Melrose PLC Annual Report 2010 · Melrose PLC 01 Business performance Governance Financials Shareholder information Annual Report 2010 Financial highlights(1) Revenue (Year ended

Making acquisitionsDriving performanceRealising value

Melrose PLC Annual Report 2010

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www.melroseplc.net

Melrose PLC Annual Report 2010

Annual Report 2010 Melrose PLC Annual Report 2010 Melrose PLC

How we performedContents

Business performance

01 Financial highlights 02 Group at a glance 04 Chairman’s statement 06 Chief Executive’s review 08 Energy business review 11 Lifting business review 14 Dynacast business review 16 Other Industrial business review19 Finance Director’s review 26 Board of Directors 28 Directors’ report

Governance

36 Corporate Governance report 40 Remuneration report 44 Statement of Directors’ responsibilities

Financials

45 Financial contents 46 Independent auditor’s report –

consolidated statements 47 Consolidated Income Statement 48 Consolidated Statement

of Comprehensive Income 49 Consolidated Statement of Cash Flows 50 Consolidated Balance Sheet 51 Consolidated Statement of

Changes in Equity 52 Notes to the accounts 88 Independent auditor’s report –

Company statements 89 Company Balance Sheet for

Melrose PLC 90 Notes to the Company Balance Sheet

Shareholder information

97 Notice of Annual General Meeting 100 Company and shareholder information

“ These are excellent results from businesses well positioned to enjoy superior growth in the years to come. We are proud of the fact that overall group profits have not declined through this sharp recession and at the current share price Melrose has created over £1 billion of shareholder value since flotation in 2003.

We are considering the sale of Dynacast and looking for our next acquisition but will only proceed if we believe it creates shareholder value. Looking ahead, we are confident of further progress in 2011 and beyond.”

Christopher MillerChairman

Designed and produced by Merchant www.merchant.co.uk

The cover of this report is printed on Taffeta Ivory Board and the text pages on Heaven 42 paper. Both papers have been independently certified as meeting the standards of the Forest Stewardship Council (FSC), and were manufactured at a mill that is certified to the ISO14001 and EMAS environmental standards.Printed at St Ives Westerham Press Ltd, ISO9001, ISO14001, FSC certified and CarbonNeutral®

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Financial highlights(1)

Revenue(Year ended 31 December 2010)

£1,379.5m2009: £1,298.5m

Headline(2) operating profit (Year ended 31 December 2010)

£196.9m2009: £149.7m

Headline(2) basic earnings per share(Year ended 31 December 2010)

25.4p2009: 16.6p

Headline(2) 2010 profit before tax of £170.8 million (2009: £118.6 million), an increase of 44%

Headline(2) 2010 earnings per share of 25.4p (2009: 16.6p), up 53%

Headline(2) operating profit margin in the second half of 2010 of 14.9%

Revenue up 6% year on year and 15% in the second half of 2010

Profit before tax of £155.3 million (2009: £82.0 million), an increase of 89%

Basic earnings per share after exceptional items and intangible asset amortisation of 28.4p (2009: 11.0p), up 158%

Net debt of £287.4 million (2009: £321.7 million) reduced by £34.3 million. Net debt is now 1.25x EBITDA(3) (2009: 1.76x)

Final dividend increased by 46% to 7.0p per share (2009: 4.8p)

Full year dividend increased by 43% to 11.0p per share (2009: 7.7p)

Since flotation over £1 billion shareholder value created at current market price

Dynacast sale process underway

The Singapore Flyer is currently the tallest Ferris wheel in the world; it is forty two stories high, with a total height of 165m (541ft). Bridon supplied 24 backstay cable assemblies and 112 spoke cable assemblies.

(1) Continuing operations only unless otherwise stated.(2) Before exceptional costs, exceptional income and intangible asset amortisation.(3) Headline(2) operating profit before depreciation and amortisation.

02 Melrose PLC Annual Report 2010

Group at a glance

Melrose’s strategy is to acquire businesses it understands, improve them by a mixture of investment and changed management focus and, in a three to five year time frame, realise the value created and return it to shareholders in the most efficient way possible.

Division

More information see page 16


EnergyWorld number one independent supplier of turbogenerators and leading supplier of other electricity generating machinery, switchgear, transformers and power infrastructure equipment. Strong aftermarket service capabilities.



LiftingTop three supplier worldwide for wire and wire rope and leading supplier worldwide of lifting fittings and blocks and custom engineered material handling products.

DynacastGlobal design and manufacturer of precision engineered die-cast metal components and assemblies.

Other IndustrialTruth Harris MPC Weber Knapp Prelok

Key strengths

Expertise to design and manufacture an extensive range of high quality, multi-pole low, medium and high voltage generators and electric motors Comprehensive and integrated aftermarket support tailored to meet customers’ needs throughout the operating life of their equipment Switchgear and transformer products in service with all UK energy supply authorities Hydropower generators to produce environmentally green energy Generators and electric motors for ship power and propulsion Strategically located around the world.

Comprehensive and competitive range of solutions in steel wire, wire and fibre rope and strand Technical expertise to support customers demanding applications, training, installation and testing World’s leading supplier of accessories used in lifting and material handling applications Strategically located around the world.

Precision engineered die-cast zinc, aluminium and magnesium alloy components Full service capability Concept and design engineering Rapid prototyping Machine building capability.

Market leading design and engineering capabilities In-depth aftermarket service supply capabilities Leading innovative product development and technology choice for customers Trusted long-standing quality brand names.

Brush Aftermarket provides dedicated customer support, replacement parts, repair, servicing and product training for generators and control equipment.

Crosby’s McKissick® oilfield drilling block has a height of 12ft and a capacity of 350 tonnes for the lifting and lowering of drilling pipes.

Seatbelt component made by Dynacast, using an automated vision system designed to check twenty different safety critical components.

MPC’s automated manufacture and assembly cell for the production of wheel arch claddings for equipment supplied to leading car manufacturers.

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1 Energy £427.5m (31%) 2 Lifting £422.7m (31%) 3 Dynacast £275.7m (20%) 4 Other Industrial £253.6m (18%)

1 Energy £73.7m (35%) 2 Lifting £66.7m (31%) 3 Dynacast £43.0m (20%) 4 Other Industrial £28.7m (14%)

1 Energy 3,277 (29%) 2 Lifting 2,917 (26%) 3 Dynacast 2,647 (24%) 4 Other Industrial 2,300 (21%)

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Revenue Headline operating profit

Average number of employees

Products Major customers Financial data

Power generation equipment with 10 kW to 250 MW electric generators Synchronous motors, induction motors, submersible and traction motors Power management and excitation systems Generator control and protection panels Generator terminal cubicles Medium voltage AC and DC traction switchgear Power and system transformers Aftermarket servicing.

General Electric Pratt & Whitney Wartsila Hitachi L3 Converteam Rolls-Royce Scottish & Southern Electricity Scottish Power UK Power Networks Network Rail and London Underground.

Wire rope, fibre rope and wire Lifting hooks, connectors, clamps and hoist rings Material handling products Monorail systems Chain hoists Industrial carts and trailers.

Global crane original equipment manufacturers (“OEMs”) and mining OEMs Major oil companies Global oil field exploration and construction contractors Construction companies Lifting products distributors.

Automotive components Telecommunications Electronic components Consumer products Die-casting machines.

P&G (Gillette) Autoliv Valeo Dell TRW Motorola Avago Apple MGI HUF.

Window and door hardware Balers, shears, waste compactors and auto shredders Automotive trims and mouldings Food packaging containers and transit trolleys Widgets for bottles and cans Sealing products Ergonomic office and desk equipment.

US hardware industry OEMs Waste and scrap processors Manufacturers and distributors in various industries and retailers.

Revenue

£427.5m2009: £418.3m

Headline operating profit

£73.7m2009: £61.0m

Revenue

£422.7m2009: £419.0m


£66.7m2009: £62.5m

Revenue

£275.7m2009: £208.7m


£43.0m2009: £21.3m

Revenue

£253.6m2009: £252.5m


£28.7m2009: £20.6m


Chairman’s statement

I am pleased to report Melrose’s eighth set of annual results since flotation in 2003. Over this period Melrose’s market capitalisation has grown from £13 million at flotation to £1.5 billion as at the date of this report. This has been achieved with a net investment(1) by our shareholders of c£450 million and so at the current share price over £1 billion of shareholder value has been created since flotation.

Results for the GroupThese accounts report the results for the Group for the year to 31 December 2010 and comparatives for the previous year.

