TIDMMGGT
RNS Number : 0990R
Meggitt PLC
04 March 2021
4 March 2021
M EGGITT P L C - 2020 Full Year r e su l t s
Strong execution on strategy with the Group well placed for the
recovery
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 audited results for the twelve months ended 31
December 2020.
Tony Wood , Chi e f Exec u t i v e , c omm e n t e d :
"Our focus throughout 2020 and as we move into 2021, continues
to be ensuring the safety and well-being of our people, protecting
our sites, serving our customers and communities and executing our
strategy. I want to thank all of my colleagues for their hard work
and dedication in helping us navigate our way through the year.
Faced with a reduction in activity and demand in one of our core
markets, we acted fast, executed well operationally and took
decisive action while positioning the Group for the recovery in
civil aerospace. While our full year performance has clearly been
impacted by the ongoing effects of COVID-19, it also reflects the
resilience and diverse nature of the Group, including the
mitigating impact of our defence and energy businesses.
The roll-out of vaccines, coupled with significant pent-up
demand to travel, provides a supportive backdrop for the recovery
in civil aerospace in 2021, although this positive development is
likely to take time to feed through into growth in global flight
activity and the aftermarket. Based on the significant progress
we've made over the last four years to transform the Group, the
effective actions we've taken in 2020, diverse end market exposure
and leading market positions, we are well placed to benefit from
the recovery and to continue to deliver long-term profitable
growth."
Operational and strategic highlights
-- Introduced measures to ensure the well-being of our people
and safe operations at all our global sites
-- Rapid and decisive action taken to reduce cost, protect cash and resize the Group
-- Continued progress on key strategic initiatives:
o Completed the streamlining of our portfolio with the sale of
our Training Systems business
o Addition of 14 SMARTSupport(R) contracts, securing further
market share in the aftermarket
o Further reduction in global footprint, now 34% below 2016
levels
o Investment in operational capability with the opening and fit
out of our new campus in Ansty Park, UK
o Accelerated our existing sustainability strategy under our
People, Planet and Technology framework
Financial summary
-- Performance of the Group reflects the impact of COVID-19 on the civil aerospace sector
-- Group revenue of GBP1,684m down 22% on an organic basis, with
a robust performance in defence, where organic revenue grew 4%
-- Underlying operating profit 53% lower at GBP191m (FY 2019: GBP403m)
-- Statutory operating loss of GBP297m (FY 2019: profit of
GBP325m) as a result of the non-cash impairment of intangible
assets and other asset write downs
-- Successful delivery of in-year cash savings of GBP450m
-- Positive free cash flow of GBP32m (FY 2019: GBP268m) and
reduction of GBP138m in net debt to GBP773m (FY 2019: GBP911m)
-- Ratios of net debt:EBITDA of 2.2x and interest cover of 9.8x
at 31 December, well within covenant limits
-- Robust liquidity position with headroom of GBP908m on
committed facilities of GBP1,537m at 31 December
-- Extended maturity of our debt with a forward start on our RCF
to September 2022; and raised $300m in USPP market in November
2020
-- In light of ongoing challenging and uncertain market
conditions, the Board has recommended not to pay a final dividend
for 2020
Outlook for 2021
-- While the rollout of vaccines is expected to ease lockdowns
and drive a gradual increase in air traffic activity, we anticipate
the trends seen in civil aerospace during the second half of 2020
are likely to continue in the first half of 2021, with recovery
weighted more towards the second half of the year. Conditions in
our defence and energy end markets are expected to remain robust in
2021. Assuming no further disruption to normal operations during
the year as a result of additional lockdowns, in 2021 we expect the
Group to generate:
o Revenue broadly in line with 2020;
o An increase in underlying operating profit versus 2020;
and
o Positive free cash flow.
G r ou p full year performance
C han g e
------- -------
20 20 20 1 9 R epo r t Or gani
GBP'm GBP'm e d % c 1 %
------- ------- --------- ---------
Or de r s 1,547.1 2,468.4 (37) (38)
R eve n u
e 1,684.1 2,276.2 (26) (22)
------- ------- --------- -------
U nde r l
y i n g 2
EB I T D A 3 296.9 507.3 (41) (40)
O pe r a t in g p r
o f i t 190.5 402.8 (53) (50)
P r o f i t be f o
r e t a x 159.5 370.3 (57) (55)
Ea r ni n g s pe r
s ha r e ( p ) 16.5 37.3 (56)
------- ------- --------- -------
S t a t u
t o r y
O pe r a t in g ( loss)/profit (297.3) 325.3 (191)
(Loss)/profit be f
o r e t a x (334.0) 286.7 (217)
(Loss) /earnings pe
r s ha r e ( p) (40.4) 28.8 (240)
------- ------- --------- -------
F r e e c
a s h f lo
w 4 31.9 267.8 (88)
Net cash flow
5 136.0 205.7 (34)
Net debt 773.0 911.2 (15)
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
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 2020 Full Year results at
9.30am GMT today, available on the Meggitt website
http://www.meggitt.com/investors/. Copies of the presentation will
be available.
https://www.investis-live.com/meggit/6021220249aa2a0e00daf86a/epad
A live dial-in is available. Please use the below details to
join:
UK: 0800 640 6441
UK Local: 020 3936 2999
Global: +44 203 936 2999
Passcode: 242805
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.
4 Free cash flow is used by the Board to measure the underlying
trading cash performance of the Group as set out in note 26.
5 Net cash flow represents the movement in net debt in the year,
adjusted to exclude new lease liabilities entered, exchange
differences and other non-cash movements.
MARKET CONTEXT AND CONDITIONS
Civil Aerospace
The outbreak of COVID-19 and subsequent lockdowns across the
world caused a significant and unprecedented reduction in
commercial air traffic in 2020, with global air traffic, as
measured by RPKs and ASKs down 65.9% and 56.5% respectively for the
full year 2020, compared with 2019 levels.
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 remained highly sensitive to
subsequent spikes in COVID-19 infection rates, the imposition of
new lockdowns and other measures such as post-flight quarantining.
Accordingly, the recovery in global passenger numbers plateaued in
the fourth quarter with global RPKs and ASKs ending the year for
the month of December down 69.7% and 56.7% respectively, showing
only a slight improvement from September's figures down 72.0% and
60.8%.
While all regions have been adversely affected, there have been
variations in the extent of traffic reductions as follows: Asia
Pacific down 62%; Europe down 70%; and North America down 65%.
There has also been a difference between domestic and international
air travel, reflecting the closure of international borders at
certain times during the year, with domestic traffic down 49% in
2020 compared with international traffic down 76%. In some domestic
markets, notably China and Russia, traffic levels recovered in 2020
to be in line with or slightly above 2019 levels.
Within civil aerospace, the extent to which different platform
categories have been affected has also varied, with global b
usiness jet utilisation down 21% in the year compared with down 48%
for the wider global commercial fleet (which comprises large and
regional jets). In the month of December 2020, business jet
utilisation had recovered to 95% of the levels seen in December
2019 reflecting its attraction to air travellers as an alternative
to commercial flights.
As a result of the severe slowdown across civil aerospace,
demand from airlines and operators for new build aircraft
significantly reduced in FY 2020, with Airbus and Boeing deliveries
down 34% and 59% respectively. Deliveries of regional and business
jets in the year were down 46% and 21% respectively. In response to
the lower demand for aircraft, airframe and engine OEMs
significantly reduced their production rates during the year, a key
driver of the Group's OE revenue.
In the first two months of 2021, high infection rates across
many countries, border closures and lockdowns have held back the
recovery and resulted in the continuation of low overall levels of
air traffic activity and passenger numbers. However, against this
backdrop, the development and rollout of vaccines globally over the
last few months has been encouraging and underpins a positive
outlook for the continued recovery in civil aerospace, with the
expectation that lockdown restrictions will be eased and passenger
confidence returns particularly in the second half of 2021. With
overall business jet activity having recovered strongly, ending
2020 close to prior year levels, we expect regional jets and narrow
bodies to recover next as short haul and domestic routes are
restored, with wide body levels coming back last reflecting a
change in consumer attitudes towards long haul, including business
travel.
Looking further ahead, most industry commentators now expect air
traffic to return to 2019 levels by around 2023/2024 (IATA
forecasting 2024) and new aircraft production rates to recover to
pre-COVID-19 levels in 2024 /2025. Beyond the recovery period, we
firmly believe that the drivers supporting air traffic growth over
the long term remain in place with IATA forecasting a growth rate
in global passenger journeys of 3.7% per annum over the next 20
years.
Defence
While the defence sector has not been immune from the effects of
COVID-19, spending in the US (which represents over 70% of our
annual defence revenue) and overall defence activity levels
remained robust in 2020, a trend reflected in our own defence
business. For fiscal year 2020, defence spending in the US was up
6%, with spending in RDT&E and procurement both up 12%, with
good outlays for major fixed wing and rotary platforms including
F-35, KC-46A, F-15EX and AH-64. In January 2021, the US DoD budget
of $ 696 bn for fiscal year 2021 was approved, broadly in line with
the level of outlays in 2020, providing a supportive backdrop over
the short to medium-term.
Energy
In energy, both supply and demand side factors led to volatility
in the oil price moving from $57 per barrel in January to below $20
per barrel in April. While the oil price subsequently increased off
its lows, trading in a range of $37 -$49 per barrel in the second
half, this dampened overall capital expenditure levels and delayed
certain projects across the oil sector during the year, while LNG
and renewables project capex remained robust.
FAST AND EFFECTIVE ACTION IN RESPONSE TO THE CRISIS
Leveraging our experience of navigating previous downturns in
civil aerospace and through close communication with our customers
and supply chain, the Group moved quickly to implement a revised
demand scenario for planning purposes and adjusted production
levels early in the second quarter. During 2020, we took a series
of decisive actions in areas within our control in response to the
crisis, focused on reducing costs, preserving cash and resizing the
business:
-- Safeguarding our people - our number one priority and the
focus of our COVID-19 Crisis Management Team has been, and
continues to be, 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. These measures
have included the introduction of social distancing, provision of
personal protective equipment, variations in working patterns
including split shifts, enhanced cleaning regimes and providing the
necessary tools and support for those employees able to work from
home.
-- Supporting the community - in response to COVID-19, our
employees and sites have supported their local communities in the
regions where we operate around the world. 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 year 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 US national response
to COVID-19, we were granted $15m in funding under the CARES Act
from the US Department of Defense to sustain critical industrial
base capability for military grade fuel bladders at our Rockmart,
US facility.
Throughout the year, 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. We have remained agile and reacted to
changes in lockdown restrictions on a regional basis allowing more
office-based employees to return to work safely where possible. We
have also supported our suppliers through supplier financing
programmes and increased their awareness of local government
support schemes during the year.
-- Reducing costs, protecting cash and resizing the Group - in
April we announced a series of actions to help the Group navigate
the crisis and enable us to deliver substantial cash savings in the
year. These actions were based on our scenario planning exercises
incorporating the most likely impact on the Group's revenue and
cash flow in 2020 and expectations on the timing of the
recovery:
1. Reducing costs - cancellation of all pay rises, pay
reductions for the Board of Directors and Executive Committee and
material cuts in discretionary spend including travel;
2. Protecting cash - in addition to the cost measures, we have
also preserved cash through targeted reductions and deferral of
certain cash expenditure including: capital expenditure; absolute
reduction in inventory levels; and the cancellation of the final
dividend for 2019 and interim dividend for 2020; and
3. Resizing the Group - having 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 to ensure that our internal capacity across our
civil aerospace business reflects the reduction in demand. As at
the end of December 2020, our total global headcount was 26% lower
(including the sale of our Training Systems business) than the end
of 2019.
As a result of the hard work and focus of our global teams to
deliver our in-year cash savings, the Group generated GBP31.9m of
free cash flow which was slightly better than our expectations at
the time of our half year results. The free cash inflow, combined
with proceeds from the sale of Training Systems, meant the Group
ended the year with net debt of GBP773.0m, GBP138.2m lower than
2019, testament to the Group's focus on tight management of the
balance sheet during the most challenging of times.
FULL YEAR RESULTS FOR 2020
Group Orders and Revenue
Our full year results reflect the effects of COVID-19 and the
unprecedented reduction in civil aerospace activity with key
financial metrics, both on a statutory and underlying basis,
declining in the period.
In our half year results, we reported that Group revenue for the
six months ended 30 June 2020 was 14% lower than the comparative
period. This reflected the 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, which more than offset a
strong performance from our defence business.
While the level of global civil aerospace flight activity
recovered in the second half, market conditions remained
challenging with the recovery impacted by second waves of COVID-19
and further lockdowns in the fourth quarter. In the second half,
Group civil aerospace organic revenue was 53% lower than the
comparative period, with OE down 51% (large jets -55%, regional
-59% and business jets -37%) and aftermarket down 54% (large jets
-52%, regional -63% and business jets -49%). After a strong first
half with organic growth of 8% (excluding Training Systems),
defence revenue was flat in the second half on an organic basis.
Energy revenue was down 11% organically in the second half, partly
reflecting the timing of projects and phasing of revenue.
For the full year, Group orders were 38% lower on an organic
basis with book to bill of 0.88x. Our order book in defence remains
robust with an organic book to bill of 1.05x. Group organic revenue
was down 22% with lower revenue in civil aerospace and energy more
than offsetting a good performance in defence where revenue grew
4%. In civil aerospace, revenue was 41% lower, with sales from
civil OE and civil AM down 40% and 41% respectively. Energy revenue
was 8% lower on an organic basis. Reported Group revenue of
GBP1,684m (FY 2019: GBP2,276m) decreased by 26% as analysed in the
table below:
GBP' m Impact %
------- --------
FY 201 9 r ev e nu e 2,276.2
Business disposals (103.9) (4)
C u rr en c y m ove m en t s (12.4) -
Or gani c movement (475.8) (22)
------- --------
FY 2020 r ev e nu e 1,684.1 (26)
------- --------
The adjustments for business disposals include the sale of:
Angouleme (completed in March 2019); Orange County product lines
(completed in June to December 2019); Training Systems (completed
in June 2020); and our Dunstable business and associated product
lines (completed in January 2021).
Currency movements in the year reflect the slight strengthening
of pound sterling against our trading currencies, principally the
US dollar. The organic revenue decline reflects the impact of
COVID-19 on civil aerospace partially offset by defence.
Profit and earnings per share
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.
As a result of the reduction in Group revenue, and
notwithstanding the significant action taken to reduce costs to
mitigate the impact of lower volumes and under absorption of fixed
costs, the Group's underlying operating margins decreased by 640
basis points, to 11.3% (FY 2019: 17.7%), with underlying operating
profit 53% lower in the year at GBP190.5m (FY 2019: GBP402.8m).
