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Company information
Meggitt PLC
Atlantic House
Aviation Park West
Bournemouth International Airport
Christchurch
Dorset BH23 6EW
United Kingdom
T +44 (0) 1202 597 597
F +44 (0) 1202 597 555
www.meggitt.com
Registered in England and Wales
Company number 432989
ANNUAL REPORT
AND ACCOUNTS
2012
Contents
01-41
Business review
63-113 Financial statements
Statutory financial statements including
the independent auditors’ report
Group financial statements
Independent auditors’ report to the members
of Meggitt PLC
Consolidated income statement
Consolidated statement of comprehensive income
Consolidated balance sheet
Consolidated statement of changes in equity
Consolidated cash flow statement
Notes to the financial statements
Company financial statements
Independent auditors’ report to the members
of Meggitt PLC
Company balance sheet
Notes to the financial statements of the Company
63
64
65
66
67
68
69-105
106
107
108-113
114–116 Supplementary information
114
115-116
Five-year record
Investor information
The Meggitt PLC annual report and accounts
2012 can be downloaded from www.meggitt.com
01
02
03
04-05
06-11
12-18
19-30
31-36
37-41
Introduction
Financial highlights
Chairman’s statement
Group strategy
Meggitt divisions
Market review
Performance review
Corporate responsibility
Principal risks and uncertainties
42-62
Governance
42
43
44-46
47-51
52-62
Contents
Board of directors
Directors’ report
Corporate governance report
Remuneration report
Meggitt deploys its extreme environment
engineering in the aerospace, defence and
energy markets.
Front cover images, left to right: Airbus A380
commercial transport; Apache Attack helicopter;
Petrobras floating, production, storage and
offloading (FPSO) vessel, Santos Basin,
offshore Brazil.
Below: see case studies on how we apply our latest
technology to airframes, military land vehicles,
offshore gas processing and aero-engines on
pages 10, 20, 24 and 28 respectively.
Designed by Hybrid Creative
Typeset by Orb Solutions
Printed by The Colourhouse
The papers used for the production of this report are
certified by the Forestry Stewardship Council® and are
elemental chlorine free. They are produced at paper
mills certified to ISO 14001 and registered to EMAS.
MEGGITT PLC REPORT AND ACCOUNTS 2012
BUSINESS REVIEW
1
Headquartered in the UK, Meggitt PLC is
a global engineering group specialising in
extreme environment components and
sub-systems for civil aerospace, military
and energy markets.
Nearly 11,000 people are employed across facilities in Asia,
Europe and North and Central America and in regional bases
in Brazil, India and the Middle East.
Meggitt’s civil aerospace interests cover large commercial jets,
regional aircraft, business jets, helicopters and general aviation.
Its military markets encompass all aircraft types, land systems,
naval platforms and aerial, land-based and marine threat
simulation for personnel training and weapons systems
development. Training extends to law enforcement and security
organisations.
The group’s growing presence in energy is driven by our fluid
controls, heat management and sensing and monitoring
capabilities, many of which are deployed in rotating power
generation equipment to help reduce maintenance costs, fuel
consumption and carbon emissions.
MEGGITT PLC REPORT AND ACCOUNTS 2012
BUSINESS REVIEW
2
Financial highlights
Meggitt’s strong 2012 results continued
to demonstrate the breadth and resilience
of its portfolio. Our equipment is installed
on around 59,000 aircraft worldwide—a
growing fleet—with a stable aftermarket
revenue stream stretching out for many
decades. While a 10% rise in revenues on
2011 can be attributed to growth in all
our markets, our energy businesses
performed exceptionally well. Meggitt
continued to invest significantly in
research and development—£122.0 million
(7.6% of revenues).
Revenue
(£ millions)
1,605.8
12 1,605.8
11
1,455.3
10
1,162.0
09 1,150.5
08 1,162.6
Underlying profit before tax
(£ millions)1
362.8
12 362.8
11
323.0
10
256.1
09 234.2
08 243.3
Cash inflow from operations before
exceptional operating items
(£ millions)
408.8
12 408.8
11
395.8
10
331.3
09 341.7
08 295.4
Dividends per share
(pence)
Underlying earnings per share
(pence)1
Order intake
(£ millions)
11.80
12 11.80
11
10.50
10
9.20
09 8.45
08 8.45
36.2
12 36.2
11
31.9
10
27.8
09 25.3
08 26.5
1,635.4
12
1,635.4
11
1,524.8
10
1,212.4
09
1,096.2
08
1,152.9
1 The definition of ‘underlying’ is provided in
notes 10 and 15 to the financial statements
on pages 81 and 83 respectively.
Chairman’s statement
MEGGITT PLC REPORT AND ACCOUNTS 2012
BUSINESS REVIEW
3
base of installed equipment and securing
future aftermarket revenues. Significant
contract wins included engine sensor
packages and thermal management
equipment on Safran’s popular LEAP
engine; fire protection and control
equipment on numerous military and civil
programmes; long-term agreements with
Sikorsky for composite components; and
another major contract in offshore gas
processing from Petrobras for our
innovative printed circuit heat exchangers.
Capital expenditure on property, plant
and equipment and other intangible
assets increased to £63.5 million (2011:
£52.1 million). We doubled the capacity of
our printed circuit heat exchanger facility
in Poole, UK. In California, we have signed
the lease on a new building to co-locate
our North American sensing businesses
onto a new campus in Irvine and
preparations are underway to combine
our North American fire detection and
fire suppression businesses onto our
established campus in Simi Valley. We
continue to implement common ERP and
other IT systems across Meggitt and
launched a major initiative to raise our
operational performance and increase
our organic growth rate.
Board of directors
We increased the international diversity
of our Board in the Autumn with the
appointment of two new non-executive
directors.
Guy Berruyer, a French national, is Group
Chief Executive of The Sage Group plc,
whose French division he joined as Chief
Executive in 1997. Guy’s early career was
spent with software and hardware vendors
in management roles at French and
pan-European levels.
Philip Cox, a chartered accountant, is
Chief Executive Officer of International
Power, which he joined as Chief Financial
Officer in 2000. Before that, Philip was
Senior Vice President for Operational
Planning at Invensys plc and Finance
Director of Siebe PLC.
In January 2013, Chief Executive Terry
Twigger announced his intention to retire.
Terry has been responsible for growing the
group from around 4,000 employees with
revenues of under £400 million to almost
11,000 employees with revenues of
£1.6 billion. His legacy is highly
significant—a world-class global
engineering business with solid
foundations and continuing enormous
potential. Stephen Young, whose
contribution as Group Finance Director
has been outstanding, succeeds him
from May 2013.
Our people
May I take this opportunity to thank
all Meggitt employees for their efforts in
what has been a year of further strong
growth. The excellent preparatory work
which has been undertaken during the
year leaves us in excellent shape for
2013’s rolling implementation of the
group-wide standardised and upgraded
production system. In particular, may I
extend my gratitude to our outgoing
CEO, Terry Twigger.
Group outlook
We continue to focus on organic growth,
supplemented from time to time with
targeted acquisitions where we can
identify value-creating opportunities. Our
energy markets remain strong with
sensing and monitoring, fluid control and
heat exchangers continuing to experience
high demand. Sales of new civil aircraft
remain strong. Air traffic growth remains
steady, sustaining demand for our
aftermarket products and services.
The potential sequestration of US defence
funding remains an uncertainty. However,
we believe our flexible manufacturing base
will enable us to redirect activity to areas
where demand is strong and we are
confident that retrofit, outsourcing and
upgrade opportunities will continue from
greater utilisation and extension of
existing programmes.
We look forward to continued growth in
2013 and beyond.
Sir Colin Terry Chairman
We continue to grow the
business by investing in
people, technologies and
facilities
Delivering our strategy
During 2012, Meggitt developed its
strong market positions further. Total
orders rose by 7% and total revenues
by 10% compared to 2011. Underlying
earnings per share were up 13% to
36.2 pence. We generated net cash of
£116.7 million (2011: outflow of £30.1
million). Net debt decreased to
£642.5 million (2011: £788.4 million) and
net debt to EBITDA reduced to 1.3 times
(2011: 1.7 times). In consequence, the
Board is proposing an increase to the
full-year dividend of 12% to 11.80 pence.
The fit between Pacific Scientific
Aerospace and Meggitt has proved to be
much better than we first thought,
enabling us to increase our synergy
target to a run-rate of $25 million savings
per annum by 2014.
Investing for growth
We continue to grow the business by
investing in people, technologies and
facilities.
In 2012, we spent 7.6% of revenues, or
£122.0 million (2011: £110.5 million) on
R&D. We invested £36.1 million (2011:
£33.2 million) on supplying free equipment
to new aircraft and programme
participation contributions, growing our
MEGGITT PLC REPORT AND ACCOUNTS 2012
BUSINESS REVIEW
4
Group strategy
Our high-performance
culture is dedicated to
meeting customer
requirements, underpinned
by financial rigour and
ethical best practice.
Meggitt aims to deliver upper quartile
shareholder returns through smart
engineering for extreme environments—
innovative, high performance, highly
reliable products that meet the demands
of critical applications in civil aerospace,
military and energy markets. Maintaining
this focus has enabled us to deliver
another strong set of results in 2012.
Focused investment
We invest in the design and manufacture
of products operating in extreme
environments and subject to demanding
certification requirements. This enables
us to win positions on new programmes,
typically on a sole-source basis,
generating aftermarket revenues for the
life of these programmes, which can be
up to 40 years in many cases.
We align our research and development
investment with our customers’
programmes and technology plans.
To meet the requirements of original
equipment manufacturers and operators,
we invest in manufacturing capacity and
regional customer support. Where
appropriate, we seek to acquire
companies that enhance our capabilities
and fast-track product and market
development.
We continue to transfer technologies into
adjacent markets. Strong growth in our
energy businesses has been supported by
the application of our aerospace-derived
condition monitoring capability into
industrial rotating machinery. Our
compact, diffusion-bonded heat
exchanger technology has moved beyond
its established oil and gas markets to
floating liquefied natural gas vessels
and waste heat recovery. We see a
significant opportunity for growth
from our industry-leading sensing
technologies in healthcare through
precision sensing components for
non-invasive medical procedures.
Achieve operational excellence
The transformation initiative, launched in
2009, has delivered substantial group-
wide improvements including a flatter,
capability-driven organisation structure
and a leaner, more flexible manufacturing
footprint. Our centralised customer
relationship teams and strengthened
engineering organisation enable us to
engage with customers earlier in the
technology development process, and at a
higher level. This has made us more
responsive to changing customer
demands and heightened customer
awareness of our full range of products
and capabilities.
In 2012, we started to invest in raising the
bar, an on-time delivery and quality
improvement initiative. This paved the
way for 2013’s rolling launch of the
Meggitt Production System, a common
Meggitt approach to the application of
lean tools and quality management. This
group-wide productivity drive will ensure
every business meets the standards of
Our strategy
Focus on components and sub-systems
for harsh environments
Invest in products with high technology
content to secure sole-source positions
with high aftermarket value
Deliver growth through organic
investment and acquisition
MEGGITT PLC REPORT AND ACCOUNTS 2012
BUSINESS REVIEW
5
ability to continue on its growth
trajectory, not least as I hand over the
reins to our Finance Director, Stephen
Young, who has played a pivotal role in
developing group strategy over the last
nine years.
Aided by an established senior
management team and a great workforce,
Stephen is committed to growing the
group further, reinvesting our income
stream into building and reinforcing our
infrastructure, extending capabilities and
enhancing the skills and experience of
our managers and employees. In so
doing, he will ensure that Meggitt
continues to deliver exemplary service to
its customers, rewarding careers to our
employees and healthy returns to
shareholders.
Terry Twigger Chief Executive
excellence expected by our customers
—and meets them consistently. We
are aiming to create a continuous
improvement culture that will serve all
our businesses and enable our people to
deliver sustainable productivity gains.
While customers will see significant
improvements, Meggitt will also benefit
from enhanced cost-competitiveness
through lower inventories, a leaner and
more effective supply chain and lower
cost of quality. Employing these
principles rigorously throughout the
group will enable us to drive our organic
growth rate higher than the medium term
target of 6 to 7%.
Across all functions, Meggitt continues
to strive for excellence. We maintain a
high-performance culture, dedicated to
meeting customer requirements,
underpinned by financial rigour and
ethical best practice.
Building our future
This is my last annual report and
accounts as Chief Executive of Meggitt.
Since joining the group in 1993, I have
seen significant change. We have grown
from a diverse engineering conglomerate
with a market capitalisation of £200
million to a global aerospace and energy
business with a market capitalisation
exceeding £3 billion. The integration of
Pacific Scientific, one of many
transforming acquisitions, is largely
complete and I am confident in Meggitt’s
How we achieve our strategy
1. Innovate in our chosen
technologies and markets
4. Meet the requirements of
our global customer base
2. Continue to strengthen
5. Maintain a culture of ethical
partnerships with customers
and financial rigour
3. Achieve operational excellence
by continually improving
To see how Meggitt’s strategy
fundamentals are reflected at
divisional level, see over.
The results of strategy
implementation are outlined
in our performance review on
pages 19 to 30.
MEGGITT PLC REPORT AND ACCOUNTS 2012
BUSINESS REVIEW
Group overview
6
Meggitt Aircraft Braking Systems
Revenue (£ millions)
% of group revenue
311.2
19.4
Underlying operating
profit (£ millions)
117.8
Meggitt Control Systems
Revenue (£ millions)
% of group revenue
214.9
13.4
Underlying operating
profit (£ millions)
50.1
Meggitt Polymers & Composites
Revenue (£ millions)
% of group revenue
187.2
11.6
Underlying operating
profit (£ millions)
34.5
Meggitt Sensing Systems
Revenue (£ millions)
% of group revenue
240.2
15.0
Underlying operating
profit (£ millions)
36.3
Meggitt Equipment Group
Revenue (£ millions)
% of group revenue
652.3
40.6
Underlying operating
profit (£ millions)
155.6
Revenue by market
Total revenue (£ millions)
1,605.8
Civil aerospace
Military
Energy and other
714.8
624.7
266.3
45%
39%
16%
Revenue by destination
Total revenue (£ millions)
1,605.8
North America
UK
Mainland Europe
Rest of World
871.6
162.4
343.7
228.1
54%
10%
22%
14%
Employees by region
Number of employees
10,980
North America
UK
Mainland Europe
Rest of World
6,011
2,597
1,593
779
55%
24%
14%
7%
R&D as a % of revenue
12 7.6
11
7.6
10
7.2
09
7.4
08 6.8
Meggitt divisions
MEGGITT PLC REPORT AND ACCOUNTS 2012
BUSINESS REVIEW
7
Meggitt Aircraft Braking Systems
Meggitt Control Systems
A leading supplier of aircraft wheels, brakes
and brake control systems.
A leading supplier of pneumatic, fluid control,
thermal management and electro-mechanical
equipment and sub-systems.
Markets
Markets
• Civil aerospace
• Fixed and rotary wing military aircraft
• Civil aersopace
• Military aircraft and ground vehicles
• Marine and industrial energy
• Ground fuelling
Capabilities
• Wheels and brakes
• Control—brake, nose wheel steering and landing gear
• Monitoring systems
• Aftermarket services
Capabilities
• Heat management
• Control valves and sub-systems
• Electro-mechanical controls
• Environmental control
• Fuel handling
›› Growth strategy
›› Growth strategy
• Secure positions, sole source where possible, on new
aircraft programmes
• Develop market-leading technologies—electric braking
• Deliver weight-saving aerospace products with more
accurate control that can withstand higher engine
temperatures
and innovative, long-life carbon heat sink materials
• Develop products that enable customers to meet low
• Expand our ATA-32 landing gear sub-systems control and
emission regulations
monitoring capability
• Create products that optimise industrial power
• Leverage low-cost manufacturing capability
generation plant efficiency
• Leverage low-cost manufacturing capability
MEGGITT PLC REPORT AND ACCOUNTS 2012
BUSINESS REVIEW
Meggitt divisions
8
Meggitt Polymers & Composites
Meggitt Sensing Systems
A leading specialist in fuel containment, engineered
aircraft sealing solutions and technical polymers,
electro-thermal ice protection and complex
composite structures and assemblies.
A leading provider of high performance sensing
and condition-monitoring solutions for high-value
rotating machinery and other assets.
Markets
Markets
• Civil aerospace
• Military aircraft and ground vehicles
• Missile systems and UAVs
• Nuclear, marine, heavy transportation and oil and
gas sectors
• Civil aerospace
• Military: fixed wing and rotary aircraft, ships, missiles
• Energy
• Test and measurement
Capabilities
Capabilities
• Life-saving fuel containment technologies for aerospace and
ground vehicles
• Lightweight integral fuel tank sealants
• Smart electro-thermal ice protection with energy-saving
proportional control
• Complex composite structures
• Aircraft and technical sealing solutions
• High-performance sensing in extreme environments
• Condition-monitoring for air and land-based machinery
›› Growth strategy
›› Growth strategy
• Extend aerospace and ground combat vehicle applications for
• Continue to invest in high-performance sensing and
IED and blast-resistant technologies
• Lead in engineered aircraft sealing solutions including
aerodynamic and fire seals
• Become a leading supplier of electro-thermal ice protection
for fixed wing aircraft
• Expand composites and assembly business into complex
aircraft structures
• Leverage our low-cost high quality manufacturing capability
advanced condition-monitoring systems that reduce aircraft
operating costs, optimise maintenance and reduce pollution
• Apply our expertise beyond aero-engines across the
airframe to support integrated vehicle health management
solutions
• Focus on energy markets through targeted solution-selling
and an expanding regional presence
• Invest in precision sensing technology for non-invasive
medical procedures
MEGGITT PLC REPORT AND ACCOUNTS 2012
BUSINESS REVIEW
9
Meggitt Equipment Group
Created to enable a set of strong, technologically-
distinct businesses to market their offerings to
specialist customers, while benefiting from the wider
Meggitt group’s investment in shared services and
common processes. In April 2011, Pacific Scientific
Aerospace joined the Meggitt Equipment Group,
bringing capabilities in power generation, linear
motion control, fire suppression, safety and security
and associated repair and overhaul services.
Markets
• Civil and military aerospace
• Defence and security
• Energy
• Automotive and industrial
60°
60°
Capabilities
• Aircraft fire protection and control systems
• Avionics
• Combat systems (ammunition-handling, military electronics
cooling and countermeasure launch and recovery systems)
• Live-fire and simulation training
• Heat transfer equipment for off-shore oil and gas
• Power generation
• Linear motion control
• Aircraft safety and security
• Automotive and industrial control electronics
›› Growth strategy
Fire protection
• Integrate fire detection with fire suppression to deliver a
Live-fire and simulation training
• Become a preferred supplier for integrated and networked
complete fire protection capability
Power
• Leveraging our capabilities in power generation, conversion
and storage to support future more electric aircraft
Heat transfer
• Continue to drive the market for our compact, high-pressure,
high-duty heat exchangers and to maintain our market lead
in this unique technology
• Explore options in chemical reformer, waste heat
live and virtual training packages for the armed services and
security and law enforcement organisations worldwide
Combat systems
• Provide smart thermal management solutions to
military electronics cooling problems
• Extend our automatic ammunition-handling capability into
larger calibre weapons
Avionics
• Continue to build our position in state-of-the-art
management and nuclear markets
secondary flight displays
MEGGITT PLC REPORT AND ACCOUNTS 2012
BUSINESS REVIEW
10
All pumped up
Aircraft tyres contain an enormous
amount of stored energy which if
released quickly, such as in a tyre burst,
can cause significant damage to an
aircraft and its systems.
MEGGITT PLC REPORT AND ACCOUNTS 2012
BUSINESS REVIEW
11
Expanding responsibility for aircraft safety and monitoring
Meggitt’s flight deck-based tyre pressure monitoring system extends the
scope of our responsibility for aircraft safety and monitoring in line with
our brake control development strategy. We can now integrate ten control,
monitoring or indication functions in our systems. The multiple safety and
maintenance benefits of remote real-time tyre pressure data to flight and
maintenance crews are offered on Bombardier Aerospace’s CSeries* and
other regional aircraft.
A new safety tool
Reducing the frequency of labour-intensive manual checks, our tyre
pressure monitoring system can be used to ensure that maintenance
procedures are fully and accurately carried out, avoiding the potentially
serious dangers associated with underinflated tyres. At the same time, it
will reduce the cost of maintenance associated with tyres exhibiting poor
wear and tear after use at sub-optimal pressures.
Warnings in the air and on the ground
After calculating tyre pressure, the system will generate warnings or
alarms about abnormal tyre inflation relative to the threshold of the
aircraft’s configuration and phase of flight. Tyre pressure anomalies will
be indicated via the aircraft’s engine indication and crew alerting system
(EICAS) and associated flight deck displays before take-off and landing,
enabling flight crews to make informed safety-critical decisions based
on aircrew operating procedures. Ground crews will be alerted to the
requirement to inflate a given tyre correctly via the aircraft’s health and
monitoring system.
* Trademarks of Bombardier Inc. or its subsidiaries
MEGGITT PLC REPORT AND ACCOUNTS 2012
BUSINESS REVIEW
Market review
12
Meggitt’s portfolio of engineered products and services for extreme
environments focuses on three core markets—civil aerospace
(45%); military (39%); and energy and speciality products (16%).
This breadth and global reach enables us to offset negative
conditions in individual sectors and regions. Meggitt performed
strongly in 2012 despite challenging market conditions, sustaining
confidence in the group’s robust business model and our ability to
deliver average revenue growth of 6 to 7% per annum over the
medium term.
With growing deliveries of new aircraft and increasing air traffic,
we expect good growth in our civil aerospace markets in 2013.
Energy should also continue to be strong. Military markets are
more uncertain, with 61% of revenues coming from the US, where
potential spending cuts are not defined. Overall, conditions in our
end markets would suggest mid-single-digit revenue growth in 2013.
Summary
Based on current market indicators and at constant exchange rates,
the group expects to deliver revenue growth in the mid-single-digits
in 2013 and to average 6 to 7% over the medium term.
Revenue by destination
Total revenue (£ millions)
1,605.8
North America
UK
Mainland Europe
Rest of World
871.6
162.4
343.7
228.1
54%
10%
22%
14%
MEGGITT PLC REPORT AND ACCOUNTS 2012
BUSINESS REVIEW
13
Civil aerospace
Military
Energy and other markets
Meggitt has won engine sensor
packages measuring vibration, shaft
speed, critical temperatures and oil
level from Snecma (Safran Group) for
its LEAP-1A, 1B and 1C engines. The
deal will generate revenues of around
$500 million over the lifetime of the
Boeing (737MAX), Airbus (A320neo)
and COMAC (C919) aircraft the LEAP
variants will power.
Sikorsky Aircraft Corporation
entered into a $129 million, five-year
agreement with Meggitt’s polymers
and composites facility in Rockmart,
Georgia, USA covering fuel tanks,
electro-thermal ice protection
equipment, secondary composite
structures and interiors for all
Sikorsky’s production military
helicopters, including the
Black Hawk.
Petrobras has awarded a
$100 million-plus contract for
over 200 of Heatric’s innovative
high-performance compact printed
circuit heat exchangers. The
equipment will feature in gas
compression, gas injection and CO2
separation modules—26 heat
exchangers for each of eight floating
production, storage and offloading
vessels in remote Brazilian offshore
locations.
45%
39%
16%
MEGGITT PLC REPORT AND ACCOUNTS 2012
BUSINESS REVIEW
Market review – Civil aerospace
14
Civil aerospace revenues account for 45% of our business and
are derived from products and sub-systems installed on almost
every jet airliner, regional aircraft and business jet in service.
The global fleet of civil aircraft on which Meggitt has content
continues to demonstrate good growth, and currently totals
around 40,000 aircraft.
Established aircraft, such as the Boeing 737/777, Airbus A320/
A330, Embraer E170/190 and several business jet programmes,
continue to see strong build rates. The re-engined variants of the
Boeing and Airbus narrowbody aircraft, for which we have
secured several significant contracts, have attracted exceptional
orders in recent years. Excellent growth on new aircraft
programmes such as the Boeing 787, Airbus A350XWB and
Gulfstream G650 also contribute to Meggitt’s estimated original
equipment (OE) revenue growth of 7 to 8% per annum over the
next five years.
Typically, Meggitt’s products are located in the more demanding
areas of an aircraft—engines, undercarriages and external
structures experiencing extremes of temperature and vibration.
We have significant sole-source positions on aircraft that can be
in service for many decades. This leads to dependable, ongoing
demand for aftermarket spares and repairs, which represent over
60% of Meggitt’s civil aerospace revenues.
Growth in global air traffic drives demand in the large jet and
regional aircraft aftermarket. In 2012, traffic growth, expressed in
Available Seat Kilometres, grew at approximately 3.5% and is
expected to grow by about 5% on average over the next five years in
line with the long term trend. Business jet utilisation remained
steady year on year, and the increasing globalisation of the fleet is
expected to yield future growth. Aftermarket demand decoupled
from traffic growth in 2012 as our customers reduced inventories.
We expect the relationship between traffic growth and spares
demand to be restored during 2013. With our growing fleet,
increasing utilisation and price increases, aftermarket sales should
grow on average by 8 to 9% per annum over the medium term.
55%
Large jet
21%
Regional aircraft
18%
Business jet
Civil aerospace revenue by sector
Civil aerospace revenue by OE and aftermarket
Large jet
Regional aircraft
Business jet
Other
55%
21%
18%
6%
OE
Aftermarket
39%
61%
MEGGITT PLC REPORT AND ACCOUNTS 2012
BUSINESS REVIEW
15
Large jet delivery forecast
Regional aircraft delivery forecast
Business jet delivery forecast
400
1,508
1,510
1,436
1,378
326
301
300
265
265
269
252
237
1,288
1,189
1,011
200
100
1,800
1,500
1,200
900
600
300
1,154
1,062
984
878
737
674
670
1,200
1,000
800
600
400
200
2011
2012
2013
2014
2015
2016
2017
2011
2012
2013
2014
2015
2016
2017
2011
2012
2013
2014
2015
2016
2017
Source: Meggitt management estimates
Source: Meggitt management estimates
Source: Meggitt management estimates
Large jet
Regional aircraft
Business jet
Regional aircraft deliveries of 237 in 2012
represented a modest decrease on 2011,
principally due to lower deliveries of
aircraft with fewer than 70 seats. We
anticipate a gradual production recovery,
led by growth in ATR 72 deliveries, a rise
in Embraer 170/175 delivery rates and the
ramp-up of Sukhoi SJ100 production.
Meggitt has a particularly strong market
share in 70-plus seat regional aircraft
equipped, in many cases, with Meggitt’s
high-value carbon braking systems. The
utilisation of these larger regional jets
has remained exceptionally strong. The
increase in take-offs and landings by
more than 10% worldwide versus 2011 is
offsetting the anticipated decline in the
utilisation of smaller regional aircraft.
Airbus and Boeing have maintained
consistently high delivery rates over the
last few years despite the 2008/9
economic downturn. Extensive order
backlogs totalling over seven years of
production at current rates at the end of
December 2012 were supported by strong
orders for their re-engined narrowbodies
totalling 2,500 aircraft.
Some 1,189 large jets were delivered in
2012, an 18% increase on 2011, with new
orders of over 2,200 aircraft giving a
book-to-bill ratio of around two.
This encouraging trend should be
sustained by growth in emerging markets
and the need to replace ageing fleets with
more fuel-efficient aircraft. Delivery
rates are forecast to grow further in 2013,
continuing their upward trend over the
medium term. This is underpinned by the
rise in Boeing and Airbus delivery rates
and ramp-ups for the production of new
programmes such as the Boeing
737MAX/787 and Airbus A320neo/
A350XWB.
Other aircraft manufacturers are
continuing to invest in new aircraft
platforms. The Bombardier C-Series and
Comac C919, both of which feature
Meggitt equipment requiring
maintenance, repair and overhaul
services, are due to enter commercial
service over the medium term.
Deliveries of new business aircraft in
2012 totalled 670, down roughly 50% from
the peak in 2008 and broadly flat relative
to 2011. However, inventories of used
aircraft are continuing to decline and
demand is showing signs of recovery both
in the US, which remains the world’s
largest market, and in emerging
international regions. Customers outside
the US own less than 30% of the global
business jet fleet but account for over
40% of the total order backlog. Despite
the cessation of Hawker business jet
production, we expect deliveries of
business jets to grow in 2013, driven by
production rate increases in new models
such as the Gulfstream G650 and G280. In
the medium term, we expect business jet
deliveries to continue to recover, driven by
a host of new jets with high-value Meggitt
content including Bombardier 7000 and
8000, Learjet 85, Cessna CJ4 and the
continuing rise of G650 and G280
production.
Meggitt’s sales of carbon brakes and
electronic braking systems slant towards
larger business jets, where we are
enjoying a significant increase in market
share. This area of the market has proven
to be considerably more resilient than
that of smaller aircraft since the
2008/2009 downturn. Several new
programmes are due to enter service
over the coming years from a range of
manufacturers including Gulfstream,
Dassault and Bombardier, giving us
confidence in the continuing recovery of
this market segment.
MEGGITT PLC REPORT AND ACCOUNTS 2012
BUSINESS REVIEW
Market review – Military aerospace and defence
16
Meggitt’s military revenues account for 39% of our business,
comprising fixed wing aircraft at 43%, rotary wing at 27%, land
vehicles at 6% and other sectors including training, at 24%. Our
installed base incorporates some 19,000 aircraft, a variety of
ground vehicles and training facilities. We expect our mix of OE
(58%) and aftermarket (42%) to continue to provide a resilient
revenue source in a challenging defence budget environment.
Defence budgets around the world remain under pressure,
most notably in the United States, as governments rebalance
spending to address national debt. However, as active operational
commitments in Iraq and Afghanistan wind down, there is likely
to be a significant appetite for re-set and retrofit of existing
equipment to ensure continued force readiness. Meggitt
estimates the military market will continue to yield organic
revenue growth over the medium term due to our positions on
key platforms in service (e.g. Black Hawk, Apache, Eurofighter,
Rafale), growth platforms (e.g. F-35 JSF, V-22) and potential
retrofits. This growth rate will be lower in 2013 and 2014 if
sequestration (additional budget cuts from 2013, which have yet to
be defined or quantified) has a material impact on programmes
with high Meggitt content. Our US military sales are 24% of group
revenues. The potential for a 10% cut across the board would
reduce group revenues by approximately 1% in 2013 and a further
1% in 2014.
43%
Fixed wing
27%
Rotary wing
6%
24%
Land vehicles
Training and other
Military revenue by sector
Military revenue by OE and aftermarket
Fixed wing
Rotary wing
Land vehicles
Training and other
43%
27%
6%
24%
OE
Aftermarket
58%
42%
MEGGITT PLC REPORT AND ACCOUNTS 2012
BUSINESS REVIEW
17
Military revenue by destination
North America
Europe
Rest of World
61%
24%
15%
Military fixed wing
Military rotary wing, land and sea
Military training
Meggitt has a significant installed base of
military fixed wing aircraft, a market in
which we are the number one provider of
wheels and brakes. With a range of
products on current platforms, such as
the F-15, F-16, F-18 E/F, Rafale and
Eurofighter and good content on growing
programmes such as the F-35 JSF and
V-22, we are confident in delivering
further growth in the medium term.
As new programme development and
acquisition funds are cut back and
delivery schedules pushed out, funding
has been diverted to production of current
platforms. Programmes that were to be
replaced by the F-35 JSF are now in
favour as deliveries of this new platform
are deferred. This includes production-
run extensions and upgrades to platforms
such as the F-18 E/F Hornet, F-15 Eagle
and F-16 Falcon, regarded as cost-
effective solutions to governments’
force and capability maintenance and
expansion plans. These are good
programmes for Meggitt.
Military helicopters have proven to be an
invaluable operational asset in Iraq and
Afghanistan, demonstrated by the
Department of Defense’s ongoing
commitment to Black Hawk, Chinook,
Osprey and Apache. As key contributors
to operational effectiveness, their
systems continue to require significant
maintenance, retrofit and upgrade to
maintain combat readiness. During 2012,
Meggitt signed a multi-year contract with
Sikorsky which will see our composite
content rise on several key helicopter
platforms.
Meggitt produces next-generation
environmental control systems for
electronic equipment and personnel
cabins. Ground-based systems are
retrofitted to front-line fighting vehicles
including the Bradley Fighting Vehicle and
M1A2 Abrams. These mission-critical
capabilities and our position as the
leading supplier of 30mm linkless
ammunition-handling systems mean we
will continue to prosper in the land
vehicle market. There is also significant
potential for Meggitt’s blast-resistant fuel
tanks, which are currently being installed
in the US Bradley Fighting Vehicle fleet.
Meggitt’s live-fire and virtual simulation
training products are market leaders,
with over 10,000 Meggitt-supplied
live-fire ranges and 5,100 virtual systems
providing training to the armed forces,
law enforcement and security
organisations. This installed base
provides regular replacement revenues.
Following Meggitt Training Systems’
selection in October 2011 as an equipment
supplier for live-fire training ranges at US
Army installations worldwide, we have
made good progress during 2012,
supplemented by a further award for the
provision of 1,100 infantry and armour
units received in early 2013.
The training businesses have seen
notable successes in international
markets during the course of 2012, with
international (ex-US) revenue growth of
49% spread across a range of contracts in
Europe, the Middle East and Asia.
MEGGITT PLC REPORT AND ACCOUNTS 2012
BUSINESS REVIEW
Market review – Energy and other markets
18
Our energy businesses accounted for 10% of group revenues in
2012. We target power generation and oil and gas markets with
condition monitoring software and hardware and our printed
circuit heat exchanger technology.
Meggitt’s condition monitoring products enhance the safety and
efficiency of turbines and optimise their maintenance regimes.
In an environment of increasing energy demand and escalating
input costs, this market is demonstrating strong growth and we
continue to invest in our offering to maximise its growth potential.
Our primary product in oil and gas is our unique printed circuit
heat exchanger (PCHE) technology. A $100 million-plus order
from Petrobras to support the first eight floating, production,
storage and offloading (FPSO) vessels of a 27-vessel programme
saw record sales for our Poole, UK-based facility in 2012 on the
back of a very strong preceding year. Indications are that this
market will remain strong over the medium term. We are also
developing PCHEs for use with emerging technologies including
waste heat management and chemical reforming.
We estimate our energy businesses will grow at a compound
annual growth rate of greater than 10% over the medium term
following 45% growth in 2012.
Other markets
Other markets comprise 6% of group revenues spread over a
range of markets including automotive, test, consumer goods
and medical.
We anticipate modest growth in these markets over the medium
term, with significant potential for acceleration in medical as our
highly accurate sensors are being used in innovative, non-invasive
medical treatments.
52%
Power generation
48%
Oil and gas
Energy revenue by market
Power generation
Oil and gas
52%
48%
Energy revenues
(£ millions)
164.2
12 164.2
11
113.1
10
82.7
09 85.4
08 70.3
Performance review
The group continued to grow strongly in 2012, with
revenues up 10% and underlying profit before tax up
12%. Civil aerospace and military businesses grew at
7%, while our energy businesses had a particularly
strong year, delivering revenue growth of 45%. Our
operational improvement initiative is off to an excellent
start, and we are confident that this will drive
enhanced organic growth in the future.
With targeted investments in technologies and capacity
expansion, the new capabilities acquired with PacSci,
and an ongoing focus on operational excellence and
customer satisfaction, we are confident in achieving
continued growth in 2013 and beyond.
Financial highlights (Table 1)
Revenue
Underlying1:
EBITDA 2
Operating profit
Profit before tax
Earnings per share (‘EPS’)
Statutory
Operating profit
Profit before tax
Earnings per share (‘EPS’)
2012
£’m
2011
£’m
1,605.8
1,455.3
%
change
+10
468.4
394.3
362.8
36.2p
323.6
292.1
31.1p
428.5
359.5
323.0
31.9p
262.5
226.0
24.0p
+9
+10
+12
+13
+23
+29
+30
Cash inflow from operations
before exceptional operating items
408.8
395.8
+3
Cash conversion3
104%
110%
1 Underlying profit and EPS are defined and reconciled to statutory measures in notes 10 and
15 respectively of the group financial statements.
2 Underlying EBITDA represents underlying operating profit adjusted to add back
amortisation and depreciation.
3 Cash conversion is the ratio of cash inflow from operations to underlying operating profit.
Cash inflow from operations excludes exceptional operating items, interest, tax and
investing activities.
MEGGITT PLC REPORT AND ACCOUNTS 2012
BUSINESS REVIEW
19
Key Performance
Indicators (KPIs)
Revenue growth
Percentage change in group revenue from
previous financial year. Target compound
proforma (excluding the impact of M&A)
growth: 6 to 7% across the cycle.
Achieved: 6% proforma growth due to
the ongoing growth in civil, military and
energy markets. We continue to expect
to achieve target over the cycle
Underlying PBT growth
Percentage change in group underlying
profit before tax from previous financial
year. Target compound proforma growth:
8 to 9% across the cycle
Achieved: 9% proforma, 12% total in 2012
Underlying EPS growth
Percentage change in group underlying
earnings per share from previous
financial year. Target compound proforma
growth: 8% across the cycle
Achieved: 13% in 2012
Return on sales
Underlying operating profit as a
percentage of revenue. Target growth in
line with revenue and PBT growth across
the cycle
Achieved: 24.6% proforma, 24.6% total
R&D as percentage of revenue
Target gross spend: 6 to 8% across the
cycle
Achieved: 7.6% in 2012
Cash conversion
Cash inflow from operations before
exceptional operating items as a
percentage of underlying operating profit.
Target conversion: 100%
Achieved: 104% in 2012
MEGGITT PLC REPORT AND ACCOUNTS 2012
BUSINESS REVIEW
20
After the blast
We minimise the risk of fuel fires in
fighting vehicles with our IED-resistant
fuel tanks. These are derived from
products which have eliminated
fire-related deaths of pilots and crew
involved in survivable helicopter crashes.
MEGGITT PLC REPORT AND ACCOUNTS 2012
BUSINESS REVIEW
21
IED-resistant fuel tanks
Our fuel tanks are unique. Some can take a bullet, which means that
military pilots and crew can get back to base safely without loss of fuel
or risk of fire. Some remain intact after high impact helicopter crashes
on rough terrain, enabling pilots and crew who survive to avoid further
injury or death by fuel fire. And now, there’s a range that enables
soldiers to walk away from survivable IED events in fighting vehicles.
Maintaining fuel integrity under dynamic loads
Until the wars in Iraq and Afghanistan, mines were the main threat to
ground vehicles. Today, the armour plating that countered mines is
easily defeated by the explosive force of IEDs that send metal into fuel
tanks, igniting them. That’s why Meggitt has launched puncture and
blast-resistant self-sealing fuel cells for military vehicles, based on
decades protecting air crew from fuel-related fires with crashworthy
fuel cells after survivable helicopter crashes. Whether it is a blast or
gunfire event, the coated fabric from which the fuel tanks are made
provides the strength to maintain fuel integrity under dynamic loads.
From aircraft to landcraft
Now in series production, the US Army has equipped over 4,000 Bradley
Fighting Vehicles with this vital fuel tank technology in an upgrade
programme designed to enhance the vehicle’s survivability during
contemporary warfare. Meggitt’s first ground vehicle contract for
leak-proof, life-saving fuel containment products evidences success
in the group’s strategy to expand its markets beyond aerospace.
MEGGITT PLC REPORT AND ACCOUNTS 2012
BUSINESS REVIEW
22
Performance review
Revenue growth (Table 2)
Civil OE
Civil AM
Total civil
Military
Energy
Other
Total
2012
revenues
£’m
281.1
433.7
714.8
624.7
164.2
102.1
1,605.8
2012
growth
%
+15
+3
+7
+7
+45
+12
+10
Proforma
growth1
%
+6
-1
+1
+3
+43
+5
+6
1 Proforma growth numbers exclude the impact of M&A.
Overall performance
The exceptional performance in our
energy businesses, with ongoing revenue
growth in civil and military markets,
enabled us to deliver robust growth in
2012. Revenue grew 10% and underlying
profit before tax grew 12%, driving a 13%
increase in underlying EPS to 36.2p. With
a strong order book and a book-to-bill
ratio of greater than one in 2012, we have
good momentum going into 2013.
Revenues and orders
The continued strength of our end
markets drove an increase in revenues of
10% to £1,605.8 million. As Table 2
demonstrates, civil OE and energy were
particularly strong, while all end markets
contributed positively to our growth
profile.
Total proforma civil aerospace revenues
grew 1%. Growth in civil OE across all
sub-segments was achieved in 2012,
offset by a modest decline in proforma
civil aftermarket revenues owing to some
destocking in the supply chain following
an exceptionally strong 2011 where we
grew 12%.
Proforma military revenues grew by 3%,
with particular strength in aerospace
aftermarket and non-aerospace
businesses.
Energy revenues increased by a very
impressive 45%, with 43% growth in
proforma revenues. The buoyant oil and
gas market, combined with the rapidly
growing FLNG and FPSO markets, drove
good demand for our unique printed
circuit heat exchangers, and our power
generation businesses performed well
following our investment in product
refreshes and enhanced routes to market.
Meggitt’s other specialist markets saw
proforma growth of 5% with ground
refuelling and industrial markets
performing particularly well.
Profit and dividends
The Board’s preferred measure of the
group’s trading performance is
underlying profit. Underlying operating
profit for the year grew 10% to
£394.3 million. A strong operational
performance helped offset an £8.4 million
currency headwind, a negative mix effect
of £5.4 million and a net investment of
£2.0 million in the raising the bar
programme and enabled us to hold the
margin at last year’s level.
Net finance costs decreased to £31.5
million as a result of strong cash
generation and lower interest rates.
Within this, post-retirement finance
charges increased modestly to £5.4
million. Underlying profit before tax
increased by 12% to £362.8m.
With an underlying tax rate of 22%,
underlying EPS increased by 13% to
36.2 pence.
On a statutory basis, profit before tax
increased by 29% to £292.1 million and
EPS increased by 30% to 31.1p. A
reconciliation between underlying profit
and statutory profit is provided in note 10
of the financial statements.
The recommended final dividend is
increased by 12% to 8.20p and represents
a total dividend for the year of 11.80p, also
up 12%.
Operational highlights (Table 3)
Meggitt Aircraft Braking Systems (MABS)
MABS represents 19% of total group
revenue, generating 89% of its revenues
from the aftermarket and 11% from OE
sales. MABS’ civil aftermarket revenues
(66% of divisional total) declined by 6% in
2012 due to the combination of
destocking, Chapter 11 events at some
customers and the accelerated decline in
utilisation of the legacy large jet fleet
(DC9/MD80). The legacy large jet fleet
accounted for revenues of c£20 million in
2012. Military revenues saw a modest
increase owing in part to a one-off
contract from the Indian Air Force for
Hawk spares. Operating margins
improved from 37.4% to 37.9% in the year
reflecting operational improvements and
favourable military mix, partially offset by
the decline in highly profitable civil
aftermarket revenues.
