7th Mar 2007 07:03
Melrose PLC07 March 2007 7 March 2007 MELROSE PLC AUDITED RESULTS FOR YEAR ENDED 31 DECEMBER 2006 Melrose PLC, the specialist manufacturing investor, today announces its auditedresults, which are reported under IFRS, for the year ended 31 December 2006. Thecomparative figures for 2005 include only seven months of trading of Dynacastand McKechnie Financial Highlights •Revenue of £507.0 million (2005: £269.9 million) •Headline Operating Profit* of £56.1 million (2005: £27.5 million) •Operating Profit of £49.2 million (2005: £8.1 million) •Headline Profit before Tax* of £43.9 million (2005: £20.9 million) •Profit before Tax of £37.0 million (2005: £1.5 million) •Headline Earnings Per Share* increased by 35% to 12.3p (2005: 9.1p) •Basic Earnings Per Share at 14.7p (2005: loss of 2.4p) •Proposing a Final Dividend of 3.75p per share (2005: 3p). Together with the interim dividend of 2.25p, this gives a full year dividend of 6p (2005: 3p) •Net debt reduced to £162.6 million (2005: £198.7 million) * before exceptional costs, exceptional income, intangible asset amortisationother than computer software and profit on disposal of businesses Other Highlights •Aerospace OEM sale process progressing as planned •Impressive performance from Dynacast •Benefits from improving the underlying quality of all of our businesses beginning to flow following actions taken to: - strengthen management teams - drive operational efficiencies - initiate restructuring programmes - investment to exploit growth opportunities in markets •Good progress achieved at smaller businesses •Strong cash performance Christopher Miller, Chairman of Melrose PLC, today said: "As today's outstanding figures show, much has been achieved in the 21 monthssince acquisition. The sale of our aerospace division is underway but will onlyproceed if we get the right price. Meanwhile we are beginning to look out forinteresting acquisition opportunities." Enquiries:Nick FoxJames HillM: Communications 020 7153 1530 CHAIRMAN'S STATEMENT I am pleased to report Melrose's second set of results since the acquisition ofthe Dynacast Group and the McKechnie Group in May 2005 for £429.0 million. RESULTS These accounts cover the full twelve months to 31 December 2006 although thecomparatives for 2005 include only seven months of trading of Dynacast andMcKechnie. Revenue for the year was £507.0 million (2005: £269.9 million), headline profitbefore tax and headline earnings per share (before exceptional costs,exceptional income, intangible asset amortisation other than computer softwareand profit on disposal of businesses. Exceptional costs and exceptional incomeare those costs of a significant and non-recurring nature or those associatedwith significant restructuring programmes) were £43.9 million (2005: £20.9million) and 12.3p (2005: 9.1p) respectively. After these items the profitbefore tax was £37.0 million (2005: £1.5 million) and the basic earnings pershare were 14.7p (2005: loss of 2.4p). These results are outstanding and are the culmination of much dedication andhard work from employees at all our businesses. On behalf of shareholders Iwould like to thank them all. In his Chief Executive's Review, David Roper describes in more detail thesuccesses of our group companies, particularly Aerospace OEM, as well as thechallenges they faced in the year. A significant part of the highly satisfactory outturn in 2006 was the earlyresult of actions taken by Melrose to improve the underlying quality of thesebusinesses. I mentioned in my report last year that we have strengthenedmanagement, initiated restructuring programmes and invested heavily whereappropriate. Twelve months on, the fruits of these actions are starting to flowthrough as forecast and there is more to come. We never take our eye off theball in this regard and work continues to deliver operational improvementwherever possible. At acquisition we also introduced cash management systems which have led to muchimproved cash generation. DIVIDENDS The Board intends to propose a final dividend of 3.75p per share (together withthe interim dividend announced on 13 September 2006 a total of 6p per share)(2005: 3p per share) at the Annual General Meeting on 14 May 2007. The dividendis payable on 18 May 2007 to shareholders on the register at 20 April 2007. BOARD APPOINTMENTS As previously announced we were extremely pleased to welcome John Grant as ourthird non-executive Director in August 2006. His experience in the manufacturingsector is particularly valuable to us and his appointment completes our Boardfor the time being. AEROSPACE OEM We announced in November 2006 that we had appointed N M Rothschild to advise ona sale of our Aerospace OEM division. This process continues and we are hopefulof a satisfactory outcome for shareholders in the near future. Shareholders should understand, however, that we would be happy to continue toown these businesses for a longer period and we will only proceed if we receivea price that reflects their inherent quality and future prospects. In the event that the sale of Aerospace OEM is successful, it is our intentionto return a significant part of the proceeds to shareholders. STRATEGY We have achieved much in the last 21 months with the businesses we own and whileit continues to be our strategy to realise value at the appropriate time, we arenow turning our thoughts to acquisitions. Although no activity should beexpected in the near term, we will actively pursue opportunities which webelieve would respond to our type of management skills and which would addsubstantial value. Shareholders should be re-assured that we will be as carefulas ever in our selection criteria. In the meantime the Board believes the outlook for our businesses in 2007 isvery encouraging. Christopher Miller7 March 2007 CHIEF EXECUTIVE'S REVIEW I am very pleased with the results of the Group in 2006. Although each of thesix divisions operates in different market sectors and faced varyingopportunities and challenges in the year, the overall performance was very good. I set out on the following pages reports on the six operating divisions. Since my report last year a lot of work has been done and a great deal ofprogress has been made in improving the quality of our six divisions. • At Dynacast the investment in and the expansion of the operations in the Far East have continued apace in order to benefit from the exciting market opportunities and customers transferring production to lower cost countries. In order to maintain operational efficiency this has necessitated an ongoing programme of plant closures in higher cost economies. In addition management have been highly successful in managing the impact of the increased price of zinc on the business during the year. • At Aerospace OEM, although assisted by favourable conditions in the industry, management have focused on delivering significant operational improvements to the businesses by targeted capital expenditure and good management disciplines. A continuing programme of close collaboration with customers on new product development has brought about notable successes in terms of winning business on new platforms. • At the four smaller businesses good progress has been made. The most difficult of these was MVC where progress has been disguised in 2006 principally by poor market conditions in the US automotive industry and commodity prices. OUTLOOK We have owned these businesses for almost two years and although much has beendone in this time to improve them, there are significant opportunities todevelop them further. As Chris Miller says in his Chairman's Statement, if we do not receive a pricefor Aerospace OEM that reflects its inherent quality and future prospects, wewould be more than happy to continue owning this high quality business. Itsoutlook for this year in very good market conditions is excellent. Dynacast is nearing the end of the restructuring programme that we formulatedupon acquisition. It will continue to focus on the growth opportunities in theFar East and to build upon its strong international market share by