Underlying profit before tax decreased by 57% to GBP159.5m (FY
2019: GBP370.3m) with underlying earnings per share down 56% at
16.5 pence (FY 2019: 37.3 pence).
The level of exceptional costs at GBP428.7m is significantly
higher than forecast at the start of the year, including impairment
of goodwill and asset write-downs arising from the unprecedented
downturn in civil aerospace during the year, resulting in Group
underlying operating profit becoming an operating loss of GBP297.3m
at the statutory level. Within exceptional costs, GBP374.2m relates
to impairment losses and other asset write downs comprising:
goodwill (GBP335.7m); development costs (GBP24.5m); inventory
(GBP8.6m); and trade receivables (GBP5.4m). Further details
relating to impairment losses and other asset write-downs are set
out in note 8.
As a result of the impairment losses and other asset write
downs, Group loss before tax was GBP334.0m (FY 2019: GBP286.7m
profit) and basic loss per share was 40.4 pence (FY 2019: earnings
per share of 28.8 pence).
Reconciliation between underlying operating profit and statutory
operating loss
2020
GBP'm
--------
Underlying operating profit 190.5
Impairment losses and other asset write-downs (374.2)
COVID-19 incremental non-recurring costs (22.0)
Site consolidations (33.5)
Other 1.0
Exceptional operating items (428.7)
Amortisation of intangible assets arising on acquisition
of businesses (88.2)
Financial instruments (2.9)
Amounts arising on the acquisition, disposal and closure
of businesses 32.0
--------
Statutory operating loss (297.3)
--------
Dividends
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 did not recommend the payment of an interim
or final dividend for 2020. This has helped retain cash within the
Group, ensured the continued management of net debt levels and
preserved financial flexibility. The Board is very aware of the
importance of dividends to our shareholders and looks forward to
restoring dividend payments when the recovery in civil aerospace is
more established.
Cash flow
The Group generated a free cash inflow of GBP31.9m (FY 2019:
GBP267.8m inflow), which was ahead of our guidance issued in
September 2020, reflecting the work done across the Group to offset
the impact of the lower operating result, including a reduction in
absolute inventory levels and planned levels of capex.
Full year cash flow statement GBPm
2020 2019
GBP'm GBP'm
-------- ----------
Underlying operating profit 190.5 402.8
Depreciation and amortisation 106.4 104.5
Working capital movements 8.1 (21.0)
Net interest paid (32.1) (33.1)
Tax paid (42.1) (14.4)
Exceptional operating items paid (49.3) (27.3)
Purchase of property, plant and equipment (89.7) (94.4)
Proceeds from disposal of property, plant
and equipment 1.3 23.1
Capitalised development costs/programme participation
costs (43.0) (56.7)
Retirement benefit deficit reduction payments (21.7) (35.2)
Other 3.5 19.5
-------- ----------
Free cash flow 31.9 267.8
Net proceeds from disposal/acquisition of
businesses 104.2 68.9
Dividends paid to Company's shareholders - (130.4)
Issue of equity share capital 0.3 -
Other (0.4) (0.6)
-------- ----------
Net cash generated 136.0 205.7
Lease liabilities entered (11.4) (54.2)
Lease liabilities disposed with business 5.6 -
Exchange differences 7.6 31.2
Other movements 0.4 (19.8)
-------- ----------
Net debt movements 138.2 162.9
-------- ----------
Net debt at 1 January (911.2) (1,074.1)
Net debt at 31 December (773.0) (911.2)
-------- ----------
Investment in capital expenditure was GBP89.7m (FY 2019:
GBP94.4m) and working capital was an inflow of GBP8.1m (FY 2019:
GBP21.0m outflow). Higher cash tax payments of GBP42.1m (FY 2019:
GBP14.4m) reflects the phasing of payments in the US and the
increase in cash exceptional costs to GBP49.3m (FY 2019: GBP27.3m),
includes GBP18.9m of non-recurring COVID-19 related costs and site
consolidation costs as we continue to rationalise our global
footprint. Deficit payments made in respect of retirement benefit
schemes were GBP21.7m (FY 2019: GBP35.2m) following an agreement
with the trustees of the UK scheme to defer four months of payments
totalling GBP9.6m that will now be spread across the 2021 to 2023
period. The free cash inflow of GBP31.9m was augmented by proceeds
from the sale of Training Systems which generated net proceeds of
GBP117.0m, with a net cash inflow for the Group of GBP136.0m for
the full year (FY 2019: GBP205.7m inflow).
As a result, at the end of December 2020, our net debt was
GBP773.0m (FY 2019: GBP911.2m), including lease liabilities of
GBP144.3m, a decrease of GBP138.2m from December 2019 after taking
into account proceeds from the sale of Training Systems and
favourable currency movements of GBP7.6m and we had significant
headroom of GBP 908.1 m on committed facilities of GBP 1,536.8
m.
Debt structure and financing
In June and October 2020, we repaid $125m and $150m respectively
on the maturity of two separate tranches of 2010 US Private
Placement Notes. In November 2020, we raised $300m in aggregate of
three and five year senior notes providing us with additional
liquidity and financial flexibility as we look ahead to 2021 and
beyond.
In April 2020, the Group was confirmed as an eligible issuer
under the Bank of England and HM Treasury's Covid Corporate
Financing Facility (CCFF), under which the Group is able to draw up
to GBP600m. While the Group issued commercial paper under this
facility during the year, as at the end of December 2020, there
were no borrowings under this facility. The Group has retained
access to the CCFF and is eligible to issue commercial paper using
this facility (subject to certain terms and restrictions) up to and
including 22 March 2021, with a maturity date of up to twelve
months. In May 2020, 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.
There are two main financial covenants in our financing
agreements. The net borrowings:underlying EBITDA ratio, which must
not exceed 3.5x, was at 2.2 x at 31 December 2020 (December 2019:
1.5 x) and interest cover, which must be not less than 3.0x, was
9.8 x (December 2019: 16.3 x). At the end of 2020, the Group had
significant headroom against both key covenant ratios, and net
borrowings:underlying EBITDA is within our target range of 1.5x to
2.5x.
OUTLOOK FOR 2021
While the rollout of vaccines is expected to ease lockdowns and
drive a gradual increase in air traffic activity, which is a
positive indicator for the civil aerospace sector and the Group,
uncertainties remain in predicting the timing and pace of the civil
recovery. At the current time, our assumption is that the trends
seen in civil aerospace during the second half of 2020 are likely
to continue in the first half of 2021, with recovery weighted more
towards the second half of the year. Conditions in our defence and
energy end markets are expected to remain robust in 2021.
Assuming no further disruption to normal operations during the
year as a result of additional lockdowns, in 2021 we expect the
Group to generate:
-- Revenue broadly in line with 2020;
-- An increase in underlying operating profit versus 2020; and
-- Positive free cash flow
We will continually review our assumptions as the year
progresses and as we gain greater clarity on the path to recovery
in civil aerospace.
While we recognise the need to remain agile and respond quickly
to changes in the external environment, based on the significant
progress we have made over the last four years to transform the
Group, the effective actions we've taken in 2020, our diverse end
market exposure and leading market positions, we are well placed to
benefit from the recovery in civil aerospace and to deliver
long-term profitable growth.
ENABLING OUR SUSTAINABLE FUTURE
At Meggitt, we work in partnership with all our stakeholders to
enable a sustainable future and have adopted a framework to support
our ambition of net zero greenhouse gas emissions by 2050, focusing
on three core pillars: People, Planet and Technology. This
framework is aligned with the United Nations Sustainability
Development Goals and the Taskforce on Climate Related Financial
Disclosures:
-- People- - through our core values of Teamwork, Integrity and
Excellence and our high performance culture we are committed to
creating a rewarding, safe and productive working environment for
our employees and supporting our local communities. During 2020, we
started the rollout of our leadership programme in Operations,
introduced our Extraordinary People recognition scheme and expanded
the number of Employee Resource Groups to eight with further
initiatives planned for 2021.
-- Planet - our goal is to contribute to a cleaner future by
continuously improving and adapting our operational systems across
our sites to promote efficiencies and improvements by harnessing
green energy, driving operational excellence and reducing harmful
emissions, where we have set a target to reduce net carbon
emissions by 50% by 2025. While we made progress in a number of
areas during the year, including the completion of several
sustainability projects at our sites, and from March 2021 sourcing
100% of electricity from green sources in the UK, we recognise that
we still have more work to do. We have set reduction targets for
our sites in 2021 covering reducing our electricity and natural gas
usage, consumption of water and rates of waste to landfill, as we
look to build on the progress we have made over the last few
years.
-- Technology - to support the evolving needs of our global
customers and building on our rich heritage, we continue to invest
in innovative new technologies to support and enable sustainable
aviation in areas including thermal and electric aircraft systems,
fire protection, composites and optical sensing. In 2020, we made
very good progress on a number of these technologies and specific
customer projects as set out in our Strategy section.
STRATEGY UPDATE
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 June 2020, 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
exposure to aftermarket revenue, greater potential for growth and
operational efficiencies. In January 2021, we completed the sale of
our Dunstable (UK) business of designing and manufacturing ducting
products for a range of space, defence and civil customers. As a
result of these disposals, over 80% of our revenue is now generated
from businesses in attractive markets and where we have a strong
competitive position, above our target set out three years ago.
Despite the challenges posed by COVID-19 and the need to
preserve cash, we sustained our investment in differentiated
technology. During the year, we met our target of prioritising at
least two-thirds of our investment in Applied Research &
Technology to enable our customers to deliver the next generation
of more sustainable aircraft. Despite changes in normal working
patterns, we also maintained strong milestone adherence on our
major development and customer programmes. A summary of our key
highlights and progress are as follows:
-- Next generation of fuel efficient engines - we are
positioning and promoting the breadth of our technology with our
customers to play a critical role in enabling the development of
the next generation of fuel efficient engines specifically
leveraging our capabilities in: thermal management; high
temperature optical sensing; and engine composites. For example, in
2020, our Thermal Systems programme patented technology for six
products which will allow a step change in engine thermal
management applications.
-- Green fire suppression - we have made good progress working
with major aircraft OEMs with VERDAGENT(TM), Meggitt's new,
proprietary 'green' fire suppressant agent to replace ozone
depleting Halon 1301, with further tests in Europe and the US to
approve its engine APU and cargo applications scheduled for
2021.
-- Optical sensing - we successfully completed the first
customer trials of our optical dynamic pressure sensing system for
ground-based industrial gas turbines and now have an installation
running with a major energy customer. We also remain on track to
install this new technology on a demonstrator aero engine with a
major OEM in 2021.
-- Engine composites - we made significant progress in
development of manufacturing processes for advanced 'gas path'
engine composite components with thin wall, high structural
integrity requirements.
-- Electric flight - working closely with a customer we have
supplied electric motors and motor drive units to support the
development of a leading electric urban/air mobility prototype
which is undergoing trials.
We have also continued to leverage advanced manufacturing
technology and processes across our sites:
-- Additive layer manufacturing (ALM) - working with our UK
joint-venture partner HiETA, we have applied ALM to build prototype
heat exchangers to operate at high temperatures for industrial and
aero applications. We have also expanded our US additive
manufacturing capability to develop flow valves and production
tooling.
-- Digital manufacturing - the rollout of advanced digital work
instructions and greater use of automation at our sites has
resulted in a meaningful increase in productivity and quality, and
we are working on plans to deploy this technology more extensively
across the Group in 2021.
As reported at the half year, we have intensified our focus on
driving improved margin and return on capital in braking systems,
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, where possible we have
re-phased our investment in both carbon and brakes production
capacity with a proportion of our capital commitments in this area
moving into 2021 and beyond.
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') from our
three global hubs for the aftermarket.
During the year, we maintained close contact with our customers
which was critical in the creation of our scenarios for planning
purposes, including the adjustment of production schedules for
original equipment based on new build rates from the OEMs and
tracking customer sentiment and buying behaviour by region in the
aftermarket.
In the period, we continued to win a number of new customer
contracts including orders for:
-- $73m from Bell Textron Inc for the supply of composite ice
protection components on the V22 Osprey;
-- $27m for the supply of liquid palletised cooling units for the Boeing P-8A aircraft;
-- $21m for the supply of high temperature cables for a nuclear energy application;
-- $20m from Northrop Grumman for the supply of fuel bladders on the F/A-18 Super Hornet ;
-- $15m from the Defence Logistics Agency to support the supply of fuel bladders; and
-- GBP8m from MODEC for the supply of Heatric printed circuit
heat exchangers, representing the largest order for that business
for over five years
In Services & Support, we saw continued momentum with
SMARTSupport(R) , our long-term contract offering for aftermarket
customers, adding an additional 14 agreements, including those with
ST Aerospace, Derco and Ameco Beijing, taking the total number to
39 with an aggregate value of GBP187m, 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 year 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. As a result
of these actions and the recent sale of our Dunstable (UK)
business, we now have 37 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 our
footprint by 50% from our 2016 baseline by 2023.
In June 2020, 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 in the Midlands, providing office-based employees that have
been working from home with the flexibility to return to the
workplace as restrictions allowed. The successful relocation of our
teams to Ansty Park will promote more integrated and efficient ways
of working across both the Group central functions and the
divisions.
Having been deferred due to the disruption caused by COVID-19,
the full transition of manufacturing from four UK sites into Ansty
Park is well underway, with the capital expenditure associated with
this transition also moving into 2021. The transition to Ansty Park
is scheduled to be completed by the end of the third quarter in
2021.
On inventory, where we have brought significant improvements in
recent years and steadily increased inventory turns from just above
2.0x in 2016 to 2.7x in 2019 , our priority in 2020 was to reduce
absolute inventory levels as part of our cash preservation measures
as we responded to the change in demand from our customers. We used
the change in market conditions as an opportunity to tighten our
supply parameters and production scheduling (including moving from
monthly to weekly deliveries of raw materials). While we made very
good progress reducing absolute inventory levels during the year,
this will remain a focus area in 2021.
Within purchasing, we continued to offer our suppliers access to
an ePayables scheme and supported them gaining access to government
schemes in the US, UK and France. Alongside this, we have 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 continued as we applied
engineering and process improvements to achieve higher quality and
further improvements in yields. During the year, our facility in
Saltillo, Mexico received approval for the manufacture and direct
shipment of additional high volume composite parts to end
customers. In addition, lower production of aircraft engines caused
by COVID-19 allowed us to accelerate the adoption of new
manufacturing technology and transfer of production lines to
Mexico, with further high volume parts transitioning in 2021.
