Final Results

Melrose PLC 07 March 2007 7 March 2007 MELROSE PLC AUDITED RESULTS FOR YEAR ENDED 31 DECEMBER 2006 Melrose PLC, the specialist manufacturing investor, today announces its audited results, which are reported under IFRS, for the year ended 31 December 2006. The comparative figures for 2005 include only seven months of trading of Dynacast and McKechnie Financial Highlights •Revenue of £507.0 million (2005: £269.9 million) •Headline Operating Profit* of £56.1 million (2005: £27.5 million) •Operating Profit of £49.2 million (2005: £8.1 million) •Headline Profit before Tax* of £43.9 million (2005: £20.9 million) •Profit before Tax of £37.0 million (2005: £1.5 million) •Headline Earnings Per Share* increased by 35% to 12.3p (2005: 9.1p) •Basic Earnings Per Share at 14.7p (2005: loss of 2.4p) •Proposing a Final Dividend of 3.75p per share (2005: 3p). Together with the interim dividend of 2.25p, this gives a full year dividend of 6p (2005: 3p) •Net debt reduced to £162.6 million (2005: £198.7 million) * before exceptional costs, exceptional income, intangible asset amortisation other than computer software and profit on disposal of businesses Other Highlights •Aerospace OEM sale process progressing as planned •Impressive performance from Dynacast •Benefits from improving the underlying quality of all of our businesses beginning to flow following actions taken to: - strengthen management teams - drive operational efficiencies - initiate restructuring programmes - investment to exploit growth opportunities in markets •Good progress achieved at smaller businesses •Strong cash performance Christopher Miller, Chairman of Melrose PLC, today said: "As today's outstanding figures show, much has been achieved in the 21 months since acquisition. The sale of our aerospace division is underway but will only proceed if we get the right price. Meanwhile we are beginning to look out for interesting acquisition opportunities." Enquiries: Nick Fox James Hill M: Communications 020 7153 1530 CHAIRMAN'S STATEMENT I am pleased to report Melrose's second set of results since the acquisition of the Dynacast Group and the McKechnie Group in May 2005 for £429.0 million. RESULTS These accounts cover the full twelve months to 31 December 2006 although the comparatives for 2005 include only seven months of trading of Dynacast and McKechnie. Revenue for the year was £507.0 million (2005: £269.9 million), headline profit before tax and headline earnings per share (before exceptional costs, exceptional income, intangible asset amortisation other than computer software and profit on disposal of businesses. Exceptional costs and exceptional income are those costs of a significant and non-recurring nature or those associated with significant restructuring programmes) were £43.9 million (2005: £20.9 million) and 12.3p (2005: 9.1p) respectively. After these items the profit before tax was £37.0 million (2005: £1.5 million) and the basic earnings per share were 14.7p (2005: loss of 2.4p). These results are outstanding and are the culmination of much dedication and hard work from employees at all our businesses. On behalf of shareholders I would like to thank them all. In his Chief Executive's Review, David Roper describes in more detail the successes of our group companies, particularly Aerospace OEM, as well as the challenges they faced in the year. A significant part of the highly satisfactory outturn in 2006 was the early result of actions taken by Melrose to improve the underlying quality of these businesses. I mentioned in my report last year that we have strengthened management, initiated restructuring programmes and invested heavily where appropriate. Twelve months on, the fruits of these actions are starting to flow through as forecast and there is more to come. We never take our eye off the ball in this regard and work continues to deliver operational improvement wherever possible. At acquisition we also introduced cash management systems which have led to much improved cash generation. DIVIDENDS The Board intends to propose a final dividend of 3.75p per share (together with the interim dividend announced on 13 September 2006 a total of 6p per share) (2005: 3p per share) at the Annual General Meeting on 14 May 2007. The dividend is payable on 18 May 2007 to shareholders on the register at 20 April 2007. BOARD APPOINTMENTS As previously announced we were extremely pleased to welcome John Grant as our third non-executive Director in August 2006. His experience in the manufacturing sector is particularly valuable to us and his appointment completes our Board for the time being. AEROSPACE OEM We announced in November 2006 that we had appointed N M Rothschild to advise on a sale of our Aerospace OEM division. This process continues and we are hopeful of a satisfactory outcome for shareholders in the near future. Shareholders should understand, however, that we would be happy to continue to own these businesses for a longer period and we will only proceed if we receive a price that reflects their inherent quality and future prospects. In the event that the sale of Aerospace OEM is successful, it is our intention to return a significant part of the proceeds to shareholders. STRATEGY We have achieved much in the last 21 months with the businesses we own and while it continues to be our strategy to realise value at the appropriate time, we are now turning our thoughts to acquisitions. Although no activity should be expected in the near term, we will actively pursue opportunities which we believe would respond to our type of management skills and which would add substantial value. Shareholders should be re-assured that we will be as careful as ever in our selection criteria. In the meantime the Board believes the outlook for our businesses in 2007 is very encouraging. Christopher Miller 7 March 2007 CHIEF EXECUTIVE'S REVIEW I am very pleased with the results of the Group in 2006. Although each of the six divisions operates in different market sectors and faced varying opportunities and challenges in the year, the overall performance was very good. I set out on the following pages reports on the six operating divisions. Since my report last year a lot of work has been done and a great deal of progress has been made in improving the quality of our six divisions. • At Dynacast the investment in and the expansion of the operations in the Far East have continued apace in order to benefit from the exciting market opportunities and customers transferring production to lower cost countries. In order to maintain operational efficiency this has necessitated an ongoing programme of plant closures in higher cost economies. In addition management have been highly successful in managing the impact of the increased price of zinc on the business during the year. • At Aerospace OEM, although assisted by favourable conditions in the industry, management have focused on delivering significant operational improvements to the businesses by targeted capital expenditure and good management disciplines. A continuing programme of close collaboration with customers on new product development has brought about notable successes in terms of winning business on new platforms. • At the four smaller businesses good progress has been made. The most difficult of these was MVC where progress has been disguised in 2006 principally by poor market conditions in the US automotive industry and commodity prices. OUTLOOK We have owned these businesses for almost two years and although much has been done in this time to improve them, there are significant opportunities to develop them further. As Chris Miller says in his Chairman's Statement, if we do not receive a price for Aerospace OEM that reflects its inherent quality and future prospects, we would be more than happy to continue owning this high quality business. Its outlook for this year in very good market conditions is excellent. Dynacast is nearing the end of the restructuring programme that we formulated upon acquisition. It will continue to focus on the growth opportunities in the Far East and to build upon its strong international market share by seeking