Melrose 2013 Full Year Results

RNS Number : 5319B

Melrose Industries PLC

05 March 2014

5 March 2014

MELROSE INDUSTRIES PLC

AUDITED RESULTS

FOR THE YEAR ENDED 31 DECEMBER 2013

Melrose Industries PLC today announces its audited results, which are reported under IFRS, for the year ended 31 December 2013.

Highlights¹

§ Headline² results

- Revenue of £1,732.8 million (2012: £1,051.1 million)

- Profit before tax of £226.1 million (2012: £117.9 million)

- Diluted earnings per share of 12.8p (2012: 8.8p)

§ Proforma³ Headline² results

- Revenue of £1,732.8 million (2012: £1,791.9 million), down 3%

- Operating profit of £274.9 million (2012: £228.5 million), up 20%

- Elster operating profit up 37%

- Elster operating margin of 17.4% (2012: 12.4%), up 5.0 percentage points

- Diluted earnings per share of 12.8p (2012: 9.4p), up 36%

§ Results after exceptional items and intangible asset amortisation

- Profit after tax of £121.9 million (2012: loss of £6.9 million)

- Diluted earnings per share of 9.3p (2012: loss of 0.9p)

§ Net debt of £140.8 million (31 December 2012: £997.7 million). Net debt equal to 0.4 x EBITDA⁴ (31 December 2012 2012: 2.6 x). Adjusting for the Return of Capital proforma net debt would have been £736.1 million, 2.3 x EBITDA⁴

§ Completion of the disposal of five of the businesses acquired with FKI, for gross proceeds of £950 million, which more than tripled their value since 2008 for shareholders in the five years of ownership

§ Shareholder payments

- Return of Capital of approximately £600 million (47.0p per share) on 28 February 2014, alongside an 11 for 13 share consolidation

- Final proposed dividend of 5.0p per share (2012: 5.0p). Full year dividend increased by 2% to 7.75p per share (2012: 7.6p)

§ Following the Return of Capital the net shareholder investment in Melrose is £0.5 billion which has successfully grown into the current market capitalisation of £3.5 billion

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

"Last year was a tremendous year for Melrose with great successes in the 'improve' and 'sell' parts of our strategy. Almost £1 billion was raised from disposals which trebled shareholders' money and Elster increased its profits by over a third in our first full year of ownership. We are ready and keen to buy again but we remain patient for the right opportunity to arise."

¹continuing operations only unless otherwise stated

² before exceptional costs, exceptional income and intangible asset amortisation, as explained in the Finance Director's review

³ assuming a full year's ownership of Elster in 2012, as explained in the Finance Director's review

⁴ headline² operating profit before depreciation and amortisation

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

Enquiries:

CTF Corporate & Financial:

Charlotte McMullen/Kate Ruck Keene +44 (0)20 3540 6460

CHAIRMAN'S STATEMENT

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

2013 has been an extremely busy year for your company. It has seen the successful integration of Elster, acquired in 2012, as well as the disposal of five businesses from our FKI acquisition in 2008. Truth, Marelli, Crosby, Acco and Harris were sold during the year for a total of £950 million, representing a more than tripling of their value for shareholders during the five years of Melrose ownership. Associated with these sales and in line with our proven strategy, a return of capital of approximately £600 million was announced on 21 January 2014 and was paid on 28 February 2014. Two large businesses from the FKI acquisition, Brush and Bridon, still remain in the Group.

The current shareholder investment in Melrose, net of annual dividends and all returns of capital since 2003 (totalling £1.5 billion), amounts to approximately £0.5 billion. Our market capitalisation at the current share price amounts to £3.5 billion meaning that approximately £3.0 billion of shareholder value has been created over the period.

We are proud of this achievement in growing shareholder value and the Board, on behalf of shareholders, recognises the efforts of our employees and thanks them for their outstanding contribution to this.

RESULTS FOR THE GROUP

These financial statements report the results for the Group for the year to 31 December 2013 and comparatives for the previous year.

Revenue from continuing businesses for the year was £1,732.8 million (2012: £1,051.1 million) and headline profit before tax (before exceptional costs, exceptional income and intangible asset amortisation) was £226.1 million (2012: £117.9 million).

Adjusting for the five disposals in the year, headline diluted EPS (before exceptional costs, exceptional income and intangible asset amortisation) on continuing businesses was 12.8p (2012 proforma: 9.4p), an increase of 36%.

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

TRADING

The speedy and rigorous implementation of restructuring projects in our 2012 Elster acquisition produced an equally swift improvement in operating margins - ahead of our best expectations - which led to an increase of over a third in Elster's profits in its first full year. Since acquisition we have raised our expectations of what Elster can achieve and the outcome to date is very encouraging.

As we indicated, despite the subdued order books of recent periods, the remaining "FKI" businesses of Bridon and Brush maintained their operating margins - a good performance. The recent and continuing level of investment in these two businesses means that the medium term outlook remains positive but weakness in specific market areas may hold back growth in the short term.

Operating cash generation remains a major focus and this has been another excellent year. This, together with the proceeds from disposals, has meant a substantial reduction of net debt to £141 million at the year end from £998 million last year. The return of capital after the year end has returned debt to our more usual levels.

DIVIDENDS

The Board proposes to pay a final dividend of 5.0p per share (2012: 5.0p). This will be paid on 15 May 2014 to those shareholders on the register at 22 April 2014, subject to the approval at the AGM on 13 May 2014. This gives a total for the year of 7.75p per share (2012: 7.6p).

We continue to pursue a progressive dividend policy.

BOARD CHANGES

Miles Templeman, our senior non-executive Director, will be stepping down at the AGM in May. He has been a director since our inception in 2003 and in this time his experience and judgement has been highly valued by the Board. We will miss his distinctive input.

At the same time we were delighted to welcome Liz Hewitt to the Board on 8 October 2013. Liz has an excellent background and experience in areas very relevant to Melrose's operations and we are already benefiting from her contribution.

Following Miles' departure, Perry Crosthwaite will become our senior non-executive Director. Perry will simultaneously relinquish his position as Chairman of the Remuneration Committee, a role that will be filled by Justin Dowley, following the conclusion of this year's AGM. Liz Hewitt will chair the Nomination Committee with effect from the end of the 2014 AGM.

STRATEGY

Our strategy of "buy, improve, sell" is by now well understood. 2013 was a highly successful year particularly in the "improve" and "sell" categories. The speed of improvement in operating margins at Elster is a tribute to the strength of our management teams. But this did not dilute our focus on realising the value in several of our "FKI" businesses, nor in returning this to shareholders. As stated before, we are now actively looking for an appropriate opportunity to repeat the success of our previous acquisitions. This is a rigorous process and we will take as long as is necessary to identify the right company.

OUTLOOK

The recovery from the financial crisis of 2008 has been slow, anaemic and patchy. Much of our growth in recent years has been from margin improvement rather than revenue growth. In common with many other companies sales growth remains challenging and we face a headwind from the current strength of Sterling. However, there is more margin improvement still achievable which, together with the inherent strength of our businesses and the continuing recovery in most of the world's economies, gives us confidence over the medium term.

Christopher Miller

5 March 2014

CHIEF EXECUTIVE'S REVIEW

DIVESTMENTS DURING THE YEAR

Realising value in businesses at the appropriate time and returning all or part of this value to shareholders has been a fundamental part of the "buy, improve, sell" strategy that Melrose has followed since being founded ten years ago.

2013 has been another highly successful year for Melrose as we continue to "improve" elements of the portfolio and have implemented the "sell" phase of our strategy. In the second half of the year, we completed the disposals of five of our "FKI" businesses for a total consideration of approximately £950 million, having more than tripled the shareholder value in respect of these businesses in five years of Melrose ownership. In July 2013, Melrose sold Truth Hardware to Tyman PLC for £135 million. In the following month we completed the disposal of Marelli Motori to an affiliate of The Carlyle Group, for a total consideration of £177 million. In November 2013, the disposal of Crosby and Acco to an affiliate of KKR & Co LP, was completed for a consideration of £633 million. Finally in December 2013 Melrose disposed of Harris Waste Management Group to Avis Industrial Corporation.

RETURN OF CAPITAL

Following these divestments, and in accordance with our strategy, we announced in January 2014 our intention to use part of the proceeds of the disposals to return approximately £600 million in cash to shareholders and to undertake a share consolidation on an 11 for 13 basis. The balance of the net sale proceeds have been used to pay down Melrose's existing borrowings.

IMPROVING THE PORTFOLIO

Elster

Following the sale of Crosby and Acco, the three Elster businesses represent two thirds of the revenue of the continuing Group. In the 18 months since its acquisition, the improvement programmes implemented within the Elster businesses are yielding significant results.

The Gas business has benefited from strategic and operational initiatives including the closure of uneconomic facilities, new product launches and the rationalisation and relocation of manufacturing operations. The Gas business is well positioned to benefit from a continued growth in gas usage across the world.

Operating profits in the Electricity business have improved significantly as a result of the relocation, reorganisation and consolidation of operational and functional activities both in North America and Europe. New products and technologies have been launched, enhanced quality control processes implemented and improvements to the supply chain initiated. Across the global market, regulatory frameworks are being put in place to upgrade the metering infrastructure from traditional metering to Smart meter solutions, providing significant growth opportunities.

In the Water business, operating profit has also improved substantially following the completion of a restructuring programme, product and business rationalisation and new product launches. Water is well positioned for growth.

Bridon

Turning to the rest of the Group, Bridon's trading results in 2013 were marginally down on 2012. Reductions in operating expenditure in the mining industry continued to impact demand for mining ropes and this has offset improved trading conditions in other core sectors such as the oil & gas, commercial construction and industrial markets. The difficult trading circumstances in the mining sector are expected to continue for at least the first half of 2014.

Bridon's strategy is to be a global technology leader for demanding rope applications. Bridon's new factory in Newcastle, UK, is fully operational and the Bridon Technology Centre, providing state of the art product design, development and testing facilities, was opened in early 2013. During the year, 19 product development and enhancement projects were completed resulting in higher performance ropes for the mining, oil & gas and industrial sectors.

Looking ahead, while the outlook for the mining sector remains uncertain, demand from the oil & gas sector is expected to be solid in 2014. At the same time, commercial construction and industrial activity continues to grow in China, and signs of recovery are also visible in the US. To mitigate the effects of the downturn in the mining sector, Bridon has focused on implementing operational efficiency improvements and strong working capital control.

Brush

Market dynamics for new generators are likely to remain subdued in 2014. However, Brush has outperformed the turbogenerator market with operational efficiency gains, a strong return on capital investment and growth in the aftermarket business.

We are investing £30 million in a new manufacturing plant in China to meet the rapid growth in demand for gas turbines in the region.

A key priority for Brush is the growth and development of the aftermarket business which, during 2013, was consolidated into a single focused global business unit. This restructuring, together with capital investment in an aftermarket workshop facility in the US and new service offerings has driven order intake up 34 per cent on the previous year.

Hawker Siddeley Switchgear had another strong year with sales and operating profit achieving gains of 6 per cent and 37 per cent respectively. Performance at the Transformers business also improved with revenue up 6 per cent, year on year.

