TIDMMGGT
RNS Number : 0660R
Meggitt PLC
26 February 2019
26 February 2019
Meggitt PLC
2018 Full-year results
Strong organic growth in all end markets
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 audited results for the year ended 31 December 2018.
Group headlines
% change
======== ======== --------------------
GBPm 2018 20171 Reported Organic2
======== ======== ========= =========
Orders 2,237.2 2,079.4 8 12
-------- -------- --------- ---------
Revenue 2,080.6 1,994.4 4 9
-------- -------- --------- ---------
Underyling
-------- -------- --------- ---------
Operating profit3 367.3 353.3 4 4
-------- -------- --------- ---------
Earnings per share3 34.2p 32.0p 7
-------- -------- --------- ---------
Statutory
-------- -------- --------- ---------
Operating profit 256.6 272.7 (6)
-------- -------- --------- ---------
Earnings per share 23.2p 37.8p (39)
-------- -------- --------- ---------
Free cash flow4 167.4 197.4 (15)
-------- -------- --------- ---------
Net debt 1,074.1 1,060.8 1
-------- -------- --------- ---------
Dividend 16.65p 15.85p 5
============================= ======== ======== ========= =========
Financial highlights
-- Organic order growth of 12% underpins expectations for long
term revenue growth; book to bill5 of 1.08x included strong
performance in civil aerospace (1.10x book to bill)
-- Organic revenue growth of 9% reflects strong performance in
growing end-markets; with 7% growth in civil aerospace, 10% in
defence and 19% in energy
-- Underlying operating margin maintained at 17.7%, with
efficiencies from strategic initiatives and lower new product
introduction costs, offset by growing free of charge ('FoC')
content and extended learning curve costs at composites sites
-- Statutory operating profit reflects strong underlying
performance and lower exceptional costs, offset by the year on
year, non-cash impact of marking to market certain financial
instruments
-- Free cash flow decreased by GBP30m to GBP167m, with 63% cash
conversion as a result of a one-off GBP30m payment to reduce the
Group's US pension scheme deficit and a GBP38m increase in
inventory buffers to support growth, site consolidation and Brexit
contingency
-- ROCE increased to 9.9% (2017: 9.3%)
-- Recommended final dividend of 11.35p giving a full year dividend of 16.65p, an increase of 5%
Strategic highlights
Strong progress on strategic initiatives, further enhancing our
foundation for revenue growth, margin expansion and cash
conversion:
-- Completion of three further non-core disposals to increase
our focus on attractive markets where we have strong positions
-- Transformational wins secured to provide engine composites on
the Pratt & Whitney F-135 and F-119 engines and brakes on the
Airbus A321neo
-- Accelerated progress on site consolidation and purchasing
initiatives is contributing to the Group's 2021 margin improvement
target with a 20% reduction in footprint and 2% p.a. reduction in
purchased costs and further opportunities emerging
-- Continued deployment of the Meggitt Production System ('MPS')
enabling increased inventory turns of 2.7x (2017: 2.5x) which
reduced the investment required to deliver growth by GBP43m
-- New customer aligned organisation implemented in January
2019, with experienced and capable teams in place to accelerate
long term growth
1 Restated for the effects of IFRS 15, IFRS 16 and IFRS 9 as set
out in note 29.
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 5 and 11.
4 Free cash flow as set out in note 25.
5 The ratio of orders received to revenue recognised in a
period.
Tony Wood, Chief Executive, commented:
"2018 was a landmark year for Meggitt, with strong performance
underpinned by our increased content on new aircraft programmes and
growing end-markets, enabling the Group to increase organic revenue
growth to 9%, ahead of our raised guidance. Our team delivered good
progress on our strategic initiatives offsetting extended learning
curve costs that we incurred at our fast growing composites sites,
enabling an increase in underlying operating profit to GBP367m.
We have a clear growth strategy and remain focused on driving
further improvements in customer and operating performance through
our new customer-aligned organisation and the sustained deployment
of the Meggitt Production System. Together with our growing
installed base of 71,000 aircraft, we are well positioned to
sustain growth over the medium term and to deliver our 2021 targets
for underlying operating margin and cash.
Reflecting this continuing confidence in the prospects for the
Group, the proposed final dividend is 11.35p giving a full year
dividend of 16.65p, an increase of 5%. We expect 2019 to be a year
of further good progress."
Contacts:
Tony Wood, Chief Executive
Louisa Burdett, 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
GROUP OVERVIEW
Meggitt is a global engineering company specialising in
high-performance components and sub--systems for the aerospace,
defence and energy markets. We have a broad-based and well balanced
portfolio, with equipment on over 71,000 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. Strong 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.
The significant increases in our content on the new aircraft
platforms that are now growing rapidly, have enabled us to
outperform the market in 2018. The growth of our installed base
represents a major refresh of our in-service portfolio and provides
a strong platform for future revenue growth. Having passed the peak
of development we are focused on operational execution and have
four strategic priorities to accelerate growth and improve return
on capital employed. These priorities are: Portfolio Strategy,
Customers, Competitiveness and Culture.
Portfolio Strategy
In 2018, we have continued to make good progress on our goal to
increase our exposure to attractive and growing markets where we
have strong competitive positions, through both our investment in
differentiated technology and programme of non-core disposals.
Developing innovative products and technologies which enable our
customers to achieve a step change in the safety, efficiency and
reliability of complex equipment continues to be a critical
priority for the Group. In 2018, we made excellent progress on a
carefully targeted group of innovative new technology projects
designed to enhance our long term competitive position in markets
with strong growth potential.
Our applied research into next generation thermal systems is an
excellent example of one such innovation project. Building on our
strong pedigree in aero-engine thermal management we are developing
a system capable of managing the step change in thermal loads that
ultra-high bypass ratio engines will generate. In 2018, we have
made great progress in developing technology with the potential to
overcome this technical hurdle, with a thermal system with
significantly lower weight and space requirements to current
equivalents.
We have also continued to execute a programme of non-core
business disposals. In March, we completed the sale of Linear
Motion LLC ('Thomson'), a provider of precision engineered products
to Umbra, and in April, we sold chemical etching subsidiary,
Precision Micro to Lloyds Development Capital. As a result of these
divestments, and five others that preceded them since December
2016, we have increased our exposure to attractive markets where we
have a strong competitive position from 66% to 72%, further
enhancing our platform for long term growth and returns. We have
also reached a definitive agreement to sell the business and assets
of one of our French businesses, Meggitt (France) SAS, based in
Fleac, France, to a subsidiary of AF Technologies. The sale is
expected to complete in April 2019. During the year to 31 December
2018, Meggitt (France) SAS, generated GBP11m of revenue.
Customers
Organic book to bill of 1.08x reflects good progress in growing
our relationships with key customers across all market segments in
2018.
In civil aerospace, the launch of our Smart Support(TM) offering
has been critical to securing a series of long term agreements with
aftermarket customers, including Emirates, Delta Airlines, SR
Technics and Turkish Technic. Smart Support(TM) provides a flexible
service and support package which enables us to tailor long term
agreements with our customers, closely aligning the services we
provide with their operations. A combination of new and surplus
parts, specialist repairs, exchange pools and technology upgrades
enable us to optimise and increase the predictability of aircraft
maintenance across the product lifecycle. Building upon the early
success of Smart Support(TM) is a key priority for 2019.
In the defence market, we have secured a number of new orders
which have enabled us to significantly increase growth in 2018 and
provide further visibility for growth in years to come. These
include retrofit fuel tanks for the F/A-18 Super Hornet and UH-60
Black Hawk; a $750m contract for composite parts for the F-119 and
F-135 engines; and a $320m extension of our contract to provide
brakes across a wide range of platforms for the Defense Logistics
Agency.
To further accelerate long term growth, we adopted a new
organisation structure in January 2019, moving from six capability
based units to four customer-aligned divisions: Airframe Systems,
Engine Systems, Energy & Equipment and Services & Support.
This structural change continues our evolution to a more integrated
and efficient Group and increases our alignment with customers
whilst ensuring we maintain a strong focus on innovation across our
businesses. Successfully implementing our new organisation and
delivering the initial benefits of this transition are an important
priority for 2019.
Competitiveness
In 2018, we delivered two notable achievements against the 2021
operational performance targets we announced at our Capital Markets
Day in 2017.
As a result of our increasingly centre-led approach to
procurement, we met our target to reduce net purchased costs by 2%
p.a. Working closely with the Group's preferred suppliers in areas
including electronics, fasteners and machining, we have been able
to simplify our supply chain whilst better leveraging our scale to
reduce cost. This approach has been more than enough to offset
tariffs on products sourced from China into our US facilities.
Whilst we expect such tariffs to remain a headwind in 2019, we
believe the progress we have made in centralised procurement will
continue to support our goal to improve underlying operating margin
by 200 basis points by 2021.
During the past twelve months, we also met our target to
consolidate our footprint by 20% by 2021, with non-core disposals
and the closure of our Maidenhead aftermarket facility contributing
to a further reduction of three sites. Having reduced our footprint
to 45 sites, we continue to target further rationalisation, with 8
site consolidations currently in progress and due to complete over
the next three years.
An important contributor to our success in consolidating
factories has been our progress in expanding capacity in some of
our existing facilities. We have doubled the capacity of our low
cost manufacturing facility in Vietnam and significantly expanded
our composites facilities in Mexico and San Diego. We have also
made excellent progress on our UK super site, with construction
activity beginning at Ansty Park, which remains on schedule to
complete around the end of 2019.
Inventory turns increased to 2.7x (2017: 2.5x) despite our
investment in buffer stocks to support our site consolidation plans
and as part of our contingency planning for a no-deal Brexit. We
are making good progress at many of our sites and we continue to
target inventory turns of 4.0x by 2021.
Our efforts to increase competitiveness and reduce cost continue
to be underpinned by the Meggitt Production System, our global
approach to continuous improvement. The financial and operational
performance improvements at our most advanced facilities continue
to demonstrate the potential we can achieve when we move a critical
mass of sites to the latter phases of the programme. In 2019, we
are focusing central resources to increase MPS maturity and deliver
sustainable operational improvements at eight large but early stage
sites that constrained overall performance in 2018. This will
significantly improve customer service and lay the foundation for
further operational efficiency, which is key to delivering our 2021
margin improvement target.
Five Polymer and Composites sites are included within these
eight early stage MPS sites. Our fast growing engine composites
site in Erlanger, Kentucky incurred significantly higher costs in
2018 due to extended learning curve impacts but exited the year
with improving yield and productivity which we expect to continue
to steadily improve in the coming year. In total, Meggitt Polymer
and Composites was a 150 basis point headwind to Group margin in
2018.
Greater levels of process reliability and increased volume
output will also be key to securing the support of our customers to
transfer high volume production to our recently expanded composite
manufacturing facility in Mexico. We anticipate a progressive
improvement in margin throughout 2019 as we execute this plan.
These complex components are reliant upon deep proprietary
manufacturing know-how which continues to enhance our position in
one of the fastest growing areas in aerospace.
Culture
In 2018, we accelerated our High Performance Culture (HPC)
programme with training rolled-out to over 2,000 of our leaders.
This programme is already having an impact on our business with
employee engagement up 4% during a period of significant change
across many of our sites. By working more closely across our
businesses we will accelerate the benefit we can achieve from
centralised purchasing, site consolidations and further focus of
our research in differentiated technologies.
As part of our high performance culture we continue to build a
more diverse workforce, where our people succeed based on their
talent, skills, knowledge and application. In 2019, we will focus
on building the pipeline of future leaders to ensure that we
increase diversity amongst our executive workforce over the coming
years.
A key principle of our corporate culture is our focus on health
and safety. In 2018, we have seen further strong performance with
our total recordable incident rate improving by 34% and our lost
time incident rate improving by 78%. Whilst we are pleased with the
progress we have made this year, we continue to develop a culture
capable of sustaining upper quartile performance in the safety of
our employees and have targeted further ambitious improvements in
2019.
HEADLINE FINANCIALS
Organic order growth of 12% reflects a strong performance,
including multi-year orders, across all key market segments. Civil
aftermarket (AM) orders grew by 16%, civil original equipment (OE)
by 16%, defence by 6% and energy by 6%, supporting a positive
outlook for revenue growth over the medium term. Group organic book
to bill was encouraging at 1.08x, particularly in civil aerospace
where strong demand for OE and aftermarket parts contributed to a
book to bill of 1.10x.