Meggitt Control Systems (MCS)
The division represents 13% of total group
revenue and generated 54% of its
revenues from OE and 46% from the
aftermarket. For MCS, civil aerospace
grew 2% in the year (5% growth in OE
offset modest decline in aftermarket),
and military grew at 11%, helped by
strong aftermarket orders. Other
markets grew by 10% reflecting a strong
performance in energy and ground
refuelling products. Operating margins
declined modestly driven by strong
performances in the relatively lower
margin civil OE and military markets.
MEGGITT PLC REPORT AND ACCOUNTS 2012
BUSINESS REVIEW
23
Operational highlights £’m (Table 3)
Revenue
2012
2011
311.2
214.9
187.2
240.2
652.3
320.5
201.6
171.2
233.9
528.1
1,605.8
1,455.3
Proforma
growth1
%
-3
+10
+9
+3
+9
+6
Aircraft Braking Systems
Control Systems
Polymers & Composites
Sensing Systems
Equipment Group
Total Group
Underlying operating profit
Return on sales %
2012
2011
117.8
50.1
34.5
36.3
155.6
394.3
119.9
47.9
31.7
43.2
116.8
359.5
Proforma
growth1
%
-2
+8
+9
-16
+21
+7
2012
37.9
23.3
18.4
15.1
23.9
24.6
2011
37.4
23.8
18.5
18.5
22.1
24.7
1 Proforma growth numbers, which exclude the impact of M&A, are provided to give a better like-for-like comparison.
Meggitt Polymers & Composites (MPC)
MPC represents 12% of total group
revenue. Revenue growth in MPC of 9% in
the year was driven by strong large jet
demand resulting in civil growth of 8%.
Military sales also grew strongly, with
increased composites content on a range
of helicopter platforms as a result of
customer outsourcing and the ongoing
Bradley fuel tank retrofit programme.
Operating margins remained steady at
18.4%, with manufacturing efficiencies
offsetting a negative mix impact.
Meggitt Sensing Systems (MSS)
MSS represents 15% of total group
revenue and generated 80% of its
revenues from the OE market and 20%
from the aftermarket. MSS proforma
revenues grew 3% in the year with
particular strength in the energy and
medical markets. Operating margins
decreased, as expected, as a result of the
movement in the Swiss Franc against the
US Dollar. Excluding this impact, operating
margins improved to 19.1% as the growth
in energy exceeded growth in the relatively
lower margin civil OE market.
Meggitt Equipment Group (MEG)
The division represents 41% of total group
revenue and generates approximately
70% of its revenues from OE and 30%
from the aftermarket. Revenue in MEG
was up 23% on last year including the
additional four-month contribution from
PacSci. On a proforma basis, revenue was
up 9% due to growth in civil OE, up 14%,
and energy revenues which were up over
70% due to the strength of the Heatric
printed circuit heat exchanger business.
Heatric grew on the back of a significant
Shell FLNG order awarded in 2011, and
initial revenues from a Petrobras order
received in 2012. This order was valued
at over $100 million for the provision
of heat exchangers to a fleet of floating
production, storage and offload vessels.
Operating margins improved due to
favourable mix, volume leverage and
incremental synergies from the PacSci
acquisition.
Cash flow and borrowings
Cash inflow from operations before
exceptional operating items was a very
healthy £408.8 million, which was 104%
of underlying operating profit. Our strong
focus on cash generation continued to
deliver excellent results in 2012.
Net cash generated of £116.7 million was
impressive given a very low take-up of
the scrip dividend and increased
investment in capacity increases and
IT infrastructure. Net debt decreased
by 19% to £642.5 million.
Investing for the future
The application of our internally
generated and owned intellectual
property is fundamental to Meggitt’s
strategy. Total research and development
expenditure in 2012 was £122.0 million or
7.6% of revenues, of which 20% was
funded by customers. The largest relative
investment was in MSS at around 14% of
segment revenues.
Investment in technology development is
aimed at adding new capabilities to our
portfolio in response to customer
requirements. Areas of focus in 2012
included a new distributed condition
monitoring system for energy gas
turbines which we intend to bring to
market during 2013, and a range of new
aerospace technologies including
development of a green fire suppressant.
We also continue to invest in transferring
our core aerospace technologies across
adjacent markets, and we will be opening
a new facility in Denmark during 2014 to
better serve medical markets with our
specialist sensing capabilities.
Meggitt invested £36.1 million in
supplying equipment free of charge to
new aircraft and making programme
participation contributions, mostly in the
MABS business. This increased
investment reflects our strong track
record in winning the new programmes
that drive future aftermarket growth.
Capital expenditure on property, plant
and equipment and other intangible
assets increased to £63.5 million,
including continued investment in
capacity, site consolidations and the
deployment of common IT systems across
the group. There has been substantial
investment in our manufacturing facilities
MEGGITT PLC REPORT AND ACCOUNTS 2012
BUSINESS REVIEW
24
Surfing gas
Petrobras floating production, storage
and offloading ships will lie in remote
locations 350 kilometres offshore
in the Atlantic Ocean. Meggitt’s heat
exchangers can safely handle the high
pressure needed to reinject extracted
gas back into oil and gas reservoirs lying
5,000 metres beneath the ocean floor.
MEGGITT PLC REPORT AND ACCOUNTS 2012
BUSINESS REVIEW
25
Transforming economics
Cutting the cost of operations
Whether it’s boosting output from existing operations or
optimising new-build projects, we optimise gas production
by replacing old technology with high efficiency PCHEs,
increasing throughput and system integrity. On new
platforms, higher efficiency, safety and durability can be
designed in. The compactness of PCHEs creates a multiplier
effect, cutting millions of dollars from total build costs by
shrinking topside bulk and simplifying construction.
Because Meggitt’s PCHEs can unlock wider performance,
safety and build-cost benefits than conventional heat
exchangers, Petrobras, Brazil’s national oil giant, has
ordered over 200 for the eight floating production, storage
and offloading ships it will commission over the next four
years. Only we can make PCHEs on a commercial scale.
Higher output, more safety
At the heart of a Meggitt PCHE is a joint-less diffusion-
bonded matrix of chemically-etched micro-channels.
Three-to five-times lighter and smaller than traditional
units, our PCHEs are capable of much higher throughput,
accommodate much higher pressures (up to 650 bar) and,
because they are 100 times less likely to develop a leak, are
extremely safe. Made from corrosion-resistant materials
and with 25-year life spans to match the offshore platforms
on which they serve, Meggitt’s PCHEs are resilient enough
to shrug off the most extreme operating conditions.
MEGGITT PLC REPORT AND ACCOUNTS 2012
BUSINESS REVIEW
26
Performance review
Investing for the future
(continued)
to provide capacity to meet future growth
driven by our high level of programme
wins over the past few years, including
new capital equipment in our US aircraft
braking systems and polymers and
composites facilities. We have doubled
the capacity of our innovative heat
exchanger business in Poole, UK and in
California, we have leased a new building
in which to co-locate our North American
sensing businesses and progressed plans
to co-locate our fire detection and fire
suppression businesses in late 2013.
To be successful in today’s environment
we must combine our advanced
technological capabilities with ever higher
levels of customer responsiveness, hence
launching our raising the bar initiative
in 2012 to improve on-time delivery and
quality. This programme will identify
areas of operational best practice and
implement them, sustainably, across
all group facilities. Such performance
improvements will help us secure the
incremental contracts needed to boost
Meggitt’s organic growth rates and, after
an initial investment of £2 million in 2012
and an estimated £6 million in 2013, we
expect to add shareholder value with
early cost savings.
As part of the group’s low-cost
manufacturing strategy, Meggitt
continued to expand the range of
capabilities at its manufacturing plants
in China, Mexico and Vietnam, a key
enabler to delivering enhanced cost-
competitiveness and developing a best-
in-class operational footprint.
Analysis of R&D costs (Table 4)
Total R&D expenditure
% of revenue
Customer-funded R&D
Capitalised
Amortisation
Charge to income
statement
2012
£’m
122.0
7.6%
(24.9)
(52.2)
11.6
2011
£’m
110.5
7.6%
(27.3)
(41.5)
11.3
56.5
53.0
Movement in net debt (£’m) (Table 5)
Cash flow from operations before exceptional operating costs
Exceptional operating costs paid
Net interest/tax paid
Capitalised development costs/programme participation costs
Net capital expenditure
Net cash generated from operations
Acquisition of businesses
Disposal of businesses
Net amounts payable to shareholders
Add back scrip dividend
Net amounts paid to shareholders
Decrease in net debt
Debt acquired with businesses
Currency movements
Other non-cash movements
Opening net debt
Closing net debt
(84.1)
13.2
2012
408.8
(14.7)
(62.5)
(88.3)
(63.2)
180.1
(8.4)
15.9
(70.9)
116.7
(0.4)
33.9
(4.3)
(788.4)
(642.5)
Analysis of total committed credit facilities (Table 6)
Private placement notes
Private placement notes
Syndicated credit facility
Syndicated credit facility
Private placement notes
US$m
180 Maturing in 2013
70 Maturing in 2015
700 Maturing in 2016
400 Maturing in 2017
600 Maturing in 2017, 2020 and 2022
1,950
Capital structure
Covenants
Meggitt’s committed credit facilities
contain two key financial ratio covenants
– net debt to EBITDA and interest cover.
As can be seen from Table 7 there is
significant headroom on both measures.
Covenant ratios (Table 7)
Net debt/EBITDA
Interest cover
Covenant
Actual*
≤3.5x
≥3.0x
1.3x
16.2x
* As calculated in accordance with loan agreements.
Meggitt’s operations are financed by
a combination of equity and debt. We
seek to minimise the cost of capital
while recognising the constraints of the
debt and equity markets and the risks
associated with high levels of gearing.
Our current post-tax average cost of
capital is approximately 8.0%.
Debt structure
During the year Meggitt successfully
negotiated a new USD 400 million five-
year syndicated credit facility to replace
a facility due to mature in 2013. As at
31 December 2012, we had undrawn,
committed credit facilities of £557 million
after taking account of surplus cash.
No further refinancing is required
before 2016.
Minimising debt financing risks
Interest
The group seeks to minimise debt
financing risk as follows:
a. Concentration of risk
We raise funds through private placement
issuances and bank loans to reduce
reliance on any one market. Bank
financing is sourced from around 15
international institutions spread across
North America, Europe and Asia. No
single bank accounts for more than 6% of
the group’s total credit facilities and the
credit rating of lenders is monitored by
our treasury department. Our largest six
lenders are Bank of America, Barclays,
HSBC, JP Morgan, Bank of Tokyo-
Mitsubishi and Sumitomo Mitsui Banking
Corporation. We also seek to maintain a
reasonable level of undrawn committed
facilities as a buffer.
b. Set-off arrangements
The group utilises set-off and netting
arrangements where possible to reduce
the potential effect of counterparty
defaults. All treasury transactions are
settled on a net basis where possible and
surplus cash is generally deposited with
our lenders up to the level of their current
exposure to us.
c. Refinancing risk
We ensure the maturity of our facilities is
staggered and refinancings are concluded
in good time.
d. Currency risk
To ensure we mitigate headroom erosion
due to currency movements our credit
facilities are denominated in US dollars,
the currency in which most of our
borrowings are held.
e. Covenant risk
The covenant calculations are drafted to
protect the group from the potential
volatility caused by accounting standard
changes, sudden movements in exchange
rates and exceptional items. This is
achieved by measuring EBITDA on a
frozen GAAP basis, retranslating net debt
and EBITDA at similar average exchange
rates and excluding exceptional items
from the definition of EBITDA. The
covenant ratios are relatively insensitive
to currency movements and we continue
to have considerable headroom on both
key financial covenant measures
(Table 7).
Meggitt seeks to reduce the volatility
caused by interest rate fluctuations. Our
US private placements are subject to fixed
interest rates whereas borrowings under
our syndicated bank credit facilities are at
floating rates. To manage interest rate
volatility, we use interest rate derivatives
to either convert floating rate interest into
fixed rate or vice versa. Our policy is to
maintain at least 25% of net debt at fixed
rates with a weighted average maturity of
two years or more. At 31 December 2012,
the percentage of net debt at fixed rates
was 43% and the weighted average period
to maturity of the first 25% was 5.4 years.
Facility headroom (£’m) (Table 8)
£557 million headroom
Net debt
£643 million
1,500
1,200
900
600
300
00
2012
Fixed rate
2013
2014
2015
Floating rate
2016
2017
Our interest charge, excluding post-
retirement net finance costs, reduced to
£26.1 million (2011: £32.0 million) driven
by strong cash generation and less debt
at higher fixed rates. Post-retirement
net finance costs increased slightly to
£5.4 million (2011: £4.5 million).
Exchange rates (Table 10)
The group is exposed to both translation
and transaction impacts due to changes
in foreign exchange rates, principally the
US dollar/sterling rate.
Net debt (£’m) (Table 9)
Sterling
US dollar
Euro
Swiss franc
Other
Net debt
2012
2011
(19.1)
592.1
(10.2)
88.6
(8.9)
(30.0)
747.5
(5.3)
79.6
(3.4)
642.5
788.4
MEGGITT PLC REPORT AND ACCOUNTS 2012
BUSINESS REVIEW
27
The net assets of overseas businesses
are translated into sterling at year end
exchange rates. To mitigate the exchange
rate exposure this causes we hold our net
debt, where cost effective and practical,
in the currencies of those businesses.
The results of overseas businesses are
translated into sterling at weighted
average exchange rates (Table 10).
Compared to 2011, the group’s underlying
profit before tax for the year was
adversely affected by £1.4 million as a
result of currency translation. Each five
cent movement of the US dollar versus
the 2012 average rate of £1 = $1.59
impacts underlying profit before tax by
approximately £7.0 million.
Exchange rates (Table 10)
Average translation rates
US dollar
Euro
Swiss franc
Year-end rates
US dollar
Euro
Swiss franc
Transaction rates
US dollar/£
US dollar/Euro
Swiss franc/US dollar
2012
2011
1.59
1.24
1.49
1.63
1.23
1.49
1.66
1.35
0.90
1.60
1.16
1.40
1.55
1.20
1.45
1.65
1.42
1.06
The group hedges known and some
anticipated transaction currency
exposures based on historical
experience and projections. Our policy
is to hedge at least 70% of the next 12
months’ anticipated exposure and to
permit the placing of cover up to five
years ahead. Compared to 2011, the
group’s underlying profit before tax
for the year was adversely affected
by £7.2 million as a result of currency
transaction movements. Each five cent
movement of the US dollar versus the
2012 average hedged rate of £1 = $1.66
impacts underlying profit before tax
by approximately £2.5 million. At 31
December 2012, $/£ cover for 2013 was
92% at an average rate of $1.62 and
we have covered approximately 30% of
our $/£ exposures for the next three
subsequent years at an average rate
of $1.52.
MEGGITT PLC REPORT AND ACCOUNTS 2012
BUSINESS REVIEW
28
Closer connections
Single point customer contact helped
to deliver a contract worth over
$1 billion for the life of Pratt & Whitney’s
revolutionary PurePower® geared
turbofan engine.
MEGGITT PLC REPORT AND ACCOUNTS 2012
BUSINESS REVIEW
29
New positions yield long-term aftermarket value
Meggitt strives to secure positions on new platforms,
preferably as a sole-source provider, after which follows
decades of stable aftermarket business in spares,
maintenance, repair and overhaul. This is exemplified by a
recent contract to provide critical components for thermal
management packages to Hamilton Sundstrand for Pratt &
Whitney’s new PurePower® geared turbofan engine.
Simplifying procurement for the integrators
Manufacturing and servicing the valves, coolant pumps,
oil coolers and heat exchangers on multiple thermal
management sub-systems for an engine that will last
around 40 years is worth around $1 billion. Meggitt
secured the contract because of its superior technology
and the Transformation programme which aligned thermal
management and fluid control businesses under one
management team, ready to simplify procurement for
systems integrators such as Hamilton Sundstrand.
Industry innovators sign up
Offering double-digit improvements in fuel reduction, noise,
environmental emissions and operating costs, the multi
award-winning engine is the fruit of 20 years’ research and
development, with customers signing the engine up for
equally innovative new platforms, including Bombardier’s
new C-Series regional jet, the Mitsubishi Regional Jet
and Airbus’s A320neo aircraft, one of the fastest selling
commercial airliners in history.
MEGGITT PLC REPORT AND ACCOUNTS 2012
BUSINESS REVIEW
30
Performance review
Taxation
Meggitt’s underlying tax rate reduced
to 22.0% (2011: 24.0%) due principally
to the favourable resolution of certain
historical items. Our statutory tax rate,
which includes items reported below
underlying operating profit is 17%
(2011: 18%) and our cash tax rate is 12%
(2011: 19%) reflecting timing differences,
tax deductible goodwill amortisation and
tax relief on pension deficit reduction
payments.
Dividends
The group has recorded strong growth
in underlying profit and EPS in the year
and remains well-positioned for further
growth. Accordingly we have increased
the recommended final dividend to
8.20 pence (2011: 7.30 pence) which
would result in a 12% increase in the
full-year dividend to 11.80 pence
(2011: 10.50 pence).
Post-retirement benefit schemes
The group’s principal defined benefit
pension schemes are in the UK and US
and are closed to new members.
Overall pension scheme deficits reduced
to £241.2 million (2011: £265.4 million).
Scheme assets increased by 9%, helped
by a rebound in equity markets. The
impact of the asset performance has
however, been partially offset by an
increase in liabilities. The main reason for
this increase is the fall in yields on AA
corporate bonds. These yields have fallen
for the fourth successive year and, as they
are used to discount scheme liabilities,
affect the values at which the liabilities
are recorded in the financial statements.
Regulations in the UK and US require
repayment of deficits over time. Deficit
payments in the year were £22.8 million
(2011: £23.9 million). In the UK, the
current agreement with the trustees, is
based on the 2009 triennial valuation of
the scheme and provides for increases in
deficit payments gradually being phased
in over the period to 2024. The Group is
currently in discussions with the trustees
of the UK schemes regarding the results
of the 2012 triennial valuation, and this
will increase annualised deficit reduction
payments by an estimated £8m from 2013.
In the US, legislation was introduced to
provide relief from the impact of historic
low AA corporate bond rates. As a result
of this new legislation, deficit payments
in the US reduced slightly in 2012 and
similar levels of payments are expected
in 2013.
Meggitt has two other principal post-
retirement benefit schemes providing
medical and life assurance benefits
to certain US employees. The group’s
exposure to increases in future medical
costs provided under these plans is
capped. Both schemes are unfunded and
have a combined deficit of £58.5 million
(2011: £54.5 million). Deficit payments
during the year were £2.2 million
(2011: £2.3 million).
Accounting standards
Meggitt’s results were not significantly
affected by changes in financial reporting
standards in 2012. In 2013 there will
be a change in the way the group is
required to account for retirement benefit
obligations. Whilst this will not impact
cash, nor will it affect the value at which
the deficit is recorded in the financial
statements, it will have a modest adverse
impact on the income statement. Further
details on the expected impact of this
change are disclosed in note 2 to the
group financial statements on page 73.
Defined benefit pension schemes summary (£’m) (Table 11)
Deficit at 1 January
Service cost
Group cash contributions
Net deficit reduction payments
Prior year service cost
Net finance cost
Actuarial (gains)/losses – schemes’ assets
Actuarial losses – schemes’ liabilities
Acquisition of businesses
Currency movements
Deficit at 31 December
Assets
Liabilities
Closing net deficits
Funding status
2012
265.4
12.3
(35.1)
(22.8)
–
2.9
(18.0)
18.6
–
(4.9)
241.2
634.7
875.9
241.2
72%
2011
210.5
11.4
(35.3)
(23.9)
0.5
2.0
25.2
48.7
1.7
0.7
265.4
584.9
850.3
265.4
69%
The above analysis excludes post-retirement healthcare schemes which have a deficit at
31 December 2012 of £58.5 million (2011: £54.5 million).
MEGGITT PLC REPORT AND ACCOUNTS 2012
BUSINESS REVIEW
31
Corporate responsibility
At Meggitt, we recognise our responsibility to shareholders,
employees, customers, suppliers and the wider community to
conduct our operations in a safe, responsible and sustainable
manner. We are committed to ensuring compliance with all
relevant national laws and regulations and aim to continually
improve our financial, social and environmental performance.
Policy
Action
Meggitt is committed to:
For our stakeholders, this means:
• upholding sound corporate governance
• providing safe working environments
principles
• providing a supportive, rewarding and
safe working environment
• conducting business relationships in an
ethical manner
• minimising the environmental impact of
products and processes
• acting as a responsible supplier and
encouraging our contractors and
suppliers to do the same
• supporting our local communities
• modern operational practices
• effective risk identification and
mitigation
• dynamic business continuity plans
• maintaining internationally-
accredited environmental
management systems
• conducting independent audits
• professional and comprehensive
employee training programmes
• the social and economic enrichment
of local communities
• robust internal and external
reporting and controls
• ensuring financial probity
MEGGITT PLC REPORT AND ACCOUNTS 2012
BUSINESS REVIEW
32
Corporate responsibility
Governance and compliance
Meggitt’s Corporate Responsibility (CR) Policy—published on
www.meggitt.com—underpins the way we manage social,
ethical and environmental issues. We devote significant internal
resources to implementing it across Meggitt facilities
worldwide. Every facility records important data on employees,
supply chain and health, safety and environmental (HSE)
performance.
CR is overseen by our Group Corporate Affairs Director. HSE
matters, trade compliance and ethics and business conduct are
managed by a highly experienced team of functional specialists.
The Board has appointed an Ethics and Trade Compliance
Committee to ensure we have effective programmes in these
areas and to oversee their management. The Board reviews HSE
at every meeting and receives a quarterly written report from
the Vice-President, Health, Safety and Environment. Divisional
presidents and site directors are responsible for implementing
our policies locally.
Environment
Meggitt’s Group Environmental Policy, which was reviewed and
updated by the Board in January 2012, commits us to:
• complying with applicable environmental legislation
• reducing the environmental impact of our own and our
suppliers’ products and operations
• ensuring our employees act in an environmentally
responsible manner
Meggitt strives to maintain the highest level of environmental
performance by setting standards and procedures driven by our
corporate leadership and implemented throughout our
businesses. To achieve the goals of our Environmental Policy,
Meggitt’s environmental management programme includes
setting environmental targets, communicating regulatory
developments, training and information-sharing, data analysis
and internal and external auditing of environmental
management systems and practices.
Meggitt is a signatory to the Sustainable Aviation Strategy of the
ADS Group (the UK’s primary aerospace, defence and security
trade association), is represented on the association’s
environmental and carbon management working groups and the
US Aerospace Industry Association (AIA) Environmental, Health
and Safety Committee.
We provide emissions data to the Carbon Disclosure Project, a
non-governmental initiative that measures and discloses the
greenhouse gas emissions and climate change strategies of
organisations around the world. Meggitt is a registered
participant in the UK’s CRC Energy Efficiency Scheme.
Meggitt continues to focus on environmentally-friendly
materials initiatives and programmes. We formed an
Obsolescence Review Board in 2012, consisting of senior health,
safety and environment, procurement, engineering, quality and
legal managers who meet regularly to review regulatory
developments and supply chain issues affecting substances
used in our processes and products. We are collaborating with
several customers and suppliers to identify and test safer
alternatives to address the increasingly restricted use of
particular substances following global regulatory
developments. Meggitt applies its expertise, research and
technology to develop solutions that sustain product quality and
performance yet reduce its impact on the environment over the
product lifecycle.
Compliance with the European Community regulation on
Registration, Evaluation, Authorisation and Restriction of
Chemicals (REACH) is managed by the group’s REACH Steering
Committee which has been active in completing due diligence
and dealing with the risks associated with the potential
obsolescence of chemicals used by aerospace manufacturers.
The HSE Director for Meggitt Sensing Systems is a member of
the Aerospace and Defence Industries Association of Europe’s
REACH Implementation Working Group, enabling us to source
and compare information about REACH compliance across the
industry. Our Vice President, Health, Safety and Environment is
a member of the AIA REACH Working Group.
Our global environmental audit programme is supported by
external consultants and includes a comprehensive review of
applicable regulatory requirements and best practice standards
at all facilities every three years. As a result of this continuous
audit programme, we have improved our performance on
inspections conducted by external regulatory agencies,
reducing the number of regulatory citations received in 2012
by 38% on 2011.
All facilities, excluding those acquired since 2011, have
successfully attained environmental management system
ISO 14001 standard certification. Pacific Scientific Aerospace
(PacSci) facilities are targeting certification by the end of 2013.
In 2010, we committed to reducing our carbon footprint by 15% in
five years relative to revenue using our performance in 2009 as a
baseline. We are on track to meet this goal with a 10% reduction
between 2009 and 2012 in CO2 emissions, equating to an
emission reduction rate of greater than 3% per year (excluding
the impact of businesses acquired during the period). Meggitt
incorporated PacSci into its Meggitt Energy Reduction
Programme (MERP) in 2012, implementing energy reduction
strategies and initiatives at its facilities which have reduced our
carbon footprint further. Including businesses acquired during
the period, we have achieved a 17% reduction to date in CO2
emissions relative to revenue since 2009.
MEGGITT PLC REPORT AND ACCOUNTS 2012
BUSINESS REVIEW
33
In 2012, we established group five-year targets to reduce
electricity, gas and water consumption and waste destined for
landfill and to increase waste that is recycled. Using 2011 for
comparison, we are targeting:
• a 15% reduction in electricity and gas consumption relative to
revenue.
• a 10% reduction in water consumption relative to revenue.
• a 10% reduction in the amount of waste sent to landfill as a
percentage of total waste generated.
• a 10% increase in the amount of waste recycled as a
percentage of total waste generated.
The metrics for 2012 show we are making good progress
towards meeting our target for a reduction in gas consumption
compared to 2011. However, increased facility consolidation and
expansion activities, acquisitions and an increase in production
of carbon brakes within our aircraft braking systems business
last year had a negative effect on electricity consumption and
waste sent to landfill. Facility consolidation activities should
improve the metrics in the longer term, although the trend
towards an increase in the manufacture of carbon brakes will
continue to have an adverse impact.
• The group achieved a 6% reduction in gas consumption due,
largely, to gas efficiency initiatives completed at our aircraft
braking systems facility in Akron, USA.
• Electricity consumption relative to revenue increased by 4%
in 2012 due to increased production of carbon brakes, facility
expansion and consolidation activities and the acquisition of
Fotomechanix (a key supplier to Heatric, our printed circuit
heat exchanger business) which we acquired in July 2012.
• Water consumption increased by 5% relative to revenue in
2012, due to the high water consumption at Fotomechanix.
Excluding Fotomechanix, water consumption decreased
relative to revenue by 1%.
• Total waste generated increased by 21% relative to revenue in
2012. This increase was primarily due to the amount of waste
generated at Fotomechanix. Excluding Fotomechanix: (i) the
increase relative to revenue was 5% and can be attributed to
increased construction debris generated by site consolidation
and expansion; (ii) total waste recycled and waste sent to
landfill as a percentage of total waste generated remained
the same at 48% and 49% respectively, as construction-
related waste generated in 2012 could not be recycled.
MERP improves information and the sharing of best practice on
energy performance through an intranet site providing detailed
information on energy efficiency projects and their
implementation. Designated energy teams at every facility
quantify the carbon impact of our operations and identify
opportunities for reducing energy consumption and improving
efficiency.
We continually seek improvements in our operations and
processes to achieve reductions in energy consumption and
improve efficiencies. For example:
• In February 2012, our aircraft braking systems facility in
Akron, USA, completed a £900,000 energy reduction project
involving the conversion of central steam heat to direct fired
natural gas heaters. This reduced CO2 by 2,768 tonnes in
2012, a 10% reduction in the overall emissions for the facility
(and a 2% reduction in emissions for the group as a whole).
The facility installed new high-efficiency compressors to
replace existing reciprocating models and the leak-prone air
distribution system. This should save 500 tonnes of CO2
emissions per year.
Environmental metrics1
Utilities
Electricity – gWh
MWh per £m2
Natural gas – gWh
MWh per £m2
Carbon dioxide (CO2) – tonnes @ 2012 rates3
Tonnes per £m2
Waste – tonnes
Tonnes per £m2
Water – cubic metres
Cubic metres per £m2
2012
Change
2011
188
118
199
125
134,444
84.2
12,861
8.05
806,941
4%
-6%
0%
21%
175
114
204
133
128,598
84.1
10,160
6.65
737,764
505
5%
483
1 Our environmental metrics are reported in full on the CR page of our website.
2 Metrics per £m are calculated using revenue converted at constant foreign exchange rates.
3 Meggitt’s carbon emissions data is derived from electricity, gas and fuel oils usage converted using the 2012 greenhouse gas conversion factors of the UK
Department for Environment and Rural Affairs (DEFRA). For electricity only, DEFRA updates prior years’ conversion factors annually, so Meggitt’s carbon
emissions arising from electricity usage in 2011 have been restated.
MEGGITT PLC REPORT AND ACCOUNTS 2012
BUSINESS REVIEW
34
Corporate responsibility
Environment (continued)
Health and safety
• Over the past two years, several Meggitt facilities upgraded
their lighting. They converted standard low-efficiency
incandescent lamps to high-efficiency compact fluorescent
models and installed improved halogen lighting systems and
occupancy sensors in office and factory areas. This has
reduced our carbon footprint by approximately 1,000 tonnes
per year.
• In 2012, we formed an energy ”kaizen” (multi-level, multi-
disciplinary problem-solving) team. This comprised energy
management and heating, ventilation and air conditioning
specialists and facility engineers from across the group to
perform internal energy efficiency assessments at several
sites. At Meggitt Control Systems in North Hollywood, an
energy kaizen event was conducted in Q4 2012 and led to
sound monitoring equipment being used to identify leaks in
the compressed air system and repairs resulting in energy
savings. More events are planned for Meggitt US facilities
in 2013.
• Meggitt Polymers & Composites in Oregon, USA, replaced an
old, inefficient moulding press with a new high-efficiency
model, raising production efficiency by 70% and lowering CO2
emissions by 17 tonnes per year.
Meggitt’s commitment to protecting its employees is
emphasised in our Health and Safety Policy, which was reviewed
and updated by the Board in December 2011. This policy outlines
our commitment to:
• formal management systems for regulatory and legislative
•
•
•
compliance and guidance on best practice
integrating identification, assessment and control of health
and safety risks into operational management
incorporating health and safety thinking into business plans
instilling the importance of health and safety in employees at
all levels and providing all employees and temporary workers
with appropriate health and safety information and training
• delivering products and services that can be installed,
operated and maintained without risk to health and safety as
far as possible
• consulting stakeholders on health and safety risk management
Strong, supportive leadership is essential to a sustainable safety
culture. In 2012 we implemented new training programmes for
all levels of leadership to achieve the primary goals of our
health and safety programme. As employees can contribute
substantially by recognising and reporting unsafe and unhealthy
conditions in the workplace promptly, we require them to take
individual responsibility for health and safety and to encourage
safe workplace behaviour in others.
Carbon
refurbishment
programme
Beginning in 2009, Meggitt Aircraft Braking Systems
in Akron, USA, developed a carbon disc recycling
programme to recover and refurbish customers’
used or worn aircraft carbon disc brakes. Instead of
disposing of them, Meggitt reprocesses them using
a carbon re-densification process. Reprocessing
and reusing worn carbon discs reduces process
time by as much as 75% compared to new carbon
disc production, significantly reducing energy
consumption, carbon emissions and waste
generation. Since implementing this programme in
2009, carbon manufacturing process emissions at
the facility have decreased by 3%.
Cutting process time by 75%
recovering and refurbishing
carbon brake discs
MEGGITT PLC REPORT AND ACCOUNTS 2012
BUSINESS REVIEW
35
In 2012, we took further measures to improve safety in the
workplace. These included:
Trade compliance
• online health and safety leadership training for all levels of
management.
• group-wide online health and safety awareness training for
•
all employees.
integration of health and safety requirements within the
Meggitt Production System initiative.
• targeted behavioural health and safety programmes such as
MoveSmart® at Meggitt Polymers & Composites’ facility in
Rockmart, US and Hearts and Minds at Meggitt Polymers &
Composites in Loughborough, UK. We aim to roll out the
latter across identified sites from 2013.
implementation of an updated group-wide Personal
Protective Equipment policy for eye and foot protection.
improved reporting and investigation of near-miss accidents
and unsafe conditions, with special emphasis on root-cause
analysis and developing timely corrective action plans.
•
•
These measures have resulted in significant improvements in
health and safety performance across the group and
outstanding achievements at some of our sites:
• 17 manufacturing sites experienced no lost time due to
accidents (2011:13)
• 15 additional sites achieved at least a 25% improvement in
key health and safety metrics, including lost time incidents,
days lost due to injury and injury severity rates.
There were no fatalities at Meggitt sites in 2012 (2011: none). In
2012, the number of reported injuries1 (including PacSci)
increased to 43 (2011: 39). The accident/incident2 rate (including
PacSci) decreased to 397 (2011: 4173).
We instituted the annual Meggitt Safety Star Programme to
formally recognise the improvements in health and safety
performance at Meggitt facilities. 70% of our manufacturing
facilities achieved at least a Bronze Safety Star award reflecting
at least a 25% improvement in key health and safety metrics. Of
those, 17 facilities will receive a Platinum Safety Star award for
outstanding performance in achieving no work-related lost time
accidents and incurring no lost work days in 2012. The Meggitt
Safety Star Awards will be awarded to sites in Q1 2013 and will
be presented by senior group or divisional management.
We continue to disseminate information and best practice
through intra-group HSE conferences, health and safety alerts
and all-employee safety bulletins.
1 We define reported injuries as those which are reportable under
local laws/regulations.
2 The accident/incident rate is calculated by taking the number
of reported injuries, multiplied by 100,000 and dividing it by the
average employee headcount during the year.
3 2011 restated.
Meggitt’s Trade Compliance Policy outlines our commitment to
comply fully with the laws and regulations governing trade
controls in the jurisdictions in which we operate
Meggitt’s group-wide trade compliance programme is based on
the model of excellence outlined in the Nunn-Wolfowitz Task
Force Report of 2000—the influential report on export
compliance best practice—and US Government guidelines. We
achieve multiple levels of accountability using four key process
tools—assessment, compliance improvement, audit and
corrective action—which are applied in a continuum. Plans
arising from the review elements enable 16 sub-processes for
our facilities to be tracked by managers at all levels, including
the executive leadership team.
Meggitt’s trade compliance teams receive training and access to
key subject matter experts inside the group and from global
trade compliance advisors Livingston International (formerly the
Vastera element of JP Morgan Trade Management Consulting).
Meggitt’s trade compliance website, a customised database of
training modules, forms, templates, regulations, editorial and
company policy and procedures, is comprehensive and well-
respected by experts in the field.
In 2012, we continued to implement our selected global trade
management software solution, Global Trade Services (GTS) 8.0,
to enhance our trade compliance programme. We completed the
pilot programme successfully and started the implementation
at selected facilities in the USA. We have started to develop the
template for implementation at some of our European facilities
in 2013. In 2012 we began to implement our enhanced import
compliance programme at a number of facilities in the UK, and
plan to expand this programme to the US in 2013.
Business ethics
Meggitt’s Ethics and Business Conduct Policy commits us to:
• conducting business fairly, impartially and in full compliance
•
with applicable laws and regulations
integrity and honesty in all our business relationships
internally and externally
Our Ethics and Business Conduct Policy and Code of Conduct,
overseen by the Ethics and Trade Compliance Committee, must
be followed by all employees and advisers. All employees have
received Code of Conduct and anti-corruption training and are
required to view our ethics training videos which are released
regularly. We are a signatory to the Statement of Adherence to
the Global Principles of Business Ethics for the Aerospace and
Defence Industry. The Group Corporate Affairs Director is a
member of the Business Ethics Committee of the Aerospace and
Defence Industries Association of Europe. Our Vice-President,
Ethics and Business Conduct serves on the Steering Committee
of the International Forum on Business Ethical Conduct (IFBEC).
During 2012, Meggitt’s Ethics Programme was evaluated, along
with 128 other aerospace companies around the world, by
Transparency International: Meggitt was ranked in the top ten.
MEGGITT PLC REPORT AND ACCOUNTS 2012
BUSINESS REVIEW
36
Employees by division1
Employees by length of service (years)1
Employees by region1
Number of employees
Number of employees
Number of employees
10,980
10,980
10,980
Aircraft Braking Systems 1,228
1,156
Control Systems
2,041
Polymers & Composites
1,617
Sensing Systems
4,400
Equipment Group
538
Cross-group facilities
11%
10%
19%
15%
40%
5%
Less than 5
Between 5 and 10
Between 10 and 15
Between 15 and 20
Between 20 and 25
Over 25
4,822
2,440
1,253
718
520
1,227
44%
22%
11%
7%
5%
11%
1 As at 31 December 2012
North America
UK
Mainland Europe
Rest of World
6,011
2,597
1,593
779
55%
24%
14%
7%
At Meggitt, all employees must have an equal opportunity to
succeed, free from discrimination and have their contribution
recognised fairly. We encourage all Meggitt employees, through
our Ethics training programme and statement of values, to
ensure that all others are treated fairly and with respect.
Meggitt makes an important economic contribution to our
local communities, with salaries, tax and social security
contributions across the group amounting to approximately
£548 million in 2012 (34% of revenue).
Individual Meggitt facilities work with the local community
and support charities at their discretion. Annual reports
reveal the exceptional generosity of many employees who
give time and money to a wide range of international and local
initiatives. Education-Business Partnerships and the UK’s
Science, Technology, Engineering and Mathematics initiative
were supported by sites locally, as were a variety of
community-based charities.
Our people, local communities and
charitable donations
At the end of 2012, Meggitt employed 10,980 people worldwide.
Learning, career development, employee engagement, strong
leadership and effective teamwork are vital components of
Meggitt’s drive for all employees to deliver high levels of
performance. In 2012, we expanded our global change
leadership programme to equip managers with the skills needed
to work in a complex matrix environment and to become more
effective team leaders. 2012 saw the introduction of a global
front-line leadership programme, designed to equip managers
with a consistent set of people management capabilities. We
continue to invest in our executive leadership programme.
During 2013, we will launch the Meggitt Production System
across the group after significant preparatory work in 2012,
including a significant focus on people and organisation
development.
Throughout the year, we focused on processes for succession
planning, staffing, and performance management to attract,
develop and motivate talented staff in all areas of our
businesses. We completed much of the groundwork for a new
global HR information system that will be implemented in 2013.
The new system will enhance the processes needed for talent
management.
Principal risks and uncertainties
MEGGITT PLC REPORT AND ACCOUNTS 2012
BUSINESS REVIEW
37
Meggitt’s risk management framework includes a formal process for
identifying, assessing and responding to risk in relation to the group’s
strategy and business objectives.
Risk management operates at all levels throughout Meggitt, across
business lines, regions and functions. The Board is responsible for risk
management including maintaining the group’s risk governance
structure and an appropriate internal control framework (see page 51).
In 2012, the role of Senior Vice President, Risk Management and
Corporate Administration was created to give greater focus to Meggitt’s
risk management and reporting. The role, approved by the Board,
reports directly to the Group Corporate Affairs Director.
Types of risk
We monitor risk across four broad categories—markets, operations, finance and
corporate. The risks outlined below, which are not presented in order of priority, are
those the group believes are the principal ones it faces. However, additional risks, of
which the group is unaware, or risks the group does not currently consider material,
could have an adverse impact.
Markets
• Competition
Finance
• Credit
• Product demand
• Exchange rates
• IT security
• Financing
Operations
• Acquisitions
• Contracts
• Equipment fault
• Supply chain
• Retirement benefits funding
Corporate
• Environmental
• Legal and regulatory
• Organisational structure
Change in risk in year
No change
Higher risk
Lower risk
MEGGITT PLC REPORT AND ACCOUNTS 2012
BUSINESS REVIEW
38
Principal risks and uncertainties
Risk description
Potential impact
Mitigation action
Markets
Competition
We operate in a highly competitive global market that has
experienced significant consolidation in recent years. Losing
contracts to competitors, some of whom have greater financial,
technological and marketing resources, or being forced to accept
lower margins, would have an adverse effect on Meggitt’s results.
The group’s competitive position would suffer were it unable to
meet future investment requirements, continue research and
development or provide cash and equipment incentives to original
equipment manufacturers. Such investments, which decrease
our cash flow in the short-term, need to be recovered through
future revenues.
Losing key intellectual property or failing to enforce its rights
could hinder our development and provide competitor advantage.
• Protecting our position by maintaining a broad
customer base.
• Maintaining diverse products and operations to
reduce the effect of action by any single competitor.
• Maintaining a competitive manufacturing base with
low-cost operations in China, Mexico and Vietnam.
• Maintaining the highest manufacturing and quality
standards and adhering to individual customer
certification requirements.
• Developing proprietary intellectual property and
products in markets that demand high levels of
technology, quality and service and strong, long-term
relationships with customers.
• Maintaining a robust intellectual property protection
programme.
• Ensuring good operational cash flow and available
finance.
• Aligning organisational structure with customer
requirements.
Product demand
IT security
Military markets currently account for 39% of group revenues.
Any reduction in military spending or reordering of priorities,
particularly by the US government (Meggitt’s largest end
customer), could adversely affect our revenues.
• Spreading our activities across the civil aerospace,
military and energy markets.
• Generating revenues from original equipment
manufacturers and aftermarket products.
A significant or prolonged downturn due to recession, commodity
prices, terrorist attack or aerospace regulations would decrease
demand for the group’s products from civil aerospace customers,
which currently account for 45% of group revenues.
• Operating across different geographical regions.
• Maintaining, where practical, a flexible manufacturing
cost base, maximising benefits by sourcing from
lower cost markets as appropriate.
Intellectual property and other business data are stored and
transmitted electronically. Accordingly, the group is exposed to
the increasing risk of data loss either through third-party breach
of our systems or the unintentional loss of data by employees.
The group is implementing a number of global IT solutions based
around a core SAP ERP system across its sites. Failure to
implement the new systems successfully could lead to
increased costs, loss of data, operational delays and unplanned
increases in working capital.
• Monitoring risks and prioritising mitigation actions
through an IT security committee.
• Continually enhancing IT security policies, upgrading
and standardising security tools and implementing
comprehensive, group-wide training programmes.
• Progressively rolling out SAP under the governance
of a dedicated steering committee—18 sites to date
successfully implemented.
• Hosting SAP in two separate locations, each with
robust disaster recovery plans.
Operations
Acquisitions
Meggitt continues to pursue acquisitions as part of our growth
strategy. Such acquisitions may not realise expected benefits.
• Undertaking robust due diligence procedures.
• Obtaining representations, warranties and
indemnities from vendors where possible.
• Appointing full-time integration teams on all
major acquisitions.
• Implementing comprehensive business integration
processes building on the success of previous
acquisition integrations. Integration of PacSci is now
largely complete.
MEGGITT PLC REPORT AND ACCOUNTS 2012
BUSINESS REVIEW
39
Risk description
Potential impact
Mitigation action
Operations
Contracts
Multi-year, fixed price contracts with original equipment
manufacturing customers expose us to variations in
production costs.
