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Interim Results

5th Aug 2008 07:00

RNS Number : 6182A
Meggitt PLC
05 August 2008
 



5 August 2008

Interim Management Report for the six months ended 30 June 2008

"Further strong progress"

Meggitt PLC ("Meggitt" or "the Group"), a leading international company specialising in aerospace equipment, sensing and defence systems, today announces unaudited interim results for the six months ended 30 June 2008.

Highlights

2008

2007

Revenue

£526.6m

£358.0m

+47%

Pro forma 20071

£460.0m

+14%

Profit before tax - underlying2

£109.6m

£69.0m

+59%

Pro forma 20071

£89.6m

+22%

Profit before tax 

£75.8m

£64.9m

+17%

EPS - underlying2

12.0p

9.8p

+22%

EPS

8.7p

8.4p

+4%

Dividend

2.70p

2.45p

+10%

Headline growth of 47% in revenue and 59% in underlying profit before tax.

Revenue up 14% and underlying profit before tax up 22% on a pro forma basis1.

Pro forma1 order intake up 18%.

Underlying earnings per share increased 22%.

Net debt reduced to £786.3m from £815.4m at 31 December 2007 (2.49x underlying EBITDA).

Meggitt's largest ever acquisition, K&F had an excellent first half and continues to trade very well. Synergies on track to meet the previously announced target.

Terry Twigger, Chief Executive, commented:

"This is another great set of results which demonstrate the strength of the Group and the excellent performance of the recently acquired K&F businesses.

Through organic growth and acquisition, Meggitt has developed a strong, broadly based portfolio of technologies and products. Although high oil prices and tight credit conditions are creating uncertainty for the airline industry generally, this strategy of serving balanced end markets with 50% of our sales going to military and energy/industrial markets combined with our wide installed base of products will enable the Group to continue to prosper going forward.

Based on this strong set of results, the Board have increased the interim dividend by 10% to 2.70 pence, and remain confident of maintaining progress in the second half."

Please contact

Terry Twigger, Chief Executive

Stephen Young, Group Finance Director

Andy Mann, Investor Relations

Meggitt PLC

Tel: +44 1202 597597

Charles Ryland or Jeremy Garcia

Buchanan Communications

Tel: +44 20 7466 5000

There will be an interim results presentation at 09:00, 5 August 2008, at the office of Buchanan Communications, 45 Moorfields, London, EC2Y 9AE.

In addition to this the audio webcast of the presentation will be available. To access the facility please visit the following link on:

http://mediaserve.buchanan.uk.com/webcasts/livegold/lrframes.htm

___________________________________________________________

1 "Pro forma" data includes the trading performance of the K&F businesses in 2007 prior to acquisition restated under the Group's accounting policies to provide a more meaningful measure of the organic growth of the enlarged Group.

2 Underlying profit and EPS are used by the Board to measure the trading performance of the Group and exclude certain items, principally amortisation of acquired intangibles, revaluation of inventory to selling price on acquisition, exceptional items and the marking to market of financial instruments as set out in notes 4 and 10.

Interim Management Report for the six months ended 30 June 2008

Results

Meggitt is pleased to report excellent progress in the first half of 2008.

Headline growth was an impressive 47% increase in revenue to £526.6 million (2007: £358.0 million) and 59% increase in underlying profit before tax to £109.6 million (2007: £69.0 million) in part reflecting the inclusion of K&F. Underlying profit is used by the Board to measure the underlying trading performance of the Group and excludes exceptional operating items, the amortisation of acquired intangibles and marking to market financial instruments amongst others, as detailed in note 4.

On a pro forma basis the Group delivered excellent organic growth in the first half. Revenue in total increased by 14% to £526.6 million (2007: £460.0 million).

Pro forma civil aerospace revenues increased by 17% to £264.4 million, military revenues rose by 9% to £191.3 million and revenues in energy and industrial/other markets grew by 19% to £70.9 million. With pro forma order intake up 18% year on year, Meggitt expects to make further progress in the second half of the year.

The Group is well balanced between civil and military markets and also between original equipment sales and the aftermarket. In total, civil aerospace markets accounted for 50% of Group revenue and military markets 37%. The aftermarket in aggregate (civil plus military) accounted for 48%.

Pro forma underlying operating profit increased by 18% to £135.5 million (2007: £114.6 million) and pro forma underlying profit before tax grew 22% to £109.6 million (2007: £89.6 million).

The underlying tax rate for the Group increased to 28% in line with previous guidance and underlying EPS increased by 22% to 12.0 pence (2007: 9.8 pence). 

 

On a statutory basis, profit before tax increased by 17% to £75.8 million (2007: £64.9 million) and EPS increased by 4% to 8.7 pence (2007: 8.4 pence).

Cash inflow from underlying operations increased to £121.0 million (2007: £63.6 million).

The Group continues to make significant investments in expanding, consolidating and relocating manufacturing facilities in 2008, which drove total capital expenditure of £21.9 million in the first six months (2007: £14.0 million).

Internally funded expenditure on research and development (R&D) increased by 16% to £27.6 million (2007: £23.7 million). Total expenditure on R&D, including the customer funded element increased to £34.8 million (2007: £32.0 million) or 7% of sales.

In the first half the Group made £8.8 million of additional pension contributions as part of an agreed plan to reduce the pension deficit over a number of years (2007: £0.3 million).

After all investment activity, interest and taxation and a net £10.6 million from the sale of S-TEC and acquisition of Ferroperm, the Group generated net cash of £31.4 million.

Net debt has decreased from £815.4 million at December 2007 to £786.3 million, less than 2.5x underlying EBITDA. Underlying interest cover was 5.2x (2007: 5.8x). The Group had headroom within its committed bank facilities of £269 million at 30 June 2008.

As a result of this strong performance the Board is increasing the interim dividend by 10% to 2.70 pence (2007: 2.45 pence).

