7th Aug 2007 07:00
Meggitt PLC07 August 2007 For Immediate Release 7 August 2007 Please contact Terry Twigger, Chief ExecutiveStephen Young, Group Finance DirectorMeggitt PLCTel: +44 1202 597597 Jeremy GarciaBuchanan CommunicationsTel: +44 20 7466 5000 "Moving up a gear" Meggitt PLC ("Meggitt" or "the Group"), the international aerospace and defencegroup, today announces unaudited interim results for the six months ended30 June 2007. Highlights 20071 2006Revenue £358.0m £325.9m +10%Profit before tax- underlying 2 £69.0m £62.0m +11%Profit before tax £64.9m £65.4m -1%EPS- underlying 2,3 9.8p 8.9p +10%EPS 3 8.4p 9.4p -11%Dividend3 2.45p 2.23p +10% • Strong growth in orders (+14% at constant exchange rates), revenue (+10%), underlying profit before tax (+11%) and underlying earnings per share (+10%) over corresponding period in 2006. • At constant exchange rates revenue increased by 16% and underlying profit before tax grew 16%. • Very strong growth in civil markets; military markets remain healthy. • Acquisition of K&F Industries (K&F) completed on 22 June creates leading positions in aircraft braking systems and flexible bladder fuel tanks. K&F had an excellent first half and continues to trade well. No results for K&F have been included in these half year figures. • Significant investments in future organic growth continuing: o R&D spend increased to £32.0m, 9% of revenue. Internally funded R&D increased 20% to £23.7m (2006: £19.7m); o Capital expenditure of £14.2m included capacity increases at UK heat exchanger and Swiss condition monitoring businesses. • Operations excellence initiatives progressed: o Global procurement team established; o Three Californian defence businesses successfully combined; o Consolidation of two UK polymers facilities and two UK defence facilities underway; o Work has begun to combine our US live fire and simulation training businesses which is expected to complete in early 2008. • Reported EPS growth held back by amortisation of acquired intangibles, fair value of financial instruments and time lag between rights issue and completion of K&F acquisition. Terry Twigger, Chief Executive, commented: "Meggitt has taken a significant step forward in the first half of 2007. Inaddition to a strong performance from our existing businesses, we areparticularly pleased to have completed our acquisition of K&F just before theend of the period. K&F gives us leading positions in aircraft braking systemsand flexible bladder fuel tanks to add to our leading positions in aerospaceequipment, condition monitoring, and defence training. The integration of K&Finto Meggitt is already well underway and we are excited by the opportunitiesthat this presents for our combined business. Our existing businesses have once again delivered strong growth as we continueto invest and expand their capabilities and production capacity. We haveincreased the interim dividend by 10%, and expect to make further progress inthe second half." _______________________________________________________________________________ 1 Excludes K&F trading which will be consolidated from 22 June and included inour second half results. The impact of K&F trading between 22 June and 30 Junewas not significant. 2 The directors consider that underlying profit and underlying EPS betterreflect the trading performance of the Group (see notes 4 and 9). 3 Adjusted for the Rights Issue using a bonus factor of 1.1682. RESULTS All comments in the following sections refer to the Meggitt businesses excludingK&F, except where specifically indicated. Meggitt has delivered another set of strong results. Civil aerospace revenuesincreased by 7% (14% at constant exchange rates) and military revenues increasedby 12% (20% at constant exchange rates), strengthened by the acquisition of FATSin October 2006. Revenues in other markets grew by 13% (17% at constant exchangerates). With order intake up 14% year on year, we expect to make furtherprogress in the second half. In total, civil aerospace markets accounted for 45% of Group revenue (2006: 46%)and military markets 39% (2006: 38%). The aftermarket in aggregate (civil plusmilitary) accounted for 39% (2006: 37%). The acquisition of K&F willsignificantly enhance our exposure to the more profitable aftermarket business;on a pro forma basis for 2006 the total aftermarket sales of the combinedbusiness would have been 48%. The Group is well balanced between civil andmilitary markets and also between original equipment sales and the aftermarket. Group revenue in total increased by 10% to £358.0m (2006: £325.9m). Excludingthe impact of acquisitions, and at constant exchange rates, organic revenuegrowth was 7%. Underlying operating profit increased by 12% to £78.5m (2006:£69.9m) and underlying profit before tax grew 11% to £69.0m (2006: £62.0m).Organic growth in underlying profit before tax was 12% with £2.9m adverseexchange rate movements offsetting the benefit from acquisitions. Underlying profit is used by the Board to measure the underlying tradingperformance of the Group and excludes exceptional operating items, theamortisation of IFRS 3 intangibles and mark to market adjustments on financialinstruments amongst others, as detailed in note 4. Including these items, profitbefore tax decreased by 1% to £64.9m and earnings per share (EPS) was furtheraffected by the timing of the rights issue and the closing of the acquisition ofK&F such that reported EPS reduced by 11% to 8.4 pence. The underlying tax rate for the Group remained at 27% and underlying EPSincreased by 10% to 9.8 pence (2006: 8.9 pence as restated for the impact of therights issue). Cash inflow from operations grew 7% to £62.5m (2006: £58.3m). Cash conversion,the ratio of cash inflow from operations before exceptional operating costs tounderlying operating profit, was 81% (2006: 85%). The Group continues to make significant investments in expanding, consolidatingand relocating manufacturing facilities in 2007, which drove capital expenditureof £14.2m in the first six months (2006: £14.4m). These investments are expectedto deliver efficiencies and will increase capacity. Internally funded expenditure on research and development (R&D) increased by 20%to £23.7m (2006: £19.7m). Total expenditure on R&D, including the customerfunded element increased to £32.0m (2006: £23.5m) or 9% of sales. Net borrowings have increased from £353.7m at December 2006 to £795.0m,primarily