15th Mar 2006 07:02
Melrose PLC15 March 2006 MELROSE PLC AUDITED RESULTS FOR YEAR ENDED 31 DECEMBER 2005 Melrose PLC today announces its audited results for the year ended 31 December2005. These include the results of the Dynacast and McKechnie businesses for theseven month period from the date of acquisition of 26 May 2005. The highlightsof the results, which are reported under IFRS, are: • Revenue for the period was £269.9m • Operating Profit (before exceptional costs and intangible asset amortisation other than computer software) for the period was £27.5m. After these costs operating profit was £8.1m • 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 • 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 workhas been done and is continuing. Order books are encouraging, particularly inour Aerospace OEM business and we expect good progress in 2006 from ourbusinesses. Our aim in listing Melrose in 2003 was to enable public marketshareholders to participate in value created from the acquisition and subsequentimprovement of businesses as an alternative where appropriate to the successfulprivate 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 theacquisition of the Dynacast Group and the McKechnie Group in May last year for£429m. RESULTS The accounts for the twelve months to 31 December 2005 include the results ofthe Dynacast and McKechnie businesses for approximately seven months since theiracquisition on 26 May 2005. Turnover for the year was £269.9m. Operating profit before exceptional costs andintangible asset amortisation (other than for computer software) was £27.5m("Headline Operating Profit") and basic earnings per share before exceptionalcosts and intangible asset amortisation (other than for computer software) were9.1p ("Headline earnings per share"). After exceptional costs and intangibleasset amortisation the operating profit was £8.1m and the loss per share was2.4p. We are very pleased with the progress since acquisition and are confident wewill be able to create significant shareholder value. The successful move from an AIM listed cash shell company to a fully listedprecision engineering group would not have been possible without the dedicationand skills of our many employees around the world, and we are grateful to themfor their support through this year of transition. Following our post-acquisition reviews, we have initiated a number of actions inall of these businesses which we believe will lead to early enhancement of theirprofitability. These have included management changes, restructuring initiativesand a substantial investment programme, particularly in Aerospace OEM. We wouldexpect to see the benefits of these actions beginning to flow through in thesecond half of this year but with more impact in 2007 and 2008. This isdiscussed in some detail in the Chief Executive's Review. DIVIDENDS In the absence of unforeseen circumstances the Board intends to propose a finaldividend of 3p per share at the AGM in May. The dividend would be payable on 19May 2006. BOARD APPOINTMENTS As previously noted, we were pleased to welcome Geoffrey Martin as Group FinanceDirector and Perry Crosthwaite as a non-executive Director to the Board duringthe 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 9December 2005 and is now more appropriately classified in the EngineeringSector. STRATEGY Our core strategy remains unchanged. We are devoting all our resources toincreasing the value inherent in the businesses we have acquired. We areconfident that this will be reflected in shareholder value over time and itremains our intention to seek an appropriate and efficient way of deliveringthis value to our shareholders in due course. Christopher Miller15 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 indifferent market sectors and provide their own challenges and opportunities. In a relatively short time we have announced a major capital expenditure projectat Hartwell, the closure of PSM's loss making European operations, the closureof three Dynacast operations and the expansion of Dynacast's operations in Chinaand Mexico. We have also made considerable changes to the head officeoperations, changed senior management and made good progress in significantlyimproving the group's cash management. In this period we also completed the listing of the Group on the London StockExchange which involved a considerable amount of time and expense. Many other projects to improve the Group's operations are underway and I amconfident they will lead to an even better performance in the future. The two largest businesses, Dynacast and Aerospace OEM, operate in verydifferent markets, although both are manufacturers of highly specialisedtechnically engineered products. The strategic challenge facing Dynacast is tomeet the requirements of its multinational customers, many of whom have been,and will continue, moving