Company Announcements

2018 Annual Report and Notice of AGM

Source: RNS
RNS Number : 2731V
Melrose Industries PLC
05 April 2019



The 2018 Annual Report and Notice of Annual General Meeting

Melrose Industries PLC (the "Company") announces that its Annual Report for the year ended 31 December 2018, which contains the Notice of Annual General Meeting (the "AGM") and Form of Proxy for the AGM have been sent to shareholders. The Annual Report and Notice are also available to view or download from the Company's website at

The Company's AGM will be held at 11.00 a.m. on 9 May 2019 at Barber-Surgeons' Hall, Monkwell Square, Wood Street, London EC2Y 5BL.

The Company's preliminary results announcement on 7 March 2019 included, in addition to the preliminary financial results, the text of the Chairman's statement, Chief Executive's review and Finance Director's review, in each case as contained in the Annual Report. The appendix to this announcement sets out the required disclosures with regard to the Directors' responsibility statement, the principal risks and uncertainties and related party transactions, in each case as contained in the Annual Report. Together, this information is provided in accordance with Disclosure & Transparency Rule 6.3.5(2). This information is not a substitute for reading the full Annual Report and Accounts for the year ended 31 December 2018.

The Company confirms that, in compliance with Listing Rule 9.6.1, an electronic copy of each of the Company's Annual Report for the year ended 31 December 2018, Notice of AGM and Form of Proxy for the AGM have been submitted to the National Storage Mechanism, appointed by the Financial Conduct Authority, and will be available shortly for inspection at


Montfort Communications:

Nick Miles, Charlotte McMullen

+44 (0) 20 3514 0897

+44 (0) 7973 130 669 /+44 (0) 7921 881 800




Directors' Responsibility Statement

We confirm that to the best of our knowledge:

·          the financial statements, prepared in accordance with the relevant financial reporting framework, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole;

·          the Strategic Report includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face; and

·          the Annual Report and financial statements, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the Company's performance, business model and strategy.

Principal Risks and Uncertainties

This section outlines the principal risks and uncertainties that may affect the Group and highlights the mitigating actions that are being taken. This section is not intended to be an exhaustive list of all the risks and uncertainties that may arise and nor is the order of the content intended to be any indication of priority.

A risk management and internal controls framework is in place within the Group and has been reviewed and adapted following the acquisition of GKN to reflect the risk profile of the newly enlarged Group and to continue to ensure that such risks and uncertainties can be identified and, where possible, managed suitably. Each Group business unit maintains a risk register which is reviewed regularly by Melrose senior management and by the Melrose Board.


Key risk

Description and impact



Risk trend

Trend commentary

Strategic priorities

Strategic risk

Acquisition of new businesses and improvement strategies


The success of the Group's acquisition strategy depends on identifying available and suitable targets, obtaining any consents or authorisations required to carry out an acquisition and procuring the necessary financing, be this from equity, debt or a combination of the two. In making acquisitions, there is a risk of unforeseen liabilities being later discovered which were not uncovered or known at the time of the due diligence process, particularly in the context of limited access in public bids. Further, as per the Group's strategy to buy and improve good but underperforming manufacturing businesses, once an acquisition is completed, there are risks that the Group will not succeed in driving strategic operational improvements to achieve the expected post-acquisition trading results or value which were originally anticipated, that the acquired products and technologies may not be successful or that the business may require significantly greater resources and investment than anticipated. If anticipated benefits are not realised or trading by acquired businesses falls below expectations, it may be necessary to impair the carrying value of these assets. The Group's return on shareholder investment may fall if acquisition hurdle rates are not met. The Group's financial performance may suffer from goodwill or other acquisition-related impairment charges, or from the identification of additional liabilities not known at the time of the acquisition.

Structured and appropriate due diligence undertaken on potential new targets where permitted and practicable.


Focus on acquisition targets that have strong headline fundamentals, high-quality products, leading market share but which are underperforming their potential and ability to generate sustainable cash flows and profit growth.


Hands-on role taken by executive Directors and other senior employees of the Group


Development of strategic plans, restructuring opportunities, capital expenditure, procurement and working capital management.

Proper incentivisation of operational management teams to align with Melrose strategy.


Executive management

Having acquired GKN this year, the Group is focused principally on improvement but is considering a number of bolt-on acquisitions, some of which it completed in the year, that would materially improve the businesses owned by the Group.




Timing of disposals

In line with our strategy and depending where the Group is within the "Buy, Improve, Sell" cycle, the expected timing of any disposal of businesses is considered as a principal risk which could have a material impact on the Group strategy. Further, due to the Group's global operations, there may be a significant impact on the timings of disposals due to political and macroeconomic factors. Depending on the timings of disposals and nature of businesses' operations there may be long-term liabilities which could be retained by the Group following a disposal. Insufficient allowance for such retained liabilities may affect the Group's financial position.

