6th Sep 2005 07:01
Meggitt PLC06 September 2005 For Immediate Release 6 September 2005 Please contact Charles Ryland or Jeremy GarciaBuchanan CommunicationsTel: +44 20 7466 5000 Meggitt PLCMeggitt PLC unaudited interim results for the six months ended 30 June 2005 "Continuing excellent progress" 2005 2004(1)Group turnover £296.1m £205.6m +44%Profit before tax - underlying(2) £55.2m £40.4m +37%Profit before tax £41.0m £39.8m +3%EPS - underlying2 9.5p 8.5p +12%Dividend 2.4p 2.2p +9% • Turnover up 44%. Up 47% at constant exchange rates. • Underlying profit before tax up 37%. Up 43% at constant exchange rates. • Underlying earnings per share (EPS) up 12%. • Dunlop acquisition and integration progressing well; significant contribution to results. • Interim dividend up 9% to 2.4p (2004: 2.2p). • Order book at July 2005 16% up on December 2004 at constant exchange rates. Terry Twigger, Chief Executive, commented:"The first half of 2005 has seen continued excellent progress with strong growthin orders, sales and underlying profitability. We are very pleased with theDunlop acquisition and its integration is going well. We look forward tocontinued progress in the second half." cont'd ... ________________________(1) 2004 results have been restated under IFRS(2) Underlying profit before tax and underlying earnings per share excludes amortisation of IFRS 3 intangibles, exceptional operating costs and IFRS 3 inventory revaluations and the marking to market of foreign currency contracts. (See note 4.) BASIS OF PREPARATION This is the first Interim Report produced using International FinancialReporting Standards (IFRS) and the comparative figures for 2004 have beenrestated. The impact of IFRS is more fully discussed in our statement of 21 June2005 which is available on the Group's website, www.meggitt.com. UNDERLYING PROFIT When managing the business, the Directors look at a number of alternative profitmeasures, which they feel reflect the underlying performance of the business.The principal profit measure used internally is "underlying profit" whichexcludes exceptional costs, amortisation of IFRS 3 intangibles, IFRS 3 inventoryrevaluations and the marking to market of foreign currency contracts which hedgefuture anticipated currency exposures. Throughout this statement there are references to underlying profit which hasbeen calculated as stated above. RESULTS Meggitt has delivered another excellent set of results, achieving recordturnover and profits in the first half of 2005. This was achieved as a result ofstrong organic growth and a good performance from the acquisitions made in thesecond half of 2004. Group turnover was £296.1m (2004: £205.6m), an increase of 44%. This increasewas after the conversion of overseas sales into sterling at less favourableexchange rates than 2004 which adversely impacted reported turnover by £5.2m.Acquisitions made in 2004 contributed £74.2m and, excluding this and the adverseimpact of currency, Group turnover increased by 11%. The 2004 acquisitions greatly increased the Group's exposure to a rapidlystrengthening civil aerospace market and, in particular, the civil aftermarket.In the first six months of 2005 civil aerospace accounted for 43% of Groupturnover (2004: 31%); military markets accounted for 39% of turnover (2004: 48%)and the aftermarket in aggregate (civil plus military) accounted for 40% ofturnover (2004: 31%). Underlying operating profit increased by 39% to £61.8m (2004: £44.5m). This wasafter a £2.5m adverse impact from currency and a £16.6m benefit from theacquisitions made in 2004. Excluding these two items, the underlying operatingprofit increase was 7%. Net interest expense increased by £2.5m to £6.6m (2004: £4.1m) driven by theacquisitions completed in 2004. This resulted in an underlying profit beforetaxation of £55.2m (2004: £40.4m) an increase of 37%. After operating exceptional costs (£1.8m), IFRS 3 adjustments for theamortisation of intangibles (£4.9m) and marking foreign currency contracts tomarket (£7.4m), profit before taxation increased by 3% to £41.0m (2004: £39.8m).A reconciliation of underlying to statutory profit before tax is shown at Note 4. Exceptional operating costs of £1.8m (2004: £0.7m) were as anticipated andrelate to the consolidation of Meggitt's polymers business into DunlopAerospace's facilities in the Midlands, which is now completed to budget and onschedule. The 2004 costs relate to the closure of the Group's manufacturingfacility in the US Virgin Islands and the relocation of production to a newfacility in China. The effective tax rate for the Group reduced to 26% (2004: 29%) and underlyingEPS increased by 12% to 9.5 pence (2004: 8.5 pence). The Group continued its track record of strong cash generation with cash flowfrom operations (before exceptional costs) 85% of underlying operating profit.Net cash inflow after paying interest and taxation was £36.6m and interest cover(based on underlying profit) improved to 9.3 times. Gearing reduced to 65% atthe end of June compared with 71% at the end of the December 2004. The Board is increasing the interim dividend by 9% to 2.4 pence (2004:2.2 pence). OPERATIONAL HIGHLIGHTS AEROSPACE • Turnover increased 60% to £219.2m (2004: £136.7m). At constant exchange rates this equates to a 64% increase. • Underlying operating profit increased 61% to £51.4m (2004: £31.9m). At constant exchange rates the increase was 70%. • Excluding the impact of 2004 acquisitions and at constant exchange rates, turnover increased by 13% and underlying operating profit by 18%. • Aerospace order book at July 2005 up 15% on December 2004 at constant exchange rates. Aerospace turnover and underlying operating profit increased by 60% and 61%respectively compared with the same period last year. On a like-for-like basis,excluding the impact of currency and acquisitions, the organic increases werestill an impressive 13% and 18% respectively. This reflects a continuing strongrecovery in civil aerospace markets and healthy military demand. The Aerospacedivision currently represents 74% of Group turnover and 83% of Group underlyingoperating profit. Notable successes included further contract awards in condition monitoring. Withoil prices remaining high, environmental legislation increasing and enginemaintenance optimisation efforts continuing, this represents a promising growthmarket for the future. During the first half of 2005 Meggitt was selected tosupply