Strategy

Meggitt's strategy is to develop leading positions in markets with high technology content and where its products have long lives operating in extreme environments. A key objective is not only to sell the original equipment but also to share in a continuing stream of highly profitable aftermarket revenues over many years, providing long term stable and profitable returns, which are very cash generative. Participation in industries such as aerospace, where the life of an aircraft is often more than 30 years, defence and energy enable Meggitt to achieve these objectives. Furthermore, the complementary mix of both civil and military, and original equipment and aftermarket, enables Meggitt to balance effectively the business cycles in these markets. 

The Group continues to invest in developing its infrastructure to meet both the evolving nature of the industry and the expectations of its customers. By expanding the development of our senior account executives with major customers, Meggitt is positioned to provide larger and more integrated systems as its customers increasingly look to reduce their supplier base.

Operational excellence remains a key feature of this strategy, leveraged through a central function to cultivate best practice throughout the Group. Considerable success is being experienced in lowering the cost and complexity of procurement for the Group. Meggitt is also expanding its low cost manufacturing facilities with the approval of a third factory in Xiamen, China, and the construction of a second factory in Mexico.

Meggitt continues to evaluate opportunities across the Group to increase collaboration and to share services. For example, its information services function is focused on standardising systems and applications, and providing the base connectivity for the secure communication and informationߛsharing needed for customer opportunities that would benefit from a Group response.

Markets

First half revenue by end market (%)

OEM (%)

Aftermarket (%)

Total (%)

Civil

Large Jet

8

17

25

Regional

2

9

11

Business Jet

3

5

8

Other

4

2

6

----

----

----

Sub-Total

17

33

50

Military

22

15

37

Other Markets

13

-

13

----

----

-----

Total

52

48

100

==

==

===

In the first half of 2008, 17% of Meggitt's revenues were from new civil aircraft. The outlook for deliveries looks robust. Despite the current high oil price and restricted credit markets, manufacturers' order books are at record levels. Airbus and Boeing for example, have order books amounting to approximately 6ߛ7 years of future deliveries, have experienced minimal cancellations and have taken just under 1,000 new orders in the first six months of 2008 compared with deliveries of just under 500 in the same period. Orders for regional aircraft continue to exceed deliveries and manufacturers have multi-year order backlogs. Demand for business jets also remains buoyant with waiting lists for some products out to 2012 and beyond.

Sales of spares and repairs for civil aircraft accounted for 33% of first half revenues. Meggitt products are on virtually every commercial aircraft in service today, from the largest wide-body transporters to very light business jets. Global air traffic has averaged 5% annual growth over the past 30 years and has quickly recovered from previous oil price shocks and economic downturns. However, we are watching airline announcements closely. As at the end of July, a number of mainly US airlines have announced retirements of existing aircraft, either for the winter season or permanently, covering circa 4% of our large jet fleet and circa 2% of our regional fleet. The impact of these retirements on Group revenues is not material.

A further 37% of revenue is generated from military products. The USA is the world's principal purchaser of military equipment and accounts for around 50% of expenditure. The US Department of Defense FY08 budget base request at $472 billion is up 8% year on year and increases a further 9% in FY09 to $515 billion. In addition, supplemental funding requests to cover current conflicts are on top of that and are approved in phases as the year progresses. $187 billion has been approved for FY08, together with an initial $67 billion out of an estimated $155 billion for FY09. Meggitt is very well placed to serve this market with high ship set values on new aircraft and helicopters such as F35, F22, Typhoon, BlackHawk, V22 Osprey and AH-64 Apache and content on virtually every military aircraft in service.

The remaining 13% of Meggitt's revenues come from energy and other markets. The global energy market is experiencing major growth in demand. The US Government's Energy Information Administration has forecast a doubling in demand worldwide for electricity before 2030, with the highest growth rates in China and India. New power generation facilities of all types are being commissioned, providing significant opportunities for our specialist monitoring, thermal management and fluid control technologies. This is the fastest growing area of Meggitt's specialist markets. Higher oil prices have also increased worldwide demand in the oil and gas production sector, where Meggitt saw unprecedented demand for its compact heat transfer engineering products in 2007. Our energy revenues in total have almost doubled between 2004 and 2007 and have increased 29% year on year in the first half.

Corporate activity

The Group has continued its strategy of making valueߛenhancing acquisitions and disposals which complement existing businesses.

On 3 January 2008, Meggitt completed the sale of its non-core company S-TEC Corporation to Cobham plc for $38 million, and on 7 January 2008, Meggitt acquired Ferroperm for £9.3 million (of which £7.8 million was paid in cash and £1.5 million was deferred). 

Ferroperm has over 50 employees and is located in Kvistgaard, Denmark. It is a world leader in the manufacture of advanced piezo-electric ceramic materials for a range of specialist sensor applications, such as vibration, dynamic pressure, underwater acoustics and medical ultrasound. 

Integration update

The K&F integration is progressing well with synergies on track to meet the March 2008 increased target of £22 million annual savings by 2010. We have already implemented or approved the specific actions which will deliver the £10 million targeted savings for 2008.

  

Operational highlights

AEROSPACE EQUIPMENT (67% of Group revenue)

Revenue increased 88% to £351.3 million (2007: £186.7 million). On a pro forma basis growth was 22%.

Underlying operating profit increased 107% to £104.5 million (2007: £50.5 million). On a pro forma basis growth was 21%.

Order intake was up 18% on a pro forma basis compared with the first half of last year.

Order intake at Engineered Fabrics Corporation (EFC), acquired with K&F, has reflected significant growth in demand for all its products including its crash resistant, self-seal fuel tanks which are used by almost all US helicopters. As a result of this continuing strong demand, EFC will, by the end of 2008, have increased the size of its facility almost 40% to over 600,000 square feet since acquisition.

Meggitt Safety Systems supplies fire detection equipment on all the Airbus fleet. It consolidated this position when it was awarded a major contract to design, develop, manufacture and support the fire protection system on the new A350 XWB aircraft. 

Business aircraft are a critical part of our strategy for wheels and brakes. During the first half Gulfstream received firm orders for its newly launched long range business jet, the G650 which has an entry into service date of 2012. Meggitt Aircraft Braking Systems (MABS) will provide the complete braking system for the G650. Several other Meggitt companies have been selected to provide key components for the aircraft and its Rolls-Royce BR725 engines, for which we are the sensors and ignition integrator. This is potentially our biggest ever contract in business aviation which should provide a strong revenue stream over the life of the programme.