as a result of the K&F acquisition. Interest cover (underlying) was avery healthy 8.3 times (December 2006: 9.0 times), although this will reduce inthe second half as a result of the acquisition. The Group had undrawn committedbank facilities of £148m at 30 June 2007, net of funds required to finance theredemption of the K&F 73/4% Senior Subordinated Notes due 2014. As a result of this strong performance the Board is increasing the interimdividend by 10% to 2.45 pence (2006: 2.23 pence as restated). STRATEGY Meggitt's aim is to deliver high returns to our shareholders through acombination of organic growth and acquisitions. We have aggressive targets andcontinue to invest heavily in our future. Our strategy is to develop leadershippositions in markets with high technology content and where our products havelong lives operating in extreme environments. A key objective is not only to sell the original equipment but also to share ina continuing stream of highly profitable aftermarket revenues over many years.Driven by aircraft usage which, in the case of civil aircraft, continues to growat a relatively constant 5% per annum, the aftermarket not only provides longterm stable and profitable returns, but is very cash generative. Industries suchas aerospace, where the life of an aircraft is often more than 30 years, defenceand energy enable us to achieve those objectives. Furthermore our mix of bothcivil and military, and original equipment and aftermarket, allows us to balanceeffectively the business cycles in these markets. As the Group grows we continue to invest in developing our infrastructure tomeet both the evolving nature of the industry and the expectations of ourcustomers. We have senior account executives at our major customers and officesin Brussels and Washington to ensure the full scope of Meggitt's activities areunderstood and that our key customers find us easy to do business with. Thisalso positions us well to provide larger and more integrated systems as ourcustomers increasingly look to reduce their supplier base. Operations excellence remains a central feature of our strategy and we haveestablished a central function to cultivate best practice throughout the Group.One of its first tasks has been to build on the excellent work already done onreducing the costs of indirect materials and services by focusing on loweringthe cost and complexity of purchasing direct materials for the Group. Anin-house global procurement team of five people has been created, supported by agreater number of external consultants. Meggitt is also evaluating opportunities across the Group to increasecollaboration in the short term and to share services in the medium term. Ourinformation services function is focused on standardising systems andapplications, and providing the base connectivity for the secure communicationand information-sharing needed for customer opportunities that would benefitfrom a group response. We want information to flow more efficiently andeffectively, ensuring that our operating companies can work together acrossgeographic and commercial boundaries, optimising group talent and resources andserving customers from a wider perspective. 2007 is a year of continued investment for Meggitt both in capital expenditureand research and development. Much of the £14.2m of capital expenditure in thefirst half of 2007 has been directed at expanding, consolidating and modernisingfactories in Switzerland and the UK to better manage increases in demand. Theinvestment made in 2006 and 2007 to consolidate our Californian defencebusinesses was completed with the move of the three businesses to their newlocation in June 2007. We believe that the co-location and unified management ofthese businesses will help us to maximise the opportunities for them goingforward. The consolidation of our two UK defence businesses and two UK polymersites commenced in the first half and the physical consolidation of our US livefire and simulation training businesses will commence in the second half. Owning intellectual property is key to maintaining Meggitt's high returns. TotalR&D expenditure, including customer funded, increased by 36% to £32.0m (2006:£23.5m) which is 9% of the Group's revenue. Our largest investments were in ourSensing Systems business, totalling £16.9m (14.8% of segment revenue), focusedon the development of our condition monitoring capabilities for recent programwins and new opportunities such as Radatec. Radatec continued to invest in thedevelopment of its microwave technology and installed a complete test system onan industrial gas turbine for a major manufacturer during the period with verypositive early results. R&D investment in Aerospace Equipment was £9.0m (4.8% ofsegment revenue) whilst Defence Systems invested £6.1m (10.7% of segmentrevenue). In-house developments are complemented by acquiring or licensingtechnology where applicable; the acquisitions of Keith Products, FATS andRadatec in 2006 are excellent examples of this. The Group manages its businesses under the key segments of: • Aerospace Equipment • Sensing Systems • Defence Systems Their key capabilities are shown below: Aerospace Equipment Sensing Systems Defence Systems(52% of Group revenue) (32% of Group revenue) (16% of Group revenue) Wheels and brakes Condition monitoring Training systems systems Thermal management High performance sensors Combat systemssystems Fluid controls Avionics Safety systems Polymer solutions These capabilities and some of the trading highlights in the first half of 2007are described in more detail under "Operational highlights" below. CORPORATE ACTIVITY The Group has continued its strategy of making acquisitions which complement itsexisting businesses. On 6 March 2007, Meggitt signed an agreement to acquire K&F in a transactionvalued at $1.8bn, subject to regulatory approvals. The final approvals werereceived in June 2007 and the acquisition was completed on 22 June 2007. K&F is a leading integrated supplier of original equipment and aftermarket partsand services for the global aerospace and defence industry. It has leadingmarket positions and its technologically sophisticated products include wheels,brakes, brake control systems, flexible bladder fuel tanks, helicopterinteriors, ice guards and fuel sealants. Detailed integration activities are now underway, following our proven modelused in past transactions including