melrose plc annual report 2006
melrose plc
cleveland house
33 king street
london sw1y 6rj
tel 44 0 20 7766 7670
fax 44 0 20 7766 7671
wwwmelroseplcnet
melrose plc annual report 2006 contents
1 highlights
2 melrose at a glance
4 chairman’s statement
6 chief executive’s review
8 business review
16 finance director’s review
22 board of directors
24 directors’ report
28 corporate governance report
32 remuneration report
36 statement of directors’ responsibilities
37 independent auditors’ report to the members of melrose plc
on the consolidated financial statements
38 consolidated income statement
39 consolidated statement of recognised income and expense
40 consolidated balance sheet
41 consolidated cash flow statement
42 notes to the accounts
70 independent auditors’ report to the members of melrose plc
on the parent company financial statements
71 company balance sheet for melrose plc
72 notes to the company balance sheet
80 company and shareholder information
81 notice of annual general meeting
hartwell recently developed
this latch for bombardier’s
learjet 45 main entry door mechanism
the unique design eliminates a
common problem of finish
deterioration by automatically lifting
the external handle off the surface
of the door when operated from
inside the aircraft
designed and produced by merchant
printed by granite highlights
“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”
christopher miller executive chairman
financial highlights
revenue
headline operating profit
1
operating profit
headline earnings per share
1
basic earnings per share
dividend per share
2
2006
2005 £2699 million
£5070 million
2006
2005 £275 million
£561 million
2006
2005 £81 million
£492 million
2006
2005 91 pence
123 pence
2006
2005 24 pence
147 pence
2006
2005 30 pence
60 pence
1
before exceptional costs exceptional income intangible asset amortisation other than computer
software and profit on disposal of businesses
2
2006 interim dividend paid and final dividend recommended
2005 results include seven months trading in respect of the mckechnie and dynacast businesses acquired
on 26 may 2005
melrose plc annual report 2006 1 melrose at a glance
melrose is an international engineering group with worldwide interests in the design development
and manufacture of specialist components for a wide range of markets including aerospace
it telecommunications consumer electronics automotive medical and consumer durables
its businesses have forged longstanding partnerships with numerous customers around
the globe – which include many household names – and melrose seeks to build on these
partnerships to enhance its profitability and thus create shareholder value
aerospace oem oem
revenue £m 1401
headline operating profit £m 331
number of employees 1320
business units
structures hartwell corporation hasco
tyee technical airborne components
fasteners linread northbridge valley todeco
electromechanical electromech technologies
welco
global design and manufacture of aerospace
components for airframes engines and
electromechanical applications
▪
supply of safetycritical components
to the aerospace industry
▪
creation of valueadded products systems
and services
▪
eight businesses serving different sectors
▪
culture based on speed flexibility and
continuous improvement
year ended 31 dec 2006
commercial corporate military regional
rotorcraft and satellites
boeing airbus ge rolls royce bombardier
and eclipse
business description
key strengths
sectors served
major customers
dynacast
revenue £m 2217
headline operating profit £m 251
number of employees 2268
business units
dynacast north america dynacast europe
dynacast asia
global design and manufacture of diecast
metal components
▪
precision engineered diecast zinc aluminium
and magnesium alloy components
▪
full service capability
▪
concept and design engineering
▪
rapid prototyping capability
▪
investment in china
year ended 31 dec 2006
computing consumer electronics healthcare
automotive and telecommunications
apple hewlett packard motorola
procter and gamble valeo and autoliv
business description
key strengths
sectors served
major customers
aerospace aftermarket
revenue £m 193
headline operating profit £m 06
number of employees 44
business units
aero quality sales stamford usa heston uk
and hong kong joint venture
specialised worldwide distribution of battery
products and battery servicing to the global
aviation industry
▪
sale and distribution of aircraft batteries
▪
battery servicing and support equipment
▪
worldwide stocking facilities
▪
rapid response time
year ended 31 dec 2006
commercial business and general aviation
air france american airlines us airways iberia
ba ryanair klm and virgin atlantic
business description
key strengths
sectors served
major customers
2 melrose plc annual report 2006 revenue by division 
headline operating profit by
division  employees by division number
mckechnie vehicle components mvc
revenue £m 480
headline loss £m 23
number of employees 481
business units
mvc newberry mvc nicholasville mvc troy
and mckechnie tool  engineering
design and manufacture of decorative exterior
wheel trim products for the us automotive
industry
▪
manufacture of coated metal and plastic
wheel trim products
▪
stamping in stainless steel for aluminium
wheel market
▪
design and development capability
▪
focus on products which require technical
expertise
year ended 31 dec 2006
us automotive industry
daimlerchrysler ford toyota nissan and
general motors
business description
key strengths
sectors served
major customers
mckechnie plastic components mpc
revenue £m 461
headline operating profit £m 24
number of employees 497
business units
mpc pickering and mpc stamford bridge
design and manufacture of engineered plastic
and plastic injectionmoulded components
▪
inhouse design and toolmaking facilities
▪
leadingedge technical development
▪
secondary operation capability including
painting printing welding and packaging
▪
bespoke product testing
year ended 31 dec 2006
automotive consumer packaging it hardware
personal care and lifestyle
diageo scottish  newcastle wavin cmp
ssl international ford toyota and honda
business description
key strengths
sectors served
major customers
mckechnie fasteners psm
revenue £m 318
headline operating profit £m 48
number of employees 734
business units
psm fasteners asia psm international
psm fasteners usa psm canning brett and
psm threadlocking and sealing
design and manufacture of industrial metal
fasteners and application of treatment for
locking and sealing of threaded components
▪
manufacturer and distributor of specialised
fasteners and joining systems for metals and
plastics
▪
sells direct to end user and through extensive
distribution network
▪
manufacturing located close to industrial
manufacturing areas
year ended 31 dec 2006
computing consumer electronics automotive
and telecommunications
visteon general motors mann and hummel
ford toyota motorola dell siemens and
infast
business description
key strengths
sectors served
major customers
a dynacast 44
b oem 28
c aftermarket 4
d mvc 9
e mpc 9
f psm 6
a
b
c
d
e
f
a
b
c
e
f
a
b
c
d
e
f
a dynacast 38
b oem 50
c aftermarket 1
d mvc –
e mpc 4
f psm 7
 before central costs
a dynacast 2268
b oem 1320
c aftermarket 44
d mvc 481
e mpc 497
f psm 734
melrose plc annual report 2006 3 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 £429m
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 £5070 million 2005 £2699 million
headline profit before tax and headline earnings per share both
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 nonrecurring nature or those associated
with significant restructuring programmes were £439 million
2005 £209 million and 123p 2005 91p respectively
after these items the profit before tax was £370 million
2005 £15 million and the basic earnings per share were
147p 2005 loss of 24p
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 on pages 6 to 7  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
chairman’s statement
“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”
4 melrose plc annual report 2006
christopher miller executive chairman “these results are outstanding and are the culmination of much dedication
and hard work from employees at all our businesses”
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 375p per share
together with an interim dividend announced on 13 september
2006 a total of 60p per share 2005 30p 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 nonexecutive 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 reassured 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
melrose plc annual report 2006 5 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 discipline 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
chief executive’s review
“a great deal of progress has been made in
improving the quality of our six divisions”
david roper chief executive
6 melrose plc annual report 2006 tyee a leader in the design test and
manufacture of rods struts and
engineered tubular components for
the aircraft and aerospace industries
is the exclusive supplier of interior
support tie rods for the boeing 787
over 60 of the 787’s interior rods will
be made from carbon fibre tubing and
titanium end fittings reducing the
weight by approximately 34 over
traditional support systems
▪
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 addon 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 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 proforma 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
business review
year ended 31 december 2006 2005
turnover £m 2217 1050
headline operating profit £m 251 136
seven months trading
electronics computers
 telecoms
28
automotive
38
others
11
hardware
 tooling
12
healthcare
11
north
america
36
europe
41
asia
23
revenue by geographic area 
revenue by sector 
8 melrose plc annual report 2006
dynacast manufactures connector
housings for the world’s leading
connector companies the components
are extremely complex tightly
toleranced and push the envelope of
diecasting technology engineers were
able to overcome complex internal
configurations and connectivity issues
in order to manufacture two complex
zinc diecastings for use in this
network cable connector 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 addon 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 nonpower version of this product this is being
manufactured in a purposebuilt 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
40000 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 threemonthly to
monthly pricing adjustments management will spend more time in
2007 developing the business including seeking out value
enhancing addon acquisitions
melrose plc annual report 2006 9
“dynacast benefits from the ability to fully recover raw
material price increases for the vast majority of its sales”
dynacast is the supplier of the
diecast handle for the new
gillette ‘fusion’ shaving system
launched in 2006 aerospace oem oem 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 proforma 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
236 this increase in operating profit would have been even
higher but for an adverse foreign exchange translation effect
estimated at £11 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 £69 million during the year in order to achieve
business review continued
year ended 31 december 2006 2005
turnover £m 1401 694
headline operating profit £m 331 146
seven months trading
structures
58
fasteners
16
electromechanical
26
revenue by business unit 
operating profit by business unit 
structures
74
fasteners
11
electromechanical
15
linread northbridge offers an
exceptionally comprehensive line of
externally threaded steel stainless
steel titanium nickel and cobalt based
alloys in lengths from 2mm to 250mm
and diameters from 15mm to 30mm
through its stateoftheart design
prototype manufacturing and inventory
management systems linread
northbridge is one of the few companies
in the world that can manufacture
these high performance high quality
parts on a very short leadtime
10 melrose plc annual report 2006
this telescopic rod is made from
aluminium and stainless steel
it is a complex part used for fan
cowls and thrust reverser cowls
in the engine environment tac in
belgium manufacture and supply
the product for various
platforms including the
airbus a340a380 these productivity targets and to increase capacity in the face of
a stronglygrowing 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
775 million investment in new machine tool technology is close to
completion and which has begun to deliver the expected stepchanges
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 ontime delivery hasco achieved an ontime
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 stateoftheart 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 aerospace oem group had an outstanding 2006 reflecting both the operational
improvements in the companies and the continuing favourable conditions in the
aerospace industry ”
rudder trim actuator supplied to
the eclipse aviation corporation
for the new eclipse 500 very light
jet actuators move the flight
surfaces such as the rudder flaps
and landing gear
melrose plc annual report 2006 11 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
business review continued
12 melrose plc annual report 2006
headquartered in placentia
california hartwell is an
acknowledged leader in the
development of quick release
latches and latching systems for
both engine and airframe
applications this engine cowl pin
latch is supplied to eads casa for
the new airbus a400m military
transporter
“the group secured product placement on key platforms during the year on the back of close
collaboration with customers on new product development” aerospace aftermarket
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 standalone
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
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 pickup 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
year ended 31 december 2006 2005
turnover £m 193 152
headline operating profit £m 06 03
seven months trading
year ended 31 december 2006 2005
turnover £m 480 316
headline operating lossprofit £m 23 03
seven months trading
“there remains significant scope for further development within our
four smaller divisions”
the superseder is a battery
chargeranalyser supplied by aqs
it is designed to charge and analyse
the latest and largest batteries in the
aviation industry and is supplied to
airlines and independent maintenance
facilities all over the world
aluminium wheel
urethane foam
chrome
plated
plasticlad
new wheel cladding system
developed by mvc and
manufactured at nicholasville
for a new ford pickup truck
melrose plc annual report 2006 13 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
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 reengineering of manufacturing processes
business review continued
the optical measuring system making
quality control checks on assembled
widgets for guinness the equipment
analyses the widget’s significant
dimensions for capability stamford
bridge has been manufacturing
widgets since 1987 and has recently
invested in a new production cell
for guinness
year ended 31 december 2006 2005
turnover £m 461 271
headline operating profit £m 24 12
seven months trading
battery cover launched in 2006 and
developed using a multi shot process
and advanced automation this
product is manufactured at mpc’s
site at stamford bridge following
a recent investment on equipment
and tooling
14 melrose plc annual report 2006 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 £24 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
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 patchbased 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
year ended 31 december 2006 2005
turnover £m 318 216
headline operating profit £m 48 04
seven months trading
industrial fasteners
manufactured by psm fasteners
in wuxi china psm manufactures
a range of fasteners for the
automotive communications
and it markets
melrose plc annual report 2006 15 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
£5070 million 2005 £2699 million headline operating profit was
£561 million 2005 £275 million giving a headline operating profit
return on sales of 111 2005 102 headline earnings per share
grew from 91p in 2005 to 123p 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 £492 million 2005 £81 million and the basic eps 147p
2005 loss of 24p
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 £12 million foreign exchange translation loss caused
mainly by the strengthening of sterling against the us dollar
finance director’s review
“headline earnings per share grew from 91p in 2005
to 123p in 2006 and this 35 increase reflects the
growth achieved in melrose year on year“
geoffrey martin group finance director
16 melrose plc annual report 2006 trading results by division
a split of sales and profit by division is shown below
headline
operating
profit before
headline depreciation
operating return and return
sales profit on sales amortisation on sales
£m £m  £m 
dynacast 2217 251 113 321 145
oem 1401 331 236 359 256
aftermarket 193 06 31 07 36
mvc 480 23 48 05 10
mpc 461 24 52 41 89
psm 318 48 151 59 186
central costs — 76 — 75 —
group 5070 561 111 707 139
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
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 130 in 2005 to 113 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 noncash charge of £19 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 noncash 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 £16 million which
includes a provision for the related costs such as national insurance
in addition consistent with ias 19 a £03 million 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 £08 million this
consists of a tax charge on headline profit before tax of £123 million
and an exceptional tax credit of £131 million including a credit of
£29 million in respect of net exceptional costs and amortisation of
intangible assets excluding computer software
the headline tax rate was 28 2005 30 on the headline profit
before tax of £439 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 £40 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
headline operating profit return on sales
after
group dynacast oem market mvc mpc psm

2006 111 113 236 31 48 52 151
2005 102 130 210 20 09 44 19
melrose plc annual report 2006 17 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
the group net debt has reduced by £361 million from
£1987 million at 31 december 2005 to £1626 million at
31 december 2006 this reduction included a £163 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
restructuring projects amounting to £60 million have been
approved in 2006 to add to the £142 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 £60 million
project for the mvc division to increase its plating capability was
authorised only £10 million of the total £60 million has been
spent in 2006
assets and liabilities
the split of assets and liabilities is shown in the table below
31 december 31 december
2006 2005
£m £m
goodwill and intangible assets 3562 4082
property plant and equipment 794 899
net working capital 452 482
net tax asset 24 05
ias 19 pension deficit 554 605
provision and other 101 170
4177 4693
after
group dynacast oem market mvc mpc psm
capital spend
£m 197 69 69 01 33 12 13
percentage of
depreciation 135 99 246 100 183 71 118
restructuring
£m 92 34 —— — 12 46
group cash flow
£m
headline operating profit 561
depreciation and computer software amortisation 146
working capital increase 84
total capital expenditure 197
disposal of assets 118
headline cash generated from operations 544
disposal of businesses 74
restructuring costs 92
interest and tax 115
pension contribution 54
dividends paid 135
exchange  other 139
total decrease in net debt in 2006 361
finance director’s review continued
18 melrose plc annual report 2006
“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” these assets and liabilities are funded by
31 december 31 december
2006 2005
£m £m
net debt 1626 1987
equity and reserves 2551 2706
4177 4693
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 £414 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 £67 million realising a profit
of £36 million on the sale
in addition proceeds of £72 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 £53 million and a net profit in
the year of £07 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 £554 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 £830 million liabilities of
£1284 million and therefore a deficit of £454 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 trustee 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 £486 million to £454 million with the reasons
for the movement being shown below
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 company strategy for the plan is to concentrate on the cash
flows required to fund the plan 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 allows 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

discount rate 51
inflation 29
pension increases 29
age
life expectancy for a male aged 65 in 2006 836
life expectancy for a male aged 65 in 2020 851
the key pension assumptions used for
the mckechnie uk pension scheme
£m
2005 ias 19 deficit 486
interest on liabilities 59
expected return on assets 48
investment outperformance 14
change in financial assumptions 16
increase in life expectancy lower mortality 25
employer contributions 39
other 01
2006 ias 19 deficit 454
reconciliation of the movement in the ias 19 deficit
of the mckechnie uk pension scheme
melrose plc annual report 2006 19 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 £1626 million which consisted
of £1959 million of interest bearing loans and borrowings less
£333 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 41 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
£11 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
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 84
headline operating profit reduction 12
net debt reduction 163
net asset reduction 414
exchange rates used in the period
average rate closing rate
us dollar
2006 184 196
2005 177 172
euro
2006 147 149
2005 147 146
finance director’s review continued
20 melrose plc annual report 2006 for reference guidelines to show the net translation exchange risks
that the group currently carries are shown below
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
exchange rate guidelines
increase in profit
£m
for every 10 cent strengthening
of the us dollar against sterling 16
for every 10 cent strengthening
of the euro against sterling 12
melrose plc annual report 2006 21 christopher miller
executive chairman
aged 55 he qualified as a
chartered accountant with
coopers  lybrand following
which he was an associate
director of hanson plc in
september 1988 he joined
the board of wassall plc as
its chief executive between
october 2000 and may 2003
he was involved in private
investment activities mr miller
