4th Mar 2008 07:00
Meggitt PLC04 March 2008 For immediate release 4 March 2008 "Another outstanding year and K&F ahead of expectations" Meggitt PLC ("Meggitt" or "the Group"), the international aerospace and defencegroup, today announces preliminary audited results for the year ended 31December 2007. FINANCIAL HIGHLIGHTS £m 2007 20061 % changeRevenue 878.2 670.3 31 Underlying2Operating profit 216.3 149.2 45Profit before tax 179.0 132.7 35Earnings per share 22.1p 19.1p 16 StatutoryOperating profit 142.7 143.2 0Profit before tax 105.4 126.7 -17Earning per share 14.6p 18.6p -22 Dividend 8.20p 7.36p 11 STRATEGIC DELIVERY - K&F acquisition trading well; savings expected to exceed target - Balanced business: revenues - civil aerospace 48%, military 38%, other markets 14% - Aftermarket revenues underpin growth - 44% of Group total - Strong organic growth - revenue up 11%; underlying operating profit up 13% - Order intake up 35%; organic up 7%. Closing order book of over £650m - Investment in product development up 22% to £70m - Expansion of manufacturing facilities in Mexico and China - Consolidation of California and UK defence systems facilities complete; consolidation of defence training businesses underway Terry Twigger, Chief Executive, commented: "Meggitt is going from strength to strength, delivering strong organic growthcomplemented by acquisitions such as K&F. Our businesses are continuing to tradewell, the integration of K&F is progressing well and is on track, and it islikely that we will exceed our targeted savings. The depth and breadth of ouraftermarket gives us confidence in achieving further growth in 2008, andaccordingly the Board have proposed a 12.1% increase in the final dividend to5.75p. As a consequence, the total dividend for the year will increase by 11.4%to 8.20p. (1) Restated, where applicable, for the effect of finalising the fair values ofprior year acquisitions and the rights issue. (2) Underlying profit and EPS are used by the Board to measure the tradingperformance of the Group and exclude certain items, principally amortisation ofacquired intangibles, revaluation of inventory to selling price on acquisition(primarily K&F in 2007 and Keith Products/FATS in 2006), operating exceptionalcosts and the marking to market of financial instruments, as set out in notes 3and 7. Please contact Terry Twigger, Chief ExecutiveStephen Young, Group Finance DirectorMeggitt PLCTel: +44 1202 597597 Charles Ryland or Jeremy GarciaBuchanan CommunicationsTel: +44 20 7466 5000 STRONG MARKETS Meggitt's markets have shown excellent growth in 2007. New civil aircraft wereproduced at record levels and the outstanding order books at OEMs underpin highproduction levels in the medium term. Available seat kilometres, which are ameasure of civil aircraft usage (a proxy for spares demand), continued to growand provide a strong revenue stream in the aftermarket. Military markets alsosaw continued growth in 2007. The US Department of Defense is key to this areaand it continued to spend significant sums not only on new equipment but alsoupgrading and replacing equipment which is seeing heavy use in the currentconflicts. The US FY08 Defense bill requested an 8% increase in base spendingfor 2008 and a further 9% has been proposed for FY09. On top of this we expectsupplementals to continue at a high level. However, delays in the approval ofthese supplementals slowed the flow of orders to parts of the defence trainingbusiness. The other markets we serve are dominated by the energy sector,providing products such as compact heat exchangers for oil and gas platforms orcondition monitoring for industrial gas turbines. High energy prices have drivenstrong sales in these areas and we expect this strong demand to continue. REVENUES Overall revenues increased by 31% to £878.2m (2006: £670.3m) reflecting bothstrong organic growth of 11% and the inclusion of the K&F businesses from 22June 2007. Our more profitable and less cyclical aftermarket business increasedas a proportion of the Group's revenues during 2007, largely as a result of theK&F acquisition. In total, aftermarket revenues (civil plus military) reached44% of the Group total (2006: 38%) and this percentage is expected to increasefurther in 2008 with the full year inclusion of K&F. Civil aerospace revenuegrew by 46% whilst military revenues were up 36% and revenue in other marketsgrew 15%. The Group is well balanced with civil aerospace markets accounting for48% of Group revenue (2006: 44%); military markets 38% (2006: 39%); and othermarkets, largely in the growing energy sector, 14% (2006: 17%). The Group'sorder intake in 2007 was up 35%, with organic growth of 7%. Our closing orderbook at 31 December 2007 exceeded £650m. PROFIT AND DIVIDENDS Underlying operating profit increased by 45% to £216.3m (2006: £149.2m). Theunderlying operating margin increased to 24.6% (2006: 22.3%). Excluding theimpact of currency and acquisitions, revenues increased by 11% whilst underlyingoperating profit increased by 13%, demonstrating the increased leverage we areachieving from our revenue growth. Net interest costs increased by £20.8m to £37.3m due to the additional financingrequired to support the K&F acquisition. Underlying profit before tax(underlying PBT) increased by 35% to £179.0m. The Board's measure of the trading performance of the Group is underlyingprofit. As expected, the K&F acquisition caused a further divergence betweenunderlying and statutory profit. Underlying operating profit for the year was£216.3m (2006: £149.2m) while statutory operating profit was £142.7m (2006:£143.2m). This divergence comes about for two principal reasons. Firstly we arerequired to revalue K&F inventory to selling price on acquisition less sellingexpenses and, secondly, a significant amount of the value of K&F is allocated tointangible assets that we are required to amortise against profit. Furtherdetail on these and other adjustments can be found in Note 3. The effective tax rate on underlying PBT was 27.5% (2006: 27.0%). Underlyingearnings per share increased 16% to 22.1 