their production to low cost countries. For AerospaceOEM the challenge is to continue to provide customer service at a time of verystrong growth in the aerospace industry. The four smaller businesses also operate in different market sectors. All fourhave strengths, but it has been necessary to refocus and reposition them inorder to be able to maximise value in the future. DYNACAST 31 December 2005 Turnover £105.0m Headline operating profit £13.6m Dynacast is a global manufacturer of precision engineered, diecast metalcomponents. The products are manufactured using proprietary die-castingtechnology and are supplied to a wide range of end markets, includingautomotive, healthcare, telecommunications and consumer electronics. Since the acquisition of Dynacast in May 2005, trading has been characterised bystrong demand in Asia offset by slower demand in Europe and the US. Much of thenew business in the Asian market has been generated from North Americancustomers with operations in Asia. We are investing heavily in Asia in order toderive maximum benefit from these favourable conditions. Dynacast benefits from the ability to be able to fully pass on raw materialprices for the vast majority of its sales. However, there is a time lag for thisselling price recovery, and when raw material prices rise quickly, as they havebeen since our acquisition, there is a short term negative impact on profits. Itshould be emphasised that this is purely a timing effect and reverses if rawmaterial prices fall. To put this in context, the price of zinc (three quartersof Dynacast's sales are manufactured using zinc) rose by over fifty per centfrom the date of acquisition in May to the year end and has continued to risesince. Dynacast is very pleased to have signed a long term agreement with Gillette tobe a key supplier to one of its latest products. This is an exciting developmentfor Dynacast which is manufacturing these products in a purpose built factory onits existing site in Austria. This is in addition to the manufacture of othersignificant product ranges for Gillette, which continue to be made in Dynacast'sfacility in Montreal. In China approximately £1.5m is being invested to expand Dynacast's capacity inShanghai. This involves investment in both conventional zinc and aluminiumdie-casting machines and the space in which to house them. When completed by themiddle of this year, Dynacast Shanghai will be a 125,000 square footmanufacturing facility. This rapid expansion in China brings with it many logistical challenges, not theleast of which is the general shortage of suitably qualified engineers. We viewthis as one of the many natural consequences that arise at times of rapidexpansion in a developing region. In the circumstances Dynacast management hasdecided to institute a graduate recruitment programme. In common with global manufacturing trends, demand for Dynacast's products isshifting to these 'low cost countries'. As a result, we continue to review ouroperating cost base in order to achieve optimum efficiency, whilst at the sametime meeting our customers' requirements. Since acquisition we have closed orannounced the closure of three manufacturing plants in the UK, Turkey and Taiwanand have announced the expansion of our facilities in China and Mexico. This isan ongoing process and further announcements are likely from time to time. In the past, whilst Dynacast's operations in North America and Asia have eachbeen managed and operated on an integrated and coordinated basis, the Europeanoperations have tended to operate somewhat independently. There has now been asenior management reorganisation in Europe in order to achieve a more unifiedapproach to the sales function. A good indication of future revenue for Dynacast is the sales of toolingprogrammes to customers. We are pleased to report that during 2005 the level oftool 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 andremain confident that it will produce good returns for our investors. AEROSPACE ORIGINAL EQUIPMENT MANUFACTURE ("AEROSPACE OEM") 31 December 2005 Turnover £69.4m Headline operating profit £14.6m 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 market presence. The Aerospace OEM Group had an excellent 2005 reflecting an extremely strongyear for the industry. Both Boeing and Airbus achieved record numbers of orderswith over 1,000 aircraft each. The Group's position as a key supplier to both ofthe "big two" has continued with the development of applications and products insupport of new platforms such as the Boeing 787, Airbus A380 and A350programmes. These successes were the product of close collaboration andteamwork. Against this backdrop, the Group embarked on a concerted effort to improve theoperational performance of its business units in order to meet customer demandand improve margins. As part of this, significant capital investment