Final Results

RNS Number : 3225Z

Melrose Industries PLC

06 March 2013

 



6 March 2013                                                                                                 

MELROSE INDUSTRIES PLC

AUDITED RESULTS

FOR THE YEAR ENDED 31 DECEMBER 2012

Melrose Industries PLC today announces its audited results, which are reported under IFRS, for the year ended 31 December 2012.

Highlights¹

§ Acquisition of Elster on 23 August 2012 for an enterprise value of £1.8 billion, improvement plan is one year ahead of schedule

§ Headline² results

-     Revenue of £1,551.4 million (2011: £1,080.4 million)

-     Profit before tax of £214.3 million (2011: £154.7 million)

-     Melrose businesses (excluding Elster) increased revenue by 7% and operating profit by 9% at constant currency

-     Elster operating margin increased by 1.9 percentage points to 14.1%, operating profit was up 11% with revenue 2% lower, at constant currency

-     Headline² diluted earnings per share of 16.1p³ (2011: 15.8p^3,5)

§ Results after exceptional items and intangible asset amortisation

-     Profit after tax of £42.9 million (2011: £110.1 million)

-     Diluted earnings per share of 4.3p (2011:12.9p)

§ Net debt of £997.7 million.  Net debt equal to 2.6x EBITDA⁴

§ Final dividend increased by 4% to 5.0p per share (2011: 4.8p⁵)

§ Full year dividend of 7.6p per share (2011: 7.4p⁵)

Christopher Miller, Chairman of Melrose Industries PLC, today said:

"Since inception less than 10 years ago Melrose has created over £2 billion of shareholder value.  We are very pleased with Elster and are already one year ahead of our improvement plan, increasing margins faster than expected.  Existing Melrose businesses have performed well and Elster is proving to be another great opportunity to create more value for Melrose shareholders."

¹ continuing operations only unless otherwise stated

² before exceptional costs, exceptional income and intangible asset amortisation

³ calculated using continuing and discontinued operations, before the profit on disposal of businesses, and the diluted weighted average number of shares for the year, adjusted to remove MPC from both years

⁴ headline² operating profit before depreciation and amortisation, including Elster for eight months pre-ownership

⁵ adjusted to include the effects of the Rights Issue

An Analysts' meeting will be held today at 11.00 am at Investec, 2 Gresham Street, London EC2V 7QP

Enquiries:     

M:Communications

Ann-marie Wilkinson/Andrew Benbow           [phone]

CHAIRMAN'S STATEMENT

I am pleased to report Melrose's tenth set of annual results since flotation in 2003.

This has been a busy and successful year for your Company.  On 23 August we completed the acquisition of Elster Group S.E. ("Elster") for an enterprise value of £1.8 billion.  The acquisition was financed by a £1.2 billion Rights Issue and a new £1.5 billion five year banking facility.

Elster is a world leader in metering products with special strength in gas meters.  It has nearly 7,000 employees in more than 30 countries and turnover in the four months of our ownership in 2012 was £411.1 million.  It is described in more detail in the Chief Executive's review.

It is still early in the integration process but we are already very pleased with the business and the potential for improvement over the next few years.

Shareholders' investment in Melrose, net of dividends and returns of capital since 2003, amounts to approximately £1.1 billion.  Our market capitalisation, at the current share price, amounts to £3.3 billion, meaning that over £2 billion of value has been created over this period.  We continue to work hard to maintain this successful track record.  Our employees throughout the Group are to be thanked for their contribution to this.

RESULTS FOR THE GROUP

These financial statements report the results for the Group for the year to 31 December 2012 and comparatives for the previous year.   The results for Elster have been included from 23 August 2012.

Revenue from continuing businesses for the year was £1,551.4 million (2011: £1,080.4 million) and headline profit before tax (before exceptional costs, exceptional income and intangible asset amortisation) was £214.3 million (2011: £154.7 million).  Headline diluted earnings per share ("EPS") on continuing and discontinued businesses was 16.3p (2011: 16.4p).  Adjusting for the disposal of MPC, headline diluted EPS was 16.1p (2011: 15.8p) an increase of 2%.  Diluted EPS (before exceptional costs, exceptional income and intangible asset amortisation) on continuing businesses was 4.3p (2011: 12.9p).  

Further details of these results are contained in the Finance Director's review.

DIVIDENDS

The Board intends to pay a final dividend of 5.0p per share (2011: 4.8p), which represents a 4% increase.  This will be paid on 13 May 2013 to those shareholders on the register at 19 April 2013, subject to approval at the AGM on 8 May 2013.  This gives a total for the year of 7.6p per share (2011: 7.4p).

These numbers and the comparatives have been affected by the Rights Issue referred to above and adjusted accordingly.

Your Board continues to pursue a progressive dividend policy.

TRADING

2012 was another excellent year for our businesses with headline operating profit increases in all three divisions of existing Melrose.  Group headline operating margins at 15.7% suffered only a small decline even allowing for the inclusion of Elster, whose margins at this stage are lower than average for the Group.  Without the effect of Elster, Group operating margins in 2012 increased again.

We continue to see excellent opportunities for investing in our businesses and in 2012 capital expenditure increased again to over twice depreciation within the three divisions of existing Melrose.  2013 is likely to be another year of high investment.  Net debt, after the additional debt taken on for Elster, was £997.7 million at 31 December 2012.  Working capital management and cash generation remain a major focus for Melrose and 2012 was another year of good performance.

Further details on trading are included in the Chief Executive's review.

STRATEGY AND OUTLOOK

I said last year that we were optimistic about identifying a suitable acquisition to continue the excellent growth of the Group.  We firmly believe that Elster represents such an opportunity.  In addition to these occasional acquisitions, however, our strategy also comprises selling existing businesses, at the appropriate time, when we believe we have achieved the bulk of improvement in performance, with subsequent related returns of capital.  We are naturally fully focused on improving the performance of Elster at present but this will not deflect us from this other equally important part of our strategy.

We signalled in our Interim Management Statement in November that order books in certain of our businesses, principally the Energy division, had weakened somewhat.  Although this continues to be the case we are confident of the outlook and therefore we expect further progress in 2013.

Economic recovery is not yet in sight in Europe, nor completely established in the US, but our mix of businesses with their strong positions in good end markets and opportunities for improvement gives us confidence for the future.

Christopher Miller

Chairman

6 March 2013

CHIEF EXECUTIVE'S REVIEW

2012 has been a good year for Melrose with continued progress from our businesses and two important M&A events.  

In June 2012, Melrose sold McKechnie Plastic Components for £30.7 million.  Whilst not in itself sizeable in the context of the Group this company was the last business acquired in the McKechnie/Dynacast acquisition made in May 2005 and thus completed the final part of our "buy, improve, sell" business model for Melrose's first acquisition.  This acquisition has resulted in our initial equity investment from shareholders of £244 million increasing to cash for shareholders of nearly £800 million and thus has been highly successful.

Secondly, during 2012 we embarked on the next phase in the "buy" element of our strategy by acquiring the Elster Group for an enterprise value of £1.8 billion.

We are at the time of writing just over six months into our post-acquisition programme.  Much has been achieved in that relatively short time, as is set out in this review and we would draw your attention in particular to the following key actions:

·     the Gas and Electricity businesses have been reorganised into global operations

·     the old Elster Head Office has been completely restructured

·     extensive restructuring has been announced at several of the key businesses

·     R&D expenditure has been maintained but has been far better targeted on the growth areas of the businesses.

These, and a number of other projects and opportunities, create the basis for "improving" Elster and make us confident that Elster will be a better business in the Melrose Group for the benefit of shareholders and the employees, customers and suppliers of Elster.

We would like to thank our shareholders and lending banks for their support in the Elster acquisition.  It is not something we take in any way for granted.  On behalf of our shareholders, I would also like to thank the employees of Elster who have welcomed and assisted in the changes that have needed to be made.

Elster is a very high quality business with strong market shares in its key markets.  2013 will be a year of substantial change and I believe these developments will enable Elster to achieve its full future potential in an exciting marketplace.

In the rest of the Group, 2012 has been a year of substantial investment.  We have invested approximately £45 million this year in a number of exciting projects.  The largest single project was Bridon's new factory in Newcastle upon Tyne, which opened in autumn 2012.  We are confident that these investments will position our businesses well for the future and will continue to improve their value.

The Energy division had a successful year in 2012.  Whilst order intake for turbogenerators in 2012 has been lower, the success in growing the aftermarket business has been very pleasing.  The division has also made very good progress in the restructuring of two of the Brush subsidiaries, HMA and Hawker Siddeley Switchgear ("HSS").  The medium and long term dynamics of the marketplace are likely to be very beneficial for Brush.

Marelli has had an outstanding year.  The business strategy of increasing the size of its generator products and continuing to focus on niche markets has succeeded beyond our expectations.  Marelli entered the new financial year with high order books and a very strong market position.

In the Lifting division Bridon has had a good year.  Revenue, profit and orders have all increased.  The new factory at Newcastle upon Tyne has been delivered on time and on budget. 

Crosby has had an outstanding year with sales and profits significantly up on 2011.  We are also pleased to have invested to increase its forging capacity over the next 12-18 months and to have improved the European business by restructuring its operations.  Crosby continues to grow its worldwide sales and offers exciting opportunities for future development.

In the Other Industrial division it is pleasing that the US housing market recovery appears to be well underway.  This has benefited Truth in 2012 and positions it well for 2013 and beyond.  Harris also performed creditably in a difficult market.

Outlook

Conditions in the overall world economy are still very hard to predict with any certainty.  The US appears to be recovering subject to uncertainties about the "Fiscal Cliff" but Europe is still in a very difficult position.  We are likely to see volatility in the UK caused by rapidly changing currency markets.  As a result of these factors we are expecting a year in which growth may be challenging but our exposure to good markets, opportunities for improvement at Elster and the fruits of recent investment should still position us well to improve the Group's performance.

ENERGY

£m	2012	2011
Total Revenue	486.8	461.6
Headline1 Operating Profit	93.4	91.1

¹ before exceptional costs, exceptional income and intangible asset amortisation

BRUSH

Brush Turbogenerators ("Turbogenerators") is the world's largest independent manufacturer of electricity generating equipment for the power generation, industrial, oil & gas and offshore sectors. From its four plants in the UK, Czech Republic, Netherlands and USA it designs, manufactures and services turbogenerators, principally in the 10 MW to 250 MW range, for both gas and steam turbine applications and supplies a globally diverse customer base.  In addition, Brush designs and manufactures systems and power transformers under the brand name Brush Transformers ("Transformers") and also produces a wide range of indoor and outdoor medium voltage AC/DC switchgear under the Hawker Siddeley Switchgear brand name. Harrington Generators International ("HGI") is a specialist UK based small generator manufacturer supplying the construction, military, telecoms and rail sectors.

During 2012 Brush continued the trend of year on year improvement post acquisition in 2008.  Revenue increased by approximately 6 per cent and this again translated to strong cash generation.

Orders in 2012 for new build turbogenerators in value terms were down year on year, primarily as a result of a trend during the year towards smaller turbogenerators on shorter lead-times for gas turbine aero-derivative applications.  Orders for large turbogenerators, primarily for steam turbine applications, were delayed as financial closure of projects reduced due to the prevailing economic conditions.  The product development strategy of increasing the product range into higher power outputs has been successful with the first sales of 187 MW air cooled turbogenerators and the first order for a 200 MW air cooled turbogenerator. These are the largest air cooled turbogenerators ever built by Brush and mark an important development for future growth.

Aftermarket orders within the turbogenerators business were up 20 per cent year on year with strong US growth, though European aftermarkets were more subdued as the utility sector in particular reduced maintenance spend.

Continued progress has been made in improving factory performance and productivity within Turbogenerators.  The restructuring of the turbogenerator manufacturing plant in the Netherlands was largely carried out during the year and the full benefits of this will be seen in 2013.

HSS had a very good year with the strong order intake seen in the first half continuing throughout.  Although revenue was 8 per cent down year on year, as a series of larger contracts were completed in 2011, operating margins improved significantly.  This was HSS's first full year of integration as part of Brush.  The full benefit of sales and marketing synergies and operational efficiencies will only be seen in 2013.  The Australian division of HSS continued to perform well during the year.

Brush Transformers had a successful year, thus continuing the progress made since integration into Brush in 2010.  Demand continued to recover in the third of the current 5 year OFGEM cycle and revenue finished higher than the previous year.  Operating margins have improved significantly as a result of the management focus placed on the development of a new manufacturing strategy, a value engineered product line and aftermarket sales.

Despite a challenging UK market, HGI Generators had a satisfactory year, with both revenue and operating margins up against the previous year. One of the highlights of 2012 for HGI was the supply of standby power to the emergency services ahead of the London Olympics.

Outlook

The prospects for medium and long term growth in power generation and in particular the aero-derivative gas turbine sector in which Turbogenerators has a leading position are well publicised and this, combined with the investment being made, means Brush is very well positioned for future growth.  However, in the short term the trend towards smaller generators and the overall financial conditions are likely to impact sales of Brush's larger 2 pole OEM generator product during 2013.   Brush should however be able to mitigate this due to continued growth in its aftermarket activities and further improved efficiencies.  After a difficult 2012 due to market conditions, the prospects for the smaller 4 pole generators are more encouraging, particularly in the oil & gas and geothermal markets.

Turbogenerators has over two thirds of its 2013 budgeted new build sales covered by orders.  This is broadly consistent with the experience from previous years.

Following the encouraging increase in order intake and investment in resources through 2012, Aftermarket is well positioned for growth in 2013.

Continued capital investment and full year benefits from restructuring programmes, both at Brush facilities in the Netherlands and HSS, gives us confidence that Brush can improve further.

MARELLI

Marelli Motori ("Marelli"), based in Italy, is one of the world's leading manufacturers of industrial electrical motors and generators with a product portfolio of motors and generators, ranging respectively from 0.12 KW to 6.4 MW and from 15 kVA to 9.0 MVA, including low, medium and high voltage. Marelli serves worldwide markets for power generation, marine, oil & gas and industrial manufacturing, through its production sites in Italy and Malaysia and further sales, service and distribution offices based in Germany, UK, Spain, USA and South Africa.

Following the increase in revenue in 2011 of around 20 per cent, a further increase of about 12.5 per cent was achieved in 2012.  As in the prior year, this was mainly due to the recovery of the marine, hydroelectric and oil & gas sectors, which explains why the mix of sales continues to be focused on large and special machines, rather than smaller standard products. Order intake is currently around 19 per cent above last year and this makes Marelli's management confident of further growth for this year.

Bespoke innovative power solutions played an important role within Marelli's results. New products included customised hydroelectric generators, large co-generation alternators for both 50 and 60 Hz usage, medium voltage marine motors and generators, together with special motors and generators for the oil & gas industries. Due to enhanced testing capabilities, customers and end users now have the opportunity to verify that products meet or exceed contractual performance. The lead times for standard products were also improved, due to the new factory layout at Marelli's Malaysian facility and the implementation of lean methodologies.

During 2012, Marelli's facility in Malaysia, which is fully dedicated to the production of standard specification machines, achieved its planned production volumes of up to 1,200 units each month. Significant capital investment has been made in Marelli's main manufacturing centre, at Arzignano, Italy; this includes a new large milling machine and a balancing machine for the increased sizes of motors and generators being manufactured. All these investments follow Marelli's strategy to focus production within its Italian facility on large and customised machines.

Outlook

Marelli had a strong order book at year end, which represents 35 per cent of the projected 2013 turnover. Marelli also aims to increase its global presence worldwide through new sales offices and to concentrate its efforts in developing new products for its strategic markets of marine, hydro, cogeneration and oil & gas, which look to remain stable. The further development of exports and opportunities to grow sales with existing key customers gives us the confidence that 2013 will be another year of progress for Marelli.

LIFTING

£m	2012	2011
Total Revenue	524.4	484.4
Headline1 Operating Profit	95.2	82.6

¹ before exceptional costs, exceptional income and intangible asset amortisation

BRIDON

Bridon designs and manufactures a comprehensive range of lifting and stabilising solutions for applications in wire rope, fibre rope, steel wire and strand. The business services global customers in the oil & gas, mining, industrial, marine and infrastructure sectors. 

Bridon demonstrated further progress in trading, as revenue, operating profit, orders and margin increased when compared against the prior year. This reflects the continued strength in Bridon's core markets, as well as its focus on operational improvements.  Working capital control remained strong but cash conversion was somewhat impacted by the slippage of sales of several large oil & gas projects into the last quarter of the year.

Demand for onshore oil & gas ropes was subdued in the first half, reflecting a weak drilling market due to low gas prices and poor drilling conditions in Canada. The offshore sector, by contrast, was strong, as global production companies invested in new ships and platforms.  Demand was strong in the North Sea, Brazil and parts of Asia and Africa; production continued to expand in the Gulf of Mexico after a significant hiatus.  In response to the growth of deep-water drilling in Latin America, Bridon opened a new facility and service centre in Macae, Brazil, in December 2012. This facility will provide wire rope and inspection services to rig operators in this fast growing oil & gas market.

The expansion in exploration and drilling also offered Bridon the chance to compete for some significant contracts for bespoke anchor lines, single point mooring systems and offshore crane ropes.  Among the biggest awards was the Quad project, one of the largest deep-water mooring systems for offshore production ever made. The mining market was also strong for Bridon in 2012 and Bridon continued to expand its global customer footprint, expanding sales for shovel ropes and shaft ropes in Russia, Poland, China and South Africa.  In North America, sales to mining machine OEMs and specialist distributors grew over 30 per cent, despite a relatively weak US coal market and is focused on the large opportunities within this area.

The commercial construction markets in Europe and the Middle East remained subdued, while crane rope sales showed moderate growth in North America, reflecting Bridon's premier position with OEMs.  Demand for crane and mining ropes continued to be solid in China, but the volatile levels of industrial production in Asia have led to variable demand for industrial ropes. Bridon's Chinese operation based in Hangzhou continued to make progress, both in domestic and local export markets.

Bridon has continued to upgrade its operations via targeted investment and through progress in programmes to drive quality, efficiency and health and safety.