Reported Group revenue of GBP2,080.6m (2017 restated:
GBP1,994.4m) increased by 4% as analysed in the table below:
GBPm % impact
-------------------- -------- ---------
2017 Revenue 1,994.4
-------------------- -------- ---------
Currency movements (23.7) -1
Acquisitions and
disposals (58.6) -4
Organic growth 168.5 +9
-------------------- -------- ---------
2018 Revenue 2,080.6 +4
-------------------- -------- ---------
Currency movements reflect the recovery of Sterling against our
trading currencies, principally the US dollar, from the low levels
in the first half of 2017. Acquisitions and disposals includes the
net impact of the disposals of Thomson (sold in March 2018) and
Precision Micro (sold in April 2018), together with the full year
impact of disposals completed in 2017. Organic growth of 9%
reflects strong performance in all of the Group's end-markets. In
civil aerospace, organic revenue grew by 7%, in defence by 10% and
in energy by 19%.
The Board's preferred non-statutory measure of the Group's
trading performance is underlying profit. Underlying operating
profit was up 4% to GBP367.3m (2017 restated: GBP353.3m),
representing a margin of 17.7% (2017 restated: 17.7%). Margin
performance reflects the growing financial contribution from the
Group's key strategic priorities, including purchasing savings from
a more centralised approach to category management and efficiencies
from those sites in the latter most stages of MPS. These
operational efficiencies together with lower new product
introduction costs were offset by continued learning curve costs
required to ramp up production of advanced engine composites; and
an increase in FoC content on high volume civil programmes and new
business jets.
Underlying net finance costs were GBP32.5m (2017 restated:
GBP33.1m) reflecting a lower net debt level, offset by an increase
in interest rates. Underlying profit before tax increased by 5% to
GBP334.8m (2017 restated: GBP320.2m).
The Group's underlying tax rate decreased to 21.0% (2017
restated: 22.7%) as a result of the US tax reforms enacted at the
end of 2017. In 2019, we expect the underlying tax rate to increase
to between 22 and 23%. Although the international tax position is
clearer following enactment of the recommendations from the Base
Erosion and Profit Shifting project in the UK, together with US tax
reforms, there are still uncertainties ahead. These include the
outcome of the EU's investigation of the UK Controlled Foreign
Companies ('CFC') regime, the impact of Brexit and expected reforms
in Swiss tax.
Underlying earnings per share increased by 7% to 34.2p (2017
restated: 32.0p).
On a statutory basis, operating profit for the year was
GBP256.6m (2017 restated: GBP272.7m) and profit before tax was
GBP216.1m (2017 restated: GBP228.3m). Statutory profit includes the
GBP10.1m non cash loss (2017: gain of GBP60.7m), from the marking
to market of financial instruments, principally currency hedges,
against future transaction exposures as well as the GBP25.1m net
gain (2017: gain of GBP25.3m) from disposals completed or agreed
during the year. Statutory profit for the year was GBP179.0m (2017
restated: GBP292.8m).
Statutory earnings per share decreased to 23.2p (2017 restated:
37.8p). 2017 benefitted from a GBP88.3m one-off non-cash gain on
the re-measurement of US deferred tax net liabilities as a result
of the decrease in the US federal corporate tax rate and this
explains most of the movement between 2017 and 2018. The statutory
adjustments between underlying and statutory profit are described
in notes 5 and 11.
The 5% increase in the recommended final dividend to 11.35p
(2017: 10.80p) gives a full year dividend of 16.65p (2017: 15.85p),
an overall increase of 5%. This reflects our on-going confidence in
the outlook for the Group and our commitment to a progressive
dividend. The full year dividend will be paid on 3 May to
shareholders on the register on the record date, 22 March 2019.
Free cash flow decreased by 15% to GBP167.4m (2017 restated:
GBP197.4m) as a result of an incremental GBP30.4m contribution to
reduce US pension deficits and an increased working capital outflow
of GBP30.1m (2017: GBP3.0m inflow). The working capital outflow is
driven by growth in inventory, with an investment of GBP37.5m to
support growth, site consolidations and Brexit contingency.
Inventory turns increased to 2.7x (2017 restated: 2.5x) which
reduced the overall investment in inventory that would otherwise
have been required to deliver growth by GBP43.0m in 2018.
The net cash inflow of GBP52.5m (2017: inflow of GBP120.2m)
after dividend payments, includes the GBP35.7m net proceeds from
the sales of Aviation Mobility, Thomson and Precision Micro.
There are two main financial covenants in our financing
agreements. The net debt:EBITDA ratio, which must not exceed 3.5x,
was at 1.8x at 31 December 2018 (2017: 1.9x) and interest cover,
which must be not less than 3.0x, was 14.7x (2017: 13.6x). The
covenants are measured on a frozen GAAP basis and adjust for
currency changes during the year. On a reported basis, the net
debt:EBITDA ratio was 2.3x (2017: 2.4x). The Group has significant
headroom against both key covenant ratios, and net debt:EBITDA is
within our target range of 1.5x to 2.5x. The Group has GBP395.6m of
undrawn headroom against committed bank facilities, after taking
account of surplus cash (2017: GBP331.4m).
TRADING SUMMARY
Revenue Growth
----------------------- ------------------ -------------------
2018 2017 Reported Organic
GBPm GBPm % %
----------------------- -------- -------- --------- --------
Civil OE 464.3 447.1 4 6
Civil AM 660.5 624.9 6 8
Total civil aerospace 1,124.8 1,072.0 5 7
----------------------- -------- -------- --------- --------
Defence 731.2 681.7 7 10
Energy 128.4 117.7 9 19
Other 96.2 123.0 (22) 9
Total 2,080.6 1,994.4 4 9
----------------------- -------- -------- --------- --------
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 24,000 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 54% of the Group total, is 59% aftermarket and 41%
original equipment (OE).
Civil OE revenue grew 6% organically. Large jet OE, the largest
component of our OE revenue, grew 5% driven principally by growth
in A320neo and B737MAX platforms. Business jet OE also saw strong
growth of 20%, which was partly offset by declining revenue in
regional jets (down 14%).
Civil aftermarket revenue grew organically by 8%, within which
large jets grew by 10%, driven by B777, B787, A350XWB and the A220
(formerly the Bombardier C Series). Business jets also grew with
revenue up 4% for the year with good growth in G-350/450 and G-500
platforms. Revenue in the regional jet aftermarket reflected a
strong growth in traffic throughout 2018, which led to organic
growth of 6%.
Overall civil aerospace revenue increased by 7% organically.
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, gives us confidence in
the growth outlook for OE revenue. The rate of growth in large jet
deliveries is expected to average 6% by 2021. Deliveries of
regional aircraft are expected to moderately increase over the
medium term and business jets are set to grow to 2021, before
starting to decline.
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 2018, which is above the
long-term trend rate of 5%. Industry forecasts for air traffic
continue to grow at or above the trend rate in the medium term.
Business jet utilisation in the US and Europe was flat in 2018 but
our higher value content and growing market share should continue
to drive revenue growth over the medium term, even in this subdued
market environment. Utilisation of the larger regional jets, where
we have strong market share given our braking systems content on
aircraft such as the Embraer E-170 and E-190 and Bombardier CRJ
700, CRJ 900 and CRJ 1000, grew by 5% in 2018. Good growth in
Europe, the Middle East and North America led to increased
aftermarket demand, particularly in the second and third
quarters.
Defence
Defence accounted for 35% of Group revenue in 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
73% of defence revenue, with 18% to European customers and 9% to
the rest of the world.
Defence revenue grew 10% organically. Original equipment revenue
grew by 7%, with strong growth in parts for the F-35 Joint Strike
Fighter and AH-64 Apache. Aftermarket revenue (which accounts for
44% of total defence revenue) increased by 15% as a result of
strong demand for retrofit fuel tanks for the F/A-18 Hornet and
UH-60 Black Hawk. These were partly offset elsewhere by lower
demand on platforms such as BAE Hawk and AH-1 Cobra.
The outlook for defence expenditure in the US, our single most
important defence market, remains healthy. Growth in defence
spending in the US is expected to continue given the increases in
FY2019 budget and the President's proposed budget for FY2020.
Energy and other
Energy and other revenue (11% of Group total) come from a
variety of end markets, including power generation (4%), oil and
gas (2%), medical (1%) and automotive (1%). 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.
Energy revenue grew organically by 19% in 2018, driven primarily
by the recovery at Heatric which has operated in challenging
end-markets following the sharp decline in the oil price in 2014.
Trading in the Group's valve and condition monitoring businesses
grew 4% on an organic basis, reflecting our success in supporting
end users and growth in small frame turbines which offset declining
demand for large frame gas turbines.
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 of
deep-water offshore gas reserves and good opportunities for use in
adjacent markets.
OPERATIONAL PERFORMANCE
The financial performance of the individual divisions is
summarised in the table below:
GBPm Underlying Operating
Revenue Profit
---------------------------------------- ---------------------- -------------------------------------
% Growth Reported % Growth
2018 2017 Organic 2018 2017 Reported Organic
-------- -------- -------------------- ---------------------- ------- ------ --------------------
Aircraft Braking
381.8 381.6 +0 +1 Systems 121.5 133.5 -9 -9
575.6 521.3 +10 +13 Control Systems 127.0 117.2 +8 +12
388.9 337.5 +15 +16 Polymers & Composites 6.0 23.8 -75 -76
498.6 501.2 -1 +4 Sensing Systems 84.0 64.2 +31 +32
235.7 252.8 -7 +12 Equipment Group 28.8 14.6 +97 +70
-------- -------- --------- --------- ---------------------- ------- ------ --------- ---------
2,080.6 1,994.4 +4 +9 Group 367.3 353.3 +4 +4
-------- -------- --------- --------- ---------------------- ------- ------ --------- ---------
Meggitt Aircraft Braking Systems (MABS) provides wheels, brakes
and brake control systems for civil and military aircraft,
including fixed wing and rotorcraft. It continues to develop
innovative technology for new programmes enabling the business to
retain its leading position in its target markets, underscored by
strong market share gains in recent years, notably on super
mid-size and long range business jets. The division represents 18%
of Group revenue, generating 91% of its revenue from the
aftermarket and 9% from OE.
MABS civil revenue declined organically by 1%. Civil aftermarket
revenue grew organically by 1% driven by good growth in regional
jets, particularly Embraer E-170 which offset lower demand on
Bombardier CRJ900 and a range of smaller aircraft. Large jet
aftermarket revenue reduced organically by 17% with strong growth
on Airbus A220 offset by significantly lower demand for spares on
mature platforms which had been strong during 2017.
MABS defence revenue increased by 8% organically, with increased
demand on UH60 Black Hawk, A--10 Thunderbolt, F-16 Falcon and
Gripen aircraft partially offset by lower demand for Eurofighter
Typhoon and BAE Hawk brakes.
Underlying operating margin decreased from 35.0% to 31.8% in
2018 driven by unfavourable revenue mix and the accelerated growth
of FoC hardware which represents a significant refresh of our
installed base. This dilutes our near term margins but will drive
aftermarket revenues for decades to come.
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 39% of its revenue from OE and 61% from
the aftermarket.
Revenue was up by 13% organically. Civil aerospace grew
organically by 15%, with strong performance in both OE and
aftermarket. OE revenue grew by 10% on an organic basis with good
growth on A320neo family, 737MAX and A350XWB partially offset by
lower demand on 787 and the A320ceo aircraft. Civil aftermarket
revenue grew by 19% on an organic basis with strong growth in large
jet demand, particularly on A320, A350XWB, 737, 777 and 787.
Defence revenue increased by 11% on an organic basis driven by
good growth in spares on fighter jet programmes, including B1-B
Lancer, UH60 Black Hawk and C-130J Hercules. Energy revenue
increased by 5% organically driven by growth in demand for small
frame industrial gas turbine valves.
Underlying operating margin declined by 40 basis points to
22.1%, reflecting lower overhead recovery at our fire protection
site during the fourth quarter as we implemented a change in ERP
system.
Meggitt Polymers & Composites (MPC) supplies flexible
bladder fuel tanks, complex composites and seals packages for a
broad range of civil and defence platforms. These products are
linked by their dependence on similar materials technology and
manufacturing processes. It supplies over 80% of the US defence
requirements for fuel bladders and ballistically-resistant and
crashworthy fuel tanks. MPC represents 19% of Group revenue and
generated 64% of its revenue from OE and 36% from the
aftermarket.
