Final Results

Melrose PLC 15 March 2006 MELROSE PLC AUDITED RESULTS FOR YEAR ENDED 31 DECEMBER 2005 Melrose PLC today announces its audited results for the year ended 31 December 2005. These include the results of the Dynacast and McKechnie businesses for the seven month period from the date of acquisition of 26 May 2005. The highlights of the results, which are reported under IFRS, are: â€¢ Revenue for the period was Â£269.9m â€¢ Operating Profit (before exceptional costs and intangible asset amortisation other than computer software) for the period was Â£27.5m. After these costs operating profit was Â£8.1m â€¢ EPS for the period was 9.1p per share (before exceptional costs and intangible asset amortisation other than computer software). After these costs EPS was a loss of 2.4p per share â€¢ Dividend payment of 3p per share to be proposed at the AGM Christopher Miller, Chairman of Melrose PLC, today said: "Since the acquisition of Dynacast and McKechnie last May, a huge amount of work has been done and is continuing. Order books are encouraging, particularly in our Aerospace OEM business and we expect good progress in 2006 from our businesses. Our aim in listing Melrose in 2003 was to enable public market shareholders to participate in value created from the acquisition and subsequent improvement of businesses as an alternative where appropriate to the successful private equity model. We are pleased that this strategy is bearing fruit." Enquiries: Tom Hampson, M: Communications 020 7153 1522 CHAIRMAN'S STATEMENT I am pleased to report Melrose's first set of full year results following the acquisition of the Dynacast Group and the McKechnie Group in May last year for Â£429m. RESULTS The accounts for the twelve months to 31 December 2005 include the results of the Dynacast and McKechnie businesses for approximately seven months since their acquisition on 26 May 2005. Turnover for the year was Â£269.9m. Operating profit before exceptional costs and intangible asset amortisation (other than for computer software) was Â£27.5m ("Headline Operating Profit") and basic earnings per share before exceptional costs and intangible asset amortisation (other than for computer software) were 9.1p ("Headline earnings per share"). After exceptional costs and intangible asset amortisation the operating profit was Â£8.1m and the loss per share was 2.4p. We are very pleased with the progress since acquisition and are confident we will be able to create significant shareholder value. The successful move from an AIM listed cash shell company to a fully listed precision engineering group would not have been possible without the dedication and skills of our many employees around the world, and we are grateful to them for their support through this year of transition. Following our post-acquisition reviews, we have initiated a number of actions in all of these businesses which we believe will lead to early enhancement of their profitability. These have included management changes, restructuring initiatives and a substantial investment programme, particularly in Aerospace OEM. We would expect to see the benefits of these actions beginning to flow through in the second half of this year but with more impact in 2007 and 2008. This is discussed in some detail in the Chief Executive's Review. DIVIDENDS In the absence of unforeseen circumstances the Board intends to propose a final dividend of 3p per share at the AGM in May. The dividend would be payable on 19 May 2006. BOARD APPOINTMENTS As previously noted, we were pleased to welcome Geoffrey Martin as Group Finance Director and Perry Crosthwaite as a non-executive Director to the Board during the year. We expect to appoint a third non-executive in due course. STOCK EXCHANGE LISTING Melrose successfully moved to a full listing on the London Stock Exchange on 9 December 2005 and is now more appropriately classified in the Engineering Sector. STRATEGY Our core strategy remains unchanged. We are devoting all our resources to increasing the value inherent in the businesses we have acquired. We are confident that this will be reflected in shareholder value over time and it remains our intention to seek an appropriate and efficient way of delivering this value to our shareholders in due course. Christopher Miller 15 March 2006 CHIEF EXECUTIVE'S REVIEW I set out below reports on our six operating divisions. We are very pleased to have acquired these businesses. They each operate in different market sectors and provide their own challenges and opportunities. In a relatively short time we have announced a major capital expenditure project at Hartwell, the closure of PSM's loss making European operations, the closure of three Dynacast operations and the expansion of Dynacast's operations in China and Mexico. We have also made considerable changes to the head office operations, changed senior management and made good progress in significantly improving the group's cash management. In this period we also completed the listing of the Group on the London Stock Exchange which involved a considerable amount of time and expense. Many other projects to improve the Group's operations are underway and I am confident they will lead to an even better performance in the future. The two largest businesses, Dynacast and Aerospace OEM, operate in very different markets, although both are manufacturers of highly specialised technically engineered products. The strategic challenge facing Dynacast is to meet the requirements of its multinational customers, many of whom have been, and will continue, moving their production to low cost countries. For Aerospace OEM the challenge is to continue to provide customer service at a time of very strong growth in the aerospace industry. The four smaller businesses also operate in different market sectors. All four have strengths, but it has been necessary to refocus and reposition them in order to be able to maximise value in the future. DYNACAST 31 December 2005 Turnover Â£105.0m Headline operating