seekingsynergistic add-on acquisitions. This is a high quality engineering businesswith exciting prospects ahead. Together with the four smaller divisions, where there remains significantoverall scope for further development, our businesses are positioned to performwell in the year ahead. DYNACAST Year Ended Year Ended£'m 31 December 2006 31 December 2005* Turnover 221.7 105.0Headline Operating Profit 25.1 13.6 * seven months of trading for McKechnie and Dynacast Dynacast is a global manufacturer of precision engineered, diecast metalcomponents and assemblies. The products are manufactured using proprietarydiecasting technology and are supplied to a wide range of end markets, includingautomotive, healthcare, telecommunications, consumer electronics and computerhardware and peripherals. The trading performance of Dynacast in 2006 was impressive. Based on unauditedpro-forma management accounts for a full calendar year in 2005, Dynacast'sturnover and operating profit in 2006 were 25% and 12% higher respectively thanin the previous year. This result was achieved in spite of an adverse zinceffect on operating profit of approximately £3 million in 2006. Underlyingtrading in North America and Europe was flat in the year, while in Asia tradingwas much higher than in 2005. Dynacast benefits from the ability to fully recover raw material price increasesfor the vast majority of its sales. Although there is a time lag for thisselling price recovery, management have made significant improvements to thecommercial terms of trade by reducing the time lag - a significant portion ofDynacast's customers are now on monthly price adjustments. To put this incontext, the price of zinc (products made out of zinc represent approximatelythree quarters of Dynacast's sales) more than doubled during 2006, which, asalready mentioned, reduced the profit in the year by about £3 million. Notwithstanding the impact of financing the additional cost of zinc in stock andzinc suppliers seeking to reduce their payment terms, management did anexcellent job in managing their working capital during the year. The increase in zinc prices during 2006 has put the diecasting industry under aconsiderable degree of pressure and a number of Dynacast's competitors areeither for sale or have filed for bankruptcy protection. This presents Dynacastwith the opportunity to make some add-on acquisitions at attractive prices. In 2006, Gillette, one of Dynacast's largest customers, introduced a new razorblade range and Dynacast is the sole supplier of the handle for the non-powerversion of this product. This is being manufactured in a purpose-built extensionto one of Dynacast's factories in Europe and is performing in line with ourexpectations. Notwithstanding this, the demand for the traditional Gilletteproduct produced by Dynacast Canada remained robust. We continued to invest heavily in China, Dynacast's fastest growing market, withsales more than doubling in 2006 based on unaudited proforma managementaccounts, and we have added 40,000 square feet of manufacturing space with anoption to acquire more. During 2007 management will also conduct a review on theestablishment of a presence in Eastern Europe by acquisition or greenfielddevelopment. The rapid growth of the business in low cost countries brings with it manylogistical challenges, not the least of which is the general shortage ofsuitably qualified management. To address this issue, Dynacast has relocatedmanagers from the US and, with a view to the longer term, has implemented aglobal graduate recruitment programme. As Dynacast continues to move its production to low cost countries to bettermeet the needs of its customers, it is necessary to constantly monitor theoperating cost base of the Group. As part of this process, during 2006 wecompleted the closure of our plant in Turkey and the closing of the plant inSpartanburg, South Carolina, is now close to completion. Having spent a considerable amount of time dealing with the effects of the risein the price of zinc during the year, and successfully moving many customersfrom three-monthly to monthly pricing adjustments, management will spend moretime in 2007 developing the business, including seeking out value enhancingadd-on acquisitions. AEROSPACE ORIGINAL EQUIPMENT MANUFACTURE ("AEROSPACE OEM") Year Ended Year Ended£'m 31 December 2006 31 December 2005* Turnover 140.1 69.4Headline Operating Profit 33.1 14.6 * seven months of trading for McKechnie and Dynacast Aerospace OEM supplies safety critical components to the global aerospaceindustry and is based in the US and Europe. The business has excellentengineering skills, producing value added products selling into niche markets inwhich it has a strong presence. The Aerospace OEM Group had an outstanding 2006 reflecting both the operationalimprovements in the companies and the continuing favourable conditions in theaerospace industry. Based on unaudited pro-forma management accounts for a fullcalendar year in 2005, the Group's turnover and operating profit in 2006increased by approximately 20% and 40% respectively over the previous year andoperating margins increased from 20% to 23.6%. This increase in operating profitwould have been even higher but for an adverse foreign exchange translationeffect estimated at £1.1 million. Although orders for aircraft by Boeing and Airbus in the commercial aerospaceindustry were lower in 2006 than in 2005, deliveries were very high and areprojected to remain strong, reflecting the favourable conditions and outlook forthe industry. The Group secured product placement on key platforms during the year on the backof close collaboration with customers on new product development. The Groupcontinued its efforts to improve the operational performance of its businessunits to meet customer demands and at the same time to increase operatingmargins. The Group invested £6.9 million during the year in order to achievethese productivity targets and to increase capacity in the face of astrongly-growing market. The disciplined approach to the management of theoperations and to the working capital requirements of the business has yieldedimpressive results. The largest investment was at Hartwell Corporation where work on the $7.75million investment in new machine tool technology is close to completion andwhich has begun to deliver the expected step-changes in productivity andcapacity. At the same time the company has focused on additional supply sideinitiatives including procurement, which together with the ongoing efficiencyimprovement has resulted in increased levels of customer service and reducedoperating costs. 2006 was one of the best years in Hartwell Corporation's history for developingnew products and winning new business from key customers. The company scoredmajor successes for the B787 nacelle programme with a major customer in Italyand in the US for both the GE and Rolls Royce engine configurations. This newlatch system design addresses a critical load requirement in the thrust reversersection of the nacelle. Hasco, the aftermarket arm of Hartwell Corporation, had a very good year withsales 33% higher than 2005, based on unaudited proforma management accounts.This achievement has resulted from Hasco's strategic focus on customer serviceimprovement through better stock availability and on-time delivery. Hascoachieved an on-time performance target of 98% in the year. Tyee Aircraft was selected as the exclusive supplier of the composite interiorrod business for the Boeing 787 Dreamliner platform. This significant awardresulted from their decision to diversify into composite rod technology andpositions it well to benefit from the market's increasing requirements forhigher specification materials to meet higher fuel efficiency and environmentalstandards. Against this backdrop a $4 million investment programme has beensanctioned to enable Tyee to purchase state-of-the-art machining equipment, aswell as to move the business from two sites into a single bigger building thatwill enable Tyee to meet future demand and improve its operational efficiency.This has already resulted