Final Results

RNS Number : 5779C

Melrose PLC

09 March 2011

9 March 2011

MELROSE PLC

AUDITED RESULTS

FOR YEAR ENDED 31 DECEMBER 2010

Melrose PLC today announces its audited results, which are reported under IFRS, for the year ended 31 December 2010.

Highlights¹

· Headline²2010 profit before tax of £170.8 million (2009: £118.6 million), an increase of 44%

· Headline² 2010 earnings per share of 25.4p (2009: 16.6p), up 53%

· Headline²operating 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 EBITDA³ (2009: 1.76x)

· Final dividend increased by 46% to 7p per share (2009: 4.8p)

· Full year dividend increased by 43% to 11p per share (2009: 7.7p)

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

· Dynacast sale process underway

Christopher Miller, Chairman of Melrose PLC, today said:

"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."

¹ continuing operations only unless otherwise stated

²before exceptional costs, exceptional income and intangible asset amortisation

³headline² operating profit before depreciation and amortisation

An Analysts' meeting will be held today at 11.00 am at Investec, 2 Gresham Street, London EC2V 7QP.

Enquiries: Nick Miles

Ann-marie Wilkinson

M: Communications 020 7920 2343

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 investment¹ 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 GROUP

These 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.

DIVIDENDS

The 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.

TRADING

The 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. 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.

¹ value of equity issued less returns of capital and dividends

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.

DYNACAST

Dynacast 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 & OUTLOOK

Much 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

CHIEF EXECUTIVE'S REVIEW

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 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 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 onstream. 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.

OUTLOOK

Melrose 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.

ENERGY

Year ended 31 December	2010	2009
£m
Revenue	427.5	418.3
Headline Operating Profit	73.7	61.0

GENERATORS

Brush 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.

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.

OUTLOOK

Brush 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.

MARELLI MOTORI ("MARELLI")

Marelli Motori, 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.

OUTLOOK

The 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.

OUTLOOK

On 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.

LIFTING

Year ended 31 December	2010	2009
£m
Revenue	422.7	419.0
Headline Operating Profit	66.7	62.5

BRIDON

Bridon 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. General demand in the offshore market was weak in the aftermath of the global recession and this was exacerbated by the moratorium on deepwater 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.

OUTLOOK

Although 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 the 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.

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.

CROSBY

Crosby 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.

OUTLOOK

On 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

Year ended 31 December	2010	2009
£m
Revenue	275.7	208.7
Headline Operating Profit	43.0	21.3

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.

Zinc is the major raw material used in the manufacture of Dynacast's products and the LME price increased from an average of $1658 per tonne in 2009 to $2156 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.

OUTLOOK

Having 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.

OTHER INDUSTRIAL

Year ended 31 December	2010	2009
£m
Revenue	253.6	252.5
Headline Operating Profit	28.7	20.6

TRUTH

Truth 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 the increasing pressure from the substantial increases in the cost of materials, a testament to its leading market position in North America.

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.

OUTLOOK

Notwithstanding 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.

HARRIS

Harris 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.

OUTLOOK

Harris 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.

MPC

MPC 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 Report 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.

OUTLOOK

MPC'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.

David Roper

9 March 2011

FINANCE DIRECTOR'S REVIEW

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 operations

The 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.

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 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 OPERATIONS

A split of revenue, headline operating profit and headline operating profit margin for 2010 and 2009 is as follows:

	2010 revenue	2010 headline operating profit/ (loss)	2010 headline operating profit margin	2009 revenue	2009 headline operating profit/ (loss)	2009 headline operating profit margin
	£m	£m		£m	£m
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/a
Central - LTIPs¹	-	(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

The 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 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 INCOME

The 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 $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 term 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 ISSUE

The 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 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 INCOME

Melrose 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:

	Total
Exceptional operating costs	£m
Restructuring costs	(5.9)
Defined benefit pension plan disposal	(4.0)
Acquisitions and disposals of businesses	(0.4)
Total	(10.3)

Exceptional operating income
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.

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 that the FKI UK Pension Plan would close 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 this has been shown in exceptional income.

ACQUISITION DURING THE PERIOD

On 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 2010

Three 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 turnover 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 MANAGEMENT

A 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 below:

	Energy	Lifting	Dynacast	Other Industrial	Central	Total continuing	Dis-continued	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%

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 flow 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.

CAPITAL EXPENDITURE

The 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	Dynacast	Other 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	-	1.0x
Capital expenditure to depreciation ratio (second half year)	1.5x	1.6x	1.4x	1.1x	-	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 MANAGEMENT

The 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.

TAX

As 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 losses	Recognised £m	Unrecognised £m	Total £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 LIABILITIES

The 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.

GOODWILL, INTANGIBLE ASSETS AND IMPAIRMENT REVIEW

The 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 £m	Lifting £m	Dynacast £m	Other Industrial £m	Total £m
Goodwill	252.1	299.7	207.6	38.7	798.1
Intangible assets (excluding goodwill)	129.1	212.5	20.5	19.0	381.1
Net 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.

PENSIONS

The 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 Plan are shown below:

	2010 Assumption %	2009 Assumption %
Discount rate	5.55	5.75
Inflation	3.45	3.45
Salary 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 main 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.

RISK MANAGEMENT

The 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 management

The 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 management

The 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.

Exchange rate risk management

The 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 period were:

	Average rate	Closing rate
US Dollar
2010	1.55	1.56
2009	1.57	1.62
Euro
2010	1.17	1.16
2009	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	5.2
Headline 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

5.0

For 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

10.4

For 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 multicurrency 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 management

As 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

Consolidated Income Statement

	Notes	Year ended 31 December 2010 £m	Year ended 31 December 2009 £m
Continuing operations
Revenue	2	1,379.5	1,298.5
Cost of sales		(988.5)	(970.3)

Gross profit		391.0	328.2

Headline⁽¹⁾ operating expenses		(193.7)	(178.9)
Share of results of joint ventures		(0.4)	0.4
Intangible asset amortisation		(26.6)	(26.7)
Exceptional costs	3	(10.3)	(23.9)
Exceptional income	3	21.4	14.0

Total net operating expenses		(209.6)	(215.1)


Operating profit		181.4	113.1

Headline⁽¹⁾ operating profit	2	196.9	149.7

Finance costs		(35.4)	(36.2)
Finance income		9.3	5.1

Profit before tax		155.3	82.0

Headline⁽¹⁾ profit before tax		170.8	118.6

Headline⁽¹⁾ tax		(44.4)	(36.1)
Exceptional tax⁽²⁾		30.4	8.8

Total tax	4	(14.0)	(27.3)


Profit for the year from continuing operations		141.3	54.7

Headline⁽¹⁾ profit for the year from continuing operations		126.4	82.5


Discontinued operations
Profit for the year from discontinued operations		-	24.6

Profit for the year		141.3	79.3


Attributable to:
Equity holders of the parent		141.1	79.5
Non-controlling interests		0.2	(0.2)

		141.3	79.3


Earnings per share
From continuing operations
- Basic	6	28.4p	11.0p
- Fully diluted	6	27.0p	10.8p
- Headline⁽¹⁾ basic	6	25.4p	16.6p
- Headline⁽¹⁾ fully diluted	6	24.1p	16.3p
From continuing and discontinued operations
- Basic	6	28.4p	16.0p
- Fully diluted	6	27.0p	15.6p

⁽¹⁾ Before exceptional costs, exceptional income and intangible asset amortisation. ⁽²⁾ Includes exceptional tax and tax on exceptional items and intangible asset amortisation.