profit Â£13.6m Dynacast is a global manufacturer of precision engineered, diecast metal components. The products are manufactured using proprietary die-casting technology and are supplied to a wide range of end markets, including automotive, healthcare, telecommunications and consumer electronics. Since the acquisition of Dynacast in May 2005, trading has been characterised by strong demand in Asia offset by slower demand in Europe and the US. Much of the new business in the Asian market has been generated from North American customers with operations in Asia. We are investing heavily in Asia in order to derive maximum benefit from these favourable conditions. Dynacast benefits from the ability to be able to fully pass on raw material prices for the vast majority of its sales. However, there is a time lag for this selling price recovery, and when raw material prices rise quickly, as they have been since our acquisition, there is a short term negative impact on profits. It should be emphasised that this is purely a timing effect and reverses if raw material prices fall. To put this in context, the price of zinc (three quarters of Dynacast's sales are manufactured using zinc) rose by over fifty per cent from the date of acquisition in May to the year end and has continued to rise since. Dynacast is very pleased to have signed a long term agreement with Gillette to be a key supplier to one of its latest products. This is an exciting development for Dynacast which is manufacturing these products in a purpose built factory on its existing site in Austria. This is in addition to the manufacture of other significant product ranges for Gillette, which continue to be made in Dynacast's facility in Montreal. In China approximately Â£1.5m is being invested to expand Dynacast's capacity in Shanghai. This involves investment in both conventional zinc and aluminium die-casting machines and the space in which to house them. When completed by the middle of this year, Dynacast Shanghai will be a 125,000 square foot manufacturing facility. This rapid expansion in China brings with it many logistical challenges, not the least of which is the general shortage of suitably qualified engineers. We view this as one of the many natural consequences that arise at times of rapid expansion in a developing region. In the circumstances Dynacast management has decided to institute a graduate recruitment programme. In common with global manufacturing trends, demand for Dynacast's products is shifting to these 'low cost countries'. As a result, we continue to review our operating cost base in order to achieve optimum efficiency, whilst at the same time meeting our customers' requirements. Since acquisition we have closed or announced the closure of three manufacturing plants in the UK, Turkey and Taiwan and have announced the expansion of our facilities in China and Mexico. This is an ongoing process and further announcements are likely from time to time. In the past, whilst Dynacast's operations in North America and Asia have each been managed and operated on an integrated and coordinated basis, the European operations have tended to operate somewhat independently. There has now been a senior management reorganisation in Europe in order to achieve a more unified approach to the sales function. A good indication of future revenue for Dynacast is the sales of tooling programmes to customers. We are pleased to report that during 2005 the level of tool sales has been most encouraging. During the year a new divisional finance director was appointed. We believe Dynacast to be a high quality, well managed engineering group and remain confident that it will produce good returns for our investors. AEROSPACE ORIGINAL EQUIPMENT MANUFACTURE ("AEROSPACE OEM") 31 December 2005 Turnover Â£69.4m Headline operating profit Â£14.6m Aerospace OEM supplies safety critical components to the global aerospace industry and is based in the US and Europe. The business has excellent engineering skills, producing value added products selling into niche markets in which it has a strong market presence. The Aerospace OEM Group had an excellent 2005 reflecting an extremely strong year for the industry. Both Boeing and Airbus achieved record numbers of orders with over 1,000 aircraft each. The Group's position as a key supplier to both of the "big two" has continued with the development of applications and products in support of new platforms such as the Boeing 787, Airbus A380 and A350 programmes. These successes were the product of close collaboration and teamwork. Against this backdrop, the Group embarked on a concerted effort to improve the operational performance of its business units in order to meet customer demand and improve margins. As part of this, significant capital investment in machine tool technology and other projects has been committed to provide a step change in productivity. The most important of these is at Hartwell. Previous investments in Mori Seiki milling platforms and Linear Pallet Pool systems helped Hartwell to meet substantially increased orders in 2005. The new investment, amounting to approximately Â£4.5m, will increase Hartwell's capabilities still further. This will reinforce a culture based on speed, flexibility and continuous improvement, helping the company to consolidate its position as an industry leader. During the year, Hartwell developed a new Bifurcation Latch System for both GE and Rolls Royce engine nacelles and is finalising the development of an extra low profile latch system for the Airbus A380, which is expected to go into production in the second half of 2006. At Hasco, the aftermarket arm of Hartwell, attention was focused on improving forecasting models. As a result, the business was able to strategically invest in stocks resulting in higher service levels to customers and increased sales. This improved forecasting had a knock-on benefit of smoothing the production requirements in the Hartwell factories. In addition, this business was provided with