Culture
Our priority in 2020 was to ensure the health and well-being of
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. During the
year, our teams 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, 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 (HPC) 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 during 2020. While our
focus on responding to the crisis necessitated deferring a lot of
planned HPC activities into 2021, we did deliver a number of
training sessions virtually and in person during the year.
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 respond to a significant adjustment
in demand across our civil business. Despite the huge challenges
presented by the need to respond to the pandemic and the re-sizing
of the business, our Group-wide Engagement score was maintained at
the High Performance Norm 6 with our scores for Alignment and
Agility
increasing by 2% and 4% respectively, providing reassuring
feedback on the manner in which the Group engaged with all
employees as we responded to the COVID-19 crisis.
We further strengthened our commitment to Diversity and
Inclusion, including a series of activities during our Inclusion
Week in October 2020 and the introduction of an additional three
Employee Resource Groups, bringing the total number of groups to
eight.
6 Culture IQ employee survey benchmark
MARKET TRADING SUMMARY
Revenue (GBP'm) Growth (%)
2020 2019 Reported Organic
-------- -------- --------- --------
Civil OE 306.0 518.6 (41) (40)
Civil AM 419.6 715.9 (41) (41)
-------- -------- --------- --------
Total civil 725.6 1,234.5 (41) (41)
Defence 768.4 824.6 (7) 4
Energy 131.1 142.7 (8) (8)
Other 59.0 74.4 (21) 11
-------- -------- --------- --------
TOTAL 1,684.1 2,276.2 (26) (22)
-------- -------- --------- --------
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 24,000 aircraft, the regional aircraft
fleet over 7,000 and business jets around 20,000. The Group has
products on the vast majority of these platforms and hence a large,
installed base. With 54% of our civil aftermarket revenue (for 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 full year, which accounted for
43% of the Group total, was 58% aftermarket and 42% original
equipment (OE).
In the year, civil OE revenue was down 40% organically
reflecting lower demand for original equipment from the OEMs, with
large jets, the largest component of our OE revenue, down 44 % and
regional jets down 46 %. Business jet OE was down 25 %. Within the
year, civil OE was down 29 % and 51 % in the first and second
halves respectively.
As a result of lower levels of air traffic activity in the
period, civil aftermarket revenue was down 41 % organically as
airlines and other aftermarket customers deferred orders for spare
parts and repairs, with large jets down 41 %, regional down 49 %
and business jets down 32 %. Within the year, civil AM was down 26%
and 54% in the first and second halves respectively.
Overall, Group civil aerospace revenue (OE and AM combined) was
41 % lower in the year on an organic basis.
Defence
Our defence business accounted for 46% of Group revenues in 2020
(including Training Systems) generating 59% of revenue from OE and
41% 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 74% of defence revenue,
with 18% to European customers and 8% to the rest of the world.
Defence spending remained robust during the year with continuing
good outlays by the US DoD and our order book remains healthy with
an organic book to bill of 1.05 x, underpinned by a number of
multi-year contracts.
Defence revenue grew 4% on an organic basis (excluding Training
Systems) with strong growth in the first half of 8%. Defence
revenue was flat in the second half on an organic basis (compared
with the same period in 2019). In OE, revenue grew 14 % organically
driven by continuing strong growth on parts for the F-35 Joint
Strike Fighter, Eurofighter, F/A-18 Hornet and in rotary wing, the
AH-64 Apache. Aftermarket revenue was 7 % lower organically
reflecting the disruption to military exercises caused by COVID-19,
with growth in fighters more than offset by lower revenue in rotary
wing and military transports.
E ne r g y a nd o t her
Energy and other revenues, which represents 11% of Group total,
come from a variety of end markets of which the single most
significant is energy (8% 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 8 % on an organic basis, reflecting
volatile end market conditions in the first half and some
disruption in both the supply chain and our sites caused by
COVID-19 towards the end of the year. In Heatric, organic revenue
was down 7% with revenue derived from our valve and condition
monitoring business 12% lower on an organic basis . Revenue from
other markets was up 11% organically on the comparative period.
The near-term and medium-term outlook for our energy businesses
remains good, with a robust order book as we entered 2021. 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 alternative, lower carbon energy sources
including renewables, positions this business well for the
future.
DIVISIONAL P E RFO R M A N C E
The focus across all four divisions during 2020 has been to
protect our people, support our communities and keep our sites open
and operating safely to support our customers. Faced with the
reduction in civil aerospace demand, the divisions responded
quickly to reduce costs and preserve cash, each making an important
contribution to the overall Group cash targets during the year.
The financial performance of the individual divisions is
summarised in the table below:
Revenue Underlying Operating Profit/(Loss)
------------------------------------- ----------------------------------------
2020 2019 (7) % Growth 2020 20197 % Growth
GBP'm GBP'm Re por O r ganic GBP'm GBP'm Re por O rg
te d te d a n ic
------- -------- ------- --------- --------- ------- --------- ---------
Airframe Systems 793.1 1,029.5 (23.0) (22.4) 120.5 247.7 (51.4) (52.2)
Engine Systems 233.6 329.5 (29.1) (28.4) (13.2) 27.2 (148.5) (150.4)
Energy & Equipment 335.0 412.5 (18.8) 6.5 42.4 53.4 (20.6) 18.1
Services & Support 322.4 499.1 (35.4) (34.8) 40.8 74.0 (44.9) (44.5)
Other 8 - 5.6 (100.0) - - 0.5 (100.0) -
------- -------- ------- --------- --------- ------- --------- ---------
Total Group 1,684.1 2,276.2 (26.0) (22.3) 190.5 402.8 (52.7) (50.5)
------- -------- ------- --------- --------- ------- --------- ---------
Airframe Systems provides Braking Systems, Fire Protection &
Safety Systems, Power & Motion, Fuel Systems, Avionics &
Sensors and Polymer Seals for around 51,000 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 55% of its revenue from
OE sales and 45% from the aftermarket derived mainly from Braking
Systems, with the remaining aftermarket revenue from other product
groups reported in Services and Support.
Operational and strategic highlights
-- Continued to support customers on new product development and
testing across a number of platforms
-- Good progress on development of new technologies, including
new 'green' fire suppression agent VERDAGENT(TM)
-- Transfer of products associated with further footprint
consolidation, including moves out of Orange County, US to Airframe
Systems sites in the US, UK and Europe
-- Secured $15m of funding under the CARES Act to support
critical industrial base capability for military grade fuel
bladders at our Rockmart, US facility
-- Deferral of capital expenditure relating to carbon capacity expansion in Braking Systems
Financial performance
Organic revenue was down 22% in the period. Civil OE revenue was
down 34% with large jets and regional jets OE down 39% and 38%
respectively, reflecting lower end market demand for new aircraft
and OEMs reducing new build rates. Business jet OE was down 18%
outperforming large and regional jets on a relative basis.
Civil aftermarket revenue was 42% lower on an organic basis
reflecting the reduction in commercial air traffic and lower demand
for spares. Organic aftermarket revenue in large, regional and
business jets was down 38%, 52% and 32% respectively.
Defence revenue was flat, with OE 6% higher driven by growth in
fighters, including the F-35 and Typhoon. In the aftermarket,
revenue was 5% 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.
7 We have restated 2019 comparatives to reflect the transfer of
the UK braking systems MRO business that took place on 1 January
2020. The impact is that AS revenue and operating profit for 2019
are GBP27.9m and GBP2.8m lower respectively than we published in
2019, with a corresponding increase for S&S.
8 Those businesses which were disposed of prior to the effective
date of the new divisional structure on 1 January 2019, or were
classified as held for sale at that date are presented separately
as 'Other'.
As a result of the lower volumes in civil OE and reduction in
higher margin civil aftermarket revenues, underlying operating
margin was 890 basis points lower than the comparative period at
15.2 % (FY 2019: 24.1 %).
In 2021, responsibility for all aftermarket activities in
Braking Systems including spares and repairs, will transfer to the
Services & Support division and be managed across the Group's
three regional aftermarket hubs.
Engine Systems has market-leading positions in advanced engine
composites, thermal and safety systems with a broad range of
technologies including vibration monitoring and engine health
management systems. This division also provides aerospace engine
flow control and sensing solutions. Strong positions on high volume
platforms mean we are well positioned for growth in Engine Systems.
The division represents 14% of Group revenue, generating 89% of its
revenue from OE and 11% from the aftermarket as a result of its
principal route to the aftermarket being through the Services &
Support division.
Operational and strategic highlights
-- Good progress developing new products in the engine core to
displace heat, increase efficiency, and reduce fuel, particularly
projects to support next generation engine demonstrators
-- Transfer of high volume engine composite parts to Saltillo,
Mexico and direct shipments from Mexico to end customers
-- Transfer of Engine Sensing products from Basingstoke to
Airframe Systems Fareham in the UK as part of ongoing footprint
consolidation
-- In Defence, continued strong growth including to support the F-135 engine programme
-- Completed sale of our ducting business based in Dunstable (UK) in January 2021
Financial performance
Revenue decreased by 28% on an organic basis with good growth in
defence more than offset by lower demand for OE parts across civil
aerospace. Civil OE revenue was 49 % lower on an organic basis,
with the absolute reduction in revenue mainly driven by large jets.
In defence, revenue grew by 9 % on an organic basis with
particularly strong growth on the F-135 programme and the F-22
Raptor.
Despite the work done within the division to significantly
reduce costs in response to the reduction in civil OE and AM
volumes across all product groups, Engine Systems generated an
underlying operating loss in the year of GBP13.2m (FY 2019: profit
of GBP 27.2 m).
Within our Engine Composites business, we continued to make good
progress with operational improvements including the transfer of
additional high volume parts to our facility in Mexico. We remain
firmly focused on our recovery plan in Engine Composites and
returning this product group to mid-teens margins having delivered
a number of operational improvements. However, as reported at the
half year, due to the severe and sudden downturn in civil OE
volumes, margin recovery 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. Defense 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 (FY 2020: revenue of GBP32.8m) is excluded from
organic figures. Energy & Equipment represents 20% of Group
revenue and generates 83% of its revenue from OE and 17% from the
aftermarket.
Operational and strategic highlights
-- Strong Defence performance across ground vehicle cooling
systems, countermeasures and ammunition handling
-- Sale of the Training Systems business in June 2020
-- Continued footprint consolidation with closure of the Orange
County site and the transfer of products to other sites in the US
and Europe
-- Continued transfer of production volumes to low cost countries
Financial performance
Revenue was up 7% organically (down 19% on a reported basis with
the inclusion of Training Systems) with a strong performance from
Defense Systems and strong OE growth on the Apache AH-64 and other
rotary wing. In energy, despite the volatility in market conditions
during the year, revenue was 12% lower on an organic basis,
reflecting a strong order book as we entered the year. Underlying
operating margins in Energy & Equipment at 12.7% were 20 basis
points lower than the comparative period (FY 2019: 12.9%).
With the US defence budget agreed for 2021, a healthy order book
and a number of promising commercial opportunities in both energy
and defence, the outlook for 2021 is encouraging. As well as
focusing on the conversion of these opportunities, our focus in
Energy & Equipment will continue to be the delivery of further
operational improvements across all sites.
Services & Support (S&S) 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.
Operational and strategic highlights
-- Continued delivery of strategic initiatives with
consolidation of repair capabilities in our three regional centres
of excellence: Ansty Park in the UK, Singapore and Miami in the
US
-- Expansion of Singapore aftermarket capability and footprint
-- Enhanced maintenance forecasting capabilities leveraging best
in class technologies to improve inventory management, reduce lead
times and enhance customer service levels
-- Introduction of 'Smart Scoping' in our three regional hubs to
leverage engineering capabilities to increase efficiency and reduce
MRO costs
Financial performance
Within S&S, order intake in civil aftermarket was down 49%
in the year as our aftermarket customers deferred orders for both
spare parts and MRO. In APAC, orders were down 37% with the
recovery in the Chinese domestic market underpinning the region;
order intake was down 48% in the Americas with the 737MAX grounding
negatively influencing demand for spare parts and, as a result of
repeated lockdowns and associated border controls, within EMEA
order intake was down 59% in the year.
Divisional revenue was 35 % lower organically with civil
aerospace revenue down 40 %. Large jet revenue, which represented
82 % of S&S civil revenue, was down 41 % organically in the
year, with regional and business jets down 39 % and 32 %
respectively. In defence, revenue was 11 % lower on an organic
basis.
On a regional basis, organic revenue was down 32% in APAC and
34% and 36% in Americas and EMEA respectively. Underlying operating
margin was 210 basis points lower at 12.7 % (FY 2019: 14.8 %).
In the coming year , our core priorities within S&S will be
to ensure the smooth integration of brakes spares and repairs into
the division, drive an increase in market share through signing
additional SMARTSupport(R) contracts and investing further in our
three regional aftermarket centres of excellence.
IN V ES T ING F O R T HE FUTURE
F2020 2019 % Change
GBP'm GBP'm Organic Reported
------- ------- -------- ---------
Total research and development
(R&D) 97.9 118.5 (14) (17)
Less: Charged to cost of sales
/ WIP (20.8) (23.8) (12) (13)
Less: Capitalised (41.4) (54.7) (20) (24)
Add: Amortisation / Impairment 32.6 28.7 24 14
------- ------- -------- ---------
Charge to underlying net operating
costs 68.3 68.7 4 (1)
------- ------- -------- ---------
Capital expenditure 89.7 94.4
------- -------
While we have scaled back expenditure on R&D in the year as
part of our overall cash saving initiative, we have continued to
invest in sustainable technologies to support new product
development and future growth opportunities. Accordingly, total
R&D expenditure in the full year of GBP97.9m was broadly in
line with the prior year as a percentage of revenue at 5.8% (FY
2019: 5.2%). The charge to underlying net operating costs,
including amortisation and impairment, decreased by 1% (increased
by 4% on an organic basis) to GBP68.3m (2019: GBP68.7m).
Capital expenditure of GBP89.7m in 2020 was slightly lower than
the prior year (FY 2019: GBP94.4m) and below our initial guidance
of around GBP130m issued in February 2020. This reflects the
actions we have taken to preserve cash and the associated deferral
of capital expenditure relating to the transfer of production to
Ansty Park and investment in carbon capacity, which will now be
incurred in 2021 and beyond as these projects are completed.
For full year 2021, we expect to invest around GBP90m on R&D
and GBP80m on capital expenditure, as we complete major projects
deferred from 2020.
