%
1,921
223%
(1) The peer group for comparison includes the FTSE 100 constituents as at 31 December 2023, with financial year ends between 1 January 2022 and 31 December 2022, 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 2023.
(2) All of the amounts attributable to pension contributions were paid as supplements to base salary in lieu of pension arrangements.
132
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023 2023 Annual Bonus (audited)
The 2023 Annual Bonus has applied a consistent approach to previous years, in line with the 2023 Directors’ Remuneration Policy. The
Committee awarded participating executive Directors a bonus of 95% of their 2023 base salary, based on 2023 performance, with the full
breakdown of the award calculation set out below.
As is shown by the table, the financial element of the 2023 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, having given detailed and thorough consideration to each of the strategic objectives
and management’s performance against them during 2023, the Committee determined that not all of the strategic objectives had been
fully met during 2023 and therefore that the strategic element should be awarded at 15% (out of a maximum of 20%). 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 2023 annual bonus award, the Committee was mindful of the macroeconomic challenges impacting the global economy,
and aware of the guidance published by the Investment Association setting out the issues that remuneration committees should consider
as they assess 2023 remuneration outcomes and set remuneration for 2024. In light of the Company’s performance during 2023, 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 2023 is appropriate and in line with that guidance.
Financial Objectives (80%)
Percentage of maximum bonus earned
Growth in adjusted diluted earnings per share
% award
Growth in adjusted diluted earnings per share sub‑total:
Threshold
Target
Maximum
Actual Performance
5%
20%
10%
40%
20%
80%
356%(1)
80%
80%
Strategic Objectives (20%)
Percentage of maximum bonus earned
Execution of the
demerger of Dowlais
Group plc – maximum
5%
The Demerger was completed successfully on 20 April 2023, having been approved by shareholders at the general
meeting of the Company held on 30 March 2023. The Demerger enabled the Group to focus on realising the full
potential of the GKN Aerospace business for the long term, a re‑rating of Melrose as an aerospace business, and the
opportunity for significant shareholder value creation over the long term.
Implementation of
strategic shift to an
aerospace‑only business
and transition plan –
maximum 5%
The strategic shift away from Melrose’s traditional “Buy, Improve, Sell” business model to operating as a long‑term
aerospace group and delivering on the Group’s new “Design, Deliver, Improve” business model is transformational for
Melrose. Management has successfully transitioned the business to align it with the new business model and further
de‑risked the operational and financial path towards achieving the Group’s 2025 operating margin targets.
Actions to deliver
the GKN Aerospace
enterprise projects are
substantially complete –
maximum 5%
Management implemented a series of GKN Aerospace restructuring projects during the year, including entering
into a binding agreement for the sale of the Portsmouth and Alabama Fuel Systems businesses, and implementing
the actions to deliver an extensive restructuring programme within Structures, including the consolidation and
restructuring of the Netherlands footprint to two multiple technology campuses in Hoogeveen and Papendrecht.
In the US and Mexico site actions were implemented to enable rationalisation to three centres of excellence
at Chihuahua, Orangeburg and Wellington, which is expected to deliver further quality, productivity and cost
improvements as volumes increase within our restructured and leaner operating base. Actions have been delivered
according to planned milestones and the corresponding benefits are materialising, and underpin the Group’s
trajectory towards achieving its stated operating margin targets.
ESG – maximum 5%
Enhancing climate strategy and achieving key milestones:
Continued significant investment was made in leading technologies to enable aviation’s route to Net Zero by 2050,
with over £45 million invested in decarbonising R&D in 2023. An updated climate physical and transition risks analysis
was undertaken to inform the Company’s sustainability actions, risk mitigation, and strategy as a pureplay aerospace
business. Science‑based targets for near‑ and long‑term emissions were submitted to SBTi for validation.
The Group’s 2025 ESG targets relating to Scope 1 and 2 emissions, water intensity, sustainable R&D investment and
sustainable products, were successfully met ahead of the 2025 target year, and a sustainability data pre‑assurance
project was commenced in preparation for formal limited assurance in the future.
Increasing commitment to diversity:
The Company continued to meet its target of maintaining at least 40% female representation at Board level during
2023, meeting the expectations of the FTSE Women Leaders Review and the FCA Listing Rules. During the year,
the Board updated its senior management diversity target to align with the FTSE Women Leaders Review target
of having at least 40% female representation at Executive Committee and direct reports level by the end of 2025.
As at 31 December 2023, this target was met with 41% female representation at Executive Committee and direct
reports level.
Strategic Objectives sub‑total:
Total annual bonus for 2023:
5%
5%
2.5%
2.5%
15%
95%
(1) The 2022 audited results have been restated to account for discontinued businesses (i.e. to account for the Demerger). As a result, adjusted diluted earnings per share for 2022
has been restated from 7.0 pence to 4.1 pence. In order to provide a like for like comparison following the Demerger, the Committee considered it appropriate to use the restated
figure for 2022 when calculating growth in adjusted diluted EPS between 2022 and 2023. However, if the Committee had used the original figure for 2022 when calculating growth in
adjusted diluted EPS between 2022 and 2023, growth would have been 167%.
133
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023GOVERNANCE DIRECTORS’ REMUNERATION REPORT CONTINUED
The 2023 bonus payments to the former Chief Executive and the
outgoing Group Finance Director will be made in cash, as both have
exceeded their minimum shareholding requirements. As per the
terms of the 2023 Directors’ Remuneration Policy, the 2023 annual
bonus payments are potentially subject to clawback. In accordance
with the terms of the 2023 Directors’ Remuneration Policy, 50%
of the 2023 bonus (post‑tax) payment to Mr Peter Dilnot may be
required to be deferred into shares. 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”) and the Melrose Automotive Share Plan (the “MASP”).
MESP
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) as well as in the 2023 Directors’ Remuneration
Policy approved at the 2023 AGM. 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 traditional 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. At the
general meeting on 30 March 2023, the MESP was adjusted to
split the invested capital between the continuing Melrose Group
and Dowlais according to a fixed ratio to match the separation of
the businesses under the Demerger, with any increase in value in
the Melrose Group being measured against the invested capital
relating to Melrose as at 31 December 2022 (with the initial invested
capital as at 31 May 2020 having been adjusted and re‑stated to
31 December 2022). The performance period was also extended by
12 months to 31 May 2024. Full details of these adjustments were
set out in the circular to shareholders dated 3 March 2023.
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
2023 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 31 December 2023. As this table demonstrates, as at
31 December 2023, the minimum return hurdle of £153,636,036 on
invested capital as at 31 December 2022 had been achieved and
therefore value would have accrued to the MESP.
MASP
The MASP is governed by the plan rules tabled and approved at
the general meeting that was held on 30 March 2023 (the “MASP
Rules”). The MASP measures the creation of shareholder value in
the demerged Dowlais group above a threshold invested capital (the
“Threshold MASP Crystallisation Value”) 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 were
placed on trust with an employee share ownership trust (“ESOT”)
established by Melrose for the purposes of satisfying awards under
the MASP. Options over these shares were granted following the
MASP Commencement Date and the extent to which the options vest
and become exercisable depends on performance, measured by the
increase in value of invested capital over the period from and including
completion of the Demerger 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. On
the MASP 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.
The increase in value of invested capital for the purposes of the MASP
is calculated by reference to the average market capitalisation of
Dowlais for the 40 Business Days prior to (but excluding) the MASP
Crystallisation Date. If the MASP Crystallisation Date had been
31 December 2023, the Threshold MASP Crystallisation Value would
not have been met by reference to the average market capitalisation
of Dowlais for the 40 Business Days prior to (but excluding)
31 December 2023, and therefore no options would have vested and
become exercisable.
Theoretical value under the MESP if crystallised on 31 December 2023
(rather than on the scheduled payment date)
Invested capital at 31 December 2022(2)
Index adjustment/minimum return
Invested capital at 31 December 2023
Number of issued ordinary shares on 31 December 2023
(excluding treasury shares)
Average price of an ordinary share for 40 business days
prior to and including 29 December 2023(3)
Deemed market capitalisation of Melrose based on average
price of an ordinary share for 40 business days prior to
29 December 2023(3)
Overall change in value for shareholders since
31 December 2022
£2,952,358,090
£153,636,036
£3,105,994,126
1,332,713,481
535.27p
£7,133,648,786
£4,027,654,660
Theoretical value to management and shareholder dilution calculated at
31 December 2023
7.5% of change in value
Total number of new shares issued under the MESP
Theoretical dilution to shareholders due to the MESP
Break‑even price of an ordinary share at 31 December 2023
for the MESP to start to deliver value
£302,074,099
56,433,704
4.06%
233p
(1) Available at www.melroseplc.net/investors/shareholder‑meetings.
(2) While the MESP awards were granted with effect from the deemed commencement
date of 31 May 2020, in connection with the Demerger, the invested capital was
allocated between the Continuing Melrose Group and the Dowlais Group as at
31 December 2022, as further described in the circular dated 3 March 2023. As a result,
the invested capital is shown here as accruing from 31 December 2022, notwithstanding
the four‑year performance period of the MESP, as adjusted for dividends paid and
distributions made on or in respect of the Company’s ordinary shares (including
pursuant to the Company’s share buyback programme) during the period from and
including 1 January 2023 to and including 31 December 2023.
(3) Being the last business day of the 2023 financial year.
134
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023 Minimum shareholding requirements and equity
exposure of the Board (audited)
Executive Directors are subject to two concurrent minimum
shareholding requirements, the full details of which are set out in
the 2023 Directors’ Remuneration Policy as approved at the 2023
AGM. In summary, the first is to always hold at least a value of
shares equal to 300% of salary, for which they are given a period of
five 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 (or his actual shareholding on
cessation, if lower), 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.
In reality, the executive Directors have generally held well in excess
of this minimum amount, 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 2023, as well as an indication
as to the size of these interests relative to the entire issued share
capital of the Company (excluding treasury shares). It also sets
out the number of ordinary shares of the Company held by each
executive Director at the end of the 2022 and 2023 financial years
and the impact on the value of these ordinary shares taking the
closing mid‑market prices for those dates:
Executive
Directors(1)
Christopher Miller
Simon Peckham
Geoffrey Martin
Peter Dilnot
Applicable
shareholding
requirement
(% salary)(2)
Current
shareholding
(% salary)(3)(4)
Shareholding
requirement
met?
300%
300%
300%
300%
7,228%
1,927%
2,585%
76%
Yes
Yes
Yes
No(9)
Shareholding
(% ordinary
share capital)
as at
31 December
2023(5)
0.562%
0.150%
0.164%
0.005%
Shares
beneficially
held on
31 December
2022(4)
Shares
beneficially
held on
31 December
2023(4)(6)
Value of
shares on
31 December
2022(7)
£
Value of
shares on
31 December
2023(3)
£
Difference in
value of
shares between
31 December
2022 and
31 December
2023(8)
£
22,777,659
7,592,553
30,635,951
43,080,146
12,444,194
12,071,895
2,023,965
16,236,699
11,483,977
(4,752,721)
6,655,730
2,218,576
8,951,957
12,588,200
3,636,243
100,000
65,444
134,500
371,329
236,829
(1) In addition to the share interests set out in the table, each of the executive Directors as at 31 December 2023 has an additional exposure by virtue of their conditional awards under
the MESP (see “Long‑term incentive arrangements” on page 134).
(2) The shareholding requirement under the 2023 Directors’ Remuneration Policy is 300% of base salary.
(3) For these purposes, the value of a share is 567.4 pence, being the closing mid‑market price on 29 December 2023, being the last business day of the 2023 financial year, and salary
is 2023 base salary as set out in the single figure table on page 131.
(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) Based on the total number of ordinary shares in issue as at 31 December 2023, inclusive of treasury shares.
(6) Following the one for three share consolidation which took place on 19 April 2023, the Company’s ordinary share capital changed from 4,054,425,961 ordinary shares of
160/21 pence each to 1,351,475,321 ordinary shares of 160/7 pence each, and consequently there was a commensurate reduction in the number of shares held by all shareholders,
including the executive Directors (but not the percentage held).
(7) 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.
(8) The figures in this column may not add up to the sum of the component parts due to rounding.
(9) Under the 2023 Directors’ Remuneration Policy, executive Directors are required to always hold at least an amount of shares equal to 300% of salary, for which they are given five
years from appointment to meet this requirement. Whilst Mr Dilnot does not currently meet the minimum shareholding requirement, it is anticipated that he will hold far in excess of
this shareholding as a result of any shares he receives in relation to the MESP in May 2024, subject to the performance conditions having been met.
No executive Director may dispose of any ordinary shares without the consent of the Chairman of the Board, 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 2023 and 7 March 2024 (the
date of this report).
Please see page 141 for a table setting out the equity interests of the Non‑executive Directors as at 31 December 2023.
135
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023GOVERNANCE DIRECTORS’ REMUNERATION REPORT CONTINUED
Key decisions and statement
of implementation for 2024
Salary review
The Committee has awarded salary increases to the executive
Directors of 5% for 2024, which is consistent with the rate of salary
increases made to the wider UK workforce. The executive Director
salary increases were determined to be appropriate in light of the
Company’s performance in 2023, whilst recognising and balancing
the need to appropriately remunerate and incentivise the executive
team to continue to deliver value to shareholders.
The bonuses for the Chief Executive Officer and Chief Financial
Officer will be prorated for 2024 such that they will be payable for
the portion of the year from 6 and 7 March 2024 onwards (being
the dates on which the relevant individuals commenced their roles
as Chief Executive Officer and Chief Financial Officer, respectively).
For the period from 1 January to 5 March 2024, Mr Dilnot will be
entitled to a prorated bonus with a maximum opportunity of 100%
of his salary for that period and for the period from 1 January to
6 March 2024, Mr Gregory will be entitled to a prorated bonus for his
role as Chief Financial Officer of GKN Aerospace.
In light of Simon Peckham and Geoffrey Martin stepping down
as Chief Executive and Group Finance Director on 6 and 7 March
respectively, and the appointments of Mr Peter Dilnot to the role
of Chief Executive Officer and Mr Matthew Gregory to the role of
Chief Financial Officer with effect from 6 and 7 March 2024 (the
“Dates of Appointment”) respectively, the Committee has approved
new remuneration structures for these roles as set out in the table
below, which will be effective from their Dates of Appointment
and prorated accordingly. The new remuneration structures were
determined to be appropriate to align executive salary and the
wider executive remuneration package with that of other FTSE 100
companies. The 2024 Directors’ Remuneration Policy is subject to
the approval of shareholders at the 2024 AGM.
The Committee therefore feels that it has been able to balance all
relevant stakeholder considerations when setting salaries for 2024.
The executive Directors’ salaries for 2024 are as follows(1):
Executive Directors
Position
Christopher Miller
Executive Vice‑Chairman
Simon Peckham
Chief Executive
Geoffrey Martin
Group Finance Director
Peter Dilnot
Chief Operating Officer /
moving to Chief
Executive Officer
Matthew Gregory Chief Financial Officer
Salary with
effect from
1 January 2024
£000
Salary change
with effect from
March 2024
£000
626
626
511
511
n/a
n/a
n/a
n/a
975
695
(1) Mr Peckham and Mr Martin stepped down as Melrose Chief Executive and Group
Finance Director respectively with effect from 6 and 7 March 2024 respectively, to
be replaced by Mr Dilnot and Mr Gregory respectively. Mr Peckham, Mr Martin and
Mr Miller will not stand for re‑election at the 2024 AGM.
Pensions and benefits
For 2024, standard benefits will be provided to the executive
Directors in line with the 2024 Directors’ Remuneration Policy.
However, the pension contribution rate for executive Directors
will be reduced from 15% to 10% of base salary for Mr Dilnot and
Mr Gregory, in order to bring the contribution to a level consistent
with the Group’s wider UK workforce as it stands following the
Demerger and the merging of Melrose and GKN Aerospace into
a single standalone business.
The Committee has approved this reduction in the pension
contribution rate and this change is also intended to be effective
from Mr Dilnot and Mr Gregory’s Dates of Appointment and
prorated accordingly.
The annual bonus will be based on financial performance metrics
of 70% with the remaining 30% based on strategic and/or personal
objectives. The financial performance metric will comprise cash
flow and operating profit, which the Committee considers to be the
appropriate metrics for the Company. The Committee considers
that the details of the strategic 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 133 in
respect of the annual bonus for the year ending 31 December 2023.
If an executive Director does not satisfy the minimum shareholding
requirement, up to 50% of any bonus award after tax will be used
to acquire shares to the extent necessary to enable the executive
Director to meet his or her minimum shareholding requirement (as
further described on page 135).
Long‑term incentive arrangements
Given the nature of the MESP (see “Long‑term incentive
arrangements” on page 134), no grants were made to the executive
Directors under the MESP in 2023, nor will any be made to them
in 2024. Grants were made to the executive Directors under the
MASP in 2023. Details of such grants were set out in the circular
published in relation to the Demerger, which is available at
www.melroseplc.net/investors/shareholder‑meetings.
Subject to shareholder approval at the 2024 AGM, going forward,
executive Directors will be granted awards under the Performance Share
Plan (the “PSP”). The intention is that following commencement of the
PSP, the Chief Executive Officer will be made an award at the maximum
level allowed of 300% of salary and the Chief Financial Officer will be
made an award at 200% of salary, however, as the PSP will commence
following crystallisation of the MESP on 31 May 2024, the 2024 awards
will be prorated from the scheme commencement date (so as to be
made at 7/12ths of 300% of salary for the Chief Executive Officer, and
7/12ths of 200% of salary for the Chief Financial Officer). Detailed
performance measures will be set by the Committee in relation to the
initial awards to be made under the PSP and are expected to be subject
to three independent performance metrics, comprising growth in fully
diluted adjusted EPS (45%), relative TSR performance versus the FTSE
100 (excluding investment trusts) (45%), and strategic objectives (10%).
Unless performance of a participant during the performance period
is sufficient to earn 25% of the relevant maximum opportunity, none
of the PSP Awards granted to that participant will vest, with 100%
of the PSP Awards granted to a participant vesting if maximum
performance is achieved.
No payment is required for the grant of a PSP Award.
Annual bonus
As part of the 2024 Directors’ Remuneration Policy, which will
be put forward for shareholder approval at the 2024 AGM, the
maximum bonus opportunity for executive Directors will remain at
200% of base salary. In practice, for 2024, this will be applied such
that the maximum opportunity will be 200% of base salary for the
new Chief Executive Officer and 150% of base salary for the new
Chief Financial Officer.
As soon as reasonably practicable after the end of each performance
period, the Committee will conduct a performance assessment.
The Committee will determine the extent to which the PSP Awards
will then vest, taking into account the extent to which performance
conditions have been satisfied. PSP Awards will vest on the vesting
date set by the Committee at grant, which will normally be the third
anniversary of the grant date. An additional two‑year post‑vesting
holding period applies to PSP Awards made to executive Directors.
136
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023 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, any awards in relation to the MESP and the MASP are not scheduled until May 2024 and May 2025,
respectively, and only then if the performance conditions are met.
Financial year
Chief Executive
Year ended 31 December 2023
Simon Peckham
Year ended 31 December 2022
Simon Peckham
Year ended 31 December 2021
Simon Peckham
Year ended 31 December 2020
Simon Peckham
Year ended 31 December 2019
Simon Peckham
Year ended 31 December 2018
Simon Peckham
Year ended 31 December 2017
Simon Peckham
Year ended 31 December 2016
Simon Peckham
Year ended 31 December 2015
Simon Peckham
Year ended 31 December 2014
Simon Peckham
Non‑LTIP
£
1,255,595
1,221,011
1,186,316
680,113
976,000
1,049,000
994,000
987,725
928,541
773,167
LTIP
£
–
–
–
–(1)
–
–
Total
remuneration
£
1,255,595
1,221,011
1,186,316
680,113
976,000
1,049,000
41,770,000(3)
42,764,000
–
–
–
987,725
928,541
773,167
Annual bonus
as a percentage
of maximum
opportunity
Long‑term
incentives
as a percentage
of maximum
opportunity
95%
100%
100%
20%
72%
95%
90%
95%
88%
58%
–
–
–
n/a(2)
–
–
n/a(4)
–
–
–
(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 2023 continued to be low at 25:1. 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 2023
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
Option A
25th percentile
pay ratio
Median
pay ratio
75th percentile
pay ratio
32:1
32:1
34:1
20:1
30:1
25:1
26:1
29:1
16:1
24:1
21:1
20:1
23:1
13:1
19:1
The employees used for the purposes of calculating the pay ratios in the table above were those employed in the UK by any business within
the Group on 31 December 2023 (for the avoidance of doubt, including the Chief Executive), and the remuneration figures were determined
with reference to the financial year ending 31 December 2023. 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 2022 financial year bonuses (which
were paid during 2023) where the 2023 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 (rounded to the nearest
£1,000).
Financial year
Element of pay
Year ended 31 December 2023
Salary and wages(1)
Total pay and benefits
25th percentile
pay employee
£35,000
£39,000
Median
employee
£44,000
£50,000
75th percentile
pay employee
£53,000
£61,000
(1) Base salary includes overtime and shift allowances/premiums. The individual at the median received shift premium and overtime during the year.
137
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023GOVERNANCE DIRECTORS’ REMUNERATION REPORT CONTINUED
Despite the Demerger resulting in a significant decrease in the Group’s employee population (which reduced from an average of 38,772
during 2022 to an average of 14,741 during 2023) all ratios for 2023 remain broadly consistent with those for 2022.
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 132 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.
)
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1,000
900
800
700
600
500
400
300
200
100
0
45,000
40,000
35,000
30,000
25,000
20,000
15,000
10,000
5,000
0
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0
0
0
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£
(
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2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
Average Employee Pay
CEO Total Single Figures Excl. 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 Group’s senior head office employees. 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 means that remuneration policies vary to take account of
geography 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 versus
2020 and for 2020 versus 2019 were naturally impacted by the COVID‑19 pandemic, which included temporary salary and fee reductions
and reduced annual bonuses for the executive Directors in 2020.
138
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023
Basic
salary/fee
percentage
Element of remuneration
change(1)
Executive Directors
2023 vs 2022
2022 vs 2021
2021 vs 2020
2020 vs 2019
Benefits
percentage
change/
amount
£000(2)
Annual
bonus
percentage
change(3)
Basic
salary/fee
percentage
change(1)
Benefits
percentage
change/
amount
£000(2)
Annual
bonus
percentage
change(3)
Basic
salary/fee
percentage
change(1)
Benefits
percentage
change/
amount
£000(2)
Annual
bonus
percentage
change(3)
Basic
salary/fee
percentage
change(1)
Benefits
percentage
change/
amount
£000(2)
Annual
bonus
percentage
change(3)
Christopher Miller
Simon Peckham
Geoffrey Martin
Peter Dilnot(4)
Non‑executive Directors
Justin Dowley
David Lis(5)
Charlotte Twyning(6)
Funmi Adegoke
Heather Lawrence(7)
Victoria Jarman(8)
Gillian Elcock(9)
Senior employees
5% 33% / 2
5% 263% / 4
5% 18% / 14
5% 22% / 2
5%
5%
4%
(48)%
14%
5%
–
8%
n/a
n/a
n/a
n/a
n/a
n/a
–
10%
n/a
0%
0%
0%
n/a
n/a
n/a
n/a
n/a
n/a
–
8%
3% 15% / 2
3% ‑45% / 1
3% 31% / 12
3% ‑88% / 2
3%
16%
22%
3%
119%
77%
–
4%
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
–
2%
12% ‑30% / 2
12% ‑26% / 2
14% ‑6% / 9
–
– / 15
n/a
415%
422%
–
‑6% ‑20% / 2
‑6% ‑2% / 3
‑6% 7% / 10
–
– / –
n/a
‑71%
‑72%
–
12%
10%
12%
12%
–
–
–
n/a
n/a
n/a
n/a
–
–
–
n/a
n/a
n/a
n/a
–
–
–
‑6%
‑4%
‑6%
278%
–
–
–
n/a
n/a
n/a
n/a
–
–
–
n/a
n/a
n/a
n/a
–
–
–
6%
92%
167%
‑1%
11%
45%
(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/or 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 only limited prior year comparisons are possible.
(5) 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.
(6) Charlotte Twyning was appointed as the Chair 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.
(7) 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 prorated 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 Chair 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.
(8) 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 prorated 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.
(9) Gillian Elcock was appointed to the Board with effect from 21 June 2023 and therefore no prior year comparison is available.
Total Shareholder Return
The total shareholder return graph below shows the value as at 31 December 2023 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 3,117%
(compared to the FTSE 100 Index TSR of 283%) 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 2023 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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3,500
3,000
2,500
2,000
1,500
1,000
500
0
Oct 03
Oct 05
Oct 07
Oct 09
Oct 11
Oct 13
Oct 15
Oct 17
Oct 19
Oct 21
Oct 23
Melrose Industries
FTSE All Share
FTSE 100
FTSE 250
139
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023GOVERNANCE
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 and GKN Aerospace senior management teams,
or the wider workforce, nor is it responsible for determining
wider employee pay. The Melrose Chief Executive is responsible
for engaging with the Melrose workforce and GKN Aerospace
senior management team in relation to remuneration, and the
GKN Aerospace senior management team is responsible for
engaging with the GKN Aerospace workforce in relation to
remuneration, and each do so throughout the year. The Committee
considers such approach to be appropriate on the basis that it still
maintains oversight of workforce pay, policies and incentives at a
Melrose level and within the GKN Aerospace senior management
team, which enables it to ensure that the approach taken to
executive remuneration is consistent with the workforce. In addition,
the CEO pay ratio continues to remain low. The Committee receives
detail on GKN Aerospace senior management remuneration to
ensure that this is consistent with the remuneration of the executive
Directors. The GKN Aerospace Chief Human Resources Officer also
provides an annual confirmation, via the Workforce Advisory Panel,
that GKN Aerospace’s senior management team remuneration 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, the Committee is satisfied that
the approach taken to remuneration at all levels is consistent with
the Company’s remuneration philosophy.
In 2023, the Committee was particularly aware of the continuing
macroeconomic challenges impacting the global economy,
including the impact of the war 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 2023 and 2024 have been taken with this background
in mind, and with the benefit of the oversight described above and
advice from its external remuneration advisors. The Committee
took this into consideration when making its decision for the
executive Director salary increases for 2024, which were consistent
with the increases awarded across the wider UK workforce.
Melrose and GKN Aerospace 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 GKN Aerospace executive team determines the retirement
benefits provided to GKN Aerospace employees.
Long‑term incentives
Participation in the Melrose long‑term incentive arrangements
(being the MESP and the MASP and, subject to approval at the
2024 AGM, the PSP) is limited to senior Melrose head office
employees. However, a GKN Aerospace long‑term incentive plan is
in place for senior managers of GKN Aerospace to incentivise them
to create value for the Company and our shareholders. Depending
on the amount of value created, participants in this incentive plan
will receive a cash payment in the event of a sale of the business.
If a sale of the 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 buyback
Year ended
31 December 2022
£ million
Year ended
31 December 2023
£ million
2,127
577(2)
1,095
173(3)
Percentage
change
(49)%
(70)%
(1) The figure is the total staff costs as stated in note 7 to the financial statements. In light of the Demerger, your Board does not consider that the table is meaningful.
(2) The figure for the year ended 31 December 2022 includes the amount returned to shareholders by way of the share buyback in 2022.
(3) The figure for the year ended 31 December 2023 includes the amount returned to shareholders by way of share buyback in 2023.
140
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023 Non‑executive Directors
Single figure table and share interests (audited)
The following table sets out the single figure of remuneration for 2023 in comparison with 2022 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(4)
Heather Lawrence(5)
Victoria Jarman
Gillian Elcock(6)
Total basic
fees
£000
Total other
fees
£000(2)
Other (bonus,
pension,
LTIP, taxable
benefits)
£000
Total
£000
Total
Fixed
£000
Total
Variable
£000
402
383
–
29
86
82
86
82
43
82
86
82
86
82
43
–
–
–
–
17
40
33
15
15
–
–
30
20
–
–
–
–
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
–
402
383
–
46
126
115
101
97
43
82
116
102
86
82
43
–
402
383
–
46
126
115
101
97
43
82
116
102
86
82
43
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Period
2023
2022
2023
2022
2023
2022
2023
2022
2023
2022
2023
2022
2023
2022
2023
2022
(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) Funmi Adegoke resigned as a Non‑executive Director of the Company on 16 June 2023 and the fees referred to above for 2023 reflect her fees for the period 1 January 2023 to
16 June 2023.
(5) Heather Lawrence was appointed as Chair of the Audit Committee on 5 May 2022 and her “Total other fees” for 2022 reflect her Audit Committee Chair fee for the period
5 May 2022 to 31 December 2022.
(6) Gillian Elcock was appointed as a Non‑executive Director of the Company with effect from 21 June 2023 and the fees referred to above for 2023 reflect her fees for the period
21 June 2023 to 31 December 2023.
Payments to past directors or for loss of office (audited)
Ms Funmi Adegoke resigned from her position as Non‑executive Director on 16 June 2023. She received her Non‑executive Director fees
from 1 January 2023 up to and including 16 June 2023. Non‑executive Directors do not receive any taxable benefits, pension contributions
or variable remuneration. Other than the amounts disclosed above, no other remuneration payment was made to Ms Adegoke in the year
and therefore no payment was made for loss of office.
No other payments to past Directors or for loss of office have been made to former Directors during the year.
Share interests
The following table sets out the subsisting interests in the equity of the Company held by the Non‑executive Directors as at 31 December 2023,
as well as an indication as to the size of these interests relative to the entire issued share capital of the Company, including treasury shares:
Non‑executive Directors
Justin Dowley
David Lis
Charlotte Twyning
Heather Lawrence
Victoria Jarman
Gillian Elcock
Total
Ordinary shares held
as at 31 December 2023(1)
Shareholding
(% ordinary share capital)
as at 31 December 2023(2)
514,123
117,950
42,896
7,500
11,166
–
693,635
0.0380%
0.0087%
0.0032%
0.0005%
0.0008%
–
0.0512%
(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.
(2) Based on the total number of ordinary shares in issue as at 31 December 2023, inclusive of treasury shares.
There have been no changes in the ordinary shareholdings of the Non‑executive Directors between 31 December 2023 and 7 March 2024
(the date of this report).
141
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023GOVERNANCE DIRECTORS’ REMUNERATION REPORT CONTINUED
Details of the Non‑executive Directors’ current terms of appointment
are set out below:
Non‑executive Directors
Justin Dowley (Chairman)
David Lis (Senior Independent Director)
Charlotte Twyning
Heather Lawrence
Victoria Jarman
Gillian Elcock
* Subject to annual re‑election.
First appointment
Expires*
1 September 2011
12 May 2016
1 October 2018
1 June 2021
1 June 2021
21 June 2023
2025
2025
2027
2027
2024
2026
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
to enable the Committee to consider their consistency with the
executive Director remuneration packages; and
• operating the Company’s long‑term incentive arrangements.
As described on page 140, although it retains oversight, the
Committee is not responsible for setting and managing the
remuneration of the Melrose and GKN Aerospace senior
management teams, or the wider workforce, nor is it responsible
for determining wider employee pay. The Melrose Chief Executive
is responsible for engaging with the Melrose workforce and
GKN Aerospace senior management team in relation to remuneration,
and the GKN Aerospace senior management team is responsible
for engaging with the GKN Aerospace workforce in relation to
remuneration. 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 and
updated by the Committee in November 2023, are available on our
website, www.melroseplc.net/governance/documents‑and‑policies,
and from the Company Secretary at Melrose’s registered office.
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 2024, 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.
The Non‑executive Director fee levels for 2023 and 2024 are set
out in the table below.
Fee element
Non‑executive Chairman fee
Basic Non‑executive Director fee
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 2023
£
Fee with effect from
1 January 2024
£
401,650
86,100
421,800
90,500
20,000
20,000
30,000
30,000
20,000
20,000
15,000
15,000
Service contracts and letters of appointment
Consistent with the best practice guidance provided by the Code,
the Company’s policy is for executive Directors to be employed
on the terms of service agreements, which may be terminated by
either the executive Director or the Company on the giving of 12
months’ written notice (subject to certain exceptions).
The executive Directors’ service contracts do not provide for
predetermined 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.
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.
142
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023 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 130, the four principles of the existing
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 on page 144. The
Committee ensured that it took all of these elements into account
when establishing the 2023 Directors’ Remuneration Policy, as
well as its application to executive Directors during the period. In
addition, the Committee has taken the Code factors into account
when establishing the 2024 Directors’ Remuneration Policy, as set
out on page 151.
Evaluation
The Code requires that FTSE 350 companies undertake a formal
and rigorous annual review 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 performance review once every
three years. The last external Melrose Board and committee
review was undertaken by Lintstock Ltd in 2020, so the Company
was required to undertake another in 2023. For this purpose, the
Company engaged Lintstock Ltd who engaged directly with the
Directors on: (i) the constitution and performance of the Board and
each committee; (ii) the Chairman of the Board; and (iii) individual
performance reviews. Lintstock Ltd produced a report based on the
feedback of Committee members and analysis of the responses,
which was presented and discussed at the December Board
meeting. Alongside such formal feedback, the Committee continued
to facilitate direct ongoing contact between its members and the
Chair of the Committee about any relevant matters that the members
wished to raise as part of the ongoing review.
Committee Membership and Attendance at meetings
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.
The attendance of the Non‑executive Directors at the scheduled
meetings of the Committee in 2023 was as follows:
Member
David Lis (Chairman)
Justin Dowley(2)
Charlotte Twyning
Victoria Jarman
Gillian Elcock(3)
No. of meetings (1)
2/2
1/2
2/2
2/2
0/0
(1) Reflects regularly scheduled meetings of the Committee that took place in 2023.
(2) Mr Dowley did not attend the Committee meeting held in November due to a conflicting
mandatory commitment. He was in any case briefed on the matters discussed at the
meeting, with his feedback being considered by the Committee.
(3) Ms Elcock was appointed to the Committee on 6 December 2023. There were
no scheduled meetings of the Committee between 6 December 2023 and
31 December 2023.
143
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023GOVERNANCE
DIRECTORS’ REMUNERATION REPORT CONTINUED
Factor
Clarity
Simplicity
Risk
How the Remuneration Committee has addressed and link to the Company’s traditional strategy
The Company’s performance remuneration has been based on supporting the implementation of the Company’s strategy, which has
traditionally been primarily to create sustainable long‑term shareholder value. This has provided clarity to all stakeholders on the relationship
between the successful implementation of the Company’s strategy and the remuneration paid.
The Company has sought to present its remuneration arrangements to investors in the clearest and most transparent way possible. We have
also remained 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 have been limited to base salary, pension contribution and benefits, which have all been 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 have only been two variable elements of
remuneration: the annual bonus and the long‑term incentive arrangements (currently comprising the MESP and MASP), both of which have
been based on simple and transparent metrics. The operation of the Annual Bonus Plan has been linked to financial performance metrics (at
least 50%) and the achievement of strategic and ESG factors. The Company has operated 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 has provided a very simple incentive framework which can be understood by all of the Company’s
stakeholders.
