Interim Results

RNS Number : 2710C

Melrose PLC

29 August 2008

 



For Immediate Release                                                                                                  29 August 2008 

MELROSE PLC

UNAUDITED RESULTS

FOR THE SIX MONTHS ENDED 30 JUNE 2008

Melrose PLC today announces its interim results for the six month period to 30 June 2008. The highlights of these results, which are reported under IFRS, are:

Financial Highlights1 

• Revenue for the period was £177.7 million (2007: £172.9 million) 

• Headline Operating Profit2 for the period increased by 18% to £13.5 million (2007: £11.4 million). Operating profit was £12.3 million (2007: £11.3 million)

• Headline Earnings per Share2 of 7.5p (2007 proforma EPS3 of 6.7p)

• Basic Earnings per Share of 6.8p (2007: 3.8p)

• Interim dividend of 2.75p (2006: 2.5p) per share

• FKI acquisition completed on 1 July 2008 and early review supports transaction rationale

¹ continuing operations only unless otherwise stated

² headline results are before exceptional costs, exceptional income and intangible asset amortisation other than computer software 

³  defined in section 'Earnings per Share' of the Finance Director's Review

Other Highlights

Christopher Miller, Chairman of Melrose PLC, today said:

'We are very pleased with these results which have been achieved in the face of more challenging economic conditions generally. We are excited too, by the prospect of integrating our latest acquisition, FKI plc, into the Group. This will add to our potential for continuing growth in the future.'

Enquiries:

Nick Miles	020 7153 1530
James Hill	020 7153 1559
M:Communications

CHAIRMAN'S STATEMENT

I am pleased to report our interim results for the six months to 30 June 2008.

RESULTS 

Revenue in the period was £177.7 million (2007: £172.9 million). Headline operating profit (before exceptional costs, exceptional income and intangible asset amortisation other than computer software amortisation) was £13.5 million (2007: £11.4 million). After these items operating profit was £12.3 million (2007: £11.3 million) and basic earnings per share were 6.8p (2007: 3.8p).

Further explanation of these results is provided in the Finance Director's Review.

DIVIDENDS

The Board has declared an interim dividend of 2.75p per share (2007: 2.5p per share). This dividend will be paid on 14 November 2008 to shareholders on the register at the close of business on 17 October 2008.

It is our policy to increase dividends progressively, broadly in line with growth in underlying earnings per share.

TRADING

The very satisfactory results in this half year have been achieved in the face of worsening economic and trading conditions, particularly in the US automotive sector which is experiencing the lowest levels of demand in almost a generation.  Overall, excluding MVC, trading has held up well. More detail on current trading is provided in the Chief Executive's Review.

FKI

The acquisition of FKI plc was completed on 1 July 2008 for a total consideration, including debt, of just under £1 billion. FKI, which had turnover of £1.4 billion for the year ended 31 March 2008, is an established international engineering business with operations worldwide. We are delighted to have concluded this transaction in difficult times for debt and equity markets.

A great opportunity exists for improving the performance of FKI over the next few years through a mixture of higher investment and increased focus on profitable growth. Many short term actions have already been implemented and there will be more to report at the time of our year-end results.

The end markets of many of FKI's businesses, in particular those supplying the oil, gas, mining and electricity generation sectors, are better placed than many to weather the economic slowdown. Current trading is encouraging.

STRATEGY

Our corporate business model is to acquire, when circumstances are right, businesses capable of being improved under our ownership over a period of years. An important part of this strategy is to realise value for shareholders and, once it has been created, return it to them. All our existing businesses, FKI included, fit into this template. Although there are no plans in the short term, shareholders should expect substantial returns of value from time to time as we were able to do last year.

OUTLOOK

The dual impact of the 'credit crunch' on the world's financial system and fast rising commodity and energy prices has created economic conditions which have not been seen for many years.

However, we believe that the majority of our businesses are well placed to confront these conditions and we expect to continue to make progress for the balance of this year and into 2009.

Christopher Miller

Chairman

29 August 2008

CHIEF EXECUTIVE'S REVIEW

I am pleased to set out below reports on the operating divisions.

DYNACAST

Period ended 30 June	2008	2007
Revenue (£m)	126.2	117.6
Headline Operating Profit (£m)	18.0	13.8

Dynacast is a global manufacturer of precision engineered, die-cast metal components and assemblies. The products are manufactured using proprietary die-casting technology and are supplied to a wide range of end markets, including automotive, healthcare, telecommunications, consumer electronics and computer hardware and peripherals.

Dynacast once again performed well in the first half of 2008 with revenue and headline operating profit up by 7% and 30% respectively. The profit was achieved after benefiting from an exchange gain on translation (largely resulting from the strength of the euro) of £1.8 million.  

It is very encouraging that the two acquisitions completed in the second half of 2007 contributed approximately 6% to the growth in both revenue and headline operating profit in the period.  During August Dynacast acquired the business of Fishercast with operations in Ontario, Canada and Wales for approximately £6 million. This is a further step in Dynacast's policy of seeking additional growth and increased profitability through add-on acquisitions.

Although movements in the price of zinc (the company's major raw material) have relatively little effect on profit, as a result of being able to pass these changes on to the customer, they do have a significant impact on turnover. The LME price of zinc fell by 36% from the first half of 2007 to the first half of 2008, which reduced reported revenue in the first half by approximately £10 million.

Trading in Europe was in line with expectations and showed good profit growth over 2007 in most of its markets. France showed a significant improvement in profitability as a result of focusing on selling price initiatives and extensive cost control, while Spain was Dynacast's only mature operation that reported a decline over 2007, as a result of the weaker economic climate, particularly in the construction sector.

