6th Mar 2007 07:06
Meggitt PLC06 March 2007 Please contact Charles Ryland or Jeremy Garcia Buchanan Communications Tel: +44 20 7466 5000 For Immediate Release 6 March 2007 Meggitt PLC unaudited results for the year ended 31 December 2006 "Another outstanding year" Financial Highlights 2006 2005(1)Revenue £670.3m £616.3m +9% Profit before tax-underlying(2) £132.7m £116.3m +14% Profit before tax £130.0m £87.1m +49% EPS - underlying(2) 22.3p 20.0p +12% EPS 22.2p 15.2p +46% Final dividend 6.0p 5.3p +13% Operational Highlights •Acquisitions completed in the year include Keith Products, FATS and Radatec •Significant investment in capital expenditure and research and development •Group internal reorganisation resulted in the formation of three divisions o Aerospace Equipment o Sensing Systems o Defence Systems Terry Twigger, Chief Executive, commented: "Meggitt had another outstanding year in 2006 driven by strong civil aerospacemarkets and continuing military demand. The Group ended the year with a strongorder book, 19% ahead of last year at constant exchange rates, and we expect tomake further good progress in 2007. As a result of an outstanding year the Boardis proposing to raise the final dividend by 13%." cont'd ..._______________________ 1 Restated where applicable for the effect of finalising the fair values ofprior year acquisitions (see note 9). 2 The Directors use underlying profit and underlying EPS to measure and monitorthe underlying trading performance of the Group (see note 2). RESULTS Excellent growth in the civil aerospace market and continued military demandsupplemented by acquisitions have contributed to another outstanding year. Grouprevenue increased by 9% to £670.3m (2005: £616.3m), with civil aerospaceincreasing by 13%; military increasing by 4% and revenue in other marketsincreasing by 8%. The Group's order book at the end of December was 19% higherthan December last year at constant exchange rates. The Group is well balanced between the civil and military markets and alsobetween original equipment and aftermarket revenues. Overall, civil aerospacemarkets accounted for 44% of Group revenue (2005: 43%); military markets 39%(2005: 40%) with the aftermarket in aggregate, civil plus military, accountingfor 38% (2005: 39%). Underlying operating profit increased by 14% to £149.2m (2005: £130.6m). Netinterest costs increased by £2.2m to £16.5m (2005: £14.3m) due to higher ratesand the cost of funding acquisitions. This left underlying profit beforetaxation (PBT) 14% higher at £132.7m (2005: £116.3m). The increase includedadverse currency movements of £2.0m and a £0.6m net benefit from acquisitions.Excluding the impact of currency and acquisitions, like-for-like underlying PBTincreased by 15%. The underlying tax rate for the Group increased, as expected, to 27% (2005: 26%)and underlying earnings per share (EPS) increased by 12% to 22.3 pence (2005:20.0 pence). Underlying profit is the principal measure used by the Board to measure andmonitor the underlying trading performance of the Group and excludes certainitems, as detailed in note 2. Including these items, reported profit before taxincreased by 49% to £130.0m and EPS increased by 46% to 22.2 pence. Cash conversion, the ratio of underlying cash flow from operations to underlyingoperating profit, was 90% (2005: 102%). The Group made significant investment in expanding, consolidating and relocatingmanufacturing facilities in 2006, which drove increased capital expenditure of£31.4m (2005: £16.2m). As previously stated, this rate of investment willcontinue in 2007 as further expansions and consolidations take place. Theseinvestments will contribute to additional efficiencies as well as increasingcapacity. Research and development costs charged to the income statement increased by 9%,in line with revenue, to £26.0m (2005: £23.8m). Net borrowings have increased from £314.3m at December 2005 to £353.7m with the£81.6m spent on acquisitions partially offset by £22.5m net cash generated andexchange rate movements. Interest cover (underlying) was a healthy 9.0 times (atDecember 2005 9.1 times). As a result of this excellent performance, the Board is proposing to increasethe final dividend by 13% to 6.0 pence (2005: 5.3 pence). This brings the fullyear dividend to 8.6 pence (2005: 7.7 pence) an increase of 12%. STRATEGY The Board's aim is to deliver upper quartile returns to our shareholders. Ourstrategy is to own businesses that operate in markets with high barriers toentry and where our products have long lives operating in extreme environments.The objective is to not only sell the original equipment but also to share in acontinuing stream of highly profitable