Final Results

Melrose PLC 05 March 2008 5 March 2008 MELROSE PLC AUDITED RESULTS FOR YEAR ENDED 31 DECEMBER 2007 Melrose PLC today announces its audited results, which are reported under IFRS, for the year ended 31 December 2007. Financial Highlights* â€¢Disposal of McKechnie Aerospace and PSM at a profit of over Â£190 million â€¢Return of Â£220 million to shareholders on 31 August 2007 â€¢Revenue of Â£344.0 million (2006: Â£323.6 million) â€¢Headline Operating Profit** of Â£24.5 million (2006: Â£19.2 million) â€¢Operating Profit of Â£18.7 million (2006: Â£11.9 million) â€¢Headline Profit before Tax** of Â£27.0 million (2006: Â£12.1 million) â€¢Profit before Tax of Â£21.2 million (2006: Â£4.8 million) â€¢Basic Earnings Per Share of 7.4p (2006: 1.2p) â€¢Basic Earnings Per Share for continuing and discontinued group of 102.1p (2006: 14.7p) â€¢2007 Proforma Earnings Per Share*** of 14.3p â€¢Proposing a Final Dividend of 4.25p per share (2006: 3.75p). Together with the interim dividend of 2.5p, this gives a full year dividend of 6.75p (2006: 6p) up 12.5% â€¢Net cash of Â£32.4 million (2006: net debt of Â£162.6 million) * continuing operations only unless otherwise stated ** before exceptional costs, exceptional income and intangible asset amortisation other than computer software *** defined in section "Earnings per Share and Number of Shares in Issue" of the Finance Director's Review Other Highlights Christopher Miller, Chairman of Melrose PLC, today said: "2007 has been a busy and successful year. We've given a good demonstration of the validity of our business model by returning Â£220 million to our shareholders after the successful sale of McKechnie Aerospace. We've also had a great set of results and are optimistic about 2008. It was also exciting for us to announce this morning that we are moving forward with FKI. Although there's some way to go yet before the deal is concluded, it would give us the opportunity for more growth and value creation in the future." An Analysts' meeting will be held today at 11.00 am at Investec, 2 Gresham Street, London EC2V 7QP Enquiries: Nick Miles James Hill M: Communications 020 7153 1530 CHAIRMAN'S STATEMENT I am pleased to report Melrose's fifth set of annual results since flotation in October 2003. RESULTS FOR THE CONTINUING GROUP Following the sale of McKechnie Aerospace and Aerospace Aftermarket divisions ("McKechnie Aerospace") and the majority of our PSM division ("PSM") (together the "Disposals"), these accounts report the results of our businesses for the twelve months to 31 December 2007 and the relevant comparatives for the previous year. They take into account the effect of the return of capital and share consolidation during August 2007. Revenue for the year was Â£344.0 million (2006: Â£323.6 million). Headline profit before tax (before exceptional costs, exceptional income and intangible asset amortisation other than computer software) was Â£27.0 million (2006: Â£12.1 million). After these items the profit before tax was Â£21.2 million (2006: Â£4.8 million) and basic earnings per share were 7.4p (2006: 1.2p) Further explanation of these results is provided in the Finance Director's Review. Our businesses and their employees have worked very hard to produce these good results and I thank them on behalf of our shareholders. 2007 was a very busy year in which much was achieved. In May we sold McKechnie Aerospace for Â£428 million and PSM for Â£30 million realising a combined profit of over Â£190 million in the two years since acquisition. In line with our stated objectives, we returned Â£220 million of capital to shareholders in August. Together with dividends this means we have returned to shareholders 95% of the equity raised since Melrose's inception in 2003. At the same time as the return of capital, shares in issue were reduced by means of a share consolidation. Notwithstanding this repayment of capital, Melrose had year end net cash of Â£32.4 million, compared with net debt of Â£162.6 million at the end of last year. In such an active year it would be easy to overlook the strong performances of our continuing businesses. All three divisions have bettered their results of last year, and although MVC continues to trade in a very difficult market place in the USA, we are optimistic that this overall improvement will continue into 2008. Cash generation remains very strong. David Roper reports in more detail on each of our businesses in his Chief Executive's Review. DIVIDENDS The Board intends to propose a final dividend of 4.25p per share (together with an interim dividend of 2.5p per share paid on 16 November 2007, a total of 6.75p per share) (2006: 6.0p per share) at the Annual General Meeting on 7 May 2008. The dividend is payable on 16 May 2008 to shareholders on the register at 14 March 2008. STRATEGY AND OUTLOOK Our model is to acquire businesses which we understand and which are capable of substantial improvement under our ownership. It is an important part of this model that we return capital to shareholders as and when value has been created and realised. We are pleased to have been able to give an effective demonstration of this during 2007. I said last September that we were well placed to pursue suitable acquisitions and that market conditions were potentially aiding us in this respect. That continues to be the case and we are optimistic of concluding one or more acquisitions in the next twelve months which will give us the opportunity for substantial further growth and profitability. Christopher Miller 5 March 2008 CHIEF EXECUTIVE'S REVIEW I am very pleased with the results of the Group in 2007. A lot happened during the year and the make-up of the Group is markedly different from this time last year. The sale of the McKechnie Aerospace division and PSM in May, resulting in a profit to Melrose of over Â£190 million after only two years in our ownership, was very gratifying. This enabled us to return Â£220 million to shareholders in August. This means that shareholders have received by way of distribution or return of capital 95% of the equity capital raised since Melrose floated in October 2003. In addition, the trading result for the Group in 2007 was good. I set out below the reports on the divisions and would mention the following highlights: â€¢ At Dynacast a major investment programme in South China is underway to take advantage of the continuing strong trading conditions in the Far East. Having completed the restructuring of its operational base and turned its attention to bolt-on acquisitions, it is pleasing to report that Dynacast has successfully completed two such acquisitions in the second half of the year - the search continues for more. â€¢ At MVC, although market conditions remain extremely challenging, operational improvements continue to be made and the new chrome plating line was successfully introduced, which assisted the launch of MVC's new plasticlad product. â€¢ At MPC the benefits of operational restructuring and of focusing on higher margin value added products are coming through well. New product introductions, supported by targeted capital investment, were notable achievements. OUTLOOK Dynacast continues to show the quality of its business franchise by reporting increased profits and margins, even in the face of large raw material price rises. In addition to its active ongoing capital investment programme, particularly in the Far East, the company is looking to make further value-enhancing bolt-on acquisitions. At both MVC and MPC the strategy is to exploit the high level of technical engineering and design expertise in the businesses, supported by bold but highly focused capital investment, to deliver improved returns. As Chris Miller says in his Chairman's Statement, having successfully sold businesses and returned capital to our shareholders, we have been able to show how our business model works in practice. Our strong financial condition and solid trading performance position us well to take advantage of the current market conditions to pursue acquisition opportunities. I am most encouraged by the trading performance of the Group and I look forward to further achievements in the year ahead. DYNACAST Year ended 31 December 2007 2006 Â£m Revenue 235.9 221.7 Headline Operating Profit 28.9 25.1 Dynacast is a global manufacturer of precision engineered, die-cast metal components and assemblies. The products are manufactured using proprietary die-casting technology and are supplied to a wide range of end markets, including automotive, healthcare, telecommunications, consumer electronics and computer hardware and peripherals. Dynacast performed well in 2007. Revenue and headline operating profit were up by 6.4% and 15.1% respectively over the previous year. These results are after suffering an exchange loss on translation (resulting from the weakness of the US dollar) of Â£0.5 million and exchange losses on transactions (primarily as a result of the increased strength of the Canadian dollar against the US dollar) of Â£1 million. Whereas Dynacast's 2006 headline operating profit was adversely impacted by approximately Â£3 million because of the non-recovery of zinc cost (the company's major raw material), management's actions in the second half of 2006 in aligning movements in zinc input prices with selling prices to customers have to a large degree removed the effect of movements in the price of zinc from headline operating profit. Europe was ahead of expectations, buoyed generally by favourable economic and trading conditions in its markets. In particular, Germany, Austria and Spain performed strongly and finished ahead of target. We were pleased with the recovery of Dynacast France after having transferred some of its less profitable work to lower cost countries. 