3 March 2022                                                                                     

 

 

MELROSE INDUSTRIES PLC

 

 AUDITED RESULTS

FOR THE YEAR ENDED 31 DECEMBER 2021

 

Melrose Industries PLC today announces its audited results for the year ended 31 December 2021.

 

Highlights

	Adjusted1 results			Statutory results
	2021 Actual rates	2020		2021 Actual rates	2020 Actual rates
		Constant currency1	Actual rates
Continuing operations	£m	£m	£m	£m	£m
Revenue	7,496	7,351	7,723	6,883	7,132
Operating profit/(loss)	375	122	141	(451)	(487)
Profit/(loss) after tax	197	(36)	(27)	(446)	(565)
Diluted earnings per share	4.1p	(0.8)p	(0.6)p	(9.6)p	(11.7)p
Net debt1	950	2,834	2,847	n/a	n/a
Leverage1	1.3x	4.1x	4.1x	n/a	n/a

Group

§  The results are ahead of expectations with better cash generation and a bigger reduction in net debt¹ and leverage¹

§  At constant currency, despite global supply challenges, sales were up 2% year on year and, notably, Group adjusted¹ operating profit tripled to £375 million, showing the substantial benefit of restructuring actions increasingly coming through

§  The Group statutory operating loss was £451 million; of the £826 million adjusting items, only £200 million were cash items, almost all relating to restructuring projects

§  All businesses returned to growth, with further benefits coming from restructuring actions.  The Melrose businesses are actively working to mitigate the current inflationary pressures through all necessary means and remain fully committed to achieving their previously stated operating margin targets

§  Melrose generated free cash flow¹ of £125 million in the year, prior to disposal proceeds, with net debt¹ reduced to £0.95 billion and leverage¹ to 1.3x adjusted¹ EBITDA.  All businesses continued to be cash positive, therefore fully funding all their improvement and restructuring costs, with their cash generation qualities transformed since acquisition

§  Working capital in the GKN businesses has reduced to 3% of sales from 5% at the GKN acquisition, with further opportunities existing to improve Aerospace inventory levels

§  Ahead of plan, the opening net debt¹ of £3.4 billion at the GKN acquisition has been fully repaid in less than four years, save cash returned to shareholders over the period, helping to protect shareholder value and de-risking the GKN transformation during some of the most challenging trading conditions

§  The GKN UK pension schemes are now in surplus helped by £1 in every £3 of free cash flow¹ since acquisition being paid into the Group's pension schemes, thereby freeing up more free cash flow¹ in the future

 

Melrose Industries PLC   Stratton House   5 Stratton Street   London   W1J 8LA   Tel: 020 7647 4500   Fax: 020 7647 4501

Registered in England & Wales   Registered no: 09800044   Registered office:  11^th floor   The Colmore Building   Colmore Circus Queensway   Birmingham

West Midlands   B4 6AT
 

 

§  Melrose has improved its ESG positioning and reporting in the year, including highlighting the substantial benefits delivered by its proprietary sustainable technology.  A new stand-alone Melrose Sustainability Report will be published, for the first time, alongside the 2021 Annual Report

§  A final dividend of 1.0 pence per share is proposed, up by one third on last year, giving a full year dividend of 1.75 pence per share

Businesses

§  Aerospace has seen adjusted¹ operating margins improve by c.4 percentage points and growth return with sales in the second half of 2021 up 18%² on 2020. Under new leadership, it has materially advanced the restructuring of its cost base and operations, with all required significant restructuring projects now underway

§  The underlying qualities of the Aerospace businesses are being improved including the accelerated development of new sustainable technologies. The Group will also benefit from exceptionally strong long-term future cash flows in Engines.  An Aerospace Investor Day is to be held on 8 June 2022 to explain its exciting full shareholder value potential

§  Automotive ended the year positively with 2021 fourth quarter sales up 12% on the third quarter, being almost back to levels seen in the first half of the year.  Sales in early 2022 have started similarly positively, consistent with the most recent industry data

§  Powder Metallurgy sales volume grew at more than double the rate of growth in car production in 2021 due to continued significant market share gains

§  In 2021, adjusted¹ operating margins in both Automotive and Powder Metallurgy more than doubled despite the well-publicised supply challenges.  During 2022, the full run rate benefits from the required restructuring projects in Automotive and Powder Metallurgy will materialise giving the opportunity to realise this shareholder value

§  Life of programme business wins of c.£5 billion in Automotive in 2021, of which more than one third are for pure electric vehicles (BEV), confirm that Automotive is both gaining market share and keeping pace with the faster than expected market conversion to electric vehicles.  Importantly, these share gains are being achieved at terms consistent with its higher margin target

§  Ergotron is running efficiently, making 25% adjusted¹ operating margins

§  The new Hydrogen technology business, which has been separated from Powder Metallurgy, has a dedicated new CEO and management team and is positioned to achieve its first sales this year

 

Justin Dowley, Chairman of Melrose Industries PLC, today said:

"We have realised gains for shareholders by doubling the value of Nortek and significantly outperforming all Group cash generation targets, which has de-risked the route to value realisation from GKN.  We have transformed the GKN businesses to increase their full potential including investing in sustainable technology and properly funding their pension schemes.  With the benefits of significant restructuring increasingly coming through, combined with the strong cash generation, Melrose is positioned to create, and realise, significant value for shareholders.

 

 

  ¹  Described in the glossary to the Preliminary Announcement and considered by the Board to be a key measure of performance

  ²  Based on existing businesses at 31 December 2021

 

ENDS

 

 

Enquiries:

 

Montfort Communications: +44 (0) 20 3514 0897

 

Nick Miles

+44 (0) 7739 701 634

miles@montfort.london

 

Charlotte McMullen

+44 (0) 7921 881 800

mcmullen@montfort.london

 

Investor Relations:

 

Chris Dyett

+44 (0) 7974 974 690

ir@melroseplc.net

 

 

CHAIRMAN'S STATEMENT

 

I am pleased to report our 19th set of annual results since flotation in 2003.

 

CALENDAR YEAR 2021

 

Melrose performed well in 2021. Despite COVID-19 and well-publicised industry supply chain issues, sales for the Group grew by 2% year-on-year at constant currency¹, and the benefits from improvement actions are increasingly evident in these results, which are ahead of expectations.  The statutory revenue for the Melrose Group was £6,883 million (2020: £7,132 million), with adjusted operating profit increasing to £375 million (2020: £141 million), which is triple prior year at constant currency¹, and is based on a statutory operating loss of £451 million (2020: £487 million). 

 

All businesses have returned to growth and seen an increase in sales towards the end of the year, with Aerospace up 18% in the second half year-on-year and Automotive sales up 12% from the third quarter to the fourth.  In tandem, improvement actions have increased adjusted operating profit margins at Aerospace by 4 percentage points, while more than doubling those at Automotive and Powder Metallurgy, with plenty more to come as the recovery continues and the full benefits of current and completed projects are delivered.

 

We have enjoyed another year of good cash performance across the Group, while continuing to invest heavily in sustainable technology and restructuring improvements.  We achieved strong free cash flow generation, which has been a feature throughout our ownership of the GKN businesses.  Along with disposal proceeds, it has enabled us to repay all of the £3.4 billion of net debt drawn to fund the GKN acquisition.  Thus year end net debt is broadly equivalent to the money refunded to shareholders via dividend and the recent return of capital.  We have reduced net debt to below £1 billion, which has resulted in a very comfortable level of leverage equal to 1.3x adjusted EBITDA, significantly below the Group's long-term average.

 

Further details of these results are contained in the Chief Executive's Review and Finance Director's Review and I would like to thank all employees for their efforts this year.

 

M&A

 

It was a busy year from a transaction perspective as well.  We sold approximately a fifth of the Group, including Brush, the last piece of the FKI acquisition which has been a great contributor to the Melrose track record, achieving 2.6 times shareholders' investment.  We also sold three of the four businesses from the Nortek acquisition in 2016, putting us firmly on the path to double shareholders' investment again.  In each case, the businesses were sold to good homes which are already building on the improvement achieved under our ownership.

 

PENSIONS

 

Melrose is also rightly proud of its track record in addressing pensions challenges in the businesses we buy and GKN has been no different.  We have delivered on our commitments to trustees early, overcoming a large pension deficit we inherited of almost £1 billion to bring the UK schemes to being fully funded this year.  This has been achieved despite the challenges of COVID-19 and without detracting from our investment in the businesses and repayment of debt. 

 

Mindful of our commitment and as a testament to our responsible stewardship, the underlying performance of the businesses has enabled us to invest a third of the free cash flow produced by the Group into the pension schemes under our ownership, helping to secure the future for pension scheme members and improving the position of our shareholders.  Given the secure nature of these schemes this naturally frees up more cash flow in the future.

 

 

DIVIDEND

 

The Board is pleased to be able to return to its progressive policy by proposing a final dividend for 2021 of 1.0 pence per share (2020: 0.75 pence).  Combined with the 2021 interim dividend of 0.75 pence per share, this represents a total dividend for the year of 1.75 pence per share (2020: 0.75 pence).  The final dividend will be paid on 20 May 2022 to those shareholders on the register at 8 April 2022, subject to approval at the Annual General Meeting ("AGM") on 5 May 2022.