Military aircraft are another important element of our wheels and brakes strategy, and within this there continues to be significant focus on developing technology to support unmanned air vehicles (UAVs). MABS has been selected to supply the wheels, electrically activated brakes and brake control systems on the latest European UAV demonstrator programme. The agreement will see them deliver equipment for the UK's Mantis UAS Advanced Concept Technology Demonstrator programme. This emphasises our position at the forefront of the European UAV marketplace, following similar wins on Barracuda and Taranis. 

In line with the Group strategy of driving operational excellence we are currently transferring the production of some of our ground fuelling and polymer seals businesses to our expanded facility in Xiamen, China.

The quality of service and delivery performance provided by Meggitt continues to be recognised by its customers. Gulfstream awarded MABS, for the second year running, their prestigious "Supplier of the Year" award. MABS also won an award from Brazilian aircraft manufacturer Embraer for its 'outstanding performance' in the development of wheels, brakes and brake control for the Phenom 300, a new light category executive jet.

SENSING SYSTEMS (23% of Group revenue)

Revenue increased 7% to £122.2 million (2007: £114.2 million).

Underlying operating profit increased by 17% to £22.6 million (2007: £19.3 million).

Sensing Systems' order intake was up 20% compared with the first half of last year.

  Sensing Systems benefits from our continued investment in R&D, totalling £12.9 million (11% of segment revenue). These investments focused on the development of condition monitoring and high performance sensors for recent programme wins as well as new opportunities. Developments in monitoring requirements for aerospace engines and the energy markets are the major beneficiaries of this R&D investment.

Recent milestones in aerospace include starting production of the advanced engine vibration monitoring systems for new Boeing 777 and 737 Next Generation aircraft. These continue to build on our position as the world leader in aircraft engine vibration monitoring.

In energy our condition monitoring systems continue to be an integral part of our customers' efforts to increase efficiency and reduce downtime. For example, Siemens have installed our VM600 protection and condition monitoring system on the world's most powerful gas turbine, Irsching 4, near Ingolstadt, Germany. Data from our system will, among other things, enable experts in Siemens' Diagnostic Centres to remotely calculate balancing for turbines without the need for an onߛsite visit, saving time and cost. We are also pursuing opportunities in emerging markets such as Brazil, China and India. For example, we are the leading supplier of condition monitoring equipment to the Brazilian bioߛfuel industry which converts byߛproducts from the sugar cane harvest into bioߛfuels. We have completed over 60 installations in Brazil in the last three years.

These inߛhouse developments are complemented by acquiring or licensing technology where applicable; the acquisition of Ferroperm in Denmark is a good example of this, as is joining international research projects. An example of this is Meggitt's commitment to Integrated Vehicle Health Management (IVHM) research, offered as part of the new IVHM Centre of Excellence (CoE), jointly launched by Cranfield University and Boeing in late 2007. We have made a five-year commitment to this growing area of IVHM, which advances existing concepts of vehicle maintenance, repair and overhaul, with the intent to develop a condition based maintenance management capability, for high-tech, high-value vehicles.

Meggitt Avionics has been selected by Korea Aerospace Industries Ltd (KAI) to supply integrated standby instruments for the new Korean utility helicopter, the primary rotary transport for the Korean armed forces. The programme is the first collaboration between Meggitt Avionics and KAI on a rotary platform and will extend to a planned 200+ rotorcraft over the next ten years. Meggitt Avionics has also benefited from recent Eurofighter orders for its air data sensors.

Sensing Systems is well positioned for continued growth going forward.

DEFENCE SYSTEMS (10% of Group revenue)

As expected, revenue declined 7% to £53.1 million (2007: £57.1 million) and underlying operating profit reduced 3% to £8.4 million (2007: £8.7 million).

Defence Systems' order book was up 12% compared with December 2007.

With the benefit of the improved order book and lower costs from the new integrated Atlanta facility, we expect a resumption in growth in the second half.

Combat Systems is enjoying strong order intake. Recent orders include an extension to our Thermal Management System (TMS) contract for the M1A2 Main Battle Tank from General Dynamics Land Systems. This extension is a $64.9 million multiߛyear contract for vapour system compression units and air handling units which are to be delivered between April 2009 

and April 2013 in support of the US Army's fleet modernisation effort. To date we have delivered over 1,100 TMS units with a further 647 units covered by the new contract. In addition to OE production we have received an additional $17 million contract for reset TMS units and spare parts, an activity which is expected to continue across the service life of these tanks.

Ammunition Handling Systems continues to grow with the Future Combat System 120mm Autoloader successfully entering the integration stage into the Mounted Combat System vehicle. This programme is expected to provide revenues of $500 million once it enters production.

The Minneapolis live fire operation is now consolidated into the Atlanta facility and will benefit our customers by providing live fire and virtual simulation products in one location, as well as providing cost savings.

Since its launch at the Paris air show in 2007, 50 GT-400 glide targets have been sold to customers in the US, Australia, the Middle East and Europe. The target has been certified by the European Aviation Safety Agency for carriage on the Falcon 20 aircraft and is carried by the Learjet. Meggitt continues to certify the product on the entire range of target towing aircraft.

Outlook

Meggitt has delivered another excellent set of results in the first half of 2008 and the strong order intake gives confidence that the Group will continue to perform in the second half. 

Beyond 2008, the outlook for our military and other markets which account for 50% of our sales remains good. Energy markets are buoyant and military budgets look set to continue to rise. Production of new civil aircraft is expected to continue at least at current rates underpinned by record order books. Sales of spares and repairs to the civil market have less visibility and will be affected by economic conditions and oil price levels. However, historically growth in air travel has been resilient in the face of oil price spikes and economic downturns and the capacity reductions announced so far will not have a material effect on the Group.

K&F is proving to be an excellent acquisition. It is trading very well and the integration is on schedule, with synergies in line with previously increased targets.

The Group remains on track to deliver further growth in the second half of this year. In recognition of this continued strong performance, the Board has increased the interim dividend by 10%.