Underlying sales growth in North America was modest, reflecting softening economic conditions; but this was mitigated, once again by focusing on cost control, to produce an encouraging increase in profit. Dynacast Mexico was the only unit to report a reversal, being heavily dependent upon the hard-hit construction and automotive sectors.  

Asia traded in line with expectations, showing decent growth over 2007; although as the Shanghai plant nears capacity, the rate of growth has inevitably slowed from its pace in earlier years. The new manufacturing facility being built in the Dongguan region of Southern China is progressing well and should be operational in early 2009. This is intended to service the high growth market in the region which is beyond the commercial reach of Dynacast's plants in Singapore and Shanghai.

As a result of the economic slowdown, particularly being experienced in the North American automotive and construction sectors; it is unlikely that the trading performance in the first half of 2008 can be sustained at the same rate in the second half. Nevertheless, Dynacast continues to perform well and we are confident that management will deliver a good trading result for the year.

MCKECHNIE PLASTIC COMPONENTS (MPC)

Period ended 30 June	2008	2007
Revenue (£m)	28.9	25.8
Headline Operating Profit (£m)	2.8	1.6

MPC is a UK producer of engineered injection moulded plastics and pressed metal components servicing a variety of markets from food and beverage packaging to automotive. Included in this section are the results of Prelok, which supplies high specification sealing and locking products.

MPC continues to perform strongly. Revenue and headline operating profit are up by 12% and 75% respectively; and in line with objectives set when this business was acquired three years ago, return on sales has reached 10%.

Management continue to improve the quality of the business at both Stamford Bridge and Pickering. As a result of close attention to customer requirements, supported by a willingness to commit to significant capital investment where necessary, MPC has developed strategic partnerships with customers on the strength of its ability to deliver complex solutions in a timely and economic manner. This has greatly assisted MPC in its efforts to recover raw material and energy price increases.

Prelok traded in line with expectations during the period with good performances in Germany and Spain and an impressive recovery in France.

In view of the current economic climate, we expect the second half of 2008 to be not as strong as the first half. However, we remain confident that MPC will deliver another good result for the year.

MCKECHNIE VEHICLE COMPONENTS (MVC)

Period ended 30 June	2008	2007
Revenue (£m)	22.6	29.5
Headline Operating Loss (£m)	(2.4)	(0.2)

MVC manufactures decorated exterior trim products for the US automotive industry, principally coated metal and plastic wheel products.

The trading performance of MVC for the period under review was very weak and was significantly below expectations. This is against the backdrop of a North American automotive market in which sales are currently at the lowest point in many years. In addition, a significant proportion of MVC's sales are for trucks and SUVs, which have suffered disproportionately in comparison with more fuel-efficient smaller cars.  MVC's sales in the period were down nearly a quarter on last year.

Notwithstanding the difficult market conditions, management have worked hard and successfully in negotiating selling price increases with customers to recover increased raw material and energy costs. In addition, there has been constant focus on cost control, including headcount reductions, which has resulted in operational efficiency improvements, but also restructuring costs.

Although new products continue to be successfully launched, order levels are substantially lower than originally indicated by customers, as a result of which the new plating line at Nicholasville is operating well below optimum capacity. In addition, the complexity of plating some of the new products, in particular the 20 inch plasticlad wheel assemblies, has required the deployment of extensive resources, resulting in operational inefficiencies.

With no upturn in the market in sight, it is imperative that action is taken to stem the losses; and to this end, a fundamental review of the business has been instigated.

FKI

FKI was acquired on 1 July 2008 and therefore its trading performance is not included in this set of results.

FKI is a major international diversified engineering group with four divisions: Lifting Products and Services; Energy Technology; FKI Logistex; and Hardware.

Lifting Products and Services and Energy Technology are excellent businesses with strong shares in markets with good growth prospects. It is our intention to develop these businesses by investing both to increase capacity and to improve operational efficiencies.  

As stated at the time of the announcement of the acquisition of FKI, discussions were taking place regarding the possible sale of FKI's automated material handling systems business, FKI Logistex. These discussions are continuing and a significant level of due diligence by the interested parties has been undertaken. We are hopeful that a sale of the business will be concluded in due course.

The two hardware businesses in FKI, Truth and Hickory, are currently facing very tough conditions in the US housing market. Truth is a strong business with a very good market share and it is our intention to develop this business in the next few years while the market recovers. Hickory continues to struggle in these markets and we have announced a process of selling or closing the different businesses within it.

A significant reduction in FKI head office costs has already taken place and major changes are being implemented to cash management and working capital practices.  We have also announced today a proposal to tender for FKI's €600 million Eurobond.

OUTLOOK

We believe these results are very good particularly taking into account current testing economic and financial conditions especially at MVC. We expect Dynacast and MPC to continue to trade well and to more than compensate for the continued poor results at MVC as a result of its US marketplace.

It is still early days yet for FKI in the Melrose Group; nevertheless a lot of early actions have already been taken and we remain confident that the acquisition will provide Melrose with an opportunity to create value for shareholders.

David Roper

Chief Executive

29 August 2008

FINANCE DIRECTOR'S REVIEW

TRADING

In the first six months of 2008, Melrose achieved revenue growth of 2.8% and headline operating profit growth of 18.4%, over the corresponding period last year. The revenue in the six months to June 2008 was £177.7 million (2007: £172.9 million) and the headline operating profit over the same period was £13.5 million (2007: £11.4 million).

