Business review Continued. Flex-Tek Bringing technology to life

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1 Business review Flex-Tek Bringing technology to life Electric cores It is hardly surprising that at the heart of any electric vehicle is its battery. These are no ordinary batteries however, and their well-being has provided Flex-Tek a niche opening for its advanced, customised heating solutions. Unlike in conventional cars, where the battery serves mainly to kickstart the engine and run accessories like a radio or air conditioner, the battery of an electric car runs virtually everything, including the crucial electric motor which actually powers the engine. Ultra-reliable, robust, and easily-produced batteries that could make electric cars competitive with conventional vehicles remain the industry s holy grail and Flex-Tek has worked closely with one leading car manufacturer to come up with a solution. Temperature and condensation control are all-important because electric car batteries are particularly prone to galvanic corrosion where rusting is accelerated by the presence of dissimilar metals and electric current (electrolyte). With the chances of temperature swings and electrical short circuits minimised, the battery is provided with a stable, long-running environment for optimal operation over many years. Power protection Protecting the all-important battery of an electric vehicle is crucial if the green alternative to conventional cars is to make headway in the competitive auto market. Maximising performance The temperature controller is light-weight, hard-wearing and powerful enough to ensure the battery can run for long periods at maximum power with minimum recharging. 44

2 Risks and responsibility Business review Chairman and Chief Executive Group overview Temperature stability Hot air from the Tutco- Farnham controller dries out the vital desiccants around the battery before they become saturated. The damp air is then routed out of the vehicle. Governance Limited charges Recharging from mains power is minimised by providing optimum operational conditions for the battery, sharply reducing debilitating temperature swings and short circuits. Accounts 45

3 Business review Flex-Tek Contribution to 2012 Group revenue 8% Contribution to 2012 Group headline operating profit 6% Percentage relates to headline operating profit before corporate costs Flex-Tek is a global provider of engineered components that heat and move fluids and gases for the aerospace, medical, industrial, construction and domestic appliance markets. Our flexible hosing and rigid tubing provide fluid management for fuel and hydraulic applications on commercial and military aircraft, deliver fuel gas and conditioned air in residential and commercial buildings, and provide respiratory care for medical applications. Flex-Tek heating elements and thermal systems improve the performance of a range of devices; from medical and diagnostic equipment to domestic appliances such as clothes tumble dryers and HVAC equipment. Revenue performance m m +6% (2011: 221m) Business features Principal operations regions Flex-Tek operations are mainly located in the US and Mexico with Asian operations located in India, China, and Malaysia, and European facilities in France and Germany. Customers We serve mainly aerospace engine and airframe manufacturers, domestic appliance manufacturers and the US construction industry. Large customers include Boeing, Airbus, Pratt & Whitney, GE Aerospace, Whirlpool, Electrolux, Trane, and Carrier. Our notable distributors in the US construction market include Ferguson and Watsco. Competitors Competitors for our Fluid Management business include specialty segments of Parker-Hannifin, Eaton, and Kongsberg; as well as vertically integrated capacity from key customers. Heat Solutions competitors in the US include: Zoppas, Nibe, Watlow and Chromalox; and in China, Kawai and Dongfang manufacture a wide variety of electric heaters. Flex-Tek s Construction products compete with US manufacturers: Hitachi, Atco, Omega-Flex, Hart & Cooley and Goodman. Flexible Solutions competes globally with a number of smaller privately owned businesses which manufacture specialty hoses. Suppliers Flex-Tek sources key raw materials from world-class companies including electrical resistance wire from Sandvik, fibreglass insulation from Owens Corning, specialty plastic resins from DuPont and PolyOne, and stainless steel from Allegheny Ludlum. Each of these supply chain partners is chosen based on its ability to provide exceptional quality, service and value. Revenue by sector 233m 1 Fluid Management 35% 2 Flexible Solutions 15% 3 Heat Solutions 24% 4 Construction Products 26% 4 1 Go to for more information

4 Chairman and Chief Executive Business review Accounts Risks and responsibility Governance Group overview Markets and trends Flex-Tek designs and manufactures engineered components which heat and move fluids and gases for aerospace, consumer products, construction, medical, and industrial applications. The diverse nature of these markets reduces Flex-Tek reliance on any specific technology, although Flex-Tek is highly leveraged to the US economy. Flex-Tek is organised under four market-specific segments focusing on superior technology and service: Fluid Management We are a market-leading manufacturer of specialty high-performance, flexible and rigid tubing assemblies for aerospace, industrial and automotive applications worldwide. Our specialised tubing provides reliable and efficient delivery of hydraulic fluids and jet fuel for both civil and military aircraft. Automotive applications include petrol and brake fluid delivery in traditional automobiles as well as nextgeneration fuels for natural gas and hydrogen-powered vehicles. Demand for our products is linked to both the worldwide air transport market and industrial growth. Heat Solutions We are the world s largest manufacturer of open coil heating elements. Our specialised elements and thermal systems serve customers that manufacture tumble dryers, HVAC equipment, medical applications, and bespoke applications where consistent temperature controls improve system efficiency and performance. Revenue is largely dictated by household appliance demand in the US. Construction Products Flex-Tek makes market-leading flexible gas piping and HVAC flexible ducting for the US construction market. Our customers are large national wholesale distributors in North America, supplying both plumbing and HVAC tradesmen. Demand is driven by a mix of the strength of the US construction industry and replacement sales. Flexible Solutions Flexible Solutions hose assemblies are focused into three distinct markets: medical respiratory care, floorcare appliances, and industrial ventilation. The business performance generally follows macroeconomic indicators such as healthcare spending, US GDP, and capital goods expenditures. Smooth operator Tapping into its long expertise in gas hose components, Flex-Tek has developed a compressed air heating system that allows paint spray guns to apply a far smoother finish in auto bodyshop repair work. The impact is more than merely aesthetic. The advanced hightemperature and controller elements combine to provide a more consistent and faster application, reduced drying time, less paint use, and most important of all up to 20% in cost savings. The device was the fruit of close co-operation between Flex-Tek subsidiary Tutco and a leading US manufacturer of auto refinishing equipment. The company had been seeking ways of providing a more affordable service while simultaneously improving quality and durability, and satisfying new environmental mandates promoting water-based paint. Though primarily geared towards the auto repair industry, the new device can also be used in a variety of sectors that commonly require spray finishing or coating, such as aerospace and furniture manufacture. 47