In keeping with Bridon's strategy to be the global technology leader for demanding rope applications, Bridon formally opened a new factory in Newcastle upon Tyne, UK, in November 2012. The Neptune Quay facility is capable of producing the world's largest and most complex ropes and is equipped to load them directly onto vessels at the deep-water port for export. In addition, a new technology centre was built adjacent to the Doncaster production facility, providing highly advanced product design, development and testing facilities. In all, Melrose invested in excess of £20 million in the expansion and improvement of Bridon's operations and technological capabilities during the year.

Bridon developed a number of new products and completed five technology development projects during 2012.  Highlights include extending the high performance Hydra product range with advanced multi-strand rope designs, to take full advantage of the new manufacturing facility at Neptune Quay. These products offer high strength ropes for offshore oil & gas market applications, such as ultra-deep abandonment and recovery with improved performance characteristics.  In the surface mining market, a Tiger Blue shovel hoist rope was developed with an improved plastic extrusion coating and a proprietary anti-wear sleeve that combats bend fatigue and rock-impact damage for customers in Canada and USA.  Within America, Bridon developed the Dyform 8 MAX, an improved product for active mobile industrial boom hoist crane applications, delivering improved strength, crush resistance and fatigue life.  For use in structures, Bridon successfully developed a sheathed full-locked coil rope assembly that provides corrosion protection and reduces installation time in bridge applications. Longer term research projects continue to advance Bridon's technological understanding of its fibre and wire rope products, with further progress being made in rope technology, developments in materials, and non-destructive evaluation of rope condition.

Outlook

The financial issues in the Eurozone and the ongoing negotiations around the "Fiscal Cliff" in the US have created uncertainty in a number of markets. As a result of this, some customers are cautious of making financial commitments. Despite this, Bridon expects demand for oil & gas and minerals to remain solid in 2013.

CROSBY

Crosby is a world leader in the design, manufacture and marketing of lifting fittings, blocks and sheaves to the oil & gas, construction and mining industries, serviced primarily through a global network of value-added specialty distributors.

Following the outstanding performance achieved by Crosby during both 2010 and 2011, the business had another very successful year in 2012. Revenue for the year was up nearly 13 per cent, with operating profit up by over 20 per cent.  While European and North American construction markets remained slow, this was more than offset by demand in oil & gas markets, and combined with growth in emerging markets, helped Crosby to achieve this record performance.

Crosby continued its focus on supporting its traditional worldwide distributor base by achieving record levels of training.  Nearly 1,000 seminars reached over 25,000 end users of Crosby product during the year.  That focus helped to reinforce the technical expertise and application knowledge that exists within Crosby and also resulted in greater market share and brand loyalty.  Additionally, several new distributors were established in Asia, where Crosby continues to grow at an average of three times the overall market growth rates within these territories.

Further growth also came from several innovative new product launches.  Crosby introduced its Easy-Loc^® Bolt Retention System, a patented design which eliminates the need for the traditional threaded bolt, nut and cotter pin, resulting in easier and more efficient operation for the end-user, while maintaining all of the safety attributes required for demanding applications.  Crosby also introduced new hoist rings designed for greater versatility in the extreme and abrasive material handling environments of subsea and saltwater applications. Lastly, the patent-pending McKissick Tubing Grab^®, for use on oil rig tubing lift projects, has been designed with a quick, easy, and efficient attachment for 'well servicing' applications.

During 2012, Crosby continued to invest in its global facilities.  An ongoing programme to optimise Crosby's European manufacturing footprint culminated in the announcement to close the facility in Nouzonville, France. Several production equipment moves are also ongoing, designed to create centres of excellence in forging and machining to support growth in Europe, the Middle East and Africa.  Additionally, the Premier Stampings facility in the UK acquired additional land and is currently in the process of building a heat treatment facility to allow for greater flexibility and independence in its supply chain.

In Asia, Crosby's manufacturing location in Hangzhou, China, nearly doubled its sales as a result of gaining its API Q1/8C certification, which is necessary in order to manufacture monogrammed products to sell to equipment end users within the oilfield industry.  By having this capability at the Chinese facility, Crosby has begun to service crane OEM customers in China with locally manufactured blocks and sheaves. 

North America also enjoyed continued investment.  A modernised galvanizing facility was completed during the year to increase capacity and reduce cost.  Two additional forging hammers, multiple induction heaters and a state-of-the-art electric upsetter were also added to improve efficiencies, quality and throughput in the four North American facilities. However, one of the most anticipated investments will not commence production until early 2014, when Crosby plans to unveil a recently delivered 35,000lb hammer.  Once operational it will be one of the largest operating in the lifting industry and allow Crosby to forge larger shackles of up to 400 tonnes, the manufacture of which would previously have been outsourced. These larger products will be used to supply the major oil companies within the offshore industry.  Overall production equipment acquired during 2012 alone will, when fully operational, increase Crosby's forging capacity in North America by more than 15%.

Outlook

The outlook for Crosby in 2013 remains positive and follows three strong years of growth since 2009. Oil prices have remained high and natural gas prices have continued to edge upwards, enough to warrant additional investment by the industry.  Crosby is well placed to take advantage of additional growth opportunities if these price trends continue although revenue growth is not expected to be at the same level as 2012.  Crosby's unrelenting focus on continuous improvement, innovative new products and market expansion, gives the business confidence to expect another solid year of market share and performance improvement.

ACCO

Acco, the supplier of material handling equipment including cranes, monorails, hoists, carts and trailers, performed well, with revenue increasing by over 20 per cent against the prior year. Operating profit for the year produced a return on sales of approximately 17 per cent.  A move to more niche products has resulted in dramatic improvement in the results of this business.

Capital investment was also made in the business, which included a replacement conveyor system in the monorail plant, various upgrades and other equipment rebuilds, designed to increase the useful and productive life of existing equipment.

Outlook

It will be difficult to repeat 2012 but Acco is well-positioned in its marketplace and optimism remains high for a further improvement in performance in 2013.

OTHER INDUSTRIAL

£m	2012	20111
Total Revenue	129.1	134.4
Headline2 Operating Profit	17.0	16.5

¹ restated to include the MPC results within discontinued operations

² before exceptional costs, exceptional income and intangible asset amortisation

TRUTH

Truth is the North American market leader in the engineering, design and manufacture of hardware products used to serve the fenestration market, which includes windows, patio doors and skylights.  Truth's channel to market is through the large well known North American fenestration OEM's.

The main manufacturing facility of Truth is in Minnesota, USA, where its engineering, research and development, die casting, metal stamping, component fabrications and assembly manufacturing takes place. Truth also has a separate facility in Toronto, Canada, which serves as a competency centre for machining technology.

During the year, both revenue and operating profit increased when compared to 2011. Revenue was up by approximately 5 per cent as the North American housing market continued its recovery.  Operating profit increased significantly due to a variety of factors which included a successful continuous improvement project as well as labour efficiency measures and enhanced management of the global supply chain, designed to eliminate unnecessary logistics costs.

The manufacture of Truth's product is carried out by a combination of in-house manufacturing, together with third party sourcing of lower margin product.

During the year, focus was placed on initiatives for continuous improvement, which included greater cost control, product quality, scrap reduction, inventory analysis and delivery times. Various capital investments were also made during the year, to include robotic automation in certain parts of the manufacturing process and new die casting equipment. These operational improvements and capital investments place Truth in a good position to capitalise on future market growth.  

Outlook 

Truth remains confident about market growth prospects within the North American housing market during 2013.  All current signs support further recovery in this market and additional sales should result in a further improvement in performance.

In addition to the positive market outlook, Truth is confident about gaining further market share as a result of widening its product portfolio.  The current and future product development pipeline includes both new products and enhancements to existing products for all product categories including windows, patio doors and commercial product.

HARRIS

Harris is a well-respected leader in the scrap and waste recycling industries, operating from two manufacturing plants in Georgia, USA. The business designs, manufactures and services a full range of size reduction equipment solutions for the scrap metal, fibre recycling and waste industries.

Harris saw revenue decrease by around 15 per cent, as demand for scrap recycling machines declined, with orders decreasing by around the same level. This contributed to a substantial fall in operating profit when compared to the prior year.

During 2012, Harris continued with its strategy to further improve the quality and reliability of its existing product ranges. Engineering resources were focused on making further improvements to products launched in 2010 and 2011, such as the Centurion EHD baler, designed for the non-ferrous market and side compressor shears, designed for the ferrous market. Strategically important product launches will occur in 2013, to include equipment for both the ferrous and non-ferrous processing markets.

Harris continued to focus on key customer-facing strategies, designed to strengthen its position in the scrap and waste recycling industries.  Harris further expanded its presence in Latin America to fully participate in the rapidly growing recycling industries in that region.  It also made efforts to strengthen relationships with the largest scrap and waste processors, as consolidation in these industries continues. Additionally, Harris remains focused on maximising Aftermarket sales opportunities.

Outlook

Harris expects little sales growth in 2013 due to overall market conditions. Notwithstanding this, Harris expects to further improve its internal efficiency and execute key strategies which will place the company in a stronger position going forward. 

ELSTER

Elster Group S.E. was acquired by Melrose in August 2012 for an enterprise value of £1.8 billion.  The figures given for each of the businesses are only for the four months post acquisition and are affected by seasonality.  Therefore, they are not an accurate indication of a run rate for 2013. 

Although it is still early days, we are very pleased with the progress that has been made so far.  Restructuring projects aimed at achieving our plan for the business have either already been completed or are at least well underway.  Part of this restructuring has been to reduce the number of reporting businesses from five to three; the Elster division has now been split into three distinct global businesses of Gas, Water and Electricity. Further detail about each of these businesses is given below.

GAS

£m	2012 - 4 months post acquisition
Total Revenue	236.9
Headline1 Operating Profit	46.7

¹ before exceptional costs, exceptional income and intangible asset amortisation

Elster Gas is a world leader in the design and manufacture of gas measurement, process heat control and gas safety control equipment, supplying a global customer base in more than 130 countries. It has one of the most extensively installed utility measurement bases in the world with more than 75 million gas metering devices deployed over the last 10 years alone.  Its complete range of end-to-end solutions enables customers to efficiently manage and control natural gas resources.

From its four lead plants in Europe and the USA, coupled with sizeable subsidiary operations in China, Russia and Mexico, Elster Gas supplies gas meters for both residential and commercial/industrial customers. In addition, the Elster Gas control equipment range of products is used extensively by global customers in both the upstream and midstream gas market sectors.

Despite continued delays in the anticipated roll out of Smart Gas Meters in Europe and a sluggish process heat control equipment market, particularly in China, Elster Gas full year revenues recovered in the last four months of the year to end up flat when compared to 2011. Revenue within the European market declined but this was more than offset by an increase in the US market.

Operating profit for the four month period post acquisition improved over the same period in 2011, largely as a result of operating efficiency improvements, which were implemented after the acquisition.

In the four months since acquisition many changes and initiatives have taken place in order to better position the business to exploit the projected long-term growth in its end market.

A new unified global organisation has been created to replace the previously separate US business and disparate European operations. Clear lines of responsibility and accountability have been established and there is now a highly motivated and performance driven management team in place, working together towards a demanding set of long-term goals and objectives. At the same time a new and focused operations review process has been introduced to improve manufacturing and procurement performance.

Further progress has also been made in rationalising the European manufacturing footprint, where the production of a number of products previously manufactured in Western Europe has been transferred to the newly extended plant in Slovakia. This strategy will continue to be executed throughout 2013 and 2014.

The extensive product portfolio within Elster Gas has been reviewed and is in the process of rationalisation to eliminate low margin products. This will also enable a more focused and value driven research and development strategy to be implemented.  The next few years will be key years in the roll out of Smart Gas Meters in Europe and significant work has been undertaken to ensure that the business is ready for this major opportunity.

Outlook

Elster Gas end markets remain healthy. Order input in 2012 increased by 2 per cent against the prior year, giving a book to bill ratio of 100 per cent. When coupled with the full year effect of post-acquisition efficiency improvements and additional planned activities in the year ahead, Elster Gas should enjoy a strong performance in 2013.

ELECTRICITY

£m	2012 - 4 months post acquisition
Total Revenue	106.8
Headline1 Operating Profit	12.6

¹ before exceptional costs, exceptional income and intangible asset amortisation

Elster Electricity is one of the world's largest international metering solution providers, supplying both traditional and Smart Meter equipment, including applications for residential, commercial, industrial, transmission and distribution markets.

The product range includes distribution and control monitoring equipment, advanced Smart Metering, demand response, networking and software solutions, together with several other communication products and services. Elster Electricity has key production facilities located in Europe, North America and South America.

Revenue within Elster Electricity was impacted by the delayed roll out of Smart Metering in Europe, plus slower than expected growth in Asian markets.  The North American market continued to be strong and this growth was primarily driven by Energy Axis, Elster Electricity's Smart solution for North America.

Operating profit was also affected by the delayed Smart Metering roll out in Europe. On-going investment in the Smart Meter product portfolio and organisational changes further impacted on the operating profit of the business.

Post-acquisition, the businesses of Elster North America and Elster International were consolidated into one Electricity business.  This was done to create efficiencies and establish a highly motivated organisation, with a clear focus and responsibility.  Since acquisition, actions have also already been taken to streamline the US business, via the reorganisation of certain sales, product management, research and development departments and the relocation of all remaining production at the Raleigh, US, facility to Mexico. Consolidation of the European manufacturing footprint is ongoing, which includes the development of Romanian facilities to act as a central European manufacturing and development centre, the closure of the Hungarian operation and the downsizing of some German and British operations.

During 2013, focus will be on the expected roll out of Smart Meters in Europe, which will be supported by investments in both new and existing Smart Meter product platforms and solutions; this will have a positive contribution on future revenues. Completion of the European manufacturing footprint will also continue to be a focus for the management team, together with further operational profitability improvements in North America.

Outlook

The global electricity metering business will remain challenging in 2013 but there are strong signs it is moving in a very positive direction over the medium term.  In Europe, targets are in place to roll out Smart Meters to 80 per cent of customers by 2020, and 100 per cent by 2022.  This means that member states of the EU will provide a commitment to develop Smart Metering on a large scale basis, although it is inevitable that not all national governments will develop their plans at the same pace. 

Further growth opportunities in Europe come from the evolution of Smart Meter functionality to grid applications, such as outage, voltage conversion, loss detection, load control and demand response.  This is already a reality in North American markets and Elster Electricity will be well placed to use its experience gained from the American market.

WATER

£m	2012 - 4 months post acquisition
Total Revenue	67.4
Headline1 Operating Profit	1.4

¹ before exceptional costs, exceptional income and intangible asset amortisation

Elster Water designs and manufactures a comprehensive range of water metering solutions, which includes high accuracy mechanical meters, fully electronic water meters and Smart metering solutions for residential, commercial and industrial sectors.

Following acquisition, a greater focus has been placed on the acceleration of various restructuring projects, profitability of sales and simplification of the business structure.   It is clear that supplying certain unprofitable markets and products was adversely affecting the financial performance of this business. 

Under Melrose ownership, various enhancements were made to the restructuring projects that had originally been announced by Elster in 2011.  These include the closure of underperforming parts of the business in Poland, Colombia and Italy, moving from an operations to a distribution market approach.  The cessation of manufacturing mechanical meters in North America and the exit from a significant number of lower margin product lines made in Germany enables a significant restructuring of operations in those markets.  Although this only delivered a small operating margin improvement in 2012, these projects are expected to deliver significant benefit from 2013 onwards.  In total, since acquisition, the closure and restructuring of five facilities in this business have been announced and are well underway.

The business has been successful in managing its overhead base, which contributed to the operating profit improvement during the year.

South America produced strong results, as both revenue and operating profit increased, following a market sales price recovery after a challenging 2011.  Continued economic growth in the Brazilian market is helping to increase meter penetration and Elster Water continues to capture significant sales with several major customers.

New product launches in 2012 included the S150 single jet meter with improved accuracy range, HT8 and ePico hybrid AMR submeters with integrated radio communication and further extensions of the polymer bodied V200 volumetric meter range.  Enhancements to the Emeris Smart Metering solutions include ERM2 route management software updates and the new Emeris WaterNet data management system, developed in conjunction with Elster Electricity.

Globally, sales of polymer bodied meters grew by over 38 per cent compared to 2011.  This is an area of substantial opportunity for Elster.  The award winning polymer meters are helping customers achieve their CO₂ reduction targets, as well as providing lead free alternatives to traditional brass and bronze products.

Outlook

The Elster Water business will continue with its restructuring plans throughout 2013. Significant operating profit improvement will be achieved from the closure or restructuring of low operating margin businesses and the cessation of poorly performing product lines.  Market conditions continue to be affected by ongoing austerity measures in several regions and competition remains strong in many segments.  However we are confident that with a revised business model for Elster Water, which will focus on its strengths and a continued emphasis on advanced metering solutions, profits within Elster Water will increase in 2013.

Simon Peckham

Chief Executive

6 March 2013

FINANCE DIRECTOR'S REVIEW

The year to 31 December 2012 was a significant year for Melrose Industries PLC ("Melrose") with the achievement of many key events. This report summarises the financial details of those events and also the financial results for the year.

NEW GROUP HOLDING COMPANY

Following shareholder approval on 5 November 2012 a Scheme of Arrangement was sanctioned by the High Court of England and Wales on 26 November 2012, pursuant to which a new listed holding company was introduced for the Melrose Group of companies.  The Scheme of Arrangement became effective on 27 November 2012 and Melrose Industries PLC became the new holding company of Melrose PLC and its subsidiaries.  The subsequent reduction of share capital by this new holding company created significant distributable reserves to assist the Group to return the proceeds of future disposals to shareholders efficiently.

ACQUISITION DURING THE YEAR

On 23 August 2012 Melrose completed the acquisition of Elster Group S.E. ("Elster") for an enterprise value of £1.8 billion.  The total costs of acquiring Elster were £73 million of which £31 million related to the raising of equity, and were offset against Share premium, and £23 million related to bank facility arrangement fees, which have been included within net debt.  These are being amortised over the five year life of the facility.  The remaining £19 million of costs are included within exceptional items.