OTHER FI N A N C I A L INFORMATION
Foreign Exchange
The Group is exposed to both translation and transaction risk
due to changes in foreign exchange rates. These risks principally
relate to the US Dollar/Sterling rate, although exposure also
exists in relation to other currency pairs, principally translation
risk for the Sterling/Euro and Sterling/Swiss Franc and transaction
risk for the US Dollar/Euro and US Dollar/ Swiss Franc.
2020 2019
----- ----
Average translation rates against Sterling:
US Dollar 1.29 1.28
Euro 1.14 1.14
Swiss Franc 1.22 1.27
----- ----
Average transaction rates:
US Dollar/Sterling 1.38 1.42
US Dollar/Euro 1.17 1.19
US Dollar/Swiss Franc 1.09 1.06
----- ----
Year-end rates against Sterling:
US Dollar 1.37 1.32
Euro 1.11 1.18
Swiss Franc 1.20 1.28
----- ----
The results of foreign subsidiaries are translated into Sterling
at weighted average exchange rates. Sterling remained volatile
throughout 2020, trading at between $1.15 and $1.37 against the US
Dollar. Over the year as a whole, the average Sterling rate against
the US Dollar was $1.29 (2019: $1.28) providing a modest negative
impact on our reported results for the year. Compared to 2019,
translation of results from overseas businesses decreased Group
revenue by GBP8.6m and decreased underlying profit before tax (PBT)
by GBP0.1m in the year.
The sensitivity of full-year revenue and underlying PBT to
exchange rate translation movements against sterling, when compared
to the 2020 average rates, is shown in the table below:
Underlying
Average Revenue PBT
rate GBP'm GBP'm
-------- -------- -----------
Impact of 10 cent movement*:
US Dollar 1.29 85 5
Euro 1.14 9 1
Swiss Franc 1.22 6 1
-------- -------- -----------
* As measured against 2020 actual full-year revenue and underlying PBT.
Transaction risk arises where revenues and/ or costs of our
businesses are denominated in a currency other than their own. We
hedge known, and some anticipated transaction currency exposures,
based on historical experience and projections. Our policy is to
hedge at least 70% of the next 12 months' anticipated exposure and
to permit the placing of cover up to five years ahead. Compared to
2019, the Group's revenue was unfavourably impacted by GBP3.8m and
underlying PBT for the year benefited by GBP2.5m from currency
transaction movements.
Each ten cent movement in the US Dollar against the average
hedge rates achieved in 2020 would affect underlying PBT by
approximately GBP7.0m in respect of US Dollar/Sterling exposure,
GBP2.0m in respect of US Dollar/Euro exposure and GBP2.0m in
respect of US Dollar/Swiss Franc exposure.
Hedging
The following table details hedging currently in Average
in place: place 8 transaction
% rates 9
--------- -------------
2021:
US dollar/Sterling 100 1.36
US dollar/Euro 100 1.16
US dollar/Swiss Franc 100 1.13
--------- -------------
2022 - 2024 inclusive:
US dollar/Sterling 70 1.33
US dollar/Euro 25 1.21
US dollar/Swiss Franc 0 N/A
--------- -------------
Taking translation and transaction benefit into account, the
impact of changes in foreign exchange rates in FY 2020 compared
with FY 2019 rates was to decrease reported revenue by GBP12.4m and
increase underlying PBT by GBP2.4m.
At the end of the year, sterling strengthened against the US
dollar. Should the current level of sterling against the US dollar
as at the date of this report be maintained throughout 2021, it
will generate a headwind for both Group revenue and profit.
8 Based on forecast transaction exposures.
9 Hedging in place with unhedged exposures based on exchange
rates at 29 January 2021.
Finance costs
Underlying net finance costs were GBP31.0m (2019: GBP32.5m)
principally reducing as a result of lower USD interest rates on our
floating rate debt, partly offset by the full year impact of
interest arising from the new Ansty Park lease, which commenced in
H2 2019. With the raising of the USD 300m private placement debt in
November 2020, a higher proportion of the Group's borrowings are
now subject to fixed interest rates, which will result in a modest
headwind to underlying net finance costs for 2021.
Taxation
The Group's underlying tax rate for the year was 19.7% (FY 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 continues to appeal against the ruling, in
parallel with the UK government's own appeal, to the European
General Court. While dates for these appeals to be heard have not
been set, the UK tax authority is obliged to collect amounts it
considers state aid and in late February 2021 the Group received
assessments from the UK tax authority. The assessments are in line
with the provision held and we shall be making a cash payment in
respect of the CFC regime in the first half of 2021.
As expected, cash tax increased in the year to GBP42.1m (FY
2019: GBP14.4m) driven by the phasing of payments and an increase
in the cash tax rate. Over the next two to three years, we expect
the cash tax rate to start converging with the P&L tax rate as
historical tax reliefs and allowances come to an end and tax relief
on certain capital expenditure is received over a longer time
period. As a result of this and the payment in respect of the UK
CFC regime, we expect the level of cash tax to be around GBP60m for
full year 2021.
Capital allocation priorities
The unprecedented impact of COVID-19 in 2020 meant we had to
adjust our normal capital allocation approach, as we focused on a
series of measures to reduce costs and preserve cash.
Notwithstanding this, our prime objective continues to be to
invest cash organically in developing differentiated technologies,
to accelerate the Group's growth and maintain its strong market
positions across a number of product categories, and operational
efficiencies. A mainstay of our capital allocation approach over
several decades has been to maintain a progressive dividend policy
and the payment of a regular dividend to our shareholders. The
decision not to pay a dividend in 2020 was difficult and so we look
forward to restoring dividend payments when the recovery in civil
aerospace is more established.
At present, the Board continues to believe that in maintaining
an efficient balance sheet with ample covenant headroom and
investment capacity, a net debt:EBITDA ratio of between 1.5x and
2.5x is appropriate, while preserving flexibility to move outside
this range in certain situations, of which COVID-19 is one. The
Board will keep this policy under review.
Retirement benefit schemes
The Group's principal defined benefit pension schemes are in the
UK and US. On 1 February 2021, the Group announced, following a
consultation process with employees, that the UK plan would be
closed to future accrual with effect from 6 April 2021. Once this
change takes effect, and following the closure of one of the
Group's US schemes during 2020, none of the UK or US defined
benefit pension schemes will be open to future accrual.
Total scheme deficits in 2020 increased to GBP295.4m (2019:
GBP267.9m) with the principal drivers of the net increase
being:
-- an increase of GBP136.1m (2019: increase of GBP142.7m)
relating to re-measurement losses on scheme liabilities,
principally arising from the significant weakening of AA corporate
bond yields in both the UK and US;
-- a reduction of GBP93.5m (2019: reduction of GBP53.5m) due to
re-measurement gains on scheme assets; and
-- net deficit reduction payments in the year of GBP21.7m (2019:
GBP35.2m). In the UK, following the COVID-19 outbreak, the Group
agreed with the trustees to defer four months of deficit
contributions amounting to GBP9.6m, which will now be made over the
remainder of the current recovery plan to August 2023. Deficit
contributions recommenced in Q3 of 2020. In the US, legislation was
passed in response to COVID-19 allowing companies to defer
contributions due in 2020 to January 2021, as a result of which the
Group deferred GBP2.4m of payments planned for 2020.
In the UK, the Group is currently making deficit payments in
accordance with a recovery plan agreed with the trustees following
the 2018 triennial funding valuation, amended in 2020 following the
four month deferral of deficit contributions. This amended recovery
plan provides for the 2018 deficit to be addressed by payments
which gradually increase over the period to August 2023. Under the
plan, the Group will make deficit contributions of GBP38.4m in
2021, GBP40.2m in 2022 and GBP29.9m in 2023.
At 31 December 2020, principally due to the significant fall in
bond yields since the date of the 2018 valuation, the current UK
funding position is approximately GBP135m 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
April 2021 triennial valuation, which we would expect to be
finalised during H1 2022. Deficit contributions to address any
additional deficit would commence at a date to be agreed with the
trustees once the valuation is finalised.
CONSOLIDATED INCOME STATEMENT
For the year ended 31 December 2020
2020 2019
Notes GBP'm GBP'm
---------- ----------
Revenue 4 1,684.1 2,276.2
Non-GAAP measures
Exceptional Impairment losses and other
asset write-downs 8a (8.6) -
Other cost of sales (1,192.0) (1,458.0)
----------------------------------------- ------ ---------- ----------
Cost of sales (1,200.6) (1,458.0)
Gross profit 483.5 818.2
Non-GAAP measures
Exceptional Impairment losses and other
asset write-downs 8a (365.6) -
Other operating costs (452.7) (541.9)
----------------------------------------- ------ ---------- ----------
Operating costs (818.3) (541.9)
Operating income 5 37.5 49.0
---------- ----------
Net operating costs (780.8) (492.9)
Operating (loss)/profit (1) (297.3) 325.3
Finance income 0.5 2.2
Finance costs (37.2) (40.8)
---------- ----------
Net finance costs 9 (36.7) (38.6)
(Loss)/profit before tax (2) (334.0) 286.7
Tax credit/(charge) 10 19.8 (64.1)
(Loss)/profit for the year attributable
to equity owners of the Company (314.2) 222.6
---------- ----------
(Loss)/earnings per share:
Basic (3) 11 (40.4)p 28.8p
Diluted (4) 11 (40.4)p 28.3p
---------- ----------
Non-GAAP Measures
(1) Underlying operating profit 4 & 6 190.5 402.8
(2) Underlying profit before tax 6 159.5 370.3
(3) Underlying basic earnings per share 11 16.5p 37.3p
(4) Underlying diluted earnings per
share 11 16.2p 36.7p
----------------------------------------- ------ ---------- ----------
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
For the year ended 31 December 2020
2020 2019
Notes GBP'm GBP'm
---------- --------
(Loss)/profit for the year attributable
to equity owners of the Company (314.2) 222.6
Items that may be reclassified to the income
statement in subsequent periods:
Currency translation movements 28 (79.9) (68.7)
Movements in fair value of financial
liabilities arising from changes in
credit risk 1.8 -
Tax effect 1.6 0.3
---------- --------
(76.5) (68.4)
Items that will not be reclassified to the
income statement in subsequent periods:
Remeasurement of retirement benefit
obligations (42.6) (89.2)
Tax effect 10.8 11.9
---------- --------
(31.8) (77.3)
Other comprehensive expense for the
year (108.3) (145.7)
Total comprehensive (expense)/income for the
year attributable to equity owners
of the Company (422.5) 76.9
---------- --------
CONSOLIDATED BALANCE SHEET
At 31 December 2020
2020 2019
Notes GBP'm GBP'm
---------- ----------
Non-current assets
Goodwill 14 1,519.5 1,966.6
Development costs 14 531.9 575.9
Programme participation costs 14 18.7 18.0
Other intangible assets 14 401.1 503.6
Property, plant and equipment 15 458.8 449.4
Investments 16 20.8 14.1
Other receivables 16.5 17.0
Contract assets 59.6 55.2
Derivative financial instruments 20 15.0 14.6
Deferred tax assets 19.2 23.3
3,061.1 3,637.7
Current assets
Inventories 426.9 489.8
Trade and other receivables 251.1 379.9
Contract assets 48.8 66.3
Derivative financial instruments 20 5.4 3.8
Current tax recoverable 11.5 11.1
Cash and cash equivalents 178.6 155.3
Assets classified as held for sale 17 14.7 -
---------- ----------
937.0 1,106.2
Total assets 4 3,998.1 4,743.9
Current liabilities
Trade and other payables (296.5) (464.5)
Contract liabilities (50.8) (50.5)
Derivative financial instruments 20 (21.6) (16.5)
Current tax liabilities (56.9) (81.6)
Lease liabilities (14.7) (16.4)
19 &
Bank and other borrowings 20 (10.5) (219.4)
Provisions 21 (32.6) (36.2)
Liabilities directly associated with
assets classified as held for sale 17 (3.7) -
(487.3) (885.1)
Net current assets 449.7 221.1
Non-current liabilities
Other payables (8.5) (2.1)
Contract liabilities (73.9) (77.0)
Derivative financial instruments 20 (0.3) (4.6)
Deferred tax liabilities (93.4) (155.3)
Lease liabilities (129.6) (136.2)
19 &
Bank and other borrowings 20 (796.8) (694.5)
Provisions 21 (80.3) (64.4)
Retirement benefit obligations 22 (295.4) (267.9)
(1,478.2) (1,402.0)
Total liabilities (1,965.5) (2,287.1)
Net assets 2,032.6 2,456.8
---------- ----------
Equity
Share capital 39.0 38.8
Share premium 1,226.6 1,226.5
Other reserves 15.7 15.7
Hedging and translation reserves 348.9 425.4
Retained earnings 402.4 750.4
---------- ----------
Total equity attributable to owners
of the Company 2,032.6 2,456.8
---------- ----------
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
For the year ended 31 December 2020
Equity attributable to owners of the
Company
Hedging
Share Share Other and translation Retained Total
capital premium reserves reserves earnings equity
GBP'm GBP'm GBP'm GBP'm GBP'm GBP'm
--------- ---------- ---------- ----------------- ---------- ----------
At 1 January 2019 38.8 1,223.9 15.7 493.8 720.2 2,492.4
Profit for the year - - - - 222.6 222.6
Other comprehensive expense
for the year - - - (68.4) (77.3) (145.7)
--------- ---------- ---------- ----------------- ---------- ----------
Total comprehensive (expense)/income
for the year - - - (68.4) 145.3 76.9
Employee share schemes:
Value of services provided - - - - 17.9 17.9
Issue of equity share
capital - 2.6 - - (2.6) -
Dividends - - - - (130.4) (130.4)
--------- ---------- ---------- ----------------- ---------- ----------
At 31 December 2019 38.8 1,226.5 15.7 425.4 750.4 2,456.8
--------- ---------- ---------- ----------------- ---------- ----------
Loss for the year - - - - (314.2) (314.2)
Other comprehensive expense
for the year - - - (76.5) (31.8) (108.3)
----- -------- ----- --------- ---------- ----------
Total comprehensive expense
for the year - - - (76.5) (346.0) (422.5)
Employee share schemes:
Value of services provided - - - - (1.7) (1.7)
Issue of equity share
capital 0.2 0.1 - - (0.3) -
----- -------- ----- --------- ---------- ----------
At 31 December 2020 39.0 1,226.6 15.7 348.9 402.4 2,032.6
----- -------- ----- --------- ---------- ----------
CONSOLIDATED CASH FLOW STATEMENT
For the year ended 31 December 2020
2020 2019
Notes GBP'm GBP'm
-------- --------
Non-GAAP measures
Cash inflow from operations before business
disposal expenses and exceptional operating
items 282.9 451.1
Cash outflow from business disposal expenses 29 (5.2) (9.4)
Cash outflow from exceptional operating
items 8 (49.3) (27.3)
---------------------------------------------- ------ -------- --------
Cash inflow from operations 26 228.4 414.4
Interest received 0.1 1.8
Interest paid (32.2) (34.9)
Tax paid (42.1) (14.4)
Cash inflow from operating activities 154.2 366.9
-------- --------
Investment acquired 16 (7.6) -
Businesses disposed 29 117.0 78.3
Capitalised development costs 14 (41.4) (54.7)
Capitalised programme participation costs (1.6) (2.0)
Purchase of intangible assets (11.0) (17.2)
Purchase of property, plant and equipment (80.8) (77.2)
Government grants received in respect of
purchase of property, plant and equipment 2.1 -
Proceeds from disposal of property, plant
and equipment 1.3 23.1
Cash outflow from investing activities (22.0) (49.7)
-------- --------
Dividends paid to Company's shareholders 12 - (130.4)
Issue of equity share capital 0.3 -
Proceeds from bank and other borrowings 618.6 0.4
Repayments of bank and other borrowings (705.8) (213.0)
Debt issue costs paid (2.4) -
Reverse lease premium received 26 3.5 18.9
Repayments of lease liabilities 18 (15.4) (16.2)
-------- --------
Cash outflow from financing activities (101.2) (340.3)
-------- --------
Net increase/(decrease) in cash and cash
equivalents 31.0 (23.1)
Cash and cash equivalents at start of the
year 155.3 181.9
Exchange losses on cash and cash equivalents (7.7) (3.5)
-------- --------
Cash and cash equivalents at end of the
year 178.6 155.3
-------- --------
NOTES TO THE FINANCIAL STATEMENTS
For the year ended 31 December 2020
1. General information and basis of preparation
This document contains abridged preliminary financial
information for the year ended 31 December 2020 together with
comparatives.