Revenue for the year was £1,379.5 million (2009: £1,298.5 million). Headline profit before tax (before exceptional costs, exceptional income and intangible asset amortisation) was £170.8 million (2009: £118.6 million) and headline basic earnings per share were 25.4p (2009: 16.6p). Profit before tax was £155.3 million (2009: £82.0 million) and the basic earnings per share were 28.4p (2009: 11.0p).

Further explanation of these results is provided in the Finance Director’s review.

DividendsThe Board intends to propose a final dividend of 7.0p per share (2009: 4.8p). Together with the interim dividend of 4.0p per share (2009: 2.9p) paid on 1 October 2010 this gives a total for the year of 11.0p per share (2009: 7.7p), an increase of 43%. This reflects both the highly successful performance in 2010 and the Board’s confidence in the future.

TradingThe trading performance of our businesses in 2010 has been outstanding.

“ In the first half of the year the Group story was one of substantially increased operating margins on essentially flat turnover. In the second half of the year this has been augmented by the return of top-line growth.”

(1) Value of equity issued less returns of capital and dividends.

Headline profit before tax

£170.8m2009: £118.6m

Headline basic earnings per share

25.4p2009: 16.6p

Total 2010 dividend

11.0p2009: 7.7p

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In the first half of the year the Group story was one of substantially increased operating margins on essentially flat turnover. In the second half of the year this has been augmented by the return of top-line growth. This combination has produced an increase of 32% in annual headline operating profit and an even higher 53% increase in the year’s headline earnings per share due to reductions in tax and net financing costs. Group headline operating margins are now at 14.3% up from 11.5% last year and in the second half of the year we have virtually achieved the margin target of 15% we set on the acquisition of FKI.

Much of this profit growth has come from FKI businesses acquired in July 2008, but also from Dynacast, our principal early cycle business, which saw strong sales growth particularly in the first half of the year. Order books for the Group remain strong going into 2011.

Cash generation in 2010 remained extremely strong. Over 100% of profits were turned into cash, generating headline operating cash (after capital expenditure) of £202.5 million; and working capital remained under strict control even in the face of improving sales. Capital expenditure, which had been somewhat curtailed during the downturn, is now back on a rising trend – we expect this to exceed depreciation over the next few years as our investment plans are implemented. We see opportunities for profitable investment in all of our businesses.

DynacastDynacast has been owned since May 2005 and the Board considers this to be an appropriate time to seek to realise the value created since then. A sale process has commenced and we are hopeful of a satisfactory outcome. Shareholders, however, can be confident that this excellent business will only be sold at a price which fully reflects the quality of its prospects. In the event a sale is successful it is our intention to return the proceeds to shareholders.

Strategy and outlookMuch has been achieved in the period since the acquisition of FKI with our existing businesses and management and employees are to be congratulated on this performance. However, there remains much opportunity for more to be achieved.

None of our major businesses has yet regained the levels of sales reached in the recent past, nor do we believe they have reached their potential in terms of profitability. Our strategy of selling businesses at the appropriate moment in their improvement cycle remains in place and this moment has not arrived for the majority of our businesses. Demand, though stronger in Europe and South East Asia than North America, continues to be good and current order books lead us to be optimistic on the sales outlook for 2011. Our ability to pass on raw material price increases, together with many initiatives on the cost front, mean we are also hopeful of further improvements in operating margins.

We are well placed operationally and financially to take on another substantial acquisition. We are as selective as ever with our criteria and although it is impossible to be precise about timing we are confident of identifying a value enhancing opportunity in due course.

In the meantime the inherent strengths of our businesses and their management teams gives the Board confidence of further progress in 2011.

Christopher Miller 9 March 2011

“ We are well placed operationally and financially to take on another substantial acquisition. We are as selective as ever with our criteria and although it is impossible to be precise about timing we are confident of identifying a value enhancing opportunity in due course.”


I am very pleased with the trading performance of the Group in 2010. As we move back into a period of sales growth though, it is worth noting that profits have increased in the Group notwithstanding the severe global downturn of the last few years.

In the first half of the year, the profit increase was achieved largely through lower costs on flat sales, whereas in the second half the profit growth was driven by increasing sales as the order books, particularly from our later cycle businesses, started to kick in. This has resulted in a steady and gratifying improvement in headline operating profit margins (a key Melrose performance indicator) to 14.9% in the second half of the year. This is significant in that it demonstrates the transition to increasing revenue driving profit growth rather than cost reduction. The Group is well placed to benefit from this in that many of its businesses operate in industries and regions with strong long term growth characteristics. As a result, during the second half of 2010 the Group has stepped up its capital expenditure programme significantly.

Whilst there are concerns about the effect of raw material price increases on the global economy, individually our businesses all benefit from strong positions in their markets and we are confident that, absent to an overall decline in the global economy, the Group will not be adversely affected.

The Energy division had an excellent year in 2010. Although the global power generation market started to recover during the year, it was not until well into the second half of the year that Brush Turbogenerators’ generator sales started to gather momentum, reflecting the later cycle nature of its business. In addition, the acquisition of GMS in the year has greatly boosted Brush Turbogenerators’ presence in the higher margin aftermarket business and this represents a major strategic opportunity for Brush. We continue to target growth in higher margin aftermarket sales and are confident that we will continue to see further success in this area over the months to come.

“ The Energy division had an excellent year in 2010. Although the global power generation market started to recover during the year, it was not until well into the second half of the year that Brush Turbogenerators’ generator sales started to gather momentum, reflecting the later cycle nature of its business.”

Chief Executive’s review

Revenue (Full year)

£1,379.5m2009: £1,298.5m

Headline operating profit margin (Second half)

14.9%2009: 13.0%

Headline basic earnings per share growth

53%2010: 25.4p versus 2009: 16.6p

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The continuing strength of the order book, allied to the efficiency gains being achieved, especially in relation to the absorption of Brush Transformers’ operations, gives us confidence that 2011 will be another good year.

In the Lifting division, Bridon’s profit in 2010 fell marginally short of its record profit in 2009. Whilst a number of Bridon’s markets saw some recovery in the year, the offshore oil and gas industry remained subdued, exacerbated by the moratorium on deepwater drilling following the Horizon oil spill in the Gulf of Mexico. During the year Bridon launched a number of exciting new products designed to meet the increasingly demanding applications required by its customers and continued to invest in the upgrading of its manufacturing and research and development facilities. With general market conditions continuing to improve and the expectation that the offshore oil and gas market will start to recover in the second half of 2011, allied to the benefits from the new products and higher capital spending, Bridon looks forward to a year of progress. Crosby recovered sharply in 2010 following a difficult 2009. Both sales and profit grew strongly, partly as a result of a general pick up in market conditions, but also as a result of the hard work put in during 2009 to work closely with its well established distributor base and continue to focus on developing new products, thereby resulting in gains in market share. With major advances being made in expanding in the Far East and increasing orders in its established North American and European markets, Crosby looks forward to a successful outcome in 2011.

Dynacast performed exceptionally well in 2010 with revenue and profit recovering strongly after a difficult 2009. Some of the cost savings made during the downturn have been retained as sales have recovered and this has resulted in a highly encouraging return on sales in the year of over 15 per cent. Sales in all three of Dynacast’s main geographic regions grew strongly in the year and new tool sales, a key indicator of future growth, reached a record high in Asia during the year. As market conditions continue to show improvement, Dynacast is confident of a further year of progress.

The Other Industrial division performed well in 2010 – profit was up substantially on the back of a modest increase in sales. MPC in particular had an exceptional year as the benefits of a focused programme of technically differentiated new products supported by capital investment started to come on stream. This has led to a strong business relationship with Jaguar Land Rover which we have been pleased to support with capital investment. We look forward to another year of progress from this division.

In February 2011, Brush Traction, Logistex UK and Madico were sold for a total consideration of £20.7 million.

OutlookMelrose group companies operate in markets that are forecast to continue to expand and to have good medium and long term growth characteristics. This, combined with an ongoing benefit from tight cost control, gives us confidence that we will continue to see progress over the years to come.

On the back of healthy order books, supported by an aggressive capital investment programme and a healthy pipeline of exciting new product introductions, we look forward to a further year of progress for the Group in 2011.

David Roper 9 March 2011

“ On the back of healthy order books, supported by an aggressive capital investment programme and a healthy pipeline of exciting new product introductions, we look forward to a further year of progress for the Group in 2011.”


Energy review

Market leading manufacturersof electricity generating equipment,switchgear and transformers.