dedicated resources to build its FAA certified repair station, which was strongly welcomed by customers and added a new revenue stream for the business. Investment in increased production capacity at TAC led to a very significant rise in shipments to key customers. The resulting reduction in the level of sub-contracting led to an improvement in margins. As part of a focus on new products and markets, TAC developed a range of carbon fibre composite Hold Open Rods for the Airbus 380 and was successful in developing new business in the helicopter market and in supplying sub-assemblies to Asian customers. Tyee's emphasis on and investment in lean manufacturing helped it take on a large increase in business with minimum additional labour, thus resulting in higher margins, whilst at the same time leading to improvements in customer service levels. Tyee developed and patented a new swivel rod assembly which provides the customer with a more compact product that is lighter in weight and much easier to assemble. Tyee also entered into a new partnership with CASA EADS for the sale of its jointly developed, patented sensor rod products for the Coast Guard Deepwater programme. Electromech Technologies made several improvements throughout the year. It upgraded its MRP system and improved product flow in its repair station business units to provide better focus on sales growth. Each of these initiatives is yielding better business performance. Furthermore, Electromech Technologies is actively engaged in developing products for the evolving new 'very light jet' market, in particular the award winning Eclipse 500, which is an exciting development for the aerospace industry. Valley Todeco has benefited from current buoyant market conditions in the fastener spot market. By not taking on longer term arrangements it has been able to benefit from the higher margin opportunities this excess demand in strong market conditions creates. Linread has seen a substantial growth in European demand for its products for airframes and engines. Management's strategy of developing long term agreements with customers, primarily Airbus and Rolls-Royce, has provided better order visibility. However, in particular at Linread Redditch this has created some challenges in recovering, from their customers, sharp increases in titanium prices, and has resulted in manufacturing issues. Aerospace OEM is constantly engaged in either negotiating new contracts with customers or renewing existing ones. During the year a major focus in these negotiations was to secure selling price increases to recover higher raw material costs, principally titanium, aluminium and stainless steel. During the year a new divisional finance director and a new vice president of operations at Hartwell were appointed. These are excellent businesses benefiting from a strong upturn in the aerospace market. The order books across the division are good and support our confidence for the year. We are working with their management to maximise their operational performance. AEROSPACE AFTERMARKET 31 December 2005 Turnover Â£15.2m Headline operating profit Â£0.3m Aerospace Aftermarket provides a 24 hours-a-day, seven days-a-week specialised distribution service offering a range of batteries, aeroplane components, related systems and engineering services to the aerospace aftermarket. On acquisition this division underwent a major change in the top management team which promptly instituted a radical review of the business. The revitalised management team has made good progress. This has resulted in a more disciplined and focused approach to running the division, including a significant cost cutting programme. The results for 2005 have begun to show the effects of this improvement and we believe 2006 will see further progress towards more satisfactory operating margins. The management team has rigorously sought out opportunities to utilise the division's engineering skills to identify and introduce to customers, mostly airlines, cheaper and more efficient access to replacement parts. As well as achieving successes on the sales front, Aerospace Aftermarket also undertook significant internal changes, including a resizing of its organisational structure and the implementation of new IT systems to improve the management of both customer and principal accounts. In addition to the buoyant state of the aerospace industry as a whole, significant opportunities exist for Aerospace Aftermarket to benefit from the growing acceptance by airlines, particularly in Europe and Asia, of PMA parts as a means of securing cheaper replacement parts. MCKECHNIE VEHICLE COMPONENTS ("MVC") 31 December 2005 Turnover Â£31.6m Headline operating profit Â£0.3m MVC manufactures decorated exterior trim products for the US automotive industry, principally coated metal and plastic wheel trims. The difficulties of this industry are well publicised. At MVC a combination of weak sales, costs of introduction of new products and unrecovered raw material costs have led to a poor performance since our acquisition. MVC as a business has, however, been successful in obtaining orders for the potentially high growth wheel cladding products from its customers. This development is exciting in sales terms but has led to costs in 2005 which will only start to be recovered in the second half of 2006 when the new cladding products deliveries increase substantially. The growth in this market sector is also likely to place stress on parts of the supply chain (especially plating) which will pose challenges this year. However, it provides a good opportunity for MVC to utilise its undoubted engineering strength to improve its performance. Since acquisition MVC has only had partial success in recovering raw material costs. It also has a current product base which includes a number of poorly performing older products. Management is currently engaged in a review of product profitability and further action will be taken to improve this position. During 2005 MVC was awarded Daimler