CONSOLIDATED UNAUDITED INCOME STATEMENT

For the six months ended 30 June 2008

 

 

 
Notes
Six months
ended
30 June
2008
£m
Six months
ended
30 June
2007
£m
Continuing operations
 
 
 
 
 
 
 
Revenue
3
526.6
358.0
 
 
 
 
Cost of sales
 
(288.1)
(197.4)
 
 
 
 
Gross profit
 
238.5
160.6
 
 
 
 
Net operating costs
 
(136.8)
(88.9)
 
 
 
 
Operating profit*
3
101.7
71.7
 
 
 
 
Finance income
7
15.9
15.6
Finance costs
8
(41.8)
(22.4)
Net finance costs
 
(25.9)
(6.8)
 
 
 
 
Profit before tax from continuing operations**
 
75.8
64.9
 
 
 
 
Tax
9
(18.3)
(16.9)
 
 
 
 
Profit for the period from continuing operations
attributable to equity shareholders
 
 
57.5
 
48.0
 
 
 
 
 
 
 
 
Earnings per share (pence):
 
 
 
Basic
10
8.7p
8.4p
Diluted
10
8.7p
8.3p
 
 
 
 
 
 
 
 
 
 
 
 
* Underlying operating profit
4
135.5
78.5
** Underlying profit before tax
4
109.6
69.0
 
 
 
 
 
 

  CONSOLIDATED UNAUDITED BALANCE SHEET

As at 30 June 2008

 

 
Notes
30 June
2008
 
£m
31 December
2007
Restated
£m
30 June
2007
Restated
£m
Non-current assets
 
 
 
 
Goodwill
15
1,075.5
1,067.8
1,071.8
Development costs
15
68.3
57.7
47.0
Programme participation costs
15
130.2
121.8
110.8
Other intangible assets
15
718.6
741.7
766.2
Property, plant and equipment
16
201.3
191.2
174.6
Trade and other receivables
 
15.0
14.4
21.0
Derivative financial instruments
 
0.7
-
3.4
Deferred tax assets
 
48.7
41.4
22.4
Assets held for sale
 
-
14.5
-
 
 
2,258.3
2,250.5
2,217.2
Current assets
 
 
 
 
Inventories
 
224.3
204.6
231.2
Trade and other receivables
 
226.0
214.6
194.9
Derivative financial instruments
 
3.7
3.6
6.9
Current tax recoverable
 
8.4
7.8
0.3
Cash and cash equivalents
18
64.0
64.9
113.9
 
 
526.4
495.5
547.2
 
 
 
 
 
Total assets
 
2,784.7
2,746.0
2,764.4
 
 
 
 
 
Current liabilities
 
 
 
 
Trade and other payables
 
(230.9)
(227.1)
(245.9)
External dividend payable
 
(37.9)
-
(26.2)
Derivative financial instruments
 
(2.2)
(0.9)
-
Current tax liabilities
 
(57.9)
(44.2)
(40.2)
Obligations under finance leases
18
(0.7)
(0.5)
(0.4)
Bank and other borrowings
17
(11.0)
(16.7)
(164.6)
Provisions
19
(14.3)
(18.0)
(13.5)
 
 
(354.9)
(307.4)
(490.8)
 
 
 
 
 
Net current assets
 
171.5
188.1
56.4
 
 
 
 
 
Non-current liabilities
 
 
 
 
Trade and other payables
 
(8.6)
(7.0)
(5.0)
Derivative financial instruments
 
(13.3)
(10.7)
(1.2)
Deferred tax liabilities
 
(259.4)
(265.5)
(266.5)
Obligations under finance leases
18
(4.8)
(5.0)
(5.0)
Bank and other borrowings
17
(833.8)
(858.1)
(753.8)
Provisions
19
(65.3)
(74.0)
(69.8)
Retirement benefit obligations
20
(188.5)
(153.3)
(146.1)
Liabilities directly associated with assets classified as held for sale
 
 
-
 
(1.6)
 
-
 
 
(1,373.7)
(1,375.2)
(1,247.4)
 
 
 
 
 
Total liabilities
 
(1,728.6)
(1,682.6)
(1,738.2)
 
 
 
 
 
Net assets
 
1,056.1
1,063.4
1,026.2
 
 
 
 
 
Equity
 
 
 
 
Share capital
 
33.0
32.9
32.8
Share premium
 
783.3
781.6
773.1
Other reserves
 
14.1
14.1
14.1
Hedging and translation reserves
 
(4.5)
(6.8)
(13.6)
Retained earnings
 
230.2
241.6
219.8
Total equity attributable to equity shareholders
23
1,056.1
1,063.4
1,026.2

 

 

 

CONSOLIDATED UNAUDITED CASH FLOW STATEMENT

For the six months ended 30 June 2008

Notes

Six months

ended

30 June

2008

£m

Six months

ended

30 June

2007 

£m

Cash inflow from underlying operations

121.0

63.6

Retirement benefit obligation deficit payments

24

(8.8)

(0.3)

Cash outflow from exceptional operating costs

5

(9.2)

(0.8)

Cash inflow from operations

24

103.0

62.5

Interest received

1.1

2.7

Interest paid

(25.5)

(9.7)

Tax paid

(12.1)

(11.6)

Cash inflow from operating activities

66.5

43.9

Purchase of subsidiaries

14

(8.1)

(554.5)

Net cash acquired with subsidiaries

-

11.5

Capitalised internal development costs

15

(10.1)

(9.4)

Capitalised programme participation costs

15

(14.6)

(4.0)

Purchase of other intangible assets

15

(1.9)

(1.5)

Purchase of property, plant and equipment

(21.3)

(13.0)

Proceeds from disposal of property, plant and equipment

0.4

0.3

Proceeds from disposal of subsidiaries

18.7

-

Cash outflow from investing activities

(36.9)

(570.6)

Issue of equity share capital

23

1.8

437.8

Expenses of issue of equity share capital

-

(9.8)

Proceeds from borrowings 

17

13.0

574.7

Debt issue costs paid

17

-

(0.9)

Repayments of borrowings 

17

(46.2)

(402.5)