Dunlop. We have already completed an initialintegration planning workshop, designated a full time integration director andappointed external consultants to assist us with the process. During July wehave successfully tendered for the redemption of the high coupon K&F debt whichwill be replaced with facilities we put in place at the time we announced thetransaction. At the time of the rights issue we announced that we expect to generatesynergies of £16m per annum by 2009 at a one-off exceptional cost of £23m overthe same timeframe. That view has been reinforced by our initial planningactivity. Further details on the timing of synergies and one-off costs will begiven with our preliminary results in March 2008. K&F's trading results for the first quarter of the calendar year (publishedunder US GAAP) reported, as expected, strong sales and operating profit growth.Sales growth was 19.6% whilst operating income excluding costs associated withthe acquisition grew by 21.1%. The second quarter continued to trade in linewith expectations. The wheels and brakes business reported significant orderintake during the half year, including the selection by Cessna to be thesupplier of wheels and brakes for its newest business jet, the Citation CJ4, andby Adamjet to supply to the new Very Light Jet, the A700. The Engineered Fabricsbusiness reported excellent order intake, including a further $20m in fuel tankorders for the KC 135. We continue to expect the transaction to enhance significantly underlyingearnings per share in 2008. OPERATIONAL HIGHLIGHTS AEROSPACE EQUIPMENT (52% of Group revenue) • Revenue increased 7% to £186.7m (2006: £175.3m). At constant exchange rates growth was 12%. • Underlying operating profit increased 15% to £50.5m (2006: £43.8m). At constant exchange rates growth was 20%. • Order intake was up 8% compared with the first half of last year (at constant exchange rates). Civil aerospace and military sales both increased by 10% at constant exchangerates with a particularly strong performance in civil aftermarket sales.Non-aerospace civil sales grew by over 40% led by our Heatric heat exchangerbusiness. Three new business groupings were created within the division at the start ofthe year to complement the existing Safety Systems and Heatric businesses. Thesecover Fluid Controls, Thermal Systems and Polymer Solutions. Grouping thosecompanies with similar product lines for engineering and marketing purposeshelps to increase value to our customers by providing sub-systems and biggerpackages, which saves them costs of part-by-part procurement, testing and systemintegration. During the half year order intake exceeded £200m and grew 8% compared to lastyear. Orders included a contract won by Keith Products from Cessna to developand provide a vapour cycle cooling system for the latest and largest of Cessna'sbusiness jets, the Citation CJ4. This builds on a presence in the business jetand general aviation market on platforms such as the Eclipse 500, King Air 350,Embraer Phenom 100 and 300. Meggitt's Safety Systems business has received additional contracts, worthapproximately $10m, under which it will continue to deliver smoke and firedetection systems to the US Navy Arleigh Burke class (DDG-51) guided missiledestroyers. These and future deliveries of an improved system will help createbusiness opportunities for similar military ship fire protection systems both inthe US and internationally. In the civil market we have enhanced our positionwith a recently awarded contract to provide a detection and extinguishing systemin the business jet market segment. Heatric, our compact heat exchanger business had another good six months,benefiting from increased investment by the oil and gas industry. The order bookfor this business is at a record level, having grown 121% since December 2006,reflecting a number of important contract wins from Aker Kvaerner Stord andHyundai Heavy Industries among others. Our existing Braking Systems business, Dunlop, continued to perform well. Aparticular focus in the first half was the developments associated with thePhenom 300 contract. First production units are nearing completion and somecomponents have already completed qualification. Full qualification will becompleted in 2007 in preparation for the inaugural Phenom 300 flight in 2008.The aircraft will enter service in 2009 and we expect to earn revenues of $100mover the life of the programme. Business jet volumes have continued to climb and Dunlop was awarded aprestigious "Supplier of the Year" award by Gulfstream Aerospace Corporation inMarch. Dunlop supplies wheels and brakes for the G500, G550 and GIV SP aircraft. Dunlop has been selected to supply the wheels, brakes, and brake control systemon another European Unmanned Air Vehicle (UAV) demonstrator programme now indevelopment. The agreement, which was reached during this year's Paris AirShow, will see Dunlop deliver equipment for a demonstrator aircraft in 2009. Itfollows last year's successful maiden flight of Dunlop's electric brake (EBrake(R)) onboard the EADS Military Air Systems Unmanned Air Vehicle (UAV) technologydemonstrator (Barracuda). It is an important deal for Dunlop, emphasising theirposition at the forefront of the UAV marketplace as unmanned vehicles progresstowards operational capability alongside traditional military aircraft in bothreconnaissance and combat operations. SENSING SYSTEMS (32% of Group revenue) • Revenue increased 8% to £114.2m (2006: £105.6m). At constant exchange rates growth was 14%. • Underlying operating profit increased by 10% to £19.3m (2006: £17.6m). At constant exchange rates growth was 15%. • Sensing Systems' order intake was up 4% compared with the first half of last year (at constant exchange rates). Our Sensing Systems businesses provide an extensive range of high value sensorsand related electronics which are used primarily in monitoring the condition ofaircraft engines in flight. We have applications on virtually every westernaircraft and have the leading position in engine vibration monitoring andcondition based maintenance on large civil aircraft engines, where sensors andelectronics are combined to provide essential operating and maintenanceinformation. Meggitt is the only company with a demonstrated on-enginemonitoring capability. Our world class position is clearly demonstrated by theinclusion of our condition monitoring systems on both