ANNUAL REPORT AND
ACCOUNTS 2013
Quick reference
What is Meggitt?
How did we
perform in 2013?
What is our
strategy and
business model?
›› 01
›› 02
›› 22
›› 04
›› 06
How do we
manage risk?
What are our key
performance
indicators
›› 15
›› 18
How do we
perform as
corporate
citizens?
›› 31
What are our
markets and
what drives
them?
›› 08
Who runs Meggitt
and how do we
reward them?
›› 36
›› 47
Contents
01-34
Strategic report
71-129
Financial statements
01
02
03
04
06
06
07
08-11
12-14
15-17
18-21
22-30
31-34
Group overview
Financial highlights
Chairman’s statement
Chief Executive’s review
Group strategy
Business model
Market matrix and investment cycle
Market review
Meggitt divisions
Principal risks and uncertainties
Key performance indicators
Chief Financial Officer’s review
Corporate responsibility
35-70
Governance reports
35
36-37
38-42
43-45
46
47-67
68-70
Chairman’s introduction
Board of directors
Corporate governance report
Audit Committee report
Nominations Committee report
Directors’ remuneration report
Directors’ report
Download the 2013 Meggitt PLC annual report
and accounts from www.meggitt.com
71-73
74
75
76
77
78
79-121
122
123
124-129
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 consolidated 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
130-132
Supplementary information
130
131-132
Five-year record
Investor information
Group overview
1
Headquartered in the UK, Meggitt PLC is a global
engineering group specialising in smart engineering
for extreme environments—components and
sub-systems providing critical functionality in
challenging applications within civil aerospace,
military and energy markets.
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.
A workforce of over 10,500 people is employed
across facilities in Asia, Europe and North 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.
The Group’s growing presence in energy is driven
by control valves for industrial gas turbines; heat
transfer engineering for oil and gas platforms and
offshore gas processing and storage; and sensing
and monitoring capabilities deployed in rotating
power generation equipment to promote safety and
reduce maintenance costs, fuel consumption and
carbon emissions.
The transfer of Meggitt’s core technologies to
other markets includes sensing materials for
breakthrough medical devices.
Revenue by market
Total revenue (£ millions)
1,637.3
Employees by region
Number of employees
10,715
Civil aerospace
736.2 | 45%
Military
616.4 | 38%
Energy and other
284.7 | 17%
North America
5,514 | 51%
UK
2,797 | 26%
Mainland Europe
1,589 | 15%
Rest of World
815 | 8%
Revenue by destination
Total revenue (£ millions)
1,637.3
Total R&D as a %
of revenue
USA
811.7 | 50%
UK
165.8 | 10%
Rest of Europe
365.1 | 22%
Rest of World
294.7 | 18%
13 8.2
12
7.6
11
7.6
10
7.2
09 7.4
MEGGITT PLC REPORT AND ACCOUNTS 2013 STRATEGIC REPORT FINANCIAL STATEMENTS SUPPLEMENTARY INFORMATION GOVERNANCE REPORTS
MEGGITT PLC REPORT AND ACCOUNTS 2013
2
2
Financial highlights
Meggitt’s 2013 results continued to demonstrate the breadth and
resilience of its portfolio. Our equipment is installed on over
60,000 aircraft worldwide—a growing fleet—with a stable
aftermarket revenue stream stretching out for many decades.
Our excellent win rate on the many new aircraft programmes
entering service, which drove our investment in research and
development of £134.9m (8.2% of revenue), gives us confidence in
making further good progress in the years to come.
Revenue
(£ millions)
1,637.3
13 1,637.3
12
1,605.8
11
1,455.3
10 1,162.0
09 1,150.5
›› See page 22
Underlying profit before tax
(£ millions)1
Free cash flow
(£ millions)
377.8
13 377.8
12
366.0
11
325.3
10
263.7
09 244.2
›› See page 24
110.4
13 110.4
12
182.4
11
193.0
10
163.3
09 155.0
›› See page 28
Underlying earnings per share
(pence)1
Dividends per share
(pence)
37.5
13 37.5
12
36.5
11
32.1
10
28.6
09 26.4
›› See page 27
12.75
13 12.75
12
11.80
11
10.50
10
9.20
09 8.45
›› See page 27
1 The definition of ‘underlying’ is provided in notes
10 and 15 to the consolidated financial
statements on pages 91 and 94 respectively. The
figures for prior years have been restated as
explained in note 44 on page 120 to the
consolidated financial statements.
MEGGITT PLC REPORT AND ACCOUNTS 2013
Chairman’s statement
3
3
Oxford University’s Said Business School.
The Meggitt Production System, the
Group’s wide-ranging continuous
improvement initiative, embodies a faculty
of operational excellence for the large
number of employees touched by it.
As a leading employer of engineers and
manufacturing experts, we are naturally
committed to maintaining the industry
pipeline of expertise. This will undoubtedly
be stimulated by the opportunities arising
from the UK government’s commitment to
co-funding investment in the aerospace
and defence industry. As a business we
are picking up the baton, developing
young talent, sponsoring students with
engineering aspirations through the
Arkwright Scholarship Trust. In turn,
they are benefiting from mentoring by
engineering graduates from our own
highly successful international graduate
development programme in which we take
care to engage bright minds early in very
challenging engineering projects.
We are also enhancing the professional
development of established Meggitt
engineers. As an integrated Group,
careers can now develop beyond business
units and divisions; we have entered into
a partnership with the Institution of
Mechanical Engineers to provide
continuous training, management and
leadership development; and we are taking
care of our subject matter experts,
ensuring that those who wish to remain
expert in their fields have career paths as
promising as those who move into
management roles. This includes plans
for a Technical Fellowship programme
to reward those at the pinnacle of
achievement in their chosen field.
Doing business the right way
We have grown Meggitt with great
determination, based on clear-cut
principles and practice. There is zero
tolerance for anything other than the fair
and impartial conduct of business that is
fully compliant with applicable laws and
regulations worldwide and integrity in
every business relationship.
Meggitt was one of the first companies
to commit to comprehensive integrity
policies, programmes and practice within
its aerospace and defence business
operations when we signed a Statement
of Adherence to the Global Principles of
Business Ethics for the Aerospace and
Defense Industry. As Chairman of the
Group’s Ethics and Trade Compliance
Committee, I am proud to say our
programmes lead the industry.
Board of directors
In May, Meggitt Group Finance Director
Stephen Young succeeded Terry Twigger
as Chief Executive. Terry spent 12 years—
nine with Stephen—quadrupling Group
revenue and increasing profitability
fivefold. Doug Webb, who succeeds
Stephen, has held senior financial
positions across a broad range of
industries. Before joining Meggitt, Doug
was Chief Financial Officer of London
Stock Exchange Group plc.
David Robins will be retiring from the
Board following the AGM on 7 May 2014
after 12 years of service as a non-
executive director, during which time
he acted as Senior Independent Director
and Chairman of the Remuneration
Committee.
Looking ahead
Meggitt delivered a creditable set of
results in 2013 despite some operational
challenges and weakness in some
markets, most notably the highly profitable
civil aftermarket.
Sequestration of US defence funding
continues to generate uncertainty.
However, our flexible manufacturing base
enables us to redirect activity where
demand remains strong, while retrofit,
upgrade and outsourcing opportunities
continue for Meggitt, as in the past, from
greater utilisation and extension of
existing programmes.
We look forward to making further
progress in 2014 and beyond, driven by a
highly resourceful workforce, underpinned
by a resilient installed base of equipment,
highly cash-generative business model
and robust balance sheet.
Sir Colin Terry Chairman
We have grown Meggitt with
great determination, based on
clear-cut principles and
practice—the fair and impartial
conduct of business that is
fully compliant with applicable
laws and regulations
worldwide and integrity in
every business relationship.
It is more than a decade since I joined
Meggitt as a non-executive director,
becoming Chairman in 2004. Since then,
the Group has become progressively
integrated, revenue has increased
threefold and employee numbers have
doubled. We have enjoyed growth
organically and by acquisition, which has
brought new capabilities and reinforced
Meggitt’s smart engineering for extreme
environments.
Investing for growth
Meggitt continues to expand its market
positions and capabilities through
investment in research and development,
facilities and, most important of all, its
people. They are the backbone of our
business and I would like to take this
opportunity to thank them for their hard
work in a challenging year.
We benefit from a talented workforce
across all disciplines, which we build on
with Group-wide career opportunities and
training at all levels. We place special
emphasis on leadership development—
executive influencing, training in vital
front-line supervision, plus strategy
development work for future Meggitt
leaders within programmes tailored by
MEGGITT PLC REPORT AND ACCOUNTS 2013 STRATEGIC REPORT FINANCIAL STATEMENTS SUPPLEMENTARY INFORMATION GOVERNANCE REPORTS 4 Chief Executive’s review
We have emerged from an
intensive bid cycle resulting
in technology sales into a
significant number of new
aircraft programmes, many
involve a full suite of Meggitt
capabilities, exceeding the
shipset content of their
predecessors. This is a very
strong indicator of future
revenue growth.
Group strategy
In my first Annual Report and Accounts
since becoming Meggitt’s Chief Executive,
I am delighted to reaffirm my
commitment to the strategy I was integral
in developing since joining the Group as
Finance Director in 2004.
Meggitt’s strategy comprises four
elements.
Delivering innovation
We focus on highly-engineered
components and sub-systems capable
of withstanding increasingly harsh
environments, such as in the next-
generation aero-engines. Our products
must operate in extremes of pressure,
temperature, impact, vibration and
contamination in applications where
certification requirements are
demanding.
We invest in manufacturing technologies
such as automation and additive
manufacturing, targeting product
technology investment in areas where we
see the greatest growth potential. Our
power business, for example, continues to
provide more electric solutions for our
customers and we are embedding this
capability increasingly across a broad
range of Meggitt products.
At the same time, we seek to leverage
shipset content by combining the Group’s
capabilities. Most recently, we deployed
our sensing systems in tyre pressure
monitoring for brake control systems and
integrated polymers and composites with
fluid control technology valves to create
complete airborne fuel systems.
We supplement organic* growth with
targeted acquisitions, increasing our
range of capabilities and improving our
market position.
Securing positions on new
platforms
Our leading-edge capabilities, intellectual
property and longstanding track record of
delivering reliable products, enable us
to secure strong positions on new
programmes, including the recently
announced wheels and brakes contract
on the Dassault 5X long-range business
jet.
Because our products span multiple
platforms across civil aerospace, military
and energy markets, we are not
dependent on single programmes,
customers, regions or segments.
We target specialist applications within
these markets, generating revenue from
original equipment and maintenance,
overhaul, spares and repair services for
the life of programmes, which can last
for decades.
Our customers’ technology roadmaps
guide our investments. This is
underpinned by rigorous product
development, programme management,
increased manufacturing capacity and
regional support for original equipment
manufacturers and their operators.
We have longstanding relationships with
major customers. Whether creating a
critical component or sub-system for an
aircraft engine or a heat exchanger for a
floating offshore gas storage and
processing vessel, we work together at
the start of design phases to ensure
demonstrable early-stage solutions.
Achieving operational
excellence
Because superior performance on quality,
cost and delivery are the building blocks
of future growth, we are intensifying our
investment in facilities, production
systems, programme management
and people.
* Organic excludes the effect of acquisitions,
disposals and foreign exchange.
MEGGITT PLC REPORT AND ACCOUNTS 2013
5
During 2013, we consolidated six factories
into three larger, more efficient facilities.
We moved a further two businesses to
new, expanded sites to meet growth
requirements. We also launched the
Meggitt Production System (MPS) at 16 of
our facilities, with a further 16 scheduled
for 2014 and the remainder during 2015.
MPS—our single, global approach to
continuous improvement—will create the
sustainable delivery and quality culture
that confers competitive advantage
beyond our technological expertise. It
reinforces our commitment to developing
our people and doing business the right
way, further strengthening our customer
partnerships. At the same time, Meggitt
will become more cost-competitive. We
will reduce working capital. We will
reduce the cost of poor quality and, as
MPS requires close relationships with
suppliers who share our management
standards and continuous improvement
philosophy, our supply chain will become
leaner and more effective. We have
already seen significant operational
improvements, with on-time delivery up
by 10% and defective parts per million
(our key performance indicator for
quality) down by 54%.
Providing through-life
product support
Once selected on a new platform, Meggitt
often becomes the sole source for a given
component for the life of the programme.
Our equipment typically operates in harsh
environments, generating a regular
requirement for spares and repairs. This
produces an annuity-like income stream
over the life of the programme—often
several decades.
We continue to invest in our product
support capability. In 2013, we opened our
new repair and overhaul centre in
Singapore, doubling our capacity and
introducing more Meggitt product lines,
and launched a major review of the best
way to deploy Meggitt’s growing
aftermarket capability to our global
customer base.
After the bid cycle
Outlook
We have emerged from an intensive bid
cycle resulting in technology sales into a
significant number of new aircraft
programmes, many involve a full suite of
Meggitt capabilities, exceeding the
shipset content of their predecessors.
This is a very strong indicator of future
revenue growth.
This accounts for R & D spend in 2013
which, at 8.2% of revenue, was at a record
level as we convert these new contracts
into sustainable revenue streams.
We are now moving into a major execution
phase, which requires us to deliver new
programmes on time and to specification
and to meet new, tougher requirements in
terms of quality, cost and delivery. The
necessary improvement in operational
performance will be supported by MPS
and the recent appointment of a Chief
Operating Officer.
Performance in 2013
Revenue growth in 2013 was weaker than
anticipated a year ago. This was due,
mainly, to currency movements, a slower
than expected recovery in civil aftermarket
revenue and uncertainties around defence
spending, particularly in the US. Supply
chain and operational issues, while now
under control, had an impact on revenues
and costs in the second half, offset by good
progress made in resolving legacy
contract issues. Against this challenging
background, total revenue rose 2% in the
year (organic: +1%) with underlying
earnings per share up 3% to 37.5p. Net
debt decreased further to 564.6m (2012:
642.5m) and net debt to EBITDA reduced to
1.2x (2012: 1.3x). The recommended final
dividend of 8.80p per share (2012: 8.20p)
takes the full year dividend to 12.75p (2012:
11.80p), an increase of 8%.
The outlook for our civil markets remains
good, with further growth in aircraft
deliveries anticipated in 2014 and beyond.
During the latter half of 2013, air traffic
growth accelerated to above the long term
trend rate of 5% and we believe that the
destocking seen over the last couple of
years is coming to an end. We therefore
maintain our view that civil original
equipment and aftermarket revenues will
grow at an average of 7 to 8% and 8 to 9%
respectively, both on an organic basis, over
the medium term. Aftermarket revenue
will likely grow at less than this rate in
2014 as the gradual recovery continues.
We anticipate a modest decline in military
revenue in 2014, reflecting the substantial
completion of the Bradley fighting vehicle
and KC135 fuel tank retrofit contracts.
Looking further ahead, uncertainty around
military budgets, notably in the US,
persists. As such, while we remain
confident in delivering an average
compound organic revenue growth rate of
2% in our military markets over the
medium term, this will be subject to
modest reductions if sequestration
impacts future budget cycles as initially
envisaged.
Energy, driven by continued strong
demand for our printed circuit heat
exchangers and new product introductions
in the condition-monitoring market, should
deliver organic revenue growth averaging
greater than 10% over the medium term.
Other markets should continue to see
modest growth.
On this basis, we expect to make further
good progress by delivering mid-single
digit organic revenue growth in 2014,
weighted towards the second half, and 6 to
7% average organic revenue growth in the
medium term.
Stephen Young Chief Executive
MEGGITT PLC REPORT AND ACCOUNTS 2013 STRATEGIC REPORT FINANCIAL STATEMENTS SUPPLEMENTARY INFORMATION GOVERNANCE REPORTS
6 Group strategy
Business model
Objective: deliver strong and sustainable
financial returns to shareholders through
leading positions in aerospace, defence
and energy markets
Our model delivers financial strength and stability throughout the
cycle. We deliver innovation, investing in multiple technologies
across our primary aerospace, defence and energy markets.
Revenues are derived from the successful execution of original
equipment programmes and aftermarket products and services
that flow from them.
Deliver innovation
Invest in leading-edge
capabilities
Focus on components
and sub-systems
for harsh environments
Deliver through organic
investment and
acquisitions
››
See p.11
Provide through-life
product support
Provide installed Meggitt
product with spares, repairs
and maintenance services
throughout programme life,
for secure and predictable
cash payback over
long term
Customers
››
See p.26
Secure positions
on new platforms
Use differentiated technology
and longstanding know-how
Spread risk across platforms
and market segments
››
See p.23
Co-develop programmes
with customers
Achieve
operational excellence
Continuously improve quality,
cost and delivery
Strengthen customer
partnerships
Maintain culture of strong
and ethical performance
››
See p.25
To see how Meggitt’s strategy fundamentals
are reflected at divisional level, see next page.
The results of strategy implementation are
outlined in the Chief Financial Officer’s review
on pages 22 to 30.
MEGGITT PLC REPORT AND ACCOUNTS 2013 Market matrix
Meggitt benefits from a balanced portfolio. Capability-based
business units deploy technological know-how and intellectual
property across all our markets so we are not dependent on single
customers, individual programmes or market segments.
Meggitt Aircraft
Braking Systems
Meggitt Control
Systems
Meggitt Polymers
& Composites
Meggitt Sensing
Systems
Meggitt Equipment
Group
7
Civil
Original equipment
Aftermarket
Military
Original equipment
Aftermarket
Energy
Other
>10% of Group revenue
3—10% of Group revenue
1—3% of Group revenue
Investment cycle
We develop technology for applications involving product life-cycles
measured in decades. Products must perform without fail in
environmental extremes, requiring regular replacement or overhaul,
generating strong returns from our initial investment over many years.
As our products are developed in line with our customers’
technology goals, we have performed strongly in the recent bid
cycle, securing positions on key platforms and refreshing the
long-term aftermarket pipeline.
Our business model requires significant cash investment in the
development phase of programmes and, for our wheels and brakes
business, the production phase also. We then make strong positive
cashflow in the in-service phase resulting in cash breakeven
typically between years 11 and 18.
Our near-term business is weighted therefore towards investment
in new development programmes, the source of sustainable growth
over the long term.
Cumulative
cash flow £
0
5
10
15
20
25
30
35
40
Typical product lifecycle (years)
Development
In production
Mature
Wheels and brakes
Civil
Military
MEGGITT PLC REPORT AND ACCOUNTS 2013 STRATEGIC REPORT FINANCIAL STATEMENTS SUPPLEMENTARY INFORMATION GOVERNANCE REPORTS MEGGITT PLC REPORT AND ACCOUNTS 2013
8
8
Market review
Meggitt’s principal markets, civil aerospace
(45% of revenue), military (38%) and energy
(11%), are characterised by long life-cycles
and the requirement for smart engineering
for extreme environments. This capability
ranges from thermal management, condition
monitoring and wheel, brake and brake control
systems to high-integrity electronics and fire
protection systems. Some of these capabilities
have applications beyond our core markets,
making up the remaining 6% of Group revenues.
Revenue by market
(£ millions)
1,637.3
Civil
736.2 | 45%
Military
616.4 | 38%
Energy & other
284.7 | 17%
Civil aerospace
Civil aerospace accounts for 45% of Group
revenue, with 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
grow, totalling over 41,000 aircraft today.
New aircraft deliveries drive sales of
original equipment, and aircraft utilisation
generates demand for spare parts and
repairs over many decades.
Original equipment
Aircraft deliveries encompass large jets
(>100 seats), regional aircraft (<100 seats)
and business jets.
Large jet deliveries in 2013 stood at a
record 1,279, 8% higher than in 2012.
Continued growth is underpinned by an
order book at the two major civil aircraft
manufacturers, Boeing and Airbus,
stretching out for seven years at current
production levels, bolstered by new
aircraft manufacturers investing in the
large jet market including Bombardier,
Sukhoi and COMAC. The high level of
demand for new aircraft deliveries is
driven primarily by high oil prices, the
relatively low cost of debt and the wave of
newer, more fuel-efficient aircraft coming
to market including Boeing’s 787 and
737MAX and Airbus’ A350XWB and
A320neo.
Regional aircraft deliveries of 263
represented an 11% increase on 2012, with
growth driven by 70-plus seat aircraft.
Growth looks set to continue over the
medium term, mirroring the growing
internationalisation of the regional aircraft
fleet beyond the US.
Business jet deliveries totalled 637, an 8%
decrease on 2012. Deliveries are still 50%
below the peak of 2008. However,
inventories are continuing to decline and
corporate profitability, historically a good
driver of business jet demand, is forecast
to rise in the coming years. As with
regional aircraft, the fleet is becoming
more global—customers in the Americas
comprise 76% of the global business jet
fleet but order trends suggest this will
move to less than 60% over the next
decade. Over the medium term, we see
deliveries continuing to recover, driven by
an improved economic growth outlook in
developed economies and the large
number of new aircraft models.
MEGGITT PLC REPORT AND ACCOUNTS 2013
STRATEGIC REPORT
GOVERNANCE REPORTS
FINANCIAL STATEMENTS SUPPLEMENTARY INFORMATION
9
9
Large jet delivery forecast
1,462
1,410
1,507
1,537
1,350
1,279
1,189
1,800
1,500
1,200
900
600
300
2012
2013
2014
2015
2016
2017
2018
Source: Meggitt management estimates
Regional aircraft delivery forecast
263
258
271
278
237
307
292
400
300
200
100
2012
2013
2014
2015
2016
2017
2018
Source: Meggitt management estimates
Business jet delivery forecast
Meggitt performance
Meggitt’s original equipment (OE) revenue
grew organically by 11% in 2013. Large jet
deliveries drive the majority of our OE
revenues, involving the supply of products
and sub-systems on engines and airframes
across thermal and fluid control, fire
protection, condition-monitoring and
high-integrity electronics. Our largest
exposure to regional aircraft and business
jets is through our wheels and brakes
business, which provides most original
equipment free of charge to civil aircraft
manufacturers. The strong OE performance
is also driven in part by our high shipset
values on new aircraft programmes, with
order books and delivery forecasts for these
programmes giving us confidence in future
growth prospects with a medium term
growth target of 7-8% per annum.
Aftermarket
The civil aerospace aftermarket is driven
primarily by aircraft utilisation which, in
the case of large jets and regional aircraft,
is measured using available seat
kilometres (ASKs). We use take-offs and
landings as a proxy for business jet
performance.
ASKs in the commercial aircraft fleet grew
modestly in the first half of 2013,
accelerating to give a full-year growth
number of 4.5%, close to the 5% long term
average. The Middle East and Africa saw
particularly strong growth, with the US
market showing a steady recovery.
Regional aircraft utilisation picked up
noticeably, driven by the recovery in North
America. Business jet utilisation in the
US and Europe continued to exhibit the
gradual improvement seen for the last two
years, with take-offs and landings in 2013
up 1% versus 2012. We would normally
expect our aftermarket revenues to follow
these leading indicators after a lag of a
few months.
Meggitt performance
Meggitt's organic aftermarket revenue was
flat for the year, but up 3% in the fourth
quarter, which is below the growth rate we
would expect given the rise in aircraft
utilisation over the course of the year. This
is primarily due to a continuation of the
destocking seen in 2012. Also, the bulk of
ASK growth has been met by new aircraft,
typically under warranty for three to five
years after initial delivery, holding back
growth in aftermarket demand. The rate of
new aircraft deliveries has also driven a
higher than normal rate of older aircraft
cannibalisation and created a surplus of
spare parts.
Regional aircraft and business jets are
important contributors to the Group’s
aftermarket revenue and the recovery in
regional aircraft utilisation in 2013 helped
offset the effects of destocking at a
significant large business jet customer.
Aircraft utilisation remains very
encouraging, with ASKs now tracking
above the long term average. This gives us
confidence in our medium term view of
annual growth in aftermarket revenue of 8
to 9%, after some of the current cyclical
factors reduce in impact.
1,002
910
846
771
Available seat kilometres (ASKs)
(billions)
1,200
1,000
800
600
400
200
670
637
675
2012
2013
2014
2015
2016
2017
2018
Source: Meggitt management estimates
7
6
5
4
3
2
1
0
1970
1975
1980
1985
1990
1995
2000
2005
2010
2013
Source: Meggitt management estimates
1983
1976
1979
1973
1971
1972
1974
1977
1978
1981
1982
1984
1986
1987
1988
1989
1991
1992
1993
1994
1996
1997
1998
1999
2001
2002
2003
2004
2006
2007
2008
2009
2011
2012
MEGGITT PLC REPORT AND ACCOUNTS 2013 STRATEGIC REPORT FINANCIAL STATEMENTS SUPPLEMENTARY INFORMATION GOVERNANCE REPORTS MEGGITT PLC REPORT AND ACCOUNTS 2013
10
10
Market review continued
Military revenue by region
Total revenue (£ millions)
616.4
USA
379.0 | 61%
Europe
144.0 | 23%
Rest of World
93.4 | 16%
Military
Military accounts for 38% of Group
revenue. Meggitt has equipment on over
20,000 aircraft and a variety of ground
vehicles, naval vessels and training
installations worldwide. During 2013, 61%
of our military revenue came from US
customers, with 23% from Europe and 16%
from the rest of the world.
Defence budgets in some key markets
were under pressure in 2013, notably in
the US where the effect of Continuing
Resolution plus sequestration affected
spending levels and the timing and size of
orders. However, European markets were
stable and parts of the Middle East and
Asia saw budget growth. The US defence
budget remains constrained, although the
Bipartisan Budget Act of December 2013
alleviated some pressure by reducing the
proposed cuts in 2014 and 2015 by $22
billion and $9 billion respectively.
Global defence spending is likely to remain
restrained. As the operational tempo in
Afghanistan slows down, this is likely to
reduce equipment utilisation levels,
limiting the demand for spare parts and
repairs. However, opportunities remain for
reset and upgrade of repatriated
equipment and supplying new products as
a significant tranche of military assets
reaches the end of their useful lives.
Meggitt performance
Meggitt’s military revenue declined
organically by 3% in 2013—a very creditable
performance given the market backdrop.
Within this, sales to the US declined by 6%,
sales to Europe increased by 12% and sales
to the rest of the world increased by 4%.
Our exposure to a broad range of fixed and
rotary wing aircraft, ground vehicles,
training facilities and naval vessels across
original equipment and aftermarket
spares and repairs, has enabled us to
demonstrate resilience in a challenging
environment over the last couple of years.
We expect to continue to do so over the
medium term. We have enjoyed
considerable success, for example,
securing retrofit programmes such as
blast-proof fuel tanks for the Bradley
fighting vehicle fleet and fuel bladders for
the KC135 tanker aircraft. While we have
now completed the Bradley retrofit
contract and the KC135 contract is winding
down, there are further opportunities for
ground vehicle fuel tank retrofits and good
growth in platforms on which we have
content such as the A400M, P-8 Poseidon
and F-35 Joint Strike Fighter. Accordingly,
we are targeting 2% organic revenue
growth in the medium term, excluding the
impact of sequestration.
Energy
Our energy business accounted for 11% of
Group revenue in 2013. We target power
generation and oil and gas markets with
condition-monitoring hardware and
software, control valves and printed circuit
heat exchanger technology.
The market for condition monitoring and
control valves has continued to grow, as
high input costs drive operators to extract
greater efficiency from their assets. As
newer, more capable monitoring
technologies come to market, operators
will maximise their asset utilisation and
minimise unplanned downtime by
retrofitting new condition-monitoring
systems onto existing plant and machinery.
The oil and gas heat transfer market
remains robust. Exploration and production
companies are increasingly turning to
extraction sites which are further offshore
and in deeper water, necessitating the
commissioning of new equipment designed
to operate in these increasingly harsh
environments. These factors have resulted
in good growth in activity for floating,
production, storage and offload (FPSO) and
floating liquefied natural gas (FLNG)
vessels, markets which are set to grow
further in the coming years.
Meggitt performance
Meggitt’s energy revenue grew 5% in 2013.
Sales to power generation customers
were broadly flat and sales to oil and gas
customers, principally through our Heatric
printed circuit heat exchanger business,
grew 11%.
We saw good growth in our industrial
valves business. Growth in our energy
condition-monitoring segment was,
however, hampered by a key raw material
shortage and some production issues
following the opening of our new facility
in Southern California in October. These
issues are now under control and we look
forward to resuming growth in this
business, augmented by the enhanced
functionality of our VibroSight® condition-
monitoring system which provides more
information, better analysis and new
decision support features to operators of
rotating machinery.
Our Heatric business continued to grow
nicely in 2013, with good progress made
against the significant contract wins we
have enjoyed in the last few years. This
business is characterised by large,
infrequent orders resulting in uneven
growth. We are confident, however, that
heightened activity levels in the FPSO and
FLNG markets will deliver further strong
growth over the next few years from the
£600 million pipeline of opportunities in
which we are actively engaged.
Our confidence in our positioning in
this market is reflected in our medium
term growth target of greater than 10%
per annum.
MEGGITT PLC REPORT AND ACCOUNTS 2013
STRATEGIC REPORT
GOVERNANCE REPORTS
FINANCIAL STATEMENTS SUPPLEMENTARY INFORMATION
11
11
Strategy insight
Deliver innovation
I want to build a complete valve out of
components made through 3-D printing,
strap it on a test engine and run it for
4,000 hours.
Stewart Chapman
Engineering Director,
Meggitt Control Systems, Dunstable, UK
Fêted as the next disruptive technology in an ever-growing
mound of press cuttings, Meggitt is already using 3-D
printing (additive layer manufacturing—ALM) for
aerospace components. To ensure the approach is not dispersed
and shallow, the Group’s research and technology team is
coordinating a project to ensure Meggitt’s in-house capability
counts, creating its own powders, forging its own design
methodology and, over the longer term, making its own
manufacturing equipment.
Over time, Meggitt believes the technology could be present in
many of its product lines, enabling more precise use of raw
materials, providing additional functionality and lowering
inventory as small, complex products are printed on demand.
For now, Meggitt is content to create a supply chain ready
to design and certify a product for a military jet, on point to
respond to its customers as the technology processes mature
and customers’ own ALM strategies coalesce.
MEGGITT PLC REPORT AND ACCOUNTS 2013 STRATEGIC REPORT FINANCIAL STATEMENTS SUPPLEMENTARY INFORMATION GOVERNANCE REPORTS 12 Meggitt divisions
Meggitt Aircraft Braking Systems
Revenue
(£ millions) 330.4
% of Group
revenue
20.2
A leading supplier of aircraft wheels,
brakes and brake control systems.
122.4
Underlying
operating
profit
(£ millions)
Markets
Capabilities
Civil aerospace
Fixed and rotary wing
military aircraft
Growth strategy
• Wheels and brakes
• Control—brake, nose wheel steering and landing gear
• Monitoring systems
• Aftermarket services
• Enhance complete landing gear sub-systems capability
• Secure sole source positions where possible on new
aircraft programmes
• Grow share of aftermarket
• Increase competitiveness, implementing Meggitt Production
System and increasing use of low-cost manufacturing
facilities
Meggitt Control Systems
Revenue
(£ millions) 205.6
% of Group
revenue
12.5
A leading supplier of pneumatic, fluid control,
thermal management and electro-mechanical
equipment and sub-systems.
Markets
Civil aerospace
Military aircraft and
ground vehicles
Energy, industrial
and marine
Ground fuelling
50.4
Underlying
operating
profit
(£ millions)
Capabilities
• Heat management
• Control valves and sub-systems
• Electro-mechanical controls
• Environmental control
• Fuel handling
Growth strategy
• Develop lightweight control systems for extreme
temperature and pressure environments to improve
aircraft performance
• Develop more products to increase the reliability and
efficiency of industrial gas turbines, developing our ability
to service them internationally
• Increase competitiveness, implementing Meggitt Production
System and increasing use of low-cost manufacturing
facilities
MEGGITT PLC REPORT AND ACCOUNTS 2013 13
Meggitt Polymers & Composites
Revenue
(£ millions) 181.0
% of Group
revenue
11.1
A leading specialist in fuel containment, engineered
aircraft sealing solutions and technical polymers,
electro-thermal ice protection and complex
composite structures and assemblies.
30.2
Underlying
operating
profit
(£ millions)
Markets
Capabilities
Civil aerospace
Military aircraft and
ground vehicles
Missile systems
and UAVs
Nuclear, marine, heavy
transportation and
oil and gas sectors
• 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
• Airframe, engine and oil & gas sealing solutions
Growth strategy
• Extend leading position in fuel tanks, developing complete
fuel sub-systems for helicopters and ground combat vehicles
• Develop more sealing solutions and electro-thermal ice
protection technology to secure attractive positions on civil
and military fixed wing aircraft
• Increase competitiveness, implementing Meggitt Production
System and increasing use of low-cost manufacturing
facilities
Meggitt Sensing Systems
Revenue
(£ millions) 240.4
% of Group
revenue
14.7
A leading provider of high-performance sensing
and condition-monitoring solutions for high-value
rotating machinery and other assets.
34.3
Underlying
operating
profit
(£ millions)
Markets
Capabilities
Civil aerospace
Military: fixed wing and rotary
aircraft, ships, missiles
Energy
Test and measurement
• High-performance sensing in extreme environments
• Condition-monitoring for air and land-based machinery
Growth strategy
• Accelerate growth in energy segment, launching innovative
new products and expanding sales and aftermarket services
in high-growth regional markets
• Develop leading-edge sensing and condition-monitoring
technologies for attractive aerospace applications
• Deploy advanced sensing knowledge and intellectual
property for high-growth medical ultrasound applications
• Increase competitiveness, implementing Meggitt Production
System and increasing use of low-cost manufacturing
facilities
MEGGITT PLC REPORT AND ACCOUNTS 2013 STRATEGIC REPORT FINANCIAL STATEMENTS SUPPLEMENTARY INFORMATION GOVERNANCE REPORTS 14 Meggitt divisions continued
Meggitt Equipment Group
Revenue
(£ millions) 679.9
% of Group
revenue
41.5
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.
Markets
159.9
Underlying
operating
profit
(£ millions)
Civil aerospace
Fixed and rotary wing
military aircraft
Defence and security
Energy
Automotive and industrial
Capabilities
Growth strategy
• 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 offshore oil and gas
• Power generation
• Linear motion control
• Aircraft safety and security
• Automotive and industrial control electronics
• Fire protection: deploy integrated fire detection and
suppression systems to secure sole source positions on new
platforms and continue to develop environmentally-friendly
aircraft fire protection systems
• Heat transfer: build on market-leading position in compact
and high-pressure heat exchangers for high-growth energy
markets
• Power: exploit capabilities in power generation, conversion
and storage for more electric aircraft
• Avionics: continue to build our position in state-of-the-art
secondary flight displays
• Training: grow our market-leading position in live and virtual
training systems for international customers in defence and
law enforcement markets
• Combat support: provide smart thermal management
solutions for military electronics systems and extend
automatic ammunition handling capability into larger calibre
weapons
• Increase competitiveness, implementing Meggitt Production
System and increasing use of low-cost manufacturing
facilities
MEGGITT PLC REPORT AND ACCOUNTS 2013
Principal risks and uncertainties
15
Meggitt’s risk management framework includes
a formal process for identifying, assessing and
responding to risk to support the delivery of the
Group’s strategy and business objectives.
Risk management operates at all levels
throughout Meggitt. The Board has overall
responsibility for risk management including
maintaining the Group’s risk governance structure
and an appropriate internal control framework.
Willis Risk Advisory Services have been appointed
to assist with a review of the existing risk
management processes against international
standards and guidelines and to advise on process
improvements, reporting and assurance.
During 2013, the Board approved an updated Risk
Management Policy, a Group Risk Management
Strategy and updated formats for regular Board
reports and the Group Risk Register. This was
supported by process and guidance documentation
detailing the revised Group-wide framework. The
implementation of an improved reporting and
communication process will ensure the revised
risk management framework is embedded
properly across the Group.
Change in risk in year
No change
Higher risk
Lower risk
Types of risk
Risk disclosure
We categorise and monitor risk across
strategic, operational, business
environment and financial categories.
• Strategic risk includes, for example,
risks arising from making poor
business decisions or sub-standard
execution of business objectives.
• Operational risk covers risk in our
business processes and programme
risk, relating to technical, quality,
project management or organisational
risk.
• Business environment risk arises
when external forces could significantly
change the fundamentals driving our
overall objectives and strategies.
• Financial risk encompasses key
financial functions including the
provision of adequate liquidity to meet
our obligations and management of
currency, interest rate, credit and other
financial risks.
Following our strategic review of the risk
management process in 2013, we have
evaluated our risk disclosure and have
focused this report on our most
significant risks. As a result, some of the
risks we disclosed in 2012 are no longer
included: risks relating to catastrophic
events, the environment, health and
safety, acquisitions, contract risk and
organisational structure. General
financial risks are no longer disclosed
here but are described in the Chief
Financial Officer’s review on pages 29 to
30, including foreign exchange risk to
reported results.
The risks outlined overleaf, which are not
presented in order of priority, are those
the Group believes are the principal ones
it currently faces. However, additional
risks, of which the Group is unaware, or
risks the Group currently considers to be
less significant, could have an adverse
impact.
Principal risks and uncertaintiesMEGGITT PLC REPORT AND ACCOUNTS 2013 STRATEGIC REPORT FINANCIAL STATEMENTS SUPPLEMENTARY INFORMATION GOVERNANCE REPORTS 16 Principal risks and uncertainties continued
Risk
Description and impact
How we manage it
Strategic
Business model
Failure to respond to fundamental
changes in the civil and military
aftermarket.
Impact: decreased revenue
and profit
• Long-term agreements are in place
• Customer-facing organisation restructured and boosted
• Investing in research and development to maintain and enhance
Meggitt’s intellectual property
• Ongoing strategic review of aftermarket including evaluation of
operational model
• Implementing Meggitt Production System (MPS) aftermarket module
across the Group
• Investment in maintenance, repair and overhaul facilities
Operational
Quality escape/
equipment failure
Defective product leading to
in-service failure, accidents, the
grounding of aircraft and prolonged
production shutdowns for Meggitt
and its customers.
Impact: decreased revenue
and profit, damage to reputation
and operational performance
• Well-developed verification, validation and system safety analysis policy
and processes in place
• Quality and customer audits and industry certifications
• Upgrading crisis management plans
• Implementing MPS across the Group
• Implementing an enhanced supplier quality assurance process
Customer
satisfaction
IT/systems
failure
Failure to meet customers’ cost,
quality and delivery standards or
qualify as preferred suppliers.
Impact: failure to win future
programmes, decreased revenue
and profit
• Achieve supplier “Gold” status or equivalent with key customers
• Step change in performance enabled through quality and delivery initiative
(now covered under the implementation of MPS)
• Implementation of programme lifecycle management process initiated
• Programme management reorganised to increase capability and focus on
programme delivery and governance
• Developing our commercial function and engineering capability
• Rolling programme of system upgrades (including SAP implementation)
to replace legacy systems
• Programme of IT security enhancements ongoing
• Reviewing existing systems, third party service providers and risks,
including resilience and disaster recovery processes and taking mitigating
action where appropriate
Prolonged malfunction of critical
systems such as SAP, due to
badly-executed implementation,
poor maintenance, change control,
business continuity and back-up
procedures; the failure of
third-parties to meet service level
agreements; or cyber attack.
Impact: decreased revenue
and profits, damage to
operational performance
Strategic objectives
Deliver innovation
Secure positions
on new platforms
Achieve operational
excellence
Provide through-life
product support
MEGGITT PLC REPORT AND ACCOUNTS 2013
17
Risk
Description and impact
How we manage it
Supply chain
Project/
programme
management
Legal and
regulatory
• Group procurement reviewing supply chain risk management framework
• Buffer inventory maintained for critical and sole-source suppliers
• Counterfeit and Fraudulent Parts Policy implemented at high-risk facilities
• Implementing integrated commercial and procurement approach to contractual
terms and conditions
Failure or inability of critical
suppliers to supply unique
products, capabilities or services
which causes the Group to be
unable to satisfy customers or meet
contractual requirements.
Impact: decreased revenue
and profit, damage to
reputation
Failure to meet new product
development and programme
milestones and certification
requirements.
Impact: significant financial
penalties leading to decreased
profit, damage to reputation
• Implementation of programme lifecycle management process initiated and
a range of engineering support applications developed
• Structured approach to maturing technologies implemented
• Deliver applied research and technology objectives in line with Group strategy
• Programme management reorganised to increase capability and focus on
programme delivery and governance
• Step change in performance enabled by quality and delivery initiative (which
is now covered under implementation of MPS)
Significant breach of increasingly
complex trade compliance, bribery
and corruption and ethics laws or
violating the terms of Meggitt’s 2013
Consent Agreement with the US
Department of State.
Impact: damage to reputation,
loss of supplier accreditations,
suspension of activity, fines from
civil and criminal proceedings
• Substantial investment in measures to ensure compliance with 2013 US
Department of State Consent Agreement, together with continuing investment
in other compliance programmes, means that the Board considers that this risk
has decreased during the year
• Trade compliance, ethics and anti-corruption policies approved by Board
• Implementing a trade compliance global IT solution
• Regular monitoring by the Ethics and Trade Compliance Committee
• Continue with trade compliance programme including external audits, and
comprehensive ethics programme including training, anti-corruption policy,
external audits and Ethics line
• Implementing import compliance programme in Americas and Europe/Asia
IT and physical
security
Failure to protect intellectual
property or other sensitive
information arising from cyber
attack or physical theft of IT and
business assets.
