Final Results

RNS Number : 8250Y

Melrose PLC

07 March 2012

7 March 2011

MELROSE PLC

AUDITED RESULTS

FOR THE YEAR ENDED 31 DECEMBER 2011

Melrose PLC today announces its audited results, which are reported under IFRS, for the year ended 31 December 2011.

Highlights¹

§ Headline² results

- Revenue in the full year £1,153.9 million (2010: £1,035.4 million), an increase of 11% on 2010

- Revenue in the second half £603.1 million (2010: £531.1 million), an increase of 14% on 2010

- Order intake of £1,212.6 million (2010: £991.2 million), an increase of 22%

- Operating profit margin of 15.7% (2010: 14.2%)

- Profit before tax of £161.2 million (2010: £121.7 million), an increase of 32%

- Diluted earnings per share³ (including discontinued businesses) of 28.8p (2010: 24.1p), up 20%

§ Results after exceptional items and intangible asset amortisation

- Profit after tax of £114.8 million (2010: £103.7 million), an increase of 11%

- Diluted earnings per share of 23.7p (2010:19.8p), up 20%

§ Net debt of £289.6 million (2010: £287.4 million). Net debt equal to 1.4x EBITDA⁴

§ New five-year £600 million committed bank refinancing completed in January 2012

§ Final dividend increased by 20% to 8.4p per share (2010: 7.0p)

§ Full year dividend increased by 18% to 13.0p per share (2010: 11.0p)

§ Completion of the disposal of Dynacast on 19 July 2011 for an enterprise value of £377 million with the equity value increased fourfold

§ Since flotation in 2003 approximately £1.5 billion shareholder value created at current market price

Christopher Miller, Chairman of Melrose PLC, today said:

"This is another set of excellent results. We continue to be confident that there is more improvement to come driven by the positive momentum of our order books and strong end markets. We also continue to look for our next acquisition and current market circumstances mean that we are, if anything, more certain that a suitable acquisition opportunity will arise."

¹continuing operations only unless otherwise stated

² before exceptional costs, exceptional income and intangible asset amortisation

³ calculated using continuing and discontinued operations, before the profit on disposal of businesses, and the diluted weighted average number of shares for the year (including 30.1 million shares assumed to be issued under the Melrose Incentive Scheme)

⁴ headline² 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 :

M:Communications

Nick Miles/Ann-marie Wilkinson/Andrew Benbow +44 (0)20 7920 2330

CHAIRMAN'S STATEMENT

I am pleased to report Melrose's ninth set of annual results since flotation in 2003. In this time Melrose has raised £785 million in capital for acquisitions and has returned £771 million in capital returns and dividends giving a current net investment by shareholders of £14 million. After payment of the final dividend proposed below, Melrose will have repaid all equity raised. At the current share price our market capitalisation means that approximately £1.5 billion of value has been created for shareholders since 2003.

RESULTS FOR THE GROUP

These accounts report the results for the Group for the year to 31 December 2011 and comparatives for the previous year.

Revenue from continuing businesses for the year was £1,153.9 million (2010: £1,035.4 million) and headline profit before tax (before exceptional costs, exceptional income and intangible asset amortisation) was £161.2 million (2010: £121.7 million). Headline diluted earnings per share ("EPS") on continuing and discontinued businesses were 28.8p (2010: 24.1p). Diluted EPS on continuing and discontinued businesses were 59.0p (2010: 27.0p).

Further details of these results are contained in the Finance Director's review.

DIVIDENDS

The Board intends to pay a final dividend of 8.4p per share (2010: 7.0p) on 14 May 2012 to those shareholders on the register at 13 April 2012, subject to approval at the AGM on 9 May 2012. This gives a total for the year of 13.0p per share (2010: 11.0p), which represents an 18% increase.

We continue to pursue a progressive policy even in years such as this where a capital return has been made.

TRADING

2011 saw an excellent performance from our businesses. Headline operating profit was up 23% on sales up 11% reflecting another year of increased headline operating margins, which are now at 15.7%. We believe there is more to come from these businesses both in profits and margins and, in this context, the most encouraging sign was the increase in order intake throughout the year, with the fourth quarter being the strongest.

We have now fully entered the investment phase with increased capital expenditure across all of our businesses. Nevertheless net debt has remained at £290 million, which means that this investment has been funded out of operational cash generation. We continued to maintain strict controls on working capital and we expect this excellent cash generation to continue.

Further details on trading are included in the Chief Executive's review.

BOARD CHANGES

We have announced today a forthcoming change of roles within the Melrose Board. Simon Peckham, currently our Chief Operating Officer, will take over as Chief Executive from the next Annual General Meeting. David Roper, whom he succeeds, will become Executive Vice-Chairman. As a founder Director, David has been a highly important and fundamental part of Melrose and its success since inception in 2003. Equally Simon, also a founder Director, has made a huge contribution to our progress and has fully earned this appointment. On behalf of shareholders I would like to thank them both for their efforts past and future. This is part of a planned management succession programme, and all your Executive Directors remain fully committed and are looking forward to continuing Melrose's development and success.

We were delighted to welcome Justin Dowley to our Board as a non-executive Director last September. He has had a distinguished career in the City and we look forward to his contribution to Melrose.

STRATEGY AND OUTLOOK

The sale of Dynacast in July 2011 for an enterprise value of £377 million and the subsequent return of these proceeds to shareholders was a further demonstration of our strategy. The first and most important part of our strategy of "buy, improve, sell" is, of course, making good acquisitions. We continue to look for suitable opportunities but, it should go without saying, we will be extremely careful in the application of our criteria, which include price. We are optimistic that we will identify something which will add further to the excellent growth of the Group.

At the interim stage we highlighted the strong end markets which most of our businesses serve and the expected return, in due course, on our increased investment programmes. Since then order books have continued to improve and we feel we are seeing early signs of recovery in the USA. Our businesses in the Rest of the World continue to perform well. While we are naturally cautious about economies in continental Europe, we are encouraged by current trading and the outlook for 2012.

Christopher Miller

Chairman

7 March 2012

CHIEF EXECUTIVE'S REVIEW

I am very pleased with the trading results of the Group in 2011. On all measures of performance, whether it be sales and operating profit growth, profit margins, cash generation or order intake, the result has been very good.

It is gratifying to see the sales growth momentum in the business increasing in the second half of the year, reflecting continuing market improvements and the benefits of the active programme of capital investment, supported by a healthy pipeline of new product introductions.

The Energy division had another excellent year in 2011. Order intake in the year was very good and continued to build through the period as the benefits of the competitiveness and energy efficiency of Brush Turbogenerators' main product, the gas turbogenerator, produced good gains in market share. Significant capital investment continues to be made in both Brush's new build and aftermarket facilities in order to increase capacity to meet projected demand and to achieve productivity gains. The absorption of Hawker Siddeley Switchgear into Brush will produce significant operational savings and in addition will result in a more targeted and focused sales function, given the customer overlap between Hawker Siddeley Switchgear and Brush Transformers. Marelli reported healthy increases in sales, orders and operating profit in the year, with a greater proportion of higher margin, more specialist business feeding through in the second half. The new plant in Malaysia is now operational and is an important step in reconfiguring Marelli's manufacturing footprint.

In the Lifting division, Bridon performed creditably in 2011, underpinned by good demand in its onshore oil & gas and mining markets. In view of the favourable prospects in most of its markets, Bridon invested heavily in 2011, with capital expenditure of approximately £13 million (2.8 times depreciation). This, together with a strong commitment to new product development, is a key part of Bridon's strategy to be the leading global solutions provider for high specification rope applications.

Crosby reported very strong results in 2011, nearly matching its record year in 2008, with good demand in its core oil & gas and mining markets, supported by its excellent relationships with its distributor base. In addition to its investment programme in the US to increase capacity and efficiency, Crosby continues to invest actively in its European and Chinese operations to enable it to take advantage of its market-leading brand name and the promising opportunities that have been identified in these markets.

In the Other Industrial division, the trading performance overall was satisfactory, reporting increased revenue and operating profit in the year. While Truth struggled in the face of challenging conditions in its markets, Harris performed well as demand for scrap recycling machines recovered in the year. MPC reported a strong trading performance as the results of its investment in the highly successful Range Rover Evoque programme started to come through.

OUTLOOK

Although conditions in the world economy remain uncertain, albeit with some signs of improvement, a large proportion of Melrose Group companies' sales derive from good market positions in the global power generation, oil & gas and mining sectors which are forecast to remain strong.

The visibility and positive momentum of our order books, supported by an aggressive capital investment programme, together with a strong pipeline of new products, give us confidence for another good year in 2012.

ENERGY

Year ended 31 December	2011	2010
£m
Revenue	461.6	427.5
Headline Operating Profit	91.1	73.7

BRUSH

Brush Turbogenerators ("Turbogenerators") is the world's largest independent manufacturer of electricity generating equipment for the power generation, industrial, oil & gas and offshore sectors. From its four plants in the UK, the Netherlands, the Czech Republic and the USA, it designs, manufactures and services turbogenerators, 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 designs and manufactures systems and power transformers under the brand name Brush Transformers ("Transformers") and also produces a wide range of indoor and outdoor medium voltage AC/DC switchgear under the Hawker Siddeley Switchgear ("HSS") brand name.

Brush performed strongly in 2011, building on the significant progress made since acquisition in 2008. Operating profit for the year was 25 per cent higher than in 2010 on the back of sales which were up by 4 per cent over the same period. Turbogenerator order intake in 2011 was substantially higher than in 2010, including the first orders for the new large air-cooled product, and the trading performance was supported by excellent cash generation during the year.

Turbogenerators' new build revenue increased marginally in 2011 over 2010, as the global power generation market continued its slow recovery. During the year, Turbogenerators increased its share of the market it operates in, particularly in the more efficient and environmentally acceptable gas turbine sector, which continues to grow at the expense of the coal and nuclear sectors, with the latter suffering as a result of the Fukushima incident in Japan.

Turbogenerators' operating profit in 2011 benefited from the contract to supply four 250 MW combined-cooled generators to the nuclear power plant at Mochovce in the Slovak Republic. 2011 was the last full year of this highly successful multi-year €46 million contract.

The productivity benefits of the substantial capital investment programme, which started in the first half of the year, have been most encouraging. During the year £15 million of capital expenditure was approved. The majority of this relates to capacity increases and productivity improvements of the 2-pole generator production facilities in Brush in the UK and Czech Republic, the benefits of which will continue to flow through 2012 and into 2013.

In order to further the productivity gains in Turbogenerators, a restructuring of the manufacturing facility in the Netherlands has been announced. The objective is to streamline the operation in order to focus exclusively on the manufacture of 4-pole generators. This should be completed by mid-2012 and will generate significant savings.

Brush's aftermarket business saw sales increase marginally in 2011 compared to 2010, as end-users sought to conserve cash by deferring maintenance expenditure. With aftermarket sales at 29 per cent of Brush's total revenue in 2011, a major effort is continuing to be directed at this business to deliver growth and margin progression, and to benefit from the very promising market opportunities that exist as a result of the large installed base of turbogenerators.

Transformers saw revenue beginning to recover in the second half of 2011 as UK demand for transformers increased, as we enter year two of the current five-year OFGEM cycle. There was a substantial improvement in order input in 2011, with orders more than double that of the previous year.

On the back of the successful integration of Transformers into Brush in 2010, HSS was also absorbed into Brush in late 2011. The customer overlap and efficiency gains should benefit the enlarged group going forward.

HSS revenue increased by 16 per cent in 2011 compared to 2010. The 'Eclipse' AC switchgear indoor product was the stand-out performer in the year, recording a 34 per cent increase, and this product now accounts for approximately 50 per cent of HSS's sales. Strong growth was also experienced in the company's Australian operation.

Order intake at HSS increased by 8 per cent over 2010 with almost all product lines being ahead of internal forecasts. The exception was the High Speed DC 'Lightning' product, which is primarily used for major projects within the rail industry, which suffered from delays in a number of major rail infrastructure projects.

As part of Brush, HSS will not only benefit from sales and marketing synergies, but also from the implementation of the Brush manufacturing strategy. We expect the latter to positively impact on the operating margin in 2012.

Harrington, the specialist small generator manufacturer based in the UK, recorded a 30 per cent increase in revenue in 2011 and a 23 per cent increase in orders as a result of winning a number of large contracts.

OUTLOOK

Record order intake in 2011 has left Brush in an excellent position for 2012.

Turbogenerators and Transformers entered 2012 with approximately 70 per cent of their budgeted 2012 new build sales covered by orders, whilst HSS has about half.

This positive order momentum, coupled with further operational improvements and the continued drive to increase the contribution from higher margin aftermarket business, gives us confidence that Brush will have another good year in 2012.

MARELLI MOTORI ("MARELLI")

Marelli, based in Italy, is one of the world's leading manufacturers of industrial generators and electric motors with a product portfolio ranging from 0.12 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 & gas and industrial manufacturing.

Marelli reported healthy increases in revenue, order intake, and operating profit in 2011 of 22 per cent, 19 per cent and 15 per cent respectively. As reported in the Interim Statement, trading in the first half of the year was affected by an adverse sales mix, which, as expected, was reversed in the second half as sales of higher margin, larger specialist machines recovered. Cash generation and control of working capital continued to be well managed.