The medium to long term outlook for power generation and the gas turbine market is positive and Brush is well placed to benefit from this and the additional growth opportunities in China and the aftermarket business.

OUTLOOK

Overall market conditions remain challenging and sales growth in 2014 is not going to be easy to achieve. We are confident that we will see further progress in our Elster businesses in 2014. However, Bridon and Brush will find it more difficult to improve their performance. Foreign exchange rates have continued to become an increasing headwind into 2014.

We are actively looking for our next acquisition and are hopeful of progress this year although as ever we remain disciplined in applying our criteria.

ELSTER GAS

£m	2013	2012 - 4 months post acquisition
Total Revenue	688.9	236.9
Headline Operating Profit	152.4	46.7

Elster Gas is a world leader in gas measurement and gas safety control equipment supplying a global customer base in more than 130 countries. With one of the most extensive installed utility measurement bases in the world and more than 75 million gas metering devices deployed over the last 10 years alone, Elster Gas products enable customers to efficiently measure, manage and control natural gas resources across the complete gas value chain.

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

Global revenues increased by over 5 per cent in 2013^*. There were strong performances from the integrated Gas metering station business, the new wholly owned Russian plant and the US "Perfection" connections business. Global demand for conventional gas meters remained robust, which compensated for further delays in the roll out of Smart meters in Europe. The control equipment market saw strong demand for residential heating products though the process heat market remained flat as global steel production stagnated in 2013.

Operating profit increased significantly when compared to 2012, as the actions identified by the new management team at acquisition started to take effect. There has been a significant improvement within the North American businesses where operational improvements were implemented during the year, including the closure of the in-house die casting at our Nebraska City facility.

Further good progress has also been made in rationalising the European manufacturing footprint with production of a number of products previously manufactured in Western Europe transferred to the newly extended plant in Slovakia. In addition, three sites were closed in 2013 and this strategy will continue to be executed throughout 2014 and 2015.

Capital investment to support the Smart meter growth will be committed as required. These investments will primarily be at our Osnabruck and Stara Tura facilities and will be phased as the Smart rollout in Europe gains momentum.

In 2013, there were four major new product launches, focused primarily at the commercial and industrial sector, which is a key element in better positioning the business to exploit the projected long term growth in its end markets. In Italy Elster launched Themis Plus, the first commercial and industrial diaphragm meter in the world to measure, display and transmit billing data daily based on the standard volume of gas. Until now, in the gas industry these functions have been carried out by separate devices.

Elster are also involved in the Smart residential gas meter programmes in the UK. While overall progress in the UK has been slower than expected, a number of key milestones have recently been passed and there is an expectation that more significant progress will be made in 2014.

* Including the period in 2012 prior to acquisition

OUTLOOK

Elster Gas end markets remain healthy with order input in 2013 similar to that achieved in 2012. When coupled with further planned operational and cost improvements, Elster Gas should enjoy another good performance in 2014.

ELSTER ELECTRICITY

£m	2013	2012 - 4 months post acquisition
Total Revenue	247.5	106.8
Headline Operating Profit	21.5	12.6

Elster Electricity is one of the largest international Smart metering solutions 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 including MDC (Meter Data Collection), together with several other communication products and services. Elster has key production facilities located in Europe, North America and South America.

Elster Electricity operates in most global markets through its own offices or agents. In South America, the biggest markets are Brazil, Argentina and Colombia, where Elster Electricity has a market leading position selling stand-alone metering and advanced metering systems. Market leading technology has also been developed by Elster Electricity to prevent electricity theft through the accessing of power lines before it arrives at the meter; this solution also allows utility companies to pin-point where there may have been a potential breach of their electricity power lines. An increasing demand for similar solutions across the region will further strengthen Elster's position across South America.

North America is served through factories and sales offices, and offers Smart metering solutions to commercial, industrial and residential markets with a leading position. Elster has deployed more than five million Smart Residential Meters over the last six years, and thus has one of the largest installed meter bases. Most of the large utilities across the region have started deploying Smart meter solutions, and it is expected that the future market demand will stabilise at the current level. Growth is expected in Mexico, where a regulatory framework is in place to accelerate further deployment.

Europe, the Middle East and Africa has seen significant growth over the last year, and with the third Energy Package calling for a European wide roll out of Smart meter solutions through to 2022, significant growth is expected in the coming years. Elster Electricity is well positioned with a broad range of products and solutions to capture its fair share of the market. The Middle East, led by United Arab Emirates, where a regulatory framework is now in place to upgrade the metering infrastructure, is also expected to experience growth.

The main markets served in the Asia Pacific regions are Australia and New Zealand. These are managed through dedicated sales offices. As with other regions served, the regulatory framework is in place to upgrade the metering infrastructure.

Sales grew in Europe based on initial Smart metering pilot projects, which will pave the way for later full deployments across a number of key utilities within most served markets. Tender activities in the year gives management confidence that further growth is to be expected in the coming years. The North American market saw a slight revenue decrease compared to the previous period in line with expectations following significant Smart metering deployment over the last years.

Operating profit improved significantly as a result of consolidation activities started in 2012, both in North America and Europe.

In 2013, production and assembly for North America was moved to Mexico; this also resulted in a streamlining of all other central functions across sales, development and product management in the US. In Europe a similar initiative commenced with key operational functions consolidated into Romania. At the same time development, product management and sales were strengthened across all markets served to support future roll out of Smart metering solutions.

During 2014 focus will be on further optimising processes across all functions, with investments in open Meter Data Collection solutions and partnerships with Smart Grid application providers.

OUTLOOK

The global market will continue to see a shift from "traditional" metering to Smart meter solutions in 2014. Whilst management expect the North America market to stabilise at current sales volumes, other markets are expected to see growth, especially Europe, where the year will see further pilot projects and significant tender activities for deployment in 2015 and beyond.

ELSTER WATER

£m	2013	2012 - 4 months post acquisition
Total Revenue	179.9	67.4
Headline Operating Profit	23.0	1.4

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

Operating profit substantially improved in 2013, when compared to 2012. This followed the completion of restructuring work that was started in 2012 and completed during the first half of 2013. The business ceased its manufacture of mechanical meters for the North American market which resulted in the closure of its large production site and the creation of a sales and distribution centre focusing on electronic residential and commercial and industrial products for the US market. In Europe, the Elster Water business further rationalised product lines and closed production sites with the consolidation of its production into its core manufacturing sites and further investment in local sales and distribution centres.

The move to higher accuracy meters and the discontinuation of low margin low accuracy meters favourably impacted average meter selling prices. The Elster Water business continued to be very successful in reducing its overhead cost base through restructuring, which significantly contributed to the operating profit improvement. The business also benefited from a year on year reduction in working capital, with strong cash conversion.

Total revenue reduced 15% in 2013, when compared to 2012. This was due to the cessation of North American mechanical meter production from the end of the first half of 2013, the rationalisation of low accuracy low margin products in Germany and Poland, the closure of sales offices, the completion of a large Australian contract in 2012 and a move to third party distribution in South America. Within Europe, the Middle East, and the Asia Pacific regions, revenues were generally flat. Africa delivered good levels of growth.

New product launches in 2013 included the introduction of the polymer bodied version of the S150 single jet meter range, reducing environmental impact and complying with future water quality requirements. A new generation of mechanical sub-meters was also launched, compatible with the latest data communication systems and an extension of the advanced electronic water meter range; this provides a full portfolio of residential products with improved battery life and polymer body technology in North America.

The Commercial and Industrial high accuracy mechanical range of products have also been enhanced following the metrological approval of the H5000 meters, which offers customers improved flexibility and lower installation costs. Also within this market, the Emeris Log system has recently been launched offering advanced data logging, storage and management features with GPRS communications.

Globally, sales of polymer bodied meters continue to grow with more than 1 million units sold in 2013. Elster's award winning polymer meters are helping customers achieve their CO2 reduction targets as well as providing lead-free alternatives to traditional brass and bronze bodied products.

Significant capital expenditure has been approved in the year to increase capacity at our Luton plant for Polymer bodied meter production and on radio module designs to support customer AMR/AMI product solutions.

OUTLOOK

Following the completion of the restructuring programme in 2013 the business is positioned well for further growth. Focus will continue to be on high accuracy meters and advanced metering solutions, where good opportunities exist within core markets.

BRUSH

£m	2013	2012
Total Revenue	350.1	371.6
Headline Operating Profit	73.1	77.9

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 ("HSS") brand name. Harrington Generators International ("HGI") is a specialist UK based small generator manufacturer supplying the construction, military, telecoms and rail sectors.

Turbogenerators is a late cycle business and as such macro-economic factors typically impact new machine order intake with a lag of approximately 18 months. The global financial crisis has created delays in funding approvals and uncertainty in investment decisions affecting the order intake levels of Brush's Turbine OEM customers. These factors all had a subsequent impact on market levels during the first half of 2013 and are anticipated to do so in 2014.

Whilst the turbogenerator market in general is believed to be circa 35 per cent down, Brush managed to outperform the market with generator sales down just 17 per cent. This performance has continued to include a higher than normal proportion of smaller machines, with unit sales just 4 per cent down year on year.

Brush has continued its extensive capital investment programme across all its units, focused on efficiency improvement, state of the art engineering machinery and production processes as well as product development and these benefits are delivering positive results.

In addition to productivity-based investments, Brush is proceeding with the construction of a greenfield generator manufacturing plant near Shanghai, China. This £30 million capital investment will produce generators primarily for the Chinese market. The investment is being made in support of several of its international turbine customers, who are setting up manufacturing operations in China to address this significant developing market. The factory has commenced construction, and is expected to deliver its first generator during the last quarter of 2015. Brush has already signed a six year long term purchase agreement with one of its major customers, Huadian GE Aero Gas Turbine Equipment Company LTD, for the supply of generators from the new factory. In the short term this will bring increased demand for the European factories, to satisfy the demand during the factory build, and in to the long term for key sub-component manufacture.

The turbogenerator plant in the Netherlands had a much improved year, benefiting from restructuring that took place in 2012. The industrial market for these machines remains competitive and further efficiency restructuring during 2014 will position this business to compete more aggressively in the global market.

Investment in research and development continues at a strong pace in Brush with the introduction of uprated and new products across its product lines. One of these developments resulted in the delivery, in the last quarter of 2013, of a 200 MW turbogenerator for a project in Colombia. This is the largest air-cooled generator ever built by Brush. Existing generators in the range have had their output and performance significantly increased as a result of the research and development programmes put in place by Brush. This had led to new orders and the successful defence of existing business from competitive threats.

The growth and development of the aftermarket business remained a key priority, capitalising on the significant fleet of Brush machines in the market globally, many of which are of an age to benefit from lifetime extension activities, as well as opportunities to use aftermarket expertise on third party machines. During the year the aftermarket business was separated out into one global business unit within Brush, to focus on this growth; this also allowed workshop facilities and service engineers to be managed more efficiently as one global resource. Aftermarket contributed strongly to 2013, helping to mitigate a softer market for new machines, by launching various new service offerings.