The acquisition and associated expenses have been funded through a combination of new debt and equity.  On 1 August 2012 a 2 for 1, fully underwritten, Rights Issue was completed and subsequently 844.4 million new Melrose Ordinary Shares were issued raising £1.2 billion.  This took the number of shares in issue to 1,266.6 million.  The diluted weighted average number of shares in issue for 2012 was 960.7 million.

In addition a new five year facility has been agreed totalling £1.5 billion, split into a £0.5 billion multi-currency term loan and a £1.0 billion multi-currency revolving credit facility agreement.  The details of this facility are included in the liquidity risk management section and refinancing section of this report.

DISPOSAL DURING THE YEAR

On 25 June 2012 the McKechnie Plastic Components ("MPC") business, previously held within the Other Industrial division, was sold.  Gross cash proceeds were £30.7 million with costs of disposal of £3.1 million.  Net assets disposed were £28.2 million resulting in an accounting loss on disposal of £0.6 million.  MPC contributed revenue of £73.5 million and headline operating profit of £6.6 million in the year ended 31 December 2011.

This disposal brought to a conclusion the successful investment in Dynacast and McKechnie which were acquired in May 2005 for a net equity investment of £244 million and sold for a total equity value of nearly £800 million of cash giving a return on equity of approximately 3.25 times.

RE-FINANCING

In January 2012 the new five year committed £600 million multi-currency revolving credit facility, agreed in December 2011, was partially drawn, replacing the committed £750 million syndicated term loan and revolving credit facility which was fully repaid.   

On 23 August this facility was repaid and a new £1.5 billion multi-currency bank facility was partially drawn down to accommodate the acquisition of Elster, split into a £0.5 billion term loan and a £1.0 billion multi-currency revolving credit facility agreement.  This facility was signed in June 2012 and expires in June 2017.  The term loan was partly used to fund the acquisition with the remaining amounts used to refinance, where necessary, the existing indebtedness of both Melrose and Elster and to finance the enlarged Group's working capital requirements.

The new facility was drawn in the Group's core currencies, namely US Dollars, Euros and Sterling, in the most suitable proportion to protect, as effectively as possible, against exchange rate volatility within the Group.

As at the year end the term loan was fully drawn and split into two tranches of £180 million and US $500 million.  The revolving credit facility is split into multi-currency Sterling based tranches totalling £760 million and a €300 million tranche.

LONG TERM INCENTIVE PLAN

On 11 April 2012, at a Melrose General Meeting, shareholders voted in favour of the early crystallisation of the previous Melrose Incentive Plan, bringing forward the maturity date from 31 May 2012 to 22 March 2012.  On crystallisation the Incentive Shares were converted into 31.2 million Melrose Ordinary Shares and as a result the total number of Ordinary Shares in the Company increased from 391.0 million to 422.2 million.

At the same meeting a new five year share-based 2012 Melrose Incentive Plan was approved by shareholders which mirrors the previous Melrose Incentive Plan in most respects except that under this new plan the potential reward has been reduced from 10% to 7.5% of the increase in shareholder value creation.  In addition a 5% dilution cap has been included in the new plan rules.  This new plan has an end date of 31 May 2017.

The charge to headline operating profit for the 2012 Melrose Incentive Plan will be £4.0 million per annum (previous Melrose Incentive Plan: £1.8 million per annum).

SEGMENTAL SPLIT OF DIVISIONS

As a consequence of the Elster acquisition and the disposal of MPC during 2012 the segmental split of the Group has been altered.

Continuing operations:

The continuing operations at 31 December 2012 now consist of four divisions, namely Energy, Lifting, Other Industrial and a new Elster division containing the businesses of Gas, Electricity and Water.

 
Discontinued operations:

The discontinued operations in 2012 include the results of the MPC business, previously shown within the Other Industrial division.  In accordance with IFRS 5 the trading results of MPC are shown as discontinued in both years.  The discontinued operations in 2011 also include the Dynacast, Brush Traction, Logistex UK, Madico and Weber Knapp businesses.

Group trading results - continuing operations

To help understand the results of the continuing operations the term 'headline' has been used.  This refers to results calculated before exceptional costs, exceptional income and intangible asset amortisation as this is considered by the Melrose Board to be the best measure of performance.

For the year ended 31 December 2012 the Group achieved revenue from continuing operations of £1,551.4 million (2011: £1,080.4 million).  Headline operating profit in the year ended 31 December 2012 was £243.1 million (2011: £174.2 million) and the headline operating profit margin (defined as the percentage of headline operating profit to revenue) decreased from 16.1% in 2011 to 15.7% in 2012.  Within this the existing continuing Melrose businesses increased their headline operating margin by 0.2 percentage points to 16.3% in 2012.

After exceptional costs, exceptional income and intangible asset amortisation Group operating profit was £137.1 million (2011: £110.5 million).

In accordance with IFRS 3: "Business combinations", the impact on the Group results if the acquisition had been made at the start of the year has been estimated despite the results of Elster being calculated under US GAAP for the first thirty three weeks of the year.  This shows that Melrose continuing revenue would have been approximately £2,271 million and headline operating profit approximately £330 million in the year to 31 December 2012.

TRADING RESULTS BY DIVISION - CONTINUING OPERATIONS

A split of revenue, headline operating profit and headline operating profit margin for 2012 and 2011 is as follows:

	2012   Revenue	2012     Headline    operating          profit/           (loss)	2012     Headline    operating           profit        margin	2011   Revenue	2011    Headline   operating         profit/          (loss)	2011    Headline   operating          profit       margin
	£m	£m	%	£m	£m	%
Energy	486.8	93.4	19.2	461.6	91.1	19.7
Lifting	524.4	95.2	18.2	484.4	82.6	17.1
Other Industrial	129.1	17.0	13.2	134.4	16.5	12.3
Elster	411.1	57.8	14.1	-	-	-
Central-corporate	-	(11.8)	-	-	(9.2)	-
Central - LTIPs(¹)	-	(8.5)	-	-	(6.8)	-
Continuing Group	1,551.4	243.1	15.7	1,080.4	174.2	16.1

⁽¹⁾ Long Term Incentive Plans

The performance of each of the trading divisions is discussed in detail in the Chief Executive's review.

Central costs comprise £11.8 million (2011: £9.2 million) of Melrose corporate costs, which increased towards the end of the year as expected following the acquisition of Elster, and a Long Term Incentive Plan ("LTIP") accrual of £8.5 million (2011: £6.8 million).  The LTIP accrual includes an amount of £0.8 million (2011: £1.8 million) in respect of the previous Melrose Incentive Plan, which matured on 22 March 2012, and an accrual of £2.7 million (2011: £nil) in respect of the new five year Melrose 2012 share-based Incentive Plan which commenced on 11 April 2012.  The annual accrual for the new five year plan was calculated in accordance with IFRS 2: "Share based payments" using a standard pricing model and will be constant until the date of crystallisation.

In addition, there was a charge of £5.0 million (2011: £5.0 million) for the cash-based divisional management incentive plans.  These plans are for senior operational management within the businesses and are designed to reward improvement in business performance, usually over a five year period.

FINANCE COSTS AND INCOME

The net headline finance cost in 2012 was £28.8 million (2011: £19.5 million).

Net interest on external bank loans, overdrafts and cash balances was £21.9 million (2011: £15.6 million).  Melrose uses interest rate swaps to fix the majority of the interest rate exposure on its drawn debt. Following the refinancing in January a new set of five year interest rate swaps was entered into and the existing ones were closed.  Following the acquisition of Elster another layer of swaps were added to ensure the Group's interest exposure was suitably protected.  More detail on these swaps is given in the finance cost risk management section of this review.

In 2012 the Group had a blended interest rate of 2.7% (2011: 3.1%).

Also included in the net headline finance cost is a £2.4 million (2011: £2.5 million) amortisation charge relating to a proportion of the arrangement costs of raising the £600 million bank facility and the new £1.5 billion bank facility, a net interest cost on pension liabilities in excess of the expected return on their assets of £3.6 million (2011: £0.3 million) and a charge for the unwinding of discounts on long term provisions of £0.9 million (2011: £1.1 million).  The introduction of IAS 19 (revised) in 2013 is expected to increase the net pension charge to headline profit before tax by approximately £10 million.

TAX

As expected, following the acquisition of Elster, the headline Income Statement tax rate increased slightly to 27% (2011: 26%).  The 27% headline tax rate is expected to increase further in 2013 as a full year of 2013 Elster results are included.

The Group has chosen to reconcile the actual tax charge for the year to the weighted average tax charge, because the weighted average rate better reflects the Group's economic operating conditions.  The main reason the headline rate is lower than the weighted average rate is the release of provisions previously held against potential overseas tax audits which have now been cleared.

The tax rate after exceptional items and intangible asset amortisation is 53% (2011: credit of 21%).  The reasons for the high rate in the year include the non-deductibility for tax purposes of many of the exceptional costs incurred during the year, (indeed the tax credit on the exceptional costs, including intangible asset amortisation, was only 7%), and the re-evaluation of the Group's deferred tax liability on intangible assets.

The cash tax rate on headline continuing operations of 23% (2011: 15%) is again below the headline rate due to the benefit arising from the utilisation of pre-existing Melrose Group tax losses and other deferred tax assets.  The rate is higher than in previous years due to the settlement of tax audits commenced prior to our ownership of FKI and the relative lack of similar deferred tax benefits being available to the Elster businesses.

The Group's current tax creditor has increased by £24 million in the year, primarily as a result of the acquisition of the Elster businesses.  The net deferred tax liability has increased more significantly, by £208 million to £266 million. The net liability includes a gross deferred tax liability of £263 million in respect of brand names and customer relationships acquired with the Elster businesses.

The deferred tax liability on existing intangible assets decreased during the year as a result of the normal amortisation of those assets but increased by the same amount as a result of the decision to amend their calculation to be consistent with the method used for the Elster intangible assets.  The deferred tax liability in respect of intangible assets is not expected to represent a future cash tax payment and will unwind as the brand names and customer relationships are amortised.

The total amount of tax losses in the Group has increased in the year mainly due to the acquisition of Elster.  The total gross tax losses within the Group are shown below:

Tax losses	Recognised                           £m	Unrecognised                             £m	Total                         £m
UK	16.1	170.6	186.7
North America	1.2	-	1.2
Rest of World	18.2	44.5	62.7
Total 2012	35.5	215.1	250.6
Total 2011	35.0	166.4	201.4

EXCEPTIONAL ITEMS

In the year ended 31 December 2012 the Group incurred exceptional operating costs of £73.9 million (2011: £40.0 million) and received exceptional income of £7.0 million (2011: £ nil).  In addition intangible asset amortisation of £39.1 million (2011: £23.7 million) was charged.  A net tax credit on these exceptional costs, exceptional income and intangible asset amortisation, of £14.5 million (2011: £20.7 million), and an exceptional tax charge of £5.8 million (2011: credit of £38.1 million) has been taken in the year.

The table below summarises the exceptional items in 2012:

	Total                         £m
Intangible asset amortisation	(39.1)
Exceptional operating costs
Elster head office closures	(9.1)
Other restructuring costs	(45.3)
Acquisitions and disposals of businesses	(19.5)
Total exceptional operating costs	(73.9)
Exceptional operating income (curtailment gain on US retirement plans)	7.0
Exceptional finance costs	(16.3)
Net tax credit on exceptional items	14.5
Exceptional tax charge	(5.8)
Total exceptional tax and tax on exceptional costs	8.7
Exceptional items and intangible asset amortisation (after tax)	(113.6)

Overall the net exceptional items and intangible asset amortisation, after tax, shows a net expense of £113.6 million (2011: £4.9 million).

The Elster head office closure and Elster restructuring costs, discussed further in the Chief Executive's review, will deliver significant cost savings in the future.  Other restructuring costs include restructuring in the Lifting division along with the costs associated with the establishment of the new holding company.  The acquisition and disposal costs primarily relate to the acquisition of Elster, along with smaller disposal activity within the Melrose Group.

In addition, £16.3 million of exceptional finance costs have been incurred which relate to the breaking of swaps on previous financing arrangements, the acceleration of the amortisation of banking fees previously capitalised and a proportion of the make whole premium charged on the repayment of Elster's Eurobond.

The exceptional operating income arises as a result of changes made to benefits in respect of Elster retirement health and life plans.

EARNINGS PER SHARE (EPS) AND NUMBER OF SHARES IN ISSUE

In the 2011 Annual Report it was explained that the best measure of year on year growth in headline diluted EPS was by comparing the headline diluted EPS of continuing and discontinued businesses, before the profit on disposal of businesses, and using the weighted average number of shares for the year.  This was because Dynacast was such a significant part of the Group and the disposal proceeds were used to buy back shares which impacted the weighted average share calculation.  Excluding the Dynacast results from the 2011 EPS calculation would therefore have been misrepresentative of year on year performance.  This gave a diluted headline EPS of 28.8p in 2011. 

In these Financial Statements, in accordance with IAS 33, all EPS numbers have been restated to apply a bonus factor of 57% to reflect the impact of the Rights Issue.  This restates the 28.8p discussed above to 16.4p.

Using the same measure the diluted headline EPS for 2012 was 16.3p, which shows a slight decrease year on year.  However, this number has been impacted by the dilutive effect of the disposal of MPC, a relatively small business within the Group where the proceeds were not used to repurchase shares.  Removing MPC from both years' calculations would result in a 2011 EPS of 15.8p and a 2012 EPS of 16.1p, showing a 2% increase year on year.  In addition there has been a negative impact year on year in respect of foreign exchange movements, particularly in relation to the Euro and the Czech Koruna.  Using constant currency and adjusting for MPC the diluted EPS has grown by 4% year on year.

In addition there was a period of time between issuing shares to buy Elster and actually owning Elster on 23 August 2012.  If the weighted average number of shares were adjusted for this period then this would increase the 2012 EPS by an additional 0.6p.  Adjusting for these factors results in underlying year on year growth of 8%.

In accordance with IAS 33, two further sets of basic and diluted EPS numbers, post exceptional items, are disclosed on the face of the Income Statement, one for continuing operations and one that also includes discontinued operations.  In the year ended 31 December 2012 the diluted EPS for continuing operations was 4.3p (2011: 12.9p) and for both continuing and discontinued operations was 4.4p (2011: 33.6p).  The decrease in the 2012 non-headline EPS is due to exceptional costs, primarily restructuring, acquisition and refinancing related, whereas 2011 benefited from the profit on disposal of Dynacast.

CASH GENERATION AND MANAGEMENT

Within the existing Melrose businesses, the period of significant investment continued with a resulting net capital expenditure to depreciation ratio of these businesses being 2.1x for the year (2011: 1.7x).  Consequently it is appropriate to look at the operating cash generated post working capital movements, but prior to capital expenditure, as a percentage of headline EBITDA (defined as headline operating profit before depreciation and amortisation) to gauge cash performance in the year.  The percentage in 2012 for the continuing Group was 84% and indeed, within this, it was 86% for the existing Melrose businesses (2011: 90%), a good conversion considering the continued 6% growth in revenue for these businesses.

For the nineteen weeks of ownership of Elster the net capital expenditure to depreciation ratio was 0.9x and the pre capital expenditure cash conversion was 79%.

The cash generation performance in 2012 is summarised as follows:

Movement in net debt	2012                    £m
Opening net debt	(289.6)
Acquired net debt with Elster	(306.3)
Cash flow from trading (after all costs including tax)	(1.0)
Increase in net debt to fund the Elster acquisition	(390.6)
Net cash flow from disposals (including net cash disposed)	27.1
Amounts paid to shareholders	(66.8)
Foreign exchange and other non-cash movements	29.5
Closing net debt	(997.7)

The detail of the cash flow from trading and the net cash flow of acquisitions is shown below:

Cash flow from trading (after all costs including tax)	2012                    £m
Headline operating profit	243.1
Depreciation and amortisation of computer software and development costs	30.5
Working capital movement	(44.0)
Headline operating cash flow (pre capex)	229.6
Headline EBITDA conversion to cash (pre capex) %	84%
Net capital expenditure	(52.9)
Net interest and net tax paid	(81.2)
Defined benefit pension contributions	(33.7)
Other (including discontinued operations)	(62.8)
Cash outflow from trading (after all costs including tax)	(1.0)

Increase in net debt arising from acquisitions	2012                    £m
Net proceeds on issue of shares	1,168.1
Cash payment for acquisitions (including costs)	(1,525.6)
Exceptional finance costs in raising and settling finance	(33.1)
Increase in net debt to fund acquisitions	(390.6)

The Balance Sheet leverage (calculated as net debt divided by headline operating profit before depreciation and amortisation) was approximately 2.6x at 31 December 2012 (31 December 2011: 1.4x).  This includes the results of the Elster businesses under previous ownership, adjusted to approximate the impact of the transition to IFRS and the impact of the fair value review in this period.

CAPITAL EXPENDITURE

Improving businesses by investing in capital projects is a key part of the Melrose strategy.  The Group continued to authorise net capital expenditure in excess of depreciation for the existing businesses and for the Elster businesses net capital expenditure was slightly less than depreciation in the four month period of ownership whilst the Board assessed strategies for these businesses.  By division, the net capital expenditure in the year was as follows:

	Energy	Lifting	Other Industrial	Elster	Central	Total
Net capital expenditure £m	10.2	30.0	3.8	8.0	0.9	52.9
Depreciation £m	7.5	9.9	3.4	9.1	0.6	30.5
Net capital expenditure to depreciation ratio (full year)	1.4x	3.0x	1.1x	0.9x	1.5x	1.7x
Melrose eight year (2005-2012) average annual multiple						1.3x

The net capital spend to depreciation ratio was 1.7x in 2012 (being 2.1x in existing Melrose and 0.9x in Elster), equal to  the 1.7x ratio in 2011 demonstrating the continued investment phase that the Group is going through in its key businesses.  The eight year Melrose average annual net capital spend remains in excess of depreciation at 1.3x.

The largest investment was made in the Bridon business (within the Lifting division) and in particular the development of a new factory on Neptune Quay in Newcastle upon Tyne to produce the largest ropes in the world.  More details on this investment and others are included in the Chief Executive's review.