The group is subject to the contracting regulations of our
government customers, particularly those of the US government,
our largest end customer, which can impose a range of sanctions
in response to violations.
• Ensuring estimates of cost are based on reliable
historic data, future productivity improvements and,
where possible, entering into multi-year, fixed price
contracts with major suppliers.
• Maintaining a comprehensive ethics and business
conduct programme, including guidelines for doing
business with the US Government and an anti-
corruption policy.
• Entering into commitments only after rigorous
commercial and legal reviews of contract terms.
• Implementing a programme of training and
development to strengthen the commercial functions
within the businesses.
Equipment fault
Meggitt’s products generally operate in extreme environments
where a serious incident arising from failure could result in
liabilities for personal injury or death and damage to our
reputation.
• Designing engineering standards and manufacturing
processes that ensure stringent quality and reliability
standards.
• Implementing best practice operational performance
The group may also be subject to material product warranty
obligations to third parties for equipment it manufactures
and services.
We rely on our own manufacturing operations and independent
suppliers for key raw materials and components, some of which
may be available from a limited number of suppliers. Any
disruption to the supply chain could have an impact on our
ability to meet customer requirements and adversely affect
the group’s results.
Meggitt’s operations are becoming increasingly subject to global
laws and regulations restricting the use of various hazardous
substances in our manufacturing processes and in our products.
This exposes the group to potential supply chain disruptions of
critical substances needed to meet stringent product
performance requirements mandated by our customers.
standards through the rollout of the Meggitt
Production System.
• Protecting the group from potential product
liability claims with liability insurance (subject
to coverage limits).
• Maintaining significant investment in modernising
facilities and improving production processes to
develop leading manufacturing operations.
• Maintaining a supplier risk assessment programme.
• Subjecting robust business continuity plans to regular
testing to manage the risk of a loss of a major facility
or supplier.
• Continuing to source a significant proportion of
products and services from lower cost economies.
• Forming an Obsolescence Review Board consisting
of senior members of the HSE, procurement,
engineering, quality and legal departments to track
and assess regulatory developments and create
action plans to identify and qualify alternative
substances or sources of supply as required.
Credit risk exists in relation to customers, banks and insurers.
• Maintaining a wide customer base and rigorous credit
Supply chain
Finance
Credit
Exchange rates
We operate in, and sell products to, a range of countries with
different currencies, resulting in exchange rate exposure.
Transaction risk arises where revenues are denominated in
currencies different from those of the costs of manufacture.
Translation risk arises on the conversion into sterling of income
statements and net assets of overseas subsidiaries.
control procedures.
• Maintaining a broad insurer group and monitoring the
credit rating of those insurers.
• Implementing offset arrangements and cash deposit
restrictions.
• Maintaining hedging in excess of 70% of the next
12 months’ anticipated transaction exposure.
• Addressing longer-term risk of exposure to exchange
rate fluctuations by sourcing goods and services in
currencies matching the revenue exposure where
cost-effective.
• Managing translation risk where possible by matching
the currency of borrowings with the net assets of
overseas subsidiaries.
MEGGITT PLC REPORT AND ACCOUNTS 2012
BUSINESS REVIEW
40
Principal risks and uncertainties
Risk description
Potential impact
Mitigation action
Finance
Financing
Meggitt’s long-term financing is provided by shareholders in
the form of equity and by banks and other institutions in the
form of debt.
The ability to raise additional equity finance depends on general
market conditions and convincing potential investors of the
strategic case for investing in Meggitt.
Debt facilities are provided for finite periods of time and need to
be renewed periodically, unless repaid from cash generated.
Such renewal could be affected by any structural issues in the
credit markets.
Debt facilities contain covenants which, if breached, could result
in the facilities being withdrawn.
• Maintaining good relationships with major
shareholders as evidenced by the equity placing
of £246 million in January 2011 to support the
acquisition of Pacific Scientific Aerospace.
• Negotiating debt facility extensions. During the year
the group successfully refinanced a 2013 maturing
bank facility with a new five-year USD400 million
committed revolving bank facility. No further
refinancing is required before 2016.
• Maintaining a broad and geographically diverse
banking syndicate, with good credit ratings.
• Using longer term US private placement funding
to reduce reliance on banks.
• Basing covenant calculations on frozen GAAP
to reduce volatility arising from certain fair
value measurements and any future accounting
standard changes.
• Including covenant clauses that enable net debt
and EBITDA to be retranslated to sterling at similar
exchange rates to reduce exchange movement
volatility.
• Regularly monitoring actual and forecast results
against covenant ratios.
Retirement
benefits funding
Corporate
Environmental
The group’s post-retirement benefit schemes are in deficit
(£299.7 million at 31 December 2012). The future deficit position
may be adversely affected by poor investment performance,
changes in corporate bond yields and inflation rates, greater than
anticipated improvements in life expectancy and changes in the
regulatory environment. This would have an adverse effect on
amounts recorded in the income statement and the level of future
cash contributions required to be made.
• Closing all defined benefit pension schemes in the
UK and US to new members.
• Reducing future service costs by basing UK future
accruals on career average salaries and freezing
group contributions to post-retiree healthcare
schemes at 2011 levels.
• Agreeing deficit recovery plans with the trustees
based on actuarial advice and the results of
scheme valuations.
Meggitt’s operations and facilities are subject to laws and
regulations that govern the discharge of pollutants and hazardous
substances into air and water, the handling, storage and disposal
of such materials, and other environmental matters. Failing to
comply with our obligations potentially exposes the group to
serious consequences, including fines, other sanctions and
operational limitations.
We are involved in the investigation and remediation of current
and former sites for which we have been identified as a potentially
responsible party under US law.
• Designing processes that minimise the effect of the
group’s operations on the environment.
• Maintaining a programme of independent third-party
audits of our sites.
• Carrying out extensive environmental due diligence
on potential acquisitions.
• Purchasing environmental insurance for all new,
and acquired, sites where this is appropriate.
MEGGITT PLC REPORT AND ACCOUNTS 2012
BUSINESS REVIEW
41
Risk description
Potential impact
Mitigation action
• Maintaining a legal compliance and risk management
function to oversee the management of these risks
and the appropriate response to any issues as
they arise.
• Maintaining a comprehensive health and safety
programme across all of our businesses, including
third-party audits, benchmarking of performance,
and detailed training programmes.
• Investing significant resources in implementing best
practice trade compliance and ethics programmes
which are reviewed quarterly by the Board’s Ethics
and Trade Compliance Committee.
Legal and
regulatory
We are subject to litigation in the ordinary course of business and
provide for such costs where appropriate. However, there is a risk
that successful claims or costs could exceed provisions. For
example, a number of asbestos-related claims have been made
against subsidiary companies. To date, the amount connected
with such claims in any year has not been material and many
claims are covered fully or partly by existing insurance and
indemnities.
The group is subject to the laws and regulations of the countries
in which it operates, including health and safety, environmental,
export and import compliance and government contracting
regulations. In the US, there is a system of voluntary disclosure to
the relevant authorities to deal with any breach of export laws.
Any reported or unreported breach may be investigated and,
depending upon its seriousness, result in criminal, civil or
administrative penalties, including suspension or debarment. The
US authorities are investigating alleged violations of US export
control laws by four US Meggitt subsidiaries and a UK business.
These investigations are likely to lead to financial penalties for
which provision has been made and the imposition of corrective
measures. Suspension or debarment and denial of export
privileges are also possible.
The aerospace industry is highly regulated so the group would be
adversely affected if a material certification, authorisation or
approval were revoked or suspended.
Organisational
structure
Meggitt’s success depends upon the efforts, abilities, experience
and expertise of certain senior and specialist employees.
Failure to retain them or recruit alternatives would have an
adverse effect.
• Maintaining development and succession programmes,
competitive benchmarked remuneration packages and
good communications at all levels.
• Strengthening central sales and marketing, operational
The group would be adversely affected by work stoppages
or slowdowns at its facilities and those of key customers
or suppliers.
As the group continues to grow organically and through
acquisition it risks becoming fragmented and unable to
execute its strategic objectives.
excellence, IT, legal and compliance functions.
• Implementing a new divisional structure.
• Standardising back office functions, provided
increasingly through shared service centres.
MEGGITT PLC REPORT AND ACCOUNTS 2012
GOVERNANCE
42
Contents
43-62
Governance
43
44-46
47-51
52-62
Board of directors
Directors’ report
Corporate governance report
Remuneration report
63-113 Financial statements
Statutory financial statements including
the independent auditors’ report
Group financial statements
Independent auditors’ report to the members
of Meggitt PLC
Consolidated income statement
Consolidated statement of comprehensive income
Consolidated balance sheet
Consolidated statement of changes in equity
Consolidated cash flow statement
Notes to the financial statements
Company financial statements
Independent auditors’ report to the members
of Meggitt PLC
Company balance sheet
Notes to the financial statements of the Company
63
64
65
66
67
68
69-105
106
107
108-113
114–116 Supplementary information
114
115-116
Five-year record
Investor information
Board of directors
MEGGITT PLC REPORT AND ACCOUNTS 2012
MEGGITT PLC REPORT AND ACCOUNTS 2012
GOVERNANCE
GOVERNANCE
43
43
Sir Colin Terry KBE CB DL FREng
Non-Executive Chairman + §
Philip Cox CBE
Non-Executive Director * + ‡
David Robins
Non-Executive Director
Sir Colin, a chartered engineer, was appointed
to the Board in February 2003, becoming non-
executive Chairman on 1 July 2004. He spent 37
years in the Royal Air Force, where he reached
the rank of Air Marshal. Since retiring, he has
held the positions of Group Managing Director
of Inflite Engineering Services, Chairman of
the Engineering Council (UK), President of the
Royal Aeronautical Society and the Council of
European Aerospace Societies. Sir Colin is now
Chairman of the UK Military Aviation Authority
Safety Advisory Committee, member of the
Advisory Board of Horton International and
non-executive director and Chairman of the
Audit Committee of Fox Marble Holdings PLC.
He is President of the Soldiers, Sailors, Airmen
and Families Association in Buckinghamshire
where he is also a Deputy Lieutenant.
Philip, a chartered accountant, was appointed
to the Board in September 2012. Philip was
Senior Vice President for Operational Planning
at Invensys plc and Finance Director of Siebe
PLC before joining International Power plc as
Chief Financial Officer in 2000. He retires as
International Power’s Chief Executive Officer
at the end of April 2013.
Philip has been a non-executive director of
Wm Morrison Supermarkets PLC since 2009,
is Chairman of its Audit Committee and will
be appointed non-executive director of PPL
Corporation, a US-listed energy utility company,
on 1 April 2013. Between 2001 and 2009, Philip
was non-executive director and Chairman of the
Audit Committee for logistics and supply chain
management group Wincanton plc.
Terry Twigger
Chief Executive + §
Terry, a chartered accountant, joined Meggitt
in 1993 and was appointed to the Board as
Group Finance Director in 1995, becoming Chief
Executive in January 2001. Terry intends to step
down as Chief Executive and Board member
after the annual general meeting on 1 May 2013.
Terry will support the Board and his successor,
Stephen Young, until his retirement on 30 June
2013.
Since June 2009, Terry has been non-executive
director and Chairman of the Audit Committee
of Filtrona plc, an international speciality
plastic and fibre products supplier.
Guy Berruyer
Non-Executive Director * + ‡
Guy was appointed to the Board in October
2012. Guy is Group Chief Executive of The Sage
Group plc, whose French division he joined as
Chief Executive in 1997. Guy’s early career was
spent with software and hardware vendors
in management roles both at French and
European level. Guy trained as an electrical
engineer at the École Polytechnique Fédérale
de Lausanne and holds an MBA from Harvard
Business School.
Philip Green
Group Corporate Affairs Director §
Philip joined Meggitt in 1994 as Group Company
Secretary and was appointed to the Board in
January 2001 with responsibility for legal and
compliance matters. He relinquished the role of
Company Secretary in 2006. Previously, Philip
spent 14 years at British Aerospace. He is a
Fellow of the Institute of Chartered Secretaries
and Administrators.
Paul Heiden
Non-Executive Director * + ‡
Paul, a Chartered Accountant, was appointed
to the Board in June 2010 and became Chairman
of the Remuneration Committee in April
2012. He was Chief Executive of FKI Plc from
2003 to 2008, having held a number of senior
positions, including Director, Industrial Business
and Finance Director of Rolls-Royce plc and
senior financial positions with Peat Marwick,
Mitchell and Co, Hanson Plc and Mercury
Communications.
Paul is non-executive director and Chairman of
the Audit and Risk Committees of UU Plc and the
London Stock Exchange Group plc and Chairman
of Intelligent Energy Holdings plc.
Guy does not hold any other non-executive
directorships.
Brenda Reichelderfer
Non-Executive Director * + ‡
Brenda was appointed to the Board in June
2011. Brenda, an engineer, was Senior Vice
President, Director of Engineering and Chief
Technology Officer of ITT Industries Corporation,
until her retirement in 2008. She is Senior Vice
President and Managing Director of private
equity sector consulting firm TriVista, a member
of the Technology Transfer Group of the Missile
Defense Agency and non-executive director
of Federal Signal Corporation and Wencor
Aerospace.
David was appointed to the Board in January
2002. He was, until December 2000, Chairman
and Chief Executive of ING Barings, before which
he spent 18 years at Phillips & Drew and UBS,
becoming Executive Vice President and Regional
Head of UBS Europe.
He is Chairman of Henderson Asian Growth
Trust, Fidelity Japanese Values Investment Trust
and Oriel Securities Ltd, director of a venture
capital-backed company and chairman of
two charities.
David Williams
Non-Executive Director * + ‡
David, a chartered accountant, was appointed
to the Board in December 2006, becoming
Senior Independent Director in February 2011.
He held a number of senior financial positions
before spending 15 years as Finance Director
of distribution and outsourcing group Bunzl plc
from 1991. He is the Joint Chairman of Mondi plc
and Mondi Limited and non-executive director
and Audit Committee Chairman of DP World
Limited. He was also a non-executive director
and Audit Committee Chairman of Tullow Oil plc
until his retirement in May 2012.
Stephen Young
Group Finance Director §
Stephen, a chartered management accountant,
was appointed to the Board in January 2004, and
will assume the role of Chief Executive following
the annual general meeting on 1 May 2013.
Stephen has held a number of senior financial
positions including Group Finance Director of
Thistle Hotels plc, Group Finance Director of
the Automobile Association and Group Financial
Controller of Thorn EMI plc. He was appointed
non-executive director of Derwent London plc in
August 2010 and is Chairman of its Audit and Risk
Committees and member of its Remuneration
and Nominations Committees.
Membership of committees
* Audit: David Williams (Chairman), Guy Berruyer,
Philip Cox, Paul Heiden, Brenda Reichelderfer
+ Nominations: Sir Colin Terry (Chairman), Terry Twigger,
Guy Berruyer, Philip Cox, Paul Heiden,
Brenda Reichelderfer, David Williams
‡ Remuneration: Paul Heiden (Chairman),
Guy Berruyer, Philip Cox, Brenda Reichelderfer,
David Williams
§ Ethics and trade compliance: Sir Colin Terry (Chairman),
Terry Twigger, Philip Green, Stephen Young
MEGGITT PLC REPORT AND ACCOUNTS 2012
GOVERNANCE
44
Directors’ report
The consolidated financial statements of the Group have been prepared
in accordance with International Financial Reporting Standards as
adopted by the European Union (‘IFRSs as adopted by the EU’) and the
Companies Act 2006.
The Company financial statements have been prepared in accordance
with UK Generally Accepted Accounting Practice (‘UK GAAP’) and the
Companies Act 2006.
The Group’s business activities, together with the factors likely to
affect its future development, performance and position, are contained
in the Business Review (pages 1 to 41). All such information as is
required to be contained in the Directors’ Report by Section 417 of the
Companies Act 2006 is incorporated by reference into this report. The
Corporate Governance Report (pages 47 to 51) also forms part of this
report.
Policies on financial risk management, including the extent to which
financial instruments are utilised to mitigate any significant risks to
which the Group is exposed, are set out in note 3 of the Group’s
financial statements.
Principal activities
Meggitt PLC is a public limited company listed on the London Stock
Exchange, domiciled in the United Kingdom and incorporated in
England and Wales with the registered number 432989. Its registered
office is at Atlantic House, Aviation Park West, Bournemouth
International Airport, Christchurch, Dorset, BH23 6EW.
Meggitt PLC is the parent company of a Group whose principal
activities during the year were the design and manufacture of high
performance components and sub-systems for aerospace, defence
and other specialist markets, including energy, medical, industrial,
test and automotive.
Directors
The directors of the Company who were in office during the year and up
to the date of signing the financial statements were: Sir Colin Terry,
Mr T Twigger, Mr G S Berruyer (appointed 2 October 2012), Mr P G Cox
(appointed 27 September 2012), Mr P E Green, Mr P Heiden, Ms B L
Reichelderfer, Mr D A Robins, Mr D M Williams and Mr S G Young.
On 9 January 2013, Mr Twigger advised the Board of his intention to step
down as Chief Executive and member of the Board on 1 May 2013.
Following a rigorous search process, involving internal and external
candidates, the Board determined that Mr Twigger will be succeeded as
Chief Executive by Mr Young, who has been Group Finance Director since
2004. Mr Twigger will support the Board and Mr Young until his
retirement on 30 June 2013. The recruitment process has begun for a
new Group Finance Director.
Under the Articles of Association (the Articles), one-third of the directors
are subject to re-election every year. However, in accordance with the UK
Corporate Governance Code, at the Annual General Meeting (AGM) in
2013 all directors will stand for re-election (except for Mr Twigger, who is
stepping down on that date).
Details of directors’ contracts and their interests in the ordinary shares
of the Company are shown in the Remuneration Report on pages 52 to 62.
None of the directors has, or has had, at any time during the financial
year a beneficial interest in any material contract relating to the business
of the Group other than service contracts.
The directors have the benefit of qualifying third-party indemnity
provisions for the purposes of Section 236 of the Companies Act 2006
pursuant to the Articles which were in effect throughout the financial
year and up to the date of this Directors’ Report. The Company also
purchased and maintained throughout the year Directors’ and Officers’
liability insurance. No indemnity is provided for the Company’s auditors.
Dividends
Substantial shareholdings
The directors recommend the payment of a final dividend of 8.20p net
per ordinary 5p share (2011: 7.30p), to be paid on 10 May 2013 to those
members on the register at close of business on 15 March 2013.
An interim dividend of 3.60p (2011: 3.20p) was paid on 5 October 2012.
If the final dividend as recommended is approved the total ordinary
dividend for the year will amount to 11.80p net per ordinary
5p share (2011: 10.50p).
Dividends are paid to shareholders net of a non-refundable tax
credit of 10%. Shareholders liable to higher rates of income tax will
have additional tax to pay.
Shareholders will be offered a scrip dividend alternative under
the share dividend plan in respect of the proposed final dividend.
During 2012, the Company made the Meggitt PLC share dividend plan
available for the dividends paid in May 2012 (the final dividend for 2011)
and in October 2012 (the interim dividend for 2012). The cash dividend
necessary to give an entitlement to one new ordinary share was fixed at
403.08p and 408.78p respectively.
Acquisitions and disposals
On 4 July 2012, the Group acquired 100% of the voting rights of
Fotomechanix Limited for a cash consideration of £11.9 million.
Fotomechanix Limited is a key supplier to Heatric, the Group’s printed
circuit heat exchanger business.
On 10 August 2012, the Group disposed of the business and assets of
Meggitt (Simi Valley), Inc. to RSA Engineered Products, Inc. for a cash
consideration of £16.1m.
At 31 December 2012, the Company had been notified under the
Disclosure and Transparency Rules (DTR) of the following substantial
interests in the issued ordinary shares of the Company requiring
disclosure:
Percentage of
total voting
rights attaching
to the issued
ordinary share
capital of the
Company
Indirect voting
rights*
Direct voting
rights*
The Capital Group
Companies, Inc.
Prudential plc
FMR LLC
–
Baillie Gifford & Co
Legal & General Group plc
25,966,967
Standard Life Investments Ltd 22,153,694
74,972,665
–
64,753,939
–
– 39,304,285
34,138,890
–
3,769,560
9.55
8.25
5.01
4.35
3.31
3.30
* One voting right per ordinary share.
Between 31 December 2012 and 22 February 2013, The Capital Group
Companies, Inc. has notified an increase in holding to 11.08% (86,993,907
indirect voting rights).
Conflicts of interest
The Company has a procedure for the disclosure, review, authorisation
and management of directors’ conflicts of interest and potential conflicts
of interest, in accordance with the provisions of the Companies Act 2006.
The procedure is included in the Articles and has been adhered to by the
Board since its introduction in 2008. In deciding whether to authorise a
conflict or potential conflict the directors must have regard to their
general duties under the Companies Act 2006. The authorisation of any
conflict matter, and the terms of authorisation are reviewed by the Board
as appropriate and, as a minimum on an annual basis.
MEGGITT PLC REPORT AND ACCOUNTS 2012
GOVERNANCE
45
Share capital and control
Corporate responsibility
The issued share capital of the Company at 31 December 2012 and
details of shares issued during the financial year are shown in note 34
on page 100. On 31 December 2012 there were 785,001,257 ordinary
shares in issue. A further 83,273 ordinary shares were issued between
1 January 2013 and 22 February 2013, all of which were issued as a result
of the exercise of share awards. The ordinary shares are listed on the
London Stock Exchange.
The rights and obligations attaching to the Company’s ordinary shares
are set out in the Articles. A copy of the Articles is available for
inspection at the registered office. The holders of ordinary shares are
entitled to receive the Company’s report and accounts, to attend and
speak at general meetings of the Company, to appoint proxies to exercise
full voting rights and to participate in any distribution of income or
capital.
There are no restrictions on transfer, or limitations on holding ordinary
shares and no requirements for prior approval of any transfers. There
are no known arrangements under which financial rights are held by
persons other than holders of the shares and no known agreements
or restrictions on share transfers or on voting rights. Shares acquired
through Company share plans rank pari passu (on an equal footing) with
the shares in issue and have no special rights.
The Company has disclosed significant direct or indirect holdings,
which are published on a regulatory information service and on the
Company’s website.
The Board takes regular account of social, environmental and ethical
matters. Our Corporate Responsibility Report gives a full update on
activities and achievements during 2012 and can be found on pages 31
to 36.
The Group continues to carry out its responsibilities for securing the
health, safety and welfare at work of employees and for protecting others
against risks to health and safety relating to the activities at work of
those employees. Every reasonable effort is made to provide safe
working conditions. Protective equipment is provided and safety training
takes place regularly. There is a Group Health and Safety Policy, which
was reviewed and updated by the Board of Directors in December 2011.
The Group regards employee communication as a vital business function.
Communication and consultation is carried out at facilities by operations
directors and other line managers using a variety of forums from daily
meetings on shop floors to monthly all employee ‘Town Hall’ meetings,
team briefings and works councils. We ensure that all employee relations
regulations are respected.
Corporate communications take a variety of forms, including
presentations from the Chief Executive via audio-visual media, global
web-enabled conferences, publications such as the Meggitt Review and a
variety of electronically distributed newsletters. Results presentations
are disseminated across the Group, which enhance our employees’
understanding of the financial and economic factors affecting the
performance of the Group.
Rules about the appointment and replacement of Company directors are
contained in the Articles which provide that a director may be appointed
by ordinary resolution of shareholders or by the existing directors, either
to fill a vacancy or as an additional director. Changes to the Articles must
be submitted to the shareholders for approval by way of special
resolution. The directors may exercise all the powers of the Company
subject to the provisions of relevant legislation, the Articles and any
directions given by the Company in general meeting. The powers of the
directors include those in relation to the issue and buyback of shares. At
each AGM, the shareholders are requested to renew the directors’
powers to allot securities in the Company up to the value specified in the
notice of meeting and to renew the directors’ powers to allot securities
without the application of pre-emption rights up to the value specified
in the notice of meeting in accordance with the Articles. The Company
can seek authority from the shareholders at the AGM to purchase its
own shares.
The directors encourage employees to become shareholders to improve
active participation in, and commitment to, the Group’s success. This
policy has been pursued for all UK employees through the Share
Incentive Plan and the Sharesave Scheme.
The Group has a policy supporting the principle of equal opportunities in
employment and opposing all forms of unlawful or unfair discrimination.
It is Group policy to give full and fair consideration to applications from
disabled people, to continue wherever possible to employ staff who
become disabled and to provide opportunities for the training, career
development and promotion of disabled employees.
The Group has an Ethics and Business Conduct Policy and a Code of
Conduct which are overseen by the Vice-President of Ethics and
Business Conduct. All employees have received a copy of the Code,
supplemented by follow-up training, which is refreshed regularly. Ethics
and business conduct is reviewed regularly by a Board committee.
Community relations and charitable donations
During the year, the Group made charitable donations of £0.2 million
(2011: £0.1 million), principally to local charities serving the communities
in which the Group operates. The Company made charitable donations of
£30,000 (2011: £15,000).
Political contributions
In accordance with the Group’s policy, no contributions were made to EU
political parties or EU political organisations (2011: £Nil) and no EU
political expenditure exceeding £2,000 was incurred in the year by the
Company or any of its subsidiaries (2011: none above £2,000). No
contributions to non-EU organisations with political objectives were
made during the year (2011: £Nil).
The Group has significant financing agreements which include change of
control provisions which, should there be a change of ownership of the
Company, could result in renegotiation, withdrawal or early repayment
of these financing agreements. These are a USD 400 million revolving
credit agreement dated July 2012, a USD 700 million revolving credit
agreement dated April 2011, a USD 600 million note purchase agreement
dated June 2010 and a USD 250 million note purchase agreement dated
June 2003. There are a number of other long-term commercial
agreements that may alter or terminate upon a change of control of the
Company following a successful takeover bid. These arrangements are
commercially confidential and their disclosure could be seriously
prejudicial to the Company.
The service contracts for the executive directors state that if there is
a change of control in the Company, executive directors may terminate
their employment within six months and would be entitled to
compensation from the Company for loss of office. The compensation
would be annual remuneration plus the value of benefits for the
unexpired notice period less 5%.
The Company does not have any agreements with the non-executive
directors or any other employees that would provide compensation
for loss of office or employment resulting from a takeover except that
provisions in the Company’s share plans may cause options and/or
awards granted to employees under such plans to vest on a takeover.
MEGGITT PLC REPORT AND ACCOUNTS 2012
GOVERNANCE
46
Directors’ report continued
Payment policy
Statement of directors’ responsibilities
The Company’s policy is to seek to comply with the terms of payment
agreed with a supplier. Where terms are not negotiated, the Company
endeavours to adhere to the supplier’s standard terms. The Company’s
creditor days at 31 December 2012 were 44 (2011: 39).
Research and development
The Group recognises the importance of investing in research and
development programmes which enhance the Group’s products and the
way they are made. Including amounts funded by customers, expenditure
on research and development amounted to £122.0 million (2011: £110.5
million). Excluding amounts funded by customers, it was £97.1 million
(2011: £83.2 million), of which £52.2 million (2011: £41.5 million) was
capitalised in accordance with the Group’s accounting policies (see note
2 of the Group’s financial statements).
Annual General Meeting – 1 May 2013
Details of the AGM and explanations of the proposed resolutions appear
in the separate Notice provided to shareholders in their elected format at
least 20 working days before the date of the AGM, and can be viewed on
our website (www.meggitt.com). In addition to routine business,
shareholders’ consent will be sought to:
(i) approve the Remuneration Report;
(ii) increase the maximum aggregate amount of directors’ fees;
(iii) renew the authority of the directors to issue shares under Article 4 of
the Articles;
(iv) approve payments to organisations of no more than £60,000 in total,
which might inadvertently be interpreted as donations to EU political
organisations under the Political Parties, Elections and Referendums
Act 2000 (as amended by the Electoral Administration Act 2006). It is
not the policy of the Company to make donations to political parties
and the directors have no intention of changing that policy; and
(v) approve the convening of general meetings on 14 clear days’ notice in
accordance with the Articles.
Auditors
PricewaterhouseCoopers LLP has expressed its willingness to continue
as independent auditors and a resolution to reappoint them will be
proposed at the 2013 AGM.
Disclosure of information to auditors
At the date of this report, as far as the directors are aware, there is
no relevant audit information of which the Company’s auditors are
unaware. Each of the directors has taken all the necessary steps
in order to make himself or herself aware of any relevant audit
information and to establish that the Company’s auditors are aware
of that information.
The directors are responsible for preparing the Annual Report, the
Remuneration Report and the financial statements in accordance with
applicable law and regulations and consider the Annual Report, taken as
a whole, to be fair balanced and understandable and to provide the
information necessary for shareholders to assess the Group’s
performance, business model and strategy.
Company law requires the directors to prepare financial statements
for each financial year. Under that law the directors have elected to
prepare the Group financial statements in accordance with IFRSs as
adopted by the EU and the Company financial statements in accordance
with UK GAAP.
Under company law, the directors must not approve the financial
statements unless they are satisfied that they give a true and fair view of
the state of affairs of the Group and the Company and of the profit or loss
of the Group for that period. In preparing these financial statements, the
directors are required to:
• select suitable accounting policies and apply them consistently;
• make judgements and accounting estimates that are reasonable
and prudent; and
• state whether IFRSs as adopted by the EU and applicable UK
Accounting Standards have been followed, subject to any material
departures disclosed and explained in the Group and Company
financial statements respectively.
The directors are responsible for keeping adequate accounting records
that are sufficient to: (i) show and explain the Group’s and the Company’s
transactions; (ii) disclose with reasonable accuracy at any time the
financial position of the Group and the Company; and (iii) enable them to
ensure that the financial statements and the Remuneration Report
comply with the Companies Act 2006 and, as regards the Group financial
statements, Article 4 of the International Accounting Standards
Regulation. They are also responsible for safeguarding the assets of the
Group and the Company and hence for taking reasonable steps for the
prevention and detection of fraud and other irregularities.
The directors are responsible for the maintenance and integrity of
the Company’s website. Legislation in the United Kingdom governing the
preparation and dissemination of financial statements may differ from
legislation in other jurisdictions.
Each of the directors, whose names and functions are listed in the Board
of Directors on page 43, confirm that to the best of their knowledge:
• the Group financial statements, which have been prepared in
accordance with IFRSs as adopted by the EU, give a true and fair view
of the assets, liabilities, financial position and profit of the Group; and
• this Directors’ Report and the Business Review on pages 1 to 41
include a fair review of the development and performance of the
business and the position of the Group, together with a description of
the principal risks and uncertainties that it faces.
By order of the Board
M L Thomas
Company Secretary
4 March 2013
Corporate governance report
MEGGITT PLC REPORT AND ACCOUNTS 2012
GOVERNANCE
47
Chairman’s introduction
Board membership and attendance during 2012
The Board considers that good corporate governance practice enhances
the strength of our values, our reputation and our ability to implement
our corporate strategy. In this report, and the Remuneration Report on
pages 52 to 62, we have provided further details about how the principles
of the UK Corporate Governance Code, as applicable for companies with
accounting periods beginning on or after 29 June 2010 (the Code), have
been applied including those relating to the role and effectiveness of the
Board, together with activities of the Board and its Committees.
In 2012, we completed an externally facilitated Board evaluation and we
have provided a report on the outcome of that process below.
In terms of the composition of the Board, although David Robins has
completed over nine years of service, he is a highly experienced and
valued non-executive director, who makes an important contribution to
the Board and so continues to serve on the Board as a director.
In 2012, we enhanced the composition of the Board with the appointment
of two independent non-executive directors, Philip Cox and Guy Berruyer.
Philip, who is a Chartered Accountant and Chief Executive of
International Power plc until his forthcoming retirement in March 2013
and Guy, who is Chief Executive of The Sage Group plc, have added to the
existing skills and experience on the Board and are expected to make a
significant contribution to the Board’s deliberations. The Board also
considers that Guy’s international experience and perspective will bring
diversity to the deliberations of the Board. Full profiles are included in
our Notice of Annual General Meeting (AGM).
On 9 January 2013, we announced the retirement of Terry Twigger as
Chief Executive and the appointment of his successor, Stephen Young,
with effect from 1 May 2013. Ensuring smooth succession of the Chief
Executive and new Group Finance Director (once selected) is a crucial
role for the Board and this will be a key focus in 2013.
I can confirm that the Company has applied the Code, which was issued in
2010 and is available on the Financial Reporting Council (FRC) website
(www.frc.org.uk). In this report we have also included our policy on
diversity and more detailed disclosures in the Audit Committee section. We
have provided explanations where we have not complied with the Code in
our Statement of Compliance on page 51. This report includes the
information required by the Disclosure and Transparency Rules (‘DTR’)
7.2 to be contained in the Company’s corporate governance statement,
with the exception of the information required under DTR 7.2.6 which is
located in the Directors Report.
Sir Colin Terry
Chairman of the Board of Directors
4 March 2013
Board of Directors
The Board met eight times in 2012. The Board retains full and effective
control of the Group and is collectively responsible for the Group’s
success through its leadership. It sets the strategy, ensures appropriate
resources are in place and reviews performance on a regular basis.
The Board is responsible for setting the Group’s values and standards
and for ensuring its obligations to shareholders, employees and others
are met. The Board considers it has a good balance of executive and
non-executive directors, is of an appropriate size and includes the skills
and experience required by the business.
Meetings
eligible Meetings
to attend attended
Name
Title
Sir Colin Terry
Mr T Twigger
Mr G S Berruyer1
Mr P G Cox2
Mr P E Green
Chairman
Executive Director
(Chief Executive)
Non-Executive Director
Non-Executive Director
Executive Director
(Group Corporate
Affairs Director)
Non-Executive Director
Mr P Heiden
Ms B L Reichelderfer Non-Executive Director
Non-Executive Director
Mr D A Robins
Non-Executive Director
Mr D M Williams
(Senior Independent Director)
Executive Director
(Group Finance Director)
Mr S G Young
8
8
2
3
8
8
8
8
8
8
8
8
2
3
8
8
8
7
8
8
1
2
Appointed on 2 October 2012.
Appointed on 27 September 2012.
The Board regularly receives reports from the Chief Executive on the
Group’s activities, from the Group Finance Director on financial
performance and treasury matters and from the Group Corporate Affairs
Director on risk, legal and compliance issues. Strategic issues and other
matters (including capital structure, financial reporting and controls) are
considered in line with a schedule of matters reserved for the decision of
the Board (which was reviewed and updated in 2012). If a decision is not
reserved for the Board, then authority lies, in accordance with an
authorisation policy, with one of the Finance Committee of the Board, the
Chief Executive, an executive director, divisional presidents or site
directors/general managers (as appropriate).
All directors are subject to election by shareholders at the first AGM after
their appointment and have been subject to re-election annually from
2012 onwards in compliance with the Code. In 2013, all directors will be
subject to re-election except for Mr Twigger, who will step down from the
Board at the end of the AGM on 1 May 2013. Biographical and other
relevant information on directors submitted for re-election is provided in
the Notice of AGM.
Chairman
• Sir Colin Terry met the independence criteria on appointment as
Chairman on 1 July 2004.
• The roles of the Chairman and Chief Executive are separate and there
is a clear division of responsibilities which has been approved and
agreed in writing by the Board.
• The Chairman is responsible for leading the Board and for ensuring its
effectiveness.
• There were no changes to the external commitments of the Chairman
in 2012.
• Accurate, timely and clear information is provided to all directors and
the Chairman is satisfied that effective communication, principally by
the Chief Executive and Group Finance Director, is undertaken with
shareholders.
• The Chairman agrees a personalised approach to the training and
development of each director and reviews this regularly.
• The Chairman facilitates the contribution of non-executive directors
and oversees the relationship between them and the executive
directors. The Chairman holds informal meetings with the other
non-executive directors without executives present.
MEGGITT PLC REPORT AND ACCOUNTS 2012
GOVERNANCE
48
Corporate governance report continued
Board of Directors continued
Board performance evaluation
Senior Independent Director
The role of Mr Williams, as Senior Independent Director, is to:
• Make himself available to shareholders if they have concerns which
contact through the normal channels has failed to resolve or for which
such contact is inappropriate;
• Ensure he has gained a balanced understanding of the issues and
concerns of major shareholders and financial analysts;
• Chair the Nominations Committee when it is considering succession to
the role of Chairman of the Board; and
• Meet with the non-executive directors at least once a year to appraise
the Chairman’s performance and on such other occasions as are
deemed appropriate.
Non-executive directors
• All of the non-executive directors are considered independent under
the Code, with the exception of Mr Robins who has served on the Board
for over nine years. Mr Robins is a highly experienced and valued
non-executive director, who makes an important contribution to the
Board and so continues to serve on the Board as a director.
• The non-executive directors play a full part by constructively
challenging and contributing to the development of strategy. The
performance of management, the integrity of financial information and
the effectiveness of financial controls and risk management systems
are also monitored.
• The non-executive directors are responsible for determining
appropriate levels of remuneration for the executive directors and
have an important role in appointing new directors.
• The terms and conditions of appointment of non-executive directors are
available for inspection at the Company’s registered office during
normal business hours. Their letters of appointment set out the
expected time commitment required. On appointment, their other
significant commitments were disclosed, including the time involved.
The work of the Board in 2012
During the year, the Board approved the acquisition of Fotomechanix
Limited and the disposal of Meggitt (Simi Valley), Inc.. The Board received
regular reports from executive directors on business and financial
performance and corporate affairs (litigation, health, safety and
environmental, trade compliance, ethics and business conduct and risk
management). The Board also received:
• Business unit and functional updates and presentations on strategy,
engineering, operational excellence, and investor relations;
• Reports on internal control, risk management and amendments to the
Code; and
• Reports on the activities of its committees.
The following other matters were also reviewed and approved:
• The 2011 Annual Report and Accounts, the 2011 full-year results
announcement and the 2012 interim results announcement;
• Interim Management Statements released in April and November;
• Recommendations to shareholders on the final dividend payment to
shareholders in respect of the year ended 31 December 2011 and the
interim dividend payment for the year ended 31 December 2012;
• The appointments of Mr Berruyer and Mr Cox to the Board;
• The Group’s strategy and budget for 2013;
• Refinancing of the Group’s USD 500 million credit facility, which was
due to expire in 2013, with a new five year USD 400 million multi-
currency revolving credit facility;
• Revised Schedule of Matters Reserved for the Board, Board delegated
authority and Terms of Reference for all Board committees;
• A revised Group Environmental Policy; and
• The appointment of Ms Thomas as Company Secretary.
During the year, no unresolved concerns were recorded in the
Board’s minutes.
In August 2012, the Board engaged Lintstock Limited to externally
facilitate the evaluation of the effectiveness of the Chairman, the Board
and its Committees. Lintstock do not have any other connection with the
Group. The responses received from the Board indicated that all
members were thoroughly engaged in the evaluation process and there
was a good level of positive alignment amongst Board members. On
considering the feedback report, key themes and actions were identified
where appropriate.
The performance of individual directors has been reviewed by the
Chairman and Chief Executive. In 2013, the Board will conduct a
self-evaluation, applying the lessons learned from the external process
used in 2012. The next external evaluation is due in 2015.
Information and professional development
The Board is supplied with the information it needs to discharge its
duties. The induction process was reviewed and refreshed in 2012, and
all new directors receive an appropriate induction to the business,
including meetings with other directors, senior management, auditors,
brokers and other professional advisors as appropriate, site visits and
the provision of a comprehensive induction pack. Major shareholders
have the opportunity to meet new non-executive directors should they
wish to do so.
Directors are encouraged to update their skills regularly and their
training needs as assessed as part of the Board evaluation process.
Their knowledge and familiarity with the Group is facilitated by access to
senior management, reports on the business and visits to the Group’s
operating facilities. Resources are available to directors for developing
and updating their knowledge and capabilities.
The Board allows all directors to take independent professional advice at
the Company’s expense. Committees are provided with sufficient
resources to undertake their duties. All directors have access to the
advice and services of the Company Secretary who is responsible to the
Board for advising on all governance matters and for ensuring that Board
procedures are complied with and there is good information flow within
the Board. The Company Secretary facilitates the induction of new
directors and assists with professional development where required. The
appointment and removal of the Company Secretary is a matter for the
Board as a whole. The Company maintains appropriate insurance for
directors and officers.
Dialogue with shareholders
The Group values its dialogue with institutional and private investors.
Effective communication with fund managers, institutional investors and
analysts about strategy, performance and policy is promoted by way of
meetings involving the Chief Executive and Group Finance Director. The
views of shareholders are reported to the Board by the Chief Executive.
The Chairman and other non-executive directors are available to attend
meetings with shareholders and a number of such meetings on corporate
governance took place in 2012. Directors’ understanding of major
shareholders’ views are enhanced by reports from the Group Head of
Investor Relations, our brokers and attendance at analysts’ briefings.
Analysts’ notes on the Group are made available to all directors.
Annual General Meeting
The Board uses the AGM to communicate with its shareholders.
Proxy appointment forms for each resolution provide shareholders with
the option to direct their proxy to vote for or against resolutions or to
withhold their vote. All proxy votes for, against and withheld are counted
by the Company’s Registrars and the level of voting for, against and
withheld on each resolution is made available after the meeting and on
the Group’s website. The proxy form and the announcement of the results
of a vote make it clear that a vote withheld is not a vote in law and will not
be counted in the calculation of the proportion of votes for and against
the resolution.
MEGGITT PLC REPORT AND ACCOUNTS 2012
GOVERNANCE
49
Separate resolutions are proposed at the AGM on substantially separate
issues and there is a resolution relating to the financial statements. The
Notice of AGM and related papers are sent to shareholders at least 20
working days before the meeting.
The respective Chairmen of the Audit, Remuneration and Nominations
Committees are available at the AGM to respond to questions. It is usual
for all other directors to attend.
Nominations Committee
Responsibilities
The Committee reviews the structure, size and composition (including
the skills, knowledge, experience and diversity) of the Board and, in
consultation with all directors, makes recommendations to the Board
with regard to any proposed changes. Decisions on Board changes are
taken by the Board as a whole.
Diversity
The Board confirms a strong commitment to diversity (including, but not
limited to, gender diversity) at all levels of the Group. The Board’s policy
on diversity commits Meggitt to:
• Ensuring that the selection and appointment process for employees
and directors includes a diverse range of candidates;
• Aspiring to achieve 25% of Board positions to be filled by women by
2015 and monitoring progress in achieving this;
• Disclosing statistics on gender diversity in every Annual Report; and
• Reviewing this policy from time-to-time and continuing to disclose this
policy in the Annual Report.
Board of Directors
Management Board
Senior executives
All employees
% of females
10%
9%
10%
28%
Terms of reference
The Committee operates within agreed Terms of Reference (last updated
in 2012) which are available at www.meggitt.com.