2011 was a productive year for Marelli in terms of new product introductions. A number of new products were successfully launched, including a synchronous 400Hz generator for use in the aviation industry, a special generator for use with tidal power and new motors to meet European efficiency regulations.

Over £1 million has been invested in the last two years in Marelli's new Malaysian factory to manufacture the smaller, more standard generators. This site has been operational since the last quarter of 2011 and currently employs around 100 people. Although, unsurprisingly, there still remain a few teething issues, relating to the finessing of the supply chain and the completion of the training programme, it is nevertheless an important step in the rebalancing of Marelli's manufacturing capacity.

Other than the investment in the Malaysian facility, additional capital expenditure was made in the year to further improve existing manufacturing and testing procedures - these include a new notching press for generators, development of CAD systems and a large machinery test room. Further capital investment has been earmarked for 2012.

OUTLOOK

The trend reported in the Interim Statement of a recovery in Marelli's higher margin marine, oil & gas and hydroelectric business looks set to continue. The positive momentum in the order intake gives us confidence that 2012 will be another year of progress for Marelli.

LIFTING

Year ended 31 December	2011	2010
£m
Revenue	484.4	422.7
Headline Operating Profit	82.6	66.7

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 & gas, mining, industrial, marine and infrastructure sectors.

Bridon's trading results improved in 2011 compared to 2010, with sales and operating profit ahead of the previous year and operating margins increased over the second half of 2010. This reflected an overall recovery in Bridon's markets, the exiting of the lower margin structures business and operational improvements. Orders received in 2011 were approximately 20 per cent higher than in 2010. Working capital control remained strong with greater than 100 per cent profit conversion to cash before capital expenditure. Although steel prices rose by some 20 per cent in the year, Bridon was largely able to pass this on, reflecting the underlying strength of the business.

Demand for onshore oil & gas remained solid through the year. In the offshore sector, there was some recovery compared to 2010 and this continues to build going into 2012. Demand improved in the North Sea, Brazil and parts of Asia and Africa, whilst exploration and drilling activities in the Gulf of Mexico have continued to be impacted by the aftermath of the Horizon oil spill, reflected in the time taken to obtain or renew licences and permits. Bridon has established a trading company in Brazil to service this important market.

The mining market has continued to see solid activity levels with the demand for commodities largely unaffected so far by the global financial downturn. Orders have improved in most markets for both deep shaft and surface mining on the back of stronger demand in Russia, China and South Africa, where Bridon is expanding its presence.

The commercial construction markets in Europe and the Middle East remained subdued through 2011, although there were some tentative signs of improvement in North America. Many industrial crane companies remain very cautious and are reluctant to commit to orders. Demand for crane ropes has continued to be solid in China, but the volatile industrial production levels in Asia have led to variable demand for industrial ropes.

Bridon's strategy is to be the global technology leader for demanding rope applications and the leading solutions provider. In order to support this strategy, Bridon is investing £20 million in building a new factory on Neptune Quay in Newcastle upon Tyne to produce the largest ropes in the world. This new factory, which will initially employ around 40 people, should be operational by December 2012.

In addition, a new technology centre is being built in Doncaster, which will provide state-of-the-art laboratory and testing facilities.

Bridon continues to invest in the upgrading of its manufacturing facilities. The programme to improve the wire mill in Doncaster was substantially completed in the year, which will increase manufacturing efficiencies and reduce carbon emissions and other environmental waste. The major investment in new capacity in the German factory is also complete, significantly improving manufacturing capability for complex multi-strand ropes.

As part of its ongoing commitment to innovation, Bridon launched eight new products in 2011 and developed some promising enhancements to existing products. For the mining market, new products include extended and sheathed round balance ropes with increased corrosion resistance and flexibility. New products for the oil & gas sector include a new 'Bristar' rope, which provides industry-leading technology for enhanced rope fatigue performance, and the 'Bristar with hyrtel' system, with greater temperature resistance when compared to conventional polymer rope structures.

OUTLOOK

The financial issues in the Eurozone have created uncertainty in markets, and as a result a number of companies are cautious in terms of making financial commitments. In spite of this, Bridon expects demand for oil & gas and commodities to remain solid in 2012. The high oil price and the continuing requirement for commodities to support economic development, particularly in the emerging markets, should support activity levels in these sectors.

Although the outlook for construction and manufacturing in general remains uncertain, continued growth in the emerging markets should underpin these sectors.

Substantial capital is being invested in Bridon to enable it to compete at the highest level in markets with favourable longer term growth prospects. With an order book at the start of this year approximately 20 per cent higher than a year previously, we are confident of a good outcome in the year ahead.

CROSBY

Crosby is a world leader in the design, manufacture and marketing of lifting fittings, blocks and sheaves to the oil & gas, construction and mining industries, serviced primarily through a global network of value-added specialty distributors.

Crosby has had an excellent year, continuing its strong recovery from the difficult year in 2009. With revenues and operating profit up by over 20 per cent and 40 per cent respectively, its performance in 2011 was close to its record year in 2008. Whilst construction markets in North America and Europe remained slow in 2011, oil & gas and mining remained strong worldwide.

During 2011, Crosby continued its focus on supporting and working closely with its traditional worldwide distributor base, with less dependence on OEMs. Through additional training programmes and close support, relationships have broadened and deepened and are resulting in Crosby growing its market share with these distributors.

2011 saw the completion of several large capital investment programmes in Crosby's main US manufacturing plants, designed to both increase production capacity and efficiency. This has been linked to an investment programme in Europe to rationalise Crosby's manufacturing base to make it more efficient and at the same time to make it less dependent on Crosby US. This will have the additional benefit of further freeing up production capacity in the US to enable it to meet the increasing demand from emerging markets such as China, Brazil and India.

It is expected that the demand for offshore oil & gas will continue to grow worldwide for the foreseeable future. In response to this, Crosby will continue to invest in large forging hammers and larger machining equipment.

The expansion of Crosby's presence in emerging markets remains a high priority. During 2011, considerable investments were made in recruiting additional sales and engineering personnel and this will remain an area of focus for 2012. Progress was made in 2011 at Crosby's crane block and sheave centre in Hangzhou, China, to produce sheaves and blocks for the Chinese market and to sell additional standard product lines into the Chinese marketplace.

During 2011, one of the key new product introductions developed by Crosby was a new tubing clamp, called the 'McKissick Tubing Grab', which provides a quick, easy and efficient attachment for the lifting of tubing to and from the rig floor within 'well servicing' applications. Although early days, this application has been well received in the market place.

Crosby continues to be at the forefront of the development of e-application systems to provide customers with real-time information relating to the installation and use of Crosby products in the field. Building on the increased usage by customers of access through the Apple iPad in 2011, Crosby is working on a suite of iPad-based and Android-based applications to extend the range of services that can be utilised by customers. It is hoped that this will be rolled out on a worldwide basis to include internet-based certifications through CertPro and Verification Pro systems.

OUTLOOK

Crosby has experienced a very sharp turnaround in its trading performance since the low point in 2009, not least because of the decisive actions taken by management. Although we do not expect the same rate of growth to continue in 2012, the strength of the opening order book gives us confidence of further improvement this year.

OTHER INDUSTRIAL

Year ended 31 December	2011	2010
£m
Revenue	207.9	185.2
Headline Operating Profit	23.1	21.8

TRUTH

Truth designs and manufactures a broad product portfolio of operating hardware for windows, patio doors and skylights. Truth products are sold primarily to OEM facilities throughout North America that serve new residential housing, commercial buildings and remodelling and replacement segments of the construction market. Primary manufacturing facilities are located in Minnesota, USA, and Ontario, Canada, with some outsourcing to lower cost countries.

After a strong recovery in 2010, both Truth and its customer base expected the momentum to continue into 2011. However, unusually harsh winter and spring weather in almost all regions of the US and Canada contributed to a slow start in 2011. Optimism for a better second half receded as it became evident that the US Government tax incentives introduced in 2010 had the effect of bringing forward demand into 2010 at the expense of 2011. On top of this, consumer confidence remained weak throughout the year.

The overall demand in the markets in which Truth operates declined in 2011 over the previous year. However, as a result of a concerted focus on new product design and development, Truth outperformed, achieving some notable market share gains.

A highlight in 2011 was the success of the award-winning 'Sentry Multi-Hinged Patio Door Hardware System'. This product was launched in mid-2011 and has been well received in the market. It is selling well and is already established as a core product within the Truth range.

Control of overheads was an area of major focus during 2011. Not only was this necessary to mitigate the impact on profit of the fall in sales, but also to help offset some of the effect of not being able to fully recover raw material price increases in the year.

OUTLOOK

Truth remains positive about the prospects for 2012. Without the distorting effect of the US Government tax incentives in 2010 and 2011, it is expected that Truth will see a more normalised pattern of demand than has been seen in the previous two years. Although the general economy in North America is seeing signs of recovery, conditions in housing and construction are lagging behind. Nevertheless, Truth is confident of continuing to gain market share on the back of a healthy pipeline of new product introductions. Truth is an inherently high quality, high margin business with a very strong position in its market. When the housing and construction markets in North America recover, Truth's trading performance will bounce back sharply.

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 size reduction equipment solutions for the scrap metal and fibre recycling industries.

Harris performed well in 2011 as demand for scrap recycling machines continued to recover from 2010. On the back of the healthy increase in orders in 2011 over the previous year, revenue increased by 15 per cent, including an encouraging contribution from aftermarket sales. Operating profit was 25 per cent higher, assisted by continued efforts to improve productivity and contain costs.

Harris continued to invest in the design and engineering of new products. Three new baler and shear products were introduced to the market in 2011 that provide variable frequency drive technology for ferrous and non-ferrous materials. These new machines boast higher throughput than the machines they are replacing, but with approximately half the energy consumption, and present a strong value proposition.

Harris expanded its presence in Latin America during 2011 to take advantage of the rapidly growing recycling industries in that region.

OUTLOOK

Harris expects demand in the recycling industry to remain stable in 2012, with sales weighted more to the second half of the year, as in 2011. After a year of significantly higher revenue and profit in 2011, we expect a more steady trading result in 2012.

MCKECHNIE PLASTIC COMPONENTS ("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.

MPC has reported strong trading results in 2011, with sales and profit up by in excess of 45 per cent and 70 per cent respectively. This is largely due to a healthy recovery in the automotive sector, where MPC is a supplier on a number of key programmes, such as the highly successful Range Rover Evoque.

During the year, MPC continued to focus on investing in its core engineering skills aimed at product and tool design, development and testing. As a result, it has been able to satisfy customer requirements for the supply of technically complex products, such as twin shot claddings, wheel arch liners and automated multi-assemblies.

Technical differentiation remains at the core of MPC's value proposition, as it seeks to work closely with partner-customers such as Jaguar Land Rover, Ford, Marks & Spencer, Makita, Diageo and Heineken. MPC was delighted to be given the Jaguar Land Rover award for both quality and systems at its two manufacturing locations in Yorkshire, UK.

OUTLOOK

MPC is well placed to continue to profit from the demand from automotive OEMs to provide cars to key export markets such as China, Russia and North America. With a number of exciting projects in the pipeline, we are confident of another year of progress for MPC.

David Roper

Chief Executive

7 March 2012

FINANCE DIRECTOR'S REVIEW

The year to 31 December 2011 included the disposal of the Dynacast division along with four smaller businesses previously shown in the Other Industrial division; Brush Traction, Logistex UK, Madico and Weber Knapp. Taken together, these five businesses constituted 25% of both Group revenue and Group headline operating profit in 2010. In accordance with IFRS 5 the trading results of these businesses have been shown as discontinued in both years in these financial statements.

Group trading results - continuing operations

The continuing operations now include the three remaining trading divisions, namely Energy, Lifting and Other Industrial.

To help understand the results of these 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 2011 the Group achieved revenue from continuing operations of £1,153.9 million (2010: £1,035.4 million) representing an 11% increase over 2010. During the second six months of 2011 this pace of year on year growth increased to 14% compared with 9% in the first six months of 2011.

Headline operating profit in the year ended 31 December 2011 was £180.8 million (2010: £147.0 million) which was up by 23% on the previous year, a very similar year on year growth rate to that achieved in the first six months of 2011. The headline operating profit margin (defined as the percentage of headline operating profit to revenue) increased from 14.2% in 2010 to 15.7% in 2011. Indeed, in the second half of 2011 the headline operating profit margin increased to 15.9%.

After exceptional costs, exceptional income and intangible asset amortisation Group operating profit was £117.0 million (2010: £134.0 million) and Group operating margin was 10.1% (2010: 12.9%).