2007 was the first full year of running the Gillette "Fusion" product, produced in a purpose-built factory in Austria, and volumes were in line with original predictions. Performance in North America was reasonable, both at the revenue and headline operating profit level. Market conditions in this region are more difficult at present than in both Europe and Asia, largely due to a higher proportion of sales to the automotive sector. It was encouraging to see in the early part of the year the operational benefits from the closure of the Spartanburg factory in South Carolina. Of special note is the continuing robust sales of handles for the "Mach III" Gillette razor, which has been produced in our factory in Montreal for ten years. In Asia, trading continued to be buoyant with Dynacast China leading the way with revenue and headline operating profit up 46.9% and 59.7% respectively over the previous year. Singapore performed particularly well in winning new sales to replace products that reached their "end-of-life" earlier in the year. In view of the continuing strong demand in the region, a capital expenditure project has been approved to invest approximately Â£4 million over the next four years in a new manufacturing facility in Southern China. When Melrose acquired Dynacast in May 2005 we embarked upon a restructuring programme to align Dynacast's manufacturing sites with its customer base, which itself was continuing to migrate production to lower cost countries. This phase is now complete and we have seen Dynacast's return on sales (on a constant zinc and currency basis) improve significantly since acquisition to 14.8%. Following this, in order to further develop the business and generate additional revenue growth, Dynacast is now focusing on add-on acquisition opportunities. The market that Dynacast operates in is very fragmented and affords considerable consolidation opportunities. Two businesses, QZD and Techmire (both based in Montreal, Canada), were acquired in September 2007 for a total cost of Â£8.7 million. QZD, a precision zinc die-casting business, has been successfully integrated into Dynacast's Montreal factory. Techmire is a designer and manufacturer of multiple-slide die-casting machines and will be operated as a stand-alone business. Techmire's overheads have already been significantly reduced and a new site has been found close to the existing Dynacast site to rehouse the production facilities. Both acquisitions are expected to improve the profitability of Dynacast's operations. Management are continuing to look for suitable acquisition opportunities (including Eastern Europe) and to invest heavily in the fast growing Far East markets, while maintaining their focus on achieving the highest levels of operating efficiency in the business. Dynacast benefits from a strong market share, a well diversified geographic and product sector exposure and excellent cash generation qualities. We are confident that management will deliver another strong set of results in 2008. MVC Year ended 31 December 2007 2006 Â£m Revenue 55.4 48.0 Headline Operating Loss (0.5) (2.3) MVC manufactures decorated exterior trim products for the US automotive industry, principally coated metal and plastic wheel products. Although MVC reported substantially improved results in 2007 over 2006, it is disappointing that the company did not reach breakeven. MVC's new products in 2007 were targeted towards the smaller crossover vehicles rather than the SUVs and pick-up trucks, which provided it with growth in a difficult marketplace. Unfortunately the benefits of this growth have been reduced principally by higher raw material costs. Whilst considerable progress was made by MVC management to recover these raw material costs in 2007 a combination of the growth in output and the size of the increases resulted in higher overall costs. Improved levels of recovery negotiated during the latter part of 2007 and the fall in raw material costs back toward the prices at the beginning of 2007 should help to continue the progress of this business towards a more satisfactory result. A key challenge for MVC management during 2008 will be addressing the profitability of a number of legacy products. The highlight of the year was the successful introduction in September of the new chrome plating line at our Nicholasville plant. This was critical in enabling MVC to meet the high level of contracted orders from customers for the new plasticlad product. In addition, significant improvements have been made in the wheel assembly process at Nicholasville which bode well for the forthcoming new product launches in 2008. Our Newberry plant continues to deliver a good performance. It coped well with the transfer of the duraclad assembly line from Nicholasville, which improved capacity utilisation, and has flexed its operational cost base well to match demand. The operational improvement in 2007 has been pleasing. However, even allowing for its good position in a niche market, conditions in the US automotive market are tough. With constant attention to the basics and the new plating line geared up to meet the projected demands of the new programmes coming on stream in the second half of 2008, we expect a continuing improvement. MPC Year ended 31 December 2007 2006 Â£m Revenue 52.7 53.9 Headline Operating Profit 3.9 3.0 MPC is a UK producer of engineered plastic injection moulded components for products used in a variety of industries, including power tools, IT hardware, food and beverage packaging and automotive. Following the sale of the fastener division of McKechnie PSM in May 2007 the results of both the PSM Thread Locking and Sealing business (which has been renamed Prelok) and Canning Brett are included in this section. MPC has delivered a strong set of results in 2007. Although the closure of the Northampton plant in 2006 resulted in a fall in revenue, this action had the desired effect of a more profitable business with headline operating profit up by 30% over 2006. MPC continues to focus its engineering expertise on more automated, highly engineered, value added products and processes, whilst building strong, long term relationships with its customers. This strategy has enabled MPC to differentiate itself from its competitors. The Stamford Bridge facility has had a good year as a result of its rigorous adherence to the above strategy, supplemented by a substantial capital expenditure programme. In addition to the successful development of new highly automated production cells together with process re-engineering for a number of key customers, new long term contracts have been signed with Diageo and Scotco for the supply of "widgets" for use in cans and bottles. The quality of the business at MPC's automotive operation at Pickering has improved notably during the year - headline operating profit has more than doubled on broadly unchanged sales. Again, focusing on the core strategy of a targeted capital investment programme together with emphasis on pricing discipline to recover input costs has paid dividends. Prelok's results in the year were most encouraging. With production volumes outstripping capacity in its Cologne facility, a new production unit located in Germany became fully operational in July 2007. This new facility, close to the Polish and Czech borders, is well positioned to profit from new business opportunities in the burgeoning Eastern European markets. With a favourable start to 2008 and further opportunities in the UK industry afforded by the demise of certain competitors, we expect MPC to continue to build on its strong foundation and to deliver another good performance this year. David Roper 5 March 2008 FINANCE DIRECTOR'S REVIEW The year to 31 December 2007 included the disposal of the McKechnie Aerospace and PSM division. Taken together, these sold businesses constituted 36% of group sales and 66% of group headline operating profit in 2006. Consequently the Melrose Group is now significantly smaller than in 2006, and in compliance with IFRS 5, the trading results for the Group are split into continuing operations and discontinued operations. GROUP TRADING RESULTS - CONTINUING OPERATIONS The continuing operations comprise Dynacast, McKechnie Vehicle Components (MVC) and McKechnie Plastic Components (MPC). The latter division now includes the remaining smaller part of PSM, trading as Prelok, and Canning Brett. To help understand the results, the term 'headline' has been used in this Review. This refers to numbers that are calculated before exceptional costs, exceptional income and intangible asset amortisation other than computer software. The Group achieved revenue from continuing operations for the year ended 31 December 2007 of Â£344.0 million (2006: Â£323.6 million) representing an increase of Â£20.4 million, 6.3% over the previous year or 9.7% at constant currency. Headline operating profit grew by 27.6% to Â£24.5 million (2006: Â£19.2 million). This represents a headline operating profit return on revenue of 7.1% (2006: 5.9%), a 1.2 percentage point increase on the previous year. At constant currency the profit growth in 2007 was 30.2% as a Â£0.5 million translation exchange loss was incurred, largely due to the weakness of the US dollar. After exceptional costs, exceptional income and intangible asset amortisation, the operating profit was Â£18.7 million (2006: Â£11.9 million). TRADING RESULTS BY DIVISION The improvement in the trading results has been driven by stronger performance at each division. A split of revenue and headline operating profit by division is as follows: ---------------------------------------------------------------------------------- Revenue Headline Return on Sales Headline Return on Sales Operating Operating Profit Profit before depreciation & amortisation Â£m Â£m % Â£m % ---------------------------------------------------------------------------------- Dynacast 235.9 28.9 12.3% 35.7 15.1% MVC 55.4 (0.5) (0.9%) 1.4 2.5% MPC 52.7 3.9 7.4% 5.5 10.4% Central - (5.8) - (5.7) - Costs Central - LTIPS - (2.0) - (2.0) - Group 344.0 24.5 7.1% 34.9 10.1% The performance by division is discussed in more detail in the Chief Executive's Review. The change in headline operating profit return on revenue percentage from 2006 to 2007 is shown below. Headline operating profit return on revenue: Group Dynacast MVC MPC % % % % 2007 7.1 12.3 (0.9) 7.4 -------------------------------------------------------------------------------- 2006 5.9 11.3 (4.8) 5.6 The increase in the continuing Group return on revenue has been driven by an improvement in all three divisions. CASH GENERATION AND MANAGEMENT Melrose places strong emphasis on cash generation and management. This is achieved by the careful monitoring of the key cash and working capital metrics in each division and by ensuring that divisional management is incentivised to turn profit into cash. Since the acquisition of the Dynacast