Consolidated Statement of Comprehensive Income

	Notes	Year ended 31 December 2010 £m	Year ended 31 December 2009 £m
Profit for the year		141.3	79.3

Currency translation on net investments		8.0	(32.8)
Currency translation on non-controlling interests		0.1	(0.2)
Transfer to Income Statement from equity of cumulative translation differences on disposal of foreign operations		(0.1)	(11.4)
(Losses)/gains on cash flow hedges		(7.8)	5.9
Transfer to Income Statement on cash flow hedges		(0.5)	11.8
Actuarial gain/(loss) on retirement benefit obligations	9	13.8	(89.9)
Reversal of limit on pension plan surplus	9	-	14.1


Other comprehensive income/(expense) before tax		13.5	(102.5)

Tax relating to components of other comprehensive income/(expense)	4	7.9	13.0

Other comprehensive income/(expense) after tax		21.4	(89.5)


Total comprehensive income/(expense) for the year		162.7	(10.2)


Attributable to:
Equity holders of the parent		162.4	(9.8)
Non-controlling interests		0.3	(0.4)

		162.7	(10.2)

Consolidated Statement of Cash Flows

	Notes	Year ended 31 December 2010 £m	Year ended 31 December 2009 £m
Net cash from operating activities from continuing operations	11	117.9	176.8
Net cash used in operating activities from discontinued operations	11	-	(2.0)

Net cash from operating activities		117.9	174.8

Investing activities
Disposal of businesses		(0.1)	49.2
Net cash disposed		-	(0.6)
Purchase of property, plant and equipment		(29.5)	(22.9)
Proceeds on disposal of property, plant and equipment		0.3	1.0
Purchase of computer software		(1.2)	(0.9)
Dividends received from joint ventures		0.3	0.2
Dividends paid to non-controlling interests		(0.2)	(0.2)
Interest received		9.3	3.8
Acquisition of subsidiaries and non-controlling interests		(9.1)	-
Net cash (used in)/from investing activities from continuing operations		(30.2)	29.6
Net cash used in investing activities from discontinued operations	11	-	(1.3)

Net cash (used in)/from investing activities		(30.2)	28.3

Financing activities
Net movement on borrowings		(0.5)	(185.8)
Repayment of obligations under finance leases		(1.1)	(0.1)
Dividends paid	5	(43.8)	(35.6)
Net cash used in financing activities from continuing operations		(45.4)	(221.5)
Net cash used in financing activities from discontinued operations	11	-	-

Net cash used in financing activities		(45.4)	(221.5)


Net increase/(decrease) in cash and cash equivalents		42.3	(18.4)
Cash and cash equivalents at beginning of year	11	147.5	167.7
Effect of foreign exchange rate changes	11	5.9	(1.8)

Cash and cash equivalents at end of year	11	195.7	147.5

Consolidated Balance Sheet

	Notes	31 December 2010 £m	31 December 2009 £m
Non-current assets
Goodwill and other intangible assets		1,181.6	1,184.3
Property, plant and equipment		253.7	252.3
Interests in joint ventures		-	0.3
Derivative financial assets	10	-	0.6
Deferred tax assets		33.0	22.1
Trade and other receivables		1.9	-

		1,470.2	1,459.6
Current assets
Inventories		216.3	222.6
Trade and other receivables		257.7	213.0
Derivative financial assets	10	3.9	2.0
Cash and cash equivalents		195.7	147.5

		673.6	585.1


Total assets	2	2,143.8	2,044.7


Current liabilities
Trade and other payables		355.3	319.5
Interest-bearing loans and borrowings	8	0.3	1.3
Derivative financial liabilities	10	8.3	2.8
Current tax liabilities		52.4	49.3
Provisions		35.9	44.6

		452.2	417.5


Net current assets		221.4	167.6


Non-current liabilities
Trade and other payables		4.7	1.8
Interest-bearing loans and borrowings	8	482.8	467.9
Derivative financial liabilities	10	3.9	0.2
Deferred tax liabilities		114.9	125.3
Retirement benefit obligations	9	119.6	169.1
Provisions		82.8	99.6

		808.7	863.9


Total liabilities	2	1,260.9	1,281.4


Net assets		882.9	763.3


Equity
Share capital		1.1	1.1
Share premium account		279.1	279.1
Merger reserve		285.1	285.1
Capital redemption reserve		220.1	220.1
Hedging and translation reserves		71.0	71.6
Retained earnings		25.1	(95.4)

Equity attributable to holders of the parent		881.5	761.6
Non-controlling interests		1.4	1.7

Total equity		882.9	763.3

The financial statements were approved and authorised for issue by the Board of Directors on 9 March 2011 and were signed on its behalf by

……………………………………………… ……………………………………………

Geoffrey Martin Simon Peckham

Group Finance Director Chief Operating Officer

Consolidated Statement of Changes In Equity

Reserves	Share capital £m		Share premium account £m	Merger reserve £m	Capital redemption reserve £m	Hedging and translation reserves £m	Retained earnings £m	Equity attributable to holders of the parent £m	Non-controlling interests £m	Total equity £m

At 1 January 2009	1.1		279.1	285.1	220.1	100.4	(80.6)	805.2	2.3	807.5

Profit/(loss) for the year	-		-	-	-	-	79.5	79.5	(0.2)	79.3
Other comprehensive expense		-	-	-	-	(28.8)	(60.5)	(89.3)	(0.2)	(89.5)

Total comprehensive (expense)/income		-	-	-	-	(28.8)	19.0	(9.8)	(0.4)	(10.2)

Dividends paid	-		-	-	-	-	(35.6)	(35.6)	(0.2)	(35.8)
Credit to equity for equity-settled share-based payments	-		-	-	-	-	1.8	1.8	-	1.8

At 31 December 2009	1.1		279.1	285.1	220.1	71.6	(95.4)	761.6	1.7	763.3

Profit for the year	-		-	-	-	-	141.1	141.1	0.2	141.3
Other comprehensive (expense)/income		-	-	-	-	(0.6)	21.9	21.3	0.1	21.4

Total comprehensive (expense)/income		-	-	-	-	(0.6)	163.0	162.4	0.3	162.7

Dividends paid	-		-	-	-	-	(43.8)	(43.8)	(0.2)	(44.0)
Credit to equity for equity-settled share-based payments	-		-	-	-	-	1.8	1.8	-	1.8
Acquisition of non-controlling interest		-	-	-	-	-	(0.5)	(0.5)	(0.4)	(0.9)

At 31 December 2010	1.1		279.1	285.1	220.1	71.0	25.1	881.5	1.4	882.9

Notes To The Accounts

1. Corporate information

The financial information included within the preliminary announcement does not constitute the Company's statutory accounts for the years ended 31 December 2010 or 31 December 2009, but is derived from those accounts. Statutory accounts for the year ended 31 December 2009 have been delivered to the Registrar of Companies and those for 2010 will be delivered to the Registrar of Companies during April 2011. The auditors have reported on those accounts; their reports were unqualified, did not draw attention to any matters by way of emphasis and did not contain statements under s498(2) or (3) of the Companies Act 2006 or equivalent proceeding legislation.

