TIDMMGGT
RNS Number : 9869W
Meggitt PLC
07 August 2018
7 August 2018
Meggitt PLC
2018 Interim results
Strong H1; well positioned to deliver upgraded full year
guidance
Meggitt PLC ("Meggitt" or "the Group"), a leading international
engineering company specialising in high performance components and
sub-systems for the aerospace, defence and energy markets, today
announces unaudited interim results for the six months ended 30
June 2018.
Group headlines
Change
GBPm H1 2018 H1 20171 Reported Organic2
Orders 1,087.2 968.3 12% 24%
Revenue 952.2 965.4 (1%) 9%
Underlying3
EBITDA4 197.3 202.6 (3%) 3%
Operating profit 150.8 161.4 (7%) (2%)
Profit before tax 136.1 143.1 (5%) (1%)
Earnings per share
(p) 13.9 14.2 (2%)
Statutory
Operating profit 123.8 196.3 (37%)
Profit before tax 105.2 172.2 (39%)
Earnings per share
(p) 11.7 19.6 (40%)
Free cash
flow 27.1 22.8 19%
Net borrowings(5) 1,032.3 1,115.9 (7%)
Dividend (p) 5.30 5.05 5%
-- Organic revenue growth of 9% reflects strong trading
performance in civil aftermarket, military and energy. Reported
revenue declined by 1% due to currency and non-core
divestments.
-- Full year organic revenue growth forecast raised (on 2 July)
to 4 to 6% following better than anticipated trading in H1 and
strong order intake with organic book to bill of 1.13x.
-- Underlying operating profit declined organically by 2% to
GBP150.8m, within which underlying operating profit at Meggitt
Polymers & Composites ('MPC') was GBP2.3m (June 2017 as
restated: GBP21.9m). Excluding MPC, underlying operating profit was
up 7% (170 basis point margin improvement).
-- Statutory operating profit declined by 37% as a result of
lower gains from disposals and non-cash mark to market of our
financial instruments, compared to the prior period.
-- Free cash flow increased by 19% to GBP27.1m (June 2017 as
restated: GBP22.8m) resulting in net borrowings:EBITDA on a
covenant basis of 1.9x (June 2017: 2.2x).
-- Strong progress on key strategic initiatives:
o Completed three further divestments to focus the portfolio,
with 70% of revenue now in attractive markets where Meggitt has a
strong competitive position;
o Continued investment in differentiated technologies;
o Factory consolidation and expansion activity ahead of plan;
work at UK Super Site now underway;
o Moving to a customer-aligned divisional structure from January
2019 in order to accelerate organic growth and realise the
operational benefits of our continued journey to becoming an
integrated Group.
-- Interim dividend up 5% to 5.3p reflecting our continued
confidence in the prospects for the Group.
1 Restated for IFRS 9 / 15 / 16.
2 Organic numbers exclude the impact of acquisitions, disposals
and foreign exchange.
3 Underlying profit and EPS are used by the Board to measure the
trading performance of the Group as set out in notes 4 and 9.
4 Underlying EBITDA represents underlying operating profit
adjusted to add back depreciation, amortisation and impairment
losses.
(5) Net borrowings represent net debt adjusted to exclude lease
liabilities.
Tony Wood, Chief Executive, commented:
"Trading in the first half was strong, with organic growth
accelerating across our civil aftermarket, military and energy end
markets. As a result, in July we increased our full year revenue
growth guidance to 4 to 6%.
Good progress has been made in the ongoing execution of our
strategy in the first half. We have continued to sharpen the
strategic focus of our portfolio and taken further steps in the
delivery of our operational transformation. Relationships with our
key customers are expanding and we have announced our intention to
move to a customer-aligned organisation structure from 2019. These
steps will further accelerate our transition to an integrated
aerospace, defence and selected energy Group.
As previously indicated, elevated costs at Meggitt Polymers
& Composites ('MPC') mean that we expect full year operating
margins to be towards the lower end of our 17.7 to 18.0% guidance
range. We remain focused on delivering further operational
improvements at MPC and expect financial recovery to build through
the second half and into 2019.
Looking forward, we remain well placed to deliver our 2021
targets to achieve an underlying operating margin of at least 19.9%
and to deliver GBP200m of cash from increasing inventory turns from
2.3x to 4.0x.
The acceleration in growth and our continuing confidence in the
prospects for the Group, underpins our interim dividend increase of
5% to 5.3p."
Enquiries:
Tony Wood, Chief Executive
Doug Webb, Chief Financial Officer
Adrian Bunn, Vice President, Strategy & Investor
Relations
Meggitt PLC
Tel: +44 1202 597597
Deborah Scott, Senior Managing Director
Nick Hasell, Managing Director
FTI Consulting
Tel: +44 203 727 1340
Analyst presentation
There will be a presentation for analysts today at 9.30am BST in
London. There will be a live webcast on the Meggitt website,
http://www.meggittinvestors.com, where copies of the presentation
will be available afterwards.
Cautionary Statement
This Results Announcement contains forward looking statements
with respect to the financial condition, results of operations and
businesses of Meggitt PLC and its strategy, plans and objectives.
These statements are made in good faith based on the information
available at the time this announcement was approved. It is
believed that the expectations reflected in these statements are
reasonable but they may be affected by a number of risks and
uncertainties that are inherent in any forward-looking statement
and which could cause actual results to differ materially from
those currently anticipated. Meggitt does not intend to update
these forward-looking statements. Nothing in this document should
be regarded as a profit forecast. This report is intended solely to
provide information to shareholders and neither Meggitt PLC nor its
directors accept liability to any other person, save as would arise
under English law.
GROUP OVERVIEW
Meggitt is a global engineering company specialising in
high-performance components and sub-systems for aerospace, defence
and selected energy markets. We have a broad-based and
well-balanced portfolio, with equipment on approximately 70,000
aircraft and many ground vehicles and energy applications
worldwide. This significant and expanding installed base provides
us with an aftermarket revenue stream stretching out for decades.
Good customer relationships and high levels of embedded
intellectual property span a broad range of products and
capabilities. This has enabled us to increase our content by up to
250% on the new civil aerospace programmes which have recently
entered service.
Significant increases in our content on new aircraft drove our
research and development ('R&D') and new product introduction
('NPI') costs to record levels in recent years but we are now
beyond the peak of spend in both areas. We have completed a major
refresh of our in-service portfolio and this investment provides a
strong platform for future revenue growth. Having passed the
development peak we are now focused on operational execution and
have outlined four strategic priorities to accelerate growth and
improve return on capital employed. These priorities are:
Portfolio, Customers, Competitiveness and Culture.
Portfolio
We will focus investment in attractive markets where we have or
can develop a leading position. This encompasses organic investment
in differentiated products and manufacturing technologies;
targeted, value enhancing acquisitions; and selective non-core
disposals.
In the six months to June 2018, we have made further progress in
focusing our portfolio, with the sale of three non-core businesses.
In January 2018, we completed the sale of Aviation Mobility to
Smart Carte Inc. In March 2018, we completed the sale of Linear
Motion (also known as Thomson) to Umbra Cuscinetti S.p.A. and in
April 2018, we completed the sale of Precision Micro to LDC.
We have also continued to advance the development of innovative
new technologies, with a view to sustaining growth in market share
on future generation aircraft platforms. For example, in July 2018
we reached an agreement with Textron Aviation to provide wireless
tyre pressure monitoring systems which can accurately check tyre
pressures in seconds on equipped business jets, without the need
for a manual gauge, enabling significant savings in maintenance
costs, increased reliability and improved safety. We have also made
progress on innovative new technology applications in areas
including thermal systems, optical sensing, time domain
reflectometry and digital manufacturing.
Customers
We continue to focus on delivery, quality and improvements in
services and support in order to increase customer satisfaction
throughout the product lifecycle. We are also increasing the depth
of our relationships with major customers through the expanding
scope of products and services we provide and by securing long term
agreements.
During the period, we have further increased our market share on
new civil aircraft platforms including the Airbus A321neo, where we
have secured Wizz Air as the launch customer for our new wheels and
brakes; and the XAC MA700, where we have been awarded contracts to
supply fire detection and suppression systems, bleed air leak
detection systems, heat exchangers and integrated standby flight
displays.
Order growth in military has also been strong, with awards
including contracts to provide advanced engine composite components
for the F-135 engine; a $21m contract to provide fuel tanks for the
UH-60 Black Hawk helicopter; wheels and brakes, fire detectors and
bleed air leak detection systems for the KFX multi-role fighter
jet; and thermal systems for the M1 Abrams tank.
The Customer Services & Support ('CSS') organisation is
driving improvements in our aftermarket, which have contributed to
good growth across both civil and military aftermarket. We continue
to build capabilities to improve customer service and improve our
routes to market including the development of strategic alliances
with leading aircraft maintenance service providers including
Boeing and Pratt & Whitney.
Competitiveness
We remain focused on making our operational performance a key
competitive strength. This includes the continued deployment of the
Meggitt Production System ('MPS'), our global approach to
continuous improvement, together with initiatives to reduce
purchased costs through supply chain consolidation and the
rationalisation of our factory footprint by at least 20% by
2021.
During the period, we have made good progress in rationalising
our supply chain and reducing purchased costs. Deploying category
management in commodities including fasteners, machining,
electrical assemblies and printed circuit board assemblies has
enabled us to reduce purchased costs by 1.4% during the period
(June 2017: 1.2%). We continue to monitor the potential secondary
effects of import tariffs on raw materials but remain focused on
delivering our 2021 target to achieve annual net purchased cost
reductions of 2%.
Continued deployment of MPS has helped us to increase inventory
turns by 0.2x to 2.7x (December 2017 as restated: 2.5x), in line
with our target to achieve 4.0x inventory turns by 2021, while
building inventory at CSS to better service customer demand and
support continued growth.
During the first half, we have refocused MPS to accelerate the
progress of sites at the earliest stages in order to increase the
pace of improvements in customer service. One example is Meggitt
Polymers & Composites in Erlanger, a red-stage site which has
made significant investments in people, processes and technology in
order to deliver a significant increase in production across a
range of composite parts on the new narrowbody engine programmes.
We have begun to see yield, output volumes and lead times improve
but expect costs to remain elevated into 2019, as we continue to
prioritise our commitments to customers over short term financial
performance.
Culture
We are focused on building and nurturing a high performance
culture where our ambitious and diverse teams act with integrity
and help us to accelerate the execution of our strategy. In support
of this we recently announced plans to restructure our five current
capability based divisions and CSS into four customer-aligned
divisions: Airframe Systems; Engine Systems; Energy &
Equipment; and Services & Support. This new structure will help
us to accelerate growth and better leverage the operational
benefits of our continued transition from a holding company to an
integrated aerospace, defence and selected energy market Group. The
new structure will take effect from 1 January 2019.
HEADLINE FINANCIALS
Orders grew by 12% on a reported basis and by 24% on an organic
basis to GBP1,087.2m. Organic orders grew by 31% in civil
aerospace, with good underlying growth, further enhanced by the
Wizz Air aftermarket contract for wheels and brakes. In military,
organic order growth was also strong at 23% as a number of
multi-year awards were booked in the period. Organic orders in
energy declined by 6% compared to strong organic growth secured in
the prior year. Energy book to bill was 0.97x (2017 as restated:
1.35x).
Reported Group revenue of GBP952.2m (2017: GBP965.4m) decreased
by 1% as analysed in the table below:
GBPm % impact
----------------------------- ------ --------
H1 2017 revenue 965.4
Acquisitions and disposals (35.4) (3.9)
Currency movements (61.2) (6.7)
Organic growth 83.4 9.1
----------------------------- ------ --------
H1 2018 revenue 952.2 (1.4)
----------------------------- ------ --------
Currency movements in the first six months reflect the recovery
of Sterling against our trading currencies, principally the US
dollar, from the low levels in the first half of 2017. The more
recent weakness in Sterling, if sustained, would result in a modest
currency tailwind in the second half. Acquisitions and disposals
relate to the sale of Meggitt Maryland, Piezo Technologies and
Piher (completed in June 2017), Aviation Mobility (completed in
January 2018), Thomson (completed in March 2018) and Precision
Micro (completed in April 2018) partly offset by the acquisition of
Elite Aerospace in March 2017. Strong organic revenue growth
reflects particularly good performance in civil aftermarket (up
11%), military (up 8%) and energy (up 32%) markets.