synergistic add-on acquisitions. This is a high quality engineering business with exciting prospects ahead. Together with the four smaller divisions, where there remains significant overall scope for further development, our businesses are positioned to perform well in the year ahead. DYNACAST Year Ended Year Ended £'m 31 December 2006 31 December 2005* Turnover 221.7 105.0 Headline Operating Profit 25.1 13.6 * seven months of trading for McKechnie and Dynacast Dynacast is a global manufacturer of precision engineered, diecast metal components and assemblies. The products are manufactured using proprietary diecasting technology and are supplied to a wide range of end markets, including automotive, healthcare, telecommunications, consumer electronics and computer hardware and peripherals. The trading performance of Dynacast in 2006 was impressive. Based on unaudited pro-forma management accounts for a full calendar year in 2005, Dynacast's turnover and operating profit in 2006 were 25% and 12% higher respectively than in the previous year. This result was achieved in spite of an adverse zinc effect on operating profit of approximately £3 million in 2006. Underlying trading in North America and Europe was flat in the year, while in Asia trading was much higher than in 2005. Dynacast benefits from the ability to fully recover raw material price increases for the vast majority of its sales. Although there is a time lag for this selling price recovery, management have made significant improvements to the commercial terms of trade by reducing the time lag - a significant portion of Dynacast's customers are now on monthly price adjustments. To put this in context, the price of zinc (products made out of zinc represent approximately three quarters of Dynacast's sales) more than doubled during 2006, which, as already mentioned, reduced the profit in the year by about £3 million. Notwithstanding the impact of financing the additional cost of zinc in stock and zinc suppliers seeking to reduce their payment terms, management did an excellent job in managing their working capital during the year. The increase in zinc prices during 2006 has put the diecasting industry under a considerable degree of pressure and a number of Dynacast's competitors are either for sale or have filed for bankruptcy protection. This presents Dynacast with the opportunity to make some add-on acquisitions at attractive prices. In 2006, Gillette, one of Dynacast's largest customers, introduced a new razor blade range and Dynacast is the sole supplier of the handle for the non-power version of this product. This is being manufactured in a purpose-built extension to one of Dynacast's factories in Europe and is performing in line with our expectations. Notwithstanding this, the demand for the traditional Gillette product produced by Dynacast Canada remained robust. We continued to invest heavily in China, Dynacast's fastest growing market, with sales more than doubling in 2006 based on unaudited proforma management accounts, and we have added 40,000 square feet of manufacturing space with an option to acquire more. During 2007 management will also conduct a review on the establishment of a presence in Eastern Europe by acquisition or greenfield development. The rapid growth of the business in low cost countries brings with it many logistical challenges, not the least of which is the general shortage of suitably qualified management. To address this issue, Dynacast has relocated managers from the US and, with a view to the longer term, has implemented a global graduate recruitment programme. As Dynacast continues to move its production to low cost countries to better meet the needs of its customers, it is necessary to constantly monitor the operating cost base of the Group. As part of this process, during 2006 we completed the closure of our plant in Turkey and the closing of the plant in Spartanburg, South Carolina, is now close to completion. Having spent a considerable amount of time dealing with the effects of the rise in the price of zinc during the year, and successfully moving many customers from three-monthly to monthly pricing adjustments, management will spend more time in 2007 developing the business, including seeking out value enhancing add-on acquisitions. AEROSPACE ORIGINAL EQUIPMENT MANUFACTURE ("AEROSPACE OEM") Year Ended Year Ended £'m 31 December 2006 31 December 2005* Turnover 140.1 69.4 Headline Operating Profit 33.1 14.6 * seven months of trading for McKechnie and Dynacast Aerospace OEM supplies safety critical components to the global aerospace industry and is based in the US and Europe. The business has excellent engineering skills, producing value added products selling into niche markets in which it has a strong presence. The Aerospace OEM Group had an outstanding 2006 reflecting both the operational improvements in the companies and the continuing favourable conditions in the aerospace industry. Based on unaudited pro-forma management accounts for a full calendar year in 2005, the Group's turnover and operating profit in 2006 increased by approximately 20% and 40% respectively over the previous year and operating margins increased from 20% to 23.6%. This increase in operating profit would have been even higher but for an adverse foreign exchange translation effect estimated at £1.1 million. Although orders for aircraft by Boeing and Airbus in the commercial aerospace industry were lower in 2006 than in 2005, deliveries were very high and are projected to remain strong, reflecting the favourable conditions and outlook for the industry. The Group secured product placement on key platforms during the year on the back of close collaboration with customers on new product development. The Group continued its efforts to improve the operational performance of its business units to meet customer demands and at the same time to increase operating margins. The Group invested £6.9 million during the year in order to achieve these productivity targets and to increase capacity in the face of a strongly-growing market. The disciplined approach to the management of the operations and to the working capital requirements of the business has yielded impressive results. The largest investment was at Hartwell Corporation where work on the $7.75 million investment in new machine tool technology is close to completion and which has begun to deliver the expected step-changes in productivity and capacity. At the same time the company has focused on additional supply side initiatives including procurement, which together with the ongoing efficiency improvement has resulted in increased levels of customer service and reduced operating costs. 2006 was one of the best years in Hartwell Corporation's history for developing new products and winning new business from key customers. The company scored major successes for the B787 nacelle programme with a major customer in Italy and in the US for both the GE and Rolls Royce engine configurations. This new latch system design addresses a critical load requirement in the thrust reverser section of the nacelle. Hasco, the aftermarket arm of Hartwell Corporation, had a very good year with sales 33% higher than 2005, based on unaudited proforma management accounts. This achievement has resulted from Hasco's strategic focus on customer service improvement through better stock availability and on-time delivery. Hasco achieved an on-time performance target of 98% in the year. Tyee Aircraft was selected as the exclusive supplier of the composite interior rod business for the Boeing 787 Dreamliner platform. This significant award resulted from their decision to diversify into composite rod technology and positions it well to benefit from the market's increasing requirements for higher specification materials to meet higher fuel efficiency and environmental standards. Against this backdrop a $4 million investment programme has been sanctioned to enable Tyee to purchase state-of-the-art machining equipment, as well as to move the business from two sites into a single bigger building that will enable Tyee to meet future demand and improve its operational