Energy businesses

Brush Turbogenerators www.brush.eu

Brush GMS www.brushgms.com

Hawker Siddeley Switchgear www.hss-ltd.com

Marelli Motori www.marellimotori.com

Harrington Generators www.hgigenerators.com

1 Europe 66% 2 North America 21% 3 Asia 8%4 Rest of World 5%

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GeneratorsBrush Turbogenerators is the world’s largest independent manufacturer of electricity generating equipment for the power generation, industrial, oil and gas and offshore sectors. From its four plants in the UK, Holland, the Czech Republic and the USA, it designs, manufactures and services generators principally in the 10 MW to 250 MW range for both gas and steam turbine applications and supplies a globally diverse customer base. In addition, Brush Turbogenerators designs and manufactures Systems and Power transformers under the Brush name for UK electrical utilities and for the oil and gas sector primarily in the Middle East.

Brush Turbogenerators performed very well in 2010 with a particularly strong second half of the year. Revenue was nearly 10 per cent higher than in 2009 and headline operating profit was approximately one third higher, resulting in a most healthy and satisfying outcome in return on sales, one of Melrose’s key performance indicators.

Revenue (Year ended 31 December 2010)

£427.5m2009: £418.3m

Headline operating profit (Year ended 31 December 2010)

£73.7m2009: £61.0m

Revenue by geographical destination (%) (Year ended 31 December 2010)

Sectors served: Power generation plants, oil and gas, utilities, industrial, marine, rail, telecommunications, construction, commercial, military, hydropower, cogeneration, uninterrupted power supply and aftermarket.

One of the four stator frames supplied by Brush to the Bohunice nuclear power plant in the Slovak Republic. Brush also supplied five rewound generator rotors as part of the modernisation of the plant, which was completed in September 2010.

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Sectors served: Power generation plants, oil and gas, utilities, industrial, marine, rail, telecommunications, construction, commercial, military, hydropower, cogeneration, uninterrupted power supply and aftermarket.

Aftermarket sales performed well and produced a 25 per cent increase in the year, aided by the contribution from the acquisition in February 2010 of GMS, a US company based in Pennsylvania. GMS has exceeded its first year targets for both orders and sales.

The global power generation market began a slow recovery in 2010 resulting in Brush Turbogenerators’ new-build sales increasing by 3 per cent in 2010 over 2009. These sales were delivered on a far leaner and more efficient cost base, producing a significant improvement in operating margins and backed up by excellent cash generation.

Significant progress was also made in the year in implementing the new Brush manufacturing strategy. A combination of targeted capital investment in core facilities, outsourcing of non-core operations and a factory management philosophy based on value stream principles has reduced average generator manufacturing lead times by 15 per cent. Furthermore, this improved performance is being carried out off an inventory base which is half what it was when FKI was acquired in 2008.

As reported in the Interim Statement last August, the operations of Brush Transformers were absorbed into Brush Turbogenerators in July 2010.

The integration of the transformers business proceeded according to plan and was largely completed during 2010, resulting in significant operational gains, which will be reflected in Brush Turbogenerators’ performance in 2011. The softness in the UK demand for transformers experienced in the first half of 2010 has continued into the second half of the year.

Harrington, the specialist generator manufacturer based in the UK, saw a small fall in sales in 2010 following the 30 per cent decline in 2009. There is evidence to suggest that the UK small generator market bottomed out in 2010 as orders increased by 14 per cent, primarily in the last quarter of the year. The transition of the business to more specialised applications is on track and Harrington enters 2011 with a healthy order book.

OutlookBrush Turbogenerators entered 2011 with a new-build order book of £132 million representing well over half of its budgeted new-build sales for 2011. These sales, allied to the improved operational efficiency of the plants, together with the increased proportion of higher margin aftermarket business and the benefits from the integration of Brush Transformers, give us confidence that Brush Turbogenerators will have another good year in 2011.

“ Sales were delivered on a far leaner and more efficient cost base, producing a significant improvement in operating margins and backed up by excellent cash generation.”

Brush TurbogeneratorsBrush is in the process of supplying four water-hydrogen cooled generators as part of an extension to the nuclear power plant situated at Mochovce, Slovak Republic. The picture shows one of the generators on test at the Brush factory in the Czech Republic. All four Brush generators will be installed by 2013, together with new hydrogen and water systems for cooling the generators, oil systems for lubrication and static excitation systems for power supply.

Marelli Motori (“Marelli”)Marelli, based in Italy, is one of the world’s leading manufacturers of industrial generators and electric motors with a product portfolio ranging from 0.2 kW to 7.2 MW. With five overseas offices in Germany, UK, Malaysia, USA and South Africa it serves worldwide markets for power generation, marine, oil and gas and industrial manufacturing.

Sales in 2010 were marginally below 2009 and headline operating profit in the year was affected by adverse sales mix and increasing raw material costs. During 2010 sales shifted away from higher margin larger specialist machines towards more standard machines, reflecting the impact of the economic downturn which hit the marine sector particularly hard. Marelli once again confirmed its cash generating abilities by converting 135% of its headline operating profit into cash.

The building of the Malaysian plant is well underway and should be fully operational by the middle of this year. This plant will make the smaller, more standard generators, thereby enabling Marelli’s Italian operation to focus on manufacturing larger, more sophisticated machines.

More information about Brush Turbogenerators is available online at www.brush.eu


Energy review continued

HSSPart of the HSS ‘Fit and Forget’ family of products, the Horizon fills the market need for outdoor, ground-mounted circuit breakers. Designed for a 38kV application, the Horizon can be used with other HSS products to provide cost effective and compact substations, or breathe new life into existing substations by replacing old and obsolete equipment.

More information about HSS is available online at www.hss-ltd.com

More information about Marelli is available online at www.marellimotori.com

MarelliIn 2010, Marelli supplied and installed a medium-voltage high-speed Vertical Hydropower Synchronous Generator to a hydropower plant in Bürglen, Switzerland. The generator is fitted with water cooled sleeve bearings able to withstand static and hydraulic loads and has a rated power of 3,700 kVA and a rated speed of 1,000 rpm. The generator weighs 19 tonnes and is able to satisfy the electric power requirements of over 900 family houses.

OutlookThe positive momentum in orders experienced in 2010 has continued into the new year and gives us confidence that 2011 will be a year of progress at Marelli.

Hawker Siddeley Switchgear (“HSS”)HSS produces a wide range of indoor and outdoor medium voltage switchgear, selling into the global power distribution and transit markets. Based in the UK, where it has both a manufacturing and a R&D facility, HSS also has manufacturing plants in Australia and China.

HSS produced another good trading result in 2010 with further encouraging progress in operating margins, assisted by continuing focus on operational efficiency improvements during the year. In addition, tight control of working capital resulted in a creditable cash generation performance.

Both UK and Australian operations recorded healthy sales and an encouraging order intake during the year on the back of a focused product development programme designed to expand the reach and the range of HSS’s core products. The indoor and outdoor power distribution markets remained strong, supported by the further development of the UK and overseas mass transit markets, where HSS secured significant business on a number of high profile infrastructure projects.

The facility in Shanghai is now fully operational, supplying circuit breakers into HSS’s UK operation. This will now be further developed to support the company’s growth strategy in South East Asia, with particular regard to the growth of metropolitan systems throughout the region. This presents a significant opportunity for HSS.

OutlookOn the back of positive trading momentum at the end of 2010 and with a strong opening order book in 2011, HSS looks forward to a good year.

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World leading suppliers of wire,wire rope products, lifting fittingsand blocks.

Lifting businesses

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

As foreshadowed in the Interim Statement in August, Bridon’s profit in 2010 fell short of the record profit recorded in 2009, which benefited particularly from strong orders in the later cycle offshore oil and gas business. Headline operating margins in the second half of 2010 were weaker, due to lower sales in this business and low margin contracts in Bridon’s structures business.

Whilst a number of Bridon’s markets experienced some recovery in 2010, market conditions in the offshore oil and gas industry remained subdued throughout the year. By contrast the onshore oil and gas sector did see some recovery.

Lifting review

Bridon www.bridon.com

Crosby www.thecrosbygroup.com

Acco www.accomhs.com

Bridon cables and end fittings were used to support the Infinity Bridge in Stockton-on-Tees. See page 12 for further details.


£422.7m2009: £419.0m


£66.7m2009: £62.5m


Sectors served: Onshore and offshore oil and gas, deep shaft and surface mining, petrochemical, alternative energy, general industrial and construction markets, fishing and marine, infrastructure (e.g. bridges and sports stadia) and material handling industries.


