Final Results

5th Mar 2008 07:07

Melrose PLC05 March 2008 5 March 2008 MELROSE PLC AUDITED RESULTS FOR YEAR ENDED 31 DECEMBER 2007 Melrose PLC today announces its audited results, which are reported under IFRS,for the year ended 31 December 2007. Financial Highlights* •Disposal of McKechnie Aerospace and PSM at a profit of over £190 million •Return of £220 million to shareholders on 31 August 2007 •Revenue of £344.0 million (2006: £323.6 million) •Headline Operating Profit** of £24.5 million (2006: £19.2 million) •Operating Profit of £18.7 million (2006: £11.9 million) •Headline Profit before Tax** of £27.0 million (2006: £12.1 million) •Profit before Tax of £21.2 million (2006: £4.8 million) •Basic Earnings Per Share of 7.4p (2006: 1.2p) •Basic Earnings Per Share for continuing and discontinued group of 102.1p (2006: 14.7p) €2007 Proforma Earnings Per Share*** of 14.3p •Proposing a Final Dividend of 4.25p per share (2006: 3.75p). Together with the interim dividend of 2.5p, this gives a full year dividend of 6.75p (2006: 6p) up 12.5% •Net cash of £32.4 million (2006: net debt of £162.6 million) * continuing operations only unless otherwise stated** before exceptional costs, exceptional income and intangible asset amortisation other than computer software*** defined in section "Earnings per Share and Number of Shares in Issue" of the Finance Director's Review Other Highlights Christopher Miller, Chairman of Melrose PLC, today said: "2007 has been a busy and successful year. We've given a good demonstration ofthe validity of our business model by returning £220 million to our shareholdersafter the successful sale of McKechnie Aerospace. We've also had a great set ofresults and are optimistic about 2008. It was also exciting for us to announce this morning that we are moving forwardwith FKI. Although there's some way to go yet before the deal is concluded, itwould give us the opportunity for more growth and value creation in the future." An Analysts' meeting will be held today at 11.00 am at Investec, 2 GreshamStreet, London EC2V 7QP Enquiries: Nick MilesJames HillM: Communications 020 7153 1530 CHAIRMAN'S STATEMENT I am pleased to report Melrose's fifth set of annual results since flotation inOctober 2003. RESULTS FOR THE CONTINUING GROUP Following the sale of McKechnie Aerospace and Aerospace Aftermarket divisions("McKechnie Aerospace") and the majority of our PSM division ("PSM") (togetherthe "Disposals"), these accounts report the results of our businesses for thetwelve months to 31 December 2007 and the relevant comparatives for the previousyear. They take into account the effect of the return of capital and shareconsolidation during August 2007. Revenue for the year was £344.0 million (2006: £323.6 million). Headline profitbefore tax (before exceptional costs, exceptional income and intangible assetamortisation other than computer software) was £27.0 million (2006: £12.1million). After these items the profit before tax was £21.2 million (2006: £4.8million) and basic earnings per share were 7.4p (2006: 1.2p) Further explanation of these results is provided in the Finance Director'sReview. Our businesses and their employees have worked very hard to produce these goodresults and I thank them on behalf of our shareholders. 2007 was a very busy year in which much was achieved. In May we sold McKechnieAerospace for £428 million and PSM for £30 million realising a combined profitof over £190 million in the two years since acquisition. In line with our statedobjectives, we returned £220 million of capital to shareholders in August.Together with dividends this means we have returned to shareholders 95% of theequity raised since Melrose's inception in 2003. At the same time as the returnof capital, shares in issue were reduced by means of a share consolidation.Notwithstanding this repayment of capital, Melrose had year end net cash of£32.4 million, compared with net debt of £162.6 million at the end of last year. In such an active year it would be easy to overlook the strong performances ofour continuing businesses. All three divisions have bettered their results oflast year, and although MVC continues to trade in a very difficult market placein the USA, we are optimistic that this overall improvement will continue into2008. Cash generation remains very strong. David Roper reports in more detail on each of our businesses in his ChiefExecutive's Review. DIVIDENDS The Board intends to propose a final dividend of 4.25p per share (together withan interim dividend of 2.5p per share paid on 16 November 2007, a total of 6.75pper share) (2006: 6.0p per share) at the Annual General Meeting on 7 May 2008.The dividend is payable on 16 May 2008 to shareholders on the register at 14March 2008. STRATEGY AND OUTLOOK Our model is to acquire businesses which we understand and which are capable ofsubstantial improvement under our ownership. It is an important part of thismodel that we return capital to shareholders as and when value has been createdand realised. We are pleased to have been able to give an effectivedemonstration of this during 2007. I said last September that we were well placed to pursue suitable acquisitionsand that market conditions were potentially aiding us in this respect. Thatcontinues to be the case and we are optimistic of concluding one or moreacquisitions in the next twelve months which will give us the opportunity forsubstantial further growth and profitability. Christopher Miller 5 March 2008 CHIEF EXECUTIVE'S REVIEW I am very pleased with the results of the Group in 2007. A lot happened duringthe year and the make-up of the Group is markedly different from this time lastyear. The sale of the McKechnie Aerospace division and PSM in May, resulting in aprofit to Melrose of over £190 million after only two years in our ownership,was very gratifying. This enabled us to return £220 million to shareholders inAugust. This means that shareholders have received by way of distribution orreturn of capital 95% of the equity capital raised since Melrose floated inOctober 2003. In addition, the trading result for the Group in 2007 was good. I set out belowthe reports on the divisions and would mention the following highlights: • At Dynacast a major investment programme in South China is underway to take advantage of the continuing strong trading conditions in the Far East. Having completed the restructuring of its operational base and turned its attention to bolt-on acquisitions, it is pleasing to report that Dynacast has successfully completed two such acquisitions in the second half of the year - the search continues for more. • At MVC, although market conditions remain extremely challenging, operational improvements continue to be made and the new chrome plating line was successfully introduced, which assisted the launch of MVC's new plasticlad product. • At MPC the benefits of operational restructuring and of focusing on higher margin value added products are coming through well. New product introductions, supported by targeted capital investment, were notable achievements. OUTLOOK Dynacast continues to show the quality of its business franchise by reportingincreased profits and margins, even in the face of large raw material pricerises. In addition to its active ongoing capital investment programme,particularly in the Far East, the company is looking to make furthervalue-enhancing bolt-on acquisitions. At both MVC and MPC the strategy is toexploit the high level of technical engineering and design expertise in thebusinesses, supported by bold but highly focused capital investment, to deliverimproved returns. As Chris Miller says in his Chairman's Statement, having successfully soldbusinesses and returned capital to our shareholders, we have been able to showhow our business model works in practice. Our strong financial condition andsolid trading performance position us well to take advantage of the currentmarket conditions to pursue acquisition opportunities. I am most encouraged by the trading performance of the Group and I look forwardto further achievements in the year ahead. DYNACAST Year ended 31 December 2007 2006£m Revenue 235.9 221.7Headline Operating Profit 28.9 25.1 Dynacast is a global manufacturer of precision engineered, die-cast metalcomponents and assemblies. The products are manufactured using proprietarydie-casting technology and are supplied to a wide range of end markets,including automotive, healthcare, telecommunications, consumer electronics andcomputer hardware and peripherals. Dynacast performed well in 2007. Revenue and headline operating profit were upby 6.4% and 15.1% respectively over the previous year. These results are aftersuffering an exchange loss on translation (resulting from the weakness of the USdollar) of £0.5 million and exchange losses on transactions (primarily as aresult of the increased strength of the Canadian dollar against the US dollar)of £1 million. Whereas Dynacast's 2006 headline operating profit was adversely impacted byapproximately £3 million because of the non-recovery of zinc cost (the company'smajor raw material), management's actions in the second half of 2006 in aligningmovements in zinc input prices with selling prices to customers have to a largedegree removed the effect of movements in the price of zinc from headlineoperating profit. Europe was ahead of expectations, buoyed generally by favourable economic andtrading conditions in its markets. In particular, Germany, Austria and Spainperformed strongly and finished ahead of target. We were pleased with therecovery of Dynacast France after having transferred some of its less profitablework to lower cost countries. 