Impact: compromised market
position, damage to reputation,
financial or contractual liabilities
• Ongoing development of IT security strategy and enhancing IT security
infrastructure, policies and procedures
• Group-wide intellectual property protection programme in place
• Implementing physical security strategy, including audits, prioritising higher
risk environments and regions
Business
environment
Product demand
Significant variation in demand for
products should military and civil
business downcycles coincide, a
serious political, economic or
terrorist event take place or an
industry consolidation materially
change the competitive landscape.
Impact: volatility in underlying
profitability
• Monitoring of external economic and commercial environment and long
lead indicators
• Focus on balanced portfolio including expansion of energy-related businesses
• Regular communication of strategy to shareholders
• Maintenance of sufficient headroom in committed bank facilities and against
bank covenants
• Maintain appropriate cost-base contingency plans
MEGGITT PLC REPORT AND ACCOUNTS 2013 STRATEGIC REPORT FINANCIAL STATEMENTS SUPPLEMENTARY INFORMATION GOVERNANCE REPORTS
18
18
Key performance indicators
The Group uses a mix of financial and non-financial key
performance indicators (KPIs) to measure execution against
its strategic objectives. To ensure we deliver value to our
shareholders over the cycle, financial KPIs balance short-term
measures (underlying PBT and free cash flow in the year) with
longer-term measures (organic revenue growth, return on
trading assets and underlying EPS growth). Non-financial KPIs
focus on investment in R&D to drive future revenues, the health
and safety of our employees and raising standards of
operational performance to satisfy our customers.
Strategic objectives
Deliver innovation
Secure positions
on new platforms
Achieve operational
excellence
Provide through-life
product support
Organic revenue growth
%
15
10
5
0
-5
-10
-15
Definition and basis of calculation
Revenue growth calculated by measuring current and prior year revenue at constant
currency, excluding revenue from any businesses acquired or disposed of in those
periods. To measure revenue at constant currency, current year revenue is restated
using translation and transaction exchange rates prevailing in the prior year. See page
27 for a reconciliation of organic revenue to revenue.
Organic revenue growth better represents underlying business performance and has
replaced the previously reported revenue growth KPI which did not exclude the impact
of currency or mergers and acquisitions.
Target
Mid-single digit in 2014. 6 to 7% over the medium term.
Result
Achieved 1.4% (2012: 5.8%). Average achieved over last five years: 1.1%.
Average achieved over three years since target was set: 6.4%. See page 22
for details.
2009 2010 2011 2012 2013
Directors’ incentive plans
Organic revenue growth is proposed as a performance measure for the 2014
Long Term Incentive Plan (LTIP). See pages 50 to 51 for details.
Underlying PBT
£’m
400
400
300
200
100
0
2009 2010 2011 2012 2013
Definition and basis of calculation
Underlying PBT is reconciled to statutory measures in note 10 of the Group financial
statements. Prior year figures have been restated for the impacts of IAS 19 (Revised)
and the treatment of net interest expense on retirement benefit obligations as
described in note 44 of the Group financial statements.
Target
We do not publish profit targets.
Result
Achieved £377.8 million (2012: £366.0 million as restated). See page 24 for details.
Directors’ incentive plans
Underlying PBT is a performance measure in the 2013 and 2014 Short Term Incentive
Plan (STIP). For the purpose of these plans, underlying PBT figures are measured at
constant currency. See pages 49 and 51 for details.
MEGGITT PLC REPORT AND ACCOUNTS 2013
1919
Return on trading assets
%
50
40
30
20
10
0
2009 2010 2011 2012 2013
Underlying EPS growth
%
16
14
12
10
8
6
4
2
0
-2
2009 2010 2011 2012 2013
Definition and basis of calculation
Underlying operating profit after tax expressed as a percentage of average trading
assets. Underlying operating profit is defined and reconciled to statutory measures
in note 10 of the Group financial statements.
Trading assets are defined as net assets adjusted to exclude goodwill, other intangible
assets arising on the acquisition of businesses, net debt, retirement benefit
obligations, derivative financial instruments and deferred tax.
Average trading assets are calculated as the average of trading assets at the start and
end of the year.
Return on trading assets measures performance by linking operating performance
to management of working capital and capital investment. It replaces the previously
reported return on sales KPI.
Target
Slight reduction in the short-term due to projected high level of investment needed
to execute high volume of new platform contracts secured in recent years. Target is to
achieve an average return on trading assets of 34.5% over the next three years.
Result
Achieved 36.0% (2012: 40.8%). Average achieved over last five years: 36.9%. See page
28 for details.
Directors’ incentive plans
Return on trading assets is proposed as a measure for the 2014 LTIP. For the purpose
of this plan, underlying operating profit after tax and trading assets are measured at
constant currency. See pages 50 to 51 for details.
Definition and basis of calculation
The percentage change in underlying earnings per share (EPS) from the previous year.
Underlying EPS is reconciled to statutory measures in note 15 of the Group financial
statements.
Target
We do not publish profit targets. However, the proposed 2014 LTIP includes EPS targets
equivalent to growth ranging from 5 to 10% per annum over the next three years.
Result
Achieved 2.7% (2012: 13.7%). Average achieved over last five years: 7.2%. See page 27
for details.
Directors’ incentive plans
Underlying EPS is a performance measure used in the 2013 LTIP and is proposed as a
measure for the 2014 LTIP. For the purpose of these plans, underlying EPS is adjusted
to exclude the impact of scrip dividends. See pages 50 to 51 for details.
MEGGITT PLC REPORT AND ACCOUNTS 2013 STRATEGIC REPORT FINANCIAL STATEMENTS SUPPLEMENTARY INFORMATION GOVERNANCE REPORTS
20
20
Key performance indicators continued
Free cash flow
250
200
150
£’m
100
50
0
2009 2010 2011 2012 2013
R&D investment
%
10
8
6
4
2
0
2009 2010 2011 2012 2013
Accident/incident rate
500
400
300
%
200
100
0
2011 2012 2013
Definition and basis of calculation
Cash generated excluding amounts in respect of acquisition of businesses, disposal of
businesses and paid to shareholders. See page 29 for a reconciliation of free cash flow
to statutory measures.
Free cash flow replaces the previously reported cash conversion KPI.
Target
We do not publish free cash flow targets.
Result
Achieved £110.4 million (2012: £182.4 million). See page 28 for details.
Directors’ incentive plans
Free cash flow, as defined above, is a performance measure in the 2014 STIP. Free
cash flow adjusted to exclude capital expenditure was a measure in the 2013 STIP.
For the purpose of these plans, actual and target free cash flow figures are measured
at constant currency. See pages 49 and 51 for details.
Definition and basis of calculation
Investment in research and development (R&D) expressed as a percentage of revenue.
Investment is measured as total expenditure in the year and is not adjusted for
amounts capitalised or amortised. Investment is measured gross of funding received
from customers.
Target
Investment of 6 to 8% per annum. This range reflects investment fluctuation within the
industry cycle.
Result
Achieved 8.2% (2012: 7.6%). Average achieved over last five years: 7.6%. See page 28
for details.
Directors’ incentive plans
R&D investment is not a specific measure used in any directors' incentive plans.
However, the 2014 LTIP proposes to include measures focussed on R&D
programme management. See pages 50 to 51 for details.
Definition and basis of calculation
The number of injuries reportable under local laws and regulations multiplied by
100,000, divided by the average employee headcount during the year. The method of
calculation was revised in 2012 and it has not been practical to restate figures prior to
2011 on this basis.
Target
Year-on-year improvement with an ultimate goal of nil.
Result
2013: 317 (2012: 397). See page 33 for details.
Directors’ incentive plans
Health and safety performance is included in the personal objectives of two executive
directors.
MEGGITT PLC REPORT AND ACCOUNTS 2013
21
21
Reduction in defective
parts per million (DPPM)
2012 2013
0
-20
-40
%
-60
-80
-100
On-time delivery
improvement
%
15
12
9
6
3
0
2012 2013
Definition and basis of calculation
Defective parts per million (DPPM) for the year expressed as a percentage
improvement from that achieved at 31 December 2011, the date at which the Meggitt
Production System introduced this consistent method of measurement. DPPM is
defined as the number of defective parts returned by customers in the year multiplied
by 1,000,000 and divided by the total number of parts delivered.
Figures include the results of disposed businesses up to the date of sale and include
the results of acquired businesses from the later of the start of the financial year
following acquisition and the date the information is first available.
This new KPI monitors the success of the Meggitt Production System.
Target
To achieve the levels of performance excellence (e.g. sometimes referred to as
'Supplier Gold') expected by our customers. We use simple on-time delivery and
DPPM measures, aggregated at a Group level, to track overall progress towards
these objectives. Given the complexity and variety of customer metrics, driven by
the large number of customers we serve, we also track performance as reported
by our customers through their own supplier scorecards.
Result
Cumulative improvement since 31 December 2011: 54% (2012: 32%). See page 5
for details.
Directors’ incentive plans
DPPM is a measure used in the 2013 STIP and is proposed as a measure for the 2014
LTIP. For the purpose of these plans, it is measured by reference to the number of
sites achieving individual targeted reductions in DPPM. See pages 49 to 51 for details.
Definition and basis of calculation
Average on-time delivery achieved in the year expressed as a percentage
improvement from that achieved at 31 December 2011, the date at which the
Meggitt Production System introduced this consistent method of measurement.
Calculated as the 12-month average of the number of parts delivered on delivery
dates agreed with customers, divided by the total number of parts delivered.
Figures include the results of disposed businesses up to the date of sale and include
the results of acquired businesses from the later of the start of the financial year
following acquisition and the date the information is first available.
This new KPI monitors the success of the Meggitt Production System.
Target
To achieve the levels of performance excellence (e.g. sometimes referred to as
'Supplier Gold') expected by our customers. We use simple on-time delivery and
DPPM measures, aggregated at a Group level, to track overall progress towards
these objectives. Given the complexity and variety of customer metrics, driven by
the large number of customers we serve, we also track performance as reported
by our customers through their own supplier scorecards.
Result
Cumulative improvement since 31 December 2011: 10.1% (2012: 3.6%). See page 5
for details.
Directors’ incentive plans
On-time delivery is a measure used in the 2013 STIP and is proposed as a measure
for the 2014 LTIP. For the purpose of these plans, it is measured by reference to the
number of sites achieving individual targeted on-time delivery figures. See pages 49
to 51 for details.
MEGGITT PLC REPORT AND ACCOUNTS 2013 STRATEGIC REPORT FINANCIAL STATEMENTS SUPPLEMENTARY INFORMATION GOVERNANCE REPORTS
22 Chief Financial Officer’s review
Doug Webb Chief Financial Officer
Overall performance
Ongoing demand growth in civil original equipment and
energy was tempered by softness in civil aftermarket and
military, and operational challenges in the year caused a
further drag on growth. Revenue grew 2% and underlying
profit before tax grew 3%, driving a 3% increase in
underlying EPS to 37.5p. With a strong order book and an
improving trend in civil aftermarket, there is good
momentum going into 2014.
Financial highlights (Table 1)
2013
£’m
20121
£’m
Reported
% change
Organic
% change
Revenue
1,637.3
1,605.8
Underlying2:
EBITDA3
Operating profit
Profit before tax
Earnings per share (‘EPS’)
Statutory:
Operating profit
Profit before tax
Earnings per share (‘EPS’)
Free cash flow4
Net debt
479.3
397.2
377.8
37.5p
300.3
269.4
29.4p
110.4
564.6
466.2
392.1
366.0
36.5p
321.4
281.3
30.1p
182.4
642.5
+2
+3
+1
+3
+3
-7
-4
-2
-39
-12
+1
+2
0
+2
1 Restated for the effects of adopting IAS 19 (Revised) and also for underlying profit
measures, the treatment of pension interest. See note 44 of the Group financial statements
for further details.
2 Underlying profit and EPS are defined and reconciled to statutory measures in notes 10 and
15 respectively of the Group financial statements.
3 Underlying EBITDA represents underlying operating profit adjusted to add back
depreciation and amortisation.
4 Free cash flow is defined and reconciled to statutory measures in note 40 of the Group
financial statements.
Revenue
Total revenue increased by 2% to
£1,637.3 million. As Table 2 (see page 24)
demonstrates, softness in civil aftermarket
and military were compensated for by
strong growth in civil original equipment
(OE). Organic growth was 1% after
adjusting for the effects of acquisitions,
disposals and foreign exchange.
Total civil aerospace revenue grew 3%
(organic: 4%), with strong organic growth
in OE of 11%, predominantly on large jets,
compensating for lower than expected
growth in aftermarket (AM). The AM
weakness was largely as a result of the
continuation of the destocking seen in
2012, although the growth trend improved
as the year progressed, with organic
growth of 2% and 3% respectively in
Q3 and Q4.
Total military revenue declined by 1%
(organic: -3%), reflecting the anticipated
effect of the drawdown from Afghanistan,
a slowdown in orders in our defence
systems business and the substantial
completion of two large retrofit
programmes, partly offset by good
growth in our training business,
particularly outside the US.
Total energy revenue increased by 5% in
2013 (organic: +5%). The favourable
demand environment for our printed
circuit heat exchangers continued, with
Heatric growing 11% in the year, although
order and milestone timing impacted
revenue in the second half. We saw good
growth in demand for our innovative valve
technology for the power generation
market. Our revenue from energy
condition monitoring was negatively
impacted in the second half by the
previously announced operational
challenges encountered during the
consolidation of our two US-based sensor
businesses into a new west coast facility,
and shortage of an important raw
material. However, the market remains
robust and we are confident that these
issues are now under control. Our
medium term expectation remains that
our energy businesses will grow at
greater than 10% per annum over the
next few years.
Total revenue from other markets grew
9% in 2013 (organic: +1% after adjusting
for the Piezotech acquisition), with good
growth in medical revenue offsetting
weakness in laboratory test and
measurement equipment.
MEGGITT PLC REPORT AND ACCOUNTS 2013
Strategy insight
Secure positions
on new platforms
23
If it was a flexible fuel tank you wanted,
our name was on it. Now, after
collaborating with experts from our
Control Systems division, we can put
Meggitt’s name to complete fuel systems.
That’s what organic growth is all about,
building value from within.
John Skubina
Vice President,
Meggitt Polymers & Composites
Meggitt has won a long-term contract starting now and
running until 2030 for the Sikorsky S-92® helicopter
sponson fuel system. It is based on an innovative
combination of Meggitt’s extreme environment composites, fuel
and fluid control technologies. Of course, innovation gets you
the attention but you won’t go far in our markets without the
trust built up from industry relationships and experience
spanning decades.
with the flexibility to withstand the stresses and strains of
take-off and landing.
Virtually every US military aircraft carries the ballistically-
resistant and crashworthy fuel tanks we introduced 25 years
ago. Today, we’re making a name for ourselves in IED-resistant
fuel tanks for ground vehicles.
We launched our long-life, lightweight bladder fuel cell
technology 30 years ago, pioneering inner liners that do not dry
out and become fatally brittle when empty for extended periods,
That’s why, when we make the leap from component to system,
the makers of a helicopter certified to the most stringent safety
requirements of the Federal Aviation Administration know our
landing will be sure.
MEGGITT PLC REPORT AND ACCOUNTS 2013 STRATEGIC REPORT FINANCIAL STATEMENTS SUPPLEMENTARY INFORMATION GOVERNANCE REPORTS
24
Chief Financial Officer’s review continued
Revenue growth (Table 2)
Civil OE
Civil AM
Total civil
Military
Energy
Other
Total
Profit
The Board’s preferred measure of the
Group’s trading performance is underlying
profit. Underlying operating profit for the
year grew 1% to £397.2 million (2012:
£392.1 million). Headwinds included the
mix effect of civil OE growing faster than
civil AM, increased investment in the
Meggitt Production System and some
previously announced operational
challenges encountered in the third
quarter. These were offset by good
progress on a legacy product liability issue
and renegotiation of a loss-making
contract, both of which had previously
been provided for, resulting in an operating
margin of 24.3% (2012: 24.4%).
Underlying net finance costs decreased
to £19.4 million (2012: £26.1 million) as
a result of cash generation and lower
interest rates, including the benefit from
the refinancing of maturing fixed rate
private placement notes by lower rate
bank debt.
Underlying profit before tax increased by
3% to £377.8 million (2012: £366.0 million).
On a statutory basis, profit before tax
decreased by 7% to £300.3 million (2012:
£321.4 million), largely as a result of a
£20.0 million exceptional charge to cover
costs associated with the supply from a
vendor of non-conforming raw material in
one of our businesses, as communicated
Operational highlights (Table 3)
Revenue
2013
£’m
330.4
205.6
181.0
240.4
679.9
2012
£’m
311.2
214.9
187.2
240.2
652.3
1,637.3
1,605.8
Growth
%
6.2%
-4.3%
-3.3%
0.1%
4.2%
2.0%
Organic
growth1
%
4.7%
1.6%
-4.6%
-2.2%
2.7%
1.4%
Meggitt Control Systems (MCS) designs
and manufactures products which
manage the flow of liquids and gases
around gas turbines (both aerospace and
industrial), and control the temperature
of oil, fuel and air in aircraft. Its valve
business also supplies industrial and
airport ground fuelling products. The
division represents 13% of Group revenue
and generated 53% of its revenue from OE
and 47% from the aftermarket.
MCS reported revenue declined 4% in
2013. On an organic basis (including
adjusting for the disposal of the Meggitt
Addison business during 2013 and the
Meggitt Simi business in 2012), MCS
revenue grew 2%, with strong civil OE
(+8%) and energy (+14%) growth more
than offsetting modest declines in civil
AM (-2%) and military (-4%). The strong
growth in civil OE was driven by large
jets, reflecting the increased deliveries by
the major manufacturers. Civil AM
weakness resulted from a continuation of
the destocking seen in 2012. Operating
margins improved from 23.2% to 24.5%
benefiting from favourable progress on a
legacy product liability issue and
following the disposal of the relatively
lower margin cabin air conditioning
business during the year.
Meggitt Polymers & Composites (MPC)
has a strong military focus, representing
60% of its revenue. It supplies flexible
bladder fuel tanks, ice protection
products and composite assemblies for a
range of fixed wing and rotary aircraft and
complex seals packages for civil and
military platforms. These market
segments are linked by their dependence
on similar materials technology and
manufacturing processes. MPC
represents 11% of Group revenue.
2013
Revenue
£’m
300.3
435.9
736.2
616.4
173.1
111.6
1,637.3
Growth
%
+7
+1
+3
-1
+5
+9
+2
Organic
growth
%
+11
0
+4
-3
+5
+1
+1
in the interim management statement in
November 2013.
Operational highlights (Table 3)
Meggitt Aircraft Braking Systems (MABS)
provides wheels, brakes and brake control
systems for over 30,000 in-service aircraft
and continues to develop innovative
technology for new programmes including
tyre pressure monitoring, auto-braking
capability and steering and landing gear
control systems across a broad range of
programmes. The division targets sole
source programmes and is particularly
strong in regional aircraft and business
jets. MABS represents 20% of Group
revenue, generating 86% of its revenue
from the aftermarket and 14% from
OE sales.
MABS civil AM revenue (65% of divisional
total) grew by 3% in 2013 with growth in
regional aircraft and large jets offsetting a
modest decline in business jets resulting
from a significant destocking at one of our
major customers. Civil OE saw strong
growth, mainly from the sale of electronic
brake control systems and A380
components. Military revenue saw a
modest increase owing in part to good
growth in Blackhawk spares for the US
DoD. Operating margins moved from
37.6% to 37.0% reflecting the growth in
lower margin military and civil OE sales.
Aircraft Braking Systems
Control Systems
Polymers & Composites
Sensing Systems
Equipment Group
Underlying operating profit2
2012
£’m
117.1
49.8
33.8
36.2
155.2
392.1
Growth
%
4.5%
1.2%
-10.7%
-5.2%
3.0%
1.3%
Organic
growth1
%
3.5%
7.1%
-12.4%
-13.5%
2.1%
0.4%
2013
£’m
122.4
50.4
30.2
34.3
159.9
397.2
1 Organic growth excludes the impact of M&A and currency and is reconciled in Table 4.
2 Restated for the effects of adopting IAS 19 (Revised) and the treatment of pension interest. See note 44 of the Group financial statements for further details.
MEGGITT PLC REPORT AND ACCOUNTS 2013
25
Strategy insight
Achieve operational
excellence
I’ve seen my world turned upside
down by the Meggitt Production System
—and it’s all the better for it.
Lee Barnes
Production Manager, Meggitt Avionics
Meggitt Production System does turn a workplace on
its head. Management, team leaders, production
supervisors, all must support the people who make
things and get them out of the door. But Lee Barnes is referring
to his own personal MPS journey.
gathering and morning meetings? Hadn’t he seen all this
before? But then, as each new doubt started to form in his
mind, there’d be a twist that defused it; something that neatly
turned the nice-but-theoretical into a sustainable, practical,
powerful improvement.
At first MPS just didn’t add up for Lee. Wasn’t he already focused
on supporting the shopfloor? Where was the time for all the KPI
Four days in and Lee knew he’d been wrong about MPS all along.
It is different and Lee couldn’t be more pleased to admit it.
MEGGITT PLC REPORT AND ACCOUNTS 2013 STRATEGIC REPORT FINANCIAL STATEMENTS SUPPLEMENTARY INFORMATION GOVERNANCE REPORTS
26
Chief Financial Officer’s review continued
Strategy insight
Provide through-life
product support
A third of new airliner deliveries are
destined for the Asia Pacific over the next
decade, so opening our new aftermarket
facility in Singapore couldn’t be more
timely or its scope more appropriate.
Walk down our central aisle and when
you reach the end, you will have seen
virtually all Meggitt’s capability.
Adrian Plevin
Vice President and General Manager,
Meggitt Aerospace Asia Pacific
We ask the airline operators to send their products home
for maintenance. That’s because, as the maker of those
products, we have the control data at our fingertips to
provide optimal repairs and advice. And beyond skilled
maintenance, Meggitt’s approach to the aftermarket is about
going the extra mile, making special logistics arrangements,
training technicians to get the best from our products and even
adding capability for third-party repairs when our customers
ask us to.
We work with the world’s premier carriers who have selected
us as their strategic partner and we work with owner-operators,
distributors and parts brokers. All benefit from the fail-safe
service that arises from our consistent management and
production processes.
That’s because our people are fundamental to the dynamic
process that places customers at the heart of our operations.
The Meggitt Production System—which encapsulates the Group’s
approach to lean manufacturing and continuous improvement
—is enhancing this, enabling us to respond with ease to rising
demand from the region—and the industry as a whole—in an era
of unprecedented new programmes. In short, we’re ready.
MEGGITT PLC REPORT AND ACCOUNTS 2013
Organic growth (Table 4)
2013
£’m
1,637.3
(44.3)
(19.0)
Revenue
2012
£’m
1,605.8
(53.1)
-
Growth
%
2.0%
Reported
Impact of M&A1
Impact of currency2
1,574.0
1,552.7
1.4%
Organic
1 Excludes the results of businesses acquired or disposed of during the current and prior year.
2 Restates the current year using 2012 translation and transaction exchange rates.
27
Underlying profit before tax
2013
£’m
377.8
(3.3)
(8.4)
366.1
2012
£’m
366.0
(8.0)
-
358.0
Growth
%
3.2%
2.3%
Reported revenue in MPC declined 3%
(organic: -5%). Civil revenue grew by 11%
on an organic basis, with sales of polymer
seals for large jets and composites for
helicopters growing particularly strongly.
As expected, military revenue declined
following substantial completion of the
KC135 and Bradley fuel tank retrofit
contracts during the second half. These
programmes contributed £16.5 million to
revenue during 2013 (2012: £29.6 million).
Operating margins moved from 18.1% to
16.7% reflecting strong growth in the
lower margin civil OE products replacing
military work, and lower sales of higher
margin ice-protection products.
Meggitt Sensing Systems (MSS) designs
and manufactures highly engineered
sensors to measure a variety of
parameters such as vibration,
temperature, pressure, fluid level and
flow. Its products are designed to operate
effectively in the extreme conditions of
temperature, vibration and contamination
that exist in an aircraft or on ground-based
turbines. Sensors are combined into
broader electronics packages, providing
condition data to engine operators and
maintenance providers, contributing to
improved safety and lower operating
costs. MSS has migrated these products
into other specialist markets requiring
similar capabilities, such as test and
measurement, automotive crash test and
medical pacemakers. It has also teamed
with MABS, winning a number of new
commercial tyre pressure monitoring
system contracts. This progresses the
strategy to apply our condition-monitoring
capability beyond engines to structural
parts of aircraft, where we see a
considerable market opportunity. MSS
represents 15% of Group revenue and
generated 80% of its revenue from OE and
20% from the aftermarket. MSS revenue is
split 39% civil aerospace, 19% military and
42% energy and other, of which the
majority is energy.
MSS reported revenue was flat in the year,
(organic: -2%, stripping out the effect of
the Piezotech acquisition) with growth in
military and medical products largely
offsetting a decline in energy where the
shortage of tourmaline limited the sales of
some high margin components. MSS also
experienced operational challenges
associated with the consolidation of two
US factories into one new facility in the
second half. A solution to the tourmaline
shortage is in process, and will be
substantially complete by the end of the
first half. Civil OE revenue saw good
growth, offset by a decline in civil AM.
Operating margins declined to 14.3%
(2012: 15.1%) as a result of the operational
challenges and OE/AM mix.
Meggitt Equipment Group (MEG)
comprises a technologically diverse
range of businesses (including PacSci),
each of which has differentiated
capabilities and a specific focus, ranging
from fire protection systems through to
sophisticated electronics and electro-
mechanical components and sub-
systems. The division represents 41%
of Group revenue and generates
approximately 70% of its revenue from
OE and 30% from the aftermarket.
Reported revenue in MEG was up 4% on
last year (organic: +3% including
adjusting for the sale of Sunbank in
December 2013 and the acquisition of
Precision Micro in 2012). Civil aerospace
increased by 4% on an organic basis
driven mainly by demand for large jet OE
products, and energy grew 11% as a
result of continued good performance at
our Heatric printed circuit heat exchanger
business. Energy revenue growth was
skewed towards the first half, reflecting
the exceptional growth in the second half
of 2012. Military revenue was broadly flat
in the year, with good growth in the
training businesses offsetting a decline
in defence systems. Operating margins
remained broadly flat at 23.5% (2012:
23.8%), with incremental synergies from
the PacSci acquisition and the
renegotiation of a loss-making contract
against which a provision had been held
largely offsetting unfavourable mix.
Taxation
Meggitt’s underlying tax rate benefited
from a one-off research and development
credit in the US, reducing slightly to 21%
(2012: 22%). We continue to expect an
underlying rate of 22% in the medium
term based on our current business mix.
Cash tax paid as a percentage of
underlying profit was 12% (2012: 9%). The
rate of cash tax paid is lower than our
underlying tax rate due to tax deductible
items which do not affect underlying
profit, including goodwill amortisation
and tax relief on retirement benefit deficit
reduction payments.
Our statutory tax rate, which includes
items excluded from underlying profit
was 14% (2012: 16%).
Earnings per share (EPS)
Underlying EPS increased by 3% to 37.5
pence (2012; 36.5 pence). An increase in
shares in issue, which includes the 21%
take up of scrip dividend on 2013 dividend
payments, offset the benefits of the lower
tax rate and resulted in EPS growth being
in line with the growth in underlying profit
before tax.
Statutory EPS declined 2% to 29.4 pence
(2012: 30.1 pence). The decline is smaller
than that in statutory profit before tax
with the reduction in statutory tax rate
more than offsetting the higher number of
shares in issue.
Dividends
The Board has increased the
recommended final dividend to 8.80 pence
(2012: 8.20 pence) which would result in
an 8% increase in the full-year dividend to
12.75 pence (2012: 11.80 pence).
MEGGITT PLC REPORT AND ACCOUNTS 2013 STRATEGIC REPORT FINANCIAL STATEMENTS SUPPLEMENTARY INFORMATION GOVERNANCE REPORTS
28
Chief Financial Officer’s review continued
Building future growth
The key pillars of our strategy are to
deliver innovation, secure positions on
new platforms in our chosen markets,
develop and sustain a culture of
operational excellence and provide our
customers with world-class through-life
support.
Innovation and technology development
are aimed at adding new capabilities to
our portfolio in response to customer
requirements. During 2013, investment in
R&D totalled £134.9 million or 8.2% of
revenue (2012: £122.0 million, 7.6%), of
which 18% was funded by customers. This
is our highest ever level of R&D, and
above our normal range of 6-8% of
revenue, reflecting the very strong
win-rate on new programmes. Areas of
focus in 2013 included advancement on a
number of wheel and brake technologies
including electrically actuated braking
and tyre pressure monitoring systems,
developing our helicopter fuel system
technology in line with Sikorsky’s
requirements on the S92 programme, and
the development of an environmentally
responsible fire suppression technology
to replace the use of halon as a
suppressant in aerospace applications.
We also continue to invest in transferring
our core aerospace technologies across
adjacent markets, and developing
manufacturing techniques including
additive manufacturing to enhance our
prototyping and manufacturing
capabilities.
Analysis of R&D costs (Table 5)
Total R&D expenditure
% of revenue
Customer-funded R&D
Capitalised
Amortisation
Charge to income
statement
2013
£’m
134.9
8.2%
(24.5)
(70.2)
16.9
2012
£’m
122.0
7.6%
(24.9)
(52.2)
11.6
57.1
56.5
2013 saw the launch of our global
approach to continuous improvement—
the Meggitt Production System—which is
already delivering tangible improvements
in quality and delivery and which will,
over the long term, create a sustainable
competitive advantage based on our
manufacturing and programme
management capabilities. We will also
become more cost competitive through
the reduction in rework costs and
working capital.
Finally, we continue to invest in our
product support capability. In 2013, we
opened our new repair and overhaul
centre in Singapore, doubling our capacity
and adding more Meggitt product lines,
and launched a major review of the
optimal way to deploy Meggitt’s growing
aftermarket capability to our global
customer base.
Cash flow and borrowings
Free cash flow of £110.4m (2012: 182.4m)
reflects continued investment in R&D and
capital expenditure as well as higher
working capital due to the lower than
anticipated revenue growth, delayed
customer receipts and the timing of
milestones in our Heatric business.
Net cash generated of £63.2 million (2012:
£116.7 million) reflects the increases in
R&D, capital expenditure and working
capital referred to above, partially offset
by net proceeds from M&A of £25.9
million (2012: £5.2 million). Net debt
decreased by 12% to £564.6 million (2012:
£642.5 million).
To reflect the Board’s focus on efficient
deployment of manageable capital, we
have introduced a new Return on Trading
Assets (ROTA) key performance indicator,
which we track at both Group and
individual business level. ROTA moved to
36.0% in 2013 (2012: 40.8%) reflecting the
investments in R&D, capital expenditure
and working capital during the year.
Meggitt invested a further £35.7 million
(2012: £36.1 million) in supplying equipment
free of charge to new aircraft and making
programme participation contributions,
mostly in MABS, and we expect this to grow
in the medium term as new regional
aircraft and business jets equipped with our
wheels and brakes are delivered.
Our leading edge capabilities incorporating
high levels of embedded intellectual
property, and our lengthy pedigree in our
chosen markets, enable us to secure
strong positions on new programmes such
as the Dassault Falcon 5X announced in
the second half of 2013. We target
specialist applications where we can
generate revenue from original equipment,
with annuity-like maintenance, overhaul,
spares and repair revenue for the life of
programmes, which can last for decades.
As our products are spread over multiple
platforms and markets, we are not
dependent on single programmes,
customers or regions.
Capital expenditure on property, plant
and equipment and other intangible
assets increased to £66.9 million (2012:
£63.2 million). There has been substantial
investment in our manufacturing facilities
during 2013. We have consolidated six
factories into three larger, more efficient
facilities, and have built additional
capacity in some of our businesses to
meet future growth requirements.
Examples of capacity growth include
further investment at our Heatric printed
circuit heat exchanger business in the UK
and new, larger facilities for our power
storage business in North America and
our sensor business in Denmark. We have
also continued to invest in the roll-out of a
common ERP system across the Group.
We believe superior performance on
quality and delivery are the building blocks
of future growth. As our customers
continue to raise the bar, we are
intensifying our investment in facilities,
production systems, programme
management and people. These
investments ensure that we will continue
to meet our customer expectations, and
will further strengthen our customer
partnerships.
MEGGITT PLC REPORT AND ACCOUNTS 2013
29
Movement in net debt (£’m) (Table 6)
Cash flow from operations before exceptional operating costs
Exceptional operating costs excluding M&A costs
Interest and tax
Capitalised development costs/programme participation costs
Capital expenditure
Free cash flow
Net proceeds from M&A
Net amounts payable to shareholders
Net cash generated
Debt acquired with businesses
Currency movements
Other non-cash movements
Opening net debt
Closing net debt
2013
2012
361.9
(15.3)
(63.4)
(105.9)
(66.9)
110.4
25.9
(73.1)
63.2
(0.3)
2.7
12.3
(642.5)
(564.6)
408.8
(12.4)
(62.5)
(88.3)
(63.2)
182.4
5.2
(70.9)
116.7
(0.4)
33.9
(4.3)
(788.4)
(642.5)
Debt structure and financing
The Group’s borrowings comprise a
combination of US private placement debt
and syndicated bank credit facilities.
During the year, the Group repaid, out of
existing facilities, expiring US $180
million private placement notes. There
were no other changes in facilities
available to the Group in the year. As at
31 December 2013, the Group had
undrawn committed credit facilities of
£504 million after taking account of
surplus cash (2012: £557 million). More
than 96% of the Group’s existing
committed facilities expire after 2015.
Facility headroom (£’m) (Table 7)
1,500
1,200
900
600
300
Headroom £504 million
Net debt
£565 million
00
2013
2014
Fixed rate
2015
2016
Floating rate
2017
2018
Debt financing risks
The Group seeks to minimise debt
financing risk as follows:
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 at
least £200 million of undrawn committed
facilities, net of cash, 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 seek to ensure the maturity of our
facilities is staggered and refinancings
are concluded in good time, typically
more than 12 months before expiry.
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.
Net debt by drawn currency (£’m) (Table 8)
2012
2013
a. Concentration of risk
We raise funds through private placement
issuances and committed bank facilities
to reduce reliance on any one market.
Bank financing is sourced from around 15
international institutions spread across
North America, Europe and Asia. No
Sterling
US dollar
Euro
Swiss franc
Other
Net debt
(21.2)
462.9
53.9
78.9
(9.9)
(19.1)
592.1
(10.2)
88.6
(8.9)
564.6
642.5
e. Covenant risk
Meggitt’s committed credit facilities
contain two financial ratio covenants—
interest cover and net debt to EBITDA.
The covenant calculations are drafted to
protect us from 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 for the
year and excluding exceptional items from
the definition of EBITDA. We continue to
have considerable headroom on both key
financial covenant measures.
Covenant ratios (Table 9)
Covenant
2013
2012
Net debt/EBITDA ≤3.5x
≥3.0x
Interest cover
1.2x
22.0x
1.3x
16.2x
Interest risk
Meggitt seeks to reduce the volatility
caused by interest rate fluctuations on net
debt. 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 2013, the
percentage of net debt at fixed rates was
46% (2012: 43%) and the weighted
average period to maturity of the first
25% was 5.4 years (2012: 5.4 years).
Foreign exchange risk
The Group is exposed to both translation
and transaction impacts due to changes
in foreign exchange rates. These risks
principally relate to the US dollar/Sterling
rate, although exposure also exists in
relation to other currency pairs including
the US dollar/Swiss franc and US
dollar/Euro.
The results of overseas businesses are
translated into sterling at weighted average
exchange rates. Compared to 2012, the
Group’s underlying profit before tax for
the year benefited by £4.7 million from
currency translation of which £3.4 million
arose on US dollar denominated profits and
MEGGITT PLC REPORT AND ACCOUNTS 2013 STRATEGIC REPORT FINANCIAL STATEMENTS SUPPLEMENTARY INFORMATION GOVERNANCE REPORTS
30
Chief Financial Officer’s review continued
the balance on other currencies. Each five
cent weakening of the US dollar versus the
2013 average rate of £1:$1.57 will adversely
impact 2014 revenue by approximately
£35 million, with the converse also being
true. The sensitivity of 2014 underlying
profit before tax to a five cent move in
the translation rate is approximately
£8.0 million.
The net assets of overseas businesses
are translated into sterling at year end
exchange rates. The resultant exchange
rate exposure is mitigated through
holding our net debt principally in the
currencies of those businesses.
Transaction risk arises where revenues
and/or costs of our businesses are
denominated in a currency other than
their own. We hedge 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 2012, the Group’s underlying
profit before tax for the year benefited by
£3.7 million from currency transaction
movements, of which £1.6 million relates
to US dollar/Sterling exposure and the
balance to other currency pairs. Each five
cent movement of the US dollar versus
the 2013 average hedged rate of £1 =
$1.62 impacts underlying profit before
tax by approximately £2.5 million. At
31 December 2013, $/£ cover for
estimated 2014 exposure was 100%
hedged at an average rate of $1.53 and
we have covered approximately 50% of
our $/£ exposures for the next three
subsequent years at an average rate
of $1.56.
Exchange rates (US$/£) (Table 10)
Average translation rates
Average transaction rates
Year-end rates
2013
1.57
1.62
1.66
2012
1.59
1.66
1.63
Post-retirement benefit schemes
The Group’s principal defined benefit
pension schemes are in the UK and US
and are closed to new members.
The total pension scheme deficits reduced
to £189.8 million (2012: £241.2 million).
Net of deferred tax, the deficits reduced
to £139.9 million (2012: £169.3 million).
The main drivers of the reduction were:
• Net deficit reduction payments of
£26.7 million (2012: £22.8 million).
Regulations in the UK and US require
repayment of deficits over time. In the
UK, the 2012 triennial actuarial
valuation was finalised during 2013 and
a repayment plan agreed with the
trustees. Under this agreement, the
Group commenced making increased
deficit payments from April 2013 with
amounts due to gradually increase over
the period to 2024. In the US, the level
of deficit payments is principally driven
by regulations. Amounts required to be
paid decreased slightly in the year and
are expected to remain relatively flat in
2014. Overall, the Group expects deficit
contributions to increase to £30.6
million in 2014.
• An actuarial gain on scheme assets of
£25.5 million (2012: £28.8 million)
principally driven by the continued
global recovery in equity markets.
Defined benefit pension scheme summary (£’m) (Table 11)
Opening net deficit
Service cost
Group cash contributions
Net deficit reduction payments
Other amounts charged to income statement1
Actuarial gains – schemes’ assets
Actuarial (gains)/losses – schemes’ liabilities
Currency movements
Closing net deficit
Assets
Liabilities
Closing net deficit
Funding status
2013
241.2
12.7
(39.4)
(26.7)
11.4
(25.5)
(10.6)
–
189.8
688.4
878.2
189.8
78%
2012
265.4
12.3
(35.1)
(22.8)
13.7
(28.8)
18.6
(4.9)
241.2
634.7
875.9
241.2
72%
1 Comprises past service costs, administration expenses borne directly by schemes and net finance costs.
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 £48.3 million
(2012: £58.5 million). The main driver of
the reduction was the increase in AA
corporate bond rates used to measure
scheme liabilities. Deficit payments
during the year were £0.7 million (2012:
£2.2 million).
In 2013, the Group adopted IAS 19
(Revised 2011) which changed the
calculation of certain items of pension
expense. In addition, the definition of
underlying profit measures was amended
to exclude net pensions interest. Details
of these changes are provided in note 44
of the Group financial statements.
Going concern
The Group’s business activities are
described on pages 8 to 14 which include
those factors most likely to affect its
future development, performance and
position. The financial position of the
Group is set out in this report and
additional information is provided in the
financial statements including note 3
(Financial risk management), note 28
(Bank and other borrowings) and note 30
(Derivative financial instruments). Details
of the principal risks and uncertainties to
which the Group is exposed, and the
mitigation plans in place, are set out on
pages 15 to 17.
The Group describes in the Strategic
report on pages 4 to 7 its cash generative
business model designed to deliver
organic revenue growth of 6-7% in the
medium term and its resilience to one-off
global shock events. The Group continues
to be cash generative even at the current
peak in the investment cycle, has
considerable headroom against existing
bank facilities and covenants and there is
no material facility expiry before 2016.
Accordingly, 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 Group and
Company financial statements.
MEGGITT PLC REPORT AND ACCOUNTS 2013
Corporate responsibility
31
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
We are committed to:
• upholding sound corporate governance
principles;
• providing a supportive, rewarding and
safe working environment with modern
operational practices;
• conducting business relationships in an
ethical manner;
• minimising the environmental impact of
products and processes and
maintaining internationally-accredited
environmental management systems;
• independent audits in key compliance
areas;
• acting as a responsible supplier and
encouraging our contractors and
suppliers to do the same;
• supporting our local communities; and
• professional and comprehensive
employee training programmes.