in good feedback from key customers. At TAC the combination of strong demand and success in winning new businessresulted in a 15% increase in sales and a 30% increase in its order book, basedon unaudited, proforma management accounts. TAC won new business on the A400Mand added new customers as a result of its focus on improved customer service.This was achieved by a change of top management that has injected a renewedsense of urgency to the business and in particular to the operational efficiencyof the factory. Electromech Technologies had a highly successful year involving, as with TAC, achange of management at the top bringing a new sense of focus to the business.Electromech is delighted that Eclipse Aviation Corporation received FAAcertification for its E500 'very light jet' and that it delivered its firstaeroplane at the end of the year. Electromech is the sole supplier of certainequipment on this programme and looks forward to a successful future for thisinnovative and exciting development in the commercial aviation industry. Inorder to ramp up production for the Eclipse, Electromech has completed a newplant layout which will enable it to better utilise its existing factory space. Valley Todeco continues to benefit from the buoyant market conditions in thefastener spot market and in addition has been successful in gaining market shareby focusing on customer service levels. This has been achieved by selectivecapital investment and a highly focused approach to operational efficiency inthe factory. The Linread fastener business experienced substantial growth in demand for itsproducts for airframes and engines in the year. Improvements in productionforecasting and scheduling have resulted in significantly better levels ofcustomer service. As a result management were able to negotiate better supplyterms on some long term agreements which, together with increased volumes, haveresulted in an improvement in both operating margins and operating cash flow. We started 2007 with the benefit of an order book that already covers a largeproportion of this year's budgeted sales and which is still growing ahead ofprojected turnover. There is also much further operational improvement to becarried out in this division. With the aerospace cycle projected to remain"strong for longer" and a management team committed to derive maximum advantagefrom this and other operational improvements to its business, this division isvery well placed to prosper. AEROSPACE AFTERMARKET Year Ended Year Ended£'m 31 December 2006 31 December 2005* Turnover 19.3 15.2Headline Operating Profit 0.6 0.3 * seven months of trading for McKechnie and Dynacast In May 2006 Arger Enterprises was sold to Heico Corporation. Following the sale,this division comprises Aero Quality Sales ("AQS"), which is a specialistaircraft battery distribution business based primarily in the US and Europe. Since the sale of Arger, AQS has established itself as a stand-alone businesswith its own dedicated team and website (with the attendant burden of higherongoing costs) focused on providing the best service to its customers, whichinclude a number of major airlines, and to its manufacturing partners, whichinclude Saft, Marathon, Gill and Concorde. Management continue to work on a number of interesting proposals to customers;however, in this very competitive market it is essential to focus on goodmargin, high quality business and to keep a tight control on costs. MCKECHNIE VEHICLE COMPONENTS ("MVC") Year Ended Year Ended£'m 31 December 2006 31 December 2005* Turnover 48.0 31.6Headline Operating (Loss)/Profit (2.3) 0.3 * seven months of trading for McKechnie and Dynacast MVC manufactures decorated exterior trim products for the US automotiveindustry, principally coated metal and plastic wheel trims. As foreshadowed in our Interim Report, MVC produced very poor trading results in2006. The troubles of the US automotive industry are well documented with the slowdownin demand, particularly for large pick-up trucks and sports utility vehicles,leading to plant shutdowns at the 'big three' US auto producers. A combination of weak sales, unrecovered raw material prices, operationalinefficiencies, unprofitable legacy contracts and the costs of the introductionof new products have led to this poor performance. In our Interim Statement we stated that plans for improvement of the businesswere underway. As part of that process we made a number of management andoperational alterations to this business. As a result this business is goingthrough a period of significant change. On a positive note, MVC has recently succeeded in obtaining some raw materialprice recovery and benefited from launching some new wheel cladding products.Management are focusing heavily on improving the operational efficiency of theplant in Nicholasville that manufactures these products, particularly relatingto scrap and overhead reduction. Work is well under way regarding the newplating line at Nicholasville, which is expected to be complete by Septemberthis year as the projected demand for the new product increases still further.This investment is currently on time and budget and its successfulimplementation is a key challenge for this year. 2007 will be an important year for MVC. The outlook for its new productsprovides a good opportunity and whilst there has been considerable progressthere remain challenges in difficult market conditions. We remain optimistic ofimprovement in 2007 and a more satisfactory year in 2008. MCKECHNIE PLASTIC COMPONENTS ("MPC") Year Ended Year Ended£'m 31 December 2006 31 December 2005* Turnover 46.1 27.1Headline Operating Profit 2.4 1.2 * seven months of trading for McKechnie and Dynacast MPC is a UK producer of engineered plastic injection moulded components forproducts used in a variety of industries, including power tools, IT hardware,food and beverage packaging, personal care and automotive. MPC reported a creditable trading result for 2006, with sales and operatingprofit marginally higher than in 2005, based on unaudited, proforma managementaccounts. This was achieved against a background of strongly rising raw materialand energy costs and difficult conditions in the automotive industry. During the year MPC has been highly successful in improving the quality of itsbusiness by focusing on value added products and exiting low margin business tomaintain its competitive advantage in the industry. This has included thedevelopment of highly automated production cells for Diageo, CMP and Wavin, inaddition to an ongoing attention to the re-engineering of manufacturingprocesses. MPC continues to build upon its core skills and seize marketopportunities where they present themselves at appropriate returns. The closure of MPC's Northampton operation and the transfer of some of itsbusiness to the Stamford Bridge facility was completed on time and on budget inthe second half of 2006. The Northampton site was sold in December for £2.4million. MPC is an improved business as a result of the actions that management havetaken in the year. Although conditions in the automotive side of the businessremain challenging, MPC is well placed to meet these and to be able to profitfrom the growth opportunities in the consumer products business. MCKECHNIE PSM ("PSM") Year Ended Year Ended£'m 31 December 2006 31 December 2005* Turnover 31.8 21.6Headline Operating Profit 4.8 0.4 * seven months of trading for McKechnie and Dynacast PSM manufactures and distributes specialised fasteners and joining systemsprimarily for the IT and automotive markets. PSM performed well in 2006, having undergone a major transformation involvingthe closure of its manufacturing operation in the Czech Republic and thetransfer of some of this production to Wuxi in China. PSM is now able tomanufacture these products more efficiently and cheaper and where necessarysupply its multinational customers through distribution centres in Europe andthe US. This closure has transformed PSM's financial performance Management worked hard to secure price increases from customers to recover asignificant proportion of the cost of its major raw material, brass, whichincreased by over 100% in 2006. At the same time management focused onoperational efficiency in the businesses' plants and supply chain initiativeswhilst at the same time providing high levels of customer service. The specialised Thread Locking and Sealing and Canning Brett businesses based inEurope continued to perform steadily in 2006. A new nylon patch-based lockingproduct was successfully launched in France during the year and, as a result ofa shortage of capacity in the company's factory in Cologne, the building of anew production unit in the eastern part of Germany was started, which should becompleted during the first half of 2007. 