On an organic basis, MPC revenue increased by 16% in 2018,
reflecting the strong content we have on new generation civil
platforms and growing demand for spares on defence aircraft. Civil
revenue grew organically by 10% as a result of strong demand for
our engine composites on the fast growth CFM Leap and Pratt &
Whitney PurePower engine programmes. Organic order growth of 32% in
civil OE underpins a healthy medium term outlook for MPC, with
continued demand anticipated for our high temperature engine
composites.
Defence revenue grew by 21% on an organic basis as a result of
strong demand for composite components on the F-135 engine and for
retrofit fuel tanks on programmes including F/A-18 Super Hornet,
F-16 Falcon and UH60 Black Hawk.
Underlying operating margin decreased from 7.1% to 1.5%
reflecting the full year impact of the elevated and extended
learning curve costs at the Group's composite sites which began to
impact financial performance in late 2017, together with the
productivity drag from our fuel tanks facility which significantly
increased capacity in the early part of 2018. The actions we have
taken during 2018 have delivered meaningful improvements in
operational performance with yield improving across all major parts
at our composites sites. The significant growth on these parts,
associated with large shipset values on fast growing new engine
programmes, means we have prioritised near term operational
performance over cost reduction in 2018. Initial yield improvements
have enabled us to reduce scrap costs in the second half, and the
transfer of production to low cost regions, increases in labour
productivity and further yield improvement are all expected to
provide good scope for cost reduction in 2019.
The outlook for MPC remains strong given the extensive
capability we have acquired, strong platform positions and
potential for significant market growth. This is particularly true
for composite components on new engine programmes where technical
barriers remain high and manufacturing know-how can be a critical
differentiator.
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. MSS has migrated these products into other
specialist markets requiring similar capabilities, such as test and
measurement, crash test and medical. 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. MSS represents 24% of Group revenue and
generated 77% of its revenue from OE and 23% from the
aftermarket.
MSS revenue increased by 4% organically, with 1% growth in civil
aerospace driven by business jet OE growth, particularly on
Bombardier Global 7500 and Embraer Legacy 450/500, which offset
falling revenue on widebody aircraft. Defence revenue increased by
6%, with strong growth on F-35 Lightning II more than sufficient to
offset declining spares demand on other fighter jet and rotorcraft
platforms. In energy and other markets (including test and
measurement, industrial and medical), MSS revenue increased
organically by 4% reflecting success in reducing reliance on OEMs
and targeting operators of industrial gas turbines; and growing
demand in medical markets for our aero-derivative sensing
capabilities.
Despite 98% growth in FoC content on new generation engine
programmes, underlying operating margin increased by 400 basis
points to 16.8% reflecting lower new product introduction costs,
purchasing savings from our centre-led approach to category
management and good progress in reducing other costs.
We have also reached a definitive agreement to sell the business
and assets of one of our French businesses, Meggitt (France) SAS,
based in Fleac, France, to a subsidiary of AF Technologies. The
sale is expected to complete in April 2019. During the year to 31
December 2018, Meggitt (France) SAS, generated GBP10.6m of
revenue.
Meggitt Equipment Group (MEG) comprises our dedicated defence
businesses and Heatric, a provider of printed circuit heat
exchangers to the energy sector. The division represents 11% of
Group revenue and generates 78% of its revenue from OE and 22% from
the aftermarket.
MEG revenue grew by 12% organically, reflecting good growth in
defence as a result of strong growth at Meggitt Defense Systems Inc
('MDSI'), a leading provider of thermal systems, ammunition
handling and scoring technologies. In energy, revenue increased
organically by 86% in 2018, driven by the recovery at Heatric which
has operated in challenging end-markets following the sharp decline
in the oil price in 2014.
Increased profitability at Heatric together with greater
operational leverage at MDSI contributed to good growth in
underlying operating margin which increased from 5.8% to 12.2% in
2018.
In March 2018, we completed the sale of Thomson to Umbra and in
April 2018, the sale of Precision Micro to Lloyds Development
Capital. The two divested businesses generated GBP11.8m of revenue
during 2018.
NEW ORGANISATION STRUCTURE
With effect from 1 January 2019, we have adopted a new
customer-aligned reporting structure which will make Meggitt a
simpler organisation to do business with and will provide access to
the complete suite of our capabilities through one, clear and
consistent interface with each of our major customer groups.
Pro-forma revenue and underlying operating margin for the year to
31 December 2018, for the new reporting structure is as
follows:
Disposed
GBPm Airframe Engine Energy Services / For
2018 Pro-forma Systems Systems & Equipment & Support Sale Group
--------- --------- ------------- ----------- --------- ------
Revenue 1,158 406 398 400 28 2,389
--------- --------- ------------- ----------- --------- ------
Intercompany Revenue (148) (127) (26) (5) (2) (308)
--------- --------- ------------- ----------- --------- ------
External Revenue 1,009 279 372 395 26 2,081
--------- --------- ------------- ----------- --------- ------
Operating Profit 259 18 31 58 1 367
--------- --------- ------------- ----------- --------- ------
Operating Margin 25.7% 6.6% 8.3% 14.7% 2.3% 17.7%
---------------------- --------- --------- ------------- ----------- --------- ------
INVESTING FOR THE FUTURE
GBPm 2018 2017 % change
Reported Organic
Total research and development
(R&D) 138.3 157.9 (12) (11)
Less: Charged to cost of goods
sold / WIP (31.8) (38.8) (18) (18)
Capitalised (58.6) (62.5) (6) (6)
Add: Amortisation / impairment 22.1 23.0 (4) (4)
Charge to net operating costs 70.0 79.6 (12) (9)
Programme participation costs 0.8 3.4 (76)
Capital expenditure 72.3 78.4 (8)
Total R&D expenditure reduced in 2018 to GBP138.3m and was
6.6% of revenue (2017: GBP157.9m, 7.9%). Applied research, combined
with targeted investment in the development of technology, remains
critical to our long-term growth. We have significantly increased
our content on new aircraft, which represents a major refresh of
our in-service portfolio. Therefore, having passed the peak of
technology development for the current generation of aircraft, we
saw reduced spend on capitalised development costs (down 6%
organically). However, we are still investing in our successful
applied research and technology (AR&T) programmes, which will
develop the next generation products and manufacturing technologies
required to enable future programmes.
We also anticipate that customer funded R&D will continue to
support AR&T, given our past success in securing such customer
funded development programmes and grants. Our investment in
programme participation costs ('PPC') excludes investment in FoC
hardware which is expensed under IFRS 15 and only comprises cash
payments. Such costs are typically associated with programmes in
the development phase. In 2018 this investment declined to
GBP0.8m.
The charge to net operating costs, including amortisation and
impairment, decreased by 12% (9% organically) to GBP70.0m (2017:
GBP79.6m).
Capital expenditure on property, plant and equipment and
intangible assets was GBP72.3m (2017: GBP78.4m). This includes the
investment required to support factory consolidations and the
expansion at sites in Coventry, Vietnam, Mexico and San Diego.
Capital expenditure is due to increase significantly in 2019, as
we accelerate plans to consolidate the Group's manufacturing
footprint, including investments at the Ansty Park site and
completion of current construction and fit out projects to increase
capacity within our existing estate.
Guidance issued at the half year for operating exceptional cash
relating to site consolidation activity had anticipated the receipt
of GBP21.0m in December 2018, for the sale of land associated with
the move to our Ansty Park site. This payment was delayed but
subsequently received in January.
FOREIGN EXCHANGE
The results of foreign subsidiaries are translated into Sterling
at weighted average exchange rates. Sterling remained volatile
throughout 2018 against all major currencies, trading at between
$1.25 and $1.43 against the US dollar. However, over the year as a
whole, the average Sterling rate against the US dollar was only
marginally stronger at $1.31 (2017: $1.30) providing a modest
adverse impact on our reported results for the year. Compared to
2017, the Group's revenue reduced by GBP15.2m and underlying profit
before tax by GBP2.7m from currency translation movements relating
to US Dollar denominated revenues and profits. The sensitivity of
revenue and underlying PBT to future exchange rate translation
movements, when compared to the 2018 average rates, is shown in the
table below:
Underlying
2018 Revenue PBT
average rate GBP'm GBP'm
---------------------------- --------------- ---------- -------------
Impact of 10 cent movement
US Dollar 1.31 115 16
Euro 1.13 11 2
Swiss Franc 1.30 9 3
---------------------------- --------------- ---------- -------------
Transaction risk arises where revenues and/or costs of our
businesses are denominated in a currency other than their own. We
hedge known, and some anticipated transaction currency exposures,
based on historical experience and projections. Our policy is to
hedge at least 70% of the next 12 months' anticipated exposure and
to permit the placing of cover up to five years ahead. Compared to
2017, the Group's revenue was adversely impacted by GBP8.5m and
underlying profit before tax for the year benefitted by GBP1.5m
from currency transaction movements. Each ten cent movement in the
US Dollar against the average hedge rates achieved in 2018 would
affect underlying profit before tax by approximately GBP9.0m in
respect of US Dollar/Sterling exposure, GBP3.0m in respect of US
Dollar/Euro exposure and GBP4.0m in respect of US Dollar/Swiss
Franc exposure.
We typically hedge transaction exposure and the following table
details hedging currently in place:
Hedging in place6 Average transaction
% Rates7
----------------------- ------------------ --------------------
2018
------------------ --------------------
US Dollar/Sterling 1.44
------------------ --------------------
US Dollar/Euro 1.21
------------------ --------------------
US Dollar/Swiss Franc 1.06
------------------ --------------------
2019
US Dollar/Sterling 100 1.43
US Dollar/Euro 91 1.19
US Dollar/Swiss Franc 82 1.07
2020 - 2023 inclusive
US Dollar/Sterling 62 1.37
US Dollar/Euro 16 1.24
US Dollar/Swiss Franc 20 1.11
----------------------- ------------------ --------------------
6 Based on forecast transaction exposures.
7 Hedging in place with unhedged exposures based on exchange
rates at 31 January 2019.
Taking both translation and transaction benefit into account,
2018 reported revenue reduced by GBP23.7m and underlying PBT
reduced by GBP1.2m.
RETIREMENT BENEFIT SCHEMES
The Group's principal defined benefit schemes are in the UK and
US and are closed to new members. Total deficits decreased to
GBP209.1m (2017: GBP308.1m). The main drivers of the reduction in
net deficit included a reduction of GBP98.3m (2017: GBP9.8m) due to
re-measurement gains on scheme liabilities, which principally arose
from a weakening of AA corporate bond yields in both the UK and US,
and net deficit reduction payments of GBP67.6m (2017: GBP33.5m).
Deficit reduction payments in 2018 included additional
contributions into two of the Group's US schemes of GBP30.4m. These
contributions, which represent an acceleration of amounts that
would have been due over the next five years, are deductible
against the Group's 2017 taxable profits and attract tax relief at
the higher rates that prevailed prior to US tax reforms enacted in
December 2017.
In the UK, the Group is currently making deficit payments in
accordance with a recovery plan agreed with the trustees following
the 2015 triennial funding valuation. This recovery plan provides
for the deficit to be addressed by payments which gradually
increase over the period to March 2024. Under this plan, the Group
will make deficit contributions of GBP32.3m in 2019 (GBP2018:
GBP30.9m). The 2018 triennial valuation is currently in progress
and preliminary results indicate a funding deficit of GBP163.0m at
April 2018. This provisional funding position is approximately
GBP34.0m lower than that projected in the 2015 valuation at the
same date. It is expected that a revised recovery plan, addressing
this improvement in funding position, will be finalised with the
trustees in the first half of 2019 although no change to the level
of payments for 2019 is currently expected.
In the US, the level of minimum annual payments is principally
driven by regulations, although additional contributions in excess
of legislative minimum amounts can be made. Following the
additional contributions in 2018, amounts required to be paid will
reduce to approximately GBP4.0m in 2019 and, absent any further
changes in legislation, will remain broadly at this level for the
next four years.
BOARD CHANGES
In September 2018, we announced that Doug Webb would retire from
his role as Executive Director and Chief Financial Officer in
December 2018. Doug served as our CFO for over five years,
overseeing a critical period in our evolution from a holding
company to an integrated group. We thank Doug for the significant
role he has played in the development of the Group and we wish him
well in his retirement.
Doug has been succeeded by Louisa Burdett who joined Meggitt as
Chief Financial Officer after serving as Group Finance Director of
Victrex, a FTSE 250 industrial polymers group focused on several
strategic markets including aerospace and energy. Louisa has
extensive experience in senior financial roles at companies
including the Financial Times Group, GE and GlaxoSmithKline and is
also a Non-Executive Director and Chair of the Audit Committee of
Electrocomponents plc.