engine variants for theAirbus A380 and Boeing 787, as well as most regional jets, including Embraer,Sukhoi and the Chinese ARJ-21. During the period the Group signed an exclusive contract with Rolls-Royce tointegrate the complete sensors and ignition package for a new member of theBR700 engine family. The contract will cover the life of the engine programmeand should generate over $30m of revenues from the sale of new engines.Aftermarket services through the life of the programme will increase this figuresignificantly. We are very pleased to have confirmed our position as a tier oneintegrator of sensor and ignition packages to Rolls-Royce - an importantmilestone in the development and execution of the Group's sensors and ignitionstrategy. In addition to aircraft condition monitoring, our sensors are also used in awide variety of other applications such as marine and industrial powergeneration turbines, test and measurement, medical, automotive and industrial.Our industrial sensor and condition monitoring business has continued to benefitfrom strong demand for large turbo machinery used in electricity generation. Our Avionics business was selected by Boeing to supply the standby flightdisplay system for the Block III AH-64-D Apache Longbow. The nine year contractis expected to generate revenue in excess of $20m including spares and support.We supply secondary flight display systems for more than 30 aircraft programmesand have supplied over 2,700 systems to date. In line with our strategy of introducing products with significant levels ofintellectual property, we have developed a new technology for use in fuelgauging systems. We are working currently with our launch customer to progressthis innovative technology through qualification and certification phases tosupport deliveries for production aircraft commencing in October 2007. Thisprogramme alone is anticipated to yield $30m in revenues throughout the productlife. Following certification, anticipated in August 2007, this technology willbe applicable to a broad base of other new and existing platforms andapplications. Development of Radatec's microwave displacement sensors for use in industrialgas turbines achieved an important milestone in the period with the installationof a complete ground-based test system in the turbine of a major manufacturer.Initial results from this test are very encouraging and reinforce our confidencein the future success of this product. The Sensing Systems business has continued to upgrade and expand its facilities,notably the Vibro-Meter factory in Switzerland which will be completed in thesecond half of 2007. This will position us well for the continued growth whichwe expect in this business going forward. DEFENCE SYSTEMS (16% of Group revenue) • Revenue increased 27% to £57.1m (2006: £45.0m). At constant exchange rates growth was 37%. • Underlying operating profit increased to £8.7m (2006: £8.5m). At constant exchange rates growth was 11%. • Defence Systems' order intake was up 73% compared with the first half of last year (at constant exchange rates). Our Defence Systems businesses made significant progress in the first half of2007. A combination of orders for existing products and new developmentprograms, coupled with the successful consolidation of the three Californiabusinesses into one company in a new facility, has positioned the segment tomeet the growing demands of its customers. Environmental Control Systems featured strongly with receipt of $31m of ordersfor the Thermal Management System for the M1A2 Main Battle Tank. We were alsoselected to provide the electronic cooling system for the Future Combat SystemMULE Programme with an initial development program valued at $6m. Futurerevenues from this program could exceed $300m once production starts in 5-6years time. Ammunition Handling Systems continues to grow with the Future Combat System120mm Autoloader successfully entering the integration stage into the MountedCombat System vehicle. This programme could provide revenues of $500m onceproduction starts in 6-7 years. Apache Combo-Pak orders were received valued at$6 m and MDS was awarded their first non-US DoD concept development contract foran autoloader system for KMW of Germany for a 35mm linkless feed system. The development programme for the next generation of Fibre Optic Towed Decoyshas entered the Low Rate Initial Production phase and significant productionquantities are expected over the next five years. In our training businesses, FATS made excellent progress since being acquired byMeggitt in October 2006. The US Marine Corps placed a $12m contract for compactvirtual simulated targetry and the US Army validated the FATS platform pavingthe way for significant future orders. The Singapore Coastguard completedacceptance testing on the Coastguard Training Simulator enabling this newproduct to be demonstrated to a wide range of customers. FATS margins arecurrently lower than the rest of the division and this, along with the temporaryadditional costs of combining our Californian businesses, has impacted theDefence Systems margin modestly. The consolidation of the live fire Caswell training products with the FATSvirtual business is well underway and is scheduled to be completed by early2008. This will provide customers with a "one-stop shop" for ground targetstraining and will improve margins. The highly successful Banshee Target System maintained its strong marketpresence with contract awards for the UK MoD, German Army and Kuwait Air Force.Negotiations have also been concluded for a new five-year supply contract withthe armed forces of another European country. OUTLOOK Meggitt has delivered a strong first half in 2007. Based on the performance ofthe businesses in the first half and the growth in order intake, the outlook ispositive. Prospects for civil aerospace are excellent, with large jet productionexpected to increase by 9% in 2007 and 11% in 2008. Strong growth is alsoexpected in the business and general aviation markets, recovering demand inregional aircraft and a continuing strong aftermarket. The outlook for themilitary market is also positive, although there is some weakness in morediscretionary areas due to the timing of US budget and supplemental approvals. K&F is trading well and the integration is on track, with detailed workstreamplans being implemented and synergy expectations confirmed. We are excited