Lifting review continued

General demand in the offshore market was weak in the aftermath of the global recession and this was exacerbated by the moratorium on deep water drilling following the Horizon oil spill in the Gulf of Mexico. Indeed, the impact of the spill was felt in markets beyond North America, as the regulatory authorities continued to scrutinise safety issues connected with deep water drilling.

By contrast, the mining market continued to improve for both deep shaft and surface mining as a result of the renewed demand for commodities, which has led to increased orders in most markets.

The commercial construction markets in North America, the Middle East and Europe remained subdued in 2010. As a result, many industrial crane companies have been cautious in placing orders, although activity has continued at reasonable levels in China and other parts of Asia. However, industrial production has increased in some countries, which has driven demand for industrial ropes.

Bridon’s focus on leading technology product development accelerated in 2010 with the introduction of eleven new products designed to meet the increasingly demanding applications required by its customers. New product introductions in 2010 included the 2G Big Hydra, an enhanced multi-layer winch rope for the oil and gas industry, which provides greater strength and rotational stability to meet the growing challenges of deep-sea deployment and the Tiger BiG Bristar rope, used in the surface mining industry for dragline applications. Improvements have also been made to Bridon’s industrial and crane range with the introduction of a new high strength Dyform 8 Bristar rope, which offers improved design and plastic sheathing, resulting in significantly increased fatigue resistance.

Bridon continues to invest in the upgrading of its manufacturing and research and development facilities. The programme to improve the wire mill in Doncaster, designed to increase manufacturing efficiencies and significantly reduce carbon emissions and other environmental waste, is due for completion in the second half of 2011. The £3 million investment in the company’s German factory, necessary to increase manufacturing capability for large multi-strand ropes, is on schedule to complete shortly. Further substantial capital investment is also planned over the next two years.

OutlookAlthough Bridon expects demand in the offshore oil and gas market to remain subdued in the first half of 2011, it is expected that this market will start to see some recovery in the second half of the year, particularly in light of the continuing strength in the price of oil. The higher oil price will also benefit Bridon’s mining business, positively affecting activity levels in the Canadian Tar Sands.

“ Bridon’s focus on leading technology product development accelerated in 2010 with the introduction of eleven new products designed to meet the increasingly demanding applications required by its customers.”

BridonThe Infinity Bridge is a public pedestrian and cycle footbridge across the River Tees in the borough of Stockton-on-Tees. Bridon manufactured the locked coil cable assemblies and end fittings for this award-winning bridge. The design utilises two tied arches and is supported using Bridon Galfan® locked coil cables fitted with Stylite® architectural sockets. The largest of the arches is tied using 90mm diameter cable assemblies and the deck is hung from the arches using 44 x 30mm diameter cables. The total length of the bridge is 237 metres.

More information about Bridon is available online at www.bridon.com

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More information about Crosby is available online at www.thecrosbygroup.com

Whilst the outlook for Bridon’s construction market remains uncertain, global manufacturing, particularly in the Far East, is likely to continue to increase during 2011, bringing modest growth to Bridon’s industrial business.

Bridon’s strategy to lead technology development through high quality manufacturing and innovative technical solutions in the wire and fibre rope industry leaves it well placed to benefit from market recovery.

CrosbyCrosby is a world leader in the design, manufacture and sale of lifting fittings and blocks to the oil and gas, construction and mining sectors, serviced primarily through a global network of specialist distributors.

The recovery in Crosby’s trading performance from a difficult 2009, reported in the Interim Statement, has continued on the back of an ongoing improvement in order bookings throughout the year. Crosby’s sales in the second half of 2010 were over 20 per cent higher than in the second half of 2009 (the low point in Crosby’s sales cycle) and this has resulted in a very encouraging recovery in Crosby’s profit and operating margins.

During the year Crosby continued to focus and build upon its broad product mix of lifting fittings sold through its traditional distributor base. Market share gains have been achieved as a result of working closely with its distributors and focusing on technical training and end-customer service and support. This model has proved very successful in North America and is beginning to gain traction in other parts of the world.

An integral part of this model is a continuing focus on new product development. During the year Crosby introduced a number of new product lines and also made refinements to existing products. The Split Nut design, used in crane blocks to enable quick removal and easy inspection, has become widely accepted in its market. In addition, Crosby is in the process of introducing a new e-applications system, soon to be available on services such as the Apple iPad, designed to provide customers with real-time information regarding the installation and usage of Crosby products.

The expansion of the Crosby franchise beyond North America and Europe, where it has a powerful presence, remains a high priority. In addition to the rationalisation of the manufacturing base in Europe, further investment was made in strengthening the sales and marketing team with a view to increasing penetration, including territories such as India and the Middle East.

Crosby continues to expand its capabilities in China by extending its network of distributors – sales volume has increased by an average of 35 per cent per annum over the past few years. This effort has been greatly assisted by the new crane block and sheave centre, based in Hangzhou, China, which has resulted in shorter delivery lead times to customers. Although at an early stage, Crosby has started stocking inventory in Brazil in order to take advantage of the fast growing offshore oil exploration opportunities.

CrosbyIn October 2010, Crosby supplied an integral piece of the system used in rescuing thirty three Chilean coal miners from their sixty nine day underground imprisonment.

Through a local distributor, Crosby provided the key link between the wire rope used to hoist the miners out of the mine and the capsule in which they made the trip to safety. A Crosby S421 Wedge Socket was used to connect the 24mm wire rope to the 600kg rescue capsule.

OutlookOn the back of a growing order book in its established North American and European markets, and significant advances being made in penetrating newer regions, we look forward to a further year of good progress.


Dynacast review

Global designer and manufacturer of precision engineered die-cast metal components and assemblies.

Dynacast is a global manufacturer of precision engineered products, including die-cast metal components that can be machined, plated and assembled to customer specifications. The products are manufactured using proprietary die-casting technology and are supplied to a wide range of end markets, including automotive, healthcare, telecommunications, consumer electronics, hardware, computers and peripherals.

After a very challenging 2009, Dynacast staged an outstanding recovery in 2010. Revenue was 32 per cent higher than in the previous year and headline operating profit more than doubled. Particularly pleasing was the improvement in the return on sales in the year to over 15 per cent. A large proportion of the costs that were taken out of the business to deal with the downturn have since returned as volumes have grown; however, it is expected that there will be some permanent saving, resulting in increased profitability.

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Dynacast businesses

Dynacast www.dynacast.com

Techmire www.techmire.com

Fishercast www.fishercast.co.uk

The Dynacast TV lamp bracket functions as a grip for the colour wheel inside Samsung’s Digital Light Protection (DLP) high-definition, flat screen television. The lamp bracket is made of aluminium alloy to deliver high strength and low product weight.



£275.7m2009: £208.7m


£43.0m2009: £21.3m


Sectors served: Automotive, telecommunications, consumer electronics, computing, healthcare and construction.

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Zinc is the major raw material used in the manufacture of Dynacast’s products and the LME price increased from an average of US $1,658 per tonne in 2009 to US $2,156 per tonne in 2010, accounting for approximately £12 million of the increase in revenue in 2010. Dynacast benefits from an established metal cost pass-through mechanism, such that this price increase had little impact on profit during the period.

The underlying (adjusted for metal and foreign currency) sales increase in Europe in 2010 over the previous year was over 30 per cent, with particularly strong performances in Germany, Austria and Spain. Sales to Gillette were up significantly as a result of the introduction of the new Fusion Pro-Glide razor.

North America, having been the hardest hit of Dynacast’s regions in 2009 as a result of the severe downturns in the automotive and construction sectors, saw a gradual recovery in 2010 with sales picking up. During the year management closed the Montreal die-casting facility and transferred the production to other Dynacast plants in North America and Europe. After adjusting for this effect and foreign currency and metal prices, underlying sales in the region rose by 13 per cent over 2009.

In Asia, where the downturn in Dynacast’s sales was not as pronounced as in Europe and North America, the underlying sales growth in 2010 was a most encouraging 23 per cent. China continues to be the growth engine in Asia with Dynacast Shanghai leading the way with underlying revenue and headline operating profit growth in the year of 48 per cent and 153 per cent respectively over 2009. The new 4,500 square metre factory, which opened in Dongguan, South China, in 2009, has continued to develop rapidly. In view of the exciting growth potential in this region, Dynacast invested in a greenfield facility in Batam, Indonesia, which operates as a satellite unit of Dynacast Singapore and commenced production in the second half of 2010.