in machinetool technology and other projects has been committed to provide a step changein productivity. The most important of these is at Hartwell. Previous investments in Mori Seikimilling platforms and Linear Pallet Pool systems helped Hartwell to meetsubstantially increased orders in 2005. The new investment, amounting toapproximately £4.5m, will increase Hartwell's capabilities still further. Thiswill 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 GEand Rolls Royce engine nacelles and is finalising the development of an extralow profile latch system for the Airbus A380, which is expected to go intoproduction in the second half of 2006. At Hasco, the aftermarket arm of Hartwell, attention was focused on improvingforecasting models. As a result, the business was able to strategically investin stocks resulting in higher service levels to customers and increased sales.This improved forecasting had a knock-on benefit of smoothing the productionrequirements in the Hartwell factories. In addition, this business was providedwith dedicated resources to build its FAA certified repair station, which wasstrongly welcomed by customers and added a new revenue stream for the business. Investment in increased production capacity at TAC led to a very significantrise in shipments to key customers. The resulting reduction in the level ofsub-contracting led to an improvement in margins. As part of a focus on newproducts and markets, TAC developed a range of carbon fibre composite Hold OpenRods for the Airbus 380 and was successful in developing new business in thehelicopter market and in supplying sub-assemblies to Asian customers. Tyee's emphasis on and investment in lean manufacturing helped it take on alarge increase in business with minimum additional labour, thus resulting inhigher margins, whilst at the same time leading to improvements in customerservice levels. Tyee developed and patented a new swivel rod assembly whichprovides the customer with a more compact product that is lighter in weight andmuch easier to assemble. Tyee also entered into a new partnership with CASA EADSfor the sale of its jointly developed, patented sensor rod products for theCoast Guard Deepwater programme. Electromech Technologies made several improvements throughout the year. Itupgraded its MRP system and improved product flow in its repair station businessunits to provide better focus on sales growth. Each of these initiatives isyielding better business performance. Furthermore, Electromech Technologies isactively engaged in developing products for the evolving new 'very light jet'market, in particular the award winning Eclipse 500, which is an excitingdevelopment for the aerospace industry. Valley Todeco has benefited from current buoyant market conditions in thefastener spot market. By not taking on longer term arrangements it has been ableto benefit from the higher margin opportunities this excess demand in strongmarket conditions creates. Linread has seen a substantial growth in European demand for its products forairframes and engines. Management's strategy of developing long term agreementswith customers, primarily Airbus and Rolls-Royce, has provided better ordervisibility. However, in particular at Linread Redditch this has created somechallenges in recovering, from their customers, sharp increases in titaniumprices, and has resulted in manufacturing issues. Aerospace OEM is constantly engaged in either negotiating new contracts withcustomers or renewing existing ones. During the year a major focus in thesenegotiations was to secure selling price increases to recover higher rawmaterial costs, principally titanium, aluminium and stainless steel. During the year a new divisional finance director and a new vice president ofoperations at Hartwell were appointed. These are excellent businesses benefiting from a strong upturn in the aerospacemarket. The order books across the division are good and support our confidencefor the year. We are working with their management to maximise their operationalperformance. AEROSPACE AFTERMARKET 31 December 2005 Turnover £15.2m Headline operating profit £0.3m Aerospace Aftermarket provides a 24 hours-a-day, seven days-a-week specialiseddistribution 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 teamwhich promptly instituted a radical review of the business. The revitalisedmanagement team has made good progress. This has resulted in a more disciplinedand focused approach to running the division, including a significant costcutting programme. The results for 2005 have begun to show the effects of thisimprovement and we believe 2006 will see further progress towards moresatisfactory operating margins. The management team has rigorously sought out opportunities to utilise thedivision's engineering skills to identify and introduce to customers, mostlyairlines, cheaper and more efficient