TIDMMGGT
RNS Number : 2807Y
Meggitt PLC
08 September 2020
8 September 2 0 20
M egg i t t P L C
2020 Interim r e su l t s
DEFENCE ROBUST AS GROUP RESPONDS TO CIVIL AEROSPACE DOWNTURN
Meggitt PLC ("Meggitt" or "the Group"), a leading international
engineering company specialising in high performance components and
sub-systems for the aerospace, defence and selected energy markets,
today announces unaudited interim results for the six months ended
30 June 2020.
Tony Wood , Chi e f Exec u t i v e , c omm e n t e d :
"The Meggitt team remains focused on protecting the safety of
our people, serving our customers and communities, and building on
our strengths, and I want to thank all of my colleagues for their
hard work and dedication over the last few months.
We had a very challenging second quarter in which we acted fast,
executed well operationally and took action to position the Group
for the recovery in civil aerospace. Our first half performance was
impacted by the ongoing effects of COVID-19 in our civil aerospace
business driven by the unprecedented reduction in global air
traffic activity. Our defence business continued to perform
strongly and represented 43% of the Group's revenue in the period.
Overall, we made very good progress on those elements within our
control, including our targeted cost and cash preservation actions
as well as resizing the Group as we look ahead to 2021. Despite the
disruption caused by COVID-19, we have c ontinued to execute
against our strategic priorities and these remain our focus for the
second half.
We are still working through a difficult and uncertain COVID-19
environment, and while it's too early to precisely predict the
trajectory of the return to prior levels of activity in civil
aerospace, we continue to focus on ensuring that the business is
well positioned to benefit from the recovery. Based on the
effective actions we've taken to strengthen liquidity and the
resilience of the Group, underpinned by our diverse end market
exposure and strong market positions, we believe we are well placed
to benefit from the recovery and to continue the transformation of
Meggitt to deliver long-term, profitable growth."
Summary
-- Performance of the Group reflects the unprecedented impact of
COVID-19 on the civil aerospace sector, with revenue slightly ahead
of our guidance in our 2 July trading update
-- Group organic revenue down 13% with a robust performance in
Defence, where revenues grew 7%, more than offset by significantly
lower revenues in Civil Aerospace and Energy where revenue was 27%
and 6% lower respectively
-- Underlying operating profit was 37% lower at GBP102m (H1 2019: GBP161m)
-- Statutory operating loss of GBP349m (H1 2019: profit of
GBP91m) largely as a result of non-cash impairment of intangible
assets and other asset write downs
-- Rapid and decisive action taken by the Group on areas within
its control to reduce cost, protect cash and resize the Group's
cost base; on track to deliver cash savings of GBP400m to GBP450m
for the full year
-- Free cash outflow of GBP 122m (H1 2019: inflow of GBP49m)
largely offset by cash inflow of GBP110m from the sale of Training
Systems
-- Net debt of GBP1,000m (FY 2019: GBP911m) including adverse
foreign exchange movement of GBP65m
-- Robust liquidity position with headroom of GBP856m on
committed facilities; access to additional liquidity via Bank of
England's and HM Treasury's CCFF (total funds available up to
GBP600m); extended maturity of our debt with a forward start on our
RCF to September 2022; ratios of net debt:EBITDA of 1.8x and
interest cover of 14.1x, well within covenant limits
-- Continued progress on key strategic initiatives including
sale of Training Systems, new customer contract wins and further
consolidation of our global footprint
-- The Board recognises the importance of the dividend to its
shareholders, but has taken the prudent decision not to pay an
interim dividend in order to retain cash within the Group, manage
net debt levels and preserve flexibility
-- The recovery in civil aerospace remains sensitive to spikes
in COVID-19 cases, creating near term uncertainty about the pace
and shape of a recovery . As a result, and recognising that there
could be a range of outcomes in our civil business in the last four
months of the year, our guidance for the Group for the full year
remains suspended. For cash, as a result of a proportion of
inventory reduction moving into 2021, we now expect to be broadly
free cash flow neutral for the full year.
G r ou p first half performance
C han g e
------ --------
H 1 20 H 1 20 1 R epo r t Or gani
GBPm 20 9 e d % c 1 %
------ -------- --------- -------
Or de r s 882 1,193 (26) (31)
R eve n u
e 917 1,071 (14) (13)
U nde r l
y i n g 2
EB I T D A 3 156 212 (27) (27)
O pe r a t in g p r
o f i t 102 161 (37) (36)
P r o f i t be f o
r e t a x 86 145 (41) (40)
Ea r ni n g s pe r
s ha r e ( p ) 8.7 14.7 (41)
S t a t u
t o r y
O pe r a t in g ( loss)/profit (349) 91
(Loss)/profit be f
o r e t a x (368) 73
(Loss) / earnings pe
r s ha r e ( p) (44.3) 7.3
F r e e c
a s h f lo
w (122) 49
Net cash flow (19) (37)
Net debt 1,000 1,124
Dividend (p) - 5.55
Enquiries
Tony Wood , C h i e f E x e c u t iv e
Louisa Burdett, Chief Financial Officer
Mathew Wootton, Vice President, Investor Relations
Jessica Barrett, Investor Relations Manager
Meg g i t t P L C
T el : 02476 826 900
N i c k H a s ell , Mana g in g D i r e c t o r
Dwight Burden, Managing Director
Alex Le May, Managing Director
F T I C on s ul t in g
T el : +4 4 2 0 3 7 2 7 1 3 4 0
A n a l ys t presentation
There will be a live webcast of the interim results at 9am BST
today available on the Meggitt website
http://www.meggittinvestors.com . Copies of the presentation will
be available.
A live dial-in is available. Please use the below details to
join:
UK: 0800 640 6441
UK Local: 020 3936 2999
Global: +44 20 3936 2999
Passcode: 616348
C a u t ion ar y S t a t e m e n t
This Results Announcement contains forward looking statements
with respect to the financial condition, results of operations and
businesses of Meggitt PLC and its strategy, plans and objectives.
These statements are made in good faith based on the information
available at the time this announcement was approved. It is
believed that the expectations reflected in these statements are
reasonable but they may be affected by a number of risks and
uncertainties that are inherent in any forward-looking statement
and which could cause actual results to differ materially from
those currently anticipated. Meggitt does not intend to update
these forward-looking statements. Nothing in this document should
be regarded as a profit forecast. This report is intended solely to
provide information to shareholders and neither Meggitt PLC nor its
directors accept liability to any other person, save as would arise
under English law.
1 Organic numbers exclude the impact of acquisitions, disposals
and foreign exchange.
2 Underlying profit and EPS are used by the Board to measure the
trading performance of the Group as set out in notes 6 and 11.
3 Underlying EBITDA represents underlying operating profit
adjusted to add back depreciation, amortisation and impairment
losses.
MARKET CONTEXT
The outbreak of COVID-19 and subsequent lockdowns across the
globe, caused a significant and unprecedented
reduction in commercial air traffic in the first half,
particularly in the second quarter when global air traffic, as
measured by RPKs, was down 90% with up to 60% of the global fleet
grounded in April. Load factors in the second quarter were 50%
compared with 83% in the comparative period. Looking ahead, IATA's
latest forecast is for air traffic to be 63% and 36% lower than
2019 levels in 2020 and 2021 respectively, reflecting a gradual
recovery as lockdowns are eased and passengers return to
flying.
As a result of the severe slowdown across civil aerospace and
the expectation that a recovery to 2019 activity levels is likely
to take a number of years, demand from operators for new build
aircraft softened, with Airbus and Boeing deliveries down 50% and
71% respectively for the six months to the end of June. Deliveries
of regional and business jets in the first six months of the year
were down 46% and 24% respectively. In response to the lower demand
for aircraft, OEMs have reduced their production rates accordingly,
a key driver of our OE revenue.
While positive signs started to emerge at the end of the second
quarter with airlines gradually increasing capacity and future
flight schedules, particularly in domestic markets, the level of
air traffic and customer demand remains sensitive to spikes in
COVID-19 infection rates and the potential for lockdowns and other
measures such as post flight quarantining. Accordingly, the
recovery in passenger numbers has been slow with global RPKs down
94% in April improving to down 80% in July, compared with the same
period in 2019.
Although activity in domestic markets has started to come back,
especially in regions where the outbreak was first seen, such as
China, international air traffic has remained at extremely low
levels, down 97% in the second quarter.
Within civil aerospace, the extent to which different platform
categories have been affected has varied, with global b usiness jet
utilisation down 51% in the second quarter compared with down 90%
for the wider global commercial fleet. In June, business jet
utilisation had recovered to 75% of the levels seen in 2019 and in
July this had risen to 83% .
While the defence sector has not been immune from the effects of
COVID-19, spending in the US and overall defence activity levels
have remained robust in the first half, a trend reflected in our
own business following a strong performance in 2019.
In energy, both supply and demand side factors led to volatility
in the oil price moving from $57 in January to a low of $21 per
barrel in April. While the oil price has increased off its lows
($43 per barrel on 7 September), this has dampened capital
expenditure levels and delayed projects across the oil and gas
sector.
Looking to the recovery in civil aerospace, most industry
commentators expect air traffic to return to 2019 levels by around
2023 (IATA forecasting 2024) and production rates to recover to
pre-COVID-19 levels by 2024/25.
Within any recovery, with business jet activity having already
recovered to over 80% of 2019 levels, we expect regional jets and
narrow bodies to recover next as short haul routes are restored,
with wide body levels coming back last reflecting a change in
consumer attitudes towards long haul, including business travel.
Beyond the recovery period, the drivers supporting air traffic
growth over the long term remain in place with IATA forecasting a
growth rate in passenger journeys of 3.7% per annum over the next
20 years.
With diverse end market exposure, including a strong Defence
business representing 43% of the Group's revenue in the first half,
and having refreshed our aftermarket annuity with strong content on
the latest platforms, we are well positioned to benefit from the
recovery in civil aerospace.
OUR RESPONSE TO THE CRISIS
Leveraging our experience of navigating previous downturns and
through close communication with our customers and supply chain,
the Group moved quickly to create a base case for planning purposes
and adjusted production levels early in the second quarter
accordingly. We have subsequently fine-tuned our scenario as new
data has become available. Alongside this, and incorporated into
our scenario planning we have taken a series of decisive actions on
areas within our control in response to the crisis focused on
reducing costs, protecting cash and resizing the business:
-- Safeguarding our people - our number one priority and the
focus of our COVID-19 crisis management committee has been to
ensure the safety of our employees, where we have followed local
government and health authority guidelines as they relate to safe
working practices at our sites.
-- Supporting the community - our employees continue to support
their local communities in the regions where we operate in response
to COVID-19. In the UK, we were part of the Ventilator UK Challenge
with responsibility for programme management of the consortium's
production of an additional 13,000 ventilators to help patients
hospitalised with COVID-19 fight the disease. We have also had
numerous examples of employees at our sites leveraging their
capabilities to produce a wide range of personal protective
equipment for key workers and employees.
-- Business continuity - the majority of our manufacturing
facilities remained open during the first half to continue to
support our customers in the critical markets that we serve in
Defence, Energy and in Aerospace for repatriation of citizens and
transport of food, freight and medical supplies. As part of the
national response to COVID-19, we were granted $15m in funding
under the CARES Act from the US Department of Defence to sustain
critical industrial base capability for military grade fuel
bladders at our Rockmart, US facility.
Throughout the second quarter, the majority of our employees
continued to work at our sites while adhering to enhanced
procedures relating to personal protection and cleaning, with the
remainder either working from home or on furlough. As lockdowns
have progressively eased, we are continuing the process of enabling
employees to gradually return safely to the workplace where it is
safe to do so. We have also supported our suppliers through
ePayables schemes and increasing their awareness of local
government support schemes.
-- Reducing costs, protecting cash and resizing the Group - in
April we announced a series of actions to help the Group navigate
the crisis which will help to deliver substantial cash savings in
the year. These actions reflect a series of base case assumptions
incorporating the most likely impact on the Group's revenues and
cash flow this year and over the next five years:
1. Cost reduction - cancellation of all pay rises, pay
reductions for senior employees and material cuts in discretionary
spend including travel;
2. Protect cash - in addition to the cost measures, targeted
reductions in capital expenditure against our previous guidance in
February 2020; achieving absolute reduction in inventory levels;
and the cancellation of the final dividend for 2019; and
3. Resize the Group - having already taken action to reduce
variable costs including accessing furlough schemes and reducing
temporary labour, we took the difficult decision to reduce the size
of our global workforce by around 15% to ensure that our internal
capacity across our civil aerospace business reflects the reduction
in demand and positions us appropriately as we enter 2021.
As announced in our July trading update, we have made good
progress executing our action plan. The reduction in our global
workforce is substantially complete representing a reduction of 18%
at the end of the half compared with the end of December 2019. As a
result of the early actions taken in the first quarter, we also
anticipate being able to derive higher savings than originally
planned from reducing our discretionary operating costs.
Notwithstanding this, reducing inventory is taking longer than
first anticipated, reflecting a degree of variation in demand
signals across the extended supply chain and as customers consume
buffer stocks in parallel with adjusting their own end market
demand. After a slow start, we are making steady progress in this
area and while we continue to anticipate delivering good levels of
cash saving from this initiative in the second half, some of the
benefits will now move into the first quarter of 2021. This is also
the key driver of our assumption that the Group will now be free
cash flow neutral for the full year. Despite this, we still
anticipate being able to deliver cash savings in 2020 of between
GBP400m and GBP450m in line with our target range set out in
April.
BASE CASE AND DOWNSIDE SCENARIOS
In light of the unprecedented downturn in civil aerospace and
associated reduction in revenue, and as noted in our RNS
announcement on 6 August 2020, the Group has modelled the following
two scenarios: a 'base case' which the business is performing in
line with and which we are using to run the Group; and, given the
inherent uncertainty over the extent and pace of recovery in the
Group's civil aerospace markets, a 'downside case' for planning
purposes, in the event that we move significantly away from the
trajectory of the base case, covering the period to 31 December
2021.