pence (2006: 19.1 pence). The recommended final dividend of 5.75p (2006 as restated: 5.13p) represents anincrease of 12.1% reflecting the Board's confidence in the outlook for thebusiness. The total dividend of 8.20p (2006 as restated 7.36p) for the year isup 11.4%. ACQUISITIONS AND DISPOSALS The acquisition of K&F was completed on 22 June 2007. K&F comprised twodivisions, Aircraft Braking Systems Corporation (ABSC) and Engineered FabricsCorporation (EFC). This was the Group's largest acquisition to date with theenterprise value of $1.8bn financed through a combination of a rights issue andadditional debt. More details of this acquisition are shown in Note 9. EFC gives us a leading position in flexible bladder fuel tanks and is continuingto expand rapidly under Meggitt ownership. The combination of Meggitt's DunlopAircraft Braking Systems business with K&F's ABSC created a leading position intheir core military, regional and business jet segments of the aerospace marketand provides a strong platform for continued growth into the future. The twobrakes businesses now trade jointly under the Meggitt Aircraft Braking Systems(MABS) banner. The integration of these businesses is proceeding well. Early integrationsavings have been achieved by eliminating head office costs and creating asingle sales and marketing organisation for the brakes business. We are also inthe process of combining our brake maintenance, repair and overhaul facilitiesin the UK onto our Coventry site. Planning has been completed to deliver savingsin excess of those anticipated at the time of the acquisition. We now expect toachieve savings of £18m in 2009, compared with the £16m which we announced atthe time of the acquisition. A further £4m has been identified in 2010 to give arun rate of £22m. We expect to achieve this at a cost of £29m. S-Tec, a producer of analogue and digital autopilots to the general aviationsegment, was identified as no longer being core to the Group during 2007 and wassold on 3 January 2008 for proceeds of $38m. On 7 January 2008 we acquired Ferroperm, a leading manufacturer ofpiezo-electric ceramic materials for specialist sensor applications for a cashconsideration of up to Danish Kroner 100m (£10m). OTHER INVESTMENT ACTIVITIES Developing and owning intellectual property is an important part of Meggitt'ssuccessful strategy. Total product development expenditure increased by 22% to£70.0m (2006: £57.6m), of which 24% is funded by customers, predominantly indefence systems and sensing systems. The largest investments were in our sensingsystems business, totalling £33.0m (14% of segment revenue). Product developmentinvestments in aerospace equipment were £25.2m (5% of segment revenue) whilstdefence systems invested £11.8m (10% of segment revenue). We also invested£20.1m in supplying free of charge equipment and making programme participationcontributions, mostly in the brakes business. Capital expenditure on property, plant and equipment increased 29% to £41.0m(2006: £31.8m), including £12.9m relating to K&F. The Group undertook a numberof facility expansions and consolidations in the year including the expansion offacilities in the US, UK, Switzerland and China. Consolidation activity wasfocused on the Californian and UK defence facilities. CASH FLOW AND BORROWINGS Underlying cash flow from operating activities was £214.3m, 99% of underlyingoperating profit (2006: £140.3m and 94%). The business generated £41.0m of net cash before acquisitions. The £920.1m costof the K&F acquisition (including acquired debt) increased our net borrowings by£493.5m (with the remaining £426.6m funded by a rights issue). Overall, aftertaking account of non-cash movements of £9.2m, net borrowings increased from£353.7m at 31 December 2006 to £815.4m at 31 December 2007. Committed bank facilities total £1,055m with maturities ranging from 2010 to2015. Gearing at 31 December 2007 increased to 77% (2006: 63%) following the K&Facquisition. AEROSPACE EQUIPMENT FINANCIAL HIGHLIGHTS (at constant exchange rates) • Total revenues up 56% to £528.1m • Underlying operating profit of £158.2m, an 82% increase • Organic revenue and underlying operating profit increased by 14% and 19% respectively • Order intake up 52% on 2006 (8% excluding acquisitions) DIVISIONAL OVERVIEW This division generates 65% of its revenues from the aftermarket through amultitude of small high margin orders. Some of the more significant individualOE contracts won in 2007, which will contribute to future aftermarket revenuegrowth, are set out below. Following the K&F acquisition, Meggitt wheels and brakes are installed on over30,000 aircraft across 150 aircraft types, performing more than 15 milliontake-offs and landings per year. We supplied new equipment for over 800production aircraft in 2007. Continued fleet growth with high utilisationregional jets and higher cycle business jets drives a growing, high marginaftermarket. Larger brakes orders included several multi-year military programs such as B-1BLancer spares valued at £22m; Korean Aerospace Industries T-50 trainer totalling£6.5m of OE equipment; and Eurofighter orders for over £9m (plus an additional£6m in our sensing systems businesses). These complemented our strongperformance on civil OE programmes where we won 3 out of 4 major contract awardsfor the most advanced next generation business jet aircraft, strengthening ourposition in the light and mid-size market segments. Our 2007 success followsthree consecutive years of multiple awards for major new business jetsreflecting the execution of our strategy to be the leader in this growingsegment. Both Gulfstream and Embraer awarded us Supplier of the Year status forour contributions to their businesses. In addition we secured the BAE SystemsTaranis unmanned technology demonstrator programme for wheels, brakes and brakecontrol system, reinforcing our leading position in this field of wheel andbrake technology for unmanned aircraft. Our engineering organisation made substantial progress in support of eight majornew wheel and brake programmes during