The Board's preferred measure of the Group's trading performance
is underlying profit. Underlying operating profit was down 7% to
GBP150.8m (2017: GBP161.4m), representing a margin of 15.8% (2017
as restated: 16.7%). The margin decline reflects continued
challenges at MPC where prolonged elevated learning curve costs at
our Erlanger site and investments to support military revenue
growth at our Rockmart site have eroded margins; together with the
expected increase in depreciation and amortisation and free of
charge costs related to strong positions on growing new platforms.
These headwinds were partially offset by favourable end-market mix,
reductions in net purchasing costs and increased operational
efficiencies across the broader Group, including productivity
improvements from MPS and initial reductions in NPI costs.
Underlying net finance costs decreased to GBP14.7m (2017 as
restated: GBP18.3m) due principally to lower average borrowings and
beneficial exchange rate movements reducing the Sterling value of
our largely US dollar denominated finance costs.
Underlying profit before tax was GBP136.1m (2017 as restated:
GBP143.1m). As previously guided the underlying tax rate decreased
to 21% (2017 as restated: 23%) as a result of the US tax reforms
enacted in late 2017. Underlying earnings per share was 13.9p (2017
as restated: 14.2p).
On a statutory basis, operating profit for the period decreased
by 37% to GBP123.8m (2017 as restated: GBP196.3m) and profit before
tax decreased by 39% to GBP105.2m (2017 as restated: GBP172.2m).
Statutory profit includes the GBP22.0m gain (2017: GBP53.2m) on the
disposal of the three non-core businesses and a GBP2.7m gain (2017
as restated: GBP36.5m) on the non-cash marking to market of
financial instruments. Earnings per share decreased by 40% to 11.7p
(2017 as restated: 19.6p), driven by the reduction in profit before
tax. The adjustments between underlying and statutory profit are
consistent with prior periods and are described in notes 4 and
9.
The interim dividend is increased by 5% to 5.30p (2017: 5.05p)
reflecting our ongoing confidence in the outlook for the Group and
our commitment to a progressive dividend. This will be paid on 28
September 2018 to shareholders on the register on 7 September
2018.
Free cash flow increased 19% to GBP27.1m (2017 as restated:
GBP22.8m), driven by reductions in development costs, working
capital outflows, operating exceptionals and interest payments.
This was partly offset by increased capital expenditure to expand
capacity and support future site rationalisation, and pension
deficit payments.
The seasonal net cash outflow of GBP35.8m (2017 as restated:
outflow of GBP3.0m) includes the GBP32.9m net proceeds from the
sale of non-core businesses together with the payment of the 2017
final dividend.
There are two main financial covenants in our financing
agreements. The net borrowings:underlying EBITDA ratio, which must
not exceed 3.5x, was 1.9x at 30 June 2018 (June 2017: 2.2x) and
interest cover, which must be not less than 3.0x, was 14.7x (June
2017: 12.5x). The Group has, therefore, significant headroom
against both key covenant ratios, and net borrowings:underlying
EBITDA is in the middle of our target range of 1.5x to 2.5x.
The Group has GBP293.5m of undrawn headroom against committed
bank facilities, after taking account of surplus cash.
TRADING SUMMARY
Revenue (GBPm) Growth (%)
H1 2017
H1 2018 restated Reported Organic
Civil OE 217.7 224.7 (3.1) 3.8
Civil AM 300.9 290.3 3.7 11.0
------------- -------- ---------- --------- --------
Total Civil 518.6 515.0 0.7 7.9
Military 321.2 322.2 (0.3) 7.6
Energy 61.8 57.5 7.5 31.8
Other 50.6 70.7 (28.4) 9.1
------------- -------- ---------- --------- --------
TOTAL 952.2 965.4 (1.4) 9.1
------------- -------- ---------- --------- --------
Civil aerospace
Meggitt operates in three main segments of the civil aerospace
market: large jets, regional aircraft and business jets. The large
jet fleet includes over 23,000 aircraft, the regional aircraft
fleet over 6,000 and business jets around 19,000. The Group has
products on virtually all these platforms and hence a very large,
and growing, installed base. The split of civil revenue, which
accounts for 55% of the Group total, is 58% aftermarket and 42%
original equipment (OE).
Civil OE revenue grew 3.8% on an organic basis. Large jet OE,
the most significant driver of our OE revenue, also grew by 3.8%
with particularly good growth on the Airbus A320neo family, A350XWB
and Boeing 737MAX offset by declining revenue on widebody
platforms, including Boeing 777 and 787 and Airbus A380. The growth
rate in large jets was also diluted by lower demand for our
composite radomes, as we had anticipated. Radomes for inflight
connectivity have grown consistently since we acquired the advanced
composites businesses in 2015, but our principal customer
experienced delays in other parts of its supply chain during late
2017 and, as expected, has reduced radome demand in 2018 as it
restocked other critical components. This, together with some of
our customers reducing buffer stocks they had built to reduce risk
in moving to full rate production, resulted in first quarter large
jet revenue declining by 3.4%. In the second quarter, large jet
revenue grew by 11.4%, where our market share gains on new
platforms combined with steady growth in deliveries have enabled us
to outperform the market.
Business jet OE revenue returned to growth for the first time
since 2015 during the first half, with organic revenue growth of
18.0% reflecting good demand for Legacy 500 and Global 7000
aircraft. Regional aircraft OE revenue was down 27.5% on an organic
basis, with lower demand for CRJ, E-170, E-190 and SJ100 aircraft,
partially offset by modest growth on ARJ21 and MRJ.
Civil aftermarket revenue grew organically by 11.0% driven by
particularly strong growth in large jet aftermarket where our
growing content on new generation aircraft and the improved
capabilities within our CSS organisation have been further enhanced
by positive demand drivers. These have included continued good
traffic growth and the scarcity of Meggitt used surplus material
('USM') as a result of low levels of retirements from the global
fleet and record passenger load factors. Civil aftermarket revenue
growth also benefitted from continued stocking demand associated
with distributor agreements signed in late 2017.
In the first six months, large jet aftermarket grew by 14.8% on
an organic basis with strong demand for spares on Airbus A320ceo
and A350XWB and Boeing 777 and 787, together with growing demand
for our brakes on the Airbus A220 (formerly Bombardier CSeries)
which has now been in service for two years. This growth was
partially offset by lower demand on the Airbus A380 and for brakes
on old platforms (particularly MD80 and MD90) which had strong
comparatives in 2017.
Regional jet aftermarket revenue grew by 8.6% organically,
reflecting good demand for E-170, Dornier 228/328, CRJ1000 and
ARJ21 driven by an acceleration in aircraft utilisation in the
second quarter. This was offset by declining revenue on platforms
including Fokker aircraft and ATR-72.
Business jet aftermarket revenue grew by 4.6% on an organic
basis. In the first quarter, revenue declined by 5.7% compared to a
much stronger first three months in 2017 when we had grown by
22.0%. In the second quarter, revenue grew by 15.1% reflecting good
demand for Gulfstream G-I/II/III and G500/550, Dassault 7X and
Hawker 750-900. This was offset by lower revenue on Gulfsream G-V
and G-650 platforms.
Overall civil aerospace revenue increased by 7.9% on an organic
basis.
Deliveries of large jets by Airbus and Boeing are underpinned by
a firm order backlog extending over a number of years, which
together with our increased shipset content on these platforms,
gives us further confidence in the growth outlook for OE revenue.
Deliveries of regional aircraft are expected to remain at current
rates over that period. Deliveries of business jets are set to grow
gradually to 2020, with the most potential coming at the smaller
end of the market which was hardest hit during the last
downturn.
Air traffic, measured in available seat kilometres (ASKs), is a
key driver of demand for spares and repairs on large and regional
aircraft. ASKs grew 6% globally in the five months to May 2018,
above the long--term trend rate of 5%. Industry forecasts are for
air traffic to continue to grow at or above the trend rate in the
medium term. Regional jet utilisation (measured in terms of take
offs and landings) grew by 3% in the six months to June 2018 and,
with strong positions as the provider of braking systems on the
larger regional aircraft (principally the Embraer E-Jet and
Bombardier CRJ), we would expect to outperform the market over the
medium term. Business jet utilisation in the US and Europe grew by
2% during the five months to May 2018 and with our higher value
content and growing market share in brakes for large cabin business
jets, we should continue to drive above market revenue growth over
the medium term.
Military
Military business accounted for 34% of Group revenue in H1 2018.
We have equipment on an installed base of around 22,000 fixed wing
and rotary aircraft and a significant number of ground vehicles and
training applications. Direct sales to US customers accounted for
72% of military revenue (June 2017: 69%), with 19% to European
customers (June 2017: 23%) and 9% to the rest of the world (June
2017: 8%).
Military revenue grew 7.6% on an organic basis. In the first
quarter, revenue increased by 2.0% as we continued to see a lag
between good order growth (1.08x book to bill in military during
the full year 2017) and revenue. In the second quarter, revenue
grew by 13.7% as a result of demand for fighter jets, particularly
F-35 Lightning where we provide a broad range of composite parts
for the engine and F/A--18 Hornet where we have begun deliveries of
the recent large retrofit order forfuel tanks. Good growth on
helicopters and ground vehicles and increased demand for training
systems offset declining revenue on light attack and transport
aircraft.
The long term outlook for defence expenditure in the US, our
single most important military market, is more positive than it has
been in recent years. Military budgets are forecast to grow by at
least 4% per annum from a higher base and there remains significant
opportunity for retrofit and reset activity.
Energy and other
Energy and other revenue (11% of Group total) come from a
variety of end markets of which the single most significant is
energy (6% of Group total). Our energy capabilities centre on
providing valves and condition-monitoring equipment for power
generation installations, including ground-based gas and wind
turbines, and printed circuit heat exchangers used primarily in the
oil and gas market. Other markets (5% of Group total) include the
automotive, industrial, test, consumer goods and medical
sectors.
As expected energy revenue grew strongly, by 31.8% on an organic
basis. Heatric revenue increased significantly in the first half
having passed a trough in demand during the same period in 2017.
Organic revenue in power generation segments grew by 8.9%, driven
by steady demand for gas turbines where we have good positions with
customers including Siemens, GE and Solar Turbines based on strong
aero--derivative technology.
The long-term growth expectations for our energy businesses, and
particularly Heatric, remain good. We have differentiated
technology which plays a critical role in the extraction and
transport of deep-water offshore gas reserves and good
opportunities for use in adjacent markets. The balance of our
energy businesses will continue to benefit from synergistic
relationships across business divisions and the long term demand
for energy, particularly in emerging markets.
OPERATIONAL PERFORMANCE
The financial performance of the individual divisions is
summarised in the table below:
Underlying Operating Profit
Revenue (GBPm) (GBPm)
% Growth % Growth
---------- ----------------- ------- ---------- -----------------
H1 2018 H1 2017(6) Reported Organic Division H1 2018 H1 2017(6) Reported Organic
---------- -------- ------- ------- ---------- -------- -------
Aircraft Braking
162.4 172.0 -6 +1 Systems 40.2 49.6 -19 -18
---------- -------- ------- ---------------------- ------- ---------- -------- -------
268.2 256.5 +5 +13 Control Systems 61.3 56.3 +9 +18
---------- -------- ------- ---------------------- ------- ---------- -------- -------
173.3 167.4 +4 +10 Polymers & Composites 2.3 21.9 -90 -91
---------- -------- ------- ---------------------- ------- ---------- -------- -------
237.0 252.3 -6 +5 Sensing Systems 34.8 32.0 +9 +14
---------- -------- ------- ---------------------- ------- ---------- -------- -------
111.3 117.2 -5 +23 Equipment Group 12.2 1.6 n/m n/m
---------- -------- ------- ---------------------- ------- ---------- -------- -------
952.2 965.4 -1 +9 Total Group 150.8 161.4 -7 -2
---------- -------- ------- ---------------------- ------- ---------- -------- -------
(6) Prior period figures for the Group have been restated to
reflect the impact of IFRS 15 / 16.