Chrysler's Gold Pentastar award for excellence in Quality, Delivery, Cost and Diversity, and it also received recognition from Toyota for meeting the customer's Diversity targets in its purchasing practices. In summary we believe 2006 will be an important year for MVC. The outlook for its new products provides a good opportunity but management is fully aware that growth in profitability equally depends on successfully meeting the challenges posed by poorly performing legacy products and increased raw material prices. MCKECHNIE PLASTIC COMPONENTS ("MPC") 31 December 2005 Turnover Â£27.1m Headline operating profit Â£1.2m MPC is a UK producer of engineered plastic and plastic injection moulded components for products used in a variety of industries, including power tools, IT hardware, food packaging, personal care and automotive. Since acquisition, management has undertaken a thorough review of the business with a view to focusing on those products where it has a competitive advantage and ensuring that the costs of producing individual products are well understood. As a result some agreements with customers have already been renegotiated to secure more commercially acceptable terms. This is an ongoing process but successful progress to date indicates the high quality of MPC's technology and customer service. Management is also keeping a tight control on costs to ensure that resources are efficiently deployed. In terms of new products and business development, MPC from its Stamford Bridge facility is very pleased to have signed a new five year exclusive contract with Diageo plc for the 'widget of tomorrow' for its canned beer products. In addition, our Pickering site has secured a major contract for the supply of interior trim panels for the highly successful Honda Civic. MCKECHNIE PSM ("PSM") 31 December 2005 Turnover Â£21.6m Headline operating profit Â£0.4m PSM manufactures and distributes specialised fasteners and joining systems primarily for the IT and automotive market. We stated in our interim report last September that we were working with PSM management to address the difficulties arising principally from the move of the bulk of PSM's UK production to the Czech Republic, which was carried out prior to our acquisition. At acquisition substantial further progress was required to justify this move. When this didn't happen a decision was taken to close the loss making European operations and this was announced in November 2005. This closure process is going to plan and we expect it will be finalised in the second quarter of 2006. The result is a smaller, more focused and profitable business with approximately 60 per cent of its sales in Asia. We believe this business will be well placed to benefit from growth in Asia and from Asian exports through its sales network in the US and European markets. Significant capital investment has been made in China to increase capacity by investing in new machines and moving to a new 80,000 square foot factory in Wuxi, near Shanghai. In addition to the activities referred to above, there remains approximately Â£10m of specialist fastener sales being manufactured in Europe. These are enjoying steady growth and will be managed separately from the Asian based business. OUTLOOK Dynacast is well positioned to benefit from the strong growth in the Asia Pacific region and from sales of the new Gillette product. Nevertheless, as noted before, although Dynacast can fully pass on the impact of raw material price changes for the vast majority of its sales, the time lag at these times of rapid change can have an impact on profit - upwards and downwards. The ability to recover these costs is evidence of a high quality business with a strong market share, which is looking to the future with confidence. Aerospace OEM is an excellent business operating in very favourable market conditions. I am looking forward to this division delivering a good performance this year. Together with the work in progress at the four smaller businesses, I am very encouraged by our acquisition and I am confident that the Group is well positioned to produce a good result in 2006. David Roper 15 March 2006 FINANCIAL REVIEW 2005 was a year of transition for Melrose PLC. In May 2005, Melrose completed the purchase of the McKechnie and Dynacast Groups for Â£429m plus Â£14.6m of fees. The split of this consideration was Â£244m of equity and Â£199.6m of cash. RESULTS FOR THE YEAR The results for 2005 and 2004 have been compiled using International Financial Reporting Standards (IFRS). The 2005 twelve month results include the trading of the McKechnie and Dynacast Groups for the seven months post acquisition from 26 May 2005. Thus the 2004 information provided in the financial statements is not on a comparable basis. The performance for 2005 is examined in more detail below and in the Chief Executive's Report. The terms "headline operating profit", "headline profit before tax" and "headline earnings per share" are referred to in this section. These have the same definition as operating profit, profit before tax and earnings per share respectively except that they are calculated before charging exceptional costs and intangible asset amortisation other than computer software. Melrose is divided into six divisions namely Dynacast, Aerospace OEM (OEM), Aerospace Aftermarket (Aftermarket), McKechnie Vehicle Components (MVC), McKechnie Plastic Components (MPC), and McKechnie PSM (PSM).The tables below analyse the performance of the Group using these six divisions as the key categories. The Group made sales in 2005 of Â£269.9m. This resulted in a headline operating profit of Â£27.5m representing a 10.2% return on sales. After exceptional costs and intangible asset amortisation the operating profit was Â£8.1m. Revenue for the year ended 31st December 2004 was nil and the operating loss was Â£4.7m. The performance by division was as follows: SPLIT OF SALES AND PROFIT BY DIVISION Sales Headline Return Headline Return on operating on sales operating profit