2007 was the first full year of running theGillette "Fusion" product, produced in a purpose-built factory in Austria, andvolumes were in line with original predictions. Performance in North America was reasonable, both at the revenue and headlineoperating profit level. Market conditions in this region are more difficult atpresent than in both Europe and Asia, largely due to a higher proportion ofsales to the automotive sector. It was encouraging to see in the early part ofthe year the operational benefits from the closure of the Spartanburg factory inSouth Carolina. Of special note is the continuing robust sales of handles forthe "Mach III" Gillette razor, which has been produced in our factory inMontreal for ten years. In Asia, trading continued to be buoyant with Dynacast China leading the waywith revenue and headline operating profit up 46.9% and 59.7% respectively overthe previous year. Singapore performed particularly well in winning new sales toreplace products that reached their "end-of-life" earlier in the year. In viewof the continuing strong demand in the region, a capital expenditure project hasbeen approved to invest approximately £4 million over the next four years in anew manufacturing facility in Southern China. When Melrose acquired Dynacast in May 2005 we embarked upon a restructuringprogramme to align Dynacast's manufacturing sites with its customer base, whichitself was continuing to migrate production to lower cost countries. This phaseis now complete and we have seen Dynacast's return on sales (on a constant zincand currency basis) improve significantly since acquisition to 14.8%. Followingthis, in order to further develop the business and generate additional revenuegrowth, Dynacast is now focusing on add-on acquisition opportunities. The marketthat Dynacast operates in is very fragmented and affords considerableconsolidation opportunities. Two businesses, QZD and Techmire (both based in Montreal, Canada), were acquiredin September 2007 for a total cost of £8.7 million. QZD, a precision zincdie-casting business, has been successfully integrated into Dynacast's Montrealfactory. Techmire is a designer and manufacturer of multiple-slide die-castingmachines and will be operated as a stand-alone business. Techmire's overheadshave already been significantly reduced and a new site has been found close tothe existing Dynacast site to rehouse the production facilities. Bothacquisitions are expected to improve the profitability of Dynacast's operations. Management are continuing to look for suitable acquisition opportunities(including Eastern Europe) and to invest heavily in the fast growing Far Eastmarkets, while maintaining their focus on achieving the highest levels ofoperating efficiency in the business. Dynacast benefits from a strong marketshare, a well diversified geographic and product sector exposure and excellentcash generation qualities. We are confident that management will deliver anotherstrong set of results in 2008. MVC Year ended 31 December 2007 2006£m Revenue 55.4 48.0Headline Operating Loss (0.5) (2.3) MVC manufactures decorated exterior trim products for the US automotiveindustry, principally coated metal and plastic wheel products. Although MVC reported substantially improved results in 2007 over 2006, it isdisappointing that the company did not reach breakeven. MVC's new products in2007 were targeted towards the smaller crossover vehicles rather than the SUVsand pick-up trucks, which provided it with growth in a difficult marketplace.Unfortunately the benefits of this growth have been reduced principally byhigher raw material costs. Whilst considerable progress was made by MVCmanagement to recover these raw material costs in 2007 a combination of thegrowth in output and the size of the increases resulted in higher overall costs.Improved levels of recovery negotiated during the latter part of 2007 and thefall in raw material costs back toward the prices at the beginning of 2007should help to continue the progress of this business towards a moresatisfactory result. A key challenge for MVC management during 2008 will beaddressing the profitability of a number of legacy products. The highlight of the year was the successful introduction in September of thenew chrome plating line at our Nicholasville plant. This was critical inenabling MVC to meet the high level of contracted orders from customers for thenew plasticlad product. In addition, significant improvements have been made inthe wheel assembly process at Nicholasville which bode well for the forthcomingnew product launches in 2008. Our Newberry plant continues to deliver a good performance. It coped well withthe transfer of the duraclad assembly line from Nicholasville, which improvedcapacity utilisation, and has flexed its operational cost base well to matchdemand. The operational improvement in 2007 has been pleasing. However, even allowingfor its good position in a niche market, conditions in the US automotive marketare tough. With constant attention to the basics and the new plating line gearedup to meet the projected demands of the new programmes coming on stream in thesecond half of 2008, we expect a continuing improvement. MPC Year ended 31 December 2007 2006£m Revenue 52.7 53.9Headline Operating Profit 3.9 3.0 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 and automotive. Following the sale of the fastenerdivision of McKechnie PSM in May 2007 the results of both the PSM Thread Lockingand Sealing business (which has been renamed Prelok) and Canning Brett areincluded in this section. MPC has delivered a strong set of results in 2007. Although the closure of theNorthampton plant in 2006 resulted in a fall in revenue, this action had thedesired effect of a more profitable business with headline operating profit upby 30% over 2006. MPC continues to focus its engineering expertise on more automated, highlyengineered, value added products and processes, whilst building strong, longterm relationships with its customers. This strategy has enabled MPC todifferentiate itself from its competitors. The Stamford Bridge facility has had a good year as a result of its rigorousadherence to the above strategy, supplemented by a substantial capitalexpenditure programme. In addition to the successful development of new highlyautomated production cells together with process re-engineering for a number ofkey customers, new long term contracts have been signed with Diageo and Scotcofor the supply of "widgets" for use in cans and bottles. The quality of the business at MPC's automotive operation at Pickering hasimproved notably during the year - headline operating profit has more thandoubled on broadly unchanged sales. Again, focusing on the core strategy of atargeted capital investment programme together with emphasis on pricingdiscipline to recover input costs has paid dividends. Prelok's results in the year were most encouraging. With production volumesoutstripping capacity in its Cologne facility, a new production unit located inGermany became fully operational in July 2007. This new facility, close to thePolish and Czech borders, is well positioned to profit from new businessopportunities in the burgeoning Eastern European markets. With a favourable start to 2008 and further opportunities in the UK industryafforded by the demise of certain competitors, we expect MPC to continue tobuild on its strong foundation and to deliver another good performance thisyear. David Roper5 March 2008 FINANCE DIRECTOR'S REVIEW The year to 31 December 2007 included the disposal of the McKechnie Aerospaceand PSM division. Taken together, these sold businesses constituted 36% of groupsales and 66% of group headline operating profit in 2006. Consequently the Melrose Group is now significantly smaller than in 2006, and incompliance with IFRS 5, the trading results for the Group are split intocontinuing operations and discontinued operations. GROUP TRADING RESULTS - CONTINUING OPERATIONS The continuing operations comprise Dynacast, McKechnie Vehicle Components (MVC)and McKechnie Plastic Components (MPC). The latter division now includes theremaining smaller part of PSM, trading as Prelok, and Canning Brett. To help understand the results, the term 'headline' has been used in thisReview. This refers to numbers that are calculated before exceptional costs,exceptional income and intangible asset amortisation other than computersoftware. The Group achieved revenue from continuing operations for the year ended 31December 2007 of £344.0 million (2006: £323.6 million) representing an increaseof £20.4 million, 6.3% over the previous year or 9.7% at constant currency. Headline operating profit grew by 27.6% to £24.5 million (2006: £19.2 million).This represents a headline operating profit return on revenue of 7.1% (2006:5.9%), a 1.2 percentage point increase on the previous year. At constant currency the profit growth in 2007 was 30.2% as a £0.5 milliontranslation exchange loss was incurred, largely due to the weakness of the USdollar. After exceptional costs, exceptional income and intangible asset amortisation,the operating profit was £18.7 million (2006: £11.9 million). TRADING RESULTS BY DIVISION The improvement in the trading results has been driven by stronger performanceat each division. A split of revenue and headline operating profit by divisionis as follows: ---------------------------------------------------------------------------------- Revenue Headline Return on Sales Headline Return on Sales Operating Operating Profit Profit before depreciation & amortisation £m £m % £m %----------------------------------------------------------------------------------Dynacast 235.9 28.9 12.3% 35.7 15.1%MVC 55.4 (0.5) (0.9%) 1.4 2.5%MPC 52.7 3.9 7.4% 5.5 10.4%Central - (5.8) - (5.7) -CostsCentral - LTIPS - (2.0) - (2.0) -Group 344.0 24.5 7.1% 34.9 10.1% The performance by division is discussed in more detail in the Chief Executive'sReview. The change in headline operating profit return on revenue percentagefrom 2006 to 2007 is shown below. Headline operating profit return on revenue: Group Dynacast MVC MPC % % % %2007 7.1 12.3 (0.9) 7.4--------------------------------------------------------------------------------2006 5.9 11.3 (4.8) 5.6 The increase in the continuing Group return on revenue has been driven by animprovement in all three divisions. CASH GENERATION AND MANAGEMENT Melrose places strong emphasis on cash generation and management. This isachieved by the