Meggitt PLC is a public limited company listed on the London
Stock Exchange, domiciled and incorporated in the United Kingdom
with the registered number 432989. Meggitt PLC is the parent
company of a Group whose principal activities during the year 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 information presented has been prepared in accordance with
both international accounting standards in conformity with the
requirements of the Companies Act 2006 and international financial
reporting standards adopted pursuant to Regulation (EC) No
1606/2002 as it applies in the European Union. It has been prepared
on a going concern basis and under the historical cost convention,
as modified by the revaluation of certain financial assets and
financial liabilities (including derivative financial instruments)
at fair value).
The financial information contained in this document does not
constitute Group statutory accounts as defined in Sections 404 and
435 of the Companies Act 2006. It is based on, and is consistent
with, that in the Group's statutory accounts for the year ended 31
December 2020 and those financial statements will be delivered to
the Registrar of Companies following the Company's Annual General
Meeting. The auditors' report on those accounts is unqualified,
does not draw attention to any matters by way of emphasis and does
not contain a statement under Section 498(2) or (3) of the
Companies Act 2006.
Group statutory accounts for the year ended 31 December 2019
were approved by the Board of Directors on 24 February 2020 and
have been filed with the Registrar of Companies. The auditors'
report on those accounts was unqualified, did not draw attention to
any matters by way of emphasis and did not contain a statement
under Section 498(2) or (3) of the Companies Act 2006.
Going concern
The directors have formed a judgement, at the time of approving
the 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 the Annual Report. For this reason, the
directors continue to adopt the going concern basis in preparing
the consolidated financial statements.
In making a judgement as to whether the going concern principle
should be adopted, the directors have considered the period
starting with the date the consolidated financial statements were
approved by the Board and ending on 31 March 2022.
Actions taken to preserve cash and liquidity
In response to the COVID-19 pandemic, the Group implemented a
number of actions to reduce costs, preserve cash and resize the
business. These actions are described on page 4. Additionally, to
preserve liquidity, during 2020 the Group:
-- Arranged a forward start on its revolving USD 750m revolving
credit facility, due to mature in September 2021, by the signing of
a new one-year USD 575m revolving credit facility maturing in
September 2022; and
-- Issued USD 300m loan notes to private placement investors which mature in 2023 and 2025.
Current liquidity
At 31 December 2020, the Group had the following committed
credit facilities with its relationship banks and private placement
investors:
Maturity date
During assessment period Later Total
------------------------------------
H1 H2 Q1
2021 2021 2022 Subtotal
GBP'm GBP'm GBP'm GBP'm GBP'm GBP'm
------- -------- ------ --------- -------- --------
USD 750m multi-currency syndicated
revolving credit facility* - 128.2 - 128.2 421.2 549.4
USD loan notes issued to private
placement investors in 2010 - - - - 91.6 91.6
USD bilateral facilities - - - - 91.5 91.5
Sterling bilateral facilities - - - - 145.0 145.0
USD loan notes issued to private
placement investors in 2016 - - - - 439.5 439.5
USD loan notes issued to private
placement investors in 2020 - - - - 219.8 219.8
------- -------- ------ --------- -------- --------
Total committed credit facilities - 128.2 - 128.2 1,408.6 1,536.8
------- -------- ------ --------- -------- --------
* Comprises USD 175m maturing in September 2021, with the
balance of USD 575m covered by the additional forward start
facility that matures in September 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 is eligible to issue commercial paper under this
facility (subject to certain terms and restrictions) up to and
including 22 March 2021, with a maturity period of up to 12 months.
The Group has no commercial paper issued under this facility at 31
December 2020 or at the date these consolidated financial
statements were approved by the Board.
At 31 December 2020, the Group had the following headroom
against its committed credit facilities:
Total
GBP'm
--------
Committed credit facilities 1,536.8
Bank and other borrowings 807.3
Less: Cash (178.6)
--------
Net borrowings excluding lease liabilities 628.7
Headroom 908.1
--------
Covenants
The committed credit facilities set out above 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 30 June and 31
December), with net debt/EBITDA not to exceed 3.5x and interest
cover to be not less than 3.0x. At 31 December 2020, net
debt/EBITDA was 2.2x and interest cover was 9.8x. The covenant with
the least headroom during the assessment period is net debt/EBITDA
at 30 June 2021, which will reflect a full trailing 12 months
performance post COVID-19, before an anticipated recovery in H2
2021. No covenant waivers have been sought by the Group.
Base case scenario
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, customer base and shareholders. To model the expected impact
on the Group, a base case model was developed in Q2 2020, which has
been regularly updated subsequently to reflect the Group's current
view of the most likely impact on its revenues and how this impacts
profit and cash flows over the next five years. The current model
was prepared for, and reviewed by, the Board in October 2020. In
assessing whether the going concern principle remains appropriate,
the Group has used the outputs from this model covering the period
to 31 March 2022. Where appropriate, the outputs have been adjusted
to reflect market dynamics between October 2020 and the date of
approval of the Annual Report - these adjustments were also
reviewed by the Board. Over the period covered by the going concern
assessment, the key assumptions within the base case scenario
are:
-- For civil AM, ASKs in 2021 are assumed to be approximately
60% of 2019 levels, with recovery weighted towards H2 2021 as the
vaccine roll-out enables the easing of lock down restrictions and
consumer demand for flights progressively increases. The
progressive recovery is assumed to continue into Q1 2022. The
Group's civil AM revenue reflects these market factors, its
exposure to specific platforms/customers and an assumed spares/MRO
mix similar to prior periods.
-- For civil OE, aircraft production rates increase modestly in
2021, re flecting emerging build rates from the Group's customer
base and the extent to which 2021 aircraft deliveries will be met
from existing inventory held by OEMs, particularly on the 737 MAX.
Aircraft production rates increase further in 2022, but remain
significantly below 2019 levels.
-- US defence spending in 2021 remains broadly flat, consistent
with the US DOD budget approved in January 2021. No significant
changes in levels of US defence spending in 2022 are assumed.
-- A modest improvement in the Group's overall gross margin
percentage in H1 2021, driven by the full period impact of the cost
saving initiatives actioned in 2020, price increases and savings
from the Group's footprint initiatives. The Group's gross margin
percentage increases progressively over the remainder of the
assessment period driven principally by the assumed increase in
civil aftermarket volumes, as ASKs start to recover, with a similar
civil AM mix assumed to prior periods.
-- At a free cash flow level, capital expenditure in 2021
remains at similar levels to 2020, before reducing modestly in 2022
following completion of the Antsy Park facility; UK pension deficit
payments continue to be made in accordance with the existing 2018
recovery plan agreed with UK trustees, including certain 2020
deferred payments; and tax payments reflect the payment in H1 2021,
notwithstanding the ongoing appeals, of the liability recognised in
respect of the Controlled Foreign Company regime.
Under the base case scenario, the Group has sufficient existing
committed credit facilities to meet its obligations as they fall
due and does not breach either of the financial covenant
ratios.
Downside scenario ("severe but plausible scenario")
Due to inherent uncertainty over the extent and pace of recovery
in the Group's commercial aerospace markets in particular, the
Group also developed a downside scenario in Q2 2020 covering the
same period as the base case scenario, and has subsequently updated
this regularly as its view of a severe but plausible scenario has
evolved. The current model was also prepared for, and reviewed by,
the Board in October 2020. To stress test the assumption that the
going concern principle remains appropriate under a severe but
plausible scenario, the Group has used the outputs from this model
covering the period to 31 March 2022. Where appropriate, outputs
have been adjusted to reflect market dynamics between October 2020
and the date of approval of the Annual Report - these adjustments
were also reviewed by the Board. The downside scenario assumes:
-- For civil AM, delays in the global vaccine roll-out programme
and the emergence of new COVID-19 variants adversely impact
consumers' ability and confidence to resume traveling as quickly as
anticipated in the base case. Under this scenario, civil AM
revenues are around 8% lower than the base case for 2021. This
approximates to a decline in ASKs of 7-10 percentage points
compared to the base case, with the reduction significantly
weighted towards H2. However, as noted above, the Group's civil AM
revenue reflects its exposure to specific platforms/customers and
an assumed spares/MRO mix, and does not correlate perfectly to
macro ASK drivers.
-- For civil OE, weaker customer demand causes airlines to
further defer purchases, resulting in reduced production build
rates for OEM deliveries, which remain broadly flat over the
assessment period.
-- Additionally, as a result of the wider impact of a more
prolonged pandemic, higher levels of government borrowing lead to
defence spending falling modestly from 2020 levels in the
assessment period.
-- Reduced volumes have a consequential adverse impact on gross
margin in the assessment period.
-- The Group takes further appropriate mitigating actions to
reduce its cost base and to preserve cash flows.
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. The continued availability of the CCFF during the
period has not been assumed. During the assessment period, the
Group does not breach either of the financial covenant ratios.
Principal risks
The Group has also considered whether its principal risks (as
described in note 30) 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
going concern assessment 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 not assumed that any of the catastrophic events described
within its business interruption risk (see note 30) occur during
the going concern assessment period. The Board has regularly
reviewed these risks throughout the period since the start of the
COVID-19 outbreak and up to the date of the financial statements,
and has approved an updated Group risk appetite statement with
associated risk tolerances to ensure that risks are managed within
acceptable limits. 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 there
are no material uncertainties around the Group's or Company's
ability to continue as a going concern and it is appropriate to
adopt the going concern principle in the financial statements.
2. Accounting policies
During the year, no new accounting standards, amendments or
revisions to existing standards, or interpretations have become
effective which had a significant impact on the Group's
consolidated financial statements.
Recent accounting developments
Amendments to IAS 37 "Onerous contracts - costs of fulfilling a
contract"
Under IAS 37, a contract is onerous when the unavoidable costs
of meeting the contractual obligations exceed the economic benefits
arising from the contract. Prior to the amendments to IAS 37, there
was diversity in practice as to whether the costs of meeting
contractual obligations should comprise only incremental costs
(e.g. direct materials and direct labour) or also include an
allocation of other direct costs (e.g. factory overheads) which
would be incurred regardless of whether the contract was being
performed or not. Under the Group's current accounting policy, it
only includes incremental direct costs in measuring the costs to
fulfil a contract under IAS 37. The IAS 37 amendments clarify
however, that the costs of fulfilling a contract should include an
allocation of other direct costs. The Group has yet to assess the
impact of these amendments, which may result in the recognition of
additional onerous contracts and will result in the measurement of
existing onerous contract provisions increasing. The amendments are
effective for accounting periods beginning on, or after, 1 January
2022 to open contracts at that date, with any additional amounts
required to be recognised as an adjustment to retained earnings at
that date. These amendments have not been early adopted.
A number of other additional new standards and amendments and
revisions to existing standards have been published and are
mandatory for the Group's future accounting periods. These have not
been early adopted and are not expected to have a significant
impact on the Group's consolidated financial statements when they
are adopted.
3. Critical accounting estimates and judgements
In applying the Group's accounting policies, the Group is
required to make certain estimates and judgements concerning the
future. These estimates and judgements are regularly reviewed and
revised as necessary. The estimates and judgements that have the
most significant effect on the amounts included in the consolidated
financial statements are described below.
Critical accounting estimates
Impairment of goodwill and other assets
The COVID-19 pandemic has had a dramatic impact in the year 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 Available Seat Kilometres (ASKs) 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 (see note
14).
Forward-looking assessments have also significantly 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 any reasonably foreseeable changes in the estimates
made would require a material change to the impairment losses or
other asset write-downs recognised in respect of these individual
asset classes in the next 12 months and accordingly these areas are
not considered to be critical estimates.
Retirement benefit obligations
The liability recognised in respect of retirement benefit
obligations is dependent on a number of estimates, principally
those relating to mortality, inflation, salary increases and the
rate at which liabilities are discounted. External actuarial advice
is taken with regard to the most appropriate assumptions to use
(see note 22).
Critical accounting judgements
Going concern
The judgement made by the directors that the going concern basis
is appropriate in preparing the consolidated financial statements
is a new critical judgement for 2020. The basis for making the
judgement, the assumptions made in reaching the judgement and the
results of the stress testing performed are set out in note 1.
Capitalisation of development costs
The Group is required to make judgements as to when development
costs meet the criteria to be recognised as intangible assets. The
majority of capitalised development costs relate to technology
developed for aerospace programmes. In such cases, costs are
typically not capitalised until a contract to develop the
technology is awarded by a customer as, prior to this date, it is
generally not possible to reliably estimate the point at which
research activities conclude and development activities commence.