Governance and compliance
Health, safety and environment (HSE),
ethics and business conduct and trade
compliance are managed by a highly
experienced team of functional
specialists, under the leadership of the
Corporate Affairs Director. Divisional
presidents and site directors are
responsible for implementing policies
and programmes locally.
The Board has approved policies on
corporate responsibility, health and
safety, environment, ethics and business
conduct and trade compliance, and these
are available on our website.
The Board has an Ethics and Trade
Compliance Committee, which meets
quarterly to discuss these programmes in
detail. HSE matters are reviewed and
discussed at every Board meeting.
2013 Activity
Environment
Meggitt strives to achieve the highest level
of environmental performance throughout
our businesses based on standards and
procedures set by Group leadership. 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.
Our global environmental audit
programme, supported by external
consultants, includes a comprehensive
review of applicable regulatory
requirements and best practice standards
at all manufacturing facilities every
three years. In total, 11 sites were
audited in 2013.
78% of our manufacturing facilities had
achieved ISO 14001 standard certification
by the end of 2013. All facilities should
achieve certification by the end of 2014.
Performance
Table 1 shows our performance for
key environmental metrics. Site
consolidations, which reduced floor space,
and gas efficiency initiatives completed at
our aircraft braking systems facilities in
Akron, USA and Coventry, UK contributed
to a drop in gas consumption relative to
revenue in 2013.
The fall in water consumption relative to
revenue is attributable to water
conservation measures implemented at
many of our facilities. For example, water
recirculating systems installed at our
North Hollywood, US facility resulted in a
57% decrease in water consumption on
2012. One of our facilities in Oregon, US
installed thermostatically-controlled
water recirculation systems saving 50% of
the water normally used in mould-cooling
tanks.
The rise in total waste was due, primarily,
to non-recyclable construction debris as
a result of site consolidations and from
waste produced by the Precision Micro
facilities acquired in 2012.
Although site consolidations generate
additional waste, our site consolidation
projects always include plans to minimise
our environmental impact and waste. Our
contractors for the site consolidation at
Orange County, US diverted more than
70% of waste generated to a recycling
facility and were selected partly on the
basis of their environmental and waste
management credentials.
Environmental metrics1 (Table 1)
Utilities
Electricity – gWh
MWh per £m revenue
Natural gas – gWh
MWh per £m revenue
Carbon dioxide (CO2)1 – tonnes at 2012 rates
Tonnes per £m revenue
Waste – tonnes
Tonnes per £m revenue
Water – cubic metres
Cubic metres per £m revenue
2013
Change
2012
192
120
183
115
133,661
83.6
14,182
8.87
744,196
466
188
119
199
126
134,444
84.9
12,861
8.12
806,941
510
1%
-9%
-2%
9%
-9%
1 Metrics per £m are calculated using revenue converted at constant exchange rates. CO2 emissions
are calculated using conversion factors published in the 2012 Guidelines to DEFRA/DECC’s GHG
Conversion Factors for Company Reporting. Conversion factors capture only CO2 emissions from
Scope 1 and 2 emissions.
MEGGITT PLC REPORT AND ACCOUNTS 2013 STRATEGIC REPORT FINANCIAL STATEMENTS SUPPLEMENTARY INFORMATION GOVERNANCE REPORTS
32 Corporate responsibility continued
Targets (Table 2)
CO2 emissions
Gas
Electricity
Water consumption
Waste to landfill
Waste recycled
Baseline year
Five year
performance period
Target
improvement over
(financial years) performance period
Achieved
as at
31.12.2013
2009
2011
2011
2011
2011
2011
To 31 December 2014
To 31 December 2016
To 31 December 2016
To 31 December 2016
To 31 December 2016
To 31 December 2016
-15%
-15%
-15%
-10%
-10%
+10%
-15.20%
-13.53%
+5.26%
-3.52%
-8.22%
-10.48%
REACH
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 continues to
address the risks associated with the
potential obsolescence of chemicals used
by aerospace manufacturers. We
continuously track substances regulated
under REACH and work closely with our
chemical suppliers to ensure substances
are registered and will be approved for
continued use, or a suitable alternative
identified.
Obsolescence
In 2013, our Obsolescence Review Board
(ORB) was instrumental in addressing the
potential impact of new US legislation on
conflict minerals, establishing protocols
for understanding how materials are
sourced and their paths into our
manufacturing facilities and products.
The ORB developed a Counterfeit and
Fraudulent Material Avoidance Policy
requiring our businesses to develop a
process that will protect our supply chain
from counterfeit parts. We continued to
collaborate with several customers and
suppliers to identify and test alternatives
to address the increasingly restricted use
of particular substances following global
regulatory developments (including
REACH, described above).
GHG emissions1 data (Table 3)
Combustion of fuel and operation of facilities3
Electricity, heat, steam and cooling purchased for own use
Intensity measurement:
Emissions reported above, normalized to tonnes per £m revenue
20132
Tonnes of CO2
34,323
100,080
134,403
84.1
1 Global GHG emissions were calculated using conversion factors published in the 2012 Guidelines to
DEFRA/DECC’s GHG Conversion Factors for Company Reporting. Conversion factors capture all
relevant GHG emissions from the categories specified. The difference between Table 3 and the CO2
emissions in Table 1 is that those in Table 3 include CH4 and N2 O emissions.
2 2012 data not available because the regulatory requirement to collect this data only came into force
for the financial year ended 31 December 2013. Comparative data will be provided in future years.
3 Does not include GHG emissions generated from Meggitt-owned and operated vehicles or refrigerant
gases as these emissions are not material to the Group’s GHG emissions.
Performance against five-year targets
Table 2 shows our performance against
internally set five-year targets. We have
met our target for CO2 emissions one year
early, and will be setting a new five-year
target using 2014 as the baseline year. Our
performance is on track to meet targets
for most metrics, but acquisitions, facility
consolidations and increased production
of carbon brakes has impacted our
progress on electricity reduction and
waste recycled.
Greenhouse gas emissions (GHG)
Table 3 shows GHG emissions data
required to be reported under the Large
and Medium-Sized Companies and Groups
(Accounts and Reports) Regulation 2008
as amended in August 2013. The sites
reporting GHG data are the same as those
consolidated in the Group’s financial
statements.
Saving energy
In 2013, we continued to seek
improvements in our operations and
processes to achieve reductions in energy
consumption and improve efficiencies. For
example:
• Significant lighting, heating and
ventilation system upgrades were made
as part of the site consolidation at
Orange County, US.
• Several facilities have replaced
inefficient air compressors with
energy-efficient variable speed drive
compressors, resulting in a saving of
approximately 1,250 tonnes of carbon
per year.
• Several facilities continued to upgrade
offices and production floors with
high-efficiency compact fluorescent
lighting, saving approximately 200
tonnes of carbon per year. One of our
facilities in Oregon, US only illuminates
office and production floor space when
occupied, after installing wireless
activity sensors.
• The carbon refurbishment programme
at our facility in Akron, US has
continued to expand in 2013 with a 54%
increase in carbon discs recovered and
refurbished from 2012. Reductions to
processing time and associated energy
consumption of around 75% resulted in
savings of approximately 1,600 tonnes of
CO2 in 2013.
MEGGITT PLC REPORT AND ACCOUNTS 2013
33
We have a highly-developed trade
compliance programme, based on the
Nunn-Wolfowitz Task Force Report of
2000 (the influential report on export
compliance best practice) and guidelines
issued by the regulatory authorities.
During 2013, we continued to implement
our global trade management software
solution to enhance our trade compliance
programme and began implementation of
our enhanced import compliance
programme at several US facilities. We
also implemented Phase 1 of the US
Government’s Export Control Reform
programme.
Local communities and
charitable donations
Individual Meggitt facilities work with the
local community and support charities at
their discretion. Education Business
Partnerships and the UK Government’s
STEM (Science, Technology, Engineering
and Mathematics) initiative were
supported locally. Meggitt’s headquarters,
based in Dorset, UK, continued to sponsor
the Arkwright Scholarship Trust, the
Institute of Mechanical Engineers’
Schools Aerospace Challenge, the local
Community Foundation and the Poole
Hospital Staff Excellence Awards.
Our employees
Learning, career development, employee
engagement, strong leadership and
effective teamwork are vital components
of Meggitt’s performance culture.
In 2013, we undertook our second
all-employee survey. 62% of our
workforce participated—1,500 more than
last time. Overall engagement levels are
7% higher than the global benchmark:
people are proud to work for Meggitt and
would recommend us as an employer.
Reportable accidents and incidents (Table 4)
Reportable accidents and incidents1
Reportable accident/incident rate2
2013
35
317
Change
-19%
-20%
2012
43
397
1 Reportable accidents and incidents are those directly reportable to a regulatory authority.
2 Accident/incident rates are the number of reportable accidents/incidents per 100,000 employees.
Health and safety
Strong, supportive leadership is essential
to a sustainable safety culture and in our
2013 employee engagement survey, we
received plaudits for our safety culture.
However, regrettably, we have to report
that in October 2013 one of our employees
died in an incident involving a test
laboratory autoclave at our facility in
Rockmart, US. An investigation is
underway by regulatory authorities to
determine the cause and we are providing
our full support.
In 2013, we continued to implement
measures to improve safety in the
workplace. These included:
• Group-wide online health and safety
awareness training for all employees;
• Integrated daily health and safety
inspections and reviews as part of the
Meggitt Production System;
• A behavioural health and safety
programme implemented at our facility
in Loughborough, UK, which contributed
to a 75% improvement in its Reporting
of Injuries, Diseases and Dangerous
Occurrences Regulations (RIDDOR)
frequency and lost time incident rates
and lost days. We plan to roll out this
programme to a number of sites across
the Group in 2014;
• Continued implementation of the
MoveSmart® programme at our facility
in Rockmart,US designed to reduce the
number of musculoskeletal injuries;
• Improved reporting and investigation of
near-miss accidents and unsafe
conditions, with special emphasis on
root-cause analysis and developing
timely corrective action plans; and
• Continued dissemination of information
and best practice through intra-Group
HSE conferences, health and safety
alerts and all-employee safety bulletins.
These measures have resulted in
improvements in health and safety
performance across the Group and
outstanding achievements at some of our
sites. We experienced a significant
reduction in reportable incidents and
associated incident rates across the
Group, as shown in Table 4. In 2013, 80%
of our manufacturing facilities achieved at
least a Bronze Meggitt Safety Star award
reflecting a 25% improvement in health
and safety performance over the three-
year average performance for years 2009
to 2011. Of those, 20 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 2013.
Ethics and business conduct
and trade compliance
Our ethics and business conduct
programme commits us to conducting
business fairly, impartially and in
compliance with laws and regulations and
acting with integrity and honesty in our
business relationships.
In 2013, we provided training on promoting
mutual respect, the UK Bribery Act and
preventing harassment in the workplace
and held two in-house ethics conferences
where facility-based ethics coordinators
reviewed and provided feedback on the
Ethics Programme. As a result of this
feedback, we launched a web application
for the Ethics Line which allows questions
or concerns to be submitted by email and
agreed to update our Ethics Guide.
The Board revised our Ethics and
Business Conduct Policy and Code of
Conduct this year along with the Anti-
Corruption Policy, and we launched a
Distributors’ Policy.
MEGGITT PLC REPORT AND ACCOUNTS 2013 STRATEGIC REPORT FINANCIAL STATEMENTS SUPPLEMENTARY INFORMATION GOVERNANCE REPORTS
34 Corporate responsibility continued
Analysis of employees (Table 5)
Employees by division1
Employees by length of service (years)1
Employees by region1
Number of employees
Number of employees
Number of employees
10,715
10,715
10,715
Aircraft Braking Systems 1,195
1,173
Control Systems
1,965
Polymers & Composites
1,654
Sensing Systems
4,116
Equipment Group
612
Cross-group facilities
11%
11%
18%
15%
39%
6%
Less than 5
Between 5 and 10
Between 10 and 15
Between 15 and 20
Between 20 and 25
Over 25
4,641
2,495
1,167
821
443
1,148
43%
23%
11%
8%
4%
11%
North America
UK
Mainland Europe
Rest of World
5,514
2,797
1,589
815
51%
26%
15%
8%
1
As at 31 December 2013.
Our employees (continued)
Various initiatives are underway, many of
which have overt goals to improve or
sustain engagement. Investment in learning
and development is one of these. We
continue to increase the amount of
corporate training, where people from
different businesses get to meet, share
views and learn together. The most
significant investment is in the Meggitt
Production System (MPS), our single, global
approach to the application of ‘lean’ tools
and other continuous improvement
practices. The purpose of MPS is to ensure
that everything we do and everyone who
does it supports the front line of our
business.
In 2013, we launched a state-of-the art
human resources information system, in
part, to facilitate performance and talent
management processes. Advanced
analytical tools will enable us to fine-tune
our personnel requirements Group-wide,
while ensuring that professional
development can be managed effectively
for all employees. Individual goals are
now more easily connected to the strategy
of business units and the Group as a
whole. The human resources information
system is a lever for behavioural change
that leads to the kind of performance
culture employees want to play a part in.
Equal opportunities
The Group supports equal employment
opportunities and opposes all forms of
unlawful or unfair discrimination. It is Group
policy to give full and fair consideration to
job applications from disabled people, to
provide opportunities for their training,
career development and promotion and to
continue wherever possible to employ staff
who become disabled.
We require all Meggitt employees,
through our Ethics training programme
and statement of values, to treat all
colleagues fairly and with respect.
Table 6 shows the number of female
employees at all levels of the workforce.
The Board’s approach to diversity is
discussed in the Nominations Committee
report (see page 46).
Table 6
Level
Board of Directors
Executive Board
Senior executives
All employees
% of females
at 31 December 2013
10%
9%
9%
29%
Human rights
Respect for human rights is at the heart of
Meggitt’s Code of Conduct, which we apply
across all our businesses.
Employee consultation
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 including daily meetings
on shop floors, monthly all-employee
‘Town Hall’ meetings, team briefings and
works councils. We respect all employee
relations regulations.
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 its performance.
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.
Strategic report
This 2013 Strategic report on pages 1
to 34 is hereby signed on behalf of the
Board of Directors.
Stephen Young
Chief Executive
3 March 2014
MEGGITT PLC REPORT AND ACCOUNTS 2013
Corporate governance report
35
Chairman’s introduction
Throughout the financial year ended 31 December 2013 and to
the date of this report, we have complied with the provisions set
out in the UK Corporate Governance Code 2012 published by the
Financial Reporting Council (the “Code”). The Company has
applied the main and supporting principles set out in the Code.
An explanation of how the main principles have been applied is
set out in this report and in the Directors’ remuneration report,
the Nominations Committee report and the Audit Committee
report. A number of new disclosure requirements are reflected
in this report (in particular, as required under the Large and
Medium-sized Companies and Groups (Accounts and Reports)
(Amendment) Regulations 2013 and the Code).
The Board is committed to maintaining high standards of
corporate governance, which are fundamental to discharging our
responsibilities. As Chairman, I encourage open and transparent
discussion and constructive challenge. It is my responsibility to
ensure that Meggitt is governed and managed in the best
interests of shareholders and wider stakeholders. In this report,
we set out our governance framework and explain how sound
and effective corporate governance practices support our
strategy of creating long-term, sustainable growth.
Leadership
In 2013, Terry Twigger retired from the Board, having served as
Chief Executive for over 12 years. He was replaced by Stephen
Young (who was, until that time, Group Finance Director) with
effect from 1 May 2013. In early June, we appointed Doug Webb
as Chief Financial Officer. On behalf of the Board, I would like to
thank Terry for his contribution to the success of Meggitt and
welcome Stephen and Doug to their new roles. I am pleased to
report that we have seen a smooth transition during the
succession period. Stephen and Doug have visited our facilities,
customers and shareholders, emphasising our continued
commitment to returns to shareholders and to improving
operational performance and customer service through
initiatives such as the Meggitt Production System.
Effectiveness
After our successful external Board evaluation in 2012, we
returned to an internal evaluation in 2013, using lessons learned
from the external process. The main findings and
recommendations of the evaluations in 2013 were to enhance our
strategy reviews and risk management process and continue to
improve the annual Board schedule, including site visits and
operational and functional presentations. A full description of the
process and outcome of this year’s formal and rigorous review is
on page 41.
Accountability
The Board, led by executive management, has enhanced our risk
management process and reporting in 2013. We have
consolidated our key risks detailed in the Annual Report: our
shareholders can read about the most significant risks and
uncertainties and the revised risk management process on
pages 15 to 17.
The Board and Audit Committee have sought to improve this
Annual Report and to ensure that it is fair, balanced and
understandable.
Remuneration
During the year, the Remuneration Committee reviewed the
directors’ remuneration package and prepared the Group’s
remuneration policy for inclusion in this year’s Directors’
remuneration report and submission to shareholders for
approval at the AGM in 2014. The Directors’ remuneration report
(pages 47 to 67) provides a detailed review of the Committee’s
2013 activity, vesting outcomes and remuneration policy and
proposals for 2014 and beyond.
Sir Colin Terry
Chairman of the Board of directors
3 March 2014
MEGGITT PLC REPORT AND ACCOUNTS 2013 STRATEGIC REPORT FINANCIAL STATEMENTS SUPPLEMENTARY INFORMATION GOVERNANCE REPORTS 36 Board of directors
Meggitt’s Board is characterised by
world-class experience of UK,
mainland European and North
American businesses spanning
multiple sectors—many with
global reach.
Sir Colin Terry
Philip Green
Paul Heiden
Stephen Young
David Williams
Brenda Reichelderfer
Doug Webb
Guy Berruyer
David Robins
Philip Cox
MEGGITT PLC REPORT AND ACCOUNTS 2013 Sir Colin Terry KBE CB DL FREng
Non-Executive Chairman + §
Appointed: 2004 | Nationality: British
Philip Green
Group Corporate Affairs Director § ◊
Appointed: 2001 | Nationality: British
Paul Heiden
Non-Executive Director * + ‡
Appointed: 2010 | Nationality: British
37
Skills and experience
Fellow of the Institute of Chartered Secretaries
and Administrators, with significant legal and
compliance experience.
Skills and experience
Chartered accountant, with considerable
experience in senior executive and financial roles
in aerospace.
Skills and experience
Chartered engineer with extensive civil aerospace,
military and industrial experience.
Current appointments
Chairman of the UK Military Aviation Authority
Safety Advisory Committee, Non-Executive Director
and Chairman of the Audit Committee of Fox Marble
Holdings PLC, and Non-Executive Chairman of
AviaMedia Tech Limited.
President of Soldiers, Sailors, Airmen and Families
Association in Buckinghamshire, of which he is
Deputy Lieutenant.
Previous appointments
37 years in Royal Air Force, reaching rank of Air
Marshal. Since retiring, was 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.
Stephen Young
Chief Executive + § ◊
Appointed: 2013 | Nationality: British
Skills and experience
Chartered management accountant with wide
experience in all financial disciplines gained from
national and multi-national businesses across
multiple sectors.
Current appointments
Member of the GC100 and the Dorset Employment
and Skills Board.
Previous appointments
Meggitt’s Company Secretary from 1994 to 2006,
after 14 years at British Aerospace in company
secretarial roles.
David Williams
Non-Executive Director * + ‡
Senior Independent Director
Appointed: 2006 | Nationality: British
Skills and experience
Chartered accountant with significant experience
in senior financial roles.
Current appointments
Joint Chairman of Mondi plc and Mondi Limited
and Non-Executive Director and Audit Committee
Chairman of DP World Limited.
Previous appointments
Senior financial roles including 15 years as Finance
Director of Bunzl plc. Non-Executive Director and
Audit Committee Chairman of Tullow Oil plc until
May 2012.
Current appointments
Non-Executive Director, Audit Committee Chairman
and member of Risk and Remuneration committees
of Derwent London plc.
Guy Berruyer
Non-Executive Director * + ‡
Appointed: 2012 | Nationality: French
Previous appointments
Meggitt’s Group Finance Director for over nine
years before appointment to Chief Executive in May
2013. Senior financial positions held previously
include Group Finance Director, Thistle Hotels plc
and Group Finance Director of the Automobile
Association.
Doug Webb
Chief Financial Officer § ◊
Appointed: 2013 | Nationality: British
Skills and experience
Chartered accountant who has held senior
international financial positions in defence,
aerospace, engineering, technology and financial
services.
Current appointments
Non-Executive Director and Chairman of SEGRO
Plc’s Audit Committee and member of the Hundred
Group of Financial Directors.
Skills and experience
Trained as electrical engineer at the École
Polytechnique Fédérale de Lausanne and holds
Harvard Business School MBA. Brings significant
experience to Board as serving FTSE-100 Chief
Executive.
Current appointments
Group Chief Executive of The Sage Group plc.
Previous appointments
Chief Executive of Sage Group plc’s French division.
Early career spent with software and hardware
vendors in French and European management roles.
Philip Cox CBE
Non-Executive Director * + ‡
Appointed: 2012 | Nationality: British
Skills and experience
Senior management experience across a range
of sectors from manufacturing to energy.
Previous appointments
Chief Financial Officer, London Stock Exchange
Group Plc, Chief Financial Officer, QinetiQ Group Plc
and various senior financial roles in the UK and US
for Logica (now CGI).
Current appointments
Non-Executive Director, Senior Independent Director
and Audit Committee Chairman of Wm Morrison
Supermarkets PLC and Non-Executive Director of
PPL Corporation, a US-listed energy utility company.
Previous appointments
Chief Executive Officer, International Power plc,
Senior Vice President, Operational Planning,
Invensys plc, Finance Director of Siebe PLC,
Non-Executive Director and Chairman of Audit
Committee of Wincanton plc.
Committee membership
* Audit Committee
+ Nominations Committee
‡ Remuneration Committee
§ Ethics and Trade Compliance Committee
◊ Finance Committee
Current appointments
Non-Executive Director and Chairman of the Audit
Committee of London Stock Exchange Group plc
and Chairman of Intelligent Energy Holdings plc.
Previous appointments
Chief Executive of FKI Plc from 2003 to 2008, 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.
Non-Executive Director of UU Plc, Bunzl plc,
Essentra PLC and Chairman of Talaris Topco
Limited.
Brenda Reichelderfer
Non-Executive Director * + ‡
Appointed: 2011 | Nationality: American
Skills and experience
Skilled engineer and business leader with
considerable US aerospace and industrial
experience.
Current appointments
Senior Vice President and Managing Director of
private equity sector consulting firm TriVista,
member of Technology Transfer Group of Missile
Defense Agency and Non-Executive Director of
Federal Signal Corporation and Wencor Aerospace.
Previous appointments
Senior Vice President, Director of Engineering and
Chief Technology Officer, having served as Group
President at two operating divisions of ITT
Industries Corporation.
David Robins
Non-Executive Director
Appointed: 2002 | Nationality: British
Skills and experience
Extensive knowledge and experience of the
interaction between businesses and capital markets
developed over a long career spanning investment
banking and venture capital.
Current appointments
Chairman of The Asian Total Return Investment
Company plc and Fidelity Japanese Values plc,
Deputy Chairman of Oriel Securities Ltd and a
Director of SVG Capital Limited, Pemberton Capital
Advisors LLP and a venture capital-backed company.
Previous appointments
Until December 2000, Chairman and Chief Executive
of ING Barings, before which spent 18 years at
Phillips & Drew and UBS, becoming Executive Vice
President and Regional Head of UBS Europe.
MEGGITT PLC REPORT AND ACCOUNTS 2013 STRATEGIC REPORT FINANCIAL STATEMENTS SUPPLEMENTARY INFORMATION GOVERNANCE REPORTS 38 Corporate governance report continued
LEADERSHIP
Our governance framework
Board of directors
Sir Colin Terry (Chairman)
Three executive directors
Six non-executive directors
Creating and delivering
sustainable shareholder value
Board committees
Remuneration
Audit
Nominations
Five independent
non-executive directors
Five independent
non-executive directors
Chairman, Chief Executive and five
independent non-executive directors
Determines the reward strategy for the
executive directors and senior
management, to align their interests with
those of the shareholders
Monitors the integrity of the Group’s
financial statements and the effectiveness
of the external and internal auditors
Ensures the Board and senior management
team have the appropriate skills, knowledge
and experience to operate effectively and to
deliver the Group’s strategy
Ethics and trade compliance
Finance
Chairman and three
executive directors
Three executive directors
Ensures the implementation and application
of the Ethics and Business Conduct and
Trade Compliance policies and programmes
Approves treasury-related activity,
insurance, and other matters delegated
to it by the Board
Management committees
Executive Board
Operations Board
Commercial Committee
Three executive directors, the Chief
Operating Officer and four senior
executives
The Chief Operating Officer
and five divisional directors
Assists the Chief Executive with the
development and implementation of the
Group’s strategy, the management of the
business and the discharge of
responsibilities delegated by the Board
Assists the Chief Operating Officer to
manage the Group’s operations and
discharge the responsibilities delegated
by the Executive Board
Three executive directors, Chief
Operating Officer and one Executive
Board member
Reviews/approves bids and proposals
and any other commercial activity
MEGGITT PLC REPORT AND ACCOUNTS 2013 39
The role of the Board
The Board retains full and effective control of the Group and
is collectively responsible for its success. It sets the Group’s
strategy, ensures appropriate resources are in place to achieve
the Group’s objectives and reviews performance regularly.
The Board is responsible for setting the Group’s values and
standards and for ensuring obligations to shareholders,
employees and others are met.
There is a Schedule of Matters Reserved for the Board (last
updated in 2012) which sets out the matters on which the Board
must make the final decision; these include, for example,
changes to the Group’s capital structure, acquisitions and
disposals above a certain threshold, approval of results
announcements, annual reports and dividends. If a decision is
not reserved for the Board, then authority lies, in accordance
with an authorisation policy, with a Board committee,
management committee, the Chief Executive or other executive
director, divisional president or site director/general manager.
Board membership and attendance during 2013
The Board met nine times in 2013 (seven scheduled meetings,
shown in the table below, and two unscheduled meetings). In
advance of any Board meetings impacted by the absence of
directors, the Chairman discussed the matters to be covered at
the meeting with, and ascertained the views of, those directors
sending their apologies.
Name
Title
Meetings
eligible Meetings
to attend1 attended
Chairman
Sir Colin Terry
Non-executive director
Mr G S Berruyer
Mr P G Cox2
Non-executive director
Mr P E Green1
Corporate Affairs Director
Mr P Heiden2
Non-executive director
Ms B L Reichelderfer Non-executive director
Mr D A Robins1
Non-executive director
Chief Executive (to 1 May 2013)
Mr T Twigger
Chief Financial Officer
Mr D R Webb
(from 6 June 2013)
Non-executive director
Group Finance Director
(to 1 May 2013)
Chief Executive
(from 1 May 2013)
Mr D M Williams
Mr S G Young
7
7
7
7
7
7
7
3
4
7
7
7
7
7
6
7
7
6
3
4
7
7
1 All of the directors attended the scheduled meetings during the year,
with the exception of Mr Green who sent his apologies for the meeting
held in June 2013 as he was undergoing medical treatment and Mr
Robins who was unable to attend the meeting held in February 2013
owing to overseas travel.
2 There were also two unscheduled meetings held during the year, which
were attended by all of the directors eligible to attend, except Mr Cox
and Mr Heiden who sent their apologies for one unscheduled meeting
in January 2013.
In advance of any Board meetings impacted by the absence of
directors, the Chairman discussed the matters to be covered at
the meeting with, and ascertained the views of, those directors.
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 a clear division of responsibilities has been approved and
agreed in writing by the Board. These were reviewed and
updated by the Board in 2013.
• The Chairman is responsible for setting the Board’s agenda
and ensuring that adequate time is available for discussion of
agenda items (including strategic issues); leading the Board;
and ensuring its effectiveness.
• The Chairman facilitates the contribution of non-executive
directors and oversees the relationship between them and the
executive directors. The Chairman holds meetings with other
non-executive directors without executive directors present.
• The Chairman is responsible for ensuring directors receive
accurate, timely and clear information and is satisfied that
effective communication, principally by the Chief Executive
and Chief Financial Officer, is undertaken with shareholders.
• The Chairman agrees a personalised approach to the training
and development of each director and reviews this regularly.
Senior Independent Director
The role of Mr Williams, as Senior Independent Director, is to:
• Make himself available to shareholders if they have concerns
that cannot be resolved through normal channels;
• Chair the Nominations Committee when it is considering the
Chairman of the Board’s succession; and
• Meet with the non-executive directors at least once a year
to appraise the Chairman’s performance.
Non-executive directors
• The non-executive directors play a full part by constructively
challenging and contributing to the development of the Group’s
strategy.
• The non-executive directors scrutinise the performance of
executive management and monitor the reporting of the
Group’s performance, the integrity of financial information
and the effectiveness of financial controls and risk
management systems.
• The non-executive directors are responsible for determining
appropriate levels of remuneration for the executive directors
and participating in the selection and recruitment of new
directors and succession planning.
• The terms and conditions of appointment of non-executive
directors are available for inspection at the Company’s
registered office during normal business hours.
MEGGITT PLC REPORT AND ACCOUNTS 2013 STRATEGIC REPORT FINANCIAL STATEMENTS SUPPLEMENTARY INFORMATION GOVERNANCE REPORTS
40 Corporate governance report continued
Company Secretary
The appointment and removal of the Company Secretary is
a matter for the Board.
The work of the Board in 2013
During the year, the Board approved the acquisition of Piezotech
LLC and the disposal of Meggitt (Addison), Inc. and the Sunbank
Family of Companies LLC. It also approved the appointment of
Mr Young as Chief Executive and Mr Webb as Chief Financial
Officer. It received regular reports from executive management
on strategy and business performance, financial performance
(including treasury activity) and corporate affairs (including risk,
legal and compliance). The Board visited a number of facilities
during the year, across all business divisions. The Board
received and discussed:
• An update on Group strategy, including market and competitive
environment and strategic priorities;
• The Group budget for 2014;
• Business unit and functional updates and presentations on
senior executive succession, operations, IT security, and
investor relations;
• Reports on internal control, risk management and going
concern; and
• Reports on the activities of its committees.
The Board reviewed and approved:
• The 2012 Annual Report and Accounts, the 2012 full-year
results announcement and the 2013 interim results
announcement;
• Interim management statements released in May and
November;
• Recommendations to shareholders on the final dividend
payment in respect of the year ended 31 December 2012 and
the interim dividend payment for the year ended 31 December
2013;
• Fees payable to the Group’s auditors and a recommendation to
shareholders on their reappointment;
• Amended terms of reference for the role of Chairman and
Chief Executive; and
• Revisions to the Group’s Ethics and Business Conduct Policy,
Code of Conduct and Anti-Corruption Policy.
Since the year-end up to the date of the Annual Report, the Board
has approved the 2013 Annual Report and Accounts, the 2013
full-year results announcement and the proposed final dividend
in respect of the year ended 31 December 2013.
During the year, no unresolved concerns were recorded in the
Board’s minutes.
Effectiveness
Composition
The Board considers it has a good balance of executive
and non-executive directors, is of an appropriate size and
includes the independence, skills, experience and knowledge
to enable the directors to discharge their respective duties and
responsibilities effectively. 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 retiring from the Board after the 2014 AGM.
All non-executive directors are asked to join the Audit,
Remuneration and Nominations Committees on appointment.
Chairmanship of Committees is considered during discussions
on composition and succession. No one other than Committee
chairmen and members are entitled to attend the meetings,
although others may be invited. Committee chairmen, members
and regular meeting invitees are noted in the respective
Committee reports below.
Each of these Committees has specific written terms of
reference issued by the Board and adopted by the relevant
Committee. These are available on our website. All Committee
chairmen report orally on the proceedings of their Committees
at the next meeting of the Board. Where appropriate, the
Committee chairmen also make recommendations to the Board
in respect of appropriate matters, for example, the fairness,
balance and understandability of the Annual Report. Further
details of the composition and operation of these Committees
are set out in the Audit Committee report, the Nominations
Committee report and Directors’ remuneration report.
Appointments to the Board
There is a formal, rigorous and transparent procedure for the
appointment of new directors to the Board. Full details are
available in the Nominations Committee report set out on page
46 which also provides details of the role and activities of the
Nominations Committee.
Commitment
The letters of appointment for the Chairman and non-executive
directors set out the expected time commitment required of
them and are available for inspection by any person during
normal business hours at the Company’s registered office and
at the AGM. Other significant commitments of the Chairman
and non-executive directors are disclosed on appointment and
require approval thereafter.
In 2013, the Chairman became chairman of AviaMediaTech
Limited. Sir Colin confirms that he continues to have sufficient
time to discharge his role as Chairman of the Board.
MEGGITT PLC REPORT AND ACCOUNTS 2013 Development
The Board is supplied with the information it needs to discharge
its duties. 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 a comprehensive induction pack.
We will continue to enhance the induction process as feedback
is received and incorporated from recently recruited directors.
The Company Secretary facilitates the induction of new directors
and assists with professional development where required.
Directors are encouraged to update their skills regularly and
their training needs are 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 all directors for the purposes of developing and
updating their knowledge and capabilities.
Information and support
The Chairman is responsible for ensuring the directors receive
accurate, timely and clear information. The Company Secretary
is responsible for ensuring good information flows within the
Board and committees and between senior management and
non-executive directors. The Board members have regular
discussions about their information and support requirements,
and are involved in setting the annual Board schedule.
The Board and its committees have been provided with sufficient
resources to undertake their duties. All directors have had
access to the advice and services of the Company Secretary
who is responsible to the Board for advising on all governance
matters. The Board allows all directors to take external
independent professional advice at the Group’s expense.
Board performance evaluation
In 2013, the Board evaluated its own effectiveness, together
with the effectiveness of the Chairman, individual directors, its
committees, auditors and remuneration advisers and agreed
its objectives for 2014. The effectiveness reviews covered
strategy, risk management, the annual Board schedule,
composition, succession, the appointment process, diversity,
remuneration, audit and open channels of communication.
The evaluation in 2013 was undertaken internally (applying
lessons learned from the externally facilitated review in 2012).
The 2013 evaluation was carried out using questionnaires and
group and individual discussions. The Board continues to be
thoroughly engaged with the review process, with the main
findings and recommendations of the 2013 evaluation identifying
the need to enhance strategy reviews and the risk management
process and implement continued improvements to the annual
Board schedule, adding more facility visits and operational and
functional presentations.
41
Accountability
Financial and business reporting
The financial statements contain an explanation of the directors’
responsibilities in preparing the Annual Report and the financial
statements (page 70) and a statement by the auditors concerning
their responsibilities (page 73). The directors also report that the
business is a going concern (page 30), detail on how the Group
generates and preserves value over the longer term (the
business model) and the Group’s strategy for delivering its
objectives in the Strategic report (pages 1 to 34).
Internal control and risk management
The Board is responsible for the Group’s system of internal
control and for maintaining and reviewing its financial and
operational effectiveness. The system of internal control is
designed to manage, but not to eliminate, the risk of failure to
achieve business objectives and to provide reasonable but not
absolute assurance against material misstatement or loss. The
Group’s system of internal controls includes:
• An on-going risk management process for identifying,
evaluating and managing the significant risks faced by the
Group that was in place for 2013 and up to the date of approval
of the Annual Report. This process is regularly reviewed by the
Board and accords with the Turnbull Guidance. The risk
management process is described in more detail on pages 15
to 17;
• An effective internal audit function which, primarily, performs
business unit reviews by rotation (including finance, IT, HR,
ethics and the bid process);
• Compliance programmes and external audits (including trade
compliance, ethics, anti-corruption, health, safety and
environmental);
• A business performance review process (including financial,
operational and compliance performance);
• Process controls, including the bid process, programme
execution, financial and IT security;
• The forecasting, budget and strategic plan processes;
• A whistleblowing line to enable employees to raise concerns;
and
• Group insurance and business continuity programmes.
The Board and Audit Committee applied the following processes
in 2013 and up to the date of approval of the Annual Report in
order to review the effectiveness of the system of internal
controls:
• Reviews of the risk management process and risk register;
• Written and verbal reports to the Audit Committee from
internal and external audit on progress with internal control
activities, including:
– reviews of business processes and activities, including
action plans to address any identified control weaknesses or
recommendations for improvements to controls or
processes;
– the results of internal audits;
– internal control recommendations made by the external
auditors; and
– follow-up actions from previous internal control
recommendations;
MEGGITT PLC REPORT AND ACCOUNTS 2013 STRATEGIC REPORT FINANCIAL STATEMENTS SUPPLEMENTARY INFORMATION GOVERNANCE REPORTS 42 Corporate governance report continued
• Regular compliance reports from the Corporate Affairs
Director;
• Regular reports on the state of the business from the Chief
Executive and Chief Financial Officer;
• A presentation on IT security activities and plans;
• Review and approval of the strategic plan and budget;
• Written report to the Audit Committee on the effectiveness of
whistleblowing procedures; and
• Annual report on insurance coverage.
The Board monitors executive management’s action plans to
implement improvements in internal controls that have been
identified following the above-mentioned reviews and reports.
The Board confirms that it has not been advised of any significant
failings or weaknesses in the Group’s internal controls.
Remuneration
A separate Remuneration Committee report is set out on pages
47 to 67 and provides details of our remuneration policy and
how it has been implemented, together with the activities of the
Remuneration Committee.
Relations with shareholders
The Group values its dialogue with institutional and private
investors.
The Board communicates with private investors via direct
communication with investor relations and the Company
Secretary, material distributed or made available on the investor
relations section of our website and at the AGM (see below).
Effective communication with fund managers, institutional
investors and analysts about the Group’s strategy, performance
and policies is promoted by meetings involving the Chief
Executive and Chief Financial Officer. The Board receives
reports from the Chief Executive and Chief Financial Officer
and the Head of Investor Relations on the views of shareholders,
which are discussed.
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 2013. Directors’
understanding of major shareholders’ views is enhanced by
reports from the Head of Investor Relations, our brokers and
attending analysts’ briefings. Analysts’ notes on the Group are
made available to all directors.
In 2013, a consultation was undertaken with significant
shareholders covering a revised proposed remuneration
package and policy. The process and outcome of this
consultation are described on page 56.
Constructive use of the 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 voting results announcement
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.
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.
At the AGM to be held on 7 May 2014, shareholders’ consent
will be sought on the following special business, in addition to
routine business:
(i) approval of the Remuneration Policy;
(ii) approval of a new Long Term Incentive Plan; and
(iii) authority to convene general meetings on 14 clear days’
notice in accordance with the Articles (on the terms set out
in the Notice of Meeting).
All directors are subject to election by shareholders at the first
AGM after their appointment and have been subject to re-election
annually since 2012 in compliance with the Code. In 2014, all
directors will be subject to election or re-election except for
Mr Robins, who will retire from the Board at the end of the AGM
on 7 May 2014.
By order of the Board
M L Thomas
Company Secretary
3 March 2014
MEGGITT PLC REPORT AND ACCOUNTS 2013
Audit Committee report
43
Responsibilities
The responsibilities of the Audit Committee include:
• Monitoring the integrity of the Group’s financial statements
and judgements made by executive management, reviewing
the Group’s financial reporting and accounting policies,
including financial information contained in formal
announcements and reviewing trading statements relating to
the Group’s performance;
• Recommending the financial statements to the Board for
approval and, since 2013, advising the Board that the Annual
Report, taken as a whole, is fair, balanced and understandable,
providing the information necessary for shareholders to assess
the Group’s performance, business model and strategy;
• Reviewing the appointment, performance and independence of
the external auditors and the role and effectiveness of the
internal audit function. In 2013, the audit partner rotated from
Mr Maitland to Mr Paynter;
• Reviewing the process for handling allegations from
whistleblowers;
• Reviewing reports from executive management and internal
and external audit on the effectiveness of systems for internal
financial controls, financial reporting and financial risk
management. The Board has overall responsibility for internal
controls and risk management (see page 15); and
• Reviewing the Committee’s own effectiveness.
Work of the committee
The Audit Committee reviewed:
• The financial information contained in the 2012 Annual Report
and 2012 full-year and 2013 interim results announcements
and recommended them to the Board for approval;
• 2013 external audit fees, and recommended them to the Board
Chairman’s introduction
I am pleased to present the report of the Audit Committee for 2013.
I chair the Audit Committee and as a Fellow of the ICAEW, Audit
Committee Chairman of DP World Limited and former Finance
Director at Bunzl plc, I bring recent and relevant financial
experience to the Committee. My fellow committee members
throughout 2013 were Guy Berruyer, Philip Cox, Paul Heiden and
Brenda Reichelderfer, who attended all three Committee meetings
during the year. By invitation, there were a number of other regular
attendees including the Chief Financial Officer, the Group Financial
Controller and the internal and external auditors. The Chairman of
the Board, the Chief Executive, the Corporate Affairs Director and
David Robins also attended by invitation.