Meggitt Aircraft Braking Systems (MABS) provides wheels, brakes
and brake control systems for around 35,000 in-service aircraft. It
continues to develop innovative technology for new programmes
enabling the business to retain its leading position in business
jets, regional jets and military jets; and to build a growing
position in large jet braking systems. The division represents 17%
of Group revenue, generating 91% of its revenue from the
aftermarket and 9% from OE sales.
MABS revenue grew by 1% on an organic basis with growth in civil
partly offset by declining military revenue.
MABS civil revenue grew by 3% on an organic basis. In large
jets, growing demand for spares on the Airbus A220 which has now
been in service for over two years, was offset by decreasing
revenue on older aircraft (including MD90, MD80, MD11, DC10 and
DC9) that performed well during the full year 2017. In regional
jets, organic aftermarket revenue increased by 9% as a result of
good growth in utilisation during the second quarter, driving
increased demand for brakes on E-170/190, CRJ and ARJ21 which
offset lower growth on Fokker and Saab platforms. Business jet
aftermarket revenue grew by 4% with good growth on Gulfstream
G500/550, G-I/II/III and Hawker 750/900, partially offset by lower
demand for Gulfstream G-V.
Military revenue at MABS declined by 7% on an organic basis with
declining revenue on Typhoon, Hawk and transport aircraft, only
partially offset by increased demand on helicopters and F-16.
Growth on F--35 brakes was negligible during the period as a result
of delays during the first quarter but we expect demand on F-35
brakes to accelerate during the second half.
Operating margins declined from 28.8% to 24.8%, driven by lower
demand for brakes on older large jet aircraft, which are typically
some of our highest margin spare parts, and growth in free of
charge shipsets.
Meggitt Control Systems (MCS) designs and manufactures products
which manage the flow of liquids and gases around aero and
industrial turbines, and control the temperature of oil, fuel and
air in aircraft engines. The division, which also provides fire
protection equipment to engines and airframes, represents 28% of
Group revenue, generating 60% of its revenue from the aftermarket
and 40% from OE.
MCS revenue was up 13% on an organic basis with 16% growth in
civil aerospace, 7% growth in military and 8% growth in energy.
In civil aerospace, OE revenue grew organically by 8% with
market share gains on new platforms contributing to strong growth
in large jets (principally on A320neo family, 737MAX and A350XWB)
offset by declining revenue on 787, 767 and in regional jets.
Aftermarket revenue grew organically by 21%, which was
supplemented in the period by stocking associated with our new
distributor agreement signed in late 2017 to manage the long tail
of small distributors that had previously purchased spares direct
from the Group. Underlying performance was also strong in large
jets where air traffic growth, record passenger load factors and
scarce supply of USM have driven growth in the underlying market.
Revenue growth was particularly strong on 777, 737, A320, A350XWB
and A340. Aftermarket revenue in business jets and regional jets
also increased during the first six months.
In military, revenue grew organically by 7% with strong demand
on F-16, UH-60, C-130J, F/A-18 and V-22 offset by declines on F-15.
Lastly energy grew organic revenue by 8%, driven by a good
performance in demand for industrial gas turbines and safety
systems for the energy sector.
Operating margins increased from 21.9% to 22.9% driven by
reductions in NPI costs and favourable mix, partly offset by
continued investment in new capabilities and capacity in CSS.
Meggitt Polymers & Composites (MPC) supplies a range of fuel
systems, complex composite assemblies and seals packages for civil
and military platforms. These products are linked by their
dependence on similar materials technology and manufacturing
processes. It supplies over 80% of the US military requirements for
fuel bladders and ballistically-resistant and crashworthy fuel
tanks and is the leading independent provider of high temperature
engine composites. MPC represents 18% of Group revenue and
generates 64% of its revenue from OE and 36% from the
aftermarket.
MPC revenue increased 10% on an organic basis with 21% growth in
military revenue partly offset by modest civil aerospace revenue
growth. In civil aerospace, growth in demand for engine composites
was offset by lower demand for our composite radomes where our
principal customer experienced delays elsewhere within its supply
chain during late 2017 which has led, as anticipated, to destocking
in the first six months.
In military, organic growth of 21% was driven by good demand for
F/A-18 fuel tanks and F-35 engine composites. Additional growth on
EH-101, V-22, P-8, AH-64 and Lynx helicopters offset declining
revenue on KC-135, F-15 and UH-60, although on the latter we have
recently secured a $21m orders for fuel tanks.
Operating margin decreased from 13.1% to 1.3% reflecting the
increased costs required to ramp up production of advanced engine
composites that first materialised during the second half of 2017.
The on-going investment in people, process and plant to meet this
complex challenge has begun to deliver operational improvements.
Whilst we expect some financial improvement in the second half, the
full recovery will extend into 2019.
We have also made significant investments in capacity to support
accelerated growth in military, including recruitment of over 300
new staff at our Rockmart site required to manufacture retrofit
fuel tanks for the F/A-18. The training investment and build-up of
finished product has added significant incremental costs which are
now starting to generate meaningful revenue growth.
Meggitt Sensing Systems (MSS) designs and manufactures highly
engineered sensors to measure a variety of parameters such as
vibration, temperature, pressure, fluid level and flow as well as
power storage, conversion and distribution systems and avionics
suites for aerospace applications. Its products are designed to
operate effectively in the extreme conditions of temperature,
vibration and contamination that exist in an aircraft or
ground-based turbine engine. Sensors are combined into broader
electronics packages, providing condition data to operators and
maintainers of engines, contributing to improved safety and lower
operating costs. Combining its capabilities with MABS, it has a
number of civil aerospace tyre pressure monitoring systems already
in service and further systems under development, having secured
positions for this technology on 10 aircraft platforms. It has also
secured a contract to provide wireless tyre pressure monitoring
systems across the Textron Aviation business jet fleet. MSS
represents 25% of Group revenue and generated 76% of its revenue
from OE and 24% from the aftermarket.
MSS revenue grew 5% on an organic basis, with growth in each of
its end markets. In civil aerospace, OE revenue grew organically by
6%, driven by good growth in business jets and civil
helicopters.
Aftermarket revenue grew organically by 1% with growth in large
jet platforms including Boeing 787 and 767 and Airbus A320 offset
by lower demand for 747. Military revenue was up 1% with good
growth on F-35 offset by declining revenue on Hawk, Typhoon, UH-60
and A400M. Energy revenue increased by 10% on an organic basis
following a reorganisation of the business and a more focused sales
campaign to both distributors and direct to end users of industrial
gas turbines.
Operating margins increased from 12.7% to 14.7% reflecting
reductions in NPI costs, lower R&D expenses, increased
productivity and the disposal of lower margin businesses which were
more than enough to offset an increase in free of charge costs
within the division.
Meggitt Equipment Group (MEG) comprises principally our
dedicated military businesses and Heatric. The division represents
12% of Group revenue and generates 78% of its revenue from OE and
22% from the aftermarket.
MEG revenue increased by 23% on an organic basis, driven by the
expected growth in energy following the weak comparative period
last year, as well as good military revenue growth. Military
revenue grew by 8% on an organic basis, reflecting strong growth in
our training business as well as good demand for defence systems on
M1 Abrams, helicopters and F/A-18.
Operating margins increased from 1.4% to 11.0% driven by the
recovery at Heatric and improved operational leverage at Meggitt
Training Systems.
In March 2018, we completed the sale of Thomson to Umbra
Cuscinetti and in April 2018, we completed the sale of Precision
Micro to LDC. In aggregate, these two units generated GBP11.6m of
revenue in the first half.
INVESTING FOR THE FUTURE
% Change
------------------------------------- -------- ----------
H1 2017
GBPm H1 2018 Restated Reported Organic
------------------------------------- -------- ---------- --------- --------
Total research and development
(R&D) 65.7 76.6 -14 -9
Less: Customer funded (13.0) (15.1) -14 -9
Less: Capitalised (27.1) (29.0) -7 -5
Add: Amortisation / Impairment 10.9 8.1 +35 +39
------------------------------------- -------- ---------- --------- --------
Charge to net operating
costs 36.5 40.6 -10 -2
Capital expenditure 36.8 33.4 +10 +29
------------------------------------- -------- ---------- --------- --------
Targeted investment in technology development remains critical
to our long-term organic growth. Total R&D expenditure in the
first half reduced to GBP65.7m and was 6.9% of revenue (2017 as
restated: GBP76.6m, 7.9%), of which 20% (2017 as restated: 20%) was
funded by customers. The charge to net operating costs, including
amortisation and impairment, decreased by 10% (2% on an organic
basis) to GBP36.5m (2017 as restated: GBP40.6m).
Reduced spend on R&D reflects the progress made on
development programmes for major new aircraft platforms including
the Airbus A220, the Gulfstream G500/600 which is due to enter
service in 2018 and Boeing 777X which is due to enter service in
2019. As more programmes pass key milestones over the next few
years, we expect R&D to reduce further as a percentage of
revenue.
The NPI expenditure associated with these platforms has now also
reached its peak, with production efficiencies beginning to
contribute to margin improvement in Meggitt Control Systems and
Meggitt Sensing Systems.
We continue to expect growth in expensed R&D relating to our
successful applied research and technology (AR&T) programmes,
which will develop the next generation products and manufacturing
technologies required to enable future aircraft programmes.
Investment in retrofit, modification and upgrades will also
continue to grow as we target more growth from mid-life upgrades,
capitalising on the increased market and product performance
knowledge garnered through our CSS organisation.
Capital expenditure on property, plant and equipment and
intangible assets was GBP36.8m (2017: GBP33.4m) a 29% increase on
an organic basis. This is principally driven by continued
investment to build capacity and support growth. Capital
expenditure will increase further in the second half, as we
accelerate rationalisation of the Group's manufacturing footprint
and IT infrastructure.
FOREIGN EXCHANGE
The strengthening of Sterling against the US dollar adversely
affected our reported results for the period.
Translation of results from overseas businesses reduced Group
revenue by GBP49.2m and underlying profit before tax (PBT) by
GBP7.2m in the first six months. The sensitivity of full-year
revenue and underlying PBT to future exchange rate translation
movements, when compared to the 2018 H1 average rates, is shown in
the table below:
Underlying
2018 H1 Revenue PBT
average rate GBP'm GBP'm
---------------------------- -------------- -------- -----------
Impact of 10 cent movement
US Dollar 1.36 90 12
Swiss Franc 1.33 8 3
Euro 1.14 11 2
---------------------------- -------------- -------- -----------
Transaction exposure, where revenue and/or costs of our
businesses are denominated in a currency other than their own,
reduced revenue by GBP12.0m and increased underlying PBT by GBP1.2m
in the period. We typically hedge transaction exposure and the
following table details hedging currently in place:
Hedging in place7 Average transaction
% rates8
----------------------- ------------------ --------------------
2018
US Dollar/Sterling 100 1.43
US Dollar/Swiss Franc 89 1.07
US Dollar/Euro 88 1.21
2019 - 2022 inclusive
US Dollar/Sterling 59 1.40
US Dollar/Swiss Franc 40 1.08
US Dollar/Euro 38 1.22
----------------------- ------------------ --------------------
7 Based on forecast transaction exposures.
8 Hedging in place with unhedged exposures based on exchange
rates at 30 June 2018
Taking translation and transaction benefit into account, 2018
reported revenue reduced by GBP61.2m and underlying PBT reduced by
GBP6.0m.
RETIREMENT BENEFIT SCHEMES
Scheme deficits in the period reduced from GBP308.1m (at 31
December 2017) to GBP245.5m. The financial assumptions used to
discount scheme liabilities moved favourably with an increase in
the rate used to discount scheme liabilities in both the UK and US
and a small reduction in UK long term inflation assumptions. These,
together with deficit reduction payments, more than offset a
volatile asset performance.
The Group made deficit reduction payments in the first half of
GBP16.4m (2017: GBP14.0m). In the UK, the 2018 triennial valuation
is in progress with a modest increase in the deficit, not covered
by the existing recovery plan which ends in March 2024,
anticipated. The valuation is expected to be finalised in 2019 and
will have no impact on contributions for 2018.
In the US, we are planning to accelerate deficit reduction
contributions scheduled over the next four years into a single $40m
payment in the third quarter of 2018. This will have the benefit of
reducing our Pension Benefit Guaranty Corporation ('PBGC') levy
while also being allowable against our 2017 taxable income.