TRADING RESULTS BY DIVISION - CONTINUING OPERATIONS

A split of revenue, headline operating profit and headline operating profit margin for 2011 and 2010 is as follows:

	2011 Revenue	2011 Headline operating profit/ (loss)	2011 Headline operating profit margin	2010 Revenue	2010 Headline operating profit/ (loss)	2010 Headline operating profit margin
	£m	£m		£m	£m
Energy	461.6	91.1	19.7%	427.5	73.7	17.2%
Lifting	484.4	82.6	17.1%	422.7	66.7	15.8%
Other Industrial	207.9	23.1	11.1%	185.2	21.8	11.8%
Central - corporate	-	(9.2)	n/a	-	(8.6)	n/a
Central - LTIPs⁽¹⁾	-	(6.8)	n/a	-	(6.6)	n/a
Continuing Group	1,153.9	180.8	15.7%	1,035.4	147.0	14.2%

⁽¹⁾ Long Term Incentive Plans

The performance of each of the trading divisions is discussed in detail in the Chief Executive's review.

Central costs comprise £9.2 million (2010: £8.6 million) of Melrose PLC corporate costs and an LTIP charge of £6.8 million (2010: £6.6 million). The LTIP charge consists of an annual accrual for the Melrose 2009 Incentive Scheme of £1.8 million (2010: £1.8 million) and an accrual for the divisional management LTIPs of £5.0 million (2010: £4.8 million). The divisional management LTIPs are cash based incentive schemes for operational management to reward improvements in business performance mainly over the period to 31 December 2014.

FINANCE COSTS AND INCOME

The net finance cost in 2011 was £19.6 million (2010: £25.3 million).

Net interest on external bank loans, overdrafts and cash balances was £15.7 million (2010: £17.9 million), which, for the year ended 31 December 2011, was largely protected from interest rate changes by a number of interest rate swaps which fix the interest rate on £380.1 million (comprising US $546.0 million and €33.3 million), which is 78% of total Group interest-bearing borrowings. More detail on these swaps (and the new swap arrangements entered into in February 2012, relating to the new banking facility drawn down on 31 January 2012) is given in the finance cost risk management section of this review. The net interest expense on external loans reduced during the year because of lower leverage ratios. In 2011 the Group had a blended interest rate of 3.1% (2010: 3.4%).

Also included in the net finance cost is a £2.5 million (2010: £2.3 million) amortisation charge relating to the initial costs of raising the £750 million bank facility, a net interest cost on pension liabilities in excess of the expected return on their assets of £0.3 million (2010: £3.3 million) and a charge for the unwinding of discounts on long term provisions of £1.1 million (2010: £1.7 million).

EARNINGS PER SHARE (EPS)

In accordance with IAS 33, two sets of basic and diluted EPS numbers are disclosed on the face of the Income Statement, one for continuing operations and one that also includes discontinued operations. In the year ended 31 December 2011 the diluted EPS for continuing operations was 23.7p (2010: 19.8p) and for both continuing and discontinued operations was 59.0p (2010: 27.0p).

The Melrose 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. With the Melrose 2009 Incentive Scheme scheduled to crystallise in 2012, it is also considered more appropriate to focus on the diluted EPS calculation which recognises the impact of the shares that are expected to be issued under the Melrose 2009 Incentive Scheme. The estimate of the value of this scheme as at 31 December 2011, using a Black Scholes pricing model compliant with IFRS 2, was £99.4 million (2010: £70.7 million). Using the average share price for the 40 business days up to 31 December 2011, if paid out in shares, this would result in the issue of 30.1 million Ordinary Shares.

Following the disposal of Dynacast and the share consolidation in the year, the Directors consider that the best measure of year on year growth in headline diluted EPS is shown by comparing the diluted EPS calculated using the headline results of continuing and discontinued businesses, before the profit on disposal of businesses, and the weighted average number of shares for the year, being 28.8p, with the headline diluted EPS of the full Group for 2010 of 24.1p. This shows a 20% increase.

EXCEPTIONAL ITEMS

In the year ended 31 December 2011 the Group incurred exceptional costs of £40.1 million (2010: £10.3 million) and did not receive any exceptional income (2010: £21.4 million). In addition intangible asset amortisation of £23.7 million (2010: £24.1 million) was charged. A tax credit on these exceptional costs and intangible asset amortisation, of £20.7 million (2010: £6.0 million), and an exceptional tax credit of £38.1 million (2010: £23.5 million) has been taken in the year.

The table below summarises the exceptional items in 2011:

	Total £m
Intangible asset amortisation	(23.7)
Exceptional costs
Increase in legal provision	(21.0)
Restructuring costs	(15.9)
Acquisitions and disposals of businesses	(3.2)
Total exceptional costs	(40.1)
Tax credit on exceptional costs and on intangible asset amortisation	20.7
Exceptional tax credit	38.1
Total exceptional tax and tax on exceptional costs	58.8
Exceptional items and intangible asset amortisation (after tax)	(5.0)

As disclosed in the 2010 Annual Report and the 2011 Interim Statements and now updated in the exceptional costs note to this announcement (note 3) two Bridon companies that Melrose acquired as part of the acquisition of FKI plc are defendants in respect of product liability litigation. In light of the current available information the provision relating to this has been increased by £21.0 million to £25.8 million (US $40 million) at 31 December 2011. This increase in the year has been charged to exceptional costs due to its size and nature.

During the second half of 2011 three restructuring programmes have been approved which are intended to enhance the operational and financial performance of the Group. These restructuring programmes include the reorganisation of the Brush facility in the Netherlands and the integration of Hawker Siddeley Switchgear into Brush Turbogenerators at a total cost of £12.0 million. In addition, as part of the large scale investment within the Bridon business, a provision for restructuring costs of £3.9 million has been recognised in order to relocate certain activities from Doncaster to the new Neptune Energy Park facility in Newcastle upon Tyne.

The Group considered the potential acquisition of Charter International plc but, following the emergence of a competitive bidder, your Board remained price disciplined and ended the process early enough to limit costs incurred to £2.4 million. The other acquisition and disposal costs of £0.8 million were primarily in respect of the return of capital following the disposal of Dynacast.

In recognition of the exceptional restructuring costs and increase in the legal provision booked in the year, a tax credit of £7.6 million has been taken and a tax credit of £13.1 million has also been recognised in respect of intangible asset amortisation. In addition, during the year, an exceptional tax credit of £38.1 million was taken of which £28.6 million related to the reduction of tax liabilities in respect of overseas tax audits inherited on the acquisition of FKI, reflecting the company's view of the most likely outcome of these audits. A further £9.5 million exceptional deferred tax credit relates to previously unrecognised tax losses that are now considered recoverable.

Overall the net exceptional items and intangible asset amortisation, after tax, shows a net expense of £5.0 million.

DISPOSAL OF BUSINESSES

On 19 July 2011 Melrose completed the disposal of Dynacast to KDI Holdings Inc, managed by Kenner & Company, Inc. for an enterprise value of £377 million (US $607 million). This comprised £366.5 million (US $590 million) in cash received on completion, together with Dynacast taking with it £10.5 million (US $17 million) of net pension liabilities. The profit on disposal of this business in the year was £150.5 million after costs of £12.8 million and Dynacast contributed £164.0 million to revenue and £26.4 million to headline operating profit in 2011.

Dynacast was an extremely successful investment for Melrose. During its six years of ownership the enterprise value of Dynacast increased from £197 million to £377 million, and the equity value increased by four times. As a result of this and Melrose's other actions nearly £1 billion in cash has been generated from the £429 million McKechnie and Dynacast acquisition in May 2005.

Four smaller businesses were sold in the year, namely, Brush Traction, Logistex UK, Madico and Weber Knapp all of which were previously shown within the Other Industrial division. Along with the disposal of the businesses, £22 million of gross pension liabilities went with the Logistex UK business, and over £100 million of parent company guarantees and bonds were transferred to the buyer on the Brush Traction disposal.

The gross proceeds received on the disposal of these businesses amounted to £24.0 million, with related costs of £1.8 million, realising a profit on disposal of £1.9 million. The businesses contributed £13.8 million to revenue and £1.0 million to headline operating profit in 2011.

RETURN OF CAPITAL AND NUMBER OF SHARES IN ISSUE

Consistent with the Melrose strategy of returning proceeds to shareholders following significant disposals, Melrose announced the return of £373.2 million to shareholders on 8 August 2011 following the sale of Dynacast.

The return was made via a redeemable share scheme which gave shareholders the option of receiving a payment either in August 2011 or April 2012, or a combination of both. A £1.1 million liability is included in the 31 December 2011 Balance Sheet to represent the outstanding balance on the £373.2 million capital repayment for those shareholders who elected to receive payment in April 2012. Alongside the capital return, a share consolidation took place which reduced the number of Ordinary Shares in issue by a factor of 11 for 14, or by 21%, from 497.6 million to 391.0 million.

CASH GENERATION AND MANAGEMENT

Melrose has started a significant period of investment in its key businesses with a resulting capital expenditure to depreciation ratio of 1.7x for the year. This means that it is appropriate to look at the operating cash generated post working capital movement, but pre capital expenditure, as a percentage of headline EBITDA (defined as headline operating profit before depreciation and amortisation) to gauge cash performance in the year. The percentage in 2011 for the continuing Group was 89% which was ahead of internal expectations. It is also pleasing to note that the pace of profit conversion to cash improved in the second half to 102% (first half: 74%).

At 31 December 2011 the percentage of net working capital to sales for the Melrose Group was 12.5% compared to 15.4% on acquisition of FKI.

The cash generation performance in 2011 is summarised as follows:

	2011 £m
Headline operating profit	180.8
Depreciation and computer software amortisation	23.1
Working capital movement	(23.3)
Headline operating cash flow (pre capex)	180.6
Headline EBITDA conversion to cash (pre capex) %	89%
Net capital expenditure	(38.9)
Net interest and net tax paid	(38.9)
Defined benefit pension contributions	(24.9)
Other (including discontinued operations)	(23.4)
Cash inflow from trading (after all costs including tax)	54.5

Movement in net debt	2011 £m
Opening net debt	(287.4)
Cash flow from trading (after all costs including tax)	54.5
Net cash flow from disposals (including net cash disposed)	373.9
Amount paid to shareholders	(424.9)
Foreign exchange and other non-cash movements	(5.7)
Closing net debt	(289.6)

The Balance Sheet leverage (calculated as net debt divided by headline operating profit before depreciation and amortisation) was 1.4x at 31 December 2011 (31 December 2010: 1.3x). The fact that this increase in leverage was so small was a result of the strong cash management and improved profitability of the continuing Group as ordinarily the disposal of Dynacast and other businesses (together contributing 25% of Group headline operating profit in 2010) and returning all the proceeds to shareholders would have increased leverage further.

CAPITAL EXPENDITURE

Improving businesses by investing in capital projects with acceptable paybacks is a key part of the Melrose strategy. By division, the capital expenditure in the year was as follows:

	Energy	Lifting	Other Industrial	Central	Total
Capital expenditure £m	11.4	21.3	6.5	-	39.2
Depreciation £m	7.9	8.8	5.8	0.6	23.1
Capital expenditure to depreciation ratio (full year)	1.4x	2.4x	1.1x	n/a	1.7x
Capital expenditure to depreciation ratio (second half year)	1.9x	3.0x	0.5x	n/a	1.9x
Melrose seven year (2005-2011) average annual multiple					1.3x

The capital spend to depreciation ratio was 1.7x in 2011, compared with 1.0x in 2010. Indeed, in the second half of 2011 it increased to 1.9x. This illustrates that the Group has returned to its investment phase by spending money on capital and restructuring projects which will improve the value of the businesses. The seven year Melrose average annual capital spend is in excess of depreciation at 1.3x.

The largest investment was made in the Bridon business (within the Lifting division) to improve the technical capabilities and capacity of the business. More detail on this investment and others is included in the Chief Executive's review.

RE-FINANCING

In December 2011 a new five year committed £600 million multi-currency revolving credit facility was agreed with a syndicate of 10 banks, strengthening the Group's banking syndicate compared to that in place previously. This was drawn down on 31 January 2012, replacing the committed £750 million syndicated term loan and revolving credit facility which was fully repaid. The new facility has no mandatory repayments in its term and allows borrowings to be repaid as cash is generated.

The facility has been drawn in the Group's core currencies namely US Dollars, Euros and Sterling in the most suitable proportion to protect, as effectively as possible, against the currency risk within the Group.

TAX

As expected, the headline Income Statement tax rate in 2011 was 26% (2010 restated: 28%). 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, as well as the settlement of prior year tax audits.

The tax rate after exceptional items and intangible asset amortisation is a credit of 18% (2010: charge of 5%). The reasons for the tax credit in the year include the reduction by £28.6 million of tax liabilities in respect of overseas tax audits inherited on the acquisition of FKI. The reduction reflects the company's view of the most likely outcome of those audits, which are now approaching conclusion. A further exceptional deferred tax credit of £9.5 million has been recognised because some of the Group's previously unrecognised tax losses are now considered recoverable. In addition, a £7.6 million tax credit has been taken in the year in respect of tax relief on exceptional costs and a tax credit of £13.1 million taken in respect of current period intangible asset amortisation and the impact upon future amortisation of the change during the year of UK tax rates.