Guy Hachey joined the Board as a Non-Executive Director and as a
member of the Audit, Remuneration and Nominations committee in
January 2019. Previously President and Chief Operating Officer of
Bombardier, Guy will bring extensive skills and experience in
aerospace and will be a strong successor for Paul Heiden who is
retiring on 25 April 2019. We thank Paul for nine years of
excellent service and contribution to the Board, particularly since
2012 when he was appointed as Chairman of the Remuneration
Committee, leading the Committee through a period of significant
change in remuneration reporting requirements, and 2016, when he
was appointed as our Senior Independent Director. Paul will be
succeeded by Guy Berruyer as Senior Independent Director and Alison
Goligher as Chairman of the Remuneration Committee.
In January 2019 we announced that Caroline Silver will join the
Board as a Non-Executive Director on 25 April 2019, immediately
prior to the AGM. Caroline will also join the Audit, Remuneration
and Nominations Committees. Caroline is a Senior Managing Director
at Moelis & Company, a leading global independent investment
bank where she specialises in financial institutions and fintech
advisory and capital raising. Previously, she was Vice Chairman of
EMEA Investment Banking at Bank of America Merrill Lynch and spent
14 years at Morgan Stanley where she held a number of senior
positions including Global Vice Chairman of Investment Banking and
European Head of Financial Institutions. She started her career as
a Chartered Accountant with PricewaterhouseCoopers.
GROUP OUTLOOK
The outlook for our civil markets continues to be positive. The
fundamental driver of our business is air traffic, which continues
to grow ahead of the long run average of 4 to 5% per annum. This is
being achieved through increased production of large jets and the
increased shipset values we have secured on the latest generation
of aircraft will underpin organic civil OE revenue growth over the
medium term ahead of overall market growth. This growth will be
partly offset by the expectation that regional jet deliveries
continue to fall in 2019 and that growth in business jets is slower
than the 20% achieved in 2018.
In 2019, we expect civil OE revenue to grow organically by 4 to
6%.
Civil aftermarket revenues will continue to benefit from above
average growth in traffic and the reduced availability of used
serviceable material given the record low retirement rate in 2018.
However, this growth will be partly offset by an anticipation of
lower utilisation of both business jets and regional aircraft which
account for 46% of Group aftermarket exposures; and a strong
comparative period in 2018, in which aftermarket growth was
supplemented by non-recurring revenue associated with new
distributor agreements signed in late 2017. In 2019, we expect
organic civil aftermarket revenue growth of 3 to 5%.
In defence markets the medium-term outlook is positive,
particularly in our largest market the US, which accounts for 73%
of revenue and where the budget for procurement; research,
development, test and evaluation; and operations and maintenance is
due to grow by 3% in 2019. Our strong technology offering and broad
platform exposure should enable us to outgrow the market and in
2019, we expect to grow organic revenue by 4 to 6%.
The outlook in our energy markets is mixed. At Heatric, we
expect the recovery to continue into 2019 given organic order
growth of 24% in 2018. This is likely to be offset by more
challenging conditions in power generation where we continue to
offset falling demand from the industrial gas turbine OEMs with
growth in sales to end users. In 2019, we expect organic energy
growth of 0 to 5%.
The Group has carefully considered a range of scenarios and
implemented mitigating actions that arise from the risk of a
potential no-deal Brexit. These include investment in buffer
inventories, the recruitment of additional customs administrators
and application for third-country EASA status, enabling us to
continue to support European registered aircraft under these
circumstances. Given that less than 5% of the Group's revenues are
transacted between the UK and the EU, Brexit is not considered to
be a significant risk for the Group in 2019.
On the basis of the above, the Group expects organic revenue
growth of 3 to 5% in 2019.
The Group expects underlying operating margin growth of 0 to 50
basis points in 2019. The increasing momentum in our strategic
initiatives, greater volume leverage and gradual improvement in
margin in engine composites are likely to be partly offset by
continued growth of FoC units and unfavourable revenue mix, with
civil OE and defence growth expected to be our fastest growing
segments.
We remain confident in delivering our 2021 margin target of at
least 19.9% and inventory turns of 4.0x, with the pace of our
strategic initiatives continuing to accelerate as headwinds from
unfavourable revenue mix are expected to ease as the rate of new
aircraft deliveries slows in the early 2020s.
Consolidated income statement
For the year ended 31 December 2018
2018 2017
Restated
(note 29)
Notes GBP'm GBP'm
Revenue 3 2,080.6 1,994.4
Cost of sales (1,320.1) (1,235.2)
---------- -----------
Gross profit 760.5 759.2
Net operating costs (503.9) (486.5)
---------- -----------
Operating profit(1) 5 256.6 272.7
Finance income 8 1.0 1.4
Finance costs 9 (41.5) (45.8)
---------- -----------
Net finance costs (40.5) (44.4)
Profit before tax(2) 216.1 228.3
Tax (charge)/credit 10 (37.1) 64.5
Profit for the year attributable to equity
owners of the Company 179.0 292.8
========== ===========
Earnings per share:
Basic(3) 11 23.2p 37.8p
Diluted(4) 22.8p 37.1p
Non-GAAP measures
(1) Underlying operating profit 5 367.3 353.3
(2) Underlying profit before tax 5 334.8 320.2
(3) Underlying basic earnings per share 11 34.2p 32.0p
(4) Underlying diluted earnings per share 11 33.7p 31.3p
-------------------------------------------- ------ ---------- -----------
Consolidated statement of comprehensive income
For the year ended 31 December 2018
2018 2017
Restated
(note 29)
Notes GBP'm GBP'm
Profit for the year attributable to equity
owners of the Company 179.0 292.8
Items that may be reclassified to the income statement
in subsequent periods:
Currency translation movements 90.7 (147.5)
Movements in fair value of financial liabilities
arising from
changes in credit risk 0.8 (2.1)
Cash flow hedge movements (0.3) (0.2)
Tax effect 2.5 (2.4)
28 93.7 (152.2)
Items that will not be reclassified to the income statement
in subsequent periods:
Remeasurement of retirement benefit obligations 21 46.2 66.6
Tax effect (7.3) (27.1)
-------- -----------
38.9 39.5
Other comprehensive income/(expense) for
the year 132.6 (112.7)
Total comprehensive income for the year
attributable to equity owners of the Company 311.6 180.1
======== ===========
Consolidated balance sheet
At 31 December 2018
31 Dec 1 Jan
31 Dec 2017 2017
2018 Restated Restated
(note (note
29) 29)
Notes GBP'm GBP'm GBP'm
Non-current assets
Goodwill 14 2,035.3 1,944.9 2,095.7
Development costs 14 557.1 495.8 543.0
Programme participation costs 14 18.2 17.1 17.0
Other intangible assets 14 610.4 672.1 817.6
Property, plant and equipment 15 404.0 406.2 424.4
Investments 16 12.9 13.6 14.8
Trade and other receivables 21.5 38.7 58.4
Contract assets 61.1 49.7 56.9
Derivative financial instruments 19 10.0 28.5 21.8
Deferred tax assets 16.3 26.3 28.8
3,746.8 3,692.9 4,078.4
Current assets
Inventories 441.2 393.4 443.0
Trade and other receivables 413.6 389.7 394.7
Contract assets 47.9 39.7 33.4
Derivative financial instruments 19 9.3 3.6 4.2
Current tax recoverable 6.4 4.3 4.4
Cash and cash equivalents 26 181.9 118.5 173.8
Assets classified as held for sale 17 10.3 9.7 -
---------- ---------- ----------
1,110.6 958.9 1,053.5
Total assets 4 4,857.4 4,651.8 5,131.9
Current liabilities
Trade and other payables (452.5) (402.1) (419.1)
Contract liabilities (47.9) (52.5) (31.7)
Derivative financial instruments 19 (18.8) (17.3) (31.2)
Current tax liabilities (39.5) (39.6) (35.6)
Lease liabilities 18 (16.1) (16.9) (17.8)
Bank and other borrowings 26 (10.2) (71.4) (175.7)
Provisions 20 (33.0) (65.7) (53.6)
Liabilities directly associated
with assets classified
as held for sale 17 - (7.8) -
---------- ---------- ----------
(618.0) (673.3) (764.7)
Net current assets 492.6 285.6 288.8
Non-current liabilities
Trade and other payables (1.3) (5.5) (4.8)
Contract liabilities (43.9) (23.1) (19.3)
Derivative financial instruments 19 (17.4) (14.6) (45.7)
Deferred tax liabilities (161.9) (142.2) (235.5)
Lease liabilities 18 (81.4) (85.2) (88.5)
Bank and other borrowings 26 (1,148.3) (1,005.8) (1,170.6)
Provisions 20 (83.7) (82.5) (131.8)
Retirement benefit obligations 21 (209.1) (308.1) (414.7)
(1,747.0) (1,667.0) (2,110.9)
Total liabilities (2,365.0) (2,340.3) (2,875.6)
Net assets 2,492.4 2,311.5 2,256.3
========== ========== ==========
Equity
Share capital 38.8 38.8 38.8
Share premium 1,223.9 1,222.2 1,219.8
Other reserves 15.7 15.7 15.7
Hedging and translation reserves 493.8 400.1 552.3
Retained earnings 720.2 634.7 429.7
---------- ---------- ----------
Total equity attributable to owners
of the Company 2,492.4 2,311.5 2,256.3
========== ========== ==========
Consolidated statement of changes in equity
For the year ended 31 December 2018
Equity attributable to owners of the Company
Hedging
Share Share Other and translation Retained Total
capital premium reserves reserves earnings equity
GBP'm GBP'm GBP'm GBP'm GBP'm GBP'm
At 1 January 2017 (Restated
see note 29) 38.8 1,219.8 15.7 552.3 429.7 2,256.3
Profit for the year - - - - 292.8 292.8
Other comprehensive
(expense)/income for
the year - - - (152.2) 39.5 (112.7)
Total comprehensive
(expense)/income for
the year - - - (152.2) 332.3 180.1
Employee share schemes:
Value of services provided - - - - 12.7 12.7
Purchase of own shares
for employee share schemes - - - - (19.0) (19.0)
Issue of equity share
capital - 2.4 - - (2.4) -
Dividends - - - - (118.6) (118.6)
At 31 December 2017
(Restated see note 29) 38.8 1,222.2 15.7 400.1 634.7 2,311.5
========= ========== ========== ================= ========== ==========
Profit for the year - - - - 179.0 179.0
Other comprehensive
income for the year - - - 93.7 38.9 132.6
Total comprehensive
income for the year - - - 93.7 217.9 311.6
Employee share schemes:
Value of services provided - - - - 16.1 16.1
Purchase of own shares
for employee share schemes - - - - (22.6) (22.6)
Issue of equity share
capital - 1.7 - - (1.7) -
Dividends - - - - (124.2) (124.2)
At 31 December 2018 38.8 1,223.9 15.7 493.8 720.2 2,492.4
===== ======== ===== ======= ========= =========
Consolidated cash flow statement
For the year ended 31 December 2018
2018 2017
Restated
Notes GBP'm GBP'm
Non-GAAP measures
Cash inflow from operations before business
acquisition and disposal expenses and exceptional
operating items 364.0 417.0
Cash outflow from business acquisition
and disposal expenses (3.8) (3.9)
Cash outflow from exceptional operating
items 7 (12.0) (13.8)
---------------------------------------------------- ------ -------- ----------
Cash inflow from operations 25 348.2 399.3
Interest received 0.2 0.2
Interest paid (33.1) (37.5)
Tax paid (20.0) (24.1)
Cash inflow from operating activities 295.3 337.9
-------- ----------
Business acquired - (19.4)
Businesses disposed 27 35.7 83.7
Capitalised development costs 14 (58.6) (62.6)
Capitalised programme participation costs (0.8) (3.4)
Purchase of intangible assets (21.8) (18.3)
Purchase of property, plant and equipment (52.6) (62.0)
Proceeds from disposal of property, plant
and equipment 2.1 1.9
Cash outflow from investing activities (96.0) (80.1)
-------- ----------
Dividends paid to Company's shareholders (124.2) (118.6)
Purchase of own shares for employee share
schemes (22.6) (19.0)
Proceeds from bank and other borrowings 85.5 64.9
Repayments of bank and other borrowings (66.8) (224.2)
Repayments of lease liabilities (14.3) (11.4)
-------- ----------
Cash outflow from financing activities (142.4) (308.3)
-------- ----------
Net increase/(decrease) in cash and cash
equivalents 56.9 (50.5)
Cash and cash equivalents at start of the
year 118.5 173.8
Exchange gains/(losses) on cash and cash
equivalents 6.5 (4.8)
-------- ----------
Cash and cash equivalents at end of the
year 181.9 118.5
======== ==========
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 December 2018
1. General information and basis of preparation
This document contains abridged preliminary financial
information for the year ended 31 December 2018 together with
comparatives.