the Engine Monitoring Unit (EMU) for both the new engines being developedfor the Boeing 787 aircraft, the Rolls-Royce Trent 1000 and the General ElectricGEnx engine. This adds to our success in winning condition monitoring programmeson the new engines for the Airbus A380, the Rolls-Royce Trent 900 and theAlliance GP7200. The EMU on the Trent 900, in particular, is one of the mostcomplex electronic units ever installed on an aircraft engine and has performedvery well during the A380 flight test programme. Winning these programmes aswell as providing a significant number of the related engine sensors hasestablished Meggitt as the market leader in engine condition monitoringequipment for airborne applications. Building on recent successes, a number of new contracts were received for theGroup's extensive product line of valves from such customers as Hispano Suiza,Honeywell and General Electric. These applications include the new Bell 429helicopter, the Boeing 787 and the new Russian regional jet family. Also, theheat management system for the Trent 900 engine was certified to scheduletogether with the GP7200 engine coolers and during the period, Boeing approvedMeggitt's silicon dioxide cables for engines on the Boeing 737 NGs. Development of our digital autopilot for the Eclipse programme continues ontrack. The Eclipse is a revolutionary low cost light twin jet aimed at businessusers and the general aviation market with a planned entry into service in 2006.There are currently over 2,250 orders with non-returnable deposits for thisaircraft. We are also providing or developing autopilots for other generalaviation aircraft including Cirrus, Lancair, Mooney, and Pilatus. Demand for military equipment remains high. By the end of July £24m(December 2004: nil) of orders relating to the second tranche of orders for theEurofighter had been received with a further £50m of orders expected in thesecond half of the year. These orders cover air data transducers, crashsurvivable memory units, engine optical pyrometers, landing computer and thewheels and brakes for the aircraft. Deliveries of these orders will commence in2006. A number of further orders for new military platforms have been receivedincluding transmission cooling fans for the newly developed Boeing HummingbirdA160 unmanned surveillance helicopter and additional fans and pumps for the V-22Osprey. Flight testing of our auto fault oil debris monitoring system has beencompleted successfully on the US Army's AH-64A and AH-64D Apache helicopters.This new system will improve significantly the mission effectiveness andavailability of the Apache by reducing the number of precautionary landings andaborted missions while lowering system maintenance costs. Similar Meggittsystems have already proved their value on the US Coast Guard's HC-130H, the USNavy's TH-57 trainer helicopter, while first deliveries for the US Navy P3 andE2 aircraft were made in July 2005. Following the order for the A400M earlier in the year, Meggitt has been chosento provide fire and bleed air systems and the engine vibration monitoring systemfor the Japanese CX military transport and PX maritime patrol aircraft.Deliveries commenced on the fire and bleed air systems for the US C5 aircraftand first deliveries were made of Bahrain's F16 canopy actuators. Military aftermarket sales continue to be strong with the on-going conflicts inthe harsh environments in Iraq and Afghanistan sustaining demand, particularlyrelated to air transport and helicopter platforms. The Dunlop Aerospace companies acquired in August 2004 have continued to performwell and have contributed £68.8m to turnover and £15.9m to underlying operatingprofit in the first half. The process of integrating the Dunlop businesses intoMeggitt has continued on schedule and during the first half of the year thepolymers businesses, Dunlop Precision Rubber and Bestobell were successfullycombined into Dunlop's facilities in the Midlands. In addition, the integrationof the Braking Systems business has been completed and a simplified managementstructure is now in place. With more integration activity in the second half weare on track to achieve our target of £7m integration benefits in 2005 (£2.6mwas achieved in the first half) and £10m in 2006. DEFENCE SYSTEMS • Turnover increased 16% to £39.6m (2004: £34.1m). At constant exchange rates the increase was 19%. • Underlying operating profit increased by 3% to £6.0m (2004: £5.8m). At constant exchange rates the increase was 6%. • Excluding the impact of 2004 acquisitions and at constant exchange rates, turnover increased by 15% and underlying operating profit by 6%. • Profit margins affected by recent success in winning significant development contracts. • Defence Systems' order book at July 2005 up 19% on December 2004 at constant exchange rates. Turnover increased 19% at constant exchange rates, with significant increases inammunition handling and ground targetry sales. Underlying operating profitincreased by 6% at constant exchange rates. The first half of the year has seen continued very strong demand for groundtargetry and ammunition handling offset by slow demand for aerial targets andanti radar seeking missile countermeasures. A number of the ground targetry andammunition handling orders are significant development contracts with initiallower margins and which will lead to important production orders in futureyears. In weapon training systems, a major initial order has been received to supportthe US Army Target Augmentation Range Programme with lightweight deployabletargetry. This system is designed to train personnel "in theatre". Also, theVoodoo target entered service with the Norwegian Armed Forces and participatedin a joint exercise with the Portuguese Navy. Demonstrations were also given tothe US Air Force in support of their programme to select a new suite of targetsto meet emerging requirements. The GT400 Glide Target, Banshee and Voodootargets were successfully flown and engaged by a variety of aircraft and weaponsystems. In ammunition handling, a major development and initial production order wasreceived for the ammunition replenishing system on the Stryker mobile gun systemvehicle. In environmental control systems further orders were received for theM1A2 Abrams tank thermal management system with additional orders anticipatednow that the US Government have announced that the M1A2 will continue in serviceuntil 