sales % profit % before Â£'m Â£'m depreciation and amortisation Â£'m Dynacast 105.0 13.6 13.0 18.1 17.2 OEM 69.4 14.6 21.0 16.3 23.5 Aftermarket 15.2 0.3 2.0 0.4 2.6 MVC 31.6 0.3 0.9 1.4 4.4 MPC 27.1 1.2 4.4 2.3 8.5 PSM 21.6 0.4 1.9 1.5 6.9 Central Costs - (2.9) - (2.8) - Group 269.9 27.5 10.2 37.2 13.8 All of the divisions made a headline operating profit during Melrose ownership. The return on sales for headline operating profit varied considerably by division from 21.0% in OEM to 0.9% in MVC. The return for the two largest divisions significantly outperformed the four smaller divisions. FINANCE COST AND PENSION CHARGE The Group incurred a total finance cost of Â£6.6m in 2005. This consisted of Â£5.4m of net bank interest, at an average cost of 4.6%, and Â£1.2m for the net finance cost of pensions. TAXATION The Group incurred a tax charge of Â£6.3m on headline profit before tax of Â£20.9m in 2005. This represents an effective tax rate of approximately 30%. A significant proportion of the Group's income is derived by entities subject to US Federal and State taxes, with a combined effective rate of over 38%. At the same time the Group benefits from significant profits being earned by entities subject to corporate income tax rates substantially less than 30% including beneficial start up tax rates in China. The total tax charge for the Group after exceptional items and intangible asset amortisation was Â£5.4m. The Group incurred a cash tax rate of 23% in 2005, significantly below the rate charged in the income statement. A lower cash tax rate is incurred due to utilisation of tax losses available to the Group in the USA. The Group continues to have confidence in its US businesses' ability to generate sustainable profits and consequently a deferred tax asset of approximately Â£29m, in respect of US federal tax losses and other items, has been recognised in the balance sheet. CURRENCY EFFECT ON TRADING The split of sales by major currency is shown in the table below. US $ Euro Sterling Singapore$ China RMB Other Total Sales - Â£'m 123.2 53.5 52.4 10.3 8.7 21.8 269.9 % 46% 20% 19% 4% 3% 8% 100% The Melrose PLC income statement is translated at the average rates of exchange for the period, and the balance sheet at the year end exchange rates. The key exchange rates used for translating the results in the period are as follows: Average rate for the period Year end rate US Dollar 1.77 1.72 Euro 1.47 1.46 Clearly the Group has a significant exposure to movements in exchange rates. The policy to hedge against these exposures is detailed below but for guidance the estimated net translation effect of a ten cent strengthening of either the US Dollar or Euro against sterling would be an approximate Â£1m increase in operating profit on an annualised basis. DIVIDENDS AND EPS Reflecting the Group's performance, in the absence of unforeseen circumstances, the Board intends to propose a final dividend of 3p per share at the AGM in May. This equates to a Â£7.7m dividend payment and would be paid on 19 May 2006. Under International Financial Reporting Standards, this is not accrued for in the 2005 results but will be charged in the 2006 income statement. The headline earnings per share was 9.1p. After charging exceptional costs and intangible asset amortisation a loss per share of 2.4p was incurred. A diluted earnings per share for the year ended 31 December 2005 is also calculated to show the effect of the Melrose management incentive scheme which was approved by shareholders on flotation. The dilution effect was small and the diluted headline earnings per share remained at 9.1p CASH MANAGEMENT AND PERFORMANCE SINCE ACQUISITION The Group places the highest importance on managing cash. The conversion of profits into cash is maximised which ensures the quality of profit is high and working capital is managed to achieve the correct balance between financial efficiency and commercial growth. In addition capital and restructuring projects which have an acceptable payback are actively encouraged and invested in as an important driver to add value. The performance on cash during 2005 is summarised as follows: GROUP CASH FLOW Â£'m Headline operating profit 27.5 Depreciation and computer software amortisation 9.7 Working capital increase (5.5) Net capital expenditure (6.8) ------ Cash generated from operations before exceptional costs 24.9 Exceptional costs and abortive acquisition fees (6.3) Interest and tax (8.6) Pension contribution (5.2) Other (1.3) ------ Increase in cash and cash equivalents including exchange 3.5 ------ The headline operating profit conversion to cash during the period was 91%. This performance was achieved despite moving from the highly leveraged financial structure under the previous ownership. This meant that some increases in working capital were justified to allow the divisions to maximise operational performance. Consequently the Group has increased the working capital investment by Â£5.5m in total in the seven months of ownership. The continued close monitoring of working capital will ensure this is managed efficiently at all times. The Â£1.3m 'other' cash outflow includes the net effect of the new bank loans and the acquisition of the businesses. CAPITAL INVESTMENT AND EXCEPTIONAL COSTS During the year ended 31 December 2005, Â£7.1m of gross capital expenditure has been spent. Asset disposal proceeds amounted to Â£0.3m giving a net capital expenditure of Â£6.8m. Gross capital expenditure represented 73% of depreciation and computer software amortisation. This ratio may rise in 2006 as capital is invested in projects with acceptable paybacks. The most significant capital project approved since the year end (and, therefore, not included in the gross capital spend for 2005) is an investment of approximately Â£4.5m in the Hartwell unit of the OEM division to reduce cost, increase capacity and improve customer service. This investment is expected to start to produce returns in 2007. A key part of the Melrose PLC strategy to add value to