the year. We made initial deliveries ofhardware for the Chinese regional jet (ARJ-21), Phenom 100 and 300, and CessnaCJ4, and also celebrated other key milestones including the roll out of theARJ-21, the roll out and start of flight testing on the Phenom 100, and the certification of the Falcon 7X. The Falcon 7X is Dassault'snewest long range, large category business jet which features our latesttechnology wheels, brakes and digital brake-by-wire brake control system andbrake temperature monitoring system. Our other aerospace equipment businesses also had an excellent year in revenueand operating profit achievement, underpinned by strong order intake. Totalorder intake for the aerospace equipment business excluding brakes was up 29% in2007 (19% excluding EFC). For example, Safety Systems was awarded a contract todevelop a complete fire protection system for a next generation business jetincluding engine fire detection, smoke detection and extinguishing which isvalued at over £15m of OE sales. They were also awarded a fire detectioncontract for a new class of US Navy destroyers, the DDG-1000. Thermal systemswas selected by Cessna to provide a vapour cycle system for the CJ4 business jetand also completed a development programme for high pressure ducting in a newgeneration military aircraft which is expected to lead to production orders ofover £20m through the life of the programme. EFC, K&F's flexible bladder fuel tanks and ice protection business, continued toexpand rapidly. We are adding 60,000 sq ft of space to enable the business tomeet a record order book including orders for replacement flexible bladder fueltanks for the KC-135 in-flight refuelling tankers. Multi-year contracts forflexible bladder fuel tanks received in 2007 were valued at over £25m, as wellas a multi-year contract with Sikorsky valued in excess of £70m between 2007 and2012 to support the upgrade of the US Army UH-60M and US Navy MH-60R/Shelicopter force. We received further orders totalling £45m to support strategicmilitary aircraft such as CH-53K, V-22, F-15 and F-16 between 2009 and 2013. Revenues from our energy and industrial applications increased 37% on the backof continued high oil and gas prices. Heatric, our compact heat exchangerbusiness serving the oil and gas exploration business, received record orders in2007 validating our decision to expand the factory at the end of 2006. Majororders included a £7m contract to supply compact heat exchangers for a sour gasprocessing plant in the Middle East. SENSING SYSTEMS FINANCIAL HIGHLIGHTS (at constant exchange rates) • Total revenues up 11% to £235.9m, all organic • Underlying operating profit of £41.5m, a 10% increase (12% organic) • Order intake up 7% on 2006 DIVISIONAL OVERVIEW Meggitt's sensing systems businesses performed strongly in 2007 with continueddemand for their state-of-the-art condition-monitoring systems from aerospaceand energy customers. These systems comprise the high performance sensors andadvanced processing electronics needed to monitor the behaviour of criticalrotating machinery and deliver the diagnostic data needed to optimiseefficiency. In 2007, we made our first commercial sales of engine condition monitoringunits. The units have been certified on both engine variants for both the AirbusA380 and Boeing 787 and entered service with the A380. Vibro-Meter's vibrationmonitoring unit was certified by Boeing for the 737 aircraft and will be cutinto production units from the middle of 2008. Orders for over 850 737 aircraftwhich were placed in 2007 will drive substantial sales, with opportunities forretrofit programmes on the 3,000 Boeing aircraft in service. On the 777 aircraftVibro-Meter's advanced vibration monitoring unit is scheduled to cut into production fromApril 2008. The outlook for original equipment sales of condition and vibrationmonitoring is excellent with both Boeing and Airbus reporting order books ofover 3,400 aircraft each at December 2007. As aircraft and engine manufacturerstransition from vibration monitoring units (one unit per aircraft with limitedfunctionality) to condition monitoring units (one unit per engine and withricher functionality) our OE sales per aircraft will multiply over the comingyears. During the year sensing systems was appointed lead integrator for Rolls-Royce onthe engine sensor and ignition package for the BR 700 series engine for a nextgeneration business jet. This was a milestone in the division's strategy toprovide a competitively-priced mix of products, logistics and procurementexpertise that simplifies procurement for customers. With over 1,000 enginesexpected to be sold, this will deliver over £20m in OE sales as well as futurespares revenue. The increasingly tough operational, economic and environmental constraints arealso driving demand for smart engineering solutions from our energy sectorcustomers. Industrial revenues performed well, led by the energy sector, withsensing systems delivering to Siemens the 2,000th "VM600" condition monitoringunit, which optimises the performance of critical parts in large scale steam andgas turbine operations. The Siemens unit will monitor the world's largest gasturbine. We expect continued growth from this segment in 2008. Radatec, the hightech start-up offering a revolutionary microwave-based sensing system to monitorturbine blades, successfully tested its turbine tip clearance solution on aGeneral Electric electricity generation turbine resulting in significantincremental fuel efficiencies and carbon emission reductions. We expecttechnologies such as this to contribute to future growth in the division. A strong financial performance in 2007 was matched by high levels of recognitionby our customers. Awards included another Gold award from Airbus for customersupport, our seventh consecutive year as a top ten supplier and a PerformanceExcellence award from Boeing. We were also recognised as one of the threeSuppliers of the Year to the ARJ-21 Chinese regional jet. DEFENCE SYSTEMS FINANCIAL HIGHLIGHTS (at constant exchange rates) • Total revenues up 28% to £114.2m • Underlying operating profit of £16.6m, up 3% • Revenue and underlying operating profit excluding the 2006 FATS acquisition decreased by 4% and 21% respectively • Order intake up 33% on 2006 DIVISIONAL OVERVIEW The division had a mixed year in 2007. Overall revenue and profit were ahead ofthe previous year, eight manufacturing locations were reduced to five to createa more integrated, efficient business and the order intake was good. Taking outthe impact of FATS, however, revenue and profit declined for two principalreasons. Firstly the costs of the various moves in California and the UK, whichhave now been completed. Secondly, uncertainty around the timing of budgetaryapprovals in the US slowed orders to our training systems business, althoughthis improved late in the year. Our customers continue to recognise our extensive capabilities and have awardedus further substantial development contracts. These will result in future largescale production programmes. For example on the Future Combat Systems programmewe have been awarded three development contracts; further development of the120mm Autoloader for the Mounted Combat System, initial development of the 30mmautoloader for the Infantry Carrier Vehicle and the integrated cooling system toprovide electronics cooling on the MULE (Multifunctional Utility/Logistics andEquipment) vehicle programme. These development contracts are expected to resultin production contracts worth over $500m starting in 2014. Having won the twoautoloader contracts we believe that Meggitt is well placed to win furtherprogrammes for these gun variants on other vehicles, such as the ExpeditionaryFighting Vehicle. We also continued to win fresh production orders for the cooling system on theM1A2 SEP Abrams tank. This cooling system has been in continuous productionsince 2000, and the $36m order received in 2007 will ensure this programcontinues for the foreseeable future, with further orders anticipated tocomplete the retrofit on existing vehicles. The cooling system is also includedin new production, including the order from the Saudi Arabian armed forces. Asthe only ground combat vehicle thermal management system to have been proven incombat, we are in a strong position to win continuing orders on next generationground combat vehicles such as the M1A3 which is expected to commencedevelopment in 2009/10 and enter into service around 2016. With its good order intake and restructured facilities Defence Systems isexpected to recover in 2008. OUTLOOK Meggitt has delivered another outstanding set of results for 2007. Our strongproprietary positions, large installed fleet, and the positive trend in aircraftutilisation all underpin the aftermarket business which is a key driver of ourbusiness model. This, together with increasing military demand and record civilorder books, will ensure our markets remain healthy over the coming years. Withbusinesses trading well and the K&F integration making good progress, we areconfident of making good progress during the current year and beyond. CONSOLIDATED INCOME STATEMENTfor the year ended 31 December 2007 Notes 2007 2006 £m Restated £mContinuing operations Revenue 2 878.2 670.3 Cost of sales (493.4) (373.8) --------- --------- Gross profit 384.8 296.5 Net operating costs (242.1) (153.3) --------- --------- Operating profit* 2 142.7 143.2 Finance income 32.7 25.1Finance costs (70.0) (41.6) --------- ---------Net finance costs 6 (37.3) (16.5) Profit before tax from continuing operations** 105.4 126.7 Tax - UK (4.4) (10.0)Tax - Overseas (11.7) (22.4) --------- ---------Tax (16.1) (32.4) ========= =========Profit for the year from continuing operations 89.3 94.3attributable to equity shareholders ========= ========= Earnings per share (pence):Basic 7 14.6p 18.6pDiluted 14.5p 18.5p Dividends per share (pence):Paid in the year 7.58p 6.77pProposed in respect of the year 8 8.20p 7.36p Dividends (£m):Paid in the year 42.2 34.3Proposed in respect of the year 53.9 37.5 -------------------------------- ------ --------- ---------* Underlying operating profit 3 216.3 149.2** Underlying profit before tax 3 179.0 132.7-------------------------------- ------ --------- --------- CONSOLIDATED BALANCE SHEETas at 31 December 2007 Notes 2007 2006 £m Restated £mNon-current assetsGoodwill 10 1,071.2 563.4Development costs 10 57.7 31.9Programme participation costs 10 121.8 33.9Other intangible assets 10 742.2 219.0Property, plant and equipment 11 195.4 127.6Trade and other receivables 14.4 20.3Deferred tax assets 41.4 32.9Assets held for sale 18 14.5 - --------- --------- 2,258.6 1,029.0Current assetsInventories 204.6 154.6Trade and other receivables 214.6 172.3Derivative financial instruments 3.6 8.4Current tax recoverable 7.8 0.2Cash and cash equivalents 16 64.9 43.6 --------- --------- 495.5 379.1 Total assets 2,754.1 1,408.1 Current liabilitiesTrade and other payables (226.8) (199.6)Derivative financial instruments (0.9) -Current tax liabilities (43.1) (17.5)Obligations under finance leases 16 (0.5) -Bank and other borrowings 16 (16.7) (17.3)Provisions (18.0) (7.5) --------- --------- (306.0) (241.9) Net current assets 189.5 137.2 Non-current liabilitiesTrade and other payables (7.0) (4.2)Derivative financial instruments (10.7) (0.6)Deferred tax liabilities (276.5) (69.9)Obligations under finance leases 16 (5.0) -Bank and other borrowings 16 (858.1) (380.0)Provisions (72.5) (54.9)Retirement benefit obligations 12 (153.3) (97.2)Liabilities directly associated with assetsclassified 18 (1.6) -as held for sale --------- --------- (1,384.7) (606.8) Total liabilities (1,690.7) (848.7) --------- ---------Net assets 1,063.4 559.4 ========= ========= EquityShare capital 32.9 21.8Share premium 781.6 356.1Other reserves 14.1 14.1Hedging and translation reserves (6.8) (6.2)Retained earnings 241.6 173.6 --------- ---------Total equity attributable to equity shareholders 14 1,063.4 559.4 ========= ========= CONSOLIDATED CASH FLOW STATEMENT for the year ended 31 December 2007 Notes 2007 2006 Restated £m £m--------------------------------- ------ --------- ---------Cash inflow from operations before 214.3 140.3exceptional operating costsCash outflow from exceptional operating costs 4 (4.2) (1.8)--------------------------------- ------ --------- --------- Cash inflow from operations 15 210.1 138.5Interest received 5.0 1.2Interest paid (34.8) (17.7)Tax paid (23.4) (19.5) --------- ---------Cash inflow from operating activities 156.9 102.5 --------- --------- Purchase of subsidiaries 9 (563.6) (86.3)Net cash acquired with subsidiaries 9 11.5 4.7Capitalised internal development costs 10 (22.4) (14.5)Capitalised programme participation costs 10 (20.1) (7.5)Purchase of other intangible assets 10 (3.3) (3.6)Purchase of property, plant and equipment (40.5) (31.4)Proceeds from disposal of property, plant andequipment 2.6 4.5Proceeds from disposal of investmentsavailable - 0.8for sale --------- ---------Cash outflow from investing activities (635.8) (133.3) --------- --------- Dividends paid to Company's shareholders (35.6) (32.0)Issue of equity share capital 439.8 3.7Expenses of issue of equity share capital (9.8) -Proceeds from borrowings 520.7 96.5Debt issue costs (3.6) -Repayments of borrowings (406.0) (36.0) --------- ---------Cash inflow from financing activities 505.5 32.2 ========= ========= Net increase in cash and cash equivalents 16 26.6 1.4Cash and cash equivalents at start of year 43.6 45.5Exchange losses on cash and cash equivalents (5.3) (3.3) --------- ---------Cash and cash equivalents at end of year 16 64.9 43.6 ========= ========= CONSOLIDATED STATEMENT OF RECOGNISED INCOME AND EXPENSEfor the year ended 31 December 2007 Notes 2007 2006 £m Restated £m Currency translation differences (0.5) (7.1)Taxation recognised on currency translationdifferences - 7.2 2.0currentActuarial gains/(losses) 24.8 (4.6)Taxation recognised on actuarial (gains)/losses - (8.2) 1.3deferredLosses on cash flow hedges (10.2) -Taxation recognised on cash flow hedge losses - 2.9 -deferred --------- ---------Net income/(expense) recorded directly in equity 16.0 (8.4) Profit for the year 89.3 94.3 --------- ---------Total recognised income for the year 14 105.3 85.9 ========= ========= NOTES TO THE FINANCIAL STATEMENTS For the year ended 31 December 2007 1. Basis of preparation This document contains abridged preliminary financial information for the yearended 31 December 2007 together with comparatives. Comparatives have beenrestated where appropriate as described in note 19. The information presented has been prepared in accordance with those parts ofthe Companies Act 1985 applicable to companies reporting under InternationalFinancial Reporting Standards as adopted by the European Union ("IFRSs") and inaccordance with the FSA Listing Rules. It has been prepared under the historicalcost convention as modified by the revaluation of land and buildings andfinancial assets and liabilities (including derivative instruments) at fairvalue. The financial information contained in this document does not constitute Groupstatutory accounts as defined in Section 240 of the Companies Act 1985. It isbased on, and is consistent with, that in the Group's statutory accounts for theyear ended 31 December 2007 and those financial statements will be delivered tothe Registrar of Companies following the Company's Annual General Meeting. Theauditors' report on those accounts is unqualified and does not contain anystatement under Section 237 of the Companies Act 1985. Group statutory accounts for the year ended 31 December 2006 have been filedwith the Registrar of Companies. The auditors' report on those accounts wasunqualified and did not contain any statement under Section 237 of the CompaniesAct 1985. 2. Segmental analysisThe Group's primary segments are its business segments. 2007 2006 £m Restated £m RevenueAerospace Equipment 528.1 356.6Sensing Systems 235.9 218.9Defence Systems 114.2 94.8 --------- --------- 878.2 670.3 ========= ========= Underlying operating profit (note 3)Aerospace Equipment 158.2 92.3Sensing Systems 41.5 39.8Defence Systems 16.6 17.1 --------- --------- 216.3 149.2 ========= ========= Operating profitAerospace Equipment 94.3 89.0Sensing Systems 40.0 41.1Defence Systems 8.4 13.1 --------- --------- 142.7 143.2 ========= ========= 3. Reconciliations between profit and underlying profit Underlying profit is used by the Board to measure and monitor the underlyingtrading performance of the Group. It excludes certain items as shown below: Notes 2007 2006 £m Restated £m Operating profit 142.7 143.2 Exceptional operating costs a 5.4 1.5Amortisation of intangibles acquired in businesscombinations b 38.4 12.9Disposal of inventory revalued in business c 21.3 1.3combinationsFinancial instruments d 5.3 (12.1)Goodwill adjustments arising from recognition of e 3.2 2.4tax losses --------- ---------Adjustments to operating profit 73.6 6.0 --------- ---------Underlying operating profit 216.3 149.2 ========= ========= Profit before tax 105.4 126.7 Adjustments to operating profit per above 73.6 6.0Exceptional finance costs a 2.0 -Exceptional finance income a (2.0) - --------- ---------Adjustments to profit before tax 73.6 6.0 --------- ---------Underlying profit before tax 179.0 132.7 ========= ========= c) Profit for the year 89.3 94.3Adjustments to profit before tax per above 73.6 6.0Tax effect of adjustments to profit before tax (33.1) (3.4) --------- ---------Underlying profit for the year 129.8 96.9 ========= ========= a. Exceptional items relate to the integration of significant acquisitions anditems which by virtue of their size and nature are considered to benon-recurring (note 4). b. The Group excludes from its underlying profit the amortisation of intangibleassets acquired in business combinations (note 10). c. IFRS 3 requires finished goods acquired through a business combination to bevalued at selling prices less costs of disposal and a reasonable profitallowance for the selling effort. Work in progress acquired in a businesscombination is valued at selling prices less costs to complete, costs ofdisposal and a reasonable profit allowance for the work not yet