The aftermarket workshop facility in the USA benefited from significant capital investment, increasing its efficiency and capacity, and thus its ability to address the key markets of the Americas, and was completed in time for the important autumn outage season. As a result of all the above, aftermarket order intake was 34 per cent above the previous year.

The HSS business had another strong year with sales 6 per cent ahead and operating profit 37% ahead of the previous year. The business was able to benefit from both the restructuring programme in 2012 and the capital project to convert the factory layout to product flow lines. New product development remains a key priority for the HSS business with further enhancements to the indoor AC Eclipse and AC/DC Rail network products a major focus.

Revenue within the Transformers business improved by 5 per cent year on year as we enter the fourth of the current 5 year OFGEM (the UK Government's Office of Gas and Electricity Markets) cycle. The capital expenditure programme approved to reorganise the production process and value engineer the product is nearing completion; this has resulted in significant margin improvement and another strong year of growth for the Transformers business. Capital was approved to develop, design and manufacture high voltage 132kV transformers, to support our power distribution customers in the UK and open up increased export opportunities.

OUTLOOK

The medium to long term growth prospects in power generation and in particular the aero-derivative gas turbine market, where Brush has such a strong leading position, remain positive. This, coupled with the additional growth available by entering the Chinese market and continued operational improvements, means the business is well positioned to benefit. As stated above the overall market dynamics remain challenging in the short term. However, this will continue to be mitigated by growth in the aftermarket business, aided by internal reorganisation, product development, continued investment and efficiency improvements.

BRIDON

£m	2013	2012
Total Revenue	266.4	268.4
Headline Operating Profit	34.1	35.8

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

Bridon's trading results were slightly lower in 2013 compared to 2012. Whilst demand in most of Bridon's core markets remained solid, reductions in expenditure in the mining industry impacted demand for mining ropes. This effect is likely to continue into 2014. Bridon primarily supplies ropes for use in existing mines rather than in the development of new mines and so should be well placed when the mining cycle starts to pick up. Bridon continued to focus on operational improvements across all its factories. Working capital control remained strong and profit to cash conversion improved significantly.

While the onshore rig count in the USA and Canada was flat, Bridon saw increases for onshore oil & gas ropes, reflecting a growth in market share through new distribution channels. The offshore sector also improved, as global production companies invested in new ships and platforms. The expansion in exploration and drilling also offers Bridon the chance to compete for some significant contracts for bespoke anchor lines, deep water mooring systems and offshore crane ropes. The contract for the Stella deep water mooring system for offshore production was won during the year.

The mining market was much weaker in 2013 compared to 2012 and this effect was felt strongly in the second half of the year. Falling commodity prices, reductions in capital expenditure by most of the larger mining companies, industrial relations issues in South Africa and lower order books for the mining machine OEMs combined to reduce demand significantly. Sales to China remained solid but demand in Russia and South Africa was subdued. In North America demand was also depressed.

The commercial construction market in the Middle East demonstrated some signs of improvement in 2013, while crane rope sales showed moderate growth in North America, reflecting Bridon's premier position with OEMs. Demand for crane and mining ropes remained solid in China, and demand for oil & gas and industrial ropes held up well in Asia. Bridon's Chinese operation based in Hangzhou continued to make progress, both in domestic and local export markets.

During the year Bridon opened a technical and service office in Aberdeen, UK. The new warehouse and service centre in Macae, Brazil is now fully operational; this facility provides wire rope, termination and inspection services to rig operators in this fast growing oil & gas market, as well as supporting import sales into Latin America.

Bridon has continued to upgrade its operations through targeted investment and through progress in programmes to drive quality, efficiency and health and safety. In both North America and Europe significant improvements were made throughout the factories in terms of waste reduction and efficiencies.

In keeping with Bridon's strategy to be the global technology leader for demanding rope applications, Bridon's new factory in Newcastle, UK, is now fully operational. This facility has already produced the largest rope ever made in the UK, which weighs 342 tonnes, has a length of 3.5km and is used as a hoist rope on offshore oil & gas vessels. The plant was profitable in its first year of operation. The Neptune Quay facility is capable of producing the world's largest and most complex ropes, and is equipped to load them directly onto barges or on to vessels on the deep water port of the River Tyne for export. In addition, the Bridon Technology Centre was formally opened in February 2013 and has been fully operational since the middle of the year. The Technology Centre provides state of the art new product design, development and testing facilities and is already fully utilised.

In 2013, Bridon completed nineteen product development and enhancement projects. Within oil & gas a low temperature polymer core was developed for the Bristar & Zebra ropes to allow the first high performance ropes to be used in arctic conditions at temperatures down to -50°C.

Three new high strength compacted crane ropes were developed for the industrial sector, while in the mining sector further enhancements were made to triangular strand and tiger blue shovel ropes to enhance rope performance and improve service life, as well as the development of a plastic impregnated rope to increase corrosion resistance in challenging operating conditions.

A fully synthetic trawl warp was launched for use in the marine sector, which offers significant fuel savings to the vessels through reduced drag in the water, while a synthetic mooring rope was developed for Liquefied Natural Gas vessels with superior stability and fatigue performance.

Major planned activities for 2014 include spiral strand design enhancement involving larger diameter wires, a patented advanced sheathing technology with translucent inspection windows and a new slimline socket for structural and deep water mooring applications. Further planned projects include improving rope lubrication, extra-long length deep shaft mining ropes, as well as continuing the work on hybrid ropes.

OUTLOOK

Bridon expects demand in oil & gas to remain solid in 2014. The oil price and demand for oil, particularly in the emerging markets, should support activity levels in this sector. However, the outlook for mining remains very uncertain, although the need for mines to begin to replenish their operating equipment should help, but the timing of this is difficult to predict. Commercial construction and industrial activity appears to be picking up in the USA and continuing in China but still remains subdued in some developed countries.

Simon Peckham

5 March 2014

FINANCE DIRECTOR'S REVIEW

The year to 31 December 2013 included the disposal of five businesses which in the prior year comprised 22% of annualised Group revenue and 28% of annualised Group headline operating profit. Consequently, in accordance with IFRS 5, the trading results of these businesses have been shown as discontinued in both years.

SPLIT OF DIVISIONS

The continuing operations consist of the FKI businesses, containing the divisions of Energy and Lifting, and the Elster businesses containing the divisions of Gas, Electricity and Water.

The discontinued operations include the results, up until the date of disposal, of the Marelli business, previously shown within the Energy division, the Crosby and Acco businesses, previously shown within the Lifting division and the Truth and Harris businesses, previously shown within the Other Industrial division. In addition, the discontinued operations in 2012 include the results of the MPC business, previously shown within the Other Industrial division.

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 2013 the Group achieved revenue from continuing operations of £1,732.8 million (2012: £1,051.1 million). Headline operating profit in the year ended 31 December 2013 was £274.9 million (2012: £149.3 million) and the headline operating profit margin (defined as the percentage of headline operating profit to revenue) increased from 14.2% in 2012 to 15.9% in 2013. The results for 2013 are not directly comparable to 2012 as the prior year performance includes only four months of Elster trading after its acquisition on 23 August 2012. This is explained in more detail later in this report.

After exceptional costs, exceptional income and intangible asset amortisation Group operating profit was £219.9 million (2012: £54.0 million).

TRADING RESULTS BY DIVISION - CONTINUING OPERATIONS

A split of revenue, headline operating profit and headline operating profit margin for 2013 and 2012 is as follows:

	2013 Revenue	2013 Headline operating profit/ (loss)	2013 Headline operating profit margin	2012 Revenue	2012 Headline operating profit/ (loss)	2012 Headline operating profit margin
	£m	£m	%	£m	£m	%
Elster	1,116.3	194.2	17.4%	411.1	57.8	14.1%
FKI	616.5	107.2	17.4%	640.0	113.7	17.8%
Central - corporate	-	(13.5)	n/a	-	(13.7)	n/a
Central - LTIPs⁽¹⁾	-	(13.0)	n/a	-	(8.5)	n/a
Continuing Group	1,732.8	274.9	15.9%	1,051.1	149.3	14.2%

⁽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 £13.5 million (2012: £13.7 million) of Melrose corporate costs and a Long Term Incentive Plan ("LTIP") accrual of £13.0 million (2012: £8.5 million). The LTIP accrual includes an amount of £4.0 million in respect of the Melrose share-based Incentive Plan (2012: £3.5 million), and a charge of £9.0 million (2012: £5.0 million) for the cash-based divisional management incentive plans.

PROFORMA GROUP TRADING RESULTS

The results for 2013 are not directly comparable to 2012 as the prior year performance includes only four months of Elster trading after its acquisition on 23 August 2012. A more appropriate comparative to use for 2012 would include a full year's ownership of Elster in 2012, along with an allowance for the finance costs of the acquisition and a consistent number of shares in both years, at constant currency. The pre-ownership results of Elster were prepared under previous accounting policies and US GAAP. On this basis the unaudited proforma headline results would be:

	2013 Actual £m	2012 Proforma £m	Proforma growth %
Revenue
Elster⁽¹⁾	1,116.3	1,146.6	-3%
FKI⁽²⁾	616.5	645.3	-4%
Continuing Group	1,732.8	1,791.9	-3%

Headline operating profit
Elster⁽¹⁾	194.2	141.6	+37%
FKI⁽²⁾	107.2	114.1	-6%
Continuing Group⁽³⁾	274.9	228.5	+20%

Headline operating margin
Elster	17.4%	12.4%	+5.0ppts
FKI	17.4%	17.7%	-0.3ppts
Continuing Group	15.9%	12.8%	+3.1ppts

Headline diluted EPS	12.8p	9.4p	+36%

⁽¹⁾ Elster revenue as reported in 2012 of £411.1 million plus £717.8 million to include the pre-ownership revenue and also £17.7 million to show at constant currency. Elster headline operating profit as reported in 2012 of £57.8 million plus £81.5 million to include the pre-ownership profits and also £2.3 million to show at constant currency.

⁽²⁾ FKI revenue as reported in 2012 of £640.0 million plus £5.3 million to show at constant currency. FKI headline operating profit as reported in 2012 of £113.7 million plus £0.4 million to show at constant currency.

⁽³⁾ Includes the Melrose central costs and an additional divisional LTIP charge of £5 million in 2012 as if Elster were owned for the full year.

FINANCE COSTS AND INCOME

The net headline finance cost in 2013 was £48.8 million (2012: £31.4 million).

In 2013 the Group had a blended interest rate of 3.1% (2012: 2.7%). The increase in the absolute value of finance costs results from the full year effect of the higher net debt following the acquisition of Elster on 23 August 2012.

Net interest on external bank loans, overdrafts and cash balances was £34.4 million (2012: £21.9 million). Melrose uses interest rate swaps to fix the majority of the interest rate exposure on its drawn debt. More detail on these swaps is given in the finance cost risk management section of this review.

Also included in the net headline finance cost is a £4.7 million (2012: £2.4 million) amortisation charge relating to the arrangement costs of raising the bank facility, a net interest cost on pension liabilities of £9.0 million (2012: £6.2 million) and a charge for the unwinding of discounts on long term provisions of £0.7 million (2012: £0.9 million).