FAIR VALUE EXERCISE

Following the acquisition of Elster, Melrose has undergone an extensive review of the Elster assets, liabilities and accounting policies.  This, along with the change from reporting under US GAAP to reporting under IFRS and from US Dollars to Sterling, has resulted in a significant amount of fair value adjustments in the Elster businesses.

In addition to a fair value review of all the Elster assets and liabilities at the acquisition date and a review of the accounting policies, Melrose has undertaken significant actions to improve the operational and financial nature of the Elster Group.  To achieve this, a number of exceptional costs have been incurred as described in the exceptional items section of this review.

ASSETS AND LIABILITIES

The summary Melrose Group assets and liabilities are shown below:

	2012                £m	2011             £m
Fixed assets (including computer software and development costs)	345.2	218.1
Intangible assets	1,156.3	334.8
Goodwill	1,836.9	568.5
Net working capital	218.5	144.8
Retirement benefit obligations	(261.3)	(117.7)
Provisions	(254.3)	(120.6)
Deferred tax and current tax	(307.1)	(74.8)
Other(¹)	5.2	(15.1)
Total	2,739.4	938.0

⁽¹⁾   Includes interests in joint ventures, net derivative liabilities and, for 2011 only, a £1.1 million liability relating to the redeemable preference C shares redeemed on 30 April 2012

These assets and liabilities are funded by:

	2012                £m	2011             £m
Net debt	(997.7)	(289.6)
Equity	(1,741.7)	(648.4)
Total	(2,739.4)	(938.0)

The increase in total equity is primarily related to the Rights Issue and the increase in net debt as a result of the acquisition of Elster.

GOODWILL, INTANGIBLE ASSETS AND IMPAIRMENT REVIEW

The total value of goodwill as at 31 December 2012 was £1,836.9 million (31 December 2011: £568.5 million) and intangible assets was £1,156.3 million (31 December 2011: £334.8 million).  These items are split by division as follows:

	Energy        £m	Lifting           £m	Other   Industrial             £m	Elster             £m	Total             £m
Goodwill	244.2	289.7	18.3	1,284.7	1,836.9
Intangible assets	106.8	180.6	16.1	852.8	1,156.3
Deferred tax on intangible assets	(29.6)	(50.3)	(4.5)	(262.8)	(347.2)
Other net assets	81.0	142.9	25.0	(61.5)	187.4
Total carrying value	402.4	562.9	54.9	1,813.2	2,833.4

The goodwill and intangible assets have been tested for impairment as at 31 December 2012.  The Board is comfortable that no impairment is required.

PROVISIONS

Total provisions at 31 December 2012 were £254.3 million (31 December 2011: £120.6 million), a significant increase from the previous year.  The following table details the movement in provisions in the year, the increase being virtually all related to the acquisition of Elster:

		Total                         £m
At 31 December 2011		120.6
Acquisition of businesses		143.0
Utilised - cash spend		(65.8)
Net charge to headline operating profit		8.5
Net charge to exceptional costs		48.3
Other (including foreign exchange)		(0.3)
At 31 December 2012		254.3

Included within the cash spend on provisions in 2012 was the resolution of the litigation case involving Bridon, details of which were included in the 2011 Annual Report.  On 23 May 2012, Bridon, Noble and Certex agreed a confidential settlement of the litigation and all claims have been dismissed with prejudice.  The settlement sum was paid by Bridon in the year, and including legal costs and current contributions from insurers, the settlement was in line with the £25.8 million provision held at the 2011 year end.

In addition to this, the other significant cash payments against provisions have been £10.6 million in respect of reorganisation provisions originally charged through exceptional items in 2011 and £13.8 million cash spend to date against the Elster reorganisation provisions which were either inherited in the opening Balance Sheet of Elster or created through exceptional items in 2012.

Of the remaining £15.6 million cash spend on provisions during 2012, £5.3 million related to provisions previously charged through operating profit with the remaining £10.3 million relating to provisions either acquired with businesses or created through exceptional items in previous years.

The net charge to headline operating profit in 2012 in respect of provisions was £8.5 million, mostly relating to the charge of £5.0 million in respect of the divisional LTIP plans. 

The other movements on provisions in the year relate to the net effect of the unwind on long term provisions, foreign exchange and the movement as a result of the disposal of MPC.

PENSIONS

The Group has a number of defined benefit and defined contribution pension plans brought forward from 2011.  In addition, Elster provides retirement benefits for most of its employees, either directly or by contributions to pension funds managed by third parties.

The acquisition of Elster has almost doubled the IAS 19 deficit in the Consolidated Balance Sheet as at 31 December 2012 with £115.2 million of the £261.3 million deficit, 44%, relating to the acquired businesses.  However, unlike the incumbent FKI and McKechnie pension plans, the Elster plans are mainly unfunded with total liabilities at 31 December 2012 of £152.8 million and total assets of £37.6 million.  The Elster plan liabilities acquired are much smaller than the existing Melrose funded plans.

The FKI UK Pension Plan remains the most significant pension plan in the Group. The net accounting deficit on this plan was £100.0 million at 31 December 2012 (31 December 2011: £79.4 million).  This plan had assets at 31 December 2012 of £630.2 million (31 December 2011: £600.3 million) and liabilities of £730.2 million (31 December 2011: £679.7 million).

The assumptions used to calculate the IAS 19 deficit of the pension plans within the Melrose Group are considered carefully by the Board of Directors.  For the FKI UK Pension Plan a male aged 65 in 2012 is expected to live for a further 22.1 years (31 December 2011: 20.3 years).  This is assumed to increase by 1.4 years (6%) for a male aged 65 in 2032.  A summary of the key assumptions of the UK plans are shown below:

	2012     Assumptions                      %	2011     Assumptions                       %
Discount rate	4.50	4.90
Inflation	3.00	3.10

It is noted that a 0.1 percentage point decrease in the discount rate would increase the pension liabilities on the main FKI UK Pension Plan by £14.1 million, or 2%, and a 0.1 percentage point increase to inflation would increase the liabilities on this plan by £6.8 million, or 1%. Furthermore, an increase by one year in the expected life of a 65 year old male member would increase the pension liabilities on this plan by £25.0 million, or 3%.

The FKI UK Pension Plan is closed to new members and to current members' future service.

The other UK defined benefit pension plan of significant size in the Group, namely the McKechnie UK Pension Plan, was in deficit of £8.2 million at 31 December 2012 (31 December 2011: surplus of £3.0 million). This plan had assets at 31 December 2012 of £170.8 million (31 December 2011: £157.5 million) and liabilities of £179.0 million (31 December 2011: £154.5 million).

The McKechnie UK Pension Plan is closed both to new members and current members' future service.

The long term strategy for the UK plans is to concentrate on the cash flows required to fund the liabilities as they fall due whether that is within the timescales of Melrose ownership or beyond.  The Melrose Board recognise that as businesses are bought and sold eventually pension plan liabilities need to exit the Group.  However this can be done at a time which is commercially sensible.

The pension plan 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.  The Melrose Group made annual contributions of £18.5 million in 2012 (2011: £18.5 million) to the FKI UK Pension Plan and £4.6 million (2011: £4.6 million) to the McKechnie UK Pension Plan.  In addition, in 2012, a one-off contribution of £6.0 million was made to the McKechnie UK Pension Plan following the disposal of the MPC business.

In addition, a US defined benefit plan for FKI exists.  At 31 December 2012, this had assets of £198.3 million (31 December 2011: £195.2 million), liabilities of £228.4 million (31 December 2011: £228.7 million) and consequently a deficit of £30.1 million (31 December 2011: £33.5 million).  This plan is closed to new members and to current members' future service.

The net deficit on the Elster acquired plans at 31 December 2012 was £115.2 million.  Included in this amount is £89.6 million, 78%, relating to unfunded German defined benefit plans and early retirement programmes.  The remaining plans in the Elster division are smaller in size with £19.2 million of the deficit, 17%, relating to US defined benefit and retirement healthcare and life insurance benefits.

RISK MANAGEMENT

The financial risks the Group faces have been considered and re-evaluated following the acquisition of Elster and policies have been implemented to best 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 2012 was £997.7 million compared to £289.6 million a year earlier.  The increase in debt resulted from the acquisition of Elster where £390.6 million has been used, in addition to the net Rights Issue proceeds, to purchase the shares of Elster and pay acquisition costs and refinancing fees.  Net debt of £306.3 million was also acquired with Elster.  Subsequent to the acquisition Melrose refinanced all of the significant Elster debt facilities which consisted of a seven year 6.25% Eurobond with a principal value of €250 million which was due to mature in April 2018, in addition to a committed €450 million multi-currency revolving credit facility and a €140 million committed multi-currency guarantee facility both of which were due to mature in April 2016.  On 28 November 2012 the Elster Eurobond was repaid together with the applicable redemption premium and accrued interest, resulting in a repayment including principal of €283.3 million.

The new £0.5 billion term loan is subject to mandatory repayments of 5 per cent on 30 June 2015, 30 June 2016 and 31 December 2016.

As with previous facilities the new facility has two financial covenants, a net debt to headline EBITDA (headline operating profit before depreciation and amortisation) covenant and an interest cover covenant, both of which are tested half yearly, each June and December.

The first covenant, which calculates net debt at average exchange rates during the period, is set at 3.5x at December 2012 and reduces to 3.25x at 31 December 2013 before further reducing to 3.0x at 30 June 2015.  For the year ended 31 December 2012 it was approximately 2.6x (31 December 2011: 1.4x), after adjusting the first thirty three weeks of Elster EBITDA from US GAAP to IFRS and reflecting fair value adjustments, showing significant headroom compared to the covenant test.  The EBITDA used in this calculation includes Elster central costs at a level prior to the actions taken following the acquisition. 

The interest cover covenant remains at 4.0x throughout the life of the facility.  At 31 December 2012 it was 9.1x (31 December 2011: 11.7x) which also affords comfortable headroom compared to the covenant test.

The initial drawdown of the new facility has been made in the core currencies of the Group, being US Dollars, Euro and Sterling and in proportions to protect the Group as efficiently as possible from currency fluctuations on net assets and profit.

In addition, there are a number of uncommitted overdraft, guarantee and borrowing facilities made available to the Group.  These uncommitted facilities are lightly used.

Cash, deposits and marketable securities amounted to £156.5 million at 31 December 2012 (31 December 2011: £195.6 million) and are offset against gross debt of £1,154.2 million (31 December 2011: £485.2 million) to arrive at the net debt position of £997.7 million (31 December 2011: £289.6 million).  The combination of this cash and the size of the new facilities allows the Directors to consider that the Group has sufficient access to liquidity for its current needs.

The Board takes careful consideration of counterparty risk with banks when deciding where to place Melrose's cash on deposit.

In accordance with the reporting requirements on going concern issued by the Financial Reporting Council the Directors acknowledge that by its very nature the economic environment causes uncertainty as to the trading outcome for 2013 and beyond.  The Group has committed borrowing facilities until June 2017.  In addition, the breadth of the end markets that the Melrose Group companies trade in, both by sector and geographically, gives some balance to various market and economic cycle risks.  Furthermore, the Group has a consistent cash generation record, and as a consequence the Directors believe that the Group can manage its business risks successfully and accordingly the Group financial statements have been prepared on a going concern basis.

Finance cost risk management

The Group remained in a net debt position at 31 December 2012 which significantly increased following the acquisition of Elster.  The new Melrose facility carries a cost of LIBOR plus a margin which depends on the leverage which ranges from 1.40% to 2.65% and as at 31 December 2012 the margin was 2.00%.

The Group entered 2012 protecting 78% of its gross debt from exposure to changes in interest rates by holding a number of interest rate swaps to fix £380.1 million (US $546.0 million and €33.3 million) of drawn debt.  Under the terms of these swaps, the Group fixed the underlying interest rate at 2.1% for US Dollars and 2.6% for the Euro, plus the bank margin which was 1.35%, through to early 2013.

In February 2012 the Group closed out these swap arrangements and replaced them with new arrangements to fix the interest rate on a proportion of the new facility drawn down on 31 January 2012. The new five year swap arrangements fixed the finance cost on US $231.0 million, £105.0 million and €42.0 million of debt.  Under the terms of these swap arrangements, the Group will pay, annually in arrears, 1.0% for US Dollar swaps, 1.1% for Euro swaps and 1.1% for Sterling swaps, plus the bank margin which was 1.5% at that time.  These arrangements protected approximately 70% of the Group's exposure to interest rate fluctuations for the term of the new facility.

In September 2012 the Group entered into another layer of interest rate swaps following the acquisition of Elster.  The new five year swap arrangements fix the finance cost on US $329.0 million, £231.8 million and €250.0 million of drawn borrowings.  Under the terms of these swap arrangements, the Group will pay, annually in arrears, 0.69% for US Dollar swaps, 0.72% for Euro swaps and 0.80% for Sterling swaps, plus the bank margin which is currently 2.00%.  These swaps have also been structured to maintain the ratio of fixed interest rate cover over the five year term allowing for Group profit generation.

This fixes the interest rate cost on US $560.0 million, £336.8 million and €292.0 million of debt, 79% of gross borrowings at 31 December 2012.  The weighted blended fixed finance cost are therefore 0.84% on US Dollar swaps, 0.78% on Euro swaps and 0.91% on Sterling swaps, plus the bank margin of 2.00%.

Exchange rate risk management

The enlarged Group trades in various countries around the world and is exposed to many different foreign currencies.  The Group therefore carries an exchange rate risk that can be categorised into three types as described below.  The Board policy is designed to protect against the majority 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 60% to 80% of the anticipated cash flows over the following twelve months, placed on a rolling quarterly basis or for 100% of each material contract. This does not eliminate the cash risk but does bring some certainty to it.

Exchange rates used in the period

US Dollar	Twelve month       average rate	Nineteen week            average rate    (Elster businesses)	Closing          rate
2012	1.59	1.61	1.62
2011	1.60	N/A	1.55
Euro
2012	1.23	1.24	1.23
2011	1.15	N/A	1.20

The effect on the key headline numbers in 2012 for the continuing Group due to the translation movement of exchange rates from 2011 to 2012 is shown below.  The table illustrates the translation movement in revenue and headline operating profit if the 2011 average exchange rates had been used to calculate the 2012 results rather than the 2012 average exchange rate.

The translation difference in 2012                                                                                         £m
Revenue increase	28.6
Headline operating profit increase	7.4

For reference in respect of the enlarged Group, an indication of the short term exchange rate risk, which shows both translation exchange risk and unhedged transaction exchange rate risk, is as follows:

Sensitivity of profit to translation and unhedged transaction exchange risk	Increase in headline           operating profit                              £m
For every 10 cent strengthening of the US Dollar against Sterling	7.5
For every 10 cent strengthening of the Euro against Sterling	12.3

The long term exchange rate risk, which ignores any hedging instruments, is as follows:

Sensitivity of profit to translation and full transaction exchange rate risk	Increase in headline           operating profit                              £m
For every 10 cent strengthening of the US Dollar against Sterling	10.5
For every 10 cent strengthening of the Euro against Sterling	10.9

No specific exchange instruments are used to protect against this translation risk because it is a non-cash risk to the Group.  However, when the Group has net debt, the hedge of having a multi-currency debt facility funding these foreign currency trading units protects against some of the Balance Sheet and banking covenant translation risk.

Lastly and potentially the most significant exchange risk that the Group has 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 risk might arise if foreign currency proceeds are converted back to Sterling, for instance to pay a dividend to shareholders.  Protection against this risk is considered on a case-by-case basis.

Contract and warranty risk

There are a number of contracts within the Melrose Group and these have increased significantly following the acquisition of Elster.  The financial risks connected with these contracts, which include the consideration of warranty terms, duration and any other commercial or legal terms are considered carefully by Melrose before being entered into.

Commodity cost risk management

As Melrose owns engineering businesses across various sectors the cumulative expenditure on commodities is important.  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 into the future.  On occasions, Melrose does enter into financial instruments on commodities when this is considered to be the most efficient way of protecting against movements.  The acquisition of Elster increased the Group's exposure to fluctuations in market prices of commodities, especially brass, steel and aluminium.  These risks are minimised through sourcing policies (including the use of multiple sources, where possible) and procurement contracts where prices are agreed for up to one year to limit exposure to price volatility.

Geoffrey Martin

Group Finance Director

6 March 2013

Consolidated Income Statement                                                               

	Notes	Year ended 31 December  2012 £m	Restated(1) year ended 31 December 2011 £m
Continuing operations
Revenue	2	1,551.4	1,080.4
Cost of sales		(1,067.9)	(749.7)
Gross profit		483.5	330.7
Headline(2) operating expenses		(241.2)	(156.5)
Share of results of joint ventures		0.8	-
Intangible asset amortisation		(39.1)	(23.7)
Exceptional operating costs	3	(73.9)	(40.0)
Exceptional operating income	3	7.0	-
Total net operating expenses		(346.4)	(220.2)
Operating profit		137.1	110.5
Headline(2) operating profit	2	243.1	174.2
Headline(2)  finance costs		(39.8)	(29.5)
Exceptional finance costs	3	(16.3)	-
Total finance costs		(56.1)	(29.5)
Finance income		11.0	10.0
Profit before tax		92.0	91.0
Headline(2) profit before tax		214.3	154.7
Headline(2) tax		(57.8)	(39.7)
Exceptional tax(3)		8.7	58.8
Total tax	4	(49.1)	19.1
Profit for the year from continuing operations		42.9	110.1
Headline(2) profit for the year from continuing operations		156.5	115.0
Discontinued operations
Profit for the year from discontinued operations	5	1.3	176.4
Profit for the year		44.2	286.5
Attributable to:
Owners of the parent		42.5	286.4
Non-controlling interests		1.7	0.1
		44.2	286.5
Earnings per share(4)
From continuing operations
- Basic	7	4.4p	13.8p
- Diluted	7	4.3p	12.9p
- Headline(2) diluted	7	16.1p	13.5p(5)
From continuing and discontinued operations
- Basic	7	4.5p	35.8p
- Diluted	7	4.4p	33.6p
- Headline(2) diluted	7	16.3p	16.4p
(1) Restated to include the results of MPC within discontinued operations. (2) Before exceptional costs, exceptional income and intangible asset amortisation. (3) Includes exceptional tax and tax on exceptional items and intangible asset amortisation. (4) Year ended 31 December 2011 restated for the effects of the Rights Issue (note 7). (5) 13.5p is the restated 2011 headline(2) diluted earnings per share from continuing operations. The Board believe that 15.8p is a more      appropriate measure to use for 2011 to compare against 2012 performance being the headline(2) diluted earnings per share from continuing     and discontinued operations adjusted to remove the earnings (£4.8 million) of the disposed business MPC.