completed. Thefair value of acquired inventory is thus significantly higher than the sameitems built post acquisition, the value of which includes no profit element.This increase arising from the revalued inventory is charged to the incomestatement as the inventory is consumed and is excluded from the Group'sunderlying profit figures. d. Although the Group uses foreign currency forward contracts to hedge againstforeign currency exposures, it has decided that the costs of meeting theextensive documentation required to be able to apply hedge accounting under IAS39 ("Financial Instruments: Recognition and Measurement") are not merited. TheGroup's underlying profit figures exclude amounts which would not have beenrecorded if hedge accounting had been applied. Where interest rate derivatives do not qualify to be hedge accounted, movementsin the fair value of these derivatives are excluded from underlying profit.Where interest rate derivatives do qualify to be accounted for as fair valuehedges, the difference between the movement in the fair values of thederivatives and in the fair value of fixed rate borrowings is excluded fromunderlying 3. Reconciliations between profit and underlying profit (continued) profit. Any gains or losses arising from the requirement to continue to measurefixed rate borrowings at fair value after the associated interest ratederivatives have matured or have been cancelled are also excluded fromunderlying profit (see note 5). e. 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. 4. Exceptional items Notes 2007 2006 £m £mExceptional operating costs:Integration of K&F Industries Holdings, Inc. ("K&F") a 4.7 -Integration of Firearms Training Systems Inc b 0.7 1.5("FATS") --------- --------- 5.4 1.5 ========= ========= Exceptional net finance costs:Rights issue - Interest on bank deposits c (2.0) -Rights issue c (1.6) -- Reduced interest payable net of costs of newfacilitiesRedemption of K&F 7.75% senior subordinated notes d 3.6 - --------- --------- - - ========= ========= Analysed as:Exceptional finance income (2.0) -Exceptional finance costs 2.0 - --------- --------- - - ========= ========= a. Costs incurred to date arise from eliminating K&F head office costs,combining our UK brakes maintenance, repair and overhaul facilities in the UKonto Dunlop's Coventry site, as well as the creation of a single brakes' salesand marketing organisation and detailed planning of the remaining integrationactivities. Further exceptional operating costs of £24.3 million are expected toarise over the next 3 years as the integration is completed. b. During the year the consolidation of FATS UK onto the Meggitt DefenceSystems Limited site in Kent has been completed. In the US, Caswell is in theprocess of being consolidated with FATS US at a new site in Atlanta. Theconsolidation will be completed in the first half of 2008. Cash expenditure on all exceptional operating costs was £4.2 million (2006: £1.8million). c. The Group announced on 6 March 2007 the proposed acquisition of K&Ffor an enterprise value of USD 1.8 billion funded in part by a rights issue withthe balance financed by a new debt facility. The reduction in net finance costsarising from the cash raised by the rights issue and finance costs associatedwith the new debt facilities have been treated as exceptional net finance incomein respect of the period between completion of the rights issue on 18 April 2007and completion of the acquisition on 22 June 2007. d. Following the acquisition of K&F the Group commenced a cash tenderoffer for K&F's USD 315 million aggregate principal amount of 7.75% seniorsubordinated notes which were due in 2014. This tender offer successfullycompleted on 3 August 2007. The premium payable on redemption being thedifference between the total consideration paid and the book value of the notesat the date the offer completed has been treated as exceptional finance costs. 5. Financial instruments An analysis of the financial instrument loss of £5.3 million (2006: gain of£12.1 million) is shown below: 2007 2006 £m £m Movement in the fair value of foreign currency forwardcontracts 5.8 (14.0)Impact of retranslating net foreign currency assets andliabilities at spot rate (0.7) 2.0Movement in the fair value of interest rate derivatives 0.2 0.1Movement in the fair value of associated fixed interestrate - (0.2)borrowings --------- ---------Financial instruments - loss/(gain) 5.3 (12.1) ========= ========= 6. Net finance costs 2007 2006 £m £m Interest on bank deposits 3.6 0.8Unwinding of interest on other receivables 0.9 1.0Expected return on retirement benefit scheme assets 27.0 22.8Other finance income 1.2 0.5 --------- ---------Finance income 32.7 25.1 ========= ========= Interest on bank borrowings (27.1) (10.9)Interest on USD 250 million senior notes (6.7) (7.3)Interest on 7.75% senior subordinated notes (1.7) -Interest on finance lease obligations (0.2) -Unwinding of discount on retirement benefit schemeliabilities (28.2) (21.8)Unwinding of interest on provisions (1.1) (1.0)Premium on redemption of 7.75% senior subordinated notes(note 4) (3.6) -Other finance costs (1.4) (0.6) --------- ---------Finance costs (70.0) (41.6) ========= ========= --------- ---------Net finance costs (37.3) (16.5) ========= ========= Analysed as:Exceptional finance costs (2.0) -Exceptional net finance income 2.0 -Interest related to retirement benefit schemes (1.2) 1.0Other trading interest (36.1) (17.5) --------- --------- (37.3) (16.5) ========= ========= 7. Earnings per share The calculation of earnings per ordinary share is based on profits of £89.3million (2006 as restated: £94.3 million) and on the weighted average of 612.6million (2006 as restated: 507.4 million) ordinary shares in issue during theyear ended 31 December 2007. Prior year comparatives have been adjusted for thebonus element of the rights issue as detailed in note 19. The calculation of diluted earnings per ordinary share is based on the sameprofits as used in the calculation of basic earnings per ordinary share. Theweighted average number of ordinary