the acquisitions is to invest in restructuring projects which further improve efficiencies. In 2005 an exceptional charge of Â£14.2m has been incurred to reflect the projects approved before the year end. These include the closure of certain Dynacast factories and the closure of the loss making European business in the PSM division. The charge consists of cash costs of Â£8.9m and non cash charges of Â£5.3m. This excludes the potential benefit of any asset disposals or working capital reductions. Additional restructuring costs may be incurred in 2006 if further projects are approved. In addition, in 2005 Melrose PLC moved from an AIM listing to the main London Stock Exchange. Listing fees of Â£2.1m were incurred in this process. This together with the Â£14.2m restructuring charge referred to above means the full exceptional costs in 2005 were Â£16.3m, as shown below. Total Cash Non Cash Â£'m Â£'m Â£'m Dynacast Turkey 1.6 0.9 0.7 Taiwan 0.1 0.1 0.0 UK 2.0 1.7 0.3 ---- ---- ---- Sub total 3.7 2.7 1.0 ---- ---- ---- PSM Closure of the European business 10.0 6.1 3.9 Other 0.5 0.1 0.4 ---- ---- ---- Sub total 10.5 6.2 4.3 ---- ---- ---- Listing fees 2.1 2.1 0.0 ---- ---- ---- TOTAL 16.3 11.0 5.3 ==== ==== ==== ONEROUS CONTRACT Prior to the acquisition by Melrose, the Linread Redditch unit of the OEM division entered into a four year customer contract. Production under this contract commenced in the first half of 2005.This contract contained pricing which, to make a profit, required operational improvements to be made and a certain titanium price to be achieved. After reviewing this contract a provision of Â£6.7m was made against potential losses due to titanium prices and poor operational performance. During the last few months considerable progress has been made towards renegotiating improved terms with the customer and improving the operational performance. During 2005 Â£1.1m of this provision was utilised and as at 31 December 2005 the remaining provision was Â£5.6m. INTANGIBLE ASSETS In compliance with International Financial Reporting Standards, the intangible assets of the Group have been valued and capitalised on the balance sheet. The total gross value of intangible assets (excluding computer software) is Â£61.5m which includes the Dynacast brand name and various long term relationships with customers. These are being amortised over their respective useful lives and a charge of Â£3.1m has been incurred in 2005 to reflect this. In addition the Group has computer software with a gross book value of Â£2.7m and goodwill of Â£348.4m. Amortisation of computer software of Â£1.3m was incurred in 2005 but there was no impairment to goodwill in the year. FINANCIAL RISK MANAGEMENT The different types of financial risk that the Group is exposed to have been considered and policies implemented to address them in the most efficient way. These are discussed in turn. LIQUIDITY & FINANCE COST The Group has a Â£200m term loan and a further Â£30m working capital facility. Group net debt at the year end was Â£198.7m. This consisted of cash and short term deposits of Â£15.2m, and interest bearing loans and borrowings of Â£213.9m. The debt facility has three covenants. In addition to a total debt covenant, the group must comply with two further bank covenants, an interest cover covenant and an earnings before interest, tax, exceptional items, depreciation and amortisation to debt covenant. The Group remained comfortably within these at all times during 2005. In addition, the Directors consider that Melrose PLC has sufficient headroom within the agreed facilities for the current size and requirements of the Group. The Group has taken out a two year fixed interest rate swap on its US dollar debt. This was secured in July 2005 at a fixed rate of 4.1%. In addition, instruments were taken out on the Euro and sterling interest rates capping them at 3% and 5% respectively. EXCHANGE RATE EXPOSURE The Group trades in many different currencies and consequently the Group is exposed to movements in exchange rates. The Group policy is to protect against the cash costs of currency movements but not the non cash costs. As a result the Group takes out forward cover against a proportion of its next twelve months anticipated future cash flows where the transaction is not in the natural currency of the division. However, the Group does not protect against the translation risk of its profit and loss account and net assets because this is a non cash cost, other than holding multi-currency debt which provides a partial hedge. The Group adopts hedge accounting which ensures that the exchange movements on the debt, which funds the Group's investments in foreign subsidiaries, are charged direct to reserves. COMMODITY PRICES In common with all engineering groups Melrose is exposed to the movement in base commodity costs. Prices rose on some commodities by a significant amount in 2005. For example the zinc purchase price for Dynacast rose by 53% in the seven months of Melrose ownership. The Group protects itself against movements in these prices by a mixture of three actions. First by passing as many as possible of them on to customers (for example Dynacast has the ability over set time periods to do this on over 85% of its sales), second by using fixed price agreements with suppliers and third by appropriate inventory procurement. CAPITAL STRUCTURE AND DEBT FACILITY The acquisition of the McKechnie and Dynacast Groups was funded using the Group's Â£200m five year committed term loan and Â£244.0m of equity. Headroom for the on-going operation of the Group was provided by a Â£30m five-year working capital facility. At the year-end the net debt was Â£198.7m and had a weighted average financing cost of 4.6%. In June the sterling debt facilities were changed to multi-currency loans to provide a natural hedge against the net assets of the Group, some of which are held in foreign currency. PENSIONS The Group has numerous post retirement benefit obligations which in total have assets of