5 Business review Flex-Tek Fuel-efficient market The push by aeroplane makers towards lighter materials to save fuel and cut harmful emissions has opened complementary markets for Flex-Tek, a long-established supplier to the aviation industry. Flex-Tex engineers have been working with their counterparts at Airbus and Boeing to develop new-generation, lightweight Kevlar high-pressure hoses that allow airlines to cut the weight of their hydraulic applications. The use of Kevlar helps new airliners such as the Airbus A380 and Boeing 787 reduce their per passenger fuel consumption to around three litres per 100 km travelled a more fuel-efficient level than even the latest family cars. By combining greater strength with less weight, Kevlar hoses can pass a demanding set of dynamic and static tests involving stresses of more than 5,000 pounds per square inch and a temperature range of -65 F to 275 F. 48

6 Performance Reported Underlying m m growth growth Revenue % 5% Headline operating profit % 36% Headline operating margin 16.3% 12.5% 380 bps Statutory operating (loss)/profit (17) 26 Return on capital employed 28.4% 21.9% 650 bps Flex-Tek s reported revenue grew 6%, or 12m, driven by an underlying increase of 10m (5%) and a 2m gain from currency translation. The improvement was generated by revenue growth from aerospace components and sales to the US residential construction market. This was partially offset by weakness in the household appliance sector of our heating element business. Headline operating margin rose 380 basis points to 16.3% as a result of the increased volumes and associated operational gearing and positive mix from the faster growing aerospace sales. The underlying increase in operating profit of 10m stemmed from higher volumes, pricing and the benefits of our cost-saving initiatives. There was also a 5m gain from the change in accounting treatment for the legal defence costs associated with the flexible gas piping business. In previous years these costs had been charged to headline operating profit but are now being treated as an exceptional item (see notes 4 and 22 to the accounts). Excluding this change in accounting treatment, the underlying headline operating profit rose 18%. As announced at the half year, a provision has been established in these accounts to resolve future claims, resulting in a charge of 55m, leading to a statutory operating loss of 17m. Return on capital employed rose 650 basis points on the back of the improved profitability. In Fluid Management, sales of components to aerospace customers improved 13% on an underlying basis. This was achieved as a result of higher volumes on major airframe platforms from Airbus and Boeing and engines from Pratt & Whitney and GE. The order book for our commercial aviation OEM business remains strong and we have gained market share in our overhaul and repair service segment. Demand in the commercial aviation market continues to be driven by increased passenger traffic, fuel and operating efficiency, and lower noise levels. In addition, sales of our flexible hose assemblies to the US automotive market for both fuel and brake applications remain robust. Sales of our flexible gas piping and HVAC ducting to the construction market rose 11%. According to the US Census Bureau, the July 2012 seasonally adjusted annual rate of new single family home starts was slightly above 500,000, a level that has been fairly constant in Growth has been achieved, resulting in increased market share, by cross-selling our ducting, flexible gas piping and HVAC heating element product lines to the US distribution market. In addition, our Construction Products division has benefited from consolidation at the distributor level. Our customers have been highly active acquirers of distributors in the US and Canada. Heat Solutions underlying revenue was 9% lower than the prior year, primarily because sales of heating elements to residential HVAC customers remain weak in the US as a result of the uncertain economy. The lower revenue was also due to reduced nickel prices and the correspondingly lower surcharges passed along to customers ( 2m). Consumer confidence remains cautious in the US and OEM appliance manufacturers continue to project low single growth rates in the US markets. We have seen an uptick in sales of our custom heating elements as our R&D investments have yielded new products and new applications. Also the cross-selling efforts to the US distributor market have increased our sales of replacement aftermarket HVAC heating elements. Underlying revenue of the Flexible Solutions division was flat against the previous year. Sales of new medical hose products in the sleep apnoea market and share gains in the US industrial market were offset by continued weakness in the floor care market. We continue to see positive results from this division as it transitions from a focus in floor care to more specialty, engineered products and markets. Flex-Tek continues to increase R&D spend in Heat Solutions and Fluid Management and is seeing commercial success from this investment. In our Asian manufacturing facilities, in China and India, our investments are showing positive results. We continue to seek new opportunities to grow our market share, expand our product portfolio, and target potential bolt-on acquisitions to build on the strength of the business and the management team. Outlook The improved sales rate seen in the second half of the year is expected to continue. Fluid Management is in a robust aerospace sales cycle which is expected to be maintained for some time. The strong sales should deliver better margins. The US housing market appears to have levelled in the second half of the year and we expect a gradual improvement in the coming year. The backlog of unsold houses has decreased, mortgage rates remain at historic low levels, and credit is more widely available. These factors should help bolster the sales of our Heat Solutions and Construction Products divisions. Flexible Solutions is expected to deliver modest growth with the general improvement in the US economy. Risks and responsibility Business review Chairman and Chief Executive Group overview Accounts Governance 49