Base case
Our base case scenario assumes civil aftermarket and OE levels
recover progressively from a low point in Q2/Q3 2020, with no
subsequent global lock down as a result of a 2(nd) wave of
COVID-19. An increasing return of passenger flights is anticipated
with a progressive increase in the fourth quarter of 2020 feeding
into civil revenue, with RPKs returning to pre-COVID-19 levels in
2024 in line with the most recent IATA outlook data. Civil OE
deliveries, which reflect the emerging build rates from the Group's
customer base, remain below 2019 levels until the end of the five
year forecast period in 2025. The base case assumes continued
robust funding of defence expenditure, particularly by the US
government, and that energy and other markets are not materially
impacted by COVID-19 over the five year forecast period.
Downside case to 31 December 2021
In the downside case, further waves of COVID-19 infection occur
globally impacting passengers' ability and confidence to resume
travelling, with an effective vaccine not widely available during
the period and a reduction in consumer discretionary expenditure
due to recession. Weakening RPKs are assumed to result in
production build rates for OEM deliveries to airlines being
depressed further. Additionally, as a result of the wider impact of
a more prolonged pandemic, higher levels of government borrowing
lead to defence spending being constrained. Energy and other
markets remain depressed as the weaker economic environment results
in reduced investment in oil and gas markets.
Using these downside assumptions we have conservatively modelled
a 15% reduction in the Group's civil revenues in 2021 compared with
the 2020 base case assumption. Defence markets experience growth in
2021, but are constrained to levels of assumed inflation. In the
downside case, the Group is also able to implement further
appropriate mitigating actions to reduce its cost base and to
preserve cash flows. Under the downside case, the Group has
sufficient financing to be able to meet its covenants and interest
cover obligations as they fall due in the period.
INTERIM MANAGEMENT REPORT 2020
In common with previous years, underlying profit is used by the
Board to measure the underlying trading performance of the Group
and excludes certain items including: amounts arising on the
acquisition, disposal and closure of businesses; amortisation of
intangible assets acquired in business combinations; movements in
financial instruments; and exceptional operating items.
In light of the unprecedented downturn in civil aerospace this
year, the level of exceptional costs at GBP402m is significantly
higher than usual, including impairment of goodwill and asset
write-offs resulting in Group underlying operating profit becoming
a loss at the statutory level. Within these exceptional costs,
GBP373m is attributable to impairment losses and other asset write
downs comprising: goodwill (GBP341m); development costs (GBP8m);
inventory (GBP16m); and trade receivables (GBP8m). Further details
relating to impairment losses and other asset write-downs are set
out in note 8.
Reconciliation between underlying operating profit and statutory
operating loss
GBPm
--------
Underlying operating profit 102.2
Impairment losses and other asset write-downs (373.2)
COVID-19 incremental non-recurring costs (13.2)
Site consolidations (14.8)
Other (0.6)
Exceptional operating items (401.8)
Amortisation of intangible assets arising
on acquisition of businesses (45.0)
Financial instruments (38.0)
Amounts arising on the acquisition, disposal
and closure of businesses 33.9
Statutory operating loss (348.7)
========
Our results in the first half, particularly the second quarter,
reflect the effects of COVID-19 and the unprecedented reduction in
civil aerospace activity with Group revenue, underlying operating
profit, underlying earnings and cash all declining in the
period.
In our trading statement on 23 April 2020, we reported that
Group revenue for the three months ended 31 March 2020 was 6%
higher than the comparative period, despite the impact of COVID-19
during the last two weeks in March. In our post close trading
update on 2 July, we reported that we had seen a marked
deterioration in trading in our civil aerospace business in the
second quarter as a result of the significant reduction in
commercial air traffic and grounding of a large proportion of the
global fleet.
In the second quarter, Civil Aerospace organic revenue was 49%
lower, with OE down 53% (large jets -55%, regional -69% and
business jets -40%) and aftermarket down 47% (large jets -48%,
regional -57% and business jets -30%). After a very strong first
quarter with organic growth of 19% (excluding Training Systems),
Defence revenue was 3% lower, with revenue from Energy 8% lower
than the comparative period.
Group orders were 31% lower in the first half on an organic
basis with book to bill of 0.9x. Our order book in Defence remains
robust with book to bill of 1.2x. Group organic revenue was down
13% with lower revenue in Civil Aerospace and Energy more than
offsetting a strong performance in Defence where revenue grew 7%.
In Civil Aerospace, revenue was 27% lower, with sales from civil OE
and civil AM down 29% and 25% respectively. Energy revenue was 6%
lower on an organic basis.
As a result of the reduction in Group revenue, including within
our higher margin aftermarket business, and the under-recovery of
fixed overheads as demand fell, the Group's underlying operating
margins decreased by 390 basis points, to 11.1% (H1 2019: 15.0%),
with underlying operating profit 37% lower in the period at
GBP102.2m (H1 2019: GBP161.1m).
Underlying profit before tax decreased by 41% to GBP85.5m (H1
2019: GBP145.4m) with underlying earnings per share also down 41%
at 8.7 pence (H1 2019: 14.7 pence).
Moving from underlying to statutory measures, as a result of the
impairment losses and other asset write downs, Group loss before
tax was GBP368.4m (H1 2019: GBP72.6m profit) and basic loss per
share was 44.3 pence (H1 2019: earnings per share of 7.3
pence).
In line with our guidance in July, the Group generated a free
cash outflow of GBP121.5m (H1 2019: GBP48.8m inflow) driven by the
lower operating result, higher working capital and, as expected, an
increase in cash tax and capital expenditure, with the latter
reflecting the Group being at the peak in the investment cycle on
strategic projects. Investment in capital expenditure was GBP57.4m
(H1 2019: GBP37.1m) and working capital was an outflow of GBP127.5m
(H1 2019: GBP76.9m outflow). Payments made in respect of retirement
benefit schemes were GBP7.1m (H1 2019: GBP17.2m) following an
agreement with the trustees of the UK scheme to defer four months
of payments totalling GBP11m that will now be spread across the
2021 to 2023 period. The free cash outflow was substantially offset
by proceeds from the sale of Training Systems which generated net
proceeds of GBP110m, with a net cash outflow for the Group of
GBP18.8m in the first half (H1 2019: GBP36.9m outflow).
At the end of June, our net debt was GBP1,000.2m (H1 2019:
GBP1,124.2m) including capitalised leases of GBP155.2m, an increase
of GBP89.0m from December 2019 after taking into account adverse
currency movements of GBP65.2m and we had ample headroom of
GBP855.5m on committed facilities of GBP1,700.5m. On 15 June 2020,
we paid $125m on the maturity of a tranche of 2010 US Private
Placement Notes, covered by bilateral loans put in place at the end
of December 2019. In October 2020, we will pay $150m on maturity of
another tranche of the 2010 US Private Placement Notes.
First half cash flow statement GBPm
H1 20 H1 19
Underlying operating profit 102.2 161.1
Depreciation and amortisation 53.6 51.3
Working capital movements (127.5) (76.9)
Net interest paid (16.5) (15.9)
Tax paid (24.4) (4.4)
Exceptional operating items paid (28.1) (11.9)
Purchase of property, plant and equipment (57.4) (37.1)
Proceeds from disposal of property, plant
and equipment 0.3 21.6
Capitalised development costs/programme
participation costs (19.4) (26.3)
Retirement benefit deficit reduction payments (7.1) (17.2)
Other 2.8 4.5
---------- ----------
Free cash flow (121.5) 48.8
Net proceeds from disposal/acquisition
of businesses 102.0 6.3
Dividends paid to Company's shareholders 0.0 (87.5)
Other 0.7 (4.5)
---------- ----------
Net cash generated (18.8) (36.9)
Lease liabilities entered (6.5) (15.9)
Lease liabilities disposed with business 4.5 0.0
Exchange differences (65.2) 5.7
Other movements (3.0) (3.0)
---------- ----------
Net debt movements (89.0) (50.1)
Net debt at 1 January (911.2) (1,074.1)
Net debt at 30 June (1,000.2) (1,124.2)
There are two main financial covenants in our financing
agreements. The net borrowings:underlying EBITDA ratio, which must
not exceed 3.5x, was at 1.8x at 30 June 2020 (June 2019: 1.8x) and
interest cover, which must be not less than 3.0x, was 14.1x (June
2019: 15.0x). The Group has significant headroom against both key
covenant ratios, and net borrowings:underlying EBITDA is well
within our target range of 1.5x to 2.5x.
In April, the Group was confirmed as an eligible issuer under
the Bank of England and HM Treasury's CCFF, under which the Group
can draw up to GBP600m. The Group has issued commercial paper under
this facility totalling GBP130m at 30 June 2020 which is included
within our committed facilities of GBP1,701m, with additional
headroom of GBP470m under the CCFF as at that date. On 11 May, we
extended the duration of our debt by securing a forward start on
our revolving credit facility, with the signing of a new one year
$575m multi-currency facility maturing in September 2022.
The Board is very aware of the importance of dividends to our
shareholders. However, the Board concluded that it was prudent not
to pay a final dividend for 2019 and in light of ongoing
challenging market conditions, the Board is not recommending the
payment of an interim dividend for 2020. This will retain cash
within the Group, ensure the continued management of net debt
levels and preserve flexibility.
ASSUMPTIONS FOR THE FULL YEAR
While the gradual improvement in some segments of the commercial
aerospace sector in the second and beginning of the third quarter
was encouraging, particularly domestic travel and business jets,
events in the last few weeks have shown that any recovery remains
highly sensitive to national spikes in COVID-19 cases, the
imposition of regional lockdowns, restrictions at international
borders and quarantining measures. As a result, near term
uncertainty about the pace and shape of a recovery across the
sector is likely to remain and could stretch into 2021, thereby
limiting visibility on the performance of our civil business for
the remainder of the financial year, including what has
historically been our most important fourth quarter with the
largest revenue and profit impact.
In our base case, for civil aerospace we assume that new build
rates remain at or near current levels and the progressive recovery
in air traffic feeds through into aftermarket revenue. In defence,
we expect outlays in our core US market to remain robust for the
rest of the financial year and conditions in our energy end markets
to remain stable. For cash, as a result of a proportion of
inventory reduction moving into 2021, we now expect to be broadly
free cash flow neutral for the full year.
Based on the above, and recognising that there could be a range
of outcomes in our civil business in the last four months leading
to a significant variation in where we finish the year, our
guidance for the Group for the full year remains suspended.
As we move further through the second half, we will continuously
review the shape of the recovery in our end markets to ensure our
businesses are aligned appropriately and will provide a further
update in our third quarter trading statement.
Having taken early and decisive action in the first half to
strengthen liquidity and resize the cost base and capacity of the
Group and with diverse end market exposure, we remain well placed
to benefit from the recovery in civil aerospace.
GRO UP O V E R V I E W AND STRATEGY UPDATE
Despite the disruption in civil aerospace in the first half, we
remain focused on operational execution and our four strategic
priorities to accelerate growth, increase cash flow and improve
return on capital employed. These priorities are: Strategic
Portfolio, Customers, Competitiveness and Culture.
Strategic Portfolio
We focus investment in attractive markets where we have, or can
develop, a leading position. This encompasses organic investment in
differentiated products and manufacturing technologies; targeted,
value enhancing acquisitions; and selective non-core disposals.
More than 70% of revenue is generated from sole-source, life of
programme positions underpinned by Meggitt-owned intellectual
property. As such, the continued strengthening of our technology
portfolio remains a critical priority of the Group.
In the first half, w e further focused our portfolio with the
sale of Training Systems, consistent with our strategy to focus on
businesses of scale in markets where leading positions offer
greater potential for growth and operational efficiencies. As a
result of this disposal, 82% of our revenue is now generated from
businesses in attractive markets and where we have a strong
competitive position, above our target of 80% set out three years
ago.
Within braking systems, we are intensifying our focus on
generating improved margin and returns while continuing to remain
highly selective on investing in new opportunities. Recognising the
change in fleet dynamics as a result of the downturn in civil
aerospace, we have also significantly re-phased and reduced our
planned investment in both carbon and production capacity.
In technology, we made good progress working with major aircraft
OEMs towards the certification of VERDAGENT(TM), Meggitt's new and
proprietary fire suppressant agent to replace Halon 1301. We
successfully completed the first customer trials of our optical
dynamic pressure sensing system for gas turbines which has resulted
in a follow-up demonstration project with an energy customer and an
agreement with a major engine OEM to install the new technology on
a demonstrator engine in 2021. And, working with our JV partner
HiETA Technologies, we have developed additively manufactured heat
exchangers to operate at high-temperatures to enable high
efficiency, sustainable power generation cycles, with prototype
units undergoing performance trials.
While our focus remains on three core markets: aerospace,
defence and selected energy, over the medium-term we also look to
increase the application of our aero-derivative intellectual
property and technology in adjacent markets, including space and
ground vehicles, to further strengthen the portfolio.
Customers
Our success in moving from a transactional approach to building
long term relationships through our customer-aligned divisions,
extends our visibility of near term customer requirements and has
enabled us to better support the demand for original equipment and
spare parts and maintenance, repair and overhaul ('MRO') in the
aftermarket.
During the first half, we maintained close contact with our
customers which has been critical in the creation of our base case,
including the adjustment of production schedules for original
equipment based on new build rates from the OEMs and tracking
customer sentiment by region in the aftermarket.