Â£85.0m and liabilities of Â£145.5m giving a net deficit of Â£60.5m. The McKechnie UK defined benefit scheme is the most material scheme for the Group. This scheme has been closed to new members and to future years service but makes up Â£48.6m of the Â£60.5m IAS 19 deficit included in the Group balance sheet at the year end. The assumptions used in calculating the pension deficit are of significant importance and are considered carefully by the board of directors. In line with best practice full disclosure of the assumptions used is made in the financial statements. Consistent with recent thinking in the actuarial profession, the assumption on mortality rates adds on an allowance for a lengthening in current life expectancy. An age rating of three years for each active and deferred member and one year for each pensioner has been added to current mortality tables. This represents a total increase in liabilities of approximately 8%. All the assumptions are considered by the Directors and their advisers to give a fair estimate of the pension valuation for a scheme within this industry and geographical sector. Geoffrey Martin 15 March 2006 CONSOLIDATED INCOME STATEMENT Before exceptional Exceptional costs & costs & Year Year intangible intangible ended 31 ended 31 asset asset December December amortisation* amortisation* 2005 2004 Â£m Â£m Â£m Â£m notes Continuing operations Revenue 2 269.9 - 269.9 - Cost of sales (207.2) - (207.2) - -------- -------- -------- -------- Gross profit 62.7 - 62.7 - Selling and distribution costs (14.5) - (14.5) - Administration expenses 3 (21.3) (3.1) (24.4) (0.9) Share of joint ventures operating profits 0.6 - 0.6 - Other operating costs 3 - (16.3) (16.3) (3.8) -------- -------- -------- -------- Operating profit/(loss) 2 27.5 (19.4) 8.1 (4.7) Finance costs (7.3) - (7.3) - Finance income 0.7 - 0.7 0.5 -------- -------- -------- -------- Profit/(loss)before tax 20.9 (19.4) 1.5 (4.2) Tax (6.3) 0.9 (5.4) - -------- -------- -------- -------- Profit/(loss)for the period from continuing operations 14.6 (18.5) (3.9) (4.2) ======== ======== ======== ======== Attributable to: Equity holders of the parent (3.9) (4.2) Minority interests - - -------- -------- (3.9) (4.2) ======== ======== Loss per share Basic (2.4)p (32.3)p Diluted (2.4)p (32.3)p ======== ======== * Other than computer software amortisation CONSOLIDATED STATEMENT OF RECOGNISED INCOME AND EXPENSE Year Year ended 31 ended 31 December December 2005 2004 Â£m Â£m Currency translation on net investments in subsidiary undertakings 17.5 - Gains on cash flow hedges 1.5 - Actuarial adjustments on pension liabilities 2.2 - -------- -------- Net income recognised directly in equity 21.2 - Transferred to profit and loss account on cash flow hedges (0.1) - Loss for the year (3.9) (4.2) -------- -------- Total recognised income and expense for the year 17.2 (4.2) ======== ======== Attributable to: Equity holders of the parent 17.2 (4.2) Minority interests - - -------- -------- 17.2 (4.2) ======== ======== CONSOLIDATED BALANCE SHEET 31 December 31 December 2005 2004 Â£m Â£m Non-current assets Goodwill and other intangible assets 408.2 - Property, plant & equipment 89.9 - Interests in joint ventures 2.7 - Derivative financial instruments 1.4 - Deferred tax assets 29.1 - -------- -------- 531.3 - Current assets Property held for re-sale 1.6 - Inventories 56.0 - Trade and other receivables 86.3 0.2 Cash and short term deposits 15.2 11.7 -------- -------- 159.1 11.9 -------- -------- Total assets 690.4 11.9 ======== ======== Current liabilities Trade and other payables 94.1 3.4 Interest-bearing loans and borrowings 3.9 - Current tax liabilities 8.7 - Provisions 10.7 - -------- -------- 117.4 3.4 -------- -------- Net current assets 41.7 8.5 -------- -------- Non-current liabilities Interest-bearing loans and borrowings 210.0 - Deferred tax liabilities 19.9 - Retirement benefit obligations 60.5 - Provisions 12.0 - -------- -------- 302.4 - -------- -------- Total liabilities 419.8 3.4 -------- -------- Net assets 270.6 8.5 ======== ======== Equity Issued share capital 0.3 0.1 Share premium account 12.8 12.8 Merger reserve 243.8 - Hedging and translation reserves 18.9 - Accumulated losses (6.1) (4.4) -------- -------- Equity attributable to holders of the parent 269.7 8.5 Minority interest 0.9 - -------- -------- Total equity 270.6 8.5 ======== ======== CONSOLIDATED CASH FLOW STATEMENT Year Year ended 31 ended 31 December December 2005 2004 notes Â£m Â£m Net cash from/(used in) operating activities 4 7.1 (1.7) Investing activities Interest received 0.7 0.6 Dividends received from joint ventures 0.5 - Proceeds on disposal of property, plant and equipment 0.3 - Purchases of property, plant and equipment (7.0) - Purchases of computer software (0.1) - Acquisition of subsidiaries (199.6) - -------- -------- Net cash (used in)/from investing activities (205.2) 0.6 -------- -------- Financing activities Repayments of obligations under finance leases (0.2) - Loan notes repaid (0.3) - New bank loans 201.7 - -------- -------- Net cash from financing activities 201.2 - -------- -------- Net increase/(decrease) in cash and cash equivalents 3.1 (1.1) Cash and cash equivalents at beginning of year 11.7 12.8 Effect of foreign exchange rate changes 0.4 - -------- -------- Cash and cash equivalents at end of year 15.2 11.7 ======== ======== NOTES 1. Status of accounts The financial statements for the year ended 31 December 2005 have been prepared in accordance with the historic cost convention and also in accordance with the accounting policies adopted under International Financial Reporting Standards, including International Accounting Standards and Interpretations (IFRSs) as adopted for use in the European Union. These accounting policies have been applied consistently in all respects throughout the current and prior years. The financial information included in the preliminary announcement does not constitute the company's statutory accounts for the years ended 31 December 2005 or 2004, but is derived from those accounts. Statutory accounts for 2004 have been delivered to the Registrar of Companies and those for 2005 will be delivered following the company's annual general meeting. The auditors have reported on those accounts; their reports were unqualified and did not contain statements under s. 237(2) or (3) Companies Act 1985. While the financial information included in this preliminary announcement has been computed in accordance with 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 in April 2006. The board of directors approved the preliminary announcement on 15 March 2006. 