The introduction of IAS 19 (revised): "Employee benefits" in 2013 has resulted in the pension interest charge being £5.1 million higher than it would have been under the previous accounting standard and increased the 2012 pension interest charge by £2.7 million.

TAX

The headline Income Statement tax rate was 27% (2012: 27%). The headline tax rate was expected to increase in 2013, where a full year of 2013 Elster results are included, but the disposal of FKI businesses with tax rates higher than the Group average offset this expected increase.

The reason that the headline tax rate for the Group is lower than the weighted blend of the statutory tax rates around the world is the recognition of deferred tax assets that were not previously thought to be recoverable. There is also a small benefit from the release of provisions previously held against potential overseas tax audits which have been successfully cleared for less cost than expected.

The tax rate after exceptional items and intangible asset amortisation is 29% (2012: 210%). The main reason for the higher rate after exceptional items than the headline rate is the £8.1 million exceptional tax charge on group reorganisations against which there is no income.

The cash tax rate on headline continuing operations of 21% (2012: 24%) is again below the headline Income Statement rate due to the benefit arising from the utilisation of pre-existing Melrose Group tax losses and other deferred tax assets. The rate includes £9 million paid during the year in settlement of tax audits of the Elster businesses relating to tax periods ended prior to our ownership of Elster.

The deferred tax liability of £287.4 million (2012: £347.2 million) 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 decreased during the year due to their utilisation against taxable profits and also as a result of some forfeiture on Group reorganisations. The total gross tax losses within the Group are shown below:

Tax losses	Recognised £m	Unrecognised £m	Total £m
UK	22.5	124.8	147.3
North America	0.3	3.1	3.4
Rest of World	19.2	47.2	66.4
Total 2013	42.0	175.1	217.1
Total 2012	35.5	215.1	250.6

EXCEPTIONAL ITEMS AND AMORTISATION OF INTANGIBLE ASSETS

In the year ended 31 December 2013 the Group incurred exceptional operating costs of £19.3 million (2012: £70.8 million). These include £14.1 million of restructuring costs in Elster, which are expected to deliver further cost savings in the future, and other restructuring costs of £4.7 million which occurred in FKI. The Group benefited from exceptional income of £28.9 million (2012: £7.0 million) mainly as a result of success in resolving a number of warranty issues inherited with the acquisition of Elster for less expense than expected. There were no exceptional finance costs in the year (2012: £16.3 million).

In addition intangible asset amortisation of £64.6 million (2012: £31.5 million) was charged. A net tax credit on these exceptional costs, exceptional income and intangible asset amortisation, of £18.9 million (2012: £24.1 million), and an exceptional tax charge of £8.1 million (2012: £5.8 million) has been taken in the year.

Overall the net exceptional items and intangible asset amortisation, after tax, shows a net expense of £44.2 million (2012: £93.3 million).

FAIR VALUE EXERCISE

Upon the acquisition of Elster, on 23 August 2012, in accordance with IFRS 3: "Business Combinations", an extensive review of the Elster assets, liabilities and accounting policies commenced and this was completed by the half year in 2013. Certain fair value adjustments were identified in the first half of 2013 which increased goodwill by £29.3 million with corresponding increases to provisions of £32.9 million, deferred tax assets of £5.2 million, and other Balance Sheet items of £1.6 million. The 2012 Balance Sheet was restated for these items in accordance with IFRS 3.

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

In accordance with IAS 33, two sets of basic and diluted EPS numbers 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 2013 the diluted EPS for continuing operations was 9.3p (2012: loss of 0.9p). For continuing and discontinued operations the diluted EPS for 2013 was 43.7p (2012: 4.1p).

Headline continuing diluted EPS for 2013 was 12.8p (2012: 8.8p). However, to reflect the underlying earnings performance, a proforma basis has been used for the continuing results in 2012. This assumes that Elster had been owned for the full year in 2012 (unaudited), with an allowance for the finance cost of the acquisition for the period Elster was not owned, and uses the same number of shares in both years, at constant currency. On this basis, the proforma headline continuing diluted EPS growth is 36%.

DISPOSALS DURING THE YEAR

On 22 November 2013 the disposal of Crosby and Acco to a newly incorporated company, controlled by affiliates of Kohlberg Kravis Roberts & Co. L.P, was completed for a gross cash consideration of £632.6 million. The profit on disposal of these two businesses was £256.6 million after costs of £13.0 million.

Three other businesses were disposed in 2013, Truth, Marelli and Harris. The gross disposal proceeds for these three businesses was £317.8 million with related costs of £12.0 million, realising a profit on disposal of £144.1 million.

These five businesses were all acquired with FKI in July 2008 and contributed £392.8 million of revenue and £79.5 million of headline operating profit in 2013, shown within discontinued operations. During the five years of Melrose ownership, the shareholder value in these businesses increased by approximately 3.5 times.

At 31 December 2013 £1.7 billion of cash had been generated from trading and disposal proceeds in respect of the FKI acquisition so far which compares to the acquisition cost of just under £1 billion, even though two large businesses, namely, Brush and Bridon, remain in the Melrose Group.

CASH GENERATION AND MANAGEMENT

The cash generation performance in 2013 and the movement in net debt are summarised as follows:

	2013 £m
Headline operating profit	274.9
Depreciation and amortisation of computer software and development costs	40.7
Working capital movement	(13.5)
Headline operating cash flow (pre capex)	302.1
Headline EBITDA conversion to cash (pre capex) %	96%
Net capital expenditure	(44.6)
Net interest and net tax paid	(78.4)
Defined benefit pension contributions	(32.7)
Other (including discontinued operations)	(37.1)
Cash inflow from trading (after all costs including tax)	109.3

The conversion of headline operating profit (before depreciation and amortisation) into cash was 96% in 2013 (2012: 85%). This strong level of cash generation was consistent across both the FKI and Elster businesses.

The movement in net debt in the year is reconciled as follows:

	2013 £m
Opening net debt	(997.7)
Cash inflow from trading (after all costs including tax)	109.3
Net cash flow from disposals⁽¹⁾	888.2
Amounts paid to shareholders	(98.1)
Foreign exchange and other	(42.5)
Closing net debt	(140.8)

⁽¹⁾ Gross disposal proceeds of £950.4 million, less costs of £25.0 million and cash disposed of £37.2 million

The Balance Sheet leverage (calculated as net debt divided by continuing headline operating profit before depreciation and amortisation) was approximately 0.4x at 31 December 2013 (31 December 2012: 2.6x). Net debt increased in February 2014 following the return of capital and, allowing for this the proforma leverage at 31 December 2013, would have been 2.3x which is considered to be a better measure of the underlying leverage level.

CAPITAL EXPENDITURE

By business, the net capital expenditure and depreciation in the year was as follows:

	Elster	FKI	Central	Total
Net capital expenditure £m	18.8	25.1	0.7	44.6
Depreciation £m	26.6	13.4	0.7	40.7
Net capital expenditure to depreciation ratio (full year)	0.7x	1.9x	1.0x	1.1x
Melrose nine year (2005-2013) average annual multiple				1.3x

The net capital spend to depreciation ratio was 1.1x in 2013 (2012: 1.7x). Within this, the ratio in the FKI businesses was 1.9x which included the commencement of the significant investment in a new factory in the Shanghai area of China. This is discussed further in the Chief Executive's Review. The net capital spend to depreciation ratio in Elster was 0.7x, while the Board assessed strategies for these businesses. Elster is inherently a less capital intensive business than FKI.

ASSETS AND LIABILITIES

The summary Melrose Group assets and liabilities are shown below:

	2013 £m	2012 £m
Fixed assets (including computer software and development costs)	265.3	345.1
Intangible assets	985.9	1,156.3
Goodwill	1,602.0	1,866.2
Net working capital	126.9	217.0
Retirement benefit obligations	(219.3)	(261.3)
Provisions	(177.8)	(287.2)
Deferred tax and current tax	(272.9)	(301.9)
Other⁽¹⁾	18.6	5.2
Total	2,328.7	2,739.4

⁽¹⁾ Includes interests in joint ventures and derivative instruments

These assets and liabilities are funded by:

	2013 £m	2012 £m
Net debt	(140.8)	(997.7)
Equity	(2,187.9)	(1,741.7)
Total	(2,328.7)	(2,739.4)

The movements in net debt and equity primarily relate to the five disposals in the year.

GOODWILL, INTANGIBLE ASSETS AND IMPAIRMENT REVIEW

The total value of goodwill as at 31 December 2013 was £1,602.0 million (31 December 2012: £1,866.2 million) and intangible assets was £985.9 million (31 December 2012: £1,156.3 million). These balances reduced as a result of the disposals in the year and the split is as follows:

	Elster £m	FKI £m	Total £m
Goodwill	1,308.4	293.6	1,602.0
Intangible assets	804.9	181.0	985.9
Deferred tax on intangible assets	(247.6)	(39.8)	(287.4)
Other net assets	(17.2)	168.5	151.3
Total carrying value	1,848.5	603.3	2,451.8

The goodwill and intangible assets have been tested for impairment as at 31 December 2013. The Board is comfortable that no impairment is required.

PROVISIONS

Total provisions at 31 December 2013 were £177.8 million (31 December 2012: £287.2 million). The significant decrease year on year related to the cash spend on restructuring provisions that were mainly set up in 2012 following the acquisition of Elster, along with a conscious decision to resolve certain warranty liabilities inherited with Elster. In total £98.2 million of cash was spent on provisions of which £72.2 million related to restructuring and warranty. The following table details the movement in provisions in the year:

		Total £m
At 31 December 2012		287.2
Cash spent on the utilisation of provisions		(98.2)
Non-cash utilisation of provisions		(7.2)
Net release to exceptional items		(3.7)
Net charge to headline operating profit		7.9
Disposal of businesses		(9.8)
Other (including foreign exchange)		1.6
At 31 December 2013		177.8

The net release to exceptional items of £3.7 million includes £26.9 million of provisions originally booked as fair value adjustments but no longer required due to their successful resolution offset by £23.2 million of exceptional costs in the year, mainly relating to further restructuring costs at Elster.

The significant reduction in provisions has not distorted headline operating profit because there was a net charge to headline operating profit in the year of £7.9 million.

PENSIONS

The Group has a number of defined benefit and defined contribution pension plans.

On 1 January 2013 IAS 19 (revised): "Employee benefits" was adopted which increased the pre-tax pension expense in the year by £7.9 million (2012: £4.8 million).

In July 2013, the FKI UK Pension Plan was demerged into three pension plans, resulting in two new pension plans being set up, namely, the Brush Group (2013) Pension Plan and the Bridon Group (2013) Pension Plan. These three defined benefit plans are now run independently and are closed to new members and to current members' future service.

Despite the demerger in July 2013, the FKI UK Pension Plan remains the most significant pension plan in the Group with an accounting net deficit of £70.8 million at 31 December 2013. Plan assets were £452.5 million and plan liabilities were £523.3 million.

At 31 December 2013, the three FKI UK plans had an accounting net deficit of £109.2 million (31 December 2012: £100.0 million). This was net of plan assets at 31 December 2013 of £671.4 million (31 December 2012: £630.2 million) and liabilities of £780.6 million (31 December 2012: £730.2 million).