The 2023 Directors’ Remuneration Policy included the following elements to mitigate against the risk of target‑based incentives:
• setting defined limits on the maximum award that could be earned, including capping the annual bonus to a maximum of 200% of base
salary, with the current executive Directors having their annual bonus capped at a maximum of 100% of base salary, 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 requiring
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 required executive Directors to maintain the minimum shareholding for a
period of two years after leaving the Company;
• aligning the performance conditions with the traditional “Buy, Improve, Sell” strategy of the Company; and
• ensuring there was 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 have been 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 has been limited to: (i) the annual bonus, which has been capped at 200% of salary, and 100% of salary for the
current executive Directors, and has been performance‑driven based on financial growth, and strategic and ESG factors; and (ii) the
long‑term incentive arrangements, currently being the MESP and the MASP.
The method of calculation, limits and discretions under the 2023 Directors’ Remuneration Policy have been clearly set out.
Proportionality The restricted fixed remuneration and capped Annual Bonus Plan has been compensated by the opportunity for potentially significant
reward entirely dependent on performance pursuant to the MESP and the MASP, that have supported the Company’s traditional value
creation strategy.
Alignment to
culture
The focus on responsible stewardship and long‑term sustainable performance has been, and remains, a key part of the Company’s culture.
This has been supported by the 2023 Directors’ Remuneration Policy, which has facilitated Committee oversight of workforce pay, policies
and incentives and deliberately restricted the annual salaries, bonuses and benefits for the current Chief Executive and the Group Finance
Director to the lower quartile of the FTSE 100.
Advisors to the Remuneration Committee
During the year, the Committee received reward advice
and advice on the remuneration reporting regulations from
PricewaterhouseCoopers LLP (“PwC LLP”), Ernst & Young LLP
(“EY LLP”) and Alvarez & Marsal Tax LLP (“A&M”). PwC LLP stood
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. PwC LLP’s fees for its advice during the
year up to 30 June 2023 was £32,300 excluding VAT, which was
charged on a time/cost basis.
The Committee appointed EY LLP to act as its remuneration
consultants in replacement of PwC LLP for the remainder of the
period under review. EY LLP’s fees for this advice was £7,000
excluding VAT, which was charged on a time/cost basis. During
the year, EY LLP also provided the Company with tax, accounting
and consulting advice. The Committee is satisfied that the advice
provided by EY LLP in relation to remuneration matters is objective
and independent.
The Committee also appointed A&M on 21 November 2023 to
act as its remuneration consultants alongside EY LLP for the
remainder of the period. A&M’s fees for this advice was £7,607
excluding VAT, which was charged on a time/cost basis. The
Committee is satisfied that the advice provided by A&M in relation
to remuneration matters is objective and independent.
The Company Secretary acts as secretary to the Committee and
attends Committee meetings. Where appropriate and other than
external remuneration advisors, the Committee invites the view of
senior personnel, such as the Chief Executive and Chief Financial
Officer, and interacts with other Board members.
144
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023 Statement of voting at general meetings
The charts below set out the votes on the: (i) 2022 Directors’
Remuneration Report, (ii) 2023 Directors’ Remuneration Policy
at the 2023 AGM, (iii) Demerger resolution setting out (amongst
other matters) adjustments to the Company’s long‑term incentive
arrangements, and (iv) MESP at the January 2021 general meeting.
Resolution to approve the Directors’ Remuneration
Report for the year ended 31 December 2022
(8 June 2023)
12
1 Votes cast for the resolution
97.29%
2 Votes cast against the resolution
2.71%
Votes withheld 57,803,529
Resolution to approve the 2023 Directors’ Remuneration
Policy (8 June 2023)
1
2
1 Votes cast for the resolution
82.02%
2 Votes cast against the resolution
17.98%
Votes withheld 75,539,706
Resolution to approve Dowlais demerger,
share consolidation and adjustments to
2020 Melrose Employee Share Plan (30 March 2023)
1
2
1 Votes cast for the resolution
99.69%
2 Votes cast against the resolution
0.31%
Votes withheld 8,718,447
Resolution to approve and implement the
2020 Melrose Employee Share Plan (21 January 2021)
1
2
1 Votes cast for the resolution
82.64%
2 Votes cast against the resolution
17.36%
Votes withheld 228,313,488
This Annual Report on Remuneration will be put to an advisory vote
at the 2024 AGM on 2 May 2024.
2024 DIRECTORS’ REMUNERATION POLICY
This Directors’ remuneration policy (the “2024 Directors’
Remuneration Policy”) shall, subject to shareholder approval at
the 2024 Annual General Meeting (“2024 AGM”), take binding
effect from the conclusion of that meeting. The Company’s current
Directors’ remuneration policy (the “2023 Directors’ Remuneration
Policy”) was approved by shareholders at the AGM in 2023,
following the demerger of Dowlais Group plc.
The main differences between the 2023 Directors’ Remuneration
Policy and the 2024 Directors’ Remuneration Policy set out below
are as follows:
• rebalancing the remuneration structure to align with the
Company’s FTSE 100 peers across fixed and variable aspects,
to reflect the new long‑term aerospace business model, using
a structure and mechanics that are reflective of the majority of
FTSE 100 companies;
• reducing the pension contribution rate for the executive Directors
from 15% to 10% of base salary in order to bring the contribution
to a level consistent with the Group’s wider UK workforce as
it stands after the Demerger and the merging of Melrose and
GKN Aerospace into a single standalone business; and
• the introduction of the Melrose Performance Share Plan (“PSP”)
which will replace the MESP as the Group’s ongoing long‑term
incentive plan.
This remuneration structure and the 2024 Directors’ Remuneration
Policy aims to attract, retain and motivate the right talent for the
business, helping to ensure continued success and growth and
allowing for flexibility to remain competitive. The 2024 Directors’
Remuneration Policy aims to continue to align the interests of the
executive Directors with the long‑term interests of shareholders,
incentivising and rewarding the achievement of long‑term
sustainable returns for shareholders by ensuring executive
Directors’ remuneration is simple, transparent, supports value
creation and pays only for performance. Details are set out below.
How did the Remuneration Committee determine the
2024 Directors’ Remuneration Policy?
In determining the 2024 Directors’ Remuneration Policy, the
Remuneration Committee:
• considered the Company’s change of strategy, and how the
2023 Directors’ Remuneration Policy should be adapted to align
with the new strategy;
• benchmarked the proposed 2024 Directors’ Remuneration
Policy against the FTSE 100 in respect of both fixed and variable
elements of remuneration;
• considered feedback from shareholders and investor bodies on
the proposed 2024 Directors’ Remuneration Policy;
• 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;
• considered wider workforce remuneration to ensure the
approach to executive remuneration is consistent; and
• consulted with the executive Directors and other relevant
members of Melrose senior management on the proposed
changes to the 2023 Directors’ Remuneration Policy (although
noting, for the avoidance of doubt, that no executive Director
played a part in any decision about his or her own remuneration).
The Remuneration Committee was mindful in its deliberations
on the 2024 Directors’ Remuneration Policy of any potential
conflicts of interest and sought to minimise them by seeking
independent advice from its external advisors, and by undertaking
a consultation with key shareholders and investor bodies.
145
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023GOVERNANCE DIRECTORS’ REMUNERATION REPORT CONTINUED
Salary, bonus and benefits
Elements
Base Salary
Details
Purpose and
link to strategy
Core element of fixed remuneration, reflecting the size and scope of the role and the shift of strategy to operating as a long‑term aerospace
business, designed to attract and retain executive Directors of the calibre required for the Group.
Operation
Opportunity
Annual Bonus
Purpose and
link to strategy
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.
No maximum salary has been set under the 2024 Directors’ Remuneration Policy.
Salary increases will normally take into account the average increase awarded to other Melrose employees and the wider workforce within
the relevant geographic area.
However, increases beyond those of the wider workforce within the relevant geographic area may be made to salary levels in certain
circumstances as required, for example to reflect:
• an increase in scope of role or responsibility;
• an increase in scope of role or responsibility;
• a material sustained change in the size and/or complexity of the Group;
• performance in role; and
• where salary was initially set at a discount to the market rate on appointment.
Rewards performance against annual targets which support the strategic direction of the Company.
Targets are set annually at the beginning of the relevant year 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.
If an executive Director does not satisfy the minimum shareholding requirement (see below), up to 50% of any bonus award after tax will
be used to acquire shares (“deferred share awards”) to the extent necessary to enable the executive Director to meet his or her minimum
shareholding requirement. The deferred share awards will be required to be retained and will remain subject to the risk of forfeiture on
cessation of employment until the earlier of the executive Director meeting his or her minimum shareholding requirement and two years after
the relevant bonus award.
Annual bonus awards are discretionary and are subject to malus and clawback provisions (see notes to this table).
Opportunity
Maximum opportunity is 200% of base salary.
Performance
metric
The Remuneration Committee will have regard to various performance metrics (which will be determined by the Remuneration Committee)
measured over the relevant financial year, when determining bonuses. At least 50% of the award will be based on financial measures, which
may include cash flow and operating profit and the balance will be based on strategic measures, which may include personal objectives
and the integration of appropriate ESG measures to align with the Company’s strategic objectives, in each case 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 strategic measures.
Stretching performance targets are set each year for the annual bonus, to reflect the key financial and strategic objectives of the Company
and to reward for delivery against these targets. When setting the targets, the Remuneration Committee will take into account a number of
different reference points, including the Company’s plans and strategy and the market environment.
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
Opportunity
Rationale
for change
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.
10% of base salary, being a percentage of salary that is consistent with the rate payable to the Group’s wider UK workforce, thereby
providing alignment with the wider UK workforce.
The Remuneration Committee is proposing to reduce the executive Directors’ pension contribution from 15% to 10% of salary in order to
bring this to a level consistent with the wider UK workforce as it stands following the demerger of Dowlais Group plc, and the subsequent
merger of Melrose with GKN Aerospace to form a single pureplay listed aerospace business.
146
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023 Elements
Details
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
Opportunity
Executive Directors receive benefits consistent with other Melrose employees and market practice, which may include private medical
insurance, life insurance and group income protection. Other benefits may be provided based on individual circumstances.
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.
Long‑term incentive arrangements – PSP
Purpose and
link to strategy
Operation
Incentivises, retains and motivates executive Directors to achieve long‑term sustainable returns for shareholders. Retention of key, high
calibre employees over three‑year performance periods and encouraging long‑term shareholding, through the post‑vesting holding
requirement, and commitment to the Company.
Annual grant in the form of conditional share awards or nil or nominal cost options (the “PSP Awards”) under the PSP to be approved by
shareholders at the 2024 AGM.
PSP Awards normally vest after a performance period of at least three years, subject to the satisfaction of the performance conditions and
continued employment and will normally be settled in shares. An additional two‑year post‑vesting holding period applies to PSP Awards
made to executive Directors.
Dividend equivalents may be payable in respect of dividends which accrue during the vesting period and, for unexercised options during the
holding period and will be paid in shares or cash.
Malus and clawback provisions apply to the PSP Awards (see notes to this table).
The Remuneration Committee will operate the PSP in accordance with the rules of the PSP.
Opportunity
The maximum PSP Award in respect of a financial year is 300% of salary.
Performance
measures
Vesting of PSP Awards is determined by the Remuneration Committee by reference to a period of at least three years, based on challenging
performance measures that the Remuneration Committee considers to be aligned with the delivery of the Group’s strategy and the creation
of long‑term shareholder value.
The performance measures are determined annually by the Remuneration Committee and may include internal financial measures, TSR or
non‑financial measures such as ESG or other strategic targets.
Unless performance of a participant during the performance period is sufficient to earn 25% of the relevant maximum opportunity, none of
the PSP Awards granted to that participant will vest, with 100% of the PSP Awards granted to a participant vesting if maximum performance
is achieved.
The Remuneration Committee may adjust upwards or downwards (including to zero) the extent to which a PSP Award shall vest if it
considers that the extent to which the PSP Award would otherwise vest is not a fair reflection of the performance of the Company or the
executive Director’s performance, taking account of overall business performance.
Material changes proposed for 2024 Directors’ Remuneration Policy for Long‑term incentive arrangements
As no further conditional awards or options can be granted under the plans previously operated by the Group (the 2020 Melrose Employee
Share Plan (the “MESP”) or the Melrose Automotive Share Plan (the “MASP”)), these plans are no longer included in the Remuneration
Policy (though awards and options already issued and payments due to participants under the MESP and the MASP may continue to be
satisfied, as further described below). The 2024 Directors’ Remuneration Policy now covers the PSP to be approved by shareholders at the
2024 AGM.
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 and, once effective, the PSP.
Component of remuneration Purpose and link to strategy Operation
Minimum shareholding
requirements
To align the interests of
executive Directors with
shareholders.
There is a minimum shareholding requirement for
executive Directors of 300% of salary. New executive
Directors will be given a period of five years from
appointment to build up this shareholding.
Post‑cessation
minimum shareholding
requirements
To ensure alignment
of interests following
the departure of an
executive Director.
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.
Opportunity
Performance measures
Not applicable
Not applicable
Not applicable
Not applicable
Non‑executive Directors
Non‑executive Director fees are set out as follows:
Purpose and link
to strategy
Set at a level that
reflects market
conditions and is
sufficient to attract
individuals with
appropriate knowledge
and expertise
Operation
Opportunity
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 Board Committee or for holding the office of Senior Independent Director.
Non‑executive Directors may be eligible to receive benefits such as use of
secretarial support, reimbursement of travel costs and other benefits that may be
appropriate. This may include the settlement by the Group of any associated tax
liabilities in relation to these expenses.
Performance measures
Not applicable
147
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023GOVERNANCE DIRECTORS’ REMUNERATION REPORT CONTINUED
Illustration of the application of the 2024 Directors’
Remuneration Policy
In illustrating the potential reward under the 2024 Directors’
Remuneration Policy, the following assumptions have been made:
• As the purpose of the scenario charts is to show an indication
of the level of remuneration that executive Directors would
receive under the 2024 Directors’ Remuneration Policy in the
first year from commencement of the policy, scenario charts
have only been included for the two executive Directors who will
be in place in their new roles from conclusion of the 2024 AGM
when the 2024 Directors’ Remuneration Policy will apply, i.e. for
Peter Dilnot as Chief Executive Officer and for Matthew Gregory
as Chief Financial Officer. These scenario charts have been
prepared on a proforma basis, as though Peter Dilnot and
Matthew Gregory had started their new roles on 1 January 2024
calendar year (rather than from 6 and 7 March 2024 respectively,
when they were appointed to their new roles and from when their
new remuneration arrangements will in fact apply). No scenario
charts have been provided for the three current executive
Directors stepping down from their roles as executive Directors
at the 2024 AGM.
• Minimum performance: fixed elements of remuneration only
(base salary applicable to their new roles), benefits as provided
from appointment to their new roles, and a pension contribution
of 10% of base salary).
• Performance in line with expectations: fixed elements of
remuneration as above, plus bonus of 50% of maximum bonus
available (such maximum being 200% of salary for Peter Dilnot
and 150% of salary for Matthew Gregory) and a PSP Award
at 50% of the maximum PSP Award available (such maximum
being 300% of salary for Peter Dilnot and 200% of salary for
Matthew Gregory).
• Maximum performance: fixed elements of remuneration as
above, plus maximum bonus and maximum PSP Award.
• Maximum performance +50% share price growth: as for
Maximum performance but with a 50% increase in the share
price.
Peter Dilnot – Chief Executive Officer (£’000)
£5,950
43%
33%
24%
£7,412
53%
27%
20%
Maximum
Max with 50% share
price growth for LTIP
£3,512
35%
26%
39%
Target
£1,075
100%
Minimum
Matthew Gregory – Chief Financial Officer (£’000)
£1,982
35%
26%
39%
Target
£766
100%
Minimum
£3,199
43%
33%
24%
£3,894
53%
27%
20%
Maximum
Max with 50% share
price growth for LTIP
Fixed pay
Annual bonus
Long-term incentives
148
NOTES TO THE REMUNERATION POLICY TABLE
Operation of the annual bonus plan and the PSP
The Remuneration Committee will operate the annual bonus plan and
the PSP in accordance with their respective rules and in accordance
with the Listing Rules and HMRC requirements where relevant.
Within these rules, the Remuneration Committee is required to
retain a number of discretions to ensure an effective operation and
administration of these plans. These discretions are consistent with
standard market practice and, in respect of the executive Directors
include (but are not limited to):
• when awards are granted and/or paid;
• the size of an award and/or a payment (subject to the limits stated
in the policy table above);
• how to determine the level of vesting;
• how to deal with a change of control or restructuring of the Group;
• how to determine a good/bad leaver for incentive plan purposes
and whether to accelerate vesting and/or waive in part or in full any
pro rating and/or any holding period;
• how to determine whether or not adjustments are required in
certain circumstances (e.g. rights issues, corporate restructuring,
events and special dividends); and
• reviewing the performance conditions (range of targets, measures
and weightings) for the annual bonus plan and PSP from year to
year.
If certain events occur, such as a material acquisition or the
divestment of a Group business, the original performance conditions
may no longer be appropriate. Therefore, the Remuneration
Committee retains the discretion to make adjustments to the targets
and/or set different measures and alter weightings as they deem
necessary to ensure the conditions achieve their original purpose, are
appropriate in the revised circumstances and, in any event, are not
materially less difficult to satisfy.
Any use of the above discretions would, where relevant, be explained
in the Directors’ remuneration report.
The Remuneration Committee may adjust upwards or downwards
(including to zero) the extent to which annual bonus shall be paid and/
or PSP Award shall vest if it considers that the extent to which the
annual bonus would be paid and/or the PSP Award would otherwise
vest is not a fair reflection of the performance of the Company or the
executive Director’s performance, taking account of overall business
performance.
Malus and Clawback provisions
Annual bonus
The Remuneration Committee may apply the 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) in the case of clawback only, 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
at any time up until the second year following payment of the bonus.
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023 PSP
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 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 (4) the Company becoming insolvent or otherwise
suffering a corporate failure so that the value of the Company’s
shares 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 prior to the relevant vesting date, the
PSP Awards held by the executive Director may be cancelled in whole
or in part for nil consideration.
Choice of performance metrics
The annual bonus performance measures are selected each
year to reflect the financial and strategic performance measures
which the Remuneration Committee considers to be aligned
with the delivery of the strategic priorities and which directly
reinforce the short‑ to medium‑term performance framework. The
PSP performance measures are selected to provide a balance
between external and internal measures of performance, reflect
the Group’s long‑term strategic key performance indicators, as
well as measure absolute and relative performance. Adjusted EPS
is a measure of the growth and profitability of the Group that also
reflects management performance, and is a measure used by
investors in deciding whether to invest in the Company. TSR aligns
performance with shareholders’ interests. The strategic measures
are selected on an annual basis to support achievement of the
Company’s objectives and business plan by focusing on the most
appropriate targeted strategic priorities, including the integration of
appropriate ESG measures.
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 vesting of the PSP Awards was based; (3)
gross misconduct by the relevant executive Director; (4) events or
behaviour of an executive Director that have led to the censure of
the Company by a significant regulatory authority or have had a
significant detrimental impact on the reputation of the Company,
provided that the 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 value of the Company’s shares 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, following the relevant vesting date but prior
to the date falling three years after the relevant vesting date, the
executive Director may be required to transfer (for nil consideration)
the number of Ordinary Shares arising from the vesting of the relevant
PSP Award, less the number of shares sold to fund the tax liability
arising from the vesting of the relevant PSP Award and/or to pay to
the Company the amount of any cash received (whether in lieu of the
issue of shares, or as a result of the sale of any such shares) on or
following the vesting of the relevant PSP Award less the amount of
any tax arising from the vesting of the relevant PSP Award.
Balance between fixed and variable pay
The performance‑related elements of remuneration are dependent
upon the achievement of outcomes that are important drivers of
sustainable growth for the business and therefore the creation of
value for shareholders.
Targets applying to the bonus and PSP are set annually, based on
a number of internal and external reference points. Bonus targets
are set by reference to the annual targets agreed by the Board.
PSP targets reflect prevailing industry context, expectations of
what will constitute appropriately challenging performance levels
and factors specific to the Company.
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; and
• the Remuneration Committee will seek to ensure that no more is
paid than is necessary.
In addition to the policy elements set out in this 2024 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 2024 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.
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:
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MELROSE INDUSTRIES PLC ANNUAL REPORT 2023GOVERNANCE DIRECTORS’ REMUNERATION REPORT CONTINUED
Element
Approach
Base salary
Salary levels will be set based on the experience, knowledge and skills of the individual and in the context of market rates for equivalent roles
in companies of a similar size and complexity. The Remuneration Committee would also consider Group relativities when setting base salary
levels.
The Remuneration Committee may set initial base salaries below the perceived market rate with the aim to make multi‑year staged increases
(or a one‑off increase) to achieve the desired market position over time. Where necessary these increases may be above those of the wider
workforce within the relevant geographic area, but would be subject to continued development in the role.
The Remuneration Committee’s intention is that a new executive Director’s incentive remuneration opportunity will consist of:
• an annual bonus opportunity which can be set up to a maximum of 200% of base salary (i.e. no more than the maximum opportunity
under the policy); and
• awards under the PSP which can be set up to a maximum of 300% of base salary (i.e. no more than the maximum opportunity under the
Incentive
remuneration
opportunity
policy).
Compensation
for forfeited
remuneration
arrangements
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.
Notice period
The notice period will be the same as the Company’s ordinary policy of 12 months.
Relocation
costs
Retirement
benefits
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 10% of salary referred to on page 146 will apply to any new executive Director. This is consistent with the
contribution level provided to the Group’s wider UK workforce.
Incentive awards and ’buyout’ awards may be granted under
the PSP or under arrangements 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.
Annual bonus
Bonus in year of cessation
Performance conditions will be measured at the normal bonus
measurement date for Good Leavers only, with the bonus normally to
be prorated 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.
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 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 151.
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.
Deferred share awards
Good Leavers will be entitled to retain deferred share awards. For
an executive Director other than a Good Leaver, any deferred share
awards which remain subject to the risk of forfeiture on cessation of
employment will usually 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 prorate a cash bonus for time. The
Remuneration Committee’s normal policy is that it will prorate
for time. It is the Remuneration Committee’s intention to be able
to use discretion to not prorate in circumstances where there is
an appropriate business case which will be explained in full to
shareholders; and
• to vest any deferred share award at the end of the original deferral
period or at the date of cessation and, for an executive Director
who is a Bad Leaver, to allow the deferred share award not to be
subject to forfeiture on cessation.
PSP
If an executive Director ceases to be employed by the Company
before the relevant vesting date, the treatment of the PSP Awards
held by such executive Director will be determined depending on their
classification as a ‘Good Leaver’ or a ‘Bad Leaver’ as defined and
summarised below.
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MELROSE INDUSTRIES PLC ANNUAL REPORT 2023 Good Leavers
If an executive Director holding PSP Awards ceases employment
in circumstances where he is a Good Leaver before the relevant
vesting date, unless the Remuneration Committee decides otherwise,
the PSP Award shall continue and vest on the original vesting date
and the PSP Award normally will be reduced on a pro‑rata basis to
reflect the number of whole days from the start of the Performance
Period to the date of termination of employment as a proportion of
the total number of days in the Performance Period although the
Remuneration Committee will have discretion to accelerate vesting to
the date of cessation and/or to waive in part or in full any pro‑rating.
Bad Leavers
If an executive Director holding PSP Awards ceases employment
in circumstances where he is a Bad Leaver before the vesting date,
unless the Remuneration Committee decides otherwise, all of
their unvested PSP Awards will lapse as of the date on which their
employment terminates.
If an executive Director ceases to be employed by the Company
after vesting date for whatever reason, they shall be entitled to retain
any outstanding vested PSP Awards held by them pursuant to the
PSP Rules.
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 150. Entitlements in respect of the PSP will be dealt
with in accordance with the PSP Rules 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 2024 Directors’ Remuneration Policy aims to align the
interests of the executive Directors with the long‑term interests of
shareholders, incentivising and rewarding long‑term sustainable
growth of the Company, but is also wholly aligned with the Code
factors of clarity, simplicity, risk, predictability, proportionality
and alignment to culture, as set out in the table below. The
Remuneration Committee ensured that it took all these elements
into account when establishing the 2024 Directors’ Remuneration
Policy, as well as its application to executive Directors. The table
below sets out how the Remuneration Committee has addressed
each factor of the Code and its link to strategy.
Factor
Clarity
How the Remuneration Committee has addressed and link to the Company’s strategy
The Company’s performance remuneration is based on supporting the implementation of the Company’s new strategy as an aerospace
business. 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.
Simplicity
The fixed elements of remuneration are limited to base salary, pension contribution and benefits.
Risk
There are two variable elements of remuneration: the annual bonus and the PSP, both of which are based on simple and transparent
metrics.
In the Remuneration Committee’s view, this provides a very simple incentive framework which can be understood by all participants and all
of the Company’s stakeholders.
The 2024 Directors’ Remuneration Policy includes the following elements to mitigate against the risk of target‑based incentives:
• setting defined limits on the maximum award that could be earned under both the annual bonus and the PSP;
• requiring the deferral of up to 50% of the annual bonus award (after tax) into ordinary shares of the Company in certain circumstances
and requiring that all of the shares awarded in relation to the PSP (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 vesting date;
• the post‑cessation minimum shareholding requirements, which require executive Directors to maintain the minimum shareholding for a
period of two years after leaving the Company;
• aligning the performance conditions with the new strategy of the Company, which is to be purely an aerospace business; and
• ensuring there is sufficient flexibility for the Remuneration Committee to adjust payments through malus and clawback and an overriding
discretion to depart from formulaic outcomes.
Predictability
Fixed remuneration for the executive Directors limits fixed costs for the Group, to provide certainty and to incentivise executive Directors
through the variable elements.
Proportionality
Variable remuneration is limited to: (i) the annual bonus; and (ii) the PSP.
The method of calculation, limits and discretions under the 2024 Directors’ Remuneration Policy in respect of the variable elements have
been clearly set out.
See the scenario charts on page 148 for an illustration of how remuneration outcomes may vary under different performance scenarios.
The link between individual variable awards and the delivery of strategy and long‑term performance of the Group is clear. In addition, as
detailed on pages 146 to 147, the Remuneration Committee may exercise discretion to adjust upwards or downwards (including to zero)
the extent to which annual bonus shall be paid and/or PSP Award shall vest if it considers that the extent to which the annual bonus would
be paid and/or the PSP Award would otherwise vest is not a fair reflection of the performance of the Company or the executive Director’s
performance, taking account of overall business performance.
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 2024 Directors’ Remuneration Policy, which: (i) facilitates Committee oversight of workforce pay, policies and incentives; (ii) provides that
executive Director pension contributions comprise a percentage of salary that is consistent with the percentage applicable to the Group’s
wider UK workforce; and (iii) sets the annual salaries, bonuses and benefits for the Chief Executive Officer and the Chief Financial Officer
broadly in line with the median of companies of a comparable size.
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MELROSE INDUSTRIES PLC ANNUAL REPORT 2023GOVERNANCE DIRECTORS’ REMUNERATION REPORT CONTINUED
Differences between the Company’s policy on Directors’
remuneration and its policy on remuneration for other
employees
Remuneration arrangements throughout the Group are determined
based on the same principle that rewards should be sufficient as is
necessary to attract and retain high calibre talent, without paying
more than is necessary and should be achieved for delivery of the
Company’s strategy.
The Company has operations in various countries, with Group
employees of differing levels of seniority. Accordingly, though
based on the over‑arching principle above, reward policies vary to
take account of these factors.
Statement of consideration of employment conditions
elsewhere in the Company
Salary, benefits and performance‑related awards provided
to employees are taken into account when setting policy for
executive Directors’ remuneration. 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 does 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 2023, which will continue
to be the case for the periods governed by the 2024 Directors’
Remuneration Policy.
Statement of consideration of shareholder views
The Company is committed to regular and ongoing engagement
and seeks the views of key shareholders and other stakeholders
on the application of the Directors’ Remuneration Policy and in
advance of amending its Directors’ Remuneration Policy. The
Chairman’s Annual Statement at pages 128 to 129 sets out how this
was done in practice for the 2024 Directors’ Remuneration Policy.
The policy is set to reflect the Company’s commercial strategy.
Payments outside the policy in this report
The Remuneration Committee retains discretion to make any
remuneration payments and payments for termination of employment
outside this policy:
• where the terms of the payment were agreed before the policy
came into effect;
• where the terms of the payment were agreed at a time when the
relevant individual was not a Director of the Company and, in
the opinion of the Remuneration Committee, the payment was
not in consideration of the individual becoming a Director of the
Company; and/or
• to satisfy contractual commitments under legacy remuneration
arrangements, including pursuant to the MASP and the MESP.
For these purposes, “payments” includes the satisfaction of awards
of variable remuneration and, in relation to an award or option over
shares, the terms of the payment are “agreed” at the time the award
or option is granted, as subsequently varied in accordance with the
2023 Directors’ Remuneration Policy prior to the 2024 Directors’
Remuneration Policy coming into force. Any such payment shall
include: (i) the conversion of any MESP Conditional Award or the
satisfaction of the exercise of any MESP Nil Cost Option under
the MESP Rules (or the settlement of any such MESP Conditional
Award or MESP 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; and (ii) the delivery of the value attributable
to the shares issued upon the conversion of any MESP Conditional
Award or the exercise of any MESP Nil Cost Option in accordance
with the MESP Rules, or the delivery of the value attributable to
the MASP Shares issued upon the exercise of any MASP Option in
accordance with the MASP Rules.
For the purposes of limbs (i) and (ii) of the immediately preceding
paragraph, capitalised terms have the meaning ascribed in the
Directors Remuneration Policy 2023.
This report was approved by the Board and signed on its behalf by:
David Lis
Chairman, Remuneration Committee
7 March 2024
152
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023 STATEMENT OF DIRECTORS’ RESPONSIBILITIES
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 United
Kingdom adopted international accounting standards. The financial
statements also comply with International Financial Reporting
Standards (“IFRS”) as issued by the International Accounting
Standards Board. 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 IFRS are insufficient to enable users to understand
the impact of particular transactions, other events and conditions
on the entity’s financial position and financial performance; and
• make an assessment of the Company’s ability to continue as a
going concern.
The Directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the Company’s
transactions and disclose with reasonable accuracy at any time
the financial position of the Company and enable them to ensure
that the financial statements comply with the Companies Act
2006. They are also responsible for safeguarding the assets of the
Company and hence for taking reasonable steps for the prevention
and detection of fraud and other irregularities.
The Directors are responsible for the maintenance and integrity of
the corporate and financial information included on the Company’s
website. Legislation in the United Kingdom governing the
preparation and dissemination of financial statements may differ
from legislation in other jurisdictions.
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 7 March 2024 and is signed on its behalf by:
Geoffrey Martin
Group Finance Director
Peter Dilnot
Chief Executive Officer
7 March 2024
7 March 2024
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MELROSE INDUSTRIES PLC ANNUAL REPORT 2023GOVERNANCE
FINANCIAL
STATEMENTS
IN THIS SECTION
Independent auditor’s report to the
members of Melrose Industries PLC ........156
Consolidated Income Statement ............. 166
Consolidated Statement of
Comprehensive Income ...........................167
Consolidated Statement of Cash Flows .. 168
Consolidated Balance Sheet ................... 169
Consolidated Statement
of Changes in Equity ................................170
Notes to the Financial Statements ...........171
Company Balance Sheet
for Melrose Industries PLC ...................... 223
Company Statement
of Changes in Equity ............................... 224
Notes to the Company Balance Sheet .... 225
Glossary .................................................. 232
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MELROSE INDUSTRIES PLC ANNUAL REPORT 2023 155
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023FINANCIAL STATEMENTS 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 2023 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;
• the related notes 1 to 30 and the related notes 1 to 8 to the Parent Company Balance Sheet.
The financial reporting framework that has been applied in the preparation of the group financial statements is applicable law, United Kingdom
adopted international accounting standards and IFRSs as issued by the IASB. The financial reporting framework that has been applied in the
preparation of the parent company financial statements is applicable law and United Kingdom Accounting Standards, including FRS 102 “The
Financial Reporting Standard applicable in the UK and Republic of Ireland” (United Kingdom Generally Accepted Accounting Practice).
2. Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under
those standards are further described in the auditor’s responsibilities for the audit of the financial statements section of our report.
We are independent of the group and the parent company in accordance with the ethical requirements that are relevant to our audit of the
financial statements in the UK, including the Financial Reporting Council’s (the ‘FRC’s’) Ethical Standard as applied to listed public interest
entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements. The non‑audit services provided to
the group and parent company for the year are disclosed in note 7 to the financial statements. We confirm that 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:
• Revenue recognition in respect of certain material Risk
and Revenue Sharing Partnerships (“RRSPs”);
• Classification of adjusting items; and
• Demerger of the GKN Automotive, GKN Powder
Metallurgy and GKN Hydrogen businesses.
Newly identified
Increased level of risk
Similar level of risk
Decreased level of risk
Materiality
Scoping
The materiality that we used for the group financial statements was £20 million which was determined using a blended
approach with multiple benchmarks including adjusted profit before tax and revenue from continuing operations.
We selected nine reporting units where we requested component auditors to perform a full scope audit of the site
components’ financial information. We also selected two corporate components for a full scope audit of their financial
information.
Significant
changes in our
approach
We also requested component auditors to audit specific account balances and transactions (“SAB”) at a further 20
reporting units. Coverage from full scope and SAB scope components totals 83% of the group’s revenue, 84% of adjusted
operating profit and 85% of net assets.
Two key audit matters identified in our prior year report pertaining to impairment of goodwill and acquired intangibles,
and completeness of loss‑making contract provisions have not been identified in the current year as the balances have
been derecognised as a result of the demerger of the GKN Automotive, GKN Powder Metallurgy and GKN Hydrogen
businesses. One new key audit matter in respect of accounting for the demerger has been identified in the current period.
The number of components we subjected to audit procedures decreased in comparison to the prior period due to a
reduction in components of the group following the demerger.
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MELROSE INDUSTRIES PLC ANNUAL REPORT 2023
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:
• obtained an 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 (including consideration of climate
change scenarios);
• 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 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 appropriateness 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. Revenue recognition in respect of certain material RRSPs
Key audit matter
description
The group has recognised total revenue of £3,350 million in 2023 (2022: £2,954 million).
There are judgements taken within the revenue recognition of certain material RRSPs in the Engines operating segment.
The risk specifically 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 the RRSPs 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 the RRSPs during the year was £680 million (2022: £547 million), which included variable consideration of
£173 million (2022: £106 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, any new events such as manufacturing defects on current engines in service, 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 (including new events during the year) 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 120 of the Audit Committee report.