 

RETURN OF CAPITAL

 

Following the Brush and Nortek sales, we completed a £729 million return of capital to shareholders in September last year.  We were clear at the time that, due to lingering uncertainty in the market, we had been conservative in determining the amount of the return in order to ensure a strong balance sheet in the event of further volatility.

 

We did indicate at that time that should these conditions improve sufficiently, we would move to make a second return of capital this year to rebalance our capital structure more in line with a traditional Melrose approach.  While the wider markets still remain below their pre-pandemic levels, there is a visible path to recovery.  We have enjoyed a strong performance during the year, with a conservative balance sheet, reset cost bases for each of the businesses and another strong cash flow performance that further reduced leverage, even with fully funding the significant restructuring and improvement plans and taking the UK pension scheme funding to surplus.

 

In line with the Melrose model, to return proceeds from disposals to shareholders, your Board would have made a second capital return to rebase our capital structure alongside these results.  However, the very recent and tragic events unfolding in Ukraine, with the knock on effects for the world markets that at this stage are uncertain and unquantifiable, have led the Board to keep the timing of this return under review at present.  Your Board recognises that this is a very conservative position and hopes that the situation will be resolved as quickly as possible, in which case the intention would be to make the return without further delay.

 

BOARD MATTERS

 

In keeping with the Board's succession planning, co-founder and executive vice chairman David Roper and non-executive director Archie Kane retired last year and we welcomed to the Board Heather Lawrence and Victoria Jarman.  This year, Liz Hewitt will reach the end of her tenure with us and retire from the Board at the close of the AGM in May.

 

Liz has been a valued member of the Board and all Board committees at various stages during her time with Melrose, most importantly serving as chairman of the Audit Committee for the past five years, as well as holding the position of senior independent director for much of that time, which will be taken up by David Lis on her departure.  It has been a period of success and change for the Company and we are very grateful for her tireless efforts.  We will miss her and wish her all the best for her continuing roles elsewhere.

 

PURPOSE, STRATEGY AND SUSTAINABILITY

 

Melrose was founded in 2003 to empower businesses to unlock their full potential for the collective benefit of stakeholders, whilst providing shareholders with a superior return on their investment.  This has been delivered through Melrose's "Buy, Improve, Sell" strategy, which means we buy good quality manufacturing businesses that are underperforming their potential and then invest heavily to improve performance and productivity as they become stronger, better businesses under our stewardship.  At the appropriate time, we then find them good owners for the next stage of their development and return the proceeds to shareholders.

 

Sustainability has always been an important part of this improvement strategy and Melrose has welcomed the increased focus it has received in recent years as an opportunity to demonstrate its commitment as an active participant across a range of key areas.  The Melrose centre is small with a tiny carbon footprint, which we nonetheless fully offset.  The primary focus is on our businesses under our decentralised model.  This year, we have published our targets aligned to our materiality analysis, including short, medium and long-term objectives for the reduction of greenhouse gas emissions, transition to renewable electricity and reduction in waste that will help drive a transformation in the sustainability of their own production.

 

We also recognise the place of our businesses in the wider economy.  Our strategy means we inherit underperforming businesses.  We provide the focus and investment which enables our businesses to be active participants in addressing these issues, whether it be through GKN Automotive's position at the heart of the electric vehicle transition, or investing in the establishment of the hydrogen economy through the UK hydrogen production start up HiiROC and the hydrogen storage business GKN Hydrogen.  GKN Aerospace is at the forefront of the development of technologies to achieve zero emissions aviation with projects like the hydrogen propulsion system H2Gear, or electric aircraft currently in testing phases like Eviation Alice, Joby and Vertical.

 

Melrose sees this as a key part of improving a business during our ownership and environmental, social and governance (ESG) priorities are an important part of our "Buy, Improve, Sell" strategy.  We see no reason why these improvements cannot be implemented whilst improving returns for our shareholders.  It is a journey and there remains plenty of improvement for us to deliver, but it has been nonetheless pleasing to see our improvement to date being recognised by several of the key benchmarking agencies, including MSCI who have given us an "A" rating and Sustainalytics who have placed us in the top quartile of our peers.  This year we are publishing our inaugural standalone Sustainability Report alongside our Annual Report and I refer you to that for further details.

 

 

 

 Justin Dowley
Non-Executive Chairman
3 March 2022

 

 

CHIEF EXECUTIVE'S REVIEW

 

Against the backdrop of continued turbulence in connection with the global pandemic, 2021 provided the opportunity to demonstrate the strength of the Melrose "Buy, Improve, Sell" model.  Over the course of the year, we sold approximately 20% of the Group.  Having overseen the complete reshaping of Brush, the power generation and distribution business, we sold it to a good home for the next stage of its development.  It was the last business held from the FKI acquisition and its sale caps a successful acquisition for shareholders, who enjoyed a 2.6 times return on their original FKI investment.

 

Except for Ergotron, all the businesses from the Nortek acquisition were also sold during the year, putting the Company on track to double shareholders' investment in that acquisition.  Under our ownership, operating margins of these businesses were approximately doubled while we invested heavily in their transformation.

 

We converted Nortek Control into a technology business through a mix of organic and acquisition actions, while we refocused and completely revitalised the product portfolio of Broan Nutone that reawakened a sleeping giant previously drifting into decline.  Most notably, we were instrumental in Nortek Air Management developing and commercialising the revolutionary Statepoint Liquid Cooling technology, capable of delivering 90% water and 30% energy savings for cooling systems servicing the booming data centre market, it quickly became a clear benchmark for the industry.  As a result, Nortek Air Management enjoys an enviable and growing order book and customer list that includes all the key global technology companies.

 

These are examples of the strong targeted investments we make in businesses under our ownership during the "Improve" phase.  We are well progressed in this phase for the GKN businesses with restructuring spend during 2021 of over £190 million in addition to investing £200 million in research and development in the businesses and bringing the GKN UK pension schemes to be fully funded.  Critical to this rate of investment has been that each of the GKN businesses has been cash generative throughout our ownership and again this year, with cash conversion equal to 110%².  This has enabled us to repay all the debt drawn down as part of the GKN acquisition, net of the amount used to fund dividends and last year's return of capital to shareholders.  This is a fantastic result achieved largely in a severe global downturn and shows the outperformance achievable under the Melrose model as we move to realise the potential of the GKN businesses.

 

For GKN Automotive and GKN Powder Metallurgy, a healthy initial market recovery from the pandemic in the first quarter of 2021 was soon overtaken by the impact of the shortage of semiconductors on the entire automotive sector.  Although demand indicators remained strong throughout, supply constraints hampered production until beginning to ease very late in the year.  As supply constraints continue to ease, we expect sales growth in coming years to simultaneously meet pent-up demand and support dealers as they rebuild their inventory levels.

 

Despite these market challenges, Automotive business wins and Powder Metallurgy sales volumes for the year increased ahead of the market growth of 3.4%.  In Powder Metallurgy's case this was by more than double as they increased their market share. Alongside this growth, both businesses more than doubled margins as volumes began to return on a substantially reduced cost base, which included some initial benefits from major rationalisations.  There is still plenty of margin improvement to come for both businesses as market recovery continues and the full benefit of restructuring projects flow through to results over the course of the coming year.  The impact of rising global inflation is also being actively managed through pricing, procurement and productivity, and we remain confident in achieving our margin targets as supply constraints ease.

 

GKN Automotive is also seeing major benefits from the accelerating transition to electric vehicles, and is converting its decades' long experience in the sector into significant wins on e-Drive platforms for both its 3-in-1 solutions and core sideshaft products for electric vehicles.  It was a busy year for production launches and included the award of the first fully outsourced 3-in-1 system for a major German manufacturer. Excluding China, GKN Automotive is now a supplier on seven of the top ten global electric vehicle platforms³ and has an order book that is matching the market in the shift to electric vehicles.  This was part of approximately £5 billion in life of programme sales wins secured, of which over a third are for pure battery electric vehicles, representing a record for the business.  This demonstrates that GKN Automotive is both gaining market share and keeping pace with the faster than expected electric vehicle transition.

 

As highlighted in its Capital Markets Day in May, Powder Metallurgy has largely completed its restructuring projects and has spun out its hydrogen storage business, to increase the focus on its core powder, sinter and additive businesses.  This has enabled better clarity on its electric vehicle transition strategy, which is well on the way to execution.  It has exited some low margin ICE business and is developing a number of exciting opportunities for e-motors and magnet technology for electric vehicles.  In addition, its additive manufacturing business continues to grow and explore opportunities in serial component production.

 

For Aerospace, the continued pandemic related travel restrictions held back the pace of the market recovery. This started to ease toward the back half of the year, having a positive impact on sales which grew 18% year-on-year in the second half.  Alongside reorganising the business into Civil, Engines and Defence segments, GKN Aerospace has seen a rebalancing of  its market exposure towards the single aisle aircraft segment, which now accounts for 39% of Civil sales and is the segment of the aerospace sector that is leading the recovery.  Engines continues to see the benefit of exceptionally strong future cash flows from its key platforms.