TRADING RESULTS BY DIVISION

The improvement in trading results has come through stronger performances at Dynacast and MPC, offset in part by weak performance at MVC. A split of revenue and headline operating profit by division is as follows:

	2008			2007
	Revenue (£m)	Headline operating profit (£m)	Return on revenue (%)	Revenue (£m)	Headline operating profit (£m)	Return on revenue (%)
Dynacast	126.2	18.0	14.3%	117.6	13.8	11.7%
MVC	22.6	(2.4)	(10.6%)	29.5	(0.2)	(0.7)%
MPC	28.9	2.8	9.7%	25.8	1.6	6.2%
Central costs	-	(3.2)	-	-	(2.8)	-
Central - LTIPS	-	(1.7)	-	-	(1.0)	-
Group	177.7	13.5	7.6%	172.9	11.4	6.6%

Further detail on the trading result of the Group and by division can be found in the Chief Executive's Review. The improvement in headline profit and the return on sales is encouraging with the exception of MVC which is under fundamental review.

CASH GENERATION

Cash management remains a high priority of the Group. The cash outflow in the first half was after the payment of the 2007 final dividend of 4.25p, (£5.7 million) on 16 May 2008 and capital expenditure of £7.7 million which was again well ahead of depreciation.  In addition Dynacast continued its excellent profit conversion to cash. In the six months to June 2008 Dynacast converted 96% of profits into cash, taking its average during Melrose ownership to 105%. 

EXCHANGE

The group has three main exchange risks: the translation risk of converting foreign trading results into Sterling at the average exchange rate for the period; the transaction risk of individual business units trading in a currency that is different from their natural currency; and the exchange risk arising when the proceeds of disposals are received in a foreign currency. A split of sales by currency, and the relevant exchange rates used for the group were as follows for the six months to June 2008.

	US$	Euro	Sterling	Other	Total
Sales by currency	36%	33%	14%	17%	100%

Exchange rates used in the period	Average rate	Closing rate
US Dollar   2008 June   2007 December   2007 June	1.97 2.00 1.97	1.99 2.00 2.00
Euro   2008 June   2007 December   2007 June	1.29 1.46 1.48	1.26 1.36 1.49

This shows the exposure to foreign currencies within the group; the main ones being the US dollar and the Euro. The currency which moved most significantly compared to the same period in 2007 was the Euro, which strengthened by 13%. The translation gain included in the income statement in the period as a result of this exchange movement was £1.9 million.  No disposals of businesses were made in the first half of 2008.

TAX

The group income statement tax rate was 26% in the period. This is unchanged compared to the prior year. The ongoing management of tax remains a focus particularly the cash tax rate and the tax position on disposals. The cash tax rate in the period was 29% which is higher than the prior year. This is a result of an anticipated settlement of prior period liabilities arising on the conclusion of a reorganisation in Canada. Without these one-off payments, the rate would have been broadly in line with the prior year cash tax rate of 18% and thus well below the income statement rate. After the acquisition of FKI both the income statement tax rate and the cash tax rate are expected to increase.

EARNINGS PER SHARE

The basic earnings per share (EPS) for the six months to June were 6.8p (2007: 3.8p) and the headline EPS 7.5p (June 2007: 3.5p). In 2007, as a consequence of the share consolidation being after 30 June 2007 the EPS for 2007 is better reflected in a proforma calculation of 6.7p which reduces the number of shares to reflect the share consolidation rather than the basic and headline EPS which exclude this effect. On this basis the headline EPS in the six months to June 2008 of 7.5p (proforma June 2007: 6.7p) represents a 12% growth.

PRINCIPAL RISKS AND UNCERTAINTIES

In addition to the risks highlighted separately in these interim results, the other principal risks and uncertainties facing the Melrose Group prior to the acquisition of FKI plc were set out in the Annual Report for the year ended 31 December 2007; a copy of which is available on the Company's website.  Principal risks and uncertainties in respect of FKI are detailed in the prospectus which was issued to shareholders on 1 May 2008 and which is also available on the Company's website. Unless otherwise stated in this report as far as the Board is aware the principal risks and uncertainties listed above are expected to remain unchanged for the current financial year.

POST BALANCE SHEET EVENTS

Three events that completed post the 30 June 2008 balance sheet date are worth mentioning and these are as follows:

Acquisition of FKI plc

On 1 July 2008, the day after this six month period ended, Melrose completed the acquisition of FKI plc. Each FKI share was purchased for 40p plus 0.277 of a Melrose share. This represented a total price to purchase the FKI issued share capital of £485.1 million and resulted in the number of Melrose shares in issue, after the acquisition of FKI, rising from 133.7 million to 497.6 million. In addition the FKI debt was absorbed, which was funded by a new committed five year £750 million bank facility. This facility was split into a £500 million term loan and a £250 million working capital facility. No trading results for FKI have been included in the six months to June 2008.

Proposed early repayment of the FKI €600 million Eurobond

Consistent with the Melrose strategy to simplify the Group balance sheet and establish more suitable long term financing, the Group has today invited any holders of the FKI plc €600 million Guaranteed Bonds due to be repaid in 2010 to tender such bonds for repurchase by FKI plc. A separate RNS announcement and notice in today's Financial Times set out the details of this invitation.  The FKI plc Group accounts for the year to March 2008, a period prior to Melrose ownership, have today been filed at Companies House and posted on the FKI website.

Dynacast acquisitions

The Group continues to seek small acquisitions for the Dynacast division. As previously announced, since the half year Dynacast has purchased the trade and assets of Fishercast, a company based in Canada and Wales, for approximately £6 million. 

Geoffrey Martin

Group Finance Director

29  August 2008

Melrose PLC

RESPONSIBILITY STATEMENT

We confirm that to the best of our knowledge:

• the condensed set of financial statements has been prepared in accordance with IAS 34 'Interim Financial Reporting';

• the interim management report includes a fair review of the information required by DTR 4.2.7R (indication of important events during the first six months and description of principal risks and uncertainties for the remaining six months of the year); and

• the interim management report includes a fair review of the information required by DTR 4.2.8R (disclosure of related parties' transactions and changes therein).

