Company Announcements

Annual Financial Report

Source: RNS
RNS Number : 1760U
Melrose Industries PLC
31 March 2021

The 2020 Annual Report and Notice of Annual General Meeting

Melrose Industries PLC (the "Company") announces that its Annual Report and financial statements for the year ended 31 December 2020 (the "Annual Report"), Notice of Annual General Meeting (the "AGM"), and Form of Proxy for the AGM have each been sent to or otherwise made available to shareholders and are available to view or download from the Company's website at

The Company's AGM will be held at 11.00 a.m. on 6 May 2021 at Leconfield House, Curzon Street, London W1J 5JA.


The Company's preliminary results announcement on 4 March 2021 included, in addition to the preliminary financial results, the text of the Chairman's statement, Chief Executive's review (including the Divisional 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 for the year ended 31 December 2020.

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 2020, 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, +44 (0) 20 3514 0897

Charlotte McMullen, +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, nor is the order of the content intended to be any indication of priority.


A risk management and internal controls framework is in place within the Group, which is continually reviewed and adapted where necessary to reflect the risk profile of the Group and to continue to ensure that such risks and uncertainties can be identified and, where possible, managed suitably. Each Group business unit maintains a risk register which is aggregated into an interactive data-driven dashboard reporting tool, to facilitate review by the Melrose senior management team, the Audit Committee and the Board.


Key risk

Description and impact



Risk trend

Trend commentary

Strategic priorities

Strategic risks

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, and 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



Following the acquisition of GKN in 2018, the Group remains focused

principally on improvement. The impact of COVID-19 has interrupted the timing of some improvement plans, but these are continuing at pace. Although no large acquisitions were made in 2020, the Group

remains open to potential new opportunities.



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 and performance. Further, due to the Group's global operations, there may be a significant impact on the timings of disposals due to political and macro-economic factors.


Depending on the timings of disposals and the nature of the businesses' operations, there may be long-term liabilities which could be retained by the Group following a disposal. Insufficient allowance for

such retained liabilities may affect the Group's financial position.

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.

Executive management


Although global M&A markets continue to experience uncertainty, there remain opportunities for value realisation, and a formal sale process has recently been commenced for the Nortek Air Management division.

The process remains highly uncertain, but the division's outstanding recent performance will translate into a good outcome for the businesses and our shareholders. Some non-core businesses were sold or placed under strategic review during 2020. However,

management continues to 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 actions and the willingness of governments to commit substantial resources. Current global economic and financial market conditions have recently been characterised by high levels of volatility and uncertainty. There has been widespread disruption to production and trading environments caused by the COVID-19 pandemic, in particular a sharp market decline in the aerospace sector due to global travel restrictions. Fluctuation in commodity prices, the potential for a significant and prolonged global downturn and uncertainty in the political environment, may materially and adversely affect the Group's operational performance and financial condition, and could have a significant impact on the timing of acquisitions and disposals. These factors may also materially affect customers, suppliers and other parties with which the Group does business. Adverse economic and financial market conditions may cause customers to terminate existing orders, to reduce their purchases from the Group, or to be unable to meet their obligations to pay outstanding debts to the Group. These market conditions may also cause our suppliers to be unable to meet their commitments to the Group or to change the credit terms they extend to the Group's businesses. Since the UK left the EU on 31 January 2020, uncertainty has continued in the UK regarding the nature and impact of the UK's future trading relationship with the EU and other international trading partners with which the UK intends to establish new terms on which to trade, and what this will mean for business and the UK economy. The impact of the COVID-19 pandemic is a significant risk to the global economy. Each of the Group's businesses and their respective production and market geographies are impacted by the COVID-19 pandemic to various extents, with the most common impacts across the Group during 2020 being the temporary reduction of manufacturing capacity and reduced requirements due to lockdown measures and international travel restrictions. The Board and the Melrose senior management team continue to regularly monitor the impact of the pandemic on the Group with particular focus on the potential for staff shortages, production delays and supply chain disruption. A significant amount of the Group's revenue is generated from operations located in North America, which during 2020 continued to experience challenging tariffs relating to the US/China trade war and uncertainty related to the US presidential election. The US has also required close monitoring related to the expected short to medium-term impact of potential changes to international trading relationships following the conclusion of a definitive future trade deal between the UK and the EU. The Group's exposure to such US trade risk factors is inherently mitigated by its manufacturing footprint across the UK and European-based GKN Aerospace and GKN Automotive divisions. Further, the Group's businesses operating in North America continue to take regular specific actions to mitigate the impact of new relevant North American tariffs and changes to international trading regulations by engaging with the relevant authorities prior to and after any such changes are implemented. Whilst the long-term impact of Brexit, COVID-19, and tariff wars are not isolated as principal risks to the Group as a whole, they present potential risks that the business units continue to monitor and assess closely, particularly in the context of potential changes to travel and working restrictions, and the cross-border trade and regulatory environments in which the business units operate. The Board continues to assess and review the potential impact of these evolving risks.

