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Melrose Industries PLC Melrose Melrose Industries PLC Annual Report for the year ended 31 December 2012 Annual Report 201 2 Buy Improve Sell 22154-04 — 27 March 2013 8:27 AM— Proof 18 Melrose Industries PLC Melrose’s strategy is to acquire manufacturing businesses in sectors it understands, enhance their performance and realise significant value often within a three to five year time frame. The Company is fully committed to investing within the businesses it acquires in order to exploit their operational and strategic strengths. The Group is made up of four distinct operating divisions: Energy, Lifting, Other Industrial and Elster. Pictured above: Cover pictures: Clockwise (L–R) Bridon supplied a variety of cable products for the Olympic Stadium in • Smart meter test bench at Elster Electricity. London; suspension cables and tension ring cables, including spiral strand • High accuracy plastic measuring chambers being moulded at Elster Water, cables and walkway cables, were used within the construction of the for use in both Smart and mechanical residential water meters. stadium roof. • Intermittent shuttle kiln, which has a furnace temperature of approximately 1,000°C. This equipment is used in the process of manufacturing technical ceramics such as isolators. Elster’s Gas Control equipment business supplied eight burners, together with burner control units and gas regulators. • Tubular stranding machine in Bridon’s new state-of-the-art manufacturing facility at Neptune Energy Park, Newcastle upon Tyne, UK. The stranding machine is used in the manufacture of steel wire strands and is equipped with the world’s largest strand compaction units. • A generator stator in the process of construction at the Brush facility in the Czech Republic. 22154-04 — 27 March 2013 8:27 AM— Proof 18 www.melroseplc.net Stock code: MRO 1 Contents “Since inception less than 10 years Business performance ago Melrose has created over 2 Timeline of major events Business performance £2 billion of shareholder value. 3 Financial highlights We are very pleased with Elster 4 The Melrose strategy 6 Group operations and are already one year ahead of 8 Group overview our improvement plan, increasing 12 Chairman’s statement margins faster than expected. 14 Chief Executive’s review Existing Melrose businesses 16 Energy business review have performed well and Elster 19 Lifting business review is proving to be another great 22 Other Industrial business review 24 Elster business review opportunity to create more value 27 Finance Director’s review for Melrose shareholders.” 37 Risks and uncertainties Governance Christopher Miller 40 Key performance indicators 42 Board of Directors Executive Chairman 44 Directors’ report Governance 56 Corporate Governance report 62 Remuneration report 68 Statement of Directors’ responsibilities Financials 69 Financial contents 70 Independent auditor’s report — Consolidated statements 71 Consolidated Income Statement Financials 72 Consolidated Statement of Comprehensive Income 73 Consolidated Statement of Cash Flows 74 Consolidated Balance Sheet 75 Consolidated Statement of Changes in Equity 76 Notes to the financial statements 119 Independent auditor’s report — Company statements 120 Company Balance Sheet for Melrose Industries PLC 121 Notes to the Company Balance Sheet Shareholder information 125 Notice of Annual General Meeting 128 Company and shareholder information Shareholder information Shareholder For more information about Melrose Industries PLC view our website at www.melroseplc.net 22154-04 — 27 March 2013 8:27 AM— Proof 18 Melrose Industries PLC 2 Annual Report 2012 Timeline of major events Melrose was listed on AIM in October 2003. The timeline of key strategic events below shows how the Group has gone from strength to strength. Completed the acquisition of Elster Group S.E. for an enterprise value of approximately August 2012 £1.8 billion. Disposal of the McKechnie Plastic Components June 2012 business for £31 million. This sale concluded the disposal of all McKechnie/Dynacast businesses from the Group, giving a return on initial equity Returned £373 million to shareholders. of approximately 3.25×. Virtually all of the equity raised from August 2011 shareholders at that time returned. Sold Dynacast for £367 million, generating July 2011 4× original equity investment. Nearly £1 billion in cash generated from McKechnie and Dynacast acquisition. Sold Brush Traction, Logistex UK February 2011 and Madico for £18 million. June/August Sold Logistex for £50 million. 2009 Completed the acquisition of FKI plc for a total consideration including debt, for an July 2008 enterprise value of just under £1 billion. Shareholders received a capital August 2007 return of £220 million. Sold the McKechnie Aerospace business for £428 million and the PSM business for May 2007 £30 million. Acquisition debt repaid. December 2005 Listed on London’s main exchange. Acquired McKechnie and Dynacast for £429 million from private equity group May 2005 Cinven. Raised £244 million in equity. October 2003 Listed on AIM – £13 million. 