shares of 615.9 million (2006 as restated:510.7 million) used in the calculation is based on the weighted average numberused in the calculation of basic earnings per share adjusted for the effect ofoptions. Underlying earnings per share is based on underlying profit (see note 3) and iscalculated below: 2007 2006 Pence Restated Pence Basic earnings per share 14.6 18.6Add back effects of:Exceptional operating costs 0.6 0.2Amortisation of intangibles acquired in businesscombinations 3.3 1.8Disposal of inventory revalued in business combinations 2.1 0.2Financial instruments 0.6 (1.7)Exceptional finance income (0.5) -Exceptional finance costs 0.4 -Rights issue * 1.0 - --------- ---------Underlying earnings per share 22.1 19.1 ========= ========= * As referred to in note 4 the Group has excluded exceptional finance incomearising from the rights issue, for the period from when the rights issueproceeds were received on 18 April 2007, to 22 June 2007, the date when theacquisition of K&F was completed. For the purposes of underlying earnings pershare for 2007 the Group has also adjusted the weighted average number of sharesused to exclude the effect of the new shares for this same period. The weightedaverage number of shares used for underlying earnings per share in 2007 is 586.9million. 8. Dividends The Board is recommending a final dividend of 5.75p per ordinary share (2006 asrestated: 5.13p). Taken with the interim dividend of 2.45p (2006 as restated2.23p) paid in the year this gives a total dividend of 8.20p (2006 as restated:7.36p) representing an increase of 11.4%. Subject to approval at the AnnualGeneral Meeting to be held on 24 April 2008, the proposed dividend will be paidon 4 July 2008 to shareholders on the register at close of business on 14 March2008. In continuation of recent practice, shareholders will be offered theopportunity to elect for shares in lieu of cash for the final dividend. 9. Business combinations Goodwill arising on acquisition comprises £519.8 million in respect of theacquisition of K&F, which completed on 22 June 2007, and £0.5 million in respectof an increase in deferred consideration payable in respect of an acquisitioncompleted in 2006. The assets and liabilities of K&F at acquisition including goodwill arising onconsolidation were as follows: Book value Fair value £m £m Non-current assetsGoodwill 426.6 519.8Development costs (note 10) 7.0 7.0Programme participation costs (note 10) 75.2 75.2Other intangible assets (note 10) 25.6 559.9Property, plant and equipment (note 11) 52.4 47.3 --------- --------- 586.8 1,209.2 Current assetsInventories 45.3 66.3Trade and other receivables 26.6 25.4Derivative financial instruments 0.5 0.5Cash and cash equivalents 11.5 11.5 --------- --------- 83.9 103.7 Total assets 670.7 1,312.9 Current liabilitiesTrade and other payables (37.8) (41.0)Current tax liabilities (9.1) (17.0)Obligations under finance leases (note 16) (0.4) (0.4)Bank and other borrowings (note 16) (5.7) (5.7)Provisions (6.2) (6.2) --------- --------- (59.2) (70.3) Net current assets 24.7 33.4 Non-current liabilitiesTrade and other payables (0.8) (0.9)Deferred tax liabilities (2.8) (209.2)Obligations under finance leases (note 16) (5.0) (5.0)Bank and other borrowings (note 16) (338.7) (356.9)Provisions (1.5) (25.0)Retirement benefit obligations (note 12) (82.0) (82.0) --------- --------- (430.8) (679.0) Total liabilities (490.0) (749.3) --------- ---------Net assets acquired 180.7 563.6 ========= ========= £m ---------Total consideration satisfied in cash (including costs) 563.6 ========= 10. Intangible assets Goodwill Development Programme Other intangible assets costs participation costs £m £m £m £m Balance at 1January 2007: 598.9 31.9 - 171.6As previously reportedRestatement(note 19) (35.5) - 33.9 47.4 -------- ---------- ---------- ---------As restated 563.4 31.9 33.9 219.0 Exchange rateadjustments (0.8) 1.2 0.4 1.5Businessesacquired (note9) 520.3 7.0 75.2 559.9Additions - 22.4 20.1 3.3Transfer toassets held forsale (8.5) (1.0) - (0.1)Adjustmentarising fromrecognition oftax losses (3.2) - - -Amortisationcharge * - (3.8) (7.8) (41.4) -------- ---------- ---------- ---------Balance at 31December 2007 1,071.2 57.7 121.8 742.2 ======== ========== ========== ========= * Of the £41.4 million amortisation of other intangible assets £38.4 millionrelates to the amortisation of intangible assets arising in businesscombinations and has been excluded from underlying profit (note 3). 11. Property, plant and equipment 2007 2006 £m £m Balance at 1 January 127.6 116.9Exchange rate adjustments 1.6 (4.5)Businesses acquired (note 9) 47.3 1.0Additions 41.0 31.8Transfer to assets available for sale (1.2) -Disposals (2.1) (2.9)Depreciation charge (18.8) (14.7) --------- ---------Balance at 31 December 195.4 127.6 ========= ========= 12. Retirement benefit obligations 2007 2006 £m £m Balance at 1 January (97.2) (98.2)Exchange rate adjustments (0.1) 2.4Businesses acquired (note 9) (82.0) -Charged to income statement (13.3) (8.3)Contributions 14.5 11.5Actuarial gains/(losses) 24.8 (4.6) --------- ---------Balance at 31 December (153.3) (97.2) ========= ========= Comprising:Fair value of scheme assets 471.4 395.8Fair value of scheme liabilities (624.7) (493.0) --------- ---------Balance at 31 December (153.3) (97.2) ========= ========= 12. Retirement benefit obligations (continued) 2007 2006 Principal financial assumptions UK schemes:Discount rate 5.65% 5.05%Inflation rate 3.25% 2.90%Current life expectancy in years: Member aged 65 (Male) 20.1 to 21.5 20.1 Overseas schemes:Discount rate 6.40% 5.75%Salary increases 4.00% N/AHealthcare cost increases * N/ACurrent life expectancy in years: Member aged 65 (Male) 18.8 17.6 * Healthcare cost increases are assumed to be 9.5% for 2008 trending down to5.0% by 2013. Prior to the acquisition of K&F the Group did not have significantpost-retirement healthcare benefit obligations. Regulations in the UK and US require repayment of pension deficits over a periodof time. This will require cash payments into the respective schemes in additionto normal contributions. These additional cash payments, which will not be acharge to the income statement, continue to be discussed with the relevantschemes' trustees and we estimate they will be less than £20 million (pre-tax)per annum. 