access to replacement parts. As well as achieving successes on the sales front, Aerospace Aftermarket alsoundertook significant internal changes, including a resizing of itsorganisational structure and the implementation of new IT systems to improve themanagement 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 thegrowing acceptance by airlines, particularly in Europe and Asia, of PMA parts asa means of securing cheaper replacement parts. MCKECHNIE VEHICLE COMPONENTS ("MVC") 31 December 2005 Turnover £31.6m Headline operating profit £0.3m MVC manufactures decorated exterior trim products for the US automotiveindustry, principally coated metal and plastic wheel trims. The difficulties of this industry are well publicised. At MVC a combination ofweak sales, costs of introduction of new products and unrecovered raw materialcosts have led to a poor performance since our acquisition. MVC as a business has, however, been successful in obtaining orders for thepotentially high growth wheel cladding products from its customers. Thisdevelopment is exciting in sales terms but has led to costs in 2005 which willonly start to be recovered in the second half of 2006 when the new claddingproducts deliveries increase substantially. The growth in this market sector isalso likely to place stress on parts of the supply chain (especially plating)which will pose challenges this year. However, it provides a good opportunityfor MVC to utilise its undoubted engineering strength to improve itsperformance. Since acquisition MVC has only had partial success in recovering raw materialcosts. It also has a current product base which includes a number of poorlyperforming older products. Management is currently engaged in a review ofproduct profitability and further action will be taken to improve this position. During 2005 MVC was awarded Daimler Chrysler's Gold Pentastar award forexcellence in Quality, Delivery, Cost and Diversity, and it also receivedrecognition from Toyota for meeting the customer's Diversity targets in itspurchasing practices. In summary we believe 2006 will be an important year for MVC. The outlook forits new products provides a good opportunity but management is fully aware thatgrowth in profitability equally depends on successfully meeting the challengesposed by poorly performing legacy products and increased raw material prices. MCKECHNIE PLASTIC COMPONENTS ("MPC") 31 December 2005 Turnover £27.1m Headline operating profit £1.2m MPC is a UK producer of engineered plastic and plastic injection mouldedcomponents 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 businesswith a view to focusing on those products where it has a competitive advantageand ensuring that the costs of producing individual products are wellunderstood. As a result some agreements with customers have already beenrenegotiated to secure more commercially acceptable terms. This is an ongoingprocess but successful progress to date indicates the high quality of MPC'stechnology and customer service. Management is also keeping a tight control oncosts to ensure that resources are efficiently deployed. In terms of new products and business development, MPC from its Stamford Bridgefacility is very pleased to have signed a new five year exclusive contract withDiageo plc for the 'widget of tomorrow' for its canned beer products. Inaddition, our Pickering site has secured a major contract for the supply ofinterior trim panels for the highly successful Honda Civic. MCKECHNIE PSM ("PSM") 31 December 2005 Turnover £21.6m Headline operating profit £0.4m PSM manufactures and distributes specialised fasteners and joining systemsprimarily for the IT and automotive market. We stated in our interim report last September that we were working with PSMmanagement to address the difficulties arising principally from the move of thebulk of PSM's UK production to the Czech Republic, which was carried out priorto our acquisition. At acquisition substantial further progress was required tojustify this move. When this didn't happen a decision was taken to close theloss making European operations and this was announced in November 2005. Thisclosure process is going to plan and we expect it will be finalised in thesecond quarter of 2006. The result is a smaller, more focused and profitable business with approximately60 per cent of its sales in Asia. We believe this business will be well placedto benefit from growth in Asia and from Asian exports through its sales networkin the US and European markets. Significant capital investment has been made in China to increase capacity byinvesting in new machines and moving to a new 80,000 square foot factory inWuxi, near Shanghai. In addition to the activities referred to above, there remains approximately£10m of specialist fastener sales being manufactured in Europe. These areenjoying steady growth and will be managed