22154-04 — 27 March 2013 8:27 AM— Proof 18 www.melroseplc.net Stock code: MRO 3 Financial highlights(1) Revenue • Acquisition of Elster on 23 August 2012 Business performance £1,551.4m (7) for an enterprise value of £1.8 billion, improvement plan is one year ahead of £411.1m (6) schedule (2) £1,080.4m £986.8m • Headline results £1,140.3m – Revenue of £1,551.4 million (2011: £1,080.4 million) 2010 2011 2012 – Profit before tax of £214.3 million (2011: £154.7 million) Headline(2) profit before tax – Melrose businesses (excluding Elster) Governance £214.3m increased revenue by 7% and operating profit by 9% at constant currency £214.3m – Elster operating margin increased by £154.7m £143.3m 1.9 percentage points to 14.1%, operating profit was up 11% with revenue 2% lower, at constant currency 2010 2011 2012 – Headline(2) diluted earnings per share of 16.1p(3) (2011: 15.8p(3,5)) Headline(2) diluted earnings per share(3) • Results after exceptional items and Financials intangible asset amortisation 16.1p (5) 16.1p (5) 15.8p – Profit after tax of £42.9 million (2011: 13.5p £110.1 million) – Diluted earnings per share of 4.3p (2011: 12.9p) • Net debt of £997.7 million. Net debt 2010 2011 2012 equal to 2.6x EBITDA(4) • Final dividend increased by 4% to 5.0p Shareholder information Shareholder per share (2011: 4.8p(5)) • Full year dividend of 7.6p per share (2011: 7.4p(5)) • Since inception less than 10 years ago Melrose has created over £2 billion of (1) Continuing operations only unless otherwise stated. (2) Before exceptional costs, exceptional income and intangible asset amortisation. shareholder value (3) Calculated using continuing and discontinued operations, before the profit on disposal of businesses, and the diluted weighted average number of shares for the year, adjusted to remove MPC. (4) Headline(2) operating profit before depreciation and amortisation of computer software and development costs, including Elster for eight months pre-ownership. (5) Adjusted to include the effects of the Rights Issue. (6) Relates to existing Melrose for the year ended 31 December 2012. (7) Relates to Elster for the four month period from acquisition to 31 December 2012. 22154-04 — 27 March 2013 8:27 AM— Proof 18 Melrose Industries PLC 4 Annual Report 2012 The Melrose strategy The Melrose strategy is to acquire good manufacturing businesses underperforming their potential, improve them by a mixture of investment, operational improvements and changed management focus, then commercially choose the right time to sell, often within a three to five year time frame but this is flexible. The value from significant disposals is then returned to shareholders. Melrose recently entered the next phase of its growth strategy via the acquisition of Elster for an enterprise value of £1.8 billion. Commercially choose the right time to sell, often between three to five years but flexible Set strategy and targets SELL Drive operational improvements Melrose management are substantial Good equity manufacturing investors IMPROVE Return value to businesses shareholders underperforming from significant their potential disposals Invest in the businesses (capex in excess of BUY depreciation) Focus on operating Change cash generation management focus Use public (incentivise well) market leverage 22154-04 — 27 March 2013 8:27 AM— Proof 18 www.melroseplc.net Stock code: MRO 5 Strategy in action Business performance Buy • In August 2012 Melrose acquired Elster Group S.E., representing the largest acquisition in Melrose’s history to date. Elster is a world leader in the provision of gas control equipment and related products, gas, electricity and water meters, networking and software solutions. • The Elster division is split into three distinct businesses of Gas, Electricity and Water. They have manufacturing facilities throughout the world and employ nearly 7,000 people in more than 30 countries. A map showing Elster’s key worldwide manufacturing locations can be seen on page 11. Since acquistion several restructuring projects have already been completed within the Elster businesses, Governance with others currently underway. Pictured: Manufacture of high accuracy plastic injection moulded measuring chambers take place at the Elster site in Luton, UK, which are used for both Smart and mechanical residential water meters. Improve • Melrose acquired FKI plc in July 2008, for an enterprise value of approximately £1 billion, which included Bridon, Brush, Crosby, Marelli, Truth and Harris. FKI was a major international diversified engineering group but operating under certain financial constraints. Financials • Since the acquisition, Melrose has identified a number of opportunities to improve these businesses, principally through an increased focus on improved profitability and cash generation. • The Group will continue with its investment strategy in these businesses, as well as consider acquisitions and organic growth into new markets, where appropriate. Pictured: New rope making machinery at Bridon’s £20 million facility at Neptune Energy Park, Newcastle upon Tyne, UK, designed to feed wire rope cores into the stranding machine.

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