Consolidated Statement of Comprehensive Income

	Notes	Year ended 31 December  2012 £m	Year ended 31 December 2011 £m
Profit for the year		44.2	286.5
Currency translation on net investments		(1.2)	(17.3)
Currency translation on non-controlling interests		0.2	-
Transfer to Income Statement from equity of cumulative translation differences on disposal of foreign operations		-	(52.6)
Losses on cash flow hedges		(6.2)	(0.1)
Transfer to Income Statement on cash flow hedges		11.9	(5.1)
Actuarial loss on retirement benefit obligations	11	(63.8)	(37.1)
Other comprehensive expense before tax		(59.1)	(112.2)
Tax relating to components of other comprehensive expense	4	2.7	16.8
Other comprehensive expense after tax		(56.4)	(95.4)
Total comprehensive (expense)/income for the year		(12.2)	191.1
Attributable to:
Owners of the parent		(14.1)	191.0
Non-controlling interests		1.9	0.1
		(12.2)	191.1

Consolidated Statement of Cash Flows

	Notes	Year ended 31 December  2012 £m	Restated(1) year ended 31 December 2011 £m
Net cash from operating activities from continuing operations	14	40.8	70.8
Net cash from operating activities from discontinued operations	14	1.7	20.4
Net cash from operating activities		42.5	91.2
Investing activities
Disposal of businesses	5	30.7	374.4
Net cash disposed	5	(1.2)	(0.5)
Acquisition and disposal costs		(27.6)	(3.2)
Purchase of property, plant and equipment		(52.1)	(33.0)
Proceeds from disposal of property, plant and equipment		1.4	0.3
Purchase of computer software		(2.2)	(1.4)
Dividends received from joint ventures		0.3	-
Interest received		11.0	10.0
Acquisition of subsidiaries		(1,500.4)	-
Cash acquired on acquisition of Elster	8	105.6	-
Dividends paid to non-controlling interests		(0.1)	-
Net cash (used in)/from investing activities from continuing operations		(1,434.6)	346.6
Net cash used in investing activities from discontinued operations	14	(1.8)	(9.4)
Net cash (used in)/from investing activities		(1,436.4)	337.2
Financing activities
Return of capital	6	(1.1)	(372.1)
Repayment of borrowings(2)		(1,176.9)	-
Net proceeds from Rights Issue		1,168.1	-
New bank loans raised(2)		1,467.1	-
Costs of raising and settling finance		(33.1)	-
Dividends paid	6	(65.7)	(52.8)
Net cash from/(used in) financing activities from continuing operations		1,358.4	(424.9)
Net cash used in financing activities from discontinued operations	14	-	(0.3)
Net cash from/(used in) financing activities		1,358.4	(425.2)
Net (decrease)/increase in cash and cash equivalents		(35.5)	3.2
Cash and cash equivalents at the beginning of the year	14	195.6	195.7
Effect of foreign exchange rate changes	14	(3.6)	(3.3)
Cash and cash equivalents at the end of the year	14	156.5	195.6

(1) Restated to include the cash flows of MPC within discontinued operations. (2) Relating to the repayment and drawdown of the Group facilities refinanced during the year (note 9).

As at 31 December 2012, the Group's net debt was £997.7 million (31 December 2011: £289.6 million). A reconciliation of the movement in net debt is shown in note 14.

Consolidated Balance Sheet

	Notes		31 December  2012 £m	Restated(1) 31 December  2011 £m
Non-current assets
Goodwill and other intangible assets			3,019.5	906.1
Property, plant and equipment			318.9	215.3
Interests in joint ventures			12.4	-
Deferred tax assets			145.1	40.4
Trade and other receivables			0.3	0.3
			3,496.2	1,162.1
Current assets
Inventories			376.1	205.8
Trade and other receivables			384.1	216.3
Derivative financial assets	12		3.3	1.7
Cash and cash equivalents			156.5	195.6
			920.0	619.4
Total assets	2		4,416.2	1,781.5
Current liabilities
Trade and other payables			539.4	276.0
Interest-bearing loans and borrowings	9		6.2	28.8
Derivative financial liabilities	12		7.0	14.1
Current tax liabilities			41.0	16.9
Provisions	10		98.4	58.2
			692.0	394.0
Net current assets			228.0	225.4
Non-current liabilities
Trade and other payables			2.6	1.6
Interest-bearing loans and borrowings	9		1,148.0	457.5
Derivative financial liabilities	12		3.5	1.6
Deferred tax liabilities			411.2	98.3
Retirement benefit obligations	11		261.3	117.7
Provisions	10		155.9	62.4
			1,982.5	739.1
Total liabilities	2		2,674.5	1,133.1
Net assets			1,741.7	648.4
Equity
Issued share capital	13		1.3	494.9
Share premium account			-	-
Merger reserve			1,190.6	1,190.6
Other reserves			(757.1)	(874.4)
Capital redemption reserve			-	(26.8)
Hedging and translation reserves			0.3	(2.6)
Retained earnings			1,299.5	(133.4)
Equity attributable to owners of the parent			1,734.6	648.3
Non-controlling interests			7.1	0.1
Total equity			1,741.7	648.4

⁽¹⁾ In accordance with IFRS 3, the prior year Issued share capital, Share premium account, Merger reserve, Other reserves and Capital redemption reserve balances have been restated to reflect the nominal share capital and reserves position of the new parent company as if it had been the holding company during both periods presented. The overall impact on net equity is £nil (note 1).

The financial statements were approved and authorised for issue by the Board of Directors on 6 March 2013 and were signed on its behalf by:

………………………………………………                                                               ……………………………………………

Geoffrey Martin                                                                                                   Simon Peckham

Group Finance Director                                                                                      Chief Executive

Consolidated Statement of Changes In Equity

Reserves	Issued share capital £m		Share premium account £m	Merger reserve £m	Other reserves £m	Capital redemption reserve £m	Hedging and translation reserves £m	Retained earnings £m	Equity attributable to owners of the parent £m	Non-controlling interests £m	Total equity £m
At 1 January 2011 (as previously reported)	1.1		279.1	285.1	-	220.1	71.0	25.1	881.5	1.4	882.9
Restatement for the effects of the new parent company(1)		468.1	(126.0)	905.5	(874.4)	(373.2)	-	-	-	-	-
At 1 January 2011 restated(1)		469.2	153.1	1,190.6	(874.4)	(153.1)	71.0	25.1	881.5	1.4	882.9
Profit for the year	-		-	-	-	-	-	286.4	286.4	0.1	286.5
Other comprehensive expense		-	-	-	-	-	(73.6)	(21.8)	(95.4)	-	(95.4)
Total comprehensive (expense)/income		-	-	-	-	-	(73.6)	264.6	191.0	0.1	191.1
Issue of redeemable preference C shares	372.1		(153.1)	-	-	(220.1)	-	-	(1.1)	-	(1.1)
Preference C shares redeemed	(346.4)		-	-	-	346.4	-	-	-	-	-
Return of capital	-		-	-	-	-	-	(372.1)	(372.1)	-	(372.1)
Dividends paid	-		-	-	-	-	-	(52.8)	(52.8)	(0.2)	(53.0)
Credit to equity for equity-settled share-based payments	-		-	-	-	-	-	1.8	1.8	-	1.8
Disposal of non-controlling interests		-	-	-	-	-	-	-	-	(1.2)	(1.2)
At 31 December 2011 restated(1)		494.9	-	1,190.6	(874.4)	(26.8)	(2.6)	(133.4)	648.3	0.1	648.4
Profit for the year	-		-	-	-	-	-	42.5	42.5	1.7	44.2
Other comprehensive income/ (expense)		-	-	-	-	-	2.9	(59.5)	(56.6)	0.2	(56.4)
Total comprehensive income/ (expense)		-	-	-	-	-	2.9	(17.0)	(14.1)	1.9	(12.2)
Preference C shares redeemed	(25.7)		-	-	-	26.8	-	(1.1)	-	-	-
Dividends paid	-		-	-	-	-	-	(65.7)	(65.7)	(0.1)	(65.8)
Credit to equity for equity-settled share-based payments	-		-	-	-	-	-	3.5	3.5	-	3.5
Issue of new shares		1,050.8	-	-	117.3	-	-	-	1,168.1	-	1,168.1
Acquisition of Elster		-	-	-	-	-	-	-	-	6.1	6.1
Purchase of Elster non-controlling interests		-	-	-	-	-	-	(5.5)	(5.5)	(0.9)	(6.4)
Capital reduction	(1,518.7)		-	-	-	-	-	1,518.7	-	-	-
At 31 December 2012	1.3		-	1,190.6	(757.1)	-	0.3	1,299.5	1,734.6	7.1	1,741.7

⁽¹⁾ In accordance with IFRS 3, the prior year Issued share capital, Share premium account, Merger reserve, Other reserves and Capital redemption reserve balances have been restated to reflect the nominal share capital and reserves position of the new parent company as if it had been the holding company during both periods presented. The overall impact on net equity is £nil (note 1).

Notes To The Financial Statements

1.             Corporate information

The financial information included within this preliminary announcement does not constitute the Company's statutory financial statements for the years ended 31 December 2012 or 31 December 2011 within the meaning of s435 of the Companies Act 2006, but is derived from those financial statements. Statutory financial statements for the year ended 31 December 2011 have been delivered to the Registrar of Companies and those for the year ended 31 December 2012 will be delivered to the Registrar of Companies during April 2013. The auditor has reported on those financial statements; their reports were unqualified, did not draw attention to any matters by way of emphasis and did not contain statements under s498(2) or (3) of the Companies Act 2006.

Following shareholder approval on 5 November 2012, a Scheme of Arrangement was sanctioned by the High Court of England and Wales on 26 November 2012, pursuant to which a new listed company was introduced for the Melrose Group of companies. The Scheme of Arrangement became effective on 27 November 2012 and Melrose Industries PLC became the new holding company of Melrose PLC and its subsidiaries by way of a share exchange.

The Scheme of Arrangement resulting in Melrose Industries PLC becoming the new holding company for the Group has been accounted for in this preliminary announcement as a reverse asset acquisition using the principles of reverse acquisition accounting set out in IFRS 3: "Business combinations".

As a consequence of applying reverse acquisition accounting principles, the consolidated results of Melrose Industries PLC ("the Group") for the year ended 31 December 2012 comprise the results of Melrose PLC and its subsidiaries for the year ended 31 December 2012 consolidated with those of Melrose Industries PLC from 27 November 2012. The comparative figures for the Group are those of the Group headed by Melrose PLC for the year ended 31 December 2011 except for the presentation of the Issued share capital, Share premium account, Merger reserve, Other reserves and Capital redemption reserve balances which have been restated to reflect the reserves position of the Group as if Melrose Industries PLC had been the parent company during both periods presented. On 23 January 2013, Melrose PLC changed its name to Melrose Limited.

While the financial information included in this preliminary announcement has been prepared in accordance with the recognition and measurement criteria of International Financial Reporting Standards ("IFRSs"), this announcement does not itself contain sufficient information to comply with IFRSs.  The Company expects to publish full financial statements that comply with IFRSs during April 2013.

The comparative information for the year ended 31 December 2011 in this preliminary announcement has been restated to include the results and cash flows of MPC, previously disclosed within the Other Industrial segment, within discontinued operations and exclude them from continuing operations.

During the current period, the Group adopted two amended Standards and Interpretations neither of which affected the amounts reported in this preliminary announcement.

Other than as noted above, the accounting policies followed are the same as those detailed within the 2011 Report and Accounts which are available on the Group's website www.melroseplc.net.

The Board of Directors approved the preliminary announcement on 6 March 2013.

2.             Segment information

Segment information is presented in accordance with IFRS 8: "Operating segments" which requires operating segments to be identified on the basis of internal reports about components of the Group that are regularly reported to the Group's Board in order to allocate resources to the segments and assess their performance. The Group's reportable operating segments under IFRS 8 are as follows:

§  Energy

§  Lifting

§  Other Industrial

§  Elster (Gas, Electricity, Water)

The Energy segment incorporates the Brush and Marelli business units, specialist suppliers of energy industrial products to the global market. The Lifting segment consists of the businesses of Bridon, Crosby and Acco, serving oil & gas production, mining, petrochemical, alternative energy and general construction markets. The Other Industrial segment consists primarily of the businesses of Truth and Harris, serving the housing and steel recycling markets.  During the year, Elster was acquired as detailed in note 8.  This has resulted in additional Elster segments being recognised of Gas, Electricity and Water along with their associated central costs. These businesses serve residential and industrial metering and utilisation markets whilst providing related communications, networking and software solutions.

There are two central cost centres which are also separately reported to the Board:

§  Central - corporate

§  Central - LTIPs⁽¹⁾

⁽¹⁾ Long Term Incentive Plans.

The Central corporate cost centre contains the Melrose Group head office costs whilst the Central LTIPs cost centre contains the costs associated with the previous Melrose Incentive Plan (crystallised on 22 March 2012), the new five year Melrose Incentive Plan (granted on 11 April 2012) and the divisional management LTIPs that are in operation across the Group.

The discontinued segment incorporates the Dynacast, Brush Traction, Logistex UK, Madico, Weber Knapp and MPC businesses in 2011 and MPC in 2012.

Transfer prices between business units 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 non-current assets and, for revenue, the location of external customers. Inter-segment sales are not material and have not been included in the analysis below.

The following tables present revenue, profit, and certain asset and liability information regarding the Group's operating segments for the year ended 31 December 2012 and the comparative period. Note 3 gives details of exceptional costs and income.

Segment revenues and results

	Segment revenue from external customers
	Note	Year ended 31 December 2012 £m	Restated(1) year ended 31 December 2011 £m
Continuing operations
Energy		486.8	461.6
Lifting		524.4	484.4
Other Industrial		129.1	134.4
Elster(2)		411.1	-
Total continuing operations		1,551.4	1,080.4
Discontinued operations	5	35.9	251.3
Total revenue		1,587.3	1,331.7

⁽¹⁾ Restated to include the revenues of MPC within discontinued operations.

⁽²⁾ Elster revenue comprises: Gas £236.9 million, Electricity £106.8 million and Water £67.4 million.

	Segment result
	Notes	Year ended 31 December 2012 £m	Restated(1) year ended 31 December 2011 £m
Continuing operations
Energy		93.4	91.1
Lifting		95.2	82.6
Other Industrial		17.0	16.5
Elster(2)		57.8	-
Central - corporate		(11.8)	(9.2)
Central - LTIPs(3)		(8.5)	(6.8)
Headline(4) operating profit		243.1	174.2
Intangible asset amortisation		(39.1)	(23.7)
Exceptional operating costs	3	(73.9)	(40.0)
Exceptional operating income	3	7.0	-
Operating profit		137.1	110.5
Finance costs - headline(4)		(39.8)	(29.5)
Finance costs - exceptional	3	(16.3)	-
Finance income		11.0	10.0
Profit before tax		92.0	91.0
Tax	4	(49.1)	19.1
Profit for the year from discontinued operations	5	1.3	176.4
Profit for the year		44.2	286.5

⁽¹⁾ Restated to include the results of MPC within discontinued operations.

⁽²⁾ Elster headline⁽⁴⁾ operating profit comprises: Gas £46.7 million, Electricity £12.6 million, Water £1.4 million, and Elster central costs £2.9 million.

⁽³⁾ Long Term Incentive Plans.

⁽⁴⁾ As defined on the Income Statement.

			Total assets		Total liabilities
			31 December  2012 £m	Restated(1) 31 December  2011 £m	31 December  2012 £m	Restated(1) 31 December  2011 £m
Energy			630.3	641.0	227.9	231.6
Lifting			769.6	767.3	206.7	212.3
Other Industrial			78.2	79.1	23.3	24.8
Elster(2)			2,728.2	-	915.0	-
Central - corporate			209.9	251.7	1,281.3	632.2
Central - LTIPs(3)			-	-	20.3	15.3
Total continuing operations			4,416.2	1,739.1	2,674.5	1,116.2
Discontinued operations			-	42.4	-	16.9
Total			4,416.2	1,781.5	2,674.5	1,133.1

⁽¹⁾ Restated to include the total assets and total liabilities of MPC within discontinued operations.

⁽²⁾ Elster total assets comprises: Gas £2,127.5 million, Electricity £335.6 million, Water £240.1 million and Elster central £25.0 million. Elster total liabilities comprises: Gas £594.4 million, Electricity £118.1 million, Water £154.7 million and Elster central £47.8 million.

⁽³⁾ Long Term Incentive Plans.

	Capital expenditure(1)		Depreciation(1)
	Year ended 31 December  2012 £m	Restated(2) year ended 31 December  2011 £m	Year ended 31 December  2012 £m	Restated(2) year ended 31 December  2011 £m
Continuing operations
Energy	10.9	11.4	7.5	7.9
Lifting	30.4	21.3	9.9	8.8
Other Industrial	3.8	2.0	3.4	4.3
Elster(3)	9.0	-	9.1	-
Central - corporate	0.9	-	0.6	0.6
Total continuing operations	55.0	34.7	30.5	21.6
Discontinued operations	1.7	8.1	0.9	5.6
Total	56.7	42.8	31.4	27.2

⁽¹⁾  Including computer software and development costs.

⁽²⁾ Restated to include the capital expenditure⁽¹⁾ and depreciation⁽¹⁾ of MPC within discontinued operations.