The other UK defined benefit pension plan of significant size in the Group, namely the McKechnie UK Pension Plan, had a deficit of £0.5 million at 31 December 2013 (31 December 2012: £8.2 million). This plan had assets at 31 December 2013 of £182.5 million (31 December 2012: £170.8 million) and liabilities of £183.0 million (31 December 2012: £179.0 million). The McKechnie UK Pension Plan is closed both to new members and current members' future service.

In addition, a US defined benefit plan for FKI exists. At 31 December 2013, the FKI US plan had assets of £177.6 million (31 December 2012: £198.3 million), liabilities of £183.0 million (31 December 2012: £228.4 million) and consequently a net deficit of £5.4 million (31 December 2012: £30.1 million). This plan is closed to new members and to current members' future service.

Elster has a number of defined benefit plans, most of which are unfunded, with a net accounting deficit at 31 December 2013 of £101.5 million (31 December 2012: £115.2 million). Within this 82%, £83.6 million, (31 December 2012: 78%) related to unfunded German defined benefit plans and early retirement programmes.

The assumptions used to calculate the IAS 19 deficit for all pension plans within the Melrose Group are considered carefully by the Board of Directors.

For the most significant plan (the FKI UK Pension Plans) a male aged 65 in 2013 is expected to live for a further 21.9 years (31 December 2012: 22.1 years), whilst a woman aged 65 would live for a further 24.1 years (31 December 2012: 24.2 years). This is assumed to increase by 1.4 years (6%) for a male and 1.5 years (6%) for a female aged 65 in 2033.

A summary of the other key assumptions used for all of the UK plans are shown below:

2013

Assumptions

2012

Assumptions

Discount rate

4.40

4.50

Inflation

3.40

3.00

It is noted that a 0.1 percentage point decrease in the discount rate would increase the pension liabilities on the UK pension plans by £14.8 million, or 2%, and a 0.1 percentage point increase to inflation would increase the liabilities on these plans by £10.9 million, or 1%. Furthermore, an increase by one year in the expected life of a 65 year old member would increase the pension liabilities on these plans by £24.4 million, or 3%.

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 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. In 2013 the Melrose Group made annual contributions of £20.0 million, in total, (2012: £18.5 million) to the three UK schemes within the FKI businesses and £5.2 million (2012: £4.6 million) to the McKechnie UK Pension Plan.

The Melrose Board recognise that as businesses are bought and sold then pension plan liabilities need to exit the Group, however this can be done at a time which is commercially sensible.

RISK MANAGEMENT

The financial risks the Group faces have been considered 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 2013 was £140.8 million compared to £997.7 million a year earlier. The decrease in net debt resulted, primarily, from the five disposals completed during the year. The return of capital of £595.3 million, discussed under post balance sheet events later in this review, increased net debt in February 2014.

At 31 December 2013 the Group had a committed term loan drawn down in two tranches of £180 million and US $290 million. In addition the Group has two revolving credit facilities of £741.5 million and €300 million at 31 December 2013. These facilities are due to mature on 29 June 2017.

The Sterling denominated term loan is subject to mandatory repayments of 5 per cent on 30 June 2015, 30 June 2016 and 31 December 2016, adjusted for non-mandatory repayments and cancellations. The US Dollar denominated term loan is no longer subject to mandatory repayment following the repayment and cancellation of US $210 million in the year.

The 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 at June and December and both of which afforded comfortable headroom at 31 December 2013.

The first covenant, which calculates net debt at average exchange rates during the period, was set at 3.25x at 31 December 2013 and reduces to 3.0x from 30 June 2015 onwards. For the year ended 31 December 2013 it was 0.5x (31 December 2012: 2.6x) but allowing for the return of capital was 2.3x on a proforma basis at this date.

The interest cover covenant remains at 4.0x throughout the life of the facility. At 31 December 2013 it was 11.8x (31 December 2012: 9.1x).

The drawdown of the facilities are 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 £200.4 million at 31 December 2013 (31 December 2012: £156.5 million) and are offset against gross debt of £341.2 million (31 December 2012: £1,154.2 million) to arrive at the net debt position of £140.8 million (31 December 2012: £997.7 million). The combination of this cash and the size of the debt 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.

Finance cost risk management

The Group remained in a net debt position at 31 December 2013. The Group's facility bears interest at interbank rates plus a margin which varies dependent on the level of the leverage and which ranges from 1.40% to 2.65%. As at 31 December 2013 the margin was 2.25% (31 December 2012: 2.00%).

At the beginning of 2013 the Group protected just under 80% of gross borrowings from exposure to changes in interest rates by holding a number of interest rate swaps to fix the interest rate cost on US $560.0 million, £336.8 million and €292.0 million of debt.

During the year, post the disposals of businesses and the resulting reduction in gross debt, several interest rate swap arrangements were closed out. This left swap arrangements in place fixing the interest rate cost on US $246.8 million, £336.8 million and €200.0 million of gross borrowings.

For the swap arrangements that remain the Group will pay, annually in arrears, a weighted blended fixed finance cost of 0.70% (2012: 0.84%) for US Dollar swaps, 0.72% (2012: 0.78%) on Euro swaps and 0.91% (2012: 0.91%) on Sterling swaps, plus the relevant bank margin which is currently 2.25%. Following the return of capital, on 28 February 2014, 78% of gross borrowings are now protected against exposure to movement in interest rates.

Exchange rate risk management

The 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 and 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 year

US Dollar	Twelve month average rate	Closing rate
2013	1.56	1.66
2012	1.59	1.62
Euro
2013	1.18	1.20
2012	1.23	1.23

The effect on the key headline numbers in 2013 for the continuing Group due to the translation movement of exchange rates from 2012 to 2013 is shown below. The table illustrates the translation movement in revenue and headline operating profit if the 2012 average exchange rates had been used to calculate the 2013 results rather than the 2013 average exchange rate.

The translation difference in 2013	£m
Revenue decrease	21.3
Headline operating profit decrease	4.0

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

5.0

For every 10 cent strengthening of the Euro against Sterling

8.4

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

7.3

For every 10 cent strengthening of the Euro against Sterling

6.4

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 management

The financial risks connected with contracts and warranties, 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. 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.

POST BALANCE SHEET EVENTS - RETURN OF CAPITAL

Consistent with the Melrose strategy of returning proceeds to shareholders following significant disposals, Melrose announced the return of £595.3 million to shareholders on 21 January 2014, which was subsequently approved by shareholders on 7 February 2014.

The return was made via a redeemable share scheme which gave shareholders the option of receiving a payment either on 28 February 2014 or 7 May 2014, or a combination of both.

Alongside the capital return, a share consolidation took place which reduced the number of Ordinary Shares by a factor of 11 for 13, or 15%, from 1,266.6 million to 1,071.8 million.

GOING CONCERN

The Group's business activities, together with the factors likely to affect its future development, performance and position are set out in the Strategic Report section of the Annual Report, as is the financial position of the Group, its cash flows, liquidity position, and borrowing facilities. In addition, the consolidated financial statements includes the Group's objectives, policies and processes for managing its capital, its financial risk management objectives, details of its financial instruments and hedging activities and its exposures to credit risk and liquidity risk.

The Group has considerable financial resources and 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 is well placed to manage its business risks successfully despite the current uncertain economic outlook.

After making enquiries, the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. For this reason, they continue to adopt the going concern basis in preparing the financial statements.

Geoffrey Martin

Group Finance Director

5 March 2014

Consolidated Income Statement

	Notes	Year ended 31 December 2013 £m	Restated⁽¹⁾ year ended 31 December 2012 £m
Continuing operations
Revenue	2	1,732.8	1,051.1
Cost of sales		(1,125.5)	(720.1)

Gross profit		607.3	331.0

Headline⁽²⁾ operating expenses		(335.2)	(182.5)
Share of headline⁽²⁾ results of joint ventures		2.8	0.8
Intangible asset amortisation		(64.6)	(31.5)
Exceptional operating costs	3	(19.3)	(70.8)
Exceptional operating income	3	28.9	7.0

Total net operating expenses		(387.4)	(277.0)


Operating profit		219.9	54.0

Headline⁽²⁾ operating profit	2	274.9	149.3

Headline⁽²⁾ finance costs		(70.5)	(42.3)
Exceptional finance costs	3	-	(16.3)

Total finance costs		(70.5)	(58.6)
Finance income		21.7	10.9

Profit before tax		171.1	6.3

Headline⁽²⁾ profit before tax		226.1	117.9

Headline⁽²⁾ tax		(60.0)	(31.5)
Exceptional tax⁽³⁾		10.8	18.3

Total tax	4	(49.2)	(13.2)


Profit/(loss) for the year from continuing operations		121.9	(6.9)

Headline⁽²⁾ profit for the year from continuing operations		166.1	86.4


Discontinued operations
Profit for the year from discontinued operations	5	442.7	47.7

Profit for the year		564.6	40.8


Attributable to:
Owners of the parent		562.7	39.1
Non-controlling interests		1.9	1.7

		564.6	40.8


Earnings per share
From continuing operations
- Basic	7	9.5	(0.9)
- Diluted	7	9.3	(0.9)
- Headline⁽²⁾ diluted	7	12.8	8.8⁽⁴⁾
From continuing and discontinued operations
- Basic	7	44.4	4.1
- Diluted	7	43.7	4.1

⁽¹⁾ Restated to include the results of Truth, Marelli, Crosby, Acco and Harris within discontinued operations (note 5) and for the adoption of IAS 19 (revised): "Employee benefits" (note 1). ⁽²⁾ Before exceptional costs, exceptional income and intangible asset amortisation. ⁽³⁾ Includes exceptional tax and tax on exceptional items and intangible asset amortisation. ⁽⁴⁾ 8.8p is the restated 2012 headline⁽²⁾ diluted earnings per share from continuing operations. The Board believe that 9.4p is a more appropriate measure to use for 2012 to compare against 2013 performance, being the headline⁽²⁾ diluted earnings per share from continuing operations assuming Elster was owned for the full year in 2012 (unaudited), with an allowance for the finance costs of the acquisition for the period Elster was not owned and using a consistent number of shares in both years, at constant currency.

Consolidated Statement of Comprehensive Income

	Notes	Year ended 31 December 2013 £m	Year ended⁽¹⁾ 31 December 2012 £m

Profit for the year		564.6	40.8

Items that will not be reclassified subsequently to the Income Statement:
Net remeasurement gain/(loss) on retirement benefit obligations		20.1	(59.0)
Income tax (charge)/credit relating to items that will not be reclassified	4	(0.6)	3.5

		19.5	(55.5)
Items that may be reclassified subsequently to the Income Statement:
Currency translation on net investments		(25.9)	(1.2)
Currency translation on non-controlling interests		(0.3)	0.2
Transfer to Income Statement from equity of cumulative translation differences on disposal of foreign operations	5	(12.1)	-
Gains/(losses) on cash flow hedges		10.0	(6.2)
Transfer to Income Statement on cash flow hedges		3.0	11.9
Income tax credit/(charge) relating to items that may be reclassified	4	0.6	(2.2)

		(24.7)	2.5


Other comprehensive expense after tax		(5.2)	(53.0)


Total comprehensive income/(expense) for the year		559.4	(12.2)


Attributable to:
Owners of the parent		557.8	(14.1)
Non-controlling interests		1.6	1.9

		559.4	(12.2)

⁽¹⁾ Restated for the adoption of IAS 19 (revised): "Employee benefits" and IAS 1 (amended): "Presentation of items of other comprehensive income" (note 1).

