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2015 Annual Report and Financial • Reviewing the Group’S Arrangements for Its Employees to Raise Statements

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2015 Annual Report and Financial • Reviewing the Group’S Arrangements for Its Employees to Raise Statements Buy Improve Sell Melrose Melrose Industries PLC Melrose Industries PLC Annual Report Annual Report 2015 for the year ended 31 December 2015 2015 was another exceptional year for the Company. Melrose has now returned £4.3 billion to shareholders, from a £2.0 billion equity investment. Download the latest Annual Report at www.melroseplc.net/ investors/reports Melrose Industries PLC Annual Report 2015 01 Contents Strategic Report Key pages: P02 Performance summary 02 P10 Business Track record 04 review Chairman’s statement 06 Chief Executive’s review 07 Market overview 08 Business review 10 Our strategy and business model 12 Our strategy in action 14 Key performance indicators 18 Finance Director’s review 20 P12 Our strategy Longer-term viability statement 27 Risk management 28 Risks and uncertainties 30 Corporate Social Responsibility 36 Governance P45 P20 Financial Governance overview 46 Board of Directors 48 performance Directors’ Report 50 Corporate Governance Report 54 Audit Committee Report 58 Nomination Committee Report 62 Directors’ Remuneration Report 64 Statement of Directors’ responsibilities 82 P46 Governance Financials overview P83 Independent auditor’s report to the 84 members of Melrose Industries PLC Consolidated Income Statement 90 Consolidated Statement of Comprehensive Income 91 Consolidated Statement of Cash Flows 92 Consolidated Balance Sheet 93 Consolidated Statement of Changes in Equity 94 Notes to the financial statements 95 Company Balance Sheet for Melrose Industries PLC 138 Company Statement of Changes in Equity 138 Notes to the Company Balance Sheet 139 Cautionary statement The Strategic Report and certain other sections of this Annual Report contain forward-looking statements. These statements are made by the Shareholder information 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 P144 with caution due to the inherent uncertainties, including both economic and business risk factors, underlying any such forward-looking information. Accordingly, readers are cautioned not to place undue reliance on any such Notice of Annual General Meeting 144 forward-looking statements. Subject to compliance with applicable laws and regulations, Melrose does not undertake any obligation to update any Company and shareholder information 150 forward-looking statement to reflect events or circumstances after the date of this Annual Report. The Strategic Report has been prepared solely to provide additional information to shareholders to assess the Company’s strategies and the potential for those strategies to succeed. Some financial and other numerical data in this Annual Report and financial statements has been rounded and, as a result, the numerical figures shown as totals may vary slightly from the exact arithmetic aggregation of the figures that precede them. Melrose Industries PLC Strategic Report 02 Annual Report 2015 Performance summary Following the successful disposal of Elster, the Group’s continuing operations consist of Brush, which is facing challenging market conditions. During 2015, prior to the disposal, Elster contributed £1,107.4 million to the Group’s revenue. Financial(1) Revenue For a shareholder who invested £1 in Melrose in 2005 on its first deal (acquiring McKechnie and £261.1 million Dynacast) and who then participated in all following deals, a net £9 of 2013 £345.1m cash returns(3) have been received, 2014 £324.3m in addition to still having more than £1 invested in Melrose 2015 £261.1m Melrose has created £2.8 billion of total shareholder value since its Headline(2) operating profit inception in 2003 Brush is performing broadly in line £20.8 million with expectations in a tough market 2013 £52.6m The Board has proposed a final 2014 £47.7m dividend of 2.6p per share (2014: 5.3p) rebased following the Elster disposal 2015 £20.8m to reflect the resulting size of the Group Headline(2) operating profit margin 8.0% 2013 15.2% 2014 14.7% 2015 8.0% (1) Continuing business unless otherwise stated. (2) Before exceptional costs, exceptional income and intangible asset amortisation. (3) Assuming every fund raising and capital return was participated in since the first deal, together with dividends paid, an extra £6 would have been invested and £15 received, net £9. Melrose Industries PLC Annual Report 2015 03 10 Business review Strategic Report Our strategy and 12 business model 20 Finance Director’s review Sale of Elster Cash consideration £3.3 billion Return to shareholders £2.4 billion Shareholder return on investment 2.3x Equity rate of return 33% Cash consideration of £3.3 billion represents a multiple of 3.1 times 2014 revenue and 14.3 times headline(1) EBITDA(2) As part of the transaction, Melrose disposed of its liabilities under the FKI UK and McKechnie UK defined benefit pension plans, as well as the Elster-related pension