⁽³⁾ Elster capital expenditure comprises: Gas £5.5 million, Electricity £1.5 million and Water £2.0 million. Elster depreciation comprises: Gas £5.1 million, Electricity £2.0 million and Water £2.0 million.

Geographical information

The Group operates in various geographical areas around the world. The Group's country of domicile is the UK and the Group's revenues and non-current assets in Europe and North America are also considered to be material.

The Group's revenue from external customers and information about its segment assets (non-current assets excluding interests in joint ventures, deferred tax assets and non-current trade and other receivables) by geographical location are detailed below:

	Revenue(1) from external customers		Non-current assets
	Year ended 31 December  2012 £m	Restated(2) year ended 31 December  2011 £m	31 December  2012 £m	Restated(2) 31 December  2011 £m
UK	143.4	129.3	414.2	348.9
Europe	445.8	280.8	1,724.5	321.7
North America	651.4	463.2	1,118.4	422.2
Other	310.8	207.1	81.3	10.5
Total continuing operations	1,551.4	1,080.4	3,338.4	1,103.3
Discontinued operations	35.9	251.3	-	18.1
Total	1,587.3	1,331.7	3,338.4	1,121.4

⁽¹⁾  Revenue is presented by destination.

⁽²⁾  Restated to include the revenue and non-current assets of MPC within discontinued operations.

3.             Exceptional costs and income

Exceptional costs	Year ended 31 December 2012 £m	Restated(1)  year ended 31 December 2011 £m
Continuing operations
Restructuring costs	(54.4)	(15.9)
Acquisition, disposal and financing costs
- operating	(19.5)	(3.1)
- financing	(16.3)	-
Increase in legal provision	-	(21.0)
Total exceptional costs	(90.2)	(40.0)
Total exceptional costs - operating	(73.9)	(40.0)
Total exceptional costs - financing	(16.3)	-
Total exceptional costs	(90.2)	(40.0)

⁽¹⁾  Restated to include the results of MPC within discontinued operations.

During 2012, the Group incurred £54.4 million (2011: £15.9 million) of costs relating to restructuring programmes, of which £52.5 million occurred in the second half of the year. These costs include £9.1 million relating to the closure of the old Elster head office along with £27.9 million of other restructuring costs occurring within several of the key Elster businesses. These include reorganising the Gas and Electricity businesses into global operations and the closure of underperforming parts of the Water business. In addition, £11.1 million of surplus leasehold property costs have been identified during the year and £6.3 million of restructuring costs have been incurred in the old Melrose businesses, in particular within the Lifting division and the corporate restructure in respect of the new holding company. The 2011 restructuring costs of £15.9 million related to programmes within the Energy and Lifting divisions.

Operating acquisition and disposal costs relate primarily to the costs incurred in acquiring Elster. In 2011, costs associated with acquisitions and disposals consisted predominantly of the expenses arising during an aborted acquisition process and the costs associated with the return of capital following the disposal of Dynacast.

Financing exceptional costs relate to the debt refinancing performed in January 2012 and subsequently in August 2012 where the amortisation of capitalised debt finance costs were accelerated and interest rate swaps were closed out early. In addition, these costs also include a proportion of the make whole premium charged upon the redemption of the Eurobond inherited on the acquisition of Elster.

The increase in the legal provision in 2011 related to a product liability claim involving Bridon. This was settled in 2012.

Exceptional income	Year ended 31 December 2012 £m	Year ended 31 December 2011 £m
Continuing operations
Pension curtailment gain	7.0	-
Total exceptional income	7.0	-

During 2012, a number of amendments were made to Elster retirement medical benefits and retirement life insurance benefits in the US. These removed £7.0 million of liabilities resulting in a curtailment gain on these plans.

4.             Tax

	Continuing operations				Discontinued operations		Total
Analysis of charge/(credit) in year:	Year ended 31 December 2012 £m			Restated(1) year ended 31 December 2011 £m	Year ended 31 December 2012 £m	Restated(1) year ended 31 December 2011 £m	Year ended 31 December 2012 £m	Year ended 31 December 2011 £m
Current tax	43.3			(7.6)	0.6	8.9	43.9	1.3
Deferred tax	5.8			(11.5)	-	(0.2)	5.8	(11.7)
Total income tax charge/(credit)			49.1	(19.1)	0.6	8.7	49.7	(10.4)
Tax charge on headline(2)  profit before tax	57.8			39.7	0.6	9.5	58.4	49.2
Exceptional tax charge/(credit)			5.8	(38.1)	-	-	5.8	(38.1)
Tax credit on net exceptional items	(13.1)			(7.6)	-	-	(13.1)	(7.6)
Tax credit in respect of intangible asset amortisation		(1.4)		(13.1)	-	(0.8)	(1.4)	(13.9)
Total income tax charge/(credit)	49.1			(19.1)	0.6	8.7	49.7	(10.4)

⁽¹⁾ Restated to include the results of MPC within discontinued operations.

⁽²⁾ As defined on the Income Statement.

The tax charge for the year ended 31 December 2012 (credit for the year ended 31 December 2011) includes an exceptional tax charge of £5.8 million (2011: credit of £38.1 million).  Of this charge, £4.2 million relates to restructuring that took place during the year and £1.6 million relates to businesses previously disposed. In 2011, a credit of £28.6 million related to the change in the company's expectation of the outcome of overseas tax audits inherited on the acquisition of FKI and a credit of £9.5 million related to the recognition of a previously unrecognised deferred tax asset during the period that was considered to be recoverable.

The charge (2011: credit) for the year can be reconciled to the profit per the Income Statement as follows:

	Year ended 31 December 2012 £m	Restated(1) year ended 31 December 2011 £m
Profit on ordinary activities before tax:
Continuing operations	92.0	91.0
Discontinued operations (note 5)	2.5	32.7
	94.5	123.7
Tax on profit on ordinary activities at weighted average rate 28.33% (2011: 27.62%)	26.8	34.2
Tax effect of:
Net permanent differences/non-deductible items	6.9	1.7
Change to calculation of deferred tax liability on intangible asset	9.8	-
Effect of rate change on deferred tax liability on intangible asset	-	(7.2)
Temporary differences not recognised in deferred tax	4.4	0.6
Tax credits, withholding taxes and other rate differences	1.6	2.3
Prior year tax adjustments	(5.6)	(3.9)
Exceptional tax charge/(credit)	5.8	(38.1)
Total tax charge/(credit) for the year	49.7	(10.4)

⁽¹⁾ Restated to include the results of MPC within discontinued operations.

The reconciliation has been performed at a blended Group tax rate of 28.33% (2011: 27.62%) which represents the weighted average of the tax rates applying to taxable profits in the jurisdictions in which those profits arose. This blended rate has increased in 2012 following the acquisition of the Elster businesses.

In addition to the amount charged to the Income Statement, a tax credit of £2.7 million (2011: £16.8 million) has been recognised directly in the Consolidated Statement of Comprehensive Income. This represents a tax credit of £4.9 million (2011: £12.0 million) in respect of retirement benefit obligations, a tax charge of £1.6 million (2011: credit of £1.5 million) in respect of movements on cash flow hedges and a tax charge of £0.6 million (2011: credit of £3.3 million) in respect of the use of losses on items taken directly to reserves in prior years.

5.             Discontinued operations

Disposal of businesses

On 25 June 2012, the Group disposed of MPC, a business acquired as part of the McKechnie acquisition in 2005, for cash consideration of £30.7 million. The costs charged during the year associated with the disposal were £3.1 million and the loss on disposal in the year was £0.6 million. There were no cumulative translation differences associated with this business to recycle upon disposal. This business was previously classified within the "Other Industrial" segment and is now shown within discontinued operations.

Financial performance of discontinued operations:

		Year ended 31 December 2012 £m	Restated(1) year ended 31 December 2011 £m
Revenue		35.9	251.3
Operating costs		(33.4)	(217.3)
Headline(2) operating profit		2.5	34.0
Intangible asset amortisation		-	(1.4)
Exceptional items(3)		-	(0.1)
Net finance income		-	0.2
Profit before tax		2.5	32.7
Headline(2) tax		(0.6)	(9.5)
Tax on intangible asset amortisation		-	0.8
Profit after tax		1.9	24.0
Cumulative translation differences recycled on disposals		-	52.6
(Loss)/gain on disposal of net assets of discontinued operations		(0.6)	99.8
Profit for the period from discontinued operations		1.3	176.4
Attributable to:
Owners of the parent		1.3	176.3
Non-controlling interests		-	0.1
		1.3	176.4

⁽¹⁾ Restated to include the results of MPC within discontinued operations.

⁽²⁾ As defined on the Income Statement.

⁽³⁾ Costs relating to the disposal of MPC incurred in 2011.

During the year, up until its sale on 25 June 2012, the MPC business contributed £35.9 million of revenue and £2.5 million of headline operating profit.

The comparative information for the year ended 31 December 2011 has been restated to exclude the results and cashflows of MPC from continuing operations and include them as discontinued operations.

Discontinued operations in 2011 also contain the results and cashflows of the Dynacast, Brush Traction, Logistex UK, Weber Knapp and Madico businesses.

The major classes of assets and liabilities disposed of with the MPC business were as follows:

			Discontinued operations £m
Goodwill and other intangible assets			3.8
Property, plant and equipment			15.1
Inventories			7.6
Trade and other receivables			19.8
Cash and cash equivalents			1.2
Total assets disposed of			47.5
Trade and other payables			18.0
Retirement benefit obligations			0.7
Tax			0.6
Total liabilities disposed of			19.3
Net assets disposed of			28.2
Cash consideration net of costs(1)			27.6
Loss on disposal of businesses			(0.6)

⁽¹⁾ Includes £3.1 million of disposal costs.

6.             Dividends

	Year ended 31 December 2012 £m	Year ended 31 December 2011 £m
Final dividend for the year ended 31 December 2010 paid of 7.0p (4.0p) (1)	-	34.8
Interim dividend for the year ended 31 December 2011 paid of 4.6p (2.6p) (1)	-	18.0
Final dividend for the year ended 31 December 2011 paid of 8.4p (4.8p) (1)	32.8	-
Interim dividend for the year ended 31 December 2012 paid of 2.6p	32.9	-
	65.7	52.8

⁽¹⁾ Adjusted to include the effects of the Rights Issue (note 7).

Proposed final dividend for the year ended 31 December 2012 of 5.0p per share (2011: 4.8p per share⁽¹⁾) totalling £63.3 million (2011: £32.8 million).

The final dividend of 5.0p was proposed by the Board on 6 March 2013 and, in accordance with IAS 10, has not been included as a liability in these financial statements.

In addition to dividends paid, shareholders approved a £373.2 million return of capital on 8 August 2011 of which £372.1 million was paid on 19 August 2011 and £1.1 million was paid on 30 April 2012.

7.             Earnings per share

Earnings attributable to owners of the parent	Year ended 31 December 2012 £m	Restated(1) year ended 31 December 2011 £m
Profit for the purposes of earnings per share	42.5	286.4
Less: profit for the year from discontinued operations (note 5)	(1.3)	(176.3)
Earnings for basis of earnings per share from continuing operations	41.2	110.1
Continuing operations
Intangible asset amortisation	39.1	23.7
Exceptional costs (note 3) - operating	73.9	40.0
Exceptional income (note 3) - operating	(7.0)	-
Exceptional costs (note 3) - financing	16.3	-
Exceptional tax(2)	(8.7)	(58.8)
Earnings for basis of headline(2) earnings per share from continuing operations	154.8	115.0
Discontinued operations
Profit for the period from discontinued operations (note 5)	1.3	176.3
Loss/(profit) on disposal of businesses	0.6	(152.4)
Intangible asset amortisation	-	1.4
Exceptional items (note 5)	-	0.1
Tax on intangible asset amortisation	-	(0.8)
Earnings for basis of headline(2) earnings per share from continuing and discontinued operations	156.7	139.6
(1) Restated to include the results of MPC within discontinued operations. (2) As defined on the Income Statement.

		Number	Number
Weighted average number of Ordinary Shares for the purposes of basic earnings per share including the effects of the Rights Issue(1) (million)		945.4	798.9
Further shares for the purposes of diluted earnings per share(2)  including the effects of the Rights Issue (1) (million)		15.3	52.8
Weighted average number of Ordinary Shares for the purposes of diluted earnings per share (million)		960.7	851.7

⁽¹⁾ On 1 August 2012, a 2 for 1, fully underwritten, Rights Issue was completed by Melrose PLC and subsequently 844.4 million new Melrose Ordinary Shares were issued raising £1.2 billion to part fund the acquisition of Elster Group S.E.. In accordance with IAS 33, a bonus factor associated with the issue of the new share capital of 57% has been applied to the number of Ordinary Shares (including comparative periods presented) for the purpose of earnings per share calculations.

⁽²⁾ Relating to the 2012 Melrose Incentive Plan and the previous Melrose Incentive Plan.

Earnings per share	Year ended 31 December 2012 pence	Restated(1)   year ended 31 December 2011 pence
Basic earnings per share
From continuing and discontinued operations	4.5	35.8
From continuing operations	4.4	13.8
From discontinued operations	0.1	22.0
Diluted earnings per share
From continuing and discontinued operations	4.4	33.6
From continuing operations	4.3	12.9
From discontinued operations	0.1	20.7
Headline(2) basic earnings per share
From continuing and discontinued operations	16.6	17.5
From continuing operations	16.4	14.4
Headline(2) diluted earnings per share
From continuing and discontinued operations	16.3	16.4
From continuing operations	16.1	13.5(3)

⁽¹⁾ Restated to include the results of MPC within discontinued operations and to include the effects of the Rights Issue.

⁽²⁾ As defined on the Income Statement.

⁽³⁾ 13.5p is the restated 2011 headline⁽²⁾ diluted earnings per share from continuing operations. The Board believe that 15.8p is a more 

    appropriate measure to use for 2011 to compare against 2012 performance being the headline⁽²⁾ diluted earnings per share from continuing

    and discontinued operations adjusted to remove the earnings (£4.8 million) of the disposed business MPC.

8.             Acquisition of subsidiaries             

In line with the Group's strategy to acquire good manufacturing businesses with potential for improvements, on 23 August 2012 the Group acquired 99.35% of the issued share capital and obtained control of Elster Group S.E. for cash consideration of £1,469.8 million. Subsequently a further 0.45% of the remaining 0.65% share capital was purchased on various dates in 2012 for total consideration of £6.4 million. Elster is a world leading engineering company and one of the world's largest providers of gas, electricity and water meters, gas utilisation products and related communications, networking and software solutions.

In addition, in September 2012, £24.2 million was paid in respect of deferred consideration relating to the acquisition of EnergyICT, a business acquired by Elster in 2009.

The amounts recognised in respect of the identifiable assets acquired and liabilities assumed are as set out in the table below. Fair values are provisional as at 31 December 2012 and are based on the information held to date.

					Fair value £m
Elster
Property, plant and equipment					100.3
Intangible assets, computer software and development costs					886.7
Derivative financial assets					0.3
Interests in joint ventures					9.8
Inventories					176.2
Trade and other receivables					182.6
Cash and cash equivalents					105.6
Trade and other payables					(356.0)
Provisions					(143.0)
Deferred tax					(206.0)
Retirement benefit obligation					(117.3)
Current tax					(29.2)
Interest-bearing loans and borrowings					(411.9)
Non-controlling interests					(4.9)
Net assets					193.2
Non-controlling interests (Elster shares)					(1.2)
Goodwill					1,277.8
Total consideration					1,469.8
Satisfied by:
Cash consideration					1,469.8

Acquisition related costs (included in exceptional operating costs) amount to £19.2 million.

The fair value of the financial assets include gross trade and other receivables of £192.8 million. The best estimate at acquisition date of the contractual cash flows not to be collected are £10.2 million.

Elster contributed £411.1 million to revenue and £57.8 million to headline operating profit for the period between the date of acquisition and the Balance Sheet date.

The Elster results were prepared under US GAAP for the first thirty three weeks of the year. Adjusting to estimate the impact of the transition to Melrose accounting policies under IFRS and assuming Elster had been acquired on the first day of the financial year, Group revenues for the period would have been approximately £2,271 million and Group headline operating profit would have been approximately £330 million.

The goodwill arising on acquisition of the Elster group is attributable to the anticipated profitability and cash flows arising from the businesses acquired. None of the goodwill is expected to be deductible for income tax purposes.

Contingent liabilities of £9.5 million have been acquired in respect of warranty and legal claims and recognised within provisions. We expect that the majority of expenditure will be incurred over the next five years.

The non-controlling interests acquired are measured based on the proportion of the fair value of their net assets.

9.             Interest-bearing loans and borrowings

This note provides information about the contractual terms of the Group's interest-bearing loans and borrowings. Details of the Group's exposure to credit, liquidity, interest rate and foreign currency risk are included in note 12.

	Current				Non-current		Total
	31 December 2012 £m			31 December 2011 £m	31 December 2012 £m	31 December 2011 £m	31 December 2012 £m	31 December 2011 £m
Fixed rate obligations
Bank borrowings - Brazilian Real		6.2		-	-	-	6.2	-
	6.2			-	-	-	6.2	-
Floating rate obligations
Bank borrowings - US Dollar loan(1)			-	-	423.3	390.1	423.3	390.1
Bank borrowings - Euro loan(2)		-		-	298.2	48.6	298.2	48.6
Bank borrowings - Sterling loan(3)		-		27.7	447.5	22.3	447.5	50.0
	-			27.7	1,169.0	461.0	1,169.0	488.7
Redeemable preference C shares		-		1.1	-	-	-	1.1
Unamortised finance costs	-			-	(21.0)	(3.5)	(21.0)	(3.5)
Total interest-bearing loans and borrowings	6.2			28.8	1,148.0	457.5	1,154.2	486.3

⁽¹⁾ Interest rate LIBOR +2.00%, final maturity June 2017 (31 December 2011: interest rate LIBOR +1.35%, final maturity April 2013).

⁽²⁾ Interest rate EURIBOR +2.00%, final maturity June 2017 (31 December 2011: interest rate EURIBOR +1.35%, final maturity April 2013).

⁽³⁾ Interest rate LIBOR +2.00%, final maturity June 2017 (31 December 2011: interest rate LIBOR +1.35%, final maturity April 2013).