was appointed as an executive
director of melrose on 29 may
2003 he is currently chairman
of tmo renewables limited
david roper
chief executive
aged 56 he qualified as a
chartered accountant with
peat marwick mitchell following
which he worked in the corporate
finance divisions of sg warburg
 co ltd bzw and dillon read
in september 1988 he was
appointed to the board of
wassall plc and became its
deputy chief executive in 1993
between october 2000 and
may 2003 he was involved in
private investment activities and
served as a nonexecutive director
on the boards of two companies
mr roper was appointed as an
executive director of melrose
on 29 may 2003
simon peckham
chief operating officer
aged 44 he qualified as a solicitor
in 1986 in 1990 he joined
wassall plc and became an
executive director of wassall plc
in 1999 from october 2000
until may 2003 he worked for
the equity finance division of
the royal bank of scotland and
was involved in several high
profile transactions mr peckham
was appointed as an executive
director of melrose on
29 may 2003
geoffrey martin
group finance director
aged 39 he qualified as a
chartered accountant with
coopers  lybrand where he
worked within the corporate
finance and audit departments in
1996 he joined royal doulton
plc where he gained a wide
range of experience he was
group finance director of royal
doulton from october 2000
until june 2005 during this
time he was heavily involved in
major projects including public
equity and debt refinancings
and the restructuring and
outsourcing of royal doulton’s
manufacturing and supply
chain mr martin was appointed
as an executive director of
melrose on 7 july 2005
board of directors
“the board of melrose which combines commercial experience with financial
expertise is dedicated to delivering shareholder value by improving the quality
of the businesses it owns through restructuring and investment where
appropriate”
22 melrose plc annual report 2006 miles templeman
nonexecutive director
aged 59 he has been a director
of several consumer goods and
retailing companies he was the
managing director of threshers
offlicences between 1985 and
1988 and the managing director
of whitbread beer company
between 1990 and 2001
mr templeman was chief
executive officer of hp bulmer
holdings plc from january 2003
to july 2003 he has also held a
number of other nonexecutive
directorships and was appointed
as a nonexecutive director of
melrose on 8 october 2003
since october 2004
mr templeman has held the
position of director general
of the institute of directors
he is currently nonexecutive
chairman of shepherd neame
limited the kentish family
brewer and nonexecutive
chairman of restaurant chain
yo sushi
perry crosthwaite
nonexecutive director
aged 58 he has over 30 years’
experience as a director in the
city of london he was a founding
director of henderson crosthwaite
institutional brokers limited
serving on the board until its
acquisition by investec group
uk plc in 1998 he became
a director of investec bank uk
limited and chairman of the
investment banking division
until his retirement in 2004
mr crosthwaite was appointed
as a nonexecutive director of
melrose on 26 july 2005
he is currently a director of
jupiter green investment trust
plc and toluna plc
john grant
nonexecutive director
aged 61 he has spent his
executive career in a variety of
senior international roles within
the automotive industry and
other engineering businesses
in 2000 mr grant led a
successful management buyout
of four specialist engineering
businesses from ascot plc to
form hasgo group ltd and
peter stubs ltd prior to that he
was chief executive of ascot plc
between 1997 and 2000
mr grant also worked as group
finance director for lucas
industries plc subsequently
lucas varity plc between 1992
and 1996 and previously held
a number of senior positions
including director of corporate
strategy within ford motor
company in europe and the
usa mr grant was appointed
as a nonexecutive director
of melrose on 1 august 2006
he is currently nonexecutive
chairman of torotrak plc and
hasgo group limited and
nonexecutive director of
mhp sa and the royal
automobile club limited
melrose plc annual report 2006 23 directors’ report
24 melrose plc annual report 2006
the directors of melrose plc present their report and the
audited financial statements of the group for the year ended
31 december 2006
principal activities and business review
melrose plc’s stated strategy is to acquire companies and
businesses whose operational performance the melrose plc
directors believe can be improved to create shareholder value the
executive directors have extensive experience of identifying and
evaluating acquisition opportunities quoted and unquoted both uk
and overseas on 26 may 2005 melrose plc completed the
acquisitions of the dynacast group and the mckechnie group for a
consideration of £429 million plus costs since acquisition melrose
has significantly improved the performance of these businesses
the chairman’s statement on pages 4 and 5 together with the
chief executive’s business review and finance director’s review on
pages 6 to 21 describe the principal activities operations
performance financial position and likely future prospects of the
group the results of the group are set out in detail on pages 38 to
41 and in the accompanying notes
the subsidiary and associated undertakings principally affecting the
profits or net assets of the group in the year are listed in note 3 to
the melrose plc uk gaap accounts company balance sheet
the principal changes in addition to actions intended to enhance
the value of the group during the year included restructuring within
dynacast mpc and psm through the rationalisation of the number
of manufacturing sites the disposal of the arger business within the
aerospace aftermarket division investment across all divisions in
existing and new technologies and the generation of cash from the
disposal of surplus assets
the company is required by the companies act to set out in this
report a fair review of the business of the group during the year
and of the position of the group at the end of the year and a
description of the principal risks and uncertainties facing the group
the information that fulfils these requirements can be found within
the chief executive’s review business review and finance director’s
review on pages 6 to 21 the finance director’s review also
indicates the key performance indicators that management use
financial results and dividend
the group’s profit for the financial year attributable to members
was £378 million including £01 million minority interests 2005
loss £39 million the directors are pleased to recommend the
payment on 18 may 2007 to ordinary shareholders on the register
at the close of business on 20 april 2007 of a final dividend of
375 pence per ordinary share
it is the intention of the board to maintain a progressive dividend
policy going forward
directors
the directors of melrose plc as at the date of this report together
with their biographical details are given on pages 22 to 23 no
other person served as a director during the year
mr john grant joined the company on 1 august 2006 as a non
executive director his appointment is governed by a letter of
appointment and he has no service contract with the company
as required by the articles of association of melrose plc mr grant
will retire at the forthcoming annual general meeting and being
eligible will offer himself for election
following the expiry of his initial appointment mr miles templeman
was reappointed for a term of three years expiring in october 2009
directors’ interests and remuneration
information on directors’ beneficial interests including those of
connected persons within the meaning of section 346 of the
companies act 1985 in the shares of the company is shown in
the remuneration report on pages 32 to 35
no director had a material interest at any time during the year in
any contract other than a service contract with the company or any
of its subsidiary undertakings
directors’ indemnities
the directors have the benefit of “qualifying third party indemnity
provisions” for the purposes of sections 309a to 309c of the
companies act 1985
share capital
there was no change to the number of shares in melrose plc in
issue during the year
on 10 may 2006 options over 8877 convertible b shares held by
ogier employee benefit trust limited the employee benefit trust
were granted to executive directors and senior management
details of these director’s options are set out in the remuneration
report on pages 32 to 35
share capital – year ended 31 december 2006
number of ordinary shares in issue
at 1 january 2006 and 31 december 2006 257119989
number of convertible b shares in issue at
1 january 2006 and 31 december 2006 59170 substantial shareholdings
as at 7 march 2007 the company has been advised of the
following interests in the ordinary share capital of the company
which are required to be notified in accordance with sections 791
to 828 of the companies act 2006
shares 
fidelity international ltd 33057359 1286
blackrock investment
management uk ltd 22583639 878
legal and general group plc 16673277 648
fc asset management plc 16158462 628
svg capital plc 11132609 433
artemis investment management ltd 10606977 413
directors’ interests in shares
directors’ interests in the shares of the company and options
to acquire shares are set out in the remuneration report on pages
32 to 35
employees
the group recognises its responsibilities for the fair treatment of all its
employees in accordance with national legislation applicable to the
territories within which it operates having regard to their skills and
abilities the group gives full and fair consideration to applications for
employment received from disabled persons and so far as particular
disabilities permit will give employees disabled during their period of
employment continued employment in the same job or if this is not
practicable a suitable alternative job equal opportunities for
appropriate training career development and promotion are available
to all employees regardless of any physical disability gender religion
race nationality sexual orientation or age
employee involvement and consultation
the directors attach great importance to the maintenance and
development of good labour relations and employee involvement
and training the results for the half year and for the financial year are
discussed with senior management and the opportunity is taken to
inform them of group developments employees everywhere are
encouraged to be aware of the performance of their business the
nature of the group’s activities places the responsibility for such
matters with local management in a manner appropriate to the
particular circumstances of each business
employee involvement in the group’s profitability is encouraged
through appropriate bonus schemes
pensions
companies within the melrose group operate various pension
schemes around the world the only material scheme to the group
is the mckechnie pension plan ‘the plan’ a uk defined benefit
pension scheme with mckechnie limited as its principal employer
the plan closed to new members on 9 may 2003 and for future
accrual as at 30 june 2005 the primary liability for funding the
plan rests with the participating employers although melrose plc
has guaranteed the payment of certain contributions members of
the plan were given the opportunity to join a defined contribution
scheme when the plan closed for future accrual further details on
the plan and other significant schemes in the group are explained
in note 24 to the accounts
research and development
the group continually invests in research and development into
new products and several new products were launched across the
group during the year some of these are mentioned in the
business review additionally the group invested in new technology
in order to reduce manufacturing costs and to improve productivity
the group will continue to invest in research and development that
has a suitable payback
social responsibility
melrose plc recognises the importance of social environmental
and ethical matters and the directors endeavour to take into
account the interests of all stakeholders including investors
employees customers suppliers and business partners when
managing the businesses within the group
community involvement
during its ownership of the dynacast and the mckechnie group
melrose has invested in order to enhance the reputation of
its businesses within the markets and communities in which
they operate
some of the group’s businesses provide training within the
community for instance at psm wuxi in china an internship
scheme was recently launched this programme is designed to
provide work experience and vocational training for local graduates
improving their opportunity to obtain permanent employment in the
local market where skilled and experienced workers are in demand
risk factors
the group’s financial risk management objectives and policies in
relation to the use of financial instruments are described in the
financial review on pages 16 to 21 additionally key risks which if
they were to occur could impact on the business are covered in
the chief executive’s and business review on pages 6 to 15
melrose plc annual report 2006 25 directors’ report continued
26 melrose plc annual report 2006
health safety and the environment
the directors seek to minimise risk to the health and safety of
the group’s employees by ensuring effective management of the
group’s activities
the group uses external consultants to carry out health and safety
and environmental audits at the majority of sites on a cyclical basis
any areas for improvement identified by the external auditor are
monitored and audit reports quantify performance in key areas
these audit reports facilitate the targeting and measurement of
future improvements
the group recognises the importance of its environmental
responsibilities monitors its impact on the environment and
implements local policies to reduce any damage that might be
caused by the group’s activities the group is committed to
ensuring that its operations have minimum adverse effect upon the
environment and that employees are aware of their role in
safeguarding the future of the environment
many sites have progressed with a number of initiatives targeted to
enhance the group’s environmental and ultimately competitive
position
initiatives designed to minimise the group’s impact on the
environment include improvements to energy efficiency reductions
in c02 emissions recycling and waste reduction specific measures
include management and recycling of solvents energy efficient
lighting reductions in water usage recycling of packaging materials
and waste management and control
many of the businesses across the group are accredited to the
international environmental standard iso14001
payments to suppliers
it is the group’s general policy to abide by the terms of payment
agreed with its suppliers at the time of individual transactions and to
ensure that suppliers are made aware of the terms of payment and
abide by them the nature of the company’s transactions is such
that any calculation of creditor days does not have any meaning
charitable and political donations
the group paid £5950 2005 £2276 to uk charities during the
year principally to local charities serving the communities in which
the group operates there were no political donations made during
the year 2005 £nil
auditors
under the companies audit investigation and community
enterprise act 2004 auditors have the right to access all
information necessary for performance of their duties as auditor
and the duties of directors in this regard are clarified
so far as each director is aware there is no relevant audit
information of which the auditors are unaware and the directors
have taken all the steps which they ought to have taken as a
director to make themselves aware of any relevant audit
information and to establish that the company’s auditors are aware
of that information
this confirmation is given and should be interpreted in accordance
with the provisions of section 234za of the companies act 1985
deloitte  touche llp have expressed their willingness to continue
in office as auditors accordingly a resolution will be proposed at
the annual general meeting of the company to reappoint deloitte
 touche llp as auditors of the company and to authorise the
directors to determine their remuneration
annual general meeting
the annual general meeting of the company will be held at the
offices of investec at 2 gresham street london ec2v 7qp at
1100 am on 14 may 2007
resolutions dealing with the following special business will be
proposed at the annual general meeting
resolution 8 will seek shareholder approval of the remuneration
report
resolution 9 will seek shareholder approval to renew the directors’
authority to allot relevant securities pursuant to section 80 of the
companies act 1985 the section 80 authority the authority
contained in the resolution will be limited to an aggregate nominal
amount of £85710 representing the authorised but unissued share
capital of the company and approximately 27 of the company’s
issued share capital as at 7 march 2007 the company does not
hold any treasury shares resolution 10 will seek to renew the authority conferred on the
board to allot equity securities of the company for cash without
application of the preemption rights provided by section 891 of
the companies act 1985 the section 89 authority it is limited to
the allotment of equity securities which have been offered pro rata
to ordinary shareholders subject to any arrangements the directors
consider appropriate to deal with fractions and overseas
requirements and otherwise in relation to the allotment of equity
securities up to a maximum nominal value of £12856
representing approximately 5 of the company’s issued ordinary
share capital as at 7 march 2007 which is in accordance with the
relevant guidelines for the company
if approved the section 80 authority and the section 89 authority
will expire at the conclusion of next year’s annual general meeting
or 15 months after the passing of the resolution whichever is
earlier the directors have no present intention of exercising the
section 80 authority or the section 89 authority
by order of the board
garry barnes
secretary
7 march 2007
melrose plc annual report 2006 27 corporate governance report
28 melrose plc annual report 2006
statement of compliance
the company supports the principles of corporate governance
contained in the combined code on corporate governance which
is appended to the listing rules of the financial services authority
the board is accountable to the company’s shareholders for good
governance the company has complied with the majority of the
provisions of the combined code – principles of good governance
and code of best practice the statements below describe how the
company has applied the principles identified in the combined
code progress on areas of noncompliance from 2005 have been
made where considered appropriate by the board as noted below
the board
the board meets regularly during the year as well as on an adhoc
basis as required by time critical business needs the board is
responsible to shareholders for the effective and proper
management and control of the company and has a formal
schedule of matters reserved for its decisions its primary roles are
to determine and review company strategy and policy consider
acquisitions and disposals assess requests for major capital
expenditure and give consideration to all other significant financial
matters this process is undertaken following discussions in
conjunction with senior executive management who in turn are
responsible for day to day conduct of the group’s operations and
for reporting to the board on the progress being made in meeting
the objectives there were four scheduled board meetings held
during the year and the attendance of each of the directors is
shown on page 30
as at 31 december 2006 the board comprised seven members
being the executive chairman mr christopher miller three other
executive directors and three nonexecutive directors the four
executive directors mr christopher miller chairman mr david
roper chief executive officer mr simon peckham chief operating
officer and mr geoffrey martin group finance director served
throughout the year
two nonexecutive directors mr miles templeman and
mr perry crosthwaite served throughout the year a third non
executive director mr john grant was appointed on 1 august
2006 mr grant brings to the board extensive industrial experience
having spent his career within the automotive industry and in other
engineering businesses mr templeman’s valuable contribution to
the work of the board is recognised and his appointment was
renewed for a further three year period the terms and conditions
of the nonexecutive directors’ appointments and the executive
directors’ service contracts are available for inspection at the
company’s registered office
the board believes the directors possess diverse business
experience in spheres complementary to the activities of melrose
plc as well as other sectors biographies of the directors are
shown on pages 22 to 23 these biographies identify other
appointments held by the directors none of the executive directors
receive any income from their appointment as nonexecutive
director elsewhere
in accordance with the provisions of the combined code
consideration has been given to the independence of all the non
executive directors the board considers all the nonexecutive
directors to be independent
mr perry crosthwaite held the position of director at investec
investment banking the company’s sponsor until his retirement in
2004 the board believes that notwithstanding the provisions of
paragraph a31 of the combined code independence of non
executive directors mr crosthwaite’s previous position at investec
does not affect his independence as a nonexecutive director of the
company as he had no direct involvement in advising the company
at any point during his time at investec the board is therefore of
the opinion that mr crosthwaite is an independent nonexecutive
director for the purposes of the combined code
mr miles templeman holds 1478 convertible b shares which he
purchased on 13 october 2003 at the time when the company
was admitted to the alternative investment market the board
believes that notwithstanding the provisions of paragraph a31 of
the combined code mr templeman’s holding of convertible b
shares does not affect his independence as a nonexecutive
director of the company
the implementation of a formal process of evaluating the
performance of the board and standing committees has begun
the chairman has held meetings with the directors including the
senior independent nonexecutive director mr miles templeman
to discuss the performance of the executive directors and the
board as a whole
in accordance with the company’s articles of association one third
or the number nearest to but not less than one third of all
directors are required to retire and submit themselves for re