Regular Board meetings and business review meetings were supplemented by weekly meetings of the Board and weekly cash management meetings during the initial height of the COVID-19 pandemic during the second and third quarters of 2020. As the initial disruption subsided in the third quarter, these additional meetings moved to fortnightly, whilst the Board continued to receive key financial information on a weekly basis. The increased frequency of meetings at Board level enabled the Board to discuss and increase their monitoring and oversight of the impact of macro-political events on the Group on a regular basis, including national and regional lockdowns, material working pattern changes, PPE supplies and distribution, and the business units' ongoing assessment of and/or use of and paying back of national support schemes where deemed appropriate.


Regular monitoring of order books, cash performance, cost control and other leading indicators, to ensure the Group and each of its businesses could respond quickly to adverse trading conditions. This included the identification of cost reduction and efficiency measures.


Bank financing is readily available to the Group from its supportive banking syndicate. This support has proven to be available to the Group even during periods of unprecedented turmoil that was experienced in 2020 due to the global pandemic.


Assessment of and/or use of national support schemes where deemed appropriate in the context of COVID-19 disruption.


Short-term inventory buffers are regularly reviewed and assessed to minimise the impact of further lockdown restrictions due to COVID-19, and the initial impact of Brexit on import costs and tariffs and border disruption.


Sales from the EU to the UK within the GKN Aerospace and GKN Automotive divisions are frequently on ex-works terms and therefore a cost to customers. This continued to be reviewed during 2020 in light of the then ongoing Brexit negotiations and the subsequent ongoing trading terms between the UK and the EU.


Strong customer relationships built on long-term partnerships often with plants in close proximity, technical excellence and quality.


Planning for potential discussions in respect of increased tariff costs that materialise following the final Brexit deal between the UK and the EU.


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

Executive management


There were unprecedented levels of volatility and uncertainty during 2020 primarily as a result of COVID-19.


The Melrose senior management team continues to actively engage with the business unit executive teams to track the potential impacts of further lockdowns or tiered restrictions aimed at curbing the impact of COVID-19, as well as the potential impacts of Brexit and the possibility of future tariffs. The Melrose senior management team engages actively with those who are working on the relevant impact assessments and mitigation actions, and reports the material findings to the Board. The Melrose senior management team monitors key issues with the divisional management teams including the impact of geopolitical uncertainty on order books, cash generation, legal and regulatory threats and other key operational and commercial indicators, to ensure the Group and each of its businesses can respond appropriately to adverse trading conditions. Tactics for mitigating the potential impact of geopolitical uncertainty include identifying cost reduction and operational efficiency measures.


The Board notes that economic uncertainty can depress business valuations and this may increase the number of potential acquisition opportunities for Melrose.





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. However, the widespread disruption caused by COVID-19 has heightened the Group's exposure to supply chain and end-market commercial risk.


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


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


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


In 2020, Common Commercial Risks increased due to the impact of the global pandemic, which affected a number of areas including supply chains, production scheduling, factory closures, customer demand rates, and freight.

The Group continued to actively invest in research and

development activities in 2020 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 report on pages 58 to 87 of the 2020 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. In addition, in light of the COVID-19 pandemic, the

Group has followed government guidance on hygiene and social

distancing protocols, and coordinated the sourcing of PPE globally to ensure no disruptions.