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MELROSE INDUSTRIES PLC ANNUAL REPORT 2023FINANCIAL STATEMENTS 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 RRSPs.
For each RRSP 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 Engines operating segment, that hold RRSPs, to
review the underlying data;
• assessing the position papers prepared by management, and the model prepared;
• considering specific events in the year, and the ongoing performance of the relevant programmes;
• 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 RRSPs with variable
consideration are within an acceptable range including the impact of the specific events in the current year and that the
overall position is reasonable.
We consider the disclosure provided in the financial statements in relation to the changes in the key assumptions is
appropriate and consistent with the requirements of IFRS 15.
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 £333 million have been made
to the statutory operating profit of £57 million to derive adjusted operating profit of £390 million.
Adjusting items included:
• amortisation of acquisition‑related intangible assets (£260 million);
• restructuring costs (£149 million);
• equity settled compensation scheme charges (£38 million);
• acquisition and disposal related charges (£3 million);
• credit from movement in derivatives and associated financial assets and liabilities (£114 million); and
• net credit from releases and changes in discount rate of fair value items (£3 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 trading
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 121
of the Audit Committee report.
158
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023 How the scope
of our audit
responded to the
key audit matter
We obtained an 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 European Securities and Markets Authority (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 and movements in fair value adjustments;
• agreed the amounts recorded through to underlying financial records and other audit support to test that the amounts
disclosed were complete and accurate;
• for 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.
Key observations The value of adjusting items results in a material difference between the statutory and adjusted results. Whilst we note that
the majority of adjusting items recur from period to period, their classification and presentation is consistent with the
group’s policy and the amounts are appropriate.
5.3. Demerger of the GKN Automotive, GKN Powder Metallurgy and GKN Hydrogen businesses
Key audit matter
description
On 30 March 2023, Melrose shareholders approved the demerger of the GKN Automotive, GKN Powder Metallurgy and
GKN Hydrogen businesses through the flotation of Dowlais Group PLC (“Dowlais”) on the London Stock Exchange. As
a consequence, the assets and liabilities of Dowlais were reclassified as held for distribution in accordance with IFRS 5
Non‑current Assets Held for Sale and Discontinued Operations.
On 20 April 2023, the group completed the demerger of Dowlais. The results of the Dowlais businesses to the demerger
date have been presented as discontinued operations and the comparative results have been restated on a consistent
basis.
At the demerger date the assets and liabilities of the Dowlais businesses have been derecognised from the balance sheet.
The demerger distribution has been measured at fair value in accordance with IFRIC 17 Distributions of Non‑cash Assets
to Owners. The difference between the derecognised net assets of £3,142 million and the fair value of the demerger
distribution of £1,973 million was recognised in the consolidated income statement as a loss on demerger. The cumulative
translation differences arising on translation of those demerged foreign currency net assets (credit of £152 million),
previously included in other comprehensive income, have also been recognised in the consolidated income statement.
As a result of the demerger, certain adjustments were made to the group’s equity settled compensation scheme. The
group retained one percent of Dowlais issued equity after the demerger.
We identified the demerger of Dowlais businesses as a key audit matter because of the significant judgements and
estimates related to:
• calculating the loss on demerger especially the measurement of the demerger distribution;
• evaluating the adjustments made to the group’s equity settled compensation scheme and determining the appropriate
accounting treatment;
• remeasuring the retained stake upon demerger;
• validating the assets and liabilities derecognised; and
• cumulative translation difference arising on translation of the foreign currency net assets of the demerged businesses.
Further details are included in note 1, 13 and 23 to the group financial statements, and also in note 3 to the group financial
statements in relation to the critical judgement for the measurement of the demerger distribution. Refer also to page 118 of
the Audit Committee report.
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MELROSE INDUSTRIES PLC ANNUAL REPORT 2023FINANCIAL STATEMENTS
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 assessed the group’s accounting conclusions, underlying analysis and calculation, and challenged the
reasonableness of the underlying judgements. Specifically, our work included, but was not limited to:
• inspecting legal agreements in relation to the demerger of the Dowlais businesses for accuracy and completeness of
transactions to the demerger date;
• evaluating the group’s accounting conclusions for the demerger steps including assessing:
• the classification and remeasurement the Dowlais businesses as held for distribution and presentation results of the
Dowlais businesses as discontinued operations under IFRS 5 Non‑current Assets Held for Sale and Discontinued
Operations;
• the measurement the demerger dividend and calculation of the loss on demerger under IFRIC 17 Distributions of
Non‑cash Assets to Owners;
• the accounting for the adjustments made to the group’s equity settled compensation scheme under IFRS 2
Share‑based Payment and IAS 19 Employee Benefits; and
• the measurement and accounting for the retained stake upon demerger under IFRS 9 Financial Instruments and
IFRS 10 Consolidated Financial Statements.
• involving our valuation specialists to challenge the judgement applied in determining the fair value of the demerger
distribution, and benchmark it against available market data and comparable organisations.
• recalculating the loss on demerger including validating the assets and liabilities derecognised, and cumulative
translation difference arising on translation of the foreign currency net assets of the demerged businesses.
• assessing whether the disclosures within the group financial statements provide sufficient detail for the reader to
understand the transactions related to the demerger of Dowlais and the accounting judgements made.
Key observations We are satisfied that the group’s accounting conclusions and disclosures in respect of the demerger of Dowlais
businesses are appropriate.
6. Our application of materiality
6.1. Materiality
We define materiality as the magnitude of misstatement in the financial statements that makes it probable that the economic decisions of a
reasonably knowledgeable person would be changed or influenced. We use materiality both in planning the scope of our audit work and in
evaluating the results of our work.
Based on our professional judgement, we determined materiality for the financial statements as a whole as follows:
Materiality
Basis for determining materiality We considered the following benchmarks:
Group financial statements
£20 million (2022: £30 million)
Rationale for the benchmarks
applied
• adjusted profit before tax; and
• revenue.
In determining our relevant benchmarks for
materiality, we considered a number of different
metrics used by investors and other readers of the
financial statements.
Materiality for the current year represented:
• 6.0% of adjusted profit before tax (2022: 7.8%);
and
• 0.6% of revenue (2022: 0.4%).
Parent company financial statements
£10 million (2022: £15 million)
We determined materiality based on net assets,
which was then capped at 50% (2022: 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.
Performance materiality
Basis and rationale for
determining performance
materiality
Group financial statements
70% (2022: 65%) of group 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 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
Parent company financial statements
70% (2022: 65%) of parent company materiality
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 £1.0 million (2022: £1.5 million),
as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds. We also report to the Audit Committee
on disclosure matters that we identified when assessing the overall presentation of the financial statements.
160
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023 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. Following the demerger there are two
operating segments in the continuing operations of the group:
• Engines; and
• Structures.
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 components and manages operations on a geographical and functional basis. There are
72 components in total (2022: 192), 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 31 components (2022: 48), of
which:
• 5 relate to components that form part of the Engines operating segment;
• 15 relate to components that form part of the Structures operating segment; and
• 11 relate to central and corporate cost centres.
Each component was set a specific component materiality, considering its relative size and any component‑specific risk factors such as
significant estimates and judgements, internal audit findings and history of error. The component materialities applied were in the range
£7 million to £10 million.
We selected 11 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 at a further 20 reporting units. Coverage from
full scope and SAB scope components totals 83% of the group’s revenue (2022: 79%), 84% of adjusted operating profit (2022: 81%) and 85%
of net assets (2022: 84%).
Engines
In respect of the Engines operating segment, 2 components were subject to a full scope audit and 3 components were subject to SAB scope
audit. These 5 components together accounted for 91% of the Engines operating segment’s revenue and 94% of the Engines operating
segment’s adjusted operating profit.
Structures
In respect of the Structures operating segment, 7 components were subject to a full audit and 8 components were subject to SAB scope
audit. These 15 components together accounted for 79% of the Structures operating segment’s revenue and 70% of the Structures operating
segment’s adjusted operating profit.
Corporate cost centres
In respect of the corporate cost centres, 2 components were subject to a full audit and 9 components were subject to a SAB scope audit.
Parent company
The audit of the parent company was performed by the group engagement team based at the parent 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.
Whilst we understood the relevant controls in key areas, given the number and diverse nature of the components of the group, we tested and
took controls reliance in certain limited areas of the audit only.
Revenue
1
3
2
Adjusted operating profit
Net assets
1
1
1 Full audit scope 66%
2 Specified audit 17%
procedures
3 Review at
group level
17%
3
2
1 Full audit scope 63%
2 Specified audit 21%
3
2
procedures
3 Review at
group level
16%
1 Full audit scope 83%
2 Specified audit
procedures
3 Review at
group level
2%
15%
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 obtained an understanding of certain key controls, such as general IT
controls for relevant IT systems, controls over significant estimates and key financial reporting controls. We further tested revenue controls for
significant and material components and relied on these controls for specific components and revenue streams.
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MELROSE INDUSTRIES PLC ANNUAL REPORT 2023FINANCIAL STATEMENTS INDEPENDENT AUDITOR’S REPORT TO THE
MEMBERS OF MELROSE INDUSTRIES PLC CONTINUED
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 Report on page 43.
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, as per note 2.
We also considered whether the Task Force on Climate‑related Financial Disclosures (“TCFD”) as well as the mandatory UK Government’s
Climate‑related Financial Disclosure (“CFD”) 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
We continued our site visit plan over the course of the year, which meant senior members of the audit team visited all significant components.
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 planning and close meetings covering all
businesses at head office and operating segment level. Each operating segment 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.
162
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023 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
• 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: classification of adjusting items and revenue recognition in respect of certain material
RRSPs. In common with all audits under ISAs (UK), we are also required to perform specific procedures to respond to the risk of management
override.
We also obtained an understanding of the legal and regulatory frameworks that the group operates in, focusing on provisions of those laws
and regulations that had a direct effect on the determination of material amounts and disclosures in the financial statements. The key laws and
regulations we considered in this context included the UK Companies Act, Listing Rules, 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 UK Bribery Act and 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 classification of adjusting items and revenue recognition in respect of certain material RRSPs
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.
163
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023FINANCIAL STATEMENTS INDEPENDENT AUDITOR’S REPORT TO THE
MEMBERS OF MELROSE INDUSTRIES PLC CONTINUED
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 27;
• 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 27;
• the directors’ statement on fair, balanced and understandable set out on page 153;
• the board’s confirmation that it has carried out a robust assessment of the emerging and principal risks set out on page 29;
• the section of the annual report that describes the review of effectiveness of risk management and internal control systems set out on
page 121; and
• the section describing the work of the audit committee set out on page 117.
14. Matters on which we are required to report by exception
14.1. Adequacy of explanations received and accounting records
Under the Companies Act 2006 we are required to report to you if, in our opinion:
• we have not received all the information and explanations we require for our audit; or
• adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from
branches not visited by us; or
• the parent company financial statements are not in agreement with the accounting records and returns.
We have nothing to report in respect of these matters.
14.2. Directors’ remuneration
Under the Companies Act 2006 we are also required to report if in our opinion certain disclosures of directors’ remuneration have not been
made or the part of the directors’ remuneration report to be audited is not in agreement with the accounting records and returns.
We have nothing to report in respect of these matters.
15. Other matters which we are required to address
15.1. Auditor tenure
Following the recommendation of the audit committee, we were appointed by the Board of Directors in 2003 to audit the financial statements
for the year ending 31 December 2003 and subsequent financial periods. The period of total uninterrupted engagement including previous
renewals and reappointments of the firm is 21 years, covering the years ending 31 December 2003 to 31 December 2023.
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).
164
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023 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) 4.1.15R – DTR 4.1.18R, these financial
statements form part of the Electronic Format Annual Financial Report filed on the National Storage Mechanism of the FCA in accordance with
DTR 4.1.15R – DTR 4.1.18R. This auditor’s report provides no assurance over whether the Electronic Format Annual Financial Report has been
prepared in compliance with DTR 4.1.15R – DTR 4.1.18R.
Edward Hanson (Senior statutory auditor)
For and on behalf of Deloitte LLP
Statutory Auditor
London, United Kingdom
7 March 2024
165
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023FINANCIAL STATEMENTS CONSOLIDATED INCOME STATEMENT
CONSOLIDATED INCOME STATEMENT
Continuing operations
Revenue
Cost of sales
Gross profit
Operating expenses
Operating profit/(loss)
Finance costs
Finance income
Loss before tax
Tax
Profit/(loss) after tax for the year from continuing operations
Discontinued operations
Loss for the year from discontinued operations
Loss after tax for the year
Attributable to:
Owners of the parent
Non-controlling interests
Earnings per share
Continuing operations
– Basic
– Diluted
Continuing and discontinued operations
– Basic
– Diluted
Adjusted((22)) results from continuing operations
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 2022 have been restated for discontinued operations (see note 1).
(2) Defined in the summary of material accounting policies (see note 2).
Year ended
31 December
2023
£m
3,350
(2,696)
654
(597)
57
(79)
14
(8)
9
1
(1,020)
(1,019)
(1,019)
–
(1,019)
Restated(1)
Year ended
31 December
2022
£m
2,954
(2,533)
421
(691)
(270)
(83)
25
(328)
99
(229)
(74)
(303)
(308)
5
(303)
0.1p
0.1p
(16.3)p
(16.3)p
(75.5)p
(75.5)p
(21.9)p
(21.9)p
390
331
263
19.5p
18.7p
147
62
58
4.1p
4.1p
Notes
4, 5
5, 6
7
7
8
13
13
10
10
10
10
5, 6
6
6
10
10
166 MELROSE INDUSTRIES PLC ANNUAL REPORT 2023
166
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Loss after tax for the year
Items that will not be reclassified subsequently to the Income Statement:
Net remeasurement loss on retirement benefit obligations
Fair value gain/(loss) on investments in equity instruments
Income tax credit/(charge) relating to items that will not be reclassified
Items that may be reclassified subsequently to the Income Statement:
Currency translation on net investments
Share of other comprehensive (expense)/income from equity accounted investments
Transfer to Income Statement from equity of cumulative translation differences
on disposal of foreign operations
Derivative gains/(losses) on hedge relationships
Transfer to Income Statement on hedge relationships
Income tax (charge)/credit relating to items that may be reclassified
Other comprehensive (expense)/income for the year
Total comprehensive (expense)/income for the year
Attributable to:
Owners of the parent
Non-controlling interests
Notes
Year ended
31 December
2023
£m
Year ended
31 December
2022
£m
(1,019)
(303)
24
12
8
15
13
8
(119)
35
29
(55)
(195)
(12)
(152)
2
–
(8)
(365)
(420)
(1,439)
(1,439)
–
(1,439)
(32)
(34)
(1)
(67)
593
13
(11)
(39)
2
5
563
496
193
187
6
193
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023 167
167
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023FINANCIAL STATEMENTS
CONSOLIDATED STATEMENT OF CASH FLOWS
CONSOLIDATED STATEMENT OF CASH FLOWS
Operating activities
Net cash used in 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
Settlement receipt from loans held with demerged entities
Purchase of property, plant and equipment
Proceeds from disposal of property, plant and equipment
Purchase of computer software and capitalised development costs
Disposal of equity accounted 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
Purchase of own shares, including associated 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 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 2022 have been restated for discontinued operations (see note 1).
Year ended
31 December
2023
£m
Restated(1)
Year ended
31 December
2022
£m
(7)
36
29
(320)
1,205
(95)
4
(11)
3
–
–
–
2
788
(67)
721
(1,371)
628
(11)
(32)
(93)
(81)
(960)
(6)
(966)
(216)
292
(19)
57
(39)
243
204
478
–
(69)
45
(7)
–
(4)
(109)
(3)
1
332
(140)
192
(598)
632
–
(29)
(504)
(77)
(576)
(23)
(599)
(203)
468
27
292
Notes
27
27
13
13
15
15
27
20
9
9
27
27
27
27
As at 31 December 2023, the Group had net debt of £572 million (31 December 2022: £1,139 million). A definition and reconciliation of the
movement in net debt is shown in note 27.
168 MELROSE INDUSTRIES PLC ANNUAL REPORT 2023
168
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023
CONSOLIDATED BALANCE SHEET
CONSOLIDATED BALANCE SHEET
Non-current assets
Goodwill and other intangible assets
Property, plant and equipment
Investments
Interests in equity accounted investments
Deferred tax assets
Derivative financial assets
Other receivables
Retirement benefit surplus
Current assets
Inventories
Trade and other receivables
Derivative financial assets
Current tax assets
Cash and cash equivalents
Assets classified as held for sale
Total assets
Current liabilities
Trade and other payables
Interest-bearing loans and borrowings
Lease obligations
Derivative financial liabilities
Current tax liabilities
Provisions
Liabilities associated with assets held for sale
Net current liabilities
Non-current liabilities
Other payables
Interest-bearing loans and borrowings
Lease obligations
Derivative financial liabilities
Deferred tax liabilities
Retirement benefit obligations
Provisions
Total liabilities
Net assets
Equity
Issued share capital
Share premium account
Merger reserve
Capital redemption reserve
Other reserves
Translation and hedging reserve
Retained earnings
Equity attributable to owners of the parent
Non-controlling interests
Total equity
31 December
2023
£m
31 December
2022
£m
Notes
11
14
12
15
22
25
17
24
16
17
25
18
13
5
19
20
28
25
21
13
19
20
28
25
22
24
21
5
26
26
3,351
777
114
7
527
46
789
–
5,611
510
713
13
6
58
18
1,318
6,929
1,179
54
40
42
20
188
10
1,533
(215)
358
576
152
64
482
99
98
1,829
3,362
3,567
309
3,271
109
753
(2,330)
273
1,182
3,567
–
3,567
6,846
2,599
62
435
373
36
670
93
11,114
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
The Financial Statements were approved and authorised for issue by the Board of Directors on 7 March 2024 and were signed on its behalf by:
Geoffrey Martin
Peter Dilnot
Group Finance Director
7 March 2024
Chief Executive Officer
7 March 2024
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023
169
169
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023FINANCIAL STATEMENTS
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Issued
share
capital
£m
Share
premium
account
£m
Merger
reserve
£m
Capital
redemption
reserve
£m
Other
reserves
£m
Translation
and hedging
reserve
£m
Retained
earnings
£m
Equity
attributable
to owners
of the
parent
£m
Non-
controlling
interests
£m
Total
equity
£m
At 1 January 2022
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
562
–
–
–
(308)
(67)
(375)
(504)
(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
Loss for the year
Other comprehensive expense
Total comprehensive expense
Purchase of own shares(1)
Dividends paid
Demerger distribution (note 13)
Derecognition of non-controlling interests
on demerger (note 13)
Equity-settled share-based payments
Deferred tax on equity-settled share-based
payments (note 8)
At 31 December 2023
(1) Further information is set out in note 1.
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(365)
(365)
–
–
–
(1,019)
(55)
(1,074)
(93)
(81)
(1,973)
(1,019)
(420)
(1,439)
(93)
(81)
(1,973)
–
–
–
–
2
–
2
22
22
309
3,271
109
753
(2,330)
273
1,182
3,567
–
–
–
–
–
–
(39)
–
–
–
(1,019)
(420)
(1,439)
(93)
(81)
(1,973)
(39)
2
22
3,567
Further information on issued share capital and reserves is set out in note 26.
170 MELROSE INDUSTRIES PLC ANNUAL REPORT 2023
170
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023
NOTES TO THE FINANCIAL STATEMENTS
NOTES TO THE FINANCIAL STATEMENTS
1. Corporate information
Melrose Industries PLC (“the Company”) is a public company limited by shares. The Company is incorporated in the United Kingdom under
the Companies Act 2006 and registered in England and Wales. The address of the registered office is given on the back cover. The nature
of the Group’s operations and its principal activities by operating segment are set out in note 5 and in the Divisional reviews on pages 8 to 13.
The Consolidated Financial Statements of the Group for the year ended 31 December 2023 were authorised in accordance with a resolution
of the Directors of Melrose Industries PLC on 7 March 2024.
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
Capital structure
On 19 April 2023, a share consolidation took place whereby shareholders received one new share in the Company for every three existing shares
held. In accordance with IAS 33: Earnings per Share, a one for three adjustment is required to the weighted average number of shares in
existence prior to the share consolidation and the prior year has been restated accordingly.
On 2 October 2023, the Group commenced a £500 million share buyback programme which is expected to complete by the end of
September 2024. At 31 December 2023, 18,761,840 shares had been purchased at an average price of 494 pence per share with cash
spent of £93 million, inclusive of costs of £1 million. These are held as treasury shares and the costs of the purchase have been recognised in
retained earnings. No liability has been recognised in respect of the remaining share buyback programme as there is no contractual obligation.
In 2022, the Group completed a share buyback programme with 318,003,512 shares repurchased and subsequently cancelled, with cash spent
of £504 million, inclusive of costs of £4 million.
Discontinued operations, disposals and assets held for sale
On 20 April 2023, the Group completed the demerger of the GKN Automotive, GKN Powder Metallurgy and GKN Hydrogen businesses through
the flotation of Dowlais Group plc (“Dowlais”) on the London Stock Exchange. The results of the Dowlais businesses 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. See note 13 for further detail.
Dowlais became a related party to the Group on demerger.
On 12 December 2023, the Group agreed a disposal of its Fuel Systems business, a non-core part of the Structures segment. At 31 December 2023,
the disposal was expected to complete within the next twelve months and accordingly the assets and liabilities of the business have been classified as
held for sale as at 31 December 2023. The disposal completed on 1 March 2024.
In addition, discontinued operations for 2022 include the results of the Ergotron business which was classified as held for sale as at 30 June 2022,
and was subsequently disposed on 6 July 2022.
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 IAS 1: Presentation of Financial Statements and making materiality judgements – disclosure of accounting policies
• Amendments to IAS 12: Income taxes – deferred tax related to assets and liabilities arising from a single transaction
• Amendments to IAS 12: Income taxes – international tax reform – pillar two model rules
• Amendments to IAS 8: Accounting polices, changes in accounting estimates and errors – definition of accounting estimates
1.2 New Standards, Amendments and Interpretations in issue but not yet effective
At 31 December 2023, 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 non-current liabilities with covenants
• Amendments to IAS 7 and IFRS 7: Supplier finance arrangements
• Amendments to IFRS 16: Lease liability in a sale and leaseback
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 material accounting policies
Basis of accounting
The Consolidated Financial Statements have been prepared in accordance with the requirements of the Companies Act 2006 and International
Financial Reporting Standards (“IFRSs”) as issued by the IASB. The Consolidated Financial Statements have been prepared on an historical cost
basis, except for the revaluation of certain financial instruments and investments which are recognised at fair value at the end of each reporting
period. Historical cost is generally based on the fair value of the consideration given in exchange for assets.
Alternative Performance Measures
The Group presents Alternative Performance Measures (“APMs”) in addition to the statutory results of the Group. These are presented in
accordance with the Guidelines on APMs issued by the European Securities and Markets Authority (“ESMA”).
APMs used by the Group are set out in the glossary to these Financial Statements on pages 232 to 239 and the reconciling items between
statutory and adjusted results are listed below and described in more detail in note 6.
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023 171
171
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023FINANCIAL STATEMENTS
NOTES TO THE FINANCIAL STATEMENTS CONTINUED
NOTES TO THE FINANCIAL STATEMENTS CONTINUED
2. Summary of material accounting policies continued
Adjusted profit measures exclude items which are significant in size or volatility or by nature are non-trading or non-recurring or any item released
to the Income Statement that was previously a fair value item booked on an acquisition.
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;
• 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, which are not considered by the Group to be part of normal financing costs;
• Finance costs in respect of the Group’s net debt strategically allocated to a demerger group of businesses at the start of the year and
subsequently settled on demerger; 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 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.
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 £1.0 billion at 31 December 2023 and sufficient headroom throughout the going concern forecast period. Forecast covenant compliance
is considered further below.
172 MELROSE INDUSTRIES PLC ANNUAL REPORT 2023
172
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023 2. Summary of material accounting policies continued
Covenants
The Group’s banking 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. As a result of the demerger on 20 April 2023, the Group renegotiated its banking
arrangements. No testing of the interest cover covenant was required at 31 December 2023. The interest cover covenant will be tested from
30 June 2024. Covenant calculations are detailed in the glossary to these Consolidated Financial Statements.
The financial covenants during the period of assessment for going concern are as follows:
Net debt to adjusted EBITDA
Interest cover
31 December
2023
30 June
2024
31 December
2024
3.5x
n/a
3.5x
4.0x
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 end markets 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. Climate scenario analysis was used to model the impact of
climate change on the Group’s cash flow position. Climate is deemed to not have a material impact over the period of 12 months for the
assessment of going concern or 36 months for assessment of viability of the Group.
The reasonably possible sensitised case models more conservative sales assumptions for 2024 and the first half of 2025. The sensitised
assumptions are specific to each business taking into account their markets, but on average represents a c.10% reduction to the Group’s
forecast revenue in each of 2024 and the first half of 2025 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 £1.0 billion and the Group’s leverage was 1.1x, comfortably below the covenant test at 31 December 2023, 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 2024 and 31 December 2024, and the Group will not require any additional sources of finance. Testing at 30 June 2025 is also
favourable, assuming arrangements similar in nature with existing agreements.
Business combinations and goodwill
The acquisition of subsidiaries is accounted for using the acquisition method. The cost of acquisition is measured at the fair value of assets
transferred, the liabilities incurred or assumed at the date of exchange of control and equity instruments issued by the Group in exchange for
control of the acquiree. Control is achieved where the Company has the power to govern the financial and operating policies of an investee entity
so as to obtain benefits from its activities. Costs directly attributable to business combinations are recognised as an expense in the Income
Statement as incurred.
The acquired identifiable assets and liabilities are measured at their fair value at the date of acquisition except those where specific guidance
is provided by IFRSs. Non-current assets and directly attributable liabilities that are classified as held for sale in accordance with IFRS 5:
Non-current assets held for sale and discontinued operations, are recognised and measured at fair value less costs to sell. Also, deferred tax
assets and liabilities are recognised and measured in accordance with IAS 12: Income taxes, liabilities and assets related to employee benefit
arrangements are recognised and measured in accordance with IAS 19 (revised): Employee benefits and liabilities or equity instruments related to
the replacement by the Group of an acquiree’s share-based payments awards are measured in accordance with IFRS 2: Share-based payment.
Any excess of the cost of the acquisition over the fair values of the identifiable net assets acquired is recognised as goodwill.
If the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, the Group
reports provisional amounts where appropriate. Those provisional amounts are adjusted during the measurement period, or additional assets
or liabilities recognised, to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known,
would have affected the amounts recognised at that date.
The measurement period is the period from the date of acquisition to the date the Group obtains complete information about facts and
circumstances that existed as of the acquisition date and is subject to a maximum period of one year.
Goodwill on acquisition is initially measured at cost, being the excess of the sum of the consideration transferred, the amount of any non-
controlling interest in the acquiree and the fair value of the acquirer’s previously held equity interest in the acquiree over the acquirer’s interest in
the net fair value of the identifiable assets, liabilities and contingent liabilities. Following initial recognition, goodwill is measured at cost less any
accumulated impairment losses. Goodwill is reviewed for impairment annually or more frequently if events or changes in circumstances indicate
that the carrying value may be impaired.
If, after reassessment, the Group’s interest in the fair value of the acquiree’s identifiable net assets exceeds the sum of the consideration
transferred, the amount of any non-controlling interest in the acquiree and the fair value of the acquirer’s previously held equity interest in the
acquiree, the excess is recognised immediately in profit or loss as a bargain purchase gain.
As at the acquisition date, any goodwill acquired is allocated to the cash-generating units acquired. Impairment is determined by assessing
the recoverable amount of the cash-generating unit to which goodwill relates. Where the recoverable amount of the cash-generating unit is less
than the carrying amount, an impairment loss is recognised in the Income Statement and is not subsequently reversed. When there is a disposal
of a cash-generating unit, goodwill relating to the operation disposed of is taken into account in determining the gain or loss on disposal of that
operation. The amount of goodwill allocated to a partial disposal is measured on the basis of the relative values of the operation disposed of and
the operation retained.
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023 173
173
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023FINANCIAL STATEMENTS
NOTES TO THE FINANCIAL STATEMENTS CONTINUED
NOTES TO THE FINANCIAL STATEMENTS CONTINUED
2. Summary of material accounting policies continued
Equity accounted investments
A joint venture is an entity which is not a subsidiary undertaking but where the interest of the Group is that of a partner in a business over which
the Group exercises joint control with its partners over the financial and operating policies. In all cases voting rights are 50% or lower.
Associated undertakings are entities that are neither a subsidiary nor a joint venture, but where the Group has a significant influence. The results,
assets and liabilities of equity accounted investments are accounted for using the equity method of accounting. The Group’s share of equity
includes goodwill arising on acquisition.
When a Group entity transacts with an equity accounted investment of the Group, profits and losses resulting from the transactions with the
equity accounted investments are recognised in the Group’s Consolidated Financial Statements only to the extent of interests in equity
accounted investments that are not related to the Group.
Revenue
Revenues are recognised either at the point of transfer of control of goods and services, or recognised over time on an activity basis using
the costs incurred as the measure of the activity. Costs are recognised as they are incurred.
The nature of agreements into which the Group enters means that certain of the Group’s arrangements with its customers have multiple
elements that can include any combination of:
• Sale of products and services;
• Risk and revenue sharing partnerships (“RRSPs”);
• Design and build; and
• Construction contracts.
Contracts are reviewed to identify each performance obligation relating to a distinct good or service and the associated consideration. The Group
allocates revenue to multiple element arrangements based on the identified performance obligations within the contracts in line with the policies
below. A performance obligation is identified if the customer can benefit from the good or service on its own or together with other readily
available resources, and it can be separately identified within the contract. This review is performed by reference to the specific contract terms.
Sale of products and services
This revenue stream accounts for the majority of Group sales. Contracts in the Automotive, Powder Metallurgy 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 whilst material affects a small number of businesses, exclusively in the Engines 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.
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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
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.
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.
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.
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2. Summary of material accounting policies continued
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 their current state under
normal operating conditions. Net realisable value is based on estimated selling price less costs expected to be incurred to completion and
disposal. Provisions are made for obsolescence or other expected losses where necessary.
Cash and cash equivalents
Cash and cash equivalents comprise cash in hand, balances with banks and similar institutions, and short-term deposits which are readily
convertible to cash and are subject to insignificant risks of changes in value.
For the purpose of the Consolidated Statement of Cash Flows, cash and cash equivalents consist of cash and cash equivalents as defined
above, net of outstanding bank overdrafts.
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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.
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.
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2. Summary of material accounting policies continued
Investments
The Group has investments in listed shares and unlisted shares, that are not traded in an active market, which are classified as financial assets,
measured at fair value. Fair value for listed shares is calculated by reference to quoted market price. Fair value for unlisted shares is determined
by assessment of expected future dividends discounted to net present value. Any changes in fair value are recognised in Other Comprehensive
Income and accumulated in retained earnings. Dividends from investments are recognised in the Income Statement when the Group’s right to
receive the dividend is established.
Trade and other receivables
Trade and other receivables are measured and carried at amortised cost using the effective interest method, less any impairment. For trade
receivables, the carrying amount is reduced by an allowance for expected lifetime losses. Subsequent recoveries of amounts previously
written off are credited against the allowance account and changes in the carrying amount of the allowance account are recognised in the
Income Statement.
Trade receivables that are assessed not to be impaired individually are also assessed for impairment on a collective basis. In measuring the
expected credit losses, the Group considers all reasonable and supportable information such as the Group’s past experience at collecting
receipts, any increase in the number of delayed receipts in the portfolio past the average credit period, and forward looking information such
as forecasts of future economic decisions.
Other receivables are also considered for impairment and if required the carrying amount is reduced by any loss arising which is recorded in the
Income Statement, although for the Group this is not material.
Financial instruments – liabilities
Recognition and derecognition of financial liabilities
Financial liabilities are recognised in the Group’s Balance Sheet when the Group becomes a party to the contractual provisions of the instruments
and are initially measured at fair value, net of transaction costs. The Group derecognises financial liabilities when the Group’s obligations are
discharged, significantly modified, cancelled or they expire.
Classification and measurement
Non-derivative financial liabilities are subsequently measured at amortised cost using the effective interest method, with interest expense
recognised on an effective interest rate basis. The effective interest method is a method of calculating the amortised cost of a financial liability
and of allocating interest expense over the relevant periods. The effective interest rate is the rate that discounts estimated future cash payments
throughout the expected life of the financial liability, or, where appropriate, a shorter period to the gross carrying amount of the financial liability.
Derivative financial instruments and hedging
The Group uses derivative financial instruments to manage its exposure to interest rate, foreign exchange rate and commodity risks, arising from
operating and financing activities. The Group does not hold or issue derivative financial instruments for speculative trading purposes. Details of
derivative financial instruments are disclosed in note 25 of the Financial Statements.
Derivative financial instruments are recognised and stated at fair value in the Group’s Balance Sheet. Their fair value is recalculated at each
reporting date. The accounting treatment for the resulting gain or loss will depend on whether the derivative meets the criteria to qualify for
hedge accounting and are designated as such.
Where derivatives do not meet the criteria to qualify for hedge accounting, any gains or losses on the revaluation to fair value at the period end
are recognised immediately in the Income Statement. Where derivatives do meet the criteria to qualify for hedge accounting, recognition of any
resulting gain or loss on revaluation depends on the nature of the hedge relationship and the item being hedged.
Derivative financial instruments with maturity dates of less than one year from the period end date are classified as current in the Balance Sheet.
Derivatives embedded in non-derivative host contracts are recognised at their fair value in the Group’s Balance Sheet when the nature,
characteristics and risks of the derivative are not closely related to the host contract. Gains and losses arising on the remeasurement of these
embedded derivatives at each balance sheet date are recognised in the Income Statement.
Hedge accounting
In order to qualify for hedge accounting, the Group is required to document from inception the relationship between the item being hedged and
the hedging instrument, along with its risk management objectives and its strategy for undertaking various hedge transactions. Furthermore, at
the inception of the hedge and on an ongoing basis, the Group documents that the hedge will be highly effective, which is when the hedging
relationships meet all of the following hedge effectiveness requirements:
• there is an economic relationship between the hedged item and the hedging instrument;
• the effect of credit risk does not dominate the value changes that result from that economic relationship; and
• the hedge ratio of the hedging relationship is the same as that resulting from the quantity of the hedged item that the Group actually hedges
and the quantity of the hedging instrument that the Group actually uses to hedge that quantity of hedged item.
The Group discontinues hedge accounting only when the hedging relationship (or a part thereof) ceases to meet the qualifying criteria (after
rebalancing, if applicable). This includes instances when the hedging instrument expires or is sold, terminated or exercised. The discontinuation
is accounted for prospectively.
The Group designates certain hedging instruments as either cash flow hedges or hedges of net investments in foreign operations.