From 1 January 2012 to 31 January 2012 the Group utilised a £750 million multi-currency committed facility which was due to expire on 22 April 2013. On 31 January 2012, all amounts outstanding on this facility were repaid using surplus cash in the Group at that time and by partially utilising a replacement facility, which was a £600 million committed multi-currency revolving credit facility.  Subsequently, to part finance the acquisition of Elster, a new five year £1.5 billion agreement was signed on 29 June 2012, split into a £0.5 billion multi-currency term loan and a £1.0 billion multi-currency revolving credit facility. Following the successful tender offer to the shareholders of Elster this facility was part drawn on 23 August 2012 in order to repay the drawings under the aforementioned £600 million facility and pay a proportion of the consideration for the Elster shares.

In addition, the new £1.5 billion facility has been part used to refinance, where necessary, the existing indebtedness of Elster. This included a seven year Eurobond with a principal value of €250 million due to mature in April 2018, a committed €450 million multi-currency revolving credit facility and a €140 million committed multi-currency guarantee facility, both of which were due to mature in April 2016.  The €450 million revolving credit facility was repaid on 28 September 2012. On 29 September 2012, the majority of the bank guarantees issued under the Elster €140 million guarantee facility were assumed under the new £1.5 billion facility. On 28 November 2012 the Elster Eurobond was repaid together with the applicable redemption premium and accrued interest, resulting in a repayment including principal of €283.3 million. 

As at 31 December 2012, the new £0.5 billion term loan was fully drawn and split into two tranches of £180 million and US $500 million. The revolving credit facility is split into multi-currency Sterling based tranches totalling £760 million and a €300 million tranche, both of which were partially drawn.

Throughout the year, the Group remained compliant with all covenants under the facilities disclosed above.  A number of companies have been, or continue to be, guarantors under the bank facilities disclosed herein.  In addition, until Elster Group S.E. becomes a wholly owned subsidiary of Melrose Industries PLC (currently 99.8% owned) and has been converted into a German limited liability company, a pledge has been given over the shares of Elster.

Drawdowns under the new facility bear interest at interbank rates of interest plus a margin determined by reference to the Group's performance under its debt cover covenant ratio and ranges between 1.40% and 2.65%.  The margin as at 31 December 2012 was 2.00% (31 December 2011: 1.35%).

The new £0.5 billion term loan is subject to mandatory repayments of 5 per cent of the original tranches on June 2015, June 2016 and 31 December 2016.

Maturity of financial liabilities

The maturity profile of anticipated future cash flows including interest in relation to the Group's financial liabilities, on an undiscounted basis and which, therefore, differs from both the carrying value and fair value is shown in the table below. Interest on floating rate debt is based on the relevant LIBOR curve for US Dollar and Sterling balances and the EURIBOR curve for Euro balances. Interest on hedging interest rate swaps is based on the relevant forward LIBOR curves for US Dollar and Sterling amounts and EURIBOR curve for Euro amounts and is illustrated as a net cash flow.

	Interest-bearing loans and borrowings £m	Derivative financial liabilities £m	Other financial liabilities £m	Total financial liabilities £m
Within one year	33.3	7.0	520.5	560.8
In one to two years	28.2	3.8	2.6	34.6
In two to five years	1,252.9	(0.3)	-	1,252.6
Effect of financing rates	(160.2)	-	-	(160.2)
31 December 2012	1,154.2	10.5	523.1	1,687.8
Within one year	38.7	14.1	268.6	321.4
In one to two years	464.2	1.6	1.6	467.4
Effect of financing rates	(16.6)	-	-	(16.6)
31 December 2011	486.3	15.7	270.2	772.2

10.          Provisions

	Surplus leasehold property costs £m	Environmental and legal costs £m	Incentive plan related £m	Warranty related costs £m	Other £m	Total £m
At 31 December 2011	19.7	63.7	15.3	1.1	20.8	120.6
Acquisition of businesses	5.9	17.4	-	88.4	31.3	143.0
Utilised(1)	(5.1)	(32.9)	-	(4.2)	(26.3)	(68.5)
Arising in the year(2)	11.1	0.5	5.0	5.0	38.6	60.2
Unwind of discount	0.4	0.5	-	-	-	0.9
Exchange differences	(0.5)	(1.0)	-	0.1	(0.5)	(1.9)
At 31 December 2012	31.5	48.2	20.3	90.4	63.9	254.3
Current	7.6	9.8	-	22.7	58.3	98.4
Non-current	23.9	38.4	20.3	67.7	5.6	155.9
	31.5	48.2	20.3	90.4	63.9	254.3

⁽¹⁾ Includes £65.8 million of provisions utilised by cash and £2.7 million through headline⁽³⁾ operating profit.

⁽²⁾ Includes £48.3 million of provisions arising in the year through exceptional costs and £11.2 million of provisions arising in the year through headline⁽³⁾ operating profit and £0.7 million arising as a result of the disposal of a subsidiary.

⁽³⁾ As defined on the Income Statement.

The provision for surplus leasehold property costs represents the estimated net payments payable over the term of these leases together with any dilapidation costs. This is expected to result in cash expenditure over the next one to six years.

Environmental and legal costs provisions relate to the estimated remediation costs of pollution, soil and groundwater contamination at certain sites and estimated future costs and settlements in relation to legal claims. Due to their nature, it is not possible to predict precisely when these provisions will be utilised.

Incentive plan related provisions are in respect of long term incentive plans for divisional senior management, expected to result in cash expenditure in the next four years.

The provision for warranty related costs represents the best estimate of the expenditure required to settle the Group's obligations. Warranty terms are, on average, between one and five years.

Other provisions relate primarily to costs that will be incurred in respect of restructuring programmes and contractual obligations.

Where appropriate, provisions have been discounted using a discount rate of 3% (31 December 2011: 3%).

11.          Retirement benefit obligations

Melrose holds several pension plans covering many of its employees, operating in several jurisdictions.

The most significant defined benefit pension plans are:

§    The FKI UK Pension Plan which is defined benefit in type and is a funded plan where the future liabilities for members' benefits are provided for by the accumulation of assets held externally to the Group in separate trustee administered funds. The plan is closed to new members and the accrual of future benefits for existing members.

§    The McKechnie UK Pension Plan which is defined benefit in type and is a funded plan (other than £4.1 million of unfunded liabilities) where the future liabilities for members' benefits are provided for by the accumulation of assets held externally to the Group in separate trustee administered funds. The plan is closed to new members and the accrual of future benefits for existing members.

§    The FKI US Pension Plan which is defined benefit in type and is a funded plan where the future liabilities for members' benefits are provided for by the accumulation of assets held externally to the Group in separate trustee administered funds. The plan is closed to new members and the accrual of future benefits for existing members.

Other plans include a number of funded and unfunded defined benefit arrangements across Europe, North America and the rest of the world.

During the year, a number of additional plans were acquired as part of the acquisition of the Elster division. The net deficit on the Elster acquired plans at 31 December 2012 was £115.2 million. Included in this amount is £89.6 million, 78%, relating to unfunded German defined benefit plans and early retirement programmes, designed to create an incentive, within a certain age group, to retire early. The remaining plans in the Elster division are not significant in size with £19.2 million, 17%, of the deficit, relating to US defined benefit and retirement healthcare and life insurance benefits.

The cost of the Group's defined benefit plans are determined in accordance with IAS 19 with the advice of independent professionally qualified actuaries on the basis of formal actuarial valuations using the projected unit credit method. In line with normal practice, these valuations are undertaken triennially in the UK and annually in the US.

The FKI UK and McKechnie UK Pension Plan valuations are based on the UK full actuarial valuations as of 31 December 2011 updated at 31 December 2012 by independent actuaries and the FKI US Pension Plan valuation is based on the US full actuarial valuation as of 31 December 2011 updated at 31 December 2012 by independent actuaries. The latest UK full actuarial valuations are due to be signed during March 2013.

The Group also operates unfunded retiree medical and welfare benefit plans, principally in the US.

The Group contributed £18.5 million (2011: £18.5 million) to the FKI UK Pension Plan and £4.6 million (2011: £4.6 million) to the McKechnie UK Pension Plan in the year ended 31 December 2012. The Group also contributed £6.0 million to the McKechnie UK Pension Plan following the disposal of the MPC business. Contributions to the FKI UK Pension Plan in 2013 will be £20.0 million.

In addition to this, there are a number of defined contribution plans across the Group. Contributions to continuing businesses during the year were £13.1 million (2011: £10.2 million).

Actuarial assumptions

The major weighted average assumptions used by the actuaries in calculating the Group's pension plan assets and liabilities are as set out below:

		31 December 2012
	FKI UK Plan % p.a.		McKechnie UK Plan % p.a.	FKI US Plan % p.a.	US Plans % p.a.	European Plans % p.a.	Other plans % p.a.
Rate of increase in salaries	n/a		3.50(1)	n/a	4.00	2.75	3.00
Rate of increase in pensions in payment	2.90		3.00	n/a	n/a	1.90	n/a
Discount rate	4.50		4.50	3.90	3.90	2.90	3.90
RPI inflation assumption	3.00		3.00	n/a	n/a	1.90	2.90

⁽¹⁾ Closed to the accrual of future benefits but active members' benefits are still linked to current salaries.

	31 December 2011
	FKI UK Plan % p.a.	McKechnie UK Plan % p.a.	FKI US Plan % p.a.	US Plans % p.a.	Other plans % p.a.
Rate of increase in salaries	n/a	3.60(1)	n/a	n/a	n/a
Rate of increase in pensions in payment	3.00	3.10	n/a	n/a	n/a
Discount rate	4.90	4.90	4.30	4.00	4.60
RPI inflation assumption	3.10	3.10	n/a	n/a	2.50

⁽¹⁾ Closed to the accrual of future benefits but active members' benefits are still linked to current salaries.

Mortality

FKI UK Pension Plan

Mortality assumptions for the most significant plan in the Group, the FKI UK plan, as at 31 December 2012 are based on the Self Administered Pension Scheme ("SAPS") "S1" base tables with scaling factors of 110% and 105% for deferred members and pensioners respectively, which reflect the results of a mortality analysis carried out on the plan's membership. Future improvements are in line with the Continuous Mortality Investigation ("CMI") improvement model with a long-term rate of improvement of 1.25% p.a. for both males and females.

The assumptions are that a member currently aged 65 will live on average for a further 22.1 years if they are male and for a further 24.2 years if they are female. For a member who retires in 2032 at age 65, the assumptions are that they will live for a further 23.5 years after retirement if they are male and for a further 25.8 years after retirement if they are female.

The mortality assumptions are in line with those adopted for the triennial valuation results as at 31 December 2011.

Sensitivities

Sensitivities around movements in the principal assumptions of the discount rate, inflation rate and mortality are discussed in the Finance Director's review.

Balance Sheet disclosures

The amount recognised in the Balance Sheet arising from net liabilities in respect of defined benefit plans is as follows:

	31 December 2012 £m		31 December 2011 £m	31 December 2010 £m	31 December 2009 £m	31 December 2008 £m
Plan liabilities		(1,304.6)	(1,076.7)	(1,039.4)	(1,033.5)	(939.7)
Plan assets		1,043.3	959.0	919.8	864.4	810.5
Limit on pension plan surplus		-	-	-	-	(14.1)
Net liabilities		(261.3)	(117.7)	(119.6)	(169.1)	(143.3)

The five year history of experience adjustments is as follows:
	31 December 2012 £m			31 December 2011 £m	31 December 2010 £m	31 December 2009 £m	31 December 2008 £m
Experience adjustments on plan liabilities			(90.1)	(72.4)	(23.8)	(130.9)	70.7
Experience adjustments on plan assets		26.3		35.3	37.6	41.0	(78.9)

The plan liabilities and assets at 31 December 2012 were split by plan as follows:

	FKI UK Plan £m	McKechnie UK Plan £m	FKI US Plan £m	US Plans £m	European Plans £m	Other plans £m	Total £m
Plan liabilities	(730.2)	(179.0)	(228.4)	(46.4)	(111.0)	(9.6)	(1,304.6)
Plan assets	630.2	170.8	198.3	26.6	9.7	7.7	1,043.3
Net liabilities	(100.0)	(8.2)	(30.1)	(19.8)	(101.3)	(1.9)	(261.3)

This amount is presented in the Balance Sheet:

	31 December 2012 £m	31 December 2011 £m	31 December 2010 £m	31 December 2009 £m	31 December 2008 £m
Net liabilities
- unfunded plans	118.0	11.2	21.0	24.2	45.2
- funded plans	143.3	106.5	98.6	144.9	84.0
Limit on pension plan surplus	-	-	-	-	14.1
	261.3	117.7	119.6	169.1	143.3

Expected returns and fair value of assets:

	Expected rates of return			Fair value of assets
	31 December		31 December	31 December	31 December
		2012	2011	2012	2011
		%	%	£m	£m
Equity instruments		7.0	7.0	410.7	348.7
Debt instruments		3.8	3.8	534.3	514.2
Other assets		5.3	4.4	98.3	96.1
Weighted average / total		5.2	5.0	1,043.3	959.0

The expected return on plan assets at 31 December 2012 is based on market expectations at 1 January 2013 for returns on assets over the entire life of the obligation.

There is no self investment (other than in relevant tracker funds) either in the Group's own financial instruments or property or other assets used by the Group.

Movements in the present value of defined benefit obligations during the year:

	Year ended 31 December 2012		Year ended 31 December 2011
		£m	£m
At beginning of year		1,076.7	1,039.4
Acquisition of business		155.1	-
Disposal of businesses		(0.7)	(41.1)
Current service cost		1.2	0.6
Past service cost		(0.9)	-
Interest cost		51.4	52.8
Actuarial losses		90.1	72.4
Benefits paid out of plan assets		(49.9)	(47.7)
Benefits paid out of Group assets for unfunded plans		(1.8)	-
Plan curtailments		(7.0)	(0.8)
Currency (gains)/losses		(9.6)	1.1
At end of year		1,304.6	1,076.7

Movements in the fair value of plan assets during the year:

	Year ended 31 December 2012		Year ended 31 December 2011
		£m	£m
At beginning of year		959.0	919.8
Acquisition of business		37.8	-
Disposal of businesses		-	(30.5)
Expected return on assets		47.8	52.3
Actuarial gains		26.3	35.3
Contributions		31.9	28.8
Benefits paid out of plan assets		(49.9)	(47.7)
Currency (losses)/gains		(9.6)	1.0
At end of year		1,043.3	959.0

The actual return on plan assets was a gain of £74.1 million (2011: £87.6 million).

Income Statement disclosures

Amounts recognised in the Income Statement in respect of these defined benefit plans are as follows:

	Year ended 31 December 2012		Restated(1) year ended 31 December 2011
		£m	£m
Continuing operations
Included within headline(2) operating profit:
- current service cost		1.2	0.4
-       past service cost		(0.9)	-
- curtailment gain		-	(0.8)
Included within net finance costs:
- interest cost		51.4	52.6
- expected return on assets		(47.8)	(52.3)
Included within exceptional items:
- curtailment gain		(7.0)	-
Discontinued operations
Included within headline(2) operating profit:
- current service cost		-	0.2
Included within net finance costs:
- interest cost		-	0.2

⁽¹⁾ Restated to include the results of MPC within discontinued operations.

⁽²⁾ As defined on the Income Statement.

Statement of Comprehensive Income disclosures

The amount recognised in the Statement of Comprehensive Income is as follows:

	Year ended 31 December 2012	Year ended 31 December 2011
	£m	£m
Actuarial losses on plan liabilities	(90.1)	(72.4)
Actuarial gains on plan assets	26.3	35.3
	(63.8)	(37.1)

The cumulative amount of actuarial gains and losses recognised in the Statement of Comprehensive Income is a total loss of £178.3 million (2011: £114.5 million).

12.          Financial instruments and risk management

The table below sets out the Group's accounting classification of each category of financial assets and liabilities and their fair values at 31 December 2012 and 31 December 2011:

	Energy £m		Lifting £m	Other(1)  Industrial £m	Central £m	Elster £m	Discontinued(1) £m	Total £m
31 December 2012
Financial assets
Cash and cash equivalents		-	-	-	156.5	-	-	156.5
Net trade receivables	93.0		78.2	8.3	0.1	141.9	-	321.5
Derivative financial assets	2.2		0.8	-	0.1	0.2	-	3.3
Financial liabilities
Interest-bearing loans and borrowings	-		-	-	(1,148.0)	(6.2)	-	(1,154.2)
Derivative financial liabilities		(1.4)	(0.7)	-	(8.2)	(0.2)	-	(10.5)
Other financial liabilities	(114.3)		(78.6)	(17.1)	(33.5)	(279.6)	-	(523.1)
31 December 2011
Financial assets
Cash and cash equivalents		-	-	-	195.6	-	-	195.6
Net trade receivables	94.0		74.6	8.8	0.1	-	15.2	192.7
Derivative financial assets	0.4		0.9	-	0.4	-	-	1.7
Financial liabilities
Interest-bearing loans and borrowings	-		-	-	(486.3)	-	-	(486.3)
Derivative financial liabilities		(8.6)	(1.0)	(0.1)	(5.8)	-	(0.2)	(15.7)
Other financial liabilities	(116.8)		(83.7)	(20.1)	(33.5)	-	(16.1)	(270.2)

⁽¹⁾ Restated to include the financial assets and financial liabilities of MPC within discontinued operations.

Credit risk

The Group considers its maximum exposure to credit risk to be as follows:

	Energy £m		Lifting £m	Other(1) Industrial £m	Central £m	Elster £m	Discontinued(1) £m	Total £m
31 December 2012
Financial assets
Cash and cash equivalents		-	-	-	156.5	-	-	156.5
Trade receivables	93.0		78.2	8.3	0.1	141.9	-	321.5
Derivative financial assets	2.2		0.8	-	0.1	0.2	-	3.3
31 December 2011
Financial assets
Cash and cash equivalents		-	-	-	195.6	-	-	195.6
Trade receivables	94.0		74.6	8.8	0.1	-	15.2	192.7
Derivative financial assets	0.4		0.9	-	0.4	-	-	1.7

⁽¹⁾ Restated to include the financial assets of MPC within discontinued operations.