The information presented has been prepared in accordance with
those parts of the Companies Act 2006 applicable to companies
reporting under International Financial Reporting Standards
('IFRSs) as adopted by the European Union and in accordance with
the FSA Listing Rules. It has been prepared on a going concern
basis and under the historical cost convention, as modified by the
revaluation of certain financial assets and financial liabilities
(including derivative financial instruments) at fair value.
The financial information contained in this document does not
constitute Group statutory accounts as defined in Sections 404 and
435 of the Companies Act 2006. It is based on, and is consistent
with, that in the Group's statutory accounts for the year ended 31
December 2018 and those financial statements will be delivered to
the Registrar of Companies following the Company's Annual General
Meeting. The auditors' report on those accounts is unqualified,
does not draw attention to any matters by way of emphasis and does
not contain a statement under Section 498(2) or (3) 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
have been filed with 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.
2. Accounting policies
The 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 accounting standards have been adopted for the
financial year. The Group has updated its accounting policies to
reflect these standards, which has resulted in a restatement of
prior period comparatives as described in note 29. The standards
which have been adopted for the first time and have had a
significant impact on the consolidated financial statements
are:
-- IFRS 15, 'Revenue from contracts with customers';
-- IFRS 16, 'Leases'; and
-- IFRS 9, 'Financial instruments'.
3. Revenue
The Group's revenue is analysed as follows:
2018 2017
Restated
GBP'm GBP'm
At a point in time 1,916.5 1,871.3
Over time: Power by the hour/Cost per brake
landing 45.0 39.1
Over time: Other 119.1 84.0
Total 2,080.6 1,994.4
========= ==========
4. Segmental analysis
The Group managed its businesses for the year ended 31 December
2018 under the key segments of Meggitt Aircraft Braking Systems,
Meggitt Control Systems, Meggitt Polymers & Composites, Meggitt
Sensing Systems and the Meggitt Equipment Group.
Year ended 31 December 2018
Meggitt
Meggitt Meggitt Polymers Meggitt Meggitt Total
Aircraft Control & Sensing Equipment
Braking Systems Composites Systems Group
Systems
GBP'm GBP'm GBP'm GBP'm GBP'm GBP'm
Gross segment revenue 389.1 577.1 391.3 541.0 253.0 2,151.5
Inter-segment revenue (7.3) (1.5) (2.4) (42.4) (17.3) (70.9)
----------
Revenue from external
customers 381.8 575.6 388.9 498.6 235.7 2,080.6
========== ========= ============ ========= =========== ========
At a point in time 349.3 570.7 385.0 489.9 121.6 1,916.5
Over time: Power by
the hour/Cost per brake
landing 31.9 4.9 - 8.2 - 45.0
Over time: Other 0.6 - 3.9 0.5 114.1 119.1
---------- --------- ------------ --------- ----------- --------
Revenue by basis of
recognition 381.8 575.6 388.9 498.6 235.7 2,080.6
========== ========= ============ ========= =========== ========
Underlying operating
profit* 121.5 127.0 6.0 84.0 28.8 367.3
========== ========= ============ ========= =========== ========
* A reconciliation of operating profit to underlying operating
profit is shown in note 5.
Year ended 31 December 2017 (Restated)
Meggitt
Meggitt Meggitt Polymers Meggitt Meggitt Total
Aircraft Control & Sensing Equipment
Braking Systems Composites Systems Group
Systems
GBP'm GBP'm GBP'm GBP'm GBP'm GBP'm
Gross segment revenue 388.1 522.5 339.4 525.8 266.4 2,042.2
Inter-segment revenue (6.5) (1.2) (1.9) (24.6) (13.6) (47.8)
----------
Revenue from external
customers 381.6 521.3 337.5 501.2 252.8 1,994.4
========== ========= ============ ========= =========== ========
At a point in time 353.6 517.9 337.5 492.6 169.7 1,871.3
Over time: Power by
the hour/Cost per brake
landing 28.0 3.4 - 7.7 - 39.1
Over time: Other - - - 0.9 83.1 84.0
---------- --------- ------------ --------- ----------- --------
Revenue by basis of
recognition 381.6 521.3 337.5 501.2 252.8 1,994.4
========== ========= ============ ========= =========== ========
Underlying operating
profit* 133.5 117.2 23.8 64.2 14.6 353.3
========== ========= ============ ========= =========== ========
* A reconciliation of operating profit to underlying operating
profit is shown in note 5.
4. Segmental analysis (continued)
Segmental assets
31 December 31 December
2018 2017
Restated
GBP'm GBP'm
Meggitt Aircraft Braking Systems 534.3 513.4
Meggitt Control Systems 418.2 346.0
Meggitt Polymers & Composites 282.5 234.1
Meggitt Sensing Systems 489.5 450.8
Meggitt Equipment Group 176.6 199.2
Total segmental trading assets 1,901.1 1,743.5
Centrally managed trading assets* 146.1 166.9
Goodwill 2,035.3 1,944.9
Other intangible assets 527.8 592.0
Investments 12.9 13.6
Derivative financial instruments -
non-current 10.0 28.5
Deferred tax assets 16.3 26.3
Derivative financial instruments -
current 9.3 3.6
Current tax recoverable 6.4 4.3
Cash and cash equivalents 181.9 118.5
Assets classified as held for sale 10.3 9.7
Total assets 4,857.4 4,651.8
============ ============
* Centrally managed trading assets principally include amounts
recoverable from insurers and other third parties in respect of
environmental issues relating to former sites, other receivables
and property, plant and equipment of central companies.
5. 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:
2018 2017
Restated
Note GBP'm GBP'm
Operating profit 256.6 272.7
Amounts arising on the acquisition,
disposal and closure of businesses a (25.1) (25.3)
Amortisation of intangible assets acquired
in business combinations (note 14) 91.5 93.5
Financial instruments (note 6) 10.1 (60.7)
Exceptional operating items (note 7) 34.2 73.1
Adjustments to operating profit* 110.7 80.6
Underlying operating profit 367.3 353.3
========= ==========
Profit before tax 216.1 228.3
Adjustments to operating profit per
above 110.7 80.6
Net interest expense on retirement benefit
obligations (note 21) 8.0 11.3
--------- ----------
Adjustments to profit before tax 118.7 91.9
Underlying profit before tax 334.8 320.2
========= ==========
Profit for the year 179.0 292.8
Adjustments to profit before tax per
above 118.7 91.9
Tax effect of adjustments to profit
before tax (29.1) (49.0)
Impact of reduction in the US rate of federal
corporate tax (note 10) (4.1) (88.3)
--------- ----------
Adjustments to profit for the year 85.5 (45.4)
Underlying profit for the year 264.5 247.4
========= ==========
* Of the adjustments to operating profit, GBP18.1m (2017
restated: GBP8.5m) relating to exceptional operating items has been
charged to cost of sales with the balance of GBP92.6m (2017
restated: GBP72.1m) included within net operating costs.
a. 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.
2018 2017
GBP'm GBP'm
Gain on disposal of businesses before
disposal expenses (30.4) (40.3)
Costs related to the disposal of businesses
in the current period 2.5 0.6
-------- -------
Gain on disposal of businesses (note
27) (27.9) (39.7)
Costs related to the disposal of businesses
in prior periods 0.3 -
Costs related to the acquisition of
businesses - 0.2
Remeasurement of fair value of contingent
consideration payable relating to previously
acquired businesses (3.6) -
Impairment of assets classified as held
for sale (note 17) 6.1 14.2
Total (25.1) (25.3)
======== =======
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 recognised if hedge accounting
had been applied.
Where interest rate derivatives qualify to be hedge accounted,
any difference recognised in the income statement between the
movements in fair value of the 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.
2018 2017
Restated
GBP'm GBP'm
Movement in fair value of foreign currency
forward contracts 27.9 (73.8)
Impact of retranslating net foreign currency
assets and liabilities
at spot rate (1.0) 0.5
Movement in fair value of interest rate derivatives 5.4 8.1
Movement in fair value of fixed rate borrowings
due to interest rate risk (4.9) (8.9)
Movement in fair value of cross currency derivatives (16.8) 13.9
Movement in fair value of treasury lock derivative (0.5) (0.5)
Total - Loss/(gain) 10.1 (60.7)
======== ==========
7. Exceptional operating items
Items which are significant by virtue of their size or nature
and which are considered non--recurring are classified as
exceptional operating items.
Income statement Cash expenditure
------------------- -------------------
2018 2017 2018 2017
Restated
Notes GBP'm GBP'm GBP'm GBP'm
Site consolidations a 28.7 7.9 8.2 8.5
Impairment loss arising from
cancellation of Dassault Falcon
5X programme b - 58.0 - -
Business restructuring costs 3.1 2.7 3.1 0.8
Guaranteed Minimum Pension equalisation
(note 21) 1.7 - - -
Integration of acquired businesses 0.7 4.5 0.7 4.5
Total 34.2 73.1 12.0 13.8
======= ========== ========= ========
a. This relates to costs incurred in respect of the Group's
previously announced plans to reduce its footprint by 20% by the
end of 2021. Cumulative costs since the announcement are GBP43.6m
(2017: GBP14.9m). In 2018, costs are principally 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. The charge in 2018 includes impairment losses
in respect of property, plant and equipment of GBP3.6m (note 15)
and assets classified as held for sale of GBP4.6m (note 17).
b. On 13 December 2017, Dassault Aviation announced the
cancellation of its Falcon 5X programme. The cancellation resulted
in a cost of GBP58.0m being recognised in 2017, comprising an
impairment loss of GBP54.4m in respect of capitalised development
costs and GBP3.6m in respect of the reduction of inventory to net
realisable value.
8. Finance income
2018 2017
GBP'm GBP'm
Interest on bank deposits - 0.1
Unwinding of interest on other receivables
(note 20) 0.8 1.2
Other finance income 0.2 0.1
Total 1.0 1.4
======= =======
9. Finance costs
2018 2017
Restated
GBP'm GBP'm
Interest on bank borrowings 2.6 2.2
Interest on senior notes 28.0 30.0
Interest on lease liabilities 3.7 3.8
Unwinding of discount on provisions (note 20) 1.7 2.0
Net interest expense on retirement benefit
obligations (note 21) 8.0 11.3
Amortisation of debt issue costs 0.8 0.9
Less: amounts capitalised in the cost of qualifying
assets (note 14) (3.3) (4.4)
------- ----------
Total 41.5 45.8
======= ==========
10. Tax
On 22 December 2017, the US government enacted comprehensive tax
legislation commonly referred to as the Tax Cuts and Jobs Act
("TCJA"). The TCJA made substantial changes to the Internal Revenue
Code of 1986, as amended. Among those changes was a significant
reduction in the generally applicable US federal corporate tax rate
from 35% to 21%, with effect from 1 January 2018. The Group's
deferred tax balances relating to its US operations were remeasured
in 2017 to reflect this rate reduction, with the impact excluded
from the Group's underlying tax charge for 2017 (note 5). In 2018,
the Group made an additional USD40.0m deficit contribution into
certain of its US pension schemes. This contribution is deductible
against the Group's US taxable profits for the year ended 31
December 2017 and accordingly attracts federal tax relief at 35%.
The GBP4.1m difference between the tax relief at 35% and the
deferred tax recognised on this deficit at 21% at 31 December 2017
has been excluded from the Group's underlying tax charge for 2018
(note 5).
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 have had no
significant impact on the tax charge for the current year.
11. Earnings per ordinary share
Earnings per ordinary share ('EPS') is calculated by dividing
the profit attributable to owners of the Company of GBP179.0m (2017
restated: GBP292.8m) by the weighted average number of shares in
issue during the year of 773.2m (2017: 774.2m shares).
