Buy Improve Sell Melrose Melrose Industries PLC Annual Report for the year ended 31 December 2014 Melrose Industries PLC A year of improvement Throughout 2014 we have focused on improving performance across the Group. Elster businesses continue to perform strongly, with profits increased by two-thirds in the two full years of ownership. Chairman’s statement More information p12 Transformational growth The management team has a successful track record in creating substantial value for shareholders, as shown below. This has been delivered over a number of deals since 2003. Improving shareholder value More information p02 £3.0bn Market capitalisation as at 4 March 2015 £170m Net shareholder investment as £13m at 4 March 2015 Listed on AIM 2003 2003 2015 2015 Cautionary statement The Strategic Report has been prepared solely to provide additional information to shareholders to assess the Company’s Download the latest Annual Report at strategies and the potential for those www.melroseplc.net/investors/reports strategies to succeed. The Strategic Report contains certain forward-looking statements. These statements are made by the Directors in good faith based on the information available to them up to the time of their approval of this report and such statements should be treated with caution due to the inherent uncertainties, including both economic and business risk factors, underlying any such forward-looking information. Melrose Industries PLC Annual Report 2014 01 Contents Strategic Report Improving shareholder value 02 Strategic Report Performance summary 04 Business at a glance 06 Market overview 08 Chairman’s statement 12 Chief Executive’s review 14 02 Our strategy 16 Key performance indicators 24 Performance Review Business review Performance Elster Gas 28 Elster Electricity 30 Review Elster Water 32 Energy 34 Risk management 36 Risks and uncertainties 38 Finance Director’s review 42 26 Corporate Social Responsibility 50 Governance Governance overview 60 Governance Board of Directors 62 Directors’ report 64 Corporate Governance report 68 Audit Committee report 72 Nomination Committee report 76 58 Directors’ remuneration report 78 Statement of Directors’ responsibilities 96 Financials Financial contents 97 Financials Independent auditor’s report to the members of Melrose Industries PLC 98 Consolidated Income Statement 102 Consolidated Statement of Comprehensive Income 103 97 Consolidated Statement of Cash Flows 104 Consolidated Balance Sheet 105 Consolidated Statement of Changes in Equity 106 Notes to the financial statements 107 Company Balance Sheet for Melrose Industries PLC 151 Notes to the Company Balance Sheet 152 Shareholder information Notice of Annual General Meeting 156 Shareholder Company and shareholder information 162 information Melrose Industries PLC 156 Annual Report 2014 Shareholder information Notice of Annual General Meeting This document is important and requires 13. To authorise the Audit Committee to determine the your immediate attention. If you are in any remuneration of the auditor of the Company. doubt as to the action you should take, 14. That, in accordance with section 551 of the Companies Act 2006 (the “Act”), the directors of the Company (the “Directors”) you should consult your stockbroker, bank be and are generally and unconditionally authorised to allot manager, solicitor, accountant, fund manager shares in the Company, or to grant rights to subscribe for or to convert any security into shares in the Company (“Rights”): or other independent financial adviser authorised under the Financial Services and (A) up to an aggregate nominal amount of £422,209; and (B) comprising equity securities (as defined in section 560 of Markets Act 2000 if you are resident in the the Act) up to an aggregate nominal amount of £844,418 United Kingdom or, if not, another (such amount to be reduced by the aggregate nominal amount of any allotments or grants made under paragraph appropriately authorised independent (A) of this resolution) in connection with an offer by way of financial adviser. rights issue: (i) to ordinary shareholders in proportion (as nearly as If you have sold or otherwise transferred all of your shares in may be practicable) to their existing holdings; and Melrose Industries PLC (the “Company”), you should send this document as soon as possible to the purchaser or transferee or (ii) to holders of other equity securities as required by to the stockbroker, bank or other agent through whom the sale or the rights of those securities or, subject to such rights, transfer was effected, for delivery to the purchaser or transferee. as the Directors otherwise consider necessary, and so that the Directors may impose any limits or Notice is given that the Annual General Meeting of the Company will restrictions and make any arrangements which they be held at Barber-Surgeons’ Hall, Monkwell Square, Wood Street, consider necessary or appropriate to deal with treasury London, EC2Y 5BL at 11.00 am on 14 May 2015 for the following shares, fractional entitlements, record dates, legal, purposes. Resolutions 1 to 14 (inclusive) will be proposed as ordinary regulatory or practical problems in, or under the laws resolutions and resolutions 15 to 17 (inclusive) as special resolutions. 