Audit Committee
Committee membership and attendance during 2012
Name
Sir Colin Terry (Chairman)
Mr T Twigger
Mr G S Berruyer1
Mr P G Cox2
Mr P Heiden
Ms B L Reichelderfer
Mr D M Williams
Meetings
eligible Meetings
to attend attended
6
7
3
3
7
7
7
6
7
1
3
7
7
7
1
2
Appointed on 2 October 2012. Mr Berruyer sent his apologies for one
day of Committee meetings (on which two separate meetings were
held) because he had meetings relating to his executive role at The
Sage Group plc that were arranged before his appointment.
Appointed on 27 September 2012.
The work of the Committee in 2012
The Committee met seven times in 2012 and focussed on the
appointment of two new non-executive directors and the selection of a
successor to the Chief Executive, Mr Twigger.
Succession and the composition of the Board
In 2012, the Committee reviewed the structure, size, diversity and
composition of the Board and in the light of these reviews, made
recommendations in respect of the role and capabilities required for the
appointment of two new non-executive directors. Mr Berruyer and Mr
Cox were appointed in Autumn 2012, using the services of an external
search consultancy, The Zygos Partnership. Zygos do not have any other
connection with the Group. Further details on the newly appointed
directors are available in the Notice of AGM for 2013.
On 9 January 2013, the Board announced that Mr Young would succeed
Mr Twigger as Chief Executive, following a rigorous search process using
executive search firm Russell Reynolds Associates, involving both
external and internal candidates. Russell Reynolds do not have any other
connection with the Group. The Board considers that Mr Young has made
an outstanding contribution as Group Finance Director and will bring his
broad range of commercial skills and extensive mergers and acquisitions
and City experience to the role. Mr Young has worked closely with Mr
Twigger for the last nine years and prior to that, has worked at Board
level across many sectors. His appointment as Chief Executive will be
effective from the end of the AGM on 1 May 2013.
A key activity in 2013 is the selection of a new Group Finance Director, for
which an executive search firm is being used. In 2013, the Committee will
also continue to regularly review the composition of the Board and
succession plans for executive and non-executive directors.
Responsibilities
• Manage the relationship with external auditors including
recommending the appointment, reappointment, assessment of
independence, review of performance and removal of the auditors;
• Recommend the audit fee and non-audit services policy;
• Discuss the nature and scope of the external audit and audit results;
• Review the external auditors management letter and ensure findings
are appropriately acted on;
• Review the effectiveness of the internal audit function and to consider
management’s response to internal audit recommendations;
• Review the Group’s procedures for handling allegations from
whistleblowers;
• Review reports from management and internal audit on the
effectiveness of systems for internal financial control, financial
reporting and risk management;
• Review, and challenge where necessary, the actions and judgements
of management, in relation to the interim and annual financial
statements and to recommend approval of the financial information
contained in those statements to the Board; and
• Report to the Board on how it has discharged its responsibilities
during the year.
Terms of reference
The Committee operates within agreed Terms of Reference (last updated
in 2012) which are available at www.meggitt.com.
Committee membership and attendance during 2012
Name
Mr D M Williams (Chairman)
Mr G S Berruyer1
Mr P G Cox2
Mr P Heiden
Ms B L Reichelderfer
Meetings
eligible Meetings
to attend attended
3
1
1
3
3
3
0
1
3
3
1
2
Appointed on 2 October 2012. Mr Berruyer sent his apologies for a
Committee meeting because he had meetings relating to his executive
role at The Sage Group plc that were arranged before his appointment.
Appointed on 27 September 2012.
The Board is satisfied that the members of the Committee have recent
and relevant financial experience. The qualifications of the members of
the Committee are on page 43.
MEGGITT PLC REPORT AND ACCOUNTS 2012
GOVERNANCE
50
Corporate governance report continued
Audit Committee continued
The work of the Committee in 2012
The Committee met three times in 2012. At these meetings, the
Committee:
• Monitored the integrity of the Group’s financial statements and
reviewed the Group’s internal controls and governance structures,
including the effectiveness of the internal audit function;
• Considered the supporting analysis from management on critical
accounting estimates and judgements (as detailed in note 3 of the
Group’s financial statements);
• Considered the analysis of cash conversion at a cash generating unit
level (the ratio of cash inflow from operations to underlying
operating profit);
• Reviewed the process for ensuring the accounting policies of the
businesses acquired as part of Pacific Scientific Aerospace had been
appropriately aligned with the Group’s policies;
• Reviewed the key internal controls operated over treasury
transactions and received a presentation on Group Treasury activity;
• Received reports from Internal Audit at every meeting covering
internal audit strategy, scope of activities to be undertaken and
findings from audit visits;
• Reviewed the effectiveness, independence, objectivity and fees of
the external auditors;
• Agreed the scope of audit and non-audit services provided by the
external auditors;
• Reviewed formal announcements relating to the Group’s financial
performance and any significant financial reporting statements
contained in those announcements;
• Received technical updates of relevant changes in the governance
environment, accounting standards and other reporting matters;
and
• Considered and discussed its own effectiveness following an
external evaluation conducted by Lintstock (see page 48).
The external auditors attended Committee meetings to discuss the
scope and the final results of the 2011 audit in detail (which included
the main risks facing the Group), the strategy for the 2012 audit and
the “hard close” results of the 2012 audit.
Auditors
The external auditors are PricewaterhouseCoopers LLP who were
appointed as Group auditors on 2 October 2003 as a result of a
competitive tender process. The lead audit partner is Mr J Maitland
whose appointment in this role commenced with the audit for the
financial year ended 31 December 2008 and will end with the audit for
the financial year ended 31 December 2012. Mr Maitland’s successor
as lead audit partner has been agreed by the Committee.
The Committee has assessed the effectiveness of the external audit
process using a questionnaire and a Committee discussion and the
Committee were satisfied with the performance of the external auditor
and the external audit process. The Committee has determined on the
basis of the satisfactory outcome of the evaluation that the external
audit will not be subject to tender in 2013, and has recommended that
the Board submit the re-appointment of PricewaterhouseCoopers LLP
to shareholders for approval at the AGM in 2013. There are no
contractual obligations which restrict the Committee’s choice of
external auditors.
Applying FRC guidance, the Group is not required to tender external
audit services until 2017 (for the financial year ending 31 December
2017), however the Committee will continue to consider and confirm
annually whether to tender the external audit.
Non-audit services
The Group places great importance on the independence of its auditors
and is careful to ensure their objectivity is not compromised. The
Committee agrees the fees paid to external auditors for their services as
auditors and is required to approve, in advance, any fees to the external
auditors for non-audit services in excess of £0.1 million. During 2012,
there were no fees paid to PricewaterhouseCoopers LLP for non-audit
services above £0.1 million. Fees paid related to services permitted to be
provided by the Group’s external auditor under the policy on non-audit
services and the Committee does not consider that the provision of those
services has impacted the independence or objectivity of the external
auditors.
The Group’s policy on non-audit services is as follows:
1. The following non-audit services may be provided by the Group’s
external auditor:
• Assurance on the interpretation and implementation of accounting
standards, financial reporting matters, tax standards and governance
regulations;
• Services related to potential acquisitions or reorganisations such as
working capital reports and due diligence procedures;
• Internal accounting and risk management control reviews and reviews
of policy and procedure compliance; and
• Attestation and other reports as required by third parties where the
information derives principally from the audited financial statements.
2. In general, the following non-audit services may not be provided by the
Group’s external auditor:
• Executive management of Group operations and activities, including
acting temporarily or permanently as a director, officer or employee of
the Group;
• Internal audit services;
• Tax planning services;
• Design and implementation of financial information systems;
• Actuarial consulting services;
• Valuation of assets or liabilities for inclusion in the Group’s financial
statements;
• Broker, investment adviser or investment banking services; and
• General consulting work, where this could impair the external
auditors’ independence or objectivity.
3. Details of non-audit services provided by the Group’s external auditor
are provided to the Audit Committee annually.
Financial reporting
The financial statements contain an explanation of the directors’
responsibilities for the preparation of the accounts (page 46) and a
statement by the auditors concerning their responsibilities (page 63).
The directors also report that the business is a going concern (page 51).
The Company has in place internal control and risk management
systems in relation to the Company’s financial reporting process
and the Group’s process for preparation of consolidated accounts.
Consolidated Group financial information is derived from the underlying
financial systems of the business units. Business unit financial
processes are integrated into these financial systems and are monitored
and managed through regular monthly reporting. The finance policies
and procedures followed in business unit reporting are set out in the
Meggitt Finance Policies and Procedures Manual. These polices are
reviewed regularly by management and compliance is monitored by
management and internal audit.
The independently run Group Ethics Line enables employees to raise any
concerns about possible improprieties in matters of financial reporting
or otherwise. This allows for proportionate and independent investigation
and appropriate follow-up action.
MEGGITT PLC REPORT AND ACCOUNTS 2012
GOVERNANCE
51
Internal control
The Board is responsible for safeguarding shareholders’ investments
and the Group’s assets, by:
• Maintaining sound risk management and internal control systems;
• Having an ongoing process for identifying, evaluating and managing
the significant risks faced by the Group;
• Conducting a review of the effectiveness of the Group’s risk
management and internal control systems at least annually and
reporting to shareholders that they have done so. The review should
cover all material controls, including financial, operational and
compliance controls; and
• Confirming that necessary actions have been taken, or are in process,
to address any significant failings or weaknesses identified from the
annual review.
The system is designed to manage the risk of failure to achieve business
objectives and can only provide reasonable assurance against material
misstatement or loss.
Key elements of the Group’s system of risk management and internal
control include:
• Quarterly reviews of those risks of particular relevance to the Group
and the appropriate risk management mitigation plans. Reviews are
based on detailed risk workshops, which are refreshed every two
years;
• Regular reviews of each operating unit performance undertaken by
Group and divisional management;
• An on-going programme of assurance activities including an internal
audit function, external financial audit, tax compliance reviews,
environmental audits, trade compliance audits, government
contracting compliance audits, anti-corruption policy audits, health
and safety audits and property risk reviews;
• A Group Finance Policies and Procedures Manual which establishes
appropriate controls and authority levels throughout the Group;
• Programmes for business continuity, health and safety, environment,
trade compliance and ethics;
• A programme management office responsible for all aspects of the
integration of the PacSci acquisition which has operated throughout
2012; and
• A comprehensive insurance programme.
To enable the Board to review the effectiveness of the system of risk
management and internal control systems the following procedures have
been in place for the year under review and up to the date of approval of
the financial statements:
• An annual review of the key risks and mitigation plans is presented to
the Board for their consideration. This was presented to the Board in
December 2012;
• Each division carries out a quarterly review of financial, operational
and compliance areas (including environmental, health and safety,
property, business continuity etc), ensures mitigation plans exist to
address those risks identified and monitors progress on implementing
mitigation plans. The results of the risk reviews have been
communicated, subject to materiality, to the Management Board and
to the Board.
• The Board receives regular reports at each Board Meeting on the state
of the business from the Group Chief Executive and the Group Finance
Director, reviews strategy plans and budgets as appropriate and
regularly receives a report on compliance activities from the Group
Corporate Affairs Director;
• Each month, divisions submit detailed operating and financial reports
covering all aspects of their performance. These are reviewed and,
subject to materiality, issues are communicated to the Management
Board and the Board;
• The Audit Committee meets regularly and reviews the effectiveness of
the internal financial control environment of the Group. At these
meetings it receives reports from the external and internal auditors;
• The Board has an Ethics and Trade Compliance Committee which
meets quarterly and reviews these areas of compliance;
• An IT Security Committee, chaired by the Group Corporate Affairs
Director, meets quarterly to consider potential risks and oversee the
implementation of the enabling technology required to deliver the
Group IS security strategy;
• Annually, the Board receives a report on the insurance coverage in
place and uninsured risks;
• On an annual basis, the site director/general manager and finance
manager of each operating unit provide written confirmation that the
businesses for which they are responsible have been in compliance
with the Group Finance Policies and Procedures Manual and other
Group policies including, but not limited to, those concerning trade
compliance, ethics and business conduct and sales representatives.
They also confirm that they are not aware of any actual or potential
breaches that could have a material impact on the Group’s financial
statements or any non compliance with laws and regulations;
• Additional improvements to the control environment have been, or are
in the process of being, implemented, as part of Transformation, the
roll-out of the global SAP template and the introduction of the Meggitt
Production System.
The Board considers that there is considerable comfort in the fact that
the Group’s cash inflow from operating activities represented 104%
(2011: 110%) of underlying operating profit in 2012. The Board confirms
full implementation of the Financial Reporting Council’s updated
Turnbull guidance on Internal Control (2005)
Compliance with the Code
The Board confirms that during the year the Company has complied with
Sections A to E of the Code, with the exception of the following:
(i) B.1.2 – between 1 January 2012 and the appointment of Mr Cox on
27 September 2012, at least half of the Board was not independent. After
a review of the composition, size and diversity of the Board, it was agreed
that two new non-executive directors should be appointed. The Company
has been in compliance with this provision since the appointment of
Mr Cox as an independent non-executive director on 27 September 2012
and has further reinforced the number of independent non-executives
with the appointment of Mr Berruyer on 2 October 2012.
(ii) D.2.1 – between 1 January 2012 and 26 April 2012 (the AGM), not all
members of the Remuneration Committee were independent because of
the membership of Mr Robins. Mr Robins continued to serve as Chairman
of the Committee to maintain consistency of chairmanship during the
2011 financial reporting cycle, which ended when the shareholders voted
on the Remuneration Report at the AGM in 2012. Mr Robins stepped down
from the Committee on 26 April 2012 and the Company has been in
compliance with the Code since that date.
Going concern
After making enquiries, the directors have formed a judgement, at the
time of approving the financial statements, that there is a reasonable
expectation that the Group and the Company have adequate resources to
continue in operational existence for the foreseeable future. For this
reason, the directors continue to adopt the going concern basis in
preparing the financial statements. This statement of going concern also
constitutes part of the Business Review on pages 1 to 41.
By order of the Board
M L Thomas
Company Secretary
4 March 2013
MEGGITT PLC REPORT AND ACCOUNTS 2012
GOVERNANCE
52
Remuneration report
Introduction
Policy Report
On behalf of the Remuneration Committee, I am pleased to present the
Directors’ Remuneration Report for the year ended 31 December 2012.
Remuneration Committee
The Committee operates within agreed Terms of Reference (last updated
in 2012) which are available at www.meggitt.com. The Committee is
responsible for determining the remuneration policy and packages for all
executive directors and Management Board members and for agreeing
the fees for the Chairman. The Chairman, Chief Executive and
Organisational Development Director attend meetings of the Committee
by invitation; they are absent when their own remuneration is under
consideration.
None of the non-executive directors has, or has had, any personal
financial interests or conflicts of interest arising from cross-
directorships or day-to-day involvement in running the business.
Membership and meeting attendance
The Remuneration Committee is currently comprised of five independent
non-executive directors.
Name
Mr P Heiden (Chairman)
Mr G S Berruyer1
Mr P G Cox2
Ms B L Reichelderfer
Mr D A Robins3
Mr D M Williams
Meetings
eligible
to attend
Meetings
attended
6
1
1
6
4
6
6
0
1
6
4
6
1
2
3
Appointed on 2 October 2012. Mr Berruyer sent his apologies for a
Committee meeting because he had meetings relating to his executive
role at The Sage Group plc that were arranged before his appointment.
Appointed on 27 September 2012.
Mr Robins is no longer judged to be independent under the Code by
virtue of his having been on the Board for over nine years. He continued
to serve as Chairman of the Committee to ensure consistency of
Chairmanship throughout the 2011 reporting cycle. He stepped down as
Chairman and member of the Committee at the end of the AGM in
April 2012.
External advisor
During the year, the Committee’s independent remuneration advisor
was Kepler Associates. Kepler were selected by the Committee as a
result of a competitive tender process and were appointed by the
Committee in 2010, after consultation with the Board. Kepler provide
guidance on remuneration matters at Board level and below, and do not
provide any other services to the Company. Kepler is a member of the
Remuneration Consultants Group and adheres to its code of conduct
(www.remunerationconsultantsgroup.com).
Executive remuneration continues to be an area of focus for
shareholders and the wider public. During 2013, the Committee will be
reviewing the Group’s executive remuneration framework, our long term
incentive plans and preparing the policy which will need to be submitted
to shareholders for approval at our 2014 AGM. We will consult major
shareholders and their representative bodies during this process, the
outcome of which will be detailed in next year’s report.
In 2012, the Committee benchmarked, reviewed and set the salaries,
annual bonuses and other performance related remuneration for the
executive directors and key members of executive management,
determined the outcome of the annual bonus and share plan awards,
reviewed the Directors’ Remuneration Report for 2011 prior to approval
by the Board, updated its Terms of Reference and considered the
effectiveness of the Committee.
During 2012, the award made in 2009 under the Executive Share Option
Scheme vested at 100%, as the Group fully met the earnings per share
performance condition. The award made in 2009 under the Equity
Participation Plan vested at 69%, as the Group fully met the earnings per
share performance condition (accounting for 50% of the award) and
achieved a TSR position of 8th in our comparator group resulting in
vesting of 39% (accounting for 50% of the award).
The total bonus pool generated in 2012 reflected another year of excellent
performance in difficult economic conditions. Profit and cash flow
performance were again very strong and the Group has made progress
on important strategic objectives, most notably on quality and delivery
through the raising the bar programme. It is the view of the Committee
that the performance of the Group, backed by the growth in the share
price in recent years, warrants the rewards which our executives will
receive in 2013.
This report has been prepared in accordance with Schedule 8 (Quoted
Companies: Directors’ Remuneration Report) to the Large and Medium-
sized Companies and Groups (Accounts and Reports) Regulations 2008
(the 2008 Regulations), the UK Corporate Governance Code 2010 (the
Code) and the Financial Services Authority’s Listing Rules. The
Department for Business Innovation & Skills (BIS) have produced draft
regulations on the approval of remuneration policy and remuneration
reporting. Although those regulations are not due to come into force until
our 2013 financial year, we have incorporated a number of the proposed
changes in this report. The 2008 Regulations require the auditors to
report to shareholders on the audited information in this report and to
state whether in their opinion the audited sections (which have been
highlighted) have been properly prepared in accordance with company
law (as implemented by the 2008 Regulations).
A resolution will be put to shareholders at the AGM on 1 May 2013 inviting
them to approve this report.
P Heiden
Chairman of the Remuneration Committee
4 March 2013
MEGGITT PLC REPORT AND ACCOUNTS 2012
GOVERNANCE
53
Key elements of the remuneration package for executive directors
The Group is committed to achieving sustained improvements in performance and this depends on the individual contributions made by the executive
directors, other senior executives and employees at all levels of the organisation. The Committee ensures that executive remuneration packages are
designed to attract, motivate and retain directors of a high calibre, to recognise the international nature of the Group’s business and to reward the
directors for enhancing value to shareholders. The Committee also takes into account pay and employment conditions throughout the Group in
determining the overall remuneration for the year.
The performance measurement of the executive directors and the determination of their annual remuneration package is undertaken by the
Committee with advice from Kepler. The package targets median levels of fixed pay, supplemented by performance-related annual bonuses and
equity-based long-term incentive plans designed to reward and incentivise growth, provide a strong link to Group and individual performance and to
take account of corporate governance best practice.
Fixed pay
Purpose and link to
strategy
Base salary
To attract and retain talent
by ensuring base salaries
are competitive in the talent
market(s) relevant to each
individual.
Pension
Provides post-retirement
benefits for participants in
a cost-efficient manner.
Operation
Opportunity
Performance metrics
In deciding salary levels, the Committee
considers personal performance, changes
of responsibility, employment conditions
and salary levels across the Group, advice
from Kepler, data from appropriate
third-party surveys and market conditions.
Base salary increases are applied in line
with the outcome of the annual review,
with any increase effective from
1 January (unless there is a change of
responsibility during the year).
Personal performance
against objectives.
None.
As at 31 December 2012, none of the
executive directors were accruing
benefits under the plan as they had
reached the Lifetime Allowance. For
details of the pensions allowance paid
to directors see page 57.
Membership of the executive section of the
Meggitt Pension Plan: a funded, registered
defined benefit pension scheme providing,
at retirement, a pension of up to two-thirds
of final pensionable salary (inclusive of
pensions from previous employments),
subject to HMRC limits.
Bonus payments to executive directors are
not pensionable and there are no unfunded
pension promises or similar arrangements
for directors.
Benefits
Designed to be competitive
in the market in which the
individual is employed.
Benefits include a fully expensed car, or car
allowance, fuel allowance, private medical
insurance for the individual and his
immediate family and a telephone.
Benefit values vary by role and are
reviewed periodically relative to market.
None.
MEGGITT PLC REPORT AND ACCOUNTS 2012
GOVERNANCE
54
Remuneration report continued
Variable pay
Purpose and link to
strategy
Annual Bonus
Incentivises the
achievement of specific
goals over the short-term
that are also aligned to the
long-term business
strategy.
Equity Participation Plan
(EPP)
Approved by shareholders
in 2005. Aligns the interests
of shareholders and
executives in growing the
value of the business over
the long-term.
Executive Share Option
Scheme (ESOS)
Approved by shareholders
in 2005. Aligns the interests
of shareholders and
executives in growing the
value of the business over
the long-term.
Share retention guidelines
To encourage share
ownership and ensure
alignment of executive
interests with those of
shareholders.
Operation
Opportunity
Performance metrics
Bonus targets are agreed by the Committee
at the start of the year for performance
during that financial year.
Payments to the executive directors are
made following consideration of the Group’s
performance and the individual’s
contribution to that performance.
The maximum bonus which can be
earned by an executive director is 150%
of basic salary, other than in truly
exceptional circumstances.
Bonuses are based on a
combination of Group
profit, cash conversion,
strategic objectives and
personal performance.
Annual award of market-priced awards.
Comprises basic and matching awards of
nil-cost options.
Award levels and performance conditions
are reviewed annually to ensure they
remain appropriate. The Committee reviews
the performance criteria for the EPP in
advance of each award.
The vesting of EPP
awards is subject to the
Group’s performance
over a 3-year
performance period.
The performance
conditions are described
on pages 58 and 59.
Allows for an annual grant of basic
awards not exceeding 125% of basic
salary. Awards have normally been made
at 75% of basic salary. The number of
shares awarded is based on the average
share price over a 90-day period ending
on the day before the date of grant.
Allows for an annual grant of matching
awards not exceeding 50% of basic
salary, subject to investing in and
retaining shares worth up to 25% of net
salary. The number of shares awarded is
based on the market price on the date of
award.
Annual award of market-priced options.
Award levels and performance conditions
are reviewed annually to ensure they
remain appropriate. The Committee reviews
the performance criteria for the ESOS in
advance of each award.
Allows for an annual grant not exceeding
300% of basic salary. Awards have
normally been made at 200% of basic
salary.
The number of shares awarded is based
on the market price on the day before the
award is made.
The vesting of ESOS
awards is subject to the
Group’s performance
over a 3-year
performance period.
The performance
condition is described
on page 60.
Requirement to hold a minimum number of
Meggitt shares defined as a % of basic
salary.
Equivalent to 100% of basic salary for
executive directors.
None.
MEGGITT PLC REPORT AND ACCOUNTS 2012
GOVERNANCE
55
Service contracts for executive directors
The policy of the Committee is to offer executive directors contracts requiring one year’s notice from the Company.
Executive Director
Mr T Twigger
Mr P E Green
Mr S G Young1
Position
Chief Executive
Group Corporate Affairs Director
Group Finance Director
Effective date of contract
26 February 2001
26 February 2001
27 February 2004
From employer
12 months
12 months
12 months
Notice period
From employee
6 months
6 months
6 months
1
It is anticipated that Mr Young’s service contract will be updated prior to his appointment as Chief Executive on 1 May 2013.
Exit payments for executive directors
Should the Company terminate the executive directors’ service contracts in breach of contract terms, then damages would be due equivalent to
annual remuneration plus the value of benefits for the unexpired notice period less 5% of the aggregate sum.
The EPP and ESOS rules provide for vesting in certain circumstances in the event of an executive leaving the Company, for example, retirement,
redundancy or leaving through ill-health. The rules also determine that awards will vest if there is a change of control. Unvested awards would
usually be reduced pro-rata to take into account the proportion of the performance period not completed and the extent to which the performance
condition for each award has been met. More details are available in the rules (which are available to shareholders on request).
External appointments held by executive directors
The Board believes that the Company can benefit from experience gained when executive directors hold external non-executive directorships.
Executive directors are allowed to hold external appointments and to receive payment provided such appointments are agreed by the Board or
Committee in advance, there are no conflicts of interests and the appointment does not lead to a deterioration in the individual’s performance.
Executive Director
Mr T Twigger
Company
Filtrona plc
Mr S G Young
Derwent London plc
Non-executive directors
Role
Non-executive director
Chairman of the Audit Committee
Non-executive director
Chairman of the Audit Committee
Fees retained
£42,500 (2011: £40,000)
£10,000 (2011: £8,874)
£50,187 (2011: £47,000)
£5,500 (2011: £4,125)
The fees paid to non-executive directors are within the limits set in the Articles. The fees paid to the Chairman are approved by the Committee and
fees paid to the other non-executive directors are approved by the Finance Committee of the Board. The Committee and the Finance Committee set
the level of fees for non-executive directors to reflect the time commitment and responsibilities of the role, after consulting independent surveys.
Non-executive directors are appointed for a term of no longer than three years, do not have a contract of service and are not eligible to join the
Company’s pension or share schemes.
Implementation Report
Five-year performance
The chart below shows the growth in value over the past 5 financial years of a hypothetical £100 holding in each of Meggitt, the FTSE 100 Index and the
EPP comparator group (shown on page 58):
Meggitt
FTSE 100
EPP Comparator Group Median
£
200
150
100
50
7
0
0
2
r
e
b
m
e
c
e
D
1
3
n
o
d
e
t
s
e
v
n
i
0
0
1
£
f
o
e
u
l
a
V
Year
2007
2008
2009
2010
2011
2012
MEGGITT PLC REPORT AND ACCOUNTS 2012
GOVERNANCE
56
Remuneration report continued
Details of directors’ remuneration (audited)
Executive directors
Mr T Twigger
Mr P E Green
Mr S G Young
Non-executive directors
Sir Colin Terry
Mr G S Berruyer4
Sir Alan Cox4
Mr P G Cox4
Mr P Heiden
Ms B L Reichelderfer4
Mr D A Robins
Mr D M Williams
Total
Basic
salary1
2012
£
639,000
309,000
382,000
Fees
2012
£
–
–
–
Taxable
benefits2
2012
£
Bonus
payments
2012
£
Pension
allowance3
2012
£
Total emoluments
excluding pension
2012
£
2011
£
30,337
17,290
19,896
766,800
371,744
459,305
319,500
141,479
177,979
1,755,637
839,513
1,039,180
1,878,016
833,700
1,081,321
–
–
–
–
–
–
–
–
165,000
12,308
–
13,269
56,705
50,000
53,295
70,000
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
165,000
12,308
–
13,269
56,705
50,000
53,295
70,000
155,000
–
11,399
–
46,000
26,025
56,000
56,000
1,330,000
420,577
67,523
1,597,849
638,958
4,054,907
4,143,461
1
2
3
4
Basic salary is shown gross of a salary sacrifice arrangement entered into on 1 April 2009 relating to pension contributions.
Taxable benefits include company car, or car allowance, private medical insurance, fuel and telephone.
The executive directors receive a pension allowance as detailed on page 57.
Appointments: Ms Reichelderfer was appointed on 7 June 2011. Mr P G Cox was appointed on 27 September 2012. Mr Berruyer was appointed on
2 October 2012. Resignation: Sir Alan Cox resigned on 24 February 2011.
Single figure for directors’ remuneration
The single figure for the total remuneration received by each executive director for the year ended 31 December 2012 and the prior year, consistent
with the methodology proposed by BIS and outlined in notes 1 to 6 is shown in the table below.
Salary1
Benefits2
Pension3
Annual bonus4
EPP basic5
EPP matching5
ESOS6
Total
Mr T Twigger
Mr P E Green
Mr S G Young
2012
£’000
639
30
320
767
496
335
430
3,017
2011
£’000
620
30
314
930
541
316
1,184
3,935
2012
£’000
309
17
157
372
227
153
197
1,432
2011
£’000
289
17
156
434
248
145
543
1,832
2012
£’000
382
20
194
459
298
201
258
1,812
2011
£’000
371
19
192
557
325
190
711
2,365
The figures have been calculated as follows:
1 Base salary is the salary earned in the year.
2 Benefits are the taxable values of benefits received in the year.
3
4
5
6
Pension is calculated as 20x the increase in value of accrued benefit in the year in respect of the Meggitt Pension Plan plus pension allowances paid to
directors in the year.
Annual bonus is the total bonus earned in respect of performance during the year.
EPP is calculated as the number of shares vesting, based on performance in the year, valued at the market value of the shares. Market value is the
market value on the day the awards vest (if they vest before the date the financial statements are approved) or the average market value for the last
three months of the financial year (if the awards vest after the date the financial statements are approved). For 2012, the TSR element of the 2009
award vested at 39% and the EPS element of the April 2011 award (delayed from August 2010) vested at 100%. The market values were 390.60p (TSR
basic award), 408.90p (TSR matching award) and 388.53p (EPS) respectively. For 2011, the EPS element of the 2009 award vested at 100% and the
market value was 390.60p.
ESOS is calculated as the number of shares vesting, based on performance in the year, valued at the difference between the market value of the shares
and the exercise price of the award. Market value is the market value of the shares on the day the awards vest (if they vest before the date the financial
statements are approved) or the average market value for the last three months of the financial year (if the awards vest after the date the financial
statements are approved). For 2012, the 2010 award vested at 100% and the market value and exercise price were 388.53p and 286.10p respectively. For
2011, the 2009 award vested at 100% and the market price and exercise price were 408.50p and 169.50p respectively.
MEGGITT PLC REPORT AND ACCOUNTS 2012
GOVERNANCE
57
Basic salary for executive directors
A review of executive basic salary levels was under taken in 2012. Effective 1 January 2013:
• Mr Twigger’s salary will increase by 3.3%, in line with salary increases across the Group.
• Mr Green’s salary continues to be below competitive levels and in the context of his continued strong performance it was agreed to increase his
salary by 5.2%.
• Mr Young’s salary has been frozen as at 1 January 2013, but will increase on 1 May 2013 to £640,000 on his appointment as Chief Executive. The
Board considers that Mr Young has made an outstanding contribution as Group Finance Director and will bring his broad range of commercial skills
and extensive mergers and acquisitions and City experience to the role. Mr Young has worked closely with Mr Twigger for the last nine years and
prior to that, has worked at Board level across many sectors. The Committee considered during their discussion on the base salary for the new
Chief Executive: (i) the skills and experience of Mr Young and the substantial increase in responsibilities on his promotion to Chief Executive; (ii)
advice from Kepler; (iii) data obtained as part of the recruitment process; and (iv) benchmarking data on salary for the Chief Executive role. The
Committee’s view is that the increase in responsibilities for Mr Young together with the other matters referred to above, warrants the basic salary
which Mr Young will receive from 1 May 2013.
Executive Director
Position
Mr T Twigger
Mr P E Green
Mr S G Young
Group Chief Executive Officer
Group Corporate Affairs Director
Group Finance Director
Fees for non-executive directors
Role
Chairman
Non-executive director
Committee chairman (Audit/Remuneration)
Senior Independent Director
Pension benefits for executive directors (audited)
Meggitt Pension Plan
Accumulated total accrued pension at 31 December 2011
Pension accrued in year
Total decrease in accrued pension in year
Accumulated total accrued pension at 31 December 2012
Transfer value basis at 31 December 20114
Increase/(decrease) in transfer value excluding directors’ contributions
Directors’ contributions5
Transfer value basis at 31 December 20124
Base salary at:
1 January 2013
£
1 January 2012
£
660,000
325,000
382,000
639,000
309,000
382,000
Increase
3.3%
5.2%
–
2012
£
165,000
50,000
10,000
10,000
Mr T Twigger1
Mr P E Green2
Mr S G Young3
£
£
£
51,419
–
(7,873)
74,596
781
(3,352)
35,225
781
(5,960)
43,546
71,244
29,265
1,584,510
79,923
–
1,715,680
(108,488)
–
803,394
74,669
–
1,664,433
1,607,192
878,063
Mr Twigger opted to leave the Meggitt Pension Plan and take his pension benefits with effect from 6 April 2011.
1
2 Mr Green opted to leave the Meggitt Pension Plan with effect from 31 March 2012. He has not drawn his pension.
3 Mr Young opted to leave the Meggitt Pension Plan and take his pension benefits with effect from 5 April 2012.
4
5
Transfer values do not represent a sum payable to the individual director, but represent a potential liability of the pension scheme.
Although there are no direct member contributions, the directors all contributed 7% of their capped pensionable salary until they left the plan,
amounting in 2012 to £Nil for Mr Twigger and £1,823 for each of Mr Green and Mr Young (2011: £2,363 for Mr Twigger and £7,832 for each of Mr Green
and Mr Young), through a salary sacrifice arrangement in the same way as all other members of the plan.
Executive directors are entitled to participate in the Meggitt Pension Plan (MPP) accruing defined benefits at 3% of salary per annum up to the
Scheme Cap. They are also entitled to a cash supplement equivalent to 50% of salary above the Scheme Cap. Upon reaching the government’s
Lifetime Allowance the directors are entitled to cease accruing further benefit under the MPP and receive the 50% allowance on their full salary.
Mr Twigger reached the Lifetime Allowance in April 2011. Mr Green and Mr Young both reached the Lifetime Allowance in April 2012. The Scheme Cap
was reduced in April 2012 per the government’s change in Annual Allowance. The MPP Scheme Cap applicable to directors was £135,000 for 2010/11
and £104,160 for 2011/12.
The directors’ dependants remain eligible for dependants’ pensions and the payment of a lump sum on death in service.
MEGGITT PLC REPORT AND ACCOUNTS 2012
GOVERNANCE
58
Remuneration report continued
Bonus payments for executive directors
The Board set stretching financial and strategic targets for the bonus in 2012. Taking into account the achievement of the challenging targets set for
the bonus year, the double-digit profit growth, the strong personal performance of each of the executive directors and the significant value created for
shareholders during the year, the Committee approved bonus awards of 120% of basic salary as at 31 December 2012 for each of the executive
directors, which will be paid in cash.
Below threshold
Between threshold
and target
At target
Between target
and stretch
At or
above stretch
Achievement
Measure
Group profit
Cash conversion
Strategic objectives – quality and delivery
Strategic objective – implementation of SAP
Personal performance
Mr T Twigger
Mr P E Green
Mr S G Young
ü
ü
ü
ü
ü
ü
ü
For awards in respect of 2013 performance, bonus payments will continue to be based on a blend of Group profit, cash and strategic targets and the
individual’s personal performance.
Share schemes for executive directors
Equity Participation Plan 2005 (EPP)
The Committee approved basic and matching awards in August 2012 (as detailed in the table on page 59). The Committee has also approved basic
and matching awards to be made for the 2013 cycle which will be granted within the plan rules and limits. The following performance measures are
attached to the 2012 and 2013 awards:
Relative TSR (25% of award)
TSR relative to a tailored peer group of international aerospace and defence companies that best reflect Meggitt’s business and geographic mix,
illustrated in the table below for 2012 and 2013 awards:
BAE Systems
BBA Aviation
Boeing (USA)
Cobham
Curtiss Wright (USA)
EADS (France)
Esterline Technologies (USA)
Finmeccanica (Italy)
Honeywell (USA)
Moog (USA)
Rockwell Collins (USA)
Rolls-Royce Group
Safran (France)
Senior
Ultra Electronic Holdings
Woodward Governor (USA)
Zodiac Aerospace (France)
Awards will vest as follows:
2012 TSR outperformance of
the median of comparator group
8% p.a. and above
Between 0% and 8% p.a.
Equal to median (0% p.a.)
Below median
2013 TSR outperformance of
the median of comparator group
8% p.a. and above
Between 0% and 8% p.a.
Equal to median (0% p.a.)
Below median
% of element vesting
100%
Straight-line vesting between 30% and 100%
30%
0%
TSR for all comparator companies is measured on a common currency basis.
MEGGITT PLC REPORT AND ACCOUNTS 2012
GOVERNANCE
59
Underlying EPS (50% of award)
Based on cumulative underlying EPS over a three year period. Awards will vest as follows:
2012 3-year cumulative EPS
122p and above
Between 110p and 122p
Equal to 110p
Below 110p
2013 3-year cumulative EPS
133p and above
Between 121p and 133p
Equal to 121p
Below 121p
% of element vesting
100%
Straight-line vesting between 30% and 100%
30%
0%
Cash conversion (25% of award)
Based on cash conversion, defined as cash flow as a percentage of underlying profit after taxation. Cash is measured before dividends, merger and
acquisition costs and capital expenditure. Awards will vest as follows:
2012 Cash conversion
95% and above
Between 87% and 95%
Equal to 87%
Below 87%
2013 Cash conversion
95% and above
Between 87% and 95%
Equal to 87%
Below 87%
% of element vesting
100%
Straight-line vesting between 30% and 100%
30%
0%
EPS and cashflow are considered by the Board to be the most important internal measures of Meggitt’s financial performance. Both are highly visible
internally and regularly monitored and reported. Maintaining relative TSR preserves alignment with shareholders’ interests.
2009 and 2010 EPP – outcome
The 2009 EPP award performance condition was based on 50% TSR and 50% EPS. The Committee confirmed vesting at 69% (EPS: 100%, TSR: 39%).
In respect of the award made in April 2011 (delayed from August 2010), the Committee has confirmed that 50% of the award which was subject to the
EPS performance condition has vested in full, as Meggitt achieved an aggregate EPS of 97.4 pence (adjusted for scrip), exceeding the maximum
vesting threshold of 86.0 pence. The vesting outcome of the 50% of the award subject to the TSR performance condition cannot be confirmed until
August 2013.
Equity Participation Plan holdings (audited)
The directors’ interests in the EPP and movements during the year are set out below:
T Twigger
Basic Award
Basic Award
Basic Award
Basic Award
Matching Award
Matching Award
Matching Award
Matching Award
P E Green
Basic Award
Basic Award
Basic Award
Basic Award
Matching Award
Matching Award
Matching Award
Matching Award
S G Young
Basic Award
Basic Award
Basic Award
Basic Award
Matching Award
Matching Award
Matching Award
Matching Award
Date of
award
Value of
award £
at 1 Jan
2012
Awarded
Exercised
Lapsed
Number of shares
at 31 Dec
2012
Date
exerciseable
from
05.08.09
21.04.11
17.08.11
22.08.12
12.08.09
21.04.11
17.08.11
22.08.12
05.08.09
21.04.11
17.08.11
22.08.12
12.08.09
21.04.11
17.08.11
22.08.12
05.08.09
21.04.11
17.08.11
22.08.12
12.08.09
21.04.11
17.08.11
22.08.12
450,000
450,000
465,000
480,000
300,000
300,000
310,000
320,000
206,250
206,250
216,750
231,750
137,500
137,500
144,500
154,500
270,000
270,000
278,250
286,500
180,000
180,000
185,000
191,000
277,180
147,299
128,117
–
154,560
109,210
89,855
–
127,041
67,512
59,719
–
70,840
50,054
41,884
–
166,308
88,379
76,663
–
92,736
65,526
53,768
–
–
–
–
122,507
–
–
–
79,536
–
–
–
59,240
–
–
–
38,461
–
–
–
73,236
–
–
–
47,547
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
84,817
–
–
–
47,295
–
–
–
38,874
–
–
–
21,677
–
–
–
50,890
–
–
–
28,377
–
–
–
192,363
147,299
128,117
122,507
107,265
109,210
89,855
79,536
88,167
67,512
59,719
59,240
49,163
50,054
41,884
38,461
115,418
88,379
76,663
73,236
64,359
65,526
53,768
47,547
05.08.12
16.08.13
17.08.14
22.08.15
12.08.12
16.08.13
17.08.14
22.08.15
05.08.12
16.08.13
17.08.14
22.08.15
12.08.12
16.08.13
17.08.14
22.08.15
05.08.12
16.08.13
17.08.14
22.08.15
12.08.12
16.08.13
17.08.14
22.08.15
Awards made in August 2009 and April 2011 (delayed from August 2010) were converted to nil cost options in September 2011. All awards made after
April 2011 have been made as nil cost options.
MEGGITT PLC REPORT AND ACCOUNTS 2012
GOVERNANCE
60
Remuneration report continued
Executive Share Option Scheme 2005 (ESOS)
The Committee approved awards within the scheme limits in 2012 as detailed in the table below, with performance measured based on three-year
cumulative EPS. Awards will vest as follows:
2012 3-year cumulative EPS
122p and above
Between 110p and 122p
Equal to 110p
Below 110p
% of options vesting
100%
Straight-line vesting between 30% and 100%
30%
0%
EPS is considered by the Board to be an important measure of Meggitt’s financial performance. It is highly visible internally and regularly monitored
and reported.
2009 and 2010 ESOS – outcome
The Committee confirmed in 2012 that the 2009 ESOS award vested at 100%. The Committee has confirmed that the 2010 ESOS award will vest at
100% as Meggitt achieved an aggregate 97.4 pence EPS (adjusted for scrip), exceeding the maximum vesting threshold of 86.0 pence.