aftermarket revenues over many years.This gives the added benefit that aftermarket revenues are more stable andprofitable than original equipment and are very cash generative. Industries suchas aerospace, where the average life of an aircraft is over 30 years, anddefence enable us to achieve those objectives. Organic growth has been, and willcontinue to be, complemented by an active acquisition policy. As the Group grows we are investing to leverage our capabilities moreeffectively. A group of senior account executives manage the strategicrelationships with our key customers and new offices in Brussels and Washingtonwill ensure the full scope of Meggitt's activities are understood. The Group iswell equipped to take advantage of numerous government procurementopportunities. During 2006 a central operations excellence function has beenestablished to cultivate best practise throughout the Group. Its first task isto build on the excellent work already done on reducing the costs of indirectmaterials and services by focusing on lowering the cost and complexity ofprocuring direct materials for the Group. Other senior group appointments inorganisational development, strategy and marketing, information services,procurement, export control and ethics are enabling us to standardise processes,practices and structures that will lead to simpler information technology, solidcompliance, ethics, risk management and business continuity programmes andresource sharing. Meggitt is also evaluating opportunities across the Group to share services. Ournew information services function will help standardise systems, move towardsgeographic data centres and set up a dedicated wide area network. This willminimise back office functions and provide the base connectivity for the securecommunication and information-sharing needed for customer opportunities thatwould benefit from a group response. We want information to flow moreefficiently and effectively where and when it needs to so that our operatingcompanies can work together across geographic and commercial boundaries,optimising group talent and resources and serving customers from a widerperspective. 2006 has been a year of significant investment for Meggitt both in capitalexpenditure and research and development. Much of the £31.4m of capitalexpenditure in 2006 was directed at consolidating factories in the UK andCalifornia to create larger, better resourced businesses and expanding andmodernising factories in the UK, China and Switzerland to manage betterincreases in demand. Owning intellectual property is key to maintaining Meggitt's high returns. Totalresearch and development expenditure, including customer funded, increased by£10.3m (22%) to £57.6m (2005: £47.3m) which is 9% of the Group's revenue. Muchof this investment is on incremental improvements in product capability butsignificant developments included condition monitoring on the Airbus A380 andBoeing 787, the launch of a new fuel gauging technology, enhanced networkingcapabilities for sensors and new sensors aimed at seismic sensing and theassessment of head trauma injuries. In-house developments are complemented byacquiring or licensing technology where applicable. The acquisitions of KeithProducts, FATS and Radatec are excellent examples of this. The development of the Group's products and technology has led to an internalreorganisation of the businesses that operate most closely together. The Groupnow manages its businesses under the key segments of: • Aerospace Equipment • Sensing Systems • Defence Systems Their key capabilities are shown below: Aerospace Equipment Sensing Systems Defence Systems (53% of Group revenue) (33% of Group revenue) (14% of Group revenue) Wheels and Brakes Condition monitoring Training systems systems Thermal management High performance sensors Combat systems: systems Avionics • Ammunition handling Fluid controls • Environmental control systems Safety systems • Countermeasure launch and recovery systems Polymers and composites These capabilities and some of the trading highlights in 2006 are described inmore detail under "Operational highlights". The fundamental change is thatAerospace Systems, previously reported as part of the Aerospace segment, has nowbeen broken out and merged with Electronics, to form the new Sensing Systemssegment. Note 3 shows the financial performance under the new segmentation witha reconciliation to the previously reported basis. CORPORATE ACTIVITY The acquisition of K&F Industries announced this morning is an excellent fitwith Meggitt's strategy and is discussed in the accompanying press release. During 2006 Meggitt continued its strategy of making bolt-on