The key role of the Audit Committee is to provide confidence in
the integrity of our processes and procedures relating to internal
financial control and corporate reporting. The Board relies on
the Committee to review financial reporting and to appoint and
oversee the work of the internal and external auditors.
The work of the Committee in 2013 is described below in detail
and included providing advice to the Board on whether these
accounts are fair, balanced and understandable.
Committee membership and attendance
for approval;
Name
Mr D M Williams (Committee chairman)
Mr G S Berruyer
Mr P G Cox
Mr P Heiden
Ms B L Reichelderfer
Meetings
eligible
to attend
Meetings
attended
• The external audit strategy memorandum and interim audit
clearance report for 2013;
3
3
3
3
3
3
3
3
3
3
• The independence, effectiveness and reappointment of the
external auditors;
• The internal audit plan for 2014 and regular update reports;
• The Group’s whistleblowing procedures;
Terms of Reference
The Committee operates within agreed terms of reference (last
updated in 2012 and scheduled for review in 2014) which are
available on our website.
• Technical accounting and governance updates provided by
the Group Financial Controller, Company Secretary and the
external auditors;
• A tax update from the Group Head of Tax and Treasury;
• The non-audit services policy, and approved and published
the policy on the Audit Committee section of our website; and
• The effectiveness of the Committee and internal audit.
Since the year end, the Committee has approved the 2013 Annual
Report and Accounts and full-year results announcement and
recommended them to the Board for approval and provided
advice to the Board that the 2013 Annual Report and Accounts,
taken as a whole, is fair, balanced and understandable. The
Committee provided this advice having approved and monitored an
enhanced review and verification process of the Annual Report
undertaken by management and provided confirmation to the
Board that this process was both followed and effective.
MEGGITT PLC REPORT AND ACCOUNTS 2013 STRATEGIC REPORT FINANCIAL STATEMENTS SUPPLEMENTARY INFORMATION GOVERNANCE REPORTS
44 Audit Committee report continued
Significant judgements relating to the financial statements
The table below summarises the significant judgements considered by the Committee in respect of the Group’s financial statements:
Significant judgements
Action
Goodwill and other intangible
assets arising on an
acquisition
Development costs
and programme
participation costs
Provision for environmental
and legal matters
Provision for onerous
contracts
Retirement benefit
obligations
Income taxes
Treatment of exceptional
operating items
The principal judgements are management’s determination of the level at which impairment testing
should be performed (including the change in the year whereby certain business units are now
aggregated as Cash Generating Units (‘CGU’s)), the achievability of CGU business plans (and therefore
future cash flows) and the appropriateness of the discount rates applied to future cash flows. The
Committee addressed this through consideration of a report from management setting out the basis
for the assumptions and providing a sensitivity analysis on key assumptions and an analysis of the
headroom for each CGU. The Committee agreed the assumptions made by management were
appropriate and that no impairment was required.
The Committee considered the method of testing for potential impairment used by management, the
reasonableness of assumptions used on specific programmes with limited headroom and the aggregation
of related intangible assets at an aircraft platform level. The Committee addressed this through
consideration of a report from management covering these areas, exposure to different platforms and
a sensitivity analysis on specific programmes. The Committee concluded that the assumptions made by
management were reasonable and the carrying value of deferred costs appropriate.
The key areas reviewed by the Committee were the ongoing environmental liabilities relating to
historic sites, the impact of the administrative settlement with the US Government regarding historic
export violations and other litigation matters. The Committee considered a report from management
setting out the basis for the judgements made on each of these items and the extent to which this was
supported by third party legal and other specialist advice. Additionally, the Board met separately with
internal legal counsel and received reports from the Group Corporate Affairs Director regarding the
above matters and these discussions were shared with the Audit Committee. The Committee agreed
with the judgements made by management.
The key areas reviewed by the Committee were the issue relating to the supply from a vendor of
non-conforming raw material identified in the year and judgements made by management relating to
selling prices, product quantities and unit costs on a small number of onerous production contracts.
The Committee considered a report from management setting out the bases for the judgements made
on each of these items. Additionally, sensitivities were discussed on assumptions which were not
contractually agreed at the balance sheet date. The Committee agreed with the accounting treatment
adopted.
Assumptions on mortality, inflation and the rates at which scheme liabilities are discounted can have a
significant impact on the value at which retirement benefit obligations are included in the financial
statements. The Committee considered a report from management setting out the basis on which the
2013 assumptions had been determined and benchmarking the Group’s assumptions used in the 2012
consolidated financial statements against those disclosed by other large corporate entities. The
Committee concluded that the assumptions recommended, and which were supported by third party
actuarial advice, were appropriate.
Judgements have to be made by management on the tax treatment of a number of transactions in
advance of the ultimate tax determination being known. In determining the appropriateness of the
estimates made, the Committee considered a report from management setting out the basis for the
judgements and also met with the Group’s independent tax advisors, Deloitte LLP, during the year. The
Committee also discussed with management the basis for determining the extent to which deferred
tax assets and liabilities were offset against one another in both the current and prior accounting
period. The Committee concluded that the position taken was appropriate.
The Audit Committee discussed the treatment and disclosure of items included within exceptional
operating items. In particular, the Committee discussed the treatment of the issue relating to the
supply from a vendor of non-conforming raw material and agreed that the nature of the item and its
significance was such that it should be treated as an exceptional operating item. The Committee also
considered the treatment of other exceptional items and noted they were treated appropriately and
consistently year on year. The Committee concluded that the treatment and disclosure of exceptional
operating items was appropriate.
The Committee also discussed each of the above judgements with the external auditors in reaching their conclusions.
MEGGITT PLC REPORT AND ACCOUNTS 2013 45
Key areas of oversight
External audit
The external auditors are PricewaterhouseCoopers LLP (PwC)
who were appointed as Group auditors on 2 October 2003 after
a competitive tender. There are no contractual obligations
restricting the Committee’s choice of external auditors.
The lead audit partner is Mr A Paynter whose appointment in
this role commenced with the audit for the financial year ended
31 December 2013. Mr Paynter has had no previous involvement
with the Group in any capacity.
The Committee assessed the effectiveness of PwC and the
external audit process using a questionnaire and a Committee
discussion on the responses to the questionnaire. The Committee
was satisfied with PwC’s performance and the external audit
process and that they had employed an appropriate level of
professional challenge in fulfilling their role. 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 2014. It has recommended that the Board submit the
re-appointment of PwC to shareholders for approval at the
AGM in 2014.
The Committee keeps under review the ongoing legislative
proposals on audit tendering and rotation from the EU and the
Competition Commission, and will implement them when they
become final. These proposals have effectively superseded the
comply-or-explain provision in the Code, which would have applied
to the Company for the first time this year. The FRC plans to
withdraw this tendering provision during 2014. Subject to the
changing regulatory regime and the Committee continuing to be
satisfied with the effectiveness of the auditors, which they will
consider annually, the Group does not expect to put the external
audit services out for tender before the end of the current audit
partner rotation period in 2018, i.e. after the audit for the financial
year ending 31 December 2017.
The Committee met with PwC without executive management
present and there were no concerns raised at that meeting. It
was confirmed that the external auditors had been able to offer
rigorous and constructive challenge to executive management
during the year.
Non-audit services
The Group places great importance on the independence of its
external 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. Details of the fees paid for
audit services, audit-related services and non-audit services can
be found in note 8 to the financial statements. The fees paid for
non-audit services in 2013 were £0.1 million (6% of the total audit
fee). Fees paid related to services permitted to be provided by
PwC under the Group’s policy on non-audit services.
The Group’s policy on non-audit services covers which services
can be provided and which generally cannot be provided (for
example internal audit services, tax planning). The full policy is
disclosed on our website.
On balance, the Committee is satisfied that the overall levels of
audit-related and non-audit fees are not material relative to the
income of the office of PwC conducting the audit or PwC as a
whole and therefore the objectivity and independence of the
external auditors was not compromised.
Internal audit
The Committee agrees the annual internal audit plan which is
developed according to a risk assessment process and ensures
that adequate resources are available to execute the plan. At
each meeting, the Committee receives a status update on the
audit programme and reviews, discusses and challenges any
significant issues arising and monitors implementation by the
business of the recommendations made. All significant Group
sites are visited by internal audit at least every three years. In
2013, internal audits were carried out at a number of Group sites,
including pre and post-SAP implementation audits and the
annual audit of the finance shared service centres. It was also
agreed that additional IT areas would be added to the scope of
internal audit in 2014.
The Committee met internal audit without executive
management present. No concerns were raised at the meeting
and it was confirmed that internal audit had been able to carry
out their work and offer constructive challenge to executive
management during the year.
The Committee considered the effectiveness of internal audit
and confirmed that they were satisfied.
Whistleblowing
The Committee is responsible for reviewing the process for
handling allegations from whistleblowers and has confirmed that
it is satisfied with the Group’s process. Whistleblowing is covered
under our Ethics and Business Conduct Policy, which is available
on our website.
The Group sponsors an independently operated and monitored
Ethics Line, enabling employees to report concerns about
possible misconduct, with proportionate and independent
investigation and appropriate follow-up action. Whistleblowing
reports are reviewed regularly by the Ethics and Trade
Compliance Committee of the Board and the Audit Committee is
responsible for reviewing whistleblowing procedures annually.
On behalf of the Audit Committee
David Williams
Chairman of the Audit Committee
3 March 2014
MEGGITT PLC REPORT AND ACCOUNTS 2013 STRATEGIC REPORT FINANCIAL STATEMENTS SUPPLEMENTARY INFORMATION GOVERNANCE REPORTS 46 Nominations Committee report
Chairman’s introduction
The Nominations Committee plays a leading role in assessing
the balance of skills and experience on the Board and the
Group’s principal committees. The Committee identifies the
roles and capabilities required to meet the demands of the
business and, with due regard to diversity, ensures that a
succession plan is in place. Candidates continue to be considered
on merit against specific criteria determined by the Committee.
During 2013, a successor was appointed for Mr Young as Group
Finance Director, after the announcement on 9 January 2013 of
his appointment as Chief Executive effective from 1 May 2013.
Following a rigorous search process using executive search firm
Russell Reynolds Associates, involving both external and internal
candidates, Mr Doug Webb was appointed as Chief Financial
Officer on 6 June 2013. Mr Webb is a chartered accountant and
was most recently Chief Financial Officer at London Stock
Exchange Group Plc and, prior to that, Chief Financial Officer at
QinetiQ Group Plc. Mr Webb’s extensive experience in senior
international financial positions across a range of industries
including defence, aerospace, engineering, technology and
financial services make him an outstanding appointment for the
role of Chief Financial Officer.
As well as considering matters relating to succession and
composition, the Committee confirmed it was satisfied with its
own effectiveness as a result of its 2013 evaluation.
We announced on 27 February 2014 that David Robins will
retire from the Board at the end of the 2014 AGM. Throughout
his time on the Board, David has always offered good advice and
independent challenge, and we have certainly benefitted from his
significant financial markets experience. On behalf of the Board,
I would like to thank David for his appreciable contribution to the
Board and the Group over the last 12 years.
In 2014, the Committee will continue to review the composition of
the Board and succession plans for executive and non-executive
directors.
Committee membership and attendance during 2013
Name
Sir Colin Terry (Chairman)
Mr T Twigger (to 1 May 2013)
Mr S G Young (from 1 May 2013)
Mr G S Berruyer
Mr P G Cox*
Mr P Heiden*
Ms B L Reichelderfer
Mr D M Williams
Meetings
eligible Meetings
to attend attended
7
3
4
7
7
7
7
7
7
3
4
7
6
5
7
7
* Mr Cox sent his apologies for a Committee meeting held on 9 January
2013 as he had, on that day, a board meeting of another company of
which he is a non-executive director which had been arranged before
his appointment to the Meggitt board. Mr Heiden sent his apologies for
the meetings held on 9 January 2013 and 1 May 2013. In advance of
Committee meetings, the Chairman discussed the matters to be
covered at the meeting with directors who had sent their apologies.
Terms of reference
The Committee operates within agreed Terms of Reference (last
updated in 2012 and scheduled for review in 2014) which are on
our website.
Responsibilities
The Committee reviews the structure, size and composition
(including the skills, knowledge, experience and diversity)
of the Board and, in consultation with the directors, makes
recommendations to the Board on any proposed changes.
Decisions on Board changes are taken by the Board as a whole.
In performing its duties, the Committee has access to the
services of the Company Secretary and may seek external
professional advice at the Group’s expense.
Board 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 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 (see below and page 34); and
• Reviewing this policy from time to time and continuing to
disclose this policy in the Annual Report.
The Board remains committed to ensuring that the directors
bring a wide range of skills, knowledge, experience, backgrounds
and perspectives. Our non-executive directors are from the
UK, US and France, and have a range of different skills and
experience, from energy to aerospace, financial, technology and
city backgrounds to an electrical engineer and a serving chief
executive. At 31 December 2013, 10% of the Board were female.
The Board will review our Board diversity target in 2014 in light
of succession planning objectives and will publish any proposed
changes in our 2014 Annual Report.
External search consultancies
During 2013, the Committee used Russell Reynolds Associates
to assist in the search for the Chief Financial Officer and
another senior financial appointment below Board level.
Russell Reynolds Associates do not have any other connection
with the Group.
On behalf of the Nominations Committee
Sir Colin Terry
Chairman of the Nominations Committee
3 March 2014
MEGGITT PLC REPORT AND ACCOUNTS 2013
Directors’ remuneration report
47
Chairman’s introduction and annual statement
It is my pleasure to present the Directors’ remuneration report for the year ended
31 December 2013. The Remuneration Committee (Committee) hope that you find the
new layout of the report (incorporating this annual statement, the Policy report and an
annual report on remuneration) to be clear and transparent. The Policy report and
annual report on remuneration will be submitted separately to shareholders for
approval at our AGM on 7 May 2014. Shareholders will separately be asked to approve
a new Long Term Incentive Plan (LTIP) which, if approved, will replace the Equity
Participation Plan (EPP) and Executive Share Option Scheme (ESOS) from 2014
onwards.
Pay philosophy
Executive remuneration packages at Meggitt 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 delivering value to shareholders. The package
targets fixed pay at market competitive levels to companies of a similar size and with
similar operating characteristics, supplemented by performance related annual
bonuses and an equity-based long term incentive plan designed to reward and
incentivise growth, and provide a strong link to Group and individual performance.
2013 activity
The key activity of the Committee in 2013 was to review the remuneration package and
policy for senior executives, taking into account shareholders’ interests and views on pay
structure simplicity and other areas of good practice, whilst keeping the package and
policy aligned with our stated pay philosophy. The major changes we consulted on were:
(i) simplifying the long term incentive structure into a single LTIP and introducing
performance measures which reflect Meggitt’s strategic goals (see page 50);
(ii) introducing annual bonus deferral into shares (see page 49);
(iii) introducing clawback provisions (see pages 49 to 50); and
(iv) increasing directors’ share ownership guidelines (see page 51).
The intended remuneration arrangements for 2014 outlined in this report are based
on this revised remuneration package and Policy.
2013 performance
Ongoing demand growth in civil original equipment and energy was tempered by
softness in the civil aftermarket and military, and operational challenges in the year
caused a further drag on growth. Revenue grew 2% and underlying profit before tax
grew 3%, driving a 3% increase in underlying EPS to 37.5p. With a strong order book
and an improving trend in civil aftermarket, there is good momentum going into 2014.
ESOS awards made in 2011 vested at 76.0% based on three-year cumulative underlying
EPS performance to 31 December 2013 (see page 59). Performance of the EPP awards
made in August 2011, where vesting has not yet been confirmed, is shown on page 58.
The Committee has used its discretion to reduce the vesting outcome under the Short
Term Incentive Plan (STIP) (for 2013 performance) and ESOS and EPP (for the EPS
element of awards vesting in 2014) in relation to the supply from a vendor of non-
conforming raw material in 2012, which was discovered in 2013 and impacted our
customers. This issue was caused by a process failure at a properly qualified supplier,
and was recovered by the Group with all necessary diligence. However, the Committee
feels the financial impact felt by shareholders should be recognised and has therefore
used its discretion to reduce the STIP and LTIP (see annual report on remuneration).
This Directors’ remuneration report has been prepared in accordance with the
provisions of the Companies Act 2006 and Schedule 8 of the Large and Medium sized
Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013.
The report meets the requirements of the UK Listing Authority’s Listing Rules and
the Disclosure and Transparency Rules. In this report we describe how the principles
relating to directors’ remuneration, as set out in the Code, are applied in practice. The
Committee confirms that throughout the financial year the Company has complied with
the Code. We have identified which sections of the report are audited.
Paul Heiden
Chairman of the Remuneration Committee
MEGGITT PLC REPORT AND ACCOUNTS 2013 STRATEGIC REPORT FINANCIAL STATEMENTS SUPPLEMENTARY INFORMATION GOVERNANCE REPORTS 48 Directors’ remuneration report continued
The Policy report
This section of the report sets out the Remuneration Policy for the directors, which shareholders will be asked to approve at the 2014
AGM. The Committee intends that the Policy will come into effect from our AGM on 7 May 2014.
Executive Director Remuneration Policy Table
Base salary
Function
Operation
To attract and retain talent by ensuring base salaries are competitive in the relevant talent market.
Salary will be reviewed by the Committee annually, in February, with changes effective from 1 April of that year.
Salaries for the year under review are disclosed in the annual report on remuneration.
In deciding salary levels, the Committee considers personal performance including how the individual has helped
to support the strategic objectives of the Group. The Committee will also consider employment conditions and
salary levels across the Group, and prevailing market conditions.
Salaries are paid to existing directors in GBP; however the Committee reserves the right to pay future and
existing directors in any other currency (converted at the prevailing market rate when a change is agreed).
Opportunity
It is not anticipated that percentage salary increases for executive directors will exceed those of the wider
workforce over the period this Policy will apply. Where increases are awarded in excess of the wider employee
population, for example if there is a material change in the responsibility, size or complexity of the role, the
Committee will provide the rationale in the relevant year’s annual report on remuneration.
Performance
metrics
None explicitly, but salaries are independently benchmarked periodically against FTSE companies in similar
industries and those with similar market capitalisation. Personal performance is also taken into account when
considering salary increases.
Pension
Function
Operation
Opportunity
To provide post-retirement benefits for executive directors in a cost-efficient manner.
The pension plans operated by the Group which executive directors are, or could be, members of are:
– Meggitt Pension Plan (defined benefit pension plan, closed to new members).
– Meggitt Workplace Savings Plan (defined contribution personal pension scheme, open to new members).
Salary is the only element of remuneration that is pensionable. There are no unfunded pension promises or
similar arrangements for directors.
From 2013, it has been our Policy that new executive director external appointments (including Mr Webb) are eligible
for a pension allowance of 25% of salary, payable either as pension contribution up to any limit set in current
regulations or, above such limits, in cash. Where agreements have been made prior to the approval of this Policy
which entitle an executive to receive a pension allowance higher than 25% of salary, pension allowances up to a
maximum of 50% of salary, will be paid; Mr Young and Mr Green had agreements prior to the approval of this Policy
which entitles them to receive a pension allowance of 50% of salary and this arrangement will continue for these
directors.
Performance
metrics
None.
MEGGITT PLC REPORT AND ACCOUNTS 2013
49
Benefits
Function
Operation
Opportunity
To provide non-cash benefits which are competitive in the market in which the executive director is employed.
The Group may provide benefits including, but not limited to, a company car or car allowance, private medical
insurance, permanent health insurance, life assurance, a fuel allowance, a mobile phone, relocation costs and
any other future benefits made available either to all employees globally or all employees in the region in which
the executive director is employed.
Benefits vary by role and individual circumstances; eligibility and cost is reviewed periodically. Benefits in respect
of the year under review are disclosed in the annual report on remuneration. It is not anticipated that the costs of
benefits provided will increase significantly in the financial years over which this Policy will apply, although the
Committee retains discretion to approve a higher cost in exceptional circumstances (e.g. to facilitate recruitment,
relocation, expatriation etc) or in circumstances where factors outside the Group’s control have changed
materially (e.g. market increases in insurance costs).
Performance
metrics
None.
Annual bonus - STIP
Function
Operation
To incentivise executive directors on delivering annual financial and personal targets.
Performance measures, targets and weightings are set at the start of the year.
The performance period of the STIP is a financial year. After the end of the financial year, to the extent that the
performance criteria have been met, 75% of the STIP award is paid in cash to the director. The remaining 25% of
the award will be deferred into shares and released (with no further performance conditions attached, and no
matching shares provided) after a further period of two years.
The Committee will have the discretion to apply clawback to reduce the size of deferred STIP awards in the event
of a material misstatement of results or personal misconduct, and such awards will lapse in certain leaver
circumstances (see page 54 for details).
Opportunity
The STIP provides for a maximum award opportunity of up to 150% of salary in normal circumstances with an
on-target opportunity of 100% of salary and an opportunity of 50% of salary at threshold for any single measure.
The Committee has discretion to make a STIP award of up to 200% of salary in exceptional circumstances (e.g.
a substantial contract win which has a significant positive financial impact in the long term but which has no, or
negative, short term financial impact). Dividends accrue on unvested deferred STIP awards over the vesting
period and are released on the vesting date.
Performance
metrics
STIP awards are based on the achievement of financial and personal performance targets. For the executive
directors, two thirds of the STIP will be weighted to financial performance, with the remainder subject to personal
performance. The relative weightings of the financial and personal elements for any STIP period, and the
measures used to assess financial and non-financial performance, will be set by the Committee in its absolute
discretion to align with the Group’s operating and strategic priorities for that year.
The award for performance under each element of the STIP will be calculated independently. The Committee will
have discretion to review the consistency of the pay-out of the financial and personal elements and adjust the
total up or down (within the levels specified above) if it does not consider this to be a fair reflection of the
underlying performance of the Group or the individual.
The personal performance element will typically be based on three to five objectives relevant to the executive’s
role.
Details of the measures, weightings and targets applicable to the STIP for each year, including a description of
how they were chosen and whether they were met, will be disclosed retrospectively in the annual report on
remuneration for the following year (subject to commercial sensitivity).
MEGGITT PLC REPORT AND ACCOUNTS 2013 STRATEGIC REPORT FINANCIAL STATEMENTS SUPPLEMENTARY INFORMATION GOVERNANCE REPORTS 50 Directors’ remuneration report continued
Long Term Incentive Plan (LTIP)—subject to shareholder approval
Function
Operation
To align the interests of executive directors with shareholders in growing the value of the Group over the long
term.
The LTIP, the introduction of which is subject to shareholder approval at the 2014 AGM, would replace the EPP and
ESOS. Under the LTIP, executive directors will be eligible to receive annual awards over Meggitt shares vesting
after three years subject to the achievement of stretching performance targets.
Opportunity
Performance
metrics
Whilst it is the current intention that LTIP awards will be in the form of nil cost options, the LTIP provides, at the
absolute discretion of the Committee, for awards over conditional shares, market value share options and
phantom awards.
The Committee will have the discretion to apply clawback to reduce the size of unvested LTIP awards in the event
of a material misstatement of results or personal misconduct.
Executive directors will normally be eligible for annual LTIP awards of 220% of salary. Awards up to a maximum
of 300% of salary may be granted in exceptional circumstances (e.g. to support the recruitment of a key executive
or to recognise exceptional individual performance). The award opportunity under the LTIP has been calibrated to
be equivalent, in fair value terms, to that granted in aggregate under the previous EPP/ESOS structure.
30% of an award will vest if performance against each performance condition is at threshold and 100% if it is at
maximum, with straight line vesting in between.
Dividends accrue on unvested LTIP awards over the vesting period and are released, to the extent the LTIP award
vests, on the vesting/exercise date.
Vesting of LTIP awards is subject to continued employment and performance against three measures, which are
intended to be as follows:
• Earnings per Share (EPS);
• Return on Trading Assets (ROTA), which is underlying operating profit after tax divided by net trading assets,
measured at constant currency. Net trading assets are adjusted to exclude goodwill and other intangibles
arising on the acquisition of a business, derivative financial instruments, retirement benefit obligations,
deferred tax and net debt; and
• Strategic goals (typically to be based on three strategic priorities around execution, growth and innovation).
The way these measures link to our KPIs can be seen on pages 18 to 21. It is the current intention that the
weighting of the measures will be equal (i.e. one third each) but that the Committee will consider, and adjust if
deemed appropriate, the weighting at the start of each LTIP cycle. Any commercially-sensitive information on
measures, targets and performance will be disclosed retrospectively.
Awards made under the LTIP will have a performance period of three financial years, starting from 1 January of
the year in which the award is made and ending on 31 December of the third year. If no entitlement has been
earned at the end of the relevant performance period, awards will lapse.
Vesting of the strategic element will also be subject to a discretionary assessment by the Committee of the extent
to which achievement of the strategic objectives is consistent with the underlying financial performance over the
three-year period.
The measures and targets in operation for grants made under the ESOS and EPP in the current year, and which
are not deemed commercially sensitive are disclosed in the annual report on remuneration.
Sharesave Scheme and Share Incentive Plan
Function
Operation
To align the interests of employees and shareholders by encouraging all employees to own Meggitt shares.
Sharesave—All employee scheme under which all UK employees (including executive directors) may save up to
the maximum monthly savings limit (as determined by legislation) over a period of three or five years. Options
under the Sharesave Scheme are granted at a discount of up to 20% to the market value of shares at the date of
grant.
Share Incentive Plan—All employee scheme under which (i) all UK employees (including executive directors) may
contribute up to the monthly maximum (as determined by legislation) to purchase shares monthly from pre-tax
pay; and (ii) all UK employees (including executive directors) may receive free shares up to the annual maximum
value (as determined by legislation).
Opportunity
Savings, contributions and free shares are capped at the prevailing legislative limit at the time UK employees are
invited to participate.
Performance
metrics
None.
MEGGITT PLC REPORT AND ACCOUNTS 2013 51
Notes to the Policy table
The Committee is satisfied that the above Policy is in the best interests of shareholders and does not promote excessive risk-taking.
The Committee retains discretion to make minor, non-significant changes to the Policy without reverting to shareholders.
Payments from outstanding awards
Outstanding awards are currently held by the directors under the EPP and the ESOS, the Group’s long term incentives operated prior
to the introduction of the proposed LTIP in 2014. These awards will continue to vest (subject to performance conditions being met)
and be capable of exercise during the period over which this Policy applies. The tables on pages 66 to 67 highlight outstanding and
vested awards.
Approach to target setting and performance measure selection
Targets applying to the STIP and LTIP are reviewed annually, based on a number of internal and external reference points, including
the Group’s strategic plan, analyst forecasts for Meggitt and its sector comparators, historical growth achieved by Meggitt and its
sector comparators and external expectations for growth in Meggitt’s markets.
STIP
The performance measures used under the STIP reflect financial targets for the year and non-financial performance objectives. The
Policy provides the Committee with flexibility to select appropriate measures on an annual basis.
STIP performance targets are set to be stretching but achievable, with regard to the particular personal performance objectives and
the economic environment in a given year. For financial measures, ‘target’ is based around the annual budget approved by the Board.
Prior to the start of the financial year, the Committee sets an appropriate performance range around target, which it considers
provides an appropriate degree of ‘stretch’ challenge and an incentive to outperform.
LTIP
It is proposed that the vesting of future LTIP awards is linked to EPS, ROTA and the achievement of long-term strategic goals.
EPS is considered by the Board to be the most important measure of Meggitt’s financial performance. It is highly visible internally,
is regularly monitored and reported, and is strongly motivational for participants. EPS targets will continue to be set on a nominal
cumulative (pence) basis to incentivise consistent performance and reflect the fact that Meggitt’s profits are generated to a large
degree outside the UK and not significantly influenced by UK retail price inflation.
ROTA helps to balance the achievement of growth and returns. The Committee believes ROTA is a good internal proxy for total
shareholder return (TSR) which focuses executives on managing the balance sheet and Meggitt’s operational performance, whilst
also being less remote for participants below Board level. The definition of net trading assets for ROTA excludes goodwill and other
intangible assets arising when a business is acquired, to reflect that acquisitions are not within the control of the majority of
participants. In order to safeguard against poor acquisitions the Committee has overall discretion to reduce the outcome under the
ROTA element if in its opinion the outcome does not reflect the underlying financial performance of the Group. The performance of
acquisitions against Board approved targets is also monitored separately.
The Committee believes that the strategic goals component will help reinforce the realisation of Group strategy and the achievement
of key non-financial and strategic goals over long product cycles which drive long-term value at Meggitt. The element will typically
comprise a scorecard of three-year targets across a maximum of three core strategic areas for the Group. The Committee believes
that this approach will enable it to reflect the Group’s long-term nature and shifting strategic priorities in the LTIP to ensure
executives’ interests remain closely aligned with those of our shareholders over time. Specific measures and targets for each area
will be developed and clearly defined at the start of each three-year cycle to balance leading and lagging indicators of performance.
Vesting of this element is subject to a discretionary assessment by the Committee of the extent to which achievement of the strategic
objectives is consistent with Meggitt’s underlying financial performance over the performance period.
Remuneration policy for other employees
The remuneration policy for other employees is based on broadly consistent principles as that for executive directors. Annual salary
reviews take into account Group performance, local pay and market conditions, and salary levels for similar roles in comparable
companies. Some employees below executive level are eligible to participate in annual bonus schemes; opportunities and
performance measures vary by organisational level, geographical region and an individual’s role. Senior executives are eligible for
LTIP on similar terms as the executive directors, although award opportunities are lower and vary by organisational level. All UK
employees are eligible to participate in the Sharesave Scheme and Share Incentive Plan on identical terms.
Share ownership guidelines
During the year, the Committee increased the minimum shareholding guidelines for executive directors from 100% to 300% of base
salary for the Chief Executive and from 100% to 200% of base salary for each of the other executive directors. There is no set time
frame within which directors have to meet the guideline, however until they meet the guideline they are not permitted to sell more
than 50% of the after-tax value of a vested share award. The shareholding requirement ceases when a director leaves the Group.
Further information on the shareholding requirement is in the annual remuneration report (see page 65).
MEGGITT PLC REPORT AND ACCOUNTS 2013 STRATEGIC REPORT FINANCIAL STATEMENTS SUPPLEMENTARY INFORMATION GOVERNANCE REPORTS 52 Directors’ remuneration report continued
Pay-for-performance: scenario analysis
The charts below provide an estimate of the potential future reward opportunities for the executive directors, and the potential split
between the different elements of remuneration under three different performance scenarios: ‘Maximum’, ‘On-target’ and ‘Minimum’.
S G Young (£’000)
D R Webb (£’000)
P E Green (£’000)
29%
29%
42%
26%
30%
44%
29%
29%
42%
Maximum
£3,474
Maximum
£2,192
Maximum
£1,803
48%
31% 21%
44%
34% 22%
48%
31% 21%
On-target
£2,119
On-target
£1,294
On-target
£1,101
100%
100%
100%
Minimum
£1,017
Minimum
£564
Minimum
£530
Salary and benefits
Pension
STIP
LTIP
Potential reward opportunities are based on Policy, applied to 2014 base salaries and 2014 incentive opportunities. Note that the LTIP
awards granted in a year will not normally vest until the third anniversary of the date of grant, and the projected value excludes the
impact of share price movement or dividend accrual.
The ‘Maximum’ scenario reflects fixed remuneration (salary and benefits and pension), plus maximum payout under all incentives
(150% of salary under the STIP, and full vesting of LTIP awards).
The ‘On-target’ scenario reflects fixed remuneration as above, plus target STIP (based on two-thirds of maximum opportunity) and
LTIP threshold vesting (30% vesting).
The ‘Minimum’ scenario reflects fixed remuneration only, being the only elements of the executive directors’ remuneration package
not linked to performance.
Non-executive directors’ remuneration policy table
Non-executive directors are submitted for re-election annually, do not have a contract of service and are not eligible to join the
Group’s pension or share schemes. Details of the Policy on fees paid to our non-executive directors are set out in the table below:
Function
Operation
Fees
To attract and retain non-executive directors of the highest calibre with broad commercial and other experience
relevant to the Group.
Fee levels are reviewed annually, with any adjustments effective 1 April each year. The fees paid to the Chairman
of the Board are determined by the Committee, while the fees for all other non-executive directors are reviewed
by a committee of the Board formed of executive directors. Fees for the year under review and for the current
year are disclosed in the annual report on remuneration.
Additional fees are paid to the chairmen of the Remuneration and Audit Committee and to the Senior Independent
Director, to reflect the additional time commitment of these roles.
In deciding fee increases, the committees consider employment conditions and salary increases across the
Group, and prevailing market conditions.
Currently, all fees are paid in GBP, however the committees reserve the right to pay future and existing non-
executive directors in any other currency (converted at the prevailing market rate when a change is agreed) .
Opportunity
Fee increases will be applied taking into account the outcome of the annual review. The maximum aggregate
annual fee for all non-executive directors (including the Chairman) as provided in the Company’s Articles of
Association is £1,000,000.
Performance
metrics
None.
MEGGITT PLC REPORT AND ACCOUNTS 2013
53
Recruitment
External appointments
In cases of hiring or appointing a new executive director from outside the Group, the Committee may make use of all existing
components of remuneration, as follows:
Component
Approach
Maximum annual
grant value
Base salary
The base salaries of new appointees will be determined based on the experience and skills
of the individual, internal comparisons, employment conditions and salary levels across
the Group, and prevailing market conditions. Initial salaries may be set below market and
consideration given to phasing any increases over two or three years subject to
development in the role.
Pension
In line with the Policy, new appointees will be entitled to become members of the Meggitt
Workplace Savings Plan (defined contribution plan) or receive a cash pension allowance of
25% of salary in lieu.
Benefits/
Sharesave/SIP
New appointees will be eligible to receive benefits in line with the Policy, and will be
eligible to participate in all-employee share schemes.
N/A
N/A
N/A
N/A
STIP
LTIP
The structure described in the Policy table will apply to new appointees with the relevant
maximum being pro-rated to reflect the proportion of employment over the year. Targets
for the personal element will be tailored to the appointee.
150% of salary
(200% in exceptional
circumstances)
New executive director appointees will be granted awards under the LTIP on similar terms
as other executives, as described in the Policy table.
220% of salary
(300% in exceptional
circumstances)
In determining the appropriate remuneration structure and levels, the Committee will take into consideration all relevant factors to
ensure that arrangements are in the best interests of Meggitt and its shareholders. The Committee may make an award in respect of
a new appointment to ‘buy out’ incentive arrangements forfeited on leaving a previous employer, i.e. over and above the approach
outlined in the table above. Any such compensatory awards will be made under existing share schemes, where appropriate, and will
be subject to the normal performance conditions of those schemes.
The Committee may also consider it appropriate to structure ‘buy-out’ awards differently to the structure described in the Policy
table, exercising the discretion available under UKLA Listing Rule 9.4.2 R where necessary to make a one-off award to an executive
director in the context of recruitment. In doing so, the Committee will consider relevant factors including any performance conditions
attached to these awards, the likelihood of those conditions being met and the proportion of the vesting period remaining. The value
of any such buy-out will be fully disclosed.
Internal promotion
In cases of appointing a new executive director by way of internal promotion, the Policy will be consistent with that for external
appointees, as detailed above. Any commitments made prior to an individual’s promotion will continue to be honoured even if they
would not otherwise be consistent with the Policy prevailing when the commitment is fulfilled, although the Group may, where
appropriate, seek to revise an individual’s existing service contract on promotion to ensure it aligns with other executive directors
and prevailing market best practice; in 2013, the Committee reviewed Mr Young’s service contract, which was subsequently updated
on 1 May, on his promotion to Chief Executive.
Disclosure on the remuneration structure of any new executive director, including details of any exceptional payments will be
disclosed in the RIS notification made at the time of appointment and in the annual report on remuneration for the year in which the
recruitment occurred.
Non-executive directors
In recruiting a new non-executive director, the Committee will use the Policy as set out in the table on page 52.
MEGGITT PLC REPORT AND ACCOUNTS 2013 STRATEGIC REPORT FINANCIAL STATEMENTS SUPPLEMENTARY INFORMATION GOVERNANCE REPORTS 54 Directors’ remuneration report continued
Service contracts and exit payment policy
Executive director service contracts, including arrangements for early termination, are carefully considered by the Committee and
are designed to recruit, retain and motivate directors of the quality required to manage the Group.
The Committee’s Policy is that executive director service contracts should be terminable on no more than 12 months’ notice. The
Committee’s approach to payments in the event of termination of employment of a director is to take account of the particular
circumstances, including the reasons for termination, individual performance, contractual obligations and the rules of the Group’s
applicable incentive plans which apply to share awards held by the executive directors:
• Compensation for loss of office in service contracts
Except as set out in the table below, under the terms of their service contracts, the executive directors may be required to work during
their notice period or may, if the Company decides, be paid in lieu of notice if not required to work the full notice period. Payment in
lieu of notice will be equal to base salary plus the cost to the Group of providing the contractual benefits (pensions allowance, health
insurance and company car or car allowance) that would otherwise have been paid or provided during the notice period. Payments will
be in equal monthly instalments and will be subject to mitigation such that payments will either reduce, or stop completely, if the
executive director obtains alternative employment.
An executive director’s employment can be terminated by the Group without notice or payment in lieu of notice in specific
circumstances including summary dismissal, bankruptcy or resignation.
• Treatment of STIP
Executive directors have no automatic entitlement to any bonus on termination of employment under the STIP, but the Committee
may use its discretion to award a bonus (normally pro-rated).
Where any bonus is deferred into shares, the award will normally lapse if an executive director’s employment terminates unless
the executive director leaves for specified ‘good leaver’ reasons. The ‘good leaver’ reasons are death, redundancy, retirement,
injury, disability, the business or company which employs the executive director ceasing to be part of the Group, any other
circumstances in which the Committee exercises discretion to treat the executive director as a ‘good leaver’ or on a change of
control. If the executive director is a ‘good leaver’ their award will vest on the normal vesting date, or earlier on a change of control,
and would not be subject to pro-rating.
• Treatment of long term incentive plan awards
The treatment of awards under the ESOS and the EPP is governed by the rules of plans which have been approved by shareholders
and is described below. Similar treatment will apply under the new LTIP which shareholders are being asked to approve at the
2014 AGM.
Awards under the plans will normally lapse if an executive director’s employment terminates unless the executive director leaves
for specified ‘good leaver’ reasons. The ‘good leaver’ reasons are the same as described above. If the executive director is a ‘good
leaver’, awards will vest to the extent that the attached performance conditions are met, but on a time pro-rated basis, with
Committee discretion to allow early vesting. Under the EPP and ESOS awards vest as soon as practicable after an employee has
left. Under the LTIP awards will vest on the normal vesting date.
MEGGITT PLC REPORT AND ACCOUNTS 2013
Mr S G Young
Service contract
dated 1 May 2013
(updated on
promotion to
Chief Executive)
Mr D R Webb
Service contract
dated 6 June 2013
Mr P E Green
Service contract
dated 26 February
2001
A summary of the key terms of the executive directors’ service contracts on termination of employment or change of control is set out
below:
55
Name
Position
Notice period
from employer
Notice period
from employee
Chief Executive
12 months
6 months
Compensation payable on termination of employment or change of control
As set out in the Policy above, but service contract includes an
obligation for the Committee to allow Mr Young to exercise
options and awards under the Group’s share plans that have
already vested at the point of termination.
No change of control provisions.
Chief Financial
Officer
12 months
6 months
As set out in the Policy above.
No change of control provisions.
Group Corporate
Affairs Director
12 months
6 months
Mr Green’s service contract was entered into before 27 June
2012 and has not been modified or renewed after that date. As
such, remuneration or payments for loss of office that are
required to be made under Mr Green’s service contract are
not required to be consistent with the Policy set out above.
Payments to Mr Green under his service contract differ from
the Policy set out above in the following respects:
On termination of employment, Mr Green is entitled to a
liquidated damages payment equal to his salary and the value
of his contractual benefits (bonus, pension allowance,
insurance and company car or car allowance) at the date of
termination, pro-rated to the remaining notice period less an
amount equal to 5% of the aggregate sum and the Committee
shall exercise its discretion under the Group’s share plans to
treat Mr Green as a ‘good leaver’.
On change of control, Mr Green may give notice to terminate
his employment within 6 months of the event and upon such
termination he shall become entitled to the liquidated
damages payment summarised above.
External appointments held by executive directors
The Board believes that the Group 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 deterioration
in the individual’s performance. Details of external appointments and the associated fees received are included in the annual report
on remuneration on page 64.
Consideration of conditions elsewhere in the Company
The Committee does not consult with employees specifically on executive remuneration policy and framework but does seek to
promote and maintain good relations with employee representative bodies—including trade unions and works councils—as part of its
broader employee engagement strategy and consults on matters affecting employees and business performance as required in each
case by law and regulation in the jurisdictions in which the Group operates. Salary increases made elsewhere in the Group are
amongst the data that the Committee considers in determining salaries for executive directors.
Consideration of shareholder views
The Committee considers shareholder views received during the year and at the AGM each year, as well as guidance from
shareholder representative bodies more broadly. The majority of shareholders continue to express support of remuneration
arrangements at Meggitt.