election at each annual general meeting of the company it is the
policy of the board that nonexecutive directors are appointed for
an initial term of three years following which their appointment will
be reviewed
on appointment all directors are advised that they have access to
the advice and services of the company secretary and in addition
that they are entitled to seek independent professional advice in the
furtherance of their duties if necessary at the company’s expense a comprehensive pack of briefing papers and an agenda is provided
for each director in advance of each scheduled meeting the
directors are able to seek further clarification and information on
any matter from any other director or employee of the group
whenever necessary decisions are taken by the board in
conjunction with the recommendations of its committees and
advice from external consultants and executive management
chairman and chief executive
the board’s policy is that the roles of chairman of the board and
chief executive of the company should be split
the division of responsibilities between the chairman and the chief
executive is set out in writing and has been approved by the board
the board considers that the respective roles and responsibilities are
clearly understood by both individuals and by the board as a whole
committees of the board
in accordance with the provisions of the combined code the board
has three standing committees the audit nomination and the
remuneration committee each of which comprise three
independent nonexecutive directors on his appointment to the
board on 1 august 2006 mr john grant was also appointed to all
three standing committees at which time mr christopher miller
ceased to be a member of the audit and remuneration
committees the duties of the committees are set out in formal
terms of reference these are available from the company
secretary membership of the committees is shown below the
company secretary acts as secretary of each of the committees
remuneration committee
the remuneration committee currently comprises three
independent nonexecutive directors mr miles templeman
mr perry crosthwaite and mr john grant mr perry crosthwaite
chairs the committee
the function of the committee is to establish and review the terms
and conditions of employment of the executive directors and to
make recommendations to the board on the overall framework and
broad policy for the remuneration of the company’s directors and
other senior executives within the group
the committee met four times during the year the attendance
of its members is shown in the table on page 30 the report to
shareholders on how directors are remunerated together with
details of individual directors’ remuneration is shown on pages
32 to 35
nomination committee
the nomination committee currently comprises mr christopher
miller and the three independent nonexecutive directors mr miles
templeman is the chairman of the nomination committee
the committee reviews the structure size and composition of the
board particularly in relation to the balance of skills experience and
knowledge and seeks to ensure that both executive and non
executive directors have the necessary skills and attributes for the
future success of the company the committee reviews succession
plans for the directors and makes recommendations to the board
on membership of the board and of its committees the
committee retains external search consultants as appropriate
the committee is expected to meet not less than twice a year and
during 2006 the committee met twice
audit committee
the audit committee comprises the three independent non
executive directors mr miles templeman is the chairman of the
audit committee each member of the committee brings relevant
financial experience from senior executive and nonexecutive
positions as described in their biographies on page 23
the committee invites the group finance director and senior
representatives of the external auditors to attend meetings as
appropriate to the business being considered in addition the
committee has the right to invite any other employees to attend
meetings where this is considered appropriate
the committee monitors and reviews the effectiveness of the
group’s internal control systems accounting policies and practices
risk management procedures and compliance controls as well as
the integrity of the company’s financial statements
the committee is responsible for the development implementation
and monitoring of the company’s policy on external audit and for
overseeing the objectivity and effectiveness of the auditors the
committee recommends the appointment and reappointment of
the company’s external auditors and considers the scope of their
audit work and the cost effectiveness of their work the committee
is aware of the audit and nonaudit services which have been
provided by deloitte  touche llp during 2006 a significant
proportion of the nonaudit services related to nonrecurring work in
connection with the proposed sale of the aerospace oem division
melrose plc annual report 2006 29 corporate governance report continued
30 melrose plc annual report 2006
deloitte  touche llp also advised on tax matters which was
considered to be appropriate given their depth of knowledge of
the affairs and financial practices in the group the committee is
satisfied that notwithstanding this work deloitte  touche llp have
retained objectivity and independence during the year
the chairman of the committee will attend the company’s annual
general meeting to respond to any shareholder questions that
might be raised concerning the committee’s activities
the committee is expected to meet not less than three times
a year and during 2006 the committee met three times
the attendance of its members and the group finance director
is shown in the table below
attendance at meetings
the table below shows the attendance of each of the directors
at the scheduled meetings of the board and its standing
committees held during the year briefing papers and a meeting
agenda is provided for each director in advance of each meeting
decisions are taken by the board in conjunction where
appropriate with the recommendations of its committees and
advice from external advisers and executive management in
addition during those months when a board meeting is not
scheduled a pack of management reports including financial
analysis is sent to each of the directors
board audit remuneration nomination
number of meetings
1
43 4 2
christopher miller 41 2 2
david roper 4
simon peckham 4
geoffrey martin 43
miles templeman 43 4 2
perry crosthwaite 43 4 2
john grant
2
22 2 1
1
in addition adhoc meetings are held from time to time which are attended by
a quorum of directors and are convened to deal with specific items of business
2
mr grant was appointed to the board and standing committees on 1 august 2006
internal control and risk management
philosophy and policy
the objective of the directors and senior management is to
safeguard and increase the value of the business and assets of the
group achievement of this objective requires the development of
policies and appropriate internal controls to ensure the group’s
resources are managed properly and any risks are identified
the board is ultimately responsible for the system of internal
control and for reviewing its effectiveness the systems and
processes established by the board are designed to manage rather
than eliminate the risk of failure to achieve business objectives and
cannot provide absolute assurance against material misstatement or
loss the board has delegated responsibility for reviewing the
internal control practices and procedures to the audit committee
the audit committee ensures the effectiveness and efficiency of
the internal control processes implemented by senior management
this includes discussions with senior management of the company
these findings are in turn discussed by the full board the board is
committed to satisfying the internal control guidance for directors
set out in the icaew turnbull report further the board is aware of
the major risks facing the company and the steps taken by the
company where possible to mitigate such risks
key risks
the group’s financial risk management objectives and policies in
relation to the use of financial instruments are described in the
finance director’s review on pages 16 to 21 other key risks which
could adversely affect the group are described in the chief
executive’s review and business review on pages 6 to 15
managing and controlling risks
a summary of the structures and processes in place to identify
and manage risks across the group are set out below divisional
executives plant managers and financial controllers are responsible
for managing the business risks within their business
there is an ongoing process to identify and evaluate risks faced by
the group through the conduct of regular meetings and business
reviews with the group’s senior management the risk process is
regularly reviewed by the board
the group has policies which address a number of key business
risks including financial treasury health and safety and
environmental the policies are made available to relevant
employees through policy manuals and also via employee
briefings on specific topics as appropriate senior management
assume responsibility for managing risk in the businesses where
appropriate external advisers are appointed in order to support
this process accountability and audit
the statement of directors’ responsibilities in relation to the
consolidated financial statements is set out on page 36
going concern
on the basis of current financial projections and facilities available
the directors have a reasonable expectation that the group has
adequate resources to continue in operational existence for the
foreseeable future for this reason they continue to adopt the going
concern basis in preparing the financial statements
internal financial controls
the group has a comprehensive system for regular monitoring and
reporting of financial performance and assessing the efficiency of
the group’s systems of internal controls a detailed budget is
prepared by management and thereafter is reviewed and formally
adopted by the board the budget and other targets are regularly
updated via a rolling forecast process and regular business review
meetings are also held involving senior management at which
the group’s overall performance is assessed the results of these
reviews are in turn reported to and discussed by the board at
each meeting
the audit committee has considered whether there is a
requirement for an internal audit function and based on the group’s
strong financial controls and management the committee is
satisfied that an internal audit function is not presently required
instead the audit of internal financial controls forms part of the
responsibilities of the group’s finance function this matter will be
kept under regular review
the board confirms that it has reviewed the effectiveness of the
system on internal controls for the year ended 31 december 2006
communications with shareholders
principally via the executive directors the company seeks to build
on a mutual understanding of objectives with its institutional
shareholders through regular meetings and presentations following
announcements of annual and interim results the senior
independent nonexecutive director mr miles templeman
is available to meet institutional shareholders should there
be unresolved matters they wish to bring to his attention
institutional shareholders will be given the opportunity upon
request to meet mr john grant the new nonexecutive director
the views of key analysts and shareholders are communicated back
to the board directly by individual directors and via the company’s
broker ensuring all members of the board develop an
understanding of the views of major shareholders
corporate information is also available on the company’s website
wwwmelroseplcnet which was updated during 2006
constructive use of the annual general meeting
the board welcomes the attendance of shareholders at the annual
general meeting and the attendance of all directors is required
by order of the board
garry barnes
secretary
7 march 2007
melrose plc annual report 2006 31 remuneration report
32 melrose plc annual report 2006
introduction and compliance
this report has been prepared by the remuneration committee on
behalf of the board in accordance with the requirements of section
234b of the companies act 1985 as amended directors’
remuneration report regulations the combined code and the
listing rules of the financial services authority a resolution inviting
shareholders to approve the report will be put to the annual
general meeting on 14 may 2007
the directors’ emoluments and directors’ shareholdings have been
subject to audit
biographies of the directors are shown on pages 22 to 23 these
biographies identify any other significant appointments held by the
directors none of the executive directors receive any income from
their appointment as nonexecutive director elsewhere
remuneration committee
the company has established a remuneration committee which
is chaired by mr perry crosthwaite an independent nonexecutive
director other current members of the committee are mr miles
templeman and mr john grant independent nonexecutive
directors of the company mr grant was appointed a director
of melrose plc on 1 august 2006 and to the remuneration
committee on 1 august 2006 at which time mr christopher
miller ceased to be a member
the terms of reference of the remuneration committee are
available from the company secretary page 29 of the corporate
governance report sets out the function of the remuneration
committee
remuneration policy
the remuneration policy is established by the board on the
recommendation of the remuneration committee
the policy for remuneration is that the package offered should be
sufficient to attract retain and motivate executive directors and
senior executives of the quality required but not more than is
necessary for this purpose it is intended that performance related
pay should comprise a significant proportion of the total
remuneration
remuneration is reviewed annually the remuneration committee
and its advisers use a number of surveys of the employment
market from which to obtain remuneration data
the remuneration package
the remuneration package comprises base salary and benefits
bonus long term incentive arrangements and pension contribution
senior employees of the group including executive directors are
remunerated using the policy described below
base salary and benefits base salary takes into account the
performance of the individual and information from independent
sources and consultants on market levels an executive director’s
basic salary is reviewed by the committee prior to the beginning of
each year and when an individual changes position or responsibility
basic salaries were reviewed in december 2006 with increases
taking effect from 1 january 2007 the executive directors also
receive a company car allowance fuel allowance private medical
insurance and life insurance cover
bonuses bonus scheme arrangements are in place for executive
directors and senior employees the executive directors and senior
employee bonus arrangements are calculated based on improvement
in operating profit of the business over the previous year and where
appropriate adjusted for operating cashflow changes
during the year the dynacast long term incentive scheme was
created for the senior management of the dynacast division
payment in cash will be made either upon the sale of dynacast or
in 2009 if the latter payment will be based upon the average
financial performance of dynacast during 2007 and 2008 a non
cash charge of £03 million was made to the income statement
during the year in respect of this scheme this charge represents an
estimate of this year’s proportion of the amortisation of the estimated
future entitlement to the members of the scheme over its life
convertible b shares incentive shares melrose plc has in place
long term incentive arrangements which only reward participants
if shareholder value is created thereby aligning the interests
of management with those of shareholders
under these incentive arrangements the participants hold incentive
shares andor options over incentive shares which convert shortly
after 31 may 2009 or if earlier on the takeover of the company
into ordinary shares with an aggregate value at conversion equal to
10 of the increase in shareholder value the number of ordinary
shares arising on conversion will be determined by reference to the
average market price of an ordinary share for 40 business days prior
to conversion or the takeover offer price as the case may be
the increase in shareholder value is calculated as the difference
between the market capitalisation at conversion determined by
reference to the average market price of an ordinary share for 40
business days prior to conversion or the offer price as the case
may be and the net invested capital in melrose plc being the
aggregate of the amounts paid on the ordinary shares up to
conversion less all amounts paid by melrose plc by way of
dividends or other distributions in respect of those shares and
where each such amount shall be adjusted in line with the
movement in the rpi plus 2 per annum from the month of
payment up to the month prior to the relevant trigger date with the consent of the remuneration committee participants may
convert early up to onethird of their holdings in 2007 and in 2008
during the year the company has adopted an incentive share
option plan as a mechanism to allot the 9170 incentive shares
reserved at flotation which are held within the employee benefit
trust following adoption the employee benefit trust granted options
over 8877 of the remaining 9170 incentive shares to executive
directors and senior employees the period during which the options
may be exercised is as detailed above for the incentive shares
as at 31 december 2006 the increase in shareholder value
attributable to the incentive shares including those which may be
exercised under the incentive share option plan was calculated as
£186 million with £170 million of this amount attributable to the
directors of the company details of the directors beneficial interest
in the incentive shares are shown in the tables later in this report
pension no director is a member of any group pension arrangement
following the changes to pensions taxation legislation which came into
force on 6 april 2006 the executive directors may elect to receive a
company contribution to their individual pension arrangements or a
supplement to basic salary in lieu of pension arrangement
service contracts
the company’s policy on directors’ service contracts is that in line
with the best practice provisions of the combined code they should
be terminable by the company on one year’s notice and directors’
contracts do not provide for predetermined compensation in the
event of termination any payments made would be determined
by reference to normal contractual principles with mitigation being
applied as appropriate
the nonexecutive directors do not have service contracts but have
letters of appointment for an initial period of three years which may
be renewed by mutual agreement normally for a maximum of two
further three year terms the terms of appointment do not contain
any contractual provisions regarding a notice period or the right to
receive compensation in the event of early termination
details of the directors’ contracts and letters of appointment are
as set out below
nonexecutive directors’ fees
the executive directors are responsible for proposing the non
executive directors’ fees in proposing such fees they take account of
similar fees paid to nonexecutive directors in listed companies within
the group’s listing sector and of similar size any decision on fee
changes is taken by the board as a whole individual nonexecutive
directors do not take part in discussion on their remuneration
nonexecutive directors do not receive benefits or pension
contributions from the group
directors’ contracts and letters of appointment
executive directors date of contract notice period
christopher miller 15 october 2003 12 months
david roper 15 october 2003 12 months
simon peckham 15 october 2003 12 months
geoffrey martin 5 december 2005 12 months
end of period
nonexecutive directors letter of appointment of appointment
miles templeman 18 december 2006 27 october 2009
perry crosthwaite 28 november 2005 25 july 2008
john grant 30 june 2006 31 july 2009
melrose plc annual report 2006 33
directors’ emoluments 2006 2005
pension total total
executive directors salaryfees bonus benefits contributions
1
emoluments emoluments
christopher miller £290000 – £18174 £43500 £351674 £290005
david roper £290000 £166054 £18370 £43500 £517924 £316906
simon peckham £290000 £166054 £17473 £43500 £517027 £319115
geoffrey martin appointed 7 july 2005 £232000 £132843 £26056 £34800 £425699 £198161
nonexecutive directors
miles templeman £35000
2
–– – £35000 £25615
perry crosthwaite appointed 26 july 2005 £35000
3
–– – £35000 £11417
john grant appointed 1 august 2006 £12500 –– – £12500 –
total £1184500 £464951 £80073 £165300 £1894824 £1161219
1
of the £165300 pension contributions £71865 is paid as a supplement to basic salary in lieu of pension arrangements for those directors whose pension expects to exceed
the lifetime allowance the balance of £93435 is paid into the individual director’s nominated private pension arrangement
2
includes £5000 per annum in recognition of chairmanships of the audit and nomination committees
3
includes £5000 per annum in recognition of chairmanship of the remuneration committee remuneration report continued
34 melrose plc annual report 2006
directors’ interests in shares
the directors’ beneficial interests including interests of connected
persons within the meaning of section 346 of the companies
act in the ordinary shares of the company at the end of the
financial year are shown below none of the directors had any
nonbeneficial interest at any time in the financial year none of the
directors who held office at the end of the financial year had any
beneficial interest in the shares of other group companies
in addition the directors had a beneficial interest in andor held
options over the convertible b shares of £100 each incentive
shares of melrose plc at 31 december 2006 as follows
included in the directors interests set out above are options
granted on 10 may 2006 over 6509 incentive shares to mr geoffrey
martin and options over 592 incentive shares granted to each of
mr christopher miller mr david roper and mr simon peckham at an
exercise price of £100 per incentive share these incentive shares
will continue to be held by the employee benefit trust until the
options are exercised
options can be exercised on the same dates as the underlying
incentive shares are converted into ordinary shares
number of incentive shares and options of melrose plc
director 31 december 2006 31 december 2005