and McKechnie businesses the profit conversion to cash for the continuing Group has averaged 94% (post working capital movement and capital expenditure). This high conversion ratio has been achieved even after spending in excess of depreciation on capital projects. Dynacast in particular, which now trades with only two weeks of net working capital, has excellent profit conversion to cash averaging 107% during Melrose ownership. Since acquisition Dynacast has generated Â£68 million in cash after all working capital movement, capital expenditure and restructuring costs. The cash generation performance in 2007 is summarised as follows: Â£m -------------------------------------------------------------------------------- Headline operating profit 24.5 Depreciation and computer software amortisation 10.4 Working capital increase (2.9) Total capital expenditure (16.0) Disposal of assets 0.4 -------------------------------------------------------------------------------- Headline cash generated from operations 16.4 Disposal of businesses 446.7 Capital distribution paid (212.6) Acquisition of subsidiaries (8.7) Restructuring costs and spend on other provisions (1.9) Interest and tax (2.8) Pension contributions (26.1) Dividends paid (13.0) Exchange & other (including discontinued operations) (3.0) -------------------------------------------------------------------------------- Total movement in net debt/net cash in 2007 195.0 During 2007, 67% of headline operating profit was converted into cash (post working capital and capital expenditure). This was despite the exceptionally high capital spend in MVC during the year. Adjusting for this, the profit conversion to cash was 94% in 2007, in line with the longer term Melrose average. CAPITAL AND RESTRUCTURING PROJECTS Since the acquisition of the Dynacast and the McKechnie businesses, Melrose has spent significant amounts on capital and restructuring projects, averaging approximately Â£25 million per year, equal to 1.3x depreciation on capital projects and 0.5x depreciation on restructuring projects. This level of expenditure demonstrates the importance the Board place on this method of creating shareholder value. The total expenditure on these items over the last three reporting periods has been as follows: 2005 2006 2007 Average x (7 mths) Â£m Â£m Â£m Â£m Capital Expenditure 7.1 19.7 18.7 1.3 x Restructuring Projects - cash spend 8.9 9.2 1.0 0.5 x -------------------------------------------------------------------------------- Total 16.0 28.9 19.7 1.8 x -------------------------------------------------------------------------------- The capital expenditure in 2007 includes continued investment in the Dynacast production facility in China; however, the most significant item of capital expenditure in 2007 was in MVC. Over the last 15 months, MVC has invested Â£7.5 million on a new nickel chrome plating line for its plasticlad wheel cover ranges. As a consequence the book value of the old discontinued plating line has been fully impaired. This Â£1.5 million non cash charge has been shown in exceptional costs. The new restructuring projects in 2007 relate mainly to integrating the small acquisitions made by Dynacast. PROFIT ON SALE OF BUSINESSES Gross proceeds from the Disposals during the year were Â£458.0 million and costs charged during the period were Â£10.8 million. Net assets disposed of were Â£233.6 million, (including goodwill and intangible assets other than computer software of Â£152.5 million), and the cumulative exchange translation movement on assets since acquisition of Â£22.0 million, previously booked straight to reserves, was recycled on disposal. As a result the profit on sale was Â£191.6 million. TAX The Melrose Group remains in a strong tax position. The headline tax charge in the profit and loss account has reduced to 26% in 2007 from 28% in 2006. This is below the UK statutory rate during the period of 30% as the Group continues to benefit from lower Far East tax rates, balanced in part with higher North American and European tax rates. The headline cash tax rate of 16% for the continuing Group remains below the profit and loss account rate but as expected the gap between the two is narrowing. The Group has significant tax losses available to it but due to the split of profits geographically most are not recognised as deferred tax assets because the majority of the losses are in the UK where insufficient profits are generated. A summary of tax losses by geography is shown below: Recognised Unrecognised Total Â£m Â£m Â£m UK - 138.6 138.6 North America 2.6 6.7 9.3 Rest of World - 18.6 18.6 -------------------------------------------------------------------------------- Total 2.6 163.9 166.5 -------------------------------------------------------------------------------- The Group paid no corporation tax on the profits it made on the Disposals. This is largely a result of the Group benefiting from the substantial shareholder exemption rules in the UK. RETURN OF CAPITAL AND SUBSEQUENT SHARE CONSOLIDATION During August 2007, following the Disposals and in line with the Melrose strategy to return surplus cash to shareholders, the Group returned Â£220 million of capital to shareholders. Shareholders had the option of receiving a payment either in August 2007 or deferred until 2008. This meant that within 28 months of acquiring the McKechnie and Dynacast businesses in May 2005, 95% of capital raised from shareholders had been returned, and the group had moved to a net cash position. The capital return was made in conjunction with a 1 for 2 share consolidation which resulted in the number of shares in issue reducing from 267.3 million to 133.7 million. As permitted some shareholders opted to defer the capital payment until 2008 and therefore a Â£7.2 million creditor is included in the 31 December 2007 balance sheet to represent the outstanding balance on the Â£220 million capital repayment. LONG TERM INCENTIVE SCHEME Melrose has an incentive scheme which rewards certain senior management with Melrose shares as defined in the Remuneration Report. The original scheme set up at the start of Melrose in October 2003 was due to run until May 2009. However, with the approval of both the Remuneration Committee and Shareholders, on 14 August 2007, in conjunction with the return of capital to Shareholders, this scheme was crystallised. This resulted in 10.2 million shares being awarded to senior management and created a Â£1.9 million crystallisation charge in the profit and loss account to recognise the national insurance due on the value of the shares awarded and the acceleration of the IFRS 2 charge associated with these shares. This one-off crystallisation charge has been shown in exceptional costs. Shareholders approved a new incentive scheme on 14 August 2007 that mirrors the old scheme but has an end date extended to May 2012, and only rewards the creation of value above that which the original scheme rewarded. The charge to headline operating profit for the incentive schemes was Â£2.0 million. This consisted of a Â£0.6 million charge relating to the original Melrose scheme for the period 1 January 2007 to 14 August 2007, a Â£0.3 million charge for the new Melrose scheme from 14 August 2007 to 31 December 2007 and a Â£1.1 million charge for a Dynacast senior management scheme. EARNINGS PER SHARE AND NUMBER OF SHARES IN ISSUE In accordance with IAS 33 two basic earnings per share numbers are disclosed on the face of the income statement, one for continuing operations only and one which also includes discontinued operations. However, because a 1 for 2 share consolidation occurred part way through the year these measures do not give a good indication of the underlying earnings per share for the continuing Group on an ongoing basis. The 1 for 2 share consolidation and the early crystallisation of the original Melrose incentive scheme caused the number of shares to change throughout the year as follows: Number of shares At 1 January 2007 257.1m Crystallisation of original Melrose incentive scheme on 14 August 2007 10.2m ---------- At 14 August 2007 267.3m 1 for 2 share consolidation completed on 15 August 2007 (133.6m) ---------- At 31 December 2007 133.7m ---------- ---------- Weighted average number of shares in the year 210.5m ---------- The earnings per share calculation for continuing operations uses the weighted average number of shares in existence for the whole of 2007 and not the lower number of shares in issue post the share consolidation. This therefore understates the underlying performance on an ongoing basis. Conversely the earnings per share including discontinued operations includes the one-off profit on the Disposals in the year and therefore significantly overstates the underlying ongoing trading performance. To help understand the underlying performance a calculation is detailed below to show earnings per share of 14.3p on a proforma basis: Â£m 2007 Headline operating profit 24.5 Proforma interest received* 1.4 ---------- 25.9 Tax** (6.7) ---------- 19.2 ---------- Shares in issue*** 133.7m Proforma EPS 14.3p * Interest income assumed at 5.7% (2007 average rate since moving to a net cash position) on Â£25 million net cash (as at 31 December 2007 less remaining return of capital of Â£7.4 million) ** Tax at 2007 headline rate (26%) *** Issued share capital after share consolidation ACQUISITIONS DURING THE YEAR During the year two small acquisitions were made by Dynacast for a combined consideration of Â£8.7 million including Â£0.3 million of costs. Both transactions were asset purchases rather than share purchases. The fair value of net assets purchased was Â£4.2 million, (including intangible assets of Â£1.6 million) and therefore the goodwill was Â£4.5 million. These acquisitions contributed only Â£0.2 million to the Dynacast headline operating profit in the year as they were not completed until September. EXCEPTIONAL COSTS AND INCOME Excluded from the headline operating profit are certain costs and income of an exceptional nature that are considered outside the normal course of business for the divisions. These charges are as follows: Year Ended 31 December 2007 Exceptional cost Cash Non Cash Total Â£m Â£m Â£m Dynacast restructure of acquisitions 1.0 0.5 1.5 MVC 'old' nickel plater impairment - 1.5 1.5 Crystallisation of original Melrose incentive