By order of the Board

David Roper	Geoffrey Martin
Chief Executive	Group Finance Director
29 August 2008	29 August 2008

Condensed Consolidated Income Statement

Continuing operations	Notes	6 months  ended 30 June  2008 Unaudited £m	6 months ended 30 June  2007 Unaudited £m	Year  ended 31 December 2007 Audited £m
Revenue	3	177.7	172.9	344.0
Cost of sales		(143.1)	(141.3)	(280.1)
Gross profit		34.6	31.6	63.9
Net operating expenses before exceptional     items and intangible asset amortisation (1)		(21.1)	(20.2)	(39.4)
Intangible asset amortisation (1)		(1.2)	(1.0)	(2.0)
Exceptional costs	5	-	-	(4.9)
Exceptional income	6	-	0.9	1.1
Total net operating expenses	4	(22.3)	(20.3)	(45.2)
Operating profit		12.3	11.3	18.7
Headline operating profit (2)	3	13.5	11.4	24.5
Finance costs		(1.5)	(3.4)	(4.3)
Finance income		1.5	4.1	6.8
Profit before tax		12.3	12.0	21.2
Tax	7	(3.2)	(2.3)	(5.6)
Profit for the period from continuing operations		9.1	9.7	15.6
Discontinued operations
Profit for the period from discontinued operations	8	-	199.4	199.4
Profit for the period		9.1	209.1	215.0
Attributable to:
Equity holders of the parent		9.1	209.0	214.8
Minority interests		-	0.1	0.2
		9.1	209.1	215.0
Earnings per share
From continuing operations
- Basic	9	6.8p	3.8p	7.4p
- Diluted	9	6.8p	3.6p	7.2p
From continuing and discontinued operations
- Basic	9	6.8p	81.3p	102.1p
- Diluted	9	6.8p	78.3p	99.2p
(1) other than computer software amortisation
(2) the terms ‘headline operating profit’, ‘headline profit before tax’ and ‘headline earnings per share’ have the same definition as operating profit, profit before tax and earnings per share respectively except that they are calculated before exceptional costs, exceptional income and intangible asset amortisation other than computer software.

Condensed Consolidated Statement of Recognised Income and Expense

	Notes	6 months ended 30 June  2008 Unaudited £m		6 months ended 30 June  2007 Unaudited £m	Year ended  31 December 2007 Audited £m
Currency translation on net investments in subsidiary undertakings	10	8.9		(5.0)	3.7
(Losses)/gains on cash flow hedges	10	(0.2)		0.5	1.1
Actuarial adjustments on pension liabilities		-		4.1	3.5
Net gain/(loss) recognised directly in equity		8.7		(0.4)	8.3
Transferred to income statement on cash flow hedges	10	(0.5)		(1.2)	(2.1)
Transfer to income statement from equity of cumulative translation differences on discontinued operations		-		22.0	22.0
Profit for the period		9.1		209.1	215.0
Total recognised income and expense for the period			17.3	229.5	243.2
Attributable to:
Equity holders of the parent		17.3		229.4	243.0
Minority interests		-		0.1	0.2
		17.3		229.5	243.2

Condensed Consolidated Balance Sheet

	Notes	30 June  2008 Unaudited £m	30 June  2007 Unaudited £m	31 December 2007 Audited £m
Non-current assets
Goodwill and other intangible assets		211.7	196.5	207.4
Property, plant and equipment		65.1	53.7	60.7
Investments		0.7	-	-
Derivative financial instruments		-	0.7	0.4
Deferred tax assets		3.2	4.0	3.1
		280.7	254.9	271.6
Current assets
Inventories		29.7	26.5	29.7
Trade and other receivables	14	104.9	67.5	67.0
Cash and short term deposits	13	36.0	265.3	46.4
		170.6	359.3	143.1
Total assets	3	451.3	614.2	414.7
Current liabilities
Trade and other payables	14	107.2	73.4	77.9
Interest-bearing loans and borrowings		19.1	2.0	8.1
Current tax liabilities		7.2	8.6	7.8
Provisions		5.5	2.2	3.5
Derivative financial instruments		0.3	-	-
		139.3	86.2	97.3
Net current assets		31.3	273.1	45.8
Non-current liabilities
Interest-bearing loans and borrowings		2.0	12.0	13.1
Deferred tax liabilities		8.0	8.7	8.1
Retirement benefit obligations	12	20.4	28.0	25.2
Provisions		2.0	4.0	3.5
		32.4	52.7	49.9
Total liabilities	3	171.7	138.9	147.2
Net assets		279.6	475.3	267.5
Equity
Issued share capital	10	0.3	0.3	58.3
Share premium account	10	-	214.6	-
Merger reserve	10	37.0	42.0	37.0
Capital redemption reserve	10	220.1	-	154.6
Hedging and translation reserves	10	10.4	(6.2)	2.2
Accumulated profits	10	10.6	223.5	14.2
Equity attributable to holders of the parent		278.4	474.2	266.3
Minority interest	10	1.2	1.1	1.2
Total equity		279.6	475.3	267.5