Executive Share Option Scheme and Sharesave holdings (audited)
The directors held the following awards under the 1996 Executive Share Option Scheme, ESOS and Sharesave 2008:
T Twigger
2005, Part A (options)
2005, Part B (stock SARs)
Sharesave (options)
Total
P E Green
2005, Part A (options)
2005, Part B (stock SARs)
Sharesave (options)
Number of shares under award
Date of award
at 1 Jan
2012
Awarded/
(exercised)
at 31 Dec
2012
Award
price
Market price
at date of
exercise
Date
exercisable
from
Expiry
date
30.04.09
10.10.05
27.09.06
29.03.07
25.03.08
30.04.09
12.03.10
02.03.11
10.04.12
14.09.12
17,699
322,987
365,613
334,448
475,248
477,876
419,434
352,573
–
–
–
–
–
–
–
–
–
–
321,752
2,752
17,699
322,987
365,613
334,448
475,248
477,876
419,434
352,573
321,752
2,752
169.50p
278.65p
263.67p
299.00p
252.50p
169.50p
286.10p
351.70p
397.20p
326.94p
2,765,878
324,504
3,090,382
–
–
–
–
–
–
–
–
–
–
30.04.12
10.10.08
27.09.09
29.03.10
25.03.11
30.04.12
12.03.13
02.03.14
10.04.15
01.11.15
29.04.19
09.10.15
26.09.16
28.03.17
24.03.18
29.04.19
11.03.20
01.03.21
09.04.22
01.05.16
Number of shares under award
Date of award
at 1 Jan
2012
Awarded/
(exercised)
at 31 Dec
2012
Award
price
Market price
at date of
exercise
Date
exercisable
from
Expiry
date
29.03.07
30.04.09
10.10.05
27.09.06
29.03.07
25.03.08
30.04.09
12.03.10
02.03.11
10.04.12
04.09.08
06.09.10
14.09.12
2,759
12,832
143,549
162,326
145,402
217,822
214,306
192,240
164,345
–
3,798
1,389
–
–
–
–
–
–
–
–
–
–
233,384
–
–
1,835
2,759
12,832
143,549
162,326
145,402
217,822
214,306
192,240
164,345
233,384
3,798
1,389
1,835
299.00p
169.50p
278.65p
263.67p
299.00p
252.50p
169.50p
286.10p
351.70p
397.20p
171.40p
222.35p
326.94p
–
–
–
–
–
–
–
–
–
–
–
–
–
29.03.10
30.04.12
10.10.08
27.09.09
29.03.10
25.03.11
30.04.12
12.03.13
02.03.14
10.04.15
01.11.13
01.11.15
01.11.17
28.03.17
29.04.19
09.10.15
26.09.16
28.03.17
24.03.18
29.04.19
11.03.20
01.03.21
09.04.22
01.05.14
01.05.16
01.05.18
Total
1,260,768
235,219
1,495,987
MEGGITT PLC REPORT AND ACCOUNTS 2012
GOVERNANCE
61
S G Young
1996 No1 (options)
2005, Part B (stock SARs)
Sharesave (options)
Total
Number of shares under award
Date of award
at 1 Jan
2012
Awarded/
(exercised)
at 31 Dec
2012
Award
price
Market price
at date of
exercise
Date
exercisable
from
Expiry
date
01.04.04
10.10.05
27.09.06
29.03.07
25.03.08
30.04.09
12.03.10
02.03.11
10.04.12
07.04.05
06.09.10
17,200
186,615
210,871
192,642
285,149
297,345
251,660
210,975
–
9,468
4,047
–
–
–
–
–
–
–
–
288,520
(9,468)
–
17,200
186,615
210,871
192,642
285,149
297,345
251,660
210,975
288,520
–
4,047
174.40p
278.65p
263.67p
299.00p
252.50p
169.50p
286.10p
351.70p
397.20p
188.76p
222.35p
–
–
–
–
–
–
–
–
–
366.60p
–
01.04.07
10.10.08
27.09.09
29.03.10
25.03.11
30.04.12
12.03.13
02.03.14
10.04.15
01.06.12
01.11.13
31.03.14
09.10.15
26.09.16
28.03.17
24.03.18
29.04.19
11.03.20
01.03.21
09.04.22
30.11.12
01.05.14
1,665,972
279,052
1,945,024
Awards made under ESOS Part B are made as stock-settled share appreciation rights (stock SARs).
The market price of the shares at 31 December 2012 was 382.30p and the range during the year was 356.50p to 414.90p. Awards may, in certain
circumstances, be exercised or lapse earlier than the dates shown on pages 59 to 60 and above.
None of the non-executive directors held options over the Company’s shares at any time during the relevant periods.
During 2012, other than holdings in share schemes and the Share Incentive Plan (included in the table on page 62) there were no other schemes to
benefit directors by enabling them to acquire shares in or debentures of the Company or any other company.
Gains made on exercise of share awards (audited)
T Twigger
P E Green
S G Young
Total
Option
1996 No 2 Executive Share Option Scheme
Sharesave
Sharesave
1996 No 2 Executive Share Option Scheme
Sharesave
Sharesave
01.06.12
9,468
2012 awards exercised
Exercise
date
Awards
exercised
Gain
2012
£’000
–
–
–
–
–
–
–
–
–
–
Gain
2011
£’000
257
5
7
120
6
–
395
–
–
–
–
–
17
17
MEGGITT PLC REPORT AND ACCOUNTS 2012
GOVERNANCE
62
Remuneration report continued
Directors’ shareholdings
The beneficial interests of the directors and their connected persons in the ordinary shares of the Company at 31 December 2012, as notified under
the Disclosure and Transparency Rules of the Financial Services Authority (DTR), were as follows:
Sir Colin Terry
Mr T Twigger
Mr G S Berruyer1
Mr P G Cox2
Mr P E Green
Mr P Heiden
Ms B L Reichelderfer
Mr D A Robins
Mr D M Williams
Mr S G Young
1
2
Appointed on 2 October 2012.
Appointed on 27 September 2012.
Shareholding
Ordinary shares of 5p each
2011
2012
11,846
1,104,756
–
–
553,260
5,701
6,000
71,261
5,000
407,154
11,603
1,103,626
–
–
552,130
5,551
6,000
68,918
5,000
394,649
Between 1 January 2013 and 22 February 2013, the only changes to the beneficial interests of the directors in the ordinary shares of the Company
are that Mr Twigger and Mr Green each acquired 58 shares and Mr Young acquired 57 shares through the Meggitt PLC Share Incentive Plan.
By order of the Board
P Heiden
Chairman, Remuneration Committee
4 March 2013
Independent auditors’ report to the members of Meggitt PLC
63
MEGGITT PLC REPORT AND ACCOUNTS 2012
FINANCIAL STATEMENTS
We have audited the group financial statements of Meggitt PLC for
the year ended 31 December 2012 which comprise the Consolidated
income statement, the Consolidated statement of comprehensive
income, the Consolidated balance sheet, the Consolidated statement
of changes in equity, the Consolidated cash flow statement and the
related notes. The financial reporting framework that has been applied
in their preparation is applicable law and International Financial
Reporting Standards (IFRSs) as adopted by the European Union.
Respective responsibilities of directors and auditors
As explained more fully in the Directors’ Responsibilities Statement
set out on page 46, the directors are responsible for the preparation of
the group financial statements and for being satisfied that they give a
true and fair view. Our responsibility is to audit and express an opinion
on the group financial statements in accordance with applicable law
and International Standards on Auditing (UK and Ireland). Those
standards require us to comply with the Auditing Practices Board’s
Ethical Standards for Auditors.
This report, including the opinions, has been prepared for and only for
the company’s members as a body in accordance with Chapter 3 of
Part 16 of the Companies Act 2006 and for no other purpose. We do not,
in giving these opinions, accept or assume responsibility for any other
purpose or to any other person to whom this report is shown or into
whose hands it may come save where expressly agreed by our prior
consent in writing.
Opinion on other matters prescribed by the Companies
Act 2006
In our opinion:
• the information given in the Directors’ Report for the financial year
for which the group financial statements are prepared is consistent
with the group financial statements; and
• the information given in the Corporate Governance Statement set
out on pages 47 to 51 with respect to internal control and risk
management systems and about share capital structures is
consistent with the financial statements.
Matters on which we are required to report by
exception
We have nothing to report in respect of the following:
Under the Companies Act 2006 we are required to report to you if, in
our opinion:
• certain disclosures of directors’ remuneration specified by law are
not made; or
• we have not received all the information and explanations we require
for our audit; or
• a Corporate Governance statement has not been prepared by the
parent company.
Scope of the audit of the financial statements
Under the Listing Rules we are required to review:
An audit involves obtaining evidence about the amounts and
disclosures in the financial statements sufficient to give reasonable
assurance that the financial statements are free from material
misstatement, whether caused by fraud or error. This includes an
assessment of: whether the accounting policies are appropriate to
the group’s circumstances and have been consistently applied and
adequately disclosed; the reasonableness of significant accounting
estimates made by the directors; and the overall presentation of
the financial statements. In addition, we read all the financial and
non-financial information in the Meggitt PLC Annual report and
accounts to identify material inconsistencies with the audited
financial statements. If we become aware of any apparent material
misstatements or inconsistencies we consider the implications for
our report.
Opinion on financial statements
In our opinion the group financial statements:
• give a true and fair view of the state of the group’s affairs as at
31 December 2012 and of its profit and cash flows for the year
then ended;
• have been properly prepared in accordance with IFRSs as adopted
by the European Union; and
• have been prepared in accordance with the requirements of the
Companies Act 2006 and Article 4 of the lAS Regulation.
• the Directors’ Statement, set out on page 51, in relation to going
concern;
• the part of the Corporate Governance Statement relating to the
company’s compliance with the nine provisions of the June 2008
Combined Code specified for our review; and
• certain elements of the report to shareholders by the Board on
directors’ remuneration.
Other matter
We have reported separately on the parent company financial
statements of Meggitt PLC for the year ended 31 December 2012
and on the information in the Directors’ Remuneration Report that
is described as having been audited.
John Maitland (Senior Statutory Auditor)
for and on behalf of PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
Reading
4 March 2013
MEGGITT PLC REPORT AND ACCOUNTS 2012
FINANCIAL STATEMENTS
64
Consolidated income statement
For the year ended 31 December 2012
Revenue
Cost of sales
Gross profit
Net operating costs
Operating profit*
Finance income
Finance costs
Net finance costs
Profit before tax**
Tax
Profit for the year attributable to owners of the parent
Earnings per share:
Basic
Diluted
* Underlying operating profit
** Underlying profit before tax
Notes
5
6
12
13
14
15
15
10
10
2012
£’m
2011
£’m
1,605.8
(929.1)
1,455.3
(839.8)
676.7
615.5
(353.1)
(353.0)
323.6
262.5
35.4
(66.9)
(31.5)
36.9
(73.4)
(36.5)
292.1
226.0
(48.8)
243.3
(41.1)
184.9
31.1p
30.7p
394.3
362.8
24.0p
23.8p
359.5
323.0
Consolidated statement of comprehensive income
65
For the year ended 31 December 2012
MEGGITT PLC REPORT AND ACCOUNTS 2012
FINANCIAL STATEMENTS
Profit for the year
Other comprehensive income for the year:
Actuarial losses
Currency translation differences
Cash flow hedge movements
Other comprehensive expense before tax
Related tax movements
Other comprehensive expense for the year
Notes
2012
£’m
2011
£’m
243.3
184.9
33
14
(6.8)
(54.7)
(5.8)
(67.3)
1.3
(66.0)
(76.6)
10.7
5.3
(60.6)
21.6
(39.0)
Total comprehensive income for the year attributable to owners of the parent
177.3
145.9
MEGGITT PLC REPORT AND ACCOUNTS 2012
FINANCIAL STATEMENTS
66
Consolidated balance sheet
As at 31 December 2012
Non-current assets
Goodwill
Development costs
Programme participation costs
Other intangible assets
Property, plant and equipment
Trade and other receivables
Derivative financial instruments
Deferred tax assets
Current assets
Inventories
Trade and other receivables
Derivative financial instruments
Current tax recoverable
Cash and cash equivalents
Total assets
Current liabilities
Trade and other payables
Derivative financial instruments
Current tax liabilities
Obligations under finance leases
Bank and other borrowings
Provisions
Net current assets
Non-current liabilities
Trade and other payables
Derivative financial instruments
Deferred tax liabilities
Obligations under finance leases
Bank and other borrowings
Provisions
Retirement benefit obligations
Total liabilities
Net assets
Equity
Share capital
Share premium
Other reserves
Hedging and translation reserves
Retained earnings
Total equity attributable to owners of the parent
The notes on pages 69 to 105 form an integral part of these consolidated financial statements.
The financial statements were approved by the Board of Directors on 4 March 2013 and signed on its behalf by:
T Twigger
Director
S G Young
Director
Notes
2012
£’m
2011
£’m
18
19
19
20
21
23
30
32
22
23
30
24
1,494.2
221.5
203.6
778.9
232.2
98.8
49.8
100.2
1,544.0
185.8
197.5
865.8
229.9
114.7
39.7
112.5
3,179.2
3,289.9
291.2
304.2
5.0
0.2
104.9
705.5
277.5
317.4
4.1
2.6
94.6
696.2
6
3,884.7
3,986.1
25
30
27
28
31
26
30
32
27
28
31
33
34
(351.9)
(4.0)
(57.0)
(3.1)
(127.0)
(44.8)
(587.8)
117.7
(6.3)
(0.2)
(289.5)
(5.0)
(612.3)
(178.5)
(299.7)
(349.4)
(12.8)
(49.4)
(0.7)
(7.0)
(50.6)
(469.9)
226.3
(6.5)
(4.2)
(316.8)
(8.2)
(867.1)
(200.2)
(319.9)
(1,391.5)
(1,722.9)
(1,979.3)
(2,192.8)
1,905.4
1,793.3
39.3
1,143.9
14.1
117.9
590.2
38.9
1,130.1
14.1
177.8
432.4
1,905.4
1,793.3
Consolidated statement of changes in equity
For the year ended 31 December 2012
67
MEGGITT PLC REPORT AND ACCOUNTS 2012
FINANCIAL STATEMENTS
Share
capital
Share
premium
Other
reserves*
Hedging and
translation
Retained
earnings
Total
equity
Notes
£’m
34.9
£’m
859.4
£’m
14.1
At 1 January 2011
Profit for the year
Other comprehensive income for the year:
Actuarial losses
Currency translation differences arising in the year
Cash flow hedge movements:
Movement in fair value
Transferred to income statement
Other comprehensive income/(expense) before tax
Related tax movements
Other comprehensive income/(expense) for the year
Total comprehensive income for the year
Equity placing
Employee share option schemes:
Value of services provided
Shares issued
Dividends
At 31 December 2011
Profit for the year
Other comprehensive income for the year:
Actuarial losses
Currency translation differences:
Arising in the year
Transferred to income statement
Cash flow hedge movements:
Movement in fair value
Transferred to income statement
Other comprehensive expense before tax
Related tax movements
Other comprehensive expense for the year
Total comprehensive (expense)/income for the year
Employee share option schemes:
Value of services provided
Shares issued
Dividends
At 31 December 2012
reserves**
£’m
159.1
£’m
370.7
£’m
1,438.2
–
184.9
184.9
–
10.7
0.2
5.1
16.0
2.7
18.7
18.7
–
–
–
–
(76.6)
–
–
–
(76.6)
18.9
(57.7)
(76.6)
10.7
0.2
5.1
(60.6)
21.6
(39.0)
127.2
145.9
–
246.0
8.2
(0.1)
(73.6)
8.2
3.4
(48.4)
–
–
–
–
–
–
–
–
–
3.5
–
0.1
0.4
–
–
–
–
–
–
–
–
–
242.5
–
3.4
24.8
–
–
–
–
–
–
–
–
–
–
–
–
–
38.9
1,130.1
14.1
177.8
432.4
1,793.3
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
0.2
0.2
–
0.8
13.0
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(54.4)
(0.3)
(3.9)
(1.9)
(60.5)
0.6
(59.9)
243.3
243.3
(6.8)
(6.8)
–
–
–
–
(6.8)
0.7
(6.1)
(54.4)
(0.3)
(3.9)
(1.9)
(67.3)
1.3
(66.0)
(59.9)
237.2
177.3
–
–
–
5.7
(0.1)
(85.0)
5.7
0.9
(71.8)
39.3
1,143.9
14.1
117.9
590.2
1,905.4
33
14
34
34
16
33
14
34
16
* Other reserves relate to capital reserves arising on the acquisition of businesses in 1985 and 1986 where merger accounting was applied.
** Hedging and translation reserves at 31 December 2012 comprise a credit balance on the hedging reserve of £1.6 million (2011: £5.9 million) and
a credit balance on the translation reserve of £116.3 million (2011: £171.9 million). Amounts recycled from the hedging reserve to the income
statement, in respect of cash flow hedge movements, have affected finance costs. Amounts recycled from the translation reserve to the
income statement, in respect of the disposal of a foreign subsidiary, have affected net operating costs.
MEGGITT PLC REPORT AND ACCOUNTS 2012
FINANCIAL STATEMENTS
68
Consolidated cash flow statement
For the year ended 31 December 2012
Cash inflow from operations before exceptional operating items
Cash outflow from exceptional operating items
Cash inflow from operations
Interest received
Interest paid
Tax paid
Cash inflow from operating activities
Businesses acquired
Net cash acquired with businesses
Business disposed
Capitalised development costs
Capitalised programme participation costs
Purchase of intangible assets
Purchase of property, plant and equipment
Proceeds from disposal of property, plant and equipment
Cash outflow from investing activities
Dividends paid to Company’s shareholders
Issue of equity share capital
Proceeds from borrowings
Debt issue costs
Repayments of borrowings
Cash (outflow)/inflow from financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents at start of year
Exchange losses on cash and cash equivalents
Cash and cash equivalents at end of year
Notes
11
39
42
43
19
19
16
2012
£’m
408.8
(14.7)
394.1
0.2
(28.1)
(34.6)
331.6
(9.4)
1.0
15.9
(52.2)
(36.1)
(28.0)
(35.5)
0.3
(144.0)
(71.8)
0.9
189.3
(2.0)
(292.7)
(176.3)
11.3
94.6
(1.0)
24
104.9
2011
£’m
395.8
(17.1)
378.7
0.3
(31.0)
(42.6)
305.4
(418.1)
0.5
–
(41.2)
(33.2)
(25.1)
(27.0)
7.5
(536.6)
(48.4)
249.5
214.3
(2.9)
(137.4)
275.1
43.9
51.9
(1.2)
94.6
Notes to the financial statements
69
MEGGITT PLC REPORT AND ACCOUNTS 2012
FINANCIAL STATEMENTS
1. Basis of preparation
Foreign currencies
The consolidated financial statements of the Group have been prepared
in accordance with International Financial Reporting Standards as
adopted by the European Union (‘IFRSs as adopted by the EU’) and the
Companies Act 2006 applicable to companies reporting under IFRS.
The consolidated financial statements have been prepared on a going
concern basis under the historical cost convention, as modified by the
revaluation of certain financial assets and financial liabilities (including
derivative instruments) at fair value.
2. Summary of significant accounting policies
The principal accounting policies adopted by the Group in the
preparation of the consolidated financial statements are set out below.
These policies have been applied consistently to all periods presented
unless stated otherwise.
Basis of consolidation
The Group financial statements consolidate the financial statements of
the Company and all of its subsidiaries. A subsidiary is an entity over
which the Group has the power to govern its financial and operating
policies. The existence and nature of potential voting rights that are
currently available to the Group are considered when determining
whether the entity is a subsidiary. The results of subsidiaries acquired
are consolidated from the date on which control passes to the Group.
The results of disposed subsidiaries are consolidated up to the date on
which control passes from the Group.
The cost of an acquisition is the fair value of consideration provided,
including the fair value of any contingent consideration, as measured at
the acquisition date. Subsequent changes to the fair value of any
contingent consideration are recorded in the income statement.
Identifiable assets and liabilities of an acquired business that meet the
conditions for recognition under IFRS 3 are recognised at their fair
value at the date of acquisition. To the extent the cost of an acquisition
exceeds the fair value of net assets acquired, the difference is recorded
as goodwill. To the extent the fair value of the net assets acquired
exceeds the cost of an acquisition, the difference is recorded
immediately in the income statement.
When a subsidiary is acquired, the fair values of its identifiable assets
and liabilities are finalised within 12 months of the acquisition date. All
fair value adjustments are recorded with effect from the date of
acquisition and consequently may result in the restatement of
previously reported financial results.
When a subsidiary is disposed, the difference between the fair value of
the consideration received or receivable and the value at which the net
assets of the subsidiary were recorded, immediately prior to disposal,
is recognised in the income statement. Any such gain or loss is
excluded from the underlying profit measures used by the Board to
monitor and measure the underlying performance of the Group (see
note 10).
Transactions between, and balances with, Group companies are
eliminated together with unrealised gains on inter-group transactions.
Unrealised losses are eliminated to the extent the asset transferred is
not impaired. The accounting policies of acquired businesses are
changed where necessary to be consistent with those of the Group.
Functional and presentational currency
The Group’s consolidated financial statements are presented in pounds
sterling. Items included in the financial statements of each of the
Group’s subsidiaries are measured using the functional currency of the
primary economic environment in which the subsidiary operates.
Transactions and balances
Transactions in foreign currencies are recorded at the rates of
exchange prevailing at the dates of the transactions. Monetary assets
and liabilities denominated in foreign currencies are reported at the
rates of exchange prevailing at the balance sheet date. Exchange
differences on retranslating monetary assets and liabilities are
recognised in the income statement except where they relate to
qualifying cash flow hedges or net investment hedges in which case
exchange differences are recognised in other comprehensive income.
Foreign subsidiaries
The results of foreign subsidiaries are translated at the average rates
of exchange for the period. Assets and liabilities of foreign subsidiaries
are translated at the rates of exchange prevailing at the balance sheet
date. Exchange differences arising from the retranslation of the results
and opening net assets of foreign subsidiaries are recognised as a
separate component of equity in hedging and translation reserves.
Exchange differences on borrowings and other currency instruments
designated as net investment hedges of foreign subsidiaries are also
recognised in hedging and translation reserves.
When a foreign subsidiary is sold, the cumulative exchange differences
relating to the retranslation of the net investment in the foreign
subsidiary are recognised in the income statement as part of the gain
or loss on disposal. This applies only to exchange differences recorded
in equity after 1 January 2004. Exchange differences arising prior to
1 January 2004 remain in equity on disposal as permitted by IFRS 1
(‘First time Adoption of International Financial Reporting Standards’).
Goodwill and fair value adjustments arising from the acquisition of a
foreign subsidiary are treated as assets and liabilities of the subsidiary
and are retranslated at the rates of exchange prevailing at the balance
sheet date.
Segment reporting
Operating segments are those segments for which results are
reviewed by the Group’s Chief Operating Decision Maker (‘CODM’) to
assess performance and make decisions about resources to be
allocated. The CODM has been identified as the Board. The Group has
determined that its current segments are Aircraft Braking Systems,
Control Systems, Polymers & Composites, Sensing Systems and the
Equipment Group.
The principal profit measure reviewed by the CODM is ‘underlying
operating profit’ as defined in note 10. A segmental analysis of
underlying operating profit is accordingly provided in the notes to the
financial statements.
Segmental information on assets is provided in respect of ‘trading
assets’ which are defined to exclude from total assets amounts which
the CODM does not review on a segmental level. Excluded assets
comprise centrally managed trading assets, goodwill, other intangible
assets, derivative financial instruments, deferred tax, current tax and
cash and cash equivalents.
No segmental information is provided in respect of liabilities as no
such measure is reviewed by the CODM.
MEGGITT PLC REPORT AND ACCOUNTS 2012
FINANCIAL STATEMENTS
70
Notes to the financial statements continued
2. Summary of significant accounting policies continued
Intangible assets
Revenue recognition
Revenue represents the fair value of consideration received or
receivable in respect of goods and services provided in the normal
course of business to external customers, net of trade discounts,
returns and sales related taxes.
Sale of goods
Revenue is recognised when the significant risks and rewards of
ownership have transferred to the customer, managerial involvement
and control of the goods is not retained by the Group, the revenue and
costs associated with the sale can be measured reliably and the
collection of related receivables is probable. In the majority of
instances these conditions are met when delivery to the customer
takes place. In a minority of instances ‘bill and hold’ arrangements
exist whereby revenue is recorded prior to delivery but only when the
customer has accepted title to the goods, the goods are separately
identifiable and available for delivery on terms agreed with the
customer and normal credit terms apply.
Contract accounting revenue
The Group is usually able to reliably estimate the outcome of a contract
at inception and accordingly recognises revenue and cost of sales by
reference to the stage of completion of the contract. Revenue is
typically measured by applying to the total contract revenue, the
proportion costs incurred in the period for work performed bear to the
total estimated contract costs. Where it is not possible to reliably
estimate the outcome of a contract, revenue is recognised equal to the
costs incurred, provided recovery of such costs is probable. If total
contract costs are forecast to exceed total contract revenue then the
expected loss is recorded immediately in the income statement.
Revenue from services
Revenue is recognised by reference to the stage of completion of the
contract. For ‘cost-plus fixed fee’ contracts, revenue is recognised
equal to the costs incurred plus an appropriate proportion of the fee
agreed with the customer. For other contracts, stage of completion is
typically measured by reference to contractual milestones achieved,
number of aircraft flying hours or number of aircraft landings.
Revenue from funded research and development
Revenue is recognised according to the stage of completion of the
contract. The stage of completion is typically measured by reference to
contractual milestones achieved.
Exceptional operating items
Items which are significant by virtue of their size or nature and which
are considered non-recurring are classified as exceptional operating
items. They include, for instance, adjustments to the fair value of
contingent consideration payable in respect of an acquired business,
costs directly attributable to the acquisition of businesses, the costs of
integrating significant acquisitions, significant restructuring costs and
gains or losses made on the disposal of businesses. Exceptional
operating items are included within the appropriate consolidated
income statement category but are highlighted separately in the notes
to the financial statements. They are excluded from the underlying
profit measures used by the Board to monitor and measure the
underlying performance of the Group (see note 10).
Goodwill
Goodwill represents the excess of the cost of an acquisition over the fair
value of the Group’s share of the identifiable net assets acquired and the
liabilities and contingent liabilities assumed. Goodwill is no longer
amortised but is tested annually for impairment. Goodwill is carried at
cost less amortisation charged prior to 1 January 2004 less
accumulated impairment losses. In the event the subsidiary to which
goodwill relates is disposed of, its attributable goodwill is included in
the determination of the gain or loss on disposal.
Research and development
Research expenditure is recognised as an expense in the income
statement as incurred. Development costs incurred on projects where
the related expenditure is separately identifiable, measurable and
management are satisfied as to the ultimate technical and commercial
viability of the project based on all relevant available information are
recognised as an intangible asset. Capitalised development costs are
carried at cost less accumulated amortisation and any impairment.
Amortisation is charged over the periods expected to benefit, typically
up to 10 years, commencing with the launch of the product.
Development costs not meeting the criteria for capitalisation are
expensed as incurred.
Programme participation costs
Programme participation costs consist of incentives given to Original
Equipment Manufacturers in connection with their selection of the
Group’s products for installation onto new aircraft where the Group
has obtained principal supplier status. These incentives comprise cash
payments and/or the supply of initial manufactured parts on a free of
charge or deeply discounted basis. Programme participation costs are
recognised as an intangible asset and carried at cost less accumulated
amortisation and any impairment. Amortisation is charged over the
periods expected to benefit from receiving the status of principal
supplier (through the sale of replacement parts), typically up to 15
years.
Other intangible assets
a) Intangible assets acquired as part of a business combination
For acquisitions, the Group recognises intangible assets separately
from goodwill provided they are separable or arise from contractual or
other legal rights and their fair value can be measured reliably. The
intangible assets recognised are recorded at fair value. Where the
intangible assets recognised have finite lives their fair value is
amortised on a straight-line basis over those lives. The nature of
intangible assets recognised and their estimated useful lives are as
follows:
Customer relationships .............................. Up to 25 years
Technology .................................................. Up to 25 years
Trade names and trademarks .................... Up to 25 years
Order backlogs ............................................ Over period of backlog
(typically up to 3 years)
Amortisation of intangible assets acquired as part of a business
combination is excluded from the underlying profit measures used by
the Board to monitor and measure the underlying performance of the
Group (see note 10).
b) Other purchased intangible assets
Purchased licences, trademarks, patents and software are carried at
cost less accumulated amortisation. Amortisation is charged on a
straight-line basis over their estimated useful economic life, typically
over periods up to 10 years.
MEGGITT PLC REPORT AND ACCOUNTS 2012
FINANCIAL STATEMENTS
71
2. Summary of significant accounting policies continued
Inventories
Property, plant and equipment
Property, plant and equipment is recorded at cost less accumulated
depreciation and any impairment, except for land which is shown at
cost less any impairment. Cost includes expenditure directly
attributable to the acquisition of the asset. Depreciation is calculated
on a straight-line basis over the estimated useful lives of the assets as
follows:
Freehold buildings ...................................... 40 to 50 years
Long and short leasehold property ........... Over period of lease
Plant and machinery ................................... 3 to 10 years
Furnaces ...................................................... Up to 20 years
Fixtures and fittings .................................... 3 to 10 years
Motor vehicles.............................................. 4 to 5 years
Assets’ residual values and useful lives are reviewed annually and
adjusted if appropriate.
Borrowing costs
Borrowing costs directly attributable to the construction or production
of qualifying assets, are capitalised as part of the cost of those assets,
until such time as the assets are substantially ready for their intended
use. Qualifying assets are those that necessarily take a substantial
period of time to get ready for their intended use, which would generally
be at least twelve months. All other borrowing costs are recognised in
the income statement in the period in which they are incurred.
Taxation
Tax payable is based on taxable profit for the period, calculated using
tax rates enacted or substantively enacted at the balance sheet date.
Deferred tax is provided in full using the liability method on temporary
differences between the tax bases of assets and liabilities and their
corresponding book values as recorded in the Group’s financial
statements. Deferred tax is provided on unremitted earnings of foreign
subsidiaries, except where the Group can control the remittance and it
is probable that the earnings will not be remitted in the foreseeable
future. Deferred tax assets are recognised only to the extent it is
probable that taxable profits will be available against which deductible
temporary differences can be utilised. Where deferred tax arises on
the initial recognition of an asset or liability, other than in a business
combination, and the recognition gives rise to no impact on taxable
profit or loss, then deferred tax is not recognised. Deferred tax is
calculated using tax rates enacted or substantively enacted at the
balance sheet date.
Impairment of non-current non-financial assets
Assets are reviewed for impairment annually and also whenever events
or changes in circumstances indicate the carrying value may not be
recoverable. To the extent the carrying value exceeds the recoverable
amount, the difference is recorded as an expense in the income
statement. The recoverable amount used for impairment testing is the
higher of the value in use and fair value less costs of disposal. For the
purpose of impairment testing, assets are grouped at the lowest levels
for which there are separately identifiable cash flows which are largely
independent of cash flows from other assets or groups of assets. At
each balance sheet date, previously recorded impairment losses, other
than any relating to goodwill, are reviewed and if no longer required
reversed with a corresponding credit to the income statement.
Inventories are recorded at the lower of cost and net realisable value.
Cost represents materials, direct labour, other direct costs and related
production overheads (based on normal operating capacity) and is
determined using the first-in first-out (FIFO) method. Net realisable
value is based on estimated selling price, less further costs expected
to be incurred to completion and disposal.
When a subsidiary is acquired, inventory of the acquired subsidiary is
recorded at fair value in the Group’s balance sheet. Finished goods are
valued at fair value, which is typically estimated selling price less costs
of disposal and a reasonable profit allowance for the selling effort.
Work in progress is valued at fair value, which is typically estimated
selling price less costs to complete, costs of disposal and a reasonable
profit allowance for work not yet completed. When this inventory is
subsequently disposed of post acquisition, the fair value is charged to
the income statement. The difference between the fair value of the
inventory consumed and its actual cost of manufacture is excluded
from the underlying profit measures used by the Board to monitor and
measure the underlying performance of the Group (see note 10).
Provision is made for obsolete, slow moving or defective items where
appropriate and for unrealised profits on items of inter-group
manufacture.
Trade receivables
Trade receivables are stated initially at fair value, then measured at
amortised cost less provisions for impairment. Provisions for
impairment are recognised in the income statement, when there is
objective evidence the Group will not be able to collect all amounts due
according to the original terms of the receivables. The impairment
recorded is the difference between the carrying value of the receivables
and its estimated future cash flows discounted where appropriate.
Cash and cash equivalents
Cash and cash equivalents include cash in hand and deposits held at
call with banks. Bank overdrafts are disclosed as current liabilities,
within bank and other borrowings, except where the Group participates
in offset arrangements with certain banks whereby cash and overdraft
amounts are offset against each other.
Trade payables
Trade payables are initially recognised at fair value and subsequently
held at amortised cost. Trade payables are not interest bearing.
Leases
Leases where the Group has substantially all the risks and rewards
of ownership are classified as finance leases. Finance leases are
capitalised at the lease’s commencement at the lower of the fair value
of the leased asset and the present value of the minimum lease
payments. Each lease payment is allocated between the liability and
finance charges so as to achieve a constant rate on the finance balance
outstanding. The corresponding rental obligations, net of finance
charges, are included in liabilities. The interest element of the finance
cost is charged to the income statement over the lease period so as to
produce a constant periodic rate of interest on the remaining balance
of the liability for each period. Assets acquired under finance leases
are depreciated over the shorter of the useful life of the asset or the
lease term.
Leases in which a significant portion of the risks and rewards of
ownership are retained by the lessor are classified as operating
leases. Payments made under operating leases (net of any incentives
received from the lessor) are charged to the income statement on a
straight-line basis over the period of the lease.
MEGGITT PLC REPORT AND ACCOUNTS 2012
FINANCIAL STATEMENTS
72
Notes to the financial statements continued
2. Summary of significant accounting policies continued
Share-based compensation
Dividends
Interim dividends are recognised as liabilities when they are approved
by the Board. Final dividends are recognised as liabilities when they
are approved by the shareholders.
Borrowings
Borrowings are initially recognised at fair value being proceeds
received less directly attributable transaction costs incurred.
Borrowings are subsequently measured at amortised cost with any
transaction costs amortised to the income statement over the period of
the borrowings using the effective interest method. Borrowings are
held at fair value where a hedge relationship is in place. Any related
interest accruals are included within borrowings. Borrowings are
classified as current liabilities unless the Group has an unconditional
right to defer settlement of the liability for at least 12 months after the
balance sheet date.
Provisions
Provision is made for environmental, legal and regulatory liabilities,
onerous contracts and product warranty claims when the Group has a
present obligation as a result of past events, it is more likely than not
that an outflow of economic benefits will be required to settle the
obligation and the amount can be reliably estimated. Provisions are
discounted to present value where the impact is significant, using a
pre-tax rate. The discount rate used is based on current market
assessments of the time value of money, adjusted to reflect any risks
specific to the obligation which have not been reflected in the
undiscounted provision. The impact of the unwinding of discounting is
recognised as a finance cost in the income statement.
Retirement benefit schemes
For defined benefit schemes, pension costs and the costs of providing
other post-retirement benefits (principally healthcare) are charged to
the income statement in accordance with the advice of qualified
independent actuaries. Past service costs are recognised immediately
in the income statement unless the changes are dependent on
employees remaining in service for a particular period in which case
costs are recognised on a straight-line basis over that period.
Retirement benefit obligations represent, for each scheme, the
difference between the fair value of the schemes’ assets and the
present value of the schemes’ defined benefit obligations measured at
the balance sheet date. The defined benefit obligation is calculated
annually by independent actuaries using the projected unit credit
method. The present value of the defined benefit obligation is
determined by discounting the defined benefit obligations using
interest rates of high quality corporate bonds denominated in the
currency in which the benefits will be paid and with terms to maturity
comparable with the terms of the related defined benefit obligations.
Actuarial gains and losses are recognised in the period in which they
arise in other comprehensive income.
For defined contribution schemes, payments are recognised in the
income statement when they fall due.
The Group operates a number of equity-settled and cash-settled
share-based compensation schemes.
For equity-settled schemes, the fair value of an award is measured at
the date of grant and reflects any market-based vesting conditions.
Non market-based vesting conditions are excluded from the fair value
of the award. At the date of grant, the Group estimates the number of
awards expected to vest as a result of non market-based vesting
conditions and the fair value of this estimated number of awards is
recognised as an expense in the income statement on a straight-line
basis over the period for which services are received. At each balance
sheet date the Group revises its estimate of the number of awards
expected to vest as a result of non market-based vesting conditions
and adjusts the amount recognised cumulatively in the income
statement to reflect the revised estimate.
For cash-settled schemes, the total amount recognised is based on the
fair value of the liability incurred. The fair value of the liability is
remeasured at each balance sheet date with changes in fair value
recognised in the income statement for the period.
Derivative financial instruments and hedging
The Group uses derivative financial instruments to hedge its exposure
to interest rate risk and foreign currency transactional risk. Derivative
financial instruments are recognised at fair value on the date the
derivative contract is entered into and are subsequently remeasured
at fair value at each balance sheet date using values determined
indirectly from quoted prices that are observable for the asset or
liability.
The method by which any gain or loss arising from remeasurement
is recognised depends on whether the instrument is designated as
a hedging instrument and if so the nature of the item hedged.
The Group recognises an instrument as a hedging instrument by
documenting, at the inception of the instrument, the relationship
between the instrument and the hedged item and the objectives and
strategy for undertaking the hedging transaction. To be designated as
a hedging instrument, an instrument must also be assessed, at
inception and on an ongoing basis, to be highly effective in offsetting
changes in fair values or cash flows of hedged items.
To the extent the maturity of the financial instrument is more than 12
months from the balance sheet date, the fair value is reported as a
non-current asset or non-current liability. All other derivative financial
instruments are reported as current assets or current liabilities.
Fair value hedges
Changes in fair value of derivative financial instruments, that are
designated and qualify as fair value hedges, are recognised in the
income statement together with changes in fair value of the hedged
item. Any difference between the movement in fair value of the
derivatives and the hedged items are excluded from the underlying
profit measures used by the Board to monitor and measure the
underlying performance of the Group (see note 10). The Group
currently only applies fair value hedge accounting to the hedging of
fixed interest rate risk on borrowings.
MEGGITT PLC REPORT AND ACCOUNTS 2012
FINANCIAL STATEMENTS
73
2. Summary of significant accounting policies continued
Recent accounting developments
Cash flow hedges
Changes in fair value of the effective portion of derivative financial
instruments, that are designated and qualify as cash flow hedges, are
initially recognised in other comprehensive income. Changes in fair
value of any ineffective portion are recognised immediately in the
income statement.
To the extent changes in fair value are recognised in other
comprehensive income, they are recycled to the income statement in
the periods in which the hedged item affects the income statement.
The Group currently only applies cash flow hedge accounting to the
hedging of floating interest rate risk on borrowings.
If the forecast transaction to which the cash flow hedge relates is
no longer expected to occur, the cumulative gain or loss previously
recognised in other comprehensive income is transferred to the income
statement immediately. If the hedging instrument is sold, expires or no
longer meets the criteria for hedge accounting the cumulative gain or
loss previously recognised in other comprehensive income is
transferred to the income statement when the forecast transaction is
recognised in the income statement.
Net investment hedges
Hedges of net investments of foreign subsidiaries are accounted for in
a similar way to cash flow hedges. Gains and losses relating to the
effective portion of any hedge are recognised in other comprehensive
income. Changes in fair value of any ineffective portion are recognised
immediately in the income statement. Cumulative gains and losses
previously recognised in other comprehensive income are transferred
to the income statement if the foreign subsidiary to which they relate is
disposed of.
Derivatives that do not meet the criteria for hedge accounting
Where derivatives do not meet the criteria for hedge accounting,
changes in fair value are recognised immediately in the income
statement. The Group utilises a number of foreign currency forward
contracts to mitigate against currency fluctuations. The Group has
determined the additional costs of meeting the extensive
documentation requirements for the Group’s large number of foreign
currency forward contracts are not merited. Gains and losses arising
from measuring these contracts at fair value are excluded from the
underlying profit measures used by the Board to monitor and measure
the underlying performance of the Group (see note 10).
Share capital
Ordinary shares are classified as equity. Incremental costs directly
attributable to the issue of new shares are deducted from the proceeds
recorded in equity.
Own shares represent shares in the Company that are held by an
independently managed Employee Share Ownership Plan. The
consideration paid for own shares, including any incremental directly
attributable costs, is recorded as a deduction from shareholders’
equity. When such shares are sold any consideration received, net of
any directly attributable costs, is recorded within shareholders’ equity.
Adoption of new and revised accounting standards
The following amendments to existing standards became effective
during the current period, but have had no significant impact on the
Group’s financial statements:
• IFRS 1 (Amended), ‘First-time Adoption of International Financial
Reporting Standards’;
• IFRS 7 (Amended), ‘Financial instruments: Disclosures’;
• IAS 12 (Amended), ‘Income taxes’.
The following amendment to an existing accounting standard has been
published and is mandatory for the Group’s future accounting periods.
It has been endorsed by the European Union. The amendment is
effective for annual periods beginning on or after 1 January 2013 and
has not been early adopted in these financial statements:
• IAS 19 (revised 2011), ‘Employee benefits’.
Management has estimated that, had this standard been adopted in
these financial statements, net operating costs for 2012 would have
increased by approximately £2.0 million, as scheme administration
expenses borne directly by defined benefit plans would be recorded as
an operating expense and not as a reduction in the expected return on
scheme assets. Net finance costs for 2012 would have increased by
approximately £9.0 million, as the expected return on scheme assets is
calculated using the same rate used to discount scheme liabilities and
will no longer include any allowance for equity-like out-performance or
deduction for scheme administration expenses. The adverse impact on
net operating costs and net finance costs would be offset by an equal
reduction in actuarial losses, which would therefore have reduced by
approximately £11.0 million. There would have been no impact on the
value at which retirement benefit obligations are recorded in the
balance sheet. The results of the prior period would also need to have
been restated accordingly. The Group intends to exclude the revised
net pension finance cost calculated under IAS 19 (revised 2011) from its
underlying profit measures (as defined in note 10) when this standard
is adopted in 2013.
The following new standards, amendments to existing standards and
new interpretations have been published and are mandatory for the
Group’s future accounting periods. With the exception of the
Improvements to IFRSs (2009-2011), the amendment to IFRS 1 and
IFRS 9, they are endorsed by the European Union. They have not been
early adopted in these financial statements and are not expected to
have a significant impact on future financial statements when they
are adopted:
Effective for annual periods beginning on or after 1 July 2012:
• IAS 1 (Amended), ‘Presentation of Financial Statements’.
Effective for annual periods beginning on or after 1 January 2013:
• ‘Improvements to IFRSs (2009-2011)’;
• IFRS 1 (Amended), ‘First-time Adoption of International Financial
Reporting Standards’;
• IFRS 7 (Amended), ‘Financial instruments: Disclosures’;
• IFRS 10, ‘Consolidated financial statements’;
• IFRS 11, ‘Joint arrangements’;
• IFRS 12, ‘Disclosures of interests in other entities’;
• IFRS 13, ‘Fair value measurement’;
• IAS 27 (revised 2011), ‘Separate financial statements’;
• IAS 28 (revised 2011), ‘Associates and joint ventures’;
• IFRIC 20, ‘Stripping costs in the production phase of a surface
mine’.
Effective for annual periods beginning on or after 1 January 2014:
• IAS 32 (Amended), ‘Financial Instruments: Presentation’.
Effective for annual periods beginning on or after 1 January 2015:
• IFRS 9, ‘Financial instruments’.
MEGGITT PLC REPORT AND ACCOUNTS 2012
FINANCIAL STATEMENTS
74
Notes to the financial statements continued
3. Financial risk management
Financial risk factors
The Group’s operations expose it to a number of financial risks including market risk (principally foreign exchange risk and interest rate risk),
credit risk and liquidity risk. These risks are managed by a centralised treasury department, in accordance with Board approved objectives,
policies and authorities. Regular reports monitor exposures and assist in managing the associated risks.
Market risk
Foreign exchange risk
The Group operates internationally and is subject to foreign exchange risks on future commercial transactions and net investments in foreign
subsidiaries. The principal exposures arise with respect to the US dollar against the Pound sterling. To mitigate risks associated with future
commercial transactions, the Group policy is to hedge known and certain forecast transaction exposures based on historical experience and
projections. The Group hedges at least 70% of the next 12 months anticipated exposure and can hedge up to five years ahead. Details of the
hedges in place are provided in note 30. The Group also uses borrowings denominated in the relevant currencies to hedge its investment in
foreign subsidiaries.