GROUP OUTLOOK
The outlook for our civil markets is good. Growth in deliveries
of large jets is expected to continue, and the increased shipset
values we enjoy on the latest generation of large jets support
organic civil OE revenue growth over the medium term ahead of
overall market growth. In 2018, we continue to expect civil OE
revenue to grow organically, albeit at a lower rate than the recent
past given the destocking trends on large jets and for composite
radomes we have seen during the past nine months. Civil OE
revenue grew organically by 4% in the first half and the Group
expects organic revenue of between 2 and 4% for the full year.
.Available seat kilometres, an important driver of our large and
regional jet aftermarket, continue to grow above the long-term
trend of 5% per annum. This, combined with the benefits of our CSS
organisation, expanded content on new aircraft, and low rates of
retirements which have led to reduced availability of surplus parts
means that we expect to outgrow the market for civil spares in the
medium term. In H1 2018, civil aftermarket organic revenue grew by
11%, with strong underlying demand enhanced by initial provisioning
for new distributor agreements. For the full year, we expect
organic civil aftermarket revenue growth of 4 to 6% reflecting an
expectation of lower revenue growth in the second half as a result
of the non-recurrence of distributor stocking revenue, slower
growth in business and regional jet segments and the accelerated
rate of growth delivered in the fourth quarter in 2017.
In military markets the potential for growth over the medium
term is good, with the US Department of Defense forecast to grow
total expenditure by 4% and by 7% in its procurement and research,
development, test and evaluation accounts, which are of most
relevance to our business. Our compelling technology offering and
broad platform exposure should enable us to outgrow the market
overall. Strong order momentum during the past 18 months began to
translate into accelerated revenue growth during the second
quarter, with particular strength in demand for training equipment
and retrofit fuel tanks for the F/A-18. For the full year, we
expect organic military revenue growth of between 6 and 8%
reflecting an expectation of continued good demand for new
production equipment, spares and repairs and training
equipment.
In energy, the Group has strong positions in selected markets
based on aero-derivative technologies (valves, actuators and
sensing systems for industrial gas turbines) and other applications
linked to our core aerospace competencies (thermal management).
Growth in global economic activity will increase demand for Meggitt
products and services over the long term. In the near term, the
return of investment in oil and gas infrastructure and potential
for growth in demand for liquid natural gas will provide good
growth opportunities for Heatric. As a result of increased
confidence in this near-term recovery at Heatric, the Group now
expects full year organic revenue growth in the segment to exceed
5%.
On the basis of the above, we expect 4 to 6% Group organic
revenue growth in 2018 (increased on 2 July from 2 to 4%). An
improving performance at MPC in the second half of 2018 will lead
to improved margins in the remainder of the year with operating
margins expected to be towards the lower end of our guidance range
of 17.7 to 18.0%.
CONDENSED CONSOLIDATED UNAUDITED INCOME STATEMENT
For the six months ended 30 June 2018
Six months Six months
ended ended
30 June 30 June
2018 2017
Restated
Notes GBPm GBPm
Revenue 3 952.2 965.4
Cost of sales (607.8) (597.2)
----------- -----------
Gross profit 344.4 368.2
Net operating costs (220.6) (171.9)
----------- -----------
Operating profit (1) 123.8 196.3
Finance income 0.5 0.7
Finance costs (19.1) (24.8)
----------- -----------
Net finance costs 7 (18.6) (24.1)
Profit before tax (2) 105.2 172.2
Tax 8 (14.8) (20.6)
Profit for the period attributable to
equity owners of the Company 90.4 151.6
=========== ===========
Earnings per share:
Basic (3) 9 11.7p 19.6p
Diluted (4) 9 11.5p 19.2p
3 &
(1) Underlying operating profit 4 150.8 161.4
(2) Underlying profit before tax 4 136.1 143.1
(3) Underlying basic earnings per share 9 13.9p 14.2p
(4) Underlying diluted earnings per
share 9 13.7p 13.9p
----------------------------------------- ------ ----------- -----------
CONDENSED CONSOLIDATED UNAUDITED STATEMENT OF COMPREHENSIVE
INCOME
For the six months ended 30 June 2018
Six months Six months
ended ended
30 June 30 June
2018 2017
Restated
Notes GBPm GBPm
Profit for the period attributable to equity
owners of the Company 90.4 151.6
Items that may be reclassified to the income
statement in subsequent periods:
Currency translation movements 23 22.6 (82.9)
Movements in fair value of financial liabilities
arising from changes in credit risk 15 0.5 (1.0)
Cash flow hedge movements 23 (0.3) (0.1)
Tax effect - 0.2
----------- -----------
22.8 (83.8)
Items that will not be reclassified to the income
statement in subsequent periods:
Remeasurement of retirement benefit obligations 55.1 31.4
Tax effect (10.7) (5.7)
----------- -----------
44.4 25.7
Other comprehensive income/(expense) for
the period 67.2 (58.1)
Total comprehensive income for the period attributable
to equity owners of the Company 157.6 93.5
=========== ===========
CONDENSED CONSOLIDATED UNAUDITED BALANCE SHEET
As at 30 June 2018
30 June 31 December
2018 2017
Restated
Notes GBPm GBPm
Non-current assets
Goodwill 12 1,978.6 1,944.9
Development costs 12 523.3 496.4
Programme participation costs 12 17.1 17.1
Other intangible assets 12 638.1 672.1
Property, plant and equipment 13 405.3 406.8
Investments 13.8 13.6
Trade and other receivables 34.4 38.7
Contract assets 29.4 29.6
Derivative financial instruments 15 17.6 28.5
Deferred tax assets 26.5 26.4
---------- ------------
3,684.1 3,674.1
Current assets
Inventories 452.7 401.7
Trade and other receivables 377.5 389.7
Contract assets 53.0 44.8
Derivative financial instruments 15 10.6 3.6
Current tax recoverable 4.8 4.3
Cash and cash equivalents 103.7 118.5
Assets classified as held for sale - 9.7
---------- ------------
1,002.3 972.3
Total assets 3 4,686.4 4,646.4
Current liabilities
Trade and other payables (381.8) (400.6)
Contract liabilities (47.0) (46.9)
Derivative financial instruments 15 (15.3) (17.3)
Current tax liabilities (49.4) (39.6)
Lease liabilities (14.2) (14.5)
14
Bank and other borrowings & 15 (63.1) (71.4)
Provisions 16 (61.5) (65.7)
Liabilities directly associated with assets
classified as held for sale - (7.8)
---------- ------------
(632.3) (663.8)
Net current assets 370.0 308.5
Non-current liabilities
Trade and other payables (7.6) (5.5)
Contract liabilities (23.3) (23.1)
Derivative financial instruments 15 (15.0) (14.6)
Deferred tax liabilities (151.6) (144.4)
Lease liabilities (76.2) (79.6)
14
Bank and other borrowings & 15 (1,072.9) (1,005.8)
Provisions 16 (74.4) (82.5)
Retirement benefit obligations 17 (245.5) (308.1)
---------- ------------
(1,666.5) (1,663.6)
Total liabilities (2,298.8) (2,327.4)
Net assets 2,387.6 2,319.0
========== ============
Equity
Share capital 38.8 38.8
Share premium 1,222.5 1,222.2
Other reserves 15.7 15.7
Hedging and translation reserves 422.4 399.6
Retained earnings 688.2 642.7
---------- ------------
Total equity attributable to owners of the
Company 2,387.6 2,319.0
========== ============
CONDENSED CONSOLIDATED UNAUDITED STATEMENT OF CHANGES IN
EQUITY
For the six months ended 30 June 2018
Equity attributable to owners of the Company
-------------------------------------------------------------------------
Hedging
Share Share Other and translation Retained Total
capital premium reserves reserves earnings equity
GBPm GBPm GBPm GBPm GBPm GBPm
At 1 January 2017 (Restated) 38.8 1,219.8 15.7 552.3 433.6 2,260.2
Profit for the period - - - - 151.6 151.6
Other comprehensive
(expense)/income - - - (83.8) 25.7 (58.1)
Total comprehensive
(expense)/income for
the period - - - (83.8) 177.3 93.5
Employee share schemes:
Value of services provided - - - - 4.5 4.5
Issue of equity share
capital - 0.2 - - (0.2) -
Purchase of own shares
for employee share schemes - - - - (9.0) (9.0)
Dividends (note 10) - - - - (79.6) (79.6)
At 30 June 2017 (Restated) 38.8 1,220.0 15.7 468.5 526.6 2,269.6
===== ======== ===== ========= ======== ========
At 1 January 2018 (Restated) 38.8 1,222.2 15.7 399.6 642.7 2,319.0
Profit for the period - - - - 90.4 90.4
Other comprehensive
income - - - 22.8 44.4 67.2
Total comprehensive
income for the period - - - 22.8 134.8 157.6
Employee share schemes:
Value of services provided - - - - 6.8 6.8
Issue of equity share
capital - 0.3 - - (0.3) -
Purchase of own shares
for employee share schemes - - - - (12.5) (12.5)
Dividends (note 10) - - - - (83.3) (83.3)
At 30 June 2018 38.8 1,222.5 15.7 422.4 688.2 2,387.6
===== ======== ===== ======= ========= =========
CONDENSED CONSOLIDATED UNAUDITED CASH FLOW STATEMENT
For the six months ended 30 June 2018
Six months Six months
ended ended
30 June 30 June
2018 2017
Restated
Notes GBPm GBPm
Cash inflow from operations before business
acquisition and disposal expenses and exceptional
operating items 123.9 124.7
Cash outflow from business acquisition
and disposal expenses 24 (3.6) (2.1)
Cash outflow from exceptional operating
items 5 (5.3) (8.0)
---------------------------------------------------- ------ ----------- -----------
Cash inflow from operations 21 115.0 114.6
Interest received 0.1 0.1
Interest paid (15.5) (19.4)
Tax paid (11.4) (10.2)
-----------
Cash inflow from operating activities 88.2 85.1
----------- -----------
Business acquired - (18.7)
Businesses disposed 24 36.5 83.6
Capitalised development costs 12 (27.1) (29.0)
Capitalised programme participation costs (0.8) (2.0)
Purchase of intangible assets (9.2) (6.5)
Purchase of property, plant and equipment (29.4) (28.4)
Proceeds from disposal of property, plant
and equipment 1.8 1.5
-----------
Cash (outflow)/inflow from investing activities (28.2) 0.5
----------- -----------
Dividends paid to Company's shareholders 10 (83.3) (79.6)
Purchase of own shares for employee share
schemes (12.5) (9.0)
Proceeds from bank and other borrowings 14 122.6 36.3
Repayments of bank and other borrowings 14 (93.9) (103.8)
Repayments of lease liabilities (6.8) (4.3)
----------- -----------
Cash outflow from financing activities (73.9) (160.4)
=========== ===========
Net decrease in cash and cash equivalents (13.9) (74.8)
Cash and cash equivalents at start of the
period 118.5 173.8
Exchange losses on cash and cash equivalents (0.9) (2.4)
----------- -----------
Cash and cash equivalents at end of the
period 103.7 96.6
=========== ===========
NOTES TO THE CONDENSED CONSOLIDATED UNAUDITED FINANCIAL
STATEMENTS
For the six months ended 30 June 2018
1. General information
Meggitt PLC is a public limited company listed on the London
Stock Exchange, domiciled in the United Kingdom and incorporated in
England and Wales with the registered number 432989. It is the
parent company of a Group whose principal activities during the
period were the design and manufacture of high performance
components and sub--systems for aerospace, defence and other
specialist markets, including energy, medical, industrial, test and
automotive.
The condensed consolidated financial statements presented in
this document have not been audited or reviewed and do not
constitute Group statutory accounts as defined in section 434 of
the Companies Act 2006. Group statutory accounts for the year ended
31 December 2017 were approved by the Board of Directors on 26
February 2018 and delivered to the Registrar of Companies. The
auditors' report on those accounts was unqualified, did not draw
attention to any matters by way of emphasis and did not contain a
statement under section 498(2) or (3) of the Companies Act
2006.