scheme 0.8 1.1 1.9 ------------------------------- Total exceptional cost 1.8 3.1 4.9 ------------------------------- Exceptional income ------------------------------- Pension curtailment gain - 1.1 1.1 ------------------------------- The three items of exceptional cost have all been discussed previously in this Review. The total cost of these exceptional items is Â£4.9 million of which Â£1.8 million is a cash cost. The item of exceptional income relates to the pensions curtailment gain that arose on the sale of the McKechnie Aerospace division. ASSETS AND LIABILITIES The split of assets and liabilities is shown in the table below: -------------------------------------------------------------------------------- 31 December 31 December 2007 2006 Â£m Â£m -------------------------------------------------------------------------------- Goodwill and intangible assets 207.4 356.2 Property, plant and equipment 60.7 79.4 Net working capital 18.8 45.2 Net tax (liability)/asset (12.8) 2.4 IAS 19 Employee Benefits (pension) (25.2) (55.4) Provisions and other (13.8) (10.1) -------------------------------------------------------------------------------- Total 235.1 417.7 These assets and liabilities are funded by: -------------------------------------------------------------------------------- 31 December 31 December 2007 2006 Â£m Â£m -------------------------------------------------------------------------------- Net (cash)/debt (32.4) 162.6 Equity 267.5 255.1 -------------------------------------------------------------------------------- Total 235.1 417.7 The assets and liabilities of the Group have changed significantly during 2007. As a result of the Disposals the Group has sold Â£233.6 million of assets and liabilities during the year, and moved into a net cash position. IMPAIRMENT REVIEW In compliance with IAS 36 the carrying value of the net assets by division has been compared to their future cash flows discounted at a rate reflective of their circumstances and method of funding. This confirmed the carrying value of each division in the Group balance sheet. PENSIONS The Group has a number of defined benefit and defined contribution schemes in place globally. The current market value of the assets of the defined benefit schemes is insufficient to satisfy the liabilities to members when they are valued on a basis consistent with IAS 19. The net accounting deficit on the schemes was Â£25.2 million (2006: Â£55.4 million) of which 63% (2006: 82%) was derived from the most significant scheme in the Group, the UK McKechnie Pension Plan (the "Plan"). This had assets at 31 December 2007 of Â£114.7 million (2006: Â£83.0 million), liabilities of Â£130.7 million (2006: Â£128.4 million) and therefore a deficit of Â£16.0 million (2006: Â£45.4 million). As part of the disposal process of the McKechnie OEM division Melrose obtained clearance from the UK Pensions Regulator for its agreement with the Trustee of the Plan. Melrose made a cash payment of Â£20.0 million to the Plan in May 2007 and agreed to pay a further Â£18.3 million in equal quarterly instalments of Â£1.5 million over the next three years starting in July 2007. Melrose PLC has also guaranteed the funding of the Plan on an ongoing basis. As a consequence of this the Company has contributed Â£25.8 million (2006: Â£5.4 million) into the Plan in 2007, significantly more than in the previous year and the total pension deficit in the Melrose Group has reduced by more than half. The movement in the Plan deficit from Â£45.4 million in 2006 to Â£16.0 million in 2007 is explained below: Â£m -------------------------------------------------------------------------------- 2006 IAS 19 deficit 45.4 Interest on liabilities 6.5 Expected return on assets (6.5) Investment outperformance (2.3) Change in key pension assumptions (8.0) Increase in life expectancy (lower mortality) 7.6 Curtailment gain (1.1) Employer contributions (25.8) Other 0.2 -------------------------------------------------------------------------------- 2007 IAS 19 deficit 16.0 The assumptions used to calculate the IAS 19 deficit are considered carefully by the Board of Directors and are considered suitable for a scheme of this nature. The mortality assumption has been made more prudent during the year to allow both for a higher level of current life expectancy than previously used but also for further increases in the expected future improvements to life expectancy. A male aged 65 in 2007 is expected to live for 20.6 years. This life expectancy is assumed to increase by 1.2 years (6%) by 2020. This has added a further Â£7.6 million to liabilities in the year. A summary of the key assumptions of the Plan are disclosed below: 31 December 31 December 2007 2006 % % -------------------------------------------------------------------------------- Discount rate 5.7 5.1 Inflation 3.3 2.9 Pension increases 3.3 2.9 -------------------------------------------------------------------------------- 31 December 31 December 2007 2006 Age Age -------------------------------------------------------------------------------- Life expectancy for a male aged 65 in 2007 85.6 83.6 Life expectancy for a male aged 65 in 2020 86.8 85.1 The long term strategy for the Plan is to concentrate on the cash flows required to fund the liabilities as they fall due. These cash flows extend many years into the future and the ultimate objective is that the total pool of assets derived from future company contributions and the investment strategy allows each cash payment to members to be made when due. Viewed on this basis the investment strategy has many years for the assets to grow to help fund the liabilities. Consistent with this approach a new investment strategy targeted at an absolute rate of return has been implemented by the Trustee, with the Company's agreement, during 2007. RISK MANAGEMENT The significant financial risks the Group faces have been considered and policies have been implemented to best deal with each risk. The four most significant financial risks are considered to be liquidity risk, finance cost risk, exchange rate risk and commodity risk. These are discussed in turn. LIQUIDITY RISK The Group moved from a net debt position of Â£162.6 million at 31 December 2006 to a net cash position at 31 December 2007 of Â£32.4 million. As a result, the Group repaid a significant amount of its bank term loans during the year. The committed bank term loan facility comprises a term loan of Â£11.0 million (2006: Â£190.4 million) which expires in 2010. The additional committed working capital facility of Â£30 million remains unchanged from the previous year and the Group also benefits from a few small local overdraft facilities and some finance lease arrangements for specific assets which have Â£1.2 million (2006: Â£3.8 million) outstanding capital balances at 31 December 2007. The combination of having a net cash position and a reduced committed bank facility means that the Directors consider that the Group has sufficient capital for its current needs. FINANCE COST RISK The interest rates the Group is exposed to are variable and linked to LIBOR. Previously, when the Group had net debt it was appropriate that financial instruments were entered into to protect against movements in interest rates. Now that the Group has net cash this protection is not considered necessary. Since moving into a net cash position and repaying the majority of the term loan in May 2007, the Group has received interest at an average rate of 5.7%. EXCHANGE RATE RISK The Group trades in various countries around the world and hence the Group is exposed to many different foreign currencies. The Group therefore carries an exchange risk that can be categorised into three types, described below. The Board policy is designed to protect against some of the cash risks but not the non-cash risks. The most common cash risk is the transaction risk the Group takes when it invoices a sale in a different currency to the one in which its cost of sale is incurred. This is addressed by taking out forward cover against approximately 80% of the anticipated cash flows over the following twelve months, placed on a rolling quarterly basis. This does not eliminate the cash risk but does bring some certainty to it. During 2007 the Group incurred a Â£1.0 million transaction exchange loss. Exchange rates used in the period: Average Rate Closing Rate to Â£ Sterling to Â£ Sterling -------------------------------------------------------------------------------- US Dollar 2007 2.00 2.00 2006 1.84 1.96 -------------------------------------------------------------------------------- Euro 2007 1.46 1.36 2006 1.47 1.49 The effect on the key headline numbers in 2007 for the continuing Group due to the translation movement of exchange rates from 2006 to 2007 is summarised as follows: 2007 exchange rate versus 2006 exchange rate Â£m -------------------------------------------------------------------------------- 2007 Effect Sales reduction 11.0 Headline operating profit reduction 0.5 Net asset increase 3.7 For reference, guidelines to show the net translation exchange risks that the Group currently carries are shown below: Increase in profit Â£m -------------------------------------------------------------------------------- For every 10 cent strengthening of the US Dollar against Sterling 0.2 For every 10 cent strengthening of the Euro against Sterling 1.1 As the translation risk is not a cash cost no exchange instruments are used to protect against this risk. However, when the Group has net debt, which it currently does not, the hedge of having a multicurrency debt facility funding these foreign currency trading units protects against some of this risk. The most significant exchange risk that the Group takes arises when a division that is predominantly based in a foreign currency is sold. The proceeds for those divisions will most likely be received in a foreign currency and therefore an exchange risk arises if these proceeds are converted back to sterling, for instance to pay a dividend to shareholders. Protection against this risk is taken on a case-by-case basis. On the signing of the agreement to sell the McKechnie Aerospace OEM and Aerospace Aftermarket divisions, Melrose purchased Sterling call options to protect against the currency exposure on US$575 million of the proceeds at an average exchange