The cash tax rate on headline continuing and discontinued operations of 14% (2010: 16%) 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 overall net tax liability (deferred and current) has decreased by £59.5 million in the year. The reduction in the current tax creditor, by £35.5 million, is mostly due to the exceptional credit taken in respect of overseas audits. The reduction in the net deferred tax creditor, by £24.0 million is largely represented by the recognition of a deferred tax asset on certain tax losses, and the reduction of the deferred tax liability on intangible assets, both of which are discussed above.

The Group's net deferred tax liability is £57.9 million (31 December 2010: £81.9 million). The largest item included within this balance is an £83.6 million (31 December 2010: £102.8 million) deferred tax liability 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.

The total amount of tax losses in the Group has decreased in the year for three reasons; the disposal of businesses containing losses, the utilisation of losses (and other assets) against taxable profits and the recalculation of available losses following tax audits. The total gross tax losses within the Group are shown below:

Tax losses	Recognised £m	Unrecognised £m	Total £m
UK	33.6	151.1	184.7
North America	1.4	-	1.4
Rest of World	-	15.3	15.3
Total 2011	35.0	166.4	201.4
Total 2010	-	251.7	251.7

ASSETS AND LIABILITIES

The summary Melrose Group assets and liabilities are shown below:

	2011 £m	2010 £m
Fixed assets (including computer software)	218.1	256.1
Intangible assets	334.8	381.1
Goodwill	568.5	798.1
Net working capital	144.8	115.9
Retirement benefit obligations	(117.7)	(119.6)
Provisions	(120.6)	(118.7)
Deferred tax and current tax	(74.8)	(134.3)
Other⁽¹⁾	(15.1)	(8.3)
Total	938.0	1,170.3

⁽¹⁾ Includes net derivative liabilities in both years and, for 2011 only, a £1.1 million liability relating to the redeemable preference C shares to be redeemed on 30 April 2012

These assets and liabilities are funded by:

	2011 £m	2010 £m
Net debt	(289.6)	(287.4)
Equity	(648.4)	(882.9)
Total	(938.0)	(1,170.3)

The decrease in total equity is primarily related to the £373.2 million return of capital to shareholders in August following the sale of Dynacast.

GOODWILL, INTANGIBLE ASSETS AND IMPAIRMENT REVIEW

The total value of goodwill as at 31 December 2011 was £568.5 million (31 December 2010: £798.1 million) and intangible assets was £334.8 million (31 December 2010: £381.1 million). These items are split by division as follows:

	Energy £m	Lifting £m	Other Industrial £m	Total £m
Goodwill	247.3	298.8	22.4	568.5
Intangible assets	117.5	199.3	18.0	334.8
Other net assets	44.6	56.9	39.4	140.9
Total carrying value	409.4	555.0	79.8	1,044.2

The goodwill and intangible assets have been tested for impairment as at 31 December 2011. The Board is comfortable that no impairment is required.

PENSIONS

The Group has a number of defined benefit and defined contribution pension plans.

The most significant pension plan in the Group is the FKI UK Pension Plan. The net accounting deficit on this plan was £79.4 million at 31 December 2011 (31 December 2010: £78.6 million). This plan had assets at 31 December 2011 of £600.3 million (31 December 2010: £549.2 million) and liabilities of £679.7 million (31 December 2010: £627.8 million).

The assumptions used to calculate the IAS 19 deficit 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 2011 is expected to live for a further 20.3 years. This is assumed to increase by 2.5 years (12%) for a male aged 65 in 2036. A summary of the key assumptions of the UK plans are shown below:

2011 Assumptions

2010

Assumptions

Discount rate

4.90

5.55

Inflation

3.10

3.45

It is noted that a 0.1 percentage point decrease in the discount rate would increase the pension liabilities on the main FKI UK Pension Plan by £10.5 million, or 2%, and a 0.1 percentage point increase to inflation would increase the liabilities on this plan by £7.0 million, or 1%. 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 £19.8 million, or 3%.

The FKI UK Pension Plan is closed to new members and on 28 February 2011 it was closed to current members' future service.

The other UK defined benefit pension plan of significant size in the Group, namely the McKechnie UK Pension Plan, was in surplus of £3.0 million at 31 December 2011 (31 December 2010: surplus of £1.9 million). This plan had assets at 31 December 2011 of £157.5 million (31 December 2010: £143.8 million) and liabilities of £154.5 million (31 December 2010: £141.9 million).

The McKechnie UK Pension Plan is closed both to new members and current members' future service.

The long term strategy for the UK plans is to concentrate on the cash flows required to fund the liabilities as they fall due whether that is within the timescales of Melrose ownership or not. The Melrose PLC Board recognise that as businesses are bought and sold eventually pension scheme liabilities need to exit the Group. However this can be done at a time which is commercially sensible.

The pension plan 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, a US defined benefit plan for FKI exists. At 31 December 2011, this had assets of £195.2 million (31 December 2010: £193.3 million), liabilities of £228.7 million (31 December 2010: £213.1 million) and consequently a deficit of £33.5 million (31 December 2010: £19.8 million). This plan is closed to new members and to current members' future accrual.

During the year the pension plans relating to Dynacast and Logistex UK were disposed which reduced the Group plan assets by £30.5 million and the Group plan liabilities by £41.1 million and hence the Group accounting deficit by £10.6 million.

PROVISIONS

Total provisions at 31 December 2011 were £120.6 million (31 December 2010: £118.7 million), a slight increase from the previous year. The following table shows the movement in provisions in the year. Within this there were some major movements:

	Total £m
At 31 December 2010	118.7
Utilised - cash spend	(37.6)
Net charge to headline operating profit	6.9
Net charge to exceptional costs	35.1
Disposal of businesses	(3.6)
Other (including foreign exchange)	1.1
At 31 December 2011	120.6

Included within cash spend on provisions in 2011 are two exceptional cash costs which the Group incurred, both of which were fully anticipated and provided. They represented payments in respect of two liabilities that were acquired with FKI plc. The first related to the transfer of £10.4 million of captive insurance liabilities to an external party, Safety National Inc., so that the Group has no further exposure to these risks. These were transferred at a cash cost of £9.0 million resulting in a profit in the year of £1.4 million. The second related to a legal settlement in respect of a historical FKI owned company, De Wind GmbH, disposed of prior to the Group's acquisition of FKI. This historical liability was paid in two tranches totalling £10.4 million. In addition £3.0 million of ongoing maintenance costs in respect of De Wind, originally provided, were paid in cash.

The net charge to headline operating profit in 2011 in respect of provisions was £6.9 million, mostly relating to the charge of £5.0 million in respect of the divisional LTIP schemes.

As described in the exceptional costs section of this review, a £21.0 million increase to a legal provision in respect of two Bridon businesses acquired as part of the acquisition of FKI plc has been charged in the year. In addition, of the £15.9 million exceptional cost relating to restructuring programmes agreed in the year, £14.1 million was booked to provisions with the remaining £1.8 million shown as an impairment of fixed assets.

The other movements on provisions in the year include £3.6 million of provisions that were sold along with the five disposed businesses and a movement of £1.1 million, being the net effect of the unwind on long term provisions and foreign exchange.

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 at 31 December 2011 was £289.6 million compared with £287.4 million a year earlier.

At 31 December 2011 the Group had a committed £750 million syndicated term loan and revolving credit facility which was due to mature in April 2013. In order to minimise future refinancing risk the Board decided prudently to refinance this facility early. As a result of the strong cash generation in Melrose since the FKI acquisition, which has allowed Group net debt to reduce by £280 million, 61% at constant currencies, the new facility could be reduced. Consequently in December 2011, a new five year committed £600 million multi-currency revolving credit facility was agreed and subsequently drawn down on 31 January 2012, at which date the original facility was repaid in full and cancelled.

The new facility is committed until December 2016 and is not subject to any mandatory repayments over its term but allows extra flexibility for the Group to reduce its borrowings as cash is generated.

The new 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 calculates net debt at average exchange rates during the period, is set at 3.0x throughout the life of the facility. For the year ended 31 December 2011 it was 1.4x (31 December 2010: 1.3x) showing significant headroom compared to the covenant test. The interest cover covenant remains at 4.0x throughout the life of the facility. At 31 December 2011 it was 11.7x (31 December 2010: 9.7x) which also affords comfortable headroom compared to the covenant test. Covenant tests are performed each June and December on the new facility.

The initial drawdown of the new facility has been made in the core currencies of the Group, being US Dollars, Euro and Sterling and in a proportion to protect the Group as efficiently as possible from currency fluctuations on net assets and profit.

In addition, there are a number of small uncommitted overdraft and borrowing facilities made available to the Group. These uncommitted facilities are lightly used.

Cash, deposits and marketable securities amounted to £195.6 million at 31 December 2011 (31 December 2010: £195.7 million) and are offset against gross debt of £485.2 million (31 December 2010: £483.1 million) to arrive at the net debt position of £289.6 million (31 December 2010: £287.4 million). The combination of this cash and the size of the new revolving facility allows the Directors to consider 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 by its very nature the economic environment causes uncertainty as to the trading outcome for 2012 and beyond. The Group has committed borrowing facilities until December 2016. 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, the Group has a consistent cash generation record, which has allowed net debt at constant exchange rates to reduce by 61% since July 2008. As a consequence the Directors believe 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 remained in a net debt position at 31 December 2011. In 2011 the Group protected 78% of its gross debt from exposure to changes in interest rates by holding a number of interest rate swaps to fix £380.1 million (US $546.0 million and €33.3 million) of term debt. Under the terms of these swaps, the Group fixed the underlying interest rate at 2.1% for US Dollars and 2.6% for the Euro through to early 2013. At 31 December 2011 this produced a blended interest rate of 3.1% (2010: 3.4%) on the £750 million facility, calculated after inclusion of the current bank margin of 1.35% (2010: 1.5%) but before amortisation of arrangement fees and non-utilisation fees.

In February 2012 the Group closed out this swap arrangement and replaced it with a new arrangement to fix the interest rate on a proportion of the new facility drawn down on 31 January 2012. The new five year swap arrangements fix the finance cost on US $231 million, £105 million and €42 million of debt. Under the terms of these new swap arrangements , the Group will pay, annually in arrears, 1.0% for US Dollar swaps, 1.1% for Euro swaps and 1.1% for Sterling swaps, plus the bank margin which is currently 1.5%. This arrangement protects approximately 70% of the Group's exposure to interest rate fluctuations for the term of the new facility.

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 the majority 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 material contract. This does not eliminate the cash risk but does bring some certainty to it.

Exchange rates used in the period

US Dollar	Average rate	Closing rate
2011	1.60	1.55
2010	1.55	1.56
Euro
2011	1.15	1.20
2010	1.17	1.16

The effect on the key headline numbers in 2011 for the continuing Group due to the translation movement of exchange rates from 2010 to 2011 is shown below. The table illustrates the translation movement in revenue and headline operating profit if the 2010 average exchange rates had been used to calculate the 2011 results rather than the 2011 average exchange rate.

The translation difference in 2011 £m
Revenue increase	5.6
Headline operating profit increase	minimal

For reference, 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

4.7

For every 10 cent strengthening of the Euro against Sterling

2.8

The long term exchange rate risk, which ignores any hedging instruments, 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

6.6

For every 10 cent strengthening of the Euro against Sterling

2.6

No specific exchange instruments are used to protect against this translation risk because it is a non-cash risk to the Group. However, when the Group has net debt, the hedge of having a multi-currency debt facility funding these foreign currency trading units protects against some of the Balance Sheet and banking covenant translation risk.

Lastly and potentially the most significant exchange risk that the Group has arises when a business that is predominantly based in a foreign currency is sold. The proceeds for those businesses may be received in a foreign currency and therefore an exchange risk might arise if foreign currency proceeds are converted back to Sterling, for instance to pay a dividend to shareholders. Protection against this risk is considered 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

Group Finance Director

7 March 2012

Consolidated Income Statement

	Notes	Year ended 31 December 2011 £m	Restated⁽¹⁾ year ended 31 December 2010 £m
Continuing operations
Revenue	2	1,153.9	1,035.4
Cost of sales		(812.9)	(731.0)

Gross profit		341.0	304.4

Headline⁽²⁾ operating expenses		(160.2)	(157.0)
Share of results of joint ventures		-	(0.4)
Intangible asset amortisation		(23.7)	(24.1)
Exceptional costs	3	(40.1)	(10.3)
Exceptional income	3	-	21.4

Total net operating expenses		(224.0)	(170.4)


Operating profit		117.0	134.0

Headline⁽²⁾ operating profit	2	180.8	147.0

Finance costs		(29.6)	(34.6)
Finance income		10.0	9.3

Profit before tax		97.4	108.7

Headline⁽²⁾ profit before tax		161.2	121.7

Headline⁽²⁾ tax		(41.4)	(34.5)
Exceptional tax⁽³⁾		58.8	29.5

Total tax	4	17.4	(5.0)


Profit for the year from continuing operations		114.8	103.7

Headline⁽²⁾ profit for the year from continuing operations		119.8	87.2


Discontinued operations
Profit for the year from discontinued operations	5	171.7	37.6

Profit for the year		286.5	141.3


Attributable to:
Owners of the parent		286.4	141.1
Non-controlling interests		0.1	0.2

		286.5	141.3


Earnings per share
From continuing operations
- Basic	7	25.2p	20.8p
- Diluted	7	23.7p	19.8p
From continuing and discontinued operations
- Basic	7	62.9p	28.4p
- Diluted	7	59.0p	27.0p
- Headline⁽²⁾ diluted	7	28.8p	24.1p

⁽¹⁾ Restated to include the results of Dynacast, Brush Traction, Logistex UK, Madico and Weber Knapp within discontinued operations. ⁽²⁾ Before exceptional costs, exceptional income and intangible asset amortisation. ⁽³⁾ Includes exceptional tax and tax on exceptional items and intangible asset amortisation.