In 2010 there has been pleasing development of Dynacast’s international business development team which operates centrally to target sales to large multi-national companies which can then source product from any of Dynacast’s factories worldwide.

New tool sales, which are a key indicator of future growth, recovered in 2010 and, although more modest in the more developed economies, were at a record high in Asia in the year, which bodes well for 2011 and beyond.

OutlookHaving recovered dramatically from the downturn in 2009 through positive management actions on costs and improving markets, Dynacast remains well positioned to continue to produce good returns.

Dynacast The telecommunications connector acts as a housing for a midsize video jack, a video patching system product from a company called ADC (a company that provides connections for wireless, cable, broadcast and enterprise networks around the world). The connector replaces six separate components, significantly improving quality as well as reducing production costs for Dynacast customers.

More information about Dynacast is available online at www.dynacast.com

“ After a very challenging 2009, Dynacast staged an outstanding recovery in 2010. Revenue was 32 per cent higher than in the previous year and headline operating profit more than doubled.”


Other Industrial review

Market leading manufacturers across the housing, construction, automotive, scrap processing and other industrial sectors.

The equipment pictured shows a Harris BSH-30-1223 B-4 guillotine shear, based in Alabama, USA. This was sold to a customer involved in the processing of miscellaneous steel scrap, pipe, plate and selected sections of freight rail cars and ship scrap. With 1,118 metric tonnes of cutting force and a capacity to produce up to 46.3 metric tonnes of scrap material per hour, this shear epitomises Harris’ lead in the manufacture of recycling equipment in the industry and remains at the leading edge of technology and innovation.

TruthTruth designs and manufactures a wide range of quality components for North American producers of fenestration products including windows and patio doors utilised in both the new construction and the repair and remodel residential markets. Most of Truth’s products are manufactured in plants in Minnesota, USA, and Ontario, Canada, with some lower margin products outsourced to China.

Truth reported a creditable trading result for 2010. As previously reported, the dramatic recovery in Truth’s trading performance from the low point in the first half of 2009 started levelling off in the first half of 2010 as distribution pipelines were replenished. Although since that time US housing indicators have improved, they nevertheless remain significantly below average. Truth has done well to continue to raise its operating margins despite increasing pressure from substantial increases in the cost of materials, a testament to its leading market position in North America.

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Other Industrial businesses

Truth www.truth.com

Harris www.harrisequip.com

MPCwww.mckechnie-plastics.co.uk

Weber Knapp www.weberknapp.com

Prelok www.prelok.com



£253.6m2009: £252.5m


£28.7m2009: £20.6m


Sectors served: Businesses serve a diverse range of sectors, including housing, construction, retail, scrap processing, fibre recycling, automotive, consumer packaging, brewing, food distribution, power tools, industrial, medical, office furniture and general engineering.

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Truth continued to increase its market share during the year, both through organic sales growth and new product development. Management’s focus during the year has centred on the control of labour costs, productivity, quality, service levels and customer satisfaction, together with constant attention to working capital management.

The major strategic initiative to outsource the manufacturing of lower margin products to China continues to make good progress and this has resulted in more capacity being made available for the efficient production of higher margin casement units in Truth’s Minnesota plant.

OutlookNotwithstanding the appalling weather conditions in a large part of the US at the beginning of 2011, which has made comparisons to last year very difficult to assess, there is a feeling that, although US housing remains sluggish, Truth will show moderate sales growth in the year. In view of the efficiency gains continuing to be made in the business and its growth in market share, Truth should continue to improve its performance in 2011 and is very well placed to benefit when the US housing market recovers.

HarrisHarris is a market leader in the scrap and waste recycling industries, operating from two plants in Georgia, USA. The company designs, manufactures and services a full range of equipment solutions and serves the scrap metal and fibre recycling industries.

Harris performed well in 2010. Although revenue declined slightly in the year, headline operating profit was over 15 per cent higher than in 2009, as a result of improved efficiency and lower costs, resulting in a healthy improvement in operating margin. Demand for scrap recycling machines recovered in 2010 with order intake being 50 per cent higher than in 2009.

Harris continued to invest in design and engineering in 2010 through its new product development group. During the year, Harris introduced four new products that boast higher throughput but with approximately half the energy consumption. These new products present a strong value proposition in the market.

During the year Harris decided to build on its strong reputation in the scrap and waste recycling industries by expanding its presence in Latin America in order to take advantage of the rapidly growing markets in that region.

In addition, during the year Harris continued to add resources to its growing aftermarket business. This has grown from approximately 20 per cent of Harris’ sales in 2008 to 34 per cent in 2010.

OutlookHarris should have another year of progress in 2011 but, based on the current order book, this is expected to be weighted to the second half of the year.

TruthTruth Hardware’s Marvel™ Power Operator system for windows and skylights is a sleek new design that is simple to install, easy to operate and above all reliable and affordable. Rated to lift skylight sashes weighing up to 90 lbs, the Marvel System has an optional hand held remote control and roof mounted rain sensor to add convenience and peace of mind.

More information about Truth is available online at www.truth.com

“ Truth continued to increase its market share during the year, both through organic sales growth and new product development.”


MPCMPC designs and manufactures engineered plastic injection moulded and extruded components and metal pressings for sectors including food and beverage packaging, automotive, construction and industrial.

The recovery signalled in the Interim Statement has continued and for the year ended 31 December 2010 MPC reported an increase in sales of approximately 35 per cent over 2009 and a near doubling of headline operating profit. The heavy focus on technically differentiated new product introductions has been rewarded with strong sales increases in the year to the automotive, building and consumer durable sectors. For example, MPC worked closely with Wavin in the development of a universal inspection chamber to prevent access to drainage systems of external contaminants into surrounding land.

During 2010, in order to achieve its new product development objectives, MPC recruited a number of engineers specifically to focus on design and testing together with the customers to help bring onstream the new value-engineered products. Exploitation of manufacturing niches that use new materials and technologies will remain a priority as the business moves forward.

MPCThe advanced multi-material injection moulded cell has been designed and developed in support of various Jaguar and Land Rover vehicle platforms. The robotic equipment shown below is used in the production of door cladding and exterior body trims. Quick change robotics technology allows for flexible use across a number of similar components, which means that MPC can supply these parts for both three and five door vehicles.

More information about MPC is available online at www.mckechnie-plastics.co.uk

“ MPC’s new business order book remains very strong with a number of key projects due to go live in 2011.”

Other Industrial review continued

OutlookMPC’s new business order book remains very strong with a number of key projects due to go live in 2011. This together with the solid recovery being seen in UK manufacturing, allied to healthy exports, provides confidence for a successful outcome for the year.

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The year to 31 December 2010 is the first full year since the FKI acquisition for which the prior year performance provides a meaningful comparative.

In addition, no businesses are shown as discontinued in 2010 and hence the 2009 and 2010 results have not been adjusted from previously announced numbers.

Group trading results – continuing operationsThe continuing operations at 31 December 2010 include four trading divisions, namely Energy, Lifting, Dynacast and Other Industrial.

To help understand the results of the continuing operations the term ‘headline’ has been used. This refers to results calculated before exceptional costs, exceptional income and intangible asset amortisation as this is considered by the Melrose PLC Board to be the best measure of performance.

For the year ended 31 December 2010 the Group achieved revenue from continuing operations of £1,379.5 million (2009: £1,298.5 million) representing a 6% increase over the previous year. During the second six months of 2010 Group revenue increased by 15% compared to the same period in 2009 – a significant improvement from the 1% fall in the first six months of 2010.

Headline operating profit in the year ended 31 December 2010 was £196.9 million (2009: £149.7 million) which was up by 32% on the previous year, a significantly faster pace of growth than for Group revenue. This was achieved by an increase in the headline operating profit margin (defined as the percentage of headline operating profit to revenue) from 11.5% in 2009 to 14.3% in 2010. Indeed, in the second half of 2010 the margin increased to 14.9%, just below our long term stated target of 15%. The reasons for this performance are highlighted in the Chief Executive’s review.

“ During the second six months of 2010 Group revenue increased by 15% compared to the same period in 2009 – a significant improvement from the 1% fall in the first six months of 2010. Headline operating profit in the year ended 31 December 2010 was £196.9 million (2009: £149.7 million) which was up by 32% on the previous year.”