2045. ELECTRONICS • Turnover increased 7% to £37.3m (2004: £34.8m). At constant exchange rates the increase was 9%. • Underlying operating profit reduced by £2.3m to £4.4m (2004: £6.7m). At constant exchange rates the decrease was £2.2m. • Investment in longer term growth opportunities has continued. • Electronics' order book at July 2005 up 25% on December 2004 at constant exchange rates. Sales increased 7% overall in the first half but were down 3% when acquisitionsare excluded, due to the anticipated reduced demand from our automotive,military and specialist lab test customers, and a product recall by a medicalcustomer (not related to our components) which negatively impacted their salesand, therefore, demand for our product. While the increase in the order book ishealthy, we expect the second half of 2005 to remain at a similar level to thefirst half. In the middle of 2004 we embarked upon two significant investment programmes todrive future growth and these continued through the first half of 2005. In thesecond half of 2004 engineering staff were increased by 30% to supportmanufacturing improvements and new product development initiatives. Keyprogrammes being worked on are smart sensing which brings intelligence to thesensor and enables sensors to be deployed as networks rather than stand alonedevices. Key customers here are the US Air Force, Boeing, NASA and, longer term,our industrial customers as costs come down. We have already booked £1.6m ofinitial orders but deployment will not start until 2008. We are also developingvery high temperature sensors for gas turbine applications, with deployment alsoexpected in 2008. The automotive and industrial sectors offer potential longerterm applications for this technology. We have also established a direct sales force in Europe, supported by adistribution and applications support facility in Germany, which will drivefuture growth in the region. The cost of these longer term initiatives, together with the sales impact, hasreduced underlying operating profit by £2.3m compared with the same period lastyear. Successes in the first half of the year include key wins with Boeing on theMulti-mission Maritime Aircraft programme, and on the AMRAAN and Sparrowprogrammes with Raytheon. We are also supporting retrofit and upgrade programmesfor Sikorsky, Goodrich, Raytheon and Bell that have the potential forsignificant revenues in 2007. New regulations for side impact and pedestrian testing continue to driveincreases in requirements for our high value sensors for dummies and vehiclecrash testing. Although partially offsetting this, are the previouslyanticipated reductions in demand from the US and European automotivemanufacturers for our high volume lower valued sensors used in on-vehicleapplications. Wilcoxon, which was acquired in December 2004, has performed in line with ourexpectations and has started to benefit from having its products marketedthrough the Electronics' worldwide sales organisation. The performance of the Asian facility is in line with our expectations. The nextphase of the development, in early 2006, is to move some products currentlybeing manufactured in Europe. The aim is not only to reduce cost but also toincrease sales of these products into the growing regional automotive andindustrial markets. CORPORATE ACTIVITY On 1 August 2005, Meggitt completed the acquisition of the Avery-Hardollbusiness, located in Blandford, Dorset, UK, for £8 million. Avery-Hardoll servesthe aerospace ground refuelling market and complements Meggitt's existing USproducts in this market. OUTLOOK The Group has continued to generate strong growth in turnover and underlyingprofit, with an excellent performance in Aerospace and Defence. Our majormarkets of Aerospace and Defence continue to look good with positive statementsfrom OE manufacturers and aftermarket suppliers, and the Group remains on trackto deliver further improvements in the second half of the year. The Directorsare confident that Meggitt will continue to trade in line with expectations andare increasing the interim dividend by 9%. CONSOLIDATED UNAUDITED INCOME STATEMENTfor the six months ended 30 June 2005 2005 2004 2004 Restated Restated June June Dec £'000 £'000 £'000Continuing operations Revenue 296,116 205,596 476,573 Cost of sales (162,001) (112,671) (269,288) Gross profit 134,115 92,925 207,285 Net operating costs (86,495) (49,069) (125,234) Operating profit - underlying (see note 4) 61,779 44,518 101,694Exceptional operating costs (see note 7) (1,840) (662) (7,879)Amortisation of IFRS 3 intangible items (see note 6a) (4,889) - (3,272)IFRS 3 inventory revaluations (see note 6b) - - (8,492)Financial instruments (see note 8) (7,430) - - Operating profit 47,620 43,856 82,051 Finance income 1,278 188 1,094Finance costs (7,895) (4,276) (12,489)Net finance costs (6,617) (4,088) (11,395) Profit before taxation - underlying (see note 4) 55,162 40,430 90,299Exceptional operating costs (see note 7) (1,840) (662) (7,879)Amortisation of IFRS 3 intangible items (see note 6a) (4,889) - (3,272)IFRS 3 inventory revaluations (see note 6b) - - (8,492)Financial instruments (see note 8) (7,430) - - Profit before tax from continuing operations 41,003 39,768 70,656 Tax (10,661) (11,544) (18,116) Profit for the period from continuing operations 30,342 28,224 52,540attributable to equity shareholders Earnings per shareBasic 7.1p 8.3p 13.9pDiluted 7.0p 8.3p 13.8p Dividends paid in the period - - 24,493Dividends proposed in the period 10,339 9,405 30,059 CONSOLIDATED UNAUDITED BALANCE SHEETas at 30 June 2005 30 June 30 June 31 December 2005 2004 2004 Restated Restated £'000 £'000 £'000 Non-current assetsGoodwill 537,320 314,961 522,081Development costs 16,396 7,446 12,530Other intangible assets 173,089 2,611 177,124Property, plant and equipment 110,169 50,360 111,553Trade and other receivables 49,394 14,637 49,301Derivative financial instruments 1,253 - -Deferred tax assets 34,642 28,754 28,850Investments held for sale 1,075 798 1,075 923,338 419,567 902,514Current assetsInventories 116,475 81,126 105,129Trade and other receivables 126,444 92,207 129,412Derivative financial instruments 679 - -Cash and cash equivalents 42,035 30,792 42,732 285,633 204,125 277,273 Total assets 1,208,971 623,692 1,179,787 Current liabilitiesTrade and other payables (151,771) (77,582) (150,769)External dividend payable (20,623) (15,057) -Derivative financial instruments (2,229) - -Current income tax liabilities (19,917) (19,621) (16,124)Bank overdraft, bank loans and other loans (2,768) (7,699) (5,914)Provisions (19,149) (12,634) (21,604) (216,457) (132,593) (194,411) Net current assets 69,176 71,532 82,862 Non-current liabilitiesTrade and other payables (1,113) (1,365) (468)Derivative financial instruments (1,639) - -Deferred tax liabilities (49,178) (4,864) (50,868)Bank loans and other loans (346,374) (139,818) (366,242)Retirement benefit obligations (87,866) (68,529) (74,955)Provisions (31,821) (24,395) (30,423) (517,991) (238,971) (522,956) Total liabilities (734,448) (371,564) (717,367) Net assets 474,523 252,128 462,420 EquityShare capital 21,538 14,796 21,481Share premium account 344,230 156,731 342,636Fair value reserves 2,167 905 1,359Cumulative translation adjustment (831) (1,787) (5,557)Other reserves 14,117 14,118 14,118Retained earnings 93,302 67,365 88,383Total equity 474,523 252,128 462,420 CONSOLIDATED UNAUDITED CASH FLOW STATEMENTfor the six months ended 30 June 2005 Six Six Year Months Months ended ended ended 31 December 30 June 30 June 2004 2005 2004 Restated Restated £'000 £'000 £'000 Cash from operations before exceptional operating costs 52,275 40,456 111,012Cash outflow from exceptional operating costs (4,885) (196) (3,088)Cash inflow from operations 47,390 40,260 107,924Interest received 710 188 1,094Interest paid (6,807) (4,191) (11,223)Debt issue costs (286) - (1,122)Taxation (10,164) (10,638) (18,578)Cash inflow from operating activities 30,843 25,619 78,095 Purchase of subsidiary undertakings 15,806 898 (440,447)Net cash acquired with subsidiaries - - 6,914Purchase of intangible assets (6,134) (2,184) (5,032)Purchase of property, plant and equipment (5,865) (5,224) (14,159)Proceeds from disposal of property, plant and equipment 259 233 192Proceeds from disposal of investments held for sale - 302 25Cash inflow/(outlow) from investing activities 4,066 (5,975) (452,507) Dividends paid to Company's shareholders - - (13,529)Issue of equity share capital 1,651 1,291 188,542Expenses of issue of ordinary share capital - - (5,625)Proceeds from borrowings - current 10,916 46,127 12,193Proceeds from borrowings - non current 45,421 45,384 241,176Repayment of borrowings - current (19,399) (45,763) (15,427)Repayment of borrowings - non current (74,835) (59,254) (13,479)Cash (outflow)/inflow from financing activities (36,246) (12,215) 393,851 Net (decrease)/increase in cash and cash equivalents (1,337) 7,429 19,439Cash and bank overdrafts at start of period 42,343 22,670 22,670Exchange gains on cash and bank overdrafts 1,029 693 234Cash and bank overdrafts at end of period 42,035 30,792 42,343 CONSOLIDATED UNAUDITED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITYfor the six months ended 30 June 2005 Share Fair value Cumulative Retained Other Total capital & reserves translation earnings reserves equity premium adjustment £'000 £'000 £'000 £'000 £'000 £'000Balance at 1January 2004restated 170,236 513 - 53,378 14,119 238,246Actuarialgains andlosses - - - 819 - 819Additionaldepreciationon revaluedassets - - - 1 (1) -Currencytranslationadjustments - - (1,787) - - (1,787)Net(expense)/incomerecognised directly inequity - - (1,787) 820 (1) (968)Profit forthe period - - - 28,224 - 28,224Total recognised(expense)/income for the period - - (1,787) 29,044 (1) 27,256Employeeshare optionscheme:Value ofservicesprovided - 392 - - - 392Shares issued 1,291 - - - - 1,291Dividends - - - (15,057) - (15,057)Balance at 30 June 2004 171,527 905 (1,787) 67,365 14,118 252,128Actuarialgains andlosses - - - 6,138 - 6,138Currencytranslationadjustments - - (3,770) - - (3,770)Net(expense)/incomerecognised directly inequity - - (3,770) 6,138 - 2,368Profit forthe period - - - 24,316 - 24,316Totalrecognisedincome forthe period - - (3,770) 30,454 - 26,684Employeeshare optionscheme:Value ofservicesprovided - 454 - - - 454Sharesissued - rightsissue 180,436 - - - - 180,436Sharesissued- options and scripdividend 12,154 - - - - 12,154Dividends - - - (9,436) - (9,436)Balance at31 December 2004 364,117 1,359 (5,557) 88,383 14,118 462,420Adoption ofIAS 32 andIAS 39 - - - 3,890 - 3,890Balance at 1January 2005 364,117 1,359 (5,557) 92,273 14,118 466,310Actuarialgains andlosses - - - (8,691) - (8,691)Additionaldepreciationon revaluedassets - - - 1 (1) -Currencytranslationadjustments - - 4,726 - - 4,726Netincome/(expense)recognised - - 4,726 (8,690) (1) (3,965)directly inequityProfit forthe period - - - 30,342 - 30,342Totalrecognisedincome forthe period - - 4,726 21,652 (1) 26,377Employeeshare optionscheme:Value ofservicesprovided - 808 - - - 808Shares issued 1,651 - - - - 1,651Dividends - - - (20,623) - (20,623)Balance at30 June 2005 365,768 2,167 (831) 93,302 14,117 474,523 NOTES TO THE FINANCIAL STATEMENTSFor the six months ended 30 June 2005 1. GENERAL INFORMATION The information presented in this document has not been audited and does notconstitute statutory accounts as defined in section 240 of the Companies Act1985. A copy of the statutory accounts for the year ended 31 December 2004prepared under UK GAAP has been delivered to the Registrar. The auditors' reporton those accounts was unqualified. 2. BASIS OF PREPARATION Prior to 2005 the Group prepared its annual financial statements in accordancewith UK GAAP. For the year ended 31 December 2005 the Group is required toprepare its annual financial statements in accordance with IFRS. The financialinformation included in this document has accordingly been prepared inaccordance with the accounting policies in note 3, which are those that thedirectors expect to apply in the preparation of the financial statements for theyear ending 31 December 2005, under IFRS. These policies are based onmanagement's current understanding of the requirements of current internationalstandards and interpretations. However, these may change if new standards orinterpretations are issued or as industry consensus evolves. The financial statements have been prepared in accordance with those parts ofthe Companies Act 1985 applicable to companies reporting under IFRS. Thefinancial statements have been prepared under the historical cost convention asmodified by the revaluation of land and buildings and financial assets andliabilities at fair value. The Group's transition date for IFRS is 1 January 2004. Comparative data for2004 has been restated to conform to the new accounting policies in