Interest rate risk
The Group has borrowings issued at both fixed and floating rates of interest. Borrowings issued at fixed rates expose the Group to fair value
interest rate risk whereas borrowings issued at floating rates expose the Group to cash flow interest rate risk. The Group’s policy is to maintain at
least 25% of its net debt at fixed rates. The Group mitigates interest rate risks through swaps which have the economic effect of converting fixed
rate borrowings into floating rate borrowings and floating rate borrowings into fixed rate borrowings. Details of the hedges in place are provided
in note 30.
Credit risk
The Group is not subject to significant concentration of credit risk with exposure spread across a large number of customers across the world. In
addition, many of the Group’s principal customers are either government departments or large multinationals. Policies are maintained to ensure
the Group makes sales to customers with an appropriate credit history. Letters of credit, or other appropriate instruments, are put in place to
reduce credit risk where considered necessary. The Group is also subject to credit risk on the counterparties to its other financial instruments
which it controls through only dealing with highly rated counterparties and netting transactions on settlement wherever possible.
Liquidity risk
The Group maintains sufficient committed facilities to meet projected borrowing requirements based on cash flow forecasts. Additional
headroom is maintained to protect against the variability of cash flows and to accommodate small bolt-on acquisitions. Key ratios are monitored
to ensure continued compliance with covenants contained in the Group’s principal credit agreements. The following table analyses the Group’s
financial liabilities and derivative assets and liabilities as at the balance sheet date. The amounts disclosed in the table are the contractual
undiscounted cash flows:
Trade and other payables*
Bank and other borrowings
Interest payments on borrowings
Obligations under finance leases (see note 27)
Derivative financial instruments:
Inflows**
Outflows**
Total
Trade and other payables*
Bank and other borrowings
Interest payments on borrowings
Obligations under finance leases (see note 27)
Derivative financial instruments:
Inflows**
Outflows**
Total
Less than
1 year
£’m
339.9
123.7
23.7
3.1
(75.2)
68.5
483.7
Less than
1 year
£’m
339.4
3.2
28.4
0.7
(86.5)
79.7
364.9
* Excludes social security and other taxes of £12.0 million (2011: £10.0 million) (see note 25).
** Assumes no change in interest rates from those prevailing at year end.
2012
1-2 years
2-5 years
Greater than
5 years
£’m
1.8
247.0
41.7
3.9
Total
£’m
346.2
712.3
141.9
8.1
£’m
2.4
341.2
55.9
0.8
(24.8)
2.1
(21.7)
0.4
(130.0)
71.7
377.6
273.1
1,150.2
£’m
2.1
0.4
20.6
0.3
(8.3)
0.7
15.8
2011
1-2 years
2-5 years
£’m
1.4
335.0
27.8
1.3
(7.9)
–
357.6
£’m
3.0
123.8
66.5
1.6
(23.6)
–
171.3
Greater than
5 years
£’m
2.1
386.9
81.8
5.3
Total
£’m
345.9
848.9
204.5
8.9
(28.6)
–
(146.6)
79.7
447.5
1,341.3
MEGGITT PLC REPORT AND ACCOUNTS 2012
FINANCIAL STATEMENTS
75
3. Financial risk management continued
Sensitivity analysis
The Group’s principal exposures in relation to market risks are to changes in the exchange rate between the US dollar and Pound sterling and to
changes in US interest rates. The table below illustrates the sensitivity of the Group’s results to changes in these key variables as at the balance
sheet date. The analysis covers only financial assets and liabilities held at the balance sheet date and is made on the basis of the hedge
designations in place on those dates and assuming no hedge ineffectiveness.
USD/GBP exchange rate +/- 10%
US yield curve +/- 1%
2012
2011
Income
statement
£’m
18.4
3.2
Equity
£’m
50.4
5.0
Income
statement
£’m
13.4
2.5
Equity
£’m
62.0
0.4
Of the impact on equity from movements in the exchange rate, £57.6 million (2011: £72.6 million) relates to US dollar net debt. However, as all US
dollar debt is designated as a net investment hedge, the impact is entirely offset by the retranslation of overseas operations.
Capital risk management
The Group’s objective when managing its capital structure is to minimise the cost of capital while maintaining adequate capital to protect against
volatility in earnings and net asset values. The strategy is designed to maximise shareholder return over the long-term. The relative proportion of
debt to equity will be adjusted over the medium-term depending on the cost of debt compared to equity and the level of uncertainty facing the
industry and the Group. The Group’s committed credit facilities contain two principal financial covenants. The Group has complied with these
covenant requirements for the year ended 31 December 2012. Further details on the covenant requirements and the Group’s performance against
these can be found on page 26 of the Performance Review. The capital structure of the Group at the balance sheet date is as follows:
Obligations under finance leases – current (see note 27)
Bank and other borrowings – current (see note 28)
Obligations under finance leases – non-current (see note 27)
Bank and other borrowings – non-current (see note 28)
Less cash and cash equivalents (see note 24)
Total net debt (see note 40)
Total equity
Debt/equity %
2012
£’m
3.1
127.0
5.0
612.3
(104.9)
2011
£’m
0.7
7.0
8.2
867.1
(94.6)
642.5
1,905.4
788.4
1,793.3
33.7%
44.0%
4. Critical accounting estimates and judgements
In applying the Group’s accounting policies set out in note 2, management is required to make certain estimates and judgements concerning the
future. These estimates and judgements are regularly reviewed and updated as necessary. The estimates and judgements that have the most
significant effect on the amounts included in these financial statements are as follows:
Goodwill
Each year the Group carries out impairment tests of its goodwill balances which requires estimates to be made of the value in use of its cash
generating units (‘CGUs’). These value in use calculations are dependent on estimates of future cash flows, long-term growth rates and
appropriate discount rates to be applied to future cash flows of the CGUs. Further details on these estimates are provided in note 18.
Development costs and programme participation costs
The Group capitalises development costs and programme participation costs provided they meet certain criteria. Costs are only capitalised
where management are satisfied as to the ultimate commercial viability of the project based on available information. Projects typically involve
long-term relationships on aircraft platforms and, in assessing commercial viability, estimates need to be made of future revenues, margins
and cash flows which are dependent on a number of factors including the size, utilisation and life of the aircraft fleet to which the capitalised
costs relate.
Fair value of intangible assets acquired in a business combination
On the acquisition of a business, it is necessary to attribute fair values to any intangible assets acquired (provided they meet the criteria to be
recognised). The fair values of these intangible assets are dependent on estimates of attributable future revenues, margins, cash flows and
appropriate discount rates to be applied to future cash flows.
Income taxes
In determining the Group’s provisions for income tax and deferred tax, it is necessary to consider transactions in a small number of key tax
jurisdictions for which the ultimate tax determination is uncertain. To the extent the final outcome differs from the tax that has been provided,
adjustments will be made to income tax and deferred tax balances held in the period the determination is made.
MEGGITT PLC REPORT AND ACCOUNTS 2012
FINANCIAL STATEMENTS
76
Notes to the financial statements continued
4. Critical accounting estimates and judgements continued
Environmental matters
The Group is involved in the investigation and remediation of certain sites for which we have been identified as a potentially responsible party
under US law. Advice is received by the Group from its environmental consultants and legal advisors to assist in the determination of the timing
and estimation of the costs the Group may incur in respect of such claims and appropriate provisions are made. To the extent these estimates
change as more information becomes available, adjustments are made to the carrying value of the provisions. The Group has extensive insurance
arrangements in place to mitigate the impact of historical environmental events on the Group.
Legal and regulatory
The Group is subject to legal proceedings and other claims arising in the ordinary course of business. The Group is required to assess the
likelihood of any adverse judgements or outcomes, as well as potential ranges of probable losses. A determination of the provisions required for
these matters is based on a careful analysis of each individual issue with the assistance of outside legal counsel. However, actual claims incurred
could differ from the original estimates.
Onerous contracts
The Group makes provision for any expected losses arising from onerous contracts which require estimates to be made of future contract
revenues, margins and cashflows. These estimates are dependent on a number of factors including anticipated sales volumes, future pricing and
production costs. To the extent these estimates change as more information becomes available, adjustments are made to the carrying value of
these provisions.
Retirement benefit obligations
The liability recognised in respect of retirement benefit obligations is dependent on a number of estimates including those relating to mortality,
inflation, salary increases and the rate at which liabilities are discounted. Any change in these assumptions would impact the retirement benefit
obligations recognised. Further details on these estimates are provided in note 33.
5. Revenue
The Group’s revenue is analysed as follows:
Sale of goods
Contract accounting revenue
Revenue from services
Revenue from funded research and development
Total
6. Segmental analysis
2012
£’m
1,417.2
115.1
48.6
24.9
2011
£’m
1,325.2
61.1
41.7
27.3
1,605.8
1,455.3
The Group manages its businesses under the key segments of Aircraft Braking Systems, Control Systems, Polymers & Composites, Sensing
Systems and the Equipment Group.
• Aircraft Braking Systems is a leading supplier of aircraft wheels, brakes and brake control systems.
• Control Systems is a leading supplier of pneumatic, fluid control, thermal management and electro-mechanical equipment and sub-systems.
• Polymers & Composites is a leading specialist in fuel containment, engineered aircraft sealing solutions and technical polymers, electro-
thermal ice protection and complex composite structures and assemblies.
• Sensing Systems is a leading provider of high-performance sensing and condition-monitoring solutions for high-value rotating machinery and
other assets.
• The Equipment Group division was created to enable a set of strong, technologically distinct businesses to market their offerings to specialist
customers, while benefiting from the Group’s investment in shared services and common processes. The division supplies aircraft fire
protection and control systems, avionics, combat systems, live-fire and simulation training, heat transfer equipment for off-shore oil and gas,
power generation, linear motion control, aircraft safety and security equipment and automotive and industrial control electronics.
• Pacific Scientific Aerospace (‘PacSci’) is managed within the Equipment Group. For the period from its acquisition to 31 December 2011, its
results were separately reported to the Chief Operating Decision Maker (‘CODM’) and accordingly PacSci was treated as a separate segment
under IFRS 8. With effect from 1 January 2012, its results are no longer separately reported to the CODM and it is not treated as a separate
segment. Comparative information has been restated to include PacSci within the Equipment Group segment.
MEGGITT PLC REPORT AND ACCOUNTS 2012
FINANCIAL STATEMENTS
77
6. Segmental analysis continued
Year ended 31 December 2012
The key performance measure reviewed by the CODM is underlying operating profit. A detailed reconciliation of operating profit to underlying operating
profit is provided in note 10.
Gross segment revenue
Inter-segment revenue
Revenue from external customers
Aircraft
Braking
Systems
£’m
311.2
–
311.2
Control
Systems
Polymers &
Composites
Sensing
Systems
Equipment
Group
Total
£’m
215.8
(0.9)
£’m
189.5
(2.3)
£’m
241.4
(1.2)
£’m
652.7
(0.4)
£’m
1,610.6
(4.8)
214.9
187.2
240.2
652.3
1,605.8
Underlying operating profit (see note 10)*
Items not affecting underlying operating profit (see note 10)
117.8
50.1
34.5
36.3
155.6
Operating profit (see note 10)
Finance income (see note 12)
Finance costs (see note 13)
Net finance costs
Profit before tax
Tax (see note 14)
Profit for the year
Exceptional operating items (see note 11)
Amortisation of intangible assets (see notes 19 and 20)**
Depreciation (see note 21)
2.4
71.1
8.4
(2.9)
5.1
2.9
0.2
6.5
3.2
7.3
8.3
7.5
6.3
31.8
9.9
394.3
(70.7)
323.6
35.4
(66.9)
(31.5)
292.1
(48.8)
243.3
13.3
122.8
31.9
* Central costs are allocated using a variety of bases designed to reflect the beneficial relationship between the costs and the segments. Bases
include headcount, payroll costs, gross assets and revenue.
** Of the total amortisation in the year, £42.2 million has been charged to underlying operating profit as defined in note 10.
The Group’s largest customer accounts for 7.0% of revenues (£112.3 million). Revenues from this customer arise across all segments.
Additions to non-current assets*
Development costs (see note 19)
Programme participation costs (see note 19)
Property, plant and equipment (see note 21)
Total
Aircraft
Braking
Systems
£’m
16.7
33.4
4.7
54.8
Control
Systems
Polymers &
Composites
Sensing
Systems
Equipment
Group
Total
£’m
12.1
2.7
3.6
18.4
£’m
0.7
–
3.1
3.8
£’m
£’m
£’m
9.2
–
7.6
16.8
13.5
–
17.6
31.1
52.2
36.1
36.6
124.9
* Relates to those non-current assets included within segmental trading assets reviewed by the CODM.
As at 31 December 2012
Aircraft Braking Systems
Control Systems
Polymers & Composites
Sensing Systems
Equipment Group
Total segmental trading assets
Centrally managed trading assets*
Goodwill (see note 18)
Other intangible assets (see note 20)
Derivative financial instruments – non-current (see note 30)
Deferred tax assets (see note 32)
Derivative financial instruments – current (see note 30)
Current tax recoverable
Cash and cash equivalents (see note 24)
Total assets
Total
£’m
479.5
145.0
79.3
190.2
314.2
1,208.2
143.3
1,494.2
778.9
49.8
100.2
5.0
0.2
104.9
3,884.7
* Centrally managed trading assets principally include amounts recoverable from insurers in respect of environmental issues relating to former
sites, other receivables and property, plant and equipment of central companies.
MEGGITT PLC REPORT AND ACCOUNTS 2012
FINANCIAL STATEMENTS
78
Notes to the financial statements continued
6. Segmental analysis continued
Year ended 31 December 2011 (Restated)
The key performance measure reviewed by the CODM is underlying operating profit. A detailed reconciliation of operating profit to underlying
operating profit is provided in note 10.
Gross segment revenue
Inter-segment revenue
Revenue from external customers
Aircraft
Braking
Systems
£’m
320.5
–
320.5
Control
Systems
Polymers &
Composites
Sensing
Systems
Equipment
Group
Total
£’m
202.9
(1.3)
201.6
£’m
173.2
(2.0)
171.2
£’m
234.6
(0.7)
233.9
£’m
528.2
(0.1)
£’m
1,459.4
(4.1)
528.1
1,455.3
Underlying operating profit (see note 10)*
Items not affecting underlying operating profit (see note 10)
119.9
47.9
31.7
43.2
116.8
Operating profit (see note 10)
Finance income (see note 12)
Finance costs (see note 13)
Net finance costs
Profit before tax
Tax (see note 14)
Profit for the year
Exceptional operating items (see note 11)
Amortisation of intangible assets (see notes 19 and 20)**
Depreciation (see note 21)
1.6
68.3
10.0
0.4
5.4
3.0
0.8
6.4
3.0
4.6
6.3
7.5
12.9
25.5
8.7
359.5
(97.0)
262.5
36.9
(73.4)
(36.5)
226.0
(41.1)
184.9
20.3
111.9
32.2
* Central costs are allocated using a variety of bases designed to reflect the beneficial relationship between the costs and the segments. Bases
include headcount, payroll costs, gross assets and revenue.
** Of the total amortisation in the year, £36.8 million has been charged to underlying operating profit as defined in note 10.
The Group’s largest customer accounts for 9.8% of revenues (£142.2 million). Revenues from this customer arise across all segments.
Additions to non-current assets*
Development costs (see note 19)
Programme participation costs (see note 19)
Property, plant and equipment (see note 21)
Total
Aircraft
Braking
Systems
£’m
14.9
32.1
10.4
57.4
Control
Systems
Polymers &
Composites
Sensing
Systems
Equipment
Group
Total
£’m
7.4
1.1
2.9
11.4
£’m
£’m
£’m
£’m
1.8
–
3.8
5.6
9.2
–
5.0
8.2
–
9.4
41.5
33.2
31.5
14.2
17.6
106.2
* Relates to those non-current assets included within segmental trading assets reviewed by the CODM.
As at 31 December 2011 (Restated)
Aircraft Braking Systems
Control Systems
Polymers & Composites
Sensing Systems
Equipment Group
Total segmental trading assets
Centrally managed trading assets*
Goodwill (see note 18)
Other intangible assets (see note 20)
Derivative financial instruments – non-current (see note 30)
Deferred tax assets (see note 32)
Derivative financial instruments – current (see note 30)
Current tax recoverable
Cash and cash equivalents (see note 24)
Total assets
Total
£’m
470.4
131.4
79.1
190.2
305.8
1,176.9
145.9
1,544.0
865.8
39.7
112.5
4.1
2.6
94.6
3,986.1
* Centrally managed trading assets principally include amounts recoverable from insurers in respect of environmental issues relating to former
sites, other receivables and property, plant and equipment of central companies.
6. Segmental analysis continued
Geographical information
Revenue
UK
Rest of Europe
North America
Rest of World
Total
Revenues are based on the location of the customer.
Non-current assets
UK
Rest of Europe*
United States of America
Rest of World
Total
MEGGITT PLC REPORT AND ACCOUNTS 2012
FINANCIAL STATEMENTS
79
2012
£’m
2011
£’m
162.4
343.7
871.6
228.1
134.0
324.7
805.2
191.4
1,605.8
1,455.3
2012
£’m
2011
£’m
708.8
206.9
2,006.6
8.1
681.9
215.6
2,118.3
7.2
2,930.4
3,023.0
* Includes non-current assets held in Switzerland of £105.3 million (2011: £109.2 million).
Segmental non-current assets are based on the location of the assets. They exclude trade and other receivables, derivative financial instruments
and deferred tax.
7. Operating profit
Operating profit is stated after charging/(crediting):
Raw materials and consumables used
Changes in inventories of finished goods and work in progress
Employee costs (see note 9)
Depreciation (see note 21)
Research and development costs expensed as incurred
Amortisation of capitalised development costs (see note 19)
Amortisation of programme participation costs (see note 19)
Amortisation of other purchased intangible assets (see note 20)
Amortisation of intangible assets acquired in business combinations (see note 10)
Loss/(profit) on disposal of property, plant and equipment (see note 39)
Exceptional operating items (see note 11)
Financial instruments (see note 10)
Disposal of inventory revalued in business combinations (see note 10)
Net foreign exchange (gains)/losses
Operating lease rentals – land and buildings
Operating lease rentals – plant, equipment and vehicles
Other operating income
2012
£’m
469.7
(22.8)
542.7
31.9
44.9
11.6
23.2
7.4
80.6
0.3
13.3
(23.4)
0.2
(2.4)
14.4
1.1
(4.8)
2011
£’m
385.6
(13.1)
469.6
32.2
41.7
11.3
20.8
4.7
75.1
(2.0)
20.3
(9.7)
11.3
0.6
13.1
1.1
(4.3)
MEGGITT PLC REPORT AND ACCOUNTS 2012
FINANCIAL STATEMENTS
80
Notes to the financial statements continued
8. Auditor remuneration
Payable to PricewaterhouseCoopers LLP and network firms:
Fees payable to the Company’s auditor and its associates:
For the audit of the Company and consolidated financial statements
For the audit of the Company’s subsidiaries pursuant to legislation
For other non-audit services
Total
No significant fees were paid for other non-audit services.
2012
£’m
2011
£’m
0.9
0.5
0.1
1.5
1.1
0.7
0.1
1.9
The Group engages PricewaterhouseCoopers LLP to undertake those non-audit related activities which they are required to, and most suited to,
perform. Further details on the Group’s policy in respect of non-audit fees is contained in the Corporate Governance Report on page 50.
9. Employee information
Employee costs including executive directors:
Wages and salaries
Social security costs
Retirement benefit costs (see note 33)
Share-based payment expense (see note 35)
Total
2012
£’m
2011
£’m
422.2
76.6
31.6
12.3
542.7
373.7
63.5
24.0
8.4
469.6
Details of directors’ remuneration is provided in the Remuneration Report on pages 52 to 62, which forms part of these financial statements.
Average monthly number of persons employed including executive directors:
Aircraft Braking Systems
Control Systems
Polymers & Composites
Sensing Systems
Equipment Group
Corporate including shared services and centres of excellence
Total
2012
Number
2011
Number
1,216
1,161
2,092
1,600
4,242
520
10,831
1,176
1,040
1,939
1,470
3,283
449
9,357
MEGGITT PLC REPORT AND ACCOUNTS 2012
FINANCIAL STATEMENTS
81
10. Reconciliations between profit and underlying profit
Underlying profit is used by the Board to monitor and measure the underlying trading performance of the Group. It excludes certain items as
described below:
Operating profit
Exceptional operating items (see note 11)
Amortisation of intangible assets acquired in business combinations
Disposal of inventory revalued in business combinations
Financial instruments
Adjustments to operating profit*
Underlying operating profit
Profit before tax
Adjustments to operating profit per above
Underlying profit before tax
Profit for the year
Adjustments to operating profit per above
Tax effect of adjustments to operating profit
Adjustments to profit for the year
Underlying profit for the year
Note
a
b
c
2012
£’m
2011
£’m
323.6
262.5
13.3
80.6
0.2
(23.4)
70.7
394.3
20.3
75.1
11.3
(9.7)
97.0
359.5
292.1
226.0
70.7
362.8
97.0
323.0
243.3
184.9
70.7
(31.0)
39.7
283.0
97.0
(36.4)
60.6
245.5
* Of the adjustments to operating profit, £5.4 million (2011: £3.7 million) relating to exceptional operating items and £0.2 million (2011: £11.3
million) relating to the disposal of inventory revalued in business combinations has been charged to cost of sales, with the balance of £65.1
million (2011: £82.0 million) included within net operating costs.
a. The Group excludes from its underlying profit figures the amortisation of intangible assets acquired in business combinations.
Amortisation of other intangible assets (see note 20)
Less amortisation of purchased intangible assets (see note 20)
Amortisation of intangible assets acquired in business combinations
2012
£’m
88.0
(7.4)
80.6
2011
£’m
79.8
(4.7)
75.1
b. IFRS 3 requires finished goods acquired in a business combination to be valued at fair value, which is typically estimated selling price less
costs of disposal and a reasonable profit allowance for the selling effort. Work in progress acquired in a business combination is valued at fair
value, which is typically estimated selling price less costs to complete, costs of disposal and a reasonable profit allowance for work still to be
carried out. The fair value of acquired inventory is thus significantly higher than the actual cost of manufacture of the same items built post
acquisition, the value of which includes no profit element. The difference between the fair value of the inventory consumed and its actual cost of
manufacture is excluded from the Group’s underlying profit figures.
c. 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 requirements 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 the derivatives are excluded from
underlying profit. Where interest rate derivatives do qualify to be hedge accounted, any difference between the movement in the fair value of the
derivatives and in the fair value of fixed rate borrowings is excluded from underlying profit.
Movement in the fair value of foreign currency forward contracts
Impact of retranslating net foreign currency assets and liabilities at spot rate
Movement in the fair value of interest rate derivatives
Movement in the fair value of fixed rate borrowings
Financial instruments – gain
2012
£’m
(20.1)
0.5
(6.4)
2.6
(23.4)
2011
£’m
5.6
(1.4)
(30.0)
16.1
(9.7)
As referred to in note 2 on page 73, in 2013 the Group will be required to adopt IAS 19 (revised 2011), ‘Employee Benefits’. This revised standard
will lead to the net pension finance cost recorded in the income statement becoming more significant. As net pension finance cost is a non-cash,
non-trading item, the Board intends from 2013 to exclude it from the underlying profit measures it uses to monitor and measure the underlying
trading performance of the Group.
MEGGITT PLC REPORT AND ACCOUNTS 2012
FINANCIAL STATEMENTS
82
Notes to the financial statements continued
11. Exceptional operating items
Site consolidations
Integration of Pacific Scientific Aerospace (‘PacSci’)
Acquisition of businesses
Transformation programme
Profit on disposal of business
Other
Exceptional operating items
Note
a
b
c
d
e
2012
£’m
9.8
4.8
1.3
0.6
(3.2)
–
2011
£’m
3.7
5.9
6.0
4.4
–
0.3
13.3
20.3
a. This principally relates to the consolidation of Sensing Systems’ New Hampshire and San Juan Capistrano facilities to a single new location in
Southern California, which was announced in June 2011. This consolidation will be substantially completed in 2013.
b. Cumulative cost synergies achieved at the end of 2012, as part of the on-going PacSci integration process were £11.0 million (2011: £4.1 million).
Costs incurred in the year in respect of this integration process were £4.8 million (2011: £5.9 million).
c. This principally relates to the acquisition of Fotomechanix Limited which completed on 4 July 2012 and the acquisition of PacSci which
completed on 21 April 2011.
d. The previously announced transformation programme was substantially completed during 2011 and achieved the increased annual run-rate
savings target of £57.0 million.
e. On 10 August 2012, the Group disposed of the business and trading assets and liabilities of Meggitt (Simi Valley), Inc making a profit on disposal
of £3.2 million (see note 43).
Cash expenditure on exceptional operating items was £14.7 million (2011: £17.1 million), comprising £6.0 million in respect of site consolidations
(2011: £1.9 million), £5.6 million in respect of the integration of PacSci (2011: £4.4 million), £1.4 million in respect of the acquisition of businesses
(2011: £6.6 million), £0.8 million in respect of the transformation programme (2011: £3.9 million), £0.9 million in respect of business disposal costs
(2011: £Nil) and £Nil million in respect of other items (2011: £0.3 million). The tax credit in respect of exceptional operating items was £5.4 million
(2011: £5.6 million).
12. Finance income
Interest on bank deposits
Unwinding of interest on other receivables
Expected return on retirement benefit scheme assets (see note 33)
Other finance income
Finance income
13. Finance costs
Interest on bank borrowings
Interest on senior notes
Interest on finance lease obligations
Unwinding of interest on provisions (see note 31)
Unwinding of interest on retirement benefit scheme liabilities (see note 33)
Amortisation of debt issue costs
Less: amounts capitalised in the cost of qualifying assets (see notes 19 and 20)
Finance costs
14. Tax
Current tax – current year
Current tax – adjustment in respect of prior years
Deferred tax – origination and reversal of temporary differences
Deferred tax – effect of changes in tax rates
Total taxation
2012
£’m
0.2
1.7
33.4
0.1
35.4
2012
£’m
5.8
19.4
1.1
1.7
38.8
1.7
(1.6)
66.9
2012
£’m
49.8
(4.9)
8.2
(4.3)
48.8
2011
£’m
0.1
1.1
35.5
0.2
36.9
2011
£’m
11.1
19.8
0.3
1.1
40.0
1.7
(0.6)
73.4
2011
£’m
44.5
(8.5)
6.5
(1.4)
41.1
MEGGITT PLC REPORT AND ACCOUNTS 2012
FINANCIAL STATEMENTS
83
14. Tax continued
The Finance Act 2011 included legislation to reduce the main rate of corporation tax in the UK from 26% to 25% with effect from 1 April 2012. The
Finance Act 2012 included legislation to further reduce the main rate of corporation tax in the UK to 24% with effect from 1 April 2012 and to 23%
with effect from 1 April 2013. The reduction in the main UK tax rate to 23% is reflected in the financial statements for the year ended 31 December
2012. The impact of this change on net deferred tax liabilities as at 31 December 2012, profit for the year (underlying and statutory) and
comprehensive income for the year has not been significant.
Reconciliation of total tax charge
A reconciliation of the notional tax charge based on average standard rates of tax (weighted in proportion to accounting profits) to the actual tax
charge is as follows:
Profit on ordinary activities before taxation at weighted average standard tax rate of 30.3%* (2011: 30.1%)
Effects of:
Permanent differences
Timing differences
Changes in statutory tax rates
Tax credits and incentives
Prior year credits
Total taxation
2012
£’m
88.5
(19.6)
(9.4)
(4.3)
(3.2)
(3.2)
48.8
2011
£’m
68.0
(14.6)
(0.1)
(1.4)
(4.3)
(6.5)
41.1
* The sensitivity of the tax charge to changes in the tax rate is such that a one percentage point increase, or reduction, in the tax rate would cause
the total taxation charge for 2012 to increase, or reduce respectively, by approximately £2.9 million.
Tax relating to components of other comprehensive income
Current tax – currency translation movements
Deferred tax – currency translation movements
Deferred tax – actuarial losses
Deferred tax – cash flow hedge movements
Other comprehensive income
Current tax
Deferred tax
Total
Tax relating to items recognised directly in equity
Deferred tax (charge)/credit relating to share-based payment
Total
15. Earnings per ordinary share
After
tax
£’m
(55.8)
0.2
(6.1)
(4.3)
(66.0)
Before
tax
£’m
11.2
(0.5)
(76.6)
5.3
(60.6)
Before
tax
£’m
(55.1)
0.4
(6.8)
(5.8)
(67.3)
2012
Tax credit/
(charge)
£’m
(0.7)
(0.2)
0.7
1.5
1.3
(0.7)
2.0
1.3
2011
Tax credit/
(charge)
£’m
3.9
0.1
18.9
(1.3)
21.6
3.9
17.7
21.6
2012
£’m
(3.1)
(3.1)
After
tax
£’m
15.1
(0.4)
(57.7)
4.0
(39.0)
2011
£’m
0.9
0.9
Earnings per ordinary share (‘EPS’) is calculated by dividing the profit attributable to owners of the parent by the weighted average number of
shares in issue during the year. The weighted average number of shares used excludes any shares bought by the Group and held during the year
by an independently managed Employee Share Ownership Plan Trust (see note 36). The weighted average number of own shares excluded was Nil
million shares (2011: 0.2 million shares). The calculation of diluted EPS adjusts the weighted average number of shares to reflect the assumption
that all potentially dilutive ordinary shares convert. For the Group this means assuming all share awards in issue are exercised.
Basic EPS
Potential effect of dilutive ordinary shares
Diluted EPS
* Profit for the year attributable to owners of the parent.
2012
Profit*
£’m
2012
Shares
Number ‘m
243.3
–
243.3
782.3
10.0
792.3
2012
EPS
Pence
31.1
(0.4)
30.7
2011
Profit*
£’m
2011
Shares
Number ‘m
184.9
–
184.9
769.7
6.2
775.9
2011
EPS
Pence
24.0
(0.2)
23.8
MEGGITT PLC REPORT AND ACCOUNTS 2012
FINANCIAL STATEMENTS
84
Notes to the financial statements continued
15. Earnings per ordinary share continued
Underlying EPS is based on underlying profit for the year (see note 10) and the same number of shares as is used in the calculation of basic EPS. It
is reconciled to basic EPS below:
Basic EPS
Add back effects of:
Exceptional operating items
Amortisation of intangible assets acquired in business combinations
Disposal of inventory revalued in business combinations
Financial instruments
Underlying EPS
2012
Pence
31.1
1.0
6.4
–
(2.3)
36.2
Diluted underlying EPS is based on underlying profit for the year (see note 10) and the same number of shares as is used in the calculation of
diluted EPS. Diluted underlying EPS for the year was 35.7 pence (2011: 31.6 pence).
16. Dividends
In respect of earlier years
In respect of 2011:
Interim of 3.20p per share
Final of 7.30p per share
In respect of 2012:
Interim of 3.60p per share
Dividends paid
Less paid as scrip dividend (see note 41)
Dividends paid in cash
2012
£’m
–
–
56.9
28.1
85.0
(13.2)
71.8
2011
Pence
24.0
1.9
6.0
0.9
(0.9)
31.9
2011
£’m
48.8
24.8
–
–
73.6
(25.2)
48.4
A final dividend in respect of 2012 of 8.20p per share (2011: 7.30p), amounting to an estimated total final dividend of £64.4 million (2011: £56.9
million) is to be proposed at the Annual General Meeting on 1 May 2013. This dividend is not reflected in these financial statements as it is has not
been approved by the shareholders at the balance sheet date.
17. Related party transactions
Transactions between the Company and its subsidiaries have been eliminated on consolidation. The remuneration of key management personnel
of the Group (which is defined as members of the Management Board), including executive directors, is set out below:
Salaries and other short-term employee benefits
Retirement benefit costs
Share-based payment expense
Total
2012
£’m
8.5
0.3
4.6
13.4
2011
£’m
8.7
0.4
3.8
12.9
Interests of key management personnel, including executive directors, in share schemes operated by the Group at the balance sheet date are set
out below:
Share options
Share appreciation rights – equity-settled
Share appreciation rights – cash-settled
Equity Participation Plan shares
Deferred Share Bonus Plan shares
2012
Average
award
price
Pence
182.49
285.74
–
N/A
N/A
2012
Number
outstanding
‘m
0.1
10.1
–
3.6
–
2011
Average
award
price
Pence
217.41
265.79
269.05
N/A
N/A
2011
Number
outstanding
‘m
0.1
9.7
0.4
4.2
0.1
Full details of all elements in the remuneration package of each director, together with directors’ share interests and share awards, are given in
the Remuneration Report on pages 52 to 62 which forms part of these financial statements.
18. Goodwill
Cost at 1 January
Exchange rate adjustments
Businesses acquired (see note 42)
Cost at 31 December
MEGGITT PLC REPORT AND ACCOUNTS 2012
FINANCIAL STATEMENTS
85
2012
£’m
1,544.0
(53.7)
3.9
2011
£’m
1,295.5
15.9
232.6
1,494.2
1,544.0
Goodwill is tested for impairment annually or more frequently if there is any indication of impairment. No impairment charge was required in the
year (2011: £Nil) and the cumulative impairment charge recognised to date is £Nil (2011: £Nil). The total amount of goodwill acquired in the year
that was expected to be deductible for tax purposes was £Nil million (2011: £85.4 million).
For the purposes of testing goodwill for impairment, goodwill is allocated to the Group’s cash generating units (‘CGUs’) which principally
comprise its individual business operations. Goodwill is initially allocated, in the year a business is acquired, to CGUs expected to benefit from the
acquisition. Subsequent adjustments are made to this allocation to the extent operations to which goodwill relates are transferred between CGUs.
An analysis of goodwill by principal CGU is shown below:
Meggitt Aircraft Braking Systems (‘MABS’)
Meggitt (North Hollywood), Inc
Pacific Scientific HTL
Meggitt (Rockmart) Inc
Meggitt Training Systems Inc
Other
Total
2012
£’m
675.8
165.6
91.0
69.9
64.1
427.8
2011
£’m
701.8
173.0
95.2
73.1
67.1
433.8
1,494.2
1,544.0
For each acquired CGU, the Group has determined its recoverable amount from value in use calculations. The value in use calculations are based
on cash flow forecasts derived from the most recent budgets and plans for the next five years, as approved by management in December 2012.
Cash flows for periods beyond five years are extrapolated using estimated growth rates. The resultant cash flows are discounted using a pre-tax
discount rate appropriate for the relevant CGU.
The key assumptions for the value in use calculations are shown below:
• Sales volumes, selling prices and cost increases over the five years covered by management’s detailed plans. Sales volumes are based on
industry forecasts and management estimates for the businesses in which each CGU operates including forecasts for OEM deliveries of large
jets, regional aircraft and business jets; air traffic growth and military spending by the US DoD and other major governments. Selling prices
and cost increases are based on past experience and management expectations of future changes in the market. Overall a cautious approach
to volume levels, selling prices and cost increases has been taken given the continued global economic uncertainty. The extent to which these
assumptions affect each principal CGU with a significant level of goodwill are described below.
MABS, Meggitt (North Hollywood), Inc and Pacific Scientific HTL are broadly spread across both civil aerospace and military platforms with
Meggitt (North Hollywood), Inc also operating in the energy sector. MABS is a world leader in the supply of braking systems particularly for
regional aircraft, business jets, and military aircraft. Meggitt (North Hollywood), Inc designs and manufactures fluid control devices and systems
for most aircraft types and has a higher content on large jets. Pacific Scientific HTL designs and manufactures customised aviation safety
equipment for large, regional, business and military aircraft. All three businesses have significant OEM and aftermarket revenues derived from
sole source positions with the aftermarket, where platform lives can be up to thirty years for civil aircraft and longer for military, representing
the greater proportion of revenues. Meggitt (Rockmart) Inc and Meggitt Training Systems Inc both operate in military markets. The principal
customer of Meggitt (Rockmart) Inc is the US DoD to whom Meggitt (Rockmart) Inc are a leading supplier of flexible fuel tanks. Meggitt Training
Systems Inc supplies integrated live and virtual training packages for armed forces and law enforcement agencies across the world.
In civil aerospace, growth in capacity terms, measured in available seat kilometres (ASK’s), is forecast to grow in line with the long-term trend
rate of 5%, which together with the Group’s growing fleet and price increases, should drive an increase in aftermarket revenues of 8 to 9% per
annum over the medium term. Our continuing confidence in air passenger travel growth is supported by the sustained high levels of order
intake at Boeing and Airbus. Large jet deliveries increased by 18% in 2012, and we continue to expect good delivery growth over the next 5 years
underpinned by strong recent order intake and a backlog at Boeing & Airbus which equates to over 7 years of deliveries at the current
production rate. Deliveries of regional aircraft declined slightly in 2012, with modest growth anticipated over the next few years, driven
principally by demand for 70-90 seat aircraft, on which Meggitt has a strong shipset content. Business jet deliveries were roughly flat in 2012
but deliveries of super-midsize and long-range aircraft, where Meggitt benefits from particularly strong market positions, grew modestly.
Further growth is anticipated in this market over the next 5 years, driven by increasing internationalisation of the customer base. In military
markets, defence budgets remain under pressure. The threat of sequestration in the US remains, and as a result we have taken an
incrementally more cautious stance on near-term revenue growth. However, we have key positions on future growth platforms, and in the
absence of any clarity on where cuts will ultimately fall, we continue to anticipate average compound organic growth in military of around 2%
per annum in the medium term.
• Growth rates used for periods beyond those covered by management’s detailed budgets and plans. Growth rates are derived from
management’s estimates which take into account the long-term nature of the industry in which each CGU operates, external industry forecasts
of long-term growth in the aerospace and defence sectors, the extent to which a CGU has sole source position on platforms where it is able to
share in a continuing stream of highly profitable aftermarket revenues, the maturity of the platforms supplied by the CGU and the technological
content of the CGU’s products. For the purpose of impairment testing, a conservative approach has been used and where the derived rate is
higher than the long-term GDP growth rates for the countries in which the CGU operates (UK: 2.3% (2011: 2.1%), US: 2.4% (2011: 2.5%)), the
latter has been used.
MEGGITT PLC REPORT AND ACCOUNTS 2012
FINANCIAL STATEMENTS
86
Notes to the financial statements continued
18. Goodwill continued
• Discount rates applied to future cash flows. The Group’s pre-tax weighted average cost of capital (WACC) was used as the foundation for
determining the discount rates to be applied. The WACC was then adjusted to reflect risks specific to the CGU not already reflected in the future
cash flows for that CGU. The discount rates used were as follows: MABS 10.8% (2011: 10.8%), Meggitt (North Hollywood), Inc, 11.1% (2011: 11.1%),
Pacific Scientific HTL 10.6% (2011: 11.2%), Meggitt (Rockmart) Inc 11.2% (2011: 11.1%), and Meggitt Training Systems Inc 10.0% (2011: 11.3%). The
discount rates used for ‘Other’ CGU’s ranged between 9.4% to 11.3% (2011: 9.5% to 11.3%).
A sensitivity analysis was carried out for each CGU to determine the extent to which its assumptions would need to change for the calculated
recoverable amounts from value in use, to fall below the carrying value of goodwill of the CGU. Management has concluded that no reasonably
foreseeable change in the key assumptions used in the impairment model would result in a significant impairment charge being recorded in the
financial statements. The principal CGU with the least headroom in percentage terms is MABS. To require an impairment in the Group financial
statements, one of the following would be required:
• Estimates of cash flows during the five year period, for which management estimates have been used, would need to reduce by more than 20%;
• Estimates of long term growth rates would need to reduce by more than 70%; or
• The discount rate applied to future cash flows would need to increase by more than 15%.
‘Other’ goodwill of £427.8 million (2011: £433.8 million) relates to approximately 20 individual CGUs. A sensitivity analysis was carried out for each
individual CGU and the aggregated results for ‘Other’ goodwill are shown below:
• If estimates of cash flows during the five year period, for which management estimates have been used, reduced by 20%, an impairment of
£13.6 million would potentially be required;
• If estimates of long term growth rates reduced by 20%, an impairment of £4.1 million would potentially be required;
• If the discount rate applied to future cash flows increased by 20%, an impairment of £16.0 million would potentially be required.
19. Development costs and programme participation costs
At 1 January 2011
Cost
Accumulated amortisation
Net book amount
Year ended 31 December 2011
Opening net book amount
Exchange rate adjustments
Businesses acquired
Additions
Interest capitalised
Amortisation*
Net book amount
At 31 December 2011
Cost
Accumulated amortisation
Net book amount
Year ended 31 December 2012
Opening net book amount
Exchange rate adjustments
Additions
Interest capitalised
Amortisation*
Net book amount
At 31 December 2012
Cost
Accumulated amortisation
Net book amount
Development
costs
£’m
184.3
(33.0)
151.3
151.3
1.4
2.4
41.5
0.5
(11.3)
185.8
230.3
(44.5)
185.8
185.8
(6.2)
52.2
1.3
(11.6)
Programme
participation
costs
£’m
266.5
(82.7)
183.8
183.8
1.3
–
33.2
–
(20.8)
197.5
301.8
(104.3)
197.5
197.5
(6.8)
36.1
–
(23.2)
221.5
203.6
276.0
(54.5)
221.5
326.9
(123.3)
203.6
* Charged to net operating costs in respect of development costs and to cost of sales in respect of programme participation costs.
Meggitt Aircraft Braking Systems has the largest share of Group development costs with a net book amount of £72.5 million (2011: Meggitt
Sensing Systems with a net book amount of £62.6 million), which have an estimated weighted average remaining life of 9.2 years (2011: 9.1 years).
Meggitt Aircraft Braking Systems has the largest share of Group programme participation costs with a net book amount of £199.5 million (2011:
£195.9 million), which have an estimated weighted average remaining life of 9.1 years (2011: 9.4 years).
MEGGITT PLC REPORT AND ACCOUNTS 2012
FINANCIAL STATEMENTS
87
Customer
relationships
Technology
Order
backlogs
(*)
£’m
(*)
£’m
(*)
£’m
Trade
names and
trademarks
(*)
£’m
734.6
(177.3)
557.3
557.3
6.5
119.9
–
–
(50.2)
633.5
863.2
(229.7)
633.5
633.5
(22.8)
0.7
–
–
–
(59.1)
192.3
(65.3)
127.0
127.0
2.0
51.7
–
–
(14.8)
165.9
246.7
(80.8)
165.9
165.9
(5.9)
2.9
–
–
–
(16.3)
552.3
146.6
21.8
(21.8)
–
–
–
11.3
–
–
(8.1)
3.2
11.4
(8.2)
3.2
3.2
(0.1)
0.1
–
–
–
(2.9)
0.3
832.1
(279.8)
552.3
240.5
(93.9)
146.6
11.2
(10.9)
0.3
26.5
(14.2)
12.3
12.3
0.2
4.1
–
–
(2.0)
14.6
30.9
(16.3)
14.6
14.6
(0.6)
–
–
–
–
(2.3)
11.7
29.9
(18.2)
11.7
Other
purchased
(**)
£’m
45.9
(20.4)
25.5
25.5
0.1
0.7
26.9
0.1
(4.7)
48.6
73.4
(24.8)
48.6
48.6
(1.3)
–
27.9
(0.1)
0.3
(7.4)
68.0
98.4
(30.4)
68.0
Total
£’m
1,021.1
(299.0)
722.1
722.1
8.8
187.7
26.9
0.1
(79.8)
865.8
1,225.6
(359.8)
865.8
865.8
(30.7)
3.7
27.9
(0.1)
0.3
(88.0)
778.9
1,212.1
(433.2)
778.9
20. Other intangible assets
At 1 January 2011
Cost
Accumulated amortisation
Net book amount
Year ended 31 December 2011
Opening net book amount
Exchange rate adjustments
Businesses acquired
Additions
Interest capitalised
Amortisation – net operating costs (see note 10)
Net book amount
At 31 December 2011
Cost
Accumulated amortisation
Net book amount
Year ended 31 December 2012
Opening net book amount
Exchange rate adjustments
Businesses acquired
Additions
Disposals
Interest capitalised
Amortisation – net operating costs (see note 10)
Net book amount
At 31 December 2012
Cost
Accumulated amortisation
Net book amount
* Acquired in business combinations. Amortisation of these items is excluded from the Group’s underlying profit figures (see note 10).