separately from the Asian basedbusiness. OUTLOOK Dynacast is well positioned to benefit from the strong growth in the AsiaPacific region and from sales of the new Gillette product. Nevertheless, asnoted before, although Dynacast can fully pass on the impact of raw materialprice changes for the vast majority of its sales, the time lag at these times ofrapid change can have an impact on profit - upwards and downwards. The abilityto recover these costs is evidence of a high quality business with a strongmarket share, which is looking to the future with confidence. Aerospace OEM is an excellent business operating in very favourable marketconditions. I am looking forward to this division delivering a good performancethis year. Together with the work in progress at the four smaller businesses, I am veryencouraged by our acquisition and I am confident that the Group is wellpositioned to produce a good result in 2006. David Roper15 March 2006 FINANCIAL REVIEW 2005 was a year of transition for Melrose PLC. In May 2005, Melrose completedthe purchase of the McKechnie and Dynacast Groups for £429m plus £14.6m of fees.The split of this consideration was £244m of equity and £199.6m of cash. RESULTS FOR THE YEAR The results for 2005 and 2004 have been compiled using International FinancialReporting Standards (IFRS). The 2005 twelve month results include the trading ofthe McKechnie and Dynacast Groups for the seven months post acquisition from 26May 2005. Thus the 2004 information provided in the financial statements is noton a comparable basis. The performance for 2005 is examined in more detail belowand in the Chief Executive's Report. The terms "headline operating profit","headline profit before tax" and "headline earnings per share" are referred toin this section. These have the same definition as operating profit, profitbefore tax and earnings per share respectively except that they are calculatedbefore charging exceptional costs and intangible asset amortisation other thancomputer 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 belowanalyse the performance of the Group using these six divisions as the keycategories. The Group made sales in 2005 of £269.9m. This resulted in a headline operatingprofit of £27.5m representing a 10.2% return on sales. After exceptional costsand intangible asset amortisation the operating profit was £8.1m. Revenue forthe year ended 31st December 2004 was nil and the operating loss was £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 £'m £'m depreciation and amortisation £'mDynacast 105.0 13.6 13.0 18.1 17.2OEM 69.4 14.6 21.0 16.3 23.5Aftermarket 15.2 0.3 2.0 0.4 2.6MVC 31.6 0.3 0.9 1.4 4.4MPC 27.1 1.2 4.4 2.3 8.5PSM 21.6 0.4 1.9 1.5 6.9Central 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 bydivision from 21.0% in OEM to 0.9% in MVC. The return for the two largestdivisions significantly outperformed the four smaller divisions. FINANCE COST AND PENSION CHARGE The Group incurred a total finance cost of £6.6m in 2005. This consisted of£5.4m of net bank interest, at an average cost of 4.6%, and £1.2m for the netfinance cost of pensions. TAXATION The Group incurred a tax charge of £6.3m on headline profit before tax of £20.9min 2005. This represents an effective tax rate of approximately 30%. Asignificant proportion of the Group's income is derived by entities subject toUS Federal and State taxes, with a combined effective rate of over 38%. At thesame time the Group benefits from significant profits being earned by entitiessubject to corporate income tax rates substantially less than 30% includingbeneficial start up tax rates in China. The total tax charge for the Group afterexceptional items and intangible asset amortisation was £5.4m. The Group incurred a cash tax rate of 23% in 2005, significantly below the ratecharged in the income statement. A lower cash tax rate is incurred due toutilisation of tax losses available to the Group in the USA. The Group continues to have confidence in its US businesses' ability to generatesustainable profits and consequently a deferred tax asset of approximately £29m,in respect of US federal tax losses and other items, has been recognised in thebalance 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 TotalSales - £'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 exchangefor the period, and the balance sheet at the year end exchange rates. The keyexchange rates used for translating the results in the period are as follows: Average rate for the period Year end rateUS Dollar 1.77 1.72Euro 1.47 1.46 Clearly the Group has a significant exposure to movements in exchange rates. Thepolicy to hedge against these exposures is detailed below but for guidance theestimated net translation effect of a ten cent strengthening of either the USDollar or Euro against sterling would be an approximate £1m increase inoperating 