MEGGITT PLC REPORT AND ACCOUNTS 2013 STRATEGIC REPORT FINANCIAL STATEMENTS SUPPLEMENTARY INFORMATION GOVERNANCE REPORTS 56 Directors’ remuneration report continued
Annual report on remuneration
The following report provides details of how our Policy was implemented during the year ended 31 December 2013.
Remuneration Committee—2013 membership and attendance
Name
Mr P Heiden (Committee chairman)
Mr G S Berruyer
Mr P G Cox
Ms B L Reichelderfer
Mr D M Williams
Meetings
eligible
to attend
Meetings
attended
6
6
6
6
6
6
6
6
6
6
There was one meeting between the end of the financial year and the date of signing of this report, at which all members attended.
Activities for the year are described in the Chairman’s introduction. The Committee operates within agreed Terms of Reference
available on our website. The Committee is responsible for determining the remuneration policy and packages for all executive
directors and Executive Board members (covering five of the next most senior executives across the Group) 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.
Advisers to the Committee
During the year, the Committee’s independent remuneration advisor was Kepler Associates (‘Kepler’). Kepler, appointed in 2010, was
selected by the Committee as a result of a competitive tender process. The Committee evaluates the support provided by Kepler
annually and is comfortable that they provide independent remuneration advice to the Committee. Kepler provide guidance on
remuneration matters at Board level and below. Kepler do not have any other connection with the Group. Kepler is a member of the
Remuneration Consultants Group and adheres to its code of conduct (www.remunerationconsultantsgroup.com). Their total fees in
2013 were £87,000.
Shareholder consultation and 2013 AGM voting
A consultation letter was issued in October 2013 to our top 20 shareholders covering over 65% of our shareholder base on a revised
remuneration package and policy, principally covering the proposed introduction of bonus deferral arrangements and a new LTIP
(with clawback provisions attached to both), on which we received positive feedback from most of these investors. We issued a
second letter in December 2013 with clarifications, particularly related to LTIP performance measures. The majority of responses
were supportive and therefore the Committee agreed to propose the Policy unchanged for shareholder approval at the AGM.
Following feedback received from investor advisory bodies in advance of the 2013 AGM, the Committee also reviewed the level of
pension contribution for Mr Young and Mr Green (50% of salary). These arrangements reflect contractual provisions to participate in
the Meggitt Pension Plan (MPP), a defined benefit scheme. On reaching the government’s Lifetime Allowance (which Mr Young and Mr
Green both reached in April 2012), executives may cease accruing further benefit under the MPP and receive the 50% allowance on
their full salary. As part of the wider review of executive remuneration, the Committee considered ways to address this concern. The
Committee decided that rather than rebalance the package (e.g. through significant salary increases or higher incentive
opportunities), it was simpler and more equitable to make no changes to these legacy pension arrangements. As stated in the Policy
report, however, pension contributions for new executive directors (as provided to Mr Webb) will be limited to 25% of salary.
The following table shows the results of the advisory vote on the 2012 Directors’ remuneration report at the 2013 AGM:
Resolution text
Votes for1
% of votes
cast for
Approval of Directors remuneration report
614,771,357
99.3
Votes against
4,225,279
% of votes
cast against
Total votes cast
Votes withheld
(abstentions)
0.7
618,996,636
45,795,274
1 A withheld vote is not a vote in law and is not counted in the calculation of the proportion of votes cast for and against a resolution.
MEGGITT PLC REPORT AND ACCOUNTS 2013
57
Single total figure of remuneration for executive directors (audited)
The table below sets out a single figure for the total remuneration received by each executive director for the year ended
31 December 2013 and the prior year:
Base salary
Taxable benefits2
Pension
STIP3
EPP basic4
EPP matching4
ESOS5
Total
Mr S G Young
Mr D R Webb
Mr P E Green
Mr T Twigger1
2013
£’000
554
21
277
250
153
108
280
2012
£’000
382
20
178
459
414
307
512
1,643
2,272
2013
£’000
240
8
57
93
-
-
-
398
2012
£’000
–
–
–
–
–
–
–
–
2013
£’000
325
14
163
126
119
84
218
2012
£’000
309
17
142
372
316
235
391
2013
£’000
220
10
110
78
456
312
659
2012
£’000
639
30
320
767
690
512
854
1,049
1,782
1,845
3,812
4
2
3
1 Mr Twigger was a director of the Company from 1 January 2013 until 1 May 2013, but continued as an employee until 30 June 2013. Remuneration
received as a result of his role as CEO is disclosed in this table. Details of remuneration for the period 1 May to 30 June 2013 is disclosed under
payments to past directors on page 62.
Taxable benefits consist primarily of company car or car allowance, fuel allowance and private health care insurance.
STIP paid for performance over the relevant financial year. Further details of the 2013 STIP, including performance measures, actual performance and
bonus payouts, can be found on page 58.
EPP is calculated as the number of shares vesting based on performance measures substantially completed during the year, valued at the market
value of the shares. For 2013, the figure represents the vesting outcome of the EPS element of the 2011 EPP award (the performance period ended on
31 December 2013) and an estimate of the outcome under the TSR element of the 2011 EPP award (the performance period of which will end in August
2014) based on performance to 31 December 2013. The market value of vested shares is based on the average share price over the last quarter of 2013
of 526.38p. For 2012, the figure represents the actual vesting outcome of 2010 EPP award valued at the share price on the date of vesting (533.00p on
16 August 2013). The valuation of the 2011 EPP award will be updated for the actual vesting outcome of the TSR element in August 2014 and the share
price on date of vesting (17 August 2014) in next year’s annual report on remuneration. Further details on performance criteria, achievement and
resulting vesting levels can be found on pages 58 to 59.
ESOS is calculated as the number of shares vesting based on performance measures substantially completed during the year, valued at the difference
between the market value of the shares and the exercise price of the award. For 2013, the figure represents the vesting outcome of the 2011 award. The
market value of vested shares is based on the average share price over the last quarter of 2013 of 526.38p and an exercise price of 351.70p. For 2012,
the 2010 award vested at 100% and the market value and exercise price were 489.70p and 286.10p respectively. The valuation of the 2011 ESOS award
will be amended for the share price on date of vesting (2 March 2014) in next year’s annual report on remuneration. Further details on performance
criteria, achievement and resulting vesting levels can be found on page 59.
5
Single total figure of remuneration for non-executive directors (audited)
The table below sets out a single figure for the total remuneration received by each non-executive director for the year ended
31 December 2013 and the prior year:
Sir Colin Terry
Mr D M Williams
Mr G S Berruyer1
Mr P G Cox2
Mr P Heiden
Ms B L Reichelderfer
Mr D A Robins
1
Appointed 2 October 2012.
2 Appointed 27 September 2012.
2013
£’000
170
72
52
52
62
52
52
2012
£’000
165
70
12
13
57
50
53
MEGGITT PLC REPORT AND ACCOUNTS 2013 STRATEGIC REPORT FINANCIAL STATEMENTS SUPPLEMENTARY INFORMATION GOVERNANCE REPORTS 58 Directors’ remuneration report continued
Incentive outcomes for the year ended 31 December 2013
STIP in respect of 2013 performance
The Board set stretching financial and strategic targets for the STIP at the start of the 2013 financial year. These targets, and our
performance against these, are summarised in the table below.
Measure
Underlying profit before tax
Performance targets
Threshold
£365m
Target
£385m
Stretch
£405m
Free cash flow1
£258m
£283m
£308m
Strategic objectives – Q&D improvement
Strategic objectives – SAP implementation
28 site targets
6 sites
Personal performance
Mr S G Young
Mr D R Webb
Mr P E Green
Mr T Twigger
1 Adjusted to exclude capital expenditure.
Actual
performance
Between
threshold
and target
Below
threshold
At target
At target
At target
At target
At target
At target
The STIP pool generated by the above results is equivalent to approximately 45% of target, however, considering the operational
performance of the Group, particularly the supply from a vendor of non-conforming raw material, the Committee has used its
discretion to reduce the STIP pool by 20%. The following awards were made to directors in respect of 2013 performance:
Mr S G Young
Mr D R Webb1
Mr P E Green
Mr T Twigger1
% salary
39
22
39
12
£’000
250
93
126
78
1 Amounts shown in respect of Mr D R Webb and Mr T Twigger have been prorated based on service as a director during the year.
2011 EPP
The EPP award made in August 2011 vests 50% on cumulative underlying EPS performance, 25% on cash conversion over three
financial years and 25% on the Group’s relative TSR performance over a three-year period commencing on the date of grant, as follows:
Measure
EPS
Weighting %
Period ending
50
31-Dec-2013
Cash conversion
25
31-Dec-2013
TSR
25
17-Aug-2014
Vesting schedule
Outcome
Vesting %
0% vesting below 97p
30% vesting for 97p per share
100% vesting for 111p or more;
Straight line vesting between these points
0% vesting below 87%
30% vesting at 87%
100% vesting at 95% and above;
Straight line vesting between these points
0% vesting below median TSR
30% vesting for median TSR
100% vesting for upper quartile TSR;
Straight line vesting between these points
106.2p1
76.01
Below
threshold
0
n/a2
n/a2
1 Represents growth in EPS of 10.5% over the performance period; the vesting outcome of the EPS portion of the award has been reduced to reflect the
cash impact of the issue relating to the supply from a vendor of non-conforming raw material.
2 The vesting outcome of the portion of the award subject to the TSR performance condition will be confirmed at the end of the three-year performance
period ending in August 2014. For the purposes of the single figure of remuneration table, the estimated vesting of this element of the 2011 award is
0%, based on Meggitt’s relative TSR performance to 31 December 2013 which is below median.
MEGGITT PLC REPORT AND ACCOUNTS 2013 59
2011 ESOS
The ESOS award made in April 2011 vested at 76.0%1 based on three-year cumulative underlying EPS performance to 31 December 2013.
Measure
EPS
Weighting
Period ending
100%
31-Dec-2013
Vesting schedule
Outcome
Vesting %
0% vesting below 97p
30% vesting for 97p per share
100% vesting for 111p or more;
Straight line vesting between these points
106.2p1
76.01
1 Represents growth in EPS of 10.5% over the performance period; the vesting outcome has been reduced to reflect the cash impact of the issue relating
to the supply from a vendor of non-conforming raw material.
Executive
Mr S G Young
Mr P E Green
Interests
held
210,975
164,345
Vesting %
Interests vesting
Date vesting
Estimated market
price at vesting1
76.0
76.0
160,341
124,902
2-Mar-14
2-Mar-14
526.38p
526.38p
Exercise price
351.70p
351.70p
Value
£’000
£280
£218
1 Based on the average share price of the Company over the three months to 31 December 2013.
2010 EPP
As disclosed in the 2012 Remuneration report, the Committee determined that 50% of the 2010 EPP award subject to the three-year
cumulative underlying EPS performance condition vested in full, based on performance to 31 December 2012. The remaining 50% of the
award was dependent on the Group’s TSR performance compared to a group of 17 international aerospace and defence companies over
the three-year period to 16 August 2013. TSR for all comparator companies is measured on a common currency basis.
Measure
TSR
Weighting
Period ending
50%
16-Aug-2013
Vesting schedule
Outcome
Vesting %
0% vesting below median TSR
30% vesting for median TSR
100% vesting for upper quartile TSR;
Straight line vesting between these points
66.4th centile
75.9
Following confirmation of the vesting outcome of this TSR element, the overall vesting outcome for the 2010 EPP award (taking into
consideration the outcomes of both the EPS and TSR elements) is 87.9% of maximum.
To allow for comparability going forward, the Committee has elected to capture the vesting of the entire 2010 EPP award in the
financial year ending 31 December 2012 for the purposes of the single figure, as follows:
Executive
Mr S G Young
Basic award
Matching award
Mr P E Green
Basic award
Matching award
Interests
held
88,379
65,526
67,512
50,054
Vesting %
Interests vested
Date vested
Market price at
vesting
87.9
87.9
77,729
57,630
59,376
44,022
16-Aug-2013
533.00p
16-Aug-2013
533.00p
Value
£’000
£414
£307
£316
£235
MEGGITT PLC REPORT AND ACCOUNTS 2013 STRATEGIC REPORT FINANCIAL STATEMENTS SUPPLEMENTARY INFORMATION GOVERNANCE REPORTS 60 Directors’ remuneration report continued
Scheme interests awarded in the year ended 31 December 2013 (audited)
2013 EPP
Executive1
Mr S G Young
Basic award
Matching award
Mr D R Webb
Basic award
Matching award
Mr P E Green
Basic award
Matching award
Form of award
Date of grant
Shares over which
awards granted
Award price
2
£’000
% of salary3
Date of vesting
Face value
Nil cost option
Nil cost option
Nil cost option
Nil cost option
Nil cost option
Nil cost option
18.03.13
05.09.13
18.03.13
114,556
66,946
60,281
39,868
58,173
33,996
419.01p
478.00p
528.77p
533.00p
419.01p
478.00p
£480
£320
£319
£212
£244
£163
18.03.16
05.09.16
18.03.16
75
50
75
50
75
50
1 Mr Twigger did not receive any awards under the ESOS or EPP in 2013.
2
The award price for the basic award is a 90-day average price up to the award date; the award price for the matching award is based on the market
price on the date of the award. The face value has been calculated using the award price for each award.
3 Based on 2013 salary.
Consistent with awards made in 2012, vesting of EPP awards granted in 2013 is dependent on the achievement of three-year targets
relating to cumulative underlying EPS, cash conversion and relative TSR outperformance. The three-year period over which
performance will be measured will be the three financial years ending 31 December 2015. This includes the performance period for the
TSR element, which the Committee considered it appropriate to align with the other performance measures. The performance
measures are as follows:
Measure
EPS
50%
Weighting
Vesting schedule
Additional information
0% vesting below 121p
30% vesting for 121p per share
100% vesting for 133p or more;
Straight line vesting between these points
0% vesting below 87%
30% vesting for 87%
100% vesting for 95%;
Straight line vesting between these points
Defined as cash flow as a % of underlying profit
after taxation. Cash flow is measured before
dividends, merger and acquisition costs and
capital expenditure.
Cash conversion
25%
TSR outperformance
of median (p.a.)
25%
0% vesting below median TSR
30% vesting for 0% p.a. outperformance
100% vesting for ≥ 8% p.a. outperformance
Straight line vesting between these points
Measured relative to a group of 17 international
aerospace and defence companies.1 TSR for all
comparators is measured on a common
currency basis.
1 BAE Systems, BBA Aviation, Boeing, Cobham, Curtiss Wright, EADS, Esterline Technologies, Finmeccanica, Honeywell, Moog, Rockwell Collins,
Rolls-Royce Group, Safran, Senior, Ultra Electronic Holdings, Woodward Governor, and Zodiac Aerospace.
2013 ESOS
Executive1
Mr S G Young
Mr P E Green
Mr D R Webb
Date of grant
05.09.13
05.09.13
05.09.13
Shares over which
awards granted
243,114
123,456
161,443
Exercise price
2
£’000
% of salary3
Face value
526.50p
526.50p
526.50p
1,280
650
850
200
200
200
1 Mr Twigger did not receive any awards under the ESOS or EPP in 2013.
2
3 Based on 2013 salary.
The exercise price is based on the close price the date before the award is granted. The face value has been calculated using the award price.
MEGGITT PLC REPORT AND ACCOUNTS 2013 61
Consistent with awards made in 2012, vesting of ESOS awards granted in 2013 is dependent on the achievement of three-year
cumulative underlying EPS targets. The three-year period over which performance will be measured will be the three financial years
ending 31 December 2015. The EPS targets are as follows:
Measure
EPS
Weighting
Vesting schedule
100%
0% vesting below 121p
30% vesting for 121p per share
100% vesting for 133p or more;
Straight line vesting between these points
Total pension entitlements (audited)
The table below sets out details of the pension entitlements under the Meggitt Pension Plan (MPP) for Mr Young, Mr Green and Mr
Twigger (until his retirement from the Board on 1 May 2013).
Under the MPP, Mr Young, Mr Green and Mr Twigger accrued defined benefits at 3% of salary per annum up to the Scheme Cap and
were entitled to a cash supplement equivalent to 50% of salary above the Scheme Cap. Since reaching the government’s Lifetime
Allowance Mr Young, Mr Green and Mr Twigger ceased accruing further benefit under the MPP and received a 50% pension allowance
on their full salary.
Mr Young and Mr Green both reached the Lifetime Allowance in April 2012 and ceased to accrue further benefit under the MPP and
instead received a 50% allowance on their full salary. Mr Twigger also received a 50% of pension allowance on his full salary until he
retired from his employment with the Company on 30 June 2013.
Mr Young and Mr Green’s dependants remain eligible for dependants’ pensions and the payment of a lump sum on death in service.
Mr Webb receives a pension allowance of 25% of base salary.The pension allowance payments made in 2013 are included in the single
total figure of remuneration table on page 57.
Mr S G Young1
Mr D R Webb2
Mr P E Green3
Mr T Twigger4
Accrued benefit
2013
£’000
27
2012
£’000
26
Date benefit receivable
05.04.2012
05.04.2012
Total value of additional
benefit if director retires
early
Left MPP
and taken
benefits
Left MPP
and taken
benefits
2013
£’000
N/A
N/A
N/A
2012
£’000
N/A
2013
£’000
73
2012
£’000
71
2013
£’000
46
2012
£’000
44
N/A 26.10.2018
26.10.2018
06.04.2011
06.04.2011
N/A
Nil. Early
retirement
factors cost
neutral
Nil. Early
retirement
factors cost
neutral
Retired
Retired
Transfer value
894
942
–
–
1,741
1,607
1,587
1,664
1 Mr Young opted to leave the MPP and take his pension benefits with effect from 5 April 2012.
2 Mr Webb is not a member of any defined benefit or defined contribution pension scheme operated by the Group. On appointment (6 June 2013), Mr
Webb received a pension allowance of 20% of base salary; this was adjusted to 25% on 1 August 2013, when the Committee agreed the policy on
pension allowances for executive directors.
3 Mr Green opted to leave the MPP with effect from 31 March 2012. He has not drawn his pension.
4 Mr Twigger opted to leave the MPP and take his pension benefits with effect from 6 April 2011. He retired from his employment with the Company on
30 June 2013.
Percentage change in CEO cash remuneration
The table below shows the percentage change in CEO remuneration from the prior year compared to the average percentage change
in remuneration for all executive employees, We have selected our executive population (around 250 people) for this comparison
because it is considered to be the most relevant, due to the structure of total remuneration; most of our senior executives receive
benefits under the same STIP and LTIP structure as our CEO.
Base salary
Taxable benefits
STIP
Total
2013
£’000
647
24
244
915
2012
£’000
639
30
767
1,436
CEO
% change
2012-2013
+1.3
-20.0
-68.2
-36.3
Executive
employees%
change
2012-2013
+3.8
+3.4
-62.8
-13.5
The CEO’s remuneration includes base salary, taxable benefits and STIP. For 2013, the figures comprise elements paid to
Mr T Twigger before his retirement from the Board in May 2013 and payments made to Mr S G Young from his appointment as CEO in
May 2013. The pay for executive employees is calculated using the increase in the earnings of full-time executive employees. The
analysis is based on a consistent set of employees.
MEGGITT PLC REPORT AND ACCOUNTS 2013 STRATEGIC REPORT FINANCIAL STATEMENTS SUPPLEMENTARY INFORMATION GOVERNANCE REPORTS
62 Directors’ remuneration report continued
Relative importance of spend on pay
The table below shows shareholder distributions (i.e. dividends and share buybacks) and total employee expenditure for 2013 and the
prior year, along with the percentage change in both.
Shareholder distributions – dividends1
Total employee expenditure2
2013
£’m
101.4
475.1
2012
£’m
92.5
453.8
% change
2012-2013
9.6%
4.7%
1 Represents dividends paid or proposed in respect of the year. See note 16 of the Group consolidated financial statements.
2 Comprises wages and salaries and retirement benefit costs. See note 9 of the Group consolidated financial statements.
Exit payments made in the year
No exit payments have been made in 2013.
Payments to past directors (audited)
Mr Twigger ceased to be a director on 1 May 2013, and retired on 30 June 2013. Details of Mr Twigger’s remuneration for the period
1 January to 1 May 2013 (including the full value of long-term incentive awards that vested on his retirement from the Group) are
disclosed in the single total figure of remuneration table on page 57. For the period 1 May to 30 June 2013, Mr Twigger continued to
receive base pay and contractual benefits, and was eligible to receive a pro-rated STIP award for this additional period worked; in
total, this amounted to £209,000.
Review of past performance
The remuneration package is structured to help ensure alignment with shareholders. There is no direct correlation between share
price movement and the change in the value of the pay package in any one year (as the remuneration package comprises several
components, some fixed, and others based on non-financial measures) the charts below show how the CEO’s pay has been sensitive
to the share price over the last five years.
This graph illustrates the Company’s performance compared to the FTSE100 Index, which is considered the most appropriate broad
equity market index against which the Group’s performance should be measured. Performance, as required by legislation, is
measured by TSR over the five year period from 1 January 2009 to 31 December 2013:
Meggitt
FTSE 100
£
450
400
350
300
250
200
150
100
50
8
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
31 Dec
2008
31 Dec
2009
31 Dec
2010
31 Dec
2011
31 Dec
2012
31 Dec
2013
The table below details the CEO’s single total figure of remuneration over the same period:
Mr S G Young
Single total figure of remuneration (£’000)
STIP outcome (% of maximum)
EPP vesting (% of maximum)
ESOS vesting (% of maximum)
Mr T Twigger
Single total figure of remuneration (£’000)
STIP outcome (% of maximum)
EPP vesting (% of maximum)
ESOS vesting (% of maximum)
2009
2010
2011
2012
2013
–
–
–
–
1,758
86%
–
100%
–
–
–
–
2,947
86%
50%
100%
–
–
–
–
4,252
100%
69%
100%
–
–
–
–
3,812
80%
88%
100%
1,643
39%
38%
76%
1,845
35%
56%
98%
Figures are provided for Mr T Twigger for the period up to 1 May 2013, and Mr S G Young for the period from his appointment as CEO on
1 May 2013.
MEGGITT PLC REPORT AND ACCOUNTS 2013
63
Implementation of Remuneration Policy for 2014
Base salary
Base salaries are reviewed taking into account personal performance, employment conditions and salary levels across the Group,
and prevailing market conditions. Base salaries were reviewed in early 2014 and, effective 1 April 2014, will be as follows for the
executive directors:
Mr S G Young
Mr D R Webb
Mr P E Green
% change
3.75
3.53
5.85
2014
£’000
664
440
344
This year, salary adjustments have been harmonised at 1 April across the Group where possible. Where this has delayed an
adjustment from January to April, the award has been prorated by 15/12ths: i.e. for a 3% adjustment in January, this is commuted to a
3.75% adjustment in April. This has been applied to the salary awards for Mr Young and Mr Webb. Mr Green’s salary continues to be
below competitive levels and it was agreed to increase his salary by 5.85%.
For context, salary adjustments across the Group vary from region to region according to local salary inflation; in the UK and the US
this is 3%, which will be prorated to 3.75% when applied to the 15 month period described above.
Pension and benefits
There were no changes in pension contribution rates or benefit provision.
2014 STIP measures
STIP measures for 2014 are based two thirds on Group performance—50% PBT and 50% cash—and one third on personal objectives.
The STIP targets for 2014, together with details of whether they have been met, will be disclosed (subject to commercial sensitivity) in
the 2014 Directors’ remuneration report. The opportunity is in line with the Policy disclosed on page 49.
2014 LTIP measures
Subject to approval of the LTIP by shareholders at the 2014 AGM, the executive directors will be granted awards under the LTIP in
early 2014, vesting of which will be subject to the following measures and targets:
Measure
Threshold
Mid-point
Weight
33.3%
33.3%
Underlying EPS (pence) 3 year aggregate (equivalent to CAGR range of 5 to 10 %)
ROTA average over three years
Quality
Delivery
% sites on target
(year 1 targets)
% sites on target
(year 1 targets)
Meggitt Production
System
Average status
per schedule
124.0
33.0%
57.0%
36%
2.0
130.5
34.5%
71.0%
57%
3.0
Stretch
137.0
36.0%
86.0%
79%
4.0
33.3%
Strategic measures1
average over 3 years
Execution
Growth
Organic revenue
growth
Programme
management
% organic revenue
growth (CAGR over 3
years)
Average status
per reviews
Average status
per schedule
5.0%
6.5%
8.0%
2.0
2.0
3.0
3.0
4.0
4.0
Innovation
Schedule
1Performance against each strategic measure will be assessed at the end of the 3-year period against a scale of:
• 1.0 —threshold objective not met
• 2.0—threshold met
• 3.0—on target
• 4.0—stretch objective met
• 5.0—stretch objective exceeded
MEGGITT PLC REPORT AND ACCOUNTS 2013 STRATEGIC REPORT FINANCIAL STATEMENTS SUPPLEMENTARY INFORMATION GOVERNANCE REPORTS 64 Directors’ remuneration report continued
Chairman and non-executive director fees
The following non-executive director fee structure was in place for the year ended 31 December 2013 and has been agreed for 2014:
Chairman fee
Non-executive director base fee
Additional fee for chairing Audit or Remuneration Committee
Additional fee for Senior Independent Director
2013
£’000
170
52
10
10
2014
£’000
176
54
10
10
This year, salary adjustments have been harmonised on 1 April across the Group where possible. Where this has delayed an adjustment
from January to April, the award has been prorated by 15/12ths: i.e. for a 3% adjustment in January, this is commuted to a 3.75%
adjustment in April. This has been applied to the fee awards for the non-executive directors and Chairman.
Directors’ beneficial interests (audited)
The beneficial interests of the directors and their connected persons in the ordinary shares of the Company at 31 December 2013, as
notified under the Disclosure and Transparency Rules of the Financial Conduct Authority (DTR) (including shares held beneficially in
the Share Incentive Plan by executive directors), were as follows:
Sir Colin Terry
Mr T Twigger1
Mr S G Young
Mr G S Berruyer2
Mr P G Cox3
Mr P E Green
Mr P Heiden
Ms B L Reichelderfer
Mr D A Robins
Mr D R Webb 4
Mr D M Williams
Shareholding
Ordinary shares of 5p each
2012
2013
12,041
1,104,866
413,351
3,000
6,824
557,978
5,841
6,000
73,008
25,648
5,000
11,846
1,104,756
407,154
–
–
553,260
5,701
6,000
71,261
–
5,000
1
2
3
4
2013 shareholding declared as at 1 May 2013 (the date Mr Twigger ceased to be a director).
Appointed on 2 October 2012.
Appointed on 27 September 2012.
Appointed on 6 June 2013.
Between 1 January 2014 and 17 February 2014, the only changes to the beneficial interests of the directors in the ordinary shares
of the Company are that Mr Young and Mr Green each acquired 47 shares through the Meggitt PLC Share Incentive Plan.
External appointments held by executive directors
Executive Director
Company
Role
Mr S G Young
Derwent London plc
Mr D R Webb
SEGRO plc
Non-executive director
Chairman of Audit Committee
Member of Remuneration Committee
Member of Nomination Committee (stepped down 01.08.2013)
Total
Non-executive director
Chairman of Audit Committee
Total
Fees retained
£’000
40
9
4
2
55
53
10
63
MEGGITT PLC REPORT AND ACCOUNTS 2013
65
Directors’ shareholding requirements (audited)
Shares which are included within the shareholding requirement are:
Source of shares
ESOS, EPP and LTIP
Deferred Bonus
Ordinary shares
Share dividend plan
Share Incentive Plan
Employee schemes (SIP, SAYE)
Description
Share awards exercised and retained.
Shares released and retained after the two-year deferral period.
Shares purchased directly in the market.
Shares acquired through the share dividend plan.
Shares acquired via the monthly SIP partnership share purchase scheme.
Free shares retained for more than 5 years under the SIP.
Share awards exercised and retained.
The table below shows the shareholding of each executive director against their respective shareholding requirement as at
31 December 2013:
Name
Mr S G Young
Mr D R Webb3
Mr P E Green
Shareholding
guideline
(% 2013
salary)
300%
200%
200%
Shares owned
outright1
413,351
25,648
557,978
Current
shareholding
(% 2013
salary)2
Guideline
met?
341%
Met
32% Building
Met
906%
Includes shares invested to be eligible for EPP matching awards.
1
2 Assessment of shareholding is based on shares owned outright, salaries as at 31 December 2013 and a share price of 527.50 pence (the value of a
Meggitt share on 31 December 2013).
3 Appointed on 6 June 2013.
On 1 May 2013, Mr Twigger held 1,104,866 shares, equivalent to 791% of his 2013 salary (valued at 472.50 pence, the value of a Meggitt
share on 1 May 2013) against the shareholding requirement which, on that date, was 100% of salary. The shareholding requirement
has been increased from 100% to 300% subsequent to Mr Twigger’s departure from the Board.
MEGGITT PLC REPORT AND ACCOUNTS 2013 STRATEGIC REPORT FINANCIAL STATEMENTS SUPPLEMENTARY INFORMATION GOVERNANCE REPORTS 66 Directors’ remuneration report continued
Directors’ interests in share schemes (audited)
All of the ESOS and EPP awards have performance conditions attached (as detailed in the Directors remuneration report in the year
of grant and in this report for those awards made in 2013):
• The awards made up to and including 2010 have already vested to the extent detailed in this and previous reports and the figures
shown in the table below for those years are the vested share award amounts.
• The awards made in 2011, 2012 and 2013 were unvested as at 31 December 2013.
Sharesave awards are not subject to performance conditions.
Number of shares under award
Date of award
at 1 Jan
2013
Awarded/
(exercised)
at 1 May
2013
Exercise
price
Market price
at date of
exercise
Date
exercisable
from
Expiry
date
Mr T Twigger
ESOS 2005, Part A (options)
2005, Part B (stock SARs)
EPP – Basic
(nil cost options)
EPP – Match
(nil cost options)
Sharesave (options)
Total
Mr S G Young
1996 ESOS No1 (options)
ESOS 2005, Part B (stock SARs)
EPP – Basic
(nil cost options)
EPP– Match
(nil cost options)
Sharesave (options)
Total
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
05.08.09
21.04.11
17.08.11
22.08.12
12.08.09
21.04.11
17.08.11
22.08.12
14.09.12
17,699
322,987
365,613
334,448
475,248
477,876
419,434
352,573
321,752
192,363
147,299
128,117
122,507
107,265
109,210
89,855
79,536
2,752
–
–
–
–
–
(341,957)
–
–
–
–
–
–
–
–
–
–
–
–
17,699
322,987
365,613
334,448
475,248
135,919
419,434
352,573
321,752
192,363
147,299
128,117
122,507
107,265
109,210
89,855
79,536
2,752
4,066,534
(341,957) 3,724,577
169.50p
278.65p
263.67p
299.00p
252.50p
169.50p
286.10p
351.70p
397.20p
–
–
–
–
–
–
–
–
326.94p
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
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
21.08.12
21.08.13
17.08.14
22.08.15
21.08.12
21.08.13
17.08.14
22.08.15
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
04.08.19
20.04.21
16.08.21
21.08.22
04.08.19
20.04.21
16.08.21
21.08.22
01.05.16
Number of shares under award
Date of award
at 1 Jan
2013
Awarded/
(exercised)
at 31 Dec
2013
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
05.09.13
05.08.09
21.04.11
17.08.11
22.08.12
18.03.13
12.08.09
21.04.11
17.08.11
22.08.12
18.03.13
06.09.10
17,200
186,615
210,871
192,642
285,149
297,345
251,660
210,975
288,520
–
115,418
88,379
76,663
73,236
–
64,359
65,526
53,768
47,547
–
4,047
–
–
–
–
–
–
–
–
–
243,114
-
(10,650)
–
–
114,556
–
(7,896)
–
–
66,946
(4,047)
17,200
186,615
210,871
192,642
285,149
297,345
251,660
210,975
288,520
243,114
115,418
77,729
76,663
73,236
114,556
64,359
57,630
53,768
47,547
66,946
–
174.40p
278.65p
263.67p
299.00p
252.50p
169.50p
286.10p
351.70p
397.20p
526.50p
–
–
–
–
–
-
–
–
–
–
222.35p
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
509.00p
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
05.09.16
21.08.12
21.08.13
17.08.14
22.08.15
18.03.16
21.08.12
21.08.13
17.08.14
22.08.15
18.03.16
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
04.09.23
04.08.19
20.04.21
16.08.21
21.08.22
17.03.23
04.08.19
20.04.21
16.08.21
21.08.22
17.03.23
01.05.14
2,529,920
402,023
2,931,943
MEGGITT PLC REPORT AND ACCOUNTS 2013
67
Number of shares under award
Date of award
at 1 Jan
2013
Awarded/
(exercised/
lapsed)
at 31 Dec
2013
Exercise
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
05.09.13
05.08.09
21.04.11
17.08.11
22.08.12
18.03.13
12.08.09
21.04.11
17.08.11
22.08.12
18.03.13
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
233,384
–
88,167
67,512
59,719
59,240
–
49,163
50,054
41,884
38,461
3,798
1,389
1,835
–
–
(122,887)
(138,961)
(145,402)
–
–
–
–
–
123,456
–
(8,135)
–
–
58,173
–
(6,032)
–
–
33,996
(3,798)
–
–
2,759
12,832
20,662
23,365
–
217,822
214,306
192,240
164,345
233,384
123,456
88,167
59,377
59,719
59,240
58,172
49,163
44,022
41,884
38,461
33,996
–
1,389
1,835
299.00p
169.50p
278.65p
263.67p
299.00p
252.50p
169.50p
286.10p
351.70p
397.20p
526.50p
–
–
–
–
–
–
–
–
–
171.40p
222.35p
326.94p
–
–
526.50p
526.50p
526.50p
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
509.00p
–
–
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
05.09.16
21.08.12
21.08.13
17.08.14
22.08.15
18.03.16
21.08.12
21.08.13
17.08.14
22.08.15
18.03.16
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
04.09.23
04.08.19
20.04.21
16.08.21
21.08.22
17.03.23
04.08.19
20.04.21
16.08.21
21.08.22
17.03.23
01.05.14
01.05.16
01.05.18
Mr P E Green
ESOS 2005, Part A (options)
ESOS 2005, Part B (stock SARs)
EPP – Basic
(nil cost options)
EPP – Match
(nil cost options)
Sharesave (options)
Total
1,950,187
(209,591)
1,740,596
Number of shares under award
Date of award
at 1 Jan
2013
Awarded/
(exercised/
lapsed)
at 31 Dec
2013
Exercise
price
Market price
at date of
exercise
Date
exercisable
from
Expiry
date
05.09.13
05.09.13
05.09.13
05.09.13
13.09.13
–
–
–
–
–
–
5,698
155,745
60,281
5,698
155,745
60,281
526.50p
526.50p
526.50p
39,868
39,868
526.50p
3,517
3,517
426.40p
265,109
265,109
–
–
–
–
–
05.09.16
05.09.16
05.09.16
04.09.23
04.09.23
04.09.23
05.09.16
04.09.23
01.11.18
01.05.19
Mr D R Webb
ESOS 2005, Part A (options)
ESOS 2005, Part B (stock SARs)
EPP – Basic
(nil cost options)
EPP – Match
(nil cost options)
Sharesave (options)
Total
By order of the Board
Paul Heiden
Chairman, Remuneration Committee
3 March 2014
MEGGITT PLC REPORT AND ACCOUNTS 2013 STRATEGIC REPORT FINANCIAL STATEMENTS SUPPLEMENTARY INFORMATION GOVERNANCE REPORTS
68 Directors’ report
The directors present their report together with the audited
consolidated financial statements of the Group (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) and Company audited financial
statements (prepared in accordance with UK Generally Accepted
Accounting Practice (‘UK GAAP’) and the Companies Act 2006)
for the year ended 31 December 2013.
Incorporation by reference
Certain laws and regulations require that specific information
should be included in the Directors’ report; the following
information is incorporated into this Directors’ report by
reference:
• Likely future developments in the Group’s business (page 1 to
34).
• The Corporate Governance Report (page 35 to 46).
• Research and development activities (page 28).
• 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 consolidated financial statements (page
84).
• Greenhouse gas emissions (page 32).
• Employee information (page 34):
—employee involvement; and
—employment of disabled persons.
• Independent auditors—disclosure of relevant audit
information (page 70).
There are no significant events affecting the Group since the end
of the year requiring disclosure.
Dividends
The directors recommend the payment of a final dividend of
8.80p net per ordinary 5p share (2012: 8.20p), to be paid on 9 May
2014 to those members on the register at close of business on
14 March 2014. An interim dividend of 3.95p (2012: 3.60p) was
paid on 4 October 2013. If the final dividend as recommended
is approved the total ordinary dividend for the year will amount
to 12.75p net per ordinary 5p share (2012: 11.80p).
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 2013, the Company made the Meggitt PLC
share dividend plan available for the dividends paid in May 2013
(the final dividend for 2012) and in October 2013 (the interim
dividend for 2013). The cash dividend necessary to give an
entitlement to one new ordinary share was fixed at 482.02p
and 534.80p respectively.
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 (Chairman), Mr T Twigger (retired from the Board
on 1 May 2013), Mr S G Young (Chief Executive), Mr G S Berruyer,
Mr P G Cox, Mr P E Green, Mr P Heiden, Ms B L Reichelderfer, Mr
D A Robins, Mr D R Webb (appointed 6 June 2013) and Mr D M
Williams (Senior Independent Director). There have been no
changes in directors since the end of the year up to the date of
this Directors’ report.
All directors will be submitted for election or re-election at the
Annual General Meeting (AGM), except Mr D A Robins who is due
to retire at the AGM. Details of any unexpired terms of the
directors’ service contracts are in the Directors’ remuneration
report. Membership of committees and biographical information
is disclosed on page 37 and in the notice of AGM.
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.
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. 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 regularly reviewed by the Board.
Political donations
No political donations were made during the year (2012: none).
Share capital and control
The issued share capital of the Company at 31 December 2013
and details of shares issued during the financial year are shown
in note 34 of the Group’s consolidated financial statements. On 31
December 2013 there were 797,045,208 ordinary shares in issue.
A further 379,202 ordinary shares were issued between 1
January 2014 and 25 February 2014, 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.
MEGGITT PLC REPORT AND ACCOUNTS 2013
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.
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 the
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 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.
69
Agreements providing compensation in the event of a takeover bid:
Director
Contractual entitlement
Mr S G Young None 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.
Mr D R Webb
None 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.
Mr P E Green Mr Green may terminate his 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%. In addition,
provisions in the Company’s share plans may
cause options and/or awards granted to
employees under such plans to vest on
a takeover.
Non-executive
directors
None.
All other
employees
There are no agreements that would provide
compensation for loss of 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.
Substantial shareholdings
At 25 February 2014, 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
Indirect ordinary share
capital of the
Company
voting
rights (m)*
Direct voting
rights (m)*
The Capital Group
Companies, Inc.
FMR LLC
Standard Life Investments Ltd
Legal & General Group plc
* One voting right per ordinary share.
–
–
22.2
23.7
119.5
40.6
3.8
–
15.02%
5.09%
3.25%
2.97%
These holdings are published on a regulatory information service
and on the Company’s website.
MEGGITT PLC REPORT AND ACCOUNTS 2013 STRATEGIC REPORT FINANCIAL STATEMENTS SUPPLEMENTARY INFORMATION GOVERNANCE REPORTS
70 Directors’ report continued
Statement of directors’ responsibilities
The directors are responsible for preparing the Annual Report,
the Directors’ remuneration report and the financial statements
in accordance with applicable law and regulations. 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 the UK 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 Directors’ 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.
Each of the directors, whose names and functions are listed in
the Board of Directors on page 37, 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
• the strategic report and this Directors’ report 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.
Each of the persons who is a director as at the date of this report
confirms that:
• so far as the director is aware, there is no relevant audit
information of which the Company’s auditors are unaware; and
• the director 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.
This confirmation is given and should be interpreted in
accordance with the provisions of section 418 of the Companies
Act 2006.
Fair, balanced and understandable
The directors as at the date of this report consider that the
Annual Report and Accounts, taken as a whole, is fair, balanced
and understandable and provides the information necessary for
shareholders to assess the Group’s performance, business
model and strategy. The Board has made this assessment on the
basis of a review of the accounts process, a discussion on the
content of the annual report assessing its fairness, balance and
understandability, together with the confirmation from executive
management that the report is fair, balanced and
understandable.
By order of the Board
M L Thomas
Company Secretary
3 March 2014
MEGGITT PLC REPORT AND ACCOUNTS 2013
Independent auditors’ report to the
members of Meggitt PLC
71
Report on the Group financial statements
Our opinion
In our opinion the Group financial statements, defined below:
• give a true and fair view of the state of the Group’s affairs as at
31 December 2013 and of the Group’s profit and cash flows for the
year then ended;
• have been properly prepared in accordance with International
Financial Reporting Standards (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 IAS Regulation.
This opinion is to be read in the context of what we say in the remainder
of this report.