note 3.These new policies reflect exemptions from restating certain financialinformation as permitted under IFRS 1. The exemptions taken by the Group arestated below: • Under IAS 16 the Group has elected to treat land and buildings revalued prior to 1 January 2004 as being held at deemed cost. • Under IAS 21 cumulative translation differences arising on the consolidation of foreign subsidiaries are required to be held in separate reserve within equity. The cumulative translation differences at 1 January 2004 have been deemed to be nil. • IAS 39 has been applied with effect from 1 January 2005 and not to the comparative data. The comparative results for 2004 in so far as they relate to financial instruments have been stated in accordance with UK Generally Accepted Accounting Principles (UK GAAP) as allowed by IFRS 1. • IFRS 2 has been applied to all awards after 7 November 2002. Earlier awards have not been restated. • IFRS 3 has been applied prospectively to acquisitions after 1 January 2004. Earlier acquisitions have not been adjusted. The fair values of three smaller acquisitions made at the end of 2004 will be finalised in the second half of 2005. On 21 June 2005, the Group released to the Stock Exchange a provisional analysisof the effects of adopting IFRS with effect from 1 January 2004. This includedreconciliations of the income statement, balance sheet and equity together withexplanations of the impacts. This analysis is also available at the web sitewww.meggitt.com. Adjustments made to these statements include the recognition ofthe final fair values of the Design and Manufacturing Division of DunlopStandard Aerospace Group Limited net assets and a number of reclassifications. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Group's previous financial statements for the year ended 31 December 2004were prepared in accordance with UK GAAP. The Group has now transitioned to IFRSand accordingly the accounting principles used in the preparation of the interimconsolidated financial statements are different from those applied in theprevious financial statements. The principal accounting policies adopted by the Group in the preparation ofthese consolidated financial statements are set out below. These policies havebeen applied consistently to all periods presented unless stated otherwise. ConsolidationThe Group financial statements consolidate the financial statements of theCompany and all subsidiaries for the period ended 30 June 2005. The results ofall subsidiaries acquired or sold during the period are consolidated for theperiods from or to the date on which control passed. A subsidiary is an entityover which the Group has the power to govern the financial and operatingpolicies of the entity. The existence and nature of potential voting rights thatare currently available to the Group are considered when determining whether theentity is a subsidiary. Acquisitions are accounted for using the purchase method. The cost of anacquisition is measured as the fair value of the consideration provided pluscosts directly attributable to the acquisition. Identifiable assets andliabilities of the acquired business are measured at their fair value at thedate of acquisition. To the extent that the fair value of consideration providedexceeds the fair value of net assets acquired the difference is recorded asgoodwill. Where the fair value of the net assets acquired exceeds the fair valueof consideration provided the difference is recorded directly in the incomestatement. Transactions between, and balances with, group companies are eliminated togetherwith unrealised gains on inter group transactions. Unrealised losses areeliminated to the extent that the asset transferred is not impaired. The accounting policies of acquired businesses are changed where necessary to beconsistent with those of the Group. Revenue recognitionRevenue represents the fair value of amounts receivable for goods and servicesprovided in the normal course of business, net of trade discounts, VAT and othersales related taxes. Revenue is recognised when the significant risks andrewards of ownership of the goods have been transferred to the customer whichoccurs when the products are shipped to the customer or services have beenprovided to the customer, title and risk of loss have been transferred andcollection is probable. An appropriate proportion of total long term contractvalue, based on the fair value of work performed, is included in revenue and anappropriate level of profit is taken based on estimated percentage completion ofthe contractual obligations if the final outcome can be reliably assessed. Intangible assets GoodwillGoodwill represents the excess of the cost of an acquisition over the fair valueof the Group's share of the net assets of the acquired business. Goodwillarising on acquisitions prior to 1 January 1998 was written off directly toequity on acquisition in accordance with the Group's prior UK GAAP accountingpolicy. Under the Group's new accounting policy such goodwill remains writtenoff against equity. Goodwill on acquisitions post 1 January 1998 is included asan intangible asset. Under the Group's prior UK GAAP accounting policy goodwillwas amortised over a maximum life of twenty years to the profit and lossaccount. Under the Group's new accounting policy the Group ceased amortisinggoodwill with effect from 1 January 2004 but has not reversed prior yearcharges. Goodwill is no longer amortised but is tested annually for impairment.Any impairment is recorded as an expense in the year that it is identified.Goodwill is carried at cost less amortisation charged prior to 1 January 2004less accumulated impairment losses. Research and DevelopmentResearch expenditure is recognised as an expense as incurred. Developmentexpenditure on projects that are undertaken where the related expenditure isseparately identifiable and management are satisfied as to the ultimatetechnical and commercial viability of the project based on all relevantavailable information is capitalised as an intangible asset. Capitaliseddevelopment expenditure is amortised on a straight line basis over the periodsexpected to benefit, typically up to 10 years, commencing with the launch of theproduct. Development expenditure is reviewed for impairment. Developmentexpenditure not meeting the criteria for capitalisation is expensed as incurred. Other intangible assetsa) Purchased intangible