 

We have not let the extended market volatility distract GKN Aerospace from making further progress on its improvement plans and it has had another strong year of cash generation, with a cash conversion rate of 124%⁴.  All major restructuring projects from our acquisition plan are now underway, with a refreshed executive team driving hard to deliver the stated 12% operating margin target.  While the full run rate benefits are not expected until 2023 or beyond, the business has already achieved an increase of 4 percentage points in operating margins for the year on flat sales. 

 

Looking more broadly across the Group, we have successfully reduced working capital, which now sits at 3% of sales for the GKN businesses, compared to 5% at the time of acquisition.  There remains more improvement available, particularly in Aerospace. We continue to invest heavily in technology, with a particular focus on sustainability.  GKN Aerospace's network of Global Technology Centres is key to this, with significant success in the development of decarbonising technology like the H2Gear hydrogen propulsion system and the creation of the first prototype of emission free aircraft such as the Eviation Alice.

 

Ergotron had another good year, with sales growth of 15% and a return to premium levels of operating margins of 25%.  Finally, Powder Metallurgy's hydrogen storage business was spun off as a standalone business in the Group, in order to maximise its potential within the emerging hydrogen economy.

 

Outlook

 

Automotive and Powder Metallurgy are both well progressed in their Melrose improvement plans and saw the start of some recovery momentum in the final quarter of 2021, close to that seen in the first half.  Early signs in the new year show this recovery continuing, and as the constraints of the semiconductor shortage ease further, focus will start to move towards realisation of this value.  The aviation market continues to navigate pandemic travel restrictions with our businesses expecting growth for the coming year albeit still below pre-pandemic levels.  There is a heavy focus on improvement in Aerospace in 2022 and we are confident this will position the business for a strong future, which we will elaborate on more fully at a Capital Markets Day to be held on 8 June 2022.

 

For all businesses, the impact of rising global inflation is a key focus for the year and our management teams remain very focused on ensuring inflation does not affect our businesses' performance, albeit with a potential time lag this year.  We are mindful of the very recent events in Ukraine, which our businesses are being proactive in addressing to ensure minimal disruption.  Against the backdrop of the ongoing market recovery, with existing improvement projects largely complete for Automotive and Powder Metallurgy and well progressed for Aerospace, there is strong belief in significant further profit improvement as they deliver their stated operating margin targets.  We are therefore in good shape to deliver strong returns and realise shareholder value.

 

Further details of the trading performance of the businesses are contained in the following Divisional Reviews.

 

 

 

AEROSPACE DIVISON

 

GKN Aerospace is a global multi-technology developer and manufacturer of airframe and engine structures and electrical wiring systems for the global aerospace industry, across both civil and defence platforms.  With operations in 12 countries, it is a global leader based on technological innovation, advanced processes and engineering excellence, while its products enable aircraft to fly safely and more efficiently.  GKN Aerospace is structured according to its three core customer markets - Civil Airframe, Defence Airframe and Engines.  Its technology is used throughout the aerospace industry: from high-use single aisle aircraft and the world's longest haul passenger planes, through to business jets, helicopters, the world's most advanced fighter jets and space launchers.

 

GKN Aerospace continued to feel the effects of COVID-19 during 2021.  While passenger flight hours improved against 2020, global travel restrictions remained prevalent, delaying the recovery of air travel.  In total, sales across the Civil Airframe and Civil Engines businesses both made good progress, particularly in the second half which saw an 18% year-on-year increase in GKN Aerospace sales, but remained well below pre-pandemic levels.

 

Having acted swiftly to reduce its cost base in 2020 in response to COVID-19, GKN Aerospace took further steps to adjust to its new commercial environment at the start of 2021 and improved its profitability, achieving adjusted operating margins of 4.4%.  All major restructuring projects from our acquisition plan are now underway and the margin increase reflects the initial benefits of a number of initiatives in line with its 'One Aerospace' approach, including reducing management layers, increasing its customer focus and simplifying its operating structure as it embedded its global Lean Operating Model, to reduce process variation and improve operational efficiency.  This is now showing benefits in quality and delivery performance, with substantial further opportunities ahead.  Supply chain management has been a strong focus, securing savings and delivery improvements, as well as responsiveness to ensure minimal disruption from situations such as the recent events in Ukraine.  There has been some further progress on improving working capital efficiency, which has contributed to the strong cash generation during the year, but again plenty more improvement is still to come.

 

GKN Aerospace also sharpened its focus through a series of global footprint projects.  On the Civil side, it divested two non-core businesses in the Netherlands, as well as completing the planned closure of two subscale sites.  In Engines, initiatives to consolidate major product families between the two Nordic sites in Sweden and Norway are well advanced, leveraging the expertise of each site and creating advanced Centres of Excellence.  Each of these steps simplified and focused GKN Aerospace during 2021, reducing costs and increasing productivity.  Further global footprint optimisation projects are now underway and will be delivered in 2022.  This includes significant work required to address profitability issues in the US Defence business and we have recently announced the closure of the St Louis site.  This closure will involve exiting approximately £140 million of sales relating to less profitable contracts by 2023.

 

Despite challenging markets, GKN Aerospace made progress commercially, securing good awards in Civil Airframes for electrical wiring interconnection systems and complex structures components such as empennage and wings.  Market dynamics have helped weight the mix of Civil components further towards the single-aisle aircraft market, which is seeing faster recovery and preparing for a significant increase in production rates.  Engines further deepened its exposure to core capabilities with key customers, including additive manufacturing, fan blade repair and composites.  Focus has been on higher margin, design to build opportunities and growing its attractive aftermarket business.  Engines will also benefit from the exceptionally strong future cash flows generated by its key risk and revenue sharing partnership (RRSP) platforms.

 

During 2021, GKN Aerospace took a further step forward in its sustainability strategy.  Investment was made in technology to support and enable this strategy to both achieve reductions in energy, material and waste in our current factories, as well as enable improvements in efficiency and revolutionary capabilities in next generation aircraft and engine platforms, which will assist the future of zero emission flight.  At the forefront of this strategy is a new network of Global Technology Centres (GTCs), to develop and demonstrate capability, drive collaboration and accelerate technological breakthroughs in each of its businesses.  In 2021 GKN Aerospace opened its £32 million UK GTC in Bristol, as well as its Dutch centre in Hoogeveen, to complement the Swedish and US hubs that are already established.

 

GKN Aerospace is now developing the next-generation of lighter and more sustainable aerostructures and engine products, as well as lightweight additive manufacturing solutions and future zero-emission propulsion systems.  Putting this technology strategy into action, GKN Aerospace established its position at the forefront of four major European propulsion programmes during 2021. Two of these - the £54 million H2GEAR project in the UK and H2JET in Sweden - are groundbreaking hydrogen projects aiming to develop propulsion systems to power aircraft using liquid hydrogen, eliminating carbon dioxide emissions.  Through collaboration in the European Clean Sky 2 programme, GKN Aerospace also delivered the first Intermediate Compressor Case for the Rolls-Royce UltraFan™ engine demonstrator, which is expected to achieve significant fuel efficiency improvements compared with current engines.

 

There were also notable achievements in more sustainable aerostructures solutions. During 2021, GKN Aerospace manufactured and delivered the first fully integrated wings, tail and wiring system for Eviation's Alice electric aircraft, as well as producing and delivering the first composite fixed trailing edge for Airbus' 'Wing of Tomorrow' project, both from its new UK GTC.  All of these projects form important ingredients on the sector's path to achieve net zero greenhouse gas emissions by 2050 and helped establish GKN Aerospace's position as a sustainability leader in the aviation industry.

 

Outlook

 

Despite the recent unrest in Ukraine, GKN Aerospace expects the recovery of the civil aviation sector to continue in 2022, which will benefit both the Civil and Engines businesses.  While uncertainty remains, and there is still some way to go to reach pre-pandemic levels, GKN Aerospace is well placed to support the significant ramp-up of single-aisle aircraft production which is already underway in 2022.  The defence market outlook remains solid, which will support the Defence segment while it implements its improvement programme.

 

Underpinned by the restructuring work already undertaken and with its position on major growth platforms and further optimisation to come, GKN Aerospace is well placed to benefit as the market recovery continues and remains well on track to unlock its potential.  The business has already demonstrated positive earnings momentum and it has a clear path to achieving its targeted 12% operating margins when sales return to pre-pandemic levels.  Looking further ahead, GKN Aerospace's technology investment and expertise will enable it to be a leader in the sustainable transformation of civil aviation, creating market opportunities and profitable growth for years to come.

 

 

 

AUTOMOTIVE DIVISION

 

GKN Automotive is the global leader in drive systems, the trusted partner for most of the world's automotive OEMs, specialising in developing, manufacturing, and supplying leading drive systems for conventional and electric vehicles through its Driveline and ePowertrain divisions.  Headquartered in the UK and operating in 20 countries, it also has a leading presence in China thanks to its long-standing joint venture Shanghai GKN HUAYU Driveline Systems Co Limited, with local partner HASCO.