acquisitionscomplementary to its existing businesses. Sensing Systems acquired Radatec in August 2006 for a consideration of £1.4m,potentially rising to £5.6m if certain milestones are met. Radatec is in theearly stages of developing microwave-based sensing, initially for turbine bladetip clearance measurement for gas turbine engines, an application which isexpected to produce significant fuel savings and reduction in emissions. Radatecwill be a small (circa £2m pa) cost to the Group in its development phase overthe next 12-18 months. Aerospace Equipment acquired Keith Products in September 2006. Keith Products isa leading supplier of compact air conditioning systems for business jets andgeneral aviation aircraft, which complements our existing range of thermalmanagement products. The consideration was £16.6m, potentially rising to £17.6m.In 2005 Keith Products reported revenue of $11.1m and EBIT of $3.7m. Finally, Defence Systems acquired Firearms Training Systems Inc ("FATS") for£68.3m in October 2006. FATS is a leading provider of ground based simulatedtraining solutions that improve the skills of military forces, law enforcementagencies and security organisations around the world. Their highly engineeredsolutions provide a range of judgemental, tactical and combined arms trainingwhich is complementary to Meggitt's live fire training businesses. FATS isheadquartered in Suwanee, Georgia and had revenue of $78.6m and EBIT of $8.8m(after non-recurring expenses estimated at $3.1m) in its fiscal year to 31 March2006. OPERATIONAL HIGHLIGHTS AEROSPACE EQUIPMENT (53% of Group revenue) • Revenue increased 9% to £356.6m (£2005: £328.6m). At constant exchange rates a 10% increase. • Underlying operating profit increased 11% to £92.3m (2005: £83.4m). At constant exchange rates the increase was 13%. Aerospace Equipment produces mainly mechanical components and subsystems foraero-engines and landing systems but it also has a growing capability on landand sea platforms. Its products are spread across a number of programmes, bothcivil and military and, because the equipment works in critical applications inharsh environments, a significant proportion of its revenues are generated froma growing and highly profitable aftermarket demand. During the year the order book continued to grow with numerous new programmeawards. These included: The contract to supply the main and nose wheels, brakes and brake-by-wirecontrol system for Embraer's Phenom 300 light jet which is expected to enter inservice in 2009. This contract is expected to be worth $100m over the life ofthe programme. Our braking business also continued to advance its technologybase by demonstrating successfully its advanced electric braking systems,EbrakeTM, which flew on the Barracuda unmanned air technology demonstrator latelast year. A contract from GE Aviation to supply bleed bias venturi flow sensors for theGEnx engine which are to be used on the Boeing 787 and Boeing 747 aircraft. Theair/oil separator for the Trent 1000 under a contract with Hamilton Sunstrand;inlet anti-ice system integration for the Embraer Phenom 100 very light jet;environmental control system valves that will be used on the US Navy's newBoeing 737 multi-mission maritime aircraft (MMA) and motor operated hydraulicenvironmental control system valves that will be installed on Boeing 757aircraft that are being converted from passenger to cargo. Boeing will incorporate Meggitt's new generation smoke detection and sensorsystem in its new 777 large aircraft and Federal Express will use the Company'sfire detection control unit as an integral part of its programme to upgrade firedetection performance on several of its aircraft models. In line with the Group's strategy and in order to satisfy our customer's demandsfor high quality products, delivered on time, and at a competitive cost level,Meggitt has continued to invest in its facilities. In Aerospace Equipment theCalifornia manufacturing facility of Airdynamics has been consolidated with theControls facility also in California USA. The UK polymers factory has beenupgraded and extended to enable the consolidation and closure of the nearbyfacility at Bagworth. This move should be completed during the first half of2007. In addition, in order to cope with an increasing order book, the facilityat Heatric is being expanded by 3,350 square metres. SENSING SYSTEMS (33% of Group revenue) • Revenue increased 9% to £218.9m (2005: £201.7m). At constant exchange rates a 10% increase. • Underlying operating profit increased 23% to £39.8m (2005: £32.5m). At constant exchange rates the increase was 23%. Meggitt Sensing Systems businesses provide industrial position