careful monitoring of the key cash and working capital metricsin each division and by ensuring that divisional management is incentivised toturn profit into cash. Since the acquisition of the Dynacast and McKechnie businesses the profitconversion to cash for the continuing Group has averaged 94% (post workingcapital movement and capital expenditure). This high conversion ratio has beenachieved even after spending in excess of depreciation on capital projects.Dynacast in particular, which now trades with only two weeks of net workingcapital, has excellent profit conversion to cash averaging 107% during Melroseownership. Since acquisition Dynacast has generated £68 million in cash afterall working capital movement, capital expenditure and restructuring costs. The cash generation performance in 2007 is summarised as follows: £m--------------------------------------------------------------------------------Headline operating profit 24.5Depreciation and computer software amortisation 10.4Working capital increase (2.9)Total capital expenditure (16.0)Disposal of assets 0.4--------------------------------------------------------------------------------Headline cash generated from operations 16.4 Disposal of businesses 446.7Capital distribution paid (212.6)Acquisition of subsidiaries (8.7)Restructuring costs and spend on other provisions (1.9)Interest and tax (2.8)Pension contributions (26.1)Dividends paid (13.0)Exchange & other (including discontinued operations) (3.0)--------------------------------------------------------------------------------Total movement in net debt/net cash in 2007 195.0 During 2007, 67% of headline operating profit was converted into cash (postworking capital and capital expenditure). This was despite the exceptionallyhigh capital spend in MVC during the year. Adjusting for this, the profitconversion to cash was 94% in 2007, in line with the longer term Melroseaverage. CAPITAL AND RESTRUCTURING PROJECTS Since the acquisition of the Dynacast and the McKechnie businesses, Melrose hasspent significant amounts on capital and restructuring projects, averagingapproximately £25 million per year, equal to 1.3x depreciation on capitalprojects and 0.5x depreciation on restructuring projects. This level ofexpenditure demonstrates the importance the Board place on this method ofcreating shareholder value. The total expenditure on these items over the lastthree reporting periods has been as follows: 2005 2006 2007 Average x (7 mths) £m £m £m £mCapital Expenditure 7.1 19.7 18.7 1.3 xRestructuring Projects - cash spend 8.9 9.2 1.0 0.5 x--------------------------------------------------------------------------------Total 16.0 28.9 19.7 1.8 x-------------------------------------------------------------------------------- The capital expenditure in 2007 includes continued investment in the Dynacastproduction facility in China; however, the most significant item of capitalexpenditure in 2007 was in MVC. Over the last 15 months, MVC has invested £7.5million on a new nickel chrome plating line for its plasticlad wheel coverranges. As a consequence the book value of the old discontinued plating line hasbeen fully impaired. This £1.5 million non cash charge has been shown inexceptional costs. The new restructuring projects in 2007 relate mainly to integrating the smallacquisitions made by Dynacast. PROFIT ON SALE OF BUSINESSES Gross proceeds from the Disposals during the year were £458.0 million and costscharged during the period were £10.8 million. Net assets disposed of were £233.6million, (including goodwill and intangible assets other than computer softwareof £152.5 million), and the cumulative exchange translation movement on assetssince acquisition of £22.0 million, previously booked straight to reserves, wasrecycled on disposal. As a result the profit on sale was £191.6 million. TAX The Melrose Group remains in a strong tax position. The headline tax charge inthe profit and loss account has reduced to 26% in 2007 from 28% in 2006. This isbelow the UK statutory rate during the period of 30% as the Group continues tobenefit from lower Far East tax rates, balanced in part with higher NorthAmerican and European tax rates. The headline cash tax rate of 16% for the continuing Group remains below theprofit and loss account rate but as expected the gap between the two isnarrowing. The Group has significant tax losses available to it but due to thesplit of profits geographically most are not recognised as deferred tax assetsbecause the majority of the losses are in the UK where insufficient profits aregenerated. A summary of tax losses by geography is shown below: Recognised Unrecognised Total £m £m £mUK - 138.6 138.6North America 2.6 6.7 9.3Rest of World - 18.6 18.6--------------------------------------------------------------------------------Total 2.6 163.9 166.5-------------------------------------------------------------------------------- The Group paid no corporation tax on the profits it made on the Disposals. Thisis largely a result of the Group benefiting from the substantial shareholderexemption rules in the UK. RETURN OF CAPITAL AND SUBSEQUENT SHARE CONSOLIDATION During August 2007, following the Disposals and in line with the Melrosestrategy to return surplus cash to shareholders, the Group returned £220 millionof capital to shareholders. Shareholders had the option of receiving a paymenteither in August 2007 or deferred until 2008. This meant that within 28 monthsof acquiring the McKechnie and Dynacast businesses in May 2005, 95% of capitalraised from shareholders had been returned, and the group had moved to a netcash position. The capital return was made in conjunction with a 1 for 2 share consolidationwhich resulted in the number of shares in issue reducing from 267.3 million to133.7 million. As permitted some shareholders opted to defer the capital paymentuntil 2008 and therefore a £7.2 million creditor is included in the 31 December2007 balance sheet to represent the outstanding balance on the £220 millioncapital repayment. LONG TERM INCENTIVE SCHEME Melrose has an incentive scheme which rewards certain senior management withMelrose shares as defined in the Remuneration Report. The original scheme set upat the start of Melrose in October 2003 was due to run until May 2009. However,with the approval of both the Remuneration Committee and Shareholders, on 14August 2007, in conjunction with the return of capital to Shareholders, thisscheme was crystallised. This resulted in 10.2 million shares being awarded tosenior management and created a £1.9 million crystallisation charge in theprofit and loss account to recognise the national insurance due on the value ofthe shares awarded and the acceleration of the IFRS 2 charge associated withthese shares. This one-off crystallisation charge has been shown in exceptionalcosts. Shareholders approved a new incentive scheme on 14 August 2007 that mirrors theold scheme but has an end date extended to May 2012, and only rewards thecreation of value above that which the original scheme rewarded. The charge to headline operating profit for the incentive schemes was £2.0million. This consisted of a £0.6 million charge relating to the originalMelrose scheme for the period 1 January 2007 to 14 August 2007, a £0.3 millioncharge for the new Melrose scheme from 14 August 2007 to 31 December 2007 and a£1.1 million charge for a Dynacast senior management scheme. EARNINGS PER SHARE AND NUMBER OF SHARES IN ISSUE In accordance with IAS 33 two basic earnings per share numbers are disclosed onthe face of the income statement, one for continuing operations only and onewhich also includes discontinued operations. However, because a 1 for 2 share consolidation occurred part way through theyear these measures do not give a good indication of the underlying earnings pershare for the continuing Group on an ongoing basis. The 1 for 2 shareconsolidation and the early crystallisation of the original Melrose incentivescheme caused the number of shares to change throughout the year as follows: Number of sharesAt 1 January 2007 257.1mCrystallisation of original Melrose incentive scheme on 14August 2007 10.2m ----------At 14 August 2007 267.3m1 for 2 share consolidation completed on 15 August 2007 (133.6m) ----------At 31 December 2007 133.7m ---------- ----------Weighted average number of shares in the year 210.5m ---------- The earnings per share calculation for continuing operations uses the weightedaverage number of shares in existence for the whole of 2007 and not the lowernumber of shares in issue post the share consolidation. This thereforeunderstates the underlying performance on an ongoing basis. Conversely theearnings per share including discontinued operations includes the one-off profiton the Disposals in the year and therefore significantly overstates theunderlying ongoing trading performance. To help understand the underlying performance a calculation is detailed below toshow earnings per share of 14.3p on a proforma basis: £m2007 Headline operating profit 24.5Proforma interest received* 1.4 ---------- 25.9Tax** (6.7) ---------- 19.2 ----------Shares in issue*** 133.7mProforma EPS 14.3p * Interest income assumed at 5.7% (2007 average rate since moving to a net cash position) on £25 million net cash (as at 31 December 2007 less remaining return of capital of £7.4 million)** Tax at 2007 headline rate (26%)*** Issued share capital after share consolidation ACQUISITIONS DURING THE YEAR During the year two small acquisitions were made by Dynacast for a combinedconsideration of £8.7 million including £0.3 million of costs. Both transactionswere asset purchases rather than share purchases. The fair value of net assets purchased was £4.2 million, (including intangibleassets of £1.6 million) and therefore the goodwill was £4.5 million. Theseacquisitions contributed only £0.2 million to the Dynacast headline operatingprofit in the year as they were not completed until September. EXCEPTIONAL COSTS AND INCOME Excluded from the headline operating profit are certain costs and income of anexceptional