Since acquiring GKN, the Melrose senior management team has actively engaged with and supported the GKN businesses' divisional management executive teams in identifying embedded contractual and business conduct risks relating to key supply chain and production programme partners. Those management teams have continued to implement and direct a series of operational change management programmes to mitigate the risks they have identified.


The Melrose senior management team, in collaboration with Ernst & Young, continues to enhance the Board and Audit Committee's visibility of the Group's Common Commercial Risks through the use of the Group reporting dashboard to aggregate and report numerous Common Commercial Risks across each of the Group's divisions.


Throughout the COVID-19 pandemic, the rate and intensity of business unit reporting was substantially increased. This ensured business unit management and the Melrose senior management team had timely access to detailed and accurate information on the trading performance of the Group, which enabled informed and quick decision-making.

Executive management


The Melrose senior management team actively engages with the divisional executive management teams to track, monitor and support  strategic planning activities and impact mitigation assessments in respect of ongoing commercial risks. Particular focus is placed on certain GKN Aerospace and GKN Automotive end markets where

customer and/or competitor concentration is high and heavier reliance

is placed on supply chain efficiency and programme partner

management. The divisional CEOs report material updates directly to members of the Melrose senior management team which maintains a

number of contact points throughout the Group to increase awareness.


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 Melrose employees. In line with the Group's decentralised structure, each divisional CEO, in

consultation with the Chief Executive, is responsible for the

appointment of their respective executive team members, with

disclosure to the Nomination Committee via the Melrose senior management team.


The Company recognises that, as with most businesses, particularly those operating within a technical field, appointments are dependent on Directors and employees with particular managerial, engineering or technical skills. Appropriate remuneration packages and long-term incentive arrangements are

offered in an effort to attract and retain such individuals.

Executive management


Succession planning remains a core focus for the Nomination

Committee and the Board. Reviewing the succession planning

arrangements of the Board as a whole, together with a review of the Melrose senior management team, will remain an area of particular focus in 2021, as well as maintaining oversight of business unit succession planning.




Compliance and ethical risks

Legal, regulatory and environmental

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) past or future environmental

damage, including potentially significant remedial costs; (ii) employee matters including liability for employee accidents in the workplace or

consequences of environmental liabilities, which may be susceptible to class action law suits, particularly but not exclusively with respect to Group businesses operating in North America; (iii) restrictions arising from economic sanctions, export controls and customs, which can result in fines, criminal penalties, adverse publicity, payment of back duties and suspension or revocation of the Group's import or export

privileges; and (iv) product liability claims, which can result in significant total liability or remedial costs, particularly for products supplied to large

volume global production programmes spanning multiple years, for example in the aerospace and automotive industries, or to consumer

end markets, for example in the air management industry. There can also be no assurance that any provisions for expected environmental

liabilities and remediation costs will adequately cover these liabilities or costs.


The Group operates in highly regulated sectors, which has been accentuated by the GKN acquisition. In addition, new legislation, regulations or certification requirements may require additional expense, restrict commercial flexibility and business strategies or

introduce additional liabilities for the Group or the Directors.

For example, the Group's operations are subject to anti-bribery and anti-corruption, anti-money laundering, competition, anti-trust and

trade compliance laws and regulations. Failure to comply with certain regulations may result in significant financial penalties, debarment from

government contracts and/or reputational damage, and may impact our business strategy.

We purchase businesses that are underperforming their potential with respect to their financial, operational and sustainability performance.


Inherent in the nature of the manufacturing businesses we acquire is that they often operate in industries that are the hardest to decarbonise.

Group sustainability performance and ratings will fluctuate during our investment cycle as we acquire new businesses in need of

improvement, and sell businesses that we have improved.

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


Group-wide standard and enhanced application to trade authorisation procedures are in place and regularly reviewed against the ever-changing global trade compliance landscape, supported by access to external trade compliance legal and regulatory specialists and electronic counterparty screening systems.


Our businesses are validated and certified in respect of quality management, environmental management and health and safety with the appropriate bodies including ISO and BS OHSAS, where relevant to their operations. The Group's businesses are either already compliant with or working towards timely compliance with new and upcoming standards. This includes Group businesses that are currently certified to BS OHSAS 18001 and are actively driving towards full transition to ISO 45001:2018.