efficiency. This has already resulted in good feedback from key customers. At TAC the combination of strong demand and success in winning new business resulted in a 15% increase in sales and a 30% increase in its order book, based on unaudited, proforma management accounts. TAC won new business on the A400M and added new customers as a result of its focus on improved customer service. This was achieved by a change of top management that has injected a renewed sense of urgency to the business and in particular to the operational efficiency of the factory. Electromech Technologies had a highly successful year involving, as with TAC, a change of management at the top bringing a new sense of focus to the business. Electromech is delighted that Eclipse Aviation Corporation received FAA certification for its E500 'very light jet' and that it delivered its first aeroplane at the end of the year. Electromech is the sole supplier of certain equipment on this programme and looks forward to a successful future for this innovative and exciting development in the commercial aviation industry. In order to ramp up production for the Eclipse, Electromech has completed a new plant layout which will enable it to better utilise its existing factory space. Valley Todeco continues to benefit from the buoyant market conditions in the fastener spot market and in addition has been successful in gaining market share by focusing on customer service levels. This has been achieved by selective capital investment and a highly focused approach to operational efficiency in the factory. The Linread fastener business experienced substantial growth in demand for its products for airframes and engines in the year. Improvements in production forecasting and scheduling have resulted in significantly better levels of customer service. As a result management were able to negotiate better supply terms on some long term agreements which, together with increased volumes, have resulted in an improvement in both operating margins and operating cash flow. We started 2007 with the benefit of an order book that already covers a large proportion of this year's budgeted sales and which is still growing ahead of projected turnover. There is also much further operational improvement to be carried out in this division. With the aerospace cycle projected to remain "strong for longer" and a management team committed to derive maximum advantage from this and other operational improvements to its business, this division is very well placed to prosper. AEROSPACE AFTERMARKET Year Ended Year Ended £'m 31 December 2006 31 December 2005* Turnover 19.3 15.2 Headline Operating Profit 0.6 0.3 * seven months of trading for McKechnie and Dynacast In May 2006 Arger Enterprises was sold to Heico Corporation. Following the sale, this division comprises Aero Quality Sales ("AQS"), which is a specialist aircraft battery distribution business based primarily in the US and Europe. Since the sale of Arger, AQS has established itself as a stand-alone business with its own dedicated team and website (with the attendant burden of higher ongoing costs) focused on providing the best service to its customers, which include a number of major airlines, and to its manufacturing partners, which include Saft, Marathon, Gill and Concorde. Management continue to work on a number of interesting proposals to customers; however, in this very competitive market it is essential to focus on good margin, high quality business and to keep a tight control on costs. MCKECHNIE VEHICLE COMPONENTS ("MVC") Year Ended Year Ended £'m 31 December 2006 31 December 2005* Turnover 48.0 31.6 Headline Operating (Loss)/Profit (2.3) 0.3 * seven months of trading for McKechnie and Dynacast MVC manufactures decorated exterior trim products for the US automotive industry, principally coated metal and plastic wheel trims. As foreshadowed in our Interim Report, MVC produced very poor trading results in 2006. The troubles of the US automotive industry are well documented with the slowdown in demand, particularly for large pick-up trucks and sports utility vehicles, leading to plant shutdowns at the 'big three' US auto producers. A combination of weak sales, unrecovered raw material prices, operational inefficiencies, unprofitable legacy contracts and the costs of the introduction of new products have led to this poor performance. In our Interim Statement we stated that plans for improvement of the business were underway. As part of that process we made a number of management and operational alterations to this business. As a result this business is going through a period of significant change. On a positive note, MVC has recently succeeded in obtaining some raw material price recovery and benefited from launching some new wheel cladding products. Management are focusing heavily on improving the operational efficiency of the plant in Nicholasville that manufactures these products, particularly relating to scrap and overhead reduction. Work is well under way regarding the new plating line at Nicholasville, which is expected to be complete by September this year as the projected demand for the new product increases still further. This investment is currently on time and budget and its successful implementation is a key challenge for this year. 2007 will be an important year for MVC. The outlook for its new products provides a good opportunity and whilst there has been considerable progress there remain challenges in difficult market conditions. We remain optimistic of improvement in 2007 and a more satisfactory year in 2008. MCKECHNIE PLASTIC COMPONENTS ("MPC") Year Ended Year Ended £'m 31 December 2006 31 December 2005* Turnover 46.1 27.1 Headline Operating Profit 2.4 1.2 * seven months of trading for McKechnie and Dynacast MPC is a UK producer of engineered plastic injection moulded components for products used in a variety of industries, including power tools, IT hardware, food and beverage packaging, personal care and automotive. MPC reported a creditable trading result for 2006, with sales and operating profit marginally higher than in 2005, based on unaudited, proforma management accounts. This was achieved against a background of strongly rising raw material and energy costs and difficult conditions in the automotive industry. During the year MPC has been highly successful in improving the quality of its business by focusing on value added products and exiting low margin business to maintain its competitive advantage in the industry. This has included the development of highly automated production cells for Diageo, CMP and Wavin, in addition to an ongoing attention to the re-engineering of manufacturing processes. MPC continues to build upon its core skills and seize market opportunities where they present themselves at appropriate returns. The closure of MPC's Northampton operation and the transfer of some of its business to the Stamford Bridge facility was completed on time and on budget in the second half of 2006. The Northampton site was sold in December for £2.4 million. MPC is an improved business as a result of the actions that management have taken in the year. Although conditions in the automotive side of the business remain challenging, MPC is well placed to meet these and to be able to profit from the growth opportunities in the consumer products business. MCKECHNIE PSM ("PSM") Year Ended Year Ended £'m 31 December 2006 31 December 2005* Turnover 31.8 21.6 Headline Operating Profit 4.8 0.4 * seven months of trading for McKechnie and Dynacast PSM manufactures and distributes specialised fasteners and joining systems primarily for the IT and automotive markets. PSM performed well in 2006, having undergone a major transformation involving the closure of its manufacturing operation in the Czech Republic and the transfer of some of this production to Wuxi in China. PSM is now able to manufacture these products more efficiently and cheaper and where necessary supply its multinational customers through distribution centres in Europe and the US. This closure has transformed PSM's financial performance Management worked hard to secure price increases from customers to recover a significant proportion of the cost of its major raw material, brass, which increased by over 100% in 2006. At the same time management focused on operational efficiency in the businesses' plants and supply chain initiatives whilst at the same time providing high levels of customer service. The specialised Thread Locking and Sealing and Canning Brett businesses based in Europe continued to perform steadily in 2006. A new nylon patch-based locking product was successfully launched in France during the year and, as a result of a shortage of capacity in the company's factory in Cologne, the building of a new production unit in the eastern part of Germany was started, which should be completed during the first half of 2007. 