Condensed Consolidated Cash Flow Statement

	Notes	6 months  ended 30 June  2008 Unaudited £m	6 months ended 30 June  2007 Unaudited £m	Year  ended 31 December  2007 Audited £m
Net cash from operating activities for  continuing operations	13	2.5	0.1	14.1
Net cash from operating activities for  discontinued operations	13	-	1.8	1.3
Net cash from operating activities		2.5	1.9	15.4
Investing activities:
Disposal of businesses		-	447.8	446.7
Net cash disposed		-	(5.8)	(5.8)
Lump sum contribution to pension plan		-	(20.0)	(20.0)
Purchases of property, plant and equipment		(7.7)	(4.7)	(15.5)
Proceeds on disposal of property, plant  and equipment		-	-	0.4
Purchase of computer software		-	(0.1)	(0.5)
Interest received		1.5	4.1	7.1
Acquisitions of subsidiaries		(1.9)	-	(8.7)
Net cash from investing activities from  continuing operations		(8.1)	421.3	403.7
Net cash used in investing activities by  discontinued operations	13	-	(2.6)	(2.6)
Net cash (used in)/from investing activities		(8.1)	418.7	401.1
Financing activities:
Repayment of borrowings		(0.2)	(179.0)	(179.0)
Repayment of obligations under finance leases		(0.2)	(0.2)	(0.3)
Dividends paid	11	(5.7)	(9.6)	(13.0)
Capital distribution		-	-	(212.6)
Issue of 2007 Incentive Shares		-	-	0.1
Net cash used in financing activities by  continuing operations		(6.1)	(188.8)	(404.8)
Net cash from financing activities from  discontinued operations	13	-	0.3	0.3
Net cash used in financing activities		(6.1)	(188.5)	(404.5)
Net (decrease)/increase in cash and cash  equivalents		(11.7)	232.1	12.0
Cash and cash equivalents at beginning  of the year		46.4	33.3	33.3
Effect of foreign exchange rate changes		1.3	(0.1)	1.1
Cash and cash equivalents at end of the  period		36.0	265.3	46.4

NOTES TO THE CONDENSED SET OF FINANCIAL STATEMENTS

1. General Information

Melrose PLC is a company incorporated in Great Britain under the Companies Act 1985. The address of the registered office is Precision House, Arden Road, Alcester B49 6HN.  

The interim financial information for the six months ended 30 June 2008 is unaudited and not reviewed and does not constitute statutory accounts within the meaning of section 240 of the Companies Act 1985. The results for the year ended 31 December 2007 shown in this report do not constitute the Company's statutory accounts for that period but have been extracted from those accounts which have been filed with the Registrar of Companies. The auditors have reported on these accounts. Their report was unqualified, did not contain a statement under section 237 (2) or (3) of the Companies Act 1985 and did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying the report.

The comparative information shows the Aerospace OEM ('OEM'), the Aerospace Aftermarket ('Aftermarket'), part of the PSM division and the US corporate centre as discontinued operations.

2. Summary of Significant Accounting Policies

The interim financial information for the six months ended 30 June 2008, which has been approved by a committee of the board of directors on 29 August 2008, has been prepared on the basis of the accounting policies set out in the Group's 2007 Annual Report and accounts on pages 40 to 46, which are consistent with International Financial Reporting Standards (IFRSs) as endorsed by the European Union, and can be found on the Group's website www.melroseplc.net. This interim report should therefore be read in conjunction with the 2007 information. The accounting policies used in the preparation of the interim financial information have been consistently applied to all periods presented. The Group has adopted all the provisions of IAS 34 'Interim Financial Reporting' in this interim report.

3. Segment Information

The Group's primary reporting format is business segments and its secondary reporting 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 revenue is derived from one activity, the sale of goods.

The Dynacast segment is a supplier of die-cast parts and components to a range of industries. McKechnie Vehicle Components ('MVC') supplies exterior trim products to major vehicle manufacturers in the USA. McKechnie Plastic Components ('MPC') is primarily a UK supplier of plastic injection moulded and extruded components to the automotive, consumer durable, IT and other industries. It also consists of the specialised Prelok and Canning Brett businesses.

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. Inter segment sales are not material and have not been included in the analysis below.

Business segments

The following table presents revenue and headline 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 period ended 30 June 2008. Notes 5 and 6 give details of exceptional costs and income.

	Revenue			Headline operating profit/(loss) (2)
	6 months ended  30 June  2008 £m	6 months ended 30 June  2007 £m	Year  ended  31 December  2007 £m	6 months ended 30 June  2008 £m		6 months ended 30 June  2007 £m		Year  ended  31 December 2007 £m
Continuing operations
Dynacast	126.2	117.6	235.9	18.0		13.8		28.9
MVC	22.6	29.5	55.4	(2.4)		(0.2)		(0.5)
MPC	28.9	25.8	52.7	2.8		1.6		3.9
Central - corporate	-	-	-	(3.2)		(2.8)		(5.8)
Central - LTIPS(1)	-	-	-	(1.7)		(1.0)		(2.0)
Continuing operations total	177.7	172.9	344.0	13.5		11.4		24.5
Discontinued operations
OEM	-	53.7	53.7	-		11.9		11.9
Aftermarket	-	5.2	5.2	-		0.1		0.1
PSM discontinued	-	8.4	8.4	-		1.4		1.4
Central discontinued	-	-	-	-		(0.4)		(0.4)
Discontinued operations total	-	67.3	67.3	-		13.0		13.0
Total	177.7	240.2	411.3	13.5		24.4		37.5

   (1)  Long-term incentive plans

   (2) As defined on the income statement

	Total assets			Total liabilities
	6 months ended 30 June  2008 £m	6 months ended 30 June  2007 £m	Year  ended  31 December 2007 £m	6 months ended 30 June  2008 £m	6 months ended 30 June  2007 £m	Year  ended  31 December 2007 £m
Continuing operations
Dynacast	334.0	307.4	322.9	75.5	76.5	80.7
MVC	32.0	37.3	32.4	9.0	13.8	11.7
MPC	35.2	28.5	31.5	12.9	11.7	11.1
Central - corporate	50.1	241.0	27.9	71.5	34.7	42.2
Central - LTIPS(1)	-	-	-	2.8	2.2	1.5
Total	451.3	614.2	414.7	171.7	138.9	147.2