Directors are experienced in judging and regularly reviewing the appropriate time in a business cycle for a disposal to realise maximum value for shareholders.


Each disposal is assessed on its merits, with a key focus on a clean disposal.


Melrose is not bound by a set investment or divestment period, enabling it to choose the opportune time.


Executive management

Although global M&A markets have been experiencing some uncertainty there remain opportunities for value realisation. Management will remain disciplined and there is no obligation to sell before it is appropriate to do so.




Operational risks

Economic and Political

The Group operates, through manufacturing and/or sales facilities, in numerous countries and is affected by global economic conditions. Businesses are also affected by government spending priorities and the willingness of governments to commit substantial resources. Current global economic and financial market conditions, including headwinds in the automotive sector, any fluctuation in commodity prices, the potential for a significant and prolonged global recession and any uncertainty in the political environment may materially and adversely affect the Group's operational performance, financial condition and could have significant impact on timing of acquisitions and disposals.

A recession may also materially affect customers, suppliers and other parties with which the Group does business. Adverse economic and financial market conditions may cause customers to terminate existing orders, to reduce their purchases from the Group, or to be unable to meet their obligations to pay outstanding debts to the Group. These market conditions may also cause our suppliers to be unable to meet their commitments to the Group or to change the credit terms they extend to the Group's businesses.

Whilst it is anticipated that the UK will leave the EU in 2019, there continues to be some uncertainty in the UK regarding the nature of Brexit and what this will mean for business and the UK economy. Whilst Brexit is not isolated as a principal risk to the Group as a whole, it does present potential risks that the business units continue to monitor and assess closely relating to potential changes to the cross-border trade and regulatory environment. The Board continues to assess and review mitigation plans.

Prior to the GKN acquisition, the majority of the Group's revenue was generated in North America, which this year has experienced challenges such as increasing tariffs from the US/China trade war. Whilst the impact from Brexit is expected to be minimal in respect of North America operations, since acquiring GKN a larger proportion of the Group's revenue is now generated from the UK and European-based GKN Aerospace and GKN Automotive divisions. Therefore, the GKN Automotive and Aerospace divisions continue to assess the potential short-to medium-term impact of changes to international trading relationships, border controls, supply chain friction and customs tariffs following a 'No Deal' Brexit and if the UK reverts to WTO rules. However, the Group's geographically balanced manufacturing footprint is expected to mitigate negative impacts which may arise from such changes on the Group as a whole.

Regular monitoring of order books, cash generation and other leading indicators, to ensure the Group and each of its businesses can respond quickly to any adverse trading conditions. This includes the identification of cost reduction and efficiency measures.

Finance for acquisitions is readily available to the Group from banking syndicates. This has proven to be available to the Group even during periods of economic downturn, for example during the global financial crisis in 2008.


Short-term inventory buffers are being planned to minimise the initial impact of a 'No Deal' Brexit on import costs and tariffs and border disruption.


Sales from the EU to the UK within the GKN Automotive and GKN Aerospace divisions are frequently on ex works terms and therefore a cost to customers. This continues to be reviewed in light of the various potential forms of UK exit from the EU being considered by the UK Government.


Strong customer relationships built on long-term partnerships often with plants in close proximity, technical excellence and quality. Planning for potential discussions in respect of increased tariff costs that materialise from a 'No Deal' Brexit.


Applications for third country status for two UK GKN Aerospace sites holding production organisation approvals or maintenance organisation approvals have been submitted.


Actions underway to arrange relevant WTO tariff administrative requirements.


The Group remains agile, diversified and well positioned to deal with any short-term uncertainty in the UK.


Executive management

There continues to be a degree of geopolitical uncertainty into 2019. However, the Board notes that economic uncertainty can depress business valuations and this may increase the number of potential acquisition opportunities for Melrose.

The Group's senior management are actively engaging with the executive teams of each division to track the potential impacts of Brexit, engage actively with those who are working on the impact assessments and mitigation actions, and report the material findings to the Board.





The Group operates in competitive markets throughout the world and is diversified across a variety of industries and production and sales geographies. This provides a degree of Group-level impact mitigation from the potential commercial challenges and market disruptions that face each of the divisions.

Each division is exposed to particular commercial and market risks, which are primarily accentuated where customer/ competitor concentration is high within their respective market segments.

Melrose operates a decentralised control and management structure which empowers divisional management teams to take full responsibility for planning, mitigating, navigating and responding to the specific commercial risks and challenges facing their respective businesses. Melrose senior management monitor the aggregated impact of such risks and provides active support to the divisional management teams in fulfilling their responsibilities.