While the financial information included in this preliminary announcement has been prepared in accordance with the recognition and measurement criteria of International Financial Reporting Standards ("IFRSs"), this announcement does not itself contain sufficient information to comply with IFRSs. The Company expects to publish full financial statements that comply with IFRSs during April 2011.

During the current period, the Group adopted a number of new or revised Standards and Interpretations none of which affected the amounts reported in this preliminary announcement.

Other than as noted above, the accounting policies followed are the same as those detailed within the 2009 Report and Accounts which are available on the Group's website www.melroseplc.net.

The Board of Directors approved the preliminary announcement on 9 March 2011.

2. Segment information

IFRS 8: "Operating segments" requires operating segments to be identified on the basis of internal reports about components of the Group that are regularly reported to the Group's Board in order to allocate resources to the segments and assess their performance. The Group's reportable operating segments under IFRS 8 are as follows:

§ Energy

§ Lifting

§ Dynacast

§ Other Industrial

The Energy segment incorporates the Turbogenerators (now including the Transformers business unit), Marelli and Switchgear business units, all specialist suppliers of energy industrial products to the global market. The Lifting segment consists primarily of the businesses of Bridon and Crosby, serving oil and gas production, mining, petrochemical, alternative energy and general construction markets. The Dynacast segment only includes the Dynacast business, which is a supplier of die-cast parts and components to a range of industries. Other Industrial incorporates all other operating businesses. Details of the significant companies included within the Other Industrial segment are set out in the Business review.

There are two central cost centres which are also separately reported to the Board:

§ Central - corporate

§ Central - LTIPs⁽¹⁾

⁽¹⁾ Long Term Incentive Plans.

The Central corporate cost centre contains the Melrose Group head office costs whilst the Central LTIPs cost centre contains the costs associated with the 2009 Melrose Incentive Scheme and the divisional management LTIP schemes that are in operation across the Group.

Transfer prices between business units are set on an arm's length basis in a manner similar to transactions with third parties.

The Group's geographical segments are determined by the location of the Group's non-current assets and, for revenue, the location of external customers. Inter-segment sales are not material and have not been included in the analysis below.

The following tables present revenue and profit information and certain asset and liability information regarding the Group's operating segments for the year ended 31 December 2010 and the comparative period. Note 3 gives details of exceptional costs and income.

Segment revenues and results

	Segment revenue from external customers
		Year ended 31 December 2010 £m	Year ended 31 December 2009 £m
Continuing operations
Energy		427.5	418.3
Lifting		422.7	419.0
Dynacast		275.7	208.7
Other Industrial		253.6	252.5

Total continuing operations		1,379.5	1,298.5

Discontinued operations		-	185.6

Total revenue		1,379.5	1,484.1

	Segment result
	Notes	Year ended 31 December 2010 £m	Year ended 31 December 2009 £m
Continuing operations
Energy		73.7	61.0
Lifting		66.7	62.5
Dynacast		43.0	21.3
Other Industrial		28.7	20.6
Central - corporate		(8.6)	(8.9)
Central - LTIPs⁽¹⁾		(6.6)	(6.8)

Headline⁽²⁾ operating profit		196.9	149.7

Intangible asset amortisation		(26.6)	(26.7)
Exceptional costs	3	(10.3)	(23.9)
Exceptional income	3	21.4	14.0

Operating profit		181.4	113.1

Finance costs		(35.4)	(36.2)
Finance income		9.3	5.1

Profit before tax		155.3	82.0
Tax	4	(14.0)	(27.3)
Profit for the year from discontinued operations		-	24.6

Profit for the year		141.3	79.3

⁽¹⁾Long Term Incentive Plans.

⁽²⁾As defined on the Income Statement.

	Total assets		Total liabilities
	31 December 2010 £m	31 December 2009 £m	31 December 2010 £m	31 December 2009 £m
Energy	643.7	649.7	216.0	242.1
Lifting	750.4	730.2	190.1	175.5
Dynacast	345.3	329.1	88.7	87.3
Other Industrial	161.0	149.3	74.1	89.3
Central - corporate	243.4	186.4	679.5	679.5
Central - LTIPs⁽¹⁾	-	-	12.5	7.7

Total	2,143.8	2,044.7	1,260.9	1,281.4

⁽¹⁾ Long Term Incentive Plans.

	Capital expenditure⁽¹⁾		Depreciation⁽¹⁾
	Year ended 31 December 2010 £m	Year ended 31 December 2009 £m	Year ended 31 December 2010 £m	Year ended 31 December 2009 £m
Continuing operations
Energy	9.4	9.6	8.0	7.5
Lifting	9.8	6.3	9.4	9.2
Dynacast	7.0	3.7	7.7	8.8
Other Industrial	5.5	4.1	7.1	7.4
Central - corporate	0.2	0.1	0.7	0.7

Total continuing operations	31.9	23.8	32.9	33.6

Discontinued operations	-	1.3	-	2.4

Total	31.9	25.1	32.9	36.0

⁽¹⁾ Including computer software.

Geographical information

The Group operates in various geographical areas around the world. The Group's country of domicile is the UK and the Group's revenues and non-current assets in Europe and North America are also considered to be material.

The Group's revenue from external customers and information about its segment assets (non-current assets excluding interests in joint ventures, derivative financial assets, deferred tax assets and non-current trade and other receivables) by geographical location are detailed below:

	Revenue⁽¹⁾ from external customers⁽²⁾		Non-current assets
	Year ended 31 December 2010 £m	Year ended 31 December 2009 £m	31 December 2010 £m	31 December 2009 £m
UK	199.8	201.8	369.4	377.8
Europe	416.4	364.3	420.1	435.9
North America	525.4	500.3	594.0	572.4
Other	237.9	232.1	51.8	50.5

Total	1,379.5	1,298.5	1,435.3	1,436.6

⁽¹⁾

Revenue is presented by destination. The comparative revenue numbers have been restated to show revenue by destination rather than by origin as previously disclosed.

⁽²⁾

From continuing operations.

3. Exceptional costs and income

Exceptional costs	Year ended 31 December 2010 £m	Year ended 31 December 2009 £m
Continuing operations
Defined benefit pension plan disposal	(4.0)	-
Acquisitions and disposals of businesses	(0.4)	-
Restructuring costs	(5.9)	(8.5)
Labour related one-off costs	-	(15.4)

Total exceptional costs	(10.3)	(23.9)

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

On 12 February 2010, the Group acquired 100% of the share capital of Generator & Motor Services of Pennsylvania, LLC (see note 7) and, in accordance with IFRS 3 (revised 2008), the £0.2 million of costs incurred on acquisition have been recognised in the Income Statement. Also during the year, the Prelok France business, previously shown within the "Other Industrial" division, was disposed of. A net loss of £0.2 million was incurred which included disposal expenses of £0.1 million and a cumulative exchange gain of £0.1 million recycled from equity.