The condensed consolidated financial statements for the six
months ended 30 June 2018 have been prepared in accordance with the
Disclosure Guidance and Transparency Rules of the Financial Conduct
Authority and International Accounting Standard 34, 'Interim
Financial Reporting' as adopted by the European Union. They should
be read in conjunction with the Group's financial statements for
the year ended 31 December 2017 which have been prepared in
accordance with IFRSs as adopted by the European Union. The
directors have formed a judgement, at the time of approving the
condensed consolidated financial statements, that there is a
reasonable expectation that the Group has adequate resources to
continue in operational existence for a period of at least 12
months from the date of approval of this interim management report.
For this reason, the directors continue to adopt the going concern
basis in preparing these condensed consolidated financial
statements.
2. Accounting policies
The condensed consolidated financial statements have been
prepared using the same accounting policies adopted in the Group's
financial statements for the year ended 31 December 2017, except as
described below.
A number of new standards have been adopted for the current
reporting period. The Group has updated its accounting policies to
reflect the impact of these standards, which has resulted in a
restatement of prior period comparatives as described in note 25.
The standards which have been adopted for the first time and which
have had a significant impact on the condensed consolidated
financial statements are:
-- IFRS 9, 'Financial instruments';
-- IFRS 15, 'Revenue from contracts with customers'; and
-- IFRS 16, 'Leases'.
The tax charge for the period has been calculated using the
expected effective tax rates for each tax jurisdiction for the year
ended 31 December 2018. These rates have been applied to the
pre--tax profits made in each jurisdiction for the six months ended
30 June 2018.
In applying the Group's accounting policies, the Group is
required to make certain estimates and judgements concerning the
future. These estimates and judgements are regularly reviewed and
revised as necessary. The estimates and judgements that have the
most significant effect on amounts included in the condensed
consolidated financial statements are the same as those that
applied to the consolidated financial statements for the year ended
31 December 2017, as disclosed on pages 121 to 122 of the Group's
2017 Annual Report, with the exception of programme participation
costs - free of charge/deeply discounted manufactured parts.
Following the adoption of IFRS 15, all such programme participation
costs are now expensed as incurred and a judgement is therefore no
longer required as to when such costs meet the requirements to be
capitalised under the Group's previous accounting policy.
3. Segmental analysis
The Group manages its businesses under the key segments of
Meggitt Aircraft Braking Systems, Meggitt Control Systems, Meggitt
Polymers & Composites, Meggitt Sensing Systems and the Meggitt
Equipment Group.
The key performance measure reviewed by the Chief Operating
Decision Maker ('CODM') is underlying operating profit. The CODM
has been identified as the Board.
In addition to the impact of restating the prior period
segmental analysis for the impact of IFRS 15 and IFRS 16, it has
also been restated to reflect the transfer of responsibility for
certain aftermarket operations from Meggitt Aircraft Braking
Systems and Meggitt Sensing Systems to Meggitt Control Systems.
Six months ended 30 June 2018:
Meggitt
Meggitt Meggitt Polymers Meggitt Meggitt Total
Aircraft Control & Sensing Equipment
Braking Systems Composites Systems Group
Systems
GBPm GBPm GBPm GBPm GBPm GBPm
Gross segmental revenue 165.5 268.8 173.9 254.1 118.4 980.7
Inter-segment revenue (3.1) (0.6) (0.6) (17.1) (7.1) (28.5)
----------
Revenue 162.4 268.2 173.3 237.0 111.3 952.2
========== ========= ============ ========= =========== =======
At a point in time 148.3 265.7 171.3 234.9 73.7 893.9
Over time:
PbH/CBL* 14.1 2.5 - 2.1 - 18.7
Other - - 2.0 - 37.6 39.6
Revenue 162.4 268.2 173.3 237.0 111.3 952.2
========== ========= ============ ========= =========== =======
Civil OE 6.3 68.7 56.2 85.3 1.2 217.7
Civil Aftermarket 120.6 124.4 19.8 35.7 0.4 300.9
Military 34.7 46.6 89.5 65.8 84.5 321.1
Energy - 19.6 - 25.4 16.8 61.8
Other 0.8 8.9 7.8 24.8 8.4 50.7
---------- --------- ------------ --------- ----------- -------
Revenue 162.4 268.2 173.3 237.0 111.3 952.2
========== ========= ============ ========= =========== =======
Underlying operating
profit ** 40.2 61.3 2.3 34.8 12.2 150.8
========== ========= ============ ========= =========== =======
Six months ended 30 June 2017 (Restated):
Meggitt
Meggitt Meggitt Polymers Meggitt Meggitt Total
Aircraft Control & Sensing Equipment
Braking Systems Composites Systems Group
Systems
GBPm GBPm GBPm GBPm GBPm GBPm
Gross segmental revenue 174.7 257.2 168.4 264.1 124.1 988.5
Inter-segment revenue (2.7) (0.7) (1.0) (11.8) (6.9) (23.1)
----------
Revenue 172.0 256.5 167.4 252.3 117.2 965.4
========== ========= ============ ========= =========== =======
At a point in time 157.0 253.1 165.9 246.6 82.5 905.1
Over time:
PbH/CBL* 15.0 3.4 - 1.7 - 20.1
Other - - 1.5 4.0 34.7 40.2
Revenue 172.0 256.5 167.4 252.3 117.2 965.4
========== ========= ============ ========= =========== =======
Civil OE 8.9 68.2 60.0 85.1 2.4 224.6
Civil Aftermarket 122.4 110.4 18.6 37.8 1.1 290.3
Military 39.9 47.8 79.1 69.3 86.0 322.1
Energy - 19.5 0.2 31.8 6.2 57.7
Other 0.8 10.6 9.5 28.3 21.5 70.7
---------- --------- ------------ --------- ----------- -------
Revenue 172.0 256.5 167.4 252.3 117.2 965.4
========== ========= ============ ========= =========== =======
Underlying operating
profit ** 49.6 56.3 21.9 32.0 1.6 161.4
========== ========= ============ ========= =========== =======
* Power by the hour/cost per brake landing contracts.
** A detailed reconciliation of underlying operating profit to
operating profit is shown in note 4.
3. Segmental analysis continued
Segment assets
30 June 31 December
2018 2017
Restated
GBPm GBPm
Meggitt Aircraft Braking Systems 553.8 540.8
Meggitt Control Systems 384.8 349.1
Meggitt Polymers & Composites 260.4 233.7
Meggitt Sensing Systems 487.5 472.7
Meggitt Equipment Group 182.7 193.5
Total segmental trading assets 1,869.2 1,789.8
Centrally managed trading assets * 103.1 115.1
Goodwill (note 12) 1,978.6 1,944.9
Other intangible assets 558.5 592.0
Investments 13.8 13.6
Derivative financial instruments - non-current
(note 15) 17.6 28.5
Deferred tax assets 26.5 26.4
Derivative financial instruments - current
(note 15) 10.6 3.6
Current tax recoverable 4.8 4.3
Cash and cash equivalents 103.7 118.5
Assets classified as held for sale - 9.7
-------- ------------
Total assets 4,686.4 4,646.4
======== ============
* Centrally managed trading assets principally include amounts
recoverable from insurers and other third parties in respect of
environmental matters relating to former sites, other receivables
and property, plant and equipment of central companies.
4. Reconciliations between profit and underlying profit
Underlying profit is used by the Board to monitor and measure
the underlying trading performance of the Group. It excludes
certain items as described below:
Six months Six months
ended ended
30 June 30 June
2018 2017
Restated
GBPm GBPm
Operating profit 123.8 196.3
Exceptional operating items (note 5) 8.1 6.7
Amounts arising on the acquisition, disposal
and closure of businesses (note 24) (22.0) (53.2)
Amortisation of intangible assets acquired
in business combinations (note 12) 43.6 48.1
Financial instruments (note 6) (2.7) (36.5)
-----------
Adjustments to operating profit * 27.0 (34.9)
Underlying operating profit 150.8 161.4
=========== ===========
Profit before tax 105.2 172.2
Adjustments to operating profit per above 27.0 (34.9)
Net interest expense on retirement benefit
obligations (note 7) 3.9 5.8
Adjustments to profit before tax 30.9 (29.1)
Underlying profit before tax 136.1 143.1
=========== ===========
Profit for the period 90.4 151.6
Adjustments to profit before tax per above 30.9 (29.1)
Tax effect of adjustments to profit before
tax (13.8) (12.7)
----------- -----------
Adjustments to profit for the period 17.1 (41.8)
Underlying profit for the period 107.5 109.8
=========== ===========
* Of the adjustments to operating profit, GBP4.0m (2017:
GBP2.0m) relating to exceptional operating items has been charged
to cost of sales with the balance of GBP23.0m debited (2017:
GBP36.9m credited) to net operating costs.
5. Exceptional operating items
Items which are significant by virtue of their size or nature,
which are considered non-recurring and which are excluded from the
underlying profit measures used by the Board to monitor and measure
the underlying performance of the Group (note 4), are classified as
exceptional operating items.
Income statement Cash expenditure
------------------------ ------------------------
Six months Six months Six months Six months
ended ended ended ended
30 June 30 June 30 June 30 June
2018 2017 2018 2017
Note GBPm GBPm GBPm GBPm
Site consolidations a 5.7 4.0 3.1 5.3
Integration of acquired
businesses 0.6 2.7 0.6 2.7
Business restructuring
costs 1.8 - 1.6 -
Exceptional operating items 8.1 6.7 5.3 8.0
=========== =========== =========== ===========
a. In 2018, this principally relates to costs incurred in
respect of the move to a new facility being constructed at Ansty
Park in the West Midlands which will enable the Group to
consolidate a range of manufacturing, engineering and support
operations into a single centre of excellence.
6. Financial instruments
Although the Group uses foreign currency forward contracts to
hedge against foreign currency exposures, it has decided that the
costs of meeting the extensive documentation requirements to be
able to apply hedge accounting under IFRS 9 'Financial Instruments'
are not merited. The Group's underlying profit figures exclude
amounts which would not have been recorded if hedge accounting had
been applied.
Where interest rate derivatives qualify to be hedge accounted,
any difference between the movement in fair value of derivatives
and in the fair value of fixed rate borrowings is excluded from
underlying profit. Where cross currency derivatives and treasury
lock derivatives do not qualify to be hedge accounted, movements in
fair value of the derivatives are excluded from underlying profit
(note 4).
Six months Six months
ended ended
30 June 30 June
2018 2017
Restated
GBPm GBPm
Movement in fair value of foreign currency
forward contracts (13.0) 47.8
Impact of retranslating net foreign currency
assets and liabilities at spot rate - 2.5
Movement in fair value of interest rate derivatives (5.6) (2.3)
Movement in fair value of fixed rate borrowings
due to interest rate risk (note 15) 4.5 2.7
Movement in fair value of cross currency derivatives 16.5 (14.5)
Movement in fair value of treasury lock derivative 0.3 0.3
Financial instruments - Gain 2.7 36.5
=========== ===========
7. Net finance costs
Six months Six months
ended ended
30 June 30 June
2018 2017
Restated
GBPm GBPm
Unwinding of interest on other receivables 0.4 0.6
Other finance income 0.1 0.1
Finance income 0.5 0.7
Interest on bank borrowings 0.6 1.3
Interest on senior notes 13.3 15.9
Interest on lease liabilities 2.1 2.0
Unwinding of discount on provisions 0.8 1.0
Net interest expense on retirement benefit
obligations (note 4) 3.9 5.8
Amortisation of debt issue costs 0.4 0.4
Less: amounts capitalised in the cost of
qualifying assets (note 12) (2.0) (1.6)
------ ------
Finance costs 19.1 24.8
Net finance costs 18.6 24.1
====== ======
8. Tax
The Finance (No 2) Act 2015 and Finance Act 2016, included
legislation to reduce the main rate of corporation tax in the UK
from 19% to 17% with effect from 1 April 2020. As these changes
were substantively enacted in prior years, they had no significant
impact on the tax charge for the current period. On 22 December
2017, the US government enacted comprehensive tax legislation
commonly referred to as the Tax Cuts and Jobs Act ("TCJA"). Among
the changes within the TCJA reforms was a significant reduction in
the generally applicable US federal corporate tax rate from 35% to
21%, with effect from 1 January 2018. As this change was enacted in
2017, the impact of remeasuring the Group's deferred tax balances
relating to its US operations was reflected in that year. Tax
payable on profits for the current period has benefited from the
tax reforms, resulting in a reduction in the Group's underlying tax
rate to 21.0% (2017 as restated: 23.3%).