Finance Director’s review


£196.9m2009: £149.7m

Net debt to headline EBITDA

1.25 times2009: 1.76 times

Working capital

8.4% of sales2009: 8.8% of sales

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Finance Director’s review continued

Annual Report 2010

The most comprehensive measure of performance is headline earnings per share (“EPS”) as this also includes both net finance costs and headline tax. As a consequence of improvements in both of these costs compared to the previous year the headline EPS in 2010 of 25.4p (2009: 16.6p) has increased by 53%. The diluted headline EPS, which recognises the current value of the Melrose 2009 Incentive Share Scheme as at 31 December 2010, was 24.1p for the year ended 31 December 2010 (2009: 16.3p) representing a 5% dilution factor (2009: 2%).

After exceptional costs, exceptional income and intangible asset amortisation, Group operating profit was £181.4 million (2009: £113.1 million), Group operating margin was 13.1% (2009: 8.7%) and EPS was 28.4p (2009: 11.0p).

Trading results by division – continuing operationsThe performance of each of these divisions is discussed in detail in the Chief Executive’s review.

Central costs comprise £8.6 million (2009: £8.9 million) of Melrose PLC corporate costs and an LTIP accrual of £6.6 million (2009: £6.8 million). This accrual includes an amount of £1.8 million (2009: £1.8 million) in respect of the Melrose 2009 Incentive Share Scheme. This annual accrual was calculated in accordance with IFRS 2 using a standard pricing model when the scheme was established and is constant until the date of crystallisation. In addition, an increase in the provision for the cash based senior management incentive schemes of £4.8 million (2009: £5.0 million) was charged. This scheme is for senior operational management and is designed to reward improvement in business performance mainly over the period to 2014.

Finance costs and incomeThe net finance cost in 2010 was £26.1 million (2009: £31.1 million).

Net interest on external bank loans, overdrafts and cash balances was £17.9 million (2009: £20.3 million), which is largely protected from interest rate changes by a number of interest rate swaps which fix the interest rate on £378.7 million (US $546.0 million and €33.3 million) of term debt. More detail on these swaps is given in the finance cost risk management section of this review. The net interest expense on external loans has reduced during the year. This is because US $80 million of the term loan was repaid in 2009 following the sale of the Logistex businesses, and also the margin charged to Melrose by the bank syndicate has become lower due to the reduction in leverage. In 2010 the Group had a blended interest rate of 3.35% (2009: 3.49%).

Also included in the net finance cost is a £2.3 million (2009: £2.1 million) amortisation charge for the initial costs of raising

the £750 million committed loan facility, a net interest cost on pension plans in excess of the expected return on their assets of £4.1 million (2009: £6.6 million) and the unwind of discounts on long term provisions of £1.7 million (2009: £1.6 million).

Earnings per share and number of shares in issueThe Board believe that headline EPS gives the best reflection of performance in the year as it strips out the impact of exceptional costs, exceptional income and intangible asset amortisation. The headline EPS for the year to 31 December 2010 was 25.4p (2009: 16.6p) which represents a 53% increase on the prior year. The diluted headline EPS for the year ended 31 December 2010 was 24.1p (2009: 16.3p). This represents a 5% dilution factor (2009: 2%) to recognise the current value, in number of shares, of the Melrose 2009 Incentive Share Scheme.

In accordance with IAS 33, two further basic EPS numbers are disclosed on the face of the Income Statement, one for continuing operations which is 28.4p (2009: 11.0p) and one that also includes discontinued operations, of which there are none in 2010, and therefore is also 28.4p (2009: 16.0p).

Exceptional costs and incomeMelrose has continued to undertake significant action to improve the operational and financial performance of the Group. To achieve this exceptional costs and exceptional income have been incurred and, along with intangible asset amortisation, these have been highlighted on the face of the Income Statement. Exceptional operating costs amounted to £10.3 million (2009: £23.9 million), exceptional income to £21.4 million (2009: £14.0 million) and intangible asset amortisation to £26.6 million (2009: £26.7 million). Exceptional operating costs and income consist of the following items:

Exceptional operating costsTotal

£m

Restructuring costs (5.9)Defined benefit pension plan disposal (4.0)

Acquisitions and disposals of businesses (0.4)

Total (10.3)

Exceptional operating incomeTotal

£m

Pension curtailment gain 13.1 FKI captive insurance commutation gain 5.6 Net release of provisions 2.7

Total 21.4

The Group incurred £5.9 million of costs relating to restructuring programmes which include the integration of the Transformers business into the Turbogenerators business within the Energy division.

Trading results by division – continuing operations

2010 Revenue

£m

2010 Headline

operating profit/(loss)

£m

2010 Headline

operating profit margin

2009 Revenue

£m

2009 Headline

operating profit/(loss)

£m

2009 Headline

operating profit margin

Energy 427.5 73.7 17.2% 418.3 61.0 14.6%Lifting 422.7 66.7 15.8% 419.0 62.5 14.9%Dynacast 275.7 43.0 15.6% 208.7 21.3 10.2%Other Industrial 253.6 28.7 11.3% 252.5 20.6 8.2%Central – corporate – (8.6) n/a – (8.9) n/aCentral – LTIPs(1) – (6.6) n/a – (6.8) n/a

Group 1,379.5 196.9 14.3% 1,298.5 149.7 11.5%

(1) Long Term Incentive Plans.

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In addition, the Group entered into a buyout arrangement to sell the liabilities of the Bridon Group Senior Executive Plan for £4.0 million in excess of IAS 19 carrying value of plan net liabilities.

In accordance with IFRS 3 (revised 2008), the £0.2 million of costs incurred in the acquisition of Generator & Motor Services of Pennsylvania, LLC are shown as exceptional costs in these financial statements. The Prelok France business, previously shown within the Other Industrial division, was disposed of for a loss of £0.2 million.

During the year, it was announced to members of the FKI UK Pension Plan that it would be closed to the accrual of future benefits on 28 February 2011 resulting in a curtailment gain of £13.1 million.

In addition, a gain of £5.6 million was generated by the commutation of certain insurance policies within the FKI captive insurance company.

During 2010, provisions created as part of the FKI fair value exercise were reassessed based on latest information and this resulted in a net release of £2.7 million, the credit for which has been shown in exceptional income.

Acquisition during the periodOn 12 February 2010, the Group acquired 100% of the issued share capital of Generator & Motor Services of Pennsylvania, LLC (“GMS”), a company operating in North America supplying aftermarket services to the turbogenerator industry. The consideration for GMS was £8.0 million. In addition acquisition costs of £0.2 million were incurred and expensed in the Income Statement in accordance with IFRS 3 (revised 2008). GMS is now reported within the Energy division.

Disposal of businesses – post 31 December 2010Three smaller businesses have been disposed of in the two months following 31 December 2010, namely, Brush Traction, Logistex UK and Madico, all of which were held within the Other Industrial division.

The net proceeds for these businesses were £20.7 million and the businesses contributed £58 million to revenue and £6 million to headline operating profit in 2010.

In addition, £22 million of pension liabilities went with the Logistex UK business, including a small deficit, and with the Brush Traction disposal over £100 million of parent company guarantees and bonds were transferred to the buyer.

Cash generation and managementA key performance measure for Melrose is the percentage of profit conversion to cash. This represents the amount of cash (post working capital movement and capital expenditure) that is generated from headline operating profit. In the year to 31 December 2010 103% (2009: 149%) of headline operating profit has been converted to cash. This means that the long term Melrose headline operating profit conversion to cash from 2003 to 2010 is now 122%, and since acquiring FKI is 136%.

The headline cash generation since acquiring FKI has been achieved across all divisions as shown in the table at the bottom of the page.

This has enabled Melrose to generate £96.9 million of cash from trading after all costs including tax in the year to 31 December 2010. Importantly, since the acquisition of FKI on 1 July 2008, £341.9 million of cash has been generated from trading after all costs including tax. In addition, £48.5 million of cash net of costs has been generated from disposals and £100.5 million has been paid to shareholders. This has meant that, at constant exchange rates, net debt has reduced by £278.5 million, 60% since the acquisition of FKI on 1 July 2008.