sensors, avionicsand an extensive range of higher value sensors and related electronics. Thelatter are used primarily in monitoring the condition of aircraft, marine andindustrial power generation turbines. We have a long successful presence in thecondition monitoring market which has created an excellent market position forour businesses. We have applications on virtually every western aircraft andhave the leading position in engine vibration monitoring and condition basedmaintenance on large civil aircraft engines where sensors and electronics arecombined to provide essential operating and maintenance information. Meggitt isthe only company with a demonstrated on-engine monitoring capability. Oursensors are also used in a wide variety of other applications such as test andmeasurement, medical, automotive and industrial. Major contracts on which the Group has continued to work during 2006 includeengine condition monitoring units (EMUs) for the GP7200 and Trent 900/1000engines which will be used on the Boeing 787. In addition, the EMUs on theGP7200 and the Trent 900 engines for the Airbus A380 aircraft are now inproduction. These projects are progressing as expected and the outlook for theproduct on the Boeing 787 aircraft looks very encouraging. The delays in theAirbus A380 programme, whilst disappointing, will have only a minor impact onthe Group's results. In line with our strategy of introducing products with significant levels ofintellectual property, we have developed a new technology for use in fuelgauging systems to be used on aircraft. We are working closely with our launchcustomer to progress this innovative technology through qualification andcertification to support deliveries for production aircraft in Q4 2007. Thisprogramme is anticipated to yield $30m in revenues throughout the product life.Following certification, this technology will be applicable to numerous otherplatforms. Although at an earlier stage of development, progress has continued on ournetwork sensing technology for next generation flight test applications and weare developing exciting new applications around seismic sensing. Furtherinvestment in our Silicon Micro Electro-Mechanical Systems facility isdelivering benefits with new designs including high shock sensors for weaponsfusing applications, new devices for implantable medical applications, nextgeneration crash and crush sensors for automotive and aerospace safety testingand sensors which measure head trauma. This business has also continued to upgrade and expand its facilities. Duringthe year Vibro-Meter Inc in New Hampshire, USA relocated to a new facility ashas Vibro-Meter UK in Basingstoke, UK and Wilcoxon in Maryland, USA. Expansionof the Vibro-Meter SA facility in Switzerland has commenced with completionexpected in the second half of 2007. Finally, the manufacturing facility inXiamen, China has also been expanded to cope with the increased level ofactivity as our businesses expand their use of this lower cost manufacturingfacility. DEFENCE SYSTEMS (14% of Group revenue) • Revenue increased 10% to £94.8m (2005: £86.0m). At constant exchange rates a 13% increase. • Underlying operating profit increased by 16% to £17.1m (2005: £14.7m). At constant exchange rates the increase was 20%. With the acquisition of FATS, Defence Systems now has a leading position inground live fire and virtual training and we are well placed to address modernrequirements for current conflicts and the retraining that will follow. Inaddition, we have attractive opportunities in aerial training systems and combatsystems where we provide ammunition handling and environmental control systems. During the year a number of major contracts have been received: The aerial targets and scoring sector secured an award from Qinetiq for the UKMinistry of Defence's Combined Aerial Targets System (CATS) programme inDecember 2006. The UK CATS programme is a 20 year contract valued at £50m forMeggitt Defence Systems. In addition, £7m of orders for aerial targets forKuwait, Germany, Finland, France, Norway and Spain have been received during theyear. The Environmental Control Systems sector has had a strong start to 2007 havingbeen awarded a research contract from Boeing to develop a cooling solution forthe F-15E's Radar Modernisation Programme. Production contracts could total $7mwith systems being delivered in the 2008-2010 timeframe. This programmedemonstrates Defence Systems' leading position in electronics cooling formilitary applications and leverages our secured technology position for futurecontracts. The US Army continues to upgrade the existing fleet of Abrams to the M1A2SEPconfiguration. As a result, General Dynamics