   (1)  Long-term incentive plans

	Capital expenditure			Depreciation and computer software amortisation
	6 months ended 30 June  2008 £m	6 months ended 30 June  2007 £m	Year  ended  31 December 2007 £m	6 months ended 30 June  2008 £m	6 months ended 30 June  2007 £m	Year  ended  31 December 2007 £m
Continuing operations
Dynacast	3.5	2.0	5.4	3.8	3.4	6.8
MVC	2.2	1.8	7.8	1.0	1.0	1.9
MPC	2.2	1.0	2.8	0.9	0.9	1.6
Central - corporate	0.4	-	-	-	-	0.1
Continuing operations total	8.3	4.8	16.0	5.7	5.3	10.4
Discontinued operations
OEM	-	2.6	2.6	-	1.2	1.2
Aftermarket	-	-	-	-	-	-
PSM discontinued	-	0.1	0.1	-	0.2	0.2
				-
Discontinued operations total	-	2.7	2.7	-	1.4	1.4
Total	8.3	7.5	18.7	5.7	6.7	11.8

   Geographical Area

	Revenue			Headline operating profit/(loss) (2)
	6 months ended 30 June  2008 £m	6 months ended 30 June  2007 £m	Year  ended  31 December 2007 £m	6 months ended 30 June  2008 £m	6 months ended 30 June  2007 £m	Year  ended  31 December 2007 £m
Continuing operations
North America	64.8	68.2	132.3	2.2	3.4	7.3
Europe	84.5	79.4	155.2	12.3	8.8	18.5
Asia	28.4	25.3	56.5	3.9	3.0	6.5
Central - corporate	-	-	-	(3.2)	(2.8)	(5.8)
Central - LTIPS(1)	-	-	-	(1.7)	(1.0)	(2.0)
Continuing operations total	177.7	172.9	344.0	13.5	11.4	24.5
Discontinued operations
North America	-	41.0	41.0	-	10.7	10.7
Europe	-	21.1	21.1	-	1.8	1.8
Asia	-	5.2	5.2	-	0.9	0.9
Central	-	-	-	-	(0.4)	(0.4)
Discontinued operations total	-	67.3	67.3	-	13.0	13.0
Total	177.7	240.2	411.3	13.5	24.4	37.5

(1)  Long-term incentive plans

(2) As defined on the income statement

	Total assets			Total liabilities
	6 months ended 30 June  2008 £m	6 months ended 30 June  2007 £m	Year  ended 31 December 2007 £m	6 months ended 30 June  2008 £m	6 months ended 30 June  2007 £m	Year  ended 31 December 2007 £m
Continuing operations
North America	184.8	187.3	188.5	30.6	37.3	39.1
Europe	174.8	148.6	157.2	52.8	51.4	49.3
Asia	41.6	37.3	41.1	14.0	13.3	15.1
Central - corporate	50.1	241.0	27.9	71.5	34.7	42.2
Central - LTIPS(1)	-	-	-	2.8	2.2	1.5
Total	451.3	614.2	414.7	171.7	138.9	147.2

(1)  Long-term incentive plans

	Capital expenditure			Depreciation and computer software amortisation
	6 months ended 30 June  2008 £m	6 months ended 30 June  2007 £m	Year  ended 31 December 2007 £m	6 months ended 30 June  2008 £m	6 months ended 30 June  2007 £m	Year  ended 31 December 2007 £m
Continuing operations
North America	3.4	2.2	8.8	2.2	2.1	4.3
Europe	3.1	1.4	5.1	2.7	2.5	4.6
Asia	1.4	1.2	2.1	0.8	0.7	1.4
Central - corporate	0.4	-	-	-	-	0.1
Continuing operations  total	8.3	4.8	16.0	5.7	5.3	10.4
Discontinued operations
North America	-	1.7	1.7	-	0.7	0.7
Europe	-	0.9	0.9	-	0.5	0.5
Asia	-	0.1	0.1	-	0.2	0.2
Discontinued  operations total	-	2.7	2.7	-	1.4	1.4
Total	8.3	7.5	18.7	5.7	6.7	11.8

4. Net Operating Expenses

Net operating expenses comprise:

	6 months ended  30 June  2008 £m	6 months  ended  30 June  2007 £m	Year  ended 31 December 2007 £m
Continuing operations
Selling and distribution costs	(7.4)	(7.2)	(14.3)
Administration expenses	(14.9)	(14.0)	(27.1)
Other operating costs - exceptional (note 5)	-	-	(4.9)
Other operating income - exceptional (note 6)	-	0.9	1.1
Total net operating expenses from continuing operations	(22.3)	(20.3)	(45.2)
Discontinued operations
Selling and distribution costs	-	(4.1)	(4.0)
Administration expenses	-	(5.2)	(5.3)
Share of joint ventures operating profits	-	0.2	0.2
Total net operating expenses from discontinued  operations	-	(9.1)	(9.1)
Total net operating expenses	(22.3)	(29.4)	(54.3)

5. Exceptional Costs

Other operating costs	6 months ended  30 June  2008 £m	6 months ended  30 June 2007 £m	Year  ended 31 December 2007 £m
Continuing operations
Dynacast restructure	-	-	(1.5)
MVC 'old' nickel plater impairment	-	-	(1.5)
Crystallisation of Melrose Original Incentive  Scheme	-	-	(1.9)
Total other operating costs	-	-	(4.9)

The Dynacast restructuring costs in 2007 relate mainly to the acquisitions of Techmire and QZD in Canada.

During the year ended 31 December 2007, the old plater was replaced at MVC and as a result an impairment against the carrying value of the asset was made.

On 14 August 2007, the Shareholders approved the early crystallisation of the Melrose Original Incentive Scheme resulting in an accelerated IFRS 2 charge and associated National Insurance charge.  