Underlying EPS is based on underlying profit for the year (note
5) and is reconciled to basic EPS below:
2018 2017
Restated
Pence Pence
Basic EPS 23.2 37.8
Adjust for effects of:
Amounts arising on the acquisition, disposal
and closure of businesses (3.2) (3.1)
Amortisation of intangible assets acquired
in business combinations 9.1 7.8
Financial instruments 1.0 (6.3)
Exceptional operating items 3.8 6.2
Net interest expense on retirement benefit
obligations 0.8 1.0
Impact of reduction in the US rate of federal
corporate tax (0.5) (11.4)
Underlying basic EPS 34.2 32.0
======= ==========
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 is
785.9m (2017: 789.2m).
Diluted underlying EPS for the year is 33.7p (2017 restated:
31.3p).
12. Dividends
The Board is recommending a final dividend of 11.35p per share
(2017: 10.80p per share). Taken with the interim dividend of 5.30p
(2017: 5.05p) paid in the year, this gives a total dividend of
16.65p (2017: 15.85p), an increase of 5.0%. Subject to approval at
the Annual General Meeting on 25 April 2019, the proposed dividend
will be paid on 3 May 2019 to shareholders on the register at the
close of business on 22 March 2019. A dividend reinvestment plan
will be made available, in respect of the final dividend, for
shareholders who wish to elect for shares in lieu of cash.
13. Related party transactions
During the year, the Group made sales to the joint venture of
GBP3.3m (2017: GBP3.7m) and purchases from the joint venture of
GBP0.2m (2017: GBP0.4m). 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.
2018 2017
GBP'm GBP'm
Salaries and other short-term employee benefits 11.1 11.7
Retirement benefit expense - 0.2
Share-based payment expense 4.1 2.3
Total 15.2 14.2
======= =======
14. Intangible assets
Programme
Development participation Other intangible
Goodwill Costs costs assets
GBP'm GBP'm GBP'm GBP'm
At 1 January 2017 (Restated) 2,095.7 543.0 17.0 817.6
Exchange rate adjustments (140.9) (36.8) (1.3) (53.2)
Business acquired 10.6 - - 9.7
Businesses disposed (20.5) - - (12.7)
Additions - 62.6 2.0 20.4
Transfer to assets classified
as held for sale - - - (1.2)
Interest capitalised - 4.4 - -
Impairment loss* - (55.3) - -
Disposals - - - (0.3)
Amortisation** - (22.1) (0.6) (108.2)
--------- ------------ --------------- -----------------
At 31 December 2017 (Restated) 1,944.9 495.8 17.1 672.1
Exchange rate adjustments 91.2 24.1 1.0 29.2
Businesses disposed (note
27) (0.8) - - (0.1)
Additions - 58.6 0.9 19.3
Interest capitalised (note
9) - 3.3 - -
Transfer to assets classified
as held for sale (note 17) - (2.6) - (0.5)
Disposals - - - (0.3)
Amortisation** - (22.1) (0.8) (109.3)
--------- ------------ --------------- -----------------
At 31 December 2018 2,035.3 557.1 18.2 610.4
========= ============ =============== =================
* Of the 2017 impairment loss, GBP54.4m in respect of
development costs was charged to exceptional operating items
following cancellation of the Dassault Falcon 5X programme (note
7).
** Included within amortisation of other intangible assets is
GBP91.5m (2017: GBP93.5m) relating to intangible assets acquired in
business combinations and which is excluded from the Group's
underlying profit figures (note 5).
15. Property, plant and equipment
2018 2017
Restated
GBP'm GBP'm
At 1 January 406.2 424.4
Exchange rate adjustments 16.2 (23.3)
Business acquired - 0.2
Businesses disposed (note 27) (3.5) (7.7)
Additions 61.6 76.8
Transfer to assets classified as held for sale
(note 17) (14.6) (5.6)
Disposals (4.7) (2.7)
Impairment loss (note 7) (3.6) (2.0)
Depreciation (53.6) (53.9)
------- ----------
At 31 December 404.0 406.2
======= ==========
16. Investments
The Group's investment in its joint venture, Parkway-HS, LLC has
been accounted for using the equity method and is stated as
follows:
2018 2017
GBP'm GBP'm
At 1 January 13.6 14.8
Exchange rate adjustments 0.8 (1.3)
Share of (loss)/profit after tax (1.5) 0.6
Dividends received - (0.5)
At 31 December 12.9 13.6
======= =======
17. Assets classified as held for sale
On 26 March 2018, the Group completed the disposal of Linear
Motion LLC, previously classified as a disposal group.
During the year, the Group decided to dispose of the trade and
assets of Meggitt (France) SAS, based in Fléac, France and at 31
December 2018, determined that a sale was highly probable.
Accordingly, the related assets have been classified as a disposal
group held for sale and are presented separately at the balance
sheet date together with directly associated liabilities. An
impairment loss of GBP6.1m (note 5) was recognised to reduce the
assets to their recoverable value. The business is reported within
Meggitt Sensing Systems.
Additionally, in 2018 the Group has transferred GBP14.0m in
respect of land and buildings relating to its manufacturing
facilities in Coventry, West Midlands, UK to assets classified as
held for sale. An impairment loss of GBP4.6m was recognised to
reduce the assets to their recoverable value (note 7). These
facilities were subject to a sale and leaseback transaction that
commenced in the year and completed in January 2019.
2018
Liabilities
directly
Assets classified associated Total
as held with assets
for sale classified
as held for
sale
GBP'm GBP'm GBP'm
At 1 January 2018 9.7 (7.8) 1.9
Exchange rate adjustments (0.5) 0.4 (0.1)
Change in carrying value of held
for sale assets and liabilities
up to date of disposal 0.8 4.1 4.9
Business disposed (10.0) 3.3 (6.7)
Additions 21.1 (0.1) 21.0
Impairment loss (10.8) 0.1 (10.7)
------------------ ------------- -------
At 31 December 2018 10.3 - 10.3
================== ============= =======
17. Assets classified as held for sale (continued)
2018
---------------------------------------
Allocated
Carrying impairment Total
value before loss
classification
as held
for sale
GBP'm GBP'm GBP'm
Development costs (note 14) 2.6 (2.6) -
Other intangible assets (note
14) 0.5 (0.5) -
Property, plant and equipment
(note 15) 14.6 (5.2) 9.4
Inventories 2.9 (2.0) 0.9
Trade and other receivables 0.5 (0.5) -
---------------- ------------ -------
Assets classified as held for
sale 21.1 (10.8) 10.3
================ ============ =======
Trade and other payables 0.1 (0.1) -
---------------- ------------ -------
Liabilities directly associated
with assets classified as held
for sale 0.1 (0.1) -
================ ============ =======
18. Lease Liabilities
The Group leases various factories, warehouses, offices, plant
and equipment. The following amounts are included in the Group's
consolidated financial statements in respect of its leases:
2018 2017
GBP'm GBP'm
Depreciation charge for right-of-use assets 14.4 13.8
Additions to right-of-use assets 4.6 15.9
Net book amount of right-of-use assets 79.1 85.1
Interest expense on lease liabilities (note
9) 3.7 3.8
Expense related to short-term leases and low-value
assets 0.7 0.7
Total cash outflow for leases comprising interest
and capital payments 18.0 15.2
======= =======
At 31 December 2018, the Group had the following significant
lease commitments:
-- A lease relating to its new facility being constructed at
Ansty Park, West Midlands, UK (note 7). The Group expects to
recognise this lease in 2019, when it obtains control of the
right-of-use asset and to recognise a lease liability and
right-of-use asset of approximately GBP60.0m at that date. The
lease term is 30 years. At the date the lease is recognised, the
Group expects undiscounted cash flows to be: GBP9.0m inflow in one
year or less; GBP11.0m outflow in more than one year but not more
than five years; and GBP99.0m outflow in more than five years.
-- In January 2019, the Group completed a sale and leaseback of
its existing manufacturing facilities in Coventry, West Midlands,
UK. Lease liabilities and right-of-use assets of approximately
GBP11.0m will be recognised and the lease terms range from two
years for the main manufacturing facilities to 25 years for one of
the Group's specialised operations. An impairment loss of GBP7.6m
has been recognised in 2018 in respect of the carrying value of the
facilities and is included within exceptional operating items (note
7). At the date the leases are recognised, the Group expects
undiscounted cash outflows to be: GBP0.9m in one year or less;
GBP2.4m in more than one year but not more than five years; and
GBP13.4m in more than five years.
19. Financial Instruments - fair value measurement
For trade and other receivables, contract assets, cash and cash
equivalents, trade and other payables, contract liabilities and the
current portion of floating rate bank and other borrowings, fair
values approximate to book values due to the short maturity periods
of these financial instruments. For trade and other receivables,
allowances are made within their book value for credit risk. The
fair values of lease liabilities approximate to their book values
due to the measurement of lease liabilities at the Group's
incremental borrowing rate which has not changed significantly
since the inception of the lease liabilities presented. Leases are
also negotiated at market rates with independent, unrelated third
parties and are subject to periodic rental reviews.
For other financial instruments, a comparison of book values and
fair values is provided below:
Book value Fair value
2018 2017 2018 2017
GBP'm GBP'm GBP'm GBP'm
Derivative financial instruments
- non-current 10.0 28.5 10.0 28.5
Derivative financial instruments
- current 9.3 3.6 9.3 3.6
Financial assets 19.3 32.1 19.3 32.1
Derivative financial instruments
- current (18.8) (17.3) (18.8) (17.3)
Bank and other borrowings - current (10.2) (71.4) (10.2) (71.4)
Derivative financial instruments
- non-current (17.4) (14.6) (17.4) (14.6)
Bank and other borrowings - non-current (1,148.3) (1,005.8) (1,136.5) (1,001.9)
---------- ---------- ---------- ----------
Financial liabilities (1,194.7) (1,109.1) (1,182.9) (1,105.2)
---------- ---------- ---------- ----------
Total (1,175.4) (1,077.0) (1,163.6) (1,073.1)
========== ========== ========== ==========
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 non-current portion of bank and other borrowings which is
held at amortised cost, but for which fair values are provided in
the table above.
The book value of bank and other borrowings is analysed as
follows:
2018 2017
GBP'm GBP'm
Held at fair value through profit and loss 242.7 235.2
Held at amortised cost 915.8 842.0
-------- --------
Total 1,158.5 1,077.2
======== ========
There were no transfers of assets or liabilities between levels
of the fair value hierarchy in the year.
20. Provisions
2018 2018
Environmental Provisions
receivables*
GBP'm GBP'm
At 1 January (Restated) (64.1) 148.2
Exchange rate adjustments (2.6) 6.3
Additional provisions/(receivables recognised)
in year (2.5) 19.6
Unused amounts reversed - (9.6)
(Credit)/charge to net finance costs (notes
8 and 9) (0.8) 1.7
Transfers to trade and other payables - (3.7)
Utilised 35.9 (45.8)
At 31 December (34.1) 116.7
--------------- ------------
2018 2017
Restated
GBP'm GBP'm
Disclosed as:
Current 33.0 65.7
Non-current 83.7 82.5
--------------- ------------
At 31 December 116.7 148.2
=============== ============
Analysed as:
Environmental 80.6 99.9
Onerous contracts 13.7 21.8
Warranty costs 15.7 18.9
Other 6.7 7.6
--------------- ------------
At 31 December 116.7 148.2
=============== ============
* Included within trade and other receivables in respect of
amounts recoverable from insurers and other third parties in
respect of environmental issues relating to historic sites.
21. Retirement benefit obligations
2018 2017
GBP'm GBP'm
At 1 January 308.1 414.7
Exchange rate adjustments 7.8 (14.9)
Service cost 16.1 16.6
Past service cost (note 7) 1.7 -
Past service credit* (5.4) (7.1)
Net interest cost (note 9) 8.0 11.3
Contributions - Group (83.7) (50.1)
Remeasurement of retirement benefit obligations (46.2) (66.6)
Administrative expenses borne directly by
schemes 2.7 4.2
At 31 December 209.1 308.1
------- -------
Analysis of retirement benefit obligations:
Pension schemes 161.5 258.3
Healthcare schemes 47.6 49.8
------- -------
At 31 December 209.1 308.1
======= =======
* Relates to the Group's decision to freeze two of the US
schemes to future accrual for existing members.
21. Retirement benefit obligations (continued)
Key financial assumptions used to calculate
scheme liabilities 2018 2017
UK scheme:
Discount rate 2.90% 2.55%
Inflation rate 3.20% 3.20%
Salary increases 2.95% 4.20%
21.7 to 21.6 to
Current life expectancy: Male aged 65 years 23.5 23.1
US schemes:
Discount rate 4.15% 3.55%
Salary increases N/A 4.43%
20.2 to 20.2 to
Current life expectancy: Male aged 65 years 20.8 20.8
Group cash contributions paid during the year included deficit
reduction payments of GBP67.6m (2017: GBP33.5m).