What we have audited
The Group financial statements, which are prepared by Meggitt PLC,
comprise:
• the Consolidated balance sheet as at 31 December 2013;
• the Consolidated income statement and Consolidated statement of
comprehensive income for the year then ended;
• the Consolidated statement of changes in equity and Consolidated
cash flow statement for the year then ended; and
• the notes to the Group financial statements, which include a
summary of significant accounting policies and other explanatory
information.
The financial reporting framework that has been applied in their
preparation comprises applicable law and IFRSs as adopted by the
European Union.
Certain disclosures required by the financial reporting framework have
been presented elsewhere in the Annual Report, rather than in the
notes to the financial statements. These are cross-referenced from the
financial statements and are identified as audited.
What an audit of financial statements involves
We conducted our audit in accordance with International Standards
on Auditing (UK and Ireland) (‘ISAs (UK & Ireland)’). 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.
We read all the financial and non-financial information in the ‘Annual
Report and Accounts’ (the ‘Annual Report’) to identify material
inconsistencies with the audited Group financial statements and to
identify any information that is apparently materially incorrect based
on, or materially inconsistent with, the knowledge acquired by us in the
course of performing the audit. If we become aware of any apparent
material misstatements or inconsistencies we consider the implications
for our report.
Overview of our audit approach
Materiality
We set certain thresholds for materiality. These helped us to determine
the nature, timing and extent of our audit procedures and to evaluate
the effect of any misstatements, both individually and on the financial
statements as a whole.
Based on our professional judgement, we determined materiality for
the Group financial statements as a whole to be £14 million, which
represents approximately 5% of profit before tax.
We agreed with the Audit Committee that we would report to them any
misstatements identified during our audit above £500,000 as well as
misstatements below that amount that, in our view, warranted
reporting for qualitative reasons.
Overview of the scope of our audit
The Group financial statements are a consolidation of a significant
number of reporting units, comprising the Group’s operating
businesses and centralised functions. In establishing our approach
to the Group audit, we determined the type of work that needed to be
performed at the reporting units by us, as the group engagement team,
or other audit teams within PwC UK and from other PwC network firms
operating under our instruction. Where the work was performed by
other audit teams, we determined the level of involvement we needed
to have in the audit work at those reporting units to be able to conclude
whether sufficient appropriate audit evidence had been obtained as a
basis for our opinion on the Group financial statements as a whole.
Based on our assessment of significance and risk a full scope audit
was performed over the complete financial information of 11 reporting
units, and targeted audit procedures over specific balances or
transactions were performed at a further 21 reporting units. Together
these 32 reporting units accounted for 91% of Group profit before tax.
This together with additional procedures performed at the Group level,
including testing the consolidation process, gave us sufficient
appropriate audit evidence for our opinion on the Group financial
statements as a whole.
Areas of particular audit focus
In preparing the financial statements, the directors made a number
of subjective judgements, for example over significant accounting
estimates that involved making assumptions and considering future
events that are inherently uncertain. We primarily focused our work in
these areas by assessing the directors’ judgements against available
evidence, forming our own judgements and evaluating the disclosures
in the financial statements.
In our audit, we tested and examined information, using sampling and
other auditing techniques, to the extent we considered necessary to
provide a reasonable basis for us to draw conclusions. We obtained
audit evidence through testing the effectiveness of controls,
substantive procedures or a combination of both.
We considered the following areas to be those that required particular
focus in the current year. This is not a complete list of all risks or areas
of focus identified by our audit. We discussed these areas of focus with
the Audit Committee. Their report on those matters that they
considered to be significant issues in relation to the financial
statements is set out on page 44.
MEGGITT PLC REPORT AND ACCOUNTS 2013 STRATEGIC REPORT FINANCIAL STATEMENTS SUPPLEMENTARY INFORMATION GOVERNANCE REPORTS 72
Independent auditors’ report to the
members of Meggitt PLC continued
Area of focus
How the scope of our audit addressed the area of focus
Valuation of goodwill and other intangible assets
Goodwill and intangible assets represent the largest assets
within the Group’s balance sheet.
The directors’ assessment of the carrying value of goodwill
and intangible assets and the annual impairment review the
directors are required to perform is described in notes 18 to 20
of the financial statements.
This assessment of the carrying value of these assets is
inherently subjective due to the judgement involved in estimating
future cash flows and in calculating the discount rate to apply to
these cash flows.
Provisions for environmental, legal and other matters
The Group has a number of material provisions in respect of
environmental, legal and other matters. These are set out in
note 31 to the financial statements. These provisions require
the directors to make estimates of the likely future cash flows
that will be required to settle the Group’s obligations. These
estimates are inherently subjective and therefore give rise to
greater audit risk.
Risk of fraud in revenue recognition
ISAs (UK & Ireland) presume there is a risk of fraud in revenue
recognition because of the pressure management may feel to
achieve results.
In assessing this risk for the Group we concluded that most
significant areas of risk related to revenues where contract
accounting principles are followed (as this involves judgement
over future cost estimates and percentage of completion),
and where adjustments to revenues are made as a result of
manual journals.
Risk of management override of internal controls
ISAs (UK & Ireland) require that we consider this.
Our work included testing management’s impairment models including the cash
flows and evaluating and corroborating key inputs used in these models.
We performed sensitivity analysis over the significant assumptions used in
the models to ascertain the point at which an impairment would be triggered,
and considered the likelihood of such a change in the key assumptions, either
individually or in aggregate. The significant assumptions included forecast sales
over the next five years, the discount rate and the terminal growth rate.
We read the disclosures in the financial statements included in note 18 in
respect of management’s impairment testing and considered whether these
were consistent with the conclusions of our audit work and met the disclosure
requirements of the relevant accounting standards.
The Group has an experienced team who are responsible for managing
environmental, legal and other matters and this expertise is supplemented by
the use of external third party experts where appropriate. Our audit procedures
included an assessment of the experience and expertise of those third parties
involved in determining the provisions, and the scope of their work.
We evaluated the existing obligations of the Group, corroborating key facts
surrounding these obligations (including obtaining third party expert reports
from the Group’s external specialists where appropriate), assessed the extent of
any insurance coverage and tested the associated provisions – for example we
recalculated provisions and independently assessed future cost estimates. We also
used our own experience of similar situations to develop an independent view of
the adequacy of the provisions.
We tested revenues recognised under contract accounting by checking that an
appropriate amount of revenue had been recognised which fairly reflected the
stage of completion of the contract. We also evaluated the design of the key
controls management has in place over contract accounting and tested some
of these controls.
We tested manual journal entries impacting revenue at in-scope reporting
units and at a Group level. Our work specifically focused on understanding the
reasons for the adjustments and corroborating the adjustments to appropriate
audit evidence.
We considered whether there was evidence of bias by the directors in the
significant accounting estimates and judgements relevant to the financial
statements. We also assessed the overall control environment of the Group,
including arrangements for staff to “whistle-blow” inappropriate actions, and
interviewed senior management and the Group’s internal audit function.
We analysed manual journals at in scope reporting units to identify higher risk
journals and we performed detailed testing over the higher risk manual journal
entries identified. We also tested any significant adjustments made to the financial
statements at a Group level.
MEGGITT PLC REPORT AND ACCOUNTS 2013 73
Other information in the Annual Report
Under ISAs (UK & Ireland), we are required to report to you if, in our
opinion, information in the Annual Report is:
• materially inconsistent with the information in the audited Group
financial statements; or
• apparently materially incorrect based on, or materially inconsistent
with, our knowledge of the Group acquired in the course of
performing our audit; or
• is otherwise misleading.
We have no exceptions to report arising from this responsibility.
Responsibilities for the financial statements and
the audit
Our responsibilities and those of the directors
As explained more fully in the statement of directors’ responsibilities
(set out on page 70), 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 ISAs (UK &
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.
Other matter
We have reported separately on the Company financial statements of
Meggitt PLC for the year ended 31 December 2013 and on the
information in the Directors’ remuneration report that is described as
having been audited.
Andrew Paynter (Senior Statutory Auditor)
for and on behalf of PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
London
3 March 2014
Going concern
Under the Listing Rules we are required to review the directors’
statement, set out on page 30, in relation to going concern. We have
nothing to report having performed our review.
As noted in the Chief Financial Officer’s review, the directors have
concluded that it is appropriate to prepare the Group’s financial
statements using the going concern basis of accounting. The going
concern basis presumes that the Group has adequate resources to
remain in operation and that the directors intend it to do so for at least
one year from the date the financial statements were signed. As part of
our audit we have concluded that the directors’ use of the going
concern basis is appropriate.
However, because not all future events or conditions can be predicted,
these statements are not a guarantee as to the Group’s ability to
continue as a going concern.
Opinion on matter prescribed by the Companies Act 2006
In our opinion the information given in the Strategic report and the
Directors’ report for the financial year for which the Group financial
statements are prepared is consistent with the Group financial
statements.
Other matters on which we are required to report
by exception
Adequacy of information and explanations received
Under the Companies Act 2006 we are required to report to you if, in
our opinion we have not received all the information and explanations
we require for our audit. We have no exceptions to report arising from
this responsibility.
Directors’ remuneration
Under the Companies Act 2006 we are required to report to you if, in
our opinion, certain disclosures of directors’ remuneration specified by
law have not been made. We have no exceptions to report arising from
these responsibilities.
Corporate governance statement
Under the Listing Rules we are required to review the part of the
Corporate Governance Statement relating to the Company’s
compliance with nine provisions of the UK Corporate Governance Code
(‘the Code’). We have nothing to report having performed our review.
On page 70 of the Annual Report, as required by the Code Provision
C.1.1, the directors state that they consider the Annual Report taken
as a whole to be fair, balanced and understandable and provides the
information necessary for members to assess the Group’s
performance, business model and strategy. On page 44, as required by
C.3.8 of the Code, the Audit Committee has set out the significant
matters that it considered in relation to the financial statements, and
how they were addressed. Under ISAs (UK & Ireland) we are required
to report to you if, in our opinion:
• the statement given by the directors is materially inconsistent with
our knowledge of the Group acquired in the course of performing
our audit; or
• the section of the Annual Report describing the work of the Audit
Committee does not appropriately address matters communicated
by us to the Audit Committee.
We have no exceptions to report arising from this responsibility.
MEGGITT PLC REPORT AND ACCOUNTS 2013 STRATEGIC REPORT FINANCIAL STATEMENTS SUPPLEMENTARY INFORMATION GOVERNANCE REPORTS 74 Consolidated income statement
For the year ended 31 December 2013
Revenue
Cost of sales
Gross profit
Net operating costs
Operating profit1
Finance income
Finance costs
Net finance costs
Profit before tax2
Tax
Profit for the year attributable to equity owners of the Company
Earnings per share:
Basic3
Diluted4
1 Underlying operating profit
2 Underlying profit before tax
3 Underlying basic earnings per share
4 Underlying diluted earnings per share
2013
£’m
2012
Restated
£’m
1,637.3
(981.1)
1,605.8
(929.1)
656.2
676.7
(355.9)
(355.3)
300.3
321.4
0.3
(31.2)
(30.9)
2.0
(42.1)
(40.1)
269.4
281.3
(37.1)
232.3
(45.8)
235.5
29.4p
28.9p
397.2
377.8
37.5p
36.9p
30.1p
29.7p
392.1
366.0
36.5p
36.0p
Notes
5
6
12
13
44
14
44
15
15
10
10
15
15
MEGGITT PLC REPORT AND ACCOUNTS 2013
Consolidated statement of comprehensive income
75
For the year ended 31 December 2013
Profit for the year
Items that may be reclassified to the income statement in subsequent periods:
Currency translation differences
Cash flow hedge movements
Tax effect
Items that will not be reclassified to the income statement in subsequent periods:
Remeasurement of retirement benefit obligations
Tax effect
Notes
2013
£’m
232.3
2012
Restated
£’m
235.5
14
33
14
(37.2)
1.9
0.1
(35.2)
46.8
(21.6)
25.2
(54.7)
(5.8)
0.6
(59.9)
4.0
(2.3)
1.7
Other comprehensive expense for the year
(10.0)
(58.2)
Total comprehensive income for the year attributable to equity owners of the Company
222.3
177.3
MEGGITT PLC REPORT AND ACCOUNTS 2013 STRATEGIC REPORT FINANCIAL STATEMENTS SUPPLEMENTARY INFORMATION GOVERNANCE REPORTS
76
Consolidated balance sheet
As at 31 December 2013
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 Company
Notes
2013
£’m
2012
£’m
18
19
19
20
21
23
30
32
22
23
30
24
1,457.1
270.5
210.6
707.3
245.5
89.9
35.5
9.1
1,494.2
221.5
203.6
778.9
232.2
98.8
49.8
100.2
3,025.5
3,179.2
299.2
328.9
11.2
2.8
116.1
758.2
291.2
304.2
5.0
0.2
104.9
705.5
6
3,783.7
3,884.7
25
30
27
28
31
26
30
32
27
28
31
33
34
(329.1)
(0.7)
(40.6)
(2.4)
(7.2)
(44.3)
(424.3)
333.9
(5.2)
(0.1)
(219.3)
(5.1)
(666.0)
(149.2)
(238.1)
(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)
(1,283.0)
(1,391.5)
(1,707.3)
(1,979.3)
2,076.4
1,905.4
39.9
1,166.3
14.1
82.7
773.4
39.3
1,143.9
14.1
117.9
590.2
2,076.4
1,905.4
The financial statements on pages 74 to 121 were approved by the Board of Directors on 3 March 2014 and signed on its behalf by:
S G Young
Director
D R Webb
Director
MEGGITT PLC REPORT AND ACCOUNTS 2013
Consolidated statement of changes in equity
For the year ended 31 December 2013
77
At 1 January 2012
Profit for the year
Other comprehensive income for the year:
Currency translation differences:
Arising in the year
Transferred to income statement
Cash flow hedge movements:
Movement in fair value
Transferred to income statement
Remeasurement of retirement benefit obligations
Other comprehensive (expense)/income before tax
Tax effect
Other comprehensive (expense)/income for the year
Total comprehensive (expense)/income for the year
Employee share schemes:
Value of services provided
Issue of equity share capital
Dividends
At 31 December 2012
Profit for the year
Other comprehensive income for the year:
Currency translation differences:
Arising in the year
Transferred to income statement
Cash flow hedge movements:
Movement in fair value
Transferred to income statement
Remeasurement of retirement benefit obligations
Other comprehensive (expense)/income before tax
Tax effect
Other comprehensive (expense)/income for the year
Total comprehensive (expense)/income for the year
Employee share schemes:
Value of services provided
Issue of equity share capital
Dividends
At 31 December 2013
Equity attributable to owners of the Company
Share
capital
Share
premium
Other
reserves*
Hedging and
translation
Notes
£’m
38.9
£’m
1,130.1
£’m
14.1
reserves**
£’m
177.8
Retained
earnings
Restated
£’m
Total
equity
Restated
£’m
432.4
1,793.3
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
0.2
0.2
–
0.8
13.0
–
–
–
–
–
–
–
–
–
–
–
–
–
–
235.5
235.5
(54.4)
(0.3)
(3.9)
(1.9)
–
(60.5)
0.6
(59.9)
–
–
–
–
4.0
4.0
(2.3)
1.7
(54.4)
(0.3)
(3.9)
(1.9)
4.0
(56.5)
(1.7)
(58.2)
(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
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
0.4
0.2
–
2.6
19.8
–
–
–
–
–
–
–
–
–
–
–
–
–
–
232.3
232.3
(31.9)
(5.3)
1.6
0.3
–
(35.3)
0.1
(35.2)
–
–
–
–
46.8
46.8
(21.6)
25.2
(31.9)
(5.3)
1.6
0.3
46.8
11.5
(21.5)
(10.0)
(35.2)
257.5
222.3
–
–
–
21.8
(0.5)
(95.6)
21.8
2.5
(75.6)
39.9
1,166.3
14.1
82.7
773.4
2,076.4
33
14
16
43
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 2013 comprise a credit balance on the hedging reserve of £3.2 million (2012: £1.6 million) and
a credit balance on the translation reserve of £79.5 million (2012: £116.3 million). Amounts recycled from the hedging reserve to the income
statement, in respect of cash flow hedge movements, have been recorded in net finance costs. Amounts recycled from the translation reserve
to the income statement, in respect of the disposal of foreign subsidiaries, have been recorded in net operating costs.
MEGGITT PLC REPORT AND ACCOUNTS 2013 STRATEGIC REPORT FINANCIAL STATEMENTS SUPPLEMENTARY INFORMATION GOVERNANCE REPORTS
78
Consolidated cash flow statement
For the year ended 31 December 2013
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
Businesses 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 from financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents at start of the year
Exchange losses on cash and cash equivalents
Cash and cash equivalents at end of the year
Notes
11
39
42
43
19
19
16
34
24
2013
£’m
361.9
(16.2)
345.7
0.3
(19.7)
(44.0)
282.3
(26.5)
53.3
(70.2)
(35.7)
(18.4)
(52.4)
3.9
2012
£’m
408.8
(14.7)
394.1
0.2
(28.1)
(34.6)
331.6
(8.4)
15.9
(52.2)
(36.1)
(28.0)
(35.5)
0.3
(146.0)
(144.0)
(75.6)
2.5
181.5
–
(231.4)
(123.0)
13.3
104.9
(2.1)
116.1
(71.8)
0.9
189.3
(2.0)
(292.7)
(176.3)
11.3
94.6
(1.0)
104.9
MEGGITT PLC REPORT AND ACCOUNTS 2013
Notes to the consolidated financial statements
79
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.
The following items in respect of the acquisition and disposal of
subsidiaries are excluded from the underlying profit measures used by
the Board to monitor and measure the underlying performance of the
Group (see note 10):
• Any amounts by which the fair value of net assets of an acquired
subsidiary exceed the cost of acquisition;
• Acquisition related expenses;
• Any gain or loss arising from the disposal of a subsidiary;and
• Any changes in the fair value of contingent consideration payable in
respect of the acquisition of a subsidiary or receivable in respect of
the disposal of a subsidiary.
Foreign currencies
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 on 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 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.
1. Basis of preparation
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.
The consolidated financial statements of the Group have been prepared
in accordance with International Financial Reporting Standards
(‘IFRSs’) as adopted by the European Union 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 subsidiaries disposed 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 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 net assets acquired exceeds the
cost of an acquisition, the difference is recorded immediately in the
income statement. Acquisition related expenses are recognised in the
income statement as incurred.
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
consideration received or receivable and the value at which net assets
of the subsidiary were recorded, immediately prior to disposal, is
recognised in the income statement. Any contingent consideration
receivable is measured at fair value at the date of disposal in
determining the gain or loss to be recognised. Contingent
consideration is measured at fair value at each subsequent balance
sheet date, with any changes in fair value recorded in the income
statement.
MEGGITT PLC REPORT AND ACCOUNTS 2013 STRATEGIC REPORT FINANCIAL STATEMENTS SUPPLEMENTARY INFORMATION GOVERNANCE REPORTS
80 Notes to the consolidated financial statements continued
2. Summary of significant accounting policies continued
Segment reporting
Exceptional operating items
Items which are significant by virtue of their size or nature, which are
considered non-recurring and which are excluded from the underlying
profit measures used by the Board to monitor and measure the
underlying performance of the Group (see note 10) 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 or receivable in respect of a disposed business,
costs directly attributable to the acquisition or disposal of businesses,
the costs of integrating significant acquisitions, significant site
consolidation and other restructuring costs and gains or losses made
on the disposal of businesses. Additionally in 2013, given its
significance and non-recurring nature, the raw material supply issue
described in note 11 has been treated as an exceptional operating item.
Exceptional operating items are included within the appropriate
consolidated income statement category but are highlighted separately
in the notes to the financial statements.
Intangible assets
Goodwill
Goodwill represents the excess of the cost of an acquisition over the fair
value of the Group’s share of identifiable net assets acquired and
liabilities and contingent liabilities assumed. Goodwill is tested annually
for impairment, and also whenever events or changes in circumstances
indicate the carrying value may not be recoverable. 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.
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 Meggitt Aircraft Braking
Meggitt Systems, Meggitt Control Systems, Meggitt Polymers &
Composites, Meggitt Sensing Systems and the Meggitt 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 (excluding software assets), derivative financial instruments,
deferred tax assets, current tax recoverable and cash and cash
equivalents.
No segmental information is provided in respect of liabilities as no
such measure is reviewed by the CODM.
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.
MEGGITT PLC RE PORT AND ACCOUNTS 2013
81
2. Summary of significant accounting policies continued
Taxation
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.
Intangible assets are initially recognised at fair value, which is
regarded as their cost. Intangible assets are subsequently held at cost
less accumulated amortisation and any provision for impairment.
Where the intangible assets recognised have finite lives their cost 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.
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 ...................................... Up to 50 years
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.
When property, plant and equipment is disposed, the difference
between sale proceeds, net of related costs, and the carrying value of
the asset is recognised in the income statement.
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.
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.
Current tax and deferred tax are recognised in the income statement,
other comprehensive income or directly in equity depending on where
the item to which they relate has been recognised.
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 level
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
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, 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
also valued at fair value at acquisition, 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 post acquisition, the fair value is charged to the
income statement. The difference between the fair value of the
inventory disposed 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.
MEGGITT PLC REPORT AND ACCOUNTS 2013 STRATEGIC REPORT FINANCIAL STATEMENTS SUPPLEMENTARY INFORMATION GOVERNANCE REPORTS 82 Notes to the consolidated financial statements continued
2. Summary of significant accounting policies continued
Provisions
Trade receivables
Trade receivables are stated initially at fair value, then measured at
amortised cost less any 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 receivable
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 commencement of the lease at the lower of fair value of
the leased asset and 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 lease obligations, net of finance
charges, are included in liabilities. 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.
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 generally 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. Certain
borrowings however are designated as fair value through profit and
loss at inception, if the Group has interest rate derivatives in place
which have the economic effect of converting fixed rate borrowings into
floating rate borrowings. Such borrowings are measured at fair value
at each balance sheet date with any movement in fair value recorded in
the income statement within net operating costs. Movements in 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).
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.
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 in the income statement within net finance costs.
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.
Remeasurement 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 has no further
obligations once the contributions have been paid.
Share-based compensation
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. When awards are exercised
and the Company issues new shares, the proceeds received, net of any
directly attributable transaction costs, are credited to share capital
(nominal value) and share premium.
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.
MEGGITT PLC RE PORT AND ACCOUNTS 2013 83
2. Summary of significant accounting policies continued
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 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 within net operating costs together with changes in
fair value of the hedged item. Any difference between the movement in
fair value of the derivatives and the hedged item is 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.
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 within net operating costs.
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. Changes in fair value of 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 within net operating costs.
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.
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 large number of foreign currency
forward contracts to mitigate against currency fluctuations. The Group
has determined the additional costs of meeting the extensive
documentation requirements in order to apply hedge accounting under
IAS 39 ‘Financial Instruments: Recognition and Measurement’ 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.
Consideration paid for own shares, including any incremental directly
attributable costs, is recorded as a deduction from equity. When such
shares are sold any consideration received, net of any directly
attributable costs, is recorded within equity.
Adoption of new and revised accounting standards
During the year, the following new accounting standard, and revision
and amendment to existing standards, became effective and had a
significant impact on the Group’s consolidated financial statements:
• IAS 19 (Revised 2011), ‘Employee benefits’. The impact of this
revision on the Group’s consolidated financial statements, including
restatement of comparatives, is set out in note 44;
• IAS 1 (Amended), ‘Presentation of financial statements’. The main
change for the Group arising from this amendment is with regard to
the way in which items are presented in the consolidated statement
of comprehensive income. Items are now required to be presented
according to whether or not they may be reclassified to the income
statement in future accounting periods; and
• IFRS 13, ‘Fair value measurement’. This standard has not had any
significant impact on amounts recognised in the consolidated
financial statements. It has however, required additional disclosures
which are set out in note 29.
Recent accounting developments
A number of new standards and amendments and revisions to existing
standards have been published and are mandatory for the Group’s
future accounting periods. They have not been adopted early in these
consolidated financial statements. None of these are expected to have
a significant impact on the consolidated financial statements when they
are adopted except as disclosed below;
• IFRS 9, ‘Financial instruments’. The main change is expected to
relate to the way in which movements in the fair value of the Group’s
fixed rate borrowings, attributable to changes in the Group’s own
credit risk, are accounted for. The Group is yet to assess the full
impact of IFRS 9 which becomes effective for accounting periods
beginning on or after 1 January 2015. This standard is subject to
endorsement by the European Union.
MEGGITT PLC REPORT AND ACCOUNTS 2013 STRATEGIC REPORT FINANCIAL STATEMENTS SUPPLEMENTARY INFORMATION GOVERNANCE REPORTS
84 Notes to the consolidated 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 the retranslation of the results
of, 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 hedges in place are provided in note 30. The Group does not currently hedge exposures arising from the retranslation of the
results of foreign subsidiaries. The Group uses borrowings denominated in the relevant currencies to hedge its net investments 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 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
non-derivative financial liabilities and derivative assets and liabilities 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
316.6
4.1
20.6
3.4
(8.2)
0.7
337.2
Less than
1 year
£’m
339.9
123.7
23.7
3.1
(75.2)
68.5
483.7
* Excludes social security and other taxes of £12.5 million (2012: £12.0 million) (see note 25).
** Assumes no change in interest rates from those prevailing at year end.
2013
1-2 years
2-5 years
Greater than
5 years
£’m
1.8
241.9
28.6
12.7
Total
£’m
321.8
658.8
116.5
19.9
£’m
2.2
370.4
48.2
2.8
(23.5)
1.9
(15.8)
–
(56.0)
3.3
402.0
269.2
1,064.3
£’m
1.2
42.4
19.1
1.0
(8.5)
0.7
55.9
2012
1-2 years
2-5 years
£’m
2.1
0.4
20.6
0.3
(8.3)
0.7
15.8
£’m
2.4
341.2
55.9
0.8
(24.8)
2.1
377.6
Greater than
5 years
£’m
1.8
247.0
41.7
3.9
Total
£’m
346.2
712.3
141.9
8.1
(21.7)
0.4
(130.0)
71.7
273.1
1,150.2
MEGGITT PLC RE PORT AND ACCOUNTS 2013
85
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 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%
2013
2012
Income
statement
£’m
25.2
4.6
Equity
£’m
36.1
4.1
Income
statement
£’m
18.4
3.2
Equity
£’m
50.4
5.0
The impact on equity from movements in the exchange rate comprises £46.3 million (2012: £57.6 million) in respect of US dollar net debt, offset by
£10.2 million (2012: £7.2 million) in respect of other financial assets and liabilities. However, as all US dollar debt is designated as a net investment
hedge, this element of the impact is entirely offset by the retranslation of foreign subsidiaries.
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 current post-tax average cost of capital is approximately 8% (2012: 8%). 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
2013. Further details on the covenant requirements and the Group’s performance against these can be found on page 29 of the Chief Financial
Officer’s review. The capital structure of the Group at the balance sheet date is as follows:
Net debt (see note 40)
Total equity
Debt/equity %
2013
£’m
564.6
2,076.4
2012
£’m
642.5
1,905.4
27.2%
33.7%
4. Critical accounting estimates and judgements
In applying the Group’s accounting policies set out in note 2, the Group is required to make certain estimates and judgements concerning the
future. These estimates and judgements are regularly reviewed and revised 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 goodwill which require 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 and sensitivities of the carrying value of goodwill to these
estimates are provided in note 18.
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. Identified intangibles are subject to impairment testing at least annually or if events
or changes in circumstances indicate the carrying value may not be recoverable. Estimates are also required of the useful life of the identified
intangible assets and these estimates are reviewed at least annually, and revised if appropriate. The Group takes advice from third parties in
determining the fair values and useful lives of intangibles arising on significant acquisitions (see note 20 for further details).
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 the Group is 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 aircraft volumes, aftermarket
revenues which are dependent on aircraft utilisation, fleet lives and operator service routines, costs of manufacture and, in the case of
development costs, the costs to complete the development activity. Capitalised costs are subject to impairment testing at least annually and,
where headroom is limited or if events or changes in circumstances indicate the carrying value may not be recoverable, more frequently (see note
19 for further details).
MEGGITT PLC REPORT AND ACCOUNTS 2013 STRATEGIC REPORT FINANCIAL STATEMENTS SUPPLEMENTARY INFORMATION GOVERNANCE REPORTS
86
Notes to the consolidated 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 it has 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. The Group has extensive insurance
arrangements in place to mitigate the impact of historical environmental events on the Group. To the extent estimates in respect of claims change
as more information becomes available, adjustments are made to the carrying value of these provisions and, if the costs are determined to be
covered by insurance, to the amounts recoverable from insurers (see note 31 for further details).
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 losses incurred
could differ from the original estimates (see note 31 for further details).
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, potential claims from third parties and cash flows. These estimates are dependent on a number of factors including
anticipated sales volumes, future pricing, production costs and the outcome of negotiations with third parties. To the extent these estimates
change as more information becomes available, adjustments are made to the carrying value of these provisions. However, actual losses incurred
could differ from the original estimates (see note 31 for further details).
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. External actuarial advice is taken with regard to the most appropriate
assumptions to use. During 2013, the determination of the discount rate for the UK scheme was impacted by a reduction in the number of high
quality UK corporate bonds, following the UK sovereign credit rating downgrade. Advice from the Group’s UK actuary was taken as to the extent to
which adjustments should be made within the reduced population of high quality bonds for individual bonds with significantly different yields, how
to reflect the shortage of bonds at the long end of the yield curve and whether to expand the population based on issue size. Further details on
these estimates and sensitivities of the retirement benefit obligations to these estimates are provided in note 33.
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. If the actual outcome of events
differed by 10% from the estimates made at 31 December 2013, the impact on the tax charge would be approximately £4.0 million. Judgements
also need to be made as to the extent to which deferred tax assets and liabilities can be offset against one another (see note 32 for further details).
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
2013
£’m
1,428.8
110.1
73.9
24.5
2012
£’m
1,417.2
115.1
48.6
24.9
1,637.3
1,605.8
MEGGITT PLC RE PORT AND ACCOUNTS 2013
87
6. Segmental analysis
Analysis by operating segment
The Group manages its businesses under the key segments of Meggitt Aircraft Braking Systems, Meggitt Control Systems, Meggitt Polymers &
Composites, Meggitt Sensing Systems and the Meggitt Equipment Group.
• Meggitt Aircraft Braking Systems is a leading supplier of aircraft wheels, brakes and brake control systems.
• Meggitt Control Systems is a leading supplier of pneumatic, fluid control, thermal management and electro-mechanical equipment and
sub-systems.
• Meggitt 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.
• Meggitt Sensing Systems is a leading provider of high-performance sensing and condition-monitoring solutions for high-value rotating
machinery and other assets.
• The Meggitt Equipment Group 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.
Year ended 31 December 2013
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
Meggitt
Aircraft
Braking
Systems
£’m
330.4
–
330.4
Meggitt
Control
Systems
Meggitt
Polymers &
Composites
Meggitt
Sensing
Systems
Meggitt
Equipment
Group
Total
£’m
206.5
(0.9)
£’m
182.9
(1.9)
£’m
242.0
(1.6)
£’m
681.4
(1.5)
£’m
1,643.2
(5.9)
205.6
181.0
240.4
679.9
1,637.3
Underlying operating profit (see note 10)*
Items not affecting underlying operating profit (see note 10)
122.4
50.4
30.2
34.3
159.9
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)***
1.5
74.5
8.1
5.3
9.1
2.8
–
6.7
3.2
6.5
7.6
7.1
15.1
28.5
11.0
*
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, £50.7 million has been charged to underlying operating profit as defined in note 10.
*** Of the total depreciation in the year, £31.4 million has been charged to underlying operating profit as defined in note 10.
The Group’s largest customer accounts for 6.6% of revenue (£108.3 million). Revenue from this customer arises across all segments.
397.2
(96.9)
300.3
0.3
(31.2)
(30.9)
269.4
(37.1)
232.3
28.4
126.4
32.2
Additions to non-current assets*
Development costs (see note 19)
Programme participation costs (see note 19)
Other purchased intangible assets
Property, plant and equipment
Total
Meggitt
Aircraft
Braking
Systems
£’m
24.8
31.5
0.4
4.0
60.7
Meggitt
Control
Systems
Meggitt
Polymers &
Composites
Meggitt
Sensing
Systems
Meggitt
Equipment
Group
Total
£’m
11.6
3.2
4.9
3.5
23.2
£’m
2.5
–
0.8
2.7
6.0
£’m
£’m
£’m
15.1
–
1.6
15.1
31.8
16.2
1.0
1.8
24.6
43.6
70.2
35.7
9.5
49.9
165.3
* Relates to those non-current assets included within segmental trading assets reviewed by the CODM.
MEGGITT PLC REPORT AND ACCOUNTS 2013 STRATEGIC REPORT FINANCIAL STATEMENTS SUPPLEMENTARY INFORMATION GOVERNANCE REPORTS
88
Notes to the consolidated financial statements continued
6. Segmental analysis continued
As at 31 December 2013
Meggitt Aircraft Braking Systems
Meggitt Control Systems
Meggitt Polymers & Composites
Meggitt Sensing Systems
Meggitt Equipment Group
Total segmental trading assets
Centrally managed trading assets*
Goodwill (see note 18)
Other intangible assets**
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
502.2
163.9
87.8
231.1
356.3
1,341.3
176.5
1,457.1
634.1
35.5
9.1
11.2
2.8
116.1
3,783.7
* 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.
** In 2013, trading assets reviewed by the CODM include software assets. Since software assets were not included in trading assets reviewed by
the CODM in 2012, the prior year comparatives have not been restated.
Year ended 31 December 2012 (Restated - see note 44)
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
Meggitt
Aircraft
Braking
Systems
£’m
311.2
–
311.2
Meggitt
Control
Systems
Meggitt
Polymers &
Composites
Meggitt
Sensing
Systems
Meggitt
Equipment
Group
Total
£’m
215.8
(0.9)
214.9
£’m
189.5
(2.3)
187.2
£’m
241.4
(1.2)
240.2
£’m
652.7
(0.4)
£’m
1,610.6
(4.8)
652.3
1,605.8
Underlying operating profit (see note 10)*
Items not affecting underlying operating profit (see note 10)
117.1
49.8
33.8
36.2
155.2
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
392.1
(70.7)
321.4
2.0
(42.1)
(40.1)
281.3
(45.8)
235.5
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 revenue (£112.3 million). Revenue from this customer arises 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
Meggitt
Aircraft
Braking
Systems
£’m
16.7
33.4
4.7
54.8
Meggitt
Control
Systems
Meggitt
Polymers &
Composites
Meggitt
Sensing
Systems
Meggitt
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.
MEGGITT PLC RE PORT AND ACCOUNTS 2013
6. Segmental analysis continued
As at 31 December 2012
Meggitt Aircraft Braking Systems
Meggitt Control Systems
Meggitt Polymers & Composites
Meggitt Sensing Systems
Meggitt 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
89
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.
Analysis by geography
Revenue
UK
Rest of Europe
United States of America
Rest of World
Total
Revenue is based on the location of the customer.
Non-current assets
UK
Rest of Europe
United States of America
Rest of World
Total
2013
£’m
2012
£’m
165.8
365.1
811.7
294.7
162.4
343.7
818.4
281.3
1,637.3
1,605.8
2013
£’m
2012
£’m
714.4
215.6
1,953.0
8.0
708.8
206.9
2,006.6
8.1
2,891.0
2,930.4
Segmental non-current assets are based on the location of the assets. They exclude trade and other receivables, derivative financial instruments
and deferred tax.
MEGGITT PLC REPORT AND ACCOUNTS 2013 STRATEGIC REPORT FINANCIAL STATEMENTS SUPPLEMENTARY INFORMATION GOVERNANCE REPORTS
90
Notes to the consolidated financial statements continued
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)
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)
Depreciation (see note 21)
(Gain)/loss on disposal of property, plant and equipment
Exceptional operating items (see note 11)
Financial instruments (see note 10)
Net foreign exchange loss/(gain)
Operating lease rentals
Other operating income
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 in respect of the current year
For the audit of the Company and consolidated financial statements in respect of the prior year
For the audit of the Company’s subsidiaries pursuant to legislation
For audit related assurance services
Total
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
2013
£’m
450.6
(5.9)
566.1
40.2
16.9
25.4
9.8
74.3
32.2
(1.1)
28.4
(6.1)
2.1
14.3
(4.6)
2012
£’m
469.7
(22.8)
542.7
44.9
11.6
23.2
7.4
80.6
31.9
0.3
13.3
(23.4)
(2.4)
15.5
(4.8)
2013
£’m
2012
£’m
0.8
0.1
0.6
0.1
1.6
0.9
–
0.5
0.1
1.5
2013
£’m
2012
£’m
441.0
79.1
34.1
11.9
566.1
422.2
76.6
31.6
12.3
542.7
Details of directors’ remuneration is provided in the Directors’ remuneration report on pages 47 to 67, which forms part of these financial
statements.
Average monthly number of persons employed including executive directors:
Meggitt Aircraft Braking Systems
Meggitt Control Systems
Meggitt Polymers & Composites
Meggitt Sensing Systems
Meggitt Equipment Group
Corporate including shared services and centres of excellence
Total
2013
Number
2012
Number
1,191
1,136
1,979
1,623
4,525
581
1,216
1,161
2,092
1,600
4,242
520
11,035
10,831
MEGGITT PLC RE PORT AND ACCOUNTS 2013
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:
91
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
Net interest expense on retirement benefit obligations (see note 33)
Adjustments to profit before tax
Underlying profit before tax
Profit for the year
Adjustments to profit before tax per above
Tax effect of adjustments to profit before tax
Adjustments to profit for the year
Underlying profit for the year
Note
a
b
c
d
2013
£’m
300.3
28.4
74.3
0.3
(6.1)
96.9
397.2
2012
Restated
£’m
321.4
13.3
80.6
0.2
(23.4)
70.7
392.1
269.4
281.3
96.9
11.5
108.4
377.8
70.7
14.0
84.7
366.0
232.3
235.5
108.4
(43.8)
64.6
296.9
84.7
(34.7)
50.0
285.5
* Of the adjustments to operating profit, £28.8 million (2012: £5.4 million) relating to exceptional operating items and £0.3 million (2012: £0.2
million) relating to the disposal of inventory revalued in business combinations has been charged to cost of sales, with the balance of £67.8
million (2012: £65.1 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 other purchased intangible assets (see note 20)
Amortisation of intangible assets acquired in business combinations
2013
£’m
84.1
(9.8)
74.3
2012
£’m
88.0
(7.4)
80.6
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 also 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 disposed of 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
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
2013
£’m
(12.0)
0.8
18.6
(13.5)
(6.1)
2012
£’m
(20.1)
0.5
(6.4)
2.6
(23.4)
d. As referred to in note 44, in 2013 the Group has adopted IAS 19 (revised 2011), ‘Employee benefits’. This revised standard has led 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 has decided to exclude it from the underlying profit measures it uses to monitor and measure the underlying trading performance of
the Group. Prior year underlying profit measures have been restated accordingly.
MEGGITT PLC REPORT AND ACCOUNTS 2013 STRATEGIC REPORT FINANCIAL STATEMENTS SUPPLEMENTARY INFORMATION GOVERNANCE REPORTS
92
Notes to the consolidated financial statements continued
11. Exceptional operating items
Site consolidations
Integration of Pacific Scientific Aerospace (‘PacSci’)
Gain on disposal of businesses
Raw material supply issue
Business acquisition expenses
Other
Exceptional operating items
Note
a
b
c
d
Income statement
Cash expenditure
2013
£’m
8.2
7.2
(9.0)
20.0
0.7
1.3
28.4
2012
£’m
9.8
4.8
(3.2)
–
1.3
0.6
2013
£’m
6.4
4.6
0.5
3.1
0.4
1.2
2012
£’m
6.0
5.6
0.9
–
1.4
0.8
13.3
16.2
14.7
a. This principally relates to the consolidation of the Group’s two North American sensor businesses onto a single new site in California, USA
and the consolidation of the Group’s two UK avionics businesses onto a single existing site in Hampshire, UK. These two consolidations were
substantially completed in 2013.
b. The integration of PacSci has now been substantially completed, following the consolidation in 2013 of the Group’s fire suppression business,
acquired as part of the PacSci acquisition, onto the existing site of its fire detection business in California, USA.
c. On 23 May 2013, the Group disposed of the shares of Meggitt (Addison), Inc. and realised a gain of £14.9 million. On 20 December 2013, the
Group disposed of the shares of the Sunbank Family of Companies LLC and realised a loss of £5.9 million (see note 43). Cash expenditure
relates to business disposal expenses which have been treated as an exceptional operating item. Proceeds from the disposal of businesses are
reported separately as part of cash outflow from investing activities (see note 43).
d. On 1 November 2013, the Group announced it had identified an issue relating to the supply from a vendor of non-conforming raw material in one
of our businesses. A solution is in place, including where necessary the replacement of the relevant parts over the next few years. The cost of
this issue is estimated to be £20.0 million.
The tax credit in respect of exceptional operating items was £10.7 million (2012: £5.4 million).