6. Exceptional Income

Other operating income	6 months ended  30 June  2008 £m	6 months ended  30 June 2007 £m	Year  ended 31 December 2007 £m
Continuing operations
Pension curtailment gain	-	0.9	1.1
Total other operating income	-	0.9	1.1

Following the disposal of the OEM division in 2007, all employees in this segment belonging to the McKechnie UK defined benefit pension plan became deferred members. The curtailment gain associated with this was £1.1 million.

7. Tax

Analysis of the charge in the period:

	6 months  ended 30  June 2008 £m	6 months ended  30 June 2007 £m	Year ended 31 December 2007 £m
Continuing operations
Current tax	3.5	3.2	6.6
Deferred tax	(0.3)	(0.9)	(1.0)
Tax charge from continuing operations	3.2	2.3	5.6
Discontinued operations
Current tax	-	(1.7)	(1.7)
Deferred tax	-	4.2	4.2
Tax charge from discontinued operations	-	2.5	2.5
Total tax charge	3.2	4.8	8.1

The expected effective rate in respect of headline operating profit before tax on continuing activities for the year ended 31 December 2008 is 26%, however, this will increase as a percentage post the FKI acquisition. The tax charge on ordinary activities has been calculated by applying this rate to the headline operating profit before tax of £13.5 million, giving £3.5 million. This is lower than the statutory rate due to the mix of and the tax rates in foreign jurisdictions.  

In addition, the tax charge on certain activities has been reduced by a credit of £0.3 million. This relates to tax on amortisation of intangible assets giving a total tax charge for the period on continuing activities of £3.2 million.

8. Discontinued operations

On 11 May 2007 the Group disposed of its interest in OEM and Aftermarket divisions. Gross proceeds from the sale of these divisions were £428.0 million and costs incurred during 2007 were £9.6 million.

On 18 May 2007 the Group disposed of its PSM fastener manufacturing business, which comprised part of the PSM division. Gross proceeds from this sale were £30.0 million and costs incurred during 2007 were £1.2 million.

Details of net assets disposed of and disposal proceeds, along with the financial performance of the discontinued operations are shown in the Group's 2007 Annual Report and accounts.

9. Earnings Per Share

	6 months ended 30 June 2008 £m	6 months ended 30 June 2007 £m	Year ended 31 December 2007 £m
Earnings for the purposes of basic earnings  per share	9.1	209.1	215.0
Less profit for the period from discontinued  operations	-	(199.4)	(199.4)
Earnings for basis of earnings per share from  continuing operations	9.1	9.7	15.6
Exceptional costs	-	-	4.9
Exceptional income	-	(0.9)	(1.1)
Intangible asset amortisation (1)	1.2	1.0	2.0
Tax	(0.3)	(0.8)	(1.6)
Earnings for basis of headline earnings per  share from continuing operations	10.0	9.0	19.8

(1) Other than computer software amortisation

	6 months ended 30 June 2008	6 months ended 30 June 2007	Year ended 31 December 2007
	Number	Number	Number
Weighted average number of ordinary shares for  the purposes of basic earnings per share (million)	133.7	257.1	210.5
Further shares for the purposes of fully diluted earnings per share (million)	-	9.9	6.3

	6 months ended 30 June 2008	6 months ended 30 June 2007	Year ended 31 December 2007
Basic earnings per share
From continuing and discontinued operations	6.8p	81.3p	102.1p
From discontinued operations	-	77.5p	94.7p
From continuing operations	6.8p	3.8p	7.4p
Fully diluted earnings per share
From continuing and discontinued operations	6.8p	78.3p	99.2p
From discontinued operations	-	74.7p	92.0p
From continuing operations	6.8p	3.6p	7.2p
Headline earnings per share
From continuing operations	7.5p	3.5p	9.4p
Fully diluted headline earnings per share
From continuing operations	7.5p	3.4p	9.1p

10. Issued Capital and Reserves

Share Capital

	30 June 2008 £m	30 June  2007 £m	31 December 2007 £m
Authorised
201,000,000 Ordinary Shares of 0.2p each (June  2007: 342,830,000 shares of 0.1p each)	0.4	0.3	0.4
Nil (December 2007: 267,330,058)  Redeemable/Deferred C shares of 82.3p each	-	-	220.0
Nil (June 2007: 59,170) Convertible B shares of  £1 each	-	0.1	-
50,000 (June 2007: Nil) 2007 Incentive shares of  £1 each	0.1	-	0.1
Authorised share capital	0.5	0.4	220.5
Allotted, called up and fully paid
133,665,029 Ordinary Shares of 0.2p each (June  2007: 257,119,989 Ordinary shares of 0.1p each)	0.2	0.2	0.2
Nil (June 2007: 59,170) Convertible B shares of  £1 each	-	0.1	-
50,000 (June 2007: Nil) 2007 Incentive shares of  £1 each	0.1	-	0.1
Nil (December 2007: 70,489,480) Deferred C  shares of 82.3p	-	-	58.0
Allotted, called up and fully paid share capital	0.3	0.3	58.3

Share premium account, capital redemption  and merger reserve	Capital redemption £m	Share  premium account £m	Merger  reserve £m
At 31 December 2006	-	214.6	42.0
Issue of C shares	-	(214.6)	(5.0)
B shares redeemed	0.1	-	-
C shares redeemed	154.5	-	-
At 31 December 2007	154.6	-	37.0
Redemption of C shares	65.5	-	-
At 30 June 2008	220.1	-	37.0

On 30 June 2008, 9,053,594 C shares of 82.3p each were redeemed. On the same date, all Deferred C shares of 82.3p each were cancelled which resulted in a transfer of £65.5 million to the capital redemption reserve.