Movement in net debt

2010 Full year

£m

Since FKI acquisition

(1 July 2008) £m

Opening net (debt)/cash (321.7) 22.3 Acquired net debt – (471.7)Net cash flow of acquisitions (9.1) (20.3)Net cash flow from disposals (0.1) 48.5 Cash generated from trading (after all costs including tax) 96.9 341.9 Amount paid to shareholders (43.8) (100.5)Foreign exchange movement (7.2) (105.3)Other non-cash movement (2.4) (2.3)

Closing net debt (287.4) (287.4)

The detail of the cash flow from trading is shown below:

Cash generated from trading (including discontinued operations)

2010 Full year

£m

Since FKI acquisition

(1 July 2008) £m

Headline operating profit 196.9 440.6 Depreciation and computer software amortisation 32.9 87.9 Working capital movement 3.1 151.4 Net capital expenditure (30.4) (80.8)Headline operating cash flow (post capex) 202.5 599.1 Headline operating profit conversion to cash % 103% 136% Net interest and net tax paid (43.8) (97.8)Defined benefit pension contributions (27.5) (75.6)Other (including restructuring costs) (34.3) (83.8)Cash generated from trading (after all costs including tax) 96.9 341.9

The Balance Sheet leverage (calculated as net debt divided by headline operating profit before depreciation and amortisation) was 1.25x at 31 December 2010. This is a 29% reduction from leverage of 1.76x at 31 December 2009 and it has more than halved compared to leverage of 2.65x two years ago.

Cash generation and management since FKI acquisition Energy Lifting Dynacast

Other Industrial Central

Total continuing Discontinued Total

Headline operating profit/(loss) £m 165.6 164.9 79.7 59.9 (42.8) 427.3 13.3 440.6

Headline operating cash generation (post capex) £m 213.2 185.0 105.3 70.2 (24.0) 549.7 49.4 599.1

Headline operating profit conversion to cash 129% 112% 132% 117% 56% 129% 371% 136%

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Annual Report 2010

Capital expenditureThe pay back on capital projects is a key part of the Melrose strategy to improve operational performance. By division, the capital expenditure in the year was as follows:

Energy Lifting DynacastOther

Industrial Central Total

Capital expenditure £m 9.4 9.8 7.0 5.5 0.2 31.9

Depreciation £m 8.0 9.4 7.7 7.1 0.7 32.9

Capital expenditure to depreciation ratio (full year) 1.2x 1.0x 0.9x 0.8x 0.3x 1.0x

Capital expenditure to depreciation ratio (second half year) 1.5x 1.6x 1.4x 1.1x 0.3x 1.4x

Melrose six year (2005-2010) average annual multiple 1.2x

The capital spend to depreciation ratio was 1.0x in 2010, compared with 0.7x in 2009. Indeed, in the second half of 2010 it increased to 1.4x. This illustrates that the Group is returning to its investment phase where the Board authorises capital and restructuring projects which will improve the value of the businesses. The six year Melrose average annual capital spend is in excess of depreciation at 1.2x.

Working capital managementThe Board continues to allow each division to have the correct amount of working capital to achieve the most suitable balance between commercial and financial efficiency. To ensure this happens, working capital days cover targets are set for each business unit for inventory, trade receivables and trade payables.

Even in this year of growth, a working capital cash inflow of £3.1 million was achieved, which means that working capital has become more efficient in the year. During Melrose’s ownership of FKI the cash generated from working capital, at constant exchange rates, is now £151.4 million, which represents a 57% reduction in net working capital. A further measure of improvement is that the percentage of net working capital to sales for the Melrose Group has now reduced to 8.4% at 31 December 2010 compared to 15.4% on acquisition of FKI.

TaxAs expected, the headline Income Statement tax rate in 2010 was 26% (2009: 30%).

This is consistent with the Group’s natural tax rate, based on the mix of 2010 contributions of profit by country and the standard statutory tax rate in those countries, as adjusted for specific, known factors. The overall effect on the Group of higher tax rates in North America and certain European countries is offset by the benefit that continues to arise from lower tax rates in the Far East and other European countries.

The rate after exceptional items and intangible asset amortisation is 9% (2009: 33%), which is lower than the headline rate due mostly to the recognition of exceptional US deferred tax assets of £23.5 million as an exceptional credit. These deferred tax assets are recognised now because sufficient future taxable profits are now expected to arise to benefit from future likely tax deductions and losses.

The headline cash tax rate of 16% (2009: 3%) is again low due to the benefit arising from the utilisation of tax losses and other deferred tax assets. In the medium term, the headline cash tax rate is expected to trend toward the headline Income Statement rate.

The total amount of tax losses in the Group has increased slightly due to the recalculation of prior year positions. This is largely offset by the utilisation of losses and other deferred tax assets against current year profits. The tax losses are as follows:

Tax lossesRecognised

£mUnrecognised

£mTotal

£m

UK – 214.5 214.5 North America – 1.3 1.3 Rest of World – 35.9 35.9

Total 2010 – 251.7 251.7

Total 2009 13.6 237.8 251.4

The Group’s net deferred tax liability is £81.9 million (2009: £103.2 million). A £102.8 million (2009: £112.9 million) deferred tax liability is provided in respect of brand names and customer relationships acquired. This liability does not represent a future cash tax payment and will unwind as the brand names and customer relationships are amortised.

Assets and liabilitiesThe summary Melrose Group assets and liabilities are shown below:

31 December 2010

£m

31 December 2009

£m

Fixed assets (including computer software) 256.1 254.3 Intangible assets (excluding Goodwill) 381.1 403.1 Goodwill 798.1 779.2 Net working capital 115.9 114.3 Retirement benefit obligations (119.6) (169.1)Provisions (118.7) (144.2)Deferred tax and current tax (134.3) (152.5)Other (8.3) (0.1)

Total 1,170.3 1,085.0

These assets and liabilities are funded by:31 December

2010 £m

31 December 2009

£m

Net debt (287.4) (321.7)Equity (882.9) (763.3)

Total (1,170.3) (1,085.0)

The increase in total equity is primarily related to the profit for the year of £141.3 million, the actuarial gain on defined benefit pension plans of £13.8 million less dividends paid to shareholders of £43.8 million.

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Annual Report 2010

Goodwill, intangible assets and impairment reviewThe total value of goodwill as at 31 December 2010 is £798.1 million (2009: £779.2 million) and the remaining intangible assets £381.1 million (2009: £403.1 million). These items are split by division as follows:

Energy

£mLifting

£mDynacast

£m

Other Industrial

£m

Total

£m

Goodwill 252.1 299.7 207.6 38.7 798.1Intangible assets (excluding Goodwill) 129.1 212.5 20.5 19.0 381.1Net other assets 46.5 48.1 28.5 29.2 152.3

Total carrying value 427.7 560.3 256.6 86.9 1,331.5

The non-current assets have been tested for impairment as at 31 December 2010. The Board is comfortable that no impairment is required.

PensionsThe Group has a number of defined benefit and defined contribution plans. The IAS 19 deficit of the defined benefit pension plans as at 31 December 2010 was £119.6 million (2009: £169.1 million).

The current market value of the assets of the FKI UK Pension Plan, the most significant plan in the Group, is insufficient to satisfy the liabilities to members when they are valued on a basis consistent with IAS 19. The net accounting deficit on this plan was £78.6 million at 31 December 2010 (2009: £110.1 million). This plan had assets at 31 December 2010 of £549.2 million (2009: £508.7 million) and liabilities of £627.8 million (2009: £618.8 million).

The other UK defined benefit pension plan of significant size in the Group, namely the McKechnie UK Pension Plan, was in surplus of £1.9 million at 31 December 2010 (2009: deficit of £12.1 million). This plan had assets at 31 December 2010 of £143.8 million (2009: £128.1 million) and liabilities of £141.9 million (2009: £140.2 million).

In addition, a US defined benefit plan for FKI exists. At 31 December 2010, this had assets of £193.3 million (2009: £174.4 million), liabilities of £213.1 million (2009: £191.4 million) and consequently a deficit of £19.8 million (2009: £17.0 million).

The assumptions used to calculate the IAS 19 value of the pension plans within the Melrose Group are considered carefully by the Board of Directors. For the FKI UK Pension Plan a male aged 65 in 2010 is expected to live for a further 20.2 years. This is assumed to increase by 2.5 years (12%) for a male aged 65 in 2035. A summary of the key assumptions of the FKI UK Pension Plan are shown below:

2010 Assumption

%

2009 Assumption

%

Discount rate 5.55 5.75Inflation 3.45 3.45Salary increases 4.00 3.95

It is noted that a 0.1 percentage point decrease in the discount rate would increase the pension liability on the FKI UK Pension Plan by £9.5 million and a 0.1 percentage point increase to inflation would increase the liability on this plan by £3.5 million. Furthermore, an increase by one year in the expected life of a 65 year old male member would increase the pension liabilities on this plan by £17.3 million.

The long term strategy for the UK plans is to focus on the cash flows required to fund the liabilities as they fall due. These cash flows extend many years into the future and the ultimate objective is that the total pool of assets derived from future company contributions and the investment strategy allows each cash payment to members to be made when due. The Melrose Group contributes £18.5 million to the FKI UK Pension Plan and £4.6 million to the McKechnie UK Pension Plan per annum.