During the year, 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. During 2009, the Group incurred £8.5 million of costs relating to restructuring programmes which included plant closures.

During 2009, the Group also incurred £15.4 million of labour related one-off costs, relating primarily to headcount reductions, in response to the economic downturn.

Exceptional income	Year ended 31 December 2010 £m	Year ended 31 December 2009 £m
Continuing operations
Pension curtailment gain	13.1	-
FKI captive insurance commutation gain	5.6	-
Net release of provisions	2.7	5.0
US retiree benefit plan closures	-	9.0

Total exceptional income	21.4	14.0

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

In 2010, a gain of £5.6 million was generated by the commutation of certain insurance policies within the FKI captive insurance company.

The net release of provisions of £2.7 million during the year represents the release of a provision set up on the acquisition of FKI net of an additional environmental and legal provision. In 2009, a review of fair value provisions at the Balance Sheet date identified £5.0 million of liabilities in excess of the amount deemed required.

In 2009, certain US retiree benefit plans were closed resulting in a release of the future retirement benefit obligations relating to continuing operations of £9.0 million.

4. Tax

	Continuing operations			Discontinued operations		Total
Analysis of charge/(credit) in year:	Year ended 31 December 2010 £m		Year ended 31 December 2009 £m	Year ended 31 December 2010 £m	Year ended 31 December 2009 £m	Year ended 31 December 2010 £m	Year ended 31 December 2009 £m
Current tax	28.8		26.2	-	1.6	28.8	27.8
Deferred tax	(14.8)		1.1	-	4.1	(14.8)	5.2

Total income tax charge	14.0		27.3	-	5.7	14.0	33.0

Tax charge on headline⁽¹⁾ operating profit after finance costs and finance income	44.4		36.1	-	2.2	44.4	38.3
Tax on net exceptional income/(costs)	4.3		(1.3)	-	3.5	4.3	2.2
Exceptional tax credit		(23.5)	-	-	-	(23.5)	-
Tax in respect of intangible asset amortisation	(11.2)		(7.5)	-	-	(11.2)	(7.5)

Total income tax charge	14.0		27.3	-	5.7	14.0	33.0

⁽¹⁾ As defined on the Income Statement.

The tax charge for the year ended 31 December 2010 includes an exceptional tax credit of £23.5 million that relates to the recognition of a deferred tax asset that is considered to be recoverable.

Of the total tax charge for the year ended 31 December 2009, £5.7 million related to trading in discontinued divisions disposed of during 2009. No tax charge or credit arose on the profit (including the cumulative exchange movement recycled from equity) of £9.7 million on the disposal of the relevant subsidiaries.

The tax for the current year is lower (2009: higher) than the average standard rate of corporation tax in the UK for the year of 28.0% (2009: 28.0%). The differences are explained in the following table:

	Year ended 31 December 2010 £m	Year ended 31 December 2009 £m
Profit on ordinary activities before tax:
Continuing operations	155.3	82.0
Discontinued operations	-	20.6

	155.3	102.6

Tax on profit on ordinary activities at UK corporate tax rate 28.0% (2009: 28.0%)	43.5	28.7

Tax effect of:
Net permanent differences	-	2.0
Net non deductible exceptional items	1.2	1.2
Adjustment in respect of foreign tax rates	(0.2)	1.4
Effect of UK rate change on deferred tax liability	(3.8)	-
Timing differences not previously recognised in deferred tax	(2.9)	(5.8)
Prior year tax adjustments	(0.3)	5.5
Exceptional tax credit	(23.5)	-

Total tax charge for the year	14.0	33.0

In addition to the amount charged to the Income Statement, a credit of £7.9 million (2009: £13.0 million) has been recognised directly in the Statement of Comprehensive Income. This represents a tax credit of £8.1 million (2009: £15.3 million) in respect of retirement benefit obligations and a tax charge of £0.2 million (2009: £2.3 million) in respect of movements on cash flow hedges.

5. Dividends

	Year ended 31 December 2010 £m	Year ended 31 December 2009 £m
Second interim dividend for the year ended 31 December 2009 of 4.80p (2008: nil)	23.9	-
Final dividend for the year ended 31 December 2009 paid of nil (2008: 4.25p)	-	21.1
Interim dividend for the year ended 31 December 2010 paid of 4.00p (2009: 2.90p)	19.9	14.5
	43.8	35.6
Proposed second interim dividend for year ended 31 December 2010 of nil (2009: 4.80p)	-	23.9
Proposed final dividend for the year ended 31 December 2010 of 7.00p (2009: nil)	34.8	-

A final dividend of 7.0p was proposed by the Board on 9 March 2011 and, in accordance with IAS 10, has not been included as a liability in these financial statements.

6. Earnings per share

Earnings	Year ended 31 December 2010 £m	Year ended 31 December 2009 £m

Profit for the purposes of earnings per share	141.1	79.5
Less: profit for the year from discontinued operations	-	(24.6)

Earnings for basis of earnings per share from continuing operations	141.1	54.9
Exceptional costs (note 3)	10.3	23.9
Exceptional income (note 3)	(21.4)	(14.0)
Intangible asset amortisation	26.6	26.7
Exceptional tax and tax on exceptional items and intangible asset amortisation	(30.4)	(8.8)

Earnings for basis of headline⁽¹⁾ earnings per share from continuing operations	126.2	82.7

⁽¹⁾As defined on the Income Statement.

	Number		Number
Weighted average number of Ordinary Shares for the purposes of basic earnings per share (million)	497.6		497.6
Further shares for the purposes of fully diluted earnings per share (million)	25.3		10.4

Weighted average number of Ordinary Shares for the purposes of diluted earnings per share (million)		522.9	508.0

Earnings per share	Year ended 31 December 2010 pence	Year ended 31 December 2009 pence

Basic earnings per share
From continuing and discontinued operations	28.4	16.0
From continuing operations	28.4	11.0
From discontinued operations	-	5.0

Fully diluted earnings per share
From continuing and discontinued operations	27.0	15.6
From continuing operations	27.0	10.8
From discontinued operations	-	4.8

Headline⁽¹⁾basic earnings per share
From continuing operations	25.4	16.6

Headline⁽¹⁾ fully diluted earnings per share
From continuing operations	24.1	16.3

⁽¹⁾As defined on the Income Statement.

7. Acquisition of subsidiaries

On 12 February 2010 the Group acquired 100% of the issued share capital, and obtained control, of Generator & Motor Services of Pennsylvania, LLC ("GMS"), a company operating in North America. GMS is a supplier of aftermarket services to the turbogenerator industry.

The following assets and liabilities were acquired:

	Acquiree's carrying amount £m	Fair value adjustments £m	Fair value £m
Property, plant and equipment	0.4	(0.1)	0.3
Intangible assets	-	0.7	0.7
Trade and other receivables	1.0	(0.6)	0.4
Trade and other payables	(0.2)	(0.4)	(0.6)
Provisions	-	(0.3)	(0.3)
Deferred tax liabilities	-	(0.3)	(0.3)

Total identifiable assets	1.2	(1.0)	0.2

Goodwill			7.8


Total consideration			8.0


Satisfied by:
Cash consideration			8.0

The adjustments to the carrying values on the acquisition above have been included to represent the fair value of the assets and liabilities acquired.