2006 was a year of major change for PSM and it is now well positioned to profit from the exciting opportunities arising in the Asian market. David Roper 7 March 2007 FINANCIAL REVIEW The year to 31 December 2006 was the first full year of trading for Melrose PLC after the acquisition of the McKechnie and Dynacast businesses in May 2005. The results for 2006 and 2005 cannot be compared directly as the 2005 results include only seven months of the enlarged group. The accounts for the Group have been compiled using International Financial Reporting Standards (IFRS). GROUP TRADING RESULTS To help the understanding of the results the terms 'headline operating profit', 'headline profit before tax' and 'headline earnings per share' have been used in this report. These are calculated before exceptional costs, exceptional income, intangible asset amortisation other than computer software and profit on disposal of businesses. The Group made sales for the year ended 31 December 2006 of £507.0 million (2005 £269.9 million). Headline operating profit was £56.1 million (2005 £27.5 million), giving a headline operating profit return on sales of 11.1% (2005 10.2%). Headline earnings per share grew from 9.1p in 2005 to 12.3p in 2006 and this 35% increase reflects the growth achieved in Melrose year on year. After exceptional costs, exceptional income, intangible asset amortisation other than computer software, and profit on disposal of businesses the operating profit was £49.2 million (2005 £8.1 million) and the Basic EPS 14.7p (2005 loss of 2.4p). This performance has been delivered despite many commodity costs such as zinc having increased in price significantly compared to 2005 and therefore reflects the success achieved in both minimising the cost increases with suppliers and passing them onto customers wherever possible. The higher profit in 2006 was achieved after incurring a £1.2 million foreign exchange translation loss caused mainly by the strengthening of Sterling against the US Dollar. TRADING RESULTS BY DIVISION A split of sales and profit by division is shown below: SPLIT OF SALES AND PROFIT BY DIVISION Sales Headline Return on Headline Return on operating sales operating sales profit profit before depreciation and amortisation £'m £'m % £'m % ----------- ---------- ----------- ----------- ----------- ----------- Dynacast 221.7 25.1 11.3 32.1 14.5 ----------- ---------- ----------- ----------- ----------- ----------- OEM 140.1 33.1 23.6 35.9 25.6 ----------- ---------- ----------- ----------- ----------- ----------- Aftermarket 19.3 0.6 3.1 0.7 3.6 ----------- ---------- ----------- ----------- ----------- ----------- MVC 48.0 (2.3) (4.8) (0.5) (1.0) ----------- ---------- ----------- ----------- ----------- ----------- MPC 46.1 2.4 5.2 4.1 8.9 ----------- ---------- ----------- ----------- ----------- ----------- PSM 31.8 4.8 15.1 5.9 18.6 ----------- ---------- ----------- ----------- ----------- ----------- Central - (7.6) - (7.5) - costs ---------- ----------- ----------- ----------- ----------- Group 507.0 56.1 11.1 70.7 13.9 ----------- ---------- ----------- ----------- ----------- ----------- The performance by division is discussed in the Chief Executive's Review but the change in the headline operating profit return on sales percentage from 2005 to 2006 is shown below: HEADLINE OPERATING PROFIT RETURN ON SALES Group Dynacast OEM Aftermarket MVC MPC PSM -------- ------ -------- -------- --------- ---------- -------- ------- 2006 11.1% 11.3% 23.6% 3.1% (4.8%) 5.2% 15.1% ------- ------ -------- -------- --------- ---------- -------- -------- 2005 10.2% 13.0% 21.0% 2.0% 0.9% 4.4% 1.9% ------- ------ -------- -------- --------- ---------- -------- -------- The increase in the headline return on sales percentage from 2005 to 2006 was driven by the strong growth in the OEM division and the successful restructuring in the PSM division. The reduction in Dynacast from 13.0% in 2005 to 11.3% in 2006 occurred because, although the increased cost of zinc has been largely recovered, it still dilutes margins and the loss in MVC reflects the unacceptable performance from this division in 2006. LONG TERM INCENTIVE SCHEMES In the 2006 Income Statement, two long term incentive schemes in the Group gave rise to a non- cash charge of £1.9 million (2005 nil). The Melrose Incentive Share Option Plan was approved by shareholders at the time of Melrose's flotation in October 2003. The charge in 2006 is a non-cash charge which represents the amortisation of an estimated, potential future entitlement to the beneficiaries under the scheme. This entitlement would be settled by the issue of shares in Melrose PLC. The assumptions used to calculate the charge were consistent with IFRS 2 for share based payments. The projected cost to the Group is amortised over the life of the scheme and as a result a charge was made in the 2006 Income Statement of £1.6 million which includes a provision for the related costs such as national insurance. In addition, consistent with IAS 19, a £0.3m charge was made for a Dynacast Long Term Incentive Scheme for the senior management of the Dynacast division which, if certain performance conditions are met, will be paid out in cash in 2009. Any charge in the Income Statement in future periods will vary in size dependent on various factors including the performance of the Melrose share price and Dynacast's future performance. TAX The Group has a total tax credit for 2006 of £0.8 million. This consists of a tax charge on headline profit before tax of £12.3 million and an exceptional tax credit of £13.1 million (including a credit of £2.9 million in respect of exceptional costs and amortisation of intangible assets). The headline tax rate was 28% (2005 30%) on the headline profit before tax of £43.9 million. This headline rate includes income subject to tax in North America at combined state and federal tax rates in excess of 28% and income in the Far East benefiting from tax rates below 28%. This rate also benefits from relief for various finance costs and tax deductible goodwill in certain territories which should also apply in the current financial year. The exceptional tax credit for this financial year has arisen through the recognition of further deferred tax assets in respect of tax losses arising as a result of the disposal of Arger and corporate restructuring. This exceptional tax credit is a one off effect and will not be repeated in the current tax year. The availability of tax losses to use against taxable profit means that the Group cash tax rate is low. In 2006 £4.0 million of tax was paid representing a headline cash tax rate of approximately 10%. On acquisition of McKechnie and Dynacast these losses were treated as an asset and as a result do not affect the headline tax rate. Thus the headline tax rate is higher than the cash tax rate. CASH GENERATION AND MANAGEMENT Significant progress has been made since acquisition in making sure that strong cash management disciplines are embedded in the Group. To recognise the importance of this, the divisional management are rewarded on achieving a strong conversion of profit into cash. The performance on cash generation in 2006 is summarised as follows: GROUP CASH FLOW £'m Headline operating profit 56.1 Depreciation and computer software amortisation 14.6 Working capital increase (8.4) Total capital expenditure (19.7) Disposal of assets 11.8 --------------------------------------------- ---------- Headline cash generated from operations 54.4 Disposal of businesses 7.4 Restructuring costs (9.2) Interest and tax (11.5) Pension contribution (5.4) Dividends paid (13.5) Exchange & Other 13.9 --------------------------------------------- ---------- Total decrease in net debt in 2006 36.1 --------------------------------------------- ---------- The Group net debt has reduced by £36.1 million from £198.7 million at 31 December 2005 to £162.6 million at 31 December 2006. This reduction included a £16.3 million exchange movement caused mainly by the strengthening of Sterling against the US Dollar and the Euro. The headline cash generated from operations represented 97% (2005 91%) of headline operating profit during 2006. This was a strong performance particularly given the significant spend on capital projects and the rebalancing of working capital to allow the divisions to drive further growth. CAPITAL AND RESTRUCTURING PROJECTS A key driver to adding shareholder value is to invest in capital and restructuring projects that have suitable paybacks, generally less than three years. The table below shows the capital and restructuring spend between the divisions in 2006: CAPITAL AND RESTRUCTURING SPEND IN 2006 Group Dynacast OEM Aftermarket MVC MPC PSM Capital spend 2006 £'m 19.7 6.9 6.9 0.1 3.3 1.2 1.3 ----- --------- ------- ---------- ------- --------- ------- 2006 % of depreciation 135% 99% 246% 100% 183% 71% 118% charge ----- --------- ------- ---------- ------- --------- ------- Restructuring spend £'m 9.2 3.4 - - - 1.2 4.6 ----- --------- ------- ---------- ------- --------- ------- Restructuring projects, amounting to £6.0 million, have been approved in 2006 to add to the £14.2 million of projects approved in 2005. These projects had largely been completed by the end of 2006. The projects to date include the closure of four Dynacast factories, parts of the European business of the PSM division and the Northampton factory of the MPC division. Significant investment in capital expenditure occurred in 2006 with the ratio to depreciation being 135%. The expenditure included the major capital investment in the Hartwell unit of the OEM division to drive efficiencies through automation. In addition a £6.0 million project for the MVC division to increase its plating capability was authorised. Only £1.0 million of the total £6.0 million has been spent in 2006. ASSETS AND LIABILITIES The split of assets and liabilities is shown in the table below: --------------------------------- ----------- ----------- Assets & Liabilities 31 December 31 December 2006 2005 £'m £'m --------------------------------- ----------- ----------- Goodwill and intangible assets 356.2 408.2 --------------------------------- ----------- ----------- Property plant and equipment 79.4 89.9 --------------------------------- ----------- ----------- Net working capital 45.2 48.2 --------------------------------- ----------- ----------- Net tax asset 2.4 0.5 --------------------------------- ----------- ----------- IAS 19 Pension deficit (55.4) (60.5) --------------------------------- ----------- ----------- Provision and other (10.1) (17.0) --------------------------------- ----------- ----------- 417.7 469.3 =========== =========== These assets and liabilities are funded by: Net Debt 162.6 198.7 --------------------------------- ----------- ----------- Equity and reserves 255.1 270.6 --------------------------------- ----------- ----------- 417.7 469.3 =========== =========== The total net assets of the Group after the deduction of net debt decreased from 2005 to 2006 despite the profit made in the year. Although the underlying value of these net assets in local currencies increased, the sterling equivalent reduced due to an exchange loss of £41.4 million on these assets, caused mainly by the strengthening of Sterling against the US dollar and the Euro. IMPAIRMENT REVIEW In compliance with IAS 36 the carrying value of the net assets by division have been compared to the future cash flows that those assets are expected to generate. This resulted in justifying the carrying value of each division in the Group balance sheet. DISPOSAL OF ASSETS AND BUSINESSES In May 2006 the Arger unit of the Aftermarket division, which made a loss in 2005, was sold for £6.7 million realising a profit of £3.6m on the sale. In addition proceeds of £6.5 million were raised from the sale of surplus assets including the factory sites which were made vacant as a result of the restructuring projects. Finally a sale and leaseback on the Stamford Bridge, UK site of the MPC division was completed in 2006, generating a cash inflow of £5.3 million and a net profit in the year of £0.7 million. PENSIONS The Group has a number of defined benefit and defined contribution schemes internationally as part of the compensation package to employees. The net position of the defined benefit schemes is that the current market value of the assets is insufficient to satisfy the liabilities to members when they are valued on a basis consistent with IAS 19. On this basis, the net deficit on the schemes was £55.4 million, of which 82% was derived from the most significant scheme in the Group, the McKechnie UK Pension Scheme ('The Plan'). This had assets at the end of December of £83.0 million, liabilities of £128.4 million and therefore a deficit of £45.4 million. Progress has been made on improving the position of The Plan during the year and Melrose continues to honour its guarantee to pay annual contributions of £5 million into the scheme for the first five years post acquisition in May 2005. An initial payment was made upfront and then quarterly instalments commenced in April 2006. In addition the company and the trustees have jointly signed a new formal funding valuation and recovery plan during 2006. It is pleasing that there has been a net reduction in the deficit during 2006 from £48.6 million to £45.4 million, with the reasons for the movement being shown below: RECONCILIATION OF THE MOVEMENT IN THE IAS 19 DEFICIT OF THE MCKECHNIE UK PENSION SCHEME £'m ----------- 2005 IAS 19 deficit 48.6 --------------------------------------------- ----------- Interest on liabilities 5.9 --------------------------------------------- ----------- Expected return on assets (4.8) --------------------------------------------- ----------- Investment outperformance (1.4) --------------------------------------------- ----------- Change in financial assumptions (1.6) --------------------------------------------- ----------- Increase in life expectancy (lower mortality) 2.5 --------------------------------------------- ----------- Employer contributions (3.9) --------------------------------------------- ----------- Other 0.1 --------------------------------------------- ----------- 2006 IAS 19 deficit 45.4 --------------------------------------------- ----------- The assumptions used to calculate the IAS 19 deficit are considered carefully by the Board of Directors and are considered suitable for a scheme of this nature. The key assumptions are disclosed below. THE KEY PENSION ASSUMPTIONS USED FOR THE MCKECHNIE UK PENSION SCHEME Discount rate 5.1% ----------------------------------- ------------------- Inflation 2.9% ----------------------------------- ------------------- Pension increases 2.9% ----------------------------------- ------------------- Life expectancy for a male aged 65 in 2006 83.6 ----------------------------------- ------------------- Life expectancy for a male aged 65 in 2020 85.1 ----------------------------------- ------------------- The company strategy for the pension scheme is to concentrate on the cash flows required to fund the scheme liabilities as they fall due. These cash flows extend many years into the future and the ultimate objective is that the total pool of assets derived from future company contributions and investment strategy allow each cash payment to members to be made when due. Viewed on this basis the investment strategy can allow a reasonable time for the assets to grow to help fund the liabilities. RISK MANAGEMENT The significant 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 