2006 was a year of major change for PSM and it is now well positioned to profitfrom the exciting opportunities arising in the Asian market. David Roper7 March 2007 FINANCIAL REVIEW The year to 31 December 2006 was the first full year of trading for Melrose PLCafter the acquisition of the McKechnie and Dynacast businesses in May 2005. Theresults for 2006 and 2005 cannot be compared directly as the 2005 resultsinclude only seven months of the enlarged group. The accounts for the Group havebeen compiled using International Financial Reporting Standards (IFRS). GROUP TRADING RESULTS To help the understanding of the results the terms 'headline operating profit','headline profit before tax' and 'headline earnings per share' have been used inthis report. These are calculated before exceptional costs, exceptional income,intangible asset amortisation other than computer software and profit ondisposal of businesses. The Group made sales for the year ended 31 December 2006 of £507.0 million (2005£269.9 million). Headline operating profit was £56.1 million (2005 £27.5million), giving a headline operating profit return on sales of 11.1% (200510.2%). Headline earnings per share grew from 9.1p in 2005 to 12.3p in 2006 andthis 35% increase reflects the growth achieved in Melrose year on year. Afterexceptional costs, exceptional income, intangible asset amortisation other thancomputer software, and profit on disposal of businesses the operating profit was£49.2 million (2005 £8.1 million) and the Basic EPS 14.7p (2005 loss of 2.4p). This performance has been delivered despite many commodity costs such as zinchaving increased in price significantly compared to 2005 and therefore reflectsthe success achieved in both minimising the cost increases with suppliers andpassing them onto customers wherever possible. The higher profit in 2006 wasachieved after incurring a £1.2 million foreign exchange translation loss causedmainly by the strengthening of Sterling against the US Dollar. TRADING RESULTS BY DIVISION A split of sales and profit by division is shown below: SPLIT OF SALES AND PROFIT BY DIVISION Sales Headline Return on Headline Return on operating sales operating sales profit profit before depreciation and amortisation £'m £'m % £'m %----------- ---------- ----------- ----------- ----------- -----------Dynacast 221.7 25.1 11.3 32.1 14.5----------- ---------- ----------- ----------- ----------- -----------OEM 140.1 33.1 23.6 35.9 25.6----------- ---------- ----------- ----------- ----------- -----------Aftermarket 19.3 0.6 3.1 0.7 3.6----------- ---------- ----------- ----------- ----------- -----------MVC 48.0 (2.3) (4.8) (0.5) (1.0)----------- ---------- ----------- ----------- ----------- -----------MPC 46.1 2.4 5.2 4.1 8.9----------- ---------- ----------- ----------- ----------- -----------PSM 31.8 4.8 15.1 5.9 18.6----------- ---------- ----------- ----------- ----------- -----------Central - (7.6) - (7.5) -costs ---------- ----------- ----------- ----------- ----------- Group 507.0 56.1 11.1 70.7 13.9----------- ---------- ----------- ----------- ----------- ----------- The performance by division is discussed in the Chief Executive's Review but thechange in the headline operating profit return on sales percentage from 2005 to2006 is shown below: HEADLINE OPERATING PROFIT RETURN ON SALES Group Dynacast OEM Aftermarket MVC MPC PSM-------- ------ -------- -------- --------- ---------- -------- -------2006 11.1% 11.3% 23.6% 3.1% (4.8%) 5.2% 15.1%------- ------ -------- -------- --------- ---------- -------- --------2005 10.2% 13.0% 21.0% 2.0% 0.9% 4.4% 1.9%------- ------ -------- -------- --------- ---------- -------- -------- The increase in the headline return on sales percentage from 2005 to 2006 wasdriven by the strong growth in the OEM division and the successful restructuringin the PSM division. The reduction in Dynacast from 13.0% in 2005 to 11.3% in2006 occurred because, although the increased cost of zinc has been largelyrecovered, it still dilutes margins and the loss in MVC reflects theunacceptable performance from this division in 2006. LONG TERM INCENTIVE SCHEMES In the 2006 Income Statement, two long term incentive schemes in the Group gaverise to a non- cash charge of £1.9 million (2005 nil). The Melrose Incentive Share Option Plan was approved by shareholders at the timeof Melrose's flotation in October 2003. The charge in 2006 is a non-cash chargewhich represents the amortisation of an estimated, potential future entitlementto the beneficiaries under the scheme. This entitlement would be settled by theissue of shares in Melrose PLC. The assumptions used to calculate the charge were consistent with IFRS 2 forshare based payments. The projected cost to the Group is amortised over the lifeof the scheme and as a result a charge was made in the 2006 Income Statement of£1.6 million which includes a provision for the related costs such as nationalinsurance. In addition, consistent with IAS 19, a £0.3m charge was made for a Dynacast LongTerm Incentive Scheme for the senior management of the Dynacast division which,if certain performance conditions are met, will be paid out in cash in 2009. Any charge in the Income Statement in future periods will vary in size dependenton various factors including the performance of the Melrose share price andDynacast's future performance. TAX The Group has a total tax credit for 2006 of £0.8 million. This consists of atax charge on headline profit before tax of £12.3 million and an exceptional taxcredit of £13.1 million (including a credit of £2.9 million in respect ofexceptional costs and amortisation of intangible assets). The headline tax rate was 28% (2005 30%) on the headline profit before tax of£43.9 million. This headline rate includes income subject to tax in North America at combinedstate and federal tax rates in excess of 28% and income in the Far Eastbenefiting from tax rates below 28%. This rate also benefits from relief forvarious finance costs and tax deductible goodwill in certain territories whichshould also apply in the current financial year. The exceptional tax credit for this financial year has arisen through therecognition of further deferred tax assets in respect of tax losses arising as aresult of the disposal of Arger and corporate restructuring. This exceptionaltax credit is a one off effect and will not be repeated in the current tax year. The availability of tax losses to use against taxable profit means that theGroup cash tax rate is low. In 2006 £4.0 million of tax was paid representing aheadline cash tax rate of approximately 10%. On acquisition of McKechnie andDynacast these losses were treated as an asset and as a result do not affect theheadline tax rate. Thus the headline tax rate is higher than the cash tax rate. CASH GENERATION AND MANAGEMENT Significant progress has been made since acquisition in making sure that strongcash management disciplines are embedded in the Group. To recognise theimportance of this, the divisional management are rewarded on achieving a strongconversion of profit into cash. The performance on cash generation in 2006 is summarised as follows: GROUP CASH FLOW £'mHeadline operating profit 56.1Depreciation and computer software amortisation 14.6Working capital increase (8.4)Total capital expenditure (19.7)Disposal of assets 11.8--------------------------------------------- ----------Headline cash generated from operations 54.4 