Consolidated Statement of Cash Flows

	Notes	Year ended 31 December 2013 £m	Restated⁽¹⁾ year ended 31 December 2012 £m
Net cash from/(used in) operating activities from continuing operations	9	91.2	(40.6)
Net cash from operating activities from discontinued operations	9	44.8	57.9

Net cash from operating activities		136.0	17.3

Investing activities
Disposal of businesses	5	950.4	30.7
Disposal costs	5	(25.0)	(2.4)
Net cash disposed	5	(37.2)	(1.2)
Purchase of property, plant and equipment		(47.0)	(36.5)
Proceeds from disposal of property, plant and equipment		6.2	1.1
Purchase of computer software		(3.8)	(1.9)
Dividends received from joint ventures		2.7	0.3
Interest received		21.7	10.9
Acquisition of subsidiaries and non-controlling interests		(12.8)	(1,500.4)
Cash acquired on acquisition of Elster		-	105.6
Dividends paid to non-controlling interests		(6.3)	(0.1)
Net cash from/(used in) investing activities from continuing operations		848.9	(1,393.9)
Net cash used in investing activities from discontinued operations	9	(11.6)	(17.3)

Net cash from/(used in) investing activities		837.3	(1,411.2)

Financing activities
Return of capital		-	(1.1)
Repayment of borrowings		(834.0)	(1,176.9)
Net proceeds from Rights Issue		-	1,168.1
New bank loans raised		-	1,467.1
Costs of raising and settling finance		-	(33.1)
Dividends paid	6	(98.1)	(65.7)
Net cash (used in)/from financing activities from continuing operations		(932.1)	1,358.4
Net cash used in financing activities from discontinued operations	9	-	-

Net cash (used in)/from financing activities		(932.1)	1,358.4


Net increase/(decrease) in cash and cash equivalents		41.2	(35.5)
Cash and cash equivalents at the beginning of the year	9	156.5	195.6
Effect of foreign exchange rate changes	9	2.7	(3.6)

Cash and cash equivalents at the end of the year	9	200.4	156.5

⁽¹⁾ Restated to include the cash flows of Truth, Marelli, Crosby, Acco and Harris within discontinued operations (note 5).

As at 31 December 2013, the Group's net debt was £140.8 million (31 December 2012: £997.7 million). A reconciliation of the movement in net debt is shown in note 9. The decrease in net debt is primarily as a result of proceeds received from business disposals in the year.

Consolidated Balance Sheet

	Notes	31 December 2013 £m	Restated⁽¹⁾ 31 December 2012 £m
Non-current assets
Goodwill and other intangible assets		2,612.0	3,048.8
Property, plant and equipment		241.2	318.8
Interests in joint ventures		12.6	12.4
Deferred tax assets		70.3	150.3
Derivative financial assets		8.1	-
Trade and other receivables		0.3	0.3

		2,944.5	3,530.6
Current assets
Inventories		234.5	375.5
Trade and other receivables		292.8	384.1
Derivative financial assets		5.1	3.3
Cash and cash equivalents		200.4	156.5

		732.8	919.4


Total assets	2	3,677.3	4,450.0


Current liabilities
Trade and other payables		399.2	540.3
Interest-bearing loans and borrowings		-	6.2
Derivative financial liabilities		7.2	7.0
Current tax liabilities		43.6	41.0
Provisions	8	74.4	101.8

		524.4	696.3


Net current assets		208.4	223.1


Non-current liabilities
Trade and other payables		1.5	2.6
Interest-bearing loans and borrowings		341.2	1,148.0
Derivative financial liabilities		-	3.5
Deferred tax liabilities		299.6	411.2
Retirement benefit obligations		219.3	261.3
Provisions	8	103.4	185.4

		965.0	2,012.0


Total liabilities	2	1,489.4	2,708.3


Net assets		2,187.9	1,741.7


Equity
Issued share capital		1.3	1.3
Merger reserve		1,190.6	1,190.6
Other reserves		(757.1)	(757.1)
Hedging reserve		5.8	(7.7)
Translation reserve		(29.9)	8.0
Retained earnings		1,775.3	1,299.5

Equity attributable to owners of the parent		2,186.0	1,734.6
Non-controlling interests		1.9	7.1

Total equity		2,187.9	1,741.7

⁽¹⁾ Restated to reflect the completion of the acquisition accounting for Elster, as explained in the Finance Director's review.

The financial statements were approved and authorised for issue by the Board of Directors on 5 March 2014 and were signed on its behalf by:

……………………………………………… ……………………………………………

Geoffrey Martin Simon Peckham

Group Finance Director Chief Executive

Consolidated Statement of Changes In Equity

	Issued share capital £m		Merger reserve £m	Other reserves £m	Capital redemption reserve £m	Hedging reserve £m	Translation reserve £m	Retained earnings £m	Equity attributable to owners of the parent £m	Non-controlling interests £m	Total equity £m


At 1 January 2012		494.9	1,190.6	(874.4)	(26.8)	(11.9)	9.3	(133.4)	648.3	0.1	648.4

Profit for the year⁽¹⁾	-		-	-	-	-	-	39.1	39.1	1.7	40.8
Other comprehensive income/(expense)⁽¹⁾		-	-	-	-	4.2	(1.3)	(56.1)	(53.2)	0.2	(53.0)

Total comprehensive income/(expense)		-	-	-	-	4.2	(1.3)	(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 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)	-	(7.7)	8.0	1,299.5	1,734.6	7.1	1,741.7

Profit for the year	-		-	-	-	-	-	562.7	562.7	1.9	564.6
Other comprehensive income/(expense)		-	-	-	-	13.5	(37.9)	19.5	(4.9)	(0.3)	(5.2)
			-
Total comprehensive income/(expense)		-	-	-	-	13.5	(37.9)	582.2	557.8	1.6	559.4

Dividends paid	-		-	-	-	-	-	(98.1)	(98.1)	(6.3)	(104.4)
Credit to equity for equity-settled share-based payments	-		-	-	-	-	-	4.0	4.0	-	4.0
Purchase of non-controlling interests		-	-	-	-	-	-	(12.3)	(12.3)	(0.5)	(12.8)

At 31 December 2013	1.3		1,190.6	(757.1)	-	5.8	(29.9)	1,775.3	2,186.0	1.9	2,187.9

⁽¹⁾ Restated for the adoption of IAS 19 (revised): "Employee benefits" (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 2013 or 31 December 2012 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 2012 have been delivered to the Registrar of Companies and those for the year ended 31 December 2013 will be delivered to the Registrar of Companies during April 2014. 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.

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 2014.

The comparative information for the year ended 31 December 2012 in these financial statements has been restated to include the results and cash flows of Truth, Marelli, Crosby, Acco and Harris within discontinued operations and exclude them from continuing operations. Truth and Harris were previously disclosed within the Other Industrial segment, Marelli within the Energy segment and Crosby and Acco within the Lifting segment. The comparative information has also been restated in accordance with the adoption of IAS 19 (revised): "Employee benefits". The Balance Sheet at 31 December 2012 has been restated to reflect the completion of the acquisition accounting of Elster.

In the current financial year, the Group has adopted the amendments to IAS 1 (amended): "Presentation of items of other comprehensive income", IAS 19 (revised): "Employee benefits" and other amended Standards and Interpretations which do not affect the amounts reported in this preliminary announcement.

The amendments to IAS 1 require items of other comprehensive income to be grouped by those items that may be reclassified subsequently to the Income Statement and those that will not be reclassified to the Income Statement, together with their associated income tax. The amendments have been applied retrospectively, and hence the presentation of items of comprehensive income have been restated to reflect the change. The effect of these changes is evident from the Consolidated Statement of Comprehensive Income.

The adoption of IAS 19 (revised): "Employee benefits" impacts the measurement of the various components representing movements in the defined benefit pension obligation and associated disclosures but not the total obligation itself. The impact on the current year in adopting the revised standard has been to increase headline operating expenses by £2.8 million and finance costs by £5.1 million whilst reducing taxation expense by £2.1 million and increasing other comprehensive income by £5.8 million. In accordance with IAS 19 (revised): "Employee benefits", the comparative periods have been restated as if the new standard had been effective from 1 January 2012. The impact has been to increase headline operating expenses in 2012 by £2.1 million, increase finance costs in 2012 by £2.7 million whilst reducing taxation expense by £1.4 million and increasing other comprehensive income in 2012 by £3.4 million.

Other than as noted above, the accounting policies followed are the same as those detailed within the 2012 Report and Accounts which are available on the Group's website www.melroseplc.net.

The Board of Directors approved the preliminary announcement on 5 March 2014.

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 categorised as follows:

FKI segments

§ Energy

§ Lifting

Elster segments

§ Gas

§ Electricity

§ Water

§ Elster central

The Energy segment consists of the Brush business, a specialist supplier of energy industrial products to the global market. The Lifting segment consists of the Bridon business, serving oil & gas production, mining, petrochemical, alternative energy and general construction markets. Elster comprises the Gas, Electricity and Water segments 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. The Central LTIPs cost centre contains the costs associated with the new five year Melrose Incentive Plan (granted on 11 April 2012), the previous Melrose Incentive Plan which crystallised on 22 March 2012 and the divisional management LTIPs that are in operation across the Group.

Following the disposal of Truth and Harris, the Other Industrial segment has ceased to exist and the results of these businesses have been included within discontinued operations.

The discontinued segment comprises Truth, Marelli, Crosby, Acco and Harris in both years. The discontinued segment in 2012 also contains the MPC business.

Transfer prices between business units are set on an arms 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 2013 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 2013 £m	Restated⁽¹⁾ year ended 31 December 2012 £m
Continuing operations
Energy		350.1	371.6
Lifting		266.4	268.4

FKI total		616.5	640.0

Gas		688.9	236.9
Electricity		247.5	106.8
Water		179.9	67.4

Elster total		1,116.3	411.1

Total continuing operations		1,732.8	1,051.1

Discontinued operations	5	392.8	536.2

Total revenue		2,125.6	1,587.3

⁽¹⁾ Restated to include the revenues of Truth, Marelli, Crosby, Acco and Harris within discontinued operations (note 5).