christopher miller 15386 14794
david roper 15386 14794
simon peckham 15386 14794
geoffrey martin 6509 nil
miles templeman 1478 1478
perry crosthwaite nil nil
john grant nil nil
number of ordinary shares of melrose plc
director 31 december 2006 31 december 2005
christopher miller 4950000 4950000
david roper 750000 750000
simon peckham 521206 310206
geoffrey martin 100000 43250
miles templeman 83522 83522
perry crosthwaite 150000 150000
john grant nil nil
 the interest of mr christopher miller includes 4000000 ordinary shares held
by harris  sheldon investments limited a company which is connected with
mr christopher miller within the meaning of the companies act 1985
incentive share option scheme
options at options at
1 january granted exercised 31 december
director 2006 in year in year 2006 date of grant option price expiry date
christopher miller nil 592 nil 592 10 may 2006 nil 31 may 2009
david roper nil 592 nil 592 10 may 2006 nil 31 may 2009
simon peckham nil 592 nil 592 10 may 2006 nil 31 may 2009
geoffrey martin nil 6509 nil 6509 10 may 2006 nil 31 may 2009
with the consent of the remuneration committee participants may convert early up to onethird of their holdings in 2007 and in 2008 total shareholder return
the ordinary share capital of melrose plc was admitted to the
official list and to trading on the london stock exchange on
9 december 2005
the performance of the company’s ordinary shares compared with
the ftse all share index and the ftse industrial engineering index for
the year ended on 31 december 2006 is shown in the graph below
this graph shows the value as at 31 december 2006 of £100
invested in melrose plc on 30 december 2005 the month when
the company was admitted to the official list of the london stock
exchange compared with £100 invested in the ftse all share
index and the industrial engineering sector the company joined
the ftse 250 share index in december 2006 however the ftse
all share index applies throughout the period being tracked and
therefore has been used for these purposes
this report was approved by the board on 7 march 2007 and
signed on its behalf by
perry crosthwaite
chairman of the remuneration committee
7 march 2007
100
105
110
115
120
125
130
dec 05 dec 06 feb 06 apr 06 jun 06 aug 06 oct 06
melrose return index
ftse all share return index
ftse industrial engineering index
melrose plc annual report 2006 35 statement of directors’ responsibilities
36 melrose plc annual report 2006
the directors are responsible for preparing the annual report
directors’ remuneration report and the financial statements
company law requires the directors to prepare financial statements
for each financial year
the directors are required by the ias regulation to prepare the
group financial statements under ifrss ifrss as adopted by the
european union the group financial statements are also required
by law to be properly prepared in accordance with the companies
act 1985 and article 4 of the ias regulation
international accounting standard 1 requires that ifrs financial
statements present fairly for each financial year the company’s
financial position financial performance and cash flows this requires
the faithful representation of the effects of transactions other events
and conditions in accordance with the definitions and recognition
criteria for assets liabilities income and expenses set out in the
international accounting standards board’s ‘framework for the
preparation and presentation of financial statements’ in virtually all
circumstances a fair presentation will be achieved by compliance
with all applicable ifrss however directors are also required to
▪
properly select and apply accounting policies
▪
present information including accounting policies in a manner
that provides relevant reliable comparable and understandable
information and
▪
provide additional disclosures when compliance with the specific
requirements in ifrss is insufficient to enable users to understand
the impact of particular transactions other events and conditions on
the entity’s financial position and financial performance
the directors have elected to prepare the parent company financial
statements in accordance with united kingdom generally accepted
accounting practice united kingdom accounting standards and
applicable law the parent company financial statements are
required by law to give a true and fair view of the state of affairs of
the company and of the profit of the company for that period in
preparing these financial statements the directors are required to
▪
select suitable accounting policies and then apply them
consistently
▪
make judgments and estimates that are reasonable and prudent
▪
state whether applicable uk accounting standards have been
followed subject to any material departures disclosed and
explained in the financial statements
the directors are responsible for keeping proper accounting records
that disclose with reasonable accuracy at any time the financial
position of the company and enable them to ensure that the
parent company financial statements comply with the companies
act 1985 they are also responsible for safeguarding the assets of
the company and hence for taking reasonable steps for the
prevention and detection of fraud and other irregularities
the directors are responsible for the maintenance and integrity of
the corporate and financial information included on the company’s
website legislation in the united kingdom governing the
preparation and dissemination of financial statements may differ
from legislation in other jurisdictions independent auditors’ report to the members of
melrose plc on the consolidated financial statements
we have audited the consolidated financial statements of
melrose plc for the year ended 31 december 2006 which
comprise the consolidated income statement the consolidated
balance sheet the consolidated cash flow statement the
consolidated statement of recognised income and expense
and the related notes 1 to 31 these consolidated financial
statements have been prepared under the accounting policies set
out therein we have also audited the information in the directors’
remuneration report that is described as having been audited
we have reported separately on the parent company financial
statements of melrose plc for the year ended 31 december 2006
this report is made solely to the company’s members as a body in
accordance with section 235 of the companies act 1985 our audit
work has been undertaken so that we might state to the company’s
members those matters we are required to state to them in an
auditors’ report and for no other purpose to the fullest extent
permitted by law we do not accept or assume responsibility to anyone
other than the company and the company’s members as a body for
our audit work for this report or for the opinions we have formed
respective responsibilities of directors and auditors
the directors’ responsibilities for preparing the annual report the
directors’ remuneration report and the consolidated financial
statements in accordance with applicable law and international
financial reporting standards ifrss as adopted by the european
union are set out in the statement of directors’ responsibilities
our responsibility is to audit the consolidated financial statements
in accordance with relevant legal and regulatory requirements and
international standards on auditing uk and ireland
we report to you our opinion as to whether the consolidated
financial statements give a true and fair view whether the
consolidated financial statements have been properly prepared in
accordance with the companies act 1985 and article 4 of the ias
regulation and whether the part of the directors’ remuneration
report described as having been audited has been properly prepared
in accordance with the companies act 1985 we also report to you
whether in our opinion the information given in the directors’ report
is consistent with the consolidated financial statements
in addition we report to you if in our opinion we have not received
all the information and explanations we require for our audit or if
information specified by law regarding directors’ remuneration and
other transactions is not disclosed
we review whether the corporate governance report reflects the
company’s compliance with the nine provisions of the 2003
combined code specified for our review by the listing rules of the
financial services authority and we report if it does not we are not
required to consider whether the board’s statements on internal
control cover all risks and controls or form an opinion on the
effectiveness of the group’s corporate governance procedures or
its risk and control procedures
we read the other information contained in the annual report as
described in the contents section and consider whether it is
consistent with the audited consolidated financial statements we
consider the implications for our report if we become aware of any
apparent misstatements or material inconsistencies with the
consolidated financial statements our responsibilities do not extend
to any further information outside the annual report
basis of audit opinion
we conducted our audit in accordance with international standards
on auditing uk and ireland issued by the auditing practices
board an audit includes examination on a test basis of evidence
relevant to the amounts and disclosures in the consolidated
financial statements and the part of the directors’ remuneration
report to be audited it also includes an assessment of the
significant estimates and judgments made by the directors in the
preparation of the consolidated financial statements and of
whether the accounting policies are appropriate to the group’s
circumstances consistently applied and adequately disclosed
we planned and performed our audit so as to obtain all the
information and explanations which we considered necessary in order
to provide us with sufficient evidence to give reasonable assurance
that the consolidated financial statements and the part of the
directors’ remuneration report to be audited are free from material
misstatement whether caused by fraud or other irregularity or error in
forming our opinion we also evaluated the overall adequacy of the
presentation of information in the consolidated financial statements
and the part of the directors’ remuneration report to be audited
opinion
in our opinion
▪
the consolidated financial statements give a true and fair view in
accordance with ifrss as adopted by the european union of the
state of the group’s affairs as at 31 december 2006 and of its
profit for the year then ended
▪
the consolidated financial statements have been properly
prepared in accordance with the companies act 1985 and article
4 of the ias regulation
▪
the part of the directors’ remuneration report described as
having been audited has been properly prepared in accordance
with the companies act 1985 and
▪
the information given in the directors’ report is consistent with
the consolidated financial statements
deloitte  touche llp
chartered accountants and registered auditors
london united kingdom
7 march 2007
melrose plc annual report 2006 37
independent auditors’ report consolidated income statement
38 melrose plc annual report 2006
year ended year ended
31 december 31 december
2006 2005
1
notes £m £m
continuing operations
revenue 4 5070 2699
cost of sales 3892 2072
gross profit 1178 627
net operating expenses before the following 625 358
share of results of joint ventures 14 08 06
intangible asset amortisation
2
12 52 31
exceptional costs 5 79 163
exceptional income 6 30 –
profit on disposal of businesses 8 32 –
total net operating expenses 686 546
operating profit 7 492 81
headline operating profit
3
4 7 561 275
finance costs 7 124 73
finance income 7 02 07
profit before tax 370 15
tax 9 08 54
profitloss for the year from continuing operations 378 39
attributable to
equity holders of the parent 26 377 39
minority interests 26 01 –
378 39
earningsloss per share
– basic 11 147p 24p
– diluted 11 144p 24p
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 year ended year ended
31 december 31 december
2006 2005
notes £m £m
currency translation on net investments in subsidiary undertakings 26 414 175
gains on cash flow hedges 26 14 15
actuarial adjustments on pension liabilities 24 12 22
net expenseincome recognised directly in equity 388 212
transferred to profit and loss account on cash flow hedges 26 14 01
profitloss for the year 378 39
total recognised income and expense for the year 24 172
attributable to
equity holders of the parent 25 172
minority interests 01 –
24 172
melrose plc annual report 2006 39
consolidated statement of recognised income and expense consolidated balance sheet
40 melrose plc annual report 2006
year ended year ended
31 december 31 december
2006 2005
notes £m £m
noncurrent assets
goodwill and other intangible assets 12 3562 4082
property plant  equipment 13 794 899
interests in joint ventures 14 26 27
derivative financial instruments 25 14 14
deferred tax assets 22 298 291
4694 5313
current assets
property held for resale 15 – 16
inventories 16 593 560
trade and other receivables 17 907 863
cash and short term deposits 18 333 152
1833 1591
total assets 4 6527 6904
current liabilities
trade and other payables 19 1048 941
interestbearing loans and borrowings 20 10 39
current tax liabilities 88 87
provisions 21 29 107
1175 1174
net current assets 658 417
noncurrent liabilities
interestbearing loans and borrowings 20 1949 2100
deferred tax liabilities 22 186 199
retirement benefit obligations 24 554 605
provisions 21 112 120
2801 3024
total liabilities 4 3976 4198
net assets 2551 2706
equity
issued share capital 26 03 03
share premium account 26 2146 2146
merger reserve 26 420 420
hedging and translation reserves 26 225 189
accumulated profitslosses 26 197 61
equity attributable to holders of the parent 2541 2697
minority interest 26 10 09
total equity 2551 2706
the financial statements were approved by the board of directors on 7 march 2007 and were signed on its behalf by
geoffrey martin simon peckham
group finance director chief operating officer consolidated cash flow statement
year ended year ended
31 december 31 december
2006 2005
notes £m £m
net cash from operating activities 27 333 71
investing activities
interest received – 07
dividends received from joint ventures 05 05
proceeds on disposal of property plant and equipment 118 03
purchases of property plant and equipment 13 194 70
purchases of computer software 12 03 01
acquisition of subsidiaries – 1996
disposal of businesses 8 74 –
net cash fromused in investing activities – 2052
financing activities
repayments of obligations under finance leases 06 02
loan notes repaid 05 03
new bank loans – 2017
decrease in bank loans 30 –
new finance leases 30 –
dividends paid 10 135 –
net cash used infrom financing activities 146 2012
net increase in cash and cash equivalents 187 31
cash and cash equivalents at beginning of year 152 117
effect of foreign exchange rate changes 27 06 04
cash and cash equivalents at end of year 18 333 152
melrose plc annual report 2006 41 notes to the accounts
42 melrose plc annual report 2006
1 corporate information
the consolidated financial statements of melrose plc for the period
ended 31 december 2006 were authorised in accordance with a
resolution of the directors of melrose plc on 7 march 2007
melrose plc is a company incorporated in the united kingdom
under the companies act 1985 the address of the registered
office is given on page 80 the nature of the group’s operations
and its principal activities are set out in note 4
these financial statements are presented in pounds sterling
because that is the currency of the primary economic environment
in which the company operates foreign operations are included in
accordance with the policies set out in note 2
at the date of authorisation of these financial statements the following
standards and interpretations are in issue but not yet effective
ifrs 7 financial instruments disclosures and the related
amendment to ias 1 on capital disclosures
ifric 4 determining whether an arrangement contains a lease
ifric 8 scope of ifrs 2
ifric 9 reassessment of embedded derivatives
ifric 11 ifrs 2 – group and treasury share transactions
the directors anticipate that the adoption of these standards and
interpretations in future periods will have no material impact on the
financial statements of the group except for additional disclosures on
capital and financial instruments when the relevant standards come
into effect for periods commencing on or after 1 january 2007
2 summary of significant accounting policies
basis of accounting
the financial statements have been prepared in accordance with
international financial reporting standards ifrss and uk law
the financial statements have also been prepared in accordance with
ifrss adopted for use in the european union and therefore comply
with article 4 of the eu ias regulation
the consolidated financial statements have been prepared on
a historical cost basis the consolidated financial statements are
presented in pounds sterling
basis of consolidation
the group financial statements include the results of the parent
undertaking and all its subsidiary undertakings the results of
businesses acquired during the period are included from the
effective date of acquisition and of those sold during the period to
the effective date of disposal
where group accounting policies are not adopted in the financial
statements of subsidiary undertakings appropriate adjustments are
made in the group financial statements
all intercompany balances and transactions including unrealised profits
arising from intragroup transactions have been eliminated in full
business combinations and goodwill
the acquisition of subsidiaries is accounted for using the purchase
method the cost of acquisition is measured as the cash paid and
the fair value of other assets given and liabilities incurred or assumed
at the date of exchange and equity instruments issued by the group
in exchange for control of the acquiree plus costs directly attributable
to the acquisition the acquired identifiable assets and liabilities are
measured at their fair value at the date of acquisition any excess of
the cost of acquisition over the fair values of the identifiable net
assets acquired is recognised as goodwill any deficiency of the cost
of acquisition below the fair values of the identifiable net assets
acquired ie discount on acquisition is credited to the income
statement in the period of acquisition
goodwill on acquisition is initially measured at cost being the excess
of the cost of the business combination over the acquirer’s interest in
the net fair value of the identifiable assets liabilities and contingent
liabilities following initial recognition goodwill is measured at cost
less any accumulated impairment losses goodwill is reviewed for
impairment annually or more frequently if events or changes in
circumstances indicate that the carrying value may be impaired
as at the acquisition date any goodwill acquired is allocated to each
of the cashgenerating units acquired impairment is determined by
assessing the recoverable amount of the cashgenerating unit to
which goodwill relates where the recoverable amount of the cash
generating unit is less than the carrying amount an impairment loss
is recognised when there is a potential disposal of a cash generating
unit goodwill relating to the operation disposed of is taken into
account in determining the gain or loss on disposal of that operation
the amount of goodwill allocated to a partial disposal is measured on
the basis of the relative values of the operation disposed of and the
operation retained
joint ventures
a joint venture is an entity which is not a subsidiary undertaking
but in which the interest of the group is that of a partner in a joint
venture over which the group exercises joint control the results
assets and liabilities of joint ventures are accounted for using the
equity method of accounting
exceptional costsincome
exceptional costsincome are those costsincome of a significant
and nonrecurring nature or those associated with significant
restructuring programmes 2 summary of significant accounting policies
continued
operating profit
operating profit is stated after charging exceptional costs crediting
exceptional income profit on disposal of businesses and after the
share of results of joint ventures but before finance income and
finance costs
revenue
revenue is recognised when the significant risks and rewards of
ownership of the goods have passed to the buyer and can be reliably
measured revenue is measured at the fair value of the consideration
received or receivable and represents amounts receivable for goods
provided in the normal course of business net of discounts customs
duties and sales taxes
borrowing costs
all borrowing costs are recognised as a finance cost in the income
statement in the period in which they are incurred
issue costs of loans
the finance cost recognised in the income statement in respect
of capital instruments is allocated to periods over the terms of the
instrument at a constant rate on the carrying amount
use of estimates
the preparation of financial statements in conformity with generally
accepted accounting practice requires management to make
estimates and assumptions that affect the reported amount of assets
and liabilities as well as the disclosure of contingent assets and
liabilities at the balance sheet date and the reported amounts of
revenues and expenses during the reporting period actual outcomes
could differ from those estimates
property plant and equipment
property plant and equipment are stated at cost less accumulated
depreciation and any impairment in value
the initial cost of an asset comprises its purchase price or
construction cost and any costs directly attributable to bring the asset
into operation the purchase price or construction cost is the
aggregate amount paid and the fair value of any other consideration
given to acquire the asset the capitalised value of a finance lease is
also included within property plant and equipment
for property the deemed cost as at the date of transition to ifrs was
the fair value at the date of the last valuation of these assets less
accumulated depreciation until the date of transition
depreciation is calculated on a straightline basis over the estimated
useful life of the asset as follows
freehold land nil
freehold buildings and long over expected economic life
leasehold property not exceeding 50 years
short leasehold property over the term of the lease
plant and other equipment 312 years
the estimated useful lives of property plant and equipment are
reviewed on an annual basis and if necessary changes in useful lives
are accounted for prospectively
the carrying values of property plant and equipment are reviewed
for impairment when events or changes in circumstances indicate
the carrying value may not be recoverable if any such indication
exists and where the carrying values exceed the estimated
recoverable amount the assets are written down to their recoverable