nature that are considered outside the normal course of business forthe divisions. These charges are as follows: Year Ended 31 December 2007Exceptional cost Cash Non Cash Total £m £m £m Dynacast restructure of acquisitions 1.0 0.5 1.5MVC 'old' nickel plater impairment - 1.5 1.5Crystallisation of original Melrose incentivescheme 0.8 1.1 1.9 -------------------------------Total exceptional cost 1.8 3.1 4.9 -------------------------------Exceptional income -------------------------------Pension curtailment gain - 1.1 1.1 ------------------------------- The three items of exceptional cost have all been discussed previously in thisReview. The total cost of these exceptional items is £4.9 million of which £1.8million is a cash cost. The item of exceptional income relates to the pensionscurtailment gain that arose on the sale of the McKechnie Aerospace division. ASSETS AND LIABILITIES The split of assets and liabilities is shown in the table below: -------------------------------------------------------------------------------- 31 December 31 December 2007 2006 £m £m--------------------------------------------------------------------------------Goodwill and intangible assets 207.4 356.2Property, plant and equipment 60.7 79.4Net working capital 18.8 45.2Net tax (liability)/asset (12.8) 2.4IAS 19 Employee Benefits (pension) (25.2) (55.4)Provisions and other (13.8) (10.1)--------------------------------------------------------------------------------Total 235.1 417.7 These assets and liabilities are funded by: -------------------------------------------------------------------------------- 31 December 31 December 2007 2006 £m £m--------------------------------------------------------------------------------Net (cash)/debt (32.4) 162.6Equity 267.5 255.1--------------------------------------------------------------------------------Total 235.1 417.7 The assets and liabilities of the Group have changed significantly during 2007.As a result of the Disposals the Group has sold £233.6 million of assets andliabilities during the year, and moved into a net cash position. IMPAIRMENT REVIEW In compliance with IAS 36 the carrying value of the net assets by division hasbeen compared to their future cash flows discounted at a rate reflective oftheir circumstances and method of funding. This confirmed the carrying value ofeach division in the Group balance sheet. PENSIONS The Group has a number of defined benefit and defined contribution schemes inplace globally. The current market value of the assets of the defined benefit schemes isinsufficient to satisfy the liabilities to members when they are valued on abasis consistent with IAS 19. The net accounting deficit on the schemes was£25.2 million (2006: £55.4 million) of which 63% (2006: 82%) was derived fromthe most significant scheme in the Group, the UK McKechnie Pension Plan (the"Plan"). This had assets at 31 December 2007 of £114.7 million (2006: £83.0million), liabilities of £130.7 million (2006: £128.4 million) and therefore adeficit of £16.0 million (2006: £45.4 million). As part of the disposal process of the McKechnie OEM division Melrose obtainedclearance from the UK Pensions Regulator for its agreement with the Trustee ofthe Plan. Melrose made a cash payment of £20.0 million to the Plan in May 2007and agreed to pay a further £18.3 million in equal quarterly instalments of £1.5million over the next three years starting in July 2007. Melrose PLC has alsoguaranteed the funding of the Plan on an ongoing basis. As a consequence of thisthe Company has contributed £25.8 million (2006: £5.4 million) into the Plan in2007, significantly more than in the previous year and the total pension deficitin the Melrose Group has reduced by more than half. The movement in the Plandeficit from £45.4 million in 2006 to £16.0 million in 2007 is explained below: £m--------------------------------------------------------------------------------2006 IAS 19 deficit 45.4Interest on liabilities 6.5Expected return on assets (6.5)Investment outperformance (2.3)Change in key pension assumptions (8.0)Increase in life expectancy (lower mortality) 7.6Curtailment gain (1.1)Employer contributions (25.8)Other 0.2--------------------------------------------------------------------------------2007 IAS 19 deficit 16.0 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 mortality assumption has been made more prudent during the year to allowboth for a higher level of current life expectancy than previously used but alsofor further increases in the expected future improvements to life expectancy. Amale aged 65 in 2007 is expected to live for 20.6 years. This life expectancy isassumed to increase by 1.2 years (6%) by 2020. This has added a further £7.6million to liabilities in the year. A summary of the key assumptions of the Planare disclosed below: 31 December 31 December 2007 2006 % %--------------------------------------------------------------------------------Discount rate 5.7 5.1Inflation 3.3 2.9Pension increases 3.3 2.9-------------------------------------------------------------------------------- 31 December 31 December 2007 2006 Age Age--------------------------------------------------------------------------------Life expectancy for a male aged 65 in 2007 85.6 83.6Life expectancy for a male aged 65 in 2020 86.8 85.1 The long term strategy for the Plan is to concentrate on the cash flows requiredto fund the liabilities as they fall due. These cash flows extend many yearsinto the future and the ultimate objective is that the total pool of assetsderived from future company contributions and the investment strategy allowseach cash payment to members to be made when due. Viewed on this basis theinvestment strategy has many years for the assets to grow to help fund theliabilities. Consistent with this approach a new investment strategy targeted atan absolute rate of return has been implemented by the Trustee, with theCompany's agreement, during 2007. 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 moved from a net debt position of £162.6 million at 31 December 2006to a net cash position at 31 December 2007 of £32.4 million. As a result, theGroup repaid a significant amount of its bank term loans during the year. Thecommitted bank term loan facility comprises a term loan of £11.0 million (2006:£190.4 million) which expires in 2010. The additional committed working capitalfacility of £30 million remains unchanged from the previous year and the Groupalso benefits from a few small local overdraft facilities and some finance leasearrangements for specific assets which have £1.2 million (2006: £3.8 million)outstanding capital balances at 31 December 2007. The combination of having a net cash position and a reduced committed bankfacility means that the Directors consider that the Group has sufficient capitalfor its current needs. FINANCE COST RISK The interest rates the Group is exposed to are variable and linked to LIBOR.Previously, when the Group had net debt it was appropriate that financialinstruments were entered into to protect against movements in interest rates.Now that the Group has net cash this protection is not considered necessary.Since moving into a net cash position and repaying the majority of the term loanin May 2007, the Group has received interest at an average rate of 5.7%. EXCHANGE RATE RISK The Group trades in various countries around the world and hence the Group isexposed to many different foreign currencies. The Group therefore carries anexchange risk that can be categorised into three types, described below. TheBoard policy is designed to protect against some of the cash risks but not thenon-cash risks. The most common cash risk is the transaction risk the Grouptakes when it invoices a sale in a different currency to the one in which itscost of sale is incurred. This is addressed by taking out forward cover againstapproximately 80% of the anticipated cash flows over the following twelvemonths, placed on a rolling quarterly basis. This does not eliminate the cashrisk but does bring some certainty to it. During 2007 the Group incurred a £1.0million transaction exchange loss. Exchange rates used in the period: Average Rate Closing Rate to £ Sterling to £ Sterling--------------------------------------------------------------------------------US Dollar2007 2.00 2.002006 1.84 1.96--------------------------------------------------------------------------------Euro2007 1.46 1.362006 1.47 1.49 The effect on the key headline numbers in 2007 for the continuing Group due tothe translation movement of exchange rates from 2006 to 2007 is summarised asfollows: 2007 exchange rate versus 2006 exchange rate £m--------------------------------------------------------------------------------2007 EffectSales reduction 11.0Headline operating profit reduction 0.5Net asset increase 3.7 For reference, guidelines to show the net translation exchange risks that theGroup currently carries are shown below: Increase in profit £m-------------------------------------------------------------------------------- For every 10 cent strengthening of the US Dollar againstSterling 0.2For every 10 cent strengthening of the Euro againstSterling 1.1 As the translation risk is not a cash cost no exchange instruments are used toprotect against this risk. However, when the Group has net debt, which itcurrently does not, the hedge of having a multicurrency debt facility fundingthese foreign currency trading units protects against some of this risk. The most significant exchange risk that the Group takes arises when a divisionthat is predominantly based in a foreign currency is sold. The proceeds forthose divisions will most likely be received in a foreign currency and thereforean exchange risk arises if these proceeds are converted back to sterling, forinstance to pay a dividend to shareholders. Protection against this risk istaken on a case-by-case basis. On the signing of the agreement to sell theMcKechnie Aerospace OEM and Aerospace Aftermarket divisions, Melrose purchasedSterling call options to protect against the currency exposure