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Cash flow hedge
Derivative financial instruments are classified as cash flow hedges when they hedge the Group’s exposure to the variability in cash flows that are
either attributable to a particular risk associated with a recognised asset or liability, or a highly probable forecasted cash flow.
The Group designates the full change in the fair value of a foreign exchange forward contract (i.e. including the forward elements) as the hedging
instrument for all of its hedging relationships involving foreign exchange forward contracts.
The effective portion of any gain or loss from revaluing the derivative financial instrument is recognised in the Statement of Comprehensive
Income and accumulated in equity. The gain or loss relating to the ineffective portion is recognised immediately in the Income Statement.
Amounts previously recognised in the Statement of Comprehensive Income and accumulated in equity are recycled to the Income Statement
in the periods when the hedged item is recognised in the Income Statement or when the forecast transaction is no longer expected to occur.
However, when the forecast transaction that is hedged results in the recognition of a non-financial asset or a non-financial liability, the gains and
losses previously deferred in equity are transferred from equity and included in the initial measurement of the cost of the non-financial asset or
non-financial liability.
Hedges of net investments in foreign operations
Derivative financial instruments and certain loan 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 hedging instruments at a reporting period end
is recognised in the Statement of Comprehensive Income. Any ineffective element is recognised immediately in the Income Statement.
The Group designates only the spot rate component of cross currency swaps in net investment hedges. The changes in the fair value of the
aligned forward and currency basis elements are recognised in other comprehensive income and accumulated in equity. If the hedged item is
time-period related, then the amount accumulated in equity is reclassified to profit or loss on an appropriate basis.
Gains and losses accumulated in equity are recognised immediately in the Income Statement when the foreign operation is disposed.
Provisions
Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow
of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the
obligation. If the effect of the time value of money is material, provisions are determined by discounting the expected future cash flows at a rate
that reflects the current market assessment of the time value of money and, where appropriate, the risks specific to the liability.
Where discounting is used, the increase in the provision due to the passage of time is recognised as a finance cost.
Contingent liabilities acquired in a business combination
Contingent liabilities acquired in a business combination are initially measured at fair value at the acquisition date. At the end of subsequent
reporting periods, such contingent liabilities are measured at the higher of the amount that would be recognised in accordance with IAS 37:
Provisions, contingent liabilities and contingent assets and the amount initially recognised less cumulative amount of revenue recognised in
accordance with the principles of IFRS 15: Revenue from contracts with customers.
Pensions and other retirement benefits
The Group operates defined benefit pension plans and defined contribution plans, some of which require contributions to be made to
administered funds separate from the Group.
For the defined benefit pension and retirement benefit plans, plan assets are measured at fair value and plan liabilities are measured on
an actuarial basis and discounted at an interest rate equivalent to the current rate of return on a high quality corporate bond of equivalent
currency and term to the plan liabilities. Any assets resulting from this calculation are limited to past service cost plus the present value of
available refunds and reductions in future contributions to the plan. The present value of the defined benefit obligation, and the related current
service cost and past service cost, are measured using the projected unit credit method.
The service cost of providing pension and other retirement benefits to employees for the period is charged to the Income Statement.
Net interest expense on net defined benefit obligations is determined by applying discount rates used to measure defined benefit obligations
at the beginning of the year to net defined benefit obligations at the beginning of the year. The net interest expense is recognised within
finance costs.
Remeasurement gains and losses comprise actuarial gains and losses, the effect of the asset ceiling (if applicable) and the return on plan assets
(excluding interest). Remeasurement gains and losses, and taxation thereon, are recognised in full in the Statement of Comprehensive Income
in the period in which they occur and are not subsequently recycled.
Actuarial gains and losses may result from differences between the actuarial assumptions underlying the plan obligations and actual experience
during the period or changes in the actuarial assumptions used in the valuation of the plan obligations.
For defined contribution plans, contributions payable are charged to the Income Statement as an operating expense when employees have
rendered services entitling them to the contributions.
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.
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2. Summary of material accounting policies continued
In preparing the Financial Statements of the individual companies, transactions in currencies other than the entity’s functional currency
(foreign currencies) are recorded at the rates of exchange prevailing on the dates of the transactions. At each balance sheet date,
monetary assets and liabilities that are denominated in foreign currencies are retranslated at the rates prevailing on the balance sheet date.
Non-monetary items carried at fair value that are denominated in foreign currencies are translated at the rates prevailing at the date when the
fair value was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated.
Exchange differences arising on the settlement of monetary items, and on the retranslation of monetary items, are included in the Income Statement
for the period. Exchange differences arising on the retranslation of non-monetary items carried at fair value are included in the Income Statement for
the period except for differences arising on the retranslation of non-monetary items in respect of which gains and losses are recognised directly in
equity. For such non-monetary items, any exchange component of that gain or loss is also recognised directly in equity.
For the purpose of presenting Consolidated Financial Statements, the assets and liabilities of the Group’s foreign operations are translated at
exchange rates prevailing on the balance sheet date. Income and expense items are translated at the average exchange rates for the period,
unless exchange rates fluctuate significantly during that period, in which case the exchange rates at the date of transactions are used.
Exchange differences arising, if any, are recognised in the Statement of Comprehensive Income and accumulated in equity (attributed to
non-controlling interests as appropriate). Such translation differences are recognised as income or as expenses in the period in which the related
operation is disposed of. Any exchange differences that have previously been attributed to non-controlling interests are derecognised but they
are not reclassified to the Income Statement.
Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and
translated at the rate prevailing at the balance sheet date.
Taxation
The tax expense is based on the taxable profits for the period and represents the sum of the tax paid or currently payable and deferred tax.
Taxable profit differs from net profit as reported in the Income Statement because it excludes items of income or expense that are taxable or
deductible in other years and it further excludes items that are never taxable or deductible. The Group’s liability for current tax is calculated using
tax rates and tax laws that have been enacted or substantively enacted by the balance sheet date.
A tax provision is recognised for those matters for which the tax determination is uncertain but it is considered probable that there will be a future
outflow of funds to a tax authority. The provisions are measured at the best estimate of the amount expected to become payable.
The assessment is based on the judgement of tax professionals within the Company supported by previous experience in respect of such
activities and in certain cases based on specialist independent advice.
Deferred tax is provided, using the liability method, on all temporary differences at the balance sheet date between the tax bases of assets
and liabilities and their carrying amounts for financial reporting purposes.
Deferred tax liabilities are recognised for all taxable temporary differences except:
• where the deferred tax liability arises on the initial recognition of goodwill or an asset or liability in a transaction that is not a business
combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and
• where the timing of the reversal of the temporary differences associated with investments in subsidiaries and interests in equity accounted
investments can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future.
Deferred tax assets are recognised for all deductible temporary differences, carry-forward of unused tax assets and unused tax losses, to the
extent that it is probable that taxable profit will be available against which the deductible temporary differences, and carry-forward of unused tax
assets and unused tax losses can be utilised except:
• where the deferred tax asset arises from the initial recognition of an asset or liability in a transaction that is not a business combination and,
at the time of the transaction, affects neither the accounting profit nor taxable profit or loss; and
• in respect of deductible temporary differences associated with investments in subsidiaries and interests in equity accounted investments,
deferred tax assets are only recognised to the extent that it is probable that the temporary differences will reverse in the foreseeable future
and taxable profit will be available against which the temporary differences can be utilised.
The carrying amount of deferred tax assets is reviewed at each balance sheet date and reduced to the extent that it is no longer probable that
sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilised.
Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the year when the asset is realised or the liability is
settled, based on tax rates and tax laws that have been enacted or substantively enacted at the relevant balance sheet date.
Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and
when they relate to income taxes levied by the same taxation authority and the Group intends to settle its current tax assets and liabilities on a
net basis.
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.
180 MELROSE INDUSTRIES PLC ANNUAL REPORT 2023
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MELROSE INDUSTRIES PLC ANNUAL REPORT 2023 2. Summary of material accounting policies continued
Share-based payments
The Group has applied the requirements of IFRS 2: Share-based payment. The Group issues equity-settled share-based payments to
certain employees. Equity-settled share-based payments are measured at fair value of the equity instrument excluding the effect of non-market
based vesting conditions at the date of grant. The fair value determined at the grant date of the equity-settled share-based payments is
expensed on a straight-line basis over the vesting period, based on the Group’s estimate of shares that will eventually vest and adjusted for the
effect of non-market based vesting conditions.
Fair value is measured by use of the Black-Scholes pricing model. The expected life used in the model has been adjusted, based on the
Directors’ best estimate, for the effects of non-transferability, exercise restrictions, and behavioural considerations.
Non-current assets and disposal groups
Non-current assets and businesses classified as held for sale are measured at the lower of carrying amount and fair value less costs to sell.
Non-current assets and businesses are classified as held for sale if their carrying amount will be recovered principally through a sale transaction
rather than through continuing use. This condition is regarded as having been met only when the sale is highly probable and the asset or
business is available for immediate sale in its present condition. Management must be committed to the sale which should be expected to qualify
for recognition as a completed sale within one year from the date of classification.
Government grants
Government grants are not recognised in the Income Statement until there is reasonable assurance that the Group will comply with the
conditions attached to them and that the grants will be received. Government grants are recognised in the Income Statement on a systematic
basis over the periods in which the Group recognises the related costs for which the grants are intended to compensate.
Specifically, government grants where the primary condition is that the Group should purchase, construct or otherwise acquire non-current
assets (including property, plant and equipment) are recognised as deferred government grants in the Balance Sheet and transferred to the
Income Statement on a systematic and rational basis over the useful lives of the related assets.
Government grants that are receivable as compensation for expenses or losses already incurred or for the purpose of giving immediate financial
support to the Group with no future related costs are recognised in the Income Statement in the period in which they become receivable.
Climate change
In preparing the Consolidated Financial Statements, the Directors have considered the impact of climate change with specific regard to the risks
identified in the Task Force on Climate-related Financial Disclosures (“TCFD”) report on page 58 as well as the Group’s Transition Plan including
emission targets.
The Directors have considered the impact of climate change in respect to the following areas and have determined that there is no material
impact on the financial reporting judgements and estimates:
• Group’s going concern assessment (note 2);
• Estimated future cash flows used in impairment assessments, where applicable, of the carrying value of non-current assets (such as goodwill)
(note 11);
• Inventory valuation with respect to climate related shift in demand (note 16);
• Recoverability of trade receivables and contract assets related to unbilled work done on risk and revenue sharing partnerships, which consider
the future expectations of airframe and engine manufacturers as well as airline customer behaviours (note 17); and
• Forecasts of future profitability to assess the recoverability of deferred tax assets in the UK, The Netherlands and US (note 22).
The Group’s Transition Plan sets out the actions the Directors intend to take in the transition to a net zero economy, how they plan to execute
on the interim and long-term emissions reduction targets, and how they plan to achieve Net Zero by 2050. The Transition Plan also sets out how
climate considerations are integrated into strategic thinking and future planning, such as major capital expenditure, acquisitions, and disposals.
The main short-term and medium-term objectives to meet this target are:
• Reduce absolute Scope 1 and 2 emissions 50% by 2030 from a 2020 baseline. This will be met by sourcing at least 50% of the Group’s
electricity from renewable sources by 2025 (where renewable energy is commercially and reasonably available in the relevant jurisdiction)
through either continued investment in onsite renewable energy as well as procurement of power purchase agreements and renewable energy
certificates. The Group will also continue to invest in energy efficiency measures to reduce overall energy consumption. The estimated
investment needed to meet these scope 1 and 2 emission improvements are incorporated into current financial planning and forecasting.
• The Group is uniquely positioned at the early stages of an aircraft life cycle to play a role in eradicating emissions for the entire sector and
ultimately unlocking its potential to positively contribute to a low carbon economy. The targets to achieve 80% of total Research and
Development (“R&D”) expenditure on climate-related R&D per year to contribute to aerospace decarbonisation by 2025 and achieve 100% of
new products which contribute to aerospace decarbonisation by 2025 demonstrate the emphasis Melrose places on developing innovative
and breakthrough technologies such as battery electric and hydrogen propulsion. During the year £48 million was spent on climate related
R&D. Future investments required to meet these targets are incorporated into our forecasts.
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023 181
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MELROSE INDUSTRIES PLC ANNUAL REPORT 2023FINANCIAL STATEMENTS
NOTES TO THE FINANCIAL STATEMENTS CONTINUED
NOTES TO THE FINANCIAL STATEMENTS CONTINUED
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, critical judgements within the scope of paragraph 122 of IAS 1: Presentation of Financial
Statements have been made during the process of applying the Group’s accounting policies.
a) Adjusting items
Judgements are required as to whether items are disclosed as adjusting, with consideration given to both quantitative and qualitative factors.
Further information about the determination of adjusting items in the year ended 31 December 2023 is included in note 2.
b) Demerger distribution
On 20 April 2023, the Group completed the demerger of the GKN Automotive, GKN Powder Metallurgy and GKN Hydrogen businesses through
the flotation of Dowlais Group plc (“Dowlais”) on the London Stock Exchange.
The demerger distribution of £1,973 million has been measured at fair value in accordance with IFRIC 17: Distributions of Non-cash Assets
to Owners and represents the number of Dowlais shares distributed to equity holders of 1,351,475,321 multiplied by the opening share price on
20 April 2023 of 146 pence. It was considered that the opening share price provided a fair representation of the value of the demerger
distribution as it was the share price closest to the time of demerger. If a different share price had been used, for example a closing price on day
one or first week of trading average, the demerger distribution value would have been impacted. For each 1p change in the share price, the
demerger distribution would have been impacted by £14 million.
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.
c) 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 2023, the retirement benefit
obligation was a net deficit of £99 million (31 December 2022: £488 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.
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.
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3. Critical accounting judgements and key sources of estimation uncertainty continued
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 £595 million (31 December 2022: £450 million) increasing to between £655 million
and £695 million. This would lead to recognition of additional revenue and profit in the next year of between £60 million and £100 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) Revenue has been restated for discontinued operations (see note 1).
Year ended
31 December
2023
£m
2,388
962
3,350
Restated(1)
Year ended
31 December
2022
£m
2,030
924
2,954
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. RRSP contracts generally include the sale
of products and services as well as certain aspects of design and build arrangements. Further details are set out below.
Risk and revenue sharing partnerships
The Group has approximately £16 billion (31 December 2022: £13 billion) in respect of contractual transaction prices including a constrained
estimate of unbilled work done, on five (31 December 2022: four) engine programmes, out of a wider population of such programmes, which has
been allocated to contracted performance obligations not satisfied at 31 December 2023. These performance obligations will be satisfied and
revenue will be recognised over a period of up to 30 years (2022: 30 years).
An additional programme has been included during the year as a result of a modification to a contract. This was announced on 6 November 2023
following a major new agreement with GE Aerospace. The agreement expands the Group’s participation on the GEnx RRSP programme and also
secures new technology work packages, aftermarket repair of engines structures and further production of fan cases for a range of GE engines.
Whilst the new agreement has not had a material impact on the reported results for the year ended 31 December 2023 or Balance Sheet as at
31 December 2023, the implications have been assessed under IFRS 15 and are material in future years. The key effects are:
• The Group’s involvement on the GEnx RRSP has been extended beyond its current focus on OE to include significantly greater participation
in the aftermarket phase. The contract modification will be accounted for prospectively, with pricing implications affecting revenue from
1 January 2024. Following changes to the termination rights, to commercially protect the Group for its increased aftermarket share, the Group
now has a contractual right to aftermarket revenue.
• The new agreement will also: 1) support GE Aerospace’s progress towards its cost and carbon emissions reduction targets with new proprietary
technology for the GEnx programme, specifically additive fabrications replacing existing processes, 2) allow the Group to join GE Aerospace’s
global aftermarket repair network on the GEnx programme with specialised repair content for complex structural components and 3) extend
existing contracts to now deliver 100% of GEnx, CF6 and GE90 fan cases, as well as 50% of GE9X fan case assembly.
The amount of revenue recognised from RRSP contracts during the year was £680 million (2022: £547 million), which included an increase
in the unbilled work done contract asset of £173 million (2022: £106 million). Within this there is revenue from the delivery of product which
is recognised at a point in time of £629 million (2022: £517 million) and revenue from provision of service which is recognised over time of
£51 million (2022: £30 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) Sale of structural OE engine components, such as turbine cases, principally to engine manufacturers, where revenue is recognised at a point
in time; and
ii) 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.
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023 183
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MELROSE INDUSTRIES PLC ANNUAL REPORT 2023FINANCIAL STATEMENTS
NOTES TO THE FINANCIAL STATEMENTS CONTINUED
NOTES TO THE FINANCIAL STATEMENTS CONTINUED
4. Revenue continued
RRSP revenue recognised over time
The nature of these RRSP contracts on long-term engine programmes means that, as a partner, the Engines segment can share revenue
earned from maintenance, repair and overhaul services which are provided by the engine manufacturers (the Group’s customers) or their
sub-contractors, but not the Group. The Group has a stand ready obligation to contribute to certain of the partnerships which typically results
in the provision of services such as technical and other programme support activities over the whole life of the engine. These services occur
over the life of the engine and due to the nature of compensation from customer arrangements, which is often flight hour based, as well as
costs which are less predictable, revenue is recognised over time using the engine manufacturer’s actual overhaul costs as an input method.
This method is considered appropriate as it best reflects the customers’ receipt and consumption of benefit from the Group’s stand ready
performance obligation.
The total contract revenue includes amounts from: expected sales of OE engine components, expected sales of spare parts and aftermarket
revenue per delivered engine for stand ready services for the life of engine obligations. The total contract revenue is allocated to all of the
performance obligations.
During the year, £30 million (2022: £nil) of revenue has been recognised relating to performance obligations satisfied by the Group in previous years
as risks have reduced and the constraint reassessed. There has been a further £27 million (2022: £19 million) of revenue recognised from changes
in assumptions which will also impact the revenue allocation between future years. Assumption changes were made following operational progress
by engine manufacturers with their customers, providing more certainty over future costs and volumes for the RRSP partners.
The Group participates on the Pratt & Whitney (“PW”) 1100G RRSP programme which produces a geared turbofan (“GTF”) engine. A specific
fleet of the GTF engines have been impacted by a rare condition in powder metal used to manufacture certain of the engine parts, which are not
supplied by the Group. GKN Aerospace has a 4% programme share on the GTF PW1100G variant impacted by this issue. According to RTX
(PW’s parent company), the full potential cash impact to Melrose of approximately £200 million will be incurred over the next three to four years,
if it is assumed that this is all a programme cost to be shared by partners in the PW1100G RRSP programme.
Melrose's financial assumptions for all of its RRSP programmes are very constrained recognising that most of the Group’s work is done on
the delivery of its parts which typically last the life of the engine, appropriately allowing for risks to arise over the full programme duration. As a
result, there is no net impact on the Group’s results for the year ended 31 December 2023 and the unbilled work done contract asset remains
appropriately constrained at 31 December 2023, in accordance with the requirements of IFRS 15. This position has been determined based on
an assessment of risk, confidence in progress on the programme during the year and future expectations.
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 demerger of the Automotive, Powder Metallurgy and Other Industrial segments during the year their results are classified within
discontinued operations and the comparative results for 2022 have been restated accordingly. In addition, the results of the Aerospace business
are now viewed by the CODM as separated into Engines and Structures. The incremental information is provided below with comparative results
for 2022 also re-presented accordingly.
The operating segments are as follows:
Engines – An industry leading global tier one supplier to the aerospace engines market, including structural engineered components; parts
repair; commercial and aftermarket contracts.
Structures – A multi-technology global tier one supplier of both civil and defence air frames, including lightweight composite and metallic
structures; electrical distribution systems and components.
In addition, there is a corporate cost centre which is also reported to the Board. The corporate 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 corporate cost
centre for the year ended 31 December 2023.
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.
184 MELROSE INDUSTRIES PLC ANNUAL REPORT 2023
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5. Segment information continued
Year ended 31 December 2023
Continuing operations
Timing of revenue recognition
At a point in time
Over time
Revenue
Year ended 31 December 2022 – restated(1)
Continuing operations
Timing of revenue recognition
At a point in time
Over time
Revenue
Engines
£m
Structures
£m
931
262
1,193
Engines
£m
806
229
1,035
1,457
700
2,157
Structures
£m
1,224
695
1,919
(1) Revenue has been restated for discontinued operations (see note 1) and the re-presentation of the Engines and Structures segments.
b) Segment operating profit
Year ended 31 December 2023
Continuing operations
Adjusted operating profit/(loss)
Items not included in adjusted operating profit(2):
Amortisation of intangible assets acquired in business combinations
Restructuring costs
Melrose equity-settled compensation scheme charges
Acquisition and disposal related gains and losses
Movement in derivatives and associated financial assets and liabilities
Net release and changes in discount rates of fair value items
Operating profit/(loss)
Finance costs
Finance income
Loss before tax
Tax
Profit after tax for the year from continuing operations
Year ended 31 December 2022 – restated(3)
Continuing operations
Adjusted operating profit/(loss)
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
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 profit/(loss)
Finance costs
Finance income
Loss before tax
Tax
Engines
£m
310
Structures
£m
110
(135)
(26)
–
–
(3)
1
147
(125)
(111)
–
–
(6)
2
(130)
Corporate(1)
£m
(30)
–
(12)
(38)
(3)
123
–
40
Engines
£m
162
Structures
£m
24
Corporate(1)
£m
(39)
(135)
(25)
20
–
3
(5)
20
(125)
(63)
1
–
9
–
(154)
–
(2)
(100)
(15)
–
20
(136)
Loss after tax for the year from continuing operations
(1) Corporate adjusted operating loss of £30 million (2022: £39 million), includes £1 million (2022: £3 million) of costs in respect of divisional management
long-term incentive plans.
(2) Further details on adjusting items are discussed in note 6.
(3) Operating profit has been restated for discontinued operations (see note 1) and the re-presentation of the Engines and Structures segments.
Total
£m
2,388
962
3,350
Total
£m
2,030
924
2,954
Total
£m
390
(260)
(149)
(38)
(3)
114
3
57
(79)
14
(8)
9
1
Total
£m
147
(260)
(90)
(79)
(15)
12
15
(270)
(83)
25
(328)
99
(229)
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023 185
185
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023FINANCIAL STATEMENTS
NOTES TO THE FINANCIAL STATEMENTS CONTINUED
NOTES TO THE FINANCIAL STATEMENTS CONTINUED
5. Segment information continued
c) Segment total assets and liabilities
Engines
Structures
Corporate
Continuing operations
Discontinued operations
Total
Total assets
Total liabilities
31 December
2023
£m
Restated(1)
31 December
2022
£m
31 December
2023
£m
Restated(1)
31 December
2022
£m
3,957
2,388
584
6,929
–
3,798
2,894
761
7,453
6,534
6,929
13,987
1,396
1,099
867
3,362
–
3,362
1,202
1,315
1,838
4,355
2,464
6,819
(1) Total assets and liabilities have been restated for discontinued operations (see note 1) and the re-presentation of the Engines and Structures segments.
d) Segment capital expenditure and depreciation
Capital expenditure(1)
Year ended
31 December
2023
£m
Restated(2)
Year ended
31 December
2022
£m
Depreciation of
owned assets(1)
Depreciation of
leased assets
Year ended
31 December
2023
£m
Restated(2)
Year ended
31 December
2022
£m
Year ended
31 December
2023
£m
Restated(2)
Year ended
31 December
2022
£m
55
63
–
118
51
169
38
39
–
77
231
308
43
74
–
117
43
160
46
77
–
123
238
361
7
17
1
25
6
31
7
14
1
22
25
47
Engines
Structures
Corporate
Continuing operations
Discontinued operations
Total
(1) Including computer software and development costs. Capital expenditure excludes lease additions.
(2) Capital expenditure and depreciation have been restated for discontinued operations (see note 1) and the re-presentation of the Engines and Structures segments.
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 retirement benefit surplus) by geographical location are detailed below:
UK
Rest of Europe
North America
Other
Continuing operations
Discontinued operations
Total
Revenue(1) from
external customers
Year ended
31 December
2023
£m
Restated(2)
Year ended
31 December
2022
£m
Segment assets
31 December
2023
£m
Restated(2)
31 December
2022
£m
579
540
2,138
93
3,350
1,582
4,932
509
408
1,971
66
2,954
4,715
7,669
882
2,166
1,179
22
4,249
–
4,249
1,042
2,501
1,038
28
4,609
5,333
9,942
(1) Revenue is presented by destination.
(2) Revenue and segment assets have been restated for discontinued operations (see note 1).
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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. For the year ended 31 December 2022 the Group presented adjusted revenue as an alternative performance
measure. Following the demerger of the Dowlais businesses, as described in note 13, the Board no longer uses adjusted revenue to monitor
the ongoing performance of the Group as there are no continuing material equity accounted investments.
a) Operating profit
Continuing operations
Operating profit/(loss)
Amortisation of intangible assets acquired in business combinations
Restructuring costs
Melrose equity-settled compensation scheme charges
Acquisition and disposal related gains and losses
Movement in derivatives and associated financial assets and liabilities
Net release and changes in discount rates of fair value items
Total adjustments to operating profit/(loss)
Adjusted operating profit
(1) Results have been restated for discontinued operations (see note 1).
Notes
a
b
c
d
e
f
Year ended
31 December
2023
£m
Restated(1)
Year ended
31 December
2022
£m
57
(270)
260
149
38
3
(114)
(3)
333
390
260
90
15
(15)
79
(12)
417
147
a. The amortisation charge on intangible assets acquired in business combinations of £260 million (2022: £260 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 £149 million (2022: £90 million), including £59 million (2022: £11 million) of
losses incurred in closing businesses within the Group. These are shown as adjusting items due to their size and non-trading nature and
during the year ended 31 December 2023 these included:
• A charge of £137 million (2022: £88 million) primarily relating to the continuation of significant restructuring projects, necessary for the
business to achieve its full potential target operating margins.
There are three significant ongoing multi-year restructuring programmes, impacting multiple sites across the Engines and Structures
divisions, two of which include European footprint consolidations, and one significant multi-site restructuring programme in North America.
These programmes incurred a combined charge, excluding losses, of £62 million in the year. Since commencement, the cumulative
charges, excluding losses, on these three restructuring programmes to 31 December 2023 has been £217 million (31 December 2022:
£155 million), approximately 35% relating to the two significant European programmes and approximately 65% in North America.
As at 31 December 2023, actions to complete the European programmes, on average, are approximately 95% complete and will
complete in 2024. During the year, the North America multi-site restructuring programme has been expanded and is approximately 70%
complete and now expected to conclude in 2025. In addition to the remaining charges to be incurred on these projects, £37 million is
included in restructuring provisions at 31 December 2023 to be settled in cash over the next two years.
• A net charge of £12 million (2022: £2 million) within the Melrose corporate cost centre that relates to changes made following the
announced change to the Group’s ongoing strategy. These include the costs of merging the Melrose corporate cost function with the
previously separate Aerospace division head office team. These restructuring actions reshape the corporate cost centre to serve as an
ongoing pureplay aerospace business.
c. The charge for the Melrose equity-settled Employee Share Scheme of £38 million (2022: £15 million), which includes a charge to the accrual
for employer’s tax payable of £28 million (2022: credit of £1 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.
d. An acquisition and disposal related net charge of £3 million (2022: credit of £15 million) arose in the year which primarily relates to ongoing
acquisition commitments. The prior year also includes the profit on disposal of two corporate properties, a loss on disposal of a non-core
Aerospace business and the initial costs incurred in respect of the demerger. These items are excluded from adjusted results due to their
non-trading nature.
e. 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 volatility and size. This totalled a credit of £114 million (2022: charge of £79 million) in the year.
f. The net release of fair value items in the year of £3 million (2022: £12 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.
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023 187
187
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023FINANCIAL STATEMENTS
NOTES TO THE FINANCIAL STATEMENTS CONTINUED
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 profit/(loss) as above
Finance costs on demerger settled net debt
Accelerated unamortised debt issue costs
Bond redemption gains
Fair value changes on cross-currency swaps
Total adjustments to loss before tax
Adjusted profit before tax
(1) Results have been restated for discontinued operations (see note 1).
Notes
g
h
i
j
Year ended
31 December
2023
£m
Restated(1)
Year ended
31 December
2022
£m
(8)
333
17
2
(13)
–
339
331
(328)
417
–
–
(24)
(3)
390
62
g. Finance costs in respect of the proportion of the Group’s net debt strategically allocated to the demerger group of businesses at the start of
the year and subsequently settled on demerger are excluded from adjusted results to ensure the finance costs of the continuing Group are
appropriately shown alongside the trading performance of the continuing business.
h. Following the demerger of the GKN Automotive, GKN Powder Metallurgy and GKN Hydrogen businesses, the existing bank facilities at that
time were repaid and all unamortised bank fees were written off. This is shown as an adjusting item due to its non-trading nature.
i. During the year, the Group repurchased £120 million of the remaining 2032 £300 million bond, on which a gain of £13 million was realised.
During 2022, the Group also undertook a tender to buy back the same 2032 £300 million bond. There were £170 million of bonds
repurchased, on which a gain of £24 million was realised. Both items are shown as an adjusting item due to their non-trading nature.
j. The fair value changes on cross-currency swaps relating to cost of hedging which are not deferred in equity were shown as an adjusting item
because of the volatility and non-trading nature.
c) Profit after tax
Continuing operations
Profit/(loss) after tax
Adjustments to loss before tax as above
Tax effect of adjustments to loss before tax
Tax effect of significant restructuring
Total adjustments to profit/(loss) after tax
Adjusted profit after tax
(1) Results have been restated for discontinued operations (see note 1).
Note
8
8
Year ended
31 December
2023
£m
Restated(1)
Year ended
31 December
2022
£m
1
339
(77)
–
262
263
(229)
390
(105)
2
287
58
188 MELROSE INDUSTRIES PLC ANNUAL REPORT 2023
188
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023
7. Expenses
Continuing operations
Operating profit/(loss) is stated after charging/(crediting):
Cost of inventories
Amortisation of intangible assets acquired in business combinations
Depreciation and impairment of property, plant and equipment
Amortisation and impairment of computer software and development costs
Lease expense(2)
Staff costs
Research and development costs(3)
Profit on disposal of property, plant and equipment
Expense of writing down inventory to net realisable value
Reversals of previous write-downs of inventory
Impairment recognised on trade receivables
Impairment reversed on trade receivables
(1) Expenses have been restated for discontinued operations (see note 1).
(2) Represents low value leases of £1 million (2022: £1 million).
(3) Shown net of government and customer funding and includes staff costs totalling £27 million (2022: £25 million).
The analysis of auditor’s remuneration is as follows:
Fees payable to the Company’s auditor for the audit of the Company’s annual accounts
Fees payable to the Company’s auditor 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
2023
£m
Restated(1)
Year ended
31 December
2022
£m
2,696
260
101
42
1
1,095
60
–
53
(44)
8
(2)
2,533
260
115
41
1
1,013
51
(33)
43
(38)
3
(2)
Year ended
31 December
2023
£m
Year ended
31 December
2022
£m
4.6
0.2
0.9
5.7
0.4
0.3
0.7
6.4
–
0.2
6.6
6.8
1.1
1.9
9.8
0.4
0.2
0.6
10.4
–
0.9
11.3
Details of the Company’s policy on the use of the auditors for non-audit services and how auditor’s independence and objectivity were safeguarded
are set out in the Audit Committee report on pages 122 to 123. 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 contribution plans
Share-based compensation expense(4)
Total staff costs
Year ended
31 December
2023
£m
Restated(1)
Year ended
31 December
2022
£m
891
136
58
10
840
101
56
16
1,095
1,013
(1) Staff costs have been restated for discontinued operations (see note 1).
(2) Wages and salaries for discontinued operations were £251 million in the period prior to disposal (2022: £924 million).
(3) Includes an employer’s tax charge of £28 million (2022: credit of £1 million) on the change in value of the employee share plans, shown as an adjusting item
(see note 6).
(4) Shown as an adjusting item (see note 6).
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023 189
189
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023FINANCIAL STATEMENTS
NOTES TO THE FINANCIAL STATEMENTS CONTINUED
NOTES TO THE FINANCIAL STATEMENTS CONTINUED
7. Expenses continued
Average monthly number of persons employed (including executive Directors)
Engines
Structures
Corporate
Continuing operations
Discontinued operations
Total average number of persons employed
Year ended
31 December
2023
Number
Restated(1)
Year ended
31 December
2022
Number
3,960
10,733
48
14,741
23,880
38,621
3,817
10,649
49
14,515
25,444
39,959
(1) Persons employed has been restated for discontinued operations (see note 1) and the re-presentation of the Engines and Structures segments.
An analysis of finance costs and income is as follows:
Continuing operations
Finance costs
Interest on bank loans and overdrafts
Amortisation of costs of raising finance
Net interest cost on pensions
Lease interest
Unwind of discount on provisions
Finance costs on demerger settled net debt(2)
Accelerated unamortised debt issue costs(2)
Fair value changes on cross-currency swaps(2)
Total finance costs
Finance income
Interest receivable
Net interest income on pensions
Bond redemption gains(2)
Total finance income
Total net finance costs
(1) Finance costs and income have been restated for discontinued operations (see note 1).
(2) These are shown as adjusting items (see note 6).
Year ended
31 December
2023
£m
Restated(1)
Year ended
31 December
2022
£m
(49)
(4)
(1)
(5)
(1)
(17)
(2)
–
(79)
1
–
13
14
(65)
(72)
(10)
–
(3)
(1)
–
–
3
(83)
–
1
24
25
(58)
190 MELROSE INDUSTRIES PLC ANNUAL REPORT 2023
190
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023
8. Tax
Continuing operations
Analysis of tax charge/(credit) in the year:
Current tax
Current year tax charge
Adjustments in respect of prior years
Total current tax charge
Deferred tax
Origination and reversal of temporary differences
Adjustments in respect of prior years
Tax on the change in value of derivative financial instruments
Adjustments to deferred tax attributable to changes in tax rates
Non-recognition of deferred tax
Total deferred tax credit
Tax credit on continuing operations
Tax charge on discontinued operations
Total tax charge/(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) Tax has been restated for discontinued operations (see note 1).
Year ended
31 December
2023
£m
Restated(1)
Year ended
31 December
2022
£m
19
4
23
(61)
(3)
29
(1)
4
(32)
(9)
28
19
£m
68
(77)
(9)
16
(4)
12
(85)
(8)
(25)
(1)
8
(111)
(99)
20
(79)
£m
4
(103)
(99)
The tax charge of £68 million (2022: £4 million) arising on adjusted profit before tax of £331 million (2022: £62 million), results in an effective tax
rate of 20.5% (2022: 6.5%).
The £77 million (2022: £103 million) tax credit recognised as an adjusting item includes a credit of £77 million (2022: £105 million) in respect of
tax credits on adjustments to loss before tax of £339 million (2022: £390 million) and a charge of £nil (2022: £2 million) in respect of internal
Group restructuring.