amount the recoverable amount of property plant and equipment
is the greater of net selling price and value in use in assessing value
in use the estimated future cash flows are discounted to their
present value using a pretax discount rate that reflects current
market assessments of the time value of money and the risks
specific to the asset for an asset that does not generate largely
independent cash inflows the recoverable amount is determined
for the cashgenerating unit to which the asset belongs and
allocated proportionately
an item of property plant and equipment is derecognised upon
disposal or when no future economic benefits are expected to
arise from the continued use of the asset any gain or loss arising on
derecognition of the asset calculated as the difference between
the net disposal proceeds and the carrying amount of the item
is included in the income statement in the year the item
is derecognised
intangible assets
intangible assets are stated at cost less accumulated amortisation
and accumulated impairment losses
on acquisition of businesses separately identifiable intangible assets
are determined in relation to the specific circumstances of the
business acquired and are valued on an appropriate basis
access to the use of patented technology and trade names are
valued using a ‘relief from royalty’ method which determines the net
present value of future additional cash flows arising from the use of
the intangible asset
melrose plc annual report 2006 43 notes to the accounts continued
44 melrose plc annual report 2006
2 summary of significant accounting policies
continued
customer relationships are valued on the basis of the net present
value of the future additional cash flows arising from customer
relationships with appropriate allowance for attrition of customers
the estimated useful lives of intangible assets are
patented technology 5 years or less
customer relationships 10 years or less
trade names 20 years or less
computer software is initially recorded at cost where these assets
have been acquired through a business combination this will be the
fair value allocated in the acquisition accounting where these have
been acquired other than through a business combination the initial
cost is the aggregate amount paid and the fair value of any other
consideration given to acquire the asset
computer software assets are amortised over their estimated useful
lives up to five years on a straight line basis
as with property plant and equipment intangible assets are tested for
impairment annually or more frequently whenever events or changes in
circumstances indicate that the carrying value may not be recoverable
impairment losses are measured on a similar basis to property plant
and equipment useful lives are also examined on an annual basis and
adjustments where applicable are made on a prospective basis
research and development costs
research costs are expensed as incurred
clearly defined and identifiable development projects in which
the technical degree of exploitation adequacy of resources and
potential market or development possibility in the undertaking are
recognisable and where it is the intention to produce market or
execute the project are capitalised when a correlation exists between
the costs incurred and future benefits and the costs can be measured
reliably costs not meeting such criteria are expensed as incurred
inventories
inventories are valued at the lower of cost and net realisable value
cost includes all direct expenditure and appropriate production
overhead expenditure incurred in bringing goods to their current
state under normal operating conditions net realisable value is
based on estimated selling price less costs expected to be incurred to
completion and disposal provision has been made for obsolescence
or other losses where necessary
trade and other receivables
trade receivables are recognised and carried at original invoice
amount less an allowance for doubtful debts an allowance is
recorded for the difference between the carrying amount and the
estimated recoverable amount
cash and cash equivalent
cash and shortterm deposits in the balance sheet comprise cash in
hand and current balances with banks and similar institutions and
shortterm deposits with an original maturity of three months or less
which are subject to insignificant risks of changes in value
for the purpose of the consolidated cash flow statement cash and
cash equivalents consist of cash and cash equivalents as defined
above net of outstanding bank overdrafts
interestbearing loans and borrowings
all loans and borrowings are initially recognised at cost being the fair
value of the consideration received net of issue costs associated with
the borrowings
after initial recognition interestbearing loans and borrowings are
subsequently measured at amortised cost using the effective interest
method amortised cost is calculated by taking into account any issue
costs and any discount or premium on settlement
gains and losses are recognised in net profit or loss when the
liabilities are derecognised or impaired as well as through the
amortisation process
leases
finance leases which transfer to the group substantially all the risks
and benefits incidental to ownership of the leased item are
capitalised at the inception of the lease at the fair value of the lease
or if lower at the present value of the minimum lease payments
lease payments are apportioned between the finance charges and
reduction of the lease liability so as to achieve a constant rate of
interest on the remaining balance of the liability finance charges are
charged directly against income
capitalised leased assets are depreciated over the shorter of the
estimated useful life of the asset or the lease term
operating lease payments are recognised as an expense in the
income statement on a straightline basis over the lease term
derivative financial instruments and hedging
derivative financial instruments are initially recognised in the balance
sheet at cost and subsequently remeasured to their fair value the
method of recognising the resulting gain or loss is dependent on
whether the derivative contract is designed to hedge a specific risk
and qualifies for hedge accounting on the date a derivative contract
is entered into the group designates derivatives which qualify as
hedges for accounting purposes as either a a hedge of the fair value 2 summary of significant accounting policies
continued
of a recognised asset or liability fair value hedge or b a hedge of
a forecast transaction or firm commitment cash flow hedge or
c a hedge of a net investment in a foreign entity
changes in the fair value of derivatives which are fair value hedges
and that are highly effective are recognised in the income statement
along with any changes in the fair value of the hedged asset or
liability that is attributable to the hedged risk changes in the fair
value of derivatives in cash flow hedges are recognised in equity
where the forecasted transaction or firm commitment results in the
recognition of an asset or liability the gains and losses previously
included in equity are included in the initial measurement of the
asset or liability otherwise amounts recorded in equity are
transferred to the income statement and classified as revenue or
expense in the same period in which the forecasted transaction
affects the income statement
hedges of net investments in foreign entities are accounted for
similarly to cash flow hedges the group hedges certain net
investments in foreign entities with foreign currency borrowings all
foreign exchange gains or losses arising on translation are recognised
in equity and included in cumulative translation differences
certain derivative instruments while providing effective economic
hedges under the group’s policies do not qualify for hedge
accounting changes in the fair value of any derivative instruments
that do not qualify for cash flow hedge accounting are recognised
immediately in the income statement
provisions
provisions are recognised when the group has a present obligation
legal or constructive as a result of a past event it is probable that an
outflow of resources embodying economic benefits will be required
to settle the obligation and a reliable estimate can be made of the
amount of the obligation where the group expects some or all of a
provision to be reimbursed for example under an insurance contract
the reimbursement is recognised as a separate asset but only when
the reimbursement is virtually certain is the expense relating to any
provision presented in the income statement net of any
reimbursement if the effect of the time value of money is material
provisions are determined by discounting the expected future cash
flows at a pretax rate that reflects the current market assessment of
the time value of money and where appropriate the risks specific to
the liability where discounting is used the increase in the provision
due to the passage of time is recognised as a finance cost
environmental liabilities
liabilities for environmental costs are recognised when environmental
assessments or cleanups are probable and the associated costs can
be reasonably estimated generally the timing of these provisions
coincides with the commitment to a formal plan of action the amount
recognised is the best estimate of the expenditure required where the
liability will not be settled for a number of years the amount
recognised is the present value of the estimated future expenditure
employee benefits
wages salaries bonuses social security contributions paid
annual leave and sick leave are accrued in the year in which the
associated services are rendered by employees of the group the
accounting policy for pensions and other postretirement benefits
is described below
pensions and other postretirement benefits
the group operates defined benefit pension schemes and defined
contribution schemes which require contributions to be made to
administered funds separate from the group in some jurisdictions
funds are not administered separately from the group but
appropriate liabilities are recognised in the balance sheet
for the defined benefit pension and postretirement benefit plans
plan assets are measured at fair value and plan liabilities are
measured on an actuarial basis using the projected unit credit
method and discounted at an interest rate equivalent to the current
rate of return on a high quality corporate bond of equivalent currency
and term to the plan liabilities
the service cost of providing pension and other postretirement
benefits to employees for the period is charged to the income
statement the cost of making improvements to pension and other
postretirement benefits is recognised in the income statement on
a straight line basis over the period during which the increase in
benefits vests to the extent that the improvement in benefits vests
immediately the cost is recognised immediately these costs are
recognised as an expense
a charge representing the unwinding of the discount on the plan
liabilities during the period is included within other finance costs
a credit representing the expected return on the plan assets during
the period is included within other finance costs this credit is based
on the market value of the plan assets and expected rates of return
at the beginning of the year
actuarial gains and losses may result from differences between the
expected return and the actual return on plan assets differences
between the actuarial assumptions underlying the plan liabilities and
actual experience during the period or changes in the actuarial
assumptions used in the valuation of the plan liabilities actuarial
gains and losses and taxation thereon are recognised in the
statement of recognised income and expense
melrose plc annual report 2006 45 notes to the accounts continued
46 melrose plc annual report 2006
2 summary of significant accounting policies
continued
for defined contribution plans contributions payable for the year
are charged to the income statement as an operating expense
foreign currency translation
the individual financial statements of each group company are
presented in the currency of the primary economic environment in
which it operates its functional currency for the purpose of the
consolidated financial statements the results and financial position
of each group company are expressed in pounds sterling which
is the functional currency of the company and the presentation
currency for the consolidated financial statements
in preparing the financial statements of the individual companies
transactions in currencies other than the entity’s functional currency
foreign currencies are recorded at the rates of exchange prevailing
on the dates of the transactions at each balance sheet date monetary
assets and liabilities that are denominated in foreign currencies are
retranslated at the rates prevailing on the balance sheet date non
monetary items carried at fair value that are denominated in foreign
currencies are translated at the rates prevailing at the date when the
fair value was determined nonmonetary items that are measured
in terms of historical cost in a foreign currency are not retranslated
exchange differences arising on the settlement of monetary items
and on the retranslation of monetary items are included in the
income statement for the period exchange differences arising on the
retranslation of nonmonetary items carried at fair value are included
in the income statement for the period except for differences arising
on the retranslation of nonmonetary items in respect of which gains
and losses are recognised directly in equity for such nonmonetary
items any exchange component of that gain or loss is also
recognised directly in equity
in order to hedge its exposure to certain foreign exchange risks
the group enters into forward contracts and options see above for
details of the group’s accounting policies in respect of such
derivative financial instruments
for the purpose of presenting consolidated financial statements the
assets and liabilities of the group’s foreign operations are translated
at exchange rates prevailing on the balance sheet date income and
expense items are translated at the average exchange rates for the
period unless exchange rates fluctuate significantly during that
period in which case the exchange rates at the date of transactions
are used exchange differences arising if any are classified as equity
and transferred to the group’s translation reserve such translation
differences are recognised as income or as expenses in the period in
which the operation is disposed of
goodwill and fair value adjustments arising on the acquisition of a
foreign entity are treated as assets and liabilities of the foreign entity
and translated at the closing rate
taxation
tax expense represents the sum of the tax paid or currently payable
and deferred tax
the tax expense is based on the taxable profits for the period taxable
profit differs from net profit as reported in the income statement
because it excludes items of income or expense that are taxable or
deductible in other years and it further excludes items that are never
taxable or deductible the group’s liability for current tax is calculated
using tax rates that have been enacted or substantively enacted by
the balance sheet date
deferred tax is provided using the liability method on all temporary
differences at the balance sheet date between the tax bases of
assets and liabilities and their carrying amounts for financial
reporting purposes
deferred tax liabilities are recognised for all taxable temporary
differences
▪
except where the deferred tax liability arises on goodwill that is
not tax deductible or the initial recognition of an asset or liability
in a transaction that is not a business combination and at the
time of the transaction affects neither the accounting profit nor
taxable profit or loss and
▪
in respect of taxable temporary differences associated with
investments in subsidiaries and interests in joint ventures except
where the timing of the reversal of the temporary differences can
be controlled and it is probable that the temporary differences
will not reverse in the foreseeable future
deferred tax assets are recognised for all deductible temporary
differences carryforward of unused tax assets and unused tax losses
to the extent that it is probable that taxable profit will be available
against which the deductible temporary differences and carryforward
of unused tax assets and unused tax losses can be utilised
▪
except where the deferred tax asset arises from the initial
recognition of an asset or liability in a transaction that is not a
business combination and at the time of the transaction affects
neither the accounting profit nor taxable profit or loss and
▪
in respect of deductible temporary differences associated with
investments in subsidiaries associates and interests in joint
ventures deferred tax assets are only recognised to the extent
that it is probable that the temporary differences will reverse in
the foreseeable future and taxable profit will be available against
which the temporary differences can be utilised 2 summary of significant accounting policies
continued
the carrying amount of deferred tax assets is reviewed at each
balance sheet date and reduced to the extent that it is no longer
probable that sufficient taxable profit will be available to allow all or
part of the deferred tax asset to be utilised
deferred tax assets and liabilities are measured at the tax rates that
are expected to apply to the year when the asset is realised or the
liability is settled based on tax rates and tax laws that have been
enacted or substantially enacted at the balance sheet date
tax relating to items recognised directly in equity is recognised in
equity and not in the income statement
revenues expenses and assets are recognised net of the amount
of sales tax except
▪
where the sales tax incurred on a purchase of goods and services
is not recoverable from the taxation authority in which case the
sales tax is recognised as part of the cost of acquisition of the
asset or as part of the expense item as applicable and
▪
receivables and payables are stated with the amount of sales tax
included
the net amount of sales tax recoverable from or payable to the
taxation authority is included as part of receivables or payables in the
balance sheet
noncurrent assets held for resale
where noncurrent assets are held for resale the assets are
transferred to current assets and held in the balance sheet at their
fair value
sharebased payments
the group has applied the requirements of ifrs 2 sharebased
payments the group issues equitysettled sharebased payments to
certain employees equitysettled sharebased payments are
measured at fair value at the date of grant the fair value determined
at the grant date of the equitysettled sharebased payments is
expensed on a straightline basis over the vesting period based on
the group’s estimate of shares that will eventually vest and adjusted
for the effect of nonmarketbased vesting conditions
fair value is measured by use of the black scholes model the
expected life used in the model has been adjusted based on
management’s best estimate for the effects of nontransferability
exercise restrictions and behavioural considerations
3 critical accounting judgments
in applying the group’s accounting policies as set out in note 2
management has made critical accounting judgements in the
determination of the fair value of assets and liabilities acquired the
carrying value of deferred tax assets the quantification of provisions
and the impairment of goodwill due to the inherent uncertainty
involved in making assumptions and estimates actual outcomes will
differ from those assumptions and estimates an analysis of the key
sources of estimation uncertainty at the balance sheet date that have
a significant risk of causing a material adjustment to the carrying
amount of assets and liabilities within the next financial year is
provided below
deferred tax assets
the carrying value of a significant deferred tax asset is dependent
on sufficient taxable profits being generated in the usa in the next
five years
provisions
the quantification of certain liabilities within provisions for
environmental remediation obligations and for future legal costs in
relation to certain claims have been estimated however such
liabilities depend on the actions of third parties and on the specific
circumstances pertaining to each obligation neither of which is
controlled by the group
impairment of noncurrent assets
goodwill and intangible assets are tested for impairment whenever
events or circumstances indicate that their carrying amounts might
be impaired such events and circumstances include the effects of
restructuring initiated by management
to determine whether goodwill is impaired requires an estimation of
the value in use of the cashgenerating units to which goodwill has
been allocated the value in use calculation requires management to
estimate the future cash flows expected to arise from the cash
generating unit and a suitable discount rate in order to calculate
present value the carrying amount of intangible assets at the
balance sheet date was £3562 million at 31 december 2006 the
group recognised no impairment loss in respect of these assets but
impairment losses could arise if changes are necessary to the
assumptions underlying the estimates in future cash flows of cash
generating units or if there are changes in market interest rates which
affect the discount rates applied to the cash flow
retirement benefit obligations
in assessing the group’s obligations relating to retirement
benefits management made key assumptions relating to current
and future mortality expected returns on plan assets discount rates
and inflation
melrose plc annual report 2006 47 notes to the accounts continued
48 melrose plc annual report 2006
4 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 note 5 and 6 give
details of exceptional costs and income the results for the year ended 31 december 2005 represents seven months trading in respect of the
mckechnie and dynacast businesses acquired on 26 may 2005
revenue headline operating profitloss
1
operating profitloss
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
business segments £m £m £m £m £m £m
dynacast 2217 1050 251 136 195 87
oem 1401 694 331 146 308 128
aftermarket 193 152 06 03 42 03
mvc 480 316 23 03 25 02
mpc 461 271 24 12 10 12
psm 318 216 48 04 42 101
central – – 76 29 80 50
5070 2699 561 275 492 81
1
as defined on the income statement
total assets total liabilities
year ended year ended year ended year ended
31 december 31 december 31 december 31 december
2006 2005 2006 2005
£m £m £m £m
dynacast 3089 3011 749 527
oem 2179 2186 325 384
aftermarket 72 119 18 34
mvc 357 427 121 109
mpc 247 380 115 108
psm 419 467 72 173
central 164 314 2576 2863
6527 6904 3976 4198 4 segment information continued
depreciation and computer
capital expenditure software amortisation
year ended year ended year ended year ended
31 december 31 december 31 december 31 december