bythe opportunities that this acquisition presents for Meggitt and are confidentin the outlook for K&F. The weakness of the US dollar will have some impact going forward, mainly onreported profit when translated to Sterling, but the Group remains on track todeliver further growth in the second half of this year. In recognition of thisstrong performance the Board has increased the interim dividend by 10%. CONSOLIDATED UNAUDITED INCOME STATEMENTfor the six months ended 30 June 2007 Notes Six Six Year months months ended ended ended 31 30 June 30 June December 2007 2006 2006 Restated Restated £m £m £m Continuing operations Revenue 3 358.0 325.9 670.3 Cost of sales (197.4) (177.6) (373.8) Gross profit 160.6 148.3 296.5 Net operating costs (88.9) (75.0) (153.3) Operating profit* 3 71.7 73.3 143.2 Finance income 4.3 1.3 3.3Finance costs (11.1) (9.2) (19.8)Net finance costs 7 (6.8) (7.9) (16.5) Profit before tax from continuing 64.9 65.4 126.7operations** Tax - UK (8.2) (1.0) (10.0)Tax - Overseas (8.7) (16.7) (22.4)Tax 8 (16.9) (17.7) (32.4) Profit for the period from continuingoperations attributable to equity shareholders 48.0 47.7 94.3 Earnings per share (pence):Basic 9 8.4p 9.4p 18.6pDiluted 9 8.3p 9.3p 18.5p Dividends per share (pence):Paid in the period - - 6.77pProposed in respect of the period 10 2.45p 2.23p 7.36p Dividends (£m):Paid in the period - - 34.3Proposed in respect of the period 10 16.1 11.3 37.5 * Underlying operating profit 4 78.5 69.9 149.2** Underlying profit before tax 4 69.0 62.0 132.7 CONSOLIDATED UNAUDITED BALANCE SHEETas at 30 June 2007 Notes 30 30 31 June June December 2007 2006 2006 Restated Restated £m £m £mNon-current assetsGoodwill 12 1,347.8 528.9 564.0Development costs 12 47.8 26.4 31.9Programme participation costs 12 111.2 31.4 33.8Other intangible assets 12 266.0 175.8 219.1Property, plant and equipment 13 186.3 122.0 127.6Trade and other receivables 21.2 28.9 20.1Derivative financial instruments 3.4 2.3 -Deferred tax assets 22.4 27.7 32.9Investments available for sale - 1.1 - 2,006.1 944.5 1,029.4Current assetsInventories 211.5 150.8 154.6Trade and other receivables 196.1 154.7 172.5Derivative financial instruments 7.1 2.8 8.4Current tax recoverable 0.3 10.2 0.2Cash and cash equivalents 19 113.9 47.3 43.6 528.9 365.8 379.3 Total assets 2,535.0 1,310.3 1,408.7 Current liabilitiesTrade and other payables (237.2) (191.0) (199.3)External dividend payable (26.2) (23.0) -Derivative financial instruments - (1.7) -Current tax liabilities (25.4) (27.9) (17.3)Bank and other borrowings 19 (165.0) (3.8) (17.3)Provisions (13.5) (12.5) (7.5) (467.3) (259.9) (241.4) Net current assets 61.6 105.9 137.9 Non-current liabilitiesTrade and other payables (6.7) (4.7) (4.3)Derivative financial instruments (1.2) - (0.6)Deferred tax liabilities (88.5) (52.5) (71.0)Bank and other borrowings 19 (743.9) (323.6) (380.0)Provisions (44.1) (56.7) (54.8)Post-retirement benefit obligations 14 (157.1) (90.4) (97.2) (1,041.5) (527.9) (607.9) Total liabilities (1,508.8) (787.8) (849.3) Net assets 1,026.2 522.5 559.4 EquityShare capital 32.8 21.7 21.8Share premium 773.1 351.4 356.1Other reserves 14.1 14.1 14.1Hedging and translation reserve (13.6) (5.8) (6.2)Retained earnings 219.8 141.1 173.6Total equity attributable to equity 17 1,026.2 522.5 559.4shareholders CONSOLIDATED UNAUDITED CASH FLOW STATEMENTfor the six months ended 30 June 2007 Notes Six Six Year months months ended ended ended 31 30 June 30 June December 2007 2006 2006 Restated Restated £m £m £m Cash inflow from operations beforeexceptional operating costs 63.3 59.2 140.3Cash outflow from exceptional operating 5 (0.8) (0.9) (1.8)costsCash inflow from operations 18 62.5 58.3 138.5Interest received 2.7 0.5 1.2Interest paid (9.7) (8.3) (17.7)Tax paid (11.6) (12.8) (19.5)Cash inflow from operating activities 43.9 37.7 102.5 Purchase of subsidiaries 11 (554.5) - (86.3)Net cash acquired with subsidiaries 11 11.5 - 4.7Capitalised internal development costs 12 (9.4) (6.2) (14.5)Capitalised programme participation costs 12 (4.0) (3.3) (7.5)Purchase of other intangible assets 12 (1.5) (2.2) (3.6)Purchase of property, plant and equipment (13.0) (15.7) (31.4)Proceeds from disposal of property, plant 0.3 3.5 4.5and equipmentProceeds from disposal of investments - - 0.8available for saleCash outflow from investing activities (570.6) (23.9) (133.3) Dividends paid to Company's shareholders - - (32.0)Issue of equity share capital 437.8 1.1 3.7Expenses of issue of equity share capital (9.8) - -Proceeds from borrowings 574.7 4.3 96.5Debt issue costs (0.9) - -Repayments of borrowings (402.5) (16.2) (36.0)Cash inflow/(outflow) from financing 599.3 (10.8) 32.2activities Net increase in cash and cash equivalents 72.6 3.0 1.4Cash and cash equivalents at start of 43.6 45.5 45.5periodExchange losses on cash and cash (2.3) (1.2) (3.3)equivalentsCash and cash equivalents at end of period 113.9 47.3 43.6 CONSOLIDATED UNAUDITED STATEMENT OF RECOGNISED INCOME AND EXPENSEfor the six months ended 30 June 2007 Notes Six Six Year months months ended ended ended 31 30 June 30 June December 2007 2006 2006 Restated £m £m £m Currency translation differences (7.9) (4.1) (7.1)Taxation recognised on currency translationdifferences: current 0.5 (0.6) 2.0Actuarial gains/(losses) 31.6 5.6 (4.6)Taxation recognised on actuarial gains/ (9.5) (1.8) 1.3(losses): deferredLosses on cash flow hedges (0.5) - -Taxation recognised on cash flow hedge 0.2 - -losses: deferredNet income/(expense) recorded directly in 14.4 (0.9) (8.4)equityProfit for the period 48.0 47.7 94.3Total recognised income for the period 17 62.4 46.8 85.9 NOTES TO THE FINANCIAL STATEMENTSFor the six months ended 30 June 2007 1. General information The information presented in this document has not been audited or reviewed anddoes not constitute Group statutory accounts as defined in section 240 of theCompanies Act 1985. Group statutory accounts for the year ended 31 December 2006were approved by the Board of Directors on 7 March 2007 and delivered to theRegistrar of Companies. The auditors' report on those accounts was unqualifiedand did not contain any statement under Section 237 of the Companies Act 1985. 