The tax charge/(credit) for the year for continuing and discontinued operations can be reconciled to the profit/(loss) before tax per the Income
Statement as follows:
Profit/(loss) before tax:
Continuing operations
Discontinued operations (note 13)
Tax charge/(credit) on profit/(loss) before tax at 23.5% (2022: 25.0%)
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
Tax credits and withholding taxes
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
Effect of rate differences between UK and overseas rates
Total tax charge/(credit) for the year
(1) Tax has been restated for discontinued operations (see note 1).
Year ended
31 December
2023
£m
Restated(1)
Year ended
31 December
2022
£m
(8)
25
17
4
(9)
8
5
3
13
–
–
(2)
(3)
19
(328)
(38)
(366)
(91)
4
(2)
13
15
(29)
2
8
1
–
(79)
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023 191
191
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023FINANCIAL STATEMENTS
NOTES TO THE FINANCIAL STATEMENTS CONTINUED
NOTES TO THE FINANCIAL STATEMENTS CONTINUED
8. Tax continued
The reconciliation has been performed at a tax rate of 23.5% (2022: 25.0%). The reconciliation rate usually represents the weighted average of
the tax rates applying to profits and losses in the jurisdictions in which those results arose in the year. However, for 2023 this rate was close to
zero due to offsetting profits and losses in the relevant jurisdictions and as such the UK rate has been used.
Tax (credits)/charges included in Other Comprehensive Income are as follows:
Deferred tax movements on retirement benefit obligations
Deferred tax movements on hedge relationship gains and losses
Total credit for the year
Year ended
31 December
2023
£m
Year ended
31 December
2022
£m
(29)
8
(21)
1
(5)
(4)
There is also a tax credit of £22 million (2022: £nil) recognised directly in the Statement of Changes in Equity in respect of deferred tax on
equity-settled share-based payments.
Global Minimum Tax rules and Franked Investment Income – litigation
The Group has reviewed the impact of the new Global Minimum Tax (“Pillar 2”) rules and considers they are unlikely to have a material impact
on the Group tax charge in their current form.
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 the Group’s view, were levied by HMRC in breach of the Group’s EU community law rights.
On 5 February 2024, the High Court handed down the latest decision in the case. This considered the question of time limits for valid claims.
The decision is broadly positive for the Group, however the decision can be appealed. 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 2023 of 1.5p
Second interim dividend for the year ended 31 December 2022 of 1.5p (4.5p)(1)
Interim dividend for the year ended 31 December 2022 of 0.825p (2.475p)(1)
Final dividend for the year ended 31 December 2021 of 1.0p (3.0p)(1)
(1) Adjusted to include the effects of the one for three share consolidation (see note 1).
Year ended
31 December
2023
£m
Year ended
31 December
2022
£m
20
61
–
–
81
–
–
33
44
77
A final dividend for the year ended 31 December 2023 of 3.5p per share totalling an expected £46 million is declared by the Board. The final
dividend of 3.5p per share was declared by the Board on 7 March 2024 and in accordance with IAS 10: Events after the reporting period, has
not been included as a liability in the Consolidated Financial Statements.
During the year, the Group commenced a £500 million share buyback programme with £93 million of cash spent, inclusive of costs of £1 million
(see note 1). In the prior year, the Group also undertook a share buyback programme, with £504 million of cash spent, inclusive of costs of £4 million.
10. Earnings per share
Earnings attributable to owners of the parent
Earnings for basis of earnings per share
Less: loss from discontinued operations (note 13)
Earnings for basis of earnings per share from continuing operations
(1) Earnings has been restated for discontinued operations (see note 1).
Weighted average number of ordinary shares for the purposes of basic earnings per share (million)
Further shares for the purposes of diluted earnings per share (million)
Weighted average number of ordinary shares for the purposes of diluted earnings per share (million)
(1) Adjusted to include the effects of the one for three share consolidation (see note 1).
192 MELROSE INDUSTRIES PLC ANNUAL REPORT 2023
192
Year ended
31 December
2023
£m
(1,019)
1,020
1
Year ended
31 December
2023
Number
1,349
56
1,405
Restated(1)
Year ended
31 December
2022
£m
(308)
79
(229)
Restated(1)
Year ended
31 December
2022
Number
1,406
–
1,406
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023
10. Earnings per share continued
On 2 October 2023, the Group commenced a £500 million share buyback programme, with 18,761,840 shares repurchased by 31 December 2023.
These are held as treasury shares and are excluded from the number of shares for the purposes of calculating earnings per share. In the prior year,
the Group completed a £500 million share buyback programme 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
Year ended
31 December
2023
pence
Restated(1)
Year ended
31 December
2022
pence
(75.5)
0.1
(75.6)
(75.5)
0.1
(75.6)
(21.9)
(16.3)
(5.6)
(21.9)
(16.3)
(5.6)
(1) Earnings per share has been restated for discontinued operations and to include the effects of the one for three share consolidation (see note 1).
Adjusted earnings from continued operations
Adjusted earnings for the basis of adjusted earnings per share
(1) Earnings has been restated for discontinued operations (see note 1).
Adjusted earnings per share from continuing operations:
Adjusted basic earnings per share
Adjusted diluted earnings per share
Year ended
31 December
2023
£m
Restated(1)
Year ended
31 December
2022
£m
263
58
Year ended
31 December
2023
pence
19.5
18.7
Restated(1)
Year ended
31 December
2022
pence
4.1
4.1
(1) Earnings per share has been restated for discontinued operations and to include the effects of the one for three share consolidation (see note 1).
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023 193
193
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023FINANCIAL STATEMENTS
NOTES TO THE FINANCIAL STATEMENTS CONTINUED
NOTES TO THE FINANCIAL STATEMENTS CONTINUED
11. Goodwill and other intangible assets
Cost
At 1 January 2022
Additions
Acquisition of businesses(2)
Disposals
Transfer to held for sale(3)
Exchange adjustments
At 31 December 2022
Additions
Disposals
Transfer to held for sale(3)
Disposal of businesses(4)
Exchange adjustments
At 31 December 2023
Amortisation and impairment
At 1 January 2022
Charge for the year:
Adjusted operating profit
Adjusting items
Impairments(5)
Disposals
Transfer to held for sale(3)
Exchange adjustments
At 31 December 2022
Charge for the year:
Adjusted operating profit
Adjusting items
Disposals
Transfer to held for sale(3)
Disposal of businesses(4)
Exchange adjustments
At 31 December 2023
Net book value
At 31 December 2023
At 31 December 2022
Customer
relationships
and contracts
£m
Brands and
intellectual property
£m
Goodwill
£m
Other(1)
£m
Computer
software
£m
Development
costs
£m
2,850
–
1
–
(455)
189
2,585
–
–
–
(1,575)
(49)
4,406
–
–
–
(122)
386
4,670
–
–
–
(1,749)
(154)
961
2,767
480
–
–
–
(100)
13
393
–
–
–
(184)
(2)
207
1,011
–
3
–
–
33
1,047
–
–
–
(401)
(15)
631
49
6
–
(2)
–
3
56
3
(1)
(1)
(33)
(1)
23
522
21
–
(4)
–
31
570
13
(3)
(1)
(100)
(15)
464
Total
£m
9,318
27
4
(6)
(677)
655
9,321
16
(4)
(2)
(4,042)
(236)
5,053
(1,226)
(95)
(383)
(29)
(195)
(1,928)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(338)
–
–
71
(105)
(1,598)
–
(228)
–
–
694
53
(1,079)
961
2,585
1,688
3,072
–
(24)
–
–
35
(9)
(93)
–
(12)
–
–
46
–
(59)
148
300
–
(104)
–
–
–
(9)
(496)
–
(69)
–
–
237
6
(322)
309
551
(7)
–
–
2
–
(2)
(36)
(3)
–
1
1
17
1
(19)
4
20
(43)
–
(9)
4
–
(9)
(50)
(466)
(9)
6
106
(134)
(252)
(2,475)
(39)
–
3
1
59
5
(42)
(309)
4
2
1,053
65
(223)
(1,702)
241
318
3,351
6,846
(1) Other includes technology and order backlog intangible assets recognised on acquisitions.
(2) Acquisition of businesses in 2022 related to Permanova Lasersystem AB within the Engines segment.
(3) Transfer to held for sale in 2023 relates to the contractually agreed sale of a non-core business in the Structures segment and in 2022 related to the Ergotron
business (see note 1).
(4) Disposal of businesses in 2023 relates to the demerger of the GKN Automotive, GKN Powder Metallurgy and GKN Hydrogen businesses (see note 1).
(5) Impairments in 2022 were shown as adjusting items.
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.
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. The combined value achieved from these improvements is
expected to be in excess of the value of goodwill acquired.
Following the Group’s demerger of GKN Automotive, GKN Powder Metallurgy and GKN Hydrogen on 20 April 2023 the internal reporting
structure changed for the remaining GKN Aerospace business to show an Engines segment and a Structures segment (see note 5). As a
consequence, the Aerospace group of cash-generating units (“CGUs”) was reorganised into an Engines group of CGUs and a Structures group
of CGUs effective from 20 April 2023.
194 MELROSE INDUSTRIES PLC ANNUAL REPORT 2023
194
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023
11. Goodwill and other intangible assets continued
As a result of the change in the groups of CGUs structure, an allocation of goodwill to the two new groups of CGUs has been performed based
on their valuation at 20 April 2023. Subsequently, impairment testing was completed, dated 20 April 2023, based on the old structure of one
group of CGUs (Aerospace) and the new structure of two groups of CGUs (Engines and Structures). No impairment was identified in respect of
any of the groups of CGUs.
Goodwill
Engines
Structures
Continuing operations – Aerospace
Discontinued operations
Total
31 December
2023
£m
Restated(1)
31 December
2022
£m
608
353
961
–
961
627
363
990
1,595
2,585
(1) Goodwill has been restated for discontinued operations (see note 1) and to reflect the revised groups of CGUs effective from 20 April 2023 when the Aerospace
group of CGUs was re-organised into the Engines and Structures groups of CGUs.
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 change
in Group strategy to become a pure-play Aerospace group, the value in use methodology has been used to determine recoverable amount.
Value in use calculations have been used to determine the recoverable amount of goodwill and other relevant net assets allocated to the Engines
and Structures groups of CGUs for the year ended 31 December 2023. The calculation uses the latest approved forecasts extrapolated into
perpetuity with growth rates shown below, which do not exceed the long-term growth rate for the relevant market.
In the prior year, fair value less costs to sell calculations were 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
was difficult to assess a sale value using observable market inputs (level 1) or inputs based on market evidence (level 2) in the environment and
so unobservable inputs (level 3) were used. A combination of discounted cash flows and EBITDA multiple valuations were used to establish fair
values for each of the groups of CGUs. Under IAS 36, the benefits from future uncommitted restructuring plans were 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 either of the groups of CGUs. No sensitivity analysis has been
provided as there is no reasonably possible change in key assumptions that could result in an impairment in either the Engines or Structures
groups of CGUs.
The basis of impairment tests and the key assumptions are set out in the tables below:
Groups of CGUs – value in use
Engines
Structures
Groups of CGUs – fair value less costs to sell
Aerospace
Automotive
Powder Metallurgy
31 December 2023
Pre-tax
discount rates
Long-term
growth rates
Years in forecast
12.25%
12.50%
3.4%
3.4%
5
5
31 December 2022
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
Risk adjusted discount rates
Cash flows within the Engines and Structures groups of CGUs are discounted using a pre-tax discount rate specific to each group of CGUs.
Discount rates reflect the current market assessments of the time value of money and the territories in which the group of CGUs operates.
In determining the cost of equity, the Capital Asset Pricing Model (“CAPM”) has been used. Under CAPM, the cost of equity is determined
by adding a risk premium, based on an industry adjustment (“Beta”), to the expected return of the equity market above the risk-free return.
The relative risk adjustment reflects the risk inherent in each group of CGUs relative to all other sectors and geographies on average.
The cost of debt is determined using a risk-free rate based on the cost of government bonds, and an interest rate premium equivalent
to a corporate bond with a similar credit rating to the Group.
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023 195
195
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023FINANCIAL STATEMENTS
NOTES TO THE FINANCIAL STATEMENTS CONTINUED
NOTES TO THE FINANCIAL STATEMENTS CONTINUED
11. Goodwill and other intangible assets continued
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
five year cash flow period. 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 sector. Underlying factors in determining the values assigned to each key
assumption are shown below.
Impairment testing has considered the impact of two transitional climate scenarios used by the Group to assess climate-related risks and
opportunities. Demand for the Group’s products may be impacted by the different scenarios over the medium to long-term. Whilst recognising
these scenarios contain major assumptions, the modelling indicates no material impact on existing revenue assumptions, with any potential
reduction in Melrose's existing products being offset by the Group’s transition plan into lower-carbon products under existing financial planning.
The potential of transition risks such as, the transitioning of carbon intensive machinery to more carbon efficient or electric models also did not
indicate a material impact on the existing financial cost in the short to medium term forecasting. The impairment testing also considers the
potential costs from climate related risks under physical scenarios RCP 2.6 and 8.5. Risks such as flooding and storm events were predicted
to not have a material impact on cost within our financial forecasting horizon.
Revenue growth and operating margins:
Revenue growth assumptions in the forecast period are based on financial budgets and five-year 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.
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. Forecasts for operating costs are based on
inflation forecasts and supply and demand factors, which take account of climate change implications for affected markets. Impairment testing
includes short to medium-term planning (five years) for both 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. hydrogen
propulsion which impacts revenues.
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.
Long-term growth rates:
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.
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
Restated(1)
Remaining
amortisation period
Net book value
Restated(1)
31 December
2023
years
31 December
2022
years
31 December
2023
£m
31 December
2022
£m
31 December
2023
years
31 December
2022
years
31 December
2023
£m
31 December
2022
£m
15
5
16
6
1,355
333
1,688
–
1,688
1,555
410
1,965
1,107
3,072
15
15
16
16
149
308
457
–
457
166
368
534
317
851
Engines
Structures
Continuing operations
Discontinued operations
Total
(1) Significant intangible assets have been restated for discontinued operations (see note 1) and to reflect the revised groups of CGUs effective from 20 April 2023
when the Aerospace group of CGUs was re-organised into the Engines and Structures groups of CGUs.
196 MELROSE INDUSTRIES PLC ANNUAL REPORT 2023
196
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023
12. Investments
Investments, carried at fair value
Shares
31 December
2023
£m
31 December
2022
£m
114
62
The Group holds a 10% equity share in HiiROC Limited, a hydrogen technology company, a 4% investment in PW1100G-JM Engine Leasing
LLC, an engine leasing business, and a 1% investment in Dowlais Group plc which was retained following the demerger on 20 April 2023 at an
initial valuation of £20 million.
There was a gain on remeasurement to fair value of £35 million (2022: loss of £34 million) and a foreign exchange translation loss of £3 million
(2022: gain of £9 million). A dividend of £5 million (2022: £4 million) was received during the year which was recorded within operating profit.
Certain of the investments are classified as a level 3 fair value under the IFRS 13 fair value hierarchy. To calculate the value at 31 December 2023,
the expected dividend flow was discounted to net present value using a discount rate of 10.5%. If the discount rate changed from 10.5% to 9.5%
the fair value would increase by £8 million.
13. Discontinued operations
On 30 March 2023, shareholders approved the demerger of the GKN Automotive, GKN Powder Metallurgy and GKN Hydrogen businesses
through the flotation of Dowlais Group plc (“Dowlais”) on the London Stock Exchange. As a consequence, the assets and liabilities of Dowlais
were reclassified as held for sale in accordance with IFRS 5: Non-current Assets Held for Sale and Discontinued Operations.
On 20 April 2023, the Group completed the demerger of Dowlais. The results of the Dowlais businesses have been classified within discontinued
operations for both years presented. In addition, discontinued operations for 2022 include the results of the Ergotron business which was
disposed of on 6 July 2022.
The demerger distribution of £1,973 million has been measured at fair value in accordance with IFRIC 17: Distributions of Non-cash Assets to Owners
(see note 3b). Total demerger costs of £64 million, of which £6 million was recognised in the year ended 31 December 2022, were incurred before
a contribution of £19 million in the form of one percent of Dowlais Group plc issued equity which has been retained by the Group. The Melrose
Automotive Share Plan has also been taken into account within the loss on disposal calculation, but its net impact was immaterial.
Financial performance of discontinued operations:
Revenue
Operating costs
Operating profit/(loss)
Net finance costs
Profit/(loss) before tax
Tax
Loss after tax
Loss on disposal of net assets of discontinued operations, net of recycled cumulative translation differences
but before transaction costs
Demerger transaction costs(2)
Loss for the year from discontinued operations
Attributable to:
Owners of the parent
Non-controlling interests
Year ended
31 December
2023
£m
1,582
(1,550)
Restated(1)
Year ended
31 December
2022
£m
4,715
(4,740)
32
(7)
25
(28)
(3)
(978)
(39)
(1,020)
(1,020)
–
(1,020)
(25)
(13)
(38)
(20)
(58)
(16)
–
(74)
(79)
5
(74)
(1) Restated for operations discontinued in the year (see note 1).
(2) Demerger transaction costs of £39 million comprise total cash costs incurred in the year of £58 million, offset by a non-cash contribution from Dowlais of
£19 million.
Cash flow information relating to discontinued operations is shown in note 27.
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023 197
197
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023FINANCIAL STATEMENTS
NOTES TO THE FINANCIAL STATEMENTS CONTINUED
NOTES TO THE FINANCIAL STATEMENTS CONTINUED
13. Discontinued operations continued
Classes of assets and liabilities disposed of and amounts classified as held for sale during the year were as follows:
Goodwill and other intangible assets
Property, plant and equipment
Current and deferred tax
Equity accounted investments
Inventories
Trade and other receivables
Derivative financial instruments
Cash and cash equivalents
Total assets
Trade and other payables
Interest-bearing loans and borrowings(2)
Lease obligations
Current and deferred tax
Retirement benefit obligations
Provisions
Total liabilities
Net assets
Demerger distribution fair value
Derecognition of non-controlling interests on demerger
Demerger costs incurred
Cumulative translation difference recycled on demerger
Loss on disposal of businesses
Classified as
held for sale(1)
£m
Businesses
disposed
£m
–
4
1
–
4
9
–
–
18
5
–
1
–
–
4
10
8
2,989
1,789
127
417
515
753
45
320
6,955
1,232
1,205
158
435
439
344
3,813
3,142
1,973
39
(39)
152
(1,017)
(1) Relates to the Fuel Systems business (see note 1).
(2) Prior to the demerger the interest-bearing loans and borrowings were inter-company. On demerger, these were subsequently settled.
Post Balance Sheet event
On 1 March 2024, the Group completed the disposal of its Fuel Systems business for £50 million, before costs and other deductions.
198 MELROSE INDUSTRIES PLC ANNUAL REPORT 2023
198
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023
14. Property, plant and equipment
Cost
At 1 January 2022
Additions
Acquisition of businesses(1)
Right-of-use asset reassessments
Disposals
Disposal of businesses(2)
Transfer to held for sale(3)
Exchange adjustments
At 31 December 2022
Additions
Right-of-use asset reassessments
Disposals
Disposal of businesses(2)
Transfer to held for sale(3)
Exchange adjustments
At 31 December 2023
Accumulated depreciation and impairment
At 1 January 2022
Charge for the year
Disposals
Disposal of businesses(2)
Transfer to held for sale(3)
Impairments(4)
Exchange adjustments
At 31 December 2022
Charge for the year
Disposals
Disposal of businesses(2)
Transfer to held for sale(3)
Impairments
Exchange adjustments
At 31 December 2023
Net book value
At 31 December 2023
At 31 December 2022
Land and
buildings
£m
Plant and
equipment
£m
1,143
38
1
–
(19)
(6)
(49)
61
1,169
34
2
(3)
(641)
(8)
(30)
523
(300)
(59)
4
6
27
(2)
(6)
(330)
(38)
2
120
7
(1)
10
(230)
293
839
2,722
281
–
(1)
(117)
–
(20)
263
3,128
150
–
(37)
(2,102)
(12)
(100)
1,027
(1,037)
(299)
108
–
15
(16)
(139)
(1,368)
(111)
34
834
9
–
59
(543)
484
1,760
Total
£m
3,865
319
1
(1)
(136)
(6)
(69)
324
4,297
184
2
(40)
(2,743)
(20)
(130)
1,550
(1,337)
(358)
112
6
42
(18)
(145)
(1,698)
(149)
36
954
16
(1)
69
(773)
777
2,599
(1) Acquisition of businesses in 2022 related to Permanova Lasersystem AB within the Engines segment.
(2) Disposal of businesses in 2023 related to the demerger of the GKN Automotive, GKN Powder Metallurgy and GKN Hydrogen businesses (see note 1). Disposal of
businesses in 2022 related to the sale of a non-core business in the Structures segment.
(3) Transfer to held for sale in 2023 relates to the contractually agreed sale of a non-core business in the Structures segment and in 2022 related to the
Ergotron business (see note 1).
(4) Impairments in 2022 were shown as adjusting items.
Assets under the course of construction at 31 December 2023 totalled £126 million (31 December 2022: £243 million).
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023 199
199
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023FINANCIAL STATEMENTS
NOTES TO THE FINANCIAL STATEMENTS CONTINUED
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 2022
Additions
Acquisition of businesses(1)
Right-of-use asset reassessments
Depreciation
Disposals
Transfer to held for sale(2)
Exchange adjustments
At 31 December 2022
Additions
Right-of-use asset reassessments
Depreciation
Transfer to held for sale(2)
Disposal of businesses(3)
Impairments
Exchange adjustments
At 31 December 2023
Land and
buildings
£m
Plant and
equipment
£m
265
19
1
–
(31)
(2)
(1)
14
265
21
2
(23)
(1)
(117)
(1)
(6)
140
48
19
–
(1)
(16)
(3)
(5)
4
46
10
–
(8)
–
(28)
–
(1)
19
Total
£m
313
38
1
(1)
(47)
(5)
(6)
18
311
31
2
(31)
(1)
(145)
(1)
(7)
159
(1) Acquisition of businesses in 2022 related to Permanova Lasersystem AB within the Engines segment.
(2) Transfer to held for sale in 2023 relates to the contractually agreed sale of a non-core business in the Structures segment and in 2022 related to the Ergotron
business (see note 1).
(3) Disposal of businesses in 2023 relates to the demerger of the GKN Automotive, GKN Powder Metallurgy and GKN Hydrogen businesses (see note 1).
15. Equity accounted investments
Aggregated amounts relating to equity accounted investments:
Share of current assets
Share of non-current assets
Share of current liabilities
Share of non-current liabilities
Interests in equity accounted investments
Group share of equity accounted investments
At 1 January
Share of results of equity accounted investments
Additions
Disposals
Disposal of businesses(1)
Dividends paid to the Group
Exchange adjustments
At 31 December
31 December
2023
£m
31 December
2022
£m
4
9
(6)
–
7
416
322
(289)
(14)
435
Year ended
31 December
2023
£m
Year ended
31 December
2022
£m
435
4
–
(3)
(417)
–
(12)
7
429
49
3
–
–
(59)
13
435
(1) Disposal of businesses in 2023 relates to the demerger of the GKN Automotive, GKN Powder Metallurgy and GKN Hydrogen businesses (see note 1).
During the year the Group demerged its one significant joint venture, held within the Automotive segment, Shanghai GKN HUAYU Driveline
Systems Co Limited (“SDS”). In addition, the Group sold its 20% investment in Business Park Aviolanda B.V. for proceeds of £3 million.
16. Inventories
Raw materials
Work in progress
Finished goods
200 MELROSE INDUSTRIES PLC ANNUAL REPORT 2023
200
31 December
2023
£m
31 December
2022
£m
235
195
80
510
518
328
179
1,025
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023
16. Inventories continued
In 2023, the write down of inventories in continuing businesses to net realisable value amounted to £53 million (2022: £43 million). The reversal
of write downs in continuing businesses amounted to £44 million (2022: £38 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.
Climate change may impact the demand from customers for certain products, however given the speed of inventory turnover the Directors
consider that there is no material impact and inventory is appropriately valued.
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
2023
£m
31 December
2022
£m
430
(10)
162
33
98
713
989
(20)
286
36
135
1,426
Trade receivables are non interest-bearing. Credit terms offered to customers vary upon the country of operation but are generally between
30 and 90 days.
Non-current
Other receivables
Contract assets
31 December
2023
£m
31 December
2022
£m
21
768
789
23
647
670
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 2023, eligible
receivables under these programmes have been factored and derecognised in line with the derecognition criteria of IFRS 9: Financial
Instruments. All receivables are solely payments of principal and interest and are held to collect.
An allowance has been made for expected lifetime credit losses with reference to past default experience and management’s assessment
of credit worthiness over trade receivables, an analysis of which is as follows:
At 1 January 2022
Income Statement charge/(credit)
Utilised
Transfer to held for sale(2)
Exchange adjustments
At 31 December 2022
Income Statement charge
Utilised
Disposal of businesses(3)
Exchange adjustments
At 31 December 2023
Engines(1)
£m
Structures(1)
£m
Restated(1)
Discontinued
operations
£m
2
2
(2)
–
2
4
1
(2)
–
–
3
5
(1)
–
–
(1)
3
5
(1)
–
–
7
16
(2)
–
(2)
1
13
1
–
(13)
(1)
–
Total
£m
23
(1)
(2)
(2)
2
20
7
(3)
(13)
(1)
10
(1) The allowance for expected lifetime credit losses has been restated for discontinued operations (see note 1) and the re-presentation of the Engines and Structures
segments.
(2) Transfer to held for sale in 2022 related to the Ergotron business which was subsequently disposed of during the second half of the year (see note 1).
(3) Disposal of businesses in 2023 relates to the demerger of the GKN Automotive, GKN Powder Metallurgy and GKN Hydrogen businesses (see 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.
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023 201
201
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023FINANCIAL STATEMENTS
NOTES TO THE FINANCIAL STATEMENTS CONTINUED
NOTES TO THE FINANCIAL STATEMENTS CONTINUED
17. Trade and other receivables continued
The ageing of impaired trade receivables past due is as follows:
0 – 30 days
31 – 60 days
60+ days
31 December
2023
£m
31 December
2022
£m
–
–
10
10
4
–
16
20
Included in the Group’s trade receivables balance are overdue trade receivables with a gross carrying amount of £19 million (31 December 2022:
£53 million) against which a provision of £10 million (31 December 2022: £20 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 £9 million (31 December 2022: £33 million) is as follows:
31 December
2023
£m
31 December
2022
£m
0 – 30 days
31 – 60 days
60+ days
9
–
–
9
The Directors consider that the carrying amount of trade and other receivables approximates to their fair value.
The Group’s contract assets comprise the following:
At 1 January 2022
Additions
Utilised
Disposal of businesses(1)
Exchange adjustments
At 31 December 2022
Additions
Utilised
Disposal of businesses(1)
Transfer to held for sale(2)
Exchange adjustments
At 31 December 2023
Participation fees
£m
Unbilled receivables
£m
Unbilled work done
£m
Other
£m
193
2
(13)
–
22
204
8
(17)
(9)
–
(10)
176
61
929
(918)
(3)
10
79
962
(973)
–
(1)
(4)
63
305
124
(18)
–
39
450
193
(20)
–
–
(28)
595
52
–
(7)
–
4
49
–
(5)
(10)
–
(2)
32
30
3
–
33
Total
£m
611
1,055
(956)
(3)
75
782
1,163
(1,015)
(19)
(1)
(44)
866
(1) Disposal of businesses in 2023 relates to the demerger of the GKN Automotive, GKN Powder Metallurgy and GKN Hydrogen businesses (see note 1).
Disposal of businesses in 2022 related to the sale of a non-core business in the Structures segment.
(2) Transfer to held for sale in 2023 relates to the contractually agreed sale of a non-core business in the Structures segment (see note 1).
An assessment for impairment of contract assets has been performed in accordance with policies described in note 2. No such impairment has
been recorded.
Climate change and the effect on customers’ ability to pay is considered in the allowance for expected credit losses. Climate change related
considerations have been taken into account in the forecasting of revenues and costs in respect of RRSP contracts in a similar manner to
those described in the impairment testing section (note 11). The Directors have concluded that climate related impacts are not material in
the recoverability of trade receivables and contract assets related to unbilled work done on risk and revenue sharing partnerships.
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
Engines segment.
202 MELROSE INDUSTRIES PLC ANNUAL REPORT 2023
202
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023
17. Trade and other receivables continued
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.
18. Cash and cash equivalents
Cash and cash equivalents
31 December
2023
£m
31 December
2022
£m
58
355
Cash and cash equivalents comprises cash at bank and in hand which earns interest at floating rates based on daily bank deposit rates and short-
term deposits which are made for varying periods of between one day and one month. The carrying amount of these assets is considered to be
equal to their fair value.
19. Trade and other payables
Current
Trade payables
Other payables
Customer advances and contract liabilities
Other taxes and social security
Government refundable advances
Funded development costs
Accruals
Deferred government grants
31 December
2023
£m
31 December
2022
£m
501
110
246
56
5
64
183
14
1,179
1,257
375
281
73
7
57
279
18
2,347
As at 31 December 2023, and as described in note 25, included within trade payables were drawings on supplier finance facilities of £86 million
(31 December 2022: £200 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 91 days (31 December 2022: 93 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
2023
£m
31 December
2022
£m
–
225
1
44
49
16
23
358
19
213
3
52
89
29
26
431
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 2024 and 2055 and the deferred government grants will be utilised over
the next five years.
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023 203
203
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023FINANCIAL STATEMENTS
NOTES TO THE FINANCIAL STATEMENTS CONTINUED
NOTES TO THE FINANCIAL STATEMENTS CONTINUED
19. Trade and other payables continued
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 Engines segment (£1 million) and Structures segment (£112 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 £118 million, two to five years £22 million and over five years £85 million (31 December 2022: one to two years
£65 million, two to five years £50 million and over five years £98 million).
The Group’s Customer advances and contract liabilities comprise the following:
Customer cash advances
Material rights given
RRSP related obligations
31 December
2023
£m
31 December
2022
£m
62
30
379
471
95
34
365
494
Customer cash advances
There are a discrete number of contracts with customers, 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.
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.
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, with more complex revenue recognition considerations. Whilst the Group has an unbilled
work done contract asset of £595 million (31 December 2022: £450 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 £58 million (31 December 2022: £91 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 £68 million (31 December 2022:
£63 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 £22 million (31 December 2022: £8 million). 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 £59 million (31 December 2022: £61 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 £30 million (31 December 2022: £27 million). This is
expected to be utilised over the warranty terms of the contracts.
• Other contract liabilities of £142 million (31 December 2022: £115 million).
204 MELROSE INDUSTRIES PLC ANNUAL REPORT 2023
204
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023
20. Interest-bearing loans and borrowings
This note provides information about the contractual terms of the Group’s interest-bearing loans and borrowings. Details of the Group’s exposure
to credit, liquidity, interest rate and foreign currency risk are included in note 25.
Floating rate obligations
Bank borrowings – US Dollar loan
Bank borrowings – Sterling loan
Bank borrowings – Euro loan
Other loans
Bank overdrafts
Fixed rate obligations
2032 bond
Unamortised finance costs
Non-cash acquisition fair value adjustment
Total interest-bearing loans and borrowings
Current
Non-current
Total
31 December
2023
£m
31 December
2022
£m
31 December
2023
£m
31 December
2022
£m
31 December
2023
£m
31 December
2022
£m
–
–
–
53
1
–
54
–
–
54
–
–
–
–
63
–
63
–
–
63
467
1
106
–
–
10
584
(8)
–
576
759
182
363
–
–
130
1,434
(3)
2
1,433
467
1
106
53
1
10
638
(8)
–
630
759
182
363
–
63
130
1,497
(3)
2
1,496
The Group’s committed bank facilities were refinanced during the year. The new facilities consist of a multi-currency term loan denominated
US$300 million and €100 million, and a US$250 million revolving credit facility, both of which mature in April 2026. In addition, the Group also
entered into multi-currency revolving credit facilities totalling US$690 million, £300 million and €300 million that initially mature in April 2026,
but with the potential to be extended for two additional one-year periods at the Company’s option.
At 31 December 2023, the term loan was fully drawn and there were drawings of US$298 million, £1 million and €22 million on the revolving
credit facilities. Applying the exchange rates at 31 December 2023, the headroom equated to £1,043 million. There are also a number of
uncommitted overdraft, guarantee and borrowing facilities made available to the Group.
During the year, £4 million of unamortised finance costs were charged to the Income Statement, and an additional £2 million was written off
relating to the old bank facility that was replaced on demerger. New unamortised finance costs of £11 million were recognised on the inception
of the new bank facility.
Throughout the year, the Group remained compliant with all covenants under the facilities disclosed above. A number of Group companies are
guarantors under the bank facilities. Further details on covenant compliance for the year ended 31 December 2023 are contained in note 25.
The bank margin on the bank facility depends on the Group leverage and were as follows:
Facility:
Term loan
1.30%
0.9% – 2.2%
Revolving credit facilities
1.30% – 1.55%
0.9% – 2.4%
0.75%
0.75%
0.75% – 2.0%
0.75% – 2.0%
31 December 2023
31 December 2022
Margin
Range
Margin
Range
At the start of the year the Group held capital market borrowings with an outstanding nominal value of £130 million from an original £300 million bond,
issued in May 2017 and due to mature in May 2032. In December 2023, an agreement was reached with certain remaining bondholders that resulted
in £120 million of the outstanding nominal value being bought back and cancelled for a total cost of £109 million (excluding accrued interest). This
represented a gain of £13 million after associated costs including the release of a fair value adjustment of £2 million on the bond, recognised on
acquisition of GKN. This gain has been recognised as an adjusting item within finance income in the Consolidated Income Statement.
Details of the remaining bond are in the table below:
Maturity date
May 2032
Notional amount
£m
10
Coupon
% p.a.
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.
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023 205
205
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023FINANCIAL STATEMENTS
NOTES TO THE FINANCIAL STATEMENTS CONTINUED
NOTES TO THE FINANCIAL STATEMENTS CONTINUED
20. Interest-bearing loans and borrowings continued
Interest-bearing
loans and
borrowings
£m
Interest rate
derivative financial
liabilities
£m
Other financial
liabilities
£m
Total financial
liabilities
£m
Within one year
In one to two years
In two to five years
After five years
Effect of financing rates
31 December 2023
Within one year
In one to two years
In two to five years
After five years
Effect of financing rates
31 December 2022
21. Provisions
At 1 January 2023
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
At 31 December 2023
Current
Non-current
88
45
565
11
(79)
630
131
1,358
18
160
(171)
1,496
–
–
–
–
–
–
3
–
–
–
–
3
799
21
7
32
–
859
1,918
60
15
25
–
2,018
Loss-making
contracts
£m
Property
related costs
£m
Environmental and
litigation
£m
Warranty
related costs
£m
Restructuring
£m
Other
£m
108
(26)
23
(2)
(41)
(1)
–
(3)
58
38
20
58
28
–
1
–
(5)
–
–
(1)
23
5
18
23
119
(7)
18
(9)
(63)
(1)
–
(3)
54
34
20
54
200
(11)
16
(18)
(154)
(2)
–
(4)
27
15
12
27
83
(97)
96
(2)
(18)
–
–
(3)
59
49
10
59
73
(8)
63
–
(63)
–
1
(1)
65
47
18
65
887
66
572
43
(79)
1,489
2,052
1,418
33
185
(171)
3,517
Total
£m
611
(149)
217
(31)
(344)
(4)
1
(15)
286
188
98
286
(1) Includes £182 million of adjusting items and £35 million recognised in adjusted operating profit.