 

GKN Automotive's Driveline division is a global leader that demonstrates strength in depth and breadth, with an extensive portfolio of drive system products that combine value with technological leadership spanning all light vehicle types, from high-volume low-cost to premium models for both conventional and electrified propulsion systems.  The ePowertrain division offers solutions for all electrified vehicles and is a go-to technology partner for Global OEMs with decades of experience.  Its ability to fully integrate eDrive systems derives from its all-wheel drive heritage and leadership.

 

The ongoing COVID-19 pandemic, global supply chain disruption, and industry-wide semiconductor shortage significantly stalled the predicted market recovery in 2021.  Even with very robust underlying demand, global light vehicle production grew just 3.4% compared to last year, which was well below initial growth projections of 13% at the start of the year and that left production 13% below pre-pandemic levels.  Despite these market challenges, GKN Automotive sales grew by 4% year-on-year due to strong growth in its eDrive business, which both gained market share and kept pace with the faster than anticipated transition to electric vehicles and reflects the expansion of GKN Automotive's addressable content per vehicle as a result of electrification.

 

In 2021, the Driveline division accelerated its shift towards electrification by further adapting its portfolio to match the changing demands of new-energy vehicles. The business completed 48 new programme launches and continued to secure a significant share of new business wins on electrified vehicle platforms, reinforcing the division's industry-leading position through its premium core products.  The ePowertrain division is increasingly benefitting from light vehicle electrification and delivering impressive growth. In 2021, the business saw the production launch of 12 new programmes across 11 different global brands powered by GKN Automotive technology.

 

The next generation of eDrive systems is now in development with a focus on reduced weight and increased efficiency and power density.  With deep expertise across all elements of eDrive, a heritage of manufacturing excellence and a global footprint, ePowertrain is a leading development partner for major leading electrified vehicle manufacturers, featuring components on seven of the top ten global platforms outside of China.  New business wins in 2021 included the award of the first fully outsourced 3-in-1 system for one of the major German manufacturers.

 

The total business being won also remains strong, with approximately £5 billion of life of programme revenue secured in new contracts throughout 2021.  The propulsion split of those business awards reflects the continuing focus on electrification, with approximately 50% of the secured life of programme revenues attributable to electrified vehicle platforms⁵.  A healthy proportion of electric vehicle orders are for core Driveline products, with an increased specification due to the elevated torque requirements of electrified vehicles.  For eDrive products, the business has the flexibility to be able to supply any part of the assembly, from sub-components to full 3-in-1 systems and is selective in choosing programmes to develop capabilities and scale.  The business being won on electric vehicle platforms is also on terms consistent with GKN Automotive's higher margin target, partly as a result of its premium core product becoming more in demand as the transition accelerates.

 

Despite the ongoing COVID-19 challenges and industrial inefficiencies related to sector demand fluctuations and supply constraints, GKN Automotive delivered an impressive operating margin expansion.  Partly in response to the market challenges outlined above, the business has strengthened its supply chain, maintained close relationships with customers and suppliers and streamlined its operations, which also enables it to minimise disruption from events such as the recent unrest in Ukraine.  Disciplined execution of its full potential transformation programme and continued strict cost control more than doubled operating profit margins to 4.6% for the full year.  A continued focus on working capital and rigorous cash management throughout 2021 resulted in strong cash generation for the business, that has enabled it to be self-funding, with a cash conversion rate of 96%⁶.

 

The improvement programme has made a major contribution to this performance, delivering approximately £60 million of cost savings in 2021 through initiatives covering procurement, operational efficiency, and fixed cost optimisation.  A major part of the programme in 2021 was the continued execution of the new industrial strategy, most notably the conclusion of plant closures in Korea, Germany and the US, the sale and re-industrialisation of a facility in Italy, and the agreement of terms to close the Birmingham site in the UK in the first half of 2022.  This contributed to the strong operating results in 2021 and leaves the business well positioned to benefit as the market continues its recovery.

 

Outlook

 

It is expected that the past two years of supply restrictions will lead to sustained demand for new light vehicles amongst consumers.  While some of last year's market headwinds are expected to continue into 2022, global light vehicle production volumes are nonetheless expected to recover, with increasing electric vehicle penetration.  GKN Automotive will benefit from this electrification trend through higher content value and technology differentiation opportunity for both divisions.  There is a strong pipeline of over 60 launches across both the divisions during 2022, with the focus for Driveline on margin expansion and ePowertrain on growth and next generation technology.

 

GKN Automotive's robust operating performance in 2021 provides a strong platform for the business going into 2022.  The restructuring initiatives undertaken during extremely volatile market conditions provide every reason to be optimistic about further operating margin expansion, healthy cash generation and profitable order book growth during the coming year.  Inflationary pressures look set to persevere across raw materials, energy and labour, with the business fully focused to offset their impact and being proactive in addressing any potential disruption caused by the recent unrest in Ukraine.  We are confident that the impact of inflation can be overcome by management actions so that, with its adjusted cost base and as full run rate benefits unfold, GKN Automotive's 10% plus operating margin target will be achieved.

 

 

 

 

POWDER METALLURGY DIVISION

 

GKN Powder Metallurgy is a global leader in metal powders and precision powder parts for the automotive and industrial sectors.  It combines the design and production of advanced powder metals with innovative sintering and additive production technologies to create unique metal and polymer products.

 

The year of 2021 was marked by a strong improvement in activity levels for GKN Powder Metallurgy across all geographies.  The pent-up demand for vehicles and other goods in general, combined with the need by the industry to recover from the low stock levels maintained during the previous year, produced very high demand during the first quarter of the year.  This high activity level registered in the first three months was followed by lower and more erratic demand, primarily from the automotive industry caused by the semiconductors supply issue.  For the full year, GKN Powder Metallurgy achieved a revenue growth of 13% compared with the previous year.  Although revenue levels remain below pre-pandemic levels, sales volume growth for the business in 2021 was double the production growth of the wider market, highlighting the increased market share achieved by the business.

 

As part of the improvement plan, the core business has been streamlined, resulting in the divestment in May 2021 of a non-core low margin structural plant in the USA, and the planned Canada plant closure, which is set to be concluded during 2022. In addition, the closure of a Sinter Metals site in Germany was communicated in November.  Having taken it through the initial development phase, GKN Hydrogen, the hydrogen storage business, was also separated into a standalone business under direct Melrose management at the end of the year.

 

Furthermore, while the year was also characterised by a significant increase in input costs, primarily coming from the cost of commodities, notably metal scrap, copper, nickel and molybdenum, the pass-through mechanisms largely protected the financial performance.  The business was also proactive in exiting lower margin sales, particularly on ICE platforms.

 

These actions have contributed to GKN Powder Metallurgy's very strong performance, with adjusted operating margins for the full year expanding to 9.3% and adjusted operating profit up 162%.  This improvement came from the stronger activity level, primarily during the first quarter, tight cost management during the lower activity months and the realisation of benefits arising from restructuring activities initiated during prior years.

 

Another year of strong cash generation saw the business achieve a cash conversion rate of 107%⁷, reflecting the sustainable improvements achieved in working capital.  The business made significant investment in new technologies and continued the development of the core business during the year.  A key focus has been the development of the transition plan for the switch to electric vehicles.  As well as innovative solutions like the launch of an electric pump for hybrid transmission vehicles, the business is well progressed in harnessing its unique powder technologies in connection with break-through technologies for magnets for e-motors.

 

Other parts of the business made good progress as well.  For Powders/Hoeganaes, the hydride powder for hydrogen storage was further developed and it will be a long-term supplier to GKN Hydrogen.  In Additive, the expansion of polymers into the Michigan site was initiated, as a way of increasing the presence in the Midwest and, in particular, to serve the global automotive manufacturers.

 

Outlook

 

Expectations are that supply chain shortages, particularly relating to the availability of semiconductors, will ease during the year, supporting another year of growth in 2022 for GKN Powder Metallurgy.  The business is being proactive in its elimination of the impact of inflationary pressures, which it expects to be able to fully offset and ensuring minimal disruption from the recent unrest in Ukraine.  The recently completed reorganisation and refocus on core products, along with the conclusion of further ongoing activities, positions GKN Powder Metallurgy well to continue the margin expansion towards reaching its 14% operating margin target as full run rate benefits flow through and we move towards realising value for shareholders.

 

 

OTHER INDUSTRIAL DIVISION

 

Having sold Brush and Nortek Control during the year, the Other Industrial division now consists of Ergotron and the newly formed GKN Hydrogen business.

 

ERGOTRON

 

Ergotron is a leading designer, manufacturer and distributor of ergonomic products for use in a variety of working, learning and healthcare environments.  Based in Minneapolis, U.S., Ergotron comprises three business segments: Healthcare, Workspace, and Custom and is respected for high quality, professional-grade products that last.

 

Revenue growth of 15% over 2020 was driven by continued global growth in Healthcare of 18% and a 42% growth in Workspace driven by employees embracing a more hybrid work environment even as they return to the office.

 

Despite a challenging year due to global supply chain issues and inflationary pressures, the business successfully offset these through price increases to maintain strong profitability.  The strong revenue growth and margin management was reflected in the 19% increase in operating profit for the year.