9. Earnings per ordinary share
Earnings per ordinary share ('EPS') is calculated by dividing
the profit attributable to equity owners of the Company of GBP90.4m
(2017 as restated: GBP151.6m) by the weighted average number of
shares in issue during the period of 772.7m (2017: 774.1m). The
weighted average number of shares used excludes treasury shares and
shares bought by the Group and held during the period by an
independently managed Employee Share Ownership Plan Trust. The
weighted average number of treasury shares excluded was Nil shares
(2017: NIL) and the weighted average number of own shares excluded
was 3.7m shares (2017: 1.6m).
Underlying EPS is based on underlying profit for the period
(note 4) and is reconciled to basic EPS below:
Six months Six months
ended ended
30 June 30 June
2018 2017
Restated
Pence Pence
Basic EPS 11.7 19.6
Adjust for the effects of:
Exceptional operating items 0.8 0.6
Amounts arising on the acquisition, disposal
and closure of businesses (3.0) (6.8)
Amortisation of intangible assets acquired
in business combinations 4.3 4.1
Financial instruments (0.3) (3.8)
Net interest expense on retirement benefit
obligations 0.4 0.5
----------- -----------
Underlying basic EPS 13.9 14.2
=========== ===========
Diluted EPS for the period is 11.5p (2017 as restated: 19.2p).
The calculation of diluted EPS adjusts the weighted average number
of shares to reflect the assumption that all potentially dilutive
ordinary shares convert. For the Group, this means assuming all
share awards in issue are exercised. The weighted average number of
shares used in the calculation of diluted EPS was 785.3m (2017:
788.5m). Underlying diluted EPS for the period is 13.7p (2017 as
restated: 13.9p). The calculation of underlying diluted EPS is
based on underlying profit (note 4) and the same weighted average
number of shares used in the calculation of diluted EPS.
10. Dividends
The directors have declared an interim dividend of 5.30p per
ordinary share (2017: 5.05p) which will be paid on 28 September
2018 to shareholders on the register on 7 September 2018. As the
dividend was approved by the directors after 30 June 2018, the
dividend cost of GBP40.9m (2017: GBP39.2m) is not recorded as a
liability at the balance sheet date. A dividend reinvestment plan
will be available for shareholders who wish to take the dividend in
the form of shares rather than cash and the last date for receipt
of forms of election for the dividend reinvestment plan is 14
September 2018.
During the period, the final dividend of 10.80p per ordinary
share in respect of the year ended 31 December 2017 was paid (2017:
10.30p final dividend in respect of the year ended 31 December
2016). The total cost of the final dividend was GBP83.3m (2017:
GBP79.6m) and was paid in cash.
11. Related party transactions
During the period, the Group made sales to the joint venture of
GBP1.3m (2017: GBP1.9m) and purchases from the joint venture of
GBP0.1m (2017: GBP0.2m). Amounts due from the joint venture at the
balance sheet date were GBP0.3m (2017: GBP0.4m). There were no
amounts due to the joint venture at the balance sheet date (2017:
GBPNil).
Transactions between the Company and its subsidiaries have been
eliminated on consolidation.
The remuneration of key management personnel of the Group, which
is defined for 2018 as members of the Board and the Group Executive
Committee, is set out below. Prior period comparatives have not
been restated to reflect changes to the definition of key
management during the current period.
Six months Six months
ended ended
30 June 30 June
2018 2017
GBPm GBPm
Salaries and other short-term employee benefits 3.5 3.4
Retirement benefit expense 0.1 0.1
Share-based payment expense 1.3 0.6
-----------
Total 4.9 4.1
=========== ===========
12. Intangible assets
Goodwill Development Programme Other intangible
costs participation assets
costs
GBPm GBPm GBPm GBPm
At 1 January 2018 (Restated) 1,944.9 496.4 17.1 672.1
Exchange rate adjustments 34.5 8.7 0.4 10.7
Additions - 27.1 - 7.6
Businesses disposed (note
24) (0.8) - - (0.2)
Interest capitalised (note
7) - 2.0 - -
Amortisation and impairment
loss * - (10.9) (0.4) (52.1)
-------- ------- ------ -------
At 30 June 2018 1,978.6 523.3 17.1 638.1
======== ======= ====== =======
* Amortisation of other intangible assets includes GBP43.6m
(2017: GBP48.1m) in respect of intangible assets acquired in
business combinations and which has been excluded from underlying
operating profit (note 4).
Goodwill is tested for impairment annually or more frequently if
there is any indication of impairment. There have been no
indications of impairment in the period. A full impairment review
was conducted for the year ended 31 December 2017 and no impairment
charge was required. The cumulative impairment charge recognised to
date is GBPNil (2017: GBPNil).
13. Property, plant and equipment
Land and Plant, equipment Right of
buildings and vehicles use assets Total
GBPm GBPm GBPm GBPm
At 1 January 2018 (Restated) 138.0 181.1 87.7 406.8
Exchange rate adjustments 1.7 2.7 1.7 6.1
Additions 10.5 14.9 1.3 26.7
Disposals (0.5) (1.9) (0.1) (2.5)
Businesses disposed (note
24) (2.1) (1.4) - (3.5)
Depreciation * (5.8) (15.1) (7.4) (28.3)
------ ------- ------ -------
At 30 June 2018 141.8 180.3 83.2 405.3
====== ======= ====== =======
* Depreciation includes GBP1.6m (2017: GBPNil) in respect of
amounts charged to exceptional operating items and which has been
excluded from underlying operating profit (note 4).
14. Bank and other borrowings
Current Non-current Total
GBPm GBPm GBPm
At 1 January 2018 71.4 1,005.8 1,077.2
Exchange rate adjustments 3.3 31.2 34.5
Proceeds from borrowings 50.0 72.6 122.6
Repayments of borrowings (61.7) (32.2) (93.9)
Other non-cash movements 0.1 (4.5) (4.4)
-------- ------------ --------
At 30 June 2018 63.1 1,072.9 1,136.0
======== ============ ========
30 June 31 December
2018 2017
Analysed as: GBPm GBPm
Bank loans 53.6 62.1
Other loans 9.5 9.3
---------- --------------
Total current 63.1 71.4
========== ==============
Bank loans 309.1 254.1
Other loans 763.8 751.7
---------- --------------
Total non-current 1,072.9 1,005.8
========== ==============
15. Financial Instruments - fair value measurement
For trade and other receivables, cash and cash equivalents,
trade and other payables, lease liabilities and the current element
of floating rate bank and other borrowings, fair values approximate
to book values. For trade and other receivables, allowances are
made within book value for credit risk. For other financial
instruments, a comparison of book values and fair values is
provided below:
Book value Fair value
30 June 31 December 30 June 31 December
2018 2017 2018 2017
GBPm GBPm GBPm GBPm
Derivative financial instruments
- non-current 17.6 28.5 17.6 28.5
Derivative financial instruments
- current 10.6 3.6 10.6 3.6
Financial assets 28.2 32.1 28.2 32.1
Derivative financial instruments
- current (15.3) (17.3) (15.3) (17.3)
Bank and other borrowings
- current (63.1) (71.4) (63.1) (71.4)
Derivative financial instruments
- non-current (15.0) (14.6) (15.0) (14.6)
Bank and other borrowings
- non-current (1,072.9) (1,005.8) (1,056.3) (1,001.9)
---------- ------------ ---------- ------------
Financial liabilities (1,166.3) (1,109.1) (1,149.7) (1,105.2)
---------- ------------ ---------- ------------
Total (1,138.1) (1,077.0) (1,121.5) (1,073.1)
========== ============ ========== ============
15. Financial Instruments - fair value measurement continued
Derivative financial instruments measured at fair value, are
classified as level 2 in the fair value measurement hierarchy, as
they have been determined using significant inputs based on
observable market data. The fair values of interest rate
derivatives have been derived from forward interest rates based on
yield curves observable at the balance sheet date and contractual
interest rates. The fair values of foreign currency forward
contracts have been derived from forward exchange rates observable
at the balance sheet date and contractual forward rates. The fair
values of cross currency derivatives have been derived from forward
interest rates based on yield curves observable at the balance
sheet date, forward exchange rates observable at the balance sheet
date and contractual interest and forward rates.
The non-current portion of bank and other borrowings measured at
fair value, is classified as level 3 in the fair value measurement
hierarchy, as it has been determined using significant inputs which
are a mixture of those based on observable market data (interest
rate risk) and those not based on observable market data (credit
risk). The fair value attributable to interest rate risk has been
derived from forward interest rates based on yield curves
observable at the balance sheet date and contractual interest
rates, with the credit risk margin kept constant. The fair value
attributable to credit risk has been derived from quotes from
lenders for borrowings of similar amounts and maturity periods. The
same methods of valuation have been used to derive the fair value
of the current and non-current element of bank and other borrowings
which are held at amortised cost, but for which fair values are
provided in the table above.
There were no transfers of assets or liabilities between levels
of the fair value hierarchy during the period.
Cumulative unrealised changes in fair value of the current and
non-current portion of bank and other borrowings, designated as
fair value through profit and loss, arising from changes in credit
risk are as follows:
Six months Six months
ended ended
30 June 30 June
2018 2017
Restated
GBPm GBPm
Fair value at 1 January (1.1) 1.0
Gain/(Loss) recognised in other comprehensive
income 0.5 (1.0)
----------- -----------
Fair value at 30 June (0.6) -
=========== ===========
The difference between fair value and contractual amount at
maturity of the current and non-current portion of bank and other
borrowings, designated as fair value through profit and loss, is as
follows:
30 June 31 December
2018 2017
GBPm GBPm
Fair value 235.4 235.2
Difference between fair value and contractual
amount at maturity (8.1) (13.0)
-------- ------------
Contractual amount payable at maturity 227.3 222.2
======== ============
Changes in fair value of financial liabilities classified as
level 3 in the hierarchy are as follows:
Six months
Six months ended
ended 30 June
30 June 2017
2018 Restated
GBPm GBPm
Bank and other borrowings at fair value through
profit and loss:
At 1 January 235.2 344.3
Exchange rate adjustments 5.1 (15.9)
Gain recognised in net operating costs (note
6) (4.5) (2.7)
Loss recognised in net finance costs 0.1 0.1
(Gain)/Loss due to changes in credit risk recognised
in other comprehensive income (0.5) 1.0
----------- -----------
At 30 June 235.4 326.8
=========== ===========
The largest movement in credit spread seen in a six month period
since inception of the borrowings is 70 basis points. A 70 basis
point movement in the credit spread used as an input in determining
fair value at 30 June 2018, would impact other comprehensive income
by approximately GBP4.2m.
16. Provisions
30 June 31 December
2018 2017
Restated
GBPm GBPm
Environmental * 90.2 99.9
Onerous contracts 19.0 21.8
Warranty costs 19.8 18.9
Other 6.9 7.6
Total 135.9 148.2
======== ============
Analysed as:
Current 61.5 65.7
Non-current 74.4 82.5
-------- ------------
Total 135.9 148.2
======== ============
* Included within trade and other receivables is GBP49.7m
(December 2017: GBP64.1m) in respect of amounts recoverable from
insurers and other third parties. During the period, GBP15.0m (June
2017: GBP15.8m) was received.
During the period, expenditure of GBP22.5m (June 2017: GBP19.4m)
was incurred, of which GBP12.4m (June 2017: GBP11.0m) related to
environmental provisions. The charge to the income statement in the
period in respect of additional provisions created was GBP8.6m
(June 2017: GBP5.4m) and the credit to the income statement in
respect of the reversal of unused amounts was GBP2.2m (June 2017:
GBP7.6m).
17. Retirement benefit obligations
30 June 31 December
2018 2017
GBPm GBPm
Amounts recognised in the balance sheet:
Present value of scheme liabilities 1,236.8 1,303.4
Fair value of scheme assets (991.3) (995.3)
Total 245.5 308.1
======== ============
Analysis of retirement benefit obligations:
Pension schemes 196.9 258.3
Healthcare schemes 48.6 49.8
-------- ------------
Total 245.5 308.1
======== ============
Key financial assumptions:
UK Scheme:
Discount rate 2.80% 2.55%
Inflation rate 3.10% 3.20%
Salary increases 4.10% 4.20%
Current life expectancy - Male aged 65 (years) 21.4 to 23.0 21.6 to
23.1
Overseas Schemes*:
Discount rate 4.05% 3.55%
Current life expectancy - Male aged 65 (years) 20.1 to 20.7 20.2 to
20.8
* Provided in respect of the most significant overseas schemes.