Cash (outflow)/inflow from financing activities

(31.4)

599.3

Net (decrease)/increase in cash and cash equivalents

(1.8)

72.6

Cash and cash equivalents at start of period

64.9

43.6

Exchange gains/(losses) on cash and cash equivalents

0.9

(2.3)

Cash and cash equivalents at end of period

64.0

113.9

  

CONSOLIDATED UNAUDITED STATEMENT OF RECOGNISED INCOME AND EXPENSE

For the six months ended 30 June 2008

Notes

Six months

ended

30 June

2008

£m

Six months

ended

30 June

2007

£m

Currency translation gains/(losses)

2.1

(7.9)

Current tax (charge)/credit on currency translation movements

(0.6)

0.5

Currency translation loss transferred to profit on sale of business

13

1.0

-

Actuarial (losses)/gains

(41.4)

31.6

Deferred tax credit/(charge) on actuarial movements

11.6

(9.5)

Losses on cash flow hedges

(0.3)

(0.5)

Deferred tax credit on cash flow hedge movements

0.1

0.2

Net (expense)/income recorded directly in equity

(27.5)

14.4

Profit for the period

57.5

48.0

Total recognised income for the period

23

30.0

62.4

  NOTES TO THE INTERIM MANAGEMENT REPORT

For the six months ended 30 June 2008

1. General information

The condensed consolidated financial information presented in this document has not been audited or reviewed and does not constitute Group statutory accounts as defined in section 240 of the Companies Act 1985. Group statutory accounts for the year ended 31 December 2007 were approved by the Board of Directors on 3 March 2008 and delivered to the Registrar of Companies. The auditors' report on those accounts was unqualified and did not contain any statement under Section 237 of the Companies Act 1985.

2. Basis of preparation

The condensed consolidated financial information for the six months ended 30 June 2008 has been prepared in accordance with the Disclosure and Transparency Rules of the Financial Services Authority and with IAS 34, "Interim financial reporting" as adopted by the European Union. The condensed consolidated financial statements should be read in conjunction with the annual financial statements for the year ended 31 December 2007.

Except as disclosed below the condensed consolidated financial statements have been prepared using the same accounting policies adopted in the annual financial statements for the year ended 31 December 2007.

The tax charge for the interim period has been calculated using the expected effective tax rates for each tax jurisdiction for the year ended 31 December 2008. These rates have been applied to the preߛtax profits made in each jurisdiction for the six months ended 30 June 2008. 

The following amendments to existing standards, new standards and interpretations are mandatory for the first time for the financial year beginning 1 January 2008 but are not currently relevant for the Group:

IFRIC 12, "Service Concession arrangements".

IFRIC 14, "IAS 19 - The limit on a defined benefit asset, minimum funding requirements and their interaction".

The following amendments to existing standards, new standards and interpretations have been issued, but are not effective for the financial year beginning 1 January 2008 and have not been early adopted: 

IFRS 2 (amendment), "Share-based payment" effective for annual periods beginning on or after 1 January 2009. This amendment is not expected to have a significant effect on the Group.

IFRS 3 (amendment), "Business combinations" and consequential amendments to IAS 27, "Consolidated and separate financial statements", IAS 28, "Investments in associates" and IAS 31, "Interests in joint ventures", effective prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual period beginning on or after 1 July 2009. The amendment to IFRS 3 will impact the Group when adopted, requiring changes for instance, to the way the Group accounts for contingent consideration and acquisition expenses. The expected impact is still being assessed in detail by management. The Group does not have any associates or significant joint ventures. 

IFRS 8, "Operating segments", effective for annual periods beginning on or after 1 January 2009. IFRS 8 replaces IAS 14 "Segment reporting" and requires a "management approach" under which segment information is presented on the same basis as that used for internal reporting purposes. The expected impact is still being assessed in detail by management.

  

2. Basis of preparation (continued)

IAS 1 (amendment), "Presentation of financial statements", effective for annual periods beginning on or after 1 January 2009. This amendment is not expected to have a significant effect on the Group.

IAS 23 (amendment), "Borrowing costs", effective for annual periods beginning on or after 1 January 2009. This amendment is not expected to have a significant effect on the Group.

IAS 27, (revised), "Consolidated and separate financial statements", effective for annual periods beginning on or after 1 July 2009. This amendment is not expected to have a significant effect on the Group.

IAS 32 (amendment), "Financial instruments: presentation", effective for annual periods beginning on or after 1 January 2009. This amendment is not expected to have a significant effect on the Group.

IFRIC 13, "Customer loyalty programmes", effective for annual periods beginning on or after 1 July 2008. This amendment is not expected to have a significant effect on the Group.

IFRIC 15, "Agreements for construction of real estates", effective for annual periods beginning on or after 1 January 2009. This amendment is not expected to have a significant effect on the Group.

IFRIC 16, "Hedges of a net investment in a foreign operation" effective for annual periods beginning on or after 1 October 2008. This amendment is not expected to have a significant effect on the Group.

3. Segmental analysis

The Group's primary segments are its business segments.

Six months

ended

30 June

2008

£m

Six months

ended

30 June

2007

£m

Revenue 

Aerospace Equipment

351.3

186.7

Sensing Systems

122.2

114.2

Defence Systems

53.1

57.1

526.6

358.0

Underlying operating profit (note 4)

Aerospace Equipment

104.5

50.5

Sensing Systems

22.6

19.3

Defence Systems

8.4

8.7

135.5

78.5

Operating profit

Aerospace Equipment

76.1

47.8

Sensing Systems

23.4

18.6

Defence Systems

2.2

5.3

101.7

71.7

  

4. Reconciliations between profit and underlying profit

Underlying profit is used by the Board to measure and monitor the underlying trading performance of the Group. It excludes certain items as shown below:

Six months

ended

30 June

2008

£m

Six months

ended

30 June

2007

£m

Operating profit 

101.7

71.7

Exceptional operating items (note 5)

6.0

0.5

Amortisation of intangibles acquired in business combinations (note 15)

28.7

9.2

Disposal of inventory revalued in business combinations 

0.3

-

Financial instruments (note 6)

(1.2)

(2.9)

Adjustments to operating profit

33.8

6.8

Underlying operating profit

135.5

78.5

Profit before tax

75.8

64.9

Adjustments to operating profit per above

33.8

6.8

Exceptional finance income (note 5)

-

(2.0)

Exceptional finance costs (note 5)

-

(0.7)

Adjustments to profit before tax

33.8

4.1

Underlying profit before tax

109.6

69.0

Profit for the period 

57.5

48.0

Adjustments to profit before tax per above

33.8

4.1

Tax effect of adjustments to profit before tax

(12.4)

(1.7)

21.4

2.4

Underlying profit for the period 

78.9

50.4

  

5. Exceptional items

Items which are significant by virtue of their size or nature and which are considered non-recurring are classified as exceptional items.