In the period, we continued to win a number of new customer
contracts including orders for: $15m from the Defence Logistics
Agency to support the supply of fuel bladders; a multi-million
dollar award from GE Aviation to continue the supply of thermal,
sensing and flow control solutions across a number of platforms;
$73m from Bell Textron Inc for the supply of composite ice
protection components on the V22 Osprey programme; $20m from
Northrop Grumman for the supply of the supply of fuel bladders on
the F/A-18 Super Hornet ; and GBP8m from MODEC for the supply of
Heatric printed circuit heat exchangers, representing the largest
order for that business for over five years.
We saw continued momentum with SMARTSupport(R) , our long-term
contract offering for aftermarket customers, adding an additional 6
agreements, including those with ST Aerospace and Derco taking the
total to 31 with an aggregate value of GBP176m, with a number of
additional opportunities in the pipeline. These long-term contracts
underpin our aftermarket and market share growth in the future and
provide better insights into customer requirements and order
patterns.
Competitiveness
While our priority during the first half has been to ensure that
people and sites operate safely as we respond to the challenges
posed by COVID-19, we remained focused on driving operational
improvements in line with our strategy.
We made further progress reducing our global footprint, with
site closures and consolidations in the UK (Basingstoke) and the US
(Orange County) and the divestment of Training Systems at the end
of the period. As a result of these actions, we now have 39 Meggitt
manufacturing sites, reduced from our original 56 sites in 2016 and
42 sites at the end of December 2019 and have identified additional
opportunities to reduce this further over the next two to three
years. We opened our new UK manufacturing and engineering centre
for Braking systems, Thermals systems and Services & Support
together with our relocated Group Headquarters at Ansty Park,
providing office-based employees that have been working from home
with the flexibility to gradually return to the workplace. During
the second half, we will complete the preparation to enable the
full transition of manufacturing from four UK sites into Ansty Park
which has been deferred to 2021 from 2020 as a result of the
disruption caused by COVID-19, with the capital expenditure
associated with this transition also moving into 2021.
On inventory, where we have steadily increased inventory turns
from just above 2.0x in 2016 to 2.7x in 2019 , our priority in the
first half has been on the management of absolute inventory levels
as we respond to the change in demand from our customers. We have
used the change in market conditions as an opportunity to further
tighten our supply parameters and production scheduling (including
moving from monthly to weekly deliveries of raw materials). The
management of absolute inventory levels will remain a key objective
and represents an important part of our cash saving targets in
2020, also helping us to return to focusing on improving our
inventory turns in 2021 and beyond.
Within purchasing, we have actively supported our suppliers
through the crisis through ePayables enrolment and access to
government funding in the US, UK and France. Alongside this, we
have also taken the opportunity to further strengthen and
consolidate our supply chain, including identifying opportunities
to derive further savings by moving more of our supply base to low
cost countries where appropriate.
Our recovery plan in Engine Composites continues as we apply
engineering and process improvements to achieve higher quality and
further improvements in yields. In April, our facility in Saltillo,
Mexico reached the first of two milestones to enable the direct
shipment of high volume composite parts to end customers with the
final milestone reached this month. In addition, lower production
of aircraft engines caused by COVID-19 has allowed us to accelerate
the adoption of new manufacturing technology in Mexico, transfer
production lines and transition further high volume parts in
2021.
Culture
Our priority over the last few months has been to look after our
people across our sites and their response to the crisis has been
outstanding, enabling us to support all our stakeholders in what
have been extremely challenging circumstances. Our teams have also
used their capabilities to support our local communities in a
variety of ways - from supporting the production of critical
ventilators for the NHS in the UK, to visors and masks and other
protective equipment for key workers.
Over the last three years we have worked hard to build and
nurture a high performance culture and improve engagement where our
ambitious and diverse teams help us to accelerate the execution of
our strategy. The progress we have made in this area and the
support of our employees has been instrumental in the Group being
able to respond strongly to the crisis.
In addition, our customer-aligned organisational structure and
more integrated approach to working across teams has been a key
enabler as we moved quickly to manage the business to our base case
and respond to a significant adjustment in demand across our civil
business.
TRADING SUMMARY
Revenue (GBPm) Growth (%)
H1 2020 H1 2019 Reported Organic
Civil OE 184.1 259.6 (29%) (29%)
Civil AM 248.2 329.3 (25%) (25%)
------------- -------- -------- --------- --------
Total Civil 432.3 588.9 (27%) (27%)
Defence 392.4 376.7 4% 7%
Energy 60.7 63.1 (4%) (6%)
Other 31.4 42.2 (26%) 2%
------------- -------- -------- --------- --------
TOTAL 916.8 1,070.9 (14%) (13%)
------------- -------- -------- --------- --------
Ci v il a e r o space
Meggitt operates in three main segments of the civil aerospace
market: large jets, regional aircraft and business jets. The large
jet fleet includes over 23,000 aircraft, the regional aircraft
fleet over 6,000 and business jets around 19,000. The Group has
products on the vast majority of these platforms and hence a large,
installed base. With c.55% of our civil aftermarket revenue (full
year 2019) generated from platforms under 10 years old, we are well
placed to continue to generate good returns over the coming years
as the market recovers.
The split of civil revenue in the first half, which accounted
for 47% of the Group total, was 57% aftermarket and 43% original
equipment (OE).
In the first half, civil OE revenue was down 29% organically
reflecting lower demand for original equipment from the OEMs, with
large jets, the largest component of our OE revenue, down 33% and
regional jets down 37%. Business jet OE was down 11%. Within the
first half, civil OE was down 1% and 53% in the first and second
quarters respectively.
As a result of lower levels of air traffic activity in the
period, civil aftermarket revenue was down 25% organically as
airlines and other aftermarket customers deferred orders for spares
and repairs, with large jets down 27%, regional down 33% and
business jets down 10%. Within the first half, civil AM was up 2%
and down 47% in the first and second quarters respectively.
Overall, civil aerospace revenue was 27% lower in the first half on
an organic basis.
Defence
Our Defence business accounted for 43% of Group revenues in H1
2020 (including Training Systems) with 60% of revenue from OE and
40% from the aftermarket. We have equipment on an installed base of
around 22,000 fixed wing and rotary aircraft and a significant
number of ground vehicles and are well placed having secured strong
positions on some of the newest and hardest worked platforms.
Direct sales to US customers accounted for 72 % of defence revenue,
with 17 % to European customers and 11 % to the rest of the
world.
Defence spending remained robust during the first half with
continuing good outlays by the US DoD and our order book remains
healthy with book to bill of 1.2x, underpinned by a number of
multi-year contracts.
Defence revenue grew 7% on an organic basis (excluding Training
Systems) with particularly strong growth in the first quarter. In
OE, revenue grew 18% driven by continuing strong growth on parts
for the F-35 Joint Strike Fighter and in rotary wing, the AH-64
Apache. Aftermarket revenue was 5% lower organically, with growth
in fighters more than offset by lower revenue on rotary wing and
special mission aircraft.
E ne r g y a nd o t her
Energy and other revenues (10% of Group total) come from a
variety of end markets of which the single most significant is
energy (7% of Group total). Our energy capabilities centre on
providing valves and condition-monitoring equipment for power
generation installations, including ground-based gas and wind
turbines, and printed circuit heat exchangers used primarily in the
oil and gas market. Other markets (3% of Group total) include the
automotive, industrial, test, consumer goods and medical
sectors.
Energy revenue was down 6% on an organic basis with Heatric
revenue up 6% on the back of a strong order book as we entered the
year, more than offset by lower revenue derived from our valve and
condition monitoring business. Revenue from other markets was up 2%
on the comparative period. The medium-term growth expectations for
our energy businesses remain solid. We have differentiated
aero-derivative technologies which play a critical role in the
extraction of deep water offshore gas reserves and the growth in
demand for liquid natural gas, green and renewable energy positions
this business well for the future.
DIVISIONAL P E RFO R M A N C E
The financial performance of the individual divisions is
summarised in the table below:
Underlying Operating Profit
Revenue ( GBPm) (GBPm)
% Growth % Growth
------- -------------- ------- ------- ---------------
Re por O r Re por O rg
H1 2020 H1 2019 te d ganic Division H1 2020 H1 2019 te d a n ic
------- ------ ------ ------- ------- ------ -------
430.8 484.6 -11 -12 Airframe Systems 70.3 101.6 -31 -33
------- ------ ------ ------------------ ------- ------- ------ -------
128.3 159.2 -19 -20 Engine Systems (9.7) 4.7 -306 -349
------- ------ ------ ------------------ ------- ------- ------ -------
180.8 191.5 -6 +8 Energy & Equipment 16.9 21.6 -22 -1
------- ------ ------ ------------------ ------- ------- ------ -------
176.9 232.5 -24 -25 Services & Support 24.7 33.0 -25 -28
------- ------ ------ ------------------ ------- ------- ------ -------
0.0 3.1 Other 4 0.0 0.2
------- ------ ------ ------------------ ------- ------- ------ -------
916.8 1,070.9 -14 -13 Total Group 102.2 161.1 -37 -36
------- ------ ------ ------------------ ------- ------- ------ -------
Airframe Systems provides Braking Systems, Fire Protection &
Safety Systems, Power & Motion, Fuel Systems, Avionics &
Sensors and Polymer Seals for around 35,000 in-service civil and
22,000 defence aircraft. As well as increasing our content on the
new generation aircraft by as much as 250%, we also have a strong
presence on all of the fastest growing and hardest worked defence
platforms. As such, we have strong relationships with all of the
major OEMs, whether commercial, defence or business jet; fixed wing
or rotorcraft; US, European or Rest of World. The division
represents 47% of Group revenue, generating 54% of its revenue from
OE sales and 46% from the aftermarket.
Organic revenue was down 12% in the half. Civil OE revenue was
down 23% with large jets and regional jets OE down 28% and 26%
respectively, reflecting lower end market demand for new aircraft
and OEMs reducing new build rates. Business jet OE was down 4%
outperforming large and regional jets on a relative basis.
Civil aftermarket revenue was 20% lower on an organic basis
reflecting the unprecedented reduction in commercial air traffic
particularly in the second quarter and lower demand for spares
within our wheels and brakes business. In the period, organic
aftermarket revenue in large, regional and business jets was down
11%, 34% and 8% respectively.
Defence revenue was up 1%, with OE 3% higher driven by growth in
fighters and transports. In the aftermarket, which represents 47%
of Airframe Systems defence revenue, revenues were 2% lower than
the prior year with growth on Typhoon, F/A-18 and light attack
platforms more than offset by declining demand on rotary wing and
special mission.
As a result of the lead time to adjust our cost base in response
to the sudden drop in civil OE volume and the resultant
under-recovery of fixed overhead combined with the reduction in
higher margin civil aftermarket revenues, underlying operating
margin was 470 basis points lower than the comparative period at
16.3% (H1 2019: 21.0%).
Engine Systems has a leading position in aero sensing with a
broad range of technologies and sensor applications including
vibration monitoring and engine health management systems. This
division also provides aero-engine heat exchangers, flow control
and advanced engine composites. Strong positions on high volume
platforms mean we are well positioned for growth in Engine Systems.
The division represents 14% of Group revenue, generating 90% of its
revenue from OE and 10% from the aftermarket as a result of its
principal route to the aftermarket being through the Services &
Support division.
Revenue decreased by 20% on an organic basis with good growth in
defence segments more than offset by lower demand for OE parts
across civil aerospace. Civil OE revenue was 38% lower on an
organic basis, with the absolute reduction in revenue mainly driven
by large jets. In defence, revenue grew by 16% on an organic basis
with particularly strong growth on the F-135 programme and higher
revenues in rotary wing/other transports.
Engine Systems generated an underlying operating loss in the
first half of GBP9.7m (H1 2019: profit of GBP4.7m) resulting from
the lower civil volumes across all product groups and, as with
Airframe Systems, the under-recovery of fixed overheads.
Within our Engine Composites business, where revenue was up 2%
in the first half driven by strong defence, we continued to make
good progress with operational improvements and the transfer of
high volume parts to our facility in Mexico. We remain on track to
ship parts directly from Mexico to end customers in the second half
and plan to move additional volumes down to Mexico in 2021. We
remain firmly focused on our recovery plan in Engine Composites and
returning this product group to mid-teens margins having made good
progress on this in 2019. However, due to the severe and sudden
downturn in civil OE demand, this will now take longer and extend
beyond our previous timeline of the end of 2021.
Energy & Equipment consists of our energy product groups and
businesses that provide products directly to defence customers.
Energy Sensors & Controls provides a range of valves,
actuators, sensor and condition monitoring systems for oil and gas
applications. Heatric provides innovative printed circuit heat
exchanger technology for offshore gas applications. Defence Systems
provides a series of complex engineered products to defence
agencies in electronic cooling, ammunition handling and scoring
systems. Training Systems was sold on 30 June 2020 and revenue from
this product group (H1 2020: revenue of GBP33.2m) is excluded from
organic figures. Energy & Equipment represents 20% of Group
revenue and generates 85% of its revenue from OE and 15% from the
aftermarket.
4 Those businesses which were disposed of prior to the effective
date of the new divisional structure or were classified as held for
sale at that date are presented separately as 'Other'.
Revenue was up 9% organically (down 6% on a reported basis with
the inclusion of Training Systems) with a strong performance in
Defence Systems driven by strong OE growth in particular on the
Apache AH-64, other rotary wing aircraft and ground vehicles. In
energy, on the back of entering the year with a strong order book,
Heatric grew revenue 6% in the half, with demand in our Energy
Sensors and Controls business 21% lower than the comparative period
as a result of weaker market conditions in oil and gas. Underlying
operating margins at 9.3% were 200 basis points lower than the
comparative period (H1 2019: 11.3%).
Services & Support provides a full service aftermarket
offering including spares distribution and MRO to our commercial,
business jet and defence customer base, throughout the lifecycle of
our products. The division represents 19% of Group revenue and
generates 100% of its revenue from the aftermarket.