 

Outlook

 

Ergotron expects further profitable growth in 2022 led by continued growth in its Healthcare segment due to market expansion and the focus on new global geographic territories.  Additionally, Ergotron is well positioned to capture growth in the Workspace segment due to the expansion of the hybrid work environment.

 

HYDROGEN

 

GKN Hydrogen

 

GKN Hydrogen offers a state-of-the-art metal hydride storage solution that was initially developed under the umbrella of the GKN Powder Metallurgy business.  It harnessed the business' unique and industry leading knowledge of powder technology to create the most reliable and secure hydrogen storage solution currently available today.  The robust system stores hydrogen compactly and safely in proprietary metal hydrides and it can be used in a wide range of industrial and commercial applications.

 

Having produced and tested pilot systems during 2021, the business has been separated into a standalone business within the Melrose Group in order to maximise the growth opportunity.  GKN Hydrogen will now move into the commercialisation phase with increased focus in 2022 and beyond.

 

 

 

 

 

 

Simon Peckham

Chief Executive

3 March 2022

 

 

 

 

FINANCE DIRECTOR'S REVIEW

 

During the year the Group successfully disposed of the Nortek Air Management division and the Brush and Nortek Control businesses from within the Other Industrial division.  Together, these businesses contributed c.20% of adjusted revenue in the previous year and are shown as discontinued operations throughout these Consolidated Financial Statements.

 

The results of the continuing businesses in the Group show substantial improvement this year over last year, as the benefits of restructuring actions are increasingly coming through.

 

MELROSE GROUP RESULTS - CONTINUING OPERATIONS

 

Statutory results:

 

The statutory IFRS results are shown on the face of the Income Statement and show revenue of £6,883 million (2020: £7,132 million), an operating loss of £451 million (2020: £487 million) and a loss before tax of £618 million (2020: £679 million).  The diluted earnings per share ("EPS"), calculated using the weighted average number of shares in issue during the year of 4,695 million (2020: 4,858 million), were a loss of 9.6 pence (2020: loss of 11.7 pence).

 

Adjusted results:

 

The adjusted results are also shown on the face of the Income Statement.  They are adjusted to include the Group's share of revenue and operating profit from certain investments in which the Group does not hold full control, equity accounted investments ("EAIs"), and to exclude certain items which are significant in size or volatility or by nature are non-trading or non-recurring, or are items released to the Income Statement that were previously a fair value item booked on an acquisition.  It is the Group's accounting policy to exclude these items from the adjusted results, which are used as an Alternative Performance Measure ("APM") as described by the European Securities and Markets Authority ("ESMA").  APMs used by the Group are defined in the glossary to the Consolidated Financial Statements.

 

The Melrose Board considers the adjusted results to be an important measure used to monitor how the businesses are performing as they achieve consistency and comparability between reporting periods when all businesses are held for the complete reporting period.

 

The adjusted results for the year ended 31 December 2021 show revenue of £7,496 million (2020: £7,723 million), an operating profit of £375 million (2020: £141 million) and a profit before tax of £252 million (2020: loss of £41 million).  Adjusted diluted EPS, calculated using the weighted average number of shares in issue in the year of 4,695 million (2020: 4,858 million), were 4.1 pence (2020: a loss of 0.6 pence).

 

Tables summarising the statutory results and adjusted results by reportable segment are shown later in this review.

 

RECONCILIATION OF STATUTORY RESULTS TO ADJUSTED RESULTS

 

The following tables reconcile the Group statutory revenue and statutory operating loss to adjusted revenue and adjusted operating profit:
 

Continuing operations:	2021 £m	2020 £m
Statutory revenue	6,883	7,132
Adjusting item:
Revenue from equity accounted investments ("EAIs")	613	591
Adjusted revenue	7,496	7,723

 

Adjusting item:

 

Adjusted revenue includes revenue from EAIs, the largest of which is a 50% interest in Shanghai GKN HUAYU Driveline Systems Co Limited ("SDS"), within the Automotive segment. During the year ended 31 December 2021, EAIs in the Group generated £613 million of revenue (2020: £591 million), which is not included in the statutory results but is shown within adjusted revenue so as not to distort the operating margins reported in the businesses when the adjusted operating profit from these EAIs is included.

 

Continuing operations:	2021 £m	2020 £m
Statutory operating loss	(451)	(487)
Adjusting items:
Amortisation of intangible assets acquired in business combinations	452	472
Restructuring costs	269	221
Currency movements in derivatives and movements in associated financial assets and liabilities	114	(182)
Net release of fair value items	(49)	(115)
Other	40	48
Write down of assets	-	184
Adjustments to statutory operating loss	826	628
Adjusted operating profit	375	141

 

Adjusting items to statutory operating loss in the year are consistent with prior years and include:

 

The amortisation charge on intangible assets acquired in business combinations of £452 million (2020: £472 million), which is excluded from adjusted results due to its non-trading nature and to enable comparison with companies that grow organically.  However, where intangible assets are trading in nature, such as computer software and development costs, the amortisation is not excluded from adjusted results.

 

Costs associated with restructuring projects in the year totalling £269 million (2020: £221 million), including a write down of assets in affected sites of £112 million (2020: £20 million).  These are shown as adjusting items due to their size and non-trading nature and during the year ended 31 December 2021 these included:

 

·     A charge of £92 million (2020: £110 million) within the Aerospace division, primarily relating to the commencement of significant multi-year restructuring projects, necessary for the business to achieve its full potential target operating margins.  These included the initial stages of European footprint consolidations in both the Civil and Engines businesses, which commenced in the first half of the year, and significant restructuring programmes in North America, across all three Aerospace sub-segments, which commenced in the second half. 

 

 

·     A charge of £147 million (2020: £60 million) within the Automotive division, primarily relating to two significant footprint consolidation actions in Europe, which significantly progressed during the year, along with costs incurred on multiple worldwide restructuring projects as the business accelerates its efforts to position its cost base during 2022 at a level that will allow the business to achieve target operating margins when supply constraints ease.

 

·     A charge of £18 million (2020: £48 million) within the Powder Metallurgy division, relating to multiple restructuring projects underway that will set the business' cost base during 2022 at a level such that target operating margins can be achieved when supply constraints ease.

 

·     A net charge of £12 million (2020: £3 million) within the Other Industrial and Corporate divisions which includes the non-cash accounting loss resulting from actions taken in the year to secure and buy-out pensioner members from the GKN UK 2016 Pension Plan with Aviva or Rothesay, as described in the pensions and post-employment obligations section of this review.  

 

Where hedge accounting is not applied, movements in the fair value of derivative financial instruments (primarily forward foreign currency exchange contracts), along with foreign exchange movements on the associated financial assets and liabilities, entered into within the businesses to mitigate the potential volatility of future cash flows on long-term foreign currency customer and supplier contracts. This totalled a charge of £114 million (2020: credit of £182 million) in the year and is shown as an adjusting item because of its volatility and size.

 

The net release of fair value items in the year of £49 million (2020: £115 million) where items have been resolved for more favourable amounts than first anticipated. During the year this included a net release of £22 million in respect of loss-making contract provisions held within the GKN businesses, where either contractual terms have been renegotiated with the relevant customer or operational efficiencies have been identified and demonstrated for a sustained period.  The net release of fair value items is shown as an adjusting item, avoiding positively distorting adjusted results.  

 

Other adjusting items of £40 million (2020: £48 million), which included items consistent with prior years, the largest of which is an adjustment of £28 million (2020: £30 million) to gross up the post-tax profits of EAIs to be consistent with the adjusted operating profits of subsidiaries within the Group.

 

In the prior year, a write down of assets of £184 million, which was recognised as a result of the impact of COVID-19, of which £133 million was within the Aerospace division. This was shown as an adjusting item because of the unprecedented nature of the COVID-19 pandemic, along with its non-trading nature and size.

 

 

STATUTORY AND ADJUSTED RESULTS BY REPORTING SEGMENT

 

The following table shows continuing revenue split by reporting segment, including EAIs for adjusted revenue:

 

	Aerospace £m	Automotive £m	Powder Metallurgy £m	Other Industrial £m	Total £m
Statutory revenue	2,538	3,164	948	233	6,883
Reconciling item:
Revenue from EAIs	5	581	27	-	613
Adjusted revenue	2,543	3,745	975	233	7,496

 

The following table shows operating (loss)/profit split by reporting segment.  Adjusting items are described earlier in this review.

 

	Aerospace £m	Automotive £m	Powder Metallurgy £m	Other Industrial £m	Corporate £m	Total £m
Statutory operating (loss)/profit	(196)	(131)	40	35	(199)	(451)
Reconciling item:
Adjusting items	308	303	51	16	148	826
Adjusted operating profit/(loss)	112	172	91	51	(51)	375

 

The performances of each of the reporting segments are discussed in the Chief Executive's Review.  The adjusted operating loss in the corporate cost centre of £51 million (2020: £46 million) included £34 million (2020: £34 million) of operating costs and £17 million (2020: £12 million) of costs relating to divisional cash-based long-term incentive plans.