2006 2005 2006 2005
business segments continued £m £m £m £m
dynacast 69 37 70 45
oem 69 10 28 17
aftermarket 01 01 01 01
mvc 33 06 18 11
mpc 12 05 17 11
psm 13 10 11 11
central – 02 01 01
197 71 146 97
revenue headline operating profit
1
operating profitloss
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
geographical area £m £m £m £m £m £m
north america 1572 1339 303 156 237 118
europe 2850 1082 167 65 164 91
asia 648 278 91 54 91 54
5070 2699 561 275 492 81
1
as defined on the income statement
total assets total liabilities
year ended year ended year ended year ended
31 december 31 december 31 december 31 december
2006 2005 2006 2005
£m £m £m £m
north america 3773 3952 625 611
europe 2099 2385 3173 3432
asia 655 567 178 155
6527 6904 3976 4198
depreciation and computer
capital expenditure software amortisation
year ended year ended year ended year ended
31 december 31 december 31 december 31 december
2006 2005 2006 2005
£m £m £m £m
north america 58 14 61 38
europe 107 42 67 50
asia 32 15 18 09
197 71 146 97
melrose plc annual report 2006 49 notes to the accounts continued
50 melrose plc annual report 2006
5 exceptional costs
year ended year ended
31 december 31 december
2006 2005
£m £m
other operating costs
dynacast restructure 37 37
psm restructure – 105
mpc restructure 22 –
listing expenses – 21
predisposal expenses 20 –
79 163
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 restructuring costs relate to the closure of the northampton manufacturing facility burnett polymer
engineering the predisposal 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 and the listing expenses related to the admission to the official list of the london
stock exchange
6 exceptional income
year ended year ended
31 december 31 december
2006 2005
£m £m
other operating income
onerous contract provision release 23 –
profit on disposal of land and buildings 07 –
30 –
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 £23 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 £07 million 7 revenues and expenses
year ended year ended
31 december 31 december
2006 2005
£m £m
net operating expenses comprise
selling and distribution costs 250 145
administration expenses 427 244
share of joint ventures’ operating profits 08 06
other operating costs 79 163
other operating income 30 –
profit on disposal of businesses 32 –
total net operating expenses 686 546
year ended year ended
31 december 31 december
2006 2005
£m £m
operating profit is stated after chargingcrediting
depreciation 142 84
amortisation of other intangible assets 52 31
amortisation of computer software 04 13
minimum lease payments recognised as an operating lease expense 34 22
impairment of property plant and equipment – 19
staff costs see below 1363 721
research and development costs 08 08
disposal of businesses note 8 32 –
the analysis of auditors’ remuneration is as follows
year ended year ended
31 december 31 december
2006 2005
£m £m
fees payable to the company’s auditors for the audit of the company’s annual accounts 04 04
fees payable to the company’s auditors and their associates for other services to the group
– the audit of the company’s subsidiaries pursuant to legislation 04 04
08 08
year ended year ended
31 december 31 december
2006 2005
£m £m
tax services 08 08
corporate finance services 11 –
other services – 35
total nonaudit fees 19 43
fees payable to deloitte and touche llp and their associates for nonaudit services to the company are not required to be disclosed because
the consolidated financial statements are required to disclose such fees on a consolidated basis
melrose plc annual report 2006 51 notes to the accounts continued
52 melrose plc annual report 2006
7 revenues and expenses continued
year ended year ended
31 december 31 december
2006 2005
£m £m
staff costs during the period including directors
wages and salaries 1218 624
social security costs 131 87
pension costs
– defined benefit plans 04 02
– defined contribution schemes 10 08
1363 721
year ended year ended
31 december 31 december
2006 2005
number number
average number of persons employed
dynacast 2268 1290
oem 1320 649
aftermarket 44 45
mvc 481 292
mpc 497 313
psm 734 438
corporate 25 16
5369 3043
the average numbers shown above are calculated on a monthly basis the number of employees at the year end was 5403 2005 5416
year ended year ended
31 december 31 december
2006 2005
£m £m
finance costs and income
bank loans and overdrafts 124 61
fair value gain on interest rate swaps transferred from equity 14 –
finance cost of pensions 14 12
interest received 02 07
total net finance costs 122 66
the finance cost of pensions is the net of the interest cost on benefit obligations of £68 million and the expected return on plan assets of
£54 million 2005 £41 million and £29 million respectively 8 disposal of businesses
on 26 may 2006 the group disposed of its interest in arger enterprises inc arger jesse industries inc jesse and mckechnie aerospace
usa inc ptmi which comprised part of the aftermarket division
on 31 march 2006 the group sold the net assets of the complex cold forming ccf business of the psm division out of mckechnie
specialist products limited
net assets at the date of disposal were as follows
arger jesse
ptmi ccf total
£m £m £m
property plant and equipment 03 03 06
inventories 15 05 20
trade receivables 11 07 18
trade payables 15 04 19
attributable goodwill 17 – 17
31 11 42
profitloss on disposal 36 04 32
total consideration 67 07 74
satisfied by
cash 67 07 74
net cash flow arising on disposal
cash consideration 67 07 74
the impact of arger jesse ptmi and ccf on the group’s results in the current and prior periods is as follows
year ended year ended
31 december 31 december
2006 2005
£m £m
revenue
arger jesse ptmi 43 60
ccf 07 18
50 78
operating loss
arger jesse ptmi 01 04
ccf 01 04
02 08
melrose plc annual report 2006 53 notes to the accounts continued
54 melrose plc annual report 2006
9 tax
analysis of creditcharge in year
year ended year ended
31 december 31 december
2006 2005
£m £m
current tax 51 30
deferred tax note 22 59 24
total income tax creditexpense 08 54
total tax charge on headline operating profit after finance costs and income 123 63
exceptional tax credits 102 –
total tax on net exceptional costs 13 –
total tax in respect of intangible asset amortisation excluding computer software 16 09
08 54
the tax for the period is lower than the standard rate of corporation tax in the uk 30 the differences are explained below
year ended year ended
31 december 31 december
2006 2005
£m £m
profit on ordinary activities before tax 370 15
tax on profit on ordinary activities at uk corporate tax rate 30 111 05
expenses not deductible for tax purposes 07 07
adjustment in respect of foreign tax rates 16 07
excess losses not utilised 16 43
deductible items not in profit and loss account 150 08
prior year tax adjustments 08 –
total tax creditcharge for the year 08 54
10 dividends
year ended year ended
31 december 31 december
2006 2005
£m £m
final dividend for the year ended 31 december 2005 paid of 30p – 77
interim dividend for the year ended 31 december 2006 paid of 225p 58 –
proposed final dividend for the year ended 31 december 2006 of 375p 96 –
the proposed final dividend is subject to approval by shareholders at the annual general meeting and has not been included as
a liability in these financial statements 11 earnings per share
year ended year ended
31 december 31 december
2006 2005
earnings £m £m
earnings for the purposes of basic earnings per share 378 39
exceptional items 17 163
intangible asset amortisation other than computer software 52 31
tax on intangible asset amortisation 16 09
tax on net exceptional costs 13 –
exceptional tax credits 102 –
earnings for headline earnings per share 316 146
number number
weighted average number of ordinary shares for the purposes of basic earnings per share million 2571 1602
further shares for the purposes of fully diluted earnings per share million 51 02
year ended year ended
31 december 31 december
2006 2005
earnings per share pence pence
basic earnings per share 147 24
fully diluted earnings per share 144 24
headline earnings per share 123 91
fully diluted headline earnings per share 120 91
where basic earnings per share are a loss the antidilutive effect of any further shares is ignored
all earnings are derived from continuing operations
12 intangible assets
other
intangible computer
goodwill assets software total
£m £m £m £m
cost
at 31 december 2005 3484 615 27 4126
additions –– 03 03
disposals 17 – 01 18
fair value adjustment 08 –– 08
exchange adjustments 381 63 02 446
at 31 december 2006 3078 552 27 3657
amortisation
at 31 december 2005 – 31 13 44
charge for the period – 52 04 56
exchange adjustments – 04 01 05
at 31 december 2006 – 79 16 95
net book value
at 31 december 2006 3078 473 11 3562
at 31 december 2005 3484 584 14 4082
other intangible assets include patented technology customer relationships and trade names
the fair value adjustment relates to the favourable settlement of a legal case provided against at acquisition
melrose plc annual report 2006 55 notes to the accounts continued
56 melrose plc annual report 2006
12 intangible assets continued
goodwill has been allocated to the business segments each of which comprises several cash generating units as follows
31 december 31 december
2006 2005
£m £m
dynacast 1578 1747
oem 1125 1283
aftermarket 10 38
mvc 161 183
mpc – –
psm 204 233
3078 3484
the group tests goodwill annually for impairment or more frequently if there are indications that goodwill might be impaired
the recoverable amounts of the cash generating units are determined from value in use calculations the key assumptions for the value in use
calculations are those regarding the discount rates growth rates and expected changes to selling prices and direct costs during the period
management estimates discount rates using pretax rates that reflect current market assessments of the time value of money and the risks
specific to the cash generating units the growth rates are based on a prudent estimate of industry growth forecasts changes in selling prices
and direct costs are based on past practices and expectations of future changes in the market
the group prepares cash flow forecasts derived from the most recent financial budgets approved by management and extrapolates cash
flows for the following nineteen years 20 years in total based on estimated growth rates of between 2 and 5 due to the loss in the
mvc division a three year plan has been agreed which has then been extended by 17 years at a 2 growth rate this rate does not exceed
the average long term growth rate for the relevant markets the discount rate applied is 12
13 property plant and equipment
land and plant and
buildings equipment total
£m £m £m
cost
at 31 december 2005 344 660 1004
additions 14 180 194
disposals 79 45 124
exchange adjustments 21 51 72
at 31 december 2006 258 744 1002
depreciation
at 31 december 2005 08 97 105
charge for the period 12 130 142
disposals 04 25 29
exchange adjustments 01 09 10
at 31 december 2006 15 193 208
net book value
at 31 december 2006 243 551 794
at 31 december 2005 336 563 899
the net carrying amount of plant and equipment includes £34 million 2005 £15 million in respect of assets held under finance leases 14 interests in joint ventures
31 december 31 december
2006 2005
£m £m
aggregated amounts relating to joint ventures
total assets 36 42
total liabilities 10 15
revenues 69 39
profit 08 06
a list of significant investments in joint ventures including the name country of incorporation and proportion of ownership interest is given in
note 3 of the melrose plc uk company gaap accounts
15 property held for resale
in the comparative period the property owned and occupied by dynacast uk limited became available for sale following the closure
of the dynacast uk manufacturing facility in 2005 the carrying value of £16 million was equal to the sale proceeds and the sale was
completed on 28 february 2006
16 inventories
31 december 31 december
2006 2005
£m £m
raw materials 141 141
work in progress 222 204
finished goods 230 215
593 560
17 trade and other receivables
31 december 31 december
2006 2005
£m £m
trade debtors 831 747
other debtors 47 74
prepayments 29 42
907 863
trade receivables are noninterest bearing and are generally on credit terms usual for the businesses and territories in which the group
operates an allowance has been made for estimated irrecoverable amounts from the sale of goods of £26 million this allowance has been
determined by reference to past default experience
18 cash and short term deposits
31 december 31 december
2006 2005
£m £m
cash at bank and in hand 333 152
cash at bank and in hand earns interest at floating rates based on daily bank deposit rates short term deposits are made for varying periods
of between one day and one month and earn interest at the respective short term deposit rates
at 31 december 2006 the group had available £187 million 2005 £218 million of undrawn committed borrowing facilities
melrose plc annual report 2006 57 notes to the accounts continued
58 melrose plc annual report 2006
19 trade and other payables
31 december 31 december
2006 2005
£m £m
trade payables 614 591
other payables 115 102
interest payable 45 16
other taxes and social security 27 21
accruals 247 211
1048 941
trade payables are noninterest bearing normal settlement terms vary by country usually being between 30 and 90 days other payables are
noninterest bearing and have an average term of approximately two months
20 interestbearing loans and borrowings
31 december 31 december
2006 2005
effective interest rate  final maturity £m £m
current
finance leases – 2007 10 04
loan notes libor minus 1 december 2005 – 05
bank loans libor plus 1 on demand – 30
10 39
non current bank loans
denominated in the following currencies
us dollar loan 627 april 2010 1118 1275
euro loan 407 april 2010 586 598
sterling loan 571 april 2010 200 200
euro loan austria 100 july 2011 17 17
1921 2090
finance leases 20082011 28 10
1949 2100
the interest rate swap detailed in note 25 reduces the interest rate on the us dollar loan to 484
the interest rate repricing profile of financial liabilities after taking into account hedging interest rate derivatives is described in note 25
the bank loans are repayable
percentage of percentage of
bank loan bank loan
repayable repayable
31 december 31 december
2006 2005
during 2008 150 150
during 2009 175 175
during 2010 675 675
1000 1000
the austrian loan is repayable in equal six monthly instalments between 2 january 2008 and 1 july 2011 the rate of interest increases to
15 on 1 january 2008 the loan is secured on the assets of the austrian subsidiary 21 provisions
surplus
leasehold environmental incentive
onerous property remediation factory scheme
contracts costs costs closure related other total
£m £m £m £m £m £m £m
at 31 december 2005 62 29 38 62 – 36 227
utilised 09 03 – 92 – 08 112
income statement 23 –– 44 15 – 36
foreign exchange 01 – 04 01 – 04 10
at 31 december 2006 29 26 34 13 15 24 141
current 29
noncurrent 112
141
the provision for onerous contracts relates to the losses arising from a long term supply arrangement and to a property lease
the provision for surplus leasehold property costs is the estimated net rentals payable over the period of the leases together with any dilapidation
costs discounted at 6 2005 5 the impact of the change of discount rate resulted in a £01 million credit to the income statement
environmental remediation provisions relate to the estimated clean up costs of pollution groundwater contamination and legal costs at
certain subsidiaries
factory closure costs at 31 december 2006 relate mainly to the closure of the dynacast operations at spartanburg in the usa
included in incentive scheme related provisions is £03 million relating to long term incentive plans and £12 million relating to national
insurance on incentive shares
other provisions relate mainly to the buy out of agency agreements estimated legal costs arising from claims for which no other liability is
expected to crystallise
22 deferred tax
the following are the major deferred tax liabilities and assets recognised by the group and movements thereon during the current and prior
reporting period
accelerated post
capital retirement
allowances  tax losses  benefit intangible
other liabilities other assets obligations assets total
£m £m £m £m £m
at 1 january 2005 –– –––
acquisition of subsidiaries 43 302 19 176 102
chargecredit to equity 13 44 02 09 24
exchange differences 02 16 –– 14
at 31 december 2005 32 274 17 167 92
chargecredit to income note 9 01 48 06 16 59
credit to equity 17 –– – 17
exchange differences 04 35 – 09 22
at 31 december 2006 44 287 11 142 112
melrose plc annual report 2006 59 notes to the accounts continued
60 melrose plc annual report 2006
22 deferred tax continued
certain deferred tax assets and liabilities have been offset the following is the analysis of the deferred tax balances after offset for financial
reporting purposes
2006 2005
£m £m
deferred tax liabilities 186 199
deferred tax assets 298 291
112 92
at the balance sheet date the group has unused tax losses of £204 million 2005 £183 million available for offset against future profits
a deferred tax asset has been recognised in respect of £58 million 2005 £29 million of such losses no deferred tax asset has been
recognised in respect of the remaining £146 million 2005 £1539 million due to the unpredictability of future profit streams these losses
may be carried forward indefinitely subject to certain continuity of business requirements
a significant part of the retirement benefit obligations recognised in the group accounts relates to the mckechnie pension plan
no deferred tax asset has been recognised on this obligation due to the unpredictability of future profit streams in the united kingdom
at the balance sheet date the aggregate amount of temporary differences associated with undistributed earnings of subsidiaries for which
deferred tax liabilities have not been recognised was £15 million 2005 £06 million no liability has been recognised in respect of these
differences because the group is in a position to control the timing of the reversal of the temporary differences and it is probable that such
differences will not reverse in the foreseeable future
temporary differences arising in connection with interests in associates and joint ventures are insignificant
23 share based payments
equitysettled share option scheme
the company has 59170 convertible b shares held by directors employees and the melrose employee benefit trust  of these shares 50000
were issued to directors and employees in 2003 and a further 9170 shares were issued to the employee benefit trust in 2005
during the year options were granted over 8877 of the 9170 shares to directors and senior employees 23 share based payments continued
equitysettled share option scheme continued
details of the options are as follows
2006 2005
weighted weighted
number of average number of average
share options exercise price share options exercise price
outstanding at beginning of period –– ––
granted during the year 8877 £100 ––
outstanding at the end of the year 8877 £100 ––
exercisable at the end of the year –– ––
the inputs into the black scholes model are as follows
2006 2005
weighted average share price £153 –
weighted average exercise price £1 –
expected volatility 250 –
expected life 24yrs –
risk free interest 2 –
expected dividend yield 32 –
expected volatility was determined by calculating the historical volatility of the group’s share price over the previous eighteen months
the expected life has been adjusted based on management’s best estimate for the effects of nontransferability exercise restrictions and
behavioural considerations
the group recognised total expenses of £04 million 2005 £nil in relation to equitysettled share based payment transactions in 2006
24 retirement benefit obligations
prior to the acquisition mckechnie and dynacast had established a number of pension schemes covering many of its employees and operating
in several jurisdictions
the most significant schemes are
▪
the mckechnie pension plan the “plan” which provides defined benefit pensions for its members the assets of the plan are held in
a fund administered by mckechnie pension trust limited an independent trustee company an actuarial valuation of the plan was carried
out at 31 december 2005 by a qualified independent actuary plan assets are stated at their bid value at 31 december 2006
▪
the dynacast and mvc pension schemes in the us are closed funded schemes of a defined benefit type with assets held in separate
trustee administered funds
▪
in germany and austria unfunded defined benefit arrangements are operated by dynacast
▪
there are also obligations to provide post retirement healthcare to former employees of mvc and to provide termination indemnities in
italy france mexico and korea to former dynacast employees
melrose plc annual report 2006 61 notes to the accounts continued
62 melrose plc annual report 2006
24 retirement benefit obligations continued
the major weighted average assumptions used by the actuaries in calculating the group’s pension scheme assets and liabilities together with
details of the net pension assets or liabilities are is set out below
mckechnie
pension plan other schemes
 pa  pa
rate of increase in salaries 34 27
rate of increase in pensions in payment 29 17
discount rate 51 53
inflation assumption 29 23
the weighted average assumptions used at 31 december 2005 are set out below
mckechnie
pension plan other schemes
 pa  pa
rate of increase in salaries 33 30
rate of increase in pensions in payment 27 15
discount rate 48 49
inflation assumption 28 21
mortality
the mortality assumption for the uk mckechnie pension plan has been strengthened over the year the assumption adopted is now
equivalent to moving halfway from the pa92 based tables to the pa92 medium cohort tables this is considered appropriate given the plan’s
geographical and industrial sector
the average life expectancy underlying the value of defined benefit obligations at 31 december 2006 which have been determined by
reference to applicable mortality statistics is set out below
2006 male 2005 male
life expectancy years years
member currently aged 65 836 828
member aged 65 in 2020 851 844
the amount recognised in the balance sheet arising from obligation in respect of defined benefit schemes is as follows
2006 2005 2004 2003
£m £m £m £m
plan obligations 1479 1455 ––
plan assets 925 850 ––
net liabilities 554 605 –– 24 retirement benefit obligations continued
this amount is presented in the consolidated balance sheet
2006 2005 2004 2003
£m £m £m £m
noncurrent liabilities
– unfunded plans 109 87 ––
– funded plans 445 518 ––
554 605 ––
expected returns and fair value of assets
expected return fair value of assets
31 december 31 december 31 december 31 december
2006 2005 2006 2005
  £m £m
equity instruments 74 71 681 614
debt instruments 49 46 127 123
other assets 44 41 117 113
weighted averagetotal 67 63 925 850