rate of Â£=US$1.986. No financial instruments of this nature currently exist in the Group. COMMODITY RISK As Melrose owns engineering businesses across various sectors the cumulative expenditure on commodities is significant to the Group results. The Group addresses the risk of base commodity costs increasing by, wherever possible, passing on the cost increases to customers or by having suitable purchase agreements with its suppliers which sometimes fix the price over some months in the future. Melrose does not generally enter into financial instruments on commodities, as this is not considered to be the most efficient way of protecting against movements. Geoffrey Martin 5 March 2008 CONSOLIDATED INCOME STATEMENT Notes Year ended Restated *** 31 December Year ended 2007 31 December 2006 Â£m Â£m -------------------------------------------------------------------------------- Continuing operations Revenue 2 344.0 323.6 Cost of sales (280.1) (265.1) -------------------------------------------------------------------------------- Gross profit 63.9 58.5 -------------------------------------------------------------------------------- Net operating expenses before exceptional (39.4) (39.3) items and intangible asset amortisation * Intangible asset amortisation * (2.0) (2.1) Exceptional costs 3 (4.9) (5.9) Exceptional income 3 1.1 0.7 -------------------------------------------------------------------------------- Total net operating expenses (45.2) (46.6) -------------------------------------------------------------------------------- Operating profit 2 18.7 11.9 -------------------------------------------------------------------------------- Headline operating profit ** 2 24.5 19.2 -------------------------------------------------------------------------------- Finance costs (4.3) (7.3) Finance income 6.8 0.2 -------------------------------------------------------------------------------- Profit before tax 21.2 4.8 Tax 4 (5.6) (1.6) -------------------------------------------------------------------------------- Profit for the year from continuing operations 15.6 3.2 -------------------------------------------------------------------------------- Discontinued operations Profit for the year from discontinued operations 199.4 34.6 -------------------------------------------------------------------------------- Profit for the year 215.0 37.8 -------------------------------------------------------------------------------- Attributable to: Equity holders of the parent 214.8 37.7 Minority interests 0.2 0.1 -------------------------------------------------------------------------------- 215.0 37.8 -------------------------------------------------------------------------------- Earnings per share From continuing operations - Basic 5 7.4p 1.2p - Diluted 5 7.2p 1.2p From continuing and discontinued operations - Basic 5 102.1p 14.7p - Diluted 5 99.2p 14.4p -------------------------------------------------------------------------------- * Other than computer software amortisation. ** The terms 'headline operating profit', 'headline profit before tax' and 'headline earnings per share' have the same definition as operating profit, profit before tax and earnings per share respectively except that they are calculated before exceptional costs, exceptional income and intangible asset amortisation other than computer software. *** Prior periods have been restated to separate the results of continuing and discontinued operations. CONSOLIDATED STATEMENT OF RECOGNISED INCOME AND EXPENSE Notes Year ended Year ended 31 December 31 December 2007 2006 Â£m Â£m -------------------------------------------------------------------------------- Currency translation on net investments in subsidiary undertakings 3.7 (41.4) Gains on cash flow hedges 1.1 1.4 Actuarial adjustments on net pension liabilities 6 3.5 1.2 -------------------------------------------------------------------------------- Net income/(expense) recognised directly in equity 8.3 (38.8) Transferred to income statement on cash flow hedges (2.1) (1.4) Transfer to income statement from equity of cumulative translation differences on discontinued operations 22.0 - Profit for the year 215.0 37.8 -------------------------------------------------------------------------------- Total recognised income and expense for the year 243.2 (2.4) -------------------------------------------------------------------------------- Attributable to: Equity holders of the parent 243.0 (2.5) Minority interests 0.2 0.1 -------------------------------------------------------------------------------- 243.2 (2.4) -------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEET Notes 31 December 31 December 2007 2006 Â£m Â£m -------------------------------------------------------------------------------- Non-current assets Goodwill and other intangible assets 207.4 356.2 Property, plant and equipment 60.7 79.4 Interests in joint ventures - 2.6 Derivative financial instruments 0.4 1.4 Deferred tax assets 3.1 29.8 -------------------------------------------------------------------------------- 271.6 469.4 Current assets Inventories 29.7 59.3 Trade and other receivables 67.0 90.7 Cash and short term deposits 46.4 33.3 -------------------------------------------------------------------------------- 143.1 183.3 -------------------------------------------------------------------------------- Total assets 2 414.7 652.7 -------------------------------------------------------------------------------- Current liabilities Trade and other payables 77.9 104.8 Interest-bearing loans and borrowings 8 8.1 1.0 Current tax liabilities 7.8 8.8 Provisions 3.5 2.9 -------------------------------------------------------------------------------- 97.3 117.5 -------------------------------------------------------------------------------- Net current assets 45.8 65.8 -------------------------------------------------------------------------------- Non-current liabilities Interest-bearing loans and borrowings 8 13.1 194.9 Deferred tax liabilities 8.1 18.6 Retirement benefit obligations 6 25.2 55.4 Provisions 3.5 11.2 -------------------------------------------------------------------------------- 49.9 280.1 -------------------------------------------------------------------------------- Total liabilities 2 147.2 397.6 -------------------------------------------------------------------------------- Net assets 267.5 255.1 -------------------------------------------------------------------------------- Equity Issued share capital 58.3 0.3 Share premium account - 214.6 Merger reserve 37.0 42.0 Capital redemption reserve 154.6 - Hedging and translation reserves 2.2 (22.5) Accumulated profits 14.2 19.7 -------------------------------------------------------------------------------- Equity attributable to holders of the parent 266.3 254.1 Minority interest 1.2 1.0 -------------------------------------------------------------------------------- Total equity 267.5 255.1 -------------------------------------------------------------------------------- CONSOLIDATED CASH FLOW STATEMENT Notes Restated Year ended Year ended 31 December 31 December 2007 2006 Â£m Â£m -------------------------------------------------------------------------------- Net cash from operating activities for continuing operations 7 14.1 9.7 Net cash from operating activities for discontinued operations 7 1.3 23.6 -------------------------------------------------------------------------------- Net cash from operating activities 15.4 33.3 -------------------------------------------------------------------------------- Investing activities Disposal of businesses 446.7 7.4 Net cash disposed (5.8) - Lump sum contribution to pension plan (20.0) - Purchases of property, plant and equipment (15.5) (11.7) Proceeds on disposal of property, plant and equipment 0.4 9.9 Purchase of computer software (0.5) - Interest received 7.1 - Acquisitions of subsidiaries (8.7) - -------------------------------------------------------------------------------- Net cash from investing activities for continuing operations 403.7 5.6 Net cash used in investing activities for discontinued operations 7 (2.6) (5.6) -------------------------------------------------------------------------------- Net cash from investing activities 401.1 - -------------------------------------------------------------------------------- Financing activities Repayment of borrowings (179.0) - Repayment of working capital facility - (3.0) Repayment of obligations under finance leases (0.3) (0.3) Dividends paid (13.0) (13.5) Loan notes repaid - (0.5) Capital distribution (212.6) - Issue of 2007 Incentive Shares 0.1 - -------------------------------------------------------------------------------- Net cash used in financing activities for continuing operations (404.8) (17.3) Net cash from financing activities for discontinued operations 7 0.3 2.7 -------------------------------------------------------------------------------- Net cash used in financing activities (404.5) (14.6) -------------------------------------------------------------------------------- Net increase in cash and cash equivalents 7 12.0 18.7 Cash and cash equivalents at beginning of year 7 33.3 15.2 Effect of foreign exchange rate changes 7 1.1 (0.6) -------------------------------------------------------------------------------- Cash and cash equivalents at end of year 7 46.4 33.3 -------------------------------------------------------------------------------- NOTES TO THE ACCOUNTS 1. Status of accounts The information included within the preliminary announcement has been prepared in accordance with the historical cost convention and also in accordance with the accounting policies adopted under International Financial Reporting Standards, including International Accounting Standards and Interpretations (IFRSs) as adopted for use in the European Union. The accounting policies followed are the same as those detailed within the 2006 Report and Accounts which are available on the Group's website www.melroseplc.net. In addition the Group has adopted IFRS 7 'Financial Instruments: Disclosures' and the related amendments to IAS 1 'Presentation of Financial Statements'. The financial information included in the preliminary announcement does not constitute the company's statutory accounts for the purpose of section 240 of the Companies Act 1985 for the years ended 31 December 2007 or 2006. Statutory accounts for the year ended 31 December 2006 have been delivered to the Registrar of Companies and the Auditors and their reports were unqualified and did not contain statements under s.237(2) or (3) Companies Act 1985. The statutory accounts for the year ended 31 December 2007 will be finalised on the basis of the financial information presented by the Directors in the preliminary announcement and will be delivered to the Registrar of Companies following the Company's Annual General Meeting in May 2008. While the financial information included in this preliminary announcement has been prepared in accordance with IFRSs, this announcement does not itself contain sufficient information to comply with IFRSs. The comparative information has been restated to show more appropriate allocation of results following the disposal of the Aerospace OEM ("OEM"), the Aerospace Aftermarket ("Aftermarket"), part of the PSM division and the US corporate centre and classification of these divisions as discontinued operations. The Board of Directors approved the preliminary announcement on 5 March 2008. 