The GMS business contributed £7.2 million to revenue and £1.5 million to headline operating profit during the period from acquisition to the 31 December 2010.

Acquisition costs of £0.2 million have been incurred and these have been expensed as exceptional costs in the Income Statement (see note 3).

The goodwill arising on the GMS acquisition is attributable to the anticipated profitability of the incremental distribution of the company's products and expected synergies.

Acquisition of non-controlling interest

On 20 September 2010, the Group acquired the 20% non-controlling interest of the Bridon Hangzhou Ropes Company Limited within the Lifting division for cash consideration of £0.9 million.

8. Interest-bearing loans and borrowings

This note provides information about the contractual terms of the Group's interest-bearing loans and borrowings. Details of the Group's exposure to credit, liquidity, interest rate and foreign currency risk are included in note 10.

	Current			Non-current		Total
	31 December 2010 £m		31 December 2009 £m	31 December 2010 £m	31 December 2009 £m	31 December 2010 £m	31 December 2009 £m

Fixed rate obligations
Bank borrowings - Euro loan (Austria) ⁽¹⁾	0.3		0.3	-	0.5	0.3	0.8

	0.3		0.3	-	0.5	0.3	0.8

Floating rate obligations
Bank borrowings - US Dollar loan⁽²⁾		-	-	388.5	374.1	388.5	374.1
Bank borrowings - Euro loan⁽³⁾	-		-	50.3	51.6	50.3	51.6
Bank borrowings - Sterling loan⁽⁴⁾		-	-	50.0	50.0	50.0	50.0
Finance leases	-		1.0	-	-	-	1.0

	-		1.0	488.8	475.7	488.8	476.7

Unamortised finance costs	-		-	(6.0)	(8.3)	(6.0)	(8.3)

Total interest bearing loans and borrowings	0.3		1.3	482.8	467.9	483.1	469.2

⁽¹⁾ Interest rate 1.5%, final maturity July 2011.

⁽²⁾ Interest rate LIBOR +1.5%, final maturity April 2013.

⁽³⁾ Interest rate EURIBOR +1.5%, final maturity April 2013.

⁽⁴⁾ Interest rate LIBOR +1.5%, final maturity April 2013.

The Group utilises a £750 million multi-currency committed bank facility that provides term loan and revolving credit facilities through to 22 April 2013. A number of Group companies act as guarantors to this facility. Drawdowns bear interest at interbank rates of interest plus a margin determined by reference to the Group's performance under its debt cover covenant ratio and ranges between 1.25% and 2.35%. The margin as at 31 December 2010 was 1.5%.

Throughout the year, the Group remained compliant with all covenants under these facilities. The term loan facility is fully drawn down having originally been set at £500 million. In 2009 the Group repaid and cancelled US $80 million of this term loan facility following the disposal of the Logistex businesses. At 31 December 2010, the undrawn amount of the £250 million revolving credit facility was £234.6 million (31 December 2009: £224.9 million) with £15.4 million (31 December 2009: £25.1 million) being utilised for letters of credit.

The interest rate re-pricing profile of financial liabilities, after taking into account hedging interest rate derivatives, is described in note 10.

Maturity of financial liabilities

The maturity profile of anticipated future cash flows including interest in relation to the Group's non derivative financial liabilities, on an undiscounted basis and which, therefore, differs from both the carrying value and fair value is shown in the table below. Interest on floating rate debt is based on the relevant LIBOR curve for US Dollar and Sterling balances and EURIBOR curve for Euro balances. Interest on hedging interest rate swaps is based on the relevant forward LIBOR curve for US Dollar amounts and EURIBOR curve for Euro and is illustrated as a net cash flow.

	Bank loans £m	Finance lease obligations £m	Total interest-bearing loans and borrowings £m	Other financial liabilities £m	Derivative financial liabilities £m	Total financial liabilities £m
Within one year	10.3	-	10.3	355.3	8.3	373.9
In one to two years	40.8	-	40.8	4.7	3.7	49.2
In two to three years	466.2	-	466.2	-	0.2	466.4
Effect of financing rates	(34.2)	-	(34.2)	-	-	(34.2)

31 December 2010	483.1	-	483.1	360.0	12.2	855.3


Within one year	14.9	1.0	15.9	319.5	2.8	338.2
In one to two years	20.1	-	20.1	1.8	0.1	22.0
In two to three years	53.3	-	53.3	-	-	53.3
After three years	456.4	-	456.4	-	0.1	456.5
Effect of financing rates	(76.5)	-	(76.5)	-	-	(76.5)

31 December 2009	468.2	1.0	469.2	321.3	3.0	793.5

9. Retirement benefit obligations

Melrose holds several pension plans covering many of its employees and operating in several jurisdictions.

The most significant defined benefit plans are:

§ The FKI UK Pension Plan is defined benefit in type and is a funded plan where the future liabilities for members' benefits are provided for by the accumulation of assets held externally to the Group in separate trustee administered funds.

§ The McKechnie UK Pension Plan. This is defined benefit in type and is a funded plan (other than £3.3 million of unfunded liabilities) where the future liabilities for members' benefits are provided for by the accumulation of assets held externally to the Group in separate trustee administered funds.

§ The FKI US Pension Plan. This is defined benefit in type and is a funded plan where the future liabilities for members' benefits are provided for by the accumulation of assets held externally to the Group in separate trustee administered funds.

Other plans include the Cleco Plan, the Dynacast US defined benefit plan and a number of funded and unfunded defined benefit arrangements across Europe.

The cost of these plans is determined in accordance with IAS 19 with the advice of independent professionally qualified actuaries on the basis of formal actuarial valuations using the projected unit credit method. In line with normal practice, these valuations are undertaken triennially in the UK and annually in the US.

The valuations are based on the UK full actuarial valuations as of 31 December 2008 updated at 31 December 2010 by independent actuaries and US full actuarial valuations as of 1 January 2010 updated at 31 December 2010 by independent actuaries.

The Group also operates unfunded retiree medical and welfare benefit plans, principally in the US.

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

The Group also entered into a buyout arrangement to dispose of the liabilities of the Bridon Group Senior Executive Plan, formerly part of the FKI UK Pension Plans, for £4.0 million in excess of the carrying value of the plan net liabilities.

The company contributes £18.5 million per annum to the FKI UK Pension Plan and £4.6 million per annum to the McKechnie UK Pension Plan.

In addition to this, there are a number of defined contribution plans across the Group. Contributions during the year were £14.4 million (2009: £15.1 million).