risk. These are discussed in turn: LIQUIDITY RISK The Group has a £200 million five year committed term loan which was arranged at the time of the Dynacast and McKechnie acquisition in 2005 and expires in 2010. In addition the Group has a £30 million committed working capital facility and various smaller finance lease arrangements for a number of specific assets. The term loan is a multicurrency facility split approximately 60% US Dollars, 30% Euros and 10% Sterling. This split was consistent with the split of net assets on acquisition and provides a partial hedge against exchange movements. The year end net debt was £162.6 million, which consisted of £195.9 million of interest bearing loans and borrowings less £33.3 million of cash and short term deposits. The directors consider that the Group has sufficient capital for its current needs. The facility has two main financial covenants. An interest cover covenant and a headline operating profit before depreciation and amortisation to debt covenant. The Group remained within these covenant tests during 2006. FINANCE COST RISK The Group pays a finance cost on its bank facilities and finance leases. The bank facilities finance cost is a variable cost linked to LIBOR plus a margin. The margin reduces as the debt to headline operating profit before depreciation and amortisation ratio reduces. To reduce the variable risk of the Group being able to meet its finance cost the Group has taken out some financial instruments to protect the base finance cost prior to the bank margin. A two year fixed interest rate swap on its US Dollar debt was secured in July 2005 and ends in July 2007 at a fixed rate of 4.1%. In addition, instruments were taken out at the same time for the same duration to cap the Euro finance cost at 3% and the Sterling finance cost at 5%. At 31 December the total value of these instruments was £1.1 million and in accordance with IAS 32 this value is recognised as an asset on the Group balance sheet. The combination of the above instruments meant that the combined average finance cost for the Group in 2006 was approximately 5%. EXCHANGE RATE RISK The Group trades in various different countries around the world and hence the Group is exposed to many different foreign currencies. The Group therefore carries an exchange risk that can be categorised into three types, described below. The Board policy to address these risks is to protect against some of the cash risks but not the non cash risks. The main ongoing 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 in. This is addressed by taking out forward cover against approximately 80% of the anticipated cash flows over the following twelve months, placed on a rolling quarterly basis. This does not eliminate the cash risk but does bring some certainty to it. The most significant non cash exchange risk is the translation risk when the income statements and balance sheets of the trading units denominated in a foreign currency are translated into Sterling. The income statements are translated at the average rates for the year and the balance sheets at the closing rate for the year. The rates used in 2006 and 2005 are shown below: EXCHANGE RATES USED IN THE PERIOD Average rate Closing rate -------------- -------------- US Dollar ----------- 2006 1.84 1.96 ------------------- ----------------- --------------------- 2005 1.77 1.72 ------------------- ----------------- --------------------- Euro ------ 2006 1.47 1.49 ------------------- ----------------- --------------------- 2005 1.47 1.46 ------------------- ----------------- --------------------- The effect on the key headline numbers in 2006 due to the movement of exchange rates from 2005 to 2006 is summarised as follows: EXCHANGE RATE MOVEMENT 2006 exchange rate versus 2005 exchange rate £'m 2006 Effect ------------- Sales reduction 8.4 ---------------------------------- ------------------- Headline operating profit reduction 1.2 ---------------------------------- ------------------- Net debt reduction 16.3 ---------------------------------- ------------------- Net asset reduction 41.4 ---------------------------------- ------------------- For reference guidelines to show the net translation exchange risks that the Group currently carries are shown below: EXCHANGE RATE GUIDELINES Increase in profit £'m For every 10 cent strengthening of the US Dollar against Sterling 1.6 -------------------------------------- -------------- For every 10 cent strengthening of the Euro against Sterling 1.2 No protection is taken other than the hedge of having a multicurrency debt facility funding these foreign currency trading units. The final most significant exchange risk that the Group takes arises when a division which is predominantly based in a foreign currency is sold. The proceeds for those divisions will most likely be received in a foreign currency and therefore an exchange risk arises if these proceeds are converted back to Sterling, for instance to pay a dividend to shareholders. Protection against this risk is taken on a case by case basis and no instruments have been taken out currently. It is recognised that this is a cash risk for which the multi currency loan gives some protection. COMMODITY RISK As Melrose owns various engineering divisions across various sectors the cumulative expenditure on commodities is significant to the Group results. The Group addresses the risk of base commodity costs increasing by having suitable purchase agreements with its suppliers sometimes fixing the price over some months in the future. Melrose does not generally enter into financial instruments on commodities as this is not considered to be the most efficient way of protecting against movements. Instead price rises are passed onto the customer wherever possible. Geoffrey Martin Group Finance Director 7 March 2007 CONSOLIDATED INCOME STATEMENT ------------------------ ------ --------- --------- Notes Year ended Year ended 31 December 31 December 2006 2005(1) £m £m ------------------------ ------ --------- --------- Continuing operations Revenue 2 507.0 269.9 Cost of sales (389.2) (207.2) ------------------------ ------ --------- --------- Gross profit 117.8 62.7 ------------------------ ------ --------- --------- Net operating expenses before the following: (62.5) (35.8) Share of results of joint ventures 0.8 0.6 Intangible asset amortisation (2) (5.2) (3.1) Exceptional costs 3 (7.9) (16.3) Exceptional income 4 3.0 - Profit on disposal of businesses 3.2 - ------------------------ ------ --------- --------- Total net operating expenses (68.6) (54.6) ------------------------ ------ --------- --------- Operating profit 2 49.2 8.1 ------------------------ ------ --------- --------- Headline operating profit (3) 2 56.1 27.5 ------------------------ ------ --------- --------- Finance costs (12.4) (7.3) Finance income 0.2 0.7 ------------------------ ------ --------- --------- Profit before tax 37.0 1.5 Tax 5 0.8 (5.4) ------------------------ ------ --------- --------- Profit/(loss) for the year from continuing operations 37.8 (3.9) ------------------------ ------ --------- --------- Attributable to: Equity holders of the parent 37.7 (3.9) Minority interests 0.1 - ------------------------ ------ --------- --------- 37.8 (3.9) ------------------------ ------ --------- --------- Earnings/(loss) per share - Basic 6 14.7p (2.4)p - Diluted 6 14.4p (2.4)p ------------------------ ------ --------- --------- (1) includes seven months trading in respect of the McKechnie and Dynacast businesses acquired on 26 May 2005. (2) other than computer software amortisation. (3) the terms 'headline operating profit', 'headline profit before tax' and 'headline earnings per share' have the same definition as operating profit, profit before tax and earnings per share respectively except that they are calculated before exceptional costs, exceptional income, intangible asset amortisation other than computer software and profit on disposal of businesses. CONSOLIDATED STATEMENT OF RECOGNISED INCOME AND EXPENSE ------------------------ ---------- --------- Year ended Year ended 31 December 31 December 2006 2005 £m £m ------------------------ ---------- --------- Currency translation on net investments in (41.4) 17.5 subsidiary undertakings Gains on cash flow hedges 1.4 1.5 Actuarial adjustments on pension liabilities 1.2 2.2 ------------------------ ---------- --------- Net (expense)/income recognised directly in (38.8) 21.2 equity Transferred to profit and loss account on cash (1.4) (0.1) flow hedges Profit/(loss) for the year 37.8 (3.9) ------------------------ ---------- --------- Total recognised income and expense for the (2.4) 17.2 year ------------------------ ---------- --------- Attributable to: Equity holders of the parent (2.5) 17.2 Minority interests 0.1 - ------------------------ ---------- --------- (2.4) 17.2 ------------------------ ---------- --------- CONSOLIDATED BALANCE SHEET ------------------------ ------ --------- --------- Notes 31 December 31 December 2006 2005 £m £m ------------------------ ------ --------- --------- Non-current assets Goodwill and other intangible assets 356.2 408.2 Property, plant & equipment 79.4 89.9 Interests in joint ventures 2.6 2.7 Derivative financial instruments 1.4 1.4 Deferred tax assets 29.8 29.1 ------------------------ ------ --------- --------- 469.4 531.3 Current assets Property held for re-sale - 1.6 Inventories 59.3 56.0 Trade and other receivables 90.7 86.3 Cash and short term deposits 33.3 15.2 ------------------------ ------ --------- --------- 183.3 159.1 ------------------------ ------ --------- --------- Total assets 2 652.7 690.4 ------------------------ ------ --------- --------- Current liabilities Trade and other payables 104.8 94.1 Interest-bearing loans and borrowings 1.0 3.9 Current tax liabilities 8.8 8.7 Provisions 2.9 10.7 ------------------------ ------ --------- --------- 117.5 117.4 ------------------------ ------ --------- --------- Net current assets 65.8 41.7 ------------------------ ------ --------- --------- Non-current liabilities Interest-bearing loans and borrowings 194.9 210.0 Deferred tax liabilities 18.6 19.9 Retirement benefit obligations 55.4 60.5 Provisions 11.2 12.0 ------------------------ ------ --------- --------- 280.1 302.4 ------------------------ ------ --------- --------- Total liabilities 2 397.6 419.8 ------------------------ ------ --------- --------- Net assets 255.1 270.6 ------------------------ ------ --------- --------- Equity Issued share capital 0.3 0.3 Share premium account 214.6 214.6 Merger reserve 42.0 42.0 Hedging and translation reserves (22.5) 18.9 Accumulated profits / (losses) 19.7 (6.1) ------------------------ ------ --------- --------- Equity attributable to holders of the parent 254.1 269.7 Minority interest 1.0 0.9 ------------------------ ------ --------- --------- Total equity 255.1 270.6 ------------------------ ------ --------- --------- The financial statements were approved by the Board of Directors on 7 March 2007. CONSOLIDATED CASH FLOW STATEMENT ------------------------ --------- --------- --------- Notes Year ended Year ended 31 December 31 December 2006 2005 £m £m ------------------------ --------- --------- --------- Net cash from operating activities 7 33.3 7.1 Investing activities Interest received - 0.7 Dividends received from joint ventures 0.5 0.5 Proceeds on disposal of property, plant and equipment 11.8 0.3 Purchases of property, plant and equipment (19.4) (7.0) Purchases of computer software (0.3) (0.1) Acquisition of subsidiaries - (199.6) Disposal of businesses 7.4 - ------------------------ --------- --------- --------- Net cash from/(used in) investing activities - (205.2) ------------------------ --------- --------- --------- Financing activities Repayments of obligations under finance leases (0.6) (0.2) Loan notes repaid (0.5) (0.3) New bank loans - 201.7 Decrease in bank loans (3.0) - New finance leases 3.0 - Dividends paid (13.5) - ------------------------ --------- --------- --------- Net cash (used in)/from financing activities (14.6) 201.2 ------------------------ --------- --------- --------- Net increase in cash and cash equivalents 18.7 3.1 Cash and cash equivalents at beginning of year 15.2 11.7 Effect of foreign exchange rate changes (0.6) 0.4 ------------------------ --------- --------- --------- Cash and cash equivalents at end of year 33.3 15.2 ------------------------ --------- --------- --------- NOTES TO THE ACCOUNTS 1. Status of accounts The financial statements for the year ended 31 December 2006 have been prepared in accordance with the historic cost convention and also in accordance with the accounting policies adopted under International Financial Reporting Standards, including International Accounting Standards and Interpretations (IFRSs) as adopted for use in the European Union. These accounting policies have been applied consistently in all respects throughout the current and prior years. The financial information included in the preliminary announcement does not constitute the company's statutory accounts for the years ended 31 December 2006 or 2005, but is derived from those accounts. Statutory accounts for 2005 have been delivered to the Registrar of Companies and those for 2006 will be delivered following the company's annual general meeting. The auditors have reported on those accounts; their reports were unqualified and did not contain statements under s.237(2) or (3) Companies Act 1985. While the financial information included in this preliminary announcement has been computed in accordance with International Financial Reporting Standards, this announcement does not itself contain sufficient information to comply with IFRSs. The Company expects to publish full financial statements that comply with IFRSs in March 2007. The Board of Directors approved the preliminary announcement on 7 March 2007. 2. Segment information The Group's primary reporting format is business segments and its secondary format is geographical segments. The operating businesses are organised and managed separately according to the nature of the products and services provided, with each segment representing a strategic business unit that offers different products and serves different markets. All reported turnover is derived from one activity, the sale of goods. The Dynacast segment is a supplier of diecast parts and components to a range of industries. The Aerospace OEM segment ("OEM") is a supplier of specialised quality components to the aerospace industry, the Aerospace Aftermarket ("Aftermarket") segment maintain and supply replacement batteries to the world's leading airlines and McKechnie Vehicle Components ("MVC") supplies exterior trim products to major vehicle manufacturers in the USA. McKechnie Plastic Components ("MPC") is a UK supplier of plastic injection moulded and extruded components to the automotive, consumer durable, IT and other industries. The McKechnie PSM ("PSM") segment manufactures and distributes specialised fasteners globally to automotive and other industries. Transfer prices between business segments 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 assets and operations. The following table presents revenue and operating profit information (which the Directors believe is the best indicator of performance) and certain asset and liability information regarding the Group's business segments for the year ended 31 December 2006. Notes 3 and 4 give details of exceptional costs and income. The results for the year ended 31 December 2005 represent seven months trading in respect of the McKechnie and Dynacast businesses acquired on 26 May 2005. Business segments Revenue £m Headline operating Operating profit/(loss) £m profit/(loss) (1) £m Year ended Year ended Year ended Year ended Year ended Year ended 31 December 31 December 31 December 31 December 31 December 31 December 2006 2005 2006 2005 2006 2005 Dynacast 221.7 105.0 25.1 13.6 19.5 8.7 OEM 140.1 69.4 33.1 14.6 30.8 12.8 Aftermarket 19.3 15.2 0.6 0.3 4.2 0.3 MVC 48.0 31.6 (2.3) 0.3 (2.5) 0.2 MPC 46.1 27.1 2.4 1.2 1.0 1.2 PSM 31.8 21.6 4.8 0.4 4.2 (10.1) Central - - (7.6) (2.9) (8.0) (5.0) -------- --------- --------- --------- --------- ---------- --------- 507.0 269.9 56.1 27.5 49.2 8.1 --------- --------- --------- --------- --------- ---------- --------- (1) As