With Melrose support, each business invests in and implements appropriate systems and processes to manage their impact on the environment, and continually reviews these in line with evolving expected practices. The executive management team of each business regularly reviews any significant climate-related issues, risks and opportunities related to the business. These reviews consider the level of climate-related risk that the business is prepared to take in pursuit of its business strategy and the effectiveness of management controls in place to mitigate climate-related risk. Any identified risks are discussed with the Melrose senior management team and escalated to the Board where necessary.


In line with our decentralised model, our businesses have frameworks in place for identifying principal risks and opportunities appropriate to their business and stakeholders, which include climate-related risks. Each business takes an appropriately tailored approach to climate-related initiatives that suits their requirements, and operational and market environments, as well as reflecting their maturity in this area at the time of becoming part of the Group.


The Board sets a leading example in sustainability, and holds each business and their management teams accountable for their progress, and provides them with a platform to absorb the Group's best practices, to accelerate their and others' progress.


The Melrose senior management team works with the businesses' executive teams, to set meaningful sustainability targets, alongside financial metrics, and Melrose provides the investment to achieve them. The businesses subsequently identify, monitor, and manage the specific environmental risks that affect their operating and market environments.


The Board with the support of the Melrose senior management team reviews the annual reports on energy usage and greenhouse gas emissions within each business, and provides support and investment to drive improvements within their operations through more efficient use of electricity, fuel and heat, including by increasing the proportion of renewable energy where commercially viable, and by implementing other climate-positive actions such as sustainable transport initiatives for employees.


The Board with the support of the Melrose senior management team spends time listening to the Group's key stakeholders to enable informed strategic decisions and to deliver on their needs.


A robust control framework is in place, underpinned by comprehensive corporate governance and compliance procedures at both a Group and business unit level, including utilisation of third party verification providers.



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


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


Insurance cover mitigates certain levels of risk and the Group's

insurers are instructed to carry out external audits of specified

areas of legal and compliance risk including health and safety.

Executive management


Each business has a fully developed legal function, headed by their respective General Counsel reporting to their executive management team, and are properly staffed and supported by external advisors where necessary or helpful to ensure ongoing compliance in the jurisdictions in which they operate across the globe. This is augmented by central oversight from the Melrose legal team and robust annual reviews.


The Board reviews its assessment of the Group's material sustainability issues annually, and is currently establishing a Group internal sustainability reporting and performance function to support the business units. During the coming year, the Board with the support of the Melrose senior management team will publish an assessment of how Melrose and its businesses are mitigating climate change risks aligned with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), and setting targets in line with the UN Sustainable Development Goals.


Information security and cyber threats

Information security and cyber threats to our systems are an

increasing priority across all industries and remain a key

UK Government agenda item.

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

Management work with the leaders of each business and external security consultants to assess the Group's increased exposure to cyber security risk and to ensure appropriate mitigation measures are in place for the Group.


During 2020, Melrose continued to monitor and enhance its

information security strategy and risk-based governance

framework with all businesses within the Group. The framework

follows the UK Government's recommended steps on cyber

security. This strategic management approach has delivered risk profiling capabilities by business and the enablement of mitigation

plans to be developed for each business to reduce their exposure to cyber risk.


The progress of each business is measured against the

information security strategy and is monitored on a quarterly basis.

Data is also externally reviewed quarterly by Ernst & Young, who

will be augmenting their review in 2021 with a mix of virtual and

onsite assurance visits.

Executive management


Information security and cyber threats are an increasing priority across all industries. The COVID-19 pandemic has increased online traffic, reduced physical contact, and created additional new threats to all of our businesses requiring increased attention. Cyber security breaches of the Group's IT systems could result in the misappropriation of confidential information belonging to it or its customers, suppliers or employees. In response to the increased sophistication of information security and cyber threats, the Group has worked, and continues to work, with external security companies to monitor, improve and refine its Group-wide strategy to aid the prevention, identification and mitigation of any present and future threats.



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 the risk that when a business that is predominantly

based in a foreign currency is sold, it is sold in that foreign currency. The Group's reported results will fluctuate as average exchange rates change. The Group's reported net assets will fluctuate as the year-end exchange rate changes.