Absent a contract to develop the technology, the Group also does
not believe there is generally sufficient certainty over the future
economic benefits that will be generated from the technology, to
allow capitalisation of costs. Once such a contract is awarded, the
Group capitalises development costs provided it expects to retain
the intellectual property in the technology throughout
substantially all of the life of the aircraft or engine and it is
probable that future economic benefits will flow to the Group. In
making a judgement as to whether economic benefits will flow to the
Group, the Group makes estimates of aircraft or engine volumes
(taking into account the extent to which the Group has a
sole-source position), aftermarket revenues which are dependent on
aircraft utilisation, fleet lives and operator service routines,
costs of manufacture and costs to complete the development
activity. During 2020, the Group recognised GBP41.4m (2019:
GBP54.7m) of development costs as an intangible asset (see note
14).
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.
Year ended 31 December 2020
Other
Airframe Engine Energy Services *
Systems Systems & Equipment & Support Total
GBP'm GBP'm GBP'm GBP'm GBP'm GBP'm
--------- --------- ------------- ----------- -------- --------
Gross segment revenue 972.7 338.8 358.5 326.6 - 1,996.6
Inter-segment revenue (179.6) (105.2) (23.5) (4.2) - (312.5)
--------- --------- ------------- ----------- -------- --------
Revenue from external
customers 793.1 233.6 335.0 322.4 - 1,684.1
--------- --------- ------------- ----------- -------- --------
At a point in time 754.2 219.9 161.2 315.2 - 1,450.5
Over time: Power by the
hour/ Cost per brake
landing 22.2 4.4 - 7.2 - 33.8
Over time: Other 16.7 9.3 173.8 - - 199.8
--------- --------- ------------- ----------- -------- --------
Revenue by basis of recognition 793.1 233.6 335.0 322.4 - 1,684.1
--------- --------- ------------- ----------- -------- --------
Underlying operating
profit/(loss)** 120.5 (13.2) 42.4 40.8 - 190.5
--------- --------- ------------- ----------- -------- --------
Year ended 31 December 2019 (restated)***
Other
Airframe Engine Energy Services *
Systems Systems & Equipment & Support Total
GBP'm GBP'm GBP'm GBP'm GBP'm GBP'm
--------- --------- ------------- ----------- -------- --------
Gross segment revenue 1,451.7 341.2 450.3 519.0 5.6 2,767.8
Inter-segment revenue (422.2) (11.7) (37.8) (19.9) - (491.6)
--------- --------- ------------- ----------- -------- --------
Revenue from external
customers 1,029.5 329.5 412.5 499.1 5.6 2,276.2
--------- --------- ------------- ----------- -------- --------
At a point in time 984.3 312.6 244.3 487.5 5.6 2,034.3
Over time: Power by the
hour/ Cost per brake
landing 35.2 7.2 - 11.6 - 54.0
Over time: Other 10.0 9.7 168.2 - - 187.9
--------- --------- ------------- ----------- -------- --------
Revenue by basis of recognition 1,029.5 329.5 412.5 499.1 5.6 2,276.2
--------- --------- ------------- ----------- -------- --------
Underlying operating
profit** 247.7 27.2 53.4 74.0 0.5 402.8
--------- --------- ------------- ----------- -------- --------
* Those businesses which were disposed of prior 1 January 2019,
the effective date of the new divisional structure, or were
classified as held for sale at that date, are presented separately
as 'Other'.
** Central costs are allocated using a variety of bases designed
to reflect the beneficial relationship between costs and segments.
Bases include headcount, payroll costs, gross assets and revenue. A
detailed reconciliation of underlying operating profit to operating
profit is shown in note 6.
*** Prior year figures have been restated to reflect the
transfer of the external customer facing relationships for the UK
braking systems maintenance, repair and overhaul business from
Airframe Systems to Services & Support with effect from 1
January 2020. The restatement comprised external revenue of
GBP27.9m and underlying operating profit of GBP2.8m.
Segmental assets
2020 2019**
GBP'm GBP'm
-------- --------
Airframe Systems 1,036.5 1,142.0
Engine Systems 356.2 437.5
Energy & Equipment 234.3 306.8
Services & Support 90.4 82.7
Total segmental trading assets 1,717.4 1,969.0
Centrally managed trading assets* 167.4 162.1
Goodwill 1,519.5 1,966.6
Other intangible assets excluding
software assets 328.6 424.0
Investments 20.8 14.1
Derivative financial instruments -
non-current 15.0 14.6
Deferred tax assets 19.2 23.3
Derivative financial instruments -
current 5.4 3.8
Current tax recoverable 11.5 11.1
Cash and cash equivalents 178.6 155.3
Assets classified as held for sale 14.7 -
-------- --------
Total assets 3,998.1 4,743.9
-------- --------
* Centrally managed trading assets principally include amounts
recoverable from insurers and other third parties in respect of
environmental issues relating to former sites, other receivables
and property, plant and equipment of central companies.
** Prior year figures have been restated to reflect the transfer
of the external customer facing relationships for the UK braking
systems maintenance, repair and overhaul business from Airframe
Systems to Services & Support with effect from 1 January 2020.
The restatement comprised segmental trading assets of GBP5.4m.
5. Operating income
Operating profit is stated after crediting:
2020 2019
GBP'm GBP'm
------- -------
Gain on disposal of property, plant and equipment - 0.9
Amounts arising on the acquisition, disposal
and closure of businesses (note 6a) 32.0 23.5
Financial instruments - gain - 15.0
Net foreign exchange gains - 3.4
Share of profit after tax of joint venture - 1.7
Other income 5.5 4.5
------- -------
Operating income 37.5 49.0
------- -------
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. Items excluded
from underlying profit measures are treated consistently with the
way performance is measured under the Group's short-term and
long-term incentive plans and with covenant requirements defined in
the Group's committed credit facilities.
2020 2019
GBP'm GBP'm
--------- ---------
Operating (loss)/profit (297.3) 325.3
Amounts arising on the acquisition, disposal
and closure of businesses (a) (32.0) (23.5)
Amortisation of intangible assets acquired
in business combinations (note 14) 88.2 89.8
Financial instruments loss/(gain) (note
7) 2.9 (15.0)
Exceptional operating items (note 8) 428.7 26.2
Adjustments to operating profit* 487.8 77.5
Underlying operating profit 190.5 402.8
--------- ---------
(Loss)/profit before tax (334.0) 286.7
Adjustments to operating profit per above 487.8 77.5
Net interest expense on retirement benefit
obligations (note 9) 5.7 6.1
--------- ---------
Adjustments to profit before tax 493.5 83.6
Underlying profit before tax 159.5 370.3
--------- ---------
(Loss)/profit for the year (314.2) 222.6
Adjustments to profit before tax per above 493.5 83.6
Tax effect of adjustments to profit before
tax (51.2) (17.5)
Adjustments to profit for the year 442.3 66.1
Underlying profit for the year 128.1 288.7
--------- ---------
* Of the adjustments to operating profit, GBP39.0m (2019:
GBP8.1m) relating to exceptional operating items has been charged
to cost of sales, with the balance of GBP448.8m (2019: GBP69.4m)
included within net operating costs.
a. The Group separately presents amounts arising on the
acquisition, disposal and closure of businesses. These include
gains or losses made on the disposal or closure of a business,
adjustments to the fair value of contingent consideration payable
in respect of acquired businesses or receivable in respect of
disposed businesses and costs directly attributable to the
acquisition and disposal of businesses.
2020 2019
GBP'm GBP'm
------- -------
Gain on disposal of businesses in the
current year (note 29) (33.3) (23.5)
Amounts recognised in respect of disposals
in prior periods 1.3 -
------- -------
Amounts arising on the acquisition, disposal
and closure of businesses (32.0) (23.5)
------- -------
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 recognised if hedge accounting
had been applied.
When interest rate derivatives qualify to be hedge accounted,
any difference recognised in the income statement as hedge
ineffectiveness between movements in fair value of derivatives and
fair value of fixed rate borrowings is excluded from underlying
profit measures.
2020 2019
GBP'm GBP'm
------- -------
Movement in fair value of foreign currency
forward contracts (15.9) (25.7)
Impact of retranslating net foreign currency
assets and liabilities at spot rate 6.5 (0.2)
Movement in fair value of interest rate derivatives 1.6 (0.3)
Movement in fair value of fixed rate borrowings
due to interest rate risk (1.6) (0.1)
Movement in fair value of cross currency derivatives 12.8 11.8
Movement in fair value of treasury lock derivative (0.5) (0.5)
------- -------
Financial instruments - loss/(gain) 2.9 (15.0)
------- -------
8. Exceptional operating items
Delivery of the Group's strategy includes the restructuring of
its cost base to deliver operational improvements. The exclusion
from underlying profit measures of significant items arising from
site consolidations, business restructuring and integration of
acquired businesses is designed by the Board to align short-term
operational decisions with this longer-term strategy. In addition,
the impact of the global COVID-19 pandemic, and the resulting
uncertainty facing the commercial aerospace industry, have given
rise to significant non-recurring impairment losses and asset
write-downs which have been treated as exceptional operating
items.
Income statement Cash flow
------------------- ---------- -------
2020 2019 2020 2019
Note GBP'm GBP'm GBP'm GBP'm
--------- -------- ---------- -------
Impairment losses and other
asset write-downs a 374.2 - - -
COVID - 19 incremental non-recurring
costs b 22.0 - 18.9 -
Site consolidations c 33.5 20.1 31.6 22.4
Business restructuring costs
and other items d (1.0) 6.1 (1.2) 4.9
--------- -------- ---------- -------
Exceptional operating items 428.7 26.2 49.3 27.3
--------- -------- ---------- -------
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 year comprise:
Cost of Operating Total
sales costs
GBP'm GBP'm GBP'm
----------- ------------- ----------
Impairment of goodwill* (note 14) - 335.7 335.7
Impairment of development costs
(note 14) - 24.5 24.5
Write down of inventory to net
realisable value 8.6 - 8.6
Expected credit losses on trade
receivables - 5.4 5.4
----------- ------------- ----------
Impairment losses and other asset
write-downs 8.6 365.6 374.2
----------- ------------- ----------
* The goodwill impairment charge is lower than that recognised
in the interim condensed consolidated financial statements solely
due to retranslation of the amounts relating to foreign currency
denominated goodwill at the average exchange rates for the
year.
To the extent any of the impairment losses or asset write-downs
recognised in the current year are reversed in a subsequent period,
the reversals will be recognised as exceptional operating
items.
The tax credit in respect of these items was GBP18.8m.
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, GBP11.5m has been recognised within
cost of sales, with the balance of GBP10.5m recognised within other
operating costs. The tax credit in respect of these items was
GBP4.9m.
c. 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
GBP97.2m. In 2020, costs are principally in respect of the move to
the new facility at Ansty Park in the West Midlands, UK 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,
GBP18.9m has been recognised within cost of sales with the balance
of GBP14.6m recognised within other operating costs. The tax credit
in respect of these items was GBP8.8m.
d. In 2020, this includes a credit of GBP1.5m relating to the
reversal of amounts previously recognised as exceptional operating
items, following the recovery of costs from a third party.
9. Net finance costs
2020 2019
GBP'm GBP'm
------- -------
Interest on bank deposits 0.1 1.4
Unwinding of interest on other receivables 0.2 0.5
Other finance income 0.2 0.3
Finance income 0.5 2.2
Interest on bank borrowings 1.3 1.2
Interest on senior notes 24.5 29.4
Interest on lease liabilities 6.0 5.0
Unwinding of discount on provisions (note
21) 0.7 1.2
Net interest expense on retirement benefit
obligations (note 6) 5.7 6.1
Amortisation of debt issue costs 0.8 0.7
Less: amounts capitalised in the cost of
qualifying assets (note 14) (1.8) (2.8)
------ ------
Finance costs 37.2 40.8
Net finance costs 36.7 38.6
------ ------
10. Tax
The statutory tax credit for the year was GBP19.8m (2019: charge
of GBP64.1m) based on the reported loss before tax of GBP334.0m
(2019: profit of GBP286.7m). Based on underlying profit before tax
of GBP159.5m (2019: GBP370.3m) the Group's underlying tax rate for
the current year was 19.7% (2019: 22.0%).
The Finance Act 2020 introduced legislation to cancel the
planned reduction in the main rate of corporation tax in the UK
from 19% to 17%. The legislation which was substantively enacted in
the year, has resulted an increase in the current tax charge of
GBP1.3m.
11. (Loss)/earnings per ordinary share
Earnings per ordinary share ('EPS') is calculated by dividing
the loss attributable to equity owners of the Company of GBP314.2m
(2019: profit of GBP222.6m) by the weighted average number of
shares in issue during the year of 777.8m (2019: 773.7m). The
weighted average number of shares excludes shares bought by the
Group and held during the year by an independently managed Employee
Share Ownership Plan Trust. The weighted average number of own
shares excluded is 3.6m shares (2019: 4.0m shares).
Underlying EPS is based on underlying profit for the year (note
6) and the same number of shares used in the calculation of basic
EPS. It is reconciled to basic EPS below:
2020 2019
Pence Pence
------- -------
Basic EPS (40.4) 28.8
Adjust for effects of:
Amounts arising on the acquisition, disposal
and closure of businesses (4.2) (2.0)
Amortisation of intangible assets acquired
in business combinations 9.2 8.8
Financial instruments - loss/(gain) 0.3 (1.6)
Exceptional operating items 51.0 2.7
Net interest expense on retirement benefit
obligations 0.6 0.6
------- -------
Underlying basic EPS 16.5 37.3
------- -------
Diluted EPS for the year is (40.4p) (2019: 28.3p). The
calculation of diluted EPS adjusts the weighted average number of
shares to reflect the assumption that all potentially dilutive
ordinary shares convert. For the Group, this means assuming all
share awards in issue are exercised. The weighted average number of
shares used in the calculation of diluted EPS is 789.4m (2019:
785.8m). Underlying diluted EPS for the year is 16.2p (2019:
36.7p). 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 EPS.
12. Dividends
On 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 did not recommend the payment of an interim
dividend in respect of 2020 and no final dividend in respect of
2020 is to be proposed at the Annual General Meeting on 29 April
2021 for the same reasons.
13. Related party transactions
The remuneration of key management personnel of the Group, which
is defined for 2020 as members of the Board and the Group Executive
Committee, is set out below.