on US$575 millionof the proceeds at an average exchange rate of £=US$1.986. No financialinstruments of this nature currently exist in the Group. COMMODITY RISK As Melrose owns engineering businesses across various sectors the cumulativeexpenditure on commodities is significant to the Group results. The Groupaddresses the risk of base commodity costs increasing by, wherever possible,passing on the cost increases to customers or by having suitable purchaseagreements with its suppliers which sometimes fix the price over some months inthe future. Melrose does not generally enter into financial instruments oncommodities, as this is not considered to be the most efficient way ofprotecting against movements. Geoffrey Martin5 March 2008 CONSOLIDATED INCOME STATEMENT Notes Year ended Restated *** 31 December Year ended 2007 31 December 2006 £m £m--------------------------------------------------------------------------------Continuing operationsRevenue 2 344.0 323.6Cost of sales (280.1) (265.1)--------------------------------------------------------------------------------Gross profit 63.9 58.5--------------------------------------------------------------------------------Net operating expenses before exceptional (39.4) (39.3)items and intangible asset amortisation *Intangible asset amortisation * (2.0) (2.1)Exceptional costs 3 (4.9) (5.9)Exceptional income 3 1.1 0.7-------------------------------------------------------------------------------- Total net operating expenses (45.2) (46.6)-------------------------------------------------------------------------------- Operating profit 2 18.7 11.9--------------------------------------------------------------------------------Headline operating profit ** 2 24.5 19.2-------------------------------------------------------------------------------- Finance costs (4.3) (7.3)Finance income 6.8 0.2-------------------------------------------------------------------------------- Profit before tax 21.2 4.8Tax 4 (5.6) (1.6)--------------------------------------------------------------------------------Profit for the year from continuingoperations 15.6 3.2--------------------------------------------------------------------------------Discontinued operationsProfit for the year from discontinuedoperations 199.4 34.6-------------------------------------------------------------------------------- Profit for the year 215.0 37.8--------------------------------------------------------------------------------Attributable to:Equity holders of the parent 214.8 37.7Minority interests 0.2 0.1-------------------------------------------------------------------------------- 215.0 37.8--------------------------------------------------------------------------------Earnings per shareFrom continuing operations- Basic 5 7.4p 1.2p- Diluted 5 7.2p 1.2pFrom continuing and discontinued operations- Basic 5 102.1p 14.7p- Diluted 5 99.2p 14.4p-------------------------------------------------------------------------------- * Other than computer software amortisation.** 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 are calculated before exceptional costs, exceptional income and intangible asset amortisation other than computer software.*** Prior periods have been restated to separate the results of continuing and discontinued operations. CONSOLIDATED STATEMENT OF RECOGNISED INCOME AND EXPENSE Notes Year ended Year ended 31 December 31 December 2007 2006 £m £m-------------------------------------------------------------------------------- Currency translation on net investments in subsidiary undertakings 3.7 (41.4)Gains on cash flow hedges 1.1 1.4Actuarial adjustments on net pensionliabilities 6 3.5 1.2-------------------------------------------------------------------------------- Net income/(expense) recognised directly in equity 8.3 (38.8)Transferred to income statement on cashflow hedges (2.1) (1.4) Transfer to income statement from equity of cumulative translation differences ondiscontinued operations 22.0 -Profit for the year 215.0 37.8-------------------------------------------------------------------------------- Total recognised income and expense for the year 243.2 (2.4)-------------------------------------------------------------------------------- Attributable to:Equity holders of the parent 243.0 (2.5)Minority interests 0.2 0.1-------------------------------------------------------------------------------- 243.2 (2.4)-------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEET Notes 31 December 31 December 2007 2006 £m £m --------------------------------------------------------------------------------Non-current assetsGoodwill and other intangible assets 207.4 356.2Property, plant and equipment 60.7 79.4Interests in joint ventures - 2.6Derivative financial instruments 0.4 1.4Deferred tax assets 3.1 29.8-------------------------------------------------------------------------------- 271.6 469.4Current assetsInventories 29.7 59.3Trade and other receivables 67.0 90.7Cash and short term deposits 46.4 33.3-------------------------------------------------------------------------------- 143.1 183.3-------------------------------------------------------------------------------- Total assets 2 414.7 652.7-------------------------------------------------------------------------------- Current liabilitiesTrade and other payables 77.9 104.8Interest-bearing loans and borrowings 8 8.1 1.0Current tax liabilities 7.8 8.8Provisions 3.5 2.9-------------------------------------------------------------------------------- 97.3 117.5--------------------------------------------------------------------------------Net current assets 45.8 65.8-------------------------------------------------------------------------------- Non-current liabilitiesInterest-bearing loans and borrowings 8 13.1 194.9Deferred tax liabilities 8.1 18.6Retirement benefit obligations 6 25.2 55.4Provisions 3.5 11.2-------------------------------------------------------------------------------- 49.9 280.1-------------------------------------------------------------------------------- Total liabilities 2 147.2 397.6-------------------------------------------------------------------------------- Net assets 267.5 255.1-------------------------------------------------------------------------------- EquityIssued share capital 58.3 0.3Share premium account - 214.6Merger reserve 37.0 42.0Capital redemption reserve 154.6 -Hedging and translation reserves 2.2 (22.5)Accumulated profits 14.2 19.7-------------------------------------------------------------------------------- Equity attributable to holders of theparent 266.3 254.1 Minority interest 1.2 1.0-------------------------------------------------------------------------------- Total equity 267.5 255.1-------------------------------------------------------------------------------- CONSOLIDATED CASH FLOW STATEMENT Notes Restated Year ended Year ended 31 December 31 December 2007 2006 £m £m-------------------------------------------------------------------------------- Net cash from operating activities forcontinuing operations 7 14.1 9.7 Net cash from operating activities fordiscontinued operations 7 1.3 23.6 -------------------------------------------------------------------------------- Net cash from operating activities 15.4 33.3--------------------------------------------------------------------------------Investing activitiesDisposal of businesses 446.7 7.4Net cash disposed (5.8) -Lump sum contribution to pension plan (20.0) -Purchases of property, plant and equipment (15.5) (11.7)Proceeds on disposal of property, plantand equipment 0.4 9.9Purchase of computer software (0.5) -Interest received 7.1 -Acquisitions of subsidiaries (8.7) --------------------------------------------------------------------------------- Net cash from investing activities forcontinuing operations 403.7 5.6 Net cash used in investing activities fordiscontinued operations 7 (2.6) (5.6) -------------------------------------------------------------------------------- Net cash from investing activities 401.1 ---------------------------------------------------------------------------------Financing activitiesRepayment of borrowings (179.0) -Repayment of working capital facility - (3.0)Repayment of obligations under financeleases (0.3) (0.3)Dividends paid (13.0) (13.5)Loan notes repaid - (0.5)Capital distribution (212.6) -Issue of 2007 Incentive Shares 0.1 --------------------------------------------------------------------------------- Net cash used in financing activities forcontinuing operations (404.8) (17.3)Net cash from financing activities fordiscontinued operations 7 0.3 2.7-------------------------------------------------------------------------------- Net cash used in financing activities (404.5) (14.6)-------------------------------------------------------------------------------- Net increase in cash and cash equivalents 7 12.0 18.7Cash and cash equivalents at beginning ofyear 7 33.3 15.2Effect of foreign exchange rate changes 7 1.1 (0.6)-------------------------------------------------------------------------------- Cash and cash equivalents at end of year 7 46.4 33.3-------------------------------------------------------------------------------- NOTES TO THE ACCOUNTS 1. Status of accounts The information included within the preliminary announcement has been preparedin accordance with the historical cost convention and also in accordance withthe accounting policies adopted under International Financial ReportingStandards, including International Accounting Standards and Interpretations(IFRSs) as adopted for use in the European Union. The accounting policiesfollowed are the same as those detailed within the 2006 Report and Accountswhich are available on the Group's website www.melroseplc.net. In addition theGroup has adopted IFRS 7 'Financial Instruments: Disclosures' and the relatedamendments to IAS 1 'Presentation of Financial Statements'. The financial information included in the preliminary announcement does notconstitute the company's statutory accounts for the purpose of section 240 ofthe Companies Act 1985 for the years ended 31 December 2007 or 2006. Statutoryaccounts for the year ended 31 December 2006 have been delivered to theRegistrar of Companies and the Auditors and their reports were unqualified anddid not contain statements under s.237(2) or (3) Companies Act 1985. The statutory accounts for the year ended 31 December 2007 will be finalised onthe basis of the financial information presented by the Directors in thepreliminary announcement and will be delivered to the Registrar of Companiesfollowing the Company's Annual General Meeting in May 2008. While the financial information included in this preliminary announcement hasbeen prepared in accordance with IFRSs, this announcement does not itselfcontain sufficient information to comply with IFRSs. The comparative information has been restated to show more appropriateallocation of results following the disposal of the Aerospace OEM ("OEM"), theAerospace Aftermarket ("Aftermarket"), part of the PSM division and the UScorporate centre and classification of these divisions as discontinuedoperations. The Board of Directors approved the preliminary announcement on 5 March 2008. 