 

 

FINANCE COSTS AND INCOME - CONTINUING OPERATIONS

 

Total net finance costs shown in the statutory IFRS results in the year ended 31 December 2021 were £167 million (2020: £192 million), of which £125 million (2020: £182 million) are shown within the adjusted results and £42 million (2020: £10 million) treated as adjusting items.

 

Adjusted results:

 

Net interest on external bank loans, bonds, overdrafts and cash balances was £91 million (2020: £133 million). The Group uses interest rate swaps to fix the majority of the interest rate exposure on its drawn debt. More detail on these swaps is given in the finance cost risk management section of this review.

 

Net finance costs in adjusted results also included: a £10 million (2020: £12 million) amortisation charge relating to the arrangement costs of raising the Group's current bank facility; an interest charge on net pension liabilities of £8 million (2020: £19 million); a charge on lease liabilities of £14 million (2020: £16 million); and a charge for the unwind of discounting on long-term provisions of £2 million (2020: £2 million).

 

Adjusting items:

 

Adjusting items, within finance costs and income, include: a charge of £45 million (2020: £nil), relating to the early settlement of certain interest rate swap instruments that were no longer needed following the disposals of the Nortek Air Management and Brush businesses; and a credit of £3 million (2020: charge of £2 million) relating to the fair value changes on cross-currency swaps.  Both are shown as adjusting items because of their volatility and non-trading nature.

 

In the prior year, adjusting items within finance costs and income included a charge of £8 million relating to costs incurred renegotiating the Group's financial covenants with its banking facility syndicate in response to the impact of COVID-19. 

 

In addition, a credit of £2 million (2020: £nil), not included in the statutory net finance costs, is included in adjusted results, relating to the gross up of post-tax profits of EAIs to be consistent with the finance costs and income of other subsidiaries within the Group.  This results in net adjusted finance costs for the year of £123 million (2020: £182 million).

 

 

 

 

DISCONTINUED OPERATIONS

 

Discontinued operations include: Nortek Air Management sold to Madison Industries LLC on 22 June 2021 for gross proceeds of £2.6 billion; the Brush business disposed on 18 June 2021 for cash consideration of £0.1 billion; and Nortek Control on 4 October 2021 for £0.2 billion.

 

The net proceeds associated with the disposal of Nortek Air Management and Nortek Control, plus more than £800 million of cash generated by the Nortek businesses since acquisition and the retention of the Ergotron business in the Group, means the Group is well placed to achieve the target of doubling shareholders' investment on the Nortek acquisition.

 

The disposal of Brush, the final business to be sold from the FKI acquisition in 2008, concluded another highly successful investment for Melrose shareholders, providing a 2.6x return on Shareholders' initial equity, equivalent to an IRR of 29%. 

 

Discontinued businesses contributed £884 million to revenue and achieved statutory operating profit of £5 million for the period of the year under ownership (2020: revenue of £1,782 million and statutory operating profit of £149 million), before contributing a net £1.3 billion profit on disposal in the year. 

 

 

RETURN OF CAPITAL AND NUMBER OF SHARES IN ISSUE

 

In line with the Group's strategy, following the disposal of Nortek Air Management and Brush, a return of £729 million in cash to Shareholders, equivalent to 15 pence per Existing Ordinary Share, was made on 31 August 2021 via a redeemable share scheme alongside a 9 for 10 share consolidation.  This reduced the number of ordinary shares in issue by 10%, from 4,858 million to 4,372 million.

 

The weighted average number of shares used for earnings per share in calculations in 2021 is 4,695 million.

 

 

TAX - CONTINUING OPERATIONS

 

The statutory results show a tax credit of £172 million (2020: credit of £114 million) which arises on a statutory loss before tax on continuing operations of £618 million (2020: loss of £679 million), a statutory tax rate of 28% (2020: 17%). 

 

The effective rate on the adjusted profit before tax for the year ended 31 December 2021 was 22%.

 

The statutory tax rate is higher than the adjusted tax rate because the statutory tax credit includes exceptional tax credits of £108 million (2020: £nil) relating to the recognition of Dutch losses that will give future tax savings as a result of a change in law, partially offset by exceptional tax charges of £70 million (2020: £nil) in respect of the extraction of the US Powder Metallurgy companies from the Automotive tax group.

 

The Group has £792 million (31 December 2020: £810 million) of deferred tax assets on tax losses, retirement benefit obligations and other timing differences. These are offset by deferred tax liabilities on intangible assets of £993 million (31 December 2020: £1,161 million) and £163 million (31 December 2020: £201 million) of other deferred tax liabilities. Most of the tax losses and other deferred tax assets will generate future cash tax savings, whereas the deferred tax liabilities on intangible assets are not expected to give rise to cash tax payments.

 

Net cash tax paid in the year ended 31 December 2021 was £65 million (2020: £14 million), 26% of adjusted profit before tax.

 

CASH GENERATION AND MANAGEMENT

 

Robust cash management initiatives continue to be run by all businesses in the Group and resulted in a free cash inflow in the year of £125 million (2020: £456 million) of which £53 million (2020: £252 million) was in discontinued operations, with each of the continuing businesses more than self-funding all costs, including substantial restructuring spend. Adjusted free cash flow, shown before restructuring cash spend, was £323 million (2020: £628 million).

 

An analysis of the adjusted free cash flow is shown in the table below:

Continuing operations (unless stated otherwise)		2021 £m	2020 £m
Adjusted operating profit		375	141
Adjusted operating profit from EAIs		(66)	(62)
Depreciation and amortisation		425	442
Lease obligation payments		(54)	(63)
Positive non-cash impact from loss-making contracts		(48)	(58)
Working capital movements		62	371
Adjusted operating cash flow (pre-capex)		694	771
Net capital expenditure		(225)	(265)
Net interest and net tax paid		(205)	(171)
Defined benefit pension contributions - ongoing		(54)	(107)
Restructuring		(193)	(161)
Dividend income from equity accounted investments		52	54
Net other		3	83
Cash flows from operations discontinued in the year, after all costs1		53	252
Free cash flow		125	456
1 includes £5 million (2020: £11 million) of restructuring spend
Adjusted free cash flow		323	628

 

Net working capital in the continuing businesses was reduced by £62 million in the year (2020: £371 million), despite Group revenue growing by 2% in the year, at constant currency. Working capital as a percentage of sales, within the remaining GKN businesses, has reduced from 5% at the GKN acquisition date to 3% at 31 December 2021, illustrating the strong cash generation achieved during Melrose ownership.

 

Net capital expenditure in the year was £225 million (2020: £265 million), representing 0.6x (2020: 0.7x) depreciation of owned assets.

 

Net interest paid in the year was £140 million (2020: £157 million), net tax payments were £65 million (2020: £14 million) and ongoing contributions to defined benefit pension schemes were £54 million (2020: £107 million). These included £30 million (2020: £60 million) paid into the GKN UK pension plans, reduced because the funding commitment made by the Group, when GKN was acquired in 2018, has been delivered ahead of schedule.  The GKN UK pension schemes are now in surplus helped by £1 in every £3 of free cash flow since acquisition being paid into the Group's pension schemes.

 

 The movement in net debt (as defined in the glossary to the Consolidated Financial Statements) is summarised as follows:

	2021 £m	2020 £m
At 1 January	(2,847)	(3,283)
Non-trading items and discontinued operations:
Net cash flow from acquisition and disposal related activities	2,536	(11)
Dividends paid to Melrose shareholders	(69)	-
Return of Capital	(729)	-
Foreign exchange and other non-cash movements1	34	(9)
Cash flow from non-trading items and discontinued operations	1,772	(20)
1 the prior period includes £7 million of cash outflows from operations discontinued last year
Free cash flow	125	456
At 31 December at closing exchange rates	(950)	(2,847)
At 31 December at 12 month average exchange rates	(947)	(2,953)

 

Group net debt at 31 December 2021, translated at closing exchange rates (being US $1.35 and €1.19), was £950 million (31 December 2020: £2,847 million, translated at closing exchange rates at 31 December 2020).

 

The significant reduction in net debt during the year consisted of a free cash inflow of £125 million and substantial inflows primarily relating to the disposals of Nortek Air Management, Nortek Control and Brush, together totalling £2,536 million. In addition, payments to shareholders included dividends of £69 million and a Return of Capital of £729 million (discussed earlier in this review). There was a £34 million reduction to net debt in respect of foreign exchange and other non-cash movements.

 

The net debt at the acquisition of GKN, of £3.4 billion, has been fully repaid within four years, save cash returned to shareholders over the period as dividends or capital returns.

 

For bank covenant purposes the Group's net debt is calculated at average exchange rates for the previous twelve months, to better align the calculation with the currency rates used to calculate profits, and was £947 million (31 December 2020: £2,953 million, translated at twelve month average exchange rates for 2020). 

 

The Group net debt leverage on this basis at 31 December 2021 was 1.3x EBITDA (31 December 2020: 4.1x EBITDA), transforming the Balance Sheet from last year's leverage, to be more conservative.