obligations. As at the date of disposal, such plans had a net deficit of £112 million and gross liabilities of £849 million Melrose used the net proceeds of the disposal to return approximately £2.4 billion in cash to shareholders, with the majority of the balance being used to pay down borrowings (1) Before exceptional costs, exceptional income and intangible asset amortisation. (2) Headline(1) operating profit before depreciation and amortisation of computer software and development costs. Melrose Industries PLC Strategic Report 04 Annual Report 2015 A strong track record from the first acquisition in May 2005 Melrose is very pleased with the track record achieved over its 12-year history since floating on AIM in 2003. Melrose has achieved an average annual return on equity investment of 22% since making the first acquisition in 2005, with an increase in operating margins of between five and nine percentage points across the businesses owned. Operational improvements Shareholder return Investment in the businesses Headline(3) operating margin Equity rate Return on Post-acquisition investment as a Bought for(1) Sold for(1) improvement (percentage points) of return original equity percentage of original equity price Elster £1.8 bn £3.3bn +9ppts 33% 2.3x 25% August 2012 December 2015 FKI £1.0 bn £1.8 bn (2) +5ppts 33% 3.4x 62% July 2008 Up to 2 March 2016 McKechnie and Dynacast £0.4bn £0.8bn +6ppts 30% 3.0x 51% May 2005 Up to June 2012 (1) Enterprise value. (2) The Company’s continuing business, Brush, was also acquired as part of the acquisition of FKI. This calculation includes a consensus value of the Brush business as at 2 March 2016. As at 2 March 2016, track record for £1 invested in Melrose Since the first deal in 2005, assuming participation in every fund raising and capital return, together with dividends paid Investment Total investment £1 £6.12 £7.12 Original Additional investment in investment subsequent capital raisings Returns Total returns £13.24 £ 1. 81 £ 1. 6 8 £16.73 Capital returns Ordinary Market value dividends of shares held Net return Net return £9.61 £9.61 Melrose Industries PLC Annual Report 2015 05 A history of value creation Strategic Report 2005 2012 2007 2011 2014 2015 2016 December August 2003 August August February March February Entered the Fully October £220 million £373 million £595 million £200 million £2.4 billion FTSE 250 on underwritten Floated returned to returned to returned to returned to returned to London’s main £1.2 billion on AIM shareholders shareholders shareholders shareholders shareholders exchange rights issue Operational improvements Shareholder return Investment in the businesses Headline(3) operating margin Equity rate Return on Post-acquisition investment as a Bought for(1) Sold for(1) improvement (percentage points) of return original equity percentage of original equity price Elster £1.8 bn £3.3bn +9ppts 33% 2.3x 25% August 2012 December 2015 FKI £1.0 bn £1.8 bn (2) +5ppts 33% 3.4x 62% July 2008 Up to 2 March 2016 McKechnie and Dynacast £0.4bn £0.8bn +6ppts 30% 3.0 x 51% May 2005 Up to June 2012 (3) Before exceptional costs, exceptional income and intangible asset amortisation. Shareholder investment and gain4 The future Since the first deal in 2005 Melrose is well-positioned to create superior shareholder value Since floating on AIM in 2003, can create significant further £2.0bn 22% Melrose has raised £2.0 billion value from similar deals in Total shareholder investment Average annual return from shareholders. the future. for a shareholder since With the latest Return of Capital the first acquisition Melrose has a simple £4.8bn in February 2016, Melrose and transparent executive has returned approximately Total shareholder value remuneration framework that 2.6x £4.3 billion in cash to investors. is aligned with shareholders’ Average return on equity across all three acquisitions Shareholders continue to own interests and supports the Brush, a leading turbogenerator delivery of the Group’s strategy. business acquired as part of the purchase of FKI, as well as Directors’ investing in the Melrose “buy, 64 Remuneration Report improve, sell” business model, which management believes (4) As at 2 March 2016. Melrose Industries PLC Strategic Report 06 Annual Report 2015 Chairman’s statement “ The Board is looking forward to another successful chapter in the Group’s history and, in due course, to invite shareholders to invest in the next project.” I am pleased to report our 13th set of Dividend Strategy annual results since flotation in 2003. Following the sale of Elster and the Since Melrose’s flotation in 2003 and subsequent £2.4 billion capital return, the introduction of our “buy, improve, sell” Results for the Group shareholders have received £4.3 billion strategy, we have seen many changes 2015 has been a highly successful year for of payments over the lifetime of Melrose, in economic and stock market conditions. Melrose and represents another milestone comfortably exceeding the £2 billion Nevertheless, through all this, returns to in our proven “buy, improve, sell” strategy.
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