2. Basis of preparation The consolidated financial statements of the Group have been prepared inaccordance with those parts of the Companies Act 1985 applicable to companiesreporting under IFRS and in accordance with Listing Rules. The consolidatedfinancial statements have been prepared under the historical cost convention asmodified by the revaluation of land and buildings, available-for-sale financialassets and financial assets and liabilities (including derivative instruments)at fair value. The consolidated financial statements have been prepared inaccordance with the accounting policies used in the preparation of the statutoryaccounts for the year ended 31 December 2006. These policies are currentlyexpected to be used in the preparation of statutory accounts for the year ended31 December 2007. Certain comparative figures have been restated. Full details on the restatementsare provided in note 20. 3. Segmental analysis The Group's primary segments are its business segments. Six months Six months Year ended ended ended 30 June 30 June 31 December 2007 2006 2006 Restated Restated £m £m £m RevenueAerospace Equipment 186.7 175.3 356.6Sensing Systems 114.2 105.6 218.9Defence Systems 57.1 45.0 94.8 358.0 325.9 670.3 Underlying operating profit (note 4)Aerospace Equipment 50.5 43.8 92.3Sensing Systems 19.3 17.6 39.8Defence Systems 8.7 8.5 17.1 78.5 69.9 149.2 Operating profitAerospace Equipment 47.8 45.6 89.0Sensing Systems 18.6 19.3 41.1Defence Systems 5.3 8.4 13.1 71.7 73.3 143.2 3. Segmental analysis continued The Group announced in its consolidated financial statements for the year ended31 December 2006 that it now manages its businesses under the key segments of: • Aerospace Equipment • Sensing Systems • Defence Systems A reconciliation of the 2006 interim results reported under the old segmentdefinitions to the way in which they are reported under the new segmentdefinitions is provided below: Old segment definitions Aerospace Defence Electronics Total Systems 2006 £m £m £m £m RevenueAerospace Equipment 175.3 - - 175.3Sensing Systems 73.2 - 32.4 105.6Defence Systems - 45.0 - 45.0 248.5 45.0 32.4 325.9 Underlying operating profit(note 4)Aerospace Equipment 43.8 - - 43.8Sensing Systems 15.4 - 2.2 17.6Defence Systems - 8.5 - 8.5 59.2 8.5 2.2 69.9 Operating profitAerospace Equipment 45.6 - - 45.6Sensing Systems 16.5 - 2.8 19.3Defence Systems - 8.4 - 8.4 62.1 8.4 2.8 73.3 4. Reconciliations between profit and underlying profit Underlying profit is used by the Board to measure and monitor the underlyingtrading performance of the Group. It excludes certain items as shown below: Six months Six months Year ended ended ended 30 June 30 June 31 December 2007 2006 2006 Restated £m £m £m Operating profit 71.7 73.3 143.2 Exceptional operating costs (note 5) 0.5 - 1.5Amortisation of intangibles acquired inbusiness combinations (note 12) 9.2 5.4 12.9Disposal of inventory revalued inbusiness combinations - 0.1 1.3Financial instruments (note 6) (2.9) (8.9) (12.1)Goodwill adjustments arising fromrecognition of tax losses* - - 2.4Adjustments to operating profit 6.8 (3.4) 6.0 Underlying operating profit 78.5 69.9 149.2 Profit before tax 64.9 65.4 126.7Adjustments to operating profit per 6.8 (3.4) 6.0aboveExceptional net finance income (note 5) (2.7) - -Underlying profit before tax 69.0 62.0 132.7 c) Profit for the period 48.0 47.7 94.3Adjustments to profit before tax per 4.1 (3.4) 6.0aboveTax effect of adjustments to profit (1.7) 1.0 (3.4)before taxUnderlying profit for the period 50.4 45.3 96.9 * The goodwill adjustment arises from the recognition of tax losses during 2006in respect of businesses acquired in earlier years. These tax losses existedwhen the businesses were acquired but a deferred tax asset was not recognised atthe time as the recoverability of those losses was not probable at the time thefair values were finalised. IFRS requires that goodwill is adjusted in the yearthe recoverability becomes probable with a corresponding charge recorded inprofit before tax. 5. Exceptional operating items The exceptional operating items relate to the integration of significantacquisitions and items which by virtue of their size and nature are consideredto be non-recurring. Exceptional operating costs The exceptional charge in 2007 of £0.5 million (2006: £Nil) relates to theon-going consolidation in both the UK and the US of Defence Systems businessesfollowing the acquisition of Firearms Training Systems Inc ("FATS"). In the UK,FATS UK is being consolidated onto the Meggitt Defence Systems Limited site inKent. In the US, Caswell is being consolidated onto the FATS US site in Atlanta.The consolidations will be completed in the first half of 2008. An exceptionalcharge of £1.5 million was recognised in the second half of 2006 relating to theconsolidation. Cash expenditure on exceptional operating costs was £0.8 million (2006: £0.9million). 5. Exceptional operating items continued Exceptional net finance income The Group announced on 6 March 2007 the proposed acquisition of K&F IndustriesHoldings, Inc (K&F) for an enterprise value of $1.8 billion funded in part by arights issue with the balance financed by a new debt facility. Finance income oncash raised by the rights issue and finance costs associated with the new debtfacilities have been treated as exceptional net finance income for the periodprior to completion of the acquisition on 22 June 2007. 6. Financial instruments Although the Group uses foreign currency forward contracts to hedge againstforeign currency exposures it has decided that the costs of meeting theextensive documentation required to be able to apply hedge accounting under IAS39 ("Financial Instruments: Recognition and Measurement") are not merited. TheGroup's underlying profit figures exclude amounts which would not have beenrecorded if hedge accounting had been applied. Where interest rate derivatives do not qualify to be hedge accounted movementsin the fair value of these derivatives are excluded from underlying profit.Where interest rate derivatives do qualify to be accounted for as fair valuehedges the difference between the movement in the fair values of the derivativesand in the fair value of fixed rate borrowings is excluded from underlyingprofit. Six months Six months Year ended ended ended 30 June 30 June 31 December 2007 2006 2006 £m £m £m Movement in the fair value of foreigncurrency forward contracts 2.2 (10.6) (14.0) Impact of retranslating net foreigncurrency assets and liabilities at spotrate (1.1) 1.4 2.0Movement in the fair value of interestrate derivatives that do not qualify forhedge accounting (4.1) - -Movement in the fair value of