12. Finance income
Interest on bank deposits
Unwinding of interest on other receivables
Other finance income
Finance income
13. Finance costs
Interest on bank borrowings
Interest on senior notes
Interest on obligations under finance leases
Unwinding of discount on provisions
Net interest expense on retirement benefit obligations (see note 33)
Amortisation of debt issue costs
Less: amounts capitalised in the cost of qualifying assets (see notes 19 and 20)
Finance costs
2013
£’m
0.1
–
0.2
0.3
2013
£’m
3.5
15.4
1.1
–
11.5
1.2
(1.5)
31.2
2012
Restated
£’m
0.2
1.7
0.1
2.0
2012
Restated
£’m
5.8
19.4
1.1
1.7
14.0
1.7
(1.6)
42.1
MEGGITT PLC RE PORT AND ACCOUNTS 2013
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
93
2013
£’m
38.0
(6.5)
11.0
(5.4)
37.1
2012
Restated
£’m
49.8
(4.9)
5.2
(4.3)
45.8
The Finance Act 2012, included legislation to reduce the main rate of corporation tax in the UK to 23% with effect from 1 April 2013. The Finance
Act 2013, included legislation to further reduce the main rate of corporation tax in the UK to 21% with effect from 1 April 2014 and to 20% with
effect from 1 April 2015. As these changes were substantively enacted during the year, they have been reflected in the consolidated financial
statements. The impact of these changes on net deferred tax liabilities at 31 December 2013, 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 tax at UK corporation tax rate of 23.25%* (2012: 24.5% as restated)
Effects of:
Different tax rates of subsidiaries operating in other jurisdictions
Permanent differences
Temporary differences
Changes in statutory tax rates
Tax credits and incentives
Prior year credits
Total taxation
2013
£’m
62.6
14.1
(20.1)
(1.5)
(5.4)
(4.4)
(8.2)
37.1
2012
Restated
£’m
68.9
16.6
(19.6)
(9.4)
(4.3)
(3.2)
(3.2)
45.8
* 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 2013 to increase, or reduce respectively, by approximately £2.7 million.
Tax relating to components of other comprehensive income
Current tax – currency translation movements
Deferred tax – currency translation movements
Deferred tax – remeasurement of retirement benefit obligations
Deferred tax – cash flow hedge movements
Other comprehensive income
Current tax
Deferred tax
Total
Tax relating to items recognised directly in equity
Current tax credit relating to share-based payment expense
Deferred tax credit/(charge) relating to share-based payment expense
Total
Before
tax
£’m
(31.9)
(5.3)
46.8
1.9
11.5
2013
Tax credit/
(charge)
£’m
0.2
0.2
(21.6)
(0.3)
(21.5)
0.2
(21.7)
(21.5)
After
tax
£’m
(31.7)
(5.1)
25.2
1.6
(10.0)
Before
tax
£’m
(55.1)
0.4
4.0
(5.8)
(56.5)
2012
Restated
Tax credit/
(charge)
£’m
(0.7)
(0.2)
(2.3)
1.5
(1.7)
(0.7)
(1.0)
(1.7)
2013
£’m
5.3
3.3
8.6
After
tax
£’m
(55.8)
0.2
1.7
(4.3)
(58.2)
2012
£’m
-
(3.1)
(3.1)
MEGGITT PLC REPORT AND ACCOUNTS 2013 STRATEGIC REPORT FINANCIAL STATEMENTS SUPPLEMENTARY INFORMATION GOVERNANCE REPORTS
94
Notes to the consolidated financial statements continued
15. Earnings per ordinary share
Earnings per ordinary share (‘EPS’) is calculated by dividing the profit attributable to owners of the Company 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 for both this and the prior year. 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 equity owners of the Company.
2013
Profit*
2013
Shares
2013
EPS
£’m
Number ‘m
Pence
232.3
–
232.3
791.1
13.1
804.2
29.4
(0.5)
28.9
2012
Profit*
Restated
£’m
235.5
–
235.5
2012
Shares
Number ‘m
782.3
10.0
792.3
2012
EPS
Restated
Pence
30.1
(0.4)
29.7
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
Adjust for effects of:
Exceptional operating items
Amortisation of intangible assets acquired in business combinations
Financial instruments
Net interest expense on retirement benefit obligations
Underlying basic EPS
2013
Pence
29.4
2.2
5.6
(0.7)
1.0
37.5
2012
Restated
Pence
30.1
1.0
6.4
(2.3)
1.3
36.5
Diluted underlying EPS is based on underlying profit for the year (see note 10) and the same number of shares used in the calculation of diluted
EPS. Diluted underlying EPS for the year was 36.9 pence (2012: 36.0 pence as restated).
16. Dividends
In respect of earlier years
In respect of 2012:
Interim of 3.60p per share
Final of 8.20p per share
In respect of 2013:
Interim of 3.95p per share
Dividends paid
Less paid as scrip dividend (see note 41)
Dividends paid in cash
2013
£’m
–
–
64.4
31.2
95.6
(20.0)
75.6
2012
£’m
56.9
28.1
–
–
85.0
(13.2)
71.8
A final dividend in respect of 2013 of 8.80p per share (2012: 8.20p), amounting to an estimated total final dividend of £70.2 million (2012: £64.4
million) is to be proposed at the Annual General Meeting on 7 May 2014. This dividend is not reflected in these financial statements as it is has not
been approved by the shareholders at the balance sheet date.
MEGGITT PLC RE PORT AND ACCOUNTS 2013
95
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 Board and the Management Board, is set out below:
Salaries and other short-term employee benefits
Retirement benefit expense
Share-based payment expense
Total
2013
£’m
6.8
0.4
3.2
10.4
2012
£’m
8.5
0.3
4.6
13.4
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
Equity participation plan shares
2013
Average
award
price
Pence
348.66
353.23
N/A
2013
Number
outstanding
‘m
0.1
5.7
2.8
2012
Average
award
price
Pence
182.49
285.74
N/A
2012
Number
outstanding
‘m
0.1
10.1
3.6
Full details of all elements in the remuneration package of each director, together with directors’ share interests and share awards, are given in
the Directors’ remuneration report on pages 47 to 67 which forms part of these financial statements.
18. Goodwill
Cost at 1 January
Exchange rate adjustments
Businesses acquired (see note 42)
Businesses disposed (see note 43)
Cost at 31 December
2013
£’m
1,494.2
(19.6)
9.0
(26.5)
2012
£’m
1,544.0
(53.7)
3.9
–
1,457.1
1,494.2
Goodwill is tested for impairment annually or more frequently if there is any indication of impairment. No impairment charge was required in the
year (2012: £Nil) and the cumulative impairment charge recognised to date is £Nil (2012: £Nil). The total amount of goodwill and other intangible
assets acquired as part of a business combination in the year that are expected to be deductible for tax purposes is £24.8 million (2012: £Nil).
For the purpose of impairment testing, 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.
Meggitt Safety Systems, Inc./Pacific Scientific HTL*
Meggitt Sensing Systems (‘MSS’)*
Meggitt (Rockmart), Inc.
Meggitt Training Systems, Inc.
Other
Total
2013
£’m
665.3
177.2
129.6
82.9
68.6
62.9
270.6
2012
£’m
675.8
165.6
132.0
73.9
69.9
64.1
312.9
1,457.1
1,494.2
* During the year, the Group determined that the cash flows of certain individual business operations were now so closely related to those of
other business unit operations within the Group, they no longer met the definition of a CGU. Accordingly, Meggitt Safety Systems, Inc. and
Pacific Scientific HTL are now treated as a single CGU and MSS SBU is treated also as a single CGU.
MEGGITT PLC REPORT AND ACCOUNTS 2013 STRATEGIC REPORT FINANCIAL STATEMENTS SUPPLEMENTARY INFORMATION GOVERNANCE REPORTS
96
Notes to the consolidated financial statements continued
18. Goodwill continued
For each 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 2013. 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., Meggitt Safety Systems, Inc./Pacific Scientific HTL and MSS are broadly spread across both civil aerospace
and military platforms with Meggitt (North Hollywood), Inc. and MSS also operating in the energy sector. MABS is a leading supplier of wheels,
brakes and brake control 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. Meggitt Safety Systems, Inc./
Pacific Scientific HTL designs and manufactures fire protection and control systems for large, regional, business and military aircraft. MSS is a
leading provider of high-performance sensing and condition-monitoring solutions for high-value rotating machinery and other assets and,
within the aerospace sector, has a higher content on large jets. All four CGUs have significant OEM and aftermarket revenue 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 revenue except for MSS which has a higher OEM content. Meggitt (Rockmart), Inc. and Meggitt Training Systems, Inc. both
operate mainly 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 revenue of 8 to 9% per
annum over the medium term. The Group’s 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 8% in 2013, and the Group expects good delivery growth over the next 5
years underpinned by continued strong recent order intake and a backlog at Boeing and Airbus which equates to over 7 years of deliveries at the
current production rate. Deliveries of regional aircraft increased by 11% in 2013, with modest growth anticipated over the next few years, driven
principally by demand for 70-90 seat aircraft, on which the Group has a strong shipset content. Total business jet deliveries decreased by 5% in
2013 but deliveries of super-midsize and long-range aircraft, where the Group benefits from particularly strong market positions, grew
strongly. Further growth is anticipated in this market over the next 5 years, driven by increasing internationalisation of the customer base and
the ongoing improvement in the US economy. In military markets, defence budgets are likely to remain under pressure over the medium term.
Sequestration has been implemented in the US, and although the effect in 2014 is unlikely to be as severe as initially anticipated, a cautious
stance on near-term revenue growth has been assumed. However, the Group has key positions on future growth platforms and, in the absence
of any clarity on where cuts will ultimately fall, continues to anticipate average compound organic military growth 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: 2.4% (2012: 2.3%), US: 2.4% (2012: 2.4%)), the
latter has been used.
• 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 10.3% (2012: 10.8%), Meggitt (North Hollywood), Inc., 11.0% (2012:
11.1%), Meggitt Safety Systems, Inc./Pacific Scientific HTL 10.8% (2012: 9.6%), Meggitt (Rockmart), Inc. 10.7% (2012: 11.2%), and Meggitt Training
Systems, Inc. 10.9% (2012: 10.0%). The discount rates used for ‘Other’ CGU’s ranged between 9.3% to 10.9% (2012: 8.4% 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. ‘Other’ goodwill of £270.6 million (2012: £312.9
million) relates to approximately 10 individual CGUs for which sensitivities at the aggregated level are also provided below.
To require an impairment in the Group financial statements, one of the following would be required:
Reduction in estimates of cash flows (more than)
Reduction of long-term growth rates (more than)
Increase in the discount rate applied to future cash flows (more than)
MABS
%
15
80
15
Other
%
20
75
15
MEGGITT PLC RE PORT AND ACCOUNTS 2013
19. Development costs and programme participation costs
At 1 January 2012
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
Year ended 31 December 2013
Opening net book amount
Exchange rate adjustments
Additions
Disposals
Interest capitalised
Amortisation*
Net book amount
At 31 December 2013
Cost
Accumulated amortisation
Net book amount
97
Development
costs
£’m
230.3
(44.5)
185.8
185.8
(6.2)
52.2
1.3
(11.6)
221.5
276.0
(54.5)
221.5
221.5
(3.8)
70.2
(2.0)
1.5
(16.9)
Programme
participation
costs
£’m
301.8
(104.3)
197.5
197.5
(6.8)
36.1
–
(23.2)
203.6
326.9
(123.3)
203.6
203.6
(3.3)
35.7
–
–
(25.4)
270.5
210.6
340.7
(70.2)
270.5
356.0
(145.4)
210.6
* Charged to net operating costs in respect of development costs and to cost of sales in respect of programme participation costs.
Interest has been capitalised using the average rate payable on the Group’s floating rate borrowings of 1.6% (2012: 1.6%).
The net book amount of development costs include £91.1 million (2012: £72.5 million) in respect of Meggitt Aircraft Braking Systems which have
an estimated weighted average remaining life of 9.1 years (2012: 9.2 years). The net book amount of programme participation costs includes
£202.7 million (2012: £199.5 million) in respect of Meggitt Aircraft Braking Systems which have an estimated weighted average remaining life of
8.4 years (2012: 9.1 years).
MEGGITT PLC REPORT AND ACCOUNTS 2013 STRATEGIC REPORT FINANCIAL STATEMENTS SUPPLEMENTARY INFORMATION GOVERNANCE REPORTS
98
Notes to the consolidated financial statements continued
20. Other intangible assets
Customer
relationships
Technology
Order
backlogs
At 1 January 2012
Cost
Accumulated amortisation
Net book amount
Year ended 31 December 2012
Opening net book amount
Exchange rate adjustments
Business 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
Year ended 31 December 2013
Opening net book amount
Exchange rate adjustments
Business acquired (see note 42)
Businesses disposed (see note 43)
Additions
Amortisation – net operating costs (see note 10)
Net book amount
At 31 December 2013
Cost
Accumulated amortisation
Net book amount
(*)
£’m
(*)
£’m
863.2
(229.7)
633.5
633.5
(22.8)
0.7
–
–
–
(59.1)
552.3
832.1
(279.8)
552.3
552.3
(5.8)
10.0
(9.5)
–
(54.7)
246.7
(80.8)
165.9
165.9
(5.9)
2.9
–
–
–
(16.3)
146.6
240.5
(93.9)
146.6
146.6
(1.4)
5.6
(1.1)
–
(17.0)
492.3
132.7
807.9
(315.6)
492.3
238.8
(106.1)
132.7
(*)
£’m
11.4
(8.2)
3.2
3.2
(0.1)
0.1
–
–
–
(2.9)
0.3
11.2
(10.9)
0.3
0.3
–
0.1
–
–
(0.3)
0.1
10.9
(10.8)
0.1
Trade
names and
trademarks
(*)
£’m
30.9
(16.3)
14.6
14.6
(0.6)
–
–
–
–
(2.3)
11.7
29.9
(18.2)
11.7
11.7
–
–
(0.6)
–
(2.3)
8.8
27.9
(19.1)
8.8
Other
purchased
(**)
£’m
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
68.0
(0.4)
0.1
–
15.5
(9.8)
73.4
Total
£’m
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
778.9
(7.6)
15.8
(11.2)
15.5
(84.1)
707.3
110.8
(37.4)
73.4
1,196.3
(489.0)
707.3
* 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. Amortisation of £1.4 million (2012: £Nil) has been charged to exceptional operating items and is excluded
from the Group’s underlying profit figures (see note 10).
No interest has been capitalised in the year. In 2012, interest was capitalised using the average rate payable on the Group’s floating rate
borrowings of 1.6%.
The net book amount of customer relationships include £350.2 million (2012: £391.5 million) in respect of Meggitt Aircraft Braking Systems which
have an estimated weighted average remaining life of 10.0 years (2012: 11.0 years). The net book amount of technology includes £70.2 million
(2012: £78.4 million) in respect of Meggitt Aircraft Braking Systems which have an estimated weighted average remaining life of 10.0 years (2012:
11.0 years).
MEGGITT PLC RE PORT AND ACCOUNTS 2013
21. Property, plant and equipment
At 1 January 2012
Cost
Accumulated depreciation
Net book amount
Year ended 31 December 2012
Opening net book amount
Exchange rate adjustments
Business acquired
Additions
Disposals
Depreciation*
Net book amount
At 31 December 2012
Cost
Accumulated depreciation
Net book amount
Year ended 31 December 2013
Opening net book amount
Exchange rate adjustments
Business acquired (see note 42)
Businesses disposed (see note 43)
Additions
Disposals
Depreciation*
Net book amount
At 31 December 2013
Cost
Accumulated depreciation
Net book amount
99
Land and
buildings
£’m
164.8
(50.4)
114.4
114.4
(2.5)
2.5
6.9
(0.1)
(7.0)
114.2
169.2
(55.0)
114.2
114.2
(0.8)
–
(0.1)
21.9
(0.1)
(6.5)
Plant,
equipment
and vehicles
£’m
372.2
(256.7)
115.5
115.5
(3.5)
1.6
29.7
(0.4)
(24.9)
118.0
380.7
(262.7)
118.0
118.0
(1.1)
0.7
(4.0)
29.6
(0.6)
(25.7)
Total
£’m
537.0
(307.1)
229.9
229.9
(6.0)
4.1
36.6
(0.5)
(31.9)
232.2
549.9
(317.7)
232.2
232.2
(1.9)
0.7
(4.1)
51.5
(0.7)
(32.2)
128.6
116.9
245.5
185.9
(57.3)
128.6
385.0
(268.1)
116.9
570.9
(325.4)
245.5
* Depreciation of £0.8 million (2012: £Nil) has been charged to exceptional operating items and is excluded from the Group’s underlying profit
figures (see note 10).
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
£4.4 million included within land and buildings (2012: £4.5 million) and £0.2 million (2012: £1.4 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
2013
£’m
10.8
(3.0)
7.8
115.1
127.9
48.4
299.2
2012
£’m
8.8
(4.2)
4.6
107.8
123.9
54.9
291.2
The cost of inventories recognised as an expense and included in cost of sales was £923.7 million (2012: £896.2 million). The cost of inventories
recognised as an expense includes £2.3 million (2012: £7.2 million) in respect of write-downs of inventory to net realisable value, and has been
reduced by £7.4 million (2012: £4.9 million) in respect of the reversal of write-downs made in previous years.
MEGGITT PLC REPORT AND ACCOUNTS 2013 STRATEGIC REPORT FINANCIAL STATEMENTS SUPPLEMENTARY INFORMATION GOVERNANCE REPORTS
100
Notes to the consolidated financial statements continued
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
2013
£’m
244.6
35.9
12.2
126.1
418.8
89.9
89.9
2012
£’m
240.2
14.6
10.4
137.8
403.0
98.8
98.8
328.9
304.2
Other receivables includes £95.9 million (2012: £102.7 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 £10.5 million (2012: £10.7 million) is shown as
current.
Trade receivables are stated after a provision for impairment of £4.1 million (2012: £6.6 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
Businesses disposed
Credit to income statement – net operating costs
At 31 December
2013
£’m
6.6
0.1
(0.5)
(2.1)
4.1
At 31 December 2013, trade receivables of £61.8 million (2012: £50.0 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
2013
£’m
53.2
8.6
61.8
2012
£’m
7.2
(0.2)
-
(0.4)
6.6
2012
£’m
42.7
7.3
50.0
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
2013
£’m
79.2
289.3
41.7
8.6
418.8
2012
£’m
69.3
279.8
42.1
11.8
403.0
MEGGITT PLC RE PORT AND ACCOUNTS 2013
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/Moody’s 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
101
2013
£’m
101.0
15.1
116.1
2013
£’m
0.7
29.0
81.7
4.7
2012
£’m
94.9
10.0
104.9
2012
£’m
1.0
27.8
72.5
3.6
116.1
104.9
2013
£’m
42.2
128.2
12.5
47.8
–
98.4
329.1
2013
£’m
2.9
2.3
5.2
2012
£’m
42.6
121.6
12.0
47.8
0.2
127.7
351.9
2012
£’m
2.9
3.4
6.3
2012
£’m
3.1
1.1
3.9
8.1
Minimum
lease payments
Present value
of minimum
lease payments
2013
£’m
2.4
1.3
3.8
7.5
2013
£’m
3.4
3.8
12.7
19.9
(12.4)
7.5
5.1
2.4
2012
£’m
4.3
3.7
13.9
21.9
(13.8)
8.1
5.0
3.1
Obligations under finance leases are principally US dollar denominated. The weighted average period to maturity is 11.0 years (2012: 11.2 years)
and the weighted average interest rate is 13.9% (2012: 16.0%).
MEGGITT PLC REPORT AND ACCOUNTS 2013 STRATEGIC REPORT FINANCIAL STATEMENTS SUPPLEMENTARY INFORMATION GOVERNANCE REPORTS
102
Notes to the consolidated financial statements continued
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
2013
£’m
3.9
3.3
7.2
245.8
420.2
666.0
2012
£’m
12.2
114.8
127.0
170.1
442.2
612.3
673.2
739.3
7.2
413.7
252.3
673.2
127.0
343.3
269.0
739.3
Bank and other borrowings are stated after deduction of unamortised debt issue costs of £3.9 million (2012: £5.1 million). Debt issue costs are
written off over the period of the facility to which they relate. The Group has no secured borrowings (2012: £0.1 million secured by specific land
and buildings of the Group).
The Group has the following committed facilities:
Senior notes (2013: USD 70.0 million, 2012: USD 250.0 million)
Senior notes (USD 600.0 million)
Syndicated credit facility (USD 700.0 million)
Syndicated credit facility (USD 400.0 million)
Total
2013
Drawn
£’m
Undrawn
£’m
42.3
362.3
186.4
62.2
653.2
–
–
236.1
179.3
415.4
Total
£’m
42.3
362.3
422.5
241.5
1,068.6
Drawn
£’m
153.8
369.1
93.8
80.1
696.8
2012
Undrawn
£’m
–
–
336.8
166.0
502.8
Total
£’m
153.8
369.1
430.6
246.1
1,199.6
The Group issued USD 250.0 million of loan notes to private placement investors in 2003. The notes were in two tranches as follows: USD 180.0
million carried an interest rate of 5.36% and were repaid in 2013 and USD 70.0 million carry an interest rate of 5.46% and are due for repayment in
2015.
The Group issued USD 600.0 million of loan notes to private placement investors in 2010. 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.
The Group has a USD 700.0 million syndicated revolving credit facility which matures in 2016 and a USD 400.0 million syndicated revolving credit
facility which matures in 2017. At 31 December 2013, the amounts drawn under revolving credit facilities were £248.6 million (2012: £173.9 million)
represented by borrowings denominated in US dollars of £97.0 million (2012: £80.1 million), in Euros of £62.3 million (2012: £Nil), in Swiss francs
of £78.3 million (2012: £93.8 million) and in Sterling of £11.0 million (2012: £Nil). Borrowings under the facilities are subject to interest at floating
rates.
The committed facilities available at each balance sheet date 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
The Group also has various uncommitted facilities with its relationship banks.
2013
Drawn
£’m
Undrawn
£’m
–
411.7
241.5
653.2
–
415.4
–
415.4
Total
£’m
–
827.1
241.5
1,068.6
Drawn
£’m
110.7
340.0
246.1
696.8
2012
Undrawn
£’m
–
502.8
–
502.8
Total
£’m
110.7
842.8
246.1
1,199.6
MEGGITT PLC RE PORT AND ACCOUNTS 2013
28. Bank and other borrowings continued
The fair value of bank and other borrowings is as follows:
Current
Non-current
Total
103
2013
2012
Book
value
£’m
7.2
666.0
673.2
Fair
value
£’m
7.2
676.3
683.5
Book
value
£’m
127.0
612.3
739.3
Fair
value
£’m
128.7
628.4
757.1
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 2013:
US dollar*
Swiss franc
Euro
Sterling
Gross bank and other borrowings
Less unamortised debt issue costs
Floating
Fixed
£’m
262.7
79.6
62.3
11.0
415.6
(3.2)
£’m
259.6
–
0.3
–
259.9
(0.7)
Bank and other borrowings
412.4
259.2
Fixed rate borrowings
Weighted
average
interest rate
%
4.2
0.7
Weighted
average
period
for which
rate is fixed
Years
4.3
3.1
Non-interest
bearing
£’m
–
–
1.6
–
1.6
–
1.6
Total
£’m
522.3
79.6
64.2
11.0
677.1
(3.9)
673.2
* On 10 June 2013, USD 180.0 million of loan notes issued in 2003 were repaid using floating rate borrowings. At 31 December 2013, a 5 year
floating to fixed interest rate swap has been entered into which has the effect of converting USD 160.0 million of the new floating rate
borrowings into fixed rate borrowings.
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
The weighted average period to maturity for non-interest bearing borrowings is 3.5 years (2012: 3.8 years).
MEGGITT PLC REPORT AND ACCOUNTS 2013 STRATEGIC REPORT FINANCIAL STATEMENTS SUPPLEMENTARY INFORMATION GOVERNANCE REPORTS
104
Notes to the consolidated financial statements continued
29. Financial instruments
As at 31 December 2013:
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 assets
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)
Financial liabilities
Total
As at 31 December 2012:
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 assets
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)
Financial liabilities
Total
Held at fair value
Held at amortised cost
Through
profit
& loss
£’m
Derivatives
used for
hedging
£’m
Loans &
receivables
Liabilities
£’m
£’m
–
33.4
–
11.2
–
44.6
–
(0.7)
–
–
–
(0.1)
–
(256.8)
(257.6)
(213.0)
–
2.1
–
–
–
2.1
–
–
–
–
–
–
–
–
–
89.9
–
316.7
–
116.1
522.7
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(316.6)
–
(2.4)
(7.2)
(5.2)
–
(5.1)
(409.2)
Total
book
value
£’m
89.9
35.5
316.7
11.2
116.1
569.4
(316.6)
(0.7)
(2.4)
(7.2)
(5.2)
(0.1)
(5.1)
(666.0)
Total
fair
value
£’m
89.9
35.5
316.7
11.2
116.1
569.4
(316.6)
(0.7)
(2.4)
(7.2)
(5.2)
(0.1)
(5.1)
(676.3)
(745.7)
(1,003.3)
(1,013.6)
2.1
522.7
(745.7)
(433.9)
(444.2)
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
–
–
–
–
–
–
–
–
–
497.5
–
–
–
–
–
–
(339.9)
–
(3.1)
(127.0)
(6.3)
–
(5.0)
(337.4)
(818.7)
(818.7)
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)
(1,097.8)
(1,115.6)
(545.5)
(563.3)
* Excludes prepayments and accrued income of £12.2 million (2012: £10.4 million) (see note 23).
** Excludes social security and other taxes of £12.5 million (2012: £12.0 million) (see note 25).
MEGGITT PLC RE PORT AND ACCOUNTS 2013
105
29. Financial instruments continued
Fair value measurement and hierarchy
For trade and other receivables, cash and cash equivalents, trade and other payables, obligations under finance leases and the current element
of bank and other borrowings, 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.
Derivative financial instruments measured at fair value, is 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 values of foreign currency forward contracts have been derived
from forward exchange rates observable at the balance sheet date together with the contractual forward rates. The fair values of interest rate
derivatives have been derived from forward interest rates based on yield curves observable at the balance sheet date together with the
contractual interest rates.
The non-current portion of bank and other borrowings measured at fair value, is classified as level 3 in the fair value measurement hierarchy, as
it 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 (credit risk). The fair value attributable to interest rate risk has been derived from forward interest rates based
on yield curves observable at the balance sheet date together with the contractual interest rates and with the credit risk margin kept constant.
The fair value attributable to credit risk has been derived from quotes from lenders for borrowings of similar amounts and maturity periods.
Similar methods of valuation have been used to derive the fair value of the non-current portion of bank and other borrowings which is held at
amortised cost but for which a fair value is provided in the table above.
There were no transfers of assets or liabilities between levels of the fair value hierarchy during the year.
Financial liabilities designated as fair value through profit or loss
Cumulative changes in the fair value of the non-current portion of bank and other borrowings arising from changes in credit risk are as follows:
Fair value at 1 January
Credit to income statement
Fair value at 31 December
2013
£’m
10.0
(3.0)
7.0
2012
£’m
11.2
(1.2)
10.0
The difference between the fair value and contractual amount at maturity of the non-current portion of bank and other borrowings is as follows:
Fair value
Difference between fair value and contractual amount at maturity
Contractual amount payable at maturity
Financial liabilities classified as level 3 in the hierarchy
Changes in fair value are as follows:
Bank and other borrowings at fair value through profit or loss:
At 1 January
Exchange rate adjustments
(Gain)/loss recognised in net operating costs
At 31 December
2013
£’m
256.8
(15.3)
241.5
2012
£’m
274.9
(28.8)
246.1
2013
£’m
274.9
(4.4)
(13.7)
256.8
2012
£’m
283.6
(12.5)
3.8
274.9
The largest movement in credit spread seen in a six month period since inception of the borrowings is 75 basis points. A 75 basis point movement
in the credit spread used as an input in determining the fair value at 31 December 2013, would impact profit before tax by approximately £10.0
million.
MEGGITT PLC REPORT AND ACCOUNTS 2013 STRATEGIC REPORT FINANCIAL STATEMENTS SUPPLEMENTARY INFORMATION GOVERNANCE REPORTS
106
Notes to the consolidated financial statements continued
30. Derivative financial instruments
As at 31 December 2013:
Interest rate swaps – cash flow hedges
Interest rate swaps – fair value hedges
Foreign currency forward contracts – not hedge accounted
Total
Less non-current portion:
Interest rate swaps – cash flow hedges
Interest rate swaps – fair value hedges
Foreign currency forward contracts – not hedge accounted
Non-current portion
Current portion
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
Interest rate swaps
Contract or underlying
principal amount
Fair value
Assets
£’m
Liabilities
£’m
Assets
£’m
Liabilities
£’m
96.6
241.5
344.5
682.6
96.6
241.5
170.6
508.7
173.9
–
–
(12.4)
(12.4)
–
–
(1.6)
(1.6)
(10.8)
2.1
22.8
21.8
46.7
2.1
22.8
10.6
35.5
11.2
–
–
(0.8)
(0.8)
–
–
(0.1)
(0.1)
(0.7)
Contract or underlying
principal amount
Fair value
Assets
£’m
246.1
–
–
233.9
480.0
246.1
–
111.5
357.6
122.4
Liabilities
£’m
Assets
£’m
Liabilities
£’m
–
(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)
The total notional principal amount of outstanding interest rate swap contracts at 31 December 2013 is £338.1 million (2012: £344.5 million), of
which £60.4 million will expire in 2017, £96.6 million will expire in 2018, £105.6 million will expire in 2020 and £75.5 million will expire in 2022. The
contracts are all denominated in USD. Of the notional principal amount outstanding, £96.6 million (2012: £98.4 million) has the economic effect of
converting floating rate US dollar borrowings into fixed rate US dollar borrowings and £241.5 million (2012: £246.1 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
At 31 December 2012, the Group had entered into cross currency swaps which were used to synthetically convert US dollar denominated
borrowings into Euro denominated borrowings to hedge against Euro denominated assets of overseas subsidiaries. The swaps were accounted
for as net investment hedges. The swaps expired during 2013.
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
2013
Assets
£’m
2013
Liabilities
£’m
2012
Assets
£’m
2012
Liabilities
£’m
17.4
4.4
21.8
–
(0.8)
(0.8)
9.2
2.5
11.7
(2.5)
(0.2)
(2.7)
MEGGITT PLC RE PORT AND ACCOUNTS 2013
30. Derivative financial instruments continued
Credit quality of derivative financial assets
The credit quality of derivative financial assets is as follows:
S&P/Moody’s rating:
AA
A
BBB
Total
31. Provisions
At 1 January 2013
Exchange rate adjustments
Business acquired (see note 42)
Businesses disposed (see note 43)
Additional provision in year – cost of sales
Additional provision in year – net operating costs
Unused amounts reversed – cost of sales
Unused amounts reversed – net operating costs
Utilised
At 31 December 2013
Current
Non-current
At 31 December 2013
2013
£’m
7.2
33.8
5.7
46.7
Environmental
legal & regulatory
(a)
Onerous
contracts
(b)
Warranty
costs
(c)
£’m
163.7
(2.1)
0.3
–
–
10.5
(1.7)
(15.9)
(14.1)
140.7
£’m
41.1
0.4
–
(0.1)
21.7
–
(16.6)
(0.1)
(6.2)
40.2
£’m
18.5
0.1
0.1
(0.3)
5.7
–
(5.2)
–
(6.3)
107
2012
£’m
7.7
37.2
9.9
54.8
Total
£’m
223.3
(1.6)
0.4
(0.4)
27.4
10.5
(23.5)
(16.0)
(26.6)
12.6
193.5
2013
£’m
44.3
149.2
193.5
2012
£’m
44.8
178.5
223.3
a) Provision has been made for known exposures arising from environmental remediation, health and safety liabilities, 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 (see note 23). 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. During the year, an administrative settlement was reached with the US Government following its investigation of alleged
violations of US export control laws by certain subsidiaries of the Group. Under the terms of the 30-month consent agreement, Meggitt-USA,
Inc. was assessed a civil penalty of USD 25 million, of which USD 22 million was suspended on condition the Government approves certain
past or future remedial costs incurred or to be incurred by the Group’s US subsidiaries. In addition, the Group will be required to implement
additional future compliance measures. No provision is held for the suspended penalty as it is not considered probable that such amounts
will be payable. 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, where
appropriate, using a discount rate appropriate to each provision. Provision has also been made for estimated losses under certain trading
contracts. As described in note 11, during 2013 the Group has been made aware of an issue relating to the supply from a vendor of non-
conforming raw material in one of our businesses. Provision has been made for the estimated future costs associated with this matter, which
include the provision of a number of free of charge replacement parts to customers over a period of several years. There are a number of
uncertainties regarding the ultimate amounts that will be payable, including the extent to which replacement parts will be required. However,
the directors believe, based on the information currently available, that the ultimate outcome will not be significantly different from that
recognised. During 2013, the Group made significant progress in resolving a small number of other contractual matters and accordingly was
able to reduce, or release, provisions previously created in respect of these matters. Onerous trading contract 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.
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 2013 STRATEGIC REPORT FINANCIAL STATEMENTS SUPPLEMENTARY INFORMATION GOVERNANCE REPORTS
108
Notes to the consolidated financial statements continued
32. Deferred tax
Movements in deferred tax assets and liabilities during the year, without taking into consideration the offsetting of balances, are as follows:
Deferred tax assets
At 1 January 2012
Exchange rate adjustments
Reclassifications
Charge to income statement (Restated) (see note 14)
Charge/(credit) to other comprehensive income (Restated) (see note 14)
Charge to equity (see note 14)
At 31 December 2012
Exchange rate adjustments
Business acquired (see note 42)
Businesses disposed (see note 43)
Reclassifications
Charge to income statement (see note 14)
Charge to other comprehensive income (see note 14)
Credit to equity (see note 14)
At 31 December 2013
Deferred tax liabilities
At 1 January 2012
Exchange rate adjustments
Business acquired
Credit to income statement (see note 14)
Credit to other comprehensive income (see note 14)
At 31 December 2012
Exchange rate adjustments
Businesses disposed (see note 43)
Reclassifications
(Charge)/credit to income statement (see note 14)
At 31 December 2013
* Acquired in business combinations.
Other
Total
Retirement
benefit
obligations
£’m
101.7
(2.8)
–
(2.3)
(2.3)
–
94.3
(0.1)
–
–
–
(4.5)
(21.6)
–
68.1
£’m
19.1
(0.3)
11.9
(7.8)
1.2
(3.1)
21.0
0.1
(0.1)
4.6
0.6
(13.4)
(0.1)
3.3
16.0
Accelerated
tax
depreciation
£’m
(18.8)
0.6
–
1.7
–
(16.5)
0.3
–
(0.3)
(2.8)
Intangible
assets
(*)
£’m
(306.3)
11.4
(0.8)
7.5
0.1
(288.1)
4.0
(6.0)
–
15.1
£’m
120.8
(3.1)
11.9
(10.1)
(1.1)
(3.1)
115.3
–
(0.1)
4.6
0.6
(17.9)
(21.7)
3.3
84.1
Total
£’m
(325.1)
12.0
(0.8)
9.2
0.1
(304.6)
4.3
(6.0)
(0.3)
12.3
(19.3)
(275.0)
(294.3)
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. During 2013, the Group reassessed the extent to which deferred tax assets
could be offset against deferred tax liabilities and determined that an element of the gross deferred tax asset relating to retirement benefit
obligations met the criteria for offset. Accordingly this offset has been reflected in the balance sheet at 31 December 2013. The Group has not
restated the balance sheet at 31 December 2012, as the adjustment would not have had a significant impact on total assets and would have had no
impact on net assets, income for the year or other comprehensive income for the year. 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
2013
£’m
9.1
(219.3)
(210.2)
2013
£’m
0.2
8.9
9.1
2013
£’m
(0.3)
(219.0)
(219.3)
2012
£’m
100.2
(289.5)
(189.3)
2012
£’m
1.5
98.7
100.2
2012
£’m
(0.1)
(289.4)
(289.5)
MEGGITT PLC RE PORT AND ACCOUNTS 2013
109
32. Deferred tax continued
The Group has unrecognised deferred tax assets of £8.9 million (2012: £10.0 million), the majority of which relates to capital losses in the UK.
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. There are no
unremitted earnings in foreign subsidiaries that would give rise to a tax liability in the event of those subsidiaries remitting their earnings.
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 but open to future accrual for existing
members;
• In the US, the Group operates five defined benefit schemes, all of which are closed to new members. With two exceptions, these schemes are
open to future accrual for existing members. The schemes are a mixture of funded and unfunded schemes; and
• In Switzerland, the Group operates a funded defined benefit scheme which is open to new members and to future accrual.
The UK and US schemes provide benefits to members in the form of a guaranteed level of pension payable for life. The benefits provided depend on a
member’s length of service. For the majority of schemes, the benefits are dependent on salary at retirement or average salary over employment in
the final years leading up to retirement. In the US, one scheme provides a fixed benefit for each year of service. The Swiss scheme has many of the
characteristics of a defined contribution scheme but provides for certain minimum benefits to be guaranteed to members.
For all funded schemes, benefit payments are made from funds administered by third parties unrelated to the Group. The assets of such schemes
are held in trust funds, or their equivalent, separate from the Group’s finances. Scheme assets held in trusts, or their equivalent, are governed by
local regulations and practice in each country, as is the nature of the relationship between the Group and the trustees (or equivalent) and their
composition. For all unfunded schemes, benefit payments are made by the Group as the obligations fall due.
The Group also operates a number of defined contribution schemes under which the Group has no further obligations once the contributions have
been paid.
Healthcare schemes
The Group has two principal other post-retirement benefit schemes providing medical and life assurance benefits to 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
Net interest expense on retirement benefit obligations
Total charge in respect of defined benefit pension schemes
Healthcare schemes:
Service cost
Net interest expense on retirement benefit obligations
Total charge in respect of healthcare schemes
Total charge
2013
£’m
19.2
12.7
0.7
9.5
22.9
1.5
2.0
3.5
45.6
2012
Restated
£’m
18.3
12.3
–
11.5
23.8
1.0
2.5
3.5
45.6
Of the total charge, £34.1 million (2012: £31.6 million) has been charged to operating profit (see note 9), of which £18.9 million (2012: £18.1 million)
has been included in cost of sales and £15.2 million (2012: £13.5 million) in net operating costs. The remaining £11.5 million (2012: £14.0 million as
restated) is included in finance costs (see note 13).
MEGGITT PLC REPORT AND ACCOUNTS 2013 STRATEGIC REPORT FINANCIAL STATEMENTS SUPPLEMENTARY INFORMATION GOVERNANCE REPORTS
110
Notes to the consolidated financial statements continued
33. Retirement benefit obligations continued
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
2013
Overseas
pension
schemes
£’m
Overseas
healthcare
schemes
£’m
238.5
(304.8)
(66.3)
–
(48.3)
(48.3)
2012
Overseas
pension
schemes
£’m
Overseas
healthcare
schemes
£’m
221.9
(329.5)
(107.6)
–
(58.5)
(58.5)
UK
pension
scheme
£’m
449.9
(573.4)
(123.5)
UK
pension
scheme
£’m
412.8
(546.4)
(133.6)
Total
£’m
688.4
(926.5)
(238.1)
Total
£’m
634.7
(934.4)
(299.7)
Of the total deficit of £238.1 million (2012: £299.7 million), £61.0 million (2012: £72.5 million) is in respect of unfunded schemes.
Analysis of pension scheme assets
Quoted
Unquoted
2013
Equities
Government bonds
Corporate bonds
Cash
Other assets
UK pension scheme
Equities
Government bonds
Corporate bonds
Cash
Property
Other assets
Overseas pension schemes
Equities
Government bonds
Corporate bonds
Cash
Property
Other assets
Total pension schemes’ assets
£’m
199.4
132.7
42.7
22.3
14.6
411.7
112.6
22.8
65.9
10.6
9.9
5.2
227.0
312.0
155.5
108.6
32.9
9.9
19.8
638.7
£’m
0.4
1.9
26.4
–
9.5
38.2
–
–
–
–
11.5
–
11.5
0.4
1.9
26.4
–
11.5
9.5
49.7
Total
£’m
199.8
134.6
69.1
22.3
24.1
449.9
112.6
22.8
65.9
10.6
21.4
5.2
238.5
312.4
157.4
135.0
32.9
21.4
29.3
688.4
Quoted
Unquoted
2012
%
44.4
29.9
15.4
5.0
5.3
100.0
47.2
9.6
27.6
4.4
9.0
2.2
100.0
45.4
22.8
19.6
4.8
3.1
4.3
100.0
£’m
124.1
124.2
55.2
24.9
23.7
352.1
110.7
33.8
50.1
4.5
9.4
3.5
212.0
234.8
158.0
105.3
29.4
9.4
27.2
564.1
£’m
0.6
7.0
38.4
–
14.7
60.7
–
–
–
–
9.9
–
9.9
0.6
7.0
38.4
–
9.9
14.7
70.6
Total
£’m
124.7
131.2
93.6
24.9
38.4
412.8
110.7
33.8
50.1
4.5
19.3
3.5
221.9
235.4
165.0
143.7
29.4
19.3
41.9
634.7
%
30.2
31.8
22.7
6.0
9.3
100.0
49.9
15.2
22.6
2.0
8.7
1.6
100.0
37.1
26.0
22.7
4.6
3.0
6.6
100.0
Other assets include hedge funds, commodities and derivatives. The schemes have no investments in any assets of the Group.