the expected return on plan assets for 2007 is based on market expectations at 1 january 2007 for returns on assets over the entire life
of the obligation
there is no self investment other than in tracker funds either in the group’s own financial instruments or property or other assets used
by the group
amounts recognised in income in respect of these defined benefit schemes are as follows
2006 2005
£m £m
in arriving at operating profit included with cost of sales selling and
distribution costs and administrative expenses 04 06
– current service cost 04 06
– past service cost – –
– effects of curtailments and settlements – –
included in finance costs 14 12
– interest cost 68 41
– expected return on assets 54 29
the actual return on scheme assets was £7 million 2005 £106 million
the amount recognised in the consolidated statement of recognised income and expense is as follows
2006 2005
£m £m
experience losses on scheme liabilities 05 55
experience gains on scheme assets 17 77
12 22
the cumulative amount of actuarial gains and losses recognised in the consolidated statement of recognised income and expense is a
cumulative gain of £34 million 2005 £22 million
melrose plc annual report 2006 63 notes to the accounts continued
64 melrose plc annual report 2006
24 retirement benefit obligations continued
movements in the benefit liabilities during the period
2006 2005
£m £m
at beginning of period 1455 –
acquisition – 1363
current service cost 04 06
interest cost 68 41
actuarial losses 05 55
benefits paid 43 18
currency gainloss 10 08
at end of period 1479 1455
movements in the fair value of scheme assets during the period
2006 2005
£m £m
at beginning of period 850 –
acquisition – 699
expected return on assets 54 29
actuarial gains 17 77
employer contributions 50 58
benefits paid 40 18
currency lossgain 06 05
at end of period 925 850
mckechnie has agreed a schedule of contributions of £5 million per annum with the trustee of the mckechnie pension plan up until
26 may 2015 these contributions have been guaranteed by melrose plc until 5 april 2010
25 derivative financial instruments
credit risk
the group’s principal financial assets are cash and short term deposits and trade and other receivables which represent the group’s
maximum exposure to credit risk in relation to financial assets
the group’s credit risk is primarily attributable to its trade receivables the amounts presented in the balance sheet are net of allowances for
doubtful receivables estimated by the group’s management based on prior experience and their assessment of the current economic
environment
the group has no significant concentration of credit risk with exposure spread over a large number of counterparties and customers
fair values
the directors consider that the financial assets and liabilities have fair values not materially different to the carrying values 25 derivative financial instruments continued
foreign exchange contracts
as at 31 december 2006 the group held foreign exchange forward contracts to mitigate expected exchange fluctuations on future sales to
customers and future purchases from suppliers the terms of the contracts are as follows
amount sold average
millions rate
sell us dollarbuy canadian dollar usd 167 11316
sell us dollarbuy chinese yuan renminbi usd 148 76421
sell us dollarbuy singapore dollar usd 139 15668
sell us dollarbuy malaysian dollar usd 785 35846
sell eurobuy sterling €153 14690
the foreign exchange contracts all mature between january 2007 and december 2007
the fair value of the contracts at 31 december 2006 was £03 million 2005 nil
hedge of net investments in foreign entities
included in interest bearing loans were the following amounts which have been designated as hedges of net investments in the group’s
subsidiaries in europe and usa and are being used to reduce the exposure to foreign exchange risk
borrowings in local currency
31 december 31 december
2006 2005
£m £m
us dollar us  1118 1275
euro € 586 598
gains on the retranslation of these borrowings of £169 million 2005 losses of £73 million have been transferred to equity to offset any
gains or losses on translation of the net investments in subsidiaries
interest rate swapscaps
the group uses interest rate swaps to manage its exposure to interest rate movements on its us dollar bank borrowings by swapping from
floating to fixed interest rates two contracts with total nominal values of us 2193 million £1118 million and fair value of £08 million have
fixed interest rates at an average rate of 409 for periods up to july 2007
the group also uses interest rate caps to manage its interest rate profile two caps with a notional principal amount of £20 million cap level
of 5 and fair value of £43000 were held at 31 december 2006 to hedge exposure on the group’s sterling borrowings up to july 2007
two caps with a total notional principal amount of€873 million £586 million cap level of 3 and fair value of £03 million were held at
31 december 2006 to hedge exposure on the group’s euro borrowings up to july 2007
all swaps and caps have been designated as cash flow hedges
melrose plc annual report 2006 65 notes to the accounts continued
66 melrose plc annual report 2006
25 derivative financial instruments continued
foreign currency risk
the group’s proposed policy for managing foreign currency risk is set out in the financial review
31 december 31 december
2006 2005
fair value assets £m £m
foreign exchange contracts 03 –
interest rate swaps 08 12
interest rate caps 03 02
14 14
26 issued capital and reserves
31 december 31 december
2006 2005
share capital £m £m
authorised
342830000 2005 342830000 ordinary shares of 01p 03 03
59170 2005 59170 convertible b shares of £1 each 01 01
04 04
allotted called up and fully paid
257119989 2005 257119989 ordinary shares of 01p 02 02
59170 2005 59170 convertible b shares of £1 each 01 01
03 03
own shares
the trustee of the melrose plc employee benefit trust holds 9170 convertible b shares in melrose plc options over 8877 convertible b
shares were granted during the year the trust has had no other transactions in the shares of melrose plc
hedging and
share merger translation accumulated minority
premium reserve reserve profitslosses interests
reserves £m £m £m £m £m
at 31 december 2004 128 –– 44 –
currency translation adjustments –– 189 ––
profit for the period –– – 39 –
actuarial adjustments on pension liabilities –– – 22 –
acquired in the period –– –– 09
premium arising on issue of 243999989 ordinary shares – 2438 –– –
at 31 december 2005 as previously reported 128 2438 189 61 09
transfer 2018 2018 –– –
at 31 december 2005 reclassified 2146 420 189 61 09
dividend paid –– – 135 –
currency translation adjustments –– 414 ––
profit for the period –– – 377 01
actuarial adjustments on pension liabilities –– – 12 –
credit to equity for equitysettled share based payments –– – 04 –
at 31 december 2006 2146 420 225 197 10
the reclassification arises with the merger relief provision of the companies act 1985 to account for acquisitions involving the issue of shares
at a premium a net total of £42 million has been retained in the merger reserve which reflects the premium on shares issued directly as
consideration for the acquisitions of dynacast and mckechnie in may 2005 26 issued capital and reserves continued
the foreign currency translation reserve is used to record exchange differences arising from the translation of the financial statements of
foreign subsidiaries it is also used to record the net investments hedged in these subsidiaries
hedging translation
reserve reserve total
hedging and translation reserves £m £m £m
balance at 31 december 2004 –– –
exchange differences on translation of overseas operations – 175 175
increase in fair value of hedging derivatives 15 – 15
transfer to income 01 – 01
balance at 31 december 2005 14 175 189
exchange differences on translation of overseas operations – 414 414
increase in fair value of hedging derivatives 14 – 14
transfer to income 14 – 14
balance at 31 december 2006 14 239 225
27 cash flow statement
2006 2005
£m £m
headline operating profit
1
561 275
adjustments for
depreciation of property plant and equipment 142 84
amortisation of computer software 04 13
abortive acquisition expenses paid – 34
restructuring costs paid and decrease in other provisions 113 61
profit of joint ventures 08 06
operating cash flows before movements in working capital 586 271
increase in inventories 94 70
increasedecrease in receivables 113 03
increase in payables 123 12
cash generated by operations 502 216
tax paid 40 48
interest paid 75 45
pension contributions paid 54 52
net cash flow from operating activities 333 71
1
as defined on the income statement
at foreign at
31 december exchange finance 31 december
2005 cash flow difference leases 2006
net debt reconciliation £m £m £m £m £m
cash 152 187 06 – 333
debt due within one year 35 35 –– –
debt due after one year 2090 – 169 – 1921
finance leases 14 06 – 30 38
1987 228 163 30 1626
melrose plc annual report 2006 67 notes to the accounts continued
68 melrose plc annual report 2006
28 commitments and contingencies
future minimum lease payments under finance leases and hire purchase contracts were as follows
31 december 31 december
2006 2005
£m £m
amounts payable
within one year 11 04
after one year but within five years 31 11
more than five years – –
total minimum lease payments 42 15
less amounts representing finance charges 04 01
38 14
future minimum rentals payable under noncancellable operating leases as at 31 december 2006 were as follows
31 december 2006 31 december 2005
land and plant and land and plant and
buildings machinery buildings machinery
£m £m £m £m
amounts payable
within one year 23 08 30 07
after one year but within five years 90 20 117 12
more than five years 78 02 57 –
191 30 204 19
capital commitments
at 31 december 2006 there were commitments of £81 million 2005 £15 million relating to the acquisition of new plant and machinery
29 related parties
transactions between the company and its subsidiaries which are related parties have been eliminated on consolidation and are not
disclosed in this note
during the period the group entered into transactions in the ordinary course of business with related parties as follows
sales of purchase of amounts owed
goods goods by related parties
£m £m £m
joint ventures at
31 december 2006 64 – 10
31 december 2005 41 03 14
sales to and purchases from related parties are priced as arm’s length transactions and generally are settled on 30 day terms 29 related parties continued
remuneration of key management personnel
the remuneration of the directors who are the key management personnel of the group is set out below in aggregate for each of the
categories specified in ias 24 related party disclosures further information about the remuneration of individual directors is provided in the
audited part of the directors’ remuneration report on pages 32 to 35
31 december 31 december
2006 2005
£m £m
short term employee benefits 19 12
post employment benefits – –
other long term benefits – –
termination benefits – –
share based payment 04 –
23 12
30 post balance sheet events
there are no post balance sheet events
31 contingent liabilities
prior to the acquisition of the dynacast and mckechnie businesses there were a number of legal and environmental claims outstanding
whilst it is difficult to reasonably estimate the ultimate outcome of these claims the directors’ best estimate of the outcome of these claims
has been included in the balance sheet
melrose plc annual report 2006 69 independent auditors’ report
70 melrose plc annual report 2006
independent auditors’ report to the members of
melrose plc on the parent company financial
statements
we have audited the parent company financial statements of
melrose plc for the year ended 31 december 2006 which
comprise the balance sheet and the related notes 1 to 15 these
parent company financial statements have been prepared under
the accounting policies set out therein
we have reported separately on the consolidated financial
statements of melrose plc for the year ended 31 december 2006
and on the information in the directors’ remuneration report that is
described as having been audited
this report is made solely to the company’s members as a
body in accordance with section 235 of the companies act 1985
our audit work has been undertaken so that we might state to the
company’s members those matters we are required to state to
them in an auditors’ report and for no other purpose to the fullest
extent permitted by law we do not accept or assume responsibility
to anyone other than the company and the company’s members
as a body for our audit work for this report or for the opinions we
have formed
respective responsibilities of directors and auditors
the directors’ responsibilities for preparing the annual report the
directors’ remuneration report and the parent company financial
statements in accordance with applicable law and united kingdom
accounting standards united kingdom generally accepted
accounting practice are set out in the statement of directors’
responsibilities
our responsibility is to audit the parent company financial statements
in accordance with relevant legal and regulatory requirements and
international standards on auditing uk and ireland
we report to you our opinion as to whether the parent company
financial statements give a true and fair view and whether the
parent company financial statements have been properly prepared
in accordance with the companies act 1985 we also report to you
whether in our opinion the directors’ report is consistent with the
parent company financial statements
in addition we report to you if in our opinion the company has
not kept proper accounting records if we have not received all the
information and explanations we require for our audit or if
information specified by law regarding directors’ remuneration and
other transactions is not disclosed
we read the other information contained in the annual report as
described in the contents section and consider whether it is
consistent with the audited parent company financial statements
the other information comprises only the directors’ report the
chairman’s statement and the chief executive’s review business
review and finance director’s review we consider the implications
for our report if we become aware of any apparent misstatements
or material inconsistencies with the parent company financial
statements our responsibilities do not extend to any further
information outside the annual report
basis of audit opinion
we conducted our audit in accordance with international standards
on auditing uk and ireland issued by the auditing practices
board an audit includes examination on a test basis of evidence
relevant to the amounts and disclosures in the parent company
financial statements it also includes an assessment of the
significant estimates and judgments made by the directors in the
preparation of the parent company financial statements and of
whether the accounting policies are appropriate to the company’s
circumstances consistently applied and adequately disclosed
we planned and performed our audit so as to obtain all the
information and explanations which we considered necessary in
order to provide us with sufficient evidence to give reasonable
assurance that the parent company financial statements are free
from material misstatement whether caused by fraud or other
irregularity or error in forming our opinion we also evaluated the
overall adequacy of the presentation of information in the parent
company financial statements
opinion
in our opinion
▪
the parent company financial statements give a true and fair
view in accordance with united kingdom generally accepted
accounting practice of the state of the company’s affairs as at
31 december 2006
▪
the parent company financial statements have been properly
prepared in accordance with the companies act 1985 and
▪
the information given in the directors’ report is consistent with
the parent company financial statements
deloitte  touche llp
chartered accountants and registered auditors
london united kingdom
7 march 2007 company balance sheet for melrose plc
31 december 31 december
2006 2005
notes £m £m
fixed assets
investment in subsidiaries 3 3325 2370
fixtures and fittings – 01
3325 2371
non current assets
derivative financial instruments 4 11 14
current assets
debtors 4 3086 4032
cash at bank and in hand 09 01
3095 4033
creditors amounts falling due within one year
bank overdrafts 6 94 30
other creditors 5 1696 1619
1790 1649
net current assets 1305 2384
total assets less current liabilities 4641 4769
creditors amounts falling due after more than one year
bank loans 5 1904 2073
provision for liabilities and charges 7 15 –
net assets 2722 2696
capital and reserves
issued share capital 8 03 03
share premium account 9 2146 2146
merger reserve 10 420 420
profit and loss account 11 142 113
hedging reserve 12 11 14
shareholders’ funds 13 2722 2696
the financial statements were approved by the board of directors on 7 march 2007 and were signed on its behalf by
geoffrey martin simon peckham
group finance director chief operating officer
melrose plc annual report 2006 71 notes to the company balance sheet
72 melrose plc annual report 2006
1 significant accounting policies
basis of accounting
the separate financial statements of the company are presented as
required by the companies act 1985 they have been prepared
under the historical cost convention and in accordance with
applicable united kingdom generally accepted accounting practice
uk gaap and law
the principal accounting policies are summarised below they have all
been applied consistently throughout the year and the preceding year
investments
fixed asset investments in subsidiaries and associates are shown at
cost less provision for impairment
for investments in subsidiaries acquired for consideration including
the issue of shares qualifying for merger relief cost is measured by
reference to the nominal value only of the shares issued any
premium is ignored
borrowing costs
all borrowing costs are recognised as interest payable in the income
statement in the period in which they are incurred
issue costs of loans
the finance cost recognised in the income statement in respect of
capital instruments is allocated to periods over the terms of the
instrument at a constant rate on the carrying amount
property plant and equipment
property plant and equipment are stated at cost less accumulated
depreciation and any impairment in value the initial cost of an asset
comprises its purchase price or construction cost and any costs
directly attributable to bring the asset into operation the purchase
price or construction cost is the aggregate amount paid and the fair
value of any other consideration given to acquire the asset the
capitalised value of a finance lease is also included within property
plant and equipment
depreciation is calculated on a straightline basis over the estimated
useful life of the asset as follows
freehold land nil
freehold buildings and long over expected economic life
leasehold property not exceeding 50 years
short leasehold property over the term of the lease
plant and other equipment 312 years
the estimated useful lives of property plant and equipment are
reviewed on an annual basis and if necessary changes in useful lives
are accounted for prospectively
the carrying values of property plant and equipment are reviewed
for impairment when events or changes in circumstances indicate the
carrying value may not be recoverable if any such indication exists
and where the carrying values exceed the estimated recoverable
amount the assets or cashgenerating units are written down to their
recoverable amount the recoverable amount of property plant and
equipment is the greater of net selling price and value in use in
assessing value in use the estimated future cash flows are discounted
to their present value using a pretax discount rate that reflects current
market assessments of the time value of money and the risks specific
to the asset for an asset that does not generate largely independent
cash inflows the recoverable amount is determined for the cash
generating unit to which the asset belongs
an item of property plant and equipment is derecognised upon
disposal or when no future economic benefits are expected to arise
from the continued use of the asset any gain or loss arising on
derecognition of the asset calculated as the difference between the
net disposal proceeds and the carrying amount of the item is included
in the income statement in the year the item is derecognised
cash and cash equivalents
cash and shortterm deposits in the balance sheet comprise cash
in hand and current balances with banks and similar institutions and
shortterm deposits with an original maturity of three months or less
which are subject to insignificant risks of changes in value
derivative financial instruments and hedging
derivative financial instruments are initially recognised in the balance
sheet at cost and subsequently remeasured to their fair value the
method of recognising the resulting gain or loss is dependent on
whether the derivative contract is designed to hedge a specific risk
and qualifies for hedge accounting on the date a derivative contract
is entered into the group designates derivatives which qualify as
hedges for accounting purposes as either a a hedge of the fair value
of a recognised asset or liability fair value hedge or b a hedge of a
forecast transaction or firm commitment cash flow hedge or c a
hedge of a net investment in a foreign entity
changes in the fair value of derivatives which are fair value hedges
and that are highly effective are recognised in the income statement
along with any changes in the fair value of the hedged asset or
liability that is attributable to the hedged risk changes in the fair
value of derivatives in cash flow hedges are recognised in equity
where the forecasted transaction or firm commitment results in the
recognition of an asset or liability the gains and losses previously
included in equity are included in the initial measurement of the
asset or liability otherwise amounts recorded in equity are
transferred to the income statement and classified as revenue or
expense in the same period in which the forecasted transaction
affects the income statement hedges of net investments in foreign entities are accounted
for similarly to cash flow hedges the group hedges certain
net investments in foreign entities with foreign currency
borrowings all foreign exchange gains or losses arising on
translation are recognised in equity and included in cumulative
translation differences
certain derivative instruments while providing effective economic
hedges under the group’s policies do not qualify for hedge
accounting changes in the fair value of any derivative instruments
that do not qualify for cash flow hedge accounting are recognised
immediately in the income statement
interestbearing loans and borrowings
all loans and borrowings are initially recognised at cost being the fair
value of the consideration received net of issue costs associated with