interest 0.6 1.3 0.1rate derivatives that do qualify forhedge accountingMovement in the fair value of associated (0.5) (1.0) (0.2)fixed interest rate borrowings Financial instruments - Gain (2.9) (8.9) (12.1) 7. Net finance costs Six months Six months Year ended ended ended 30 June 30 June 31 December 2007 2006 2006 £m £m £m Interest on bank deposits 0.3 0.3 0.8Other receivables - discount unwinding 0.5 0.5 1.0Other finance income 0.4 0.1 0.5Exceptional net finance income (note 5) 2.7 - - 3.9 0.9 2.3Interest on post-retirement benefit (12.0) (10.9) (21.8)obligationsExpected return on post-retirementbenefit scheme assets 12.4 11.3 22.8Finance income 4.3 1.3 3.3 Interest on bank borrowings (6.9) (4.6) (10.9)Interest on senior notes (3.4) (3.7) (7.3)Provisions - discount unwinding (0.5) (0.6) (1.0)Other finance costs (0.3) (0.3) (0.6)Finance costs (11.1) (9.2) (19.8) Net finance costs (6.8) (7.9) (16.5) 8. Taxation The tax charge for the period has been calculated using the expected tax ratefor the year for each tax jurisdiction. These rates have been applied to the pretax profits made in each jurisdiction for the six months to 30 June 2007. 9. Earnings per share The calculation of earnings per ordinary share is based on profits of £48.0m(2006: £47.7m) and on the weighted average 568.3m (2006 as restated: 506.7m)ordinary shares in issue during the six months to 30 June 2007. Prior yearcomparatives have been adjusted for the bonus element of the rights issue asdetailed in note 20. The calculation of diluted earnings per ordinary share is based on the sameprofits as used in the calculation of basic earnings per ordinary share. Theweighted average number of ordinary shares of 571.8m (2006 as restated: 510.7m)used in the calculation is based on the weighted average number used in thecalculation of basic earnings per share adjusted for the effect of options. Underlying earnings per share is based on underlying profit (see note 4) and iscalculated below: 9. Earnings per share continued Six months Six months Year ended ended ended 30 June 30 June 31 December 2007 2006 2006 Restated Restated pence pence pence Basic earnings per share 8.4 9.4 18.6Add back effects of:Exceptional operating costs - - 0.2Amortisation of intangibles acquired inbusiness combinations 1.1 0.8 1.8Disposal of inventory revalued inbusiness combinations - - 0.2Financial instruments (0.3) (1.3) (1.7)Exceptional net finance income (0.3) - -Rights issue * 0.9 - -Underlying earnings per share 9.8 8.9 19.1 * As referred to in note 5 the Group has excluded exceptional net finance incomearising from the rights issue for the period from when the rights issue proceedswere received on 18 April 2007 to 22 June 2007, the date when the acquisition ofK&F was completed. For the purposes of underlying EPS for 2007 the Group hasalso adjusted the weighted average number of shares used to exclude the effectof the new shares for this same period. The weighted average number of sharesused for underlying EPS in 2007 is 516.3m. 10. Dividends The Directors have declared an interim net dividend of 2.45p per ordinary share(2006 as restated: 2.23p) which will be paid on 9 November 2007 to shareholderson the register on 21 September 2007. A scrip dividend will be available forshareholders who wish to take the dividend in the form of shares rather thancash. As the dividend was approved by the Directors after 30 June 2007 thedividend cost of £16.1m (2006: £11.3m) is not recorded as a liability at 30 June2007. 11. Business combinations The assets and liabilities of K&F on 22 June 2007 including goodwill arising onconsolidation were as follows: £mNon-current assetsGoodwill 793.5Development costs 7.8Programme participation costs 75.6Other intangible assets 57.4Property, plant and equipment 54.8Trade and other receivables 0.2 989.3Current assetsInventories 46.5Trade and other receivables 26.6Derivative financial instruments 0.7Cash and cash equivalents 11.5 85.3 Total assets 1,074.6 Current liabilitiesTrade and other payables (33.8)Current tax liabilities (3.2)Bank and other borrowings (6.1)Provisions (6.2) (49.3) Net current assets 36.0 Non-current liabilitiesTrade and other payables (2.6)Deferred tax liabilities (19.6)Bank and other borrowings (347.0)Provisions (0.7)Post-retirement benefit obligations (93.0) (462.9) Total liabilities (512.2) Net assets acquired 562.4 £m Consideration satisfied in cash (including costs) 554.5Costs not yet settled 7.9Total consideration 562.4 Due to the proximity of the acquisition completion to the interim date the abovefigures reflect provisional book values for the assets and liabilities of K&F.Adjustments to finalise book values and reflect fair value adjustments requiredwill be made in the Group consolidated financial statements for the year ended31 December 2007. The trading results of K&F post acquisition for the nine days from completion on22 June 2007 to 30 June 2007 were not significant and accordingly have not beenreflected in these consolidated financial statements. 12. Intangible assets Goodwill Development Programme Other costs participation intangible costs assets £m £m £m £m Balance at 1 January 2007:As previously reported 598.9 31.9 - 171.6Restatement (note 20) (34.9) - 33.8 47.5As restated 564.0 31.9 33.8 219.1 Exchange rate adjustments (9.7) (0.6) (0.3) (1.3)Businesses acquired (note 11) 793.5 7.8 75.6 57.4Additions - 9.4 4.0 1.5Amortisation charge - (0.7) (1.9) (10.7)*Balance at 30 June 2007 1,347.8 47.8 111.2 266.0 * Of the £10.7m amortisation of other intangible assets £9.2m relates to theamortisation of intangible assets arising in business combinations and has beenexcluded from underlying profit (note 4). 