Consolidated Statement of Comprehensive Income

	Notes	Year ended 31 December 2011 £m	Year ended 31 December 2010 £m
Profit for the year		286.5	141.3

Currency translation on net investments		(17.3)	8.0
Currency translation on non-controlling interests		-	0.1
Transfer to Income Statement from equity of cumulative translation differences on disposal of foreign operations		(52.6)	(0.1)
Losses on cash flow hedges		(0.1)	(7.8)
Transfer to Income Statement on cash flow hedges		(5.1)	(0.5)
Actuarial (loss)/gain on retirement benefit obligations	10	(37.1)	13.8


Other comprehensive (expense)/income before tax		(112.2)	13.5

Tax relating to components of other comprehensive (expense)/income	4	16.8	7.9

Other comprehensive (expense)/income after tax		(95.4)	21.4


Total comprehensive income for the year		191.1	162.7


Attributable to:
Owners of the parent		191.0	162.4
Non-controlling interests		0.1	0.3

		191.1	162.7

Consolidated Statement of Cash Flows

	Notes	Year ended 31 December 2011 £m	Restated⁽¹⁾ year ended 31 December 2010 £m
Net cash from operating activities from continuing operations	13	74.6	72.7
Net cash from operating activities from discontinued operations	13	16.6	45.2

Net cash from operating activities		91.2	117.9

Investing activities
Disposal of businesses		374.4	(0.1)
Net cash disposed	5	(0.5)	-
Acquisition and disposal costs	3	(3.2)	-
Purchase of property, plant and equipment		(37.6)	(22.9)
Proceeds on disposal of property, plant and equipment		0.3	0.2
Purchase of computer software		(1.6)	(1.2)
Dividends received from joint ventures		-	0.3
Interest received		10.0	9.3
Acquisition of subsidiaries and non-controlling interests		-	(9.1)
Net cash from/(used in) investing activities from continuing operations		341.8	(23.5)
Net cash used in investing activities from discontinued operations	13	(4.6)	(6.7)

Net cash from/(used in) investing activities		337.2	(30.2)

Financing activities
Return of capital	6	(372.1)	-
Repayment of obligations under finance leases		-	(1.1)
Dividends paid	6	(52.8)	(43.8)
Net cash used in financing activities from continuing operations		(424.9)	(44.9)
Net cash used in financing activities from discontinued operations	13	(0.3)	(0.5)

Net cash used in financing activities		(425.2)	(45.4)


Net increase in cash and cash equivalents		3.2	42.3
Cash and cash equivalents at beginning of year	13	195.7	147.5
Effect of foreign exchange rate changes	13	(3.3)	5.9

Cash and cash equivalents at end of year	13	195.6	195.7

⁽¹⁾ Restated to include the cash flows of Dynacast, Brush Traction, Logistex UK, Madico and Weber Knapp within discontinued operations.

As at 31 December 2011, the Group's net debt was £289.6 million (31 December 2010: £287.4 million). A reconciliation of the movement in net debt is show in note 13.

Consolidated Balance Sheet

	Notes	31 December 2011 £m	31 December 2010 £m
Non-current assets
Goodwill and other intangible assets		906.1	1,181.6
Property, plant and equipment		215.3	253.7
Deferred tax assets		40.4	33.0
Trade and other receivables		0.3	1.9

		1,162.1	1,470.2
Current assets
Inventories		205.8	216.3
Trade and other receivables		216.3	257.7
Derivative financial assets	11	1.7	3.9
Cash and cash equivalents		195.6	195.7

		619.4	673.6


Total assets	2	1,781.5	2,143.8


Current liabilities
Trade and other payables		276.0	355.3
Interest-bearing loans and borrowings	8	28.8	0.3
Derivative financial liabilities	11	14.1	8.3
Current tax liabilities		16.9	52.4
Provisions	9	58.2	35.9

		394.0	452.2


Net current assets		225.4	221.4


Non-current liabilities
Trade and other payables		1.6	4.7
Interest-bearing loans and borrowings	8	457.5	482.8
Derivative financial liabilities	11	1.6	3.9
Deferred tax liabilities		98.3	114.9
Retirement benefit obligations	10	117.7	119.6
Provisions	9	62.4	82.8

		739.1	808.7


Total liabilities	2	1,133.1	1,260.9


Net assets		648.4	882.9


Equity
Issued share capital	12	26.8	1.1
Share premium account		126.0	279.1
Merger reserve		285.1	285.1
Capital redemption reserve		346.4	220.1
Hedging and translation reserves		(2.6)	71.0
Retained earnings		(133.4)	25.1

Equity attributable to owners of the parent		648.3	881.5
Non-controlling interests		0.1	1.4

Total equity		648.4	882.9

The financial statements were approved and authorised for issue by the Board of Directors on 7 March 2012 and were signed on its behalf by:

……………………………………………… ……………………………………………

Geoffrey Martin Simon Peckham

Group Finance Director Chief Operating Officer

Consolidated Statement of Changes In Equity

Reserves	Issued 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 owners of the parent £m	Non-controlling interests £m	Total equity £m

At 1 January 2010	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

Profit for the year	-		-	-	-	-	286.4	286.4	0.1	286.5
Other comprehensive expense		-	-	-	-	(73.6)	(21.8)	(95.4)	-	(95.4)

Total comprehensive (expense)/income		-	-	-	-	(73.6)	264.6	191.0	0.1	191.1

Issue of redeemable preference C shares	372.1		(153.1)	-	(220.1)	-	-	(1.1)	-	(1.1)
Preference C shares redeemed	(346.4)		-	-	346.4	-	-	-	-	-
Return of capital	-		-	-	-	-	(372.1)	(372.1)	-	(372.1)
Dividends paid	-		-	-	-	-	(52.8)	(52.8)	(0.2)	(53.0)
Credit to equity for equity-settled share-based payments	-		-	-	-	-	1.8	1.8	-	1.8
Disposal of non-controlling interests		-	-	-	-	-	-	-	(1.2)	(1.2)

At 31 December 2011	26.8		126.0	285.1	346.4	(2.6)	(133.4)	648.3	0.1	648.4

Notes To The Financial Statements

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 2011 or 31 December 2010, but is derived from those accounts. Statutory accounts for the year ended 31 December 2010 have been delivered to the Registrar of Companies and those for the year ended 31 December 2011 will be delivered to the Registrar of Companies during April 2012. The auditor has 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.

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 2012.

The comparative information for the year ended 31 December 2010 in this preliminary announcement has been restated to include the results and cash flows of the Dynacast segment along with four businesses previously shown in the Other Industrial segment; namely Brush Traction, Logistex UK, Madico and Weber Knapp, within discontinued operations.

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 2010 Report and Accounts which are available on the Group's website www.melroseplc.net.

The Board of Directors approved the preliminary announcement on 7 March 2012.

2. Segment information

Segment information is presented in accordance with IFRS 8: "Operating segments" which 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

§ Other Industrial

The Energy segment incorporates the Turbogenerators (now including the Hawker Siddeley Switchgear business unit) and Marelli business units, specialist suppliers of energy industrial products to the global market. The Lifting segment consists of the businesses of Bridon, Crosby and Acco, serving oil & gas production, mining, petrochemical, alternative energy and general construction markets. The Other Industrial segment consists of the businesses of Truth, Harris and MPC primarily serving the housing, scrap processing, engineered plastic and automotive markets.

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.

The discontinued segment incorporates the Dynacast segment along with four businesses previously shown in the Other Industrial segment; namely Brush Traction, Logistex UK, Madico and Weber Knapp.

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, profit, and certain asset and liability information regarding the Group's operating segments for the year ended 31 December 2011 and the comparative period. Note 3 gives details of exceptional costs and income.

Segment revenues and results

	Segment revenue from external customers
	Note	Year ended 31 December 2011 £m	Restated⁽¹⁾ year ended 31 December 2010 £m
Continuing operations
Energy		461.6	427.5
Lifting		484.4	422.7
Other Industrial		207.9	185.2

Total continuing operations		1,153.9	1,035.4

Discontinued operations	5	177.8	344.1

Total revenue		1,331.7	1,379.5

⁽¹⁾ Restated to include the results of Dynacast, Brush Traction, Logistex UK, Madico and Weber Knapp within discontinued operations.

	Segment result
	Notes	Year ended 31 December 2011 £m	Restated⁽¹⁾ year ended 31 December 2010 £m
Continuing operations
Energy		91.1	73.7
Lifting		82.6	66.7
Other Industrial		23.1	21.8
Central - corporate		(9.2)	(8.6)
Central - LTIPs⁽²⁾		(6.8)	(6.6)

Headline⁽³⁾ operating profit		180.8	147.0

Intangible asset amortisation		(23.7)	(24.1)
Exceptional costs	3	(40.1)	(10.3)
Exceptional income	3	-	21.4

Operating profit		117.0	134.0

Finance costs		(29.6)	(34.6)
Finance income		10.0	9.3

Profit before tax		97.4	108.7
Tax	4	17.4	(5.0)
Profit for the year from discontinued operations	5	171.7	37.6

Profit for the year		286.5	141.3

⁽¹⁾Restated to include the results of Dynacast, Brush Traction, Logistex UK, Madico and Weber Knapp within discontinued operations.

⁽²⁾Long Term Incentive Plans.

⁽³⁾As defined on the Income Statement.

	Total assets		Total liabilities
	31 December 2011 £m	Restated⁽¹⁾ 31 December 2010 £m	31 December 2011 £m	Restated⁽¹⁾ 31 December 2010 £m
Energy	641.0	643.7	231.6	216.0
Lifting	767.3	750.4	212.3	190.1
Other Industrial	121.5	117.2	41.7	48.0
Central - corporate	251.7	243.4	632.2	678.4
Central - LTIPs⁽²⁾	-	-	15.3	12.5

Total continuing operations	1,781.5	1,754.7	1,133.1	1,145.0

Discontinued operations	-	389.1	-	115.9

Total	1,781.5	2,143.8	1,133.1	1,260.9

⁽¹⁾ Restated to include the total assets and total liabilities of Dynacast, Brush Traction, Logistex UK, Madico and Weber Knapp within discontinued operations.

⁽²⁾Long Term Incentive Plans.

	Capital expenditure⁽¹⁾		Depreciation⁽¹⁾
	Year ended 31 December 2011 £m	Restated⁽²⁾ year ended 31 December 2010 £m	Year ended 31 December 2011 £m	Restated⁽²⁾ year ended 31 December 2010 £m
Continuing operations
Energy	11.4	9.4	7.9	8.0
Lifting	21.3	9.8	8.8	9.4
Other Industrial	6.5	4.8	5.8	5.9
Central - corporate	-	0.2	0.6	0.7

Total continuing operations	39.2	24.2	23.1	24.0

Discontinued operations	3.6	7.7	4.1	8.9

Total	42.8	31.9	27.2	32.9

⁽¹⁾Including computer software.

⁽²⁾Restated to include the capital expenditure⁽¹⁾ and depreciation⁽¹⁾ of Dynacast, Brush Traction, Logistex UK, Madico and Weber Knapp within discontinued operations.

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 deferred tax assets and non-current trade and other receivables) by geographical location are detailed below:

	Revenue⁽¹⁾ from external customers		Non-current assets
	Year ended 31 December 2011 £m	Restated⁽²⁾ year ended 31 December 2010 £m	31 December 2011 £m	Restated⁽²⁾ 31 December 2010 £m
UK	195.2	156.5	367.0	362.4
Europe	287.6	294.1	321.7	339.6
North America	463.5	419.8	422.2	430.2
Other	207.6	165.0	10.5	9.8

Total continuing operations	1,153.9	1,035.4	1,121.4	1,142.0

Discontinued operations	177.8	344.1	-	293.3

Total	1,331.7	1,379.5	1,121.4	1,435.3

⁽¹⁾Revenue is presented by destination.

⁽²⁾Restated to include the revenue and non-current assets of Dynacast, Brush Traction, Logistex UK, Madico and Weber Knapp within discontinued operations.