Actuarial assumptions

The major weighted average assumptions used by the actuaries in calculating the Group's pension plan assets and liabilities are as set out below:

	31 December 2010
	FKI UK Plan % p.a.	McKechnie UK Plan % p.a.	FKI US Pension Plan % p.a.	US Retiree Benefit Plans % p.a.	Other plans % p.a.
Rate of increase in salaries	4.00	3.95	3.50	n/a	3.00
Rate of increase in pensions in payment	3.30	3.45	n/a	n/a	3.22
Discount rate	5.55	5.55	5.10	5.10	5.44
RPI inflation assumption	3.45	3.45	2.75	n/a	3.41

	31 December 2009
	FKI UK Plan % p.a.	McKechnie UK Plan % p.a.	FKI US Pension Plan % p.a.	US Retiree Benefit Plans % p.a.	Other plans % p.a.
Rate of increase in salaries	3.95	3.95	3.25	n/a	3.00
Rate of increase in pensions in payment	3.30	3.45	n/a	n/a	3.17
Discount rate	5.75	5.75	5.80	5.80	5.72
RPI inflation assumption	3.45	3.45	2.75	n/a	3.24

In addition to this, for certain deferred members, it has been determined that inflation will be based upon the Consumer Price Index ("CPI") rather than the Retail Price Index ("RPI"). This results in an inflation rate 0.85% lower than RPI for those members. The resulting reduction in the present value of plan liabilities of £12.3 million is included in the Statement of Other Comprehensive Income.

Mortality

FKI UK Plan

Mortality assumptions for the most significant plan in the Group, the FKI UK plan, as at 31 December 2010 are based on 90% of the "heavy" Self Administered Pension Scheme (SAPS) tables, reflecting the plan membership being largely employed in the industrial sector. Future improvements are in line with 80% (60% for women) of the Long Cohort, subject to a minimum underpin of 1% p.a.

The assumptions are that a member currently aged 65 will live on average for a further 20.2 years if they are male and for a further 23.6 years if they are female. For a member who retires in 2035 at age 65, the assumptions are that they will live for a further 22.7 years after retirement if they are male and for a further 25.9 years after retirement if they are female.

The mortality assumptions are in line with those adopted for the triennial valuation results as at 31 December 2008.

Sensitivities

Sensitivities around movements in the principal assumptions of the discount rate, inflation rate and mortality are discussed in the Finance Director's review.

Balance Sheet disclosures

The amount recognised in the Balance Sheet arising from net liabilities in respect of defined benefit plans is as follows:

	31 December 2010 £m	31 December 2009 £m	31 December 2008 £m	31 December 2007 £m	31 December 2006 £m

Plan liabilities	(1,039.4)	(1,033.5)	(939.7)	(148.4)	(147.9)
Plan assets	919.8	864.4	810.5	123.2	92.5
Limit on pension plan surplus	-	-	(14.1)	-	-

Net liabilities	(119.6)	(169.1)	(143.3)	(25.2)	(55.4)


The five year history of experience adjustments is as follows:
	31 December 2010 £m	31 December 2009 £m	31 December 2008 £m	31 December 2007 £m	31 December 2006 £m
Experience adjustments on plan liabilities	(23.8)	(130.9)	70.7	1.2	(0.5)
Experience adjustments on plan assets	37.6	41.0	(78.9)	2.3	1.7

The plan liabilities and assets at 31 December 2010 were split by plan as follows:

	FKI UK Plan £m	McKechnie UK Plan £m	FKI US Pension Plan £m	US Retiree Benefit Plans £m	Other plans £m	Total £m
Plan liabilities	(627.8)	(141.9)	(213.1)	(1.1)	(55.5)	(1,039.4)
Plan assets	549.2	143.8	193.3	-	33.5	919.8

Net (liabilities)/assets	(78.6)	1.9	(19.8)	(1.1)	(22.0)	(119.6)

This amount is presented in the Balance Sheet:

	31 December 2010 £m	31 December 2009 £m	31 December 2008 £m	31 December 2007 £m	31 December 2006 £m
Net liabilities
- unfunded plans	21.0	24.2	45.2	4.1	10.9
- funded plans	98.6	144.9	84.0	21.1	44.5
Limit on pension plan surplus	-	-	14.1	-	-

	119.6	169.1	143.3	25.2	55.4

Expected returns and fair value of assets:

	Expected return		Fair value of assets
	31 December	31 December	31 December	31 December
	2010	2009	2010	2009
	%	%	£m	£m
Equity instruments	8.4	8.5	411.1	312.1
Debt instruments	5.1	4.8	430.5	440.7
Other assets	3.4	6.1	78.2	111.6

Weighted average / total	6.4	6.3	919.8	864.4

The expected return on plan assets at 31 December 2010 is based on market expectations at 1 January 2011 for returns on assets over the entire life of the obligation.

There is no self investment (other than in tracker funds) either in the Group's own financial instruments or property or other assets used by the Group.

Movements in the present value of defined benefit obligations during the year:

	Year ended 31 December 2010	Year ended 31 December 2009
	£m	£m
At beginning of year	1,033.5	939.7
Disposal of pension plan	(18.3)	(1.8)
Current service cost	4.3	7.3
Interest cost	57.3	55.2
Actuarial losses	23.8	130.9
Benefits paid	(52.8)	(48.3)
Plan curtailments	(16.5)	(23.5)
Currency losses/(gains)	8.1	(26.0)

At end of year	1,039.4	1,033.5

Movements in the fair value of plan assets during the year:

	Year ended 31 December 2010	Year ended 31 December 2009
	£m	£m
At beginning of year	864.4	810.5
Disposal of pension plan	(22.3)	-
Settlement contribution on disposal	4.9	-
Expected return on assets	53.2	48.6
Actuarial gains	37.6	41.0
Contributions	27.5	32.1
Benefits paid	(52.8)	(48.3)
Currency gains/(losses)	7.3	(19.5)

At end of year	919.8	864.4

The actual return on plan assets was a gain of £90.8 million (2009: gain of £89.6 million).

Income Statement disclosures

Amounts recognised in income in respect of these defined benefit plans are as follows:

	Year ended 31 December 2010	Year ended 31 December 2009
	£m	£m
In arriving at operating profit (included within cost of sales, selling and distribution costs and administration expenses):
- current service cost	4.3	7.3
- effects of curtailments and settlements	(3.4)	(3.4)
Included within net finance costs:
- interest cost	57.3	55.2
- expected return on assets	(53.2)	(48.6)
Included within exceptional items:
- net effects of curtailment and settlements	(9.1)	(9.0)
Included within profit from discontinued operations:
- effects of curtailments and settlements	-	(11.1)

Statement of Comprehensive Income disclosures

The amount recognised in the Statement of Comprehensive Income is as follows:

	Year ended 31 December 2010	Year ended 31 December 2009
	£m	£m
Actuarial losses on plan liabilities	(23.8)	(130.9)
Actuarial gains on plan assets	37.6	41.0
	13.8	(89.9)
Reversal of limit on pension plan surplus	-	14.1

	13.8	(75.8)

The cumulative amount of actuarial gains and losses recognised in the Statement of Comprehensive Income is a total loss of £77.4 million (2009: loss of £91.2 million).