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 £7.7m dividend payment and would be paid on 19 May 2006. UnderInternational Financial Reporting Standards, this is not accrued for in the 2005results but will be charged in the 2006 income statement. The headline earnings per share was 9.1p. After charging exceptional costs andintangible asset amortisation a loss per share of 2.4p was incurred. A diluted earnings per share for the year ended 31 December 2005 is alsocalculated to show the effect of the Melrose management incentive scheme whichwas approved by shareholders on flotation. The dilution effect was small and thediluted 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 ofprofits into cash is maximised which ensures the quality of profit is high andworking capital is managed to achieve the correct balance between financialefficiency and commercial growth. In addition capital and restructuring projectswhich have an acceptable payback are actively encouraged and invested in as animportant driver to add value. The performance on cash during 2005 is summarised as follows: GROUP CASH FLOW £'mHeadline operating profit 27.5Depreciation and computer software amortisation 9.7Working 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%. Thisperformance was achieved despite moving from the highly leveraged financialstructure under the previous ownership. This meant that some increases inworking capital were justified to allow the divisions to maximise operationalperformance. Consequently the Group has increased the working capital investmentby £5.5m in total in the seven months of ownership. The continued closemonitoring of working capital will ensure this is managed efficiently at alltimes. The £1.3m 'other' cash outflow includes the net effect of the new bankloans and the acquisition of the businesses. CAPITAL INVESTMENT AND EXCEPTIONAL COSTS During the year ended 31 December 2005, £7.1m of gross capital expenditure hasbeen spent. Asset disposal proceeds amounted to £0.3m giving a net capitalexpenditure of £6.8m. Gross capital expenditure represented 73% of depreciationand computer software amortisation. This ratio may rise in 2006 as capital isinvested in projects with acceptable paybacks. The most significant capitalproject approved since the year end (and, therefore, not included in the grosscapital spend for 2005) is an investment of approximately £4.5m in the Hartwellunit of the OEM division to reduce cost, increase capacity and improve customerservice. 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 toinvest in restructuring projects which further improve efficiencies. In 2005 anexceptional charge of £14.2m has been incurred to reflect the projects approvedbefore the year end. These include the closure of certain Dynacast factories andthe closure of the loss making European business in the PSM division. The chargeconsists of cash costs of £8.9m and non cash charges of £5.3m. This excludes thepotential benefit of any asset disposals or working capital reductions.Additional restructuring costs may be incurred in 2006 if further projects areapproved. In addition, in 2005 Melrose PLC moved from an AIM listing to the main LondonStock Exchange. Listing fees of £2.1m were incurred in this process. Thistogether with the £14.2m restructuring charge referred to above means the fullexceptional costs in 2005 were £16.3m, as shown below. Total Cash Non Cash £'m £'m £'mDynacast 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 OEMdivision entered into a four year customer contract. Production under thiscontract commenced in the first half of 2005.This contract contained pricingwhich, to make a profit, required operational improvements to be made and acertain titanium price to be achieved. After reviewing this contract a provisionof £6.7m was made against potential losses due to titanium prices and pooroperational performance. During the last few months considerable progress hasbeen made towards renegotiating improved terms with the customer and improvingthe operational performance. During 2005 £1.1m of this provision was utilisedand as at 31 December 2005 the remaining provision was £5.6m. INTANGIBLE ASSETS In compliance with International Financial Reporting Standards, the intangibleassets of the Group have been valued and capitalised on the balance sheet. Thetotal gross value of intangible assets (excluding computer software) is £61.5mwhich includes the Dynacast brand name and various long term relationships withcustomers. These are being amortised over their respective useful lives and acharge of £3.1m has been incurred in 2005 to reflect this. In addition the Grouphas computer software with a gross book value of £2.7m and goodwill of £348.4m.Amortisation of computer software of £1.3m was incurred in 2005 but there was noimpairment to goodwill in the year. FINANCIAL RISK MANAGEMENT The different types of