2. Segment information The Group's primary reporting format is business segments and its secondaryreporting format is geographical segments. The operating businesses areorganised and managed separately according to the nature of the products andservices provided, with each segment representing a strategic business unit thatoffers different products and serves different markets. All reported revenue isderived from one activity, the sale of goods. During the period, the Group discontinued its operations in the OEM,Aftermarket, part of the PSM division and the US corporate centre segments. The Dynacast segment is a supplier of die-cast parts and components to a rangeof industries. 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") continuing segment consists of the specialised Prelok and Canning Brettbusinesses and is now included in the MPC segment for reporting purposes. 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. Inter segment sales are not material and have not beenincluded in the analysis below. The following table presents revenue, headline operating profit information(which the Directors believe is the best indicator of performance), operatingprofit and certain asset and liability information regarding the Group'sbusiness segments for the year ended 31 December 2007. Note 3 gives details ofexceptional costs and income. Business segments Revenue Headline operating profit/(loss)** Operating profit/(loss)---------------------------------------------------------------------------------------------- Year ended Year ended Year ended Year ended Year ended Year ended 31 December 31 December 31 December 31 December 31 December 31 December 2007 2006 2007 2006 2007 2006 £m £m £m £m £m £m----------------------------------------------------------------------------------------------ContinuingoperationsDynacast 235.9 221.7 28.9 25.1 25.6 19.5MVC 55.4 48.0 (0.5) (2.3) (2.2) (2.5)MPC 52.7 53.9 3.9 3.0 3.9 1.5Central - corporate - - (5.8) (5.5) (4.7) (5.5)Central - LTIPs* - - (2.0) (1.1) (3.9) (1.1)---------------------------------------------------------------------------------------------- Continuingoperations total 344.0 323.6 24.5 19.2 18.7 11.9 Discontinued operations OEM 53.7 140.1 11.9 33.1 10.9 30.8Aftermarket 5.2 19.3 0.1 0.6 0.1 4.2PSMdiscontinued 8.4 24.0 1.4 4.2 1.4 3.7Centraldiscontinued - - (0.4) (1.0) (0.4) (1.4)----------------------------------------------------------------------------------------------Discontinued operations total 67.3 183.4 13.0 36.9 12.0 37.3----------------------------------------------------------------------------------------------Total 411.3 507.0 37.5 56.1 30.7 49.2---------------------------------------------------------------------------------------------- * Long term incentive plans** As defined on the income statement Total assets Total liabilities---------------------------------------------------------------------------------------------- Year ended Year ended Year ended Year ended 31 December 31 December 31 December 31 December 2007 2006 2007 2006 £m £m £m £m----------------------------------------------------------------------------------------------Continuing operationsDynacast 322.9 308.9 80.7 74.9MVC 32.4 35.7 11.7 12.1MPC 31.5 32.2 11.1 13.0Central - corporate 27.9 (4.6) 42.2 165.5Central - LTIPs * - - 1.5 1.5---------------------------------------------------------------------------------------------- Continuing operations total 414.7 372.2 147.2 267.0 Discontinued operationsOEM - 217.9 - 32.5Aftermarket - 7.2 - 1.8PSM discontinued - 34.4 - 5.7Central discontinued - 21.0 - 90.6operations Discontinued operations total - 280.5 - 130.6----------------------------------------------------------------------------------------------Total 414.7 652.7 147.2 397.6---------------------------------------------------------------------------------------------- * Long term incentive plans Following the disposal of OEM, Aftermarket, part of the PSM division and UScorporate centre, certain central assets relating to those businesses weredisposed of, leaving a central overdraft in excess of central assets in theprior year. This is shown as a negative asset in the table above in accordancewith IAS 14. Capital expenditure Depreciation and computer software amortisation---------------------------------------------------------------------------------------------- Year ended Year ended Year ended Year ended 31 December 31 December 31 December 31 December 2007 2006 2007 2006 £m £m £m £m----------------------------------------------------------------------------------------------ContinuingoperationsDynacast 5.4 6.9 6.8 7.0MVC 7.8 3.3 1.9 1.8MPC 2.8 1.5 1.6 2.1Central - corporate - - 0.1 0.1----------------------------------------------------------------------------------------------Continuing operations total 16.0 11.7 10.4 11.0 Discontinued operationsOEM 2.6 6.9 1.2 2.8Aftermarket - 0.1 - 0.1PSM discontinued 0.1 1.0 0.2 0.7---------------------------------------------------------------------------------------------- Discontinued operationstotal 2.7 8.0 1.4 3.6---------------------------------------------------------------------------------------------- Total 18.7 19.7 11.8 14.6---------------------------------------------------------------------------------------------- Geographical area Revenue Headline operating Operating profit/(loss) profit/(loss) ** Year ended Year ended Year ended Year ended Year ended Year ended 31 December 31 December 31 December 31 December 31 December 31 December 2007 2006 2007 2006 2007 2006 £m £m £m £m £m £m----------------------------------------------------------------------------------------------ContinuingoperationsNorth America 132.3 127.0 7.3 3.6 3.2 (1.3)Europe 155.2 146.3 18.5 16.6 17.6 14.2Asia 56.5 50.3 6.5 5.6 6.5 5.6Central -corporate - - (5.8) (5.5) (4.7) (5.5)Central -LTIPs * - - (2.0) (1.1) (3.9) (1.1)---------------------------------------------------------------------------------------------- Continuingoperations total 344.0 323.6 24.5 19.2 18.7 11.9 DiscontinuedoperationsNorth America 41.0 109.1 10.7 27.7 9.7 26.0Europe 21.1 59.8 1.8 6.7 1.8 8.8Asia 5.2 14.5 0.9 3.5 0.9 3.5Central - - (0.4) (1.0) (0.4) (1.0)---------------------------------------------------------------------------------------------- Discontinuedoperations total 67.3 183.4 13.0 36.9 12.0 37.3---------------------------------------------------------------------------------------------- Total 411.3 507.0 37.5 56.1 30.7 49.2---------------------------------------------------------------------------------------------- * Long term incentive plans** As defined on the income statement Total assets Total liabilities---------------------------------------------------------------------------------------------- Year ended Year ended Year ended Year ended 31 December 31 December 31 December 31 December 2007 2006 2007 2006 £m £m £m £m----------------------------------------------------------------------------------------------Continuing operationsNorth America 188.5 183.5 39.1 36.2Europe 157.2 156.9 49.3 50.1Asia 41.1 36.4 15.1 13.7Central -corporate 27.9 (4.6) 42.2 165.5Central -LTIPs * - - 1.5 1.5---------------------------------------------------------------------------------------------- Continuing operationstotal 414.7 372.2 147.2 267.0 Discontinued operationsNorth America - 172.8 - 23.3Europe - 57.6 - 12.6Asia - 29.1 - 4.1Central - 21.0 - 90.6---------------------------------------------------------------------------------------------- Discontinued operationstotal - 280.5 - 130.6---------------------------------------------------------------------------------------------- Total 414.7 652.7 147.2 397.6---------------------------------------------------------------------------------------------- * Long term incentive plans Capital expenditure Depreciation and computer software amortisation Year ended Year ended Year ended Year ended 31 December 31 December 31 December 31 December 2007 2006 2007 2006 £m £m £m £m----------------------------------------------------------------------------------------------Continuing operationsNorth America 8.8 5.2 4.3 4.4Europe 5.1 4.2 4.6 5.1Asia 2.1 2.3 1.4 1.4Central -corporate - - 0.1 0.1---------------------------------------------------------------------------------------------- Continuing operationstotal 16.0 11.7 10.4 11.0 Discontinued operationsNorth America 1.7 5.5 0.7 1.7Europe 0.9 1.6 0.5 1.5Asia 0.1 0.9 0.2 0.4---------------------------------------------------------------------------------------------- Discontinued operationstotal 2.7 8.0 1.4 3.6---------------------------------------------------------------------------------------------- Total 18.7 19.7 11.8 14.6---------------------------------------------------------------------------------------------- 3. Exceptional costs and income Exceptional costs Year ended Year ended 31 December 31 December 2007 2006 £m £mOther operating