Cash contributions paid during the period were GBP24.5m (June
2017: GBP22.8m) including deficit reduction payments of
GBP16.4m
(June 2017: GBP14.0m).
18. Issued share capital
30 June 31 December
2018 2017
No. m No. m
Allotted and fully paid 776.5 776.4
======== ============
The increase in the number of shares during the period relates
to shares issued on the exercise of Sharesave awards.
19. Contingent liabilities
The Company has given guarantees in respect of credit facilities
for certain of its subsidiaries, some property leases, other
leasing arrangements and the performance by some current and former
subsidiaries of certain contracts. Also, there are similar
guarantees given by certain other Group companies. The directors do
not believe that the effect of giving these guarantees will have a
material adverse effect upon the Group's financial position.
The Company and various of its subsidiaries are, from time to
time, parties to legal proceedings and claims which arise in the
ordinary course of business. The directors do not anticipate that
the outcome of these proceedings, actions and claims, either
individually or in aggregate, will have a material adverse effect
upon the Group's financial position.
20. Capital commitments
30 June 31 December
2018 2017
GBPm GBPm
Contracted for but not incurred:
Intangible assets 1.9 2.8
Property, plant and equipment 12.1 18.8
-------- ------------
Total 14.0 21.6
======== ============
21. Cash inflow from operations
Six months Six months
ended ended
30 June 30 June
2018 2017
Restated
GBPm GBPm
Profit for the period 90.4 151.6
Adjustments for:
Finance income (note 7) (0.5) (0.7)
Finance costs (note 7) 19.1 24.8
Tax 14.8 20.6
Depreciation (note 13) 28.3 25.4
Amortisation and impairment losses (note
12) 63.4 63.8
Loss on disposal of property, plant and equipment 0.7 1.5
Gain on disposal of businesses before disposal
expenses (note 24) (26.6) (53.2)
Financial instruments - Gain (note 6) (2.7) (36.5)
Share of loss after tax of joint venture
not distributed to the Group 0.1 -
Retirement benefit obligation deficit payments
(note 17) (16.4) (14.0)
Share-based payment expense 4.9 2.0
Changes in working capital (60.5) (70.7)
-----------
Cash inflow from operations 115.0 114.6
=========== ===========
The Board uses free cash flow to monitor and measure the
underlying trading cash performance of the Group. It is reconciled
to cash from operating activities below:
Six months Six months
ended ended
30 June 30 June
2018 2017
Restated
GBPm GBPm
Cash inflow from operating activities 88.2 85.1
Add back cash outflow from business acquisition
and disposal expenses 3.6 2.1
Capitalised development costs (27.1) (29.0)
Capitalised programme participation costs (0.8) (2.0)
Purchase of intangible assets (9.2) (6.5)
Purchase of property, plant and equipment (29.4) (28.4)
Proceeds from disposal of property, plant and
equipment 1.8 1.5
----------- -----------
Free cash inflow 27.1 22.8
=========== ===========
22. Movements in net debt
Six months Six months
ended ended
30 June 30 June
2018 2017
Restated
GBPm GBPm
At 1 January 1,052.8 1,277.1
Cash inflow from operating activities (88.2) (85.1)
Cash outflow from investing activities 28.2 (0.5)
Dividends paid to Company's shareholders (note
10) 83.3 79.6
Purchase of own shares for employee share
schemes 12.5 9.0
----------- -----------
Net cash generated - outflow 35.8 3.0
Debt acquired with business - 0.7
Debt disposed with businesses - (0.9)
Lease liabilities entered 1.4 -
Exchange rate adjustments 34.8 (65.7)
Other non-cash movements (2.1) (1.9)
-----------
At 30 June 1,122.7 1,212.3
=========== ===========
Analysed as:
Bank and other borrowings - current 63.1 200.6
Bank and other borrowings - non-current 1,072.9 1,011.9
Cash and cash equivalents (103.7) (96.6)
-------- --------
Net borrowings 1,032.3 1,115.9
Lease liabilities - current 14.2 14.9
Lease liabilities - non-current 76.2 81.5
Total 1,122.7 1,212.3
======== ========
23. Components of other comprehensive income
Six months Six months
ended ended
30 June 30 June
2018 2017
Restated
GBPm GBPm
Arising in the period 25.6 (69.4)
Transferred to the income statement (3.0) (13.5)
----------- -----------
Currency translation movements - Gain/(Loss) 22.6 (82.9)
=========== ===========
Movement in fair value 0.1 (0.1)
Transferred to the income statement (0.4) -
------ ------
Cash flow hedge movements - Loss (0.3) (0.1)
====== ======
24. Business disposals
On 12 January 2018, the Group disposed of 100% of the equity in
Aviation Mobility, LLC ('Aviation Mobility') for a consideration of
USD 14.0m.
On 14th November 2017, the Group agreed to the disposal of 100%
of the equity of Linear Motion LLC ('Linear Motion') subject to
certain regulatory clearances being obtained. The related assets
were classified as a disposal group held for sale and were
presented separately at 31 December 2017 together with directly
associated liabilities. The disposal subsequently completed on 26
March 2018 for a consideration of USD 4.4m and is subject to a
customary adjustment for working capital in the business at the
date of disposal.
On 21 April 2018, the Group disposed of 100% of the ordinary
shares of Precision Micro Limited ('Precision Micro') for a
consideration of GBP22.5m, which is subject to a customary
adjustment for working capital in the business at the date of
disposal. The company specialised in production photo etching for
the automotive and medical sectors, where synergies with the rest
of the Group were limited.
The businesses were not a major line of business or geographical
area of operation of the Group. Aviation Mobility was reported
within Meggitt Control Systems and Linear Motion and Precision
Micro within the Meggitt Equipment Group.
The net assets of the businesses at the date of disposal were as
follows:
Aviation Linear Precision Total
Mobility Motion Micro
GBPm GBPm GBPm GBPm
Goodwill (note 12) - - 0.8 0.8
Other intangible assets (note
12) - - 0.2 0.2
Property, plant and equipment
(note 13) - - 3.5 3.5
Inventories - - 1.1 1.1
Trade and other receivables
- current 0.3 - 3.4 3.7
Current tax recoverable - - 0.6 0.6
Cash and cash equivalents - - 0.7 0.7
Assets classified as held
for sale - 10.4 - 10.4
Trade and other payables -
current - - (1.9) (1.9)
Liabilities directly associated
with assets
classified as held for sale - (6.6) - (6.6)
Net assets 0.3 3.8 8.4 12.5
Currency translation gain
transferred from equity (3.0)
Business disposal expenses 4.2
Working capital adjustment
payable 1.1
Gain on disposal of businesses 22.4
--------------
Total consideration received
in cash 37.2
==============
Cash inflow arising on disposal:
Total consideration received
in cash 37.2
Less: cash and cash equivalents
disposed of (0.7)
------------
Businesses disposed 36.5
Less: business disposal expenses
paid (3.6)
------------
Total cash inflow 32.9
============
The Group separately presents amounts arising on the
acquisition, disposal and closure of businesses. These include
gains or losses made on the disposal or closure of a business,
adjustments to the fair value of contingent consideration payable
in respect of an acquired business or receivable in respect of a
disposed business and costs directly attributable to the
acquisition and disposal of businesses.
Six months Six months
ended ended
30 June 30 June
2018 2017
GBPm GBPm
Gain on disposal of businesses before
disposal expenses (note 21) 26.6 53.2
Costs related to the disposal of businesses
in the current period (4.2) -
----------- -----------
Gain on disposal of businesses 22.4 53.2
Costs related to the disposal of businesses
in prior periods (0.4) -
Amounts arising on the acquisition,
disposal and closure of businesses (note
4) 22.0 53.2
=========== ===========
25. Restatement of prior period comparatives
This note explains the impact on the condensed consolidated
financial statements of the adoption of IFRS 15 'Revenue from
contracts with customers' and IFRS 9 'Financial instruments' which
became effective for the financial period beginning 1 January 2018
and of IFRS 16 'Leases' which the Group has early adopted. As a
result of changes required to the Group's accounting policies
arising from adoption of these standards, prior period comparatives
have been restated.
In addition, the Group has finalised the fair values of assets
and liabilities of Elite Aerospace, Inc. ('Elite') which was
acquired on 28 March 2017. IFRS 3 requires fair value adjustments
to be recorded with effect from the date of acquisition and
consequently have resulted in a restatement of previously reported
results.
The following tables show the impact of these changes on each
line item affected. Line items which are not impacted by the
restatement have been aggregated within the relevant sub-totals.
The impact of each new standard is also explained in more detail
within the footnotes that follow the tables.
Condensed consolidated unaudited income statement (extract)
IFRS IFRS IFRS
Six months 15 16 9 Six months
ended ended
30 June 30 June
2017 2017
As previously Restated
reported
GBPm GBPm GBPm GBPm GBPm
Revenue 968.1 (2.7) - - 965.4
Cost of sales (586.9) (10.3) - - (597.2)
--------------- ------- ------ ------ -------------
Gross profit 381.2 (13.0) - - 368.2
Net operating costs (173.0) (0.7) 0.8 1.0 (171.9)
--------------- ------- ------ ------ -------------
Operating profit 208.2 (13.7) 0.8 1.0 196.3
Net finance costs (22.7) - (1.4) - (24.1)
--------------- ------- ------ ------ -------------
Profit before tax 185.5 (13.7) (0.6) 1.0 172.2
Tax (24.9) 4.3 0.2 (0.2) (20.6)
Profit for the period 160.6 (9.4) (0.4) 0.8 151.6
=============== ======= ====== ====== =============
Earnings per share:
Basic (pence) 20.7 (1.2) - 0.1 19.6
Diluted (pence) 20.4 (1.2) (0.1) 0.1 19.2
Underlying operating profit 174.3 (13.7) 0.8 - 161.4
Underlying profit before
tax 157.4 (13.7) (0.6) - 143.1
Underlying basic earnings
per share (pence) 15.5 (1.2) (0.1) - 14.2
Underlying diluted earnings
per share (pence) 15.2 (1.2) (0.1) - 13.9
25. Restatement of prior period comparatives continued
Condensed consolidated unaudited statement of comprehensive income
(extract)
IFRS IFRS
Six months IFRS 15 16 9 Six months
ended ended
30 June 30 June
2017 2017
As previously Restated
reported
GBPm GBPm GBPm GBPm GBPm
Profit for the period 160.6 (9.4) (0.4) 0.8 151.6
Items that may be reclassified
to the income statement in
subsequent periods:
Currency translation movements (89.9) 7.0 - - (82.9)
Movements in fair value of
financial liabilities arising
from changes in credit risk - - - (1.0) (1.0)
Cash flow hedge movements (0.1) - - - (0.1)
Tax effect - - - 0.2 0.2
(90.0) 7.0 - (0.8) (83.8)
Items that will not be reclassified
to the income statement in
subsequent periods: 25.7 - - - 25.7
--------- -------- ------ -------- -----------
Other comprehensive (expense)/income (64.3) 7.0 - (0.8) (58.1)
Total comprehensive income
for the period 96.3 (2.4) (0.4) - 93.5
========= ======== ====== ======== ===========
Condensed consolidated unaudited balance sheet (extract)
IFRS IFRS IFRS
1 January 15 16 9 1 January
2017 2017
As previously Restated
reported
GBPm GBPm GBPm GBPm GBPm
Net assets 2,456.4 (193.8) (2.4) - 2,260.2
=============== ======== ====== ====== ==========
Equity
Hedging and translation reserves 551.5 - - 0.8 552.3
Retained earnings 630.6 (193.8) (2.4) (0.8) 433.6
Other equity 1,274.3 - - - 1,274.3
-------- -------- ------ ------ --------
Total equity 2,456.4 (193.8) (2.4) - 2,260.2
======== ======== ====== ====== ========
25. Restatement of prior period comparatives continued
Condensed consolidated unaudited balance sheet (extract)
IFRS IFRS IFRS
31 December 15 16 9 Elite 31 December
2017 2017
As previously Restated
reported
GBPm GBPm GBPm GBPm GBPm GBPm
Non-current assets
Goodwill 1,947.0 - - - (2.1) 1,944.9
Development costs 482.3 14.1 - - - 496.4
Programme participation
costs 332.1 (315.0) - - - 17.1
Property, plant
and equipment 322.9 - 83.9 - - 406.8
Trade and other
receivables 39.2 (0.5) - - - 38.7
Contract assets - 29.6 - - - 29.6
Deferred tax assets 11.5 14.8 0.1 - - 26.4
Other non-current
assets 714.2 - - - - 714.2
--------------- -------- ------- ------ ------ ------------
3,849.2 (257.0) 84.0 - (2.1) 3,674.1
Current assets
Inventories 404.1 (2.4) - - - 401.7
Trade and other
receivables 437.1 (47.4) - - - 389.7
Contract assets - 44.8 - - - 44.8
Other current assets 136.1 - - - - 136.1
977.3 (5.0) - - - 972.3
Total assets 4,826.5 (262.0) 84.0 - (2.1) 4,646.4
Current liabilities
Trade and other
payables (445.5) 44.9 - - - (400.6)
Contract liabilities - (46.9) - - - (46.9)
Lease liabilities (0.1) - (14.4) - - (14.5)
Provisions (64.2) - - - (1.5) (65.7)
Other current liabilities (136.1) - - - - (136.1)
--------------- -------- ------- ------ ------ ------------
(645.9) (2.0) (14.4) - (1.5) (663.8)
Net current assets 331.4 (7.0) (14.4) - (1.5) 308.5
Non-current liabilities
Trade and other
payables (5.5) - - - - (5.5)
Contract liabilities - (23.1) - - - (23.1)
Derivative financial
instruments (14.6) - - - - (14.6)
Deferred tax liabilities (201.7) 54.1 0.9 - 2.3 (144.4)
Lease liabilities (6.0) - (73.6) - - (79.6)
Other non-current
liabilities (1,396.4) - - - - (1,396.4)
(1,624.2) 31.0 (72.7) - 2.3 (1,663.6)
Total liabilities (2,270.1) 29.0 (87.1) - 0.8 (2,327.4)
Net assets 2,556.4 (233.0) (3.1) - (1.3) 2,319.0
=============== ======== ======= ====== ====== ============
Equity
Hedging and translation
reserves 386.9 13.4 0.2 (0.9) - 399.6
Retained earnings 892.8 (246.4) (3.3) 0.9 (1.3) 642.7
Other equity 1,276.7 - - - - 1,276.7
--------------- -------- ------- ------ ------ ------------
Total equity 2,556.4 (233.0) (3.1) - (1.3) 2,319.0
=============== ======== ======= ====== ====== ============
25. Restatement of prior period comparatives continued
Impact of IFRS 15
In accordance with the transition provisions in IFRS 15, the
standard has been adopted retrospectively with restatements made to
prior period comparatives. A summary of the principal areas of IFRS
15 that have impacted the Group are shown in the tables below and
footnotes that follow.