Exceptional net operating costs

Exceptional net operating costs includes a charge of £7.4 million (2007: £0.5 million) which principally relates to the onߛgoing integration of the recently acquired K&F Industries Holdings Inc ("K&F") and Firearms Training Systems Inc ("FATS"). Total cash spend in the period was £9.2 million (2007: £0.8 million).

In January 2008 the Group completed the disposal of S-TEC Corporation and recorded a profit of £1.4 million which has been treated as an exceptional item.

Six months

ended

30 June

2008

£m

Six months

ended

30 June

2007

£m

Integration of businesses

7.4

0.5

Profit on sale of S-TEC Corporation (note 13)

(1.4)

-

Total

6.0

0.5

Exceptional net finance income

In connection with the acquisition of K&F, finance income on cash raised by the rights issue and finance costs associated with new debt facilities were treated as exceptional net finance income for the period from completion of the rights issue on 18 April 2007 to completion of the acquisition on 22 June 2007.

Six months

ended

30 June

2008

£m

Six months

ended

30 June

2007

£m

Rights issue - Interest on bank deposits

-

(2.0)

Rights issue - Reduced interest payable net of costs of new facilities

-

(0.7)

Total

-

(2.7)

Analysed as:

Exceptional finance income (note 4)

-

(2.0)

Exceptional finance costs (note 4)

-

(0.7)

Total

-

(2.7)

  

6. Financial instruments

Although the Group uses foreign currency forward contracts to hedge against foreign currency exposures it has decided that the costs of meeting the extensive documentation required to be able to apply hedge accounting under IAS 39 ("Financial Instruments: Recognition and Measurement") are not merited. The Group's underlying profit figures exclude amounts which would not have been recorded if hedge accounting had been applied.

Where interest rate derivatives do not qualify to be hedge accounted, movements in the fair value of these derivatives are excluded from underlying profit. Where interest rate derivatives do qualify to be accounted for as fair value hedges, any difference between the movement in the fair values of the derivatives and in the fair value of fixed rate borrowings is excluded from underlying profit. Any gains or losses arising from the requirement to continue to measure fixed rate borrowings at fair value after the associated interest rate derivatives have matured or have been cancelled are also excluded from underlying profit.

Six months

ended

30 June

2008

£m

Six months

ended

30 June

2007

£m

Movement in the fair value of foreign currency forward contracts

1.2

(2.2)

Retranslation of net foreign currency assets and liabilities at spot rate

(0.8)

1.1

Movement in the fair value of interest rate derivatives 

-

3.5

Movement in the fair value of associated fixed interest rate borrowings

0.8

0.5

Total gain

1.2

2.9

7. Finance income

Six months

ended

30 June

2008

£m

Six months

ended

30 June

2007

£m

Interest on bank deposits

0.3

2.3

Unwinding of interest on other receivables

0.5

0.5

Expected return on retirement benefit scheme assets

15.0

12.4

Other finance income

0.1

0.4

Total

15.9

15.6

8. Finance costs

Six months

ended

30 June

2008

£m

Six months

ended

30 June

2007

£m

Interest on bank borrowings

19.1

6.2

Interest on USD 250 million senior notes

3.4

3.4

Interest on finance lease obligations

0.2

-

Unwinding of interest on retirement benefit scheme liabilities

17.6

12.0

Unwinding of interest on provisions (note 19)

0.8

0.5

Other finance costs

0.7

0.3

Total

41.8

22.4

9. Tax

The tax charge for the period has been calculated using the expected tax rate for the year for each tax jurisdiction. These rates have been applied to the preߛtax profits made in each jurisdiction for the six months to 30 June 2008.

10. Earnings per share

The calculation of earnings per ordinary share is based on profits of £57.5 million (2007: £48.0 million) and on the weighted average 658.7 million (2007: 568.3 million) ordinary shares in issue during the six months to 30 June 2008.

The calculation of diluted earnings per ordinary share is based on the same profits as used in the calculation of basic earnings per ordinary share. The weighted average number of ordinary shares of 660.3 million (2007: 571.8 million) used in the calculation is based on the weighted average number used in the calculation of basic earnings per share adjusted for the effect of options.

Underlying earnings per share is based on underlying profit (see note 4) and is calculated below:

Six months

ended

30 June

2008

pence

Six months

ended

30 June

2007

pence

Basic earnings per share

8.7

8.4

Add back effects of:

Exceptional net operating costs

0.6

-

Amortisation of intangibles acquired in business combinations

2.8

1.1

Financial instruments

(0.1)

(0.3)

Exceptional finance income

-

(0.2)

Exceptional finance costs

-

(0.1)

Rights issue *

-

0.9

Underlying earnings per share

12.0

9.8

* As referred to in note 5 the Group excluded exceptional net finance income arising from the rights issue for the period from when the rights issue proceeds were received on 18 April 2007 to 22 June 2007, the date when the acquisition of K&F was completed. For the purposes of underlying EPS for 2007 the Group adjusted the weighted average number of shares used to exclude the effect of the new shares for this same period. The weighted average number of shares used for underlying EPS for the six months ended 30 June 2007 was 516.3 million.

11. Dividends

The Directors have declared an interim net dividend of 2.70 pence per ordinary share (2007: 2.45 pence) which will be paid on 3 October 2008 to shareholders on the register on 15 August 2008. A scrip dividend will be available for shareholders who wish to take the dividend in the form of shares rather than cash. As the dividend was approved by the Directors after 30 June 2008 the dividend cost of £18.0 million (2007: £16.1 million) is not recorded as a liability at 30 June 2008.