Within S&S, order intake in civil aftermarket was down 40%
in the first half as our aftermarket customers deferred orders for
both spare parts and MRO. In APAC, orders were down 25% with the
recovery in the Chinese domestic market underpinning the region;
order intake was down 37% in the Americas and as a result of the
border controls within EMEA, order intake was down 47% in the
period. Organic revenue was down 24% in APAC and 27% in both the
Americas and EMEA.
Revenue was 24% lower organically with civil aerospace revenue
down 29%. Large jet revenue, which represents 82% of civil revenue,
was down 30% in the first half, with regional jets down 29%.
Revenue from business jets was down 17% in the period. In defence,
order intake was 30% down on the comparative period with revenue 5%
lower on an organic basis.
Underlying operating margin was broadly flat at 14.0% (H1 2019:
14.2%).
IN V ES T ING F O R T HE FUTURE
H1 2020 H1 2019 % Change
GBPm Organic Reported
-------- -------- --------
Total research and development
(R&D) 55.7 65.0 (17) (14)
Less: Charged to cost of
sales / WIP (13.6) (14.5) (12) (6)
Less: Capitalised (18.8) (25.1) (28) (25)
Add: Amortisation / Impairment 16.6 13.4 22 24
Charge to underlying net
operating costs 39.9 38.8 (1) 3
Capital expenditure 57.4 37.1 55
-------- -------- -------- ---------
While we have scaled back expenditure on R&D in the period
as part of our overall cash saving initiative, we have continued to
invest in new technologies to support new product development and
future growth opportunities. Accordingly, total R&D expenditure
in the first half of GBP55.7m stayed constant as a percentage of
revenue at 6.1% (H1 2019: GBP65.0m, 6.1%). The charge to underlying
net operating costs, including amortisation and impairment,
increased by 1% (decreased by 3% on an organic basis) to GBP39.9m
(2019: GBP38.8m).
As expected, capital expenditure increased in the first half to
GBP57.4m (H1 2019: GBP37.1m) driven by investment in transformation
and growth projects including the fit-out of Ansty Park and
investment in carbon brakes capacity.
At the time of our full year results in February, we expected
total Group capital expenditure on property, plant and equipment
and intangible assets would increase in 2020 to between GBP120m and
GBP140m (FY2019: GBP94m) driven by these major projects. As part of
our actions to preserve cash this year in response to the crisis,
we have scaled back this investment and now expect capital
expenditure to be around GBP100m for the full year.
OTHER FI N A N C I A L INFORMATION
Group Orders and Revenue
Orders reduced by 26% on a reported basis (31% on an organic
basis) to GBP881.5m. Reported Group revenue of GBP916.8m (H1 2019:
GBP1,070.9m) decreased by 14% as analysed in the table below:
% imp a
GBP m c t
--------------------- ------- -------
H1 201 9 r ev e
nu e 1,070.9
Business disposals (27.9) -3
C u rr en c y m
ove m en t s 11.4 +2
Or gani c g r o
w t h (137.6) -13
--------------------- ------- -------
H1 2020 r ev e
nu e 916.8 -14
--------------------- ------- -------
Business disposals include the sale of Angouleme (completed in
March 2019), Orange County product lines (completed in June to
December 2019) and Training Systems (completed in June 2020).
Currency movements in the first six months reflect the weakening of
pound sterling against our trading currencies, principally the US
dollar. The current level of sterling at the date of this report,
would generate a headwind for the Group in the second half. The
reduction in organic revenue growth reflects the impact of COVID-19
on civil aerospace (down 27%) partially offset by good performance
in defence (up 7%).
Foreign Exchange
The weakening of sterling against the US dollar positively
affected our reported results for the period. Translation of
results from overseas businesses increased Group revenue by GBP9.9m
and underlying profit before tax (PBT) by GBP0.9m in the first six
months.
The sensitivity of full-year revenue and underlying PBT to
exchange rate translation movements against sterling, when compared
to the 2019 average rates, is shown in the table below:
Underlying
2019 Revenue PBT
average rate GBP'm GBP'm
----------------------------- -------------- -------- -----------
Impact of 10 cent movement*
US Dollar 1.28 120 20
Swiss Franc 1.27 8 3
Euro 1.14 11 2
----------------------------- -------------- -------- -----------
* As measured against 2019 actual full-year revenue and underlying PBT.
Transaction exposure, where revenues and/or costs of our
businesses are denominated in a currency other than their own,
increased revenue by GBP1.5m and increased underlying PBT by
GBP2.0m in the period. We typically hedge transaction exposure and
the following table details hedging currently in place:
Hedging in
place 5 Average transaction
% rates 6
----------------------- ----------- --------------------
2020
US dollar/sterling 100 1.37
US dollar/Swiss franc 86 1.08
US dollar/euro 100 1.15
2021 - 2024 inclusive
US dollar/sterling 79 1.33
US dollar/Swiss franc 7 1.09
US dollar/euro 23 1.17
----------------------- ----------- --------------------
Taking translation and transaction benefit into account, H1 2020
reported revenue increased by GBP11.4m and underlying PBT increased
by GBP2.9m.
Finance costs
Underlying net finance costs were GBP16.7m (H1 2019: GBP15.7m)
principally increasing as a result of additional interest arising
from the new Ansty Park lease, which commenced in H2 2019.
Tax charge
The Group's underlying tax rate was 21.2% (H1 2019: 22.0%). As
reported in 2019, the Group is impacted by the EU Commission ruling
that the UK CFC regime constituted partial state aid. The Group
maintains the provision held at 31 December 2019 of GBP18.3m in
respect of this matter. During the period the Group has been in
dialogue with HMRC and continue to appeal against the ruling, in
parallel with the UK government's own appeal, to the European
General Court. Currently dates for these appeals to be heard have
not been set, nor have timings for cash payments. As expected, cash
tax increased in the period to GBP24.4m (H1 2019: GBP4.4m) largely
driven by the phasing of payments.
For the full year, we expect the level of cash tax to be around
GBP50m.
Retirement benefit schemes
The Group's principal defined benefit schemes are in the UK and
US and are closed to new members. Total deficits increased to
GBP326.3m (December 2019: GBP267.9m). The main driver of the
increase was re-measurement losses on scheme liabilities of
GBP91.1m, primarily arising from a significant reduction in AA
corporate bond yields used to determine their valuation, which are
at their lowest levels over the last 15 years. Asset performance
was mixed with a strong return from the schemes' liability hedge
portfolio of government bonds, corporate bonds and derivatives more
than offsetting a volatile equity performance where markets,
despite a partial recovery in the second quarter, fell
significantly over the period.
5 Based on forecast transaction exposures.
6 Hedging in place with unhedged exposures based on exchange
rates at 30 June 2020.
Deficit reduction payments in the period were GBP7.1m (2019:
GBP17.2m). In the UK, following the COVID-19 outbreak, the Group
agreed with the trustees deferral of four months deficit
contributions amounting to GBP11m, which will now be made over the
remainder of the current recovery plan to 2023, with payments of
GBP35.5m, GBP37.2m and GBP27.0m in 2021, 2022 and 2023
respectively. Deficit contributions have now resumed in the UK.
At 30 June 2020, principally due to the fall in bond yields
since the date of the 2018 valuation, the current UK funding
position is approximately GBP190m lower than that projected in the
2018 valuation. This funding shortfall will, should it remain, be
addressed through a revised recovery plan as part of the 2021
triennial valuation. In the US, legislation was passed in response
to COVID-19, allowing companies to defer contributions due in 2020
to 2021. Contributions to the US scheme are expected to remain at
modest levels for the next three years.
CONDENSED CONSOLIDATED UNAUDITED INCOME STATEMENT
For the six months ended 30 June 2020
Six months Six months
ended ended
30 June 30 June
2020 2019
Notes GBPm GBPm
Revenue 4 916.8 1,070.9
Non-GAAP measures
Exceptional Impairment losses and other
asset write-offs 8a (16.0) -
Other cost of sales (640.6) (697.0)
------------------------------------------- ------ ----------- -----------
Cost of sales (656.6) (697.0)
Gross profit 260.2 373.9
Non-GAAP measures
Exceptional Impairment losses and other
asset write-offs 8a (357.2) -
Other operating costs (287.1) (286.5)
------------------------------------------- ------ ----------- -----------
Operating costs (644.3) (286.5)
Operating income 5 35.4 4.0
----------- -----------
Net operating costs (608.9) (282.5)
Operating (loss)/profit (1) (348.7) 91.4
Finance income 0.3 0.6
Finance costs (20.0) (19.4)
----------- -----------
Net finance costs 9 (19.7) (18.8)
(Loss)/profit before tax (2) (368.4) 72.6
Tax credit/(charge) 10 24.1 (16.0)
(Loss)/profit for the period attributable
to equity owners of the Company (344.3) 56.6
=========== ===========
(Loss)/earnings per share:
Basic (3) 11 (44.3)p 7.3p
Diluted (4) 11 (43.7)p 7.2p
Non-GAAP Measures
4 &
(1) Underlying operating profit 6 102.2 161.1
(2) Underlying profit before tax 6 85.5 145.4
(3) Underlying basic earnings per share 11 8.7p 14.7p
(4) Underlying diluted earnings per
share 11 8.5p 14.5p
------------------------------------------- ------ ----------- -----------
CONDENSED CONSOLIDATED UNAUDITED STATEMENT OF COMPREHENSIVE
INCOME
For the six months ended 30 June 2020
Six months Six months
ended ended
30 June 30 June
2020 2019
Notes GBPm GBPm
(Loss)/profit for the period attributable
to equity owners of the Company (344.3) 56.6
Items that may be reclassified to the income
statement in subsequent periods:
Currency translation movements 27 100.0 16.4
Movements in fair value of financial liabilities
arising from changes in credit risk:
Bank and other borrowings 19 2.2 (0.6)
Derivative financial instruments (1.4) -
Tax effect (0.1) 0.1
----------- -----------
100.7 15.9
Items that will not be reclassified to the income
statement in subsequent periods:
Remeasurement of retirement benefit obligations (51.3) (63.2)
Tax effect 12.0 11.1
----------- -----------
(39.3) (52.1)
Other comprehensive income/(expense) for
the period 61.4 (36.2)
Total comprehensive (expense)/income for the
period attributable to equity owners of the Company (282.9) 20.4
=========== ===========
CONDENSED CONSOLIDATED UNAUDITED BALANCE SHEET
At 30 June 2020
30 June 31 December
2020 2019
Notes GBPm GBPm
Non-current assets
Goodwill 14 1,655.3 1,966.6
Development costs 14 588.7 575.9
Programme participation costs 14 20.8 18.0
Other intangible assets 14 489.2 503.6
Property, plant and equipment 15 485.4 449.4
Investments 16 23.8 14.1
Other receivables 16.1 17.0
Contract assets 63.4 55.2
Derivative financial instruments 19 7.4 14.6
Deferred tax assets 32.3 23.3
---------- ------------
3,382.4 3,637.7
Current assets
Inventories 521.2 489.8
Trade and other receivables 331.8 379.9
Contract assets 62.7 66.3
Derivative financial instruments 19 1.0 3.8
Current tax recoverable 7.9 11.1
Cash and cash equivalents 236.9 155.3
1,161.5 1,106.2
Total assets 4 4,543.9 4,743.9
Current liabilities
Trade and other payables (328.9) (464.5)
Contract liabilities (53.1) (50.5)
Derivative financial instruments 19 (22.0) (16.5)
Current tax liabilities (68.3) (81.6)
Lease liabilities (16.2) (16.4)
18
Bank and other borrowings & 19 (263.2) (219.4)
Provisions 20 (48.5) (36.2)
(800.2) (885.1)
Net current assets 361.3 221.1
Non-current liabilities
Other payables (4.7) (2.1)
Contract liabilities (77.5) (77.0)
Derivative financial instruments 19 (25.5) (4.6)
Deferred tax liabilities (121.1) (155.3)
Lease liabilities (139.0) (136.2)
18
Bank and other borrowings & 19 (818.7) (694.5)
Provisions 20 (60.5) (64.4)
Retirement benefit obligations 21 (326.3) (267.9)
---------- ------------
(1,573.3) (1,402.0)
Total liabilities (2,373.5) (2,287.1)
Net assets 2,170.4 2,456.8
========== ============
Equity
Share capital 22 39.0 38.8
Share premium 1,226.6 1,226.5
Other reserves 15.7 15.7
Hedging and translation reserves 526.1 425.4
Retained earnings 363.0 750.4
---------- ------------
Total equity attributable to owners of the
Company 2,170.4 2,456.8
========== ============
CONDENSED CONSOLIDATED UNAUDITED STATEMENT OF CHANGES IN
EQUITY
For the six months ended 30 June 2020
Equity attributable to owners of the Company
-------------------------------------------------------------------------
Hedging
Share Share Other and translation Retained Total
capital premium reserves reserves earnings equity
GBPm GBPm GBPm GBPm GBPm GBPm
At 1 January 2019 38.8 1,223.9 15.7 493.8 720.2 2,492.4
Profit for the period - - - - 56.6 56.6
Other comprehensive
income/(expense) - - - 15.9 (52.1) (36.2)
Total comprehensive
income for the period - - - 15.9 4.5 20.4
Employee share schemes:
Value of services provided - - - - 9.8 9.8
Issue of equity share
capital - 0.4 - - (0.4) -
Dividends (note 12) - - - - (87.5) (87.5)
At 30 June 2019 38.8 1,224.3 15.7 509.7 646.6 2,435.1
===== ======== ===== ======= ======= ========
At 1 January 2020 38.8 1,226.5 15.7 425.4 750.4 2,456.8
Loss for the period - - - - (344.3) (344.3)
Other comprehensive
income/(expense) - - - 100.7 (39.3) 61.4
Total comprehensive
income/(expense) for
the period - - - 100.7 (383.6) (282.9)
Employee share schemes:
Value of services provided - - - - (3.5) (3.5)
Issue of equity share
capital 0.2 0.1 - - (0.3) -
At 30 June 2020 39.0 1,226.6 15.7 526.1 363.0 2,170.4
===== ======== ===== ======== ========== ==========
CONDENSED CONSOLIDATED UNAUDITED CASH FLOW STATEMENT
For the six months ended 30 June 2020
Six months Six months
ended ended
30 June 30 June
2020 2019
Notes GBPm GBPm
Non-GAAP Measures
Cash inflow from operations before business
disposal expenses and exceptional operating
items 21.2 118.3
Cash outflow from business disposal expenses 28 (2.7) (0.9)
Cash outflow from exceptional operating
items 8 (28.1) (11.9)
------------------------------------------------- ------ ----------- -----------
Cash (outflow)/inflow from operations 25 (9.6) 105.5
Interest received 0.1 0.3
Interest paid (16.6) (16.2)
Tax paid (24.4) (4.4)
-----------
Cash (outflow)/inflow from operating activities (50.5) 85.2
----------- -----------
Businesses disposed 28 112.3 7.2
Purchase of investment 16 (7.6) -
Capitalised development costs 14 (18.8) (25.1)
Capitalised programme participation costs (0.6) (1.2)
Purchase of intangible assets (10.8) (3.7)
Purchase of property, plant and equipment (46.6) (33.4)
Proceeds from disposal of property, plant
and equipment 0.3 21.6
-----------
Cash inflow/(outflow) from investing activities 28.2 (34.6)
----------- -----------
Dividends paid to Company's shareholders 12 - (87.5)
Proceeds from bank and other borrowings 18 394.5 17.8
Debt issue costs paid 18 (1.6) -
Repayments of bank and other borrowings 18 (294.4) (37.0)
Reverse lease premium received 17 3.5 -
Repayments of lease liabilities (8.2) (7.5)
----------- -----------
Cash inflow/(outflow) from financing activities 93.8 (114.2)
=========== ===========
Net increase/(decrease) in cash and cash
equivalents 71.5 (63.6)
Cash and cash equivalents at start of the
period 155.3 181.9
Exchange gains/(losses) on cash and cash
equivalents 10.1 (1.9)
----------- -----------
Cash and cash equivalents at end of the
period 236.9 116.4
=========== ===========
NOTES TO THE CONDENSED CONSOLIDATED UNAUDITED FINANCIAL
STATEMENTS
For the six months ended 30 June 2020
1. General information
Meggitt PLC is a public limited company listed on the London
Stock Exchange, domiciled in the United Kingdom and incorporated in
England and Wales with the registered number 432989. It is the
parent company of a Group whose principal activities during the
period were the design and manufacture of high performance
components and sub--systems for aerospace, defence and other
specialist markets, including energy, medical, industrial and
test.