Customer
Programme Programme funding Other Reclassifications Six months
participation participation on ended
costs costs development 30 June
programmes 2017
(a) (b) (c) (d) (e) Impact
GBPm GBPm GBPm GBPm GBPm GBPm
Revenue - (1.2) - (1.5) - (2.7)
Cost of sales (12.7) 1.2 - 1.2 - (10.3)
--------------- --------------- ------------- ------ ------------------ --------------
Gross profit (12.7) - - (0.3) - (13.0)
Net operating
costs (0.7)
--------------
Operating profit (13.7)
Tax 4.3
--------------
Profit for the
period (9.4)
==============
Customer
Programme Programme funding Other Reclassifications 1 January
participation participation on 2017
costs costs development Impact
programmes
(a) (b) (c) (d) (e)
GBPm GBPm GBPm GBPm GBPm GBPm
Net assets (186.5) - - (7.3) - (193.8)
=============== =============== ============= ====== ================== ===========
Customer
Programme Programme funding Other Reclassifications 31 December
participation participation on 2017
costs costs development Impact
programmes
(a) (b) (c) (d) (e)
GBPm GBPm GBPm GBPm GBPm GBPm
Development costs - - 14.1 - - 14.1
Programme participation
costs (285.4) (29.6) - - - (315.0)
Trade and other
receivables
- non-current - - - (0.5) - (0.5)
Contract assets -
non-current - 29.6 - - - 29.6
Deferred tax assets 14.8 - - - - 14.8
Inventories - - - (2.4) - (2.4)
Trade and other
receivables
- current - - - - (47.4) (47.4)
Contract assets -
current - - - - 44.8 44.8
Trade and other payables - - - - 44.9 44.9
Contract liabilities
- current - - - (4.6) (42.3) (46.9)
Contract liabilities
- non-current - - (14.1) (9.0) - (23.1)
Deferred tax liabilities 50.8 - - 3.3 - 54.1
--------------- --------------- ------------- ------- ------------------ -------------
Net assets (219.8) - - (13.2) - (233.0)
=============== =============== ============= ======= ================== =============
a) Programme participation costs - Free of charge/deeply discounted manufactured parts
Programme participation costs consist of incentives given to
Original Equipment Manufacturers in connection with their selection
of the Group's products for installation onto new aircraft where
the Group has obtained principal supplier status. Where these
incentives comprise the supply of initial manufactured parts on a
free of charge or deeply discounted basis, amounts are recognised
within costs of sales as incurred. Under the Group's previous
accounting policy, amounts were recognised as an intangible asset
and amortised over their useful lives to cost of sales over periods
typically up to 15 years.
b) Programme participation costs - Cash payments
Where programme participation costs are in the form of cash
payments, the treatment depends on the contractual relationship
between the Group and the third party to whom the payment is made.
Where the payment is made to a third party under a revenue contract
(as defined by IFRS 15), or the award of future IFRS 15 revenue
contracts on the programme from the same party is highly probable,
payments are recognised as a contract asset and amortised, as a
deduction from revenue, over the periods expected to benefit from
those contracts. This situation most frequently arises where the
payment is made to the same party to whom OE and/or aftermarket
parts are sold. Other payments are recognised as an intangible
asset and amortised as a charge to cost of sales. Under the Group's
previous accounting policy, all programme participation cash
payments were recognised as intangible assets and amortised as a
charge to cost of sales.
25. Restatement of prior period comparatives continued
Impact of IFRS 15 continued
c) Customer funding towards development costs
Where a customer contributes to the Group's development costs
and those costs meet the criteria under IAS 38 to be recognised as
an intangible asset, the funding is recognised as a contract
liability and is amortised, as an increase to revenue, over the
periods expected to benefit from future revenue from the customer
over the life of the programme. Under the Group's previous
accounting policy, customer funding was netted off amounts
recognised as development costs and accordingly reduced the
subsequent amortisation charged to net operating costs.
d) Other
A number of other revenue timing differences, none of which is
individually significant, arose from the adoption of
IFRS 15:
i. Revenue recognised over time
The Group recognises revenue under power by the hour and cost
per brake landing type contracts over time using costs incurred as
the measure of contract completion. Under the Group's previous
accounting policy, revenue was recognised based on the number of
aircraft flying hours or the number of aircraft landings.
Where the Group builds a product with no alternative use and has
an enforceable right to payment from the customer for costs
incurred, plus a reasonable margin, throughout the life of the
contract then revenue is recognised over time using costs incurred
as the measure of contract completion. Under the Group's previous
accounting policy, the majority of contracts that meet this
requirement were accounted for in a similar way using contract
accounting, although the method of measuring progress has, in some
cases, changed. For instance, funded research and development
contracts were previously recognised as revenue over time using
customer agreed milestones achieved as a measure of contract
completion. Additionally a small number of contracts for which
contract accounting was previously applied no longer meet the IFRS
15 criteria to be recognised over time, particularly certain
contracts in the Heatric business, and are now recognised at a
point in time, usually when the goods are delivered to the
customer. Conversely, certain military contracts for which revenue
was previously recognised as goods were delivered to the customer
meet the IFRS 15 over time criteria and accordingly revenue is
recognised as costs are incurred.
ii. Revenue recognised at a point in time
The timing of revenue on the substantial majority of the Group's
contracts, previously recognised at a point in time, has not been
significantly affected by IFRS 15, with revenue continuing to be
recognised as goods are delivered to the customer and at the price
agreed with the customer for those goods. A minority of contracts
required changes to the timing of revenue recognition to reflect
IFRS 15 guidance on areas such as whether multiple deliveries and
services provided to a customer should be accounted for
individually, variable consideration and material rights.
e) Reclassifications
Certain balances representing amounts recoverable on contracts,
previously included within trade and other receivables, and
deferred income and advance payments received from customers,
previously included within trade and other payables, have been
reclassified to contract assets and contract liabilities as
appropriate.
Impact of IFRS 16
The Group has early adopted IFRS 16 using the full retrospective
approach on transition. Under IFRS 16, except for certain short
term leases and leases of low-value assets, a liability is
recognised at lease inception equal to the present value of
payments due under the lease. The lease liability is subsequently
measured using the effective interest rate method, with interest
charged to finance costs. At lease inception, a right of use asset
is also recognised equal to the lease liability, adjusted to
reflect any lease incentives paid to or received from the lessor,
asset restoration and other direct costs. The right of use asset is
depreciated over the shorter of the life of the asset or the lease
term to either costs of sales or net operating costs.
Under the Group's previous accounting policy, the majority of
the Group's leases were accounted for as operating leases with
rentals charged to cost of sales or net operating costs on a
straight line basis over the lease term, with no element of the
rentals charged to finance costs. No asset or lease liability was
recognised on the Group's balance sheet for these leases.
Impact of IFRS 9
Under IFRS 9, where financial liabilities are subsequently
measured at fair value, any element of the fair value gain or loss
arising attributable to changes in credit risk is recognised in
other comprehensive income. Under the Group's previous accounting
policy, such amounts were recognised within net operating
costs.
26. Approval of interim management report
The interim management report was approved by the Board of
Directors on 6 August 2018.
27. Availability of interim management report
The interim management report will be available on the Group's
website www.meggitt.com from 7 August 2018. Paper copies of the
report will be available to the public from the Company's
registered office at Atlantic House, Aviation Park West,
Bournemouth International Airport, Christchurch, Dorset, BH23
6EW.
Risks and uncertainties
The Group disclosed in its 2017 Annual Report the principal
risks and uncertainties which the Group is exposed to. These risks
have not changed significantly over the period and are expected to
continue to be relevant for the remaining six months of the
year.
The risks relate to those arising from fundamental changes in
the Group's business model, reduced demand for the Group's
products, not aligning technology strategies with customer
requirements, quality escape/equipment fault, business
interruption, failure to meet new product development and programme
milestones and certification requirements, failure to meet
customers' cost, quality and delivery standards, failure to
integrate effectively acquisitions, IT/systems failure, supply
chain management, failure to successfully and simultaneously
deliver significant change programmes, legal and regulatory matters
and changes in tax legislation. Further details can be found in the
'Risk management' section of the 2017 Annual Report on pages 40 to
45, together with details of strategies adopted to mitigate these
exposures.
STATEMENT OF DIRECTORS' RESPONSIBILITIES
The directors confirm that to the best of their knowledge:
-- This condensed set of consolidated interim financial
statements has been prepared in accordance with IAS 34 'Interim
Financial Reporting' as adopted by the European Union; and
-- The interim management report (including the interim
financial statements, management report and responsibility
statements) includes a fair review of the information required by
DTR 4.2.7R and DTR 4.2.8R, namely:
o An indication of important events that have occurred during
the six months ended 30 June 2018 and their impact on the condensed
set of financial statements, and a description of the principal
risks and uncertainties for the remaining six months of the
financial year; and
o Material related party transactions in the six months ended 30
June 2018 and any material changes to the related party
transactions described in the last annual report.
By order of the Board:
A Wood D R Webb
Director Director
6 August 2018 6 August 2018
- E N D S -
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
IR UNSKRWBAWRAR
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