financial risk that the Group is exposed to have beenconsidered and policies implemented to address them in the most efficient way.These are discussed in turn. LIQUIDITY & FINANCE COST The Group has a £200m term loan and a further £30m working capital facility.Group net debt at the year end was £198.7m. This consisted of cash and shortterm deposits of £15.2m, and interest bearing loans and borrowings of £213.9m.The debt facility has three covenants. In addition to a total debt covenant, thegroup must comply with two further bank covenants, an interest cover covenantand an earnings before interest, tax, exceptional items, depreciation andamortisation to debt covenant. The Group remained comfortably within these atall times during 2005. In addition, the Directors consider that Melrose PLC hassufficient headroom within the agreed facilities for the current size andrequirements of the Group. The Group has taken out a two year fixed interest rate swap on its US dollardebt. 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 themat 3% and 5% respectively. EXCHANGE RATE EXPOSURE The Group trades in many different currencies and consequently the Group isexposed to movements in exchange rates. The Group policy is to protect againstthe cash costs of currency movements but not the non cash costs. As a result theGroup takes out forward cover against a proportion of its next twelve monthsanticipated future cash flows where the transaction is not in the naturalcurrency of the division. However, the Group does not protect against thetranslation risk of its profit and loss account and net assets because this is anon cash cost, other than holding multi-currency debt which provides a partialhedge. The Group adopts hedge accounting which ensures that the exchangemovements on the debt, which funds the Group's investments in foreignsubsidiaries, are charged direct to reserves. COMMODITY PRICES In common with all engineering groups Melrose is exposed to the movement in basecommodity costs. Prices rose on some commodities by a significant amount in2005. For example the zinc purchase price for Dynacast rose by 53% in the sevenmonths of Melrose ownership. The Group protects itself against movements inthese prices by a mixture of three actions. First by passing as many as possibleof them on to customers (for example Dynacast has the ability over set timeperiods to do this on over 85% of its sales), second by using fixed priceagreements with suppliers and third by appropriate inventory procurement. CAPITAL STRUCTURE AND DEBT FACILITY The acquisition of the McKechnie and Dynacast Groups was funded using theGroup's £200m five year committed term loan and £244.0m of equity. Headroom forthe on-going operation of the Group was provided by a £30m five-year workingcapital facility. At the year-end the net debt was £198.7m and had a weighted average financingcost of 4.6%. In June the sterling debt facilities were changed tomulti-currency loans to provide a natural hedge against the net assets of theGroup, some of which are held in foreign currency. PENSIONS The Group has numerous post retirement benefit obligations which in total haveassets of £85.0m and liabilities of £145.5m giving a net deficit of £60.5m. TheMcKechnie 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 makesup £48.6m of the £60.5m IAS 19 deficit included in the Group balance sheet atthe year end. The assumptions used in calculating the pension deficit are of significantimportance and are considered carefully by the board of directors. In line withbest practice full disclosure of the assumptions used is made in the financialstatements. Consistent with recent thinking in the actuarial profession, theassumption on mortality rates adds on an allowance for a lengthening in currentlife expectancy. An age rating of three years for each active and deferredmember and one year for each pensioner has been added to current mortalitytables. This represents a total increase in liabilities of approximately 8%. All the assumptions are considered by the Directors and their advisers to give afair estimate of the pension valuation for a scheme within this industry andgeographical sector. Geoffrey Martin15 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 £m £m £m £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 venturesoperating 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 continuingoperations 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 shareBasic (2.4)p (32.3)pDiluted (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 £m £m Currency translation on net investmentsin 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 oncash 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 £m £mNon-current assetsGoodwill 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 assetsProperty held for re-sale 1.6 -Inventories 56.0 -Trade and other receivables 