The condensed consolidated financial statements presented in
this document have not been audited or reviewed and do not
constitute Group statutory accounts as defined in section 434 of
the Companies Act 2006. Group statutory accounts for the year ended
31 December 2019 were approved by the Board of Directors on 24
February 2020 and delivered to the Registrar of Companies. The
auditors' report on those accounts was unqualified, did not draw
attention to any matters by way of emphasis and did not contain a
statement under section 498(2) or (3) of the Companies Act
2006.
The condensed consolidated financial statements for the six
months ended 30 June 2020 have been prepared in accordance with the
Disclosure Guidance and Transparency Rules of the Financial Conduct
Authority and International Accounting Standard 34, 'Interim
Financial Reporting' as adopted by the European Union. They should
be read in conjunction with the Group's financial statements for
the year ended 31 December 2019 which have been prepared in
accordance with IFRSs as adopted by the European Union.
Going concern
The directors have formed a judgement, at the time of approving
the condensed consolidated financial statements, that there is a
reasonable expectation that the Group has adequate resources to
continue in operational existence for a period of at least 12
months from the date of approval of this interim management report
. For this reason, the directors continue to adopt the going
concern basis in preparing these condensed consolidated financial
statements.
In making an assessment as to whether the going concern
principle should be adopted, the directors have considered the
period starting with the date these condensed consolidated
financial statements were approved by the Board and ending on 31
December 2021.
The impact on the commercial aerospace segment following the
outbreak of COVID-19 is substantial and unprecedented, affecting
many areas of the Group's business including its employees, supply
chain and customer base. To model the expected impact on the Group,
a base case model has been developed which reflects its current
view of the most likely impact on the Group's revenues, the extent
to which appropriate mitigating actions on costs can be implemented
and how this impacts cash flows over the next five years. In
assessing whether the going concern principle remains appropriate,
the Group has used the output from this model covering the period
to 31 December 2021. The Group has also considered the liquidity
available to it over the period to 31 December 2021.
Base case scenario
The base case scenario assumes civil aftermarket and OE levels
recover progressively from a low point expected to take place in
Q2/Q3 2020, with no second wave of global lock down restrictions.
An increasing return of passenger flights is anticipated, with RPKs
returning to pre-COVID-19 levels in 2024. Civil OE deliveries,
which reflect the emerging build rates from the Group's customer
base, remain below 2019 levels until the end of the five year
forecast period. The base case assumes continued robust funding of
defence expenditure, particularly by the US government, and that
energy and other markets are not largely impacted by COVID-19 over
the five year forecast period.
The Group has already made good progress in executing the
actions announced in April 2020 to reduce its cost base, preserve
cash and resize the business for H2 2020 and 2021. The reduction in
the Group's global workforce has proceeded as planned. Inventory
reduction remains a key objective for the Group and cash savings
from this initiative are assumed in the second half of 2020 and
into early 2021. Overall, the Group is on track to reduce cash
outflows by around GBP400m to GBP450m in 2020 and these have been
assumed in the base case model.
Liquidity
At 30 June 2020. The Group had the following committed credit
facilities with its relationship banks and private placement
investors:
-- A USD 750m syndicated revolving credit facility which matures
in September 2021. On 11 May 2020, the Group additionally secured a
forward start on its revolving credit facility, with the signing of
a new one year USD 575m multi-currency facility maturing in
2022;
-- Two sterling denominated committed bilateral facilities
totalling GBP145m and a USD 125m committed bilateral facility.
These facilities all mature in 2023;
-- USD 600m loan notes issued to private placement investors, of
which USD 300m are due for repayment in 2023 and USD 300m in 2026;
and
-- USD 275m loan notes issued to private placement investors, of
which USD 150m are due for repayment in H2 2020 and USD 125m in
2022.
Additionally, the Group has been confirmed as an eligible issuer
under the Bank of England's and HM Treasury's Covid Corporate
Financing Facility ('CCFF'), under which the Group can draw up to
GBP600m. The Group has issued commercial paper under this facility
totalling GBP129.9m at June 30, 2020.
During the period covered by the going concern assessment, the
Group has assumed that no additional refinancing is carried out.
Using exchange rates prevailing at 30 June 2020, the following
committed credit facilities have therefore been assumed:
30 June 31 December
2020 2021
GBPm GBPm
Revolving syndicated credit facility 611.0 468.4
Bilateral facilities 246.8 246.8
Notes issued to private placement investors 712.8 590.6
CCFF 129.9 -
-------- ------------
Committed credit facilities 1,700.5 1,305.8
======== ============
Uncommitted liquidity of up to GBP600m under the CCFF remains
available to draw until May 2021, for up to a one year term.
At 30 June 2020, the Group's net borrowings, excluding finance
lease obligations, were GBP845.0m and it had GBP855.5m of headroom
against its committed facilities.
Downside scenario ("Severe but plausible scenario")
Due to the inherent uncertainty over the extent and pace of a
recovery in the Group's commercial aerospace markets in particular,
and to stress test the assumption that the going concern principle
remains appropriate, the Group has also developed a downside
scenario covering the period to 31 December 2021. Under this
scenario, waves of COVID-19 infection occur globally, impacting
consumers' ability and confidence to resume traveling, with an
effective vaccine not widely available during the period and
reduced consumer discretionary spending power. Weakening RPKs are
assumed to result in production build rates for OEM deliveries to
airlines being depressed further. Additionally, as a result of the
wider impact of a more prolonged pandemic, higher levels of
government borrowing lead to defence spending being constrained.
These result in the Group's civil revenues falling by 15% in 2021,
when measured against the 2020 base case assumption. Defence
markets experience growth in 2021, but this is constrained to
levels of assumed inflation. Energy and other markets remain
depressed as the weaker economic environment results in reduced
investment in oil and gas markets.
The downside scenario assumes the Group takes further
appropriate mitigating actions to reduce its cost base and to
preserve cash flows. The continued availability of the CCFF during
the going concern assessment period has not been assumed.
Under the downside scenario, the Group has sufficient financing
to be able to meet its obligations as they fall due in the period
under assessment.
Covenants
Credit facilities provided by the Group's relationship banks and
private placement investors contain two financial ratio covenants -
net debt/EBITDA and interest cover. The covenant calculations are
drafted to protect the Group from potential volatility caused by
accounting standard changes, sudden movements in exchange rates and
exceptional items. This is achieved by measuring EBITDA on a frozen
GAAP basis, excluding exceptional operating items and retranslating
net debt and EBITDA at similar average exchange rates. Covenant
ratios are required to be measured on a trailing 12 month basis
twice a year (at June 30 and December 31), with net debt/EBITDA not
to exceed 3.5x and interest cover to be not less than 3.0x. In the
downside scenario, the Group does not breach either of these ratios
during the going concern assessment period.
Principal risks
The Group has also considered whether its principal risks (as
described in the Risks and Uncertainties section of these condensed
consolidated financial statements) have been appropriately
reflected in the downside scenario. In making this assessment, the
Group has considered the likelihood of the risks taking place
during the period and, were they to occur, the extent to which the
impacts would be experienced during this period and the timing of
mitigation actions available to the Group. The Group has concluded
that the downside scenario has been appropriately adjusted to
reflect these risks.
Conclusion
Based on the above, the directors have therefore concluded it is
appropriate to adopt the going concern principle in these condensed
consolidated financial statements.
2. Accounting policies
The condensed consolidated financial statements have been
prepared using the same accounting policies adopted in the Group's
financial statements for the year ended 31 December 2019 except as
described below.
A number of amendments to, and the interpretation of, existing
accounting standards became effective during the period, none of
which have had a significant impact on the condensed consolidated
financial statements.
In applying the Group's accounting policies, the Group is
required to make certain judgements and estimates concerning the
future. These judgements and estimates are regularly reviewed and
revised as necessary. The judgements and estimates that have the
most significant effect on amounts included in the condensed
consolidated financial statements are set out in note 3.
The tax charge for the period has been calculated using the
expected effective tax rates for each tax jurisdiction for the year
ended 31 December 2020. These rates have been applied to the
pre--tax profits made in each jurisdiction for the six months ended
30 June 2020.
3. Critical accounting judgements and estimates
In applying its accounting policies, the Group is required to
make certain judgements and estimates concerning the future. These
are regularly reviewed and revised as necessary.
The COVID-19 pandemic has had a dramatic impact in the period on
the commercial aerospace industry, with significant uncertainty
over the duration of the current disruption to air traffic
movements and the eventual pace and extent of the recovery. Forward
looking assessments of Revenue Passenger Kilometres (RPKs) and new
aircraft production build rates, which impact the Group's civil
aftermarket and OE revenues and hence its cash flows, are therefore
subject to significant estimation uncertainty.
The area most impacted by this estimation uncertainty is the
assessment by the Group of the extent to which goodwill has become
impaired. Details on the assumptions made in making this
assessment, the impairment recognised and the sensitivities of the
amounts recorded to reasonably foreseeable changes in assumptions
are set out in note 14.
Forward looking assessments have also impacted the Group's
estimates of the recoverable value of development costs, net
realisable value of inventory and expected credit losses on trade
receivables. Note 8 sets out the impairment losses and other asset
write-downs recognised by the Group having completed these
assessments. Based on available current information, the Group does
not believe that any reasonably foreseeable changes in the
assumptions made would require a material change to the impairment
losses or other asset write downs recognised in respect of these
individual asset classes.
An update on the critical accounting judgements and estimates
disclosed in the Group's 2019 Annual Report is set out below:
-- Critical accounting judgements
The Group's judgement as to when development costs meet the
criteria to be recognised as intangible assets remains a critical
judgement for the current period. The estimation uncertainty
described above has been reflected in the Group's assessment in the
current period of when costs should be capitalised.
The other critical judgements disclosed in 2019 arose
specifically from the change in divisional structure implemented in
2019, how this impacted the level at which goodwill testing should
be performed and the reallocation of goodwill to the new CGUs and
groups of CGUs identified. These are no longer critical judgments
in 2020, following the completion of this restructuring in
2019.
-- Critical accounting estimates
The Group's critical estimates relating to retirement benefit
obligations, environmental provisions and income taxes remain
critical estimates. The estimates have not been significantly
impacted by the COVID-19 pandemic.
4. Segmental analysis
The Group manages its businesses under four customer-aligned
divisions: Airframe Systems, Engine Systems, Energy & Equipment
and Services & Support.
The key performance measure reviewed by the Chief Operating
Decision Maker ('CODM') is underlying operating profit. The CODM
has been identified as the Board.