(2) Includes £8 million of adjusting items and £23 million recognised in adjusted operating profit.
(3) Disposal of businesses relates to the demerger of the GKN Automotive, GKN Powder Metallurgy and GKN Hydrogen businesses (see note 1).
(4) Transfer to held for sale relates to the contractually agreed sale of a non-core business in the Structures segment (see note 1).
(5) Includes £1 million within finance costs relating to the time value of money.
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 2023, the loss-making contracts provision within Engines totalled
£14 million (31 December 2022: £17 million) and £44 million within Structures (31 December 2022: £45 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 in continuing operations during the year of £23 million has benefited adjusted operating profit with £3 million recognised in Engines
and £20 million recognised in Structures. In addition, £21 million has been charged on a net basis (2022: £8 million released) and is shown as
an adjusting item.
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 £7 million (31 December 2022: £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 £47 million (31 December 2022: £93 million). Liabilities for environmental costs are recognised
when environmental assessments are probable and the associated costs can be reasonably estimated.
206 MELROSE INDUSTRIES PLC ANNUAL REPORT 2023
206
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023
21. Provisions continued
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 to two years. 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 three years.
Where appropriate, provisions have been discounted using discount rates between 0% and 7% (31 December 2022: 0% and 14%) depending
on the territory in which the provision resides and the length of its expected utilisation.
22. Deferred tax
The following are the major deferred tax assets and liabilities recognised by the Group and movements thereon during the current and prior year.
At 1 January 2022
Credit to income
Credit to equity
Disposal of businesses(1)
Acquisition of businesses(2)
Transfer to held for sale(3)
Exchange adjustments
Movement in set off of assets and liabilities(4)
At 31 December 2022
Credit/(charge) to income
Credit to equity
Disposal of businesses(1)
Transfer to held for sale(3)
Exchange adjustments
Movement in set off of assets and liabilities(4)
At 31 December 2023
Deferred tax assets
Deferred tax liabilities
Tax losses and other
assets
£m
Accelerated
capital allowances
and other liabilities
£m
Deferred tax on
intangible assets
£m
Total deferred
tax liabilities
£m
Total net
deferred tax
£m
250
35
4
(10)
–
(9)
44
59
373
55
43
(189)
(1)
(18)
264
527
(127)
3
–
–
(1)
–
(18)
(7)
(150)
(85)
–
31
–
10
(18)
(212)
(487)
111
–
–
–
30
(71)
(52)
(469)
73
–
347
–
25
(246)
(270)
(614)
114
–
–
(1)
30
(89)
(59)
(619)
(12)
–
378
–
35
(264)
(482)
(364)
149
4
(10)
(1)
21
(45)
–
(246)
43
43
189
(1)
17
–
45
(1) Disposal of businesses in 2023 relates to the demerger of the GKN Automotive, GKN Powder Metallurgy and GKN Hydrogen businesses (see note 1).
Disposal of businesses in 2022 related to the sale of a non-core business.
(2) Acquisition of businesses in 2022 related to Permanova Lasersystem AB within the Engines segment.
(3) Transfer to held for sale in 2023 relates to the contractually agreed sale of a non-core business in the Structures segment and in 2022 related to the Ergotron
business (see note 1).
(4) Set off of deferred tax assets and liabilities in accordance with IAS 12 within territories with a right of set off.
As at 31 December 2023, the Group had gross unused corporate income tax losses of £2,039 million (31 December 2022: £2,176 million)
available for offset against future profits. A deferred tax asset of £446 million (31 December 2022: £477 million) has been recognised in respect
of £1,799 million (31 December 2022: £1,938 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 £nil (2022: £6 million) 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
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023 207
207
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023FINANCIAL STATEMENTS
NOTES TO THE FINANCIAL STATEMENTS CONTINUED
NOTES TO THE FINANCIAL STATEMENTS CONTINUED
22. Deferred tax continued
is recognised to the extent that sufficient future profits are anticipated to utilise these losses. The Group continues to recognise deferred tax
assets 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 £33 million
(31 December 2022: £47 million) has been recognised on tax credits (primarily US) and US state tax losses.
Using similar forecasting considerations to those in the impairment section (note 11), climate change is deemed not to have a material impact
on the future taxable profits of the Group and its ability to utilise unused tax losses and deductible temporary differences.
Deferred tax assets have also been recognised on Group retirement benefit obligations at £7 million (31 December 2022: £14 million) and on
other temporary differences at £261 million (31 December 2022: £318 million). The gross deferred tax assets therefore amount to £747 million
(31 December 2022: £856 million).
Deferred tax liabilities have been recognised on intangible assets at £479 million (31 December 2022: £923 million) and accelerated capital
allowances and other temporary differences at £223 million (31 December 2022: £179 million). The gross deferred tax liabilities therefore amount
to £702 million (31 December 2022: £1,102 million).
There are no material unrecognised deferred tax assets at 31 December 2023 (31 December 2022: £nil), other than the losses referred to above.
No deferred tax is recognised on the unremitted earnings of overseas subsidiaries except where the distribution of such profits is planned.
If these earnings were remitted in full, tax of £2 million (31 December 2022: £62 million) would be payable.
23. Share-based payments
2020 Employee Share Plan
Following the demerger of GKN Automotive, GKN Powder Metallurgy and GKN Hydrogen (“Dowlais”, see note 1), certain adjustments were
made to the Melrose 2020 Employee Share Plan (“the MESP”), following shareholder approval, which preserved the rights of the participants
of the plan.
Firstly, the invested capital was allocated between the continuing Melrose Group and Dowlais. Secondly, recognising that the timelines of both
the demerger and the crystallisation date of the MESP coincided, the performance of the MESP was extended by one year. Finally, to recognise
the value creation platform already prepared for Dowlais whilst under Melrose ownership, the invested capital allocated formed the basis for the
creation of a separate parallel Melrose Automotive share plan (“the MASP”), under which the creation of further value in Dowlais will be rewarded
up to 31 May 2025. The MASP is not an equity-settled share-based payment arrangement for the Group and so an adjustment was recorded
to recycle £5 million from Retained Earnings.
Further details in respect of the MESP are set out in the Directors’ Remuneration Report on page 134.
The MESP
During the year, the Group recognised a charge of £35 million (2022: £15 million) in respect of the MESP, inclusive of a £28 million charge in
respect of related national insurance (2022: credit of £1 million), recognised in adjusting items (note 6).
The estimated value of the MESP at 31 December 2023 if settled at that date was £302 million (31 December 2022: £nil). Using a Black-Scholes
option pricing model, the projected value of this plan at 31 May 2024 (being the end of the revised four year performance period) is £274 million
(31 December 2022: £22 million).
The annual IFRS 2 charge in respect of the MESP was £16 million which ceased on 31 May 2023. 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)
£1.81
£1.71
58%
2.4 years
0.0%
(1) Valuation assumptions are not required to be updated to reflect the current capital structure of the Group.
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 £58 million (2022: £56 million) represent contributions payable
to these plans by the Group at rates specified in the rules of the plans.
208 MELROSE INDUSTRIES PLC ANNUAL REPORT 2023
208
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023
24. Retirement benefit obligations continued
Defined benefit plans
The Group sponsors defined benefit plans for qualifying employees of certain subsidiaries. The funded defined benefit plans are administered
by separate funds that are legally separated from the Group. The Trustees of the funds are required by law to act in the interest of the fund
and of all relevant stakeholders in the plans. The Trustees of the pension funds are responsible for the investment policy with regard to the
assets of the fund.
During the year, £439 million of net retirement benefit obligations were disposed with the demerger of the GKN Automotive, GKN Powder
Metallurgy and GKN Hydrogen businesses (note 1).
Also during the year, a buy-in policy was purchased for £45 million which fully insured pensioner members who were in the GKN Group Pension
Scheme Number 4. The present value of funded defined benefit obligations for GKN Group Pension Scheme Number 4 was actuarially calculated
and the plan asset was set equal. Following the demerger of the GKN Automotive, GKN Powder Metallurgy and GKN Hydrogen businesses, the
most significant defined benefit pension plans in the Group at 31 December 2023 were:
GKN Group Pension Schemes (Numbers 1 and 4)
The GKN Group Pension Schemes (Numbers 1 and 4) are funded plans closed to new members and were closed to future accrual in 2017.
The valuation of the plans was based on a full actuarial valuation as of 5 April 2022, updated to 31 December 2023 by independent actuaries.
In June 2023, the UK High Court ruled that certain historical amendments for contracted-out defined benefit schemes were invalid if they were
not accompanied by the correct actuarial confirmation. The judgement is subject to appeal. The Trustees and the Group are monitoring
developments and will consider if there are any implications for the GKN UK Group Pension Schemes, if the ruling is upheld.
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 2023, updated to 31 December 2023 by independent actuaries.
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.
Contributions
The Group contributed £72 million (2022: £59 million) to defined benefit pension plans and post-employment plans, inclusive of the £45 million
purchase of a buy-in policy discussed above, in the year ended 31 December 2023. The Group expects to contribute £25 million in 2024.
Actuarial assumptions
The major assumptions used by the actuaries in calculating the Group’s pension liabilities are as set out below:
31 December 2023
GKN Group Pension Schemes (Numbers 1 and 4)
GKN US plans
31 December 2022
GKN Group Pension Schemes (Numbers 1 – 4)
GKN US plans
GKN Europe plans
Rate of increase
of pensions in payment
% per annum
Discount rate
%
Price inflation
(RPI/CPI)
%
2.6
n/a
2.7
n/a
2.6
4.5
4.8
4.8
5.0
3.7
2.9/2.5
n/a
3.2/2.7
n/a
2.6/2.6
Mortality
GKN Group Pension Schemes (Numbers 1 and 4)
The GKN Group Pension Schemes (Numbers 1 and 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.
Scaling factors vary by scheme.
Future improvements for all UK plans are in line with the 2022 Continuous Mortality Investigation (“CMI”) core projection model (SK = 7.5, A = 0%,
w2022 = 25%) 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 in line with PRI – 2012 tables. Future improvements for all US plans are in line
with MP2021.
The following table shows the future life expectancy of individuals age 65 at the year end and the future life expectancy of individuals aged 65
in 20 years’ time.
Male today
Female today
Male in 20 years’ time
Female in 20 years’ time
GKN Group
Pension Schemes
(Numbers 1 and 4)
years
GKN US
Consolidated
Pension Plan
years
22.0
24.0
22.8
25.0
19.7
21.6
21.2
23.1
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023 209
209
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023FINANCIAL STATEMENTS
NOTES TO THE FINANCIAL STATEMENTS CONTINUED
NOTES TO THE FINANCIAL STATEMENTS CONTINUED
24. Retirement benefit obligations continued
Balance Sheet disclosures
The amounts recognised in the Consolidated Balance Sheet in respect of defined benefit plans were as follows:
Present value of funded defined benefit obligations
Fair value of plan assets
Funded status
Present value of unfunded defined benefit obligations
Net liabilities
Analysed as:
Retirement benefit surplus
Retirement benefit obligations
Net liabilities
31 December
2023
£m
31 December
2022
£m
(1,193)
1,118
(1,931)
1,941
(75)
(24)
(99)
–
(99)
(99)
10
(498)
(488)
93
(581)
(488)
The net retirement benefit obligations in continuing businesses is attributable to Engines: liability of £2 million (31 December 2022: £1 million)
and Structures: liability of £97 million (31 December 2022: £26 million).
The plan assets and liabilities at 31 December 2023 were as follows:
Plan assets
Plan liabilities
Net liabilities
UK
Plans(1)
£m
1,070
(1,136)
(66)
US
Plans
£m
47
(72)
(25)
Other
Plans
£m
1
(9)
(8)
Total
£m
1,118
(1,217)
(99)
(1) Includes a liability in respect of the GKN post-employment medical plans of £6 million and a net deficit in respect of the GKN Group Pension Scheme
(Numbers 1 and 4) of £60 million.
The major categories and fair values of plan assets at the end of the year for each category were as follows:
Equities
Government bonds
Corporate bonds
Property
Insurance contracts
Multi-strategy/Diversified growth funds
Private equity
Other(1)
Total
31 December
2023
£m
31 December
2022
£m
–
363
60
9
439
130
24
93
85
722
196
18
28
354
80
458
1,118
1,941
(1) Primarily consists of cash collateral and liability driven investments.
Excluding the insurance contracts purchased in respect of GKN Group Pension Scheme Number 4, the assets were well diversified and the
majority of plan assets had quoted prices in active markets. All government bonds were issued by reputable governments and were generally
AA rated or higher. Interest rate and inflation rate swaps were also employed to complement the role of fixed and index-linked bond holdings
for liability risk management.
The Trustees continually review whether the chosen investment strategy is appropriate with a view to providing the pension benefits and to
ensure appropriate matching of risk and return profiles. The main strategic policies included maintaining an appropriate asset mix, managing
interest rate sensitivity and maintaining an appropriate equity buffer. Investment results are regularly reviewed.
210 MELROSE INDUSTRIES PLC ANNUAL REPORT 2023
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MELROSE INDUSTRIES PLC ANNUAL REPORT 2023
24. Retirement benefit obligations continued
Movements in the present value of defined benefit obligations during the year:
At 1 January
Current service cost
Interest cost on obligations
Remeasurement gains – demographic
Remeasurement losses/(gains) – financial
Remeasurement losses – 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
2023
£m
Year ended
31 December
2022
£m
2,429
2
71
–
3
23
(79)
(7)
–
(1,214)
(11)
1,217
3,471
9
66
(1)
(1,072)
102
(134)
(24)
(44)
–
56
2,429
(1) During 2022, a settlement gain of £2 million was recognised in discontinued operations relating to the buy-out of certain US pension schemes and was shown
as an adjusting item.
(2) Disposal of businesses in 2023 relates to the demerger of the GKN Automotive, GKN Powder Metallurgy and GKN Hydrogen businesses (see note 1).
The defined benefit plan liabilities were 13% (31 December 2022: 15%) in respect of active plan participants, 27% (31 December 2022: 25%)
in respect of deferred plan participants and 60% (31 December 2022: 60%) in respect of pensioners.
The weighted average duration of the defined benefit plan liabilities at 31 December 2023 was 12.7 years (31 December 2022: 12.8 years).
Movements in the fair value of plan assets during the year:
At 1 January
Interest income on plan assets
Return on plan assets, excluding interest income
Contributions
Benefits paid out of plan assets
Plan administrative costs
Settlements(1)
Disposal of businesses(2)
Exchange adjustments
At 31 December
Year ended
31 December
2023
£m
Year ended
31 December
2022
£m
1,941
66
(93)
65
(79)
(4)
–
(775)
(3)
1,118
3,010
61
(1,003)
35
(134)
(8)
(42)
–
22
1,941
(1) During 2022, a settlement gain of £2 million was recognised in discontinued operations relating to the buy-out of certain US pension schemes and was shown as
an adjusting item.
(2) Disposal of businesses in 2023 relates to the demerger of the GKN Automotive, GKN Powder Metallurgy and GKN Hydrogen businesses (see note 1).
The actual return on plan assets was a loss of £27 million (2022: loss of £942 million).
Income Statement disclosures
Amounts recognised in the Consolidated Income Statement in respect of these defined benefit plans were as follows:
Continuing operations
Included within operating profit/(loss):
– plan administrative costs
Included within net finance costs:
– interest cost on defined benefit obligations
– interest income on plan assets
Year ended
31 December
2023
£m
Restated(1)
Year ended
31 December
2022
£m
4
56
(55)
8
35
(36)
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023 211
211
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023FINANCIAL STATEMENTS
NOTES TO THE FINANCIAL STATEMENTS CONTINUED
NOTES TO THE FINANCIAL STATEMENTS CONTINUED
24. Retirement benefit obligations continued
Discontinued operations
Included within operating profit/(loss):
– current service cost
– settlement gains(2)
Included within net finance costs:
– interest cost on defined benefit obligations
– interest income on plan assets
Year ended
31 December
2023
£m
Restated(1)
Year ended
31 December
2022
£m
2
–
15
(11)
9
(2)
31
(25)
(1) Restated for discontinued operations (see note 1).
(2) During 2022, a settlement gain of £2 million was recognised in discontinued operations relating to the buy-out of certain US pension schemes and was shown
as an adjusting item.
Statement of Comprehensive Income disclosures
Amounts recognised in the Consolidated Statement of Comprehensive Income in respect of these defined benefit plans were as follows:
Return on plan assets, excluding interest income
Remeasurement gains arising from changes in demographic assumptions
Remeasurement (losses)/gains arising from changes in financial assumptions
Remeasurement losses arising from experience adjustments
Net remeasurement loss on retirement benefit obligations
Year ended
31 December
2023
£m
Year ended
31 December
2022
£m
(93)
–
(3)
(23)
(119)
(1,003)
1
1,072
(102)
(32)
Risks and sensitivities
The defined benefit plans expose the Group to actuarial risks, such as longevity risk, inflation risk, interest rate risk and market (investment) risk.
The Group is not exposed to any unusual, entity specific or plan specific risks.
A sensitivity analysis on the principal assumptions used to measure the plan liabilities at the year end was as follows:
Discount rate
Inflation assumption(1)
Assumed life expectancy at age 65 (rate of mortality)
Change in assumption
Increase by 0.5 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
71
(78)
(42)
45
(43)
44
(2)
2
n/a
n/a
n/a
n/a
(1) The inflation sensitivity encompasses the impact on pension increases, where applicable.
The sensitivity analysis above was determined based on reasonably possible changes to the respective assumptions, while holding all other
assumptions constant. There has been no change in the methods or assumptions used in preparing the sensitivity analysis from prior years.
Sensitivities are based on the relevant assumptions and membership profile as at 31 December 2023 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.
212 MELROSE INDUSTRIES PLC ANNUAL REPORT 2023
212
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023
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 2023 and 31 December 2022:
31 December 2023
Financial assets
Classified as amortised cost:
Cash and cash equivalents
Net trade receivables
Classified as fair value:
Investments
Derivative financial assets
Foreign currency forward contracts
Interest rate derivatives
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
Embedded derivatives(1)
31 December 2022 (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
Embedded derivatives(1)
Engines
£m
Structures
£m
Corporate
£m
Discontinued
operations
£m
–
168
57
–
–
–
–
(43)
(35)
(345)
–
–
–
160
52
–
–
–
(47)
(44)
(306)
–
–
–
–
252
–
–
–
9
–
(6)
(150)
(419)
–
(4)
–
298
–
–
12
–
(12)
(155)
(452)
–
–
(6)
58
–
57
47
3
–
(630)
–
(7)
(46)
(102)
–
355
–
10
61
–
(1,496)
–
(8)
(45)
(217)
(3)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
511
–
1
–
–
–
(159)
(1,156)
(1)
–
–
Total
£m
58
420
114
47
3
9
(630)
(49)
(192)
(810)
(102)
(4)
355
969
62
62
12
(1,496)
(59)
(366)
(1,959)
(218)
(3)
(6)
(1) The embedded derivative is classified as a level 3 fair value under the IFRS 13 fair value hierarchy.
(2) Financial assets and liabilities have been restated for discontinued operations (see note 1) and the re-presentation of the Engines and Structures segments.
Reconciliation of liabilities arising from financing activities
Liabilities arising from financing activities, as defined by IAS 7, totalled £1,799 million at 31 December 2022 comprising; external debt of
£1,433 million (excluding £63 million of bank overdrafts) and lease obligations of £366 million. During the year a cash outflow in those liabilities totalled
£781 million as follows: net drawdown of external debt of £462 million (note 27), net repayment of external debt of £1,205 million (note 27) following
the demerger of the GKN Automotive, GKN Powder Metallurgy and GKN Hydrogen businesses and repayment of principal on lease obligations of
£38 million (note 28). There is also a decrease to liabilities arising from financing activities relating to non-cash items totalling £197 million comprising;
a decrease in external debt of £61 million due to changes in foreign exchange rates and other non-cash movements (including costs of £11 million
(note 20) of raising debt finance) and a decrease in respect of lease obligations of £136 million. As at 31 December 2023, liabilities arising from
financing activities, as defined by IAS 7, totalled £821 million comprising; external debt of £629 million (excluding £1 million of bank overdrafts)
and lease obligations of £192 million.
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023 213
213
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023FINANCIAL STATEMENTS
NOTES TO THE FINANCIAL STATEMENTS CONTINUED
NOTES TO THE FINANCIAL STATEMENTS CONTINUED
25. Financial instruments and risk management continued
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.
Fair values
As at 31 December 2023, the £10 million (31 December 2022: £130 million) bond maturing in 2032 had a carrying value of £10 million
(31 December 2022: £132 million) and a fair value of £9 million (31 December 2022: £110 million).
The Directors consider that the carrying amount of other financial assets and liabilities approximate to their fair 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 (investment grade). 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:
31 December 2023
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 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
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
58
59
117
(630)
(106)
(736)
–
–
–
–
–
–
58
59
117
(630)
(106)
(736)
(12)
(50)
(62)
(40)
102
62
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
Net amount
£m
46
9
55
(670)
(4)
(674)
Net amount
£m
284
12
296
(1,577)
(13)
(1,590)
Capital risk
The Group manages its capital to ensure that entities in the Group will be able to continue as a going concern.
The capital structure of the Group as at 31 December 2023 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.
214 MELROSE INDUSTRIES PLC ANNUAL REPORT 2023
214
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023
25. Financial instruments and risk management continued
Liquidity risk management
Overview of banking facilities
The Group’s committed bank facilities were refinanced during the year. The new facilities consist of a multi-currency term loan denominated
US$300 million and €100 million, and a US$250 million revolving credit facility, both of which mature in April 2026. In addition, the Group also
entered into multi-currency revolving credit facilities totalling US$690 million, £300 million and €300 million that initially mature in April 2026,
but with the potential to be extended for two additional one-year periods at the Company’s option.
At 31 December 2023, the term loan was fully drawn and there were drawings of US$298 million, £1 million and €22 million on the revolving
credit facilities. Applying the exchange rates at 31 December 2023, the headroom equated to £1,043 million. There are also a number of
uncommitted overdraft, guarantee and borrowing facilities made available to the Group.
In addition to the headroom on the multi-currency committed revolving credit facility, cash, deposits and marketable securities, net of overdrafts,
in the Group amounted to £57 million at 31 December 2023 (31 December 2022: £292 million) and are offset to arrive at the Group net debt
position of £572 million (31 December 2022: £1,139 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. As a result of the demerger, the Group renegotiated its banking arrangements.
No testing of the interest cover covenant was required at 31 December 2023. From 30 June 2024, the date of its first test, the interest cover
covenant is set at 4.0x.
The net debt to adjusted EBITDA covenant test level is 3.5x from 31 December 2023. At 31 December 2023, the Group net debt leverage
was 1.1x.
Bonds
Capital market borrowings as at 31 December 2023, inherited as part of the GKN acquisition, consist of a £10 million bond maturing May 2032
following a further repurchase of the bond during the year, see note 20 for details.
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 2023, the drawings on these facilities were
£268 million (31 December 2022: £325 million). At 31 December 2023, the drawings in the continuing Group within Engines were £107 million
(31 December 2022: £85 million) and £161 million in Structures (31 December 2022: £53 million). At 31 December 2022, there were drawings
of £187 million within businesses demerged during the year.
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 £42 million (31 December 2022: £94 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 2023, total facilities were £143 million (31 December 2022: £328 million) with drawings of £86 million (31 December 2022:
£200 million). The arrangements do not change the timing of the Group’s cash outflows. At 31 December 2023, the drawings in the continuing
Group within Engines were £43 million (31 December 2022: £39 million) and £43 million in Structures (31 December 2022: £36 million).
At 31 December 2022, there were drawings of £125 million within businesses demerged during the year.
Hedge of net investments in foreign entities using loans and derivatives
Interest-bearing loans and borrowings are designated as hedges of net investments in the Group’s subsidiaries in the USA and Europe to reduce
the exposure to the related foreign exchange risks.
The value of these were as follows:
Local borrowing currency:
US Dollar
Euro
31 December
2023
£m
31 December
2022
£m
467
106
759
363
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023 215
215
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023FINANCIAL STATEMENTS
NOTES TO THE FINANCIAL STATEMENTS CONTINUED
NOTES TO THE FINANCIAL STATEMENTS CONTINUED
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 gain of £43 million (2022: loss of £60 million). As at 31 December 2023, the cumulative loss in the foreign
currency translation reserve for continuing hedges on net investments using borrowings was £25 million (31 December 2022: £87 million).
There were no cross-currency swaps outstanding at 31 December 2023 or 31 December 2022. In the prior year, there were cross currency
swaps with an opening fair value liability of £1 million, with foreign exchange movements on these cross-currency swaps, which were recorded
in derivative gains/(losses) on hedge relationships within Other Comprehensive Income, being a gain of £19 million and net cash receipts of
£18 million.
The foreign exchange movement on those GKN cross-currency swaps, which is recorded in derivative gains/(losses) on hedge relationships,
was £nil (2022: loss of £62 million).
Finance cost risk management
The bank margin on the bank facility depends on the Group leverage, see note 20 for details.
The policy of the Board is to fix up to approximately 70% of the interest rate exposure of the Group’s borrowings.
The interest rate derivatives are designated as cash flow hedges and were highly effective throughout 2023. The fair value of the contracts as
at 31 December 2023 was a net asset of £3 million (31 December 2022: liability of £3 million). The movement of £6 million for the year ended
31 December 2023 (2022: £4 million) comprised of a credit of £2 million (2022: £4 million) booked to derivatives gains/(losses) on hedge
relationships in the year within Other Comprehensive Income, and a £4 million (2022: £nil) reduction in the interest accrual. During the prior 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.
During the year ended 31 December 2023, some of the critical terms of the interest rate derivatives and the hedged items were not perfectly
matched; however, this did not give rise to any ineffectiveness through the Income Statement in the year (2022: £nil).
Interest rate sensitivity analysis
Assuming the net debt, inclusive of interest rate derivatives, held as at the balance sheet date was outstanding for the whole year, a one
percentage point rise in market interest rates for all currencies would decrease profit before tax by the following amounts:
Sterling
US Dollar
Euro
Year ended
31 December
2023
£m
Year ended
31 December
2022
£m
–
(1)
(1)
(2)
(5)
(2)
On the basis of the floating-to-fixed interest rate derivatives in place at the balance sheet date, a one percentage point fall in market interest rates
for all currencies would decrease Group equity by £9 million (31 December 2022: £nil).
Exchange rate risk management
The Group trades in various countries around the world and is exposed to movements in a number of foreign currencies. Following the demerger
and subsequent update to the Group’s strategy to be a pureplay aerospace business going forward, the exposure to foreign exchange
movements related to a disposal now no longer represents a material risk for the Group.
The Group therefore carries exchange rate risk that can be categorised into two types: transaction and translation risk, as described in the
paragraphs below. The Group’s policy is designed to protect against the majority of the cash risks but not the non-cash risks.
The most common exchange rate risk is the transaction risk the Group takes when it invoices a customer or purchases from suppliers in a
different currency to the underlying functional currency of the relevant business. The Group’s policy is to review transactional foreign exchange
exposures, and place necessary hedging contracts, quarterly on a rolling basis. To the extent the cash flows associated with a transactional
foreign exchange risk are committed, the Group will hedge 100% at the time the cash flow becomes committed. For forecast and variable cash
flows, the Group hedges a proportion of the expected cash flows, with the percentage being hedged lowering as the time horizon lengthens.
The Group hedges on a sliding scale, typically hedging around 90% of foreign exchange exposures expected over the next twelve months,
with the percentage decreasing by approximately 10 percentage points 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, 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.
216 MELROSE INDUSTRIES PLC ANNUAL REPORT 2023
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MELROSE INDUSTRIES PLC ANNUAL REPORT 2023
25. Financial instruments and risk management continued
As at 31 December 2023, 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 2023 of £55 million (31 December 2022: £156 million). There were no contracts where hedge accounting was applied as
at 31 December 2023 (31 December 2022: no contracts where hedge accounting was applied).
The change in fair value of foreign exchange forward contracts recognised in derivative gains/(losses) on hedging relationships within Other
Comprehensive Income was £nil (2022: £nil) and a credit of £nil (2022: £1 million) was reclassified to the Income Statement.
There were no cross-currency swaps in place during the year. In the prior year, certain cross-currency swaps were designated as net investment
hedges and £5 million was booked through the Income Statement in finance costs of which a credit of £3 million was treated as an adjusting
item (note 6). These cross-currency swaps 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 2023
Foreign exchange forward contracts
Year ended 31 December 2022
Foreign exchange forward contracts
0–1 year
£m
1–2 years
£m
2–5 years
£m
5+ years
£m
549
855
370
618
464
834
58
19
Total
£m
1,441
2,326
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
Euro
Year ended
31 December
2023
£m
Year ended
31 December
2022
£m
2
(5)
(11)
(3)
The following table details the impact of hypothetical changes in foreign exchange rates on financial assets and liabilities at the balance
sheet date, illustrating the increase/(decrease) in Group equity caused by a 10% strengthening of the US Dollar and Euro against Sterling.
The analysis assumes that all other variables, in particular other foreign currency exchange rates, remain constant.
US Dollar
Euro
31 December
2023
£m
31 December
2022
£m
–
(1)
(10)
(7)
In addition, the change in equity due to a 10% strengthening of the US Dollar against Sterling for the translation of net investment hedging
instruments would be a decrease of £47 million (2022: £77 million) and for the Euro, a decrease of £11 million (2022: £36 million). However,
there would be no overall effect on equity because there would be an offset in the currency translation of the foreign operation.
Fair value measurements recognised in the Balance Sheet
Foreign currency forward contracts are measured using quoted forward exchange rates and yield curves derived from quoted interest rates
matching the maturities of the contracts.
Interest rate swap and cross-currency swap contracts are measured using yield curves derived from quoted interest and foreign exchange rates.
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023 217
217
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023FINANCIAL STATEMENTS
NOTES TO THE FINANCIAL STATEMENTS CONTINUED
NOTES TO THE FINANCIAL STATEMENTS CONTINUED
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:
Hedging Instruments
Pay fixed, receive floating interest rate derivatives
Within one year
In one to two years
In two to five years
Total
Average fixed rate
Notional principal
Fair value of assets/
(liabilities)
31 December
2023
%
31 December
2022
%
31 December
2023
£m
31 December
2022
£m
31 December
2023
£m
31 December
2022
£m
3.49%
3.49%
3.49%
2.24%
–
–
414
414
414
260
–
–
–
–
3
3
(3)
–
–
(3)
During the year, the Group entered into pay fixed, receive floating interest rate derivatives totalling $440 million and €80 million, which were
outstanding as at 31 December 2023. Pay fixed, receive floating derivatives, which totalled $315 million, that were outstanding at 31 December 2022
matured during the year.
Derivative and financial assets and liabilities are presented within the Balance Sheet as:
Non-current assets
Current assets
Current liabilities
Non-current liabilities
31 December
2023
£m
31 December
2022
£m
46
13
(42)
(64)
36
38
(86)
(141)
The change in fair value of interest rate derivatives is discussed in the Finance Risk Management section of the Finance Director’s Review.
All hedging instruments are booked in the Balance Sheet as derivative financial assets or derivative financial liabilities.
The fair value of derivative financial instruments is derived from inputs other than quoted prices that are observable for the asset or liability, either
directly (i.e. as prices) or indirectly (i.e. derived from prices) and they are therefore categorised within Level 2 of the fair value hierarchy set out in
IFRS 13: Fair value measurement. The Group’s policy is to recognise transfers into and out of the different fair value hierarchy levels at the date
the event or change in circumstances that caused the transfer to occur. There have been no transfers between levels in the year.
The following table sets out details of the Group’s material hedged items at the balance sheet date where hedge accounting is applied:
Hedged items
Floating rate borrowings – interest risk
Net assets of designated investments
Change in fair value for
calculating ineffectiveness
Balance in translation
and hedging reserve
for continuing hedges
Balance in translation
and hedging reserve
for discontinued hedges
31 December
2023
£m
31 December
2022
£m
31 December
2023
£m
31 December
2022
£m
31 December
2023
£m
31 December
2022
£m
(2)
–
(4)
–
(2)
–
–
–
–
–
–
116
There is no balance held in cash flow hedge reserve from hedging relationships for which hedge accounting is no longer applied.
26. Issued share capital and reserves
Share Capital
Allotted, called-up and fully paid
1,351,475,321 (31 December 2022: 4,054,425,961) Ordinary Shares of 160/7 pence (31 December 2022:
160/21 pence) each
31 December
2023
£m
31 December
2022
£m
309
309
309
309
On 19 April 2023, a share consolidation took place whereby shareholders received one new share in the Company for every three existing
shares held. In addition, a share buyback programme has commenced during the year with 18,761,840 shares repurchased and held as
treasury shares.
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.
218 MELROSE INDUSTRIES PLC ANNUAL REPORT 2023
218
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023
26. Issued share capital and reserves continued
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.
At 1 January 2022
Movements within other comprehensive income:
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
Movements within other comprehensive 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 cash flow hedges
Associated deferred tax
Amounts reclassified to the Income Statement
At 31 December 2023
Cost of hedge
reserve
£m
Cash flow hedge
reserve
£m
Foreign currency
translation reserve
£m
Translation
and hedging
reserve
£m
(10)
–
–
–
–
–
–
–
–
10
–
–
–
–
–
–
–
–
–
(9)
–
–
–
–
–
–
4
(1)
6
–
–
–
–
–
2
(1)
–
1
95
76
665
6
(60)
–
(43)
–
–
–
(25)
638
(250)
(7)
43
–
–
–
(152)
272
665
6
(60)
–
(43)
–
4
(1)
(9)
638
(250)
(7)
43
–
2
(1)
(152)
273
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 £152 million (2022: £11 million) following the disposal
of businesses.