    

 

 

ASSETS AND LIABILITIES

 

The summarised Melrose Group assets and liabilities are shown below:

 

	2021 £m	2020 £m
Goodwill and intangible assets acquired with business combinations	7,043	8,790
Tangible fixed assets, computer software and development costs	2,875	3,541
Equity accounted investments	429	430
Net working capital	159	346
Net retirement benefit obligations	(461)	(838)
Provisions	(701)	(1,021)
Deferred tax and current tax	(495)	(717)
Lease obligations	(376)	(555)
Net other	17	(19)
Total	8,490	9,957

 

These assets and liabilities are funded by:

	2021 £m	2020 £m
Net debt	(950)	(2,847)
Equity	(7,540)	(7,110)
Total	(8,490)	(9,957)

 

Net debt shown in the table above is defined in the glossary to the Consolidated Financial Statements and is consistent with the banking facility covenant testing definition.

 

 

GOODWILL, INTANGIBLE ASSETS AND IMPAIRMENT REVIEW

 

The total value of goodwill as at 31 December 2021 was £2,850 million (31 December 2020: £3,640 million) and intangible assets acquired with business combinations was £4,193 million (31 December 2020: £5,150 million). These items are split by reporting segment as follows:

 

31 December 2021	Aerospace £m	Automotive £m	Powder Metallurgy £m	Other Industrial £m	Total £m
Goodwill	933	1,001	507	409	2,850
Intangible assets acquired with business combinations	2,542	979	559	113	4,193
Total goodwill and acquired intangible assets	3,475	1,980	1,066	522	7,043

 

The Group's goodwill and intangible assets have been tested for impairment, and in accordance with IAS 36 "Impairment of assets" the recoverable amount has been assessed as being the higher of the fair value less costs to sell and the value in use. 

 

Under IAS 36, the value in use basis for calculating the recoverable amount prohibits the inclusion of future uncommitted restructuring plans, whilst the fair value less costs to sell basis of valuation allows the inclusion of these plans if it is deemed that a market participant would also restructure.

 

With the future benefits of restructuring projects currently forming a material part of valuations for certain businesses within the Group, the fair value less costs to sell basis gives the higher valuation at this point in time for the GKN group of cash generating units, and therefore in accordance with IAS 36, has been used in assessing the recoverable amount for these businesses.

 

The Board is comfortable that no impairment is required in respect of the valuation of goodwill and intangible assets in its businesses as at 31 December 2021. 

 

PROVISIONS

 

Total provisions at 31 December 2021 were £701 million (31 December 2020: £1,021 million), which included: £222 million for warranty (31 December 2020: £330 million); £167 million for loss-making contracts (31 December 2020: £241 million); £135 million for environmental and litigation issues (31 December 2020: £191 million); £81 million for restructuring (31 December 2020: £147 million); and other provisions of £96 million (31 December 2020: £112 million).

 

The following table details the movement in provisions in the year:

 

	Total £m
At 1 January 2021	1,021
Spend against provisions	(278)
Net charge to adjusted operating profit	72
Net charge shown as adjusting items	96
Release of loss-making contract provision to adjusting items	(22)
Utilisation of loss-making contract provision	(48)
Disposals	(118)
Other (including foreign exchange)	(22)
At 31 December 2021	701

 

Spend against provisions in the year, of £278 million, included £167 million of cash spent on restructuring activities.

 

The net charge to adjusted operating profit in the year of £72 million is primarily in respect of ongoing warranty and workers' compensation charges which are closely matched by similar cash payments in the year. 

 

The net charge shown as adjusting items in the Income Statement of £96 million primarily includes costs associated with restructuring actions of £124 million, discussed within the adjusting items section of this review, net of a release, mainly relating to fair value items settled for an amount more favourable than first anticipated.

 

The utilisation of the loss-making contract provision was £48 million in the year (31 December 2020: £59 million).  Furthermore, £22 million, approximately 13%, of the remaining loss-making contract provision was released as an adjusting item in the year, either because contracts have been favourably resolved following positive negotiations with customers or because operational efficiencies have been demonstrated for a sustained period of time.  At 31 December 2021 the loss-making contract provision was £167 million, approximately 70% lower than when GKN was acquired in 2018.

 

Movement in provisions in the year also included foreign exchange movements of £21 million and the unwind of discounting on certain provisions of £1 million.  These are shown in the Other category in the table above.

 

 

PENSIONS AND POST-EMPLOYMENT OBLIGATIONS

 

Melrose operates a number of defined benefit pension schemes and retiree medical plans across the Group, accounted for using IAS 19 Revised: "Employee Benefits". 

 

The values of the Group plans were updated at 31 December 2021 by independent actuaries to reflect the latest key assumptions and are summarised as follows:

 

	Assets £m	Liabilities £m	Accounting surplus/deficit £m
GKN UK Group pension schemes (Numbers 1 - 4)	2,754	(2,575)	179
Other Group pension schemes	256	(896)	(640)
Total Group pension schemes	3,010	(3,471)	(461)

 

The most significant pension plans remaining in the Group are the GKN UK Group Pension Schemes (Numbers 1 - 4), two of which are allocated to the Aerospace division and two to the Automotive division.  At 31 December 2021 in total these four pension plans had aggregate gross assets of £2,754 million (31 December 2020: £2,556 million), gross liabilities of £2,575 million (31 December 2020: £2,755 million) and a net surplus of £179 million (31 December 2020: net deficit of £199 million), split 60% of the surplus held within Aerospace and 40% within Automotive.  These GKN schemes are closed to new members and to the accrual of future benefits for current members.

 

The largest deficits within the other pension schemes in the Group relate to German GKN pension plans which provide benefits dependent on final salary and service, and which are generally unfunded and closed to new members.  At 31 December 2021 these plans had a net deficit of £530 million (31 December 2020: £559 million).

 

During the year, £53 million of net surplus on pension schemes were transferred with businesses on disposal. In addition, a successful buy-out of pensioner liabilities of the GKN UK 2016 Pension Plan was performed, resulting in c.8,000 pensioners benefits being secured with Aviva or Rothesay.  Prior to the completion of the buy-out process, the remaining 2,659 deferred members, along with the resulting net surplus of £43 million, of the GKN UK 2016 Pension Plan were transferred to a ring-fenced section of the GKN Group Pension Scheme Number 2.

 

The Group's funding commitment of the GKN UK Group Pension Schemes, made when GKN was acquired in 2018, has been delivered ahead of schedule following an agreed contribution of £34 million after the disposal of Nortek Air Management.  The ongoing contributions to these defined benefit pension schemes have now halved to £30 million per annum, with no further requirement to contribute amounts following disposals of businesses.

 

In total, ongoing contributions to the Group defined benefit pension plans and post-employment medical plans in the year ended 31 December 2021 were £54 million and are expected to be at a similar level in 2022.

 

A summary of the assumptions used are shown in the Financial Statements.  It is noted that a 0.1 percentage point decrease in the discount rate would increase the retirement benefit accounting liabilities of the Group, on an IAS 19 basis, by £61 million, or 2%, and a 0.1 percentage point increase to inflation would increase the liabilities by £41 million, or 1%.  Furthermore, an increase by one year in the expected life of a 65 year old member would increase the pension liabilities on these plans by £175 million, or 5%.

 

FINANCIAL RISK MANAGEMENT

 

The financial risks the Group faces continue to be considered and policies are implemented to appropriately deal with each risk. The most significant financial risks are considered to be liquidity risk, finance cost risk, exchange rate risk, contract and warranty risk and commodity cost risk.

 

These are discussed in turn below.

 

Liquidity risk management

 

The Group's net debt position at 31 December 2021 was £950 million (31 December 2020: £2,847 million).

 

In December 2021, the Group extended the maturity date of both its term loan and revolving credit facility to 30 June 2024. Subsequent to this extension, in December 2021 the term loan was partly prepaid by £70 million and US$172 million. Consequently, the Group's committed bank funding includes a multi-currency denominated term loan of £30 million (31 December 2020: £100 million) and US$788 million (31 December 2020: US$960 million) and a multi-currency denominated revolving credit facility of £1.1 billion, US$2.0 billion and €0.5 billion. Loans drawn under this facility are guaranteed by Melrose Industries PLC and certain of its subsidiaries, but there is no security over any of the Group's assets in respect of this facility.

 

At 31 December 2021, the term loan was fully drawn and there were no amounts drawn on the multi-currency revolving credit facility. Applying the exchange rates at 31 December 2021, the headroom equated to £3.0 billion. There are also a number of uncommitted overdraft, guarantee and borrowing facilities made available to the Group.

 

In addition to the headroom on the multi-currency committed revolving credit facility, cash, deposits and marketable securities, net of overdrafts, in the Group amounted to £468 million at 31 December 2021 (31 December 2020: £160 million).

 

The Group also holds capital market borrowings as at 31 December 2021 consisting of:

Maturity date	Notional amount £m	Coupon % p.a.	Cross-currency swaps million	Interest rate on swaps % p.a.
September 2022	450	5.375%	US$373	5.70%
			€284	3.87%
May 2032	300	4.625%	n/a	n/a

 

The committed bank funding has two financial covenants, being a net debt to adjusted EBITDA covenant and an interest cover covenant, both of which are tested half-yearly in June and December. 