The Group's principal financial assets are cash and cash equivalents, trade receivables and derivative financial assets which represent the Group's maximum exposure to credit risk in relation to financial assets.

The Group's credit risk on cash and cash equivalents and derivative financial instruments is limited because the counter-parties are banks with strong credit-ratings assigned by international credit-rating agencies. The Group's credit risk is primarily attributable to its trade receivables.  The amounts presented in the Consolidated Balance Sheet are net of allowances for doubtful receivables, estimated by the Group's management based on prior experience and their assessment of the current economic environment. 

Capital risk

The Group manages its capital to ensure that entities in the Group will be able to continue as a going concern while maximising the return to stakeholders through the optimisation of the Group's net debt and equity balance.

The capital structure of the Group consists of net debt, which includes the borrowings disclosed in note 9, after deducting cash and cash equivalents, and equity attributable to equity holders of the parent, comprising Issued share capital, Reserves and Retained earnings as disclosed in the Consolidated Statement of Changes in Equity.

Liquidity risk

The Group's policy for managing liquidity rate risk is set out in the Finance Director's review.

Fair values

The Directors consider that the financial assets and liabilities have fair values not materially different to the carrying values.

Foreign exchange contracts

As at 31 December 2012, the Group held foreign exchange forward contracts to mitigate expected exchange fluctuations on cash flows on sales to customers and purchases from suppliers. These instruments operate as cash flow hedges unless the amounts involved are small. The terms of the material currency pairs with total principals in excess of Sterling £1 million equivalent are as follows:

		31 December 2012 Selling currency millions	31 December 2012 Average hedged rate	31 December 2011 Selling currency millions	31 December 2011 Average hedged rate
Sell Australian Dollar/Buy Euro		AUD 4.7	EUR/AUD 1.27	-	-
Sell Australian Dollar/Buy Sterling		AUD 4.3	GBP/AUD 1.58	AUD 4.3	GBP/AUD 1.60
Sell Canadian Dollar/Buy Sterling		-	-	CAD 4.3	GBP/CAD 1.60
Sell Canadian Dollar/Buy US Dollar		CAD 1.7	USD/CAD 1.00	CAD 1.9	USD/CAD 0.99
Sell Chinese Renminbi/Buy US Dollar		-	-	CNY 10.3	USD/CNY 6.43
Sell Czech Koruna/Buy US Dollar		CZK 33.9	USD/CZK 20.24	-	-
Sell Euro/Buy Chinese Renminbi		-	-	EUR 2.3	EUR/CNY 8.74
Sell Euro/Buy Czech Koruna		EUR 7.1	EUR/CZK 25.20	EUR 16.8	EUR/CZK 24.59
Sell Euro/Buy Mexican Peso		EUR 4.1	EUR/MXN 17.01	-	-
Sell Euro/Buy Polish Zloty		EUR 1.8	EUR/PLZ 4.09	-	-
Sell Euro/Buy Sterling		EUR 37.4	GBP/EUR 1.24	EUR 24.4	GBP/EUR 1.15
Sell Euro/Buy US Dollar		EUR 2.7	EUR/USD 1.28	EUR 2.8	EUR/USD 1.38
Sell Hong Kong Dollar/Buy Sterling		HKD 16.9	GBP/HKD 12.41	HKD 21.7	GBP/HKD 12.11
Sell Malaysian Ringgit/Buy Euro		MYR 5.8	EUR/MYR 4.00	-	-
Sell Malaysian Ringgit/Buy US Dollar		MYR 5.6	USD/MYR 3.11	-	-
Sell Norwegian Krone/Buy Euro		-	-	NOK 28.1	EUR/NOK 7.86
Sell Norwegian Krone/Buy Sterling		NOK 92.3	GBP/NOK 9.30	NOK 56.9	GBP/NOK 9.13
Sell Singapore Dollar/Buy Sterling		SGD 2.1	GBP/SGD 1.98	-	-
Sell South African Rand/Buy Euro		ZAR 21.1	EUR/ZAR 10.60	ZAR 34.7	EUR/ZAR 10.51
Sell South African Rand/Buy Sterling		ZAR 29.3	GBP/ZAR 14.21	-	-
Sell Sterling/Buy Czech Koruna		GBP 62.1	GBP/CZK 30.58	GBP 87.1	GBP/CZK 28.55
Sell Sterling/Buy Euro		GBP 37.0	GBP/EUR 1.22	GBP 35.5	GBP/EUR 1.15
Sell Sterling /Buy US Dollar		GBP 3.1	GBP/USD 1.61	GBP 1.1	GBP/USD 1.58
Sell UAE Dirham/Buy Sterling		AED 6.8	GBP/AED 5.90	-	-
Sell US Dollar/Buy Canadian Dollar		USD 3.7	USD/CAD 1.00	USD 4.9	USD/CAD 0.99
Sell US Dollar/Buy Chinese Renminbi		-	-	USD 1.6	USD/CNY 6.43
Sell US Dollar /Buy Czech Koruna		-	-	USD 4.2	USD/CZK 18.50
Sell US Dollar/Buy Euro		USD 5.6	EUR/USD 1.22	USD 6.4	EUR/USD 1.38
Sell US Dollar/Buy Sterling		USD 84.5	GBP/USD 1.59	USD 79.8	GBP/USD 1.59

The foreign exchange contracts all mature between January 2013 and August 2014.

The fair value of the contracts at 31 December 2012 was a net asset of £0.8 million (31 December 2011: net liability of £8.3 million).

Commodity swap contracts

As at 31 December 2012, the Group held a number of copper swap contracts that were designated as cash flow hedges. These swap contracts lock the Group into fixed copper prices to protect against fluctuations in the market price of copper. The terms of the contracts are:

Commodity swaps	Commodity	Total quantity	Maturity	Pricing
Group pays	Copper	130 tonnes	4 February 2013	7,538 per tonne
Group receives	Copper	130 tonnes	4 February 2013	Average LME price for the month
Group pays	Copper	170 tonnes	4 March 2013	7,698 per tonne
Group receives	Copper	170 tonnes	4 March 2013	Average LME price for the month
Group pays	Copper	190 tonnes	3 April 2013	7,405 per tonne
Group receives	Copper	190 tonnes	3 April 2013	Average LME price for the month
Group pays	Copper	120 tonnes	2 May 2013	7,395 per tonne
Group receives	Copper	120 tonnes	2 May 2013	Average LME price for the month
Group pays	Copper	80 tonnes	4 June 2013	7,323 per tonne
Group receives	Copper	80 tonnes	4 June 2013	Average LME price for the month
Group pays	Copper	70 tonnes	2 July 2013	7,327 per tonne
Group receives	Copper	70 tonnes	2 July 2013	Average LME price for the month
Group pays	Copper	50 tonnes	2 August 2013	7,330 per tonne
Group receives	Copper	50 tonnes	2 August 2013	Average LME price for the month

The fair value of the contracts at 31 December 2012 was a net asset of £0.1 million (31 December 2011: £nil).

Hedge of net investments in foreign entities

Included in interest-bearing loans at 31 December 2012 were the following amounts which were designated as hedges of net investments in the Group's subsidiaries in Europe and the USA and were being used to reduce the exposure to foreign exchange risks.

Borrowings in local currency:

	31 December 2012 £m	31 December 2011 £m
US Dollar	307.8	390.1
Euro	281.9	48.6

Interest rate sensitivity analysis

A one percentage point rise in market interest rates for all currencies would (decrease)/increase profit before tax by the following amounts assuming the net debt as at the Balance Sheet date was outstanding for the whole year:

	Year ended   31 December 2012  £m	Year ended 31 December 2011 £m
Sterling	(1.0)	0.4
US Dollar	(0.5)	(0.3)
Euro	(0.6)	(0.2)
	(2.1)	(0.1)

Interest rate risk management

The Group's policy for managing interest rate risk is set out in the Finance Director's review.

The Group entered 2012 protecting 78% of its gross debt from exposure to changes in interest rates by holding a number of interest rate swaps to fix £380.1 million (US $546.0 million and €33.3 million) of drawn debt. Under the terms of these swaps, the Group fixed the underlying interest rate at 2.1% for US Dollars and 2.6% for the Euro, plus the bank margin which was 1.35% at that time.

In February 2012 the Group closed out these swap arrangements and replaced them with new swap arrangements to fix the interest rate on a proportion of the new facility drawn down on 31 January 2012. The new five year swap arrangements fixed the finance cost on US $231.0 million, £105.0 million and €42.0 million of debt. Under the terms of these new swap arrangements, the Group will pay annually in arrears, 1.0% for US Dollar swaps, 1.1% for Euro swaps and 1.1% for Sterling swaps, plus the bank margin which was 1.5% at that time.  This arrangement protected approximately 70% of the Group's exposure to interest rate fluctuations for the term of the new facility.

In September 2012 the Group entered into another layer of interest rate swaps following the acquisition of Elster. The new five year swap arrangements fixed the finance cost on US $329.0 million, £231.8 million and €250.0 million of drawn borrowings.  Under the terms of the new swap arrangements, the Group will pay, annually in arrears, 0.69% for US Dollar swaps, 0.72% for Euro swaps and 0.80% for Sterling swaps, plus the current bank margin which is 2.00%. These swaps have also been structured to maintain the ratio of fixed interest rate cover over the five year term allowing for Group profit generation.

This fixes the interest rate cost on US $560.0 million, £336.8 million and €292.0 million of debt, 79% of gross borrowings as at 31 December 2012. The weighted blended fixed finance cost are therefore 0.84% on US Dollar swaps, 0.78% on Euro swaps and 0.91% on Sterling swaps, plus the bank margin of 2.00%.

These interest rate swaps have been designated as cash flow hedges and were highly effective throughout 2012. The fair value of the contracts at 31 December 2012 was a net liability of £8.1 million (31 December 2011: £5.7 million).

Foreign currency risk

The Group's policy for managing foreign currency risk is set out in the Finance Director's review.

Foreign currency sensitivity analysis

Currency risks are defined by IFRS 7 as the risk that the fair value or future cash flows of a financial asset or liability will fluctuate because of changes in foreign exchange rates.

The following table details the transactional impact of hypothetical changes in foreign exchange rates on financial assets and liabilities at the Balance Sheet date, illustrating the (decrease)/increase in Group operating profit caused by a 10 cent strengthening of the US Dollar and Euro against Sterling and a 10% strengthening of the Czech Koruna against Sterling compared to the year end spot rate. The analysis assumes that all other variables, in particular other foreign currency exchange rates, remain constant. The Group operates in a range of different currencies, and those with a material impact are noted here:

	Year ended   31 December 2012  £m	Year ended 31 December 2011 £m
US Dollar	(0.7)	(0.4)
Euro	0.4	0.5
Czech Koruna	0.2	2.0

The following table details the impact of hypothetical changes in foreign exchange rates on financial assets and liabilities at the Balance Sheet date, illustrating the increase/(decrease) in Group equity caused by a 10 cent strengthening of the US Dollar and Euro against Sterling and a 10% strengthening of the Czech Koruna against Sterling. The analysis assumes that all other variables, in particular other foreign currency exchange rates, remain constant. The Group operates in a range of different currencies, and those with a material impact are noted here:

	31 December 2012  £m	31 December 2011 £m
US Dollar	1.6	(0.7)
Euro	1.7	2.3
Czech Koruna	-	0.1

In addition, the change in equity due to a 10 cent strengthening of the US Dollar and Euro against Sterling for the translation of net investment hedging instruments would be a decrease of £20.2 million (31 December 2011: £26.8 million) and £24.9 million (31 December 2011: £4.4 million) respectively. However, there would be no overall effect on equity because there would be an offset in the currency translation of the foreign operation.

Fair value measurements recognised in the Balance Sheet 

Foreign currency forward contracts are measured using quoted forward exchange rates and yield curves derived from quoted interest rates matching the maturities of the contracts.

Commodity swaps are measured using quoted forward commodity prices.

Interest rate swap contracts are measured using yield curves derived from quoted interest rates.

The fair values are shown below. 

	31 December 2012 Current £m		31 December 2012 Non-current £m	31 December 2012 Total £m	31 December 2011 Current £m	31 December 2011 Non-current £m	31 December 2011 Total £m
Derivative financial assets
Foreign currency forward contracts		3.2	-	3.2	1.6	-	1.6
Commodity swaps	0.1		-	0.1	0.1	-	0.1
	3.3		-	3.3	1.7	-	1.7
Derivative financial liabilities
Foreign currency forward contracts		(2.4)	-	(2.4)	(8.7)	(1.2)	(9.9)
Commodity swaps	-		-	-	(0.1)	-	(0.1)
Interest rate swaps	(4.6)		(3.5)	(8.1)	(5.3)	(0.4)	(5.7)
	(7.0)		(3.5)	(10.5)	(14.1)	(1.6)	(15.7)

The fair value of these are derived from inputs other than quoted prices that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices) and they therefore are categorised within Level 2 of the fair value hierarchy set out in IFRS 7.

13.          Issued share capital and reserves

Share Capital		31 December  2012 £m	Restated(1) 31 December 2011 £m
Allotted, called-up and fully paid
1,266,627,036 (31 December 2011: 390,961,043) Ordinary Shares of 0.1p each (31 December 2011: 120p each)		1.3	469.1
Nil (31 December 2011: 34,331,656) C Deferred Shares of 75.0p each		-	25.7
Nil (31 December 2011: 50,000) Incentive Shares of £1 each		-	0.1
		1.3	494.9

⁽¹⁾ In accordance with IFRS 3, the prior year Issued share capital, Share premium account, Merger reserve, Other reserves and Capital redemption reserve balances have been restated to reflect the nominal share capital and reserves position of the new parent company as if it had been the holding company during both periods presented. The overall impact on net equity is £nil (note 1).

On 12 April 2012, following approval at a General Meeting of the shareholders, the former Melrose Incentive Plan was crystallised. This resulted in the conversion of 50,000 £1 Melrose Incentive Shares into 31,247,969 Ordinary Shares of Melrose PLC.

On 30 April 2012, the remaining 34,331,656 C Deferred Shares were redeemed resulting in a £25.7 million transfer from Issued Share Capital into the Capital Redemption Reserve. In addition, the 1,392,194 C Shares were redeemed and cancelled on 30 April 2012 at a value of £1.1 million which was also transferred to the Capital Redemption Reserve.

On 1 August 2012 a 2 for 1, fully underwritten, Rights Issue was completed by Melrose PLC and 844,418,024 Melrose PLC Ordinary Shares were issued raising £1.2 billion to part fund the acquisition of Elster.

Following the Rights Issue, the total number of 14/55p Melrose PLC Ordinary Shares in issue was 1,266,627,036.

On 27 November 2012, a Scheme of Arrangement approved by the High Court of England and Wales became effective and resulted in Melrose Industries PLC becoming the new holding company of Melrose PLC and its subsidiaries.  The arrangement resulted in the issue of 1 new 120p Melrose Industries PLC Ordinary Share for each 14/55p Melrose PLC Ordinary Share.   Melrose Industries PLC consequently issued 1,266,627,036 Ordinary Shares.

As explained in Note 1, Ordinary Share Capital at 31 December 2011 has been restated to reflect the nominal value of the Ordinary Shares of Melrose Industries PLC at the date on which Melrose Industries PLC became the new holding company.   The nominal value of each Ordinary Share in issue at 31 December 2011 has therefore been restated from 14/55p to 120p.

 

On 28 November 2012, the nominal value of each Ordinary Share of Melrose Industries PLC was reduced from 120p to 0.1p and resulted in a transfer of £1,518.7 million to Retained Earnings.

14.          Cash flow statement

	Year ended   31 December  2012 £m	Restated (1) year ended 31 December 2011 £m
Reconciliation of headline(2) operating profit to cash generated by continuing operations
Headline(2) operating profit from continuing operations	243.1	174.2
Adjustments for:
Depreciation of property, plant and equipment	28.1	21.0
Amortisation of computer software and development costs	2.4	0.6
Restructuring costs paid and movements in other provisions	(62.9)	(32.2)
Operating cash flows before movements in working capital	210.7	163.6
Increase in inventories	(3.5)	(17.5)
Increase in receivables	(7.7)	(14.5)
(Decrease)/increase in payables	(32.8)	13.0
Cash generated by operations	166.7	144.6
Tax paid	(49.4)	(22.9)
Interest paid	(42.8)	(26.0)
Defined benefit pension contributions paid	(33.7)	(24.9)
Net cash from operating activities from continuing operations	40.8	70.8

⁽¹⁾ Restated to include the results of MPC within discontinued operations.

⁽²⁾ As defined on the Income Statement.

Cash flow from discontinued operations	Year ended   31 December  2012 £m	Restated (1) year ended 31 December 2011 £m
Cash generated from discontinued operations	1.7	28.1
Tax paid	-	(3.8)
Defined benefit pension contributions paid	-	(3.9)
Net cash from operating activities from discontinued operations	1.7	20.4
Purchase of property, plant and equipment	(1.8)	(9.5)
Purchase of computer software	-	(0.2)
Interest received	-	0.5
Dividends paid to non-controlling interests	-	(0.2)
Net cash used in investing activities from discontinued operations	(1.8)	(9.4)
Net movement in borrowing	-	(0.3)
Net cash used in financing activities from discontinued operations	-	(0.3)

⁽¹⁾ Restated to include the results of MPC within discontinued operations.

Net debt reconciliation

	At 31 December 2011	Cash flow	Acquisitions	Disposals	Other non-cash movements	Foreign exchange difference	At 31 December 2012
	£m	£m	£m	£m	£m	£m	£m
Cash	195.6	222.4	(285.0)	27.1	-	(3.6)	156.5
Debt due within one year	(27.7)	27.8	(6.5)	-	-	0.2	(6.2)
Debt due after one year	(457.5)	(318.0)	(405.4)	-	15.6	17.3	(1,148.0)
Net debt	(289.6)	(67.8)	(696.9)	27.1	15.6	13.9	(997.7)

 

END

 

 

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