the borrowings
after initial recognition interestbearing loans and borrowings are
subsequently measured at amortised cost using the effective interest
method amortised cost is calculated by taking into account any issue
costs and any discount or premium on settlement
gains and losses are recognised in net profit or loss when the
liabilities are derecognised or impaired as well as through the
amortisation process
sharebased payments
the group has applied the requirements of ifrs 2 sharebased
payments the group issues equitysettled sharebased payments
to certain employees equitysettled sharebased payments are
measured at fair value at the date of grant the fair value determined
at the grant date of the equitysettled sharebased payments is
expensed on a straightline basis over the vesting period based on
the group’s estimate of shares that will eventually vest and adjusted
for the effect of nonmarket based vesting conditions
fair value is measured by use of the black scholes model the
expected life used in the model has been adjusted based on
management’s best estimate for the effects of nontransferability
exercise restrictions and behavioural considerations
2 profit for the year
as permitted by section 230 of the companies act 1985 the
company has elected not to present its own profit and loss account
for the year melrose plc reported a profit for the financial year
ended 31 december 2006 of £160 million 2005 £157 million
the auditors’ remuneration for audit services to the company was
£04 million 2005 £04 million
staff costs charged to operating profit comprise
31 december 31 december
2006 2005
£m £m
wages and salaries 27 13
social security costs 02 01
other pension costs 01 01
30 15
the pension costs relate to payments made by the company to
individual employees’ personal pension arrangements
melrose plc annual report 2006 73 notes to the company balance sheet continued
74 melrose plc annual report 2006
3 fixed asset investments
31 december 31 december
2006 2005
£m £m
subsidiaries 3325 2370
associates – –
3325 2370
the company has investments in the following subsidiaries and associates which principally affected the profits or net assets of the group
the following subsidiaries are directly owned by melrose plc
country of holding
subsidiaries incorporation principal activity 
dynacast canada uk limited england and wales hedging company 100
dynacast holdings limited england and wales holding company 100
dynacast international limited england and wales holding company 100
melrose management resources limited england and wales provision of management services 100
melrose overseas holdings limited england and wales holding company 100
melrose uk holdings limited england and wales holding company 100
melrose uk1 limited england and wales holding company 100
melrose uk2 limited england and wales holding company 100
melrose uk3 limited england and wales holding company 100
mozart jersey holdings 1 limited jersey holding company 100
mozart jersey holdings 2 limited jersey holding company 100
 acquired during the year from other group companies
other indirectly owned subsidiaries and joint ventures of the group are
country of functional  equity
incorporation currency interest
aero quality sales limited england and wales sterling 100
dynacast melaka sdn bhd malaysia ringgit 100
dynacast singapore pte limited singapore sg  100
dynacast uk limited england and wales sterling 100
dynacast beteiligungs gmbh germany euro 100
dynacast canada inc canada canadian  100
dynacast deutschland gmbh and co kg germany euro 100
dynacast españa sa spain euro 100
dynacast france sa france euro 100
dynacast holdings france sas france euro 100
dynacast inc usa us  100
dynacast investments limited england and wales sterling 100
dynacast italia srl italy euro 100
dynacast korea limited korea korean won 90
dynacast loz doo slovenia euro 100
dynacast österreich gmbh austria euro 100
dynacast taiwan limited taiwan nt  100
dynacast teknik dokum sanayi limited turkey us  100
dynacast us holdings inc usa us  100
dynacast verwaltung gmbh germany euro 100
fijaciones industriales psm sa spain euro 100
hartwell corporation usa us  100
japan psm company limited japan yen 50
linread limited trading as linread northbridge england and wales sterling 100 3 fixed asset investments continued
country of functional  equity
incorporation currency interest
mckechnie aerospace aftermarket asia limited hong kong us  51
mckechnie aerospace holdings limited england and wales sterling 100
mckechnie engineered plastics limited trading as mckechnie plastic components england and wales sterling 100
mckechnie ep holdings limited england and wales sterling 100
mckechnie holdings uk limited england and wales sterling 100
mckechnie investments inc usa us  100
mckechnie investments usa limited england and wales sterling 100
mckechnie management services limited england and wales sterling 100
mckechnie specialist products limited trading as canning brett and threadlocking and sealing england and wales sterling 100
mckechnie vehicle components usa inc usa us  100
melrose beteiligungs und verwaltungs gmbh austria euro 100
melrose singapore 1 pte ltd singapore sg  100
melrose singapore 2 pte ltd singapore sg  100
melrose singapore holdings pte ltd singapore sg  100
melrose spain sl spain euro 100
melrose uk holdings limited england and wales sterling 100
melrose uk 1a limited england and wales sterling 100
melrose uk 2a limited england and wales sterling 100
melrose uk 3a limited england and wales sterling 100
melrose us 1 llc usa us  100
melrose us 2 llc usa us  100
melrose us 3 llc usa us  100
new dynacast de mexico sa de cv mexico us  100
petcin france sa france euro 100
psm celada fasteners srl italy euro 50
psm fasteners ab sweden sek 50
psm fasteners asia ltd taiwan nt  100
psm fasteners pty limited australia australian  50
psm fasteners singapore pte co ltd singapore sg  100
psm fasteners wuxi ltd china rmb 100
psm fastener corporation usa us  100
psm fasteners international bv holland euro 100
psm fixation sa france euro 100
psm international limited england and wales sterling 100
psm international sro czech republic koruna 100
psm threadlocking and sealing gmbh germany euro 100
shanghai dynacast automotive casting co ltd china rmb 100
shanghai dynacast electronic components ltd china rmb 100
sundaram dynacast limited india rupee 49
technical airborne components industries sprl belgium euro 100
valley todeco inc usa us  100
western sky industries llc trading as tyee electromech welco and aero quality sales usa us  100
subsidiaries £m
cost and net book value
at 31 december 2005 2370
additions 1065
disposals 110
at 31 december 2006 3325
the additions and disposals relate to group reorganisations in the year sales to and from fellow group companies
melrose plc annual report 2006 75 notes to the company balance sheet continued
76 melrose plc annual report 2006
4 debtors
31 december 31 december
2006 2005
£m £m
amounts falling due after one year
derivative financial instruments 11 14
details of the interest rate swaps and caps on which this amount arises are given in note 25 of the group financial statements
amounts falling due within one year
amounts owed by group undertakings 3084 4026
vat recoverable – 05
prepayments 02 01
3086 4032
5 trade and other creditors
31 december 31 december
2006 2005
£m £m
amounts falling due within one year
amounts owed to group undertakings 1642 1561
accruals 54 58
1696 1619
amounts falling due after one year
bank loans and overdrafts 1904 2073
1904 2073
6 bank loans
31 december
final 2006
effective interest rate  maturity £m
current
overdrafts libor plus 1 on demand 94
noncurrent bank loans
denominated in the following currencies
us dollar loan 627 april 2010 1118
euro loan 407 april 2010 586
sterling loan 571 april 2010 200
1904
the bank loans are repayable
percentage of
bank loan repayable
during 2008 150
during 2009 175
during 2010 675
1000 7 provisions for liabilities and charges
incentive
scheme related
£m
at 31 december 2005 –
utilised –
profit and loss account 15
at 31 december 2006 15
included in incentive scheme related provisions is £03 million relating to long term incentive plans and £12 million relating to national
insurance on incentive schemes
8 calledup share capital
31 december 31 december
2006 2005
£m £m
authorised
342830000 2005 342830000 ordinary shares of 01p each 03 03
59170 2005 59170 convertible b shares of £1 each 01 01
04 04
issued and fully paid
257119989 2005 257119989 ordinary shares of 01p each 02 02
59170 2005 59170 convertible b shares of £1 each 01 01
03 03
the convertible b shares are nonvoting and not entitled to any dividends under these arrangements the directors and employees hold
convertible b shares incentive shares which convert shortly after 31 may 2009 or if earlier on a takeover of the company into ordinary
shares with an aggregate value on conversion equal to 10 of the increase in shareholder value the number of ordinary shares arising on
conversion will be determined by reference to the average market price of an ordinary share for forty business days prior to conversion or the
takeover offer price as the case may be
the increase in shareholder value is calculated as the difference between the market capitalisation of the company at conversion
determined by reference to the average market price of an ordinary share for forty business days prior to conversion or the offer price
as the case may be and the net invested capital in the company being the aggregate of the amounts paid on the ordinary shares up to
conversion less all amounts paid by the company by way of dividends or other distributions in respect of those shares where each such
amounts shall be adjusted in line with the movement in the rpi plus 2 per annum
own shares
the melrose plc employees’ benefit trust holds 9170 convertible b shares in melrose plc options over 8877 convertible b shares were granted
during the year the trust has had no other transactions in the shares of melrose plc
9 share premium account
£m
at 31 december 2005 as previously reported 128
transfer 2018
at 31 december 2005 reclassified and at 31 december 2006 2146
melrose plc annual report 2006 77 notes to the company balance sheet continued
78 melrose plc annual report 2006
10 merger reserve
£m
at 31 december 2005 as previously reported 2438
transfer 2018
at 31 december 2005 reclassified and at 31 december 2006 420
the reclassification arises with the merger relief provision of the companies act 1985 to account for acquisitions involving the issue of shares
at a premium a net total of £42 million has been retained in the merger reserve which reflects the premium on shares issued directly as
consideration for the acquisitions of dynacast and mckechnie in may 2005
11 profit and loss account
£m
at 31 december 2004 44
dividends paid –
profit for the financial year 157
at 31 december 2005 113
dividends paid 135
profit for the financial year 160
credit to equity for equity settled share based payments 04
at 31 december 2006 142
12 hedging reserve
£m
at 31 december 2005 14
increase in fair value of hedging derivatives 11
transfer to income 14
at 31 december 2006 11
13 reconciliation of movements in equity shareholders’ funds
£m
at 31 december 2004 85
dividends paid –
profit for the financial year 157
increase in share capital 2440
increase in hedging reserve 14
at 31 december 2005 2696
dividends paid 135
profit for the financial year 160
increase in share capital –
decrease in hedging reserve 03
credit to equity for equity settled share based payments 04
at 31 december 2006 2722 14 operating lease commitments
at the balance sheet date the company had outstanding commitments for future lease payments under noncancellable operating leases
which fall due as follows
2006 2005
£m £m
within one year 01 03
in the second to fifth years inclusive – 01
after five years – –
15 related party transactions
transactions with key management personnel are shown in note 29 of the group financial statements
melrose plc annual report 2006 79 80 melrose plc annual report 2006
company and shareholder information
as at 31 december 2006 there were 536 holders of ordinary shares in the company their shareholdings are analysed as follows
percentage of
number of total number number of percentage of
size of shareholding shareholders of shareholders ordinary shares ordinary shares
15000 181 3377 411107 016
500150000 163 3041 2617486 102
50001100000 35 653 2490918 097
100001500000 75 1399 20487178 797
over 500000 82 1530 231113300 8988
total 536 1000 257119989 1000
financial calendar 2007
exdividend date for final dividend 18 april 2007
record date for final dividend 20 april 2007
annual general meeting 14 may 2007
payment of final dividend 18 may 2007
announcement of interim results september 2007
intended payment of interim dividend november 2007
preliminary announcement of 2007 results march 2008
head office
cleveland house 33 king street
london sw1y 6rj
tel 44 0 20 7766 7670
fax 44 0 20 7766 7671
wwwmelroseplcnet
registered office
precision house arden road alcester
warwickshire b49 6hn
tel  44 0 1789 761020
fax  44 0 1789 761058
registered number 4763064
bankers
lloyds tsb bank plc and barclays bank plc
auditors
deloitte  touche llp
hill house 1 little new street
london ec4a 3tr
legal advisers
clifford chance llp
10 upper bank street
london e14 5jj
registrars
lloyds tsb registrars
the causeway worthing
west sussex bn99 6da
wwwshareviewcouk melrose plc annual report 2006 81
notice of annual general meeting
notice is hereby given that the fourth annual general meeting of
the company will be held at the offices of investec at 2 gresham
street london ec2v 7qp at 1100 am on 14 may 2007 for the
following purposes
ordinary business
1 to receive the company’s audited financial statements for the
financial year ended 31 december 2006 together with the
directors’ report and the auditors’ report on those financial
statements
2 to declare a final dividend for the year ended
31 december 2006
3 to reelect mr perry crosthwaite who retires by rotation
as a director of the company
4 to reelect mr geoffrey martin who retires by rotation
as a director of the company
5 to elect mr john grant who has been appointed as a director
since the last annual general meeting as a director of the
company
6 to elect mr miles templeman who has been reappointed as
a director since the last annual general meeting as a director
of the company
7 to reappoint deloitte  touche llp as auditors of the company
to hold office from the conclusion of this meeting until the
conclusion of the next annual general meeting of the company
at which accounts are laid and to authorise the directors to
determine their remuneration
special business
to consider and if thought fit to pass the following resolutions
which will be proposed in the case of resolutions 8 and 9
as ordinary resolutions and in the case of resolution 10 as a
special resolution
8 that the directors’ remuneration report contained in the
company’s report and financial statements for the year ended
31 december 2006 be approved
9 that in substitution for all existing authorities the directors be
generally and unconditionally authorised in accordance with
section 80 of the companies act 1985 the act to exercise all
the powers of the company to allot relevant securities within
the meaning of that section up to an aggregate nominal
amount of £85710 this authority will expire unless previously
renewed varied or revoked by the company in general
meeting 15 months after the date of the passing of this
resolution or at the conclusion of the next annual general
meeting of the company following the passing of this
resolution whichever first occurs save that the company may
before such expiry make an offer or agreement which would or
might require relevant securities to be allotted after expiry of this
authority and the directors may allot relevant securities in
pursuance of that offer or agreement as if the authority
conferred by this resolution had not expired
10 that in substitution for all existing powers and subject to the
passing of resolution 9 the directors be generally empowered
pursuant to section 95 of the act to allot equity securities
within the meaning of section 942 of the act for cash
pursuant to the general authority conferred by resolution 9
as if section 891 of the act did not apply to the allotment
provided that the power conferred by this resolution
a will expire unless previously renewed varied or revoked by
the company in general meeting 15 months after the date
of the passing of this resolution or at the conclusion of the
next annual general meeting of the company following the
passing of this resolution whichever first occurs save that
the company may before such expiry make an offer or
agreement which would or might require equity securities to
be allotted after expiry of this power and the directors may
allot equity securities in pursuance of that offer or agreement
as if the power conferred by this resolution had not expired
b is limited to
i allotments of equity securities in connection with a rights
issue and
ii allotments of equity securities for cash otherwise than
pursuant to paragraph i up to an aggregate nominal
value of £12856 notice of annual general meeting continued
82 melrose plc annual report 2006
for the purposes of this resolution 10 ‘rights issue’ means an offer
of equity securities open for acceptance for a period fixed by the
directors to holders of ordinary shares made in proportion as
nearly as may be to their respective existing holdings of ordinary
shares but subject to the directors having
a right to make such exclusions or other arrangements in
connection with the offer as they deem necessary or expedient
a to deal with equity securities representing fractional
entitlements and
b to deal with legal or practical problems arising in any overseas
territory or by virtue of shares being represented by depositary
receipts the requirements of any regulatory body or stock
exchange or any matter whatsoever
the power conferred on the directors by this resolution 10 shall
also apply to a sale of treasury shares which is an allotment of
equity securities by virtue of section 943a of the act but with the
omission of the words “pursuant to the general authority conferred
by resolution 9”
by order of the board registered office
precision house
garry e barnes arden road
company secretary alcester
26 march 2007 b49 6hn
notes
these notes are important and require your immediate attention
1 the holders of ordinary shares and convertible b shares in the
company are entitled to attend the annual general meeting
but only holders of ordinary shares are entitled to vote a
member entitled to attend and vote may appoint a proxy or
proxies to attend and on a poll to vote on their behalf a proxy
need not be a member of the company
2 a form of proxy is enclosed with this notice to be effective a
form of proxy must be completed signed and deposited with
the company’s registrars at the address specified on the form
of proxy not less than 48 hours before the time for holding the
meeting together with any authority under which it is executed
or a notarially certified copy of such authority depositing a
completed form of proxy will not preclude a member from
attending the meeting and voting in person
3 pursuant to regulation 41 of the uncertificated securities
regulations 2001 to be entitled to attend and vote at the
annual general meeting and for the purposes of the
determination by the company of the number of votes they
may cast members must be entered on the company’s
register of members by 600 pm on 11 may 2007 changes
to entries on the register of members after this time shall be
disregarded in determining the rights of any person to attend
or vote at the meeting
4 copies of the following documents will be available for
inspection at the company’s registered office during normal
business hours saturdays sundays and public holidays
excepted from the date of this notice until the date of the
annual general meeting and at the place of the annual general
meeting for 15 minutes prior to and during the meeting
a the register of directors’ interests in shares of the company
b copies of all service agreements under which directors of
the company are employed by the company or any
subsidiaries and
c a copy of the terms of appointment of the nonexecutive
directors of the company contents
1 highlights
2 melrose at a glance
4 chairman’s statement
6 chief executive’s review
8 business review
16 finance director’s review
22 board of directors
24 directors’ report
28 corporate governance report
32 remuneration report
36 statement of directors’ responsibilities
37 independent auditors’ report to the members of melrose plc
on the consolidated financial statements
38 consolidated income statement
39 consolidated statement of recognised income and expense
40 consolidated balance sheet
41 consolidated cash flow statement
42 notes to the accounts
70 independent auditors’ report to the members of melrose plc
on the parent company financial statements
71 company balance sheet for melrose plc
72 notes to the company balance sheet
80 company and shareholder information
81 notice of annual general meeting
hartwell recently developed
this latch for bombardier’s
learjet 45 main entry door mechanism
the unique design eliminates a
common problem of finish
deterioration by automatically lifting
the external handle off the surface
of the door when operated from
inside the aircraft
designed and produced by merchant
printed by granite melrose plc annual report 2006
melrose plc
cleveland house
33 king street
london sw1y 6rj
tel 44 0 20 7766 7670
fax 44 0 20 7766 7671
wwwmelroseplcnet
melrose plc annual report 2006


Summary:
 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 £429m
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 £5070 million 2005 £2699 million
headline profit before tax and headline earnings per share both
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 nonrecurring nature or those associated
with significant restructuring programmes were £439 million
2005 £209 million and 123p 2005 91p respectively
after these items the profit before tax was £370 million
2005 £15 million and the basic earnings per share were
147p 2005 loss of 24p
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 on pages 6 to 7  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
chairman’s statement
“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”
4 melrose plc annual report 2006
christopher miller executive chairman “these results are outstanding and are the culmination of much dedication
and hard work from employees at all our businesses”
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 375p per share
together with an interim dividend announced on 13 september
2006 a total of 60p per share 2005 30p 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 nonexecutive 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 reassured 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
melrose plc annual report 2006 5