2. Segment information The Group's primary reporting format is business segments and its secondary reporting format is geographical segments. The operating businesses are organised and managed separately according to the nature of the products and services provided, with each segment representing a strategic business unit that offers different products and serves different markets. All reported revenue is derived from one activity, the sale of goods. During the period, the Group discontinued its operations in the OEM, Aftermarket, part of the PSM division and the US corporate centre segments. The Dynacast segment is a supplier of die-cast parts and components to a range of industries. McKechnie Vehicle Components ("MVC") supplies exterior trim products to major vehicle manufacturers in the USA. McKechnie Plastic Components ("MPC") is a UK supplier of plastic injection moulded and extruded components to the automotive, consumer durable, IT and other industries. The McKechnie PSM ("PSM") continuing segment consists of the specialised Prelok and Canning Brett businesses and is now included in the MPC segment for reporting purposes. Transfer prices between business segments are set on an arm's length basis in a manner similar to transactions with third parties. The Group's geographical segments are determined by the location of the Group's assets and operations. Inter segment sales are not material and have not been included in the analysis below. The following table presents revenue, headline operating profit information (which the Directors believe is the best indicator of performance), operating profit and certain asset and liability information regarding the Group's business segments for the year ended 31 December 2007. Note 3 gives details of exceptional costs and income. Business segments Revenue Headline operating profit/(loss)** Operating profit/(loss) ---------------------------------------------------------------------------------------------- Year ended Year ended Year ended Year ended Year ended Year ended 31 December 31 December 31 December 31 December 31 December 31 December 2007 2006 2007 2006 2007 2006 Â£m Â£m Â£m Â£m Â£m Â£m ---------------------------------------------------------------------------------------------- Continuing operations Dynacast 235.9 221.7 28.9 25.1 25.6 19.5 MVC 55.4 48.0 (0.5) (2.3) (2.2) (2.5) MPC 52.7 53.9 3.9 3.0 3.9 1.5 Central - corporate - - (5.8) (5.5) (4.7) (5.5) Central - LTIPs* - - (2.0) (1.1) (3.9) (1.1) ---------------------------------------------------------------------------------------------- Continuing operations total 344.0 323.6 24.5 19.2 18.7 11.9 Discontinued operations OEM 53.7 140.1 11.9 33.1 10.9 30.8 Aftermarket 5.2 19.3 0.1 0.6 0.1 4.2 PSM discontinued 8.4 24.0 1.4 4.2 1.4 3.7 Central discontinued - - (0.4) (1.0) (0.4) (1.4) ---------------------------------------------------------------------------------------------- Discontinued operations total 67.3 183.4 13.0 36.9 12.0 37.3 ---------------------------------------------------------------------------------------------- Total 411.3 507.0 37.5 56.1 30.7 49.2 ---------------------------------------------------------------------------------------------- * Long term incentive plans ** As defined on the income statement Total assets Total liabilities ---------------------------------------------------------------------------------------------- Year ended Year ended Year ended Year ended 31 December 31 December 31 December 31 December 2007 2006 2007 2006 Â£m Â£m Â£m Â£m ---------------------------------------------------------------------------------------------- Continuing operations Dynacast 322.9 308.9 80.7 74.9 MVC 32.4 35.7 11.7 12.1 MPC 31.5 32.2 11.1 13.0 Central - corporate 27.9 (4.6) 42.2 165.5 Central - LTIPs * - - 1.5 1.5 ---------------------------------------------------------------------------------------------- Continuing operations total 414.7 372.2 147.2 267.0 Discontinued operations OEM - 217.9 - 32.5 Aftermarket - 7.2 - 1.8 PSM discontinued - 34.4 - 5.7 Central discontinued - 21.0 - 90.6 operations Discontinued operations total - 280.5 - 130.6 ---------------------------------------------------------------------------------------------- Total 414.7 652.7 147.2 397.6 ---------------------------------------------------------------------------------------------- * Long term incentive plans Following the disposal of OEM, Aftermarket, part of the PSM division and US corporate centre, certain central assets relating to those businesses were disposed of, leaving a central overdraft in excess of central assets in the prior year. This is shown as a negative asset in the table above in accordance with IAS 14. Capital expenditure Depreciation and computer software amortisation ---------------------------------------------------------------------------------------------- Year ended Year ended Year ended Year ended 31 December 31 December 31 December 31 December 2007 2006 2007 2006 Â£m Â£m Â£m Â£m ---------------------------------------------------------------------------------------------- Continuing operations Dynacast 5.4 6.9 6.8 7.0 MVC 7.8 3.3 1.9 1.8 MPC 2.8 1.5 1.6 2.1 Central - corporate - - 0.1 0.1 ---------------------------------------------------------------------------------------------- Continuing operations total 16.0 11.7 10.4 11.0 Discontinued operations OEM 2.6 6.9 1.2 2.8 Aftermarket - 0.1 - 0.1 PSM discontinued 0.1 1.0 0.2 0.7 ---------------------------------------------------------------------------------------------- Discontinued operations total 2.7 8.0 1.4 3.6 ---------------------------------------------------------------------------------------------- Total 18.7 19.7 11.8 14.6 ---------------------------------------------------------------------------------------------- Geographical area Revenue Headline operating Operating profit/(loss) profit/(loss) ** Year ended Year ended Year ended Year ended Year ended Year ended 31 December 31 December 31 December 31 December 31 December 31 December 2007 2006 2007 2006 2007 2006 Â£m Â£m Â£m Â£m Â£m Â£m ---------------------------------------------------------------------------------------------- Continuing operations North America 132.3 127.0 7.3 3.6 3.2 (1.3) Europe 155.2 146.3 18.5 16.6 17.6 14.2 Asia 56.5 50.3 6.5 5.6 6.5 5.6 Central - corporate - - (5.8) (5.5) (4.7) (5.5) Central - LTIPs * - - (2.0) (1.1) (3.9) (1.1) ---------------------------------------------------------------------------------------------- Continuing operations total 344.0 323.6 24.5 19.2 18.7 11.9 Discontinued operations North America 41.0 109.1 10.7 27.7 9.7 26.0 Europe 21.1 59.8 1.8 6.7 1.8 8.8 Asia 5.2 14.5 0.9 3.5 0.9 3.5 Central - - (0.4) (1.0) (0.4) (1.0) ---------------------------------------------------------------------------------------------- Discontinued operations total 67.3 183.4 13.0 36.9 12.0 37.3 ---------------------------------------------------------------------------------------------- Total 411.3 507.0 37.5 56.1 30.7 49.2 ---------------------------------------------------------------------------------------------- * Long term incentive plans ** As defined on the income statement Total assets Total liabilities ---------------------------------------------------------------------------------------------- Year ended Year ended Year ended Year ended 31 December 31 December 31 December 31 December 2007 2006 2007 2006 Â£m Â£m Â£m Â£m ---------------------------------------------------------------------------------------------- Continuing operations North America 188.5 183.5 39.1 36.2 Europe 157.2 156.9 49.3 50.1 Asia 41.1 36.4 15.1 13.7 Central - corporate 27.9 (4.6) 42.2 165.5 Central - LTIPs * - - 1.5 1.5 ---------------------------------------------------------------------------------------------- Continuing operations total 414.7 372.2 147.2 267.0 Discontinued operations North America - 172.8 - 23.3 Europe - 57.6 - 12.6 Asia - 29.1 - 4.1 Central - 21.0 - 90.6 ---------------------------------------------------------------------------------------------- Discontinued operations total - 280.5 - 130.6 ---------------------------------------------------------------------------------------------- Total 414.7 652.7 147.2 397.6 ---------------------------------------------------------------------------------------------- * Long term incentive plans Capital expenditure Depreciation and computer software amortisation Year ended Year ended Year ended Year ended 31 December 31 December 31 December 31 December 2007 2006 2007 2006 Â£m Â£m Â£m Â£m ---------------------------------------------------------------------------------------------- Continuing operations North America 8.8 5.2 4.3 4.4 Europe 5.1 4.2 4.6 5.1 Asia 2.1 2.3 1.4 1.4 Central - corporate - - 0.1 0.1 ---------------------------------------------------------------------------------------------- Continuing operations total 16.0 11.7 10.4 11.0 Discontinued operations North America 1.7 5.5 0.7 1.7 Europe 0.9 1.6 0.5 1.5 Asia 0.1 0.9 0.2 0.4 ---------------------------------------------------------------------------------------------- Discontinued operations total 2.7 8.0 1.4 3.6 ---------------------------------------------------------------------------------------------- Total 18.7 