 

The net debt to adjusted EBITDA covenant test level is set at 4.25x at 31 December 2021; 4.0x at 30 June 2022; 3.75x at 31 December 2022; and 3.5x at 30 June 2023 and onwards. At 31 December 2021 the Group net debt leverage was 1.3x, affording comfortable headroom.

 

The interest cover test is set at 3.0x at 31 December 2021; 3.25x at 30 June 2022; and 4.0x from 31 December 2022 onwards.  At 31 December 2021 the Group interest cover was 5.9x, again showing comfortable headroom compared to the covenant test.

 

A limited number of Group trade receivables are subject to non-recourse factoring and customer supply chain finance arrangements. As at 31 December 2021, these amounted to £310 million (31 December 2020: £314 million) and as a result there was a net cash reduction in the year of £4 million (2020: benefit of £60 million).

 

In addition, some suppliers have access to utilise the Group's supplier finance programmes, which are provided by a number of the Group's banks. As at 31 December 2021 there were drawings on these facilities of £102 million (31 December 2020: £62 million). There is no cost to the Group for providing these programmes as the cost is borne by the suppliers. These programmes allow suppliers to choose whether they want to accelerate the payment of their invoices by the financing banks, at a low interest cost, based on the credit rating of the Group as determined by the financing banks. If the Group exited these arrangements or the banks ceased to fund the programmes there could be a potential impact of approximately £60 million (31 December 2020: approximately £30 million) on the Group's cash flows. The risk of this happening is considered low as the Group has extended the number of banks that provide this type of financing to ensure there is not a significant exposure to any one bank.

 

 

Finance cost risk management

 

The policy of the Board is to fix approximately 70% of the interest rate exposure of the Group. Following the disposals of Nortek Air Management, Nortek Control and Brush, the Group's net debt reduced significantly and, to maintain the policy of fixing approximately 70% of the Group's interest rate exposure, several of the interest rate swaps were cancelled at a cash cost of £47 million.

 

The bank margin on the bank facility depends on the Group leverage, which reduced following the disposals completed in the year.  Following the extension of the bank facility in December 2021, the bank margins were as follows:

 

	31 Dec 2021		31 Dec 2020
Facility:	Margin	Range	Margin	Range
Term Loan	0.75%	0.75% - 2.0%	2.0%	0.75% - 2.0%
Revolving Credit Facility	0.75%	0.75% - 2.0%	2.25%	0.95% - 2.25%

 

The Group holds cross-currency interest rate swaps associated with the 2022 fixed rate capital market borrowings, described earlier in this review. In addition, US$ bank debt of US$170 million is swapped into €150 million and is used to reduce the cost of the Group's borrowings. The Group also holds interest rate swap instruments to fix the cost of LIBOR on borrowings under the bank facility. The Income Statement cost on the 2022 cross-currency and interest rate swaps are as follows:

 

Interest rate swaps associated with:	31 Dec 2021	Maturity
2022 fixed rate capital market borrowings	3.4%	September 2022
Fixing LIBOR on the Group bank facility (excluding margin)	2.2%	January 2023

 

At 31 December 2021, the fair value liability of all cross-currency swaps held by the Group was £69 million (31 December 2020: £89 million).

 

The Group's combined Income Statement cost of debt for the next 12 months including the prior year comparative is shown below:

 

	31 Dec 2021	31 Dec 2020
Excluding amortisation of bank arrangement fees	3.4%	3.9%
Including amortisation of bank arrangement fees	4.1%	4.2%

 

 

Exchange rate risk management

 

The Group trades in various countries around the world and is exposed to movements in a number of foreign currencies. The Group therefore carries exchange rate risk that can be categorised into three types: transaction, translation and disposal related risk, as described in the paragraphs below. The Group's policy is designed to protect against the majority of the cash risks but not the non-cash risks. 

 

The most common exchange rate risk is the transaction risk the Group takes when it invoices a customer or purchases from suppliers in a different currency to the underlying functional currency of the relevant business.  The Group's policy is to review transactional foreign exchange exposures, and place necessary hedging contracts, quarterly on a rolling basis.  To the extent the cash flows associated with a transactional foreign exchange risk are committed, the Group will hedge 100% at the time the cash flow becomes committed. For forecast and variable cash flows, the Group hedges a proportion of the expected cash flows, with the percentage being hedged lowering as the time horizon lengthens. The average time horizons for GKN Aerospace, GKN Automotive and GKN Powder Metallurgy reflect the longer-term nature of the contracts within these divisions.  Typically, in total the Group hedges around 90% of foreign exchange exposures expected over the next twelve months and approximately 60% to 80% of exposures expected between 12 and 24 months. This policy does not eliminate the cash risk but does bring some certainty to it.

 

The translation rate risk is the effect on the Group results in the period due to the movement of exchange rates used to translate foreign results into Sterling from one period to the next. No specific exchange instruments are used to protect against the translation risk because it is a non-cash risk to the Group, until foreign currency is subsequently converted to Sterling. However, the Group utilises its multi-currency banking facilities and cross-currency swaps, where relevant, to maintain an appropriate mix of debt in each currency. The hedge of having debt drawn in these currencies funding the trading units with US Dollars or Euro functional currencies protects against some of the Balance Sheet and banking covenant translation risk.

 

Lastly, exchange rate risk arises when a business that is predominantly based in a foreign currency is sold. The proceeds for those businesses may be received in a foreign currency and therefore an exchange rate risk may arise on conversion of foreign currency proceeds into Sterling, for example to pay a Sterling dividend or Capital Return to shareholders. Protection against this risk is considered on a case by case basis and, if appropriate, hedged at the time.

 

Exchange rates for currencies most relevant to the Group in the year were:

US Dollar		Average rate	Closing rate
2021		1.38	1.35
2020		1.28	1.37
Euro
2021		1.16	1.19
2020		1.13	1.12

 

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:

 

£m	USD	EUR	CNY	Other
Increase in adjusted operating profit	23	4	8	11
% impact on adjusted operating profit	6%	1%	2%	3%

 

The impact from transactional foreign exchange exposures is not material in the short term due to hedge coverage being approximately 90%.

 

A 10 percent strengthening in either the US Dollar or Euro would have the following impact on debt as at 31 December 2021:

	USD	EUR
Increase in debt - £ million	74	37
Increase in debt	5%	3%

 

 

Contract and warranty risk management

 

Under Melrose management a suitable bid and contract management process exists in the businesses, which includes thorough reviews of contract terms and conditions, contract-specific risk assessments and clear delegation of authority for approvals. These processes aim to ensure effective management of risks associated with complex contracts. The financial risks connected with contracts and warranties include the consideration of commercial, legal and warranty terms and their duration, which are all considered carefully by the businesses and Melrose centrally before being entered into.

Commodity cost risk management

 

The cumulative expenditure on commodities is important to the Group and the risk of base commodity costs increasing is mitigated, wherever possible, by passing on the cost increases to customers or by having suitable purchase agreements with suppliers which fix the price over a certain period. These risks are also managed through sourcing policies, including the use of multiple suppliers, where possible, and procurement contracts where prices are agreed in advance to limit exposure to price volatility.  Occasionally, businesses within the Group enter financial instruments on commodities when this is considered to be the most efficient way of protecting against price movements. 

 

GOING CONCERN

 

As part of their consideration of going concern, the Directors have reviewed the Group's future cash forecasts and profit projections, which are based on market data, internal information and recent past experience.

 

The Group has modelled a reasonably possible downside scenario against future cash forecasts.  The Group's Balance Sheet is transformed compared to the same time last year, and for any reasonably possible downside scenario, the Group has sufficient headroom to avoid breaching any financial covenant and would not require any additional sources of financing throughout the forecast period.

 

The macroeconomic environment remains uncertain and volatile.  The impacts of the pandemic, political conflict and unrest on trading conditions and supply chain constraints could be more prolonged or severe than the Directors have considered in this reasonably possible scenario.  It is recognised that the very recent events in Ukraine are still unfolding and any wider impacts are difficult to fully assess at this early time.

 

The Group's current committed bank facility headroom, its access to liquidity, and the sensible levels of bank covenants in place with lending banks, allow the Directors to consider it appropriate that the Group can manage its business risks successfully and adopt a going concern basis in preparing these Financial Statements.

 

 

 

 

 

 

Geoffrey Martin

Group Finance Director

3 March 2022

 

 

CAUTIONARY STATEMENT

 

This announcement contains forward-looking statements.  These statements are made in good faith based on the information available up to the time of the approval of this announcement, and should be treated with caution due to the inherent uncertainties, including both economic and business risk factors, underlying any such forward-looking information.  Accordingly, readers are cautioned not to place undue reliance on any such forward-looking statements.  Subject to compliance with applicable laws and regulations, the Company does not undertake any obligation to update any forward-looking statement to reflect events or circumstances after the date of this announcement.

 

This announcement has been prepared solely to provide information to shareholders to assess the Company's strategies and the potential for those strategies to succeed, and neither the Company nor its directors accept any liability to any other person save as would arise under English law.