  

12. Related party transactions

The remuneration of the key management personnel of the Group including executive directors is set out below:

Six months

ended

30 June

2008

£m

Six months

ended

30 June

2007

£m

Wages and salaries

1.9

1.6

Social security costs

0.3

0.2

Pension costs

0.1

0.1

Share based payments

1.0

1.0

Total

3.3

2.9

13. Disposal of business

On 3 January 2008 the Group completed the disposal of S-TEC Corporation for a net consideration of £15.6 million.

Six months

ended

30 June

2008

£m

Six months

ended

30 June

2007

£m

Net assets disposed of

13.2

-

Currency translation differences transferred from equity

1.0

-

14.2

-

Net consideration

15.6

-

Profit on disposal (note 5)

1.4

-

  

14. Business combinations 

On 7 January the Group acquired 100% of the share capital of Ferroperm Piezoceramics A/S ("Ferroperm"), a business that manufactures advanced piezo-electric ceramic materials for specialist sensor applications, for a cash consideration of £9.3 million. The impact of Ferroperm on the income statement for the period ended 30 June 2008 was not significant.

The book value and provisional fair value of net assets acquired are as follows:

Book value

£m

Fair value

£m

Non-current assets

Goodwill (note 15)

-

5.1

Other intangible assets (note 15)

0.3

4.3

Property, plant and equipment (note 16)

0.7

0.7

1.0

10.1

Current assets

Inventories

0.9

1.1

Trade and other receivables

0.6

0.7

1.5

1.8

Total assets

2.5

11.9

Current liabilities

Trade and other payables

(0.3)

(0.4)

Current tax liabilities

(0.2)

(0.2)

Bank and other borrowings (note 17)

(0.8)

(0.8)

Provisions (note 19)

(0.1)

(0.1)

(1.4)

(1.5)

Net current assets

0.1

0.3

Non-current liabilities

Deferred tax liabilities

-

(1.1)

-

(1.1)

Total liabilities

(1.4)

(2.6)

Net assets acquired

1.1

9.3

£m

Consideration satisfied in cash (including costs)

7.8

Deferred consideration

1.5

Total consideration

9.3

Total cash consideration paid in respect of acquisitions totalled £8.1 million of which £7.8 million was paid in respect of Ferroperm and £0.3 million in respect of acquisitions completed in earlier periods.

  

15. Intangible assets

Goodwill

Development costs

Programme

participation

costs

Other intangible assets

£m

£m

£m

£m

At 1 January 2007

564.0

31.9

33.8

219.1

Exchange rate adjustments

(8.6)

(0.6)

(0.3)

(3.1)

Businesses acquired 

516.4

7.0

75.2

559.4

Additions

-

9.4

4.0

1.5

Amortisation charge

-

(0.7)

(1.9)

(10.7)*

At 30 June 2007 as restated

1,071.8

47.0

110.8

766.2

At 1 January 2008 :

As previously reported

1,071.2

57.7

121.8

742.2

Restatement (note 25)

(3.4)

-

-

(0.5)

As restated

1,067.8

57.7

121.8

741.7

Exchange rate adjustments

2.6

2.0

(0.1)

0.7

Businesses acquired (note 14)

5.1

-

-

4.3

Additions

-

10.1

14.6

1.9

Amortisation charge (note 24)

-

(1.5)

(6.1)

(30.0)*

At 30 June 2008

1,075.5

68.3

130.2

718.6

* Of the £30.0 million (2007: £10.7 million) amortisation of other intangible assets, £28.7 million (2007: £9.2 million) relates to the amortisation of intangible assets arising in business combinations and has been excluded from underlying profit (note 4).

16. Property, plant and equipment

30 June

2008

£m

30 June

2007

Restated

£m

At 1 January as previously reported

195.4

127.6

Restatement (note 25)

(4.2)

-

As restated

191.2

127.6

Exchange rate adjustments

1.9

(1.1)

Businesses acquired (note 14)

0.7

43.1

Additions

20.0

12.5

Disposals

(0.4)

(0.2)

Depreciation charge (note 24)

(12.1)

(7.3)

At 30 June

201.3

174.6

17. Bank and other borrowings

30 June

2008

£m

30 June

2007

Restated

£m

At 1 January

874.8

397.3

Exchange rate adjustments

8.7

(9.6)

Businesses acquired (note 14)

0.8

362.6

Proceeds from borrowings

13.0

574.7

Debt issue costs paid

-

(0.9)

Repayment of borrowings

(46.2)

(402.5)

Other non-cash movements

(6.3)

(3.2)

At 30 June

844.8

918.4

Disclosed as:

Current

11.0

164.6

Non-current

833.8

753.8

At 30 June

844.8

918.4

18. Net debt

30 June

2008

£m

30 June

2007

Restated

£m

Bank and other borrowings (note 17)

844.8

918.4

Obligations under finance leases - current

0.7

0.4

Obligations under finance leases - non-current

4.8

5.0

Less: Cash and cash equivalents

(64.0)

(113.9)

At 30 June

786.3

809.9

19. Provisions

30 June

2008

£m

30 June

2007

Restated

£m

At 1 January as previously reported

90.5

62.4

Restatement (note 25)

1.5

-

As restated

92.0

62.4

Exchange rate adjustments

0.1

(1.2)

Businesses acquired (note 14)

0.1

32.7

Charge/(credit) to income statement - net operating costs

0.9

(0.6)

Charge to income statement - finance costs (note 8)

0.8

0.5

Utilised

(14.3)

(10.5)

At 30 June

79.6

83.3

Disclosed as:

Current

14.3

13.5

Non-current

65.3

69.8

At 30 June

79.6

83.3

  

20. Retirement benefit obligations

30 June

2008

£m

30 June

2007

Restated

£m

The amounts recognised in the balance sheet are as follows:

Fair value of scheme assets

441.0

466.4

Fair value of scheme liabilities

(629.5)

(612.5)

At 30 June

(188.5)

(146.1)

Analysis of retirement benefit obligations:

Pension schemes

(138.5)

(95.6)

Healthcare schemes

(50.0)

(50.5)

At 30 June

(188.5)

(146.1)

Key financial assumptions:

UK Schemes:

Discount rate

6.20%

5.70%

Salary inflation rate

4.90%

4.20%

Current life expectancy - Male aged 65 (years)

20.1 to 21.5

20.1

US Schemes:

Discount rate

6.75%

6.25%

Salary inflation rate

4.00%

4.00%

Current life expectancy - Male aged 65 (years)

18.8

18.8

Healthcare cost increases for US schemes are assumed to be 9.5% for 2008 (10.3% for 2007) trending down to 5.0% by 2013. There have been no changes to mortality or healthcare assumptions from those used at 31 December 2007.