22. Issued share capital
2018 2017
No. m No. m
Allotted and fully paid 776.9 776.4
======= =======
23. Contingent liabilities
The Company has given guarantees in respect of credit facilities
for certain of its subsidiaries, some property and other leases,
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.
24. Capital commitments
2018 2017
GBP'm GBP'm
Contracted for but not incurred:
Intangible assets 0.6 2.8
Property, plant and equipment 14.3 18.8
At 31 December 14.9 21.6
======= =======
25. Cash inflow from operations
2018 2017
Restated
GBP'm GBP'm
Profit for the year 179.0 292.8
Adjustments for:
Finance income (note 8) (1.0) (1.4)
Finance costs (note 9) 41.5 45.8
Tax 37.1 (64.5)
Depreciation (note 15) 53.6 53.9
Amortisation (note 14) 132.2 130.9
Impairment loss (notes 14 and 15) 3.6 57.3
Loss on disposal of property, plant and equipment 3.0 0.8
Loss on disposal of software and other intangible
assets - 0.3
Gain on disposal of businesses (note 5) (30.4) (40.3)
Impairment of assets classified as held for
sale (note 17) 10.7 14.2
Remeasurement of fair value of contingent consideration
payable (note 5) (3.6) -
Financial instruments (note 6) 10.1 (60.7)
Share of loss/(profit) after tax of joint venture
(note 16) 1.5 (0.6)
Dividend income from joint venture (note 16) - 0.5
Change in carrying value of held for sale assets
and liabilities up to date of disposal (2.0) -
Retirement benefit obligation deficit payments
(note 21) (67.6) (33.5)
Share-based payment expense 13.5 8.0
Changes in working capital (33.0) (4.2)
Total 348.2 399.3
======== ==========
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:
2018 2017
Restated
GBP'm GBP'm
Cash inflow from operating activities 295.3 337.9
Add back cash outflow from business acquisition
and disposal expenses 3.8 3.9
Capitalised development costs (58.6) (62.6)
Capitalised programme participation costs (0.8) (3.4)
Purchase of intangible assets (21.8) (18.3)
Purchase of property, plant and equipment (52.6) (62.0)
Proceeds from disposal of property, plant and
equipment 2.1 1.9
------- ----------
Free cash inflow 167.4 197.4
======= ==========
26. Movements in net debt
2018 2017
Restated
GBP'm GBP'm
At 1 January 1,060.8 1,278.8
Cash inflow from operating activities (295.3) (337.9)
Cash outflow from investing activities 96.0 80.1
Dividends paid to Company's shareholders 124.2 118.6
Purchase of own shares for employee share schemes 22.6 19.0
-------- ----------
Net cash generated (52.5) (120.2)
Debt acquired with business - 0.6
Debt disposed with businesses - (0.8)
Lease liabilities entered 4.6 15.9
Exchange rate adjustments 65.5 (105.0)
Other non-cash movements (4.3) (8.5)
At 31 December 1,074.1 1,060.8
======== ==========
2018 2017
Restated
GBP'm GBP'm
Analysed as:
Bank and other borrowings - current 10.2 71.4
Bank and other borrowings - non-current 1,148.3 1,005.8
Lease liabilities - current 16.1 16.9
Lease liabilities - non-current 81.4 85.2
Cash and cash equivalents (181.9) (118.5)
-------- ----------
Total 1,074.1 1,060.8
======== ==========
27. Business disposals
On 12 January 2018, the Group disposed of 100% of the equity in
Aviation Mobility, LLC ('Aviation Mobility') for a consideration of
USD14.0m. Aviation Mobility was previously reported within Meggitt
Control Systems.
On 14 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 USD4.2m. Linear Motion was
previously reported within the Meggitt Equipment Group.
On 21 April 2018, the Group disposed of 100% of the ordinary
shares of Precision Micro Limited ('Precision Micro') for a
consideration of GBP21.9m. The company specialised in production
photo etching for the automotive and medical sectors, where
synergies with the rest of the Group were limited. Precision Micro
was previously reported within the Meggitt Equipment Group.
On 24 December 2018, the Group disposed of a small number of
product lines from within one of its sensing systems businesses for
a consideration of USD10.0m. These product lines were previously
reported within Meggitt Sensing Systems.
The businesses disposed were not a major line of business or
geographical area of operation of the Group.
27. Business disposals (continued)
The net assets of the businesses at the date of disposed were as
follows:
Precision Total
Aviation Mobility Linear Motion Micro
Sensing product Lines
GBP'm GBP'm GBP'm GBP'm GBP'm
Goodwill (note 14) - - 0.8 - 0.8
Other intangible assets
(note 14) - - 0.1 - 0.1
Property, plant and
equipment (note 15) - - 3.5 - 3.5
Inventories - - 1.1 0.8 1.9
Trade and other
receivables - current 0.3 - 3.4 - 3.7
Cash and cash equivalents - - 0.7 - 0.7
Assets classified as held
for sale (note 17) - 10.0 - - 10.0
Trade and other payables -
current - - (1.9) - (1.9)
Liabilities directly
association with assets
classified as held for
sale (note 17) - (3.3) - - (3.3)
------------------- -------------- ------------ ---------------------- --------------
Net assets 0.3 6.7 7.7 0.8 15.5
Currency translation gain
transferred from equity
(note 28) (3.0)
Business disposal expenses 2.5
Deferred consideration
receivable (7.9)
Difference between fair
value of consideration
and amounts received 1.8
Gain on disposal (note 5) 27.9
--------------
Total consideration
received in cash 36.8
==============
Cash inflow arising on
disposal:
Total consideration
received in cash 36.8
Less: cash and cash
equivalents disposed of (0.7)
Less: cash paid in respect
of businesses disposed of
in prior periods (0.4)
--------------
Businesses disposed 35.7
Less: business disposal
expenses paid (3.8)
--------------
Total cash inflow 31.9
==============
28. Components of other comprehensive income
2018 2017
Restated
GBP'm GBP'm
Arising in the year 93.7 (138.9)
Transferred to the income statement (note
27) (3.0) (8.6)
------- ----------
Currency translation movements - gain/(loss) 90.7 (147.5)
Movement in fair value of financial liabilities
arising from changes in credit risk 0.8 (2.1)
Cash flow hedge movements: transferred to
the income statement (0.3) (0.2)
------- ----------
Other comprehensive income before tax 91.2 (149.8)
Tax effect 2.5 (2.4)
Items that may be reclassified to the income
statement
in subsequent periods 93.7 (152.2)
======= ==========
29. Restatement of prior period comparatives
This note explains the impact on the 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 year 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, in 2018 the Group 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 has 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.
Consolidated income statement (extract)
IFRS IFRS IFRS
15 16 9 Elite 2017
2017 Restated
As previously
reported
GBPm GBPm GBPm GBPm GBP'm GBPm
Revenue 2,027.3 (32.9) - - - 1,994.4
Cost of sales (1,234.0) (1.2) - - - (1,235.2)
--------------- ------- ------ ------ ------- ----------
Gross profit 793.3 (34.1) - - - 759.2
Net operating costs (489.1) (0.2) 0.7 2.1 - (486.5)
--------------- ------- ------ ------ ------- ----------
Operating profit 304.2 (34.3) 0.7 2.1 - 272.7
Net finance costs (41.8) - (2.6) - - (44.4)
--------------- ------- ------ ------ ------- ----------
Profit before tax 262.4 (34.3) (1.9) 2.1 - 228.3
Tax credit/(charge) 87.6 (21.2) (0.2) (0.4) (1.3) 64.5
Profit for the year 350.0 (55.5) (2.1) 1.7 (1.3) 292.8
=============== ======= ====== ====== ======= ==========
Earnings per share (EPS):
Basic (pence) 45.2 (7.2) (0.2) 0.2 (0.2) 37.8
Diluted (pence) 44.3 (7.0) (0.2) 0.2 (0.2) 37.1
Non-GAAP measures:
Underlying operating profit 388.4 (35.8) 0.7 - - 353.3
Underlying profit before
tax 357.9 (35.8) (1.9) - - 320.2
Underlying basic EPS (pence) 35.3 (3.2) (0.1) - - 32.0
Underlying diluted EPS
(pence) 34.6 (3.2) (0.1) - - 31.3
Consolidated statement of comprehensive income (extract)
2017 IFRS IFRS IFRS Elite 2017
As 15 16 9 Restated
previously
reported
GBPm GBPm GBPm
GBPm GBPm GBPm
Profit for the year 350.0 (55.5) (2.1) 1.7 (1.3) 292.8
Items that may be reclassified
to the income statement
in subsequent periods:
Currency translation movements (161.6) 13.7 0.4 - - (147.5)
Movements in fair value
of financial liabilities
arising from changes in
credit risk - - - (2.1) - (2.1)
Cash flow hedge movements (0.2) - - - - (0.2)
Tax effect (2.8) - - 0.4 - (2.4)
(164.6) 13.7 0.4 (1.7) - (152.2)
Items that will not be
reclassified to the income
statement in subsequent
periods 39.5 - - - - 39.5
------------ --------- -------- --------- -------- ------------
Other comprehensive (expense)/income (125.1) 13.7 0.4 (1.7) - (112.7)
Total comprehensive income
for the year 224.9 (41.8) (1.7) - (1.3) 180.1
============ ========= ======== ========= ======== ============
Consolidated balance sheet (extract)
IFRS IFRS IFRS
15 16 9 Elite 1 January
1 January 2017
2017 Restated
As previously
reported
GBPm GBPm GBPm GBPm GBPm GBPm
Net assets 2,456.4 (196.5) (3.6) - - 2,256.3
=============== ======== ====== ====== ====== ==========
Equity
Hedging and translation
reserves 551.5 - - 0.8 - 552.3
Retained earnings 630.6 (196.5) (3.6) (0.8) - 429.7
Other equity 1,274.3 - - - - 1,274.3
-------- -------- ------ ------ --------
Total equity 2,456.4 (196.5) (3.6) - - 2,256.3
======== ======== ====== ====== ========
Consolidated balance sheet (extract)
IFRS IFRS IFRS
15 16 9 Elite
31 December 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 13.5 - - - 495.8
Programme participation
costs 332.1 (315.0) - - - 17.1
Property, plant
and equipment 322.9 - 83.3 - - 406.2
Trade and other
receivables 39.2 (0.5) - - - 38.7
Contract assets - 49.7 - - - 49.7
Deferred tax assets 11.5 14.7 0.1 - - 26.3
Other non-current
assets 714.2 - - - - 714.2
--------------- -------- ------- -------- ------ ------------
3,849.2 (237.6) 83.4 - (2.1) 3,692.9
Current assets
Inventories 404.1 (10.7) - - - 393.4
Trade and other
receivables 437.1 (47.4) - - - 389.7
Contract assets - 39.7 - - - 39.7
Other current assets 136.1 - - - - 136.1
977.3 (18.4) - - - 958.9
Total assets 4,826.5 (256.0) 83.4 - (2.1) 4,651.8
Current liabilities
Trade and other
payables (445.5) 37.6 5.8 - - (402.1)
Contract liabilities - (52.5) - - - (52.5)
Lease liabilities (0.1) - (16.8) - - (16.9)
Provisions (64.2) - - - (1.5) (65.7)
Other current liabilities (136.1) - - - - (136.1)
--------------- -------- ------- -------- ------ ------------
(645.9) (14.9) (11.0) - (1.5) (673.3)
Net current assets 331.4 (33.3) (11.0) - (1.5) 285.6
Non-current liabilities
Contract liabilities - (23.1) - - - (23.1)
Deferred tax liabilities (201.7) 55.7 1.5 - 2.3 (142.2)
Lease liabilities (6.0) - (79.2) - - (85.2)
Other non-current
liabilities (1,416.5) - - - - (1,416.5)
(1,624.2) 32.6 (77.7) - 2.3 (1,667.0)
Total liabilities (2,270.1) 17.7 (88.7) - 0.8 (2,340.3)
Net assets 2,556.4 (238.3) (5.3) - (1.3) 2,311.5
=============== ======== ======= ======== ====== ============
Equity
Hedging and translation
reserves 386.9 13.7 0.4 (0.9) - 400.1
Retained earnings 892.8 (252.0) (5.7) 0.9 (1.3) 634.7
Other equity 1,276.7 - - - - 1,276.7
--------------- -------- ------- -------- ------ ------------
Total equity 2,556.4 (238.3) (5.3) - (1.3) 2,311.5
=============== ======== ======= ======== ====== ============
Impact of IFRS 15
In accordance with the transition provisions in IFRS 15, the
standard has been adopted retrospectively with restatements made to
prior year 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 Reclass 2017
participation participation on Impact
costs costs development
programmes
(a) (b) (c) (d) (e)
GBPm GBPm GBPm GBPm GBPm GBPm
Revenue - (2.5) - (30.4) - (32.9)
Cost of sales (21.4) 2.5 - 17.7 - (1.2)
-------------- ---------------- ---------------- ------- ----------------- ------------
Gross loss (21.4) - - (12.7) - (34.1)
Net operating costs - - - (0.2) - (0.2)
-------------- ---------------- ---------------- ------- ----------------- ------------
Operating loss (21.4) - - (12.9) - (34.3)
Tax charge (21.2)
------------
Loss for the year (55.5)
============
Customer
Programme Programme funding Other Reclass 1 January
participation participation on 2017
costs costs development Impact
programmes
(a) (b) (c) (d) (e)
GBPm GBPm GBPm GBPm GBPm GBPm
Net assets (188.3) - - (8.2) - (196.5)
=================== ================ ============ ========== ============= ============
Customer
Programme Programme funding Other Reclass 31 December
participation participation on 2017
costs costs development Impact
programmes
(a) (b) (c) (d) (e)
GBPm GBPm GBPm GBPm GBPm GBPm
Development costs - - 13.5 - - 13.5
Programme
participation
costs (285.4) (29.6) - - - (315.0)
Trade and other
receivables
- non-current - - - 8.9 (9.4) (0.5)
Contract assets -
non-current - 26.8 - (6.5) 29.4 49.7
Deferred tax assets 14.7 - - - - 14.7
Inventories - - - 4.5 (15.2) (10.7)
Trade and other
receivables
- current - - - (16.6) (30.8) (47.4)
Contract assets -
current - 2.8 - 7.8 29.1 39.7
Trade and other
payables
- current - - - (17.5) 55.1 37.6
Contract
liabilities
- current - - (0.3) 6.0 (58.2) (52.5)
Contract
liabilities
- non-current - - (13.2) (9.9) - (23.1)
Deferred tax
liabilities 50.8 - - 4.9 - 55.7
-------------- ---------------- ---------------- ----------- ------------- ------------
Net assets (219.9) - - (18.4) - (238.3)
============== ================ ================ =========== ============= ============
Impact of IFRS 15 continued
a) Programme participation costs - Free of charge/deeply discounted manufactured parts
Programme participation costs consist of incentives given to
OEMs 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 original equipment 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.