Disposal of businesses 7.4Restructuring costs (9.2)Interest and tax (11.5)Pension contribution (5.4)Dividends paid (13.5)Exchange & Other 13.9--------------------------------------------- ----------Total decrease in net debt in 2006 36.1--------------------------------------------- ---------- The Group net debt has reduced by £36.1 million from £198.7 million at 31December 2005 to £162.6 million at 31 December 2006. This reduction included a£16.3 million exchange movement caused mainly by the strengthening of Sterlingagainst the US Dollar and the Euro. The headline cash generated from operations represented 97% (2005 91%) ofheadline operating profit during 2006. This was a strong performanceparticularly given the significant spend on capital projects and the rebalancingof working capital to allow the divisions to drive further growth. CAPITAL AND RESTRUCTURING PROJECTS A key driver to adding shareholder value is to invest in capital andrestructuring projects that have suitable paybacks, generally less than threeyears. The table below shows the capital and restructuring spend between the divisionsin 2006: CAPITAL AND RESTRUCTURING SPEND IN 2006 Group Dynacast OEM Aftermarket MVC MPC PSMCapital spend2006 £'m 19.7 6.9 6.9 0.1 3.3 1.2 1.3 ----- --------- ------- ---------- ------- --------- -------2006 % ofdepreciation 135% 99% 246% 100% 183% 71% 118%charge ----- --------- ------- ---------- ------- --------- ------- Restructuringspend £'m 9.2 3.4 - - - 1.2 4.6 ----- --------- ------- ---------- ------- --------- ------- Restructuring projects, amounting to £6.0 million, have been approved in 2006 toadd to the £14.2 million of projects approved in 2005. These projects hadlargely been completed by the end of 2006. The projects to date include theclosure of four Dynacast factories, parts of the European business of the PSMdivision and the Northampton factory of the MPC division. Significant investment in capital expenditure occurred in 2006 with the ratio todepreciation being 135%. The expenditure included the major capital investmentin the Hartwell unit of the OEM division to drive efficiencies throughautomation. In addition a £6.0 million project for the MVC division to increaseits plating capability was authorised. Only £1.0 million of the total £6.0million has been spent in 2006. ASSETS AND LIABILITIES The split of assets and liabilities is shown in the table below: --------------------------------- ----------- -----------Assets & Liabilities 31 December 31 December 2006 2005 £'m £'m--------------------------------- ----------- -----------Goodwill and intangible assets 356.2 408.2--------------------------------- ----------- -----------Property plant and equipment 79.4 89.9--------------------------------- ----------- -----------Net working capital 45.2 48.2--------------------------------- ----------- -----------Net tax asset 2.4 0.5--------------------------------- ----------- -----------IAS 19 Pension deficit (55.4) (60.5)--------------------------------- ----------- -----------Provision and other (10.1) (17.0)--------------------------------- ----------- ----------- 417.7 469.3 =========== =========== These assets and liabilities are funded by: Net Debt 162.6 198.7--------------------------------- ----------- -----------Equity and reserves 255.1 270.6--------------------------------- ----------- ----------- 417.7 469.3 =========== =========== The total net assets of the Group after the deduction of net debt decreased from2005 to 2006 despite the profit made in the year. Although the underlying valueof these net assets in local currencies increased, the sterling equivalentreduced due to an exchange loss of £41.4 million on these assets, caused mainlyby the strengthening of Sterling against the US dollar and the Euro. IMPAIRMENT REVIEW In compliance with IAS 36 the carrying value of the net assets by division havebeen compared to the future cash flows that those assets are expected togenerate. This resulted in justifying the carrying value of each division in theGroup balance sheet. DISPOSAL OF ASSETS AND BUSINESSES In May 2006 the Arger unit of the Aftermarket division, which made a loss in2005, was sold for £6.7 million realising a profit of £3.6m on the sale. In addition proceeds of £6.5 million were raised from the sale of surplus assetsincluding the factory sites which were made vacant as a result of therestructuring projects. Finally a sale and leaseback on the Stamford Bridge, UKsite of the MPC division was completed in 2006, generating a cash inflow of £5.3million and a net profit in the year of £0.7 million. PENSIONS The Group has a number of defined benefit and defined contribution schemesinternationally as part of the compensation package to employees. The net position of the defined benefit schemes is that the current market valueof the assets is insufficient to satisfy the liabilities to members when theyare valued on a basis consistent with IAS 19. On this basis, the net deficit onthe schemes was £55.4 million, of which 82% was derived from the mostsignificant scheme in the Group, the McKechnie UK Pension Scheme ('The Plan').This had assets at the end of December of £83.0 million, liabilities of £128.4million and therefore a deficit of £45.4 million. Progress has been made on improving the position of The Plan during the year andMelrose continues to honour its guarantee to pay annual contributions of £5million into the scheme for the first five years post acquisition in May 2005.An initial payment was made upfront and then quarterly instalments commenced inApril 2006. In addition the company and the trustees have jointly signed a newformal funding valuation and recovery plan during 2006. It is pleasing that there has been a net reduction in the deficit during 2006from £48.6 million to £45.4 million, with the reasons for the movement beingshown below: RECONCILIATION OF THE MOVEMENT IN THE IAS 19 DEFICIT OF THE MCKECHNIE UK PENSIONSCHEME £'m -----------2005 IAS 19 deficit 48.6--------------------------------------------- -----------Interest on liabilities 5.9--------------------------------------------- -----------Expected return on assets (4.8)--------------------------------------------- -----------Investment outperformance (1.4)--------------------------------------------- -----------Change in financial assumptions (1.6)--------------------------------------------- -----------Increase in life expectancy (lower mortality) 2.5--------------------------------------------- -----------Employer contributions (3.9)--------------------------------------------- -----------Other 0.1--------------------------------------------- -----------2006 IAS 19 deficit 45.4--------------------------------------------- ----------- The assumptions used to calculate the IAS 19 deficit are considered carefully bythe Board of Directors and are considered suitable for a scheme of this nature.The key assumptions are disclosed below. THE KEY PENSION ASSUMPTIONS USED FOR THE MCKECHNIE UK PENSION SCHEME Discount rate 5.1%----------------------------------- -------------------Inflation 2.9%----------------------------------- -------------------Pension increases 2.9%----------------------------------- -------------------Life expectancy for a male aged 65 in 2006 83.6----------------------------------- -------------------Life expectancy for a male aged 65 in 2020 85.1----------------------------------- ------------------- The company strategy for the pension scheme is to concentrate on the cash flowsrequired to fund the scheme liabilities as they fall due. These cash flowsextend many years into the future and the ultimate objective is that the totalpool of assets derived from future company contributions and investment strategyallow each cash payment to members to be made when due. Viewed on this basis theinvestment strategy can allow a reasonable time for the assets to grow to helpfund the liabilities. RISK MANAGEMENT The significant financial risks the Group faces have been considered andpolicies have been implemented to best deal with each risk. The four mostsignificant financial risks are considered to