3. Exceptional costs and income

Exceptional costs	Year ended 31 December 2011 £m	Year ended 31 December 2010 £m
Continuing operations
Increase in legal provision	(21.0)	-
Restructuring costs	(15.9)	(5.9)
Acquisitions and disposals of businesses	(3.2)	(0.4)
Defined benefit pension plan disposal	-	(4.0)

Total exceptional costs	(40.1)	(10.3)

During the year, a legal provision, in respect of two Bridon companies, in connection with product liability litigation in the US inherited, in part, from the FKI acquisition has been increased to £25.8 million (US $40.0 million). Noble Drilling Services ("Noble") is claiming from Bridon and its US distributor for alleged losses arising from Hurricane Ike causing two offshore drilling rigs secured by Bridon ropes to break station in the Gulf of Mexico. The operator of the wells, Anadarko Petroleum Corp., then opportunistically joined the litigation seeking to recover alleged losses of its own from all parties, including Noble, but the court endorsed Bridon's analysis that this claim was meritless and dismissed it in full by way of summary judgement. The amount of the Noble claim is US $104 million which, based on legal and factual analysis, Bridon considers to be grossly inflated. Bridon intends to vigorously defend against all claims asserted against it at trial, which is set for later this year, and has robust defences to all allegations. In the event of an adverse ruling, Bridon already has a number of strong grounds for appeal, which itself could take a further six to eighteen months. Bridon has an insurance programme of up to £105 million (US $163 million at 31 December 2011) that may be available to respond and Bridon is currently in discussions with its insurers in relation to the extent of this coverage.

During 2011, the Group incurred £15.9 million (2010: £5.9 million) of costs relating to restructuring programmes which include the integration of the Hawker Siddeley Switchgear business into the Turbogenerators business within the Energy division, the reorganisation of the Brush facility in the Netherlands also within the Energy division and, within the Lifting division, the restructuring at Bridon's Doncaster works following the large scale investment to relocate certain activities from Doncaster to the newly invested Neptune Energy Park facility in Newcastle upon Tyne.

Costs associated with acquisitions and disposals of businesses consist predominately of the expenses arising during the aborted process to acquire Charter International plc and the costs associated with the return of capital following the disposal of Dynacast.

In addition, the Group incurred two exceptional cash costs during the year, both were fully anticipated and fully provided and represented two exceptional liabilities that were acquired with FKI plc. The first related to the transfer of £10.4 million, at a cash cost of £9.0 million, of FKI captive insurance liabilities to an external party so that the Group has no further exposure to these risks. The second related to a legal settlement in respect of an historical FKI owned company, De Wind GmbH, paid in two tranches totalling £10.4 million.

On 12 February 2010, the Group acquired 100% of the share capital of Generator & Motor Services of Pennsylvania, LLC. Also during 2010, the Prelok France business was disposed of. A net loss of £0.2 million was incurred which included a cumulative exchange gain of £0.1 million recycled from equity.

In 2010, 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.

Exceptional income	Year ended 31 December 2011 £m	Year ended 31 December 2010 £m
Continuing operations
Pension curtailment gain	-	13.1
FKI captive insurance commutation gain	-	5.6
Net release of provisions	-	2.7

Total exceptional income	-	21.4

In 2010, it was announced to the members that the FKI UK Pension Plan would be closed to the accrual of future benefits for existing members on 28 February 2011, resulting in a curtailment gain of £13.1 million in that year.

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 2010 represented the release of a provision set up on the acquisition of FKI net of an additional environmental and legal provision.

4. Tax

	Continuing operations				Discontinued operations		Total
Analysis of (credit)/charge in year:	Year ended 31 December 2011 £m			Restated⁽¹⁾ year ended 31 December 2010 £m	Year ended 31 December 2011 £m	Restated⁽¹⁾ year ended 31 December 2010 £m	Year ended 31 December 2011 £m	Restated⁽¹⁾ year ended 31 December 2010 £m
Current tax	(5.9)			16.3	7.2	12.5	1.3	28.8
Deferred tax	(11.5)			(11.3)	(0.2)	(3.5)	(11.7)	(14.8)

Total income tax (credit)/charge			(17.4)	5.0	7.0	9.0	(10.4)	14.0

Tax charge on headline⁽²⁾ profit before tax	41.4			34.5	7.8	9.9	49.2	44.4
Exceptional tax credit		(38.1)		(23.5)	-	-	(38.1)	(23.5)
Tax (credit)/charge on net exceptional items	(7.6)			4.3	-	-	(7.6)	4.3
Tax credit in respect of intangible asset amortisation	(13.1)			(10.3)	(0.8)	(0.9)	(13.9)	(11.2)

Total income tax (credit)/charge	(17.4)			5.0	7.0	9.0	(10.4)	14.0

⁽¹⁾ Restated to include the results of Dynacast, Brush Traction, Logistex UK, Madico and Weber Knapp within discontinued operations.

⁽²⁾ As defined on the Income Statement.

The tax credit for the year ended 31 December 2011 (charge for the year ended 31 December 2010) includes an exceptional tax credit of £38.1 million (2010: £23.5 million). Of this exceptional tax credit, £28.6 million (2010: £nil) relates to the change in the company's expectation of the outcome of overseas tax audits inherited on the acquisition of FKI and £9.5 million (2010: £23.5 million) relates to the recognition of a previously unrecognised deferred tax asset during the period that is now considered to be recoverable.

The income tax rate for the current year is lower (2010: lower) than the average standard rate of corporation tax in the UK for the year of 26.5% (2010: 28.0%). The differences are explained in the following table:

	Year ended 31 December 2011 £m	Restated⁽¹⁾ year ended 31 December 2010 £m
Profit on ordinary activities before tax:
Continuing operations	97.4	108.7
Discontinued operations (note 5)	26.3	46.6

	123.7	155.3

Tax on profit on ordinary activities at UK corporate tax rate 26.5% (2010: 28.0%)	32.8	43.5

Tax effect of:
Net permanent differences	1.7	1.2
Adjustment in respect of foreign tax rates	3.7	(0.2)
Effect of UK rate change on deferred tax liability	(7.2)	(3.8)
Timing differences not recognised in deferred tax	0.6	(2.9)
Prior year tax adjustments	(3.9)	(0.3)
Exceptional tax credit	(38.1)	(23.5)

Total tax (credit)/charge for the year	(10.4)	14.0

⁽¹⁾ Restated to include the results of Dynacast, Brush Traction, Logistex UK, Madico and Weber Knapp within discontinued operations.

In addition to the amount (credited)/charged to the Income Statement, a tax credit of £16.8 million (2010: £7.9 million) has been recognised directly in the Statement of Comprehensive Income. This represents a tax credit of £12.0 million (2010: £8.1 million) in respect of retirement benefit obligations, a tax credit of £1.5 million (2010: charge of £0.2 million) in respect of movements on cash flow hedges and a tax credit of £3.3 million (2010: £nil) in respect of the use of losses on items taken directly to reserves in prior years.

A tax charge of £0.8 million arising on the disposal of businesses has been included, as a cost of disposal, in the net gain on disposal of net assets of discontinued operations (note 5).

5. Discontinued operations

Disposal of businesses

On 19 July 2011, the Group completed the disposal of the Dynacast business for a cash consideration of US $590.0 million (£366.5 million). The costs charged during the year associated with the disposal were £12.8 million and the profit on disposal in the year was £150.5 million after the recycling of cumulative translation differences of £51.4 million. In addition, disposal costs of £2.3 million were paid during the year which had been accrued in 2010.

During the year, the Group also disposed of four businesses; namely Brush Traction, Logistex UK, Madico and Weber Knapp, previously shown within the Other Industrial segment. The cash consideration received for these businesses was £24.0 million and the costs incurred were £1.8 million, including £0.8 million of tax charged on the disposal of the assets of Brush Traction. The profit on disposal of these businesses was £1.9 million after the recycling of cumulative translation differences of £1.2 million.

Financial performance of discontinued operations:

	Year ended 31 December 2011 £m	Restated⁽¹⁾ year ended 31 December 2010 £m
Revenue	177.8	344.1
Operating costs	(150.4)	(294.2)

Headline⁽²⁾ operating profit	27.4	49.9
Intangible asset amortisation	(1.4)	(2.5)
Net finance income/(costs)	0.3	(0.8)

Profit before tax	26.3	46.6
Headline tax	(7.8)	(9.9)
Tax on intangible asset amortisation	0.8	0.9

Profit after tax	19.3	37.6
Cumulative translation differences recycled on disposals	52.6	-
Gain on disposal of net assets of discontinued operations	99.8	-

Profit for the period from discontinued operations	171.7	37.6


Attributable to:
Owners of the parent	171.6	37.4
Non-controlling interests	0.1	0.2

	171.7	37.6

⁽¹⁾ Restated to include the results of Dynacast, Brush Traction, Logistex UK, Madico and Weber Knapp within discontinued operations.

⁽²⁾ As defined in the Income Statement.

During the year, up until its sale on 19 July 2011, the Dynacast business contributed £164.0 million of revenue and £26.4 million of headline operating profit. The disposed businesses from the Other Industrial segment contributed £13.8 million to revenue and £1.0 million to headline operating profit up to the point of sale.

The major classes of assets and liabilities disposed of during the year were as follows:

	Dynacast £m	Other Industrial £m	Discontinued operations £m
Goodwill and other intangible assets	223.8	16.4	240.2
Property, plant and equipment	40.1	7.6	47.7
Inventories	24.1	7.6	31.7
Trade and other receivables	51.9	11.9	63.8
Cash and cash equivalents	-	0.5	0.5

Total assets disposed of	339.9	44.0	383.9
Trade and other payables	65.6	22.0	87.6
Tax⁽¹⁾	4.8	-	4.8
Retirement benefit obligations	10.5	0.1	10.6
Provisions	3.2	0.4	3.6
Non-controlling interests	1.2	-	1.2

Total liabilities disposed of	85.3	22.5	107.8
Net assets disposed of	254.6	21.5	276.1
Cash consideration net of costs⁽²⁾	353.7	22.2	375.9

Gain on disposal of net assets	99.1	0.7	99.8
Cumulative translation differences recycled on disposals	51.4	1.2	52.6

Profit on disposal of businesses	150.5	1.9	152.4

⁽¹⁾ Includes £1.7 million of net deferred tax assets.

⁽²⁾ In addition £2.3 million of cash costs were incurred on the disposal of Dynacast which had been accrued in 2010.

6. Dividends

	Year ended 31 December 2011 £m	Year ended 31 December 2010 £m
Second interim dividend for the year ended 31 December 2010 of nil (2009: 4.8p)	-	23.9
Final dividend for the year ended 31 December 2010 paid of 7.0p (2009: nil)	34.8	-
Interim dividend for the year ended 31 December 2011 paid of 4.6p (2010: 4.0p)	18.0	19.9
	52.8	43.8
Proposed final dividend for the year ended 31 December 2011 of 8.4p (2010: 7.0p)	32.8	34.8

A final dividend of 8.4p was proposed by the Board on 7 March 2012 and, in accordance with IAS 10, has not been included as a liability in these financial statements.

In addition to dividends paid, shareholders approved a £373.2 million return of capital on 8 August 2011 of which £372.1 million was paid on 19 August 2011.

7. Earnings per share

Earnings attributable to owners of the parent	Year ended 31 December 2011 £m	Restated⁽¹⁾ year ended 31 December 2010 £m

Profit for the purposes of earnings per share	286.4	141.1
Less: profit for the year from discontinued operations (note 5)	(171.6)	(37.4)

Earnings for basis of earnings per share from continuing operations	114.8	103.7

Continuing operations
Intangible asset amortisation	23.7	24.1
Exceptional costs (note 3)	40.1	10.3
Exceptional income (note 3)	-	(21.4)
Exceptional tax⁽²⁾	(58.8)	(29.5)

Earnings for basis of headline⁽²⁾ earnings per share from continuing operations	119.8	87.2

Discontinued operations
Profit for the period from discontinued operations (note 5)	171.6	37.4
Profit on disposal of businesses	(152.4)	-
Intangible asset amortisation	1.4	2.5
Tax on intangible asset amortisation	(0.8)	(0.9)

Earnings for basis of headline⁽²⁾ earnings per share from continuing and discontinued operations	139.6	126.2

⁽¹⁾ Restated to include the results of Dynacast, Brush Traction, Logistex UK, Madico and Weber Knapp within discontinued operations. ⁽²⁾ As defined on the Income Statement.

	Number		Number
Weighted average number of Ordinary Shares for the purposes of basic earnings per share (million)	455.3		497.6
Further shares for the purposes of diluted earnings per share (million)⁽¹⁾	30.1		25.3

Weighted average number of Ordinary Shares for the purposes of diluted earnings per share (million)		485.4	522.9

⁽¹⁾ Relating to the 2009 Melrose Incentive Scheme.

Earnings per share	Year ended 31 December 2011 pence	Restated⁽¹⁾ year ended 31 December 2010 pence

Basic earnings per share
From continuing and discontinued operations	62.9	28.4
From continuing operations	25.2	20.8
From discontinued operations	37.7	7.6

Diluted earnings per share
From continuing and discontinued operations	59.0	27.0
From continuing operations	23.7	19.8
From discontinued operations	35.3	7.2

Headline⁽²⁾basic earnings per share
From continuing and discontinued operations	30.7	25.4

Headline⁽²⁾ diluted earnings per share
From continuing and discontinued operations	28.8	24.1

⁽¹⁾Restated to include the results of Dynacast, Brush Traction, Logistex UK, Madico and Weber Knapp within discontinued operations.

⁽²⁾As defined on the Income Statement.