In addition, the strategy includes reducing the volatility of liabilities whenever commercially viable.

The McKechnie UK Pension Plan is closed both to new members and current members’ future service. The FKI UK Pension Plan is closed to new members and on 28 February 2011 it closed to current members’ future service, resulting in a curtailment gain of £13.1 million. This gain was included in exceptional income so as not to distort headline performance. Further post retirement benefits were terminated during 2010 on US retiree benefit plans reducing liabilities by £3.4 million.

In addition, on 5 March 2010 the Group sold the assets (£17.4 million) and liabilities (£18.9 million) of the Bridon Group Senior Executive Plan to Aegon Trustee solutions at a premium to the IAS 19 net liabilities of £4.0 million which is shown in exceptional costs. The Trustees are in the process of winding up this plan.

24 Melrose PLC


Annual Report 2010

Risk managementThe financial risks the Group faces have been considered and policies have been implemented to best deal with each risk. The four most significant financial risks are considered to be liquidity risk, finance cost risk, exchange rate risk and commodity cost risk. These are discussed in turn.

Liquidity risk managementThe Group’s net debt position continued to improve during the year ending 31 December 2010 at £287.4 million compared with £321.7 million a year earlier. This decrease in net debt resulted from strong operational cash generation (more cash was generated than profit) and is despite an exchange rate translation loss on foreign currency denominated net debt of £7.2 million.

The Group has a multi-currency committed facility that provides a term loan and revolving credit facility through to April 2013. These facilities have reduced from £750 million at inception in April 2008 to approximately £739 million as at 31 December 2010. The term loan is fully drawn down, having originally been set at £500 million and has since been reduced by applying the proceeds from the disposal of the Logistex businesses in 2009. The term loan is subject to a 15% repayment amortisation and, as a result of the repayments arising from the Logistex proceeds, the first scheduled repayment of approximately £3 million is not now due until April 2012. The last repayment prior to maturity of £25 million is due in October 2012. The revolving credit facility of £250 million is not subject to any such repayments and the undrawn facility headroom at 31 December 2010 was £234.6 million (2009: £224.9 million). In addition, there are a number of small uncommitted overdraft and borrowing facilities made available to the Group. These uncommitted facilities are lightly used.

In 2008 the term loan portion of this facility was converted into currency loans comprising US $686.0 million, €58.3 million and £50.0 million. In 2009 the Group used disposal proceeds to repay US $80.0 million of the US Dollar loans equivalent to 9% of the term loan, leaving US $606.0 million, €58.3 million and £50.0 million outstanding at 31 December 2010. Consequently, using the exchange rates as at 31 December 2010, the term loan is now equivalent to £488.8 million.

The facility has two financial covenants: a net debt to headline EBITDA (headline operating profit before depreciation and amortisation) covenant and an interest cover covenant. The first covenant, which now calculates net debt at average exchange rates during the period, is set at 3.0x for December 2010 reducing by 0.25x each year until 2013. At these exchange rates the net debt to headline EBITDA at 31 December 2010 was 1.27x (compared to 1.25x at Balance Sheet rates) allowing significant headroom compared to the covenant test. The interest cover covenant remains at 3.5x throughout the life of the facility. At 31 December 2010 the actual interest cover was 9.7x which also affords comfortable headroom compared to the covenant test. Covenant tests are performed each June and December.

Cash, deposits and marketable securities amounted to £195.7 million at 31 December 2010 (2009: £147.5 million) and are offset against gross debt of £483.1 million (2009: £469.2 million) to arrive at the net debt position of £287.4 million (2009: £321.7 million). In combination with the undrawn committed facility headroom of £234.6 million (2009: £224.9 million), the Board considers that the Group has sufficient access to liquidity for its current needs.

In accordance with the reporting requirements on going concern issued by the Financial Reporting Council the Directors acknowledge that the economic environment causes uncertainty as to the trading outcome for 2011. The Group has committed borrowing facilities until April 2013. In addition, the breadth of the end markets that the Melrose Group companies trade in, both by sector and geographically, gives some balance to various market and economic cycle risks. Furthermore, as a result of the consistent cash generation record, which has allowed net debt at constant exchange rates to reduce by 60% since July 2008, the financial headroom has significantly improved. The Group’s forecasts take into account reasonable possible changes to trading performances. As a consequence the Board believes that the Group can manage its business risks successfully and accordingly the Group financial statements have been prepared on a going concern basis.

Finance cost risk managementThe Group maintained a net debt position throughout 2010. The Group protects 78% of its gross debt from exposure to changes in interest rates by holding a number of interest rate swaps to fix £378.7 million (US $546.0 million and €33.3 million) of term debt. Under the terms of these swaps, the Group has fixed the underlying interest rate at 2.1% for US Dollars and 2.6% for the Euro through to early 2013. At 31 December 2010 this produced a blended interest rate of 3.35% (2009: 3.49%) on the £750 million facility, calculated after inclusion of the current 1.5% margin but before amortisation of arrangement fees and non-utilisation fees.

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Exchange rate risk managementThe Group trades in various countries around the world and is exposed to many different foreign currencies. The Group therefore carries an exchange rate risk that can be categorised into three types as described below. The Board policy is designed to protect against some of the cash risks but not the non-cash risks. The most common cash risk is the transaction risk the Group takes when it invoices a sale in a different currency to the one in which its cost of sale is incurred. This is addressed by taking out forward cover against approximately 60% to 80% of the anticipated cash flows over the following twelve months, placed on a rolling quarterly basis or for 100% of each committed contract. This does not eliminate the cash risk but does bring some certainty to it.

Exchange rates used in the periodAverage

rateClosing

rate

US Dollar2010 1.55 1.562009 1.57 1.62

Euro2010 1.17 1.162009 1.12 1.13

The effect on the key headline numbers in 2010 for the continuing Group due to the translation movement of exchange rates from 2009 to 2010 is shown below. The table illustrates the translation movement in revenue and headline operating profit if the 2009 average exchange rates had been used to calculate the 2010 results rather than the 2010 average exchange rates.

The translation difference in 2010 £m

Revenue increase 5.2Headline operating profit increase 1.2

For reference, guidelines to show the net translation exchange risks that the Group currently carries and an indication of the short term exchange rate risk, which shows both translation exchange risk and unhedged transaction exchange rate risk is as follows:

Sensitivity of profit to translation and unhedged transaction exchange risk

Increase in headline

operating profit £m

For every 10 cent strengthening of the US Dollar against Sterling 5.0For every 10 cent strengthening of the Euro against Sterling 5.0

The long term exchange rate risk, which ignores any hedging instruments in place, is as follows:

Sensitivity of profit to translation and full transaction exchange rate risk

Increase in headline

operating profit £m

For every 10 cent strengthening of the US Dollar against Sterling 10.4For every 10 cent strengthening of the Euro against Sterling 9.0

No exchange instruments are used to protect against translation risk. However, when the Group has net debt, the hedge of having a multi-currency debt facility funding these foreign currency trading units protects against some of this risk.

The most significant exchange risk that the Group takes arises when a significant business that is predominantly based in a foreign currency is sold. The proceeds for those businesses will most likely be received in a foreign currency and therefore an exchange risk arises if these proceeds are converted back to Sterling, for instance to pay a dividend to shareholders. Protection against this risk is taken on a case-by-case basis.

Commodity cost risk managementAs Melrose owns engineering businesses across various sectors the cumulative expenditure on commodities is important. The Group addresses the risk of base commodity costs increasing by, wherever possible, passing on the cost increases to customers or by having suitable purchase agreements with its suppliers which sometimes fix the price over some months into the future. On occasions, Melrose does enter into financial instruments on commodities when this is considered to be the most efficient way of protecting against movements.

Geoffrey Martin 9 March 2011


Board of Directors

Geoffrey Martin Group Finance Director

Christopher Miller Executive Chairman

David Roper Chief Executive

Simon Peckham Chief Operating Officer

Age 59, he qualified as a chartered accountant with Coopers & Lybrand, following which he was an Associate Director of Hanson plc. In September 1988 he joined the board of Wassall PLC as its Chief Executive. Between October 2000 and May 2003 he was involved in private investment activities. Mr Miller was appointed as an executive Director of Melrose on 29 May 2003.

Melrose PLC Annual Report 2010 · Melrose PLC 01 Business performance Governance Financials Shareholder information Annual Report 2010 Financial highlights(1) Revenue (Year ended

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