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023 219
219
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023FINANCIAL STATEMENTS
NOTES TO THE FINANCIAL STATEMENTS CONTINUED
NOTES TO THE FINANCIAL STATEMENTS CONTINUED
27. Cash flow statement
Reconciliation of operating profit/(loss) to net cash used in operating activities generated
by continuing operations
Operating profit/(loss)
Adjusting items
Adjusted operating profit
Adjustments for:
Depreciation of property, plant and equipment
Amortisation of computer software and development costs
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(3)
Interest paid on lease obligations
Acquisition and disposal costs
Net cash used in operating activities
Notes
6
6
Year ended
31 December
2023
£m
Restated(1)
Year ended
31 December
2022
£m
57
333
390
100
42
(160)
(67)
(10)
(140)
4
(17)
(79)
(5)
(65)
(7)
(270)
417
147
104
41
(60)
(23)
(88)
(172)
112
(8)
(76)
(6)
(10)
(39)
(1) Restated for discontinued operations (see note 1).
(2) The year ended 31 December 2023 includes £45 million for the purchase of a buy-in policy for GKN Group Pension Scheme Number 4 (see note 24).
(3) The year ended 31 December 2023 includes £17 million of finance costs on the proportion of the Group’s net debt strategically allocated to demerged businesses
at the start of the year and settled on demerger (see note 6).
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
Tax paid
Interest paid on lease obligations
Interest paid on loans and borrowings
Net cash from operating activities from discontinued operations
Interest received
Dividends received from equity accounted investments
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
(1) Restated for discontinued operations (see note 1).
31 December
2023
£m
31 December
2022
£m
58
(1)
57
355
(63)
292
Year ended
31 December
2023
£m
Restated(1)
Year ended
31 December
2022
£m
54
(5)
(8)
(3)
(2)
36
–
–
(62)
–
(5)
(67)
(6)
(6)
377
(36)
(81)
(6)
(11)
243
3
59
(203)
21
(20)
(140)
(23)
(23)
Net debt reconciliation
Net debt consists of interest-bearing loans and borrowings (excluding any acquisition related fair value adjustments) and cash and
cash equivalents.
220 MELROSE INDUSTRIES PLC ANNUAL REPORT 2023
220
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023
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:
31 December
2023
£m
31 December
2022
£m
Interest-bearing loans and borrowings – due within one year
Interest-bearing loans and borrowings – due after one year
External debt
Less:
Cash and cash equivalents
Adjustments:
Non-cash acquisition fair value adjustments
Net debt
The table below shows the key components of the movement in net debt:
(54)
(576)
(630)
58
(572)
–
(572)
At
31 December
2022
£m
(1,433)
2
(1,431)
292
(1,139)
Cash flow
£m
Acquisitions
and disposals
£m
Other non-cash
movements
£m
Effect of foreign
exchange
£m
(462)
–
(462)
169
(293)
1,205
–
1,205
(385)
820
18
(2)
16
–
16
43
–
43
(19)
24
(63)
(1,433)
(1,496)
355
(1,141)
2
(1,139)
At
31 December
2023
£m
(629)
–
(629)
57
(572)
31 December
2023
£m
31 December
2022
£m
45
102
75
(30)
192
40
152
192
69
166
209
(78)
366
60
306
366
External debt (excluding bank overdrafts)
Non-cash acquisition fair value adjustments
Cash and cash equivalents, net of bank
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
Amount due for settlement after one year
Present value of lease obligations
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.
During the year £158 million of lease obligations were disposed of with the demerger of the GKN Automotive, GKN Powder Metallurgy and
GKN Hydrogen businesses (see note 13).
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 £179 million (31 December 2022: £171 million).
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023 221
221
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023FINANCIAL STATEMENTS
NOTES TO THE FINANCIAL STATEMENTS CONTINUED
NOTES TO THE FINANCIAL STATEMENTS CONTINUED
28. Commitments continued
The table below shows the key components in the movement in lease obligations.
At 1 January
Additions
Interest charge
Reassessment of lease obligation
Payment of principal
Payment of interest
Disposals
Disposal of businesses(1)
Transfer to held for sale(2)
Exchange adjustments
At 31 December
Year ended
31 December
2023
£m
Year ended
31 December
2022
£m
366
31
8
2
(38)
(8)
–
(158)
(1)
(10)
192
376
38
9
(1)
(52)
(12)
(5)
(3)
(7)
23
366
(1) Disposal of businesses in 2023 relates to the demerger of the GKN Automotive, GKN Powder Metallurgy and GKN Hydrogen businesses (see note 1). Disposal of
businesses in 2022 related to the sale of a non-core business in the Structures segment.
(2) Transfer to held for sale in 2023 relates to the contractually agreed sale of a non-core business in the Structures segment and in 2022 related to the Ergotron
business (see note 1).
Capital commitments
At 31 December 2023, there were commitments of £115 million (31 December 2022: £127 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.
During the year ended 31 December 2023, £417 million of equity accounted investments were disposed with the demerger of the GKN
Automotive, GKN Powder Metallurgy and GKN Hydrogen businesses (note 13) into Dowlais, who became a related party upon demerger.
During the year, the Group entered into a Transitional Services Agreement with Dowlais to provide services and support to ensure continuity
immediately following the demerger. As a result, income of £1 million (2022: £nil) has been recognised in the Income Statement for continuing
operations.
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 131 and 141.
Short-term employee benefits
Share-based payments
Year ended
31 December
2023
£m
Year ended
31 December
2022
£m
5
5
10
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 reworks related to such
products could be particularly costly. The costs of product reworks are not always covered by insurance. 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.
222 MELROSE INDUSTRIES PLC ANNUAL REPORT 2023
222
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023
COMPANY BALANCE SHEET FOR MELROSE INDUSTRIES PLC
COMPANY BALANCE SHEET FOR MELROSE INDUSTRIES PLC
Fixed assets
Investments
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
31 December
2023
£m
31 December
2022
£m
Notes
3
4
5
6
7
10,608
10,591
549
487
(4,893)
(4,344)
6,264
(22)
6,242
309
3,271
109
753
1,800
6,242
(3,443)
(2,956)
7,635
(2)
7,633
309
3,271
109
753
3,191
7,633
The Company reported a profit for the financial year ended 31 December 2023 of £737 million (2022: loss of £19 million).
The financial statements were approved by the Board of Directors on 7 March 2024 and were signed on its behalf by:
Geoffrey Martin
Peter Dilnot
Group Finance Director
Chief Executive Officer
7 March 2024
7 March 2024
Registered number: 09800044
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023 223
223
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023FINANCIAL STATEMENTS
COMPANY STATEMENT OF CHANGES IN EQUITY
COMPANY STATEMENT OF CHANGES IN EQUITY
Issued
share capital
£m
Share premium
account
£m
Merger
reserve
£m
Capital redemption
reserve
£m
At 1 January 2022
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
Profit for the year (note 2)
Other comprehensive expense
Total comprehensive income
Purchase of own shares(1)
Dividends paid
Demerger distribution(2)
Equity-settled share-based payments
Deferred tax on equity-settled share-based
payments
At 31 December 2023
333
–
–
(24)
–
–
309
–
–
–
–
–
–
–
–
3,271
109
–
–
–
–
–
–
–
–
–
–
3,271
109
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
109
309
3,271
729
–
–
24
–
–
753
–
–
–
–
–
–
–
–
753
Retained
earnings
£m
3,775
(19)
(19)
(504)
(77)
16
3,191
737
(5)
732
(93)
(81)
(1,973)
2
22
1,800
Shareholders’
funds
£m
8,217
(19)
(19)
(504)
(77)
16
7,633
737
(5)
732
(93)
(81)
(1,973)
2
22
6,242
(1) Further information is set out in note 1.
(2) Further information is set out in note 13 to the Group Consolidated Financial Statements.
Refer to the Section 172 statement in the Strategic Report on pages 37 to 42 for further details on the Company’s Distribution Policy.
224
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023 224
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023
NOTES TO THE COMPANY BALANCE SHEET
NOTES TO THE COMPANY BALANCE SHEET
1. Material accounting policies
Basis of accounting
Melrose Industries PLC (“the Company”) is a public company limited by shares. The Company is incorporated in the United Kingdom under
the Companies Act 2006 and registered in England and Wales. The address of the registered office is given on the back cover. The nature of the
Group’s operations and its principal activities are set out in the Strategic Report on pages 1 to 97.
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 2 October 2023, the Company commenced a £500 million share buyback programme, with 18,761,840 shares repurchased by
31 December 2023. These are held as treasury shares. In the prior year, the Company completed a £500 million share buyback programme with
318,003,512 shares repurchased and subsequently cancelled.
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 £1.0 billion at
31 December 2023 and sufficient headroom throughout the going concern forecast period. Forecast covenant compliance is considered further below.
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
2023
30 June
2024
31 December
2024
3.5x
n/a
3.5x
4.0x
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 end markets 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. Climate scenario analysis was used to model the impact of
climate change on the Group’s cash flow position. Climate is deemed to not have a material impact over the period of 12 months for the
assessment of going concern or 36 months for assessment of viability of the Group.
The reasonably possible sensitised case models more conservative sales assumptions for 2024 and the first half of 2025. The sensitised
assumptions are specific to each business taking into account their markets, but on average represents a c.10% reduction to the Group’s
forecast revenue in each of 2024 and the first half of 2025 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 £1.0 billion and the Group’s leverage was 1.1x, comfortably below the covenant test at 31 December 2023, 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 2024 and 31 December 2024, and the Group will not require any additional sources of finance. Testing at 30 June 2025 is also
favourable, assuming arrangements similar in nature with existing agreements.
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.
The Company has an investment in listed shares, which are classified as financial assets, measured at fair value. Fair value is by reference
to quoted market price. Any changes to fair value are recognised in Other Comprehensive Income and accumulated in retained earnings in
accordance with IFRS 9: Financial Instruments. Dividends received from investments are recognised in the Income Statement when the
Company’s right to receive the dividend is established.
Impairment of assets
Assets, other than those held at fair value, are assessed for indicators of impairment at each balance sheet date. If there is objective evidence
of impairment, an impairment loss is recognised in profit or loss as described below.
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023 225
225
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023FINANCIAL STATEMENTS
NOTES TO THE COMPANY BALANCE SHEET CONTINUED
NOTES TO THE COMPANY BALANCE SHEET CONTINUED
1. Material accounting policies continued
Non-financial assets
An asset is impaired where there is objective evidence that, as a result of one or more events that occurred after initial recognition, the estimated
recoverable value of the asset has been reduced. The recoverable amount of an asset is the higher of its fair value less costs to sell and its value
in use.
Where indicators exist for a decrease in impairment loss, the prior impairment loss is tested to determine reversal. An impairment loss is reversed
on an individual impaired asset to the extent that the revised recoverable value does not lead to a revised carrying amount higher than the
carrying value had no impairment been recognised.
For amounts owed by Group undertakings, the Company recognises lifetime expected credit losses when there has been a significant increase in
credit risk since initial recognition. However, if the credit risk on the financial instrument has not increased significantly since initial recognition, the
Company measures the loss allowance for that financial instrument at an amount equal to one year’s expected credit losses.
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 fair value, which is the transaction price (including transaction costs). After initial
recognition, amounts owed to/from Group undertakings are subsequently measured at amortised cost using the effective interest rate method.
Financial assets and liabilities are only offset in the Balance Sheet when, and only when, there exists a legally enforceable right to set off the
recognised amounts and the Company intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously.
Financial assets are derecognised when, and only when, a) the contractual rights to the cash flows from the financial asset expire or are settled,
b) the Company transfers to another party substantially all of the risks and rewards of ownership of the financial asset, or c) the Company, despite
having retained some, but not all, significant risks and rewards of ownership, has transferred control of the asset to another party.
Financial liabilities are derecognised only when the obligation specified in the contract is discharged, cancelled or expires.
Share-based payments
The Company issues equity-settled share-based payments to certain employees. The required disclosures are included in the Group
Consolidated Financial Statements.
Equity-settled share-based payments are measured at fair value (excluding the effect of non-market based vesting conditions) at the date of grant.
The fair value determined at the grant date of the equity-settled share-based payments is expensed on a straight-line basis over the vesting period,
based on the Company’s estimate of the shares that will eventually vest and adjusted for the effect of non-market based vesting conditions.
Fair value is measured by use of the Black-Scholes pricing model. The expected life used in the model has been adjusted, based on the
Directors’ best estimate, for the effects of non-transferability, exercise restrictions, and behavioural considerations.
Where equity-settled share-based payments are made available to employees of the Company’s subsidiaries, these are treated as increases
in equity over the vesting period of the award with a corresponding increase in the Company’s investment in subsidiaries.
Taxation
Current tax, including UK corporation tax and foreign tax, is provided at amounts expected to be paid (or recovered) using the tax rates and laws
that have been enacted or substantively enacted by the balance sheet date.
Deferred tax is recognised in respect of all timing differences that have originated but not reversed at the balance sheet date where transactions
or events that result in an obligation to pay more tax in the future or a right to pay less tax in the future have occurred. Timing differences are
differences between the Company’s taxable profits and its results as stated in the Financial Statements that arise from the inclusion of gains and
losses in tax assessments in periods different from those in which they are recognised in the Financial Statements.
Provisions
Provisions are recognised when the Company has a present obligation (legal or constructive) as a result of a past event, it is probable that an
outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount
of the obligation. If the effect of the time value of money is material, provisions are determined by discounting the expected future cash flows
at a rate that reflects the current market assessment of the time value of money and, where appropriate, the risks specific to the liability.
Where discounting is used, the increase in the provision due to the passage of time is recognised as a finance cost.
Critical accounting judgements and key sources of estimation uncertainty
There were no critical accounting judgements that would have a significant effect on the amounts recognised in the Parent Company Financial
Statements or key sources of estimation uncertainty at the balance sheet date that would have a significant risk of causing a material adjustment
to the carrying amounts of assets and liabilities within the next financial year.
2. Result for the year
As permitted by section 408 of the Companies Act 2006 the Company has elected not to present its own Profit and Loss Account for the year.
Melrose Industries PLC reported a profit for the financial year ended 31 December 2023 of £737 million (2022: loss of £19 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 128 to 152. There were no other employees of the
Company in the year.
226 MELROSE INDUSTRIES PLC ANNUAL REPORT 2023
226
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023
3. Investments
At 1 January 2023
Additions
Disposals
Revaluations
At 31 December 2023
External
investments
£m
Investments in
subsidiaries
£m
–
20
–
(5)
15
10,591
1,086
(1,084)
–
10,593
Total
£m
10,591
1,106
(1,084)
(5)
10,608
During the year, the Company acquired investments in GKN Automotive, through the purchase of GKN Industries Limited, and GKN Powder
Metallurgy and GKN Hydrogen, through the purchase of GKN Powder Metallurgy Holdings Limited (which owned GKN Hydrogen Limited) for
total consideration of £1,084 million, settled through an inter-company loan.
On 20 April 2023, the Company completed the demerger of the GKN Automotive, GKN Powder Metallurgy and GKN Hydrogen businesses
through the flotation of Dowlais Group plc ("Dowlais") on the London Stock Exchange. There was a demerger distribution of £1,973 million and
the Company retained a 1% investment in Dowlais with an initial valuation of £20 million (see note 13 of the Consolidated Financial Statements),
which resulted in a profit on disposal of £909 million.
The 1% investment in Dowlais was subsequently remeasured to fair value at 31 December 2023 of £15 million.
A £2 million investment from equity-settled share-based payments for subsidiaries is included as an addition to investments in subsidiaries
at 31 December 2023. Further details on the Group’s share-based payment scheme is 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 2023, the market capitalisation of the Company of £7,562 million was in excess of the carrying value of its
investments (£10,608 million) net of intercompany positions (£4,415 million).
The recoverable amount of the investments in subsidiaries 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 2023:
Equity interest %
Class of Share held
Brazil
Av. Alfredo Ignácio Noqueira Penido, 335 – Sala 1103 – Edifício Madison Power, São José dos
Campos, SP, 12246-000
GKN Aerospace Transparency Systems do Brasil Ltda
Canada
600-1134 Grande Allée Ouest, Quebec, G1S 1E5
Fokker Elmo Canada Inc.
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
1 Xinwang Road, Jingjiang Economic and Technic Development Zone, Jingjiang, Jiangsu
GKN Aerospace (Jingjiang) Co., Ltd
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
France
Boulevard De L Europe, BP 177 91006 Evry-Courcouronnes CEDEX
Arianespace Participation S.A.
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
100
Quota capital
100
Ordinary
100
Registered investment
100
Registered investment
100
Registered investment
100
40
1.6320
5.5
100
100
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023 227
227
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023FINANCIAL STATEMENTS
NOTES TO THE COMPANY BALANCE SHEET CONTINUED
NOTES TO THE COMPANY BALANCE SHEET CONTINUED
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
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
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
Mexico
Calle Washinton 3701, interior 18, Complejo Industrial Las Americas, Chihuahua, Chihuahua,
C.P. 31114
FAE Aerostructures SA de CV
The Netherlands
Pietersbergweg 283, 1105 BM, Amsterdam
Ridderkerk Property 1 BV
Markt 22, 3351 PB, Papendrecht
Fabriek Slobbengors Beheer B.V.
Fabriek Slobbengors C.V.
Hoofdkantoor Slobbengors Beheer B.V.
Kantoor Industrieweg C.V.
Anthony Fokkerweg 4, 3351 NL, Papendrecht
Fokker Elmo B.V.
Fokker Elmo Holding B.V.
Grasbeemd 28, 5705 DG, Helmond
SFT Helmond B.V.
Industrieweg 4, 3351 LB, Papendrecht
Cooperative Delivery of Retrokits (CDR) V.O.F.
Structural Laminates Industries B.V.
Fokker Technologies Group B.V.
Fokker Technology B.V.
GKN Aerospace Netherlands B.V.
Fokker Aerostructures B.V.
Fokker (CDR) B.V.
Norway
Kirkegårdsveien 45, 3616 Kongsberg
GKN Aerospace Norway AS
Kongsberg Technology Training Centre AS
Kongsberg Terotech AS
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.
Sweden
SE – 461 81, Trollhättan
GKN Aerospace Sweden AB
GKN Sweden Holdings AB
Kryptongatan 11, 431 53 Mölndal
Permanova Lasersystem AB
Thailand
9/21 Moo 5, Phaholyothin Road Klong 1, Klong Luang, Patumthanee, 12120
GKN Aerospace Transparency Systems (Thailand) Limited
Equity interest %
Class of Share held
Equity interest %
Class of Share held
49
100
100
100
100
100
100
49
49
49
49
100
100
100
50
100
100
100
100
100
100
100
33.33
50
49
100
100
100
100
100
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary(1)
Ordinary
Ordinary(1)
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Turkey
Ege Serbest Bölgesi, SADI Sok. No:10, 35410 Gaziemir, Izmir
Fokker Elmo Havacilik Sanayi Ve Ticaret Limited Sirketi
11th Floor, The Colmore Building, 20 Colmore Circus Queensway, Birmingham, B4 6AT
United Kingdom
Alcester Capricorn
Alcester EP1 Limited
Alcester Number 1 Limited
Alder Miles Druce Limited
Birfield Limited
British Hovercraft Corporation Limited
Brush Holdings Limited
Colmore Lifting Limited
Colmore Overseas Holdings Limited
Eachairn Aerospace Holdings Limited
Falcon Works Property Limited
Firth Cleveland Limited
F.P.T. Industries Limited
GKN Aerospace Civil Services Holdings Limited
GKN Aerospace Civil Services Limited
GKN Aerospace (FFT) Limited
GKN Aerospace Services Limited
GKN Aerospace Holdings Limited
GKN Aerospace Transparency Systems (Kings Norton) Limited
GKN Aerospace Transparency Systems (Luton) Limited
GKN Bound Brook Limited
GKN Building Services Europe Limited
GKN CEDU Limited
GKN Composites Limited
GKN Computer Services Limited
GKN Defence Holdings Limited
GKN Defence Limited
GKN Enterprise Limited
GKN Export Services Limited
GKN Fasteners Limited
GKN Finance (UK) Limited
GKN Hardy Spicer Limited
GKN Holdings Limited
GKN Limited
GKN Pistons Limited
GKN Quest Trustee Limited
GKN Sankey Finance Limited
GKN SEK Investments Limited
GKN Technology Limited
GKN Trading Limited
GKN Westland Aerospace (Avonmouth) Limited
GKN Westland Aerospace Advanced Materials Limited
GKN Westland Aerospace Aviation Support Limited
GKN Westland Aerospace Holdings Limited
GKN Westland Design Services Limited
GKN Westland Limited
GKN Westland Overseas Holdings Limited
GKN Westland Services Limited
GKN 1 Trustee 2018 Limited
GKN 4 Trustee 2018 Limited
Guest, Keen and Nettlefolds, Limited
Laycock Engineering Limited
Melrose Aerospace Limited
Melrose Euro Investments Limited
Melrose GBP Investments Limited
Melrose Intermediate Limited
McKechnie 2005 Pension Scheme Trustee Limited
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary and deferred
Ordinary and deferred(2)
Ordinary and
convertible preference
228 MELROSE INDUSTRIES PLC ANNUAL REPORT 2023
228
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023 229
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023
Turkey
Ege Serbest Bölgesi, SADI Sok. No:10, 35410 Gaziemir, Izmir
Fokker Elmo Havacilik Sanayi Ve Ticaret Limited Sirketi
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
Birfield Limited
British Hovercraft Corporation Limited
Brush Holdings Limited
Colmore Lifting Limited
Colmore Overseas Holdings Limited
Eachairn Aerospace Holdings Limited
Falcon Works Property Limited
Firth Cleveland Limited
F.P.T. Industries Limited
GKN Aerospace Civil Services Holdings Limited
GKN Aerospace Civil Services Limited
GKN Aerospace (FFT) Limited
GKN Aerospace Services Limited
GKN Aerospace Holdings Limited
GKN Aerospace Transparency Systems (Kings Norton) Limited
GKN Aerospace Transparency Systems (Luton) Limited
GKN Bound Brook Limited
GKN Building Services Europe Limited
GKN CEDU Limited
GKN Composites Limited
GKN Computer Services Limited
GKN Defence Holdings Limited
GKN Defence Limited
GKN Enterprise Limited
GKN Export Services Limited
GKN Fasteners Limited
GKN Finance (UK) Limited
GKN Hardy Spicer Limited
GKN Holdings Limited
GKN Limited
GKN Pistons Limited
GKN Quest Trustee Limited
GKN Sankey Finance Limited
GKN SEK Investments Limited
GKN Technology Limited
GKN Trading Limited
GKN Westland Aerospace (Avonmouth) Limited
GKN Westland Aerospace Advanced Materials Limited
GKN Westland Aerospace Aviation Support Limited
GKN Westland Aerospace Holdings Limited
GKN Westland Design Services Limited
GKN Westland Limited
GKN Westland Overseas Holdings Limited
GKN Westland Services Limited
GKN 1 Trustee 2018 Limited
GKN 4 Trustee 2018 Limited
Guest, Keen and Nettlefolds, Limited
Laycock Engineering Limited
McKechnie 2005 Pension Scheme Trustee Limited
Melrose Aerospace Limited
Melrose Euro Investments Limited
Melrose GBP Investments Limited
Melrose Intermediate Limited
Equity interest %
Class of Share held
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
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 and deferred
Ordinary
Ordinary
Ordinary
Ordinary and deferred(2)
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary and
convertible preference
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023 229
229
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023FINANCIAL STATEMENTS
NOTES TO THE COMPANY BALANCE SHEET CONTINUED
NOTES TO THE COMPANY BALANCE SHEET CONTINUED
Equity interest %
Class of Share held
Melrose NOK Investments 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
Capital Square, 58 Morrison Street, Edinburgh, Scotland, EH3 8BP
A. P. Newall & Company Limited
GKN Investments II GP Limited
GKN Investments II LP (this partnership is controlled by, and its results are consolidated by, the Group
and as such advantage has been taken of the exemption set out in regulation 7 of the Partnerships
(Accounts) Regulations 2008)
2nd Floor, Nova North, 11 Bressenden Place, London, SW1E 5BY
Dowlais Group plc
Number 22 Mount Ephraim, Tunbridge Wells, England, TN4 8AS
HiiROC Limited
USA
2 Sun Court, Suite 400, Peachtree Corners, GA, 30092
Fokker Elmo Inc.
1209 Orange Street, Wilmington, Delaware, 19801
Melrose North America, Inc
PW1100G-JM Engine Leasing, LLC
2710 Gateway Oaks Drive, Suite 150 N, Sacramento, CA, 95833
GENIL, Inc.
GKN Aerospace Camarillo, Inc.
GKN Aerospace Chem-tronics Inc.
GKN Aerospace Transparency Systems, Inc
251 Little Falls Drive, Wilmington Delaware, 19808
FPT Industries LLC
GKN Aerospace Aerostructures, Inc
GKN Aerospace GTC LLC
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 Westland Aerospace, Inc.
80 State Street, Albany New York, 12207
GKN Aerospace Monitor, Inc.
135 North Pennsylvania Street, Suite 1610, Indianapolis, Indiana, 46204
GKN Aerospace Muncie, Inc.
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary and
redeemable preference
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Membership interest
1
10.21
Ordinary
Ordinary
100
100
4
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
Common stock
Common
Class C Unit
Ordinary
Ordinary
Ordinary
Common Stock
Membership interest
Common
Membership interest
Membership interest
Common stock
Ordinary
Membership interest
Membership interest
Ordinary
Membership interest
Common stock
Membership interest
Common stock
Common
Common
Each of the subsidiaries and significant holdings listed are included in the Consolidated Financial Statements of the Company and are held in
each case by a subsidiary undertaking, except for Melrose Aerospace Limited, GKN Limited and Dowlais Group plc, for which the applicable
share interests are held directly by Melrose Industries PLC.
Notes
(1) The Group owns 49% directly with a total effective ownership of 49.98% in the company.
(2) The Group has a direct interest in 100% of the issued ordinary share capital. The deferred shares are held by third parties.
230 MELROSE INDUSTRIES PLC ANNUAL REPORT 2023
230
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023
4. Debtors
Amounts falling due after one year:
Amounts owed by Group undertakings
Deferred tax
31 December
2023
£m
31 December
2022
£m
475
74
549
446
41
487
Amounts owed by Group undertakings are either interest-bearing or non interest-bearing depending on the type and duration of the receivable
relationship. They are unsecured, accumulate interest in a range between 0% and 6% and are due to mature in April 2028. At 31 December 2023,
the amount receivable of £475 million (31 December 2022: £446 million) has been classified as an amount falling due after one year 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
Other timing differences
The tax losses may be carried forward indefinitely.
5. Creditors
Amounts falling due within one year:
Amounts owed to Group undertakings
Accruals and other creditors
31 December
2023
£m
31 December
2022
£m
36
38
74
36
5
41
31 December
2023
£m
31 December
2022
£m
4,890
3
4,893
3,441
2
3,443
Amounts owed to Group undertakings are unsecured, accumulate interest in a range between 0% and 6%, have no fixed date of repayment and
are repayable on demand.
The Directors consider that amounts owed to Group undertakings approximate to their fair value.
6. Provisions
At 1 January 2023
Charge to profit and loss account
At 31 December 2023
Incentive plan
related
£m
2
20
22
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.
7. Issued share capital
Share Capital
Allotted, called-up and fully paid
1,351,475,321 (31 December 2022: 4,054,425,961) Ordinary Shares of 160/7 pence (31 December 2022:
160/21 pence) each
31 December
2023
£m
31 December
2022
£m
309
309
309
309
On 19 April 2023, a share consolidation took place whereby shareholders received one new share in the Company for every three existing shares
held. Also, a share buyback programme has commenced during the year with 18,761,840 shares repurchased and held as treasury shares.
The rights of each class of share are described in the Directors’ Report.
8. Related party transactions
The Company has taken the exemption in FRS 102.33: “Related party information” not to disclose intercompany balances and transactions
in the year with fully owned subsidiary undertakings.
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023 231
231
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023FINANCIAL STATEMENTS
GLOSSARY
GLOSSARY
Alternative Performance Measures (“APMs”)
In accordance with the Guidelines on APMs issued by the European Securities and Markets Authority (“ESMA”), additional information is provided
on the APMs used by the Group below.
In the reporting of financial information, the Group uses certain measures that are not required under IFRS. These additional measures
(commonly referred to as APMs) provide additional information on the performance of the business and trends to stakeholders. These measures
are consistent with those used internally, and are considered important to understanding the financial performance and financial health of the
Group. APMs are considered to be an important measure to monitor how the businesses are performing because this provides a meaningful
comparison of how the business is managed and measured on a day-to-day basis and achieves consistency and comparability between
reporting periods.
These APMs may not be directly comparable with similarly titled 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 and comparable information has been restated(1).
Income Statement Measures
APM
Adjusting items
Closest equivalent statutory measure
None
Reconciling items to statutory measure
Adjusting items (note 6)
Definition and purpose
Those items which the Group excludes from its adjusted profit metrics in order to present a further measure of the Group’s performance.
These include items which are significant in size or volatility or by nature are non-trading or non-recurring or any item released to the Income
Statement that was previously a fair value item booked on an acquisition.
This provides a meaningful comparison of how the business is managed and measured on a day-to-day basis and provides consistency
and comparability between reporting periods.
APM
Adjusted operating profit
Closest equivalent statutory measure
Operating profit/(loss)(2)
Reconciling items to statutory measure
Adjusting items (note 6)
Definition and purpose
The Group uses adjusted profit measures to provide a useful and more comparable measure of the ongoing performance of the Group.
Adjusted measures are reconciled to statutory measures by removing adjusting items, the nature of which are disclosed above and further
detailed in note 6.
Adjusted operating profit
Operating profit/(loss)
Adjusting items to operating profit/(loss) (note 6)
Adjusted operating profit
APM
Adjusted operating margin
Closest equivalent statutory measure
Operating margin(3)
Reconciling items to statutory measure
Adjusting items (note 6)
Year ended
31 December
2023
£m
57
333
390
Restated(1)
Year ended
31 December
2022
£m
(270)
417
147
Definition and purpose
Adjusted operating margin represents Adjusted operating profit as a percentage of revenue. The Group uses adjusted profit measures to provide
a useful and more comparable measure of the ongoing performance of the Group.
232
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023 232
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023
APM
Adjusted profit before tax
Closest equivalent statutory measure
Loss before tax
Reconciling items to statutory measure
Adjusting items (note 6)
Definition and purpose
Profit before the impact of adjusting items and tax. As discussed above, adjusted profit measures are used to provide a useful and more
comparable measure of the ongoing performance of the Group. Adjusted measures are reconciled to statutory measures by removing adjusting
items, the nature of which are disclosed above and further detailed in note 6.
Adjusted profit before tax
Loss before tax
Adjusting items to loss before tax (note 6)
Adjusted profit before tax
APM
Adjusted profit after tax
Closest equivalent statutory measure
Profit/(loss) after tax
Reconciling items to statutory measure
Adjusting items (note 6)
Year ended
31 December
2023
£m
(8)
339
331
Restated(1)
Year ended
31 December
2022
£m
(328)
390
62
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 profit after tax
Profit/(loss) after tax
Adjusting items to profit/(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
Reconciling items to statutory measure
Constant currency foreign exchange rates
Year ended
31 December
2023
£m
1
262
263
Restated(1)
Year ended
31 December
2022
£m
(229)
287
58
Definition and purpose
The Group uses GBP based constant currency models to measure performance. These are calculated by applying 2023 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.
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023 233
233
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023FINANCIAL STATEMENTS
GLOSSARY CONTINUED
GLOSSARY CONTINUED
APM
Adjusted EBITDA for leverage covenant purposes
Closest equivalent statutory measure
Operating profit/(loss)(2)
Reconciling items to statutory measure
Adjusting items (note 6), depreciation of property, plant and equipment and amortisation of computer software and development costs,
imputed lease charge, share of non-controlling interests and other adjustments required for 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
2023
£m
Year ended(5)
31 December
2022
£m
390
142
(37)
–
20
515
480
406
(63)
(5)
(19)
799
APM
Adjusted tax rate
Closest equivalent statutory measure
Effective tax rate
Reconciling items to statutory measure
Adjusting items, adjusting tax items and the tax impact of adjusting items (note 6 and note 8)
Definition and purpose
The income tax charge for the Group excluding adjusting tax items, and the tax impact of adjusting items, divided by adjusted profit before tax.
This measure is a useful indicator of the ongoing tax rate for the Group.
Adjusted tax rate
Tax credit per Income Statement
Adjusted for:
Tax impact of adjusting items
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
2023
£m
Restated(1)
Year ended
31 December
2022
£m
9
(77)
–
(68)
331
20.5%
99
(105)
2
(4)
62
6.5%
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.
234 MELROSE INDUSTRIES PLC ANNUAL REPORT 2023
234
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023
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.
APM
Interest cover
Closest equivalent statutory measure
None
Reconciling items to statutory measure
Not applicable
Definition and purpose
Adjusted EBITDA calculated for covenant purposes (including adjusted EBITDA of businesses disposed) as a multiple of net interest payable on
bank loans and overdrafts.
This measure is used for bank covenant testing.
Balance Sheet Measures
APM
Working capital
Closest equivalent statutory measure
Inventories, trade and other receivables less trade and other payables
Reconciling items to statutory measure
Not applicable
Definition and purpose
Working capital comprises inventories, current 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
Reconciling items to statutory measure
Reconciliation of net debt (note 27)
Definition and purpose
Net debt comprises cash and cash equivalents and interest-bearing loans and borrowings but excludes non-cash acquisition fair value
adjustments.
Net debt is one measure that could be used to indicate the strength of the Group’s Balance Sheet position and is a useful measure of the
indebtedness of the Group.
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023 235
235
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023FINANCIAL STATEMENTS
GLOSSARY CONTINUED
GLOSSARY CONTINUED
APM
Bank covenant definition of net debt at average rates and leverage
Closest equivalent statutory measure
Cash and cash equivalents less interest-bearing loans and borrowings
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.
Bank covenant definition of net debt at average rates and leverage
Net debt at closing rates (note 27)
Impact of foreign exchange
Bank covenant definition of net debt at average rates
Leverage
APM
Proforma opening net debt and proforma opening leverage
Closest equivalent statutory measure
Cash and cash equivalents less interest-bearing loans and borrowings
31 December
2023
£m
572
12
584
1.1x
31 December(5)
2022
£m
1,139
(27)
1,112
1.4x
Reconciling items to statutory measure
Disposal of businesses net of cash and cash equivalents disposed and borrowings repaid, associated transaction costs, pension buy-in cost
paid and second interim dividend paid to shareholders
Definition and purpose
Proforma opening net debt represents net debt for the Group when excluding transactions related to the demerger of the GKN Automotive,
GKN Powder Metallurgy and the GKN Hydrogen businesses.
Proforma opening net debt is one measure that could be used to indicate the strength of the Group’s opening Balance Sheet position and is
a useful measure to compare against the ongoing indebtedness of the Group.