2020 2019
GBP'm GBP'm
------- -------
Salaries and other short-term employee benefits 4.7 10.8
Share-based payment (credit)/expense (0.5) 2.5
------- -------
Total 4.2 13.3
------- -------
14. Intangible assets
Programme
Development participation Other intangible
Goodwill Costs costs assets
GBP'm GBP'm GBP'm GBP'm
--------- ------------ --------------- -----------------
At 1 January 2019 2,035.3 557.1 18.2 610.4
Exchange rate adjustments (57.9) (16.3) (0.7) (15.0)
Businesses disposed (10.8) (0.9) - -
Additions - 54.7 1.6 17.2
Interest capitalised (note
9) - 2.8 - -
Transfers from contract assets - 7.2 - -
Disposals - - - (0.4)
Amortisation* - (28.7) (1.1) (108.6)
--------- ------------ --------------- -----------------
At 31 December 2019 1,966.6 575.9 18.0 503.6
Exchange rate adjustments (22.9) (7.6) (0.7) (7.3)
Businesses disposed (note
29) (84.8) (19.7) - (0.1)
Additions - 41.4 2.6 13.2
Interest capitalised (note
9) - 1.8 - -
Transferred to assets classified
as held for sale (note 17) (3.7) - - -
Transfers to contract assets - (1.8) - -
Disposals - (1.0) - (0.4)
Impairment losses* (335.7) (25.6) - -
Amortisation** - (31.5) (1.2) (107.9)
--------- ------------ --------------- -----------------
At 31 December 2020 1,519.5 531.9 18.7 401.1
--------- ------------ --------------- -----------------
* Included within impairment losses is GBP335.7m (2019: GBPNil)
relating to goodwill and GBP24.5m (2019: GBPNil) relating to
development costs which have been recognised as exceptional
operating items and excluded from the Group's underlying profit
figures (note 6)
** Included within amortisation of other intangible assets is
GBP88.2m (2019: GBP89.8m) relating to intangible assets acquired in
business combinations and which is excluded from the Group's
underlying profit figures (note 6).
Goodwill
Impairment testing - trigger event
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 2020. The Group considered this to be the date a
trigger event under IAS 36 'Impairment of Assets' occurred and
therefore performed an additional impairment test of its goodwill
balances at the end of March, the closest month end date to this
announcement.
For the purpose of impairment testing, the Group used
value-in-use calculations to determine recoverable amounts as it
did not believe reliable estimates of fair value less costs of
disposal existed given the current market uncertainty. No changes
were made in 2020 to the level at which impairment testing was
performed. The key assumptions for the value in use calculations
for all CGUs and groups of CGUs are discussed in note 14 of the
2020 Interim Results on pages 29 to 30 together with details of
sensitivity testing.
As a result of the impairment test, impairment losses of
GBP335.7m have been recognised as an exceptional operating item
(see note 8). The impairment charge in the year is analysed by CGU
or group of CGUs as follows:
GBP'm
------
Airframe Systems 122.3
Engine Systems 199.7
Energy & Equipment - Fribourg 13.7
------
Total (note 8)* 335.7
------
* The goodwill impairment charge is lower than that recognised
in the interim condensed consolidated financial statements solely
due to retranslation of the amounts relating to foreign currency
denominated goodwill at the average exchange rates for the
year.
Impairment testing subsequent to the trigger event
The Group has assessed whether, at 31 December 2020, there are
indicators that an additional impairment charge would be required
and concluded that such indicators do not exist. This was supported
by a review of:
-- Assets allocated to each of the CGUs and groups of CGUs, for
which an impairment loss was recognised following the trigger event
impairment testing. These had decreased modestly between the
trigger event impairment test date (after recording the impairment
losses) and 31 December 2020;
-- Cash flow estimates for the periods covered by management
estimates. The Group's current five year base case and downside
scenarios, the earlier years of which were used in the going
concern assessment judgement (see note 1), and the probability
weightings that management would assign to these scenarios, were
compared with the equivalent scenarios used for the trigger event
impairment test. Between the trigger event impairment testing date
and 31 December 2020, whilst a second wave of global lockdown
restrictions has taken place, there were also a number of vaccines
announced which were in the process of obtaining regulatory
approval and which subsequent to the balance sheet date have
received approval and are being rolled out globally. When comparing
the current cash flow estimates, which capture a greater part of
the anticipated recovery in the aerospace industry by using the
five-year period to 31 December 2025, rather than the five-year
period to 31 March 2025 at the impairment test trigger event date,
no indicators of an additional impairment were identified;
-- Growth rates for periods beyond those covered by management
estimates. Management's own estimates of long term growth rates had
not changed and long term inflation forecasts for the countries in
which the CGUs and groups of CGUs operate have either remained at
the same levels, or increased modestly at 31 December 2020, since
the trigger event impairment test date; and
-- Discount rates at 31 December 2020. These were recalculated
at 31 December 2020 and had decreased since the trigger event
impairment test for all CGUs and groups of CGUs.
15. Property, plant and equipment
2020 2019
GBP'm GBP'm
------- -------
At 1 January 449.4 404.0
Exchange rate adjustments (6.8) (11.2)
Businesses disposed (note 29) (6.8) (6.2)
Additions 83.0 132.9
Transfer to assets classified as held for
sale (note 17) (1.7) -
Disposals (1.6) (12.8)
Depreciation * (56.7) (57.3)
------- -------
At 31 December 458.8 449.4
------- -------
* The depreciation charge for the year includes GBP3.8m which
has been charged to exceptional operating items (2019:
GBP1.4m).
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:
2020 2019
GBP'm GBP'm
------- -------
At 1 January 14.1 12.9
Exchange rate adjustments (0.5) (0.5)
Additions* 10.4 -
Share of (loss)/profit after tax (3.2) 1.7
------- -------
At 31 December 20.8 14.1
------- -------
* In January 2020, the Group acquired a 33% 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 GBP 7.6m paid in cash in the year and
contingent consideration of GBP2.8m.
17. Assets classified as held for sale
In December 2020, the sale of the Group's aircraft ducting
business, based in Dunstable UK, together with a small product line
from one of the Group's other businesses was agreed. Accordingly,
the related assets of the business have been classified as a
disposal group held for sale and are presented separately at the
balance sheet date together with directly associated liabilities.
The sale completed on 30 January 2021 for a cash consideration of
GBP20.2m, subject to an adjustment for working capital in the
business at the date of disposal.
2020
------------------------------------
Liabilities
directly
Assets associated
classified with assets Total
as held classified
for sale as held for
sale
GBP'm GBP'm GBP'm
------------ ------------- -------
At 1 January 2020 - - -
Additions 14.7 (3.7) 11.0
------------ ------------- -------
At 31 December 2020 14.7 (3.7) 11.0
------------ ------------- -------
Total
GBP'm
-------
Goodwill (note 14) 3.7
Property, plant and equipment (note 15) 1.7
Inventories 5.2
Trade and other receivables 4.1
-------
Assets classified as held for sale 14.7
-------
Trade and other payables (1.4)
Contract liabilities (1.1)
Provisions (note 21) (0.1)
Lease liabilities (1.1)
-------
Liabilities directly associated with
assets classified as held for sale (3.7)
-------
18. Lease Liabilities
The Group leases various factories, warehouses, offices, plant
and equipment. The following amounts are included in respect of its
leases:
2020 2019
GBP'm GBP'm
------- -------
Depreciation charge for right-of-use assets 16.0 16.5
Additions to right-of-use assets* 11.4 55.5
Net book amount of right-of-use assets 104.6 116.0
Interest on lease liabilities (note 9) 6.0 5.0
Expense related to short-term leases and
low-value assets 0.6 0.1
Net cash outflow for leases** 17.9 1.4
------- -------
* In 2019, this includes GBP38.4m relating to the new Ansty Park
site which has a lease term of 30 years.
** Comprises capital payments of GBP15.4m (2019: GBP16.2m) and
interest payments of GBP6.0m (2019: GBP4.1m), less a reverse lease
premium received of GBP3.5m (2019: GBP18.9m) relating to the new
Ansty Park site.
19. Bank and other borrowings
Current Non-current Total
GBP'm GBP'm GBP'm
-------- ------------ --------
At 1 January 2020 219.4 694.5 913.9
Exchange rate adjustments 9.1 (22.2) (13.1)
Proceeds 132.1 486.5 618.6
Repayments (347.2) (358.6) (705.8)
Debt issue costs paid - (2.4) (2.4)
Other movements (2.9) (1.0) (3.9)
-------- ------------ --------
At 31 December 2020 10.5 796.8 807.3
-------- ------------ --------
2020 2019
Analysed as: GBP'm GBP'm
-------- --------
Bank loans 2.2 0.2
Other loans* 8.3 219.2
-------- --------
Current portion 10.5 219.4
-------- --------
Bank loans 43.7 141.4
Other loans 753.1 553.1
-------- --------
Non-current portion 796.8 694.5
-------- --------
20. 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
2020 2019 2020 2019
GBP'm GBP'm GBP'm GBP'm
-------- -------- -------- --------
Derivative financial instruments
- non-current 15.0 14.6 15.0 14.6
Derivative financial instruments
- current 5.4 3.8 5.4 3.8
-------- -------- -------- --------
Financial assets 20.4 18.4 20.4 18.4
-------- -------- -------- --------
Derivative financial instruments
- current (21.6) (16.5) (21.6) (16.5)
Bank and other borrowings -
current (10.5) (219.4) (10.5) (220.7)
Derivative financial instruments
- non-current (0.3) (4.6) (0.3) (4.6)
Bank and other borrowings -
non-current (796.8) (694.5) (813.1) (702.7)
-------- -------- -------- --------
Financial liabilities (829.2) (935.0) (845.5) (944.5)
-------- -------- -------- --------
Total (808.8) (916.6) (825.1) (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.
The current and non-current elements of 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 years. The same methods of valuation
have been used to derive the fair values of the current and
non-current elements of fixed rate bank and other borrowings which
are held at amortised cost, but for which fair values are provided
in the table above.
The book value of bank and other borrowings is analysed as
follows:
2020 2019
GBP'm GBP'm
------- -------
Held at fair value through profit and loss 95.0 234.6
Held at amortised cost 712.3 679.3
------- -------
Total 807.3 913.9
------- -------
There were no transfers of assets or liabilities between levels
of the fair value hierarchy in the year.
The Group designates loans that are in a hedge relationship with
interest rate swaps as fair value through profit and loss. The
difference between fair values and contractual amounts at maturity
of the current and non-current elements of bank and other
borrowings designated as fair value through profit and loss is as
follows:
2020 2019
GBP'm GBP'm
------- -------
Contractual amount payable at maturity 91.6 227.1
Cumulative fair value adjustments arising
from changes in interest rate risk 4.8 6.4
Cumulative fair value adjustments arising
from changes in credit risk (1.5) 0.3
Accrued interest and debt costs 0.1 0.8
------- -------
Fair value 95.0 234.6
------- -------
Changes in fair value in the year are as follows:
2020 2019
GBP'm GBP'm
-------- -------
Bank and other borrowings at fair value
through profit and loss:
At 1 January 234.6 242.7
Exchange rate adjustments 2.6 (8.1)
Settled upon maturity (138.1) -
Gain recognised in net operating costs due
to interest rate risk (1.6) (0.1)
(Gain)/loss recognised in net finance costs
due to movements in accrued interest and
debt costs (0.7) 0.1
Gain recognised in other comprehensive income
due to changes in credit risk (1.8) -
-------- -------
At 31 December 95.0 234.6
-------- -------
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 31 December 2020, would impact other
comprehensive income by approximately GBP1.4m.
21. Provisions
2020
GBP'm
-------
At 1 January 100.6
Exchange rate adjustments (2.8)
Businesses disposed (0.8)
Transferred to assets classified as held
for sale (note 17) (0.1)
Additional provisions 41.2
Unused amounts reversed (4.8)
Charge to net finance costs (note 9) 0.7
Transfers to trade and other payables (0.5)
Amounts utilised (20.6)
-------
At 31 December 112.9
-------
2020 2019
GBP'm GBP'm
------- -------
Disclosed as:
Current 32.6 36.2
Non-current 80.3 64.4
------- -------
At 31 December 112.9 100.6
------- -------
Analysed as:
Environmental* 72.7 66.7
Onerous contracts 13.0 13.3
Warranty costs 16.0 14.8
Other 11.2 5.8
------- -------
At 31 December 112.9 100.6
------- -------
* Included within other receivables is GBP18.8m (2019: GBP17.0m)
in respect of amounts recoverable from insurers and other third
parties in respect of environmental issues relating to historic
sites.
22. Retirement benefit obligations
2020 2019
GBP'm GBP'm
------- -------
At 1 January 267.9 209 .1
Exchange rate adjustments (1.8) (4.0)
Service cost 15.2 12.8
Past service cost 0.1 -
Net interest expense (note 9) 5.7 6.1
Contributions - Group (36.9) (48.0)
Administrative expenses borne directly by
schemes 2.6 2.7
Remeasurement of retirement benefit obligations 42.6 89.2
------- -------
At 31 December 295.4 267.9
------- -------
Analysis of retirement benefit obligations:
Pension schemes 248.7 222.0
Healthcare schemes 46.7 45.9
------- -------
At 31 December 295.4 267.9
------- -------
Key financial assumptions used to calculate
scheme liabilities 2020 2019
-------- --------
UK scheme:
Discount rate 1.40% 2.05%
Inflation rate 3.00% 3.00%
Salary increases 2.80% 2.85%
21.7 to 21.6 to
Current life expectancy: Male aged 65 years 23.6 23.4
-------- --------
US schemes:
Discount rate 2.30% 3.10%
19.7 to 19.8 to
Current life expectancy: Male aged 65 years 20.6 20.6
-------- --------
Group cash contributions paid during the year included deficit
reduction payments of GBP21.7m (2019: GBP35.2m).
23. Issued share capital
2020 2019
No. m No. m
------- -------
Allotted and fully paid 781.2 777.5
------- -------
24. 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 the
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.