Six months ended 30 June 2020:
Services Other
Airframe Engine Energy & * Total
Systems Systems & Equipment Support
GBPm GBPm GBPm GBPm GBPm GBPm
Gross segmental revenue 543.9 186.5 196.5 180.3 - 1,107.2
Inter-segment revenue (113.1) (58.2) (15.7) (3.4) - (190.4)
Revenue from external
customers 430.8 128.3 180.8 176.9 - 916.8
========= ========= ============= ========= ====== ========
At a point in time 411.3 120.3 90.9 172.0 - 794.5
Over time: Power by the
hour/Cost per brake landing 13.8 2.4 - 4.9 - 21.1
Over time: Other 5.7 5.6 89.9 - - 101.2
Revenue by basis of recognition 430.8 128.3 180.8 176.9 - 916.8
========= ========= ============= ========= ====== ========
Underlying operating
profit/(loss) ** 70.3 (9.7) 16.9 24.7 - 102.2
========= ========= ============= ========= ====== ========
Six months ended 30 June 2019 Restated ***:
Other
Airframe Engine Energy Services * Total
Systems Systems & Equipment & Support
GBPm GBPm GBPm GBPm GBPm GBPm
Gross segmental revenue 596.3 223.3 223.9 238.1 3.3 1,284.9
Inter-segment revenue (111.7) (64.1) (32.4) (5.6) (0.2) (214.0)
Revenue from external
customers 484.6 159.2 191.5 232.5 3.1 1,070.9
========= ========= ============= =========== ====== ========
At a point in time 462.0 156.1 118.4 232.5 3.1 972.1
Over time: Power by the
hour/Cost per brake landing 18.4 3.1 - - - 21.5
Over time: Other 4.2 - 73.1 - - 77.3
Revenue by basis of recognition 484.6 159.2 191.5 232.5 3.1 1,070.9
========= ========= ============= =========== ====== ========
Underlying operating
profit ** 101.6 4.7 21.6 33.0 0.2 161.1
========= ========= ============= =========== ====== ========
* Those businesses which were disposed of prior to the effective
date of the new divisional structure or were classified as held for
sale at that date, were presented separately as 'Other'.
** A detailed reconciliation of underlying operating profit to
operating profit is shown in note 6.
*** Prior period figures have been restated to reflect the
transfer of the external customer facing relationships for the UK
braking systems MRO business from Airframe Systems to Services
& Support with effect from 1 January 2020. The restatement
comprised external revenue of GBP13.7m and underlying operating
profit of GBP1.3m.
Analysis of segmental trading assets
31 December
30 June 2019
2020 Restated*
GBPm GBPm
Airframe Systems 1,219.6 1,147.1
Engine Systems 440.3 437.5
Energy & Equipment 266.6 306.8
Services & Support 97.9 77.6
Total segmental trading assets 2,024.4 1,969.0
Centrally managed trading assets ** 148.5 162.1
Goodwill (note 14) 1,655.3 1,966.6
Other intangible assets 406.4 424.0
Investments (note 16) 23.8 14.1
Derivative financial instruments - non-current
(note 19) 7.4 14.6
Deferred tax assets 32.3 23.3
Derivative financial instruments - current
(note 19) 1.0 3.8
Current tax recoverable 7.9 11.1
Cash and cash equivalents 236.9 155.3
Total assets 4,543.9 4,743.9
======== ============
* The prior year figures have been restated to reflect the
transfer of the external customer facing relationships for the UK
braking systems MRO business from Airframe Systems to Services
& Support with effect from 1 January 2020.
** Centrally managed trading assets principally include amounts
recoverable from insurers and other third parties in respect of
environmental matters relating to former sites, other receivables
and property, plant and equipment of central companies.
5. Operating income
Operating profit is stated after crediting:
Six months Six months
ended ended
30 June 30 June
2020 2019
GBPm GBPm
Amounts arising on the acquisition, disposal
and closure of businesses (note 28) 33.9 1.5
Gain on disposal of property, plant and equipment - 0.4
Net foreign exchange gains 0.4 -
Share of profit after tax of joint venture - 0.1
Other income 1.1 2.0
Operating income 35.4 4.0
=========== ===========
6. Reconciliations between profit and underlying profit
Underlying profit is used by the Board to monitor and measure
the underlying trading performance of the Group. It excludes
certain items as described below :
Six months Six months
ended ended
30 June 30 June
2020 2019
GBPm GBPm
Operating (loss)/profit (348.7) 91.4
Amounts arising on the acquisition, disposal
and closure of businesses (note 28) (33.9) (1.5)
Amortisation of intangible assets acquired
in business combinations (note 14) 45.0 44.9
Financial instruments (note 7) 38.0 15.3
Exceptional operating items (note 8) 401.8 11.0
-----------
Adjustments to operating profit * 450.9 69.7
Underlying operating profit 102.2 161.1
=========== ===========
(Loss)/profit before tax (368.4) 72.6
Adjustments to operating profit per above 450.9 69.7
Net interest expense on retirement benefit
obligations (note 9) 3.0 3.1
Adjustments to profit before tax 453.9 72.8
Underlying profit before tax 85.5 145.4
=========== ===========
(Loss)/profit for the period (344.3) 56.6
Adjustments to profit before tax per above 453.9 72.8
Tax effect of adjustments to profit before
tax (42.2) (16.0)
----------- -----------
Adjustments to profit for the period 411.7 56.8
Underlying profit for the period 67.4 113.4
=========== ===========
* Of the adjustments to operating profit, GBP31.6m (2019:
GBP4.3m) relating to exceptional operating items has been charged
to cost of sales with the balance of GBP419.3m (2019: GBP65.4m)
included within net operating costs.
7. Financial instruments
To ensure appropriate and timely commercial decisions are made
as to when and how to mitigate the Group's foreign currency and
interest rate exposures, gains and losses arising from the marking
to market of financial instruments that are not hedge accounted are
excluded from underlying profit measures.
Although the Group uses foreign currency forward contracts to
hedge against foreign currency exposures, it has decided that the
costs of meeting the extensive documentation requirements to be
able to apply hedge accounting under IFRS 9 'Financial Instruments'
are not merited. The Group's underlying profit figures exclude
amounts which would not have been recorded if hedge accounting had
been applied.
Where interest rate derivatives qualify to be hedge accounted,
any difference 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.
Six months Six months
ended ended
30 June 30 June
2020 2019
GBPm GBPm
Movement in fair value of foreign currency forward
contracts 40.2 3.0
Impact of retranslating net foreign currency
assets and liabilities at spot rate 2.3 1.4
Movement in fair value of interest rate derivatives (0.9) (2.2)
Movement in fair value of fixed rate borrowings
due to interest rate risk (note 19) 1.1 1.8
Movement in fair value of cross currency derivatives (4.4) 11.6
Movement in fair value of treasury lock derivative (0.3) (0.3)
Financial instruments - Loss (note 6) 38.0 15.3
=========== ===========
8. Exceptional operating items
Items which are significant by virtue of their size or nature;
are considered non-recurring; and which are excluded from the
underlying profit measures used by the Board to measure the
underlying performance of the Group, are classified as exceptional
operating items.
Income statement Cash expenditure
------------------------ ------------------------
Six months Six months Six months Six months
ended ended ended ended
30 June 30 June 30 June 30 June
2020 2019 2020 2019
Note GBPm GBPm GBPm GBPm
Impairment losses and other
asset write-offs a 373.2 - - -
COVID - 19 incremental
non-recurring costs b 13.2 - 8.7 -
Site consolidations c 14.8 8.9 18.7 9.6
Business restructuring costs 0.6 2.1 0.7 2.3
Exceptional operating items 401.8 11.0 28.1 11.9
=========== =========== =========== ===========
a. The Group has recognised material impairment losses and other
reductions in asset values arising from the current uncertainty
facing the commercial aerospace industry. These have been
aggregated and classified as an exceptional operating item given
their size and that they all arise from the unprecedented
circumstances that the industry has experienced in 2020. This
treatment is consistent with the Group's policy, with impairment
losses and other asset write downs following the cancellation of
the Dassault 5X programme treated as an exceptional operating item
in 2017.
Following the COVID-19 outbreak, governments have imposed strict
travel restrictions contributing to a dramatic reduction in flight
numbers and passenger load factors, the parking by operators of
record numbers of aircraft, several airlines filing for bankruptcy
and OE customers significantly reducing production levels. These
events, together with uncertainty over the extent and pace of
recovery in the sector, have impacted the reliability of forecasts
for commercial aerospace more generally and also for specific
aircraft platforms. Whilst management believes the COVID-19
outbreak is directly responsible for substantially all of the
amounts recorded, it recognises the inherent difficulties in making
a reliable estimate of the impact directly attributable to the
pandemic and accordingly has not disclosed the amounts as related
solely to COVID-19 or attempted to quantify the COVID-19 specific
element.
The amounts recognised in the period comprise:
Cost of Operating Total
sales costs
GBPm GBPm GBPm
Impairment of goodwill (note 14) - 341.1 341.1
Impairment of development costs
(note 14) - 8.2 8.2
Write down of inventory to net realisable
value 16.0 - 16.0
Expected credit losses on trade
receivables - 7.9 7.9
Impairment losses and other asset
write-offs 16.0 357.2 373.2
=========== ============= =========
The tax credit in respect of these items was GBP19.0m.
The amounts recognised represent the largest single exceptional
item recorded by the Group in its history and given the
significance of the amounts involved the Group has chosen to
present these separately on the face of the income statement as it
believes this presents better information for shareholders.
Under IAS 36 'Impairment of assets', reversal of goodwill
impairment losses recognised in interim financial statements is not
permitted. However, to the extent reversals of any other amounts
recognised in this period are required in future accounting
periods, such reversals will be treated consistently as exceptional
operating items.
b. In 2020, given its significance, the Group has excluded
income and expenditure directly attributable to the global COVID-19
pandemic, and which is not expected to recur in future periods,
from its underlying profit measures. This principally relates to
severance costs arising from the Group's announcement on 23 April
2020 that it would be reducing its global workforce by around 15%
in response to the COVID-19 outbreak. Other amounts include
additional cleaning costs; the purchase of personal protective
equipment; and shift premiums and other associated costs arising
from social distancing measures. Of the amounts classified as
exceptional operating items, GBP7.8m has been recognised within
cost of sales, with the balance of GBP5.4m recognised within other
operating costs. The tax credit in respect of these items was
GBP2.9m.
c. Delivery of the Group's strategy includes the restructuring
of its cost base to deliver operational improvements. The exclusion
from underlying profit measures (see note 6) of significant items
arising from site consolidations and business restructuring is
designed by the Board to align short-term operational decisions
with this longer-term strategy.
Amounts principally relate to costs incurred in respect of the
Group's previously announced plans to reduce its footprint by the
end of 2021. Cumulative costs since the announcement are GBP78.5m.
In 2020, costs are principally in respect of the move to the new
facility 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 and the move
of one of its Energy & Equipment businesses following the
disposal of a number of its product lines in 2019. Of the amounts
classified as exceptional operating items, GBP7.8m has been
recognised within cost of sales with the balance of GBP7.0m
recognised within other operating costs. The tax credit in respect
of these items was GBP3.2m.
9. Net finance costs
Six months Six months
ended ended
30 June 30 June
2020 2019
GBPm GBPm
Interest on bank deposits 0.1 0.1
Unwinding of interest on other receivables 0.1 0.3
Other finance income 0.1 0.2
Finance income 0.3 0.6
Interest on bank borrowings 0.2 1.0
Interest on senior notes 13.7 13.5
Interest on lease liabilities 3.3 2.1
Unwinding of discount on provisions 0.4 0.8
Net interest expense on retirement benefit
obligations (note 6) 3.0 3.1
Amortisation of debt issue costs 0.3 0.4
Less: amounts capitalised in the cost of
qualifying assets (note 14) (0.9) (1.5)
------ ------
Finance costs 20.0 19.4
Net finance costs 19.7 18.8
====== ======
10. Tax
The statutory tax credit for the period was GBP24.1m (2019:
charge of GBP16.0m) based on the reported loss before tax of
GBP368.4m (2019: profit of GBP72.6m). The disposal of the Meggitt
Training Systems business (note 28), did not have a significant
impact on the statutory tax charge for the current period as the
taxable gain calculated under US tax law was minimal. The
exceptional impairment losses and other asset write-offs in the
current period of GBP373.2m (note 8) resulted in a non-underlying
tax credit of GBP19.0m, reflecting the net adjustment to deferred
tax assets and liabilities.
Based on underlying profit before tax of GBP85.5m (2019:
GBP145.4m) the Group's underlying tax rate for the current period
was 21.2% (2019: 22.0%).
The Spring Budget 2020 announced that the main rate of
corporation tax in the UK applicable from 1 April 2020 will remain
at 19%, rather than the previously enacted reduction to 17%. As
this change was substantively enacted during the period, it has
been reflected in these financial statements. The change did not
have a significant impact on the tax charge for the current
period.
11. Earnings per ordinary share
For the period, the loss per ordinary share is calculated by
dividing the loss attributable to owners of the Company of
GBP344.3m (2019: profit of GBP56.6m) by the weighted average number
of shares in issue during the period of 777.0m (2019: 772.9m). The
weighted average number of shares used excludes shares bought by
the Group and held during the period by an independently managed
Employee Share Ownership Plan Trust. The weighted average number of
own shares excluded is 3.4m shares (2019: 4.0m).
Underlying EPS is based on underlying profit for the period
(note 6) and is reconciled to basic (loss)/earnings per share
below:
Six months Six months
ended ended
30 June 30 June
2020 2019
Pence Pence
Basic (loss)/earnings per share (44.3) 7.3
Adjust for the effects of:
Amounts arising on the acquisition, disposal
and closure of businesses (4.4) (0.1)
Amortisation of intangible assets acquired
in business combinations 4.6 4.5
Financial instruments 4.0 1.6
Exceptional operating items 48.5 1.1
Net interest expense on retirement benefit
obligations 0.3 0.3
Underlying basic earnings per share 8.7 14.7
=========== ===========
Diluted loss per share for the period is 43.7p (2019: earnings
per share of 7.2p). The calculation of diluted (loss)/earnings per
share 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 is 788.2m (2019: 784.7m). Underlying diluted EPS for
the period is 8.5p (2019: 14.5p). The calculation of underlying
diluted EPS is based on underlying profit (note 6) and the same
weighted average number of shares used in the calculation of
diluted (loss)/earnings per share.