assetsPurchased licences, patents, trademarks and software licenses and programs areincluded at cost and are amortised in equal instalments over the period of theagreements, which is their estimated useful economic life. b) IFRS 3 intangible assetsFor acquisitions of businesses after 1 January 2004, the Group recognisesseparately from goodwill intangible assets provided they are separable, arisefrom contractual or other legal rights and their fair value can be measuredreliably. The intangible assets recognised are recorded at fair value. Where theintangible assets recognised have finite lives their fair value is amortised ona straight line basis over those lives. The nature of those intangibles andtheir estimated useful lives are as follows: Tradenames Indefinite lifeOrder backlogs Over period of backlogCustomer contracts andrelated customer relationships Up to 25 yearsPatented and unpatented technology Up to 25 years Both purchased intangibles and intangibles identified on acquisition of abusiness are subject to impairment tests. Property, plant and equipmentLand and buildings comprise mainly factories and offices. All property, plantand equipment is recorded at cost less subsequent depreciation and impairmentexcept for land which is shown at cost less any impairment. Cost includesexpenditure that is directly attributable to the acquisition of the property,plant and equipment. The Group has taken advantage of the exemption under IFRS 1not to restate property previously revalued under UK GAAP and to treat theseearlier revaluations as deemed cost. Depreciation is provided on a straight linebasis over the estimated useful lives of the assets as follows: Freehold buildings 40 to 50 yearsLong and short leasehold property over period of leasePlant and machinery 3 to 10 yearsFurnaces up to 20 yearsFixtures and fittings 3 to 10 yearsMotor vehicles 4 to 5 years The assets' residual values and estimated useful lives are reviewed and adjustedif necessary at each balance sheet date. Asset carrying values are tested forimpairment. Investments held for saleInvestments held for sale are measured at fair value at each balance sheet date.Gains and losses arising are recorded in equity. Cumulative gains and lossespreviously recognised in equity are transferred to the income statement if theinvestment to which they relate is disposed of. Impairment of non current assetsAssets that have indefinite lives are tested for impairment annually. Assetsthat are subject to amortisation or depreciation are reviewed for impairmentwhenever events or changes in circumstances indicate that the carrying value maynot be recoverable. To the extent that the carrying value exceeds therecoverable amount an impairment loss is recorded for the difference as anexpense. The recoverable amount used for impairment testing is the higher of thevalue in use and its fair value less costs of disposal. For the purpose ofimpairment testing assets are grouped at the lowest levels for which there areseparately identifiable cash flows (cash generating units). Impairment chargesonce recorded are not reversed in subsequent periods even where thecircumstances that triggered the impairment no longer apply. InventoriesWhere a business is acquired, inventory of the acquired business is recorded atfair value in the Group's balance sheet. Finished goods are stated at sellingprices less the costs of disposal and a reasonable profit allowance for theselling effort. Work in progress is stated at selling prices less the costs tocomplete, the costs of disposal, and a reasonable profit allowance for the workstill to be carried out. All other inventories are recorded at the lower of cost and net realisablevalue. Cost represents materials, direct labour, other direct costs and relatedproduction overheads (based on normal operating capacity) and is determinedusing the first-in first-out (FIFO) method. Net realisable value is based onestimated selling price, less further costs expected to be incurred tocompletion and disposal. In all cases provision is made for obsolete, slow moving or defective itemswhere appropriate, and for unrealised profits on items of intra-groupmanufacture. Provision is made for the full amount of foreseeable losses on contracts. Trade receivablesTrade receivables are stated at their nominal value less provisions forimpairment. Provisions for impairment are recognised when there is objectiveevidence that the Group will not be able to collect all amounts due according tothe original terms of the receivables. The impairment recorded is the differencebetween the carrying value of the receivables and the estimated future cashflowsdiscounted where appropriate. Any impairment required is recorded in the incomestatement. Deferred costsDeferred costs comprise costs incurred associated with Original EquipmentManufacturers ("OEMs") including the supply of initial manufactured parts,typically on a free of charge basis, onto new aircraft where the Group hasobtained principal supplier status. Deferred costs are amortised over theperiods expected to benefit (typically through the sale of replacement parts)from receiving the status of "principal supplier", generally over terms rangingfrom 3 to 10 years. Deferred costs are reviewed annually for impairment. Cash and cash equivalentsCash and cash equivalents includes cash in hand, deposits held at call withbanks and bank overdrafts. Bank overdrafts are disclosed as current liabilitiesexcept where the Group participates in offset arrangements with certain bankswhereby cash and overdraft amounts are offset against each other. Deferred income taxDeferred income tax is provided using the liability method on temporarydifferences between the tax bases of assets and liabilities and theircorresponding book values as recorded in the Group financial statements.Deferred tax is calculated using tax rates that have been enacted or aresubstantially enacted at the balance sheet date. However, where deferred taxarises on the initial recognition of an asset or liability other than in abusiness combination and the recognition gives rise to no impact on taxableprofit or loss then deferred tax is not provided. Deferred income tax is provided on unremitted earnings of overseas subsidiariesexcept where the Group can control the remittance and it is probable that theearnings will not be remitted in the foreseeable future. Deferred income tax assets are only recognised to