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 met 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 defence 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 or as a single performance obligation, variable
consideration and material rights.
Impact of IFRS 15 (continued)
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 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 as
appropriate.
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 right-of-use 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 that is 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. Overall, IFRS 9 does not have a significant impact
since the majority of the Group's financial assets continue to be
held at amortised cost. The Group is also not exposed to a
significant concentration of credit risk, and accordingly the
impact of applying an expected credit loss model to its financial
assets was not significant.
Principal risks and uncertainties
Strategic - Business model
Description
Failure to respond to fundamental changes in our aerospace
business model, primarily the evolving aftermarket. This includes
more durable parts requiring less frequent replacement, a growing
supply of surplus parts, OE customers seeking greater control of
their aftermarket supply chain and accelerated pace of new aircraft
deliveries leading to the earlier retirement of older aircraft.
Impact
Decreased revenue and profit.
How we manage it
-- Alignment of Group, divisional and functional strategy processes.
-- Dedicated full-service aftermarket organisation.
-- Long-term customer agreements as part of maintaining and monitoring pricing strategy.
-- Investment in research and development to maintain and
enhance Meggitt's intellectual property.
Strategic - Industry changes
Description
Significant variation in demand for products should civil
aerospace, defence and energy business downcycles coincide; a
serious political, economic or terrorist event that adversely
affects the aerospace industry occur or consolidation that
materially changes the competitive landscape.
Impact
Volatility in underlying profitability.
How we manage it
-- Monitoring external economic and commercial environment and
long-lead indicators whilst maintaining focus on balanced
portfolio.
-- EASA (European Aviation Safety Agency) has acknowledged our
application for "third country" certification that mirrors the
existing EASA certifications held by UK Meggitt sites. We have now
started to be issued with the third country certificates which
allow continued trading with our European customers.
-- Maintaining sufficient headroom in committed credit
facilities and against covenants in those facilities whilst
implementing appropriate cost-base contingency plans.
Strategic - Technology strategy
Description
Failure to develop and implement meaningful technology
strategies to meet customers' needs.
Impact
Restriction of ability to compete on new programmes with
consequent decrease in revenue and profit.
How we manage it
-- Management of technology development plans that align
technology readiness, market needs and financial returns using a
gated process.
-- Recruiting and training first-class engineers and scientists
with appropriate technology skills.
-- Ring-fenced budgets focused on longer-term technology developments.
-- Leveraging our R&D budget through partnerships including
government, academia and other companies.
Operational - Quality escape/equipment failure
Description
Defective product leading to in-service failure, accidents, the
grounding of aircraft or prolonged production shutdowns for the
Group and its customers.
Impact
Decreased revenue and profit, damage to operational performance
and reputation.
How we manage it
-- System safety analysis, verification and validation policy
and processes, combined with quality and customer audits and
industry certifications.
-- Meggitt Production System.
-- Supplier quality assurance process.
Operational - Business interruption
Description
A catastrophic event such as an earthquake (the Group has a
significant operational presence in Southern California) or fire
could lead to infrastructure and property damage which prevents the
Group from fulfilling its contractual obligations.
Impact
Decreased revenue and profit, damage to operational performance
and reputation.
How we manage it
-- Group-wide business continuity and crisis management plans, subject to regular testing.
-- Comprehensive insurance programme, renewed annually and
subject to property risk assessment visits.
Operational - Project/programme management
Description
Failure to meet new product development programme milestones and
certification requirements and successfully transition new products
into manufacturing as production rates increase. This also covers
lower than expected production volumes, including programme
cancellations.
Impact
Failure to deliver financial returns against investment and/or
significant financial penalties leading to decreased profit and
damage to reputation.
How we manage it
-- Rigorous commercial and technological reviews of bids and
contractual terms before entering into programmes.
-- Continuous review of programme performance through the
Programme Lifecycle Management (PLM) process including:
-- regular monitoring of the end market performance of key OE programmes;
-- internal review process, to stress-test readiness to proceed
at each stage of the key programmes; and
-- regular monitoring of the financial health of customers.
Operational - Customer satisfaction
Description
Failure to meet customers' cost, quality and delivery standards
or qualify as preferred suppliers.
Impact
Failure to win future programmes, decreased revenue and
profit.
How we manage it
-- Creation of a customer facing organisational structure
including a dedicated aftermarket division.
-- Regular monitoring of customer scorecards and ensuring
responsiveness to issues via Voice of the Customer process.
-- Functional excellence in operations, project management and engineering.
-- Increased utilisation of low-cost manufacturing base.
Operational - Acquisition integration/performance
Description
Failure to effectively integrate acquisitions and failure to
realise financial returns from the advanced composites
acquisitions.
Impact
Decreased revenue and profit.
How we manage it
-- Internal pre-acquisition due diligence supplemented by external experts.
-- Increase in local capabilities to manage production ramp-up
and delivery of the financial model, including cost synergies,
under Group PMO oversight.
-- Standard Meggitt processes implemented as part of a proven
post-merger process led by incumbent divisional management,
supported by experienced dedicated operational teams with a senior
oversight committee.
Operational - Cyber breach
Description
A breach of IT security due to cyber crime/terrorism resulting
in intellectual property or other sensitive information being lost,
made inaccessible, corrupted or accessed by unauthorised users.
This also includes the loss of critical systems such as SAP due to
badly-executed implementation or change of control; poor
maintenance, business continuity or back--up procedures and the
failure of third parties to meet service level agreements.
Impact
Decreased revenue and profit, damage to operational performance
and reputation.
How we manage it
-- IT security infrastructure, policies and procedures.
-- Group-wide intellectual property protection programme.
-- Management of third party service providers and risks,
including resilience and disaster recovery processes.
-- Implementation of rolling programme of system upgrades
(including SAP implementation) to replace legacy systems.
Operational - Supply chain
Description
Failure or inability of critical suppliers to supply unique
products, capabilities or services preventing the Group from
satisfying customers or meeting contractual requirements.
Impact
Decreased revenue and profit, damage to operational performance
and reputation.
How we manage it
-- Supplier excellence framework combined with integrated
commercial and procurement approach to contractual terms and
conditions including development of long-term agreements.
-- Local sourcing strategy to improve operational efficiency and
minimise potential impacts and disruption from cross-border
tariffs.
-- Maintenance of buffer inventory for critical and sole-source suppliers.
-- Implementation of measures to mitigate counterfeit and
fraudulent parts at high-risk facilities.
Operational - Group change management
Description
Failure to successfully, simultaneously, deliver the significant
change programmes currently in process and planned, including site
consolidation activity such as Ansty Park.
Impact
Decreased revenue and profit, increased costs, damage to
operational performance and reputation.
How we manage it
-- Creation of dedicated site consolidation and property management teams for Ansty Park.
-- Regular monitoring by Executive Leadership Team through operational and project reviews.
-- MPS implementation at new/expanded sites.
Operational - People
Description
Failure to attract, retain or mobilise people due to factors
including industrial action, workforce demographics, lack of
training, availability of talent and inadequate compensation.
Impact
Decreased revenue and profit, damage to operational
performance.
How we manage it
-- Roll-out of High Performance Culture.
-- Employee engagement programmes.
-- Graduate and apprentice programmes in partnership with schools and universities.
-- Regular monitoring by Executive Leadership Team.
Corporate - Legal & compliance
Description
Significant breach of increasingly complex trade compliance,
bribery & corruption, US Government contracting, ethics,
intellectual property, data protection, competition/antitrust laws
and facilitation of tax evasion.
Impact
Damage to reputation, loss of supplier accreditations,
suspension of activity, fines from civil and criminal
proceedings.
How we manage it
-- Continuing investment in compliance programmes, including
Board approved policies and roll out of training and IT
solutions.
-- Regular monitoring by Ethics and Trade Compliance Committee,
supported by ongoing trade compliance programme including third
party audits.
-- Comprehensive ethics programme including training, anti-corruption policy and Ethics line.
-- Third party audits including HS&E and the Criminal Finance Act.
-- MPS implementation to enhance safety measures, validated by third party audits.
Financial - Taxation
Description
Tax legislation is complex and compliance can be subject to
interpretation. Events such as the OECD BEPS programme, the US tax
and tariff changes and the impact of Brexit create uncertainty
which could negate the effectiveness of the Group's current, well
established, tax-efficient international structures, including
those used to finance acquisitions.
Impact
Higher effective tax rates resulting in decreased profit.
How we manage it
-- Monitoring international tax developments to assess implications of future legislation.
-- Maintenance of a low-risk rating with UK HMRC and other tax
authorities through open dialogue and, where possible,
pre-agreement of arrangements to confirm compliance with
legislation.
-- Assessment of options to mitigate impact of legislative
changes on the Group's effective tax rate.
-- Use of multiple expert third party tax advisors.
DIRECTORS' RESPONSIBILITIES STATEMENT
Each of the persons who is a director at the date of the
approval of this report confirm that, to the best of their
knowledge:
-- the Group financial statements, which have been prepared in
accordance with IFRSs as adopted by the EU, give a true and fair
view of the assets, liabilities, financial position and profit of
the Group; and
-- the Strategic report and the Directors' report include a fair
review of the development and performance of the business and the
position of the Group, together with a description of the principal
risks and uncertainties that it faces; and
-- the Annual Report and Accounts, taken as a whole, is fair,
balanced and understandable and provides the information necessary
for shareholders to assess the Group's position, performance,
business model and strategy.
By order of the Board:
A Wood L Burdett
Director Director
25 February 2019 25 February 2019
- 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
FR SEEFWIFUSELE
(END) Dow Jones Newswires
February 26, 2019 02:00 ET (07:00 GMT)
Meggitt (LSE:MGGT)
Historical Stock Chart
From Mar 2024 to Apr 2024
Meggitt (LSE:MGGT)
Historical Stock Chart
From Apr 2023 to Apr 2024