defined on the income statement 2. Segment information (continued) Total assets £m Total liabilities £m ----------- --------------------- --------------------- Year ended Year ended Year ended Year ended 31 December 31 December 31 December 31 December ----------- 2006 2005 2006 2005 ----------- ----------- ----------- ----------- Dynacast 308.9 301.1 74.9 52.7 OEM 217.9 218.6 32.5 38.4 Aftermarket 7.2 11.9 1.8 3.4 MVC 35.7 42.7 12.1 10.9 MPC 24.7 38.0 11.5 10.8 PSM 41.9 46.7 7.2 17.3 Central 16.4 31.4 257.6 286.3 ----------- ----------- ----------- ----------- ----------- 652.7 690.4 397.6 419.8 ----------- ----------- ----------- ----------- Capital expenditure £m Depreciation and computer software amortisation £m Year ended Year ended Year ended Year ended 31 December 31 December 31 December 31 December 2006 2005 2006 2005 ----------- ----------- ----------- ----------- Dynacast 6.9 3.7 7.0 4.5 OEM 6.9 1.0 2.8 1.7 Aftermarket 0.1 0.1 0.1 0.1 MVC 3.3 0.6 1.8 1.1 MPC 1.2 0.5 1.7 1.1 PSM 1.3 1.0 1.1 1.1 Central - 0.2 0.1 0.1 ----------- ---------- ----------- ----------- ----------- 19.7 7.1 14.6 9.7 ----------- ---------- ----------- ----------- ----------- Geographical area Revenue £m Headline operating profit (1) £m Operating profit/(loss) £m --------- --------------- --------------- --------------- Year ended Year ended Year ended Year ended Year ended Year ended 31 December 31 December 31 December 31 December 31 December 31 December 2006 2005 2006 2005 2006 2005 North 157.2 133.9 30.3 15.6 23.7 11.8 America Europe 285.0 108.2 16.7 6.5 16.4 (9.1) Asia 64.8 27.8 9.1 5.4 9.1 5.4 --------- --------- --------- --------- --------- --------- --------- 507.0 269.9 56.1 27.5 49.2 8.1 --------- --------- --------- --------- --------- --------- --------- (1) As defined on the income statement Total assets £m Total liabilities £m Year ended Year ended Year ended Year ended 31 December 31 December 31 December 31 December 2006 2005 2006 2005 ----------- ----------- ----------- ----------- North America 377.3 395.2 62.5 61.1 Europe 209.9 238.5 317.3 343.2 Asia 65.5 56.7 17.8 15.5 ----------- ----------- ----------- ----------- ----------- 652.7 690.4 397.6 419.8 ----------- ----------- ----------- ----------- ----------- Capital expenditure £m Depreciation and computer software amortisation £m Year ended Year ended Year ended Year ended 31 December 31 December 31 December 31 December 2006 2005 2006 2005 ----------- ----------- ----------- ----------- North America 5.8 1.4 6.1 3.8 Europe 10.7 4.2 6.7 5.0 Asia 3.2 1.5 1.8 0.9 ----------- ---------- ----------- ----------- ----------- 19.7 7.1 14.6 9.7 ----------- ---------- ----------- ----------- ----------- 3. Exceptional costs Year ended Year ended 31 December 31 December 2006 2005 £m £m Other operating costs Dynacast restructure 3.7 3.7 PSM restructure - 10.5 MPC restructure 2.2 - Listing expenses - 2.1 Pre-disposal expenses 2.0 - -------------------------- --------- --------- 7.9 16.3 The Dynacast restructuring costs in 2006 relate to the closure of the Spartanburg, South Carolina, USA manufacturing facility. The Dynacast restructuring costs in 2005 related to the closure of the UK manufacturing facility, the Taiwan tool making facility and the Turkish manufacturing facility. The MPC restructure costs relate to the closure of the Northampton manufacturing facility ("Burnett Polymer Engineering"). The pre-disposal costs relate to the potential sale of divisions. In 2005, the PSM restructuring costs related to the closure of the loss making part of the European fastener business of PSM. In 2005, the listing expenses related to the admission to the official list of the London Stock Exchange. 4. Exceptional income Year ended Year ended 31 December 31 December 2006 2005 £m £m Other operating income Onerous contract provision release 2.3 - Profit on disposal of land and buildings 0.7 - 3.0 - At acquisition, an onerous contract was identified and appropriate provision was made based on the circumstances prevailing at acquisition. In July 2006 the terms of the contract have been renegotiated and the improved terms of the contract have been reflected in the accounts resulting in a release to the income statement of £2.3 million. During the year, land and buildings held in the MPC business segment were sold in a sale and leaseback transaction resulting in a net profit of £0.7 million. 5. Tax Analysis of (credit)/charge in year: --------------------------- --------- --------- Year ended Year ended 31 December 31 December 2006 2005 £m £m --------------------------- --------- --------- Current tax 5.1 3.0 Deferred tax (5.9) 2.4 --------------------------- --------- --------- Total income tax (credit)/expense (0.8) 5.4 --------------------------- --------- --------- Total tax charge on headline operating profit after finance 12.3 6.3 costs and income Exceptional tax credits (10.2) - Total tax on net exceptional costs (1.3) - --------------------------- --------- --------- Total tax in respect of intangible asset amortisation excluding (1.6) (0.9) computer software --------------------------- --------- --------- (0.8) 5.4 6. Earnings per share -------------------------- --------- ---------- Earnings Year ended Year ended 31 December 31 December 2006 2005 £m £m Earnings for the purposes of basic earnings per share 37.8 (3.9) Exceptional items 1.7 16.3 Intangible asset amortisation other than computer software 5.2 3.1 Tax on intangible asset amortisation (1.6) (0.9) Tax on net exceptional costs (1.3) - Exceptional tax credits (10.2) - -------------------------- --------- ---------- Earnings for headline earnings per share 31.6 14.6 Number Number -------------------------- --------- ---------- Weighted average number of ordinary shares for the 257.1 160.2 purposes of basic earnings per share (million) Further shares for the purposes of fully diluted 5.1 0.2 earnings per share (million) -------------------------- --------- --------- Earnings per share Year ended Year ended 31 December 31 December 2006 2005 Pence Pence ----------------------------------- --------- --------- Basic earnings per share 14.7 (2.4) Fully diluted earnings per share 14.4 (2.4) Headline earnings per share 12.3 9.1 Fully diluted headline earnings per share 12.0 9.1 ----------------------------------- --------- --------- Where basic earnings per share are a loss, the anti-dilutive effect of any further shares is ignored. All earnings are derived from continuing operations. 7. Notes to the cash flow statement ------------------------- --------- --------- 2006 2005 £m £m ------------------------- --------- --------- Headline operating profit(1) 56.1 27.5 Adjustments for: Depreciation of property, plant and equipment 14.2 8.4 Amortisation of computer software 0.4 1.3 Abortive acquisition expenses paid - (3.4) Restructuring costs paid and decrease in other provisions (11.3) (6.1) Profit of joint ventures (0.8) (0.6) ------------------------- --------- --------- Operating cash flows before movements in working 58.6 27.1 capital Increase in inventories (9.4) (7.0) (Increase)/decrease in receivables (11.3) 0.3 Increase in payables 12.3 1.2 ------------------------- --------- --------- Cash generated by operations 50.2 21.6 Income taxes paid (4.0) (4.8) Interest paid (7.5) (4.5) Pension contributions paid (5.4) (5.2) ------------------------- --------- --------- Net cash flow from operating activities 33.3 7.1 ------------------------- --------- --------- (1) As defined on the income statement Net debt reconciliation At 31 Cash flow Foreign Finance At 31 December exchange leases December 2006 2005 difference £m £m £m £m £m ---------------- ------ -------- -------- -------- -------- Cash 15.2 18.7 (0.6) - 33.3 Debt due within one year (3.5) 3.5 - - - Debt due after one year (209.0) - 16.9 - (192.1) Finance leases (1.4) 0.6 - (3.0) (3.8) ---------------- ------ -------- -------- -------- -------- (198.7) 22.8 16.3 (3.0) (162.6) ---------------- ------ -------- -------- -------- -------- This information is provided by RNS The company news service from the London Stock Exchange

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