19.7 11.8 14.6 ---------------------------------------------------------------------------------------------- 3. Exceptional costs and income Exceptional costs Year ended Year ended 31 December 31 December 2007 2006 Â£m Â£m Other operating costs ---------------------------------------------------------------------------------------------- Continuing operations Dynacast restructure (1.5) (3.7) MVC 'old' nickel plater impairment (1.5) - Crystallisation of Original Melrose Incentive Scheme (1.9) - MPC restructure - (2.2) ---------------------------------------------------------------------------------------------- Total other operating costs - continuing (4.9) (5.9) ---------------------------------------------------------------------------------------------- Discontinued operations Pre-disposal expenses - (2.0) ---------------------------------------------------------------------------------------------- Total other operating costs - discontinued - (2.0) ---------------------------------------------------------------------------------------------- Total other operating costs (4.9) (7.9) ---------------------------------------------------------------------------------------------- The Dynacast restructuring costs in 2007 relate mainly to the acquisitions of Techmire and QZD in Canada. The Dynacast restructuring costs in 2006 related to the closure of the Spartanburg, South Carolina, USA manufacturing facility. During the year ended 31 December 2007, the old plater was replaced at MVC and as a result an impairment against the carrying value of the asset was made. On 14 August 2007, the Shareholders approved the early crystallisation of the Original Melrose Incentive Scheme resulting in an accelerated IFRS 2 charge and associated National Insurance charge . The MPC restructure costs related to the closure of the Northampton manufacturing facility in 2006. The pre-disposal costs in 2006 related to the sale of divisions which were completed in 2007. Exceptional income Year ended Year ended 31 December 31 December 2007 2006 Â£m Â£m Other operating income ---------------------------------------------------------------------------------------------- Continuing operations Pension curtailment gain 1.1 - Profit on disposal of land and buildings - 0.7 ---------------------------------------------------------------------------------------------- Total other operating income - continuing 1.1 0.7 Discontinued operations Onerous contract provision release - 2.3 ---------------------------------------------------------------------------------------------- Total other operating income - discontinued - 2.3 ---------------------------------------------------------------------------------------------- Total other operating income 1.1 3.0 ---------------------------------------------------------------------------------------------- Following the disposal of the OEM division, all employees in this segment belonging to the McKechnie UK defined benefit pension plan became deferred members. The curtailment gain associated with this was Â£1.1 million. During the year ended 31 December 2006, land and buildings held in the MPC business segment were sold in a sale and leaseback transaction resulting in a net profit of Â£0.7 million. Upon acquisition of the McKechnie Group in May 2005, an onerous contract was identified and appropriate provision was made based on the circumstances prevailing at acquisition. During 2006, the terms of the contract were renegotiated and the improved terms of the contract were reflected in the accounts resulting in a release to the income statement of Â£2.3 million. 4. Tax Analysis of charge/ (credit) in year: Continuing operations Discontinued operations Total --------------------------------------------------------------------------------------------------------- Year ended Year ended Year ended Year ended Year ended Year ended 31 December 31 December 31 December 31 December 31 December 31 December 2007 2006 2007 2006 2007 2006 Â£m Â£m Â£m Â£m Â£m Â£m --------------------------------------------------------------------------------------------------------- Current tax 6.6 4.5 (1.7) 0.6 4.9 5.1 Deferred tax (1.0) (2.9) 4.2 (3.0) 3.2 (5.9) --------------------------------------------------------------------------------------------------------- Total income tax charge/(credit) 5.6 1.6 2.5 (2.4) 8.1 (0.8) --------------------------------------------------------------------------------------------------------- Tax charge on headline operating profit after finance costs and income 7.2 3.5 2.8 8.8 10.0 12.3 Exceptional tax credits - - - (10.2) - (10.2) Tax on net exceptional costs (1.0) (1.3) - - (1.0) (1.3) Tax in respect of intangible asset amortisation excluding computer software (0.6) (0.6) (0.3) (1.0) (0.9) (1.6) --------------------------------------------------------------------------------------------------------- Total income tax charge/(credit) 5.6 1.6 2.5 (2.4) 8.1 (0.8) --------------------------------------------------------------------------------------------------------- Of the charge to current tax, approximately Â£2.5 million (2006: credit of Â£2.4 million) related to profits arising in the discontinued divisions, which were disposed of during the year. No tax charge or credit arose on the disposal of the relevant subsidiaries. 5. Earnings per share --------------------------------------------------------------------------------------------------------- Earnings Year ended Year ended 31 December 31 December 2007 2006 Â£m Â£m --------------------------------------------------------------------------------------------------------- Earnings for the purposes of basic earnings per share 215.0 37.8 Less profit for the year from discontinued operations (199.4) (34.6) --------------------------------------------------------------------------------------------------------- Earnings for basis of earnings per share from continuing operations 15.6 3.2 Exceptional costs 4.9 5.9 Exceptional income (1.1) (0.7) Intangible asset amortisation * 2.0 2.1 Tax on exceptional items and intangible asset amortisation* (1.6) (1.9) --------------------------------------------------------------------------------------------------------- Earnings for basis of headline earnings per share from continuing 19.8 8.6 operations --------------------------------------------------------------------------------------------------------- * Other than computer software --------------------------------------------------------------------------------------------------------- Number Number Weighted average number of ordinary shares for the purposes of basic earnings per share (million) 210.5 257.1 Further shares for the purposes of fully diluted earnings per share (million) 6.3 5.1 --------------------------------------------------------------------------------------------------------- Further shares for dilution is calculated for 2007 as a weighted average of the two Melrose incentive schemes that were in operation during the year. --------------------------------------------------------------------------------------------------------- Earnings per share Year ended Year ended 31 December 31 December 2006 2007 Pence Pence --------------------------------------------------------------------------------------------------------- Basic earnings per share From continuing and discontinued operations 102.1 14.7 From discontinued operations 94.7 13.5 From continuing operations 7.4 1.2 --------------------------------------------------------------------------------------------------------- Fully diluted earnings per share From continuing and discontinued operations 99.2 14.4 From discontinued operations 92.0 13.2 From continuing operations 7.2 1.2 --------------------------------------------------------------------------------------------------------- Headline earnings per share From continuing operations 9.4 3.3 --------------------------------------------------------------------------------------------------------- Fully diluted headline earnings per share From continuing operations 9.1 3.3 --------------------------------------------------------------------------------------------------------- 6. Retirement benefit obligations Prior to the acquisition, McKechnie and Dynacast had established a number of pension schemes covering many of its employees and operating in several jurisdictions. The most significant schemes are: â€¢ The UK McKechnie Pension Plan ("the Plan") which provides defined benefit pensions for its members. The assets of the Plan are held in a fund administered by McKechnie Pension Trust Limited, an independent trustee company, an actuarial valuation of the Plan was carried out at 31 December 2005 by a qualified independent actuary. Plan assets are stated at their bid value at 31 December 2007. â€¢ The Dynacast and MVC Pension Schemes in the US are funded schemes of a defined benefit type with assets held in separate trustee administered funds. â€¢ In Germany and Austria, unfunded defined benefit arrangements are operated by Dynacast. â€¢ There are also obligations to provide post retirement healthcare to former employees of MVC and to provide termination indemnities in Italy and France to current Dynacast employees. The major weighted average assumptions at 31 December 2007 used by the actuaries in calculating the Group's pension scheme assets and liabilities together with details of the net pension assets or liabilities are as set out below: McKechnie Other schemes Pension Plan (% p.a.) (% p.a.) Rate of increase in salaries 3.8 3.0 Rate of increase in pensions in payment 3.3 1.9 Discount rate 5.7 5.9 Inflation assumption 3.3 2.3 The weighted average assumptions used at 31 December 2006 are set out below: McKechnie Other schemes Pension Plan (% p.a.) (% p.a.) Rate of increase in salaries 3.4 2.7 Rate of increase in pensions in payment 2.9 1.7 Discount rate 5.1 5.3 Inflation assumption 2.9 2.3 Mortality The mortality assumption for the UK McKechnie Pension Plan has been strengthened during the year. At 31 December 2006, a position of halfway between the PA 92 base tables and the PA 92 medium cohort tables was adopted. The mortality assumptions at 31 December 2007 relate to the PA 92 medium cohort tables with an age adjustment of two years and an improvement floor of 1%. This is considered appropriate given the Plan's geographical and