the extent that it is probablethat future taxable profits will arise against which the temporary differencescan be utilised. LeasesLeases in which a significant portion of the risks and rewards of ownership areretained by the lessor are accounted for as operating leases. Payments madeunder such leases are charged to the income statement on a straight line basisover the period of the lease. Provision for liabilities and chargesProvision is made for onerous property leases, environmental and litigationliabilities and for product warranty claims when the Group has a presentobligation as a result of past events, it is more likely than not that anoutflow of economic benefits will be required to settle the obligation and theamount can be reliably estimated. Provisions are discounted to present valuewhere the impact is significant. BorrowingsBorrowings are initially recognised at fair value being proceeds received lessdirectly attributable transaction costs incurred. Borrowings are subsequentlymeasured at amortised cost with any transaction costs amortised to the incomestatement over the period of the borrowings. Borrowings are classified ascurrent liabilities unless the Group has an unconditional right to defersettlement of the liability for at least 12 months after the balance sheet date. Foreign currencies Functional and presentational currencyThe Group's consolidated financial statements are presented in pounds sterlingthe functional currency of the Group being the currency of the primary economicenvironment in which the Group operates. Transactions and balancesTransactions in foreign currencies are recorded at the rate of exchange at thedate of the transaction. Monetary assets and liabilities denominated in foreigncurrencies at the balance sheet date are reported at the rates of exchangeprevailing at that date. Exchange differences on retranslating monetary assetsand liabilities are recognised in the income statement except where they relateto qualifying cash flow or investment hedges in which case the exchangedifferences are deferred in equity. Overseas subsidiary resultsThe results of overseas operations are translated at average rates of exchangefor the year. Assets and liabilities of overseas operations are translated atthe exchange rates prevailing at the balance sheet date. Exchange differencesarising from the translation of the results of overseas operations and theiropening net assets are recognised as a separate component of equity. Exchangedifferences on borrowings and other currency instruments designated as a hedgeof overseas operations are also taken to equity. When a foreign operation is sold the cumulative exchange differences relating tothe retranslation of the net investment in that foreign operation are recognisedin the income statement as part of the gain or loss on disposal. This appliesonly to exchange differences recorded in equity after 1 January 2004. Exchangedifferences arising prior to 1 January 2004 remain in equity on disposal aspermitted by IFRS 1. Pension scheme arrangementsThe Group operates a number of defined contribution and defined benefit pensionplans and accounts for pension costs in accordance with the requirements of IAS19. A defined contribution plan is a plan in which the Group pays contributions intopublicly or privately administered plans on a voluntary, statutory orcontractual basis. The Group has no further payment obligations once thecontributions have been made. The amount charged to the income statement is thecontribution payable in the year. Differences between contributions payable inthe year and contributions actually paid are shown as accruals or prepayments inthe balance sheet. A defined benefit plan is a plan in which the amount of pension benefit that anemployee will receive on retirement is defined and usually is dependent on anumber of factors including length of service, age and compensation. For definedbenefit schemes, defined benefit pension costs and the costs of providing otherpost retirement benefits are charged to the profit and loss account on asystematic basis over the service lives of the eligible employees in accordancewith the advice of qualified independent actuaries. Past service costs arerecognised immediately in the income statement unless the changes are dependenton the employees remaining in service for a particular period in which case thecosts are recognised on a straight line basis over that period The retirement benefit assets/obligations recognised on the balance sheetrepresents for each plan the difference between the fair value of the planassets and the present value of the defined benefit obligation at the balancesheet date. The defined benefit obligation is calculated annually by independentactuaries using the projected credit method. The present value of the definedbenefit obligation is determined by discounting the defined benefit obligationsusing interest rates of high quality corporate bonds denominated in the currencyin which the benefits will be paid and with terms to maturity comparable withthe terms of the related defined benefit obligations. Cumulative actuarial gains and losses are recognised in the period in which theyarise in the Statement of Recognised Income and Expenditure. Share based compensationThe Group operates a number of share based compensation schemes. The fair valueof the services received from employees in return for the grant of options isrecognised as an expense in the income statement over the period for whichservices are received (vesting period). The total amount recognised is based onthe fair value of the equity instrument measured at the date the award is made.Assumptions are made as to the total number of equity instruments that will vestand this assumption is reviewed at each balance sheet date. The impact of anyrevision to vesting estimates is recognised in the income statement over thevesting period. Proceeds received, net of any directly attributable transaction costs, arecredited to share capital and share premium. Derivative financial instruments and hedgingThe Group uses derivative financial instruments to hedge its exposure tointerest rate and foreign currency risk. Derivative financial instruments arerecognised at fair value on the date the derivative contract is entered into andare subsequently remeasured at fair value at each balance sheet date. To theextent that the maturity of the financial instrument