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 11.

	Current			Non-current		Total
	31 December 2011 £m		31 December 2010 £m	31 December 2011 £m	31 December 2010 £m	31 December 2011 £m	31 December 2010 £m

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

	-		0.3	-	-	-	0.3

Floating rate obligations
Bank borrowings - US Dollar loan⁽²⁾		-	-	390.1	388.5	390.1	388.5
Bank borrowings - Euro loan⁽³⁾	-		-	48.6	50.3	48.6	50.3
Bank borrowings - Sterling loan⁽⁴⁾		27.7	-	22.3	50.0	50.0	50.0

	27.7		-	461.0	488.8	488.7	488.8

Redeemable preference C shares		1.1	-	-	-	1.1	-
Unamortised finance costs	-		-	(3.5)	(6.0)	(3.5)	(6.0)

Total interest-bearing loans and borrowings	28.8		0.3	457.5	482.8	486.3	483.1

⁽¹⁾ Interest rate 1.50%, repaid June 2011.

⁽²⁾ Interest rate LIBOR +1.35%, final maturity April 2013.

⁽³⁾ Interest rate EURIBOR +1.35%, final maturity April 2013.

⁽⁴⁾ Interest rate LIBOR +1.35%, final maturity April 2013.

During 2011, the Group utilised a £750 million multi-currency committed bank facility that provided 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 2011 was 1.35% (31 December 2010: 1.50%).

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 business.

On 22 December 2011, the Group agreed a new five year banking facility. On 31 January 2012, all amounts outstanding on the original facility were repaid using surplus cash in the Group at that time and by partially utilising the new facility.

The new facility is a £600 million, multi-currency, committed, revolving credit facility. A number of Group companies continue to act as guarantors under the new 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 1.20% and 2.00%.

The interest rate re-pricing profile of financial liabilities, after taking into account hedging interest rate derivatives, is described in note 11.

As described in note 12, the 1,392,194 redeemable preference C shares will be redeemed on 30 April 2012 at a value of £1.1 million. In accordance with applicable accounting standards, the liability is not included in net debt.

Maturity of financial liabilities

The maturity profile of anticipated future cash flows including interest in relation to the Group's 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 amounts and is illustrated as a net cash flow.

	Interest-bearing loans and borrowings £m		Derivative financial liabilities £m	Other financial liabilities £m	Total financial liabilities £m
Within one year		38.7	14.1	268.6	321.4
In one to two years		464.2	1.6	1.6	467.4
Effect of financing rates		(16.6)	-	-	(16.6)

31 December 2011		486.3	15.7	270.2	772.2


Within one year		10.3	8.3	343.8	362.4
In one to two years		40.8	3.7	4.7	49.2
In two to three years		466.2	0.2	-	466.4
Effect of financing rates		(34.2)	-	-	(34.2)

31 December 2010		483.1	12.2	348.5	843.8

9. Provisions

	Surplus leasehold property costs £m	Environmental and legal costs £m	Incentive scheme related £m	FKI captive insurance £m	Other £m	Total £m
At 31 December 2010	26.4	57.7	12.5	11.0	11.1	118.7
Disposal of businesses	(2.1)	-	-	-	(1.5)	(3.6)
Utilised⁽¹⁾	(5.2)	(16.0)	(2.2)	(11.0)	(4.8)	(39.2)
Arising in the year⁽²⁾	-	21.0	5.0	-	17.6	43.6
Unwind of discount	0.6	0.5	-	-	-	1.1
Exchange differences	-	0.5	-	-	(0.5)	-

At 31 December 2011	19.7	63.7	15.3	-	21.9	120.6


Current	4.7	31.6	-	-	21.9	58.2
Non-current	15.0	32.1	15.3	-	-	62.4

	19.7	63.7	15.3	-	21.9	120.6

⁽¹⁾ Includes £37.6 million of provisions utilised by cash and £1.6 million through headline⁽³⁾ operating profit.

⁽²⁾ Includes £35.1 million of provisions arising in the year through exceptional costs (note 3) and £8.5 million of provisions arising in the year through headline⁽³⁾ operating profit.

⁽³⁾ As defined on the Income Statement.

The provision for surplus leasehold property costs represents the estimated net payments payable over the term of these leases together with any dilapidation costs. This is expected to result in cash expenditure over the next one to seven years.

Environmental and legal costs provisions relate to the estimated remediation costs of pollution, soil and groundwater contamination at certain sites and estimated future costs and settlements in relation to legal claims. Due to their nature, it is not possible to predict precisely when these provisions will be utilised.

Incentive scheme related provisions are in respect of long term incentive plans for divisional senior management, expected to result in cash expenditure in the next three to four years.

The FKI captive insurance provision related to known and actuarial assessments of future claims covered by the captive including, but not limited to, public and product liability, employer's liability in the UK, workers' compensation in the US and US automotive claims. Following the sale of these liabilities, within the year, at 31 December 2011 the Group has no further exposure to these claims.

Other provisions relate primarily to costs that will be incurred in respect of restructuring programmes and warranty provisions.

Where appropriate, provisions have been discounted using a discount rate of 3% (31 December 2010: 3%).

10. Retirement benefit obligations

Melrose holds several pension plans covering many of its employees, 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 plan is closed to new members and on 28 February 2011 was closed to the accrual of future benefits for existing members.

§ The McKechnie UK Pension Plan is defined benefit in type and is a funded plan (other than £3.5 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 plan is closed to the accrual of future benefits.

§ The FKI US 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 plan is closed to the accrual of future benefits.

Other plans include a number of funded and unfunded defined benefit arrangements across Europe.

Upon the sale of Dynacast and Logistex UK, £41.1 million of plan obligations and £30.5 million of plan assets were disposed.

The cost of the Group's defined benefit 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 2011 by independent actuaries and US full actuarial valuations as of 31 December 2010 updated at 31 December 2011 by independent actuaries. The next formal UK valuations as at 31 December 2011 are currently being undertaken.

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

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 £10.9 million (2010: £14.4 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 2011
	FKI UK Plan % p.a.	McKechnie UK Plan % p.a.	FKI US Plan % p.a.	US Retiree Benefit Plans % p.a.	Other plans % p.a.
Rate of increase in salaries	n/a	3.60⁽¹⁾	n/a	n/a	n/a
Rate of increase in pensions in payment	3.00	3.10	n/a	n/a	n/a
Discount rate	4.90	4.90	4.30	4.00	4.60
RPI inflation assumption	3.10	3.10	2.75	n/a	2.50

⁽¹⁾ Closed to the accrual of future benefits but active members benefits are still linked to current salaries.

	31 December 2010
	FKI UK Plan % p.a.	McKechnie UK Plan % p.a.	FKI US 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

Mortality

FKI UK Pension Plan

Mortality assumptions for the most significant plan in the Group, the FKI UK plan, as at 31 December 2011 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 20.3 years if they are male and for a further 23.7 years if they are female. For a member who retires in 2036 at age 65, the assumptions are that they will live for a further 22.8 years after retirement if they are male and for a further 26.0 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 2011 £m	31 December 2010 £m	31 December 2009 £m	31 December 2008 £m	31 December 2007 £m

Plan liabilities		(1,076.7)	(1,039.4)	(1,033.5)	(939.7)	(148.4)
Plan assets		959.0	919.8	864.4	810.5	123.2
Limit on pension plan surplus		-	-	-	(14.1)	-

Net liabilities		(117.7)	(119.6)	(169.1)	(143.3)	(25.2)


The five year history of experience adjustments is as follows:
	31 December 2011 £m		31 December 2010 £m	31 December 2009 £m	31 December 2008 £m	31 December 2007 £m
Experience adjustments on plan liabilities		(72.4)	(23.8)	(130.9)	70.7	1.2
Experience adjustments on plan assets		35.3	37.6	41.0	(78.9)	2.3

The plan liabilities and assets at 31 December 2011 were split by plan as follows:

	FKI UK Plan £m	McKechnie UK Plan £m	FKI US Plan £m	US Retiree Benefit Plans £m	Other plans £m	Total £m
Plan liabilities	(679.7)	(154.5)	(228.7)	(0.9)	(12.9)	(1,076.7)
Plan assets	600.3	157.5	195.2	-	6.0	959.0

Net (liabilities)/assets	(79.4)	3.0	(33.5)	(0.9)	(6.9)	(117.7)

This amount is presented in the Balance Sheet:

	31 December 2011 £m	31 December 2010 £m	31 December 2009 £m	31 December 2008 £m	31 December 2007 £m
Net liabilities
- unfunded plans	11.2	21.0	24.2	45.2	4.1
- funded plans	106.5	98.6	144.9	84.0	21.1
Limit on pension plan surplus	-	-	-	14.1	-

	117.7	119.6	169.1	143.3	25.2

Expected returns and fair value of assets:

	Expected rates of return		Fair value of assets
	31 December	31 December	31 December	31 December
	2011	2010	2011	2010
	%	%	£m	£m
Equity instruments	7.0	8.4	348.7	411.1
Debt instruments	3.8	5.1	514.2	430.5
Other assets	4.4	3.4	96.1	78.2

Weighted average / total	5.0	6.4	959.0	919.8

The expected return on plan assets at 31 December 2011 is based on market expectations at 1 January 2012 for returns on assets over the entire life of the obligation.

There is no self investment (other than in relevant 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 2011	Year ended 31 December 2010
	£m	£m
At beginning of year	1,039.4	1,033.5
Disposal of businesses	(41.1)	-
Disposal of pension plan	-	(18.3)
Current service cost	0.6	4.3
Interest cost	52.8	57.3
Actuarial losses	72.4	23.8
Benefits paid	(47.7)	(52.8)
Plan curtailments	(0.8)	(16.5)
Currency losses	1.1	8.1

At end of year	1,076.7	1,039.4

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

	Year ended 31 December 2011	Year ended 31 December 2010
	£m	£m
At beginning of year	919.8	864.4
Disposal of businesses	(30.5)	-
Disposal of pension plan	-	(22.3)
Settlement contribution on disposal	-	4.9
Expected return on assets	52.3	53.2
Actuarial gains	35.3	37.6
Contributions	28.8	27.5
Benefits paid	(47.7)	(52.8)
Currency gains	1.0	7.3

At end of year	959.0	919.8

The actual return on plan assets was a gain of £87.6 million (2010: gain of £90.8 million).

Income Statement disclosures

Amounts recognised in the Income Statement in respect of these defined benefit plans are as follows:

	Year ended 31 December 2011		Restated⁽¹⁾ year ended 31 December 2010
		£m	£m
Continuing operations
Included within headline⁽²⁾ operating profit:
- current service cost		0.4	3.9
- net effects of curtailments and settlements		(0.8)	(3.4)
Included within net finance costs:
- interest cost		52.6	55.1
- expected return on assets		(52.3)	(51.8)
Included within exceptional items:
- net effects of curtailment and settlements		-	(9.1)

Discontinued operations
Included within headline⁽²⁾ operating profit:
- current service cost		0.2	0.4
Included within net finance costs:
- interest cost		0.2	2.2
- expected return on assets		-	(1.4)

⁽¹⁾ Restated to include the results of Dynacast, Brush Traction, Logistex UK, Madico and Weber Knapp within discontinued operations.

⁽²⁾ As defined on the Income Statement.

Statement of Comprehensive Income disclosures

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

	Year ended 31 December 2011	Year ended 31 December 2010
	£m	£m
Actuarial losses on plan liabilities	(72.4)	(23.8)
Actuarial gains on plan assets	35.3	37.6
	(37.1)	13.8

The cumulative amount of actuarial gains and losses recognised in the Statement of Comprehensive Income is a total loss of £114.5 million (2010: loss of £77.4 million).

11. 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 2011 and 31 December 2010:

	Energy £m		Lifting £m	Other⁽¹⁾ Industrial £m	Central £m	Discontinued⁽¹⁾ £m	Total £m
31 December 2011
Financial assets
Cash and cash equivalents	-		-	-	195.6	-	195.6
Trade receivables	94.0		74.6	24.0	0.1	-	192.7
Derivative financial assets	0.4		0.9	-	0.4	-	1.7
Financial liabilities
Interest-bearing loans and borrowings		-	-	-	(486.3)	-	(486.3)
Derivative financial liabilities	(8.6)		(1.0)	(0.3)	(5.8)	-	(15.7)
Other financial liabilities	(116.8)		(83.7)	(36.2)	(33.5)	-	(270.2)

31 December 2010
Financial assets
Cash and cash equivalents	-		-	-	195.7	-	195.7
Trade receivables	88.4		65.5	18.1	0.2	52.7	224.9
Derivative financial assets	2.3		0.4	0.1	0.5	0.6	3.9
Financial liabilities
Interest-bearing loans and borrowings		-	-	-	(482.8)	(0.3)	(483.1)
Derivative financial liabilities	(0.6)		(1.0)	-	(10.5)	(0.1)	(12.2)
Other financial liabilities	(105.3)		(79.8)	(37.6)	(40.8)	(85.0)	(348.5)

⁽¹⁾Restated to include the financial assets and financial liabilities of Dynacast, Brush Traction, Logistex UK, Madico and Weber Knapp within discontinued operations.