13. Share capital 2007 2006 No. m No. m Number of shares outstanding at start of year 436.1 433.2Rights issue 218.2 -Issued on exercise of SAYE and executive share options 1.9 2.2Scrip dividend 2.1 0.7 --------- ---------Number of shares outstanding at end of year 658.3 436.1 ========= ========= 14. Summary of movements in equity 2007 2006 £m Restated £m At 1 January 559.4 496.7Total recognised income for the year 105.3 85.9Employee share schemes:Value of services provided 4.3 5.2Proceeds from shares issued 3.4 3.7Dividends (35.6) (32.0)Rights issue 426.6 -Purchase of own shares - (0.1) --------- ---------At 31 December 1,063.4 559.4 ========= ========= 15. Cash inflow from operations 2007 2006 £m Restated £m Profit for the year 89.3 94.3Adjustments for:Tax 16.1 32.4Depreciation and amortisation 71.8 37.0Profit on disposal of property, plant and equipment (0.5) (1.6)Net finance costs 37.3 16.5Financial instruments 5.3 (12.1)Adjustment to goodwill on recognition of tax losses 3.2 2.4Changes in working capital (12.4) (30.4) --------- ---------Cash inflow from operations 210.1 138.5 ========= ========= 16. Reconciliation of net cash flow to movement in net debt 2007 2006 £m £mMovement in the year in:Cash and cash equivalents 26.6 1.4Bank and other borrowings (111.1) (60.5) --------- ---------Change in net debt resulting from cash flows (84.5) (59.1) Arising on acquisition of businesses (note 9) (368.0) (15.5)Other non-cash movements (5.9) (0.8)Exchange differences (3.3) 36.0 --------- ---------Movement in net debt in the year (461.7) (39.4) Net debt at 1 January (353.7) (314.3) --------- ---------Net debt at end of year (815.4) (353.7) ========= =========Disclosed as:Cash and cash equivalents 64.9 43.6Obligations under finance leases - current (0.5) -Obligations under finance leases - non-current (5.0) -Bank and other borrowings - current (16.7) (17.3)Bank and other borrowings - non-current (858.1) (380.0) --------- ---------Net debt at end of year (815.4) (353.7) ========= ========= 17. Analysis of net debt In addition to cash and cash equivalents of £64.9 million (2006: £43.6 million)the Group also has committed undrawn borrowing facilities of £205.6 million(2006: £110.4 million). The weighted average maturity profile of our committedfacilities is 3.8 years (2006: 4.4 years). The Group also has access tosignificant lines of uncommitted facilities. The maturity profile of the Group'scommitted facilities at the year end is shown below: 2007 2006 £m £m In 2010 341.6 347.4In 2012 587.7 -In 2013 90.4 92.0In 2015 35.2 35.7 --------- ---------Committed facilities 1,054.9 475.1 ========= ========= The Group's banking covenants are still measured under UK GAAP and, on thisbasis, interest cover for the year ended 31 December 2007 was 6.5 times(covenant greater than 3.0). Net debt to EBITDA as at 31 December 2007 was 2.7times (covenant less than 4.0). Interest cover (based on underlying operatingprofit) was 5.8 times (2006: 9.0 times). 18. Assets and liabilities held for sale The disposal of S-Tec Corporation ("S-Tec") was announced on 21 November 2007subject to certain regulatory clearances and subsequently completed on 3 January2008 for a consideration of USD 38 million. Accordingly at 31 December 2007 therelated assets of £14.5 million and liabilities of £1.6 million have beenclassified as a disposal group held for sale and are presented separately in thebalance sheet. 19. Restatement of prior years Finalisation of fair values of prior year acquisitions IFRS 3 requires fair values of assets and liabilities acquired to be finalisedwithin 12 months of the acquisition date with the exception of certain deferredtax balances (note 3). All fair value adjustments are required to be recordedwith effect from the date of acquisition and consequently result in therestatement of previously reported financial results. During 2007 the Group finalised the fair values of three acquisitions completedin 2006 and this resulted in adjustments to the profit for the year ended 31December 2006 and to the balance sheet at that date. The impact of theadjustments is shown below: Year ended 31 December 2006 £m Profit for the year as previously reported 96.5Amortisation of intangibles acquired in business combinations (2.1)Disposal of inventory revalued in business combinations (1.2)Tax effect of adjustments above 1.1 ---------Profit for the year as restated 94.3 ========= 19. Restatement of prior years (continued) 31 December 2006 £m Goodwill as previously reported 598.9Intangibles acquired in business combinations (51.2)Revaluation of inventory acquired in business combinations (1.2)Other 1.3Tax effect of adjustments above 15.6 ---------Goodwill as restated 563.4 ========= Programme participation costs Programme participation costs represent costs incurred by the Group associatedwith Original Equipment Manufacturers on new aircraft where the Group hasprincipal supplier status. These costs include cash payments and the supply ofinitial manufactured parts, typically on a free of charge or deeply discountedbasis. Programme participation costs have been reclassified from otherreceivables to intangible assets. Programme participation costs were previouslyreferred to as "deferred costs" in the Group's 2006 consolidated financialstatements. 31 December 2006 £m As previously reported:Other intangible assets 1.7Trade and other receivables - non-current 28.9Trade and other receivables - current 3.3 --------- 33.9 =========As restated:Programme participation costs 33.9 ========= Rights issue Earnings per share and dividends per share data for the prior year have beenrestated for the bonus element of the rights issue approved by the shareholdersof the Group in 2007. The factor applied to reflect the bonus element was1.16814. - E N D S - This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
MGGT.L