156 of any territory or any other matter, Ordinary resolutions such authorities to expire at the conclusion of the Company’s 1. To receive the Company’s audited financial statements for next Annual General Meeting after this resolution is passed or, if the financial year ended 31 December 2014, together with earlier, at the close of business on 30 June 2016, but, in each the Directors’ report, strategic report and the auditor’s report case, so that the Company may make offers or agreements on those financial statements. before the authority expires which would or might require 2. To approve the Directors’ Remuneration Report (other than the shares to be allotted or Rights to be granted after the authority part containing the Directors’ remuneration policy) for the year expires, and so that the Directors may allot shares or grant ended 31 December 2014, as set out on pages 78 to 95 (save Rights in pursuance of any such offer or agreement for pages 88 to 95) of the Company’s 2014 Annual Report. notwithstanding that the authority conferred by this resolution has expired. 3. To declare a final dividend of 5.3p per Ordinary Share for the year ended 31 December 2014. 4. To re-elect Christopher Miller as a Director of the Company. 5. To re-elect David Roper as a Director of the Company. 6. To re-elect Simon Peckham as a Director of the Company. Notice of AGM 7. To re-elect Geoffrey Martin as a Director of the Company. 8. To re-elect Perry Crosthwaite as a Director of the Company. 9. To re-elect John Grant as a Director of the Company. 10. To re-elect Justin Dowley as a Director of the Company. 11. To re-elect Liz Hewitt as a Director of the Company. 12. To re-appoint Deloitte LLP as auditor of the Company to hold More information p156 office from the conclusion of this meeting until the conclusion of the next Annual General Meeting of the Company at which accounts are laid. Melrose Industries PLC 02 Annual Report 2014 Strategic Report Improving shareholder value Delivering transformational growth... Melrose has achieved an average annual return on equity investment of 23% since making our first investment in 2005 and an increase in operating margins of 5 to 7 percentage points across the businesses we owned. See the Melrose timeline of key events at www.melroseplc.net/about-us/history £2.8bn of shareholder value created x 4 shareholder value Melrose Industries PLC Annual Report 2014 03 Strategic Report Strategic Report We are very pleased with the track Total shareholder return versus public benchmarks record which we have achieved over Source: Datastream the first 11 years of our history and remain confident that Melrose is Since acquisition of McKechnie and Dynacast well-positioned to create superior shareholder value going forward. x 4.0 Outperformed FTSE 350 benchmark by 23% Average annual return Since acquisition of FKI on investment x 4.5 Outperformed £0.2bn FTSE 350 benchmark by Net shareholder investment at 4 March 2015 £3.0bn Market capitalisation at 4 March 2015 Track record for a shareholder For £1 invested in Melrose... Since the rst deal in 2005 <10 years £3.81 IRR 23% £1 Melrose Industries PLC 04 Annual Report 2014 Strategic Report Performance summary Financial(1) Revenue Headline(2) operating profit Headline(2) operating profit margin £1,377.5m £246.0m 17.9% 2013 £1,466.4m 2013 £240.0m 2013 16.4% 2014 £1,377.5m 2014 £246.0m 2014 17.9% Headline(2) profit before tax of £213 million, up 21% (11% at actual In common with many currency) and headline(2) proforma(3) earnings per share of 15.3p companies that trade internationally, the movement Elster profits up by two thirds (circa £80 million) in the two full in exchange rates in 2014 has years of ownership caused a headwind to profits of around 8%. For ease of Elster now delivering revenue and order intake growth, comparison, unless stated up +9% and +6% respectively in the second half of 2014 otherwise, the year-on-year All three Elster divisions achieved profit growth in 2014 variances in these financial (Gas +13%, Electricity +23% and Water +11%) highlights are stated using constant currency. Brush (revenue -3% and profit -7%) suffering from a tough OEM (Original Equipment Manufacturer) generator end market In November 2014 Bridon sold for £365 million, doubling shareholders’ original investment Return of Capital of £200 million (18.7p per share) to be paid on 16 March 2015 alongside a 13 for 14 share consolidation IFRS profit after tax(4) of £87 million (2013: £102 million) Net debt at 31 December 2014 of £501 million, equal to 1.8x EBITDA(5).