2. Segment information The Group's primary reporting format is business segments and its secondary format is geographical segments. The operating businesses are organised and managed separately according to the nature of the products and services provided, with each segment representing a strategic business unit that offers different products and serves different markets. All reported turnover is derived from one activity, the sale of goods. The Dynacast segment is a supplier of diecast parts and components to a range of industries. The Aerospace OEM segment is a supplier of specialised quality components to the Aerospace industry, the Aerospace Aftermarket segment is a supplier of replacement parts to the world's leading airlines and McKechnie Vehicle Components ("MVC") supplies exterior trim products to major vehicle manufacturers in the USA. McKechnie Plastic Components ("MPC") is a UK supplier of plastic injection moulded and extruded components to the automotive, consumer durable, IT and other industries. The PSM segment manufactures and distributes specialised fasteners globally to automotive and other industries. Transfer prices between business segments are set on an arm's length basis in a manner similar to transactions with third parties. The Group's geographical segments are determined by the location of the Group's assets and operations. Business segments The following table presents revenue and profit information and certain asset and liability information regarding the Group's business segments for the period ended 31 December 2005. Intersegment sales are not material and have not been included in the analysis below. All businesses were acquired in the period therefore no comparatives have been presented. Dynacast OEM After- MPC MVC PSM Other Total Business market segment Â£m Â£m Â£m Â£m Â£m Â£m Â£m Â£m Revenue Segment revenue 105.0 69.4 15.2 27.1 31.6 21.6 - 269.9 ===== ===== ===== ===== ===== ===== ===== ===== Operating profit Segment result 13.6 14.6 0.3 1.2 0.3 0.4 (2.9) 27.5 Exceptional items & intangible asset amortisation other than computer software (4.9) (1.8) - - (0.1) (10.5) (2.1) (19.4) ----- ----- ----- ----- ----- ----- ----- ----- Operating profit 8.7 12.8 0.3 1.2 0.2 (10.1) (5.0) 8.1 ===== ===== ===== ===== ===== ===== ===== ===== Assets and liabilities Segment assets 299.5 218.6 11.9 38.0 42.7 44.0 31.4 686.1 Interests in joint ventures - - - - - 2.7 - 2.7 Property held for re-sale 1.6 - - - - - - 1.6 Liabilities 52.7 38.4 3.4 10.8 10.9 17.3 286.3 419.8 Other segment information Capital expenditure inc computer software 3.7 1.0 0.1 0.5 0.6 1.0 0.2 7.1 Depreciation and computer software amortisation 4.5 1.7 0.1 1.1 1.1 1.1 0.1 9.7 ===== ===== ===== ===== ===== ===== ===== ===== Geographical Area North America Europe Asia Total Â£m Â£m Â£m Â£m Revenue Segment revenue 133.9 108.2 27.8 269.9 ====== ====== ====== ====== Result Segment result 13.4 7.2 6.9 27.5 Exceptional items & intangible asset amortisation other than computer software (3.8) (15.6) - (19.4) ------ ------ ------ ------ Operating profit 9.6 (8.4) 6.9 8.1 ====== ====== ====== ====== Assets and liabilities Assets 395.2 235.2 55.7 686.1 Interest in joint ventures - 1.7 1.0 2.7 Property for resale - 1.6 - 1.6 Liabilities 61.1 343.2 15.5 419.8 Other segment information Capital expenditure inc. computer software 1.4 4.2 1.5 7.1 Depreciation and computer software amortisation 3.8 5.0 0.9 9.7 ====== ====== ====== ====== Other liabilities largely represent the group's borrowings and the McKechnie Pension Plan. 3. Exceptional items and amortisation of intangible assets other than computer software Year ended Year ended 31 December 2005 31 December 2004 Â£m Â£m Dynacast restructure 3.7 - PSM restructure 10.5 - Listing expenses 2.1 - Abortive acquisition expenses - 3.8 ------- ------- 16.3 3.8 ======= ======= In November 2005, the Group announced the closure of the loss making part of the European fastener business of PSM. The total cost of the closure is Â£10.5m. The Dynacast restructuring costs relate to the closure of the UK manufacturing facility, the Taiwan tool-making facility and closure of the Turkish manufacturing facility. The total cost of these closures was Â£3.7m. On 9 December 2005 the Company was admitted to the Official List of the London Stock Exchange - expenses associated with the listing were Â£2.1m. Amortisation of intangible assets other than computer software amounted to Â£3.1m. 4. Cash flow statement 2005 2004 Â£m Â£m Operating profit before exceptional costs and intangible 27.5 (4.8) asset amortisation* Adjustments for: Depreciation of property, plant and equipment 8.4 - Amortisation of computer software 1.3 - Abortive acquisition expenses paid (3.4) - Restructuring costs paid (2.9) - Decrease in provisions (3.2) - Profit of joint ventures (0.6) - ------- ------- Operating cash flows before movements in 27.1 (4.8) working capital Increase in inventories (7.0) - Decrease / (increase) in receivables 0.3 (0.2) Increase in payables 1.2 3.3 ------- ------- Cash generated by operations 21.6 (1.7) Income taxes paid (4.8) - Interest paid (4.5) - Pension contribution paid (5.2) - ------- ------- Net cash flow from operating activities 7.1 (1.7) ======= ======= * other than computer software amortisation This information is provided by RNS The company news service from the London Stock Exchange

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