Proforma opening net debt and proforma opening leverage
Opening net debt (note 27)
Disposal of businesses, net of cash disposed (note 13)
Settlement receipt from loans held with demerged entities (note 13)
Reduction in net debt following the demerger of Dowlais
Cash flows from discontinued operations (note 27)
Finance costs on demerger settled net debt (note 6)
Net cash outflow from Dowlais businesses to date of demerger
Demerger related costs
Pension buy-in (note 24)
Debt refinancing costs
Demerger related costs and pension buy-in
Second interim dividend for the year ended 31 December 2022 (note 9)
Proforma opening net debt
Proforma opening adjusted EBITDA for leverage covenant purposes((66))
Proforma opening leverage
236 MELROSE INDUSTRIES PLC ANNUAL REPORT 2023
236
£m
(1,139)
(320)
1,205
885
(37)
(17)
(54)
(62)
(45)
(11)
(118)
(61)
(487)
266
1.8x
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023
Cash Flow Measures
APM
Adjusted operating cash flow (pre-capex)
Closest equivalent statutory measure
Net cash from operating activities
Reconciling items to statutory measure
Non-working capital items (note 27)
Definition and purpose
Adjusted operating cash flow (pre-capex) is calculated as net cash from operating activities before net cash from operating activities from
discontinued operations, restructuring costs paid and movements in provisions, defined benefit pension contributions paid, tax paid, interest paid
on loans and borrowings, interest paid on lease obligations, acquisition and disposal costs and the repayment of principal under lease obligations.
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 movements 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)
Year ended
31 December
2023
£m
Restated(1)
Year ended
31 December
2022
£m
29
204
(36)
137
67
17
79
5
65
(32)
331
(243)
37
23
8
76
6
10
(29)
92
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023 237
237
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023FINANCIAL STATEMENTS
GLOSSARY CONTINUED
GLOSSARY CONTINUED
APM
Free cash flow
Closest equivalent statutory measure
Net increase/decrease in cash and cash equivalents (net of bank overdrafts)
Reconciling items to statutory measure
Acquisition and disposal related cash flows, dividends paid to owners of the parent, transactions in own shares and movements on
borrowing facilities
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
2023
£m
Restated(1)
Year ended
31 December
2022
£m
(216)
(203)
1,371
(628)
11
81
93
320
(1,205)
–
(3)
–
37
65
–
17
45
(12)
598
(632)
–
77
504
(478)
–
3
–
4
(80)
10
109
–
–
(88)
Year ended
31 December
2023
£m
Restated(1)
Year ended
31 December
2022
£m
(12)
125
113
(88)
53
(35)
Free cash flow
Net decrease in cash and cash equivalents (net of bank overdrafts)
Debt related:
Repayment of borrowings
Drawings on borrowing facilities
Costs of raising debt finance
Equity related:
Dividends paid to owners of the parent
Purchase of own shares, including associated costs
Acquisition and disposal related:
Disposal of businesses, net of cash disposed
Settlement receipt from loans held with demerged entities
Equity accounted investments additions
Disposal of equity accounted investments
Acquisition of subsidiaries, net of cash acquired
Cash flows from/(used in) discontinued operations
Acquisition and disposal costs
Settlement of derivatives used in net investment hedging
Finance costs on demerger settled net debt
GKN UK pension plan buy-in
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.
APM
Adjusted free cash flow
Free cash flow
Restructuring costs paid
Adjusted free cash flow
238 MELROSE INDUSTRIES PLC ANNUAL REPORT 2023
238
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023
APM
Free cash flow pre-interest and tax and free cash flow pre-interest and tax margin
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 interest and tax cash flows excluding finance costs on demerger settled net debt
Definition and purpose
Free cash flow pre-interest and tax represents free cash flow adjusted for interest and tax and excluding finance costs on demerger settled net debt.
Free cash flow pre-interest and tax margin represents free cash flow adjusted for interest and tax and excluding finance costs on demerger
settled net debt divided by revenue.
Free cash flow pre-interest and tax
Free cash flow
Tax paid
Interest paid on loans and borrowings
Interest paid on lease obligations
Interest received
Finance costs on demerger settled net debt
Free cash flow pre-interest and tax
Free cash flow pre-interest and tax margin
APM
Capital expenditure (capex)
Closest equivalent statutory measure
None
Reconciling items to statutory measure
Not applicable
Year ended
31 December
2023
£m
Restated(1)
Year ended
31 December
2022
£m
(12)
17
79
5
(2)
(17)
70
(88)
8
76
6
(1)
–
1
2.1%
0.0%
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
Definition and purpose
Net capital expenditure divided by depreciation of owned property, plant and equipment and amortisation of computer software and
development costs.
APM
Dividend per share
Closest equivalent statutory measure
Dividend per share
Reconciling items to statutory measure
Not applicable
Definition and purpose
Amounts payable by way of dividends in terms of pence per share.
(1) Restated for discontinued operations (see note 1).
(2) Operating profit/(loss) is not defined within IFRS but is a widely accepted profit measure being profit/(loss) before finance costs, finance income and tax.
(3) Operating margin is not defined within IFRS but is a widely accepted profit measure being derived from operating profit/(loss)(2) divided by revenue.
(4) Included within other adjustments required for leverage covenant purposes in the year ended 31 December 2023 are unrealised annual savings from spend
incurred in the year on restructuring projects. In the year ended 31 December 2022 are dividends received from equity accounted investments and the removal
of adjusted operating profit of equity accounted investments.
(5) Year ended 31 December 2022 remains aligned to the original calculations supporting the Group’s bank debt compliance certificate and has not been restated
for discontinued operations.
(6) Proforma opening adjusted EBITDA for leverage covenant purposes comprises Aerospace adjusted operating profit, depreciation of property, plant and
equipment and amortisation of computer software and development costs, imputed lease charge and proforma corporate costs of £30 million.
(7) Excludes non-cash utilisation of loss-making contract provisions of £23 million (2022: £23 million).
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023 239
239
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023FINANCIAL STATEMENTS
NOTICE OF ANNUAL GENERAL MEETING
The Annual General Meeting of
Melrose Industries PLC (the “Company”)
will be held at 11.00 am on Thursday
2 May 2024 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 2 May 2024 for the purposes set out below.
Resolutions 1 to 15 (inclusive) will be proposed as ordinary resolutions
and resolutions 16 to 20 (inclusive) as special resolutions.
Ordinary resolutions
1.
To receive the Company’s audited financial statements for the
financial year ended 31 December 2023, 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 2023, as set out on pages 128 to 152 of the
Company’s 2023 Annual Report.
3.
To approve the 2024 Directors’ Remuneration Policy, as set out on
pages 145 to 152 of the Company’s 2023 Annual Report.
4. To approve a final dividend of 3.5 pence per ordinary share for the
year ended 31 December 2023.
5.
To approve the rules of the 2024 Melrose performance share plan
(the “PSP”), in the form produced to the AGM and initialled by the
Chairman for the purposes of identification (a summary of which is
set out in the Appendix) and to authorise the Board to do all such
acts and things necessary or desirable to establish and implement
the PSP, and to establish such further plans based on the PSP
or schedules to the PSP as the Board considers necessary or
desirable but which have been modified to take account of local
tax, exchange control or securities laws in overseas territories,
provided that any shares made available under such further
plans or schedules are treated as counting against any limits on
individual or overall participation in the PSP.
6.
To re‑elect Peter Dilnot as a Director of the Company.
7.
To elect Matthew Gregory 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 Heather Lawrence as a Director of the Company.
12. To elect Gillian Elcock as a Director of the Company.
13. To appoint PricewaterhouseCoopers LLP as auditor of the
Company to hold office from the conclusion of this meeting until
the conclusion of the next Annual General Meeting of the Company
at which accounts are laid.
14. To authorise the Audit Committee to determine the remuneration of
the auditor of the Company.
15. That, in accordance with section 551 of the Companies Act 2006
(the “Act”), the directors of the Company (the “Directors”) be and
are generally and unconditionally authorised to allot shares in the
Company, or to grant rights to subscribe for or to convert any
security into shares in the Company (“Rights”):
(A) up to an aggregate nominal amount of £100,320,336; and
(B) comprising equity securities (as defined in section 560 of the
Act) up to an aggregate nominal amount of £200,640,672
(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:
(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 2025, 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.
240
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023
Special resolutions
16. That, subject to the passing of resolution 15, the Directors be and
are generally empowered to allot equity securities (as defined
in section 560 of the Act) for cash pursuant to the authorities
granted by resolution 15 and/or to sell ordinary shares held by the
Company as treasury shares for cash, in each case as if section
561 of the Act did not apply to any such allotment or sale, provided
that this power shall be limited:
17. That, subject to the passing of resolution 15 and in addition to
any power granted under resolution 16, the Directors be and
are generally empowered to allot equity securities (as defined
in section 560 of the Act) for cash pursuant to the authorities
granted by resolution 15 and/or to sell ordinary shares held by the
Company as treasury shares for cash, in each case as if section
561 of the Act did not apply to any such allotment or sale, provided
that this power shall be:
(A) limited to the allotment of equity securities pursuant to the
authority granted by paragraph (A) of resolution 15 or sale
of treasury shares up to a nominal amount of £15,048,050
such authority to be used only for the purposes of financing
(or refinancing, if the authority is to be used within 12 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 2025, 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.
(A) to the allotment of equity securities in connection with an offer
of equity securities (but in the case of an allotment pursuant
to the authority granted under paragraph (B) of resolution 15,
such power shall be limited to the allotment of equity securities
in connection with a fully pre‑emptive offer):
(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;
(B) to the allotment (otherwise than in circumstances set out in
paragraph (A) of this resolution) of equity securities pursuant to
the authority granted by paragraph (A) of resolution 15 or sale
of treasury shares up to a nominal amount of £15,048,050 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 2025, 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.
241
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023ADDITIONAL INFORMATION
NOTICE OF ANNUAL GENERAL MEETING CONTINUED
18. That the Company be and is generally and unconditionally
authorised to make one or more market purchases (within the
meaning of section 693 of the Act) of ordinary shares in the capital
of the Company provided that:
(A) the maximum aggregate number of ordinary shares authorised
to be purchased is 197,373,991;
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.
(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;
By order of the Board
Warren Fernandez
Company Secretary
2 April 2024
Registered Office:
11th Floor The Colmore Building
20 Colmore Circus Queensway
Birmingham
West Midlands
B4 6AT
(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 2025;
(E) the Company may make a contract of purchase of ordinary
shares under this authority which would or might be executed
wholly or partly after the expiry of this authority, and may
make a purchase of ordinary shares in pursuance of any such
contract; and
(F) any ordinary shares purchased pursuant to this authority
may either be held as treasury shares or cancelled by the
Company, depending on which course of action is considered
by the Directors to be in the best interests of shareholders at
the time.
19. That a general meeting other than an Annual General Meeting may
be called on not less than 14 clear days’ notice.
20. That, subject to the confirmation of the High Court of Justice in
England and Wales (the “Court”), an amount of £2,271,261,766.04
standing to the credit of the Company’s share premium account
and the entire amount standing to the credit of the Company’s
capital redemption reserve as at 5:00 pm on the day immediately
preceding the day on which the Court makes an order confirming
the reduction of capital be cancelled and the nominal value of each
issued fully paid up ordinary share be reduced from 160/7 pence
each to £0.001 each.
242
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023
Explanatory notes to the proposed resolutions
Resolutions 1 to 15 (inclusive) are proposed as ordinary resolutions,
which means that for each of those resolutions to be passed, more
than half the votes cast must be cast in favour of the resolution.
Resolutions 16 to 20 (inclusive) are proposed as special resolutions,
which means that for each of those resolutions to be passed, at
least three‑quarters of the votes cast must be cast in favour of
the resolution.
Resolution 1 – Receipt of 2023 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 “2023 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 128 to 129 (inclusive) of the 2023 Annual
Report, summarises, for the year ended 31 December 2023, 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 130 to 145
(inclusive) of the 2023 Annual Report, provides details of the
remuneration paid to Directors in respect of the year ended
31 December 2023, 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 2023, 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 156 to 165 of the 2023
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 2024 Directors’ remuneration policy
The new Directors’ remuneration policy (the “2024 Directors’
Remuneration Policy”) is set out in full on pages 145 to 152 (inclusive)
of the 2023 Annual Report. The annual statement from the Chairman of
the Remuneration Committee, set out on pages 128 to 129 (inclusive)
of the 2023 Annual Report, explains in more detail the background and
rationale for the 2024 Directors’ Remuneration Policy.
As noted in the 2024 Directors’ Remuneration Policy, the 2024
Directors’ Remuneration Policy will take effect immediately after the
close of the AGM on 2 May 2024, 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 2024 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 2024 Directors’ Remuneration Policy (unless a payment has
been separately approved by a shareholder resolution).
If the 2024 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 2024 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 2027.
If the 2024 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.
Resolution 4 – Declaration of final dividend
The Board is recommending, and shareholders are being asked to
approve, the declaration of a final dividend of 3.5 pence per ordinary
share for the year ended 31 December 2023. The final dividend will,
subject to shareholder approval, be paid on 8 May 2024 to the holders
of ordinary shares whose names are recorded on the register of
members of the Company at the close of business on 2 April 2024.
Resolution 5 – Approval of 2024 Melrose performance share plan
The Company is seeking shareholder approval for the PSP, which is
proposed to succeed the 2020 Melrose Employee Share Plan which is
due to crystallise on 31 May 2024.
Information on the principal features of the PSP can be found in the
Appendix.
A copy of the PSP rules will be available for inspection at the
Company’s registered office, upon request, during usual 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 Annual General Meeting and will also be available for inspection
for 15 minutes before and during the Annual General Meeting. A copy
of the PSP rules will also be available for inspection on the national
storage mechanism from the date of this notice until the date of
the AGM.
243
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023ADDITIONAL INFORMATION NOTICE OF ANNUAL GENERAL MEETING CONTINUED
In accordance with the Articles:
•
•
Matthew Gregory, Chief Financial Officer, is standing for election
as a Director of the Company following his appointment to
the Board with effect from 7 March 2024. Matthew brings
strong management continuity and a deep understanding of
GKN Aerospace, having served as its Chief Financial Officer since
September 2022. Matthew has extensive experience in holding
chief financial officer roles at listed companies.
Gillian Elcock, Non‑executive Director, is standing for election
as a Director of the Company following her appointment to the
Board with effect from 21 June 2023. Gillian brings extensive
asset management and investment research experience, including
covering the aerospace and defence sector, as well as insight
gained from several non‑executive director roles.
Biographical details of each Director standing for re‑election or election
(as applicable) can be found on pages 102 to 103 (inclusive) of the
2023 Annual Report. All of the Non‑executive Directors standing
for re‑election or election (as applicable) are currently considered
independent under the Code.
Resolution 13 – Appointment of auditor
On the recommendation of the Audit Committee, the Board proposes
the appointment of PricewaterhouseCoopers LLP (“PwC”) as the
Company’s auditor for the financial year commencing 1 January 2024.
The appointment of the Company’s current auditor, Deloitte LLP, will
end following its report on the 2023 financial statements at the AGM to
be held on 2 May 2024. 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.
This resolution proposes the appointment of PwC until the conclusion
of the next AGM of the Company at which accounts are laid.
Details of the transition of auditor are set out on page 122 of the 2023
Annual Report.
Resolution 14 – Authority to agree auditor’s remuneration
This resolution seeks authority for the Audit Committee to determine
the level of the auditor’s remuneration.
Resolutions 6 to 12 (inclusive) – Re‑election and 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 each 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. Following further positive
engagement with key shareholders in 2023, a further and final
extension of his tenure for an additional two years was approved
in order to provide certainty and stability through the completion of
the demerger of Dowlais Group plc. Justin Dowley was considered
independent upon his appointment as Non‑executive Chairman.
Peter Dilnot, Chief Executive Officer, a position to which he was
appointed on 6 March 2024, 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 chief executive officer for GKN Aerospace most recently
since October 2023. 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.
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.
Heather Lawrence, Non‑executive Director, is standing for
re‑election due to her 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 Chair of the
Audit Committee.
244
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023 Resolution 17 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 £15,048,050 (representing a further 5% of the issued ordinary
share capital of the Company (excluding treasury shares) as at
27 March 2024, 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 12 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 12‑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.
Subject to Resolution 20 being duly passed, following the Court Order
(defined below) being registered with the Registrar of Companies in
England and Wales, the Board will only exercise the authorities and
powers described above and in paragraph (B) of Resolution 16 and
paragraph (A) of Resolution 17 up to an aggregate amount equal to
5% and 5%, respectively, of the Company’s share capital following the
Capital Reduction (defined below).
The Board acknowledges the provisions of the Pre‑Emption Group
Principles and confirms that it will follow the general principles set
out therein. Having taking into consideration shareholder feedback,
the Board has opted for a limit of 5% of the issued ordinary share
capital of the Company (excluding treasury shares) in resolutions 16
and 17, rather than the limit of 10% set out in the Pre‑Emption Group
Principles, in order to seek alignment with shareholder preferences,
balanced with the Board’s belief that the 5% limit provides sufficient
flexibility to the Company at this time. 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 2025. 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.
Resolution 15 – Authority to allot shares
This resolution seeks shareholder approval to grant the Directors the
authority to allot shares in the Company, or to grant rights to subscribe
for or convert any securities into shares in the Company (“Rights”),
pursuant to section 551 of the Act (the “Section 551 authority”). The
authority contained in paragraph (A) of the resolution will be limited to
an aggregate nominal amount of £100,320,336, being approximately
one‑third of the Company’s issued ordinary share capital (excluding
treasury shares) as at 27 March 2024 (being the latest practicable date
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 £200,640,672,
representing approximately two‑thirds of the Company’s issued
ordinary share capital (excluding treasury shares) as at 27 March 2024
(being the latest practicable date 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).
As at 27 March 2024, the Company held 34,770,906 ordinary shares in
treasury, representing approximately 2.64% of the Company’s issued
ordinary share capital (excluding treasury shares) as at such date.
Subject to Resolution 20 being duly passed, following the Court Order
(defined below) being registered with the Registrar of Companies
in England and Wales, the Board will only exercise the authorities
and powers described above and in paragraphs (A) and (B) of
Resolution 15 up to an aggregate amount equal to one‑third and
two‑thirds, respectively, of the Company’s share capital following the
Capital Reduction (defined below).
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 16 to 17 – 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 16 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 £15,048,050,
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 £15,048,050 is equivalent to 5% of the total
issued ordinary share capital of the Company (excluding treasury
shares) as at 27 March 2024, being the latest practicable date prior to
publication of this Notice.
245
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023ADDITIONAL INFORMATION NOTICE OF ANNUAL GENERAL MEETING CONTINUED
Resolution 20 – Reduction of Capital
Resolution 20 is a special resolution to cancel an amount equal to
£2,271,261,766.04 standing to the credit of the Company’s share
premium account and the entire amount standing to the credit of
the Company’s capital redemption reserve as at 5:00 pm on the day
immediately preceding the day on which the High Court of Justice in
England and Wales (the “Court”) makes an order (the “Court Order”)
confirming the reduction of capital and to reduce the nominal value
of each issued fully paid up ordinary share from 160/7 pence each
to £0.001 each (the “Capital Reduction”). The amount currently
standing to the credit of the Company’s capital redemption reserve is
£752,967,084.51. On Completion of the proposed Capital Reduction,
an amount of £3,331,786,020.029 (plus any amount allocated to the
Company’s capital redemption reserve between the date of this notice
and 5:00 pm on the day immediately preceding the day on which
the Court Order is made) will be allocated to a distributable reserve
account of the Company.
The Company is not permitted to pay any dividends unless it has
distributable reserves. The Capital Reduction is being proposed in
order to create distributable reserves to support the future payment by
the Company of dividends or other distributions to its shareholders.
The completion of the Capital Reduction will not affect the rights
attaching to the ordinary shares and will not result in any change to the
number of ordinary shares in issue.
Under the Act, a public company may reduce its share capital provided
that it obtains the approval of its shareholders by special resolution in a
general meeting and that the Court confirms the reduction.
If Resolution 20 is duly passed, it is the intention of the Company to
apply to the Court for confirmation of the Capital Reduction as soon
as reasonably practicable thereafter. The Capital Reduction will only
take effect if confirmed by the Court and upon the Court Order being
registered with the Registrar of Companies in England and Wales. It
is expected that, if confirmed by the Court, the Court Order will be
effective before the end of 2024.
Resolution 18 – Authority to purchase own shares
This resolution seeks shareholder approval to grant the Company the
authority to purchase its own shares pursuant to sections 693 and
701 of the Act.
This authority is limited to an aggregate maximum number of 197,373,991
ordinary shares, representing approximately 14.99% of the Company’s
issued ordinary share capital (excluding treasury shares) as at
27 March 2024 (being the latest practicable date prior to the publication
of this notice).
The approval sought at resolution 18 maintains the increase approved
by shareholders at the 2023 Annual General Meeting from the 10%
authority approved by shareholders at Annual General Meetings
prior to 2023 and is proposed to provide continued flexibility to the
Company 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 2025. The Directors intend
to exercise their authority to continue the share buyback programme
commenced by the Company at the beginning of October 2023.
Resolution 19 – Notice period for general meetings other
than AGMs
This resolution seeks shareholder approval to allow the Company to
continue to call general meetings (other than AGMs) on 14 clear days’
notice. In accordance with the Act, as amended by the Companies
(Shareholders’ Rights) Regulations 2009, the notice period required for
general meetings of the Company is 21 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.
246
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023 The Directors reserve the right (where necessary by application to
the Court) to abandon, discontinue or adjourn any application to the
Court for confirmation of the Capital Reduction if the Directors believe
that the terms required to obtain confirmation are unsatisfactory to
the Company or if, as the result of a material unforeseen event, the
Directors consider that to continue with the Capital Reduction would
be inappropriate or inadvisable.
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.
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 30 April 2024 (or, in the event
of an adjournment, on the date which is two days, excluding any
day which is not a working day, before the time of the adjourned
meeting). Changes to entries on the register of members after this
time shall be disregarded in determining the rights of any person to
attend or vote at the meeting.
5.
6.
7.
8.
As at 27 March 2024 (being the latest practicable date prior to the
publication of this notice), the Company’s issued ordinary share
capital consists of 1,316,704,415 ordinary shares of 160/7 pence
each (excluding treasury shares), carrying the right to one vote
each. Therefore, the total number of voting rights in the Company
on 27 March 2024 was 1,316,704,415.
CREST members who wish to appoint a proxy or proxies through
the CREST electronic proxy appointment service may do so by
using the procedures described in the CREST Manual (available
at www.euroclear.com). CREST Personal Members or other
CREST sponsored members, and those CREST members who
have appointed a service provider(s), should refer to their CREST
sponsor or voting service provider(s), who will be able to take the
appropriate action on their behalf.
In order for a proxy appointment or instruction made using the
CREST service to be valid, the appropriate CREST message (a
“CREST Proxy Instruction”) must be properly authenticated in
accordance with Euroclear UK & Ireland Limited’s specifications,
and must contain the information required for such instruction,
as described in the CREST Manual. The message, regardless
of whether it constitutes the appointment of a proxy or is an
amendment to the instruction given to a previously appointed
proxy, must, in order to be valid, be transmitted so as to be
received by the issuer’s agent (ID RA19) by 11.00 am (BST) on
30 April 2024. 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.
247
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023ADDITIONAL INFORMATION NOTICE OF ANNUAL GENERAL MEETING CONTINUED
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 30 April 2024 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.
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/investors/
shareholder‑meetings.
11. Any corporation which is a member can appoint one or more
16. You may not use an electronic address provided in either this
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.
notice or any related documents (including the form of proxy) to
communicate with the Company for any purposes other than those
expressly stated.
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.
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.
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;
(B) a copy of the terms of appointment of the Non‑executive
Directors of the Company; and
(C) a copy of the PSP rules.
18. You may register your vote online by visiting Equiniti’s website at
www.shareview.co.uk. In order to register your vote online, you
will need to create an online portfolio using your Shareholder
Reference Number which is set out on the enclosed form of proxy.
Once signed up and logged in simply click “View” on the “My
Investments” page and follow the on‑screen instructions. 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 30 April 2024.
248
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023
Appendix – Summary of the principal features of the
Melrose Performance Share Plan (the “PSP”)
Introduction
The Board believes it is important to incentivise, retain and motivate
employees of the appropriate calibre to achieve long‑term sustainable
returns for shareholders. Accordingly, it proposes to adopt the PSP.
This will succeed the 2020 Melrose Employee Share Plan which is due
to crystallise on 31 May 2024.
Performance conditions for Performance Awards will be set by the
Remuneration Committee, typically measuring performance over at
least three years. Performance conditions will relate to one or more
metrics aligned to the strategy of the business. The Remuneration
Committee may vary any performance condition following an event
provided it considers the varied condition to be fair and reasonable and
not materially less challenging than the original conditions would have
been but for that event.
Eligibility
All employees of the Company’s group are eligible for selection
to participate in the PSP at the discretion of the Remuneration
Committee. In practice, it is expected that the executive Directors and
other senior individuals will be granted Awards.
Irrespective of the extent to which any performance condition attached
to an Award has been satisfied, the Remuneration Committee may
adjust the level of vesting. Such discretion would only be used in
exceptional circumstances and may have regard to corporate and
personal performance.
Operation
Under the PSP, awards will be granted in the form of conditional share
awards or nil or nominal cost options, giving a conditional entitlement
to acquire a number of ordinary shares in the Company (“Shares”).
Awards may be granted within six weeks after the Plan is approved
by the Company’s shareholders, announcement of its results for any
period, commencement of employment or at other times in exceptional
circumstances.
Awards may not be granted more than 10 years after shareholder
approval of the PSP.
Awards may be Performance Awards (that normally vest after three
years with vesting subject to continued employment and the meeting of
performance conditions), Restricted Stock Awards (that normally vest
after three years subject only to continued employment) or Buy‑out
Awards (to compensate for forfeited awards from previous employment
and which will normally vest at the same time as such awards subject
to continued employment and, potentially, subject to the meeting of
performance conditions).
The Remuneration Committee may also (i) grant cash‑based Awards of
an equivalent value to share‑based Awards; and/or (ii) fully or partially
satisfy share‑based Awards in cash (expected only to be in exceptional
circumstances or to fund tax liabilities).
Awards will vest on the vesting date set by the Remuneration
Committee, which (except for Buy‑out Awards) will normally be the
third anniversary of the grant date.
Awards structured as options will normally be exercisable until 10 years
from grant.
Plan Limits
In any 10‑calendar years (but excluding awards granted under earlier
plans), the Company may not issue (or grant rights to issue) Shares
representing more than 10 per cent of the issued ordinary share capital
of the Company for awards under the PSP and any other employee
share plan adopted by the Company (and a 5% limit will apply to
awards granted under executive or discretionary share plans). Awards
that are relinquished or lapse will be disregarded for these purposes.
Shares transferred out of treasury will count towards these limits unless
the Remuneration Committee determines that counting them is no
longer in accordance with market practice.
Individual Limits
An employee may not receive Performance Awards for any year over
Shares with a value exceeding 300% of base salary or, if greater,
the maximum permitted by the Company’s prevailing directors’
remuneration policy approved by shareholders. There is no individual
limit for Restricted Stock Awards or Buy‑out Awards.
249
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023ADDITIONAL INFORMATION NOTICE OF ANNUAL GENERAL MEETING CONTINUED
Holding period
Shares acquired pursuant to Awards granted to executive Directors
(and to other individuals at Remuneration Committee discretion),
excluding any sold to fund tax obligations, must normally be retained
for two years from vesting.
Adjustment of Awards
If there is a variation of the share capital of the Company or if there is a
material corporate event which affects the market price of Shares to a
material extent, the Remuneration Committee may adjust the number
of shares subject to an Award (and any option price).
Leavers
If a participant ceases to be employed by the Company’s group before
the normal vesting date, the treatment of their Awards will depend on
their classification as a ‘Good Leaver’ or a ‘Bad Leaver’.
‘Good Leaver’ treatment will apply if a participant ceases employment
due to: death; ill‑health, injury; disability; redundancy; retirement with
the agreement of the Company; transfer of a company or business
out of the Company’s group; or otherwise at the discretion of the
Remuneration Committee. A Participant will be a ‘Bad Leaver’ if they
otherwise cease group employment.
Good Leavers’ Awards shall normally continue and vest on the original
vesting date but will normally be reduced pro‑rata to the elapsed
portion of the normal vesting period. The Remuneration Committee
does, however, have discretion to accelerate vesting and/or partly or
fully waive any pro‑rating. Awards structured as options will normally be
exercisable for 12 months from vesting.
Vesting of Awards may also be accelerated in certain circumstances in
connection with transfer of employment outside the UK.
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 participant; (3)
events or behaviour of a participant 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 participant 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 Shares is materially reduced, provided that the Board
determines, following an appropriate review of accountability, that the
participant should be held responsible (in whole or in part) for that
insolvency or corporate failure prior to the relevant vesting date, the
Awards held by the participant 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 vesting of the Awards was based; (3) gross misconduct
by the relevant participant; (4) events or behaviour of a participant 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
participant 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 Shares is
materially reduced, provided that the Board determines, following an
appropriate review of accountability, that the participant should be held
responsible (in whole or in part) for that insolvency or corporate failure,
following the relevant vesting date but prior to the date falling three
years after the relevant vesting date, the participant may be required
to transfer (for nil consideration) the number of Shares arising from the
vesting of the relevant Award, less the number of Shares sold to fund
the tax liability arising from the vesting of the relevant Award and/or to
pay to the Company the amount of any cash received on or following
the vesting of the relevant Award less the amount of any tax paid in
relation to that cash. Amounts due under Clawback provisions may
also be recovered by lapsing Awards or withholding from amounts
otherwise due to the participant from group companies.
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MELROSE INDUSTRIES PLC ANNUAL REPORT 2023 Corporate Events
If there is a change of control of the Company, the Remuneration
Committee may determine that Awards may vest. If the change
of control occurs during the vesting period, the vested number of
Shares will normally be determined by the Remuneration Committee
pro‑rata to the elapsed proportion of the normal vesting period (with
Remuneration Committee having discretion to partly or fully waive
any pro‑rating). Where relevant, the extent of vesting will also reflect
the extent to which a performance condition has (or is expected to
be) satisfied.
The Remuneration Committee may also similarly accelerate the vesting
of Awards on the occurrence of certain material corporate events.
Rights attaching to Ordinary Shares
Any Shares allotted when an Award vests or is exercised will rank
equally with Shares then in issue (except for rights arising by reference
to a record date prior to their allotment).
Dividend Equivalent
The Remuneration Committee may decide that participants will
receive a payment (in cash or Shares) equivalent to the dividends
that would have been payable on vested Shares between grant and
vesting (or, in the case of an option where there is a holding period,
the earlier of the date of exercise of the option and the expiry of the
holding period) and this may assume the reinvestment of dividends.
Payment shall be at the same time as delivery of the related vested
Shares (or cash payment).
Alterations
The Board or the Remuneration Committee may alter the PSP
provided that shareholder approval must be obtained for any alteration
to the advantage of eligible employees or participants or which relates
to the provisions relating to eligibility, individual or overall limits, the
basis for determining the entitlement to, and the terms of, awards, the
adjustments that may be made in the event of any variation to the share
capital of the Company and/or the rule relating to such prior approval
(except for minor alterations to benefit the administration of the PSP,
to take account of the provisions of any legislation, or to obtain or
maintain favourable tax, exchange control or regulatory treatment for
any participant or member of the Company’s group).
Non‑transferable and non‑pensionable
Awards are not transferable (except on death).
Benefits received under the PSP are not pensionable.
Overseas plans
The Board may establish further plans based on the PSP for overseas
territories to take account of local tax, exchange control or securities
laws. Shares made available under such plans will count against the
limits on individual and overall participation under the PSP.
251
MELROSE INDUSTRIES PLC ANNUAL REPORT 2023ADDITIONAL INFORMATION COMPANY AND SHAREHOLDER INFORMATION
As at 31 December 2023, there were 15,783 holders of ordinary shares of 160/7 pence each in the Company. An analysis of these shareholdings
as at 31 December 2023 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
Ex‑dividend date for final dividend
Record date for final dividend
Annual General Meeting
Payment date of final dividend
Announcement of interim results
Intended payment of interim dividend
Expected preliminary announcement of 2024 results
Total number of holdings
Percentage of holders
Total number of shares Percentage issued capital
14,403
843
322
215
15,783
14,542
1,241
15,783
91.26%
5.34%
2.04%
1.36%
100.00%
92.14%
7.86%
100.00%
9,510,018
11,854,303
60,435,467
1,269,675,533
1,351,475,321
14,161,319
1,337,314,002
1,351,475,321
0.70%
0.88%
4.47%
93.95%
100.00%
1.05%
98.95%
100.00%
28 March 2024
2 April 2024
2 May 2024
8 May 2024
1 August 2024
September 2024
March 2025
Registrar
Equiniti
Aspect House
Spencer Road
Lancing
West Sussex BN99 6DA
If you require any help or need
to contact Equiniti please visit
www.shareview.co.uk.
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
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
ING Bank N.V., 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
J.P. Morgan Chase Bank N.A.,
London Branch
MUFG Bank, Ltd.
National Westminster Bank plc
Royal Bank of Canada
Skandinaviska Enskilda Banken
AB (publ)
UniCredit Bank AG
Wells Fargo Bank, N.A.,
London Branch
A range of shareholder information is available at Equiniti’s online portfolio service www.shareview.co.uk, where you can register for a Shareview
Portfolio to access information about your holding and undertake a number of activities, including appointing a proxy, changing a dividend
mandate and updating your address. To register, you will need your 11‑digit Shareholder Reference Number (“SRN”), which can be found on your
proxy form or dividend voucher.
Gifting your shares
If you have a small number of shares and the dealing costs or minimum fee make it uneconomical to sell them, you may like to donate them to
benefit charities through ShareGift, a registered charity. Further information is available on the ShareGift website at www.sharegift.org or call
+44 (0)20 7930 3737.
Share fraud warning
Many companies have become aware that their shareholders have received unsolicited telephone calls or correspondence concerning
investment matters. Fraudsters use persuasive and high‑pressure tactics to lure investors into scams. They may offer to sell shares that turn
out to be worthless or non‑existent, or to buy shares at an inflated price in return for an upfront payment. For more detailed information on this
kind of activity or to report a scam, please call the Financial Conduct Authority’s Consumer Helpline on +44 (0)800 111 6768 or visit
www.fca.org.uk/consumers/scams.
(1) Based on the total number of ordinary shares in issue as at 31 December 2023, inclusive of treasury shares.
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Melrose Industries PLC
Registered Office
11th Floor, The Colmore Building
20 Colmore Circus Queensway
Birmingham
West Midlands
B4 6AT
Tel: +44 (0) 121 296 2800
Registered Number: 09800044
Head Office
Stratton House
5 Stratton Street
London
W1J 8LA
Tel: +44 (0) 20 7647 4500
www.melroseplc.net
London Stock Exchange
Code: MRO
SEDOL: BNGDN82
LEI: 213800RGNXXZY2M7TR85