industrial sector. This added Â£7.6 million to the liabilities at 31 December 2007. The average life expectancy underlying the value of defined benefit obligations at 31 December 2007, which have been determined by reference to applicable mortality statistics are set out below: ---------------------------------------------------------------------------------------- Life expectancy 31 December 31 December 2007 2006 years years ---------------------------------------------------------------------------------------- Male member currently aged 65 85.6 83.6 Male member aged 65 in 2020 86.8 85.1 ---------------------------------------------------------------------------------------- The amount recognised in the balance sheet arising from obligations in respect of defined benefit schemes is as follows: ---------------------------------------------------------------------------------------- 31 December 31 December 31 December 31 December 31 December 2007 2006 2005 2004 2003 Â£m Â£m Â£m Â£m Â£m ---------------------------------------------------------------------------------------- Plan obligations (148.4) (147.9) (145.5) - - Plan assets 123.2 92.5 85.0 - - ---------------------------------------------------------------------------------------- Net liabilities (25.2) (55.4) (60.5) - - ---------------------------------------------------------------------------------------- This amount is presented in the balance sheet: ---------------------------------------------------------------------------------------- 31 December 31 December 31 December 31 December 31 December 2007 2006 2005 2004 2003 Â£m Â£m Â£m Â£m Â£m ---------------------------------------------------------------------------------------- Non-current liabilities - unfunded plans 4.1 10.9 8.7 - - - funded plans 21.1 44.5 51.8 - - ---------------------------------------------------------------------------------------- 25.2 55.4 60.5 - - ---------------------------------------------------------------------------------------- Expected returns and fair value of assets: Expected return Fair value of assets 31 December 31 December 31 December 31 December 2007 2006 2007 2006 % % Â£m Â£m ----------------------------------------------------------------------------------- Equity instruments 7.4 7.4 33.7 68.1 Debt instruments 4.6 4.9 3.9 12.7 Other assets 6.8 4.4 85.6 11.7 ---------------------------------------------------------------------------------- Weighted average / total 6.9 6.7 123.2 92.5 ---------------------------------------------------------------------------------- There is no self investment (other than in tracker funds) either in the Group's own financial instruments or property or other assets used by the Group. Amounts recognised in income in respect of these defined benefit schemes are as follows: Year ended Year ended 31 December 31 December 2007 2006 Â£m Â£m -------------------------------------------------------------------------------- In arriving at operating profit (included within cost of sales, selling and distribution costs and administrative expenses) - current service cost 0.4 0.4 - effects of curtailments and settlements (1.1) - Included in finance costs - interest cost 7.4 6.8 - expected return on assets (7.0) (5.4) -------------------------------------------------------------------------------- The actual return on scheme assets was Â£9.3 million (2006: Â£7.1 million). The amount recognised in the consolidated Statement of Recognised Income and Expense is as follows: Year ended Year ended 31 December 31 December 2007 2006 Â£m Â£m -------------------------------------------------------------------------------- Experience gains/(losses) on scheme liabilities 1.2 (0.5) Experience gains on scheme assets 2.3 1.7 -------------------------------------------------------------------------------- 3.5 1.2 -------------------------------------------------------------------------------- The cumulative amount of actuarial gains and losses recognised in the Consolidated Statement of Recognised Income and Expenses is a total gain of Â£6.9 million (2006: Â£3.4 million). Movements in the benefit liabilities during the year: Year ended Year ended 31 December 31 December 2007 2006 Â£m Â£m At beginning of year 147.9 145.5 Disposals (0.6) - Current service cost 0.4 0.4 Interest cost 7.4 6.8 Actuarial (gain)/losses (1.2) 0.5 Benefits paid (3.9) (4.3) Plan settlements (0.8) - Plan curtailments (1.1) - Currency loss/(gain) 0.3 (1.0) -------------------------------------------------------------------------------- At end of year 148.4 147.9 -------------------------------------------------------------------------------- Movements in the fair value of scheme assets during the year: Year ended Year ended 31 December 31 December 2007 2006 Â£m Â£m At beginning of year 92.5 85.0 Disposals (0.4) - Expected return on assets 7.0 5.4 Actuarial gains 2.3 1.7 Employer contributions 26.7 5.0 Benefits paid (3.9) (4.0) Plan settlements (0.8) - Currency loss (0.2) (0.6) -------------------------------------------------------------------------------- At end of year 123.2 92.5 -------------------------------------------------------------------------------- The Company has guaranteed a schedule of contributions of Â£6.1 million per annum with the Trustee of the McKechnie Pension Plan up until May 2010. 7. Notes to the cash flow statement -------------------------------------------------------------------------------- Year ended Year ended 31 December 31 December 2007 2006 Â£m Â£m -------------------------------------------------------------------------------- Reconciliation of operating profit to cash generated by operations Headline operating profit from continuing operations* 24.5 19.2 Adjustments for: Depreciation of property, plant and equipment 10.3 10.9 Amortisation of computer software 0.1 0.1 Restructuring costs paid and decrease in other provisions (1.9) (5.5) -------------------------------------------------------------------------------- Operating cash flows before movements in working capital 33.0 24.7 Decrease/(increase) in inventories 1.4 (6.3) Increase in receivables (0.5) (8.4) (Decrease)/increase in payables (3.8) 10.2 -------------------------------------------------------------------------------- Cash generated by operations 30.1 20.2 Tax paid (4.2) (2.0) Interest paid (5.7) (4.0) Pension contributions paid (6.1) (4.5) -------------------------------------------------------------------------------- Net cash flow from operating activities for continuing operations 14.1 9.7 -------------------------------------------------------------------------------- * As defined on the income statement -------------------------------------------------------------------------------- Year ended Year ended 31 December 31 December 2007 2006 Â£m Â£m -------------------------------------------------------------------------------- Cash flow from discontinued operations Cash generated from discontinued operations 6.9 30.8 Tax paid (0.6) (2.0) Interest paid (4.2) (3.5) Pension contributions paid (0.6) (0.9) Profit of joint ventures (0.2) (0.8) -------------------------------------------------------------------------------- Net cash from operating activities for discontinued operations 1.3 23.6 -------------------------------------------------------------------------------- Dividends from joint ventures - 0.5 Interest received 0.1 - Purchase of property, plant and equipment (2.6) (7.7) Proceeds on disposal of property, plant and equipment - 1.9 Purchase of computer software (0.1) (0.3) -------------------------------------------------------------------------------- Net cash used in investing activities for discontinued operations (2.6) (5.6) -------------------------------------------------------------------------------- Repayments of obligations under finance leases - (0.3) New finance leases 0.3 3.0 -------------------------------------------------------------------------------- Net cash from financing activities for discontinued operations 0.3 2.7 -------------------------------------------------------------------------------- Net debt reconciliation At 31 Cash Foreign Disposals New Other At 31 December flow exchange (excluding cash leases non-cash December 2006 difference and overdrafts) movements 2007 Â£m Â£m Â£m Â£m Â£m Â£m Â£m ---------------------------------------------------------------------------------------------- Cash 33.3 12.0 1.1 - - - 46.4 Debt due - - - - - (0.5) (0.5) within one year Debt due after (192.1) 179.0 0.3 - - 0.5 (12.3) one year Leases (3.8) 0.3 0.1 2.5 (0.3) - (1.2) ---------------------------------------------------------------------------------------------- Net (debt) (162.6) 191.3 1.5 2.5 (0.3) - 32.4 /cash ---------------------------------------------------------------------------------------------- 8. Interest-bearing loans and borrowings -------------------------------------------------------------------------------- Effective interest Final 31 December 31 December rate % Maturity 2007 2006 Â£m Â£m -------------------------------------------------------------------------------- Current Finance leases - 2008-2011 0.4 1.0 Euro loan (Austria) 1.0 July 2011 0.5 - Redeemable Preference C shares - June 2008 7.2 - -------------------------------------------------------------------------------- 8.1 1.0 -------------------------------------------------------------------------------- Non current bank loans Denominated in the following currencies: US Dollar loan - - - 111.8 Euro loan - - - 58.6 Sterling loan LIBOR plus 0.35% April 2010 11.0 20.0 Euro loan (Austria) 1.0 July 2011 1.3 1.7 -------------------------------------------------------------------------------- 12.3 192.1 Finance leases 2009-2011 0.8 2.8 -------------------------------------------------------------------------------- 13.1 194.9 -------------------------------------------------------------------------------- The 9,053,594 Redeemable Preference C Shares will be redeemed on 30 June 2008 at a value of Â£7.4 million. The shares have been discounted at 6% to show the fair value as at 31 December 2007 of Â£7.2 million and in accordance with the applicable accounting standards the liability is not included in net debt, as shown in the net debt reconciliation. This information is provided by RNS The company news service from the London Stock Exchange

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