	Segment result
	Notes	Year ended 31 December 2013 £m	Restated⁽¹⁾ year ended 31 December 2012 £m
Continuing operations
Energy		73.1	77.9
Lifting		34.1	35.8

FKI headline⁽²⁾operating profit		107.2	113.7

Gas		152.4	46.7
Electricity		21.5	12.6
Water		23.0	1.4
Elster central		(2.7)	(2.9)

Elster headline⁽²⁾operating profit		194.2	57.8

Central - corporate		(13.5)	(13.7)
Central - LTIPs⁽³⁾		(13.0)	(8.5)

Headline⁽²⁾ operating profit		274.9	149.3

Intangible asset amortisation		(64.6)	(31.5)
Exceptional operating costs	3	(19.3)	(70.8)
Exceptional operating income	3	28.9	7.0

Operating profit		219.9	54.0

Finance costs - headline⁽²⁾		(70.5)	(42.3)
Finance costs - exceptional	3	-	(16.3)
Finance income		21.7	10.9

Profit before tax		171.1	6.3
Tax	4	(49.2)	(13.2)
Profit for the year from discontinued operations	5	442.7	47.7

Profit for the year		564.6	40.8

⁽¹⁾Restated to include the results of Truth, Marelli, Crosby, Acco and Harris within discontinued operations (note 5) and for the adoption of IAS 19 (revised): "Employee benefits" (note 1).

⁽²⁾As defined on the Income Statement.

⁽³⁾Long Term Incentive Plans.

	Total assets		Total liabilities
	31 December 2013 £m	Restated⁽¹⁾ 31 December 2012 £m	31 December 2013 £m	Restated⁽¹⁾ 31 December 2012 £m
Energy	497.7	498.4	146.5	184.1
Lifting	340.4	348.5	88.3	129.7

FKI total	838.1	846.9	234.8	313.8

Gas	2,038.7	2,134.0	470.3	600.9
Electricity	343.0	345.7	117.7	128.2
Water	201.6	257.3	92.6	171.9
Elster central	6.3	25.0	60.5	47.8

Elster total	2,589.6	2,762.0	741.1	948.8

Central - corporate	249.6	185.4	491.9	1,271.9
Central - LTIPs⁽²⁾	-	-	21.6	20.3

Total continuing operations	3,677.3	3,794.3	1,489.4	2,554.8

Discontinued operations	-	655.7	-	153.5

Total	3,677.3	4,450.0	1,489.4	2,708.3

⁽¹⁾ Restated to reflect the completion of the acquisition accounting for Elster and to include the total assets and total liabilities of Truth, Marelli, Crosby, Acco and Harris within discontinued operations (note 5).

⁽²⁾ Long Term Incentive Plans.

	Capital expenditure⁽¹⁾		Depreciation⁽¹⁾
	Year ended 31 December 2013 £m	Restated⁽²⁾ year ended 31 December 2012 £m	Year ended 31 December 2013 £m	Restated⁽²⁾ year ended 31 December 2012 £m
Continuing operations
Energy	16.8	8.7	5.9	5.1
Lifting	8.6	20.5	7.5	5.7

FKI total	25.4	29.2	13.4	10.8

Gas	14.1	5.5	15.4	5.1
Electricity	6.9	1.5	6.7	2.0
Water	3.7	2.0	4.5	2.0
Elster central	0.3	-	-	-

Elster total	25.0	9.0	26.6	9.1

Central - corporate	0.6	0.9	0.7	0.6

Total continuing operations	51.0	39.1	40.7	20.5

Discontinued operations	10.3	17.6	7.7	10.9

Total	61.3	56.7	48.4	31.4

⁽¹⁾Including computer software and development costs.

⁽²⁾Restated to include the capital expenditure⁽¹⁾ and depreciation⁽¹⁾ of Truth, Marelli, Crosby, Acco and Harris within discontinued operations (note 5).

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, derivative financial 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 2013 £m	Restated⁽²⁾ year ended 31 December 2012 £m	31 December 2013 £m	Restated^(2,3) 31 December 2012 £m
UK	213.5	126.2	417.2	400.9
Europe	574.4	332.9	1,557.1	1,637.2
North America	540.5	348.2	761.9	799.5
Other	404.4	243.8	117.0	86.9

Total continuing operations	1,732.8	1,051.1	2,853.2	2,924.5

Discontinued operations	392.8	536.2	-	443.1

Total	2,125.6	1,587.3	2,853.2	3,367.6

⁽¹⁾Revenue is presented by destination.

⁽²⁾Restated to include the revenue and non-current assets of Truth, Marelli, Crosby, Acco and Harris within discontinued operations (note 5).

⁽³⁾Restated to reflect the completion of the acquisition accounting for Elster.

3. Exceptional costs and income

Exceptional costs	Year ended 31 December 2013 £m	Restated⁽¹⁾ year ended 31 December 2012 £m
Continuing operations
Restructuring costs	(18.8)	(51.3)
Acquisition, disposal and financing costs
- operating	(0.5)	(19.5)
- financing	-	(16.3)

Total exceptional costs	(19.3)	(87.1)


Total exceptional costs - operating	(19.3)	(70.8)
Total exceptional costs - financing	-	(16.3)

Total exceptional costs	(19.3)	(87.1)

⁽¹⁾Restated to include the results of Truth, Marelli, Crosby, Acco and Harris within discontinued operations (note 5).

During 2013, the continuing Group incurred £18.8 million (2012: £51.3 million) of costs relating to restructuring programmes. These costs include £14.1 million in relation to restructuring within the Elster segment and £4.7 million in relation to the FKI businesses, mainly within the Energy segment.

Restructuring costs incurred in 2012 included £9.1 million relating to the closure of the old Elster head office along with £27.9 million of other restructuring costs that occurred within several of the key Elster businesses. In addition, £11.1 million of surplus leasehold property costs were identified during 2012 and £3.2 million of restructuring costs were incurred in the FKI businesses.

The Group incurred £0.5 million of expenses on acquisition and disposal related activities during the year. In 2012, operating acquisition and disposal costs of £19.5 million related primarily to the costs incurred in acquiring Elster.

Financing exceptional costs in 2012 related to the debt refinancings performed, mainly in respect of the acquisition of Elster.

Exceptional income	Year ended 31 December 2013 £m	Year ended 31 December 2012 £m
Continuing operations
Release of items previously booked as fair value adjustments	28.9	-
Pension curtailment gain	-	7.0

Total exceptional income	28.9	7.0

Following the successful resolution of certain warranty and legal issues in the second half of the year, and therefore outside of the fair value window, £28.9 million of provisions, inherited with the acquisition of Elster, have been released during the year as exceptional income.

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 2013 £m			Restated⁽¹⁾ year ended 31 December 2012 £m	Year ended 31 December 2013 £m	Restated⁽¹⁾ year ended 31 December 2012 £m	Year ended 31 December 2013 £m	Year ended 31 December 2012 £m
Current tax	44.1			17.9	32.9	26.0	77.0	43.9
Deferred tax	5.1			(4.7)	(2.5)	9.1	2.6	4.4

Total income tax charge		49.2		13.2	30.4	35.1	79.6	48.3

Tax charge on headline⁽²⁾ profit before tax	60.0			31.5	32.5	25.5	92.5	57.0
Exceptional tax charge		8.1		5.8	-	-	8.1	5.8
Tax charge/(credit) on net exceptional items	3.7			(13.1)	-	-	3.7	(13.1)
Tax (credit)/charge in respect of intangible asset amortisation			(22.6)	(11.0)	(2.1)	9.6	(24.7)	(1.4)

Total income tax charge	49.2			13.2	30.4	35.1	79.6	48.3

⁽¹⁾ Restated to include the results of Truth, Marelli, Crosby, Acco and Harris within discontinued operations (note 5) and for the adoption of IAS 19 (revised): "Employee benefits" (note 1).

⁽²⁾ As defined on the Income Statement.

The tax charge for the year ended 31 December 2013 includes an exceptional tax charge of £8.1 million relating to the tax costs arising on an internal reorganisation of the Water segment. Within the 2012 exceptional tax charge of £5.8 million, £4.2 million related to the tax impact of the holding company restructuring that took place during the year as certain deferred tax assets were no longer considered likely to be available and £1.6 million related to businesses previously disposed.

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

	Year ended 31 December 2013 £m	Restated⁽¹⁾ year ended 31 December 2012 £m
Profit on ordinary activities before tax:
Continuing operations	171.1	6.3
Discontinued operations (note 5)	72.4	83.4

	243.5	89.7

Tax on profit on ordinary activities at weighted average rate 29.89% (2012: 28.33%)	72.8	25.4

Tax effect of:
Net permanent differences/non-deductible items	5.8	6.9
Change to calculation of deferred tax liability on intangible asset	-	9.8
Effect of rate change on deferred tax liability on intangible asset	(3.9)	-
Temporary differences not recognised in deferred tax	(2.2)	4.4
Tax credits, withholding taxes and other rate differences	1.4	1.6
Prior year tax adjustments	(2.4)	(5.6)
Exceptional tax charge	8.1	5.8

Total tax charge for the year	79.6	48.3

⁽¹⁾ Restated to include the results of Truth, Marelli, Crosby, Acco and Harris within discontinued operations (note 5) and for the adoption of IAS 19 (revised): "Employee benefits" (note 1).

The reconciliation has been performed at a blended Group tax rate of 29.89% (2012: 28.33%) which represents the weighted average of the tax rates applying to taxable profits in the jurisdictions in which those profits arose.

In addition to the amount charged to the Income Statement, a tax credit of £nil (2012: £1.3 million) has been recognised directly in the Consolidated Statement of Comprehensive Income. This represents a tax charge of £0.6 million (2012: £3.5 million credit) in respect of retirement benefit obligations, a tax credit of £0.6 million (2012: £1.6 million charge) in respect of movements on cash flow hedges and a tax charge of £nil (2012: £0.6 million) in respect of the use of losses on items taken directly to reserves in prior years.

5. Discontinued operations

Disposal of businesses

On 22 November 2013 the Group completed the disposal of Crosby and Acco, two businesses acquired as part of the FKI acquisition in 2008, for gross cash consideration of $1,016.9 million (£632.6 million). The costs charged during the year associated with the disposal were £13.0 million. The profit on disposal in the year was £256.6 million after the recycling of cumulative translation differences of £6.6 million. The Crosby and Acco businesses were previously classified within the Lifting segment and are now shown within discontinued operations.

On 1 August 2013, the Group completed the disposal of Marelli (also acquired as part of FKI), for cash consideration of €207.2 million (£177.1 million). The costs charged during the year associated with the disposal were £7.3 million. The profit on disposal in the year was £70.4 million after the recycling of cumulative translation differences of £3.5 million. The Marelli business was previously classified within the Energy segment and is now shown within discontinued operations.

During the year, the Group also disposed of two other businesses; namely Truth disposed on 3 July 2013 and Harris disposed on 31 December 2013, both previously shown within the Other Industrial segment. The combined cash consideration received for these businesses was $215.4 million (£140.7 million) and the costs incurred were £4.7 million. The combined profit on disposal of these businesses was £73.7 million after the recycling of cumulative translation differences of £2.0 million.

During the year, up until the date of disposal, these businesses contributed £392.8 million of revenue and £79.5 million of headline operating profit.

The comparative information for the year ended 31 December 2012 has been restated to exclude the results and cashflows of these businesses from continuing operations and include them as discontinued operations.

Discontinued operations in 2012 also contain the results and cashflows of the MPC business, which was disposed on 25 June 2012.