is more than 12 months fromthe balance sheet date the fair value is reported as a non current asset orliability. Derivative financial instruments with maturities of less than 12months from the balance sheet are shown as current assets or liabilities. The method by which any gain or loss is recognised depends on the designation ofthe derivative financial instrument: Fair value hedgesFair value hedges are hedges of the fair value of recognised assets orliabilities or a firm commitment. Interest rate swaps that change fixed rateinterest to variable rate interest are an example of an instrument that would betreated as a fair value hedge assuming it meets the hedge criteria. Changes inthe fair value of derivative financial instruments that are designated as fairvalue hedges are recognised in the income statement together with changes in thefair value of the hedged item. Cash flow hedgesCash flow hedges are hedges of highly probable forecast transaction. Interestrate swaps that change variable rate interest to fixed rate interest are anexample of an instrument that would be treated as a cash flow hedge assuming itmeets the hedge criteria. Changes in the fair value of the effective portion ofderivative financial instruments that are designated as cash flow hedges areinitially recorded in a separate reserve within equity To the extent that changes in the fair value are recorded in equity they arerecycled to the income statement in the periods in which the hedged item affectsthe income statement. However, when the transaction to which the hedge relatesresults in the recognition of a non monetary asset (e.g. inventory) or aliability then gains and losses previously recognised in equity are included inthe initial measurement of the cost of the non monetary asset or liability. If the forecast transaction to which the cash flow hedge relates is no longerexpected to occur the cumulative gain or loss previously recognised in equity istransferred to the income statement immediately. If the hedging instrument is sold, expires or no longer meets the criteria forhedge accounting the cumulative gains and losses previously recognised in equityare transferred to the income statement when the forecast transaction isrecognised in the income statement. Net investment hedgeGains and losses on net investments of foreign subsidiaries are accounted for ina similar way to cash flow hedges. Gains and losses relating to the effectiveportion of any hedge are recognised in equity. Changes in the fair value of anyineffective portion are recognised in the income statement. Cumulative gains and losses previously recognised in equity are transferred tothe income statement if the foreign business to which they relate is disposedof. Derivatives that do not meet the criteria for hedge accountingWhere derivatives do not meet the criteria for hedge accounting changes in fairvalue are recognised immediately in the income statement. The Group utilises anumber of foreign currency forward contracts to mitigate against currencyfluctuations. The Group has determined that the additional costs of meeting theextensive documentation requirements for the Group's large number of foreigncurrency contracts is not merited. Accordingly gains and losses arising frommeasuring the contracts at fair value are recorded immediately in the incomestatement. Capital instrumentsOrdinary shares are classified as equity. Incremental costs directlyattributable to the issue of new shares or options are deducted from theproceeds recorded in equity. Other instruments are classified as liabilities ifthey contain an obligation to transfer economic benefits and otherwise areincluded in shareholders' funds. The finance cost recognised in the incomestatement in respect of capital instruments other than equity shares isallocated to periods over the term of the instrument at a constant rate ofcharge based on the carrying amount. Segment reportingA business segment is a group of businesses engaged in providing products andservices that are subject to similar risks and returns and whose risks andreturns differ from other business segments. A geographical segment is a groupof businesses which operate in economic environments that are subject to similarrisks and returns and whose risks and returns differ from other geographicalsegments. 4. RECONCILIATIONS BETWEEN PROFIT AND UNDERLYING PROFIT The Group has historically reported an additional underlying profit measurewhich adjusted operating profit and profit before taxation for exceptional itemsand goodwill amortisation. The Group continues to report an additional measureof underlying performance which excludes items considered by the Group not to beof an underlying profit nature. A reconciliation of the profit figures is shownbelow: 30 30 31 June June December 2005 2004 2004 Restated Restated £'000 £'000 £'000 Operating profit 47,620 43,856 82,051 Amortisation of IFRS 3 intangible items (Note 6a) 4,889 - 3,272IFRS 3 inventory revaluations (Note 6b) - - 8,492Exceptional operating costs (Note 7) 1,840 662 7,879Financial instruments (Note 8) 7,430 - -Adjustments to operating profit 14,159 662 19,643 Operating profit - underlying 61,779 44,518 101,694 Profit before taxation 41,003 39,768 70,656Adjustments to operating profit per above 14,159 662 19,643Profit before taxation - underlying 55,162 40,430 90,299 5. SEGMENTAL ANALYSIS The Group's primary segments are its business segments Six months ended 30 June 2005 Aerospace Defence Electronics Total Total gross segment revenue 219,335 39,614 37,695 296,644Inter-segment revenue (127) - (401) (528)Revenue 219,208 39,614 37,294 296,116 Operating profit - underlying 51,369 6,012 4,398 61,779Exceptional operating costs (1,840) - - (1,840)Amortisation of IFRS 3 intangibleassets (4,889) - - (4,889)Financial instruments (6,759) 77 (748) (7,430)Operating profit 37,881 6,089 3,650 47,620 Six months ended 30 June 2004 Aerospace Defence Electronics Total Total gross segment revenue 136,691 34,097 35,326 206,114Inter-segment revenue - - (518) (518)Revenue 136,691 34,097 34,808 205,596 Operating profit - underlying 31,925 5,844 6,749 44,518Exceptional operating costs - - (662) (662)Amortisation of IFRS 3 intangible assets - - - -Financial instruments - - - -Operating profit 31,925 5,844 6,087 43,856 Year ended 31 December 2004 Aerospace Defence Electronics TotalRelated Shares:
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