The Group policy is to protect against the majority of foreign

exchange risk which affects cash, by hedging such risks with

financial instruments.


The businesses are protected against being over-hedged, due to short to medium-term reductions in forecasts, as the percentage of hedges compared to forecast foreign exchange exposures tapers over future periods.


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

Executive management


Group results are reported in Sterling but a large proportion of its revenues are denominated in currencies other than Sterling, primarily US Dollar and Euro. Sensitivity to the key currency pairs is shown in the Finance Director's review on pages 36 to 42 of the 2020 Annual Report.





Any shortfall in the Group's defined benefit pension schemes may require additional funding. As at 31 December 2020, the Group's pension schemes had an aggregate deficit, on an accounting basis, of £838 million (2019: £1,121 million). Changes in discount rates, inflation, asset values or mortality assumptions could lead to a materially higher deficit. For example, the cost of a buy-out on a discontinued basis uses more conservative assumptions and is likely to be significantly higher than the accounting deficit. Alternatively, if the plans are managed on an ongoing basis, there is a risk that the plans' assets, such as investments in equity and debt securities, will not be sufficient to cover the value of the retirement benefits to be provided under the plans. The implications of a higher pension deficit include a direct impact on valuation, implied credit rating and potential additional funding requirements at subsequent triennial reviews. In the event of a major disposal that generates significant cash proceeds which are returned to the shareholders, the Group may be required to make additional cash payments to the plans or provide additional security.

The Group's key funded UK defined benefit pension plans are

closed to new entrants and future service accrual. Long-term

funding arrangements are agreed with the Trustees and reviewed following completion of actuarial valuations.


Active engagement with the Trustees on pension plan asset

allocations and strategies.


During the year the GKN Schemes 1-4 appointed a fiduciary manager which will allow more timely decisions to be made on

changing investments as circumstances require. Also, investments can be spread across more asset classes which will reduce risk.

Executive management


Although the risks are well understood, the deficit significantly reduced and funding plans for the GKN Schemes having already been agreed with the Trustees, the size of the gross liabilities as a proportion of the Group's net assets remains significant. During the period, gross liabilities increased as a result of changes in financial conditions. The increase was offset by increases in scheme assets arising from the return on investments and group contributions of £111 million. As a result of the deficit reduction during the period, the Trustees took action to better hedge risks associated with movements in inflation and interest rates, and to reduce investment risk. Accordingly, the volatility risk to the Group is reduced.





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 36 to 42 of the 2020 Annual Report, the Group has term loans of US$960 million and £100 million and revolving credit facilities comprising US$2.0 billion, €0.5 billion and £1.1 billion.


In addition, the GKN net debt at acquisition included capital market borrowings across three unsecured bonds that totalled £1.1 billion. Two of these bonds - totalling £750 million - remain outstanding as at 31 December 2020 and further detail is provided in the Finance Director's review on pages 36 to 42 of the 2020 Annual Report.


The sudden and material impact of COVID-19 in 2020 has brought cash management into sharp focus. In line with the Group's strategy, investment is made in the businesses (capital expenditure and restructuring actions) and there is a requirement to assess liquidity and headroom when new businesses are acquired.

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


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


The Group gained agreement from its lenders to a three-year

extension, at the Group's option to be built into its multi-currency

term loan denominated £100 million and US$960 million,

exercisable at any time prior to 1 April 2021 that would extend the

maturity date of the loan to 30 April 2024. Since the end of the

current reporting period, this option has been exercised.


The Group operates a conservative level of headroom across its

financing covenants which is designed to avoid the need for any unplanned refinancing.


As a result of COVID-19 the Group's banking syndicate agreed to amend its financial covenants during the year, covering the periods up to and including 31 December 2022, which provides significant headroom over the existing covenants.

Executive management


Whilst the Group maintains strong cash controls and forecasting processes, in light of the COVID-19 pandemic, management have

driven a redoubling of 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 and combined with the negotiation of covenant waivers with our supportive banking syndicate, the Group is satisfied that it has adequate resources

available to meet its liabilities.






Related party transactions


Except for transactions with associates (see Note 29 to the 2020 Annual Report on page 191), no other related party had material transactions or loans with the Company over the last two financial years.


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