recently awarded Defence Systems a$16m contract to provide 186 new TMSTM (Thermal Management System) followingover 900 such systems that have already been delivered over the last six years.This new batch will begin delivery in early 2008, dovetailing neatly intoexisting production deliveries. Additionally, Defence Systems will begin shortlyto see significant US Army reset contracts to refurbish Abrams TMSTM that haveseen extended combat duty in Iraq. Development work is also underway on enhancedcooling solutions for the new electronics to be integrated into the nextgeneration battle tank, the M1AX. In the Ammunition Handling System sector, Meggitt has been awarded a $3mcontract by the US Marine Corps to develop a new Ammunition Handling System forthe AH-1W/Z Super Cobra attack helicopter. Subsequent production contracts areexpected to yield more than $20m in revenues beginning in 2009. Additionally,the development of the 120mm autoloader system for the FCS MCS variant hascontinued in a contract valued at more than $44m. Finally, Defence Systems has also been awarded three classified counter measuresprogrammes with the US Air Force. These planned programmes run to 2012, andleverage Defence Systems' technology and expertise in protecting militaryaircraft, and are valued at more than $78m over the life of the programmes. Work has continued on the co-location of the three Californian Defence Systemsbusinesses onto one site and this should be completed early in the secondquarter of 2007. In addition, the UK facility in Ashford, Kent has been moved toa new site and plans are underway to move the FATS UK facility in Lincoln tothis site. Also during 2007, it is planned to commence the transfer of theactivities of Caswell who make ground targets in Minneapolis, Minnesota, to FATSin Atlanta, Georgia. This move should be completed in the first half of 2008 andwill cost £3.2m and be treated as an operating exceptional cost (2006 £1.5m;2007 £1.7m). OUTLOOK Meggitt has a clear strategy which it continues to execute. The Group hascontinued to deliver strong growth in revenue and underlying profit in line withits strategic objectives. Prospects for the civil aerospace market remainexcellent not only in demand for large jets but also in the business, light jetand general aviation markets. Meanwhile we expect continuing military demand.With the Group's order book 19% higher at 31 December 2006 than at 31 December2005, at constant exchange rates, we are confident that Meggitt will deliverfurther growth in 2007. In line with our strong performance in 2006 and thepositive trading conditions going forward, the Directors are recommending a 13%increase in the final dividend. CONSOLIDATED INCOME STATEMENT for the year ended 31 December 2006 2006 2005 Restated £'m £'mContinuing operations Revenue 670.3 616.3 Cost of sales (372.6) (338.8) Gross profit 297.7 277.5 Net operating costs (151.2) (176.1) Operating profit * 146.5 101.4 Finance income 3.3 4.9Finance costs (19.8) (19.2)Net finance costs (16.5) (14.3) Profit before tax from continuing operations ** 130.0 87.1 Tax - UK (10.1) (1.2)Tax - Overseas (23.4) (20.4)Tax (33.5) (21.6) Profit for the year from continuing operations 96.5 65.5 attributable to equity shareholders Earnings per shareBasic 22.2p 15.2pDiluted 22.1p 15.1p Dividends paid to equity shareholders in the year 34.3 31.0Dividends paid and proposed to equity 37.5 33.4shareholders in respect of the year Dividend per share - Interim paid 2.6p 2.4pDividend per share - Final proposed 6.0p 5.3p * Underlying operating profit (see note 2) 149.2 130.6** Underlying profit before tax (see note 2) 132.7 116.3 CONSOLIDATED BALANCE SHEET as at 31 December 2006 2006 2005 Restated £'m £'mNon-current assetsGoodwill 598.9 546.9Development costs 31.9 21.7Other intangible assets 171.6 182.2Property, plant and equipment 127.6 116.9Trade and other receivables 49.0 68.0Deferred tax assets 32.9 32.0Investments available for sale - 1.1 1,011.9 968.8Current assetsInventories 154.4 134.5Trade and other receivables 174.8 138.7Derivative financial instruments 8.4 0.1Current tax recoverable 0.2 6.0Cash and cash equivalents 43.6 45.5 381.4 324.8 Total assets 1,393.3 1,293.6 Current liabilitiesTrade and other payables (198.2) (168.2)Derivative financial instruments - (4.5)Current tax liabilities (17.5) (20.4)Bank and other borrowings (17.3) (13.0)Provisions (7.5) (18.4) (240.5) (224.5) Net current assets 140.9 100.3 Non-current liabilitiesTrade and other payables (4.3) (4.6)Derivative financial instruments (0.6) (1.6)Deferred tax liabilities (55.2) (53.3)Bank and other borrowings (380.0) (346.8)Provisions (54.0) (67.9)Retirement benefit obligations (97.2) (98.2) (591.3) (572.4) Total liabilities (831.8) (796.9) Net assets 561.5 496.7 EquityShare capital 21.8 21.7Share premium 356.1 350.2Other reserves 14.1 14.1Hedging and translation reserve (6.3) (1.1)Retained earnings 175.8 111.8Capital and reserves attributable to 561.5 496.7equity shareholders CONSOLIDATED CASH FLOW STATEMENT for the year ended 31 December 2006 2006 2005 £'m £'m Cash inflow from operations before exceptional operating 133.8 132.8costsCash outflow from exceptional operating costs (1.8) (5.5)(note 4) Cash inflow from operations 132.0 127.3Interest received 1.2 1.4Interest paid (17.7) (14.9)Debt issue costs - (0.3)Tax paid (19.5) (21.2)Cash inflow from operating activities 96.0 92.3 Purchase of subsidiaries (86.3) 0.5Net cash acquired with subsidiaries 4.7 0.9Capitalised internal development costs (14.5) (8.0)Purchase of other intangible assets (4.6) (3.5)Purchase of property, plant and equipment (31.4) (16.2)Proceeds from disposal of property, plant and 4.5 0.5equipmentProceeds from disposal of investments 0.8 -available for saleCash outflow from investing activities (126.8) (25.8) Dividends paid to Company's shareholders (32.0) (26.0)Issue of equity share capital 3.7 2.8Proceeds from borrowings 96.5 81.2Repayments of borrowings (36.0) (124.6)Cash inflow/(outflow) from financing 32.2 (66.6)activities Net increase/(decrease) in cash and cash 1.4 (0.1)equivalentsCash and cash equivalents at start of year 45.5 42.3Exchange (losses)/gains on cash and cash (3.3) 3.3equivalentsCash and cash equivalents at end of year 43.6 45.5 CONSOLIDATED STATEMENT OF RECOGNISED INCOME AND EXPENSE for the year ended 31 December 2006 2006 2005 Restated £'m £'m Currency translation differences (7.2) 3.5Taxation recognised on currency translation differences: 2.0 1.0current Actuarial losses (4.6) (24.4)Taxation recognised on actuarial losses: 1.3 8.0deferred Net expense recorded directly in equity (8.5) (11.9) Profit for the year 96.5 65.5 Total recognised income for the year 88.0 53.6 NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2006 1. BASIS OF PREPARATION The financial information contained in this document contains abridgedpreliminary financial information for the year ended 31 December 2006 togetherwith comparatives. Comparatives have been restated where appropriate as detailedin note 9. It has been prepared on the basis of the policies that will be applied in theconsolidated statutory accounts for the year ended 31 December 2006. Thesepolicies remain unchanged from those applied in the consolidated statutoryaccounts for the year ended 21 December 2005. The financial information presented in this document has not been audited. Ithas however, been agreed with the Group's auditors and the auditors are expectedto issue an unqualified opinion on the consolidated statutory accounts of theGroup shortly. 2. RECONCILIATIONS BETWEEN PROFIT AND UNDERLYING PROFIT Underlying profit is used by the Board to measure and monitor the underlyingtrading performance of the Group. It excludes exceptional operating costs andcosts which the Board considers to be of a non operational nature. Thederivation of these measures is shown below: 2006 2005 Restated £'m £'m Operating profit 146.5 101.4 Exceptional operating costs (note 4) 1.5 7.0Amortisation of intangibles acquired in business 10.8 11.2combinationsDisposal of inventory revalued in business 0.1 0.9combinationsFinancial instruments (note 5) (12.1) 10.1Goodwill adjustment arising from recognition of 2.4 -tax losses*Adjustments to operating profit 2.7 29.2 Underlying operating profit 149.2 130.6 Profit before tax 130.0 87.1Adjustments to operating profit per above 2.7 29.2 Underlying profit before tax 132.7 116.3 Profit for the year 96.5 65.5Adjustments to operating profit per above 2.7 29.2Tax effect of adjustments to operating profit (2.3) (8.6) Underlying profit for the year 96.9 86.1 * The goodwill adjustment arises from the recognition of tax losses during theyear in respect of businesses acquired in earlier years. These tax lossesexisted when the businesses were acquired but a deferred tax asset was notrecognised at the time as the recoverability of those losses was not probable atthe time the fair values were finalised. IFRS requires that goodwill is adjustedin the year the recoverability becomes probable with a corresponding chargerecorded in profit before tax. 3. SEGMENTAL ANALYSIS The Group's primary segments are its business segments. 