12. Dividends
On the 27 March 2020, the Group announced that the Board had
decided that it was prudent to withdraw the recommendation to pay
the final dividend in respect of the year ended 31 December 2019 of
11.95 pence per share. That action, together with a series of
significant measures to reduce costs and tightly manage cash flow,
was taken to further strengthen the financial position and
liquidity of the Group. The directors do not recommend the payment
of an interim dividend in respect of 2020.
During the 6 months to June 2019, the final dividend of 11.35p
per ordinary share in respect of the year ended 31 December 2018
was paid. The total cost of the final dividend was GBP87.5m and was
paid in cash. During the same period, the directors declared an
interim dividend of 5.55p per ordinary share which was paid on 4
October 2019. As there was no legal obligation to make the dividend
payment, the dividend cost of GBP42.9m was not recorded as a
liability at the balance sheet date.
13. Related party transactions
The remuneration of key management personnel of the Group, which
is defined as members of the Board and the Group Executive
Committee, is set out below.
Six months Six months
ended ended
30 June 30 June
2020 2019
GBPm GBPm
Salaries and other short-term employee benefits 2.9 3.2
Share-based payment expense (0.9) 1.9
-----------
Total 2.0 5.1
=========== ===========
14. Intangible assets
Programme
Development participation Other intangible
Goodwill costs costs assets
GBPm GBPm GBPm GBPm
At 1 January 2020 1,966.6 575.9 18.0 503.6
Exchange rate adjustments 114 . 6 37.3 1.3 29.6
Additions - 18.8 2.1 10.9
Business disposed (note
28) (84.8) (19.7) - (0.1)
Disposals - - - (0.1)
Interest capitalised (note
9) - 0.9 - -
Transfers - 0.3 - (0.1)
Impairment losses (note
8a) (341.1) (8.2)
Amortisation * (16.6) (0.6) (54.6)
-------- ------- ------ -------
At 30 June 2020 1,655.3 588.7 20.8 489.2
======== ======= ====== =======
* Amortisation of other intangible assets includes GBP45.0m
(2019: GBP44.9m) in respect of intangible assets acquired in
business combinations and which has been excluded from underlying
operating profit (note 6).
Goodwill
On 19 March 2020, the Group released a trading update in
response to the COVID-19 pandemic including an announcement that in
light of the highly fluid market and global macro-economic
situation, it was too early to provide earnings guidance for the
remainder of the current financial year. The Group considers this
to be the date a trigger event under IAS 36 "Impairment of Assets"
occurred and has therefore performed an additional impairment test
of its goodwill balances at the end of March, the closest month end
date to this announcement. Under the Group's annual impairment
testing cycle, goodwill would normally be tested in Q4 2020.
For the purpose of impairment testing, the Group has used
value-in-use calculations to determine recoverable amounts as it
does not believe that reliable estimates of fair value less costs
of disposal exist given the current market uncertainty. No changes
were made in 2020 to the level at which impairment testing was
performed. The key assumptions used in the value-in-use
calculations were:
-- Discount rates applied to future cash flows
The Group has used the same methodology to determine pre-tax
discount rates to those disclosed in its 2019 Annual Report. The
pre-tax discount rates derived in 2020 were as follows:
Airframe Systems 10.7%
Engine Systems 9.1%
Services & Support 10.4%
CGUs within Energy & Equipment 8.1% to 11.0%
-- Cash flows covered by management estimates
Estimates of cash flows prepared and approved by management
subsequent to the COVID-19 outbreak and which cover a five year
period have been used. The Group does not believe there is
sufficient reliability over forecasts in excess of five years for
longer periods to be used for impairment testing, even though as a
result it is possible that elements of the aerospace recovery will
not be captured by using this shorter period.
Given the current uncertainty affecting forecasts for the
markets in which the Group operates, it does not consider the
approach adopted in prior periods of using a single set of cash
flows as its best estimate to be appropriate. Accordingly in 2020,
the Group has prepared cash flow forecasts covering a number of
potential scenarios which have then been probability weighted to
derive an expected value for the cash flows to be used for
impairment testing. The three scenarios modelled reflect different
assumptions as to the extent and pace of recovery in the civil
aerospace sector in particular, although the impacts on other
markets of the economic uncertainty arising from COVID-19 were also
considered.
The base case described in note 1 was one of the models used. A
variant of the base case has also been developed which, whilst
assuming revenue levels consistent with those reflected in the base
case, assumes a slower level of gross margin improvement over the
five years. In aggregate a 70% probability has been assigned to
these two base scenarios. The third scenario, to which a 30%
probability has been assigned, uses the downside scenario developed
for the period to the end of 2021 as part of the going concern
assessment (note 1), and then assumes a gradual recovery from 2022
onwards, with gross margin improvements year on year consistent
with the base case variant model. Under this scenario, revenues in
year five are approximately 10% lower than in either of the base
case models. The sensitivity of the amounts recorded as an
impairment charge to the probabilities assigned to the three
scenarios is such that increasing to 80% or reducing to 60% the
percentage applied to the two base scenarios would have resulted in
a reduction or increase in the impairment charge of GBP70.0m
respectively.
-- Growth rates used for periods beyond those covered by management estimates
The Group's assumptions reflect a number of different inputs:
its own estimates taking into account the long term nature of the
industry in which the CGUs operate and their sole source positions,
industry estimates where available, the impacts of climate change
and other potential structural changes in markets and long term
inflation forecasts for the countries in which the CGUs operate.
These different assumptions were probability weighted to derive an
expected growth rate and the lower of this value and the long term
inflation forecasts for the countries in which the CGUs operate was
used. Growth rates used range from 0.7% to 2.2%.
As a result of the impairment test, a charge of GBP341.1m has
been recognised as an exceptional operating item (note 8a). The
cumulative impairment charge recognised to date is GBP341.1m (2019:
GBPNil). The impairment charge in the period is analysed by CGU or
group of CGUs as follows:
GBPm
Airframe Systems 124.4
Engine Systems 202.9
Energy & Equipment - Fribourg 13.8
------
Total (note 8a) 341.1
======
It is reasonably foreseeable that the adverse changes in
assumptions set out below could arise and would lead to an
increased impairment charge in future accounting periods:
-- Discount rates applied to future cash flows increase by 50 basis points
This would lead to an additional impairment of GBP195.8m,
comprising Airframe Systems of GBP154.9m, Engine Systems of
GBP36.8m and Energy & Equipment - Fribourg of GBP4.1m. Goodwill
relating to other CGUs and groups of CGUs would not be
impacted.
-- Probability weighted cash flows move adversely by 5% over the five year period
This would lead to an additional impairment of GBP213.0m,
comprising Airframe Systems of GBP175.2m, Engine Systems of
GBP31.6m and Energy & Equipment - Fribourg of GBP6.2m. Goodwill
relating to other CGUs and groups of CGUs would not be
impacted.
-- Long term growth rates reduce by 50bps
This would lead to an additional impairment of GBP181.8m,
comprising Airframe Systems of GBP142.7m, Engine Systems of
GBP35.1m and Energy & Equipment - Fribourg of GBP4.0m. Goodwill
relating to other CGUs and groups of CGUs would not be
impacted.
It is also reasonably foreseeable that favourable movements in
assumptions of similar levels to those adverse movements described
could occur. However, under IAS 36 'Impairment of assets', amounts
previously recognised as a goodwill impairment charge are not
permitted to be reversed.
Development costs
During the period an impairment charge of GBP8.2m (2019: GBPNil)
has been recognised (note 8a).
The programmes with the largest capitalised development cost
balances are the Airbus A220 (GBP98.5m), Bombardier Global 7500
(GBP53.7m), Embraer Legacy 450/500 (GBP45.1m), Irkut MC-21
(GBP43.8m) and Gulfstream G500/600 (GBP32.2m). No reasonably
foreseeable change in cash flow estimates for any of these
platforms would result in a material impairment charge being
recognised. In making this assessment, the Group has assumed no
cancellation of any platform occurs.
15. Property, plant and equipment
Land and Plant, equipment Right-of-use
buildings and vehicles assets(*) Total
GBPm GBPm GBPm GBPm
At 1 January 2020 126.1 207.3 116.0 449.4
Exchange rate adjustments 7.6 12.9 4.1 24.6
Additions 14.5 26.0 6.5 47.0
Business disposed (note
28) (0.4) (2.4) (4.0) (6.8)
Disposals - (0.1) (0.1) (0.2)
Transfers 0.3 (0.4) - (0.1)
Depreciation ** (3.9) (16.4) (8.2) (28.5)
------ ------- ------ -------
At 30 June 2020 144.2 226.9 114.3 485.4
====== ======= ====== =======
* The net book amount comprises property of GBP112.3m (December
2019: GBP113.5m) and other assets of GBP2.0m (December 2019:
GBP2.5m).
** Depreciation includes GBP1.7m (2019: GBP0.1m) in respect of
amounts charged to exceptional operating items and which has been
excluded from underlying operating profit (note 6).
16. Investments
The Group's investments in its joint ventures, Meggitt UTC
Aerospace Systems, LLC and HiETA Technologies Limited are accounted
for using the equity method and are stated as follows:
GBPm
At 1 January 2020 14.1
Additions * 10.3
Exchange rate adjustments 1.1
Share of loss after tax (1.7)
At 30 June 2020 23.8
======
* In January 2020, the Group acquired an investment in HiETA
Technologies Ltd, a UK company with world-leading capabilities in
metal additive manufacturing and a focus on developing new ways to
make heat exchangers using additive manufacturing technology. The
investment comprised GBP7.6m paid in cash during the period and
contingent consideration of GBP2.7m.
17. Lease Liabilities
The Group leases various factories, warehouses, offices, plant
and equipment. The following amounts are included in these
condensed consolidated financial statements in respect of its
leases:
Six months Six months
ended ended
30 June 30 June
2020 2019
GBP'm GBP'm
Depreciation charge for right-of-use assets
(note 15) 8.2 7.3
Additions to right-of-use assets (note 15) 6.5 19.6
Net book amount of right-of-use assets (note
15) 114.3 91.7
Interest on lease liabilities (note 9) 3.3 2.1
Expense related to short-term leases and low-value
assets 0.1 0.1
Net cash outflow* 8.0 9.6
=========== ===========
* Comprises capital payments of GBP8.2m (2019: GBP7.5m) and
interest payments of GBP3.3m (2019: GBP2.1m), less a reverse lease
premium received of GBP3.5m (2019: GBPNil) relating to the new
Ansty Park site.
18. Bank and other borrowings
Current Non-current Total
GBPm GBPm GBPm
At 1 January 2020 219.4 694.5 913.9
Exchange rate adjustments 15.9 54.1 70.0
Proceeds 130.6 263.9 394.5
Repayments (101.8) (192.6) (294.4)
Other non-cash movements (0.9) 0.4 (0.5)
Debt issue costs paid - (1.6) (1.6)
At 30 June 2020 263.2 818.7 1,081.9
======== ============ ========
30 June 31 December
2020 2019
Analysed as: GBPm GBPm
Bank loans 130.8 0.2
Other loans* 132.4 219.2
-------- ------------
Total current 263.2 219.4
======== ============
Bank loans 223.5 141.4
Other loans 595.2 553.1
-------- ------------
Total non-current 818.7 694.5
======== ============
* Includes at 30 June 2020, USD150.0m senior notes which are due for repayment in October 2020.
19. Financial Instruments - fair value measurement
For trade and other receivables, contract assets, cash and cash
equivalents, trade and other payables and contract liabilities,
fair values approximate to book values due to the short maturity
periods of these financial instruments. For trade and other
receivables and contract assets, allowances are made within their
book value for credit risk. As required by IFRS 7 'Financial
Instruments: Disclosures', a comparison of book values and fair
values for certain other financial instruments is provided
below:
Book value Fair value
30 June 31 December 30 June 31 December
2020 2019 2020 2019
GBPm GBPm GBPm GBPm
Derivative financial instruments
- non-current 7.4 14.6 7.4 14.6
Derivative financial instruments
- current 1.0 3.8 1.0 3.8
Financial assets 8.4 18.4 8.4 18.4
Derivative financial instruments
- current (22.0) (16.5) (22.0) (16.5)
Bank and other borrowings
- current (263.2) (219.4) (263.8) (220.7)
Derivative financial instruments
- non-current (25.5) (4.6) (25.5) (4.6)
Bank and other borrowings
- non-current (818.7) (694.5) (835.5) (702.7)
---------- ------------ ---------- ------------
Financial liabilities (1,129.4) (935.0) (1,146.8) (944.5)
---------- ------------ ---------- ------------
Total (1,121.0) (916.6) (1,138.4) (926.1)
========== ============ ========== ============
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. Credit risk is not
significant for these instruments.
Floating rate bank and other borrowings are classified as level
1 in the fair value measurement hierarchy as the fair values
approximate to book values due to the short maturity periods of
these liabilities. Fixed rate bank and other borrowings measured at
fair value, are classified as level 3 in the fair value measurement
hierarchy, as they have 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 values attributable to interest rate risk
have 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 values
attributable to credit risk have 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 fixed rate bank and other borrowings which are held at
amortised cost, but for which fair values are provided in the table
above.
There were no transfers of assets or liabilities between levels
of the fair value hierarchy during the period.