The current service cost recognised in the income statement for the period was £6.8 million (2007: £4.9 million). Employer cash contributions paid during the period were £15.6 million (2007: £5.2 million).

21. Contingent liabilities

The Company has given guarantees in respect of uncommitted facilities for certain of its subsidiaries, some property leases, other leasing arrangements and the performance by some current and former subsidiaries of certain contracts. Also, there are similar guarantees given by certain of the management companies. The fair value of these guarantees is not considered to be significant.

The Company and various of its subsidiaries are, from time to time, parties to legal proceedings and claims which arise in the ordinary course of business. The directors do not anticipate that the outcome of these proceedings, actions and claims, either individually or in aggregate, will have a material adverse effect upon the Group's financial position.

  

22. Share capital

30 June

2008

No. m

30 June

2007

No. m

Number of shares outstanding at 1 January

658.3

436.1

Issued in respect of rights issue

-

218.2

Issued on exercise of executive and SAYE share options

1.1

0.9

Number of shares outstanding at 30 June

659.4

655.2

23. Summary of movements in equity

30 June

2008

£m

30 June

2007

£m

At 1 January

1,063.4

559.4

Total recognised income for the period

30.0

62.4

Rights issue

-

426.6

Employee share schemes:

Value of services provided (net of tax)

(1.2)

2.6

Shares issued

1.8

1.4

Dividends

(37.9)

(26.2)

At 30 June

1,056.1

1,026.2

24. Cash inflow from operations

Six months

ended

30 June

2008

£m

Six months

ended

30 June

2007

£m

Profit for the period

57.5

48.0

Adjustments for:

Tax

18.3

16.9

Depreciation (note 16)

12.1

7.3

Amortisation (note 15)

37.6

13.3

Profit on disposal of property, plant & equipment

-

(0.1)

Profit on disposal of subsidiaries (note 13)

(1.4)

-

Finance income (note 7)

(15.9)

(15.6)

Finance costs (note 8)

41.8

22.4

Financial instruments (note 6)

(1.2)

(2.9)

Retirement benefit obligation deficit payments

(8.8)

(0.3)

Changes in working capital

(37.0)

(26.5)

Total

103.0

62.5

  

25. Restatement of prior periods

Finalisation of fair values of prior year acquisitions

IFRS requires fair values to be finalised within 12 months of the acquisition date. All fair value adjustments are required to be recorded with effect from the date of acquisition and consequently result in the restatement of previously reported financial results. In 2008 the Group finalised the fair values of the assets and liabilities arising from the acquisition of K&F on 22 June 2007 and this resulted in adjustments to the balance sheet at that date. The impact of the adjustments is shown below:

31 December

2007

£m

30 June

2007

£m

Goodwill as previously reported (note 15)

1,071.2

1,347.8

Fair value adjustments reflected in Group statutory accounts for year ended 31 December 2007

-

(272.6)

1,071.2

1,075.2

Finalisation in 2008 of fair values in respect of:

Other intangibles (note 15)

0.5

0.5

Property, plant and equipment (note 16)

4.2

4.2

Trade and other payables - current

0.3

0.3

Current tax liabilities

1.1

1.1

Deferred tax liability - non-current

(11.0)

(11.0)

Provisions - non-current (note 19)

1.5

1.5

Goodwill as restated (note 15)

1,067.8

1,071.8

26. Approval of interim management report

The interim management report was approved by the Board of Directors on 4 August 2008.

27. Availability of interim management report

The interim management report will be made available to all shareholders from 29 August 2008 and will be available to the public at the Company's registered office at Atlantic House, Aviation Park West, Bournemouth International Airport, Christchurch, Dorset, BH23 6EW from that date.

Risks and uncertainties

The Group disclosed in its 2007 Annual Report the principal risks and uncertainties the Group is exposed to and these are expected to continue to be relevant for the remaining six months of the year.

The risks include those arising from reduced demand for the Group's products, market competition, legal, export, environmental or other regulatory matters, equipment fault, fixed price contracts, retirement benefit plan funding, supply chain management and acquisitions together with credit risk, interest rate and exchange rate risk. Further details can be found in the "Risks and Uncertainties" section of the Annual Report 2007 together with details of certain strategies adopted to mitigate any exposures.

In light of the economic climate and increases in oil prices, a number of airlines have, since the end of 2007, announced plans to park up a number of aircraft within their fleet. To date announcements of potential aircraft to be parked are not expected to be material to Meggitt's results. 

  

STATEMENT OF DIRECTORS' RESPONSIBILITIES

The directors confirm that to the best of their knowledge:

this condensed consolidated interim financial information has been prepared in accordance with IAS 34 "Interim Financial Reporting" as adopted by the European Union;

the interim management report includes a fair review of the information required by DTR 4.2.7 and DTR 4.2.8, namely:

An indication of important events that have occurred during the six months ended 30 June 2008 and their impact on the condensed set of financial statements, and a description of the principal risks and uncertainties for the remaining six months of the financial year; and

Material related party transactions in the six months ended 30 June 2008 and any material changes in the related party transactions described in the last annual report.

By order of the Board:

T Twigger S Young

Chief Executive Group Finance Director

4 August 2008 4 August 2008

- E N D S -

This information is provided by RNS
The company news service from the London Stock Exchange
 
END
 
 
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