costs----------------------------------------------------------------------------------------------Continuing operationsDynacast restructure (1.5) (3.7)MVC 'old' nickel plater impairment (1.5) -Crystallisation of Original MelroseIncentive Scheme (1.9) -MPC restructure - (2.2)---------------------------------------------------------------------------------------------- Total other operating costs - continuing (4.9) (5.9)----------------------------------------------------------------------------------------------Discontinued operationsPre-disposal expenses - (2.0)---------------------------------------------------------------------------------------------- Total other operating costs -discontinued - (2.0)---------------------------------------------------------------------------------------------- Total other operating costs (4.9) (7.9)---------------------------------------------------------------------------------------------- The Dynacast restructuring costs in 2007 relate mainly to the acquisitions ofTechmire and QZD in Canada. The Dynacast restructuring costs in 2006 related tothe closure of the Spartanburg, South Carolina, USA manufacturing facility. During the year ended 31 December 2007, the old plater was replaced at MVC andas a result an impairment against the carrying value of the asset was made. On 14 August 2007, the Shareholders approved the early crystallisation of theOriginal Melrose Incentive Scheme resulting in an accelerated IFRS 2 charge andassociated National Insurance charge . The MPC restructure costs related to the closure of the Northamptonmanufacturing facility in 2006. The pre-disposal costs in 2006 related to the sale of divisions which werecompleted in 2007. Exceptional income Year ended Year ended 31 December 31 December 2007 2006 £m £mOther operating income----------------------------------------------------------------------------------------------Continuing operationsPension curtailment gain 1.1 -Profit on disposal of land and buildings - 0.7---------------------------------------------------------------------------------------------- Total other operating income - continuing 1.1 0.7 Discontinued operationsOnerous contract provision release - 2.3---------------------------------------------------------------------------------------------- Total other operating income - discontinued - 2.3---------------------------------------------------------------------------------------------- Total other operating income 1.1 3.0----------------------------------------------------------------------------------------------Following the disposal of the OEM division, all employees in this segmentbelonging to the McKechnie UK defined benefit pension plan became deferredmembers. The curtailment gain associated with this was £1.1 million. During the year ended 31 December 2006, land and buildings held in the MPCbusiness segment were sold in a sale and leaseback transaction resulting in anet profit of £0.7 million. Upon acquisition of the McKechnie Group in May 2005, an onerous contract wasidentified and appropriate provision was made based on the circumstancesprevailing at acquisition. During 2006, the terms of the contract wererenegotiated and the improved terms of the contract were reflected in theaccounts resulting in a release to the income statement of £2.3 million. 4. Tax Analysis of charge/ (credit) in year: Continuing operations Discontinued operations Total --------------------------------------------------------------------------------------------------------- Year ended Year ended Year ended Year ended Year ended Year ended 31 December 31 December 31 December 31 December 31 December 31 December 2007 2006 2007 2006 2007 2006 £m £m £m £m £m £m ---------------------------------------------------------------------------------------------------------Current tax 6.6 4.5 (1.7) 0.6 4.9 5.1Deferred tax (1.0) (2.9) 4.2 (3.0) 3.2 (5.9)--------------------------------------------------------------------------------------------------------- Total income taxcharge/(credit) 5.6 1.6 2.5 (2.4) 8.1 (0.8)--------------------------------------------------------------------------------------------------------- Tax charge on headlineoperating profit after finance costs and income 7.2 3.5 2.8 8.8 10.0 12.3 Exceptional tax credits - - - (10.2) - (10.2)Tax on net exceptionalcosts (1.0) (1.3) - - (1.0) (1.3)Tax in respectof intangible assetamortisation excluding computer software (0.6) (0.6) (0.3) (1.0) (0.9) (1.6) ---------------------------------------------------------------------------------------------------------Total incometax charge/(credit) 5.6 1.6 2.5 (2.4) 8.1 (0.8)--------------------------------------------------------------------------------------------------------- Of the charge to current tax, approximately £2.5 million (2006: credit of £2.4million) related to profits arising in the discontinued divisions, which weredisposed of during the year. No tax charge or credit arose on the disposal ofthe relevant subsidiaries. 5. Earnings per share ---------------------------------------------------------------------------------------------------------Earnings Year ended Year ended 31 December 31 December 2007 2006 £m £m--------------------------------------------------------------------------------------------------------- Earnings for the purposes of basic earnings pershare 215.0 37.8Less profit for the year from discontinuedoperations (199.4) (34.6)--------------------------------------------------------------------------------------------------------- Earnings for basis of earnings per share fromcontinuing operations 15.6 3.2Exceptional costs 4.9 5.9Exceptional income (1.1) (0.7)Intangible asset amortisation * 2.0 2.1Tax on exceptional items and intangible assetamortisation* (1.6) (1.9)--------------------------------------------------------------------------------------------------------- Earnings for basis of headline earnings pershare from continuing 19.8 8.6operations---------------------------------------------------------------------------------------------------------* Other than computer software--------------------------------------------------------------------------------------------------------- Number Number Weighted average number of ordinary shares forthe purposes of basic earnings per share (million) 210.5 257.1 Further shares for the purposes of fullydiluted earnings per share (million) 6.3 5.1--------------------------------------------------------------------------------------------------------- Further shares for dilution is calculated for 2007 as a weighted average of thetwo Melrose incentive schemes that were in operation during the year. ---------------------------------------------------------------------------------------------------------Earnings per share Year ended Year ended 31 December 31 December 2006 2007 Pence Pence--------------------------------------------------------------------------------------------------------- Basic earnings per shareFrom continuing and discontinued operations 102.1 14.7From discontinued operations 94.7 13.5From continuing operations 7.4 1.2--------------------------------------------------------------------------------------------------------- Fully diluted earnings per shareFrom continuing and discontinued operations 99.2 14.4From discontinued operations 92.0 13.2From continuing operations 7.2 1.2--------------------------------------------------------------------------------------------------------- Headline earnings per shareFrom continuing operations 9.4 3.3--------------------------------------------------------------------------------------------------------- Fully diluted headline earnings per shareFrom continuing operations 9.1 3.3--------------------------------------------------------------------------------------------------------- 6. Retirement benefit obligations Prior to the acquisition, McKechnie and Dynacast had established a number ofpension schemes covering many of its employees and operating in severaljurisdictions. The most significant schemes are: • The UK McKechnie Pension Plan ("the Plan") which provides defined benefit pensions for its members. The assets of the Plan are held in a fund administered by McKechnie Pension Trust Limited, an independent trustee company, an actuarial valuation of the Plan was carried out at 31 December 2005 by a qualified independent actuary. Plan assets are stated at their bid value at 31 December 2007. • The Dynacast and MVC Pension Schemes in the US are funded schemes of a defined benefit type with assets held in separate trustee administered funds. • In Germany and Austria, unfunded defined benefit arrangements are operated by Dynacast. • There are also obligations to provide post retirement healthcare to former employees of MVC and to provide termination indemnities in Italy and France to current Dynacast employees. The major weighted average assumptions at 31 December 2007 used by the actuariesin calculating the Group's pension scheme assets and liabilities together withdetails of the net pension assets or liabilities are as set out below: McKechnie Other schemes Pension Plan (% p.a.) (% p.a.) Rate of increase in salaries 3.8 3.0Rate of increase in pensions in payment 3.3 1.9Discount rate 5.7 5.9Inflation assumption 3.3 2.3 The weighted average assumptions used at 31 December 2006 are set out below: McKechnie Other schemes Pension Plan (% p.a.) (% p.a.) Rate of increase in salaries 3.4 2.7Rate of increase in pensions in payment 2.9 1.7Discount rate 5.1 5.3Inflation assumption 2.9 2.3 Mortality The mortality assumption for the UK McKechnie Pension Plan has been strengthenedduring the year. At 31 December 2006, a position of halfway between the PA 92base tables and the PA 92 medium cohort tables was adopted. The mortalityassumptions at 31 December 2007 relate to the PA 92 medium cohort tables with anage adjustment of two years and an improvement floor of 1%. This is consideredappropriate given the Plan's geographical and industrial sector. This added £7.6million to the liabilities at 31 December 2007. The average life expectancy