Credit risk

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

	Energy £m	Lifting £m	Other⁽¹⁾ Industrial £m	Central £m	Discontinued⁽¹⁾ £m	Total £m
31 December 2011
Financial assets
Cash and cash equivalents	-	-	-	195.6	-	195.6
Trade receivables	94.0	74.6	24.0	0.1	-	192.7
Derivative financial assets	0.4	0.9	-	0.4	-	1.7

31 December 2010
Financial assets
Cash and cash equivalents	-	-	-	195.7	-	195.7
Trade receivables	88.4	65.5	18.1	0.2	52.7	224.9
Derivative financial assets	2.3	0.4	0.1	0.5	0.6	3.9

⁽¹⁾Restated to include the financial assets of Dynacast, Brush Traction, Logistex UK, Madico and Weber Knapp within discontinued operations.

The Group's principal financial assets are cash and cash equivalents, 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.

Capital risk

The Group manages its capital to ensure that entities in the Group will be able to continue as a going concern while maximising the return to stakeholders through the optimisation of the Groups net debt and equity balance.

The capital structure of the Group consists of net debt, which includes the borrowings disclosed in note 8, after deducting cash and cash equivalents, and equity attributable to equity holders of the parent, comprising issued share capital, reserves and retained earnings as disclosed in the Statement of Changes in Equity.

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 2011, 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 2011 Selling currency millions	31 December 2011 Average hedged rate	31 December 2010 Selling currency millions	31 December 2010 Average hedged rate
Sell Australian Dollar/Buy Sterling	AUD 4.3	GBP/AUD 1.60	AUD 4.6	GBP/AUD 1.69
Sell Canadian Dollar/Buy Sterling	CAD 4.3	GBP/CAD 1.60	CAD 6.1	GBP/CAD 1.62
Sell Canadian Dollar/Buy US Dollar	CAD 1.9	USD/CAD 0.99	-	-
Sell Chinese Renminbi/Buy US Dollar	CNY 10.3	USD/CNY 6.43	-	-
Sell Czech Koruna/Buy Euro	-	-	CZK 160.0	EUR/CZK 24.89
Sell Euro/Buy Chinese Renminbi	EUR 2.3	EUR/CNY 8.74	-	-
Sell Euro/Buy Czech Koruna	EUR 16.8	EUR/CZK 24.59	EUR 41.5	EUR/CZK 25.34
Sell Euro/Buy Sterling	EUR 24.4	GBP/EUR 1.15	EUR 16.4	GBP/EUR 1.18
Sell Euro/Buy US Dollar	EUR 2.8	EUR/USD 1.38	EUR 1.4	EUR/USD 1.34
Sell Hong Kong Dollar/Buy Sterling	HKD 21.7	GBP/HKD 12.11	-	-
Sell Norwegian Krone/Buy Euro	NOK 28.1	EUR/NOK 7.86	-	-
Sell Norwegian Krone/Buy Sterling	NOK 56.9	GBP/NOK 9.13	NOK 11.7	GBP/NOK 9.58
Sell Polish Zloty/Buy Sterling	-	-	PLN 10.3	GBP/PLN 4.70
Sell Singapore Dollar/Buy US Dollar	-	-	SGD 5.2	USD/SGD 1.37
Sell South African Rand/Buy Euro	ZAR 34.7	EUR/ZAR 10.51	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 87.1	GBP/CZK 28.55	GBP 32.2	GBP/CZK 29.89
Sell Sterling/Buy Euro	GBP 35.5	GBP/EUR 1.15	GBP 11.8	GBP/EUR 1.17
Sell Sterling /Buy US Dollar	GBP 1.1	GBP/USD 1.58	GBP 1.3	GBP/USD 1.57
Sell UAE Dirham/Buy Sterling	-	-	AED 7.5	GBP/AED 5.64
Sell US Dollar/Buy Canadian Dollar	USD 4.9	USD/CAD 0.99	USD 13.8	USD/CAD 1.04
Sell US Dollar/Buy Chinese Renminbi	USD 1.6	USD/CNY 6.43	USD 16.3	USD/CNY 6.56
Sell US Dollar /Buy Czech Koruna	USD 4.2	USD/CZK 18.50	USD 4.2	USD/CZK 19.06
Sell US Dollar/Buy Euro	USD 6.4	EUR/USD 1.38	USD 7.1	EUR/USD 1.36
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
Sell US Dollar/Buy Sterling	USD 79.8	GBP/USD 1.59	USD 67.5	GBP/USD 1.54

The foreign exchange contracts all mature between January 2012 and August 2013.

The fair value of the contracts at 31 December 2011 was a net liability of £8.3 million (31 December 2010: net asset of £1.5 million).

Commodity swap contracts

As at 31 December 2011, the Group held a number of 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	150 tonnes	04 January 2012	Fixed price of US Dollar 8,809 per tonne
Group receives	Copper	150 tonnes	04 January 2012	Average LME price for the month
Group pays	Copper	150 tonnes	02 February 2012	Fixed price of US Dollar 7,698 per tonne
Group receives	Copper	150 tonnes	02 February 2012	Average LME price for the month
Group pays	Copper	150 tonnes	02 March 2012	Fixed price of US Dollar 7,405 per tonne
Group receives	Copper	150 tonnes	02 March 2012	Average LME price for the month
Group pays	Copper	170 tonnes	03 April 2012	Fixed price of US Dollar 7,395 per tonne
Group receives	Copper	170 tonnes	03 April 2012	Average LME price for the month
Group pays	Copper	60 tonnes	02 May 2012	Fixed price of US Dollar 7,323 per tonne
Group receives	Copper	60 tonnes	02 May 2012	Average LME price for the month
Group pays	Copper	60 tonnes	06 June 2012	Fixed price of US Dollar 7,327 per tonne
Group receives	Copper	60 tonnes	06 June 2012	Average LME price for the month
Group pays	Copper	50 tonnes	03 July 2012	Fixed price of US Dollar 7,330 per tonne
Group receives	Copper	50 tonnes	03 July 2012	Average LME price for the month

The fair value of the contracts at 31 December 2011 was £nil (31 December 2010: net asset of £0.2 million).

Hedge of net investments in foreign entities

Included in interest-bearing loans at 31 December 2011 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 2011

£m

31 December

2010

£m

US Dollar

390.1

388.5

Euro

48.6

50.3

Interest rate sensitivity analysis

A one percentage point rise in market interest rates for all currencies would increase/(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 2011 £m	Year ended 31 December 2010 £m
Sterling	0.4	(0.1)
US Dollar	(0.3)	-
Euro	(0.2)	(0.2)

	(0.1)	(0.3)

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 US $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 are all due to 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 is due to mature 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 2011. The fair value of the contracts at 31 December 2011 was a net liability of £5.7 million (31 December 2010: net liability of £10.0 million).

In February 2012, the Group closed out these swap arrangements and entered into a number of new interest swaps to hedge US $231.0 million, €42.0 million and £105.0 million denominated bank debt. These swaps mature in January 2017. Under the terms of these swaps, the Group will pay annually in arrears 1.0% for US Dollar swaps, 1.1% for Euro swaps and 1.1% for Sterling swaps plus a margin of 1.5%. These interest rate swaps have been designated as cash flow hedges.

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 (decrease)/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 2011 £m	Year ended 31 December 2010 £m
US Dollar	(0.4)	1.8
Euro	0.5	2.7
Czech Koruna	2.0	0.7

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 2011 £m	31 December 2010 £m
US Dollar	(0.7)	(1.6)
Euro	2.3	0.4
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 £26.8 million (31 December 2010: £26.6 million) and £4.4 million (31 December 2010: £4.7 million) respectively. However, there would be no overall 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 2011 Current £m		31 December 2011 Non-current £m	31 December 2011 Total £m	31 December 2010 Current £m	31 December 2010 Non-current £m	31 December 2010 Total £m
Derivative financial assets
Foreign currency forward contracts		1.6	-	1.6	3.7	-	3.7
Commodity swaps	0.1		-	0.1	0.2	-	0.2

	1.7		-	1.7	3.9	-	3.9

Derivative financial liabilities
Foreign currency forward contracts		(8.7)	(1.2)	(9.9)	(2.2)	-	(2.2)
Commodity swaps	(0.1)		-	(0.1)	-	-	-
Interest rate swaps	(5.3)		(0.4)	(5.7)	(6.1)	(3.9)	(10.0)

	(14.1)		(1.6)	(15.7)	(8.3)	(3.9)	(12.2)

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.

12. Issued capital and reserves

Share Capital	31 December 2011 £m	31 December 2010 £m
Allotted, called-up and fully paid
390,961,043 (31 December 2010: 497,586,779) Ordinary Shares of 14/55p each (31 December 2010: 0.2p each)	1.0	1.0
34,331,656 (31 December 2010: nil) C Deferred Shares of 75.0p each	25.7	-
50,000 (31 December 2010: 50,000) 2009 Incentive Shares of £1 each	0.1	0.1

	26.8	1.1

On 8 August 2011 at a General Meeting, shareholders approved resolutions to return capital of £373.2 million to shareholders.

The return of capital took place by increasing the authorised share capital by £373.2 million through the issue of 497,586,779 redeemable preference C shares ("C Shares") of 75.0p nominal value each and capitalising £220.1 million of the capital redemption reserve and £153.1 million of the share premium account to pay up in full the C Shares. The C Shares were allotted on the basis of one C Share for each Ordinary Share of 0.2p each held on 8 August 2011. Shareholders had the option to receive the cash value inherent in the C Share by way of income or the choice of two capital options. As a result of the elections made by shareholders in respect of the return of capital:

§ 461,862,929 C Shares were redeemed and subsequently cancelled with effect from 19 August 2011

§ 1,392,194 C Shares will be redeemed on 30 April 2012

§ 34,331,656 C Shares were paid a dividend which was paid on 19 August 2011 and these C Shares converted into C Deferred Shares

Both the remaining 1,392,194 C Shares and the 34,331,656 C Deferred Shares carry no voting rights or rights to dividends.

In conjunction with the return of capital, on 9 August 2011 an 11 for 14 share consolidation took place which reduced the issued Ordinary Share capital to 390,961,043 shares of 14/55 pence each.

Redemption of the C Deferred Shares on 30 April 2012 will result in a £25.7 million transfer from share capital into the capital redemption reserve. In addition, the 1,392,194 C Shares will be redeemed and cancelled on 30 April 2012 at a value of £1.1 million which will also be transferred to the capital redemption reserve.

13. Cash flow statement

	Year ended 31 December 2011 £m	Restated⁽¹⁾ year ended 31 December 2010 £m
Reconciliation of operating profit to cash generated by continuing operations
Headline⁽²⁾ operating profit from continuing operations	180.8	147.0
Adjustments for:
Depreciation of property, plant and equipment	22.5	23.3
Amortisation of computer software	0.6	0.7
Restructuring costs paid and decrease in other provisions	(32.2)	(29.2)

Operating cash flows before movements in working capital	171.7	141.8
(Increase)/decrease in inventories	(20.4)	12.2
Increase in receivables	(16.9)	(34.7)
Increase in payables	14.0	28.2

Cash generated by operations	148.4	147.5
Tax paid	(22.9)	(23.7)
Interest paid	(26.0)	(25.6)
Defined benefit pension contributions paid	(24.9)	(25.5)

Net cash from operating activities from continuing operations	74.6	72.7

⁽¹⁾ Restated to include the results of Dynacast, Brush Traction, Logistex UK, Madico and Weber Knapp within discontinued operations.

⁽²⁾ As defined on the Income Statement.

Cash flow from discontinued operations	Year ended 31 December 2011 £m	Restated⁽¹⁾ year ended 31 December 2010 £m
Cash generated from discontinued operations	24.3	51.0
Tax paid	(3.8)	(3.5)
Interest paid	-	(0.3)
Defined benefit pension contributions paid	(3.9)	(2.0)

Net cash from operating activities from discontinued operations	16.6	45.2


Purchase of property, plant and equipment	(4.9)	(6.6)
Proceeds on disposal of property, plant and equipment	-	0.1
Interest received	0.5	-
Dividends paid to non-controlling interests	(0.2)	(0.2)

Net cash used in investing activities from discontinued operations	(4.6)	(6.7)


Net movement in borrowing	(0.3)	(0.5)

Net cash used in financing activities from discontinued operations	(0.3)	(0.5)

⁽¹⁾ Restated to include the results of Dynacast, Brush Traction, Logistex UK, Madico and Weber Knapp within discontinued operations.

Net debt reconciliation

	At 31 December 2010	Cash flow	Disposals	Other non-cash movements	Foreign exchange difference	At 31 December 2011
	£m	£m	£m	£m	£m	£m
Cash	195.7	(371.2)	374.4	-	(3.3)	195.6
Debt due within one year	(0.3)	0.3	-	(27.7)	-	(27.7)
Debt due after one year	(482.8)	-	-	25.2	0.1	(457.5)

Net debt	(287.4)	(370.9)	374.4	(2.5)	(3.2)	(289.6)

This information is provided by RNS

The company news service from the London Stock Exchange

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