** Principally relates to software costs.
The net book amount of customer relationships include £391.5 million (2011: £444.1 million) in respect of Meggitt Aircraft Braking Systems which
have an estimated weighted average remaining life of 11.0 years (2011: 12.0 years). The net book amount of technology includes £78.4 million
(2011: £88.8 million) in respect of Meggitt Aircraft Braking Systems which have an estimated weighted average remaining life of 11.0 years (2011:
12.0 years).
During 2011, cost and accumulated amortisation relating to completed order backlogs was eliminated.
MEGGITT PLC REPORT AND ACCOUNTS 2012
FINANCIAL STATEMENTS
88
Notes to the financial statements continued
21. Property, plant and equipment
At 1 January 2011
Cost
Accumulated depreciation
Net book amount
Year ended 31 December 2011
Opening net book amount
Exchange rate adjustments
Businesses acquired
Additions
Disposals
Depreciation
Net book amount
At 31 December 2011
Cost
Accumulated depreciation
Net book amount
Year ended 31 December 2012
Opening net book amount
Exchange rate adjustments
Businesses acquired
Additions
Disposals
Depreciation
Net book amount
At 31 December 2012
Cost
Accumulated depreciation
Net book amount
Land and
buildings
£’m
151.4
(43.0)
108.4
108.4
0.4
5.6
8.7
(1.1)
(7.6)
114.4
164.8
(50.4)
114.4
114.4
(2.5)
2.5
6.9
(0.1)
(7.0)
Plant,
equipment
and vehicles
£’m
335.9
(237.2)
98.7
98.7
0.7
18.1
22.8
(0.2)
(24.6)
115.5
372.2
(256.7)
115.5
115.5
(3.5)
1.6
29.7
(0.4)
(24.9)
Total
£’m
487.3
(280.2)
207.1
207.1
1.1
23.7
31.5
(1.3)
(32.2)
229.9
537.0
(307.1)
229.9
229.9
(6.0)
4.1
36.6
(0.5)
(31.9)
114.2
118.0
232.2
169.2
(55.0)
114.2
380.7
(262.7)
118.0
549.9
(317.7)
232.2
The Group’s obligations under finance leases (see note 27) are secured by the lessors’ title to the leased assets, which have a carrying amount
of £4.5 million included within land and buildings (2011: £5.0 million) and £1.4 million (2011: £2.0 million) included within plant, equipment and
vehicles.
22. Inventories
Contract costs incurred
Less progress billings
Net contract costs
Raw materials and bought-in components
Manufacturing work in progress
Finished goods and goods for resale
Total
2012
£’m
8.8
(4.2)
4.6
107.8
123.9
54.9
291.2
2011
£’m
12.1
(3.5)
8.6
105.4
110.0
53.5
277.5
The cost of inventories recognised as an expense and included in cost of sales amounted to £896.2 million (2011: £828.3 million).
23. Trade and other receivables
Trade receivables
Amounts recoverable on contracts
Prepayments and accrued income
Other receivables
Total
Less non-current portion:
Other receivables
Non-current portion
Current portion
MEGGITT PLC REPORT AND ACCOUNTS 2012
FINANCIAL STATEMENTS
89
2012
£’m
240.2
14.6
10.4
137.8
403.0
98.8
98.8
304.2
2011
£’m
263.0
8.3
10.8
150.0
432.1
114.7
114.7
317.4
Other receivables includes £102.7 million (2011: £112.8 million) in respect of insurance receivables arising on environmental issues pertaining to
businesses sold by Whittaker Corporation prior to its acquisition by the Group (see note 31) of which £10.7 million (2011: £5.1 million) is shown as
current.
Trade receivables are stated after a provision for impairment of £6.6 million (2011: £7.2 million). Other balances within trade and other receivables
do not contain impaired assets. The provision for impairment against trade receivables is based on a specific risk assessment taking into account
past default experience and is analysed as follows:
At 1 January
Exchange rate adjustments
(Credit)/charge to income statement – net operating costs
At 31 December
2012
£’m
7.2
(0.2)
(0.4)
6.6
At 31 December 2012, trade receivables of £50.0 million (2011: £42.8 million) were past due but not impaired. These relate to a number of
independent customers for whom there is no recent history of default. The ageing analysis of these trade receivables is as follows:
Up to 3 months overdue
Over 3 months overdue
Total
2012
£’m
42.7
7.3
50.0
2011
£’m
3.9
0.1
3.2
7.2
2011
£’m
34.4
8.4
42.8
The maximum exposure to credit risk at the balance sheet date is the fair value of each class of receivable reported above. The Group does not
hold any collateral as security.
Trade and other receivables are denominated in the following currencies:
Sterling
US dollar
Euro
Other
Total
2012
£’m
69.3
279.8
42.1
11.8
403.0
2011
£’m
60.0
325.0
38.6
8.5
432.1
MEGGITT PLC REPORT AND ACCOUNTS 2012
FINANCIAL STATEMENTS
90
Notes to the financial statements continued
24. Cash and cash equivalents
Cash at bank and on hand
Short-term bank deposits
Total
Cash and cash equivalents are subject to interest at floating rates. The credit quality of cash and cash equivalents is as follows:
S&P rating:
AAA
AA
A
BBB
Total
25. Trade and other payables – current
Payments received on account
Trade payables
Social security and other taxes
Accrued expenses
Deferred consideration relating to acquired businesses
Other payables
Total
26. Trade and other payables – non-current
Deferred consideration relating to acquired businesses
Other payables
Total
27. Obligations under finance leases
Amounts payable under finance leases:
In one year or less
In more than one year but not more than five years
In more than five years
Total
Less: future finance charges
Present value of lease obligations
Less non-current portion
Current portion
2012
£’m
94.9
10.0
104.9
2012
£’m
1.0
27.8
72.5
3.6
104.9
2012
£’m
42.6
121.6
12.0
47.8
0.2
127.7
351.9
2012
£’m
2.9
3.4
6.3
2011
£’m
80.6
14.0
94.6
2011
£’m
0.6
16.0
63.8
14.2
94.6
2011
£’m
42.1
142.4
10.0
53.2
–
101.7
349.4
2011
£’m
3.1
3.4
6.5
2011
£’m
0.7
2.9
5.3
8.9
Minimum
lease payments
Present value
of minimum
lease payments
2012
£’m
3.1
1.1
3.9
8.1
2012
£’m
4.3
3.7
13.9
21.9
(13.8)
8.1
5.0
3.1
2011
£’m
1.8
7.1
15.5
24.4
(15.5)
8.9
8.2
0.7
The underlying currency of obligations under finance leases is Sterling £0.2 million (2011: £Nil) and US dollar £7.9 million (2011: £8.9 million). The
weighted average period to maturity is 11.2 years (2011: 12.0 years) and the weighted average interest rate is 16.0% (2011: 15.3%).
28. Bank and other borrowings
Current
Bank loans
Other loans
Total current
Non-current
Bank loans
Other loans
Total non-current
Total
Analysis of bank and other borrowings repayable:
In one year or less
In more than one year but not more than five years
In more than five years
Total
MEGGITT PLC REPORT AND ACCOUNTS 2012
FINANCIAL STATEMENTS
91
2012
£’m
12.2
114.8
127.0
170.1
442.2
612.3
2011
£’m
2.7
4.3
7.0
292.6
574.5
867.1
739.3
874.1
127.0
343.3
269.0
739.3
7.0
455.6
411.5
874.1
Bank and other borrowings are stated after deduction of unamortised debt issue costs. Debt issue costs are written off over the period of the
facility to which they relate. Secured borrowings amounted to £0.1 million (2011: £0.2 million) which are secured by specific land and buildings of
the Group.
The Group has the following committed facilities:
Senior notes (2012: USD 250.0 million, 2011: USD 250.0 million)
Senior notes (2012: USD 600.0 million, 2011: USD 600.0 million)
Syndicated credit facility (2012: USD 400.0 million, 2011: USD 500.0 million)
Syndicated credit facility (2012: USD 700.0 million, 2011: USD 700.0 million)
Total
2012
Drawn
£’m
Undrawn
£’m
153.8
369.1
80.1
93.8
696.8
–
–
166.0
336.8
502.8
Total
£’m
153.8
369.1
246.1
430.6
1,199.6
Drawn
£’m
160.9
386.1
218.3
77.3
842.6
2011
Undrawn
£’m
–
–
103.4
373.1
476.5
Total
£’m
160.9
386.1
321.7
450.4
1,319.1
The Group issued USD 250.0 million of loan notes to private placement investors in 2003. These were all drawn at 31 December 2012 and the
sterling equivalent was £153.8 million. The notes are in two tranches as follows: USD 180.0 million carry an interest rate of 5.36% and are due for
repayment in 2013 and USD 70.0 million carry an interest rate of 5.46% and are due for repayment in 2015. The Group has sufficient headroom in
existing facilities and the loan notes that mature in 2013 will not be refinanced.
The Group issued USD 600.0 million of loan notes to private placement investors in 2010. These were all drawn at 31 December 2012 and the
sterling equivalent was £369.1 million. The notes are in four tranches as follows: USD 200.0 million carry an interest rate of 4.62% and are due for
repayment in 2017, USD 125.0 million carry an interest rate of 5.02% and are due for repayment in 2020, USD 150.0 million carry an interest rate of
5.17% and are due for repayment in 2020 and USD 125.0 million carry an interest rate of 5.12% and are due for repayment in 2022.
During 2012, the Group successfully negotiated a new USD 400.0 million five-year syndicated revolving credit facility to replace an existing facility
due to mature in July 2013. The Group also has a USD 700.0 million syndicated revolving credit facility which matures in 2016.
At 31 December 2012, the amounts drawn under revolving credit facilities were £173.9 million (2011: £295.6 million) represented by borrowings
denominated in US dollars of £80.1 million (2011: £212.9 million) and in Swiss francs of £93.8 million (2011: £82.7 million). Borrowings under the
facilities are subject to interest at floating rates. The Group also has various uncommitted facilities with its relationship banks.
The committed facilities available as at 31 December 2012 and 31 December 2011 expire as follows:
In one year or less
In more than one year but not more than five years
In more than five years
Total
2012
Drawn
£’m
Undrawn
£’m
110.7
340.0
246.1
696.8
–
502.8
–
502.8
Total
£’m
110.7
842.8
246.1
1,199.6
Drawn
£’m
–
456.6
386.0
842.6
2011
Undrawn
£’m
–
476.5
–
476.5
Total
£’m
–
933.1
386.0
1,319.1
MEGGITT PLC REPORT AND ACCOUNTS 2012
FINANCIAL STATEMENTS
92
Notes to the financial statements continued
28. Bank and other borrowings continued
The fair value of bank and other borrowings is as follows:
Current
Non-current
Total
2012
2011
Book
value
£’m
127.0
612.3
739.3
Fair
value
£’m
128.7
628.4
757.1
Book
value
£’m
7.0
867.1
874.1
Fair
value
£’m
7.0
885.6
892.6
After taking account of the financial derivatives that alter the interest and currency basis of the financial liabilities entered into by the Group, the
interest rate exposure on gross bank and other borrowings is:
As at 31 December 2012:
US dollar*
Swiss franc
Euro
Sterling
Gross bank and other borrowings
Less unamortised debt issue costs
Floating
Fixed
£’m
294.8
93.8
68.1
7.5
464.2
(4.6)
£’m
276.8
–
0.1
–
276.9
(0.5)
Bank and other borrowings
459.6
276.4
Fixed rate borrowings
Weighted
average
interest rate
%
5.1
5.9
Weighted
average
period
for which
rate is fixed
Years
5.3
0.5
Non-interest
bearing
£’m
–
–
3.3
–
3.3
–
3.3
Total
£’m
571.6
93.8
71.5
7.5
744.4
(5.1)
739.3
* On 10 June 2013, USD 180.0 million of the 10 year fixed rate private placement loan notes issued in 2003 will be repaid using floating rate
borrowings. As at 31 December 2012, a new USD 160.0 million floating to fixed interest rate swap had been entered into which will have the
effect of converting USD 160.0 million of the new floating rate borrowings, arising upon the repayment of the USD 180.0 million private
placement loan notes, into fixed rate borrowings. This will reduce the weighted average interest rate on fixed rate borrowings to 4.3%.
As at 31 December 2011:
US dollar
Swiss franc
Euro
Other
Gross bank and other borrowings
Less unamortised debt issue costs
Floating
Fixed
£’m
233.6
82.7
75.8
0.2
392.3
(3.7)
£’m
482.6
–
0.2
–
482.8
(1.1)
Bank and other borrowings
388.6
481.7
Fixed rate borrowings
Weighted
average
interest rate
%
5.1
5.9
Weighted
average
period
for which
rate is fixed
Years
2.7
1.0
Non-interest
bearing
£’m
–
–
3.8
–
3.8
–
3.8
Total
£’m
716.2
82.7
79.8
0.2
878.9
(4.8)
874.1
The weighted average period to maturity for non-interest bearing borrowings is 3.8 years (2011: 3.4 years).
29. Financial instruments
For cash and cash equivalents, trade and other receivables, trade and other payables and obligations under finance leases, fair values
approximate to their book values due to the short maturity periods of these financial instruments. For trade and other receivables, allowances are
made within the book value for credit risk. For other financial instruments, fair values are based on market values, or where not available on
discounting future cash flows at prevailing market rates, and by applying year end exchange rates.
IFRS 7 ‘Financial Instruments: Disclosures’ requires the disclosure of financial assets and liabilities held at fair value using a hierarchy that
reflects the significance of the inputs used in making the fair value measurements. Derivative financial instruments measured at fair value in the
following table are classified as level 2 in the fair value measurement hierarchy, as they have been determined using significant inputs based on
observable market data. The fair value of the non-current portion of bank and other borrowings has been determined using significant inputs
which are a mixture of those based on observable market data (interest rate risk) and those not based on observable market data for which the
Group takes advice from a third party (credit risk). The non-current portion of bank and other borrowings, held at fair value, in the following table
is therefore classified as level 3 in the fair value measurement hierarchy.
MEGGITT PLC REPORT AND ACCOUNTS 2012
FINANCIAL STATEMENTS
93
Held at fair value
Held at amortised cost
Through
profit
& loss
£’m
Derivatives
used for
hedging
£’m
Loans &
receivables
Liabilities
£’m
£’m
–
49.8
–
5.0
–
54.8
–
(2.7)
–
–
–
(0.2)
–
(274.9)
(277.8)
(223.0)
–
–
–
–
–
–
–
(1.3)
–
–
–
–
–
–
(1.3)
(1.3)
98.8
–
293.8
–
104.9
497.5
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(339.9)
–
(3.1)
(127.0)
(6.3)
–
(5.0)
(337.4)
Total
book
value
£’m
98.8
49.8
293.8
5.0
104.9
552.3
(339.9)
(4.0)
(3.1)
(127.0)
(6.3)
(0.2)
(5.0)
(612.3)
Total
fair
value
£’m
98.8
49.8
293.8
5.0
104.9
552.3
(339.9)
(4.0)
(3.1)
(128.7)
(6.3)
(0.2)
(5.0)
(628.4)
(818.7)
(1,097.8)
(1,115.6)
497.5
(818.7)
(545.5)
(563.3)
Held at fair value
Held at amortised cost
Through
profit
& loss
£’m
Derivatives
used for
hedging
£’m
Loans &
receivables
Liabilities
£’m
£’m
–
39.7
–
1.1
–
40.8
–
(10.3)
–
–
–
(4.2)
–
(283.6)
(298.1)
(257.3)
–
–
–
3.0
–
3.0
–
(2.5)
–
–
–
–
–
–
(2.5)
0.5
114.7
–
306.6
–
94.6
515.9
–
–
–
–
–
–
–
–
–
515.9
–
–
–
–
–
–
(339.4)
–
(0.7)
(7.0)
(6.5)
–
(8.2)
(583.5)
(945.3)
(945.3)
Total
book
value
£’m
114.7
39.7
306.6
4.1
94.6
559.7
(339.4)
(12.8)
(0.7)
(7.0)
(6.5)
(4.2)
(8.2)
(867.1)
Total
fair
value
£’m
114.7
39.7
306.6
4.1
94.6
559.7
(339.4)
(12.8)
(0.7)
(7.0)
(6.5)
(4.2)
(8.2)
(885.6)
(1,245.9)
(1,264.4)
(686.2)
(704.7)
29. Financial instruments continued
As at 31 December 2012:
Financial assets
Non-current:
Trade and other receivables (see note 23)
Derivative financial instruments (see note 30)
Current:
Trade and other receivables*
Derivative financial instruments (see note 30)
Cash and cash equivalents (see note 24)
Financial liabilities
Current:
Trade and other payables**
Derivative financial instruments (see note 30)
Obligations under finance leases (see note 27)
Bank and other borrowings (see note 28)
Non-current:
Trade and other payables (see note 26)
Derivative financial instruments (see note 30)
Obligations under finance leases (see note 27)
Bank and other borrowings (see note 28)
Total
As at 31 December 2011:
Financial assets
Non-current:
Trade and other receivables (see note 23)
Derivative financial instruments (see note 30)
Current:
Trade and other receivables*
Derivative financial instruments (see note 30)
Cash and cash equivalents (see note 24)
Financial liabilities
Current:
Trade and other payables**
Derivative financial instruments (see note 30)
Obligations under finance leases (see note 27)
Bank and other borrowings (see note 28)
Non-current:
Trade and other payables (see note 26)
Derivative financial instruments (see note 30)
Obligations under finance leases (see note 27)
Bank and other borrowings (see note 28)
Total
* Excludes prepayments and accrued income of £10.4 million (2011: £10.8 million) (see note 23).
** Excludes social security and other taxes of £12.0 million (2011: £10.0 million) (see note 25).
MEGGITT PLC REPORT AND ACCOUNTS 2012
FINANCIAL STATEMENTS
94
Notes to the financial statements continued
29. Financial instruments continued
The following table presents the changes in financial instruments held at fair value and classified as level 3 during the year:
Bank and other borrowings at fair value through profit and loss:
Opening balance
Exchange rate adjustments
Loss recognised in net operating costs
Closing balance
30. Derivative financial instruments
As at 31 December 2012:
Interest rate swaps – fair value hedges
Interest rate swaps – not hedge accounted
Cross currency swaps – net investment hedges
Foreign currency forward contracts – not hedge accounted
Total
Less non-current portion:
Interest rate swaps – fair value hedges
Interest rate swaps – not hedge accounted
Foreign currency forward contracts – not hedge accounted
Non-current portion
Current portion
As at 31 December 2011:
Interest rate swaps – cash flow hedges
Interest rate swaps – fair value hedges
Interest rate swaps – not hedge accounted
Cross currency swaps – net investment hedges
Foreign currency forward contracts – not hedge accounted
Total
Less non-current portion:
Interest rate swaps – fair value hedges
Foreign currency forward contracts – not hedge accounted
Non-current portion
Current portion
Interest rate swaps
2012
£’m
2011
£’m
(283.6)
12.5
(3.8)
(265.6)
(2.6)
(15.4)
(274.9)
(283.6)
Contract or underlying
principal amount
Fair value
Assets
£’m
Liabilities
£’m
Assets
£’m
Liabilities
£’m
246.1
–
–
233.9
480.0
246.1
–
111.5
357.6
122.4
–
(98.4)
(68.1)
(54.8)
(221.3)
–
(98.4)
(3.2)
(101.6)
(119.7)
43.1
–
–
11.7
54.8
43.1
–
6.7
49.8
5.0
–
(0.2)
(1.3)
(2.7)
(4.2)
-
(0.2)
–
(0.2)
(4.0)
Contract or underlying
principal amount
Fair value
Assets
£’m
–
257.4
–
75.2
72.8
405.4
257.4
47.0
304.4
101.0
Liabilities
£’m
Assets
£’m
Liabilities
£’m
(112.6)
–
(80.4)
–
(143.0)
(336.0)
–
(35.9)
(35.9)
(300.1)
–
39.2
–
3.0
1.6
43.8
39.2
0.5
39.7
4.1
(2.5)
–
(1.8)
–
(12.7)
(17.0)
–
(4.2)
(4.2)
(12.8)
The total notional principal amount of outstanding interest rate swap contracts at 31 December 2012 is £344.5 million (2011: £450.4 million), of
which £61.5 million will expire in 2017, £98.4 million will expire in 2018, £107.7 million will expire in 2020 and £76.9 million will expire in 2022. The
contracts are all denominated in USD. Of the notional principal amount outstanding, £98.4 million (2011: £193.0 million) has the economic effect of
converting floating rate US dollar borrowings into fixed rate US dollar borrowings and £246.1 million (2011: £257.4 million) has the economic
effect of converting fixed rate US dollar borrowings into floating rate US dollar borrowings. To the extent they meet the criteria for hedge
accounting, the floating rate to fixed rate swap contracts are accounted for as cash flow hedges and the fixed rate to floating rate swap contracts
as fair value hedges.
Cross currency swaps
Cross currency swaps are used to synthetically convert US dollar denominated borrowings into Euro denominated borrowings to hedge against
Euro denominated assets of overseas subsidiaries. To the extent they meet the criteria for hedge accounting, cross currency swaps are accounted
for as net investment hedges.
MEGGITT PLC REPORT AND ACCOUNTS 2012
FINANCIAL STATEMENTS
95
30. Derivative financial instruments continued
Foreign currency forward contracts
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 requirements to be able to apply hedge accounting under IAS 39 ‘Financial Instruments: Recognition and
Measurement’ are not merited.
Fair value:
US dollar forward sales (USD/£)
Forward sales denominated in other currencies
Total
Credit quality of derivative financial assets
The credit quality of derivative financial assets is as follows:
AA
A
BBB
Total
31. Provisions
At 1 January 2012
Exchange rate adjustments
Businesses acquired
Transfers from trade and other payables – non-current
(Credit)/charge to income statement – cost of sales
Charge/(credit) to income statement – net operating costs
Charge to income statement – finance costs (see note 13)
Utilised
At 31 December 2012
Current
Non-current
At 31 December 2012
2012
Assets
£’m
2012
Liabilities
£’m
2011
Assets
£’m
2011
Liabilities
£’m
9.2
2.5
11.7
(2.5)
(0.2)
(2.7)
1.0
0.6
1.6
(9.3)
(3.4)
(12.7)
2012
£’m
7.7
37.2
9.9
54.8
Environmental
legal & regulatory
(a)
Onerous
contracts
(b)
Warranty
costs
(c)
£’m
185.2
(8.0)
–
0.4
–
0.6
1.7
(16.2)
163.7
£’m
44.1
(1.7)
0.3
11.9
(6.9)
(2.4)
–
(4.2)
41.1
£’m
21.5
(0.8)
–
–
4.2
–
–
(6.4)
2011
£’m
13.8
21.9
8.1
43.8
Total
£’m
250.8
(10.5)
0.3
12.3
(2.7)
(1.8)
1.7
(26.8)
18.5
223.3
2012
£’m
44.8
178.5
223.3
2011
£’m
50.6
200.2
250.8
a) Provision has been made for known exposures arising from environmental, health and safety, product liability matters, legal proceedings
and contractual disputes in a number of businesses. The Group’s operations and facilities are subject to laws and regulations that govern
the discharge of pollutants and hazardous substances into the ground, air and water as well as the handling, storage and disposal of such
materials and other environmental matters. Failure to comply with its obligations potentially exposes the Group to serious consequences,
including fines, other sanctions and limitations on operations. The Group is involved in the investigation and remediation of current and former
sites for which it has been identified as a potentially responsible party under US law. Provision has been made for the expected costs arising
from these sites based on information currently available. A receivable has been established to the extent these costs are recoverable under
the Group’s environmental insurance policies or from other parties. A number of asbestos-related claims have been made against subsidiary
companies of the Group. To date, the amount connected with such claims in any year has not been material and many claims are covered fully
or partly by existing insurance and indemnities. There is a provision for claims which cannot be recovered from insurers. The US Government is
investigating alleged violations of US export control laws by four US subsidiaries and one UK subsidiary of the Group. These investigations are
likely to lead to financial penalties and the imposition of corrective measures for which provision has been made. The provisions are expected
to be substantially utilised over the next ten years and are discounted, where appropriate, using a discount rate appropriate to each provision.
b) Onerous contracts include lease obligations and trading contracts. Provision has been made for the estimated rental shortfall in respect of
properties with onerous lease obligations. These will be utilised over the lease terms typically up to five years and are discounted using a
discount rate appropriate to each provision. Provision has also been made for estimated losses under certain trading contracts. These are
expected to be substantially utilised over the next ten years.
c) Provision has been made for product warranty claims. These provisions are expected to be utilised over the next three years.
MEGGITT PLC REPORT AND ACCOUNTS 2012
FINANCIAL STATEMENTS
96
Notes to the financial statements continued
32. Deferred tax
Movements in deferred tax assets and liabilities during the year, without taking into consideration the offsetting of balances within the same tax
jurisdiction, are as follows:
Deferred tax assets
At 1 January 2011
Exchange rate adjustments
Businesses acquired
Reclassifications
Charged to income statement (see note 14)
Credited/(charged) to other comprehensive income (see note 14)
Credited to equity (see note 14)
At 31 December 2011
Exchange rate adjustments
Reclassifications
Charged to income statement (see note 14)
Credited to other comprehensive income (see note 14)
Charged to equity (see note 14)
At 31 December 2012
Deferred tax liabilities
At 1 January 2011
Exchange rate adjustments
Businesses acquired
(Charged)/credited to income statement (see note 14)
At 31 December 2011
Exchange rate adjustments
Businesses acquired
Credited to income statement (see note 14)
Credited to other comprehensive income (see note 14)
At 31 December 2012
* Acquired in business combinations.
Retirement
benefit
obligations
£’m
89.0
0.5
0.6
–
(7.3)
18.9
–
101.7
(2.8)
–
(5.3)
0.7
–
94.3
Other
Total
£’m
3.2
0.6
23.3
(1.1)
(6.6)
(1.2)
0.9
19.1
(0.3)
11.9
(7.8)
1.2
(3.1)
£’m
92.2
1.1
23.9
(1.1)
(13.9)
17.7
0.9
120.8
(3.1)
11.9
(13.1)
1.9
(3.1)
21.0
115.3
Accelerated
tax
depreciation
£’m
(11.4)
(0.3)
(1.9)
(5.2)
(18.8)
0.6
–
1.7
–
Intangible
assets
(*)
£’m
(305.4)
(1.1)
(13.8)
14.0
(306.3)
11.4
(0.8)
7.5
0.1
Total
£’m
(316.8)
(1.4)
(15.7)
8.8
(325.1)
12.0
(0.8)
9.2
0.1
(16.5)
(288.1)
(304.6)
Deferred tax assets and liabilities are offset where there is a legally enforceable right to offset current tax assets against current tax liabilities
and when the deferred income taxes relate to the same tax authority. The balances after allowing for such offsets are as follows:
Deferred tax assets
Deferred tax liabilities
Net balance at 31 December
Deferred tax assets are analysed as follows:
To be recovered within one year
To be recovered after more than one year
Total
Deferred tax liabilities are analysed as follows:
Falling due within one year
Falling due after more than one year
Total
2012
£’m
100.2
(289.5)
(189.3)
2012
£’m
1.5
98.7
100.2
2012
£’m
(0.1)
(289.4)
(289.5)
2011
£’m
112.5
(316.8)
(204.3)
2011
£’m
0.9
111.6
112.5
2011
£’m
(0.4)
(316.4)
(316.8)
The Group has unrecognised deferred tax assets of £10.0 million (2011: £28.1 million), the majority of which relates to the Group’s operations in
the US together with unutilised losses. Deferred tax assets have not been recognised in respect of these items, as it is not regarded as more likely
than not that they will be recovered. Deferred tax assets not recognised would be recoverable in the event that they reverse and suitable taxable
profits are available. No provision has been made for taxation that would arise in the event of foreign subsidiaries distributing their reserves as
these amounts are retained for investment in the businesses. The aggregate unrecognised deferred tax liability in respect of such unremitted
earnings is £Nil (2011: £Nil).
MEGGITT PLC REPORT AND ACCOUNTS 2012
FINANCIAL STATEMENTS
97
33. Retirement benefit obligations
Pension schemes
The Group operates a number of pension schemes for the benefit of its employees. The nature of each scheme which has a significant impact on
the financial statements is as follows:
• In the UK, the Group operates a funded defined benefit scheme which is closed to new members;
• In the US, the Group operates a number of defined benefit schemes, all of which are closed to new members. The US schemes are a mixture of
funded and unfunded plans; and
• In Switzerland, the Group operates a funded defined benefit scheme.
The assets of all defined benefit schemes are held in trust funds separate from the Group’s finances. The Group also operates a number of defined
contribution schemes.
Healthcare schemes
The Group has two principal other post-retirement benefit schemes providing medical and life assurance benefits, covering certain employees,
and former employees, of Meggitt Aircraft Braking Systems Corporation and Meggitt (Rockmart), Inc. These schemes are unfunded.
Amounts recognised in the income statement
Total charge in respect of defined contribution pension schemes
Defined benefit pension schemes
Service cost
Past service cost
Expected return on scheme assets
Interest cost
Total charge in respect of defined benefit pension schemes
Healthcare schemes
Service cost
Past service credit*
Interest cost
Total charge/(credit) in respect of healthcare schemes
Total charge
2012
£’m
18.3
12.3
–
(33.4)
36.3
15.2
1.0
–
2.5
3.5
37.0
2011
£’m
14.7
11.4
0.5
(35.5)
37.5
13.9
0.8
(3.4)
2.5
(0.1)
28.5
* During 2011, the number of healthcare plans made available to employees was reduced. The reduction in scheme liabilities arising from this
change was recorded as a past service credit.
Of the total charge, £31.6 million (2011: £24.0 million) has been charged to operating profit (see note 9), of which £18.1 million (2011: £15.6 million)
has been included in cost of sales and £13.5 million (2011: £8.4 million) in net operating costs. The remaining £5.4 million (2011: £4.5 million) is
included in net finance costs (see notes 12 and 13).
Amounts recognised in the balance sheet
Fair value of scheme assets
Present value of scheme liabilities
Retirement benefit obligations
Fair value of scheme assets
Present value of scheme liabilities
Retirement benefit obligations
UK
pension
scheme
£’m
412.8
(546.4)
2012
Overseas
pension
schemes
£’m
Overseas
healthcare
schemes
£’m
221.9
(329.5)
–
(58.5)
(58.5)
(133.6)
(107.6)
UK
pension
scheme
£’m
381.1
(538.5)
(157.4)
2011
Overseas
pension
schemes
£’m
Overseas
healthcare
schemes
£’m
203.8
(311.8)
(108.0)
–
(54.5)
(54.5)
Total
£’m
634.7
(934.4)
(299.7)
Total
£’m
584.9
(904.8)
(319.9)
Of the total deficit of £299.7 million (2011: £319.9 million), £72.5 million (2011: £67.8 million) is in respect of unfunded schemes.
MEGGITT PLC REPORT AND ACCOUNTS 2012
FINANCIAL STATEMENTS
98
Notes to the financial statements continued
33. Retirement benefit obligations continued
Analysis of scheme assets
Equities
Hedge funds
Commodities
Property
Corporate bonds
Government bonds
Other assets
Total
Equities
Hedge funds
Commodities
Property
Corporate bonds
Government bonds
Other assets
Total
UK pension scheme
Overseas pension schemes
Total
2012
%
30.2
2.5
5.6
–
22.7
31.8
7.2
100.0
Expected
return %
7.40
7.40
7.40
N/A
4.50
2.70
5.10
5.08
%
49.9
–
1.5
8.7
22.6
15.2
2.1
100.0
Expected
return %
8.70
N/A
8.70
7.80
4.00
3.50
3.10
6.65
£’m
235.4
10.4
26.4
19.3
143.7
165.0
34.5
634.7
£’m
110.7
–
3.3
19.3
50.1
33.8
4.7
221.9
2011
UK pension scheme
Overseas pension schemes
Total
%
46.2
8.3
4.9
–
14.9
24.1
1.6
100.0
Expected
return %
7.50
7.50
7.50
N/A
4.70
2.80
2.80
5.87
£’m
99.2
2.3
2.3
11.2
51.1
34.4
3.3
%
48.7
1.1
1.1
5.5
25.1
16.9
1.6
203.8
100.0
Expected
return %
9.50
7.50
7.50
7.50
5.00
3.50
4.80
7.13
£’m
275.4
34.0
20.7
11.2
108.0
126.4
9.2
584.9
£’m
124.7
10.4
23.1
–
93.6
131.2
29.8
412.8
£’m
176.2
31.7
18.4
–
56.9
92.0
5.9
381.1
%
37.1
1.6
4.2
3.0
22.6
26.0
5.5
100.0
%
47.1
5.8
3.5
1.9
18.5
21.6
1.6
100.0
The schemes have no investments in any assets of the Group.
To develop the expected long-term rate of return on assets assumption, the Group considered the current level of expected returns on risk free
investments (primarily government bonds), the historical level of the risk premium associated with the other asset classes in the investment
portfolio and the expectations for future returns of each asset class. The expected return for each asset class was then weighted based on the
target asset allocation to develop the expected long-term rate of return on assets assumption for the portfolio.
Changes in the fair value of scheme assets
At 1 January
Exchange rate adjustments
Businesses acquired
Expected return on scheme assets (see note 12)
Contributions – Group
Contributions – Members
Benefits paid
Actuarial gains/(losses)
At 31 December
2012
£’m
584.9
(8.4)
–
33.4
38.3
3.6
(35.1)
18.0
634.7
2011
£’m
567.9
1.9
0.2
35.5
38.4
3.9
(37.7)
(25.2)
584.9
The actual return on scheme assets was a gain of £51.4 million (2011: Gain of £10.3 million).
Financial assumptions used to calculate scheme liabilities
Discount rate
Inflation rate
Increases to deferred benefits during deferment*
Increases to pensions in payment*
Salary increases
* To the extent not overridden by specific scheme rules.
2012
UK
pension
scheme
Overseas
pension
schemes
Overseas
healthcare
schemes
4.50%
3.00%
2.50%
3.00%
4.00%
3.80%
N/A
N/A
N/A
4.00%
3.80%
N/A
N/A
N/A
N/A
UK
pension
scheme
4.70%
3.00%
2.20%
2.90%
4.00%
2011
Overseas
pension
schemes
Overseas
healthcare
schemes
4.65%
N/A
N/A
N/A
4.00%
4.65%
N/A
N/A
N/A
N/A
MEGGITT PLC REPORT AND ACCOUNTS 2012
FINANCIAL STATEMENTS
99
33. Retirement benefit obligations continued
In determining the fair value of scheme liabilities, the Group uses mortality assumptions which are based on published mortality tables adjusted
to reflect the characteristics of the scheme populations, which in 2012 include the results of a postcode analysis of members used to support the
2012 triennial UK actuarial valuation. The Group’s mortality assumptions in the UK are based on recent mortality investigations of Self
Administered Pension Schemes adjusted to reflect the profile of the membership of the Plan. Allowance has been made for rates of mortality to
continue to fall at the rate of 1.25% per annum. In the US, mortality assumptions are based on the RP2000 IRS RPA tables.
Member age 45 (life expectancy at age 65) – male
Member age 45 (life expectancy at age 65) – female
Member age 65 (current life expectancy) – male
Member age 65 (current life expectancy) – female
2012
2011
UK
scheme
Years
Overseas
schemes
Years
UK
scheme
Years
Overseas
schemes
Years
23.4-25.1
26.2-27.9
21.7-23.5
24.2-25.9
19.2
21.0
19.2
21.0
23.9-26.4
26.7-28.0
22.0-24.6
24.8-26.0
19.1
20.9
19.1
20.9
Details on the sensitivity of scheme liabilities to changes in assumptions are provided below:
• The impact of a 10 basis point reduction in discount rate would cause scheme liabilities at 31 December 2012 to increase by approximately
£14.5 million;
• The impact of a 10 basis point increase in inflation rate would cause scheme liabilities at 31 December 2012 to increase by approximately
£10.1 million;
• The impact of assuming every scheme member were to live for an additional year would cause scheme liabilities at 31 December 2012 to
increase by approximately £24.1 million.
Changes in the present value of scheme liabilities
At 1 January
Exchange rate adjustments
Businesses acquired
Service cost
Past service credit
Interest cost (see note 13)
Contributions – Members
Benefits paid
Actuarial losses
At 31 December
Cumulative losses recognised in other comprehensive income
At 1 January
Actuarial losses
Deferred tax credit
Net actuarial losses in the year
At 31 December
History of experience gains and losses and retirement benefit obligations
2012
£’m
904.8
(15.8)
–
13.3
–
38.8
3.6
(35.1)
24.8
934.4
2012
£’m
(145.4)
(6.8)
0.7
(6.1)
2011
£’m
833.0
3.0
1.9
12.2
(2.9)
40.0
3.9
(37.7)
51.4
904.8
2011
£’m
(87.7)
(76.6)
18.9
(57.7)
(151.5)
(145.4)
Experience adjustments on scheme assets:
Gain/(Loss)
Percentage of scheme assets
Experience adjustments on scheme liabilities:
Gain/(loss)
Percentage of scheme liabilities
Fair value of scheme assets
Present value of scheme liabilities
Scheme deficits
2012
£’m
2011
£’m
18.0
2.8%
20.3
2.2%
634.7
(934.4)
(299.7)
(25.2)
(4.3%)
3.7
0.4%
584.9
(904.8)
(319.9)
2010
£’m
21.7
3.8%
(5.0)
(0.6%)
567.9
(833.0)
(265.1)
2009
£’m
46.1
9.1%
3.0
0.4%
504.2
(784.7)
(280.5)
2008
£’m
(115.0)
(25.4%)
(4.9)
(0.7%)
451.9
(693.1)
(241.2)
The estimated Group contributions expected to be paid to the schemes during 2013 are £45.2 million.
MEGGITT PLC REPORT AND ACCOUNTS 2012
FINANCIAL STATEMENTS
100
Notes to the financial statements continued
34. Share capital and share schemes
Issued share capital
Allotted and fully paid:
At 1 January 2011
Equity placing
Issued on exercise of executive share awards
Issued on exercise of sharesave awards
Scrip dividends
At 31 December 2011
Issued on exercise of executive share awards
Issued on exercise of sharesave awards
Scrip dividends
At 31 December 2012
Share Options
Year of grant
Meggitt 1998 Sharesave Scheme
2006
Meggitt 2008 Sharesave Scheme
2008
2008
2010
2010
2010
2012
2012
Meggitt 1996 No 1 Executive Share Option Scheme
2004
Meggitt Executive Share Option Scheme 2005 Part A
2005
2006
2007
2007
2008
2009
2010
2011
2011
2012
Ordinary
shares of
5p each
Number ‘m
Nominal
value
Net
consideration
£’m
£’m
698.0
69.8
2.4
1.1
7.5
778.8
2.7
0.2
3.3
785.0
34.9
3.5
0.1
–
0.4
38.9
0.2
–
0.2
39.3
246.0
1.7
1.8
25.2
0.6
0.4
13.2
Number of
ordinary shares
under award
Exercise
price
per share
Exercise period
From
To
50,669
203.18p
01.12.13
31.05.14
580,317
79,604
456,533
479,479
50,781
784,842
409,984
171.40p
171.40p
222.35p
222.35p
222.35p
326.94p
326.94p
01.11.13
01.11.15
01.11.13
01.11.15
01.11.17
01.11.15
01.11.17
30.04.14
30.04.16
30.04.14
30.04.16
30.04.18
30.04.16
30.04.18
17,200
174.40p
01.04.07
31.03.14
184,890
20,848
13,126
10,152
22,101
48,230
48,551
134,405
8,683
228,791
278.65p
263.67p
299.00p
295.50p
252.50p
169.50p
286.10p
351.70p
345.50p
397.20p
10.10.08
27.09.09
29.03.10
16.04.10
25.03.11
30.04.12
12.03.13
02.03.14
17.08.14
10.04.15
09.10.15
26.09.16
28.03.17
15.04.17
24.03.18
29.04.19
11.03.20
01.03.21
16.08.21
09.04.22
All the above awards, which were granted for nil consideration, may in certain circumstances, be exercised earlier than the dates given. The
weighted average remaining contractual life of outstanding awards is 3.6 years (2011: 3.7 years).
Share Appreciation Rights – Equity-settled
Year of grant
Meggitt Executive Share Option Scheme 2005 Part B
2005
2006
2006
2007
2007
2008
2008
2009
2010
2011
2011
2012
Indicative
number of shares
to be released*
Number of
ordinary shares
under award
Exercise
price
per share
Exercise period
From
To
276,284
487,370
18,073
343,762
8,068
714,005
192,719
1,532,645
1,133,211
320,652
49,217
–
1,019,040
1,570,610
61,108
1,577,674
35,533
2,102,958
413,216
2,753,431
4,503,395
4,006,056
511,297
5,199,153
278.65p
263.67p
269.23p
299.00p
295.50p
252.50p
204.00p
169.50p
286.10p
351.70p
345.50p
397.20p
10.10.08
27.09.09
09.10.09
29.03.10
16.04.10
25.03.11
07.08.11
30.04.12
12.03.13
02.03.14
17.08.14
10.04.15
09.10.15
26.09.16
08.10.16
28.03.17
15.04.17
24.03.18
06.08.18
29.04.19
11.03.20
01.03.21
16.08.21
09.04.22
* Based on indicative share price of 382.30p, the share price as at 31 December 2012.
All the above share appreciation rights, which were granted for nil consideration, may in certain circumstances, be exercised earlier than the
dates given. The weighted average remaining contractual life of outstanding awards is 6.9 years (2011: 7.2 years).
MEGGITT PLC REPORT AND ACCOUNTS 2012
FINANCIAL STATEMENTS
101
35. Share-based payment
The Group operates a number of share schemes for the benefit of its employees. The total expense recorded in the income statement for the year
in respect of such schemes was £12.3 million (2011: £8.4 million) (see note 9). The nature of each scheme which has a significant impact on the
expense recorded in the income statement is set out below.