be liquidity risk, finance costrisk, exchange rate risk and commodity risk. These are discussed in turn: LIQUIDITY RISK The Group has a £200 million five year committed term loan which was arranged atthe time of the Dynacast and McKechnie acquisition in 2005 and expires in 2010.In addition the Group has a £30 million committed working capital facility andvarious smaller finance lease arrangements for a number of specific assets. Theterm loan is a multicurrency facility split approximately 60% US Dollars, 30%Euros and 10% Sterling. This split was consistent with the split of net assetson acquisition and provides a partial hedge against exchange movements. The year end net debt was £162.6 million, which consisted of £195.9 million ofinterest bearing loans and borrowings less £33.3 million of cash and short termdeposits. The directors consider that the Group has sufficient capital for itscurrent needs. The facility has two main financial covenants. An interest cover covenant and aheadline operating profit before depreciation and amortisation to debt covenant.The Group remained within these covenant tests during 2006. FINANCE COST RISK The Group pays a finance cost on its bank facilities and finance leases. Thebank facilities finance cost is a variable cost linked to LIBOR plus a margin.The margin reduces as the debt to headline operating profit before depreciationand amortisation ratio reduces. To reduce the variable risk of the Group beingable to meet its finance cost the Group has taken out some financial instrumentsto protect the base finance cost prior to the bank margin. A two year fixedinterest rate swap on its US Dollar debt was secured in July 2005 and ends inJuly 2007 at a fixed rate of 4.1%. In addition, instruments were taken out atthe same time for the same duration to cap the Euro finance cost at 3% and theSterling finance cost at 5%. At 31 December the total value of these instrumentswas £1.1 million and in accordance with IAS 32 this value is recognised as anasset on the Group balance sheet. The combination of the above instruments meant that the combined average financecost for the Group in 2006 was approximately 5%. EXCHANGE RATE RISK The Group trades in various different countries around the world and hence theGroup is exposed to many different foreign currencies. The Group thereforecarries an exchange risk that can be categorised into three types, describedbelow. The Board policy to address these risks is to protect against some of thecash risks but not the non cash risks. The main ongoing cash risk is thetransaction risk the Group takes when it invoices a sale in a different currencyto the one in which its cost of sale is incurred in. This is addressed by takingout forward cover against approximately 80% of the anticipated cash flows overthe following twelve months, placed on a rolling quarterly basis. This does noteliminate the cash risk but does bring some certainty to it. The most significant non cash exchange risk is the translation risk when theincome statements and balance sheets of the trading units denominated in aforeign currency are translated into Sterling. The income statements aretranslated at the average rates for the year and the balance sheets at theclosing rate for the year. The rates used in 2006 and 2005 are shown below: EXCHANGE RATES USED IN THE PERIOD Average rate Closing rate -------------- --------------US Dollar-----------2006 1.84 1.96------------------- ----------------- ---------------------2005 1.77 1.72------------------- ----------------- --------------------- Euro------2006 1.47 1.49------------------- ----------------- ---------------------2005 1.47 1.46------------------- ----------------- --------------------- The effect on the key headline numbers in 2006 due to the movement of exchangerates from 2005 to 2006 is summarised as follows: EXCHANGE RATE MOVEMENT 2006 exchange rate versus 2005 exchange rate £'m2006 Effect-------------Sales reduction 8.4---------------------------------- -------------------Headline operating profitreduction 1.2---------------------------------- -------------------Net debt reduction 16.3---------------------------------- -------------------Net asset reduction 41.4---------------------------------- ------------------- For reference guidelines to show the net translation exchange risks that theGroup currently carries are shown below: EXCHANGE RATE GUIDELINES Increase in profit £'mFor every 10 cent strengthening of the US Dollar againstSterling 1.6-------------------------------------- --------------For every 10 cent strengthening of the Euro againstSterling 1.2 No protection is taken other than the hedge of having a multicurrency debtfacility funding these foreign currency trading units. The final most significant exchange risk that the Group takes arises when adivision which is predominantly based in a foreign currency is sold. Theproceeds for those divisions will most likely be received in a foreign currencyand therefore an exchange risk arises if these proceeds are converted back toSterling, for instance to pay a dividend to shareholders. Protection againstthis risk is taken on a case by case basis and no instruments have been takenout currently. It is recognised that this is a cash risk for which the multicurrency loan gives some protection. COMMODITY RISK As Melrose owns various engineering divisions across various sectors thecumulative expenditure on commodities is significant to the Group results. TheGroup addresses the risk of base commodity costs increasing by having suitablepurchase agreements with its suppliers sometimes fixing the price over somemonths in the future. Melrose does not generally enter into financialinstruments on commodities as this is not considered to be the most efficientway of protecting against movements. Instead price rises are passed onto thecustomer wherever possible. Geoffrey MartinGroup Finance Director7 March 2007 CONSOLIDATED INCOME STATEMENT ------------------------ ------ --------- --------- Notes Year ended Year ended 31 December 31 December 2006 2005(1) £m £m------------------------ ------ --------- --------- Continuing operationsRevenue 2 507.0 269.9Cost of sales (389.2) (207.2)------------------------ ------ --------- --------- Gross profit 117.8 62.7 ------------------------ ------ --------- --------- Net operating expenses before the following: (62.5) (35.8) Share of results of joint ventures 0.8 0.6 Intangible asset amortisation (2) (5.2) (3.1) Exceptional costs 3 (7.9) (16.3) Exceptional income 4 3.0 - Profit on disposal of businesses 3.2 ------------------------- ------ --------- --------- Total net operating expenses (68.6) (54.6)------------------------ ------ --------- --------- Operating profit 2 49.2 8.1------------------------ ------ --------- ---------Headline operating profit (3) 2 56.1 27.5------------------------ ------ --------- --------- Finance costs (12.4) (7.3)Finance income 0.2 0.7------------------------ ------ --------- --------- Profit before tax 37.0 1.5Tax 5 0.8 (5.4)------------------------ ------ --------- --------- Profit/(loss) for the year fromcontinuing operations 37.8 (3.9)------------------------ ------ --------- --------- Attributable to:Equity holders of the parent 37.7 (3.9)Minority interests 0.1 ------------------------- ------ --------- --------- 37.8 (3.9)------------------------ ------ --------- --------- Earnings/(loss) per share - Basic 6 14.7p (2.4)p - Diluted 6 14.4p (2.4)p------------------------ ------ --------- --------- (1) includes seven months trading in respect of the McKechnie and Dynacastbusinesses acquired on 26 May 2005. (2) other than computer software amortisation. (3) the terms 'headline operating profit', 'headline profit before tax' and'headline earnings per share' have the same definition as operating profit,profit before tax and earnings per share respectively except that they arecalculated before exceptional costs, exceptional income, intangible assetamortisation other than computer software and profit on disposal of businesses. CONSOLIDATED STATEMENT OF RECOGNISED INCOME AND EXPENSE ------------------------ ---------- --------- Year ended Year ended 31 December 31 December 2006 2005 £m £m------------------------ ---------- ---------Currency translation on net investments in (41.4) 17.5subsidiary undertakingsGains on cash flow hedges 1.4 1.5Actuarial adjustments on pension liabilities 1.2 2.2------------------------ ---------- ---------Net (expense)/income recognised directly in (38.8) 21.2equityTransferred to profit and loss account on cash (1.4) (0.1)flow hedgesProfit/(loss) for the year 37.8 (3.9)------------------------ ---------- ---------Total recognised income and expense for the (2.4) 17.2year------------------------ ---------- ---------Attributable to:Equity holders of the parent (2.5) 17.2Minority interests 0.1 ------------------------- ---------- --------- (2.4) 17.2------------------------ ---------- --------- CONSOLIDATED BALANCE SHEET ------------------------ ------ --------- --------- Notes 31 December 31 December 2006 2005 £m £m------------------------ ------ --------- --------- Non-current assetsGoodwill and other intangible assets 356.2 408.2Property, plant & equipment 79.4 89.9Interests in joint ventures 2.6 2.7Derivative financial instruments 1.4 1.4Deferred tax assets 29.8 29.1------------------------ ------ --------- --------- 469.4 531.3Current assetsProperty held for re-sale - 1.6Inventories 59.3 56.0Trade and other receivables 90.7 86.3Cash and short term deposits 33.3 15.2------------------------ ------ --------- --------- 183.3 159.1------------------------ ------ --------- --------- Total assets 2 652.7 690.4------------------------ ------ --------- --------- Current liabilitiesTrade and other payables 104.8 94.1Interest-bearing loans and borrowings 1.0 3.9Current tax liabilities 8.8 8.7Provisions 2.9 10.7------------------------ ------ --------- --------- 117.5 117.4------------------------ ------ --------- ---------Net current assets 65.8 41.7------------------------ ------ --------- ---------Non-current liabilitiesInterest-bearing loans and borrowings 194.9 210.0Deferred tax liabilities 18.6 19.9Retirement benefit obligations 55.4 60.5Provisions 11.2 12.0------------------------ ------ --------- --------- 280.1 302.4------------------------ ------ --------- ---------Total liabilities 2 397.6 419.8------------------------ ------ --------- ---------Net assets 255.1 270.6------------------------ ------ --------- ---------EquityIssued share capital 0.3 0.3Share premium account 214.6 214.6Merger reserve 42.0 42.0Hedging and translation reserves (22.5) 18.9Accumulated profits / (losses) 19.7 (6.1)------------------------ ------ --------- ---------Equity attributable to holders of theparent 254.1 269.7 Minority interest 1.0 0.9------------------------ ------ --------- ---------Total equity 255.1 270.6------------------------ ------ --------- --------- The financial statements were approved by the Board of Directors on 7 March2007. CONSOLIDATED CASH FLOW STATEMENT ------------------------ --------- --------- --------- Notes Year ended Year ended 31 December 31 December 2006 2005 £m £m------------------------ --------- --------- --------- Net cash from operating activities 7 33.3 7.1 Investing activitiesInterest received - 0.7Dividends received from joint ventures 0.5 0.5Proceeds on disposal of property, plant andequipment 11.8 0.3Purchases of property, plant and equipment (19.4) (7.0)Purchases of computer software (0.3) (0.1)Acquisition of subsidiaries - (199.6)Disposal of businesses 7.4 ------------------------- --------- --------- ---------Net cash from/(used in) investingactivities - (205.2)------------------------ --------- --------- ---------Financing activitiesRepayments of obligations under financeleases (0.6) (0.2)Loan notes repaid (0.5) (0.3)New bank loans - 201.7Decrease in bank loans (3.0) -New finance leases 3.0 -Dividends paid (13.5) ------------------------- --------- --------- ---------Net cash (used in)/from financingactivities (14.6) 201.2------------------------ --------- --------- ---------Net increase in cash and cash equivalents 18.7 3.1 Cash and cash equivalents at beginning ofyear 15.2 11.7Effect of foreign exchange rate changes (0.6) 0.4------------------------ --------- --------- ---------Cash and cash equivalents at end of year 33.3 15.2------------------------ --------- --------- --------- NOTES TO THE ACCOUNTS 1. Status of accounts The financial statements for the year ended 31 December 2006 have been preparedin accordance with the historic cost convention and also in accordance with theaccounting policies adopted under International Financial Reporting Standards,including International Accounting Standards and Interpretations (IFRSs) asadopted for use in the European Union. These accounting policies have beenapplied consistently in all respects throughout the current and prior years. The financial information included in the preliminary announcement does notconstitute the company's statutory accounts for the years ended 31 December 2006or 2005, but is derived from those accounts. Statutory accounts for 2005 havebeen delivered to the Registrar of Companies and those for 2006 will bedelivered following the company's annual general meeting. The auditors havereported on those accounts; their reports were unqualified and did not containstatements under s.237(2) or (3) Companies Act 1985. While the financial information included in this preliminary announcement hasbeen computed in accordance with International Financial Reporting Standards,this announcement does not itself contain sufficient information to comply withIFRSs. The Company expects to publish full financial statements that comply withIFRSs in March 2007. The Board of Directors approved the preliminary announcement on 7 March 2007. 2. Segment information The Group's primary reporting format is business segments and its secondaryformat is geographical segments. The operating businesses are organised andmanaged separately according to the nature of the products and servicesprovided, with each segment representing a strategic business unit that offersdifferent products and serves different markets. All reported turnover isderived from one activity, the sale of goods. The Dynacast segment is a supplier of diecast parts and components to a range ofindustries. The Aerospace OEM segment ("OEM") is a supplier of specialisedquality components to the aerospace industry, the Aerospace Aftermarket("Aftermarket") segment maintain and supply replacement batteries to the world'sleading airlines and McKechnie Vehicle Components ("MVC") supplies exterior trimproducts to major vehicle manufacturers in the USA. McKechnie Plastic Components("MPC") is a UK supplier of plastic injection moulded and extruded components tothe automotive, consumer durable, IT and other industries. The McKechnie PSM("PSM") segment manufactures and distributes specialised fasteners globally toautomotive and other industries. Transfer prices between business segments are set on an arm's length basis in amanner similar to transactions with third parties. The Group's geographical segments are determined by the location of the Group'sassets and operations. The following table presents revenue and operating profit information (which theDirectors believe is the best indicator of performance) and certain asset andliability information regarding the Group's business segments for the year ended31 December 2006. Notes 3 and 4 give details of exceptional costs and income.The results for the year ended 31 December 2005 represent seven months tradingin respect of the McKechnie and Dynacast businesses acquired on 26 May 2005. Business segments Revenue £m Headline operating Operating profit/(loss) £m profit/(loss) (1) £m Year ended Year ended Year ended Year ended Year ended Year ended 31 December 31 December 31 December 31 December 31 December 31 December 2006 2005 2006 2005 2006 2005 Dynacast 221.7 105.0 25.1 13.6 19.5 8.7OEM 140.1 69.4 33.1 14.6 30.8 12.8Aftermarket 19.3 15.2 0.6 0.3 4.2 0.3MVC 48.0 31.6 (2.3) 0.3 (2.5) 0.2MPC 46.1 27.1 2.4 1.2 1.0 1.2PSM 31.8 21.6 4.8 0.4 4.2 (10.1)Central - - (7.6) (2.9) (8.0) (5.0)-------- --------- --------- --------- --------- ---------- --------- 507.0 269.9 56.1 27.5 49.2 8.1--------- --------- --------- --------- --------- ---------- --------- (1) As defined on the income statement 2. Segment information (continued) Total assets £m Total liabilities £m----------- --------------------- --------------------- Year ended Year ended Year ended Year ended 31 December 31 December 31 December 31 December----------- 2006 2005 2006 2005 ----------- ----------- ----------- ----------- Dynacast 308.9 301.1 74.9 52.7OEM 217.9 218.6 32.5 38.4Aftermarket 7.2 11.9 1.8 3.4MVC 35.7 42.7 12.1 10.9MPC 24.7 38.0 11.5 10.8PSM 41.9 46.7 7.2 17.3Central 16.4 31.4 257.6 286.3----------- ----------- ----------- ----------- ----------- 652.7 690.4 397.6 419.8 ----------- ----------- ----------- ----------- Capital expenditure £m Depreciation and computer software amortisation £m Year ended Year ended Year ended Year ended 31 December 31 December 31 December 31 December 2006 2005 2006 2005 ----------- ----------- ----------- ----------- Dynacast 6.9 3.7 7.0 4.5OEM 6.9 1.0 2.8 1.7Aftermarket 0.1 0.1 0.1 0.1MVC 3.3 0.6 1.8 1.1MPC 1.2 0.5 1.7 1.1PSM 1.3 1.0 1.1 1.1Central - 0.2 0.1 0.1----------- ---------- ----------- ----------- ----------- 19.7 7.1 14.6 9.7----------- ---------- ----------- ----------- ----------- Geographical area Revenue £m Headline operating profit (1) £m Operating profit/(loss) £m--------- --------------- --------------- --------------- Year ended Year ended Year ended Year ended Year ended Year ended 31 December 31 December 31 December 31 December 31 December 31 December 2006 2005 2006 2005 2006 2005 North 157.2 133.9 30.3 15.6 23.7 11.8AmericaEurope 285.0 108.2 16.7 6.5 16.4 (9.1)Asia 64.8 27.8 9.1 5.4 9.1 5.4--------- --------- --------- --------- --------- --------- --------- 507.0 269.9 56.1 27.5 49.2 8.1--------- --------- --------- --------- --------- --------- --------- (1) As defined on the income statement Total assets £m Total liabilities £m Year ended Year ended Year ended Year ended 31 December 31 December 31 December 31 December 2006 2005 2006 2005 ----------- ----------- ----------- ----------- North America 377.3 395.2 62.5 61.1Europe 209.9 238.5 317.3 343.2Asia 65.5 56.7 17.8 15.5----------- ----------- ----------- ----------- ----------- 652.7 690.4 397.6 419.8----------- ----------- ----------- ----------- ----------- Capital expenditure £m Depreciation and computer software amortisation £m Year ended Year ended Year ended Year ended 31 December 31 December 31 December 31 December 2006 2005 2006 2005 ----------- ----------- ----------- ----------- North America 5.8 1.4 6.1 3.8Europe 10.7 4.2 6.7 5.0Asia 3.2 1.5 1.8 0.9----------- ---------- ----------- ----------- ----------- 19.7 7.1 14.6 9.7----------- ---------- ----------- ----------- ----------- 3. Exceptional costs Year ended Year ended 31 December 31 December 2006 2005 £m £mOther operating costsDynacast restructure 3.7 3.7PSM restructure - 10.5MPC restructure 2.2 -Listing expenses - 2.1Pre-disposal expenses 2.0 --------------------------- --------- --------- 7.9 16.3 The Dynacast restructuring costs in 2006 relate to the closure of theSpartanburg, South Carolina, USA manufacturing facility. The Dynacastrestructuring costs in 2005 related to the closure of the UK manufacturingfacility, the Taiwan tool making facility and the Turkish manufacturingfacility. The MPC restructure costs relate to the closure of the Northampton manufacturingfacility ("Burnett Polymer Engineering"). The pre-disposal costs relate to the potential sale of divisions. In 2005, the PSM restructuring costs related to the closure of the loss makingpart of the European fastener business of PSM. In 2005, the listing expenses related to the admission to the official list ofthe London Stock Exchange. 4. Exceptional income Year ended Year ended 31 December 31 December 2006 2005 £m £m Other operating incomeOnerous contract provision release 2.3 -Profit on disposal of land and buildings 0.7 - 3.0 - At acquisition, an onerous contract was identified and appropriate provision wasmade based on the circumstances prevailing at acquisition. In July 2006 theterms of the contract have been renegotiated and the improved terms of thecontract have been reflected in the accounts resulting in a release to theincome statement of £2.3 million. During the year, land and buildings held in the MPC business segment were soldin a sale and leaseback transaction resulting in a net profit of £0.7 million. 5. Tax Analysis of (credit)/charge in year: --------------------------- --------- --------- Year ended Year ended 31 December 31 December 2006 2005 £m £m--------------------------- --------- --------- Current tax 5.1 3.0Deferred tax (5.9) 2.4--------------------------- --------- --------- Total income tax (credit)/expense (0.8) 5.4--------------------------- --------- --------- Total tax charge on headline operating profit afterfinance 12.3 6.3costs and incomeExceptional tax credits (10.2) -Total tax on net exceptional costs (1.3) ---------------------------- --------- ---------Total tax in respect of intangible assetamortisation excluding (1.6) (0.9)computer software--------------------------- --------- --------- (0.8) 5.4 6. Earnings per share-------------------------- --------- ----------Earnings Year ended Year ended 31 December 31 December 2006 2005 £m £m Earnings for the purposes of basic earnings pershare 37.8 (3.9)Exceptional items 1.7 16.3Intangible asset amortisation other than computersoftware 5.2 3.1Tax on intangible asset amortisation (1.6) (0.9)Tax on net exceptional costs (1.3) -Exceptional tax credits (10.2) --------------------------- --------- ---------- Earnings for headline earnings per share 31.6 14.6 Number Number-------------------------- --------- ----------Weighted average number of ordinary shares for the 257.1 160.2purposes of basic earnings per share (million)Further shares for the purposes of fully diluted 5.1 0.2earnings per share (million) -------------------------- --------- ---------Earnings per share Year ended Year ended 31 December 31 December 2006 2005 Pence Pence----------------------------------- --------- --------- Basic earnings per share 14.7 (2.4)Fully diluted earnings per share 14.4 (2.4)Headline earnings per share 12.3 9.1Fully diluted headline earnings per share 12.0 9.1----------------------------------- --------- --------- Where basic earnings per share are a loss, the anti-dilutive effect of anyfurther shares is ignored. All earnings are derived from continuing operations. 7. Notes to the cash flow statement ------------------------- --------- --------- 2006 2005 £m £m------------------------- --------- --------- Headline operating profit(1) 56.1 27.5 Adjustments for:Depreciation of property, plant and equipment 14.2 8.4Amortisation of computer software 0.4 1.3Abortive acquisition expenses paid - (3.4)Restructuring costs paid and decrease in other provisions (11.3) (6.1)Profit of joint ventures (0.8) (0.6)------------------------- --------- ---------Operating cash flows before movements in working 58.6 27.1capital Increase in inventories (9.4) (7.0)(Increase)/decrease in receivables (11.3) 0.3Increase in payables 12.3 1.2------------------------- --------- ---------Cash generated by operations 50.2 21.6 Income taxes paid (4.0) (4.8)Interest paid (7.5) (4.5)Pension contributions paid (5.4) (5.2)------------------------- --------- ---------Net cash flow from operating activities 33.3 7.1------------------------- --------- --------- (1) As defined on the income statement Net debt reconciliation At 31 Cash flow Foreign Finance At 31 December exchange leases December 2006 2005 difference £m £m £m £m £m---------------- ------ -------- -------- -------- -------- Cash 15.2 18.7 (0.6) - 33.3Debt duewithin oneyear (3.5) 3.5 - - -Debt due afterone year (209.0) - 16.9 - (192.1)Finance leases (1.4) 0.6 - (3.0) (3.8)---------------- ------ -------- -------- -------- -------- (198.7) 22.8 16.3 (3.0) (162.6)---------------- ------ -------- -------- -------- -------- This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
Melrose