10. Financial instruments and risk management

The table below sets out the Group's accounting classification of each category of financial assets and liabilities and their fair values at 31 December 2010 and 31 December 2009:

	Energy £m	Lifting £m	Dynacast £m	Other Industrial £m	Central £m	Total £m
31 December 2010
Financial assets
Cash and cash equivalents	-	-	-	-	195.7	195.7
Trade receivables	88.4	65.5	41.2	29.6	0.2	224.9
Derivative financial assets	2.3	0.4	0.6	0.1	0.5	3.9
Financial liabilities
Bank loans	-	-	(0.3)	-	(482.8)	(483.1)
Derivative financial liabilities	(0.6)	(1.0)	(0.1)	-	(10.5)	(12.2)
Other financial liabilities	(109.5)	(81.9)	(65.1)	(61.0)	(42.5)	(360.0)

31 December 2009
Financial assets
Cash and cash equivalents	-	-	-	-	147.5	147.5
Trade receivables	72.0	60.0	34.1	23.0	0.4	189.5
Derivative financial assets	0.6	0.4	0.5	-	1.1	2.6
Financial liabilities
Bank loans	-	-	(0.8)	-	(467.4)	(468.2)
Finance lease obligations	-	(1.0)	-	-	-	(1.0)
Derivative financial liabilities	(1.4)	(1.1)	(0.2)	-	(0.3)	(3.0)
Other financial liabilities	(102.1)	(68.8)	(60.4)	(48.2)	(41.8)	(321.3)

Credit risk

The Group considers its maximum exposure to credit risk to be as follows:

	Energy £m	Lifting £m	Dynacast £m	Other Industrial £m	Central £m	Total £m
31 December 2010
Financial assets
Cash and cash equivalents	-	-	-	-	195.7	195.7
Trade receivables	88.4	65.5	41.2	29.6	0.2	224.9
Derivative financial assets	2.3	0.4	0.6	0.1	0.5	3.9

31 December 2009
Financial assets
Cash and cash equivalents	-	-	-	-	147.5	147.5
Trade receivables	72.0	60.0	34.1	23.0	0.4	189.5
Derivative financial assets	0.6	0.4	0.5	-	1.1	2.6

The Group's principal financial assets are cash and short-term deposits, trade receivables and derivative financial assets which represent the Group's maximum exposure to credit risk in relation to financial assets.

The Group's credit risk on cash and cash equivalents and derivative financial instruments is limited because the counter-parties are banks with high credit-ratings assigned by international credit-rating agencies. The Group's credit risk is primarily attributable to its trade receivables. The amounts presented in the Balance Sheet are net of allowances for doubtful receivables, estimated by the Group's management based on prior experience and their assessment of the current economic environment.

Liquidity risk

The Group's policy for managing liquidity rate risk is set out in the Finance Director's review.

Fair values

The Directors consider that the financial assets and liabilities have fair values not materially different to the carrying values.

Foreign exchange contracts

As at 31 December 2010, the Group held foreign exchange forward contracts to mitigate expected exchange fluctuations on cash flows on sales to customers and purchases from suppliers. These instruments operate as cash flow hedges unless the amounts involved are small. The terms of the material currency pairs with total principals in excess of Sterling £1 million equivalent are as follows:

	31 December 2010 Selling currency millions	31 December 2010 Average hedged rate	31 December 2009 Selling currency millions	31 December 2009 Average hedged rate
Sell Australian Dollar/Buy Sterling	AUD 4.6	GBP/AUD 1.69	AUD 4.6	GBP/AUD1.90
Sell Canadian Dollar/Buy Sterling	CAD 6.1	GBP/CAD 1.62	-	-
Sell Canadian Dollar/Buy US Dollar	-	-	CAD 5.7	USD/CAD 1.09
Sell Czech Koruna/Buy Euro	CZK 160.0	EUR/CZK 24.89	CZK 84.1	EUR/CZK 27.90
Sell Euro/Buy Czech Koruna	EUR 41.5	EUR/CZK 25.34	EUR 52.5	EUR/CZK 26.37
Sell Euro/Buy Sterling	EUR 16.4	GBP/EUR 1.18	EUR 34.0	GBP/EUR 1.13
Sell Euro/Buy US Dollar	EUR 1.4	EUR/USD 1.34	-	-
Sell Norwegian Krone/Buy Sterling	NOK 11.7	GBP/NOK 9.58	NOK 15.9	GBP/NOK 9.57
Sell Polish Zloty/Buy Sterling	PLN 10.3	GBP/PLN 4.70	PLN 19.4	GBP/PLN 4.68
Sell Singapore Dollar/Buy US Dollar	SGD 5.2	USD/SGD 1.37	-	-
Sell South African Rand/Buy Euro	ZAR 30.2	EUR/ZAR 9.78	-	-
Sell South African Rand/Buy Sterling	ZAR 16.4	GBP/ZAR 11.54	-	-
Sell Sterling/Buy Czech Koruna	GBP 32.2	GBP/CZK 29.89	GBP 19.6	GBP/CZK 29.71
Sell Sterling/Buy Euro	GBP 11.8	GBP/EUR 1.17	GBP 25.3	GBP/EUR 1.11
Sell Sterling /Buy US Dollar	GBP 1.3	GBP/USD 1.57	GBP 24.1	GBP/USD 1.64
Sell U.A.E Dirham/Buy Sterling	AED 7.5	GBP/AED 5.64	-	-
Sell US Dollar/Buy Canadian Dollar	USD 13.8	USD/CAD 1.04	USD 15.7	USD/CAD 1.08
Sell US Dollar/Buy Chinese Renminbi	USD 16.3	USD/CNY 6.56	USD 6.1	USD/CNY 6.77
Sell US Dollar /Buy Czech Koruna	USD 4.2	USD/CZK 19.06	-	-
Sell US Dollar/Buy Euro	USD 7.1	EUR/USD 1.36	USD 6.2	EUR/USD 1.47
Sell US Dollar/Buy Korean Won	-	-	USD 2.0	USD/KRW 1,184.30
Sell US Dollar/Buy Malaysian Ringgit	USD 8.0	USD/MYR 3.15	-	-
Sell US Dollar/Buy Singapore Dollar	USD 14.0	USD/SGD 1.35	USD 11.4	USD/SGD 1.43
Sell US Dollar/Buy Sterling	USD 67.5	GBP/USD 1.54	USD 64.6	GBP/USD 1.64

The foreign exchange contracts all mature between January 2011 and March 2012.

The fair value of the contracts at 31 December 2010 was a net asset of £1.5 million (2009: net liability of £1.2 million).

As at 31 December 2010, the Group held three copper swap contracts that were designated as cash flow hedges. These swap contracts lock the Group into fixed copper prices to protect against fluctuations in the market price of copper. The terms of the contracts are:

Commodity swaps	Commodity	Total quantity	Maturity	Pricing
Group pays	Copper	80 tonnes	4 January 2011	Fixed price of US Dollar 8,063 per tonne
Group receives	Copper	80 tonnes	4 January 2011	Average LME price for the month
Group pays	Copper	80 tonnes	2 February 2011	Fixed price of US Dollar 8,348 per tonne
Group receives	Copper	80 tonnes	2 February 2011	Average LME price for the month
Group pays	Copper	80 tonnes	2 March 2011	Fixed price of US Dollar 8,200 per tonne
Group receives	Copper	80 tonnes	2 March 2011	Average LME price for the month

The fair value of the contracts at 31 December 2010 was a net asset of £0.2 million (2009: nil).

Hedge of net investments in foreign entities

Included in interest-bearing loans at 31 December 2010 were the following amounts which were designated as hedges of net investments in the Group's subsidiaries in Europe and the USA and were being used to reduce the exposure to foreign exchange risks.