Common commercial risk areas that potentially affect a large proportion of the Melrose businesses include those related to production quality assurance, health and safety performance, customer concentration and uncertainties related to future customer demand, the impact of increased competitive pressures on the maintenance/improvement of market share, potential disruptions to supply chains and increases to the price of raw materials, technological innovation and market disruption, and the performance and management of programme partners.

The Group continued to actively invest in research and development activities in 2018 to augment its platforms for future product expansion, quality improvements, customer alignment and achieving further production efficiencies. Details about the Group's research and development activities are provided on page 76 of the Annual Report.


Health and safety, awareness initiatives and performance enhancements continued to be implemented in alignment with regulation, market practice and site-based risk assessments and requirements. Further details are provided on pages 66 and 67 of the Annual Report.

Executive management


Melrose senior management engage actively with the divisional executive teams to track, monitor and support strategic planning activities and impact mitigation assessments in respect of ongoing commercial risks. Particular focus is placed on certain GKN Aerospace and GKN Automotive market segments where customer and/or competitor concentration is high and heavier reliance is placed on supply chain efficiency and programme partner management. With support from the Melrose senior management, the divisional Chief Executives report material updates directly to the Group's executive Directors.



Loss of key management and capabilities

The success of the Group is built upon strong management teams. As a result, the loss of key personnel could have a significant impact on performance, at least for a time. The loss of key personnel or the failure to plan adequately for succession or develop new talent may impact the reputation of the Group or lead to a disruption in the leadership of the business. Competition for personnel is intense and the Group may not be successful in attracting or retaining qualified personnel, particularly engineering professionals.

Succession planning within the Group is coordinated via the Nomination Committee in conjunction with the Board and includes all Directors and senior employees. In line with the Group's decentralised structure, each divisional CEO, in consultation with the Chief Executive, is responsible for the appointment of their respective executive team members, with disclosure to the Nomination Committee.


The Company recognises that, as with most businesses, particularly those operating within a technical field, it is dependent on Directors and employees with particular managerial, engineering or technical skills. Appropriate remuneration packages and long-term incentive arrangements are offered in an effort to attract and retain such individuals.

Executive management

Succession planning remains a core focus for the Nomination Committee and the Board. Succession planning of executive Directors and senior management, together with visibility of potential successors within the Group, has been selected as an area for targeted management focus during 2019.




Compliance and ethical risks

Legal, regulatory and environmental

There is a risk that the Group may not always be in complete compliance with laws, regulations or permits, for example concerning environmental requirements. The Group could be held responsible for liabilities and consequences arising from past or future environmental damage, including potentially significant remedial costs. There can also be no assurance that any provisions for expected environmental liabilities and remediation costs will adequately cover these liabilities or costs.

The Group operates in highly regulated sectors, which has been accentuated by the GKN acquisition. In addition, new legislation, regulations or certification requirements may require additional expense, restrict commercial flexibility and business strategies or introduce additional liabilities for the Group or Directors. For example, the Group's operations are subject to anti-bribery and anti-corruption, anti-money laundering, competition, anti-trust and trade compliance laws and regulations. Failure to comply with certain regulations may result in significant financial penalties, debarment from government contracts and/or reputational damage and impact our business strategy.

Regular monitoring of legal and regulatory matters at both a Group and business unit level. Consultation with external advisers where necessary.


A robust control framework is in place, underpinned by comprehensive corporate governance and compliance procedures at both a Group and business unit level.


Where possible and practicable, due diligence processes during the acquisition stage seek to identify legal, regulatory and environmental risks. At the business unit level, controls are in place to prevent such risks from crystallising.


Any environmental risks that crystallise are subject to mitigation by specialist consultants engaged for this purpose. External consultants assist the Group in complying with new and emerging environmental regulations.


Insurance cover mitigates certain levels of risk.


Executive management

The Group undertakes annual reviews to ensure it has a robust legal and compliance framework and considers the risk to be consistent with prior years.



Information security and cyber threats

Information security and cyber threats are an increasing priority across all industries and remain a key UK government agenda item.

Like many businesses, Melrose recognises that the Group may have a potential exposure in this area. Potential exposure to such risks has increased in the year due to the scale, complexity and public-facing nature of the acquisition of GKN. In addition, Melrose recognises that the inherent security threat is considered highest in GKN Aerospace where data is held in relation to civil aerospace technology and controlled military contracts.

Management continues to work with its business leaders and external security consultants to better understand the Group's increased exposure to cyber security risk and to ensure appropriate mitigations are in place for the enlarged Group.


Melrose has deployed its information security strategy and risk-based governance framework to the acquired GKN group within the year to mitigate the Group's exposure to cyber risk, which follows the UK government's recommended steps on cyber security. This strategy has been successfully implemented across the whole Group with significant progress made during the year in both our GKN and existing businesses.


The progress of each business is measured against the information security strategy and is monitored on a quarterly basis.