MEGGITT PLC RE PORT AND ACCOUNTS 2013
33. Retirement benefit obligations continued
Changes in the fair value of scheme assets
At 1 January
Exchange rate adjustments
Interest income
Contributions – Group
Contributions – Members
Benefits paid
Remeasurement gain: Return on schemes’ assets excluding amounts included in interest income
Administrative expenses borne directly by the schemes *
At 31 December
111
2013
£’m
634.7
(3.1)
24.9
41.6
3.6
(37.5)
25.5
(1.3)
688.4
2012
Restated
£’m
584.9
(8.4)
24.7
38.3
3.6
(35.1)
28.9
(2.2)
634.7
* In 2013, certain administrative expenses previously paid by the schemes are now being paid directly by the Group. All administrative expenses,
whether paid directly by the Group or borne by the schemes, are charged to net operating costs.
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.
2013
UK
pension
scheme
Overseas
pension
schemes
Overseas
healthcare
schemes
4.60%
3.40%
2.60%
3.30%
4.40%
4.55%
N/A
N/A
N/A
4.76%
4.55%
N/A
N/A
N/A
N/A
UK
pension
scheme
4.50%
3.00%
2.50%
3.00%
4.00%
2012
Overseas
pension
schemes
Overseas
healthcare
schemes
3.80%
N/A
N/A
N/A
4.00%
3.80%
N/A
N/A
N/A
N/A
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. 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, which include the results of a
postcode analysis of members used to support the 2012 triennial UK actuarial valuation. 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
2013
2012
UK
scheme
Years
Overseas
schemes
Years
UK
scheme
Years
Overseas
schemes
Years
23.5-25.2
26.3-27.9
21.8-23.6
24.3-26.0
19.3
21.1
19.3
21.1
23.4-25.1
26.2-27.9
21.7-23.5
24.2-25.9
19.2
21.0
19.2
21.0
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 2013 to increase by approximately
£14.4 million;
• The impact of a 10 basis point increase in inflation and salary inflation rates would cause scheme liabilities at 31 December 2013 to increase by
approximately £10.7 million;
• The impact of assuming every scheme member were to live for an additional year would cause scheme liabilities at 31 December 2013 to
increase by approximately £22.7 million.
The above sensitivity analyses are based on a change in an assumption while keeping all other assumptions constant. In practice, this is unlikely
to occur, and changes in some of the assumptions may be correlated. When calculating the sensitivity of the defined benefit obligation to
significant actuarial assumptions, the same method of calculating the defined benefit obligation has been used as when calculating the
retirement benefit obligations recognised in the balance sheet. The methods and types of assumptions used in preparing the sensitivity analysis
did not change compared to the previous year.
In the US, regulatory bodies are currently consulting on a new set of mortality tables which reflect recently observed longevity experience. New
mortality tables are expected to be finalised in the next two years and will, once adopted, likely provide for increased longevity and accordingly
higher retirement benefit scheme liabilities for most US schemes. It is not yet possible to quantify the impact any changes may have on our
schemes’ retirement benefit liabilities.
MEGGITT PLC REPORT AND ACCOUNTS 2013 STRATEGIC REPORT FINANCIAL STATEMENTS SUPPLEMENTARY INFORMATION GOVERNANCE REPORTS
112
Notes to the consolidated financial statements continued
33. Retirement benefit obligations continued
Changes in the present value of retirement benefit obligations
At 1 January
Exchange rate adjustments
Service cost
Past service cost
Net interest expense on retirement benefit obligations (see note 13)
Contributions – Group
Remeasurement of retirement benefit obligations:
Gain from change in demographic assumptions
(Gain)/loss from change in financial assumptions
Return on schemes’ assets excluding amounts included in interest income
Total remeasurement gain
Administrative expenses borne directly by the schemes
At 31 December
Risks
2013
£’m
299.7
(0.9)
14.2
0.7
11.5
(41.6)
(6.9)
(14.4)
(25.5)
(46.8)
1.3
2012
Restated
£’m
319.9
(7.4)
13.3
–
14.0
(38.3)
(6.2)
31.1
(28.9)
(4.0)
2.2
238.1
299.7
The Group is exposed to a number of risks arising from operating its defined benefit pension and healthcare schemes, the most significant of
which are detailed below:
Asset volatility
In determining the present value of schemes’ defined benefit obligations, liabilities are discounted using interest rates of high quality corporate
bonds. To the extent the actual return on schemes’ assets is below this yield, the retirement benefit obligations recognised in the consolidated
financial statements would increase. This risk is partly mitigated by funded schemes investing in matching corporate bonds, such that changes in
asset values are offset by similar changes in the value of scheme liabilities. However, the Group also invests in other asset types such as equities,
property, commodities, derivatives and hedge funds where movements in asset values may be uncorrelated to movements in the yields on high
quality corporate bonds. The Group believes that, due to the long-term nature of its scheme liabilities, it is appropriate to invest in assets which
are expected to out-perform corporate bonds over this timeframe. Scheme assets are well diversified, such that the failure of any single
investment would not have a material impact on the overall level of assets. The Group actively monitors how the duration and expected yield of
scheme assets are matching the expected cash outflows arising from the pension obligations. For each funded scheme, there is a ‘glide-path’ in
place which provides, to the extent the funding position improves, for asset volatility to be reduced by increased investment in long-term fixed
interest securities with maturities that match the benefit payments as they fall due.
Interest rate risk
In determining the present value of schemes’ defined benefit obligations, liabilities are discounted using interest rates of high quality corporate
bonds. If these yields fall, the retirement benefit obligations recognised in the consolidated financial statements would increase. This risk is
partly mitigated through the funded schemes investing in matching assets as described above.
Inflation rate risk
In determining the present value of schemes’ defined benefit obligations, estimates are made as to levels of salary inflation, inflation increases
that will apply to deferred benefits during deferment and pensions in payment, and healthcare cost inflation. To the extent actual inflation exceeds
these estimates, the retirement benefit obligations recognised in the consolidated financial statements would increase. Salary inflation risk is
partly mitigated in both the UK and US schemes by linking benefits in respect of future service to average salaries over a period of employment
rather than final salary at retirement. Benefits in respect of certain periods of past service are still linked to final salary at retirement. In the UK,
inflation risk in respect of deferred benefits and pensions in payment is mitigated by caps on the levels of inflation under the scheme rules. In the
US and Switzerland, the schemes provide for no inflation to be applied to benefits in deferment or retirement. Exposure to inflation on US
healthcare costs has been mitigated by freezing Group contributions to medical costs at 2011 cost levels.
Longevity risk
In determining the present value of schemes’ defined benefit obligations, assumptions are made as to the life expectancy of members during
employment and in retirement. To the extent life expectancy exceeds this estimate, the retirement benefit obligations recognised in the
consolidated financial statements would increase. This risk is more significant in the UK plan, where inflationary increases result in higher
sensitivity to changes in life expectancy. The Group currently does not use derivatives, such as longevity swaps, to mitigate this risk.
The Group has not changed the processes used to manage defined benefit scheme risks during the year.
Other information
In the UK, the last triennial valuation was in 2012 following which the Group agreed with the UK trustees to progressively increase deficit
reduction payments, with the aim being to eliminate the deficit by 2024. In the US, deficit reduction levels are driven by regulations and provide for
deficits to be eliminated over periods up to 15 years. There is no significant deficit in the Swiss scheme. The estimated Group contributions
expected to be paid to the schemes during 2014 are £46.4 million.
MEGGITT PLC RE PORT AND ACCOUNTS 2013
33. Retirement benefit obligations continued
The weighted average duration of the schemes’ defined benefit obligation is 17.1 years. The expected maturity of undiscounted pension and
healthcare benefits at 31 December 2013 is as follows:
113
Pension schemes
Healthcare schemes
Total
34. Share capital and share schemes
Issued 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
Issued on exercise of executive share awards
Issued on exercise of sharesave awards
Scrip dividends
At 31 December 2013
Share Options
Year of grant
Meggitt 2008 Sharesave Scheme
2008
2008
2010
2010
2010
2012
2012
2013
2013
Meggitt 1996 No 1 Executive Share Option Scheme
2004
Meggitt Executive Share Option Scheme 2005 Part A
2005
2006
2007
2008
2009
2010
2011
2011
2012
2013
2013
Less than
a year
£’m
Between
1-2 years
£’m
Between
2-5 years
£’m
32.6
3.4
36.0
33.4
3.4
36.8
104.3
10.7
115.0
Over
5 years
£’m
1,631.0
67.4
Total
£’m
1,801.3
84.9
1,698.4
1,886.2
Ordinary
shares of
5p each
Number ‘m
Nominal
value
Net
consideration
£’m
£’m
778.8
2.7
0.2
3.3
785.0
7.2
1.1
3.8
797.1
38.9
0.2
–
0.2
39.3
0.3
0.1
0.2
39.9
0.6
0.4
13.2
0.5
2.0
20.0
Number of
ordinary shares
under award
Exercise
price
per share
Exercise period
From
To
25,066
74,311
16,994
451,831
50,781
724,303
382,279
511,899
251,845
171.40p
171.40p
222.35p
222.35p
222.35p
326.94p
326.94p
426.40p
426.40p
01.11.13
01.11.15
01.11.13
01.11.15
01.11.17
01.11.15
01.11.17
01.11.16
01.11.18
30.04.14
30.04.16
30.04.14
30.04.16
30.04.18
30.04.16
30.04.18
30.04.17
30.04.19
17,200
174.40p
01.04.07
31.03.14
73,289
9,471
8,442
10,220
30,531
19,171
134,405
8,683
221,239
240,108
5,504
278.65p
263.67p
299.00p
252.50p
169.50p
286.10p
351.70p
345.50p
397.20p
526.50p
545.00p
10.10.08
27.09.09
29.03.10
25.03.11
30.04.12
12.03.13
02.03.14
17.08.14
10.04.15
05.09.16
09.09.16
09.10.15
26.09.16
28.03.17
24.03.18
29.04.19
11.03.20
01.03.21
16.08.21
09.04.22
04.09.23
08.09.23
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 4.2 years (2012: 3.6 years).
MEGGITT PLC REPORT AND ACCOUNTS 2013 STRATEGIC REPORT FINANCIAL STATEMENTS SUPPLEMENTARY INFORMATION GOVERNANCE REPORTS
114
Notes to the consolidated financial statements continued
34. Share capital and share schemes continued
Share Appreciation Rights – Equity-settled
Year of grant
Meggitt Executive Share Option Scheme 2005 Part B
2005
2006
2007
2007
2008
2008
2009
2010
2011
2011
2012
2013
2013
Indicative
number of shares
to be released*
Number of
ordinary shares
under award
Exercise
price
per share
Exercise period
From
To
193,672
264,387
233,089
43,075
569,335
307,984
1,164,992
982,420
1,325,677
184,223
1,196,324
7,344
–
410,536
528,614
538,093
95,170
1,092,088
502,200
1,716,573
2,146,754
3,977,785
533,944
4,843,140
3,873,782
11,679
278.65p
263.67p
299.00p
288.75p
252.50p
204.00p
169.50p
286.10p
351.70p
345.50p
397.20p
526.50p
545.00p
10.10.08
27.09.09
29.03.10
17.08.10
25.03.11
07.08.11
30.04.12
12.03.13
02.03.14
17.08.14
10.04.15
05.09.16
09.09.16
09.10.15
26.09.16
28.03.17
16.08.17
24.03.18
06.08.18
29.04.19
11.03.20
01.03.21
16.08.21
09.04.22
04.09.23
08.09.23
* Based on indicative share price of 527.50p, the share price at 31 December 2013.
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 7.1 years (2012: 6.9 years). During the year, a number of
cash-settled share appreciation rights were converted into equity-settled share appreciation rights (see note 35).
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 in respect of
such schemes was £11.9 million (2012: £12.3 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 Meggitt 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.
During the year, 3.4 million awards (2012: Nil) previously issued as cash-settled, were modified to equity-settled. Of these awards, 0.6 million had
not fully vested and were remeasured to fair value at the date they were modified. The fair value derived, is being expensed to the income
statement over the remaining vesting period.
An expense of £2.5 million (2012: £3.1 million) was recorded in the year in respect of all equity-settled awards. Movements in the number of
outstanding awards and their related weighted average award prices are as follows:
At 1 January
Granted
Lapsed
Modified from cash-settled
Exercised
At 31 December
2013
Average
award
price
Pence
304.35
526.58
365.26
262.04
262.42
360.49
2013
Number of
awards
outstanding
‘m
24.5
4.1
(0.5)
3.4
(10.4)
21.1
2012
Average
award
price
Pence
270.11
397.20
340.77
N/A
203.50
304.35
2012
Number of
awards
outstanding
‘m
21.5
5.5
(0.2)
-
(2.3)
24.5
MEGGITT PLC RE PORT AND ACCOUNTS 2013
35. Share-based payment continued
At 31 December 2013, of the total number of awards outstanding, 7.2 million are exercisable at an average exercise price of 245.50 pence (2012:
9.9 million at an average exercise price of 239.54 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:
115
Share price at date of grant/modification (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)
2013
Award in
September
2013
Modification in
April
2012
Award in
April
526.50
526.50
3.0
35%
5.0
1.56%
3.24%
121.37
468.60
351.70
1.0
27%
3.0
0.73%
2.65%
120.54
397.20
397.20
3.0
38%
5.0
1.07%
3.31%
98.25
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. Awards can only be exercised if the Group
meets an earnings per share performance condition.
As referred to above, during the year 3.4 million awards (2012: Nil) were modified from cash-settled to equity-settled. These awards were
remeasured to fair value immediately prior to the date of modification and a corresponding expense recorded in the income statement. The
liability of £5.9 million was then reclassified to equity on the date the awards were modified.
An expense of £3.1 million (2012: £2.5 million) was recorded in the year in respect of all cash-settled awards. The Group has recorded a liability at
the balance sheet date of £0.7 million (2012: £4.9 million). The total intrinsic value at the balance sheet date was £0.9 million (2012: £5.5 million.
Movements in the number of outstanding awards and their related weighted average award prices are as follows:
At 1 January
Granted
Lapsed
Modified to equity-settled
Exercised
At 31 December
2013
Average
award
price
Pence
267.74
526.50
385.07
262.04
242.59
354.05
2013
Number of
awards
outstanding
‘m
4.8
0.1
(0.1)
(3.4)
(0.8)
0.6
2012
Average
award
price
Pence
252.59
397.20
340.43
N/A
232.00
267.74
2012
Number of
awards
outstanding
‘m
6.8
0.2
(0.1)
-
(2.1)
4.8
At 31 December 2013, of the total number of awards outstanding, 0.2 million are exercisable at an average exercise price of 205.24 pence (2012:
3.2 million at an average exercise price of 235.26 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 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 2013
and 2012, 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 in 2009 and 2010, 50% of the award was based on an
EPS measure and 50% on a TSR condition. An expense of £5.4 million (2012: £5.9 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
2013
Number of
shares
under award
outstanding
‘m
2012
Number of
shares
under award
outstanding
‘m
7.8
2.1
(0.6)
(1.6)
7.7
8.3
2.4
(1.3)
(1.6)
7.8
MEGGITT PLC REPORT AND ACCOUNTS 2013 STRATEGIC REPORT FINANCIAL STATEMENTS SUPPLEMENTARY INFORMATION GOVERNANCE REPORTS
116
Notes to the consolidated financial statements continued
35. Share-based payment continued
At 31 December 2013, 1.5 million of the shares under award are eligible for release (2012: 1.1 million).
The fair value of the awards made in 2013, subject to the EPS and cash flow performance conditions, was 478.00 pence (2012: 392.97 pence). The
fair value of the awards made in 2013, 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, in respect of the principal awards made in the year, 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
2013
Award in
March
478.00
3.0
26%
3.0
0.26%
248.00
2012
Award in
August
392.97
3.0
29%
3.0
0.26%
240.00
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 Directors’ remuneration report on pages 47 to 67. At 31 December 2013, the trust held no ordinary shares (2012: 1,708 shares).
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
2013
£’m
1.4
7.5
8.9
2012
£’m
1.1
8.4
9.5
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 leases various items of plant and machinery under both cancellable and non-
cancellable operating leases. 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
2013
£’m
13.0
38.2
25.7
76.9
2012
£’m
13.7
43.6
25.6
82.9
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.
MEGGITT PLC RE PORT AND ACCOUNTS 2013
39. Cash inflow from operations
Profit for the year
Adjustments for:
Finance income (see note 12)
Finance costs (see note 13)
Tax (see note 14)
Depreciation (see note 21)
Amortisation (see notes 19 and 20)
(Gain)/loss on disposal of property, plant and equipment
Gain on disposal of businesses (see note 11)
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
40. Movements in net debt
At 1 January
Free cash inflow
Businesses acquired (see note 42)
Business acquisition expenses (see note 11)
Businesses disposed (see note 43)
Business disposal expenses (see note 11)
Dividends paid to Company’s shareholders (see note 16)
Issue of equity share capital (see note 34)
Net cash generated – inflow
Debt acquired with businesses (see note 42)
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
117
2013
£’m
232.3
(0.3)
31.2
37.1
32.2
126.4
(1.1)
(9.0)
(6.1)
(27.4)
11.9
(16.4)
(24.6)
(13.1)
(27.4)
2012
Restated
£’m
235.5
(2.0)
42.1
45.8
31.9
122.8
0.3
(3.2)
(23.4)
(25.0)
12.3
(30.5)
14.7
6.7
(33.9)
345.7
394.1
2013
£’m
2012
£’m
642.5
788.4
(110.4)
26.5
0.4
(53.3)
0.5
75.6
(2.5)
(63.2)
0.3
(2.7)
(12.3)
(182.4)
8.4
1.4
(15.9)
0.9
71.8
(0.9)
(116.7)
0.4
(33.9)
4.3
564.6
642.5
2013
£’m
7.2
666.0
2.4
5.1
(116.1)
564.6
2012
£’m
127.0
612.3
3.1
5.0
(104.9)
642.5
MEGGITT PLC REPORT AND ACCOUNTS 2013 STRATEGIC REPORT FINANCIAL STATEMENTS SUPPLEMENTARY INFORMATION GOVERNANCE REPORTS
118
Notes to the consolidated financial statements continued
41. Major non-cash transactions
During the year, Meggitt PLC issued 3.8 million shares worth £20.0 million in respect of scrip dividends (2012: 3.3 million shares worth £13.2
million) (see notes 16 and 34).
42. Business combinations
On 27 August 2013, the Group acquired 100% of the voting rights of Piezotech, LLC (‘Piezotech’). Piezotech’s high-end performance piezo-ceramic
technology for extreme temperature gas turbine sensors and its position in emerging energy and medical markets strengthen two strands of the
Group’s sensing business. The assets and liabilities of Piezotech at the date of acquisition, including the goodwill arising on consolidation, were as
follows:
Goodwill (see note 18)
Other intangible assets (see note 20)
Property, plant and equipment (see note 21)
Inventories
Trade and other receivables - current
Trade and other payables - current
Obligations under finance leases - current
Provisions - current (see note 31)
Obligations under finance leases - non-current
Deferred tax liabilities (see note 32)
Net assets
Consideration satisfied in cash
Total consideration payable
Fair value
£’m
9.0
15.8
0.7
1.0
1.4
(0.6)
(0.1)
(0.4)
(0.2)
(0.1)
26.5
26.5
26.5
Goodwill arising on consolidation is based on preliminary estimates of fair values which will be finalised in 2014. Goodwill is attributable to the
profitability of the acquired business and expected future synergies arising following the acquisition. Costs related to the acquisition were £0.5
million. These costs have been treated as an exceptional operating item (see note 11). The impact of the acquired business on the results of the
Group for the period since acquisition is not significant and would not have been significant had it been acquired on 1 January 2013.
MEGGITT PLC RE PORT AND ACCOUNTS 2013
119
43. Business disposals
On 23 May 2013, the Group disposed of 100% of the ordinary shares of Meggitt (Addison), Inc. (‘Addison’) for a total consideration of £26.0 million.
Addison was engaged in vapour cycle air conditioning systems providing cooling, heating and ventilation for fixed wing light aircraft. On 20
December 2013, the Group disposed of 100% of the ordinary shares of the Sunbank Family of Companies LLC (’Sunbank’) for a total consideration
of £28.3 million. Sunbank supplied connector accessories, backshells, and conduit systems for aerospace and industrial markets. These
businesses were no longer considered core to the Group’s operations. The impact of the disposals on the Group’s results and cash flows for the
year was not significant.
The net assets of the businesses at the dates of disposal were as follows:
Goodwill (see note 18)
Other intangible assets (see note 20)
Property, plant and equipment (see note 21)
Deferred tax assets (see note 32)
Inventories
Trade and other receivables - current
Cash and cash equivalents
Trade and other payables - current
Provisions - current (see note 31)
Deferred tax liabilities (see note 32)
Net assets
Currency translation gain transferred from equity
Gain/(loss) on disposal (see note 11)
Total consideration
Satisfied by:
Proceeds received from disposal of businesses
Business disposal expenses paid (see note 11)
Trade and other receivables - contingent consideration
Trade and other payables - other
Total consideration
Net cash inflow arising on disposal:
Proceeds received from disposal of businesses
Less: cash and cash equivalents disposed of
Businesses disposed
Less business disposal expenses paid
Total cash inflow
Addison
£’m
8.0
5.6
0.3
-
2.0
2.2
0.2
(1.2)
(0.1)
(0.9)
16.1
(5.0)
14.9
26.0
26.4
(0.3)
-
(0.1)
26.0
26.4
(0.2)
26.2
(0.3)
25.9
Sunbank
£’m
18.5
5.6
3.8
2.3
4.3
3.1
1.2
(4.0)
(0.3)
-
34.5
(0.3)
(5.9)
28.3
28.3
(0.2)
0.8
(0.6)
28.3
28.3
(1.2)
27.1
(0.2)
26.9
Total
£’m
26.5
11.2
4.1
2.3
6.3
5.3
1.4
(5.2)
(0.4)
(0.9)
50.6
(5.3)
9.0
54.3
54.7
(0.5)
0.8
(0.7)
54.3
54.7
(1.4)
53.3
(0.5)
52.8
MEGGITT PLC REPORT AND ACCOUNTS 2013 STRATEGIC REPORT FINANCIAL STATEMENTS SUPPLEMENTARY INFORMATION GOVERNANCE REPORTS
120
Notes to the consolidated financial statements continued
44. Restatement of prior year comparatives
IAS 19 (Revised 2011), ‘Employee benefits’ makes changes to the recognition and measurement of certain items of defined benefit pension
expense. Scheme administration expenses borne directly by defined benefit schemes are now recorded within net operating costs and not, as
previously accounted for, as a reduction in the expected return on scheme assets. The expected return on scheme assets is now calculated using
the same rate used to discount scheme liabilities and no longer includes any allowance for equity-like out-performance or deduction for scheme
administration expenses. The adverse impact on net operating costs and net finance costs of these changes is offset by an equal reduction in
remeasurement losses. As the Group has always recognised remeasurement gains and losses immediately there has been no impact on the
value at which retirement benefit obligations are recorded in the balance sheet. As the revised net pension finance cost calculated under IAS 19
(Revised 2011), ‘Employee benefits’ is a non-cash, non-trading item, the Board has in 2013, as previously announced, excluded it from the
underlying profit measures (as defined in note 10) it uses to monitor and measure the underlying performance of the Group. The prior year
comparatives have been restated accordingly.
The impact of these changes is set out below:
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 equity owners of the Company
Items that will not be reclassified to the income statement in subsequent
periods:
Remeasurement of retirement benefit obligations
Tax effect
Other items affecting other comprehensive income
Other comprehensive income for the year
Total comprehensive income for the year
attributable to equity owners of the Company
Earnings per share (pence)
Basic
Diluted
Underlying operating profit
Underlying profit before tax
Underlying basic earnings per share (pence)
Underlying diluted earnings per share (pence)
Under
prior year
policy
£’m
2013
Change
in policy
As
reported
£’m
£’m
Under
prior year
policy
£’m
1,605.8
(929.1)
1,637.3
(981.1)
656.2
676.7
(355.9)
(353.1)
300.3
323.6
0.3
(31.2)
(30.9)
35.4
(66.9)
(31.5)
2012
Change
in policy
As
restated
£’m
£’m
–
–
–
(2.2)
(2.2)
(33.4)
24.8
(8.6)
1,605.8
(929.1)
676.7
(355.3)
321.4
2.0
(42.1)
(40.1)
1,637.3
(981.1)
656.2
(354.2)
302.0
33.2
(56.1)
(22.9)
–
–
–
(1.7)
(1.7)
(32.9)
24.9
(8.0)
279.1
(9.7)
269.4
292.1
(10.8)
281.3
(39.7)
239.4
2.6
(7.1)
(37.1)
232.3
(48.8)
243.3
3.0
(7.8)
(45.8)
235.5
37.1
(19.0)
(35.2)
(17.1)
9.7
(2.6)
–
7.1
46.8
(21.6)
(35.2)
(10.0)
(6.8)
0.7
(59.9)
(66.0)
10.8
(3.0)
–
7.8
4.0
(2.3)
(59.9)
(58.2)
222.3
–
222.3
177.3
–
177.3
30.3
29.8
398.9
376.0
37.3
36.8
(0.9)
(0.9)
(1.7)
1.8
0.2
0.1
29.4
28.9
397.2
377.8
37.5
36.9
31.1
30.7
394.3
362.8
36.2
35.7
(1.0)
(1.0)
(2.2)
3.2
0.3
0.3
30.1
29.7
392.1
366.0
36.5
36.0
MEGGITT PLC RE PORT AND ACCOUNTS 2013
121
45. Group companies
The following information is not a complete listing of all subsidiary companies at 31 December 2013 and relates only to those subsidiaries
principally affecting the profits or assets of the Group.
United Kingdom
Meggitt Aerospace Limited
Meggitt Defence Systems Limited
Continental Europe
Artus SAS – France
Meggitt SA – Switzerland
Meggitt Finance Limited ‡
Meggitt (UK) Limited
Piher Sensors & Controls SA – Spain
North America
Linear Motion LLC
Meggitt Aircraft Braking Systems Corporation
Meggitt Aircraft Braking Systems Kentucky Corporation
Meggitt Defense Systems, Inc.
Meggitt GP, Inc.‡
Meggitt Oregon, Inc.
Meggitt Safety Systems, Inc.
Meggitt Training Systems, Inc.
Meggitt (North Hollywood), Inc.
Meggitt (Orange County), Inc.
Meggitt (Rockmart), Inc.
NASCO Aircraft Brake, Inc.
OECO, LLC
Pacific Scientific Company
Piezotech, LLC
Securaplane Technologies, Inc.
Rest of World
Meggitt Aerospace Asia Pacific Pte Limited – Singapore
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 2013.
iii) All companies listed above are included in the consolidation.
iv) Companies marked ‡ are management companies. Otherwise all companies are operating companies engaged in the Group’s principal
activities as described in note 1.
A full list of subsidiary companies will be annexed to the next annual return to the Registrar of Companies.
MEGGITT PLC REPORT AND ACCOUNTS 2013 STRATEGIC REPORT FINANCIAL STATEMENTS SUPPLEMENTARY INFORMATION GOVERNANCE REPORTS
122
Independent auditors’ report to the
members of Meggitt PLC
Report on the Company financial statements
Our opinion
In our opinion the Company financial statements, defined below:
• give a true and fair view of the state of the Company’s affairs as at 31
December 2013;
• 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.
This opinion is to be read in the context of what we say in the remainder
of this report.
What we have audited
The Company financial statements, which are prepared by Meggitt
PLC, comprise:
• the Company balance sheet as at 31 December 2013; and
• the notes to the Company financial statements, which include a
summary of significant accounting policies and other explanatory
information.
The financial reporting framework applied in their preparation
comprises applicable law and United Kingdom Accounting Standards
(United Kingdom Generally Accepted Accounting Practice).
In applying the financial reporting framework, the directors have
made a number of subjective judgements, for example on significant
accounting estimates. In making such judgements, they have made
assumptions and considered future events.
Certain disclosures required by the financial reporting framework have
been presented elsewhere in the Annual Report, rather than in the
notes to the financial statements. These are cross-referenced from the
financial statements and are identified as audited.
What an audit of financial statements involves
We conducted our audit in accordance with International Standards on
Auditing (UK and Ireland) (‘ISAs (UK & Ireland)’). An audit obtains
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 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.
We read all the financial and non-financial information in the ‘Annual
Report and Accounts’ (the ‘Annual Report’) to identify material
inconsistencies with the audited Company financial statements and to
identify any information that is apparently materially incorrect based
on, or materially inconsistent with, the knowledge acquired by us in the
course of performing the audit. If we become aware of any apparent
material misstatements or inconsistencies we consider the
implications for our report.
Opinions on matters prescribed by the
Companies Act 2006
In our opinion:
• the information given in the Strategic report and the Directors’
report for the financial year for which the Company financial
statements are prepared is consistent with the Company financial
statements; and
• the part of the Directors’ remuneration report to be audited has
been properly prepared in accordance with the Companies Act 2006.
Other matters on which we are required to report
by exception
Adequacy of accounting records and information and
explanations received
Under the Companies Act 2006 we are required to report to you if, in
our opinion:
• we have not received all the information and explanations we require
for our audit; or
• adequate accounting records have not been kept by the Company, or
returns adequate for our audit have not been received from
branches not visited by us; or
• the Company financial statements and the part of the Directors’
remuneration report to be audited are not in agreement with the
accounting records and returns.
We have no exceptions to report arising from this responsibility.
Directors’ remuneration
Under the Companies Act 2006, we are required to report to you if, in
our opinion, certain disclosures of directors’ remuneration specified by
law have not been made. We have no exceptions to report arising from
this responsibility.
Other information in the Annual Report
Under ISAs (UK & Ireland), we are required to report to you if, in our
opinion, information in the Annual Report is:
• materially inconsistent with the information in the audited Company
financial statements; or
• apparently materially incorrect based on, or materially inconsistent
with, our knowledge of the Company acquired in the course of
performing our audit; or
• is otherwise misleading.
We have no exceptions to report arising from this responsibility.
Responsibilities for the financial statements and the audit
Our responsibilities and those of the directors
As explained more fully in the Statement of directors’ responsibilities
(set out on page 70), the directors are responsible for the preparation
of the 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 Company
financial statements in accordance with applicable law and ISAs (UK &
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 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.
Other matter
We have reported separately on the Group financial statements of
Meggitt PLC for the year ended 31 December 2013.
Andrew Paynter (Senior Statutory Auditor)
for and on behalf of PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
London
3 March 2014
MEGGITT PLC RE PORT AND ACCOUNTS 2013 Company balance sheet
As at 31 December 2013
123
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
Notes
2013
£’m
2012
£’m
3
9
4
5
9
6
9
7
8
9
12
13
13
13
13
31.1
35.5
2,069.9
2,136.5
24.6
50.4
2,060.7
2,135.7
940.0
11.4
17.0
968.4
(79.5)
(9.3)
879.6
958.3
4.9
13.5
976.7
(186.1)
(5.0)
785.6
3,016.1
2,921.3
(664.5)
(1.7)
(10.2)
(609.8)
(2.0)
(0.2)
2,339.7
2,309.3
39.9
1,166.3
17.5
1,116.0
39.3
1,143.9
17.5
1,108.6
2,339.7
2,309.3
The financial statements on pages 123 to 129 were approved by the Board of Directors on 3 March 2014 and signed on its behalf by:
S G Young
Director
D R Webb
Director
MEGGITT PLC REPORT AND ACCOUNTS 2013 STRATEGIC REPORT FINANCIAL STATEMENTS SUPPLEMENTARY INFORMATION GOVERNANCE REPORTS
124
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
The principal accounting policies adopted by the Company in the
preparation of the financial statements are set out below. These
policies have been applied consistently to all periods presented unless
stated otherwise.
Investments
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:
Land and buildings ...................................... over period of lease
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.
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 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.
Pension scheme arrangements
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 (nominal
value) 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.
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.
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.
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.
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 RE PORT AND ACCOUNTS 2013 2. Summary of significant accounting policies continued
Loans
125
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.
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 by the Company 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 2013 STRATEGIC REPORT FINANCIAL STATEMENTS SUPPLEMENTARY INFORMATION GOVERNANCE REPORTS 126
Notes to the financial statements of the Company continued
3. Tangible fixed assets
Cost at 1 January 2013
Additions
Disposals
Cost at 31 December 2013
Accumulated depreciation at 1 January 2013
Charge for year
Disposals
Accumulated depreciation at 31 December 2013
Net book amount at 31 December 2013
Net book amount at 31 December 2012
Net book amount of land and buildings:
Freehold
Short leasehold
Total
4. Investments
Shares in subsidiaries:
At 1 January
Capital contributions (see note 13)
At 31 December
Land and
buildings
£’m
0.8
–
(0.1)
0.7
0.4
–
–
0.4
0.3
0.4
Plant,
equipment
and vehicles
£’m
30.2
9.0
(0.2)
39.0
6.0
2.4
(0.2)
8.2
30.8
24.2
2013
£’m
–
0.3
0.3
Total
£’m
31.0
9.0
(0.3)
39.7
6.4
2.4
(0.2)
8.6
31.1
24.6
2012
£’m
0.1
0.3
0.4
2013
£’m
2012
£’m
2,060.7
9.2
2,052.4
8.3
2,069.9
2,060.7
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 45 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
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, other loans and amounts owed to subsidiary undertakings are unsecured.
2013
£’m
2012
£’m
936.3
1.2
2.5
940.0
2013
£’m
0.1
2.9
2.8
45.5
16.2
5.6
1.9
4.5
79.5
954.1
2.5
1.7
958.3
2012
£’m
7.6
114.0
4.0
30.1
16.7
3.8
4.0
5.9
186.1
MEGGITT PLC RE PORT AND ACCOUNTS 2013
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
Amounts repayable in more than five years mature in 2020 and 2022.
8. Provision for liabilities and charges
At 1 January 2013
Credit to profit and loss account
Charge to profit and loss reserve
Utilisation of provision
At 31 December 2013
The deferred tax provision are analysed as follows:
Accelerated capital allowances
Other short-term timing differences
Total
Movements in the deferred tax provision are analysed as follows:
At 1 January
(Credit)/charge to profit and loss account
Charge/(credit) to profit and loss reserve
At 31 December
127
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
Total
£’m
2.0
(0.2)
0.1
(0.2)
1.7
2012
£’m
2.0
(0.2)
1.8
2012
£’m
0.6
2.4
(1.2)
1.8
2013
£’m
245.8
418.7
664.5
2013
£’m
0.1
245.8
245.9
2013
£’m
2.9
166.8
251.9
421.6
Onerous
lease costs
£’m
Deferred tax
provision
£’m
0.2
–
–
(0.2)
–
1.8
(0.2)
0.1
–
1.7
2013
£’m
1.7
–
1.7
2013
£’m
1.8
(0.2)
0.1
1.7
MEGGITT PLC REPORT AND ACCOUNTS 2013 STRATEGIC REPORT FINANCIAL STATEMENTS SUPPLEMENTARY INFORMATION GOVERNANCE REPORTS
128
Notes to the financial statements of the Company continued
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
2013
Assets
£’m
2013
Liabilities
£’m
2012
Assets
£’m
2012
Liabilities
£’m
24.9
–
22.0
46.9
24.9
10.6
35.5
11.4
–
–
(19.5)
(19.5)
–
(10.2)
(10.2)
(9.3)
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)
2012
£’m
0.1
0.1
2012
£’m
0.1
0.1
0.2
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:
Plant, equipment and vehicles
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
11. Pensions
2013
£’m
0.1
0.1
2013
£’m
–
0.1
0.1
The Directors believe that the FRS 17 total 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 in respect of the UK scheme. At 31 December 2013, an amount of £0.1 million (2012: £0.1
million) relating to contributions payable in respect of the defined contribution scheme were outstanding.
12. Called-up share capital
Allotted and fully paid:
At 1 January 2013
Issued on exercise of executive share awards
Issued on exercise of sharesave awards
Scrip dividends
At 31 December 2013
Ordinary
shares of
5p each
Number ‘m
Nominal
value
Net
consideration
£’m
£’m
785.0
7.2
1.1
3.8
797.1
39.3
0.3
0.1
0.2
39.9
0.5
2.0
20.0
MEGGITT PLC RE PORT AND ACCOUNTS 2013
129
13. Reconciliation of movements in shareholders’ funds
At 1 January 2013
Profit for the financial year
Dividends
Cash flow hedge movements
Currency translation differences
Employee share option schemes:
Value of subsidiary employee services (see note 4)
Value of services provided
Shares issued
Scrip dividends
Called-up
share
capital
£’m
39.3
–
–
–
–
–
–
0.4
0.2
Share
premium
account
£’m
1,143.9
–
–
–
–
–
–
2.6
19.8
Other
reserves
£’m
17.5
–
–
–
–
–
–
–
–
Profit and
loss
reserve
£’m
1,108.6
90.3
(95.6)
1.6
0.2
9.2
2.2
(0.5)
–
Total
2013
£’m
2,309.3
90.3
(95.6)
1.6
0.2
9.2
2.2
2.5
20.0
Total
2012
£’m
2,183.5
188.6
(85.0)
(4.3)
1.2
8.3
2.9
0.9
13.2
At 31 December 2013
39.9
1,166.3
17.5
1,116.0
2,339.7
2,309.3
Details of the Group’s employee share schemes are included in note 35 of the Meggitt PLC Group accounts.
MEGGITT PLC REPORT AND ACCOUNTS 2013 STRATEGIC REPORT FINANCIAL STATEMENTS SUPPLEMENTARY INFORMATION GOVERNANCE REPORTS
130 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
Net interest expense on retirement benefit obligations*
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
2013
£’m
2012
£’m
2011
£’m
2010
£’m
2009
£’m
1,637.3
1,605.8
1,455.3
1,162.0
1,150.5
377.8
(28.4)
(74.3)
(0.3)
6.1
(11.5)
269.4
366.0
(13.3)
(80.6)
(0.2)
23.4
(14.0)
281.3
325.3
(20.3)
(75.1)
(11.3)
9.7
(12.1)
216.2
29.4p
37.5p
12.75p
30.1p
36.5p
11.80p
23.1p
32.1p
10.50p
263.7
(15.7)
(64.7)
–
(3.2)
(15.3)
164.8
19.3p
28.6p
9.20p
244.2
(20.8)
(69.2)
–
36.6
(13.3)
177.5
20.2p
26.4p
8.45p
27.2%
33.7%
44.0%
50.2%
63.5%
* The figures for prior years have been restated (see note 44 to the Group financial statements).
MEGGITT PLC REPORT AND ACCOUNTS 2013
Investor information
131
Dividends
The proposed 2013 final dividend of 8.80p per ordinary share, if approved, will be paid on 9 May 2014 to
shareholders on the register on 14 March 2014. The expected payment date for the 2014 interim dividend
is 3 October 2014.
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 2013 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 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 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 the Financial Services Act 2012 only. Computershare Investor Services PLC is authorised
and regulated by the Financial Conduct 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 2013 STRATEGIC REPORT FINANCIAL STATEMENTS SUPPLEMENTARY INFORMATION GOVERNANCE REPORTS
132
Investor information continued
Analysis of ordinary shareholders as at 31 December 2013
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
5,529
2,557
549
129
74
69
101
9,008
0.16
1.00
2.11
2.44
3.36
6.24
84.69
100.00
Types of shareholder
Individuals
Banks and nominees
Investment and insurance companies
Other
7,438
1,476
27
67
1.78
97.37
0.14
0.71
9,008
100.00
2014 provisional financial calendar
Key dates 2014
Full-year results announcement for year
ended 31 December 2013
Final dividend ex-dividend date
Final dividend record date
Report and accounts for year
ended 31 December 2013 despatched
Deadline for receipt of scrip dividend elections
AGM and interim management statement
Final dividend for year ended
31 December 2013 – payment date
Interim announcement for period ended 30 June 2014
Interim dividend ex-dividend date
Interim dividend record date
Deadline for receipt of scrip dividend elections
Interim dividend for period ended
30 June 2014 – payment date
Interim management statement
4 March
12 March
14 March
27 March
17 April
7 May
9 May
5 August
13 August
15 August
19 September
3 October
5 November
MARCH
4
Full-year
results
MAY
7
AGM & interim
management
statement
AUGUST
NOVEMBER
5
Interim
results
5
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
Independent auditors
PricewaterhouseCoopers LLP
Solicitors
Clifford Chance LLP
Brokers
Bank of America Merrill Lynch
Financial advisors
N M Rothschild & Sons Limited
MEGGITT PLC REPORT AND ACCOUNTS 2013
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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