Borrowings in local currency:

31
December 2010

£m

31 December

2009

£m

US Dollar

388.5

374.1

Euro

50.3

51.6

Interest rate sensitivity analysis

A one percentage point rise in market interest rates for all currencies would decrease profit before tax by the following amounts assuming the net debt as at the Balance Sheet date was outstanding for the whole year:

	Year ended 31 December 2010 £m	Year ended 31 December 2009 £m
Sterling	(0.1)	(0.1)
US Dollar	-	(0.3)
Euro	(0.2)	(0.2)

	(0.3)	(0.6)

Interest rate risk management

The Group's policy for managing interest rate risk is set out in the Finance Director's review.

In January 2009, the Group entered into a number of interest rate swaps to hedge $546.0 million of US Dollar denominated bank debt into fixed rates of interest. Under the terms of these swaps the Group will pay an average rate of 2.1% p.a. plus a 2.0% margin annually in arrears and receive 3 month US Dollar LIBOR plus 2.0% quarterly in arrears. These swaps all mature in January 2013.

In April 2009, the Group also took out an interest rate swap to hedge €33.3 million of Euro denominated debt into fixed rates of interest. The swap is structured in a similar way to the US Dollar interest rate swaps with the Group paying 2.6% plus a 2.0% margin annually in arrears and receiving 3 month EURIBOR plus 2.0% quarterly in arrears. This swap matures in April 2013.

A corresponding amount of debt drawn under the £500 million term loan is matched with these swaps.

These interest rate swaps have been designated as cash flow hedges and were highly effective throughout 2010. The fair value of the contracts at 31 December 2010 was a net liability of £10.0 million (2009: net asset of £0.8 million).

Foreign currency risk

The Group's policy for managing foreign currency risk is set out in the Finance Director's review.

Foreign currency sensitivity analysis

Currency risks are defined by IFRS 7 as the risk that the fair value or future cash flows of a financial asset or liability will fluctuate because of changes in foreign exchange rates.

The following table details the transactional impact of hypothetical changes in foreign exchange rates on financial assets and liabilities at the Balance Sheet date, illustrating the increase in Group operating profit caused by a 10 cent strengthening of the US Dollar and Euro against Sterling and a 10% strengthening of the Czech Koruna against Sterling compared to the year end spot rate. The analysis assumes that all other variables, in particular other foreign currency exchange rates, remain constant. The Group operates in a range of different currencies, and those with a material impact are noted here:

	Year ended 31 December 2010 £m	Year ended 31 December 2009 £m
US Dollar	1.8	1.6
Euro	2.7	1.2
Czech Koruna	0.7	0.4

The following table details the impact of hypothetical changes in foreign exchange rates on financial assets and liabilities at the Balance Sheet date, illustrating the (decrease)/increase in Group equity caused by a 10 cent strengthening of the US Dollar and Euro against Sterling and a 10% strengthening of the Czech Koruna against Sterling. The analysis assumes that all other variables, in particular other foreign currency exchange rates, remain constant. The Group operates in a range of different currencies, and those with a material impact are noted here:

	31 December 2010 £m	31 December 2009 £m

US Dollar	(1.6)	(0.4)
Euro	0.4	(0.5)
Czech Koruna	(0.1)	0.1

In addition, the change in equity due to a 10 cent strengthening of the US Dollar and Euro against Sterling for the translation of net investment hedging instruments would be a decrease of £26.6 million and £4.7 million respectively. However, there would be no effect on equity because there would be an offset in the currency translation of the foreign operation.

Fair value measurements recognised in the Balance Sheet

Foreign currency forward contracts are measured using quoted forward exchange rates and yield curves derived from quoted interest rates matching the maturities of the contracts.

Commodity swaps are measured using quoted forward commodity prices.

Interest rate swap contracts are measured using yield curves derived from quoted interest rates. The fair value is shown below.

	31 December 2010 Current £m		31 December 2010 Non-current £m	31 December 2010 Total £m	31 December 2009 Current £m	31 December 2009 Non-current £m	31 December 2009 Total £m
Derivative financial assets
Foreign currency forward contracts		3.7	-	3.7	1.7	-	1.7
Commodity swaps	0.2		-	0.2	-	-	-
Interest rate swaps	-		-	-	0.3	0.6	0.9

	3.9		-	3.9	2.0	0.6	2.6

Derivative financial liabilities
Foreign currency forward contracts		(2.2)	-	(2.2)	(2.8)	(0.1)	(2.9)
Interest rate swaps	(6.1)		(3.9)	(10.0)	-	(0.1)	(0.1)

	(8.3)		(3.9)	(12.2)	(2.8)	(0.2)	(3.0)

The fair value of these are derived from inputs other than quoted prices that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices) and they therefore are categorised within Level 2 of the fair value hierarchy set out in IFRS 7.

11. Cash flow statement

	Year ended 31 December 2010 £m	Year ended 31 December 2009 £m
Reconciliation of operating profit to cash generated by continuing operations
Headline⁽¹⁾ operating profit from continuing operations	196.9	149.7
Adjustments for:
Depreciation of property, plant and equipment	32.0	32.7
Amortisation of computer software	0.9	0.9
Restructuring costs paid and decrease in other provisions	(34.4)	(33.4)

Operating cash flows before movements in working capital	195.4	149.9
Decrease in inventories	11.2	79.8
(Increase)/decrease in receivables	(43.3)	66.1
Increase/(decrease) in payables	35.2	(65.8)

Cash generated by operations	198.5	230.0
Tax paid	(27.2)	(3.4)
Interest paid	(25.9)	(13.4)
Defined benefit pension contributions paid	(27.5)	(32.0)
Incentive scheme payments	-	(4.4)

Net cash from operating activities from continuing operations	117.9	176.8

⁽¹⁾ As defined on the Income Statement.

	Year ended 31 December 2010 £m	Year ended 31 December 2009 £m
Cash flow from discontinued operations
Cash generated from discontinued operations	-	(2.0)
Tax received	-	0.1
Defined benefit pension contributions paid	-	(0.1)

Net cash used in operating activities from discontinued operations	-	(2.0)


Investments in joint ventures	-	(0.2)
Purchase of property, plant and equipment	-	(1.3)
Proceeds on disposal of property, plant and equipment	-	0.2

Net cash used in investing activities from discontinued operations	-	(1.3)


Net cash used in financing activities from discontinued operations	-	-

Net debt reconciliation

	At 31 December 2009	Cash flow	Foreign exchange difference	Acquisitions	Disposals	Other non-cash movements	At 31 December 2010
	£m	£m	£m	£m	£m	£m	£m
Cash	147.5	51.5	5.9	(9.1)	(0.1)	-	195.7
Debt due within one year	(0.3)	0.5	-	-	-	(0.5)	(0.3)
Debt due after one year	(467.9)	-	(13.1)	-	-	(1.8)	(482.8)
Leases	(1.0)	1.1	-	-	-	(0.1)	-

Net debt	(321.7)	53.1	(7.2)	(9.1)	(0.1)	(2.4)	(287.4)

This information is provided by RNS

The company news service from the London Stock Exchange

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