Meggitt 1996 Executive Share Option Scheme and Executive Share Option Scheme 2005
Equity-settled
Share awards are granted to certain senior executives at an award price equal to the market price of the shares on the day before the grant is
made. The awards are generally exercisable at the earliest three years after the grant is made. Awards can only be exercised if the Group meets
an earnings per share performance condition. The Group has no obligation, legal or constructive, to settle the awards in cash. Awards under Part
A of the schemes provide for the executive on exercise to be entitled, on payment of the award price, to the number of shares under award.
Awards under Part B of the schemes are in the form of equity-settled share appreciation rights (SAR’s) and provide for the executive on exercise
to be entitled to receive equity equivalent to the gain in value between the award price and the market price on the date of exercise.
An expense of £3.1 million (2011: £2.7 million) was recorded in the year. Movements in the number of outstanding awards and their related
weighted average award prices are as follows:
At 1 January
Granted
Lapsed
Exercised
At 31 December
2012
Average
award
price
Pence
270.11
397.20
340.77
203.50
304.35
2012
Number of
awards
outstanding
‘m
21.5
5.5
(0.2)
(2.3)
24.5
2011
Average
award
price
Pence
247.34
350.88
283.83
247.83
270.11
2011
Number of
awards
outstanding
‘m
19.5
4.9
(0.3)
(2.6)
21.5
At 31 December 2012, of the total number of awards outstanding, 9.9 million are exercisable at an average exercise price of 239.54 pence (2011:
8.0 million at an average exercise price of 265.60 pence). The fair values of the awards made in the year were determined using the Black-Scholes
option pricing model. The significant assumptions used in the model and the fair values determined were:
Share price at date of grant (pence)
Award price (pence)
Vesting period (years)
Expected volatility
Expected life of award (years)
Risk free rate
Expected dividend yield
Fair value at date of award (pence)
2012
Award in
April
397.20
397.20
3.0
38%
5.0
1.07%
3.31%
98.25
2011
Award in
August
345.50
345.50
3.0
37%
5.0
1.61%
3.29%
86.40
2011
Award in
March
351.70
351.70
3.0
38%
5.0
2.45%
3.29%
92.98
Expected volatility figures are based on volatility over the last five years measured using a statistical analysis of daily share prices. Awards may
be exercised at any point between the vesting date and ten years after the date the award was made.
Cash-settled
Under the terms of the Meggitt Executive Share Option Scheme 2005, the Group may grant cash-settled SAR’s to certain overseas employees.
The Group is required to pay the intrinsic value of the SAR’s to the employee at the date of exercise. An expense of £2.5 million (2011: £0.5 million)
was recorded in the year. The Group has recorded a liability at the balance sheet date of £4.9 million (2011: £6.6 million). The total intrinsic value at
the balance sheet date was £5.5 million (2011: £6.8 million).
Movements in the number of outstanding awards and their related weighted average award prices are as follows:
At 1 January
Granted
Lapsed
Exercised
At 31 December
2012
Average
award
price
Pence
252.59
397.20
340.43
232.00
267.74
2012
Number of
awards
outstanding
‘m
6.8
0.2
(0.1)
(2.1)
4.8
2011
Average
award
price
Pence
243.05
350.29
243.74
256.52
252.59
2011
Number of
awards
outstanding
‘m
8.2
0.9
(0.4)
(1.9)
6.8
At 31 December 2012, of the total number of awards outstanding, 3.2 million are exercisable at an average exercise price of 235.26 pence (2011:
4.0 million at an average exercise price of 255.13 pence). The fair value of the awards made in the year were determined, at the grant date, using
the Black-Scholes option pricing model and reflect the same assumptions used for equity-settled awards as disclosed above. As a cash-settled
award, the fair value of outstanding awards is remeasured at each balance sheet date.
MEGGITT PLC REPORT AND ACCOUNTS 2012
FINANCIAL STATEMENTS
102
Notes to the financial statements continued
35. Share-based payment continued
Meggitt Equity Participation Plan 2005
Under the Meggitt Equity Participation Plan 2005, an annual award of shares may be made to certain senior executives. For awards made in 2012
and 2011, the number of shares, if any that an executive ultimately receives, depends on three performance conditions:
• An earnings per share (EPS) measure (50% of the award);
• A cash flow measure (25% of the award); and
• Total Shareholder Return (TSR) achieved by the Group as measured against a comparator group selected by the Remuneration Committee (25%
of the award).
Each of the conditions is measured over a three year performance period. For awards made between 2008 and 2010, 50% of the award was based
on an EPS measure and 50% on a TSR condition. An expense of £5.9 million (2011: £4.6 million) was recorded in the year. Movements in the
number of outstanding shares that may potentially be released to employees are as follows:
At 1 January
Awarded
Lapsed
Released to employees
At 31 December
2012
Number of
shares
under award
outstanding
‘m
2011
Number of
shares
under award
outstanding
‘m
8.3
2.4
(1.3)
(1.6)
7.8
5.9
4.6
(1.1)
(1.1)
8.3
At 31 December 2012, 1.1 million of the shares under award are eligible for release (2011: Nil).
The fair value of the awards made in 2012 subject to the EPS and cashflow performance conditions was 392.97 pence. The fair value of the awards
made in 2012, which were subject to the TSR performance condition, was determined using a Monte Carlo model. The significant assumptions
used in the model and the fair values determined were:
Share price at date of grant (pence)
Vesting period (years)
Expected volatility
Expected life of award (years)
Risk free rate
Fair value at date of award (pence)
36. Own shares
2012
Award in
August
392.97
3.0
29%
3.0
0.26%
240.00
2011
Award in
August
345.00
3.0
41%
3.0
0.82%
241.00
2011
Award in
April
351.50
2.3
36%
3.0
1.30%
217.00
Own shares represents shares in the Company that are held by an independently managed Employee Share Ownership Plan Trust (‘the trust’)
formed to purchase shares to be used to meet certain of the Company’s future obligations in respect of employee share schemes as described in
the Remuneration Report on pages 52 to 62.
At 31 December 2012, the trust held 1,708 ordinary shares representing 0.00% of the issued share capital of the Company. The shares, all of which
were unallocated, were purchased during 2012.
At 31 December 2011, the trust held 111,335 ordinary shares representing 0.01% of the issued share capital of the Company. The shares, all of
which were allocated to the Deferred Share Bonus Plan, were purchased during 2010. The Group retained the full benefit of 26,545 of the shares
in the Deferred Share Bonus Plan until such time as awards were released to participating employees. The Group had no benefit accruing to it
over the remaining 84,790 shares in the Deferred Share Bonus Plan.
37. Contingent liabilities
The Company has given guarantees in respect of credit 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 other
Group companies. The directors do not believe that the effect of giving these guarantees will have a material adverse effect upon the Group’s
financial position.
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.
38. Contractual commitments
Capital commitments
Contracted for but not incurred:
Intangible assets
Property, plant and equipment
Total
Operating lease commitments
MEGGITT PLC REPORT AND ACCOUNTS 2012
FINANCIAL STATEMENTS
103
2012
£’m
1.1
8.4
9.5
2011
£’m
0.9
6.9
7.8
The Group leases various factories, warehouses and offices under non-cancellable operating leases. These leases have various lease periods,
escalation clauses and renewal rights. Additionally the Group also leases various items of plant and machinery under cancellable operating
leases. The expenditure on operating leases is charged to the income statement as incurred and is disclosed in note 7.
The future aggregate minimum lease payments under non–cancellable operating leases are as follows:
In one year or less
In more than one year but not more than five years
In more than five years
Total
Other financial commitments
2012
£’m
13.7
43.6
25.6
82.9
2011
£’m
11.6
27.6
11.2
50.4
The Group enters into long-term arrangements with Aircraft and Original Equipment Manufacturers to design, develop and supply products to
them for the life of the aircraft. This represents a significant long-term financial commitment for the Group and requires the consideration of a
number of uncertainties including the feasibility of the product and the ultimate commercial viability over a period which can extend over 40 years.
The directors are satisfied that, at this time, there are no significant contingent liabilities arising from these commitments.
39. Cash inflow from operations
Profit for the year
Adjustments for:
Tax (see note 14)
Depreciation (see note 21)
Amortisation (see notes 19 and 20)
Loss/(profit) on disposal of property, plant and equipment
Profit on disposal of business (see note 11)
Finance income (see note 12)
Finance costs (see note 13)
Financial instruments (see note 10)
Retirement benefit obligation deficit payments
Share-based payment expense (see note 35)
Changes in working capital:
Inventories
Trade and other receivables
Trade and other payables
Provisions
Cash inflow from operations
2012
£’m
2011
£’m
243.3
184.9
48.8
31.9
122.8
0.3
(3.2)
(35.4)
66.9
(23.4)
(25.0)
12.3
(30.5)
14.7
4.5
(33.9)
41.1
32.2
111.9
(2.0)
–
(36.9)
73.4
(9.7)
(26.2)
8.4
6.4
(59.0)
35.9
18.3
394.1
378.7
MEGGITT PLC REPORT AND ACCOUNTS 2012
FINANCIAL STATEMENTS
104
Notes to the financial statements continued
40. Movements in net debt
At 1 January
Cash inflow from operating activities
Cash outflow from investing activities excluding businesses acquired and disposed
Free cash inflow
Businesses acquired
Net cash acquired with businesses
Business disposed
Dividends paid to Company’s shareholders
Issue of equity share capital
Net cash generated – (inflow)/outflow
Debt acquired with businesses
Exchange rate adjustments
Other non-cash movements
At 31 December
Analysed as:
Bank and other borrowings – current (see note 28)
Bank and other borrowings – non-current (see note 28)
Obligations under finance leases – current (see note 27)
Obligations under finance leases – non-current (see note 27)
Cash and cash equivalents (see note 24)
Total
41. Major non-cash transactions
2012
£’m
2011
£’m
788.4
721.4
(331.6)
151.5
(180.1)
9.4
(1.0)
(15.9)
71.8
(0.9)
(116.7)
0.4
(33.9)
4.3
(305.4)
119.0
(186.4)
418.1
(0.5)
–
48.4
(249.5)
30.1
–
13.9
23.0
642.5
788.4
2012
£’m
127.0
612.3
3.1
5.0
(104.9)
642.5
2011
£’m
7.0
867.1
0.7
8.2
(94.6)
788.4
During the year, Meggitt PLC issued 3.3 million shares worth £13.2 million in respect of scrip dividends (2011: 7.5 million shares worth £25.2
million) (see notes 16 and 34).
42. Business combinations
On 4 July 2012, the Group acquired 100% of the voting rights of Fotomechanix Limited (‘Fotomechanix’) for a cash consideration of £11.9 million.
The acquired business is a key supplier to Heatric, our printed circuit heat exchanger business and is managed within the Equipment Group.
Goodwill arising on consolidation, based on preliminary estimates of fair values which will be finalised in 2013, was £3.9 million. The impact of the
acquired business on the results of the Group for the period since acquisition is not significant.
Total consideration paid in respect of acquisitions during the year is as follows:
Cash paid in respect of Fotomechanix
Cash (received)/paid in respect of Pacific Scientific Aerospace
Cash paid in respect of acquisitions in earlier years
Total consideration paid
43. Disposals
2012
£’m
11.9
(2.5)
–
9.4
2011
£’m
–
417.1
1.0
418.1
On 10 August 2012, the business and trading assets and liabilities of Meggitt (Simi Valley), Inc were sold for a cash consideration of £16.1 million,
of which £15.9 million was received in the year. The profit on disposal of the business was £3.2 million and has been treated as an exceptional
operating item and excluded from the Group’s underlying profit figures (see notes 10 and 11). The business, which was no longer considered core
to the Group’s operations, was engaged in manufacturing ducting and sheet metal components, ozone converters, pneumatic air inlets and
specialist connectors for aerospace applications. The impact of the disposal on the Group’s results for the year was not significant.
MEGGITT PLC REPORT AND ACCOUNTS 2012
FINANCIAL STATEMENTS
105
44. Group companies
The following information is not a complete listing of all subsidiary companies at 31 December 2012 and relates only to those subsidiaries
principally affecting the profits or assets of the Group.
United Kingdom
Dunlop Limited‡
Dunlop Aerospace Group Limited‡
Dunlop Aerospace Holdings Limited‡
Meggitt Aerospace Holdings Limited‡
Meggitt Finance Limited‡
Meggitt International Limited‡
Meggitt (UK) Limited
Continental Europe
Artus SAS – France
Meggitt Holdings (France) SNC – France‡
Meggitt SA – Switzerland
North America
Joslyn Sunbank Company LLC
Meggitt Aircraft Braking Systems Corporation
Meggitt GP Inc‡
Meggitt Oregon, Inc
Meggitt Training Systems Inc
Meggitt-USA Holdings LLC‡
Meggitt (Maryland), Inc
Meggitt (North Hollywood), Inc
Meggitt (San Juan Capistrano), Inc
NASCO Aircraft Brake Inc
Pacific Scientific Company
Whittaker Corporation‡
Dunlop Holdings Limited‡
Dunlop Aerospace Overseas Limited‡
Meggitt Aerospace Limited
Meggitt Defence Systems Limited
Meggitt International Holdings Limited*‡
Meggitt Properties PLC‡
Meggitt Acquisition (France) SAS – France‡
Meggitt (France) SAS – France
Piher Sensors & Controls SA – Spain
Linear Motion LLC
Meggitt Defense Systems, Inc
Meggitt Holdings (USA) Inc‡
Meggitt Safety Systems Inc
Meggitt-USA, Inc‡
Meggitt (Addison), Inc
Meggitt (New Hampshire), Inc
Meggitt (Rockmart), Inc
Meggitt (Troy), Inc
OECO LLC
Securaplane Technologies Inc
Rest of World
Meggitt Aerospace Asia Pacific Pte Limited – Singapore
Meggitt (Xiamen) Sensors & Controls Co Limited – China
Meggitt Brasil (Soluçeos de Engenharia) Limited – Brazil
i)
United Kingdom companies listed above are incorporated and registered in England and Wales. North American companies listed above
are incorporated and registered in the United States of America. Other companies listed above are incorporated in the country named.
ii) The ordinary shares of all subsidiaries were 100% owned by Meggitt PLC, either directly or indirectly, at 31 December 2012.
iii) All companies listed above are included in the consolidation.
iv) The company marked * is a direct subsidiary of Meggitt PLC.
v)
Companies marked ‡ are management companies. Otherwise all companies are operating companies engaged in the Group’s principal
activities as described in the Report of the Directors on page 44.
A full list of subsidiary companies will be annexed to the next annual return to the Registrar of Companies.
MEGGITT PLC REPORT AND ACCOUNTS 2012
FINANCIAL STATEMENTS
106
Independent auditors’ report to the members of Meggitt PLC
We have audited the parent company financial statements of Meggitt
PLC for the year ended 31 December 2012 which comprise the
Company balance sheet and the related notes. The financial reporting
framework that has been applied in their preparation is applicable law
and United Kingdom Accounting Standards (United Kingdom Generally
Accepted Accounting Practice).
Respective responsibilities of directors and auditors
As explained more fully in the Directors’ Responsibilities Statement set
out on page 46, the directors are responsible for the preparation of the
parent company financial statements and for being satisfied that they
give a true and fair view. Our responsibility is to audit and express an
opinion on the parent company financial statements in accordance with
applicable law and International Standards on Auditing (UK and
Ireland). Those standards require us to comply with the Auditing
Practices Board’s Ethical Standards for Auditors.
This report, including the opinions, has been prepared for and only for
the company’s members as a body in accordance with Chapter 3 of
Part 16 of the Companies Act 2006 and for no other purpose. We do not,
in giving these opinions, accept or assume responsibility for any other
purpose or to any other person to whom this report is shown or into
whose hands it may come save where expressly agreed by our prior
consent in writing.
Scope of the audit of the financial statements
An audit involves obtaining evidence about the amounts and
disclosures in the financial statements sufficient to give reasonable
assurance that the financial statements are free from material
misstatement, whether caused by fraud or error. This includes an
assessment of: whether the accounting policies are appropriate to the
parent company’s circumstances and have been consistently applied
and adequately disclosed; the reasonableness of significant accounting
estimates made by the directors; and the overall presentation of the
financial statements. In addition, we read all the financial and
non-financial information in the Meggitt PLC Annual report and
accounts to identify material inconsistencies with the audited financial
statements. If we become aware of any apparent material
misstatements or inconsistencies we consider the implications for
our report.
Opinion on financial statements
In our opinion the parent company financial statements:
• give a true and fair view of the state of the company’s affairs as at
31 December 2012;
• have been properly prepared in accordance with United Kingdom
Generally Accepted Accounting Practice; and
• have been prepared in accordance with the requirements of the
Companies Act 2006.
Opinion on other matters prescribed by the Companies
Act 2006
In our opinion:
• the part of the Directors’ Remuneration Report to be audited has
been properly prepared in accordance with the Companies Act 2006;
and
• the information given in the Directors’ Report for the financial year
for which the parent company financial statements are prepared is
consistent with the parent company financial statements.
Matters on which we are required to report by
exception
We have nothing to report in respect of the following matters where the
Companies Act 2006 requires us to report to you if, in our opinion:
• adequate accounting records have not been kept by the parent
company, or returns adequate for our audit have not been received
from branches not visited by us; or
• the parent company financial statements and the part of the
Directors’ Remuneration Report to be audited are not in agreement
with the accounting records and returns; or
• certain disclosures of directors’ remuneration specified by law are
not made; or
• we have not received all the information and explanations we require
for our audit.
Other matter
We have reported separately on the group financial statements of
Meggitt PLC for the year ended 31 December 2012.
John Maitland (Senior Statutory Auditor)
for and on behalf of PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
Reading
4 March 2013
MEGGITT PLC REPORT AND ACCOUNTS 2012
FINANCIAL STATEMENTS
107
Notes
2012
£’m
2011
£’m
3
9
4
5
9
6
9
7
8
9
12
13
13
13
13
24.6
50.4
2,060.7
2,135.7
958.3
4.9
13.5
976.7
(186.1)
(5.0)
785.6
16.8
39.9
2,052.4
2,109.1
1,010.4
7.4
28.6
1,046.4
(89.5)
(13.4)
943.5
2,921.3
3,052.6
(609.8)
(2.0)
(0.2)
(864.0)
(0.9)
(4.2)
2,309.3
2,183.5
39.3
1,143.9
17.5
1,108.6
38.9
1,130.1
17.5
997.0
2,309.3
2,183.5
Company balance sheet
As at 31 December 2012
Fixed assets
Tangible fixed assets
Derivative financial instruments
Investments
Current assets
Debtors
Derivative financial instruments
Cash at bank and in hand
Creditors – amounts falling due within one year
Derivative financial instruments
Net current assets
Total assets less current liabilities
Creditors – amounts falling due after more than one year
Provision for liabilities and charges
Derivative financial instruments
Net assets
Capital and reserves
Called-up share capital
Share premium account
Other reserves
Profit and loss reserve
Total shareholders’ funds
The notes on pages 108 to 113 form an integral part of these financial statements.
The financial statements were approved by the Board of Directors on 4 March 2013 and signed on its behalf by:
T Twigger
Director
S G Young
Director
MEGGITT PLC REPORT AND ACCOUNTS 2012
FINANCIAL STATEMENTS
108
Notes to the financial statements of the Company
1. Basis of preparation
Foreign currencies
These financial statements have been prepared on a going concern
basis under the historical cost accounting convention, as modified by
the revaluation of financial assets and financial liabilities (including
derivative financial instruments) at fair value, in accordance with the
Companies Act 2006. The Company continues to prepare its annual
financial statements in accordance with UK Generally Accepted
Accounting Practice (UK GAAP).
2. Summary of significant accounting policies
Transactions and balances
Transactions in foreign currencies are recorded at the rate of exchange
prevailing at the dates of the transactions. Monetary assets and
liabilities, denominated in foreign currencies at the balance sheet date,
are reported at the rates of exchange prevailing at that date. Exchange
differences on retranslating monetary assets and liabilities are
recognised in the profit and loss account except where they relate to
qualifying cash flow hedges in which case the exchange differences are
recognised in equity.
Investments
Pension scheme arrangements
Investments in subsidiaries are stated at cost less provision for
impairment in value except for investments acquired before 1 January
1988 where Section 612 merger relief has been taken and investments
are stated at the nominal value of the shares issued in consideration.
Tangible fixed assets
Tangible fixed assets are stated at cost, net of depreciation and any
provision for impairment. Cost includes the original purchase price of
the asset and costs attributable to bringing the asset into use.
Depreciation is not provided on freehold land. On other assets it is
provided in equal annual instalments over the estimated useful lives
of the assets as follows:
Freehold buildings ...................................... 40 to 50 years
Leasehold property ..................................... over period of lease
Fixtures and fittings .................................... 3 to 10 years
Plant and equipment ................................... 3 to 10 years
Motor vehicles.............................................. 5 years
Operating leases
Rental costs under operating leases are charged to the profit and loss
account on a straight-line basis over the lease term, even if the
payments are not made on this basis.
Taxation
The charge for taxation is based on the profit for the period and takes
into account taxation deferred because of timing differences between
the treatment of certain items for taxation and accounting purposes.
Deferred taxation is provided in full, without discounting, on timing
differences that result in an obligation at the balance sheet date to pay
more tax, or a right to pay less tax, at a future date, at rates expected
to apply when they crystallise based on current tax rates and law.
Deferred taxation assets are recognised to the extent it is regarded as
more likely than not that they will be recovered.
Deferred taxation is not provided on timing differences arising from
the sale or revaluation of fixed assets unless, at the balance sheet date,
a binding commitment to sell the asset has been entered into and it is
unlikely that any gain will qualify for rollover relief.
Provision for liabilities and charges
In accordance with FRS 12, provision is made for onerous property
leases. Provisions are discounted where appropriate to reflect the time
value of money.
As the Company is unable to identify its share of the underlying assets
and liabilities of the Meggitt Pension Plan on a consistent and
reasonable basis, the Company accounts for the scheme as though it
were a defined contribution scheme. Accordingly the amount charged
to the profit and loss account is the contribution payable in the period.
Differences between contributions payable in the period and
contributions paid are shown as accruals or prepayments in the
balance sheet.
Share-based compensation
The fair value of services received from employees is recognised as
an expense in the profit and loss account over the period for which
services are received (‘the vesting period’).
For equity-settled awards, the fair value of an award is measured at
the date of grant and reflects any market-based vesting conditions.
Non market-based vesting conditions are excluded from the fair value
of the award. At the date of grant, the Company estimates the number
of awards expected to vest as a result of non market-based vesting
conditions and the fair value of this estimated number of awards is
recognised as an expense in the profit and loss account on a straight-
line basis over the vesting period. At each balance sheet date, the
Company revises its estimate of the number of awards expected to vest
as a result of non market-based vesting conditions and adjusts the
amount recognised cumulatively in the profit and loss account to
reflect the revised estimate. Proceeds received, net of directly
attributable transaction costs, are credited to share capital and
share premium.
For cash-settled awards, the total amount recognised is based on the
fair value of the liability incurred. The fair value of the liability is
remeasured at each balance sheet date with changes in fair value
recognised in the profit and loss account for the period.
The grant by the Company of options over its equity instruments
to employees of subsidiary undertakings, is treated as a capital
contribution. The fair value of the awards made is recognised,
over the vesting period, as an increase in investment in subsidiary
undertakings, with a corresponding credit to the profit and loss
reserve.
Shares in the Company are held by an independently managed
Employee Share Ownership Trust (‘ESOP Trust’), to meet future
obligations in respect of the Company’s employee share schemes.
The cost of own shares held by the ESOP Trust is deducted from
shareholders’ funds.
MEGGITT PLC REPORT AND ACCOUNTS 2012
FINANCIAL STATEMENTS
109
2. Summary of significant accounting policies continued
Loans
Loans are initially stated at proceeds received less directly attributable
transaction costs incurred. Transaction costs are amortised to the
profit and loss account over the period of the loans. Loans are held at
fair value where a hedge relationship is in place. Any related interest
accruals are included within the value at which loans are recorded.
Loans are classified as current liabilities unless the Company has an
unconditional right to defer settlement of the liability for at least 12
months after the balance sheet date.
Capital instruments
Ordinary shares are classified as equity. Incremental costs directly
attributable to the issue of new shares are deducted from the proceeds
recorded in equity. Other instruments are classified as liabilities if they
contain an obligation to transfer economic benefits, otherwise they are
included in shareholders’ funds.
Dividends
Interim dividends are recognised when they are approved by the Board.
Final dividends are recognised when they are approved by the
Company’s shareholders.
Profit and recognised gains and losses of the Company
The Company has taken advantage of the legal dispensation contained
in Section 408 of the Companies Act 2006 allowing it not to publish a
separate profit and loss account and related notes. The Company has
also taken advantage of the legal dispensation contained in Section 408
of the Companies Act 2006 allowing it not to publish a separate
statement of recognised gains and losses.
Cash flow statement
The Company has taken advantage of the exemption under FRS 1
(revised 1996) from the requirement to produce a cash flow statement.
A consolidated cash flow statement is included in the Meggitt PLC
Group accounts.
Related party transactions
The Company has taken advantage of the exemption contained in FRS 8
from the requirement to disclose related party transactions within
the Group.
Derivative financial instruments and hedging
Derivative financial instruments are recognised at fair value on the
date the derivative contract is entered into and are subsequently
remeasured at fair value at each balance sheet date. To the extent the
maturity of the financial instrument is more than 12 months from the
balance sheet date, the fair value is reported as a non-current asset or
liability. Derivative financial instruments with maturities of less than 12
months from the balance sheet are shown as current assets or
liabilities. The method by which any gain or loss is recognised depends
on the designation of the derivative financial instrument:
Fair value hedges
Fair value hedges are hedges of the fair value of recognised assets or
liabilities or a firm commitment. Interest rate swaps that change fixed
rate interest to variable rate interest are treated as fair value hedges
provided they meet the hedge criteria. Changes in the fair value of
derivative financial instruments, designated as fair value hedges, are
recognised in the profit and loss account together with changes in the
fair value of the hedged item.
Cash flow hedges
Cash flow hedges are hedges of highly probable forecast transactions.
Interest rate swaps that change variable rate interest to fixed rate
interest are treated as cash flow hedges provided they meet the hedge
criteria. Changes in fair value of the effective portion of derivative
financial instruments, designated as cash flow hedges, are initially
recorded within equity. To the extent changes in fair value are recorded
in equity, they are recycled to the profit and loss account in the periods
in which the hedged item affects the profit and loss account. However,
when the transaction to which the hedge relates results in the
recognition of a non-monetary asset or a liability then gains and losses
previously recognised in equity are included in the initial measurement
of the cost of the non-monetary asset or liability.
If the forecast transaction to which the cash flow hedge relates is no
longer expected to occur, the cumulative gain or loss previously
recognised in equity is transferred to the profit and loss account
immediately. If the hedging instrument is sold, expires or no longer
meets the criteria for hedge accounting the cumulative gain or loss
previously recognised in equity is transferred to the profit and loss
account when the forecast transaction is recognised in the profit and
loss account.
Derivatives that do not meet the criteria for hedge accounting
Where derivatives do not meet the criteria for hedge accounting,
changes in fair value are recognised immediately in the profit and loss
account. The Company utilises a number of foreign currency forward
contracts to mitigate against currency fluctuations. The Company has
determined that the additional costs of meeting the extensive
documentation requirements for the Company’s large number of
foreign currency contracts are not merited. Accordingly gains and
losses arising from measuring the contracts at fair value are recorded
immediately in the profit and loss account.
MEGGITT PLC REPORT AND ACCOUNTS 2012
FINANCIAL STATEMENTS
110
Notes to the financial statements of the Company continued
3. Tangible fixed assets
Cost at 1 January 2012
Additions
Disposals
Cost at 31 December 2012
Accumulated depreciation at 1 January 2012
Charge for year
Disposals
Accumulated depreciation at 31 December 2012
Net book amount at 31 December 2012
Net book amount at 31 December 2011
Net book amount of land and buildings:
Freehold
Short leasehold
Total
4. Investments
Shares in subsidiaries:
At 1 January
Additions
Disposals
Cost of share-based payments in respect of employees of subsidiary undertakings net of recoveries (see note 13)
Reversal of provision for impairment in value
At 31 December
Land and
buildings
£’m
0.8
–
–
0.8
0.4
–
–
0.4
0.4
0.4
Plant,
equipment
and vehicles
£’m
20.7
9.7
(0.2)
30.2
4.3
1.8
(0.1)
6.0
24.2
16.4
2012
£’m
0.1
0.3
0.4
Total
£’m
21.5
9.7
(0.2)
31.0
4.7
1.8
(0.1)
6.4
24.6
16.8
2011
£’m
0.1
0.3
0.4
2012
£’m
2011
£’m
2,052.4
–
–
8.3
–
187.1
1,983.7
(133.7)
7.6
7.7
2,060.7
2,052.4
During 2011, an internal Group reorganisation was undertaken. Following this, the direct subsidiaries of the Company were sold to a new
subsidiary holding company, Meggitt International Holdings Limited. No impact on the Company’s investments arose on this transaction. In
addition, £1,850.0 million of the Company’s inter-group receivables were transferred to the new holding company in consideration for additional
shares subscribed for in Meggitt International Holdings Limited.
The directors believe that the carrying value of the investments is supported by their underlying assets.
A list of principal subsidiaries is included in note 44 of the Meggitt PLC Group accounts.
5. Debtors
Amounts falling due within one year:
Amounts owed by subsidiary undertakings
Other debtors
Prepayments and accrued income
Total
2012
£’m
2011
£’m
954.1
2.5
1.7
958.3
1,005.9
2.9
1.6
1,010.4
6. Creditors – amounts falling due within one year
Bank loans and overdrafts
Other loans
Trade creditors
Amounts owed to subsidiary undertakings
UK corporation tax payable
Taxation and social security
Other creditors
Accruals
Total
Bank loans and overdrafts and other loans are unsecured.
7. Creditors – amounts falling due after more than one year
Bank loans
Other loans
Total
Bank loans and other loans are unsecured.
Analysis of bank loans and overdrafts repayable:
In one year or less
In more than one year but not more than five years
Total
Analysis of other loans repayable:
In one year or less
In more than one year but not more than five years
In more than five years
Total
8. Provision for liabilities and charges
At 1 January 2012
Charged to profit and loss account
Credited to profit and loss reserve
Utilisation of provision
At 31 December 2012
MEGGITT PLC REPORT AND ACCOUNTS 2012
FINANCIAL STATEMENTS
111
2012
£’m
7.6
114.0
4.0
30.1
16.7
3.8
4.0
5.9
186.1
2012
£’m
170.2
439.6
609.8
2012
£’m
7.6
170.2
177.8
2012
£’m
114.0
171.5
268.1
553.6
Onerous
lease costs
£’m
Deferred tax
provision
£’m
0.3
–
–
(0.1)
0.2
0.6
2.4
(1.2)
–
1.8
2011
£’m
0.4
3.4
5.9
55.0
12.4
3.7
1.8
6.9
89.5
2011
£’m
292.5
571.5
864.0
2011
£’m
0.4
292.5
292.9
2011
£’m
3.4
160.7
410.8
574.9
Total
£’m
0.9
2.4
(1.2)
(0.1)
2.0
Onerous lease costs
Provision has been made for the estimated rental shortfall in respect of properties with onerous lease obligations and will be utilised over the
lease terms of up to two years.
MEGGITT PLC REPORT AND ACCOUNTS 2012
FINANCIAL STATEMENTS
112
Notes to the financial statements of the Company continued
8. Provision for liabilities and charges continued
Deferred tax liabilities are analysed as follows:
Accelerated capital allowances
Other short-term timing differences
Total
Movements in deferred tax balances are analysed as follows:
At 1 January
Charged to profit and loss account
Credited/(charged) to profit and loss reserve
At 31 December
9. Derivative financial instruments
Interest rate swaps
Cross currency swaps
Foreign currency forward contracts
Total
Less non-current portion:
Interest rate swaps
Foreign currency forward contracts
Non-current portion
Current portion
2012
£’m
(2.0)
0.2
(1.8)
2012
£’m
(0.6)
(2.4)
1.2
(1.8)
2011
£’m
(1.0)
0.4
(0.6)
2011
£’m
1.0
(0.5)
(1.1)
(0.6)
2012
Assets
£’m
2012
Liabilities
£’m
2011
Assets
£’m
2011
Liabilities
£’m
43.1
–
12.2
55.3
43.1
7.3
50.4
4.9
(0.2)
(1.3)
(3.7)
(5.2)
(0.2)
–
(0.2)
(5.0)
39.2
3.0
5.1
47.3
39.2
0.7
39.9
7.4
(4.3)
–
(13.3)
(17.6)
–
(4.2)
(4.2)
(13.4)
The Company is exempt from the FRS 29 disclosures as the consolidated financial statements of Meggitt PLC give the disclosures required by
IFRS 7 (see Meggitt PLC Group accounts notes 29 and 30).
10. Commitments
Capital commitments
Contracted for but not incurred:
Property, plant and equipment
Total
Operating lease commitments
The annual commitments under non-cancellable operating leases, all of which relate to land and buildings, expire as follows:
Within two to five years
Later than five years
Total
2012
£’m
0.1
0.1
2012
£’m
0.1
0.1
0.2
2011
£’m
–
–
2011
£’m
0.1
0.1
0.2
MEGGITT PLC REPORT AND ACCOUNTS 2012
FINANCIAL STATEMENTS
113
11. Pensions
The Directors believe that the FRS 17 deficit for the scheme in which the Company participates would be consistent with the IAS 19 deficit
reported in note 33 to the Meggitt PLC Group accounts.
12. Called-up share capital
Allotted and fully paid:
At 1 January 2012
Issued on exercise of executive share awards
Issued on exercise of sharesave awards
Scrip dividends
At 31 December 2012
13. Reconciliation of movements in shareholders’ funds
At 1 January 2012
Profit for the financial year
Dividends
Cash flow hedge movements
Currency translation differences
Equity placing
Employee share option schemes:
Value of subsidiary employee services (see note 4)
Value of services provided
Shares issued
Scrip dividends
Ordinary
shares of
5p each
Number ‘m
Nominal
value
Net
consideration
£’m
£’m
778.8
2.7
0.2
3.3
785.0
38.9
0.2
–
0.2
39.3
Called-up
share
capital
£’m
38.9
–
–
–
–
–
–
–
0.2
0.2
Share
premium
account
£’m
1,130.1
–
–
–
–
–
–
–
0.8
13.0
Other
reserves
£’m
17.5
–
–
–
–
–
–
–
–
–
Profit and
loss
reserve
£’m
997.0
188.6
(85.0)
(4.3)
1.2
–
8.3
2.9
(0.1)
–
Total
2012
£’m
2,183.5
188.6
(85.0)
(4.3)
1.2
–
8.3
2.9
0.9
13.2
0.6
0.4
13.2
Total
2011
£’m
1,187.6
782.7
(73.6)
4.0
–
246.0
7.6
0.6
3.4
25.2
At 31 December 2012
39.3
1,143.9
17.5
1,108.6
2,309.3
2,183.5
Details of the Group’s employee share schemes are included in note 35 of the Meggitt PLC Group accounts.
MEGGITT PLC REPORT AND ACCOUNTS 2012
SUPPLEMENTARY INFORMATION
114
Five-year record
Revenue and profit
Revenue
Underlying profit before tax
Exceptional operating items
Amortisation of intangible assets acquired in business combinations
Disposal of inventory revalued in business combinations
Financial instruments
Profit before tax
Earnings and dividends
Earnings per share – basic
Earnings per share – underlying
Dividends per ordinary share (paid or proposed in respect of the year)
Gearing ratio
Year end net debt as a percentage of capital employed
2012
£’m
2011
£’m
2010
£’m
2009
£’m
2008
£’m
1,605.8
1,455.3
1,162.0
1,150.5
1,162.6
362.8
(13.3)
(80.6)
(0.2)
23.4
292.1
323.0
(20.3)
(75.1)
(11.3)
9.7
226.0
31.1p
36.2p
11.80p
24.0p
31.9p
10.50p
256.1
(15.7)
(64.7)
–
(3.2)
172.5
20.1p
27.8p
9.20p
234.2
(20.8)
(69.2)
–
36.6
180.8
20.5p
25.3p
8.45p
243.3
(15.8)
(61.8)
(0.3)
(46.1)
119.3
15.0p
26.5p
8.45p
33.7%
44.0%
50.2%
63.5%
81.5%
Investor Information
MEGGITT PLC REPORT AND ACCOUNTS 2012
SUPPLEMENTARY INFORMATION
115
Dividends
The proposed 2012 final dividend of 8.20p per ordinary share, if approved, will be paid on 10 May 2013 to
shareholders on the register on 15 March 2013. The expected payment date for the 2013 interim dividend
is 4 October 2013.
Shareholder enquiries
Enquiries about the following administrative matters should be addressed to Meggitt PLC’s registrar:
Registrar:
Computershare Investor
Services PLC
The Pavilions
Bridgwater Road
Bristol BS99 6ZZ
T: 0870 703 6210
E: www.investorcentre.co.uk/contactus
• Change of address notification.
• Lost share certificates.
• Dividend payment enquiries.
• Dividend mandate instructions. Shareholders may have their dividends paid directly into their bank or
building society accounts by completing a dividend mandate form. Tax vouchers are sent directly to
shareholders’ registered addresses.
• Amalgamation of shareholdings. Shareholders who receive more than one copy of the annual report are
invited to amalgamate their accounts on the share register.
Shareholders can view and manage their shareholdings online at www.investorcentre.co.uk, including
updating address records, making dividend payment enquiries, updating dividend mandates and viewing
the latest share price. Shareholders will need their Shareholder Reference Number (SRN), which can be
found on their share certificate or a recent dividend tax voucher, to access this site. Once signed up to
Investor Centre, an activation code will be sent to the shareholder’s registered address to enable the
shareholder to manage their holding.
Electronic communications
and electronic proxy voting
Meggitt encourages shareholders to vote at the Annual General Meeting (AGM) and provides a facility for
electronic proxy voting. Shareholders who are not Crest members can vote online on resolutions proposed
at the AGM via our website after voting has opened. Proxy cards contain further details on how and when to
vote and further information for Crest members.
We provide annual reports and other documents to shareholders in their elected format under the
electronic communications provisions, which were approved by the shareholders at the AGM in 2007.
Electronic copies of the Annual Report and Accounts 2012 and the Notice of AGM will be posted on our
website where Meggitt PLC’s announcements to the Stock Exchange and press releases are also
published.
We have established share dealing services with the group’s registrar, Computershare Investor Services
PLC, which provides shareholders with an easy way to buy or sell Meggitt PLC ordinary shares on the
London Stock Exchange.
The internet share dealing service commission is 1% of the value of the transaction, subject to a minimum
charge of £30. Stamp duty, currently 0.5%, is payable on purchases. There is no need to open an account to
deal. Real-time dealing is available during market hours. There is a facility to place orders outside market
hours. Up to 90-day limit orders are available for sales. To access the service, shareholders should have
their SRN to hand and log onto www.computershare.com/dealing/uk.
The telephone share dealing service commission is 1% of the value of the transaction plus £35. Stamp
duty, currently 0.5%, is payable on purchases. The service is available from 8.00am to 4.30pm Monday to
Friday, excluding bank holidays, on telephone number 0870 703 0084. Shareholders should have their
SRN ready when making the call. Detailed terms and conditions are available on request by telephoning
0870 702 0000.
This is not a recommendation to buy, sell or hold shares in Meggitt PLC. Shareholders who are unsure of
what action to take should obtain independent financial advice. Share values may go down as well as up
which may result in shareholders receiving less than they originally invested.
Insofar as this statement constitutes a financial promotion for the share dealing service provided by
Computershare Investor Services PLC, it has been approved by Computershare Investor Services PLC for
the purpose of Section 21(2)(b) of the Financial Services and Markets Act 2000 only. Computershare
Investor Services PLC is authorised and regulated by the Financial Services Authority. Where this
statement has been received in a country where providing such a service would be contrary to local laws
or regulations, this should be treated as information only.
ShareGift (registered charity number 1052686), the independent share donation charity, is especially useful
for those who may want to dispose of a small number of shares which are uneconomic to sell on their own.
Shares which have been donated to ShareGift are aggregated and sold when practicable, with the proceeds
passed on to a wide range of UK registered charities. Further details about ShareGift can be obtained from
www.ShareGift.org.
Share dealing services
8.00am – 4.30pm
Monday – Friday
T: 0870 703 0084
ShareGift
17 Carlton House Terrace
London SW1Y 5AH
T: 0207 930 3737
MEGGITT PLC REPORT AND ACCOUNTS 2012
SUPPLEMENTARY INFORMATION
116
Investor Information continued
Analysis of ordinary shareholders as at 31 December 2012
Size of holdings
1–999
1,000–9,999
10,000–99,999
100,000–249,999
250,000–499,999
500,000–999,999
1,000,000 and over
Number of
shareholders
% of total
shares
Number of
shareholders
% of total
shares
5,505
2,468
528
113
75
67
106
8,862
0.16
0.98
2.00
2.26
3.42
6.06
85.12
100.00
Types of shareholder
Individuals
Banks and nominees
Investment and insurance companies
Other
7,470
1,301
28
63
2.03
96.61
0.15
1.21
8,862
100.00
2013 provisional financial calendar
Key dates
Full-year results announcement for year
ended 31 December 2012
Final dividend ex-dividend date
Final dividend record date
Report and accounts for year
ended 31 December 2012 despatched
Deadline for receipt of scrip dividend elections
AGM and interim management statement
Final dividend for year ended
31 December 2012 – payment date
Interim announcement for period ended 30 June 2013
Interim dividend ex-dividend date
Interim dividend record date
Deadline for receipt of scrip dividend elections
Interim dividend for period ended
30 June 2013 – payment date
Interim management statement
5 March
13 March
15 March
28 March
22 April
1 May
10 May
6 August
14 August
16 August
20 September
4 October
1 November
MARCH
5
Full-year
results
MAY
1
AGM & interim
management
statement
AUGUST
NOVEMBER
6
Interim
results
1
Interim
management
statement
Contact us
Investor relations
T: 01202 597 597
investors@meggitt.com
Information on Meggitt PLC, including the latest share
price: www.meggitt.com
Advisors
Registrars
Computershare Investor Services PLC
Principal clearing bankers
HSBC Bank plc
Barclays Bank PLC
Bank of America Merrill Lynch
Merchant bankers
N M Rothschild & Sons Limited
Independent auditors
PricewaterhouseCoopers LLP
Solicitors
Clifford Chance LLP
Brokers
Bank of America Merrill Lynch
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Company information
Meggitt PLC
Atlantic House
Aviation Park West
Bournemouth International Airport
Christchurch
Dorset BH23 6EW
United Kingdom
T +44 (0) 1202 597 597
F +44 (0) 1202 597 555
www.meggitt.com
Registered in England and Wales
Company number 432989
ANNUAL REPORT
AND ACCOUNTS
2012