Cumulative unrealised changes in fair value of bank and other
borrowings, designated as fair value through profit and loss,
arising from changes in credit risk are as follows:
Six months Six months
ended ended
30 June 30 June
2020 2019
GBPm GBPm
Fair value at 1 January 0.3 0.3
(Gain)/loss recognised in other comprehensive
income (2.2) 0.6
----------- -----------
Fair value at 30 June - arising from changes
in credit risk (1.9) 0.9
=========== ===========
The difference between fair values and contractual amounts at
maturity of bank and other borrowings, designated as fair value
through profit and loss, is as follows:
31
30 June December
2020 2019
GBPm GBPm
Fair value 148.8 234.6
Difference between fair value and contractual
amount at maturity (6.2) (7.5)
-------- ----------
Contractual amount payable at maturity 142.6 227.1
======== ==========
Changes in fair value of bank and other borrowings classified as
level 3 in the hierarchy are as follows:
Six months Six months
ended ended
30 June 30 June
2020 2019
GBPm GBPm
At 1 January 234.6 242.7
Exchange rate adjustments 14.9 0.7
Settled on maturity (99.5) -
Loss recognised in net operating costs (note
7) 1.1 1.8
(Gain)/loss recognised in net finance costs (0.1) 0.1
(Gain)/loss due to changes in credit risk recognised
in other comprehensive income (2.2) 0.6
----------- -----------
At 30 June 148.8 245.9
=========== ===========
The largest movement in credit spread seen in a six month period
since inception of the borrowings is 100 basis points. A 100 basis
point movement in the credit spread used as an input in determining
fair values at 30 June 2020, would impact other comprehensive
income by approximately GBP2.0m.
20. Provisions
30 June 31 December
2020 2019
GBPm GBPm
Environmental * 68.3 66.7
Onerous contracts 17.5 13.3
Warranty costs 16.0 14.8
Other 7.2 5.8
Total 109.0 100.6
======== ============
Analysed as:
Current 48.5 36.2
Non-current 60.5 64.4
-------- ------------
Total 109.0 100.6
======== ============
* Included within other receivables is GBP18.3m (December 2019:
GBP17.0m) in respect of amounts recoverable from insurers and other
third parties. During the period, GBPNil (June 2019: GBP7.4m) was
received.
During the period, expenditure of GBP8.3m (June 2019: GBP19.5m)
was incurred, of which GBP3.8m (June 2019: GBP12.7m) related to
environmental provisions. The charge to the income statement in the
period in respect of additional provisions created was GBP10.5m
(June 2019: GBP9.5m) and the credit to the income statement in
respect of the reversal of unused amounts was GBP1.9m (June 2019:
GBP1.0m).
21. Retirement benefit obligations
30 June 31 December
2020 2019
GBPm GBPm
Amounts recognised in the balance sheet:
Present value of liabilities 1,471.4 1,347.5
Fair value of assets (1,145.1) (1,079.6)
Total 326.3 267.9
========== ============
Analysis of retirement benefit obligations:
Pension schemes 272.7 222.0
Healthcare schemes 53.6 45.9
---------- ------------
Total 326.3 267.9
========== ============
Key financial assumptions:
UK Scheme:
Discount rate 1.60% 2.05%
Inflation rate 2.90% 3.00%
Salary increases 2.90% 2.85%
21.6 to
Current life expectancy - Male aged 65 (years) 21.6 to 23.4 23.4
Overseas Schemes*:
Discount rate 2.45% 3.10%
19.8 to
Current life expectancy - Male aged 65 (years) 19.8 to 20.6 20.6
* Provided in respect of the most significant overseas schemes.
Cash contributions paid during the period were GBP14.8m (June
2019: GBP23.6m) including deficit reduction payments of GBP7.1m
(June 2019: GBP17.2m).
22. Issued share capital
30 June 31 December
2020 2019
No. m No. m
Allotted and fully paid 780.7 777.5
======== ============
The increase in the number of shares during the period relates
to shares issued on the exercise of Executive share awards and
Sharesave awards.
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 believe that the probability
of an outflow of economic benefits arising from these guarantees is
remote.
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
30 June 31 December
2020 2019
GBPm GBPm
Contracted for but not incurred:
Intangible assets 3.6 3.7
Property, plant and equipment 46.2 46.9
-------- ------------
Total 49.8 50.6
======== ============
25. Cash inflow from operations
Six months Six months
ended ended
30 June 30 June
2020 2019
GBPm GBPm
(Loss)/profit for the period (344.3) 56.6
Adjustments for:
Finance income (note 9) (0.3) (0.6)
Finance costs (note 9) 20.0 19.4
Tax (note 10) (24.1) 16.0
Depreciation (note 15) 28.5 27.5
Amortisation and impairment losses (note
14) 421.1 68.8
Loss/(gain) on disposal of property, plant
and equipment 0.1 (0.4)
Gain on disposal of businesses before disposal
expenses (note 28) (38.1) (3.0)
Financial instruments - Loss (note 7) 38.0 15.3
Impact of retranslating net foreign currency
cash at spot rate 0.7 (4.5)
Share of loss/(profit) after tax of joint
venture 1.7 (0.1)
Change in carrying value of assets held for
sale to date of disposal - 0.6
Retirement benefit obligation deficit payments
(note 21) (7.1) (17.2)
Share-based payment (credit)/charge (3.7) 6.4
Changes in working capital (102.1) (79.3)
-----------
Cash (outflow)/inflow from operations (9.6) 105.5
=========== ===========
The Board uses free cash flow to monitor and measure the
underlying trading cash performance of the Group. It is reconciled
to cash from operating activities below:
Six months Six months
ended ended
30 June 30 June
2020 2019
GBPm GBPm
Cash (outflow)/inflow from operating activities (50.5) 85.2
Add back cash outflow from business disposal
expenses 2.7 0.9
Add back impact of retranslating net foreign
currency cash at spot rate (0.7) 4.5
Capitalised development costs (18.8) (25.1)
Capitalised programme participation costs (0.6) (1.2)
Purchase of intangible assets (10.8) (3.7)
Purchase of property, plant and equipment (46.6) (33.4)
Proceeds from disposal of property, plant and
equipment 0.3 21.6
Reverse lease premium received 3.5 -
----------- -----------
Free cash (outflow)/ inflow (121.5) 48.8
=========== ===========
26. Movements in net debt
Six months Six months
ended ended
30 June 30 June
2020 2019
GBP'm GBP'm
At 1 January 911.2 1,074.1
Cash outflow/(inflow) from operating activities 50.5 (85.2)
Cash (inflow)/outflow from investing activities (28.2) 34.6
Dividends paid to Company's shareholders (note
12) - 87.5
Lease liabilities disposed with businesses
(note 28) (4.5) -
Lease liabilities entered 6.5 15.9
Exchange rate adjustments 65.2 (5.7)
Other movements (0.5) 3.0
----------- -----------
Total 1,000.2 1,124.2
=========== ===========
Analysed as:
Bank and other borrowings - current 263.2 110.5
Bank and other borrowings - non-current 818.7 1,023.9
Lease liabilities - current 16.2 17.2
Lease liabilities - non-current 139.0 89.0
Cash and cash equivalents (236.9) (116.4)
-----------
Total 1,000.2 1,124.2
=========== ===========
27. Components of other comprehensive income
Six months Six months
ended ended
30 June 30 June
2020 2019
GBPm GBPm
Arising in the period 144.0 16.4
Transferred to the income statement (note
28) (44.0) -
----------- -----------
Currency translation movements - Gain 100.0 16.4
=========== ===========
28. Business disposals
On 30 June 2020, the Group disposed of Meggitt Training Systems,
for a cash consideration of USD150.4m which included an adjustment
for net debt and working capital in the business at the date of
disposal. The transaction is consistent with the Group's strategy
to focus on businesses of scale in markets where its leading
positions offer greater potential for growth and operational
efficiencies.
Meggitt Training Systems was a leader in developing and
deploying advanced technology-enabled training systems. During the
year to 31 December 2019, it generated GBP104.0 million revenue,
had gross assets of GBP149.0 million and an underlying operating
profit of GBP11.2 million.
The business disposed was not a major line of business or
geographical area of operation of the Group. The net assets of the
business at the date of disposal were as follows:
Meggitt
Training
Systems
GBPm
Goodwill (note 14) 84.8
Development costs (note 14) 19.7
Other intangible assets (note
14) 0.1
Property, plant and equipment
(note 15) 6.8
Inventories 11.6
Trade and other receivables 9.4
Contract assets - current 22.6
Cash and cash equivalents 9.8
Trade and other payables -
current (15.5)
Contract liabilities - current (4.4)
Lease liabilities - current
(note 26) (1.5)
Provisions - current (0.1)
Deferred tax liabilities (7.8)
Lease liabilities - non-current
(note 26) (3.0)
Net assets 132.5
Currency translation gain transferred
from equity (note 27) (44.0)
Business disposal expenses 3.1
Deferred consideration receivable (4.5)
Gain on disposal of business 35.0
----------
Total consideration received
in cash 122.1
==========
C ash inflow arising on disposal:
Total consideration received
in cash 122.1
Less: cash and cash equivalents
disposed of (9.8)
-----------
Business disposed 112.3
Less: business disposal expenses
paid * (2.7)
-----------
Total cash inflow 109.6
===========
* Of the total business disposal expenses paid, GBP1.5m were in
respect of the disposal of Meggitt Training Systems, with the
balance relating to disposals in the prior year.
Delivery of the Group's strategy includes investment in
acquisitions that enhance its technology portfolio. The exclusion
of significant items arising from M&A activity is designed by
the Board to align short-term operational decisions with this
longer term strategy. Accordingly amounts arising on the
acquisition, disposal and closure of businesses are excluded from
underlying profit measures. These include gains or losses made on
the disposal or closure of businesses, adjustments to the fair
value of contingent consideration payable in respect of acquired
businesses or receivable in respect of disposed businesses and
costs directly attributable to the acquisition and disposal of
businesses.
Six months Six months
ended ended
30 June 30 June
2020 2019
GBPm GBPm
Gain on disposal of business before
disposal expenses (note 25) 38.1 3.0
Costs related to the disposal of businesses
in the current period (3.1) (1.2)
----------- -----------
Gain on disposal of businesses in the
current period 35.0 1.8
Costs related to the disposal of businesses
in prior periods (1.1) (0.3)
Amounts arising on the acquisition,
disposal and closure of businesses (note
6) 33.9 1.5
=========== ===========
29. Approval of interim management report
The interim management report was approved by the Board of
Directors on 7 September 2020.
30. Availability of interim management report
The interim management report will be available on the Group's
website www.meggitt.com from 8 September 2020. Paper copies of the
report will be available to the public from the Company's
registered office at Pilot Way, Ansty Business Park, Coventry, CV7
9JU.
RISKS AND UNCERTAINTIES
The Group's principal risks and uncertainties are disclosed in
its 2019 Annual Report. Our risk management process is a formal,
continuous process that requires risk owners to regularly reassess
risks and include learnings from events to drive improvements in
our control environment. During the first half of 2020 we have
considered the significant impact of COVID-19 on civil aviation,
our business and the industries in which it operates.
Most importantly, we have implemented specific COVID-19 safety
measures to ensure the safe operation of all our factories and
offices, and to limit the spread of COVID-19, including personal
protective equipment, social distancing and changes to shift
patterns, temperature checks, improved cleaning regimes and
increased remote working.
The Group has determined it is most appropriate to consider the
impact of COVID-19 on its principal risks individually, rather than
introducing a single, all-encompassing COVID-19 risk. The principal
risks that are most significantly impacted by COVID-19, together
with our mitigating actions are described below:
Risk of industry change: The Group's risk relating to industry
changes incorporated, among other scenarios, the risk of a
pandemic, a dramatic reduction in OE build rates and an oil price
shock, all of which have occurred in the first half of 2020. The
Group's response has included the deployment of our crisis
management team to ensure the safety and wellbeing of our employees
and on-going operational ability of our facilities. Strategically
the Group has set-up a CEO-led project team to reassess its end
markets and take prompt action to preserve cash and re-size the
business. These decisive actions are set out on pages 3 and 4.
Financing risk: The material reduction in civil demand has
reduced our cash inflows. The rapid actions taken in H1 2020 to
preserve cash, reduce cost and secure external liquidity, including
a new forward start RCF facility and access to the UK Government's
Covid Corporate Financing Fund ("CCFF"), are reported on pages 3
and 4. To assess the possibility of a covenant breach and our
ability to access financing on commercial terms, we have also
stress tested downside trading scenarios, as described in note 1 to
the condensed consolidated financial statements.
Business interruption risk: We are closely monitoring our supply
chain and putting in place mitigations where appropriate.
Project/ programme management risk: The Group's
programme-related risks include the financial health of customers
and suppliers; the timeliness and quality of our manufacturing
activity; and the potential for any resultant impairments of
associated assets. These continue to be monitored and managed as
part of the Group's COVID-19 response project team's activities.
Impairment of goodwill and development costs are disclosed in note
14 to the condensed consolidated financial statements.
We have updated the remaining risks for any COVID-19 specific
impacts.
Further details can be found in the 'Risk management' section of
the 2019 Annual Report on pages 44 to 51, together with details of
strategies adopted to mitigate these exposures.
STATEMENT OF DIRECTORS' RESPONSIBILITIES
The directors confirm that to the best of their knowledge:
-- This condensed set of consolidated interim financial
statements has been prepared in accordance with IAS 34 'Interim
Financial Reporting' as adopted by the European Union; and
-- The interim management report (including the interim
financial statements, management report and responsibility
statements) includes a fair review of the information required by
DTR 4.2.7R and DTR 4.2.8R, namely:
o An indication of important events that have occurred during
the six months ended 30 June 2020 and their impact on the condensed
set of financial statements, and a description of the principal
risks and uncertainties for the remaining six months of the
financial year; and
o Material related party transactions in the six months ended 30
June 2020 and any material changes to the related party
transactions described in the last annual report.
By order of the Board:
A Wood L Burdett
Director Director
7 September 2020 7 September 2020
- E N D S -
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IR UBVKRRKUKRAR
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September 08, 2020 02:00 ET (06:00 GMT)
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