2006 2005 Restated £'m £'mRevenueAerospace Equipment 356.6 328.6Sensing Systems 218.9 201.7Defence Systems 94.8 86.0 670.3 616.3 Underlying operating profit (note 2)Aerospace Equipment 92.3 83.4Sensing Systems 39.8 32.5Defence Systems 17.1 14.7 149.2 130.6 Operating profitAerospace Equipment 90.0 59.1Sensing Systems 41.1 27.9Defence Systems 15.4 14.4 146.5 101.4 The development of the Group's products and technology and the markets in whichit operates has led to an internal reorganisation of the businesses that operatemost closely together and the organisational management for those businessunits. The Group now manages its businesses under the key segments of: • Aerospace Equipment • Sensing Systems • Defence Systems A reconciliation of the 2005 results reported under the old segment definitionsto the way in which they are reported under the new segment definitions isprovided below: Old segment definitions Aerospace Defence Electronics Total Systems 2005 £'m £'m £'m £'m RevenueAerospace Equipment 328.6 - - 328.6Sensing Systems 130.0 - 71.7 201.7Defence Systems - 86.0 - 86.0 458.6 86.0 71.7 616.3 Underlying operating profit(note 2)Aerospace Equipment 83.4 - - 83.4Sensing Systems 23.8 - 8.7 32.5Defence Systems - 14.7 - 14.7 107.2 14.7 8.7 130.6 Operating profitAerospace Equipment 59.1 - - 59.1Sensing Systems 20.9 - 7.0 27.9Defence Systems - 14.4 - 14.4 80.0 14.4 7.0 101.4 4. EXCEPTIONAL OPERATING COSTS The exceptional operating costs relate to the integration of significantacquisitions and other costs which by virtue of their size and nature areconsidered to be non-recurring. The exceptional charge in 2006 of £1.5 million relates to the consolidation inboth the UK and US of Defence Systems businesses following the acquisition ofFirearms Training Systems Inc ("FATS"). In the UK, FATS UK is being consolidatedonto the Meggitt Defence Systems Limited site in Kent. In the US, Caswell isbeing consolidated onto the FATS US site in Atlanta. The total cost of theseconsolidations, which will be completed in the first half of 2008, is expectedto be £3.2 million. The exceptional charge in 2005 of £7.0 million relates to completion of theconsolidation of Meggitt's polymers business into Dunlop Aerospace's facilitiesin the Midlands and the costs associated with the requirement to move the Avicafacility in Hemel Hempstead following the explosion at the Buncefield FuelDistribution Depot. Cash expenditure on exceptional operating costs was £1.8 million (2005: £5.5million). 5. FINANCIAL INSTRUMENTS The Group has decided that the costs of meeting the extensive documentationrequired to be able to apply hedge accounting under IAS 39 for its foreigncurrency forward contracts are not merited. The Group's underlying profitfigures exclude amounts which would not have been recorded if hedge accountinghad been applied. Interest rate swaps are used as a hedge against fixed rateborrowings but any difference between the movement in the fair value of the swapand the associated borrowings are excluded from the Group's underlying profitfigures. 2006 2005 £'m £'m Movement for the year in the fair value offoreigncurrency forward contracts 14.0 (11.1) Impact of retranslating net foreign currencyassetsand liabilities at spot rate (2.0) 1.0 Difference between the fair value of interestrate swapsand associated fixed rate borrowings 0.1 - Gain / (Loss) 12.1 (10.1) 6. DIVIDENDS The Board is recommending a final dividend of 6.00p per ordinary share (2005:5.30p). Taken with the interim dividend of 2.60p (2005: 2.40p) paid in the yearthis gives a total dividend of 8.60p (2005: 7.70p) representing an increase of12%. Subject to approval at the Annual General Meeting to be held on 26 April2007, the proposed dividend will be paid on 6 July 2007 to persons registered asholders of the Ordinary Shares at close of business on 16 March 2007. Incontinuation of recent practice, ordinary shareholders will be offered theopportunity to elect for shares in lieu of cash for the final dividend. 7. EARNINGS PER SHARE The calculation of earnings per ordinary share is based on profits of£96.5 million (2005: £65.5 million) and on the weighted average 434.4 million(2005: 430.7 million) ordinary shares in issue during the year to 31 December2006. The calculation of diluted earnings per ordinary share is based on the sameprofits as used in the calculation of basic earnings per ordinary share. Theweighted average number of shares of 437.2 million (2005: 433.3 million) used inthe calculation is based on the weighted average number used in the calculationof basic earnings per share adjusted for the effect of options. Underlying earnings per share which is based on underlying profit (see note 2)is calculated below: 2006 2005 Restated pence pence Basic earnings per share 22.2 15.2 Add back effects of:Exceptional operating costs 0.3 1.1Amortisation of intangibles acquired in business 1.8 1.8combinationsDisposal