13. Property, plant and equipment 30 30 31 June June December 2007 2006 2006 £m £m £m Net book value at 1 January 127.6 116.9 116.9Exchange rate adjustments (1.1) (2.1) (4.5)Businesses acquired (note 11) 54.8 - 1.0Additions 12.5 16.2 31.8Disposals (0.2) (1.7) (2.9)Depreciation charge (7.3) (7.3) (14.7)Net book value at end of period 186.3 122.0 127.6 14. Post-retirement benefit obligations 30 30 31 June June December 2007 2006 2006 £m £m £m Fair value of schemes' assets 434.9 347.7 369.3Fair value of schemes' liabilities (592.0) (438.1) (466.5)Post-retirement benefit obligations (157.1) (90.4) (97.2) Principal financial assumptions:Discount rate - UK schemes 5.70% 5.25% 5.05%Discount rate - US schemes 6.25% 6.25% 5.75%Inflation rate - UK schemes 3.20% 2.85% 2.90%Salary compensation increase - US schemes 4.00% N/A N/AHealthcare cost increases - US schemes * N/A N/A * Future costs of healthcare benefits at June 2007 are based on an initial trendrate of 10.3% reducing to 5.0% by 2013. Prior to the acquisition of K&F theGroup did not have significant post-retirement healthcare benefit obligations. The Group made changes during the period to the mortality assumptions it usesfor all its US schemes. The new assumptions provide for, on average, furtherlongevity of approximately 1.0 year. 15. Contingent liabilities The Company and various of its subsidiaries are, from time to time, parties tolegal proceedings and claims which arise in the ordinary course of business.These include, amongst others issues such as environmental (where the Group isresponsible for clean-up costs mainly in the United States which are largelycovered by insurance), export control (where the Group is being investigated foralleged historic breaches of US regulations) and health and safety (where theGroup periodically receives asbestos related claims in respect of discontinuedor divested businesses again largely covered by insurance). These matters areregularly reviewed by the Directors and, where appropriate, reasonable provisionis made in the Group accounts but there can be no guarantee that such provisionor insurance will cover all potential outcomes. 16. Share capital Six months Six months Year ended ended ended 30 June 30 June 31 December 2007 2006 2006 No. m No. m No. m Number of shares outstanding at start of 436.1 433.2 433.2periodRights issue 218.2 - -Issued on exercise of executive shareoptions and SAYE share options 0.9 0.8 2.2Scrip dividend - - 0.7Number of shares outstanding at end of 655.2 434.0 436.1period 17. Summary of movements in equity Six months Six months Year ended ended ended 30 June 30 June 31 December 2007 2006 2006 Restated £m £m £m At 1 January 559.4 496.7 496.7Total recognised income for the period 62.4 46.8 85.9Employee share schemes:Value of services provided 2.6 0.8 5.2Proceeds from shares issued 1.4 1.2 3.7Dividends (26.2) (23.0) (32.0)Rights issue 426.6 - -Purchase of own shares - - (0.1)At end of period 1,026.2 522.5 559.4 18. Cash inflow from operations Six months Six months Year ended ended ended 30 June 30 June 31 December 2007 2006 2006 Restated Restated £m £m £m Profit for the period 48.0 47.7 94.3Adjustments for:Tax 16.9 17.7 32.4Depreciation and amortisation 20.6 17.1 37.0Profit on disposal of property, plant & (0.1) (1.8) (1.6)equipmentNet finance costs 6.8 7.9 16.5Financial instruments (2.9) (8.9) (12.1)Adjustment to goodwill on recognition of - - 2.4tax lossesChanges in working capital (26.8) (21.4) (30.4)Cash inflow from operations 62.5 58.3 138.5 19. Reconciliation of net cash flow to movement in net debt Six months Six months Year ended ended ended 30 June 30 June 31 December 2007 2006 2006 £m £m £mMovement in the period in:Cash and cash equivalents 72.6 3.0 1.4Bank and other borrowings (171.3) 11.9 (60.5)Change in net debt resulting from cash (98.7) 14.9 (59.1)flows Arising on acquisition of businesses (353.1) - (15.5)(note 11)Other non-cash movements 3.2 0.4 (0.8)Exchange differences 7.3 18.9 36.0Movement in net debt in the period (441.3) 34.2 (39.4) Net debt at 1 January (353.7) (314.3) (314.3) Net debt at end of period (795.0) (280.1) (353.7) Disclosed as:Cash and cash equivalents 113.9 47.3 43.6Bank and other borrowings - capital (165.0) (3.8) (17.3)Bank and other borrowings - non-current (743.9) (323.6) (380.0)Net debt at end of period (795.0) (280.1) (353.7) 20. Restatement of prior periods Finalisation of fair values of prior year acquisitions IFRS requires fair values to be finalised within 12 months of the acquisitiondate. All fair value adjustments are required to be recorded with effect fromthe date of acquisition and consequently result in the restatement of previouslyreported financial results. In 2007 the Group made adjustments to the fair values for three acquisitionscompleted in the second half of 2006 and this resulted in adjustments to theprofit for the year ended 31 December 2006 and to the balance sheet at thatdate. The impact of the adjustments is shown below: Year ended 31 December 2006 £m Profit for the period as previously reported 96.5Amortisation of intangibles acquired in business (2.1)combinationsDisposal of inventory revalued in business combinations (1.2)Tax effect of adjustments above 1.1Profit for the period as restated 94.3 31 December 2006 £m Goodwill as previously reported 598.9Intangibles acquired in business combinations (51.3)Revaluation of inventory acquired in business combinations (1.2)Other 0.8Tax effect of adjustments above 16.8Goodwill as restated 564.0 Programme participation costs Programme participation costs represent costs incurred by the Group associatedwith Original Equipment Manufacturers on new aircraft where the Group hasprincipal supplier status. These costs include cash payments and the supply ofinitial manufactured parts, typically on a free of charge or deeply discountedbasis. Programme participation costs have been reclassified from otherreceivables to intangible assets. Programme participation costs were previouslyreferred to as "deferred costs" in the Group's 2006 consolidated financialstatements. 30 June 31 December 2006 2006 £m £m As previously reported:Other intangible assets 0.9 1.7Trade and other receivables - non-current 27.2 28.8Trade and other receivables - current 3.3 3.3 31.4 33.8As restated:Programme participation costs 31.4 33.8 Rights issue Earnings per share and dividends per share data for prior periods have beenrestated for the bonus element of the rights issue approved by the shareholdersof the Group in 2007. The factor applied to reflect the bonus element was1.1682. 21. Approval of interim financial statements These interim financial statements were approved by the Board of Directors on6 August 2007. 22. Availability of interim financial statements The interim financial statements will be made available to all shareholders from31 August 2007 and will be available to the public at the Company's registeredoffice at Atlantic House, Aviation Park West, Bournemouth International Airport,Christchurch, Dorset, BH23 6EW from that date. - E N D S - This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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