Reserves	Hedging and  translation reserve £m	Accumulated  profits/(losses) £m	Minority Interests £m
At 31 December 2006	(22.5)	19.7	1.0
Currency translation and hedging adjustments	2.7	-	-
Profit for the period	22.0	214.8	0.2
Dividend paid	-	(13.0)	-
Credit to equity for equity settled share based  payments	-	1.8	-
Return of capital	-	(212.6)	-
Actuarial adjustments on net pension liabilities	-	3.5	-
At 31 December 2007	2.2	14.2	1.2
Currency translation and hedging adjustments	8.2	-	-
Profit for the period	-	9.1	-
Dividend paid	-	(5.7)	-
Credit to equity for equity settled share based  payments	-	0.4	-
Return of capital	-	(7.4)	-
At 30 June 2008	10.4	10.6	1.2

Hedging and translation reserve	Hedging reserve £m	Translation reserve £m	Total £m
At 31 December 2006	1.4	(23.9)	(22.5)
Exchange differences on translation of overseas  operations	-	3.7	3.7
Increase in fair value of hedging derivatives	1.1	-	1.1
Transfer to income	(2.1)	22.0	19.9
At 31 December 2007	0.4	1.8	2.2
Exchange differences on translation of overseas  operations	-	8.9	8.9
Decrease in fair value of hedging derivatives	(0.2)	-	(0.2)
Transfer to income	(0.5)	-	(0.5)
At 30 June 2008	(0.3)	10.7	10.4

11. Dividends

	6 months ended  30 June	6 months ended  30 June	Year  ended  31 December
	2008	2007	2007
	£m	£m	£m
Final dividend for the year ended  31 December 2006 paid of 3.75p	-	9.6	9.6
Interim dividend for the year ended  31 December 2007 paid of 2.5p	-	-	3.4
Final dividend for the year ended  31 December 2007 paid of 4.25p	5.7	-	-
Dividends paid	5.7	9.6	13.0

A proposed 2008 interim dividend of 2.75p was approved by the Board on 29 August 2008 and has not been included as a liability as at 30 June 2008.

12. Retirement Benefit Obligations

The defined benefit obligation at 30 June 2008 is estimated based on the latest actuarial valuation at 31 December 2005. In addition, the McKechnie UK defined benefit plan's assumptions have been updated to reflect market conditions at 31 December 2007 where appropriate. The defined benefit plan assets have been updated to reflect the £4.0 million contributions made to the McKechnie UK defined benefit plan during the period.

13. Cash Flow

	6 months  ended 30 June  2008 £m	6 months ended 30 June  2007 £m	Year  ended 31 December  2007 £m
Reconciliation of operating profit to cash generated  by operations
Headline operating profit from continuing operations (1)	13.5	11.4	24.5
Adjustments for:
Depreciation of property, plant and equipment	5.7	5.2	10.3
Amortisation of computer software	-	0.1	0.1
Restructuring costs paid and decrease in other  provisions	0.8	(1.2)	(1.9)
Operating cash flows before movements in working  capital	20.0	15.5	33.0
Decrease/(increase) in inventories	1.0	(0.1)	1.4
Increase in receivables	(2.2)	(6.9)	(0.5)
Decrease in payables	(7.1)	(0.9)	(3.8)
Cash generated by operations	11.7	7.6	30.1
Tax paid	(4.0)	(0.6)	(4.2)
Interest paid	(1.2)	(4.9)	(5.7)
Pension contributions paid	(4.0)	(2.0)	(6.1)
Net cash from operating activities for continuing  operations	2.5	0.1	14.1

(1) As defined on the income statement

	6 months  ended 30 June  2008 £m	6 months ended 30 June  2007 £m	Year  ended  31 December  2007 £m
Cash flow from discontinued operations
Cash generated from discontinued operations	-	7.4	6.9
Tax paid	-	(0.6)	(0.6)
Interest paid	-	(4.2)	(4.2)
Pension contributions paid	-	(0.6)	(0.6)
Profit of joint ventures	-	(0.2)	(0.2)
Net cash from operating activities for discontinued  operations	-	1.8	1.3
Interest received	-	0.1	0.1
Purchase of property, plant and equipment	-	(2.6)	(2.6)
Purchase of computer software	-	(0.1)	(0.1)
Net cash used in investing activities by  discontinued operations	-	(2.6)	(2.6)
New finance leases	-	0.3	0.3
Net cash from financing activities for discontinued  operations	-	0.3	0.3

Net debt reconciliation

	At 31 December 2007	Cash flow	Foreign exchange difference	Other non-cash changes	At  30 June 2008
	£m	£m	£m	£m	£m
Cash	46.4	(11.7)	1.3	-	36.0
Debt due within  one year	(0.5)	0.2	-	(11.2)	(11.5)
Debt due after one  year	(12.3)	-	(0.1)	11.2	(1.2)
Leases	(1.2)	0.2	-	-	(1.0)
Net funds	32.4	(11.3)	1.2	-	22.3

14. Subsequent Events

On 1 July 2008, Melrose PLC acquired the FKI plc group for consideration of £485.1 million comprising £236.0 million cash, the issue of 163,424,202 shares with a fair value of £248.4 million and a £0.7 million investment already made prior to the period end. The fair value attributed to the issue of shares was determined based upon the quoted share price of Melrose PLC on the date of acquisition.  In addition, total deal costs comprising listing costs, debt finance costs and other acquisitions costs of £35 million have been incurred. Costs of £1.2 million have been paid in the period, the remaining associated liabilities are recognised within trade and other payables and a corresponding asset recognised in trade and other receivables as at 30 June 2008. Following the acquisition of FKI plc the listing costs will be set off against the share premium account, debt finance costs will be capitalised and amortised in line with the term of the debt and other acquisition costs will be added to the cost of investment and form part of goodwill.

The fair value and initial carrying amount recognised at the acquisition date for each class of FKI's assets, liabilities and contingent liabilities have not been disclosed as it is not practical to do so in the time available since the acquisition.

 

END

 

 

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