25. Capital commitments
2020 2019
GBP'm GBP'm
------- -------
Contracted for but not incurred:
Intangible assets 3.8 3.7
Property, plant and equipment 24.0 46.9
------- -------
Total 27.8 50.6
------- -------
26. Cash inflow from operations
2020 2019
GBP'm GBP'm
-------- --------
(Loss)/profit for the year (314.2) 222.6
Adjustments for:
Finance income (note 9) (0.5) (2.2)
Finance costs (note 9) 37.2 40.8
Tax (19.8) 64.1
Depreciation (note 15) 56.7 57.3
Amortisation (note 14) 140.6 138.4
Impairment losses (note 14) 361.3 -
Loss/(gain) on disposal of property, plant
and equipment 1.4 (0.9)
Gain on disposal of businesses (note 6) (32.0) (23.5)
Costs arising on disposal of businesses
(note 29) (3.8) (12.2)
Financial instruments - loss/(gain) (note
7) 2.9 (15.0)
Impact of retranslating net foreign currency
cash at spot rate (0.4) (0.6)
Share of loss/(profit) after tax of joint
venture (note 16) 3.2 (1.7)
Change in carrying value of held for sale
assets and liabilities up to date of disposal - (0.5)
Retirement benefit obligation deficit payments
(note 22) (21.7) (35.2)
Share-based payment (credit)/expense (2.5) 10.1
Changes in working capital 20.0 (27.1)
-------- --------
Total 228.4 414.4
-------- --------
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:
2020 2019
GBP'm GBP'm
------- -------
Cash inflow from operating activities 154.2 366.9
Add back cash outflow from business disposal
expenses 5.2 9.4
Add back impact of retranslating net foreign
currency at spot rate 0.4 0.6
Capitalised development costs (note 14) (41.4) (54.7)
Capitalised programme participation costs (1.6) (2.0)
Purchase of intangible assets (11.0) (17.2)
Purchase of property, plant and equipment
(net of grants received) (78.7) (77.2)
Proceeds from disposal of property, plant
and equipment 1.3 23.1
Reverse lease premium received* 3.5 18.9
------- -------
Free cash inflow 31.9 267.8
------- -------
* Prior to any discussions with the lessor, the Group had
negotiated terms for the purchase of land and subsequent
construction of the building at Ansty Park, with a number of third
parties. The lessor received the benefit of these negotiated terms
when it contracted with those same third parties, and in return
agreed to make a reverse lease premium payment to the Group, the
majority of which was received in 2019 at inception of the lease
with the balance received in 2020. The receipt of the reverse lease
premium of GBP3.5m (2019: GBP18.9m) has been included in free cash
flow consistent with the treatment of capital expenditure incurred
by the Group relating to the Ansty Park site.
27. Movements in net debt
2020 2019
GBP'm GBP'm
-------- --------
At 1 January 911.2 1,074.1
Cash inflow from operating activities (154.2) (366.9)
Cash outflow from investing activities 22.0 49.7
Cash (inflow)/outflow from financing activities (0.3) 130.4
Lease liabilities entered 11.4 54.2
Businesses disposed or classified as held
for sale (5.6) -
Exchange rate adjustments (7.6) (31.2)
Other non-cash movements (3.9) 0.9
-------- --------
At 31 December 773.0 911.2
-------- --------
2020 2020
GBP'm GBP'm
-------- --------
Analysed as:
Bank and other borrowings - current 10.5 219.4
Bank and other borrowings - non-current 796.8 694.5
Lease liabilities - current 14.7 16.4
Lease liabilities - non-current 129.6 136.2
Cash and cash equivalents (178.6) (155.3)
-------- --------
Total 773.0 911.2
-------- --------
28. Currency translation movements
2020 2019
GBP'm GBP'm
------- -------
Arising in the year (35.9) (68.7)
Transferred to the income statement (note
29) (44.0) -
------- -------
Currency translation movements - loss (79.9) (68.7)
------- -------
29. Business disposals
On 30 June 2020, the Group disposed of Meggitt Training Systems
(MTS), for a cash consideration of USD155.7m. 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. 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:
GBP'm
-------
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
- current 9.4
Contract assets - current 22.6
Cash and cash equivalents 9.8
Trade and other payables -
current (15.4)
Contract liabilities - current (4.4)
Lease liabilities - current (1.5)
Provisions - current (0.1)
Deferred tax (6.7)
Lease liabilities - non-current (3.0)
Net assets 133.7
Currency translation gain transferred
from equity (note 28) (44.0)
Business disposal expenses 3.8
Gain on disposal (note 6a) 33.3
-------
Total consideration received
in cash 126.8
-------
C ash inflow arising on disposal:
Total consideration received
in cash 126.8
Less: cash and cash equivalents
disposed of (9.8)
------------
Business disposed 117.0
Less: business disposal expenses
paid * (5.2)
------------
Total cash inflow 111.8
------------
* Of the total business disposal expenses paid, GBP3.5m were in
respect of the disposal of MTS, with the balance relating to
disposals in the prior year.
30. Principal risks and uncertainties
Strategic - Industry changes
Description
Significant variation in demand for air travel and/or our
products due to aerospace and defence business downcycles
coinciding; serious political, economic, pandemic (including the
on-going impacts of COVID-19) or terrorist events; or industry
consolidation that materially changes the competitive
landscape.
Impact
Volatility in revenue and underlying profitability.
How we manage it
-- Demand is managed by monitoring external economic and
commercial environment and long-lead indicators whilst maintaining
focus on balanced portfolio.
-- Monitoring international political and tax developments to
assess implications of future legislation.
Strategic - Business model
Description
Failure to respond to fundamental changes in our aerospace
business model, primarily the evolving aftermarket. This includes
more durable parts requiring less frequent replacement, a growing
supply of surplus parts, OE customers seeking greater control of
their aftermarket supply chain and accelerated pace of new aircraft
deliveries leading to the earlier retirement of older aircraft.
Impact
Decreased revenue and profit.
How we manage it
-- Alignment of Group, divisional and functional strategy processes.
-- Dedicated full-service aftermarket organisation.
-- Long-term customer agreements including SMART Support(TM)
packages to create tailored solutions for customers throughout the
product lifecycle enabling more effective performance monitoring
and more predictable pricing.
-- Investment in research and development to maintain and
enhance Meggitt's intellectual property.
Strategic - Climate change
Description
Failure to adapt to the transition and physical impacts of
climate change, including:
-- Government legislation to limit air travel;
-- Regulations limiting greenhouse gas emissions from aviation
come into effect faster than technical solutions;
-- Societal attitudes shifting against air travel (e.g. 'flight shaming');
-- Acute physical risks such as the increased likelihood of extreme weather events; and
-- Chronic physical risks such as changing weather patterns
including rising temperatures and sea levels.
Impact
Decreased revenue and profit, damage to operational performance
and reputation.
How we manage it
-- Continued dialogue with governments, industry bodies and
customers to maintain awareness of evolving aviation sector
requirements.
-- Continued focus on developing technologies to support
sustainable aviation and on reducing the carbon intensity of our
production operations.
-- Allocation of two-thirds of innovation budget to sustainable solutions.
-- Reduction in Group carbon footprint through new facilities
and more efficient production processes.
-- Comprehensive business continuity plans across the Group,
supported by an insurance programme subject to annual renewal.
-- Long-term weather considerations as part of site footprint strategy.
Operational - Quality escape/equipment failure
Description
Defective product leading to in-service failure, accidents, the
grounding of aircraft or prolonged production shut-downs for the
Group and its customers.
Impact
Decreased revenue and profit, damage to operational performance
and reputation.
How we manage it
-- System safety analysis, verification and validation policy
and processes, combined with quality and customer audits and
industry certifications.
-- Meggitt Production System (MPS).
-- Supplier quality assurance process.
Operational - Business interruption
Description
A catastrophic event such as natural disasters (including
earthquake - the Group has a significant operational presence in
Southern California); civil unrest, military conflict or terrorist
activity; or a pandemic (including further impacts from COVID-19)
could lead to infrastructure disruption and/or property damage
which prevents the Group from fulfilling its contractual
obligations.
Impact
Decreased revenue and profit, damage to operational performance
and reputation.
How we manage it
-- Group-wide business continuity and crisis management plans,
subject to regular testing and also invoked during 2020 in response
to COVID-19.
-- Comprehensive insurance programme, renewed annually and
subject to property risk assessment visits.
Operational - Project/programme management
Description
Failure to meet new product development programme milestones and
certification requirements and successfully transition new products
into manufacturing as production rates increase. This also covers
lower than expected production volumes, including programme
cancellations or delays, notably the 737 MAX.
Impact
Failure to deliver financial returns against investment and/ or
significant financial penalties leading to decreased profit and
damage to reputation.
How we manage it
-- Rigorous commercial and technological reviews of bids and
contractual terms before entering into programmes.
-- Continuous review of programme performance through the
Programme Lifecycle Management (PLM) process including:
-- regular monitoring of the end-market performance of key OE programmes;
-- internal review process, to stress-test readiness to proceed
at each stage of key programmes; and
-- regular monitoring of the financial health of customers.
Operational - Customer satisfaction
Description
Failure to meet customers' cost, quality and delivery standards
or qualify as preferred suppliers.
Impact
Failure to win future programmes resulting in decreased revenue
and profit.
How we manage it
-- Creation of a customer facing organisational structure
including a dedicated aftermarket division.
-- Regular monitoring of customer scorecards and ensuring
responsiveness to issues via Voice of the Customer process.
-- Functional excellence in operations, project management and engineering.
-- Increased utilisation of low-cost manufacturing base.
Operational - IT/Systems failure
Description
A breach of IT security due to increasingly more sophisticated
cyber-crime/terrorism resulting in intellectual property or other
sensitive information being lost, made inaccessible, corrupted or
accessed by unauthorised users. This also includes the loss of
critical systems such as SAP due to poorly executed implementation
or change of control; poor maintenance, business continuity or back
-- up procedures and the failure of third parties to meet service
level agreements.
Impact
Decreased revenue and profit, damage to operational performance
and reputation.
How we manage it
-- Information Security infrastructure, policies and procedures
supported by a Group wide security awareness programme.
-- Intelligence sharing on threats with government and security
bodies including the FBI, CPNI and NCSC
-- Group wide intellectual property protection programme.
-- Management of third party service providers and risks,
including resilience and disaster recovery processes.
-- Rolling programme of system upgrades (including SAP
implementation) to replace legacy systems.
-- Defined vulnerability management policy with monitoring
capability to ensure that vulnerabilities are identified and
appropriately patched.
-- Dedicated cyber-security protective monitoring resources,
employing industry leading technical controls and procedures.
Operational - Supply chain
Description
Failure or inability of critical suppliers to supply unique
products, capabilities or services preventing the Group from
satisfying customers or meeting contractual requirements.
Impact
Decreased revenue and profit, damage to operational performance
and reputation.
How we manage it
-- Supplier excellence framework combined with integrated
commercial and procurement approach to contractual terms and
conditions including development of long-term agreements.
-- Local sourcing strategy to improve operational efficiency and
minimise potential impacts and disruption from cross-border
tariffs.
-- Maintenance of buffer inventory for critical and sole-source suppliers.
-- Implementation of measures to mitigate counterfeit and
fraudulent parts at high-risk facilities.
Operational - Group change management
Description
Failure to successfully, simultaneously, deliver the significant
change programmes currently in process and planned, including site
consolidation activity such as Ansty Park and investments in new
carbon manufacturing facilities in the
USA.
Impact
Decreased revenue and profit, increased costs, damage to
operational performance and reputation.
How we manage it
-- PMO oversight of large capital projects.
-- Dedicated site consolidation and property management teams for Ansty Park.
-- Regular monitoring by Executive Committee through operational and project reviews.
-- MPS implementation at new/expanded sites.
Operational - People
Description
Failure to attract, retain or mobilise people due to factors
including industrial action, workforce demographics, lack of
training, availability of talent and inadequate compensation.
Impact
Decreased revenue and profit, damage to operational
performance.
How we manage it
-- Embedding of High Performance Culture.
-- Action plans to improve employee engagement.
-- Graduate and apprentice programmes in partnership with schools and universities.
-- Regular oversight by Executive Committee.
-- Creation of Employee Resource Groups to foster diversity,
boost employee engagement and enable global collaboration.
Corporate - Legal & compliance
Description
Significant breach of increasingly complex trade compliance,
bribery and corruption, US Government contracting, ethics,
intellectual property, data protection or competition/antitrust
laws and facilitation of tax evasion.
Impact
Damage to reputation, loss of supplier accreditations,
suspension of activity, fines from civil and criminal
proceedings.
How we manage it
-- Continuing investment in compliance programmes including
Board -- approved policies and roll out of training and IT
solutions.
-- Regular monitoring by Corporate Responsibility Committee.
-- On -- going trade compliance programme including third -- party audits.
-- Comprehensive ethics programme including training, anti --
corruption policy and 'Speak Up' line.
-- Third -- party and internal audits including HS&E and Anti-Bribery & Corruption.
-- MPS implementation to enhance safety measures, validated by third -- party audits.
Financial - Pension funding
Description
The Group operates defined benefit pensions schemes in the UK,
US and Switzerland. The level of deficits in these schemes may be
affected adversely by investment returns, interest rates,
increasing life expectancy and changes in the regulatory
environment. The rates at which deficits are funded is subject to
agreement with the trustees in the UK and is dependent on
legislation in the US and Switzerland.
Impact
Higher pension scheme funding contributions resulting in
decreased cash and profit.
How we manage it
-- Triennial valuation process and deficit funding agreement with UK Pension Trustees.
-- Continued monitoring of asset allocations and funding levels for all schemes.
-- Closure of UK and US schemes to future accrual.
Financial - Liquidity
Description
The Group has debt funding and committed credit facilities from
diverse sources which could be at risk in the event of the Group
being unable to raise funds when required at a normal price owing
to financial market disruption or an unwaived breach of the related
financial covenants.
Impact
Inability to access financing on normal commercial terms.
How we manage it
-- Maintaining sufficient headroom in committed credit
facilities and against covenants in those facilities
-- Arranging funding with maturities spread over several years
or the ability to terminate early at little or no cost to the
Group.
DIRECTORS' RESPONSIBILITIES STATEMENT
Each of the persons who is a director at the date of the
approval of this report confirm that, to the best of their
knowledge:
-- the Group financial statements, which have been prepared in
accordance with international accounting standards in conformity
with the requirements of the Companies Act 2006 and adopted
pursuant to Regulation (EC) No 1606/2002 as it applies in the
European Union, give a true and fair view of the assets,
liabilities, financial position and profit of the Group; and
-- the Strategic report and the Directors' report include a fair
review of the development and performance of the business and the
position of the Group, together with a description of the principal
risks and uncertainties that it faces; and
-- the Annual Report and Accounts, taken as a whole, is fair,
balanced and understandable and provides the information necessary
for shareholders to assess the Group's position, performance,
business model and strategy.
By order of the Board:
A Wood L Burdett
Director Director
3 March 2021 3 March 2021
- E N D S -
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
RNS may use your IP address to confirm compliance with the terms
and conditions, to analyse how you engage with the information
contained in this communication, and to share such analysis on an
anonymised basis with others as part of our commercial services.
For further information about how RNS and the London Stock Exchange
use the personal data you provide us, please see our Privacy
Policy.
END
FR SSDFUDEFSEED
(END) Dow Jones Newswires
March 04, 2021 02:00 ET (07:00 GMT)
Meggitt (LSE:MGGT)
Historical Stock Chart
From Apr 2024 to May 2024
Meggitt (LSE:MGGT)
Historical Stock Chart
From May 2023 to May 2024