86.3 0.2Cash and short term deposits 15.2 11.7 -------- -------- 159.1 11.9 -------- --------Total assets 690.4 11.9 ======== ========Current liabilitiesTrade and other payables 94.1 3.4Interest-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 liabilitiesInterest-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 ======== ========EquityIssued share capital 0.3 0.1Share premium account 12.8 12.8Merger 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 £m £m Net cash from/(used in) operating activities 4 7.1 (1.7) Investing activitiesInterest received 0.7 0.6Dividends received from joint ventures 0.5 -Proceeds on disposal of property, plant andequipment 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 activitiesRepayments 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 12.8Effect 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 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 2005or 2004, but is derived from those accounts. Statutory accounts for 2004 havebeen delivered to the Registrar of Companies and those for 2005 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(IFRSs), this announcement does not itself contain sufficient information tocomply with IFRSs. The Company expects to publish full financial statements thatcomply 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 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 is a supplier of specialised quality components to theAerospace industry, the Aerospace Aftermarket segment is a supplier ofreplacement parts to the world's leading airlines and McKechnie VehicleComponents ("MVC") supplies exterior trim products to major vehiclemanufacturers in the USA. McKechnie Plastic Components ("MPC") is a UK supplierof plastic injection moulded and extruded components to the automotive, consumerdurable, IT and other industries. The PSM segment manufactures and distributesspecialised fasteners globally to automotive 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. Business segments The following table presents revenue and profit information and certain assetand liability information regarding the Group's business segments for the periodended 31 December 2005. Intersegment sales are not material and have not beenincluded in the analysis below. All businesses were acquired in the periodtherefore no comparatives have been presented. Dynacast OEM After- MPC MVC PSM Other TotalBusiness market segment £m £m £m £m £m £m £m £m RevenueSegment revenue 105.0 69.4 15.2 27.1 31.6 21.6 - 269.9 ===== ===== ===== ===== ===== ===== ===== =====Operating profitSegment result 13.6 14.6 0.3 1.2 0.3 0.4 (2.9) 27.5Exceptional items & intangible assetamortisation 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 liabilitiesSegment assets 299.5 218.6 11.9 38.0 42.7 44.0 31.4 686.1Interests injoint ventures - - - - - 2.7 - 2.7Property held for re-sale 1.6 - - - - - - 1.6Liabilities 52.7 38.4 3.4 10.8 10.9 17.3 286.3 419.8 Other segment informationCapital expenditure inc computer software 3.7 1.0 0.1 0.5 0.6 1.0 0.2 7.1Depreciation and computersoftware amortisation 4.5 1.7 0.1 1.1 1.1 1.1 0.1 9.7 ===== ===== ===== ===== ===== ===== ===== ===== Geographical Area North America Europe Asia Total £m £m £m £m RevenueSegment revenue 133.9 108.2 27.8 269.9 ====== ====== ====== ======ResultSegment result 13.4 7.2 6.9 27.5Exceptional items & intangible assetamortisation other than computer software (3.8) (15.6) - (19.4) ------ ------ ------ ------Operating profit 9.6 (8.4) 6.9 8.1 ====== ====== ====== ======Assets and liabilitiesAssets 395.2 235.2 55.7 686.1Interest in joint ventures - 1.7 1.0 2.7Property for resale - 1.6 - 1.6Liabilities 61.1 343.2 15.5 419.8 Other segment informationCapital expenditure inc. computer software 1.4 4.2 1.5 7.1Depreciation and computer software amortisation 3.8 5.0 0.9 9.7 ====== ====== ====== ====== Other liabilities largely represent the group's borrowings and the McKechniePension Plan. 3. Exceptional items and amortisation of intangible assets other than computersoftware Year ended Year ended 31 December 2005 31 December 2004 £m £mDynacast 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 theEuropean fastener business of PSM. The total cost of the closure is £10.5m. The Dynacast restructuring costs relate to the closure of the UK manufacturingfacility, the Taiwan tool-making facility and closure of the Turkishmanufacturing facility. The total cost of these closures was £3.7m. On 9 December 2005 the Company was admitted to the Official List of the LondonStock Exchange - expenses associated with the listing were £2.1m. Amortisation of intangible assets other than computer software amounted to£3.1m. 4. Cash flow statement 2005 2004 £m £m Operating profit before exceptional costsand 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 ExchangeRelated Shares:
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