Executive management

Information security and cyber threats are an increasing priority across all industries. Cyber security breaches of the Group's IT systems could result in the misappropriation of confidential information belonging to it or its customers, suppliers or employees. In response to the increased sophistication of information security and cyber threats, the Group has worked, and continues to work, with external security consultants to monitor, improve and refine its Group-wide strategy to aid the prevention, identification and mitigation of any threats.



Financial risks

Foreign exchange

Due to the global nature of operations and volatility in the foreign exchange market, exchange rate fluctuations have and could continue to have a material impact on the reported results of the Group.

The Group is exposed to three types of currency risk: transaction risk, translation risk and risk that when a business that is predominantly based in a foreign currency is sold, it is sold in that foreign currency. The Group's reported results will fluctuate as average exchange rates change. The Group's reported net assets will fluctuate as the year-end exchange rate changes.

The Group policy is to protect against the majority of foreign exchange risk which affects cash, by hedging such risks with financial instruments.


Protection against specific transaction risks is taken by the Board on a case-by-case basis.

Executive management

Group results are reported in Sterling but a large proportion of the revenues are denominated in currencies other than Sterling, primarily US Dollar and Euro. Following the GKN acquisition, the Group has exposure on both a transactional and translational basis to more currencies. Sensitivity to the key currency pairs is shown in the Finance Director's review on pages 47 and 48 of the Annual Report.





The defined benefit pension schemes acquired with GKN were proportionately less well funded and higher profile than those of the 2017 Group.

Any shortfall in the Group's defined benefit pension schemes may require additional funding. As at 31 December 2018, the Group's pension schemes had an aggregate deficit, on an accounting basis, of £1,413 million. Changes in discount rates, inflation, asset values or mortality assumptions could lead to a materially higher deficit. For example, the cost of a buyout on a discontinued basis uses more conservative assumptions and is likely to be significantly higher than the accounting deficit.

Alternatively, if the plans are managed on an ongoing basis, there is a risk that the plans' assets, such as investments in equity and debt securities, will not be sufficient to cover the value of the retirement benefits to be provided under the plans. The implications of a higher pension deficit include a direct impact on valuation, implied credit rating and potential additional funding requirements at subsequent triennial reviews. In the event of a major disposal that generates significant cash proceeds which are returned to the shareholders, the Group may be required to make additional cash payments to the plans or provide additional security.

The Group's key funded pension plans, including the GKN plans, are closed to new entrants and future service accrual. Long-term funding arrangements are agreed with the Trustees and reviewed following completion of actuarial valuations.


Active engagement with Trustees on pension plan asset allocations and strategies.

Executive management

Although the risks are well understood and funding plans for the GKN Schemes have already been agreed with Scheme Trustees, the size of the gross liabilities as a proportion of the Group's net assets has increased significantly.





The ability to raise debt or to refinance existing borrowings in the bank or capital markets is dependent on market conditions and the proper functioning of financial markets. As set out in more detail in the Finance Director's review on pages 46 to 47 of the Annual Report, the Group has term loans of US$960m and £100m and revolving credit facilities comprising US$2 billion, €0.5 billion and £1.1 billion.

In addition, the GKN net debt at acquisition included capital market borrowings across three unsecured bonds which in total amount to £1.1 billion. These bonds remain outstanding as at 31 December 2018 and further detail is provided in the Finance Director's review on pages 46 to 47 of the Annual Report.

Furthermore, in line with the Group's strategy, investment is made in the businesses (capital expenditure in excess of depreciation) and there is a requirement to assess liquidity and headroom when new businesses are acquired. In addition, the Group may be unable to refinance its debt when it falls due.

To ensure it has comprehensive and timely visibility of the liquidity position, the Group conducts monthly reviews of its cash forecast, which are in turn revised quarterly.


The Group operates cash management mechanisms, including cash pooling across the Group and maintenance of revolving credit facilities to mitigate the risk of any liquidity issues.


The Group operates a conservative level of headroom across its financing covenants which is designed to avoid the need for any unplanned refinancing.

Executive management

The Group is satisfied that it has adequate resources  available to meet its liabilities.





Related Party Transactions

Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation.

In the ordinary course of business sales and purchases of goods take place between subsidiaries and equity accounted investment companies priced on an arm's length basis. Sales by subsidiaries to equity accounted investments in the year ended 31 December 2018 totalled £28 million (2017: £nil). Purchases by subsidiaries from equity accounted investments in the year ended 31 December 2018 totalled £14 million (2017: £nil). At 31 December 2018, amounts receivable from equity accounted investments totalled £6 million (31 December 2017: £nil) and amounts payable to equity accounted investments totalled £2 million (31 December 2017: £nil).

Sales to and purchases from Group companies are priced on an arm's length basis and generally are settled on 30-day terms.

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".


Year ended
31 December


Year ended
31 December


Short term employee benefits...................................



Share-based payments........







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