Financial performance of discontinued operations:

	Year ended 31 December 2013 £m	Restated⁽¹⁾ year ended 31 December 2012 £m
Revenue	392.8	536.2
Operating costs	(313.3)	(442.0)

Headline⁽²⁾ operating profit	79.5	94.2
Intangible asset amortisation	(6.3)	(7.6)
Exceptional items	(0.7)	(3.1)
Net finance costs	(0.1)	(0.1)

Profit before tax	72.4	83.4
Headline⁽²⁾ tax	(32.5)	(25.5)
Exceptional tax	2.1	(9.6)
-
Profit after tax	42.0	48.3
Cumulative translation differences recycled on disposals	12.1	-
Gain/(loss) on disposal of net assets of discontinued operations	388.6	(0.6)

Profit for the period from discontinued operations	442.7	47.7


Attributable to:
Owners of the parent	442.7	47.7
Non-controlling interests	-	-

	442.7	47.7

⁽¹⁾ Restated to include the results of Truth, Marelli, Crosby, Acco and Harris within discontinued operations.

⁽²⁾ As defined on the Income Statement.

The major classes of assets and liabilities, by segment, disposed of within these businesses were as follows:

	Lifting £m	Energy £m	Other Industrial £m	Discontinued operations £m
Goodwill and other intangible assets	285.5	42.4	34.7	362.6
Property, plant and equipment	40.2	30.0	12.6	82.8
Inventories	54.2	33.3	18.6	106.1
Trade and other receivables	47.6	41.8	13.6	103.0
Cash and cash equivalents	25.3	6.6	5.3	37.2

Total assets	452.8	154.1	84.8	691.7
Trade and other payables	33.1	38.4	14.5	86.0
Retirement benefit obligations	6.1	4.1	-	10.2
Provisions	9.3	0.4	0.1	9.8
Tax and deferred tax	34.7	8.3	5.9	48.9

Total liabilities	83.2	51.2	20.5	154.9
Net assets	369.6	102.9	64.3	536.8
Cash consideration net of costs⁽¹⁾	619.6	169.8	136.0	925.4
Cumulative translation difference recycled on disposals	6.6	3.5	2.0	12.1

Profit on disposal of businesses	256.6	70.4	73.7	400.7

⁽¹⁾ Net of £25.0 million of disposal costs.

6. Dividends

	Year ended 31 December 2013 £m	Year ended 31 December 2012 £m
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
Final dividend for the year ended 31 December 2012 paid of 5.0p	63.3	-
Interim dividend for the year ended 31 December 2013 paid of 2.75p	34.8	-

	98.1	65.7

⁽¹⁾ Adjusted to include the effects of the Rights Issue on 1 August 2012.

Proposed final dividend for the year ended 31 December 2013 of 5.0p per share (2012: 5.0p per share) totalling £53.6 million (2012: £63.3 million).

The final dividend of 5.0p was proposed by the Board on 5 March 2014 and, in accordance with IAS 10: "Events after the reporting period", has not been included as a liability in these financial statements.

7. Earnings per share

Earnings attributable to owners of the parent	Year ended 31 December 2013 £m	Restated⁽¹⁾ year ended 31 December 2012 £m

Profit for the purposes of earnings per share	562.7	39.1
Less: profit for the year from discontinued operations (note 5)	(442.7)	(47.7)

Earnings for basis of earnings per share from continuing operations	120.0	(8.6)

Continuing operations
Intangible asset amortisation	64.6	31.5
Exceptional costs (note 3) - operating	19.3	70.8
Exceptional income (note 3) - operating	(28.9)	(7.0)
Exceptional costs (note 3) - financing	-	16.3
Exceptional tax⁽²⁾	(10.8)	(18.3)

Earnings for basis of headline⁽²⁾ earnings per share from continuing operations	164.2	84.7

Discontinued operations (note 5)
Profit for the period from discontinued operations	442.7	47.7
(Profit)/loss on disposal of businesses	(400.7)	0.6
Intangible asset amortisation	6.3	7.6
Exceptional items	0.7	3.1
Exceptional tax⁽²⁾	(2.1)	9.6

Earnings for basis of headline⁽²⁾ earnings per share from continuing and discontinued operations	211.1	153.3

⁽¹⁾ Restated to include the results of Truth, Marelli, Crosby, Acco and Harris within discontinued operations (note 5) and for the adoption of IAS19 (revised): "Employee benefits" (note 1). ⁽²⁾ As defined on the Income Statement.

	Number	Number
Weighted average number of Ordinary Shares for the purposes of basic earnings per share including, for 2012, the effects of the Rights Issue⁽¹⁾(million)	1,266.6	945.4
Further shares for the purposes of diluted earnings per share⁽²⁾ including, for 2012, the effects of the Rights Issue⁽¹⁾ (million)	20.1	15.3

Weighted average number of Ordinary Shares for the purposes of diluted earnings per share (million)	1,286.7	960.7

⁽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: "Earnings per share", a bonus factor associated with the issue of the new share capital of 57% was applied to the number of Ordinary Shares for the purpose of earnings per share calculations for 2012.

⁽²⁾ Relating to the 2012 Melrose Incentive Plan and the previous Melrose Incentive Plan which crystallised on 11 April 2012.

Earnings per share	Year ended 31 December 2013 pence	Restated⁽¹⁾ year ended 31 December 2012 pence

Basic earnings per share
From continuing and discontinued operations	44.4	4.1
From continuing operations	9.5	(0.9)
From discontinued operations	34.9	5.0

Diluted earnings per share
From continuing and discontinued operations	43.7	4.1
From continuing operations	9.3	(0.9)
From discontinued operations	34.4	5.0

Headline⁽²⁾basic earnings per share
From continuing and discontinued operations	16.7	16.2
From continuing operations	13.0	9.0

Headline⁽²⁾ diluted earnings per share
From continuing and discontinued operations	16.4	16.0
From continuing operations	12.8	8.8

⁽¹⁾Restated to include the results of Truth, Marelli, Crosby, Acco and Harris within discontinued operations (note 5) and for the adoption of IAS19 (revised): "Employee benefits" (note 1).

⁽²⁾As defined on the Income Statement.

8. 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 2012 restated⁽¹⁾		31.5		68.7	20.3	102.5	64.2	287.2
Utilised⁽²⁾	(10.6)			(7.7)	(7.7)	(24.1)	(55.3)	(105.4)
Net release to exceptional items⁽³⁾			(0.5)	1.8	-	(19.7)	14.7	(3.7)
Net charge to headline⁽⁴⁾ operating profit	-			0.9	9.0	(2.8)	0.8	7.9
Disposal of businesses	-			(9.2)	-	-	(0.6)	(9.8)
Unwind of discount	0.6			0.1	-	-	-	0.7
Exchange differences	0.2			(0.5)	-	0.2	1.0	0.9

At 31 December 2013	21.2			54.1	21.6	56.1	24.8	177.8


Current	6.6			8.3	-	38.1	21.4	74.4
Non-current	14.6			45.8	21.6	18.0	3.4	103.4

	21.2			54.1	21.6	56.1	24.8	177.8

⁽¹⁾ Restated to reflect the completion of the acquisition accounting for Elster.

⁽²⁾ Includes £98.2 million of cash spend against provisions and £7.2 million non cash utilisation.

⁽³⁾ Net of £26.9 million of provisions originally booked as fair value adjustments on acquisition of Elster, released to exceptional income, and £23.2 million of other exceptional costs, mainly relating to restructuring.

⁽⁴⁾ 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 five 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, usually resulting in cash spend within one year.

Where appropriate, provisions have been discounted using a discount rate of 3% (31 December 2012: 3%).

9. Cash flow statement

	Year ended 31 December 2013 £m	Restated⁽¹⁾ year ended 31 December 2012 £m
Reconciliation of headline⁽²⁾ operating profit to cash generated by continuing operations
Headline⁽²⁾ operating profit from continuing operations	274.9	149.3
Adjustments for:
Depreciation of property, plant and equipment	35.4	18.4
Amortisation of computer software and development costs	5.3	2.1
Restructuring costs paid and movements in other provisions	(63.3)	(57.1)

Operating cash flows before movements in working capital	252.3	112.7
Decrease in inventories	27.9	12.4
Increase in receivables	(1.2)	(2.4)
Decrease in payables	(40.2)	(34.7)

Cash generated by operations	238.8	88.0
Tax paid	(46.9)	(28.3)
Interest paid	(53.2)	(42.8)
Acquisition costs	(11.4)	(25.2)
Defined benefit pension contributions paid	(32.7)	(32.3)
Incentive scheme payments	(3.4)	-

Net cash from/(used in) operating activities from continuing operations	91.2	(40.6)

⁽¹⁾ Restated to include the results of Truth, Marelli, Crosby, Acco and Harris within discontinued operations (note 5).

⁽²⁾ As defined on the Income Statement.

Cash flow from discontinued operations	Year ended 31 December 2013 £m	Restated⁽¹⁾ year ended 31 December 2012 £m
Cash generated from discontinued operations	59.6	80.4
Tax paid	(13.9)	(21.1)
Defined benefit pension contributions paid	(0.9)	(1.4)

Net cash from operating activities from discontinued operations	44.8	57.9


Purchase of property, plant and equipment	(11.6)	(17.4)
Purchase of computer software	(0.1)	(0.3)
Proceeds from disposal of property, plant and equipment	-	0.3
Interest received	0.1	0.1

Net cash used in investing activities from discontinued operations	(11.6)	(17.3)


Net movement in borrowing	-	-

Net cash used in financing activities from discontinued operations	-	-

⁽¹⁾ Restated to include the results of Truth, Marelli, Crosby, Acco and Harris within discontinued operations (note 5).

Net debt reconciliation

	At 31 December 2012		Cash flow	Acquisitions	Disposals	Other non-cash movements	Foreign exchange difference	At 31 December 2013
	£m		£m	£m	£m	£m	£m	£m
Cash	156.5		(822.8)	(24.2)	888.2	-	2.7	200.4
Debt due within one year		(6.2)	5.7	-	-	-	0.5	-
Debt due after one year	(1,148.0)		828.3	-	-	(4.7)	(16.8)	(341.2)

Net debt	(997.7)		11.2	(24.2)	888.2	(4.7)	(13.6)	(140.8)

10. Post Balance Sheet events

At a General Meeting of the Company held on 7 February 2014, shareholders approved a return of capital of 47 pence per Ordinary Share totalling £595.3 million.

'B' and 'C' shares with a total value of £595.3 million have been created resulting in a corresponding reduction in the merger reserve. As the capital return payments are made, either on 28 February 2014, 7 May 2014 or a combination of both, depending upon elections made by shareholders, the 'B' and 'C' shares will be redeemed and £595.3 million will be transferred to the capital redemption reserve.

As a result of the approval of the capital return, on 10 February 2014 the number of Ordinary Shares in issue was consolidated in a ratio of 11 for 13 in order to maintain comparability of the Company's share price before and after the capital return. On 10 February 2014 the number of Ordinary Shares in issue became 1,071,761,339, each with a nominal value of 13/110 pence.

This information is provided by RNS

The company news service from the London Stock Exchange

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