of inventory revalued in business - 0.2combinationsFinancial instruments (2.0) 1.7 Underlying earnings per share 22.3 20.0 8. ACQUISITIONS On 19 October 2006 Meggitt completed the acquisition of Firearms TrainingSystems, Inc. for a total consideration of £68.3 million. The assets and liabilities arising from the acquisition are as follows: Acquiree's Fair book value value £'m £'m Property, plant and equipment 1.0 0.9Deferred tax assets 0.9 1.9Inventories 6.8 8.1Trade and other receivables - current 12.7 9.5Cash and cash equivalents 4.7 4.7Trade and other payables - current (7.9) (9.5)Current tax liabilities (0.1) (0.3)Trade and other payables - non-current (0.3) (0.3)Bank and other borrowings - non current (15.5) (15.5)Provisions - non current (0.1) (1.2) 2.2 (1.7) Consideration: 68.3 Goodwill on acquisition 70.0 The Group also made the following acquisitions during the year: On 22 August 2006, Meggitt completed the acquisition of Radatec, Inc for aconsideration including costs of £1.4 million with an additional £4.2 millionpotentially payable subject to meeting agreed milestones. On 12 September 2006, Meggitt completed the acquisition of Keith Products LLPfor an initial consideration including costs of £16.6 million with a further£1.0 million potentially payable subject to the achievement of performancetargets. 9. RESTATEMENT OF PRIOR YEAR IFRS requires fair values of assets and liabilities acquired to be finalisedwithin 12 months of the acquisition date with the exception of certain deferredtax balances. All fair value adjustments are required to be recorded with effectfrom the date of acquisition and consequently may result in restatement ofpreviously reported financial results. During 2006 the Group finalised the fair values for three acquisitions completedin the second half of 2005 and this resulted in adjustments to the profit forthe year ended 31 December 2005 and to the balance sheet at that date. The impact of the adjustments is shown below: 2005 £'m Profit for the year as previously reported 66.2 Amortisation of intangibles acquired in business (0.3)combinationsDisposal of inventory revalued in business (0.7)combinationsTax effect of adjustments above 0.3 (0.7) Profit for the year restated 65.5 Goodwill as previously reported 551.4 Intangibles acquired in business combinations (5.0)Disposal of inventory revalued in business (0.8)combinationsTax effect of adjustments above 1.9Other (0.6) Goodwill as restated 546.9 10. RETIREMENT BENEFIT OBLIGATIONS 2006 2005 £'m £'m Fair value of schemes' assets 369.3 349.1Fair value of schemes' liabilities (466.5) (447.3)Retirement benefit obligations (97.2) (98.2) Principal financial assumptions:Discount rate - UK schemes 5.05% 4.85%Discount rate - US schemes 5.75% 5.50% Inflation rate - UK schemes 2.90% 2.60%Inflation rate - US schemes N/A N/A Male age 65 (current life expectancy) - UK schemes 20.1 20.1Female age 65 (current life expectancy) - UK 23.0 23.0schemesMale age 65 (current life expectancy) - US schemes 17.6 17.6Female age 65 (current life expectancy) - US 20.1 20.1schemes 11. SHARE CAPITAL 2006 2005 No. m No. m Number of shares outstanding at 1 January 433.2 429.6 Issued on exercise of executive share options 1.9 1.8Issued on exercise of SAYE share schemes 0.3 0.1Scrip dividend 0.7 1.7 Number of shares outstanding at 31 December 436.1 433.2 12. SUMMARY OF MOVEMENTS IN EQUITY 2006 2005 Restated £'m £'m At 1 January 496.7 462.4 Total recognised income for the year 88.0 53.6Employee share schemes:Value of services provided 5.2 -Proceeds from shares issued 3.7 2.8Dividends (32.0) (26.0)Purchase of own shares (0.1) -Adoption of IAS32 and IAS39 - 3.9 At 31 December 561.5 496.7 13. CASH INFLOW FROM OPERATIONS 2006 2005 Restated £'m £'m Profit for the year 96.5 65.5 Adjustments for:Tax 33.5 21.6Depreciation and amortisation 31.7 29.1Profit on disposal of property, plant & equipment (1.6) (0.2)Net finance costs 16.5 14.3Financial instruments (12.1) 10.1Adjustment to goodwill on recognition of tax 2.4 -lossesChanges in working capital (34.9) (13.1) Cash inflow from operations 132.0 127.3 14. RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET DEBT 2006 2005 £'m £'m Movement in the year in:Cash and cash equivalents 1.4 (0.1)Bank and other borrowings (60.5) 43.4Change in net debt resulting from cash flows (59.1) 43.3 On acquisition of businesses (15.5) (1.5)Other non-cash movements (0.8) (1.2)Exchange differences 36.0 (25.5)Movement in net debt in the year (39.4) 15.1 Net debt at 1 January (314.3) (329.4) Net debt at 31 December (353.7) (314.3) - E N D S - This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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