underlying the value of defined benefit obligationsat 31 December 2007, which have been determined by reference to applicablemortality statistics are set out below: ----------------------------------------------------------------------------------------Life expectancy 31 December 31 December 2007 2006 years years---------------------------------------------------------------------------------------- Male member currently aged 65 85.6 83.6Male member aged 65 in 2020 86.8 85.1---------------------------------------------------------------------------------------- The amount recognised in the balance sheet arising from obligations in respectof defined benefit schemes is as follows: ---------------------------------------------------------------------------------------- 31 December 31 December 31 December 31 December 31 December 2007 2006 2005 2004 2003 £m £m £m £m £m---------------------------------------------------------------------------------------- Plan obligations (148.4) (147.9) (145.5) - -Plan assets 123.2 92.5 85.0 - ----------------------------------------------------------------------------------------- Net liabilities (25.2) (55.4) (60.5) - ----------------------------------------------------------------------------------------- This amount is presented in the balance sheet: ---------------------------------------------------------------------------------------- 31 December 31 December 31 December 31 December 31 December 2007 2006 2005 2004 2003 £m £m £m £m £m----------------------------------------------------------------------------------------Non-currentliabilities - unfunded plans 4.1 10.9 8.7 - -- funded plans 21.1 44.5 51.8 - ----------------------------------------------------------------------------------------- 25.2 55.4 60.5 - ----------------------------------------------------------------------------------------- Expected returns and fair value of assets: Expected return Fair value of assets 31 December 31 December 31 December 31 December 2007 2006 2007 2006 % % £m £m-----------------------------------------------------------------------------------Equity instruments 7.4 7.4 33.7 68.1Debt instruments 4.6 4.9 3.9 12.7Other assets 6.8 4.4 85.6 11.7---------------------------------------------------------------------------------- Weighted average /total 6.9 6.7 123.2 92.5---------------------------------------------------------------------------------- There is no self investment (other than in tracker funds) either in the Group'sown financial instruments or property or other assets used by the Group. Amounts recognised in income in respect of these defined benefit schemes are asfollows: Year ended Year ended 31 December 31 December 2007 2006 £m £m--------------------------------------------------------------------------------In arriving at operating profit (included within costof sales, sellingand distribution costs and administrative expenses)- current service cost 0.4 0.4- effects of curtailments and settlements (1.1) -Included in finance costs- interest cost 7.4 6.8- expected return on assets (7.0) (5.4)-------------------------------------------------------------------------------- The actual return on scheme assets was £9.3 million (2006: £7.1 million). The amount recognised in the consolidated Statement of Recognised Income andExpense is as follows: Year ended Year ended 31 December 31 December 2007 2006 £m £m--------------------------------------------------------------------------------Experience gains/(losses) on scheme liabilities 1.2 (0.5)Experience gains on scheme assets 2.3 1.7-------------------------------------------------------------------------------- 3.5 1.2-------------------------------------------------------------------------------- The cumulative amount of actuarial gains and losses recognised in theConsolidated Statement of Recognised Income and Expenses is a total gain of £6.9million (2006: £3.4 million). Movements in the benefit liabilities during the year: Year ended Year ended 31 December 31 December 2007 2006 £m £m At beginning of year 147.9 145.5 Disposals (0.6) -Current service cost 0.4 0.4Interest cost 7.4 6.8Actuarial (gain)/losses (1.2) 0.5Benefits paid (3.9) (4.3)Plan settlements (0.8) -Plan curtailments (1.1) -Currency loss/(gain) 0.3 (1.0)--------------------------------------------------------------------------------At end of year 148.4 147.9-------------------------------------------------------------------------------- Movements in the fair value of scheme assets during the year: Year ended Year ended 31 December 31 December 2007 2006 £m £m At beginning of year 92.5 85.0 Disposals (0.4) -Expected return on assets 7.0 5.4Actuarial gains 2.3 1.7Employer contributions 26.7 5.0Benefits paid (3.9) (4.0)Plan settlements (0.8) -Currency loss (0.2) (0.6)--------------------------------------------------------------------------------At end of year 123.2 92.5-------------------------------------------------------------------------------- The Company has guaranteed a schedule of contributions of £6.1 million per annumwith the Trustee of the McKechnie Pension Plan up until May 2010. 7. Notes to the cash flow statement -------------------------------------------------------------------------------- Year ended Year ended 31 December 31 December 2007 2006 £m £m -------------------------------------------------------------------------------- Reconciliation of operating profit to cash generatedby operationsHeadline operating profit fromcontinuing operations* 24.5 19.2Adjustments for:Depreciation of property, plant andequipment 10.3 10.9Amortisation of computer software 0.1 0.1Restructuring costs paid and decreasein other provisions (1.9) (5.5)-------------------------------------------------------------------------------- Operating cash flows before movementsin working capital 33.0 24.7Decrease/(increase) in inventories 1.4 (6.3)Increase in receivables (0.5) (8.4)(Decrease)/increase in payables (3.8) 10.2-------------------------------------------------------------------------------- Cash generated by operations 30.1 20.2Tax paid (4.2) (2.0)Interest paid (5.7) (4.0)Pension contributions paid (6.1) (4.5)-------------------------------------------------------------------------------- Net cash flow from operatingactivities for continuing operations 14.1 9.7-------------------------------------------------------------------------------- * As defined on the income statement -------------------------------------------------------------------------------- Year ended Year ended 31 December 31 December 2007 2006 £m £m -------------------------------------------------------------------------------- Cash flow from discontinued operationsCash generated from discontinuedoperations 6.9 30.8Tax paid (0.6) (2.0)Interest paid (4.2) (3.5)Pension contributions paid (0.6) (0.9)Profit of joint ventures (0.2) (0.8)-------------------------------------------------------------------------------- Net cash from operating activitiesfor discontinued operations 1.3 23.6-------------------------------------------------------------------------------- Dividends from joint ventures - 0.5Interest received 0.1 -Purchase of property, plant andequipment (2.6) (7.7)Proceeds on disposal of property,plant and equipment - 1.9Purchase of computer software (0.1) (0.3)-------------------------------------------------------------------------------- Net cash used in investing activitiesfor discontinued operations (2.6) (5.6)--------------------------------------------------------------------------------Repayments of obligations underfinance leases - (0.3)New finance leases 0.3 3.0-------------------------------------------------------------------------------- Net cash from financing activitiesfor discontinued operations 0.3 2.7-------------------------------------------------------------------------------- Net debt reconciliation At 31 Cash Foreign Disposals New Other At 31 December flow exchange (excluding cash leases non-cash December 2006 difference and overdrafts) movements 2007 £m £m £m £m £m £m £m---------------------------------------------------------------------------------------------- Cash 33.3 12.0 1.1 - - - 46.4Debt due - - - - - (0.5) (0.5)withinone yearDebt dueafter (192.1) 179.0 0.3 - - 0.5 (12.3)oneyearLeases (3.8) 0.3 0.1 2.5 (0.3) - (1.2)---------------------------------------------------------------------------------------------- Net (debt) (162.6) 191.3 1.5 2.5 (0.3) - 32.4/cash---------------------------------------------------------------------------------------------- 8. Interest-bearing loans and borrowings -------------------------------------------------------------------------------- Effective interest Final 31 December 31 December rate % Maturity 2007 2006 £m £m-------------------------------------------------------------------------------- CurrentFinance leases - 2008-2011 0.4 1.0Euro loan (Austria) 1.0 July 2011 0.5 -Redeemable PreferenceC shares - June 2008 7.2 --------------------------------------------------------------------------------- 8.1 1.0--------------------------------------------------------------------------------Non current bank loansDenominated in the followingcurrencies:US Dollar loan - - - 111.8Euro loan - - - 58.6Sterling loan LIBOR plus 0.35% April 2010 11.0 20.0Euro loan (Austria) 1.0 July 2011 1.3 1.7-------------------------------------------------------------------------------- 12.3 192.1Finance leases 2009-2011 0.8 2.8-------------------------------------------------------------------------------- 13.1 194.9-------------------------------------------------------------------------------- The 9,053,594 Redeemable Preference C Shares will be redeemed on 30 June 2008 ata value of £7.4 million. The shares have been discounted at 6% to show the fairvalue as at 31 December 2007 of £7.2 million and in accordance with theapplicable accounting standards the liability is not included in net debt, asshown in the net debt reconciliation. This information is provided by RNS The company news service from the London Stock Exchange

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